Lorenz v. CSX Corp.
1 F.3d 1406, 1993 U.S. App. LEXIS 20325, 26 Fed. R. Serv. 3d 435 (1993)
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Rule of Law:
Under the Racketeer Influenced and Corrupt Organizations Act (RICO), a parent corporation cannot be the liable 'person' and its nearly wholly-owned subsidiary the 'enterprise' when the subsidiary is merely carrying out the affairs of the parent, as the two entities are not sufficiently distinct for a claim under 18 U.S.C. § 1962(c).
Facts:
- Prior to December 13, 1977, Plaintiffs purchased convertible debentures issued by the Baltimore and Ohio Railroad Company (B&O).
- B&O was 99.63% owned by Chesapeake and Ohio Railroad Company (C&O), which was a wholly-owned subsidiary of CSX Corporation's corporate predecessor.
- To segregate its non-rail assets, B&O transferred them to a wholly-owned subsidiary, Mid Allegheny Corporation (MAC).
- On December 13, 1977, B&O's board declared a dividend of MAC stock to be distributed to B&O shareholders, but did so without providing any advance notice.
- This lack of notice prevented the debentureholders from exercising their option to convert their debentures into B&O common stock in time to receive the valuable MAC dividend.
- The plaintiffs in this action are debentureholders who held their debentures on December 13, 1977, but subsequently sold them without ever converting them into B&O stock.
- These plaintiffs were excluded from the remedy provided to other debentureholders in prior, related litigation known as the PTC/Guttmann litigation.
- The indenture trustee for the debentures was Chase Manhattan Bank.
Procedural Posture:
- Plaintiff Ethel B. Savin filed a class action complaint in the U.S. District Court for the Southern District of New York, which was then transferred to the Western District of Pennsylvania.
- The Lorenz plaintiffs filed a similar class action complaint in the U.S. District Court for the Western District of Pennsylvania.
- The defendants filed motions to dismiss the complaints for failure to state a claim under Fed. R. Civ. P. 12(b)(6).
- The district court denied a motion by Savin to amend her complaint.
- In a series of orders, the district court dismissed all claims against all defendants, including claims for RICO violations, breach of fiduciary duty, and violations of section 10(b) of the Securities Exchange Act.
- The plaintiffs appealed the district court's final orders of dismissal to the U.S. Court of Appeals for the Third Circuit.
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Issue:
Does a civil RICO claim under 18 U.S.C. § 1962(c) fail as a matter of law when it alleges that a parent corporation (the 'person') conducted the affairs of its nearly wholly-owned subsidiary (the 'enterprise') through a pattern of racketeering activity?
Opinions:
Majority - Cowen, Circuit Judge.
Yes, a civil RICO claim under 18 U.S.C. § 1962(c) fails when the alleged 'person' and 'enterprise' are not distinct entities. Citing its precedent in B.F. Hirsch v. Enright Refining Co. and Brittingham v. Mobil Corp., the court reasoned that the plain language of § 1962(c) requires the defendant 'person' to be separate from the 'enterprise' it allegedly corrupts. A subsidiary that merely acts on behalf of, or for the benefit of, its parent company does not satisfy this distinctiveness requirement. Here, the plaintiffs' own allegations suggest that B&O (the enterprise) was not a passive victim but acted in concert with its parent companies, CSX and C&O (the persons), to carry out their business, thereby failing to establish the necessary distinction between the person and the enterprise.
Analysis:
This decision reinforces the Third Circuit's strict interpretation of the RICO distinctiveness requirement, particularly in the context of corporate families. By holding that a parent and its subsidiary are not distinct for RICO purposes when the subsidiary is merely implementing the parent's policies, the court significantly raises the pleading standard for plaintiffs. This precedent makes it substantially more difficult to hold parent corporations liable under § 1962(c) for actions taken through their subsidiaries, requiring plaintiffs to allege specific facts showing the parent played a role in the fraud that was truly distinct from the subsidiary's actions. The case also reaffirms the principle that the duties of a corporation and an indenture trustee to debentureholders are strictly defined by the contract (the indenture) and are not expanded by fiduciary principles or federal securities laws.
