HCB Fin. Corp. v. McPherson

• Decision Date: 04 August 2021
• Docket Number: No. 20-50718,20-50718
• Citation: 8 F.4th 335
• Parties: HCB FINANCIAL CORPORATION, Plaintiff—Appellant, v. Lee K. MCPHERSON, in her individual capacity and in her capacity as trustee of the trust U/W/O Babette L. Wiener dated 10/30/1984, also known as Lee Kennedy, also known as Lee F. Kennedy, also known as Lee K. Freyer; Brenda L. Adkinson; Harry Rauch Freyer, in his individual capacity and in his capacity as trustee of the trust U/W/O Babette L. Wiener dated 10/30/1984; Emmanuel Kniahynycky; Neil McPherson; Samuel Reynolds; Anita L. Williams ; Palms Destin Holdings, L.L.C.; Michael William Mead; Mead Law; Title, P.L.L.C.; Jeffrey L. Hall; et al, Defendants—Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

8 F.4th 335

HCB FINANCIAL CORPORATION, Plaintiff—Appellant,

v.Lee K. MCPHERSON, in her individual capacity and in her capacity as trustee of the trust U/W/O Babette L. Wiener dated 10/30/1984, also known as Lee Kennedy, also known as Lee F. Kennedy, also known as Lee K. Freyer; Brenda L. Adkinson; Harry Rauch Freyer, in his individual capacity and in his capacity as trustee of the trust U/W/O Babette L. Wiener dated 10/30/1984; Emmanuel Kniahynycky; Neil McPherson; Samuel Reynolds; Anita L. Williams ; Palms Destin Holdings, L.L.C.; Michael William Mead; Mead Law; Title, P.L.L.C.; Jeffrey L. Hall; et al, Defendants—Appellees.

No. 20-50718

United States Court of Appeals, Fifth Circuit.

FILED August 4, 2021

Fred Lee Butler, Esq., Adams & Reese, L.L.P., Houston, TX, Robin Bryan Cheatham, Scott Robert Cheatham, Jeffrey Edward Richardson, Adams & Reese, L.L.P., New Orleans, LA, for Plaintiff-Appellant.

Sherrard Hayes, II, Danielle Katharina Hatchitt, Geoffrey D. Weisbart, Weisbart Springer Hayes, L.L.P., Austin, TX, for Defendant-Appellee Lee K. McPherson.

Joseph Robert Knight, Alithea Z. Sullivan, Esq., Ewell, Brown, Blanke & Knight, L.L.P., Austin, TX, for Defendants-Appellees Brenda L. Adkinson, Harry Rauch Freyer, Emmanuel Kniahynycky, Samuel Reynolds, Anita L. Williams.

Vaughan Eugene Waters, Esq., Laura Flores Macom, Richard J. Reynolds, III, Esq., Thornton, Biechlin, Reynolds & Guerra, L.C., San Antonio, TX, for Defendants-Appellees Michael William Mead, Mead Law & Title, P.L.L.C.

Michael Brian Johnson, Timothy John Stostad, Thompson, Coe, Cousins & Irons, L.L.P., Austin, TX, for Defendant-Appellee Jeffrey L. Hall.

Before Clement, Haynes, and Wilson, Circuit Judges.

Edith Brown Clement, Circuit Judge:

Several years ago, in a separate lawsuit, HCB Financial Corp. won a $2 million judgment against Lee McPherson for a defaulted loan. After years of unsuccessful attempts to collect, HCB filed this lawsuit against McPherson and the other defendants (collectively, "McPherson"), seeking treble damages under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1962, 1964(c). One month after HCB filed suit, McPherson registered the $2 million judgment plus interest with the first court. Because McPherson satisfied the underlying judgment, the district court here found that HCB had suffered no injury—an essential element of its RICO claim. As a result, the court dismissed the suit with prejudice.

This presents a question of first impression for our circuit: Can the possibility that a plaintiff may recover treble damages sustain a RICO action after the underlying debt is satisfied? The only other circuit to squarely address this question has said it cannot. We now join our sister circuit and affirm the district court's dismissal.

I.

The unpaid judgment at issue comes from an earlier lawsuit that HCB Financial brought against McPherson in the Southern District of Mississippi. The district court there entered a $2,019,495.82 judgment in favor of HCB and against McPherson. HCB Fin. Corp. v. Kennedy , No. 1:10-cv-559-HSO, 2013 WL 12090332 (S.D. Miss. Mar. 14, 2013), as amended , 2013 WL 12090333 (S.D. Miss. July 11, 2013). A panel of this court affirmed. HCB Fin. Corp. v. Kennedy , 570 F. App'x 396 (5th Cir. 2014) (per curiam).¹

For years after the Mississippi court entered judgment, HCB sought in vain to collect through post-judgment discovery, various lawsuits, intervention in a California action McPherson had filed, and various charging orders. HCB then filed this RICO action in the Western District of Texas on December 24, 2018. HCB's complaint alleged that McPherson and her "family members, accountants, engineers, real estate brokers, bankers, and business partners" had engaged in a racketeering enterprise "to defraud banks, title insurance companies, courts, and [her] legitimate creditors, including HCB."

Motivated to action by HCB's RICO lawsuit, McPherson returned to the Southern District of Mississippi on January 25, 2019, to deposit the funds and satisfy her judgment. The Mississippi court ordered McPherson to deposit $2,036,293.60 with the court, representing the judgment plus post-judgment interest. The court initially denied McPherson's motion for an order declaring the judgment satisfied, pending resolution of any post-judgment attorneys’ fees. That matter has since been resolved.²

Returning to this case in the Western District of Texas, HCB then filed a 345-page amended complaint. In addition to its RICO allegations, HCB also brought more than a dozen state-law claims and one count under the Federal Declaratory Judgment Act, 28 U.S.C. § 2201. HCB seeks RICO treble damages pursuant to 18 U.S.C. § 1964(c), monetary damages, and injunctive and declaratory relief.³

McPherson and the other defendants filed four motions to dismiss. Most importantly, two groups of defendants argued that HCB failed to plead an injury. They also argued that the RICO claims were barred by the statute of limitations, that HCB failed to plead essential elements of a RICO enterprise, and that the court should decline supplemental jurisdiction over the state-law claims. Two other groups of defendants sought dismissal for lack of personal jurisdiction under Rule 12(b)(2), an issue that the district court did not reach.

The magistrate judge ("MJ") issued a detailed Report and Recommendation finding that HCB lacked statutory RICO standing and recommending dismissal without prejudice. HCB objected broadly to the Report and Recommendation. HCB argued that the issue should be analyzed as a question of mootness and then rejected the idea that McPherson's deposit of the Mississippi judgment mooted a RICO claim.⁴ McPherson objected narrowly, arguing for dismissal with prejudice. The district court overruled HCB's objections, adopted the Report and Recommendation, and agreed with McPherson that amendment would be futile. The court dismissed HCB's RICO claims with prejudice and declined to exercise supplemental jurisdiction over the state-law claims. HCB appealed.

II.

RICO makes it "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. ..." 18 U.S.C. § 1962(c). The statute "provides a private civil action to recover treble damages for injury ‘by reason of a violation of’ its substantive provisions." Sedima, S.P.R.L. v. Imrex Co. , 473 U.S. 479, 481, 105 S.Ct. 3275, 87 L.Ed.2d 346 (1985) (quoting 18 U.S.C. § 1964(c) ). "Broadly stated, a civil RICO claimant must prove (1) a violation of the substantive RICO statute, 18 U.S.C. § 1962, and (2) an injury to the plaintiff's ‘business or property by reason of a violation of section 1962.’ " Alcorn Cnty. v. U.S. Interstate Supplies, Inc. , 731 F.2d 1160, 1167 (5th Cir. 1984) (quoting 18 U.S.C. § 1964(c) ), abrogated on other grounds by United States v. Cooper , 135 F.3d 960 (5th Cir. 1998).

Courts sometimes refer to these requirements as RICO standing or statutory standing. See In re Taxable Mun. Bond Sec. Litig. , 51 F.3d 518, 521 (5th Cir. 1995) ("The standing provision of civil RICO provides that ‘[a]ny person injured in his business or property by reason of a violation of section 1962 of this chapter may sue therefor ... and shall recover threefold the damages he sustains.’ " (quoting 18 U.S.C. § 1964(c) )). Accordingly, courts insist that damages or injury "as a result of the RICO violation" is "a necessity for standing under RICO." Id. at 522. Or, as the Supreme Court has put it, "the plaintiff only has standing if, and can only recover to the extent that, he has been injured in his business or property by the conduct constituting the violation." Sedima , 473 U.S. at 496, 105 S.Ct. 3275.

Although statutory standing involves an inquiry into alleged injury, it is not synonymous with Article III standing. Instead, a motion to dismiss for lack of statutory standing is analyzed under Rule 12(b)(6), not Rule 12(b)(1). Cox, Cox, Filo, Camel & Wilson, L.L.C. v. Sasol N. Am., Inc. , 544 F. App'x 455, 457 n.8 (5th Cir. 2013) (mem.); Arroyo v. Oprona, Inc. , 736 F. App'x 427, 429 (5th Cir. 2018) (per curiam); see DeMauro v. DeMauro , 115 F.3d 94, 96 (1st Cir. 1997) ; In re Schering–Plough Corp. Intron/Temodar Consumer Class Action , 678 F.3d 235, 243 (3d Cir. 2012) ; see also Canyon Cnty. v. Syngenta Seeds, Inc. , 519 F.3d 969, 974 n.7 (9th Cir. 2008) ("[T]he question of statutory standing [under RICO] is to be resolved under Rule 12(b)(6), once Article III standing has been established." (citation omitted)).

Recognizing this, the district court correctly analyzed the motions to dismiss under Rule 12(b)(6). We review that dismissal de novo. Molina-Aranda v. Black Magic Enters., L.L.C. , 983 F.3d 779, 783 (5th Cir. 2020). We review the district court's denial of leave to amend the complaint for abuse of discretion. Price v. Pinnacle Brands, Inc. , 138 F.3d 602, 605 (5th Cir. 1998) (per curiam).

III.

The district court considered two arguments that HCB proffered to establish injury: "lost debt" damages and "lost investment opportunity" damages. We begin with the "lost debt" issue.

A.

"Lost debt" damages are "damages in the form of an owed, but as-yet-uncollected, amount." D'Addario v. D'Addario , 901 F.3d 80, 93 (2d Cir. 2018). On that understanding, the district court dismissed HCB's RICO claims because, once McPherson satisfied the $2 million judgment, HCB's debt was no longer "lost." This is a matter of first impression for our circuit, but the district court was not without guidance. The Second Circuit has addressed this precise question. So, we begin with a review of three instructive decisions from our sister circuit. We then address HCB's counterproposal. Finally, we explain why we join the Second Circuit's approach.

1.

The first decision is Bankers Trust Co. v....