Rogers v. McDorman

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT United States Court of Appeals

Fifth Circuit

FILED

March 18, 2008

No. 05-41347 Charles R. Fulbruge III

Clerk

KENNETH D. ROGERS; ANDREW DUNN; PAT H. COONE;

BETTY S. COONE; WAYNE D. BUTCHEE; CLINT L. HINES;

DAVID G. HINES; SYBIL K. JENKINS

Plaintiffs-Appellants

v.

ROBERT L. MCDORMAN; et al.

Defendants-Appellees

Appeal from the United States District Court

for the Eastern District of Texas

Before HIGGINBOTHAM, SMITH, and OWEN, Circuit Judges.

PATRICK E. HIGGINBOTHAM, Circuit Judge:

The former directors of Mauriceville National Bank (Directors) sued

Robert McDorman, Meshell McDorman, Deon Thornton, and various

McDorman-related business entities (Defendants), alleging violations of the

Racketeer Influenced and Corrupt Organizations Act (RICO) and state-law

claims. Joe Penland was also a defendant. A jury found Defendants liable under

RICO and some state-law theories, but only assessed damages for the RICO

violations; however, the jury also found that Directors were in pari delicto with

No. 05-41347

Defendants. The district court entered a take nothing judgment against

Defendants.

Directors appealed, principally challenging the in pari delicto defense and

the finding that Penland was not liable. Penland cross-appealed. Prior to oral

argument, Penland and Directors settled, dismissing their appeals against each

other.1 Directors maintained their appeal as to Defendants. For the reasons

that follow, we affirm.

I

Robert McDorman held an ownership interest in an entity called MML,

which owned two used car lots in east Texas, called “McDorman Motors.”

McDorman also held an ownership interest in a wholesale car company, RLM.

McDorman and his businesses had a longstanding relationship with

Mauriceville National Bank (MNB), a small Texas bank.

In December 1999, McDorman and Joe Penland formed a company called

Mac-Pro, which began operating a car lot under the “McDorman Motors” name.

Penland contributed capital and McDorman ran the day-to-day operations. In

December 2000, with the businesses experiencing cash-flow problems, Penland

agreed to make an additional capital contribution, and in exchange acquired

greater ownership of the businesses. MML, RLM, and Mac-Pro were rolled into

a new, enlarged Mac-Pro, in which Penland took an 85% ownership interest.

McDorman continued to manage the day-to-day operations.

Beginning in October 2000, McDorman initiated a check-kiting scheme –

which he considered a loan arrangement with MNB – to cover short-term

financing gaps. The scheme moved money through MNB, Community Bank, and

1

We, therefore, do not consider the issues raised by Directors that concern only

Penland, nor do we consider any of the issues raised in Penland’s cross-appeal.

2

No. 05-41347

SouthTrust Bank. The scheme was not, however, a typical check-kite, as it used

cashier’s checks and, more important here, MNB actively participated in it.2

The scheme followed a regular pattern. McDorman’s wife, Meshell, would

call MNB in the morning to check the balances in the Mac-Pro and McDorman

Motors accounts. She would then have MNB prepare cashier’s checks payable

to Mac-Pro or McDorman Motors. A cashier’s check is “[a] check drawn by a

bank on itself”;3 it is an obligation of the bank that the bank is committed to

honor, making it similar to cash.4 Thus, normally, a customer must pay for a

cashier’s check when it is issued, such as by tendering cash or debiting an

account at the bank. McDorman, however, did not do so. Rather, a runner

would be sent to pick up the cashier’s checks, which were then deposited in Mac-

Pro and McDorman Motors accounts at Community Bank or SouthTrust Bank.

The runner would “pay” for the cashier’s checks with regular checks drawn on

Mac-Pro and McDorman Motors accounts at MNB. MNB, however, would not

immediately process the payment checks, but would hold the payment checks for

processing on the next business day. This created a gap between when

McDorman took possession of MNB funds and when he paid for the cashier’s

checks, allowing McDorman to belatedly cover the payment checks. The next

day, the runner would deposit into Mac-Pro and McDorman Motors accounts at

MNB regular checks drawn on accounts at Community Bank or SouthTrust

2

According to Black’s Law Dictionary, 231 (7th ed. 1999), check-kiting is “[t]he illegal

practice of writing a check against a bank account with insufficient funds to cover the check,

in the hope that the funds from a previously deposited check will reach the account before the

bank debits the amount of the outstanding check.”

3

Id. at 230.

4

See Cmty. Nat. Bank v. Channelview Bank, 814 S.W.2d 424, 427 (Tex. App.–Houston

1991) (“A cashier’s check circulates through commerce as the equivalent of cash. A cashier’s

check is a bill of exchange drawn by the bank upon itself and is accepted in advance by the act

of its issuance and is not subject to countermand by either its purchaser or the issuing bank.

The bank’s issuance of the check is acceptance of the check and constitutes an agreement by

the bank to honor the check as presented.”).

3

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Bank to cover the previous day’s payment checks. At the end of the scheme, it

evolved to where McDorman was receiving the cashier’s checks in the morning

and the payment checks were not dropped off until the afternoon.

For the scheme to work, McDorman needed MNB’s help, and he received

it. Thornton, the then-president and CEO of MNB, directed MNB employees to

assist McDorman. A number of employees prepared the cashier’s checks,

although Teresa Viator prepared most of them. The trial evidence indicates that

other employees played a role in facilitating the scheme, such as the tellers who

specially tracked and reported deposits into McDorman related accounts.

From October 2000 through early January 2001, more than $4 million was

kited. The scheme temporarily ceased when bank auditors and examiners

arrived at MNB in January. The scheme resumed in March 2001, and from then

until its collapse on July 12, 2001, approximately $37 million more was kited.

In June 2000, Penland became concerned that McDorman had used

Mac-Pro funds to pay personal debts. According to Penland, this prompted his

decision to withdraw from Mac-Pro, although some evidence indicates that he

wanted out because of the check-kiting. Penland officially transferred his

ownership interest on July 13, but in the meantime required McDorman to fax

to him each day copies of the checks written on the businesses’ accounts.

Penland claimed that in early July he discovered suspiciously large checks

being written by McDorman to MNB; he met with McDorman and learned of the

scheme. McDorman, however, did not immediately stop the check-kiting. The

scheme unraveled when Penland reported it to Community Bank on July 12, and

Community Bank took steps to protect itself. Mac-Pro and McDorman Motors

accounts at Community Bank were frozen, and Penland instructed McDorman

to issue stop payment orders on Community Bank and SouthTrust Bank checks

paid to MNB. A number of Mac-Pro and McDorman Motors debts – but not the

amounts owed for the cashier’s checks – were paid off after the scheme stopped.

4

No. 05-41347

MNB, unable to collect payment on the final cashier’s checks, suffered some $3.3

million in losses and faced the prospect of failing. Federal regulators required

Directors to recapitalize MNB for $2 million, enter a consent decree, and make

periodic reports.

Throughout the check-kiting scheme, and before, MNB and McDorman

had other banking and lending relationships. Car dealers like McDorman often

use “sight drafts” to purchase cars. McDorman would frequently negotiate sight

drafts to third parties, and occasionally MNB paid for the sight drafts with

cashier’s checks before McDorman paid for the cashier’s checks. MNB’s internal

compliance officer, Donna Venable, thrice informed Directors about this. MNB

also entered into an indirect lending agreement with McDorman, whereby MNB

would purchase car loans from McDorman. Finally, MNB made various other

loans to McDorman, for example, loaning $350,000 to help one of his businesses

emerge from bankruptcy. Although the parties dispute the importance, and

profitability, of McDorman as a customer to MNB, it is clear that McDorman

was a significant customer.

MNB’s claims against Defendants and Penland were assigned to Directors,

and in July 2003, Directors brought claims under the civil provisions of RICO5

and Texas law. The case was tried over twelve days. The jury found that 1)

Penland was not liable for anything; 2) Defendants violated civil RICO, causing

$3,374,256 in damages, and that they conspired to violate RICO but for zero

damages; 3) Directors were in pari delicto with Defendants; 4) no defendants

were liable for common-law fraud or conspiracy to commit fraud; and 5) the

McDormans and Thornton were liable for constructive fraud but for zero

damages. The district court entered a take nothing judgment.

II

5

See 18 U.S.C. § 1964(c)-(d).

5

No. 05-41347

The principal issue in this appeal is the in pari delicto defense, which

“derives from the Latin, in pari delicto potior est conditio defendentis: ‘In a case

of equal or mutual fault . . . the position of the [defending] party . . . is the better

one.’”6 The defense embodies “the common-law notion that a plaintiff’s recovery

may be barred by his own wrongful conduct,”7 and is undergirded by the

concerns, “first, that courts should not lend their good offices to mediating

disputes among wrongdoers; and second, that denying judicial relief to an

admitted wrongdoer is an effective means of deterring illegality.”8

A

We consider first a threshold question: whether Defendants properly

raised in pari delicto. Directors point to Rule 8(c), which requires parties to

plead affirmative defenses,9 and argue that in pari delicto falls within the Rule’s

ambit, Defendants did not properly plead and raise the defense, and therefore

Defendants waived it.10

While it is true that failure to abide by Rule 8(c) leads to waiver, there is

some play in the joints. A defendant must “plead an affirmative defense with

enough specificity or factual particularity to give the plaintiff ‘fair notice’ of the

defense that is being advanced.”11 The concern is that “[a] defendant should not

be permitted to ‘lie behind a log’ and ambush a plaintiff with an unexpected

6

Bateman Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299, 306 (1985) (quoting

Black’s Law Dictionary 711 (5th ed. 1979)).

7

Pinter v. Dahl, 486 U.S. 622, 632 (1988).

8

Bateman Eichler, 472 U.S. at 306.

9

See Fed. R. Civ. P. 8(c) (“In responding to a pleading, a party must affirmatively state

any avoidance or affirmative defense . . . .”).

10

See Pinto Trucking Serv., Inc. v. Motor Dispatch, Inc., 649 F.2d 530, 534 (7th Cir.

1981) (holding that the district court properly prevented defendants from raising in pari delicto

for the first time at trial).

11

Woodfield v. Bowman, 193 F.3d 354, 362 (5th Cir. 1999).

6

No. 05-41347

defense.”12 “Where the [affirmative defense] is raised in the trial court in a

manner that does not result in unfair surprise, however, technical failure to

comply precisely with Rule 8(c) is not fatal.”13 “More specifically, a defendant

does not waive an affirmative defense if it is raised at a ‘pragmatically sufficient

time, and [the plaintiff] was not prejudiced in its ability to respond.’”14

We agree that in pari delicto is an affirmative defense, but conclude that

Defendants did not waive it. Their answers specifically raised Directors’ conduct

as an affirmative defense. For example, Penland’s answer alleged that “[t]he

injuries, damages, and losses alleged in the Original Complaint were caused in

whole or in part by the acts or omissions of Plaintiffs, Plaintiffs’ agents, and/or

others,” and that Directors had violated “the law, rules and regulations

governing the operations of a national banking association.” The McDorman

Defendants’ answer asserted that MNB knowingly participated in the scheme,

and that Directors were “estopped from complaining about the transactions as,

at a minimum, they knowingly allowed the transactions to occur to their

benefit.”15 Penland’s and McDorman’s answers also both pled unclean hands.

From the beginning, Directors knew that Defendants contended that they were

involved in the scheme and their participation contributed to MNB’s losses – in

other words, that their conduct would form a basis of Defendants’ defense.16

12

Ingraham v. United States, 808 F.2d 1075, 1079 (5th Cir. 1987).

13

Allied Chem. Corp. v. Mackay, 695 F.2d 854, 855-56 (5th Cir. 1983) (per curiam).

14

Arismendez v. Nightingale Home Health Care, Inc., 493 F.3d 602, 610 (5th Cir. 2007)

(quoting Lucas v. United States, 807 F.2d 414, 418 (5th Cir. 1986)).

15

Directors’ contention that Robert McDorman individually waived the defense is

spurious. The footnote in the McDorman Defendants’ answer on which they rely was an

attempt to clarify that the check-kiting revolved around the business entities, that is

McDorman was not “individually” kiting checks. The footnote cannot be fairly read as meaning

that the affirmative defenses would not apply to him.

16

See Bull’s Corner Rest., Inc. v. Dir. of FEMA, 759 F.2d 500, 502 (5th Cir. 1985)

(finding no waiver where defendant pled substance of policy exclusion as an affirmative defense

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Moreover, Directors knew that in pari delicto itself was at issue, as they

contested its applicability in a pretrial brief. During a pretrial hearing, the

district court analyzed whether the defense was cognizable under civil RICO,

ruling that it is.17 The defense was raised at a “pragmatically sufficient time,”

and Directors cannot credibly claim they were surprised.

Directors contend that the district court’s decision to allow in pari delicto

“prejudiced” them because it led to the admission of circumstantial evidence in

support of the defense that did not otherwise speak to the check-kiting scheme.18

Directors misunderstand “prejudice” in this context: the prejudice inquiry

considers whether the plaintiff had sufficient notice to prepare for and contest

the defense, and not simply whether the defense, and evidence in support of it,

were detrimental to the plaintiff (as every affirmative defense is). Directors

tender no explanation of how Defendants’ failure to plead in pari delicto more

even though the policy exclusion was not pled by name), superceded in part by rule on other

grounds, Fed. R. Civ. P. 52(a).

17

Compare Lubke v. City of Arlington, 455 F.3d 489, 499 (5th Cir. 2006) (“Regardless

whether the City pled offset, however, both parties addressed the issue in their pretrial

motions in limine. Lubke was on notice of the City’s position and suffered no prejudice by the

absence of a formal initial pleading.”), reh’g denied, 473 F.3d 571 (5th Cir. 2006); Giles v.

General Electric, 245 F.3d 474, 492 (5th Cir. 2001) (concluding the plaintiff was not “unfairly

surprised” where the affirmative defense was addressed in the pretrial order and the court held

a hearing on the issue pretrial), with Morris v. Homco Int’l, Inc., 853 F.2d 337, 343 (5th Cir.

1988) (finding waiver where the district court raised an affirmative defense “in drafting its

opinion months after trial”); Ingraham, 808 F.2d at 1078-80 (concluding the Government

waived a statutory defense by raising it for the first time after trial).

18

Directors’ discussion of the “prejudice” and “confusion” caused by Defendants’ in pari

delicto defense focused on waiver, and cannot be fairly read as appealing the district court’s

evidentiary rulings. Indeed, Rule 403 is not mentioned. See Fed. R. Evid. 403 (“Although

relevant, evidence may be excluded if its probative value is substantially outweighed by the

danger of unfair prejudice, confusion of the issues, or misleading the jury, or by considerations

of undue delay, waste of time, or needless presentation of cumulative evidence.”). As such,

Directors abandoned any “evidentiary” arguments. See, e.g., Askanase v. Fatjo, 130 F.3d 657,

668 (5th Cir. 1997) (“All issues not briefed are waived.”).

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formally prejudiced their ability to develop their case pretrial,19 or hindered their

ability to contest the defense at trial.20

B

Directors argued in their briefs that in pari delicto is not a defense to a

civil RICO claim.21 They explained that interpretations of RICO begin and end

with the statute’s text, which does not mention the defense; and that, as civil

RICO liability turns on committing criminal RICO acts, principles of criminal

jurisprudence should apply to civil RICO defenses and in pari delicto would not

be a defense to a criminal RICO claim. However, during his oral argument

rebuttal, Directors’ counsel conceded, upon “mature reflection,” that in pari

delicto is a cognizable defense to civil RICO. We agree, and briefly explain why.

RICO provides that “[a]ny person injured in his business or property by

reason of a violation of section 1962 of this chapter may sue therefor in any

appropriate United States district court and shall recover threefold the damages

he sustains.”22 Section 1962, in turn, lays out the criminal prohibitions. Thus,

civil RICO liability is dependent upon a defendant’s committing criminal RICO

acts. But neither civil RICO’s textual silence nor its relationship with the

criminal provisions is alone determinative of its contours.

For example, although civil RICO does not provide for a statute of

limitations, the Supreme Court nevertheless held that civil RICO claims are

19

See Pinto Trucking Serv., 649 F.2d at 534 (raising the defense at the “eleventh-hour”

prevented plaintiff from taking discovery on the defense).

20

Cf. Morris, 853 F.2d at 343 (explaining that “[the defendant] had no notice that the

issue of [plaintiff’s] substantial performance would be important in the litigation until the time

had passed to meet the issue squarely”).

21

Although Directors also argue that in pari delicto does not apply to their common-law

claims, we do not address the issue because of the jury’s findings of either no liability or zero

damages as to those claims.

22

18 U.S.C. § 1964(c).

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subject to a four-year statute of limitations.23 Nor has its silence prevented the

application of a discovery rule governing when the statute of limitations begins

to run,24 or stopped the Supreme Court from suggesting that a civil RICO

plaintiff may be able to invoke the doctrine of equitable tolling.25 While, of

course, the concerns animating statute of limitations issues are not the same as

those here, the larger – and critical – point is that textual silence is often only

the beginning, and not the end, of the inquiry;26 it is often the predicate for

interstitial federal common law.

The Supreme Court has also explained that different concerns underlie

civil and criminal RICO. In rejecting the argument that criminal RICO’s five-

year statute of limitations should apply to civil RICO claims, the Court noted

that the “‘catchall’ federal 5-year statute of limitations for criminal RICO actions

does not reflect any congressional balancing of the competing equities unique to

civil RICO actions or, indeed, any other federal civil remedy.”27 The Court

subsequently reiterated, when confronting an argument that RICO’s civil

provisions should follow the criminal, that “there are significant differences

between civil and criminal RICO actions, and this Court has held that criminal

23

Agency Holding Corp. v. Malley-Duff & Assocs., Inc., 483 U.S. 143 (1987).

24

See Rotella v. Wood, 528 U.S. 549 (2000).

25

See id. at 560-61 (“In rejecting pattern discovery as a basic rule, we do not unsettle

the understanding that federal statutes of limitations are generally subject to equitable

principles of tolling, and where a pattern remains obscure in the face of a plaintiff’s diligence

in seeking to identify it, equitable tolling may be one answer to the plaintiff’s difficulty . . . .”

(citations omitted)).

26

For example, courts have taken civil RICO’s textual silence as an indication that

Congress did not intend to displace background principles. See, e.g., Tafflin v. Levitt, 493 U.S.

455 (1990) (holding that, under the presumption of concurrent jurisdiction, Congress did not

display an intent to deprive state courts of concurrent jurisdiction over civil RICO claims);

Chappell v. Robbins, 73 F.3d 918, 923-25 (9th Cir. 1996) (“In passing RICO, Congress did not

evince a ‘clear legislative intent’ to displace common-law immunities.”).

27

Agency Holding Corp., 483 U.S. at 155-56 (emphasis added).

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RICO does not provide an apt analogy.”28 The Court’s admonishment to consider

“the competing equities unique to civil RICO actions” stands in contrast to the

argument that RICO’s civil provisions should follow lockstep its criminal

provisions. Thus, though civil RICO may mirror the criminal provisions in some

instances, any such determination must pay attention to civil RICO itself.

The Eleventh Circuit has considered whether in pari delicto is a defense

to a civil RICO claim, holding that it is.29 The court began by analyzing the

Supreme Court’s decisions in Bateman Eichler, Hill Richards, Inc. v. Berner30

and Perma Life Mufflers, Inc. v. International Parts Corp.,31 which considered

the applicability of in pari delicto to securities and antitrust claims, respectively.

Although the Court held that the defense was unavailable in each case, it was

concerned that the defense would be used to defeat claims by persons who were

not active participants in the violation of federal law.32 Perma Life Mufflers did

not foreclose a defense to an antitrust claim based on a plaintiff’s “truly complete

involvement,”33 and Bateman Eichler explicitly recognized that in pari delicto

28

Klehr v. A.O. Smith Corp., 521 U.S. 179, 188 (1997); see also Sedima, S.P.R.L. v.

Imrex Co., Inc., 473 U.S. 479, 491 (1985) (“That the offending conduct [in civil RICO] is

described by reference to criminal statutes does not mean that its occurrence must be

established by criminal standards or that the consequences of a finding of liability in a private

civil action are identical to the consequences of a criminal conviction.”).

29

Official Comm. of Unsecured Creditors of PSA, Inc. v. Edwards, 437 F.3d 1145, 1152-

56 (11th Cir.), cert. denied, Laddin v. Reliance Trust Co., 127 S. Ct. 45 (2006).

30

472 U.S. 299 (1985).

31

392 U.S. 134 (1968).

32

See Official Comm., 437 F.3d at 1154 (“As in Perma Life Mufflers, the holding in

Bateman Eichler was limited, because the Court concluded that the tippees were not active

participants in the alleged violation of federal law.”).

33

See 392 U.S. at 140 (“We need not decide, however, whether such truly complete

involvement and participation in a monopolistic scheme could ever be a basis, wholly apart

from the idea of in pari delicto, for barring a plaintiff’s cause of action, for in the present case

the factual picture respondents attempt to paint is utterly refuted by the record.”).

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could be available in the securities law context.34 The Eleventh Circuit,

therefore, concluded that in pari delicto could apply to federal statutory claims,

and derived the following guidance for its application:

Under Perma Life Mufflers and Bateman Eichler, the application of

the defense of in pari delicto to causes of action created by federal

statutes depends on two factors: (1) the plaintiffs’ active

participation in the violation vel non and (2) the policy goals of the

federal statute.35

The court then held that in pari delicto could apply to a civil RICO claim. The

court explained that the plaintiff was not a passive participant in the fraudulent

scheme giving rise to the lawsuit, but an active one. As the court noted,

“[b]ecause federal RICO violations, as a matter of law, require affirmative

wrongdoing rather than passive acquiescence, Perma Life Mufflers does not

preclude the defense of in pari delicto in the RICO context.”36

Nor would in pari delicto interfere with civil RICO’s policy goals. The

court explained that it would be “anomalous, to say the least, for the RICO

statute to make racketeering unlawful in one provision, yet award the violator

with treble damages in another provision of the same statute.”37 To allow co-

conspirators to recover from each other would not, as the court pointed out,

deprive violators of their ill-gotten gains, but would transfer the ill-gotten gains

between them. Finally, the Eleventh Circuit rejected lower court decisions

34

See 472 U.S. at 310-11 (“Accordingly, a private action for damages in these

circumstances may be barred on the grounds of the plaintiff’s own culpability only where (1)

as a direct result of his own actions, the plaintiff bears at least substantially equal

responsibility for the violations he seeks to redress, and (2) preclusion of suit would not

significantly interfere with the effective enforcement of the securities laws and protection of

the investing public.”).

35

Official Comm., 437 F.3d at 1154.

36

Id. at 1155-56.

37

Id. at 1155.

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holding that in pari delicto is not available to defend against civil RICO claims,

as those opinions turned on misinterpretations of Perma Life Mufflers.38

We are persuaded by the Eleventh Circuit, adopt its analysis, and

therefore hold that in pari delicto is a cognizable defense to a civil RICO claim.

C

Directors next argue that the district court erred by applying the Bateman

Eichler formulation of in pari delicto – “as a direct result of his own actions, the

plaintiff bears at least substantially equal responsibility for the violations he

seeks to redress.”39 Directors argue that Bateman Eichler only established when

the defense applies and not its content. Thus, they urge, this court’s pre-

Bateman Eichler version of in pari delicto – “mutual, simultaneous, and

relatively equal” fault40 – survives, and the district court erred by not using it.

Bateman Eichler went beyond merely establishing when in pari delicto is

available; the Court also addressed the defense’s substantive content. As the

Court explained in Pinter v. Dahl, “The first prong of [the Bateman Eichler test]

captures the essential elements of the classic in pari delicto doctrine.”41

Following the Court’s lead, this court has applied Bateman Eichler’s formulation

of in pari delicto.42 Directors’ interpretation of in pari delicto is “outdated,” as

it fails to account for the Court’s change of approach to in pari delicto wrought

38

Id. at 1155-56.

39

472 U.S. at 310-11 (emphasis added).

40

See, e.g., Woolf v. S.D. Cohn & Co., 515 F.2d 591, 604 (5th Cir. 1975).

41

Pinter, 486 U.S. at 633.

42

See In re Royale Airlines, Inc., 98 F.3d 852, 856 (5th Cir. 1996); Banc One Capital

Partners Corp. v. Kneipper, 67 F.3d 1187, 1197 (5th Cir. 1995). Royale Airlines initially

misquotes Bateman Eichler, see 98 F.3d at 855 (stating the test as “substantial responsibility”),

but then properly states the Bateman Eichler standard, see id. at 856 (“where the plaintiff bore

at least substantially equal responsibility,” and “the plaintiff bears at least substantially equal

responsibility” (emphasis added)).

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by Bateman Eichler.43 The district court properly followed Bateman Eichler’s

“substantially equal responsibility” standard.44

Nor did the district court commit reversible error in its application of

Bateman Eichler’s second prong. Directors argue that the district court failed

to make the required case-specific finding that in pari delicto would not interfere

with the effective enforcement of RICO and protection of victims. Assuming

such a responsibility exists, the district court fulfilled it. The court addressed

whether in pari delicto would interfere with civil RICO’s policy goals during a

pretrial hearing, concluding that it would not.45 By submitting the defense to

the jury, the court affirmed its earlier ruling on the facts of this case. Directors

also argued in their post-trial motion that the district court failed to make the

required policy analysis. The court ruled that the defense did not interfere with

RICO’s goals, relying on its pretrial analysis and ruling. The district court

43

Peltz v. SHB Commodities, Inc., 115 F.3d 1082, 1090 (2d Cir. 1997) (rejecting a

similar argument that a pre-Bateman Eichler in pari delicto standard should have been used).

44

Directors have abandoned any arguments that the jury instruction or interrogatory

wording impermissibly deviated from Bateman Eichler by not raising them. See Askanase, 130

F.3d at 668 (“All issues not briefed are waived.”).

45

The district court explained: “Now, that leads to the second factor that is set out in

the Bateman Eichler case, which is that preclusion of the suit would not significantly interfere

with the effective enforcement of the laws and protection of the public. . . . In this case we’re

talking about RICO, which is designed to prevent and punish racketeering. There doesn’t seem

to be an intent of Congress to allow one racketeer to sue another racketeer for civil damages

claiming that the other racketeer should owe the first racketeer. And, so, it doesn’t seem that

precluding a suit by one who is shown to be a racketeer from suing another would interfere

with the policies or enforcement of the law. There would still be [the] possibility of suits by

plaintiffs who are less than substantially equally responsible – which would include even

negligent, to my reading of the law, even negligent plaintiffs or plaintiffs who are slow on the

uptake and, based on Bateman Eichler, even plaintiffs who had unclean hands. But when you

get to substantially equally responsible, which, in effect, would mean they were also involved

in the racketeering activity, precluding a suit by those people would not seem to significantly

interfere with the effective enforcement. The court also notes, of course, that innocent

plaintiffs would still be able to sue; and, of course, the United States Government can sue or

can enforce the law criminally.”

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addressed the policy ramifications of the defense three times, each time ruling

the defense was permissible.

Nor have Directors convinced this court that the policy concerns

underlying civil RICO preclude in pari delicto here. “Congress intended RICO’s

civil remedies to help eradicate ‘organized crime from the social fabric’ by

divesting ‘the association of the fruits of ill-gotten gains.’”46 Allowing Directors

to recover “under RICO would not divest RICO violators of their ill-gotten gains,”

rather it would let plaintiffs found by a jury to bear “substantially equal

responsibility” for their injuries to recover damages; the check-kiting scheme

could not work without MNB’s active participation, and the jury found that

Directors were active participants in the wrongdoing. This is not a situation

where an innocent or passive victim is being deprived of a RICO remedy. We do

not think Congress intended RICO to facilitate “a wealth transfer among

similarly situated conspirators”;47 indeed, countenancing such a “wealth

transfer” would, perversely, reward conspirators with treble damages – and that

hardly seems to further RICO’s deterrence goals.

D

Directors next challenge the sufficiency of the evidence. They properly

moved for judgment as a matter of law, which is a challenge to the legal

sufficiency of the evidence.48 We review the district court’s ruling on the motion

46

Genty v. Resolution Trust Corp., 937 F.2d 899, 910 (3d Cir. 1991) (quoting United

States v. Turkette, 452 U.S. 576, 585 (1981)).

47

Official Comm., 437 F.3d at 1155.

48

Flowers v. S. Reg’l Physician Servs., Inc., 247 F.3d 229, 235 (5th Cir. 2001).

15

No. 05-41347

de novo, applying the same standard of review as the district court.49 Boeing v.

Shipman50 defines our inquiry:

Under Boeing, there must be a conflict in substantial evidence to

create a jury question. Substantial evidence is defined as evidence

of such quality and weight that reasonable and fair-minded men in

the exercise of impartial judgment might reach different

conclusions. Consequently, a mere scintilla of evidence is

insufficient to present a question for the jury. Even if the evidence

is more than a scintilla, Boeing assumes that some evidence may

exist to support a position which is yet so overwhelmed by contrary

proof as to yield to a [motion for judgment as a matter of law].51

We draw all reasonable inferences and resolve all credibility determinations in

favor of the jury’s verdict.52 “Thus, we will reverse, ‘only if no reasonable jury

could have arrived at the verdict.’”53

The evidence that Directors were in pari delicto is circumstantial, but it

is sufficient to sustain the jury’s finding. Directors and Venable, the compliance

officer, testified that they did not know about the scheme until it crashed, and

a number of employees testified that they did not discuss the scheme with

Directors.

The evidence shows that MNB was a small institution, employing

approximately 15 people in the branch where the kiting occurred, the same

branch where Directors held their board meetings. Numerous persons were

involved in the kite, including Thornton; the employees who prepared the

49

Id.

50

411 F.2d 365 (5th Cir. 1969) (en banc), overruled on other grounds by Gautreaux v.

Scurlock Marine, Inc., 107 F.3d 331 (5th Cir. 1997) (en banc).

51

Gaia Techs. Inc. v. Recycled Prods. Corp., 175 F.3d 365, 374-75 (5th Cir. 1999)

(quoting Rhodes v. Guiberson Oil Tools, 75 F.3d 989, 993 (5th Cir. 1996) (en banc)).

52

Miss. Chem. Corp. v. Dresser-Rand Co., 287 F.3d 359, 365 (5th Cir. 2002).

53

Id. (quoting Snyder v. Trepagnier, 142 F.3d 791, 795 (5th Cir. 1998)).

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No. 05-41347

cashier’s checks; and other employees who provided collateral assistance. MNB

employed special procedures for McDorman accounts. For example, the tellers

specially tracked and reported deposits in McDorman accounts, information that

was reasonably related to the scheme. The employees indicated that they did

not hide what they were doing, and that McDorman never asked them to. The

cashier’s checks were paid out of a general cashier’s checks account, and the

evidence indicates that the cashier’s checks used in the check-kiting were

recorded in the cashier’s checks log book, which indicated the check number, the

amount, who it was going to, the date, and which employee issued it.

During the course of the kite, MNB issued more than 160 cashier’s checks,

totaling approximately $41.2 million. The amounts of the checks varied, but

nearly all of the checks were for more than $100,000, and approximately half the

checks were for more than $250,000; indeed, the first check was for $450,000.

The amounts of the cashier’s checks stand in contrast to the financial size of

MNB, which was a small bank with a capitalization of around $3.5 million. A

reasonable jury could conclude that it is implausible that the accounting

irregularities the scheme would generate – the mismatch between debiting of the

cashier’s checks account and the deposit of payment – could go unnoticed; this

inference seems especially strong given that other accounting irregularities

involving McDorman, such as the cashier’s checks involved with the sight drafts,

were discovered and reported to Directors. And, there is evidence indicating that

Directors engaged in at least some hands-on management at MNB, for example

in their role on the Loan Committee. MNB’s size, both physically and

financially, casts doubt on Directors’ claimed ignorance and supports an

inference that it is unlikely the scheme could have been carried out without

Directors’ knowledge and approval.

While Directors attempt to place the blame on Thornton, there are a

number of reasons to reject the contention that she authorized the scheme in a

17

No. 05-41347

rogue act. First, McDorman attended a meeting with the controlling block of the

Directors and Thornton in February 2001, while the kiting was in hiatus. The

main reason for the meeting was, apparently, to discuss whether McDorman

might buy part of MNB. When asked whether there was discussion of the check-

kiting, McDorman testified that “I thanked a couple of them whenever I talked

to them, for letting me pay my stuff with cashier’s checks; but we didn’t go into

any detail about anything at all pertaining to that.” Although his testimony is

ambiguous, at the least it demonstrates that McDorman himself broached the

use of cashier’s checks with some of the Directors, and more specifically suggests

that McDorman was thanking them for special treatment. Shortly after this

meeting, the check-kiting resumed.

Second, Thornton had worked at MNB for years, apparently without

incident. One Director testified that he had known Thornton since 1963. The

evidence indicates that Thornton had not attempted to hide other aspects of

McDorman’s relationship with MNB from Directors. Thornton’s history with

MNB undercuts the notion that she independently decided to authorize a check-

kiting scheme. Venable’s testimony about a meeting she had with Directors

following the scheme’s collapse bolsters this inference. Venable was principally

speaking about her reports highlighting problems with the sight drafts. Venable

read the following from her deposition without objection: “He [one of the

Directors] said that it didn’t matter what I had reported in those reports. They

trusted Deon, and they didn’t stop it.” One implication of this, and the sight

drafts, is that it is unlikely that Thornton was acting independently.

Third, and in some respects most striking, is what Directors did not do

after the scheme collapsed. Viator, who prepared most of the cashier’s checks,

testified that none of the Directors ever asked her about what happened. Evelyn

Carabin, who prepared the cashier’s checks that led to MNB’s losses, similarly

testified that none of the Directors ever came to her to find out what happened.

18

No. 05-41347

That Directors never spoke with the employees who were directly involved in a

scheme that nearly caused MNB to collapse supports numerous reasonable

inferences related to Directors’ involvement and knowledge.

Fourth, the jury heard testimony about the extensive business dealings

between MNB and McDorman. The sight draft relationship, where MNB

sometimes paid for sight drafts with cashier’s checks for which McDorman had

not yet paid, was quite revealing. Three separate reports by Donna Venable to

Directors detailed that this was happening, and Venable testified that she told

Directors personally during a board meeting in January 2001 that this was still

occurring. Yet, according to her, Directors exhibited no surprise and asked no

questions. As the district court noted, “It was uncontroverted that Thornton,

with full knowledge of [Directors], was exceeding her lending authority in

issuing cashier’s checks to McDorman.” Another employee, Kyle Armitage,

wrote in a letter to Director Pat Coone that he “did have knowledge of

McDorman’s transactions from the reports [he] saw daily,” referring to

McDorman’s overdraft problems, and that these problems were “well

documented.” Though these issues are distinct from the check-kiting, there are

commonalities that belie the conclusion that MNB employees were

independently helping McDorman with the check-kiting.

The evidence of the business dealings also addresses another puzzle in this

case: why Directors would countenance a scheme that threatened MNB’s

financial integrity. There was testimony that MNB had modest profits during

the relevant time-period. MNB had a number of banking and lending

relationships with McDorman, and the jury could reasonably conclude that

keeping and facilitating his business – even though the check-kiting itself may

not have been profitable – were important to MNB’s bottom line. The evidence

also indicates that Directors had taken chances involving McDorman before, in

particular the extent of the indirect lending arrangement, which eventually

19

No. 05-41347

concerned federal regulators, and the sight drafts. Despite the risks associated

with McDorman, Armitage wrote in his letter that “at least one, and possibly

more, Board members were considering increasing our relationship with

[McDorman].”

Taken as a whole, and drawing all reasonable inferences and credibility

questions in support of the verdict, the evidence is sufficient for a reasonable

jury to conclude the Directors knew about and authorized the scheme. As MNB’s

active participation was a necessary component for the scheme to work, there

was no reversible error in the jury’s determination that Directors were in pari

delicto with Defendants.54

Alternatively, Directors argue that, if they and MNB’s employees were in

pari delicto, then their actions and knowledge should not be imputed to MNB

under agency principles because their interests were adverse to MNB.55 This is

important, they continue, because they are not advancing personal claims

54

Directors argue that they had to be in pari delicto in the acts that actually caused the

loss, the “end game,” by which we understand them to mean the stop payment orders and

other acts of Penland, McDorman, Community Bank, and SouthTrust Bank that prevented

collection on the payment checks. In pari delicto, however, does not require that the plaintiff

play a role in every aspect of the scheme or acts causing his loss – rather, Directors’ recovery

“may be barred on the grounds of [their] own culpability only where . . . as a direct result of his

own actions, the plaintiff bears at least substantially equal responsibility for the violations he

seeks to redress.” Bateman Eichler, 472 U.S. at 310-11.

55

Directors’ assertion that federal law, as opposed to state law, governs the imputation

of an agent’s knowledge to its principal because RICO is a federal statute is not, to say the

least, without difficulties. See O’Melveny & Myers v. FDIC, 512 U.S. 79 (1994); see also

Nisselson v. Lernout, 469 F.3d 143, 154 & n.3 (1st Cir. 2006) (“We look to state law to ascertain

when wrongful conduct should be imputed to a corporation.”), cert. denied, 127 S. Ct. 2131

(2007). We need not wrestle with these difficulties, however, for the relevant Texas law

dovetails with our cases applying agency imputation principles. Compare Askanase, 130 F.3d

at 666 (stating the general imputation rule and adverse interest exception), with FDIC v. Ernst

& Young, 967 F.2d 166, 170-71 (5th Cir. 1992) (“In Texas, whether an employee’s fraud is

attributable to a corporation depends on whether the fraud was on behalf of the corporation

or against it.”); Mays v. First State Bank of Keller, 247 S.W. 845 (Tex. Comm’n App. 1923,

judgm’t adopted) (recognizing the general imputation rule and the adverse interest exception);

see also Goldstein v. Union Nat. Bank, 213 S.W. 584 (Tex. 1919); Kirby v. Cruce, 688 S.W.2d

161, 168 (Tex. App.–Dallas 1985).

20

No. 05-41347

against Defendants but rather are litigating MNB’s claims as its assignees. In

other words, MNB would not be in pari delicto and, as they stand in MNB’s

shoes, the defense should not bar recovery. We are not persuaded.

“Generally, courts impute a bank officer or director’s knowledge to the

bank unless the officer or director acts with an interest adverse to the bank.”56

The oddity in Directors’ argument is that, after explaining in detail the adverse

interest exception, they do not explain how their or MNB’s employees’ interests

were adverse to MNB.57 Viator’s and Carabin’s testimony establishes that they

thought that they were working on MNB’s behalf and for its benefit; and

Directors’ expert on check-kiting testified he saw no evidence that they, or

Thornton, received bribes or kickbacks. Nor does the evidence show that

Directors personally benefitted at MNB’s expense, or had any other adverse

interest. The evidence explains why Directors would authorize the scheme:

McDorman was a big client, and keeping and growing his business was

important to MNB. They took a calculated risk that backfired. As has been

aptly noted, “Fraud on behalf of a corporation is not the same thing as fraud

against it.”58 It cannot be, as Directors suggest, that they were acting adversely

56

Ernst & Young, 967 F.2d at 170

57

See Goldstein, 213 S.W. at 590 (asking whether “the agent’s interests are so

incompatible with the interests of his principal as practically to destroy the agency or to render

it reasonably probable that an ordinary person, in the agent’s position, under such

circumstances, will neither act in behalf of his principal upon his so acquired knowledge, nor

disclose that knowledge to his principal, but, because of such incompatibility in interests, will

withhold such knowledge from the principal”); Restatement (Third) of Agency § 5.04 (2006)

(explaining that “notice of a fact that an agent knows or has reason to know is not imputed to

the principal if the agent acts adversely to the principal in a transaction or matter, intending

to act solely for the agent’s own purposes or those of another person”).

58

Greenstein, Logan & Co. v. Burgess Mktg., Inc., 744 S.W.2d 170, 190 (Tex. App.–Waco

1987) (quoting Cenco Inc. v. Seidman & Seidman, 686 F.2d 449, 456 (7th Cir. 1982)); see also

FDIC v. Shrader & York, 991 F.2d 216, 223-24 (5th Cir. 1993) (examining the difference

between fraud on behalf of a corporation and fraud against the corporation); Ernst & Young,

967 F.2d at 171 (discussing the same under Texas law).

21

No. 05-41347

simply because the scheme eventually hurt MNB.59 The evidence clearly

supports a finding that MNB was in pari delicto in the scheme through the acts

of its agents.

Directors’ reliance on the Seventh Circuit’s decision in Schacht v. Brown,60

where the court did not impute the acts of a corporation’s directors and

managers to the corporation, is misplaced. The Illinois Director of Insurance

took over a failed insurance corporation as the statutory liquidator, and sued the

defendants under RICO for their acts leading to the corporation’s failure. The

defendants, relying on equitable estoppel, argued that their actions should be

imputed to the corporation, their principal, and that because the Director of

Insurance was asserting claims on behalf of the corporation, he should be

precluded from asserting claims that the corporation would not be able to bring.

The court rejected this argument, drawing a distinction between fraud on behalf

of the corporation and fraud targeted at the corporation.61 The corporation in

Schacht “was, inter alia, fraudulently continued in business past its point of

insolvency and systematically looted of its most profitable and least risky

business and more than $3,000,000 in income–all actions which aggravated [the

corporation’s] insolvency.”62 As the court summed it up, “[T]he prolonged

artificial insolvency of [the corporation] benefitted only [its] managers and the

59

See Restatement (Third) of Agency § 5.04 cmt. c (2006) (“However, for purposes of

common-law agency, the fact that an action taken by an agent has unfavorable results for the

principal does not establish that the agent acted adversely.”).

60

711 F.2d 1343 (7th Cir. 1983).

61

See id. at 1347 (explaining that “[t]he Cenco court limited its estoppel analysis to

cases where ‘the managers are not stealing from the company . . . but instead are turning the

company into an engine of theft against outsiders.’”(quoting Cenco, 686 F.2d at 454)); id. at

1348 (“In no way can these results be described as beneficial to [the corporation].”).

62

Id. at 1347-48 (emphasis added).

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No. 05-41347

other alleged conspirators, not the corporation.”63 The situation here clearly

differs from that in Schacht; in short, trying to generate and develop business

for the corporation is a far cry from looting the corporation’s assets.

Accordingly, we conclude that there was sufficient evidence to support a

jury finding that Directors – and MNB – were in pari delicto.

III

Directors also argue that the district court erred in denying their motion

for a new trial. We review a district court’s denial of a motion for a new trial for

abuse of discretion.64 Directors assert three grounds: inconsistency in the

verdict, the possibility of a compromise verdict, and the submission of the in pari

delicto defense to the jury. We find no error.

The jury found that Defendants were liable under RICO, and assessed

approximately $3 million in damages. The jury also found that they conspired

to violate RICO and that the McDormans and Thornton committed constructive

fraud, but the jury assessed zero damages for both of these actions. The jury

found Penland not liable for anything, and found all of the defendants not liable

for common law fraud.

“In determining whether [jury] answers are inconsistent, we look to

‘whether the answers may fairly be said to represent a logical and probable

decision on the relevant issues as submitted.’”65 We will find inconsistency in the

jury’s answers “‘only if there is no way to reconcile them,’” making “‘a concerted

effort to reconcile apparent inconsistencies in answers to special verdicts if at all

63

Id. at 1348.

64

Fiber Sys. Int’l, Inc. v. Roehrs, 470 F.3d 1150, 1167 (5th Cir. 2006).

65

Id. (quoting FDIC v. Fid. & Deposit Co., 45 F.3d 969, 977 (5th Cir. 1995)).

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No. 05-41347

possible.’”66 “In attempting to reconcile special verdicts, our [Seventh

Amendment] mandate to create consistency requires that we look beyond the

face of the interrogatories to the court’s instructions as well.”67

This circuit, among others, has concluded that a finding of liability but no

damages does not necessarily render a verdict fatally inconsistent.68 The jury

here was instructed that Directors had to prove damages and that Defendants’

acts proximately caused those damages. The jury was further instructed to

consider each of the Directors’ claims and any resulting damages separately.

This is not a case where the answers to two interrogatories are inherently in

conflict. The district court explained that Directors’ case suffered from a

weakness of proof regarding damages, including “the amount of damages that

arose from the various acts of Defendants,” whether MNB in fact profited from

its transactions with McDorman prior to the scheme’s collapse, and how

Community Bank’s acts figured in to MNB’s losses. As the court noted, “[t]he

evidence concerning the loss to [MNB] was far from crystal clear.” The weakness

of proof is particularly acute as to the constructive fraud, and we note further

that the jury’s in pari delicto finding would render any inconsistency regarding

the RICO conspiracy harmless. Thus, we agree with the district court that the

zero damages awards can be understood to mean that Directors failed to carry

their burden of proof.

66

Id. at 1168 (quoting Willard v. The John Hayward, 577 F.2d 1009, 1011 (5th Cir.

1978), and Ellis v. Weasler Eng’g Inc., 258 F.3d 326, 343 (5th Cir. 2001)).

67

Alverez v. J. Ray McDermott & Co., Inc., 674 F.2d 1037, 1040 (5th Cir. 1982).

68

See Dairy Farmers of Am., Inc. v. Travelers Ins. Co., 391 F.3d 936, 945 (8th Cir. 2004)

(“Even assuming the claim were not waived, a jury’s finding of liability without a

corresponding award of damages does not invalidate the verdict.”); Zhang v. Am. Gem

Seafoods, Inc., 339 F.3d 1020, 1036 (9th Cir. 2003) (noting that “the federal rule is that failure

to award damages does not by itself render a verdict invalid” (quoting Philippine Nat’l Oil Co.

v. Garrett Corp., 724 F.2d 803, 806 (9th Cir. 1984)); Wingartner v. Md. Cas. Co., 313 F.2d 754,

756 (5th Cir. 1963) (explaining the federal rule).

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No. 05-41347

Directors also complain that it was inconsistent for the jury to find some

of the Defendants liable under RICO, which was predicated on bank fraud, and

not to also find those Defendants liable for common law fraud. Similar as RICO

liability and common-law fraud liability may be here because bank fraud was the

predicate RICO act, they are not the same and should not be conflated, and the

jury was so instructed. The jury followed its instructions: it considered the

claims separately and concluded that Directors proved one but not the other.

Nor was there a compromise verdict. “A compromise verdict occurs when

a jury which is unable to agree on liability compromises that disagreement and

awards inadequate damages.”69 In considering whether a jury compromised on

a verdict, we consider “the ‘totality of circumstances’ and consider any indicia of

compromise apparent from the record and other factors that may have caused

a verdict for damages that would be inadequate if the jury actually found

liability.”70 The verdict does not evince horse trading of damages for liability.

The jury assessed damages for the RICO violation in the amount that Directors

argued MNB directly lost from the check-kiting,71 and again the evidence on

damages was wanting.72 The zero damages award reflects a failure of proof

rather than a jury disregarding its instructions and compromising on the verdict.

69

Pagan v. Shoney’s, Inc., 931 F.2d 334, 339 (5th Cir. 1991).

70

Yarbrough v. Strum, Ruger & Co., 964 F.2d 376, 379 (5th Cir. 1992).

71

See id. (“It is inconceivable that the jury could find liability and then award damages

for past but not future disfigurement, for past and future medical expenses but not for past and

future pain and suffering, mental anguish, and lost earning capacity. [Defendant] did not

dispute that [plaintiff] was seriously injured and that his injury would cause him impairment

and disfigurement for the rest of his life.”).

72

Hatfield v. Seaboard Air Line R. Co., 396 F.2d 721, 723 (5th Cir. 1968) (“The verdict

award of nominal damages in the teeth of an uncontroverted showing of substantial damages

lacks any support in the record and cannot stand.”).

25

No. 05-41347

Finally, Directors offer a number of arguments based on in pari delicto as

justifying a new trial.73 The district court properly allowed the defense and the

evidence in support of it, and we are not persuaded that the jury was misled or

confused. The district court did not abuse its discretion.

AFFIRMED.

73

Directors’ challenges to in pari delicto, which we addressed in Section II, were

generally presented in the alternative: the alleged errors justified either judgment as a matter

of law for Directors or a new trial. Directors also offered a stand-alone argument that the

defense confused and misled the jury. We address all of these bases for a new trial here.

26