Opinion
20-CV-7251 (PAE) (KHP)
12-10-2021
CITY OF NEW YORK, Counterclaim Plaintiff, v. ANDRE DENNIS AND CARLO NAPPI, Counterclaim Defendants.
TO: THE HONORABLE PAUL A. ENGELMAYER, UNITED STATES DISTRICT JUDGE
FROM: THE HONORABLE KATHARINE H. PARKER, UNITED STATES MAGISTRATE JUDGE
REPORT & RECOMMENDATION INQUEST ON DAMAGES
KATHARINE H. PARKER United States Magistrate Judge
Counterclaim Plaintiff, the City of New York (“Plaintiff”) moves for damages, penalties and injunctive relief under the Contraband Cigarette Trafficking Act (“CCTA”) and/or the Racketeer Influenced Corrupt Organizations Act (“RICO”) against Counterclaim Defendants Andre Dennis (“Dennis”) and Carlo Nappi (“Nappi”) (together, “Defendants”). Having entered an order of default against Defendants, the Honorable Paul A. Engelmayer referred this action to the undersigned for a report and recommendation on the damages requested.
For the reasons stated below, I respectfully recommend that the Court grant a permanent injunction against Defendants, enter judgment for Plaintiff in the amount of $167,500 against Defendant Nappi in CCTA penalties and $2,543,310 in damages under RICO against both Nappi and Dennis, jointly and severally, and award post-judgement interest pursuant to 28 U.S.C. § 1961.
BACKGROUND
It is well-settled that in light of Defendant's default, Plaintiff's allegations, with the exception of those related to damages, are accepted as true. See Finkel v. Romanowicz, 577 F.3d 79, 84 (2d Cir. 2009) (citing Au Bon Pain Corp. v. Artect, Inc., 653 F.2d 61, 65 (2d Cir. 1981)). Accordingly, the following facts are established as a result of the Defendants' default:
• On June 19, 2019, Kevin Ringelberg was pulled over for a traffic violation while driving through Bronx, New York with a load of contraband cigarettes in plain view. (Counterclaims ¶¶ 163-168 (ECF No. 6.)) The New York City Sheriff's office conducted a search of Ringelberg's van and seized 2, 084 cartons of contraband cigarettes that were purchased from a North Carolina wholesaler for around $117,000, and arrested Ringelberg. (Counterclaims ¶¶ 169, 178-80.)
• The City of New York uncovered a scheme whereby Defendants Dennis, Nappi, and Ringelberg trafficked cigarettes from a low-tax jurisdiction into New York, where Dennis sold them for below-market prices. (Counterclaims ¶¶ 143, 145, 162.)
• Defendant Dennis, a resident of the Shinnecock Indian Reservation in Southampton, New York, hired Ringelberg to transport contraband cigarettes from North Carolina to New York. (Complaint ¶ 1 (ECF No. 1); see also Counterclaims ¶¶ 174, 180, 209.)
• Defendant Nappi located the source from North Carolina to purchase the cigarettes from and arranged for Dennis' orders by telephoning the cigarette dealer on multiple occasions, sending by facsimile the required order forms, and directed Ringelberg to pay for and pick up the cigarettes and transport them to New York. (Counterclaims ¶¶ 147, 203.)
• Ringelberg admitted that he transported sealed quantities of cash from AD Native, a business owned by Dennis, to Rebel Tobacco Co Inc. in Charlotte, North Carolina, and would return to New York with the cigarettes. (Counterclaims ¶¶ 146, 172, 181, 201, 202.) Ringelberg attested that he traveled into and through New York City with the unstamped cigarettes and bills of lading, which were signed by both him and Dennis. (Ringelberg Decl., ECF No. 72.)
• Defendants are not authorized to import or otherwise distribute cigarettes in the state or City of New York. (Counterclaims ¶ 160.)
• Plaintiff obtained copies of bills of lading documenting Ringelberg's transportation of cigarettes pursuant to the scheme from North Carolina to Southampton, New York. On a total of 34 trips from 2017 to 2019, Ringelberg transported 56, 518 cartons of contraband cigarettes from North Carolina to New York, where Dennis paid an estimated total of $2,912,579.39. (Friedrich Decl. ¶ 8; Friedrich Decl. Ex. D-E (ECF No. 68.))
• Ringelberg, Dennis and Nappi are each a member of an association-in-fact enterprise that engaged in the shipment, transport, receipt, possession, sale, distribution, or purchase of contraband cigarettes to avoid New York state and city taxes. (Counterclaims ¶ 192.)
• The New York City tax is $1.50 per pack, or $15.00 per carton. (Counterclaims ¶ 156); N.Y.C. Admin. Code § 11-1302.
Kevin Ringelberg, the original plaintiff and a counterclaim defendant is no longer a party in this action. Ringelberg and Plaintiff (the City of New York) agreed to dismiss the claims against one another. Therefore, only the claims against Defendants Dennis and Nappi remain.
One carton of cigarettes contains ten (10) packs of twenty (20) cigarettes, a total of 200 cigarettes.
Procedural History
On September 4, 2020, Kevin Ringelberg filed a complaint against the City of New York alleging amongst other things, false arrest; assault and battery, and malicious prosecution. (Complaint ¶¶ 65-97.) On October 1, 2020, Plaintiff filed its answer and asserted counterclaims for violation of the CCTA and RICO against Ringelberg, Dennis and Nappi, and for violation of N.Y. Public Health Law § 1399-ll against Ringelberg. (Counterclaims ¶¶ 143-243.) On March 23, 2021, Judge Engelmayer granted the City's motion for a default judgment as to liability against Dennis and referred the case to the undersigned for an inquest on damages. (ECF No. 35.) Defendant Nappi appeared solely for purposes of contesting service, which was denied. (ECF Nos. 43, 45.) He thereafter failed to appear and defend himself, leading Judge Engelmayer to grant the City's motion for a default judgment against him on July 22, 2021. (ECF No. 63.) Judge Engelmayer then amended his referral to the undersigned to include an inquest on damages for both Dennis and Nappi. (ECF No. 64.)
This Court held an inquest hearing on September 30, 2021 to review Plaintiff's request and provided the Defendants with an opportunity to appear and object. Defendants did not make any written submissions to oppose Plaintiff's request for damages or appear at the hearing notwithstanding that they were provided notice. On November 2, 2021, the undersigned requested supplemental briefing from Plaintiff pertaining to its claim for damages (ECF No. 70), which Plaintiff provided on November 30, 2021. (ECF Nos. 71-72.) After review of the submissions, I respectfully recommend that Plaintiff be awarded damages as set forth in detail below.
DISCUSSION
I. Inquest Hearing and Proof of Damages
Federal Rule of Civil Procedure 55 governs judgments against a party that has failed to plead or otherwise defend itself in an action. Au Bon Pain Corp., 653 F.2d at 64 (defendant's ongoing failure to appear supported failure to plead for the purpose of entry of default). In this case, Judge Engelmayer entered a default judgment against Counterclaim Defendants on March 23, 2021 and July 22, 2021, respectively. (ECF Nos. 35, 63.)
A default constitutes an admission of all well pleaded factual allegations in the complaint, and the allegations as they pertain to liability are deemed true. Greyhound Exhibitgroup, Inc. v. E.L.U.L. Realty Corp., 973 F.2d 155, 158 (2d Cir. 1992). However, Plaintiffs still bear the burden of establishing their entitlement to recovery and thus must substantiate their claims with evidence to prove the extent of their damages. Id. Even when a defendant has defaulted, a substantive analysis of the alleged claims is required to determine whether the plaintiff may be awarded damages, and proof of damages is required. Flaks v. Koegel, 504 F.2d 702, 707 (2d Cir. 1974).
II. Subject Matter Jurisdiction
Federal courts are courts of limited jurisdiction. Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 377 (1994). Standing must be established before a court decides a case on the merits. Harty v. W. Point Realty, Inc., 477 F.Supp.3d 163, 166 (S.D.N.Y. 2020) (citation omitted). Article III standing requires the plaintiff to demonstrate: (1) an injury in fact that is concrete and particularized; (2) a causal connection between the injury and the conduct complained of so that the injury is fairly traceable to the challenged action of the defendant; and (3) that it is likely the injury will be redressed by a favorable decision. Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61 (1992). Under Article III of the U.S. Constitution, for an injury to be particularized, it “must affect the plaintiff in a personal and individual way.” Id. at n.1.
Here, there is evidence that all of the cartons of cigarettes were transported into and through New York City and none were affixed with a joint New York State/New York City tax stamp. (Counterclaims ¶¶ 143, 145-147, 162-167, 169, 172-173, 179, 201-203; Friedrich Decl. Exs. C-E; Ringelberg Decl.) Under New York Tax Law § 471-a, the so-called “back-up” cigarette tax collection statute, New York City can collect a tax on all cigarettes “used” within its jurisdiction. The statute defines “use” as “the exercise of any right or power actual or constructive and shall include but is not limited to the receipt, storage or any keeping or retention for any length of time, but shall not include possession for sale.” N.Y. Tax L. § 471-a. The New York City Administrative Code further provides that “it shall be presumed that all sales or uses. . . . are subject to tax until the contrary is established, and the burden of proof that a . . . use is not taxable . . . shall be upon the vendor or purchaser.” N.Y.C Admin. Code § 11-1302. Like the state law, the City Administrative Code defines “use” to include the “receipt, storage, or any keeping or retention for any length of time. . .” N.Y.C. Admin. Code § 11-1301(4).
Only licensed cigarette stamping agents are permitted to purchase and apply the mandatory State and City cigarette stamps. City of New York v. Hatu, 2019 WL 2325902, at *2 (S.D.N.Y. May 31, 2019) (describing State and City regulatory scheme). According to the Counterclaims and other proof submitted in connection with this inquest, neither Dennis nor Nappi is a New York-licensed stamping agent, nor are they otherwise authorized to deal in unstamped cigarettes in New York State or City. (Counterclaims ¶ 160.) Thus, because Defendants exercised a “right or power, actual or constructive” over the cigarettes and possessed them within the City by virtue of their transportation into and through the City, the Cigarettes are subject to City tax. See N.Y. Tax L. § 471-a; N.Y.C. Admin. Code § 11-1302; see also City of New York. v. FedEx Ground Package Sys., 351 F.Supp.3d 456, 482-83 (S.D.N.Y. 2018) (finding that cigarettes are subject to tax upon their entry into the City).
Accordingly, the City has suffered a particular injury granting it standing to assert claims and seek appropriate remedies under the CCTA. See City of New York v. Golden Feather Smoke Shop, Inc., 2013 WL 3187049, at *15 (E.D.N.Y. June 20, 2013) (finding the City had standing to pursue CCTA violations because of loss of tax revenue); City of New York v. Chavez, 2012 WL 1022283, at *5 (S.D.N.Y. Mar. 26, 2012) (“The City, through its Corporation Counsel, has standing to bring an action under the CCTA to prevent and restrain CCTA violations, in pursuit of which it may seek injunctive or other equitable relief.”) (internal quotations and alteration omitted).
III. Contraband Cigarette Trafficking Act (CCTA)
The CCTA, 18 U.S.C. §§ 2341-2346, prohibits the shipping, transporting, receiving, possessing, selling, distributing or purchasing contraband cigarettes, defined as more than 10, 000 cigarettes that bear no evidence of the payment of applicable cigarette taxes in the State or locality in which the cigarettes are found, if that jurisdiction requires stamps to be placed on packages or other containers of cigarettes to evidence tax payments. 18 U.S.C. §§ 2341(2); 2342. State and local authorities may commence an action to prevent and restrain violations of the CCTA and obtain civil penalties, money damages, and injunctive or other equitable relief.” 18 U.S.C. § 2346(b). However, “[n]o civil action may be commenced . . . against an Indian tribe or an Indian in Indian country[.]” Id.
Here, the cigarettes transported by Defendants are contraband cigarettes within the meaning of the CCTA because (i) State and City cigarette taxes are applicable to the cigarettes; (ii) New York State and City both require a stamp to be placed on packages of cigarettes to evidence payment of cigarette taxes; (iii) according to the evidence submitted, Defendants transported 56, 518 cartons (more than 10, 000 cigarettes) found within the State and the City without such stamps (Ringelberg Decl. and Exhibits); and (iv) Defendants are not persons entitled to possess or otherwise engage in any conduct with unstamped cigarettes.
Accordingly, Plaintiff may seek available remedies provided by the CCTA including injunctive relief, monetary damages, and penalties. Plaintiff seeks CCTA penalties against Nappi only and does not seek penalties against Dennis because he is a Shinnecock Native American Tribal Member who resides at the Shinnecock Reservation per the CCTA's provision precluding actions against an “Indian in Indian country.” 18 U.S.C. § 2346(b). However, Plaintiff does seek treble damages and injunctive relief against both Defendants pursuant to RICO discussed below.
IV. Racketeer Influenced Corrupt Organizations Act (RICO)
“To establish a [RICO violation] a plaintiff must show: ‘(1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity.'” Chavez, 2012 WL 1022283, at *6 (quoting DeFalco v. Bernas, 244 F.3d 286, 306 (2d Cir.2001)). “A RICO enterprise ‘includes any individual, partnership, corporation, association, or other legal entity, and any union or group of individuals associated in fact although not a legal entity.'” Id. (quoting 18 U.S.C. § 1961(4)). Racketeering activity is broadly defined and includes violations of the CCTA. Id. (citing DeFalco, 244 F.3d at 306). A “pattern of racketeering activity” requires at least two acts of racketeering activity committed within a ten-year span. 18 U.S.C. § 1961(5).
A Plaintiff seeking remedies under RICO must also establish standing under the statute. To establish RICO standing, the Second Circuit requires plaintiffs to demonstrate: "(1) a violation of § 1962; (2) injury to business or property; and (3) causation of the injury by the violation." First Nationwide Bank v. Gelt Funding Corp., 27 F.3d 763, 767 (2d Cir. 1994).
Plaintiff has sufficiently shown a RICO violation. Defendants engaged in transporting cigarettes to New York from North Carolina. Nappi found the enterprise's partner and suppliers in North Carolina and coordinated the shipments, Dennis paid for and received the contraband cigarettes, and Ringelberg transported the cigarettes. (See Counterclaims ¶¶ 146-47, 172, 174, 180-81, 203, 209.) Defendants were an association-in-fact under RICO because they worked together to accomplish their goal of cigarette trafficking for profit over a period sufficient to pursue its purpose. See Chavez, 2012 WL 1022283, at *6 (finding an association-in fact enterprise to violate the CCTA based on similar facts). Next, there is no doubt that Defendants' actions constituted a pattern because they transported contraband cigarettes from North Carolina to New York on 34 separate occasions as evidenced by the bills of lading and the seizure incident. As noted above, Plaintiff has established that both Defendants Nappi and Dennis violated the CCTA, which is the predicate act of racketeering activity necessary to establish its RICO claim. Of note, case law confirms that an “Indian in Indian Country” can be liable under RICO when the predicate offense is a CCTA violation. See City of New York. v. Gordon, 1 F.Supp.3d 94, 112 (S.D.N.Y. 2013); United States v. Fiander, 547 F.3d 1036 (9th Cir. 2008).
As also discussed above, Plaintiff has demonstrated RICO standing because it has shown Defendants violated the CCTA and that it did not receive any taxes from the cigarettes, which constitutes an injury. There can be no dispute that the injury was caused by Defendants' failure to pay the tax.
Accordingly, Plaintiff is entitled to relief under the RICO statute.
V. Relief Sought
a. CCTA Civil Penalties
Plaintiff seeks CCTA penalties against Defendant Nappi only. The CCTA authorizes states and local governments to collect civil penalties. 18 U.S.C. § 2346(b)(2). The statute does not, however, provide a formula by which penalties are calculated. As such, courts in this Circuit have relied on the penalty provisions of the Prevent All Cigarette Trafficking (“PACT”) Act, 15 U.S.C. § 377, another federal statute targeted at cigarette trafficking. See, e.g., Golden Feather Smoke Shop, Inc., 2013 WL 3187049, at *38; City of New York v. Milhelm Attea & Bros., Inc., 2012 WL 3579568, at *33 (E.D.N.Y. Aug. 17, 2012). The PACT Act provides for penalties of $2,500 for a first violation, or $5,000 for any other violation within one year of a prior violation. 15 U.S.C. § 377(b)(1)(B). A single CCTA violation occurs each time 10, 001 unstamped cigarettes are brought into a state or city. See FedEx Ground Package Sys., 351 F.Supp.3d at 477 (“Any group of knowing shipments totaling over 10, 000 unstamped cigarettes amounts to a CCTA violation giving rise to a cause of action.”).
Here, Defendants trafficked 56, 518 cartons of cigarettes. There are 20 cigarettes per pack and 10 packs per carton, which means that in this case, Defendants trafficked approximately 11, 303, 600 individual cigarettes. (Friedrich Decl. ¶ 10; Friedrich Decl. Ex. G). Thus, the seizure was well above the 10, 001 cigarette threshold established by the CCTA and would support a finding of approximately 1, 130 separate violations (i.e., 11, 303, 600/10, 001). This many violations would yield a total of $5,647,500 in penalties using PACT Act penalties as a measure. However, Plaintiff only requests penalties for each time cigarette deliveries were transported into New York City (i.e., 34 trips based on the bills of lading and seizure incident), not based on the total number of cigarettes trafficked. Thus, it proposes CCTA civil penalties of $167,500 ($2,500 for the first violation and $5,000 for each of the subsequent 33 violations). This amount is reasonable and in line with how other courts have computed CCTA civil penalties. See City of Suffolk v. Golden Feather Smoke Shop, Inc., 2016 WL 4399309, at *3 (E.D.N.Y. Aug. 17, 2016) (awarding CCTA penalties of $226,591, $700, 00, and $237,500 against each defendant respectively).
Accordingly, I respectfully recommend that Plaintiff be awarded civil penalties in the amount of $167,500 against Defendant Nappi.
b. Injunctive Relief
Plaintiff seeks a permanent injunction under RICO and the CCTA enjoining Defendants from shipping, transporting, receiving, possessing, selling, distributing or purchasing contraband cigarettes into, through or within the City of New York.
Injunctive relief is available under both RICO and the CCTA. See Gingras v. Think Fin., Inc., 922 F.3d 112, 124 (2d Cir. 2019) (“binding Circuit precedent compels us to hold that RICO authorizes private rights of action for injunctive relief.”); 18 U.S.C. §2346(b)(1-2). When seeking a permanent injunction, the moving party must show success on the merits. Golden Feather Smoke Shop, Inc., 2013 WL 3187049, at *27. "A court may issue an injunction on a motion for default judgment provided that the moving party shows that (1) it is entitled to injunctive relief under the applicable statute and (2) it meets the prerequisites for the issuance of an injunction." Elsevier Inc. v. Stew Yee Chew, 2019 WL 74606, at *11 (S.D.N.Y. Jan. 2, 2019) (report and recommendation adopted 2019 WL 10947099 (S.D.N.Y. Jan. 22, 2019)) (quoting Kingvision Pay-Per-View Ltd. v. Lalaleo, 429 F.Supp.2d 506, 516 (E.D.N.Y. 2006)). Those prerequisites are:
(1) that it has suffered an irreparable injury; (2) that remedies available at law, such as monetary damages, are inadequate to compensate for that injury; (3) that, considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and (4) that the public interest would not be disserved by a permanent injunction.Elsevier Inc., 2019 WL 74606, at *11.
The Second Circuit has held that “the City [is] not required to make a showing of irreparable harm to obtain an injunction under . . . the CCTA [because] such conduct, in and of itself, is harmful to the public." City of New York v. Golden Feather Smoke Shop, Inc., 597 F.3d 115, 121 (2d Cir. 2010). Thus, “the City is entitled to a presumption of irreparable harm[.]” Id. Monetary damages and penalties are inadequate remedies given the public health risks associated with cigarettes, and, the public interest would in fact benefit and not be disserved by the granting of a permanent injunction.
Lastly, Plaintiff is at a severe disadvantage of attempting to track and confiscate contraband cigarettes trafficked in its jurisdiction due to its lack of resources and the difficulty of detecting cigarette traffickers, as evidenced by the ease with which Defendants carried out their scheme undetected for several years and considering the expense of tracking individuals and pursuing and collecting damages from them for CCTA violations. (See City of New York's Revised Inquest Memorandum, pgs. 4-7 (ECF No. 67.).) In sum, the balance of hardships weighs in favor of granting an injunction.
Accordingly, I respectfully recommend that Plaintiff be granted a permanent injunction against Defendants prohibiting them from shipping, transporting, receiving, possessing, selling, distributing or purchasing contraband cigarettes into, through or within the City of New York. See Golden Feather Smoke Shop, Inc., 2013 WL 3187049, at *31 (granting “City's motion for an order permanently enjoining the moving defendants from engaging in any transactions with unstamped cigarettes.”); see also Gingras v. Think Fin., Inc., 922 F.3d 112, 124 (2d Cir. 2019) (“binding Circuit precedent compels us to hold that RICO authorizes private rights of action for injunctive relief.”).
c. CCTA Damages and Treble
Finally, Plaintiff seeks an award of treble the CCTA damages against both Defendants pursuant to RICO. Insofar as the CCTA does not provide a method to calculate damages, the Second Circuit has held that the appropriate measure of damages under the CCTA is the unpaid City taxes on every carton of cigarettes illegally transported into the City. See New York v. UPS, 942 F.3d 554, 598 (2d Cir. 2019) (“A straightforward reading of both the CCTA and the PACT Act leads us to conclude that the proper measure of damages under either statute is simply the amount of unpaid taxes on the unlawful transactions”). Further, under RICO, treble damages are appropriate, even when a party has defaulted. See City of New York v. Tavares, 2016 WL 7912006, at *7 (E.D.N.Y. Dec. 23, 2016) (report and recommendation adopted sub nom. City of New York v. Khashman, 2017 WL 325250 (E.D.N.Y. Jan. 20, 2017)) (awarding $2,386,800 in treble damages on default for CCTA violations where 54, 030 cartons of contraband cigarettes were transported into New York City). Lastly, when there is more than one defendant at fault, those defendants may be held jointly and severally liable. See City of Suffolk v. Golden Feather Smoke Shop, Inc., 2016 WL 4399309, at *2 (E.D.N.Y. Aug. 17, 2016) (“The Court agrees that holding the cigarette business and its operator jointly and severally liable for the civil penalties is appropriate”); see also Gov't Emps. Ins. Co. v. Parkway Med. Care, P.C., 2017 WL 1133282, at *1 (E.D.N.Y. Feb. 21, 2017) (report and recommendation adopted, 2017 WL 1131901 (E.D.N.Y. Mar. 24, 2017)) (awarding RICO damages jointly and severally against defendants). As noted above, even though Dennis is an “Indian in Indian Country” who cannot be liable under the CCTA, this Court has held that such a person can be liable under RICO and that RICO damages can be measured by the CCTA damage. See Gordon, 1 F.Supp.3d at 112 (Furman, J.).
Here, Defendants trafficked a total of 56, 518 cartons of contraband cigarettes. (Friedrich Decl. ¶ 10; Friedrich Decl. Ex. G). New York City imposes a tax rate of $15 per carton of cigarettes. N.Y.C. Admin. Code § 11-1302. Thus, Defendants failed to pay $847,770 (56, 518 cartons X $15 per carton) in taxes-the appropriate measure of damages under the CCTA. Because Plaintiff has established a RICO violation, it is entitled to treble those damages, resulting in $2,543,310 ($847,770 X 3).
Accordingly, I recommend that Plaintiff be awarded treble damages under RICO in the amount of $2,543,310 against Defendants jointly and severally.
VI. Post-judgment Interest on Damages
Under 28 U.S.C. § 1961, “[i]nterest shall be allowed on any money judgment in a civil case recovered in a district court.” Here, Plaintiff requests post-judgment interest. Accordingly, I respectfully recommend post-judgment interest be awarded at the statutory rate calculated by the Clerk of the Court pursuant to 28 U.S.C. § 1961.
CONCLUSION
For the reasons stated above, I respectfully recommend that Plaintiff's proposed judgment at ECF 68-8 be entered and that Plaintiff be awarded $167,500 in civil penalties against Nappi and $2,543,310 in damages under RICO against Nappi and Dennis, jointly and severally. I also recommend that an injunction be issued enjoining Defendants from knowingly shipping, transporting, receiving, possessing, selling, distributing, or purchasing contraband cigarettes (as defined in 18 U.S.C. § 2341(2)) into, through or within the City of New York, and from employing or instructing any other individual or entity to engage in the above prohibited conduct on their behalf.
Respectfully submitted,