Court Opinion

ID: 56312
Source: CourtListenerOpinion
Date Created: 2010-04-26 01:54:55+00
Date Added: 2024-06-11T14:57:33.773882
License: Public Domain

In the
                                                               United States Court of Appeals
          United States Court of Appeals                                Fifth Circuit

                                                                    FILED
                     for the Fifth Circuit                       January 4, 2008
                           _______________
                                                              Charles R. Fulbruge III
                             m 06-40364                               Clerk
                           _______________

                           JOHN S. CLARK,
INDIVIDUALLY AND AS TRUSTEE OF THE JOHN S. AND LORETTA J. CLARK TRUST,

                                               Plaintiff-Appellant,

                               VERSUS

                         DONALD DOUGLAS,
                  ALSO KNOWN AS DONNIE DOUGLAS;
                   CHERYL WALKER DOUGLAS;
                 CADDO CREEK PRODUCTION, INC.,
                        A TEXAS CORPORATION;
           LYLE J. BRANDON; LANA ROBERTS BRANDON,

                                               Defendants-Appellees.

                     _________________________

              Appeals from the United States District Court
                   for the Eastern District of Texas
                           m 4:05-CV-290
                 ______________________________
Before GARWOOD, SMITH, and DEMOSS,                         the terms of a second lease package. Clark
  Circuit Judges.                                          contends that the second lease package con-
                                                           tained the following terms pursuant to an oral
JERRY E. SMITH, Circuit Judge:*                            agreement: (1) The trust would acquire the
                                                           surface rights for, and the working interest in,
   John Clark appeals the dismissal of this civil          the Temple-Inland Lease; (2) Douglas and
RICO action pursuant to Federal Rule of Civil              Caddo Creek would operate the more than fif-
Procedure 12(b)(6) and the denial of relief                teen wells on the Temple-Inland Lease at their
under Federal Rule of Civil Procedure 60(b).               sole expense; (3) the trust would obtain the
We affirm.                                                 working interests in the T.O. Meaux Lease,
                                                           the Compass-Moore Lease, the McClinton
                        I.                                 (South 25 Acres) Lease, the McKinney Lease,
   Clark makes the following allegations as                the Kalos Lease, the Crawford 5 Lease, the
part of the RICO case statement filed in sup-              Garrison Lease, and the 9.99% override on the
port of his complaint: On September 5, 1998,               McClinton (South 25 Acres) Lease from T.
defendant Donald Douglas contacted Clark                   Johnson, Ltd.; (4) Douglas and Caddo Creek
about investing in oil well production managed             would operate the wells on these leases at their
by Caddo Creek Production, Inc. (“Caddo                    sole expense; and (5) after the trust received
Creek”), an oil and gas business of which                  the return of all its investment, revenues would
Douglas was an officer, director, and share-               be shared equally between the trust and
holder. Based on Douglas’s representation                  Douglas/Caddo Creek.
that he had significant experience in the oil and
gas industry, Clark, individually and as trustee              Clark further avers that, pursuant to the
for the John S. and Loretta J. Clark Trust (“the           second agreement, he paid $835,000 to T.
trust”), agreed with Douglas that Lockout                  Johnson, Ltd., and received a warranty deed
Corporation/21st Century Marketing, Inc.                   purporting to grant title to the properties de-
(“Lockout”), would provide Clark with a 50%                scribed above. A few months later, Douglas
interest in the production of five wells (a “five          and McBay informed Clark that all the leases
well package” to be transferred to the trust by            except the Temple-Inland lease were “doggy
Lockout representative Elvis Clint McBay);                 leases” subject to plugging liabilities; they ad-
Lockout would operate the wells and market                 vised Clark to dispose of the leases so as to
the production therefrom at no cost to the                 avoid these liabilities. Clark then asserts that
trust; and the trust would pay $85,000 to                  he tried to transfer the leases to a third party
Lockout, McBay, and Douglas.                               but that someone altered the McClinton Lease
                                                           and the override assignments to reflect that T.
   Clark alleges that he paid the initial $85,000          Johnson, Ltd., was the grantee. T. Johnson,
fee, then another $30,000 to Caddo Creek,                  Ltd., subsequently assigned its interest to
before he agreed with Douglas and McBay to                 McBay.

                                                              In May 2001, Douglas, his wife Cheryl,
   *                                                       Caddo Creek, Lyle Brandon, and Lana Bran-
     Pursuant to 5TH CIR. R. 47.5, the court has de-
                                                           don altered a copy of the June 16, 1999, as-
termined that this opinion should not be published
and is not precedent except under the limited              signment, naming Caddo Creek, rather than
circumstances set forth in 5TH CIR. R. 47.5.4.             the trust, as owner of the Temple-Inland

                                                       2
Lease. They then sold an interest in that lease         and the Knollenbergs. Donald Douglas, Cher-
to a third party for $100,000.                          yl Douglas, Caddo Creek, and Lyle and Lana
                                                        Brandon appeared pro se and did not file mo-
    Around June 2001, Douglas and McBay                 tions to dismiss, but the court dismissed the
entered into an agreement with William M.               complaint against them on its own motion for
Knollenberg, an oilman to whom Douglas had              failure to state a claim.3 Having dismissed
introduced Clark. Under the agreement, Knol-            Clark’s federal claim with prejudice, the court
lenberg issued five million shares of common            declined to exercise jurisdiction over his sup-
stock in National Equities Holdings, Inc.               plemental claims and dismissed them without
(“NEHI”), a company of which Knollenberg                prejudice pursuant to 28 U.S.C. § 1367(c).
was president, to Douglas and McBay, in ex-
change for which Douglas, Caddo Creek, Mc-                  Clark appealed, then dismissed the appeal
Bay and Lockout transferred interests in the            against all counseled defendants (NEHI, Wil-
Temple-Inland Lease to third parties at the di-         liam and Doris Knollenberg, Virgin America
rection of Knollenberg. In October 2002,                Energy, Inc., MPCC Inc., Lockout Corpora-
Knollenberg, on behalf of NEHI, offered to              tion, and McBay) in an agreement stipulating
purchase from Clark the trust’s interest in the         that each side shall pay its own attorneys’ fees,
Temple-Inland Lease; Clark rejected the offer.          but Clark maintains the appeal against all pro
                                                        se defendants (Donald Douglas, Cheryl Doug-
    Thereafter, however, McBay and Knollen-             las, Caddo Creek, Lyle Brandon and Lana
berg arranged for NEHI and two other compa-             Brandon), who have not filed a brief in this
nies allegedly controlled by Knollenberg to             appeal.
form limited partnerships to drill wells on the
Temple-Inland Lease. Third parties invested                A few days after this case was submitted
in the partnerships.                                    without oral argument to the instant panel,
                                                        Clark filed in the district court a “Motion to
                         II.                            Vacate and To Remand or To Remand Issue
   NEHI and two other companies controlled              of Newly Discovered Evidence.” To confer
by Knollenberg sued Clark individually and as           jurisdiction on the district court to grant the
trustee of the trust in Texas court for breach of       motion, if it wished to in its discretion under
contract, quantum meruit, and promissory es-            rule 60(b), the panel issued an opinion that de-
toppel; eventually McBay and Lockout were               nied the motion to vacate and remand but
joined as defendants. Clark filed the instant           granted in part the motion to remand, thus re-
action, seeking damages for RICO violations,2           manding for the limited purpose of giving the
common law fraud, and conversion; Clark also            district court the latitude of granting the rule
seeks an accounting.                                    60(b) motion if it wished. The panel retained
                                                        jurisdiction. Clark v. Douglas, 229 Fed.
   The district court dismissed this action pur-
suant to rule 12(b)(6), acting on motions to
dismiss filed by McBay, Lockout, NEHI, Vir-                3
                                                             See Bazrowx v. Scott, 136 F.3d 1053, 1054
gin America Energy Corporation, MPCC Inc.,
                                                        (5th Cir. 1998) (“The district court may dismiss an
                                                        action on its own motion under Rule 12(b)(6) ‘As
                                                        long as the procedure employed is fair.’”) (citation
   2
       See 18 U.S.C. § 1962(a),(b), (c).                omitted).

                                                    3
App’x 314 (5th Cir. 2007) (per curiam).                  cember 30, 2005. Clark indicates that he
                                                         informed the court on November 21, 2005,
   In an order entered on August 30, 2007,               that he intended to amend his complaint, but
styled “Memorandum Opinion and Order De-                 the record shows that he failed to file an
nying Plaintiff’s Motion for Relief from Judg-           amendment. Clark implies that this failure
ment,” the district court denied the rule 60(b)          resulted from a sudden alteration by the court
motion. On September 5, 2007, Clark ap-                  of its scheduling order on December 20, 2005,
pealed that order. We consider both appeals              whereby the court refused to accept further
as a consolidated matter.                                filings until it ruled on defendants’ motions to
                                                         dismiss. Clark avers that he moved to lift that
                        III.                             restriction on case filings and to amend his
   Apparently feeling that his repeated failure          complaint but that the motion was inexplicably
to comply with discovery orders and briefing             ignored.
limitations in the district court was insufficient
to convey the full measure of his disrespect for            Clark fails to mention in his brief that he did
that court, Clark accuses the district court of          not file his motion for leave to amend his com-
improperly denying his motion for leave to               plaint until January 21, 2006, a month after the
amend his complaint merely for the purpose of            time period for free amendments had expired,
removing a difficult case from its docket. We            three weeks after the free-amendment period
disagree.                                                had been initially scheduled to end, and nearly
                                                         six months after McBay and Lockout had filed
     Although dismissals on the pleadings with-          their motion under rule 12(b)(6). Ultimately,
out leave to amend are disfavored, see Price v.          Clark availed himself of three chances to set
Pinnacle Brands, Inc., 138 F.3d 602, 608 (5th            forth the factual allegations of his complaint:
Cir. 1998), the disposition here was correct.            the complaint, the RICO case statement (filed
We review denial of leave to amend a com-                pursuant to counsel’s FED. R. CIV. P. 11 obli-
plaint for abuse of discretion. Id. Although             gation to make a reasonable investigation of
Federal Rule of Civil Procedure 15(a) estab-             the facts underlying his complaint), and his
lishes a bias in favor of granting motions to            reply to the defendants’ response to the RICO
amend a complaint, leave is not automatic. “In           case statement.4 Under these circumstances, it
deciding whether to allow amendment, a dis-              was not an abuse of discretion to deny Clark
trict court ‘may consider such factors as undue          an additional opportunity to amend pursuant
delay, bad faith or dilatory motive on the part          to a motion filed three weeks after the time for
of the movant, repeated failure to cure defi-            amendment specified by the scheduling order
ciencies by amendments previously allowed,
undue prejudice to the opposing party, and fu-
tility of amendment.’” Id. (quoting Southmark
Corp. v. Schulte Roth & Zabel (In re South-                 4
mark Corp.), 88 F.3d 311, 314 (5th Cir.                       See Herrmann Holdings Ltd. v. Lucent Techs.
1996)).                                                  Inc., 302 F.3d 552, 566-67 (5th Cir. 2002) (affirm-
                                                         ing refusal to amend permit further amendment
                                                         after plaintiff had amended twice). See also Price,
   Clark was unduly dilatory. The court’s
                                                         138 F.3d at 608 (affirming refusal to amend after
scheduling order provided that pleadings could           plaintiff had filed complaint, RICO case statement,
be freely amended without motion until De-               and reply to motion to dismiss).

                                                     4
had ended.5                                                 serting a RICO claim must allege the existence
                                                            of an enterprise.” Id. at 204. Such an en-
                      IV.                                   terprise may be either a formal legal entity or
   We likewise affirm the rule 12(b)(6) dis-                an association-in-fact. See St. Paul Mercury
missal, which we review de novo. See Thomp-                 Ins. Co. v. Williamson, 224 F.3d 425, 439 (5th
son v. Goetzmann, 337 F.3d 489, 494 (5th Cir.               Cir. 2000).
2003). Dismissal is appropriate only where it
appears beyond doubt that plaintiff would not                   Clark alleges that the defendants collective-
be entitled to recover under any set of facts he            ly engaged in an association-in-fact. To prove
could prove in support of his claim. See                    that an association-in-fact-type RICO enter-
Conley v. Gibson, 355 U.S. 41, 45-46 (1957).                prise existed, Clark must eventually bring forth
                                                            “evidence of an ongoing organization, formal
                                                            or informal, and . . . evidence that the various
    Clark has alleged RICO violations under 18              associates function as a continuing unit . . . .
U.S.C. § 1962(a), (b), (c), and (d), which                  This formulation of an association-in-fact en-
“[r]educed to their simplest terms . . . state the          terprise incorporates the notion of continuity.”
following:                                                  Crowe, 43 F.3d at 205. Accordingly, an “‘as-
                                                            sociation-in-fact enterprise 1) must have an ex-
   (a) a person who has received income from                istence separate and apart from the pattern of
   a pattern of racketeering activity cannot in-            racketeering, 2) must be an ongoing organiza-
   vest that income in an enterprise;                       tion and 3) its members must function as a
                                                            continuing unit as shown by a hierarchical or
   (b) a person cannot acquire or maintain an               consensual decision making structure.’” Id.
   interest in an enterprise through a pattern              (quoting Delta Truck & Tractor Inc. v. J.I.
   of racketeering activity; [and]                          Case Co., 855 F.2d 241, 243 (5th Cir. 1988)).

   (c) a person who is employed by or associ-
   ated with an enterprise cannot conduct the                  The district court ruled that Clark had failed
   affairs of the enterprise through a pattern of           to plead, outside of conclusional statements of
   racketeering activity.6                                  law masquerading as factual conclusions, that
                                                            the alleged enterprise had any existence sepa-
Crowe v. Henry, 43 F.3d 198, 203 (5th Cir.                  rate from the pattern of racketeering or that its
1995). These sections contain common ele-                   members functioned as a continuing unit with
ments, one of which is that “[a] plaintiff as-              a coherent decision-making structure. Be-
                                                            cause it is sufficient to sustain the judgment,
                                                            we look only to whether Clark has pleaded
   5
     Although the district court did not specifically       that an enterprise existed separately from the
mention that it was denying leave to amend, it is           alleged pattern of racketeering.
evident that the court so intended and was doing so
largely for the reason that Clark had missed the               He did not. Clark’s RICO case statement
deadline and had had other opportunities to correct         declares the following:
any deficiency.
   6
     Section 1962(d) prohibits only conspiracy to               The “enterprise” itself was to and did en-
violate the first three sections.                              gage in no legitimate business. The “enter-

                                                        5
   prise” came into being only for the purpose            brushing their teeth), but § 1962 applies solely
   of engaging in fraudulent activity, i.e.               where the enterprise as a whole exists sepa-
   “Scamming” those who might wish or be                  rately and apart from the alleged pattern of
   convinced to engage in the oil and gas bus-            racketeering activity. See Elliot v. Foufas,
   iness and other speculative investments.               867 F.2d 877, 881 (5th Cir. 1989).
   Although [all of the defendants] presumably
   all engage in legitimate activitiesSSsome re-             The facts pleaded indicate that it did not.
   lated to the oil businessSSapart from the              The complaint was properly dismissed, and the
   “enterprise,” when the “enterprise” itself             district court acted within its discretion by dis-
   did and do goes [sic] about its intended ac-           missing Clark’s state law claims without preju-
   tivities, it engaged only in nefarious activ-          dice to their being refiled in state court. See
   ities, albeit all were not “racketeering activi-       § 1367(c).
   ties,” as defined by 18 U.S.C. § 1961(1)
   and albeit all were not directed toward                                        V.
   Clark and/or the Clark Trust.                             There is no reversible error in the denial of
                                                          the rule 60(b) motion. We affirm that denial,
    That statement, in conjunction with the fac-          essentially for the reasons given by the district
tual allegations recounted above, illustrates             court.
that, aside from his conclusional allegation that
the association-in-fact enterprise exists sep-               The judgment and the order denying rule
arately from the pattern of racketeering, Clark           60( b) relief are AFFIRMED.
has failed to plead specific facts showing that
the association exists for purposes other than
merely to commit the predicate acts. The “en-
terprise” mentioned by § 1962 may not be the
pattern of racketeering activityitself; rather, “it
is an entity separate and apart from the pattern
of activity in which it engages.” United States
v. Turkette, 452 U.S. 576, 583 (1981).

    Based on the pleadings, the association-in-
fact between the defendants existed uniquely
to defraud Clark and the trust of their invest-
ment; it did not exist separately and apart from
the pattern of racketeering activity alleged and
therefore did not exist in violation of § 1962.
Clark’s insistence in his brief that various
members of the alleged enterprise participate
in the oil and gas business and engage in on-
going activities such as oil well operation is
misplaced; the members of any alleged enter-
prise will have an existence separate from the
pattern of racketeering activity (easily demon-
strated by their engaging in such activities as

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