Brady v. Dairy Fresh Products Co.

• Decision Date: 09 September 1992
• Docket Number: 90-55507,Nos. 89-56023,s. 89-56023
• Citation: 974 F.2d 1149
• Parties: RICO Bus.Disp.Guide 8082 Ronald P. BRADY; Vincent Lombardo; Allen Larson; Erling Schlak; Karl Schlak; Henry Jessen; Robert W. Brady; Terrain, Inc., a North Dakota corporation; Gerner, Inc., a North Dakota corporation; Triple J Farms, Inc., a Wyoming corporation, Plaintiffs-Appellants, v. DAIRY FRESH PRODUCTS CO., a California corporation; Sylvester Feichtinger; Escondido Valley Poultry Association; Demler Farms, Inc., a California corporation, Defendants-Appellees. Ronald P. BRADY, an individual; Robert W. Brady, an individual; Karl R. Schlak, an individual; Terrain, Inc., a North Dakota corporation; Erling O. Schlak, an individual; Gerner, Inc., a North Dakota corporation; Henry Jessen, an individual; Evelyn Jessen, an individual; Triple J Farms, a Wyoming corporation; Allen D. Larson, an individual; Vincent Lombardo, an individual, Plaintiffs-Appellants, v. Bennett LITTLE, an individual; Harold O. Wright, an individual; Dairy Fresh Products Co., a California corporation; Demler Farms, Inc., a California corporation; Sylvester Feichtinger, individually and as Trustee of the Maria Feichtinger Family Trust; The Escondido Poultry Association, Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1149

974 F.2d 1149

RICO Bus.Disp.Guide 8082

Ronald P. BRADY; Vincent Lombardo; Allen Larson; Erling

Schlak; Karl Schlak; Henry Jessen; Robert W. Brady;

Terrain, Inc., a North Dakota corporation; Gerner, Inc., a

North Dakota corporation; Triple J Farms, Inc., a Wyoming

corporation, Plaintiffs-Appellants, v. DAIRY FRESH PRODUCTS CO., a California corporation;

Sylvester Feichtinger; Escondido Valley Poultry

Association; Demler Farms, Inc., a

California corporation,

Defendants-Appellees.

Ronald P. BRADY, an individual; Robert W. Brady, an

individual; Karl R. Schlak, an individual; Terrain, Inc.,

a North Dakota corporation; Erling O. Schlak, an

individual; Gerner, Inc., a North Dakota corporation;

Henry Jessen, an individual; Evelyn Jessen, an individual;

Triple J Farms, a Wyoming corporation; Allen D. Larson, an individual; Vincent Lombardo, an individual, Plaintiffs-Appellants, v. Bennett LITTLE, an individual; Harold O. Wright, an

individual; Dairy Fresh Products Co., a California

corporation; Demler Farms, Inc., a California corporation;

Sylvester Feichtinger, individually and as Trustee of the

Maria Feichtinger Family Trust; The Escondido Poultry

Association, Defendants-Appellees.

Nos. 89-56023, 90-55507.

United States Court of Appeals Ninth Circuit.

Argued and Submitted Feb. 4, 1992.

Decided Sept. 9, 1992.

Richard D. Corona, David A. Perkins, Corona, Balistreri & Ramseyer, San Diego, Cal., for plaintiffs-appellants.

Thomas D. Schaefer, Lightner, Castro, Schaefer & Schatz, San Diego, Cal., Gerald Lee Bolinger, Santa Ana, Cal., for defendants-appellees.

Appeal from the United States District Court for the Southern District of California.

Before: WALLACE, Chief Judge, BROWNING and FERGUSON, Circuit Judges.

WALLACE, Chief Judge:

Ronald Brady, Vincent Lombardo, Allen Larson, Erling Schlak, Karl Schlak, Henry Jessen, Evelyn Jessen, Robert Brady, Terrain, Inc., Gerner, Inc., and Triple J Farms, Inc. (the investors) appeal from the district court's summary judgment, subsequent to a certification that there was no just reason for delay under Federal Rule of Civil Procedure 54(b). The district court granted summary judgment on all counts in favor of Dairy Fresh Products Co. (Dairy Fresh), Sylvester Feichtinger, Escondido Valley Poultry Association (Association), and Demler Farms, Inc. (Demler) (collectively defendants). The district court had jurisdiction pursuant to 28 U.S.C. § 1331. We have jurisdiction over this timely appeal pursuant to 28 U.S.C. § 1291. We are called upon to address issues arising under the Racketeer Influenced and Corrupt Organizations (RICO) statute, including one that has divided sister circuits. We affirm in part and reverse and remand in part.

I

In 1981, Feichtinger and Rabinoff, co-owners of Dairy Fresh, engaged Little and Bencal, Inc. to market its Campo ranches to investors as tax shelters. Dairy Fresh employed Wright as a vice-president, and one of his duties was "to complete [the] 1982 tax shelters." Little and Rabinoff's plan called for the investors to own the property for five years and then sell the property back to Dairy Fresh. Little and Bencal, Inc. represented that the investors would be entitled to a ten percent investment tax credit and one hundred percent depreciation over five years. The representations proved to be false when the Campo ranch investments were audited by the Internal Revenue Service and the represented tax advantages were disallowed. The basis of the disallowance was the failure to "change the user" of the property.

Little and Rabinoff also conceived the started pullet investment plan. Wright, as vice-president, assisted with the program. Under this scheme, the investor was to purchase one-day old chicks (started pullets) from Demler, an entity controlled by Dairy Fresh. Dairy Fresh would then repurchase the birds at the end of a twenty-six week period. The Association provided financing for the investors. Little and Bencal, Inc. represented to various investors that they would be entitled to income tax deductions for related consulting fees and the prepayment of management, feed, and care expenses for the started pullets. Although the contracts called for started pullets, some of the chickens that Demler provided may have been laying hens. The started pullet program tax benefits have not been challenged by the Internal Revenue Service.

In January 1984, Little, Wright, Rogers, and Ronald Brady discussed the prospect of purchasing the Dinuba Poppy Farm poultry ranch. Shortly thereafter, Little also revealed an opportunity to purchase Kennebec Breeders, Inc. (Kennebec) with its broiler/breeder bloodline. The Kennebec stock was represented by Little to produce a superior broiler chicken.

Little proposed that he and Ronald Brady purchase the Dinuba Poppy Farm as a joint venture, each owning a one-half interest. Little also structured a plan on behalf of the joint venture whereby ten buildings located at the Dinuba Poppy Farm would be sold to tax shelter investors for $150,000 each. Little contemplated that the investors would also purchase $10,000 of stock in Kennebec, which would, at the end of five years, repurchase the investors' stock. Wright was later selected as the president of Kennebec.

Brady and Bencal, Inc. eventually executed a "joint venture" agreement. Little told Brady that the only difference between this agreement and earlier drafts was that Bencal, Inc. had been substituted in lieu of Little. Brady believed that "in one form or another," Little had a one-half interest in the Dinuba transaction. Brady purchased approximately twenty-five thousand units of the broiler/breeder stock based on Little's representation that he would do the same. However, in January 1985, Little advised Ronald Brady that he had sold Bencal, Inc. to Wright and divested himself of all interest in the joint venture.

The Kennebec broiler chick program was similar to the earlier started pullet program. The Dinuba and Kennebec investments eventually failed.

Little also discussed with Ronald Brady the formation of a layer chick venture using King's Valley Farms and a shell corporation, King's Valley Farms, Inc. Brady and Little each agreed to invest in King's Valley Farms, Inc. Brady and Little also agreed to buy a one-third share interest that eventually would be sold to Wright. Later, Wright began to place Dairy Fresh orders with the King's Valley Farms hatchery.

The investors filed a twenty-four count complaint against various persons, including the defendants, Wright, and Little. The investors claimed that the defendants, Wright, and Little were liable for violations of the federal securities laws and RICO. The investors also asserted a number of pendent state law claims. The district court granted the defendants' motion for summary judgment on all counts.

The investors contend that the district court erred in granting summary judgment against them. We review a summary judgment de novo. Tzung v. State Farm Fire & Casualty Co., 873 F.2d 1338, 1339 (9th Cir.1989). We must determine "whether, viewing the evidence in a light most favorable to the nonmoving party, there are any genuine issues of material fact and whether the district court applied the relevant substantive law." Id. at 1339-40.

II

The investors contend that the district court erred by granting the defendants' motion for summary judgment on the RICO count. Their first argument asserts that the defendants were directly liable under RICO.

The investors begin with the proposition that the defendants may be held liable for violations of 18 U.S.C. § 1962(a). Under section 1962(a), it is unlawful for a person to use or invest income derived from a pattern of racketeering activity in an enterprise. Under the clear language of this provision, the person who receives and invests the "racketeering" income must have participated as a principal in the racketeering activities. See United States v. Wyatt, 807 F.2d 1480, 1482 (9th Cir.), cert. denied, 484 U.S. 858, 108 S.Ct. 170, 98 L.Ed.2d 124 (1987). There is no evidence to substantiate the claim that any defendant culpably participated as a principal in the alleged racketeering pattern.

The investors next contend that the defendants should be held liable for violations of 18 U.S.C. § 1962(c). "A plaintiff in a RICO section 1962(c) case must present proof of four RICO elements: (1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity." Sigmond v. Brown, 828 F.2d 8, 8 (9th Cir.1987) (internal quotations omitted). A pattern of racketeering activity does not exist unless there is evidence of two predicate acts. 18 U.S.C. § 1961(5). The investors failed to produce evidence that a defendant committed the two requisite predicate acts. Neither have they presented evidence that a defendant made misrepresentations or otherwise culpably participated in Wright and Little's alleged fraudulent conduct.

The investors, however, argue that the defendants should be held liable under RICO because corrupt and fraudulent conduct occurred at managerial levels. The Seventh Circuit, in D & S Auto Parts, Inc. v. Schwartz, 838 F.2d 964 (7th Cir.) (D & S Auto Parts ), cert. denied, 486 U.S. 1061, 108 S.Ct. 2833, 100 L.Ed.2d 933 (1988), indicated that there may be situations in which illegal conduct takes place "at such a high level that it may be deemed corporate policy to promote or engage in illegal conduct." Id. at 967 n. 5. The investors argue that liability may be appropriate in this situation under the doctrines of aider and abettor, conspiracy, or controlling person liability. Even assuming that any of these doctrines are applicable under RICO, the alleged culpable involvement of Wright and Little in this fraudulent scheme does not reasonably lead to the conclusion that it was corporate policy to promote or engage in illegal conduct. For such an inference to arise reasonably, the involvement of high level officials in the underlying...