Court Opinion

ID: 3052636
Source: CourtListenerOpinion
Date Created: 2015-10-13 23:43:24.761194+00
Date Added: 2024-06-11T12:46:39.847863
License: Public Domain

FOR PUBLICATION
  UNITED STATES COURT OF APPEALS
       FOR THE NINTH CIRCUIT

ROBERT W. WALTER,                      
                Plaintiff-Appellant,
                v.
RICHARD C. DRAYSON, Individually;            No. 07-16284
ELIZABETH WALTER Individually;
KAREN TEMPLE, ATTORNEY AT LAW                 D.C. No.
                                           CV-06-00568-SOM
LLLC, doing business as Bodden
& Temple, LLLC; KAREN M.                       OPINION
TEMPLE, also known as Karen M.
Grant Temple also known as
Karen M. Grant,
             Defendants-Appellees.
                                       
       Appeal from the United States District Court
                for the District of Hawaii
       Susan Oki Mollway, District Judge, Presiding

           Argued and Submitted June 20, 2008
            Submission Vacated June 27, 2008
              Resubmitted August 11, 2008
                    Honolulu, Hawaii

                   Filed August 18, 2008

    Before: Alfred T. Goodwin, Pamela Ann Rymer, and
              Sandra S. Ikuta, Circuit Judges.

                  Opinion by Judge Rymer

                            10905
10908               WALTER v. DRAYSON

                       COUNSEL

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

Mark D. Bernstein, Honolulu, Hawaii, for defendant-appellee
Elizabeth Walter; Shelton G. W. Jim On, Jim On & Beerman,
Honolulu, Hawaii, for defendant-appellee Richard C. Dray-
son; Keith K. Hiraoka, Roeca Louie & Hiraoka, Honolulu,
Hawaii, for defendants-appellees Karen M. Temple and Karen
Temple, AAL, LLLC.
                      WALTER v. DRAYSON                   10909
                          OPINION

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 Wal-
ter, 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 Wal-
ter, 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 conduct-
ing its affairs under Reves v. Ernst & Young, 507 U.S. 170,
179 (1993), and Baumer v. Pachl, 8 F.3d 1341, 1344 (9th Cir.
1993). For this reason the court also dismissed the RICO con-
spiracy 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 fidu-
ciary 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
10910                 WALTER v. DRAYSON
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, Eliza-
beth, 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, fraud-
ulently 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 remov-
ing Drayson and Elizabeth Walter as trustees. It was dis-
missed on motion, and a First Amended Complaint was filed
that eliminated the request for injunctive and declaratory
                      WALTER v. DRAYSON                    10911
relief. It, too, was dismissed with leave to amend. To the dis-
trict 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 con-
clusory, 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 infor-
mation 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. Micro-
soft 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.
10912                  WALTER v. DRAYSON
   [1] 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 com-
    merce, to conduct or participate, directly or indi-
    rectly, in the conduct of such enterprise’s affairs
    through a pattern of racketeering activity or collec-
    tion 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 racke-
teering activity.’ ” Odom, 486 F.3d at 547 (quoting Sedima,
S.P.R.L. v. Imrex Co., 473 U.S. 479, 496 (1985)). It is the
first, or conduct, element that is at issue here.

   Walter argues that Temple had a major role in the enter-
prise and his RICO claims were properly pled in that she did
not act in accordance with applicable Hawai’i and profes-
sional 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 sub-
ject her to liability for conducting the affairs of the enterprise.

  [2] Reves is the controlling authority on the point of what
constitutes “conduct.” In Reves, a RICO claim was asserted
                      WALTER v. DRAYSON                    10913
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 cor-
rectly 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. At the same time, the Court explained that “partici-
pate” 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. 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 con-
duct of an enterprise’s affairs given how clear it was that
Arthur Young was not acting under the direction of the Co-
op’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.

   [3] We applied Reves’s “operation or management” test to
the provision of legal services in Baumer. Emery Erdy and
Estate Planning Associates, Inc. (not defendants in the RICO
case) sold limited partnership interests until they got cross-
threaded with the California Department of Corporations.
They then retained Pachl, an attorney and RICO defendant,
who wrote two letters to the Department, filed a partnership
agreement, and helped Erdy in bankruptcy proceedings. We
found this level of involvement insufficient to impute liability
to Pachl under Reves. Pachl held no formal position in the
limited partnership; he played no part in directing the affairs
of the enterprise; and his role was limited to providing legal
services. Further, we held: “Whether Pachl rendered his ser-
vices well or poorly, properly or improperly, is irrelevant to
the Reves test.” 8 F.3d at 1344. It follows that Temple’s
10914                    WALTER v. DRAYSON
alleged involvement is also insufficient. Like the accounting
firm in Reves, she and her firm were not acting under direc-
tion from the trust or the trustees, at least, not so far as we can
tell from the pleadings. Like the lawyer in Baumer, she alleg-
edly wrote emails, gave advice, and took positions on behalf
of her clients. We assume (because we must) that her perfor-
mance was deficient in the respects claimed by Walter. But
we know from Baumer and Reves that the quality of the ser-
vices rendered doesn’t matter. And there is no indication that
Temple, anymore than Pachl or Arthur Young, was thereby
directing the enterprise. It is not enough that Temple failed to
stop illegal activity, for Reves requires “some degree of direc-
tion.” 507 U.S. at 179. Finally, the factual allegations raise no
inference that Temple tried to control the enterprise by any-
thing akin, for example, to bribery. See id. at 184.

   Walter maintains that reliance on Baumer and Reves is mis-
placed as the enterprises alleged in those cases were not
associated-in-fact enterprises.1 He submits that this distinction
is material, pointing out that the Seventh Circuit in MCM
Partners, Inc. v. Andrews-Bartlett & Associates, Inc., noted
the difference between one who is an “outsider” to the enter-
prise (as Arthur Young was in Reves) and one who is part of
the enterprise itself. 62 F.3d 967, 979 (7th Cir. 1995). In that
case, MCM, which was a supplier of forklifts and moving
equipment, alleged that two exhibition contractors, A-B and
FDC, refused to rent forklift equipment from MCM because
they had been coerced by a competing rental equipment com-
pany, O.G. Service Corporation, into refusing to deal. The
RICO enterprise was alleged to be associated-in-fact and
comprised of O.G., A-B, FDC, the Teamsters, and others, to
make O.G. the exclusive provider of forklift equipment. The
activities of A-B and FDC allegedly were undertaken at the
  1
   He also suggests that time has overtaken Baumer, given that Odom
overruled Chang v. Chen, 80 F.3d 1293 (9th Cir. 1996), which was of the
same vintage. However, as a panel, we lack the option of considering this
possibility.
                      WALTER v. DRAYSON                    10915
direction of other members of the enterprise. The court saw
the issue as whether A-B and FDC were “outsiders,” like the
accounting firm in Reves, or were lower-rung participants
who acted under the direction of the enterprise’s upper man-
agement. On the facts alleged, it came down on the side of
lower-rung participants because A-B and FDC were alleged
to be members of an association-in-fact constituting the enter-
prise, they were part of the enterprise itself, they knowingly
undertook the predicate acts “at the direction” of the enter-
prise’s management, and they were “vital to the achievement
of the enterprise’s primary goal, as only they had the ability
to exclude MCM from the market by dealing exclusively with
[O.G.]” Id.

   [4] While true that neither Reves nor Baumer concerned an
associated-in-fact enterprise, whereas this is the type of enter-
prise at issue here, still there must be an element of direction.
Section 1962(c)’s “conduct” requirement applies without
regard to the nature of the enterprise. Otherwise, as Reves
explains, simply being involved would suffice. 507 U.S. at
177-78. No doubt Temple was involved as an alleged part of
the enterprise, but the conduct attributed to her would not sup-
port recovery for giving, or taking, direction. Temple does not
occupy a position in the “chain of command,” as the First Cir-
cuit put it, through which the affairs of the enterprise are con-
ducted. United States v. Oreto, 37 F.3d 739, 750 (1st Cir.
1994) (quoted with approval in MCM, 62 F.3d at 978). Unlike
the contractors in MCM, she did not become a participant in
directing the enterprise’s affairs by knowingly implementing
decisions of upper management. And she was not indispens-
able to achievement of the enterprise’s goal. In this, too, Tem-
ple is different from the contractors in MCM whose
participation was “vital” to the mission’s success because they
were the only act in town.

  [5] In sum, the pleadings show that Temple and her firm
were part of the enterprise but fail to show that she or her firm
had “some part in directing its affairs.” Reves, 507 U.S. at
10916                      WALTER v. DRAYSON
179. One can be “part” of an enterprise without having a role
in its management and operation. Simply performing services
for the enterprise does not rise to the level of direction,
whether one is “inside” or “outside.” Accordingly, neither
reasonable inferences, nor triable issues, exist sufficient to
subject Temple or her firm to liability under § 1962(c).

                                     III

   Walter argues that, in any event, the third trustee is not a
required party2 on the state law claims for the primary reason
that he brings this action on his own behalf — not deriva-
tively for the trust or the beneficiaries — and that he seeks to
recover tort damages, not to recover trust assets. Further, Wal-
ter posits that an accounting is not necessary because he was
entitled to immediate possession of his 25% portion of trust
assets in July 2006 when the trustees determined to proceed
with a preliminary distribution. Moreover, Walter claims, the
trust has in effect terminated and is being kept alive only to
make it appear that this action sounds in equity.

   [6] This said, Walter does not dispute that an action for
breach of a trustee’s fiduciary duty must proceed in equity
unless the beneficiary is due an immediate, unconditional
payment, or that a trustee is under no obligation to distribute
immediately if an accounting would be necessary to ascertain
the correct amount. Among other things, Walter claims that
the trustees failed to collect rental income from Patricia Wal-
ter’s condominium from October 29, 2005 through June 30,
2006. However, the amount is uncertain. Even if it could rea-
sonably be estimated by comparables, there’s no telling
whether taxes and fees would cut into the rent. Thus, the trust-
  2
    Fed. R. Civ. P. 19 (2007) has replaced “necessary party,” the phrasing
at the time of the district court’s decision, with “required party.” However,
the change is stylistic, not substantive, so has no effect on the analysis. See
Republic of the Philippines v. Pimentel, ___ U.S. ___, 128 S. Ct. 2180,
2184-85 (2008).
                      WALTER v. DRAYSON                    10917
ees’ exposure is indefinite and an accounting is required to
settle it.

   [7] This being so, the trust and the trustees are required par-
ties. See Lucas v. Lucas, 20 Haw. 433, 441-42 (1911); Fed.
R. Civ. P. 19. Rock, however, cannot be joined as he and
Walter are both citizens of Colorado. Therefore, dismissal of
the state law claims, without prejudice, was appropriate.

  AFFIRMED.