Whelan v. Winchester Production Co.

• Decision Date: 30 January 2003
• Docket Number: No. 01-41105.,01-41105.
• Citation: 319 F.3d 225
• Parties: John S. WHELAN; R.J. Whelan, Jr.; Mary Virginia Whelan; Estate of Virginia Abney Whelan; Regina Whelan Skoda; Margaret Whelan Hensley; Lynn Abney Lomax; James K. Abney, Jr.; Katherine L. Abney; Inez Elizabeth Abney Furrh; Robert Abney Price; Jane Abney Price; Blanch K. Abney, Plaintiffs-Appellees-Cross-Appellants, v. WINCHESTER PRODUCTION COMPANY; Westchester Gas Company; Estate of Sam Vaughan; Kim Vaughan; Amy Vaughan, an individual; Phillip Baldwin, Jr.; Newton W. Dorsett; Newiel Inc.; Loutex Production Company, Defendants-Appellants-Cross-Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 225

319 F.3d 225

John S. WHELAN; R.J. Whelan, Jr.; Mary Virginia Whelan; Estate of Virginia Abney Whelan; Regina Whelan Skoda; Margaret Whelan Hensley; Lynn Abney Lomax; James K. Abney, Jr.; Katherine L. Abney; Inez Elizabeth Abney Furrh; Robert Abney Price; Jane Abney Price; Blanch K. Abney, Plaintiffs-Appellees-Cross-Appellants, v. WINCHESTER PRODUCTION COMPANY; Westchester Gas Company; Estate of Sam Vaughan; Kim Vaughan; Amy Vaughan, an individual; Phillip Baldwin, Jr.; Newton W. Dorsett; Newiel Inc.; Loutex Production Company, Defendants-Appellants-Cross-Appellees.

No. 01-41105.

United States Court of Appeals, Fifth Circuit.

January 30, 2003.

Ron Adkison (argued), Wellborn, Houston, Adkison, Mann, Sadler & Hill, Henderson, TX, Damon Michael Young, Sr., Young, Pickett & Lee, Texarkana, TX, for Plaintiffs-Appellees-Cross-Appellants.

Deborah Johnson Race (argued), Ireland, Carroll & Kelley, Tyler, TX, for Defendants-Appellants-Cross-Appellees.

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

Before HIGGINBOTHAM, DUHÉ and DeMOSS, Circuit Judges.

DUHÉ, Circuit Judge:

The district court dismissed on summary judgment Plaintiffs' civil Racketeer Influenced and Corrupt Organizations Act and common law fraud claims, the latter without prejudice. Defendants appeal requesting dismissal of Plaintiffs' common law fraud claim with prejudice. Plaintiffs appeal the dismissal of their RICO claims. We affirm.

I. FACTUAL AND PROCEDURAL HISTORY

The defendants are: Winchester Production Company, its parent Westchester Gas Company, the estate of Sam Vaughan, Kim Vaughan, Amy Vaughan, Phillip Baldwin, Jr., and Newton Dorsett and his companies, Newiel, Inc. and Loutex Production Co. Sam Vaughan directed Winchester Production and Westchester Gas until his death in 1989 and is succeeded in that role by his daughter Kim Vaughan. Amy Vaughan, also the daughter of Sam Vaughan, receives income from Winchester and Westchester. Phillip Baldwin is an attorney for Winchester and Westchester.¹ Newton Dorsett purchased from Winchester the well bore of one of the wells at issue, and in a transaction dealing with another property, obtained a mineral lease from Winchester. The plaintiffs, John S. Whelan, et al. ("Whelan"), are royalty owners.

Whelan alleges that Sam Vaughan, and after his death Kim Vaughan, with the aid of Phillip Baldwin and Newton Dorsett, used employees of the corporate defendants to defraud Whelan of royalties. Beginning in 1987 and ending at some point between 1991 and 1993, Winchester employees engaged in the practice of reallocating production among gas wells. The purpose of the reallocations is disputed; Defendants argue that the reallocations were temporary and were intended to take advantage of the best prices available, while Whelan contends that they were used to defraud royalty owners of payments. Kim Vaughan, who has served as president of Winchester Production and Westchester Gas since 1990, learned in connection with another lawsuit that reports reflecting reallocated production, rather than actual production, had been filed with the Texas Railroad Commission and Comptroller of Public Accounts. Kim Vaughan hired an accounting firm to prepare corrected reports for submission to the Railroad Commission and the Comptroller and to determine the amount owing to royalty owners who had been underpaid as a result of the reallocations. Winchester paid additional royalties based on the accountants' report. Whelan, wishing to determine for itself the correct production allocations, declined to accept the payment amounts as determined by Winchester's accountants.

Whelan alleges also that the Winchester defendants and Dorsett cooperated to fraudulently obtain mineral interests belonging to Whelan, further depriving it of its rightful share of royalties. Dorsett purchased a well bore from the Winchester defendants and obtained an assignment from Texaco to produce oil from the well. Whelan contends that the assignment was invalid because Whelan, not Texaco, owned the mineral rights. Dorsett also obtained a mineral lease from Bank One, trustee of the Virginia Abney Whelan Trust. Whelan alleges that Dorsett knew the lease to be invalid. Dorsett later obtained leases directly from the Whelan heirs and, in connection with the same property, obtained from Winchester another mineral lease.

Whelan brought a civil RICO action against the Winchester defendants. The case's lengthy procedural history includes Whelan's filing of two RICO case statements and two amended complaints, the first of which added Newton Dorsett and his companies as defendants. The magistrate judge recommended, and the district court adopted and approved, summary judgment for Defendants, finding that Whelan produced no evidence tending to demonstrate a RICO enterprise. The district court issued a final judgment dismissing all claims.

Eight days after the district court issued its final judgment, Whelan moved for a new trial and for reconsideration and amendment of the final judgment. Whelan argued in its motion for amendment that its second amended complaint contained state law claims never mentioned in the magistrate judge's report and recommendation. Whelan requested that the unadjudicated state law claims be dismissed without prejudice. The district court denied the new trial but granted the motion to amend, stating that Whelan's second amended complaint "may support a cause of action for common law fraud." Because Whelan's RICO claim had been the only federal claim, the court declined pendent jurisdiction and dismissed the common law fraud claim without prejudice.

Defendants moved for alteration or amendment of the amended final judgment, arguing that Whelan had failed to state fraud with particularity as required by Federal Rule of Civil Procedure 9. The district court denied Defendants' motion, stating that it, having declined pendent jurisdiction, "did not intend to address the merits of the state law claim."

Whelan argues that the district court erred in finding that Whelan's evidence offered no support for the existence of an association-in-fact enterprise as required by RICO. Defendants contend that the district court erred in finding that the pleadings stated a claim for common law fraud and dismissing the claim without prejudice. We address these arguments in turn.

II. SUMMARY JUDGMENT

A. Standard of Review

We review the grant of summary judgment de novo, applying the same standard as would the district court. Boston Old Colony Ins. Co. v. Tiner Associates, Inc., 288 F.3d 222, 227 (2002). Summary judgment is appropriate when the movant can demonstrate that the pleadings, depositions, affidavits, and other evidence available to the court establish no genuine issue of material fact. Fed.R.Civ.P. 56(c). Once the movant has met its burden, the nonmovant must demonstrate that there are fact issues warranting a trial. Fed.R.Civ.P. 56(e). In opposing summary judgment, the nonmovant may not rely on conclusory allegations in his pleadings; rather, he must set forth sufficient evidence supporting a claimed factual dispute to require a fact finder to resolve the parties' differing versions of the truth at trial. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986). If the nonmovant fails to make a showing on an element for which he bears the burden of proof, the movant is entitled to judgment as a matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). The evidence must be viewed in a light most favorable to the nonmovant. Walker v. Thompson, 214 F.3d 615, 624 (5th Cir.2000).

B. Whelan's RICO claims

Whelan asserts that Defendants violated all four subsections of 18 U.S.C. § 1962.² Elements common to all four are: (1) a person³ who engages in (2) a pattern⁴ of racketeering activity⁵ (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), cert. denied, 489 U.S. 1079, 109 S.Ct. 1531, 103 L.Ed.2d 836 (1989).

Central to the district court's grant of summary judgment was its conclusion that Whelan failed to demonstrate an enterprise. An enterprise is a group of persons or entities associating together for the common purpose of engaging in a course of conduct. United States v. Turkette, 452 U.S. 576, 583, 101 S.Ct. 2524, 2528, 69 L.Ed.2d 246 (1981). The enterprise may be a legal entity or "any union or group of individuals associated in fact although not a legal entity." 18 U.S.C. § 1961(4) (emphasis added). The plaintiff alleging an association-in-fact enterprise must adduce evidence demonstrating "`an ongoing organization, formal or informal, and ... evidence that the various associates function as a continuing unit'." Atkinson v. Anadarko Bank & Trust Co., 808 F.2d 438, 439-40 (1987) (quoting Turkette, 452 U.S. at 583, 101 S.Ct. at 2528). The enterprise is not a pattern of racketeering activity, but must exist separate and apart from the pattern of racketeering activity in which it engages. Id. at 441.

For purposes of § 1962(c), which prohibits the conduct of an enterprise's affairs through a pattern of racketeering activity, the plaintiff must demonstrate not only that the enterprise is distinct from the series of predicate acts constituting racketeering activity, but also that the RICO "person" who commits the predicate acts is distinct from the enterprise. Bishop v. Corbitt Marine Ways, Inc., 802 F.2d 122, 123 (5th Cir.1986). It is not enough to establish that a defendant corporation through its agents committed the predicate acts in the conduct of its own business. Elliott v. Foufas, 867 F.2d 877, 881 (5th Cir.1989). That officers or employees of a corporation, in the course of their employment, associate to commit predicate acts does not establish an association-in-fact enterprise distinct from the...