Federal Deposit Ins. Corp. v. Kerr

• Citation: 637 F. Supp. 828
• Decision Date: 13 June 1986
• Docket Number: No. C-C-85-74-P.,C-C-85-74-P.
• Court: United States District Courts. 4th Circuit. Western District of North Carolina
• Parties: FEDERAL DEPOSIT INSURANCE CORPORATION, As Liquidating Agent for Republic Bank of Kansas City, Plaintiff, v. Preston KERR, Presco Industries, Inc., d/b/a Ellett Brothers, Ray Adams, Trustee for Ellett Brothers, Inc., Tuscarora Corporation, and Tuscarora Acquisition Company No. 6, Inc., Defendants, and Tuscarora Acquisition Company No. 7, Inc., Chilton Ellett, Allan C. Watkins, Trustee for the unsecured creditors of Ellett Brothers, Inc., Bancamerica Commercial Corporation, Eagle Oil & Development, Inc., and Leroy G. Bailey, Jr., and Robert D. Gorham, Jr., Additional Defendants.

637 F. Supp. 828

FEDERAL DEPOSIT INSURANCE CORPORATION, As Liquidating Agent for Republic Bank of Kansas City, Plaintiff, v. Preston KERR, Presco Industries, Inc., d/b/a Ellett Brothers, Ray Adams, Trustee for Ellett Brothers, Inc., Tuscarora Corporation, and Tuscarora Acquisition Company No. 6, Inc., Defendants, and Tuscarora Acquisition Company No. 7, Inc., Chilton Ellett, Allan C. Watkins, Trustee for the unsecured creditors of Ellett Brothers, Inc., Bancamerica Commercial Corporation, Eagle Oil & Development, Inc., and Leroy G. Bailey, Jr., and Robert D. Gorham, Jr., Additional Defendants.

No. C-C-85-74-P.

United States District Court, W.D. North Carolina, Charlotte Division.

June 13, 1986.

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Gaston H. Gage, Parker, Poe, Thompson, Bernstein, Gage & Preston, Charlotte, N.C., John S. Gordon, Gordon & Gordon, Kansas City, Mo., Jeffrey S. Hacker, Federal Deposit Ins. Corp., Dallas, Tex., for plaintiff.

Michael J. Mahoney, Baker & Hostetler, Cleveland, Ohio, Rebecca L. Jackson, Baker & Hostetler, Washington, D.C., Philip D. Lambeth, Harkey, Fletcher & Lambeth, Charlotte, N.C., Ray Adams, Overland Park, Kan., C. Richard Rayburn, Jr., Charlotte, N.C., Stuart N. Bennett, Carl A. Eklund, Roath & Brega, Denver, Colo., James Smith, Moore, Van Allen, Allen & Thigpen, Charlotte, N.C., Sheila Janicke, Smith, Gill, Fisher & Butts, Kansas City, Mo., Edgar Love, III, Kennedy, Covington, Lobdell & Hickman, Charlotte, N.C., Harriet E. Styler, Salt Lake City, Utah, for defendants.

ORDER

ROBERT D. POTTER, Chief Judge.

INTRODUCTION

THIS MATTER was heard before the undersigned on May 2, 1986 on Defendants' Motions to dismiss. Attorney Gaston Gage represented Plaintiff, Federal Deposit Insurance Corporation ("FDIC") bringing this action as the liquidating agent for the Republic Bank of Kansas City. Attorney Rick Rayburn represented Defendant Tuscarora Corporation d/b/a Tuscarora Investments ("Tuscarora"), a North Carolina corporation and wholly owned by Robert D. Gorham, Jr.; Defendant Tuscarora Acquisition Company No. 6, Inc. ("TAC 6"), a wholly owned subsidiary of Tuscarora; Defendant Tuscarora Acquisition Company No. 7, Inc. ("TAC 7"), a wholly owned subsidiary of TAC 6; Defendant Robert D. Gorham, Jr. ("Gorham"), a North Carolina resident; and Defendant Chilton Ellett ("Ellett"), a South Carolina resident until January 30, 1985. Attorneys Edgar Love and Mark Covington represented Defendant BancAmerica Commercial Corporation ("BACC"). Attorney Mark Ross represented Defendant Allan C. Watkins ("Watkins"), Trustee for the unsecured creditors of Ellett Brothers, Inc. and a Colorado resident.

This action arises out of a corporate transaction in which the Tuscarora Defendants purchased substantially all of the assets of Presco. The FDIC claims a security interest in 50 percent of the stock of Presco, and that the sale of the Presco assets to the Tuscarora Defendants has impaired the value of the Presco stock and that such sale was wrongful. The FDIC seeks injunctive relief, damages, and a judgment declaring a constructive trust over all Presco assets.

Defendants have filed various Motions to dismiss FDIC's Second Amended Complaint. Having considered the pleadings and the arguments of Defendants' Motions, the Court is of the opinion that Defendants' Motions should be denied.

STATEMENT OF THE CASE

This action arose out of Defendant Preston Kerr's ("Kerr") failure to repay certain loans he obtained from Republic Bank of Kansas City ("Republic"). In obtaining these loans, Kerr gave Republic a security interest in his shares of Presco. The pledged shares represented 50 percent of the outstanding stock of Presco; the other 50 percent was held by Defendant Watkins as Trustee for the unsecured creditors of Ellett Brothers under an Amended Plan of Reorganization confirmed by a Colorado Bankruptcy Court.

The Tuscarora Defendants acquired the assets of Presco in late January of 1985 for the following consideration: (a) $3,900,000.00 in cash, (b) the assumption of a promissory note obligation in the amount of $2,100,000.00 (the maker of that note was Kerr), (c) the assumption of Presco's liabilities (with certain stated exceptions), and the assumption of Presco's obligations on certain industrial revenue bonds, and (d) certain additional payments by TAC 6 on Presco's behalf to Chilton Ellett, Presco's President, and to Allan Watkins, Trustee, in the aggregate amount of $290,000.00. Also, there was a disbursement of $300,000.00 of the cash portion of the purchase price payable under the Asset Purchase Agreement dated January 30, 1985 to Allan C. Watkins in satisfaction of a portion of his obligations incurred in the purchase of the stock. The $2,100,000.00 note of Kerr to Watkins assumed by TAC 6 evidences a diversion of Presco's assets to Watkins and Kerr without any benefit to Presco, according to the FDIC.

The closing of this agreement took place in the office of Steven D. Hope, former attorney for Tuscarora Defendants, in Charlotte on January 30, 1985, and into the early morning hours of January 31. BACC was also present at the January 30 closing, according to the FDIC, for the purpose of receiving $1,715,000.00 of the consideration due Presco to satisfy a personal obligation of Kerr. There were other distributions without fair value of Presco assets reflected on Kerr's accounting, according to the FDIC, leaving virtually no marketable and liquid assets in Presco. Among the corporate documents at the closing were the Resolutions of Liquidation and Distribution of Presco.

The FDIC seeks to recover from the Defendants under claims based on alleged violations of the Federal Securities Laws, violation of RICO, and fraudulent corporate waste and liquidation. In addition, Plaintiff has asserted three derivative claims on behalf of Presco based on the same alleged Federal Securities violations, the same alleged fraudulent corporate waste and liquidation, and a theory of unjust enrichment. Plaintiff prays for compensatory damages, punitive damages, declaratory and injunctive relief, and rescission of all relevant transactions.

RICO

The Defendants argue that the FDIC has failed to state a claim upon which relief can be granted under RICO, and therefore those claims should be dismissed pursuant to Fed.R.Civ.P. 12(b)(6). "A complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-102, 2 L.Ed.2d 80 (1957); See also, Thompson v. Brotherhood of Sleeping Car Porters, 316 F.2d 191 (4th Cir.1963). Further, the Complaint is construed in the light most favorable to the Plaintiff and its allegations are taken as true, Jenkins v. McKeithen, 395 U.S. 411, 89 S.Ct. 1843, 23 L.Ed.2d 404 (1969), and the motion to dismiss is generally viewed with disfavor. Madison v. Purdy, 410 F.2d 99 (5th Cir.1969).

Thus, the FDIC's RICO claim should not be dismissed for failure to state a claim unless it appears beyond doubt that the FDIC can prove no set of facts in support of its claim that: (1) there existed an enterprise which affected interstate commerce; (2) that the defendants were associated with the enterprise; (3) that the defendants participated in the conduct of the enterprise's affairs; and (4) that such participation was through a pattern of racketeering activity. Sedima, S.P.R.L. v. Imrex Company, Inc., ___ U.S. ___, 105 S.Ct. 3275, 87 L.Ed.2d 346 (1985).

The Defendants have made numerous assertions as to why the FDIC's RICO claim should be dismissed, including the failure to sufficiently allege an "enterprise," or that such an enterprise affects interstate commerce; failure to sufficiently allege a "pattern" of racketeering activity; and failure to sufficiently allege criminal activity constituting a predicate act.

Title 18 of the United States Code, Section 1962(c) 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.

For purposes of this statute, "racketeering activity" includes any act indictable under 18 U.S.C. § 1341 (relating to mail fraud), 18 U.S.C. § 1343 (relating to wire fraud), and securities fraud. 18 U.S.C. § 1961(1).

The elements of an indictable offense under the federal mail and wire fraud statutes are: (1) the existence of a scheme to defraud, and (2) the use of the mails or interstate wires in furtherance of the fraudulent scheme. Reliance need not be proven. See 18 U.S.C. §§ 1341, 1343; United States v. Murr, 681 F.2d 246, 248 (4th Cir.1982) (the common element of mail fraud cases in that the accused attempted to use the mail as an instrument of his crime); and United States v. Condolon, 600 F.2d 7, 8 (4th Cir.1979) (must show a scheme to defraud and use of an interstate communication facility, such as a telephone, to execute that scheme). See also, Vinden v. Graphics One, 623 F.Supp. 1417 (C.D.Cal.1985). A "scheme to defraud" must seek to deprive one of property through fraudulent or deceptive means, such as material misrepresentation, concealment, breach of duty to disclose information or taking of bribes or kickbacks. United States v. Pintar, 630 F.2d 1270 (8th Cir.1980).

The elements of an offense for fraud in the purchase and sale of securities under § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 of the Securities Exchange Commission are: (1) the use of any manipulative or deceptive device, (2) in connection with the purchase or sale of any security, and (3) the use of the mail or other instrumentality in interstate commerce. Olympic Capital...