How long does a defendant have to engage in alleged criminal activity in order for a civil RICO claim against it to survive a motion to dismiss? According to the district court in Kalitta Air, LLC v. GSBD & Associates (6th Cir., No. 14-1027, Nov. 13, 2014) (unpublished) [PDF], an alleged pattern of predicate fraudulent acts spanning between 16 and 32 months and ostensibly including multiple victims from discrete schemes was not enough. In reversing the district court’s dismissal order, however, the Sixth Circuit’s ruling demonstrates that the viability of RICO claims will not necessarily hinge on a calendar but may turn on whether the complaint sufficiently alleges an open-ended scheme.
The fundamental issue in Kalitta Air is whether, under the Rule 12(b)(6) standard, the plaintiff sufficiently alleged a RICO scheme that demonstrated the requisite “closed-ended continuity” (i.e., a closed period of repeated conduct) or “open-ended continuity” (i.e., past conduct that inherently projects into the future and threatens repetition). The alleged facts in the case are involved but, in salient part, boil down as follows. Kalitta contracted with GSB to buy jet fuel for Kalitta’s air-cargo business, after GSB claimed it could obtain a discounted price for the fuel based on purported connections with international banks and the Saudi royal family. After providing $29 million to GSB in an escrow account facilitated by escrow agent First International over the course of many months, Kalitta discovered that GSB allegedly violated the contract, draining the escrow fund, converting Kalitta’s escrowed monies, and shortchanging Kalitta of some $4 million in fuel that it had purchased. Kalitta brought contract, fraud and RICO claims against GSB and other related persons and entities, alleging a series of predicate acts that included a similar scheme of alleged fraud by GSB against another company, Arrow Air, as well as an allegedly fraudulent scheme involving home mortgages that made use of Kalitta’s escrowed funds.
In reversing the district court, District Judge Lee Rosenthal (S.D. Texas), sitting by designation, wrote for a unanimous panel that included Circuit Judges Sutton and Kethledge. The panel found that, “[i]f proven, Kalitta’s well-pleaded factual allegations of the predicate acts, of another victim of a very similar scheme, and of the continued operation of GSB and First International, combine to support a plausible inference that GSB—the alleged RICO enterprise—used these and similar predicate acts as its ‘regular way of doing business’ and that it and the other defendants remain a threat to others.” The panel further found that “[w]hile allegations that defendants breached an open-ended contract do not by themselves, or necessarily when combined with other allegations, state a RICO claim, the allegations in Kalitta’s amended complaint go beyond those asserting a mere contract dispute.” In particular, the panel noted the nature of the contract between Kalitta and GSB: “Although either party could terminate on 60-days’ notice, the agreement could have continued indefinitely but for the fortuity of Kalitta’s discovery.” The panel also noted that “even after the contracts ended, the defendants stripped the escrow account and sent invoices and emails with false statements to get Kalitta to resume the arrangement.” Finally, the panel observed that “Arrow Air’s choice of whether to allege fraud or RICO claims in its own lawsuit does not foreclose Kalitta’s RICO claims in its action. Kalitta’s allegations that GSB and other defendants used an escrow account to supply Arrow Air with less jet fuel than it paid for and to get the money earlier than the contract allowed make it plausible that Arrow Air was a victim of the same racketeering activity that deceived Kalitta.” For these reasons, the panel found that Kalitta’s complaint sufficiently alleged a RICO claim that met the requirement of “open-ended continuity.”
Although the Sixth Circuit’s conclusion is properly driven by the terms of the contract between Kalitta and GSB as well as specifics regarding GSB’s allegedly fraudulent acts, the ruling in Kalitta Air increases the potential viability of RICO claims, making the statutory charge a more viable arrow in the business quiver. Kalitta Air is worthy of review before filing a RICO complaint or moving to dismiss such an action.