Warren v. Manufacturers Nat. Bank of Detroit

• Decision Date: 16 April 1985
• Docket Number: No. 84-1051,84-1051
• Citation: 759 F.2d 542
• Parties: Harold WARREN, Plaintiff-Appellant, v. MANUFACTURERS NATIONAL BANK OF DETROIT, a national banking association, Defendant-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 542

759 F.2d 542

Harold WARREN, Plaintiff-Appellant, v. MANUFACTURERS NATIONAL BANK OF DETROIT, a national banking

association, Defendant-Appellee.

No. 84-1051.

United States Court of Appeals, Sixth Circuit.

Argued March 11, 1985.

Decided April 16, 1985.

William J. Weinstein, Weinstein, Kroll and Gordon, Joel Hoffman (argued), Southfield, Mich., for plaintiff-appellant.

Richard D. Rohr, Robert J. Diehl, Jr. (argued), Detroit, Mich., for defendant-appellee.

Before KENNEDY and WELLFORD, Circuit Judges, and PHILLIPS, Senior Circuit Judge.

WELLFORD, Circuit Judge.

The Racketeer Influenced and Corrupt Organization Act ("RICO"), 18 U.S.C. Secs. 1961-1968, once again raises its complications in this civil dispute. Plaintiff, Harold Warren, brought this action in his individual capacity as creditor, sole shareholder, and chairman of the board of Paragon Steel Corporation ("Paragon"), claiming that Paragon was defrauded by defendant, Manufacturers National Bank of Detroit, by substantial overcharge of represented interest on a loan of several million dollars. The trial court held, however, that plaintiff, in his individual capacity, was not a proper party to pursue such an action, and accordingly dismissed the complaint.

In 1958 plaintiff and his brother founded Paragon, a steel warehousing and sales company located in Detroit, Michigan. By 1974 plaintiff had become the sole shareholder of that corporation. After acquiring sole control of Paragon, plaintiff transferred the corporate stock to a newly formed entity known as PSC Corporation, ("PSC"). PSC was wholly owned by plaintiff's son, daughter-in-law, and four others. As a part of the sales agreement, and to secure the debt owed him by PSC, plaintiff retained possession of the Paragon stock. At this time plaintiff was named chairman of the board of Paragon.

In the Spring of 1980 Paragon was allegedly approached and actively solicited by defendant to become one of its banking customers. Alleged representations were made to plaintiff at this time that Paragon could receive loans at 2 1/2 percent over the prime rate. Defendant allegedly informed plaintiff that the prime rate was the rate charged defendant's best clients. ¹ Impressed with this presentation and acting as chairman of the board, plaintiff authorized Paragon to enter into a real estate mortgage with defendant whereby Paragon was loaned approximately ten million dollars, and whereby Paragon was obligated to pay interest at 2 1/2 percent above the prime lending rate.

In 1982 PSC defaulted on its obligation owed to plaintiff, and pursuant to their security agreement plaintiff reassumed ownership of the Paragon stock. About this same time Paragon began experiencing cash flow problems, jeopardizing its obligation to defendant. Following an attempt to liquidate and pay off its debts, Paragon was forced into involuntary bankruptcy in July 1982.

Plaintiff claims he and Paragon were defrauded by defendant's representations that the prime rate was the rate charged its "best" customers when instead it set its prime rate above what it was charging its best customers. Because of its reliance on these fraudulent representations, Paragon at times was required to pay very high interest rates. This enormous interest rate eventually led Paragon to bankruptcy.

Plaintiff asserts that not only was Paragon injured, but also that he personally was injured in three separate capacities by defendant's fraudulent scheme. First, he was the sole shareholder of Paragon and accordingly lost his total investment when his stock became worthless. Second, he was chairman of the board and the chief executive officer of Paragon. When the corporation went bankrupt he lost not only his job, but also very substantial fringe benefits. Finally, plaintiff claims to be the major creditor both of PSC and Paragon, damaged by Paragon's bankruptcy.

The question we are called upon to address is whether plaintiff may bring an action in his individual capacity under RICO for injuries apparently inflicted upon the corporation. Plaintiff claims his injuries are different from those inflicted upon Paragon, and that he has standing to pursue his claim under the "any person" language of 18 U.S.C. Sec. 1964. That statute provides in relevant part that "[a]ny person injured in his business or property by reason of violation of section 1962 ... may sue therefor in any appropriate United States district court...."

We cannot agree with plaintiff's contention. In his capacity as a shareholder of Paragon, any injury he incurred was actually one sustained by the corporation.

An action to redress injuries to a corporation cannot be maintained by a shareholder in his own name but must be brought in the name of the corporation. The shareholder's rights are merely derivative and can be asserted only through the corporation. Although this rule does not apply in a case where the shareholder shows a violation of duty owed directly to him, diminution in value of the corporate assets is insufficient direct harm to give the shareholder standing to sue in his own right.

Stevens v. Lowder, 643 F.2d 1078, 1080 (5th Cir.) (citation omitted), reh'g denied, 652 F.2d 1001 (1981). See also Sherman v. British Leyland Motors, Ltd., 601 F.2d 429, 439-40 (9th Cir.1979); Scharmer v. Carrollton Mfg. Co., 525 F.2d 95 (6th Cir.1975). Though plaintiff correctly points out that Stevens, Sherman and Scharmer were all cases dealing with the antitrust laws, we hold that this general rule applies with equal force to actions brought under RICO. See also Gallagher v. Canon U.S.A., Inc., 588 F.Supp. 108, 110-11 (N.D.Ill.1984).

Plaintiff also claims injury by reason of his loss of employment. His claimed injury as an employee is not a basis of an independent cause of action under RICO because of the corporate injury. Plaintiff lost his job because Paragon was forced into bankruptcy. The alleged acts of fraud were directed not toward plaintiff as an employee of Paragon, but rather were directed to Paragon as a corporate entity or person. Assuming the truth of plaintiff's claim, the fraudulent misrepresentation was made to Paragon, not to any individual as such. Any injury Warren suffered as a result of this fraud, here his lost employment, was merely incidental to the corporation's injury. Plaintiff has no more standing as an employee than he does as a shareholder of Paragon. We cannot rationally justify individual employee claims under RICO where the corporate employer is a victim.

Congress granted the right to sue "any person," but it required that the asserted injury arise "by reason of" the challenged conduct. 18 U.S.C. Sec. 1963(c). Here, though plaintiff's loss of employment might be characterized in one sense to be a consequence of defendant's conduct, it hardly can be said to have been directly "caused" by the asserted conduct.

We apply, therefore, basic principles of the law of corporations in cases of this nature. See generally 1 W. Fletcher, Cyclopedia of the Law of Private Corporations Sec. 36 (rev.perm.ed.1983). Where a corporation is defrauded bringing about ultimate bankruptcy, a cause of action exists on the part of the corporation against the wrongdoer. Should the requisites of RICO be met, there may exist a federal cause of action on behalf of the corporation. Employees of the corporation who may incidentally lose their jobs...