Lum v. Bank Amer , 361 F.3d 217 ( 2004 )

Opinions of the United
2004 Decisions States Court of Appeals
for the Third Circuit
3-11-2004
Lum v. Bank Amer
Precedential or Non-Precedential: Precedential
Docket No. 01-4348P
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PRECEDENTIAL Argued on June 2, 2003
UNITED STATES COURT OF
APPEALS Before: SLOVITER, ALITO and ROTH,
FOR THE THIRD CIRCUIT Circuit Judges
____________
(Opinion filed: March 11, 2004)
No: 01-4348
Ira A. Schochet, Esquire
HING Q. LUM; DEBRA LUM, husband
and wife, G. Martin Meyers, Esquire (Argued)
individually and on behalf of all persons
35 West Main Street, Suite 106
similarly situated; GARY ORIANI
Denville, New Jersey 07834
v.
BANK OF AMERICA; CITIBANK, Counsel for Appellants
N.A.; CHASE MANHATTAN BANK;
MORGAN GUARANTY TRUST CO.;
FIRST UNION NATIONAL BANK;
WELLS FARGO BANK, N.A.; FLEET
William E. Deitrick, Esquire
BANK; PNC BANK N.A.;
THE BANK OF NEW YORK; KEY Mayer, Brown, Rowe & Maw
BANK; BANK ONE ; U.S. BANK;
190 South LaSalle Street
JOHN DOES, ONE THROUGH 100
Chicago, Illinois 60603
Hing Q. Lum, Debra Lum, and
Gary S. Oriani,
Richard H. Klapper, Esquire
Appellants
Sullivan & Cromwell
125 Broad Street
New York, New York 10004
Appeal from the United States District
Court
for the District of New Jersey
Kenneth N. Laptook, Esquire
(D.C. Civil Action No. 00-cv-00223)
District Judge: Honorable Faith S. Wolff & Samson, P.C.
Hochberg
5 Becker Farm Road
______________________ Roseland, New Jersey 07068
Peter E. Greene, Esquire (Argued) Darryl J. May, Esquire
Skadden, Arps, Slate, Meagher & Flom, Ballard, Spahr, Andrews & Ingersoll, LLP
LLP
1735 Market Street, 51st Floor
Four Times Square
Philadelphia, PA 19103
New York, New York 10036
Frederick A. Nicoll, Esquire
Joseph L. Buckley, Esquire
Dorsey & Whitney, LLP
Sills, Cummis, Radin, Tischman
East 80, Route 4
Epstein & Gross
Paramus, New Jersey 07652
One Riverfront Plaza
Newark, New Jersey 07102
Brian J. McMahon, Esquire
Gibbons, Del Deo, Dolan, Griffinger &
Gregory R. Haworth, Esquire Vecchione
Duane, Morris LLP One Riverfront Plaza
744 Broad Street, Suite 1200 Newark, New Jersey 07101
Newark, New Jersey 07102
William T. Marshall, Esquire
Anthony J. Laura, Esquire Zeichner, Ellman & Krause
Reed Smith, LLP 103 Eisenhower Parkway
One Riverfront Plaza Roseland, NJ 07068
Newark, New Jersey 07102
Allen E. Molnar, Esquire
Anthony P. La Rocco, Esquire Klett, Rooney, Lieber & Schorling
Kirkpatrick & Lockhart, LLP 550 Broad Street, Suite 810
One Riverfront Plaza, 7 th Floor Newark, NJ 07102
Newark, New Jersey 07102
Mark S. Melodia, Esquire
2
Reed Smith which publish independent indices of the
prime rate. The banks allegedly violated
136 Main Street
RICO by making these misrepresentations
Princeton Forrestal Village, Suite 250 about “prime rate” through the mails and
over interstate wires. Plaintiffs claim that
Princeton, NJ 08540
the fraudulently inflated “prime rate” has
resulted in their being charged higher
interest than permitted by the terms of the
Counsel for Appellees
“prime plus” loan agreements.
________________
The District Court dismissed
OPINION plaintiffs’ RICO claim because it lacked
the specificity in pleading fraud that is
required under Fed. R. Civ. P. 9(b). It
dismissed the antitrust claim for failure to
ROTH, Circuit Judge: meet the minimum standards for pleading
an antitrust conspiracy. Lum v. Bank of
The meaning of the term “prime
America, No. 00-223, slip op. at 11-12,
rate” lies at the heart of this appeal.
(E.D. Pa. Nov. 29, 2001). 1
Plaintiffs, Hing Q. Lum, his wife Debra,
and Gary Oriani have borrowed money We agree that the RICO claim was
from defendant banks pursuant to lending properly dismissed. Because it is
agreements with “prime plus” interest predicated on mail and wire fraud, Federal
rates. Plaintiffs claim in their Amended Rule of Civil Procedure 9(b) requires that
Complaint that the defendant banks, in the fraud be pled with specificity. It was
setting “prime plus” interest rates, have not. Moreover, the antitrust claim is also
violated the Sherman Antitrust Act, 15 based on fraud – on misrepresentations in
U.S.C. § 1, and the Racketeer Influenced the information given to consumers and on
and Corrupt Organizations Act (RICO), 18 misrepresentations in the information
U.S.C. § 1962(c), § 1962(d). The banks
allegedly violated the Sherman Act by
agreeing to misrepresent that “prime rate”
Plaintiffs also allege violations of the
is the lowest rate available to their most
New Jersey Consumer Fraud statute,
creditworthy borrowers, when in fact they
56:8-2 et seq., and the New Jersey
have offered some large borrowers
common law of contracts. Having
financing at interest rates below prime
dismissed all the federal claims, the
rate; they allegedly gave false information
District Court dismissed these claims for
about their “prime rate” both to consumers
lack of supplemental jurisdiction. See 28
who were seeking credit and to leading
U.S.C. §1367(c)(3); Borough of West
financial publications, such as the New
Mifflin v. Lancaster, 45 F.3d 780, 788
York Times and the Wall Street Journal,
(3d Cir. 1995).
3
given to the independent financial therefore, affirm the judgment of the
publications. Although antitrust claims District Court.
generally are not subject to the heightened
pleading requirement of Rule 9(b), fraud
must be pled with particularity in all I. Facts and Procedural History
claims based on fraud – “In all averments
of fraud or mistake, the circumstances
constituting fraud or mistake shall be On January 14, 2000, Hing and
stated with particularity.” Fed. R. Civ. P. Debra Lum filed a complaint in the United
9(b) (emphasis added). Fraud is the basis States District Court for the District of
for the antitrust violation alleged here. In New Jersey on behalf of themselves and of
paragraph 18 of the Amended Complaint, a purported class of similarly situated
plaintiffs aver that the banks “fraudulently individuals who borrowed money from the
and artificially inflate[d] the ‘prime rate’ defendant banks from April 22, 1987, to
published in the outside indexes by falsely the present. The purported class was not
reporting the Bank’s individual prime rates certified prior to dismissal of the
to the various publications. . . . the ‘prime complaint. The defendants in the suit are
rate’ published by the outside indexes twelve of the country’s largest banks and
remained artificially high and the prime one hundred unnamed individuals. On
plus interest rates on the consumer credit April 6, 2000, the plaintiffs filed an
instruments were fraudulently inflated.” Amended Complaint adding Gary Oriani
(emphasis added). Because, as in the as a plaintiff. The Amended Complaint
RICO claim, plaintiffs’ allegations of alleges that defendants violated RICO, the
fraud did not comply with Rule 9(b), the Sherman Antitrust Act, and New Jersey
antitrust claim would properly have been law by the manner in which they fixed the
dismissed on these grounds.2 “prime plus” interest rate. Prime plus
interest rates are tied to the “prime rate” as
Finally, we agree with the District
it is defined by the lender or by an outside
Court’s denial of leave to amend.
index reported in a major financial
Plaintiffs’ statements at oral argument and
publication. These publications in turn
their briefs both before the District Court
develop their indices from the prime rates
and before us make it clear that granting
reported by leading financial institutions,
leave to amend would be futile. We will,
including defendant banks. At the heart of
the Amended Complaint are the following
allegations:
Although the allegations of conspiracy
in the Amended Complaint are somewhat
conclusory, we do not agree with the
17. At some point in
District Court’s position that they do not
time prior to the
meet the pleading requirements of Fed.
Class Period, the
R. Civ. P. 8(a).
4
Bank Defendants scheme, conspiracy
f o r m u l a te d a n d and course of
carried out a plan, conduct designed to
scheme and f r a u d ul e n t l y a n d
conspiracy to fix and artificially inflate the
control the “prime “prime rate”
rate” published by published in the
the outside indexes. outside indexes by
Because these prime falsely reporting the
rate indexes had been Bank ’s individual
incorporated into prime rates to the
thousands of existing various publications.
financial instruments To effectuate this
as well as into new scheme, the Banks
financial instruments reported as their
written by the Banks, prime rates, rates far
control of the prime in excess of the rates
rate published in the the Banks actually
outside indexes charged to their
would enable the largest and most
Banks to effectively creditworthy
raise interest rates customers. As a
unilaterally on these result of this plan,
credit instruments, scheme, conspiracy
and in so doing and course of
increase their income conduct, the “prime
and profits by rate” published by
m il l i o n s , if not the outside indexes
billions of dollars on remained artificially
an annual basis. high and the prime
plus interest rates on
the consumer credit
18. During the Class instrume nts were
Period, while fraudulently inflated.
main taining an
(emphasis added).
appearance of
following a prime The Amended Complaint then
rate set by neutral identifies three financial transactions
forces, the Banks pursuant to which the named plaintiffs
entered into a plan, obtained financing at a “prime plus”
5
interest rate. The plaintiffs did not attach Debra Lum obtained a home equity loan
the agreements documenting these three from Morris County Savings Bank, now
transactions, but the defendants provided First Union National Bank, in April 1987.
copies of the agreements in support of This loan required the plaintiffs to pay
their motion to dismiss.3 First, Hing and interest at a rate of two percentage points
above the prime rate, as reported in The
New York Times. Second, plaintiff Debra
Lum received credit cards from defendant
While plaintiffs did not attach this
Bank of America in 1990 and from Chase
credit agreement to the complaint, they
Manhattan Bank in 1991. These cards
do not dispute that the District Court
have interest rates tied to the prime rate
properly considered the agreement. In
reported in the Wall Street Journal. The
deciding motions to dismiss pursuant to
Rule 12(b)(6), courts generally consider
only the allegations in the complaint,
exhibits attached to the complaint, agreements are integral to and relied
matters of public record, and documents upon in the complaint.
that form the basis of a claim. See In re It should be noted that, under this
Burlington Coat Factory Sec. Litig., 114 standard, the District Court improperly
F.3d 1410, 1426 (3d Cir. 1997); Pension took judicial notice of Hing Lum’s
Benefit Guar. Corp. v. White Consol. deposition testimony in a prior
Indus., Inc., 998 F.2d 1192, 1196 (3d Cir. proceeding that he understands that the
1993). A document forms the basis of a term prime rate does not mean the lowest
claim if the document is "integral to or rate available to a bank’s most
explicitly relied upon in the complaint." creditworthy customers. While a prior
Burlington Coat Factory, 114 F.3d at judicial opinion constitutes a public
1426 (emphasis omitted). The purpose record of which a court may take judicial
of this rule is to avoid the situation where notice, it may do so on a motion to
a plaintiff with a legally deficient claim dismiss only to establish the existence of
that is based on a particular document the opinion, not for the truth of the facts
can avoid dismissal of that claim by asserted in the opinion. See Southern
failing to attach the relied upon Cross Overseas Agencies, Inc. v. Wah
document. See Pension Benefit Guar. Kwong Shipping Group, Ltd., 181 F.3d
Corp., 998 F.2d at 1196. Further, 410, 427 (3d Cir. 1999). Thus, “a court
considering such a document is not that examines a transcript of a prior
unfair to a plaintiff because, by relying proceeding to find facts converts a
on the document, the plaintiff is on motion to dismiss into a motion for
notice that the document will be summary judgment.” Id. at 427 n. 7.
considered. See Burlington Coat Nevertheless, since there are sufficient
Factory, 114 F.3d at 1426. In the present other grounds to support dismissal here,
case, there is no dispute that the credit this error is not a basis for reversal.
6
Bank of America agreement defines this The District Court had jurisdiction
prime rate as “the base rate on corporate over the federal RICO and antitrust claims
loans at large U.S. money center pursuant to 28 U.S.C. § 1331, and
commercial banks.” The Chase Manhattan supplemental jurisdiction over the state
agreement states that: law claims pursuant to 28 U.S.C. § 1367.
We have jurisdiction over the District
For purposes of this
Court’s final order pursuant to 28 U.S.C. §
Agreement, the Prime Rate
1291.
as published in “Money
Rates” table of The Wall We exercise plenary review over a
Street Journal or any other district court’s dismissal of a complaint
newspaper of national under Rule 12(b)(6). Ditri v. Coldwell
circulation selected by us is Banker Residential Affiliates, Inc., 954
merely a pricing index. It is F.2d 869, 871 (3d Cir. 1992). We review
not, and should not be a district court’s denial of leave to amend
considered by you to for abuse of discretion. Heyl & Patterson
represent, the lowest or the Int’l, Inc. v. F.D. Rich Housing of the
best interest rate available to Virgin Islands, Inc., 663 F.2d 419, 425 (3d
a borrower at any particular Cir. 1981).
bank at any given time.
III. Discussion
In considering a motion to dismiss,
In connection with all three of these a court must accept as true all of the
transactions, the defendant banks have sent factual allegations in the complaint and
to plaintiffs, through the U.S. mail, draw all reasonable inferences from those
monthly statements regarding the prime facts in favor of the plaintiffs. Moore v.
rate. Tartler, 986 F.2d 682, 685 (3d Cir. 1993).
A court may dismiss the complaint only if
On May 5, 2000, defendants moved
it is clear that no relief could be granted
to dismiss the complaint. In their
under any set of facts that could be proved
opposition to the motion, plaintiffs
consistent with the allegations. Hishon v.
submitted a detailed RICO Case Statement
King & Spalding, 467 U.S. 69, 73 (1984).
pursuant to the Local Rules of the District
In the present case, even accepting the
of New Jersey. On November 29, 2001,
allegations in the complaint as true and
following oral argument, the District Court
drawing every reasonable inference in
granted defendants’ motion to dismiss.
favor of the plaintiffs, they have failed to
Plaintiffs filed a timely appeal.
adequately plead either a RICO or an
antitrust cause of action.
II. Jurisdiction and Standard of A. RICO:
Review
7
The plaintiffs have failed to 676 (3d Cir. 1988), vacated on other
adequately plead a RICO cause of action grounds, 489 U.S. 1049 (1989).
predicated on mail and wire fraud because
The federal mail and wire fraud
their general allegations of fraud do not
statutes prohibit the use of the mail or
comply with Rule 9(b) and their specific
interstate wires for purposes of carrying
a l l eg a t i o n s r e g a r d in g p a r t i c u l a r
out any scheme or artifice to defraud. See
transactions do not amount to fraud. The
18 U.S.C. §§ 1341, 1343. "'A scheme
RICO statute provides that:
or artifice to defraud need not be
It shall be unlawful for any fraudulent on its face, but must involve
person employed by or some sort of fraudulent misrepresentation
as s o c i at e d w i t h a ny or omission reasonably calculated to
enterprise engaged in, or the deceive persons of ordinary prudence and
activities of which affect, comprehension.'" Brokerage Concepts,
interstate or foreign Inc. v. U.S. Healthcare, Inc., 140 F.3d 494,
commerce, to conduct or 528 (3d Cir. 1998) (quoting Kehr
participate, directly or Packages, Inc. v. Fidelcor, Inc., 926 F.2d
indirectly, in the conduct of 1406, 1415 (3d Cir. 1991)).
such enterprise’s affairs
Where, as here, plaintiffs rely on
through a pattern of
mail and wire fraud as a basis for a RICO
racketeering activity or
violation, the allegations of fraud must
collection of unlawful debt.
comply with Federal Rule of Civil
Procedure 9(b), which requires that
allegations of fraud be pled with
18 U.S.C. § 1962(c). It is also unlawful
specificity. See Saporito, 843 F.2d at 673.
for anyone to conspire to violate § 1962(c).
In order to satisfy Rule 9(b), plaintiffs
See 18 U.S.C. § 1962(d). In order to plead
must plead with particularity “the
a violation of RICO, plaintiffs must allege
‘circumstances’ of the alleged fraud in
(1) conduct (2) of an enterprise (3) through
order to place the defendants on notice of
a pattern (4) of racketeering activity. See
the precise misconduct with which they are
Sedima, S.P.R.L. v. Imrex Co., Inc., 473
charged, and to safeguard defendants
U.S. 479, 496 (1985). A pattern of
against spurious charges of immoral and
racketeering activity requires at least two
fraudulent behavior.” Seville Indus.
predicate acts of racketeering. See 18
Mach. Corp. v. Southmost Mach. Corp.,
U.S.C. § 1961(5). These predicate acts of
742 F.2d 786, 791 (3d Cir. 1984).
racketeering may include, inter alia,
Plaintiffs may satisfy this requirement by
federal mail fraud under 18 U.S.C. § 1341pleading the “date, place or time” of the
or federal wire fraud under 18 U.S.C. §
fraud, or through “alternative means of
1343. See 18 U.S.C. § 1961(1); Saporito
injecting precision and some measure of
v. Combustion Eng’g, Inc., 843 F.2d 666,
substantiation into their allegations of
8
fraud.” Id. (holding that a plaintiff conspiracy described in this
satisfied Rule 9(b) by pleading which Complaint. Each month
machines were the subject of alleged during the Class Period,
fraudulent transactions and the nature and Defendants mailed
subject of the alleged misrepresentations). thousands of bank
Plaintiffs also must allege who made a statements, advertisements
misrepresentation to whom and the general for credit cards, contracts
content of the misrepresentation. See and promotional materials
Saporito, 843 F.2d at 675; Rolo v. City containing the fraudulent
Investing Co. Liquidating Trust, 155 F.3d sta ted a nd a r tif ic ially
644, 658-59 (3d Cir. 1998); Klein v. inflated interest rates to
General Nutrition Co., Inc., 186 F.3d 338, Plaintiffs and the Class in
345 (3d Cir. 1999). f u r t h e ra n c e o f t h e i r
fraudulent scheme. Each
In the present case, the RICO cause
such act constituted a
of action consists of the following
violation of 18 U.S.C. §
allegation of mail and wire fraud:
1341.
44. During the Class
Period, within the meaning
of 18 U.S.C. §1962(c), the (b) During the Class
Defendants conducted and Period Defendants
participated, directly and transmitted or caused to be
indirectly, in the conduct of transmitted by means of
the enterprises through the wire communications in
pattern of racketeering interstate or foreign
activity: commerce, writings, signs,
signals, pictures or sounds
for the purpose of executing
(a) During the Class a scheme or artifice to
Period, Defendants used the defraud the plaintiffs, or for
U.S. mails and/or interstate obtaining money or property
wire facilities in connection of the Plaintiffs and the
with accomplishing the Class by means of false or
fraudulent scheme described f r a u d u le n t p r e t e n se s ,
in this Complaint. Each representations or promises
such use of the U.S. mails or as se t f orth in this
interstate wire facilities was Complaint in the allegations
for the purpose of executing set forth above. Examples
and furthering the include interstate telephone
f r a u d u lent sche m e o r calls and/or facsim ile
9
transmissions by prospective District Court failed to address explicitly
borrowers, seeking to the fact that the factual background section
promote borro win g of the Amended Complaint and the RICO
allegedly tied to the "prime Case Statement identify three specific
rate," or to collect interest allegedly fraudulent transactions – the
charges and loan payments mortgage with First Union, and the credit
allegedly due in connection card transactions with Bank of America
with borrowing on the and Chase Manhattan, the dates of these
f i n a n ci a l a n d c r e d it transactions, and the names of the
instruments tied to the d e f e n d a nts w h o m a d e a l le g e d
"prime rate," as well as misrepresentations to particular plaintiffs.4
interstate telephone or wire
transmissions of the Bank's
prime rate to the publishers
In their brief, plaintiffs claim that the
of the outside indexes. Each
RICO Case Statement alleges that Oriani
of these acts constitutes a
entered into an instant credit agreement
violation of 18 U.S.C. §
with Bank of New York in March 1994.
1343.
However, the RICO Case Statement only
The “fraudulent scheme described in the alleges that Bank of New York
Complaint” refers to paragraphs 17 and 18 represented a certain interest rate tied to
of the Amended Complaint which we have the prime rate on a particular date. It
set out above in Part I. does not allege that Oriani entered into a
credit agreement with Bank of New
The District Court properly ruled
York, the date of the credit agreement, or
that these conclusory allegations do not
the terms of the agreement (in particular
satisfy Rule 9(b). They do not indicate the
what interest rate Oriani would pay).
date, time , or place of any
Plaintiffs did not submit the credit
misrepresentation; nor do they provide an
agreement that Oriani allegedly entered
alternative means of injecting precision
into with Bank of New York. Based on
and some measure of substantiation into
the representations of Oriani's counsel at
the fraud allegations because they do not
oral argument before the District Court,
identify particular fraudulent financial
Bank of New York conducted a search of
transactions. See Seville, 742 F.2d at 791.
its records but could not find a record of
Nor do these allegations indicate which
the agreement with Oriani. Nevertheless,
defendant(s) made misrepresentations to
Bank of New York submitted its standard
which plaintiff(s). See id.; Saporito, 843
Instant Credit Agreement from the period
F.2d at 675; Rolo, 155 F.3d at 658-59;
during which Oriani claimed he entered
Klein, 186 F.3d at 345.
into an agreement with Bank of New
Plaintiffs contend, however, that the York. This agreement merely defined
the term “prime rate” as the rate reported
10
Plaintiffs, citing Michaels Building Co. v. date, time, or place of the alleged
Ameritrust Co., 848 F.2d 674 (6th Cir. m i s r e p re s e n ta t i o n s , the fin ancia l
1988), and Haroco, Inc. v. American Nat'l transactions in connection with which
Bank and Trust Co. of Chicago, 747 F.2d these misrepresentations were made, or
384 (7th Cir. 1984), aff'd 473 U.S. 606 who made the misrepresentation to whom.
(1985), argue that these allegations are See Seville, 742 F.2d at 791; Saporito, 843
sufficient to plead a RICO cause of action. F.2d at 675; Rolo, 155 F.3d at 658-59;
In Michaels and Haroco, the Courts of Klein, 186 F.3d at 345. Plaintiffs also
Appeals for the Sixth and Seventh allege that, on February 4, 2000, and
Circuits, respectively, held that complaints March 29, 2000, Citibank and First Union
adequately pled RICO causes of action represented to the "class" that the prime
predicated on mail and wire fraud when rate was the rate charged to their most
they alleged that banks misrepresented in creditworthy comm ercial customers.
particular loan agreements that the prime However, plaintiffs do not allege that these
rate is the interest rate charged by the representations were made to a named
banks to their most creditw orthy plaintiff, or that any particular individual
commercial borrowers, although in fact the entered into a financial transaction with
banks charged lower rates to some this term. See Rolo, 155 F.3d at 659
commercial borrowers. See Michaels, 848 (holding that, until a class is certified, a
F.2d at 677; Haroco, 747 F.2d at 385. RICO action is one between the named
plaintiffs and defendants, and the
In the present case, however, the
adequacy of the pleading must be analyzed
Amended Complaint fails to allege fraud
with regard to the specificity of the fraud
in relation to the three identified
allegations relating to the named
transactions because, unlike Michaels or
plaintiffs).
Haroco, the plaintiffs do not, and cannot,
allege that any of the three purportedly In order to counter their failure to
fraudulent credit agreements define the cite specific instances of active
term “prime rate” as the lowest interest misrepresentation that the prime rate is the
rate available to a bank’s most lowest rate available to a bank’s most
creditworthy borrowers. See id. creditworthy borrowers, the plaintiffs
focus on omissions by defendants. They
In addition, plaintiffs make general
argue that the term “prime rate” is so
claims that defendants misrepresented that
generally understood to mean the lowest
the prime rate is the lowest rate charged to
rate available to a bank’s most
their most creditworthy custom ers.
creditworthy borrowers that the failure to
However, these allegations do not satisfy
disclose that some borrowers obtain loans
Rule 9(b) because they do not indicate the
with interest rates below the prime rate
constitutes fraud.
We conclude to the contrary. Even
in the Wall Street Journal.
11
drawing every reasonable inference in rate because “a decision to charge certain
favor of plaintiffs, the meaning of the term customers lower rates than others – a
“prime rate” is sufficiently indefinite that common occurrence in the banking
it is reasonable for the parties to have industry – merely reflects the bank’s
different understandings of its meaning. greater confidence in the financial stability
For example, more than twenty years ago, of those customers.”). It is therefore
a congressional committee, in a staff unreasonable to infer that defendants’ use
report, described “prime rate” as a “murky, of the equivocal term “prime rate” was
ill-defined term that rarely reflects the reasonably calculated to deceive persons
lowest rates available to corporate of ordinary prudence and comprehension
customers.” See Staff of House Comm. on into believing that no borrower obtained
Banking, Finance and Urban Affairs, 97th an interest rate below the prime rate.
Cong., 1 st Sess., An Analysis of Prime Plaintiffs’ claim boils down to a
Rate Lending Practices of the Ten Largest disagreement about the meaning of the
United States Banks 3 (Comm. Print term “prime rate.” This disagreement does
1981). This lack of precision in the term not rise to the level of fraud; at most, it
“prime rate” has also been recognized by alleges a contract dispute. See Blount, 819
the courts. See, e.g., Blount Fin. Serv. Inc. F.2d at 152-53.
v. Walter E. Heller and Co., 819 F.2d 151,
Moreover, the requirement of Rule
152-53 (6th Cir. 1987) (“The fact that the
12(b)(6) that we draw every reasonable
parties take different positions under the
inference in favor of plaintiffs does not
contract as to the appropriate prime rate, or
preclude us from reaching this result.
the fact that the defendant charged too
Plaintiffs do not ask us just to infer that the
high a ‘prime rate’ and thereby concealed
term “prime rate” means the lowest rate
or refused to disclose what the plaintiff
available to defendants’ most creditworthy
considers the true prime rate called for
borrowers. They ask us to conclude that
under the contract, does not give rise to a
this meaning is so universally accepted
valid claim for fraud.”); Wilcox v. First
that it is the only possible meaning and
Interstate Bank of Oregon, 815 F.2d 522,
that a reasonable person could not
527-28 (9th Cir. 1987) (opining that prime
understand the term to mean anything else.
rate indicates the average cost of a loan
In light of Wilcox and Blount, this is not a
because most loans are negotiated at
reasonable inference. See Blount, 819
interest rates above or below prime);
F.2d at 151; Wilcox, 815 F.2d at 528. We
Center Cadillac, Inc. v. Bank Leumi Trust
conclude that the term “prime rate,” in the
Co. of New York, 859 F. Supp. 97, 103
context in which it was used here, is
(S.D.N.Y. 1994), aff’d, 99 F.3d 401 (2d
imprecise.
Cir. 1995) (holding that a lender does not
commit the predicate act of mail fraud by Furthermore, even if we were to
omitting a definition of prime rate and have held it to be fraudulent to use the
charging some borrowers below the prime term “prime rate” without disclosing that
12
some borrowers obtain financing below Street Journal) expressly stated in one of
the prime rate, the defendants in this case the three allegedly fraudulent credit
clearly did disclose that some borrowers agreements, relied upon by the plaintiffs,
obtained financing below the prime rate. that the prime rate is not the lowest rate
The 1991 credit card agreement between offered to the bank’s most creditworthy
defendant Chase Manhattan and plaintiff customer, it would be difficult to conclude,
Debra Lum states: as plaintiffs allege, that the defendants
conducted an enterprise through a pattern
For purposes of this
of racketeering activity by making
Agreement, the Prime Rate
misrepresentations or omissions that were
as published in "Money
reasonably calculated to deceive persons
Rates" table of The Wall
of ordinary prudence and comprehension.
Street Journal or any other
newspaper of national Plaintiffs, however, point to a
circulation selected by us is representation in another of the three
merely a pricing index. It is agreements, the credit card agreement
not, and should not be between Debra Lum and Bank of America,
considered by you to in support of their fraud claim. They argue
represent, the lowest or the that the representation in this agreement –
best interest rate available to that the prime rate is "the base rate on
a borrower at any particular corporate loans at large U.S. money center
bank at any given time. commercial banks" – is tantamount to
defining the prime rate as the lowest rate
available to a bank’s most creditworthy
(emphasis added). Plaintiffs argue that the borrowers. However, as with the term
term “it” in the last sentence of the Chase “prime rate,” a person of ordinary
Manhattan agreement refers to the term prudence and comprehension would not
“index” in the preceding sentence, not the conclude from this statement that no
term “prime rate.” This distinction is commercial borrowers obtain an interest
meaningless, however, because, according rate below the base rate because nothing in
to the terms of the contract, the prime rate the term “base rate” excludes the
for purposes of the credit card agreement possibility of discounts for some
is the prime rate reported in the Wall Street custome rs. Indeed, as plaintiffs
Journal. Thus, the caveat applies equally acknowledge in their opening brief, citing
to both rates. B LACK’S L AW D ICTIONARY 1191 (6 TH Ed.
1990), “base rate” is “effectively
Given the fact that one member of
equivalent” to “prime rate.” See also Form
the RICO association-in-fact (alleged by
FR 2028a/s, Fed. Res. Board, Prime Rate
plaintiffs to be the defendant banks plus
Supp. to Survey of Terms of Business
the Reuters News Service, Dow Jones,
Lending. As with the term “prime rate,”
Inc., The New York Times, and the Wall
13
because of the possibility of discounts, the U.S. 464, 473 (1962); see also Hospital
term “base rate” may not mean the lowest Bldg. Co. v. Trustees, 425 U.S. 738, 746
possible rate. (1976) (“[I]n antitrust cases, . . . dismissal
prior to giving the plaintiff ample
We conclude, therefore, that
opportunity for discovery should be
plaintiffs have failed to plead fraud with
granted very sparingly.”). Likewise, in
particularity in their RICO claim so that
Knuth v. Erie-Crawford Dairy Coop, this
the District Court properly dismissed it. 5
Court stated that "we should be extremely
B. Sherman Antitrust Act: liberal in construing antitrust complaints."
395 F.2d 420, 423 (3d Cir. 1968).
Similarly, since the Amended
Complaint alleges that defendants carried We have, however, recognized that
out their antitrust conspiracy through “‘while antitrust complaints are not subject
fraud, plaintiffs have failed to state a cause to especially stringent pleadings, see
of action under Section 1 of the Sherman Knuth, supra, neither are they exempt from
Antitrust Act because of the defects in the the federal rules.’” Commonwealth of
fraud allegations discussed above. Pennsylvania v. Pepsico, Inc., 836 F.2d
Generally, the pleading standard for 173, 179 (3d Cir. 1988) (quoting Sims v.
Section 1 claims is the short and concise Mack Truck Corp., 488 F. Supp. 592, 608
statement standard of Rule 8(a). In Poller (E.D. Pa. 1980)).
v. Columbia Broad. Sys., the Supreme
Because plaintiffs allege that the
Court cautioned that “summary procedures
defendants accomplished the goal of their
should be used sparingly in complex
conspiracy through fraud, the Amended
antitrust litigation where motive and intent
Complaint is subject to Rule 9(b). See
play leading roles, the proof is largely in
Fed. R. Civ. P. 9(b) (“In all averments of
the hands of the alleged conspirators, and
fraud or mistake, the circumstances
hostile witnesses thicken the plot.” 368
constituting fraud or mistake shall be
stated with particularity.” (emphasis
added)). Plaintiffs, nevertheless, pointing
Having correctly found that plaintiffs
to paragraph 17 of the Amended
failed to adequately plead a substantive
Complaint, argue that their antitrust claim
RICO claim under 18 U.S.C. § 1962(c),
merely alleges that defendants conspired to
the District Court properly dismissed the
set an artificially high floor on interest
RICO conspiracy claim under 18 U.S.C.
rates by agreeing to raise the prime rate,
§ 1962(d). “Any claim under section
and that allegations of misrepresentations
1962(d) based on conspiracy to violate
regarding the prime rate only go to their
the other subsections of section 1962
RICO claim. In paragraph 17, the
necessarily must fail if the substantive
A m ended Complaint alleges that
claims are themselves deficient.”
defendants “formulated and carried out a
Lightning Lube, Inc. v. WITCO Corp., 4
plan, scheme and conspiracy to fix and
F.3d 1153, 1192 (3d Cir. 1993).
14
control the ‘prime rate’ published by the consumer credit instruments
outside indexes.” were fraudulently inflated.
This paragraph of the Amended
Complaint cannot, however, be read in
(emphasis added). In short, the fact that
isolation. See Chabal v. Reagan, 822 F.2d
the fraud is not identified in paragraph 17
349, 357 (3d Cir. 1987). The very next
of the Amended Complaint does not rule
paragraph of the Amended Complaint
out that fraud is part of the antitrust
makes clear that plaintiffs are alleging that
allegation because paragraph 17 merely
the defendants carried out this plan,
identifies the existence of a conspiracy to
scheme, and conspiracy through fraud:
fix the prime rate, while paragraph 18
18. During the Class identifies how the rate fixing was
Period, while maintaining accomplished – through fraud.
an appearance of following
Because plaintiffs have alleged
a prime rate set by neutral
fraud as a basis for their antitrust cause of
forces, the Banks entered
action, this claim is subject to the
into a pla n, s ch e m e,
heightened pleading requirement of Rule
conspiracy, and course of
9(b). As discussed above, plaintiffs have
c o n d u c t d e s i g n e d to
failed to satisfy the requirements of Rule
fraudulently and artificially
9(b) with regard to their theory that
inflate the “prime rate”
defendants misrepresented that the prime
published in the outside
rate would be the lowest rate available to
indexes by falsely reporting
their most creditworthy customers. They
the Bank’s individual prime
have also failed to particularize how false
r a t e s t o t h e va r i o us
information on their “prime rate” was sent
publications. To effectuate
to the financial publications for inclusion
this scheme, the Banks
in the independent indices. They have not
reported as their prime rates,
set out who sent what information to
rates far in excess of the
whom or when it was sent. Nor have they
rates the Banks actually
particularized by how many points the
charged to their largest and
prime rate was falsely reported or whether
most creditworthy
there was any consistency among the
customers. As a result of
defendant banks in the amount by which
this plan , sc h em e,
the prime rate was falsely reported. We
conspiracy and course of
conclude, therefore, that plaintiffs have not
conduct, the “prime rate”
adequately pled an antitrust claim
published by the outside
predicated on fraud.
indexes remained artificially
high and the prime plus C. Leave To Amend:
interest rates on th e
15
Can plaintiffs cure the deficiencies what we believe at this time
in the Amended Complaint by further is the basis of the claim, that
amendment, either by providing particulars we can assert in good faith
of the fraudulent conduct or by dropping is based on conscious
the allegations of fraud? The Federal parallelism, and it might
Rules of Civil Procedure provide that very well be that during
leave to amend “shall be freely given when discovery, we will be able to
justice so requires.” Fed. R. Civ. P. 15(a). establish that there were
The District Court denied the request to actual meetings and direct
amend on the basis that amendment would discussions.
be futile.
We agree that it is clear from the
This statement, viewed in light of
statements in plaintiffs’ briefs and at oral
the record before the court, is not
argument both before the District Court
sufficient to establish cons cio us
and before us that leave to amend would
parallelism. “The law is settled that proof
be futile. Plaintiffs cannot allege
of consciously parallel business behavior
sufficient facts to support fraud in either
is circumstantial evidence from which an
the RICO or the antitrust claims. At oral
agreement, tacit or express, can be inferred
argument, plaintiffs did not identify any
but that such evidence, without more, is
additional allegations of fraud related to
insufficient unless the circumstances under
other financial transactions, or of other
which it occurred make the inference of
misrepresentations made in connection
rational independent choice less attractive
with the three identified transactions, that
than that of concerted action.” Bogosian,
they would include in a Second Amended
561 F.2d at 446. We have identified two
Complaint. Having examined the
such circumstances, known as “plus
contracts from the three purportedly
factors”: 1) where defendants acted in
fraudulent transactions, it is clear that there
contradiction of their own economic
are no further particulars of fraud in these
interests, and 2) where there is satisfactory
transactions to set out and that granting
demonstration of a motive to enter into an
leave to amend would be futile.
agreement. See id.; Venzie Corp. v.
Similarly, permitting plaintiffs to United States Mineral Prod., 521 F.2d
amend their antitrust claim to remove the 1309, 1316 (3d Cir. 1975). Since
fraud allegation would be futile. They will conscious parallelism is an evidentiary rule
have no additional information to provide that relates to how a plaintiff may prove
here either. The only alternative basis for the existence of an agreement, a plaintiff
the antitrust claim that plaintiffs propose is need not allege the existence of these plus
a claim of conscious parallelism. As factors in order to plead an antitrust cause
plaintiffs’ attorney stated at oral argument: of action. See Bogosian, 561 F.2d at 446
(holding that plaintiffs adequately pled an
16
antitrust cause of action where they alleged Citi Platinum Select 1.65
a combination and that the defendants
Citi Advantage Card 9.9
entered into parallel contracts with tying
agreements). First Union
In the present case, however, Visa Classic 7.9
granting plaintiffs leave to plead conscious
Visa Gold 6.4
parallelism would be futile because
plaintiffs do not allege, or seek to amend Visa Platinum 4.9
their complaint to allege, that defendants
US Bank
engaged in consciously parallel pricing as
to the final interest rate that defendants WorldPerks Visa Card 9.75
charged consumers. Indeed, the Amended
Wells Fargo
Complaint alleges that the Chase
Manhattan Advantage Credit agreement Proven Credit Standard/Platinum
offered an interest rate of 6 percentage MasterCard 9.4
points above the prime rate (or 5
Preferred Proven C r e d it
percentage points above the prime rate if
Standard/Platinum MasterCard 7.4
the customer had a Chase Manhattan
banking relationship), but Citibank offered Premium Credit Standard/Platinum
an interest rate of 1.65 percentage points MasterCard 4.0
above the prime rate. In addition, in their
Standard Mastercard 7.4
RICO Case Statement, plaintiffs allege
that the following banks offered the Further, according to the RICO
following interest rates on the following Case Statement, some defendants offered
credit cards through March 29, 2000: prime plus interest rates where the
percentage points above the prime rate
varied. The following banks offered the
Percentage Points Above Prime
following interest rates on the following
Bank of America: credit cards through March 29, 2000:
Visa Classic 2.9 Percentage Points Above Prime
Visa Gold 2.9 Bank of America
Standard Mastercard2.9 Visa Classic 2.9 to 12.9
Bank One Standard Mastercard 2.9 to 12.9
Visa OneCard Platinum (for Visa Gold 2.9 to 12.9
purchase)6.9
Visa Platinum 7.9 to 12.9
CitiBank
Key Bank
17
Variable Rate Gold Visa1.99 to the following interest rates on lines of
13.99 credit:`
Percentage Points Above Prime
Variable Rate Gold MasterCard
1.99 to 13.99 Chase Manhattan Advantage Credit 6
Variable Rate Classic Visa 1.99 to First Union Cash Reserve Credit (New
13.99 York) 9.5
Variable Rate Classic MasterCard Key Bank Preferred Line of Credit (New
1.99 to 13.99 York)5.49
US Bank PNC Unsecured Line of Credit A
competitive rate
Visa Classic 2.9 to 8.9
Bank of New York EquityLink Line of
Visa Platinum 1.9 to 8.9
Credit0 6
Still other defendants offered
The only reasonable conclusion that
incentives. For example, Bank One
can be drawn from these figures is that
offered a credit card with an introductory
there was price competition as to the final
rate of 2.9% for the first six months,
interest rate on credit cards and lines of
followed by a rate of 6.9 percentage points
credit. See Hishon, 467 U.S. at 73.
above the prime rate (for purchases).
Chase Manhattan offered a credit card Plaintiffs argue that they do not
with a fixed rate of 3.99% for the first nine have to allege conscious price parallelism
months, followed by a rate of 8.49 as to the actual interest rate charged to
percentage points above the prime rate customers because their allegations of
(9.49 percentage points for non-preferred conscious price parallelism as to the prime
customers). Bank of New York offered a rates is sufficient to state an antitrust cause
credit card with an introductory rate of of action. In support of this argument,
5.99% for nine months, followed by a plaintiffs cite several cases that recognize
fixed rate of 13.49% for balances greater that an agreement to artificially inflate the
than or equal to $2,500, or 15.49% for base rate from which negotiations begin
balances less than $2,500 – or a customer can violate the antitrust laws by causing
could elect a variable rate after the first consumers to pay more than they would
month of 5.49 percentage points above the absent an agreement to inflate the base
prime rate for balances greater than or rate. See In re NADSAQ Market-Makers
equal to $2,500, or 7.49 percentage points Antitrust Litig., 169 F.R.D. 493, 517-18
above the prime rate for balances less than
$2,500.
The Bank of New York EquityLink
Similarly, the RICO Case Statement
Line of Credit had an introductory fixed
alleges that the following banks offered
rate of 5.9% for the first six months.
18
(S.D.N.Y. 1996); In re Indus. Diamond In an industry with hundreds
Litig., 167 F.R.D. 374, 383 (S.D.N.Y. of products and a pervasive
1996); Fisher Brothers, 102 F.R.D. 570, policy of allowing discounts
578 (E.D. Pa 1984); In re Glassine and and promotional allowances
Greaseproof Paper Antitrust Litig., 88 to purchasers, . . . charts and
F.R.D. 302, 306 (E.D. Pa. 1980). We need reports focusing on list
not decide whether an actual agreement to prices rather than
artificially raise a base price violates transactional prices have
antitrust laws because that issue is not little value. “Especially in
before us. Rather, the issue before us is an oligopoly setting, in
whether we reasonably can infer from which price competition is
plaintiffs’ factual allegations of parallel most likely to take place
base pricing that defendants agreed to through less observable and
inflate the interest rates charged to less regular means than list
consumers and small businesses. p r i c e s , i t w o u l d be
unre ason able to dra w
The Supreme Court and this Court
conclusions about the
already have decided this issue in the
existence of tacit
negative. See Brooke Group LTD v.
coordination or
Brown & Williamson Tobacco Corp., 509
supracompetitive pricing
U.S. 209, 227, 235-36 (1993); In re Baby
from data that reflect only
Food Antitrust Litig., 166 F.3d 112, 128
list prices.” Brooke Group,
(3d Cir. 1999). In Brooke Group and In re
509 U.S. at 236.
Baby Food Antitrust Litigation, the
plaintiffs argued that an inference of an 166 F.3d at 128 (emphasis in original).
agreement to artificially inflate prices
While Brooke Group involved
could be drawn from evidence of
judgment as a matter of law and In re Baby
consciously parallel list prices. See id.Food Antitrust Litigation involved
Both the Supreme Court and this Court
summary judgment, assuming the factual
rejected this argument, holding that the
allegations are true in the present case and
relevant inquiry for purposes of
drawing every reasonable inference in
determining if an agreement to inflate
favor of plaintiffs, the plaintiffs contend
prices can be inferred from consciously
that they can allege that there is price
parallel pricing is whether there is
parallelism in setting the prime rate. We
consciously parallel pricing in the final
can see, however, from the information
price consumers pay, not whether there is
provided to the District Court by the
conscious parallelism in the list price from
plaintiffs that, due to discounts and
which negotiations for the final price
com petition regarding how many
begins. See id. As we stated in In re Baby
percentage points above the prime rate that
Food Litigation:
banks may charge, there is not price
19
parallelism in the final interest rate
charged to consumers. Under these
circumstances, in light of Brooke Group
and In re Baby Food Antitrust Litigation,
it is clear that no relief could be granted
under any set of facts that could be proved
consistent with the allegations. Therefore,
granting leave to amend would be futile.
IV. Conclusion
For the reasons stated above, we
will affirm the judgment of the District
Court.
20