Commercial Litigation and Arbitration

RICO — Minority Member of LLC May Bring Direct (Not Derivative) Action for Injury Resulting from Harm to Entity — Relevance of State Law — Analogy to Close Corporations Noted

Cameron v. Rohn, 2012 U.S. Dist. LEXIS 18986 (D.V.I. Feb. 14, 2012):

This dispute arises out of the relationship between Rohn and Cameron and the breakup of their former law partnership, The Law Offices of Rohn and Cameron, LLC ("the Law Office"). *** Although Cameron and Rohn never signed a written partnership agreement or a written LLC operating agreement, at the time that the Law Office began operation, Cameron and Rohn agreed on *** the following: all cases initiated after 2000 would be transferred to the Law Office, and fees from those cases would be split 70% to Rohn and 30% to Cameron...; Rohn and Cameron would have an ownership interest in the Law Office, also in accordance with the 70/30 split...; Cameron's "sweat equity" that she contributed to Rohn LLC from 2000 through 2004 satisfied her ownership interest and she would not be required to make an initial contribution...; Cameron would receive a guaranteed base salary of $400,000 in addition to normal distributions from the Law Office...; and the new LLC would pay operating costs for all cases, even though it would not receive fees from pre-2000 cases.... The unsigned Operating Agreement defined Rohn as the majority interest member in the Law Office, with the right to make all major decisions....

*** Plaintiffs claim that after the formation of the Law Office Rohn engaged in numerous fraudulent and unlawful acts. ***[A]ccounting irregularities and the misuse of Law Office funds, along with a failure to properly file tax returns on behalf of the relevant entities, caused Cameron to ask for dissolution and winding up of the Law Office.... Rohn, however, refused to provide a proper accounting..... Following Cameron's request to dissolve and wind up the affairs of the Law Office, but prior to her distributional share being purchased by Rohn, P.C., Rohn transferred the assets of the Law Office to another Rohn-controlled entity, Rohn & Carpenter....

v. RICO Claims (Counts two)

*** In an earlier motion to dismiss in this case, Defendants similarly argued that Plaintiffs do not have standing to assert their RICO claims [because] ... Plaintiffs had no vested interest in the property of the Law Office because no written operating agreement was signed by the parties and because Plaintiffs had withdrawn from membership.... The Court rejected these arguments.... Defendants have now renewed this argument by taking a different approach; they now argue that Plaintiffs cannot establish standing because their RICO claim must be brought as a derivative claim. This argument, however, must also be rejected.

At the heart of Defendants' argument is the extent of injury to the Plaintiff, if any, and what caused those injuries. Plaintiffs allege three separate injuries as the basis for this claim: "Plaintiffs have been injured in that [1] Plaintiffs' capital interest in Rohn and Cameron, LLC was significantly reduced, [2] the assets of Rohn and Cameron, LLC were intentionally eviscerated, and [3] Plaintiff Cameron did not receive the agreed upon salaries for years 2007 ($400,000) and 2008 ($260,000)." ***

This case is unique in that it stands at the intersection of two separate lines of cases dealing with standing in the context of RICO actions based on the interpretation of 18 U.S.C. § 1964(c). See generally Maio v. Aetna, Inc., 221 F.3d 472 (3d Cir. 2000). The first line of cases deals with whether a plaintiff has suffered an "injury in his business or property." The second line of cases deal with whether plaintiff's injury was "by reason of" the defendant's RICO violations — i.e., can the defendant's actions reasonably be considered the "proximate cause" of the plaintiff's injury? See Hemi Group, LLC v. City of New York, U.S. , 130 S. Ct. 983, 988, 175 L. Ed. 2d 943 (2010) (recognizing that these are "two distinct issues").

Although the Third Circuit has never directly ruled on the question presented by the Rohn Defendants, it has stated in passing that "[f]ederal courts that have considered the question in shareholder suits all have held that shareholders lack standing to assert RICO claims where their injuries are not direct and distinct from any injury sustained by the corporation and shareholders generally." In re Sunrise Sec. Litig., 916 F.2d 874, 880 (3d Cir. 1990) (collecting cases). This is because "[t]here is no need to broaden the universe of actionable harms to permit RICO suits by parties who have been injured only indirectly." Anza v. Ideal Steel Supply Corp., 547 U.S. 451, 460, 126 S. Ct. 1991, 164 L. Ed. 2d 720 (2006).

"[A] showing of injury requires proof of a concrete financial loss and not mere injury to a valuable intangible property interest." Maio, 221 F.3d at 483 (quoting Steele v. Hosp Corp. of Am., 36 F.3d 69, 70 (9th Cir. 1994)). However, "it is appropriate to look to state law for guidance in deciding whether plaintiffs have stated a nonderivative claim, rather than to fashion federal common law in this area." In re Sunrise Sec. Litig., 916 F.2d at 881; see also Bridge, 553 U.S. at 660 ("We have repeatedly refused to adopt narrowing constructions of RICO in order to make it conform to a preconceived notion of what Congress intended to proscribe." (collecting cases)). An important distinction exists in some states, as well as in the Virgin Islands, between derivative suits brought by the shareholders of a corporation and those brought by members of an LLC. This is because an LLC is "a relatively new unincorporated business entity possessing some characteristics of both a corporation and a partnership." Zambelli Fireworks Mfg. Co. v. Wood, 592 F.3d 412, 419 (3d Cir. 2010).

***[T]he territorial law of the Virgin Islands treats breaches of fiduciary duties and breaches of LLC operating agreements by members of an LLC as harms directly against other members of that LLC.... Because of this, the Virgin Islands ULLCA permits direct suits by one member of an LLC against other members of that LLC. See 13 V.I.C. § 1410(a). Moreover, a suit by an ex-member is permissible against a current member for acts occurring during the period in which the ex-member still maintained membership in the LLC....

There are at least two injuries alleged in the RICO count of the Amended Complaint that under Virgin Islands territorial law are considered direct harms against the Plaintiffs. First, Plaintiffs suffered direct harm as a result of the Rohn Defendants' breach of their fiduciary duties, which thereby diminished Plaintiffs' capital interest in the Law Office. See 13 V.I.C. § 1410(a)(2). Although this is generally considered derivative in nature, under the ULLCA as adopted in the Virgin Islands, such suits may be brought directly by one member of an LLC against another. Id.

Footnote 3. This is in line with the observations of at least one popular treatise, which has noted that "[i]t has been suggested that a different rule — permitting individual actions by shareholders — might apply in the context of close corporations." Gregory P. Joseph, Civil RICO: A Definitive Guide 44 (3d ed. 2010). In these situations, "[s]hareholders in close corporations may in all events be able to establish personal business injury as a result of their association and identification with the entity." Id. (citing Siddle v. Crants, 650 F. Supp. 2d 773 (M.D. Tenn. 2009)). The Court, however, need not decide that question here, especially because bright-line rules are avoided in this area. See Bridge, 530 U.S. at 654.

Second, Plaintiffs suffered a direct harm as a result of the Defendants' breach of the operating agreement, see 13 V.I.C. § 1410(a)(1), which in this case included a term that provided for payment of a salary to Cameron***.

Footnote 4. Plaintiffs' third alleged injury — i.e., that the assets of the Law Office were intentionally eviscerated — was not an injury to the Plaintiffs but was instead an injury only to the Law Office.... Therefore, Plaintiffs' do not have standing under RICO on this basis.

"[L]ook[ing] to [territorial] law for guidance," as the Third Circuit has required, Plaintiffs' have sufficiently pled that they have been "injured in [their] business or property." An illustrative case is Grafman v. Century Broad Corp., 743 F. Supp. 544 (N.D. Ill. 1990). There, the court permitted RICO claims to proceed where the shareholder plaintiff loaned the corporation money that was not repaid on account of the defendant's misdeeds and on the basis of an alleged breach of a compensation agreement. Id. at 549.

In addition to being "injured in his business or property," however, this injury must also be "by reason of a violation of section 1962." 18 U.S.C. § 1964(c). ***

On the unique facts of this case, the Court has concluded that Plaintiffs have successfully alleged standing to bring a claim under RICO. The facts of this case are most analogous to the Supreme Court's decision in Bridge. To begin, the predicate acts complained of in this case are the electronic wire transfers of money that occurred in December 2007. (Am. Compl. ¶ 139). This had a direct effect on Plaintiffs' capital interest in the Law Office.

There are several reasons for this Court's conclusion. First, no independent variables can account for Plaintiffs' loss. Unlike in Anza or Holmes, the actions of Defendants in this case are in no way related to business activities that can be accounted for by wholly-innocent conduct inherent in competition for customers. Here, Defendants are alleged to be nothing more than white-collar thieves--taking assets from one entity and placing it with others. Second, ... there is no difficulty in apportioning liability to the Plaintiffs--they would be entitled to 30% of the assets wrongfully conveyed to the other Rohn-controlled entities. The damages here are substantially concrete; Plaintiffs' have identified both the percentage that they are owed and the dollar amounts of the unlawfully transferred assets. See Clark v. Conahan, 737 F. Supp. 2d 239, 267 (M.D. Pa. 2010). Moreover, there is no indication that multiple recovery would occur in this case. Third, there is no better suited party — or for that matter, any party — able to hold Defendants accountable in this case. As this Court recently noted in another Opinion in this case, and as Defendants argued quite strenuously in briefing that motion, the Law Office in this case does not have an independent interest apart from its members' interests in seeking to vindicate its rights.... Therefore, all three policy factors identified by the Supreme Court weigh in favor of the Plaintiff.

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