Ashland Oil, Inc. v. Arnett

• Court: U.S. Court of Appeals — Seventh Circuit
• Writing for the Court: Before MANION and KANNE, Circuit Judges, and FAIRCHILD; FAIRCHILD
• Citation: Ashland Oil, Inc. v. Arnett, 875 F.2d 1271 (7th Cir. 1989)
• Decision Date: 16 May 1989
• Docket Number: Nos. 87-2139,87-2140 and 87-2198,s. 87-2139
• Parties: RICO Bus.Disp.Guide 7213 ASHLAND OIL, INC., a Kentucky corporation, Bell Fuels, Inc., a Nevada corporation, Jasper County Farm Bureau Cooperative Association, Inc., an Indiana corporation, Marathon Petroleum Company, an Ohio corporation, Plaintiffs-Appellants/Cross-Appellees, v. Toy Rex ARNETT, Jr., Thomas R. Arnett, and Donald G. Richards, Defendants-Appellees/Cross-Appellants, and Rena Arnett, Super Payless Gas, Inc., Charles Arnett, Norma Arnett, William Shireman, Steel City Gas Stop, Inc., Carson Truck Plaza, Inc., Kenneth Ford, Carson Petroleum Company, Interstate Truck Plazas of America, Inc., and Richards, Isenberg & Co., Inc., Defendants-Appellees.

Page 1271

875 F.2d 1271

RICO Bus.Disp.Guide 7213

ASHLAND OIL, INC., a Kentucky corporation, Bell Fuels, Inc. a Nevada corporation, Jasper County Farm Bureau Cooperative Association, Inc., an Indiana corporation, Marathon Petroleum Company, an Ohio corporation Plaintiffs-Appellants/Cross-Appellees, v. Toy Rex ARNETT, Jr., Thomas R. Arnett, and Donald G Richards, Defendants-Appellees/Cross-Appellants and Rena Arnett, Super Payless Gas, Inc., Charles Arnett, Norma Arnett, William Shireman, Steel City Gas Stop, Inc., Carson Truck Plaza, Inc., Kenneth Ford, Carson Petroleum Company, Interstate Truck Plazas of America, Inc., and Richards, Isenberg & Co., Inc., Defendants-Appellees.

Nos. 87-2139, 87-2140 and 87-2198.

United States Court of Appeals, Seventh Circuit.

Argued April 13, 1988.

Decided May 16, 1989.

Melbourne A. Noel, Jr., Brad A. Levin, Laser, Schostok, Kolman and Frank, Chicago, Ill., for plaintiffs-appellants/cross-appellees.

Karen L. Hughes, Lucas Holcomb & Medrea, Merrillville, Ind., Alan S. Brown, Locke Reynolds Boyd & Weisell, Indianapolis, Ind., Roger J. McFadden and Thomas J. Dillon, Schuyler, Roche & Zwirner, Chicago, Ill., for appellees.

Before MANION and KANNE, Circuit Judges, and FAIRCHILD, Senior Circuit Judge.

FAIRCHILD, Senior Circuit Judge.

This case involves an appeal and cross-appeals from a judgment entered following a jury trial. The plaintiffs, four oil suppliers, alleged that Toy and Thomas Arnett orchestrated two episodes of fraud, executed through a petroleum wholesale corporation owned by them, named Arnett Oil, Inc. According to the plaintiffs, the two Arnetts, in league with Arnett Oil's accountant, Donald G. Richards, induced three of the plaintiffs to extend or expand Arnett Oil's credit by mailing them a false financial statement showing Arnett Oil to be in sound financial condition, when in fact it was not. The plaintiffs also alleged that the Arnetts, beginning approximately ten months after sending out the false financial statement, picked up unusually large quantities of petroleum product from the plaintiffs' sales terminals without intending to pay. The plaintiffs argued that the frauds were a part of the Arnett brothers' scheme to "bust out" Arnett Oil; that is, to expand the company's assets at the expense of the plaintiffs, and then to funnel those assets or their proceeds to themselves through intermediary companies also owned or controlled by them or their relatives. As a result, Arnett Oil would become unable to pay the plaintiffs for their product.

The plaintiffs contended that the defendants (including a number of defendants exonerated by the jury and not before us) had violated the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. Sec. 1961, et seq., as amended. The plaintiffs alleged that the Arnetts and Mr. Richards conducted the affairs of Arnett Oil through two patterns of racketeering activity in violation of Sec. 1962(c). They alleged that the credit fraud involved predicate acts of mail and wire fraud which constituted one pattern of racketeering activity within the meaning of Sec. 1961(5), and that predicate acts of mail, wire, andbankruptcy fraud, and arson, committed during the product theft episode formed another. They also alleged that Mr. Richards' preparation of Arnett Oil's financial statement was common law fraud.

The district court submitted to the jury detailed interrogatories based on each of the plaintiffs' RICO and fraud counts. The plaintiffs were unsuccessful in persuading the jury that the defendants had used or invested the proceeds derived from racketeering activity in five defendant companies owned or controlled by the Arnetts (Counts III, IV, VI, VII, and VIII). 18 U.S.C. Sec. 1962(a). These counts are not involved in this appeal. The jury also found that Arnett Oil's "trucking arm," Super Payless Gas, Inc., (Super Payless) did not violate Sec. 1962(d) by conspiring to violate Sec. 1962(c).

The jury did find, however, that Toy and Thomas Arnett had participated in or conducted the affairs of Arnett Oil through the two patterns of racketeering activity, in violation of 18 U.S.C. Sec. 1962(c) (Counts I and II). The district court entered judgment (after trebling the actual damages found by the jury) against Toy and Thomas Arnett in favor of plaintiffs Marathon Petroleum Company (Marathon) for $1,062,249.00, Jasper County Farm Bureau Cooperative Association, Inc. (Jasper) for $1,577,145.00, Bell Fuels, Inc. for $286,623.00, and Ashland Oil, Inc. (Ashland) for $1,647,027.00.

The district court granted a directed verdict on the fraud claim (Count X) against all plaintiffs in favor of Richards & Company (Mr. Richards' accounting firm), and against Marathon in favor of Mr. Richards. Jasper voluntarily dismissed its fraud claim during trial. The jury found in favor of the remaining two plaintiffs, Ashland and Bell Fuels, and against Mr. Richards. The court entered judgment accordingly, awarding $75,000 in damages to Bell Fuels, and $100,000 to Ashland. ¹

I. THE FACTS

The four plaintiffs supplied petroleum products to Arnett Oil, a wholesale dealer headquartered in Remington, Indiana. Arnett Oil resold to a network of service stations, truck stops and other oil-related businesses, some controlled or run by the Arnett family and its business associates. Arnett Oil began as the sole proprietorship of Toy Arnett, and was incorporated in 1978. In late 1979 Thomas Arnett became general manager, and Toy Arnett moved to Florida, but remained president and controlling shareholder.

A. The Credit Fraud

The gist of the facts alleged in Count I was that the Arnett brothers fraudulently schemed to induce Ashland, Marathon and Bell Fuels to extend credit to Arnett Oil beyond the level justified by its financial condition.

Arnett Oil often purchased on credit. To establish or maintain a credit account with Ashland, Bell Fuels and Marathon, Arnett Oil periodically sent each company financial compilations. Arnett Oil commissioned monthly and year-end compilations from defendant Richards, a certified public accountant.

On June 7, 1982, Ashland cancelled Arnett Oil's credit based upon a February, 1982 financial statement which showed Arnett Oil in very poor financial condition. Mr. Richards produced a March, 1982 statement which inflated Arnett Oil's accounts receivable by $400,000 and its inventory by $75,000. This statement was mailed to Ashland, Bell Fuels and Marathon. (Neither the Arnetts nor Mr. Richards challenges the sufficiency of proof of the statement's falsity.)

Relying solely on the "special accrual" statement, Marathon increased Arnett Oil's credit limit from $100,000 to $185,000.

After receiving the March, 1982 financial compilation, Bell Fuels' credit manager first called Mr. Richards to clarify its contents. Relying on the compilation and what it considered to be Mr. Richard's assurance of the statement's accuracy, Bell Fuels opened a credit account for Arnett Oil of $75,000.

Mr. Richards also responded to telephone and written inquiries from Ashland's credit manager in Columbus, Ohio concerning the "special accrual" statement. Ashland subsequently re-established Arnett Oil's previously cancelled credit, setting a $100,000 limit.

B. The Product Theft

Count II alleged a scheme by which Arnett Oil would get large quantities of plaintiffs' product without paying or intending to pay for it, and then would divert the product or its proceeds to the Arnett brothers' benefit. The crux of the scheme was to take fuel from the plaintiffs' automatic petroleum terminals rapidly enough to obtain huge amounts of fuel before their billing mechanisms could catch up and terminate Arnett Oil's credit.

Ashland and Marathon used Marathon's automated terminal facility in Hammond, Indiana to deliver fuel to their wholesale customers, such as Arnett Oil. The wholesaler, by using coded cards, could pick up supplies of petroleum products 24 hours a day, seven days a week, without immediate payment. A computer at the terminal would transmit the data to Marathon's Findlay, Ohio office, which, if appropriate, would relay the information to Ashland's office in Kentucky. Because it could take up to three and a half days for Ashland and Marathon's credit departments to learn of a customer's pick-up, it was possible for a customer to "lift" fuel in excess of its credit limit before access to the terminal could be cut off.

Jasper, headquartered in Rensselaer, Indiana, sold through the Indiana Farm Bureau Cooperative in Peru, Indiana, which was open six days a week, twenty-four hours a day. Jasper provided release numbers to customers, allowing them to pick up fuel.

Bell Fuels used the Mobil Oil terminal in Hammond, Indiana, and employed an honor system allowing customers to pick up fuel without first paying for it or getting the seller's authorization.

Beginning April 21, 1983, Arnett Oil took substantial amounts of petroleum product from Marathon's Hammond terminal, making "lifts" around the clock. During four and a half days, Arnett Oil took product worth over twice its credit limit with Marathon. Because the period ran over a weekend, Marathon's credit department did not learn that Arnett had exceeded its credit limit until Tuesday morning, April 27. After failing to receive the money which Arnett Oil had told Marathon that they would wire, Marathon locked Arnett out of its terminal on April 28, 1983. Arnett Oil now owed Marathon $354,083.28.

When Arnett Oil was locked out of Marathon's terminal on April 28, it began taking petroleum product unusually rapidly from Bell Fuels. That day, Tom Arnett from his Remington, Indiana office called Paul Davenport, Bell Fuels' Chief Credit Officer in Chicago, telling him (falsely) that Arnett Oil had a profitable average year, and that he would send Mr. Davenport a new financial statement of Arnett Oil within the next ten days which would be comparable to the figures on the...