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A federal judge has dismissed a proposed class-action civil RICO suit against former officers and directors of the Pittsburgh, Pa.-based Allegheny Health Education and Research Foundation (AHERF), brought by charitable donors and recipients who said their money was squandered before the hospital chain ended up in bankruptcy. In his 46-page opinion in Browne v. Abdelhak, Senior U.S. District Judge Clarence C. Newcomer found that neither group — the donors or the recipients — has a legally protectable “property interest” in the money. Attorneys Sherrie R. Savett and Michael J. Fantini of Philadelphia’s Berger & Montague filed the suit on behalf of a proposed class of people and organizations who provided funds to AHERF in contribution to grants or endowments “to be used for specific purposes relating to research, medicine, patient care, education, lectureships, etc.,” and a second proposed class “who were the beneficiaries or recipients of grants or endowments held by AHERF.” The defendants in the suit are “the inner circle of officers of AHERF,” as well as members of the executive committee of its Board of Trustees and Mellon Bank Corp. The suit essentially alleged that the defendants wrongfully seized and misappropriated the class members’ restricted endowment funds and grants held in AHERF’s custody. In the late 1980s, the suit said, AHERF expanded with the acquisition of two medical schools — the Medical College of Pennsylvania and Hahnemann University, and their related hospitals — and later acquired several community hospitals and the St. Christopher Hospital for Children. In the midst of the financial strain that resulted from AHERF’s overexpansion, the suit alleged that the defendants raided and used millions of dollars from various endowments and accounts for “unauthorized purposes, including awarding themselves exorbitant pay raises, bonuses, and other compensations; repaying a [$89 million] loan to defendant Mellon; and for other business purposes of AHERF.” The alleged misuse of funds was “part of a larger fraudulent scheme by the defendants to keep AHERF afloat for as long as possible so that the defendants could continue to loot AHERF as well as plaintiffs’ funds in order to enrich themselves,” the suit alleged. In July 1998, AHERF filed for bankruptcy court protection from creditors who were owed an estimated $1.3 billion. Several teams of defense lawyers moved to have the suit dismissed, arguing that both proposed plaintiff classes lacked standing to bring suit under RICO. To have standing to bring a RICO claim, a plaintiff must have been injured in his business or property, and that injury must have been proximately caused by the alleged RICO pattern. The defense teams argued that none of the plaintiffs alleged a true property interest that would grant standing to bring the suit. DONORS Looking first to the charitable donor class, Newcomer found that “despite the dearth of case law on the subject, it has been held that a property interest is created in a donation when a right of reverter, right to modify, or right to redirect is retained by the donor.” But Pennsylvania courts, he said, “have joined in not recognizing an implied possibility of reverter.” Instead, Newcomer said, Pennsylvania courts have concluded that “where there is a conveyance to a corporate grantee, the addition of the words, ‘for no other use or purpose whatsoever,’ is not of itself sufficient to create a base fee where the purpose expressed in the limitation and in the corporate charter are similar.” The suit alleged that when the plaintiffs established, or contributed to the endowments or grants held by AHERF, “the officer and trustee defendants agreed and/or caused AHERF to represent to and agree with plaintiffs and class members that the endowment and grant funds would be restricted, that is, AHERF and the officer and trustee defendants could only use the funds for the purposes designated by plaintiffs and the Class, and not for any other purposes.” But Newcomer found that the suit’s “general allegations” about the plaintiffs’ endowment agreements’ language “are not sufficient to show that the plaintiffs retained any rights of reverter, rights to modify, or rights to redirect.” BENEFICIARIES Turning to the standing of the proposed beneficiary class, Newcomer found that the question was somewhat more complicated. “Although the beneficiary plaintiffs’ standing to enforce the trusts is not really contested, their standing as to whether they may recover damages is disputed,” Newcomer wrote. The Restatement (Second) of Trusts, he said, states that “the remedies for the failure of the trustees of a charitable trust to perform their duties under the trust are exclusively equitable.” However, Newcomer said, the Restatement also says that “if the trustee is under a duty to pay money immediately and unconditionally to the beneficiary, the beneficiary can maintain an action at law against the trustee to enforce payment.” Newcomer concluded that the suit “sufficiently pleads that AHERF was holding grant money for the beneficiary plaintiffs in charitable trust for the purposes of funding their research,” and that the allegations “sufficiently show that AHERF had a duty to pay the beneficiary plaintiffs from the funds.” However, Newcomer said, “AHERF’s duty to pay was not unconditional; rather, it was restricted to the particular uses for which the money was granted.” While the beneficiary plaintiffs “clearly had an interest in the funds,”‘ he said, “their interest was limited to the conditions and restrictions set forth by the grants and was not alienable without valid restraint upon alienation.” As a result, Newcomer concluded that the beneficiary plaintiffs “did not have a property interest in those restricted grants funds for which they now seek to recover unrestricted, and possibly treble, damages.” Therefore, he said, neither of the proposed classes have standing to bring any RICO claims. Mellon Bank was represented by attorneys Jay H. Calvert, Joseph B.G. Fay and Bryant Lim of Philadelphia-based Morgan Lewis & Bockius, along with Richard S. Toder and Menachem O. Zelmanovitz of Morgan’s New York office. Eight “outside director” defendants were represented by Pittsburgh-based Kirkpatrick & Lockhart attorneys Robert L. Byer, David L. McClenahan, Wendy E. Smith, Nicholas P. Vari and John T. Waldron. Sherif S. Abdelhak, AHERF’s former CEO, was represented by George E. McGrann of Pittsburgh’s Sweeney Metz Fox & Schermer, along with Judith F. Olson of Philadelphia-based Schnader Harrison Segal & Lewis. AHERF’s former head of human resources, Dwight L. Kasperbauer, was represented by Philadelphia-based Drinker Biddle & Reath attorneys Michael J. Holston, John F. Schultz, Kirk D. Weaver, Amy E. Pizzutillo and Mary Catherine Roper. David McConnell, AHERF’s former CFO, was represented by Kevin K. Douglass and Amy L. Wetterau of Babst Callard Clements & Zomner, along with Robert A. King of Pittsburgh-based Buchanan Ingersoll. And former AHERF general counsel Nancy Wynstra was represented by Sal Cognetti of Scranton’s Foley Cognetti & Comerford, along with Jeffrey B. Balicki, Jeffrey R. Lalama and Francis C. Rapp of Pittsburgh-based Feldstein Grinberg Stein & McKee.

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