Management and Operation Test Applies to Associated-In-Fact Enterprises
On August 18, 2008, the Ninth Circuit ruled that the management and operation test applies to associated-in-fact enterprises in Walter v. Drayson, --- F.3d ----, 2008 WL 3823027 (C.A.9 (Hawai'i)). In Walter, Robert W. Walter, a beneficiary of a trust established by his mother asserted violations of the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. § 1962(c) and (d), as well as various state law claims, against a trustee, the trustee’s CPA, who was also a trustee; and Karen Temple, a lawyer, together with her law firm, Bodden & Temple, who provided legal services to the trustor and the trustees. Robert's RICO theory was that the trustees, the CPA, the lawyer and her law firm were an associated-in-fact enterprise whose purpose was to gain and maintain control of the trust and to facilitate the wrongful taking of trust assets.
The district court dismissed Robert’s second amended complaint in a published opinion. Walter v. Drayson, 496 F.Supp.2d 1162 (D.Haw2007). It held that Temple's role was limited to providing legal services such that she did not operate or manage the enterprise and so, could not be liable for conducting its affairs under Reves v. Ernst & Young, 507 U.S. 170, 179 (1993), and Baumer v. Pachl, 8 F.3d 1341, 1344 (9th Cir.1993). For this reason the court also dismissed the RICO conspiracy allegations. Robert appealed to the Ninth Circuit, arguing that the district court misapprehended the “operation and management” test in the context of an associated-in-fact enterprise. The Ninth Circuit disagreed with Robert and affirmed the district court dismissal of his RICO claims with prejudice.
The Ninth Circuit noted that Robert's second amended complaint showed that Temple and her firm were part of the enterprise but failed to show that she or her firm had “some part in directing its affairs.”Reves, 507 U.S. at 179. One can be “part” of an enterprise without having a role in its management and operation. Simply performing services for the enterprise does not rise to the level of direction, whether one is “inside” or “outside.” Accordingly, neither reasonable inferences, nor triable issues, exist sufficient to subject Temple or her firm to liability under § 1962(c).
Thus, in order to be subject to RICO liability a member of an associated-in-fact enterprise must operate, manage or direct the enterprise.
