County of Suffolk v. Golden Feather Smoke Shop, Inc. et al

Filing 167

MEMORANDUM AND ORDER: For the reasons stated above, the Court awards the County civil penalties against the Defaulting Defendants in the following amounts: $226,591 jointly and severally against Thomasina Mack and TDM Discount Cigarettes; $ ;700,000 jointly and severally against Denise Paschall, Tony Phillips, and Smoking Arrow Smoke Shop; and $237,500 jointly and severally against Jesse Watkins and Monique's Smoke Shop. This Memorandum and Order resolves the final outstanding issue in this action. The Clerk of Court is directed to enter judgment accordingly and close the case. Ordered by Judge Carol Bagley Amon on 8/16/2016. (fwd for judgment) (Fernandez, Erica)

UNITED STA TES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK

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COUNTY OF SUFFOLK,

Plaintiff,

NOT FOR PUBLICATION
MEMORANDUM & ORDER
09-CV-162 (CBA) (VMS)

- against GOLDEN FEATHER SMOKE SHOP, INC., KIMO
SMOKE SHOP, INC., SMOKE AND ROLLS INC.,
SHAWN MORRISON, KIANA MORRISON, in her
individual capacity, MONIQUE'S SMOKE SHOP,
ERNESTINE WATKINS, in her individual capacity,
JESSE WATKINS, WAYNE HARRIS, PEACE PIPE
SMOKE SHOP, RODNEY MORRISON, Sr.,
CHARLOTTE MORRISON, in her individual capacity,
RED DOT & FEATHERS SMOKE SHOP, INC.,
RAYMOND HART, in his individual capacity,
SMOKING ARROW SMOKE SHOP, DENISE
PASCHALL, in her individual capacity, TONY D.
PHILLIPS, TDM DISCOUNT CIGARETTES, and
THOMASINA MACK, in her individual capacity,

f ILED

ti Ct.DIN OFFICE

U.8. ~Ci' COURT E.D.N.Y.

* AUG 17 2016 *
BROOKLYN OFFICE

Defendants.

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AMON, United States District Judge:

The County of Suffolk initiated this action against individuals and businesses engaged in
the sale of untaJCed cigarettes in violation of the Contraband Cigarette Trafficking Act ("CCTA"),
18 U.S.C. § 2341 et seq., and the Cigarette Marketing Standards Act ("CMSA"), N.Y. TalC L.
§ 483 et seq.

In a March 23, 2016, Memorandum and Order (the "Default Judgement M&O"),

the Court granted default judgment against defendants Thomasina Mack, TDM Discount
Cigarettes, Denise Paschall, Tony Phillips, Smoking Arrow Smoke Shop, Jesse Watkins, and
Monique's Smoke Shop (collectively, the "Defaulting Defendants").

(See D.E. # 161.)

The

Court held, however, that the County's penalty calculations were insufficient to support the civil
penalties it sought.

(See id. at 12.)

The Court directed the County to file a supplemental brief

addressing the deficiencies, (see id. at 13), which the County did, (see D.E. # 166 ("Supp. Br.")).
No Defaulting Defendant filed a response to this supplemental submission.

For the reasons

below, the Court now awards the requested civil penalties to the County.
DISCUSSION

The County seeks only civil penalties under the CCTA, not an award of damages.
Because the CCTA does not specify a penalty amount for violations of its core prohibition on
transacting in contraband cigarettes, this Court looks to the analogous penalty provisions of the
Prevent All Cigarette Trafficking ("PACT') Act.

See. e.g., City of New York v. Golden Feather

Smoke Shop. Inc., No. 08-CV-3966 (CBA) (JMA), 2013 WL 3187049 (E.D.N.Y. filed Sept. 29,
2008) (hereinafter the "City Case").

Under the relevant PACT Act provisions, the Court may

"impose a penalty of up to 2% of each defendant's gross sales of unstamped cigarettes for the year
preceding a chosen violation date."

That calculation provide~ the "starting point for

Id. at *5.

an award," which the Court then adjusts using "traditional factors, including the good or bad faith
of the defendants, the injury to the public, and the defendants' ability to pay[,] taking into account
their gross and net profits from their business of selling unstamped cigarettes."

Id. (internal

quotation marks omitted).
In its motion for default judgment, the County argued that the appropriate penalty is 2% of
contraband cigarette sales made by each of the Defaulting Defendants for the year 2008.
Estimating $25 per carton in revenue, the County calculated the following penalty amounts:
Defendants
Thomasina Mack,
TDM Discount Cigarettes
Denise Paschall, Tony Phillips,
Smoking Arrow Smoke Shop
Jesse Watkins, Monique's Smoke Shoo

Cartons
453,182

Revenue
$11,329,550

Penaltv
$226,591

1,400,000

$35,000,000

$700,000

475,000

$11,875,000

$237,500

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But as the Court explained in the Default Judgment M&O, those calculations did not (1) address
the "traditional factors" relevant to the penalty amount, (2) specify the monetary relief sought from
each particular defendant, or (3) explain why any amounts that the Defaulting Defendants paid in
the City Case need not be deducted from the penalties sought here.

The County now remedies

those deficiencies with its supplemental briefing.
First, the County addresses the traditional factors the Court considers when determining
the proper amount of civil penalties, specifically good or bad faith, injury to the public, and ability
to pay.

The County first highlights the Defaulting Defendants' bad faith and injury to the public.

It emphasizes that the Defaulting Defendants "caused substantial loss to multiple victims" through
their "recurrent and not isolated" conduct by "operat[ing] an illicit business, for years, that stripped
the City, County, and State of tax revenue."

(Supp. Br. at 3; see also id. at 5--6 (Mack and TOM);

id. at 7-8 (Paschall, Smoking Arrow, Phillips); id. at 9-10 (Watkins and Monique's Smoke Shop).)
As to ability to pay, the County notes that the Defaulting Defendants' poor recordkeeping inhibits
an evaluation of their net and gross profits.

(Id. at 4.)

urges, should bear the burden of this uncertainty.

The Defaulting Defendants, the County

(See iQJ

Further, the County argues that the

2% gross-sale penalty it seeks is far less than the "per violation" measure also provided for in the
PACT Act-indeed many millions of dollars less, given the number of violations.

(Id. at 4-5.)

Finally, the County states that "it is logical to conclude [Defaulting Defendants] have the ability
to pay" given the "extraordinarily lucrative [illicit] business in which [they] engaged."

(Id. at 5.)

The County details how lucrative these enterprises were for each set of Defaulting Defendants.
(See id. at 6 (Mack and TOM, with gross sales of$45 million between 2005 and 2008); id. at 7-8
(Paschall, Smoking Arrow, and Phillips, with gross profits of $1 million per week from
approximately 2007 to 2009); id. at 9-10 (Watkins and Monique's Smoke Shop, with $11 million
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in gross revenue in both 2006 and 2007).)

Based on these arguments, the Court is persuaded that

the traditional factors weigh against adjusting the amount of civil penalties the County seeks.
Second, the County clarifies that it seeks the specified amounts against the cigarette
business and its owner and operator jointly and severally.

(Id. at 1.)

Analogizing to

disgorgement awards, the County argues that "the court has the discretion to find joint and several
liability when two or more defendants have collaborated in the illegal conduct."

S.E.C. v.

Opulentica, LLC, 479 F. Supp. 2d 319, 330 (S.D.N.Y. 2007). According to the County, the
business and its operator are "collaborating or closely related parties" on whom it is proper to
"impose joint and several liability for combined profits."

(Supp. Br. at 1 (quoting U.S. S.E.C. v.

Svndicated Food Serv. lnt'l. lnc., No. 04-CV-1303 (NGG) (VMS), 2014 WL 2884578, at *11
(E.D.N.Y. Feb. 14, 2014), report and recommendation adopted, 2014 WL 1311442 (E.D.N.Y. Mar.
28, 2014)).)
The Court agrees that holding the cigarette business and its operator jointly and severally
liable for the civil penalties is appropriate here. The Court granted default judgment against the
Defaulting Defendants based on allegations that the individuals were the owners and operators of
the entities and that "each of those individuals and business entities" had sold unstamped
cigarettes. (See Default Judgment M&O at 9 (citing Comp!.

iii! 15-25).) These allegations

support joint and several liability, and the default constitutes an admission of them, see Greyhound
Exhibitgroup, lnc. v. E.L. U.L. Realty Corn., 973 F.2d 155, 158 (2d Cir. 1992). Additionally,
imposing joint and several liability supports the purpose of civil penalties, which both serve "as a
rough form ofliquidated damages," United States v. Urserv, 518 U.S. 267, 283-84 (1996) (citation
omitted), and work in some measure "to punish culpable individuals," and not "simply to extract
compensation or restore the status quo," Tull v. United States, 481U.S.412, 422 (1987); accord
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Johnson v. S.E.C., 87 F.3d 484, 492 (D.C. Cir. 1996) ("[T]he ordinary, contemporary, common
meaning of the word 'penalty,' [is] a sanction imposed by the government for unlawful or
proscribed conduct which goes beyond remedying the damage caused to the harmed party.").
Finally, the CCTA's remedies provision provides not only for civil penalties, but also for "any
other appropriate relief for violations of this chapter from any person (or by any person controlling
such person)," 18 U.S.C. § 2346-and does not contain any statutory language limiting the amount
of civil penalties the Court may impose, cf. S.E.C. v. Pentagon Capital Mgmt. PLC, 725 F.3d 279,
288 (2d Cir. 2013) (finding that the district court could not impose joint and several liability
because the relevant statute, 15 U.S.C. § 77t(d)(2), limited the civil penalty to the "gross amount
of pecuniary gain to such defendant"). The Court therefore concludes that the business entity and
the owner or operator shall be jointly and severally liable for the civil penalties imposed.
Third, the County explains why the civil penalties should not be offset by any amounts
awarded in the City Case.
forms of relief.

The County points out that the statutes at issue provide for multiple

(Supp. Br. at 2.)

The CCTA provides for "any other appropriate relief ...

including civil penalties, money damages, and injunctive or other equitable relief." (See id.
(quoting 18 U.S.C. § 2346) (emphasis added).) The PACT Act provides for similar multiple
forms of relief. (See id. (citing 15 U.S.C. § 378(c)(l)(A)).) Additionally, the County implies
that an offset would be an equitable defense, and such equitable defenses do not apply to plaintiffs
like the County acting in law enforcement capacities to seek statutorily authorized civil penalties.
(See id. at 3 (citing State of New York v. United Parcel Serv .. Inc .. -- F. Supp. 3d --, 2016 WL
502042, at *13 (S.D.N.Y. Feb. 8, 2016) (collecting cases indicating that equitable defenses do not
apply in such circumstances and therefore holding that a mitigation defense is not available for
CCTA and PACT Act claims)).) See also State ofN.Y. v. Riley, 53 F.3d 520, 522 (2d Cir. 1995)
5

("The doctrine of equitable offset, as the name itself reflects, embodies concepts of equity .... ").
Lastly, the County points out that Mack and TDM were subject only to damages in the City Case,
(see Supp. Br. at 6); Paschall, Smoking Arrow, Watkins, and Monique's Smoke Shop settled the
City Case, (id. at 8); and Phillips was assessed a civil penalty for only one year's sales and has yet
to appear or pay, (hlJ. None of the Defaulting Defendants, therefore, has paid a civil penalty to
offset the penalties awarded here. The Court finds these arguments together persuasive and
therefore awards civil penalties without any offset.
CONCLUSION

For the reasons stated above, the Court awards the County civil penalties against the
Defaulting Defendants in the following amounts: $226,591 jointly and severally against
Thomasina Mack and TDM Discount Cigarettes; $700,000 jointly and severally against Denise
Paschall, Tony Phillips, and Smoking Arrow Smoke Shop; and $237,500 jointly and severally
against Jesse Watkins and Monique's Smoke Shop.
This Memorandum and Order resolves the final outstanding issue in this action.
Clerk of Court is directed to enter judgment accordingly and close the case.
SO ORDERED.
Dated: August 16, 2016
Brooklyn, New York

s/Carol Bagley Amon

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Carol Bagl?f Am<i6/
United States District Judge

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