DeMauro v. DeMauro ( 1997 )

UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
No. 96-2082
ANNETTE B. DeMAURO,
Plaintiff, Appellant,
v.
JOSEPH M. DeMAURO, EDWARD MARTIN, DeMAURO CO., INC.,
NICHOLAS DeMAURO, TRI-AREA DEVELOPMENT CO., INC. and JOAN MARTIN,
Defendants, Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Reginald C. Lindsay, U.S. District Judge]
Before
Boudin, Circuit Judge,
Bownes, Senior Circuit Judge,
and Lynch, Circuit Judge.
S. James Boumil for appellant.
Kathleen M. Morrissey with whom Bernard A. Dwork, Roger T.
Manwaring, Barron & Stadfeld, P.C., Richard L. Fox and Carragher & Fox
were on brief for appellees Edward Martin, DeMauro Co., Inc., Nicholas
DeMauro, Tri-Area Development Co., Inc. and Joan Martin.
June 11, 1997
BOUDIN, Circuit Judge. In this case, one of the
participants in a pending divorce action has invoked the
federal racketeering statute to challenge asset transfers by
her spouse. The district court responded by dismissing the
complaint without prejudice on abstention grounds. Because
dismissal was on the pleadings, we assume the truth of
statements in the complaint, cautioning that they have yet to
be proved.
Annette and Joseph DeMauro were married in 1979. Joseph
worked
in
the construction business and, according to Annette,
earned "millions of dollars," promising to share monies with
Annette. But the marriage proved less successful than his
business. The couple separated, and in 1994, Annette--a New
Hampshire resident--sued for divorce in New Hampshire state
court.
The divorce action has been a bitter and prolonged
contest. At various times, Joseph has refused to pay spousal
support
orders (which total more than $250,000), has failed to
appear for court proceedings, has resisted discovery requests
concerning his income and property interests by invoking the
Fifth
Amendment,
and
has
been held in contempt of court. After
more than two years, the divorce action remains unresolved.
In
May
1996,
Annette
filed the instant suit in the federal
district court in Massachusetts. The complaint named Joseph
and
five
other defendants: Joseph's 42-year-old son, Nicholas
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DeMauro; Joseph's sister and brother-in-law, Joan and Edwar
ons allegedly controlled by Joseph and
icholas--DeM
auro Co., Inc. and Tri-Area Development Co., Inc.
Joseph
d
Martin;
and
two
corporati
N was alleged to have a residence in Massachusetts and
both corporations had offices in the state.
The
complaint
set
forth
a RICO claim for civil conspiracy,
18 U.S.C. S 1961 et seq., specifying predicate racketeering
acts of (1) mail fraud, 18 U.S.C. S 1341, (2) wire fraud, 18
U.S.C. S 1343, and (3) "extortionate threats," 18 U.S.C.
S 1951. The complaint also alleged pendent state-law claims1
for intentional infliction of emotional distress, breach of
fiduciary
duty,
conspiracy, fraudulent conveyances, and illegal
telephone recordings.
In
support
of the RICO claim, the complaint charged inter
alia that Joseph and the other defendants fraudulently
concealed
from
Annette
separate and marital property to prevent
her
from
sharing in these assets. Annette alleged that Joseph
and the other defendants
by means of false pretenses, representations, and
devices established bank and investment accounts in
Switzerland, [the] Middle East, France,
Liechtenstein, several states of the United States
and
various
and sundry other locations most of which
accounts
were established under the names of straws,
sham trusts, shell companies and phony
1
Diversity
jurisdict
ion was not available because although
Joseph
is
apparently not a New Hampshire resident, Annette and
the Martins are New Hampshire residents, thus defeating the
complete
diversity
requirement. Casas Office Machines, Inc. v.
Mita
Copystar America, Inc., 42 F.3d 668, 673 (1st Cir. 1994).
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"foundations,
" all designed to conceal the location,
extent, and existence of assets from [Annette] and
persons with whom [Joseph] did business.
The alleged activity was undertaken not by Annette's
husband
alone,
but
also
by others who comprised an alleged RICO
"enterprise," and it involves alleged concealments "well in
excess
of
a
million dollars." And, allegedly, Joseph not only
threatened to deprive Annette of assets but also boasted that
he had bribed foreign officials to secure himself a false
identity and foreign passport.
In June 1996, all the defendants except Joseph moved to
dismiss
the
suit
on
various grounds, including lack of standing
to
bring
RICO claims and failure to plead fraud with requisite
particularity,
Fed.
R.
Civ. P. 9(b). Joseph did not join these
motions because he had not yet been served process, despite
efforts
by
Annette
to
locate and serve him. Joseph was finally
served with process while appearing involuntarily in New
Hampshire state court, having been arrested and brought there
for a hearing on his failure to pay ordered spousal support.
On July 26, 1996, the district judge issued a seven-page
order.
He
expressed
doubt whether Annette had shown a property
interest protectible under the civil RICO statute; but he
ultimately did not decide this issue and instead dismissed
without
prejudice Annette's claims against all the defendants.
The dismissal was based upon the doctrine of abstention
established in Burford v. Sun Oil Co., 319 U.S. 315 (1943).
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Rather than staying the federal proceedings, the court
dismissed, noting that Annette could
replead if and when she can show a "property" right
which . . . has been denied her by the defendants'
allegedly illegal transfers--that is, after the
resolution of the divorce action and the attendant
allocation of marital assets.
The parties had not addressed the possibility of
abstention
in
their
filings. In August 1996, Annette moved for
reconsideration, arguing that abstention was not proper and
that, if it were proper, the court should stay proceedings
rather
than
dismissing
the action. The court denied her motion
without comment. Annette now appeals.
1. For reasons that will become evident, we begin with
the threshold issue bypassed by the district court, namely,
whether the plaintiff has made out a claim of "injury" to her
"business
or
property,"
as is required for a civil RICO damages
action. 18 U.S.C. S 1964(c). This is sometimes described as
a "standing" issue. There is plainly a case or controversy
under
Article III; but the statutory precondition of injury to
business or property must also be met. Sedima, S.P.R.L. v.
Imrex Co., 473 U.S. 479, 496 (1985).
One might think it obvious that a precondition in a
federal
statute
would
be
defined uniformly by federal law. Cf.
Agency Holding Corp. v. Malley-Duff & Assoc., Inc., 483 U.S.
143, 147-49 (1987) (civil RICO statute of limitations). This
is especially so where the same phrase--injury to business or
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property--is also a long-standing requirement under section 4
of the Clayton Act, 15 U.S.C. S 15(a). Yet, the RICO
precedents are filled with references to state property law,
which is often said to govern by implicit cross-reference.
E.g., Doe v. Roe, 958 F.2d 763, 768 (7th Cir. 1992) (citing
cases).
Some role does exist for state law. There is no general
federal law of property transfers, so the question who owns a
piece
of
property
is
likely to be settled by state law. On the
other hand, one might expect federal law to decide whether a
given
interest, recognized by state law, rises to the level of
"business
or
property,"
or whether "injury" has been done to it
by
the
acts
alleged.2 Where to set the "business or property"
threshold depends on federal statutory purpose, and that
purpose is likely to support a definition that is uniform
throughout the country.
In all events, the assets that Annette ultimately claims
to have been concealed are "property" by any definition: the
complaint
alleges fraudulent concealment and transfers of real
property
and
bank account funds by Joseph. One difficulty--so
far as we can tell from the undeveloped record--is that most
(perhaps all) of this property may have been held from the
2
E.g.
,
A
ssociated Gen. Contractors of California, Inc. v.
California State Council of Carpenters, 459 U.S. 519, 529-45
(1983) (examining the meaning of "injury" under section 4 of
the Clayton Act); compare Roma Constr. Co. v. aRusso, 96 F.3d
566, 579-80 n.10 (1st Cir. 1996) (Lynch, J., concurring).
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outset in Joseph's name or in the name of others such as
foundations
that he controls. The complaint also implies that
most
(perhaps all) of the underlying assets were the result of
the success of Joseph's construction business.
New
Hampshire
is
not
a
community property state, see Baker
v.
Baker
,
421 A.2d 998, 1000 (N.H. 1980), and much of the real
property and monies described in the complaint may not yet be
Annette's property. To this extent, what Annette has is an
expectancy: in the divorce proceedings, some or much of this
property may be awarded to Annette. State law provides for
"equitable division" in divorce actions of "all tangible and
intangible property and assets . . . belonging to either or
both
parties,
whether
title to the property is held in the name
of either or both parties." N.H. Rev. Stat. Ann. S 458:16-a.
An equal division is presumptively equitable. Id. S 458:16-
a(II).
If the real and other tangible property, or most of it,
belongs
to
Joseph,
can
it still be said that Annette's divorce-
suit claim to a share is also "property" protectible by RICO?
Possibly so. Some precedent, at least under the Clayton Act,
extends
protection
to
intangibles under certain circumstances.3
3E.g., E.A. McQuade Tours, Inc. v. Consolidated Air Tour
Manual
Comm.,
467 F.2d 178, 184 (5th Cir. 1972), cert. denied,
409 U.S. 1109 (1973) (contracts are "property" under the
Clayton Act); cf. Logan v. Zimmerman Brush Co., 455 U.S. 422,
430-33
(1982) (right to use adjudicatory procedures created by
state
Fair
Employment Practices Act is "property" protected by
the Due Process Clause).
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But even if we assume arguendo that Annette's claim is itself
protected property, the question remains whether Joseph's
alleged efforts to conceal what is still his property (real
property and cash) has "injured" Annette's property (her
inchoate claim).
Certainly, Annette may be worse off because of the
concealment;
but her legal claim remains intact, together with
various
remedies directed at concealment of assets. (In fact,
she has already obtained attachments in state court totalling
$33
million
on property owned partly or solely by Joseph.) No
one
knows
what
Annette
will be awarded in the divorce action or
whether Joseph's alleged efforts to conceal will hamper her
ability to collect. In sum, any claim of present "injury" to
her
claim
is
speculative, so long as we are concerned with the
movement of real property or cash that for now belongs to
Joseph.
Pertinent here is a decision of this court upholding
dismissal of a civil RICO claim brought by a plaintiff who
alleged injury based on a "hypothetical inability to recover"
if it won its pending contract lawsuit against the defendant.
The
defendant
had
allegedly made fraudulent transfers of assets
to his wife; but we held that the RICO claim was not ripe for
adjudication because the claimed injury was too speculative.
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Lincoln House, Inc. v. Dupre, 903 F.2d 845, 847 (1st Cir.
1990). This and like decisions4 seem directly on point.
To be sure, there is a certain arbitrariness in drawing
the line here. But while RICO is to be construed broadly,
Sedima, 473 U.S. at 498, "injury to property" is not an
infinitely
elastic
concept. And in cases like this, it is hard
to
see
how
a
court would calculate damages now, given the dual
uncertainties of what Annette will be awarded and how it will
be
affected
by concealment. See First Nationwide Bank v. Gelt
Funding Corp., 27 F.3d 763, 768 (2d Cir. 1994), cert. denied,
115
S.
Ct.
728 (1995) ("[A]s a general rule, a cause of action
does
not
accrue under RICO until the amount of damages becomes
clear and definite.").
This conclusion--that Annette has not adequately alleged
injury to her property--applies only to the extent that the
concealed property currently belongs solely to Joseph or
others. However, the complaint also asserts that Joseph has
sought to conceal "marital" or "separate" property. To the
extent that Annette is claiming a present ownership interest,
she appears to be asserting injury to her property within the
terms
of
the
RICO
statute. Cf. Grimmett v. Brown, 75 F.3d 506,
4See Barnett v. Stern, 909 F.2d 973, 977 n.4 (7th Cir.
1990); Bankers Trust Co. v. Rhoades, 859 F.2d 1096, 1106 (2d
Cir. 1988), cert. denied, 490 U.S. 1007 (1989); Capasso v.
Cigna Ins. Co., 765 F. Supp. 839, 842 (S.D.N.Y. 1991).
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516-17
(9th
Cir.),
cert.
granted, 116 S. Ct. 2521 (1996), cert.
dismissed, 117 S. Ct. 759 (1997).
Admittedly, Annette's allegations of ownership are
confusing
and
in
certain
respects lack supporting detail. They
certainly could be explored through inquiry and discovery and
could be tested, if doubtful, by a motion to dismiss or by
summary judgment. Still, on the present pleadings the
possibility remains that Annette already owns some of the
property allegedly concealed by Joseph and others. On that
premise, we turn to the issue of abstention.
2.
We
note
at
the
start
that the district court's remedy-
-dismissal
on
abstention
grounds--is not permissible. Just two
months
before
the
district court issued its ruling, the Supreme
Court
held
that abstention, under Burford or otherwise, may be
appropriate
in
suits
for
damages. Quackenbush v. Allstate Ins.
Co.
,
116
S.
Ct. 1712, 1728 (1996). But the Court further held
that in a damages action, the district court may only order a
stay
pending
resolution of state proceedings; it cannot invoke
abstention to dismiss the suit altogether. Id.The rationale of Quackenbush is that damages actions,
unlike suits for equitable relief, do not invoke the court's
equitable
discretion. Id. at 1727. This rule may seem rather
wooden,
given
the
merger
of law and equity, but the Court means
what
it
says:
Quackenbus
h held that the dismissal of a damages
action on Burford grounds was reversible error, without
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deciding whether "a more limited abstention-based stay order
would have been warranted on the facts of this case." Id. at
1728. There is no question that the present RICO claim is
primarily a damages action. See complaint, qq 62-67. It is
uncertain
whether
equitable relief is even available to private
plaintiffs under civil RICO. Lincoln House, 903 F.2d at 848.
The question remains whether the district court has
authority
at
least
to
stay Annette's federal suit on abstention
grounds, pending resolution of the New Hampshire divorce
proceeding. In that proceeding, the state court might
determine what property is currently owned by Annette. See
N.H.
Rev.
Stat. Ann. S 458:16-a(II). For this reason, another
district court--cited by the district court in this case--has
abstained
from adjudicating a federal RICO action brought by a
spouse involved in pending divorce proceedings. Farkas v.
D'Oca, 857 F. Supp. 300, 303-04 (S.D.N.Y. 1994). See also
Dibbs v. Gonsalves, 921 F. Supp. 44, 52 (D.P.R. 1996).
This
is
not
a
wholly
persuasive reason given New Hampshire
law's stress on an equitable division of all the parties'
property.
The
New
Hampshire decree may just as well not decide
who owned specific property prior to the divorce: its main
concern
is
with who will own what after the divorce. And, the
Supreme Court has discouraged abstention based solely on the
ground that a related state court action may address similar
issues, Colorado River Water Conservation Dist. v. United
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States
,
424
U.S.
800,
817 (1976), with only limited exceptions,
e.g., Railroad Comm'n of Texas v. Pullman Co., 312 U.S. 496(1941).
A more plausible basis for abstention is the possible
interference
that a civil RICO action at this time might cause
to the state court's decision as to how to divide property in
the divorce. The so-called domestic relations exception does
not preclude federal courts from adjudicating tort actions
merely
because the parties were married and are in the process
of
divorce.
Ankenbrandt
v. Richards, 504 U.S. 689, 704 (1992).
But this case is not just a tort action between divorcing
parties:
the
civil
RICO
claim is directed to the same property
that is going to be allocated between the parties as a result
of the decree. Cf. Colorado River, 424 U.S. at 819.
In
this
instance,
the
state court may be unlikely to award
Joseph any interest in property now owned solely by Annette,
but that is hardly so clear with respect to property owned
jointly. Suppose Annette were awarded the value (or three
times
the
value)
of
disputed jointly owned property in the RICO
case
and
the
state
court
then determined that the same property
ought to be allocated to Joseph. At the very least, there is
a possibility of conflict between judgments,
requiring one of them to be modified to take account of
the other. Otherwise, the state divorce decree's intended
allocation of property could easily be frustrated.
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Another
potential
conflict is Annette's expressed interest
in
seeking
interim
relief from the federal court, presumably by
way
of
provisional
attachments or other ad litem remedies. Cf.
Fed. R. Civ. P. 64; Teradyne, Inc. v. Mostek Corp., 797 F.2d
43, 53 (1st Cir. 1986). The federal court's ability to reach
and freeze out-of-state property may well be greater than the
New Hampshire divorce court's. At the same time, interim
allocations of property are standard fare for divorce courts,
and the obvious potential for interference with this function
is an extremely serious matter.
Our
case,
and those kinds of threatened interference, are
not a perfect fit with the Burford doctrine. There, the
Supreme Court approved abstention to avoid conflict with a
comprehensive state regime of business regulation.5 But
abstention
doctrines are not "rigid pigeonholes," Pennzoil Co.
v. Texaco Inc., 481 U.S. 1, 11 n.9 (1987), and the ultimate
question is whether there are "exceptional circumstances" in
which abstention "would clearly serve an important . . .
interest."
Colorado
Rive
r, 424 U.S. at 813 (citation omitted).
Such an interest is potentially present here. See also Minot
v. Eckardt-Minot, 13 F.3d 590, 593-95 (2d Cir. 1994).
5Burford, 319 U.S. at 326 (allocation of oil drilling
rights).
See
also Alabama Public Serv. Comm'n v. Southern Ry.
Co.
,
341
U.S. 341, 346-48 (1951) (scheduling of local railroad
service);
All
state Ins. Co. v. Sabbagh, 603 F.2d 228, 229 (1st
Cir. 1979) (setting of automobile insurance rates).
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Not
only
divorce, but the allocation of property incident
to a divorce, are longstanding local functions governed by
state law. Ankenbrandt, while curtailing the domestic
relations
exception,
nevertheless made clear the priority given
the state resolution of family law issues, including alimony
determinations. 504 U.S. at 704, 706. See also Friends of
Children, Inc. v. Matava, 766 F.2d 35, 37 (1st Cir. 1985).
Divorces
are
frequently
accompanied by disputes about property,
including
both
interim
and final allocations. Such state court
authority
would be threatened if civil RICO actions become the
shadow proceeding for policing such disputes.
We conclude that abstention by use of a stay may be
permissible
where
a
RICO
action is directed against concealment
or transfer of property that is the very subject of a pending
divorce
proceeding.
The
divorce proceedings might or might not
resolve the federal dispute--there are many possible
permutations and plenty of unanswered legal questions. But
staying the federal RICO claim will reduce the risk of
interfering with interim state allocations and permit the
federal court to tailor any final federal judgment to avoid
undermining the divorce court's allocation of property.
3. While abstention may be permissible, it cannot be
automatic in a case of this kind. A decision to abstain
requires not only that certain preconditions be met, but also
that
the
district
court
reasonably find that such abstention is
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appropriate in the case at hand.6 Of course, this may not be
much of an issue when the particular abstention rubric itself
resumes
stro
defendant seeks a federal injunction interfering with an
ongoing state criminal trial. Younger, 401 U.S. at 45, 54.
Cases
like
the
present
one differ markedly from situations
like Younger. Not only do we have far less experience with
p ngly in favor of abstention--for example, where a
civil RICO actions that overlap divorce proceedings, but
extreme
variations can be imagined both as to underlying facts
and equitable concerns. Certainly in some instances a civil
RICO claim might be so plausible and so distinct from an
ordinary divorce action property dispute as to undermine any
argument for a stay; or even if a trial were stayed, there
might be a compelling argument for interim relief to protect
the plaintiff's right to ultimate relief in the RICO action.
In sum, abstention here is a possible, but not a
mechanical
answer.
The
district court's judgment cannot stand,
simply
because it conflicts with Quackenbush. Nor do we think
that the dismissal on abstention grounds can simply be
transformed into a stay; such a stay might in the end be
equitably justifiable, but not without giving the parties a
6See Quackenbush, 116 S. Ct. at 1726-28; Colorado River,
424 U.S. at 818; Younger v. Harris, 401 U.S. 37, 54 (1971);
Bath
Memorial Hosp. v. Maine Health Care Fin. Comm'n, 853 F.2d
1007,
1015
(1st
Cir.
1988); Friends of Children, Inc., 766 F.2d
at 37.
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chance to address the matter and not without an appraisal by
the court that goes beyond the possible overlap in issues.
In
making
such
an
appraisal, the district court is free to
consider the plausibility of this civil RICO claim as a
freestanding cause of action, the actual threat in this case
for
conflict
between such a suit and the pending state divorce
action, any threat of immediate harm associated with alleged
ongoing civil RICO violations, and other consequences or
concerns
that make it equitably reasonable to accelerate or to
defer consideration of federal relief. Once the pertinent
factors are mustered and assessed, the district court's
exercise of judgment is normally respected. Friends of
Children, Inc., 766 F.2d at 37.
The district court has no obligation to pursue the
abstention issue at all if the matter can be disposed of more
appropriately on other grounds. Motions to dismiss have been
made for lack of standing (an issue discussed above), for
failure to plead fraud with particularity, and for other
reasons. Possibly, further exploration will reveal that
Annette
has
no standing as to any of the property in question.
In all events, the order in which to consider issues is a
matter for the district judge.
The treatment of the pendent state claims depends, in
turn, on the outcome of the inquiries just described. If the
district court finds no basis for a claim of injury to
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property,
presumably
it
will dismiss the pendent claims without
prejudice. See 28 U.S.C. S 1367(c)(3). If it determines to
stay the civil RICO claim on abstention grounds, then the
treatment of the pendent claims is less clear-cut, see id.S 1367(c)(4), but the parties have not addressed that issue,
and we express no view upon it.
The judgment of the district court is vacated and the
matter remanded for further proceedings consistent with this
decision.
It is so ordered.
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