Routine Wage and Hour violations do not constitute RICO predicate acts

A hospital is allegedly to have failed to pay required minimum wage. Here, even if that occurred in multiple incidents it would not constitute a RICO violation.

Opinion Lundy v. Catholic Health System, 711 F. 3d 106 (2d Cir. 2013)


Plaintiffs, a respiratory therapist and two nurses, allege that the Catholic Health System of Long Island Inc., a collection of hospitals, healthcare providers, and related entities (collectively, “CHS”), failed to compensate them adequately for time worked during meal breaks, before and after scheduled shifts, and during required training sessions. They sued on behalf of a purported class of similarly situated employees (collectively, “the Plaintiffs”) and take this appeal from orders of the United States District Court for the Eastern District of New York (Seybert, J.), dismissing the claims asserted under the Fair Labor Standards Act (“FLSA”), the Racketeer Influenced and Corrupt Organizations Act (“RICO”), and the New York Labor Law (“NYLL”).

We affirm the dismissal of the FLSA and RICO claims for failure to state a claim. We also affirm the dismissal of Plaintiffs’ NYLL overtime claims, which have the same deficiencies as the FLSA overtime claims. However, because the district court did not explain why Plaintiffs’ NYLL gap-time claims were dismissed with prejudice, we vacate that aspect of the judgment and remand for further consideration of the NYLL gap-time claims.


The original complaint, alleging violations of FLSA and RICO, was filed in March 2010 by Daisy Ricks, a healthcare employee, on behalf of similarly situated employees, against the Long Island Health Network, Inc., Catholic Health Services of Long Island, and various related entities.[1] The First Amended Complaint, filed in June 2010, substituted Dennis Lundy, Patricia Wolman, and Kelly Iwasiuk as lead plaintiffs, dropped some defendants, and added claims under NYLL and state common law. The twelve causes of action pleaded were FLSA, RICO, NYLL, implied contract, express contract, implied covenants, quantum meruit, unjust enrichment, fraud, negligent misrepresentation, conversion, and estoppel. This case is one of many similar class actions brought by the same law firm, Thomas & Solomon LLP, against numerous healthcare entities in the region. A dozen of them are currently on appeal before this Court.[2]

The FLSA claims focused on alleged unpaid overtime. In relevant part, FLSA’s overtime provision states that “no employer shall employ any of his employees . . . for a workweek longer than forty hours unless such employee receives compensation for his employment in excess of the hours above specified at a rate not less than one and one-half times the regular rate at which he is employed.” 29 U.S.C. § 207(a)(1).[3]

It is alleged that CHS used an automatic timekeeping system that deducted time from paychecks for meals and other breaks even though employees frequently were required to work through their breaks, and that CHS failed to pay for time spent working before and after scheduled shifts, and for time spent attending training programs.[4]

The procedural history of this case was prolonged by four attempts to amend the complaint, and various orders dismissing the claims, as recounted below.

A Second Amended Complaint, filed in August 2010, replaced some of the defendants that had been sued in error. On motion, the district court dismissed most of the claims, without prejudice. The FLSA overtime claims were dismissed for failure to approximate the number of uncompensated overtime hours. The FLSA claim for “gap-time” pay (i.e., for unpaid hours below the 40-hour overtime threshold) was dismissed—with prejudice—on the ground that FLSA does not permit gap-time claims when the employment contract explicitly provides compensation for gap time worked. The RICO claims were dismissed—with prejudice—for insufficient allegations of any pattern of racketeering activity. Once the federal claims were dismissed, the state law claims were dismissed without prejudice.

The district court granted leave to replead the FLSA overtime claims that were dismissed without prejudice, but cautioned that any future complaint “should contain significantly more factual detail concerning who the named Plaintiffs are, where they worked, in what capacity they worked, the types of schedules they typically or periodically worked, and any collective bargaining agreements they may have been subject to.” Special App. 18. The district court said that it would “not be impressed if the Third Amended Complaint prattle[d] on for another 217 paragraphs, solely for the sake of repeating various conclusory allegations many times over.” Id. at 19.

The Third Amended Complaint, filed in January 2011, was largely identical to the Second (with the addition of approximately ten paragraphs). When CHS moved to dismiss, the court issued an order sua sponte urging supplemental briefing and a more definite statement. Observing that Plaintiffs had again failed to achieve sufficient specificity, the court added:

[T]he Court does not believe that it would serve anyone’s interest to enter another dismissal without prejudice, which would be followed almost assuredly by another amended complaint and then a full round of Rule 12(b)(6) briefing. Instead, the Court considers it more appropriate to sua sponte direct Plaintiffs to file a more definite statement, which it will then use to judge the sufficiency of the [Third Amended Complaint].

Special App. 26. The court expressed concern with the vagueness of the pleading, directed Plaintiffs to stop “hiding the ball,” id. at 27, and listed specific information needed for a more definite statement.

Plaintiffs failed to issue a more definite statement and instead filed a Fourth Amended Complaint (hereinafter, “the Complaint”) in May 2011. The RICO and estoppel claims were dropped, and the remaining causes of action were pleaded as before, supplemented with some more facts.

CHS’s renewed motion to dismiss was largely granted in February 2012, on the following grounds:

1. Plaintiffs insufficiently pled the requisite employer-employee relationship as to each named defendant, because Lundy, Wolman, and Iwasiuk worked only at Good Samaritan Hospital, and because the “economic realities” of the relationships among defendants did not constitute a single employment organization. The FLSA claims against all defendants other than Good Samaritan were dismissed with prejudice.[5]

2. The FLSA claims against Defendant James Harden (the CEO, President, and Director of CHS) were dismissed with prejudice because the economic reality of his relationship with Lundy, Wolman, and Iwasiuk did not amount to an employer-employee relationship.

3. As to the claim that the automatic timekeeping deductions allegedly violated FLSA as applied to Plaintiffs (even though they were not per se illegal), the Plaintiffs failed to show that they were personally denied overtime by this system.

4. As to their FLSA overtime allegations against Good Samaritan, Plaintiffs were required to plead that they worked (1) compensable hours (2) in excess of 40 hours per week, and (3) that CHS knew that Plaintiffs were working overtime. Only some of the categories of purportedly unpaid work—meal breaks, time before and after scheduled shifts, and training—constituted “compensable” hours.

Work during meal breaks is compensable under FLSA if “predominantly” for the employer’s benefit. Special App. 62. Although Plaintiffs alleged that their meal breaks were “typically” missed or interrupted, the Complaint “is void of any facts regarding the nature and frequency of these interruptions during the relevant time period or how often meal breaks were missed altogether as opposed to just interrupted.” Id. at 63. Absent such specificity, there is no claim for compensable time.

Time spent working before and after scheduled shifts is compensable if it is “integral and indispensable” to performance of the job and not de minimis. Id. at 64. Vague assertions that Wolman and Iwasiuk spent fifteen to thirty minutes before their shifts “preparing” their assignments did not state a claim for compensable time. Id. at 64-65. On the other hand, Lundy’s allegation—that he had to arrive early to receive his assignment from the nurse working the prior shift and leave late to hand off assignments to the nurse taking over—could be compensable.

Time spent at training is not compensable if it is outside regular hours, if attendance is voluntary, if the training is not directly related to the job, and if the employee does not perform productive work during the training. See id. at 66. Wolman and Lundy’s allegations regarding monthly, mandatory staff meetings stated claims for compensable time. (Iwasiuk made no allegation of uncompensated trainings.)

5. The potentially valid allegations of compensable time nevertheless did not allege that the compensable time exceeded 40 hours, as required for a FLSA overtime claim. Wolman and Iwasiuk’s sparse allegations could not support a claim for time in excess of 40 hours. And Plaintiffs conceded that Lundy never actually worked more than 40 hours in one week. The FLSA claims against Good Samaritan were therefore dismissed without prejudice.

6. Once the federal claims were dismissed, discretion was exercised against taking jurisdiction over the state law claims, thereby also dismissing them without prejudice.

Having done all this, the district court granted Plaintiffs limited leave to file a further complaint alleging only those claims that had been dismissed without prejudice, and again gave specific guidance as to the “contours” of such a complaint. Special App. 70-72.

In response to Plaintiffs’ inquiry, the district court issued another order a month later, clarifying the scope of the February 2012 order dismissing the Complaint. The court explained that it dismissed all claims against all defendants, except Good Samaritan, and that the FLSA and NYLL claims were dismissed with prejudice, while the remaining state law claims were not. See id. at 76.

Plaintiffs mercifully elected to forgo another amended complaint, and instead filed their Notice of Appeal on April 11, 2012, indicating their intent to appeal the district court’s December 2010 Order dismissing the Second Amended Complaint, the May 2011 sua sponte Order requesting supplemental briefing, the February 2012 Order dismissing the Fourth Amended Complaint, and the March 2012 Order clarifying the scope of the dismissal.


On appeal, Plaintiffs challenge the dismissal of the overtime claims under FLSA; the gap-time claims under FLSA (and NYLL); [3] the NYLL claims with prejudice; and [4] the RICO claims.


We review de novo dismissal of a complaint for failure to state a claim upon which relief can be granted, “accepting all factual allegations in the complaint as true, and drawing all reasonable inferences in the plaintiff’s favor.” Holmes v. Grubman, 568 F.3d 329, 335 (2d Cir. 2009) (internal quotation marks omitted). “To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (internal quotation marks omitted).

Nevertheless, “the tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions.” Id. “Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.” Id. Pleadings that “are no more than conclusions . . . are not entitled to the assumption of truth.” Id. at 679.


As to the overtime claims under FLSA, Plaintiffs argue that they sufficiently alleged [i] compensable work that was unpaid, [ii] uncompensated work in excess of 40 hours in a given week, and [iii] status as “employees” of all the Defendants. Although the district court held Plaintiffs’ complaint lacking on all three grounds, we affirm on the second ground—the failure to allege uncompensated work in excess of 40 hours in a given week—because it entirely disposes of the FLSA overtime claims.

Section 207(a)(1) of FLSA requires that, “for a workweek longer than forty hours,” an employee who works “in excess of” forty hours shall be compensated for that excess work “at a rate not less than one and one-half times the regular rate at which he is employed” (i.e., time and a half). 29 U.S.C. § 207(a)(1).[6] So, to survive a motion to dismiss, Plaintiffs must allege sufficient factual matter to state a plausible claim that they worked compensable overtime in a workweek longer than 40 hours. Under Federal Rule of Civil Procedure 8(a)(2), a “plausible” claim contains “factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Iqbal, 556 U.S. at 678; see also Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (“Factual allegations must be enough to raise a right to relief above the speculative level . . . on the assumption that all the allegations in the complaint are true (even if doubtful in fact).” (internal citation omitted)).

We have not previously considered the degree of specificity needed to state an overtime claim under FLSA. Federal courts have diverged somewhat on the question. See Butler v. DirectSat USA, LLC, 800 F. Supp. 2d 662, 667 (D. Md. 2011) (recognizing that “courts across the country have expressed differing views as to the level of factual detail necessary to plead a claim for overtime compensation under FLSA”). Within this Circuit, some courts have required an approximation of the total uncompensated hours worked during a given workweek in excess of 40 hours. See, e.g., Nichols v. Mahoney, 608 F. Supp. 2d 526, 547 (S.D.N.Y. 2009); Zhong v. August August Corp., 498 F. Supp. 2d 625, 628 (S.D.N.Y. 2007). Courts elsewhere have done without an estimate of overtime, and deemed sufficient an allegation that plaintiff worked some amount in excess of 40 hours without compensation. See, e.g., Butler, 800 F. Supp. 2d at 668 (collecting cases).

We conclude that in order to state a plausible FLSA overtime claim, a plaintiff must sufficiently allege 40 hours of work in a given workweek as well as some uncompensated time in excess of the 40 hours. See 29 U.S.C. § 207(a)(1) (requiring that, “for a workweek longer than forty hours,” an employee who works “in excess of” forty hours shall be compensated time and a half for the excess hours).

Determining whether a plausible claim has been pled is “a context-specific task that requires the reviewing court to draw on its judicial experience and common sense.”[7] Iqbal, 556 U.S. at 679. Reviewing Plaintiffs’ allegations, as the district court thoroughly did, we find no plausible claim that FLSA was violated, because Plaintiffs have not alleged a single workweek in which they worked at least 40 hours and also worked uncompensated time in excess of 40 hours.

1. Wolman was “typically” scheduled to work three shifts per week, totaling 37.5 hours. J.A. 1797. She “occasionally” worked an additional 12.5-hour shift or worked a slightly longer shift, id., but how occasionally or how long, she does not say; nor does she say that she was denied overtime pay in any such particular week. She alleges three types of uncompensated work: (1) 30-minute meal breaks which were “typically” missed or interrupted; (2) uncompensated time before and after her scheduled shifts, “typically” resulting in an additional 15 minutes per shift; and (3) trainings “such as” a monthly staff meeting, “typically” lasting 30 minutes, and respiratory therapy training consisting of, “on average,” 10 hours per year. Id.

She has not alleged that she ever completely missed all three meal breaks in a week, or that she also worked a full 15 minutes of uncompensated time around every shift; but even if she did, she would have alleged a total 39 hours and 45 minutes worked. A monthly 30-minute staff meeting, an installment of the ten yearly hours of training, or an additional or longer shift could theoretically put her over the 40-hour mark in one or another unspecified week (or weeks); but her allegations supply nothing but low-octane fuel for speculation, not the plausible claim that is required.

2. Iwasiuk “typically” worked four shifts per week, totaling 30 hours. J.A. 1799. She claims that “approximately twice a month,” she worked “five to six shifts” instead of four shifts, totaling between 37.5 and 45 hours. Id. Like Wolman, Iwasiuk does not allege that she was denied overtime pay in a week where she worked these additional shifts. By way of uncompensated work, she alleges that her 30-minute meal breaks were “typically” missed or interrupted and that she worked uncompensated time before her scheduled shifts, “typically” 30 minutes, and after her scheduled shifts, “often” an additional two hours. Id. Maybe she missed all of her meal breaks, and always worked an additional 30 minutes before and two hours after her shifts, and maybe some of these labors were performed in a week when she worked more than her four shifts. But this invited speculation does not amount to a plausible claim under FLSA.

3. Lundy worked between 22.5 and 30 hours per week, J.A. 1800, and Plaintiffs conceded below—and do not dispute on appeal—that he never worked over 40 hours in any given week.

We therefore affirm the dismissal of Plaintiffs’ FLSA overtime claims. We need not consider alternative grounds that were conscientiously explored by the district court, such as the lack of an employer-employee relationship between the named Plaintiffs and many of the Defendants, and the insufficient allegations that additional minutes, such as meal breaks, were “compensable” as a matter of law.


A gap-time claim is one in which an employee has not worked 40 hours in a given week but seeks recovery of unpaid time worked, or in which an employee has worked over 40 hours in a given week but seeks recovery for unpaid work under 40 hours. An employee who has not worked overtime has no claim under FLSA for hours worked below the 40-hour overtime threshold, unless the average hourly wage falls below the federal minimum wage. See United States v. Klinghoffer Bros. Realty Corp., 285 F.2d 487, 494 (2d Cir. 1960) (denying petitions for rehearing); Monahan v. Cnty. of Chesterfield, 95 F.3d 1263, 1280 (4th Cir. 1996) (“Logically, in pay periods without overtime, there can be no violation of section 207 which regulates overtime payment.”).

Notwithstanding that Plaintiffs have failed to sufficiently allege any week in which they worked uncompensated time in excess of 40 hours, Plaintiffs invoke FLSA to seek gap-time wages for weeks in which they claim to have worked over 40 hours. The viability of such a claim has not yet been settled in this Circuit, but we now hold that FLSA does not provide for a gap-time claim even when an employee has worked overtime.

As the district court explained, the text of FLSA requires only payment of minimum wages and overtime wages. See 29 U.S.C. §§ 201-19. It simply does not consider or afford a recovery for gap-time hours. Our reasoning in Klinghoffer confirms this view: “[T]he agreement to work certain additional hours for nothing was in essence an agreement to accept a reduction in pay. So long as the reduced rate still exceeds [the minimum wage], an agreement to accept reduced pay is valid. . . .” 285 F.2d at 494. Plaintiffs here have not alleged that they were paid below minimum wage.

So long as an employee is being paid the minimum wage or more, FLSA does not provide recourse for unpaid hours below the 40-hour threshold, even if the employee also works overtime hours the same week. See id. In this way federal law supplements the hourly employment arrangement with features that may not be guaranteed by state laws, without creating a federal remedy for all wage disputes—of which the garden variety would be for payment of hours worked in a 40-hour work week. For such claims there seems to be no lack of a state remedy, including a basic contract action. See, e.g., Point IV (discussing the New York Labor Law).

As the district court observed, some courts may allow such claims to a limited extent. Special App. 13 (citing Monahan, 95 F.3d at 1279, and other cases). Among them is the Fourth Circuit in Monahan, which relied on interpretive guidance provided by the Department of Labor. See 29 C.F.R. §§ 778.315, .317, .322. “Unlike regulations,” however, “interpretations are not binding and do not have the force of law.” Freeman v. Nat’l Broad. Co., 80 F.3d 78, 83 (2d Cir. 1996) (analyzing deference owed to Department of Labor interpretation of FLSA). “Thus, although they are entitled to some deference, the weight accorded a particular interpretation under the FLSA depends upon `the thoroughness evident in its consideration, the validity of its reasoning, its consistency with earlier and later pronouncements, and all those factors which give it power to persuade.'” Id. (quoting Skidmore v. Swift & Co., 323 U.S. 134, 140 (1944)).

The interpretive guidance on which Monahan relied, insofar as it might be read to recognize gap-time claims under FLSA, is owed deference only to the extent it is persuasive: it is not.[8]

Section 778.315 of the guidance, which considers the FLSA requirement for time-and-a-half pay, offers the following clarification: “This extra compensation for the excess hours of overtime work under the Act cannot be said to have been paid to an employee unless all the straight time compensation due him for the nonovertime hours under his contract (express or implied) . . . has been paid.” 29 C.F.R. § 778.315. This interpretation suggests that an employer could violate FLSA by failing to compensate an employee for gap time worked when the employee also works overtime; but the Department of Labor provides no statutory support or reasoned explanation for this interpretation.[9]

The Department of Labor adds, also without explanation, that “[a]n agreement not to compensate employees for certain nonovertime hours stands on no better footing since it would have the same effect of diminishing the employee’s total overtime compensation.” 29 C.F.R. § 778.317. This guidance seems to rely on nothing more than other (unreasoned) guidance, and directly conflicts with Klinghoffer, which ruled that such an agreement would not violate the limited protections of the FLSA. 285 F.2d at 494.

Accordingly, we therefore affirm the dismissal of Plaintiffs’ FLSA gap-time claims.[10]


The claims under the NYLL were dismissed with prejudice. Plaintiffs argue that the district court lacked jurisdiction to dismiss Plaintiffs’ NYLL claims because it declined to exercise supplemental jurisdiction once it dismissed the federal claims.

In the welter of amended complaints, motions to dismiss, and orders that rule and clarify, the record is somewhat confusing on this point. The state law claims were considered generally in the February 2012 order, in which the district court “decline[d] to exercise supplemental jurisdiction over Plaintiff’s state law claims,” thereby dismissing them without prejudice. Special App. 69. But at the same time, the district court stated that Plaintiffs’ FLSA and NYLL claims are examined under the same legal standards, and that the analysis dismissing Plaintiffs’ FLSA claims “applies with equal force to Plaintiffs’ NYLL claims.” Id. at 47 n.4; see also id. at 61 n.8. In response to Plaintiffs’ motion for partial reconsideration and clarification, the March 2012 order explained that the “NYLL claims against these Defendants were dismissed WITH PREJUDICE.” Id. at 76.

The exercise of supplemental jurisdiction is within the sound discretion of the district court. See Carnegie-Mellon Univ. v. Cohill, 484 U.S. 343, 349-50 (1988). Courts “consider and weigh in each case, and at every stage of the litigation, the values of judicial economy, convenience, fairness, and comity in order to decide whether to exercise” supplemental jurisdiction. Id. at 350. Once all federal claims have been dismissed, the balance of factors will “usual[ly]” point toward a declination. Id. at 350 n.7.

“We review the district court’s decision for abuse of discretion, and depending on the precise circumstances of a case, have variously approved and disapproved the exercise of supplemental jurisdiction where all federal-law claims have been dismissed.” Kolari v. N.Y.-Presbyterian Hosp., 455 F.3d 118, 122 (2d Cir. 2006) (internal citations omitted). The dismissal of state law claims has been upheld after dismissal of the federal claims, particularly where the state law claim implicated federal interests such as preemption, or where the dismissal of the federal claims was late in the litigation, or where the state law claims involved only settled principles rather than novel issues. Valencia ex rel. Franco v. Lee, 316 F.3d 299, 305-06 (2d Cir. 2003). And we have upheld the exercise of supplemental jurisdiction in situations when as here the “state law claims are analytically identical” to federal claims. Benn v. City of New York, 482 F. App’x 637, 639 (2d Cir. 2012); see also Petrosino v. Bell Atl., 385 F.3d 210, 220 n.11 (2d Cir. 2004).

In dismissing the NYLL claims with prejudice, the district court relied on the fact that the same standard applied to the FLSA and NYLL claims. That exercise of supplemental jurisdiction was entirely consistent with this Court’s precedent.[11] Reviewing the district court’s determination for an abuse of discretion, we largely affirm the district court’s dismissal of the NYLL claims with prejudice.

However, Plaintiffs point out that the district court order was arguably inconsistent in dismissing Plaintiffs’ NYLL claims with prejudice notwithstanding its observation that Plaintiffs may have a valid gap-time claim under NYLL.

According to the district court: “the NYLL does recognize Gap Time Claims and provides for full recovery of all unpaid straight-time wages owed.” Special App. 61 n.9 (internal quotations and citations omitted). “Thus, to the extent that the . . . Plaintiffs have adequately pled that they worked compensable time for which they were not properly paid, Plaintiffs have a statutory right under the NYLL to recover straight-time wages for those hours.” Id. This observation appears consistent with NYLL, which provides that “[i]f any employee is paid by his or her employer less than the wage to which he or she is entitled . . . he or she shall recover in a civil action the amount of any such underpayments . . . .” NYLL § 663(1) (emphasis added).

We express no view as to the merits of NYLL gap-time claims, or as to the adequacy of Plaintiffs’ pleading. But because New York law may recognize Plaintiffs’ NYLL gap-time claims, the district court erred in dismissing them with prejudice based solely on its dismissal of Plaintiffs’ FLSA claims. We therefore affirm the dismissal of Plaintiffs’ NYLL overtime claims, but vacate the dismissal of Plaintiffs’ NYLL gap-time claims and remand for further consideration in that narrow respect.


Finally, Plaintiffs challenge the dismissal of their RICO claims, which alleged that CHS used the mails to defraud Plaintiffs by sending them their payroll checks. The district court dismissed the RICO claims, holding that Plaintiffs had not alleged any pattern of racketeering activity.

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.” Anatian v. Coutts Bank (Switz.) Ltd., 193 F.3d 85, 88 (2d Cir. 1999) (internal quotation marks omitted). The pattern of racketeering activity must consist of two or more predicate acts of racketeering. 18 U.S.C. § 1961(5).

The Third Amended Complaint cites the mailing of “misleading payroll checks” to show mail fraud as a RICO predicate act, J.A. 1779, on the theory that the mailings “deliberately concealed from its employees that they did not receive compensation for all compensable work that they performed and misled them into believing that they were being paid properly.” Id. at 1764-65; see also id. at 1765-67 (describing the mailing of checks).[12]

“To prove a violation of the mail fraud statute, plaintiffs must establish the existence of a fraudulent scheme and a mailing in furtherance of the scheme.” McLaughlin v. Anderson, 962 F.2d 187, 190-91 (2d Cir. 1992). On a motion to dismiss a RICO claim, Plaintiffs’ allegations must also satisfy the requirement that, “[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake.” Fed. R. Civ. P. 9(b); see McLaughlin, 962 F.2d at 191. So Plaintiffs must plead the alleged mail fraud with particularity, and establish that the mailings were in furtherance of a fraudulent scheme. Id. Plaintiffs’ allegations fail on both accounts.

As to particularity, the “complaint must adequately specify the statements it claims were false or misleading, give particulars as to the respect in which plaintiff contends the statements were fraudulent, state when and where the statements were made, and identify those responsible for the statements.” Cosmas v. Hassett, 886 F.2d 8, 11 (2d Cir. 1989). Plaintiffs here have not alleged what any particular Defendant did to advance the RICO scheme. Nor have they otherwise pled particular details regarding the alleged fraudulent mailings. Bare-bones allegations do not satisfy Rule 9(b).

Almost more fundamentally, Plaintiffs have not established that the mailings were “in furtherance” of any fraudulent scheme. As the district court observed, the mailing of pay stubs cannot further the fraudulent scheme because the pay stubs would have revealed (not concealed) that Plaintiffs were not being paid for all of their alleged compensable overtime. See Special App. 16-17. Mailings that thus “increase[] the probability that [the mailer] would be detected and apprehended” do not constitute mail fraud. United States v. Maze, 414 U.S. 395, 403 (1974); see also Cavallaro v. UMass Mem’l Health Care Inc., No. 09-40152, 2010 WL 3609535, at *3 (D. Mass. July 2, 2010) (examining very similar claim of mail fraud based on paychecks and ruling that the mailings “made the scheme’s discovery more likely”). We therefore affirm the dismissal of Plaintiffs’ RICO claims.


For the foregoing reasons, we affirm the dismissal of Plaintiffs’ claims under FLSA, their NYLL overtime claims, and their RICO claims, but we vacate the dismissal with prejudice of Plaintiffs’ gap-time claims under the NYLL, and remand for further consideration in that limited respect.

[*] The Honorable Sandra Day O’Connor, Associate Justice (retired) of the United States Supreme Court, sitting by designation.

[1] The complicated facts and procedural history of this case are recounted in detail in five orders issued by the district court. See Mem. & Order, Wolman v. Catholic Health System of Long Island, Inc., No. 10-CV-1326 (E.D.N.Y. Dec. 30, 2010) (Special App. 1-19); Mem. & Order, Wolman v. Catholic Health System of Long Island, Inc., No. 10-CV-1326 (E.D.N.Y. May 5, 2011) (Special App. 20-32); Mem. & Order, Wolman v. Catholic Health System of Long Island, Inc., No. 10-CV-1326 (E.D.N.Y. May 24, 2011) (Special App. 33-37); Mem. & Order, Wolman v. Catholic Health System of Long Island, Inc., No. 10-CV-1326 (E.D.N.Y. Feb. 16, 2012) (Special App. 38-74); Mem. & Order, Wolman v. Catholic Health System of Long Island, Inc., No. 10-CV-1326 (E.D.N.Y. Mar. 12, 2012) (Special App. 75-77). We recount only those that bear on the resolution of this appeal.

[2] See Yarus v. N.Y.C. Health & Hosps. Corp., No. 11-710; Megginson v. Westchester Cnty. Health Care Corp., No. 11-713; Megginson v. Westchester Med. Ctr., No. 12-4084; Alamu v. Bronx-Lebanon Hosp. Ctr., No. 11-728; Alamu v. Bronx-Lebanon Hosp. Ctr., No. 12-4085; Nakahata v. N.Y.-Presbyterian HealthCare Sys., No. 11-734; Nakahata v. N.Y. Presbyterian HealthCare Sys., No. 12-4128; Hinterberger v. Catholic Health Sys., No. 12-630; Hinterberger v. Catholic Health Sys., No. 12-918; Gordon v. Kaleida Health, No. 12-654; Gordon v. Kaleida Health, No. 12-670; Lundy v. Catholic Health Sys. of Long Island Inc., No. 12-1453.

[3] In addition to FLSA’s overtime provisions, Section 206 of FLSA requires that employers pay a minimum wage. Plaintiffs have not brought minimum wage claims in this case.

[4] Since Plaintiffs were not subject to a collective bargaining agreement while they were employed by CHS, the Labor Management Relations Act is not at issue in this case.

[5] The court also rejected arguments that all of the named defendants operated as a single enterprise, or that they were all liable under theories of agency and alter-ego. Even though the district court dismissed the FLSA claims against CHS, we use the term “CHS” in this opinion to refer to Defendants generally.

[6] In its entirety, Section 207(a)(1) provides:

Except as otherwise provided in this section, no employer shall employ any of his employees who in any workweek is engaged in commerce or in the production of goods for commerce, or is employed in an enterprise engaged in commerce or in the production of goods for commerce, for a workweek longer than forty hours unless such employee receives compensation for his employment in excess of the hours above specified at a rate not less than one and one-half times the regular rate at which he is employed.


[7] Under a case-specific approach, some courts may find that an approximation of overtime hours worked may help draw a plaintiff’s claim closer to plausibility.

[8] The district court identified deficiencies in the Fourth Circuit’s view and expressed “serious concerns” about allowing gap-time claims under FLSA. Special App. 15. One judge within the Fourth Circuit has acknowledged the force of the competing view:

While I follow the direction of Monahan and the Department of Labor regulations in this opinion, I note that one could, in the alternative, take the approach that compensation for FLSA overtime hours is the sole recovery available under the FLSA maximum hour provision. This approach would leave the contractual interpretation and determination of straight time compensation to state courts, which are better positioned to address these issues.

Koelker v. Mayor & City Council of Cumberland, 599 F. Supp. 2d 624, 635 n.11 (D. Md. 2009) (Motz, J.) (emphasis in original).

[9] Section 778.322 appears to merely build from this flawed interpretation: “[O]vertime compensation cannot be said to have been paid until all straight time compensation due the employee under the statute or his employment contract has been paid.” 29 C.F.R. § 778.322. Again, the Department of Labor’s interpretation is not grounded in the statute and provides no reasoned explanation for this conclusion.

[10] Even if we were to assume that an employee who has worked overtime may also seek gap-time pay under FLSA, such a claim would not be viable if the employment agreement provided that the employee would be compensated for all non-overtime hours worked. See Monahan, 95 F.3d at 1272. Here, Plaintiffs allege “binding, express oral contracts” that include an “explicit promise to compensate Plaintiffs and Class Members for `all hours worked.'” J.A. 1819. Of course in that event a contractual remedy may be available; but the district court dismissed the breach of contract claims and Plaintiffs have not appealed on that ground.

[11] In any event, the district court’s dismissal of Plaintiffs’ NYLL claims was proper under the Cohill factors: judicial economy, convenience, fairness, and comity. See 484 U.S. at 350. Judicial economy and convenience are served by dismissing Plaintiffs’ NYLL claims with prejudice. And considering that Plaintiffs amended their complaint at least four times with express guidance from the district court, they cannot argue now that it is unfair to dismiss their inadequately pleaded NYLL claims.

[12] Federal courts are properly wary of transforming any civil FLSA violation into a RICO case. See, e.g., Vandermark v. City of New York, 615 F. Supp. 2d 196, 209-10 (S.D.N.Y. 2009) (Scheindlin, J.) (“Racketeering is far more than simple illegality. Alleged civil violations of the FLSA do not amount to racketeering.”).

Flip Mortgage v. McElhone- Garden Variety fraud defense

A company does something arguably unlawful, and uses the mail various times to do it. Is that now a RICO offense. The 4th Cir. rejects that argument saying,

“FMC properly alleged the necessary predicate acts, in this case many incidents of fraud in which the mails were used. The only question suitable for summary judgment is whether the acts alleged constitute a “pattern of racketeering activity” within the meaning of 18 U.S.C. § 1961(5). We believe that a negative answer is dictated by our recent decisions in Eastern Publishing and Advertising v. Chesapeake Publishing and Advertising, 831 F.2d 488 (4th Cir.1987); HMK Corporation v. Walsey, 828 F.2d 1071 (4th Cir.1987); and International Data Bank v. Zepkin, 812 F.2d 149 (4th Cir.1987). Together, these decisions indicate that this circuit will not lightly permit ordinary business contract or fraud disputes to be transformed into federal RICO claims.’

Opinion Flip Mortgage v. McElhone, 841 F.2d 531 (1988)

Donald H. McELHONE; C. Warren Crandall, Defendants-Appellants and
Josephine McElhone; Ruth W. Crandall; James Schaffer, Defendants.
Donald H. McELHONE; Josephine McElhone; C. Warren Crandall; Ruth W. Crandall; James Schaffer, Defendants-Appellees.

Nos. 87-1529, 87-1543.

United States Court of Appeals, Fourth Circuit.

Argued November 5, 1987.

Decided March 4, 1988.

BUTZNER, Senior Circuit Judge:

Donald B. McElhone and C. Warren Crandall, directors and officers of Shamrock Computer Services, Inc. (SCS), appeal a summary judgment entered in favor of Flip Mortgage Corporation (FMC). The principal issue raised by the appeal is whether directors of a dissolved corporation who continue to operate the corporate business in violation of Virginia law are personally liable for debts incurred by the corporation before dissolution. The district court held that Virginia law imposed such liability even though the corporation was subsequently reinstated. We agree with the district court that Virginia law imposes liability on directors who breach their fiduciary duty to creditors to whom the corporation became indebted before dissolution. Nevertheless, we vacate the judgment and remand for determination of the directors’ personal liability in accordance with the directions contained in Part II of this opinion.

FMC cross-appeals, assigning as error the district court’s dismissal of several other claims that it asserted. We affirm the district court’s judgment with respect to these issues except for its dismissal of FMC’s claim of fraud.


FMC and SCS contracted in 1977 to develop and market a family of computerized mortgage related services. FMC supplied financial expertise, concepts for new products, and marketing efforts, while SCS provided computer expertise, hardware, and computer services to customers. The “Flexible Loan Insurance Program” (FLIP) computer services were distributed primarily through a time-sharing network organized and managed by SCS.[1] SCS billed the users and was obligated under the terms of the contract to remit to FMC 70% of the revenue from customers’ usage of the FLIP system. Some income was also derived from licensing the system for use on a separate computer system, and FMC was entitled to 70% of this revenue.

In 1982, SCS declared that the 70%-30% formula had become inequitable and unilaterally reduced the sums paid FMC. As a result, FMC filed an action based on diversity of citizenship in the district court for the Eastern District of Pennsylvania. Discovery disclosed that for years SCS had not accounted for all receipts each month, and by this means it had deprived FMC of substantial income. As a result, FMC recovered a judgment of $136,714.11 plus interest. The court also ordered an accounting to determine damages for periods not covered by its monetary judgment and directed that SCS pay FMC its full share of all future revenue.

SCS has not satisfied the judgment FMC obtained in the Eastern District of Pennsylvania. According to FMC, it has not furnished the accounting the court ordered nor has it made the required payments on continuing revenues. FMC charges that the directors violated or obstructed the fulfillment of the order by dissipating the assets of the corporation. On April 25, 1985, the day before a hearing was scheduled before the federal court in Pennsylvania on a motion to hold the corporation in contempt for its noncompliance with the judgment, SCS filed a petition for bankruptcy. FMC then commenced this action against the directors, which the district court for the Eastern District of Pennsylvania transferred to the Eastern District of Virginia.


Count VI, which is the subject of the appeal taken by McElhone and Crandall (directors), alleged that they became personally liable for debts the corporation incurred before and during dissolution. The statutory basis for this count is Va.Code §§ 13.1-91 and -92, which provide in part as follows:[2]

534*534 [I]f the corporation fails before the first day of June after the second such annual date to file the annual report or to pay the annual registration fees or franchise taxes … such corporation shall be thereupon automatically dissolved as of the first day of June and its properties and affairs shall pass automatically to its directors as trustees in dissolution. Thereupon, the trustees shall proceed to collect the assets of the corporations, sell, convey and dispose of such of its properties as are not to be distributed in kind to its stockholders, pay, satisfy and discharge its liabilities and obligations and do all other acts required to liquidate its business and affairs….

* * * * * *

Upon the entry by the Commission of an order of reinstatement, the corporate existence shall be deemed to have continued from the date of dissolution except that reinstatement shall have no effect on any question of personal liability of the directors, officers or agents in respect of the period between dissolution and reinstatement.

The evidence established that for two consecutive years SCS failed to file the annual reports and to pay the annual registration fee and franchise tax. As a result, it was dissolved on June 1, 1983. In violation of the statute, the directors continued to operate the business instead of marshalling corporate assets and paying its creditors. The corporation was reinstated on January 5, 1984. Finding no genuine issue of material fact, the district court entered summary judgment against the directors in the amount of the unpaid judgment, which had been entered by the district court for the Eastern District of Pennsylvania against SCS, plus interest.

The directors argue that their liability, if any, is limited to debts incurred by SCS to FMC in the period of dissolution — June 1, 1983, to January 5, 1984. FMC contends that the directors are liable for debts incurred both before and during dissolution. The district court, perceiving the opportunity for abuse if the directors were permitted to avoid liability for pre-existing debts while they operated without a corporate charter, held that the directors were liable to FMC for debts SCS incurred before and during dissolution.

There can be no doubt that the directors are liable to FMC for debts incurred during the period of dissolution. Two recent cases have applied the statute to impose liability under these circumstances. See McLean Bank v. Nelson, 232 Va. 420, 350 S.E.2d 651 (1986); Moore v. Occupational Safety and Health Review Comm’n, 591 F.2d 991 (4th Cir.1979). These cases, however, dealt only with debts incurred during dissolution, and the courts had no occasion to consider whether directors were liable for debts incurred before dissolution.

People dealing with a corporation are obliged to look to the corporation for satisfaction of their claims. Only in extraordinary circumstances are directors liable for corporate debts. Virginia Code sections 13.1-91 and -92 must be construed in a manner consistent with the strong public policy of shielding directors from individual liability for corporate debt. The statute does not impose any liability for corporate debt on the directors simply because the corporation has been automatically dissolved. Even after dissolution, the directors are shielded from individual liability if they discharge the duties the statute places on them to marshal assets, pay pre-existing debts, and distribute the remaining funds, if any, to the shareholders. Moreover, the directors may temporarily continue the corporate business as an incident to its liquidation without incurring individual liability. See Moore, 591 F.2d at 994 n. 5. If the assets are insufficient to discharge pre-existing debts and the expenses of liquidation, the directors are not liable for the deficiency. Creditors who opted to deal with the corporation when it was a going concern have no cause to complain if they are not paid in full. It is fair to assume that they looked to the corporation’s ability to pay, not the directors’, when they dealt with the corporation.

The directors’ difficulty arises when they violate the law and carry on the business instead of liquidating it. They then 535*535 become personally liable. McLean Bank, 232 Va. 420, 350 S.E.2d 651, and Moore, 591 F.2d 991. This is not inconsistent with the public policy shielding directors, for it cannot be assumed that creditors elected to deal with corporations whose directors have breached the express trust the law imposes on them to pay the creditors.

The nature and extent of the directors’ liability depend on provisions of the Code that describe the effect of dissolution on the corporation, the function of the directors of a dissolved corporation, the injury caused by the directors’ wrongdoing, and the effect of reinstatement.[3] The Supreme Court of Virginia has explained the effect of dissolution on the corporation. “A dissolved domestic corporation is no corporation at all.” McLean Bank, 232 Va. at 426, 350 S.E.2d at 656; accord Moore, 591 F.2d at 995.

Also, the Supreme Court of Virginia has admonished that where possible every word of the statutes must be given meaning. McLean Bank, 232 Va. at 427, 350 S.E.2d at 656. This principle requires, in the context of this case, a court to give meaning to the word “trustees” in § 13.1-91. Upon dissolution, the directors no longer function as directors of a corporation. Section 13.1-91 provides that they become “trustees” in dissolution. The assets of the corporation automatically pass to them in their new capacity. This is the res of the trust they must administer. Section 13.1-91 also prescribes the duty of the trustees. It is to collect the assets, pay the corporation’s obligations, and distribute the remaining funds, if any, to the shareholders. Because the trustees are not authorized to incur new debt, except that which may be essential to wind up the business, it is obvious that the obligations mentioned in section 13.1-91 are pre-existing debts of the corporation. The pre-existing creditors are, along with the shareholders, the beneficiaries of the trust created by the statute.

It is when they breach their fiduciary duties as trustees that the directors incur personal liability to the beneficiaries of the trust created by section 13.1-91. Section 13.1-92 provides that such liability, once incurred, is not discharged by the reinstatement of the corporation. McElhone and Crandall breached their fiduciary duties, by using the trust res for operation of the business in violation of the statute instead of paying pre-existing obligations that SCS owed FMC. For this reason they are personally liable to FMC for the damages caused by their breach of trust.

The directors assert several additional defenses. The first of these is res adjudicata or collateral estoppel. Although the directors did not plead res adjudicata they pled collateral estoppel. They contend that the directors were exonerated in the Pennsylvania litigation.

The district court in Pennsylvania initially denied FMC’s motion to join the directors, saying that FMC could bring another action against them if the corporation were to default. Later, in denying a postverdict motion to enter judgment against the directors, the court expressed the opinion that Virginia law did not impose liability on them. FMC appealed the postverdict order to the Court of Appeals for the Third Circuit which held that judgment could not be entered against the directors because they were not parties to the litigation. It did not consider whether they would be liable, had they been parties. Flip Mortgage Corp. v. Shamrock Computer Services, Inc., 770 F.2d 1069 (3d Cir.1985) (unpublished). This record of the proceedings discloses that the liability of the directors was not decided. Consequently, the defense of collateral estoppel is unavailable to the directors. Indeed, FMC is doing what the district court in Pennsylvania initially suggested that it might do — bring a separate action against the directors if the corporation defaulted.

536*536 The directors also claim that due to the neglect of their registered agent, they did not learn of the dissolution until late December 1983 when FMC raised the issue.

Neglect of the registered agent cannot absolve the directors. They were also officers of the corporation and knew or should have known that the corporation was not furnishing the agent the necessary information to file annual reports and that it was not remitting the necessary funds to pay the fees and taxes required by law. A similar defense was rejected by implication in Moore, 591 F.2d at 993.

Next, the directors assert that a release signed by FMC absolves them of liability. Initially, FMC contracted with Shamrock Enterprises, a partnership. The contract contemplated that Shamrock Enterprises would be succeeded by a corporation known as Shamrock Computer Services, Inc. (SCS) to be formed in 30 days. The contract provided in part that FMC would not sue the partnership or its partners after the new corporation was formed and undertook the business formerly conducted by the partnership. SCS was formed and it assumed the obligations of the contract as contemplated by the parties. The directors now assert this release of the partnership and its partners as a defense.

The short answer is that FMC is not suing McElhone and Crandall as partners or the partnership. None of the damages awarded FMC by the district court arose out of activities conducted by the partnership.

In sum, the directors are liable for the full amount of all unpaid debts incurred during the period of dissolution, together with all damages caused by their failure to pay off pre-existing debts upon dissolution. In the district court in Pennsylvania, FMC sought damages against SCS from the date the corporation was formed in 1977 to the date of the trial. Because of deficiencies in the records kept by SCS, the Pennsylvania court’s monetary award, upon which the Virginia district court based its judgment, was confined to the period October 1, 1978, to September 30, 1983.[4]

In count VI of this suit, FMC sought damages for the entire period from the inception of SCS until its reinstatement on January 5, 1984. On remand, therefore, the task of the district court is twofold. First, it should determine the amount of the debt incurred to FMC during the period of dissolution, from June 1, 1983, to January 5, 1984. This will include the portion of the Pennsylvania judgment properly allocable to that period and the indebtedness incurred to FMC from September 30, 1983, to January 5, 1984. Because the directors operated without a corporate charter they are personally liable for the debt incurred during dissolution and the interest on it. McLean, 232 Va. 420, 350 S.E.2d 651; Moore, 591 F.2d 991.

Second, the court must determine the damages caused by the directors’ failure in their capacity as trustees to use the assets received at dissolution to pay off the pre-existing debts. Because FMC has received nothing, its damages are potentially as high as the full amount of the debt.[5] The pre-existing debt owed to FMC consists of the portion of the Pennsylvania judgment attributed to the period between October 1, 1978, and June 1, 1983, together with an amount not yet determined for the period from the inception of SCS until October 1, 1978. FMC’s damages, however, cannot be more than the amount it would have received had there been no breach of trust. The evidence in the record suggests that the trustees could have discharged most or all of the debt due FMC at the time of dissolution.[6] On remand, the district 537*537 court should determine the true value of the corporate assets at dissolution and the proportion of that amount that should properly have been distributed to FMC, taking into the equation the debts SCS owed other creditors. This amount will be the limit of the directors’ personal liability in their capacity as trustees for the debts incurred before dissolution.

In determining these facts, it must be remembered that the burden is on the directors as trustees to produce accurate accounts of the assets and affairs of the trust created by section 13.1-91 and to prove any charges or other debts which they wish to advance to limit their liability to FMC. Restatement (Second) of Trusts § 172 Comments a and b (1959). If it is found that the directors neglected their duty to keep accurate records, they must bear the risk of any uncertainty — they cannot be allowed to profit from uncertainty created by their own wrongdoing.


In its cross-appeal, FMC assigns error to the district court’s entry of summary judgment on five causes of action set forth in separate counts of the complaint. FMC asserts that the count alleging fraud raises material issues of disputed fact. The charges of fraud advanced by FMC are essentially three: that the appellees never intended to abide by the terms of the November 1977 contract and promised to do so merely to lure FMC into a relationship in which it could be cheated; that from November 1977 until the total disruption of the business relationship SCS submitted false revenue reports to FMC and thereby cheated it out of its rightful earnings; and that the revised interpretation of the contract announced by SCS in November 1982 was asserted in bad faith for the purpose of cheating FMC out of its rightful earnings.

Certainly the revised interpretation of the contract was nothing more than a breach of contract: there was neither the misrepresentation of a present fact nor the actual reliance on such a misrepresentation required for all forms of actionable fraud. See Winn v. Aleda Construction Co., 227 Va. 304, 308, 315 S.E.2d 193, 195 (1984); B-W Acceptance Corp. v. Benjamin T. Crump Co., 199 Va. 312, 315, 99 S.E.2d 606, 609 (1957).

As to the inducement to enter the contract, it is true that courts properly resist attempts to transfer breach of contract cases into fraud and therefore that fraud “cannot ordinarily be predicated on unfulfilled promises or statements of future events.” Soble v. Herman, 175 Va. 489, 500, 9 S.E.2d 459, 464 (1940). But the Virginia Supreme Court recently held that fraud can be found in a breach of contract if the defendant did not intend to perform at the time of contracting. “[T]he promisor’s intention — his state of mind — is a matter of fact. When he makes the promise, intending not to perform, his promise is a misrepresentation of present fact, and if made to induce the promisee to act to his detriment, is actionable as an actual fraud.” Colonial Ford Truck Sales v. Schneider, 228 Va. 671, 677, 325 S.E.2d 91, 94 (1985). The evidence in the record, viewed most favorably to FMC, indicates that SCS and these individual defendants began submitting false revenue reports almost from the moment the contract was signed. A rational trier of fact could conclude from this that SCS and its officers never intended to abide by the terms of the contract. “Circumstantial evidence is not only sufficient, but in most cases [of fraud] is the only proof that can be adduced.” Cook v. Hayden, 183 Va. 203, 209, 31 S.E.2d 625, 627 (1944). We therefore conclude that FMC has alleged a cause of action for fraud based on the principles of Colonial Ford.

The regular submission of false revenue reports falls more clearly within the scope of actual fraud. As the district court saw it, “these people didn’t pay their bills. Now that may not be exemplary, but its not fraud.” But it is alleged that they did more than not pay their bills — an open and obvious breach of contract which could have provoked a speedy response from FMC. FMC charges that they undertook a course of deception intended to make their 538*538 wrongs seem right, to lead FMC to believe that nothing was amiss, and to lure it into sleeping on its rights. It is just such deception that the law of fraud is intended to punish. Actual fraud requires “(1) a false representation, (2) of a material fact, (3) made intentionally and knowingly, (4) with intent to mislead, (5) reliance by the party misled, and (6) resulting damage to the party misled.” Winn, 227 Va. at 308, 315 S.E.2d at 195. If the proof sustains the allegations, each intentionally falsified revenue report submitted by SCS to FMC, and accepted by FMC as the basis for calculating the sums due to FMC, would satisfy all six of these criteria.

We conclude that summary judgment on the fraud count must be vacated. To prevail on remand, however, FMC must prove that McElhone and Crandall personally participated in the alleged fraudulent acts. Moreover, the district court must exercise care that the compensatory damages for fraud do not duplicate damages recovered under count VI.


In connection with the allegations of fraud, many of which involved the use of the mails, FMC sought triple damages under RICO against the directors of SCS.

FMC properly alleged the necessary predicate acts, in this case many incidents of fraud in which the mails were used. The only question suitable for summary judgment is whether the acts alleged constitute a “pattern of racketeering activity” within the meaning of 18 U.S.C. § 1961(5). We believe that a negative answer is dictated by our recent decisions in Eastern Publishing and Advertising v. Chesapeake Publishing and Advertising, 831 F.2d 488 (4th Cir.1987); HMK Corporation v. Walsey, 828 F.2d 1071 (4th Cir.1987); and International Data Bank v. Zepkin, 812 F.2d 149 (4th Cir.1987). Together, these decisions indicate that this circuit will not lightly permit ordinary business contract or fraud disputes to be transformed into federal RICO claims. Bearing in mind that “the heightened civil and criminal penalties of RICO are reserved for schemes whose scope and persistence set them above the routine,” HMK, 828 F.2d at 1074, we believe that the scheme in the present case does not rise above the routine, and does not resemble the sort of extended, widespread, or particularly dangerous pattern of racketeering which Congress intended to combat with federal penalties. See Zepkin, 812 F.2d at 155. It is true that FMC’s allegations point to fraudulent acts spanning seven years depriving FMC of money properly due to it on many distinct occasions. Nevertheless, FMC’s own pleadings present this series of events as part of a single scheme perpetrated by SCS and its directors against a single victim. FMC alleges that the directors of SCS, from the inception of the corporation, never intended to abide by the contract’s terms. This plan, FMC alleges, they stuck to persistently and effectively. Given the unity and narrow focus of the scheme, the fact that the planned injury was inflicted and suffered over a period of years cannot convert this single scheme into a pattern within the meaning of RICO.

In fact, a great many ordinary business disputes arising out of dishonest business practices or doubtful accounting methods, such as have until the present been redressed by state remedies, could be described as multiple individual instances of fraud, if one chose to do so. But to adopt such a characterization would transform “every such dispute … [into] a cause of action under RICO.” HMK, 828 F.2d at 1074. Our precedents have not adopted an interpretation of the statute producing such a result.[7]


FMC further alleges that the officers and directors of SCS drained that corporation 539*539 of assets through a series of fraudulent conveyances. FMC asks that those conveyances be set aside and that the directors be held liable for all losses resulting from the fraudulent conveyances. Particularly, FMC charges that the directors had SCS: pay unreasonable salaries and grant interest free loans to themselves, purchase home appliances for themselves, pay for various expenses arising from McElhone’s hobby of coaching soccer, make improper payments to a partnership owned by the directors, pay for vacation expenses of the directors, purchase equipment and pay for secretarial help used in the directors’ non-SCS business activities, make payments for an office condominium purchased by the directors, pay exorbitant rent to the directors as owners of the office space used by SCS, transfer a life insurance policy on Crandall to him for no consideration, transfer two cars owned by SCS to Mrs. McElhone and a dummy corporation owned by Mrs. Crandall for illusory consideration, and transfer SCS’s profitable business relationship with a customer to McElhone personally.

Whatever may be the merit of these and related allegations, the district court correctly dismissed them from this case. Any fraudulent conveyances were, in the first instance, injuries to the SCS corporation and only secondarily to a creditor such as FMC looking to the assets of SCS for recovery. Now that SCS is in bankruptcy, 11 U.S.C. § 544(b) confers authority on the trustee in bankruptcy to pursue corporate assets improperly transferred.


We affirm the dismissal of count VII for failure to state a claim upon which relief can be granted. This count was based on an alleged breach of fiduciary duty arising out of a joint venture. The district court ruled that there had been no joint venture and hence no fiduciary duty. “Whether or not a given set of circumstances constitutes a joint adventure is generally a question for the jury.” Smith v. Grenadier, 203 Va. 740, 744, 127 S.E.2d 107, 110 (1962). However, where it “appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief,” the court should dismiss a claim. Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 102, 2 L.Ed.2d 80 (1957). The contract of November 2, 1977, was attached to and incorporated by reference in the complaint filed by FMC. That contract clearly revealed that no joint venture could be established. To establish a joint venture, Virginia law requires an “agreement to share in the profits or losses” of an undertaking. Ortiz v. Barrett, 222 Va. 118, 131, 278 S.E.2d 833, 840 (1981). FMC and SCS had no such agreement; rather, they were engaged in a fairly straightforward contractual relationship. Although certain receipts were to be split according to a formula, there was no agreement to share profits, and any losses would have been borne by the party suffering them.

Again, a joint venture does not exist unless the parties each “have a voice in the control and management” of the enterprise, Ortiz, 222 Va. at 131, 278 S.E.2d at 840, an “`equal right to direct and govern the movements and conduct of each other in respect thereto.'” Alban Tractor Co. v. Sheffield, 220 Va. 861, 863, 263 S.E.2d 67, 68 (1980) (citation omitted). While FMC had specific contractual rights which gave it narrow authority to control certain SCS business decisions, the great bulk of SCS’s decisions were left entirely to the discretion of SCS. And SCS had no control over FMC at all.

540*540 Accordingly, as shown by the contract made part of the complaint, the relationship between FMC and SCS lacked the degree both of commonality of interest and of mutual control required to establish a joint venture under Virginia law. The dismissal of count VII pursuant to Federal Rule of Civil Procedure 12(b)(6) was therefore proper.


In separate counts FMC also seeks recovery on a theory of constructive trust and on the ground that the district court should pierce the corporate veil. If McElhone and Crandall personally participated in the alleged fraud, there is no need for these counts. If they did not, these counts cannot provide a basis for recovery. Therefore, we affirm the dismissal of these counts to simplify the issues on remand.


The judgment of the district court is affirmed in part, vacated in part, and the case is remanded for further proceedings consistent with this opinion. FMC, having substantially prevailed, shall recover its costs.

[1] A time-sharing computer network consists of a central computer, which stores programs and performs all calculations, and user terminals. Individual users access the central computer through telephone connections and terminals located in their own offices. Typically, users pay some monthly fee for access privileges plus an hourly rate for time actually spent utilizing the central computer.

[2] Va.Code §§ 13.1-91 and -92 were recodified as amended in 1985 as §§ 13.1-752 and -754. None of the minor changes made are material to this case.

[3] Virginia statutes differ from those dealing with dissolution in a majority of the states. Many states preserve a de facto corporate entity during liquidation or absolve the directors from liability if the corporation is reinstated and ratifies what the directors did during liquidation. See Gusky, Dissolution, Forfeiture, and Liquidation of Virginia Corporations, 12 U.Rich.L.Rev. 333, 341-349 (1978). The Virginia Code contains no similar provisions.

[4] The court in Pennsylvania directed SCS to render an accounting for the excluded periods, so that the full debt could be determined, but further proceedings against SCS were preempted by SCS’s filing of bankruptcy.

[5] Of course, to prevent a double recovery by FMC, the district court must take account of any monies recovered from SCS through bankruptcy proceedings or otherwise.

[6] A balance sheet dated June 30, 1983, which was shortly after the corporation was dissolved, disclosed that the directors in their capacity as trustees held assets in excess of $149,000 to wind up the business. Current and long-term liabilities were less than $17,000.

[7] The circuits, as is well known, are split on this issue. There is little doubt that FMC’s complaint would support a RICO claim under the Second Circuit’s test, which requires only “continuing operation” and a common purpose or plan served by the various fraudulent acts. See Beck v. Manufacturers Hanover Trust Co., 820 F.2d 46 (2d Cir.1987).

Conversely, FMC’s RICO claim could not survive the Eighth Circuit’s restrictive standard laid out in Superior Oil Co. v. Fulmer, 785 F.2d 252 (8th Cir.1986). That case was factually quite similar to the present one: a single defendant engaged, over a period of time, in multiple fraudulent acts in order to conceal an ongoing and continuous theft of oil from a single plaintiff. The Eighth Circuit considered this continuous theft, with its multiple attendant frauds, as only one racketeering activity and would have required proof that the defendant engaged in other similar activities before conceding that a “pattern” existed.

The Seventh Circuit, which steers a middle course, recently held that, although they could be “viewed as a part of a single grand scheme,” allegations of multiple, distinct fraudulent acts perpetrated on a single victim over a four year period constituted a pattern sufficient to support a RICO claim. Morgan v. Bank of Waukegan, 804 F.2d 970, 976 (7th Cir.1986).