Walter v. Drayson

Decision Date18 August 2008
Docket NumberNo. 07-16284.,07-16284.
Citation538 F.3d 1244
PartiesRobert W. WALTER, Plaintiff-Appellant, v. Richard C. DRAYSON, Individually; Elizabeth Walter Individually; Karen Temple, Attorney at Law LLLC, doing business as Bodden & Temple, LLLC; Karen M. Temple, also known as Karen M. Grant Temple also known as Karen M. Grant, Defendants-Appellees.
CourtU.S. Court of Appeals — Ninth Circuit

Robert W. Walter, Greenwood Village, CO, Pro se, plaintiff-appellant.

Mark D. Bernstein, Honolulu, HI, for defendant-appellee Elizabeth Walter.

Shelton G.W. Jim On, Jim On & Beerman, Honolulu, HI, for defendant-appellee Richard C. Drayson.

Keith K. Hiraoka, Roeca Louie & Hiraoka, Honolulu, HI, for defendants-appellees Karen M. Temple and Karen Temple, AAL, LLLC.

Appeal from the United States District Court for the District of Hawaii; Susan Oki Mollway, District Judge, Presiding. D.C. No. CV-06-00568-SOM.

Before: ALFRED T. GOODWIN, PAMELA ANN RYMER, and SANDRA S. IKUTA, Circuit Judges.

RYMER, Circuit Judge:

Robert W. Walter (Walter), one of four siblings who are beneficiaries of a trust created by their mother, Patricia Ward Walter, asserts violations of the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. § 1962(c) and (d), as well as various state law claims, against Elizabeth Walter, a trustee; Richard C. Drayson, Patricia Walter's CPA and also a trustee; and Karen Temple together with her law firm, Bodden & Temple, who provided legal services to the trustor and the trustees. Walter's RICO theory is that Elizabeth Walter, Drayson, Temple, and her firm, were an associated-in-fact enterprise whose purpose was to gain and maintain control of the trust and to facilitate the wrongful taking of trust assets.

The district court dismissed the second amended complaint in a published opinion. Walter v. Drayson, 496 F.Supp.2d 1162 (D.Haw.2007). It held that Temple's role was limited to providing legal services such that she did not operate or manage the enterprise and so, could not be liable for conducting its affairs under Reves v. Ernst & Young, 507 U.S. 170, 179, 113 S.Ct. 1163, 122 L.Ed.2d 525 (1993), and Baumer v. Pachl, 8 F.3d 1341, 1344 (9th Cir.1993). For this reason the court also dismissed the RICO conspiracy allegations. Walter appeals, arguing that the district court misapprehended the "operation and management" test in the context of an associated-in-fact enterprise. We conclude otherwise based on the pleadings, and the Second Amended RICO Case Statement, before us.

Lacking the hook of a federal question, Walter's state law claims may proceed only if there is an independent basis for jurisdiction. However, his claims sounding in breach of fiduciary duty necessarily implicate Eugene H. Rock, who became a successor trustee upon Patricia Walter's death, and who, like Walter, is a resident of Colorado. Thus, diversity is destroyed and these claims were properly dismissed under Rule 19 of the Federal Rules of Civil Procedure.

Accordingly, we affirm.

I

In 1986, Patricia Ward Walter created a revocable living trust with herself as sole trustee. Her four children, including Robert and Elizabeth, were designated as equal beneficiaries. She died in 2005.

The gist of Walter's complaint is that once his mother became incapacitated by a series of strokes, his sister, Elizabeth, improperly removed jewelry belonging to the trust, and after Patricia Walter's death, failed to rent real property owned by the trust and continued paying caregivers. Temple is a Maui lawyer who represented Patricia Walter in various trust matters and did legal work for the trustees. Walter alleges that in doing so, Temple acted in her personal, rather than professional, capacity; in particular, he avers, Temple advised Elizabeth Walter not to send monthly reports, refused to allow Walter to see trust documents not protected by the attorney client privilege, and sent communications to non-clients. Temple, Elizabeth Walter, and Drayson, it is alleged, were an associated-in-fact enterprise to achieve the shared goal of gaining control of the trust, facilitating the wrongful taking of trust assets by Elizabeth Walter and Drayson, fraudulently obtaining releases of liability, concealing their acts, and impeding justice. The complaint charges that these acts amounted to blackmail, extortion, mail fraud, theft, waste of trust assets, and other predicate offenses.

In his original complaint, Walter sought relief for violation of federal and state RICO, an accounting, and an order removing Drayson and Elizabeth Walter as trustees. It was dismissed on motion, and a First Amended Complaint was filed that eliminated the request for injunctive and declaratory relief. It, too, was dismissed with leave to amend. To the district court it did not appear that Temple did anything beyond acting as legal counsel to the trust, thus the allegations in its view did not satisfy the "operation or management" test adopted by Reves. Walter then filed the Second Amended Complaint, at issue now, together with an amended RICO Case Statement. The district court again dismissed the action, this time with prejudice. It held that allegations that Temple was not acting in her capacity as trustees' counsel were conclusory, Sprewell v. Golden State Warriors, 266 F.3d 979, 988 (9th Cir.2001), and the factual allegations that she caused Walter not to receive monthly reports and failed to send information he requested failed to show that she was directing the affairs of the enterprise.

This appeal followed.

II

Our task is simplified by Walter's position in the district court that if Temple is not liable, he cannot prevail on his § 1962(c) claims. Likewise, we do not need to consider the viability of Walter's conspiracy claim under 18 U.S.C. § 1962(d), because he does not appeal the dismissal on this basis. Consequently, all we must decide is whether Reves applies and, assuming it does, whether Temple conducted the affairs of the enterprise under its standard.

We are guided by the normal rules applicable to review of dismissals for failure to state a claim pursuant to Fed. R.Civ.P. 12(b)(6). Thus, our review is de novo. We construe the complaint (and, in this case, also the RICO statement) in the light most favorable to the non-moving party, and we take the allegations and reasonable inferences as true. Odom v. Microsoft Corp., 486 F.3d 541, 545 (9th Cir.2007) (en banc). In addition, we are mindful of Odom's enjoinder not to be stingy in interpreting and applying RICO. Id. at 547.

The statute that Temple allegedly violated, 18 U.S.C. § 1962(c), 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.

"To state a claim under § 1962(c), a plaintiff must allege `(1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity.'" Odom, 486 F.3d at 547 (quoting Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 496, 105 S.Ct. 3275, 87 L.Ed.2d 346 (1985)). It is the first, or conduct, element that is at issue here.

Walter argues that Temple had a major role in the enterprise and his RICO claims were properly pled in that she did not act in accordance with applicable Hawai'i and professional standards. He relies on Living Designs, Inc. v. E.I. Dupont de Nemours & Co., 431 F.3d 353 (9th Cir.2005), where we acknowledged that DuPont and the law firms hired to defend it in lawsuits brought by Living Designs could be an associated-in-fact enterprise. The issue was whether the enterprise formed by DuPont, the law firms it employed, and the expert witnesses retained by the law firms, was separate and distinct from DuPont, the RICO "person" alleged in the complaint. We held that they were, as the litigation enterprise was necessarily distinct from the client retaining the services. Id. at 362. But Living Designs sheds little light on this case, where there is no question about structure, and we take it as given that Drayson, Elizabeth Walter, and Temple could be an associated-in-fact enterprise. Rather, the issue here is whether the particular allegations about Temple are sufficient to subject her to liability for conducting the affairs of the enterprise.

Reves is the controlling authority on the point of what constitutes "conduct." In Reves, a RICO claim was asserted against Arthur Young, an accounting firm, that had reviewed a series of transactions and incorrectly certified records of the Farmer's Cooperative of Arkansas and Oklahoma, Inc., which was the enterprise. The Court held that failure to advise correctly did not give rise to liability under § 1962(c). In so doing, it rejected Reves's position that "conduct" should be read as "carry on" so that almost any involvement would do. Instead, it concluded that the word "conduct," used twice in § 1962(c), "requires an element of direction." 507 U.S. at 177-78, 113 S.Ct. 1163. At the same time, the Court explained that "participate" connotes "to take part in." Thus "to `participate, directly or indirectly, in the conduct of such enterprise's affairs,' one must have some part in directing those affairs." Id. at 179, 113 S.Ct. 1163. While it is not necessary to be upper management to be liable, and the Court did not have to decide the extent to which low-level employees could "participate" in the conduct of an enterprise's affairs given how clear it was that Arthur Young was not acting under the direction of the Coop's officers or board, it did observe that an enterprise "also might be `operated' or `managed' by others `associated with' the enterprise who exert control over it as, for example, by bribery." Id. at 184, 113 S.Ct. 1163...

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