Opinion ID: 553321
Heading Depth: 2
Heading Rank: 6

Heading: The Case at Hand: Pelletier's RICO Suit.

Text: 80 At the conclusion of the January 30 hearing, as Zweifel was leaving the courtroom, a process server presented him with the complaint in the instant case (the RICO suit); Schlanger had filed it, on behalf of Pelletier, in the district court that morning. 81 The complaint consisted of a chronological history of House of Travel and focused on three of the four stock transactions described above--the Langston/Hurst Group transaction of October 7, 1983; the Pelletier/Hurst Group transaction of December 29, 1984; and the Pelletier/Elite transaction of May 4, 1985 41 --and House of Travel's chapter 11 proceeding in the bankruptcy court. Pelletier alleged that each of these transactions, and the chapter 11 proceeding, was the product of a scheme that Culpepper had devised in September 1983 (1) to induce his House of Travel coshareholder to sell and/or a third party to buy the coshareholder's House of Travel stock; (2) to induce the purchaser, after the stock changed hands, to obtain working capital for the company; and, then, (3) to bleed the company of its new working capital. According to the complaint, this is how Culpepper executed his scheme. First, whenever House of Travel fell into financial difficulties, Culpepper would look for an investor to replace his coshareholder and to obtain working capital for the company. When he found a good prospect, Culpepper would tout House of Travel as a good investment--that simply needed more working capital. Culpepper would explain that the company's lack of sufficient working capital was due to his coshareholder's misfeasance. When the prospect indicated an unwillingness to purchase a minority interest in the company, Culpepper would promise to give him effective control of the company by vesting him with the power to manage it. If this satisfied the prospect and he agreed to buy out the coshareholder and arrange for new working capital, Culpepper would induce his coshareholder to sell by convincing him that if he did not sell, he would lose his entire investment in House of Travel. 82 Culpepper, the complaint alleged, devised this scheme sometime prior to October 7, 1983, and he used it for the first time to get Langston to sell, and the Hurst Group to buy, 40 of his 50 House of Travel shares (i.e., 40% of the company). Culpepper purportedly convinced Langston that both of them should sell 40 shares to the Hurst Group, but only Langston completed the transaction. Culpepper, when House of Travel's financial condition subsequently deteriorated, executed his scheme again in December 1984; in an effort to salvage his investment, he allegedly induced Pelletier to buy out the Hurst Group and to obtain a line of credit for House of Travel. The inducement, according to the complaint, was Culpepper's promise to give Pelletier his, Culpepper's, authority to manage the company; after Pelletier bought the Hurst Group's interest, however, Culpepper reneged on his promise. Culpepper allegedly executed his scheme for a third time on May 4, 1985, inducing Pelletier to sell to Elite the House of Travel shares he had acquired from the Hurst Group. 83 Zweifel and his law firm, according to the complaint, joined Culpepper's scheme, as coconspirators, in the fall of 1984, shortly before Pelletier purchased the Hurst Group's stock; they joined the scheme, the complaint said, to protect and enhance the stream of income they had been receiving from House of Travel in the form of attorney's fees. Thereafter, Zweifel purportedly became aware of Pelletier's plan to purchase the Hurst Group's interest in House of Travel and Culpepper's intention to induce Pelletier to go forward with the purchase, and to obtain a line of credit for the company, by promising to give Pelletier the authority to manage the company. On January 8, 1985, however, after Pelletier had purchased the Hurst Group's stock and obtained the line of credit, Zweifel counseled Culpepper to renege on his promise and thereby helped Culpepper maintain control over the company. When, in March 1985, the Superior Court of Fulton County, Georgia upheld the decision of House of Travel's board of directors (in which the Hursts, at Pelletier's direction, voted to replace Culpepper as House of Travel's president and Zweifel's law firm as its counsel), Zweifel, with the help of Donald L. Rickertsen, counseled Culpepper to file a chapter 11 petition, and thus put House of Travel in the hands of the bankruptcy court. Zweifel did this, it was alleged, to enable Culpepper to continue his control, at least temporarily, over House of Travel's affairs. 84 The complaint alleged that, while House of Travel was before the bankruptcy court, four other individuals and two corporations, in addition to Zweifel and his law firm, joined Culpepper's scheme, as coconspirators. They were Rickertsen, who represented House of Travel during the chapter 11 proceeding, Frank Carmines and Charles Crumley, the bankruptcy examiner and auditor, respectively, assigned to the chapter 11 case, Elite and its president, Joyce Carson, and House of Travel. Collectively, these coconspirators helped Culpepper get rid of Pelletier, as Culpepper's coshareholder in House of Travel, by fraudulently inducing Pelletier to sell his House of Travel stock to Elite. The fraud was principally this. Part of the consideration Pelletier received for the stock was House of Travel's assignment to Pelletier of any claims it may have had against Zweifel and Lokey & Bowden; Pelletier could not sue on these claims, however, without the bankruptcy court's approval. Rickertsen and Carmines, acting for all of the coconspirators, promised Pelletier that they would not oppose the granting of such approval, but they did not intend to abide by their promise; when Pelletier, through Schlanger, petitioned the bankruptcy court for leave to sue, Rickertsen and Zweifel objected and the court sustained their objection. As a result, Pelletier was never able to sue Zweifel and Lokey & Bowden on House of Travel's claims, and, according to Pelletier, a substantial portion of the consideration he received for his House of Travel stock thus went for naught. 85 Pelletier alleged that the foregoing conduct rendered Zweifel liable to him for money damages on ten grounds, or counts. Count one alleged that Zweifel and his coconspirators had violated four federal RICO criminal provisions, 18 U.S.C. Secs. 1962(a)-(d) (1988), and sought treble damages under RICO's civil remedies statute, 18 U.S.C. Sec. 1964(c) (1988), for these violations. Section 1962(a) makes it a crime for anyone who has derived income from a pattern of racketeering activity ... in which such person has participated as a principal ... to use or invest, directly or indirectly, any part of such income ... in acquisition of any interest in, or the establishment or operation of, any enterprise ... engaged in ... interstate ... commerce. Pelletier alleged that Zweifel violated section 1962(a) in that, while representing House of Travel and Culpepper as an attorney, he received such income and invested it in the operation of the following enterprises engaged in interstate commerce: House of Travel, Lokey & Bowden, and the Bankruptcy Court for the Northern District of Georgia. The pattern of racketeering activity that allegedly generated the income, and in which Zweifel supposedly engaged, consisted of the criminal acts, called predicate acts, of mail, 42 wire, 43 securities, 44 and bankruptcy 45 fraud; using interstate facilities to further an unlawful activity; 46 extortion under color of official right; 47 state law barratry; 48 state law false statements; 49 and witness tampering, in violation of both federal and state law. 50 86 Section 1962(b) imposes criminal liability on anyone, who through a pattern of racketeering activity ... acquire[s] or maintain[s], directly or indirectly, any interest in or control of any enterprise ... engaged in ... interstate ... commerce. Pelletier alleged, in count one, that Zweifel, through the predicate acts described above, maintained an interest in or control of the same three enterprises: House of Travel, Lokey & Bowden, and the bankruptcy court. 87 Section 1962(c) makes it a crime for any person employed by or associated with any enterprise engaged in ... interstate ... commerce ... to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity. Pelletier alleged that Zweifel, while employed or associated with House of Travel, Lokey & Bowden, and the bankruptcy court conducted or participated in the conduct of their affairs through the commission of the predicate acts described above. 88 Section 1962(d) makes it a crime for anyone to conspire to violate the substantive offenses of sections 1962(a)-(c). Pelletier alleged that Zweifel's conduct, as described in the complaint, violated this conspiracy provision. Pelletier, however, did not point to the particular conduct that constituted a violation of section 1962(d). Rather, in alleging this RICO violation--and those above (sections 1962(a), (b), and (c)), Pelletier simply left it to the reader to discern which allegations of fact gave rise to Zweifel's liability under RICO. 89 Counts two through nine of Pelletier's complaint sought money damages for several predicate acts that allegedly gave rise to the count one RICO violations. Count two of Pelletier's complaint alleged that Zweifel, in counseling Culpepper to renege on his promise to transfer managerial control over House of Travel's affairs to Pelletier and in failing to inform Pelletier of the extent of the Hurst Group's misappropriation of the company's funds, committed securities fraud in violation of 15 U.S.C. Sec. 78j(b) and Rule 10b-5, 17 C.F.R. Sec. 240.10b-5 (1990) (hereinafter Rule 10b5). 51 Counts three, four, and five alleged that Zweifel, by engaging in such conduct, also committed securities fraud in violation of 15 U.S.C. Secs. 77l (1), (2) 52 and 77q(a), 53 and the Georgia code, Ga.Code Ann. Sec. 10-5-12 (1989), 54 and count six alleged that, by engaging in such conduct, he committed common law fraud. Count seven alleged that Zweifel breached his fiduciary duty to Pelletier, as a House of Travel shareholder (in essence, the same claim Pelletier raised in the state court suit he filed against Zweifel and Lokey & Bowden on January 23, 1986). Count eight alleged that Zweifel had committed state law barratry, 55 presumably by advising Rickertsen that Culpepper was still House of Travel's president and had authority to file a chapter 11 petition on its behalf. Count nine alleged that Zweifel made false statements, 56 presumably to the state superior court (in Pelletier's, and Langston's, shareholders' derivative suit or in the Hurst Group's suit for specific performance) and in an affidavit he signed with respect to the Culpepper-Langston-Hurst Group transaction. Finally, in count ten, Pelletier alleged that Zweifel injured him through state law racketeering activity in violation of Ga.Code Ann. Sec. 16-14-1 et seq. (1988). 57 90 Zweifel, on February 20, moved the court to dismiss Pelletier's RICO suit for failure to state a claim for relief or, alternatively, to require Pelletier to file a more definite statement, contending that Pelletier's allegations were so muddled that he could not frame a responsive pleading. 58 The next day, February 21, Zweifel and Lokey & Bowden removed Pelletier's state court suit (brought on January 23) to the federal district court, contending that the suit involved a matter pending in the bankruptcy court and thus, under 28 U.S.C. Sec. 1334 (1988), fell within the district court's subject matter jurisdiction. Then, on February 28, they answered Pelletier's complaint in that suit. In their answer, they alleged that Pelletier was not, and had never been, a House of Travel shareholder; 59 therefore, he could not recover from them on the theory that their conduct depreciated his ownership interest in the company. They alleged, alternatively, that, assuming that Pelletier had been a House of Travel shareholder during the relevant period, they could not be liable to him for breaching the fiduciary duty described in his complaint because no such duty existed under Georgia law. 60 Accordingly, as a separate affirmative defense, Zweifel and Lokey & Bowden alleged that the complaint failed to state a claim for relief. 91 The same day, February 28, that Zweifel and Lokey & Bowden filed this answer to Pelletier's state court complaint (which they had removed to the district court), the district court heard the alternative motions Zweifel had addressed to Pelletier's RICO suit. When the hearing began, District Judge G. Ernest Tidwell, to whom the case had been assigned, told Schlanger, who was there for Pelletier, that he was treading on mighty dangerous grounds; he then asked Schlanger if he was familiar with Rule 11. Schlanger replied that he was familiar with the Rule and did not think he was violating it. He said, we have got more facts on this case than any ... RICO case I know that's been filed in this court. The court countered this statement by observing that the pivotal allegations of Pelletier's complaint constituted nothing more than bald conclusions and that, if Schlanger wanted to pursue the case, he would have to amend his complaint. As the hearing progressed, Judge Tidwell indicated that his respect for Hamilton Lokey was such that he might not be able to be fair to Pelletier; accordingly, he said that he would probably recuse himself. He did so on March 3, without ruling on Zweifel's motion to dismiss, and the case was assigned to District Judge Orinda D. Evans. She presided over the case to its conclusion. 92 On March 19, Zweifel and Lokey & Bowden moved the district court for judgment on the pleadings in the state court suit they had removed to federal court, i.e., they asked the court to decide the case on the basis of their affirmative defense of failure to state a claim for relief. Before the court could issue a ruling, however, Pelletier moved the court to remand the proceedings to the state court. 93 On April 7, Schlanger filed an amended complaint, the complaint now before us, in Pelletier's RICO suit. The new complaint was seventy pages long and incorporated by reference four large volumes of evidentiary exhibits. The amended complaint replicated, in substance, the allegations in Pelletier's original complaint. As before, however, Schlanger did not connect his factual allegations with his legal conclusions. Framed in eight counts, the amended complaint repled eight of the ten counts of the original complaint; counts six and seven of the original complaint, asserting common law fraud and breach of fiduciary duty claims, had been dropped, and counts eight, nine, and ten of the original complaint became counts six, seven, and eight of the amended complaint. On April 18, Zweifel moved the court to dismiss the amended complaint for failure to state a claim for relief or, alternatively, to require Pelletier to file a more definite statement. 61 94 On April 24, 1986, while he was preparing his memorandum in opposition to Zweifel's motion to dismiss Pelletier's amended complaint in the RICO case, and while the district court was considering Zweifel's and Lokey & Bowden's motion for judgment on the pleadings in the removed state court action, Schlanger returned to the bankruptcy court and House of Travel's chapter 11 proceeding and filed an Application to Permit the Pursuit of Certain Claims and Causes of Action. In this application, he represented that House of Travel had some meritorious malpractice claims against Zweifel and Lokey & Bowden and asked the court to allow Pelletier to pursue them in another forum. Schlanger also proposed a new allocation of any recovery that might result: 60% would go to Pelletier and 40% to House of Travel. (The original Elite agreement, as noted supra, had provided that Pelletier would receive 70%, House of Travel 20%, and Elite 10% of any recovery Pelletier obtained.) The bankruptcy court advised Schlanger that it would not rule on his application until it could assess the strength of House of Travel's claims against the lawyers. To assist it in making such an assessment, the court appointed an attorney, John J. Goger, to examine the claims and to determine whether granting the application would be in the best interest of the debtor's estate. 95 On September 22, 1986, Pelletier's litigation against Zweifel--his removed state court action against Zweifel and Lokey & Bowden and his RICO suit against Zweifel--was once again divided when Judge Evans, granting Pelletier's motion to remand, sent Pelletier's suit against Zweifel and Lokey & Bowden back to state court. In remanding the case, she left undecided the defendants' motion for judgment on the pleadings (based on their affirmative defense of failure to state a claim for relief) and directed them to present the motion to the state court. They did so, and the state court denied the motion. 96 On October 2, 1986, in the RICO case, Judge Evans heard argument on Zweifel's alternative motions to dismiss or for a more definite statement and took them under advisement. That same day, Goger, having finished the task the bankruptcy court had given him, presented his findings to the court. As noted, Goger had been told to evaluate the claims that Schlanger contemplated bringing against Zweifel and Lokey & Bowden. He focused, in particular, on Schlanger's claim that Zweifel had fraudulently induced Pelletier to purchase the Hurst Group's House of Travel shares, on December 29, 1984, by persuading Culpepper not to enter into the management agreement Culpepper had told Pelletier that he would sign. Goger also examined Schlanger's claims that Zweifel and his firm had engaged in abusive litigation tactics in defending House of Travel in Pelletier's (and Langston's) shareholders' derivative suit; that Zweifel had, without cause, prevented the sale of House of Travel's assets to willing purchasers; that Zweifel had prevented Culpepper and Pelletier from settling their differences; and that Zweifel and Lokey & Bowden had committed bankruptcy fraud by having Culpepper file an unauthorized chapter 11 petition in behalf of House of Travel. After a thorough review of the evidence, Goger concluded, and reported to the bankruptcy court, that there does not appear to be substantial justification for a lawsuit against [Zweifel and] Lokey & Bowden asserting an entitlement to damages for alleged negligence and breaches of fiduciary duties. Goger referred the court to Fed.R.Civ.P. 11 and stated that, [w]hile any litigation presents uncertainties, and the discovery of new facts is certainly possible, the possibility of affirmative recovery in the instant case is sufficiently remote, and the possibility of an award under Rule 11 ... is sufficiently great that the pursuit of the asserted claims of [House of Travel] against Lokey & Bowden should not be undertaken. Goger therefore recommended that the court deny Pelletier's application. 97 Schlanger, of course, and Pelletier received a copy of Goger's report. They objected to Goger's recommendation, and the court held a hearing on whether to grant Pelletier's application. Schlanger appeared at the hearing and argued in support of the application. Goger, in response, defended his recommendation. He repeated the statement he had made in his report about the possibility of Rule 11 sanctions if Pelletier sued Zweifel and Lokey & Bowden; in Goger's opinion, the risk of sanctions counseled against the bringing of suit. The bankruptcy court agreed, and denied Pelletier's application on December 3, 1986. 98 On January 9, 1987, Judge Evans ruled on Zweifel's alternative motions--for dismissal or for a more definite statement--in the RICO case. The court dismissed counts three, four, six, seven, and eight for failure to state a claim for relief: count three, a federal securities claim under 15 U.S.C. Secs. 77l(1), (2), did not state a claim for relief since an indispensable element of that claim was that the defendant sold securities--yet neither Zweifel nor his clients sold securities to Pelletier; counts four, securities fraud in violation of 15 U.S.C. Sec. 77q(a), six, state law barratry, and seven, state law false statements, failed because the statutory provisions they relied upon did not create private rights of action; and count eight, the Georgia RICO claim, failed because Pelletier had not pled any predicate acts of racketeering. Finally, the court struck from count one, as immaterial or as insufficient, all references to the predicate acts of extortion, barratry, false statements, and witness tampering. Judge Evans did not grant Pelletier leave to replead any of these counts, and Pelletier did not ask her to amend her order to allow him to do so. 62 99 Seven months later, on August 7, 1987, Pelletier moved for leave to file a second amended complaint. The proposed complaint strengthened his Georgia RICO claim by alleging several predicate acts of racketeering. It deleted, however, all reference to his federal securities claims under 15 U.S.C. Secs. 77l and 77q, and dropped the false statements and barratry counts (although they were retained as predicate acts for the Georgia RICO claim). Pelletier also sought to assert a new claim--the claim he had brought against Zweifel (and Lokey & Bowden) in the state superior court on January 23, 1986. 100 That same day, August 7, Zweifel moved for summary judgment on the remaining counts of the amended complaint: count one (the RICO claim based on Zweifel's alleged violations of subsections (a) through (d) of section 1962), count two (the securities fraud claims under section 78j(b) and Rule 10b-5), and count five (the securities fraud claims under Georgia's equivalent of Rule 10b-5). 101 In October 1987, while his motion for summary judgment was pending in the district court, Zweifel discovered that the Hurst Group did not have any House of Travel stock to sell to Pelletier on December 29, 1984; it had already sold all of its House of Travel shares to TI. Armed with this information, Zweifel moved the district court for leave to file a supplemental affidavit in support of his motion for summary judgment and to engage in further discovery. (At the same time, Zweifel and Lokey & Bowden, relying on Zweifel's discovery of the Hurst Group's sale to TI, moved the state court for summary judgment in Pelletier's tort action against them. The court denied their motion, and they appealed. See infra at 1495.) In his motion, Zweifel asserted that Pelletier never owned any House of Travel shares and, consequently, could not prevail on any claims whose sufficiency depended on Pelletier's ownership of such stock. The district court granted Zweifel's motion, observing that the Hurst Groups' sale to TI was highly material to Pelletier's claims against Zweifel. 102 On January 6, 1988, Judge Evans denied Pelletier's motion for leave to file a second amended complaint, noting that Pelletier had delayed too long before he moved to amend--a full seven months since she had entered the dismissal order. Judge Evans also observed that the new state law claim that Pelletier wished to bring was still being litigated in state court and that if he wished to bring this claim in federal court he should have brought it in his original complaint as a pendent claim. (Pelletier does not challenge this ruling in his present appeal; rather, he stands on the allegations in his amended complaint.) 103 On August 11, 1988, the district court granted Zweifel's motion for summary judgment, dismissing the remaining counts of Pelletier's amended complaint--counts one, two, and five--and entered final judgment for Zweifel. The court granted the motion because the record simply failed to establish that Zweifel committed any of the fraudulent acts charged in these counts. The court's approach assumed that all of the fraudulent acts were actionable--there simply was no evidence of Zweifel's knowing participation in them. After the district court had disposed of Pelletier's case, Zweifel moved the court to impose sanctions, under Fed.R.Civ.P. 11, against Pelletier and his attorney, Schlanger. 104 On April 24, 1989, before the district court could rule on Zweifel's Rule 11 motion, Pelletier took an appeal, No. 89-8334, from the district court's final judgment dismissing his case. While his appeal was being briefed, the Georgia Court of Appeals decided the appeal in Pelletier's tort action against Zweifel and Lokey & Bowden. See Lokey & Bowden v. Pelletier, 192 Ga.App. 470, 385 S.E.2d 90 (1989). The court held that the appellant attorneys were entitled to summary judgment against Pelletier since the evidence demonstrated as a matter of law that Pelletier was never a House of Travel shareholder; TI owned the shares the Hurst Group supposedly sold him on December 29, 1984, and did not rescind its purchase of those shares until it provided written notice to the Hurst Group on March 12, 1985. Pelletier petitioned the Supreme Court of Georgia to issue a writ of certiorari setting aside the court of appeals' decision, but the supreme court denied his petition on September 7, 1989. 105 On July 10, 1989, the district court denied Zweifel's Rule 11 motion for sanctions, and Zweifel appealed, No. 89-8667. We thereafter granted the parties' motions to consolidate the appeal with the appeal in No. 89-8334. We now affirm the district court's final judgment in No. 89-8334. We reverse its order in No. 89-8667 denying Rule 11 sanctions, and remand the case so that sanctions may be imposed.