Opinion
02 Civ. 4788 (RMB) (AJP).
April 18, 2005
DECISION AND ORDER
I. Background
In this action, filed on or about June 20, 2002, Ideal Steel Supply Corp. ("Plaintiff" or "Ideal") alleges that National Steel Supply, Inc. ("National") and its owners, Joseph and Vincent Anza (collectively, "Defendants"), have engaged in a racketeering scheme in violation of 18 U.S.C. §§ 1962(a) and (c) ("RICO"). Ideal alleges that, under a "cash, no tax" scheme, Defendants fail to collect and remit New York State sales tax on cash sales and file fraudulent sales tax returns with the intent and effect of causing Ideal, National's principal competitor, to lose business (because National is able to charge less than Ideal on cash sales). (See AC ¶¶ 2-6, 16, 21, 27-29, 32, 44-49.) Ideal also alleges that Defendants' "cash, no tax" scheme breaches a settlement agreement the parties executed in a 1997 litigation, wherein National and Ideal agreed, among other things, not to interfere with each others' "business activities other than through legitimate and proper competition." (AC ¶ 8, 60-67.)
Ideal filed an amended complaint ("amended complaint" or "AC") on or about September 13, 2002.
On April 1, 2003, the Court dismissed the amended complaint because Ideal had not alleged that it "relied on the [fraudulent] sales tax returns Defendants mailed or wired to the New York State Department of Taxation." Ideal Steel Supply Corp. v. Anza, 254 F. Supp. 2d 464, 468 (S.D.N.Y. 2003) ("Ideal Steel I"). The United States Court of Appeals for the Second Circuit reversed, holding that Ideal may pursue its civil RICO claims "even where the scheme depended on fraudulent communications directed to and relied on by a third party rather than [Ideal]."Ideal Steel Supply Corp. v. Anza, 373 F.3d 251, 263-64 (2d Cir. 2004) ("Ideal Steel II"). Defendants filed a petition for certiorari on or about September 29, 2004 (No. 04-433), which is pending before the Supreme Court of the United States.
On or about December 30, 2004, Ideal moved to amend the AC. (See Plaintiff's Memorandum of Law, dated December 30, 2004 ("Pl. Mem.").) In its Proposed Amended Complaint ("PAC"), Ideal seeks to add two new claims for RICO under §§ 1962(a) and (c) (PAC Fourth (§ 1962(c)) and Fifth (§ 1962(a)) Causes of Action) ("proposed RICO claims"). Ideal also seeks to add allegations that the proposed RICO claims constitute additional support for its existing breach of contract claim. (See PAC ¶¶ 85, 86). The proposed RICO claims allege that Defendants have engaged in an "income tax free sales" scheme ("income tax scheme") to gain a competitive advantage over Ideal "by [knowingly] filing false income tax returns and defrauding the Internal Revenue Service and the New York State Department of Taxation and Finance," with each filing constituting a violation of the federal mail fraud statute, 18 U.S.C. § 1341, and a predicate act of racketeering under 18 U.S.C. § 1961(b). (PAC ¶¶ 50-51, 90, 92.) Ideal alleges that, since 1998, National "significantly understates its income on its federal and state income tax returns by, inter alia, using the false sales figures taken from National's sales tax returns and understating its gross profit margins on its underreported sales by improperly manipulating the other components of the gross profit calculation. . . ." (Id. ¶¶ 7, 48.) Ideal alleges that "Defendants pass on to National customers the income tax 'savings' that defendants realize as a result of their false returns, thereby increasing National sales and customer base through lower pricing without decreasing its profit margin," and causing injury to Ideal's business. (Id. ¶¶ 56-57, 95.)
On or about February 22, 2005, Defendants submitted an opposition to Ideal's motion. (See Defendants' Memorandum in Opposition, dated February 22, 2005 ("Def. Mem."), at 5 ("While the Second Circuit blessed the expansion of RICO to cover allegedsales tax violations that give a price advantage to a head-to-head competitor, it did not consider, much less expand, RICO to include claims based on alleged income tax violations.") (emphasis in original).) Ideal submitted a reply on February 22, 2005. (See Plaintiff's Reply, dated February 22, 2205 ("Pl. Reply").)
For the reasons set forth below, Plaintiff's motion to amend is granted.
The Court is in no sense ruling on the ultimate merits of the parties' claims.
II. Standard of Review
Federal Rule of Civil Procedure 15(a) provides that a party may amend a pleading "only by leave of court or by written consent of the adverse party; and leave shall be freely given when justice so requires." Fed.R.Civ.P. 15(a). Leave to amend "should not be denied unless there is evidence of undue delay, bad faith, undue prejudice to the non-movant, or futility." Milanese v. Rust-Oleum Corp., 244 F.3d 104, 110 (2d Cir. 2001) (citingFoman v. Davis, 371 U.S. 178, 182 (1962)). A court measures futility under the same standard as a motion to dismiss under Fed.R.Civ.P. 12(b)(6). Nettis v. Levitt, 241 F.3d 186, 194 n. 4 (2d Cir. 2001). A Rule 12(b)(6) motion may be granted only if it appears that the plaintiff can prove no set of facts that would entitle him to relief, while making all reasonable inferences in plaintiff's favor and taking the allegations plead in the complaint as true. See id. An amendment which seeks to include time-barred claims is futile. Middle Atlantic Utils. Co. v. S.M.W. Dev. Corp., 392 F.2d 380, 385 (2d Cir. 1968). Fed.R.Civ.P. 9(b), which requires that fraud be pled with particularity, "applies to civil RICO claims for which fraud is the predicate illegal act." Moore v. PaineWebber, Inc., 189 F.3d 165, 172 (2d Cir. 1999).
III. Analysis
A. Prejudice
Defendants argue that they will be unduly prejudiced by Ideal's proposed amendments because Defendants and their experts would need "at least three months to adequately analyze the effects" of the alleged income tax scheme. (Def. Mem. at 10-11.) Defendants also argue that they "will need to conduct a full-scale examination of the finances and tax filings of Ideal and its principal to determine whether they have a counterclaim for damages arising from tax fraud committed by Ideal. . . ." (Id.) Ideal argues that "[t]he additional claims should not require significant additional documents" and "[a]ny additional deposition discovery should be marginal at most" because: (i) "[t]he parties have already exchange most, if not all, of the documents relating to the additional claims, including National income tax returns and [Joseph and Vincent] Anza's redacted income tax returns"; (ii) "Ideal has also produced its income tax returns"; and (iii) the parties "have agreed to allow plaintiff to question witnesses on income taxrelated matters during discovery." (Pl. Mem. at 9.) Ideal further argues that, even if Defendants need three more months to conduct discovery, "this is not enough to deny a motion for leave to amend." (Pl. Reply at 8.)
"In determining what constitutes 'prejudice,' [courts] consider whether the assertion of a the new claim would: (i) require the opponent to expend significant additional resources to conduct discovery and prepare for trial; (ii) significantly delay the resolution of the dispute; or (iii) prevent the plaintiff from bringing a timely action in another jurisdiction." Block v. First Blood Assocs., 988 F.2d 344, 350 (2d Cir. 1993). However, an "adverse party's burden of undertaking discovery, standing alone, does not suffice to warrant denial of a motion to amend a pleading." United States v. Cont'l Illinois Nat'l Bank Trust Co. of Chicago, 889 F.2d 1248, 1255 (2d Cir. 1989).
The Court does not find that Defendants would be unduly prejudiced by the proposed amendments. Ideal filed its motion to amend on or about December 30, 2004, well before discovery closed (on or about March 25, 2005), and no trial date has been set. (And, not all of the discovery concerning the proposed RICO claims appears to have been conducted.) See Cont'l Illiniois Nat'l Bank, 889 F.2d at 1255; Hamptons Bays Connections, Inc. v. Duffy, 212 F.R.D. 119, 123-24 (E.D.N.Y. 2003) ("some additional time, effort, or money do[es] not constitute 'undue prejudice'") (internal quotation omitted); A.V. by Versace, Inc. v. Gianni Versace, 87 F. Supp. 2d 281, 299 (S.D.N.Y. 2000) (same).
B. Futility
(a) Predicate Acts
1. RICO Claims
Defendants argue that "income tax fraud is . . . not a predicate act under the RICO statute" and that Ideal is "labeling a tax fraud as a mail fraud" in order to sue under RICO. (Def. Mem. at 8-9.) Defendants assert that because "[t]ax evasion and related offenses under Title 26 are not predicate acts under RICO . . . the Department of Justice ['DOJ'] will not authorize RICO or money laundering prosecutions predicated on the mail and wire fraud statutes where the underlying conduct is federal tax fraud." (Id. at 8.) Ideal argues that it "does not allege that tax evasion is the predicate act [but rather] alleges that defendants' mailing of false returns gives rise to RICO jurisdiction." (Pl. Reply at 4.) Ideal contends that whether or not the DOJ "chooses not to prosecute tax fraud under thecriminal RICO mail and wire fraud statutes" is not relevant where, as here, Ideal is not seeking to "collect unpaid taxes" but rather to enforce its "right to be made whole for damages cause by a racketeering scheme." (Pl. Mem. at 12; Pl. Reply at 4-5) (emphasis in original).
For the purposes of the instant motion, the Court perceives no distinction between mail fraud based upon the mailing of fraudulent sales tax returns, which the Second Circuit has found constitutes a predicate act, see Ideal Steel II at 264, and mail fraud based upon the mailing of fraudulent income tax returns. Accordingly, Ideal's proposed RICO claims may be added to the AC. See id.; but see Piccone v. Bd. of Directors of Doctors Hosp., 97 Civ. 8182, 2000 WL 1219391, at *5 (S.D.N.Y. Aug. 28, 2000) ("If one alleges predicate acts of mail fraud, as [plaintiff] does, it is necessary to allege that the injured party relied on the fraudulent misrepresentations of the defendants, and that the reliance was the cause of the injury.")
(b) Causation
Defendants argue that Ideal has "failed to alleged in its amended complaint facts sufficient to satisfy the pleading requirement for proximate causation under [Ideal Steel II] — that National mailing of allegedly fraudulent income tax returns actually gave National a competitive advantage over Ideal" because Ideal alleges: (i) that "as a result of National's [income tax scheme] 'National can lower its price to meet or beat Ideal's prices'"; and (ii) that "'Ideal's prices are the same or lower on average than National's.'" (Def. Mem. at 5-6 (emphasis in original) (quoting PAC ¶¶ 12, 39).) Ideal responds that Defendants "ignore the language of the proposed amended complaint," and asserts that "these very allegations when tied to defendants' sales tax scheme were held sufficient to state a cause of action [by the Second Circuit in Ideal Steel II]." (Pl. Reply at 3-4.)
In Ideal Steel II, the Second Circuit held that a plaintiff adequately pleads proximate cause when the complaint alleges "facts to show that the defendant engaged in a pattern of fraudulent conduct that is within the RICO definition of racketeering activity and that was intended to and did give the defendant a competitive advantage over the plaintiff. . . ."Ideal Steel II at 263 (emphasis added). Indeed, "mere speculation that some injury might occur is insufficient to state a civil RICO claim." First Nationwide Bank v. Gelt Funding, Corp., 820 F. Supp. 89, 94 (S.D.N.Y. 1993) (citing Bankers Trust Co. v. Rhoades, 859 F.2d 1096, 1104 (2d Cir. 1988)); see also Commercial Cleaning Servs. L.L.C. v. Colin Serv. Sys. Inc., 271 F.3d 374, 380 (2d Cir. 2001) (in order to bring civil RICO claim under § 1964(c), plaintiff must allege, among other things, "injury to business or property"). Ideal alleges, among other things, that Defendants' "cash, no tax" and income tax schemes "have caused Ideal to lose business to National and enabled National to gain sales and market share at Ideal's expense." (PAC ¶¶ 12, 55) (emphasis added). See Cosmas v. Hassett, 886 F.2d 8, 11 (2d Cir. 1989) ("On a motion to dismiss, a court must read the complaint generously, and draw all inferences in favor of the pleader.") See also Fed.R.Civ.P. 8(e)(2) ("A party may . . . state as many separate claims or defenses as the party has regardless of consistency . . . subject to the obligations set forth in Rule 11."); Henry v. Daytop Village, Inc., 42 F.3d 89, 95 (2d Cir. 1994) ("The inconsistency may lie either in the statement of the facts or in the legal theories adopted. . . .") (internal quotation omitted). But see Odyssey Re (London) Ltd. v. Stirling Cooke Brown Holdings Ltd., 85 F. Supp. 2d 282, 302 (S.D.N.Y. 2000) (holding that "[t]o show transaction causation, . . . plaintiff must show that it relied on defendant's omission."); Piccone, 2000 WL 1219391, at *5.
(c) Statute of Limitations
Defendants argue that Ideal's proposed RICO § 1962(a) claim (PAC Fifth Cause of Action) is barred by the four-year statute of limitations because it asserts that Defendants invested the proceeds from their income tax scheme "'to open National's Bronx location in or about the summer of 2000.'" (Def. Mem. at 6 (quoting PAC ¶ 100).) Defendants contend that this claim does not "relate back" to the original complaint under Fed.R.Civ.P. 15(c)(2) ("Rule 15(c)") because Ideal's original RICO claims "dealt exclusively with allegations of National diverting Ideal's customers by offering them lower prices by not charging sales tax on cash purchases" while Ideal's proposed RICO claims "allege non-payment of income taxes by National — an entirely different set of facts." (Def. Mem. at 6-7) (emphasis in original). Ideal responds that the proposed RICO claims do "relate back" because "Defendants have been on notice since the filing of the original complaint that their tax manipulations and false filings would be the subject of scrutiny in this case." (Pl. Reply at 7.) Ideal contends that "[t]he understated sales numbers for National's total sales which make the sales tax returns false are repeated without change on National's income tax returns" and that "Plaintiff's additional claims involve additional manipulations of the same and related documents by the same people for the same periods of time as the original complaint. . . ." (Id. at 7-8.)
Because Ideal moved to amend the AC in December 2004, and its proposed RICO § 1962(a) claim alleges that Defendants used income tax scheme proceeds in the summer of 2000 (see PAC ¶ 100), the new claim would be time-barred unless it relates back to the original complaint, which was filed in June 2002. See Tho Dinh Tran v. Alphonse Hotel Corp., 281 F.3d 23, 35 (2d Cir. 2002). Rule 15(c) provides that "[a]n amendment of a pleading relates back to the date of the original pleading when . . . the claim or defense asserted in the amended pleading arose out of the conduct, transaction, or occurrence set forth or attempted to be set forth in the original pleading. . . ." Fed.R.Civ.P. 15(c)(2). "For a newly added action to relate back, 'the basic claim must have arisen out of the conduct set forth in the original pleading. . . .'" Tho Dinh Tran, 281 F.3d at 35 (quoting Schiavone v. Fortune, 477 U.S. 21, 29 (1986)); see also Benfield v. Mocatta Metals Corp., 26 F.3d 19, 23 (2d Cir. 1994) (relation-back doctrine applies where there is "sufficient commonality" between acts alleged in the original complaint and the proposed amendments, and where the proposed amendments would require "evidence of the same or similar wrongful acts and the testimony of the same or similar witnesses as would proof of [the original claims]"). "'The pertinent inquiry . . . is whether the original complaint gave the defendant fair notice of the newly alleged claims.'" Tho Dinh Tran, 281 F.3d at 36 (quotingWilson v. Fairchild Republic Co., 143 F.3d 733, 738 (2d Cir. 1998)). Rule 15(c) is "to be liberally construed." Siegel v. Converters Transp., Inc., 714 F.2d 213, 216 (2d Cir. 1983).
Ideal's original complaint alleged that, in order competitively to disadvantage Ideal, National does not charge cash-paying customers sales tax and "misrepresent[s] the total amount of taxable sales and the amount of sales tax collected" on National's state sales tax returns. (Complaint, dated June 20, 2002, ¶¶ 4-5, 27-28; see also AC ¶¶ 4-5, 27-28.) Ideal's proposed RICO claims allege that National is also able to undercut Ideal's prices because National understates its income on its federal and state income tax returns "by, inter alia, using the false sales figures taken from National's sales tax returns and understating its gross profit margins on its underreported sales by improperly manipulating the other components of the gross profit calculation. . . ." (PAC ¶¶ 7, 48.) The proposed RICO claims(s) are based upon conduct described in Ideal's original complaint, i.e. Defendants' manipulations of sales figures. See Tho Dinh Tran, 281 F.3d at 35-36. There is "sufficient commonality" between the alleged "cash, no tax" scheme and the alleged income tax scheme. See Oliner v. McBride's Indus., Inc., 106 F.R.D. 9, 13 (S.D.N.Y. 1985).
2. Breach of Contract Claim
For reasons similar to those which underline the Court's determination that Ideal may amend the AC to include the proposed RICO claims, Ideal may also amend its breach of contract claim.See Fed.R.Civ.P. 15(a) ("leave shall be freely given when justice so requires").
IV. Conclusion
For the reasons stated above, Plaintiff's motion amend the AC is granted. Plaintiff shall serve and filed its amended complaint on or before April 25, 2005.