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Civil racketeering charges cannot be brought against three banks solely because they failed to report bounced checks in attorney escrow funds, the 2nd U.S. Circuit Court of Appeals has ruled. While victims of disbarred attorney David Schick may proceed against the banks on state law claims, the 2nd Circuit said the connection between the banks’ alleged concealment of Schick’s misconduct and investor losses was simply too attenuated to support a racketeering claim. “The creative pleading in the instant cases serve as a reminder why the Racketeer Influenced and Corrupt Organizations Act’s (RICO) treble damages provisions are not available to remedy every possible injury that can, with some ingenuity, be attributed to defendant’s injurious conduct,” Judge Sonia Sotomayor said in Lerner v. Fleet Bank N.A., 01-7755 and the companion case, Bayroff v. Fleet Bank N.A. Schick had set up accounts at Fleet and two other banks for a scheme in which he used investors’ money to back up bids on distressed mortgage pools. Schick ultimately pleaded guilty to fraud in the Southern and Eastern Districts in connection with the theft of $82 million from the accounts. The investors claimed Schick drew over 500 checks from the accounts during a three-year period, and the banks extended about $125 million in overdrafts to the attorney before they began refusing to honor the checks. The plaintiffs’ racketeering theory was based on the banks’ agreement to report dishonored checks drawn on attorney accounts to New York’s Lawyer’s Fund for the Client Protection. The racketeering “enterprise,” the plaintiffs charged, was the “New York State Attorney Discipline System,” which they said included the Lawyer’s Fund, the Appellate Division, and the Departmental Disciplinary Committee or Departmental Grievance Committee of each judicial department with jurisdiction over Schick. The banks, the plaintiffs said, were “gatekeepers” in the reporting system that runs from the Lawyer’s Fund to the disciplinary bodies. And had the banks reported the dishonored checks, plaintiffs said, Schick would have been disciplined, putting the investors on notice to stop investing money with the lawyer. Eastern District of New York Judge Frederic Block dismissed the Lerner and Bayroff cases, finding that the plaintiffs lacked standing to pursue their RICO claims. On the appeal, Judge Sotomayor said the court was affirming the dismissal of the cases, but for a different reason. “We hold that a lack of RICO standing does not divest the district court of jurisdiction over the action, because RICO standing, unlike other standing doctrines, is sufficiently intertwined with the merits of the RICO claim that such a rule would turn the underlying merits questions into jurisdictional issues,” she said. Therefore, she said, while the 2nd Circuit was affirming the dismissal of RICO claims “because the alleged pattern of racketeering activity was not the proximate cause of the plaintiffs’ injuries,” it was doing so not for lack of jurisdiction, but for failure to state a claim. Turning to the issue of proximate cause, Sotomayor said the racketeering activities charged in the complaint were not a “substantial factor in the chain of causation that led to plaintiffs’ losses,” and that each assumption in the chain was “inherently speculative.” “For example, it would be impossible to determine if and when the Appellate Division would have disciplined Schick,” she said. “Thus, there is no rational way to allocate the damages that flow from the failure of the Appellate Division to act.” Moreover, the judge said, “we have repeatedly emphasized that the reasonably foreseeable victims of a RICO violation are the targets, competitors and intended victims of the racketeering enterprise.” Judge Block should have kept the state law claims in Lerner because of diversity jurisdiction, she said. And as for Bayroff, where the plaintiffs are New York residents and there is no diversity jurisdiction, the court was remanding the case for Block to determine whether to exercise his discretion and assume supplemental jurisdiction over the state law claims in that case. “Because the district court must adjudicate identical issues in Lerner,” she said, “judicial economy might best be served by exercising supplemental jurisdiction over the Bayroff state-law claims.” Judge Chester J. Straub and Judge Richard W. Goldberg of the United States Court of International Trade, sitting by designation, joined in the opinion. G. Robert Blakey of Notre Dame Law School, and James B. Zane, Edward S. Rudofsky and Arlene H. Schechter of New York’s Zane and Rudofsky represented the plaintiffs. Richard F. Zeigler and David M. Meisels of New York-based Cleary, Gottlieb, Steen & Hamilton represented Fleet Bank. Celia G. Barenholtz and Chaya Weinberg-Brodt of New York-based Kronish Lieb Weiner & Hellman represented Republic National Bank of New York. Allen C. Wasserman of Fulbright & Jaworski represented Sterling National Bank and Trust Company of New York.

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