Phoenix Bond & Indemnity Comp v. MD Sass Investors Services, In, No. 12-3281 (7th Cir. 2013)Annotate this Case
In the United States Court of Appeals For the Seventh Circuit ____________________ Nos. 12 3235, 3241, 3281, 3292, 13 1052, 1055 56, 1060, 1433, 1435, 1449 50 BCS SERVICES, INC., and PHOENIX BOND & INDEMNITY CO., Plaintiffs Appellees, v. BG INVESTMENTS, INC., et al., Defendants Appellants. ____________________ Appeals from the United States District Court for the Northern District of Illinois, Eastern Division. Nos. 05 C 4095, 07 C 1367 Matthew F. Kennelly, Judge. ____________________ SUBMITTED JUNE 28, 2013 DECIDED AUGUST 23, 2013 ____________________ Before BAUER, POSNER, and MANION, Circuit Judges. POSNER, Circuit Judge. These consolidated appeals are se quels to our decision in BCS Services, Inc. v. Heartwood 88, LLC, 637 F.3d 750 (7th Cir. 2011), which reversed judgments dismissing two suits which for simplicity we treated and will continue to treat as one. The plaintiffs, BCS Services, Inc. 2 Nos. 12 3235, et al. and Phoenix Bond & Indemnity Co., seek damages for mail fraud under the Racketeer Influenced and Corrupt Organi zations Act (RICO), 18 U.S.C. §§ 1961 et seq., and for interfer ence with a prospective business advantage under Illinois tort law. The ground of dismissal that we rejected when last the case was before us was that the plaintiffs could not prove that the defendants alleged wrongdoing, even if it was proved, was a proximate cause of their alleged losses. 637 F.3d at 756. When an owner of property in Cook County, Illinois, fails to pay his property tax on time, the amount of tax past due becomes a lien on the property. The County sells its tax liens at auctions. The bids at the auctions are stated as per centages of the taxes past due. The percentage that a bidder bids, multiplied by the amount of past due taxes (plus any interest due on them), is the penalty that the bidder de mands from the owner to clear the lien. The winning bidder is the bidder who bids (that is, is willing to accept) the low est penalty often zero percent of the tax due, meaning that the bidder is offering to pay the County the entire past due taxes and receive in exchange the lien. The taxpayer has two to three years in which to erase the lien by paying the winner of the auction (and hence new owner of the lien) the past due taxes that the winner had paid the County, plus the penalty (if any). If the taxpayer fails to redeem by paying what he owes, the purchaser of the lien can obtain a tax deed to the property and thus become the property s owner. In deciding which tax liens being auc tioned to bid for and how much to bid (whether a zero per cent penalty, or a 5 percent penalty, or any other percent), the would be tax lienor is looking for properties whose owners are unlikely to redeem them by paying the past due Nos. 12 3235, et al. 3 taxes during the redemption period and which are worth more than the past due taxes on them. The auctions are conducted in rapid fire fashion in a room in which the bidders bid by raising a card with their bidder ID number and shouting out the penalty percentage that they are bidding. Almost 85 percent of the winning bids are at the zero percent penalty level; that is, most bids are identical zero percent bids. How is the auctioneer to pick the winner in such a case? Because the bids are identical, the auctioneer tries to award the lien to the bidder who raised his hand first. But if many bidders raise their hands as soon as the bidding begins, the auctioneer may find it impossible to determine who raised his hand first, in which event he ll probably pick one of the zero percent bidders at random. The County s rules permit only one agent of a potential buyer, or of a group of cooperating buyers ( related enti ties ), to bid. Otherwise a potential buyer could increase the likelihood of winning by packing the room. He would be likely to have some fast hands and some ringside seats, as well as having an advantage just by virtue of the number of his hands, when the auctioneer threw up his hands and awarded liens randomly among the zero percent bidders, or tried to rotate them among the bidders in the interest of fairness. If a company s violation of the prohibition against bidding by multiple bidders was concealed and thus operated as a fraud on the one armed bidders (that is, the bidders who complied with the single bidder rule), the com pany would have engaged in a pattern of mail fraud in vio lation of RICO because the County uses the mails to notify property owners that the County has sold its tax liens on the property and that unless the past due taxes are paid the property will be forfeited to the lienor. 4 Nos. 12 3235, et al. The case is a little more complicated than we ve let on so far because several groups each composed of entities related to each other are accused of the fraud. Only two groups re main in the case, however, Sass and Gray, the others (or their principals) having settled with the plaintiffs. Each group should have had only one arm to bid with at each auction session; instead each had as many arms as it had members. Each group had (offstage) a kingpin who financed the group s bidding activity. When a member of the group won a lien, the kingpin would buy it from him. On remand from our decision reversing the district court, the case was tried to a jury that at the end of a four week tri al found in favor of the plaintiffs and awarded damages against the two remaining groups totaling, after various ad justments, some $7 million, to which the judge added some $13 million in plaintiffs attorneys fees and related expenses. The defendants make a number of arguments for revers ing (not all of which merit discussion). They argue that the plaintiffs were not victims of mail fraud because they had no property interest in the tax liens that they were prevented by the fraud from buying. The premise is true but irrelevant. Any person injured in his business or property by reason of a violation of section 1962 of this chapter may sue therefor in any appropriate United States district court and shall recover threefold the damages he sustains ¦ . 18 U.S.C. § 1964(c) (emphasis added); see also Maiz v. Virani, 253 F.3d 641, 662 64 (11th Cir. 2001); Terminate Control Corp. v. Horowitz, 28 F.3d 1335, 1343 (2d Cir. 1994). The plaintiffs were deprived of the profit they would have made had the fraud not prevented them from Nos. 12 3235, et al. 5 being awarded as many tax liens as they would have been awarded otherwise. It is true that the criminal act on which the RICO claim is based mail fraud requires that the defendants have ob tained money or property by fraud. 18 U.S.C. § 1341. But tax liens, which is what the defendants obtained, are proper ty. United States v. Security Industrial Bank, 459 U.S. 70, 76 77 (1982); In re Tarnow, 749 F.2d 464, 466 (7th Cir. 1984). In this case they are property of Cook County. The property to which section 1341 refers need not be the plaintiffs , provid ed they are directly injured by the defendants unlawful ac quisition of the property. See Phoenix Bond & Indemnity Co. v. Bridge, 477 F.3d 928, 932 (7th Cir. 2007), affirmed, 553 U.S. 639 (2008); Commercial Cleaning Services, L.L.C. v. Colin Service Systems, Inc., 271 F.3d 374, 378, 382 83 (2d Cir. 2001); Mid At lantic Telecom, Inc. v. Long Distance Services, Inc., 18 F.3d 260, 260, 263 (4th Cir. 1994). As they were: the defendants took from the City property that, had they not taken it, would have been obtained by the plaintiffs at the same time in the same place the auction room. The judge was correct to deny the defendants request to instruct the jury that it could not find for the plaintiffs if there has been only a deprivation of intangible rights to a fair opportunity to obtain money or property. The instruc tion was irrelevant. The plaintiffs were not complaining about a deprivation of intangible rights, such as a right to honest service by an agent; they were complaining about a fraud that caused them a money loss. The County s rule against bids by multiple agents of the same principal (the single bidder rule) defines principal as the tax buying entity, a term the defendants argue 6 Nos. 12 3235, et al. should be limited to bidders at the tax lien sale, as distinct from some distant puppet master. There s no basis for such a narrow definition, which would deprive the rule of any bite. There was additional evidence that the defendants elabo rately concealed multiple agent bidding scheme was contra ry to the County s policy and that the defendants knew this. They argue that had the County known of their fraud it might nevertheless have done nothing about it, in which event the fraud would not have made the plaintiffs worse off. Cf. United States v. Fenzl, 670 F.3d 778, 781 (7th Cir. 2012). But a County official testified that the County would have barred bidders found in violation of the single bidder rule. There was also evidence that the defendants were aware of this possibility and that it was a motive for their attempt to conceal the fraud. And suppose the County would not have enforced the rule, and knowing this the defendants had not concealed their violation of it. The plaintiffs would have raised a storm, brought pressure to bear on the County (and what could the County have said in defense of its refusal to enforce its rule? It is a perfectly sensible rule), and might have sued to en force the rule on the ground that they were its intended ben eficiaries and had been harmed by its violation. The defendants object to the judge s refusing to instruct the jury that statements made when there is a good faith disagreement about the applicable governing law or when the law is unclear are not false. That s preposterous. A statement can be false even though the person making it has a good faith belief, even a perfectly reasonable belief, that it is true. Good faith does negate intent to defraud, United States v. Dunn, 961 F.2d 648, 650 (7th Cir. 1992); South Atlan Nos. 12 3235, et al. 7 tic Limited Partnership of Tennessee, L.P. v. Riese, 284 F.3d 518, 530 32 (4th Cir. 2002) but the judge correctly so instructed the jury. The defendants complain about an adjustment that the plaintiffs damages expert made concerning the number of tax liens on which the plaintiffs bid in competition with the defendants. He made the adjustment after seeing a video of part of the 2007 auction, one of the auctions embraced by the suit. The video revealed that the plaintiffs had not bid on all the tax liens that their records stated they intended to bid on. The expert revised his report to reduce his estimate of the plaintiffs bids at all the auctions in the period covered by the suit by the same percentage that the video required him to reduce his estimate of the number of bids by each plaintiff at the 2007 auction. The percentage reduction was 19.3 per cent for BCS and 22.3 percent for Phoenix. The defendants argue that the district judge should have subjected this adjustment to a Daubert examination to de termine whether the expert should have been permitted to offer his revised estimate at the trial. But that would have been a waste of time, because it is clear that the adjustment that the expert made on the basis of the video was reasona ble. What choice had he? Not knowing that they were being defrauded, the plaintiffs had no reason to think they needed to make and retain good records of their unsuccessful bids for of what use would such records have been had there been no fraud and thus no lawsuit? So this is a case in which defendants misconduct pre vented the plaintiffs from calculating damages accurately and in such cases damages can be estimated by methods that would be deemed impermissibly speculative in other con 8 Nos. 12 3235, et al. texts. E.g., J. Truett Payne Co. v. Chrysler Motors Corp., 451 U.S. 557, 566 67 (1981); Story Parchment Co. v. Paterson Parchment Paper Co., 282 U.S. 555, 562 66 (1931); Haslund v. Simon Property Group, Inc., 378 F.3d 653, 658 (7th Cir. 2004). Once the plaintiff proves injury, broad latitude is allowed in quantifying damages, especially when the defendant s own conduct impedes quantification. Id. Even speculation has its place in estimating damages, and doubts should be resolved against the wrongdoer. Mid America Tablewares, Inc. v. Mogi Trading Co., 100 F.3d 1353, 1365 (7th Cir. 1996), quoting Olympia Equipment Leasing Co. v. Western Union Tele graph Co., 797 F.2d 370, 383 (7th Cir. 1986). Otherwise the more grievous the wrong done, the less likelihood there would be of a recovery. Bigelow v. RKO Radio Pictures, Inc., 327 U.S. 251, 265 (1946). The unavoidable element of specula tion in the adjustment of damages on the basis of the video was within permissible bounds. The defendants also object that the expert s method of calculating damages exaggerated each defendant s proper share. The expert divided the number of liens that the plain tiffs had won by the number of liens won by all eligible bid ders, thus excluding the liens won by the defendants (in cluding the defendants who had settled before trial). This procedure yielded what the expert termed the bid win per centage, an estimate of how well the plaintiffs would have done if the bidding had been completely honest no multi ple bidders. He then multiplied the number of liens that each defendant had won by the bid win percentage. Since the bid win percentage was the percentage of liens that an honest bidder could expect to win, any lower percentage, such as the percentage the plaintiffs won, presumably reflected the unfair competition of the multiple bidders. Nos. 12 3235, et al. 9 Each defendant argues that in computing the bid win percentage the expert should have excluded the defendants one by one rather than as a group. For example, the expert calculated the bid win for plaintiff BCS at the 2003 auction to have been 12.45 percent. Defendant Gray argues that it should have been 5.2 percent. (The lower the percentage, the lower BCS s damages, because its damages are based on its failure to have obtained the bid win percentage the per centage it could expect to win in a non rigged auction of tax liens.) Gray arrives at that figure by dividing the number of liens won by BCS not by the number of liens won by all hon est bidders but by the number won by all bidders minus Gray a group that includes other multiple bidders. That s an improper procedure, because it depresses BCS s (and Phoenix s) bid win percentages by bids won by dishonest as well as honest bidding methods. The plaintiffs state law claim was for tortious interfer ence with a business opportunity, and the jury awarded pu nitive damages for the tort. The defendants argue that this was double counting, because the damages for the same ac tivity that were awarded for the defendants violation of RICO were treble the loss that the violation had inflicted on the plaintiffs, yet the same acts had been charged as viola tions both of RICO and of state tort law. To this the plaintiffs respond that damages are trebled under RICO not as pun ishment but because the ordinary methods of calculating compensatory damages undercompensate. And so the Su preme Court has held. PacifiCare Health Systems, Inc. v. Book, 538 U.S. 401, 405 06 (2003); Cook County v. United States ex rel. Chandler, 538 U.S. 119, 129 31 (2003); Shearson/American Ex press, Inc. v. McMahon, 482 U.S. 220, 240 41 (1987); see also Liquid Air Corp. v. Rogers, 834 F.2d 1297, 1310 n. 8 (7th Cir. 10 Nos. 12 3235, et al. 1987). The holding can be questioned. It s true that under compensation is one of the reasons for awarding punitive damages, Mathias v. Accor Economy Lodging, Inc., 347 F.3d 672, 676 77 (7th Cir. 2003), though the main reason is pun ishment (deterrence). But even if the methods used to calcu late compensatory damages systematically undercompen sate plaintiffs, it can t be right that in RICO cases those methods always yield exactly one third of the damages actu ally sustained by a plaintiff, in which event trebling would indeed be necessary to provide him with full compensation. But of course we re bound by the Supreme Court s interpre tation of RICO s treble damages remedy as being compensa tory rather than punitive, and this defeats the defendants argument. Sass makes a somewhat related argument, that the dis trict judge violated the one satisfaction rule by not allow ing Sass to set off against its damages liability the full amount that the plaintiffs received in settlement of claims against other participants in the tax lien fraud. The judge did allow a setoff, but only after deducting his estimate of how much of the total amount of the settlements was in respect of liability to pay punitive damages, pursuant to the rule that money paid in settlement of punitive damages claims is not subject to setoff. Bosco v. Serhant, 836 F.2d 271, 281 (7th Cir. 1987); Ratner v. Sioux Natural Gas Corp., 719 F.2d 801, 804 (5th Cir. 1983). The one satisfaction rule is intended to prevent compensation in excess of the plaintiff s loss; punitive dam ages, to the extent not intended to remedy undercompensa tion, are deliberately excess compensation. The district judge set off more than half the settlement payments against the damages awarded at trial. The jury had awarded the plaintiffs both untrebled compensatory Nos. 12 3235, et al. 11 damages and punitive damages, the latter limited to the state law claim for tortious interference with the plaintiffs chances for buying tax liens at the auctions. Of the total damages awarded by the jury 46 percent represented puni tive damages, the other 54 percent compensatory damages, and it was the latter percentage that the judge used to decide what percentage of the settlement moneys received by the plaintiffs should be set off against the judgment. The de fendants point out that the 46 percent allocation to punitive damages dropped to 9.6 percent when, after the jury deliv ered its verdict, the judge trebled the compensatory damages that the jury had awarded for the RICO violations and add ed attorneys fees and costs (without these additions the pu nitive damages would have dropped from 46 to 22.1 percent of the total settlement moneys). And remember that the en tire trebled damages are deemed compensatory. The settle ments do not distinguish between punitive and compensato ry damages. But since the settling parties must have foreseen that damages awarded by the jury for the RICO violations would be trebled and that the plaintiffs would be entitled to an award of attorneys fees and costs, a more realistic guess was that a shade more than 90 percent of the settlement amount was the settling parties estimate of a likely award of compensatory damages if the case went to trial. That is not a bad argument, but it is vitiated by the de fendants refusal to acknowledge the implication that 9.6 percent of the amount of the settlement should not be sub tracted from the judgment. They insist that because the set tlement agreements do not mention punitive damages the entire amount of the settlements must be compensatory. That s wrong. The parties negotiating the settlements were sophisticated and must have been aware that an award of 12 Nos. 12 3235, et al. punitive damages for fraud would be likely if there were a trial. That awareness would influence the amount of the set tlement. An appellant cannot prevail by making an unreasonable argument while forfeiting the only reasonable one he could have made. Last the defendants complain about the amount of attor neys fees and expenses that the district judge awarded the plaintiffs. They argue that the award includes fees that the plaintiffs lawyers expended in investigating other actually or possibly ineligible bidders at the tax lien auctions in which the plaintiffs participated. Yet these investigations were essential. Without them the plaintiffs would not have known whether the harm they suffered was attributable on ly to the defendants or to others as well, in which case they would not be entitled to as large a damages award from the defendants. See Uniroyal Goodrich Tire Co. v. Mutual Trading Corp., 63 F.3d 516, 526 (7th Cir. 1995); Baughman v. Wilson Freight Forwarding Co., 583 F.2d 1208, 1215 (3d Cir. 1978); Rode v. Dellarciprete, 892 F.2d 1177, 1185 (3d Cir. 1990). The defendants further argue that the plaintiffs should have been required to allocate a portion of their attorneys fees to the settlements they made with other parties accused of ineligible bidding. That would be correct if the settlements had reduced the injury that the defendants ineligible bid ding had inflicted on the plaintiffs, for then the fees would have been allocable, in part anyway, to the present suit. But the judge found, not clearly erroneously, that the injuries were separate. And finally we reject as did the district court the argu ment that the fee award was excessive because it was almost Nos. 12 3235, et al. 13 twice the damages awarded the plaintiffs at trial. Plaintiffs cannot know in advance how much they ll win at a trial, or how elaborate a defense the defendants will mount, and so they cannot estimate with any precision either the cost of winning or whether they will win. The plaintiffs asked the jury for roughly twice the compensatory damages that the jury awarded them, and if that was a reasonable albeit un successful request, the legal fees and costs that they incurred were not unreasonable. How much the plaintiffs would have to spend on the liti gation would depend in part on the stubbornness of the de fense and it turned out to be enormously though futilely stubborn. Attorney fee shifting, as under RICO, is intended to facilitate suit by victims of unlawful behavior, see, e.g., Agency Holding Corp. v. Malley Duff & Associates, Inc., 483 U.S. 143, 151 (1987); PrimeCo Personal Communications, Lim ited Partnership v. City of Mequon, 352 F.3d 1147, 1152 (7th Cir. 2003), and awarding legal fees reasonably incurred ex ante even if excessive seeming ex post (which is to say with the wisdom of hindsight) is necessary to achieve that objective. See City of Riverside v. Rivera, 477 U.S. 561, 573 76, 578 (1986) (plurality opinion); FMC Corp. v. Varonos, 892 F.2d 1308, 1316 17 (7th Cir. 1990). The defendants were hyperaggres sive adversaries. They drove up the plaintiffs legal costs without justification. AFFIRMED.