Lerner v. Colman

• Decision Date: 17 February 2022
• Docket Number: No. 20-1984,20-1984
• Citation: 26 F.4th 71
• Parties: Sandra Colman LERNER, Plaintiff, Appellant, v. Stephen J. COLMAN; Daniel J. Flynn, III ; James F. Canavan ; Lisa Labrique; Elizabeth Colman; Karen Reidy; Kirsten Hunt; William Christopher Colman, Defendants, Appellees.
• Court: U.S. Court of Appeals — First Circuit

26 F.4th 71

Sandra Colman LERNER, Plaintiff, Appellant,

v.Stephen J. COLMAN; Daniel J. Flynn, III ; James F. Canavan ; Lisa Labrique; Elizabeth Colman; Karen Reidy; Kirsten Hunt; William Christopher Colman, Defendants, Appellees.

No. 20-1984

United States Court of Appeals, First Circuit.

February 17, 2022

Michael F. Connolly, with whom William D. Black and Rubin and Rudman, LLP were on brief, for appellant.

Dana A. Curhan for appellee Stephen J. Colman.

Andrew C. Oatway for appellee James F. Canavan, who joined in appellee Stephen J. Colman's brief and argument.

Before Howard, Chief Judge, Thompson and Kayatta, Circuit Judges.

KAYATTA, Circuit Judge.

This lawsuit arises out of a dispute concerning the disposition of assets once held by the uncle of the two principal protagonists in this case, plaintiff Sandra Colman Lerner ("Lerner") and her cousin, defendant Stephen Colman ("Stephen").¹ Because Lerner and Stephen are both citizens of the Commonwealth of Massachusetts, this lawsuit claimed a place on the docket of the United States District Court only because Lerner attempted to plead claims under the federal Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. §§ 1962, 1964(c), to which she has appended state law claims for fraud and breach of fiduciary duty. The district court found that the complaint failed in its effort to plead RICO claims. With the federal claims removed from the case, the district court then dismissed the state law claims without prejudice to their refiling in state court. Lerner now appeals, arguing that her complaint adequately stated a cause of action under RICO. For the following reasons, we affirm the judgment of the district court that this dispute belongs in a state court, not in a federal court.

I.

A.

Because we are reviewing an order dismissing a complaint for failure even to state a claim, we assume -- without deciding -- that the properly pleaded facts are true. Home Orthopedics Corp. v. Rodríguez, 781 F.3d 521, 527 (1st Cir. 2015). Those facts begin with a description of the conduct directly injuring Lerner, centering on events surrounding the death of Lerner and Stephen's uncle, Bill Colman ("Bill"). Borrowing from the complaint, we refer to these events as "the Solar Resources Scheme."

In 2003, Bill founded a company called Solar Resources, Inc. to develop land in Utah for salt extraction. About two weeks before Bill died in December 2011, Stephen allegedly caused a valuable water right in Utah to be transferred, without Bill's authorization, from Bill's personal ownership to Solar Resources. After Bill died without a will, Stephen became the personal representative of Bill's estate, with sole control of his assets. Bill's heirs by the laws of intestacy are Lerner, Stephen, and Bill's ten other nieces and nephews.

In the weeks that followed Bill's death, Stephen completed the transfer of the water right to Solar Resources by filing various materials with the Utah Division of Water Rights, including an Assignment of Water Right that contained an allegedly forged signature of Bill Colman. Accordingly, Bill's estate at the time of probate no longer included the water right, and the right was not distributed to his heirs directly.

According to the complaint, also following Bill's death, Stephen caused more than fifty percent of the shares of Solar Resources to be transferred to himself, his siblings, Bill's former wife, and Stephen's longtime friends and business associates James Canavan and Daniel Flynn -- none of whom paid a "fair" price, if any, for their shares. Lerner alleges that Canavan and Flynn knew or had reason to know that the Solar Resources stock was fraudulently obtained, but she stops short of alleging that they played any particular role in these events. By contrast, her complaint alleges that Stephen prepared various falsified documents to effectuate the stock transfers, including falsified checks and back-dated stock certificates.

Solar Resources was later sold in December 2012 for $11 million, with Stephen receiving $2.5 million for his shares alone. The proceeds from the 46.5% of the shares that continued to be held by Bill's estate were distributed to his heirs as a major component of the estate.

Finally, Lerner alleges that Stephen concealed the nature of the stock transactions from her and the other heirs to induce their consent to the sale of Solar Resources. His cover stories included telling the other heirs that the stock transfers were disbursements for investments and telling Lerner that the transfers had been gifts. Lerner only learned of the scheme in 2018, when one of her cousins told her about the "investment" cover story.

As a result of Stephen's maneuvers, Lerner contends that she missed out on a larger inheritance from Bill Colman's estate, both because Stephen prevented the water right from being directly distributed to the heirs and because he reduced by more than half the proportion of Solar Resources' value that should have passed through the estate.

B.

Stephen's conduct that directly affected Lerner ended with the diminishment of her inheritance brought about by the Solar Resources Scheme. The complaint, though, alleges four other illicit schemes carried out (to varying extents) by Stephen, with Canavan and Flynn, over the course of fifteen years. These schemes caused no direct harm to Lerner. Rather, she says that they demonstrate a pattern of fraudulent business activities that included the Solar Resources Scheme and that is sufficient to bring Stephen and his companions within the purview of RICO as a "criminal enterprise."

The first alleged scheme took place from April 1999 through at least June 2000. In this "Patriot Investments Scheme," Flynn approached an investor named George Brewster and successfully solicited nearly $1.5 million in investments to purchase and develop properties. In exchange for one of these investments, Flynn gave Brewster a promissory note for $450,000. Lerner alleges that the specific real estate project advertised to Brewster never actually existed and that a similarly named venture, managed by Stephen, received the invested funds instead.

Second, the complaint describes a scheme whereby Flynn allegedly abused his role as a listing agent for a property on East Howard Street in Quincy (the "East Howard Scheme"). In 2002, Flynn, on behalf of his company Daniel J. Flynn & Co. (DJFCO), agreed to advertise and attempt to sell the East Howard Street property as the agent of the seller, a business called LINC Property I, LLC. In early 2003, LINC agreed to sell the property for $825,000 to a trust of which Canavan was the trustee and in which Flynn held an undisclosed interest. Flynn then induced an unwitting investor -- again, George Brewster -- to give Canavan funds for the purchase of the East Howard Street property, but he told Brewster that the price was $1,325,000. Flynn allegedly pocketed both the $500,000 upcharge and the commission on the actual sale value without informing LINC of the higher value received for the property or informing Brewster of the lower cost Canavan's trust had actually paid for it. According to the complaint, after Brewster learned that the true sales price was $500,000 less than he had paid Canavan, Brewster filed suit against Flynn, Canavan, and Stephen.

Third, from 2008 through at least April 2012, Flynn allegedly misled a group of investors in what we will call the "DJF Fund Scheme." Flynn solicited twenty-five limited partners for the DJF Real Estate Opportunity Fund 1, L.P. ("DJF Fund") in 2008 and provided periodic updates between 2010 and 2012. Flynn and Stephen allegedly drafted false promissory notes purporting to reflect debts owed to the DJF Fund and prepared materials for the limited partners representing that the DJF Fund held these notes as assets. Eventually, many of the limited partners filed suit against Flynn and DJFCO alleging a combined loss of more than $9 million.

Fourth, the complaint describes a multiyear Ponzi scheme -- dubbed "the Greenleaf Property Scheme" -- which began circa 2008. The complaint alleges that Flynn induced several rounds of investors to loan money to the DJF Fund for the purchase and development of a building on Greenleaf Street in Quincy -- a building, Lerner claims, that Flynn had already purchased in 2005. Flynn, Stephen, and Canavan then allegedly used these funds to repay other investors and victims from other schemes. At least some of the Greenleaf Property investors received promissory notes purportedly drafted by Canavan or Stephen, the latter of whom also allegedly drafted fraudulent purchase and sale agreements as in-house counsel for DJFCO. The complaint states that several of these investors, too, sued Flynn upon learning he already owned the Greenleaf Property.

Finally, as an epilogue to this narrative, the complaint recounts that Flynn was indicted in 2015 for federal mail and wire fraud offenses stemming from conduct spanning from 2007 to the indictment. Flynn ultimately pleaded guilty to all charges and agreed to pay millions of dollars in restitution to seventy-three victims.

C.

Lerner brought this suit seeking treble damages under RICO from Stephen, Flynn, and Canavan (the "enterprise defendants") for the losses she suffered from the Solar Resources Scheme. Her complaint includes three RICO counts, alleging violations of 18 U.S.C. § 1962(c) (conducting a racketeering enterprise), § 1962(a) and (b) (using racketeering income and acquiring control of a business through racketeering, respectively), and § 1962(d) (RICO conspiracy). Lerner also brought Massachusetts state-law claims for fraud and breach of fiduciary duties against Stephen, and a claim for "money had and received" against his siblings, all arising out of the Solar Resources Scheme.

The defendants moved to dismiss Lerner's complaint. The district court issued a detailed opinion granting the motion, finding, as relevant to this appeal, that the civil RICO statute's...