George T. Qualley v. Clo-Tex International, Inc., and John T. Cross, Sr.

Citations: 212 F.3d 1123; 54 Fed. R. Serv. 874; 2000 U.S. App. LEXIS 11611; 2000 WL 675300Docket: 99-1572

Court: Court of Appeals for the Eighth Circuit; May 25, 2000; Federal Appellate Court

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George T. Qualley filed a lawsuit against Clo-Tex International, Inc. and John T. Cross, Sr., claiming they were part of a scheme involving up to fifty individuals to defraud his company, American African Trading Co., through a fictitious sale of Nigerian crude oil. Qualley alleged violations under the Racketeer Influenced and Corrupt Organizations Act (RICO) and Iowa common law for conspiracy to defraud. The jury ruled in Qualley's favor, finding Clo-Tex conspired to defraud him, and that Cross violated RICO. They awarded Qualley actual damages and one million dollars in punitive damages against Clo-Tex.

Clo-Tex and Cross appealed, contending that the district court made errors in evidentiary rulings, jury instructions, and the damages awarded. They also challenged the denial of their motion for judgment as a matter of law. The appellate court ultimately reversed the lower court's decision and remanded the case.

Qualley, an attorney specializing in tax and commercial law, had extensive experience and affiliations, including with a Nigerian law firm, Onyeukwu. The oil transaction began when Onyeukwu sought Qualley’s assistance for a political meeting, which led to discussions about developing trade relations, particularly in oil. Onyeukwu later indicated potential sales of crude oil from the Nigerian National Petroleum Corporation (NNPC), proposing terms that Qualley was initially unwilling to accept, specifically regarding upfront payments. Qualley emphasized his commitment to pay in full upon delivery and discussed incorporating a business in Nigeria for the venture, while continuing to negotiate the terms of the oil transaction.

Between January 31 and February 16, 1995, Onyeukwu informed Qualley via fax that the African Trading Company, Inc. had been established in Nigeria for him and requested letterhead stationery listing the corporation's officers. On February 16, Qualley signed a letter on this letterhead to NNPC, seeking a three-year contract to "spot lift" between two and ten million barrels of crude oil for Shell International. On March 8, Qualley traveled to Nigeria to meet NNPC officials and signed contracts for the purchase of 2,000,000 barrels of crude oil, with his friend Leo Eriksen accompanying him as an advisor. On March 15, Qualley signed a purchase contract for the oil, with Eriksen witnessing and a director from NNPC, John West, signing as well. During this period, Eriksen initiated three wire transfers to account number 17692470 at First National Bank of Maryland, following wiring instructions provided by West. These transfers were credited to Clo-Tex, a Maryland corporation, and directed to John Cross, Clo-Tex's president. The funds were ultimately linked to Socit James Mercantile, owned by Nigerian James Kalu (also known as James Kelly). On March 20, Qualley signed agreements for the oil's shipment to Houston, but the shipments never arrived, and West did not meet Qualley as planned. In August 1995, the American African Trading Company assigned its claims against Clo-Tex and others to Qualley, who filed a complaint naming 51 defendants, successfully serving only Cross and Clo-Tex. Following a four-day trial, the jury found Cross and Clo-Tex liable for $41,282 in actual damages and awarded Qualley $1 million in punitive damages, which was reduced to 25% due to the jury's finding that Clo-Tex's wrongful conduct was not primarily directed at Qualley. Qualley was later awarded treble damages against Cross under 18 U.S.C. § 1964. Cross and Clo-Tex subsequently filed a motion for judgment as a matter of law or a new trial, which was denied, leading to their appeal raising seven issues related to evidentiary rulings and the punitive damages awarded.

Evidentiary rulings by a trial court are assessed under an abuse of discretion standard, where error must affect a substantial right and be supported by a timely, specific objection. Federal Rule of Evidence 103(a) states that no error in evidence admission or exclusion warrants a new trial unless it is inconsistent with substantial justice. An abuse of discretion occurs only if the error significantly impacts the case's outcome, with the burden of proof on the party claiming prejudice. Cross and Clo-Tex argue that the trial court improperly took judicial notice of certain facts related to Nigerian fraud scams, asserting these facts do not pertain specifically to the parties involved. The court's reliance on various reports and videotapes, which were not specifically related to the litigants, constituted an error, as the judicial notice invoked was for legislative facts rather than adjudicative facts, falling outside the scope of Rule 201.

Cross and Clo-Tex challenge the admissibility of deposition testimonies from Rudolph Datcher and Nathaniel Spinner, arguing they contain hearsay and lack proper foundation. Both individuals incurred financial losses related to crude oil shipments claimed to be from Nigeria. Datcher and Spinner met with members of the Cassidy family and Prince Zankli regarding these shipments, where they were informed that the oil belonged to the Cassidys' company, American Business International (ABI). Spinner issued two $25,000 checks to ABI, while Datcher endorsed a cashier's check to ABI in exchange for a promissory note from Zankli. After transferring the check, Datcher was unable to contact the Cassidys or Zankli and subsequently spoke with a bank employee who confirmed the names of John Cross, Joyce Cassidy, and Prince Zankli were associated with a specific account. Appellants argue this testimony is inadmissible hearsay since the bank employee's statements were not made during trial or deposition and were offered to prove the truth of the matter asserted. The trial court erred by admitting this testimony, as it did not meet the requirements for admissibility. Qualley’s argument that the error was harmless, citing that Datcher provided other testimony regarding the account based on personal knowledge, is disputed; the record lacks evidence of Datcher's independent knowledge of the account details. Additionally, Spinner's deposition included statements attributed to Zankli and the Cassidys that were objected to as hearsay. The trial court did not make a clear ruling on these objections during the trial.

The trial court found that the plaintiff demonstrated a conspiracy existed and that hearsay statements in Spinner's deposition were made during and in furtherance of that conspiracy. Appellants argued this finding was erroneous, asserting that the only evidence linking them to the Cassidys and Prince Zankli was payments deposited into Clo-Tex's account. Qualley countered that sufficient evidence supported the trial court’s conspiracy finding. Under Rule 801(d)(2)(E), a co-conspirator's statement is not hearsay if made during the conspiracy. The court must establish both the existence of a conspiracy and that the statements were made while the declarant and the opposing party were part of it.

After reviewing the trial record, it was concluded that the trial court's finding of a conspiracy involving Zankli, the Cassidys, Cross, and Clo-Tex was clearly erroneous. The statements alone did not prove the conspiracy or the participation of Cross and Clo-Tex. The only document connecting them to Zankli and the Cassidys was a letter instructing a wire transfer related to a payment, which, combined with the statements, failed to establish a conspiracy by a preponderance of evidence. Consequently, the statements were deemed inadmissible under the co-conspirator rule. The document also noted that the jury's verdict must be based on admissible evidence and indicated potential prejudice from the erroneous admission of Spinner's testimony, as the jury awarded substantial punitive damages but found Clo-Tex's wrongdoing was not specifically directed at Qualley.

Evidence improperly submitted to the jury had a prejudicial effect on their deliberations. The trial court instructed the jury to accept judicially noticed legislative facts as conclusively proven, which improperly introduced facts beyond the jury's purview. Additionally, inadmissible hearsay from Datcher prompted jury inquiries regarding the involvement of Cross, Zankli, and Cassidy in transactions linked to fraudulent activities. Qualley, who bears the burden of proof for claims under RICO and common law, was affected by these evidentiary errors, which constituted an abuse of discretion and were not harmless. Consequently, the court reversed the trial court's rulings on evidentiary issues, found insufficient evidence to support a $1,000,000 punitive damages award, vacated the judgment, and remanded the case for a new trial on all issues.

Qualley amended his complaint three times, adding five additional defendants, with 40 of the total 56 defendants allegedly residing in Nigeria or being Nigerian citizens. The financial claims include $24,000 wired to Clo-Tex's account and $17,282 in expenses. Spinner's testimony included meetings with various individuals at Metropolitan Mortgage Corporation, but the trial court found no evidence that a bank employee discussed was part of the conspiracy with the Cassidys and others. Qualley argued that certain statements should be considered admissions under Federal Rule of Evidence 801(d)(2)(D) or other exceptions in Rule 803, but the court declined to address these claims. The court noted that the co-conspirator statement rule does not serve as an exception to hearsay but identifies certain statements as party admissions. Appellants contended that the trial court failed to explicitly evaluate the admissibility of challenged statements before jury submission, referencing the United States v. Bell case's procedural guidelines. The court acknowledged that those procedures should have been followed to allow for potential curative instructions. Spinner's assertions regarding involvement in the fraud lacked independent foundation, relying mainly on hearsay. Key exhibits, including a 1991 contract and a collection of letters, did not reference Cross or Clo-Tex, and Qualley claimed judicially noticed facts affected Cross's credibility and punitive damages. However, the court found those facts were not adjudicative, cautioning against potential stereotyping based on national origin. On remand, the court advised careful consideration of evidence admissibility and declined to determine issues related to jury instructions or the inclusion of wire transfers in damage awards until retrial.