We use cookies to better understand how you use our site and to improve your experience by personalizing content. Please review our updated Privacy Policy and Terms of Use. If you accept the use of cookies, please click the "I accept" button.I acceptI declineX
Skip navigational links

U.S. Court in Pennsylvania Dismisses Charitable Donors' RICO Claim Against Nonprofit Organization Leadership


HLD, v. 28, n. 10 (October 2000)

U.S. Court in Pennsylvania Dismisses Charitable Donors' RICO Claim Against Nonprofit Organization Leadership

Several charitable donors to and beneficiaries of the Allegheny Health Education and Research Foundation ("AHERF") instituted a class action in federal court in Pennsylvania against the AHERF leadership and governance ("defendants"), alleging civil violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO") in that the AHERF leadership had wrongfully applied endowments and grants held in AHERF's custody. Seventeen defendants moved to dismiss.

The U.S. District Court for the Eastern District of Pennsylvania granted the motions to dismiss. The decision is significant because it confirms traditional charitable trust principles regarding limitations on the standing rights of donors. Plaintiffs in the case fell into two separate categories: "donor plaintiffs," consisting of certain individuals and an organization that had contributed funds to AHERF in grants or endowments to be used for specific purposes relating to research, medicine, patient care, education, lectureships, and so forth, and "beneficiary plaintiffs," consisting of several individuals who were designated as named beneficiaries or recipients of grants or endowments held by AHERF pursuant to written medical research/teaching grant contracts. Defendants were "the inner circle of officers of AHERF," the members of the Executive Committee of the Board of Trustees of AHERF, and Mellon Bank.

Plaintiffs' RICO allegation was that defendants had wrongfully seized and misappropriated their restricted endowment funds and grants held in AHERF's custody. Specifically, plaintiffs alleged (1) that defendants misapplied substantial sums from various endowments and accounts for "unauthorized purposes," including the provision to themselves of inappropriate compensation and benefits and repayment of an $89 million loan to Mellon Bank and (2) that the alleged misuse of AHERF funds was part of a larger fraudulent arrangement to maintain the corporate existence of AHERF for as long as possible to facilitate further misapplication of corporate funds for defendants' own benefit. Defendants responded that plaintiffs' actions should be dismissed for lack of standing to bring a RICO claim and for failure to state a cause of action under RICO. The court agreed with defendants' position.

Perhaps the most relevant of the issues addressed by the court was the issue of standing. In order to have standing to bring a RICO claim, (1) the plaintiff must have been injured in his business or property and (2) that injury must have been proximately caused by the alleged RICO pattern. The court concluded that none of the plaintiffs had had the requisite property interest in the subject endowments and grants sufficient to create standing.

With respect to the donor plaintiffs, the court observed that "a property interest is created in a donation when a right of reverter, right to modify or right to redirect is retained by the donor." Charitable trust law has traditionally provided that donors/settlors lack standing to challenge the actions of directors/trustees of charitable corporations unless the donor/settlor has reserved a definite interest in the trust property. Whether in any given case the settlor desired to give a determinable interest only and to reserve a possibility of reverter is a factual question that must be reviewed under close scrutiny; a court will not imply such a limitation absent clear proof that a limitation was granted or reserved. Indeed, the court observed that Pennsylvania courts have not recognized an implied possibility of reverter. In the instant case, the court found that none of the subject endowment agreements had provided any of the donor plaintiffs any rights of reverter, rights to modify, rights to redirect, or any other power to discontinue the endowment and withdraw the subject funds. Accordingly, the court concluded that the donor plaintiffs had failed to establish any standing under RICO to sue because they had failed to allege any injury to a business or property interest: "[w]here there is a conveyance to a corporate grantee, the addition of the words, 'for no other use or purpose whatsoever' is not of itself sufficient to create a base fee where the purpose expressed in the limitation and in the corporate charter are similar."

With respect to the beneficiary plaintiffs, the issue was not whether they had standing to enforce the trusts, but whether they had standing to recover damages thereunder. The court referred to the Restatement (Second) of Trusts in observing that "the remedies for the failure of the trustees of a charitable trust to perform their duties under the trust are strictly equitable" and that, "if the trustee is under a duty to pay money immediately and unconditionally to the beneficiary, the beneficiary can maintain an action at law against the trustee to enforce payment." The court agreed with the beneficiary plaintiffs that AHERF was holding grant money for them for the purposes of funding their research and that AHERF had a duty to pay them from those funds. Nevertheless, the corporate obligation to pay was not unconditional but rather was restricted to the specific uses for which the money was granted. Accordingly, although the beneficiary plaintiffs clearly had an interest in the funds, the court found the fact that their interest was limited by the grant restrictions and conditions and was not alienable without valid restraint on alienation meant that the interest did not rise to the requisite property interest for which they could recover damages.

Further, even though the court concluded that all of plaintiffs' RICO claims should be dismissed against all plaintiffs for their failure to allege a property interest, the court also addressed defendants' other arguments. The first such argument was that plaintiffs had failed to allege facts sufficient to establish that the RICO pattern complained of was the proximate cause of one's injury. The court concluded that the donor plaintiffs' injuries were too remote to confer upon them standing, but that the beneficiary plaintiffs had indeed pleaded injuries that were directly caused by the alleged racketeering activities. The second such argument challenged the RICO claims themselves. The court concluded that plaintiffs' RICO claims could be dismissed for failure to plead those claims adequately.

Although the RICO nature of plaintiffs' claims could be regarded as somewhat unusual, the court's decision may be welcomed by governance of nonprofit institutions, including hospitals and health systems, to the extent that it confirms existing charitable trust law. The decision may be useful as such institutions deal with the growing trend of third parties, such as donors and charitable beneficiaries, to assert standing and challenge the business practices of nonprofit organizations.

Brown v. Abdelhak, No. 98-6688 (E.D. Pa. Aug. 23, 2000) (17 pages).

Health Lawyers thanks Michael W. Peregrine, of Gardner, Carton & Douglas, in Chicago, Illinois, and James R. Schwartz, of Manatt, Phelps & Phillips, LLP, in Los Angeles, California, for writing the above summary.

© 2018 American Health Lawyers Association. All rights reserved. 1620 Eye Street NW, 6th Floor, Washington, DC 20006-4010 P. 202-833-1100 F. 202-833-1105