Ocean Energy II, Inc. v. Alexander & Alexander, Inc.

• Decision Date: 27 March 1989
• Docket Number: No. 88-3155,88-3155
• Citation: 868 F.2d 740
• Parties: RICO Bus.Disp.Guide 7200 OCEAN ENERGY II, INC., and Coteau Services, Inc., Plaintiffs-Appellants, v. ALEXANDER & ALEXANDER, INC., et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 740

868 F.2d 740

RICO Bus.Disp.Guide 7200

OCEAN ENERGY II, INC., and Coteau Services, Inc. Plaintiffs-Appellants, v. ALEXANDER & ALEXANDER, INC., et al., Defendants-Appellees.

No. 88-3155.

United States Court of Appeals, Fifth Circuit.

March 27, 1989.

Donald V. Organ, New Orleans, La., for plaintiffs-appellants.

Jones, Walker, Waechter, Poitevent, Carrere & Denegre, Pauline F. Hardin, John C. Combe, James P. Browning, Jr., New Orleans, La., for defendants-appellees.

Appeal from the United States District Court for the Eastern District of Louisiana.

Before THORNBERRY, KING, and JONES, Circuit Judges.

THORNBERRY, Circuit Judge:

Plaintiffs-appellants Ocean Energy II, Inc. and Coteau Services, Inc. (at times collectively referred to herein as "Pressure Services" ¹) brought this suit against its insurance agent Alexander & Alexander, Inc., a Louisiana corporation, (A & A) and others ² alleging fraud in the sale of an insurance program in violation of 18 U.S.C. Sec. 1961 et seq., the civil RICO statute. On motion for summary judgment, the district court dismissed appellants' RICO claim for lack of standing or, alternatively, for failure to establish an essential element of its cause of action. Having found that appellants met the burden of proof necessary to oppose a motion for summary judgment on these issues, we now reverse and remand.

I. Background

As this is an appeal from summary judgment, we recite the evidence presented to the district court in the light most favorable to Pressure Services, the nonmovant. See Reid v. State Farm Mut. Auto. Ins. Co., 784 F.2d 577, 578 (5th Cir.1986).

Pressure Services is engaged in various oilfield-related businesses. For several months prior to the events forming the basis of the current dispute, Pressure Services carried insurance with the Transit Casualty Company (Transit) to protect itself against losses arising from worker's compensation claims and general accident liability. Pressure Services purchased this coverage through G & K Insurance Company, a local agent, who negotiated with Carlos S. Miro of Miro & Associates Risk Management, Inc. (Miro). Miro, in turn, issued the Transit policy which remained in effect from March 1 to July 1, 1984.

Miro's role in the sale of Transit insurance is potentially central to this litigation; therefore, we briefly review his involvement in the present dispute. Through several agency agreements, Transit appointed Miro to act as its "sub-agent." This arrangement supposedly gave Miro the authority to approve and issue policies without the need to procure Transit's prior approval so long as Miro observed the parameters set forth in the agency agreement. In fact, Miro was furnished with blank Transit policies to facilitate the direct placement of insurance.

Early in the summer of 1984, Pressure Services expressed dissatisfaction with the high cost of the Transit insurance. It therefore contacted A & A, another local agent through which Pressure Services on occasion had purchased insurance in the past, to seek a more favorable program. Although A & A maintains it procured two quotations for Pressure Services' review--one from Transit and a second from Denver Gray Company, the record contains no documentation reflecting the details of the latter proposal. By contrast, A & A appears to have undergone substantial negotiations with Miro to obtain a comprehensively drafted proposal of continued coverage through Transit. The Miro/Transit proposal submitted by A & A to Pressure Services outlined specific coverages and attendant costs. As the proposal document explains, the program's costs were to be based on a "self-insured retention concept" under which the underwriter develops a composite rate which normally is applied to payrolls to determine insurance cost. This composite rate consisted of (1) an insurance and service fee and (2) a loss fund.

A loss fund is a fund into which premiums are paid. The fund earns interest. Monies from the fund are used to pay losses only if and when they arise. If losses do not occur or do not occur to the extent of the fund's balance, the fund's surplus and unused, accumulated interest are returned to the insureds. The loss fund concept is distinguishable from a fixed premium arrangement under which insureds pay premiums regardless of whether losses arise. The relevant effects of a loss fund program are twofold. First, the net costs to the insureds will be lower than under a standard policy, and second, as a consequence, the carrier's income will be diminished to the extent the loss fund is returned to the insureds.

Based on A & A's presentation of Miro's proposal, Pressure Services purchased the Transit program which remained in effect from July 1, 1984 to March 1, 1985. The manner in which this policy was sold to Pressure Services is the subject of the present lawsuit. In December 1985, more than nine months after the policy expired, Transit was declared insolvent by a Missouri court. Consequently, claims which Pressure Services had submitted to Transit while its policy was in effect went unpaid. Pressure Services now seeks to recover the costs attributable to these uninsured losses.

Pressure Services brought suit against A & A, A & A's parent corporation, and A & A's claims handler alleging that they employed the mails to fraudulently sell an illegal insurance program. Specifically Pressure Services claimed that the use of a composite rate structure violated a variety of Louisiana's insurance regulations, that the use of mails constituted mail fraud in violation of 18 U.S.C. Sec. 1341, and that the occurrence of two or more incidents of mail fraud was sufficient to state a RICO claim under 18 U.S.C. Secs. 1962(a)-(d).

Although section 1962 enumerates four distinct RICO violations, common elements apply to all four offenses. We recently noted that "[r]educed to its three essentials, a [violation of section 1962] must involve: (1) a person who engages in (2) a pattern of racketeering activity (3) connected to the acquisition, establishment, conduct, or control of an enterprise." Delta Truck & Tractor, Inc. v. J.I. Case Co., 855 F.2d 241, 242 (5th Cir.1988). In addition to alleging these essential elements, a RICO plaintiff must have standing to sue pursuant to 18 U.S.C. Sec. 1964(c).

In response to Pressure Services' complaint, the defendants-appellees filed two motions to dismiss for failure to state a RICO claim and one for partial summary judgment. Our review of the motions indicates that the defendants challenged the sufficiency of allegations relating to (1) Pressure Services' standing, (2) the existence of an "association in fact" enterprise, (3) the existence of incidents of mail fraud, (4) the existence of a pattern of racketeering, and (5) the timeliness of the lawsuit. The district court concluded that "assuming arguendo " that the plaintiffs properly alleged all other elements, the lack of standing and failure to present evidence creating a factual dispute as to the existence of an "association in fact" enterprise warranted dismissal of Pressure Services' claims. Consequently, the district court granted defendants' motion for summary judgment.

Because the district court only ruled on the issues of standing and the existence of an "association in fact" enterprise, we confine our analysis to these two issues. See KSLA-TV, Inc. v. Radio Corp. of America, 693 F.2d 544, 546 (5th Cir.1982) (concluding that issues raised by summary judgment motion but not addressed by district court's ruling should be "disposed of in the first instance by the district court"). For purposes of this appeal, we assume, as the district court did, that A & A's use of the mails to sell illegal insurance programs constituted a pattern of racketeering activity. Based solely on this assumption, we have used phrases such as "A & A's fraudulent acts" or "A & A's predicate acts." This is merely for convenience. On remand, Pressure Services will bear the burden of establishing all elements of its RICO claims including a pattern of racketeering activity.

II. Claims Abandoned on Appeal

We commence by noting that Pressure Services initially alleged that various persons and/or entities other than itself had suffered injuries by reason of appellees' fraudulent acts. For example, Pressure Services' complaint claimed that appellees' scheme defrauded citizens of Louisiana, "others" in the insurance industry, Louisiana insurance buyers, and Transit of the protection of the insurance laws of the state of Louisiana. The district court dismissed the claims based on these injuries because, as the Supreme Court had recently held in McNally v. United States ³ and Carpenter v. United States, ⁴ the mail fraud statute, 18 U.S.C. Sec. 1341, only allows recovery for damages to one's property rights.

Pressure Services has failed to advance adequately arguments in its appellate brief challenging the district court's disposition of the claims relating to these "loss of protection" injuries. We therefore conclude that claims based on these injuries have been abandoned. See United States v. Ballard, 779 F.2d 287, 295 (5th Cir.), cert. denied, 475 U.S. 1109, 106 S.Ct. 1518, 89 L.Ed.2d 916 (1986); Netto v. National R.R. Passenger Corp. (AMTRAK), 863 F.2d 1210, n. 4 (5th Cir.1989).

III. Standing to Sue under Civil RICO

Pressure Services' complaint alleged that it suffered numerous injuries resulting from Transit's insolvency including: attorneys' fees and other litigation costs incurred defending claims brought by accident victims, indemnity payments in the form of damages and compensation to claimants, medical and administrative expenses on worker's compensation and seaman claims, loss of good will, and damage to business operations due to "starvation of liquidity." In essence, Pressure Services' claims can be reduced to the contention that the appellees fraudulently induced it to "purchase insurance from Transit with a scheme that...