Howell Hydrocarbons, Inc. v. Adams

• Decision Date: 27 March 1990
• Docket Number: No. 89-5572,89-5572
• Citation: 897 F.2d 183
• Parties: , 16 Fed.R.Serv.3d 690, RICO Bus.Disp.Guide 7455 HOWELL HYDROCARBONS, INC., Plaintiff-Appellant, v. John ADAMS, et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 183

897 F.2d 183

58 USLW 2592, 16 Fed.R.Serv.3d 690, RICO

Bus.Disp.Guide 7455

HOWELL HYDROCARBONS, INC., Plaintiff-Appellant, v. John ADAMS, et al., Defendants-Appellees.

No. 89-5572.

United States Court of Appeals Fifth Circuit.

March 27, 1990.

Rehearing Denied April 25, 1990.

Eugene B. Wilshire, Jr., Jacalyn D. Scott, Wilshire, Scott, Halbarch & Dyer, Houston, Tex., for plaintiff-appellant.

D. Bobbitt Noel, Jr., Vinson & Elkins, Houston, Tex., for defendants-appellees.

Appeal from the United States District Court for the Western District of Texas.

Before HIGGINBOTHAM, SMITH and DUHE, Circuit Judges.

PATRICK E. HIGGINBOTHAM, Circuit Judge:

Howell Hydrocarbons, Inc. appeals from the district court's grant of summary judgment in favor of the defendants. The district court granted summary judgment on Howell's RICO claims on the grounds that they were barred by res judicata, and that there was insufficient evidence of the pattern of racketeering necessary to support those RICO claims. The district court then dismissed Howell's pendent state law claims. While we disagree with the district court that Howell's claims were barred by res judicata, we affirm the summary judgment because there was insufficient evidence of a pattern of racketeering.

I

Plaintiff-Appellant Howell Hydrocarbons, Inc. is a Delaware corporation which maintains its principal place of business in San Antonio, Texas. Howell refines and markets petroleum products, including jet fuel.

Defendants Warren Tomlinson and Harold Harris were directors, officers and shareholders of Tomlinson Oil Company. TOC was a publicly traded oil and gas company. Pioneer Refining Ltd. was a Texas limited partnership. TOC effectively owned over 90% of Pioneer because Pioneer's general partner, Tomlinson Refining, Inc., was a wholly owned subsidiary of TOC. Tomlinson was the sole limited partner in Pioneer and owned the remaining 8.3% not controlled by TOC.

Defendants Randall Smith, Basil Vasiliou and Smith-Vasiliou Management, Inc., acquired a controlling interest in TOC in 1983 and 1984. Smith, Vasiliou and SVM, securities traders, obtained their interest in TOC in part through the purchase of TOC debentures by Bronstein Factors, Inc., an entity they controlled. Defendant John Adams was Smith and Vasiliou's New Jersey tax attorney. Adams was appointed to the TOC board in 1983 and became TOC's chief executive officer in 1984.

In 1983 and 1984 Howell sold jet fuel on credit to Pioneer so that Pioneer could fulfill part of its contract to supply jet fuel (the JP-4 contract) to the United States. Howell's terms were net 10, but the usual time between delivery and payment was 13 days. The government usually paid Pioneer for deliveries on the 11th day. The JP-4 contract was to be up for renewal on April 1, 1984, and Howell's contract with Pioneer was to expire on the same day. Pursuant to its contract with Howell, a standby letter of credit was to be outstanding to cover payments owed for the fuel delivered. This letter of credit had been arranged with Mellon Bank, and it had been renewed, the latest renewal to end on March 31, 1984. From March 21 through April 3, 1984, Pioneer took ten deliveries of jet fuel from Howell with a total invoice of just over $344,000. Pioneer never paid for these deliveries, although Pioneer did resell the fuel to the U.S. and received payment for it within eleven days of each delivery, as was customary. Pioneer ceased all business on April 3, 1984. On April 3 and 4, Pioneer wire-transferred most of the available funds out of its bank accounts with Mellon Bank to TOC bank accounts at other institutions.

Howell maintains that the Bronstein group wanted control of TOC because TOC had a large tax net operating loss carry forward, and to take personal advantage of this, Smith and Vasiliou had to gain effective control of 80% of TOC. Howell also alleges that they wanted to take advantage of Pioneer's cash flow arrangement resulting from the government contract, and that during 1983 and 1984 cash was transferred from Pioneer to TOC on a regular basis.

Mellon Bank was a major lender to TOC and Pioneer during this period. Mellon was owed approximately $8,500,000 and had a first lien security interest in all assets of both entities. Mellon maintained escrow, collateral and operating accounts for both companies. Receivables were accumulated in the escrow accounts to service the monthly debt. The debt service was transferred to the collateral account and the remainder to the operating accounts.

The Bronstein group began meeting with Mellon in December 1983, seeking a restructuring of the debt. Several proposals were put forth to Mellon, each of which required Mellon to forgive debt, which it refused to do because it was adequately secured. Howell alleges that at a meeting on January 5, 1984, with Harris, Smith, and Vasiliou present, it was disclosed to Mellon that a million dollar "negative working capital" existed in connection with Pioneer's JP-4 contract because of float between payment and billing. Howell alleges that the defendants also disclosed that they intended to "divest" Pioneer of the JP-4 contract. When this occurred, the defendants explained, the million dollar negative, which was made up of the account debts to Howell and Triangle, another jet fuel supplier, would have to be paid by the Mellon letters of credit. Howell claims that this disclosure established that money was being diverted out of Pioneer in amounts sufficient to assure that when deliveries of the jet fuel ceased, Pioneer would owe its jet fuel suppliers at least one million dollars more than it was due to receive. Howell contends that what was said at these meetings proves that the defendants knew of the shortfall. Howell also alleges that the result of these meetings was that they "realistically assured that Howell's letter of credit would not be renewed upon expiration in March of 1984." Howell alleges that at this time the defendants knew that they were going to terminate the JP-4 contract which would leave them with a cash shortage, and a significant account debt to Howell that they did not intend to pay.

Howell alleges that the Bronstein group intended to merge TOC with Bronstein and utilize the loss carry forward. It further alleges that the new board wanted to take TOC into Chapter 11, and would probably siphon off funds out of the Mellon accounts into other bank accounts to build up a war chest. In other words, they would receive product from their suppliers and sell to the government under their JP-4 contract and let the payables build up to a maximum and then file for bankruptcy under Chapter 11.

Howell also alleges that the defendants met on April 2, 1984, and decided at that meeting to take one more shipment from Howell, for which they had no intention of paying, and then would cease performing under the JP-4 contract. They instructed TOC's treasurer to transfer substantially all of Pioneer's money on account at Mellon into TOC accounts in other banks in order to prevent Mellon from freezing the funds. Howell also alleges that the defendants intended to keep this secret from Howell and Triangle, thus defrauding them, for if they were told, Howell and Triangle would have presented their letters of credit to Mellon, and Mellon would have frozen the accounts.

Howell alleges that if it had been advised of the true facts--the million dollar negative as imparted to Mellon in January 1984, the nonrenewal of the letter of credit, the defendants' bankruptcy plans, and the defendants' plans to transfer all of Pioneer's funds to banks other than Mellon--Howell would not have allowed any extensions of credit to Pioneer, and would have suffered no losses.

On May 14, 1984, before the filing of the bankruptcy actions, Howell filed Howell Hydrocarbons, Inc. v. Pioneer Refining, Ltd. et al., No. 84-23115, in Harris County, Texas, alleging that the foregoing facts constituted common law fraud and breach of contract. On June 11, 1984, TOC, Tomlinson Refining, and Pioneer all filed for reorganization under Chapter 11. Howell filed a Proof of Claim on February 1, 1985. On July 25, 1985, the debtors filed a consolidated plan of reorganization, and after a disclosure statement was approved, the court set August 30, 1985, as the deadline for filing objections to confirmation of the Plan. On August 20, 1985, the debtors filed their application to consolidate all three cases substantively on the grounds that they were really one business entity and had conducted their affairs as such. After due notice to all creditors, including Howell, and with no objections, the Bankruptcy Court consolidated the three bankruptcies. Howell got all of the required notices. There were no objections to confirmation, and the plan was confirmed on September 10, 1985.

Howell filed this suit in February 1986, alleging that the defendants, who were shareholders, officers, directors and managing agents of TOC, caused damage to Howell by operating TOC and Pioneer in a fraudulent manner. Howell asserted RICO claims, based upon mail and wire fraud and bankruptcy fraud, and state law claims of alter ego and common law fraud. Howell maintained that the defendants fraudulently operated Pioneer and TOC in such a way that they intentionally created a false impression that Pioneer was solvent, so that Howell would continue supplying jet fuel to Pioneer on credit. Howell also alleged that in contemplation of the bankruptcy filings the defendants caused the depletion of all of Pioneer's cash by effectuating six wire transfers of over $1 million from Pioneer accounts to TOC accounts. A magistrate entered summary judgment on three grounds: first, that there was insufficient evidence of RICO as to all six defendants; second, that all claims were barred by res judicata; and third, that Howell lacked standing to assert the RICO claim based on bankruptcy fraud. The district court adopted the...