Opinion ID: 72909
Heading Depth: 3
Heading Rank: 2

Heading: application of the rico standing requirement

Text: TO PLAINTIFFS’ RICO CLAIMS

Konstand contends that he has suffered three distinct injuries that give him RICO standing. First, he contends that the defendants conspired to unlawfully wrest his shares of BCI stock from him. Although this alleged injury is direct, it does not constitute a RICO claim that is still viable, because it occurred in 1975, eight years before Konstand filed this lawsuit. In our previous opinion in this case, we held that Konstand’s claims relating to this injury are time-barred. See Bivens, 906 F.2d at 1555. Accordingly, this injury cannot be the basis for a viable RICO claim. Second, Konstand alleges that his status as a pledgor of stock gives him RICO standing. He points out that a pledgor of stock has a stake in a corporation that transcends that of a mere shareholder, and that difference in stake may allow the pledgor to sue management directly in situations where a shareholder could not. See Citibank, N.A. v. Data Lease Financial Corp., 828 F.2d 686, 693 (11th Cir. 1987) (citing Empire Life Ins. Co. of 13 America v. Valdak Corp., 468 F.2d 330, 336 (5th Cir. 1972)). However, Konstand’s status as a pledgor of stock does not give him RICO standing for any viable claims relating to the three injuries he allegedly suffered. As we have just noted, the statute of limitations bars any claim with respect to the 1975 takeover of BCI. Therefore, whether Konstand’s status as a pledgor is sufficient to confer RICO standing is irrelevant to claims arising from that 1975 injury. At the time of Konstand’s second alleged injury, the mismanagement and alleged skimming of revenues from the hotel from 1975 until 1981, he was no longer a pledgor of stock. By early 1975, UCB had foreclosed on Konstand’s stock pledge, buying the stock at a public sale in early 1975. Therefore, Konstand was not a pledgor at the time that the alleged skimming of assets took place because his pledge already had been “called in.”4 Once UCB foreclosed on the shares that Konstand had pledged he was, at best, similarly situated with other shareholders. Because Konstand lost his pledgor status once UCB foreclosed on his BCI shares, the stock pledge also cannot confer RICO standing on Konstand’s claims related to the mismanagement of the hotel from 1975 until 1981. Therefore, his stock pledge cannot be the basis for any RICO standing. See Pelletier, 921 F.2d at 1500; Citibank, 828 F.2d at 693. That Konstand may have held additional stock that was not pledged (see Part IV, infra) 4 is irrelevant, because only stock actually pledged could create a stake sufficient to support RICO standing. Whether or not Konstand pledged all of his holdings in BCI, he was no longer a pledgor once UCB foreclosed on all of the shares that he had pledged. 14 Finally, Konstand contends that because he loaned BCI $105,000, he has RICO standing as a creditor of BCI. He asserts that his status as a creditor allows him to pursue his RICO claims with regard to both the alleged mismanagement of assets and skimming of profits from the hotel during the 1975-1981 period and the allegedly fraudulent sale of the hotel for less than its fair market value in 1981. In support of his position, Konstand refers us to the relatively lenient test for creditor RICO standing that the Second Circuit has adopted. That circuit has held that a creditor will have standing to pursue RICO claims whenever harm to that creditor is “reasonably foreseeable or anticipated as a natural consequence.” See GICC Capital Corp. v. Technology Finance Group, 30 F.3d 289, 292-93 (2d Cir. 1994), cert. denied, ___ U.S. ___, 116 S. Ct. 2547 (1996). However, the Second Circuit’s broad interpretation of RICO standing is inconsistent with the Supreme Court’s analysis in Holmes and with our analysis in Pelletier. As those decisions make clear, the test for RICO standing is whether the alleged injury was directly caused by the RICO violation, not whether such harm was reasonably foreseeable. See Holmes at 268, 112 S. Ct. at 1319; Pelletier, 921 F.2d at 1500. We do not mean to imply that a creditor can never have RICO standing, because it is possible that a pattern of racketeering could be directed specifically at a corporation’s creditors. A creditor will have RICO standing only when his injury passes the directness test laid out in Holmes and Pelletier, which will not be the case if the injury alleged was suffered only as a result of harm to the corporation. See Hamid v. Price Waterhouse, 51 F.3d 1411, 1420 (9th Cir. 1995); Manson v. Stacescu, 11 F.3d 1127, 1130 (2d Cir. 1993); see also 15 Sparling v. Hoffman Constr. Co., Inc., 864 F.2d 635, 640 (9th Cir. 1988) (holding that creditor lacks RICO standing unless he shows injury other than that shown by shareholders). Konstand claims that as a creditor, he has RICO standing to pursue the injuries that he suffered as a result of the alleged skimming of profits and the sale of the hotel at below its market value. We believe that Konstand’s status as a BCI creditor does not confer RICO standing on his individual claims with regard to the skimming of profits, because that alleged diversion of hotel revenues had too derivative an effect on Konstand as a creditor; the skimming was aimed primarily at the corporation, not at its creditors. The sale of the hotel allegedly at a price below its market value is a different matter. At the time that BGH sold the Gainesville Hilton, it was in bankruptcy seeking protection from its creditors, including Konstand. As a creditor, Konstand had a direct interest in seeing the hotel sold for as high a price as possible. See 11 U.S.C. § 1104(a) (allowing for appointment of independent trustee to prevent debtor from defrauding creditors). The sale of the hotel for a higher price would have directly benefitted major creditors such as Konstand, because they would have been able to recover a greater percentage of the debts owed to them. In contrast, the sale of the hotel for a higher price would have little impact on the shareholders and the corporation, since the additional funds from the sale would have been used to satisfy creditors instead of going to shareholders. Therefore, the sale of the hotel at a lower price affected creditors in a manner distinct from shareholders, and in a manner sufficiently direct to confer RICO standing on Konstand in his capacity as a creditor. See Bankers Trust Co. v. Rhoades, 859 F.2d 1096, 1100-01 (2d Cir. 1988) (relying in part 16 on defendants’ alleged fraudulent transfers to avoid bankruptcy creditors to support RICO standing).
Karns and Malick rely on their capacities as shareholder and limited partner in BCI and BGH, respectively, to assert their RICO claims. As discussed above, a shareholder’s injuries that result from racketeering activity directed toward a corporation are too indirect to sustain a RICO claim. See Pelletier, 921 F.2d at 1500; Warner, 828 F.2d at 1530. The same is true of a limited partner’s injuries in the same circumstances. See Whalen v. Carter, 954 F.2d 1087, 1093 (5th Cir. 1992). Accordingly, neither Karns nor Malick has standing to pursue RICO claims for their individual injuries.
In addition to their individual claims, Karns, Konstand, and Malick each brought claims on behalf of other entities. Karns and Konstand brought shareholder derivative suits on behalf of BCI, while Malick brought a partnership derivative suit on behalf of BGH. The district court granted summary judgment against the plaintiffs on all of these derivative claims, and the plaintiffs have appealed from that judgment. a. Karns’ and Konstand’s Shareholder Derivative Claims The district court dismissed Konstand’s and Karns’ claims because it concluded that shareholder derivative suits do not confer RICO standing. Relying on the tripartite analysis that the Fifth Circuit adopted in Whalen v. Carter, 954 F.2d 1087 (5th Cir. 1992), the district 17 court noted that a shareholder derivative suit has three characteristics that normally identify a claim lacking RICO standing: (1) the alleged racketeering activity is directed at the corporation; (2) the injury to shareholders is derived from the injury suffered by the corporation; and (3) the claim accrues in the corporation. Because a shareholder derivative suit satisfies each of those conditions, see id. at 1091, the district court concluded that the injury in such suits is too indirect for the suit to be brought under RICO. We believe that the Fifth Circuit’s Whalen analysis is applicable only where shareholders sue “for the loss in value of their shares,” id., at 1091, not where they sue on behalf of the corporation itself to recoup its losses. The Whalen analysis does not bar shareholder derivative suits, which are brought to recover the corporation’s losses. Therefore, the district court erred in concluding that plaintiffs bringing a shareholder derivative action lack RICO standing. See Manson v. Stacescu, 11 F.3d 1127, 1132 (2d Cir. 1993) (noting that proximate cause requirement serves judicial economy by forcing shareholders to recover for injuries under RICO by bringing single shareholder derivative claim on behalf of corporation); Warren v. Manufacturers National Bank of Detroit, 759 F.2d 542, 544 (6th Cir. 1985) (RICO action to redress injuries to corporation cannot be maintained by shareholder in own name; must be brought in name of corporation either by corporation or as shareholder derivative suit) (citing Stevens v. Lowder, 643 F.2d 1078, 1080 (5th Cir. Unit B Apr. 1981)). What remains to be decided, however, is whether these plaintiffs have brought a proper shareholder derivative action. 18 In addition to alleging the underlying offense against the corporation, the plaintiff in a shareholder derivative suit must allege that he is a shareholder and must name the corporation as a party to the suit. See, e.g., Fla. Stat. § 607.07401. Konstand and Karns have met all of those requirements. In paragraph one of the complaint, Konstand and Karns both assert that they are bringing claims both “individually and as shareholders of BCI,” and they have named BCI as a defendant. Evidence that both sides have presented through affidavits, depositions, and at trial indicates that the alleged sch3emes were directed at BCI and BGH. Accordingly, Karns and Konstand have brought proper shareholder derivative claims, and have RICO standing to pursue claims on behalf of the corporation. b. Malick’s Partnership Derivative Claim Malick contends that he has asserted a valid RICO claim through his partnership derivative suit. In 1986, Florida law was amended to allow limited partners to bring derivative suits in the same manner as shareholders. See Fla. Stat. § 620.163. Accordingly, Malick as a limited partner in BGH can assert a derivative claim on behalf of the partnership in the same manner that the shareholders of BCI can assert a derivative claim on behalf of the corporation. As Malick points out, the defendants have consistently maintained that the alleged racketeering scheme targeted BCI and BGH as entities, rather than targeting particular individuals. Malick contends that because his derivative suit recognizes the partnership BGH as the real party in interest, and because the alleged schemes were directed in part at BGH, his partnership derivative claims have RICO standing. 19 The district court dismissed Malick’s claim on the grounds that it did not assert a proper partnership derivative claim. Malick failed to name the partnership, BGH, as a party to this action. In a partnership derivative suit, the partnership is an indispensable party. See Liddy v. Urbanek, 707 F.2d 1222, 1224 (11th Cir. 1983) (holding that corporation is an indispensable party in a derivative suit); Lenz v. Associated Inns and Restaurants Co. of America, 833 F. Supp. 362, 378 (S.D.N.Y. 1993) (“Simply put, in a derivative action brought by a limited partner, the limited partnership is an indispensable party.”) (interpreting New York and Oklahoma partnership law, both of which are based on Uniform Partnership Act, 6 U.L.A. §§ 1001, 1002, which serves as the model for the Florida statute authorizing such derivative actions). Malick's argument that BGH does not need to be named as a party because the Florida statute authorizing limited partner derivative suits does not expressly require it, see Fla. Stat. §§ 620.163, 620.164, misses the point. Malick was required to name BGH in order to plead a proper derivative action even absent a statutory requirement, because BGH is an indispensable party. Accordingly, while Konstand and Karns have properly asserted shareholder derivative claims, Malick lacks RICO standing because he has failed properly to state a proper partnership derivative claim.5