Hofstetter v. Fletcher
| Decision Date | 14 October 1988 |
| Docket Number | No. 87-3502,87-3502 |
| Parties | -1109, 91-1 USTC P 50,102 Myra L. HOFSTETTER, Plaintiff-Appellee, v. Donald S. FLETCHER, The Fletcher-McKelvie Group, Fletcher Insurance Association, and Evelyn Johnson, Defendants-Appellants, and Neil McKelvie, Neil Christal, Sr., Neil Christal, Jr., and The New York Life Insurance Company, Defendants. |
| Court | U.S. Court of Appeals — Sixth Circuit |
Barbara M. Brown (argued), Cincinnati, Ohio, for defendants-appellants.
Michael G. Florez, William H. Blessing (argued), Cincinnati, Ohio, for plaintiff-appellee.
Before MARTIN, GUY and NORRIS, Circuit Judges.
The defendants, Donald S. Fletcher, Evelyn Johnson, and the Fletcher-McKelvie Group, appeal from the jury's verdict in favor of plaintiff, Myra L. Hofstetter, finding defendants liable for common law fraud, breach of fiduciary duty, breach of contract, and for violating the Ohio Consumer Sales Practices Act, Ohio Rev.Code Ann. Sec. 1345.01, et seq. Fletcher and Johnson also appeal from the portion of the jury's verdict imposing liability under the federal Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. Sec. 1961, et seq. For the following reasons, the award of damages is affirmed.
The various claims against defendants were essentially based on their use of a fraudulent sales tactic to sell life insurance policies to investors such as plaintiff, Myra Hofstetter. Fletcher, a San Francisco based agent for New York Life Insurance Company, travelled throughout the country selling life insurance policies by emphasizing favorable tax advantages. According to Fletcher, potential investors could drastically reduce and even eliminate their federal income tax liability by purchasing a life insurance policy in conjunction with the formation of a home-based business. Fletcher informed the investors that they could write off almost all of their household expenses and attribute them to deductible business expenses. Fletcher also promised to assist the investors in the filing of their annual income tax forms. In order to participate in this tax/insurance program, the investor was required to purchase life insurance policies from Fletcher by paying annual premiums equal to one-half of the client's income tax for the previous year. The client was also required to become involved in a home-based business and to invest the equivalent of the other half of the preceding year's tax payment in the home-based business. In order to obtain sufficient capital, many of the clients submitted new IRS W-4 forms, prepared by Fletcher, claiming enough exemptions to lower their federal tax withholding on their paychecks to zero. The previously withheld money was then used to fund the required insurance via the life insurance company's automatic monthly withdrawals from the clients' checking accounts. The money was also available for investments in the home-based business.
Fletcher's sales promotion scheme proved very successful and within a year he had dramatically increased his sales from $159,000 in 1975 to more than $1.3 million in 1977. By 1978, Fletcher's annual sales exceeded $4 million and he joined with another agent, Neil McKelvie, to form the Fletcher-McKelvie Group. Fletcher subsequently recruited other agents, including defendant Evelyn Johnson, to join the Fletcher-McKelvie Group and to help conduct his tax/insurance seminars. Fletcher conducted these seminars throughout the United States. Between 1977 and 1980, the Fletcher Group sold more than $36 million in New York Life Insurance policies.
In June 1977, plaintiff, Myra Hofstetter, attended one of Fletcher's seminars in Harrison, Ohio. Hofstetter was a widow of limited means who was employed as a telephone cable splicer for Cincinnati Bell. During the presentation, Fletcher assured the audience that he could legally reduce their federal income tax liability to zero. Fletcher also made frequent references to patriotism, capitalism, and religion. Following the seminar, Evelyn Johnson visited plaintiff at her home and convinced her to participate in the tax/insurance program. Johnson prepared a new W-4 form for Hofstetter, declaring 25 exemptions in order to eliminate any federal income tax withholding from her paycheck. While at Hofstetter's home, Johnson calculated the amount of life insurance that Hofstetter would have to buy ($2,500 in premiums per year--one policy on Hofstetter's life and one on the life of her roommate, Patty Brinker). Johnson also prepared applications for the required policies and took Hofstetter's check for $226 reflecting the initial insurance premium payment. Johnson further arranged for automatic monthly payments to be drawn from Hofstetter's checking accounts and sent directly to New York Life Insurance Company. Cincinnati Bell initially refused to process plaintiff's W-4; however, it eventually relented after receiving a threatening letter from Fletcher's attorney written on behalf of plaintiff.
On June 18, 1980, New York Life Insurance Company notified Hofstetter that Fletcher, Johnson, and McKelvie were no longer associated with the New York Life Insurance Company and that the company did not endorse or authorize any tax program of the Fletcher-McKelvie Group. In March 1981, plaintiff received a full refund for the premium she paid to the New York Life Insurance Company. Nevertheless, plaintiff continued to rely on Fletcher to assist her in preparing her annual income tax returns. In 1981, Hofstetter was informed that the Internal Revenue Service (IRS) was auditing her 1979 and 1980 tax returns which Fletcher had prepared. Following Fletcher's instructions, she telephoned him when she received notice of the audit. Fletcher dictated some letters to Hofstetter which she then mailed to the IRS. Shortly thereafter, Fletcher assumed complete responsibility for representing plaintiff before the IRS. Hofstetter later received notice that her returns for the years 1981-83 would be audited. Hofstetter again relied on Fletcher to handle the audit and he continued to assure her that "everything was going as planned" and that the IRS would drop the audits. Hofstetter apparently refused to cooperate with the IRS in its investigation and instead referred all inquiries to Fletcher.
In January of 1985, the IRS issued a notice of levy, garnished Hofstetter's savings and checking accounts, and imposed a statutory lien on her home. By the time of trial, tax assessments, penalties, and interest had reached approximately $70,000, in addition to more than $9,000 in payments which Hofstetter had already made to the IRS before the trial. Hofstetter was unable to meet her various financial obligations following the actions taken by the IRS. She filed suit against the defendants on October 2, 1985. In her suit, Hofstetter alleged that she had been promised zero tax liability and that she had been damaged by the fact that she was now being assessed additional taxes along with the penalties and interest. Three of the defendants, including New York Life Insurance Company, settled with plaintiff prior to termination of the trial. Judge Rubin entered a directed verdict for defendants on plaintiff's claims under the Securities Exchange Act of 1934. The jury found defendants Fletcher and Johnson liable under the Racketeer Influenced and Corrupt Organizations Act, and Fletcher, Johnson, and the Fletcher-McKelvie Group liable under the Ohio Consumer Sales Practices Act, and common law theories of fraud, breach of contract, and breach of fiduciary duty. Judge Rubin subsequently issued several orders of remittitur altering the amount of damages to a final total of approximately $300,000. Defendants appeal from this judgment.
Defendants raise numerous issues on appeal which they categorize in their brief under eight "assignments of error." In response, plaintiff's brief on appeal identifies 26 separate issues raised by defendants on appeal. For purposes of our analysis, we will discuss each of the issues as they relate to the various causes of action as set forth in plaintiff's complaint.
Most of the defendants' claims of error relate to the jury's finding of liability under the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. Sec. 1962(c), which provides:
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.
In Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 105 S.Ct. 3275, 87 L.Ed.2d 346 (1985), the Supreme Court set forth the elements which must be alleged in order to state a claim under section 1962(c): "(1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity." 473 U.S. at 496, 105 S.Ct. at 3285. The definition of "racketeering activity," contained in section 1961(1), refers to a variety of federal offenses including mail fraud, 18 U.S.C. Sec. 1341, and wire fraud, 18 U.S.C. Sec. 1343. The definitional section of the RICO statute also provides that " 'a pattern of racketeering activity' requires at least two acts of racketeering activity...." 18 U.S.C. Sec. 1961(5).
On appeal, defendants repeatedly contend that the "trial court erred" in finding liability and assessing damages under RICO and the other causes of action. This case, however, was submitted to, and decided by, a jury. Therefore, we assume that the defendants are arguing that the trial court erred by refusing to grant their motion for a directed verdict and that they were entitled to judgment as a matter of law.
Defendants contend that the plaintiff failed to present sufficient evidence of mail fraud and/or wire fraud. The elements of...
To continue reading
Request your trial
-
US v. Kensington Hosp.
...duty to the Medicare/Medicaid funds. C. Other Cases None of the cases cited by the government helps its argument. Hofstetter v. Fletcher, 905 F.2d 897 (6th Cir.1988), concerned a situation where the defendant induced the beneficiary, prepared her taxes, and had control over her representati......
-
U.S. v. Blandford
...S.P.R.L. v. Imrex Co., 473 U.S. 479, 496, 105 S.Ct. 3275, 3285, 87 L.Ed.2d 346 (1985) (footnote omitted); see also Hofstetter v. Fletcher, 905 F.2d 897, 901 (6th Cir.1988). In his first assignment of error relative to his RICO conviction, Blandford argues that his predicate acts of mail fra......
-
Shuttlesworth v. Housing Opportunities Made Equal
...denied, ___ U.S. ___, 114 S.Ct. 1298, 127 L.Ed.2d 650 (1994). The enterprise must be "a separate, ongoing" entity. Hofstetter v. Fletcher, 905 F.2d 897, 903 (6th Cir.1988). The definition encompasses both illegitimate enterprises and legitimate enterprises involved in racketeering operation......
-
Sparks v. Countrywide Home Loans, Inc.
...that applies to civil RICO actions. Agency Holding Corp. v. Malley-Duff & Associates, Inc., 483 U.S. 143 (1987); Hofstetter v. Fletcher, 905 F.2d 897, 904 (6th Cir. 1988). The four-year statute of limitation "begins to run when the plaintiff knows or has reason to know of the RICO injury wh......