A Private Claim for Civil Racketeering in Arizona

A.R.S. § 13-2314.04 authorizes a private claim for civil racketeering: “A person who sustains reasonably foreseeable injury to his person, business or property by a pattern of racketeering activity, or by violation of section 13-2312 involving a pattern of racketeering activity, may file an action in superior court . . . .” A.R.S. § 13-2314.04(A).

(a) At least two acts of racketeering as defined in section 13-2301, subsection D, paragraph 4, subdivision (b), item (iv), (v), (vi), (vii), (viii), (ix), (x), (xiii), (xv), (xvi), (xvii), (xviii), (xix), (xx), (xxiv), or (xxvi) that meet the following requirements:

(i) The last act of racketeering activity that is alleged as the basis of the claim occurred within five years of a prior act of racketeering.

(ii)The acts of racketeering that are alleged as the basis of the claim were related to each other or to a common external organizing principle, including the affairs of an enterprise. Acts of racketeering are related if they have the same or similar purposes, results, participants, victims or methods of commission or are otherwise interrelated by distinguishing characteristics.

(iii) The acts of racketeering that are alleged as the basis of the claim were continuous or exhibited the threat of being continuous.

(b) A single act of racketeering as defined in section 13-2301, subsection D, paragraph 4, subdivision (b), item (i), (ii), (iii), (xi), (xii), (xiv), (xxi), (xxii), (xxiii), (xxv), (xxvii) or (xxviii).

A.R.S. § 13-2314.04(T)(3). See also RAJI Commercial Torts 32 Racketeering (Unlawful Activity Defined); RAJI Commercial Torts 33 Racketeering (Pattern of Unlawful Activity Defined).

The two acts of racketeering that require relatedness, continuity and occurrence within five years of one another to constitute a pattern of racketeering activity under A.R.S. § 13-2314.04(T)(3)(a) may include the following acts that are committed for financial gain: forgery (A.R.S. § 13-2001, et seq.), theft (A.R.S. § 13-1801, et seq.), bribery (A.R.S. § 13-2601, et seq.; A.R.S. § 13-2309), gambling (A.R.S. § 13-3301, et seq.), usury (A.R.S. § 13-2208), extortion (A.R.S. § 13-1804), extortionate extensions of credit (A.R.S. §§ 13-2301 to 13-2304), participating in a criminal syndicate (A.R.S. § 13-2308), asserting false claims including, but not limited to, false claims asserted through fraud or arson, intentional or reckless false statements or publications concerning land for sale or lease or sale of subdivided lands or sale and mortgage of unsubdivided lands (A.R.S. § 32-2161), resale of realty with intent to defraud (A.R.S. § 33-458), intentional or reckless fraud in the purchase or sale of securities (A.R.S. § 44-1991), intentional or reckless sale of unregistered securities or real property securities (A.R.S. § 44-1841), a scheme or artifice to defraud (A.R.S. § 13-2310), restraint of trade or commerce in violation of section 34-252, and money laundering (A.R.S. § 13-2317). A.R.S. § 13-2301(D)(4)(b)(iv), (v), (vi), (vii), (viii), (ix), (x), (xiii), (xv), (xvi), (xvii), (xviii), (xix), (xx), (xxiv), and (xxvi). One act that violates two separate laws does not constitute two predicate acts. See United States v. Walgren, 885 F.2d 1417, 1425 (9th Cir. 1989). 

For intentional or reckless fraud in the purchase or sale of securities to constitute a predicate act, the defendant must be convicted of a crime in connection with the fraud. A.R.S. § 13-2314.04(A). AccordPremier Info. Mgmt., Inc. v. Bank of Am. Nat’l Ass’n, 2009 U.S. Dist. LEXIS 33759, at *6-7 (D. Ariz. Apr. 17, 2009). Thus, conduct actionable as securities fraud is not a viable racketeering activity unless the defendant has been criminally convicted of the fraud. “A defendant convicted in any criminal proceeding is precluded from subsequently denying the essential allegations of the criminal offense of which the defendant was convicted in any civil proceedings,” and “a conviction may result from a verdict or plead including a no contest plea.” A.R.S. § 13-2314.04(E).

Since Arizona’s statute is analogous to the federal statute, courts look to federal interpretations for guidance, and in doing so have held related predicate acts are continuous under section 13-2314.04(T)(3)(a)(iii) if they extend over a substantial period of time, i.e., more than a few weeks or months. See Lifeflite Med. Air Transp., Inc. v. Native Am. Air Servs., Inc., 198 Ariz. 149, 152-53, 7 P.3d 158, 161-62 (Ct. App. 2000).

The single act of racketeering that constitutes a pattern of racketeering activity under A.R.S. § 13-2314.04(T)(3)(b) may include the following acts that are committed for financial gain: homicide (A.R.S. § 13-1101, et seq.), robbery (A.R.S. § 13-1901, et seq.), kidnapping (A.R.S. § 13-1301, et seq.), prohibited drugs, marijuana or other prohibited chemicals or substances (A.R.S. § 13-3401, et seq.), trafficking in explosives, weapons or stolen property (A.R.S. §§ 13-2307, 13-3102 to 13-3103), obstructing or hindering criminal investigations or prosecutions (A.R.S. § 13-2409), obscenity (A.R.S. § 13-3501, et seq.), sexual exploitation of a minor (A.R.S. § 13-3553), prostitution (A.R.S. § 13-3201, et seq.), terrorism (A.R.S. § 13-2308.01), obscene or indecent telephone communications to minors for commercial purposes (A.R.S. § 13-3512), and counterfeiting marks as proscribed in section 44-1453. A.R.S. § 13-2301(D)(4)(b)(i), (ii), (iii), (xi), (xii), (xiv), (xxi), (xxii), (xxiii), (xxv), (xxvii) and (xxviii).

With respect to the “committed for financial gain” requirement for all acts of racketeering under A.R.S. § 13-2314.04(T)(3), “‘[g]ain’ means any benefit, interest or property of any kind without reduction for expenses of acquiring or maintaining it or incurred for any other reason.” A.R.S. § 13-2314.04(T)(2).

A violation of A.R.S. § 13-2312 involving a pattern of racketeering activity also gives rise to a private racketeering claim. Violations of section 13-2312 include: (1) committing illegal control of an enterprise, i.e., acquiring or maintaining, by investment or otherwise, control of any enterprise through racketeering or its proceeds; (2) illegally conducting an enterprise, i.e., person employed by or associated with enterprise conducting an enterprise’s affairs through racketeering or participating directly or indirectly in the conduct of any enterprise that the person knows is being conducted through racketeering; and (3) hiring, engaging or using a minor for any conduct preparation to or in completion with the foregoing acts. A.R.S. § 13-2312(A)-(C). 

For purposes of section 13-2312, “control” of an enterprise “means the possession of sufficient means to permit substantial direction over the affairs of an enterprise and, in relation to property, means to acquire or possess” and an “enterprise” is “any corporation, partnership, association, labor union or other legal entity or any group of persons associated in fact although not a legal entity.” A.R.S. § 13-2301(D)(1)-(2).

To establish a private claim for civil racketeering, the plaintiff must prove: (1) the defendant engaged in a pattern of unlawful activity for the purpose of financial gain; (2) the defendant’s pattern of unlawful activity caused the plaintiff’s damages; and (3) the plaintiff’s damages were a reasonably foreseeable result of the defendant’s pattern of unlawful activity. RAJI Commercial Torts 31 Racketeering (Elements) (citing A.R.S. § 13-2314.04(A)). See also Rosier v. First Fin. Capital Corp., 181 Ariz. 218, 889 P.2d 11 (Ct. App. 1994) (requiring proof of proximate cause). The plaintiff must prove all three of these elements by a preponderance of evidence. A.R.S. § 13-2314.04(G).

Unless a crime of violence is alleged as a racketeering act, the plaintiff may not refer to the defendant as a “racketeer” and must refer to the claim as one for “unlawful acts” or “a pattern of unlawful activity.” See A.R.S. § 13-2314.04(S).

If the plaintiff alleges fraud or coercion in connection with act of racketeering, the circumstances constituting the fraud or coercion must be plead with particularity with respect to each defendant. A.R.S. § 13-2314.04(R). Accord Fromkin v. Indymac Bank FSB, 2010 U.S. Dist. LEXIS 60651, at *11-13 (D. Ariz. June 18, 2010); Beshears v. Provident Life & Accident Ins. Co., 2007 U.S. Dist. LEXIS 35947, at *8-10 (D. Ariz. May 15, 2007). See also Ariz. R. Civ. P. 9(b).

The plaintiff must bring a claim or a pattern of unlawful activity within “within three years from the date the violation was discovered, or should have been discovered with reasonable diligence, and ten years after the events giving rise to the cause of action, whichever comes first.” A.R.S. § 13-2314.04(F). The only exception to this is a claim involving an act of racketeering for intentional or reckless fraud in the purchase of sale of securities, which begins to run on the date on which the requisite criminal conviction becomes final. A.R.S. § 13-2314.04(A).

The plaintiff must serve a notice identifying the action, plaintiff and plaintiff’s attorney and one copy of the pleading on the attorney general within thirty days after the action is filed with the superior court. A.R.S. § 13-2314.04(H). The attorney general is then permitted to intervene in the action if it is of special public importance or appear as amicus curiae in the action. A.R.S. § 13-2314.04(H). While the statute indicates the notice “requirement is jurisdictional,” A.R.S. § 13-2314.04(H), this jurisdictional component has been found void because conditioning jurisdiction on compliance with procedural requirements impermissiblyconflicts with court rules governing procedure. See Encinas v. Pompa, 189 Ariz. 157, 939 P.2d 435 (Ct. App. 1997); Pompa v. Superior Court,187 Ariz. 531, 931 P.2d 431 (Ct. App. 1997). Accordingly, while the notice is a procedural requirement and aid to the Attorney General in exercising his right to intervene, it is not a jurisdictional requirement in eyes of the court. 

The court has jurisdiction to prevent, restrain and remedy a pattern of racketeering activity or a violation of section 13-2312 involving a pattern of racketeering activity, after making provisions for the rights of all innocent persons affected by the violation and after a hearing or trial, as appropriate, by issuing appropriate orders. A.R.S. § 13-2314.04(B). Before determining liability, such orders may include entering restraining orders or prohibitions or taking such other actions, including the acceptance of satisfactory performance bonds, the creation of receiverships and the enforcement of constructive trusts, in connection with any property or other interest subject to damage or other remedies or restraints as the court deems proper. A.R.S. § 13-2314.04(C). After determining liability, such orders may include: (1) ordering any person to divest himself of any direct or indirect interest in any enterprise; (2) imposing reasonable restrictions on the future activities or investments of any person, including prohibiting the person from engaging in the same type of endeavor as the enterprise engaged in; (3) ordering dissolution or reorganization of any enterprise (4) ordering the payment of up to treble damages to injured persons; and (5) ordering prejudgment interest on actual damages (not treble damages). A.R.S. § 13-2314.04(D)(1)-(5).

A person or enterprise that acquires any property through an offense listed in A.R.S. § 13-2301(D) or violation of A.R.S. § 13-2312 is an involuntary trustee, and the involuntary trustee or any other person or enterprise must hold the property, its proceeds and its fruits in constructive trust for the benefit of persons entitled to remedies under A.R.S. § 13-2314.04. A.R.S. § 13-2314.04(D)(6). The only exception to this is a bona fide purchaser for value who is reasonably without notice of the unlawful conduct and is not knowingly taking part in an illegal transaction. Id. For purchases of A.R.S. § 13-2314.04(D)(6), “acquire” means for a person to possess, to act so as to exclude another person from using the person’s property except on the person’s own terms or to bring about or receive the transfer of any interest in property, whether to himself or another person, or to secure performance of a service. A.R.S. § 13-2314.04(T)(1). “Proceeds” are any interest in property of any kind acquired through or caused by an act or omission, or derived from the act or omission, directly or indirectly, and any fruits of this interest, in whatever form. A.R.S. § 13-2314.04(T)(4).

A natural person or an enterprise may not be held liable in damages or for other relief under A.R.S. § 13-2314.04 based on the conduct of another or agent, unless the fact finder finds by a preponderance of evidence that the natural person or director or high managerial agent performed, authorized, requested, commanded, ratified or recklessly tolerated the unlawful conduct of the other or agent, and in such circumstances, the fact finder must make particularized findings sufficient to permit a full and complete review of the record, if any, of the person’s conduct. A.R.S. § 13-2314.04(L).

“Recklessly” means “that a person is aware of and consciously disregards a substantial and unjustifiable risk that the result will occur or that the circumstance exists” . . . [and] “ratification” [is defined] as the “[c]onfirmation and acceptance of a previous act, thereby making the act valid from the moment it was done.” Both “ratified” and “recklessly tolerated” call for a construction that imputes knowledge or conscious awareness. That is, one who ratifies or recklessly tolerates the conduct of another must necessarily have knowledge or conscious awareness that the conduct is of a criminal nature in order to be found liable. Digital Sys. Eng’g, Inc. v. Bruce-Moreno, 2010 Ariz. App. Unpub. LEXIS 1315, at *16-17 (Nov. 16, 2010) (citations omitted). A person or enterprise may not be held liable in damages for recklessly tolerating the unlawful conduct of another person or agent if the other person or agent committed intentional or reckless false statements or publications concerning land for sale or lease or sale of subdivided lands or sale and mortgaging of unsubdivided lands, intentional or reckless fraud in the purchase or sale of securities, intentional or reckless sale of unregistered securities or real property securities, or scheme or artifice to defraud and that unlawful conduct involved the purchase or sale of securities. A.R.S. § 13-2314.04(L).

A prevailing plaintiff is entitled to recover treble damages and may recover the costs of the suit, including reasonable attorney fees for trial and appellate representation, and prejudgment interest on actual damages (not treble damages). A.R.S. § 13-2314.04(A); A.R.S. § 13-2314.04(D)(4)-(5). See also RAJI Commercial Torts 34 Racketeering (Damages), Comment; Sullivan v. Metro Prods., Inc., 150 Ariz. 573, 724 P.2d 1242 (Ct. App. 1986) (treble damages are mandatory). The plaintiff may not recover “award costs, including attorney fees, if the award would be unjust because of special circumstances, including the relevant disparate economic position of the parties or the disproportionate amount of the costs, including attorney fees, to the nature of the damage or other relief obtained.” A.R.S. § 13-2314.04(M). Since such civil actions are intended to be remedial, not punitive, the plaintiff may only recover punitive damages or emotional injury damages in the event of bodily injury. A.R.S. § 13-2314.04(K). See also RAJI Commercial Torts 34 Racketeering (Damages), Comment. The foregoing civil remedies are supplemental and not mutually exclusive. A.R.S. § 13-2314.04(K). 

A prevailing defendant may be awarded costs and reasonable attorney fees incurred in defense of the claim. A.R.S. § 13-2314.04(A). 

The costs awardable to the prevailing party under A.R.S. § 13-2314.04(A) do not include expert costs. See Aviva USA Corp. v. Vazirani, 2013 U.S. Dist. LEXIS 116328, at *16-17 (D. Ariz. Aug. 16, 2013).

A pleading filed in a civil action or proceeding under this section must be verified by at least one party or the party’s attorney, and if represented, any pleading, motion or other paper must be signed by at least one attorney and state the attorney’s name and address. A.R.S. § 13-2314.04(O). In verifying or signing the pleading, motion or other paper, the person or person’s attorney certifies that he or she has carefully read the pleading, motion or other paper and, based on a reasonable inquiry, believes it is well grounded in fact, warranted by existing law or there is a good faith argument for the extension, modification or reversal of existing law, and is not made for any bad faith, vexatious, wanton, improper or oppressive reason, including to harass, cause unnecessary delay, impose a needless increase in the cost of litigation or force an unjust settlement. A.R.S. § 13-2314.04(P). See also Ariz. R. Civ. P. 11. If any pleading, motion or other paper is signed in violation of the certification provisions of section 13-2314.04(P), the court, on its own motion or the motion of the other party and after a hearing and appropriate findings of fact, must impose on the person who verified it or the attorneys who signed it, or both, a proper sanction to deter future conduct, including the costs of the proceeding under section 13-2314.04(N). A.R.S. § 13-2314.04(Q).

Similarly, if the court finds the filing of any pleading, motion or other paper under this section was frivolous or any civil action or proceeding was brought or continued under this section in bad faith, vexatiously, wantonly or for an improper or oppressive reason, the court must award a proper sanction to deter the conduct in the future that may include the costs of the civil action or proceeding, including the costs of investigation and reasonable attorney fees in the trial and appellate courts. A.R.S. § 13-2314.04(N).

In sum, a plaintiff may bring a private claim for civil racketeering against a defendant, but must prove by a preponderance of evidence that the defendant engaged in a pattern of unlawful activity for financial gain, which caused plaintiff’s damages that were reasonably foreseeable.