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Regions Bank v. Kaplan

United States District Court, M.D. Florida, Tampa Division

November 7, 2017

REGIONS BANK, Plaintiff,
v.
MARVIN I. KAPLAN, et al., Defendants. Count 1 Fraud Gary Todd Smith, Charles L. Starr, III, SAA

          ORDER

          ELIZABETH A. KOVACHEVICH, UNITED STATE DISTRICT JUDGE.

         This cause is before the Court on:

Dkt. 804 Supplemental Memorandum
Dkt. 805 Report and Recommendation
Dkt. 806 Memorandum (Bank Parties)
Dkt. 807 Response (Kaplan Parties)

         On March 24, 2015, the Court granted the Motion for Final Default Judgment of Crossclaimants Marvin I. Kaplan, R1A Palms, LLC, Triple Net Exchange, LLC, MK Investing, LLC and BNK Smith, LLC (“Kaplan Parties”) against G. Todd Smith, Gary T. Smith, Lucy B. Smith and Smith Advertising & Associates, Inc. (“SAA”) on the claims in the Amended Counterclaim and Crossclaim (Dkt. 93). (Dkts. 346, 349). The Court reserved jurisdiction for the determination of damages. On April 22, 2016, the Court referred the determination of damages to the assigned Magistrate Judge for an evidentiary hearing, and a Report and Recommendation. (Dkt. 667).

         The assigned Magistrate Judge conducted an evidentiary hearing on November 17, 2016, and has issued a Report and Recommendation recommending that the Court award damages as follows:

R1A Palms, LLC

$47, 598, 983.00

Triple Net Exchange, LLC

$11, 246, 494.00

MK Investing, LLC

$ 7, 795, 449.47

BNK Smith, LLC

$ 2, 963, 804.18

         The assigned Magistrate Judge further recommends pre-judgment interest on the base amounts, post-judgment interest, and the award of $40, 609.00 in attorney's fees. (Dkt. 805).

         I. Background

         The Amended Counterclaim/Crossclaims (Dkt. 93) includes the following claims:

Count 1
Fraud
Gary Todd Smith, Charles L. Starr, III, SAA

Count II

Conspiracy to Defraud

Charles L. Starr, III, Gary Todd Smith, Gary Truman Smith, Lucy B. Smith, Bridgeview Bank Group, SAA

Count III

Negligent Misrepresentation

Charles L. Starr, III, Gary Todd Smith, SAA

Count IV

Violation of 18 U.S.C. Sec. 1962(c) and Sec. 1964

Charles L. Starr, III, Gary Todd Smith, Gary Truman Smith, Lucy B. Smith, Bridgeview Bank Group, SAA

Count V

Violation of 18 U.S.C. Sec. 1962(d) and Sec. 1964

Charles L. Starr, III, Gary Todd

Smith, Gary Truman Smith, Lucy

B. Smith, Bridgeview Bank Group, SAA

Count VI

Violation of F.S. Sec. 772.103(3) and 772.104

Charles L Starr, III, Gary Todd

Smith, Gary Truman Smith, Lucy

B. Smith, Bridgeview Bank Group, SAA

Count VII

Violation of F.S. Sec. 772.103(4) and 772.104

Charles L. Starr, III, Gary Todd

Smith, Gary Truman Smith, Lucy

B. Smith, Bridgeview Bank Group, SAA

Count VIII

Violation of F.S. Sec. 772.11

Gary Todd Smith, Gary Truman Smith, Lucy B. Smith, SAA

Count IX

Conversion

Gary Todd Smith, Gary Truman Smith, Lucy B. Smith, SAA

Count X

Violation of Florida's Deceptive and Unfair Trade Practices Act

Gary Todd Smith, Gary Truman Smith, Lucy B. Smith, Bridgeview Bank Group, SAA

Count XI

Violation of F. S. Sec. 68.065

SAA

Count XII

Breach of Contract

SAA, Gary Todd Smith, Gary Truman Smith

Count XIII

Breach of U.C.C. 4-302(A)

Bridgeview Bank Group

Count XIV

Breach of U.C.C. 4-302(A)

Wells Fargo, N.A.

Count XV

Breach of 12 C.F.R. Part 229

Bridgeview Bank Group

Count XVI

Breach of 12 C.F.R. Part 229

Wells Fargo, N.A.

Count XVII

Negligence

Bridgeview Bank Group

Count XVIII

Negligence

Wells Fargo, N.A.

Count XIX

Fraud

Bridgeview Bank Group

Count XX

Negligent Misrepresentation

Bridgeview Bank Group

Count XXI

Defamation Per Se

Regions Bank, Florida Bankers Association, Inc., Robert Nicholas Shaw

Count XXII

Invasion of Privacy

Regions Bank, Florida Bankers Association, Inc., Robert Nicholas Shaw

Count XXIII

Negligence/Negligent Misrepresentation

Regions Bank

         The Court notes that Kaplan Parties attached documents to the Amended Counterclaim and Crossclaims. (Exhs. 1-72). Exhibits 1-67 are copies of promissory notes from SAA to Kaplan Entities with due dates from 1/20/12 to 1/25/12. Exhibits 68-72 are copies of Notices of Intent to Claim Damages for Civil Theft, all dated in April, 2012. A list of unpaid checks is attached to Exhibit 72.

         Gary Todd Smith, Gary Truman Smith, Lucy B. Smith, and Smith Advertising & Associates, Inc. are named Defendants in Counts II, IV, V, VI, VII, VIII, IX, and X. Gary Todd Smith and Smith Advertising & Associates, Inc. are named Defendants in Counts I and III. Count XI names only Smith Advertising & Associates, Inc. as a Defendant. Count XII is directed to Gary Todd Smith, Gary Truman Smith and Smith Advertising& Associates, Inc.

         In the Supplemental Memorandum, Kaplan Parties request that all Defendants be held jointly and severally liable for the damages incurred by the Kaplan Entities as a result of the fraudulent acts described in the Crossclaim. (Dkt. 804, p. 23).

         II. Standard of Review

         A. Report and Recommendation

         The District Court determines de novo any part of the Report and Recommendation that has been properly objected to. The District Court may accept, reject, modify in whole or in part the recommended disposition, may receive further evidence, or may recommit the matter to the Magistrate Judge with instructions. See 28 U.S.C. Sec. 636(b)(1); Fed.R.Civ.P. 72(b)(3). [I]n the absence of a timely filed objection, a district court need not conduct a de novo review, but instead must only satisfy itself that there is no clear error on the face of the record to accept the recommendation. To the extent that the magistrate judge has made findings of fact based upon the testimony of witnesses heard before the magistrate judge, the district court is obligated to review the transcript or listen to the tape-recording of those proceedings. LoConte v. Dugger, 847 F.2d 745, 750 (11th Cir. 1988).

         B. Default Judgment

         The entry of a default against a defendant, unless set aside pursuant to Fed.R.Civ.P. 55 (c), severely limits the defendant's ability to defend the action. While “a default is not treated as an absolute confession by the defendant of his liability and of the plaintiffs right to recover, ” a defaulted defendant is deemed to “admit[] the plaintiff's well-pleaded allegations of fact.” Nishimatsu Const. Co. v. Houston Nat'l Bank, 515 F.2d 1200, 1206 (5th Cir. 1975). The defendant is not held to admit facts that are not well-pleaded or to admit conclusions of law. Id.

         Before entering a default judgment for damages, the district court must ensure that the well-pleaded allegations in the complaint, which are taken as true due to the default, actually state a substantive cause of action and that there is a substantive, sufficient basis in the pleadings for the particular relief sought. At that point, the defendant, even though in default, is still entitled to contest the sufficiency of the complaint and its allegations to support the judgment being sought. See Cotton v. Mass. Mutual Life Ins. Co., 402 F.3d 1267, 1278 (11th Cir. 2005)(citing Nishimatsu, 515 F.2d at 1206.)

         III. Discussion

         A. Objection

         Regions Bank, Bridgeview Bank Group, Wells Fargo Bank, N.A. and Charles Larry Starr, III filed a Memorandum (Dkt. 806) requesting that the Court defer ruling on the Report and Recommendation pending ruling on Regions' tort claims against Marvin I. Kaplan, R1A Palms, LLC, Triple Net Exchange, LLC, MK Investing, LLC, and BNK Smith, LLC, to avoid the possibility of inconsistent rulings.

         In support of the objection, Regions Bank cites Frow v. De La Veaa, 82 U.S. 552 (1872), in which Supreme Court states:

“The true mode of proceeding where a bill makes a joint charge against several defendants, and one of them makes default is simply to enter a default and a formal decree pro confesso against him, and proceed with the cause upon the answers of the other defendants. The defaulting defendant has merely lost his standing in court...But if the suit be decided against the complainant on their merits, the bill will be dismissed as to all the defendants alike-the defaulter as well as the others. If it be decided in the complainant's favor, he will then be entitled to a final decree against all. But a final decree on the merits against the defaulting defendant alone, pending the continuance of the cause, would be incongruous and illegal.”)

R1A Palms, LLC, Triple Net Exchange, LLC, MK Investing, LLC and BNK Smith, LLC have filed a response (Dkt. 807) to the Memorandum, arguing that no inconsistencies can arise that would preclude the Court from approving the Report and Recommendation, and entering a final judgment against the Smiths.

         The Court has ruled on the pending claims asserted by Regions Bank against Marvin I. Kaplan, R1A Palms, LLC, Triple Net Exchange, LLC, MK Investing, LLC, and BNK Smith, LLC in the Memorandum Opinion after the bench trial, and the summary judgment Order. (Dkts. 652, 826). The Court has ruled on the pending claims asserted by Marvin I. Kaplan, R1A Palms, LLC, Triple Net Exchange, LLC, MK Investing, LLC and BNK Smith, LLC against Regions Bank, Bridgeview Bank Group, Wells Fargo Bank, N.A. and Charles Larry Starr, III in the summary judgment Orders. (Dkts. 654, 655, 656, 657).

         After consideration, the Court finds that the request to defer ruling is moot, and therefore overrules the objection to the Report and Recommendation (Dkt. 806).

         B. Subsequent Dismissal of Counts IV, V, VI, VII

         The Report and Recommendation recognized that, although the Court entered default judgment in favor of the Kaplan Parties on all counts (each an alternative theory of liability for the lost investments), the Kaplan Parties may only recover once for the same actual damages. The Report and Recommendation also recognized that Count IV incorporates the core operative facts that make up the other counts of the Third Party Complaint (Dkt. 93 at par. 201). (Dkt. 805, p. 6).

         The Court notes that the RICO counts were dismissed on reconsideration against Counterclaim/Crossclaim Defendants Charles L. Starr, III and Bridgeview Bank Group. (Dkts. 351, 378). The Court dismissed the RICO counts based on insufficient allegations of the use of mail or wires as to the first phase of the fraudulent scheme, and a lack of closed-end continuity as to the second phase of the scheme.

         The Eleventh Circuit has extended the Frow rule to apply to defendants who are similarly situated, even if not jointly and severally liable. See Gulf Coast Fans. Inc. v. Midwest Elecs. Importers. Inc., 740 F.2d 1499, 1512 (11th Cir. 1984).

         Counterclaim/Crossclaim Plaintiffs have requested a joint and several damage award against the defaulting Defendants. Because the Court dismissed the RICO counts as to other Defendants named in those Counts, the Court is concerned that Frow. supra, compels the Court to dismiss the RICO counts as to the Smith parties. If the RICO counts are dismissed as to the Smith parties pursuant to Frow, the Court would look to the remaining pending Counts to award damages.

         The Court has considered whether the RICO counts state a cause of action if Charles L. Starr, III and Bridgeview Bank Group are dismissed from those Counts. The Eleventh Circuit has instructed that a plaintiff bringing a RICO claim under Sec. 1962(c) “must satisfy four elements of proof: 1) conduct 2) of an enterprise 3) through a pattern 4) of racketeering activity. Williams v. Mohawk Industries. Inc., 568 F.3d 1350, 1355 (11th Cir. 2009)(citations omitted): see also Sedima, S.P.R.L v. Imrex Co., Inc., 473 U.S. 479, 496 (1985).

         In Count IV, Counterclaim/Crossclaim Plaintiffs allege that the Ponzi scheme is the RICO enterprise. (Dkt. 93, p. 32). Counterclaim/Crossclaim Plaintiffs further allege that the enterprise is an association-in-fact comprised of “Starr, T. Smith, G. Smith, L. Smith, Bridgeview and SAA.” Section 1961 defines “enterprise” 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.” See 18 U.S.C. Sec. 1961(4).

         During the relevant time, G. Todd Smith, Gary T. Smith and Lucy B. Smith owned or managed Smith Advertising & Associates, Inc. (Dkt. 93, p. 3, pars. 14-16). Without Defendants Charles L. Starr, III, and Bridgeview Bank Group, the enterprise consists of the corporation, SAA, and its owners and/or officers. In Ray v. Spirit Airlines. Inc., 836 F.3d 1340, 1357 (11th Cir. 2016), the Eleventh Circuit Court of Appeals held:

“We, too, hold that plaintiffs may not plead the existence of a RICO enterprise between a corporate defendant and its agents or employees acting within the scope of their roles for the corporation because a corporation necessarily acts through its agents and employees. For our purposes, there is no distinction between the corporate person and the alleged enterprise.”

         The Eleventh Circuit Court of Appeals explained that, while RICO is intended to interpreted broadly, permitting plaintiffs to plead an enterprise consisting of a defendant corporation, its officers, agents and employees acting within the scope of their employment would broaden RICO beyond any reasonable constraints. Id., at 1357. In the absence of an association-in-fact, the RICO claims would fail, because there is no RICO person which is distinct from the RICO enterprise.

         1. Related Criminal Cases

         The Court notes that there are criminal cases related to this case:

A. Case No.8:16-CR-36-T-33TGW
In Case 8:16-CR-36-T-33TGW, United States v. Marcia Caulder, Defendant Marcia Caulder entered a plea of guilty to Count One, conspiracy to commit wire and mail fraud, each affecting a financial institution, 18 U.S.C. Sec. 371, and was sentenced to 60 months imprisonment, a 3 year term of supervised release, a special assessment fee of $100.00, a forfeiture money judgment in the amount of $120, 000.00, and restitution of $57, 797, 575.50, jointly and severally with Tanisha Melvin (Case No. 8:16-CR-34-T-17JSS); Amber Mathias (Case No. 8:16-CR-35-T-15MAP) and Gary Todd Smith (Case No. 8:16-CR-120-T-17TGW).

         The Corrected Judgment (Dkt. 37) includes a list of the victims, and the restitution amount owed to each victim. The victims include Marvin Kaplan, $24, 228, 535.00, Regions Bank, $6, 343, 000.00, and Charles L Starr, III, $1, 266, 616.26.

         B. Case No. 8:16-CR-34-T-17JSS

         In Case No. 8:16-CR-34-T-17JSS, United States v. Tanisha Melvin, Defendant Tanisha Melvin entered a guilty plea to Count One of the Information, conspiracy to commit mail fraud and wire fraud, each affecting a financial institution, in violation of 18 U.S.C. Sec. 371 (Dkt. 10). On June 30, 2017, Defendant Melvin was sentenced to 9 months imprisonment, a 3-year term of supervised release, a special assessment of $100.00, a forfeiture money judgment in the amount of $70, 000.00, and restitution in the amount of $57, 797, 575.90, jointly and severally with Amber Mathias in Docket No. 8:16-CR-35-T-35MAP, Marcia Caulder in Docket No. 8:16-CR-36-T-33TGW and Gary Todd Smith in Docket No. 8:16-CR-120-T-17TGW. A list of victims and the amount of restitution due to each victim is attached to the Final Judgment (Dkt. 57).

         The Court notes that the Plea Agreements of Defendants Caulder and Melvin provide:

6. Restitution to Victims of Offense of Conviction
Pursuant to 18 U.S.C. Sec. 3663(a)and (b), and 3663A(a) and (b), the defendant agrees to make full restitution to any person or entity that lent money to Smith Advertising through bridge loans or factoring. With respect to restitution flowing from factoring through RMF, the defendant agrees that the restitution shall be made directly to the individual members of RMF.

         The Court further notes that 18 U.S.C. Sec. 3664(1) provides:

A conviction of a defendant for an offense involving the act giving rise to an order of restitution shall estop the defendant from denying the essential allegations of that offense in any subsequent Federal civil proceeding or State civil proceeding, to the extent consistent with State law, brought by the victim.

         The statement of facts in Defendant Caulder's Plea Agreement (Dkt. 3, pp. 16-29) includes the following, inter alia:

1. Sometime, in or about 2007, Smith Advertising's Florida office was established at 1626 Ringling Boulevard, Suite 510, Sarasota, Florida 34236. (Dkt. 3, p. 16).
2. On May 5, 2009, G.T.S. and G.T.S. met with a group of principals organized by L.S., which was then known as the “Investment Group” to discuss replacing Capital Plus as Smith's factor. These principals later formed Receivable Management Funding (“RMF”) and they included M.S., W.S., and L.S. RMF was based in Sarasota and ...

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