November 13, 2014
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 Arthur D. Spatt granted an evidentiary hearing in response to defendant's motion to reduce his sentence based on a recent amendment to the Sentencing Guidelines. Judge Eric N. Vitaliano upheld a financial penalty imposed on plaintiff for failing to respond to a government request that he provide information about his unlicensed trip to Cuba. Judge Joanna Seybert, dismissing a diversity action, found that limitations on attorney fees under applicable law prevented plaintiff from meeting the $75,000 "amount in controversy" requirement. And Judge Joseph F. Bianco held that a debtor's filing of a Chapter 7 case did not stay an action against him and his company by the Secretary of Labor to enforce minimum wage and overtime regulations.
Sentence Reduction Issue
In United States v. Mitchell, 08 CR 253 (EDNY, Dec. 13, 2011), Judge Spatt found that an evidentiary hearing was required to determine defendant's eligibility for a sentence reduction under 18 U.S.C. §3582(c)(2).
Defendant Mitchell pled guilty to distributing five grams or more of cocaine base in violation of 21 U.S.C. §§841(a)(1) and 841(b)(1)(B)(iii). The plea agreement stipulated that Mitchell's sentence "should be calculated based on a drug type and quantity of at least 150 grams of cocaine base. . . ." It also provided for a three-level reduction for acceptance of responsibility and a one-level reduction for global settlement.
The presentence investigation report stated that Mitchell was accountable for 436.6 grams of crack cocaine. Mitchell's sentencing memorandum accepted that figure "for discussion purposes," but disputed the amount of crack cocaine in a footnote. The defendant withdrew the objection at sentencing, since whether the defendant was accountable for 150 grams or 436.6 grams of cocaine would not change his base offense level of 32. After considering a number of factors, the court sentenced Mitchell to a non-guidelines sentence of 72 months.
Effective Nov. 1, 2011, the U.S. Sentencing Commission amended the offense levels in the guidelines applicable to crack cocaine offenses. The amendment applied retroactively.
Mitchell moved pursuant to 18 U.S.C. §3582(c)(2) to reduce his sentence in light of the guidelines amendment, since he had been sentenced over his initial objection based on 436.6 grams of cocaine instead of the 150 grams of cocaine set forth in the plea agreement. The government argued that since Mitchell had been sentenced based on 436.6 grams of cocaine, applying the guidelines amendment to that amount of cocaine would not result in a lower sentence.
In Dillon v. United States, 130 S. Ct. 2683 (2010), the Supreme Court identified a two-step inquiry for adjudicating a sentence reduction under 18 U.S.C. §3582(c). First, the court must determine if the defendant is eligible for a sentence reduction. If so, the court then must consider any applicable section 3553(a) factors and determine in the court's discretion whether a reduction was appropriate under the circumstances.
The court may not, however, sentence the defendant to less than the amended guidelines range unless the defendant initially received a non-guidelines reduced sentence due to his substantial assistance to authorities. In this case, Mitchell had initially been sentenced to 72 months, which was below his guideline minimum of 97 months, but not because of substantial assistance to the authorities.
The guidelines amendment introduced different base offense levels for different amounts of cocaine: level 32 for 280 to 840 grams; level 30 for 196 to 280 grams; and level 28 for 112 to 196 grams. With adjustment for acceptance of responsibility, global settlement and criminal history, the amended guideline range for 150 grams of cocaine would be 63 to 78 months, potentially lower than Mitchell's initial sentence of 72 months.
Thus, Mitchell was potentially entitled to a reduction in sentence, depending on the amount of cocaine attributable to him. In considering a §3582(c) motion, the court may not revisit any procedural errors or factual findings made at the original sentencing. The court must consider what sentence it would have imposed if the amendment had been in place at the time of the original sentencing.
While aware of the court's limited authority to revisit the facts, in the interest of justice, Judge Spatt ordered an evidentiary hearing to permit Mitchell to challenge the drug amount in the presentence report. Mitchell had not conceded liability for 436.6 grams of cocaine, but withdrew his objection specifically because it would not affect his base offense level. Because the guidelines amendment made the drug amount relevant, Mitchell's objection had been preserved.
Judge Spatt also noted that a failure to permit Mitchell a hearing would compel defendants "'to litigate every aspect of the sentencing report in the original hearing, even though irrelevant to the immediate sentencing determination' in anticipation of the very real possibility that Congress will approve further sentence reductions for crack cocaine offenses." Slip op 11.
Cuban Trade Embargo
In Sanders v. Szubin, 09 CV 3052 (EDNY, Dec. 6, 2011), Judge Vitaliano, granting defendants' motion for summary judgment, affirmed the penalty imposed on plaintiff by the Office of Foreign Assets Control (OFAC) for failure to comply with Cuban trade embargo regulations.
Some form of a U.S. trade embargo on Cuba has been in place since 1963. Under the embargo, "individuals subject to the jurisdiction of the United States may not engage in transactions related to travel to, from, or within Cuba in the absence of a license issued by OFAC." Slip op. 3. In November 1998, OFAC received information from U.S. Customs Service officials posted in Nassau, The Bahamas, that plaintiff had traveled to Cuba without an OFAC license. In March 2000, OFAC sent plaintiff a Requirement to Furnish Information (RFI), demanding that he provide written, detailed information concerning his trip to Cuba. Plaintiff never responded.
In February 2002 OFAC issued a Prepenalty Notice to plaintiff warning him that it intended to impose a civil fine of $10,000 for his failure to respond to the RFI. Plaintiff requested a hearing, and in April 2002, his attorney renewed that request and asserted that the threatened fine implicated the Fifth Amendment. In February 2005, OFAC issued an Order Instituting Proceedings. Plaintiff answered, seeking refuge in the Fifth Amendment.
Following a hearing, in September 2008 an administrative law judge issued a decision rejecting plaintiff's Fifth Amendment argument and imposing a penalty of $1,000, rather than the $9,000 penalty sought by OFAC at the hearing. On review, the Treasury Secretary's designee modified the penalty amount to $9,000. In this action Plaintiff challenges imposition of the $9,000 penalty on Fifth and Eighth Amendment grounds and asserts that the upward modification of the penalty on review was arbitrary and capricious.
Judge Vitaliano reviewed the agency's decision on the constitutional issues de novo, but reviewed the decision on the amount of the penalty deferentially. Plaintiff contended that his nonresponse to the RFI was an exercise of his Fifth Amendment right because the act of response would have been incriminating. But as Judge Vitaliano explained, plaintiff had an obligation to respond to each question and affirmatively assert the privilege. He could not refuse to make any response at all. Plaintiff's actions did not fit into the limited exception where, by giving any form of response, plaintiff would have identified himself for criminal investigation. The government had sent the questionnaire to plaintiff because it had already identified him as a potential target for investigation regarding his suspected trip to Cuba. Although plaintiff was entitled to withhold information that might incriminate him, he was required to invoke Fifth Amendment protection question-by-question, which he failed to do. Thus, the Fifth Amendment did not bar OFAC from imposing a penalty on plaintiff for refusing to respond in any way.
Nor was the imposition of a $9,000 fine unconstitutional under the Excessive Fines Clause of the Eighth Amendment. The court examined the factual circumstances of the imposition of the fine and determined that it met the requirement of proportionality, i.e., the amount of the fine bore a relationship to the gravity of the offense. First, plaintiff willfully failed to report information pursuant to a complex regulatory scheme based on the foreign policy of the United States. Thus, his transgression was serious and the type of activity the regulatory scheme was intended to deter. Second, plaintiff fell into the class of people the regulations were intended to oversee. Third, the maximum fine that could be imposed on plaintiff was $55,000.
Thus, the $9,000 fine fit within the statutory scheme. Finally, the fine matched the generalized harm of frustrating the purposes of the statute. Judge Vitaliano concluded: "Balancing the willfulness of the violation with the purpose and importance of the regulatory scheme, leavened by the likelihood of little substantive harm to the government, proportionality is honored and the Excessive Fines Clause of the Eighth Amendment is unabridged." Slip op. 16.
Amount in Controversy
In Massaro v. Pitts, 10 CV 0911 (EDNY, Nov. 15, 2011), Judge Seybert dismissed an unopposed contract action, brought under the court's diversity jurisdiction, for failure to meet the amount in controversy requirement.
Plaintiff sought to enforce a promissory note given by defendant in connection with the sale of stock. The note provided that, if payment of $35,716.22 was not made within 10 days of Dec. 31, 2009, plaintiff could assess a 5 percent late fee, and recover "costs incurred to collect the principal, including reasonable attorney's fees."
Payment was not made, plaintiff sued in March 2010, and defendant failed to answer. Plaintiff applied for a default judgment, and the application was referred for a Report and Recommendation to Magistrate Judge William D. Wall, who recommended that plaintiff be awarded a default judgment of $35,716.22 in damages and $350 in costs. Upon receipt of Magistrate Judge Wall's recommendation, Judge Seybert ordered plaintiff to show cause why the matter should not be dismissed for lack of subject matter jurisdiction given its failure to exceed the $75,000 amount in controversy threshold for diversity matters under 28 U.S.C. §1332(a)(1).
Plaintiff argued that the 5 percent late fee, interest, and attorney fees brought the amount in controversy above $75,000. Noting that §1332(a)(1) does not permit consideration of interest to meet the jurisdictional threshold, Judge Seybert focused on the late fee and attorney fees.
Attorney fees "may be used to satisfy the amount in controversy requirement . . . where they are recoverable as of right pursuant to statute or contract." In re Ciprofloxacin Hydrochloride Antitrust Litig., 166 F.Supp.2d 740, 755 (E.D.N.Y. 2001). However, as the 5 percent late fee brought the amount due under the promissory note to $37,502.03, plaintiff would have to show that at least $37,497.98 was due in attorney fees. Judge Seybert dismissed the action because Hawaii law, "which governs the promissory note pursuant to a choice-of-law clause," caps attorney fees in promissory note and breach of contract actions at 25 percent of the judgment, leaving the amount in controversy "well below the $75,000 jurisdictional requirement." Slip Op. 4, 6.
Automatic Stay Exception
In Solis v. SCA Restaurant Corp. d/b/a Luigi Q Italian Restaurant, 09 CV 2212 (EDNY, Dec. 1, 2011), Judge Bianco denied defendant/debtor's request that the automatic stay arising under §362 of the Bankruptcy Code be applied to this action by the Secretary of Labor to enforce minimum wage and overtime compensation regulations. Co-defendant Luigi Quarta, the owner of SCA Restaurant Corp., filed a Chapter 7 proceeding after the Secretary of Labor commenced this action.
Section 362(a) of the Bankruptcy Code automatically stays judicial proceedings against a debtor. There are exceptions to the stay, however. Section 362(b)(4) provides an exception for actions by a governmental unit to enforce its police or regulatory power. The purpose of the exception is to prevent a debtor from frustrating governmental functions by filing a bankruptcy petition.
Judge Bianco examined the purpose of the law the Department of Labor sought to enforce to determine whether it was acting to enforce its police and regulatory power or merely to protect its status as a creditor. First, the court looked at whether the Department of Labor's action related to public safety and welfare or the government's interest in the debtor's property. Here, the government had no pecuniary interest in defendants' estates in seeking to enforce a statutory scheme intended to prevent unfair competition in the market by payment of substandard wages. Moreover, any judgment would be enforced through claims in bankruptcy court just like any other claim against the debtor.
The action also satisfied the public policy test by enforcing the Department of Labor's regulatory powers under the Fair Labor Standards Act intended to ensure that covered employees receive minimum wage and overtime compensations and that employers maintain proper wage and hour records. The injunction sought by the Secretary of Labor would "prevent further violations, protect labor conditions, and prevent 'unfair labor competition in the market from companies who pay substandard wages.'" Slip op. 5. In addition, a money judgment would deter unlawful behavior by other employers. The action was therefore exempt from the automatic stay under the police and regulatory power exception. Slip op. 8.
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 January 13, 2012, issue of the New York Law Journal. Copyright © 2012 ALM Properties, Inc. All rights reserved. Further duplication without permission is prohibited.]