Gallagher v. Canon USA, Inc.
| Decision Date | 24 July 1984 |
| Docket Number | No. 84 C 459.,84 C 459. |
| Court | U.S. District Court — Northern District of Illinois |
| Parties | Patrick J. GALLAGHER, Plaintiff, v. CANON U.S.A., INC., Defendant. |
Joseph R. Marconi, Douglas K. Morrison, Chicago, Ill., for plaintiff.
David C. McLauchlan, Mark A. Kreger, Lord, Bissell & Brook, Chicago, Ill., for defendant.
Patrick Gallagher (Gallagher") has moved pursuant to Fed.R.Civ.P. ("Rule") 12(b) to dismiss the Amended Counterclaim of Canon U.S.A., Inc. ("Canon"). Gallagher contends Canon has failed (1) to allege standing to sue under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961-1968, and (2) to plead fraud with sufficient particularity as required by Rule 9(b). For the reasons stated in this memorandum opinion and order, Gallagher's motion is granted and Canon's Counterclaim is dismissed without prejudice.
Gallagher's Complaint alleges Canon orally agreed to make Gallagher an authorized dealer of Canon office equipment, then breached that agreement, causing Gallagher to go out of business after he had spent over $250,000 opening a dealership. Canon assertedly breached its agreement by refusing to permit its majority-owned subsidiary Ambassador Office Equipment, Inc. ("Ambassador") to sell Gallagher Canon office equipment. Gallagher seeks not only reliance damages but also more than $1 million in lost profits and appreciation.
After this Court granted Gallagher's motion for a more definite statement of the original Counterclaim, Canon filed an Amended Counterclaim. Canon's Amended Counterclaim charges Gallagher participated in a pattern of racketeering activity in violation of RICO, alleging:
Canon has thus added very little since this Court required it to provide a more definite statement. It has made some wording changes and has added allegations reported in the third and fourth numbered paragraphs above. That is not enough to escape dismissal without prejudice.
Canon urges it can bring a RICO claim because it is a "person injured" under 18 U.S.C. § 1964(c) ("Section 1964(c)"). Where however Canon seeks RICO standing simply as a shareholder of an injured corporation, it stretches RICO far beyond standing notions employed for any other type of action. Accordingly, the Amended Counterclaim does not survive unless it can be recast to allege only wrongs by which Canon was injured in its own right, not just through the value of its Ambassador stock.
In this case Canon makes clear it is affected by Gallagher's alleged behavior principally through Gallagher's effect on the value of Canon's subsidiary Ambassador. If a majority shareholder can sue under RICO solely for injury to the value of its stock, no logical reason exists for the unavailability of a like claim to a minority shareholder. It is axiomatic that the benefits of controlling a corporation do not include the right to profit from the legal rights of that corporation to the exclusion of minority shareholders. So the issue here is whether shareholders in general can sue under RICO directly for injury to the corporations in which they hold stock.
In the broadest sense of the term shareholders have been "injured in ... their property" under Section 1964(c) when they suffer a decline in the value of their stock. However the courts' willingness to enforce RICO's broad language (see Schacht v. Brown, 711 F.2d 1343 (7th Cir.) (en banc), cert. denied, ___ U.S. ___, ___, 104 S.Ct. 508, 509, 78 L.Ed.2d 698 (1983)) does not require, as Canon seems to suggest, that RICO "be interpreted woodenly and without regard to its aim" (id. at 1356). In this case there is no indication whatever Congress intended courts to disregard the corporate entity in interpreting Section 1964(c). Under state law the appropriate way for a shareholder to assert the rights of its corporation is by bringing a derivative action — if the corporation will not act for itself. See, e.g., Poliquin v. Sapp, 72 Ill.App.3d 477, 480, 28 Ill.Dec. 615, 618, 390 N.E.2d 974, 977 (4th Dist. 1979).
Canon argues it is more than a "mere shareholder" and therefore can sue in its own name much as Waste Recovery Corp. v. Mahler, 566 F.Supp. 1466, 1468 (S.D.N. Y.1983) found in permitting a holding company to proceed under RICO. First it must be noted Waste Recovery proceeded (id.) on the same basis articulated here, that a shareholder "may not sue to redress damage done to him merely by virtue of a decline in value of his stock." Thus the court addressed the propriety of direct as opposed to derivative action by reference to pre-RICO cases — something Canon has not done here. More important, however, there appears to be no predicate (so to speak) for direct action in this case as there was in Waste Recovery. Canon denies any contractual relationship between Gallagher and Canon (Ans. ¶¶ 5-6), and its Amended Counterclaim does not provide the basis for assuming any breach by Gallagher of any duty owing directly to Canon.2
Canon of course disavows that its Amended Counterclaim is based principally on its status as a shareholder (Mem. 6):
Canon's relationship is far more substantial than that of a "mere" shareholder. Canon has alleged injuries to its business and property other than diminution in the value of its stock. As alleged in its Amended Counterclaim, Canon organized Ambassador for the purpose of acting as the sole distributor of Canon office equipment in the Chicago area. Gallagher's racketeering activity caused the virtual destruction of Ambassador's ability to function as an effective dealer of Canon equipment, which in turn resulted in lost sales by Canon and damage to Canon's business reputation.
That argument however rests on the mistaken assumption Canon can recover for damages to its stock once it shows it is more than a "mere shareholder." Damage to the value of the Ambassador stock is not a proper subject of an individual claim in any event.3
Canon's allegations are not sufficiently precise to ascertain whether "lost sales by Canon and damage to Canon's business reputation" are the proper subjects of an individual action by Canon, rather than simply mirroring indirectly what has really been suffered by Ambassador. Moreover where a pleading is defective it is not this Court's duty to make such a determination in the first instance.4 At the very least Canon must redraft the Amended Counterclaim so it alleges only wrongs actionable by direct rather than derivative action. Before it again submits any such redraft, however, Canon is directed to take a hard...
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