TAGC Management, LLC v. Lehman, Lee & Xu Ltd. ( 2013 )

12-2211-cv
TAGC Mgmt., LLC v. Lehman, Lee & Xu Ltd.
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
SUMMARY ORDER
RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A
SUMMARY ORDER FILED ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED BY
FEDERAL RULE OF APPELLATE PROCEDURE 32.1 AND THIS COURT’S LOCAL RULE 32.1.1. WHEN
CITING A SUMMARY ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY MUST CITE
EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC DATABASE (WITH THE NOTATION
“SUMMARY ORDER”). A PARTY CITING TO A SUMMARY ORDER MUST SERVE A COPY OF IT ON
ANY PARTY NOT REPRESENTED BY COUNSEL.
At a stated term of the United States Court of Appeals for the Second Circuit, held at
the Thurgood Marshall United States Courthouse, 40 Foley Square, in the City of New York,
on the 4th day of September, two thousand thirteen.
PRESENT: JON O. NEWMAN,
REENA RAGGI,
GERARD E. LYNCH,
Circuit Judges.
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TAGC Management, LLC, a Nevada Limited Liability
Company, TAGC I, LLC, a Nevada Limited Liability
Company, TOTAL ACCESS GLOBAL CAPITAL, LLC, a
Texas Limited Liability Company,
Plaintiffs-Appellees,
v. No. 12-2211-cv
LEHMAN, LEE & XU LIMITED, a Hong Kong
Corporation,
Defendant-Appellant,
EDWARD EUGENE LEHMAN, an individual, KAROLINA
LEHMAN, an individual, SCOTT GARNER, an individual,
HOME & GARDEN LIMITED, a Hong Kong Corporation,
LEHMAN, LEE & XU PATENT AND TRADEMARK
AGENTS LIMITED, a Hong Kong Corporation, LEHMAN,
LEE & XU CORPORATE SERVICES LIMITED, a Hong
Kong Corporation, LEHMAN, JONES & PARTNERS (HK)
LIMITED, a Hong Kong Corporation, LEHMAN GS
LIMITED, a Hong Kong Corporation, LEHMAN & CO
MANAGEMENT, LTD., a British Virgin Islands Company,
DOES 1-10, INCLUSIVE,
Defendants.*
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FOR APPELLANT: Anthony Scordo, III, Stueben & Scordo, Cedar Grove,
New Jersey.
FOR APPELLEES: Donald R. Dinan, Roetzel & Andress, LPA, Washington,
D.C.
Appeal from a judgment of the United States District Court for the Southern District
of New York (Katherine B. Forrest, Judge).
UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, ADJUDGED, AND
DECREED that the revised judgment entered on June 25, 2012, is AFFIRMED in part and
VACATED in part.
Defendant Lehman, Lee & Xu Limited (“Lehman”) appeals from a default judgment
entered in favor of plaintiffs TAGC Management, LLC, TAGC I, LLC, and Total Access
Global Capital, LLC (collectively, “TAGC”), as a sanction for Lehman’s failure to comply
with a discovery order directing that it make deponents available for in-person depositions
in the Southern District of New York. See Fed. R. Civ. P. 37(b)(2)(A)(iii), (vi) (providing
*
The Clerk of Court is directed to amend the official caption as shown above.
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that discovery sanctions may include “default judgment against the disobedient party”).1 We
review a district court’s decision on a motion for discovery sanctions for “abuse of discretion,
which includes errors of law and clearly erroneous assessments of evidence.” Chin v. Port
Auth. of N.Y & N.J., 685 F.3d 135, 162 (2d Cir. 2012). We assume the parties’ familiarity
with the facts and record of the underlying proceedings, which we reference only as
necessary to explain our decision to affirm in part and vacate in part.
While “default is an admission of all well-pleaded allegations against the defaulting
party,” Vermont Teddy Bear Co. v. 1-800 Beargram Co., 373 F.3d 241, 246 (2d Cir. 2004),
a district court “need not agree that the alleged facts constitute a valid cause of action,” Au
Bon Pain Corp. v. Artect, Inc., 653 F.2d 61, 65 (2d Cir. 1981). “Indeed, we have recently
suggested that, prior to entering default judgment, a district court is ‘required to determine
whether the plaintiff’s allegations establish the defendant’s liability as a matter of law.’”
City of New York v. Mickalis Pawn Shop, LLC, 645 F.3d 114, 137 (2d Cir. 2011) (quoting
Finkel v. Romanowicz, 577 F.3d 79, 84 (2d Cir. 2009)) (alterations omitted).
In this case, TAGC asserted three federal claims against the named defendants:
racketeering conspiracy, see 18 U.S.C. § 1962(c), (d); securities fraud, see 15 U.S.C.
§ 78j(b), 17 C.F.R. § 240.10b-5; and false advertising in violation of the Lanham Act, see 15
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TAGC submits that this appeal is foreclosed by a settlement agreement among the
parties, an argument we rejected in our order of February 14, 2013, which denied dismissal.
See Order Den. Mot. Dismiss, No. 12-2211 (2d Cir. Feb. 14, 2013). There is no reason to
reconsider that decision today.
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U.S.C. § 1125(a)(1)(B). TAGC also sued on state-law claims of conversion, breach of
fiduciary duty, professional negligence, fraud, and unjust enrichment. In entering judgment
for TAGC, the district court made no findings as to the legal sufficiency of any of these
allegations. In addition to an award of $1,135,850 in general compensatory damages,
however, it also awarded treble damages, relief available only on the racketeering claim.2
Lehman submits that any award of damages for racketeering was legal error because
the pleadings fail to support every element of such a claim. Reviewing the complaint
pursuant to the standard enunciated in Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570
(2007), and Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009), we identify a single concern: the
pleadings do not appear to support the continuity requirement necessary to satisfy the pattern
element of racketeering. See, e.g., H.J. Inc. v. Nw. Bell Tel. Co., 492 U.S. 229, 241 (1989);
United States v. Cain, 671 F.3d 271, 288 (2d Cir. 2012). The “‘continuity’ requirement can
be satisfied either by showing a ‘closed-ended’ pattern—a series of related predicate acts
extending over a substantial period of time—or by demonstrating an ‘open-ended’ pattern
of racketeering activity that poses a threat of continuing criminal conduct beyond the period
2
In the district court, TAGC contended that treble damages were also available on the
Lanham Act claim. It does not renew that claim on appeal, and thus has abandoned it. In
any event, any such argument would be meritless. TAGC’s complaint states, in a conclusory
manner, that Lehman’s allegedly false advertising caused TAGC to suffer injuries “in the
form of lost sales, profits and goodwill,” but it alleges no facts plausibly to support that
conclusion. See Famous Horse Inc. v. 5th Ave. Photo Inc., 624 F.3d 106, 114-15 (to state
a false advertising claim under the Lanham Act, a plaintiff must allege that defendants’
misleading statements undermined its business interests).
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during which the predicate acts were performed.” Spool v. World Child Int’l Adoption
Agency, 520 F.3d 178, 183 (2d Cir. 2008); see United States v. Cain, 671 F.3d at 288.
TAGC does not dispute that it failed to allege closed-ended continuity. Insofar as
TAGC argues that it satisfactorily pleaded open-ended continuity in ¶ 46 of its complaint,
the relevant language states only that the alleged enterprise, which appears to have been an
association in fact, “would continue as an ongoing criminal enterprise until stopped by law
enforcement.” Compl. ¶ 46. The complaint fails to plead facts plausibly supporting this
conclusory allegation. See Bell Atl. Corp. v. Twombly, 550 U.S. at 570. Certainly, there is
no reasonable likelihood that defendants will persuade TAGC to wire any more funds to
Lehman. See generally GICC Capital Corp. v. Tech. Fin. Grp., Inc., 67 F.3d 463, 466 (2d
Cir. 1995) (observing that threat of continued looting cannot be inferred when plaintiff has
“nothing left to loot”). Insofar as TAGC submits that open-ended continuity can be inferred
from its pleading that Lehman’s website overstates the law firm’s size “with the intent to
trick, confuse, and deceive potential clients,” Compl. ¶ 17, the likelihood of the enterprise’s
using the website to defraud future hypothetical victims in ways similar to those alleged here
is “entirely speculative” and, therefore, cannot pose a plausible threat of continuing criminal
conduct. GICC Capital Corp. v. Tech. Fin. Grp., Inc., 67 F.3d at 466. Indeed, in describing
the racketeering scheme at issue, the complaint does not state a criminal goal reaching
beyond TAGC. See Compl. ¶ 45 (“The scheme was to gain access to the funds of Plaintiff’s
clients[.]”).
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Thus, because TAGC’s pleadings, even when accepted as true, fail to state a valid
cause of action for racketeering, we conclude that the award of treble damages cannot stand.
Lehman further argues that even the compensatory award cannot stand because
TAGC’s pleadings fail as a matter of law to support its other federal claims under the
Exchange and Lanham Acts. Lehman does not dispute that the pleadings support TAGC’s
various state law claims. It argues only that the district court lacked jurisdiction to award
damages for state claims in the absence of a viable federal claim. We disagree. Contrary to
Lehman’s argument, the fact that TAGC’s federal claims lack merit does not mean that they
are so “wholly insubstantial or frivolous” that they do not give rise to federal subject matter
jurisdiction. S. New Eng. Tel. Co. v. Global NAPs Inc., 624 F.3d 123, 132 (2d Cir. 2010)
(internal quotation marks omitted); see also Carlson Principal Fin. Grp., 320 F.3d 301, 307
(2d Cir. 2003) (“Whether [a plaintiff] is able to assert a valid claim under [a federal statute]
is irrelevant to the question of whether the District Court has subject matter jurisdiction over
her complaint.”). “[O]n its face. . . the complaint is drawn so as to seek recovery under
federal law or the Constitution,” and we therefore “find a sufficient basis for jurisdiction,”
even though dismissal of the federal claims on the merits was appropriate. See Nowak v.
Ironworkers Local 6 Pension Fund, 81 F.3d 1182, 1191 (2d Cir. 1996).
Here, the district court dismissed no federal claims. We need not decide whether the
pleadings were sufficient to support default judgments on the Exchange or Lanham Act
claims because, even if not, they were sufficient to support default judgment and
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compensatory awards on the state claims and, at this point, judicial economy, convenience,
fairness, and comity are all served by affirming the judgment at least in part on that ground.
The judgment is therefore VACATED insofar as it awards treble damages, and
AFFIRMED in all other respects.
FOR THE COURT:
CATHERINE O’HAGAN WOLFE, Clerk of Court
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