HBE Leasing Corp. v. Frank

• Decision Date: 13 April 1994
• Docket Number: D,No. 557,557
• Citation: 22 F.3d 41
• Parties: , RICO Bus.Disp.Guide 8544 HBE LEASING CORPORATION, Signal Capital Corporation, Reyna Leasing Corporation, Reyna Financial Corporation and John Hancock Leasing Corporation, Plaintiffs-Appellees, v. Hiram H. FRANK, Hiram J. Frank, Henry J. Sandlas III, Henry J. Sandlas IV, Bruce Huggins, H.H.F. Farms, Inc., H.H. Frank Enterprises, Inc., Golden Egg Farms, Inc., and Robert Ames, Defendants-Appellants. ocket 93-7085.
• Court: U.S. Court of Appeals — Second Circuit

Page 41

22 F.3d 41

29 Fed.R.Serv.3d 471, RICO Bus.Disp.Guide 8544

HBE LEASING CORPORATION, Signal Capital Corporation, Reyna

Leasing Corporation, Reyna Financial Corporation and John Hancock Leasing Corporation, Plaintiffs-Appellees, v. Hiram H. FRANK, Hiram J. Frank, Henry J. Sandlas III, Henry

J. Sandlas IV, Bruce Huggins, H.H.F. Farms, Inc., H.H. Frank

Enterprises, Inc., Golden Egg Farms, Inc., and Robert Ames,

Defendants-Appellants.

No. 557, Docket 93-7085.

United States Court of Appeals, Second Circuit.

Argued Dec. 17, 1993.

Decided April 13, 1994.

Frederick T. Davis, New York City (Stephen M. Cowherd, Shearman & Sterling, S. Pitkin Marshall, New York City), for plaintiffs-appellees.

Judd Burstein, New York City (Jay Goldberg, Richard Ware Levitt, New York City, of counsel), for defendants-appellants Hiram H. Frank and Golden Egg Farms Inc.

Gerald B. Lefcourt, New York City, for defendants-appellants Henry J. Sandlas III and Henry J. Sandlas IV.

Sheryl E. Reich, New York City, for defendants-appellants Hiram J. Frank and H.H. Frank Enterprises, Inc.

Richard A. Stoloff, Monticello, NY, (Goldstein & Stoloff, Monticello, NY), for defendants-appellants Bruce Huggins and H.H.F. Farms, Inc.

Cliff Gordon, Monticello, NY, for defendant-appellant Robert Ames.

Before: MAHONEY and WALKER, Circuit Judges, and EGINTON, District Judge. ^*

WALKER, Circuit Judge:

Defendants in this action appeal from a judgment of the United States District Court for the Southern District of New York (Gerard L. Goettel, Judge ). After a three month jury trial, defendants were found jointly and severally liable under the civil provisions of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. Sec. 1961 et seq., in the amount of $6,556,714, which amount was then trebled For the reasons stated below, we affirm the judgment of the district court in its entirety.

pursuant to 18 U.S.C. Sec. 1964(c). The defendants were also found liable for state common law fraud in the identical amount of $6,556,714, allocated among the various defendants. Finally, the jury assessed punitive damages in the amount of $5 million, similarly allocated among the various defendants. On appeal, defendants argue, inter alia, that the district court erred by permitting the plaintiffs to pursue a theory of liability allegedly precluded by the pretrial order and by forbidding defense counsel from mentioning before the jury RICO's treble damage and attorneys fees provisions.

BACKGROUND

Defendants are individuals and companies who were engaged in commercial egg farming. Egg producing is generally a labor intensive enterprise, for both chickens and humans alike. However, large egg-producing farms can minimize the human labor costs by utilizing automated equipment to harvest the eggs. This apparatus, a vast contraption comprised of a series of coops, cages, and conveyor belts, enables just a few workers to manage the egg production for thousands of chickens. The dominant manufacturer of this automated egg-producing equipment is "Big Dutchman," and it is Big Dutchman equipment which is at the center of this controversy.

Plaintiffs are large and prominent leasing companies. Plaintiffs' complaint alleged that the defendants engaged in a large-scale scheme to defraud plaintiffs over several years in a series of phony farm equipment leasing transactions.

Between 1982 and 1985, principal defendants Hiram H. Frank and his son Hiram J. Frank solicited the various plaintiffs to purchase new Big Dutchman equipment from defendant H.H.F. Farms, Inc. The plaintiffs would in turn lease the equipment to numerous egg-producing farms in order to replace outmoded Big Dutchman machines installed on those farms in the 1960's. This transaction would benefit both parties: the farms would benefit by obtaining the new equipment without having to pay the full price at the time of acquisition and the plaintiffs would benefit by financing the farms' acquisition of the equipment, and by reaping an Investment Tax Credit for the purchase price of the equipment. In the end, the parties consummated some fourteen separate leasing transactions in which the defendants purported to sell plaintiffs some $5 million worth of equipment.

The arrangement operated smoothly until mid-1985, when the defendants started missing lease payments. By December 1985, all leasing payments to the plaintiffs ceased. The plaintiffs subsequently learned that the defendants had systematically divested the farms of cash and liquid assets, thus making repayment of the leases impossible as a practical matter.

In the aftermath of the defaults, plaintiffs more closely investigated the defendants' operation and eventually reached two conclusions: first, they realized that both the equipment vendor and lessee farms were controlled by defendants Hiram H. Frank and his son; and second, they came to believe that in fact no "new" equipment ever existed. Plaintiffs alleged at trial that no actual equipment was ever purchased or installed, and that the entire leasing arrangement was a sham concocted by the individual defendants. Since there is no challenge as to the sufficiency of the evidence, nor could there be on this record, there is no need to recount in detail the evidence adduced during the lengthy trial in support of the plaintiffs' allegations of fraud. However, some key components of that evidence are noteworthy. Plaintiffs offered testimony that they were never actually able to inspect this "newly installed" equipment on site because the defendants warned that any foreign presence on the farms would risk the destruction of the entire flock through the spread of the avian flu. One of defendants' workers testified that during his tenure at one of the farms from 1976 to 1986 no "new" equipment was ever installed. Another worker testified that just before the plaintiffs arrived for a post-default inspection of the equipment, the defendants hurriedly sanded and repainted The plaintiffs called virtually all of the individual defendants to testify. These defendants vigorously denied any wrongdoing. They maintained at trial that they actually installed older but unused "inventoried" equipment following the lease transactions. It was clear even from defendants' own records that no "new" equipment was purchased at the time of the leases, although the lease invoices specified "NEW BIG DUTCHMAN" equipment. Thus defendants contended that equipment purportedly installed during the 1980's had actually been purchased in the 1960's and put in storage.

the old equipment to give it the appearance of being new. Finally, shortly after the default but before suspecting any fraud, plaintiffs hired an egg-farming equipment dealer to inspect the "new" equipment and determine a likely resale value. He testified that, upon visiting the farms, he was astonished to realize that the "new" equipment he had been hired to inspect was the identical equipment he had himself installed in the 1960's. He pointed out several graphic instances where he had personally "customized" parts of the existing equipment during its installation some twenty years earlier.

DISCUSSION

Defendants raise several issues on appeal, only two of which require discussion. First, defendants claim that the district court erred by permitting the plaintiffs to pursue a theory of liability in the course of the trial in violation of the pretrial order issued pursuant to Fed.R.Civ.P. 16. Second, they argue that the district court erroneously prohibited defense counsel from discussing RICO's treble damage and attorneys fees provisions before the jury. Both arguments lack merit.

I. The Alleged Rule 16 Violation

Defendants argue that the district court's pretrial order estopped plaintiffs from pursuing a particular theory in response to defendants' "inventory" defense. Although the plaintiffs consistently argued that the "new" Big Dutchman equipment was fictitious, they suggested that even if older "inventoried" equipment was installed, the lease transactions were nonetheless fraudulent because the agreements specified that the old equipment would be replaced by new equipment.

In their original complaint, plaintiffs listed twenty-seven leasing transactions as to which plaintiffs alleged the equipment "did not exist or was sold at inflated prices." Noting the apparent contradiction in the two theories, the district court required that the plaintiffs settle on a single theory. Although not stated clearly in the original complaint, of these twenty-seven transactions, fourteen consisted of leases where plaintiffs alleged that no "new" equipment existed, and the remaining thirteen involved transactions in which the plaintiffs acknowledged that equipment was in fact installed, but that the equipment was variously old, used, and/or virtually worthless. Subsequently, as reflected in the Revised Contentions that became a part of the Rule 16 pretrial order, the plaintiffs distinguished the two groups of transactions and stated unequivocally that "[e]ach of the 14 sale and lease transactions identified ... was a sham in that the new and unused equipment HHF Farms purported to sell to the plaintiffs did not exist." The remaining thirteen transactions were dropped from the action as a basis for liability, although one of these latter transactions was admitted to prove the defendants' conspiratorial relationship.

At trial, plaintiffs presented substantial evidence that no equipment actually existed as to the fourteen leasing transactions. The defendants countered with their inventory defense. In a few instances, plaintiffs voiced their views that the inventory defense was in fact no defense at all because the lease agreements, upon which they relied, specified new equipment and not old, inventoried equipment. Defendants objected and argued that plaintiffs should not be allowed to take the position that the inventory defense was fraudulent because it would improperly...