United States District Court, Northern District of Illinois, E.D
July 24, 1984
PATRICK J. GALLAGHER, PLAINTIFF,
CANON U.S.A., INC., DEFENDANT.
The opinion of the court was delivered by: Shadur, District Judge.
MEMORANDUM OPINION AND ORDER
Patrick Gallagher (Gallagher") has moved pursuant to
Fed.R.Civ.P. ("Rule") 12(b) to dismiss the Amended Counterclaim
of Canon U.S.A., Inc. ("Canon"). Gallagher contends Canon has
failed (1) to allege standing to sue under the Racketeer
Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961-1968,
and (2) to plead fraud with sufficient particularity
as required by Rule 9(b). For the reasons stated in this
memorandum opinion and order, Gallagher's motion is granted and
Canon's Counterclaim is dismissed without prejudice.
Gallagher's Complaint alleges Canon orally agreed to make
Gallagher an authorized dealer of Canon office equipment, then
breached that agreement, causing Gallagher to go out of business
after he had spent over $250,000 opening a dealership. Canon
assertedly breached its agreement by refusing to permit its
majority-owned subsidiary Ambassador Office Equipment, Inc.
("Ambassador") to sell Gallagher Canon office equipment.
Gallagher seeks not only reliance damages but also more than $1
million in lost profits and appreciation.
After this Court granted Gallagher's motion for a more definite
statement of the original Counterclaim, Canon filed an Amended
Counterclaim. Canon's Amended Counterclaim charges Gallagher
participated in a pattern of racketeering activity in violation
of RICO, alleging:
1. Gallagher formed and is responsible for the
operation of various business enterprises engaged in
interstate commerce, including Command Duplicating
Services, Inc. in Illinois and Command Duplicating
Services, Inc. in Nevada (Amended Counterclaim ¶¶
2. Gallagher and other agents of Gallagher's
enterprises "unlawfully caused the transfer of
substantial amounts of equipment and other assets of
CANON or Ambassador to said business enterprises
without reasonable compensation therefor and with the
intent to defraud CANON and Ambassador" (id. ¶ 8).
3. Gallagher and other agents of Gallagher's
enterprises "unlawfully received cash payments,
reimbursements for personal expenses and other
valuable benefits from Ambassador without CANON's
knowledge or consent which were not related to any
legitimate business purpose all with the intent to
defraud CANON and Ambassador" (id. ¶ 9).
4. That scheme to defraud described in Amended
Counterclaim ¶¶ 8-9 "was accomplished through the use
of the United States mails in violation of
18 U.S.C. § 1341 and the wires in violation of
18 U.S.C. § 1343" (id. ¶ 10).
5. That scheme to defraud also "included the
knowing transportation or receipt in interstate
commerce by the above-stated business enterprises of
photocopying machines and other goods and equipment
belonging to CANON or Ambassador having a value in
excess of Five Thousand Dollars ($5,000.00), in
violation of 18 U.S.C. § 2314 and 2315" (id. ¶ 11).
6. Canon suffered damages in excess of $2 million
because "Ambassador's ability to function as an
effective dealer of Canon office equipment was
seriously impaired, which has resulted in substantial
damage to CANON in the form of lost sales of Canon
brand office equipment, injury to CANON's business
reputation and good will in the Chicago area, and a
decline in the value of shares of Ambassador stock
held by CANON" (id. ¶ 13).
Canon has thus added very little since this Court required it
to provide a more definite statement. It has made some wording
changes and has added allegations reported in the third and
paragraphs above. That is not enough to escape dismissal without
Canon urges it can bring a RICO claim because it is a "person
injured" under 18 U.S.C. § 1964(c) ("Section 1964(c)"). Where
however Canon seeks RICO standing simply as a shareholder of an
injured corporation, it stretches RICO far beyond standing
notions employed for any other type of action. Accordingly, the
Amended Counterclaim does not survive unless it can be recast to
allege only wrongs by which Canon was injured in its own right,
not just through the value of its Ambassador stock.
In this case Canon makes clear it is affected by Gallagher's
alleged behavior principally through Gallagher's effect on the
value of Canon's subsidiary Ambassador. If a majority shareholder
can sue under RICO solely for injury to the value of its stock,
no logical reason exists for the unavailability of a like claim
to a minority shareholder. It is axiomatic that the benefits of
controlling a corporation do not include the right to profit from
the legal rights of that corporation to the exclusion of minority
shareholders. So the issue here is whether shareholders in
general can sue under RICO directly for injury to the
corporations in which they hold stock.
In the broadest sense of the term shareholders have been
"injured in . . . [their] property" under Section 1964(c) when
they suffer a decline in the value of their stock. However the
courts' willingness to enforce RICO's broad language (see Schacht
v. Brown, 711 F.2d 1343 (7th Cir.) (en banc), cert. denied, ___
U.S. ___, 104 S.Ct. 508, 509, 78 L.Ed.2d 698 (1983)) does not
require, as Canon seems to suggest, that RICO "be interpreted
woodenly and without regard to [its] aim" (id. at 1356). In this
case there is no indication whatever Congress intended courts to
disregard the corporate entity in interpreting Section 1964(c).
Under state law the appropriate way for a shareholder to assert
the rights of its corporation is by bringing a derivative action
— if the corporation will not act for itself. See, e.g., Poliquin
v. Sapp, 72 Ill. App.3d 477, 480, 28 Ill.Dec. 615, 618,
390 N.E.2d 974, 977 (4th Dist. 1979).
Canon argues it is more than a "mere shareholder" and therefore
can sue in its own name much as Waste Recovery Corp. v. Mahler,
566 F. Supp. 1466, 1468 (S.D.N.Y. 1983) found in permitting a
holding company to proceed under RICO. First it must be noted
Waste Recovery proceeded (id.) on the same basis articulated
here, that a shareholder "may not sue to redress damage done to
him merely by virtue of a decline in value of his stock." Thus
the court addressed the propriety of direct as opposed to
derivative action by reference to pre-RICO cases — something
Canon has not done here. More important, however, there appears
to be no predicate (so to speak) for direct action in this case
as there was in Waste Recovery. Canon denies any contractual
relationship between Gallagher and Canon (Ans. ¶¶ 5-6), and its
Amended Counterclaim does not provide the basis for assuming any
breach by Gallagher of any duty owing directly to Canon.*fn2
Canon of course disavows that its Amended Counterclaim is based
principally on its status as a shareholder (Mem. 6):
Canon's relationship is far more substantial than
that of a "mere" shareholder. Canon has alleged
injuries to its business and property other than
diminution in the value of its stock. As alleged in
its Amended Counterclaim, Canon organized Ambassador
for the purpose of acting as the sole distributor of
Canon office equipment in the Chicago area.
Gallagher's racketeering activity caused the virtual
destruction of Ambassador's ability to function as an
effective dealer of Canon
equipment, which in turn resulted in lost sales by
Canon and damage to Canon's business reputation.
That argument however rests on the mistaken assumption Canon can
recover for damages to its stock once it shows it is more than a
"mere shareholder." Damage to the value of the Ambassador stock
is not a proper subject of an individual claim in any event.*fn3
Canon's allegations are not sufficiently precise to ascertain
whether "lost sales by Canon and damage to Canon's business
reputation" are the proper subjects of an individual action by
Canon, rather than simply mirroring indirectly what has really
been suffered by Ambassador. Moreover where a pleading is
defective it is not this Court's duty to make such a
determination in the first instance.*fn4 At the very least Canon
must redraft the Amended Counterclaim so it alleges only wrongs
actionable by direct rather than derivative action. Before it
again submits any such redraft, however, Canon is directed to
take a hard look at whether "the `gravamen' of the pleadings
alleges injury to the plaintiff upon an individual claim as
distinguished from an injury which affects the shareholders as a
whole." Poliquin, 72 Ill. App.3d at 480, 28 Ill.Dec. 615, 618, 390
N.E.2d at 977 (citation omitted).
Rule 9(b) Particularity
In response to this Court's granting Gallagher's motion for a
more definite statement, Canon filed an Amended Counterclaim
instead of a statement. But the Amended Counterclaim's new
allegations do not contribute the least bit to alleviating the
vagueness on which Gallagher's motion was based and granted.
Counterclaim ¶ 7 alleged in vague and conclusory fashion that
Gallagher "caused the transfer of substantial amounts of
equipment" from Ambassador. Amended Counterclaim ¶ 8 repeats that
allegation almost verbatim. Canon's purported "more definite
statement" contained in Amended Counterclaim ¶ 9 is actually a
wholly separate allegation, equally vague, that Gallagher
"unlawfully received cash payments" from Ambassador. Canon's only
other additional allegations describe the relationship between
Canon and Ambassador (Amended Counterclaim ¶ 4) and expand on the
way Canon claims to have been injured by Gallagher's fraud (id.
¶ 13). Neither adds anything to the particularity (more
accurately, lack of particularity) with which Canon has pleaded
Gallagher's fraud itself.
Thus Canon's Amended Counterclaim could be stricken solely for
failure to comply with this Court's order. But it must be added
it is just not conceivable Canon has a reasonable basis for its
claim, and yet can plead nothing more helpful or informative than
that over a five-year period Gallagher or his agents "unlawfully
caused the transfer of substantial amounts of equipment" to his
enterprises (id. ¶ 8) and "unlawfully received cash payments,
reimbursements for personal expenses and other valuable benefits"
(id. ¶ 9). Canon's Amended Counterclaim does not even come close
to providing a "brief sketch of how the fraudulent scheme
operated, when and where it occurred, and the participants," as
required by our Court of Appeals in Tomera v. Galt, 511 F.2d 504,
509 (7th Cir. 1975).*fn5 It is
doubtful whether it meets even the minimal requirements of Rule
8, as modified in fraud claims by Rule 9(b).
Gallagher's motion is granted and Canon's Amended Counterclaim
is dismissed without prejudice. This is Canon's second attempt to
file a legally sufficient counterclaim. Any third attempt may be
subject to dismissal with prejudice even for defects that might
not ordinarily be considered fatal.