Brannon v. Boatmen's First National Bank ( 1998 )

F I L E D
United States Court of Appeals
Tenth Circuit
PUBLISH
AUG 25 1998
UNITED STATES COURT OF APPEALS
PATRICK FISHER
Clerk
TENTH CIRCUIT
WILMA L. BRANNON, on behalf of
themselves and all others similarly
situated; CHARLENE THOMAS, on
behalf of themselves and all others
similarly situated,
Plaintiffs - Appellants,
No. 97-6052
v.
BOATMEN’S FIRST NATIONAL
BANK OF OKLAHOMA; T.B.A. OF
OKLAHOMA INC.; BOATMEN’S
BANCSHARES INC.,
Defendants - Appellees.
Appeal from the United States District Court
for the Western District of Oklahoma
(D.C. No. 96-CV-1125)
Adam B. Goodman, Edelman & Combs (Daniel A. Edelman, Cathleen M. Combs,
James O. Latturner, and Beth I. Solomon, Edelman & Combs, and Tomme J. Fent,
Community Legal Services of Oklahoma City, P.C., Oklahoma City, Oklahoma,
with him on the brief), Chicago, Illinois, for Plaintiffs - Appellants.
Joe E. Edwards (Ricki V. Sonders and Susan Moebius Henderson with him on the
brief), Day, Edwards, Federman, Propester & Christensen, P.C., Oklahoma City,
Oklahoma, for Defendants - Appellees.
Before BRORBY , BARRETT and LUCERO , Circuit Judges.
LUCERO , Circuit Judge.
This appeal arises from the district court’s 12(b)(6) dismissal of a civil
action pursuant to the Racketeer Influenced Corrupt Organizations Act (“RICO”),
18 U.S.C. §§ 1961-1968, brought by plaintiffs Wilma Brannon and Charlene
Thomas against Boatmen’s Bancshares, Inc. (“Bancshares”), a bank holding
company, and its subsidiary, Boatmen’s First National Bank of Oklahoma
(“Boatmen’s”). We are asked to address whether a parent-subsidiary corporate
relationship standing alone is enough to invoke RICO liability. Holding that it is
not, we affirm.
I
Plaintiffs obtained financing for the purchase of used automobiles by means
of standard form retail installment sales contracts assigned to defendant
Boatmen’s. The terms of the contracts require the borrower to maintain adequate
insurance on the collateral and provide that if the borrower fails to maintain such
coverage, the lending institution is authorized to procure the insurance itself and
add these costs to the balance of the borrower’s account, a procedure known as
“force placed” insurance.
According to plaintiffs’ complaint, Boatmen’s obtained “force placed”
insurance for their automobiles. Plaintiffs allege that, in such transactions, it was
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Boatmen’s practice to charge consumers more than the actual cost of the
insurance, to procure insurance not authorized by the sales contracts or that
exceeded the contracts’ terms, and not to disclose to consumers their altered
obligations and misrepresent their rights under the sales contracts. Seeking relief,
plaintiffs filed suit in federal court alleging a violation of RICO, 18 U.S.C. §
1962(c), and various pendent state law claims. The district court granted
defendants’ motion to dismiss for failure to state a claim. 1
Plaintiffs appeal the
order of dismissal and contend that the district court abused its discretion by
refusing to grant them leave to amend their complaint.
II
Section 1962(c) of RICO 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 . . . .
18 U.S.C. § 1962(c). Count I of plaintiffs’ complaint alleges that Boatmen’s is
the RICO person and Bancshares the RICO enterprise. Count II asserts a roughly
inverse relationship, with Bancshares in the role of the person and “the corporate
group headed by Bancshares” and “Boatmen’s and the other subsidiaries of
1
The district court dismissed plaintiffs’ RICO claims with prejudice. The
remaining claims against Bancshares, Boatmen’s and T.B.A. of Oklahoma, Inc.,
brought pursuant to Oklahoma state law, were dismissed without prejudice.
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Bancshares that purchase retail installment contracts” as the alleged RICO
enterprises. Appellants’ Br. at 10. 2
The district court concluded that plaintiffs
failed to sufficiently plead the existence of an enterprise distinct from the RICO
person and dismissed both counts for failure to state a claim upon which relief
could be granted. We review de novo the district court’s dismissal. See
Chemical Weapons Working Group, Inc. v. United States Dep’t of the Army , 111
F.3d 1485, 1490 (10th Cir. 1997).
A. Count I
It is well-settled in this circuit, as in most others, that for purposes of 18
U.S.C. § 1962(c), the defendant “person” must be an entity distinct from the
alleged “enterprise.” See Board of County Comm’rs v. Liberty Group , 965 F.2d
879, 885 & n.4 (10th Cir. 1992) (citing cases); see also David B. Smith &
Terrance G. Reed, Civil RICO ¶ 3.07, at 3-77 to 3-78 & nn.2 & 3 (1998). But see
United States v. Hartley , 678 F.2d 961, 987-990 (11th Cir. 1982) (holding person
and enterprise need not be different entities). This interpretation flows from the
statute’s mandate that the person who engages in the pattern of racketeering
activity be “employed by or associated with” the enterprise. 18 U.S.C. § 1962(c);
see Yellow Bus Lines, Inc. v. Local Union 639 , 883 F.2d 132, 139 (D.C. Cir.
2
Plaintiffs named several other enterprises in Counts I and II. They do
not appeal the district court’s determination with respect to those alleged
enterprises. See Appellants’ Br. at 9 n.2, 10 n.3.
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1989) (“Logic alone dictates that one entity may not serve as the enterprise and
the person associated with it because . . . ‘you cannot associate with yourself.’”)
(quoting McCullough v. Suter , 757 F.2d 142, 144 (7th Cir. 1985)). The district
court concluded that plaintiffs’ allegation that Boatmen’s conducted or
participated in the conduct of its parent’s affairs is insufficient to satisfy this
requirement. We agree.
The Supreme Court has held that liability under § 1962(c) “depends on
showing that the defendant[] conduct[s] or participat[es] in the conduct of the
‘enterprise’s affairs,’ not just [its] own affairs.” Reves v. Ernst & Young , 507
U.S. 170, 185 (1993). As to Count I, plaintiffs submit that Boatmen’s actions
constitute conduct or participation in the conduct of Bancshares’ affairs. In
support of this proposition, they call our attention to the Seventh Circuit’s
decision in Haroco, Inc. v. American Nat’l Bank & Trust Co. of Chicago , 747
F.2d 384 (7th Cir. 1984), aff’d on other grounds , 473 U.S. 606 (1985). The
Haroco appellants argued that their § 1962(c) claim was properly pleaded by
alleging first, that the defendant corporation was both the person and the
enterprise, and second, that the defendant conducted the affairs of its parent
corporation. See id. at 399, 402. The Seventh Circuit rejected this first
contention, holding that, for purposes of § 1962(c), the person and the enterprise
must be distinct entities. See id. at 401-02; accord Liberty Group , 965 F.2d at
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885 & n.4. The Haroco court agreed, however, with the plaintiffs’ second
proposition, concluding that it was “virtually self-evident that a subsidiary acts on
behalf of, and thus conducts the affairs of, its parent corporation.” 747 F.2d at
402-03.
As an initial matter, we are concerned that the broad rule enunciated by the
Haroco court would allow the application of RICO in every fraud case against a
corporation. A parent corporation, as a matter of corporate reality, is nothing
more than the controlling shareholder of a subsidiary. The implied holding in
Haroco is therefore that, because a corporation acts on behalf of its controlling
shareholders, a § 1962(c) claim naming a corporation as the “person” and its
shareholders, whether individuals or legal entities, as the “enterprise” is properly
pleaded. Dramatically expanding RICO liability because of a business
organization choice makes little sense from a policy perspective. See In re
Tucker Freight Lines, Inc. , 789 F. Supp. 884, 893 (W.D. Mich. 1991) (“If a
corporation is not liable for conduct on the day before another corporation buys it,
no RICO policy indicates that it should be liable on the day after.”); cf. Discon,
Inc. v. Nynex Corp. , 93 F.3d 1055, 1064 (2d Cir. 1996) (“It would be inconsistent
for a RICO person . . . to be subject to liability simply because it is separately
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incorporated, whereas otherwise it would not be held liable . . . .”) (rejecting
Haroco ), cert. granted , 118 S. Ct. 1298 (1998). 3
Moreover, Haroco ’s precedential value has been limited by the Seventh
Circuit’s recent decision in Emery v. American Gen. Fin., Inc. , 134 F.3d 1321(7th Cir. 1997). The plaintiffs in Emery charged that the defendant corporation
conducted the affairs of an enterprise consisting of, among others, its parent
corporation. See id. at 1324. Holding that plaintiffs had failed to state a claim,
the Emery court commented:
The plaintiff’s lawyer continues . . . to believe that the requirement
in a case such as this of proof that defendants conducted the affairs
of an enterprise through a pattern of racketeering activity, 18 U.S.C.
§ 1962(c), is satisfied merely by showing that the pattern of predicate
acts . . . were committed by a firm that has agents or affiliates. That
is not enough. The firm must be shown to use its agents or affiliates
in a way that bears at least a family resemblance to the paradigmatic
RICO case in which a criminal obtains control of a legitimate (or
3
A number of courts facing similar issues have also rejected this aspect of
Haroco . See NCNB Nat’l Bank of North Carolina v. Tiller , 814 F.2d 931, 936
(4th Cir. 1987) (holding that, as a matter of law, defendant bank is not distinct
from its holding company, the alleged enterprise, for purposes of § 1962(c)),
overruled on other grounds by Busby v. Crown Supply, Inc. , 896 F.2d 833 (4th
Cir. 1990); Atkinson v. Anadarko Bank & Trust Co. , 808 F.2d 438, 441 (5th Cir.
1987) (affirming judgment notwithstanding the verdict because no evidence that
defendant bank was distinct from its holding company, the enterprise); Nebraska
Sec. Bank v. Dain Bosworth Inc. , 838 F. Supp. 1362, 1369 (D. Neb. 1993)
(rejecting the reasoning in Haroco and holding that neither parent nor its wholly
owned subsidiary can constitute a § 1962(c) enterprise if the other is named the
defendant person); Tucker Freight Lines, Inc. , 789 F. Supp. at 893 (rejecting
Haroco and granting motion to dismiss because defendant corporation was not
distinct from parent, the alleged enterprise).
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legitimate-appearing) firm and uses the firm as the instrument of his
criminality.
Id. at 1323-24. Thus, after Emery , in order to state a viable claim under § 1962(c)
against a corporation for conducting the affairs of its parent corporation, a
plaintiff must, at the very least, allege the parent “somehow made it easier to
commit or conceal the fraud of which the plaintiff complains.” Id. at 1324. We
therefore decline plaintiffs’ invitation to adopt a rule in this circuit that a mere
allegation that the RICO “person” is the subsidiary conducting the affairs of the
parent is sufficient to state a claim under § 1962(c). 4
As the Supreme Court has held, plaintiffs must allege that the “defendant[]
conduct[s] or participat[es] in the conduct of the ‘enterprise’s affairs,’ not just
[its] own affairs .” Reves , 507 U.S. at 185 (emphasis added). The Seventh Circuit
4
Plaintiffs also contend that the result they seek is compelled by the Third
Circuit’s decision in Jaguar Cars, Inc. v. Royal Oaks Motor Car Co. , 46 F.3d 258(3d Cir. 1995). In so doing, they misconstrue that opinion. Jaguar Cars holds
only that “corporate officers/employees . . . may properly be held liable as
persons managing the affairs of their corporation as an enterprise through a
pattern of racketeering activity.” Id. at 261. We note that this conclusion has
long been the rule in this circuit. See Liberty Group , 965 F.2d at 886 (noting that
employee of partnership may be liable under § 1962(c) for conducting the affairs
of the partnership). Plaintiffs contend that the relationship between a subsidiary
and its parent is analogous to that between officers/employees and a corporation.
The analogy fails, however, for the simple reason that corporations can act only
through their employees and agents. See Metcalf v. PaineWebber Inc. , 886 F.
Supp. 503, 514 n.12 (W.D. Pa. 1995) (concluding that the holding in Jaguar Cars
cannot be extended to corporate defendants), aff’d mem. , 79 F.3d 1138 (3d Cir.
1996).
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amplified this language in Emery , 134 F.3d at 1324, and Fitzgerald v. Chrysler
Corp. , 116 F.3d 225, 227 (7th Cir. 1997), which hold that, at a bare minimum, an
allegation of RICO liability under 1962(c) must indicate how the defendant used
the alleged enterprise to facilitate the fraudulent conduct. In Fitzgerald , the
plaintiffs filed a § 1962(c) claim against Chrysler, alleging that it engaged in
warranty fraud through enterprises consisting of its subsidiaries and dealers. The
court contrasted the facts before it with,
[t]he prototypical RICO case . . . in which a person bent on criminal
activity seizes control of a previously legitimate firm and uses the
firm’s resources, contacts, facilities, and appearance of legitimacy to
perpetrate more, and less easily discovered, criminal acts than he
could do in his own person, that is, without channeling his criminal
activities through the enterprise that he has taken over.
Fitzgerald , 116 F.3d at 227. Because plaintiffs failed to allege how Chrysler was
“empowered to perpetrate warranty fraud” through the alleged enterprises, the
court affirmed the dismissal for failure to state a claim. Id.Likewise, in Emery , the court rejected the proposition that a corporation
can be said to conduct the affairs of a RICO enterprise merely because it is a firm
with agents or affiliates. See 134 F.3d at 1324. Once again distinguishing
between the facts in issue and the prototypical RICO case, the court held that the
defendant corporation must be shown to use the alleged enterprise “as the
instrument of [its] criminality,” and the plaintiff must plead that the alleged
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enterprise “somehow made it easier to commit or conceal the fraud of which the
plaintiff complains.” Id.
Turning to the complaint before us, Count I properly alleges that Boatmen’s
engaged in mail fraud, which is encompassed by RICO’s broad definition of
“racketeering activity.” See 18 U.S.C. § 1961(1)(B). According to the complaint,
the alleged mail fraud was conducted entirely by Boatmen’s, the defendant
person. With respect to Bancshares, the alleged enterprise, plaintiffs assert only
that (1) “Bancshares delegated responsibility for the organization and servicing of
the consumer credit obligations at issue in this case to Boatmen’s,” (2) “[a]ll
revenue and profits derived by Boatmen’s from the conduct complained of in this
case inured to the benefit of Bancshares and is reflected on the financial
statements issued by Bancshares to the public for the purpose of raising capital,”
and (3) “the capital Bancshares obtained from the public was used to create and
fund the operations of its subsidiaries, including Boatmen’s.” Appellants’ App. at
4 (Complaint, ¶¶ 12-14). These allegations do nothing more than define a
legitimate corporate and financial relationship between Boatmen’s and its holding
company.
It is irrelevant to plaintiffs’ RICO claim against Boatmen’s that the
responsibility for organizing and servicing consumer credit obligations was
delegated to it by Bancshares. This allegation does not show that the subsidiary
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was engaged in the conduct of its parent’s affairs; to the contrary, it suggests that
the handling of consumer credit obligations was Boatmen’s affair. Moreover,
plaintiffs’ allegations that Boatmen’s revenue and profits benefitted Bancshares
establish nothing more than that the bank holding company benefitted financially
from the success of its subsidiary—a fact that on its own is unrelated to RICO
liability.
Thus, the complaint alleges no activity on the part of Bancshares that might
reasonably be understood to implicate it in the scheme attributed to Boatmen’s.
In this sense, the case before us is similar to Richmond v. Nationwide Cassel L.P. ,
52 F.3d 640 (7th Cir. 1995). In Richmond , “[n]ot one of the non-defendant
entities, supposedly constituent parts of the ‘enterprise,’ is described as playing a
role in the force placed insurance that allegedly was foisted on the used car
purchaser-victim.” Id. at 645. The court concluded that because the complaint
“alleges only that the defendants perpetrating the fraud on [plaintiff] were
conducting their own . . . affairs,” it failed to allege adequately an enterprise. Id.
at 645-46; see also Liberty Group , 965 F.2d at 885 (“[A] separate enterprise is not
demonstrated by the mere showing that the corporation committed a pattern of
predicate acts in the conduct of its own business.”); cf. Atkinson v. Anadato Bank
& Trust Co. , 808 F.2d 438, 441 (5th Cir. 1987) (judgment notwithstanding the
verdict proper when evidence presented was that mail fraud was conducted by
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defendant bank and no evidence was presented of activity by alleged enterprise).
We do not exclude the possibility that, as the Emery court recognized, there
are situations where a subsidiary and parent relationship, properly alleged, could
state a claim for § 1962(c) liability. See 134 F.3d at 1324. It is insufficient,
however, merely to assert that a defendant corporation accused of racketeering is
a subsidiary and therefore automatically conducts the affairs of its parent.
Nothing in plaintiffs’ allegations indicates how the relationship between
Boatmen’s and its holding company allowed the defendant bank to perpetrate or
conceal the alleged mail fraud. We therefore agree with the district court that the
action against Boatmen’s failed to state a claim.
B. Count II
As for plaintiffs’ claim against Bancshares, defendants contend that it is
insufficient to allege merely that the RICO person is a parent corporation
conducting the affairs of alleged enterprises that are also its subsidiaries or
affiliates. There is substantial case law supporting this proposition. See, e.g. ,
Emery , 134 F.3d at 1324 (holding that no goal or policy of RICO satisfied by
imposing liability on parent when “[t]here is no allegation that by using
subsidiaries rather than divisions the [enterprise] somehow made it easier to
commit or conceal the fraud”); Khurana v. Innovative Health Care Sys., Inc. , 130
F.3d 143, 155 (5th Cir. 1997) (affirming dismissal of § 1962(c) claims against
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hospital and parent corporation on grounds that enterprise pleaded “is in reality a
‘stand-in,’ or another name, for the corporate entity”); Fitzgerald , 116 F.3d at 228(“[W]here a [corporation] deals with its dealers and other agents in the ordinary
way, so that their role in the manufacturer’s illegal acts is entirely incidental,
differing not at all from what it would be if these agents were . . . employees . . .,
the [corporation] . . . (or any subset of the members of the corporate family) do
not constitute an enterprise within the meaning of the statute.”); Discon , 93 F.3d
at 1064 (holding that three corporate defendants operating “within a unified
corporate structure” and “guided by a single corporate consciousness” could not
together constitute the enterprise); Compagnie de Reassurance d’Ile de France v.
New England Reinsurance Corp. , 57 F.3d 56, 92 (1st Cir. 1995) (affirming
dismissal of RICO claim when subsidiary, the alleged enterprise, took no actions
independent of its defendant parent); Lorenz v. CSX Corp. , 1 F.3d 1406, 1412 (3d
Cir. 1993) (RICO claim against parent not stated when subsidiary, the alleged
enterprise, “merely acts on behalf of, or to the benefit of, its parent”); NCNB
Nat’l Bank of North Carolina v. Tiller , 814 F.2d 931, 936 (4th Cir. 1987) (“[A]
‘person’ is not distinct from an ‘enterprise’ when a corporation and its wholly
owned subsidiary are involved.”), overruled on other grounds by Busby v. Crown
Supply, Inc. , 896 F.2d 833 (4th Cir. 1990). In light of this compelling precedent,
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we doubt plaintiff has properly alleged a RICO enterprise distinct from
Bancshares.
Plaintiffs’ claim fails, however, for a more fundamental reason. As the
Supreme Court has stated, “[a] violation of § 1962(c) . . . requires (1) conduct (2)
of an enterprise (3) through a pattern (4) of racketeering activity.” Sedima,
S.P.R.L. v. Imrex Co. , 473 U.S. 479, 496 (1985) (footnote omitted). Each of
these elements must be alleged in order to state a claim. See id. In this case,
plaintiffs have simply failed to allege that Bancshares engaged in a “pattern of
racketeering activity.” 5
Although the complaint submits that Bancshares
delegated responsibility for “servicing of the consumer credit obligations at issue
in this case to Boatmen’s,” Appellant’s App. at 4 (Complaint, ¶ 12), it alleges
only that Boatmen’s carried out the practices of which plaintiffs complain, see id.
at 10-11 (Complaint, ¶¶ 43-48). Nowhere in the complaint is Bancshares alleged
to have engaged in conduct constituting mail fraud. As such, the complaint fails
to allege an actionable violation of § 1962(c) against Bancshares, and was
therefore properly dismissed by the district court.
III
5
Under § 1961(5) a “pattern of racketeering activity” requires “at least
two acts of racketeering activity.” 18 U.S.C. § 1961(5); see also Sedima , 473
U.S. at 496 n.14 (discussing definition of “pattern of racketeering activity”).
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Plaintiffs’ final claim on appeal is that the district court abused its
discretion by refusing to permit them to amend their complaint. We have
diligently explored the record and have not found any motions pursuant to Fed. R.
Civ. P. 15(a) filed by the plaintiffs prior to entry of judgment. Our search for a
motion by plaintiffs to amend the judgment pursuant to Fed. R. Civ. P. 59(e), or
to have it vacated pursuant to Fed. R. Civ. P. 60(b), was equally unavailing. See
Seymour v. Thornton , 79 F.3d 980, 987 (10th Cir. 1996) (“[O]nce judgment is
entered, the filing of an amended complaint is not permissible until judgment is
set aside or vacated pursuant to Fed. R. Civ. P. 59(e) or 60(b).”) (quoting Cooper
v. Shumway , 780 F.2d 27, 29 (10th Cir. 1985)); Glenn v. First Nat’l Bank in
Grand Junction , 868 F.2d 368, 370 (10th Cir. 1989) (holding in RICO case that
district court is not required sua sponte to allow plaintiffs to amend complaint);
see also 6 Charles Alan Wright et al., Federal Practice and Procedure § 1489 (2d
ed. 1990). Plaintiffs ask us to conclude that the district court abused its
discretion notwithstanding their own apparent failure to invoke that discretion in
the first place. We will not satisfy this request.
IV
For the foregoing reasons, the judgment of the district court is
AFFIRMED .
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