RICO — RICO Remedies Don’t Include Setting Aside Prior Judgment or Undermining Its Preclusive Effect — Loss of Claims Due to Fraud on the Court = RICO Injury — Elements of Fraud on Court and Issue Preclusion

Knight v. Phoenix Central, Inc., 2014 U.S. App. LEXIS 7508 (10th Cir. April 22, 2014):

Judy Knight appeals from the dismissal of her lawsuit on the grounds of untimeliness, failure to state a claim, and claim preclusion (res judicata). We affirm the judgment below. Most of our reasons for affirmance are routine. But this appeal does raise interesting questions regarding claims under the federal Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. §§ 1961-68, based on alleged misconduct in prior litigation.

I. Background

In 2010 this court decided two appeals involving claims and cross-claims between, on one side, Ms. Knight and her company Phoenix  [*2] Central Inc. (Phoenix), an Oklahoma corporation, and, on the other side, Mooring Capital Fund, LLC (Capital) and Mooring Financial Corporation (Financial). See Mooring Capital Fund, LLC v. Knight, 388 F. App'x 814 (10th Cir. 2010) (Mooring I). Two years later, Ms. Knight filed a new suit in Oklahoma state court on behalf of herself, Phoenix, and another of her companies, Mini Malls of America, also an Oklahoma corporation. The defendants were Capital and Financial and individuals associated with them, including Financial's Chief Executive Officer, John Jacquemin, and unnamed "Counsels and Agents of Defendants." R. at 15. Capital, Financial, and Mr. Jacquemin removed the litigation to federal district court.

The removing defendants moved to dismiss with prejudice. In addition to filing a response, Ms. Knight filed a first amended complaint that named as additional defendants the law firm and individual lawyers who represented Capital and Financial in Mooring I (the Counsel Defendants). Capital, Financial, and Mr. Jacquemin then moved to dismiss the first amended complaint with prejudice. Citing claim preclusion, the statute of limitations, and Fed. R. Civ. P. 12(b)(6), the court granted  [*3] the motion the next day. In the same order, the court sua sponte dismissed the claims against the other defendants.

The day after the district court filed its judgment dismissing the action with prejudice, Ms. Knight filed a motion to remand the case to state court, which the district court denied as moot. Ms. Knight then filed a Fed. R. Civ. P. 59 motion to vacate, alter, or amend the dismissal order, which the district court also denied. Shortly thereafter, Ms. Knight sent an e-mail message seeking the district judge's recusal. The court ordered the e-mail to be filed and denied the request for recusal. Ms. Knight has appealed.1 We affirm. The removal of the case to federal court was proper. Some of Ms. Knight's claims were untimely and the others fail to state a claim or are barred by issue preclusion (collateral estoppel). And her request for recusal was untimely.

1   Ms. Knight filed notices of appeal naming as appellants herself and her two corporations. We have previously explained to Ms. Knight that as a nonattorney she cannot represent a corporation in federal court. See Mooring I, 388 F. App'x at 823. No counsel has filed a notice of appeal or appeared for the entities. Consequently,  [*4] Ms. Knight is the only appellant, and we do not consider any arguments regarding the entities' claims.

II. Analysis

***

B. Dismissal of Claims

Ms. Knight challenges the district court's application of statutes of limitations, Rule 12(b)(6), and claim preclusion. For ease of analysis, we divide her claims into two categories — first, claims concerning events that occurred before the Mooring I litigation (Phase 1 claims), and, second, claims concerning events that occurred during the Mooring I proceedings (Phase 2 claims). We address each category separately. Our review is de novo. See Wallace v. Microsoft Corp., 596 F.3d 703, 705 (10th Cir. 2010) (statute of limitations); Gee v. Pacheco, 627 F.3d 1178, 1183 (10th Cir. 2010) (Rule 12(b)(6)); Valley View Angus Ranch, Inc. v. Duke Energy Field Servs., Inc., 497 F.3d 1096, 1100 (10th Cir. 2007)  [*8] (preclusion).

1. Phase 1 Claims

The Phase 1 claims are claims based on events before Mooring I. They include claims that were asserted but failed in Mooring I and claims that could have been asserted but were not. It was proper for the district court to dismiss these claims on the ground that any applicable limitations period had expired.

***

2. Phase 2 Claims

The Phase 2 claims are those claims concerning events that occurred during Mooring I. They include claims that the  [*9] defendants committed fraud and deceit in their filings and testimony and that their litigation conduct was tortious. It was proper for the district court to dismiss the Phase 2 claims under Rule 12(b)(6) and on the ground of preclusion (although the appropriate preclusion doctrine is issue preclusion, not claim preclusion).

***

b. RICO Claims

The remaining Phase 2 claims are the federal RICO claims. For these claims, Ms. Knight asserts that defendants made misrepresentations to the district court, through pleadings and testimony, that increased the cost of litigating Mooring I and caused the district court to rule against her on her individual claims in Mooring I. She alleges that this activity violated the federal wire-fraud and mail-fraud statutes, and thereby constituted a pattern of racketeering in violation of RICO. See 18 U.S.C. § 1962(c). In light of the Mooring I judgment, however, she is barred from bringing these claims.

An essential element of a RICO claim is that the plaintiff was injured in her business or property by the RICO violation. See 18 U.S.C. § 1964(c) (creating a civil cause of action for "[a]ny person injured in his business or property by reason of a violation of section 1962"); Deck v. Engineered Laminates, 349 F.3d 1253, 1257 (10th Cir. 2003) ("[A] plaintiff has standing to bring a RICO claim only if he was injured  [*12] in his business or property by reason of the defendant's violation of § 1962."). But, as explained below, the damages Ms. Knight alleges from Phase 2 conduct--increased litigation costs and lost claims--were matters resolved by Mooring I. Further litigation of these issues is therefore precluded, and the Phase 2 RICO claims cannot proceed unless and until Ms. Knight obtains relief from the judgment in Mooring I. See Robinson v. Volkswagenwerk AG, 56 F.3d 1268, 1272-73 (10th Cir. 1995) (plaintiffs could not pursue fraud claims based on litigation misconduct without first obtaining relief from prior judgment because their claims of damages from fraud were incompatible with facts necessarily decided in the prior action).

Because Mooring I is a federal judgment in a diversity action applying Oklahoma law, Oklahoma's preclusion law applies. See Semtek Int'l Inc. v. Lockheed Martin Corp., 531 U.S. 497, 508 (2001). In this case the appropriate preclusion doctrine is issue preclusion. We recognize that the district court relied on claim preclusion rather than issue preclusion, but we may affirm on any ground supported by the record. See Bixler v. Foster, 596 F.3d 751, 760 (10th Cir. 2010). And  [*13] the defendants raised both claim preclusion and issue preclusion in the district court, so Ms. Knight had an opportunity to address both doctrines. See id.

"Issue preclusion prevents relitigation of facts and issues actually litigated and necessarily determined in an earlier proceeding between the same parties or their privies." Durham v. McDonald's Rests. Of Okla., Inc., 256 P.3d 64, 66 (Okla. 2011) (emphasis omitted).

   To establish issue preclusion, a party must prove: 1) that the party against whom it is being asserted was either a party to or a privy of a party to the prior action; 2) that the issue subject to preclusion has actually been adjudicated in the prior case; 3) that the adjudicated issue was necessary and essential to the outcome of that prior case; and 4) the party against whom it is interposed had a full and fair opportunity to litigate the claim or critical issue.

Id. at 66-67 (emphasis omitted). "The principle of issue preclusion operates to bar from relitigation both correct and erroneous resolutions of jurisdictional and nonjurisdictional challenges." Okla. Dep't of Pub. Safety v. McCrady, 176 P.3d 1194, 1199 (Okla. 2007). "An issue is actually litigated and necessarily  [*14] determined if it is properly raised in the pleadings, or otherwise submitted for determination, and judgment would not have been rendered but for the determination of that issue." Id.

Before examining the applicability of issue preclusion to the two types of damage alleged by Ms. Knight--increased litigation costs in Mooring I and her loss on the merits in Mooring I--we address three potential grounds for not applying preclusion doctrine to her federal RICO claims. First, Ms. Knight asserts that the defendants other than Capital and Financial (namely, the individual defendants and the law firm) cannot rely on preclusion because they were not parties in Mooring I. Those other defendants, however, are in privity with Capital and Financial. See Plotner v. AT & T Corp., 224 F.3d 1161, 1169 (10th Cir. 2000) ("The law firm defendants appear by virtue of their activities as representatives of [other defendants], also creating privity."); Fox v. Maulding, 112 F.3d 453, 459-60 (10th Cir. 1997) (officers and directors of bank were privies of bank for purposes of RICO claims because allegations related to actions taken in their capacities as officers and directors). "In light of the circumstances  [*15] of this case, including the alleged relationship between the defendants in this and the previous trial, we think that Oklahoma would not prohibit the defensive assertion of collateral estoppel on the sole grounds that the defendants here were not parties to the previous action." Robinson, 56 F.3d at 1272 n.3.

Second, Ms. Knight complains that the defendants did not submit the entire record from Mooring I in support of their preclusion argument. The district court, however, could take judicial notice of its own records to evaluate preclusion. See Gee, 627 F.3d at 1194.

Third, we consider the possibility that issue preclusion does not apply here because Ms. Knight's complaint enables her to set aside the judgment in Mooring I, eliminating any preclusive effect that it may have. We reject the possibility for the following reasons.

To begin with, the remedies under RICO do not include setting aside a prior judgment or undermining its preclusive effect by a collateral attack. The circuits to consider the matter have rejected such relief. See Hendrick v. H.E. Avent, 891 F.2d 583, 585-87 (5th Cir. 1990) (collateral attack on judgment through RICO claim is barred by res judicata); Gekas v. Pipin (In re Met-L-Wood Corp.), 861 F.2d 1012, 1016 (7th Cir. 1988)  [*16] ("RICO is many things, but it is not an exception to res judicata."); see also Gulf Petro Trading Co. v. Nigerian Nat'l Petroleum Corp., 512 F.3d 742, 747, 749-50 (5th Cir. 2008) (RICO suit was impermissible collateral attack on foreign arbitration award); Regions Bank v. J.R. Oil Co., LLC, 387 F.3d 721, 731-32 (8th Cir. 2004) (RICO claims by nonparty to bankruptcy action were impermissible collateral attack on bankruptcy judgment that was good against the world).

Moreover, Ms. Knight's complaint does not support a direct attack on the Mooring I judgment under either Fed. R. Civ. P. 60(b)(3) (court may relieve a party of a judgment for "fraud (whether previously called intrinsic or extrinsic), misrepresentation, or misconduct by an opposing party") or an action based on fraud on the court, see Fed. R. Civ. P. 60(d)(3) (Rule 60 "does not limit a court's power to . . . set aside a judgment for fraud on the court"). If construed as a motion under Rule 60(b)(3) (which would need to have been filed in Mooring I in any event), the motion was untimely under Fed. R. Civ. P. 60(c)(1) (one-year time limit for Rule 60(b)(3) motions). And the complaint's allegations regarding defendants' litigation  [*17] misconduct fail to rise to the level of a claim for fraud on the court. See Plotner, 224 F.3d at 1170 (fraud on the court "refers to misrepresentation direct[ly] affecting the judicial process, not simply the non-disclosure to one party of facts known by another"); Weese v. Schukman, 98 F.3d 542, 553 (10th Cir. 1996) (allegations of "material misrepresentations or omitted information needed to make . . . answers fully truthful . . . simply do not rise to the level necessary to constitute 'fraud on the court'"); Bulloch v. United States, 763 F.2d 1115, 1121 (10th Cir. 1985) (en banc) ("Fraud on the court . . . is fraud which is directed to the judicial machinery itself and is not fraud between the parties or fraudulent documents, false statements or perjury. . . . It is thus fraud where the court or a member is corrupted or influenced or influence is attempted or where the judge has not performed his judicial function--thus where the impartial functions of the court have been directly corrupted.").

We now examine the elements of issue preclusion with respect to Ms. Knight's two categories of alleged damages.

i. Increased Costs in Mooring I

As one item of damages, Ms. Knight asserts that  [*18] defendants' fraud unnecessarily increased the costs of litigating Mooring I. But the parties' conduct, and its relation to the fees and costs incurred, were issues in Mooring I.

After the trial, both sides moved for awards of attorney fees. Phoenix requested an award of $224,392.17 against Capital and Financial, and Capital and Financial requested an award of $306,644.34 against Ms. Knight. See Mooring I, 388 F. App'x at 818. The district court granted the motions in part, awarding Phoenix $49,000 and awarding Capital and Financial $88,000. Id. As part of its determination, "the district court declined to find that Capital and Financial acted in bad faith [and] assessed blame for the protracted litigation on all parties, not just Capital and Financial." Id. at 828; see also id. at 826 (district court "observed that both parties' fees were unreasonable [and] that both parties contributed to the excessive fees"). Phoenix appealed the amount of the fees awarded to it, and Ms. Knight appealed the award in favor of Capital and Financial against her. See id. at 818, 825-28.

On appeal Ms. Knight argued "that Capital and Financial do not deserve an award of fees because of their bad faith and  [*19] misconduct" and that the district court "did not properly weigh that Capital and Financial created the situation that led to increased fees." Id. at 827. This court held, however, that the district court "thoughtfully reviewed the case, taking into account" the proper factors in determining a fee award. Id. Further, this court held that the district court did not abuse its discretion in declining to find that Capital and Financial acted in bad faith and in assessing blame for increased costs on all the parties. See id. at 828.

All the elements of issue preclusion are met as to Ms. Knight's claim of RICO damages from the increased costs of litigating Mooring I. Ms. Knight, individually, was a party in Mooring I. As discussed above, the district court actually adjudicated the parties' responsibility for the fees and costs incurred in litigating the action. The district court considered Ms. Knight's allegations of misconduct, but it specifically declined to find that Capital and Financial acted in bad faith. If they did not act in bad faith, they could not have acted fraudulently; therefore, Ms. Knight's current claim of damage would require her to establish facts that are incompatible  [*20] with Mooring I. Further, the adjudication was necessary and essential to the court's determination of the parties' motions for fees and costs.

As to the final element of issue preclusion, Ms. Knight argues that because of defendants' fraudulent conduct, she did not have a full and fair opportunity to litigate her claims in Mooring I. We disagree. In large part, "full and fair opportunity" focuses on procedural due process and fundamental fairness. The Oklahoma Supreme Court has stated:

   Issue preclusion . . . is an equitable doctrine. Where the parties' alignment and the raised legal and factual issues warrant and fairness to the parties is not compromised by the process, its application is appropriate. It is indeed the proceeding's substance and the degree of due process inherent in it, rather than its form, which is the court's bellwether for the doctrine's application.

Cities Serv. Co. v. Gulf Oil Corp., 980 P.2d 116, 126 (Okla. 1999) (internal quotation marks omitted). And in a case arising from Oklahoma, this court wrote, "The requirement that the party against whom the prior judgment is asserted had a full and fair opportunity to be heard centers on the fundamental fairness of preventing  [*21] the party from relitigating an issue he has lost in a prior proceeding." Sil-Flo, Inc. v. SFHC, Inc., 917 F.2d 1507, 1521 (10th Cir. 1990).

The Oklahoma Supreme Court has identified several relevant factors in evaluating this element:

   (1) whether the [party] had ample incentive to litigate the issue fully in the earlier proceeding; (2) whether the judgment or order for which preclusive effect is sought is itself inconsistent with one or more earlier judgments in the [party's] favor; . . . (3) whether the second action affords the [party] procedural opportunities unavailable in the first that could readily produce a different result; . . . [(4)] whether the current litigation's legal demands are closely aligned in time and subject matter to those in the earlier proceedings; [(5)] whether the present litigation was clearly foreseeable . . . at the time of the earlier proceedings; and [(6)] whether in the first proceeding the [party] had sufficient opportunity to be heard on the issue.

Cities Serv. Co., 980 P.2d at 125 (footnotes omitted); see also Sil-Flo, 917 F.2d at 1521 ("Often, the inquiry will focus on whether there were significant procedural limitations in the prior proceeding, whether  [*22] the party had the incentive to litigate fully the issue, or whether effective litigation was limited by the nature or relationship of the parties."); Restatement (2d) of Judgments §§ 28, 29 (listing factors that may justify not applying preclusion).2

2   The Oklahoma Supreme Court has relied on the Restatement (Second) of Judgments as authority. See, e.g., Johnson v. State ex rel. Dep't of Pub. Safety, 2 P.3d 334, 337 (Okla. 2000); Kirkpatrick v. Chrysler Corp., 920 P.2d 122, 132 (Okla. 1996).

Nothing in this appeal indicates that applying issue preclusion would be fundamentally unfair to Ms. Knight. She had the opportunity to be heard in Mooring I, including the opportunity to appeal to this court, and she had ample incentive to litigate the issue fully, given that Capital and Financial sought an award exceeding $300,000. We recognize that preclusion may not be appropriate when "the party sought to be precluded, as a result of the conduct of his adversary or other special circumstances, did not have an adequate opportunity or incentive to obtain a full and fair adjudication in the initial action." Restatement (2d) of Judgments § 28(5)(c). But Ms. Knight does not identify any arguments  [*23] she would have made regarding fees and costs in Mooring I had it not been for defendants' alleged fraud, does not offer any specific explanation of how defendants' litigation misconduct affected her ability to litigate the issue of fees and costs in Mooring I, and does not allege that there is evidence of litigation misconduct that was unavailable while Mooring I was pending.

ii. Lost Claims in Mooring I

As another item of damages, Ms. Knight asserts that the defendants' conduct caused the district court to rule against her on her individual claims in Mooring I. This court has recognized that a cause of action is a form of property for purposes of RICO. See Deck, 349 F.3d at 1259. But we decline to recognize a conclusively meritless claim as property under RICO, and Ms. Knight's individual claims in Mooring I were declared to be meritless. See 388 F. App'x at 818, 823-25. As with her litigation-costs argument, unless and until the Mooring I judgment is vacated, issue preclusion establishes conclusively that her claims in Mooring I lacked merit.

Each element of issue preclusion is satisfied with regard to Ms. Knight's individual claims. She presented her individual claims to the court,  [*24] and judgment was rendered against her. Id. at 818, 827. The adjudication of her claims was necessary and essential to the outcome of Mooring I. And Ms. Knight alleges no facts indicating that she lacked a full and fair opportunity to litigate her individual claims in Mooring I. Rather than offering any specific explanation of how defendants' litigation misconduct prevented her from adequately presenting her individual claims, she makes only conclusory allegations that defendants' misconduct caused the court to rule against her unjustly.

As long as the Mooring I judgment stands, Ms. Knight cannot plead an essential element of her Phase 2 RICO claim--namely, injury to a colorable cause of action. Dismissal of the claim is required under the doctrine of issue preclusion.

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