Watchous Enters. v. Mournes

87 F.4th 1170

WATCHOUS ENTERPRISES, LLC, Plaintiff - Appellee, v. William J. MOURNES; Kendra Duval,as personal representative for the Estate of Gordon W. Duval;Charles A. Elfsten; Mark M. Hasegawa; Mark S. Zouvas, Defendants - Appellants,andPacific National Capital; Waterfall Mountain USA LLC;Waterfall Mountain LLC; Waterfall International Holdings Limited, Defendants.

No. 22-3071

United States Court of Appeals, Tenth Circuit

FILED November 30, 2023

Appeal from the United States District Court for the District of Kansas (D.C. No. 6:16-CV-01432-DDC)

Jeffrey R. King, Crossroads Legal Solutions, Westwood Hills, Kansas, for Defendants - Appellants.

Shane A. Rosson (James A. Walker with him on the brief), Triplett Woolf Garretson, LLC, Wichita, Kansas, for Plaintiff - Appellee.

Before HOLMES, Chief Judge, HARTZ, and CARSON, Circuit Judges.

HARTZ, Circuit Judge.

Five individual defendants (Appellants) appeal the judgments against them on a variety of claims brought by Watchous Enterprises, LLC. Appellants were associated with companies that Watchous hoped would fund or help find funding for its oil and gas operations.¹

In 2016 Watchous contracted with one of the companies, Pacific National Capital, paying it a $7,600 nonrefundable deposit to secure help finding a lender or a joint-venture partner. Pacific introduced Watchous to companies affiliated with Waterfall Mountain LLC. We will refer to all those affiliated companies, individually and collectively, as Waterfall. Watchous and Waterfall eventually executed a letter of intent to enter into a joint venture to which Waterfall would contribute more than $80 million. As part of the arrangement, Watchous paid Waterfall a $175,000 refundable deposit. Waterfall said that it would fund the venture through proceeds of loans backed by billions of dollars in Venezuelan sovereign bonds in the name of Waterfall or its lender (RPB Company). But Waterfall never funded Watchous, and Watchous was never refunded the $175,000.

Watchous filed suit in the United States District Court for the District of Kansas, bringing claims under the federal Racketeer Influenced and Corrupt Organizations Act (RICO) and common-law claims under Kansas law against Pacific and Waterfall as well as against the five Appellants sued individually. We consider only the claims against Appellants.

The district court granted partial summary judgment in favor of Watchous on its fraud claims (leaving damages for the jury to decide), essentially on the ground that Appellants misrepresented and failed to disclose "the historic and contemporary facts about Waterfall's dubious finances, loan defaults, and consistent lack of success in funding similar projects."² Watchous Enters., LLC v. Pac. Nat'l Cap. (Watchous I), No. 16-1432-JTM, 2020 WL 1233753 at *36 (D. Kan. Mar. 13, 2020). Watchous's remaining claims proceeded to trial, where a jury found that Appellants had engaged in a civil conspiracy to defraud Watchous and had violated RICO, 18 U.S.C. § 1962(c) and (d). The jury awarded compensatory and punitive damages.

On appeal Appellants raise three challenges to the judgment below. First, they argue that the district court improperly granted summary judgment on the fraud claims. Among other arguments, they contend that summary judgment was improper because the evidence against them did not meet the exacting standard for granting summary judgment to a plaintiff in a fraud case, where the intent of the defendants is an element of the claim. Second, they argue that the court abused its discretion by improperly using Fed. R. Civ. P. 56(g) to deem facts established for purposes of trial. Third, they argue that the court improperly granted Watchous's motions in limine to exclude evidence contrary to those established facts, evidence that Watchous had unsuccessfully tried to obtain loans from more than 120 banks, and evidence of the poor financial condition of several Appellants. Because we reject the second and third arguments, we must affirm the jury verdict. We therefore need not address the propriety of summary judgment, because reversal of the summary judgment would not affect the damages awards to Watchous. Exercising jurisdiction under 28 U.S.C. § 1291,³ we affirm.

I. BACKGROUND

A. Factual Background

The following facts are uncontroverted. Watchous engages in oil and gas exploration and production. Klee Watchous is its managing member.⁴ On May 30, 2016, Watchous contacted Pacific, a company that looks for financing for oil and gas ventures, to seek a loan or a joint-venture partner to finance its operations. Appellants Charles Elfsten and Mark Hasegawa, both Pacific officers, emailed and spoke with Watchous, stating that they would be interested in representing it and had in mind a fund, which they called "our fund," that could finance a joint venture. Aplee. App. 140, 145. The fund referred to was Waterfall.

On June 4, 2016, Watchous entered into two agreements with Pacific, one hiring Pacific to find it a lender and the other hiring it to find a joint-venture partner. In accordance with the terms of the joint-venture placement agreement, two days later Watchous wired Pacific a "non-refundable processing/underwriting fee" of $7,600. Aplee. App. at 116. Under that agreement Pacific would receive a success fee—3% of the gross proceeds provided by the joint-venture partner—should Watchous enter into a joint venture with Waterfall.

Waterfall was a group of companies that provided "funding and partner syndication" for energy, natural-resource, technology, and real-estate projects. Aplts. App., Vol. II at 216. Its officers and agents included Appellant William Mournes, Waterfall's managing director; Appellant Gordon Duval, Waterfall's in-house counsel and assistant managing director; and Appellant Mark Zouvas, a Waterfall consultant and potential business partner. Waterfall said it intended to fund Watchous's project using $2.4 billion in Venezuelan sovereign bonds purchased beginning in 2014. The bonds were said to be "blocked in favor of" Waterfall or its lender, RPB Company, for one year and one month, Aplee. App. at 241, 258; and Waterfall was said to have a beneficial interest in the bonds. But, as Watchous later learned after the transaction fell through, the bonds could only be used as collateral for a loan and the Venezuelan Central Bank had to approve any transaction.

Although Pacific negotiated on Watchous's behalf with companies other than Waterfall, Waterfall appeared to be the favorite. Elfsten stated in an email sent after this litigation commenced that he had "[v]erbally told [Watchous] [he had] known Bill Mournes for 30 years and ha[d] been involved in prior transactions" with him. Id. at 364. Asked for advice regarding a potential deal with Beal Bank, Elfsten told Watchous that the bank might be Watchous's cheapest joint-venture option, though "our [joint venture fund, Waterfall] would be great." Id. at 143. Hasegawa continued to refer to Waterfall as "our fund." Id. at 121, 136, 137, 140, 145, 147, 150.

The Pacific officers represented that Waterfall was a successful enterprise. In early June 2016 Hasegawa, with Elfsten copied on the message, informed Watchous that Waterfall "bring[s] in about $10 billion a year." Id. at 113. Later that month he added that Waterfall "generally want[ed] [projects] $10 million and up." Id. at 135. On July 18 he sent Watchous a message, with Elfsten copied, claiming that "our fund [Waterfall] is closing on two more bonds this month worth $2.4 billion." Id. at 147. On July 19 Hasegawa reported to Watchous that he and Elfsten had spoken with "our fund manager Bill [Mournes]" and reported that Waterfall would "probably" be able to fund "a big part of" Watchous's proposed joint venture—which contemplated an $80 million buy-in for half of Watchous—"from funds he has coming the end of this month." Id. at 145.

On July 25 and 26, 2016, Hasegawa emailed Watchous the terms of Waterfall's offer. Elfsten, Zouvas, Duval, and Mournes were copied on the correspondence. Waterfall, Hasegawa said, was "in agreement to do a 50/50 total joint venture" with Waterfall providing $80 million by November 17. Id. at 151. For its part, Watchous was to make a refundable deposit of $175,000 to Waterfall.

With a deal on the table, several Appellants gave Watchous further information regarding Waterfall's financial health. On July 26 Hasegawa assured Watchous that Waterfall was "in good standing" in the United States and internationally, and that it had checking accounts at four major U.S. financial institutions. Id. at 235-36. On July 27 Mournes discussed the deal over lunch with Watchous representatives. On July 28 Elfsten forwarded Watchous a statement from a Venezuelan bank that portrayed Waterfall as having $599,970 in an account there. On July 29 Klee Watchous asked Elfsten to vouch for Waterfall before he sent the $175,000 deposit. Elfsten vouched for Waterfall and its ability to repay the deposit.

Zouvas also provided information after the July 27 meeting between Mournes and Watchous. Copying Duval and Mournes, he sent Klee Watchous an unsigned promissory note for the $175,000; documents from a supposed prior deal that were "representative of the type of deal we would structure"; and "copies of our bonds [held in Venezuelan banks]." Id. at 152, 238. In addition, Duval responded to Klee Watchous's request that Waterfall "send references of those with whom you have done similar joint ventures," id. at 458, by providing a list of six references. (Waterfall conceded at summary judgment that four of the references were owed money by Waterfall, and a fifth was a Waterfall agent who also served on its executive committee.)

Shortly after Duval sent the list of references, Mournes circulated the final Letter of Intent to enter into a joint venture, signed by him and Klee Watchous. It provided that Waterfall would "contribute cash" to the joint venture amounting to $81.2 million, beginning on or before ...