KIRSCHNER et al v. WACHOVIA CAPITAL MARKETS, LLC et al
Filing
458
ORDER denying 418 Motion to Dismiss. Signed by Judge Donetta W. Ambrose on 5/26/11. (ask)
IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF PENNSYLVANIA
IN RE: LE-NATURE‟S, INC.
) WDPA No. 9-MC-162
) MDL N0. 2021
______________________________________________________________________________
FARM CREDIT LEASING SERVICES CORP.,
Plaintiff,
vs.
KRONES, INC., et al.,
Defendants.
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)
) No. 9-1445
)
)
)
)
)
)
OPINION AND ORDER
SYNOPSIS
This action is part of a consolidated multi-district proceeding, docketed at No. 9-MC-162,
with which the parties are familiar. In this particular case, Plaintiff Farm Credit Leasing
(“FCL”) avers that Defendants wrongfully involved FCL in an overvalued industrial equipment
lease with Le-Nature‟s. Defendants Krones AG, a German corporation, and Volker Kronseder,
a German citizen and resident, and Chairman and CEO of Krones AG at the pertinent times, have
moved to dismiss the Complaint against them on grounds of RICO‟s limited domestic reach.1
For the following reasons, their Motion will be denied.
I. STANDARD OF REVIEW
In deciding a motion to dismiss, all factual allegations, and all reasonable inferences
therefrom, must be accepted as true and viewed in a light most favorable to the plaintiff. Colburn
v. Upper Darby Twp., 838 F.2d 663, 666 (3d Cir. 1988). A claim is plausible on its face, and
1
Defendant Kronseder also moves for dismissal based on lack of personal jurisdiction, an issue that, as the parties
agree, will be held in abeyance pending jurisdictional discovery.
not subject to dismissal, "when the plaintiff pleads factual content that allows the court to draw
the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v.
Iqbal,
U.S. , 129 S.Ct. 1937, 1949, 173 L. Ed. 2d 868 (2009) (citing Bell Atl. Corp. v.
Twombly, 550 U.S. 544, 556, 127 S. Ct. 1955, 167 L. Ed. 2d 929 (2007)). While "[t]he
plausibility standard is not akin to a 'probability requirement' … it asks for more than a sheer
possibility…." Id. at 949. A motion to dismiss will be granted if the plaintiff has not articulated
facts sufficient to "raise a right to relief above the speculative level." Bangura v. City of
Philadelphia, 338 Fed. Appx. 261 (3d Cir. 2009) (citing Twombly, 127 S. Ct. at 1965). Thus, a
“formulaic recitation of the elements of a cause of action will not do.” Twombly, 127 S. Ct. at
1964-65.
II. DISCUSSION
A. Morrison v. National Australia Bank Ltd.
Defendants‟ Motion is based, principally, on the relatively recent decision of Morrison v.
Nat'l Austl. Bank Ltd., 130 S. Ct. 2869, __ U.S. __, 177 L. Ed. 2d 535 (2010). In Morrison, the
Court considered the reach of the Securities Exchange Act, 17 CFR § 240.10b-5, which relates to
deceptive conduct “in connection with” the purchase or sale of any security.2 The case involved
2
Rule 10b-5, in pertinent part, makes it illegal:
for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the
mails or of any facility of any national securities exchange,
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the
statements made, in the light of the circumstances under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon
any person,
in connection with the purchase or sale of any security." 17 CFR § 240.10b-5 (2009).
Section 10, pursuant to which the Regulation was promulgated, reads, in pertinent part, as follows:
foreign plaintiffs suing foreign and United States defendants, for misconduct related to a stock
traded only on foreign exchanges, and not in the United States. Id. at 2875. The defendants,
however, allegedly engaged in deceptive conduct in the United States. Id. at 2875-76. The
parties brought before the Court the issue of whether the Securities Exchange Act “provides a
cause of action to foreign plaintiffs suing foreign and American defendants for misconduct in
connection with securities traded on foreign exchanges.” Id. at 2875.
After emphasizing that the question was one of merits rather than subject matter
jurisdiction, the Court moved on to the issue of the statute‟s territorial reach. Id. at 2877-78. In
so doing, the Court confirmed and applied the presumption that absent an expression of
Congressional intent that a statute apply extraterritorially, the statute does not so apply. Id. at
2883. In employing the presumption, the Court rejected the more fluid, ad-hoc “effects” and
“conduct” approaches to determining the statute‟s reach, which had developed in the lower
courts. The “effects” test focused on "whether the wrongful conduct had a substantial effect in
the United States or upon United States citizens"; the “conduct” test focused on "whether the
wrongful conduct occurred in the United States." Id. at 2879.
In addition, the Court acknowledged that determining a statute‟s territorial scope did not
necessarily end the inquiry. 3 Id. at 2884. In Morrison, the plaintiffs claimed that they did not, in
fact, seek extraterritorial application, because the alleged deceptive conduct occurred
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate
commerce or of the mails, or of any facility of any national securities exchange . . . [t]o use or employ, in connection
with the purchase or sale of any security registered on a national securities exchange or any security not so
registered, . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as
the [Securities and Exchange] Commission may prescribe . . . ." 15 U.S.C. 78j(b).
3
Reflexive reference to the term “focus” is unhelpful, as a statute could be described as concentrated on the
activities it criminalizes -- here, racketeering activities -- or on the entity or person it seeks to protect, or on a blend
of both, and all three options may be accurate depending on context. Similarly, RICO‟s stated purpose -- to “seek
the eradication of organized crime in the United States,” does not assist, in any appreciable way, a conclusion
regarding RICO‟s “focus,” as that word was used in Morrison.
domestically. Id. Thus, it remained to determine whether domestic deceptive conduct related
to the securities transaction was sufficient to bring the claim within the statute‟s ambit. As the
Supreme Court has noted, “it is a rare case of prohibited extraterritorial application that lacks all
contact with the territory of the United States.” Id. at 2884.
In making its inquiry, the Court looked to the plaintiffs‟ claim in light of the “‟focus‟ of
Congressional concern” embodied in the statute. Id. at 2879. In assessing that “focus,” the
Court noted that the Securities Exchange Act did not punish deceptive conduct alone, but
“deceptive conduct „in connection with the purchase or sale of any security registered on a
national securities exchange or any security not so registered.‟” Id. at 2884. Thus, it found that
the transactions, and not the prohibited acts, were “the objects of the statute‟s solicitude.” Id.
Accordingly, the Court found that the Securities Exchange Act focused on securities transactions
in the United States, rather than extraterritorially -- thus, it follows that the statute only applies in
the case of domestic securities transactions. Id. at 2884. It distinguished the Exchange Act in
this respect from the wire-fraud statute, which prohibits “‟any scheme or artifice to defraud,‟ -fraud simpliciter, without any requirements that it be „in connection with‟ any particular
transaction or event.‟” Id. at 2887.4 The Court also noted the probability of incompatibility with
the laws of other countries, which regulate their own securities exchanges and transactions. Id.
at 2885.
B. RICO and Plaintiff’s Complaint
Because the RICO statute does not contain evidence that Congress intended
extraterritorial application, Morrison has been held to preclude such application. United States v.
Philip Morris USA, Inc., No. 99-2496, 2011 U.S. Dist. LEXIS 32053, at *24 (D. D. C. Mar. 28,
4
In mentioning the wire-fraud statute, the Court discussed the case of Pasquantino v. United States, 544 U.S. 349,
125 S. Ct. 1766, 161 L. Ed. 2d 619 (2005). In Pasquinto, defendants were found to have violated the wire-fraud act
by ordering liquor via phone call placed in the United States, with the intent to smuggle it into Canada. Id. at 371.
2011); Norex Petroleum Ltd. v. Access Indus., Inc., 631 F.3d 29, 32-33 (2d Cir. 2010); Cedeño
v. Intech Group, Inc., 733 F. Supp. 2d 471, 473-74 (S.D.N.Y. 2010). At first glance, and as the
present parties caution, this case might appear to impose a choice between the two evils of either
adopting Morrison wholesale and thus per se immunizing foreign defendants from RICO
liability, or endorsing a case-by-case analysis that effectively revives the “conduct” or “effect”type test rejected by the United States Supreme Court.5
The present Plaintiff does not contest
RICO‟s territorial scope; instead, it argues, inter alia, that Defendants participated in a domestic
enterprise, and thus fall within that scope. In turn, Defendants contend that the alleged predicate
acts were foreign, and RICO cannot apply to foreign conduct merely because the enterprise is
domestic. In addition, they argue that they are alleged to have engaged, at most, in minimal
domestic conduct. This, they assert, renders the claim extraterritorial and beyond RICO‟s reach.
Applying the same mode of analysis used in Morrison, I will begin with assessing the
focus of Congressional concern embodied in RICO. RICO prohibits not racketeering activity
standing alone, but racketeering activity in specified types of connection with “any enterprise
which is engaged in, or the activities of which affect, interstate or foreign commerce.” 18 U.S.C.
' 1962. 6 In other words, in the case of RICO, the enterprise is clearly an object of
5
I am persuaded that, having been rejected with respect to the Securities Exchange Act, the “effects” and “conduct”
approaches should likewise be rejected, for the same reasons, in the RICO context.
6
In pertinent part, RICO reads as follows:
(a) It shall be unlawful for any person who has received any income derived, directly or indirectly, from a pattern of
racketeering activity or through collection of an unlawful debt in which such person has participated as a principal
within the meaning of section 2, title 18, United States Code…to use or invest, directly or indirectly, any part of
such income, or the proceeds of such income, in acquisition of any interest in, or the establishment or operation of,
any enterprise which is engaged in, or the activities of which affect, interstate or foreign commerce. …
(b) It shall be unlawful for any person through a pattern of racketeering activity or through collection of an unlawful
debt to acquire or maintain, directly or indirectly, any interest in or control of any enterprise which is engaged in, or
the activities of which affect, interstate or foreign commerce.
(c) It shall be unlawful for any person employed by or associated with any enterprise engaged in, or the activities of
Congressional solicitude. To further borrow from Morrison, RICO does not prohibit
racketeering activities simpliciter -- indeed, those activities are independently criminalized by
statute -- but only as related, in enumerated ways, to an enterprise. Thus, RICO “focuses,” in the
context of a territorial analysis, on domestic rather than foreign enterprise.7 As a result, a claim
involving a domestic enterprise falls within range of RICO. European Cmty. v. RJR Nabisco,
Inc., No. 2-5771, 2011 U.S. Dist. LEXIS 23538, at **15-16 (E.D. N.Y. Mar. 8, 2011) (applying
Morrison to conclude that “focus” of RICO is domestic enterprise).
The underlying purposes of RICO support this conclusion. “A major purpose of the
RICO statute was to protect legitimate enterprises by attacking and removing those who had
infiltrated them for unlawful purposes.” United States v. McDade, 28 F.3d 283 (3d Cir. 1994)
(emphasis omitted). “[T]he focus of RICO is on the enterprise as the recipient of, or cover for, a
pattern of criminal activity.” Cedeño,733 F. Supp. 2d at 474. Indeed, the very title of the statute,
“Racketeer Influenced and Corrupt Organizations,” suggests an emphasis on the organization, or
enterprise, itself. Consistent with this principle, it has been found that RICO is inapplicable to a
solely foreign enterprise. Id. For all of these reasons, I find that the principles of Morrison do
not bar a RICO claim if a complaint avers a domestic enterprise.8
which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such
enterprise's affairs through a pattern of racketeering activity or collection of unlawful debt.
(d) It shall be unlawful for any person to conspire to violate any of the provisions of subsection (a), (b), or (c) of this
section.
18 U.S.C.S. ' 1962.
7
I do not intend to suggest that there may be only one concern underlying a statute, or that one element of the statute
takes primacy; instead, this analysis inheres only in the territorial issue. Indeed, RICO may have more than one
“focus” -- including, for example, the pattern of racketeering activity required by the statute.
8
Other countries do not have precise analogues to RICO, possibly because “other countries have not had exactly the
same problems with organized crime as those that led to enactment of RICO in the United States.” Wise, Edward,
Rico and its Analogues: Some Comparative Considerations, 27 Syracuse J. Int'l L. & Com. 303, 305 (2000).
In this case, as Defendants do not contest, Plaintiff alleges that Defendants participated in
a domestic enterprise.9 Thus, I need not decide whether RICO reaches this case because
Defendants‟ conduct, or the effects thereof, occurred in the United States or elsewhere -- in other
words, no ad-hoc analysis is required. Instead, the alleged enterprise was domestic, and within
the ambit of RICO. Accordingly, Morrison‟s presumption does not preclude the Plaintiff‟s
RICO claim.
As a final matter, Defendants challenge Plaintiff‟s allegations primarily to support their
argument that those allegations do not establish a sufficient domestic connection to implicate
RICO, and not as a direct pleading sufficiency challenge under Twombly and Iqbal. To the
extent that Defendants do contend that the Complaint alleges insufficient facts to support RICO
liability, aside from the territoriality contention, I am not persuaded. I have considered and
rejected similar arguments elsewhere in this MDL proceeding. See, e.g., Order dated October
16, 2009, Kirshner v. Wachovia Capital Markets, LLC, W.D. Pa. Docket No. 9-162; Order dated
September 16, 2009, CIT v. Krones, W.D. Pa. Docket No. 9-162. As suggested in those cases,
Plaintiff must allege enough facts to permit a reasonable inference that it is plausible that
Defendants were part of an enterprise and thus liable for the misconduct alleged under RICO. I
agree that the pleading contains several conclusory allegations, but at this early stage in the
litigation, it is sufficient under applicable standards.
CONCLUSION
In sum, Morrison does not apply to preclude RICO from applying in this case. Further, I
do not find Plaintiff‟s pleading of RICO claims against Defendant insufficient under applicable
standards. As the parties agree, Defendant Kronseder‟s personal jurisdiction argument is best
9
Although I recognize the problems that might arise in different RICO contexts, I do not opine as to how today‟s
findings apply to an associated-in-fact enterprise, which might not have a distinct “location” as does an enterprise
that is a legal entity.
disposed of after pertinent discovery has concluded. Thus, I will deny that aspect of the Motion
without prejudice.
ORDER
AND NOW, this 26th day of May, 2011, it is hereby ORDERED, ADJUDGED, and
DECREED that Defendants‟ Motion to Dismiss (Docket No. 20) is DENIED. The denial is
without prejudice solely to the extent that Defendant Kronseder may refile his Motion to Dismiss
pursuant to Fed. R. Civ. P. (12)(b)(2), after jurisdictional discovery.
BY THE COURT:
/s/Donetta W. Ambrose
Donetta W. Ambrose
Senior Judge, U.S. District Court
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