Commercial Litigation and Arbitration

RICO Standing — Creditor Lacks Standing to Sue Until Collateral and All Alternative Sources of Recovery Are Exhausted

From Harbinger Capital Partners Master Fund I, Ltd. v. Wachovia Capital Markets, LLC, 2008 U.S. Dist. LEXIS 67462 (S.D.N.Y. Aug. 26, 2008):

[1. RICO Standing vs. Article III Standing.] [E]stablishing "RICO standing is a more rigorous matter than [establishing] standing under Article III." Denney v. Deutsche Bank AG, 443 F.3d 253, 266 (2d Cir. 2006) (citing Lerner v. Fleet Bank, N.A., 318 F.3d 113, 123 (2d Cir. 2003)).

[2. Clear-and-Definite Injury Requirement.] With respect to the injury element, "'a cause of action does not accrue under RICO until the amount of damages becomes clear and definite.'"

[3. Creditor Lacks Standing as Long as Amount of Loss Remains Uncertain.] "[A] creditor claiming that its ability to collect its debt has been impaired or frustrated by a RICO violation lacks standing to sue under RICO for the amount of the debt as long as the extent of the loss remains uncertain, as for example where collection efforts continue."

[4. Bankruptcy Liquidation Plan, While Executory and Vibrant, Defeats Creditor Standing Under RICO.] In this case, the Plan -- which was sponsored by plaintiffs, among others -- specifically called for the appointment of a Liquidation Trustee to prosecute claims on behalf of the estate against those parties "responsible for the collapse of Le Nature's." *** The Plan contemplated that proceeds from the estate's recovery would go towards satisfying Le Nature's' debts to its creditors. Accordingly, until the Liquidation Trustee has prosecuted those claims, the amount of plaintiffs' loss remains indefinite and therefore plaintiffs lack standing.

[5. Liquidation of Creditor’s Collateral Is Only the Beginning.] [T]he liquidation of collateral does not itself render plaintiffs' damages "clear and definite" for plaintiffs may still look to sources beyond their collateral on the bank debt to offset their damages. See Motorola, 322 F.3d at 135 ("The 'clear and definite' amount of damages suffered by a secured creditor who is fraudulently induced to make a loan . . . 'cannot be established until it is finally determined whether the collateral is insufficient to make the plaintiff whole, and if so, by how much' . . . because the RICO damages are netted against recovery obtained from collateral and other sources.").

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