Bridge v. Phoenix Bond & Indemnity Co.

The Court this Term will clarify whether RICO lawsuits are available to people or companies who are directly injured by a defendant's fraudulent statements to a neutral party.

The case, Bridge v. Phoenix Bond & Indemnity, No. 07-210, arises from the obscure backwater of Cook County, Illinois, property tax lien auctions.

When a property owner neglects his tax bill, the county acquires a lien on the real estate. Rather than take the property itself, the county auctions the liens once a year. Each bidder pays the amount of back taxes and receives the right to seek the money plus a penalty from the property owner. Owners who do not pay the lienholders forfeit their properties. Because the properties can have great resale value, multiple entities typically vie for the liens and the county awards each to the entity that seeks the lowest penalty from the owner.

Demand for the liens is so high that competing bidders for the same property will often lower their penalty bid to zero percent, resulting in a tie among bidders. The county then allocates properties evenly among zero bidders. In order to assure equity among zero bidders, it requires them to mail affidavits that they are bidding in their own name and are not related to any other bidders.

The respondents in this case sued the petitioners for allegedly submitting false affidavits to hide the fact that they were actually in collusion. As a result, they wound up with a disproportionate number of tax liens at the expense of the petitioners.

The respondents brought a civil RICO suit, alleging that the false affidavits amounted to a predicate offense of mail fraud. The district court held that the respondents lacked standing because the false statements were made to the county, rather than directly to them.

The Seventh Circuit reversed in an opinion by Chief Judge Frank Easterbrook, essentially holding that the respondents had suffered an injury in fact -- the loss of an opportunity to acquire the lien -- and therefore had standing. The appeals court further held that the respondents had satisfied the proximate cause requirement of RICO because although the fraud had been perpetrated on the county, they were its direct victims.

In seeking certiorari, the petitioners claimed that the circuits were split on the question whether a RICO plaintiff had to plead and prove reliance on a fraudulent statement. The respondents suggested that the issues of reliance and standing were merely superficial labels for the analytical issue of proximate cause. On that issue, they urged, the circuits were essentially in accord and the Seventh Circuit opinion was in the mainstream.

In agreeing to hear the case despite the parties' evident disagreement of the precise issue at stake, the Court stated that its review would be limited to the question "[w]hether 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."

The case is likely to be argued in the spring.

RICO, statutory interpretation, causation, reliance

On Monday, the high court held that RICO lawsuits are available to people or companies who are directly injured by a defendant's fraudulent statements to a neutral party.

The case, Bridge v. Phoenix Bond & Indemnity, No. 07-210, arises from the obscure backwater of Cook County, Illinois, property tax lien auctions.

When a property owner neglects his tax bill, the county acquires a lien on the real estate. Rather than take the property itself, the county auctions the liens once a year. Each bidder pays the amount of back taxes and receives the right to seek the money plus a penalty from the property owner. Owners who do not pay the lienholders forfeit their properties. Because the properties can have great resale value, multiple entities typically vie for the liens and the county awards each to the entity that seeks the lowest penalty from the owner.

Demand for the liens is so high that competing bidders for the same property will often lower their penalty bid to zero percent, resulting in a tie among bidders. The county then allocates properties evenly among zero bidders. In order to assure equity among zero bidders, it requires them to mail affidavits that they are bidding in their own name and are not related to any other bidders.

The respondents in this case sued the petitioners for allegedly submitting false affidavits to hide the fact that they were actually in collusion. As a result, they wound up with a disproportionate number of tax liens at the expense of the petitioners.

The respondents brought a civil RICO suit, alleging that the false affidavits amounted to a predicate offense of mail fraud. The district court held that the respondents lacked standing because the false statements were made to the county, rather than directly to them.

The Seventh Circuit reversed in an opinion by Chief Judge Frank Easterbrook, essentially holding that the respondents had suffered an injury in fact -- the loss of an opportunity to acquire the lien -- and therefore had standing. The appeals court further held that the respondents had satisfied the proximate cause requirement of RICO because although the fraud had been perpetrated on the county, they were its direct victims.

In seeking certiorari, the petitioners claimed that the circuits were split on the question whether a RICO plaintiff had to plead and prove reliance on a fraudulent statement. The respondents suggested that the issues of reliance and standing were merely superficial labels for the analytical issue of proximate cause. On that issue, they urged, the circuits were essentially in accord and the Seventh Circuit opinion was in the mainstream.

In agreeing to hear the case despite the parties' evident disagreement of the precise issue at stake, the Court stated that its review would be limited to the question "[w]hether 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."

On June 9, a unanimous court upheld the appeals court decision.

"Accepting their allegations as true, respondents clearly were injured by petitioners’ scheme: As a result of petitioners’ fraud, respondents lost valuable liens they otherwise would have been awarded," Justice Clarence Thomas wrote for the court. "And this is true even though they did not rely on petitioners’ false attestations of compliance with the county’s rules."