Healy v. Fox

• Decision Date: 19 November 2021
• Docket Number: 3:21-CV-03004-RAL
• Citation: 572 F.Supp.3d 730
• Parties: Bret HEALY, Plaintiff, v. Albert Steven FOX, Bryce Healy, Mary Ann Osborne, Defendants.
• Court: U.S. District Court — District of South Dakota

572 F.Supp.3d 730

Bret HEALY, Plaintiff,

v.Albert Steven FOX, Bryce Healy, Mary Ann Osborne, Defendants.

3:21-CV-03004-RAL

United States District Court, D. South Dakota, Central Division.

Signed November 19, 2021

Tucker J. Volesky, Volesky Law, Huron, SD, Joseph E. Sandler, Pro Hac Vice, Mark Lancaster, Pro Hac Vice, Sandler, Reiff, Lamb, Rosenstein & Birkenstock, PC, Washington, DC, for Plaintiff.

Daniel F. Duffy, Emily M. Smoragiewicz, Bangs, McCullen, Butler, Foye & Simmons, Rapid City, SD, for Defendant Albert Steven Fox.

Joseph B. Erickson, Lee A. Schoenbeck, Schoenbeck Law, PC, Watertown, SD, for Defendant Bryce Healy.

Jack H. Hieb, Zachary W. Peterson, Richardson, Wyly, Wise, Sauck & Hieb, LLP, Aberdeen, SD, for Defendant Mary Ann Osborne.

OPINION AND ORDER GRANTING DEFENDANTS’ MOTIONS TO DISMISS

ROBERTO A. LANGE, CHIEF JUDGE

This case arises from a bitter dispute over ownership and control of a family ranch. On February 22, 2021, plaintiff Bret Healy ("Bret") filed this action against his mother Mary Ann Osborne ("Osborne"), brother Bryce Healy ("Bryce"), the family's longtime attorney Albert Steven Fox ("Fox") (collectively "Defendants"), and others¹ alleging they fraudulently acted to deprive Bret of his interest in valuable real property and induce him into investing $2.7 million into the family ranch. Doc. 1. Defendants filed motions to dismiss in groups on March 3, March 10, and March 15, 2021. Docs. 11, 24, 30, 32. After the motions to dismiss were filed, Bret on March 24, 2021, without obtaining leave of the Court,² filed an Amended Complaint dropping his prior claims and asserting against the Defendants Bryce, Osborne and Fox a claim under 18 U.S.C. § 1964(c) of the Racketeer Influenced and Corrupt Organizations ("RICO") Act. Docs. 1, 35. Bret's Amended Complaint claims that the named Defendants conspired to defraud him by intentionally failing to provide proper consideration when forming the corporate entity, Healy Ranch, Inc. ("HRI"), which the parties used to manage their family ranch and in which he invested over $2 million. Doc. 35. Defendants Bryce, Osborne and Fox responded with renewed motions to dismiss. Docs. 36, 38, 40. Bret opposed the motions to dismiss, Doc. 42, and the Defendants replied. Docs. 43, 44, 45. For the reasons explained below, this Court grants Defendants’ motions to dismiss for failure to state a claim.

I. Facts Not Subject to Dispute

Bret's Amended Complaint alleges that on August 8, 2017, he received HRI tax documents during discovery in a lawsuit against the Defendants in state court³ revealing that HRI shares issued in 1994 to Osborne, which were subsequently transferred to Bret in 2000, were void because she failed to provide proper consideration when she established the corporation. Doc. 35 at ¶¶ 2–4, 21-26. On August 1, 1994, Osborne signed Articles of Incorporation, drafted by Fox and filed with the South Dakota Secretary of State, authorizing HRI to issue 1,000,000 shares of common stock. Doc. 35 at ¶¶ 22, 75. Article VI of the Articles of Incorporation stated that the "corporation will not commence business until consideration of the value of at least Five Thousand Dollars has been received for the issuance of shares." Doc. 35 at ¶ 22. The same day, Osborne, through her attorney Fox, caused HRI to issue Osborne 299,348 shares of common stock, constituting all the issued and outstanding shares of the corporation. Doc. 35 at ¶ 23.

Bret alleges that because Osborne provided no consideration for the shares, the shares were void then and in subsequent transactions. Doc. 35 at ¶¶ 24–25, 30-31. However, in 1995, Osborne caused to be conveyed to HRI from a previously established partnership all the land on which the ranch was situated. Doc. 35 at ¶ 33. After that conveyance, HRI held the record title to and thereby owned the ranch and land. Doc. 35 at ¶ 33. Bret contends, "[t]he transfer of the land did not and could not represent consideration for the shares of the Corporation because the property interest in the land never belonged to [Osborne] personally. At the time of formation of HRI, the land belonged to the [partnership]-not to [Osborne]." Doc. 35 at ¶ 34. Therefore, according to Bret, because an asset of a partnership belongs to the partnership and not an individual, the exchange of the partnership's interest in real property for the issuance of HRI stock to Osborne was invalid and thus the shares issued were void. Doc. 35 at ¶¶ 34–38 (citing SDCL § 48-7A-203 ) ("Property acquired by a partnership is property of the partnership and not of the partners individually.").

Bret alleges that the fatally flawed corporate entity, HRI, became a RICO "enterprise" as defined by 18 U.S.C. § 1961(4) which the Defendants used to defraud him out of over $2 million over the course of the next seventeen years. Doc. 35 at ¶¶ 1, 85–97. Bret claims that the Defendants conspired together to violate 18 U.S.C. §§ 1341⁴ ("mail fraud") and 1344⁵ ("bank fraud"), both considered "racketeering activity" under 18 U.S.C. § 1961(1), and therefore engaged in a "pattern of racketeering activity"⁶ entitling him to relief under 18 U.S.C. § 1962(c)⁷ and (d).⁸ Doc. 35 at ¶¶ 82–83, 93–97, 106, 109.

Bret claims that the mail fraud began in 2000 when Osborne sold her interest in HRI to her three sons Bret, Bryce and Barry. Doc. 35 at ¶¶ 5, 39. Each son purchased a one-third interest in HRI. Doc. 35 at ¶ 39. From 2000 to 2016, Bryce (in his role as secretary and treasurer) mailed to Bret Form K-1 accounting documents reflecting Bret's one-third ownership in HRI, which Bret claims induced him to invest $2,053,100 of his own funds on improvements to and operation of the ranch, from which he alleges Osborne and Bryce took substantial sums. Doc. 35 at ¶¶ 5–6, 52–60. Bret understood these Form K-1 papers to document his one-third ownership of the outstanding stock of HRI. Doc. 35 at ¶ 52. However, according to the Amended Complaint, the shares were void, and thus Bret had no interest in HRI despite investing in its operation. Doc. 35 at ¶¶ 7, 53–57. Bret claims that he never would have invested into the farm's operation if he did not own valid shares in the corporation. Doc. 35 at ¶ 58. Bret alleges that Osborne and Bryce paid themselves approximately $400,000 from HRI funds. Doc. 35 at ¶ 60. During this time, Bret served as HRI's director and president. Doc. 35 at ¶ 45. According to Bret, this scheme to defraud him using the mail violated 18 U.S.C. § 1341. Doc. 35 at ¶ 90.

Bret also alleges that Defendants committed bank fraud in violation of 18 U.S.C. § 1344 when they entered into an agreement to fraudulently use HRI and Bret's investment in the corporation as collateral for bank loans, Doc. 35 at ¶¶ 61–63. On three separate occasions in 1999, 2002 and 2008, Defendants listed HRI assets as collateral in loan applications. Doc. 35 at ¶¶ 62–66. Specifically, regarding the 2008 loan, Bret alleges that Fox not only removed corporate minutes for years 2000 through 2005 from the HRI corporate record book, but also substituted new minutes for 2000 through 2004 and 2006 through 2008.⁹ Doc. 35 at ¶ 67. On one occasion, Bret claims that his forged signature was transmitted by Fox as part of one of the loan applications. Doc. 35 at ¶ 68. Bret asserts that these loan transactions involve the Defendants defrauding Bret and the banks by having Bret sign loan documents as president of HRI despite HRI never validly existing as a corporation and thus lacking valid corporate officers. Doc. 35 at ¶¶ 69–72.

Defendants’ motions to dismiss, Docs. 36, 38, 40, assert that Bret's claim is barred by the doctrine of res judicata, specifically claim preclusion based on Bret having litigated and lost related claims in state court action. Doc. 37 at 4-9; Doc. 39; Doc. 41 at 7–12; see generally Healy, 934 N.W.2d at 565. In the state court action, the Supreme Court of South Dakota affirmed summary judgment disposing of Bret's state court complaint naming these same Defendants and "charging all of the defendants with conversion, fraud, and conspiracy to commit fraud" because Bret's claims were time-barred by the statute of limitations. Healy, 934 N.W.2d at 561, 565. Bret also had sued Osborne "for breach of contract, breach of the implied covenant of good faith and fair dealing, breach of fiduciary duties, and negligence." Id. at 561. One issue in the state court action was whether Bret had actual or constructive knowledge that HRI held the entire interest in the family ranch after 1995, thereby extinguishing any interest Bret claims to have held in the partnership the family previously used to conduct ranch operations. See id. at 563 ("We decline to address Bret's claim of ownership because the threshold issue in this case centers on the timeliness of Bret's claims for conversion, breach of contract, fraud, conspiracy to commit fraud, unjust enrichment, breach of fiduciary duties, and negligence.").

Bret claimed then in state court as he does now in the Amended Complaint, Doc. 35 at ¶ 20, that he owned a one-fourth interest in the partnership. See Healy, 934 N.W.2d at 560. Specifically, the court held Bret had notice of the transfer of interest from the partnership to HRI. Id. at 565. The Supreme Court of South Dakota stated, "[t]he record establishes that Bret [acting as president of HRI] had either actual or constructive notice of [Osborne's] 1995 warranty deed by, at the latest, 1999[.]" Id. The court, referring to HRI as the "corporation," continued:

[T]he only reasonable inference we can draw from the undisputed material facts contained in this record is that Bret was keenly aware of the preeminence of the corporation having purchased, along with his two brothers, a one-third interest in the corporation in 2000 by contract for deed. He served for many years as the corporation's president with access to corporate records. He signed seven mortgage agreements on behalf of the corporation. When he individually purchased a parcel of the

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