Barrett v. Tallon

• Decision Date: 19 July 1994
• Docket Number: Nos. 93-7029,93-7080,s. 93-7029
• Citation: 30 F.3d 1296
• Parties: RICO Bus.Disp.Guide 8607 Robert L. BARRETT; Barrett Cattle, Inc.; B & R Farms; Johnny Slover; Johnny Slover Cattle, Inc., Plaintiffs-Appellants, v. Gerald TALLON, individually; the Bank of Johnston County; Ray Fox, individually, and doing business as R.R.R. Cattle Company; Alvin Bradshaw, individually, and doing business as R.R.R. Cattle Company, Defendants-Appellees. Robert L. BARRETT; Barrett Cattle, Inc.; B & R Farms; Johnny Slover; Johnny Slover Cattle, Inc., Plaintiffs-Appellants, v. The BANK OF JOHNSTON COUNTY, Defendant-Appellee, and Gerald Tallon, individually; Ray Fox, individually, and doing business as R.R.R. Cattle Company; Alvin Bradshaw, individually, and doing business as R.R.R. Cattle Company, Defendants.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1296

30 F.3d 1296

RICO Bus.Disp.Guide 8607

Robert L. BARRETT; Barrett Cattle, Inc.; B & R Farms;

Johnny Slover; Johnny Slover Cattle, Inc., Plaintiffs-Appellants, v. Gerald TALLON, individually; the Bank of Johnston County;

Ray Fox, individually, and doing business as R.R.R. Cattle

Company; Alvin Bradshaw, individually, and doing business

as R.R.R. Cattle Company, Defendants-Appellees.

Robert L. BARRETT; Barrett Cattle, Inc.; B & R Farms;

Johnny Slover; Johnny Slover Cattle, Inc., Plaintiffs-Appellants, v. The BANK OF JOHNSTON COUNTY, Defendant-Appellee, and Gerald Tallon, individually; Ray Fox, individually, and doing business as R.R.R. Cattle Company; Alvin

Bradshaw, individually, and doing

business as R.R.R. Cattle

Company, Defendants.

Nos. 93-7029, 93-7080.

United States Court of Appeals Tenth Circuit.

July 19, 1994.

Donald M. Hunt of Carr, Fouts, Hunt, Craig, Terrill & Wolfe, Lubbock, TX, for appellants.

Ron Wright of Wright, Stout & Fite, Muskogee, OK, for appellees.

Before SEYMOUR, Chief Judge, LOGAN, and ANDERSON, Circuit Judges.

STEPHEN H. ANDERSON, Circuit Judge.

Plaintiffs Robert L. Barrett, Johnny Slover, and their cattle companies appeal from separate orders of the district court (1) dismissing their complaint for failure to state a claim, Fed.R.Civ.P. 12(b)(6), and (2) imposing against them Rule 11 sanctions of $32,885.15. For convenience we decide both appeals (Nos. 93-7029 and 93-7080) in this opinion. The district court held that the complaint did not state a claim under the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. Secs. 1961-1968. The plaintiffs do not challenge that holding but contend that they successfully pleaded state law claims of fraud and conversion for which there was diversity jurisdiction. The plaintiffs also object to the Rule 11 sanctions on several grounds. We reverse the order of dismissal to the extent that it is inconsistent with this opinion and remand for further proceedings. In addition, we vacate the order of sanctions.

BACKGROUND

The plaintiffs (appellants) in this case are Barrett, Slover, and their closely held cattle corporations (Barrett Cattle, Inc., B & R Farms, Inc., and Johnny Slover Cattle Co., Inc.). The defendants are the Bank of Johnston County, Oklahoma ("Bank"), Bank president and chief executive Gerald Tallon, and Ray Fox and Alvin Bradshaw of the R.R.R. Cattle Co. ("R.R.R."). ¹ According to the complaint, all plaintiffs reside in Texas, and all defendants reside in Oklahoma. Pl.'s Am.Compl., Appellant's App., No. 93-7029, Tab 1 at 1-3 (hereinafter "Compl.")

Plaintiffs filed their original complaint on October 1, 1992, and amended it on November 13. In essence, the plaintiffs alleged that they placed their cattle in the hands of R.R.R. (Fox and Bradshaw) pursuant to a grazing contract, which plaintiffs say they agreed to based on Tallon's express assurances of R.R.R.'s trustworthiness. Id. at 3-4. Tallon allegedly knew otherwise, however, and conspired with R.R.R. to defraud the plaintiffs. Id. at 4. According to the complaint, Tallon and Fox mortgaged the plaintiffs' cattle to the Bank in return for $140,000, and Fox, Bradshaw, and the Bank sold the cattle at auction without the plaintiffs' consent, keeping the proceeds for themselves. Id. at 4-5. ²

The complaint stated: "This is an action to recover ... damages as a result of ... violati[ons] ... of the RICO Act ...," and alleged federal jurisdiction on that basis. Id. at 3. It also stated: "Jurisdiction properly lies based on the ... diversity statute," 28 U.S.C. Sec. 1332(a)(1). Id. at 2-3.

The Bank moved to dismiss for failure to state a claim under Rule 12(b)(6), or, in the alternative, to stay the federal proceedings in favor of a pending state case between the parties. Bradshaw and Tallon answered the complaint, denying liability and asserting that the complaint failed to state a claim.

On February 26, 1993, the district court entered an order dismissing the complaint with prejudice as to all defendants pursuant to Rule 12(b)(6). Dismissal Order, Appellant's App., No. 93-7029, Tab 12 (hereinafter "Dismissal Order"). The court held that the complaint failed to state a RICO claim because it did not allege the requisite "enterprise" Plaintiffs' allegations are an unsuccessful effort to dress a garden-variety state fraud and/or conversion case in RICO clothing,....

                or "pattern of racketeering activity."   Id. at 2-3.  The district court concluded
                

There is presently pending in [an Oklahoma state court] a lawsuit involving these same parties and ... claims ... which are repeated herein as RICO allegations.... Plaintiffs' RICO allegations are nothing more than their state fraud and conversion claims against these defendants.... In any event, the court finds that plaintiffs' complaint fails to state a cause of action on which relief can be granted.

Id. at 3-4. On March 18, the plaintiffs filed a motion asking the district court to reconsider, or, in the alternative, for leave to amend their complaint. That motion was denied.

The Bank, meanwhile, filed a motion for Rule 11 sanctions seeking to recover its costs and attorneys' fees incurred in defending against the federal complaint. The district court granted the motion, finding that "plaintiffs' RICO claim ... [was] frivolous and nothing more than an attempt to harass the defendant with unnecessary, vexatious, and multiple litigation on their state claims for fraud and conversion." Sanctions Order, Appellant's App., No. 93-7080, Tab 9 at 2 (hereinafter "Sanctions Order"). The court ordered the plaintiffs to pay "defendants' attorney's fees and costs, necessarily incurred in defending this action," which the court found to be $32,885.15. Id. at 2-3. The order imposed no liability for the sanctions award on plaintiffs' attorneys.

DISCUSSION

I. RULE 12(B)(6) DISMISSAL OF THE COMPLAINT

We review a dismissal under Rule 12(b)(6) de novo, confining our review to the allegations in the complaint and accepting the facts pleaded as true. Doyle v. Oklahoma Bar Ass'n, 998 F.2d 1559, 1566 (10th Cir.1993). We will uphold a Rule 12(b)(6) dismissal only when it appears "clear that no relief could be granted under any set of facts that could be proved consistent with the allegations." Hishon v. King & Spalding, 467 U.S. 69, 73, 104 S.Ct. 2229, 2232, 81 L.Ed.2d 59 (1984); Lehman v. City of Louisville, 967 F.2d 1474, 1476 (10th Cir.1992).

As noted above, plaintiffs accept the ruling that they failed to state a RICO claim. They contend, however, that the district court erred in confining its analysis to RICO without considering whether the complaint alleged fraud or conversion under state law and, if so, whether diversity jurisdiction enabled those claims to be heard in federal court. We agree that the district court read the complaint too narrowly.

While the district court correctly observed that the plaintiffs attempted "to dress a garden-variety state fraud and/or conversion case in RICO clothing," the fact that RICO was improperly invoked did not mandate complete dismissal of the complaint. A complaint should not be dismissed under Rule 12(b)(6) "merely because plaintiff's allegations do not support the legal theory he intends to proceed on," 5A Charles A. Wright & Arthur R. Miller, Federal Practice & Procedure Sec. 1357, at 336-37 (2d ed. 1990), and certainly not when other theories are apparent on the face of the complaint.

In focusing on RICO, the district court failed to analyze whether the complaint adequately pleaded "garden variety" fraud or conversion. Based on our review of the complaint, as explained below, we hold that the plaintiffs successfully pleaded fraud against Tallon and the Bank, and conversion against Tallon, the Bank, Fox, and Bradshaw. Consequently, the complaint should not have been dismissed in its entirety.

A. Preliminary Issues

Before discussing the substantive allegations in the complaint, we address two matters that may require consideration on remand. First, the district court never addressed the plaintiffs' allegation of diversity jurisdiction in the complaint. See Dismissal Order at 1 ("Federal jurisdiction in this case is based upon alleged violations of the RICO statute,...."). This was likely because the district court viewed the complaint as purely RICO in character rather than because the court had found diversity jurisdiction lacking. Thus, we assume--but do not decide--that diversity jurisdiction exists for purposes of reviewing the complaint under Rule 12(b)(6). Of course, on remand the district court must determine whether it has subject matter jurisdiction over the surviving state law claims.

Second, because the proceedings below focused on RICO, there has been little discussion about which state's law applies to the fraud and conversion claims. Plaintiffs have suggested without explanation that Oklahoma law applies, but neither the defendants nor the district court addressed the question. A federal court sitting in diversity applies the substantive law, including choice of law rules, of the forum state. Moore v. Subaru of America, 891 F.2d 1445, 1448 (10th Cir.1989). Here, the forum state is Oklahoma, which in tort cases requires application of the law of the state with the most significant relationship to the occurrence and to the parties. Childs v. State ex rel. Oklahoma State Univ., 848 P.2d 571, 578 n. 41 (Okla.), cert. denied, --- U.S. ----, 114 S.Ct. 92, 126 L.Ed.2d 60 (1993); White v. White, 618 P.2d 921, 924 (Okla.1980). According to the complaint, the plaintiffs reside in Texas, the defendants reside in Oklahoma, and most if not all of the allegations occurred either place. Thus, either Oklahoma or Texas law applies. We leave the choice of law question open because under either Oklahoma or Texas law we reach the same conclusions about the complaint under Rule 12(b)(6).

B. The Complaint

1. Fraud

Under Oklahoma and Texas law, a fraud claim requires proof...