Rogers v. McDorman

Decision Date18 March 2008
Docket NumberNo. 05-41347.,05-41347.
Citation521 F.3d 381
PartiesKenneth D. ROGERS; Andrew Dunn; Pat H. Coone; Betty S. Coone; Wayne D. Butchee; Clint L. Hines; David G. Hines; Sybil K. Jenkins, Plaintiffs-Appellants, v. Robert L. McDORMAN; et al., Defendants-Appellees.
CourtU.S. Court of Appeals — Fifth Circuit

Richard Lyle Coffman, Beaumont, TX, George Robert Blakey (argued), Notre Dame Law School, Notre Dame, IN, for Plaintiffs-Appellants-Cross-Appellees.

David Lawrence Horan (argued), David John Schenck, Jones Day, Dallas, TX, for Defendants-Appellees.

Before HIGGINBOTHAM, SMITH and OWEN, Circuit Judges.

PATRICK E. HIGGINBOTHAM, Circuit Judge:

The former directors of Mauriceville National Bank (Directors) sued Robert McDorman, Meshell McDorman, Deon Thornton, and various McDorman-related business entities (Defendants), alleging violations of the Racketeer Influenced and Corrupt Organizations Act (RICO) and state-law claims. Joe Penland was also a defendant. A jury found Defendants liable under RICO and some state-law theories, but only assessed damages for the RICO violations; however, the jury also found that Directors were in pari delicto with Defendants. The district court entered a take nothing judgment against Defendants.

Directors appealed, principally challenging the in pari delicto defense and the finding that Penland was not liable. Penland cross-appealed. Prior to oral argument, Penland and Directors settled, dismissing their appeals against each other.1 Directors maintained their appeal as to Defendants. For the reasons that follow, we affirm.

I

Robert McDorman held an ownership interest in an entity called MML, which owned two used car lots in east Texas, called "McDorman Motors." McDorman also held an ownership interest in a wholesale car company, RLM. McDorman and his businesses had a longstanding relationship with Mauriceville National Bank (MNB), a small Texas bank.

In December 1999, McDorman and Joe Penland formed a company called Mac-Pro, which began operating a car lot under the "McDorman Motors" name. Penland contributed capital and McDorman ran the day-to-day operations. In December 2000, with the businesses experiencing cash-flow problems, Penland agreed to make an additional capital contribution, and in exchange acquired greater ownership of the businesses. MML, RLM, and Mac-Pro were rolled into a new, enlarged Mac-Pro, in which Penland took an 85% ownership interest. McDorman continued to manage the day-to-day operations.

Beginning in October 2000, McDorman initiated a check-kiting scheme — which he considered a loan arrangement with MNB — to cover short-term financing gaps. The scheme moved money through MNB, Community Bank, and SouthTrust Bank. The scheme was not, however, a typical check-kite, as it used cashier's checks and, more important here, MNB actively participated in it.2

The scheme followed a regular pattern. McDorman's wife, Meshell, would call MNB in the morning to check the balances in the Mac-Pro and McDorman Motors accounts. She would then have MNB prepare cashier's checks payable to Mac-Pro or McDorman Motors. A cashier's check is "[a] check drawn by a bank on itself';3 it is an obligation of the bank that the bank is committed to honor, making it similar to cash.4 Thus, normally, a customer must pay for a cashier's check when it is issued, such as by tendering cash or debiting an account at the bank. McDorman, however, did not do so. Rather, a runner would be sent to pick up the cashier's checks, which were then deposited in Mac-Pro and McDorman Motors accounts at Community Bank or SouthTrust Bank. The runner would "pay" for the cashier's checks with regular checks drawn on Mac-Pro and McDorman Motors accounts at MNB. MNB, however, would not immediately process the payment checks, but would hold the payment checks for processing on the next business day. This created a gap between when McDorman took possession of MNB funds and when he paid for the cashier's checks, allowing McDorman to belatedly cover the payment checks. The next day, the runner would deposit into Mac-Pro and McDorman Motors accounts at MNB regular checks drawn on accounts at Community Bank or SouthTrust Bank to cover the previous day's payment checks. At the end of the scheme, it evolved to where McDorman was receiving the cashier's checks in the morning and the payment checks were not dropped off until the afternoon.

For the scheme to work, McDorman needed MNB's help, and he received it. Thornton, the then-president and CEO of MNB, directed MNB employees to assist McDorman. A number of employees prepared the cashier's checks, although Teresa Viator prepared most of them. The trial evidence indicates that other employees played a role in facilitating the scheme, such as the tellers who specially tracked and reported deposits into McDorman related accounts.

From October 2000 through early January 2001, more than $4 million was kited. The scheme temporarily ceased when bank auditors and examiners arrived at MNB in January. The scheme resumed in March 2001, and from then until its collapse on July 12, 2001, approximately $37 million more was kited.

In June 2000, Penland became concerned that McDorman had used Mac-Pro funds to pay personal debts. According to Penland, this prompted his decision to withdraw from Mac-Pro, although some evidence indicates that he wanted out because of the check-kiting. Penland officially transferred his ownership interest on July 13, but in the meantime required McDorman to fax to him each day copies of the checks written on the businesses' accounts.

Penland claimed that in early July he discovered suspiciously large checks being written by McDorman to MNB; he met with McDorman and learned of the scheme. McDorman, however, did not immediately stop the check-kiting. The scheme unraveled when Penland reported it to Community Bank on July 12, and Community Bank took steps to protect itself. Mac-Pro and McDorman Motors accounts at Community Bank were frozen, and Penland instructed McDorman to issue stop payment orders on Community Bank and SouthTrust Bank checks paid to MNB. A number of Mac-Pro and McDorman Motors debts — but not the amounts owed for the cashier's checks — were paid off after the scheme stopped. MNB, unable to collect payment on the final cashier's checks, suffered some $3.3 million in losses and faced the prospect of Tailing. Federal regulators required Directors to recapitalize MNB for $2 million, enter a consent decree, and make periodic reports.

Throughout the check-kiting scheme, and before, MNB and McDorman had other banking and lending relationships. Car dealers like McDorman often use "sight drafts" to purchase cars. McDorman would frequently negotiate sight drafts to third parties, and occasionally MNB paid for the sight drafts with cashier's checks before McDorman paid for the cashier's checks. MNB's internal compliance officer, Donna Venable, thrice informed Directors about this. MNB also entered into an indirect lending agreement with McDorman, whereby MNB would purchase car loans from McDorman. Finally, MNB made various other loans to McDorman for example, loaning $350,000 to help one of his businesses emerge from bankruptcy. Although the parties dispute the importance, and profitability, of McDorman as a customer to MNB, it is clear that McDorman was a significant customer.

MNB's claims against Defendants and Penland were assigned to Directors, and in July 2003, Directors brought claims under the civil provisions of RICO5 and Texas law. The case was tried over twelve days. The jury found that 1) Penland was not liable for anything; 2) Defendants violated civil RICO, causing $3,374,256 in damages, and that they conspired to violate RICO but for zero damages; 3) Directors were in pari delicto with Defendants; 4) no defendants were liable for common-law fraud or conspiracy to commit fraud; and 5) the McDormans and Thornton were liable for constructive fraud but for zero damages. The district court entered a take nothing judgment.

II

The principal issue in this appeal is the in pari delicto defense, which "derives from the Latin, in pari delicto potior est conditio defendentis:`In a case of equal or mutual fault ... the position of the [defending] party ... is the better one.'"6 The defense embodies "the common-law notion that a plaintiffs recovery may be barred by his own wrongful conduct,"7 and is undergirded by the concerns, "first, that courts should not lend their good offices to mediating disputes among wrongdoers; and second, that denying judicial relief to an admitted wrongdoer is an effective means of deterring illegality."8

A

We consider first a threshold question: whether Defendants properly raised in pari delicto. Directors point to Rule 8(c), which requires parties to plead affirmative defenses,9 and argue that in pari delicto falls within the Rule's ambit, Defendants did not properly plead and raise the defense, and therefore Defendants waived it.10

While it is true that failure to abide by Rule 8(c) leads to waiver, there is some play in the joints. A defendant must "plead an affirmative defense with enough specificity or factual particularity to give the plaintiff`fair notice' of the defense that is being advanced."11 The concern is that "[a] defendant should not be permitted to lie behind a log and ambush a plaintiff with an unexpected defense."12 "Where the [affirmative defense] is raised in the trial court in a manner that does not result in unfair surprise, however, technical failure to comply precisely with Rule 8(c) is not fatal."13 "More specifically, a defendant does not waive an affirmative defense if it is raised at a`pragmatically sufficient time, and [the plaintiff] was not prejudiced in its ability to respond.'"14

We agree that in pari delicto is an affirmative defense, but conclude that Defendants did not waive it. Their answers specifically raised Directors' conduct as an affirmative defense. For example,...

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