I am a big fan of AMC’s new Breaking Bad Prequel, Better Call Saul (and big fan of Breaking Bad, too). I am also a civil RICO lawyer. So naturally, when I watched the eighth episode of season one (March 23, 2015) entitled: “Rico” (and by the way, the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C.§1961 et seq., the reference for the episode title, is colloquially referred to as “RICO” more often than “Rico”), its content and storyline were especially significant for me. I also had a lot of racing thoughts during the hour about what Saul got right and what it got wrong regarding RICO, so to clear my head, I thought I’d share my unique perspective of this episode with a blog (which will also help to organize my thoughts). [Warning: Spoilers Ahead!]
Main protagonist Jimmy McGill (aka Saul Goodman) is grinding out a living in Albuquerque, New Mexico preparing wills for elderly clients. One of his clients is a resident of Sandpiper Crossing, an assisted living center for the elderly. While in the course of preparing his client’s will (and trying to secure payment for his services), he stumbles on a possibly wide-spread billing scam being carried out by Sandpiper. In short, Jimmy discovers that Sandpiper directly obtains all pensions and social security of its residents, deducts living expenses for that resident, and then pays each resident the left-over amount as a monthly allowance. The wrong-doing, however, is that Sandpiper is significantly overcharging its residents for the personal/medical items it provides (such as toilet paper, aspirin, syringes, etc.).
Jimmy begins talking to other residents to find out how widespread the overcharging scheme is, and then enlists his more experienced older-brother-attorney, Chuck, to assist him. Towards the end of the episode, Chuck determines that this is a civil RICO case, which is how the storyline of this week’s episode ends. Before we find out what happens to the case, I’ll give my thoughts on eight civil RICO issues that I spotted in this episode with a plus/minus rating. (And because New Mexico is in the Tenth Circuit, I will focus my analysis on Tenth Circuit case law as much possible).
The first issue in Jimmy’s RICO case is Sandpiper’s possible spoliation of evidence. After Jimmy begins talking to a number of Sandpiper residents, management becomes suspicious, bars Jimmy from re-entering, and begins shredding documents. Jimmy sees the shredding going on and astutely issues a letter to Sandpiper’s counsel on the spot, notifying it that he intends to file a legal action for the overbilling. Putting aside that his letter was written on toilet paper, Jimmy was correct in promptly issuing this letter because Sandpiper is now on notice of likely litigation and is required to preserve all evidence (i.e., cease shredding) or else risk sanctions for “spoliating evidence.” See, Turner v. Pub. Serv. Co. of Colorado, 563 F.3d 1136, 1149 (10th Cir. 2009) (“Spoliation sanctions are proper when ‘(1) a party has a duty to preserve evidence because it knew, or should have known, that litigation was imminent, and (2) the adverse party was prejudiced by the destruction of the evidence.’”) (citing authority). Better Call Saul got this issue right, so plus-one for Jimmy (and its writers) here.
The second issue in Jimmy’s RICO case is when Sandpiper’s attorney obtains Jimmy’s litigation letter and threatens him (Jimmy) with Rule 11 Sanctions if he pursues it. Fed. R. Civ. P. 11’s (“Rule 11”) purpose is to curb the filing of frivolous lawsuits and pleadings by providing monetary sanctions to the “victims” of such judicial abuse. But at this point in the life of Jimmy’s RICO case, Rule 11 sanctions are simply not available. Rule 11 states, in pertinent part:
(a) Signature. Every pleading, written motion, and other paper must be signed by at least one attorney of record…
(b) Representations to the Court. By presenting to the court a pleading, written motion, or other paper…an attorney…certifies that to the best of the person’s knowledge, information, and belief, formed after an inquiry reasonable under the circumstances: (1) it is not being presented for any improper purpose…(2) the claims…are warranted by existing law…(3) the factual contentions have evidentiary support…
The upshot here is that Rule 11 is only available once an attorney (or party) signs a pleading that it files with the Court. Writing a demand letter—even if it is based on a completely frivolous theory—is not yet grounds for Rule 11 sanctions. Rule 11 would only become available once the case is actually filed. (Rule 11 also provides the possible offender with a 21-day safe-harbor period to withdraw the frivolous pleading before any sanctions would be imposed. See Rule 11(c)(2)). It is worth noting here that there could be other possible legal consequences for issuing a frivolous demand letter, but Rule 11 is not one of them. Better Call Saul got this issue wrong, so minus-one for Jimmy (and its writers) here.
The third issue in Jimmy’s RICO case involves the essence of the RICO statute—the RICO enterprise. In order to have a civil RICO case, there must be an enterprise, which as we have stated in the past on this blog, is a “separate entity… such as [a] crime family or a legitimate corporation.” http://www.fosterpc.com/do-you-have-a-rico-case/. The enterprise is not a defendant in the case, but instead, is the entity through which the racketeering activity is conducted, or it can be the victim of the racketeering activity. See 18 U.S.C. §§ 1961(4) and 1962(c)-(d); see also http://www.fosterpc.com/the-silent-rico-enterprise/. One of the most fundamental aspects of the enterprise requirement is “distinctness,” i.e., that the enterprise and the defendant cannot be the same entity, otherwise your complaint will face certain dismissal. See, e.g., Cedric Kushner Promotions, Ltd. v. King, 533 U.S. 158, 161 (2001) (“We do not quarrel with the basic principle that to establish liability under § 1962(c) one must allege and prove the existence of two distinct entities: (1) a ‘person’; and (2) an ‘enterprise’ that is not simply the same ‘person’ referred to by a different name.”). Here, it appears that Jimmy intends to sue Sandpiper as the Defendant as well as identifying it as the enterprise through which the overbilling scheme was carried out. This will definitely run afoul of the “distinctness” requirement and cause his case to be dismissed before discovery even begins.
One possible way around this problem would be to name the owners and managers of Sandpiper as individual Defendants, and having Sandpiper Crossings (the corporate entity) identified as the non-party RICO enterprise, as was the case in Cedric Kushner. There are some obvious practical considerations that go along with this proposed strategy, but as long as there is a factual basis to proceed this way, it is legally sound. As it stands now, Jimmy’s possible case against Sandpiper will almost certainly be dismissed. Better Call Saul got this major issue wrong, so minus-two for Jimmy (and its writers) here.
The fourth issue in Jimmy’s RICO case is his use of the mail-fraud statute, 18 U.S.C. 1341, as the act of racketeering (or “RICO predicate act”) that Sandpiper violated. The theory of Jimmy’s case is that Sandpiper violated §1341 when it ordered syringes from Nebraska, had them shipped to its facilities nationwide (including in New Mexico), and then deceptively overcharged its residents for these same syringes (as well as other items). I agree that this is likely mail fraud under §1341 and is an act of racketeering subject to civil RICO. My issue, however, is with Jimmy (and Chuck’s) analysis of why the mail fraud statute applies.
Jimmy and Chuck spent the entire night taping together pieces of shredded documents they obtained from Sandpiper looking for a “smoking gun.” After this extremely tedious task, they found a document showing that the syringes had been shipped from Nebraska to New Mexico—across state lines—and therefore subject to the mail fraud statute (now making this a civil RICO case in their opinion). But this was completely unnecessary because mail fraud can be established even if the mailings were intrastate (and not interstate). See, e.g., United States v. Elliott, 89 F.3d 1360, 1364 (8th Cir. 1996) (“the jurisdictional basis of the mail fraud statute is grounded in the Postal Power and therefore necessarily encompasses all items passing through the United States mails, even if their passage is purely intrastate.”) (citing authority); In re Burzynski, 989 F.2d 733, 742 (5th Cir. 1993) (same proposition). In short, as long as Sandpiper used the U.S. mails at any point to carry-out this scheme—for example, by mailing checks, invoices, or financial statements to its residents—the mail fraud statute is implicated, even if the mailings were sent to and from New Mexico. Jimmy and Chuck spent a lot of valuable time reconstructing shredded documents that were not essential to their case. Better Call Saul got this issue wrong, so minus-one for Jimmy (and its writers) here.
The fifth issue in Jimmy’s RICO case is whether a pattern of racketeering can be established, another requirement under RICO. 18 U.S.C. §1961(5) defines a pattern of racketeering as: “at least two acts of racketeering activity, one of which occurred after the effective date of this chapter and the last of which occurred within ten years…after the commission of a prior act of racketeering activity.” And while proving a pattern can often be complicated, the issue here seems clear cut, as the overbilling appears to have been going on for many years, involved many residents, and continues to occur at the present time. Therefore, Jimmy can easily satisfy either the closed-ended (past violations) or the open-ended (ongoing, future) pattern options. See, e.g., H.J. Inc. v. Nw. Bell Tel. Co., 492 U.S. 229, 241 (1989) (‘”Continuity’ is both a closed- and open-ended concept, referring either to a closed period of repeated conduct, or to past conduct that by its nature projects into the future with a threat of repetition.”). Better Call Saul got this issue right, so plus-one for Jimmy (and its writers) here.
The sixth issue in Jimmy’s RICO case is proceeding as a class action. I agree with Jimmy and Chuck that this case should proceed as a class action, as each over-billed resident of Sandpiper is a likely class member. (And there are multiple Sandpiper locations in different states!). Once Jimmy and Chuck realize the magnitude of the case, they determine that Jimmy needs to “sign up” more clients at the New Mexico facility. While continuing to investigate the claims (by interviewing more residents) is a very prudent way to proceed, assuming that Jimmy has at least one client/class representative, there is no need to continue “signing up” additional class members. If this case proceeds as a class action, it will do so under Fed. R. Civ. P. 23(b)(3) (“Rule 23”), which means that all class members will receive “notice” (under Rule 23(c)(2)) regarding their rights to opt-out of the class or be bound by any judgment. In other words, class actions under Rule 23(b)(3) are “opt-out” classes in which class members are presumptively included, unless they specify (usually in writing) that they want to be excluded. Accordingly, if Jimmy can get his class certified under Rule 23, “signing up” more class members is legally unnecessary. Better Call Saul got this issue wrong, so minus-one for Jimmy (and its writers) here.
The seventh issue in Jimmy’s RICO case is legal research. Chuck was talking really fast about the cases that he wanted Jimmy to “pull from westlaw,” but I caught two of them, and I do not believe they are really very applicable. The first is Holmes v. Sec. Investor Prot. Corp., 503 U.S. 258 (1992), which primarily concerns the issue of whether a plaintiff is the most directly injured party and whether there is a better plaintiff to sue. While Holmes deals with the issue of proximate causation—which is always an issue in civil RICO cases—the most obviously injured party in Jimmy’s case are the elderly residents of Sandpiper. There does not appear to be any party better positioned to sue. Therefore, Holmes is not on point. The second case is Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479 (1985). While Sedima is clearly a seminal civil RICO case, it stands for the now (and in 2002 when Saul takes place) non-controversial propositions that: a) there is no requirement that a civil RICO defendant must first be convicted criminally; and b) that a plaintiff need not show any specialized “racketeering” injury (e.g., ordinary money damages are acceptable to proceed). Jimmy and Chuck would be better off focusing their research elsewhere. Better Call Saul got this issue wrong, so minus-one for Jimmy (and its writers) here.
The eighth issue in Jimmy’s RICO case is the amount of damages. As Jimmy and Chuck correctly note, treble damages (or damages x 3) are available to a prevailing civil RICO plaintiff (as well as costs and attorneys fees). 18 U.S.C. 1964(c) (“Any person injured in his business or property by reason of a violation of section 1962…shall recover threefold the damages he sustains and the cost of the suit, including a reasonable attorney’s fee…”). Moreover, Chuck correctly recognizes that Sandpiper’s offer to settle (pre-suit) for $100,000 is significantly lower than the true value of the case, especially when considering that Sandpiper has many residents at numerous assisted living locations in various states. Chuck and Jimmy correctly refused to settle. Better Call Saul got this issue right, so plus-one for Jimmy (and its writers) here.
In conclusion, I think Jimmy has stumbled upon a very good civil RICO case, which if pursued properly, could provide the class-members with significant monetary reimbursement for their losses (i.e., the amount they were overbilled). My concern is that neither Jimmy nor Chuck fully understand all the legal and practical issues that go into prosecuting a major civil RICO class action (see: total score of minus-3), and that they may lose the case before it even gets going.
More simply put: Would you want Jimmy McGill (or Chuck McGill, for that matter) as your Rule 23(g) class counsel? Better not call Saul!