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JONES v. BASKIN

September 24, 1987

John J. B. Jones, an individual, Plaintiff
v.
Baskin, Flaherty, Elliot And Mannino, P.C.; Philip Baskin, an individual; Raymond N. Baum, an individual; James B. Brown, an individual; Victor R. Delle Donne, an individual; Robert E. Fiorito, an individual; James J. Flaherty, an individual; Linda L. Goldston, an individual; Kenneth E. Lewis, an individual; R. Darryl Ponton, an individual; Charles E. Wittlin, an individual; Nelson P. Young, an individual; and Swartz Albanesi Izenson & Company, a Partnership, Defendants



The opinion of the court was delivered by: MENCER

 Glenn E. Mencer

 FACTS:

 On March 31, 1985, sixty year old John J. B. Jones was dismissed as an attorney by the law firm of Baskin Flaherty Elliott and Mannino, P.C., a professional corporation ["BFEM"]. Jones, suit alleges that his dismissal was the result of age discrimination. He further alleges that BFEM, a number of BFEM attorneys (Baskin, Baum, Brown, Donne, Fiorito, Flaherty, Goldston, Lewis, Ponton and Wittlin), a former BFEM attorney (Young) and BFEM's accountants, Swartz, Albanesi, Izenson & Co. ["SAI"], were parties to a tax fraud conspiracy involving improper reporting of fee income held in escrow accounts, and delayed reporting of paychecks to employees.

 Jones brought suit under the Age Discrimination in Employment Act ["ADEA"], the Employee Retirement Income Security Act of 1974 ["ERISA"], and the civil enforcement provisions of the Racketeer Influenced and Corrupt Organizations Act ["RICO"]. There are also pendent Pennsylvania state common law claims for breach of contract, conspiracy, breach of fiduciary duties, indemnification and for an accounting.

 BFEM, the individual defendants who are attorneys at BFEM, Young and SAI have moved to dismiss the entire complaint, or, in the alternative, to stay the proceedings pending arbitration.

 DISCUSSION:

 I. Civil RICO Claims

 Plaintiff's complaint alleges a number of violations of section 1962(c) of the RICO statute. 18 U.S.C. § 1962(c). The defendants, motions to dismiss challenge Jones, standing to sue under the RICO statute and assert that the complaint fails to allege commission of any predicate acts, known as "racketeering activities," required under the RICO statute. 18 U.S.C.A. § 1961(1). Even if such predicate acts were alleged, the defendants maintain that these acts did not constitute a "pattern of racketeering activity" as required under § 1962(c). The law firm, BFEM, named as the RICO "enterprise" in the complaint, requests dismissal of the RICO count as to BFEM on the grounds that § 1962(c) does not permit civil prosecution of a "person" also named as an "enterprise."

 A. Does The Plaintiff Have Standing To Sue Under RICO?

 Section 1964(c) grants standing for civil RICO claims to "any person injured in his business or property by reason of violation of section 1962." 18 U.S.C. § 1964(c); Sedima, S.P.R.L. v. Imrex Co., Inc., 473 U.S. 479, 495, 105 S. Ct. 3275, 3285-3286, 87 L. Ed. 2d 346 (1985). In other words, a plaintiff need show damage by conduct prohibited by section 1962. Lawaetz v. Bank of Nova Scotia, 653 F. Supp. 1278, 1284 (D.V.I. 1987).

 The plaintiff's complaint alleges injury "in his business, property rights, contractual rights and employment" due to the violations of § 1962(c), although such injury is not explained. Complaint, p 37. The complaint refers to the possibility of future tax liability for errors in his personal income tax returns made in reliance on allegedly fraudulent K-1 supplied to him by BFEM's predecessors. Complaint, pp 99-100. However, the hypothetical possibility of a future tax prosecution does not present a ripe dispute for this court, and will not suffice as an injury to confer standing. See generally Thomas v. Union Carbide Agric. Products Co., 473 U.S. 568, 580-581, 105 S. Ct. 3325, 87 L. Ed. 2d 409, 419-420 (1985); 13A C. Wright, A. Miller, J. E. Cooper, Federal Practice and Procedure § 3532 (Supp. 1987) (The central concern of ripeness determination "is whether the case involves uncertain or contingent future events that may not occur as anticipated, or indeed may not occur at all.").

 In his July 13, 1987 Brief In Opposition, the plaintiff alleges that he suffered injury in the form of understated partnership profits due to the fraudulent concealment of escrow payments. Plaintiff's Brief In Opposition To Defendant Swartz Albanesi Izenson & Co.'s Supplemental Motion To Dismiss, p. 4. Injury is also alleged for a reduction in capital payout upon the plaintiff's termination by BFEM, due to the deferred reporting of paychecks to "numerous shareholder employees" in December of 1983 and 1984. Id. at 5. Accepting these allegations of injury as true, the plaintiff's standing depends upon whether or not the alleged injuries were caused by the acts which violated § 1962(c).

 While the alleged tax frauds may have been the purpose behind the alleged bookkeeping improprieties which caused the plaintiff's pecuniary losses, neither the acts of tax fraud nor mail fraud themselves directly caused the injuries suffered by the plaintiff. The injuries alleged by the plaintiff were the direct result of the internal bookkeeping of BFEM and its predecessors, not the mail (or tax) frauds, which are the violations under § 1962(c).

 According to Sedima, a plaintiff has standing to sue under RICO only "to the extent that he has been injured . . . by the conduct constituting the violation." Sedima, 473 U.S. at 496, 105 S. Ct. at 3285-3286, 87 L. Ed. 2d at 359. "Direct injury keys the right to sue for a RICO violation and suits seeking damages for harm suffered derivatively will be dismissed for lack of standing." Lawaetz v. Bank of Nova Scotia, 653 F. Supp. at 1284 (family members had standing to bring civil RICO suit against bank where they expended personal funds in reliance on bank's fruadulent inducement that it would provide a substantial loan, thereby suffering direct injury). Standing to maintain a private civil RICO action depends on whether the plaintiff suffered "direct injury" by the conduct which violates section 1962. Id.; see also Cenco v. Seidman & Seidman, 686 F.2d 449, 457 (7th Cir.), cert. denied 459 U.S. 880, 103 S. Ct. 177, 74 L. Ed. 2d 145 (1982) (auditors used as "tool" of RICO enterprise were injured indirectly, therefore lacked standing); Gilbert v. Prudential-Bache Securities, Inc., 643 F. Supp. 107, 109 (E.D.Pa. 1986) (securities investors lacked standing under section 1962(a) where the defendants, investment of proceeds was not casually related to any injury to the plaintiffs); Levey v. E. Stewart Mitchell, Inc., 585 F. Supp. 1030, 1034 1035 (D.Md.), aff'd 762 F.2d 998 (4th Cir. 1985) (primary investors and guarantors of companies succeeding corporate RICO victim suffered an indirect injury and therefore lacked standing).

  In another case involving the discharge of a white-collar employee, a bank vice-president was fired after he reported banking irregularites to the Controller of the Currency which involved questionable financial activity by the bank's chairman. Morast v. Lance, 807 F.2d 926 (11th Cir. 1987). The discharged bank vice-president brought a civil RICO action. The Eleventh Circuit found that the vice-president "was not fired because he refused to participate in the bank's illegal scheme." Id. at 933. Morast v. Lance held that the vice-president lacked standing because the plaintiff's "injury, his discharge, did not flow directly from the predicate acts, the defendants, banking violations." Id. They concluded:

 
Morast is not using the RICO statutes to stop the alleged illegal practices; rather, he is attempting to use the RICO statutes as a source ...

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