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The STATE of New York, City of New York, ex rel. Leonard M. Campagna, Plaintiff, v. POST INTEGRATIONS, INC., Ebocom, Inc. and Mary Gerdts, Defendants.
In this qui tam action brought on behalf of the State of New York (“State”) 1 and the City of New York (“City”), defendants Post Integrations, Inc. (“Post”), Ebocom, LLC a/s/h/a Ebocom, Inc. (“Ebocom”), and Mary Gerdts (“Gerdts”) (collectively, hereinafter “defendants”) seek dismissal of plaintiff-relator Leonard M. Campagna's (“Campagna”) First Amended Complaint with prejudice, pursuant to CPLR 3211(a)(7) and 3016(b), for failure to state a cause of action and for failure to plead fraud with specificity, and pursuant to New York State Finance Law (“Finance Law”) Section 190(6)(d), for attorneys' fees and costs. For the reasons stated herein, this Court finds that Campagna's First Amended Complaint, construed in the light most favorable to him, sets forth a cause of action asserting that defendants violated Section 189(1)(g) of the New York False Claims Act (“False Claims Act” or “FCA”), consisting of the Finance Law at Section 187 et seq., but dismisses, without prejudice and with leave to replead, the causes of action in the complaint based upon purported violations of Finance Law Sections 189(1)(h) and 189(1)(c).
Factual and Procedural History
Campagna commenced this action by filing a Complaint on or about May 6, 2014 alleging violations of the False Claims Act. After the Attorney General declined to intervene in this litigation, Campagna elected to continue the action, pursuant to Finance Law Section 190(2)(f), and filed a verified First Amended Complaint dated May 22, 2015, alleging that defendants violated Sections 189(1)(c), (g), and (h) of the Finance Law. The First Amended Complaint contains two causes of action involving three categories of false claims resulting from defendants' purported knowing refusal to pay franchise and other corporate taxes to both the State and the City. Campagna alleges the following:
Defendants continuously and systematically engaged in transactions in New York pursuant to their agreements with some of the most prominent hotels in New York. These activities produced significant gross receipts on a daily basis for more than five years through credit card transactions that were initiated and closed in New York and affecting New York visitors and residents who used their credit cards at New York hotel properties. These credit card transactions were processed through sponsoring banks that were based in or conduct financial transactions in New York, establishing a clear nexus between Defendants' business activities and the state.
Sinatra, Jr. Aff. Ex. C, ¶ 1 (First Amended Complaint). More specifically, Campagna contends that defendants purposefully structured their contracts for services with New York hotels such that all services were “deemed” to have been performed in Arizona in order to avoid paying New York taxes. Id. ¶¶ 1-2, 4. Further, Campagna alleges, upon information and belief, that defendants and their employees travelled to New York “to consult with and service their New York clients,” as all three defendants emphasized customer service and Post boasted of its close relationship with New York customers. Id. ¶¶ 3, 35-37, 56, 58. As a result, Campagna asserts that Post and Ebocom have violated the New York Business Corporation Law (“BCL”) and the New York Tax Law (“Tax Law”) by failing to properly register in New York for the purpose of conducting business in the State, file required certificates for said purpose, and pay State franchise taxes and the General Corporation Tax (“GCT”) as required by the City. Id. ¶ 70.
In his first cause of action, Campagna alleges that defendants violated Section 189(1)(g) of the Finance Law by having “intentionally structured their contracts to avoid tax consequences by falsely characterizing their business activities as being ‘deemed’ to take place in Arizona” and in so doing “knowingly made, used, or caused to be made or used, false records or statements material to an obligation to pay or transmit money or property to the state and local governments.” Id. ¶ 82. Additionally, Campagna alleges that defendants violated Section 189(1)(h) of the Finance Law such that they “knowingly concealed or knowingly and improperly avoided or decreased an obligation to pay or transmit money or property to the state or local government, specifically fees owing to the state of New York for out-of-state business required to register in the state.” Id. ¶ 83. In his second cause of action, Campagna alleges that defendants violated Section 189(1)(c) of the Finance Law by conspiring to commit a violation of Finance Law Section 189(1)(g). With respect to both causes of action, Campagna alleges that defendants' actions constitute conduct prohibited by Article 9-A of the Tax Law and Title 11, Chapter 6, Subchapter 2 of the New York City Administrative Code (“Administrative Code”) by depriving the State and City of franchise and corporate tax revenues. Further, Campagna asserts, upon information and belief, that the threshold requirements contained in Finance Law Sections 189(a)(4)(i) and (ii) have been met because defendants have a net income or sales in excess of $1,000,000 for any taxable year at issue in this litigation and Campagna has pleaded damages in excess of $350,000.
I. Finance Law Section 189(1)(h)
Finance Law Section 189(1)(h) is limited in its application to tax False Claims Act cases by Finance Law Section 189(4)(a)(iii), which specifically excludes liability under paragraph (h) in tax law cases: “This section shall apply to claims, records, or statements made under the tax law only if ․ (iii) the person is alleged to have violated paragraph (a), (b), (c), (d), (e), (f) or (g) of subdivision one of this section.” Campagna concedes the inapplicability of this provision to False Claims Act cases involving tax law, but asserts that the “[c]omplaint does not, however, seek recovery on behalf of the State and City of New York under Section 189(1)(h) except with respect to fees,” such as “registration and other fees owed but avoided by [d]efendants.” Pl.'s Mem. in Opp'n, at 4. Nonetheless, a claim under Finance Law Section 189(1)(h) fails in this instance for several reasons.
First, in order to recover fees allegedly avoided by defendants' failure to register out-of-state businesses for the purpose of doing business in New York State under Finance Law Section 189(1)(h), Campagna should have specifically alleged violations of the applicable sections of both the BCL, Section 104-A(l), and the New York Limited Liability Company Law, Section 1306(c), that require foreign corporations and limited liability companies, respectively, to pay a fee to register the entity with the Secretary of State in order to do business in New York. Instead, Campagna merely refers to the BCL in the First Amended Complaint with respect to the fact that an out-of-state corporation must apply to register to do business in New York. First Am. Compl., ¶ 61. Absent any specific alleged violation of the BCL or the Limited Liability Company Law, the First Amended Complaint fails to give defendants adequate notice of such a claim and the related relief being sought. The First Amended Complaint, even if liberally construed, cannot be read to contain such an allegation. Accordingly, for this reason, Campagna's cause of action under Finance Law Section 189(1)(h) must be dismissed as it is insufficiently pleaded.
Second, Campagna's cause of action under Finance Law Section 189(1)(h) must also be dismissed on the ground that any fees or penalties that are owed and unpaid under State and City tax laws based upon defendants' failure to register to do business in New York are not recoverable because Finance Law Section 189(1)(h) is inapplicable to violations of the tax law. As a basis for his cause of action under Finance Law Section 189(1)(h), Campagna alleges a violation of the Tax Law to the extent that “all authorized foreign corporations pay an annual maintenance fee of $300 to the Department of Taxation and Finance.” Id. ¶ 62. Campagna, however, improperly alleges that defendants violated provisions of the tax law, specifically Article 9-A of the Tax Law and Title 11, Chapter 6, Subchapter 2 of the Administrative Code. As a result, Campagna's first cause of action alleging false claims pursuant to Finance Law Section 189(1)(h) is dismissed with leave to replead.
II. Finance Law Section 189(1)(g)
The remainder of Campagna's first cause of action alleging the filing of false claims pursuant to Finance Law Section 189(1)(g) survives the instant motion to dismiss. Under this section of the Finance Law, Campagna alleges that defendants made fraudulent statements relating to tax issues. While defendants argue that the First Amended Complaint fails to assert a cause of action under Finance Law Section 189(1)(g) because the false statements were not contained in a tax filing or other document presented to the New York State government, this argument is without merit. According to what is tantamount to an amicus curiae brief by the Attorney General's Office, the False Claims Act “explicitly prohibits intentionally or recklessly false records or statements concerning tax liabilities, whether or not they are made or presented to a tax authority.” Atty. Gen. Br., at 1. As a result, the Attorney General states that “[d]efendants' interpretation of the statute ignores this language, and would achieve the contradictory result of eliminating from the [False Claims] Act's scope an entire class of tax violations—that of non-filers.” Id. The Attorney General further states that “[t]here is no basis in the statute or the legislative intent, let alone any caselaw, for such an interpretation. Accordingly, it should be rejected, and [d]efendants' motion to dismiss should be denied insofar as it rests on this interpretation of the Act.” Id. As the Attorney General's Office is a proper executive agency to take a position on the interpretation of the False Claims Act, the Court will follow this interpretation as it is neither arbitrary or irrational. See In re Consol. Mut. Ins. Co. (Arcade Cleaning Contractors, Inc.), 60 NY2d 1, 8 (1983) (stating that the Superintendent of Insurance's interpretation of the insurance law should be upheld unless irrational or unreasonable); Corcoran v. Am. Transit Ins. Co., 170 AD2d 268 (1st Dep't 1991) (stating that the Superintendent of Insurance's interpretation of the insurance law was entitled to deference unless irrational); see also Suter v. Gen. Accident Ins. Co. of Am., 2006 WL 2000881 (D.N.J. 2006), vacated, Goldman v. Gen. Accident Ins. Co. of Am., 2007 WL 2781935 (D.N.J. 2007) (stating that it was unreasonable to rely on out of state agency cases to determine the applicable legal standard).
In further support of both Campagna's cause of action under Finance Law Section 189(1)(g) and against defendants' argument that Campagna failed to allege the requisite scienter for a false claim under this section, both the Attorney General's Office and the statute itself only require a false statement material to an obligation to pay to be made recklessly. Finance Law Sections 189(1)(a) and (b) impose liability on any person who “knowingly presents, or causes to be presented a false or fraudulent claim for payment or approval” (Fin. L. § 189(1)(a) ) or who makes or uses a materially false record or statement material to such presentation (id. § 189(1)(b) ). Finance Law Section 189(1)(g), however, imposes liability on any person who “knowingly makes, uses, or causes to be made or used, a false record or statement material to an obligation to pay or transmit money or property to the state or a local government.” Despite the fact that Finance Law Section 189(1)(g) includes the term “knowingly,” the False Claims Act also defines “knowingly” to mean “that a person, with respect to information ․ (ii) acts in deliberate ignorance of the truth or falsity of the information; or (iii) acts in reckless disregard of the truth or falsity of the information; and (b) require[s] no proof of specific intent to defraud.” Fin. L. §§ 188(3)(a)(ii)-(iii), (b). Finance Law Section 188(3)(b) does contain the caveat that “acts occurring by mistake or as a result of mere negligence are not covered by this article.” Nevertheless, contrary to defendants' argument, Campagna has pleaded allegations which indicate that “[d]efendants intentionally structured a scheme to avoid the obligation to pay taxes with the knowledge that they had to pay taxes in New York (Complaint at ¶¶ 2, 5, 82).” Pl.'s Mem. in Opp'n, at 6. Defendants do not contest the materiality of the statements, merely that they were not directed to the government in part because no tax returns that could possibly contain a false statement were ever filed in New York. However, Campagna has alleged that defendants made material false statements to customers, card networks, and the Internal Revenue Service.2
More importantly, Section 189(1)(g) of the Finance Law does not require that any false statement or record be made or presented to a government agency. State ex rel. Seiden v. Utica First Ins. Co., 96 AD3d 67, 71-72 (1st Dep't 2012). As applied in this instance, defendants would not be required to file a tax return with New York tax authorities in order to be held liable under the False Claims Act for making a false statement. As stated in Seiden:
To allege a reverse false claim [under Section 189(1)(g) ], a plaintiff must state facts tending to show: “(1) that the defendant made, used, or caused to be used a [material] record or statement to conceal, avoid, or decrease an obligation to [the government]; (2) that the statement or record was false; (3) that the defendant knew that the statement or record was false; and (4) that [the state] suffered damages as a result.”
Id. (third and fourth alterations in original) (quoting United States v. Raymond & Whitcomb Co., 53 F. Supp. 2d 436, 444-45 (S.D.NY 1999) ).3 Courts have construed nearly identical language in the federal False Claims Act in the same manner: “We note that for a reverse false claim action, presentment of a false claim is not at issue and presentment of a false statement is not required by the statute and thus, does not need to be pled.” U.S. ex rel. Matheny v. Medco Health Sols., Inc., 671 F.3d 1217, 1224 n.12 (11th Cir. 2012). As indicated by the Attorney General's Office, “[t]he [False Claims] Act therefore imposes, by its plain meaning, liability for tax violations above certain monetary thresholds whether or not a filing has been made with the State or local tax authorities.” Atty. Gen. Br., at 4.
Moreover, William J. Comiskey, Esq., a partner at Hodgson Russ LLP, the firm representing defendants in this action, who is also a former deputy commissioner for tax enforcement at the New York State Department of Taxation and Finance (“Department of Taxation and Finance” or “DTF”), specifically described this type of False Claims Act tax offenses in a set of 2011 CLE course materials as stated below:
Non-filing tax evaders: The [FCA] covers tax violations that are based upon a knowingly false record or statement material to a tax obligation. Such violations will generally involve false returns (or related documents) or false documents submitted by the taxpayer (or false statements made by the taxpayer) to the Department during audit or some similar time.
What about those who evade by not filing? The FCA imposes liability if the individual knowingly “makes, uses or causes to be made or used, a false record or statement material” to the individual's tax obligation. By its terms the statute does not require a filed return. Instead, liability can be predicated on any false record or statement material to the tax obligation, even if that false record or statement is not filed with the Department. Generating a false set of books, falsifying records to hide a fact (such as, for example, residency in New York) or even filing a false return in another jurisdiction are some false records that might provide a possible basis for liability under the FCA.
William J. Comiskey, Esq., Tax Whistleblowers and the New York False Claims Act, at 8 (2011), available at http://www.nycla.org/pdf/Hot%20Topics%20in%20Tax%20Book.pdf (emphasis added) (footnote omitted) (quoting Fin. L. § 189(1)(g) ). The commentary by Comiskey regarding the requirements of the False Claims Act, while not an admission by defendants, highlights that the principle that false statements do not need to be made directly to the government has not been considered a disputed legal proposition by academics and individuals with expertise in the False Claims Act.
Defendants attempt to evade liability under Section 189(1)(g) of the Finance Law by referring to Finance Law Section 189(4)(b), which provides that the Attorney General must consult with the Commissioner of the Department of Taxation and Finance prior to litigating actions involving tax-related violations of the False Claims Act. See Defs.' Supp. Reply Mem., at 2. Finance Law Section 189(4)(b), however, does not limit the False Claims Act's application to tax-related violations. Instead, this section instead provides only that, if the Attorney General to file a qui tam action or intervene in such an action “that is based on the filing of false claims, records or statements made under the tax law,” “[t]he attorney general shall consult with the commissioner of the department of taxation and finance.” Fin. L. § 189(4)(b). Contrary to defendants' assertions, this provision is in no way related to the applicability of Finance Law Section 189(1)(g) with respect to tax violations. Instead, Finance Law Section 189(4)(a) explicitly states that “[t]his section shall apply to claims, records, or statements made under the tax law” that meet specific requirements. Section 189(4)(b) merely explains the procedure that must take place should the Attorney General's Office involve itself in a tax-related qui tam action without limiting the scope or applicability of Finance Law Section 189 to tax-related violations.
Additionally, defendants' motion to dismiss fails due to State and City tax laws. Defendants urge that Tax Law Section 209(1)(a), which applies an Article 9-A franchise tax on out-of-state corporations for the privilege of “doing business, or of employing capital, or of owning or leasing property in this state in a corporate or organized capacity, or of maintaining an office in this state,” does not apply in this instance since they lack the required nexus with New York to impose such a tax.4 Defendants assert that “merely marketing to a New York customer base and deriving receipts from those customers” (Defs.' Mem., at 13), as well as sending employees to the State, and City, is insufficient to establish such a nexus. However, defendants fail to fully quote Tax Law Section 209(1)(a), which also provides that the Article 9-A franchise tax applies to an out-of-state corporation “deriving receipts from activity in this state.” On that basis alone, Campagna's allegations that defendants have derived receipts from electronically processing credit card transactions “that were initiated and closed in New York” that affected “New York visitors and residents who used their credit cards at New York hotel properties,” which produced “gross receipts on a daily basis for more than five years,” require denial of the instant motion. Sinatra Aff. Ex. C, ¶ 1 (First Amended Complaint); id. ¶ 52. Furthermore, defendants owe an obligation to pay franchise taxes to the State and the City based upon their economic activities in the State.5
Putting aside the fact that the First Amended Complaint sufficiently alleges submissions of false claims in violation of Tax Law Article 9-A in this regard, defendants have a sufficient nexus with New York to subject it to State tax obligations. Indeed, the Appellate Division, First Department has clarified the “substantial nexus” standard, which no longer expressly requires the location of an office within the State in order to constitute a physical presence for “doing business.” As stated in Amazon.com, LLC v. New York State Department of Taxation & Finance, 81 AD3d 183, 195 (1st Dep't 2010):
The sine qua non for the finding that a party has a substantial nexus with New York, and is thus required to collect sales or use taxes, is that it have a physical presence within the state ( [Matter of Moran Towing Corp. v. Urbach, 99 NY2d 443, 449 (2003) ], citing Matter of Orvis Co. v Tax Appeals Trib. of State of NY, 86 NY2d 165 , cert denied sub nom. Vermont Info. Processing, Inc. v Commissioner, NY State Dept. of Taxation & Fin., 516 US 989 ; see also National Bellas Hess, Inc. v Department of Revenue of Ill., 386 US 753  ). Nevertheless, “[w]hile a physical presence of the vendor is required, it need not be substantial” (Orvis Co. at 178). While it must constitute more than a “ ‘slightest presence’ ” (id., quoting National Geographic Soc. v California Bd. of Equalization, 430 US 551, 556  ), “it may be manifested by the presence in the taxing State of the vendor's property or the conduct of economic activities in the taxing State performed by the vendor's personnel or on its behalf” (Orvis Co. at 178).
81 AD3d at 195 (second alteration in original) (emphasis added); see also, e.g., Overstock.com, Inc. v. New York State Dep't of Taxation & Fin., 20 NY3d 586, 595 (2013) (“The presence requirement will be satisfied if economic activities are performed in New York by the seller's employees or on its behalf.”). Further, the Court of Appeals concluded that even visits by a company's employees for the purpose of troubleshooting or “to establish and maintain a market” for sales of its product constituted “activities in New York [that] were, thus, definite and of greater significance than merely a slightest presence.” Orvis Co. v. Tax Appeals Tribunal of State of NY, 86 NY2d 165, 181 (1995). Taking Campagna's following allegations as true: that defendants provide credit card processing services to several prominent hotels in New York (Sinatra Aff. Ex. C, ¶¶ 9, 26, 43), that defendants' employees visited New York to engage with clients (id. ¶ 58), and that defendants emphasize close interactions and personalized services with its clients (id. ¶¶ 27, 28, 30, 31, 35-37), this Court finds that defendants have a substantial nexus with New York that is greater than the “slightest presence” in the State. Accordingly, defendants' economic activities performed in the State by processing credit card swipes for New York hotels constitutes a “substantial nexus” with New York that could subject it to State and City tax obligations.6
Moreover, the City submitted a statement of interest in this matter to address defendants' argument that they are not subject to GCT because they are not “doing business” in New York.7 The City sets forth the following interpretation of the relevant City tax law as set forth in the Administrative Code:
A corporation is subject to GCT if it is “doing business” in the City for any part of the tax year. See N.Y.C. Ad. Code § 11-603(1). There are four bases for GCT, one of which is the corporation's entire net income allocable within the City. Id. § 11-604(1). The portion of entire net income to be allocated within the City is a function of the corporation's “business allocation percentage.” Id. § 11-604(3)(a). This number is calculated based on, among other factors and certain exceptions not relevant here, the percentage of the corporation's worldwide “receipts” arising from (i) sales of tangible personal property within the City; (ii) “services performed within” the City; (iii) rentals from property situated in the City; and (iv) “all other business receipts earned within” the City. Id. § 11-604(3)(a)(2). Thus, a corporation that earns revenue within the City, from services performed in the City or otherwise, is subject to GCT liability. Id.; see also 19 R.C.NY § 11-65(b).
City's letter dated March 20, 2017 by Brian T. Horan, Esq., Assistant Corporation Counsel, at 1. The specific allegations, as set forth in the First Amended Complaint, indicate that Post contracted both with banks and merchants in order to process credit card transactions. First Am. Compl., ¶¶ 15, 19, 26-28, 57. Post's clients included New York City-based hotels such as the Trump Hotel Collection, Hilton Hotels, Intercontinental Hotels and Resorts, the Mandarin Oriental, and the Waldorf Astoria-New York (id. ¶¶ 2, 26), to which defendants traveled in order to service these clients as part of “a ‘consultative’ approach that emphasizes high-end expertise and close interaction with clients to create a personalized and customized relationship” (id. ¶ 28; see also id. ¶¶ 3, 58). As a result of these contracts with the aforementioned New York customers, defendants generated more than $1 million in net sales. Id., ¶ 59. The above allegations, taken as true, indicate that Post conducted business with New York clients, serviced these clients in New York, and generated a significant amount of revenue from them as a result. As such, Post received revenue that arose from services performed within the City, which subjects them to GCT. N.Y.C. Admin. Code §§ 11-603(1), 11-604(3)(a)(2)(B).
Similarly, Ebocom's attempt to avoid liability for its failure to pay State and City taxes by asserting that it is incorrectly sued as a corporation, instead of a limited liability company (“LLC”), fails. Defendants assert that both the franchise tax under Article 9-A of the Tax Law and GCT are imposed only on corporations and Ebocom has not made any election to be taxed as a corporation. The Department of Taxation and Finance, however, has stated that “a foreign LLC or LLP that conducts business or other activities in New York State is not relieved of its obligation to apply for Tax Department registration and licenses, and, if applicable, to pay the annual filing fee and/or to make estimated tax payments on behalf of certain partners, simply because it fails to register with the Department of State.” New York State Department of Taxation and Finance, Publication 16: New York Tax Status of Limited Liability Companies and Limited Liability Partnerships, at 5 (Nov. 2014), available at https://www.tax.ny.gov/pdf/publications/multi/pub16.pdf. The Department of Taxation and Finance has stated that an LLC is doing business in New York if it “performs a series of acts or transactions in New York State with regularity or continuity for livelihood or profit, as distinguished from isolated or incidental transactions.” Id. at 7. Since the allegations in the First Amended Complaint likewise suggest that Ebocom is a foreign entity doing business in New York, it does not escape liability for failure to pay State and City taxes in New York under the argument that it was improperly sued. Moreover, as discussed infra, Ebocom may also be subject to pay New York taxes based on allegations that it conspired with Post to contract with New York entities for the purpose of processing credit card transactions, which is not addressed in defendants' motion to dismiss.
While additional discovery, in accordance with this Court's referral of the parties to a Special Master/Referee for this purpose, is required to support the factual allegations set forth above, the allegations themselves are sufficient to survive the instant motion to dismiss. This Court appreciates that the parties have a turbulent relationship and this is why, with the approval of the parties, a Special Master, James Chou, Esq., was appointed to consider issues of confidentiality and discovery. As a result, this Court has already approved the protective order and the Special Master will be supervising discovery. To be clear, additional factual development is needed in order to substantiate defendants' alleged violation of Finance Law Section 189(1)(g) contained in the First Amended Complaint. Nonetheless, defendants' motion to dismiss is denied with respect to claims alleged under Finance Law Section 189(1)(g). After further discovery is conducted, if defendants believe that their conduct still does not fall within the parameters of the State and City tax laws, they may move for summary judgment.
Obviously, on a motion to dismiss, the Court takes all factual allegations as true. As alleged by Campagna, even after a change in the Tax Law in 2015 made it clear that taxes would have to be paid, defendants failed to pay said taxes. As stated by defendants, the amendment to Section 210-A(5)(c)(4) of the Tax Law, effective for tax years beginning on or after January 1, 2015, provides that receipts from “credit card authorization processing, and clearing and settlement processing” are now sourced to the location where the “customer accesses the credit card processor's network,” instead of where the processing takes place. See Defs.' Mem., at 26. While defendants assert that “the 2015 statutory amendment confirms that, prior to tax year 2015, defendants indeed had no tax liability,” and that they are not liable for the failure to pay any taxes after the 2015 amendment to the Tax Law “[b]ecause tax year 2015 is still open, [so] the new provision does not govern” at the time this motion was filed (id.), the 2015 tax year has since closed. Thus, this time period constitutes a separate basis for concluding that there is an alleged violation of the False Claims Act by defendants based on their failure to file taxes in New York beginning with the 2015 tax year. At some point, after reasonable discovery has been conducted, this Court will be able to determine whether taxes were in fact owed by defendants and whether defendants' failure to pay any potential taxes owed constitutes a violation of the False Claims Act. Although this Court finds there may be a valid assertion by Campagna that defendants did not pay taxes as required by the 2015 amendment, the First Amended Complaint fails to appropriately assert such a claim because the complaint was filed prior to the enactment of the amendment to the Tax Law. As such, the second amended complaint should set forth allegations, in a separate paragraph, indicating defendants' failure to pay taxes under the Tax Law as amended in 2015, if this claim is being advanced.
III. Finance Law Section 189(1)(c)
Additionally, Campagna's claim under Finance Law Section 189(1)(c) for conspiracy to violate Section 189(1)(g) of the Finance Law survives defendants' motion to dismiss. Under Finance Law Section 189(1)(c), a person has committed a violation of the False Claims Act if they “conspire[d] to commit a violation of paragraph (a), (b), (d), (e), (f) or (g) of this subdivision.” To prove a violation of this section, “a relator must show that the defendant agreed with another to commit a violation of ․ NYFCA sections 189(1)(a), (b) or (g), and committed an overt act in furtherance of the violation.” United States v. Catholic Health Sys. of Long Island Inc., 2017 WL 1239589, at *8 (E.D.NY Mar. 31, 2017). Campagna alleges that Gerdts, as an experienced credit card executive and the sole shareholder and owner of Ebocom and Post (Sinatra Aff. Ex. C, ¶ 11), knowingly structured her contracts in a way to purposefully avoid tax obligations in New York and that collectively, defendants knowingly engaged in such a scheme in order to avoid such tax obligations as the two Arizona entities both contracted with banks and hotels to process credit card transactions outside of New York State. However, the First Amended Complaint does not allege facts that indicate the existence of a conspiracy to violate Section 189(1)(g) of the Finance Law. While Campagna alleges the existence of a scheme, no specific facts are alleged to support such a scheme that would constitute a conspiracy to violate the False Claims Act. Despite the fact that Campagna's underlying claim of a violation of Finance Law Section 189(1)(g) survives defendants' motion to dismiss, his conspiracy claim under Finance Law Section 189(1)(c) is dismissed with leave to replead this cause of action based upon the completion of additional discovery. Once discovery is completed on this issue, however, defendants may demonstrate that no such conspiracy has occurred. “[T]he success of [Campagna's] conspiracy claim depends on the availability of his underlying NY FCA claim” because “New York law does not recognize the substantive tort of civil conspiracy as an independent cause of action, and thus conspiracy is available ‘only if there is evidence of an underlying actionable tort.’ ” Wilcox v. Credit Suisse, 2015 WL 7008109, at *4 (Sup. Ct. Westchester County July 17, 2015) (quoting UniCredito Italiano SPA v. JPMorgan Chase Bank, 288 F. Supp. 2d 485, 504 (S.D.NY 2003).
Based upon the foregoing, it is hereby ordered that defendants' motion to dismiss is granted in part and denied in part. The instant motion is denied with respect to the cause of action based upon a violation of Finance Law Section 189(1)(g), but is granted as to the causes of action premised upon purported violations of Finance Law Sections 189(1)(h) and 189(1)(c). However, this Court dismisses the causes of action under Finance Law Sections 189(1)(h) and 189(1)(c) without prejudice and with leave to replead. This constitutes the decision and order of this Court.
1. The Attorney General of the State of New York (“Attorney General”) has declined to intervene in this matter and filed a declination notice on or about November 17, 2014 pursuant to New York State Finance Law (“Finance Law”) Section 190(2)(f). Thus, this action is being pursued solely by Campagna.
2. Although Campagna also alleges that defendants made false statements to Arizona tax authorities, such statements are not material or relevant to the instant action under the New York False Claims Act.
3. New York's False Claims Act was designed to follow the federal False Claims Act, “and therefore it is appropriate to look toward federal law when interpreting the New York act.” Seiden, 96 AD3d at 71.
4. Defendants concede that “New York City employs an identical threshold for the GCT under N.Y.C. Admin[istrative] Code § 11-603(1), substituting ‘city’ for ‘state.’ ” Defs.' Mem., at 14 n.10.
5. The parties submitted correspondence with respect to a determination made by an Administrative Law Judge (“ALJ”) of the Division of Tax Appeals, entitled In re Checkfree Services Corp., DTA Nos. 825971 & 825972 (NY Div. Tax App. Jan. 5, 2017), regarding the location to which a receipt should properly be attributed for tax purposes. Similarly, the Attorney General's Office, despite deciding not to intervene in the within action, also submitted an advisory opinion issued by the Department of Taxation and Finance in Petition No. C120126A, TSB-A-13(6)C (Apr. 11, 2013) regarding the extent to which an out-of-state corporation is considered to be “doing business” in New York for purposes of the Tax Law. However, the ALJ's determination is not entitled to deference. Similarly, the Department of Taxation and Finance's advisory opinion is not “binding upon [the Department] except with respect to the person to whom such opinion is rendered.” Tax Law § 171, ¶ 24. Should the Commissioner of the Department of Taxation and Finance adopt either the ALJ's position or the DTF's advisory opinion, this Court will consider that determination in future motions for summary judgment. Additionally, the parties submitted correspondence with respect to a recent New Jersey Superior Court case entitled State of New Jersey ex rel. Leonard M. Campagna v. Post Integrations, Inc., Ebocom, Inc., and Mary Gerdts, Docket No. ESX-L-6341-14 (N.J. Super. Ct. Essex County), in which the Hon. Michelle Hollar-Gregory granted defendants' motion to dismiss plaintiff's qui tam complaint. See Decision dated Nov. 6, 2015. However, as clarified on appeal, that case was decided on the merits under the New Jersey False Claims Act, which unlike New York's False Claims Act, does not cover false claims under the New Jersey tax law. See State of New Jersey ex rel. Campagna v. Post Integrations, Inc. et al., Docket No. A-1463-15T1, at 5-6 (N.J. Super. Ct. App. Div. July 19, 2017), available at http://appellatelaw-nj.com/wp-content/uploads/2017/07/State-ex-rel.-Campagna-v.-Post-Integrations-Inc..pdf.
6. While the DTF's advisory opinion discussed in n. 5, supra, is not binding, it is persuasive. See, e.g., In re Kane, DTA No. 824767, at 7 (NY Div. Tax App. Jan. 29, 2015). The same conclusion would be reached under the DTF's advisory opinion. As here, the corporation solicited sales within the State and engaged in other activities, which included visiting the State, such that the corporation had sufficient contacts to trigger the tax. Id. at 4.
7. This Court issued an order dated January 5, 2017 asking the State to set forth its interpretation of the relevant tax laws and amendments thereof. By letter dated March 6, 2017, the Attorney General's Office indicated that the Department of Taxation and Finance declined to offer any position on the relevant law. Accordingly, the City submitted a letter dated March 20, 2017 offering its interpretation of City tax laws.
James E. d'Auguste, J.
Response sent, thank you
Docket No: 100516/2014
Decided: October 12, 2017
Court: Supreme Court, New York County, New York.
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