This column reports on several significant, representative decisions handed down recently in the U.S. District Court for the Eastern District of New York. Judge Jack B. Weinstein dismissed three of the racketeering acts in an alleged RICO conspiracy. Judge Arthur D. Spatt dismissed various claims by a GMC dealership against General Motors arising from the failure to help plaintiff acquire a Buick and/or Pontiac dealership. Judge Frederic Block reduced a jury’s punitive damages award after a verdict finding retaliation for a sex discrimination claim. And Judge Eric N. Vitaliano dealt with claims for a prejudgment attachment and a preliminary injunction in a civil RICO case.
In United States v. Carneglia, 08 CR 76 (EDNY, Jan. 27, 2009), Judge Weinstein granted defendant’s motion to dismiss three out of 18 racketeering acts in an alleged RICO conspiracy where the challenged acts did not name defendant and their inclusion was unduly burdensome to the defense and needlessly cumulative.
The defense planned to argue at trial that the statute of limitations barred criminal liability because defendant withdrew from the conspiracy more than five years before the date of the indictment. In response to this anticipated defense, the government contended that the three racketeering acts in question –10, 16 and 17 – were needed to prove that the RICO conspiracy continued, with defendant as a member, to a date within the five-year limitations period.
In moving to dismiss the three acts, defendant asserted that they were overly prejudicial and too hard to defend against insofar as they implicated only other people. Of the remaining 15 racketeering acts, moreover, four charged incidents that occurred within five years of the indictment.
This case, Judge Weinstein observed, is one of ‘sprawling scope and diversity.’ The charges span more than 30 years; the superseding indictment, returned shortly before trial, and the government’s delays in producing discovery material have made defense preparation even more difficult. The inclusion of racketeering acts 10, 16 and 17 would increase the defense burden while doing little to strengthen the government’s case. As the court stated:
The government has itself indicated that it did not intend to ask the jury to return a verdict based on these three racketeering acts. . . . At least four timely racketeering acts alleged in count one involve the defendant and may support an argument against application of the five-year statute of limitations. Slip op. 6.
In short, keeping acts 10, 16 and 17 among the formally charged offenses was ‘unfair and unnecessary.’
Vehicle Dealer Act
In Bright Bay GMC Truck Inc. v. General Motors Corporation, 08 CV 2857 (EDNY, Jan. 20, 2009), Judge Spatt granted General Motors’ motion to dismiss a complaint by a GMC Dealership alleging violations of the New York Franchised Motor Vehicle Dealer Act (FMVDA) and the GM Sales Agreement.
According to the complaint, in 1990 plaintiff purchased a GMC dealership in Long Island to sell GM trucks, vans and SUVs. At the time, GM told plaintiff it could eventually add a Buick franchise at the same location.
In 1995 GM announced its ‘Channel Strategy,’ aimed at encouraging dealers to have Buick, Pontiac and GMC lines in one facility. GM allegedly promised plaintiff that it would be ‘awarded’ the next GM franchise to become available in Long Island. In 2007, after a franchise became available, GM contacted plaintiff to negotiate an agreement allowing plaintiff to acquire existing Buick and Pontiac dealerships in West Babylon. But later GM, cutting plaintiff out, permitted the owner of those dealerships to relocate them to his nearby Chevrolet dealership.
In 2007 GM also confirmed its intention to eliminate any remaining ‘stand alone’ dealerships. Plaintiff then tried repeatedly, without success, to buy a Pontiac and/or Buick franchise.
The complaint alleged that GM’s Channel Strategy rendered plaintiff’s ‘stand alone’ GMC dealership unprofitable, breaching the parties’ sales agreement, dealer agreement and implied covenant of good faith and fair dealing. Plaintiff similarly challenged GM’s consent to the relocation of the other dealerships. Finally, plaintiff claimed that GM’s conduct constructively terminated plaintiff’s dealership, in violation of Franchised Motor Vehicle Dealer Act.
Judge Spatt rejected plaintiff’s argument, based on §463(2)(d)(1) of the act, that GM effectively terminated plaintiff’s ‘stand alone’ GMC franchise. As the court said:
The Plaintiff currently sells GMC vehicles at its dealership and, by all accounts, may continue to do so until the parties’ Sales Agreement expires in October of 2010. In announcing the Channel Strategy, GM merely encouraged dealers to align the Buick, Pontiac, and GMC lines in one dealership facility. The fact that GM has not given the Plaintiff a Pontiac or Buick franchise or assisted it in purchasing one, does not mean that GM has terminated the Plaintiff’s GMC franchise. Slip op. 7.
Nor was there any improper ‘coercion’ by GM under §463(2)(b). The complaint alleged no demands at all by GM, much less any wrongful demands or intimidation, and plaintiff admitted that the Channel Strategy was voluntary.
Judge Spatt saw no merit in plaintiff’s claims that the sales agreement had been breached. Contrary to plaintiff’s position, that Agreement does not require GM to help plaintiff acquire a Pontiac or Buick dealership. Rather, it merely offers plaintiff a supply of GMC trucks sufficient to meet market demand. Furthermore, GM’s tacit approval of the other owner’s relocation has not ‘improperly’ prevented a reasonable profit for plaintiff’s GMC franchise. Slip op. 9-12.
Judge Spatt also dismissed counts claiming breach of the dealer agreement and the implied covenant of good faith and fair dealing.
In Norris v. New York City College of Technology, 07 CV 853 (EDNY, Jan. 14, 2009), after a jury verdict in plaintiff’s favor finding retaliation for a sex discrimination complaint, Judge Block denied defendants’ post-trial motion for judgment as a matter of law or for a new trial, but remitted plaintiff’s punitive damages award from $425,000 to $25,000, giving her the choice between accepting the remittitur or electing to have a new trial on punitive damages.
Plaintiff was the vice president for finance and administration at the New York City College of Technology until she was terminated in December 2004. Defendant Russell Hotzler sought her termination from the time he became president of City Tech in August 2004. He actually terminated her, however, at about the time she filed her claim for sex discrimination. She alleged here that she was fired in retaliation for that claim.
At trial, plaintiff testified that the letter terminating her was postmarked Dec. 20, the same day Hotzler learned about her claim, and that she did not receive it until January. In contrast, Hotzler and the human resources director testified that Hotzler wrote the termination letter on Dec. 17.
Although the jury rejected plaintiff’s sex discrimination claim, it concluded that Hotzler did not terminate plaintiff until after he learned of her discrimination complaint. In Judge Block’s view the verdict finding retaliation was amply supported.
In denying defendants’ motion for a new trial, the court rejected defendants’ arguments that the verdict was against the weight of the evidence or that defendants had been precluded from cross-examining plaintiff regarding her retaliation claim.
Judge Block explained that neither City Tech nor Hotzler could be held liable for punitive damages under Title VII, since punitive damages are not available against a governmental agency. Punitive damages are also not available under the New York State Human Rights Law. Although the New York City Human Rights Law authorizes punitive damages, they are not available against a public corporation such as City Tech, but only against individuals who aided and abetted an employer’s acts of retaliation. Thus, Hotzler alone was liable for punitive damages under the city’s human rights law.
Judge Block then concluded that Hotzler met the standard for punitive damages based on the jury’s conclusion ‘that Hotzler did not terminate Norris until immediately after he learned of her complaint of sex discrimination,’ and, accordingly, had engaged in intentional discrimination. Hotzler also admittedly had known that discrimination and retaliation in employment were against the law.
Although the evidence showed that Hotzler ‘acted intentionally and with knowledge that his conduct would violate [plaintiff’s] rights, no other indicia of reprehensibility are present.’ Slip op. 15. There was no violence or threat of violence. Thus, ‘while such conduct warrants some amount of punishment and deterrence, it is not sufficiently reprehensible to support the jury’s award of $425,000.’ Slip op. 15-16.
Judge Block concluded that the amount of $25,000 would vindicate the goals of punishment and deterrence without being excessive. The court offered plaintiff the option of accepting the reduced amount or a new trial. Slip op. 17-22.
In DLJ Mortgage Capital Inc. v. Kontogiannis, 08 CV 4607 (EDNY, Jan. 20, 2009), Judge Vitaliano denied plaintiff’s motion for a prejudgment attachment against property owned by RICO defendants and granted a preliminary injunction prohibiting defendant Plaza Real Estate from transferring or encumbering certain real property during the pendency of the litigation. The court denied a preliminary injunction as to all other defendants.
Plaintiff DLJ Mortgage Capital Inc. alleged that 22 individual and corporate defendants engaged in a wide-ranging and complex mortgage fraud scheme, involving at least 95 fake real estate sales and mortgage loan transactions, and laundered the proceeds in violation of RICO. The fake loans were then sold to plaintiff, which claimed damages of over $50 million.
Plaintiff claimed that an additional four defendants fraudulently received real property from some of the RICO defendants in an effort to hide or shield assets from creditors. According to plaintiff, defendants participated in all aspects of the fraud, from preparing and approving false loan applications; executing phony closing documents; neglecting to record deeds and mortgages; failing to issue checks to pay mortgage and transfer taxes, recording fees, title insurance and lender fees; preparing false loan documentation; and selling the mortgages in the secondary-mortgage market to institutions such as plaintiff. Plaintiff also alleged that defendants resold some of the underlying properties to third parties, making monthly payments on the fake loans to create the illusion that they were legitimate.
Judge Vitaliano denied the motion for an attachment based on the lack of evidence that defendants (a) had or were about to assign, dispose of, encumber or secret property or remove it from the state, and (b) acted with the intent to defraud creditors or frustrate the enforcement of a judgment that might be rendered in plaintiff’s favor. Reviewing the transactions of each defendant to determine whether ‘badges of fraud’ were present to provide proof of fraudulent intent, Judge Vitaliano considered whether there was:
- a gross inadequacy of consideration;
- a close relationship between transferor and transferee;
- the transferor’s insolvency as a result of the conveyance;
- a questionable transfer not in the ordinary course of business;
- secrecy in the transfer; and
- retention of control of the property by the transferor after the conveyance. Slip op. 12.
Plaintiff alleged that defendant Kontogiannis was likely to transfer his assets given his role as mastermind of the mortgage scheme, his criminal history and other activities. The court found plaintiff’s conclusory allegations insufficient to establish that Kontogiannis disposed of any assets with the intent to defraud his creditors or frustrate the enforcement of a judgment that might be rendered in plaintiff’s favor. Similarly, defendant John Michael’s transfer of property to his wife two weeks before his indictment and two years before plaintiff initiated this action, with no evidence that Michael was rendered insolvent by the transfer, did not satisfy the fraudulent intent requirement.
Concerning transfers by defendants Elias Apergis, Loring Estates and Group Kappa, the court found that sufficient badges of fraud were present:
- each of the properties transferred for nominal consideration were already encumbered by mortgages sold to plaintiff;
- the transfers were not in the ordinary course of business; and
- the timing was suspiciously close to plaintiff’s commencement of this action.
Nevertheless, plaintiff did not show a probability of success on the merits or that it had stated a RICO claim against these defendants. The RICO claims were conclusory and relied on group pleading. Slip op. 23-25.
Next, Judge Vitaliano noted that the court lacked authority to issue a preliminary injunction preventing a defendant from disposing of assets pending adjudication of a claim for money damages.
Addressing plaintiff’s equitable claims, the court found that plaintiff failed to plead the existence of a confidential or fiduciary relationship between it and any of the defendants necessary for a constructive trust claim. Plaintiff did show a likelihood of success on the merits on its fraudulent conveyance claim against one defendant, Plaza Real Estate, as transferee of six properties corresponding to six transactions that allegedly defrauded plaintiff.
Plaintiff showed proof of actual fraudulent intent on the part of the transferors and established irreparable harm in the absence of an injunction. Accordingly, the court enjoined Plaza Real Estate from transferring or encumbering certain properties during the pendency of the litigation. Slip op. 29-34.
Harvey M. Stone and Richard H. Dolan are partners at Schlam Stone & Dolan. Bennette D. Kramer, a partner of the firm, assisted in the preparation of the article.
[This article is reprinted with permission from the February 20, 2009, issue of the New York Law Journal. Copyright © 2009 ALM Properties, Inc. All rights reserved. Further duplication without permission is prohibited.]