Opinion
No. 00 Civ. 0009 (GBD)(KNF).
July 27, 2005
REPORT AND RECOMMENDATION
TO THE HONORABLE GEORGE B. DANIELS, UNITED STATES DISTRICT JUDGE
I. INTRODUCTION
Plaintiff Barton Fleishman ("Fleishman"), proceeding pro se as the assignee of Mir-Bar Realty Corporation, Miriam Fleishman, Howard Fleishman and 611 Sixth Ave. Corporation ("assignors"), filed a second amended complaint in the above-captioned action, alleging usury and violations of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961, et seq., ("RICO" or "RICO Act") against defendants Victoria Peslak Hyman ("V. Hyman"); Platinum Designs, Inc. ("Platinum Designs"); Steven Hyman ("S. Hyman"); Bruce D. Friedberg ("Friedberg"); Friedberg Associates; Jack Hollander ("Hollander"); Robert L. Rattet ("Rattet"); Jonathan S. Pasternak ("Pasternak"); Rattet, Hollander Pasternak, L.L.P. ("RHP"); Northern Equity, Inc.; Lawrence I. Linksman ("Linksman"); Bridge Funding, Inc.; New York Urban, Inc.; Fundex Capital Corporation; Liberty Finance Corporation; and Anglo African Shipping Company of New York, Inc. (collectively, "defendants"). The second amended complaint also asserts ten additional state-law claims ("additional state-law claims") against various groups of defendants: (a) breach of fiduciary duty, self-dealing, malpractice and breach of covenant of good faith, asserted against Hollander, Rattet, Pasternak and RHP; (b) conspiracy, deceit, breach of duty of loyalty, economic duress and breach of contract, asserted against V. Hyman, S. Hyman, Friedberg, RHP and Linksman; and (c) tortious interference with a business, apparently asserted against all of the defendants.
Before the Court are four applications by the defendants that the second amended complaint be dismissed, pursuant to Fed.R.Civ.P. 12(b), as well as an application by S. Hyman, V. Hyman, and Platinum Designs (collectively, "Hyman defendants") that Fleishman be sanctioned, pursuant to Fed.R.Civ.P. 11(b).
II. BACKGROUND
Fleishman filed the original complaint in this action as the assignee of Mir-Bar, Miriam Fleishman and Howard Fleishman, alleging usury and violations of the RICO Act against the defendants. Thereafter, the defendants made applications, inter alia, to dismiss the original complaint, pursuant to Fed.R.Civ.P. 9(b), 12(b)(5) and (12)(b)(6) ("original motions to dismiss"). Among other things, the defendants contended that the injuries of which Fleishman complained were suffered by Mir-Bar and not by Fleishman, and so Fleishman lacked standing to bring the action and, in turn, the court lacked subject matter jurisdiction over the action. During the pendency of the original motions to dismiss, Fleishman filed an amended complaint that differed from the original complaint only in that it added an additional claim, for legal malpractice, against Hollander, Rattet, Pasternak and RHP ("original malpractice claim").
In a Report and Recommendation, dated September 30, 2004 ("2004 Report and Recommendation"), the undersigned recommended that your Honor dismiss the original complaint's usury and RICO claims, pursuant to Fed.R.Civ.P. 12(b)(6), as they failed to state claims upon which relief might be granted. The undersigned also found that the original complaint, construed liberally, made it sufficiently clear that Fleishman brought the action as the assignee of Mir-Bar. Accordingly, the Court recommended that the motions to dismiss the action for lack of subject matter jurisdiction be denied.
According to Fleishman, he is domiciled in Pennsylvania, and the defendants are all domiciled in other states, including New York. Consequently, the parties to the original malpractice claim were nominally diverse, and the Report and Recommendation noted that diversity jurisdiction might require the court to entertain that claim. However, Mir-Bar, Miriam Fleishman and Howard Fleishman were, according to the original complaint, domiciled in New York. Therefore, in light of the bar against jurisdiction obtained by improper or collusive assignments of claims, see 28 U.S.C. § 1359, the Report and Recommendation noted that "a finding of diversity jurisdiction [over the original malpractice claim] might require further inquiry into the purpose of the assignment of claims by Mir-Bar to Fleishman." 2004 Report and Recommendation at 12-13 n. 8. In light of the court's independent obligation to ensure that it has subject matter jurisdiction over the action and in light of the jurisdictional rule set forth in 28 U.S.C. § 1359, the Court recommended that Fleishman be directed to file a second amended complaint to "set forth more fully the jurisdictional basis, if any, upon which the court might exercise jurisdiction over his legal malpractice claim."
Your Honor adopted the 2004 Report and Recommendation in its entirety. Accordingly, all claims in the action, except for the legal malpractice claim, were dismissed. Thereafter, Fleishman filed the instant second amended complaint. The allegations in the second amended complaint pertaining to usury and RICO are essentially the same as those made in the original complaint. Although the caption of the second amended complaint indicates that Fleishman now brings the action as the assignee of both the above-noted individuals and entity and as the assignee of "611 Sixth Ave. Corp.," the second amended complaint contains no allegations about the circumstances of the assignment of any claim to Fleishman.
The 2004 Report and Recommendation contained a detailed recitation of facts alleged in the original complaint. Since essentially the same facts are alleged in the second amended complaint, that recitation is not repeated here.
III. DISCUSSION
Motions to Dismiss
A court may dismiss an action pursuant to Fed.R.Civ.P. 12(b)(1), for lack of subject matter jurisdiction, or Fed.R.Civ.P. 12(b)(6), for failure to state a claim upon which relief can be granted, only if "it appears beyond doubt, even when the complaint is liberally construed, that the plaintiff can prove no set of facts which would entitle him to relief." Jaghory v. New York State Dept. of Educ., 131 F.3d 326, 329 (2d Cir. 1997).
A. RICO, Usury and Additional State-Law Claims
Fleishman was granted permission to file a second amended complaint for a limited purpose, namely, to set forth the jurisdictional basis, if any, upon which the court might entertain the sole remaining claim in this action — his legal malpractice claim against Rattet, Hollander, Pasternak and RHP. However, the second amended complaint asserts usury and RICO claims that are essentially the same as those dismissed previously, as well as a raft of additional state-law claims. For the reasons set forth in the 2004 Report and Recommendation, the usury and RICO claims should again be dismissed. Moreover, the usury and RICO claims and the additional state-law claims — that is, all of the claims contained in the second amended complaint, other than the legal malpractice claim — should be dismissed for the additional reason that Fleishman did not obtain leave of the court, as required by Fed.R.Civ.P. 15(a), to amend his complaint to introduce (or re-introduce) those claims into the action. B. Legal Malpractice Claim 28 U.S.C. § 1359 ("§ 1359"), provides: "A district court shall not have jurisdiction of a civil action in which any party, by assignment or otherwise, has been improperly or collusively made or joined to invoke the jurisdiction of such court." Assignments or transfers of claims that purport to create diversity jurisdiction merit special scrutiny, since "such devices, unless controlled, can provide a simple means of expanding federal diversity jurisdiction far beyond [its intended purpose], which was simply to provide an impartial forum for out-of-state parties who might be subject to prejudice in local state courts."Prudential Oil Corp. v. Phillips Petroleum Co., 546 F.2d 469, 474 (2d Cir. 1976). Accordingly, courts construe § 1359 "broadly[,] to bar any improper attempt to create federal diversity jurisdiction."Id. at 475. In particular, in the Second Circuit, courts apply a rebuttable presumption that such assignments are collusive, within the meaning of § 1359, where they involve transfers of claims between parent and subsidiary corporations and between closely held corporations and their officers and shareholders.See id. at 475-77 (assignment by corporate parent to subsidiary); Airlines Reporting Corp. v. S and N Travel, Inc., 58 F.3d 857, 863 (2d Cir. 1995) (assignment by shareholders to corporation); Falow v. Cucci, 2003 WL 22999458, *8 (S.D.N.Y. Dec. 19, 2003) (assignment by corporation to one of only two officer-shareholders). Scrutiny even closer than that normally applied under § 1359 must be applied to such assignments because of the ease with which they may be arranged and "the difficulty in detecting the true reason for the assignment." Falow, 2003 WL 22999458 at *9.
In his memorandum in opposition to the application filed by Friedberg and Friedberg Associates, Fleishman requests "permission to amend the complaint to read Barton Fleishman as plaintiff. All of the funds paid to the defendants were paid by Barton Fleishman which created a relationship between Barton Fleishman and the defendants." As no notice of motion or memorandum of law has been filed in support of this application, it is not properly before the Court. See Local Civil Rules 6.1, 7.1. Even if the application were before the Court, it would be denied as futile: since none of the pleadings or other materials submitted by Fleishman to date suggest that he played any role in the underlying transactions except as an agent for Mir-Bar, it is clear that Fleishman cannot prove that the defendants had a contractual obligation or other duty to him, personally.
According to the materials attached to the second amended complaint, Howard Fleishman, Miriam Fleishman and Barton Fleishman were the sole owners and shareholders of Mir-Bar. See Litigation Affidavit of Howard Fleishman, Miriam Fleishman and Bart Fleishman, dated April 4, 1997. The second amended complaint indicates that 611 Sixth Ave. Corporation was owned either by Mir-Bar or by Fleishman, Miriam Fleishman and Howard Fleishman. Fleishman alleges that he is a citizen of Pennsylvania. Since the assignors and several of the defendants are domiciliaries of New York, a transfer of claims by assignors to Fleishman is one that would "vest the court with a jurisdiction it had not formerly enjoyed." O'Brien v. AVCO Corp., 425 F.2d 1030, 1034 (2d Cir. 1969). Therefore, a rebuttable presumption should be applied in this action that the alleged assignments are collusive or improper, within the meaning of § 1359.
In order to overcome such a presumption, the party asserting diversity must proffer evidence demonstrating a legitimate, non-pretextual business purpose for the assignment that is "unconnected with the creation of diversity jurisdiction."Prudential Oil, 546 F.2d at 476; see also Airlines Reporting, 58 F.3d at 863. Other than making reference to Barton Fleishman as the assignee of Mir-Bar, Howard Fleishman, Miriam Fleishman and 611 Sixth Ave. Corporation, the second amended complaint contains no information about the assignment of any claim by any of these individuals and entities to the plaintiff. Consequently, Fleishman has not met the above-noted burden, and no finding of diversity jurisdiction is warranted.
As the only other basis for jurisdiction over the legal malpractice claim is supplemental jurisdiction, which is discretionary, see 28 U.S.C. § 1367, this claim can and should be dismissed.
Rule 11 Sanctions
The Hyman defendants contend that Fleishman should be sanctioned, pursuant to Fed.R.Civ.P. 11, inter alia, because he has re-asserted the RICO and usury claims in the second amended complaint and asserted ten additional state law claims without any legal basis for doing so and for the improper purpose of harassing the defendants.
The main objective of Fed.R.Civ.P. 11 sanctions is to deter baseless filings in the district court. See Cooter Gell v. Hartmarx Corp., 496 U.S. 384, 393, 110 S. Ct. 2447, 2454 (1990). "Under Fed.R.Civ.P. 11, sanctions may be imposed on a person who signs a pleading, motion, or other paper for an improper purpose such as to delay or needlessly increase the cost of litigation, or does so without a belief, formed after reasonable inquiry, that the position espoused is factually supportable and is warranted by existing law or by a non-frivolous argument for the extension, modification, or reversal of existing law." Caisse Nationale de Credit Agricole-CNCA, New York Branch v. Valcorp, Inc., 28 F.3d 259, 264 (2d Cir. 1994). A litigant's pro se status is no shield to Fed.R.Civ.P. 11 sanctions. See Segarra v. Messina, 153 F.R.D. 22, 30 (N.D.N.Y. 1994).
A court "may consider the special circumstances of litigants who are untutored in law" when considering whether imposing Rule 11 sanctions on a pro se litigant is warranted.See Maduakolam v. Columbia Univ., 866 F.2d 53, 56 (2d Cir. 1989). In connection with their motion to dismiss the original complaint, Hollander, Rattet, Pasternak and RHP submitted to your Honor documents that suggest that Fleishman is or was an attorney admitted to the bar of the state of New York. Fleishman has not disputed this suggestion. Therefore, the special consideration contemplated in Maduakolam does not appear to be warranted in this action.
After a claim for relief has been rejected by a court, the successive presentation of that claim in the same action is barred by the law of the case. Morley v. Ciba-Geigy Corp., 66 F.3d 21, 25 (2d Cir. 1995). Such a presentation is without any basis in existing law and is sanctionable, pursuant to Fed.R.Civ.P. 11(b)(2). Id. The successive presentation of a previously rejected claim is also sanctionable, pursuant to Fed.R.Civ.P. 11(b)(1), to the extent that it evidences an improper purpose, such as harassment, unnecessary delay or needless increase in the cost of litigation. Id.; see also Knipe v. Skinner, 19 F.3d 72, 77 (2d Cir. 1994) (citing Zaldivar v. City of Los Angeles, 780 F.2d 823, 832 [9th Cir. 1986] ["Without question, successive complaints based upon propositions of law previously rejected may constitute harassment under Rule 11."]).
In the case at bar, the RICO and usury claims asserted in the second amended complaint are nearly identical to those asserted in the original complaint. Consequently, they suffer from the same deficiencies that led to the dismissal of the RICO and usury claims in the original complaint. In addition, the additional state-law claims asserted in the second amended complaint are beyond the scope of the amendments that Fleishman was granted leave to make to his complaint. The deficiencies in the usury and RICO claims and the limited grant of leave to amend were drawn to Fleishman's attention by the 2004 Report and Recommendation, which was adopted in its entirety by an order of the court.
A reasonable inquiry into the law of this case and the decisional law cited in the 2004 Report and Recommendation would have revealed that the RICO and usury claims asserted in the second amended complaint are not warranted by existing law. Fleishman has not articulated any non-frivolous argument for the modification or reversal of the law of this case or the decisional law cited in the 2004 Report and Recommendation. Moreover, the inclusion of numerous unauthorized claims in the second amended complaint — the previously dismissed RICO and usury claims, as well as ten new state-law claims asserted against some or all of the sixteen defendants in this action — evidences an intent by Fleishman to harass the defendants and increase the cost of litigation needlessly. Indeed, these additional state-law claims, in many instances, include no allegations about an act(s) each defendant might have taken that would make the defendant liable under each of the asserted claims.
In response to the Hyman defendants' application for sanctions, Fleishman contends that: (1) the application is "premature" because no discovery has occurred in this action; and (2) even if the RICO claim is dismissed, the usury claim "should not be dismissed against any of the defendants" and, therefore, there is no basis for sanctions. However, Fleishman has not identified — and the Court is not aware of — any legal authority that supports the contention that sanctions may not be imposed prior to discovery. Therefore, Fleishman's first contention is without merit. For the reasons discussed above and in the 2004 Report and Recommendation, the usury claim should be dismissed. Even if the usury claim were not without merit, the lack of merit to the RICO claim and the unauthorized filing of the additional state-law claims would still evidence violations of Fed.R.Civ.P. 11. Therefore, Fleishman's second contention also lacks merit.
In light of the foregoing, the Court finds that the plaintiff's presentation of the RICO and usury claims to the court as part of the second amended complaint violated Fed.R.Civ.P. 11(b)(2), as it was not based upon a reasonable inquiry into existing law. The Court also finds that the plaintiff's presentation of the RICO, usury and additional state-law claims to the court as part of the second amended complaint violated Fed.R.Civ.P. 11(b)(1), as those claims were presented for the improper purposes of harassment and needless increase in the cost of litigation. As a consequence of these violations, Fleishman has also consumed, improperly, judicial resources that might have been devoted to other actions pending in this court.
The Hyman defendants also contend that the additional state-law claims themselves lack a basis in existing law, since the pertinent statutes of limitations bar those claims. Due to the lengthy pendency of the original motion to dismiss, however, a non-frivolous argument could be made that the statutes of limitations should be equitably tolled. Accordingly, the Court does not find the assertion of the additional state-law claims to be a violation of Fed.R.Civ.P. 11(b)(2) in this respect.
Fed.R.Civ.P. 11(c)(2) provides, in pertinent part, that a sanction under Rule 11 may include "an order to pay a penalty into court, or, if imposed on motion and warranted for effective deterrence, an order directing payment to the movant of some or all of the reasonable attorneys' fees and other expenses incurred as a direct result of the violation." In order to deter Fleishman and other litigants from the type of conduct noted above, Fleishman should be directed to pay: (1) to the Hyman defendants, the reasonable attorney fees and costs those defendants incurred in making their application to dismiss the second amended complaint and the instant application for sanctions; and (2) to the Clerk of Court, a monetary sanction of $5,000.00.
IV. RECOMMENDATION
For the reasons set forth above, I recommend that: (1) the second amended complaint be dismissed; and (2) the plaintiff be sanctioned, pursuant to Fed.R.Civ.P. 11, as noted above.
V. FILING OF OBJECTIONS TO THIS REPORT AND RECOMMENDATION
Pursuant to 28 U.S.C. § 636(b)(1) and Rule 72(b) of the Federal Rules of Civil Procedure, the parties shall have ten (10) days from service of this Report to file written objections. See also Fed.R.Civ.P. 6. Such objections, and any responses to objections, shall be filed with the Clerk of Court, with courtesy copies delivered to the chambers of the Honorable George B. Daniels, 40 Centre Street, Room 410, New York, New York, 10007. Any requests for an extension of time for filing objections must be directed to Judge Daniels, and to the chambers of the undersigned, 40 Centre Street, Room 540, New York, New York, 10007. FAILURE TO FILE OBJECTIONS WITHIN TEN (10) DAYS WILL RESULT IN A WAIVER OF OBJECTIONS AND WILL PRECLUDE APPELLATE REVIEW. See Thomas v. Arn, 474 U.S. 140 (1985); IUE AFL-CIO Pension Fund v. Herrmann, 9 F.3d 1049, 1054 (2d Cir. 1993);Frank v. Johnson, 968 F.2d 298, 300 (2d Cir. 1992); Wesolek v. Canadair Ltd., 838 F.2d 55, 57-59 (2d Cir. 1988); McCarthy v. Manson, 714 F.2d 234, 237-38 (2d Cir. 1983).