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GRAFMAN v. CENTURY BROADCASTING CORP.

December 14, 1989

HOWARD GRAFMAN, personally and on behalf of Century Broadcasting Corporation, Plaintiff,
v.
CENTURY BROADCASTING CORPORATION, a Delaware corporation; GEORGE A. COLLIAS; ANTHONY C. KARLOS; JAMES S. SOTER; JOSEPH M. BAISCH; and RICHARD J. BONICK, JR., Defendants



The opinion of the court was delivered by: DUFF

 BRIAN BARNETT DUFF, UNITED STATES DISTRICT JUDGE

 On July 7, 1989, Howard Grafman filed suit on behalf of himself and Century Broadcasting Corporation against the corporation, George A. Collias, Anthony C. Karlos, James S. Soter, Joseph M. Baisch, and Richard J. Bonick, Jr. Grafman's complaint proceeds in four counts. In Count 1, Grafman contends that the defendants have violated 18 U.S.C. §§ 1962(c)-(d) (1982), which are part of the Racketeer Influenced and Corrupt Organizations Act ("RICO"). In Count 2, Grafman alleges that the defendants violated id. at §§ 1962(a) and (d). Counts 3 and 4 are common law claims of breach of fiduciary obligation and fraud. Grafman alleges that the defendants committed these actions in connection with a major reorganization of Century.

 The defendants have moved to dismiss Grafman's complaint under Rule 12(b) (6), Fed.R.Civ.Pro. For purposes of this motion, this court must accept the allegations of fact contained in Grafman's complaint as true, and view them, along with the reasonable inferences which the court can draw from them, in the light most favorable to Grafman. See Ellsworth v. City of Racine, 774 F.2d 182, 184 (7th Cir. 1985).

 Accordingly, these are the facts: Grafman founded Century in 1962. Presently he is a shareholder in and director of the corporation. From 1976 until December 29, 1986, Grafman owned 20% of Century's stock, the same amount owned by fellow directors Collias and Karlos. In late 1986, Collias, Karlos, and Bonick (since their names will appear together so many times, the court will call them "the Three") allegedly devised a plan to give Collias and Karlos greater control of Century through the use of fraud and self-dealing. As part of that plan, whose purposes the Three concealed from and misrepresented to Century's shareholders, Century "underwent" reorganization into a subchapter S corporation. There followed a "forced" buyout and liquidation of the shares of approximately 106 shareholders. As a result of these maneuvers, which included use of the United States Mail, Collias and Karlos's respective holdings in Century increased to 30% each, giving them voting control of the corporation when they acted in concert.

 After the palace coup the defendants allegedly began to enrich the Three at Century's expense. The defendants had unspecific financial transactions with financial institutions which were to Century's detriment. They borrowed great sums from a bank, partly on the basis of a personal guarantee previously tendered to the bank by Grafman, without allowing Grafman to participate in these dealings. Bonick and Collias also misrepresented Century's financial health to the bank, which somehow furthered their scheme to gain control of Century.

 The crowning blows began in late 1988. In November, without obtaining the approval of Century's board or its shareholders, the Three obtained government approval for the transfer of station KMEL-FM, a Century radio property in San Francisco. The Three intended to put the property in the hands of a limited partnership which they had created, known as the San Francisco Century Limited Partnership. Creation of this partnership allegedly was the first step in a new effort to enrich Collias and Karlos; in this, the Three received help from alleged co-conspirators Soter and Baisch, who also were Century shareholders and directors. In December, the Three approached Heller Financial, Inc. to finance the purchase of another San Francisco radio station, KNBR-AM. The Three apparently intended to use the limited partnership as the vehicle for this purchase, and planned to transfer partnership interests to Collias and Karlos without adequate consideration. Heller said no to the deal, and so the Three approached another bank with a slightly different proposal. That bank also balked.

 Finally, in June 1989, the Three found a willing financier, Greyhound Financial Corporation. The Three then caused the assets of KMEL-FM to go to the limited partnership, whose interests were held solely (or so one can infer from Grafman's complaint) by Collias and Karlos. Other Century shareholders were left out of the deal. In order to gain approval of this transaction, the Three falsely represented to Grafman and Century's other directors and shareholders that transfer of KMEL-FM to the limited partnership was a prerequisite to Greyhound's financing the deal. Collias and Karlos also concealed from Century's shareholders and directors the existence of a bona-fide offer to purchase the shares of Century, a proposal which Collias and Karlos rejected out of hand. As a result of these transactions, Collias and Karlos now have exclusive control of KMEL-FM.

 The defendants press several arguments why this court should dismiss Grafman's complaint. They first contend that Grafman lacks standing to bring his RICO claims. The RICO statute limits its private civil remedies to "any person injured in his business or property by reason of a violation of section 1962. . . ." 18 U.S.C. § 1964(c). The defendants contend that all of the RICO injuries which Grafman alleges were not done to him, but to Century. Shareholder derivative actions are not permitted by RICO. See Rylewicz v. Beaton Services, Ltd., 888 F.2d 1175, 1989 U.S.App. LEXIS 16659 (7th Cir. 1989); Flynn v. Merrick, 881 F.2d 446, 449-50 (7th Cir. 1989). If this rule applied to this case, the court would have to dismiss Counts 1-2, for although Grafman has captioned his action as one brought on behalf of Century Broadcasting Corporation, he has not complied with Rule 23.1, Fed.R.Civ.Pro., which governs derivative actions.

 This exception will save some aspects of Counts 1-2, but not all of them. Most of Grafman's allegations concern harm to Century, particularly those relating to the financial improprieties of the Three and the transfer of KMEL-FM to the Century Limited Partnership. These actions harmed all of Century's shareholders, not just Grafman. Grafman does allege harms, however, which did not befall all of Century's shareholders: the diminution of his voting power on account of the 1986 reorganization of Century and the loss of his rights on account of the by-law changes made the following year. From the complaint it appears that Grafman has standing to challenge these acts.

 Having persuaded the court to narrow the harms for which Grafman may recover, the defendants direct three arguments specifically against Count 1. One of them is so powerful that the court will decline to rule on the other two. The defendants argue that Grafman fails to allege "racketeering activity," as required to state a cause of action under § 1962(c). Grafman contends that he alleges mail fraud, which is a violation of 18 U.S.C. § 1341 and one of the things defined as "racketeering activity" in id., § 1961(1)(A).

 The defendants would accept mail fraud as being "racketeering activity" only if Grafman adequately alleged it in compliance with Rule 9(b), Fed.R.Civ.Pro. That rule states in part: "In all averments of fraud or mistake, the circumstances constituting the fraud or mistake shall be stated with particularity." Rule 9(b) applies to allegations of fraud in civil RICO actions. See Haroco v. American Nat. B. & T. Co. of Chicago, 747 F.2d 384, 405 (7th Cir. 1984), aff'd 473 U.S. 606, 87 L. Ed. 2d 437, 105 S. Ct. 3291 (1985) (per curiam); Frank E. Basil, Inc. v. Leidesdorf, 713 F. Supp. 1194, 1197-98 (N.D.Ill. 1989). As this court held in Basil, id. at 1198, "a complaint of fraud . . . ...


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