Simpson Electric Corp. v. Leucadia Inc.

128 A.D.2d 339, 515 N.Y.S.2d 794, 1987 N.Y. App. Div. LEXIS 43565

• Court: Appellate Division of the Supreme Court of the State of New York
• Decided: May 18, 1987
• Status: Published

Opinions

OPINION OF THE COURT

Thompson, J. P.

The issue with which we are confronted on this appeal is a question of first impression in this judicial department: whether State courts enjoy concurrent jurisdiction with Federal courts over civil claims under the Racketeer Influenced and Corrupt Organizations Act (hereinafter RICO) (18 USC §§ 1961-1968). We find that the structure and language of that Act, viewed together with its legislative history and underlying policies, leads to the inexorable conclusion that Congress implicitly intended to confer exclusive jurisdiction over RICO claims on the Federal courts. Therefore, we affirm the order of Special Term (126 Misc 2d 312) dismissing the fifth counterclaim of Leucadia, Inc., alleging a RICO violation.

This action arises out of an agreement between Simpson Electric Corporation (hereinafter Simpson) and Leucadia, Inc., formerly known as James Talcott, Inc. (hereinafter Leucadia) for the provision of electrical contracting work in connection with the renovation of a building located at 315 Park Avenue South in Manhattan (hereinafter the premises). The premises were owned and operated by the defendant Grand-White Realty Corporation (hereinafter Grand-White) and the third-party defendant Isaac Silverman (hereinafter Silverman), who was Grand-White’s president and majority shareholder. Leucadia held a mortgage on the premises. In May 1984, Simpson commenced an action to recover damages in excess of $13,000,000, inter alia, for the balance due on electrical renovation work under the contract. In its answer, Leucadia denied the essential allegations of the complaint and interposed six counterclaims. The fifth counterclaim, which is the subject of this appeal, alleged a RICO violation. Leucadia asserted that Simpson, Silverman and Grand-White were an "enterprise”, as that term is defined in 18 USC § 1961 (4), which was engaged in a pattern of racketeering activity affecting interstate commerce in violation of 18 USC § 1962. The gravamen of Leucadia’s RICO claim is that Silverman and Simpson engaged in a fraudulent scheme whereby Silver-man obtained loans from Leucadia to pay bills and invoices submitted by Simpson. Although Silverman knew the bills and invoices were highly inflated, he induced Leucadia to make loans and gave Leucadia mortgages on the premises as security. In return, Simpson made substantial payments to Silverman personally. As predicate acts, Leucadia alleged that Simpson used the United States mail to execute the scheme and committed at least two acts of mail fraud, thereby engaging in a pattern of racketeering activity in violation of 18 USC § 1962. In February 1982, Leucadia obtained a judgment of foreclosure and sale, and the premises was sold at public auction. In October 1982, a deficiency judgment was entered in favor of Leucadia and against Grand-White in an amount in excess of $10,000,000.

Simpson moved, inter alia, to dismiss the RICO counterclaim on the ground that the court lacked subject matter jurisdiction over that claim. Special Term dismissed the RICO counterclaim. Initially, it found that State courts have concurrent jurisdiction with Federal courts over civil RICO claims. Notwithstanding this jurisdictional determination, Special Term dismissed the RICO counterclaim in reliance upon the July 25, 1984 decision of the United States Circuit Court of Appeals for the Second Circuit in Sedima, S.P.R.L. v Imrex Co. (741 F2d 482), which held that a prior criminal conviction of the predicate act is a prerequisite to a civil RICO action. On July 1, 1985, the United States Supreme Court reversed the Second Circuit in Sedima, S.P.R.L. v Imrex Co. (473 US 479). In its decision, the Supreme Court admonished that RICO is to be read and applied broadly and liberally to " 'effectuate its remedial purposes’ ” (Sedima, S.P.R.L. v Imrex Co., 473 US 479, 498, supra, quoting from Pub L 91-452, § 904 [a], 84 US Stat 947). It held that no prior predicate criminal conviction was necessary in order to establish a prima facie case under RICO, nor does RICO require proof of a " 'racketeering injury’ ” (Sedima, S.P.R.L. v Imrex Co., supra, at 498-499). To prove a claim under 18 USC § 1962 (c), a party must demonstrate (1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity (Sedima, S.P.R.L. v Imrex Co., supra, at 500). We do not address our inquiry to the question of whether Leucadia, in its fifth counterclaim, has sufficiently pleaded a cause of action under 18 USC § 1962 (c). This issue is rendered moot by our determination that RICO claims fall within the exclusive jurisdiction of the Federal courts.

Simpson argues on appeal that Special Term properly dismissed Leucadia’s fifth counterclaim because State courts lack subject matter jurisdiction over civil claims under RICO. In support of its contention, the plaintiff relies upon a May 1985 decision of the Appellate Division, First Department, in Green-view Trading Co. v Hershman & Leicher (108 AD2d 468), finding that Federal jurisdiction over RICO claims is exclusive.

In our analysis of the jurisdictional question, we indulge the presumption in favor of concurrent jurisdiction announced by the Supreme Court over a century ago in Claflin v Houseman (93 US 130), and reaffirmed, more recently, in the seminal case of Gulf Offshore Co. v Mobil Oil Corp. (453 US 473). Absent a congressional provision precluding concurrent jurisdiction or a disabling incompatibility between the Federal claim and adjudication of that claim in a State court, State courts may assume subject matter jurisdiction over Federal causes of action (see, Gulf Offshore Co. v Mobil Oil Corp., supra, at 477).

Despite the presumption of concurrent jurisdiction, Congress may confine jurisdiction either explicitly or implicitly. Specifically, the presumption of concurrent jurisdiction may be rebutted by (1) an explicit statutory directive, (2) an unmistakable implication from legislative history, or (3) a clear incompatibility between Federal interests and State court jurisdiction (Gulf Offshore Co. v Mobil Oil Corp., supra, at 478). The factors that generally commend exclusive Federal court jurisdiction over Federal claims under the latter possibility, i.e., "clear incompatibility”, include "the desirability of uniform interpretation, the expertise of federal judges in federal law, and the assumed greater hospitality of federal courts to peculiarly federal claims” (Gulf Offshore Co. v Mobil Oil Corp., supra, at 478, 483-484).

These principles of law are not disputed by the parties; it is their application to the RICO Act which represents the point of departure of the parties’ opposing claims and also that of the views expressed in this majority opinion with those of our dissenting colleagues.

Looking first at the language of that provision of the RICO Act which creates the civil remedy for private litigants and also confers jurisdiction on Federal courts, noticeably absent is either any explicit limitation of jurisdiction to the Federal courts or a grant of concurrent jurisdiction to the State courts (see, 18 USC § 1964 [c]). That section provides: "Any person injured in his business or property by reason of a violation of section 1962 of this chapter may sue therefor in any appropriate United States district court and shall recover threefold the damages he sustains and the cost of the suit, including a reasonable attorney’s fee” (18 USC § 1964 [c]). Thus, the first factor of the Gulf Offshore framework is absent here and the starting point of our analysis must necessarily be an examination of the language, structure, legislative history and underlying policies of the RICO Act to determine whether Congress implicitly restricted jurisdiction.

The question of whether State courts have concurrent jurisdiction with the Federal courts to hear and decide civil RICO claims has not been widely litigated. In fact, to date, no Federal appellate court has considered the question¹ and the only appellate decision in this State emanates from the First Department (see, Greenview Trading Co. v Hershman & Leicher, 108 AD2d 468, supra). Such limited Federal and State authority as exists has been sharply divided.² Courts finding exclusive Federal jurisdiction primarily rely on the factors discussed below. First, Congress consciously patterned the RICO Act (see, 18 USC § 1964 [c]) after the private remedy provision of section 4 of the Clayton Antitrust Act (see, 15 USC § 15). Courts uniformly have held that the latter provision confers exclusive Federal jurisdiction for claims arising under it. On the basis of the virtually identical language of RICO and its antitrust prototype, the District Court in County of Cook v Midcon Corp. (574 F Supp 902, affd 773 F2d 892), held that the jurisdictional grant in the RICO Act created exclusive jurisdiction in the Federal courts over civil RICO claims (see, County of Cook v Midcon Corp., supra, at 912). The Midcon court reasoned that the legislators must have known that the language of the Clayton Act had consistently been construed as giving Federal courts exclusive jurisdiction over antitrust claims. By parity of reasoning, therefore, the legislators must have likewise intended that RICO claims should be the exclusive province of the Federal courts.

Adopting the reasoning of Midcon (supra), our colleagues in the First Department in Greenview Trading Co. v Hershman & Leicher (supra, at 470-471) reached the same result, also predicating their determination on the identity of language between 18 USC § 1964 (c) and 15 USC § 15.

Quite apart from the arguments in favor of exclusive jurisdiction founded upon the antitrust prototype, other specific aspects of the structure and language of the statutory scheme further demonstrate that Congress envisioned only Federal enforcement of RICO claims. The predicate acts upon which a RICO action may be premised are defined generally in terms of substantive Federal crime (see, 18 USC § 1961). RICO statutes also include procedural mechanisms which are available only in the Federal system. Section 1965 (18 USC § 1965) contains extended venue and process provisions applicable only in the Federal courts. Additionally, the power to compel forfeiture and divestment is limited to the Federal District Courts, with authority specifically delegated to the Attorney General of the United States to seize the forfeited property (see, 18 USC § 1964 [a]; §§ 1966, 1968). It seems clear that by expanding the procedural abilities of the Federal courts, Congress envisaged a scheme whereby prosecution of racketeering activities and the private litigation arising thereunder would be within the exclusive domain of the Federal courts. Thus, viewing RICO broadly, several courts have found that an unmistakable inference of intended Federal exclusive jurisdiction is created thereunder (see, Kinsey v Nestor Exploration— 1981 A, 604 F Supp 1365, 1370-1371; Cianci v Superior Ct. [Poppingo], 40 Cal 3d 903, 925-931, 221 Cal Rptr 575, 588-592, 710 P2d 375, 389-392 [Lucas, J., concurring and dissenting]; Main Rusk Assocs. v Interior Space Constructors, 699 SW2d 305, 306 [Tex Civ App]). We adopt those findings and conclude that the States, with their more truncated jurisdictional powers, are ill-equipped to match the effectiveness of the Federal courts in combating the infiltration of organized crime into legitimate businesses.

Turning then to the last element involved in the Gulf Offshore analysis, i.e., demonstration of a clear incompatibility between Federal interests and State court jurisdiction, the broad purpose of RICO, namely, to aid in eliminating organized crime in the United States (see, United States v Turkette, 452 US 576, 589), is best served by exclusive Federal court jurisdiction. Because RICO is designed to protect the public interest of the Nation as a whole from the effects of organized crime, it is more properly the subject of enforcement by the Federal courts. To inject the State courts into the fray when interpretation of RICO has already diverged greatly in the Federal courts would only compound an extremely complex situation. The reasoning of Justice (now Chief Justice) Lucas, concurring and dissenting in Cianci v Superior Ct. (Poppingo) (40 Cal 3d 903, 925-931, 221 Cal Rptr 575, 588-592, 710 P2d 375, 388-392, supra), in this regard, is compelling. Justice Lucas promotes a finding of exclusive Federal jurisdiction as necessary to ensure a more uniform approach to the interpretation and application of RICO (see, Cianci v Superior Ct. [Poppingo], 40 Cal 3d 903, 930, 221 Cal Rptr 575, 591-592, 710 P2d 375, 392, supra). While the Federal courts have fared none too well in this regard, the scope of the discordant interpretations emerging from the Federal courts is the most vigorous argument against concurrent jurisdiction for the State courts. At this juncture, the Federal courts are in a far better position to ensure uniformity in interpretation and application of the extremely complex RICO Act (accord, Kinsey v Nestor Exploration—1981A, supra, at 1371; Maplewood Bank & Trust Co. v Acorn, Inc., 207 NJ Super 590, 504 A2d 819, 821; Levinson v American Acc. Reinsurance Group, 503 A2d 632, 635 [Del Ch]; Cianci v Superior Ct. [Poppingo], 40 Cal 3d 903, 930-931, 221 Cal Rptr 575, 591-592, 710 P2d 375, 391, supra [Lucas, J., concurring and dissenting]; Greenview Trading Co. v Hershman & Leicher, 108 AD2d 468, 472-473, supra).

With regard to any parochial interest in exercising jurisdiction over RICO claims, it is fair to state that New York does not believe its courts have concurrent jurisdiction. This conclusion is derived from New York’s recent enactment of an Organized Crime Control Act (hereinafter OCCA) (L 1986, ch 516), an antiracketeering law patterned on the Federal RICO Act. The initiation by the New York State Attorney-General, prior to OCCA’s enactment, of a lawsuit in the United States District Court for the Southern District of New York, charging certain individuals and corporations with violations of the Federal RICO Act (see, NYLJ, May 29, 1986, at 1, col 3) lends additional weight to this premise. If the State believed otherwise, its legislative efforts in this regard would be merely duplicative and unnecessary (see, Kinsey v Nestor Exploration —1981A, supra, at 1370; Levinson v American Acc. Reinsurance Group, supra, at 635). Moreover, if the State courts had concurrent jurisdiction, the State Attorney-General would most likely have brought any actions charging RICO violations in a more familiar forum.

OCCA is far more restrictive than its Federal counterpart, thereby evincing this State’s interest in limiting its use to appropriate cases. Drawing on the Federal RICO experience and Federal judicial interpretations of RICO’s breadth, New York calculatedly narrowed the definition of the requisite pattern of criminal activity for prosecution under OCCA to ensure that the crimes making up the criminal enterprise are not isolated incidents or part of a single criminal transaction (see, Governor’s Approval Mem, 1986 McKinney’s Session Laws of NY, at 3175-3178). Laws of 1986 (ch 516, adding Penal Law § 460.00), which enumerates OCCA’s legislative findings, removes any doubt as to whether the Legislature intended to include within its scope garden-variety fraud and breach of contract cases. It provides: "[T]his article is not intended to be employed to prosecute relatively minor or isolated acts of criminality which, while related to an enterprise and arguably part of a pattern as defined in this article, can be adequately and more fairly prosecuted as separate offenses” (L 1986, ch 516, adding Penal Law § 460.00). Thus, this State’s adoption of its own RICO-like statute lends support to the position that a basic incompatibility exists between State court jurisdiction and Federal interests under the RICO Act.

As the foregoing discussion indicates, the core issue presented on this appeal is hotly disputed. However, the counter arguments offered in support of concurrent jurisdiction are less compelling than those militating in favor of exclusive jurisdiction. Our dissenting colleagues place great stock in the recent decision of the United States Supreme Court in Sedima, S.P.R.L. v Imrex Co. (473 US 479, supra), claiming that "[i]n the aftermath of Sedima, we can no longer, with assurance, analogize RICO with the antitrust legislation” (dissenting opn, at 353). The dissent perceives the decision in Sedima as casting doubt upon the continued viability of Greenview Trading Co. v Hershman & Leicher (supra), a pre-Sedima decision. We do not read Sedima quite so broadly. The Sedima majority touches on the debate about the extent to which Congress intended to pattern RICO provisions upon Federal antitrust laws (see, Sedima, S.P.R.L. v Imrex Co., supra, at 498-499). However, it appears that the only conclusion reached upon its review of the legislative history is that the antitrust principles defining the proximity between a plaintiff’s injury and a defendant’s antitrust violation were not intended by Congress to be grafted onto the RICO’s provisions. As our dissenting colleagues acknowledge, Sedima did not address the jurisdictional question.

We are cognizant that the position on this issue espoused by the dissent finds some support in the decisional law. Some courts believe that the analogy between RICO and Federal antitrust legislation is too weak to overcome the normal presumption of concurrent jurisdiction (see, HMK Corp. v Walsey, 637 F Supp 710, 717; Karel v Kroner, 635 F Supp 725, 730; Cianci v Superior Ct. [Poppingo] 40 Cal 3d 903, 912-914, 221 Cal Rptr 575, 579-580, 710 P2d 375, 379-380, supra; County of Cook v Midcon Corp., 773 F2d 892, 905, n 4, supra). Notwithstanding these views to the contrary, there can be little doubt, even after Sedima, that Congress utilized the Clayton Act as a model for RICO and intended to adopt the antitrust remedies such as civil actions and treble damages. The virtual identity of jurisdictional language in the RICO Act (see, 18 USC § 1964 [c]) and the jurisdictional provision of the Clayton Act (see, 15 USC § 15) may not be discounted as being either accidental or meaningless. Because it may reasonably be presumed that Congress, when drafting RICO, had knowledge that judicial interpretations of the virtually identical provisions of the Clayton Act conferred exclusive jurisdiction on the Federal courts, the analogy to antitrust law compels a similar conclusion at bar (see, County of Cook v Midcon Corp., 574 F Supp 902, 912, affd 773 F2d 892, supra; see also, Levinson v American Acc. Reinsurance Group, 503 A2d 632, 635, supra).

Neither our dissenting colleagues nor the courts which have determined that the States have concurrent jurisdiction over RICO claims have directly addressed the extensive reference throughout the RICO Act to Federal enforcement. RICO has not and, indeed, cannot similarly extend to the States the broad procedural and jurisdictional boundaries which it accords the Federal courts.

With reference to the clear incompatibility between State and Federal jurisdiction, the third factor in our analysis, the dissent focuses on the fact that RICO predicate offenses incorporate violations of State as well as Federal law. They also return to the Sedima analysis which recognized that RICO is frequently applied to ordinary fraud and breach of contract actions. However, what this argument overlooks is that several of the predicate acts are within the exclusive province of the Federal courts. Thus, concurrent jurisdiction would involve the State courts in the complex interpretation of the underlying Federal law which has divided the Federal courts. State courts lack expertise in these areas and will not contribute to the uniform interpretation of the RICO statutes (see, Kinsey v Nestor Exploration—1981A, 604 F Supp 1365, 1371, supra; Greenview Trading Co. v Hershman & Leicher, 108 AD2d 468, 472, supra).

Application of RICO to cases not anticipated by Congress does not detract from the arguments militating in favor of exclusive Federal jurisdiction. The fact that RICO has been applied to a wide breadth of situations does not alter the original congressional intent. Even the Supreme Court in Sedima acknowledged that "in its * * * civil version, RICO is evolving into something quite different from the original conception of its enactors” (Sedima, S.P.R.L. v Imrex Co., 473 US 479, 500, supra). The fact that the courts give a more expansive interpretation to civil RICO than what Congress intended does not, therefore, validate a finding of concurrent jurisdiction contrary to congressional intent. To infer such an intent to give State courts jurisdiction would be untenable in view of the recognized purpose of Congress in enacting the RICO statute, i.e., to strengthen Federal law enforcement efforts to stamp out organized crime in the United States.

In sum, we conclude that Federal jurisdiction over civil RICO claims is exclusive. The structure, language and legislative history of the RICO Act demonstrates that Congress implicitly granted exclusive jurisdiction to the Federal courts. Moreover, the broad purpose of RICO as an aid in eliminating organized crime in the United States will best be served by exclusive Federal jurisdiction which will facilitate uniformity of interpretation and application. The provisions of New York’s OCCA serve to pinpoint the basic incompatibility between Federal interests and State court jurisdiction.

Accordingly, the order of Special Term dismissing the defendant Leucadia’s fifth counterclaim alleging a RICO violation should be affirmed.

1 . In County of Cook v Midcon Corp. (574 F Supp 902, affd 773 F2d 892, 905, n 4), the United States Circuit Court of Appeals for the Seventh Circuit refused to address the exclusivity issue but voiced its doubts whether, in light of the presumption of concurrent jurisdiction, RICO jurisdiction is exclusively Federal.

2 . Compare Spence v Flynt (647 F Supp 1266 [D Wyo 1986]); Broadway v San Antonio Shoe (643 F Supp 584 [SD Tex 1986]); Massey v City of Oklahoma City (643 F Supp 81 [WD Okla 1986]); Kinsey v Nestor Exploration—1981A (604 F Supp 1365 [ED Wash 1985]); County of Cook v Midcon Corp. (574 F Supp 902 [ND 111 1983], affd 773 F2d 892 [7th Cir 1985]); Thrall Car Mfg. Co. v Lindquist (145 111 App 3d 712, 495 NE2d 1132); Levinson v American Acc. Reinsurance Group (503 A2d 632 [Del Ch]); Maplewood Bank & Trust Co. v Acorn, Inc. (207 NJ Super 590, 504 A2d 819); Main Rusk Assocs. v Interior Space Constructors (699 SW2d 305 [Tex Civ App]); Green-view Trading Co. v Hershman & Leicher (108 AD2d 468), all holding that Federal courts have exclusive jurisdiction, with HMK Corp. v Walsey (637 F Supp 710 [ED Va 1986]; Karel v Kroner (635 F Supp 725 [ND 111 1986]); Kurz Co. v Lombardi (595 F Supp 373 [ED Pa 1984]); Luebke v Marine Natl. Bank (567 F Supp 1460 [ED Wis 1983]); Cianci v Superior Ct. (Poppingo) (40 Cal 3d 903, 221 Cal Rptr 575, 710 P2d 375), all holding that State courts have concurrent jurisdiction.