United States District Court, S.D. New York
August 17, 2005.
INTERNATIONAL GEMMOLOGICAL INSTITUTE, INC., Plaintiff,
ABE RAFAEIL, a/k/a EBRAHIM RAPHAEL, a/k/a "ABE," SHACE LULGJURAJ, SOL RAFAEIL, DOMANI INTERNATIONAL ENTERPRISES, EXPRESS FINE JEWELRY MANUFACTURING CORP., EURO ANTIQUES & GEMS, INC., a/k/a EURO ANTIQUES, NEW YORK RAFAEIL DIAMONDS, a/k/a RAFAEIL BROTHERS, a/k/a RAFAEIL DIAMOND CO., REX JEWELRY LTD. a/k/a REX JEWELERS, a/k/a REX JEWELRY, a/k/a REX OF NEW YORK, ROSEN DIAMOND CO., INC., a/k/a ROSEN DIAMONDS, a/k/a ROSEN, SR 2003 CORP., UBEX USA, INC., WHEEL OF THE WORLD AUTO CORP., YAFA JEWELRY INC., a/k/a YAFA, MANSOUR FARSIJANY, a/k/a "AMIR," JOHN DOE 1 (DOMANI), JOHN DOE 2 (EXPRESS), JOHN DOE 3 (EURO), JOHN DOE 4 (NEW YORK RAFAEIL), JOHN DOE 5 (SR 2003), JOHN DOE 6 (ROSEN DIAMOND), JOHN DOE 7 (UBEX), JOHN DOE 8 (WHEELS), and JOHN DOE 9 (YAFA), Defendants.
The opinion of the court was delivered by: JAMES FRANCIS, Magistrate Judge
REPORT AND RECOMMENDATION
This is an action brought pursuant to the Racketeer Influenced
and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961, et
seq. The plaintiff also brings pendant state law claims for
conversion, fraud, breach of fiduciary duty, and unjust
enrichment. Four defendants Shace Lulgjuraj, Rosen Diamond Co.,
Inc. ("Rosen Diamonds"), Ubex USA, Inc. ("Ubex"), and Mansour
Farsijany failed to answer the complaint and default judgments were entered
against them. The case was then referred to me for an inquest on
damages against these defendants. Although the defaulting
defendants were advised of the date of the inquest, they failed
to appear. Therefore, the following findings are based on the
evidence presented by the plaintiff.
International Gemmological Institute, Inc. ("IGI") is a New
York corporation that specializes in certifying and appraising
gems. (Complaint ("Compl."), ¶ 3). Defendant Shace Lulgjuraj
worked for IGI from January 1995 until October 2000 and December
2001 until January 2003 as an assistant to the President.
(Compl., ¶ 29). Ms. Lulgjuraj's responsibilities included
preparing checks for vendors, recording check information in
IGI's check book, and handling cancelled checks. (Compl., ¶ 31).
With help from the other defendants, Ms. Lulgjuraj used her
position to embezzle funds from IGI. (Compl., ¶ 33).
At the behest of Abe Rafaeil, Ms. Lulgjuraj prepared checks
with forged signatures for companies that were not entitled to
receive money from IGI. (Compl., ¶¶ 35-36). These companies, with
which Mr. Rafaeil was affiliated, included Domani International
Enterprises, Euro Antiques & Gems, Inc., Express Fine Jewelry
Manufacturing Corp., Rex Jewelry Ltd. ("Rex Jewelry"), Rosen
Diamonds, Ubex, Yafa Jewelry Inc., and Wheel of the World Auto Corp. (Compl., ¶¶ 35-36). Mansour Farsijany was named as a
defendant because he is a manager of Rex. (Compl., ¶ 17). The
managers of the other companies are also identified as
defendants, although their names are unknown. (Compl., ¶¶ 18-25).
In exchange for the forged checks, Ms. Lulgjuraj received money
and gifts from Mr. Rafaeil. The checks were then sold or cashed
by Mr. Rafaeil and the other defendants. (Compl., ¶¶ 35-36). When
the cancelled checks were returned to IGI, Ms. Lulgjuraj
intercepted them to prevent detection. (Compl., ¶ 43). In order
to camouflage her scheme, Ms. Lulgjuraj also falsified company
records by claiming the checks were paid to companies with which
IGI ordinarily conducted business. (Compl., ¶ 44). This alleged
illegal activity occurred from January 1995 until December 2002.
(Compl., ¶¶ 35, 48-55).
The plaintiff commenced this action on February 25, 2005.
Several defendants answered the Complaint, and the suit against
them is ongoing. Ms. Lulgjuraj, Rosen Diamonds, Ubex, and Mr.
Farsijany, however, failed to answer. Accordingly, the Honorable
John G. Koeltl, U.S.D.J., entered default judgments against them
and referred the case to me for an inquest on damages.
Rex Jewelry asserts that this inquest is premature and has
asked me to delay determining damages until after the liability
of the remaining defendants has been decided. This request appears
to be motivated by concerns about the precedential effect my
determination will have on any ultimate jury trial. While other
courts have granted similar requests in the past, I find that the
balance of the equities in the instant case favors my proceeding
with the inquest at this time.
The principles governing the default of some but not all
defendants in a litigation derive from Frow v. De La Vega,
82 U.S. 552 (1872). See Garafola v. Ecker Restoration Corp., No.
94 Civ. 7999, 1996 WL 312346, at *1 (S.D.N.Y. June 10, 1996). In
Frow, eight defendants were accused of jointly defrauding the
plaintiff. 82 U.S. at 552-53. One defendant, Frow, defaulted,
while the rest proceeded to trial and prevailed against the
plaintiff. See id. at 553. The plaintiff then sought to
enforce the default judgment against Frow, who appealed. See
id. Finding the situation "unseemly and absurd, as well as
unauthorized by law," the Supreme Court set aside the default
judgment. Id. at 554.
Frow has been interpreted to prohibit entry of a default
judgment against one of several defendants where the theory of
recovery is joint liability, such that no one defendant may be
liable unless all defendants are liable. See U.S. Securities &
Futures Corp. v. Irvine, No. 00 Civ. 2322, 2001 U.S. Dist. LEXIS
25167, at *11 (S.D.N.Y. May 23, 2001); 10 James Wm. Moore et al.,
Moore's Federal Practice § 55.25 at 55-46 (3d ed. 1999). In
such a case, the defaulting defendant is barred from participating in
further proceedings on the merits, but would be exonerated if the
other defendants prevail. See Garafola, 1996 WL 312346, at
In cases where the theory of recovery is joint and several
liability, however, Frow does not directly apply. See
Garafola, 1996 WL 312346, at *2. Since each defendant is
accused of individually causing the entire injury, it would not
be inconsistent to hold some but not all defendants liable. See
Farberware, Inc. v. Groben, No. 89 Civ. 6240, 1991 WL 123964,
at *3 (S.D.N.Y. July 3, 1991). Therefore, in joint and several
liability cases the court may enter a default judgment against
any defendant that fails to appear. See Montcalm Publishing
Corp. v. Ryan, 807 F. Supp. 975, 978 (S.D.N.Y. 1992). Many
courts, however, have refused to assess damages against
defaulting defendants in these cases since doing so presents the
possibility of judgments inconsistent with jury awards against
the non-defaulting parties. See Lawrence v. Vaman Trading
Co., No. 92 Civ. 0377, 1993 WL 190266, at *2 (S.D.N.Y. May 28,
1993). Instead, these courts have consolidated the inquest with
the damages aspect of the trial. See Farberware, 1991 WL
123964, at *3.
The main justification for requiring such a delay has been
judicial economy. See Miele v. Greyling, No. 94 Civ. 3674,
1995 WL 217554, at *3 (S.D.N.Y. April 13, 1995); In re Uranium
Antitrust Litigation, 617 F.2d 1248, 1262 (7th Cir. 1980). Here,
however, the strain on judicial resources is so slight that this
consideration must give way to the interests of the parties in
proceeding with the inquest.
It is undisputed that the amount of damages that a plaintiff
may recover from defaulting and non-defaulting defendants in a
case based on joint and several liability should not differ.
See Montcalm, 807 F. Supp. at 978; Hunt v. Inter-Globe
Energy, Inc., 770 F.2d 145, 148 (10th Cir. 1985). However, it is
unclear why the mere possibility that such a circumstance may
come to pass should prevent this Court from assessing damages. If
a jury returns a verdict for a different amount than is assessed
during this inquest, my ruling will be set aside and the jury's
finding will prevail. This mild administrative inconvenience is
clearly outweighed by the interests of the parties in proceeding
with the damage assessment at this time.
The plaintiff in this case has suffered a significant monetary
injury. Postponing the inquest would delay and perhaps
jeopardize its recovery since a plaintiff cannot begin to
collect on a judgment until it is final. During the potentially
protracted litigation against the non-defaulting defendants, the
defaulting defendants would have ample opportunity to spend,
secrete, or otherwise protect their ill-gotten gains. If they are
successful in doing so, the delayed inquest could permanently
prevent the plaintiff from being made whole. The non-defaulting defendants could also be injured by a
postponed assessment of damages. If the defaulting parties are
able to insulate themselves from judgment during the continuing
litigation, the non-defaulting parties could be forced to satisfy
the entire damage award without the possibility of contribution
from the defaulting defendants. On the other hand, any fears that
the non-defaulting parties have about the precedential effect of
this inquest are baseless. It will have none. Even courts that
have chosen to delay damage assessments in similar situations
have acknowledged this point. See Lawrence, 1993 WL 190266,
at *2 ("[The Court should] stay its determination of damages . . .
not because the nondefaulters would be bound by the damage
determination against the defaulters, but to avoid the problems
of dealing with inconsistent damage determinations[.]").
The only parties that may experience prejudice from assessing
damages now are the defaulting defendants, who could be
temporarily deprived of an amount greater than the jury
ultimately awards. However, it is also possible that the damages
assessed by a jury will be the same as or greater than those
assessed by this Court, in which case such prejudice would not
come to pass. In any event, the interests of these defaulting
defendants who have failed to respond and thereby admitted
liability are significantly weaker than those of the plaintiff
they injured, and any prejudice to the defaulting defendants
could be easily corrected. The mere possibility of inconvenience to the defaulting
defendants should not require this Court to delay, and threaten,
the plaintiff's recovery. Therefore, assessing damages is not
premature and I will proceed with the inquest at this time.
The Court has subject matter jurisdiction over the RICO claims
in this dispute pursuant to the RICO statute,
18 U.S.C. § 1964(c), and federal question jurisdiction, 28 U.S.C. § 1331. It
can also exercise supplemental jurisdiction over the state law
claims under 28 U.S.C. § 1367. There is personal jurisdiction
over Ms. Lulgjuraj because she is a resident of New York (Compl.,
¶ 5); over Rosen Diamonds because it is a business organized and
operated under the laws of New York (Compl., ¶ 12); over Ubex
because it is a business located in New York (Compl., ¶ 14); and
over Mr. Farsijany because he manages a corporation organized in
New York (Compl., ¶¶ 11, 17).
When a defendant defaults, all of the plaintiff's factual
allegations are accepted as true except those relating to
damages. See Transatlantic Marine Claims Agency, Inc. v. Ace
Shipping Corp., 109 F.3d 105, 108 (2d Cir. 1997); Cotton v.
Slone, 4 F.3d 176, 181 (2d Cir. 1993); Time Warner Cable of New
York City v. Barnes, 13 F. Supp. 2d 543, 547 (S.D.N.Y. 1998).
IGI's well-pled allegations establish violations of RICO and
state law. The plaintiff alleges that each defendant violated the RICO
statute, converted the plaintiff's property, and received unjust
enrichment. IGI also claims that Ms. Lulgjuraj committed fraud
and breached her fiduciary duties. The other defendants are
accused of aiding and abetting Ms. Lulgjuraj in committing these
1. RICO Claims
To establish a civil RICO claim, the plaintiff must demonstrate
that a RICO violation caused an injury to business or property.
See DeFalco v. Bernas, 244 F.3d 286, 305 (2d Cir. 2001).
Proof of a RICO violation, in turn, requires showing that each of
the defendants, "through the commission of two or more acts
constituting a pattern of racketeering activity, directly or
indirectly participated in an enterprise, the activities of which
affected interstate or foreign commerce." Id. at 306.
In the RICO statute, "racketeering activity" is defined in
terms of a long list of state and federal crimes.
18 U.S.C. § 1961(1). These enumerated crimes include mail fraud, bank fraud,
and money laundering. 18 U.S.C. § 1961(1)(B). Mail fraud is
committed when a person uses the mails to execute a scheme to
defraud. 18 U.S.C. § 1341. Bank fraud involves obtaining money
from a financial institution by means of fraudulent pretenses.
18 U.S.C. § 1344. Money laundering is committed when a person
knowingly engages in a transaction that is either designed to
conceal the proceeds of unlawful activity or involves criminally derived property that is of a value greater than $10,000.
18 U.S.C. §§ 1956, 1957.
The RICO statute requires as least two acts of racketeering
activity within a period of ten years to constitute a "pattern of
racketeering activity." 18 U.S.C. § 1961(5); see also
DeFalco, 244 F.3d at 320. However, more is required than merely
showing the minimum number of predicate acts. It must also be
proved that a relationship exists between the acts such that they
pose a threat of continuing illegal activity. See H.J. Inc. v.
Northwestern Bell Telephone Co., 492 U.S. 229, 239 (1989).
The term "enterprise" is broadly defined to include "any
individual, partnership, corporation, association, or other legal
entity, and any union or group of individuals associated in fact
although not a legal entity." 18 U.S.C. § 1961(4). To directly or
indirectly participate in an enterprise, however, a person must
participate in the operation or management of the enterprise
itself. See Reves v. Ernst & Young, 507 U.S. 170, 185 (1993).
While participation is not limited to those with primary
responsibility for the enterprise's affairs, some part in
directing the enterprise's affairs is required. See id. at
The allegations in the plaintiff's Complaint establish that the
defaulting defendants violated the RICO statute. First, they
utilized the mails to defraud the plaintiff by causing the
mailing of each of the fraudulent checks by IGI's bank to IGI.
Their scheme also involved bank fraud, since money was obtained from
IGI's bank account with forged checks. A claim of money
laundering has also been made out, because it has been alleged
that the parties devised a scheme by which funds were illegally
obtained, sought to conceal this fact, and engaged in
transactions involving more than $10,000 with criminally derived
property. This fraudulent use of IGI's bank account affected
The allegations also support finding a pattern of racketeering
activity. The predicate offenses cited are not only numerous
enough to qualify as a pattern, but also display the type of
continuing illegal activity prohibited by RICO.
Finally, the plaintiff's allegations establish participation by
each defendant in the enterprise, which consisted of a group of
individuals and businesses associated in fact. The allegations
demonstrate that Ms. Lulgjuraj managed the bank and mail fraud
offenses by forging checks and falsifying company records. The
other defaulting defendants operated the money laundering and
mail fraud activities by knowingly accepting forged checks,
cashing them, attempting to conceal their illegal origin, and
causing them to be delivered to IGI by mail.
Since the plaintiffs have demonstrated that the defendants'
RICO violations injured their business, they have satisfied their
burden of establishing a civil RICO claim. 2. State Law Claims
The tort of conversion is committed under New York law "when a
defendant exercises unauthorized dominion over personal property
in interference with a plaintiff's legal title or superior right
of possession." LoPresti v. Terwilliger, 126 F.3d 34, 41 (2d
Cir. 1997). The plaintiff's allegation that the defendants
intentionally misappropriated IGI's funds satisfies the elements
for the tort of conversion.
The elements of a claim of fraud in New York are a material
misrepresentation or omission of fact made with knowledge of its
falsity and with an intent to defraud, coupled with reasonable
reliance on the part of the plaintiff that causes damage to the
plaintiff. See Baker v. Dorfman, 239 F.3d 415, 423 (2d Cir.
2000). Aiding and abetting fraud requires "the existence of a
fraud, defendant's knowledge of the fraud, and proof that the
defendant provided substantial assistance to advance the fraud's
commission." Wight v. BankAmerica Corp., 219 F.3d 79, 91 (2d
Cir. 2000); Fidelity Funding of California, Inc. v. Reinhold,
79 F. Supp. 2d 110, 122 (E.D.N.Y. 1997).
The false records kept by Ms. Lulgjuraj to prevent detection of
her scheme qualify as a material misrepresentation for the
purposes of New York's fraud law. IGI reasonably relied on Ms.
Lulgjuraj's representations, which caused the plaintiff monetary
damage. Therefore, a claim of fraud has been established against Ms. Lulgjuraj. Although the other defaulting defendants did not
directly commit such fraud against the plaintiff, they did aid
and abet Ms. Lulgjuraj's actions. The defendants' knowing
acceptance of and payment for Ms. Lulgjuraj's forged checks
provided substantial assistance to advance the fraud's
The elements of a New York claim for participating in a breach
of fiduciary duty are that a breach by a fiduciary of obligations
to another occurred, that the defendant knowingly induced or
participated in the breach, and that the plaintiff suffered
damages as a result. See Whitney v. Citibank, N.A.,
782 F.3d 1106, 1115 (2d Cir. 1986). For a defendant to be liable for
aiding and abetting a breach of fiduciary duty, it must also be
shown that the defendant had actual knowledge of the breach.
See In re Sharp International Corp., 403 F.3d 43, 49 (2d Cir.
The plaintiff alleges that Ms. Lulgjuraj owed a fiduciary duty
to IGI, which she knowingly breached by misappropriating company
funds. Since this situation caused damage to the plaintiff, Ms.
Lulgjuraj can be held liable for her breach of fiduciary duty.
Once again, the plaintiff demonstrates that the other defaulting
defendants aided and abetted Ms. Lulgjuraj's tortious conduct by
paying for and accepting the IGI checks with knowledge that they
To prevail on a claim for unjust enrichment in New York, a
plaintiff must show that the defendant benefitted at the plaintiff's expense and that equity and good conscience require
restitution. See Kaye v. Grossman, 202 F.3d 611, 616 (2d Cir.
2000). Here, the plaintiff has demonstrated that the defendants
received money that they did not deserve. In such a situation,
equity requires the defaulting defendants to provide restitution
to the plaintiff for their unjust enrichment.
The plaintiff has provided copies of checks forged by Ms.
Lulgjuraj and cashed by the other defendants in the amount of
$6,080,108.48. (Exhs. 7 & 8 attached to Affidavit of Jerry
Ehrenwald dated July 1, 2005). The defaulting defendants are
jointly and severally liable for that amount under both state and
federal law. Under the RICO statute, however, these actual
damages should be trebled to $18,240,325.44. 18 U.S.C. § 1964(c).
IGI also asks for prejudgment interest, post-judgment interest,
and attorneys' fees.
Several courts have taken the view that prejudgment interest is
inappropriate in RICO cases absent exceptional circumstances.
See In re Crazy Eddie Securities Litigation,
948 F. Supp. 1154, 1166 (E.D.N.Y. 1996); Bingham v. Zolt, 810 F. Supp. 100,
102 (S.D.N.Y. 1993). Even if exceptional circumstances were not
present in this case, prejudgment interest is available on the
plaintiff's state law claims. New York Civil Practice Law and
Rules ("CPLR") § 5001(a) ("Interest 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[.]"). "Courts applying § 5001(a) have without
qualification awarded interest as a matter of right whenever any
tortious conduct causes pecuniary damage to tangible or
intangible property interests." Baker, 239 F.3d at 425. Here,
the defendants' conduct caused pecuniary damage to the
plaintiff's property interests and prejudgment interest is
Under New York law, interest is computed at the rate of nine
percent per year and calculated from the earliest ascertainable
date the cause of action existed. CPLR §§ 5001(b), 5004. The
plaintiff seeks interest from December 31, 2002, the last day of
the last year of stolen payments. This is an appropriate accrual
date, and interest should therefore be awarded from that point
until the date of judgment on the principal amount of
A plaintiff who prevails on a RICO claim is also entitled to an
award of costs, including reasonable attorneys' fees.
18 U.S.C. § 1964(c). IGI, however, has not submitted time records that would
support such an award. Therefore, these costs should not be
included in a judgment at this time.
For the reasons set forth above, I recommend that judgment be
entered in favor of the plaintiff and against Shace Lulgjuraj, Rosen Diamonds, Ubex, and Mansour Farsijany, jointly and
severally, in the amount of $18,240,325.44, together with
interest at the rate of nine percent per year on the principal
sum of $6,080,108.48 running from December 31, 2002, until the
date of judgment.
Pursuant to 28 U.S.C. § 636(b)(1) and Rules 72, 6(a), and 6(e)
of the Federal Rules of Civil Procedure, the parties shall have
ten (10) days to file written objections to this Report and
Recommendation. Such objections shall be filed with the Clerk of
the Court, with extra copies delivered to the chambers of the
Honorable John G. Koeltl, Room 1030, and to the chambers of the
undersigned, Room 1960, 500 Pearl Street, New York, New York
10007. Failure to file timely objections will preclude appellate
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