Antitrust Law Daily Wrap Up, RICO—W.D. Wash.: Company founder’s RICO claims against former business associates time-barred, (Jul 3, 2014)

By Linda O’Brien, J.D., LL.M.

In action by a software technology company founder against his former business associates for alleged defrauding him and his company in violation of the Racketeering Influenced and Corrupt Organizations Act (RICO), the federal district court in Seattle has granted the defendants’ motion to dismiss the complaint as time-barred (Phillips v. Cane, June 30, 2014, Robart, J.).

Entrepreneur Mark Phillips co-founded MOD Systems, Inc. which developed technical software applications for data encryption, in 2005. Subsequently, Phillips formed business relationships with financial advisor, Jan Wallace, attorney Kyleen Cane, and investors, Amin and Afshan Lakha. Phillips filed suit against Wallace, Cane, the Lakhas and others, alleging that the defendants formed a criminal group to defraud Phillips and MOD, in violation of RICO. Phillips claimed that the group ousted him as MOD’s chief executive officer (CEO) through threats and misrepresentations, fraudulently gained control over his equity interests in MOD, and brought financial ruin to MOD. The Lakhas moved for dismissal.

Statute of limitations. The court found that Phillips’s RICO claims were barred by the four-year statute of limitations. For a claim under RICO, the statute of limitations begins to run when a plaintiff knew or should have become aware of the injury underlying the cause of action. Following the “injury discovery” rule, the court determined that the latest date at which the limitations period began to run was when Phillips’ financial expert, Dennis Mandell, filed a “whistleblower” complaint against Wallace in February 2010. Mandell’s complaint alleged the same claims in Phillip’s complaint regarding Wallace’s offshore bank accounts, holding companies, and involvement in defrauding other companies. Phillips’s attachment of the Mandell complaint in his case and statement that he met with Mandell in 2010 prior of his filing of the whistleblower complaint indicated that Phillips had actual knowledge of Wallace’s alleged scheme to defraud MOD at least as of February 2010.

Moreover, there were other potential dates at which the statute of limitations could be deemed to have begun running, according to the court. Phillips alleged in his complaint that in March 2009 he was coerced by threats to resign as Mod’s CEO and to sign an agreement designating Cane as trustee of his equity interests in MOD. In November 2009, Phillips sought to remove Cane as trustee for allegedly misusing investment funds under her control. Phillips also wrote a letter in March 2010, outlining allegations against the same defendants in which he described their roles in forcing him out of his position at MOD. As a result of the alleged acts, Phillips knew or should have known of the fraudulent scheme, the court noted.

Tolling. The doctrine of equitable tolling did not apply to Phillip’s failure to timely file his claims. He failed to assert facts to show that the deadline passed despite his diligent pursuit of judicial remedies or due to an extraordinary circumstance that prevented him from filing his complaint. Finally, Phillips was denied leave to amend since the claims were time-barred and any amendment would be futile, the court concluded.

The case is No. 2:14-cv-00343-JLR.

Attorneys: Larry Steven Gangnes (Lane Powell PC) for Kyleen Elisabeth Cane and Chloe Jardine-Cutler.

Companies: New DOT Corp.

Cases: RICO WashingtonNews