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Romain v. Seabrook

United States District Court, S.D. New York

December 15, 2017

ELIZABETH ROMAIN, et al., Plaintiffs,
NORMAN SEABROOK, et al., Defendants.



         Plaintiffs Elizabeth Romain, Herman Jiminian, Jeanette Feliciano, Albin Duclet, and Maria Moreira are a group of active-duty and retired corrections officers. Plaintiffs belong to the Corrections Officers Benevolent Association, Inc. (“COBA”) and are beneficiaries of COBA's Annuity Fund, a retirement benefits fund, and COBA's General Fund, the union's operating account. The two Funds are nominal defendants in this action.

         Defendant Norman Seabrook (“Seabrook”) is the former President of COBA. Defendants Elias Husamudeen, Joseph Bracco, Elizabeth Castro, Michael Maiello, Amelia Warner, Thomas Farrell, Karen Tyson, Benny Boscio, Kenyatta Johnson, Albert Craig, Daniel Palmieri, Angel Castro, Frederic Fusco, and Paulette Bernard (collectively, “Executive Board Defendants”) hold various positions on COBA's Executive Board. Defendant Koehler & Isaacs, LLP (“Koehler & Isaacs”) is a law firm that represents COBA.

         In 2016, Seabrook and Defendant Murray Huberfeld (“Huberfeld”), co-founder and President of Defendant Platinum Management (NY) LLC (“Platinum”), were arrested and indicted for honest services wire fraud and conspiracy to commit honest services wire fraud. The indictment charged these Defendants with participation in a kickback scheme, where Seabrook would invest money from COBA's Annuity Fund and General Fund with Platinum in exchange for personal payments from the investment firm.

         On the basis of this alleged scheme, Plaintiffs filed this suit derivatively on behalf of COBA against Seabrook, the Executive Board Defendants, and Koehler & Isaacs for breach of fiduciary duty, and against Koehler & Isaacs only for aiding and abetting breach of fiduciary duty. Plaintiffs also assert a claim for an equitable accounting against the Executive Board Defendants directly, and derivative claims against the Executive Board Defendants only for unjust enrichment and an injunction prohibiting them from advancing Seabrook's legal fees in the criminal case against him.

         Finally, Plaintiffs assert a derivative claim against Seabrook, Platinum, Huberfeld, and Defendant Jona Rechnitz (“Rechnitz”) for civil violations of the Racketeer Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C. § 1962 et seq.[1]

         The Executive Board Defendants, Koehler & Isaacs, and Rechnitz all filed separate motions to dismiss.[2]

         The Executive Board Defendants also filed a motion under Federal Rule of Civil Procedure 11 for sanctions against Plaintiffs and their counsel for allegedly making “legal contentions unwarranted by existing law without a non-frivolous argument otherwise.” (Dkt. No. 120 at 1.) In response, Plaintiffs filed a motion for Rule 11 sanctions against the Executive Board Defendants on the grounds that their motion “lacks any meritorious basis . . . and was filed for improper purposes.” (Dkt. No. 144 at 1.)

         For the reasons that follow, the motions to dismiss are granted, and the respective motions for sanctions are denied.

         I. Background

         The following facts are taken from the Amended Complaint and are presumed true for the purposes of this motion.

         COBA is New York City's largest correctional officers union, representing more than 9, 000 officers. (Dkt. No. 106 (“FAC”) ¶ 52.) The union is managed by a ten-member Executive Board and five other trustees. (FAC ¶ 53.) Upon retirement, COBA members are eligible to receive an annuity benefit from the COBA Annuity Fund, which is funded primarily by New York City. (FAC ¶ 55.) The COBA Annuity Fund is administered by the COBA Executive Board, which has in turn delegated responsibility for overseeing the Fund to a “sub-group” of Board members (collectively, “Annuity Fund Sub-Group Defendants”). (FAC ¶¶ 55, 57.) The Executive Board also manages the COBA General Fund, an operating account that is financed by membership dues. (FAC ¶ 58.)

         In late 2013, Norman Seabrook, then-President of COBA, [3] was introduced to Jona Rechnitz. (FAC ¶ 61.) In November and December 2013, they twice traveled together to the Dominican Republic, and Rechnitz paid for the flights. (FAC ¶¶ 62-63.) Rechnitz then helped arrange a kickback scheme between Seabrook and Defendant Murray Huberfeld, co-founder and President of Platinum, a hedge fund management company. (FAC ¶¶ 40-41.) Under the agreement, Platinum would pay Seabrook a personal kickback of $100, 000 to $150, 000 per year if he facilitated the investment of COBA funds with Platinum. (FAC ¶¶ 65-66.)

         Around January 2014, Platinum representatives met with Seabrook, Defendant Michael Maiello (COBA's treasurer), and two other Executive Board Members to discuss investing COBA funds in the Platinum Partners Value Arbitrage Fund (“PPVA”). (FAC ¶¶ 38, 67.) The Amended Complaint alleges that PPVA, which invested in energy, mining, and Asia-based arbitrage opportunities, was a “Ponzi scheme.” (FAC ¶¶ 79-80.) After this meeting, the Annuity Fund Sub-Group Defendants authorized investment of $10 million of the COBA Annuity Fund in PPVA. (FAC ¶ 67.) In August 2014, they approved an additional $5 million investment. (FAC ¶ 68.) Plaintiffs allege, on information and belief, that the Annuity Fund SubGroup Defendants did not seek the full Executive Board's approval before making these two investments, which constituted nearly 20% of the Annuity Fund. (FAC ¶¶ 69, 72.) In fact, Seabrook “typically” made investment decisions regarding the Annuity Fund's money “without input from the Annuity Fund Board of the Executive Board.” (FAC ¶ 96.)

         Around June 2014, Seabrook invested an additional $5 million in PPVA, this time from the COBA General Fund. (FAC ¶ 70.) He made this investment, which constituted approximately 40% of the General Fund, without the Executive Board's knowledge. (FAC ¶¶ 70, 74.) Maiello approved all of these investments “without properly vetting the transaction[s].” (FAC ¶ 71.)

         Plaintiffs allege that the other members of the Executive Board “rarely question[ed] Seabrook.” (FAC ¶ 100.) Seabrook secured the Board members' loyalty with “substantial emoluments from COBA's various vendors, including envelopes stuffed with gift cards, ” and “access to cars, including money for gas, tolls, and maintenance.” (FAC ¶¶ 101, 105.) The Executive Board Defendants also received annual Christmas gifts and cash gifts of “between $500 and $1000” from Daniel H. Cook & Associates, COBA's fund administrator, and “expensive GPS systems” from Defendant Koehler & Isaacs, COBA's law firm. (FAC ¶¶ 43, 102-03.) Seabrook and the Executive Board also used COBA funds to purchase tickets to “sporting events and concerts.” (FAC ¶ 104.)

         In December 2014, Seabrook demanded payment of his first kickback from Platinum. Huberfeld arranged for Rechnitz to deliver a $60, 000 kickback to Seabrook in a Ferragamo bag. (FAC ¶ 77.)

         In June 2016, Huberfeld and Seabrook were arrested by the federal government and charged with honest services fraud and wire fraud. The next month, Platinum announced that it would liquidate its funds. (FAC ¶¶ 88-89.) On October 19, 2016, PPVA filed for Chapter 15 bankruptcy. (FAC ¶ 91). COBA's PPVA investments are “now worthless.” (FAC ¶ 98.)

         On October 31, 2016, Plaintiffs filed this suit, asserting a direct claim for an equitable accounting and derivative claims on behalf of COBA's membership. (Dkt. No. 4 at 2.) After Defendants filed a first round of motions to dismiss the original complaint, Plaintiffs filed an amended complaint on May 17, 2017, asserting claims for: breaches of fiduciary duty, aiding and abetting breaches of fiduciary duty, civil RICO violations, unjust enrichment, injunctive relief, and equitable accounting. (FAC ¶¶ 147-216) The Executive Board Defendants, Koehler & Isaacs, and Rechnitz all filed motions to dismiss. (Dkt. Nos. 121, 123, 127.) The Executive Board Defendants and Plaintiffs have also filed respective motions for Rule 11 sanctions against each other. (Dkt. Nos. 119, 143.)

         II. Motions to Dismiss

         A. Legal Standards

         To survive a motion to dismiss for failure to state a claim, a plaintiff must plead “only enough facts to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). A claim is facially plausible when plaintiffs plead facts that would allow “the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). “The Court must accept as true all well-pleaded factual allegations in the complaint, and ‘draw [ ] all inferences in the plaintiff's favor.'” Goonan v. Fed. Reserve Bank of N.Y., 916 F.Supp.2d 470, 478 (S.D.N.Y. 2013) (quoting Allaire Corp. v. Okumus, 433 F.3d 248, 249-50 (2d Cir. 2006)). However, “the tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions. Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.” Iqbal, 556 U.S. at 678.

         Federal Rule of Civil Procedure 23.1 “requires that a plaintiff in a . . . derivative action ‘state with particularity . . . any effort by the plaintiff to obtain the desired actions from the directors . . . and . . . the reasons for not obtaining the action or not making the effort.'” Canty v. Day, 13 F.Supp.3d 333, 341 (S.D.N.Y. 2014), aff'd, 599 F. App'x 20 (2d Cir. 2015) (second, third, and fourth alterations in original) (quoting Fed.R.Civ.P. 23.1(b)(3)). “This rule sets forth a ‘rule of pleading' as to ‘the specificity of facts alleged with regard to efforts made to urge a corporation's directors to bring the action in question, ' which is referred to as ‘demand' on the corporation.”[4] Id. at 341-42 (quoting Halebian v. Berv, 590 F.3d 195, 206 n.7 (2d Cir. 2009)).

         “In contrast to a motion to dismiss pursuant to Rule 12(b)(6), a Rule 23.1 motion to dismiss for failure to make a demand is not intended to test the legal sufficiency of the plaintiffs' substantive claim, ” but instead “its purpose is to determine who is entitled, as between the corporation and its shareholders, to assert the plaintiff's underlying substantive claim on the corporation's behalf.” In re Veeco Instruments, Inc. Sec. Litig., 434 F.Supp.2d 267, 273 (S.D.N.Y. 2006) (second quoting Levine v. Smith, 1989 WL 150784, at *5 (Del. Ch. 1989), aff'd, 591 A.2d 194 (Del. 1991)). “Because Rule 23.1 requires that plaintiffs make particularized allegations, it imposes a pleading standard higher than the normal standard applicable to the analysis of a pleading challenged under Rule 12(b)(6).” Canty, 13 F.Supp.3d at 342 (quoting In re Am. Int'l Grp., Inc. Derivative Litig., 700 F.Supp.2d 419, 430 (S.D.N.Y. 2010), aff'd, 415 F. App'x 285 (2d Cir. 2011)). “The ‘adequacy' of a plaintiff[']s pre-suit demand efforts ‘is to be determined by state law absent a finding that application of state law would be inconsistent with a federal policy underlying a federal claim in the action.'” Id. (quoting Halebian, 590 F.3d at 206 n.7). Because it is undisputed that COBA is a New York not-for-profit corporation, New York law governs the adequacy of Plaintiffs' pre-suit demand. See id.

         B. ...

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