Bennett v. Centerpoint Bank
Case Date: 10/19/1992
Docket No: 91-1603
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___________________ No. 91-1603 L. DICKINSON BENNETT, Plaintiff, Appellant, v. CENTERPOINT BANK, ET AL., Defendants, Appellees. __________________ No. 91-1604 L. DICKINSON BENNETT, Plaintiff, Appellee, v. CENTERPOINT BANK, ET AL., Defendants, Appellants. _________________________ APPEALS FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE [Hon. Shane Devine, U.S. District Judge] ___________________ Before Breyer, Chief Judge, Selya and Cyr, Circuit Judges. ___________________ L. Dickinson Bennett, on brief pro se. Martha V. Gordon and Merrill & Broderick on brief for appellees Centerpoint Bank, Philip M. Stone and Edward L. Hahn. W. Wright Danenbarger and Wiggin & Nourie on for appellees David B. Salzman, Richard P. Demers, Michael J. Kenndey, Anthony J. Frederick, Jr., Ronald H. Bogers, Donald J. Levasseur, Robert A. Bellemore and G. Roy. Martha v. Gordon and Merrill & Broderick on brief for appellants Centerpoint Bank, Philip M. Stone and Edward L. Hahn. W. Wright Danenbarger and Wiggin & Nourie on brief for appellants David B. Salzman, Richard P. Demers, Michael J. Kennedy, Anthony J. Frederick, Jr., Ronald H. Bogers, Donald J. Levasseur, Robert A. Bellemore and Ronald G. Roy. L. Dickinson Bennett on brief pro se. __________________ __________________ Per Curiam. These matters involve (1) the plaintiff's appeal from the district court's dismissal of his complaint, which alleged that the defendants had violated the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. 1961 et. seq., and (2) the defendants' appeal from the district court's denial of their motion for sanctions under Fed. R. Civ. P. 11. We will sketch the facts alleged in the complaint; they are set forth in more detail in the district court's order. Bennett v. Centerpoint Bank, 761 F.Supp. 908 (D.N.H. 1991). Bennett, along with his partners in Manchester Bank Associates, set out to organize the Community National Bank (CNB). They filed an application for a bank charter with the federal Office of the Comptroller of the Currency (OCC), appointed themselves interim directors of the nascent bank, and solicited stock subscriptions from some 150 investors. In October 1989, the interim directors of CNB received an offer from Centerpoint Bank, another embryonic banking venture in Manchester, New Hampshire. The gist of Centerpoint's proposal was that the market could bear one, but not two, new banks. Centerpoint therefore offered to pay CNB's interim directors either $200,000 or $250,000, depending on the payment schedule, for (1) a non-competition agreement and (2) certain intangible assets (defined as "market research, consulting, services, etc."). In addition, some of Centerpoint's directors would pay $25,000 for a share of Manchester Bank Associates. As late as November 4, 1989, CNB's interim directors, including Bennett, were unanimous in their willingness to accept Centerpoint's offer. By the time the non-competition agreement was ready for execution on November 7, however, Bennett had soured on the deal, so that only his co-directors actually signed the agreement and went through with the transaction. They eventually received $225,000 from Centerpoint, and several of them joined Centerpoint's board of directors. According to Bennett, when his co-directors bolted from CNB, they caused a "significant change" in CNB's plans, which caused OCC (once Bennett had informed it of the change) to require CNB to withdraw its application for a bank charter. Bennett duly (and unilaterally) withdrew the application. At that moment, he alleges, CNB "ceased to exist as a body corporate." This happened on November 8, 1989. Bennett claims that his former co-directors (the "CNB defendants") along with Centerpoint and two of its officers (the "Centerpoint defendants"), then embarked on the "pattern of racketeering activity" that forms the basis of his civil RICO complaint. Boiled down to its essence, the complaint alleges that the defendants did the following: (1) They misappropriated the list of CNB's stock subscribers. (2) Using that list, they attempted to convince CNB's subscribers to invest in Centerpoint, committing fraud on the subscribers through a variety of affirmative misrepresentations and material omissions. (3) They also asked OCC to delay the return of the CNB subscribers' funds (which were being held in an escrow account), and to allow them to transfer, directly from the escrow account to Centerpoint, any money that those subscribers agreed to re-invest in Centerpoint. (4) When Bennett asked OCC to deny this request, one of the defendants, an officer of Centerpoint, made comments to Bennett that he took as a threat to his safety and the safety of his family. (5) The CNB defendants purported to meet as CNB's board of directors (even though this meeting took place after Bennett had withdrawn the application and ended CNB's corporate life), and voted to remove Bennett as chairman of the board. (6) The CNB defendants used the money they received from Centerpoint to repay First Mutual Bank for Savings, which had given them a loan to cover CNB's organizational costs. In return, First Mutual released the CNB defendants from their personal guarantees of the loan, and dismissed them from a state court lawsuit it had instituted to recover the debt. Neither Bennett nor CNB received a release or a stipulation of dismissal. I Since Bennett has appealed a decision to dismiss his complaint pursuant to Fed. R. Civ. P. 12(b)(6), our review is plenary. We must accept the allegations in the complaint as true and draw all reasonable inferences from them in the plaintiff's favor, and we should not affirm the dismissal "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Miranda v. Ponce Federal Bank, No. 90-2214 (1st Cir., Oct. 29, 1991) (quoting Conley v. Gibson, 355 U.S. 41, 45-46 (1957)). We will, however, require the plaintiff to have "set forth factual allegations, either direct or inferential, respecting each material element necessary to sustain recovery under some actionable legal theory." Gooley v. Mobil Oil Corp., 851 F.2d 513, 515 (1st Cir. 1988). Since this is a civil RICO complaint, moreover, we will take "particular care . . . to balance the liberality of the Civil Rules with the necessity of preventing abusive or vexatious treatment of defendants." Miranda v. Ponce Federal Bank, supra. We will require the plaintiff to have stated, "at a bare minimum, . . . facts sufficient to portray (i) specific instances of racketeering activity within the reach of the RICO statute and (ii) a causal nexus between that activity and the harm alleged." Id. The district court dismissed the complaint for failure to meet the second, causal nexus, requirement. In other words, the district court ruled that Bennett lacked standing to bring a civil RICO suit. 18 U.S.C. 1964(c) confers such standing on "[a]ny person injured in his business or property by reason of" a violation of the RICO statute. This standing requirement actually has three elements. First, the plaintiff's injury must be of the sort recognized by the statute -- an injury to "business or property." Second, "the conduct constituting the violation" -- either the pattern of racketeering or one or more of its predicate acts -- must be the actual cause of the plaintiff's injury. Sedima, S.P.R.L. v. Imrex Co., Inc., 473 U.S. 479, 496 (1985). See also Arzuaga-Collazo v. Oriental Federal Savings Bank, 913 F.2d 5, 7 (1st Cir. 1990) (plaintiffs did not state RICO claim when they failed to make clear how alleged racketeering acts injured their business or property). Actual causation alone, however, "is insufficient to confer RICO standing . . . since section 1964(c) establishes a proximate cause requirement as well." Willis v. Lipton, No. 90-1930 (1st Cir., Oct. 28, 1991). "RICO liability is not to be extended without limit, for 'some boundary must be set to liability for the consequences of any act, upon the basis of some social idea of justice or policy.'" Id. (quoting Sperber v. Boesky, 849 F.2d 60, 63 (2d Cir. 1988)). See also In re Crazy Eddie Securities Litigation, 714 F.Supp. 1285, 1291 (E.D.N.Y. 1989) ("some practical boundary must be set . . . on the basis of the objectives of the statute, the foreseeable consequences of the acts, and their relationship to the loss claimed"). Proximate cause, therefore, is the third element of RICO standing. II We agree with the district court that the allegations in the complaint do not give Bennett RICO standing. The complaint is divided into forty-three counts, each of which (save the last) alleges the commission of one or more predicate acts. The last count alleges the RICO violation itself. Each count contains some variation on the rote incantation that the defendants' acts "injured" Bennett in his "business or property." These bare allegations are plainly inadequate. See Gooley v. Mobil Oil Corp., 851 F.2d at 515. See also In re U.S. Grant Hotel Associates, Ltd. Securities Litigation, 740 F.Supp. 1460, 1469 (S.D.Cal. 1990) (conclusory allegations of injury resulting from predicate acts do not create standing). Nor do the facts alleged in the complaint lend enough content to Bennett's conclusions about injury and causation to permit us to infer that he has RICO standing. In the district court the parties argued about several "harms" that the complaint described, either expressly or indirectly. On appeal, however, Bennett focuses on a single area of alleged "harm," the depletion of CNB's corporate assets. We note first that, with the exception of the misappropriated subscriber list and the "intangible assets" that the CNB defendants agreed to sell to Centerpoint, Bennett's complaint does not identify any particular corporate assets or describe how the defendants robbed those assets of value. It seems to us that CNB's primary asset was its corporate existence and its potential as a profitable business -- in other words, not its current value but its ability to acquire a value. Two events ended that existence and erased that potential: the CNB defendants' decision to accept Centerpoint's offer and sign a non-competition agreement (a decision in which Bennett initially joined), and Bennett's consequent withdrawal of CNB's application for a bank charter. Neither event involved a predicate act of racketeering within the definition of 18 U.S.C. 1961(1). The harm that flowed from those events, therefore, cannot be remedied by a civil RICO suit. The statute "provides no cause of action to individuals injured by acts other than criminal RICO violations." Nodine v. Textron, Inc., 819 F.2d 347, 349 (1st Cir. 1987). Even if we assume that the defendants' predicate acts did squander, to an unidentified extent, the value of certain corporate assets, we do not see how the depletion of the assets gives Bennett standing to bring a RICO suit. Bennett does not, because he cannot, claim that he has a right to recover personally for CNB's corporate injury. See Roeder v. Alpha Industries, Inc., 814 F.2d 22, 29 (1st Cir. 1987) (RICO suit for injuries to corporation can be brought only by corporation or by shareholder suing derivatively on its behalf). He argues, rather, that he can sue as an organizer of the bank. The injury, in this theory, is tertiary. First the defendants injured the corporation, eroding its ability to pay its debts. This prevented the bank's creditors from enjoying a recovery they might otherwise have obtained from a healthier debtor. Bennett, as an organizer of the venture, bore a responsibility, imposed by federal regulation, to pay the costs associated with an unsuccessful organization. See 12 C.F.R. 16.7(c). An injury to the bank's creditors, therefore, was an injury to him. See Mid-State Fertilizer Co. v. Exchange National Bank, 877 F.2d 1333, 1336 (7th Cir. 1989) ("[g]uarantors are contingent creditors"). All this may be true, but it begs the essential question: whether a corporation's creditors have standing to sue under RICO for an injury caused by the depletion of the debtor corporation's assets. A number of courts have said that they do not. See, e.g., Mid-State Fertilizer Co. v. Exchange National Bank, 877 F.2d at 1335-36; National Enterprises, Inc. v. Mellon Financial Services Corp., 847 F.2d 251, 254-55 (5th Cir. 1988); Wooten v. Loshbough, 738 F.Supp. 314 (N.D.Ind. 1990); Dana Molded Products, Inc. v. Brodner, 58 B.R. 576, 580-81 (N.D.Ill. 1986). These cases, it is true, are predicated to a greater or lesser extent on a distinction between "direct" and "indirect" injuries. We have expressly declined to recognize that distinction as a proximate cause boundary in civil RICO cases. See Bass v. Campagnone, 838 F.2d 10, 11 (1st Cir. 1988); Roeder v. Alpha Industries, Inc., 814 F.2d at 29. We have said that the proper inquiry is "not whether the plaintiff has alleged a direct or indirect injury, but rather whether he or she has alleged an injury that 'flows from' the predicate acts." Bass v. Campagnone, 838 F.2d at 12. The rationale of our decisions in Roeder and Bass, however, also bars Bennett's claim. In Roeder, for example, we ruled that a corporation's involvement in illegal activities can damage the value of its stock, and therefore cause an indirect injury to its shareholders, and that the indirect nature of the injury is itself no obstacle to a suit by an individual shareholder. 814 F.2d at 29. Nevertheless, we held that a RICO suit for such injuries could only be brought by the corporation, or by a shareholder suing derivatively on behalf of the corporation. Id. This was because the alleged injury to the individual plaintiff -- that is, the decline in value of the plaintiff-shareholder's stocks -- "merely reflects the decrease of the value of the firm." Id. at 30. An individual shareholder could not bring a personal RICO action to recover for this injury to the corporation "without impairing the rights of prior claimants to such assets." Id. (quoting Rand v. Anaconda-Ericsson, Inc., 794 F.2d 843, 849 (2d Cir. 1986)). The analysis is no different when the individual plaintiff is a creditor or a guarantor. A creditor, like a shareholder, possesses an interest in the firm, the value of which is dependent on the value of the firm itself. The creditor's loss, like the shareholder's loss in Roeder, "merely reflects the decrease in the value of the firm" caused by the defendant's racketeering. An individual creditor, like an individual shareholder, cannot obtain relief without interfering with the ability of other creditors (and shareholders) to do so as well. As the Seventh Circuit has noted, since we already "allow the corporation to litigate in its own name and collect the whole sum," Mid-State Fertilizer Co. v. Exchange National Bank, 877 F.2d at 1336, to allow individuals who hold rights in the corporation to recover personally for their derivative injuries would be to authorize "a form of double-counting." Id. at 1335. If the injury to the corporation is $100, and the injury to each of its two shareholders (or creditors) $50, allowing the corporation to recover for the entire injury, and the shareholders or creditors to recover personally for their injuries, would force the defendant to pay double the damages he has caused. The alternative -- a system that somehow allocated recovery between the corporation and any individual plaintiffs -- would be a procedural "nightmare." Id. We will assume, as Bennett asserts, that the "corporation" here no longer exists and therefore may be incapable of suing to redress the collective wrong. But this does not automatically entitle Bennett to bring a lawsuit that would otherwise belong to the defunct bank. In Bass v. Campagnone, we held that where the "corporate" entity (in that case, a labor union), cannot or will not sue, and a derivative action is not available, an individual plaintiff has standing only if he sues on behalf of the entire class of people whose interest in the entity was affected by the defendant's wrongs -- that is, in this case, on behalf of all of CNB's creditors. 838 F.2d at 13. Bennett's complaint asserts no interests but his own. In both Roeder and Bass we acknowledged an exception to this general standing requirement. One who holds rights in the injured entity -- whether a shareholder as in Roeder, a union member as in Bass, or a creditor as here -- may recover personally if the injury to his or her interest is "peculiar to him alone, and does not fall alike upon other [shareholders, union members or creditors]." Roeder, 814 F.2d at 30. See also Ashland Oil, Inc. v. Arnett, 875 F.2d 1271, 1280 (7th Cir. 1989) (particular creditors may sue where facts show injury "significantly different from injuries to creditors in general"); Bass v. Campagnone, 838 F.2d at 12, 13. Bennett's claims of injury as an organizer/creditor, however, are grossly inadequate to the task of showing a "peculiar" injury. Bennett has alleged only that "various creditors" of the Bank "are unpaid," while "others" have filed claims in excess of $1,400,000. According to Bennett, those creditors have "looked to" Bennett, "among others," for payment. This allegation has two defects. First, it does not identify an "injury" traceable to racketeering activity. The organizers' obligation to satisfy CNB's creditors arose when the banking venture failed, leaving debts behind. But that event, as we have said, was not a consequence of the defendants' predicate acts. And neither, as far as we can tell on the basis of the facts alleged, were those debts. The defendants' racketeering would have caused an injury only if it forced the organizers to pay the creditors more than they would have needed to pay had the venture simply failed and no racketeering activity occurred. With one possible exception, however, Bennett tells us absolutely nothing about how the defendants' predicate acts depleted CNB's assets and left its organizers on the hook for a debt that would otherwise have been satisfied by the company. The complaint also fails to identify an injury that is "peculiar" to Bennett among the organizers. The federal regulation he cites, making bank organizers liable for the costs of organization, applies to organizers in general. The complaint (again, with one possible exception) does not suggest that Bennett's former partners (and current adversaries) are any less liable to CNB's creditors than he is. Indeed, the statement that the creditors have looked to Bennett, "among others," for satisfaction, suggests that the creditors have not sought to impose any special obligations on Bennett. The sole possible exception is Bennett's allegation that the CNB defendants obtained releases from their personal guarantees to First Mutual and stipulations of dismissal from First National's debt collection suit, but obtained no relief for Bennett or CNB. If one accepts (1) that this act qualified as a predicate act of racketeering, (2) that the $225,000 the CNB defendants obtained from Centerpoint represented the value of assets that should properly have remained with the company, and (3) that the payment to First Mutual did not completely satisfy the organizers' debt, one could infer from the complaint, we suppose, that Bennett, alone among CNB's organizers, is now exposed to collection efforts for the remainder of the debt to First Mutual. But exposure does not equal injury: there is nothing in the complaint to suggest that First Mutual has actually pursued its lawsuit or any other action against Bennett alone, and certainly nothing to suggest that it has done so to the point of settlement or judgment. In other words, there is nothing in the complaint to say or suggest that Bennett has paid First Mutual anything, much less that he has paid it more than he would have paid if the defendants had never committed a predicate act. The injury, therefore, is speculative and the suit, at the very least, premature. See Bankers Trust Co. v. Rhoades, 859 F.2d 1096, 1102-03 (2d Cir. 1988) (until injury occurs, there is no right to sue under RICO); Arabian American Oil Co. v. Scarfone, 713 F.Supp. 1420, 1421 (M.D.Fla. 1989) ("potential exposure" insufficient to satisfy injury requirement); Abraham v. Marist College, 706 F.Supp. 294 (S.D.N.Y. 1989) (possibility that plaintiff might be denied government grant); Anitora Travel, Inc. v. Lapian, 677 F.Supp. 209, 216 (S.D.N.Y. 1988); Jones v. Baskin, Flaherty, Elliot and Mannino, P.C., 670 F.Supp. 597, 599 (W.D.Pa. 1987) (possibility of future tax prosecution). III We need not linger over the defendants' cross-appeal. The district court ruled that Bennett had not violated Rule 11 since he had "made a reasonable effort to find legal support for his theory of standing." 761 F.Supp. at 918. We would disturb that conclusion only if it was an abuse of the district court's discretion, Kale v. Combined Insurance Co., 861 F.2d 746, 756-58 (1st Cir. 1988), and we find no such error here. Rule 11 imposes a test of "objective reasonableness under the circumstances existing at the time." Id. at 758. The circumstances here include (1) Bennett's pro se status, see Thomas v. Evans, 880 F.2d 1235, 1240 (11th Cir. 1989), (2) the absence of any First Circuit precedent on the specific standing issue raised by his complaint, see Winstead v. Indiana Insurance Co., 855 F.2d 430, 435 (7th Cir. 1988), and (3) this court's rejection of the distinction (between direct and indirect injuries) upon which other courts had based their decisions to deny RICO standing to corporate creditors injured by harms inflicted on the debtor corporation. Taking those circumstances into account, we would be hard put to conclude that the district court erred in ruling that Bennett had a good faith, though ultimately ineffective, "argument for the extension . . . of existing law," Fed. R. Civ. P. 11, much less that the district court abused its discretion in so ruling. Affirmed. |