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SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK ---------------------------------------------------------------------X THE PEOPLE OF THE STATE OF NEW YORK, by ERIC T. SCHNEIDERMAN, Attorney General of the State of New York, Index No.

Petitioner, IAS Part _________

-against- Assigned to Justice ________ SKS ASSOCIATES LLC f/k/a LEASE RESIDUALS HOLDINGS (OFC), LLC, NORTHERN LEASING SYSTEMS, INC., LEASE FINANCE GROUP LLC, MBF LEASING, GOLDEN EAGLE LEASING LLC, and LEASE SOURCE-LSI, LLC a/k/a LEASE SOURCE, INC.,

Respondents. ---------------------------------------------------------------------X

MEMORANDUM OF LAW IN SUPPORT OF THE VERIFIED PETITION

ERIC T. SCHNEIDERMAN Attorney General of the State of New York Attorney for Petitioner 120 Broadway New York, NY 10271 (212) 416-8313 Of Counsel JANE M. AZIA Bureau Chief Consumer Frauds and Protection Bureau LAURA J. LEVINE TRISTAN C. SNELL Assistant Attorneys General

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TABLE OF CONTENTS Page TABLE OF AUTHORITIES .......................................................................................................... ii PRELIMINARY STATEMENT .................................................................................................... 1 STATEMENT OF FACTS ............................................................................................................. 2 ARGUMENT .................................................................................................................................. 6 I. RESPONDENTS’ ACTIVITIES CONSTITUTE REPEATED AND PERSISTENT FRAUD AND ILLEGALITY IN VIOLATION OF EXECUTIVE LAW § 63(12) .............. 6 A. Respondents Have Engaged in Repeated and Persistent Fraud within the Meaning of Executive Law § 63(12) .............................................................................. 7 B. Respondents have Engaged in Repeated and Persistent Illegality within the Meaning of Executive Law § 63(12) ............................................................................... 9 1. Respondents Have Repeatedly and Persistently Violated GBL § 349 ...................... 9 2. Respondents Have Repeatedly and Persistently Violated GBL Article 9-B ........... 13 II. THE COURT SHOULD GRANT PERMANENT INJUNCTIVE RELIEF, RESTITUTION, CIVIL PENALTIES, AND COSTS ........................................................ 15 A. The Court Should Grant Permanent Injunctive Relief Against Respondents’ Illegal and Fraudulent Conduct ..................................................................................... 15 B. Respondents Must Pay Restitution and Damages to Aggrieved Former Consumers..................................................................................................................... 16 C. Respondents Should be Ordered to Disgorge All Profits Derived from their Fraudulent and Illegal Conduct ..................................................................................... 17 D. Respondents Should be Ordered to Pay Penalties for Repeated Illegal Conduct ......................................................................................................................... 18 E. Respondents Should be Ordered to Pay Costs ............................................................. 18 CONCLUSION ............................................................................................................................. 19

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TABLE OF AUTHORITIES

Cases Page Aldrich v. Northern Leasing Systems, Inc., Index No. 602803/07 (Sup. Ct. N. Y. Co. Mar. 12, 2009) ........................................................ 11 Dowd v. Alliance Mortgage Co., 32 A.D.3d 894 (2d Dep’t 2006) ................................................................................................ 12 ExxonMobil Inter-America, Inc. v. Advanced Information Engineering Serv. Inc.,

328 F. Supp. 2d 443 (S.D.N.Y. 2004) ....................................................................................... 11 Gaidon v. Guardian Life Ins Co. of American, 94 N.Y.2d 330 (1999) ............................................................................................................... 10 Goldman v. Simon Prop. Grp., Inc.

58 A.D.3d 208 (2d Dep’t 2008) ................................................................................................ 12 Guggenheimer v. Ginzburg,

43 N.Y.2d 268, 273 (1977) ......................................................................................................... 8 Holiday Point Realty Co. v. Kempner Corp., 118 A.D.2d 545, 547 (2d Dept 1986) ........................................................................................ 13 In re People v. Applied Card Systems, Inc.,

27 A.D.3d 1047 (3d Dep’t 2005), aff’d on other grounds, 11 N.Y.3d 105 (2008) .................... 8 In re People v. Therapeutic Hypnosis Inc.,

83 Misc. 2d 1068 (Sup. Ct. Alb. Co. 1975), rev’d on other grounds, 52 A.D.2d 1017 (3d Dep’t 1976) .............................................................................................. 19 In re People v. Wilco Energy Corp.,

284 A.D.2d 469 (2d Dep’t 2001) .............................................................................................. 18 In re State v. Bevis Indus. Inc.,

63 Misc.2d 1088 (Sup. Ct. N.Y. Co. 1970) ............................................................................. 16 In re State v. Colorado State Christian College of the Church of the Inner Power, Inc.,

76 Misc.2d 50 (Sup. Ct. N.Y. Co. 1973) .................................................................................. 10

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Lefkowitz v. Bull Investment Group,

46 A.D.2d 25 (3d Dep’t 1974), aff’d, 35 N.Y.2d 647 (1975) ..................................................... 7 Lefkowitz v. E.F.G. Baby Products,

40 A.D.2d 364 (3d Dep’t 1973) .................................................................................................. 9 Lefkowitz v. Person,

75 Misc.2d 252 (Sup. Ct. N.Y. Co. 1973) .................................................................................. 9 Meyers Bros. Parking Sys. v. Sherman,

87 A.D.2d 562 (1st Dep’t 1982 ) aff’d, 57 N.Y.2d 653 (1982) ................................................ 18 Midland Equities of N.Y., Inc., 117 Misc. 2d at 208 ........................................................................................................ 15, 16, 19 Official Comm. of Unsecured Creditors of WorldCom, Inc. v. S.E.C., 467 F.3d 73 (2d Cir. 2006)........................................................................................................ 17 Oswego Laborers’ Local 214 Pension Fund v. Marine Midland Bank, 85 N.Y.2d 20 (1995) ................................................................................................................. 11 People v. 21st Century Leisure Spa Int’l.,

153 Misc.2d 938 (Sup. Ct. N.Y. Co. 1991) ................................................................................ 7 People v. Allied Mktg. Group,

220 A.D.2d 370 (1st Dep’t 1995) ............................................................................................. 18 People v. Apple Health & Sports Clubs, Ltd., 206 A.D.2d 266, 267 (App. Dep’t 1994), appeal denied, 84 N.Y.2d 1004 (1994) .................... 7 People v. Applied Card Sys., Inc., 27 A.D.3d 104, 107 (3d Dep’t 2005), aff’d on other grounds,

11 N.Y.3d 105 (2008) ..................................................................................................... 7, 10, 17 People v. B.C. Assocs., Inc.,

2 Misc. 2d 43, 44-46 (Sup. Ct. N.Y. Co. 1959) .......................................................................... 7 People v. Boyajian Law Off ices, P.C.,

17 Misc. 3d 1119(A) (Sup. Ct. N.Y. Co. 2007) .......................................................................... 9 People v. Empyre Inground Pools, Inc.,

227 A.D.2d 7313 (3d Dep’t 1996) .............................................................................. 6, 9, 15, 16

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People v. Gen. Elec. Co., Inc., 302 A.D.2d 3146 (1st Dep’t 2003) ............................................................................ 6, 8, 10, 15 People v. Life Science Church,

113 Misc. 2d 970 (Sup. Ct. N.Y. Co. 1982) ............................................................................. 17 People v. Network Assocs. Inc.,

195 Misc.2d 384, 389 (Sup. Ct. N.Y. Co. 2003) ..................................................................... 10 People v. Telehublink Corp.,

301 A.D.2d 1006 (3d Dep’t 2003) ...................................................................................... 16, 18 People v. Vacco,

174 Misc.2d 571, 583 (Sup. Ct. N.Y. Co. 1997) ...................................................................... 13 Robles v. 4 Brother Homes,

2 Misc.3d 1001(A), 2003 WL 23312872 (N.Y. City Civ. Ct. 2003) ........................................ 14 Securitron Magnalock Corp. v. Schnabolk, 65 F.3d 256 (2d Cir.1995)......................................................................................................... 11 Serin v. Northern Leasing,

No. 7:06-CV-1625, 2009 WL 7823216 (S.D.N.Y. Dec. 18, 2009) .......................................... 11 Simington v. Lease Finance Group, LLC, Case No. 1:10-cv-06052 (S.D.N.Y. Feb. 28, 2012) .................................................................. 11 Spirit Locker v. Evo Direct,

696 F. Supp.2d 296 (E.D.N.Y. 2010) ....................................................................................... 11 State v. Bevis Indus. Inc.,

63 Misc.2d 1088 (Sup. Ct. NY Co. 1970) ............................................................................... 17 State v. Daro Chartours, Inc.,

72 A.D.2d 872 (3d Dep’t 1979) .......................................................................................... 15, 19 State v. Feldman,

210 F. Supp. 2d 294301 (S.D.N.Y. 2002)................................................................................. 10 State v. Ford Motor Co.,

136 A.D.2d 154, 158 (3d Dep’t 1988) aff’d, 74 N.Y.2d 495 (1989) .......................................... 8 State v. Hotel Waldorf-Astoria Corp., 67 Misc.2d 90 (Sup. Ct. N.Y. Co. 1971) ............................................................................ 15, 19

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State v. Management Transition Res.,

115 Misc. 2d 489 (Sup. Ct. N.Y. Co. 1982) ................................................................... 9, 15, 16 State v. Person,

75 Misc.2d 25253 (Sup. Ct. N.Y. Co. 1973) .............................................................................. 6 State v. Princess Prestige Co.,

42 N.Y.2d 1047 (1977) ......................................................................................... 6, 9, 15, 16, 17 State v. Saksnit,

69 Misc.2d 554 (Sup. Ct. N.Y. Co. 1972) ................................................................................ 14 State v. Scottish-Am. Ass’n,

52 A.D.2d 528 (1st Dep’t 1976) ............................................................................................... 15 State v. Solil Management Corp.,

128 Misc. 2d 767 (Sup. Ct. N.Y. Co.), aff’d, 114 A.D. 2d 1057 (1st Dep’t 1985) ................... 17 Verizon Directories Corp. v. Yellow Book USA, Inc.,

338 F. Supp. 2d 422 (E.D.N.Y 2004) ....................................................................................... 11 Walts v. First Union Mortgage Corp.,

259 A.D.2d 322 (1st Dep’t 1999), leave to appeal dismissed in part, denied in part, 94 N.Y.2d 795 (1999) ............................................................................................................... 12

State Statutes CPLR § 8303(a)(6) ....................................................................................................................... 18 Executive Law § 63(12) ......................................................................................................... passim New York General Business Law (“GBL”) GBL § 130........................................................................................................................... 9, 13, 14 GBL § 133........................................................................................................................... 9, 14, 15 GBL § 349..................................................................................................................... 9, 10, 11, 18 GBL § 350-d ................................................................................................................................. 18 GBL Article 22-A ................................................................................................................... 12, 18

Other Authorities David D. Siegel, N.Y. Practice § 547, at 943 (4th ed. 2005) .......................................................... 7 Governor's Approval Mem, L 1970, ch 44, 1970 McKinney's Session Laws of NY, at 3074 ....... 16 Memorandum of Governor Rockefeller, 1970 NY Legis Ann, ch 43 at 472 ................................ 10

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SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK ---------------------------------------------------------------------X THE PEOPLE OF THE STATE OF NEW YORK, by ERIC T. SCHNEIDERMAN, Attorney General of the State of New York, Index No.

Petitioner, IAS Part _________

-against- Assigned to Justice ________ SKS ASSOCIATES LLC f/k/a LEASE RESIDUALS HOLDINGS (OFC), LLC, NORTHERN LEASING SYSTEMS, INC., LEASE FINANCE GROUP LLC, MBF LEASING, GOLDEN EAGLE LEASING LLC, and LEASE SOURCE-LSI, LLC a/k/a LEASE SOURCE, INC.,

Respondents. ---------------------------------------------------------------------X

MEMORANDUM OF LAW IN SUPPORT OF THE VERIFIED PETITION

Petitioner, the People of the State of New York, by Eric T. Schneiderman, Attorney

General of the State of New York, submits this Memorandum of Law in support of the Verified

Petition.

PRELIMINARY STATEMENT

Respondents are affiliated entities that specialize in the leasing of credit card point-of-

sale processing terminals and other equipment to small businesses. In late 2010, respondents

implemented a scheme to deduct allegedly uncollected reimbursements for personal property

taxes as well as administrative fees from the bank accounts of former customers. Without notice,

tens of thousands of former customers’ bank accounts were suddenly debited by SKS, an

unknown entity respondents created to disguise their involvement. Former customers who

received notice faced an additional web of misrepresentations, as SKS falsely claimed an “audit”

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had been conducted and threatened to refer customers to collection and credit agencies

notwithstanding respondents’ standard practice to the contrary. In reality, the tax amounts

debited were not even actual amounts but simulated estimates. Incredibly, over 77% of the

amounts sought by SKS were not taxes at all but merely alleged “fees” related to the taxes.

Respondents’ scheme attempted to drain over $10 million from over 100,000 former customers

up to eleven years after their contracts had expired, ultimately extracting at least $3.5 million

from former customers’ bank accounts through deceptive Automatic Clearing House (“ACH”)

withdrawals.

Petitioner brings this summary proceeding pursuant to Executive Law § 63(12) and

General Business Law (“GBL”) § 349 for injunctive relief, restitution, damages, and civil

penalties against respondents for their fraudulent and illegal conduct and deceptive acts or

practices, in connection with their wrongful ACH withdrawals from former customers’ bank

accounts whose contracts had expired. For the reasons set forth below and in the Verified

Petition and the Affirmation of Assistant Attorney General Tristan C. Snell (the “Snell

Affirmation”), the Attorney General requests that the Court (a) permanently enjoin respondents

from the fraudulent, deceptive and illegal acts and practices alleged in the Petition; (b) require

respondents to pay full restitution and damages to all injured former customers; and (c) require

respondents to pay penalties for their deceptive practices.

STATEMENT OF FACTS

The facts relevant to this proceeding, which are set forth in the Snell Affirmation and the

exhibits annexed thereto, are summarized below.

In March 2011, respondents Northern Leasing Systems, Inc. (“NLS”), Lease Finance

Group LLC (“LFG”), MBF Leasing (“MBF”), Golden Eagle Leasing LLC (“GEL”), and Lease

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Source-LSI, LLC (“LSI”)— a group of affiliated companies specializing in the leasing of

equipment to small businesses, operating through a shell company, SKS Associates LLC

(“SKS”) (collectively “respondents” unless otherwise specified) — began extracting funds from

the bank accounts of their former customers, some of whose lease agreements had expired as far

back as 2000. See Snell Aff. ¶ 10, 31, 43. In some cases, former customers — primarily mom-

and-pop retailers, sole proprietorships, and other small businesses — received a deceptive and

misleading letter notifying them of the debits shortly before they took place. Id. ¶¶ 14, 43, 45-

50. In other cases, SKS debited the former customers’ accounts with no notice at all. Id. ¶ 42.

Former customers who called SKS about the improper withdrawals encountered a web of

additional deceptions and falsehoods, such as the false claim that an “audit” had been conducted

on the customers’ account, when, as respondents themselves have conceded, no audit was ever

performed. Id. ¶¶ 65-69.

Each of the former customers had executed a lease agreement with respondents, typically

for a four-year term, primarily for POS terminals. The lease agreements contained a provision

mandating automatic monthly payments through ACH withdrawals. These lease agreements

required lessees to provide their checking account and bank routing numbers to facilitate those

automatic monthly ACH payments. Id. ¶ 18. Although some specific terms of respondents’

standard lease agreements changed over time, none of the agreements used by respondents

clearly and conspicuously disclosed that lessees were responsible for reimbursing respondents

for sales and personal property taxes owed on the POS terminals, along with the administrative

fees purportedly related to those tax payments. Information regarding reimbursement for taxes

and fees was contained in small print on the second to fourth pages, which many customers did

not see and which in many cases was not shown to them. Id. ¶ 22. Moreover, the lease

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agreements were either ambiguous or completely silent as to the exact amount and frequency of

fees that could be collected with the taxes. Id. ¶ 23.

It is undisputed that respondents failed to collect personal property taxes and “fees”

associated with either personal property taxes or sales taxes that had already been collected for

certain customers during the lease terms. Respondents have offered three different, contradictory

explanations for such failures. Id. ¶¶ 26-30. Having failed to timely collect the taxes and fees,

respondents then created a scheme to collect these taxes and fees from at least 107,054 former

customers with leases that were active at any point since 2000. Respondents created a database

(which they referred to as “Schedule I”) listing these customers and the tax and fee amounts

purportedly owed, because respondents had no such records of taxes owed or paid, broken down

by individual lessee. Instead, respondents asked their outside vendor, PFSC, to estimate a

simulated personal property tax bill for each former customer based on aggregate tax amounts

paid to a particular jurisdiction. These estimates included estimating taxes paid by a former

vendor used by respondents that went out of business and did not provide its records to

respondents. Schedule I included former customers who had previously received full, explicit

releases from respondents, typically through purchasing the equipment at the end of the lease

term. Id. ¶¶ 31-37.

To protect their business reputation while carrying out this scheme, respondents

transferred the rights to receive purportedly owed taxes and fees listed on Schedule I to SKS, a

shell company with no assets, no employees, and no actual physical location aside from NLS’s

office in New York. Id. ¶¶ 38-41. Beginning on or about March 1, 2011, SKS began sending

out deceptive billing notices to approximately 35% of the former customers informing them that

their bank account was to be debited for allegedly owed amounts. Id. ¶ 64. These notices were

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rife with deceptions, including: (i) falsely stating that an audit had been conducted on the former

customers’ accounts; (ii) falsely claiming that each former customer owed “taxes and related

fees,” when 25% of former customers owed no taxes at all; (iii) failing to disclose that SKS was

an affiliated entity of NLS created to disguise NLS’s role in the collection scheme; (iv) in many

cases, falsely stating that the amount SKS claimed was owed was “[i]n accordance with the

terms of [the former customer’s] lease agreement,” because the agreement had expired and

contained no survival clause purporting to allow respondents to collect taxes and fees after the

termination of the lease; and (v) falsely stating “we intend to debit your account,” — suggesting

that customers would receive notice and have the opportunity to contact SKS before any

withdrawal of funds, when SKS in fact sent thousands of former customers the notice letter the

same day, or only one day before, they debited the former customers’ accounts. Id. ¶¶ 43-51.

When thousands of upset former customers called the telephone number listed in the SKS

letter, respondents engaged in further deceptive practices from their New York office.

Respondents’ customer service representatives made repeated misrepresentations to former

customers, including threatening referrals to collection agencies and credit bureaus that they had

no intention of carrying out. Id. ¶¶ 65-70. Moreover, on or around March 25, 2011,

respondents reacted to the deluge of upset former customers not by addressing their concerns or

by altering or abandoning their collection efforts, but by discontinuing the practice of sending

notice letters at all. Subsequently, SKS debited the bank accounts of thousands of former

customers — some of whose lease agreements had expired more than 10 years beforehand —

with no warning whatsoever. Id. ¶¶ 56-61.

The SKS collection scheme continued until it was halted by a nationwide temporary

restraining order, issued on April 8, 2011, and a preliminary injunction issued on June 13, 2011.

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See Just Film, Inc. v. Merch. Servs., Inc., No. 10-CV-1993, 2010 WL 4923146 (N.D. Cal. Nov.

29, 2011) (Snell Aff., Exs. N and O).

The evidence of respondents’ fraudulent scheme is overwhelming. As set forth below

and in the Snell Affirmation and Exhibits thereto, the evidence includes testimony from two

current NLS employees taken by the Office of the Attorney General (“OAG”); over 70 former

customer affidavits and complaints submitted to OAG recounting their adverse experience with

respondents; over 90 former lessees’ complaints submitted to the Better Business Bureau of

Metropolitan New York (the “BBB”); deceptive billing notices sent to the former lessees; and

substantial additional documentary evidence.

ARGUMENT

I. RESPONDENTS’ ACTIVITIES CONSTITUTE REPEATED AND PERSISTENT FRAUD AND ILLEGALITY IN VIOLATION OF EXECUTIVE LAW § 63(12) Executive Law § 63(12) empowers the Attorney General to bring a special proceeding for

permanent injunctive relief, restitution, and damages whenever a person or business engages in

“repeated or persistent fraud or illegality.” “Repeated” is defined as conduct that affects more

than one person. People v. Empyre Inground Pools, Inc., 227 A.D.2d 731, 733 (3d Dep’t 1996).

Thus, the Attorney General is not required to establish that a large percentage of the person’s or

business’s transactions were fraudulent or illegal. State v. Princess Prestige Co., 42 N.Y.2d 104,

107 (1977) (finding 16 out of 3,600 total transactions a sufficient basis to proceed under

Executive Law § 63(12)). Moreover, respondents cannot avoid liability under Executive Law §

63(12) by demonstrating that they have discontinued the fraudulent or illegal conduct, as there is

no guarantee that respondents will not resume their conduct at a later date. See People v. Gen.

Elec. Co., 302 A.D.2d 314, 316 (1st Dep’t 2003); State v. Person, 75 Misc.2d 252, 253 (Sup. Ct.

N.Y. Co. 1973).

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A special proceeding, as authorized under Executive Law § 63(12), is "plenary as an

action, culminating in a judgment, but is brought on with the ease, speed and economy of a mere

motion." David D. Siegel, N.Y. Practice § 547, at 943 (4th ed. 2005). The legislative purpose

for allowing a special proceeding under Section 63(12) is to further the public interest by giving

the Attorney General an expeditious means to enjoin fraudulent or illegal activity and obtain

relief for its victims, including ex parte relief. People v. B.C. Assocs., Inc., 22 Misc. 2d 43, 44-

46 (Sup. Ct. N.Y. Co. 1959). A special proceeding goes right to the merits.

A. Respondents Have Engaged in Repeated and Persistent Fraud within the Meaning of Executive Law § 63(12) Respondents’ deceptive and fraudulent collection scheme falls well within the ambit of

conduct proscribed by Executive Law § 63(12). Within the context of Executive Law § 63(12),

the term “fraud” has its own meaning. The statute defines the words “fraud” or “fraudulent” to

include “any device, scheme or artifice to defraud and any deception, misrepresentation,

concealment, suppression, false pretense, false promise or unconscionable contractual

provisions.” In keeping with this language and the legislative intent it evinces, courts have

consistently applied an extremely broad view of what constitutes fraudulent and deceptive

conduct in proceedings brought by the Attorney General under Executive Law § 63(12), going

well beyond the scope of fraud and deception found at common law. See, e.g., Lefkowitz v. Bull

Inv. Grp., 46 A.D.2d 25, 28 (3d Dep’t 1974), aff’d, 35 N.Y.2d 647 (1975); People v. 21st

Century Leisure Spa Int’l., 153 Misc. 2d 938, 943 (Sup. Ct. N.Y. Co. 1991). It is well-settled

that it is not necessary to establish the traditional elements of common law fraud, such as

reliance or intent to deceive, to establish liability for statutory fraud under Executive Law §

63(12). See People v. Apple Health & Sports Clubs, 206 A.D.2d 266, 267 (1st Dep’t 1994),

appeal denied, 84 N.Y.2d 1004 (1994); 21st Century Leisure Spa, 153 Misc. 2d at 944; State v.

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Ford Motor Co., 136 A.D.2d 154, 158 (3d Dep’t 1988), aff’d, 74 N.Y.2d 495 (1989).

The test of fraudulent conduct under Executive Law § 63(12) is whether the act “has the

capacity or tendency to deceive, or creates an atmosphere conducive to fraud.” People v.

Applied Card Sys., Inc., 27 A.D.3d 104, 107 (3d Dep’t 2005), aff’d on other grounds, 11 N.Y.3d

105 (2008); People v. Gen. Elec. Co., 302 A.D.2d 314 (1st Dep’t 2003). Executive Law §

63(12) thus protects the credulous and the unthinking as well as the cynical and the intelligent,

the trusting as well as the suspicious. See Gen. Elec., 302 A.D.2d at 314; Applied Card, 27

A.D.3d at 106; Guggenheimer v. Ginzburg, 43 N.Y.2d 268, 273 (1977).

In this case, the evidence submitted by petitioner overwhelmingly demonstrates that

respondents engaged in repeated fraudulent conduct within the meaning of Executive Law §

63(12) by collecting unsubstantiated taxes and fees (and, in some cases, taxes and fees that

respondents concede were not owed) from former customers, including customers whose lease

agreements expired more than a decade before the ACH withdrawals occurred. In many

instances, these former customers, who had every reason to believe that their obligations to

respondents ended with the expiration of the lease agreements, received no notice that their bank

accounts would be debited. In other cases, former customers received deceptive billing notices

from SKS, used by respondents to disguise its collection efforts from former customers. These

notices contained multiple misrepresentations— including a statement that an “audit” had been

conducted on former customers’ accounts, when respondents themselves have conceded that no

such audit was ever performed. See id.. ¶¶ 43-51. Many former customers who were able to

reach a customer service representative were falsely told that an audit had been conducted on

their accounts, or were falsely told that if they contested the charges, the charges would be

referred to a collection agency and reported to credit agencies. See id. ¶¶ 65-70. More than 160

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consumers complained to the OAG and/or BBB about the above-described practices. See id. ¶

14.

Collecting money through false or deceptive means, such as those employed by

respondents, constitutes a fraudulent and illegal practice within the meaning of Executive Law §

63(12). See, e.g., People v. Boyajian Law Offices, P.C., 17 Misc. 3d 1119(A) (Sup. Ct. N.Y. Co.

2007) (granting injunctive relief and referral to special referee where law firm engaged in

deceptive practices, including threatening litigation it had no intent in bringing, aimed at

coercing consumers into paying claimed debts and additional money consumers did not owe);

State v. Management Transition Res., 115 Misc. 2d 489 (Sup. Ct. N.Y. Co. 1982) (granting

injunctive relief and restitution to consumers where company made false representations that it

would help consumers obtain employment); Lefkowitz v. Person, 75 Misc. 2d 252 (Sup. Ct. N.Y.

Co. 1973) (enjoining paralegal training school from misrepresenting the state of the job market

for paralegals and ordering the creation of a restitution fund for students).

B. Respondents Have Engaged in Repeated and Persistent Illegality within the Meaning of Executive Law § 63(12) A violation of state law constitutes illegality within the meaning of Executive Law

§ 63(12) and is actionable thereunder when persistent or repeated. See Princess Prestige, 42

N.Y.2d at 107; Empyre Inground, 227 A.D.2d at 733; Lefkowitz v. E.F.G. Baby Prods., 40

A.D.2d 364 (3d Dep’t 1973). Here, respondents’ repeated and persistent violations of GBL §§

349, 130 and 133 are actionable under Executive Law § 63(12).

1. Respondents Have Repeatedly and Persistently Violated GBL § 349

GBL § 349 declares unlawful "[d]eceptive acts or practices in the conduct of any

business, trade or commerce or in the furnishing of any service in this state." Oswego Laborers’

Local 214 Pension Fund v. Marine Midland Bank, 85 N.Y.2d 20, 26 (1995). The statute

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reflected the legislature's intent to promote an "honest market." Id., citing Memorandum of

Governor Rockefeller, 1970 NY Legis Ann, ch 43 at 472. The definition of deceptive practices

under GBL § 349 is given parallel construction to that of fraud under Executive Law § 63(12).

In re State v. Colorado State Christian Coll. of the Church of the Inner Power, Inc., 76 Misc. 2d

50, 54 (Sup. Ct. N.Y. Co. 1973). A representation or omission is deceptive pursuant to GBL §

349 if it is likely to mislead a reasonable consumer acting reasonably under the circumstances.

Oswego, 85 N.Y.2d at 26.

Like Executive Law § 63(12), GBL § 349 is “intended to be broadly applicable,

extending far beyond the reach of common law fraud.” State v. Feldman, 210 F. Supp. 2d 294,

301 (S.D.N.Y. 2002). As with statutory fraud under Executive Law § 63(12), the elements of

common law fraud need not be established to demonstrate a violation of GBL § 349. Applied

Card, 27 A.D.3d at 107; Gen. Elec., 302 A.D.2d at 315; People v. Network Assocs. Inc., 195

Misc. 2d 384, 389 (Sup. Ct. N.Y. Co. 2003); Colorado State Christian Coll., 76 Misc. 2d at 56.

As a result, a practice with the capacity to mislead or deceive a reasonable person violates GBL §

349, regardless of whether it falls within the scope of common law fraud. Gaidon v. Guardian

Life Ins., 94 N.Y.2d 330, 348 (1999). Even omissions may be the basis for claims pursuant to

GBL § 349. Applied Card, 27 A.D.3d at 107.

GBL § 349 applies to all "consumer-oriented" deceptive practices, regardless of whether

the victims are individuals who purchased goods or services for their personal use or small

business owners who purchased goods or services for their business. “A defendant engages in

“consumer-oriented” activity if his actions cause any “consumer injury or harm to the public

interest.” Feldman, 210 F. Supp.2d at 301. The critical question “is whether the matter affects

the public interest in New York, not whether the suit is brought by a consumer . . . .” Securitron

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Magnalock Corp. v. Schnabolk, 65 F.3d 256, 264 (2d Cir.1995). Deceptive practices that target

similarly situated individuals or entities and do not involve simply private contract disputes or

"single shot" transactions fall squarely within the ambit of GBL § 349. See, e.g., Oswego, 85

N.Y.2d at 25-26 (finding consumer-oriented conduct where pension fund challenged

misrepresentations and material omissions of bank in opening savings account); ExxonMobil

Inter-America, Inc. v. Advanced Information Engineering Serv. Inc., 328 F. Supp. 2d 443

(S.D.N.Y. 2004) (“§ 349 liability attaches primarily where a party’s misrepresentations are

boilerplate and have the potential to be repeated in order to deceive numerous similarly situated

buyers”); Verizon Directories Corp. v. Yellow Book USA, Inc., 338 F. Supp. 2d 422, 428

(E.D.N.Y 2004) (“[s]mall business owners, as purchasers and potential purchasers of advertising

in yellow pages directories, qualify as “consumers” within the meaning of the [GBL]”). Indeed,

in a recent case involving NLS itself, the court found a viable GBL § 349 claim where the

plaintiff lessees alleged that the defendants filed frivolous lawsuits containing false averments

based upon forged lease agreements. Serin v. Northern Leasing, No. 7:06-CV-1625, 2009 WL

7823216, at *15 (S.D.N.Y. Dec. 18, 2009).1

Respondents’ fraudulent and deceptive acts, detailed above, in the Petition, and in the

Snell Affirmation and attached exhibits, constitute deceptive acts and practices in violation of

GBL § 349 for the reasons set forth in Section 1.A, and thus constitute repeated illegality within

1 Respondents will likely point to two other unreported decisions that dismissed GBL § 349 claims in

private class actions against Northern Leasing, Aldrich v. Northern Leasing Systems, Inc., Index No. 602803/07 (Sup. Ct. N. Y. Co. Mar. 12, 2009) and Simington v. Lease Finance Group, LLC, Case No. 1:10-cv-06052 (S.D.N.Y. Feb. 28, 2012). The conduct at issue in those cases is different than the case at bar, and both cases misconstrued the meaning of "consumer-oriented" conduct. In Aldrich, the court considered plaintiffs' claims a private contract dispute and thus outside the scope of GBL § 349, while Simington adopted the erroneous reasoning of Spirit Locker v. Evo Direct, 696 F. Supp.2d 296 (E.D.N.Y. 2010), which held that for a claim to be consumer-oriented the conduct must "to some extent" be "directed at non-business consumers." Not only are these cases wrongly decided, but they are also distinguishable from this case where respondents' engaged in a widespread practice of unlawfully withdrawing money from thousands of former customers' bank accounts, thereby undermining the public interest in a fair and honest marketplace and the integrity of the banking system.

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the meaning of Executive Law § 63(12). Respondents targeted thousands of unsophisticated

small business owners whose boilerplate lease agreements had expired long ago. Through the

use of a shell corporation intended to disguise their collection efforts, respondents extracted

hundreds of thousands of dollars from their former customers' bank accounts often without any

notice whatsoever. When notice was provided, it misrepresented the nature and basis for the

withdrawals. Although respondents claimed that these amounts were for unpaid taxes and

administrative fees, over 77% of the amounts sought were not taxes at all but merely alleged

“fees” related to the taxes. In many cases, respondents debited customer accounts who had been

given releases through buyouts or other settlements. When customers did inquire about the

withdrawals, respondents misrepresented the basis for their actions.

This widespread practice of collecting money from former customers under false

pretenses and without adequate justification is contrary to the public interest and violated GBL §

349. See, e.g., Goldman v. Simon Prop. Grp., Inc. 58 A.D.3d 208 (2d Dep’t 2008) (allegations

of a bank’s, or card issuer’s, unilateral imposition of illegal and or unwarranted fees upon its

customers state a valid claim under GBL § 349); Dowd v. Alliance Mortgage Co., 32 A.D.3d 894

(2d Dep’t 2006) (allegations that mortgage company’s collection of additional and unspecified

fees not previously disclosed to homeowner state a valid claim under GBL § 349); Walts v. First

Union Mortgage Corp., 259 A.D.2d 322 (1st Dep’t 1999) (allegations of loan servicers’ billing

and collecting premium payments here customers no longer needed the underlying insurance

states a valid GBL § 349 claim), leave to appeal dismissed in part, denied in part, 94 N.Y.2d 795

(1999). Recovery is necessary so that the Attorney General can fulfill his legislative mandate

pursuant to GBL Article 22-A to protect and secure an honest New York marketplace.

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2. Respondents Have Repeatedly and Persistently Violated GBL Article 9-B

GBL § 130 provides, “no person shall hereafter (i) carry on or conduct business in

this state under any name other than his or its real name” until the proper filings are made

with New York State. If the “person” is a “corporation, limited partnership or other limited

liability company,” GBL § 130(b) prohibits the transaction of business in New York without

the filing of a certificate with the office of the secretary of state setting forth, among other

identifying information, “the name or designation under which business is carried on or

conducted or transacted, [and] its corporate, limited partnership, or limited liability company

name . . . .” The purpose of GBL § 130 is “to protect the public, affording the public

information concerning the identity of the persons conducting business, and preventing

deception and confusion.” Holiday Point Realty Co. v. Kempner Corp., 118 A.D.2d 545,

547 (2d Dept 1986).

The evidence establishes that respondents repeatedly and persistently violated GBL § 130

by using an unregistered business name, SKS, for nearly three months prior to filing a Certificate

of Amendment with the Department of State on March 11, 2011.2 Snell Aff. ¶ 4. On December

15, 2010, nearly three months prior to this mandated filing, NLS, SKS and LFG executed a

purchase agreement whereby the Schedule I leases were transferred to “SKS Associates LLC.”

Id. ¶ 40. Beginning on or about March 1, 2011, respondents used the SKS name to send

thousands of deceptive letters to former customers. Id. ¶ 43. Approximately 15,000 former

customers received misleading billing notices from SKS before it legally existed. Id. ¶ 49.

This is a clear violation of GBL § 130. See People v. Vacco, 174 Misc.2d 571, 583 (Sup.

Ct. N.Y. Co. 1997) (operating under assumed business name without requisite governmental

2 SKS was originally created pursuant to the laws of the State of New York under the name Lease Residuals Holdings (OFC), LLC on December 31, 2008. A Certificate of Amendment changing its name to SKS was not filed with the New York Secretary of State until March 11, 2011.

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filing violates GBL § 130); State v. Saksnit, 69 Misc.2d 554 (Sup. Ct. N.Y. Co. 1972) (use of

corporate and assumed names for businesses not authorized to do business in New York violates

GBL § 130). Respondents’ conduct constitutes repeated and persistent illegality within the

meaning of Executive Law § 63(12).

Respondents use of the SKS name also violated GBL § 133, which provides:

No person, firm, or corporation shall, with intent to deceive or mislead the public, assume, adopt or use as part of, a corporate . . . name . . . for the purposes of trade, or any other purpose, any name . . . which may deceive or mislead the public as to the identity of such person, firm or corporation . . . or as to the connection of such person, firm or corporation with any other person, firm or corporation . . . .

It is beyond dispute that respondents used SKS, one of the “shelf entit[ies]” or “off the

shelf entit[ies]” respondents kept at their disposal, to try to disguise NLS’s involvement in the

collection scheme. Snell Aff. ¶ 39. Respondents admit SKS sent the misleading billing notices

in order to “keep Northern’s name out of the headlines,” “keep Northern’s name from being the

name that is collecting in these amounts,” and “try to avoid whatever ramifications” might arise

from the scheme. Id. ¶¶ 38. To further conceal SKS’s connection to NLS, SKS letters sent to

former customers used a P.O. box return address, rather than respondents’ usual return address of

NLS’s physical headquarters. Id. ¶ 43. As a result, when former customers accounts’ were

suddenly debited years after their leases had expired, or when they suddenly received letters

informing them of the allegedly owed taxes and fees, the debiting entity was not the business

with which they had signed their lease agreements — such as NLS, LFG, MBF, GEL, or LSI —

but the completely unknown “SKS Associates LLC.” As respondents intended, the deliberate

use of the SKS façade had the effect of deceiving and confusing the former customers. Id. ¶¶ 40-

42. See Robles v. 4 Brother Homes, 2 Misc.3d 1001(A), 2003 WL 23312872 (N.Y. City Civ. Ct.

2003) (respondents’ failure to file timely the requisite certificate under GBL § 130 is itself

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sufficient to show intent to deceive under GBL § 133). Respondents’ intentional use of the SKS

name to deceive and mislead their former customers violates GBL § 133 and constitutes repeated

and persistent illegality within the meaning of Executive Law § 63(12).

II. THE COURT SHOULD GRANT PERMANENT INJUNCTIVE RELIEF, RESTITUTION, DAMAGES, CIVIL PENALTIES, AND COSTS

In proceedings brought pursuant to Executive Law § 63(12) and GBL § 349, the Court

has broad equitable authority to grant injunctive relief, restitution, damages, civil penalties, and

costs. See Empyre Inground, 227 A.D.2d at 734; Princess Prestige, 42 N.Y.2d at 107; State v.

Scottish-Am. Ass’n, 52 A.D.2d 528 (1st Dep’t 1976). Here, respondents’ repeated and persistent

fraudulent and illegal acts warrant the imposition of injunctive relief, as well as restitution to

affected former customers, disgorgement of profits received, civil penalties, and costs.

A. The Court Should Grant Permanent Injunctive Relief Against Respondents’ Illegal and Fraudulent Conduct

In actions brought pursuant to Executive Law § 63(12), a court’s remedial powers are

extremely broad, and courts routinely grant permanent injunctive relief in addition to other forms

of relief. See Princess Prestige, 42 N.Y.2d at 108; State v. Daro Chartours, 72 A.D.2d 872,

873; Scottish-Am. Ass’n, 52 A.D.2d at 528; Management Transition, 115 Misc. 2d at 489;

Midland Equities, 117 Misc. 2d at 206; State v. Hotel Waldorf-Astoria Corp., 67 Misc. 2d 90

(Sup. Ct. N.Y. Co. 1971). The Court should permanently enjoin respondents from engaging in

the fraudulent, deceptive, and illegal practices alleged in the Verified Petition.

Furthermore, in view of respondents’ egregiously fraudulent conduct affecting thousands

of former customers, the Court should permanently enjoin respondents from collecting any of the

fees or taxes allegedly owed by the former lessees. See People v. Gen. Elec. Co., Inc., 302

A.D.2d 314 (issuing permanent injunction against certain misrepresentations); Midland Equities,

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117 Misc. 2d at 208 (issuing permanent injunction against engaging in foreclosure consulting

services).

B. Respondents Must Pay Restitution and Damages to Aggrieved Former Customers

In addition to injunctive relief, the Court should grant restitution to all victims nationwide

who have been injured as a result of respondents’ illegal and fraudulent conduct. Executive Law

§ 63(12) specifically provides for restitution as a "means to make the victims of past fraud whole

again.” Governor's Approval Mem, L 1970, ch 44, 1970 McKinney's Session Laws of NY, at

3074. The scope of the relief granted “is addressed to the sound judicial discretion of the court.”

Princess Prestige, 42 N.Y.2d at 108.

Courts have routinely held that illegal, deceptive, and fraudulent business conduct

warrants restitution to victims. See, e.g., Empyre Inground, 227 A.D.2d at 733-34 (ordering

restitution after respondents engaged in misleading advertising and deceptive practices in

connection with door-to-door sales); People v. Telehublink Corp., 301 A.D.2d 1006, 1008-09 (3d

Dep’t 2003) (ordering restitution for illegal advance fees charged by loan broker); Management

Transition, 115 Misc. 2d at 492 (unlicensed employment agency ordered to pay restitution to

consumers who paid fees); Midland Equities, 117 Misc. 2d at 208 (respondents ordered to pay

restitution for fraudulent mortgage consulting services); State v. Bevis Indus., 63 Misc. 2d 1088

(Sup. Ct. N.Y. Co. 1970) (ordering restitution after respondents falsely advertised the availability

of refunds and misrepresented value of goods and timeliness of delivery).

The Court has wide latitude to fashion an appropriate form of restitution. Thus, in

actions brought pursuant to Executive Law § 63(12), courts frequently order the creation of a

restitution fund for distribution to affected victims and sometimes also specify how victims

should be notified and how restitution should be distributed. See, e.g., People v. Life Science

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Church, 113 Misc. 2d 970, 971 (Sup. Ct. N.Y. Co. 1982); Bevis Indus., 63 Misc. 2d at 1091

(Sup. Ct. N.Y. Co. 1970). In other cases, courts direct the parties to suggest a mechanism for

identifying and notifying affected victims and distributing restitution in their settling of an order.

See, e.g., Princess Prestige, 42 N.Y.2d at 108; Gen. Elec., 302 A.D.2d at 316.

In this case, the Court should order respondents provide full restitution to all former

customers from whom they collected taxes and/or fees, as these taxes and/or fees were obtained

through fraud and misrepresentations. Each former customer should be paid restitution in the

exact amount of respondents’ debit, plus interest. These former customers are easily identifiable

from respondents’ records, and petitioner has included in its prayer for relief a request for a full

accounting of respondents’ collection scheme, to aid in that identification.

In addition to restitution, compensatory damages for defrauded former lessees should also

be awarded. It is well-settled that compensatory damages are available under Executive Law §

63(12). State v. Solil Management Corp., 128 Misc. 2d 767 (Sup. Ct. N.Y. Co.), aff’d, 114 A.D.

2d 1057 (1st Dep’t 1985). In this case, respondents should be directed to pay compensatory

damages to any former customers who were charged overdraft or other bank fees (including fees

associated with closing or reopening their checking accounts), or who suffered any harm to their

credit, as a result of respondents’ unauthorized ACH withdrawals.

C. Respondents Should be Ordered to Disgorge All Profits Derived from their Fraudulent and Illegal Conduct

Finally, in a proceeding brought by the Attorney General under Executive Law § 63(12),

this Court may order “disgorgement – an equitable remedy distinct from restitution – of profits

that [the] respondents derived . . . .” Applied Card, 11 N.Y. 3d at 105. The primary purpose of

disgorgement is to deter law violations by depriving violators of their ill-gotten gains. Official

Comm. of Unsecured Creditors of WorldCom, Inc. v. S.E.C., 467 F.3d 73 (2d Cir. 2006).

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Therefore, the size of the disgorgement order ‘need not be tied to the [amount of] losses

suffered.’” Id. Here, over 77% of the amounts sought by SKS were respondents’ own

“administrative fees” related to the purported taxes. Respondents should be ordered to disgorge

the full amount of these “fees”, in addition to tax amounts collected where such taxes had, in

fact, been paid by former customers directly to taxing authorities.

D. Respondents Should be Ordered to Pay Penalties for Repeated Illegal Conduct

GBL Article 22-A, § 350-d provides for the assessment of a civil penalty of up to $5,000

for each deceptive act or false advertisement in violation of Article 22-A. Courts routinely

award penalties in civil enforcement cases brought by OAG. See, e.g., Telehublink Corp., 301

A.D.2d at 1006; People v. Wilco Energy Corp., 284 A.D.2d at 474; People v. Allied Mktg. Grp.,

220 A.D.2d 370 (1st Dep’t 1995). Because civil penalties are paid to the State, their purpose is

to deter future violations and to punish illegal conduct, not to compensate the injured party. See

Meyers Bros. Parking Sys. v. Sherman, 87 A.D.2d 562, 563 (1st Dep’t 1982), aff’d, 57 N.Y.2d

653 (1982). The total penalty should not be so small as to represent merely a cost of doing

business; to the contrary, the penalty should be large enough to serve as a warning to discourage

the prohibited act. See id. at 563.

Here, respondents have engaged in numerous deceptive acts and practices in violation of

GBL § 349. Respondents attempted to snatch over $10 million through fraudulent ACH

withdrawals and succeeded in defrauding tens of thousands of former lessees. The Court should

impose a substantial penalty under GBL § 350-d for each attempted ACH withdrawal, whether

or not it was successful.

E. Respondents Should be Ordered to Pay Costs

CPLR § 8303(a)(6) provides that the court may award the Attorney General “a sum not

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exceeding two thousand dollars against each defendant” in a special proceeding pursuant to

Executive Law § 63(12). Courts have routinely granted these costs. See, e.g., Daro Chartours,

72 A.D.2d at 873; Midland Equities, 117 Misc. 2d at 208; In re People v. Therapeutic Hypnosis

Inc., 83 Misc. 2d 1068, 1071-72 (Sup. Ct. Alb. Co. 1975), rev’d on other grounds, 52 A.D.2d

1017 (3d Dep’t 1976); Hotel Waldorf-Astoria Corp., 67 Misc. 2d. at 92. Accordingly, an award

of additional costs in the amount of $2,000 against each respondent should also be granted.

CONCLUSION

For all the foregoing reasons, the Court should make a summary determination in

petitioner’s favor on all causes of action and grant injunctive relief, restitution, damages, civil

penalties, and costs, as requested in the Verified Petition.

Dated: April 20, 2012 Respectfully submitted, ERIC T. SCHNEIDERMAN Attorney General of the State of New York Attorney for Petitioner By: __________________________ LAURA J. LEVINE Assistant Attorney General Bureau of Consumer Frauds and Protection 120 Broadway New York, NY 10271 (212) 416-8313 Of Counsel Jane M. Azia Bureau Chief Consumer Frauds and Protection Bureau Tristan C. Snell Assistant Attorney General

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Case 4:10-cv-01993-CW Document 510-16 Filed 05/23/13 Page 1...

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