sent by mail, were false. Plaintiffs contend that, with discovery, they can prove these allegations.
Rule 9(b) of the Federal Rules of Civil procedure is designed to protect defendants from allegations of fraud based on such speculations. Plaintiffs' conclusory contention that defendants had the motive and opportunity to conceal income on their tax returns is unpersuasive. Such a contention can be plausibly raised about many a taxpayer.
Plaintiffs allege no facts giving rise to a strong inference that defendants knowingly on recklessly used the mails to send false tax returns.
2. Whether the adequately alleged acts of racketeering activity constitute a "pattern"
The proposed amended complaint, like the earlier complaint already dismissed by this court, alleges a single act of attempted extortion. To establish a "pattern of racketeering activity," a complaint must allege at least two such acts, 18 U.S.C. § 1961(5), and those acts must be "continuous" and "related." Thus, the proposed complaint fails to allege that defendants violated section 1962.
Whether the Foundation was injured in its "business or property" by reason of a violation of section 1962
In its previous opinion, this court concluded that, because the complaint alleged solely a breach of fiduciary duty by Foundation directors, the complaint failed to allege a cognizable RICO injury. 818 F. Supp. at 44.
Plaintiffs contend, in reargument, that the Foundation and its beneficiaries have been injured due to a wrongful denial of economic information and honest administration. The proposed complaint does not explain whether this injury arises from the failure of Foundation members to re-elect Trask as trustee or from the dishonest use of the Foundation by defendants for their personal advantage. Presumably the alleged denial of information and honest services arises from either or both of these acts.
Whether a charitable organization has standing to bring a RICO action against its unpaid trustees who use the organization for personal advantage appears to be a question of first impression. The court therefore explains its reasoning in some detail.
Section 1964(c) provides a civil remedy only to "any person injured in his business or property by reason of a violation of section 1962." In West Hartford v. Operation Rescue, 915 F.2d 92, 103-04 (2d Cir. 1990), cert. denied, 121 L. Ed. 2d 33, 113 S. Ct. 66 (1992), the Second Circuit reasoned, based on the legislative history of the RICO Act and cases interpreting the analogous Clayton Act, 15 U.S.C. §§ 15 et seq., that the words "business or property" refer only to "commercial interests and enterprises."
That court held that the plaintiff, a municipal corporation, did not have standing to allege injury to its ability "to carry out its functions," even though it could show that defendant had imposed costs of $ 42,000 in police overtime wages. The court suggested that the municipality could only recover under the RICO Act for injuries suffered "'in its capacity as a consumer of goods and services"' or "'as a party to commercial transactions.'" Id. at 103 (citations omitted).
The proposed complaint here alleges no discernible economic injury to the Foundation, whether as a consumer of services or a party to a commercial transaction. It does not say that the Foundation made grants after the time defendants allegedly used it to extort releases or failed to re-elect Trask, that it paid salaries to allegedly dishonest trustees, or that it disseminated "economic information" that might place anyone's investments at risk. Any economic injuries to the Foundation due to taxes that one day could be imposed, or to prospective beneficiaries that do not receive grants, are entirely speculative.
The only alleged injury to this non-commercial corporation is that its governing body has been injured and, thus, the Foundation, like the Town of West Hartford, has been injured in its ability to carry out its function. Injuries of this sort to a noncommercial enterprise do not fall within the scope of section 1964(c).
As the Second Circuit reiterated in West Hartford, "'the purpose of civil RICO liability does not extend to deterring any illegal act . . . for which there are state and common law remedies.'" Id. at 104 (ellipsis in original). New York State provides a remedy to the members of a not-for-profit corporation and to the New York Attorney General when a not-for-profit corporation's directors and officers engage in the kinds of acts alleged here. See N.Y. Not-for-Profit Corp. Law §§ 706(d), 714(c), and 1102(a)(2)(D). Indeed, plaintiffs relied on this statute when obtaining injunctive relief from the state court. This court sees no reason why the state law remedy, narrowly crafted to cure the very wrongful conduct alleged here, is inadequate.
Plaintiffs cite United States v. Wallach, 935 F.2d 445, 461 (2d Cir. 1991) for the proposition that the Foundation and its prospective beneficiaries have a property interest in the proper management of the Foundation. That case has no application here. It held merely that shareholders of a for-profit corporation have a "property interest," within the meaning of the mail fraud statute, in economic information relating to a corporation and that the directors and officers who act dishonestly can be indicted under that statute.
That case does not construe "property" in section 1964(c). More fundamentally, even if "property" is construed identically in section 1964(c) and the mail fraud statute, Wallach does not suggest that the RICO Act protects non-commercial enterprises, such as a charitable foundation, from the dishonest administration of its unpaid trustees where no discernible economic harm results. That court explained that when dishonest corporate directors deny shareholders of accurate information regarding how corporate assets are spent, the shareholder's investments are placed at risk. Plaintiffs allege no similar harm.
Thus, the proposed amended complaint alleges no injury to the Foundation cognizable under the RICO Act.
Defendants' motion to dismiss RICO claims in 92 CV 4036 is granted, and plaintiffs' motion for leave to file a second amended complaint in that action is denied. The court declines to exercise supplemental jurisdiction over the remaining state claims in that case, having dismissed all claims over which this court has original jurisdiction. 28 U.S.C. § 1367(c)(3). That case is remanded to the state court.
Plaintiffs' motion to reargue and for leave to file an amended complaint in 92 CV 4037 is denied. The court affirms its previous opinion remanding that case to the state court.
Both cases are dismissed.
Dated: Brooklyn, New York
September 8, 1993
Eugene H. Nickerson, U.S.D.J.
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