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Click here for the full text of this decision FACTS: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 named 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. In exchange, he 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 percent 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 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. 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”; it is an obligation of the bank that the bank is committed to honor, making it similar to cash. 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 MacPro 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 check 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 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, 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 indicated 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, 2000, 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. 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 the now-former directors of Mauriceville National Bank 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; 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 MNB’s 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 Robert McDorman, Meshell McDorman, Deon Thornton and various McDorman-related business entities (defendants) and Penland were assigned to the former directors, and in July 2003, the directors brought claims under the civil provisions of Racketeer Influenced and Corrupt Organizations Act (RICO) and Texas law. The case was tried over 12 days. The jury found that: 1. Penland was not liable for anything; 2. the defendants violated civil RICO, causing $3,374,256 in damages, and that they conspired to violate RICO but for zero damages; 3. the directors were in pari delicto with the 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. HOLDING:Affirmed. An in pari delicto defense, the court stated, embodies “the common-law notion that a plaintiff’s recovery may be barred by his own wrongful conduct.” The court agreed that in pari delicto is an affirmative defense and concluded that the defendants did not waive it. Their answers specifically raised the directors’ conduct as an affirmative defense, the court stated. The directors, the court stated, 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. The defense was raised at a “pragmatically sufficient time,” and the directors cannot credibly claim they were surprised. The directors, the court stated, also argued in their briefs that in pari delicto is not a defense to a civil RICO claim. They explained that interpretations of RICO begin and end with the statute’s text, which does not mention the defense. 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. The court noted that the 11th U.S. Circuit Court of Appeals has 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 suit 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, [U.S. Supreme Court precedent] does not preclude the defense of in pari delicto in the RICO context. Following the 11th Circuit, the court held that in pari delicto is a cognizable defense to a civil RICO claim. Next, the court concluded that sufficient evidence supported a jury finding that the directors and MNB were in pari delicto. OPINION:Higginbotham, J.; Higginbotham, Smith and Owen, JJ.

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