Farag v. XYZ Two Way Radio Serv. Inc.

MEMORANDUM & ORDER Plaintiffs are a group of former shareholders of defendant XYZ Two Way Radio Service, Inc., which provides ground-transportation services. Plaintiffs allege that XYZ wrongfully terminated them and forced them to sell their shares at below-market prices. They sued XYZ and eight members of its board of directors (including Mohamed Mowad, who is XYZ’s president, in addition to serving on the board).¹ Plaintiffs assert claims under the Racketeer Influenced and Corrupt Organizations Act (“RICO”) and various state laws. Defendants move to dismiss the complaint pursuant to Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6). For the following reasons, I grant the motion to dismiss for failure to state a claim under Rule 12(b)(6). I. Background A. Factual Background The following factual allegations are drawn from the amended complaint. Defendant XYZ coordinates “black car” ground transportation services. First Amended Compl. (“FAC”) 26, ECF No. 2. Each share of XYZ entitles a shareholder to drive, or rent to a third party, one car. Id. Plaintiffs allege that in February 2019, they discovered that XYZ’s President, defendant Mowad, “had committed various wrongdoings, unethical behavior, breaches of fiduciary duty and theft, self-dealing” to benefit himself and the Board at Plaintiffs’ expense. Id. 52. The complaint is short on specifics, but Plaintiffs allege (among other things) that Defendants engaged in “oppressive conduct that destroy[ed] or substantially diminish[ed] the value” of their shares, id. 42; threatened them “on a daily basis…with arbitrary and unwarranted fines” and the “expulsion and forced sale of their shares,” id. 45; “confiscate[d]” the shares, and “ through self-dealing, convert[ed] these shares to their own use and benefit.” Id. 40. Plaintiffs contend that the forced redemption of their shares, and their concomitant expulsion from the firm, were donein retaliation for the plaintiffs having demanded an investigation into Mowad’s earlier wrongful acts. Id. 54. They say that Defendants filed a series of baseless grievances — what the parties call “10-5 violations” — against Plaintiffs.² Id. 58. Defendants then “terminated, expelled and fined all of the Plaintiffs individually herein in excess of $20,000.00 without any cause, reason, or justification.” Id. 58. Upon termination, Defendants forced Plaintiffs to sell their shares of XYZ at “an extremely diluted value below the fair market value of such shares.” Id. 54. Each share sold for $5,000, which Plaintiffs claim was a “gross undervaluation.” Id. 83. These actions, Plaintiffs allege, were all part of a long-term “scheme,” beginning in 2010, to enable members of the Board to obtain additional shares at artificially low prices. Id.

77, 119. B. Procedural History This lawsuit is the latest in a series of actions — heretofore all unsuccessful — by Plaintiffs and other former XYZ shareholders. In September 2011, a group of former XYZ shareholders, including one current plaintiff (Abdelhamid), sued XYZ and certain directors in New York State Supreme Court on behalf of themselves and “all other Shareholders of XYZ.” See Ex. 3 to Declaration of Deana Davidian (“Davidian Decl.”), ECF No. 17-3. They challenged (1) their terminations and fines, (2) the sale of their shares for “less than market value,” (3) embezzlement of funds, and (4) Mowad’s acquisition of certain XYZ shares. Id. The court dismissed the majority of these claims in April 2013, see Ex. 4 to Davidian Decl., ECF No. 17-4, and the remainder in January 2014. See Ex. 5 to Davidian Decl., ECF No. 17-5.³ In April 2019, several of the plaintiffs here sued Defendants — again in New York State Supreme Court — alleging, among other things, that (1) XYZ’s disciplinary charges against them were “false,” (2) XYZ had imposed “unwarranted” fines in “retaliation” for their having accused Mowad of misconduct, and (3) their shares were sold for less than fair market value.⁴ See Ex. 6 to Davidian Decl. 5-6, ECF No. 17-6. The court dismissed this action in July 2019. See Ex. 11 to Davidian Decl. 7, ECF No. 17-11.⁵ In December 2019, plaintiffs Abdelhamid, Abdelnaby, Chan, Elbaridi, and Farag filed yet another lawsuit against XYZ and Mowad, again in New York State Supreme Court. They challenged their terminations, alleging violations of New York Labor Law (“NYLL”), including that they were terminated “in retaliation for the complaints [they] lodged” at the February 2019 annual XYZ shareholder meeting. Ex. 12 to Davidian Decl. 10, 13, 16, 19, ECF No. 17-12. In March 2020, those plaintiffs stipulated to the dismissal of their NYLL claims with prejudice. Ex. 14 to Davidian Decl. 2, ECF No. 17-14. Defendants advise that, in addition to these unfavorable terminations in prior cases, several plaintiffs have waived claims against XYZ, either in the course of prior actions or during their separation from the company.⁶ Defendants seek to dismiss certain claims based on those releases. Defs.’ Mem. in Supp. of Mot. to Dismiss, ECF No. 16 (“Defs. Br.”), at 6, 21. I do not consider the releases at this stage, however, because these documents are outside the pleadings, and not all of the relevant documents were made part of the court record in the prior actions (such that I could take judicial notice of them here). Plaintiffs filed the instant action on September 9, 2020. ECF No. 1. They amended their complaint as of right one day later. ECF No. 2. The amended complaint alleges eight claims: one civil RICO claim, under 18 U.S.C. §1962(c) and (d) (Count Eight), and state-law claims for wrongful termination and retaliation, breach of fiduciary duty, unjust enrichment, conversion or embezzlement, and self-dealing (Counts One through Seven). Id. At a pre-motion conference in December 2021, Plaintiffs heard Defendants’ articulated bases for dismissal and then declined the Court’s invitation to amend the complaint further. See Pre-Motion Conference Tr., ECF No. 32; see also Defs.’ Ltr. Requesting a Pre-Motion Conference, ECF No. 12. Defendants then moved to dismiss for lack of jurisdiction — arguing Plaintiffs lack standing — and failure to state a claim. Defs. Br. II. Legal Standard As discussed below and in the margin, Defendants’ RICO standing argument presents no jurisdictional impediment and is properly reviewed under Rule 12(b)(6), not 12(b)(1).⁷ In the 12(b)(6) analysis, I reach the merits on only the RICO claim, as that is the sole basis for federal jurisdiction. To overcome a Rule 12(b)(6) motion, a plaintiff must plead factual allegations sufficient “to state a claim to relief that is plausible on its face.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007).⁸ A claim is plausible “when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). The Court must accept all factual allegations in the complaint as true and draw all reasonable inferences in the plaintiff’s favor. See Lundy v. Catholic Health Sys. of Long Island Inc., 711 F.3d 106, 113 (2d Cir. 2013). III. Discussion Plaintiffs level their civil RICO claim against all Defendants. For the reasons set forth below, this claim is dismissed. Plaintiffs’ state-law claims are dismissed as abandoned because Plaintiffs’ opposition brief does not address Defendants’ arguments that Plaintiffs fail to state claims for each such claim. See Pls.’ Mem. in Opp. to Mot. to Dismiss, ECF No. 20 (“Pls. Opp.”). A. RICO Claim Plaintiffs allege that Defendants violated RICO by conspiring to deprive them of the value of their XYZ stock. FAC 119. To establish a civil RICO claim, a plaintiff must allege “(1) conduct, (2) of an enterprise, (3) through a pattern (4) of racketeering activity,” as well as “injury to business or property as a result of the RICO violation.” Lundy, 711 F.3d at 119. 1. RICO Standing Defendants argue, as a threshold matter, that Plaintiffs lack standing to bring a RICO claim because they are alleging harms against XYZ and not against them personally. This argument is not jurisdictional, for the reasons set out in note 7 supra. It is also not correct, at least as applied to the instant factual allegations. “To satisfy RICO’s standing requirements, a plaintiff must demonstrate (1) a violation of section 1962; (2) injury to business or property; and (3) causation of the injury by the violation.” Motorola Credit Corp. v. Uzan, 322 F.3d 130, 135 (2d Cir. 2003). “The requirement that the injury be to the plaintiff’s business or property means that the plaintiff must show a proprietary type of damage.” Gotlin v. Lederman, 367 F. Supp. 2d 349, 356 (E.D.N.Y. 2005). It is generally settled that shareholders lack standing to bring a claim in their individual capacities for injuries to the corporation — i.e., claims that are derivative of the corporation’s injury. See, e.g., Lakonia Mgmt. Ltd. v. Meriwether, 106 F. Supp. 2d 540, 551 (S.D.N.Y. 2000) (“A decrease in value of a holder’s shares which merely reflects the decrease in value of the firm as a result of the alleged illegal conduct is derivation rather than direct in nature and cannot confer individual standing under RICO.”). New York courts have applied Delaware’s framework to determine whether a claim is direct or derivative: [A] court should look to the nature of the wrong and to whom the relief should go. The stockholder’s claimed direct injury must be independent of any alleged injury to the corporation. The stockholder must demonstrate that the duty breached was owed to the stockholder and that he or she can prevail without showing an injury to the corporation. Yudell v. Gilbert, 949 N.Y.S.2d 380, 384 (App. Div. 2012) (adopting test framed by Delaware Supreme Court in Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1039 (Del. 2004)). “Thus, under Tooley, a court should consider (1) who suffered the alleged harm (the corporation or the stockholders); and (2) who would receive the benefit of any recovery or other remedy (the corporation or the stockholders individually).” Yudell, 949 N.Y.S.2d at 384. Plaintiffs satisfy this requirement because they allege injuries that are distinct from injuries to the corporation itself, and Plaintiffs themselves — not XYZ — would receive the benefit of any recovery. They claim that Defendants “confiscate[d]” and “ convert[ed],” or improperly redeemed, the shares they held, FAC 40, rather than simply diminishing the value of those shares by looting the corporation. See, e.g., id.