VICTOR MARRERO, United States District Judge.
Plaintiffs Kevin Shulman and Caran Ross, in their capacities as co-trustees of the Florence Shulman Pourover Trust, and Estelle Harwood, individually and in her capacity as trustee of the Estelle Harwood Revocable Trust, on behalf of themselves and all others similarly situated (collectively, "Plaintiffs"), brought this action against defendants Chaitman LLP ("Chaitman") and Becker & Poliakoff, LLP ("B&P," and together with Chaitman, "Defendants") alleging breach of fiduciary duty, breach of contract, unjust enrichment, and fraud related to Defendants' representation of Plaintiffs in various lawsuits stemming from the liquidation of Bernard L. Madoff Investment Securities LLC. (
By Order dated August 9, 2018 (Dkt. No. 66), the Court referred general pretrial matters and dispositive motions to Magistrate Judge James L. Cott. Specifically, the Court referred Defendants' motions to dismiss for lack of subject matter jurisdiction. (
On April 11, 2019, Magistrate Judge Cott issued a Report and Recommendation, a copy of which is attached and incorporated herein, recommending that Defendants' Motions to Dismiss be denied and Plaintiffs' Motion to Amend be granted. (
For the reasons stated below, the Court adopts the recommendations of the Report in their entirety.
A district court evaluating a magistrate judge's report may adopt those portions of the report to which no "specific written objection" is made, as long as the factual and legal bases supporting the findings and conclusions set forth in those sections are not clearly erroneous or contrary to law. Fed. R. Civ. P. 72(b);
Because motions to dismiss require a dispositive determination of the parties' claims, a district court's review of a magistrate judge's determination of such a motion is evaluated under the de novo standard applicable to dispositive matters under Federal Rule of Civil Procedure 72(b), as opposed to the clearly erroneous or contrary to law standard applicable to a magistrate judge's ruling as to non-dispositive matters under Federal Rule of Civil Procedure Rule 72(a). A district judge may accept, set aside, or modify, in whole or in part, the findings and recommendations of the magistrate judge.
Upon a de novo review of the full factual record in this litigation, including the pleadings and the parties' respective papers submitted in connection with the underlying motions and in this proceeding, as well as the Report and applicable legal authorities, the Court reaches the same conclusions as Magistrate Judge Cott. The Court further concludes that the findings, reasoning, and legal support for the recommendations made in the Report are consistent with applicable law as set forth in the cases and statutes relied upon therein, and are thus warranted. Accordingly, for substantially the reasons set forth in Magistrate Judge Cott's thorough and detailed Report, the Court adopts in their entirety the Report's factual and legal analyses and determinations, as well as its substantive recommendations, as the Court's ruling on Defendants' Motions to Dismiss (Dkt. Nos. 54, 58) and Plaintiffs' Motion to Amend (Dkt. No. 92).
For the reasons discussed above, it is hereby
JAMES L. COTT, United States Magistrate Judge.
Plaintiffs Kevin Shulman and Caran Ross, in their capacities as co-trustees of the Florence Shulman Pourover Trust, and Estelle Harwood, individually and in her capacity as trustee of the Estelle Harwood Revocable Trust, brought this class action against defendants Becker & Poliakoff, LLP and Chaitman LLP for breach of fiduciary duty, breach of contract, unjust enrichment, and fraud. Plaintiffs' claims arise from defendants' legal representation of them and similarly situated entities and individuals in separate lawsuits related to the liquidation of Bernard L. Madoff Investment Securities LLC.
Defendants have each moved to dismiss this action, arguing that the Court lacks subject-matter jurisdiction over this case. Plaintiffs oppose defendants' motions, asserting that the Court has jurisdiction over this matter under the Class Action Fairness Act, 28 U.S.C. § 1332(d). They contend that the jurisdictional requirements of the Act—minimal diversity, 100 or more class members, and an amount in controversy of at least $5,000,000—have been satisfied and defendants' motions should be denied.
Before the Court is also plaintiffs' motion for leave to amend the First Amended Complaint. Plaintiffs argue that there is good cause to further amend the complaint to add Helen Davis Chaitman, Esq., former Becker and Poliakoff, LLP attorney and currently Chaitman LLP's principal attorney, as a defendant to this lawsuit. They assert that the amendment would cure any alleged jurisdictional deficiencies. Both defendants oppose plaintiffs' motion, arguing that plaintiffs have failed to demonstrate good cause to amend and that their proposed amendment is a futile attempt to cure the jurisdictional defects of this case.
For the reasons discussed below, the Court has jurisdiction over this lawsuit pursuant to the Class Action Fairness Act. Thus, I recommend that defendants' motions to dismiss be denied. In addition, plaintiffs have established good cause to further amend their complaint. Therefore, I recommend that if necessary plaintiffs' motion for leave to amend the First Amended Complaint be granted.
Plaintiffs' lawsuit concerns the legal representation that Helen Chaitman provided to the putative class—victims of the Bernard L. Madoff Investment Securities LLC ("BLMIS") ponzi scheme—when she was their counsel while at the law firms Becker & Poliakoff, LLP ("B&P") and Chaitman LLP. See First Amended Complaint ("FAC") dated January 3, 2018, Dkt. No. 13. As described by plaintiffs, in the underlying liquidation proceedings following the revelation of BLMIS' fraud, trustee Irving Picard was charged with determining the "net equity" of the BLMIS investors (the amount of liquidated BLMIS assets to which each investor was entitled), and redistributing funds from the so-called "net winners" (those who received more funds from BLMIS than they had invested) to the "net losers" (those who invested more funds than they had received). Id. ¶¶ 2, 33-35.
Plaintiffs allege that Helen Chaitman "represented both net winners and net losers in a zero-sum game; the more money collected from some of her clients (the net winners), the more available to be distributed
Plaintiffs also assert that Helen Chaitman herself is a "net loser" and "personally stands to receive money taken from her net winner clients," but nonetheless represented these three groups of clients despite this "irreconcilable conflict," and "bilked hundreds of thousands of dollars (if not more) from each of her net winner clients by actively discouraging them from settling Mr. Picard's clawback actions." Id. ¶¶ 6, 8. Plaintiffs contend that Helen Chaitman represented to "net winner" clients that "continued, full-scale litigation was the only viable option" because Picard "never would settle for less than 100% of what he claimed he was owed." Id. ¶¶ 8, 47. They allege that Picard "imposed no such all-or-nothing condition on settlements," and that Helen Chaitman's misrepresentations induced "full-scale litigation rather than attempts to settle," and "allowed [her] to continue billing [ ] clients hourly for unnecessary—and often unproductive—work." Id. ¶¶ 8, 74.
Plaintiffs assert four causes of action against defendants—breach of fiduciary duty, breach of contract, unjust enrichment, and fraud—and seek compensatory damages and restitution of attorneys' fees paid to B&P and Chaitman LLP, as well as plaintiffs' attorneys' fees and costs. See id. ¶¶ 51-80. Plaintiffs also seek an award of punitive damages for their breach of fiduciary duty claim, asserting that "[d]efendants' conduct amounts to such gross, wanton or willful fraud, dishonesty, or malicious wrongdoing as to involve a high degree of moral culpability, making it appropriate to deter [d]efendants from engaging in similar conduct in the future." Id. ¶ 57.
Plaintiffs allege that "[t]his Court has subject matter jurisdiction over this matter pursuant to 28 U.S.C. § 1332(d) because the amount in controversy, exclusive of interest and costs, exceeds $5,000,000, and at least one member of the proposed class is a citizen of a state different from any defendant." Id. ¶ 16. The FAC defines the proposed class as "all persons who were represented by and paid legal fees to B&P and/or Chaitman LLP in connection with the BLMIS liquidation litigation." Id. ¶ 20. Plaintiffs allege "B&P and Chaitman LLP represented at least more than 40 individual clients in the BLMIS litigation, and, on information and belief, represented hundreds of such clients." Id. ¶ 24.
The named plaintiffs, Kevin Shulman, Caran Ross, and Estelle Harwood, are residents and citizens of New Jersey, California, and Florida, respectively. See id. ¶¶ 11-13. Both B&P and Chaitman LLP are limited liability partnership law firms organized under the laws of New York State, with principal places of business in New York, New York. See id. ¶¶ 14-15. Helen Chaitman was a member of B&P from February 15, 2010 until September 19, 2015, after which she left B&P and founded Chaitman LLP in October 2015. Id.; B&P Answer dated May 7, 2018 ¶ 14, Dkt. No. 31; Chaitman LLP Answer dated May 7, 2018 ¶ 39, Dkt. No. 32.
On November 29, 2017, plaintiffs Kevin Shulman and Caran Ross, in their capacities as co-trustees of the Florence Shulman Pourover Trust, filed their class action complaint against B&P and Chaitman
From January through March 2018, defendants sent various letters to the Court requesting dismissal of the FAC. See Dkt. Nos. 14, 17-18, 20-21. On March 29, 2018, the Court held a telephone conference with the parties to address their submissions and advised them that "the [FAC] contains sufficiently developed and particular factual allegations supporting [p]laintiffs' legal claims to survive a motion to dismiss." Dkt. No. 28, at 5. The Court construed Chaitman LLP's January and February letters and B&P's February and March letters as motions to dismiss the FAC pursuant to Rule 12(b) of the Federal Rules of Civil Procedure and denied both motions. See id.
On May 7, 2018, defendants filed their respective answers to the FAC. See Dkt. Nos. 31-32. B&P's answer included cross-claims against Chaitman LLP for contribution and indemnification, see Dkt. No. 31, at 12; and Chaitman LLP brought counterclaims against plaintiffs Kevin Shulman individually, as trustee for the Florence Shulman Pourover Trust, the Alvin E. Shulman Pourover Trust, and Alvin E. Shulman individually, and as power of attorney for the Alvin E. Shulman Pourover Trust; and Caran Ross individually, see Dkt. No. 32, at 27. On June 4, 2018, plaintiffs Kevin Shulman and Caran Ross filed their answer to Chaitman LLP's counterclaims. See Dkt. No. 35.
On June 8, 2018, this case was referred to me for general pretrial supervision. See Dkt. No. 36.
By Order dated June 21, 2018, I directed the parties to be prepared to address the question of the Court's subject-matter jurisdiction at the June 22 conference. See Dkt. No. 41. Following the June 22 conference, I issued a scheduling order, inter alia, for defendants' Rule 12(h)(3) motions to dismiss for lack of subject-matter jurisdiction. See Dkt. No. 42.
On July 31, 2018, defendants submitted their respective motions to dismiss, along with supporting memoranda of law, declarations, and affidavits. See Chaitman LLP Notice of Motion, Dkt. No. 54; Memorandum of Law in Support of Chaitman LLP's Motion to Dismiss the First Amended Complaint ("Chaitman Mem."), Dkt. No. 56; Declaration of Joan M. Gilbride, Esq., Dkt. No. 55; Declaration of Helen Davis Chaitman, Esq. ("Chaitman Decl.") dated July 30, 2018, Dkt. No. 55-3; Becker & Poliakoff, LLP Notice of Motion, Dkt. No. 58; Memorandum of Law in Support of Defendant Becker & Poliakoff's Motion to Dismiss Plaintiffs' First Amended Complaint ("B&P Mem."), Dkt. No. 61; Declaration of Jamie R. Wozman, Esq. ("Wozman Decl."), Dkt. No. 59; Affidavit of Victor J. DiGioia, Esq. ("DiGioia Aff."), Dkt. No. 60.
On August 28, 2018, defendants submitted their respective reply papers in further support of their motions to dismiss. See Reply Memorandum of Law in Further Support of Chaitman LLP's Motion to Dismiss the First Amended Complaint ("Chaitman Reply Mem."), Dkt. No. 84; Declaration of David Bloom, Esq., Dkt. No. 85; Affidavit of Lourdes Blanco on Behalf of Chaitman LLP ("Blanco Aff."), Dkt. No. 85-1; Reply Memorandum of Law in Support of Defendant Becker & Poliakoff LLP's Motion to Dismiss Plaintiffs' First Amended Complaint ("B&P Reply Mem."), Dkt. No. 89; Reply Declaration of Jamie R. Wozman ("Wozman Reply Decl."), Dkt. No. 88.
Prior to defendants' motions to dismiss being fully submitted, on August 17, 2018, plaintiffs requested a pre-motion conference to discuss their anticipated motion for leave to amend the FAC to name Helen Chaitman as a defendant. See Dkt. No. 74. In their letter, plaintiffs argued that their proposed amendment would "obviate[ ] the subject matter jurisdiction concerns" raised by defendants. Id. at 1. Chaitman LLP responded to plaintiffs' request on August 21, 2018, arguing that plaintiffs' request for leave to amend should be denied. See Dkt. No. 77. After hearing from the parties during a status conference on August 28, 2018, I set a briefing schedule for plaintiffs' motion, and advised the parties that I would address plaintiffs' motion for leave to amend in conjunction with defendants' motions to dismiss in my report and recommendation. See Dkt. No. 90.
On September 21, 2018, plaintiffs moved for leave to amend their FAC to add Helen Chaitman as a named defendant. See Plaintiffs' Notice of Motion and Motion for Leave to Amend to Add Helen Chaitman as a Named Defendant, Dkt. No. 92; Plaintiffs' Memorandum of Law in Support of Motion for Leave to Amend to Add Helen Davis Chaitman as a Named Defendant ("Pls. Mem."), Dkt. No. 93; Affidavit of Dylan Ruga in Support of Motion for Leave to Amend to Add Helen Davis Chaitman as a Named Defendant ("Ruga Aff. for Leave to Amend"), Dkt. No. 94.
On October 5, 2018, defendants submitted their respective opposition papers to plaintiffs' motion. See Memorandum of Law Submitted by Defendant Becker & Poliakoff in Opposition to Plaintiffs' Motion Seeking Leave to Amend to Add Helen David Chaitman as a Named Defendant ("B&P Opp. Mem."), Dkt. No. 100; Defendant Chaitman LLP's Memorandum of
In light of the parties' various dispositive motions, on October 11, 2018, I issued a Memorandum Order staying deposition discovery and reserving decision as to Chaitman LLP's request to bifurcate discovery. See Dkt. No. 104. On January 29, 2019, plaintiffs requested a lift of the deposition stay, but after reviewing their letter and defendants' responses, I denied plaintiffs' application. See Dkt. Nos. 114-17.
Defendants have each moved to dismiss plaintiffs' lawsuit for lack of subject-matter jurisdiction under Rule 12(h)(3) of the Federal Rules of Civil Procedure. Rule 12(h)(3) states: "[i]f the court determines at any time that it lacks subject-matter jurisdiction, the court must dismiss the action." "Motions brought pursuant to Rule 12(h)(3) are subject to the same standards as motions to dismiss for want of subject matter jurisdiction brought pursuant to Rule 12(b)(1)." Castro v. Feliciano, No. 16-CV-901 (WHP), 2018 WL 4265878, at *2 (S.D.N.Y. Sept. 6, 2018) (citations omitted). "Determining the existence of subject matter jurisdiction is a threshold inquiry and a claim is properly dismissed for lack of subject matter jurisdiction... when the district court lacks the statutory or constitutional power to adjudicate it." Morrison v. Nat'l Australia Bank Ltd., 547 F.3d 167, 170 (2d Cir. 2008) (citations omitted).
In deciding a Rule 12 motion to dismiss, "a court must accept as true all of the material factual allegations in the complaint." Anirudh v. CitiMortgage, Inc., 598 F.Supp.2d 448, 449 (S.D.N.Y. 2009) (citations omitted). However, "jurisdiction must be shown affirmatively, and that showing is not made by drawing from the pleadings inferences favorable to the party asserting it." Parker Madison Partners v. Airbnb, Inc., 283 F.Supp.3d 174, 178 (S.D.N.Y. 2017) (citing Morrison, 547 F.3d at 170). "A plaintiff asserting subject matter jurisdiction has the burden of proving by a preponderance of the evidence that it exists." Fountain v. Karim, 838 F.3d 129, 134 (2d Cir. 2016) (citing Makarova v. United States, 201 F.3d 110, 113 (2d Cir. 2000)). "In resolving a motion to dismiss for lack of subject matter jurisdiction ..., a district court may refer to evidence outside the pleadings." Cortlandt Street Recovery Corp. v. Hellas Telecomm., S.A.R.L., 790 F.3d 411, 419, n.5 (2d Cir. 2015) (citing Makarova, 201 F.3d at 113).
The Class Action Fairness Act of 2005 ("CAFA"), Pub. L. No. 109-2, 119 Stat. 4 (2005) (codified, in part, at 28 U.S.C. § 1332(d)), "confer[s] federal jurisdiction over any class action involving `(1) 100 or more class members, (2) an aggregate amount in controversy of at least $5,000,000, exclusive of interest and costs, and (3) minimal diversity, i.e., where at least one plaintiff and one defendant are citizens of different states.'" Cutrone v. Mortgage Electronic Registration Systems, Inc., 749 F.3d 137, 142 (2d Cir. 2014)
Specifically, 28 U.S.C. § 1332(d)(2)(A) provides: "[t]he district courts shall have original jurisdiction of any civil action in which the matter in controversy exceeds the sum or value of $5,000,000, exclusive of interests and costs, and is a class action in which—any member of a class of plaintiffs is a citizen of a State different from any defendant[.]" Further, 29 U.S.C. § 1332(d)(5)(B) states that jurisdiction "shall not apply to any class action in which ... the number of members of all proposed plaintiff classes in the aggregate is less than 100." And 28 U.S.C. § 1332(d)(6) provides: "[i]n any class action, the claims of the individual class members shall be aggregated to determine whether the matter in controversy exceeds the sum or value of $5,000,000, exclusive of interest and costs." "Under CAFA, as under the traditional rule, the party asserting subject matter jurisdiction has the burden of proving it." Blockbuster, Inc., 472 F.3d at 59. Thus, plaintiffs must demonstrate that there is a "reasonable probability" that the jurisdictional requirements of CAFA have been satisfied. Id.
CAFA's relaxed diversity jurisdiction standards require only minimal diversity rather than complete diversity. See F5 Capital v. Pappas, 856 F.3d 61, 80 (2d Cir. 2017) ("CAFA is an independent anchor of jurisdiction ... that requires only minimal diversity ..."). Plaintiffs are citizens of New Jersey, California, and Florida, and both B&P and Chaitman LLP are limited liability partnerships organized under the laws of New York State, with principal places of business in New York, New York. See Pls. Opp. Mem. as to Chaitman LLP at 2, n.1; Pls. Opp Mem. as to B&P at 3; FAC ¶¶ 11-13. In light of the parties' citizenship and the fact that defendants do not dispute that plaintiffs have met their burden as to CAFA's minimal diversity requirement, this element of CAFA jurisdiction has been satisfied.
However, both defendants argue that plaintiffs have failed to meet their burden as to CAFA's $5,000,000 amount-in-controversy requirement. Chaitman Mem. at 4; B&P Mem. at 1. Furthermore, Chaitman LLP contends that plaintiffs have failed to allege that the proposed class consists of 100 or more members. Chaitman Mem. at 4.
In the FAC, plaintiffs allege: (1) "[Helen Chaitman] had signed up hundreds of clients who agreed to pay her hourly fees to defend them against Mr. Picard's clawback lawsuits[,]" FAC ¶ 3; (2) "[defendants] represented at least more than 40 individual clients in the BLMIS litigation, and, on information and belief, represented hundreds of such clients[,]" id. ¶ 24; and (3) "Chaitman LLP's website boasts that `Chaitman
Chaitman LLP disputes that there are at least 100 potential members in the putative class. Chaitman Mem. at 11; Chaitman Reply Mem. at 2. To support its position, Chaitman LLP offers an affidavit from its office manager to demonstrate that it represents only 78 "net winners," Chaitman Reply Mem. at 2; Blanco Aff. ¶ 12 ("The number of cases we were defending as of November 29, 2017 [(the date of the initial filing of plaintiffs' complaint)] was 78...."), but it is unclear whether any of these 78 "cases" involved multiple clients and thus whether the number of "net winner" clients Chaitman LLP actually represents is higher than 78.
Even if it represents only 78 "net winner" clients, Chaitman LLP offers no explanation or authority to rebut plaintiffs' evidence demonstrating that at least 109 of Helen Chaitman's clients, whom she represented when she was at B&P, are potential class members to this action. Nor does it explain why the information on its website regarding its representation of more than 1,600 Madoff customers should be disregarded in evaluating whether plaintiffs have satisfied, at least at this juncture, the 100-plus class members requirement. While Chaitman LLP contends that the proposed class must consist of "at least 100 members per defendant," Chaitman Mem. at 4, it provides no authority to support its position. Notably, CAFA provides that "the number of members of all proposed plaintiff classes in the aggregate" must be at least 100. 28 U.S.C. § 1332(d)(5)(B); see also Aros v. United Rentals, Inc., No. 3:10-CV-73 (JCH), 2011 WL 1647471, at *4 (D. Conn. Apr. 25, 2011) ("CAFA's plain language calls for all proposed plaintiff classes to be aggregated.").
Chaitman LLP also asserts that plaintiffs have not satisfied their pleading burden because the FAC does not allege that the proposed class consists of at least 100 members and only alleges "upon information and belief" that "hundreds" of clients were represented. Chaitman Mem. at 10-11. It argues that "jurisdictional allegations cannot be made upon information and belief." Id. (internal quotations marks and citations omitted).
However, contrary to Chaitman LLP's argument, Chaitman Mem. at 10-11; Chaitman Reply Mem. at 2-3, plaintiffs may make jurisdictional allegations upon information and belief if they have a good faith basis to do so. See, e.g., Sourceone
Here, B&P's invoice as well as Chaitman LLP's website information demonstrate that the proposed class is made up of more than 100 members and that there is "a sound factual basis for invoking" jurisdiction based on plaintiffs' satisfaction of CAFA's class members requirement. Sourceone Healthcare Techs., Inc., 2008 WL 2697324, at *2.
In the absence of any authority or arguments to suggest that CAFA's 100-or-more class members requirement must be satisfied as to
Finally, CAFA's legislative history suggests that the statute is "intended to expand substantially federal court jurisdiction over class actions[,]" and "[i]ts provisions should be read broadly, with a strong preference that interstate class actions should be heard in a federal court...." S. Rep. 109-14, at 43 (2005), 2005 U.S.C.C.A.N. 3, 41. For example, "in cases in which it is unclear whether `the number of members of all proposed plaintiff classes in the aggregate is less than 100,' a federal court should err in favor of exercising jurisdiction over the matter." S. Rep. 109-14, at 42 (2005), 2005 U.S.C.C.A.N. 3, 40. In light of both the plain language and legislative history
Having satisfied the minimal diversity and class members requirements, plaintiffs must also "show that it appears to a `reasonable probability' that the aggregate claims of the plaintiff class are in excess of $5 million." Cutrone, 749 F.3d at 141 (quoting Blockbuster, 472 F.3d at 58). "In satisfying the `reasonable probability' burden, `there is a rebuttable presumption that the face of the complaint is a good faith representation of the actual amount in controversy.'" Hart v. Rick's NY Cabaret Intern., Inc., 967 F.Supp.2d 955, 961 (S.D.N.Y. 2014) (quoting Colavito v. N.Y. Organ Donor Network, Inc., 438 F.3d 214, 221 (2d Cir. 2006) (citation omitted)). "To overcome the face-of-the complaint presumption, the party opposing jurisdiction must show `to a legal certainty' that the amount recoverable does not meet the jurisdictional threshold." Ebin v. Kangadis Food Inc., No. 13-CV-2311 (JSR), 2013 WL 3936193, at *2 (S.D.N.Y. July 26, 2013) (quoting St. Paul Mercury Indem. Co. v. Red Cab Co., 303 U.S. 283, 290, 58 S.Ct. 586, 82 S.Ct. 845 (1938)).
In their FAC, plaintiffs allege: (1) "[Helen] Chaitman bilked hundreds of thousands of dollars (if not more) from each of her net winner clients by actively discouraging them from settling Mr. Picard's clawback actions[,]" FAC ¶ 8; (2) "the amount in controversy ... exceeds $5,000,000, ..." id. ¶ 16; (3) "[plaintiffs] and the members of the proposed class pray for an award of punitive damages...," id. ¶ 57; and (4) "the proposed class [] pray that the Court order disgorgement and restitution of any and all attorneys' fees paid to [defendants] ...," id. ¶ 69. In their prayer for relief they also seek attorneys' fees and costs associated with bringing this action. Plaintiffs contend that their allegations were "made in good faith with sufficient factual content to back it up: the FAC alleges hundreds of clients (¶¶ 3, 20, 46(c)), each of whom executed retainers for hourly-fee or contingency-fee representation (¶¶ 38-45), for legal work related to a multi-billion dollar Ponzi scheme (¶¶ 29-37)." Pls. Opp. Mem. as to B&P at 5.
In their motion papers, defendants identify the amount of fees collected by each law firm for the matters giving rise to this action. According to B&P, it has collected at least $3,204,774 in fees during the relevant time period. See B&P Reply Mem. at 5-6; Wozman Decl., Ex. A (spreadsheet) at 20, Dkt. No. 59-1; DiGioia Aff., Ex. A (ledger) at 2-10, Dkt. No. 60-1; Wozman Reply Decl., Ex. A: B&P Responses to Plaintiffs' Second Set of Interrogatories at 4, 6, Dkt. No. 88-1. Separately, according to Chaitman LLP, it has collected at least $2,761,610.69 in fees during the subject period. Chaitman Reply Mem. at 6; Blanco Aff. ¶¶ 5-10. In the aggregate, these amounts equal $5,966,384.69 and thus exceed the $5,000,000 required amount-in-controversy.
However, defendants argue that plaintiffs' damages against each defendant law firm cannot be aggregated to satisfy CAFA's amount-in-controversy requirement because defendants are not jointly liable for plaintiffs' claims and cannot be held jointly liable for the disgorgement of one another's legal fees. Chaitman Mem. at 12-13; B&P Mem. at 7-8. Defendants point out that the FAC does not plead that defendants are jointly liable and contend that the $5,000,000 amount-in-controversy requirement must be satisfied as to each
In opposing defendants' position, plaintiffs rely on the statutory language of CAFA, 28 U.S.C. §§ 1332(d)(2) and (6), to argue that the damages against each defendant may be aggregated to meet the $5,000,000 requirement. Pls. Opp. Mem as to Chaitman at 10; Pls. Opp. Mem. as to B&P at 7. They also rely on the Supreme Court's decision in Standard Fire Ins. Co. v. Knowles, which observes: "[CAFA] tells the District Court to determine whether it has jurisdiction by adding up the value of the claim of each person who falls within the definition of [plaintiffs'] proposed class and determine whether the resulting sum exceeds $5 million. If so, there is jurisdiction and the court may proceed with the case." 568 U.S. 588, 592, 133 S.Ct. 1345, 185 L.Ed.2d 439 (2013); Pls. Opp. Mem. as to Chaitman at 10; Pls. Opp. Mem. as to B&P at 7. Plaintiffs argue that defendants' motions should be denied because they have not proven to a "legal certainty" that plaintiffs' claims are for less than $5,000,000. Pls. Opp. Mem. as to Chaitman at 14; Pls. Opp. Mem. as to B&P at 1, 6.
Chaitman LLP relies on two out-of-district cases to support its contention that "[w]hile CAFA permits aggregation of claims of separate plaintiffs ... claims against multiple defendants can only be aggregated when the defendants are jointly liable." Chaitman Mem. at 12 (citing Vagle v. Archstone Communities, LLC, No. CV 13-09044 (RGK) (AJWx), 2014 WL 463532 (C.D. Cal. Feb. 5, 2014); Hollinger v. Home State Cty. Mut. Ins. Co., No. 5:09-CV-118, 2010 WL 11530632 (E.D. Tex. Aug. 5, 2010)). It argues that the damages against each defendant are identifiable and separate; and that plaintiffs' claims arise from allegations that each co-defendant breached separate contracts and separately owed fiduciary duties, was enriched by fees that were separately collected, and engaged in intentional misconduct which can only be claimed against a single actor. Chaitman Mem. at 13.
B&P also cites to Vagle and offers two additional out-of-district cases to support defendants' common contention that claims against multiple defendants can only be aggregated when the defendants are jointly liable. See B&P Mem. at 7 (quoting Middle Tenn. News Co. v. Charnel of Cincinnati, Inc., 250 F.3d 1077, 1081 (7th Cir. 2001) ("[W]hen there are two or more defendants, [a] plaintiff may aggregate the amount against the defendants to satisfy the amount in controversy requirement only if the defendants are jointly liable; however, if the defendants are severally liable, plaintiff must satisfy the amount in controversy requirement against each individual defendant.") (emphasis in original); citing Castillo v. Western Range Assoc.,
As applied here, these non-binding authorities are not persuasive because they are factually distinguishable from this lawsuit and/or rely on pre-CAFA or non-CAFA cases to support defendants' proposition that aggregation of damages against multiple defendants is permissible only if defendants are jointly liable. Middle Tenn. News Co. is not a CAFA case and thus is inapplicable. Castillo is a wage-and-hour class action that "essentially consist[ed] of two parallel class actions asserting like claims under similar factual circumstances," but each representative plaintiffs claims were brought against two different sets of employer-defendants and were "wholly unrelated to the claims of the other." 2017 WL 1364584, at *8. In Vagle, different classes of tenants, who lived in different apartment buildings, asserted claims against different management companies and as a result the Vagle court was not persuaded that, under those circumstances, potential damages against all defendants should be aggregated to determine the amount in controversy. 2014 WL 463532, at *3. In addition, the non-aggregation standard articulated in Hollinger should not be applied to this case because it is based on traditional diversity principles and as such relies solely on pre-CAFA and non-CAFA cases. 2010 WL 11530632, at *9.
The non-aggregation standards articulated in these cases do not apply here because plaintiffs and other potential class members make up the same group of clients who were represented by the same attorney in the same underlying BLMIS litigation during the two successive time periods when Helen Chaitman worked at B&P and then at Chaitman LLP. The claims brought against B&P are wholly related to the claims brought against Chaitman LLP and all arise from the common denominator of Helen Chaitman's representation of plaintiffs and the putative class in their BLMIS lawsuits.
Although I did not find any additional authorities in this Circuit addressing the issue of whether aggregating damages against multiple defendants, absent joint liability, is permissible in order to meet CAFA's amount-in-controversy requirement, the Supreme Court in Exxon Mobil Corp. v. Allapattah Services, Inc. did recognize that CAFA "abrogates the [traditional] rule against aggregating claims." 545 U.S. 546, 571, 125 S.Ct. 2611, 162 L.Ed.2d 502 (2005). Moreover, the Second Circuit in Blockbuster found that "[u]nlike the general diversity statute ... CAFA explicitly provides for aggregation of each class member's claims in determining whether the amount of controversy is at least $5,000,000." 472 F.3d at 59 (citing 28 U.S.C. § 1332(d)(6)). See also Nguyen v. FXCM Inc., 364 F.Supp.3d 227, 237-238 (S.D.N.Y. 2019) (CAFA explicitly provides for aggregation of claims in determining amount in controversy).
In the absence of any direct authority, CAFA's statutory language should control. CAFA explicitly provides: "[t]he district courts shall have original jurisdiction of any civil action in which the matter in controversy exceeds the sum or value of $5,000,000 ...." 28 U.S.C. § 1332(d)(2). It also provides: "claims of the individual class members shall be aggregated to determine whether the matter in controversy exceeds the sum or value of $5,000,000." 28
Here, defendants have offered evidence demonstrating that the aggregate amount of fees collected by them from their BLMIS clients alone—without considering plaintiffs' other potential damages—equals $5,966,384.69 ($3,204,774 on B&P's part and $2,761,610.69 on Chaitman LLP's part). This amount exceeds CAFA's $5,000,000 threshold. Thus, defendants' own evidence establishes that CAFA's amount-in-controversy requirement has been satisfied.
Presumably, if Helen Chaitman had not left B&P and started her own law firm, the amount-in-controversy would not even be an issue in this case, given this aggregate amount of fees. It would be an anomalous result, therefore, if the Court were to find in the face of the particular facts of this case and the legislative history of CAFA that it lacked subject-matter jurisdiction and the dispute should be litigated in state court. Moreover, as is discussed below, if Helen Chaitman herself needs to be added as a defendant in this case to ensure there is a sufficient predicate for liability, then plaintiffs' motion to amend should be granted.
In light of the conclusion that there is subject-matter jurisdiction over both defendants on the current record, it is not necessary to reach plaintiffs' motion for leave to further amend the pleadings to add Helen Chaitman as a named defendant in this lawsuit. However, should the reviewing Court disagree with that conclusion, then for the reasons discussed below the proposed amendment should be permitted to cure any purported jurisdictional deficiency.
Rule 15(a)(2) of the Federal Rules of Civil Procedure provides that in cases in which a party has already amended its pleadings once as a matter of right, "a party may amend its pleading only with the opposing party's written consent or the court's leave." Fed. R. Civ. P. 15(a)(2). While a district court should "freely give leave [to amend] when justice so requires," id., "[a] district court has discretion to deny leave for good reason, including futility, bad faith, undue delay, or undue prejudice to the opposing party." McCarthy v. Dun & Bradstreet Corp., 482 F.3d 184, 200 (2d Cir. 2007). "`Where ... a scheduling order governs amendments to the complaint,' and a plaintiff wishes to amend after the deadline to do so has passed, the plaintiff must show good cause to modify the deadline under Rule 16." BPP Illinois, LLC v. Royal Bank of Scotland Grp. PLC, 859 F.3d 188, 195 (2d Cir. 2017) (quoting Holmes v. Grubman, 568 F.3d 329, 334-35 (2d Cir. 2009)). "Whether good cause exists turns on the diligence of the moving party." Holmes, 568 F.3d at 335 (citation omitted).
"While motions to amend are generally governed by Rule 15(a), Rule 21 controls if the proposed amendment adds new parties." Bridgeport Music Inc. v. UMG Recordings, Inc., No. 05-CV-6430 (VM) (JCF), 2008 WL 113672, at *2 (S.D.N.Y. Jan. 10, 2008), adopted by Bridgeport Music, Inc. v. Universal Music Grp., Inc., 248 F.R.D. 408 (S.D.N.Y. Feb. 15, 2008). Rule 21 states: "the court may at any time, on just terms, add or drop a party." Fed. R. Civ. P. 21. "In deciding whether to permit joinder, courts apply the `same standard of liberality afforded to motions to amend pleadings under Rule 15.'" Bridgeport Music Inc., 248 F.R.D. at 412 (quoting Soler v. G&U, Inc., 86 F.R.D. 524, 528 (S.D.N.Y. 1980)).
As a threshold matter, the parties do not dispute that their joint proposed scheduling order indicated a June 8, 2018 deadline to amend any pleadings. See Pls. Mem. at 4; Chaitman Opp. Mem. at 7. However, there is no order on the docket reflecting that June 8 deadline. While the parties emailed a joint proposed scheduling order to the Court on June 20, 2018, indicating their agreement to a June 8 deadline to amend or join parties, see Ruga Aff. for Leave to Amend ¶ 3; Chaitman Opp. Mem. at 7, this deadline was not included in the June 22, 2018 scheduling order, see Dkt. No. 42, and the parties did not address this deadline at the June 22, 2018 initial pre-trial conference or seek to include this deadline in any court order
Based on the conclusions contained in this Report, it is not necessary for plaintiffs to add Helen Chaitman as a defendant to satisfy CAFAs jurisdictional requirements; nonetheless, there is good cause to grant plaintiffs' motion in light of Helen Chaitman's involvement in the underlying BLMIS litigation. It is evident that Helen Chaitman "is the focal point of this action" because she was "the principal attorney for plaintiffs and proposed class members at both [B&P and Chaitman LLP]." Pls. Mem. at 8-9. She has been identified in all parties' Rule 26(a) initial disclosures and has been the focus of plaintiffs' allegations and discovery. Id. at 9. Helen Chaitman has been the managing partner of Chaitman LLP since it was formed in September 2015. Chaitman Decl. ¶ 2. Prior to that time, she was a shareholder of B&P from February 2010 to September 18, 2015. DiGioia Aff. ¶ 5.
New York Partnership Law provides: "each partner, employee or agent of a partnership which is a registered limited liability partnership shall be personally and fully liable and accountable for any negligent or wrongful act or misconduct committed by ... her ... while rendering professional services on behalf of such registered limited liability partnership ..." N.Y. Partnership Law § 26(c)(i) (McKinney). It also provides: "each shareholder... of a ... registered limited liability partnership ... that is a partner, employee or agent of a partnership which is a registered limited liability partnership shall be personally and fully liable and accountable for any negligent or wrongful act or misconduct committed by ... her... while rendering professional services in ... her capacity as a partner, employee or agent of such registered limited liability partnership." Id. § 26(c)(ii). Here, there is no dispute that defendants are limited liability partnership law firms and the FAC sufficiently alleges facts with respect to Helen Chaitman's representation of plaintiffs and the putative class. In light of plaintiffs' allegations and her positions at each defendant law firm, Helen Chaitman's purported misconduct exposes her to liability in this lawsuit under New York's partnership laws.
For the most part, defendants argue that plaintiffs' proposed amendment is a futile attempt to cure jurisdictional defects, but in those same arguments they acknowledge Helen Chaitman's potential liability in this lawsuit. Chaitman LLP observes that plaintiffs "could ... allege that [Helen] Chaitman is jointly and severally liable with Chaitman LLP (i.e. after September 2015, during her tenure as a partner of [Chaitman LLP]) and/or that she is jointly and severally liable with [B&P] (i.e. before September 2015, during her tenure as a partner of [B&P])." Chaitman Opp. Mem. at 16. B&P also recognizes that under New York's partnership laws, it "would be jointly liable with [Helen] Chaitman for the alleged wrongful acts she committed on behalf of [B&P] within the reasonable scope of the firm's business" from February 2010 through September 2015. B&P Opp. Mem. at 5; B&P Reply Mem. at 9-10. B&P further suggests that "[Helen] Chaitman may be individually liable for the approximately $2.7 million in fees her current firm [(Chaitman LLP)] collected in the matters giving rise to this suit, since those fees were generated as a result of the acts she committed on behalf of Chaitman LLP." Id. at 5-6. While no determination as to the allocation of any party's liability need be made at this stage of the lawsuit, New York's partnership laws support
It is also noteworthy that plaintiffs are not seeking to add any new claims and are prepared to voluntarily dismiss the pending related action against Helen Chaitman if their motion to amend is granted. Pls. Mem. at 9, 16. See Bridgeport Music, Inc., 248 F.R.D. at 415 (motion to amend granted because "[t]he interests of judicial economy [] favor adding [new defendant] as a party to this action over deferring claims against it to separate future action. The plaintiffs' claims against [new defendant] are identical to those already in the case..."); Randolph-Rand Corp. of N.Y. v. Tidy Handbags, Inc., No. 96-CV-1829 (DF), 2001 WL 1286989, at *4 (S.D.N.Y. Oct. 24, 2001) (motion to amend granted even though proposed amendments would add additional parties because claims against additional parties are identical to those raised in original complaint and defendants did not show that addition of parties would affect duration or scope of discovery).
As to defendants' other arguments, Chaitman LLP claims that plaintiffs' motion should be denied, in part, because of plaintiffs' delay, see Chaitman Opp. Mem. at 11, and B&P points out that plaintiffs' motion is procedurally defective because it does not include a proposed amended complaint. See B&P Opp. Mem. at 1. Indeed, plaintiffs failed to comply with proper motion practice in that regard. Moreover, Chaitman LLP's point is well-taken— "[p]laintiffs were well aware of the extent of [Helen] Chaitman's involvement in the underlying representation," Chaitman Opp. Mem. at 10, and should have acted more expeditiously to name her as a defendant.
But this case is still relatively in its early stages and the parties have not taken any depositions to date due to the stay imposed by the Court. Procedural deficiencies and delay alone are insufficient reasons to prohibit plaintiffs' proposed amendment, especially in the absence of any arguments relating to bad faith or undue prejudice (which defendants do not assert). See, e.g., Hinds Cty., Miss. v. Wachovia Bank N.A., 885 F.Supp.2d 617, 626 (S.D.N.Y. 2012) ("Delay alone, in the absence of an additional reason such as prejudice to the opposing party, usually does not warrant denial of leave to amend.") (citation omitted). The balance of considerations thus weighs in favor of granting plaintiffs' motion.
For the foregoing reasons, the Court has jurisdiction over this lawsuit under the Class Action Fairness Act as there is minimal diversity, there are more than 100 potential class members, and the amount in controversy exceeds $5,000,000. Therefore, I recommend that defendants' motions to dismiss for lack of subject-matter jurisdiction be denied. In addition, plaintiffs have established good cause to amend the First Amended Complaint to add Helen Chaitman as defendant should it be necessary to do so for jurisdictional purposes. Therefore, I recommend that plaintiffs' motion to amend be granted.
Pursuant to 28 U.S.C. § 636(b)(1) and Rule 72(b) of the Federal Rules of Civil Procedure, the parties shall have fourteen (14) days from service of this Report to file written objections. See also Fed. R. Civ. P. 6. Such objections, and any responses to such objections, shall be filed with the Clerk of Court, with courtesy copies delivered to the chambers of the Honorable Victor Marrero and to the chambers of the
