Johnsen v. Rogers
| Decision Date | 01 November 1982 |
| Docket Number | No. CV 81-2464 CHH.,CV 81-2464 CHH. |
| Parties | Gordon JOHNSEN, Lewis Phan, Petro Investments, Inc., a Nevada corporation, Magoil Investments, Inc., a Nevada corporation, Oil Resources Enterprise, a California Partnership, School Land Oil Company, a California Partnership, Calabasas Oil Company, a California Partnership, Carolwood Oil Company, a California Partnership, Hidden Hills Oil Company, a California Partnership, Thousand Oaks Oil Company, a California Partnership, Tioga Oil Company, a California Partnership, Pilgramage Oil Company, a California Partnership, Broadway Oil Enterprise, a Colorado Limited Partnership, Dumetz Oil Enterprise, a Colorado Limited Partnership, Plaintiffs, v. Jerry L. ROGERS; Oil-Gas Equipment Co., Inc., an Oklahoma corporation; James Cooper, aka James Douglas; Western Oil Resources, Ltd., a Nevada corporation, Norman W. Glade, Defendants. |
| Court | U.S. District Court — Central District of California |
David M. Garland, R.F. Wade, Newport Beach, Cal., for plaintiffs.
Barash & Hill by Gary L. Bostwick, Christina L. Machon, Los Angeles, Cal., for defendants Jerry L. Rogers and Oil-Gas Equipment Co., Inc.
Whitman & Ransom, Lee D. Unterman, Charles C. Lee, Robert P. Andreani, Los Angeles, Cal., for defendants James Cooper, aka James Douglas, and Western Oil Resources, Ltd.
This action is to recover monies paid for fractional interests in oil and gas leaseholds and "turnkey" drilling and operating contracts pursuant to the Securities Act of 1933 ("Securities Act"), 15 U.S.C. § 77a et seq., the Securities and Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78a et seq., and Securities and Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5; and treble damages, attorney's fees and costs pursuant to the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq.1
On January 22, 1982, Judge Kelleher entered an "Order re Motion of Defendants to Dismiss and Strike."2 Judge Kelleher dismissed several claims in the First Amended Complaint and gave plaintiffs 20 days to amend certain claims. Plaintiffs filed their motion for leave to file a second amended complaint and submitted a Proposed Second Amended Complaint on January 28, 1982. In addition to making the amendments authorized by Judge Kelleher, plaintiffs sought to include claims for treble damages, attorney's fees and costs under RICO. The motion came before me on March 8, 1982. Having reviewed the Proposed Second Amended Complaint and having considered the points and authorities submitted in support of and in opposition to the motion and oral argument, I issued an Order on March 22, 1982, granting in part and denying in part plaintiffs' motion to amend. The basis of that Order is set forth below.
Plaintiffs Gordon Johnsen, Lewis Phan and School Land Oil Company ("School Land") are purchasers of fractional interests in oil and gas leaseholds and parties to turnkey drilling and operating contracts relating to those leaseholds. Defendants Oil-Gas Equipment Company, Inc. ("Oil-Gas Equipment") and Jerry L. Rogers, its president, sold the oil and gas leaseholds to plaintiffs. Defendants Western Oil Resources, Ltd. ("Western Oil") and its president James Cooper a/k/a James Douglas ("Douglas") entered into turnkey drilling and operating contracts with plaintiffs to drill and operate oil and gas wells on the purchased leaseholds.
Plaintiffs allege that defendants, individually and as co-conspirators, made material misrepresentations and concealed material facts from plaintiffs regarding the geology and potential productivity of the leaseholds to induce plaintiffs to purchase the leaseholds and to enter into drilling and operating contracts with defendants. These acts allegedly were done in violation of RICO and the federal securities laws and resulted in plaintiffs' loss of a substantial portion of their investment.3
Plaintiffs, in the Proposed Second Amended Complaint, allege RICO claims for the first time. Plaintiffs assert that defendants' conduct violated 18 U.S.C. § 1962(c) which provides:
It shall be 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 or collection of unlawful debt. Emphasis added.
Plaintiffs contend that defendants' conduct constitutes "racketeering activity" as defined in 18 U.S.C. § 1961(1)(D): "(1) `Racketeering activity' means ... (D) any offense involving ... fraud in the sale of securities ...." Section 1961(5) of Title 18 provides that a "pattern of racketeering activity" requires at least two acts of racketeering activity within ten years of each other. If plaintiffs could successfully demonstrate that they were injured "in their business or property by reason of a violation of section 1962," they would be entitled to recover treble damages, attorney's fees and costs of the suit. 18 U.S.C. § 1964(c).
"Leave to amend should be freely given when justice so requires." Fed.R. Civ.P. 15(a). However, as the Supreme Court stated in Foman v. Davis, 371 U.S. 178, 182, 83 S.Ct. 227, 230, 9 L.Ed.2d 222 (1962), leave may be denied when there is an apparent reason to do so, "such as undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of allowance of the amendment, futility of amendment, etc...."
The facts supporting the RICO claims are the same as those supporting the securities fraud claims, i.e., defendants' fraud in the sale of securities. Plaintiffs were necessarily aware of all the facts asserted in support of the RICO claims prior to filing the Complaint on May 20, 1981, the First Amended Complaint on June 23, 1981, and their opposition to defendants' motions to strike and to dismiss the First Amended Complaint on November 2, 1981. At no time prior to filing the Proposed Second Amended Complaint on January 28, 1982 did plaintiffs assert a RICO claim.
Plaintiffs' sole justification for their eight-month delay in bringing the RICO claims is that they had not previously thought of them. Based on the severity of the remedies available under RICO, the eight-month delay and the absence of any justifiable excuse for the delay, the Court exercises its discretion under Rule 15(a) of the Federal Rules of Civil Procedure and denies plaintiffs' motions to add the RICO claims. Compare Komie v. Buehler Corp., 449 F.2d 644 (9th Cir.1971); see also 6 C. Wright & A. Miller, Federal Practice and Procedure §§ 1487-1488 & n. 93, at 435, 443 (1971).
Even were the RICO claims timely raised, the Court finds those claims legally insufficient on their face.4 Congress expressly provided that "the provisions of RICO shall be liberally construed to effectuate its remedial purposes," Organized Crime Control Act of 1970, Pub.L.No. 91-452, Title IX, § 904, 84 Stat. 947 (1970), codified at 18 U.S.C.A. § 1961 note (Supp.1982), however, because RICO is primarily a criminal statute, federal courts increasingly are refusing to find a RICO claim in civil cases even though such a claim could fall within a literal reading of the statute.
These courts have taken two tacks in limiting RICO's civil application. The more direct approach has been to impose RICO's civil penalties only on "entities involved with organized crime or activities within the penumbra of that phrase."5 The other approach has been to define narrowly the type of injury protected by the Act.6 In so doing, these courts have limited standing under 18 U.S.C. § 1964(c) to plaintiffs alleging something more, or different, than direct injury resulting from the predicate acts that constitute the racketeering activity.7 Instead, a plaintiff must allege a commercial or "racketeering enterprise" injury. See Harper, supra, 545 F.Supp. at 1007; Van Schaick, supra, 535 F.Supp. at 1137 n. 11; Landmark Savings, supra, 527 F.Supp. at 208; cf. North Barrington Development, supra, (requiring an allegation of a competitive injury).
As the courts in Van Schaick and Landmark Savings noted, 18 U.S.C. § 1964(c) is similar to the treble damage provision contained in section 4 of the Clayton Act, 15 U.S.C. § 15.8 To recover treble damages under section 4, a "plaintiff must prove `antitrust injury,' which is to say injury of the type the antitrust laws were intended to prevent and that flows from that which makes defendants' acts unlawful." Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 489, 97 S.Ct. 690, 697, 50 L.Ed.2d 701 (1977).
I find that a plaintiff similarly must allege a "racketeering enterprise injury" to recover treble damages under RICO; that is, a commercial injury caused by the conducting of an "enterprise's affairs through a pattern of racketeering activity."9 Congress' primary purpose in enacting RICO was to "cope with the infiltration of legitimate business" by organized crime. United States v. Turkette, 452 U.S. 576, 592, 101 S.Ct. 2524, 2533, 69 L.Ed.2d 246 (1981). United States v. Bledsoe, 674 F.2d 647, 662 (8th Cir.1982).10
Section 1964(c) of Title 18 provides a cause of action for "any person injured in his business or property by reason of a violation of section 1962 ...." While plaintiffs summarily conclude that they "have been injured in their business or property" by defendants' acts (Proposed Second Amended Complaint, ¶¶ 158 and 165), it is clear that the injury to which plaintiffs refer is...
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