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Enneking v. University National Bank

United States District Court, Tenth Circuit

December 23, 2013

Joseph Enneking, Plaintiff,
v.
University National Bank, et al., Defendants.

MEMORANDUM AND ORDER

J. THOMAS MARTEN, JUDGE

Following the collapse of the housing market in Junction City Kansas, the owner of an interest in a failed building supply company has brought a variety of claims against numerous defendants, including claims under the Racketeer Influenced and Corrupt Organizations (RICO) Act, 18 U.S.C. § 1962. The plaintiff alleges that Schmidt Builders Supply (SBS) was injured as the result of a scheme in which the defendants, including University National Bank (UNB), Bankers’ Bank of Kansas (BBOK), and Walter Craig Ellis (an officer of BBOK), sought to make and conceal bad loans involving John Duncan, SBS’s chief executive officer, chief financial officer, and director. UNB, BBOK and Ellis have moved to dismiss under Fed.R.Civ.Pr. 12(b)(6). The court finds that plaintiff’s RICO claim is untenable, and the pendent state law claims should be dismissed without prejudice.

In resolving the Motions to Dismiss, the court accepts as true all factual claims in the Complaint. The plaintiff must present sufficient facts to state a cause of action that is “plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). That is, the plaintiff must “nudge [his] claims across the line from conceivable to plausible.” Id. In this context, a claim is facially plausible if the facts presented in the Complaint “allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). In resolving a Motion to Dismiss, the court can draw on both its judicial experience and common sense. Id., at 679. While the court accepts as true the factual allegations in the Complaint, it need not accept legal conclusions, expressed either as “formulaic recitation of the elements of a cause of action” or “naked assertions devoid of further factual enhancement.” Id. at 678.

The plaintiff Joseph Enneking is a trustee of the SBS Employee Stock Ownership Trust, which held a 40% interest in SBS. Enneking brings the present action as a derivative claim against the defendants for the harm they allegedly caused SBS. In addition to the defendants who have filed motions to dismiss, the Complaint names two additional defendants: Duncan (the former head of SBS), and Troy Gregory, senior lending officer and Senior Vice-President at UNB from 2005 to 2009. Gregory is no longer employed by UNB. At the time of the Complaint, Duncan had been indicted on charges of bank fraud and money laundering. (¶ 12).[1] Duncan has subsequently pled guilty, and awaits sentencing. Case No. 13-40013-01-JAR.

The Complaint centers on two building developments in Junction City, Kansas, both of which anticipated substantial profits due to the anticipated relocation of the First Infantry Division, the “Big Red One, ” to nearby Fort Riley. In 2006, Duncan joined three other individuals (Dave Freeman, Bill Skepnik, and Brennan Fagan) in creating Big D Development, LLC.

In 2006, Big D began to develop vacant lots in the Sutter Woods and Sutter Highlands developments, and obtained a $5 million loan from UNB (in which BBOK later participated) to fund its operations. In addition, Big D obtained a $12 million loan from the City of Junction City. According to the Complaint, this assistance was obtained in part because Freeman bribed a Junction City official.

However, Big D began to experience difficulties in 2007 when the anticipated housing boom failed. The Complaint asserts that, in order to conceal their exposure on the Big D loan (which at the time amounted to some $1.88 million in outstanding debt), the Banks decided to make a much larger, $15.2 million loan to the Big D principals for the construction of an apartment complex in Junction City. (¶ 17(e), (g)). The new loan was known as the Bluejay loan, named for Bluejay Properties, LLC, the entity created by Freeman, Fagan, Skepnik, and John Larkin, to undertake the construction.

According to the plaintiff, in order to raise this capital, BBOK and UNB had to fool other banks into participating by supplying false and misleading information. (¶ 17(I)). This false information include false documentation which was supplied by John Duncan. First, on April 16, 2008, Duncan presented a letter to UNB stating falsely that SBS had inventory on hand to use on the project. Second, on April 24, 2008, Duncan created a false, “Photo-shopped” invoice indicating that SBS had much more inventory than it actually had. (¶¶ 101, 110). BBOK and UNB encouraged the participation of the other banks in the Bluejay loan, although they were aware that it was insufficiently collateralized.

The Complaint alleges that funds issued by the Banks to SBS as a part of the Bluejay development was instead diverted away by Duncan for other uses, including deposit into his personal account. (¶¶ 114, 115).

SBS collapsed on July 19, 2011, according to the Complaint, due to “the weight of bank debt [to its own lender, Kaw Valley Bank] and John Duncan's stealing and deception.” Count 1 of the Complaint alleges the defendants violated RICO, 18 U.S.C. § 1962(a)(b) and (c), and also that they conspired to do so, in violation of § 1962(d). through various acts (¶¶ 189-90). Specifically, the Complaint alleges that Duncan committed various acts of mail fraud and bank fraud in connection with obtaining the Bluejay loan. (¶181). They also contend that Ferguson (who is not named as a defendant) committed bank fraud when he bribed the Junction City official in 2006 to obtain initial funding for the Big D project. With respect to the defendant Banks and their agents Ellis and Gregory, the Complaint alleges that they committed bank fraud by engaging in a series of misrepresentations as to the participating banks, to prevent them from knowing of the true economic situation. (¶ 182). The Complaint also presents various state tort claims against the defendants.

In their motion, BBOK and Ellis present four reasons why Enneking’s RICO claim is fatally flawed: (a) the plaintiff has failed to present any plausible “enterprise” involved in the underlying activity, (b) SBS suffered no direct injury from the predicate acts of the supposed racketeering, (c) the defendants did not conduct the supposed enterprise, and (d) the plaintiff has failed to show that the enterprise operated with the requisite continuity. UNB joins two of these substantive arguments (lack of direct injury and lack of continuity) with two procedural arguments. UNB contends that the court should dismiss the action under Fed.R.Civ.Pr. 19(a)(1, ) because Enneking has failed to join necessary parties, in particular SBS’s lender, KVB. In addition, it argues, the court should dismiss the action under the first-to-file rule, given the previously filed adversarial bankruptcy proceeding, The University National Bank v. Bluejay Properties, LLC, Adversary Proceeding No. 12-06130.

Although the Complaint refers to 18 U.S.C. § 1962(a) and (b) (which involve the illegal investment of racketeering income or the use of racketeering acts to acquire control over an enterprise), the essence of the plaintiff’s claim is that defendants violated § 1962(c), which prohibits anyone from conducting the affairs of an enterprise through a pattern of racketeering. See Tal v. Hogan, 453 F.3d 1244, 1262 (10th Cir. 2006). Count 1 makes no attempt to show that the defendant Banks or Ferguson invested racketeering income in an enterprise, or that they employed a pattern of racketeering activity in order to acquire or maintain control over an enterprise.

In addition to the underlying elements of a claim under § 1962(c), the plaintiff must establish that he was a “person injured in his business or property by reason of a violation of section 1962 of this chapter.” 18 U.S.C. § 1964(c). This provision means that the plaintiff’s damages must “flow from the commission of the predicate acts.” Sedima, S.P.RL. v. Imrex Co., 473 U.S. 479, 497 (1985). "Our precedents make clear that in the RICO context, the focus is on the directness of the relationship between the conduct and the harm..” Hemi Group, LLC v. City of New York, 559 U.S. 1, 13 (2010). See also Holmes v. Securities Investor Protection Corp., 503 U.S. 258 (1992); Anza v. Ideal Steel Supply Corp., 547 U.S. 451, 461 (2005) (in determining proximate causation under RICO, “the central question ... is whether the alleged violation led directly to the plaintiff's injuries").

The court finds, first, that the plaintiff’s RICO claim is flawed because the Complaint fails to plausibly allege that SBS’s damages were proximately caused by the defendant’s actions. Civil liability under § 1962 depends upon a direct relationship between the illegal conduct and the plaintiff’s injuries. See Hemi Group, 559 U.S. at 12 (for RICO analysis, “the focus ...


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