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Saturday, May 25, 2024 | Back issues
Courthouse News Service Courthouse News Service

Federal Judge Punted Off Lien Auction RICO Suit

CHICAGO (CN) - The 7th Circuit, for the second time, reversed the dismissal of a racketeering lawsuit, saying that the defendants had been "throwing sand in the district judge's eyes."

BCS Services and Phoenix Bond and Indemnity demanded $5 million in damages for an alleged fraud involving Cook County's tax lien auctions.

The county places liens on properties whose owners fail to pay taxes on time. Different entities buy up these liens at auction, hoping that the property owners will not pay the amount owed, and the lien holders can then acquire the property deed.

Tax lienors look for properties that are worth more than the past-due taxes and whose owners are unlikely to redeem then. To acquire the liens, they must outfox other bidders at auction who all enter the same bid.

Auctioneers must often pick a winner between identical bids, since 85 percent of the winning bids are awarded to entities that say they will not penalize homeowners if they pay the balance of their debt. To give the appearance of fairness, auctioneers often try to spread liens evenly across the pool of bidders.

County rules try to stamp out unfair competition by limiting potential buyers, or buyer groups, to sending just one agent to bid. According to the lawsuit, three coordinating buyer groups fraudulently violated this rule over a six-year period. H

Having more hands in the air at auction allegedly gave these buyer groups an unfair advantage. While plaintiffs received about 7 percent of the 96,000 of the penalty-free liens awarded during the six years in question, defendants won 41 percent.

If awards were distributed randomly among the bidders, and everyone was playing by the rules, the three defendant groups should have won bids just 10.5 percent of the time, the plaintiffs argued.

The Northern District of Illinois in Chicago dismissed the case more than five years ago, saying that plaintiffs "at best were indirect victims of the alleged fraud," and lacked standing to sue.

But the 7th Circuit reversed that finding, and the Supreme Court affirmed that the plaintiffs indeed had standing.

Upon remand, U.S. District Judge James Holderman dismissed the case again on slightly different grounds. In the latest summary judgment award, Holderman said the plaintiffs could not prove that the fraud was a "proximate cause" of their losses.

"In round two [Holderman] thought that although we and the Supreme Court had held that the plaintiffs were direct victims, they had not been injured directly; the casual link between the fraud and the injury was 'tenuous,'" Judge Richard Posner wrote for the 7th Circuit on Thursday.

Devoting almost five of the opinion's pages to the legal doctrine of proximate cause, Posner concluded: "It was injected [into the case] for no better reason - and it is not a good reason - than that it has figured in several RICO cases decided recently by the Supreme Court. ... The doctrine has no application to this case."

Though other factors could have contributed to the plaintiffs' lower percentage of awards, Posner said "it seems highly likely that at least part of this dramatic difference in success was attributable simply to more hands in the air."

The court speculated that BCS and Phoenix have asserted facts sufficient to both survive summary judgment and to carry their burden of proving an amount of damages "with sufficient ... precision to justify an award of that amount."

The case will return to the Northern District of Illinois for trial, but Holderman is off the case.

"As this is the second reversal of the district judge in the same case, we think it best to spread the pain and invoke our Rule 36, so that the trial will be before a different judge," the court ordered.

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