Revised February 5, 2003
UNITED STATES COURT OF APPEALS
For the Fifth Circuit
No. 01-41105
JOHN S. WHELAN; RJ WHELAN JR; MARY VIRGINIA WHELAN; ESTATE OF
VIRGINIA ABNEY WHELAN; REGINAL 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,
VERSUS
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.
Appeal from the United States District Court
for the Eastern District of Texas
January 30, 2003
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 San 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
1
When necessary, we distinguish Winchester
Production/Westchester Gas and its principals from Newton Dorsett
and his companies by referring to the former as “the Winchester
defendants” and the latter as “Dorsett”.
2
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
3
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
4
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
5
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 (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. Cattret, 477 U.S. 317, 322 (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)
2
Reduced to plain English by this Court in In re Burzynski, 989
F.2d 733, 741 (5th Cir. 1993), ths subsections state:
(a) a person who has received income from a pattern of
racketeering cannot invest that income in an enterprise.
(b) a person cannot acquire or maintain an interest in an
enterprise through a pattern of racketeering.
(c) a person who is employed by or associated with an
enterprise cannot conduct the enterprise's affairs through a
pattern of racketeering.
(d) a person cannot conspire to violate subsections (a), (b),
or (c).
3
A RICO “person” is “any individual or entity capable of holding
a legal or beneficial interest in property.” 18 U.S.C. § 1961.
4
A “pattern of racketeering activity requires at least two acts
of racketeering activity, one of which occurred after the effective
date of this chapter and the last of which occurred within ten
years (excluding any period of imprisonment) after the commission
of a prior act of racketeering activity.” 18 U.S.C. § 1961(5).
5
“Racketeering activity” includes acts indictable under 18
U.S.C. § 1341 (relating to mail fraud) and § 1343 (relating to wire
fraud). 18 U.S.C. § 1961(1)(B).
6
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 (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
(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
7
racketeering activity, but also that the RICO “person” who commits
the predicate acts is distinct from the enterprise. Bishop v.
Corbett Marine Ways, Inc., 802 F.2d 122, 123 (5th Cir. 1996). It
is not enough to establish that a defendant corporation through its
agents committed the predicate acts in the conduct of its own
business. Elliot 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 corporation.
Id.; see also Atkinson, 808 F.2d at 441.
Whelan alleged that Defendants were an association in fact
consisting of “the corporate Defendants, Sam Vaughan, Kim Vaughan,
Amy Vaughan, Phillip Baldwin, Jr., both individually and as
executor of the estate of Sam Vaughan, and Newton Dorsett.”6 Whelan
argues that the enterprise’s purpose to defraud the royalty owners
of their payments is distinct from the predicate acts of mail and
wire fraud, which were merely the means to accomplish the ultimate
purpose.
Whelan’s § 1962(c) claim cannot succeed because Whelan has not
demonstrated an enterprise as required by that subsection. First,
Whelan offers no competent evidence other than that of predicate
acts to demonstrate an association between Newton Dorsett and the
Winchester defendants. Dorsett’s purchase of a well bore from
6
RICO Case Statement at 10.
8
Winchester and acquisition of a mineral lease from Winchester serve
to connect him with the Winchester defendants in the commission of
predicate acts, but fail to demonstrate the existence of an
association separate from the predicate acts. Testimony from
Whelan’s expert witness, Kenneth Frazier, that Dorsett and Sam
Vaughan had been in “several deals together”7 is speculation;
Frazier went on to state that he had no contact with Winchester
during the period in which Sam Vaughan and Dorsett are supposed to
have been associated.8
Even if we accepted that Whelan’s evidence demonstrated an
association beyond the commission of predicate acts, Whelan is
unable to demonstrate the association’s continuity. The concept of
continuity has been incorporated into the enterprise requirement in
order to control the scope of RICO. Delta Truck, 855 F.2d at 243.
An enterprise that “briefly flourished and faded” will not suffice;
Whelan must adduce evidence showing that the enterprise functioned
as a continuing unit. Landry v. Airline Pilots Ass’n Int’l AFL-
CIO, 901 F.2d 404, 433 (5th Cir. 1990). The few transactions
between Dorsett and the Winchester defendants supported by summary
judgment evidence are insufficient to demonstrate the required
continuity.
Putting aside the association between Dorsett and the
7
Deposition of Kenneth Frazier at 34.
8
Id.
9
Winchester defendants, Whelan urges us to consider the Winchester
defendants alone as constituting an enterprise. The predicate acts
committed by the Winchester defendants, such as mailing false
production reports, were committed by agents and officers of
Winchester in the ordinary course of business. No summary judgment
evidence offered by Whelan demonstrates an association beyond one
in the course of employment by Winchester. Company officers and
employees not associated other than through the activities of the
company do not constitute an enterprise for purposes of § 1962(c).
For the remaining subsections of § 1962, we consider the
Winchester defendants alone as constituting an enterprise, but
conclude nonetheless that Whelan’s evidence reveals no triable fact
issues. Whelan offers only conclusory allegations in support of
claims that the Winchester defendants violated § 1962(a) by using
funds from racketeering to invest in an enterprise or violated §
1962(b) by acquiring or increasing their interests in an enterprise
through racketeering. Moreover, Whelan points to no evidence
demonstrating that § 1962(a) or (b) violations were the proximate
cause of damages suffered by Whelan. See St. Paul Mercury Ins. Co.
v Williamson, 224 F.3d 425, 443 (5th Cir. 2000); Crowe v. Henry, 43
F.3d 198, 205 (5th Cir. 1995). Finally, Whelan offers only
conclusory allegations that Defendants violated §1962(d) by
conspiring to commit RICO violations. Conclusory allegations are
insufficient to defeat a properly supported motion for summary
judgment. Fed. R. Civ. P. 56(e). We conclude that the district
10
court was correct to grant summary judgment dismissing Whelan’s
RICO claim.
II. WHELAN’S STATE LAW CLAIM
Defendants argue that the district court abused its discretion
in dismissing Whelan’s common law fraud claim without prejudice.
Defendants contend that Whelan’s first statement of common law
fraud occurred with its request for amendment of a final judgment,
and neither Defendants nor the court was on notice of any state law
claim. Defendants maintain that Whelan, having named RICO as the
basis for its recovery, should be limited to RICO.
A motion to alter or amend a final judgment, when filed within
ten days from the date the original judgment issues, is governed by
Federal Rule of Civil Procedure 59(e). Bohlin v. Banning Co.,
Inc., 6 F.3d 350, 353 (5th Cir. 1993). The decision by the
district court to amend its judgment is reviewed for abuse of
discretion and need only be reasonable. Id.
The district court amended its judgment because it concluded
Whelan’s second amended complaint “might state a claim for common
law fraud.” We accept the court’s refusal to evaluate the
complaint under the Rule 9 mandate of particularity, which would
apply only if the claim were being adjudicated in federal court.
Reviewing the decision to amend, we ask only whether the court
reasonably could conclude that the complaint stated a pendent claim
for common law fraud. In assessing whether the court was
11
reasonable, we look to Rule 8 of the Federal Rules of Civil
Procedure.
Pleadings must be construed “as to do substantial justice.”
Fed. R. Civ. P. 8(f). The Rules require only “'a short and plain
statement of the claim' that will give the defendant fair notice of
what the plaintiff's claim is and the grounds upon which it rests."
Conley v. Gibson, 355 U.S. 41, 47, 78 S. Ct. 99, 103 (1957)
(quoting Fed. R. Civ. P. 8(a)(2)).
Our reading of the complaint satisfies us that the district
court did not abuse its discretion in amending its judgment. We do
not intend to say that allegations sufficient to support pendent
claims for common law fraud inhere in every RICO claim. Neither is
our ruling based on the adequacy of Whelan’s allegations in stating
a claim for fraud; we leave to the state court the task of
evaluating the substance of Whelan’s fraud complaint. Our review
of the complaint is for the limited purpose of evaluating whether
the district court could reasonably have concluded that the
complaint gave Defendants fair notice of what Whelan’s claims were.
Because we conclude that it could, we find no abuse of discretion.
III. CONCLUSION
Whelan’s evidence demonstrates no material fact issue
regarding its RICO claims; therefore, summary judgment dismissing
its RICO claim was proper. The district court’s amendment of its
judgment was not an abuse of discretion. We affirm the amended
12
judgment of the district court.
AFFIRMED
13