The opinion of the court was delivered by: CONNER
Plaintiffs brought this action against Walter G. Cook, his father, Walter J. Cook, and two corporations allegedly controlled by them, Okapi Realty Co., Inc. ("Okapi") and Oxford Development and Investors, Corp ("Oxford"). Plaintiffs seek to recover compensatory and punitive damages for losses they suffered as a result of investing in real estate tax shelters engineered by the Cooks through the two corporations. Plaintiffs allege that the Cooks induced them to invest in these ventures by failing to disclose to them that the tax shelters were mere shams which had no assets, and by falsely representing to them that they would receive substantial returns on their investments, as well as substantial tax write-offs.
Defendants did not answer or move against the complaint and did not appear at the initial pretrial conference scheduled by the Court. Accordingly, plaintiffs sought and obtained from the Court an order directing defendants to show cause why a default judgment, including $150,500 in compensatory damages and $1,000,000 in punitive damages, should not be entered against them. Defendants Walter G. Cook, Okapi, and Oxford did not appear in response to the order to show cause. Defendant Walter J. Cook did appear, but he was late in arriving, and the Court had already scheduled an inquest on plaintiffs' prayer for compensatory and punitive damages Walter J. Cook was directed to appear at the hearing and show cause at that time
Walter J. Cook appeared at the inquest, and advised the Court that he had no notice of the lawsuit until he was served with the order to show cause. Accordingly, I indicated that I would not enter a default judgment with respect to him. Walter J. Cook agreed to accept service of the complaint, and has since filed an answer to it.
Counsel for Walter G. Cook, Okapi, and Oxford also appeared at the hearing: Walter G. Cook himself did not appear. When questioned by the Court, counsel did not contest that Walter G. Cook had received the summons and complaint and the order to show cause, and could not explain why Walter G. Cook had failed to respond to them. Instead, counsel indicated that he had been retained solely to present defendants' argument that the Court lacked personal jurisdiction over Walter G. Cook and the two corporations because plaintiffs had failed to serve them properly. After hearing argument from both sides, I rejected defendants' contention, and indicated that I would enter a default judgment against Walter G. Cook, Okapi, and Oxford. I also stated, however, that these defendants could submit additional arguments and authorities to me in the context of a motion for reconsideration.
Plaintiffs then proceeded to put in proof of their damages Plaintiffs relied on: (1) the "well-pleaded allegations of the complaint," see Trans World Airlines, Inc. v. Hughes, 449 F.2d 51, 63 (2d Cir. 1971), rev'd on other grounds, 409 U.S. 363, 34 L. Ed. 2d 577, 93 S. Ct. 647 (1973); (2) the testimony of Nirmalendu Srivastava, plaintiffs' investment adviser, who described his dealings with the defendants; (3) the testimony of John F. Harnes, an attorney for the plaintiffs, who described his attempts to give notice of the lawsuit and the pretrial proceedings to the defendants; and (4) previous judicial decisions in which Walter G. Cook was adjudged to have committed various frauds.
At the close of the hearing, I ruled that plaintiffs were entitled to the compensatory damages they had demanded, but that they had failed to demonstrate that they were entitled to punitive damages. Plaintiffs have asked me to reconsider that decision. They argue that their "well-pleaded allegations" that Walter G. Cook has previously promoted fraudulent investments, together with the fact that in the past courts have found that Walter G. Cook has engaged in serious misconduct, are sufficient to support the imposition of punitive damages. Defendants Walter G. Cook, Okapi, and Oxford have also asked me to reconsider my decision that mail service was properly made upon them. After carefully reviewing the parties' submissions, I reaffirm my previous decisions on both the issues of service and punitive damages.
1. Service on Walter G. Cook
Plaintiffs attempted to serve Walter G. Cook pursuant to rule 4(c)(2)(C)(ii), Fed. R. Civ P., by mailing a summons and complaint and an acknowledgment of service to him at his office at 545 Fifth Avenue in Manhattan. Cook does not deny that he received the papers, but notes that he did not sign the acknowledgment of service and did not return it to the plaintiffs.
Rule 4(c)(2)(C)(ii), Fed. R. Civ. P., provides that "[i]f no acknowledgment of service . . . is received by the sender within 20 days after the date of mailing, service of such summons and complaint shall be made" by personal service pursuant to rule 4(d). Since the plaintiffs did not make follow-up personal service under rule 4(d), Walter G. Cook argues that the service by mail was ineffective, and concludes that the Court lacks personal jurisdiction over him.
Cook's position is inconsistent with the recent decision of our court of appeals in Morse v Elmira Country Club, 752 F.2d 35 (2d Cir. 1984). There, the court of appeals held that rule 4(c)(2)(C)(ii) should not be read to "void a received-but-unacknowledged mail service." Id. at 39. The court explained that the rule does not say that a received-but-unacknowledged mail service is ineffective, "nor do[es] [it] command personal service as a prerequisite to effective service by mail (if mail service is unacknowledged)." Id. Instead, the court stated that the purpose of the follow-up personal service is simply to provide a foundation for the return, and reasoned that since service can be effective without a return, follow-up personal service is not necessary for received-but-unacknowledged mail service to be valid and effective. Id.
The court also stressed that "strong factors of justice and equity" favor a finding of effective service where, as here, the recipient actually receives the mail service, but refuses to acknowledge it. Id. As in Morse, Cook has not given an "adequate explanation why the acknowledgment was withheld . . ., nor any proper basis for nullifying mail service deliberately left unacknowledged." Id. Since Cook does not deny that he received the mail service, I can only conclude that he refused to acknowledge service in order to inconvenience or harass the plaintiffs. The court of appeals made clear, however, that absent some showing of good cause, a ...