PUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

NORA CHISOLM; TINA WILCE; LAURA
RICHARDS,
Plaintiffs-Appellants,

and

STARLETTE SEAMSTER,
Plaintiff,

v.

TRANSOUTH FINANCIAL CORPORATION,
Defendant-Appellee,

and

CHARLIE FALK'S AUTO WHOLESALE
INCORPORATED; JB COLLECTION
CORPORATION,
                                   No. 95-2629
Defendants,

CAROLYN L. NOLEN; GERALDINE B.
WILLIAMS; PAUL T. KAZMIERSKI;
RAYMOND L. RAASCH; AVA
HOWINGTON; PETER GRAY; JANICE M.
DIXON; BRENDA POWELL; TIMOTHY S.
BOOKER,
Claimants,

FALK FINANCE, INCORPORATED;
CHARLES FALK, SR.; CHARLES
FALK, JR.; KATHERINE FALK;
ANDERSON & STRUDWICK,
INCORPORATED; ARTHUR TRUMAN
GOODSON; WILLA JEAN COLLINS,
Movants.
Appeal from the United States District Court
for the Eastern District of Virginia, at Norfolk.
John A. MacKenzie, Senior District Judge.
(CA-93-632-2)

Argued: April 1, 1996

Decided: September 10, 1996

Before HALL and MOTZ, Circuit Judges, and BUTZNER,
Senior Circuit Judge.

_________________________________________________________________

Vacated and remanded with instructions by published opinion. Judge
Hall wrote the opinion, in which Judge Motz and Senior Judge Butz-
ner joined.

_________________________________________________________________

COUNSEL

ARGUED: George Robert Blakey, UNIVERSITY OF NOTRE
DAME, Notre Dame, Indiana, for Appellant. Gregory Neil Stillman,
HUNTON & WILLIAMS, Norfolk, Virginia, for Appellee. ON
BRIEF: Kieron F. Quinn, F. Paul Bland, Jr., LAW OFFICE OF
KIERON QUINN, Baltimore, Maryland, for Appellant. Benjamin V.
Madison, III, HUNTON & WILLIAMS, Norfolk, Virginia, for
Appellee.

_________________________________________________________________

OPINION

HALL, Circuit Judge:

The appellants are three of four plaintiffs who filed a putative class
action against appellee TranSouth Financial Corporation and others,
seeking redress under the Racketeer Influenced and Corrupt Organi-
zations Act (RICO), 18 U.S.C. § 1961 et seq., for damages they sus-

                     2
tained as victims of a "revolving repossession" scheme. The district
court entered a final judgment dismissing the action as to TranSouth
under Fed. R. Civ. P. 12(b)(6), because the plaintiffs had failed to
allege in their complaint that, following the repossession of their vehi-
cles, they had relied to their detriment on the written notices of sale
mailed to them by TranSouth.

In the wake of the judgment, the plaintiffs moved to amend their
complaint, but the district court denied the motion because it believed
that the plaintiffs could prove no set of facts establishing that they had
relied on the mailings. We hold that the district court's denial of the
plaintiffs' motion to amend was an abuse of its discretion; we thus
vacate the court's judgment and remand with instructions to permit
the amendment.

I.

A.

We review de novo the district court's dismissal of the plaintiffs'
complaint under Rule 12(b)(6). Randall v. United States, 30 F.3d 518,
522 (4th Cir. 1994), cert. denied, 115 S. Ct. 1956 (1995). We must
accept the well-pled allegations of the complaint as true, and we must
construe the facts and reasonable inferences derived therefrom in the
light most favorable to the plaintiffs. Id.; Little v. Federal Bureau of
Investigation, 1 F.3d 255, 256 (4th Cir. 1993).

According to the complaint, TranSouth conspired with Charlie
Falk's Auto Wholesale, Inc., and JB Collection Corporation, both of
Norfolk, Virginia, to effect an automobile "churning" or revolving
repossession scheme. Falk's sold used vehicles at inflated prices,
offering to arrange financing at interest rates as high as thirty percent.
Under the terms of the financing contracts, Falk's retained a security
interest in the vehicles pending full repayment of the loan by the bor-
rower. Falk's then assigned the secured notes to TranSouth, agreeing
to buy back the notes for a fixed price -- usually $1,000 to $1,500
-- in the event of the borrower's default.

                     3
If a borrower missed a payment, TranSouth had the vehicle
repossessed.1 It then mailed a"Notice of Private Sale," giving the bor-
rower an opportunity to redeem the vehicle.2 Any vehicles that were
not redeemed were retransferred, with the accompanying notes, to
Falk's for the prearranged consideration.3

Upon repurchasing the notes, Falk's assigned them to JB, its
wholly-owned subsidiary. JB then demanded payment from the bor-
rowers for the "deficiency" between the loan balance and the price
obtained by the "sale" of the vehicle, i.e., the retransfer price. If the
borrower failed to pay, JB filed a deficiency action in state court for
the stated amount. On occasion, JB also claimed attorney fees of
twenty-five percent, notwithstanding that it had filed suit without the
assistance of counsel.

While JB was trying to collect from the borrowers, Falk's resold
the repossessed vehicles for about the same price as (or even more
than) it had previously, starting the process all over again. The origi-
nal borrowers were never notified of these subsequent, legitimate
_________________________________________________________________

1 TranSouth usually employed a subsidiary of Falk's to repossess the
automobiles, and the vehicles were frequently taken to a lot leased from
Falk's by TranSouth.

2 Va. Code Ann. § 8.9-504(3) (Michie 1991) provides that, upon the
borrower's default under a security agreement, "[d]isposition of the col-
lateral may be by public or private proceedings. . .. [R]easonable notifi-
cation of the time after which any private sale or other intended
disposition is to be made shall be sent by the secured party to the debtor.
. . ."

3 These retransfers were not actually "sales" under Virginia law:

          A person who is liable to a secured party under a guaranty,
          indorsement, repurchase agreement or the like and who receives
          a transfer of collateral from the secured party or is subrogated to
          his rights has thereafter the rights and duties of the secured party.
          Such a transfer of collateral is not a sale or disposition of the
          collateral under this Title.

Va. Code Ann. § 8.9-504(5) (Michie 1991) (emphases supplied).

                     4
sales; the amount of the purchase price was not credited to the defi-
ciencies, and the borrowers were not paid any resultant surplus.4

B.

On June 17, 1993, four victims of the scheme filed a complaint in
the district court against Falk's, JB, and TranSouth. The complaint
alleged that the three had violated various provisions of RICO, and
that JB had failed to comply with the Fair Debt Collection Act, 15
U.S.C.A. § 1692 et seq. (West 1982). The plaintiffs also asserted state
law claims against each defendant for violations of Virginia's Con-
sumer Protection Act and its version of the Uniform Commercial Code,5
and for common law fraud and conspiracy.

The matter was referred by the district court to a magistrate judge
to conduct hearings and make proposed findings. The magistrate
judge issued his report and recommendation on November 19, 1993,
wherein he concluded that the RICO claims should be dismissed (as
to TranSouth) or judgment granted on the pleadings (as to Falk's and
JB). See Fed. R. Civ. P. 12(b)(6), (c).

The magistrate judge further recommended that summary judgment
be granted to JB on one plaintiff's FDCA claim, because the statute
_________________________________________________________________
4 The case of plaintiff Starlette Seamster illustrates the effect of the
scheme on its victims. On August 21, 1987, Seamster purchased a 1984
Dodge Aries on credit from Falk's for $6,492. Falk's assigned the loan
to TranSouth, agreeing to buy back the note for $1,500 in the event of
Seamster's default, which indeed occurred about fourteen months later.
TranSouth repossessed the car and mailed its "Notice of Private Sale" to
Seamster, who failed to respond. Falk's repurchased the loan, and JB
demanded payment of the $2,743 "deficiency" between the $1,500 repur-
chase price and the outstanding loan balance; in March 1989, with no
payment forthcoming, JB filed suit. On May 20, 1989, Falk's resold the
Aries for $6,300, only $192 less than what Seamster had paid for it
almost two years earlier, and $2,057 more than the balance of her loan.
Notwithstanding this windfall, JB neither remitted any of the surplus to
Seamster nor withdrew its lawsuit.
5 Va. Code Ann. §§ 59.1-196 et seq. (Michie 1992 & Supp. 1996), and
8.1-101 et seq. (Michie 1991 & Supp. 1996).

                    5
of limitations had expired. Lastly, the magistrate judge concluded that
the state law claims against TranSouth should be dismissed without
prejudice because no viable federal claim against it remained. See
United Mine Workers of America v. Gibbs, 383 U.S. 715, 726 (1966).
The district court adopted the magistrate judge's proposed disposi-
tion. Chisolm v. Charlie Falk Auto Wholesalers, Inc., 851 F. Supp.
739 (E.D. Va. 1994). On May 11, 1994, the court denied the plain-
tiffs' alternative motions for reconsideration or to amend the com-
plaint.

C.

On July 27, 1994, the plaintiffs settled with Falk's and JB as to the
remaining FDCA and state law claims; a written "stipulation of settle-
ment" was filed in the district court on October 13, 1994. On August
3, 1995, the court approved the settlement, and it dismissed the plain-
tiffs' claims against Falk's and JB with prejudice.

The accompanying order certified two classes for the purposes of
settlement only. Under the terms of their agreement with the plain-
tiffs, Falk's and JB agreed to forgive approximately $10 million in
deficiency judgments and to pay $400,000 to the class and its attor-
neys. The companies also agreed to conduct all future dispositions of
repossessed automobiles in compliance with Virginia law. Final judg-
ment having been entered in the matter, three of the plaintiffs now
appeal the district court's dismissal of two of their four RICO claims
against TranSouth.

II.

A.

The appellants maintain that TranSouth was more than just an
unwitting participant in the scheme, and that its actions violated two
distinct provisions of RICO: 18 U.S.C. §§ 1962(a) and (d). Subsection
(a) provides, in pertinent part:

          It shall be unlawful for any person who has received any
          income derived, directly or indirectly, from a pattern of

                    6
          racketeering activity . . . to use or invest, directly or indi-
          rectly, any part of such income, or the proceeds of such
          income, in acquisition of any interest in, or the establish-
          ment or operation of, any enterprise which is engaged in, or
          the activities of which affect, interstate or foreign com-
          merce. . . .

Subsection (d) makes it a crime to conspire to violate any of the sec-
tion's substantive provisions, including Subsection (a).

"Racketeering activity" refers to an assortment of crimes, one of
which is federal mail fraud. See 18 U.S.C.A.§ 1961(1) (West Supp.
1996). A "pattern" requires, at a minimum, two acts of racketeering
activity within ten years. 18 U.S.C.A. § 1961(5) (West 1984); Sedima,
S.P.R.L. v. Imrex Co., Inc., 473 U.S. 479, 496 n.14 (1985). The appel-
lants assert that TranSouth committed mail fraud each time that it
notified a defaulting borrower that his or her repossessed vehicle
would, if not redeemed, be disposed of at a private"sale." According
to the appellants, the notice was intentionally misleading because
TranSouth knew that a transfer of collateral under a repurchase agree-
ment was not a "sale" at all. See note 3, supra.

RICO provides that "[a]ny person injured in his business or prop-
erty by reason of a violation of section 1962 of this chapter may sue
therefor . . . and shall recover threefold the damages he sustains and
the cost of the suit, including a reasonable attorney's fee. . . ." 18
U.S.C.A. § 1964(c) (West Supp. 1996). The government need not
prosecute a RICO violation as a prerequisite to the filing of a civil suit
against the alleged violator. Sedima, 473 U.S. at 493.

B.

The elements of mail fraud are (1) a scheme disclosing an intent
to defraud, and (2) the use of the mails in furtherance of the scheme.
See Pereira v. United States, 347 U.S. 1, 8 (1954). Although the
crime of common law fraud requires the intended victim to have justi-
fiably and detrimentally relied on the defendant's misrepresentation,
no such "reliance" element must be proved to obtain a conviction for
mail fraud. See Armco Indus. Credit Corp. v. SLT Warehouse Co.,
782 F.2d 475, 481-82 (5th Cir. 1986). Thus, assuming that TranSouth,

                     7
through its agents, mailed the notice letters with the intent to defraud
the borrowers by facilitating the churning scheme, it committed mail
fraud. By mailing many such letters, it may have engaged in a pattern
of activity sufficient to establish one or more RICO violations.

The difficulty in this case lies in § 1964(c)'s requirement that, in
order to recover damages in a civil action, a person be injured in his
business or property "by reason of" a § 1962 violation. See Section II-
A, supra. The statute is not so broad as it first seems:

          This language can of course be read to mean that a plaintiff
          is injured "by reason of" a RICO violation, and therefore
          may recover, simply on showing that the defendant violated
          § 1962, the plaintiff was injured, and the defendant's viola-
          tion was a "but for" cause of plaintiff's injury. This conclu-
          sion is hardly compelled, however, and the very
          unlikelihood that Congress meant to allow all factually
          injured plaintiffs to recover persuades us that the Act should
          not get such an expansive reading.

Holmes v. Securities Investor Protection Corp. , 503 U.S. 258, 265-66
(1992) (footnotes and citations omitted). Consequently, it is not
enough that a civil RICO plaintiff prove that, but for the defendant's
violation, he would not have been injured; he must also show that the
violation proximately caused the harm. Id. at 268; Brandenburg v.
Seidel, 859 F.2d 1179, 1189 (4th Cir. 1988). The pertinent inquiry in
determining the existence of proximate, or "legal" cause, is "whether
the conduct has been so significant and important a cause that the
defendant should be held responsible." Brandenburg at 1189, quoting
Prosser & Keeton, Torts, § 42 p. 272 (5th ed. 1984).

In Brandenburg, depositors of an insolvent Maryland savings and
loan association brought civil RICO claims against former officers
and directors of the equally insolvent Maryland Savings-Share Insur-
ance Corporation (MSSIC), a quasi-public entity established by the
state legislature to regulate S&Ls and insure their deposits. The
depositors asserted, among other things, that MSSIC's print advertise-
ments and promotional materials, touting the security of the deposits
that it insured, persuaded them to deposit their funds in member insti-
tutions. In addition, newspaper advertisements carrying the MSSIC

                     8
seal, but placed by the savings and loan itself, were said to have
encouraged the deposit of more funds than MSSIC could safely
insure. MSSIC's advertisements and promotional literature were
alleged to have intentionally conveyed the misleading impression that
it was a state agency and that its depositors' accounts were insured
by the state. The depositors maintained that the deceptive materials
violated the federal mail fraud statute.

We held, inter alia, that the depositors had failed to allege a suffi-
cient causal connection between their losses and MSSIC's purported
crimes. Although we acknowledged that the agency's representations
might have induced deposits beyond its capacity to insure them, and
thus may have been a cause-in-fact of the insolvency, we concluded
that the depositors' losses were proximately caused by the saving and
loan's failure to maintain adequate reserves, in conjunction with
MSSIC's negligent dereliction of its oversight responsibilities.
Because any injury suffered by the depositors to their property was
not "by reason of" any racketeering activity proscribed by § 1961(1),
we affirmed the district court's dismissal of the RICO claims against
MSSIC.

C.

Our decision in Brandenburg essentially bifurcated the "by reason
of" analysis. We said that, where the predicate act giving rise to civil
liability under RICO was alleged to have been mail fraud, prospective
plaintiffs must, in order to demonstrate their standing to sue,6 plausi-
bly allege both that they detrimentally relied in some way on the
fraudulent mailing, see 859 F.2d at 1188-89, and that the mailing was
a proximate cause of the alleged injury to their business or property.
Id. at 1189-90. Though our decision focused primarily on the deposi-
tors' inability to allege proximate cause, we also noted that their sup-
posed reliance on certain representations made by MSSIC was not
justifiable. See id. at 1188-89.
_________________________________________________________________
6 See Brandenburg, 859 F.2d at 1187 ("The Supreme Court has
explained these injury and causation requirements as aspects of standing,
rather than elements of the civil RICO plaintiff's prima facie case."),
citing Sedima, 473 U.S. at 496-97.

                    9
When we decided in Brandenburg to impose a reliance require-
ment in the civil RICO context, we were fully aware that no analo-
gous rule existed in criminal RICO prosecutions involving mail fraud.
Id. at 1188 n.10. As we made clear in Caviness v. Derand Resources
Corp., 983 F.2d 1295 (4th Cir. 1993), a showing of reliance on the
predicate act of fraud ensures the existence of a"direct relation
between the injury asserted and the injurious conduct alleged." Id. at
1305, quoting Holmes, 503 U.S. at 268; see also Mid Atlantic Tele-
com, Inc. v. Long Distance Servs., Inc., 18 F.3d 260, 264 (4th Cir.)
(remanding for, inter alia, resolution of reliance issue), cert. denied,
115 S. Ct. 323 (1994).7

The appellants here contend that our pleading requirement is too
rigid, contrary both to Congress's intent that RICO be liberally con-
strued, see Pub. L. No. 91-452, 84 Stat. 947 (1970), and the Supreme
Court's admonition that strict requirements of standing or proximate
cause not be erected as obstacles to private RICO litigants. See
Sedima, 473 U.S. at 498-99. The appellants insist that § 1964(c)'s "by
reason of" language contemplates that a civil RICO suit may be main-
tained, not only in mail fraud cases where the deceitful mailing is the
blade rushing down toward the guillotine victim, but also in cases
involving more grandiose schemes to cheat, where the mailing is but
part of the frame that holds the blade.

We have never held otherwise. Inasmuch as an injury may have
more than one proximate cause, our rule that reliance be shown in
civil RICO fraud actions does not also dictate that the fraud be the
sole legal cause of the plaintiff's injury, so long as it is a legal cause.
The only caveat is that, where fraud is alleged as a proximate cause
of the injury, the fraud must be a "classic" one. In other words, the
plaintiff must have justifiably relied, to his detriment, on the defen-
dant's material misrepresentation.
_________________________________________________________________

7 Even were we to question the wisdom of the reliance requirement --
as the appellants urge -- we are bound to apply circuit precedent until
it is either overruled en banc or superseded by a decision of the Supreme
Court. Busby v. Crown Supply, Inc., 896 F.2d 833, 840-41 (4th Cir.
1990).

                    10
D.

The complaint filed in this matter adequately alleges injury. The
appellants allege that their vehicles were repossessed and "sold" at a
price substantially below market value. The vehicles were later resold
legitimately, but the appellants were never informed of those transac-
tions. Hence, not only were excess funds generated by the "sale" of
the collateral illegally withheld, but the appellants also ostensibly
remained obligated to pay phantom deficiencies. Consequently, the
appellants suffered injury to their property. See Complaint, ¶¶ 90, 92.

The complaint also adequately alleges proximate cause. In order
for the scheme to succeed, the appellants needed to be convinced that
the "private sales" referenced in the TranSouth notices were legiti-
mate. Had an appellant's suspicion been aroused, she might have
inquired further or -- worse -- retained a lawyer to investigate the
matter. See Complaint, ¶ 84 ("To further the scheme, Transouth issues
false and deceptive notices of private sale which are intended to and
which do mislead the public about their repossession and redemption
rights."). Indeed, concealment of the nature of the "private sales" was
the very linchpin of the scheme.

As we have noted, "the legal cause determination is properly one
for the court, taking into consideration such factors as the foreseea-
bility of the particular injury, the intervention of other independent
causes, and the factual directness of the causal connection."
Brandenburg, 859 F.2d at 1189 (citation omitted). If we accept, as we
must for now, the appellants' allegation that TranSouth acted in con-
cert with Falk's and JB in a unified scheme, it is readily apparent that
all of the Brandenburg factors militate strongly in favor of holding
TranSouth responsible for its actions.8

It is equally obvious, though, that the appellants have failed to
allege that they actually relied on the TranSouth mailings to inform
them of their rights and to assure them that these rights were being
protected. Inasmuch as the appellants did not specifically plead reli-
_________________________________________________________________
8 We therefore reject the district court's alternative holding that the
facts alleged in the complaint failed to show that TranSouth's mailings
proximately caused the appellants' injuries. See 851 F. Supp. at 746.

                    11
ance, we can hardly fault the district court for faithfully applying our
precedents and dismissing the complaint.

III.

We see no reason, however, to deprive the appellants of the oppor-
tunity to amend their complaint, if they can, to allege reliance. No dis-
covery has yet been conducted, and the complaint has not previously
been substantively amended, at least as far as TranSouth is concerned.9
Although TranSouth has filed its answer, the rules provide that leave
to amend "shall be freely given when justice so requires." Fed. R. Civ.
P. 15(a); see Medigen of Ky., Inc. v. Public Serv. Comm'n of W. Va.,
985 F.2d 164, 167-68 (4th Cir. 1993) ("Although the decision whether
to grant leave rests within the sound discretion of the district court,
. . . the federal rules strongly favor granting leave to amend.") (cita-
tion omitted).

Here, the district court apparently believed that the appellants were
incapable of pleading reliance on TranSouth's notice mailings; thus,
granting them leave to amend would be a fruitless act. See New Beck-
ley Mining Corp. v. United Mine Workers of America , 18 F.3d 1161,
1164 (4th Cir. 1994) ("A court may refuse to allow leave to amend
pleadings when the proposed changes would be futile.") (citation
omitted). The magistrate judge's report, appended to the district
court's opinion, makes the point:

          [The] plaintiffs' argument concedes that they would not
          have redeemed the cars even if they had known that the pro-
          cess was a sham and concedes further that the plaintiffs can-
          not make such an allegation. In short, plaintiffs did not, and
          can not, allege that they acted in reliance on the TranSouth
          mailings.

851 F. Supp. at 757 (citation to record omitted).
_________________________________________________________________

9 Two amendments of the complaint have been allowed, but only for
the purpose of effectuating the settlement agreement negotiated with
Falk's and JB.

                     12
In our view, the magistrate judge's conclusion misconstrues the
role of the notice letter in the overall scheme. If the appellants' theory
of the case prove to be true, TranSouth did not mail the notices to pre-
vent the defaulting borrowers from exercising their redemption rights,
but only to assure them that the liquidation of the collateral was pro-
ceeding legally and legitimately, thus influencing them to accept the
process without question, and depriving them of a meritorious defense
to JB's deficiency suit. As the magistrate judge noted in the very next
sentence of his opinion:

          Plaintiffs' "reliance" argument amounts to no more than a
          general complaint that TranSouth participated in a massive
          fraud, an illegal and profitable scam, that took advantage of
          the innocent plaintiffs' reliance on the apparent legitimacy
          and legality of the operation.

Id. (emphasis supplied). We could scarcely say it more clearly. The
only difficulty with the appellants' approach so far is that they have
argued reliance without first pleading it. We therefore vacate the dis-
trict court's judgment of dismissal and remand the case with instruc-
tions for it to give the appellants an opportunity to correct this defect.

VACATED AND REMANDED WITH INSTRUCTIONS

                     13
