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.