Sabre Group v. Phoenix Bond

This case has to do with how to interpret a federal law (called RICO--the Racketeer Influenced and Corrupt Organizations Act, enacted in 1970--18 USC secs 1961-1968) which was passed primarily to catch the Mafia but whose scope has expanded to include many individuals or groups engaging in fraudulent activity. At issue in this case is mail fraud--specifically the using of the mails to communicate material that Phoenix Bond says was fraudulent. Mail fraud is defined as an activity where someone

"devise[s] or intend[s] to devise any scheme or artifice to defraud..for the purpose of executing such scheme or artifice or attempting to do so, places in any post office or authorized depository for mail matter...any matter or thing whatever to be sen,...", 18 USC sec. 1341.

The RICO statute defines "racketeering activity," among other things, as including anything that violates 18 USC sec. 1341. Once something is defined as "racketeering activity," any person "injured" by this activity can sue in US District Court and recover "threefold the damages he sustains and the cost of the suit, including a reasonable attorney's fee," 18 USC sec. 1964(c).

Thus, we have, in biblical terminology, a threefold cord that cannot quickly be broken. Alleged fraudulent activity, if it creates an injury and does so by use of the US mails, can be stopped by a suit under RICO, and the offending party, which committed the fraud, is liable for what we in law call "treble damages." Plaintiffs, therefore, try to define their opponents' activity as "RICO" activity; defendants try to argue that their conduct in no way rises to the level of RICO activity.

One of the places where the issue is contested most hotly (i.e., whether defendant's activity comes under the RICO statute) is whether an injured party must personally be injured by the defendant--i.e., whether the plaintiff has relied on representations made by the defendant and thus suffered as a consequence. All of this is a little ethereal, but will come into focus when we look at the facts of this case.

The Facts of the Case

Judge Easterbrook, the author of the opinion in the 7th Circuit (477 F3d 928 (7th Cir 2007)), laid out the general factual background for this Chicago case as follows:

"Failure to pay property taxes creates a lien for the amount of the unpaid tax (including interest), plus a penalty. Cook County, Illinois, sells tax liens at auction. The bids are stated as percentage penalties that the owner must pay (on top of the taxes and interest) to the winning bidder to clear the lien. The bidder willing to accept the lowest penalty wins the auction; the winner pays the back taxes to the County and receives the tax lien plus the right to collect the penalty. If the owner does not pay up, the lien holder can obtain a tax deed and thus become the parcel's owner."

These are the general background "facts" of the Cook County tax lien system. Now, let's turn to the relevant facts of this case. Sabre and Phoenix are two companies that "bid" for these tax liens. Competition for liens is fierce because it is usually the case that the individual taxpayer, whose lien is sold, won't ever pay his taxes, thus enabling the lienholder to foreclose on the property and own it. Thus, even though an interest can be charged on the taxpayer, the competition has driven this interest rate down to 0%. Companies still "make money," however, because of the aforementioned default problem.

So, many companies want to get into the business of buying up tax liens. Because everyone will charge 0% interest, the County faces the problem of receiving multiple identical bids from various lien-buying companies. In order to resolve this problem of identical bids, the County decided to allocate the bids by lot. For example, this means that "If X bids 0% on ten parcels, and each parcel attracts five bids at that penalty rate, then the County awards X two of the ten parcels."

It doesn't take a rocket scientist to figure out that in order to win more bids, you have to submit more bids. And, in order to disguise that it is really one company submitting multiple bids, companies would begin to submit bids through agents or other entities that might confuse the process and put them in a competitive advantage in getting these liens. For this reason, Cook County passed an ordinance, called the "Single, Simultaneous Bidder Rule," which required every tax buying entity to submit an affidavit saying that no "related entity" had bid for the liens.

The Case Arises--and the Issue Before the Sup Court

But here is where we have the issue before the Court. Phoenix accused Sabre of violating the ordinance by submitting an affidavit saying that no related entity was bidding on the tax liens when, in fact (according to Phoenix), Sabre was indirectly submitting several bids. Lying in an affidavit in order to secure material advantage would be fraud. Since this fraud was communicated through the mail, it would be mail fraud. Since mail fraud is defined in the RICO statute as a "racketeering activity," you have RICO brought in. Then, you have the potential of treble damages. Bingo. Big penalties.

At least, that is the theory of the case as argued by Phoenix. But Sabre responds that Phoenix hasn't "relied" on Sabre's statements and that RICO is only triggered when there is actual reliance by the party claimed to be hurt. If there was any fraud at all in the case, Sabre argues, it was fraud on Cook County (which awarded the liens), and in fact Cook County wasn't defrauded since it received all the tax money it requested.

Phoenix, on the other hand, argues that a party doesn't have to be directly reliant on the fraudulent activity to suffer from its results. In other words, Phoenix claims that it doesn't have to receive Sabre's affidavit and rely on its claims in order to be injured under RICO and then bring its treble damage claim. So now the issue is before the Court. Here is how the Court defined the question it will consider:

"Whether reliance is a required element of a RICO claim predicated on mail fraud and, if it is, whether that reliance must be by the plaintiff.”

Conclusion

This states the issue in a nutshell. Does the RICO statute require that the party who claims injury (Phoenix--a competitor of Sabre) demonstrate that it relied on Sabre's claims to Cook County? If it does, Phoenix loses. If the RICO statute doesn't require plaintiff reliance on Sabre's statements, then Phoenix wins. The issue before the Court, then, is how broadly to read the RICO statute.

You would have thought that after 38 years the "reliance" issue would have been settled. After all, reliance is a pretty basic issue in tort law. But the Circuit Courts differ in their approach. The 7th Circuit decided that reliance wasn't necessary. It is in a minority position on this one, but the Supremes may well affirm the 7th Circuit. It seems that the Court wants to give federal law a bigger "bite" against "bad guys.."

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