Neibel v. Trans World Assur. Co., s. 95-16149

Decision Date11 March 1997
Docket NumberNos. 95-16149,95-16748,s. 95-16149
PartiesRICO Bus.Disp.Guide 9237, 97 Cal. Daily Op. Serv. 1800, 97 Daily Journal D.A.R. 3382 John NEIBEL; Nancy Neibel; Laureen Perkins; Michael Perkins; Rhonda Foston; Frances Foston; Bernard Foston; James Harding; Richard Kerrigan; Charlene McLean; Roy Phillips; Arthur Yancey; Marilyn Dupree; Dennis Layton; Allen Layton; Kathleen O'Docharty; David O'Docharty; John Core; Delilah Core; Gary Strand; Richard Rose; Elbert Ferguson; C.J. Bartyzel; Joseph Ransom; Becky Bochman; Bruce Bochman; Shirley Kent; Plaintiffs-Appellees, v. TRANS WORLD ASSURANCE COMPANY, Defendant-Appellant.
CourtU.S. Court of Appeals — Ninth Circuit

Sandra J. Smith and Barry R. Levy, Horvitz & Levy, Encino, California, for the defendant-appellant.

William H. Blessing, Cincinnati, Ohio, Iris W. Fein of Fein & Jakab, New York City, for the plaintiffs-appellees.

Appeals from the United States District Court for the Northern District of California; Charles A. Legge, District Judge, Presiding, D.C. No. CV-91-02316-CAL.

Before: GOODWIN, WALLACE, and RYMER, Circuit Judges.

OPINION

WALLACE, Circuit Judge:

Trans World Assurance (Trans World) appeals from a judgment following a jury trial in favor of John Neibel and twenty-one other plaintiff-appellees (Neibel) for violations of 18 U.S.C. § 1962(d) of the Racketeer Influenced and Corrupt Organizations Act (RICO), common law fraud, and negligent misrepresentation. Trans World also challenges the jury's state law punitive damage award, as well as the district court's award of attorney's fees and related expenses under 18 U.S.C. § 1964(c). The district court had jurisdiction under 28 U.S.C. § 1331. We have jurisdiction over this timely appeal pursuant to 28 U.S.C. § 1291, and we affirm.

I

This is not the first time that a tax scheme of Donald Fletcher and a conspiring insurance company has graced the pages of the Federal Reporter. See Davis v. Mutual Life Ins. Co. of New York, 6 F.3d 367 (6th Cir.1993), cert. denied, 510 U.S. 1193, 114 S.Ct. 1298, 127 L.Ed.2d 650 (1994); Hofstetter v. Fletcher, 905 F.2d 897 (6th Cir.1988). Each time, the facts remain remarkably consistent.

Fletcher and his associates, who operated under the auspices of "Fletcher Insurance Associates" (FIA), preyed on what he called "Joe Lunch Buckets"--middle class Americans with little experience with the tax laws or the legal system. At his tax seminars, Fletcher promised those in attendance, like Neibel, that they could lawfully reduce their income tax liability to zero by taking home-based business deductions under the Internal Revenue Code. Fletcher's program would provide tax return preparation and advice, future legal protection against Internal Revenue Service (IRS) audits, and insurance benefits to the client-investors who joined.

Yet there were several catches to this "tried and true" scheme. To enroll in Fletcher's plan, a client had to (1) run a home-based business, like Amway; (2) record every family expenditure; (3) turn over all tax records and affairs to Fletcher and his associates; and most importantly, (4) buy the life insurance policies specified by Fletcher, which in this case belonged to Trans World. Fletcher "freed up" money for a client to purchase the insurance policy by preparing new W-4 tax forms, which increased the number of withholding allowances and thus reduced tax liability. Insurance companies (here, Trans World) would automatically withdraw this "extra" money from the client's checking account to pay for the insurance policy.

Impressed with Fletcher's sales of other insurance companies' policies, Trans World executive Charles Royals hired Fletcher in September 1981 and immediately appointed him a general agent with Trans World. This position gave Fletcher the authority to hire, train, and fire Trans World agents. Trans World also named Fletcher as its "Marketing Director" on that same day. Both positions were independent contractor positions. Fletcher and FIA did good business for Trans World and quickly became one of Trans World's top agencies. Fletcher's tax scheme brought millions of dollars in sales to Trans World. Royals urged Fletcher to "keep up the good work with the seminars. You're doing great." Royals attended one of Fletcher's seminars as a featured guest and was introduced to the audience as Trans World's president. Royals even shook hands and spoke with those in attendance. Royals also attended a meeting at FIA's office in San Carlos, California, and was overheard discussing Fletcher's scheme and "how they were going to make money" from FIA. Royals, as Trans World's president, was fully aware of the nature of Fletcher's scheme and approved of it: "I have no problem with you changing W-4 forms. It's done all the time." Fletcher described Trans World's support for his scheme: "[Trans World is] one-hundred percent behind us" and "we're all talking the same language."

Unfortunately for Fletcher's and Trans World's clients, the scheme raised the suspicions of the IRS, which began auditing the returns of Trans World's clients who purchased insurance policies through Fletcher's program. Despite FIA's promise that "nobody had ever lost a dime" under its scheme, these audits eventually led to Fletcher's and Trans World's clients incurring severe IRS penalties for late payments and overstated deductions. In May 1986, Trans World received a letter from Michael Florez, an attorney, that detailed Fletcher's "tax shelter sham" and its impact on Trans World's clients. Trans World rejected Florez's offer to provide more information and continued to sign up policyholders through Fletcher's scheme. In January 1987, Trans World was served with a summons and complaint for a federal suit in Ohio arising from Trans World's relationship with Fletcher's tax scheme. Trans World did not timely respond to this complaint and continued to use FIA agents to sell its insurance policies. In March 1987, Trans World received the second service of summons for the Ohio litigation, yet still continued to sell policies through Fletcher's scheme.

By the late 1980's, Trans World faced several lawsuits arising from its association with FIA. In 1990, Royals ordered the destruction of microfilm records in Trans World's San Mateo headquarters, which contained the sales records of FIA agents. Trans World's Pensacola administrative office also destroyed its microfilm records. Although Royals claimed this destruction was standard operating procedure, Trans World's principal office secretary of ten years, Marti Groves, testified that the destruction of microfilm records was not business as usual.

At a jury trial, Neibel alleged that Trans World and Mutual Life Insurance Company of New York (Mutual) violated 18 U.S.C. § 1962(c)-(d). Neibel also alleged several state law claims, including fraud and negligent misrepresentation, and requested state law punitive damages. Mutual settled out of court with Neibel before trial. After Neibel finished presenting evidence, Trans World moved for a directed verdict. The district court granted Trans World's motion on the section 1962(c) claim, concluding that Neibel failed to establish that Trans World participated directly or indirectly in the conduct of FIA's affairs. The district court denied the motion as to the remaining claims, and the jury found Trans World liable for violating section 1962(d), awarding Neibel $259,366 in actual damages (trebled to $778,098 under 18 U.S.C. § 1964(c)). It also awarded Neibel $87,000 in damages for fraud and negligent misrepresentation. Finally, the jury awarded $500,000 in punitive damages under California Civil Code § 3294. After trial, the court awarded Neibel $472,066 in attorneys' fees and $49,496.24 in costs under section 1964(c) of RICO.

II

Trans World first argues that the district court's directed verdict on the section 1962(c) claim prevents Neibel from succeeding on the section 1962(d) claim. We review interpretations of RICO de novo. Ticor Title Ins. Co. v. Florida, 937 F.2d 447, 450 (9th Cir.1991). Section 1962(c) of RICO states:

It shall be unlawful for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity or collection of unlawful debt.

18 U.S.C. § 1962(c). Section 1962(d) states: "It shall be unlawful for any person to conspire to violate any of the provisions of subsection (a), (b), or (c) of this section." 18 U.S.C. § 1962(d).

Trans World cites Religious Technology Center v. Wollersheim, 971 F.2d 364, 367 n. 8 (9th Cir.1992), and contends that since the district court entered a directed verdict on the substantive claim (section 1962(c)), then the conspiracy claim (section 1962(d)) to violate section 1962(c) cannot stand. Yet Religious Technology Center stands for a wholly different proposition. In that case, we held that since the plaintiff "failed to allege the requisite substantive elements of RICO, the conspiracy cause of action cannot stand." Id. In other words, if the section 1962(c) claim does not state an action upon which relief could ever be granted, regardless of the evidence, then the section 1962(d) claim cannot be entertained. That proposition differs from the facts of this case, where the trial court granted a directed verdict on the 1962(c) claim due to a lack of evidence. A lack of evidence may render the substantive claim deficient, but it does not render it legally impossible.

We have never considered directly whether a civil conspiracy claim can survive if the substantive claim does not. In United States v. Ohlson, 552 F.2d 1347, 1349 (9th Cir.1977), we held that in a criminal RICO proceeding, the crime of conspiracy...

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