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24971 - Gentry v. Yonce, et al.

Shearouse Adv. Sh. No. 24
S.E. 2d

STATE OF SOUTH CAROLINA

In The Supreme Court

Mary Gentry and Ralph

Bryan, Appellants,

v.

Kenneth M. Yonce,

D/B/A, Yonce's Stop N

Shop; Shirley Fincher,

formerly D/B/A, Star

Stop N Shop; Walter M.

Fulmer, D/B/A, Fulmer's

Amoco; Joseph A.

Rhinehart, D/B/A,

Country Peddler and

The Country Peddler; H

& S Amusements, Inc;

William Gordon Silver

and James Harold

Matthews, D/B/A, H & S

Amusements; and

Willard Britton, D/B/A,

Association

Amusements, Respondents.



Appeal From Saluda County

James W. Johnson, Jr., Judge

Opinion No. 24971

Heard June 22, 1999 - Filed July 13, 1999

AFFIRMED IN PART; REVERSED IN PART

Douglas H. Westbrook, of Charleston, for appellants.



p.24


GENTRY v. YONCE





James M. Griffin, of Simmons, Griffin & Lydon, of

Columbia, for respondents.



Lawrenc& E. Richter, Jr., and Saul Gliserman, of The

Richter Firm, of Mount Pleasant; and R. Randall

Bridwell, of Columbia, all for Amicus Curiae Legacy

Alliance.



Dwight F. Drake and B. Rush Smith, III, both of

Nelson, Mullins, Riley & Scarborough, L.L.P.; and

Richard A. Harpootlian, of the Law Offices of Richard

Harpootlian, all of Columbia, for Amicus Curiae

South Carolina Coin Operators Association.





MOORE, A.J.: Appellants brought this class action suit alleging

causes of action under the Racketeer Influenced and Corrupt Organizations

Act (RICO - 18 U.S.C. § 1961 et seq.) and the Unfair Trade Practices Act

(UTPA - S.C. Code Ann. § 39-5-20 et. seq.).1 Respondents are owners and

operators of video poker machines located in Saluda and Newberry Counties.

The trial court granted respondents' motion to dismiss the RICO and UTPA

causes of action. We affirm in part and reverse in part.





ISSUES



1) Did the trial court err in dismissing the RICO claim?



2) Did the trial court err in dismissing the UTPA claim?





DISCUSSION





Initially, we note that in deciding a motion to dismiss pursuant to

12(b)(6), SCRCP, the trial court should consider only the allegations set forth


1 Appellants did not appeal the circuit court's dismissal of their

conversion cause of action. Furthermore, the circuit court did not rule upon

the motion to dismiss the cause of action brought pursuant to S.C. Code Ann.

§ 32-1-10 (1977), which provides for the recovery of gambling losses.

p.25


GENTRY v. YONCE





on the face of the plaintiffs complaint and a 12(b)(6) motion should not be

granted if "facts alleged and inferences reasonably deducible therefrom

would entitle the plaintiff to any relief on any theory of the case." Stiles v.

Onorato, 318 S.C. 297, 300, 457 S.E.2d 601, 602 (1995).2 The question is

whether, in the light most favorable to the plaintiff, and with every doubt

resolved in his behalf, the complaint states any valid claim for relief

Further, the complaint should not be dismissed merely because the court

doubts the plaintiff will prevail in the action. Toussaint v. Ham, 292 S.C.

415, 357 S.E.2d 8 (1987). See also Kennedy v. Henderson, 289 S.C. 393, 346

S.E.2d 526 (1986) (where there is cause for doubt, or it is clear that the ends

of justice may well be promoted by a trial on the merits, a demurrer should

be denied where novel issues are present or are involved); Springfield v.

Williams Plumbing Supply Co., 249 S.C. 130,153 S.E.2d 184 (1967).





1) RICO claim





Respondents moved to dismiss the RICO claim on the grounds that

appellants: failed to state sufficient facts to constitute a cause of action;

failed to plead fraud with particularity; lacked standing because the injuries

complained of were not proximately caused by any alleged RICO violation;

and failed to plead the RICO claim with the particularity required pursuant

to Rule 9(b), SCRCP.





The circuit court dismissed the RICO cause of action on the ground

that complaints alleging RICO violations are subject to the same stringent

pleading requirements applicable to fraud claims. The circuit court also held

appellants failed to plead the existence of two "predicate acts" that constitute


2Appellants contend the circuit court erred in considering any of the

grounds for respondents' pre-answer motions that were based upon a defense

not listed in Rule 12(b), SCRCP. We agree. In Glenn v. School Dist. Five,

294 S.C. 530, 366 S.E.2d 47 (Ct. App. 1988), the Court of Appeals held the

statute of limitations is not a defense listed under Rule 12(b) that may be

raised by pre-answer motion. Similarly, here, respondents cannot raise any

defense or objection that is not permitted to be raised pre-answer in a Rule

12(b) motion, for example lack of standing. Thus, we have addressed only

the issues necessary to decide if the complaint states sufficient facts under

Rule 12 (b)(6).

p.26


GENTRY v. YONCE





a "pattern of racketeering" as required by RICO.3





A) Pleading Requirements





The circuit court held that complaints alleging RICO violations are

subject to the same stringent pleading requirements applicable to fraud

claims pursuant to Rule 9(b), SCRCP.4 We disagree.





The circuit court cited three cases to support its conclusion that RICO

actions are subject to the particularity pleading requirement of Rule 9(b).

However, in each of these cases, the underlying predicate acts alleged in

support of the RICO action were acts of fraud. Florida Dep't of Ins. v.

Debenture Guar., 921 F.Supp. 750 (M.D.Fla. 1996)(allegations of federal

securities fraud); Grant v. Union Bank, 629 F.Supp. 570, 575 (D. Utah

1986)(allegations of mail and wire fraud); Crystal v. Foy. 562 F.Supp. 422

(S.D.N.Y. 1983)(allegations of fraudulent conduct violating the Securities

Exchange Act). Here, the underlying predicate acts alleged in support. of the

RICO cause of action are violations of S.C. Code Ann. § 12-21-2804(B)(Supp.

1998) which prohibits the offering of special inducements5 and S.C. Code

Ann. § 12-21-2804(A)(Supp. 1998) which prohibits businesses from receiving




3 In order to establish a RICO violation, appellants are required to

establish the following: (1) the commission of two or more "predicate acts" (2)

constituting a "pattern" (3) of "racketeering activity" through which (4) the

culpable person (5) invests in, maintains an interest in, participates in, or

conspires to do any of the preceding in (6) an enterprise, and (7) such

activities affect interstate commerce. 18 U.S.C. § 1961-1962 (1984 &

Supp.1993). Roper v. Dynamique Concepts, 316 S.C. 131, 447 S.E.2d 218

(1994).. "Racketeering activity" is defined in § 1961(l)(A) to include any act

or threat involving gambling which is chargeable under State law and

punishable by imprisonment for more than one year.





4 Rule 9 (b), SCRCP, provides: "In all averments of fraud or mistake,

the circumstances constituting fraud or mistake shall be stated with

particularity. Malice, intent, knowledge, and other condition of mind of a

person may be averred generally."





5 In this case, appellants allege the offering of a "jackpot" is a special

inducement.

p.27


GENTRY v. YONCE





primary or substantial gross proceeds from video gaming devices. Thus, the

alleged underlying predicate acts are not based in fraud.6





As respondents point out, some courts have specifically held that the

same standard of particularity should be applied to all RICO claims. See, e.g.

Plount v. American Home Assurance Co., 668 F.Supp. 204 (S.D.N.Y.1987);

Schnitzer v. Oppenheimer & Co., 633 F.Supp. 92 (D.Or.1985); Taylor v. Bear

Stearns & Co., 572 F.Supp. 667 (N.D.Ga.1983). However, contrary to the

respondents' contention, the specificity requirement for pleading RICO

claims is not well-settled. Many courts have not been persuaded by the

reasoning of the courts that have applied Rule 9(b) to all RICO actions and

have limited the application of Rule 9(b) to fraud-based RICO claims. See

United States v. District Council of N.Y. City, 778 F.Supp. 738 (S.D.N.Y.

1991); United States v. Bonanno Organized Crime Family, 683 F.Supp. 1411

(E.D.N.Y.1988); Seville Indus. Mach. Corp. v. Southmost Mach. Corp., 742

F.2d 786, 792 n. 7 (3d Cir.1984), cert. denied, 469 U.S. 1211, 105 S.Ct. 1179,

84 L.Ed.2d 327 (1985). "Logically it follows,'at least in most circuits, that

when predicate acts are not based on fraud, there is no pleading requirement

of particularity." 2 James Wm. Moore, Moore's Federal Practice §

9.03(6)(b)(3rd ed. 1999). "Fraud claims brought under the RICO Act are

subject to the particularity requirements of Rule 9(b)." 5 Wright & Miller,

Federal Practice and Procedure 2d § 1251.1 (1988)(emphasis added).





Furthermore, Rule 9(b) by its terms applies only to those cases in

which fraud or mistake are averred. The particularity requirement is a

means for courts to summarily dispose of frivolous lawsuits based on fraud.

Courts applying the particularity requirement to all RICO allegations have

reasoned that the purposes advanced by Rule 9(b) are equally served by

applying the rule to non-fraud RICO claims. These courts have also

concluded that RICO allegations are even more damaging to a defendant's

reputation by labeling him with the stigma-laden term "racketeer." See

Plount ("Yet all of the concerns that dictate that fraud be pleaded with

particularity exist with even greater urgency in civil RICO actions."). But see

Sedima v. Imrex Co., 473 U.S. 479) 492, 105 S.Ct. 3275, 3283, 87 L.,Ed.2d 346


6Appellants also allege violations of § 12-21-2791. As discussed more

fully herein, on appeal, appellants concede the circuit court correctly held a

violation of this section could not serve as a predicate act.

p.28


GENTRY v. YONCE





(1985) ("As for stigma, a civil RICO proceeding leaves no greater stain than

do a number of other civil proceedings"); Rodonich v. House Wreckers Union

Local 95, 627 F.Supp. 176, 178 (S.D.N.Y.1985) (questioning propriety of

altering RICO's pleading burden). However, federal courts have a greater

need to summarily treat frivolous RICO claims than fraud claims because

the civil RICO treble damages clause provides a strong incentive for

plaintiffs to convert the garden variety fraud cause of action into a

racketeering action.





We have considered the reasoning of the above cases and we agree

with the cases that do not require pleading to comply with Rule 9 unless

fraud is alleged as the predicate act.7 There are many actions that could

damage a person's reputation and particularity should not be required in

each of these cases. This was simply not intended by the enactment of Rule

9. "Since the rule is a special pleading requirement and contrary to the

general approach of simplified pleading adopted by the federal rules, its

scope of application should be construed narrowly and not extended to other

legal theories or defenses." 5 Wright and Miller Federal Practice and

Procedure § 1297 (1990). Accordingly, the circuit court's holding that the

particularity requirement of Rule 9(b) applies in this case is error.8





B) "Predicate Acts"9


7 Another consideration often cited by the cases discussing the pleading

requirements is Rule 8. Often courts read the rules together and specifically

attempt to harmonize Rule 8 and Rule 9. See e.g. Friedlander v. Nims, 755

F.2d 810, 813 n.3 (1 11h Cir. 1985)(acknowledging and resolving a "potential

conflict" between Rule 8's notice pleading and Rule 9's particularity

pleading).





8 We find no distinction in the pleading requirement between

allegations of mail fraud and common law fraud. Thus, we agree with the

circuit court that mail fraud must be pled with particularity and affirm the

dismissal of this part of the complaint.





9 The circuit court summarily held that a violation of § 12-21-2804(A)

could not be used as a predicate act since this provision had been ruled

unconstitutional for vagueness in Reyelt et al. v. South Carolina Tax

Comm'n, Civil Action No. 6:93-1491-3 (D.S.C. July 5, 1994). However, this

p.29


GENTRY v. YONCE





The circuit court also held that appellants did not plead the existence

of two predicate acts that could constitute a pattern of racketeering. The

circuit court held that the alleged violations of two sections of the South

Carolina Video Game Machines Act cannot serve as predicate offenses under

RICO.10We disagree.





In their complaint, appellants allege respondents have violated § § 12

2 1-2791 and 12-21-2804(A) and (B). Section 12-21-2791 provides for a $125

cap on the amount that may be paid out as winnings on a video game

machine. This section does not provide any penalty. Violations of this

specific section are punishable under § 12-54-40(H) which provides for a civil

penalty and not any criminal penalty.11 Thus, a violation of § 12-21-2791


decision is not binding on this Court. See Phillips v. Periodical Publishers'

Serv. Bureau, Inc., 300 S.C. 444, 388 S.E.2d 787 (1989). Accordingly, the

circuit court erred in holding a violation of this section could not be a

predicate act solely based upon this case. Kennedy v. Henderson, supra

(demurrer should be denied when novel issues are involved).





10Legacy Alliance filed an amicus brief in support of the reversal of the

grant of respondents' motion to dismiss. In its amicus brief, Legacy Alliance

sets forth an interesting argument that the predicate act could actually be a

violation of the federal Unlawful Gambling Business Act, 18 U.S.C. § 1955,

which prohibits the use of interstate instrumentalities by anyone who

conducts a business that violates the State law in which it is conducted.

Legacy Alliance states that a violation of any of the South Carolina Code

sections under the Video Game Machines Act could serve as a predicate act

because the federal law references any State law and does not limit it to

those which are punishable by an imprisonment of one year. However,

appellants are relying strictly upon 18 U.S.C. § 1961 (1)(A) which requires

that a violation of the State law be punishable by imprisonment for more

than one year. Accordingly, this argument is inapplicable to this case.





11The Department of Revenue has applied § 12-54-40(H) for violations

of § 12-21-2791. Section 12-54-40 (H) provides: "A person who must obtain a

license or purchase stamps for identification purposes, and who fails to

obtain or display the license properly, or to affix the stamps properly, or to

comply with statutory provisions, is subject to a penalty of not less than fifty

p.30


GENTRY v. YONCE





cannot be a predicate offense for a RICO violation. The circuit court

correctly ruled that § 12-21-2791 cannot be a predicate act and, in fact,

appellants concede this in their reply brief.





Section 12-21-2804(B) provides: "No person who maintains a place or

premises for the operation of machines licensed under Section

12-21-2720(A)(3)12 may advertise in any manner for the playing of the

machines nor may a person offer or allow to be offered any special inducement

to a person for the playing of machines permitted under Section

12-21-2720(A)(3). "(emphasis added). Section 12-21-2804(F) provides in

pertinent part: "A person violating subsections (A), (B), (D), or (E) of this

section is subject to a fine of up to five thousand dollars to be imposed by the

commission. The commission, upon a determination that the violation is

wilful, may refer the violation to the Attorney General or to the appropriate

circuit solicitor for criminal prosecution, and, upon conviction, the person

must be fined not more than ten thousand dollars or imprisoned not more

than two years, or both. . ." Appellants contend respondents violated this

section by advertising that "jackpots" could be won which were in excess of


dollars nor more than five hundred dollars for each failure. For failure to

obtain or display a license as prescribed in Sections 12-21-2720 and

12-21-2730, the penalty is fifty dollars for each failure to comply."





12 Section 12-21-2720(A) provides in part:

Every person who maintains for use or permits the use of, on a

place or premises occupied by him, one or more of the following

machines or devices shall apply for and procure from the South

Carolina Department of Revenue a license effective for two years

for the privilege of making use of the machine in South Carolina

and shall pay for the license a tax of fifty dollars for each machine

in item (1), two hundred dollars for each machine in item (2),

and four thousand dollars for each machine in item (3): . . .

(3) a machine of the nonpayout type, in-line pin game, or video

game with free play feature operated by a slot in which is deposited

a coin or thing of value except machines of the nonpayout pin table

type with levers or "flippers" operated by the player by which the

course of the balls may be altered or changed.

p.31


GENTRY v. YONCE





the $125 limit. The circuit court held that § 12-21-2804(B) "does not apply to

the logos and other identifying information which physically comprise the

video game machine." We disagree.





Advertising that jackpots greater than $125 may be won is more than

a logo.13At this stage of these proceedings, we think that the advertising or

offering of jackpots could be construed as a special inducement and thus could

support a RICO claim. 14Accordingly, the circuit court erred in dismissing

appellants' RICO cause of action alleging violations of §§ 12-21-2804(A) and

(B) as predicate acts.15





2) UTPA



Respondents moved to dismiss the UTPA claim on the grounds that

appellants: failed to state sufficient facts to constitute a cause of action;

failed to plead the UTPA claim with the particularity required pursuant to

Rule 9(b), SCRCP; the conduct complained of is authorized by the S.C. Video

Game Machines Act (S.C. Code Ann. § 12-21-2770 (Supp. 1998)); and the

actions are exempt from the UTPA pursuant to S.C. Code Ann. § 39-5-40

(1985). Again, only the grounds based upon Rule 12(b) should have been

considered by the circuit court. Glenn v. School Dist. Five, supra.


13To hold otherwise, would mean that offers for free food and drinks,

which are clearly prohibited, when part of the machine would not be special

inducements.





14 The circuit court also cites 44 Liquormart v. Rhode Island, 517 U.S.

484, 116 S.Ct. 1495, 134 L.Ed.2d 711 (1996), for the proposition that

interpreting this statute to apply to logos would render the statute

unconstitutionally broad. 44 Liquormart dealt with a complete ban on price

advertising for alcohol in Rhode Island. It is simply inapplicable to this

situation.





15We note the General Assembly recently passed legislation which

specifically provides that an operator is prohibited from offering an

inducement of cash other than authorized payouts and jackpots. This

legislation takes effect December 1, 1999, if a majority of the voters in the

November 2nd referendum decide that cash payouts on video game machines

should continue.

p.32


GENTRY v. YONCE





The circuit court held the conduct which appellants contend forms the

basis for a UTPA cause of action are exempt from the UTPA pursuant to §

39-5-40. Section 39-5-40 (emphasis added) provides, in part: "Nothing in this

article shall apply to: (a) Actions or transactions permitted under laws

administered by any regulatory body or officer acting under statutory

authority of this State or the United States or actions or transactions

permitted by any other South Carolina State law."





The circuit court held that appellants have not alleged that advertising

a jackpot is a deceptive act because appellants have not alleged that

respondents have not paid out more than $125 in winnings. The circuit

court also held that appellants had failed to allege either that the statements

regarding the jackpots were false or that they were ignorant of the $125

limit.





Section 12-21-2791 states that operators "shall limit the cash payout

for credits earned for free games to two thousand five hundred credits a

player a location during any twenty-four hour period. The cash value of

credits for each free game is limited to five cents." Thus, there is a cap of

$125 per 24-hour period on payouts. Again, we note appellants are alleging

a violation of the inducement section (§12-21-2804(B)) and not solely the

payout section (§ 12-21-2791). The advertising of the jackpot and the paying

out of the jackpot are two separate violations under the Gaming Act.







Under the UTPA, it is unlawful to engage in " [u]nfair methods of

competition and unfair or deceptive acts or practices in the conduct of any

trade or commerce." S.C. Code Ann. § 39-5-20 (1985). An act is "unfair"

when it is offensive to public policy or when it is immoral, unethical, or

oppressive. An act is "deceptive" when it has a tendency to deceive. Harris

v. NCNB, 85 N.C.App. 669, 355 S.E.2d 838 (1987)(cited in Young v. Century

Lincoln-Mercury, Inc., 302 S.C. 320, 396 S.E.2d 105 (Ct. App. 1989), reversed

on other grounds, 309 S.C. 263, 422 S.E.2d 103 (1992)). Advertising a

jackpot over the statutory $125 limit is offensive and has a tendency to

deceive a person into thinking that a jackpot ov6r-$125 is legal.16 Thus, we


16We easily reject respondents' argument that there are no restrictions

on "winning jackpots" or an amount of credits worth more than $125.

Respondents contend there is only a limitation that prohibits an operator

p.33


GENTRY v. YONCE





hold that advertising a "jackpot" could be a violation of the UTPA and

dismissal of this cause of action is not appropriate at this stage of the

proceedings.







On appeal, respondents also contend the $125 limit does not prohibit

successive cash payouts over several days and/or the subtracting the amount

of money placed into the machine by the player prior to the operator paying

the $125 limit. We disagree. The circuit court did not interpret § 12-21-2791

in his order. The circuit court merely held that there is no limit on the

amount of free game credits a player may earn during a 24-hour period and §

12-21-2791 limits the amount of cash payouts for free game credits earned to

$125 in any 24-hour period. However, we take this opportunity to hold that §

12-21-2791 states exactly what it means.





The statue is not ambiguous. "When the terms of a statute are clear

and not ambiguous, there is no room for construction and the Courts are

required to apply such according to their literal meaning." McMillen Feed

Mills, Inc. v. Mayer, 265 S.C. 500, 220 S.E.2d 221 (1975). Allowing video

operators to pay out a larger jackpot over several days would render the

statute meaningless. It would nullify the limit. Further, to subtract how

much the player has deposited into the machine would likewise render the

statue meaningless. 17Statutes should not be construed so as to lead to an

absurd result. Carolina Power & Light v. Town of Pageland, 321 S.C. 5382

471 S.E.2d 137 (1996). We will reject a meaning when to accept it would

lead to a result so plainly absurd that it could not have been intended by the

Legislature or would defeat the plain legislative intention. Kiriakides v.


from redeeming more that $125 worth of free game credits. Accepting

respondents' argument would render the advertising "unfair" because as

stated 'above an act is unfair under the UTPA when it has a tendency to

deceive. Surely, the average person playing video poker that advertises the

winning of a jackpot would assume that the operator would pay the

advertised jackpot amount if won.





17We note that the video poker industry as ' whole has not been

subtracting a player's deposits into the machine from his total winnings

when paying out. Thus, the procedures followed by the industry in paying

out winnings do not even comply with or support this interpretation of the

$125 payout limit.

p.34


GENTRY v. YONCE





United Artists Communications, Inc., 312 S.C. 271, 440 S.E.2d 364 (1994).

Thus, we hold the $125 limit is a $125 per 24-hour period limit.18 Successive

cash payouts over several days or subtracting the money a player has

deposited into the machine is not authorized under this statue and would

render the $125 limit meaningless.19





In conclusion, on the basis of the complaint it cannot be stated

appellants are not entitled to any relief whatsoever. Accordingly, we reverse

the circuit court's ruling that the RICO cause of action must be pled with

particularity, §§ 12-21-2804(A) and (B) cannot serve as predicate acts under

RICO, the UTPA cause of action was not sufficiently pled, and the conduct

alleged in violation of the UTPA is authorized by law or is exempted. We

affirm the circuit court's ruling that §12-21-2791 cannot serve as a predicate

act.





AFFIRMED IN PART AND REVERSED IN PART.



FINNEY, C.J., TOAL, BURNETT, JJ., and Acting Associate

Justice George T. Gregory, Jr., concur.




18The United States District Court held similarly in Johnson v. Collins,

C.A. No. 3:97-2136-17 (D.S.C. filed September 15, 1998, and April 28, 1999),

that the $125 payout limit is $125 per 24-hour period, and alleged violations

of §§ 12-21-2804(A) and (B) can serve as predicate acts in a RICO cause of

action. The order which granted permanent injunctive relief has been stayed

by the Fourth Circuit Court of Appeals pending appeal of the injunction

order on its merits. Johnson v. Collins, No. 98-2225(L)(CA-97-2136-3-17) (4 th

Cir. filed July 7, 1999). However, the District Court's ruling and analysis on

the above issues are consistent with our opinion.





19Again, we note that the General Assembly-has recently passed

legislation which increases the payout limit to $500 regardless of the amount

of money deposited into the machine by the player. This part of the

legislation takes effect December 1, 1999) if a majority of the voters decide in

the November 2nd referendum that cash payouts on video game machines

should continue.



p.35