## Facts

- This civil action alleged Racketeer Influenced and Corrupt Organizations Act (RICO) violations tied to a troubled real-estate development that included a country club and golf course.
- Count I of plaintiffs’ third amended complaint (the “Paganica Supper Club Scheme”) was brought by plaintiffs Schwartz and Meier, who were the major shareholders of S & M, Inc. (S & M).
- The country-club complex was owned by Paganica, Inc. (Paganica), controlled by Gary Dinges; within the complex, S & M operated the pro shop and supper club under a lease.
- On April 1, 1981, Paganica and S & M entered into a Management Agreement under which S & M took over operations of the complex and received an option to purchase the complex and golf course for $1 million.
- The Management Agreement included an express promise that the property subject to the purchase option would not be further encumbered; the agreement also included stock-related provisions involving S & M.
- Regulatory action and financial distress affected the development: the EPA halted lot sales due to water/sewer problems and required repurchases, leading Paganica toward bankruptcy and prompting efforts to refinance and restructure.
- Dinges and others devised a plan to create Rexmoor Properties, Inc. (Rexmoor), refinance Paganica’s debt, transfer assets, and retire debt through sales of Rexmoor stock; Rexmoor’s offering later faced setbacks including broker withdrawals and SEC intervention.
- In Count I, Schwartz and Meier alleged that defendants carried out fraudulent acts (including alleged mail fraud) in connection with refinancing and transfers that, in effect, impaired rights associated with the country-club property and the purchase option.
- Defendants Mark Youngers, Robert Simpson, and Fred Shaffer (movants) were officers and/or directors of financial institutions involved in financing Rexmoor-related projects; Youngers was also a director of Paganica.
- Movants sought summary judgment on Count I, arguing that Schwartz and Meier, suing in their individual capacities, were not the proper parties to assert a RICO claim because any injury was to S & M (the option holder), making the shareholders’ harm merely derivative.

## Issues

1. Whether Schwartz and Meier, as individual shareholders (and signatories to the Management Agreement), were the real parties in interest with standing to assert a civil RICO claim for alleged injury tied to the country-club purchase option.
2. Whether Schwartz and Meier showed a distinct personal injury or a special duty owed directly to them by movants that would permit an individual (non-derivative) RICO claim.

## Decision

- The court granted summary judgment to Youngers, Simpson, and Shaffer on Count I.
- The court treated the dispositive question as whether the plaintiffs to Count I were the proper parties to assert the RICO claim (i.e., the real parties in interest).
- The court concluded that, although Schwartz and Meier were parties to the Management Agreement, S & M—not Schwartz and Meier as individuals—held the option to purchase and the related “no further encumbrance” protection.
- Because the option and related contractual protections ran to S & M, any alleged impairment of those rights constituted injury to S & M; any drop in the value of Schwartz and Meier’s ownership interests was indirect and did not support an individual RICO claim.
- The court rejected plaintiffs’ attempt to rely on a “special duty” theory to convert the alleged corporate injury into a personal one.
- The court reserved ruling on other claims not addressed in this Memorandum and Order; as to Simpson, who was implicated only in Count I, the ruling disposed of the case against him.

## Legal Principles

- Under general corporate law, shareholders ordinarily cannot sue individually for injuries that are suffered by the corporation; a decline in the value of a shareholder’s interest is typically an indirect injury.
- This limitation applies in civil RICO actions; RICO does not allow shareholders to recover personally for damages that belong to the corporation.
- Federal Rule of Civil Procedure 17 requires that an action be prosecuted in the name of the real party in interest; when the corporation holds the right allegedly harmed, the corporation is the proper plaintiff.
- A shareholder may sue directly only when the shareholder pleads and proves (a) a distinct injury separate from the corporation’s injury or (b) breach of a special duty owed directly to that shareholder.
- Being a shareholder, and even being a signatory to an agreement, does not create individual standing when the substantive right at issue (here, the purchase option and related protection) belongs to the corporation.

## Conclusion

The court held that Schwartz and Meier could not pursue Count I as individual plaintiffs under civil RICO because the purchase option and the promise against further encumbrances belonged to S & M, making any alleged harm a corporate injury and any shareholder loss merely indirect; plaintiffs also failed to show a distinct personal injury or a special duty owed to them by the movants, so summary judgment was entered for Youngers, Simpson, and Shaffer on Count I.


Schrag v. Dinges, 825 F. Supp. 954 (1993)