Cannarozzi v. Fiumara

United States Court of Appeals
For the First Circuit

No. 03-1391

SAMUEL CANNAROZZI AND ERICA CANNAROZZI,

Plaintiffs, Appellants,

v.

PETER FIUMARA,

Defendant, Appellee,

STEVEN J. MARULLO; BURNS & LEVINSON, LLP;
ATTORNEYS LIABILITY ASSURANCE SOCIETY, INC.,

Defendants.

APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Robert E. Keeton, U.S. District Judge]

Before

Torruella, Circuit Judge,
Lourie,* Circuit Judge,
and Howard, Circuit Judge.

Robert W. Walker, with whom Walker and Associates was on
brief, for appellants.
Richard B. Villiotte, with whom James J. Cipoletta, was on
brief, for appellee.

June 2, 2004

*
Of the Federal Circuit, sitting by designation.
 TORRUELLA, Circuit Judge. This case requires us to

interpret a provision of the Racketeer Influenced and Corrupt

Organizations Act ("RICO" or the "Act"), 18 U.S.C. § 1962(b), which

incorporates state law, here the Massachusetts criminal usury

statute. Samuel Cannarozzi sued Peter Fiumara alleging the latter

collected from him several "unlawful debts" in violation of RICO.

Because the loans did not offend the Massachusetts criminal usury

statute, the district court correctly concluded the debts were not

"unlawful" within the meaning of RICO and properly granted

Fiumara's motion for summary judgment.

I. Factual Background

Samuel Cannarozzi is an on-again off-again compulsive

gambler.1 A series of football gambling losses indebted him to

Joey Yerardi in 1988; in a short period the debt reached $22,000,

beyond his capacity to deliver the agreed upon weekly payments.

Cannarozzi contacted attorney Steven Marullo who referred

Cannarozzi to Marullo's client, Peter Fiumara.

Early in 1991, Cannarozzi met with Fiumara at Fiumara's

men's nightclub in Revere, Massachusetts. Fiumara proposed to buy

out Cannarozzi's debt to Yerardi in exchange for a promise to repay

him the sum at 3% per week. Cannarozzi began weekly payments, but

1
As we review a grant of Fiumara's motion for summary judgment,
the facts are narrated in the light most favorable to Cannarozzi's
claims. González-Pérez v. Hosp. Interamericano de Medicina
Avanzada, 355 F.3d 1, 3 (1st Cir. 2004).

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stopped when he had repaid $40,000 because of a federal

investigation into Yerardi and Fiumara and the advice of a federal

prosecutor who told him that "the book on these individuals is far

from closed."2 Marullo insisted that Cannarozzi continue to make

payments.

In the following years, Cannarozzi seems to have kept his

gambling under control, and he built up ownership interests in two

restaurants (with Marullo as his counsel). When the opportunity

arose in March 1996 for Cannarozzi to acquire an additional

restaurant interest for $30,000, he actually returned to Fiumara --

on Marullo's recommendation -- to ask for financing. Fiumara

agreed to loan Cannarozzi the $30,000, and the two executed two

$15,000 promissory notes, drafted by Marullo, and dated April 15,

1996 and June 10, 1996. The funds on the first note were tendered

on April 15, 1996, and Marullo notified the Massachusetts Attorney

General of the loan on April 16, 1996.3

By the end of the year, Cannarozzi was back to losing

money gambling and borrowed an additional $30,000 from Fiumara in

2
Cannarozzi was subpoenaed to appear before a federal grand jury
and testified in relation to his dealings with Yerardi, but not
Fiumara.
3
The Massachusetts criminal usury statute, Mass. Gen. Laws ch.
271, § 49, discussed at length below, exempts lenders from its
penalties for loans exceeding 20% per annum if they "notif[y] the
attorney general of his intent to engage in a transaction or
transactions which, but for the provisions of this paragraph, would
be proscribed . . . providing any such person maintains records of
any such transaction." Mass. Gen. Laws ch. 271, § 49(d).

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December 1996. A December 1, 1996 note recorded this loan; on

December 3rd Marullo sent notification to the Attorney General.

In the next two years, Cannarozzi paid Fiumara over

$200,000. Cannarozzi met with Marullo and Fiumara in December 1997

and asserted that his 1996 loans, which totaled $60,000, should

have been fully paid by that time. Cannarozzi was told that his

payments had only covered the interest, and Fiumara and Marullo

discussed Fiumara's business partner who had been found executed in

an automobile trunk with unpaid debts to Whitey Bulger.

In response to Cannarozzi's request, Marullo drafted a

note dated December 10, 1997 for $450,000 to pay his outstanding

obligations to Fiumara. Cannarozzi signed this note requiring

weekly payments of $1,000, secured by a mortgage on the property of

the Sierra's Restaurant ("Sierra's") in Sudbury, Massachusetts, a

commercial interest owned by Cannarozzi. Notice of the loan was

delivered to the Attorney General on December 16, 1997.

A new note dated April 24, 1998 for $550,000 extinguished

the $450,000 December 1997 note and all prior obligations. It was

a non-interest loan requiring $1,000 weekly payments, also secured

by Sierra's. Marullo sent notice to the Attorney General the same

day.

The last promissory note signed by Cannarozzi and

Fiumara, also a non-interest loan requiring $1,000 weekly payments,

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was dated August 1, 1998 for the amount of $1,000,000 and

extinguished the previous note.

Cannarozzi brought suit in January 2000 alleging a number

of counts under RICO and Massachusetts state law against Fiumara

and several other defendants. The district court dismissed all

claims against the other defendants and several claims against

Fiumara. Fiumara subsequently filed a motion for summary judgment

which the district court granted in full dismissing the remaining

RICO and state law claims against Fiumara. Cannarozzi appeals.

II. Collection of an Unlawful Debt

In Section 1962(b), RICO provides that:

It shall be unlawful for any person through a
pattern of racketeering activity or through
collection of an unlawful debt to acquire or
maintain, directly or indirectly, any interest
in or control of any enterprise which is
engaged in, or the activities of which affect,
interstate or foreign commerce.

Id. Cannarozzi's complaint alleges that Fiumara violated RICO by

acquiring an interest in Cannarozzi's commercial enterprise,

Sierra's, as collateral on debts to Fiumara. To fall within the

reach of the statute (and Congress's power to legislate), Sierra's

must affect interstate or foreign commerce. 18 U.S.C. § 1962(b);

see United States v. López, 514 U.S. 549, 556-59 (1995) (discussing

limits of Commerce Clause power). Fiumara has not challenged this

characterization. See, e.g., Katzenbach v. McClung, 379 U.S. 294,

300 (1964) ("one can hardly travel without eating"). The statute

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takes a flexible stance on how the interest or control is acquired,

and Fiumara does not question that his right to Cannarozzi's

property as collateral qualifies as "acquir[ing] or maintain[ing],

directly or indirectly, any interest in or control of. . . ." 18

U.S.C. § 1962(b).

The Act prohibits appropriation of such property that

comes about either "through a pattern of racketeering activity or

through collection of an unlawful debt." Id. On appeal,

Cannarozzi does not purport to have raised a genuine issue of fact

concerning Fiumara's engagement in a pattern of racketeering

activity but rather rests the complaint on Fiumara's alleged

collection of an unlawful debt.

The three § 1962(b) counts dismissed by the district

court correspond to three different loans, each secured by

Cannarozzi's interest in Sierra's. In Count 13, Cannarozzi alleges

a § 1962(b) violation based on the December 10, 1997 note and

mortgage. Count 16 involves the April 24, 1998 note and mortgage,

and Count 19 the August 18, 1998 note and mortgage.

Because Cannarozzi relies on the "collection of an

unlawful debt" prong of § 1962(b), he must create a genuine issue

of fact as to the loan's status as "unlawful." RICO defines

"unlawful debt" in § 1961(6) as follows:

"unlawful debt" means a debt (A) incurred or
contracted in gambling activity which was in
violation of the law of the United States, a
State or political subdivision thereof, or

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 which is unenforceable under State or Federal
law in whole or in part as to principal or
interest because of the laws relating to
usury, and (B) which was incurred in
connection with the business of gambling in
violation of the law of the United States, a
State or political subdivision thereof, or the
business of lending money or a thing of value
at a rate usurious under State or Federal law,
where the usurious rate is at least twice the
enforceable rate.

18 U.S.C. § 1961(6) (emphasis supplied); see Sundance Land Corp. v.

Cmty. First Fed. Sav. & Loan Ass'n., 840 F.2d 653, 665 (9th Cir.

1988) (applying § 1961(6) definition to interpret § 1962(b));

United States v. Salinas, 564 F.2d 688, 689 (5th Cir.

1977)(applying § 1961(6) definition to interpret § 1962(c)).

Accordingly, "to prove that what was collected was an unlawful debt

within the meaning of RICO, [Cannarozzi] would have to show that

[1] the debt was unenforceable in whole or in part because of state

or federal laws relating to usury, [2] the debt was incurred in

connection with 'the business of lending money . . . at a

[usurious] rate,' and [3] the usurious rate was at least twice the

enforceable rate." Durante Bros. & Sons, Inc. v. Flushing Nat'l

Bank, 755 F.2d 239, 248 (2d Cir. 1985) (quoting 18 U.S.C. § 1961

(6)).

Cannarozzi's claim only survives summary judgment if

there is a genuine issue of fact presented by the record as to all

three elements. The district court correctly assumed that if the

loans in question were enforceable under the Massachusetts criminal

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usury statute, Mass. Gen. Laws ch. 271, § 49, then Fiumara deserved

summary judgment.4 The Massachusetts criminal usury statute states

in relevant part, in paragraph (a), that,

Whoever in exchange for either a loan of money
or other property knowingly contracts for,
charges, takes or receives, directly or
indirectly, interest and expenses the
aggregate of which exceeds an amount greater
than twenty per centum per annum upon the sum
loaned or the equivalent rate for a longer or
shorter period, shall be guilty of criminal
usury . . . .

Mass. Gen. Laws ch. 271, § 49(a). In paragraph (d), the statute

provides an important exception to criminal liability:

The provisions of paragraph (a) . . . shall
not apply to any person who notifies the
attorney general of his intent to engage in a
transaction or transactions which, but for the
provisions of this paragraph, would be
proscribed under the provisions of paragraph
(a) providing any such person maintains
records of any such transaction.

Mass. Gen. Laws ch. 271, § 49(d) (emphasis supplied). The Supreme

Judicial Court has explained that "[w]hile parties may contract for

interest in an amount greater than twenty per cent, the Legislature

4
The district court failed, however, to reference the § 1961(6)
definition, with all of its necessary elements. The district court
opinion is incorrect insomuch as it suggests that a debt is
"unlawful" for RICO purposes merely by virtue of being
"unenforceable under State . . . law in whole or in part as to
principal or interest because of the laws relating to usury." 18
U.S.C. § 1961(6). In addition, "the debt [must have been] incurred
in connection with 'the business of lending money . . . at a
[usurious] rate,' and . . . the usurious rate [must have been] at
least twice the enforceable rate." Durante Bros. at 248 (quoting
18 U.S.C. § 1961(6)).

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has determined that as a matter of public policy persons who charge

more than twenty per cent interest must register with the Attorney

General." Begelfer v. Najarian, 409 N.E.2d 167, 172 (Mass. 1980).

The legal -- and factual -- inquiry as to Cannarozzi's three RICO

counts becomes relatively straightforward: did Fiumara provide the

Attorney General adequate notification for the three loans named in

the counts?

We review the district court's factual determinations for

clear error and its legal conclusions de novo. See Watson v.

Deaconess Waltham Hosp., 298 F.3d 102, 108 (1st Cir. 2002). The

district court found that "[t]he record is clear and it is

undisputed that notifications to the attorney general were sent by

Marullo on 4/16/96, 12/3/96, 10/16/97, and 4/24/98." Cannarozzi v.

Marullo, Civ. No. 00-10164-REK, at 5 (D. Mass. Feb. 5, 2003). The

parties do not dispute this finding, clearly evidenced by the

record. The district court recognized that these notification

dates did not match each high interest loan disbursed to Cannarozzi

and explained that:

The wording of the [criminal usury] statute
plainly states, however, that the notification
applies to the "intent to engage in
transaction or transactions" and that
"notification shall be valid for a two year
period." Every loan at issue in this case was
made within two years of sending a
notification letter to the Attorney General of
Massachusetts.

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Id. (emphasis in the original). That reading, that notification is

valid for two years for loan transactions during that period,

comports with the language of the statute, and Cannarozzi does not

argue to the contrary on appeal.

Nevertheless, Cannarozzi demurs, contending that while

Fiumara may have provided adequate notice as to these three loans,

that does not make them enforceable by the terms of the usury

statute. Cannarozzi argues on appeal, as he did in opposing

summary judgment, as follows:

Fiumara asserts the mortgages he obtained on
Cannarozzi's commercial real estate dated
12/10/97, 4/24/98, and 9/1/98, were security
for loans consisting of "roll ups of past
debt." Because the consideration for these
mortgages allegedly derived from Fiumara's
prior loans to Cannarozzi, plaintiffs argue
that if any of said loans were in violation of
Mass. Gen. Laws ch. 271, § 49, Fiumara's
procurement of the mortgages would also be in
violation of 18 U.S.C. § 1962(b).

The argument has some moral and policy appeal: a loanshark should

not be able to escape criminal liability -- and recover usurious

interest payments -- by the artifice of refinancing with notice to

the Attorney General. Any successful argument, though, must be

directed not to the purposes behind RICO, see United States v.

Oreto, 37 F.3d 739, 751 (1st Cir. 1994) ("Congress declared in RICO

that the statutory purpose was 'to seek the eradication of

organized crime in the United States' and Congress listed 'loan

sharking' as a means by which 'organized crime derives much of its

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power.'") (quoting Pub. L. 91-452, § 1 (Statement of Findings and

Purpose following 18 U.S.C. § 1961)), but rather to Massachusetts

law. See Salinas, 564 F.2d at 691 (dispositive inquiry is "whether

the particular State involved prohibits the . . . activity

charged") (quoting United States v. Nardello, 303 U.S. 286, 539

(1969)). Cannarozzi provides no authority for the proposition that

Massachusetts courts would refuse to enforce the loans in dispute

under the criminal usury statute.5

Looking closely at Cannarozzi's argument in the context

of the first of these three loans, issued on December 10, 1997, it

becomes apparent that the court below did not err in concluding

that the loans did not violate the Massachusetts criminal usury

statute.6 In December 1997, Cannarozzi went to see Fiumara because

he could not handle his debt load. The result was the signing of

5
Cannarozzi cites one case, Levites v. Chipman, 568 N.E.2d 639,
642 (Mass. App. Ct. 1991), which stands for the proposition that a
"loan [is] immune from attack as usurious" if "notice was on file
with the Attorney General at the time the loan proceeds were
distributed." This supports the argument that some of the earlier
loans -- not at issue in this case -- would not have been
enforceable because notice was served late or not at all. See also
Schwartz v. Levensailor, 15 Mass. L. Rep. 177, 2002 Mass. Super.
LEXIS 343,at *6 (Mass. Super. Ct. 2002) (loan at usurious rate
disbursed without prior notice not enforceable). Levites, though,
does not help Cannarozzi explain why the loans specified in the
three counts, secured by his interest in Sierra's, would not be
enforced in Massachusetts courts because of the criminal usury
statute.
6
If Cannarozzi cannot show that the first of these debts was
unlawful on a "rolling up" theory, the subsequent debts, properly
reported as they were, would also be lawful on that theory.

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a new note, one that for the first time was secured by Cannarozzi's

commercial property interest in Sierra's. Cannarozzi's argument

would require us to accept that a notification defect on part or

all of an existing debt cannot be cured by a refinancing with

proper notification. We decline to endorse that interpretation of

Massachusetts law, principally because Massachusetts courts have

applied to the criminal usury statute "the ordinary rule of

construction that any criminal statute is construed strictly

against the Commonwealth." Hakim Enters., Inc. v. Reinhardt, 566

N.E.2d 115, 116 (Mass. App. Ct. 1991); e.g., Clean Harbors, Inc. v.

John Hancock Life Ins. Co., 17 Mass. L. Rep. 468, 2004 Mass. Super.

LEXIS 66, at *32 (Mass. Super. Ct. 2004) (declining to invalidate

otherwise usurious note despite notification to the Attorney

General several hours after loan was disbursed).

On the face of the statute -- and the Supreme Judicial

Court's leading case addressing its meaning, see Begelfer, 409

N.E.2d 167 -- notification to the Attorney General is an absolute

defense to the enforceability of the note in question. We can

glean a rationale for this construction from a related area of

Massachusetts law, involving the enforceability of compound

interest loans that are refinanced:

"We think the term 'compound interest', as it
is commonly understood, applies to an
agreement whereby interest thereafter to
accrue automatically bears interest. Such
agreements the law has refused to countenance
principally for the reason that an improvident

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 debtor is not likely to realize the extent to
which the interest will accumulate. Though
the term 'compound interest' may apply in
certain other circumstances, we think it does
not apply where interest has already fallen
due and has become a debt which, like any
other debt, may either be paid in cash or
reloaned to the debtor under a new agreement
that it shall bear interest. Such an
agreement is not a snare which is likely to
entrap the unwary, for the borrower cannot
fail to realize the exact extent of his
obligation." Household Fin. Corp. v.
Goldring, 263 App. Div. 524, 527 (N.Y. 1942).
Where a debt includes accrued interest, "if a
new note is given for the interest, it is
thereby converted into capital, and may
rightfully be given with interest." Ferry v.
Ferry, 2 Cush. 92, 99 (1848). Wilcox v.
Howland, 23 Pick. 167 (1839).

Coupounas v. Madden, 514 N.E.2d 1316, 1321 (Mass. 1987)(emphasis

supplied). Similarly, Cannarozzi had the opportunity before

signing the new note to realize the magnitude to which his

arrearage had escalated. Were his debts then unenforceable under

state law, Cannarozzi would have had recourse in state court under

the existing note.

Cannarozzi has presented us with no more than a remote

possibility, without precedential support, that Massachusetts

courts would refuse to enforce a note which refinanced usurious

debts. Because "[a]ny reasonable doubt as to the meaning of a

criminal statute must be resolved in favor of a defendant," Clean

Harbors, 2004 Mass. Super. LEXIS 66 at *32 (interpreting the

criminal usury statute), we conclude that Cannarozzi has failed to

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establish a genuine issue of fact concerning the existence of an

"unlawful debt" to Fiumara as to all three counts.

III. State Law Claims

Cannarozzi also appeals the dismissal without prejudice

of a number of state law claims against Fiumara. According to the

supplemental jurisdiction statute, "district courts may decline to

exercise supplemental jurisdiction" when "the district court has

dismissed all claims over which it has original jurisdiction." 28

U.S.C. § 1367(c). The district court had dismissed "all claims

over which it ha[d] original jurisdiction," and the district court

acted within its discretion in declining to exercise jurisdiction

over Cannarozzi's state law claims. See Rodríguez v. Doral

Mortgage Corp., 57 F.3d 1168, 1177 (1st Cir. 1995) ("As a general

principle, the unfavorable disposition of a plaintiff's federal

claims at the early stages of a suit, well before the commencement

of trial, will trigger the dismissal without prejudice of any

supplemental state-law claims.").

IV. Conclusion

For the foregoing reasons, the judgment of the district

court is affirmed.

Affirmed.

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