Docket: Docket Nos. 16-2944; 16-3115; August Term, 2017
Court: Court of Appeals for the Second Circuit; February 27, 2018; Federal Appellate Court
Daniel Kim filed a lawsuit under the Racketeer Influenced and Corrupt Organizations Act (RICO), claiming that the defendants fraudulently sued him for trademark infringement. The defendants moved to dismiss the case, arguing that their litigation actions against Kim did not qualify as predicate acts under RICO. Kim sought to disqualify one of the defendants' attorneys, Michael S. Kimm, and requested permission to amend his complaint. The United States District Court for the Eastern District of New York dismissed Kim's case, agreeing that the defendants’ litigation actions were insufficient for a RICO claim, and denied his motions to amend and disqualify Kimm. The defendants subsequently sought sanctions under Rule 11, which the court also denied. Kim, now representing himself, appealed the dismissal and the denial of his motions, while Kimm and the co-defendants cross-appealed regarding the sanctions. The appellate court affirmed the district court’s ruling, agreeing that the litigation actions did not constitute RICO predicate acts and that the district court acted within its discretion in denying the motions.
The case is connected to a previous litigation, Sik Gaek, Inc. v. Yogi's II, Inc., where Sik Gaek, Inc. sued Kim and his restaurant for breach of a trademark license agreement and related claims. The district court had previously ruled in favor of Kim in that case, dismissing the claims against him and later agreeing to dismiss the remaining claims against Yogi's II, Inc.
On August 15, 2015, Daniel Kim, a lawyer and defendant in the Sik Gaek I lawsuit, initiated a new action against the owner of Sik Gaek, Inc., his wife, their attorneys, and an accountant. Kim's amended complaint accused these defendants of being part of two criminal enterprises that conspired to sue him for trademark infringement and breach of contract in Sik Gaek I, alleging that the lawsuit was an attempt to extort $2 million from him. He claimed the defendants submitted false documents to misrepresent ownership of a trademark, licensed it to a third party, and subsequently sued him for breach of the licensing agreement. Kim characterized these actions as obstruction of justice, mail fraud, and wire fraud, constituting a pattern of racketeering activity, and asserted a RICO conspiracy claim based on the coordinated efforts of the defendants.
On September 11, 2015, the defendants moved to dismiss the action under Rule 12(b)(6), arguing Kim failed to establish a pattern of racketeering activity necessary for a RICO claim and raised defenses such as collateral estoppel and res judicata. Kim sought to disqualify one of the defendants' counsel and opposed the motion to dismiss while requesting permission to file a second amended complaint. The district court granted the defendants' motion to dismiss on August 9, 2016, ruling that Kim did not adequately allege a pattern of racketeering activity since most of the alleged predicate acts were litigation activities from Sik Gaek I, which are not recognized as RICO predicate acts under established precedent. The court also found Kim's pre-litigation allegations legally deficient and denied his motion to disqualify counsel as moot, alongside denying the request to amend the complaint, concluding that the proposed amendments would add only insufficient litigation activities.
Defendants filed for sanctions against Kim, asserting his lawsuit was baseless and sought to recoup costs from the Sik Gaek I litigation. The district court denied their motion, stating Kim's claims were not legally or factually frivolous, noting that while most courts deemed litigation activities non-predicate acts under RICO, some disagreed, making sanctions unwarranted. Kim appealed the dismissal of his case and the denial of his motions to amend his complaint and disqualify Kimm. Defendants cross-appealed the sanctions denial.
The appeal addresses whether the district court mistakenly dismissed Kim's RICO claim under Rule 12(b)(6). Kim contests the ruling that the defendants' litigation actions did not qualify as predicate acts for RICO. The court reviews such dismissals de novo, accepting all factual allegations as true and inferring reasonable conclusions in Kim’s favor. To survive dismissal, a complaint must present sufficient factual content to establish a plausible claim.
Under RICO (18 U.S.C. § 1964(c)), a private right of action exists for those injured in business or property due to violations of § 1962. A RICO claim requires proof of: 1) a violation of § 1962; 2) injury to business or property; and 3) causation linking the injury to the violation. The current appeal focuses on whether Kim adequately alleged a violation of § 1962, which mandates proof of: 1) conduct; 2) of an enterprise; 3) through a pattern; 4) of racketeering activity. The defendants, supported by the district court, argued that Kim did not sufficiently demonstrate a pattern of racketeering activity, defined as at least two indictable acts under specified federal statutes, within a ten-year timeframe.
Kim alleges the defendants committed predicate acts of mail fraud, wire fraud, and obstruction of justice during the Sik Gaek I litigation, specifically through the preparation and filing of four declarations containing fraudulent representations intended to influence the district court's ruling in favor of Sik Gaek, Inc. The district court dismissed Kim's complaint, stating these litigation activities do not constitute predicate acts under Section 1962(c). The court referenced multiple precedents indicating that without evidence of corruption, litigation activities cannot serve as RICO predicate offenses. The decision highlighted the policy implications of allowing RICO claims based on litigation activities, noting that such claims could lead to an influx of retaliatory lawsuits, undermine principles of res judicata and collateral estoppel, and essentially allow for the relitigation of cases in federal courts. The court affirmed the dismissal on these grounds, aligning with established case law that frivolous or fraudulent litigation alone does not satisfy the requirements for RICO predicate acts.
Endorsing the interpretation of RICO as suggested would deter litigants and attorneys and undermine the public policy of ensuring open court access. Any unsuccessful lawsuit could expose parties to significant RICO liability, which could lead to a chilling effect on litigation. Kim cites Sykes v. Mel S. Harris & Associates LLC to support the claim that RICO applies to attorneys securing default judgments through fraudulent means. However, this reliance is incorrect; Kim likely intended to reference the district court ruling in the same case, which upheld allegations of significant fraudulent activity involving multiple parties and various out-of-court actions. In contrast, the current case solely involves claims of fraudulent court documents without additional misconduct. The court does not categorically dismiss all RICO claims based on litigation but concludes that a single frivolous lawsuit cannot serve as a valid RICO predicate act. Consequently, the district court's decision to dismiss Kim's amended complaint is affirmed.
Kim argued that the district court erred in denying his request to file a second amended complaint, which was reviewed for abuse of discretion. While Rule 15(a) of the Federal Rules of Civil Procedure encourages granting leave to amend, a district court has discretion to deny it for reasons such as futility, bad faith, undue delay, or prejudice to the opposing party. Kim's proposed amendments involved additional litigation-related predicate acts, which did not alter the legal deficiencies already identified by the court. Consequently, the district court's denial of leave to amend was not an abuse of discretion since the amendments were deemed futile.
Additionally, Kim contended that the district court wrongly denied his motion to disqualify Kimm, the defendants' counsel, citing the "advocate-witness" rule. However, the court deemed the motion moot after dismissing Kim's amended complaint with prejudice, as there was no potential for Kimm to serve as a witness. This decision was also not an abuse of discretion.
Lastly, the defendants claimed the district court erred in denying their motion for sanctions against Kim under Rule 11 and 28 U.S.C. § 1927. Rule 11 requires that filings are not for improper purposes and are warranted by existing law. To impose sanctions under § 1927, clear evidence of claims being entirely baseless and brought in bad faith is needed. The district court's denial of sanctions was reviewed for abuse of discretion but was upheld.
Defendants argued for sanctions against Kim, claiming his RICO claims were frivolous. The court found that, although Kim's amended complaint did not successfully state a RICO claim, it was not so clearly foreclosed by precedent as to be indefensible. At the time of filing, there was no binding precedent in the Circuit regarding whether litigation activities could qualify as predicate acts under RICO, and some courts had recognized such claims. Consequently, Kim's claims were not precluded by binding precedent, despite their low likelihood of success, and his legal position was supported by case law, even if not binding on the court.
The defendants also claimed sanctions were warranted due to collateral estoppel and res judicata, but this argument was presented only superficially without substantial support, leading the court to conclude that it was waived. The court emphasized that appellants must adequately argue issues and provide citations to relevant authorities, as insufficiently argued issues are considered waived.
The district court's denial of the defendants' motion for sanctions was affirmed. The court also noted that Kim did not contest the ruling that his pre-litigation activities failed to state a RICO claim, resulting in a waiver of that argument. Additionally, while 28 U.S.C. § 1927 applies primarily to attorneys, it could have been relevant to Kim as he is a lawyer, potentially subject to sanctions for his own conduct.
