Friday, October 16, 2009

Members of Homeowner's Group Could Not Sue Group's Board for RICO Violations

This posting was written by Mark Engstrom, Editor of CCH RICO Business Disputes Guide.

In a case of first impression, members of a homeowner association lacked standing to sue the president of the association’s board, the members and managers of a limited liability company (LLC) that controlled the board, the LLC itself, and an associated construction company for violations of the fedearl RICO law, the federal district court in New Orleans has ruled. The defendants allegedly engaged in a racketeering scheme that diverted homeowner assessments for their own use.

A shareholder derivative suit analysis was used to determine whether the members of the homeowner’s association had standing to sue, even though the members paid regular dues and assessments rather than an initial share price, and thus were not classic shareholder-mode claimants. Under the derivative suit analysis, courts asked: (1) whether the racketeering activity was directed against the corporation; (2) whether the alleged injury to shareholders merely derived from, and thus was not distinct from, the injury to the corporation; and (3) whether state law provided that the sole cause of action accrued in the corporation.

In this case, the alleged misconduct was directed at the homeowner association’s funds, not at the homeowners themselves, the court explained. In addition, the homeowners’ injuries were derivative of the association’s injuries and were not distinct from them. Finally, Louisiana law did not provide standing for members of a homeowner's association to sue the association for breaches of fiduciary duty by the association’s officers.

The case, Joffrion v. Tufaro, USDC ED La., appears at CCH RICO Business Disputes Guide ¶11,743.

No comments: