4 K & D Corp. v. Concierge Auctions, LLC

Citations: 2 F. Supp. 3d 525; 2014 U.S. Dist. LEXIS 31222; 2014 WL 904451Docket: No. 13 Civ. 2527(JGK)

Court: District Court, S.D. New York; March 10, 2014; Federal District Court

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Plaintiffs 4 K. D Corporation (d/b/a Grand Estates Auction Company), Grand Estates, Deborah Jarol, and Sherwin Jarol allege violations under the RICO Act and New York General Business Law, along with claims for tortious interference against defendants Concierge Auctions, LLC and others. The allegations stem from purported fraudulent practices by Concierge to attract customers for luxury home auctions, which allegedly harmed Grand Estates, a competing auction house. The lawsuit includes unnamed defendants and concerns actions by non-party Chad Roffers, an original managing member of Concierge. The court has jurisdiction over the claims due to their federal and state law connections. The defendants' motion to dismiss the Amended Complaint under Federal Rule of Civil Procedure 12(b)(6) is partially granted and partially denied. The court must accept plaintiffs' allegations as true and draw reasonable inferences in their favor, focusing on the legal sufficiency of the complaint rather than weighing evidence. The court can consider referenced documents and matters subject to judicial notice. Grand Estates and Concierge are identified as competing auction houses, with Grand Estates based in North Carolina and Concierge in New York. Roffers, linked to both Concierge and CA Partners, plays a significant role in the alleged misconduct.

Roffers was employed by CA Partners and served as an independent contractor for Concierge from its formation in 2008 until March 2012, holding the title of Head of Client Services. Defendant Brady, president of Concierge and a former employee of Roffers, previously worked as a real estate broker and vice president of marketing at Concierge. He owns BHI, which replaced him as a member of Concierge in January 2012. Defendant Russo, the COO of Concierge, also owns Segue, which became a member of Concierge in January 2012. Defendant Graham was CEO until 2012 and a member of Concierge during multiple years, but his interest was bought out, and he is no longer employed there.

The plaintiffs allege that the defendants fraudulently induced sellers of luxury real estate to enter auction contracts with Concierge through false promises and misrepresentations regarding auction results, sales statistics, and other deceptive practices, including the use of shill bidders and allowing bids from unregistered bidders. This fraudulent conduct allegedly harmed Grand Estates by diverting sellers to Concierge. Additionally, the defendants purportedly used income from these practices to pay Realogy Services Group, LLC, for promotional services through Sotheby’s International Realty.

Prior to Concierge's formation, Roffers owned Sky Sotheby, which faced market difficulties leading to debts owed to SIR. Following the termination of Sky Sotheby as a franchisee, Realogy established a Strategic Alliance Agreement with Concierge, naming it as Realogy’s preferred auctioneer to help Roffers repay his debt. Consequently, SIR franchisees were instructed to refer clients to Concierge.

Regarding the plaintiffs Sherwin and Deborah Jarol, the defendants allegedly made misrepresentations about Concierge’s experience and success, leading the Jarols to contract with Concierge for an auction. Their agreement included a $100,000 break-up fee in escrow, which was released to Concierge despite no bids being received at the auction. Furthermore, Concierge misrepresented the auction as no-reserve and falsely indicated the Jarols were in financial distress, resulting in damages for the Jarols, including the loss of the break-up fee and challenges in selling their property. Similar allegations were made against the defendants concerning at least five other properties.

Defendants allegedly made false representations to property owners regarding the success of Concierge to secure contracts and provided false bidder information. The plaintiffs assert several instances where sellers chose Concierge over Grand Estates due to these misrepresentations. They bring four claims under the RICO Act, specifically under 18 U.S.C. § 1962(a), (d), and § 1964(c), with § 1964(c) allowing any person injured by a RICO violation to sue in federal court. The claim under § 1962(c) is directed at defendants Graham, Russo, Brady, and CA Partners, asserting that it is unlawful for individuals associated with an enterprise affecting interstate commerce to engage in racketeering or unlawful debt collection. To establish a claim under § 1962(c), the plaintiffs must demonstrate conduct of an enterprise through a pattern of racketeering activity. Racketeering activity includes acts indictable under 18 U.S.C. § 1961(1)(B), such as wire fraud. A pattern requires at least two related predicate acts that suggest ongoing criminal activity. The defendants argue that the plaintiffs fail to distinguish between the "person" and "enterprise" required under § 1962(c), as both must be separate entities. A corporation cannot be both the RICO "person" and the "enterprise." Courts have dismissed claims in which a corporation was both.

The Second Circuit Court of Appeals in Riverwoods determined that a complaint did not adequately state a claim under RICO § 1962(c) because it alleged the corporation was both a RICO "person" and the sole member of the RICO "enterprise," failing to show distinctness. Similarly, in Cruz, the Court found the complaint insufficient as it did not establish a distinct RICO "enterprise" separate from the corporation itself, which included the corporation and its executives. The court disregarded various alleged members due to a lack of a "common purpose" in fraudulent conduct. 

Distinctness may be satisfied when a corporation is claimed as the RICO "enterprise" while its owners or employees are the RICO "persons." This was validated by the Supreme Court in Cedric Kushner, where it ruled that the president and sole shareholder of a corporation could be treated as distinct from the corporation itself. Subsequent cases have upheld this distinction, indicating that a parent and subsidiary relationship can also meet the distinctness requirement. 

In the current case, plaintiffs allege that Concierge is the RICO "enterprise," with defendants Brady, Russo, Graham, and CA Partners as RICO "persons" managing Concierge through racketeering activities. The claim under § 1962(c) targets these individuals, not Concierge, thereby satisfying the distinctness requirement. 

Furthermore, to establish a RICO claim, plaintiffs must allege two or more related "predicate acts" that form a "pattern" of racketeering activity, necessitating that a defendant personally committed or assisted in the commission of such acts.

Defendants contend that plaintiffs' allegations of RICO predicate acts, specifically wire fraud, do not meet the particularity requirement of Federal Rule of Civil Procedure 9(b). This rule mandates that fraud allegations must detail the circumstances constituting the fraud to provide defendants with fair notice, protect their reputations, and avoid baseless claims. The particularity requirement necessitates specificity regarding the false or misleading statements, including the timing, location, and identity of the speaker. However, this requirement is not a rigid formula; it should be assessed based on the context and facts of each case. 

While some allegations by the plaintiffs lack the necessary specifics regarding wire fraud, others meet the requirement by detailing material misrepresentations in marketing materials, including false statistics and track records that influenced property sellers' contracts with Concierge. The allegations provide sufficient context regarding the timing of these statements. Defendants also argue that statements made by "Concierge" do not fulfill the requirement due to a lack of specific speaker identification. Nonetheless, many statements are attributed to Concierge's marketing materials, which can be linked to the business entity. Additionally, it is alleged that defendant Brady, as vice president of marketing and president of Concierge, was responsible for these marketing and public relations efforts.

Plaintiffs allege that Russo, as COO of Concierge, directed or knowingly caused misrepresentations in marketing materials. It is established that liability for mail or wire fraud can arise from causing such communications to occur, even if the defendants did not personally send them. Plaintiffs assert specific instances where Russo made false representations to sellers regarding property auctions, leading those sellers to rely on these misrepresentations when contracting with Concierge. Consequently, the claims against Russo and Brady meet the particularity requirement for fraud.

To establish a RICO claim based on mail or wire fraud, plaintiffs must prove (1) a scheme to defraud with intent, (2) the objective of obtaining money or property, and (3) the use of wires or mails to advance the scheme. The allegations suggest Russo and Brady made multiple false representations over three years, satisfying the criteria for RICO predicate acts.

In contrast, claims against Graham and CA Partners are insufficient. Graham is only alleged to have made false statements in media articles without specific evidence of material falsity or intent to induce purchases. As for CA Partners, it is linked to the actions of non-party Roffers, who is currently in bankruptcy and cannot be sued, weakening the plaintiffs' case against CA Partners.

The plaintiffs' claim under 18 U.S.C. § 1962(c) against CA Partners is insufficient, as they provide only a vague allegation of racketeering without identifying specific acts of wire fraud or demonstrating the commission of multiple predicate acts. To establish a civil RICO claim, plaintiffs must show that they suffered an injury directly caused by the defendants' violations. The Supreme Court's ruling in *Holmes v. Sec. Investor Prot. Corp.* clarifies that mere "but-for" causation is inadequate; the violation must be the proximate cause of the injury, requiring a direct connection between the alleged misconduct and the harm. The court also outlined three policy considerations for evaluating proximate cause: (1) the difficulty in determining damages attributable to the violation; (2) the complications of apportioning damages among differently injured plaintiffs; and (3) the capability of directly injured victims to enforce the law without complications from more remote injuries. In this case, the plaintiffs contend that Grand Estates was harmed due to the defendants' fraudulent actions which provided Concierge with a competitive edge in auctions. They reference the *Commercial Cleaning* case, where the court found that direct competitors could readily ascertain damages without the complexities associated with non-competitive claims.

Governmental authorities' actions to recover lost taxes and fees do not remedy the specific harm caused by the defendant's hiring of undocumented workers at low wages. The Court of Appeals recognized that the defendant's business competitors were the most directly harmed by the alleged RICO conspiracy, thus satisfying the "proximate cause" requirement for the plaintiffs' claims. However, Grand Estates' injuries are indirect and derivative, stemming solely from the alleged fraud against property sellers who chose Concierge’s auction services over Grand Estates. The plaintiffs acknowledged that Grand Estates could only be injured through the injury to the property sellers, indicating a lack of direct harm. Additionally, Grand Estates is not the sole competitor of Concierge, and multiple factors could influence a seller's decision to contract with Concierge instead of Grand Estates. This creates uncertainty regarding the actual impact of Concierge's actions on Grand Estates’ business. The Supreme Court's decision in Anza v. Ideal Steel Supply Corp. parallels this case, where the plaintiff was found not to have suffered a proximate injury due to the complexities of customer loss and pricing. The court concluded that, similar to Anza, without clear evidence that property sellers would have chosen Grand Estates absent the alleged fraud, establishing a direct causal link to damages is problematic. The third Holmes factor, which considers whether the direct victims are likely to sue, also suggests against granting standing to Grand Estates, as the immediate victims of the alleged harm (the undocumented workers) are unlikely to pursue legal action.

Government actions to recover lost taxes and fees do not address the harm suffered by a plaintiff in a case involving profit loss, as noted in *Commercial Cleaning*. In *Anza*, the New York State was considered the immediate victim of tax fraud and could pursue its own claims. In the current matter, plaintiffs acknowledge that Grand Estates' injuries stem from the alleged fraud against property sellers, who are capable of suing independently. The individual plaintiffs, the Jarols, are pursuing their own RICO claims, while another party, the Bloesers, has withdrawn theirs. Therefore, Grand Estates lacks standing to assert a claim under RICO since it cannot demonstrate that the defendants' actions were the proximate cause of its injuries, nor that its standing is essential to address the sellers' claims.

Conversely, the Jarols meet the "proximate injury" requirement as direct victims of the alleged fraud, claiming specific damages, including a $100,000 break-up fee loss and difficulties in selling their home. The defendants contest the Jarols' claims, asserting they involve isolated transactions and lack the requisite continuity of predicate acts. However, the court finds these arguments unpersuasive, confirming that the Jarols have sufficiently alleged injury linked to the RICO violation. The court grants the defendants’ motion to dismiss the RICO claim against Graham and CA Partners but denies it against Russo and Brady, allowing the Jarols' claim to proceed while dismissing Grand Estates' claim due to lack of proximate injury. The only remaining claim under Count III is the Jarols' RICO claim against defendants Brady and Russo.

Plaintiffs assert RICO claims under 18 U.S.C. §§ 1962(a), (b), and (d) against all defendants. Section 1962(a) prohibits individuals from using income derived from racketeering activity to invest in enterprises that affect interstate or foreign commerce. To establish a claim under this section, plaintiffs must demonstrate that defendants invested racketeering income in an enterprise and that plaintiffs suffered injury from this investment, distinct from injuries caused by the underlying racketeering acts. Section 1962(b) similarly makes it unlawful to acquire or maintain control of an enterprise through racketeering activity, requiring a showing of acquisition-related injury.

The "enterprise" referenced in sections 1962(a) and (b) pertains to an entity acquired with funds from racketeering, not necessarily the racketeering operation itself. In this case, plaintiffs allege that defendants utilized racketeering income to pay Realogy and its subsidiary SIR to ensure continued business referrals to Concierge, as well as to provide gifts to real estate brokers and to finance the employment of Roffers by CA Partners. However, the plaintiffs' injuries were attributed to the defendants' misrepresentations, not directly to the referrals or employment activities. Allegations of injury stemming solely from the predicate acts of wire fraud do not satisfy the requirements for claims under sections 1962(a) and (b). Furthermore, plaintiffs claim that the defendants used racketeering income to acquire interests in Concierge from Graham and Mattison.

Plaintiffs have not demonstrated any injury resulting from their purchase of interests in Concierge, which was allegedly involved in the defendants' fraudulent activities. The court highlights that if the defendants invested income from a fraudulent scheme back into the same enterprise, any injury from such investments cannot be distinct from the injuries caused by the underlying illegal acts, thus failing to support claims under 18 U.S.C. §§ 1962(a) and (b). The motion to dismiss Counts I and II is granted on these grounds.

Regarding the claim under § 1962(d), which prohibits conspiracy to violate §§ 1962(a) and (c), the plaintiffs provide only a vague assertion of an agreement among defendants to commit violations without specific facts supporting any coordinated action. General allegations of business structure do not suffice to demonstrate a shared intent to commit predicate acts. Therefore, the plaintiffs have also failed to state a claim under § 1962(d), leading to the dismissal of Count IV.

Additionally, with Grand Estates dismissed from the only remaining federal claim under § 1962(c), the context of the state law claims is noted without detailed consideration.

Grand Estates's state law claims are closely related to its federal wire fraud claim, establishing a single case or controversy under Article III, thereby allowing the court to exercise supplemental jurisdiction as per 28 U.S.C. 1367(a). The court finds no circumstances under 28 U.S.C. 1367(c) that would preclude exercising this jurisdiction. The plaintiffs assert a claim for tortious interference under New York law, specifically targeting interference with business relationships. However, the plaintiffs have abandoned their claim for tortious interference with contract due to lack of discussion in their Memorandum of Law.

To succeed in a tortious interference claim in New York, a plaintiff must demonstrate: (1) a business relationship with a third party, (2) the defendant's knowledge of that relationship and intentional interference, (3) that interference was out of malice or involved improper means, and (4) that such interference caused injury. The plaintiffs allege instances where potential sellers interacted with Grand Estates but ultimately chose Concierge after being misled. Despite these allegations, the plaintiffs fail to show that defendants knew of the specific relationships with Grand Estates or that the interference was intentional. The argument that the defendants' knowledge can be inferred from competition is insufficient, as actual knowledge of the specific business relationships is required for a valid claim. Generalized allegations do not satisfy the necessary legal standard for establishing tortious interference.

Plaintiffs are required to demonstrate that defendants had actual knowledge of specific business relationships they allegedly interfered with in order to establish a claim for tortious interference. The Amended Complaint lacks factual allegations supporting that the defendants knew of any particular business relationship involving Grand Estates and a potential seller, leading to the dismissal of the tortious interference claim. 

Furthermore, the plaintiffs assert two claims under New York General Business Law Sections 349 and 350. Section 349 addresses deceptive acts in business, while Section 350 pertains to false advertising. To succeed under either section, a plaintiff must show consumer-oriented conduct that is materially misleading and that results in injury. Additionally, both sections require that the deceptive act occur in New York, as emphasized by the New York Court of Appeals. 

The plaintiffs argue that the territorial requirement is met due to a choice-of-law provision and a forum-selection clause in the contract with the Jarols, mandating disputes be resolved in New York courts under New York law.

Choice-of-law and forum-selection provisions indicating New York law do not inherently establish the location of a transaction. There are no allegations in the Amended Complaint that the transaction between Concierge and the Jarols occurred in New York, and plaintiffs conceded that the Jarols were not injured in New York. The plaintiffs claim the Jarols were injured due to information disseminated from New York, but the New York Court of Appeals in Goshen ruled that merely originating a marketing campaign in New York does not constitute an actionable deceptive act unless the consumer transaction occurs in New York. Consequently, the claims under General Business Law (GBL) §§ 349 and 350 must be dismissed.

Furthermore, the GBL claims of the Jarols and Grand Estates fail because the plaintiffs did not demonstrate that Concierge's conduct was “consumer-oriented,” a necessary element for such claims. New York courts have consistently held that a “single shot transaction” involving knowledgeable parties and substantial sums does not qualify as “consumer-oriented.” Factors considered include the amounts at stake, the nature of the contracts, and the sophistication of the parties involved, none of which alone are determinative. Contracts tailored to specific requirements are not deemed consumer-oriented under GBL § 349. The statute typically addresses individual consumers misled by sellers of consumer goods through false advertising, contrasting with the luxury property auctions at issue, which involved complex arrangements among sophisticated parties and significant marketing expenses.

Contracts involved in the alleged transactions were established through a detailed process of pitching and negotiations between the auctioneer and sellers, distinguishing them from typical consumer sales. Due to the significant sums involved and the personalized nature of the services provided, these contracts are deemed not “consumer-oriented” under relevant statutes, as established in previous case law. The plaintiffs failed to demonstrate that the luxury real estate transactions affected consumers broadly, thus their claims under Sections 349 and 350 were insufficient. Additionally, the claims of the Jarols did not meet the territoriality requirement, leading to the dismissal of Counts V and VII. The court granted the defendants’ motion to dismiss except for the RICO claim by Deborah and Sherwin Jarol against Brady and Russo, which was denied. The court noted the discontinuation of claims by two original plaintiffs and addressed the issue of distinctness under the RICO statute, clarifying that a corporation cannot be both the defendant and the enterprise in a RICO claim. The court referenced relevant case law to support its conclusions.

Plaintiffs allege, alternatively, a RICO "enterprise-in-fact" involving all defendants, including Concierge, but have abandoned this theory in their legal memorandum and during oral arguments. They also initially claimed bank fraud under 18 U.S.C. § 1344 but later withdrew this allegation. Defendants contest that the Jarol plaintiffs suffered injuries from a "pattern" of racketeering activity, asserting only isolated transactions caused harm. This raises an issue regarding the adequacy of injury pleading, to be addressed later in the opinion. However, defendants do not challenge the overall sufficiency of the plaintiffs' claims of a "pattern" of wire fraud. The court need not determine whether the actions of Brady and Russo represent an "open-ended" or "closed-ended" pattern of racketeering.

Plaintiffs allege that Concierge misrepresented a successful auction to gain business from a Cornwall-on-Hudson property seller, but fail to specify the timing and method of these communications, rendering the wire fraud claims insufficient. Additionally, claims regarding Graham soliciting "stalking horse" bids are also insufficient. The Amended Complaint lacks clarity on what constitutes the alleged "enterprises" related to the defendants' control for RICO claims under sections 1962(a) and (b). Both claims fail because plaintiffs do not allege injuries distinct from those caused by the RICO predicate acts.

Defendants argue that Grand Estates' injury does not meet the "proximate cause" requirement for the 1962(c) claim, but this requirement also applies to 1962(a) and (b) claims. Thus, all of Grand Estates' RICO claims should be dismissed for failing to satisfy proximate cause. Regarding claims under New York's Sections 349 and 350, defendants assert that Grand Estates cannot bring these claims due to lack of direct injury. However, New York law allows competitors to sue under these sections if the deceptive acts cause consumer harm and affect public interest. Courts often reject claims under these sections if the main issue is harm to the plaintiff's business rather than broader public interest harm.

In the case of Emergency Enclosures, Inc. v. Nat’l Fire Adjustment Co., the court addressed the claims made by Grand Estates under the General Business Law (GBL), specifically regarding alleged damages due to false advertisements and deceptive trade practices by Concierge. Grand Estates contends that Concierge's actions provided an unfair competitive edge, constituting injury to its business. However, the court noted that for GBL claims to succeed, there must be evidence of "consumer-oriented" conduct that impacts the public interest broadly. The court emphasized that merely having multiple similar transactions does not qualify as "consumer-oriented." It rejected the notion that a transaction becomes "consumer-oriented" simply due to multiple clients involved, citing that certain transactions, like luxury real estate sales, have been deemed non-consumer-oriented. Additionally, the court stated that the defendants' dispute regarding personal jurisdiction over CA Partners, Segue, and BHI is moot since no claims remain against these parties.