Schrag v. Dinges

• Decision Date: 08 June 1993
• Docket Number: Civ. A. No. 88-1373-FGT.
• Citation: 825 F. Supp. 954
• Parties: Galen SCHRAG, et al., Plaintiffs, v. Ted DINGES, Jr., et al., Defendants.
• Court: U.S. District Court — District of Kansas

825 F. Supp. 954

Galen SCHRAG, et al., Plaintiffs, v. Ted DINGES, Jr., et al., Defendants.

Civ. A. No. 88-1373-FGT.

United States District Court, D. Kansas.

June 8, 1993.

James C. Dodd, James Craig Dodd & Assoc., Enid, OK, for Galen Schrag.

Dan W. Forker, Reynolds, Pierce, Forker Suter & Rose, Hutchinson, KS, for Charles Brooks.

Richard J. Rome, Hutchinson, KS, for Karolyn Dinges.

Robert J. Roth, Hershberger, Patterson, Jones & Roth, Wichita, KS, for Fred Shaffer.

William L. Mitchell, Mitchell & Henry, Hutchinson, KS, for Robert Simpson.

Thomas D. Kitch, Fleeson, Gooing, Coulson & Kitch, Wichita, KS, for Mark Younger.

MEMORANDUM AND ORDER

THEIS, District Judge.

This is a civil action brought under the Racketeering Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq. The plaintiffs allege that the defendants were involved, in various combinations, in four separate fraudulent schemes concerning development of a real estate investment firm called Rexmoor Properties, Inc. ("Rexmoor"). The matter is before the court on motions for summary judgment filed by defendant Mark Youngers (Doc. 679), defendant Robert Simpson (Doc. 742), and defendant Fred Shaffer (Doc. 774). These defendants were officers and/or directors of financial institutions which participated in the financing of the Rexmoor projects. Defendant Youngers was also a director of Paganica, Inc., one of the real estate development firms involved.

Although the defendants have presented arguments relating to each claim against them, this Memorandum and Order deals only with Count I. The court reserves ruling as to the other claims. Defendant Simpson is named only in Count I of the Third Amended Complaint.

The court will begin with a summary of the allegations in plaintiffs' Third Amended Complaint that relate to Count I—also known as the Paganica Supper Club Scheme. Merlin Kaufman, the named plaintiff in Count II, owned a section of land that he was developing into a large residential community, which included a country club and golf course. Defendant Gary Dinges, through his company called Paganica, owned the country club complex and was responsible for managing the development of streets, sewer and water, and marketing the residential lots in Kaufman's development. Some of the residential lots were sold to individual purchasers.

Within the country club complex were a pro shop and supper club, both operated by plaintiffs Schwartz and Meier under a lease agreement between their corporation, S & M, Inc., ("S & M") and Paganica. On April 1, 1981, Paganica entered into a contract (hereinafter referred to as "Management Agreement") allowing S & M to take over operations of the entire country club complex with an option to purchase the complex and golf course for $1 million. The agreement included an express promise that the property subject to the option to purchase would not be further encumbered. The Management Agreement also provided for the sale of twenty percent of S & M stock to Paganica and gave Schwartz and Meier the option to sell their S & M stock in the event that S & M did not exercise the option to purchase.

In 1980, the EPA halted the sale of lots and froze the development due to substandard well and sewer systems. Paganica was directed to repurchase all previously sold lots for the original price plus interest. Paganica installed new water and sewer systems through the issuance of municipal bonds, and attempted to find new purchasers for the lots. However, the lots remained virtually unsold by 1982. The EPA repurchase requirement and the subsequent lack of sales brought Paganica to the verge of bankruptcy.

Hoping to retire Paganica's debt and return the corporation to profitability, Gary Dinges and Jay Ewing devised a plan to start a new corporation, refinance the Paganica debt, transfer Paganica's assets to the new corporation and retire the Paganica refinancing debt through the sale of stock issued by the new corporation, which was to be called Rexmoor Properties, Inc. ("Rexmoor"). The new corporate entity would hold and manage commercial real estate nationwide; property owners would own capital stock in this corporation in return for transferring their real estate to the corporation. The properties transferred to this corporation, however, must be subject to low debt leverage or no debt at all, and must have a positive cash flow after debt service.

Gary Dinges wanted Paganica to exchange its property assets for stock in Rexmoor. However, Paganica and Gary Dinges were deeply in debt, and he had no "debt free" property to transfer to Rexmoor or money to raise the $1 million initial capital investment required to get Rexmoor off the ground.

Defendant Mark Youngers was Chief Financial Officer at Valley Federal Savings & Loan. Youngers was a major stockholder in Paganica. He also owned stock in Americo, another insolvent company run by Gary Dinges. In November 1981, Gary Dinges secretly agreed to trade Youngers' worthless stocks in Americo and Paganica for valuable capital stock in Rexmoor. In addition to this trade, Youngers agreed to help Gary Dinges obtain loans from Valley Federal for the purpose of making Rexmoor a reality.

Gary Dinges, already deeply in debt from his Paganica ventures, approached Valley Federal in November 1981 for a loan to enable Rexmoor to make a public offering of its stock. When the Board of Directors of Valley Federal refused to grant the loan, the president of Valley Federal, defendant Shaffer —who personally stood to profit from the Rexmoor venture—entered into an agreement with Ellinwood Bank, whose president, defendant Simpson, also had a personal stake in Rexmoor. Under that agreement, Ellinwood Bank would loan Paganica $500,000 to be secured by a $500,000 irrevocable letter of credit issued by Valley Federal. As security for Valley Federal's letter of credit, Gary Dinges encumbered the property that was subject to the S & M exclusive option, in violation of the Management agreement. Youngers, as a board member of Paganica and bank officer at Valley Federal, is alleged to have known about the S & M option. Because Paganica had to transfer "debt free" property to Rexmoor in exchange for stocks, Youngers, Shaffer and a fellow bank officer named Brooks decided not to file the mortgage on the Schwartz-Meier property. Simpson, in turn, agreed that Ellinwood Bank would not call Valley Federal's letter of credit if Valley Federal would loan $1 million on an uncreditworthy real estate project known as Hidden Valley, thereby releasing Simpson from a loan guarantee in connection with the Hidden Valley project. Because of the Hidden Valley loan, Simpson later permitted the Valley Federal letter of credit to expire.

The $500,000 loan from Ellinwood Bank was insufficient for Gary Dinges to refinance the Paganica debt and loan Rexmoor part of its required capital. Thus, Valley Federal— through Shaffer, Youngers and Brooks— made several additional major loans to Gary Dinges and Paganica. To enable Paganica to qualify for loans of such magnitude, Shaffer, Youngers and Brooks intentionally misrepresented Paganica's financial condition. Specifically, the income and assets of Paganica Golf and Supper Club, which belonged to S & M, were misrepresented as Paganica's assets and income.

These fraudulent loans extended by Valley Federal were repaid in May 1984 by Boulevard Bank. Youngers allegedly forwarded correspondence and loan documents, which included the S & M mortgage, to Denis Dieker, vice president at Boulevard Bank, in an attempt to escape detection by the banking authorities.

Rexmoor never lived up to the expectations of its creators. By the middle of 1983, Shearson/American Express and Jessup & Lamont, respected national firms, withdrew as broker-manager for Rexmoor. In July 1983, Coldwell Bankers, the company that performed the appraisals on prospective Rexmoor properties, withdrew its approval to use its appraisals. In January 1984, the SEC refused to permit Rexmoor to go forward and conducted another review of the entire offering. The Rexmoor registration statement was withdrawn from the SEC on February 3, 1984.

The plaintiffs allege that the defendants committed mail fraud on various specified occasions in using the United States Postal Service to deliver correspondence, loan documents, mortgages, and other materials in connection with the fraudulent Paganica Supper Club scheme.

Defendants Shaffer, Simpson and Youngers argue that they should be granted summary judgment as to Count I of the Third Amended Complaint, which is brought by plaintiffs Schwartz and Meier. Defendants present several arguments in favor of summary judgment. However, the court will consider only the issue of whether plaintiffs are the proper parties to assert the RICO claim as it is dispositive of Count I. The allegations set forth above are uncontested for purposes of resolving this issue.

Schwartz and Meier were the major shareholders of S & M. Although plaintiffs were parties to the Management Agreement, it was S & M, not Schwartz and Meier as individuals, who had the option to purchase the Paganica property. The agreement that the property would not be further encumbered related to the option to purchase. Defendants argue, therefore, that the injury alleged is actually an injury to the corporation and not to the individual shareholders, and that Schwartz and Meier do not have standing to bring an action for such injury.

As a matter of general corporation law, an action...