Georgia Gulf Corp. v. Ward, C-87-1404-A.

• Decision Date: 31 December 1987
• Docket Number: No. C-87-1404-A.,C-87-1404-A.
• Citation: 701 F. Supp. 1556
• Parties: GEORGIA GULF CORPORATION v. Wilbur J. WARD, et al.
• Court: U.S. District Court — Northern District of Georgia

701 F. Supp. 1556

GEORGIA GULF CORPORATION v. Wilbur J. WARD, et al.

No. C-87-1404-A.

United States District Court, N.D. Georgia, A.D.

December 31, 1987.

Thomas A. Pogue, Atlanta, Ga., for plaintiff.

William T. Hudson, Decatur, Ga., for defendant.

ORDER

O'KELLEY, Chief Judge.

This case was submitted to the court for consideration of the motions to dismiss by defendants Watkins, Ward, Roskind and Holtrachem, Inc. ("Holtrachem"), defendant Watkins' motion to stay discovery, and the motion for leave to file a supplemental brief by defendants Holtrachem and Roskind. After careful consideration of the record and briefs of counsel, and for the reasons set out below, the court dismisses Count II (Georgia Rico), denies the motions to dismiss the remaining counts, and dissolves its August 11, 1987 temporary stay of discovery. Watkins' motion to stay discovery is denied as moot. Finally, the motion for leave to file a supplemental brief is granted.

Factual Background

This is an action for fraud brought by Georgia Gulf Corporation ("Georgia Gulf") against two former employees ("Watkins" and "Ward"), a customer ("Holtrachem") and Holtrachem's President ("Roskind"). Georgia Gulf, formerly a division of Georgia Pacific, is a chemical manufacturer and supplier, and Ward and Watkins were sales supervisors for both Georgia Gulf and the predecessor chemicals division of Georgia Pacific. The complaint alleges that Roskind and Holtrachem controlled Carolina Nitrogen, a buyer of Georgia Gulf products, and that they encouraged Watkins and Ward to purchase ownership interests in that company.

The instant action is based upon an alleged kickback scheme orchestrated by these defendants. Georgia Gulf claims that Ward and Watkins received secret payments from Holtrachem and Roskind in two different ways: (1) direct and indirect payments from Holtrachem and Roskind to Ward; (2) payments to Ward and Watkins through "consulting fees" paid by Carolina Nitrogen, and through profits on the sale of their interests in Carolina Nitrogen. Georgia Gulf does not allege that any of the kickbacks presently at issue were related to sales of chemicals to Carolina Nitrogen. Rather, Carolina Nitrogen appears to have been a conduit for the payment of kickbacks to Ward and Watkins.

Georgia Gulf claims that this kickback scheme violated corporate policy, resulted in the breach of Ward's and Watkins' fiduciary duties, and otherwise defrauded Georgia Gulf of the faithful and honest services of its employees. The complaint contains four counts: Count I, violation of the federal Racketeer Influenced and Corrupt Organization Act, 18 U.S.C. §§ 1961-64, ("RICO"); Count II, violation of O.C.G.A. § 16-14-4(b) and (c) ("Georgia RICO"); Count III, breach of fiduciary duties under Georgia common law and O.C.G.A. § 10-6-25; and Count IV, fraud and conspiracy to defraud under Georgia common law.

Discussion

The defendants have each moved to dismiss the complaint for lack of jurisdiction under Rule 12(b)(1), failure to state a claim for which relief can be granted under Rule 12(b)(6), and for failure to plead fraud with particularity under Rule 9(b). Fed.R.Civ.P. 9(b), 12(b)(1) & (6). Many of the defendants raise identical arguments in their motions to dismiss. A few of the arguments are unique. In light of this, and in an effort to succinctly state the reasoning supporting each of its rulings on the present motions, the court analyzes each Count individually, addressing all of the defendants' arguments, both shared and unique, which relate to the dismissal of that count.

Count I: Federal RICO

Dismissal Under Rule 12(b)(6)

Each of the defendants moves to dismiss Count I, the Federal RICO count, for failure to state a cause of action. Fed.R. Civ.P. 12(b)(6). Dismissal under Rule 12(b)(6) is appropriate only if the court determines that "the plaintiff can prove no set of facts in support of his claims 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); Friedlander v. Nims, 755 F.2d 810 (11th Cir.1985).

The defendants' principle argument for dismissal of the RICO count is that Georgia Gulf has failed to allege predicate acts sufficient to trigger RICO liability. Georgia Gulf alleged violations of both the federal mail and wire fraud statutes, 18 U.S.C. §§ 1341, 1343, as predicate acts under RICO. 18 U.S.C. § 1961(1). Specifically, Georgia Gulf contends that the defendants used the United States mails and interstate telephone wires in their scheme to "deprive it of the faithful and honest services of its agents Ward and Watkins." Complaint at para. 25.

The thrust of the defendants' argument to dismiss the RICO count is that the deprivation of the faithful services of an employee is not an injury to property under the mail and wire fraud statutes. The defendants further contend that because Georgia Gulf failed to allege sufficient predicate acts, the RICO count should be dismissed.

The defendants rely on the recent Supreme Court opinion of McNally v. United States, 483 U.S. 350, 107 S.Ct. 2875, 97 L.Ed.2d 292 (1987), for the proposition that mere deprivation of the faithful and honest services of an employee, absent proof of damage to property rights, is insufficient to constitute a violation of the federal mail and wire fraud statutes. The McNally defendants were public officials of Kentucky who had been convicted under the mail fraud statute for defrauding the state of their faithful and honest services by secretly diverting the payment of commissions on the award of state insurance contracts over which they had supervisory authority. McNally, supra 107 S.Ct. at 2877. The commissions themselves, however, were not the property of the state; the sole injury to Kentucky arose out of the fact that its officers were using their official positions to funnel insurance commissions to themselves and their friends. Id. at 2882. Significantly, the government had not charged or proved that Kentucky would have paid lower insurance premiums in the absence of this scheme. Id. Instead, the government simply argued that the defendants' conduct had deprived Kentucky of its intangible rights to honest and impartial government. Id. at 2877.

The Court in McNally began its analysis by explaining that the mail fraud statute protected property rights alone. Id. at 2811. The Court then noted that the state lost no property by the diversion of the commissions, and that the government had not argued that the state's insurance premiums would have been lower in the absence of the scheme to defraud. Id. at 2882. Accordingly, the Court reversed the mail fraud convictions, finding that the citizenry's interest in fair and honest government did not implicate any property right.

The RICO count in the instant case alleges a scheme to defraud Georgia Gulf of the faithful and honest services of its employees. This case might, on first impression, appear similar to McNally, and therefore appropriate for dismissal.¹ A more thorough reading of the complaint in its entirety, however, reveals some subtle yet dispositive differences.

The alleged scheme at issue here includes kickback payments to Ward and Watkins. Assuming the scheme is proven, Ward and Watkins breached their duties of loyalty to Georgia Gulf, whether they are considered to be agents or mere employees, by using their positions for their own personal benefit and to the detriment of the corporation. Lane Co. v. Taylor, 174 Ga. App. 356, 330 S.E.2d 112, 118 (1985).² Financial loss is a necessary implication of the existence of the kickback payments; Georgia Gulf did not receive as much profit on the sale of its products as it might otherwise have if the defendants had not conspired to withhold from it Holtrachem's implicit willingness to pay more for chemicals. The kickback payments, therefore, constitute lost profit opportunities to Georgia Gulf. United States v. Conner, 752 F.2d 566, 572-73 (11th Cir.1985), cert. denied, 474 U.S. 821, 106 S.Ct. 72, 88 L.Ed.2d 59 (1985).

It is the well-established law of this circuit that such kickback schemes deprive the employer of property. Id. at 573. When, as here, a breach of fiduciary duty and a conspiracy to defraud are accompanied by a deprivation of property, McNally constitutes no bar to recovery under the mail fraud statute. Carpenter v. United States, ___ U.S. ___, 108 S.Ct. 316, 98 L.Ed.2d 275 (1987). Accordingly, the court finds that Georgia Gulf's allegations of mail and wire fraud are sufficient to constitute predicate acts under RICO.

The Particularity Requirement Of Rule 9(b)

All of the defendants argue that Georgia Gulf has failed to plead fraud with the particularity required under Rule 9(b). Fed.R.Civ.P. 9(b). "The particularity requirement of Rule 9(b) does not abrogate the requirement of Fed.R.Civ.P. 8(a) & (e) that the complaint set forth a short and plain statement of the claim, and that each averment should be `simple, concise and direct.'" Currie v. Cayman Resources Corp., 595 F.Supp. 1364, 1371 (N.D.Ga. 1984). See Friedlander v. Nims, 755 F.2d 810, 813 n. 3 (11th Cir.1985). Further, Rule 9(b) does not require the setting out of "detailed evidentiary matter." Id. The Rule itself requires that the plaintiff allege the "circumstances constituting fraud." Fed.R.Civ.P. 9(b). When applied to a RICO claim based on mail or wire fraud, the plaintiff must allege "sufficient facts to put the defendants on notice of the charges of a scheme to defraud and the use of the mails or wires in furtherance of that scheme." 2A J. Moore & J. Lucas, Moore's Federal Practice para. 9.034, at 9-54, 55 (2d. ed. 1987).

Georgia Gulf has fulfilled the requirements of Rule 9(b). The scheme to defraud is set out explicitly, and Georgia Gulf has alleged how the mails and interstate wires were used in furtherance of the scheme. The court is unpersuaded by the defendants' argument that the complaint is deficient in that it fails to...