City of New York v. Cyco.Net, Inc., 03 CV 383 DAB.

CourtUnited States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
Citation383 F.Supp.2d 526
Docket NumberNo. 03 CV 383 DAB.,03 CV 383 DAB.
PartiesTHE CITY OF NEW YORK, Plaintiff, v. CYCO.NET, INC., Richard A. Urrea, Daniel R. Urrea, Hemi Group, LLC, Kai Gachupin, Dirtcheapcigs.com, Inc., Fred Teutenberg IV, Fred Teutenberg V, Michael E. Smith, d/b/a PaylessCigs, Hooray's Inc., Stephen F. Knopp, Dmitriy Zilberman, S4L Distributing, Inc., William C. Baker III, Double B Distributing, d/b/a Discount Tobacco Store, William J. Bevins, Jr., Defendants.
Decision Date27 January 2005

Toby Michael John Butterfield, Cowan, Debaets, Abrahams, New York City, Frederick W. Adkins, H. Patrick Cline, Jr., Cline, Adkins & Cline, Norton, VA, for Defendants.

OPINION

BATTS, District Judge.

Plaintiff City of New York (the "City") has brought this action against Defendants, alleging violations of civil Racketeer Influenced and Corrupt Organizations Act (hereinafter "RICO"), 18 U.S.C. § 1961, et seq., New York General Business Law § 349 and common law fraud.1 Plaintiff seeks compensatory damages and injunctive relief, in the form of an end to Defendants' allegedly fraudulent and illegal activities, and attorney's fees. The various Defendants, as explained below, move to dismiss the claims for failure to plead fraud with particularity, for lack of personal jurisdiction, for improper venue, pursuant to Rules 9(b), 12(b)(2), 12(b)(3), and 12(b)(6) of the Federal Rules of Civil Procedure, respectively, and to transfer venue, pursuant to 28 U.S.C. §§ 1406(a) and 1404(a).

The 16 named Defendants have been separated into three groups for purposes of this lawsuit: the Multistate Defendants, the Dirtcheap Defendants, and the Bulkcigs Defendants. For the purposes of this lawsuit, Defendants Cyco.net, Richard A. Urrea, Daniel R. Urrea, Hemi Group, Kai Gachupin, Michael E. Smith, Hooray's Inc., Stephen F. Knopp, and Dmitriy Zilberman have joined together as the "Multistate Defendants."2 Defendants S4L, Inc., William C. Baker, Double B, and William Bevins filed their motion jointly under common representation as the "Bulkcigs Defendants." Defendants www.Dirtcheapcigs.com, Fred Teutenberg IV, and Fred Teutenberg V, have joined together as the "Dirtcheap Defendants." Otherwise, aside from the employee-employer relationships described below, these individuals and enterprises are separate and unrelated enterprises. (Am.Compl.¶ 65).

Defendants Fred Teutenberg IV and Fred Teutenberg V move to dismiss for lack of personal jurisdiction based on Fed.R.Civ.P. 12(b)(2). The Multistate Defendants, the Dirtcheap Defendants, and the Bulkcigs Defendants move to dismiss for improper venue under Fed.R.Civ.P. 12(b)(3) and 28 U.S.C. § 1406(a). The Multistate Defendants and the Bulkcigs Defendants also move in the alternative for transfer of venue under 28 U.S.C. §§ 1406(a) and 28 U.S.C. § 1404(a). The Multistate Defendants and the Dirtcheap Defendants move to dismiss for failure to state claims upon which relief can be granted under Fed.R.Civ.P. 12(b)(6) and 9(b).

Plaintiff opposes all motions. For the following reasons, Defendants' motions are DENIED in part and GRANTED in part.

I. BACKGROUND

The facts, summarized below, are taken from the Amended Complaint and the Amended RICO Statement,3 the allegations of which must be assumed to be true for purposes of these motions to dismiss. See Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 102, 2 L.Ed.2d 80, 84 (1957); McGinty v. State of New York, 193 F.3d 64, 68 (2d Cir.1999).

A. The Scheme

Plaintiff alleges that the Defendants conducted the management and operation of the affairs of their own enterprises, directly or indirectly, through a pattern of racketeering activity within the meaning of 18 U.S.C. §§ 1961(1)(B), 1961(5), and 1962(c), in violation of 18 U.S.C. § 1962(c), consisting of continuous and multiple instances of mail and wire fraud in violation of 18 U.S.C. §§ 1341 and 1343. (Am.Compl.¶¶ 16, 64, 80, 90.)

Specifically, Plaintiff contends that the Defendants agreed to a plan within an enterprise, whereby cigarettes would be sold to New York City residents without informing New York State tax authorities of the sales, and/or by falsely advertising the cigarettes as "tax-free," and/or by advertising that sales will not be reported to the New York State tax authorities. (Am.Compl.¶ 84). Plaintiff alleges that the scheme to defraud New York City is precisely the purpose of each enterprise. (Am.Compl.¶ 85.) Further, Plaintiff alleges that Defendants' business plans depend upon (1) concealment of their customers' purchases from state tax authorities; (2) informing their customers of Defendants' policies of concealment; and (3) concealing purchasers' tax liability from the purchasers themselves. (Am.Compl.¶ 10-12.)

Consequently, each time Defendants use the mails or wires to effect a sale of cigarettes to New York City residents while subsequently failing to file a record of the sale with the New York State tax authorities, in compliance with the Jenkins Act, 15 U.S.C. § 375 et seq., an instance of mail or wire fraud has been committed. (Am.Compl.¶¶ 16, 64, 81, 90, 91). The relevant part of the Jenkins Act provides:

Any person who sells or transfers for profit cigarettes in interstate commerce, whereby such cigarettes are shipped into a State taxing the sale or use of cigarettes, to other than a distributor licensed by or located in such State, or who advertises or offers cigarettes for such a sale or transfer and shipment, shall —

(1) first file with the tobacco tax administrator of the State into which such shipment is made or in which such advertisement or offer is disseminated a statement setting forth his name and trade name (if any), and the address of this principal place of business and of any other place of business; and

(2) not later than the 10th day of each calendar month, file with the tobacco tax administrator of the State into which such shipment is made, a memorandum or copy of the invoice covering each and every shipment of cigarettes made during the previous calendar month into such State; the memorandum or invoice in each case to include the name and address of the person to whom the shipment was made, the brand, and the quantity thereof.

15 U.S.C. 376(a).

Plaintiff's third and fourth claims assert that Defendants' business practices violate New York State's General Business Law § 349 and furthermore, constitute fraud under the common law. (Am.Compl.¶¶ 107, 108, 109, 111, 112, 113.) In particular, Plaintiff cites two practices as deceptive and misleading and thus, unlawful under GBL § 349:(1) Defendants' failure to file the Jenkins Act Reports with the New York State tax authorities and (2) Defendants' on-line representations to its customers that the Defendants are not legally required to file such reports and/or can sell cigarettes "tax free" on the Internet. (Id.)

B. The Defendants

Plaintiff alleges that the Defendants' illegal and fraudulent conduct is carried out by seven enterprises: the "Aabakismokes Enterprise," the "Cigarettespecials Enterprise," the "Dirtcheapcigs Enterprise," the "Paylesscigs Enterprise," the "Smokes-Direct Enterprise," the "Bulkcigs Enterprise," and the "DiscountTobacco Enterprise."4 (Am.Compl.¶ 62.) As explained in detail below, the following Defendants comprise the following enterprises: Defendants Cyco.net, Richard Urrea, and Daniel Urrea comprise the Aabakismokes Enterprise; Defendants Hemi Group, LLC and Kai Gachupin comprise the Cigarettespecials Enterprise; Defendants Dirtcheapcigs.com, Fred Teutenberg IV, and Fred Teutenberg V comprise the Dirtcheapcigs Enterprise; Defendant Michael E. Smith comprises Paylesscigs Enterprise; Defendants Hooray's, Stephen Knopp, and Dmitriy Zilberman comprise the Smokes-Direct Enterprise; Defendants S4L Distributing, Inc. and William C. Baker III comprise the Bulkcigs Enterprise; and Defendants Double B Distributing and William J. Bevins comprise the DiscountTobacco Enterprise. (Am. RICO Stmt. at 1-5.) Each enterprise is a competitor in as much as each sells cigarettes via the Internet. Defendant enterprises reside in and operate from four different states: Kentucky, Missouri, New Mexico and Virginia.

1. Multistate Defendants

For the purposes of this lawsuit, Defendants Cyco.net, Richard A. Urrea, Daniel R. Urrea, Hemi Group, Kai Gachupin, Michael E. Smith, Hooray's Inc., Stephen F. Knopp and Dmitriy Zilberman have joined together to file their 12(b)(3) motion to dismiss. (Pl.'s Mem. of Law at 1.) Plaintiff alleges the Multistate Defendants consist of four separate enterprises: the Aabakismokes Enterprise, the Cigarettespecials Enterprise, the Paylesscigs Enterprise, and the Smokes-Direct Enterprise.

a. Aabakismokes Enterprise

Plaintiff alleges the Aabakismokes Enterprise includes Defendants Cyco.net, Inc., Richard Urrea and Daniel Urrea.

Defendant Cyco.net, Inc. is a publicly traded corporation, organized under the laws of the State of New Mexico with a principal place of business in Albuquerque, New Mexico. (Am.Compl.¶ 20.) Plaintiff alleges Defendant Cyco.net is an associate of Aabakismokes Enterprise (Am.Compl.¶ 67), and that Cyco.net owns and/or controls the Aabakismokes Enterprise.

Cyco.net, Inc. employs four people, all of whom reside in the District of New Mexico. (Urrea Decl. ¶ 6; Am. RICO Stmt. at 2.) Plaintiff alleges that the Aabakismokes Enterprise operates the Internet websites www.aabakismokes.com and www.cycocigs.com. Plaintiff alleges that at the direction of Cyco.net and its principals, Defendants Daniel Urrea and Richard Urrea, the Aabakismokes Enterprise sells cigarettes to New York City residents and conceals the sales from New York State tax authorities. Approximately forty percent of the Aabakismokes Enterprise's Internet sales are to New...

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