Opinion
C. A. PC-2018-3635
04-08-2022
RICHARD L. GEMMA, as Receiver for BR Asset Management, LLC f/k/a Benrus, LLC, Plaintiff, v. MICHAEL F. SWEENEY, DUFFY & SWEENEY, LTD., PALMLAKE GROUP, LLC, Barry Gertz, Defendants.
For Plaintiff: Max Wistow, Esq. For Defendant: Marc DeSisto, Esq., William M. Russo, Esq. William M. Dolan, Esq.
For Plaintiff: Max Wistow, Esq.
For Defendant: Marc DeSisto, Esq., William M. Russo, Esq. William M. Dolan, Esq.
DECISION
STERN, J.
Before this Court is Plaintiff Richard L. Gemma, as Receiver for BR Asset Management, LLC's (Plaintiff) (1) Motion to Compel the Production of Documents from Duffy & Sweeney Ltd.; (2) Motions to Compel Deposition Testimony from Defendants Michael F. Sweeney and Barry Gertz; and (3) Motion to File their Third Amended Complaint. These motions were filed pursuant to Rules 15(a)(1) and 37(a) of the Superior Court Rules of Civil Procedure. Defendants-Michael F. Sweeney (Sweeney), Duffy & Sweeney, Ltd. (Duffy & Sweeney), PalmLake Group, LLC (PalmLake), and Barry Gertz (Gertz) (collectively, Defendants)-filed timely objections. Jurisdiction is pursuant to Rules 15 and 37.
Defendants note in the Objection that they would produce the documents requested in Plaintiff's Motion to Compel. (Defs.' Omnibus Obj. 10.) Based on Defendants' compliance with the relief sought in Plaintiff's Motion, this Motion is now moot for the purposes of this Decision.
I
Facts and Travel
The Court has previously had the opportunity to issue multiple Decisions arising out of the instant matter. Consequently, the Court will briefly summarize the factual background in this litigation, highlighting the most pertinent facts relevant to the instant Motions.
BR Asset Management, LLC (BRAM), the Plaintiff entity at issue in this matter, was a retailer that designed, marketed, branded, and otherwise sold consumer products including both watches and backpacks. Gemma v. Sweeney, No. PC-2018-3635, 2019 WL 5396136, *1 (R.I. Super. Oct. 15, 2019). In or about 2014, Sweeney and Duffy & Sweeney represented BRAM. Id. Further, in or about April 2016, BRAM projected $1,000,000 in sales but lacked the cash flow to pay for production costs. Id. By April 20, 2016, Sweeney, Duffy & Sweeney, and BRAM reached a financing agreement, in principle, where BRAM would receive $499,621.14 to fund the production of backpacks. Id. According to Plaintiff, the parties understood that the financing arrangement was a "bridge loan." Id. Defendants internally referred to the financing transaction as a loan. Id.
On April 22, 2016, Sweeney and Duffy & Sweeney notified BRAM that they had advanced some of the funding in the amount of $149,886.34. Id. That same day, Sweeney signed and submitted PalmLake's Articles of Organization to the Florida Secretary of State. Id. Sweeney identified himself as the authorized Manager of PalmLake. Id. Sweeney and Gertz are members of PalmLake. Id. Shortly after advancing the funds, BRAM and Sweeney, purportedly on behalf of PalmLake, executed a financing transaction styled as a sale of BRAM's backpack purchase orders to PalmLake for a total purchase price of $499,621.14 (the Agreement). Id. Sweeney and Duffy & Sweeney negotiated and drafted the Agreement, which provided for an initial advance of $149,886.34; a "fee" to PalmLake equal to 15 percent of the advances within ninety days; and contained a Florida choice-of-law provision. Id.
On May 5, 2016, Sweeney personally advanced $22,500 to BRAM, in addition to the purchase price, to fund BRAM's production of watches. Id. In or about May 20, 2016, BRAM and Sweeney, purportedly on behalf of PalmLake, entered into a supplemental financing agreement (the First Addendum), drafted by Sweeney and Duffy & Sweeney. Id. Like the Agreement, the First Addendum contained a Florida choice-of-law provision and provided for a 15 percent "fee" due to PalmLake. Id. On May 20, 2016, the balance of the original purchase price was purportedly advanced. Id.
On June 23, 2016, Expeditors, a shipping and delivery company, e-mailed a request for $77,533 to BRAM, copying Sweeney, who in turn forwarded the e-mail to Gertz, stating the following: "We need to advance this for shipping and duties for the large backpack order we funded . . . I will wire today so not to delay and you can send me half." Id. On June 23, 2016, Sweeney responded to Expeditors and stated that he would be "wiring the $77,553 . . . from his UBS account." Id. Gertz replied to Sweeney stating, "I will write [sic] half to your personal account." Id. Sweeney wired the money on June 23, 2016. Id. Around June 28, 2016, BRAM and Sweeney, purportedly on behalf of PalmLake, entered into a supplemental financing agreement (the Second Addendum, together with First Addendum, Addenda). Id. Sweeney and Duffy & Sweeney drafted the Second Addendum. Id. Like the Agreement and First Addendum, the Second Addendum contained a Florida choice-of-law provision and provided for a 15 percent "fee" due to PalmLake. Id. Additionally, the Second Addendum reflected the additional $77,533 advance. Id.
Starting in July 2016, Sweeney, Duffy & Sweeney, and Duffy & Sweeney employees (acting on their behalf) demanded and collected payments from BRAM and subsequently deposited amounts collected into Duffy & Sweeney's "Client Trust Account" for BRAM. Id. Most of the payments were from BRAM's account debtors. Id. Once deposited in the Trust Account, Duffy & Sweeney caused substantially all funds to be distributed directly to Sweeney and Gertz, individually, and not to PalmLake. Id. BRAM repaid a total of $689,625.26, along with an additional $4,000 "legal fee." Id.
Plaintiff filed a Complaint on May 25, 2018, an Amended Complaint on July 30, 2018, and a Second Amended Complaint on April 25, 2019. Id. On November 1, 2021, Plaintiff filed a Motion to File its Third Amended Complaint in this matter along with a Motion to Compel the Production of Documents and two Motions to Compel Deposition Testimony from Sweeney and Gertz. On December 8, 2021, this Court heard oral argument and reserved decision. The Court's Decision follows.
II
Standard of Review
Rule 37(a)(2) of the Superior Court Rules of Civil Procedure permits a party to file a motion to compel discovery in the event that a deponent fails to meaningfully respond to a question propounded under Rules 30 and 31 of the Superior Court Rules of Civil Procedure. Super. R. Civ. P. 37(a)(2). With respect to discoverable matters in general, the Rules of Civil Procedure provide that, unless otherwise limited by order of the court in accordance with these rules, the scope of discovery is as follows:
"In General. Parties may obtain discovery regarding any matter, not privileged, which is relevant to the subject matter involved in the pending action, whether it relates to the claim or defense of the party seeking discovery or to the claim or defense of any other party, including the existence, description, nature, custody, condition and location of any documents, electronically stored information or tangible things and the identity and location of persons having knowledge of any discoverable matter. It is not ground for objection that the information sought will be inadmissible at the trial if the information sought appears reasonably calculated to lead to the discovery of admissible evidence." Super. R. Civ. P. 26(b)(1).
Regarding discoverable matters and objections to questions during a deposition, Rule 30(d)(1) states the following:
"(1) Any objection to evidence during a deposition shall be stated concisely and in a non-argumentative and non-suggestive manner. A person may instruct a deponent not to answer only when necessary to preserve a privilege, to enforce a limitation on evidence directed by the court, or to present a motion under paragraph (3)." Super. R. Civ. P. 30(d)(1).
Separately, pursuant to Rule 15(a), a court may grant leave to amend "when justice so requires." Super. R. Civ. P. 15(a). Additionally, the Rhode Island Supreme Court has held that "trial justices should liberally allow amendments to the pleadings." Lomastro v. Iacovelli, 56 A.3d 92, 95 (R.I. 2012). However, "a number of reasons-such as undue delay, bad faith, undue prejudice to the opposing party, or, most relevant to this case, futility of the amendment-may nonetheless warrant the denial of a motion to amend." IDC Properties, Inc. v. Goat Island South Condominium Association, Inc., 128 A.3d 383, 393 (R.I. 2015).
While the Rhode Island Supreme Court has not definitively expressed the burden of proof the Superior Court must find in order to determine if a motion to amend may be denied on the basis of futility, this Court will assume that the party objecting to a motion to amend must prove that the amendment is futile beyond a reasonable doubt as is required for this Court to properly grant a motion to dismiss.
III
Analysis
As stated above, before this Court are Plaintiff's Motions to Compel Deposition Testimony and Motion to File its Third Amended Complaint. The Court will first address Plaintiff's Motions to Compel under Rule 30(d)(1) of the Superior Court Rules of Civil Procedure. Next, the Court will turn to Plaintiff's Motion to File a Third Amended Complaint. In addressing Plaintiff's Motion to Amend, this Court will pay particular attention to both the Court's previous Decision addressing Plaintiff's Racketeer Influenced and Corrupt Organizations (RICO) Act claims as well as the existing jurisprudence and background law surrounding RICO.
A
Plaintiff's Motions to Compel
In the Motions to Compel, Plaintiff asserts that this Court must grant the motions so that it may elicit deposition testimony from both Sweeney and Gertz concerning the potential existence of "other transactions" between the two defendants and its alleged evidentiary value in support of its previously dismissed RICO claim. (Pl.'s Mem. in Supp. of Mot. to Compel 1.) In support of its Motion, Plaintiff asserts that Kelvey v. Coughlin, 625 A.2d 775 (R.I. 1993) prevented the defendant deponents from refusing to answer the plaintiff's questions and that this Court has not previously issued an order foreclosing the questions asked during Sweeney and Gertz's depositions. Id. at 1-2. Plaintiff asserts that Kelvey stands for the proposition that the exclusive basis upon which a deponent can refuse to answer a question in a deposition is when the answer contains privileged information. Id. at 2-3.
In Kelvey, the Rhode Island Supreme Court held that the only instance in which an attorney is justified in instructing a deponent not to answer a question is when the question calls for privileged information. Kelvey, 625 A.2d at 776. Otherwise, "the objection is stated, and the evidence objected to is taken subject to the objections." Id. However, as Defendants point out, Rule 30(d)(1) was amended two years after the Rhode Island Supreme Court decided Kelvey. (Defs.' Obj. at 6.) Currently, Rule 30(d)(1) reads as follows:
"(1) Any objection to evidence during a deposition shall be stated concisely and in a non-argumentative and non-suggestive manner. A person may instruct a deponent not to answer only when necessary to preserve a privilege, to enforce a limitation on evidence directed by the court, or to present a motion under paragraph (3)." Super. R. Civ. P. 30(d)(1) (emphasis added).
Therefore, based on the recently amended language contained in Rule 30(d)(1), it is clear that deponents are permitted to refuse to answer a question during a deposition pursuant to a court-imposed limitation on evidence. See id. In this Court's June 9, 2020 Decision, the Court held that prior business dealings between Sweeney and Gertz were irrelevant to the current lawsuit. (Decision 4 (June 9, 2020) (Stern, J.).) Specifically, the Court explained that "discovery into any and all business relationships, transactions, and/or communications between Sweeney and Gertz from January 1, 2011, to present is not relevant to PalmLake, the Agreement, or Defendants [sic] dealings with BRAM." Id. (emphasis added).
Further, in this Court's June 9, 2020 Decision, it held that the scope of discovery was limited to the Agreement between BRAM and PalmLake. Id. Specifically, the Court stated "[w]hile the Defendants' contention that the scope of discovery is constrained to matters relative to a claim or defense is misplaced-as the plain language of Rule 26, and our Supreme Court's rulings, dictate that the scope of discovery is any matter relating to the subject matter of the litigation-the subject matter of the instant litigation is the April 23, 2016 'Purchase Order Purchase Agreement' (the Agreement) entered into by and between BRAM and PalmLake." Id. (emphasis added).
Additionally, Plaintiff argues that it is entitled to question Sweeney regarding a letter arising out of the Audette matter before this Court and a potential nexus between Rule 1.8 of the Rhode Island Rules of Professional Conduct violations in Audette and the instant matter. (Pl.'s Mem. in Supp. of Mot. to Compel 11-15.) However, it is clear that this Court's June 9, 2020 Decision clarified the scope of this case as the Agreement between BRAM and PalmLake. Therefore, under Rule 30(d)(1), this line of questioning was impermissible based on the Court's previous limitations contained in its Decision, and both Sweeney and Gertz were properly instructed not to answer the questions posed at their depositions.
Plaintiff's Motions to Compel additionally argue that questions posed at Defendants' depositions were improperly unanswered on the basis of attorney client privilege. (Pl.'s Mem. in Supp. of Mot. to Compel 15-20.) Because this Court has already determined that this line of inquiry falls outside of the scope of the Court's previous evidentiary limitation, this Court need not address this argument.
B
Plaintiff's Motion to Amend
In addition to Plaintiff's Motions to Compel in the instant matter, Plaintiff also filed a Motion to file a Third Amended Complaint. See Pl.'s Proposed Third Am. Compl. In the Proposed Third Amended Complaint, Plaintiff seeks to replead previously alleged RICO violations against Defendants. Id. However, in this Court's October 15, 2019 Decision, it dismissed the RICO allegations due to several fatal deficiencies in the manner in which the allegations were pled. See Gemma, 2019 WL 5396136, at *7.
Under Rule 15(a) of the Superior Court Rules of Civil Procedure, a court may grant leave to amend "when justice so requires." Super. R. Civ. P. 15(a). Additionally, the Rhode Island Supreme Court has held that "trial justices should liberally allow amendments to the pleadings." Lomastro, 56 A.3d at 95. However, "a number of reasons-such as undue delay, bad faith, undue prejudice to the opposing party, or, most relevant to this case, futility of the amendment-may nonetheless warrant the denial of a motion to amend." IDC Properties, Inc., 128 A.3d at 393.
As stated above, this Court assumes that Defendants must demonstrate that filing the Proposed Third Amended Complaint would be futile beyond a reasonable doubt, which it would be required to demonstrate on a Motion to Dismiss.
Plaintiff contends that this Court should grant its Motion to File a Third Amended Complaint and allow it to reinstate its RICO claims, despite this Court's previous October 15, 2019 Decision dismissing its RICO claims. (Pl.'s Mot. to Amend 7-8.) In support of this argument, Plaintiff contends that, as opposed to the single April 23 Agreement and its Addenda, the Defendants have actually entered into a series of separate transactions constituting the basis for a reinstated RICO claim. Id. at 12. However, it is clear based on the Court's previous factual findings in its October 15, 2019 Decision that the two updates to the original April 23 Agreement constitute Addenda and are clearly not separate transactions for the purposes of RICO. See Gemma, 2019 WL 5396136, at *1-2.
The Plaintiff also argues that they are seeking to add allegations to their Proposed Third Amended Complaint alleging that Sweeney agreed to indemnify Gertz. (Pl.'s Mot. to Amend 11.) However, as explained below, the existence of an indemnification agreement between Sweeney and Gertz fails to allege the existence of an "association-in-fact" enterprise, which may ostensibly establish the existence of multiple transactions under RICO. Additionally, it is clear that both Rhode Island and Florida's RICO statutes are clearly not intended to cover the type of conduct at issue in Plaintiff's Complaint.
As previously stated, on October 15, 2019, this Court issued a written Decision in this matter dismissing the RICO claims that Plaintiff is attempting to reincorporate back into its Proposed Third Amended Complaint in the instant Motion to Amend. See Docket (PC-2018-3635). The Court's Decision took issue with numerous pleading deficiencies contained in Plaintiff's Complaint which Plaintiff now seeks to correct in the Proposed Third Amended Complaint. See Pl.'s Proposed Third Am. Compl. Overall, the following pleading deficiencies persist in Plaintiff's Proposed Third Amended Complaint based on Plaintiff's failure to observe the Court's Decision granting Defendants' Motion to Dismiss.
First, in Plaintiff's Proposed Third Amended Complaint, he attempts to separate out two distinct enterprises. (Pl.'s Proposed Third Am. Compl. ¶¶ 92-117.) In order to plead a RICO action successfully, each claim must allege an enterprise. The first enterprise identified by Plaintiff is PalmLake. Id. The second enterprise is identified as Sweeney and Gertz as a collective, even though that same count designates both Sweeney and Gertz separately as the RICO defendants. Id. This Court's previous Decision held that neither PalmLake nor Duffy & Sweeney can serve as the RICO enterprise without violating the distinctiveness requirement. See Gemma, 2019 WL 5396136, at *6. ("At least as alleged, for the purposes of the RICO claims, neither PalmLake nor D&S can serve as the RICO enterprise without violating the distinctiveness requirement."). "Any individual the Complaint named as a RICO person cannot, as a matter of law, serve as the RICO enterprise; to hold otherwise would be to enable the RICO persons to work 'double duty' and violate the distinctiveness requirement." Id. at *7 (quoting Miranda v. Ponce Federal Bank, 948 F.2d 41, 44 (1st Cir. 1991)).
As with the previous Second Amended Complaint, the Proposed Third Amended Complaint fails to demonstrate how an entity comprised solely of two members can serve as a distinct RICO enterprise. Additionally, Plaintiff's allegation that Sweeney and Gertz collectively constitute an enterprise, while at the same time alleging that the exact same individuals and an entity comprised solely of Sweeney and Gertz constitute the RICO defendants, does not satisfy the distinctiveness requirement for a valid RICO claim. Additionally, the Court's previous October 15, 2019 Decision states that unless Plaintiff could "distinguish between Defendants' respective roles," the Complaint would violate the distinctiveness requirement. Id. It is clear that the
Proposed Third Amended Complaint does not successfully remedy the Court's inability to differentiate between the separate and distinct roles occupied by the alleged RICO defendants and the requisite enterprises as is required under the law.
Further, the Court's October 15, 2019 Decision took issue with Plaintiff's allegations that PalmLake is a RICO enterprise, because elsewhere in the Complaint Plaintiff is alleging that PalmLake is the alter ego of Sweeney and Gertz. Id. at *7 ("These alter-ego allegations destroy the possibility of PalmLake serving as the legal enterprise.") Plaintiff's Proposed Third Amended Complaint retains this deficiency, despite the Court's previous October 15, 2019 Decision. Additionally, the Court previously took issue with Plaintiff's failure to clearly allege facts suggesting that Sweeney and Gertz constitute an entity "separate and apart" from the alleged collection of unlawful debt that serves as the basis for Plaintiff's allegation of a predicate act. Id. at *8. Plaintiff's Proposed Third Amended Complaint has not provided the Court with additional clarity on this issue sufficient to permit a Motion to Amend.
With regard to Plaintiff's argument that the pleading deficiencies can be overcome based on Rule 8(e)(2) of the Superior Court Rules of Civil Procedure, which allows for alternate pleading, this Court has already rejected this argument in the October 15, 2019 Decision and noted that Plaintiff's allegations of usury against all Defendants further reinforces the Complaint's inconsistency and deficiency. Id. at *7. The Plaintiff's Proposed Third Amended Complaint still includes the usury counts against all Defendants. See Pl.'s Proposed Third Am. Compl. ¶¶ 79-91. Separately, regarding Plaintiff's inability to satisfy the distinctiveness requirement under RICO, this Court's previous October 15, 2019 Decision highlighted the fact that Plaintiff was treating all of the parties in the exact same way in the Complaint. See Gemma, 2019 WL 5396136, at *6-7. This issue still clearly persists in paragraphs 1-71 of Plaintiff's Proposed Third Amended Complaint. (Pl.'s Proposed Am. Compl. ¶ 69) ("At all times relevant hereto, Defendant Sweeney was acting for himself and on behalf of Defendants Gertz, D&S, and purportedly PalmLake, with regard to the loan payments."). Finally, this Court's previous October 15, 2019 Decision took issue with Plaintiff's allegations of simple usury. Gemma, 2019 WL 5396136, at *8 ("[T]his Court has an obligation to draw clear lines between RICO and simple usury."). As explained below, "simple usury" is likely insufficient for the purposes of this action.
In addition to the deficiencies noted in the Court's October 15, 2019 Decision that Plaintiff failed to remedy, it is also clear that the RICO statute itself and its accompanying jurisprudence did not contemplate the alleged transactions at issue falling under the scope of the law. Rhode Island and Florida have RICO statutes that almost exclusively mirror the federal counterpart. See Vitone v. Metropolitan Life Insurance. Co., 943 F.Supp. 192, 200 (D.R.I. 1996). Further, Rhode Island courts treat state civil RICO claims in an extremely similar fashion to federal civil RICO claims. See Carlsten v. The Widecom Group, Inc., No. PC-1997-1425, 2003 WL 21688263 (R.I. Super. July 1, 2003). Overall, for the reasons explained below, the instant matter is inappropriate for a RICO action.
While federal case law has suggested that the collection of an unlawful debt itself may violate RICO even without a "pattern" of "racketeering [activity, ]" case law regarding civil RICO actions based on the collection of unlawful debt strongly suggest that it was not intended to be used in the instant matter. See Schar et al, RICO: A Guide to Civil RICO Litigation in Federal Courts Jenner & Block at 52; 18 U.S.C. § 1961(6) ("unlawful debt" means a debt "incurred or contracted in gambling activity which was in violation of the law" and a debt "which was incurred in connection with the business of gambling in violation of the law . . . . "); Durante Brothers & Sons, Inc. v. Flushing National Bank, 755 F.2d 239, 250 (2d Cir. 1985) (collection of unlawful debt as a predicate for RICO liability "seems to have been an explicit recognition of the evils of loan sharking" and requirement that loan must be incurred in connection with "the business of" making usurious loans excludes from the scope of the statute occasional usurious transactions by individuals or entities not in the business of loan sharking) (emphasis added); Malvar Egerique v. Chowaiki, No. 19 Civ. 3110 (KPF), 2020 WL 1974228, at *19 (S.D.N.Y. Apr. 24, 2020) (finding that section 1961(6) does not encompass occasional usurious transactions and dismissing RICO claims where plaintiff only alleged a single usurious loan) (emphasis added).
Additionally, based on the requirements of the RICO statute, Plaintiff has also failed to plead that each Defendant has intended to engage in conduct with actual knowledge of the illegal activities. See Walters v. McMahen, 684 F.3d 435, 440-43 (4th Cir. 2012) (affirming the dismissal of a complaint for failure to plead sufficient facts showing that an employer has actual knowledge that aliens were "brought into the United States" for predicate act of illegal hiring). Specifically, Plaintiff's Proposed Third Amended Complaint fails to incorporate the usury counts into the RICO counts. See Pl.'s Proposed Am. Compl. This omission, in addition to the lack of allegations demonstrating that Defendants had actual knowledge, further exemplifies Plaintiff's failure to adequately plead the alleged RICO violations.
Additionally, in Zarrella v. Minnesota Mutual Life Insurance Co., 824 A.2d 1249 (R.I. 2003), the Rhode Island Supreme Court held that in order to establish civil liability under RICO, "a plaintiff must first establish that defendant engaged in criminal activity[, ]" otherwise they will not be able to prevail on those claims. Zarrella, 824 A.2d at 1261. In Plaintiff's RICO counts, it specifically excludes all counts referencing the requisite criminal predicate act in the Proposed Third Amended Complaint. See Pl.'s Proposed Am. Compl. 22-28. This pleading deficiency makes it impossible for Plaintiff to adequately plead the requisite predicate act for the RICO claims. All of the above-mentioned deficiencies in Plaintiff's Proposed Third Amended Complaint have convinced this Court that allowing Plaintiff to refile the Complaint would be futile under Rhode Island law.
IV
Conclusion
Based on the foregoing, Plaintiff's Motions to Compel Deposition Testimony from Sweeney and Gertz are denied. This Court must deny Plaintiff's Motions as a matter of law because Defendants have successfully demonstrated that this Court's previous June 9, 2020 Decision forecloses further testimony regarding an alleged indemnification agreement or alleged Rule 1.8 violations. This Court also denies Plaintiff's Motion to File a Third Amended Complaint in this instant matter because Defendants have successfully established that Plaintiff's attempted filing of the Third Amended Complaint under Rhode Island law would be futile. Counsel shall prepare and submit the appropriate order for entry consistent with this Decision.