State Of New York v. Grand River Enterprises Six Nations, LTD. et al
Filing
92
DECISION and ORDER denying 77 Motion for Hearing; granting 80 81 Motions to Stay. Signed by Hon. Leslie G. Foschio on 2/18/2015. (SDW)
UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF NEW YORK
____________________________________
STATE OF NEW YORK,
DECISION
and
ORDER
Plaintiff,
v.
GRAND RIVER ENTERPRISES SIX NATIONS, LTD.,
NATIVE WHOLESALE SUPPLY COMPANY, INC.,
14-CV-910A(F)
Defendants.
____________________________________
APPEARANCES:
ERIC T. SCHNEIDERMAN
New York State Attorney General
Attorney for the Plaintiff
DANA BIBERMAN,
JOSHUA S. SPRAGUE,
Assistant Attorneys General, of Counsel
120 Broadway
New York, New York 10271
FRIEDMAN KAPLAN SEILER & ADELMAN LLP
Attorneys for Defendant Grand River Enterprises
ERIC O. CORNGOLD,
JEFFREY R. WANG, of Counsel
7 Times Square, 27th Floor
New York, New York 10036
WEBSTER SZANYI, LLP
Attorneys for Defendant Native Wholesale Supply
JEREMY COLBY,
NELSON PEREL,
KEVIN A. SZANYI, of Counsel
1400 Liberty Building
Buffalo, New York 14202
JURISDICTION
On January 16, 2015, Hon. Richard J. Arcara referred this case to the
undersigned for all pretrial matters (Doc. No. 83). It is presently before the court on
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Plaintiff’s motion to conduct a pretrial conference and entry of a case management
order pursuant to Fed.R.Civ.P. 16 (Doc. No. 77) (“Plaintiff’s motion”) and Defendants’
motions to stay discovery pursuant to Fed.R.Civ.P. 26(c) (Doc. Nos. 80 and 81)
(“Defendants’ motions to stay discovery”) pending Defendants’ motions (Doc. Nos. 79
and 81) to dismiss pursuant to Fed.R.Civ.P. 12(b)(6) (“Defendants’ motions to dismiss”).
BACKGROUND and FACTS 1
Plaintiff’s Second Amended Complaint alleges violations of 18 U.S.C. §§ 2341 et.
seq., the Contraband Cigarette Trafficking Act (“CCTA”), prohibiting knowingly to
transport, receive, possess, sell, distribute or purchase contraband cigarettes, i.e., more
than 10,000 cigarettes, found in a state without evidence of payment of any applicable
state tax, and the Prevent All Cigarette Trafficking Act (“PACT Act”), 15 U.S.C. §§ 375
et. seq., prohibiting interstate cigarette sales, as defined by the statute specifically §
375(9) (“§ 375(9)”), unless the seller has registered with the U.S. Attorney General or
the state’s tobacco tax administrator and reports information related to such sales as
required. Plaintiff also alleges violations of New York Tax Law, §§ 375-378 imposing an
excise tax and prepaid sales tax on cigarettes held for sale in New York state, except
for sales to Indians on tribal territory, and New York Tax Law § 480-b requiring cigarette
manufacturers to file certifications with the New York Department of Taxation and
Finance describing the manufacturer’s cigarette brands.
Defendants’ motions to dismiss contend that as Defendant Grand River
Enterprises Six Nations, Ltd. (“GRE”) is solely a Canadian manufacturer of cigarettes
Plaintiff cannot plausibly allege it is subject to either the CCTA or PACT Act and that
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Taken from the pleadings and papers filed in connection with the instant motions.
2
Plaintiff’s threshold allegation that GRE and Defendant Native Wholesale Supply
Company (“NW”), which allegedly purposes most of GRE’s cigarettes for distribution,
operate as a joint venture, thereby subjecting GRE to liability under these federal
statutes based on NW’s importation and sales of GRE’s Seneca brand cigarettes within
New York State, as well as violations of New York tax laws as alleged by Plaintiff, based
on the principle of vicarious liability applicable to joint ventures available under New
York law, also fails as Plaintiff has not plausibly alleged the existence of the putative
joint venture. Defendant NW contends that as an Indian corporate entity selling to
Indian resellers located in Indian territories within New York State, it is exempt from
CCTA prohibitions and because Plaintiff fails to allege NW engages in sales to
consumers, or satisfies the PACT Act’s definition of interstate commerce under 15
U.S.C. § 375(9), Plaintiff cannot plausibly allege NW is subject to the registration and
filing requirements of the PACT Act which is limited to cigarette sellers engaged in such
“delivery sales” involving consumers, as defined in 15 U.S.C. § 375(5); however, NW
does not seek to dismiss Plaintiff’s Second Amended Complaint’s claims alleging
violations of New York State’s tax laws. Defendants accordingly maintain that given
Defendants meritorious contentions in support of Defendants’ motions to dismiss, it
would be premature and unnecessarily burdensome to Defendants to commence
discovery prior to the court’s determination of Defendants’ motions to dismiss.
In opposition to Defendants’ motions to stay discovery, Plaintiff contends that
Plaintiff’s allegations that GRE and NW operate as a joint venture for the purpose of
manufacturing and distributing millions of untaxed cigarettes into New York state worth
hundreds of millions of dollars are based in part on admissions of GRE and NW to this
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effect, amply demonstrating, that Plaintiff has plausibly alleged such joint venture thus
subjecting GRE to liability under the CCTA, PACT Act and New York Tax Law based on
NW’s shipments into New York State of untaxed cigarettes as contraband for retail sale
on Indian reservations within the state. Plaintiff also contends that NW’s argument that
it is beyond the reach of the CCTA and PACT Act because the CCTA exempts NW’s
cigarette sales to Indian wholesalers and retailers from its coverage is based on basic
misconstructions of applicable case law and ignores that NW has not sought to dismiss
Plaintiff’s state law claims. Plaintiff further argues that because Defendants’ motions to
dismiss ultimately will prove to be meritless, granting Defendants’ requested stay will
unnecessarily delay Plaintiff’s entitlement to Plaintiff’s requested injunctive relief and
substantial monetary damages contrary to the Plaintiff’s interest in obtaining the
significant tax revenues Defendants have failed to pay on the alleged illegal importation
of GRE untaxed cigarettes and the associated detriment to public health in New York
state resulting from the lost deterrent effect of higher cigarette prices of presently
untaxed, and thus discounted, cigarettes sold at retail within New York State as a result
of Defendants’ joint venture.
DISCUSSION
In deciding whether to grant a protective order staying discovery pending a
motion to dismiss, courts have discretion in evaluating several factors relevant to
considering such motions, see Deliser v. Miller, 2014 WL 4626858, at *8 (N.D.N.Y.
Sep’t. 15, 2014), including the strength of the moving party’s showing of an
unmeritorious claim; the likely breadth and burden of discovery; and risk of prejudice to
the party opposing a stay. See Barnes v. County of Monroe, 2013 WL 5298574, at *1
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(W.D.N.Y. Sep’t. 19, 2013). Here, the merits of Defendants’ motions to stay turn on
several questions relating to the applicability to Defendants’ cigarette making and
distribution activities of Plaintiff’s CCTA and PACT Act claims as well as the viability of
Plaintiff’s asserted joint venture theory which seeks to hold GRE vicariously liable based
on NW’s alleged violations of the CCTA, PACT Act and New York’s excise and sales
tax law applicable to cigarette sales. See Zehnick v. Meadowbrook II Associates, 799
N.Y.S.2d 604, 607 (3rd Dep’t. 2005) (recognizing joint venture relationship between
parties sufficient to support vicarious liability of one joint venture for actions of the other)
(citing Mondello v. New York Blood Center – Greater New York Blood Program, 604
N.E.2d 81, 87 (N.Y. 1992) and caselaw). More specifically, Plaintiff’s allegations
assume Plaintiff’s joint venture theory is available as a ground for CCTA and PACT Act
liability, and neither GRE nor NW contend otherwise.
The court notes that discovery against at least NW regarding Plaintiff’s state law
claims, which are not the subject of NW’s motion to dismiss, is likely to proceed
regardless of whether GRE and NW succeed on Defendants’ motions to dismiss with
respect to Plaintiff’s CCTA and PACT Act claims and Plaintiff’s state claims against
GRE, yet the scope and related burdens of discovery could be significantly affected
should those federal claims be dismissed. Additionally, while also recognizing that
Defendants’ representation in the course of a prior U.S. – Canada trade agreement
arbitration proceeding, commenced in 2004, that a joint venture previously existed
(which Plaintiff asserts has continued in operation) between Defendants as Plaintiff
alleges points toward a finding that Plaintiff’s joint venture theory is plausibly pleaded,
see In re Parmalat Securities Litig., 421 F.Supp.2d 703, 717 (S.D.N.Y. 2006) (intent of
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parties to enter into joint venture “most important element”), yet given that Plaintiff has
not specifically alleged the existence of an agreement between Defendants as to profit
and loss sharing 2 and this matter is presently before the undersigned for a report and
recommendation, it may be wiser to await Judge Arcara’s determination on this alleged
basis for imposition of vicarious liability under the CCTA and PACT Act against GRE,
essential to Plaintiff’s federal and state tax law based claims against GRE, and whether
it is necessary to plausibly allege each element of Plaintiff’s joint venture theory. See,
e.g., Demian, Ltd. v. Charles A. Frank Associates, 671 F.2d 720, 723 (2d Cir. 1982)
(absence of evidence of profit or loss sharing agreement between parties negates
finding of joint venture). Thus, the court finds that Defendants’ contentions in support
of Defendants’ motion to dismiss are not so insubstantial that discovery should be
commenced at this time as Plaintiff requests. The court recognizes Plaintiff’s strong
public policy interests, including recovery of lost revenue and realization of future
revenue, but finds, at this early stage of the proceedings, that the need for the court to
give careful scrutiny to the issues raised by Defendants’ motions to dismiss prior to
authorizing full discovery, should prevail at this time.
CONCLUSION
Based on the foregoing, Defendants’ motions to stay discovery (Doc. Nos. 80
and 81) are GRANTED; Plaintiff’s motion (Doc. No. 77) is DENIED.
2
Given the apparent extraordinary profitability of the alleged contraband cigarette distribution scheme by
Defendants any losses arising from the joint venture appear highly unlikely.
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SO ORDERED.
/s/ Leslie G. Foschio
________________________________
LESLIE G. FOSCHIO
UNITED STATES MAGISTRATE JUDGE
Dated: February 18, 2015
Buffalo, New York
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