Parcoil Corp. v. NOWSCO Well Service, Ltd.

• Decision Date: 23 October 1989
• Docket Number: No. 89-3216,89-3216
• Citation: 887 F.2d 502
• Parties: RICO Bus.Disp.Guide 7348 PARCOIL CORPORATION, Plaintiff-Appellant, v. NOWSCO WELL SERVICE, LTD., Defendant-Appellee, and Fox Drilling Company; Robert Fox, Defendants.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 502

887 F.2d 502

RICO Bus.Disp.Guide 7348

PARCOIL CORPORATION, Plaintiff-Appellant, v. NOWSCO WELL SERVICE, LTD., Defendant-Appellee and Fox Drilling Company; Robert Fox, Defendants.

No. 89-3216.

United States Court of Appeals Fourth Circuit.

Argued Sept. 11, 1989.

Decided Oct. 23, 1989.

William C. Cooper (Gary S. Kessler, on brief), for plaintiff-appellant.

Catherine Dabney Munster (James A. Varner, Clarksburg, W.Va., on brief), for defendant-appellee.

Before MURNAGHAN, SPROUSE and CHAPMAN, Circuit Judges.

SPROUSE, Circuit Judge:

The action below was brought by Parcoil Corporation (Parcoil), the owner of oil and gas leases in West Virginia, against its drilling contractor, Fox Drilling Company (Fox), and Fox's subcontractor, NOWSCO Well Service, Ltd. (NOWSCO). ¹ Parcoil alleged violations of the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. Secs. 1961-1968, plus common law fraud, negligence, and breach of the implied covenants of good faith and fair dealing, all based on the actions of Fox and NOWSCO in falsifying reports concerning the type of sand used in fracturing (or "fracing") the oil and gas wells. Parcoil and Fox settled the litigation between them prior to trial. The district court granted a partial summary judgment to NOWSCO on the RICO counts, holding that they were barred because the complaint alleged only a single, limited scheme to defraud, which was insufficient to establish a pattern of racketeering activity as required by RICO. Pursuant to Fed.R.Civ.P. 54(b), the district court directed entry of its order as final, and Parcoil appealed. We affirm, but for reasons somewhat different from those expressed by the district court.

The contract between Parcoil and Fox called for Fox to complete to the point of production a significant number of oil and gas wells; this process included fracing the wells. Fracing involves using hydraulic pressure to fracture the oil- or gas- bearing strata of rock, then injecting sand through the drilled well to "prop" the fissures open. This facilitates the flow of oil and gas into the well.

Initially, Parcoil left specifications as to the fracing process to the discretion of Fox (their contract being for a turnkey operation). After some sixty-five wells had been drilled, however, Parcoil became convinced that Fox was using too much finegrain sand (80/100 mesh) and not enough coarse-grain sand (20/40 mesh), resulting in the fissures being plugged rather than "propped". Parcoil therefore instructed Fox to change its fracing treatment to use a greater proportion of 20/40 sand. Fox agreed to fracture subsequent wells in accordance with Parcoil's instructions.

For four months in late 1983 and early 1984, Fox retained NOWSCO to fracture thirteen of the Parcoil wells. Fox instructed a NOWSCO representative to use the same composition of sand as had been used in the previous wells, but to write up the invoices so as to reflect the composition desired by Parcoil. The NOWSCO employees did so, sending seventeen falsified reports over a four-month period. There is no indication that either NOWSCO or Fox profited by the use of the finer-grained sand; rather, its use reflected Fox's views as to how this phase of the fracing operation properly should be conducted. Nevertheless, Parcoil claims it was injured in that the wells do not produce the quantity of oil and gas they should.

The conspiracy and actions of Fox and NOWSCO in using the finer composition of sand and falsifying the invoices to indicate use of a coarser sand formed the basis of Parcoil's suit against Fox and NOWSCO. Parcoil grounded its RICO claims on the allegations that NOWSCO's actions constituted predicate acts of mail fraud, 18 U.S.C. Sec. 1341, and wire fraud, 18 U.S.C. Sec. 1343, and amounted to a conspiracy to engage and engagement in a pattern of racketeering activity, 18 U.S.C. Secs. 1961 & 1962.

The district court, in granting the motion for partial summary judgment on the RICO claims, based its decision solely on its holding that Parcoil alleged, at best, a single, limited scheme to defraud, and that this did not satisfy the RICO requirement of a pattern. At the time of the district court's decision, the law was unsettled regarding single schemes as RICO violations. Since then, the United States Supreme Court has decided H.J. Inc. v. Northwestern Bell Telephone Co., --- U.S. ----, 109 S.Ct. 2893, 106 L.Ed.2d 195 (1989), and there is now no question but that a single scheme may be sufficient to establish a pattern.

Nevertheless, we affirm, because we think Parcoil does not allege sufficient continuity to the scheme to bring it within RICO's purview. In H.J. Inc., the Supreme Court made it clear that "[t]o establish a RICO pattern it must also be shown that the predicates themselves amount to, or that they otherwise constitute a threat of, continuing racketeering activity." 109 S.Ct. at 2901 (emphasis in original). H.J. Inc. defined continuity as:

both a closed- and open-ended concept, referring either to a closed period of repeated conduct, or to past conduct that by its nature projects into the future with a threat of repetition. It is, in either case, centrally a temporal concept--and particularly so in the RICO context, where what must be continuous, RICO's predicate acts or offenses, and the relationship these predicates must bear one to another, are distinct requirements. A party alleging a RICO violation may demonstrate continuity over a closed period by proving a series of related predicates extending over a substantial period of time. Predicate acts extending over a few weeks or months and threatening no future criminal conduct do not satisfy this requirement: Congress was concerned in RICO with long-term criminal conduct. Often a RICO action will be brought before continuity can be established in this way. In such cases, liability depends on whether the threat of continuity is demonstrated.

Whether the predicates proved establish a threat of continued racketeering activity depends on the specific facts of each case.... A RICO pattern may surely be established if the related predicates themselves involve a distinct threat of long-term racketeering activity, either implicit or explicit.... In other cases, the threat of continuity may be established by showing that the predicate acts or offenses are part of an ongoing entity's regular way of doing business.

109 S.Ct. at 2902 (citations omitted).

We have considered the question of continuity previously. ² Brandenburg v. Seidel, 859 F.2d 1179 (4th Cir.1988); Walk v. Baltimore & Ohio R.R., 847 F.2d 1100 (4th Cir.1988), vacated and remanded for further...