Patrick Joffroin, et al v. Joseph Tufaro, et al

Filing 511107061

Case: 09-30984

Document: 00511107061

Page: 1

Date Filed: 05/11/2010

IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT
United States Court of Appeals Fifth Circuit

N o . 09-30984

FILED
May 11, 2010

Lyle W. Cayce Clerk P A T R IC K JOFFROIN; PHILLIP HEBERT; MICKEY O'CONNOR; DANNY K E A T IN G ; BETTIE KEATING; ET AL, P l a i n t if fs ­ A p p e l la n t s v. J O S E P H S. TUFARO; TROY DUHON; JEFFREY J. NEUPORT; CLIPPER L A N D HOLDINGS, L.L.C.; CLIPPER CONSTRUCTION, L.L.C., D e fe n d a n ts ­ A p p e lle e s

A p p e a l from the United States District Court fo r the Eastern District of Louisiana

B e fo r e REAVLEY, PRADO, and OWEN, Circuit Judges. P R A D O , Circuit Judge: P a tr ic k Joffroin and forty-eight other homeowners ("Appellants") in the C lip p e r Estates subdivision in Slidell, Louisiana appeal the district court's d is m is s a l of their lawsuit for lack of standing. Appellants are members of the C lip p e r Estates Master Homeowners Association ("CEMHOA"), and filed this la w su it against the developers of the Clipper Estates subdivision ("Appellees"), a lle g in g violations of the Racketeer Influenced and Corrupt Organizations Act, 1 8 U.S.C. §§ 1961­68 ("RICO"). Appellants alleged that Appellees, through their

Case: 09-30984

Document: 00511107061

Page: 2

Date Filed: 05/11/2010

09-30984 c o n t r o l of the CEMHOA, neglected the common areas and diverted Appellants' a s s e s sm e n ts for their own benefit. The district court dismissed after finding that A p p e lla n t s ' alleged injuries derived from injuries to the CEMHOA and that A p p e l la n t s lacked standing to bring a direct suit. Because the district court c o r r e c t ly applied our standing precedent, we affirm. I . FACTUAL AND PROCEDURAL BACKGROUND A p p e lle e s are Clipper Land Holdings, L.L.C., Clipper Construction, L.L.C., a n d corporate officers of those entities. Joseph Tufaro is President and

C h a ir m a n of the CEMHOA, and is a member and manager of Clipper Land H o ld in g s and Clipper Construction. Clipper Land Holdings controls the

C E M H O A board. Jeffrey Neuport is the Chief Financial Officer ("CFO") of all t h r e e Clipper entities. Troy Duhon is a member and manager of Clipper Land H o l d in g s and a former member and manager of Clipper Construction. All

m e m b e r s of the CEMHOA, including Appellants, pay homeowners' assessments t o the CEMHOA for the maintenance of the common areas and to promote the c o m m o n benefit of the subdivision. Appellants brought this lawsuit after

g a in in g access to the CEMHOA's records and finding allegedly questionable tr a n s a c tio n s and unexplained payments to Clipper Construction. Appellants alleged that Tufaro billed the CEMHOA $157,383 via Clipper C o n s t r u c tio n without justification, and that the records did not explain total m a n a g e m e n t fees for Clipper Construction of $33,708 over thirty-four months. A p p e l la n ts also alleged that Appellees damaged them by increasing

a s s e s sm e n ts , including $182 in total quarterly assessments, a $600 special a s s e s s m e n t in 2006 due to Hurricane Katrina, and a $200 special assessment in 2 0 0 8 for additional road reserve and CPA services (paid to Neuport). In addition

2

Case: 09-30984

Document: 00511107061

Page: 3

Date Filed: 05/11/2010

09-30984 t o the damages caused by the increased assessments, Appellants claimed that A p p e lle e s harmed them by diverting funds that should have been used for repair e ffo r ts . Finally, Appellants claimed that Appellees' operating procurement

p r o c e d u r e was deficient, preventing the CEMHOA from taking advantage of c o m p e t it iv e bidding for various services, and that the CEMHOA paid more for a trash contract granted to a company employing Tufaro's relatives than it o th e r w is e would have. Appellants alleged that these were "racketeering activities" in violation of R IC O .1 See 18 U.S.C. § 1962. Appellants alleged that because RICO provides a cause of action for "[a]ny person injured in his business or property by reason o f a violation of section 1962," 18 U.S.C. § 1964(c), they were entitled to d a m a g e s . Appellants sought treble damages for assessments paid that were d i v e r te d for Appellees' use and not utilized for the maintenance of the common a r e a s or diverted for work performed for other Clipper entities. Appellants also s o u g h t treble damages for the total amount of contracts procured that were not in the interest of the CEMHOA as well as any kickbacks received by Appellees fo r such contracts. Appellees moved to dismiss the complaint under Federal Rules of Civil P r o c e d u r e 12(b)(6) and 9(b). The district court found that Appellants lacked s t a n d in g after applying our three-part test from Whalen v. Carter, 954 F.2d 1 0 8 7 , 1093 (5th Cir. 1992). The district court declined to exercise supplemental ju r is d ic tio n over the remaining state law claims, and dismissed Appellants'

Appellants also brought Louisiana state law claims, including Louisiana civil RICO, conversion, fraud and intentional misrepresentation, violation of fiduciary duties, and unjust enrichment, and requested that the court pierce the corporate veil and appoint a receiver to manage the CEMHOA's affairs.

1

3

Case: 09-30984

Document: 00511107061

Page: 4

Date Filed: 05/11/2010

09-30984 la w s u it .2 Appellants timely appealed. I I . DISCUSSION W e review a district court's dismissal for lack of standing de novo. United S ta t e s v. $500,000.00 in U.S. Currency, 591 F.3d 402, 404 (5th Cir. 2009). W h e re , as here, RICO plaintiffs bring claims analogous to shareholder derivative c la im s, we apply a three-part test to determine whether the plaintiffs satisfy g e n e r a l standing requirements. See Ocean Energy II, Inc. v. Alexander &

A l e x a n d e r , Inc., 868 F.2d 740, 745 (5th Cir. 1989). We ask "(1) whether the r a ck e t e e r i n g activity was directed against the corporation; (2) whether the a lle g e d injury to the shareholders merely derived from, and thus was not distinct fr o m , the injury to the corporation; and (3) whether state law provides that the s o l e cause of action accrues in the corporation." Whalen, 954 F.2d at 1091. "If e a ch of these questions can be answered `yes,' then the [plaintiffs] do not have t h e requisite standing." Id. As to Whalen's first prong, Appellees directed their alleged racketeering a ct iv it y against the CEMHOA. Appellees' alleged improper manipulation of the C E M H O A for their own benefit allegedly violated RICO. Appellants' claims are fo r monies diverted from the CEMHOA's treasury. Appellants do not allege that A p p e lle e s "committed any fraudulent acts with the direct intent to injure" A p p e lla n ts . Id. at 1092. A s to Whalen's second prong, the alleged injury to Appellants merely

Although the district court's decision to dismiss the state law claims is subject to review for abuse of discretion, Batiste v. Island Records Inc., 179 F.3d 217, 226 (5th Cir. 1999), Appellants do not argue that, if the district court correctly dismissed for lack of standing, the district court abused its discretion by dismissing the remaining state law claims. Therefore, we do not address this issue.

2

4

Case: 09-30984

Document: 00511107061

Page: 5

Date Filed: 05/11/2010

09-30984 d e r iv e d from, and was not distinct from, the injury to the CEMHOA. As to the d u t ie s to the CEMHOA that Appellees allegedly neglected, such as maintenance o f the common areas, those injuries result from Appellees' breach of their o b lig a t io n s to the CEMHOA, not any obligation owed directly to Appellants. T h u s , any injury Appellants suffered due to such neglect must have been s u f fe r e d first by the CEMHOA. With regard to the higher assessments, those w e r e allegedly necessary because Appellees used the CEMHOA's funds for their o w n benefit. Although the assessments were charged to Appellants directly, t h e y were charged by the CEMHOA. Under Appellants' theory, the CEMHOA c h a r g e d higher assessments both to make more money for Appellees and to keep t h e CEMHOA solvent. The diversion of those assessments caused the CEMHOA in ju r y . Thus, Appellants have not shown an injury distinct from that of the CEM HOA. As to Whalen's third prong, Louisiana law provides that the sole cause of a ct io n accrues in the CEMHOA. In Stall v. State Farm Fire and Casualty Co., a condo owner sued her property manager, the condo owner's association, and t h e association's insurer based on the settlement of insurance claims after H u r r ic a n e Katrina. 995 So. 2d 670, 672­73 (La. Ct. App. 2008). The condo o w n e r asserted that the association's settlement with the insurer was in s u ffic ie n t, which affected her ability to repair her condo unit. Id. at 673. The L o u i s i a n a appellate court found that she lacked standing as to the claims a g a in s t the manager and the association for breach of fiduciary duties. Id. at 6 7 5 . The court held that the condo owner's "alleged injury would be to the c o r p o r a tio n and not to [the condo owner] directly," and "courts have made it clear t h a t a shareholder cannot assert an injury or loss as a separate claim." Id.

5

Case: 09-30984

Document: 00511107061

Page: 6

Date Filed: 05/11/2010

09-30984 S ta ll is on point. Although Stall dealt with a condo association instead of a homeowners' association, and negligence instead of RICO standing, the general s ta n d i n g principles that the Stall court relied on apply here. See also Sun D r illin g Prods. Corp. v. Rayborn, 798 So. 2d 1141, 1154 (La. Ct. App. 2001) ("[I]n s it u a t io n s where the alleged loss to the individual shareholder is the same loss t h a t would be suffered by other shareholders, the loss is considered to be in d ir e c t ." ). Therefore, we find that the third Whalen prong is also met. We now turn to Appellants' arguments as to why the three-part test does n o t apply to this case. Appellants argue that Appellees leave the CEMHOA just e n o u g h money to remain solvent, and that because the CEMHOA is a non-profit o r g a n iz a t io n , depriving it of profits is not a harm to the organization. Thus, a c c o r d in g to Appellants, the CEMHOA is merely a conduit for Appellees' alleged w r o n g d o in g and Appellants are injured directly. Appellants' argument would r e q u ir e us to find that non-profit organizations can never be injured unless they a r e actually driven out of business. We reject this meritless contention. Appellants also argue that the special assessments directly injure them b e ca u se they pay them periodically, unlike a stockholder who purchases stock o n ly once. However, in Bass v. Campagnone, union members brought a civil R I C O suit against the local union president, alleging, among other things, that h is actions caused them to pay increased union dues. 838 F.2d 10, 12 (1st Cir. 1 9 8 8 ) . The First Circuit rejected the plaintiffs' arguments because the alleged in ju r ie s were common to all union members and did not distinguish based on the c o n tin u in g harm inflicted by periodic union dues. Id. We find Bass instructive h e r e . Appellants provide no case law to support their argument that periodic a n d continuing harm makes the injury direct, and we see no reason to make

6

Case: 09-30984

Document: 00511107061

Page: 7

Date Filed: 05/11/2010

09-30984 s u c h a distinction. Therefore, we rely on Whalen's three-part test and reject A p p e lla n ts ' proposed distinction. Appellants attempt to draw a parallel between this case and our holding in Whalen. In Whalen, although we answered yes to the first two prongs of our s t a n d in g test, we held that Louisiana law afforded the limited partners a private a ct io n , relying on Dupuis v. Becnel Co., 535 So. 2d 375 (La. 1988). Whalen, 954 F .2 d at 1093­94. However, standing was not an issue in suits brought by limited p a r tn ers against general partners, because, in Louisiana, partners owe fiduciary d u tie s not only to the partnership, but directly to the other partners. See

B ro ck m a n v. Salt Lake Farm P'ship, 768 So. 2d 836, 844 (La. Ct. App. 2000). T h e r e fo r e Whalen's holding as it pertains to standing for limited partners does n o t change our analysis in this case. F in a lly , we reject Appellants' argument that we should find standing b e c a u s e Appellees control the CEMHOA. Appellants' argument merely

h ig h lig h ts the rationale for a derivative suit remedy. See McClure v. Borne C h e m ic a l Co., 292 F.2d 824, 827 (3d Cir. 1961) (stating that the derivative suit w a s created to provide a remedy for shareholders where the alleged wrongdoers c o n tr o lle d the corporation and there is little chance the corporation would bring s u i t itself). Shareholders can assert the interests of the corporation against m a n a g e m e n t when those in control of the corporation are acting against its in t e r e s ts . See FDIC v. Barton, 96 F.3d 128, 134 (5th Cir. 1996) (in a case in te r p r e t in g Louisiana law, stating that the fact that directors controlled the c o r p o r a tio n did not make it impossible to sue them, but that shareholders could h a v e brought a derivative suit). Finding an exception to our standing precedent h e r e would ignore this well-established remedy. See Palowsky v. Premier

7

Case: 09-30984

Document: 00511107061

Page: 8

Date Filed: 05/11/2010

09-30984 B a n c o r p , Inc., 597 So. 2d 543, 545 (La. Ct. App. 1992) ("[A] shareholder may only s u e to recover losses to a corporation resulting from mismanagement and b r e a ch e s of fiduciary duties secondarily through a shareholder's derivative s u it." ). III. CONCLUSION B e c a u s e we answer all three Whalen standing questions positively and b e c a u s e Appellants' other arguments are without merit, we find that Appellants la c k e d standing. We therefore AFFIRM. A F F IR M E D .

8