Clark v. Natl Equi Hold Inc, et al

In the
United States Court of Appeals
for the Fifth Circuit
_______________
m 06-40364
_______________
JOHN S. CLARK,
INDIVIDUALLY AND AS TRUSTEE OF THE JOHN S. AND LORETTA J. CLARK TRUST,
Plaintiff-Appellant,
VERSUS
DONALD DOUGLAS,
ALSO KNOWN AS DONNIE DOUGLAS;
CHERYL WALKER DOUGLAS;
CADDO CREEK PRODUCTION, INC.,
A TEXAS CORPORATION;
LYLE J. BRANDON; LANA ROBERTS BRANDON,
Defendants-Appellees.
_________________________
Appeals from the United States District Court
for the Eastern District of Texas
m 4:05-CV-290
______________________________
United States Court of Appeals
Fifth Circuit
F I L E D
January 4, 2008
Charles R. Fulbruge III
Clerk

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Before GARWOOD, SMITH, and DEMOSS,
Circuit Judges.
JERRY E. SMITH, Circuit Judge:*
John Clark appeals the dismissal of this civil
RICO action pursuant to Federal Rule of Civil
Procedure 12(b)(6) and the denial of relief
under Federal Rule of Civil Procedure 60(b).
We affirm.
I.
Clark makes the following allegations as
part of the RICO case statement filed in sup-
port of his complaint: On September 5, 1998,
defendant Donald Douglas contacted Clark
about investing in oil well production managed
by Caddo Creek Production, Inc. (“Caddo
Creek”), an oil and gas business of which
Douglas was an officer, director, and share-
holder. Based on Douglas’s representation
that he had significant experience in the oil and
gas industry, Clark, individually and as trustee
for the John S. and Loretta J. Clark Trust (“the
trust”), agreed with Douglas that Lockout
Corporation/21st Century Marketing, Inc.
(“Lockout”), would provide Clark with a 50%
interest in the production of five wells (a “five
well package” to be transferred to the trust by
Lockout representative Elvis Clint McBay);
Lockout would operate the wells and market
the production therefrom at no cost to the
trust; and the trust would pay $85,000 to
Lockout, McBay, and Douglas.
Clark alleges that he paid the initial $85,000
fee, then another $30,000 to Caddo Creek,
before he agreed with Douglas and McBay to
the terms of a second lease package. Clark
contends that the second lease package con-
tained the following terms pursuant to an oral
agreement: (1) The trust would acquire the
surface rights for, and the working interest in,
the Temple-Inland Lease; (2) Douglas and
Caddo Creek would operate the more than fif-
teen wells on the Temple-Inland Lease at their
sole expense; (3) the trust would obtain the
working interests in the T.O. Meaux Lease,
the Compass-Moore Lease, the McClinton
(South 25 Acres) Lease, the McKinney Lease,
the Kalos Lease, the Crawford 5 Lease, the
Garrison Lease, and the 9.99% override on the
McClinton (South 25 Acres) Lease from T.
Johnson, Ltd.; (4) Douglas and Caddo Creek
would operate the wells on these leases at their
sole expense; and (5) after the trust received
the return of all its investment, revenues would
be shared equally between the trust and
Douglas/Caddo Creek.
Clark further avers that, pursuant to the
second agreement, he paid $835,000 to T.
Johnson, Ltd., and received a warranty deed
purporting to grant title to the properties de-
scribed above. A few months later, Douglas
and McBay informed Clark that all the leases
except the Temple-Inland lease were “doggy
leases” subject to plugging liabilities; they ad-
vised Clark to dispose of the leases so as to
avoid these liabilities. Clark then asserts that
he tried to transfer the leases to a third party
but that someone altered the McClinton Lease
and the override assignments to reflect that T.
Johnson, Ltd., was the grantee. T. Johnson,
Ltd., subsequently assigned its interest to
McBay.
In May 2001, Douglas, his wife Cheryl,
Caddo Creek, Lyle Brandon, and Lana Bran-
don altered a copy of the June 16, 1999, as-
signment, naming Caddo Creek, rather than
the trust, as owner of the Temple-Inland
* Pursuant to 5TH CIR. R. 47.5, the court has de-
termined that this opinion should not be published
and is not precedent except under the limited
circumstances set forth in 5TH CIR. R. 47.5.4.

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Lease. They then sold an interest in that lease
to a third party for $100,000.
Around June 2001, Douglas and McBay
entered into an agreement with William M.
Knollenberg, an oilman to whom Douglas had
introduced Clark. Under the agreement, Knol-
lenberg issued five million shares of common
stock in National Equities Holdings, Inc.
(“NEHI”), a company of which Knollenberg
was president, to Douglas and McBay, in ex-
change for which Douglas, Caddo Creek, Mc-
Bay and Lockout transferred interests in the
Temple-Inland Lease to third parties at the di-
rection of Knollenberg. In October 2002,
Knollenberg, on behalf of NEHI, offered to
purchase from Clark the trust’s interest in the
Temple-Inland Lease; Clark rejected the offer.
Thereafter, however, McBay and Knollen-
berg arranged for NEHI and two other compa-
nies allegedly controlled by Knollenberg to
form limited partnerships to drill wells on the
Temple-Inland Lease. Third parties invested
in the partnerships.
II.
NEHI and two other companies controlled
by Knollenberg sued Clark individually and as
trustee of the trust in Texas court for breach of
contract, quantum meruit, and promissory es-
toppel; eventually McBay and Lockout were
joined as defendants. Clark filed the instant
action, seeking damages for RICO violations,2
common law fraud, and conversion; Clark also
seeks an accounting.
The district court dismissed this action pur-
suant to rule 12(b)(6), acting on motions to
dismiss filed by McBay, Lockout, NEHI, Vir-
gin America Energy Corporation, MPCC Inc.,
and the Knollenbergs. Donald Douglas, Cher-
yl Douglas, Caddo Creek, and Lyle and Lana
Brandon appeared pro se and did not file mo-
tions to dismiss, but the court dismissed the
complaint against them on its own motion for
failure to state a claim.3 Having dismissed
Clark’s federal claim with prejudice, the court
declined to exercise jurisdiction over his sup-
plemental claims and dismissed them without
prejudice pursuant to 28 U.S.C. § 1367(c).
Clark appealed, then dismissed the appeal
against all counseled defendants (NEHI, Wil-
liam and Doris Knollenberg, Virgin America
Energy, Inc., MPCC Inc., Lockout Corpora-
tion, and McBay) in an agreement stipulating
that each side shall pay its own attorneys’ fees,
but Clark maintains the appeal against all pro
se defendants (Donald Douglas, Cheryl Doug-
las, Caddo Creek, Lyle Brandon and Lana
Brandon), who have not filed a brief in this
appeal.
A few days after this case was submitted
without oral argument to the instant panel,
Clark filed in the district court a “Motion to
Vacate and To Remand or To Remand Issue
of Newly Discovered Evidence.” To confer
jurisdiction on the district court to grant the
motion, if it wished to in its discretion under
rule 60(b), the panel issued an opinion that de-
nied the motion to vacate and remand but
granted in part the motion to remand, thus re-
manding for the limited purpose of giving the
district court the latitude of granting the rule
60(b) motion if it wished. The panel retained
jurisdiction. Clark v. Douglas, 229 Fed.
2 See 18 U.S.C. § 1962(a),(b), (c).
3 See Bazrowx v. Scott, 136 F.3d 1053, 1054
(5th Cir. 1998) (“The district court may dismiss an
action on its own motion under Rule 12(b)(6) ‘As
long as the procedure employed is fair.’”) (citation
omitted).

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App’x 314 (5th Cir. 2007) (per curiam).
In an order entered on August 30, 2007,
styled “Memorandum Opinion and Order De-
nying Plaintiff’s Motion for Relief from Judg-
ment,” the district court denied the rule 60(b)
motion. On September 5, 2007, Clark ap-
pealed that order. We consider both appeals
as a consolidated matter.
III.
Apparently feeling that his repeated failure
to comply with discovery orders and briefing
limitations in the district court was insufficient
to convey the full measure of his disrespect for
that court, Clark accuses the district court of
improperly denying his motion for leave to
amend his complaint merely for the purpose of
removing a difficult case from its docket. We
disagree.
Although dismissals on the pleadings with-
out leave to amend are disfavored, see Price v.
Pinnacle Brands, Inc., 138 F.3d 602, 608 (5th
Cir. 1998), the disposition here was correct.
We review denial of leave to amend a com-
plaint for abuse of discretion. Id. Although
Federal Rule of Civil Procedure 15(a) estab-
lishes a bias in favor of granting motions to
amend a complaint, leave is not automatic. “In
deciding whether to allow amendment, a dis-
trict court ‘may consider such factors as undue
delay, bad faith or dilatory motive on the part
of the movant, repeated failure to cure defi-
ciencies by amendments previously allowed,
undue prejudice to the opposing party, and fu-
tility of amendment.’” Id. (quoting Southmark
Corp. v. Schulte Roth & Zabel (In re South-
mark Corp.), 88 F.3d 311, 314 (5th Cir.
1996)).
Clark was unduly dilatory. The court’s
scheduling order provided that pleadings could
be freely amended without motion until De-
cember 30, 2005. Clark indicates that he
informed the court on November 21, 2005,
that he intended to amend his complaint, but
the record shows that he failed to file an
amendment. Clark implies that this failure
resulted from a sudden alteration by the court
of its scheduling order on December 20, 2005,
whereby the court refused to accept further
filings until it ruled on defendants’ motions to
dismiss. Clark avers that he moved to lift that
restriction on case filings and to amend his
complaint but that the motion was inexplicably
ignored.
Clark fails to mention in his brief that he did
not file his motion for leave to amend his com-
plaint until January 21, 2006, a month after the
time period for free amendments had expired,
three weeks after the free-amendment period
had been initially scheduled to end, and nearly
six months after McBay and Lockout had filed
their motion under rule 12(b)(6). Ultimately,
Clark availed himself of three chances to set
forth the factual allegations of his complaint:
the complaint, the RICO case statement (filed
pursuant to counsel’s FED. R. CIV. P. 11 obli-
gation to make a reasonable investigation of
the facts underlying his complaint), and his
reply to the defendants’ response to the RICO
case statement.4 Under these circumstances, it
was not an abuse of discretion to deny Clark
an additional opportunity to amend pursuant
to a motion filed three weeks after the time for
amendment specified by the scheduling order
4 See Herrmann Holdings Ltd. v. Lucent Techs.
Inc., 302 F.3d 552, 566-67 (5th Cir. 2002) (affirm-
ing refusal to amend permit further amendment
after plaintiff had amended twice). See also Price,
138 F.3d at 608 (affirming refusal to amend after
plaintiff had filed complaint, RICO case statement,
and reply to motion to dismiss).

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had ended.5
IV.
We likewise affirm the rule 12(b)(6) dis-
missal, which we review de novo. See Thomp-
son v. Goetzmann, 337 F.3d 489, 494 (5th Cir.
2003). Dismissal is appropriate only where it
appears beyond doubt that plaintiff would not
be entitled to recover under any set of facts he
could prove in support of his claim. See
Conley v. Gibson, 355 U.S. 41, 45-46 (1957).
Clark has alleged RICO violations under 18
U.S.C. § 1962(a), (b), (c), and (d), which
“[r]educed to their simplest terms . . . state the
following:
(a) a person who has received income from
a pattern of racketeering activity cannot in-
vest that income in an enterprise;
(b) a person cannot acquire or maintain an
interest in an enterprise through a pattern
of racketeering activity; [and]
(c) a person who is employed by or associ-
ated with an enterprise cannot conduct the
affairs of the enterprise through a pattern of
racketeering activity.6
Crowe v. Henry, 43 F.3d 198, 203 (5th Cir.
1995). These sections contain common ele-
ments, one of which is that “[a] plaintiff as-
serting a RICO claim must allege the existence
of an enterprise.” Id. at 204. Such an en-
terprise may be either a formal legal entity or
an association-in-fact. See St. Paul Mercury
Ins. Co. v. Williamson, 224 F.3d 425, 439 (5th
Cir. 2000).
Clark alleges that the defendants collective-
ly engaged in an association-in-fact. To prove
that an association-in-fact-type RICO enter-
prise existed, Clark must eventually bring forth
“evidence of an ongoing organization, formal
or informal, and . . . evidence that the various
associates function as a continuing unit . . . .
This formulation of an association-in-fact en-
terprise incorporates the notion of continuity.”
Crowe, 43 F.3d at 205. Accordingly, an “‘as-
sociation-in-fact enterprise 1) must have an ex-
istence separate and apart from the pattern of
racketeering, 2) must be an ongoing organiza-
tion and 3) its members must function as a
continuing unit as shown by a hierarchical or
consensual decision making structure.’” Id.
(quoting Delta Truck & Tractor Inc. v. J.I.
Case Co., 855 F.2d 241, 243 (5th Cir. 1988)).
The district court ruled that Clark had failed
to plead, outside of conclusional statements of
law masquerading as factual conclusions, that
the alleged enterprise had any existence sepa-
rate from the pattern of racketeering or that its
members functioned as a continuing unit with
a coherent decision-making structure. Be-
cause it is sufficient to sustain the judgment,
we look only to whether Clark has pleaded
that an enterprise existed separately from the
alleged pattern of racketeering.
He did not. Clark’s RICO case statement
declares the following:
The “enterprise” itself was to and did en-
gage in no legitimate business. The “enter-
5 Although the district court did not specifically
mention that it was denying leave to amend, it is
evident that the court so intended and was doing so
largely for the reason that Clark had missed the
deadline and had had other opportunities to correct
any deficiency.
6 Section 1962(d) prohibits only conspiracy to
violate the first three sections.

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prise” came into being only for the purpose
of engaging in fraudulent activity, i.e.
“Scamming” those who might wish or be
convinced to engage in the oil and gas bus-
iness and other speculative investments.
Although [allof the defendants] presumably
all engage in legitimate activitiesSSsome re-
lated to the oil businessSSapart from the
“enterprise,” when the “enterprise” itself
did and do goes [sic] about its intended ac-
tivities, it engaged only in nefarious activ-
ities, albeit allwere not “racketeering activi-
ties,” as defined by 18 U.S.C. § 1961(1)
and albeit all were not directed toward
Clark and/or the Clark Trust.
That statement, in conjunction with the fac-
tual allegations recounted above, illustrates
that, aside from his conclusionalallegation that
the association-in-fact enterprise exists sep-
arately from the pattern of racketeering, Clark
has failed to plead specific facts showing that
the association exists for purposes other than
merely to commit the predicate acts. The “en-
terprise” mentioned by § 1962 may not be the
pattern of racketeering activityitself; rather, “it
is an entity separate and apart from the pattern
of activity in which it engages.” United States
v. Turkette, 452 U.S. 576, 583 (1981).
Based on the pleadings, the association-in-
fact between the defendants existed uniquely
to defraud Clark and the trust of their invest-
ment; it did not exist separately and apart from
the pattern of racketeering activity alleged and
therefore did not exist in violation of § 1962.
Clark’s insistence in his brief that various
members of the alleged enterprise participate
in the oil and gas business and engage in on-
going activities such as oil well operation is
misplaced; the members of any alleged enter-
prise will have an existence separate from the
pattern of racketeering activity (easily demon-
strated by their engaging in such activities as
brushing their teeth), but § 1962 applies solely
where the enterprise as a whole exists sepa-
rately and apart from the alleged pattern of
racketeering activity. See Elliot v. Foufas,
867 F.2d 877, 881 (5th Cir. 1989).
The facts pleaded indicate that it did not.
The complaint was properly dismissed, and the
district court acted within its discretion by dis-
missing Clark’s state law claims without preju-
dice to their being refiled in state court. See
§ 1367(c).
V.
There is no reversible error in the denial of
the rule 60(b) motion. We affirm that denial,
essentially for the reasons given by the district
court.
The judgment and the order denying rule
60( b) relief are AFFIRMED.

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