Antitrust Law Daily Wrap Up, RICO—3rdCir: “Partner” in Land Development Deal Lacks Standing to Pursue Derivative Claims, (Feb 7, 2013)

By Jeffrey May, J.D.

An individual who claimed to have entered into an agreement to be an equal partner in the development of a property in Rockaway Township, New Jersey, could not proceed with federal claims under the Racketeer Influenced and Corrupt Organizations Act of 1970 (RICO) and state RICO claims against his partner, the partner's family members, and others for allegedly engaging in a scheme to defraud him of millions of dollars in profits from the development, the U.S. Court of Appeals in Philadelphia has ruled in a not precedential opinion (Yarosh v. Salkind, February 6, 2013, per curiam). Summary judgment in favor of the defendants was affirmed.

The development was to be run out of one of the defending partner's existing companies—Fox Development, Inc. The plaintiff alleged that the defendants looted Fox of its assets, unlawfully diverted Fox's funds to other persons and entities, altered Fox’s books, and invested the money diverted from Fox into purchases of real estate to the detriment of the plaintiff and Fox.

The plaintiff brought individual claims and derivative claims on behalf of Fox. The plaintiff lacked standing to bring the derivative claims, the appellate court ruled. He was not a shareholder of Fox. The plaintiff unsuccessfully argued that he was to be an “equal partner” in the venture, which meant a 50% ownership interest in Fox. The plaintiff also contended that a $250,000 loan he made to Fox—and which was repaid with interest—was a shareholder loan and supported his purported ownership interest. However, the court concluded that there was no evidence that this was a shareholder loan.

The plaintiff argued on appeal that the district court erroneously dismissed his individual claims. He criticized the court for not providing separate analyses of his derivative claims and individual claims. However, the plaintiff failed to clearly separate his individual claims from his derivative claims, according to the appellate court.

“Given this lack of clarity, we can no more perform a separate analysis of the purported individual claims than could the District Court,” the appellate court concluded. Thus, the individual RICO claims were rejected as well.

The case is No. 08-3872.

Attorneys: Mark S. Halpern (Halpern & Levy) for Plaintiff-Appellant Samuel Yarosh, Jr. Richard E. Hamilton (Stern & Kilcullen) for Defendant-Appellee Morton Salkind.

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