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ARAMONY v. UNITED WAY OF AMERICA

July 7, 1997

WILLIAM ARAMONY, Plaintiff, against UNITED WAY OF AMERICA, individually and as administrator and named fiduciary under the United Way of America Replacement Benefit Plan, and as administrator of the United Way Supplemental Benefits Agreement, UNITED WAY REPLACEMENT BENEFIT PLAN and UNITED WAY SUPPLEMENTAL BENEFITS AGREEMENT, Defendants.


The opinion of the court was delivered by: SCHEINDLIN

 SHIRA A. SCHEINDLIN, U.S.D.J.:

 Plaintiff William Aramony ("Aramony") moves to dismiss the counterclaim served on January 15, 1997 by defendant United Way of America ("UWA"). *fn1" UWA moves for the return of privileged documents produced to Aramony. For the reasons set forth below, Aramony's motion is granted in part and denied in part and UWA's motion is granted.

 I. LEGAL STANDARD FOR MOTION TO DISMISS

 In deciding a Rule 12(b)(6) motion, the court must accept as true material facts alleged in the complaint and draw all reasonable inferences in the nonmovant's favor. See Kaluczky v. City of White Plains, 57 F.3d 202, 206 (2d Cir. 1995). Such a motion cannot be granted simply because recovery appears remote or unlikely on the face of a complaint, as "the issue is not whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims." Bernheim v. Litt, 79 F.3d 318, 321 (2d Cir. 1996) (quoting Villager Pond, Inc. v. Town of Darien, 56 F.3d 375, 378 (2d Cir. 1995) (quoting Scheuer v. Rhodes, 416 U.S. 232, 236, 40 L. Ed. 2d 90, 94 S. Ct. 1683 (1974)), cert. denied, 136 L. Ed. 2d 14, 117 S. Ct. 50 (Oct. 7, 1996)) (internal quotation marks omitted). Rather, dismissal can only be granted if "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Scheuer, 416 U.S. at 236.

 II. BACKGROUND

 Plaintiff Aramony is the former President and Chief Executive Officer of United Way of America ("UWA"), a not-for-profit organization chartered in New York and headquartered in Alexandria, Virginia. See Counterclaim PP 1-2. UWA acts as a service organization for approximately 1,400 local United Way organizations across the country. Id.

 In late 1991 and early 1992, a series of newspaper articles reported that plaintiff had improperly benefited from his position at United Way. The principal allegations focused on plaintiff's expenses and alleged failure to reimburse UWA for personal items. In response to those reports, UWA's Board of Governors retained the law firm of Verner, Liipfert, Bernhard, McPherson and Hand Chartered ("Verner, Liipfert") and The Investigative Group, Inc. ("IGI") to investigate and prepare a written report of their findings. That report, furnished to the board on April 2, 1992, alleged poor management and haphazard expenditures under Aramony's stewardship. Id. PP 4-5.

 Aramony was fired in March of 1992, and following further investigations by the Department of Justice, Aramony was indicted in September of 1994 and convicted in June of 1995 of 25 counts of mail fraud, wire fraud, interstate transportation of fraudulently-obtained property, money laundering, filing false tax returns, and aiding in the filing of false tax returns by a federal jury in the Eastern District of Virginia. Aramony is currently incarcerated in a federal correctional facility. Id. P 8. Following a separate investigation by the Attorney General of the State of New York, a civil action was commenced against Aramony alleging breach of fiduciary duty under New York Not-for-Profit Corporations Law § 720 (McKinney 1997) ("N-PCL"). That action is still pending. Id. P 10.

 Aramony commenced this action on May 24, 1996, seeking recovery under a series of retirement benefit plans which he had entered into while still employed by UWA. After UWA's motion to dismiss the complaint was granted in part and denied in part, see Aramony v. United Way of America, 949 F. Supp. 1080 (S.D.N.Y. 1996), UWA filed and served an answer and counterclaim on January 15, 1997. Aramony filed this motion to dismiss UWA's counterclaim pursuant to Fed. R. Civ. P. 12(b)(6) and 12(c).

 In the midst of this litigation, on August 23, 1996, Aramony's counsel Michael Bailey served a First Request for Production of Documents on UWA. In response, UWA and UWA's counsel Verner, Liipfert, Bernhard, McPherson and Hand produced 210 boxes (630,000 pages) of documents. *fn2" Steptoe & Johnson, Verner, Liipfert's co-counsel, conducted a review of the documents over an eleven-week period beginning on September 16, 1997. See Declaration of Eric G. Serron, Steptoe & Johnson attorney, ("Serron Dec.") at P 4. Three attorneys, joined by a fourth in the sixth week of the inspection, and three paralegals participated in the document review. Id. A total of 324.1 hours of attorney time and 445.4 hours of paralegal time was spent reviewing documents and facilitating production. See Declaration of Sara E. Hauptfuehrer of Steptoe & Johnson, ("Hauptfuehrer Dec.") at PP 4, 6.

 Bailey reviewed the documents at the Verner, Liipfert offices on several different dates and selected 68,500 pages for copying. Id. at P 11. In October and November 1996, an outside copy service produced two copies, sending one directly to Bailey and the other to Steptoe. Id. On May 12, 1997, approximately six months later, Steptoe received a letter from Bailey indicating that certain documents covered by a claim of attorney-client privilege or work product protection had been included in the materials produced. Id. at P 13. Specifically, Steptoe asserts that ninety-nine pages of documents are privileged and were inadvertently produced. See Letter from Hauptfuehrer to Bailey, dated June 10, 1997; Letter from Hauptfuehrer to the Court, dated June 19, 1997. Among the documents is the memo, drafted by Verner, Liipfert for UWA, outlining the parties' respective claims, the merits of those claims and the likelihood of success if Aramony sued UWA. On May 13, 1997, Steptoe demanded return of the memo via a letter faxed to Bailey. Here, Steptoe also demands the return of the remainder of the privileged documents. *fn3"

 III. ARAMONY'S MOTION TO DISMISS

 A. RICO

 1. Timeliness

 Aramony argues that UWA's RICO counterclaim is time-barred because it fails to allege any cognizable RICO injury falling within the appropriate statute of limitations period. The following questions must be answered in order to evaluate that argument: (1) what is the statute of limitations; (2) when does it begin to run; (3) when is the period tolled if a RICO violation is alleged in a counterclaim; and (4) whether UWA alleges RICO injuries occurring within the appropriate period.

 Although no statute of limitations is explicitly set forth in the RICO statute, the Supreme Court has held that civil RICO actions are subject to the four-year period contained in § 4B of the Clayton Act. See Agency Holding Corp. v. Malley-Duff & Assocs., Inc., 483 U.S. 143, 156, 97 L. Ed. 2d 121, 107 S. Ct. 2759 (1987). It was not until this term, however, that the Supreme Court considered what events trigger the accrual of that period. See Klehr v. A.O. Smith Corp., 138 L. Ed. 2d 373, 117 S. Ct. 1984, 1997 U.S. LEXIS 3861, 1997 WL 331794 (U.S. 1997) (1997). While holding that the Third Circuit's "last predicate act" rule of accrual is wrong, the Supreme Court declined to resolve the more troublesome circuit split on whether a plaintiff's lack of knowledge of his injury can forestall accrual of the limitations period. *fn4" Id. at *6. As a result, the Second Circuit's "injury discovery" rule (also endorsed by the First, Fourth, Fifth, Seventh, and Ninth Circuits) controls: the period accrues on the date on which the plaintiff first "knows or has reason to know of the injury that is the basis for the action." Cullen v. Margiotta, 811 F.2d 698, 725 (2d Cir. 1987). Under this rule, a plaintiff "may sue for any injury he discovers or should have discovered within four years of the commencement of his suit, regardless [of] when the RICO violation causing such injury occurred." Bankers Trust Co. v. Rhoades, 859 F.2d 1096, 1103 (2d Cir. 1988); see also Bingham v. Zolt, 66 F.3d 553, 560 (2d Cir. 1995), cert. denied, 134 L. Ed. 2d 543, 116 S. Ct. 1418 (1996):

 
A necessary corollary of the separate accrual rule is that a plaintiff may only recover for injuries discovered or discoverable within four years of the time suit is brought. As long as separate and independent injuries continue to flow from the underlying RICO violations--regardless of when those violations occurred--plaintiff may wait indefinitely to sue, but may then win compensation only for injuries within the four-year "window" before suit was filed.

 (citations omitted). Thus, UWA's RICO claim can only stand if it was brought within four years of when UWA discovered or should have discovered a sustainable RICO injury; and if so, UWA can only recover for those injuries discovered or discoverable within that same period.

 In order to define the actual dates of this period, a determination must be made as to when the period ended. Under Fed. R. Civ. P. 13, a counterclaim tolls its limitations period at the filing of the initial complaint if it is compulsory, but not until the service of the counterclaim if it is permissive. See Employers Ins. of Wausau v. United States, 764 F.2d 1572, 1576 (Fed. Cir. 1985) (citing Burlington Indus., Inc. v. Milliken & Co., 690 F.2d 380, 389 (4th Cir. 1982)). The operative language in Rule 13 defines compulsory counterclaims as those which arise from "the transaction or occurrence that is the subject matter of the opposing party's claim." Fed. R. Civ. P. 13(a). While other circuits consider evidentiary overlap, potential res judicata problems, and similarity of facts and law in determining whether a counterclaim arises out of the same transaction or occurrence as the initial complaint, this circuit inquires whether a "logical relationship" exists between the claims, and whether "the essential facts of the claims are 'so logically connected that considerations of judicial economy and fairness dictate that all the issues be resolved in one lawsuit.'" Adam v. Jacobs, 950 F.2d 89, 92 (2d Cir. 1991) (quoting United States v. Aquavella, 615 F.2d 12, 22 (2d Cir. 1980)); see also Harris v. Steinem, 571 F.2d 119, 123 (2d Cir. 1978). *fn5"

 The most recent "logical relationship" decision by this Circuit discussed a series of Truth-in-Lending Act (TILA) cases where the counterclaims were ultimately declared permissive. The Court of Appeals pointed out that the opposing claims required different legal analyses: "The borrower need only show that the loan documents do not comply with specific federal regulations. By contrast, the bank must show a breach of contract. A lender's claim for debt against a borrower who sues for violation of TILA has none of the characteristics associated with a compulsory counterclaim." Adam, 950 F.2d at 93.

 This reasoning is applicable to the present case. While a RICO counterclaim against an ERISA complaint may not always be permissive, Aramony's ERISA claims will require an evaluation of Aramony's performance of his employment agreements, whereas UWA's RICO claim requires a different and more complex analysis of how Aramony's wrongful acts constituted racketeering activity under 18 U.S.C. § 1962(c).

 UWA had four years to file its RICO claim from the time it learned of Aramony's untoward conduct in early 1992. UWA's RICO claim in no way depends on the resolution of Aramony's ERISA claims, and involves completely different law. Accordingly, UWA's counterclaim is permissive and suspends the RICO limitations period on the date it was served, namely January 15, 1997. *fn6" UWA's RICO counterclaim may only go forward if UWA discovered or should have discovered cognizable RICO injuries within four years of that date, namely after January 15, 1993.

 2. Cognizable RICO Injuries

 Neither party disputes that UWA was injured by Aramony when he misappropriated funds on various occasions prior to 1991, and that UWA learned of those injuries by April 1992. But the only injuries relevant to this claim are those which UWA purports to have suffered at Aramony's hands after January 15, 1993: losses of dues from member organizations; losses of charitable contributions from the general public; and losses of legal, accounting and consulting fees spent mitigating reputational damage. See RICO Statement PP 15-17. ...


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