Fleischhauer v. Feltner

• Decision Date: 31 August 1989
• Docket Number: No. 87-4060,87-4060
• Parties: RICO Bus.Disp.Guide 7254 Harry E. FLEISCHHAUER, et al., Plaintiffs-Appellees, v. C. Elvin FELTNER, Jr., et al., Defendants-Appellants.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 1290

879 F.2d 1290

RICO Bus.Disp.Guide 7254

Harry E. FLEISCHHAUER, et al., Plaintiffs-Appellees, v. C. Elvin FELTNER, Jr., et al., Defendants-Appellants.

No. 87-4060.

United States Court of Appeals, Sixth Circuit.

Argued Feb. 10, 1989.

Decided June 27, 1989.

Supplemental Opinion of Aug. 31, 1989.

Douglas G. Cole, Richard Boydston (argued), Strauss & Troy, Cincinnati, Ohio, Martin C. Weisman, Anthony V. Trogan, Weisman, Trogan, Young & Schloss, Birmingham, Mich., for defendants-appellants.

Roger C. Stridsberg (argued), James Rimedio, F. Harrison Green, Cincinnati, Ohio, for plaintiffs-appellees.

Before KRUPANSKY and WELLFORD, Circuit Judges, and JOINER, ^* Senior District Judge.

WELLFORD, Circuit Judge.

This appeal follows a jury verdict awarding appellees treble damages of $3,951,351.00 for RICO violations associated with appellees' participation in appellants' film investment program. Appellants raise several issues regarding liability and damages. We affirm the liability determination, except as to Krypton, and reverse, in part, the damages award.

I. FACTS

This controversy arose when 19 separate plaintiffs purchased non-theatrical rights to the distribution of 23 full length feature motion pictures and television episodes from five defendants. ¹

The rights in the films the plaintiffs purchased included the right to distribute the films on television and cable television, by video cassette, and for other viewing except in movie theaters. Most plaintiffs entered into contracts with either Metropolitan or Palm Beach in November or December of 1980, but Donald Forrester entered into a contract with Metropolitan in early 1981.

The five defendants all allegedly participated in the marketing and sale of the film rights to the plaintiffs. Metropolitan and Palm Beach sold to the plaintiffs the distribution rights to the films. Krypton was not incorporated until September 28, 1982, but it is alleged, nonetheless, that Krypton was actively engaged in the film marketing plan as early as November of 1980. Feltner was the sole shareholder, a director and the chairman of the three defendant corporations. Mr. Levine, an attorney, was an officer of each defendant corporation.

In October, 1980, Levine mailed a packet of information to Fleischhauer, an investment advisor, on the availability of the films in question. Levine followed up the mailing by telephoning Fleischhauer. As a result of that conversation, Levine mailed Fleischhauer a "full kit" detailing the terms of the film program offered. Fleischhauer contacted Donald Forrester, his accountant and a certified professional accountant, to review the full kit. Levine then traveled to Cincinnati in November to discuss the investment with Fleischhauer and Donald Forrester and afterward Fleischhauer checked references Levine furnished.

In the agreement reached at the meeting, Fleischhauer was to receive a 10% commission on each sale Metropolitan made and a 20% commission on each sale Palm Beach made. Fleischhauer agreed to share the commissions with Donald Forrester. Fleischhauer received $56,000 in commissions on sales of the film rights to the plaintiffs. At oral argument, appellees noted that no evidence was admitted indicating that Fleischhauer paid any commissions to Donald Forrester. All other plaintiffs were initially advised of the investment opportunity by Fleischhauer or by Donald Forrester.

Most plaintiffs received their information either directly or indirectly (through Fleischhauer or Forrester) from the full investment kit, in which a written explanation of the prospective investment was set forth. This kit is over 100 pages long and contains material relating to the tax benefits of the transaction, a list of film titles available, a purchase and sale agreement, copies of financing options, a 64 page legal opinion and miscellaneous questions, answers and examples.

The transaction was described by the seller defendants as a purchase for both income and tax advantage purposes to be financed through an initial "down payment," the balance expected to be paid with interest from revenues generated by the buyers' distribution activity over a ten year period. The purchase prices and down payments varied depending upon the nature of the film. ² The standard form contract included a provision for making the down payment in installments. Buyer plaintiffs were to take full responsibility for arranging the distribution of the film. Sellers represented that plaintiffs could enter into further distribution contracts providing that the distributor would retain 40% of the gross revenues without any reimbursement of expenses.

The kit issued by defendants explained that a plaintiff could obtain a refinancing agreement with an unaffiliated entity, Southwest Capital Corporation, in the event revenues were not sufficient to pay the purchase price over the ten year period. It also addressed the tax implications of the purchase and discussed KIRO, Inc. v. Commissioner, 51 T.C. 155 (1968). (Under that decision, the owner of film distribution rights was permitted under certain circumstances to deduct 100% of the purchase price of the films over 7 years at a rate of 60% in the first year, 15% in the second year, and 5% for each of the following five years.)

Through the kit materials furnished, defendants also advised interested parties that there was a significant chance that the purchaser would be audited by the Internal Revenue Service because of earlier abuses regarding production and distribution of motion pictures. Defendants offered to convert liability on the purchase contract from full recourse to nonrecourse in the event the IRS disallowed anticipated deductions and write-offs on the investment. A condition of that conversion option was A list of numerous distributors was provided to Fleischhauer, but it was expected that those films which were episodes in a series would be handled by a single distributor. In the event all episodes in a series were not sold, the seller agreed to make the unsold episodes available to the purchaser's distributor.

that the purchaser plaintiff must contest the IRS determination.

A number of the plaintiffs testified that they never spoke with either Feltner or Levine prior to purchasing their film and that they relied solely on the advice of Fleischhauer. Plaintiff Ralph testified that he spoke to neither Feltner nor Levine before purchasing his film but relied solely on the advice of Fleischhauer and Donald Forrester and his own review of the kit. Several plaintiffs testified that they spoke with Levine before signing his contract on limited subjects such as selection of film or the distribution process. Only four plaintiffs, including the Forresters and Fleischhauer, spoke with Feltner before purchasing their film rights.

There was no evidence about the identity of the particular seller in the case of four other plaintiffs. ³ Six plaintiffs purchased their films from Metropolitan; the remaining plaintiffs purchased their films from Palm Beach.

All plaintiffs allegedly entered intitially into distribution contracts with Joseph Green Film Enterprises, Inc. (Green) which was not named as a defendant. Access letters were provided to Green for the benefit of all plaintiffs in order that Green could obtain access to the films, but Green failed to secure distribution of any of the films because many unauthorized copies of the films were available to those who wished to use them and the copies plaintiffs purchased were of poor quality. Testimony was offered that Levine knew, before the films were sold, that the films were not marketable either because they were unauthorized copies or because unauthorized copies were readily available.

Because they were unsuccessful in efforts to distribute or lease the films, several plaintiffs who had made only partial down payments withheld the balances within a few months after execution of their contracts. Others testified that although they obtained options with Southwest Capital Corporation to extend the ten year period in which the contract balance was to be paid, they subsequently failed to pay the required annual fee to preserve that option.

As a result of their failure and resulting frustration in effecting distribution of their films, plaintiffs were solicited by Bruce Forrester and Donald Forrester to pursue this litigation against defendants seeking compensatory and punitive damages and attorney's fees, based on RICO charges and Ohio common law fraud.

Appellants have submitted a chart, which is attached as an appendix, compiled from trial testimony and exhibits, setting out pertinent data concerning each plaintiff, the purchase price involved, the actual payment made to defendant or defendants, whether that plaintiff who claimed tax write-offs was audited, a purported outline of tax treatment, and damage awards rendered (before any trebling of the award under RICO). Appellees have not challenged appellants' computations. In all, fourteen of the nineteen investors were audited by the Internal Revenue Service, which disallowed very substantial deductions claimed. The bulk of damages awarded to plaintiffs was against defendant Feltner. Donald Forrester, as an extreme example, paid nothing on his investment of $162,500, yet claimed $97,500 worth of tax benefits which have been challenged by IRS. Donald Forrester was awarded, nonetheless, almost $171,500 in damages subject to trebling. Fleischhauer invested some $138,500, paid only $200 and claimed $40,000 in tax benefits, which was challenged by IRS. He was awarded $56,754 in damages (apart from commissions and trebling). Total damages awarded all plaintiffs, before trebling, against the defendants was $1,317,117.00.

Of the nineteen investments made, fourteen of the nineteen investors were audited The first RICO claim by each plaintiff alleges, in part, as follows:

by the Internal Revenue Service for deductions taken relating...