Klapper v. Commonwealth Realty Trust

• Decision Date: 22 June 1987
• Docket Number: Civ. A. No. 85-686CMW.
• Citation: 657 F. Supp. 948
• Parties: Mildred and Israel T. KLAPPER, Plaintiffs, v. COMMONWEALTH REALTY TRUST, an unincorporated real estate investment trust organized under the laws of the Commonwealth of Pennsylvania; Country & New Town Properties, Inc., a Delaware corporation; C.N.T. Properties (U.S.), Inc., a Delaware corporation; Geoffrey A. Adkin, David Newton, Gerald M. Newton, Edward B. Stokes and William Zucker, Defendants.
• Court: U.S. District Court — District of Delaware

657 F. Supp. 948

Mildred and Israel T. KLAPPER, Plaintiffs, v. COMMONWEALTH REALTY TRUST, an unincorporated real estate investment trust organized under the laws of the Commonwealth of Pennsylvania; Country & New Town Properties, Inc., a Delaware corporation; C.N.T. Properties (U.S.), Inc., a Delaware corporation; Geoffrey A. Adkin, David Newton, Gerald M. Newton, Edward B. Stokes and William Zucker, Defendants.

Civ. A. No. 85-686CMW.

United States District Court, D. Delaware.

March 31, 1987.

Stay Granted and Appeal Certified June 22, 1987.

Irving Morris, Kevin Gross, and Carolyn D. Mack, of Morris and Rosenthal, Wilmington, Del., Martin H. Philip, of counsel, Palmerton, Pa., for plaintiffs.

William Prickett, John H. Small, and Wayne Carey, of Prickett, Jones, Elliott, Kristol & Schnee, Wilmington, Del., Andrew J. Levander, and Adam B. Rowland, of Shereff, Friedman, Hoffman & Goodman, of counsel, New York City, for defendants.

OPINION

CALEB M. WRIGHT, Senior District Judge.

The plaintiffs, minority shareholders in a Real Estate Investment Trust, filed this action against the controlling stockholders of the Trust, alleging, inter alia, violations of the Racketeering Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961, et seq. The plaintiffs' amended complaint charged that defendants, the controlling stockholders, engaged in a "pattern" of racketeering activity in violation of RICO. The plaintiffs further alleged that the pattern of racketeering activity consisted of: (1) mail and wire fraud relating to the diversion of a business opportunity; (2) mail and wire fraud relating to the usurpation of Trust dividends; and (3) mail and wire fraud in connection with attempted securities fraud.

Defendants' motion to dismiss countered that the plaintiffs lack standing to bring a RICO action because any injury was to the Trust; that the plaintiffs failed to adequately allege a RICO "enterprise"; and that plaintiffs did not sufficiently allege a "pattern" of racketeering activity. Defendants also filed a Motion for Rule 11 Sanctions against plaintiffs' attorneys for bringing frivolous claims.

This matter was referred to a Magistrate who, after hearing arguments and reviewing briefs on the matter, issued a report finding that plaintiffs did not have standing to bring this action. The report also suggested that the action be dismissed because the plaintiffs failed to adequately allege a RICO enterprise or a pattern of racketeering activity. The report, however, recommended against Rule 11 sanctions.

Although the Court agrees with the Magistrate's Report that Rule 11 sanctions should not be imposed, it cannot concur that the action should be dismissed. Accordingly, this Court holds that: (1) plaintiffs have standing to maintain a RICO violation; (2) the plaintiffs adequately alleged a RICO enterprise for purposes of 18 U.S.C. §§ 1962(a) and (b), but not 18 U.S.C. § 1962(c); and (3) that plaintiffs adequately alleged a "pattern of racketeering activity." The Court denies defendants' motion to dismiss and grants plaintiffs leave to amend the complaint.

FACTS

Plaintiffs Mildred and Israel T. Klapper (the "Klappers") own 108 shares of the Commonwealth Realty Trust (the "Trust"), a Pennsylvania business trust organized to own and hold real estate. The Klappers commenced this class action lawsuit on November 25, 1986, to challenge the proposed merger between the Trust and C.N.T. Properties (U.S.), Inc. ("Properties"). Properties is a newly formed Delaware corporation that is 90% controlled by Country and New Town Properties, Inc. ("CNTP") — another Delaware corporation that owns and otherwise deals in real estate. CNTP is a wholly owned subsidiary of Country and New Town Properties (Holdings) B.V. ("Holdings"), a Netherlands corporation. Holdings, in turn, is controlled by two British entities: The British and Commonwealth Shipping Company, PLC ("B & C"), and the Country and New Town Properties, p.l.c. ("C & N"). See Diagram at Appendix One.

The two British companies — B & C and C & N — and their Netherlands subsidiary, Holdings, organized the Delaware corporation CNTP to hold real estate in the United States. The proposed merger would have joined the Trust with Properties, with Properties being the only surviving corporation. Only Properties, the Trust, and CNTP are corporate defendants in this action. Collectively, however, B & C, C & N, Holdings and CNTP constitute the "Controlling Stockholders" of the Trust.

The individual defendants in this action — Adkin, D. Newton, G. Newton, Stokes and Zucker — are all trustees of the Trust.

In 1981, the Controlling Stockholders, through CNTP, gained undisputed control of the Trust. (They currently own approximately 74% of its outstanding shares). By 1983, the Controlling Stockholders had also positioned their nominees in key management positions. Although defendants Stokes and Zucker are independent members of the Board of Trustees, the other three members — Adkin, D. Newton and G. Newton — are all affiliated with the "Controlling Stockholders". G. Newton, for example, is Chairman and Managing Director of C & N, Director of Holding, Chairman of the Board of CNTP, Chairman of the Board of Property, and Trustee of the Trust.

The heart of plaintiffs' contention is that a series of transactions executed by the Controlling Stockholders constituted a pattern of racketeering activity in violation of the Racketeering Influenced and Corrupt Practices Act ("RICO"), 18 U.S.C. §§ 1961 et seq. These transactions are: (1) the Plainsboro Transaction; (2) the CCM Arrangement; and (3) the attempted merger of Trust and Properties.

The Plainsboro transaction involved a loan of $4,075,000 made by the Trust to the Plainsboro Limited Partnership ("PLP"), a New Jersey Limited partnership in which CNTP is both a general partner and a limited partner in another entity which is also a general partner of PLP. The loan was to finance a land transaction in Plainsboro, New Jersey. The loan was to enable PLP to acquire and develop a 40-acre tract of land. PLP gave the Trust a mortgage to secure the loan, but this mortgage was wholly subordinated to existing mortgages as well as to any construction financing which PLP obtains for development of the land. Developing property is the type of activity in which the Trust engages.

The second transaction bearing upon the relationship between the Controlling Stockholders and the Trust is an arrangement with Country and Commonwealth Management, Inc. ("CCM"). The Trust made CCM a wholly-owned subsidiary of CNTP which annually receives substantial money from the Trust for "real estate and advisory services." Gerald Newton, the Chairman of the Board of CNTP, is also Chairman of the Board of CCM. The Controlling Stockholders, therefore, were allegedly usurping a corporate opportunity through the PLP transaction and diverting dividends from stockholders in the CCM transaction. Both allegedly directly injured the plaintiff stockholders by reducing the dividends they were to receive.

The third important transaction was the aborted Trust-Properties merger — the incident that triggered this litigation. On June 19, 1985, defendants Stokes and Zucker, Trustees of the Trust, were appointed to act as a Special Committee to consider the merger of Trust into Properties. The Special Committee then retained independent legal counsel and hired Management Planning, Inc., an independent investment and financial consulting firm, and Jackson Cross Company, an independent real estate appraiser. The Special Committee chose not to retain an independent financial advisor to act for the minority shareholders in the Trust. Instead, using the management company and real estate advisor, the Special Committee eventually determined that the fair price per share for the merger was $12.70.

On September 26, 1985, the Trust entered into a Merger Agreement that required all Trust shareholders other than CNTP and its affiliates to exchange their shares at $12.70 on the merger date: November 26, 1985. The Merger Agreement contained, as a condition precedent, a clause providing that "no action or proceeding before any court ... shall have been commenced (and be pending) ... against the Trust, CNTP, Properties or any of their respective affiliates, associates, offices, directors or trustees seeking to challenge the Agreement or Merger."

On November 4, 1985, the Trust sent to all shareholders a Notice of Merger disclosing the details of the merger and the Special Committee's price evaluation. The Notice of Merger specifically rejected the conclusions of an earlier real estate appraisal that had been performed by Strouse, Greenberg and Co. (The appraisal had been made in connection with the financial statement prepared by CNTP's parent company C & N). The appraisal valued the Trust's Pennsylvania office buildings at an amount $11 million higher than the value determined by the Special Committee's advisor. If this figure were accurate, the price per share for merger purposes should have been $19.70 rather than the $12.70 determined by the Special Committee. In the Notice, the Special Committee rejected the Strouse, Greenberg appraisal as having been for a different purpose and as having been based solely "on the income approach." It appears, however, that the Jackson Cross appraisal was also based on the income approach.

Three weeks after the Notice went out to shareholders, on November 25, 1985 — the eve of the scheduled merger — the defendants aborted the transaction because of litigation brought in Pennsylvania State Court by a Philadelphia investor who owned 59,450 shares of the Trust. I. Wistar Morris, III v. Commonwealth Realty Trust, et al., Pennsylvania Court of Common Pleas, Philadelphia County, Civil Trial Division, November Term, 1985, No. 3421. The merger was not terminated until the close of business on that day. The very same day, however, plaintiffs in the...