Clark v. Natl Equi Hold Inc

• Court: Court of Appeals for the Fifth Circuit
• Decided: January 4, 2008
• Docket: 06-40364
• Status: Unpublished

Opinion

In the United States Court of Appeals United States Court of Appeals Fifth Circuit

FILED for the Fifth Circuit January 4, 2008 _______________ Charles R. Fulbruge III m 06-40364 Clerk _______________

JOHN S. CLARK, INDIVIDUALLY AND AS TRUSTEE OF THE JOHN S. AND LORETTA J. CLARK TRUST,

Plaintiff-Appellant,

VERSUS

DONALD DOUGLAS, ALSO KNOWN AS DONNIE DOUGLAS; CHERYL WALKER DOUGLAS; CADDO CREEK PRODUCTION, INC., A TEXAS CORPORATION; LYLE J. BRANDON; LANA ROBERTS BRANDON,

Defendants-Appellees.

_________________________

Appeals from the United States District Court for the Eastern District of Texas m 4:05-CV-290 ______________________________ Before GARWOOD, SMITH, and DEMOSS, the terms of a second lease package. Clark Circuit Judges. contends that the second lease package con- tained the following terms pursuant to an oral JERRY E. SMITH, Circuit Judge:* agreement: (1) The trust would acquire the surface rights for, and the working interest in, John Clark appeals the dismissal of this civil the Temple-Inland Lease; (2) Douglas and RICO action pursuant to Federal Rule of Civil Caddo Creek would operate the more than fif- Procedure 12(b)(6) and the denial of relief teen wells on the Temple-Inland Lease at their under Federal Rule of Civil Procedure 60(b). sole expense; (3) the trust would obtain the We affirm. working interests in the T.O. Meaux Lease, the Compass-Moore Lease, the McClinton I. (South 25 Acres) Lease, the McKinney Lease, Clark makes the following allegations as the Kalos Lease, the Crawford 5 Lease, the part of the RICO case statement filed in sup- Garrison Lease, and the 9.99% override on the port of his complaint: On September 5, 1998, McClinton (South 25 Acres) Lease from T. defendant Donald Douglas contacted Clark Johnson, Ltd.; (4) Douglas and Caddo Creek about investing in oil well production managed would operate the wells on these leases at their by Caddo Creek Production, Inc. (“Caddo sole expense; and (5) after the trust received Creek”), an oil and gas business of which the return of all its investment, revenues would Douglas was an officer, director, and share- be shared equally between the trust and holder. Based on Douglas’s representation Douglas/Caddo Creek. that he had significant experience in the oil and gas industry, Clark, individually and as trustee Clark further avers that, pursuant to the for the John S. and Loretta J. Clark Trust (“the second agreement, he paid $835,000 to T. trust”), agreed with Douglas that Lockout Johnson, Ltd., and received a warranty deed Corporation/21st Century Marketing, Inc. purporting to grant title to the properties de- (“Lockout”), would provide Clark with a 50% scribed above. A few months later, Douglas interest in the production of five wells (a “five and McBay informed Clark that all the leases well package” to be transferred to the trust by except the Temple-Inland lease were “doggy Lockout representative Elvis Clint McBay); leases” subject to plugging liabilities; they ad- Lockout would operate the wells and market vised Clark to dispose of the leases so as to the production therefrom at no cost to the avoid these liabilities. Clark then asserts that trust; and the trust would pay $85,000 to he tried to transfer the leases to a third party Lockout, McBay, and Douglas. but that someone altered the McClinton Lease and the override assignments to reflect that T. Clark alleges that he paid the initial $85,000 Johnson, Ltd., was the grantee. T. Johnson, fee, then another $30,000 to Caddo Creek, Ltd., subsequently assigned its interest to before he agreed with Douglas and McBay to McBay.

In May 2001, Douglas, his wife Cheryl, * Caddo Creek, Lyle Brandon, and Lana Bran- Pursuant to 5TH CIR. R. 47.5, the court has de- don altered a copy of the June 16, 1999, as- termined that this opinion should not be published and is not precedent except under the limited signment, naming Caddo Creek, rather than circumstances set forth in 5TH CIR. R. 47.5.4. the trust, as owner of the Temple-Inland

2 Lease. They then sold an interest in that lease and the Knollenbergs. Donald Douglas, Cher- to a third party for $100,000. yl Douglas, Caddo Creek, and Lyle and Lana Brandon appeared pro se and did not file mo- Around June 2001, Douglas and McBay tions to dismiss, but the court dismissed the entered into an agreement with William M. complaint against them on its own motion for Knollenberg, an oilman to whom Douglas had failure to state a claim.3 Having dismissed introduced Clark. Under the agreement, Knol- Clark’s federal claim with prejudice, the court lenberg issued five million shares of common declined to exercise jurisdiction over his sup- stock in National Equities Holdings, Inc. plemental claims and dismissed them without (“NEHI”), a company of which Knollenberg prejudice pursuant to 28 U.S.C. § 1367(c). was president, to Douglas and McBay, in ex- change for which Douglas, Caddo Creek, Mc- Clark appealed, then dismissed the appeal Bay and Lockout transferred interests in the against all counseled defendants (NEHI, Wil- Temple-Inland Lease to third parties at the di- liam and Doris Knollenberg, Virgin America rection of Knollenberg. In October 2002, Energy, Inc., MPCC Inc., Lockout Corpora- Knollenberg, on behalf of NEHI, offered to tion, and McBay) in an agreement stipulating purchase from Clark the trust’s interest in the that each side shall pay its own attorneys’ fees, Temple-Inland Lease; Clark rejected the offer. but Clark maintains the appeal against all pro se defendants (Donald Douglas, Cheryl Doug- Thereafter, however, McBay and Knollen- las, Caddo Creek, Lyle Brandon and Lana berg arranged for NEHI and two other compa- Brandon), who have not filed a brief in this nies allegedly controlled by Knollenberg to appeal. form limited partnerships to drill wells on the Temple-Inland Lease. Third parties invested A few days after this case was submitted in the partnerships. without oral argument to the instant panel, Clark filed in the district court a “Motion to II. Vacate and To Remand or To Remand Issue NEHI and two other companies controlled of Newly Discovered Evidence.” To confer by Knollenberg sued Clark individually and as jurisdiction on the district court to grant the trustee of the trust in Texas court for breach of motion, if it wished to in its discretion under contract, quantum meruit, and promissory es- rule 60(b), the panel issued an opinion that de- toppel; eventually McBay and Lockout were nied the motion to vacate and remand but joined as defendants. Clark filed the instant granted in part the motion to remand, thus re- action, seeking damages for RICO violations,2 manding for the limited purpose of giving the common law fraud, and conversion; Clark also district court the latitude of granting the rule seeks an accounting. 60(b) motion if it wished. The panel retained jurisdiction. Clark v. Douglas, 229 Fed. The district court dismissed this action pur- suant to rule 12(b)(6), acting on motions to dismiss filed by McBay, Lockout, NEHI, Vir- 3 See Bazrowx v. Scott, 136 F.3d 1053, 1054 gin America Energy Corporation, MPCC Inc., (5th Cir. 1998) (“The district court may dismiss an action on its own motion under Rule 12(b)(6) ‘As long as the procedure employed is fair.’”) (citation 2 See 18 U.S.C. § 1962(a),(b), (c). omitted).

3 App’x 314 (5th Cir. 2007) (per curiam). cember 30, 2005. Clark indicates that he informed the court on November 21, 2005, In an order entered on August 30, 2007, that he intended to amend his complaint, but styled “Memorandum Opinion and Order De- the record shows that he failed to file an nying Plaintiff’s Motion for Relief from Judg- amendment. Clark implies that this failure ment,” the district court denied the rule 60(b) resulted from a sudden alteration by the court motion. On September 5, 2007, Clark ap- of its scheduling order on December 20, 2005, pealed that order. We consider both appeals whereby the court refused to accept further as a consolidated matter. filings until it ruled on defendants’ motions to dismiss. Clark avers that he moved to lift that III. restriction on case filings and to amend his Apparently feeling that his repeated failure complaint but that the motion was inexplicably to comply with discovery orders and briefing ignored. limitations in the district court was insufficient to convey the full measure of his disrespect for Clark fails to mention in his brief that he did that court, Clark accuses the district court of not file his motion for leave to amend his com- improperly denying his motion for leave to plaint until January 21, 2006, a month after the amend his complaint merely for the purpose of time period for free amendments had expired, removing a difficult case from its docket. We three weeks after the free-amendment period disagree. had been initially scheduled to end, and nearly six months after McBay and Lockout had filed Although dismissals on the pleadings with- their motion under rule 12(b)(6). Ultimately, out leave to amend are disfavored, see Price v. Clark availed himself of three chances to set Pinnacle Brands, Inc., 138 F.3d 602, 608 (5th forth the factual allegations of his complaint: Cir. 1998), the disposition here was correct. the complaint, the RICO case statement (filed We review denial of leave to amend a com- pursuant to counsel’s FED. R. CIV. P. 11 obli- plaint for abuse of discretion. Id. Although gation to make a reasonable investigation of Federal Rule of Civil Procedure 15(a) estab- the facts underlying his complaint), and his lishes a bias in favor of granting motions to reply to the defendants’ response to the RICO amend a complaint, leave is not automatic. “In case statement.4 Under these circumstances, it deciding whether to allow amendment, a dis- was not an abuse of discretion to deny Clark trict court ‘may consider such factors as undue an additional opportunity to amend pursuant delay, bad faith or dilatory motive on the part to a motion filed three weeks after the time for of the movant, repeated failure to cure defi- amendment specified by the scheduling order ciencies by amendments previously allowed, undue prejudice to the opposing party, and fu- tility of amendment.’” Id. (quoting Southmark Corp. v. Schulte Roth & Zabel (In re South- 4 mark Corp.), 88 F.3d 311, 314 (5th Cir. See Herrmann Holdings Ltd. v. Lucent Techs. 1996)). Inc., 302 F.3d 552, 566-67 (5th Cir. 2002) (affirm- ing refusal to amend permit further amendment after plaintiff had amended twice). See also Price, Clark was unduly dilatory. The court’s 138 F.3d at 608 (affirming refusal to amend after scheduling order provided that pleadings could plaintiff had filed complaint, RICO case statement, be freely amended without motion until De- and reply to motion to dismiss).

4 had ended.5 serting a RICO claim must allege the existence of an enterprise.” Id. at 204. Such an en- IV. terprise may be either a formal legal entity or We likewise affirm the rule 12(b)(6) dis- an association-in-fact. See St. Paul Mercury missal, which we review de novo. See Thomp- Ins. Co. v. Williamson, 224 F.3d 425, 439 (5th son v. Goetzmann, 337 F.3d 489, 494 (5th Cir. Cir. 2000). 2003). Dismissal is appropriate only where it appears beyond doubt that plaintiff would not Clark alleges that the defendants collective- be entitled to recover under any set of facts he ly engaged in an association-in-fact. To prove could prove in support of his claim. See that an association-in-fact-type RICO enter- Conley v. Gibson, 355 U.S. 41, 45-46 (1957). prise existed, Clark must eventually bring forth “evidence of an ongoing organization, formal or informal, and . . . evidence that the various Clark has alleged RICO violations under 18 associates function as a continuing unit . . . . U.S.C. § 1962(a), (b), (c), and (d), which This formulation of an association-in-fact en- “[r]educed to their simplest terms . . . state the terprise incorporates the notion of continuity.” following: Crowe, 43 F.3d at 205. Accordingly, an “‘as- sociation-in-fact enterprise 1) must have an ex- (a) a person who has received income from istence separate and apart from the pattern of a pattern of racketeering activity cannot in- racketeering, 2) must be an ongoing organiza- vest that income in an enterprise; tion and 3) its members must function as a continuing unit as shown by a hierarchical or (b) a person cannot acquire or maintain an consensual decision making structure.’” Id. interest in an enterprise through a pattern (quoting Delta Truck & Tractor Inc. v. J.I. of racketeering activity; [and] Case Co., 855 F.2d 241, 243 (5th Cir. 1988)).

(c) a person who is employed by or associ- ated with an enterprise cannot conduct the The district court ruled that Clark had failed affairs of the enterprise through a pattern of to plead, outside of conclusional statements of racketeering activity.6 law masquerading as factual conclusions, that the alleged enterprise had any existence sepa- Crowe v. Henry, 43 F.3d 198, 203 (5th Cir. rate from the pattern of racketeering or that its 1995). These sections contain common ele- members functioned as a continuing unit with ments, one of which is that “[a] plaintiff as- a coherent decision-making structure. Be- cause it is sufficient to sustain the judgment, we look only to whether Clark has pleaded 5 Although the district court did not specifically that an enterprise existed separately from the mention that it was denying leave to amend, it is alleged pattern of racketeering. evident that the court so intended and was doing so largely for the reason that Clark had missed the He did not. Clark’s RICO case statement deadline and had had other opportunities to correct declares the following: any deficiency. 6 Section 1962(d) prohibits only conspiracy to The “enterprise” itself was to and did en- violate the first three sections. gage in no legitimate business. The “enter-

5 prise” came into being only for the purpose brushing their teeth), but § 1962 applies solely of engaging in fraudulent activity, i.e. where the enterprise as a whole exists sepa- “Scamming” those who might wish or be rately and apart from the alleged pattern of convinced to engage in the oil and gas bus- racketeering activity. See Elliot v. Foufas, iness and other speculative investments. 867 F.2d 877, 881 (5th Cir. 1989). Although [all of the defendants] presumably all engage in legitimate activitiesSSsome re- The facts pleaded indicate that it did not. lated to the oil businessSSapart from the The complaint was properly dismissed, and the “enterprise,” when the “enterprise” itself district court acted within its discretion by dis- did and do goes [sic] about its intended ac- missing Clark’s state law claims without preju- tivities, it engaged only in nefarious activ- dice to their being refiled in state court. See ities, albeit all were not “racketeering activi- § 1367(c). ties,” as defined by 18 U.S.C. § 1961(1) and albeit all were not directed toward V. Clark and/or the Clark Trust. There is no reversible error in the denial of the rule 60(b) motion. We affirm that denial, That statement, in conjunction with the fac- essentially for the reasons given by the district tual allegations recounted above, illustrates court. that, aside from his conclusional allegation that the association-in-fact enterprise exists sep- The judgment and the order denying rule arately from the pattern of racketeering, Clark 60( b) relief are AFFIRMED. has failed to plead specific facts showing that the association exists for purposes other than merely to commit the predicate acts. The “en- terprise” mentioned by § 1962 may not be the pattern of racketeering activityitself; rather, “it is an entity separate and apart from the pattern of activity in which it engages.” United States v. Turkette, 452 U.S. 576, 583 (1981).

Based on the pleadings, the association-in- fact between the defendants existed uniquely to defraud Clark and the trust of their invest- ment; it did not exist separately and apart from the pattern of racketeering activity alleged and therefore did not exist in violation of § 1962. Clark’s insistence in his brief that various members of the alleged enterprise participate in the oil and gas business and engage in on- going activities such as oil well operation is misplaced; the members of any alleged enter- prise will have an existence separate from the pattern of racketeering activity (easily demon- strated by their engaging in such activities as