Opinion
16-CV-5255 (AJN) (JLC)
03-31-2021
LEWIS FAMILY GROUP FUND LP, et al., Plaintiffs, v. JSBARKATS PLLC, et al., Defendants.
REPORT AND RECOMMENDATION
JAMES L. COTT, United States Magistrate Judge.
To the Honorable Alison J. Nathan, United States District Judge: Plaintiffs Lewis Family Group Fund LP, LF Fund GP LLC, and Kelly Ann Lewis brought this action against defendants Sunny J. Barkats, JSBarkats PLLC, and Sunny Sky Realty, LLC seeking, inter alia, monetary relief for RICO claims and related common law claims, including common law fraud, and intentional and negligent infliction of emotional distress. On July 11, 2019, the Court entered a default in favor of plaintiffs. The case was subsequently referred to me to conduct an inquest into damages. For the reasons set forth below, I recommend that defendants be held jointly and severally liable for $405,000 in RICO treble damages, as well as for prejudgment interest on that award at a rate of 9% per annum, and for $164,541.65 in compensatory damages on plaintiffs' negligent infliction of emotional distress claim.
I. BACKGROUND
A. Facts
The following facts, which are drawn from a review of plaintiffs' pleadings, affidavits, and submissions related to this inquest, “are deemed established for the purpose of determining the damages to which they are entitled.” Salazar v. 203 Lena Inc., No. 16-CV-7743 (VB) (JLC), 2020 WL 5627118, at *1 (S.D.N.Y. Sept. 18, 2020) (citing City of New York v. Mickalis Pawn Shop, LLC, 645 F.3d 114, 137 (2d Cir. 2011)), adopted by 2020 WL 6257158 (S.D.N.Y. Oct. 23, 2020).
Plaintiffs are Lewis Family Group Fund LP f/k/a Lewis Family Investments Fund, LP, a Delaware limited partnership doing business in California, its general partner LF Fund GP LLC, also a Delaware limited partnership doing business in California (together, the “Lewis Family Fund”), and Kelly Ann Lewis (“Lewis”), an individual who lives in California (collectively, “Plaintiffs”). Second Amended Complaint, dated May 5, 2017 (“SAC”), Dkt. No. 71, ¶¶ 14-16. The remaining defendants are Sunny J. Barkats, an attorney based in New York City, JSBarkats PLLC (“JSB PLLC”), his New York-based law firm, and Sunny Sky Realty, LLC, a New York limited liability company and real estate brokerage firm (collectively, “Defendants” or “Barkats Defendants”). Id. ¶¶ 17-19.
The SAC also named JP Morgan Chase Bank, N.A. (“Chase”), and Does 1 through 10. The Court granted Chase's motion to dismiss on January 18, 2018. Dkt. No. 161. Defendants Does 1 through 10, made up of agents and employees or alter-egos of one or more of the named defendants (SAC ¶ 23), have not been identified.
Lewis established a relationship with Barkats in late 2014 through her brother Ryan Lewis, who had been discussing legal representation with Michael Wheeler, an associate at JSB PLLC. Id. ¶ 29. After one meeting with Lewis, her brother, and her father, Barkats sent Lewis a retainer agreement. Id. ¶¶ 31-32. Barkats-nor anyone at JSB PLLC-never advised Lewis that there was “a significant risk that Ba[r]kats' professional judgment on behalf of [ ] Plaintiffs would be adversely affected by Barkats' own . . . interest.” Id. ¶ 34.
Barkats originally sent Lewis a copy of a proposed retainer agreement on December 1, 2014. Id. ¶ 35. On January 6, 2015, Barkats sent a new retainer agreement and, through a series of emails, misrepresented the contents of the new retainer agreement, to which he made material changes that were increasingly favorable to his financial interests. Id. ¶¶ 36-44. The new agreement-which Lewis signed on January 7, 2015 in reliance on Barkats' various misrepresentations-provided that Lewis would wire a minimum of $250,000 into a commercial bank account to be created by Barkats, and not a lawyer's escrow account as provided by the original proposed retainer and as required by Rule 1.15 of the Rules of Professional Conduct. Id. ¶¶ 47-49.
Plaintiffs mistakenly cite to Rule 1.5(a)(1) in the SAC. SAC ¶ 48. However, it is Rule 1.15(b)(1) that applies. “To ensure the total separation of attorney funds from those belonging to others, the Rules require that a lawyer segregate funds belonging to clients or third parties in a special account. Specifically, Rule 1.15(b)(1) provides that ‘[a] lawyer who is in possession of funds belonging to another person incident to the lawyer's practice of law shall maintain such funds in a banking institution within New York State.'” In the Matter of Wooten, No. 15-MC-1496 (BMC) (RML), 2016 WL 5900150, at *6 (E.D.N.Y. Oct. 11, 2016) (alteration in original) (citing Rule 1.15(b)(1)). In addition, “subsection (b)(2) provides that ‘[a] lawyer . . . shall identify the special bank account or accounts required by Rule 1.15(b)(1) as an “Attorney Special Account, ” “Attorney Trust Account, ” or “Attorney Escrow Account, ” and shall obtain checks and deposit slips that bear such title.'” Id. (alteration in original) (citing Rule 1.15(b)(2)).
On January 16, 2015, JSB PLLC organized the Lewis Family Investments Fund LP as a Delaware limited partnership, and its general partner, LF Fund GP, LLC, as a Delaware limited liability company. Id. ¶ 51. Without properly advising Lewis, Barkats convinced her to sign the limited partnership agreement and the operating agreement “based on false and fraudulent pretenses as to their true relevance or purported exigent circumstances.” Id. ¶ 55; see generally ¶¶ 55-61 (detailing emails and misrepresentations surrounding Lewis' signing of agreements). In addition, without advising Lewis of the changes, Barkats inserted several provisions in the agreements that gave Barkats unilateral discretion to use the Lewis Family Fund's $260,000 investment capital (the amount that had been invested, $10,000 more than the minimum), allowed Barkats to advise Sunny Sky Realty to engage in activities in direct competition to the Lewis Family Fund, and mandated joint consent of both Lewis and Barkats to terminate the partnership, essentially allowing Barkats to give himself “perpetual control” of the Lewis Family Fund. Id. ¶¶ 64-67.
On February 3, 2015, Barkats opened a commercial bank account with Chase in the name of “Lewis Family Fund Investment, ” for which he was the sole signatory, and proceeded to use the account for Defendants' personal use without any consent or authority from Plaintiffs. Id. ¶¶ 69-78. Of the original $260,000 that Lewis wired to the account, $145,740 was disbursed or invested by Defendants since February 9, 2015, including: (1) $15,000 disbursed to JSB PLLC as monthly legal fees; (2) $100,000 transferred to Barkats' personal account on May 28, 2015, of which Barkats used $90,000 to buy an investment property in Irvington, New Jersey; (3) $30,000 used to purchase, on September 1, 2015, without Lewis's knowledge or consent, common stock of Mobileye, a technology company; (4) $554.29 withdrawn as ATM charges by Barkats, who had an ATM card made for himself, for restaurant meals, parking lots, taxis, and other expenditures, without Lewis's knowledge or consent; and (5) $185.71 deducted by Chase as bank charges for printing a checkbook and miscellaneous items. Id. ¶¶ 75-76, 78. In addition, Barkats transferred the profits of the Lewis Family Fund's only bridge loan to himself, JSB PLLC, and Sunny Sky Realty. Id. ¶¶ 79-83.
Starting in mid-October 2015, after being repeatedly asked for a full accounting of the Lewis Family Fund, Barkats sent a series of emails lying to Lewis about the fund and delaying a full accounting. Id. ¶¶ 95-100. After receiving copies of the bank records from Chase, Lewis withdrew the remaining $111,700 in the account and terminated the retainer agreement with JSB PLLC verbally on October 21, 2015 and in writing on October 27, 2015. Id. ¶¶ 107-08. On October 27, 2015, Barkats contacted Chase, claiming the he had sole management rights to the money in the Lewis Family Fund, and that the transfer of the money to Lewis was unauthorized. Id. ¶ 110. Chase eventually filed an interpleader action in the Superior Court of California, Los Angeles County-Central District, captioned JPMorgan Chase Bank, NA v. Lewis Family Investments Fund LP, LF Fund GP, LLC, Sanny J. Barkats a/k/a Sunny J. Barkats, Kelly Ann Lewis and Does 1 through 100, Case No.: BC602252 (“California Interpleader Action”). Id. ¶ 111. After numerous delays and motions on Barkats' part, the California court rendered a judgment favorable to Plaintiffs. Id. ¶ 112.
As part of their Second Amended Complaint, Plaintiffs identified several similar frauds and schemes by Defendants dating back to January 1, 2013, including defrauding the rapper Lil' Kim, id. ¶¶ 115-23; the soccer player Pinhas Zahavi, id. ¶¶ 124-37; and the companies InoLife Technologies Inc., Eastern Institutional, Darling Capital LLC, and U.S. Suite LLC, id. ¶¶ 138-94.
The Second Amended Complaint includes claims for relief against Defendants for RICO (count one), RICO conspiracy (count two), breach of contract (count three), breach of fiduciary duty/legal malpractice (count four), conversion (count five), constructive trust (count six), fraudulent inducement (count seven), theft of business opportunities (count eight), accounting (count nine), temporary and permanent injunctive relief (count ten), intentional infliction of emotional distress (count thirteen), and negligent infliction of emotional distress (count fourteen).
B. Procedural History
Plaintiffs filed their original complaint on July 1, 2016 (Dkt. No. 1), their first amended complaint on July 29, 2016, (Dkt. No. 24), and their second amended complaint on May 10, 2017 (Dkt. No. 71). Defendants submitted their answer to the SAC on June 22, 2017. Dkt. No. 86. After a case management conference on January 26, 2018, Defendants indicated they would file a motion for summary judgment, but after requesting extensions on February 22, 2018 (Dkt. No. 180), August 24, 2018 (Dkt. No. 190), and October 4, 2018 (Dkt. No. 192), they never submitted one.
On November 2, 2018, Defendants submitted a letter-motion requesting a stay of these proceedings in light of a sealed New York state grand jury indictment against Barkats that purportedly implicated the same transactions involved in this case. Dkt. No. 195. However, Defendants failed to demonstrate any relation between the indictment and this case, and on December 17, 2018 (Dkt. No. 205), I denied the request for a stay, and directed the parties to comply with the Court's order to submit a joint letter in preparation for trial. See Dkt. No. 194. Instead of filing a joint letter, Defendants' counsel moved to withdraw as counsel on December 26, 2018 (Dkt. No. 206), and again on January 30, 2019 (Dkt. No. 213). After the Court approved the withdrawal and a substitution of counsel on February 5, 2019 (Dkt. No. 215), and set a trial schedule on February 15, 2019, Plaintiffs submitted two letters informing the Court that they had been unable to contact Defendants' counsel. Dkt. Nos. 219, 241.
On May 10, 2019, at the deadline for pretrial submissions, Defendants' new counsel moved to withdraw. Dkt. No. 243. The Court denied the motion on June 3, 2019 because it did not comply with Local Rule 1.4 and because it was based on representations that the Court determined were “merely another delay tactic in this long-running action.” Dkt. No. 249 at 1. The Court then ordered Defendants to file their pretrial materials by June 11, 2019 and warned them that if they failed to do so, the Court would strike Defendants' answer, defenses, and counterclaims and enter a default judgment against them as a sanction for their repeated failed to participate in the litigation. Id. at 4.
After Defendants failed to submit any pretrial materials, the Court issued Rule 37 sanctions against them on July 11, 2019, for their “sustained campaign of delay tactics stretching over a year, ” finding that an entry of a default judgment against the Barkats Defendants was appropriate. Dkt. No. 252, at 5. The Court directed Plaintiffs to submit a brief establishing liability as a matter of law. Id. at 6. On July 26, 2019, Plaintiffs filed a memorandum of law arguing that they had established liability on five of their claims: their two RICO claims (Counts 1 and 2) and their common law claims for breach of fiduciary duty (Count 4), conversion (Count 5), and fraudulent inducement (Count 7). Plaintiffs' Memorandum of Law Pursuant to Court Order dated July 25, 2019 (“Pl. July 2019 Mem.”), Dkt. No. 258.
On July 21, 2020, this case was referred back to me for a damages inquest. Dkt. Nos. 267, 268. As part of the referral order, I was asked to “evaluate whether Plaintiffs' allegations establish liability as a matter of law.” Dkt. No. 267, at 2. On that same day, I issued an order asking Plaintiffs to file proposed findings of fact and conclusions of law tying the damages figures to their legal claims. Dkt. No. 270. On September 14, 2020, Plaintiffs submitted their proposed findings of fact (“Pl. Proposed Findings of Fact”) (Dkt. Nos. 278 & 279), and proposed conclusions of law (“Pl. Sept. 2020 Mem. Law”), Dkt. No. 279-11.
Plaintiffs request the following in damages: compensatory damages in the amount of $250,565.40 on their breach of contract claim, plus prejudgment interest of $108,236.30, or total damages in the sum of $358,803.70; compensatory damages in the amount of $250,565.40 on their breach of fiduciary duty claim, plus prejudgment interest of $108,236.30, or total damages in the sum of $358,803.70; compensatory damages of $250,565.40 on their fraudulent inducement and conversion claims, plus punitive damages of $300,000.00 and prejudgment interest of $108,236.30, or total damages of $658,803.70; treble damages on their RICO & RICO conspiracy claims in the amount of $751,696.20, plus prejudgment interest of $108,236.30, for total damages of $859,934.50; and compensatory damages as a direct and proximate result of Defendants' intentional and/or negligent infliction of emotional distress of $324,681.21, plus prejudgment interest of $108,236.30, or total additional damages of $432,919.51. Pl. Proposed Findings of Fact at 17-18.
II. DISCUSSION
A. Legal Standards
1. Damages May Only Be Awarded on the Well-Pleaded Allegations of the Complaint
“Where a defendant has defaulted, the court is required to accept all of the plaintiff's factual allegations as true and draw all reasonable inferences in the plaintiff's favor, . . . but it is also required to determine whether the plaintiff's allegations establish [the defendant's] liability as a matter of law.” Related Companies, L.P. v. Ruthling, No. 17-CV-4175 (JSR) (DF), 2019 WL 10947100, at *3 (S.D.N.Y. July 23, 2019) (internal quotation and alteration omitted) (quoting Finkel v. Romanowicz, 577 F.3d 79, 84 (2d Cir. 2009)). “In other words, as a defendant's default only establishes its liability based on the well-pleaded allegations of the complaint, the court must still scrutinize the plaintiff's pleading and find the claims sufficiently pleaded.” Id. (citing Galeana v. Lemongrass on Broadway Corp., 120 F.Supp.3d 306, 313 (S.D.N.Y. 2014)). Thus, if “the complaint fails to state a cognizable claim, a plaintiff may not recover even upon defendant's default.” Bolivar v. FIT Int'l Grp. Corp., No. 12-CV-0781 (PGG) (DF), 2017 WL 11473766, at *13 (S.D.N.Y. Mar. 16, 2017), adopted by 2019 WL 4565067 (Sept. 20, 2019) (internal quotation marks omitted) (citing Allstate Ins. Co. v. Afanasyev, No. 12-CV-2423 (JBW) (CLP), 2016 WL 1156769, at *6 (E.D.N.Y. Feb. 11, 2016), adopted by 2016 WL 1189284 (Mar. 22, 2016)).
2. Damages Must Be Established with Reasonable Certainty
“[A]lthough a ‘default judgment entered on well-pleaded allegations in a complaint establishes a defendant's liability,' it does not reach the issue of damages.” Id. (quoting Bambu Sales, Inc. v. Ozak Trading, Inc., 58 F.3d 849, 854 (2d Cir. 1995) and citing Ferri v. Berkowitz, 561 Fed.Appx. 64, 65 (2d Cir. 2014)). “A plaintiff must therefore substantiate his claim for damages with admissible evidence to prove the extent of those damages.” Id. (quoting Hounddog Prod., L.L.C. v. Empire Film Grp., Inc., 826 F.Supp.2d 619, 627 (S.D.N.Y. 2011)).
“While the Court must ‘take the necessary steps to establish damages with reasonable certainty,' the Court need not hold a hearing ‘as long as it ensures that there is a basis for the damages specified in a default judgment.'” Idir v. La Calle TV, LLC, No. 19-CV-6251 (JGK), 2020 WL 4016425, at *2 (S.D.N.Y. July 15, 2020) (alteration omitted) (quoting Transatlantic Marine Claims Agency, Inc. v. Ace Shipping Corp., 109 F.3d 105, 111 (2d Cir. 1997) and Fustok v. ContiCommodity Servs., Inc., 873 F.2d 38, 40 (2d Cir. 1989), respectively). Because Plaintiffs' submissions have not been contested and “they provide all the information necessary to determine the plaintiff[s'] damages, ” the Court finds that a hearing is unnecessary. Id. In addition, “no party in this case has requested a hearing on damages.” Id.
Plaintiffs may support claimed damages through “a sworn affidavit by a person with knowledge of the relevant facts, or by documentary evidence duly authenticated by a person with knowledge.” Related Companies, 2019 WL 10947100, at *3 (citations omitted). “Alternatively, evidence may be provided by a declaration made under penalty of perjury, in accordance with the requirements of 28 U.S.C. § 1746.” Id. (citing Local Civ. R. 1.9(a)).
“The plaintiff also bears the burden to ‘introduce sufficient evidence to establish the amount of damages with reasonable certainty.'” Bolivar, 2017 WL 11473766, at *13 (quoting RGI Brands LLC v. Cognac Brisset-Aurige, S.A.R.L., No. 12-CV-1369 (LGS) (AJP), 2013 WL 1668206, at *6 (S.D.N.Y. Apr. 18, 2013), adopted by 2013 WL 4505255 (Aug. 23, 2013)). “While a plaintiff is entitled to all reasonable inferences in its favor based upon the evidence submitted, if a plaintiff fails to demonstrate its damages to a reasonable certainty, then the court should decline to award any damages, even where liability has been established through default.” Id. (internal citation omitted) (citing U.S. ex rel. Nat. Dev. & Const. Corp. v. U.S. Envtl. Universal Servs., Inc., No. 11-CV-0730 (CS), 2014 WL 4652712, at *3 (S.D.N.Y. Sept. 2, 2014) and Lenard v. Design Studio, 889 F.Supp.2d 518, 538 (S.D.N.Y. 2012)).
B. RICO Claims
“To establish a RICO claim, a plaintiff must show: (1) a violation of the RICO statute, 18 U.S.C. § 1962; (2) an injury to business or property; and (3) that the injury was caused by the violation of Section 1962 .” Lewis v. Steward, No. 19-CV-8085 (PAE) (OTW), 2020 WL 6801920, at *5 (S.D.N.Y. Nov. 19, 2020) (quoting Cruz v. FXDirectDealer, LLC, 720 F.3d 115, 120 (2d Cir. 2013)). Plaintiffs allege violations of the RICO statute under Sections 1962(c) and 1962(d). SAC ¶¶ 195217. Section 1962(c) makes it “unlawful for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity.” 18 U.S.C. § 1962(c). Section 1962(d) makes it “unlawful for any person to conspire to violate any of the provisions of subsection (a), (b), or (c) of this section.” Id. § 1962(d).
1. Violation of Section 1962(c)
“To state a violation of Section 1962(c), a plaintiff must plead ‘(1) conduct, (2) of an enterprise, (3) through a pattern (4) of racketeering activity.'” Yien-Koo King v. Wang, No. 14-CV-7694 (LJL), 2020 WL 6875403, at *18 (S.D.N.Y. Nov. 23, 2020) (quoting Anatian v. Coutts 223 Bank Ltd., 193 F.3d 85, 88 (2d Cir. 1999)). “Where the RICO claim is based on predicate acts of mail and wire fraud, as in this case, the plaintiff must plead these elements with particularity.” Related Companies, 2019 WL 10947100, at *4 (internal citation omitted); see also D. Penguin Bros. v. City Nat. Bank, 587 Fed.Appx. 663, 666 (2d Cir. 2014) (“In the RICO context, a plaintiff must plead predicate acts sounding in fraud or mistake according to the particularity requirement of Rule 9(b) ....”).
a) RICO Enterprise
A plaintiff asserting a RICO claim under Section 1962(c) “must allege and prove the existence of two distinct entities: (1) a ‘person'; and (2) an ‘enterprise' that is not simply the same ‘person' referred to by a different name, ” as the statute applies only to “‘person[s] who are ‘employed by or associated with' the ‘enterprise.'” Cedric Kushner Promotions, Ltd. v. King, 533 U.S. 158, 161 (2001) (citing 18 U.S.C. §§ 1961(3), 1961(4)). “Moreover, a RICO plaintiff must also allege that the defendants conducted or participated, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity.” Bolivar, 2017 WL 11473766, at *16 (alteration and quotation omitted omitted) (quoting De Sole v. Knoedler Gallery, LLC, 974 F.Supp.2d 274, 301 (S.D.N.Y. 2013)). Under RICO, a person is “any individual or entity capable of holding a legal or beneficial interest in property, ” 18 U.S.C. § 1961(3), and an enterprise is “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. § 1961(4).
Although the enterprise requirement is “most easily satisfied when the enterprise is a formal legal entity . . . [, ] an association-in-fact may also be a RICO enterprise.” Palatkevich v. Choupak, No. 12-CV-1681 (CM), 2014 WL 1509236, at *11 (S.D.N.Y. Jan. 24, 2014) (internal quotation marks omitted) (citing First Capital Asset Mgmt., Inc. v. Satinwood, Inc., 385 F.3d 159, 173 (2d Cir.2004)). Here, Plaintiffs allege an association-in-fact enterprise. SAC ¶ 197. “An association-in-fact enterprise must have, at a minimum, the following structural features: ‘a purpose, relationships among those associated with the enterprise, and longevity sufficient to permit these associates to pursue the enterprise's purpose.'” Mayfield v. Asta Funding, Inc., 95 F.Supp.3d 685, 699 (S.D.N.Y. 2015) (quoting Boyle v. U.S., 556 U.S. 938, 946 (2009)). An association-in-fact enterprise must also exist “separate and apart from the pattern of activity in which it engages.” D. Penguin Bros., 587 Fed.Appx. at 667 (quoting United States v. Turkette, 452 U.S. 576, 583 (1981)).
Plaintiffs have sufficiently pleaded the existence of a RICO enterprise and that Defendants participated in the conduct of the enterprise. The SAC alleges that JSB, PLLC, Sunny Sky Realty, LLC, and Barkats were associated together for the common purpose of defrauding Plaintiffs (SAC ¶¶ 1-4, 19, 68-87, 95-108, 113-14), other clients, and related financial services companies. Id. ¶¶ 3-4, 115-194; Pl. July 2019 Mem. at 6-7. The SAC further details the actions of each Defendant in furtherance of the scheme and describes their relationship to each other. Specifically, Plaintiffs allege that Barkats served as a securities lawyer, JSB PLLC was a law firm providing legal services, and Sunny Sky Realty was a licensed real estate firm (SAC ¶¶ 17-19), and that Barkats and JSB PLLC were primarily involved with implementing much of the scheme, while Sunny Sky Realty assisted through the movement of funds and theft of business opportunities. Id. ¶¶ 88-94; Pl. July 2019 Mem. at 7.
As to the requirement that the “person” and “enterprise” be distinct, as Plaintiffs note (Pl. July 2019 Mem. at 7), in Cedric Kushner, the Supreme Court held that a plaintiff adequately alleged a distinct RICO “person” and “enterprise, ” when contending that a corporation's president and sole shareholder was the RICO “person, ” and his corporation was the RICO “enterprise.” 533 U.S. at 163. Plaintiffs have thus sufficiently pleaded that the RICO persons and enterprise are distinct, with Barkats owning and controlling both JSB and Sunny Sky Realty. See, e.g., U1it4less, Inc. v. Fedex Corp., 871 F.3d 199, 206 (2d Cir. 2017) (“Where . . . a natural person controls two active corporations that operate independently in different lines of business, receive independent benefits from the illegal acts of the enterprise, and affirmatively use their separate corporate status to further the illegal goals of the enterprise, we will regard each of the three entities as distinct from their coordinated enterprise under Section 1962(c).”).
b) Pattern of Racketeering Activity
Plaintiffs asserting a Section 1962(c) RICO claim must also allege a “pattern of racketeering activity, ” which entails “at least two acts of racketeering activity” within 10 years of one another. 18 U.S.C. § 1961(5). “Racketeering activity, ” as defined by RICO, includes a number of criminal offenses, including mail fraud under 18 U.S.C. § 1341 and wire fraud under 18 U.S.C. § 1343. See 18 U.S.C. § 1961(1). Demonstrating a “pattern of racketeering activity” requires establishing that the activity is (1) “‘related'” and (2) “‘amount[s] to or pose[s] a threat of continued criminal activity.'” Crawford v. Franklin Credit Mgmt. Corp., 758 F.3d 473, 478 (2d Cir. 2014) (quoting H.J. Inc. v. Nw. Bell Tel. Co., 492 U.S. 229, 239 (1989)).
1. Predicate Acts of Mail and Wire Fraud
To state claims for mail and wire fraud as predicates for a RICO violation, Plaintiffs must allege: “[i] a scheme to defraud, [ii] money or property as the object of the scheme, and [iii] use of the mails or wires to further the scheme.” Malvar Egerique v. Chowaiki, No. 19-CV-3110 (KPF), 2020 WL 1974228, at *9 (S.D.N.Y. Apr. 24, 2020) (alteration in original) (quoting United States v. Weaver, 860 F.3d 90, 94 (2d Cir. 2017)). “Because the mail fraud and the wire fraud statutes use the same relevant language, [courts] analyze them the same way.” Id. (alteration in original) (quoting Weaver, 860 F.3d at 94). The mailed or wired communications do not need to be fraudulent themselves to violate these statutes, but they must “be made in furtherance of the fraudulent scheme.” Crawford, 758 F.3d at 488. “[T]he gravamen of the offense is the scheme to defraud.” Id. at 10 (alteration in original) (quoting Weaver, 860 F.3d at 94). “In order to prove the existence of a scheme to defraud, [a party must prove both] ‘that the misrepresentations were material' . . . and that the defendant acted with fraudulent intent.” Id. (alteration in original) (quoting Weaver, 860 F.3d at 94).
Allegations of mail and wire fraud, as predicate acts for a RICO claim, must be pleaded with particularity under Rule 9(b) of the Federal Rules of Civil Procedure. See, e.g., Kalimantano GmbH v. Motion in Time, Inc., 939 F.Supp.2d 392, 412 (S.D.N.Y. 2013) (citing Spool v. World Child Int'l Adoption Agency, 520 F.3d 178, 184-85 (2d Cir. 2008)). To be sufficient under Rule 9(b), however, “the complaint need not specify the time, place and content of each mail communication where the nature and mechanics of the underlying scheme is sufficiently detailed.” Ctr. Cadillac, Inc. v. Bank Leumi Trust Co., 808 F.Supp. 213, 229 (S.D.N.Y. 1992); see also In re Sumitomo Copper Litig., 995 F.Supp. 451, 456 (S.D.N.Y. 1998) (“In complex civil RICO actions involving multiple defendants . . ., Rule 9(b) does not require that the temporal or geographic particulars of each mailing or wire transmission made in furtherance of the fraudulent scheme be stated with particularity.... Rule 9(b) requires only that the plaintiff delineate, with adequate particularity in the body of the complaint, the specific circumstances constituting the overall fraudulent scheme.” (citations omitted)).
Plaintiffs have alleged these elements with particularity. They have established that Defendants failed to advise Plaintiffs of the risks of the retainer agreement in emails (SAC ¶ 34), misrepresented the contents of the retainer agreement and partnership agreements in various emails (id. ¶¶ 52, 56-57), opened accounts on behalf of Plaintiffs without their knowledge or consent (id. ¶ 73), publicly misrepresented how they were using Plaintiffs' funds (id. ¶ 83), arranged a planned reverse merger via regular mail through false representations (id. ¶ 86), misrepresented in various emails the nature and amount of funds in Plaintiffs' accounts (id. ¶¶ 96-103), and used similar methods to defraud other clients (id. ¶¶ 123, 125, 129-30). These allegations sufficiently plead, with particularity, the existence of a fraudulent scheme as well as Defendants' specific intent to defraud. Plaintiffs describe Defendants' alleged fraud “in detail and ‘connect the allegations of fraud to each individual defendant.'” Delgado v. Ocwen Loan Servicing, LLC, No. 13-CV-4427 (NGG) (RML), 2014 WL 4773991, at *19 (E.D.N.Y. Sept. 24, 2014) (quoting Colony at Holbrook, Inc. v. Strata G.C., Inc., 928 F.Supp. 1224, 1231 (E.D.N.Y. 1996)). Moreover, Plaintiffs have pled more than two predicate acts that have occurred within ten years, with the above-cited allegations ranging from 2013 through 2017. Pl. July 2019 Mem. at 9.
2. Relatedness
“Predicate crimes must be related both to each other (‘horizontal relatedness') and to the enterprise as a whole (‘vertical relatedness').” Egerique, 2020 WL 1974228, at *8 (citing Reich v. Lopez, 858 F.3d 55, 60 (2d Cir. 2017)). Vertical relatedness “requires only ‘that the defendant was enabled to commit the offense solely because of his position in the enterprise or his involvement in or control over the enterprise's affairs, or because the offense related to the activities of the enterprise.'” Reich, 858 F.3d at 61 (quoting United States v. Burden, 600 F.3d 204, 216 (2d Cir. 2010)). Plaintiffs' Second Amended Complaint sufficiently alleges vertical relatedness because the mail and wire fraud relate to Defendants' enterprise as the communications were all sent and coordinated by Barkats, JSB PLLC, and Sunny Sky Realty. SAC ¶¶ 2-3. Moreover, Plaintiffs allege that Barkats is the “sole and managing member of both JSBarkats PLLC and Sunny Sky Realty.” Id. at 19. Horizontal relatedness requires that the predicate acts “have the same or similar purposes, results, participants, victims, or methods of commission, or otherwise are interrelated by distinguishing characteristics and are not isolated events.” Reich, 858 F.3d at 61 (quoting H.J. Inc. v. Nw. Bell Tel. Co., 492 U.S. 229, 240 (1989)). Plaintiffs have also adequately alleged horizontal relatedness. They have made plain that Defendants misrepresented their authority to open up a bank account without Plaintiffs' signature and used the bank account for Barkats' personal gain (SAC ¶¶ 68-87), misrepresented and misdirected business opportunities from Plaintiffs to benefit Sunny Sky Realty (id. ¶¶ 88-94), and repeatedly lied in emails to Plaintiffs about how Defendants were using Plaintiffs' funds (id. ¶¶ 95-108, 113-14). Thus, Plaintiffs sufficiently demonstrated that Defendants' “methods of commission, victims, and results of the predicate acts” are similar and therefore related: Defendants used emails to deceive Plaintiffs as part of a scheme to defraud for Barkats' personal gain. Reich, 858 F.3d at 62.
3. Continuity
To satisfy continuity, a plaintiff must establish either “a series of related predicate acts extending over a substantial period of time” (“closed-ended continuity”) or “a threat of continuing criminal activity” (“open-ended continuity).” Egerique, 2020 WL 1974228, at *9 (quoting Cofacredit, S.A. v. Windsor Plumbing Supply Co., 187 F.3d 229, 242 (2d Cir. 1999)). Plaintiffs allege “closed-ended continuity” and “open-ended continuity” (Pl. July 2019 Mem. at 9) and have established both.
Closed-ended continuity “requires that the predicate crimes extend ‘over a substantial period of time.” Egerique, 2020 WL 1974228, at *9 (internal citation and quotation marks omitted) (quoting Reich, 858 F.3d at 60). In addition, the Second Circuit “generally requires that the crimes extend over at least two years.” Id. (quoting Reich, 858 F.3d at 60). “Although continuity is primarily a temporal concept, other factors such as the number and variety of predicate acts, the number of both participants and victims, and the presence of separate schemes are also relevant in determining whether closed-ended continuity exists.” Williams v. Equitable Acceptance Corp., 443 F.Supp.3d 480, 493 (S.D.N.Y. 2020) (quoting First Cap. Asset Manag., Inc. v. Satinwood, Inc., 385 F.3d 159, 181 (2d Cir. 2004)). Plaintiffs have sufficiently alleged predicate acts that span four years, from 2013 to 2017, have identified multiple defendants and victims, and have pled similar but separate schemes affecting both Plaintiffs and other individuals. Pl. July 2019 Mem. at 9; SAC ¶¶ 195-217. See, e.g., Equinox Gallery Ltd. v. Dorfman, 306 F.Supp.3d 560, 573 (S.D.N.Y. 2018) (finding closed-ended continuity in an association-in-fact enterprise with single victim where predicate acts spanned six years).
“On the other hand, criminal activity that by its nature projects into the future with a threat of repetition possesses open-ended continuity ....” Id. (quotation marks omitted) (quoting Reich, 858 F.3d at 60). Plaintiffs have sufficiently pled opened-ended continuity as well. Specifically, the alleged predicate acts span four years, and, crucially, the SAC “contains allegations of numerous individuals other than the Named Plaintiffs . . . that are consistent with the scheme alleged by plaintiffs.” Williams, 443 F.Supp.3d at 493. Pl. July 2019 Mem. at 9; SAC ¶¶ 195-217. Given these pleadings, the SAC “contains sufficient allegations that reveal ‘the threat of continuity.'” Id. (quoting Beauford v. Helmsley, 865 F.2d 1386, 1392 (2d Cir. 1989)).
c) Injury and Causation
“[A] civil RICO plaintiff must allege and ultimately prove that a violation was both a ‘but-for” and ‘proximate cause' of its injury.'” Alix v. McKinsey & Co., Inc., 404 F.Supp.3d 827, 833 (S.D.N.Y. 2019) (citing Holmes v. Securities Investor Corp. 503 U.S. 258, 268 (1992)). “Upon a defendant's default, proximate causation is irrefutably established when it is properly alleged in the complaint.” Bolivar, 2017 WL 11473766, at *19 (quoting Lukaszuk v. Sudeen, No. 02-CV-5143 (JG) (MDG), 2007 WL 4699018, at *5 (E.D.N.Y. Nov. 27, 2007)). Plaintiffs allege that they relied on Defendants' various misrepresentations in signing the agreements and if it were not for those misrepresentations they would not have lost at least $153,000 of their initial investments or the alleged theft of business opportunities through Sunny Sky Realty. Pl. July 2019 Mem. at 11; SAC ¶¶ 54, 259. These allegations sufficiently plead the injury and causation requirements under the RICO statute. See, e.g., Bolivar, 2017 WL 11473766, at *19 (complaint adequately alleged injury and causation under RICO where plaintiffs relied upon defendants' misrepresentations when investing funds).
2. Violation of Section 1962(d)
“To state a claim for RICO conspiracy under § 1962(d), the plaintiff must also ‘allege the existence of an agreement to violate RICO's substantive provisions.'” Butcher v. Wendt, 975 F.3d 236, 241 (2d Cir. 2020) (quoting Williams v. Affinion Grp., LLC, 889 F.3d 116, 124 (2d Cir. 2018)). “It is not necessary for the conspiratorial agreement to be express, so long as its existence can plausibly be inferred from words, actions, and the interdependence of activities and persons involved.” Bolivar, 2017 WL 11473766, at *19 (internal quotation and alteration omitted) (quoting Envtl. Servs., Inc. v. Recycle Green Servs., Inc., 7 F.Supp.3d 260, 275 (E.D.N.Y. 2014).
Plaintiffs adequately allege that Barkats, JSB PLLC, and Sunny Sky Realty are liable under Section 1962(d) for conspiring to violate the RICO statute, with Barkats managing both JSB PLLC and Sunny Sky Realty. “[T]hese defendants each worked together to commit mail and wire fraud in furtherance of their fraudulent scheme. Thus, an agreement to violate Section 1962(c) can be inferred.” Id. at *20.
3. Barkats, JSB PLLC, and Sunny Sky Realty Are Jointly and Severally Liable
“While the Second Circuit has not addressed whether all RICO coconspirators may be held jointly and severally liable for damages arising from all acts of the conspiracy, several courts in this Circuit, as well as other circuit courts, have answered this question in the affirmative.” Related Companies, 2019 WL 10947100, at *8 (citing cases); see, e.g., Allstate Ins. Co. v. Harvey Family Chiropractic, Physical Therapy & Acupuncture, PLLC, No. 15-CV-7149 (SJ) (CLP), 2018 WL 8544440, at *18 (E.D.N.Y. Sept. 21, 2018) (“[W]here defendants are involved in a RICO conspiracy, each defendant is jointly and severally liable for all of the plaintiff's damages, even those with which an individual defendant was not personally involved.” (quotation marks and citation omitted)) (report and recommendation); Sole v. Knoedler Gallery, LLC, No. 12-CV-2313 (PGG) (HBP), 2016 WL 5417880, at *6-7 (S.D.N.Y. July 21, 2016), adopted by 2016 WL 5468298 (Sept. 28, 2016) (awarding, upon defendants' default, damages for RICO conspiracy claim against all co-conspirators jointly and severally); Loop Prod. v. Capital Connections LLC, 797 F.Supp.2d 338, 353 (S.D.N.Y. 2011) (same). I, therefore, recommend that, for their RICO violations, Barkats, JSB PLLC, and Sunny Sky Realty be held jointly and severally liable for Plaintiffs' RICO damages.
C. Common Law Claims
In addition to the damages for the RICO claims, Plaintiffs seek compensatory damages of $250,565.40 as a direct and proximate result of the Barkats defendants' breach of contract, breach of fiduciary duty, fraudulent inducement, and conversion, plus prejudgment interest of $108,236.30, or total damages of $358,803.70, with an additional $300,000.00 in punitive damages on the fraudulent inducement and conversion claims. Although Plaintiffs allege separate duties stemming from the various common law claims, the damages submissions for the fraud, breach of contract, breach of fiduciary duty, and conversion claims, all stem from the same injuries. Because all of the damages submissions arise from the same injuries as the common law fraud, “there is no reason for the Court to examine the adequacy of Plaintiff[s'] pleading with respect to any other claims that [they have] pleaded.” Hood v. Ascent Med. Corp., No. 13-CV-628 (RWS) (DF), 2016 WL 1366920, at *15 (S.D.N.Y. Mar. 3, 2016), adopted by, 2016 WL 3453656 (June 20, 2016), aff'd, 691 Fed.Appx. 8 (2d Cir. 2017). “Assessing Plaintiffs' other claims is unnecessary, as each of Plaintiffs' claims arise from the same fraudulent conduct and allege the same injury . . . and Plaintiffs are not, in any event, entitled to duplicative damages arising from the same conduct and same injury.” Bolivar, 2017 WL 11473766, at *14 n.11 (citing Phelan v. Local 305 of United Ass'n of Journeymen, 973 F.2d 1050, 1063 (2d Cir. 1992) (“A plaintiff may not recover twice for the same injury.”); see also, e.g., Am. Transit Ins. Co. v. Bilyk, No. 19-CV-5171 (BMC), 2021 WL 216673, at *7 (E.D.N.Y. Jan. 21, 2021) (“Because plaintiff's motion for default judgment is granted as to its common law fraud claims, the motion as to the unjust enrichment claims is denied as duplicative.”); Sole, 2016 WL 5417880, at *9 n.7 (“Plaintiffs are not entitled to recover . . . on their common law fraud claims in addition to their Civil RICO recovery-such a recovery would be duplicative of their overlapping Civil RICO damage recovery.”). Moreover, the RICO and common law fraud claims “cover the full extent of the damages that Plaintiffs seek, in that, while the underlying damages would be the same, the fraud claim . . . provides for prejudgment interest, and the RICO claim . . . provides for treble damages.” Bolivar, 2017 WL 11473766, at *14 (internal citations omitted). Thus, the Court will address only the common law fraud claims for purposes of determining whether prejudgment interest is appropriate here, and then will separately address the intentional infliction of emotional distress (“IIED”) and negligent infliction of emotional distress (“NIED”) claims as they arise from different injuries.
Plaintiffs argue that their conversion claim is not duplicative in part because it is the basis for punitive damages. Pl. Sept. 2020 Mem. at 8. However, because “the Defaulting Defendants are being assessed treble damages under the RICO statute, and such damages meet the purposes of retribution and deterrence, ” Plaintiffs should not be awarded punitive damages. Loop Prod. v. Capital Connections, LLC, 797 F.Supp.2d 338, 353 n.1 (S.D.N.Y. 2011); see also Charron v. Pinnacle Grp. N.Y. LLC, 874 F.Supp.2d 179, 195 (S.D.N.Y. 2012 (“[P]unitive damages are not available under any circumstances as a remedy for Plaintiffs' RICO claims.” (citing Bingham v. Zolt, 823 F.Supp. 1126, 1135 (S.D.N.Y. 1993))), aff'd sub nom. Charron v. Wiener, 731 F.3d 241 (2d Cir. 2013).
1. Common Law Fraud
“Where a moving party cites the law of a particular state in support of its claims, and the adverse party does not oppose the motion, the adverse party's ‘silence on the choice-of-law question' may be understood to ‘constitute implied consent . . . sufficient to establish choice of law.'” Related Companies, 2019 WL 10947100, at *10 (alteration omitted) (quoting Travelers Cas. And Surety Co. of America v. Gold, Scollar, Moshan, PLLC, No. 14-CV-10196 (DF), 2018 WL 1508573, at *7 (S.D.N.Y. Mar. 14, 2018)). Plaintiffs cite to New York law in their inquest motion papers and in the absence of any opposition from Defendants, the Court will apply New York law in considering Plaintiffs' common law claims.
a) Adequacy of Pleadings
“Under New York law, to state a claim for fraud a plaintiff must demonstrate: (1) a misrepresentation or omission of material fact; (2) which the defendant knew to be false; (3) which the defendant made with the intention of inducing reliance; (4) upon which the plaintiff reasonably relied; and (5) which caused injury to the plaintiff.” Bolivar, 2017 WL 11473766, at *14 (quoting Wynn v. AC Rochester, 273 F.3d 153, 156 (2d Cir. 2001)). As discussed in relation to the RICO fraud-based claim, pursuant to Rule 9(b) of the Federal Rules of Civil Procedure, a plaintiff who alleges fraud “must state with particularity the circumstances constituting fraud or mistake.” Fed.R.Civ.P. 9(b). “In order to comply with Rule 9(b), the complaint must: (1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent.'” Bolivar, 2017 WL 11473766, at *14 (alteration and quotation omitted) (quoting Lerner v. Fleet Bank, N.A., 459 F.3d 273, 290 (2d Cir. 2006)). In addition, “[w]here the fraudulent conduct is alleged to have taken place over a number of years, the requirements of Rule 9(b) are less stringently applied.” Id. (quoting U.S. ex rel. Taylor v. Gabelli, 345 F.Supp.2d 313, 326 (S.D.N.Y. 2004)). Moreover, a plaintiff “must also allege facts that give rise to a strong inference of fraudulent intent.” Id. (quoting Shields v. Citytrust Bancorp., Inc., 25 F.3d 1124, 1128 (2d Cir. 1994)).
As discussed in the RICO section, Plaintiffs have established the elements of fraud. Specifically, they have sufficiently alleged that Defendants failed to advise Plaintiffs of the risks of the retainer agreement in emails (SAC ¶ 34), misrepresented the contents of the retainer agreement and partnership agreements in various emails (id. ¶¶ 52, 56-57), opened accounts on behalf of Plaintiffs without their knowledge or consent (id. ¶ 73), publicly misrepresented how they were using Plaintiffs' funds (id. ¶ 83), arranged a planned reverse merger via regular mail through false representations (id. ¶ 86), misrepresented in various emails the nature and amount of funds in Plaintiffs' accounts (id. ¶¶ 96-103), and used similar methods to defraud other clients (id. ¶¶ 123, 125, 129-30). Such allegations satisfy “the material misrepresentation element of a New York common law fraud claim and the heightened pleading standards of Rule 9(b).” Am. Transit Ins. Co. v. Bilyk, No. 19-CV-5171 (BMC), 2021 WL 216673, at *7 (E.D.N.Y. Jan. 21, 2021) (citing Allstate Ins. Co. v. Nazarov, No. 11-CV-6187 (PKC) (VMS), 2015 WL 5774459, at *15 (E.D.N.Y. Sept. 30, 2015)).
b) Liability
Plaintiffs request that the Court hold Barkats personally liable for their claims, essentially asking the Court to treat the corporate defendants as his alter egos. SAC ¶ 27. “New York law permits a plaintiff to pierce the corporate veil and sue a non-signatory for breach of contract when the non-party is an alter ego of one or more signatories.” Marquette Transportation Fin., LLC v. Soleil Chartered Bank, No. 18-CV-9879 (LGS), 2020 WL 122975, at *4 (S.D.N.Y. Jan. 16, 2020) (quoting Mirage Entm't, Inc. v. FEG Entretenimientos S.A., 326 F.Supp.3d 26, 34 (S.D.N.Y. 2018) (internal quotation marks omitted). “[A] plaintiff seeking to pierce the corporate veil must show that (1) the owners exercised complete domination of the corporation in respect to the transaction attacked; and (2) that such domination was used to commit a fraud or wrong against the plaintiff which resulted in plaintiff's injury.” Id. (quoting Cortlandt St. Recovery Corp. v. Bonderman, 96 N.E.3d 191, 203 (N.Y. 2018)). In order to determine whether an entity or individual has exercised complete domination, courts consider a number of factors, including:
“Under New York choice of law principles, ‘the law of the state of incorporation determines when the corporate form will be disregarded and liability will be imposed on shareholders.'” Moses v. Martin, 360 F.Supp.2d 533, 541 (S.D.N.Y. 2004) (quoting Fletcher v. Atex, Inc., 68 F.3d 1451, 1456 (2d Cir. 1995). Because JSB PLLC and Sunny Sky Realty are New York corporations, New York law determines whether the corporate veil can be pierced in this instance.
(1) disregard of corporate formalities; (2) inadequate capitalization; (3) intermingling of funds; (4) overlap in ownership, officers, directors, and personnel; (4) common office space, address and telephone numbers of corporate entities; (6) the degree of discretion shown by the allegedly dominated corporation; (7) whether the dealings between the entities are at arms length; (8) whether the corporations are treated as independent profit centers; (9) payment or guarantee of the corporation's debts by the dominating entity; and (10) intermingling of property between the entities.Id. (quoting Freeman v. Complex Computing Co., 119 F.3d 1044, 1053 (2d Cir. 1997)).
“These elements are satisfied here based on many of the same allegations supporting the RICO claims.” Kriss v. Bayrock Grp. LLC, No. 10-CV-3959 (LGS) (DCF), 2016 WL 7046816, at *23 (S.D.N.Y. Dec. 2, 2016), on reconsideration in part, 2017 WL 1901966 (S.D.N.Y. May 8, 2017). Plaintiffs sufficiently alleged that Barkats, as its sole and managing member, exercised complete domination over both JSB PLLC and Sunny Sky Realty by using the corporations primarily for his interest to defraud his clients (SAC ¶¶ 19, 25), using JSB PLLC's trust account as his “own personal petty cash” to misappropriate client funds for his own use (id. ¶ 26), and fully controlling the attorney-client relationship to defraud Plaintiffs, as previously demonstrated as related to the RICO claims. As to Sunny Sky Realty, Plaintiffs also adequately pled that Barkats used Sunny Sky Realty as an alter-ego to divert business opportunities and funds from the Lewis Family Fund. Id. ¶¶ 28, 60, 81, 88-103.
Plaintiffs have thus adequately pled that Barkats is an alter ego of Sunny Sky Realty and JSB PLLC and used his domination over those entities to perpetrate various frauds on Plaintiffs. Accordingly, Barkats should be found to be personally liable for the fraud claims.
2. Plaintiffs Are Entitled to Prejudgment Interest on the Fraud Claims
Plaintiffs may not recover prejudgment interest on their RICO claims because they are already being compensated through treble damages. See, e.g., Bolivar, 2017 WL 11473766, at *20 (“[C]ourts generally do not award prejudgment interest on a RICO claim where treble damages are adequate to compensate the plaintiffs.”) (citation omitted). However, because “[u]nder New York law, an award of prejudgment interest ‘is mandatory for a common law fraud claim, '” Fertitta v. Knoedler Gallery, LLC, No. 14-CV-2259 (JPO) (HBP), 2018 WL 3720063, at *7 (S.D.N.Y. June 8, 2018) (quoting Healing Power, Inc. v. ACE Cont'l Exps., Ltd., No. 07-CV-4175 (NGG) (RLM), 2008 WL 4693246 at *9 (E.D.N.Y. Oct. 17, 2008)), adopted by, 2018 WL 3708656 (Aug. 2, 2018), Plaintiffs are entitled to prejudgment interest on their common law fraud claims. See, e.g., Sole, 2016 WL 5417880, at *11 (awarding, upon defendants' default, treble damages under RICO and prejudgment interest under New York law); Howard v. Freedman, No. 12-CV-5263 (PGG) (HBP), 2016 WL 5417884, at *10 (S.D.N.Y. July 21, 2016) (same), adopted by 2016 WL 5468300 (Sept. 28, 2016).
For fraud-based causes of action, New York law provides for prejudgment interest at a rate of 9% per annum. Fertitta, 2018 WL 3720063, at *7 (citing N.Y. C.L.P.R §§ 5001(a), 5004). “Prejudgment interest is typically computed from the earliest ascertainable date the cause of action existed, but, where damages were incurred at various times, may be computed from each date the damages were incurred or from a single reasonable intermediate date.” Bolivar, 2017 WL 11473766, at *21 (quotation and alteration omitted) (quoting N.Y.C.P.L.R. § 5001(b)). This prejudgment interest start date is discussed further in the Damages section below.
3. Intentional and Negligent Infliction of Emotional Distress a) Plaintiffs Have Not Adequately Pled a Claim for IIED
“To state a claim for the intentional infliction of emotional distress, a plaintiff must allege ‘(i) extreme and outrageous conduct; (ii) intent to cause, or disregard of a substantial probability of causing, severe emotional distress; (iii) a causal connection between the conduct and injury; and (iv) severe emotional distress.'” Seifts v. Consumer Health Sols. LLC, 61 F.Supp.3d 306, 324 (S.D.N.Y. 2014) (quoting Howell v. N.Y. Post Co., Inc., 81 N.Y.2d 115, 121 (1993)). “The conduct must be so outrageous and extreme ‘as to go beyond all possible bounds of decency, and to be regarded as atrocious, and utterly intolerable in a civilized community'” Id. (quoting Howell, 81 N.Y.2d at 122 (1993). “Whether the conduct alleged may reasonably be regarded as so extreme and outrageous as to permit recovery is a matter for the court to determine in the first instance.” Id. (quoting Stuto v. Fleishman, 164 F.3d 820, 827 (2d Cir. 1999)). Crucially, “[c]ourts are reluctant to allow recovery under the banner of intentional infliction of emotional distress absent a deliberate and malicious campaign of harassment or intimidation.” Woods v. Sieger, Ross & Aguire, LLC, No. 11-CV-5698 (JFK), 2012 WL 1811628, at *7 (S.D.N.Y. May 18, 2012) (quoting Cohn-Frankel v. United Synagogue of Conservative Judaism, 667 N.Y.S.2d 360, 362 (N.Y.App.Div. 1998)). “Given the ‘rigorous' requirements, courts often dismiss claims under the ‘extreme and outrageous conduct' prong as a matter of law.” Reid v. Sack, No. 20-CV-1817 (VM), 2021 WL 100490, at *5 (S.D.N.Y. Jan. 12, 2021) (quoting Bender v. City of New York, 78 F.3d 787, 790 (2d Cir. 1996)); see also Medina v. City of New York, No. 19-CV-9412 (AJN), 2020 WL 7028688, at *13 (S.D.N.Y. Nov. 30, 2020) (“When pleading intentional infliction of emotional distress, ‘[t]he bar is extremely high, and this highly disfavored cause of action is almost never successful.” (quoting Sesto v. Slaine, 171 F.Supp.3d 194, 201-02 (S.D.N.Y. 2016)).
Plaintiffs allege that Defendants' misconduct was “so outrageous in character . . . as to go beyond all possible bounds of decency, ” which caused Lewis “to suffer severe emotional distress, anguish, and concomitant life-threatening physical injuries, and has incurred and continues to incur medical expenses.” SAC ¶¶ 30506. Citing Rich v. Fox News Network, LLC, 939 F.3d 112 (2d Cir. 2019), Plaintiffs argue that they have satisfied the “extreme and outrageous” element of IIED by alleging that Defendants' conduct “amounted to a deliberate and malicious campaign.” Pl. Sept. 2020 Mem. Law at 8-9. While Defendants' conduct, as alleged, is, at a minimum, extremely troubling and potentially worse, Barkats' actions- do not meet the extraordinarily high standard of “extreme and outrageous conduct.” See, e.g., Reid, 2021 WL 100490, at *5 (“The Court is not persuaded that the allegations in the Complaint, including Defendants' misrepresentation of the status of a lawsuit, the status of filings in an arbitration, or the existence of and attendance at a court conference, are examples of ‘extreme and outrageous' conduct ....”); Seifts, 61 F.Supp.3d at 324 (“[A]n intentional breach of contract is not ‘extreme and outrageous' conduct.”). “While the allegations in the Complaint, if true, raise serious questions about [Barkats'] practice of law, it does not follow that this conduct exceeds ‘all bounds usually tolerated by decent society.'” Reid, 2021 WL 100490, at *5.
b) Plaintiffs Have Adequately Pled a Claim for NIED
In order to state a claim of negligent infliction of emotional distress, Plaintiffs must allege “a breach of a duty of care resulting directly in emotional harm.” Mortimer v. City of New York, No. 15-CV-7186 (KPF), 2018 WL 1605982, at *27 (S.D.N.Y. Mar. 29, 2018) (quoting Taggart v. Costabile, 14 N.Y.S.3d 388, 397 (2d Dep't 2015)). “A claim of negligent infliction of emotional distress [] does not require extreme or outrageous conduct.” Id. (citing Taggart, 14 N.Y.S.3d at 397).Lewis must allege NIED “under one of two theories: (1) the ‘bystander' theory or (2) the ‘direct duty theory.'” Poppel v. Estate of Archibald, No. 19-CV-01403 (ALC), 2020 WL 2749719, at *7 (S.D.N.Y. May 27, 2020) (quoting Werner v. Selene Fin., LLC, No. 17-CV-6514 (NSR), 2019 WL 1316465, at *11 (S.D.N.Y. Mar. 22, 2019). As relevant here, “the direct duty theory applies when she suffered an emotional injury from the defendant's breach of a duty which unreasonably endangered her own physical safety.” Id. (internal quotations omitted) (quoting Werner, 2019 WL 1316465, at *11). “A breach of the duty of care resulting directly in emotional harm is compensable even though no physical injury occurred when the mental injury is a direct, rather than a consequential, result of the breach and when the claim possesses some guarantee of genuineness.” Taggart, 131 A.D.3d at 252 (quoting Ornstein v. New York City Health & Hosps. Corp., 10 N.Y.3d 1, 6(2008)).
There is a split in New York state courts and courts in this District as to whether “extreme and outrageous conduct” is an element of an NIED claim. See Poppel, WL 2749719, at *7, n.7.
While Plaintiffs do not appear to explicitly identify a specific duty of care in their submissions, they do allege that, as Lewis' attorney, Barkats owed Lewis a fiduciary duty. SAC ¶¶ 231-45. See, e.g., Guiles v. Simser, 804 N.Y.S.2d 904, 907 (N.Y. Sup. Ct. 2005) (“[T]he lawyer is under a fiduciary duty to the client which requires not only an acceptable level of competence in the relevant area of the law but also the exercise of the ‘highest duty of care.'” (quoting Black's Law Dictionary, 7th ed.)) aff'd, 35 A.D.3d 1054 (2006); Schick v. Berg, No. 03-CV-5513 (LBS), 2004 WL 856298, at *8 (S.D.N.Y. Apr. 20, 2004) (describing lawyer's fiduciary duty to avoid conflicts of interest as “duty of care”), aff'd, 430 F.3d 112 (2d Cir. 2005). The SAC alleges that “[a]s a proximate result of the negligent conduct of the BARKATS defendants as aforesaid, Plaintiff LEWIS suffered significant emotional distress and substantial physical injury which required hospitalization and ultimately, life threatening surgery.” SAC ¶ 310. In her declaration, Lewis specifies that as a result of Barkats' conduct-defrauding her, threatening her with lawsuits, pursuing frivolous litigation, and blackmailing her to sign a settlement agreement-she began to suffer from “non-stop dysfunctional uterine bleeding that required emergency hospitalization requiring multiple blood transfusions and lifethreatening surgery.” Declaration of Kelly Ann Lewis dated September 11, 2020 (Dkt. No. 278-19) (“Lewis Decl.”) at ¶ 13. She “continue[s] to suffer sporadic exacerbation of [her] dysfunctional bleeding, ” leading to multiple hospitalizations. Id. ¶15. In addition, in a declaration, her doctor stated that “being withheld funds, is a substantial factor in bringing about Kelly Ann Lewis' physical injuries, including an exacerbation of her dysfunctional menstrual bleeding and menorrhagia leading to hospital admissions for syncope and anemia requiring blood transfusion and treatment of an iatrogenic upper extremity venous thrombosis.” Declaration of Joseph J. Pachorek, M.D., dated January 12, 2017 (Dkt. No. 278-20). Together these allegations are sufficient to establish that Barkats' breach of duty of care directly caused Lewis' injuries.
D. Damages
“Treble damages under RICO are mandatory.” Related Companies, 2019 WL 10947100, at *8 (citing MDO Dev. Corp. v. Kelly, 735 F.Supp. 591, 593 (S.D.N.Y. 1990) and 18 U.S.C. § 1964(c)). Pursuant to 18 U.S.C. § 1964(c), “an injured party is automatically entitled to recover threefold the damages' it sustains for a RICO violation.” Allstate Ins. Co. v. Abramov, No. 16-CV-1465 (AMD) (SJB), 2020 WL 1172697, at *13 (E.D.N.Y. Feb. 21, 2020) (quoting 18 U.S.C. § 1964(c)), adopted by 2020 WL 1166498 (Mar. 11, 2020).
“[B]ecause the RICO damages wholly compensate plaintiff and that award has been trebled, separate awards of damages on the common law fraud claims would amount to a double recovery for plaintiff.” Am. Transit Ins. Co., 2021 WL 216673, at *9 (citing Gov't Emps. Ins. Co. v. Esses, No. 12-CV-4424 (RJD) (VVP), 2013 WL 5972481, at *10 n.3 (E.D.N.Y. Nov. 5, 2013)). As a result, the total damages award for the fraud claims “will be the trebled RICO damages, plus prejudgment interest on the fraud damages.” Id.
1. RICO Treble Damages and Prejudgment Interest
“Courts apply the ‘out-of-pocket' measure of damages in civil RICO actions predicated on fraud.” Related Companies, 2019 WL 10947100, at *8 (citing Fertitta, 2018 WL 3720063, at *5). To calculate “out-of-pocket” damages, “courts ‘compar[e] the value of the consideration given up by the victim of the fraud to the value of what he or she received.'” Id. (alteration in original) (quoting Fertitta, 2018 WL 3720063, at *5). Specifically,
‘Out of pocket' damages are calculated in three steps. First, the plaintiff must show the actual value of the consideration it received. Second, the plaintiff must prove that the defendant's fraudulent inducement directly caused the plaintiff to agree to deliver consideration that was greater than the value of the received consideration. Finally, the difference between the value of the received consideration and the delivered consideration constitutes ‘out of pocket' damages.Id. (quoting Fertitta, 2018 WL 3720063, at *5). Moreover, plaintiffs alleging a RICO claim “may not recover for speculative losses or where the amount of damages is unprovable.” Id. (quoting Makowski v. United Bhd. Of Carpenters and Joiners of Am., No. 08-CV-6150 (PAC), 2010 WL 3026510, at *8 (S.D.N.Y. Aug. 2, 2010)).
Lastly, plaintiffs alleging a RICO claim “‘are only entitled to damages proximately caused by the predicate acts' of the RICO violation.” Id. (citing In re Crazy Eddie Sec. Litig., 812 F.Supp. 338, 355 (E.D.N.Y. 1993)).
Plaintiffs allege $250,565.40 in damages as a result of Defendants' fraudulent misconduct-specifically, $230,441.77 in net funds deployed with JSB PLLC and $20,123.63 from earnings on the various sales of the Lewis Fund assets. Schwarz Decl., Exhibit A (Dkt. No. 278-1)-plus $108,238.30 in prejudgment interest, for a total of $358,803.70. In addition, Plaintiffs allege they are entitled to $79,887.48 from the legal fees that were awarded to attorneys as a result of Barkats' frivolous litigation.
a. Monies Taken from Lewis Funds and Legal Fees
Plaintiffs claim they are entitled to $230,441.77 to compensate them for the money taken from the Lewis funds as a result of Defendants' fraudulent misconduct. Plaintiffs have adequately supported most, but not all, of these claimed damages. Plaintiffs' counsel, who was a forensic certified public accountant for almost two decades, submitted a sworn declaration, in which he attached documentary evidence purporting to substantiate each claim. See Schwarz Decl. ¶¶ 3-4.
Plaintiffs claim the following: $30,000 from an unauthorized transfer from Barkats in order to fund his stock investment, for which they provided a copy of a check, dated September 1, 2015, id. at Exhibit A-3 (Dkt. No. 278-5); and $100,000 as an unauthorized transfer from May 28, 2015 to Barkats' personal bank account and $5,000 from a legal fee from January 7, 2015, both reflected in bank statements (id. at Exhibit A-4 (Dkt. No. 278-6) ($100,000), id. at Exhibit A-6 (Dkt. No. 278-8) ($5,000)) that Barkats advanced to JSP PLLC to fund the purchase of New Jersey tax properties at an auction, for which Plaintiffs provided property tax records and a statement referring to the deed, id. at Exhibit A-4 (Dkt. No. 278-6). The Court finds these submissions to be adequate. See, e.g., Related Companies, 2019 WL 10947100, at *3 (“The requisite evidence to support the plaintiff's claimed damages may be provided via a sworn affidavit by a person with knowledge of the relevant facts, or by documentary evidence duly authenticated by a person with knowledge.”).
Plaintiffs also requested $554.29, which they describe as Barkats' debit card charges, but only provide a spreadsheet with no underlying documentation. See Id. Exhibit B (citing spreadsheet at Exhibit A, at 3, Dkt. No. 278-2). Without more, the Court cannot award damages on these charges. See, e.g., Bolivar, 2017 WL 11473766, at *6 (rejecting submission on damages inquest where plaintiffs “failed to demonstrate that their summary spreadsheets were supported by underlying bank records”).
Plaintiffs have sufficiently demonstrated that the various unauthorized withdrawals constitute “out-of-pocket” damages and have provided adequate documentation to support those damages and should thus be awarded RICO treble damages and prejudgment interest under New York law. On the September 1, 2015 $30,000 unauthorized transfer, Plaintiffs are entitled to $90,000 in treble damages, in which prejudgment interest accrues at the rate of $73.97 per day (($30,000/365)*9%) from September 1, 2015, until the day of judgment. On the January 7, 2015 $5,000 unauthorized transfer, Plaintiffs are entitled to $15,000 in treble damages, in which prejudgment interest accrues at the rate of $12.50 per day (($5,000/365)*9%) from January 7, 2015, until the day of judgment. On the May 28, 2015 $100,000 unauthorized transfer, Plaintiffs are entitled to $300,000 in treble damages, in which prejudgment interest accrues at the rate of $246.57 per day (($100,000/365)*9%) from May 28, 2015, until the day of judgment. See Schwarz Decl., Exhibit G (Dkt. No. 278-18) (providing dates and calculating prejudgment interest); Unique Lotus Gems v. Gholian Enterprises Inc., No. 18-CV-10808 (AT) (GWG), 2019 WL 6227856, at *11 (S.D.N.Y. Nov. 22, 2019) (calculating New York prejudgment interest until the date of judgment), adopted by 2019 WL 6701953 (S.D.N.Y. Dec. 9, 2019).
As previously mentioned, New York law provides for prejudgment interest at a rate of 9% per annum, Fertitta, 2018 WL 3720063, at *7 (citing N.Y.C.L.P.R §§ 5001(a), 5004), from “the earliest ascertainable date the cause of action existed, ” Bolivar, 2017 WL 11473766, at *21 (quotation and alteration omitted) (quoting N.Y.C.P.L.R. § 5001(b)).
In total, I recommend Plaintiffs be awarded $405,000 in RICO treble damages, plus prejudgment interest as described until the date that judgment is entered.
b. Misappropriated Profits
Plaintiffs allege a total of $20,123.63 in lost profits, divided as $3,324.48 from the sale of the Irvington, New Jersey house, $3,532.12 on the profit earned from the sale of FCAU stock, $11,967.73 on the profit earned from the sale of GM stock, and $1,299.30 on final liquidation of a stock account at Olympus Securities LLC. Schwarz Decl., Exhibit A. However, under the out-of-pocket rule, “[t]here can be no recovery of profits which would have been realized in the absence of fraud” because “[d]amages are to be calculated to compensate plaintiffs for what they lost because of the fraud, not to compensate them for what they might have gained.” Negrete v. Citibank, N.A., 759 Fed.Appx. 42, 48 (2d Cir. 2019) (quoting Lama Hldg. Co. v. Smith Barney Inc., 88 N.Y.2d 413, 421(1996)). Plaintiffs are therefore not entitled to the profit of the sale of Barkats' various assets that he purchased through Plaintiffs' diverted funds. See, e.g., Related Companies, 2019 WL 10947100, at *10 (“The proceeds of the sale of the house would presumably not constitute an out-of-pocket loss to Plaintiffs.”). Rather, “only the amount diverted from Plaintiffs toward the sale of the house [and other assets] would constitute such a loss.” Id.; see, e.g., Elsevier Inc. v. W.H.P.R., Inc., 692 F.Supp.2d 297, 310 (S.D.N.Y. 2010) (“[T]he Complaint does not allege the sort of “out-of-pocket” loss often present in a fraudbased RICO action. Instead, .... Plaintiffs allege lost profits.”).
c. Legal Fees in California Interpleader Action
Plaintiffs claim they are entitled to $79,887.48 from the legal fees that were awarded to the attorneys as a result of Barkats' litigation in California, which consists of $35,000 distributed on January 9, 2017 for Chase's attorneys and $44,887.48 distributed on April 21, 2017 for Lewis' attorneys, for which Plaintiffs provided a bank statement and a copy of the California court's judgment awarding the attorney fees, id. at Exhibit A (Dkt. 278-2), A-8 (Dkt. 278-10), and A-9 (Dkt. 27811). However, the SAC alleges that Chase is liable for the legal fees, not the Barkats Defendants. See SAC ¶ 301 (“LEWIS FAMILY FUND has been severely damaged in an amount to be determined at a trial of this action including . . . legal expenditures incurred in the defense of the interpleader action . . . for all of which CHASE is liable to Plaintiffs”); id. at 109 (claims for monetary relief specifying “on Counts XII against the defendant, JP MORGAN CHASE BANK, N.A., damages and losses . . . plus legal fees actually incurred in the defense of the interpleader action”).
Under Federal Rule of Civil Procedure 54(c), “[a] default judgment must not differ in kind from, or exceed in amount, what is demanded in the pleadings.” Fed.R.Civ.P. 54(c). “[N]otice that comes at the inquest stage' is not sufficient in itself to satisfy the notice requirement of Rule 54(c) and to ‘permit a plaintiff in a default action to recover for damages not claimed in the complaint.'” Glassman-Brown v. Pouring Wine, LLC, No. 14-CV-3763 (TPG) (KNF), 2015 WL 5853802, at *3 (S.D.N.Y. Aug. 5, 2015), adopted by 2015 WL 5853807 (S.D.N.Y. Oct. 7, 2015) (alteration in original) (quoting Silge v. Merz, 510 F.3d 157, 161 (2d Cir. 2007)). Therefore, because Plaintiffs never attributed the legal costs in the California action to the Barkats Defendants in their pleadings, they have failed to meet the notice requirement under Rule 54(c) and cannot recover those damages here.
2. NIED Damages
Lewis claims a total of $324,681.21 in compensatory damages for Defendants' negligent infliction of emotional distress, which includes $244,681.21 of medical expenses, and $80,000 for the loss of 12 months of salary earnings from March 2016 through February 2017. Lewis Decl. ¶¶ 17-18. As part of her sworn declaration, Lewis submitted hospital and medical provider records and bills, delineated as follows: $160,139.56 from Northridge Hospital, for which she submitted various medical records, none of which identify any costs paid (id. at Exhibit B-1, Dkt. No. 276-2); $36,655.00 from Los Angeles Reproductive Center, for which she submitted itemized paid invoices (id. at Exhibit B-2, Dkt. No. 276-3); $17,230.23 from MDR Pharmacy, for which she provided itemized paid invoices (id. at Exhibit B-3, Dkt. No. 276-4); $24,105.00 from Southern California Reproductive Center, for which she provided itemized paid invoices (id. at Exhibit B-4, Dkt. No. 276-5); and $6,551.42 from Brian D. Rudin, MD, for which she provided receipts (id. at Exhibit B-5, Dkt. No. 276-5).
Per the Court's September 18, 2020 Order (Dkt. No. 281), these records have been sealed.
Because the records from Northridge Hospital do not identify any dollar amounts paid or provide any evidence as to how much money Lewis had to pay, I recommend, on the record before the Court, not awarding the $160,139.56 Lewis seeks. See, e.g., A.B. v. Staropoli, No. 08-CV-4585 (LMS), 2013 WL 12441525, at *8 (S.D.N.Y. Dec. 11, 2013) (finding that plaintiffs “failed to establish their medical expenses with the ‘reasonable certainty'” because the “medical expenses claimed [were] not supported by the medical bills provided”). On the other hand, the records from Los Angeles Reproductive Center, MDR Pharmacy, Southern California Reproductive Center, and Brian D. Rudin, MD, all constitute adequate documentation through paid invoices and receipts, and I therefore recommend awarding a total of $84,541.65 for these expenses. See, e.g., Cartright v. Lodge, No. 15-CV-9939 (KMW) (RLE), 2017 WL 1194241, at *6 (S.D.N.Y. Mar. 30, 2017) (awarding damages for NIED in inquest where plaintiff submitted therapy invoices). Lastly, because “[d]amages for loss of past earnings may be awarded ‘based solely on plaintiff's testimony without supporting documentation, '” I recommend that Lewis be awarded $80,000 in lost earnings based on her sworn declaration. Norcia v. Dieber's Castle Tavern, Ltd., 980 F.Supp.2d 492, 503 (S.D.N.Y. 2013) (quoting Kane v. Coundorous, 783 N.Y.S.2d 530, 531 (2004)).
Thus, the total award as a result of Defendants' negligent infliction of emotional distress is $164,541.65.
III. CONCLUSION
For all of the foregoing reasons, I recommend that the Court award Plaintiffs $405,000 in RICO treble damages, as well as prejudgment interest on that award (as a result of the common law fraud claims) at a rate of 9% per annum as described above, and $164,541.65 in compensatory damages on their negligent infliction of emotional distress claim against the Barkats Defendants jointly and severally.
PROCEDURE FOR FILING OBJECTIONS
Pursuant to 28 U.S.C. § 636(b)(1) and Rule 72(b) of the Federal Rules of Civil Procedure, the parties shall have fourteen (14) days from service of this Report to file written objections. See also Fed.R.Civ.P. 6. Such objections, and any responses to such objections, shall be filed with the Clerk of Court, with courtesy copies delivered to the chambers of the Honorable Alison J. Nathan, United States Courthouse, 500 Pearl Street, New York, NY 10007, and to the chambers of the undersigned, United States Courthouse, 500 Pearl Street, New York, New York, 10007. Any requests for an extension of time for filing objections must be directed to Judge Nathan.
FAILURE TO FILE OBJECTIONS WITHIN FOURTEEN (14) DAYS WILL RESULT IN A WAIVER OF OBJECTIONS AND WILL PRECLUDE APPELLATE REVIEW. 28 U.S.C. § 636(b)(1); Fed.R.Civ.P. 72. See Thomas v. Arn, 474 U.S. 140 (1985); Wagner & Wagner, LLP v. Atkinson, Haskins, Nellis, Brittingham, Gladd & Carwile, P.C., 596 F.3d 84, 92 (2d Cir. 2010).