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Keywords

plaintiffdefendantattorneypleaclass actioncivil procedurerehabilitation

plaintiffjurisdictionpleacivil procedure

Related Cases

University of Maryland at Baltimore v. Peat, Marwick, Main & Co., 996 F.2d 1534, 62 USLW 2028, RICO Bus.Disp.Guide 8324

Facts

When Mutual Fire, Marine & Inland Insurance Company went into statutory rehabilitation, it triggered various insolvency proceedings. Four plaintiffs filed a class action against Peat Marwick, claiming that the firm performed materially deficient audits of Mutual Fire. The plaintiffs alleged violations of state law and RICO, while the Insurance Commissioner initiated contempt proceedings against the plaintiffs' attorneys for potentially violating confidentiality orders from the Commonwealth Court.

The essential facts pleaded are the following. Peat Marwick was Mutual Fire's independent auditor, and it issued unqualified auditor's opinions on Mutual Fire's financial statements for the fiscal years ending December 31, 1979–84. The last opinion was issued before June 30, 1985.

Issue

Whether the district court properly dismissed the plaintiffs' amended complaint under Federal Rule of Civil Procedure 12(b)(6) for failure to state a RICO claim.

Rule

To establish a RICO claim, a plaintiff must show that the defendant participated in the affairs of an enterprise through a pattern of racketeering activity, which requires a sufficient nexus between the defendant's actions and the enterprise's operations.

Section 1962(c) makes it unlawful for 'any person employed by or associated with any enterprise engaged in, or the activities of 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.'

Analysis

The court applied the 'operation or management' test from Reves v. Ernst & Young, concluding that Peat Marwick's actions, including performing audits and attending board meetings, did not constitute participation in the management of Mutual Fire's affairs. The court found that the plaintiffs failed to allege that Peat Marwick had any role in directing the enterprise's affairs, leading to the dismissal of the RICO claim.

The court believed that Reves v. Ernst & Young, 507 U.S. 170, 113 S.Ct. 1163, 122 L.Ed.2d 525 (1993), is dispositive. The Supreme Court addressed the validity of the Eighth Circuit's 'operation or management' test of participation in the affairs of an enterprise.

Conclusion

The court affirmed the dismissal of the RICO claim and reversed the dismissal of the state law claims, remanding them for further proceedings without prejudice.

The district court did not err in dismissing the RICO count. It is clear that the plaintiffs never pleaded a substantial RICO claim, which was the only claim that conferred federal question jurisdiction.

Who won?

Peat Marwick prevailed in the dismissal of the RICO claims due to the plaintiffs' failure to adequately plead participation in the enterprise's affairs.

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