United States District Court, Southern District of New York
May 12, 2003
PETER C. TOSTO, ET AL., PLAINTIFFS, AGAINST JOHN ZELAYA, ET AL., DEFENDANTS
The opinion of the court was delivered by: Kevin Nathaniel Fox, United States Magistrate Judge
REPORT AND RECOMMENDATION
TO THE HONORABLE WILLIAM H. PAULEY III, UNITED STATES DISTRICT JUDGE
In this action, plaintiffs Peter C. Tosto ("Tosto"), Thomas Telegades ("Telegades"), Tellerstock, Inc., Investor Relations, Inc., and Consolidated Asset Management, Inc. (collectively "plaintiffs") allege common law fraud against defendants John Zelaya ("Zelaya"), Anthony Leavitt ("Leavitt"), Capital International Holdings, Inc. ("Capital International"), Capital International Securities Group ("CISG"), CIH, Inc. ("CIH"), and Capital Investment Holdings ("Capital Invest"); breach of fiduciary duty against defendants David Gothard ("Gothard") and Advanced Lighting Solutions, Inc. ("AVLS"); aiding and abetting breach of fiduciary duty against defendants Zelaya, Leavitt, Capital International, CISG, Capital Invest and SPC, Inc. ("SPC"); and breach of contract against defendants CISG, AVLS, Zelaya and Capital Invest.
The Complaint was filed on December 8, 1999. On February 4, 2000, Zelaya, Capital International, CISG, CIH, Capital Invest and SPC (collectively "Capital defendants") served an answer. However, as the litigation progressed, the Capital defendants failed to respond to plaintiffs' discovery demands. The Capital defendants' counsel then moved to be released from the obligation of continuing to represent them. The motion was granted, and the Capital defendants were ordered to obtain new counsel and to appear at a conference on June 22, 2001. The Capital defendants failed to appear at the conference.
Thereafter, your Honor ordered that a default judgment be entered against the Capital defendants.*fn1 The matter was then referred to the undersigned to conduct an inquest and to report and recommend the amount of damages, if any, to be awarded to plaintiffs against the Capital defendants. The Court directed plaintiffs to file and serve proposed findings of fact and conclusions of law and an inquest memorandum setting forth their proof of damages, costs of this action, and their attorneys' fees. Each of the Capital defendants was directed to file and serve opposing memoranda, affidavits and exhibits, as well as any alternative findings of fact and conclusions of law he or it deemed appropriate, and to state whether a hearing was requested for the purpose of examining witnesses.
Plaintiffs served and filed an affidavit in support of their inquest submission, proposed findings of fact and conclusions of law, and the declaration of plaintiff Telegades in support of the inquest submission. Defendant Zelaya submitted a declaration in opposition to plaintiffs' inquest submission.
Plaintiffs' submissions aver that they are entitled to $2,197,121.45 in contract damages; $2,197,121.45 in damages for fraud; punitive damages in an amount to be determined by the Court; $150,673.25 in attorneys' fees; and $12,875.37 in costs.
For the reasons set forth below, I recommend that plaintiffs be awarded $1,682,638.33 in compensatory damages, and prejudgment interest, to be calculated at the statutory rate of 9% per year, accruing on December 8, 1999.
II. BACKGROUND AND FACTS
Based on submissions by the plaintiff, the Complaint filed in the instant action — the allegations of which, perforce of defendants' default, must be accepted as true, except those relating to damages, see Cotton v. Slone, 4 F.3d 176, 181 (2d Cir. 1993); Greyhound Exhibitgroup, Inc. v. E.L.U.L. Realty Corp., 973 F.2d 155, 158 (2d Cir. 1992) — and the Court's review of the entire court file maintained in this action, the following findings of fact are made:
Tosto is a citizen of the state of Georgia; he was a shareholder of Investor Relations, Inc., and an officer of Tellerstock, Inc. and Investor Relations, Inc. Telegades is a citizen of the state of New York, and an officer and director of Consolidated Asset Management, Inc. Tellerstock, Inc. was a corporation formed and existing under the laws of the state of Delaware. Tellerstock, Inc. is not operating. Investor Relations, Inc. was a corporation formed and existing under the laws of the state of Utah. Investor Relations, Inc. is not operating. Consolidated Asset Management, Inc. is a corporation formed and existing under the laws of the state of New York. It has its principal place of business at Wappingers Falls, New York.
Zelaya is a citizen of the state of Florida. At all relevant times, Zelaya was secretary and director of Capital International, president, secretary and sole director of CISG, and president of CIH. Zelaya also was, or is, president and secretary of Capital Invest, and vice president, treasurer and sole director of SPC.
Capital International is a corporation formed and existing under the laws of the state of Florida. It has its principal place of business at One Southeast Third Avenue, Miami, Florida. Capital International is the holding company for defendants CISG and CIH.
CISG is a Florida corporation with its principal place of business at One Southeast Third Avenue, Miami, Florida. CISG is or was a registered broker-dealer and a subsidiary of Capital International. CISG is a Nevada corporation with its principal place of business in Nevada. CIH is a subsidiary of Capital International and the parent company of Capital Invest. Capital Invest is a Florida corporation with its principal place of business at One Southeast Third Avenue, Miami, Florida. Capital Invest is the parent company of SPC. SPC is a Nevada corporation with its principal place of business at 3773 Howard Hughes Parkway, Las Vegas, Nevada.
AVLS is a publicly traded company which, in November 1997, was attempting to develop and market commercially a new type of electronic billboard. AVLS had been attempting to raise money for several years. In late 1996, AVLS entered into an agreement with CISG whereby CISG agreed to make a series of public offerings of AVLS stock in return for a role in managing the company.
On November 5, 1997, AVLS commenced a lawsuit against plaintiffs, one of whom had been a director of AVLS; AVLS sought damages and injunctive relief. At the time the lawsuit was filed, plaintiffs owned a total of 601,228 shares of AVLS. AVLS moved for a preliminary injunction to prevent plaintiffs from trading the shares. The court ordered a temporary restraining order against plaintiffs to prevent them from trading the shares. Thereafter, before the preliminary injunction motion could be decided, AVLS and plaintiffs entered into a settlement agreement (the "Settlement Agreement"), which resolved the lawsuit.
The Settlement Agreement, which was fully executed on January 21, 1998, required Capital Invest to cause the formation of SPC as a limited liability corporation.*fn2 SPC was to be formed for the sole purpose of holding and selling plaintiffs' AVLS shares. Specifically, SPC was required to hold plaintiffs' shares until April 13, 1998, and then trade them for a period of twelve months. In addition, SPC was required to make monthly payments to plaintiffs, along with a possible balloon payment at the end, resulting in a total payment to plaintiffs of $1,878,837.50 by April 13, 1999. For its part, Capital Invest agreed to maintain sufficient collateral to ensure that this amount was paid. Plaintiffs contend that, by executing the Settlement Agreement, Zelaya represented and warranted that Capital Invest would maintain assets in the amount of $1,878,835.50 until at least April 13, 1999.
Plaintiffs assert that defendants CISG, Capital Invest, SPC and AVLS committed numerous events of default under the Settlement Agreement. Among other things, plaintiffs contend, these defendants failed to cause the formation of SPC promptly, failed to sell any of plaintiffs' shares, failed to provide monthly reports on trading activity, and failed to make all of the monthly payments due under the Settlement Agreement. Although a total of $73,818.75, purportedly derived from monthly trading activity, had been paid to the plaintiffs as of August 1998, this represented less than the amount required to be paid by that date under the terms of the Settlement Agreement. Moreover, although proper notice was given, none of these events of default was cured timely. Consequently, pursuant to the terms of the Settlement Agreement, plaintiffs were entitled to, inter alia, the return of all of the shares of AVLS stock that remained unsold and, if the shares were not returned promptly, an entry of judgment against Capital Invest and SPC.
As of August 24, 1998, only a portion of the shares had been returned and this portion was not in "free trading" form. Consequently, on September 3, 1998, plaintiffs obtained a court order requiring the return of all of the shares and their conversion into free trading form. However, even then, not all of the shares were returned. As a result, on September 17, 1998, the New York State Supreme Court, New York County, entered judgment for the plaintiffs in the amount of $1,805,203.80 against Capital Invest and SPC. This sum reflected the amount due under the Settlement Agreement ($1,878,837.50) less the amount previously paid to plaintiffs under that agreement ($73,818.75). Plaintiffs contend that interest has been accruing, at the statutory rate of 9%, since the date of judgment. To date, no portion of the judgment has been satisfied.
A total of 580,603 AVLS shares ultimately were returned to the plaintiffs. Plaintiffs aver that, by the time the shares were finally returned, and any trading restrictions had been removed, the market price of the shares had dropped from $3.00 per share to less than $1.00 per share. On October 1, 1998, plaintiffs state, the shares underwent a "one-for-three reverse stock split" in an effort to raise the price per share. However, this method of attempting to effect an increase in the price per share of the stock proved unsuccessful.
Plaintiffs state that after the shares were returned to them, the shares became the subject of a private sale at a price of approximately $0.10 per share. In his declaration, Telegades avers that he did not conduct the private sale and has never seen any documents concerning the sale. He states: "Nor, as far as I know, were any proceeds paid; I certainly did not receive any, although I would have been entitled to do so."
Telegades states further that he learned subsequently that, "upon information and belief," the shares were eventually traded from the accounts of three corporations: Admiral Investments Ltd., Greenford Investments Ltd. and McDonalds Ltd. According to Telegades, records in his possession show that AVLS stock was traded as early as August 1998 by at least two of these corporations. However, Telegades maintains, it is impossible at this time to determine the source of the AVLS stock that was traded by these corporations or whether any of that stock included the shares plaintiffs later received pursuant to the Settlement Agreement. Telegades claims that his "best recollection" is that most of the 580,603 shares that were returned to the plaintiffs were not placed in "free trading form" until September 1998. However, Telegades states, "to give the Capital defendants the benefit of every possible doubt," plaintiffs determined to use trading information reflected in the relevant corporate accounts as a model to calculate the value of the shares plaintiffs received pursuant to the Settlement Agreement.
Plaintiffs aver that, based on the trading information reflected in those accounts for the period August 1998 through October 1998, the value of the AVLS shares that were returned to the plaintiffs was $122,565.47. Plaintiffs conclude that this amount should be deducted from any damages, because the revenues due them as a result of the breach of the Settlement Agreement must be offset by any amount they have saved or earned as a result of the breach.
Plaintiffs maintain that the Capital defendants induced them fraudulently to enter into the Settlement Agreement and conveyed assets fraudulently (or accepted such conveyances) in order to prevent plaintiffs from enforcing the judgment previously entered in state court. Plaintiffs state that these allegations are based on certain documents obtained in attempting to enforce the judgment against Capital Invest and SPC and on deposition testimony from Zelaya.
Specifically, as set forth in the Complaint, plaintiffs contend that they entered into the Settlement Agreement based on representations by Zelaya that Capital Invest was the holding company of CISG and had sufficient assets to support the full payment due under the Settlement Agreement; however, Capital Invest did not have these assets. On January 20, 1998, Zelaya caused CIH to pledge all or some of the shares it owned in a certain corporation for the purpose of satisfying the obligation imposed on Capital Invest under the Settlement Agreement. Plaintiffs state that they were not shown this pledge agreement at the time they entered into the Settlement Agreement and did not learn of its existence until after Capital Invest and SPC had defaulted on their obligations. The pledge agreement, which plaintiffs later obtained in discovery, showed that the pledge was not valid: the pledge agreement stated that the relevant corporate shares would not be transferred to Capital Invest. Therefore, the shares did not become the property of Capital Invest, and Capital Invest did not own or control those shares. After learning that plaintiffs had obtained a judgment against Capital Invest and SPC, Zelaya, as president and sole shareholder of Capital Invest, convened a special shareholders meeting which only he attended; at that meeting, Zelaya made the decision to terminate the stock pledge agreement and return the relevant corporate shares to CIH, thus preventing plaintiffs from recovering on the judgment. After termination of the stock pledge agreement, no assets remained in Capital Invest.
In addition to their allegation of common law fraud, plaintiffs also allege breach of the Settlement Agreement, and seek entry in this court of the September 17, 1998, state court judgment against Capital Invest and SPC, pursuant to the full faith and credit statute, 28 U.S.C. § 1738. As noted above, in July 2001, your Honor ordered that a default judgment be entered against the Capital defendants. Plaintiffs' submissions aver that they are entitled to contract damages in the amount of $2,197,121.41, damages for fraud in the amount of $2,197,121.41, punitive damages in an amount to be determined by the court, attorneys' fees in the amount of $150,673.25 and costs in the amount of $12,875.37.
In support of their application for damages, plaintiffs have submitted: (i) a copy of the Settlement Agreement; (ii) correspondence from plaintiffs' counsel to Zelaya concerning the defendant signatories' failure to comply with the terms of the Settlement Agreement; and (iii) schedules of sales of AVLS stock for the period August 1998 through October 1998.
Defendant Zelaya has opposed plaintiffs' claims for damages. Zelaya maintains that plaintiffs' submissions fail to substantiate their damages claims because, as Telegades concedes in his affidavit, plaintiffs "have absolutely no idea of who sold the 580,603 shares of AVLS stock or what price they were sold at." Moreover, Zelaya contends, Telegades is unable to identify the individual(s) who transferred plaintiffs' shares to the corporate entities whose trading activity plaintiffs have relied upon in calculating their damages, or, indeed, to state for a fact that the shares were ever transferred at all. Thus, Zelaya argues, it is equally possible that plaintiffs, instead of transferring the shares to the relevant corporate entities, sold the stock for $3.00 per share and received a payment of more than $1,800,000, or approximately the amount (that is, $1,878,837.50) plaintiffs were due to receive under the Settlement Agreement.
Zelaya contends further that, because plaintiffs received all that they were entitled to receive under the Settlement Agreement, any award of damages would constitute a double recovery. Zelaya observes that plaintiffs are claiming, not that they were unable to obtain a judgment in the previous litigation, but, rather, that they have been unable to recover on that judgment. However, Zelaya argues, this was never a condition of satisfaction under the Settlement Agreement. Therefore, to award damages based on the plaintiffs' inability to recover on the judgment rendered in a previous lawsuit would constitute a double recovery.
In reply, plaintiffs assert, inter alia, that, contrary to Zelaya's contention, the relevant shares of AVLS stock were only returned and converted to free trading form on September 24, 1998. Since the shares were then trading for less than $1.00 per share, plaintiffs could not have recovered the shares' full value. Plaintiffs also object to Zelaya's contention that they are seeking a double recovery.
III. CONCLUSIONS OF LAW
A default judgment in an action establishes liability, but is not a concession of damages. See Cappetta v. Lippman, 913 F. Supp. 302, 304 (S.D.N.Y. 1996) (citing Flaks v. Koegel, 504 F.2d 702, 707 [2d Cir. 1974]). Damages must be established by the plaintiff in a post-default inquest. See id. In conducting an inquest, the court need not hold a hearing "as long as it [has] insured that there was a basis for the damages specified in the default judgment." Transatlantic Marine Claims Agency, Inc. v. Ace Shipping Corp., 109 F.3d 105, 111 (2d Cir. 1997). The court may rely on affidavits or documentary evidence in evaluating the fairness of the sum requested. See Tamarin v. Adam Caterers, Inc., 13 F.3d 51, 54 (2d Cir. 1993).
1. Fraud Claim
Plaintiffs allege that Zelaya and the other Capital defendants induced them fraudulently to enter into the Settlement Agreement and conveyed assets fraudulently in order to prevent plaintiffs from enforcing the state court judgment obtained as a result of the breach of that agreement. Plaintiffs base their allegations of fraud on documents obtained in attempting to enforce the state court judgment and on deposition testimony from Zelaya.
Under New York law, the allegation that a party made intentionally-false statements indicating an intent to perform under a contract does not state a claim for fraud. See Bridgestone/Firestone Inc. v. Recovery Credit Services, 98 F.3d 13, 20 (2d Cir. 1996) (citing McKernin v. Fanny Farmer Candy Shops, Inc., 176 A.D.2d 233, 234, 574 N.Y.S.2d 58, 59 [App. Div.2d Dep't 1991]); Bamira v. Greenberg, 256 A.D.2d 237, 239, 682 N.Y.S.2d 174, 176 (App. Div. 1st Dep't 1998) ("It is well settled that a cause of action based upon breach of contract cannot be converted into one for fraud merely by alleging that defendants did not intend to fulfill the contract."). However, a separable and distinct cause of action for fraud will lie where a plaintiff "demonstrate[s] a fraudulent misrepresentation collateral or extraneous to the contract." Bridgestone/Firestone, Inc., 98 F.3d at 20 (citing Deerfield Communications Corp. v. Chesebrough-Ponds, Inc., 68 N.Y.2d 954, 956, 510 N.Y.S.2d 88 ) see also Regal Custom Clothiers, Ltd. v. Mohan's Custom Tailors, Inc., No. 96 Civ. 6320, 1997 WL 370595, at *6 (S.D.N.Y. July 1, 1997). "Fraudulently inducing the plaintiff to enter a contract or engaging in conduct outside the contract but intended to defeat the contract, are examples of conduct which is sufficiently collateral to state a proper claim in tort." Four Finger Art Factory, Inc. v. Dinicola, No. 99 Civ. 1259, 2000 WL 145466, at *4 (S.D.N.Y. Feb. 9, 2000) (quoting New York University v. Continental Ins. Co., 87 N.Y.2d 308, 316 ) (internal quotation omitted).
In this case, plaintiffs allege a misrepresentation above and beyond the terms of the Settlement Agreement. As outlined above, they allege that Zelaya represented to them that Capital Invest had the resources necessary to perform under the Settlement Agreement, when in fact he knew that Capital Invest had no assets at all. Hence, plaintiffs allege a misrepresentation of present fact, rather than of future intent, and assert that the misrepresentation, which was the inducement for the contract, was extraneous or collateral to it. Hence, plaintiffs' fraud claim is not redundant of their breach of contract claim.
Moreover, plaintiffs allege that Zelaya engaged in conduct outside the contract that was intended to defeat the contract. They allege that he signed a stock pledge agreement which purported to transfer to Capital Invest the resources necessary to perform under the Settlement Agreement, that the pledge agreement was not valid, and that, moreover, Zelaya terminated the pledge agreement when he learned that plaintiffs had obtained a judgment against Capital Invest and SPC, and returned the relevant corporate shares to CIH. Thus, Zelaya attempted to defeat the Settlement Agreement by preventing plaintiffs from recovering on the judgment. Therefore, since plaintiffs' allegation of fraud does not duplicate their breach of contract claim, plaintiffs' fraud claim is actionable. See Campers' World Int'l, Inc. v. Perry Ellis Int'l, Inc., No. 02 Civ 453, 2002 WL 1870243, at *4 (S.D.N.Y. Aug. 13, 2002); Regal Custom Clothiers, Ltd., 1997 WL 370595, at *6; Deerfield Communications Corp., 68 N.Y.2d at 956, 510 N.Y.S.2d at 89.
Under New York law,
[t]he true measure of damage [for fraud] is indemnity
for the actual pecuniary loss sustained as the direct
result of the wrong or what is known as the
out-of-pocket rule. Under this rule, the loss is
computed by ascertaining the difference between the
value of the bargain which a plaintiff was induced by
fraud to make and the amount or value of the
consideration exacted as the price of the bargain.
Lama Holding Co. v. Smith Barney Inc., 88 N.Y.2d 413, 421, 646 N.Y.S.2d 76, 80 (1996) (citations omitted). See also Hangzhou Silk Import and Export Corp. v. P.C.B. Int'l Indus., Inc., No. 00 Civ. 6344, 2002 WL 2031591, at *7 (S.D.N.Y. Sept. 5, 2002); Camper's World Int'l Inc., 2002 WL 1870243, at *4-5,
The Court finds that plaintiffs' proof as to $1,682,638.33 of its fraud claim is sufficiently well supported to allow an award of damages. Specifically, based on plaintiffs' inquest submissions — including the Telegades declaration, relevant provisions of the Settlement Agreement, correspondence between plaintiff's counsel and Zelaya concerning payment of the amount then due under the Settlement Agreement, the 1998 state court judgment, and schedules of sales of AVLS stock made through the accounts of Admiral Investments Ltd., Greenford Investments Ltd. and McDonalds Ltd. during the period August 1998 through October 1998 — the Court finds as follows:
The value of the shares owned by plaintiffs at the time they entered into the Settlement Agreement was $1,878,837.50 (that is, 601,228 shares at a price per share of $3.125). As of August 1998, plaintiffs had received $73,818.75 under the Settlement Agreement, reducing the amount due them to $1,805,203.80; this amount is reflected in the default judgment obtained by plaintiffs on September 17, 1998. The amount due plaintiffs is further reduced by the value of the shares that were returned to them in August and September 1998, that is, $122,565.47.*fn3 Thus, the actual loss sustained by plaintiffs as a direct result of the Capital defendants' fraud is $1,682,638.33.*fn4
Under New York law, plaintiffs are entitled to prejudgment interest on their fraud claim. See Mallis v. Bankers Trust Co., 717 F.2d 683, 694-95 (2d Cir. 1983) (citing New York Civil Practice Law and Rules ("CPLR") § 5001). The most pertinent New York statute provides, in relevant part, "[i]nterest shall be recovered upon a sum awarded because of . . . an act or omission depriving or otherwise interfering with title to, or possession or enjoyment of, property. . . ." CPLR § 5001(a). The CPLR provides further that "[i]nterest shall be computed from the earliest ascertainable date the cause of action existed. . . ." CPLR § 5001(b). A cause of action based on fraud accrues when the fraud is discovered or could with reasonable diligence have been discovered. See § CPLR 213(8). In New York, the statutory rate for prejudgment interest is 9% per annum. See CPLR § 5004.
Here, plaintiffs state that they discovered the Capital defendants' fraudulent misconduct while attempting to enforce the judgment obtained in September 1998 and, based on such discovery, commenced the instant action. Therefore, interest is appropriately calculated at least from the filing date of this lawsuit. Accordingly, plaintiffs are entitled to prejudgment interest at the statutory rate of 9% per year on the amount of $1,682,638.33, accruing on December 8, 1999.
2. Breach of Contract Claim
In September 1998, plaintiffs obtained a judgment in state court against defendants Capital Invest and SPC for breach of the Settlement Agreement. In the instant action, plaintiffs seek to have the state court judgment entered in this court, pursuant to the full faith and credit statute. Plaintiffs also have renewed their claim of breach of the Settlement Agreement — in this case, against defendants CISG and Zelaya, as well as Capital Invest.*fn5
Although, as noted earlier in this writing, a default judgment in an action establishes liability, nevertheless, a court has discretion to determine whether the facts alleged in a complaint state a valid cause of action. See, e.g., In re Crazy Eddie Sec. Litig., 948 F. Supp. 1154, 1160 (E.D.N.Y. 1996). In this case, defendant Zelaya's contention that, since plaintiffs were able to obtain a judgment in the previous litigation, they are not entitled to damages for breach of contract in this action, in effect contests his liability under the Complaint with respect to plaintiffs' breach of contract claim. The Court must first determine, therefore, the validity of plaintiffs' claim of breach of contract in order to determine the extent of damages, if any, they are legally entitled to recover. See id.
The full faith and credit statute, 28 U.S.C. § 1738, requires federal courts to give state court judgments the same credit, validity and effect such judgments would have in the state's own courts.*fn6 See Allen v. McCurry, 449 U.S. 90, 96, 101 S.Ct. 411, 415 (1980) ("Congress has specifically required all federal courts to give preclusive effect to state-court judgments whenever the courts of the State from which the judgments emerged would do so."); Osipova v. New York City Dep't of Health, No. 02 Civ. 5072, 2002 WL 31558031, at *2 (S.D.N.Y. Nov. 19, 2002). "Accordingly the federal courts consistently have applied res judicata and collateral estoppel to causes of action and issues decided by state courts." Osipova, 2002 WL 31558031, at *2 (quoting Kremer v. Chem. Constr. Corp., 456 U.S. 461, 466, 102 S.Ct. 1883, 1889 ). In applying these doctrines, a federal court must look to the rules of the state from which the judgment is taken to determine the preclusive effect of that judgment. See Infinity/U.S.A.. Inc. v. Sprocor, Inc., 656 F. Supp. 909, 913 (E.D.N.Y. 1987).
A defendant's default in the rendering state will not nullify the res judicata effect of a prior state court judgment. See Webpro Inc. v. Petrou, No. 02 Civ. 3465, 2002 WL 31132889, at *2 (S.D.N.Y. Sept. 25, 2002) (citing Ionescu v. Brancoveanu, 246 A.D.2d 414, 668 N.Y.S.2d 164, 166 [App. Div. 1998]); Dominican Sisters of Ontario, Inc. v. Dunn, 272 A.D.2d 367, 368, 707 N.Y.S.2d 215, 216 (App. Div.2d Dep't 2000). Hence, unless the first court did not have subject matter or personal jurisdiction, or the judgment was procured through fraud or collusion, a default judgment acts as res judicata in a subsequent claim. See Webpro Inc., 2002 WL 31132889, at *2; Infinity/U.S.A., Inc., 656 F. Supp. at 912.
In this case, there is no indication in the record, nor do the defendants assert, that the state court lacked either subject matter or personal jurisdiction. Furthermore, the record contains no evidence indicating that the state court judgment was procured through fraud or collusion. Therefore, under the full faith and credit statute, this court must give the judgment rendered by the state court against Capital Invest and SPC for their default under the terms of the Settlement Agreement the same credit, validity and effect it would have in the State of New York. See Infinity/U.S.A., Inc., 656 F. Supp. at 913; Reliance Insurance Co. v. Calderon, 685 F. Supp. 72, 75 (S.D.N.Y. 1988). Accordingly, plaintiffs' request that the 1998 state court judgment against Capital Invest and SPC be entered in this court should be granted. See Webpro Inc., 2002 WL 31132889, at *4.
The breach of contract claim alleged in this action, however, is barred by the doctrine of res judicata. Under New York law, "the doctrine of res judicata operates to bar future litigation between the same parties of a cause of action based on the same transaction where the cause of action was raised or could have been raised in a prior proceeding." Beck v. Eastern Mut. Ins. Co., 295 A.D.2d 740, 741, 744 N.Y.S.2d 57 (App. Div.3d Dep't 2002). "In other words, once a claim is brought to a final conclusion, all other claims arising out of the same transaction or series of transactions are barred, even if based upon different theories or if seeking a different remedy." Webpro Inc., 2002 WL 31132889, at *4 (quoting O'Brien v. City of Syracuse, 54 N.Y.2d 353, 357, 445 N.Y.S.2d 687, 688 ) (internal quotation omitted).
Under New York law, a default judgment is a judgment on the merits for the purpose of the doctrine of res judicata. See Feeney v. Licari, 131 A.D.2d 539, 540, 516 N.Y.S.2d 265, 266 (App. Div.2d Dep't 1987); Siegel, N.Y. Prac. § 541 (3d ed. 1999). Furthermore, the doctrine of res judicata "prevents the parties to an action and those in privity with them from subsequently relitigating any questions that were necessarily decided therein." Watts v. Swiss Bank Corp., 27 N.Y.2d 270, 277, 317 N.Y.S.2d 315, 320 (1970). The parties encompassed by the term privity include, among others, those who control an action although not formal parties to it and those whose interests are represented by a party to the action. See id.
In the case at bar, it appears that plaintiffs would be precluded from bringing their breach of contract claim a second time in the New York courts. In the previous action, plaintiffs asserted their rights under the Settlement Agreement to obtain, in the event of default, a judgment against defendants Capital Invest and SPC. On September 17, 1998, the state court entered judgment for the plaintiffs. Since a default judgment is a judgment on the merits under New York law, plaintiffs' breach of contract claim against Capital Invest and SPC was "brought to a final conclusion" in the previous action.
Moreover, the previous action was based on the same transaction — that is, breach of the Settlement Agreement — and alleged similar facts — for example, that the defendants failed to perform their obligations under the Settlement Agreement by, among other things, failing to sell any of plaintiffs' AVLS shares and failing to provide monthly reports on trading activity — as the breach of contract claim brought in this action. Hence, the defendants' conduct with respect to the instant breach of contract claim was also raised during the 1998 action for breach of the terms of the Settlement Agreement, as the basis for that litigation.
Furthermore, although CISG and Zelaya were not named as defendants in plaintiffs' prior action, they are in privity with Capital Invest and SPC. As set forth in the Complaint: (1) Zelaya exercised "complete dominion and control" over, inter alia CISG and Capital Invest; (2) Capital Invest and SPC were closely related to and alter egos of CISG and other similarly-named entities, all of which were owned by Zelaya; (3) Zelaya was or is the president of, inter alia, CISG and Capital Invest; (4) Capital Invest did not maintain separate books or records and did not have any assets; and (5) Zelaya created Capital Invest as a shell corporation whose shares were wholly owned by CIH.
Thus, CISG and Zelaya were in privity with Capital Invest and SPC because their interests were adequately represented by those entities in the prior litigation. Zelaya was or is the president of Capital Invest. See Zellermaier v. Travelers Indem. Co. of Ill., 190 Misc.2d 487, 490 n. 1, 739 N.Y.S.2d 922, 924 n. 1 (Sup.Ct. New York Cty. 2002) ("[S]ince plaintiff is the president of [the corporation] . . . [he] is therefore a person in privity with it. . . ."). In addition, SPC was an alter ego of CISG, which was owned by Zelaya. See Shire Realty Corp. v. Schorr, 55 A.D.2d 356, 361, 390 N.Y.S.2d 622, 625 (App. Div.2d Dep't 1977) ("A clearer case for application of the doctrine [of privity] could hardly be imagined than one involving successive attempts to litigate the same question by a corporation and by its owner or owners."). Moreover, Zelaya had control of the prior litigation. See Bayshore Family Partners, L.P. v. Foundation of Jewish Philanthropies, 270 A.D.2d 374, 376, 704 N.Y.S.2d 631, 633 (App. Div.2d Dep't 2000) ("The respondents in this action were in privity with [the party appearing] in the prior action [because] . . . they had control of that litigation."). Therefore, CISG and Zelaya are entitled to any preclusive effect of res judicata with respect to plaintiffs' breach of contract claim in the case at bar.
For the reasons set forth above, the Court finds that the plaintiffs' claim of breach of contract against CISG, Zelaya and Capital Invest would be barred in New York by the doctrine of res judicata. Therefore, under the full faith and credit statute, this court is required to do the same. Accordingly, the plaintiffs are not entitled to recover any damages for the breach of contract they have alleged in the instant action.
Plaintiffs seek punitive damages against the Capital defendants on the ground that their fraudulent conduct was wanton and willful. Plaintiffs assert that the Capital defendants deliberately misled them into believing that Capital Invest, rather than Capital International, was the holding company for CISG, "thereby inducing them to accept a worthless Confession of Judgment." Moreover, plaintiffs contend, Zelaya's use of a "confusing array of shell companies" to avoid meeting their obligations under the Settlement Agreement showed a "clear intent to defraud."
"Under New York law, the purpose of awarding punitive damages is not to make the victim whole but to punish the defendant and to deter egregious conduct." Canelle v. Russian Tea Room Realty LLC, No. 01 Civ. 0616, 2002 WL 287750, at *6 (S.D.N.Y. Feb. 27, 2002) (citing Rocanova v. Equitable Life Assurance Soc'y of the United States, 83 N.Y.2d 603, 613, 612 N.Y.S.2d 339, 342 ). In otherwise private fraud and deceit actions arising out of a contractual relationship, punitive damages may be recovered provided the fraud is directed at the public generally and "involves high moral culpability." Walker v. Sheldon, 10 N.Y.2d 401, 405, 223 N.Y.S.2d 488, 491 (1961); see also Canelle, 2002 WL 287750, at *5-6; Baxter Diagnostics, Inc. v. Novatek Med., Inc., No. 94 Civ. 5220, 1998 WL 665138, at *2 (S.D.N.Y. Sept. 25, 1998); Riordan v. Nationwide Mut. Fire Ins. Co., 756 F. Supp. 732, 740 (S.D.N.Y. 1990). Thus, in order to recover punitive damages, a private party must demonstrate egregious tortious conduct by which he or she was aggrieved, and also must show that the conduct was part of a pattern of similar conduct directed at the public generally. See Canelle, 2002 WL 287750, at *6
The imposition of punitive damages is discretionary with the finder of fact. See Mar Oil, S.A. v. Morrissey, 982 F.2d 830, 844 (2d Cir. 1993). Where a party has defaulted on a common law fraud claim, an award of punitive damages is permissible. See Wilson v. Car Land Diagnostics Center, Inc., No. 99 Civ. 9570, 2001 WL 1491280, at *4 (S.D.N.Y. Nov. 26, 2001); Flaks v. Koegel, 504 F.2d 702, 706 (2d Cir. 1974).
Since the Capital defendants have defaulted on plaintiff's common law fraud claim, punitive damages may be awarded in this case. However, while plaintiffs' submissions establish that Zelaya deliberately defrauded plaintiffs, the submissions fail to show that Zelaya's conduct was part of a pattern of similar conduct directed at the public generally, evincing "a high degree of moral turpitude and . . . a criminal indifference to civil obligations." Walker, 10 N.Y.2d at 405, 223 N.Y.S.2d at 491. Therefore, the Court finds that an award of punitive damages would not be appropriate in this case.
Attorney's Fees and Costs
As a general rule, attorneys' fees are not recoverable by the successful party in the absence of express statutory or contractual authority. See Technical Career Insts., Inc. v. Local 2110, United Auto Workers, AFL-CIO, No. 00 Civ. 9786, 2002 WL 441170, at *5 (S.D.N.Y. Mar. 21, 2002); Astor Holdings, Inc. v. Roski, No. 01 Civ. 1905, 2002 WL 72936, at *22 (S.D.N.Y. Jan. 17, 2002). However, when such authority is absent, a court may award the prevailing party attorneys' fees "where the other party has conducted an action `in bad faith, vexatiously, wantonly, or for oppressive reasons.'" Mar Oil, 982 F.2d at 844 (quoting F.D. Rich Co. v. United States ex rel. Indus. Lumber Co., 417 U.S. 116, 129, 94 S.Ct. 2157, 2165 ); see also Technical Career Insts., 2002 WL 441170, at *5.
When fixing a reasonable rate for attorney fees, it is appropriate for a court to consider and to apply the prevailing market rates in the relevant community for similar legal work of lawyers of reasonably comparable skill, experience and reputation. See Blum v. Stenson, 465 U.S. 886, 895 n. 11, 104 S.Ct. 1541, 1547 n. 11 (1984). In addition, it is permissible for a court to rely upon its own knowledge of private firm hourly rates in deciding what reasonable attorney fees are in the community. Miele v. N.Y. State Teamsters Conf. Pens. & Retirement Fund, 831 F.2d 407, 409 (2d Cir. 1987).
In the Second Circuit, a party seeking an award of attorney's fees must support that request with contemporaneous time records that show "for each attorney, the date, the hours expended, and the nature of the work done." New York State Ass'n for Retarded Children, Inc. v. Carey, 711 F.2d 1136, 1154 (2d Cir. 1983). Data concerning the training and experience of counsel should also be provided to enable a court to assess whether the fees requested are comparable to those charged in the relevant legal community for similar cases by attorneys of like training and experience. See, e.g., Orchano v. Advanced Recovery, Inc., 107 F.3d 94, 97-98 (2d Cir. 1997). Attorney fee applications that do not contain the information noted above "should normally be disallowed." New York State Ass'n for Retarded Children. Inc., 711 F.2d at 1154.
Although there is no statutory or contractual authorization for attorneys' fees in this case, an award of such fees to plaintiffs is appropriate in light of the Capital defendants' misconduct. In prosecuting this action against the Capital defendants, plaintiffs engaged the service of the law firm Beldock Levine & Hoffman LLP. Ronald C. Minkoff, Esq., an attorney with that firm, submitted an affidavit to the Court setting forth the names of the attorneys who worked on this matter, the hours each attorney expended and the hourly rate at which each attorney was compensated. However, Mr. Minkoff's affidavit does not provide information concerning the nature of the work performed or the experience of the attorneys who performed legal work in connection with this action. Therefore, the Court is unable to assess whether the attorney's fees charged in the instant case are comparable to legal fees charged in this community for similar cases handled by attorneys whose training and experience is similar to the training and experience of plaintiffs' counsel. Under the circumstances, no award of attorneys' fees should be made. However, plaintiffs should be given a reasonable period of time in which to submit competent evidence to the court supplementing their original submission concerning the attorneys' fees incurred in prosecuting this action.
Counsel for plaintiffs has also submitted a statement of the costs incurred by plaintiffs in prosecuting this action against the Capital defendants. The Court has examined that statement and has determined that certain services for which fees have been charged appear to be either inappropriate or duplicative, and that the fees associated with certain services appear to be excessive. For example, plaintiffs' counsel includes among the costs of prosecuting this action a fee for "photocopies" of $2,029.35 and also a fee for "document reproduction" of $17.67. In addition, the statement includes a fee for "computer assisted law research" of $3,814.21 and for "miscellaneous" of $1,196.89. So that they may establish which, if any, of the items on counsel's list of disbursements constitutes an appropriate litigation expense, plaintiffs should be given a reasonable period of time in which to submit to the court a revised statement of costs.
For the reasons set forth above, I recommend that plaintiffs be awarded compensatory damages in the amount of $1,682,638.33 and prejudgment interest, to be calculated by the Clerk of Court at a rate of 9% per year, on this amount, accruing on December 8, 1999. I also recommend that plaintiffs be given a reasonable period of time in which to submit competent evidence to the court, in the form of affidavits or otherwise, to cure the deficiencies in their original submissions concerning the costs and attorneys' fees incurred in prosecuting this action.
Plaintiffs shall serve a copy of this Report and Recommendation upon the Capital defendants and submit proof of service to the Court.
V. FILING OF OBJECTIONS TO THIS REPORT AND RECOMMENDATION
Pursuant to 28 U.S.C. § 636 (b)(1) and Rule 72(b) of the Federal Rules of Civil Procedure, the parties shall have ten (10) days from service of this Report to file written objections. See also, Fed.R.Civ.P. 6. Such objections, and any responses to objections, shall be filed with the Clerk of Court, with courtesy copies delivered to the chambers of the Honorable William H. Pauley III, 500 Pearl Street, Room 2210, New York, New York, 10007, and to the chambers of the undersigned, 40 Centre Street, Room 540, New York, New York, 10007. Any requests for an extension of time for filing objections must be directed to Judge Pauley. FAILURE TO FILE OBJECTIONS WITHIN TEN (10) DAYS WILL RESULT IN A WAIVER OF OBJECTIONS AND WILL PRECLUDE APPELLATE REVIEW. See Thomas v. Arn 474 U.S. 140 (1985); IUE AFL-CIO Pension Fund v. Herrmann, 9 F.3d 1049, 1054 (2d Cir. 1993); Frank v. Johnson, 968 F.2d 298, 300 (2d Cir. 1992); Wesolek v. Canadair Ltd., 838 F.2d 55, 57-59 (2d Cir. 1988); McCarthy v. Manson, 714 F.2d 234, 237-38 (2d Cir. 1983).