Commercial Litigation and Arbitration

Derivative Standing Requirements under RICO

From Morrell v. Alfortish, 2010 U.S. Dist. LEXIS 119331 (E.D. La. Nov. 8, 2010):

This case arises out of an alleged RICO enterprise operated by executives and board members of the Louisiana Horsemen's Benevolent & Protective Association 1993, Inc. ("LHBPA"). The LHBPA is a non-profit corporation empowered to represent the interests of race horse owners and trainers in dealings with racing tracks, the Louisiana State Racing Commission, and the Louisiana Legislature. ***

Plaintiffs are Arthur Morrell, a horse owner and former member of the Board of Directors of the LHBPA, and Carl Woodley, a horse trainer. ***

First, Plaintiff Morrell alleges that while a member of the LHBPA board, he inquired into purportedly improper financial activities by Defendants Alfortish and Mona Romero after Hurricane Katrina. Plaintiffs allege that in retaliation Defendants Alfortish and Mona Romero "rigged" the March 2008 election of the LHBPA board to remove Morrell from his position. ***

Second, Plaintiffs allege that certain defendants misused LHBPA funds in connection with post-Katrina construction contracts. ***

Third, Plaintiffs allege that the LHBPA misused the proceeds of two lawsuit settlements held by the LHBPA on behalf of horse owners. ***

Fourth, Plaintiffs allege that Defendant Alfortish and others misused donated hurricane relief money. ***

i. Derivative Standing [under RICO]

With respect to the first inquiry, Defendants argue that Plaintiffs, who are members of the LHBPA, a non-profit corporation, lack standing to assert what are essentially derivative claims for injuries incurred only by the LHBPA. The Fifth Circuit applies a three-prong test to determine whether shareholders of a corporation may assert a civil RICO claim for alleged injuries:

Where ... RICO plaintiffs bring claims analogous to shareholder derivative claims, we apply a three-part test to determine whether the plaintiffs satisfy general standing requirements. ... We ask "(1) whether the racketeering activity was directed against the corporation; (2) whether the alleged injury to the shareholders merely derived from, and thus was not distinct from, the injury to the corporation; and (3) whether state law provides that the sole cause of action accrues in the corporation."

Joffroin v. Tufaro, 606 F.3d 235, 238 (5th Cir. 2010) (quoting Whalen, 954 F.2d at 1093).

In Joffroin, the RICO plaintiffs were members of a homeowners association who alleged that officers of the association breached their fiduciary duties and diverted association fees to their personal benefit. *** The Fifth Circuit held that the members lacked standing to sue. The first *** prong was satisfied because the claims "were for monies diverted from [the association's] treasury and the plaintiffs did not allege that [defendants] 'committed any fraudulent acts with the direct intent to injure' [plaintiffs]." *** The second *** prong was satisfied because the alleged injury to the members was based on the defendant's breach of fiduciary obligations owed to the association, and therefore the injury was "merely derived from, and was not distinct from, the injury to [the homeowner's association]." *** Finally, the third prong was satisfied because the court found that under Louisiana law, the cause of action for breach of a fiduciary duty owed to a homeowners association accrued in the association, and not its members. ***

The Joffroin/Whalen standing analysis defeats Plaintiff Woodley's claims, but not Plaintiff Morrell's. First, there are no allegations of any racketeering conduct directed specifically at Plaintiff Woodley. Second, there are no allegations regarding any specific injury incurred by Plaintiff Woodley; rather, the complaint repeatedly emphasizes that it seeks damages "in such amount as will fully reimburse the LHBPA" and that "the entire membership of LHBPA are 'alleged victims.'" Thus, Plaintiff Woodley does not have a cause of action against the Defendants under Louisiana law and he consequently lacks standing to assert a civil RICO claim.

However, Plaintiff Morrell sufficiently alleges standing under Joffroin. Morrell alleges that the election-rigging scheme was directed at him, and injured him directly by robbing him of his position on the Board. This is a specific injury to Morrell himself, and not to the LHBPA, such that the first and second prongs of the Joffroin test are not met. Thus, Morrell survives the first half of the civil RICO standing analysis.

Held, while Morrell has derivative standing, he cannot establish RICO standing — i.e., injury to business or property under § 1964(c).

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