Marco Destin, Inc. v. Levy

Background

Marco Destin, Inc., Panama Surf & Sport, Inc., E&T, Inc., and an affiliate identified in the opinion as 1000 Highway 98 East Corp. (collectively, “Marco-Destin”) brought an independent action under Federal Rule of Civil Procedure 60(d). They sought to set aside a February 15, 2011 stipulated order of settlement and dismissal that resolved an earlier lawsuit brought by L&L Wings, Inc. against Marco-Destin. That earlier lawsuit included breach-of-contract and trademark-infringement claims concerning the “Wings” mark.

The 2011 settlement required Marco-Destin and its affiliates to pay L&L $3.5 million and stop using the “Wings” mark and trade dress. It also included releases under which Marco-Destin agreed not to bring certain claims concerning the mark, trade dress, or the license agreement against L&L and its officers and agents.

Marco-Destin alleged that Shaul Levy, Meir Levy, Ariel Levy, and Bennett Krasner, individually and as agents of L&L, obtained the settlement through fraud. The allegations concerned supposed misrepresentations about ownership of the “Wings” mark, concealment of a license agreement involving Shepard Morrow, and allegedly false statements made to the United States Patent and Trademark Office. Marco-Destin also alleged that a trademark registration obtained by L&L was fraudulently submitted in the earlier lawsuit and helped produce a favorable ruling and the later settlement.

Motions and legal standards

The Levy defendants and Krasner separately moved to dismiss the complaint. The Levy defendants also moved for sanctions under 28 U.S.C. § 1927, arguing that Marco-Destin’s lawsuit was meritless and unreasonably multiplied the proceedings.

For the dismissal motions, the court applied the Rule 12(b)(6) standard. At that stage, the court accepted the complaint’s non-conclusory factual allegations as true and considered whether they plausibly stated claims for relief. The court also took judicial notice of filings from earlier litigation, the bankruptcy case, and publicly available trademark records, while stating that the complaint’s allegations controlled for resolving the motions.

Fraud-on-the-court claim

The court held that Marco-Destin failed to state a claim for fraud on the court. An independent fraud-on-the-court action requires clear and convincing proof that the defendant interfered with the court’s ability to decide a matter impartially and prevented the opposing party from fully and fairly presenting its case or defense. The court explained that the claim is not time-barred, but that the requirement of showing interference with the adversarial process is essential.

The court concluded that Marco-Destin had opportunities in the earlier lawsuit to investigate L&L’s claimed ownership of the “Wings” mark. In particular, the license agreement between Marco-Destin and L&L stated that other people or entities might have registered trademark or service-mark rights and might claim a superior right to use the mark. The court also noted that Marco-Destin could have investigated the publicly available trademark records, sought more information from L&L, or questioned L&L officers about the prior rights associated with Shepard Morrow.

Although the court stated that it did not condone L&L’s failure to disclose the Morrow license agreement in the earlier lawsuit, it held that this alleged concealment did not prevent Marco-Destin from fully and fairly litigating the ownership issue. Because Marco-Destin could have addressed the alleged fraud during the earlier lawsuit, the court did not decide whether L&L acted in bad faith or interfered with the court’s impartial decision-making.

Fraud claim and settlement releases

The court treated Count Two in two possible ways. To the extent it repeated the fraud-on-the-court claim, it was dismissed for the same reasons as Count One. To the extent it asserted an independent fraud claim for damages against the individual defendants, it was also dismissed.

The court ruled that allegations properly covered by Rule 60(b)(3), which concerns relief from an order based on fraud, misrepresentation, or misconduct by an opposing party, had to be brought within one year of the order. Marco-Destin could not avoid that deadline by labeling the case an independent action under Rule 60(d). The court also held that the independent damages claim was barred by the applicable time limits under New York law because Marco-Destin should have discovered the alleged fraud through reasonable inquiry during the earlier lawsuit.

Finally, the court held that the releases in the 2011 settlement order independently required dismissal of the damages claim against the individual defendants. Because the court would not disturb the 2011 settlement order, its release provisions remained effective.

Sanctions and disposition

The court denied the Levy defendants’ request for sanctions. Sanctions under Section 1927 or the court’s inherent powers required clear evidence that the claims were entirely meritless and pursued for an improper purpose. The court found that this demanding standard was not met, noting in part that this was the first time Marco-Destin had brought this type of claim in a district court and that the effect of the bankruptcy court’s order remained unsettled.

The court granted the defendants’ motions to dismiss the complaint and denied the Levy defendants’ motion insofar as it sought sanctions. It directed the Clerk to enter judgment for the defendants, terminate the motions, and close the case.