Racketeering charge against major poultry company in contract production case survives dismissal

August 9, 2006 | Roger McEowen

Photo contributed by T. Haggerty, Dickinson County Kansas

 

The federal Racketeering Influence and Corrupt Organization Act (RICO) was enacted in the 1970s to provide additional ammunition to federal prosecutors in their fight against organized crime. But, RICO also contains a provision for private citizens to sue a person or entity who engages in a pattern of racketeering activity - and that is precisely what happened in this case. Here, a Texas farm couple sued Pilgrim’s Pride on RICO as well as state-based claims for conduct associated with a poultry production contract. Pilgrim’s Pride moved to get the claims dismissed, but the court refused.

The plaintiffs moved from Georgia to Texas where they purchased a chicken farm. The farm grew chickens under a production contract with Pilgrim’s Pride. Without the contract, the farm was worthless for any other farming activity. Pilgrim’s Pride required the plaintiffs to use a specific bank and appraiser for the mortgage loan in order to continue the contract after the sale. Upon purchasing the farm, Pilgrim’s Pride required the plaintiffs to make substantial capital improvements to the farm under threat of contract cancellation. The plaintiffs met all of the conditions (including borrowing additional money to make substantial improvements to existing facilities on the farm), but Pilgrim’s Pride still cancelled the contract within four months after the plaintiffs purchased the farm. The cancellation caused the plaintiffs to default on their mortgage and capital improvement loans, and the bank reacquired the farm at foreclosure at a substantially reduced price.

The plaintiffs sued the former farm owner, the bank, the appraiser and Pilgrim’s Pride under state fraud and contract law as well as the federal RICO statute. As for the RICO claim, the plaintiffs alleged that Pilgrim’s Pride set up a six-step scheme to defraud the plaintiffs:  (1) advertise the farm with promises of long-term contracts by Pilgrim’s Pride and require the buyer to use specific bankers and appraisers who will confirm a grossly inflated price for the property; (2) reward the bankers and appraisers with a steady stream of farmers selling and buying farms tied via contract with Pilgrim’s Pride (with the bankers and appraisers getting appraisal fees and closing costs); (3) arbitrarily demand and extract capital improvements from the farm purchaser to the greatest extent possible; (4) terminate the contract with the farmer, thereby rendering the farm worthless; (5) once the farmer is at the mercy of Pilgrim’s Pride, give the farmer the option to participate in the scheme or foreclose on the farm at a lower price, and; (6) return to step one and repeat the process with another farm buyer.

Pilgrim’s Pride tried to get the case dismissed either on the basis that RICO did not apply to them or that the plaintiffs’ allegations were false. The court refused to dismiss the case. In a RICO action, a plaintiff must show that the defendant engaged in a pattern of racketeering activity connected to the acquisition, establishment, conduct or control of an enterprise. The court noted that when ruling on a motion to dismiss, the plaintiffs’ allegations in the petition are deemed true. So, the issue was whether the plaintiffs had alleged sufficient facts which, if true, would prove a violation of RICO and the state fraud claims. The issue was not whether the plaintiffs could prove their claims, but whether the claims were legally sufficient. The court said they were. So, the case proceeds to the next stage. Eventually, the court will get to the actual merits of the plaintiffs’ claims, and whether the allegations can be proved.

Even though the court’s opinion only involved a procedural matter, the case is important for what it illustrates. Contract production arrangements need to be entered into with care. The big problem is that the party offering the contract typically has far greater bargaining power than the producer. That can lead to all sorts of problems. Also, if a producer is required to use a specific bank and specific appraiser as a condition of keeping the contract, be suspicious. The same can be said about mandated capital improvements. In any event, always, have an attorney review the contract and, in situations such as that presented in this case, the entire purchase arrangement before signing on the bottom line.

Stay tuned to developments in this case - it could eventually have significant ramifications in the domain of agricultural production contracts. Do v. Pilgrim’s Pride Corp. , et al. , No. 9:05 CV238, 2005 U.S. Dist. LEXIS 55374 (E.D. Tex.Aug. 9, 2006).