Opinion
101957/08.
Decided April 14, 2009.
E. Timothy McAuliffe, Esq., of E. Timothy McAuliffe, PLLC, for moving defendants and Thomas J. Fleming, Esq., of Olshan Grundman Frome Rosenzweig Wolosky LLP for plaintiffs.
In this action, plaintiffs allege they were defrauded into investing over $4.45 million in a Colorado company called San Holdings, Inc. ("Sanz") pursuant to a March 2006 private placement, an investment that has been rendered worthless as Sanz filed for liquidation in November 2007. In addition to suing Sanz's former managers, defendants John Jenkins, Robert Ogden, Mark Hardy and Kirk Hanson, plaintiffs assert a single fraud cause of action against former members of Sanz's board of directors, who now move to dismiss the complaint.
In motion sequence number 001, defendants Rodger R. Krouse, Marc J. Leder, Clarence E. Terry, M. Stephen Liff, Stephen G. Marble, T. Scott King, C. Daryl Hollis, and George R. Rea move, pursuant to CPLR 3211 (a) (7) and (a) (8), to dismiss the complaint based on lack of personal jurisdiction and failure to plead fraud with specificity.
In motion sequence number 003, defendant Gary F. Holloway, also a former director of Sanz, moves to dismiss for failure to plead fraud as against him with the requisite particularity. Collectively, the moving defendants are referred to as the "Director Defendants."
BACKGROUND
The complaint alleges that, in late 2005, defendant John Jenkins, the former president, chief executive officer and chairman of Sanz, inquired of Michael Potter whether Mr. Potter's firm, Monarch Capital Group LLC ("Monarch Capital"), would assist Sanz in raising money (Complaint ¶¶ 3, 10). Sanz allegedly owed its largest shareholder, Sun Solunet, LLC, approximately $14 million, and Sun Solunet did not wish to make any further investment in Sanz ( id. at ¶ 11). Plaintiffs allege that they, "[t]hrough Monarch Capital," entered into negotiations with Sanz executives, including defendants Ogden and Jenkins, and with defendant Marc Leder from Sun Solunet" about investing in the company ( id. at ¶ 12). One of the plaintiffs' demands was that senior management of Sanz demonstrate their confidence in the company's future by investing on the same terms as plaintiffs ( id.). Defendants Jenkins, Ogden, Hardy and Hanson allegedly agreed to make a bona fide investment, in the aggregate, of approximately $250,000 ( id.).
Plaintiffs also claim that, in order to induce them to invest in Sanz, in December 2005 and February 2006, defendants Jenkins and Ogden provided Monarch Capital with forecasts for Sanz's "EarthWhere" software business that contained false figures for projected sales for the first quarter of 2006, wholly unrealistic projections for the rest of the year and were based on false assurances that problems with pricing its contracts had been fixed and that Sanz would be cash flow positive (Complaint ¶¶ 13, 14). Rather than the $4.9 million in revenue predicted for 2006, Sanz, in fact, suffered a net loss of $32.9 million for the year ( id.).
The complaint further alleges that defendants Jenkins and Ogden, along with the Director Defendants, also caused Sanz to falsely represent to each plaintiff that, except for fees paid to Monarch Capital, no brokerage or finder's fees or commissions were being paid in connection with plaintiffs' investment (Complaint ¶ 15).
In March 2006, plaintiffs invested an aggregate of $4.45 million in Sanz (Complaint ¶ 17). In June 2007, Sanz allegedly disclosed that Jenkins and Ogden, together with the other management defendants, had received bonuses in conjunction with the cash raised in this private placement and that these bonuses were invested in the private placement ( id. at ¶ 18). "In other words, defendants simply took a portion of plaintiffs' fresh capital and paid it back to the Management Defendants, who [got] a free ride at plaintiff's expense" ( id.).
Each of the Director Defendants purportedly served on the board of Sanz at the request of Sun Capital Partners, Inc. ("Sun Capital"), the investment firm that owned Sun Solunet (Complaint ¶¶ 7, 19). Defendants Krouse, Leder, Terry, Liff, Marble and King were all employees of Sun Capital, and plaintiffs allege that "it was clear to these directors that [Sanz] would be unable to repay the substantial sums that it owed Sun Solunet. In order to keep the Company alive, they joined in and supported the deceptions perpetrated by the Management Defendants "( id. at ¶ 19). "Each of the Sun Director Defendants was aware that the representations that these other defendants were making were false and each participated in, approved of, and lent support to, the Management Defendants in their fraudulent scheme" ( id.). The Director Defendants allegedly participated by, among other things, approving the bonuses that were issued to senior management ( id.).
In November 2007, Sanz filed for liquidation and plaintiffs lost their entire investment in the company (Complaint ¶¶ 1, 21). They commenced this action on February 1, 2008 alleging that they were defrauded into making their investment.
In opposition to defendants' motions to dismiss, which are based on lack of personal jurisdiction and pleading fraud insufficiently, plaintiffs offer an affidavit from Michael Potter of Monarch Capital. Mr. Potter contends that from late 2005 through the beginning of 2006, he and Jenkins, together with their respective counsel, negotiated the terms and conditions of the Securities Purchase Agreements pursuant to which plaintiffs invested in Sanz (Potter Aff ¶ 6). "Throughout the negotiation, Jenkins reported to and sought instruction and approval from the Director Defendants and . . . It was clear that the Director Defendants . . . all participated in the negotiation of this transaction" ( id.). Mr. Potter further claims that, in response to his demand that management participate in the private placement, "Jenkins cited to some liquidity problems and informed me that he would discuss the matter with the other defendants, including the Director Defendants . . . Jenkins made it clear to me that the Director Defendants were aware of and had approved this condition"( id. at ¶ 7).
Mr. Potter further avers, that on or about January 24, 2006, he spoke with defendant Marc C. Leder, one of the Director Defendants, about the private placement, the reasons Sanz was seeking outside capital and the terms and conditions of the investment. "Specifically, Leder represented to me that the company and its management were strong" (Potter Aff ¶ 10).
Sanz is a Colorado corporation with its principal place of business in Englewood, Colorado (Krouse Aff ¶ 2). There is no allegation in the complaint or any evidence submitted on these motions regarding where Sun Solunet or Sun Capital are incorporated or do business. There are seventeen plaintiffs, only four of which are located in New York, the other thirteen reside or are located in Colorado, New Jersey, Virginia, Ohio, Bermuda and Toronto, Canada (Complaint ¶ 2). Plaintiffs contend that they negotiated and purchased their investments in Sanz "through" Monarch Capital ( id. at ¶ 12). Neither the complaint nor the Potter affidavit identifies where Monarch Capital is incorporated or does business.
Each of the Director Defendants submit affidavits in which they aver that they live and work either in Florida or North Carolina. While defendants Krouse, Leder, Terry, Liff, and King, admit that they have visited New York to conduct business on behalf of their employer, who maintains an office here, they deny conducting any business in New York as individuals. All of the Director Defendants, save Leder, deny having any communications or contact with any of the plaintiffs, either within the State or New York or otherwise.
DISCUSSION
Lack of Personal Jurisdiction
While the complaint merely states that "[e]ach defendant has sufficient contacts with New York to be subject to personal jurisdiction in this forum" (Complaint ¶ 8), in opposition to these motions, plaintiff argues that the court has jurisdiction over the Director Defendants pursuant to the first three subsections of CPLR 302 (a), New York's long-arm jurisdiction statute. That statute provides, in relevant part, that: "a court may exercise personal jurisdiction over any non-domiciliary . . . who in person or through an agent:
1. transacts any business within the state or contracts anywhere to supply goods or services in the state; or
2. commits a tortious act within the state (except defamation); or
3. commits a tortious act without the state causing injury within the state (except defamation), if he
. . .
(ii) expects or should reasonably expect the act to have consequences in the state and derives substantial revenue from interstate or international commerce" (CPLR 302 [a]).
Plaintiffs, relying first on CPLR 302 (a) (1), contend that the Director Defendants transacted business in New York because, in seeking outside capital for their company at the behest of Sanz's main investor, Sun Solunet, the Director Defendants reached out to Monarch Capital in New York through their agent, Jenkins, and initiated and directed the discussions regarding the private placement.
A plaintiff attempting to invoke long-arm jurisdiction pursuant to CPLR 302 (a) (1) based on the actions of the defendant's agent, as in this case need not establish a formal agency relationship between the defendant and the agent; rather it only needs to convince the court that the agent engaged in purposeful activities in New York in relation to his transaction for the benefit of and with the knowledge and consent of the out-of-state defendants, and that they exercised some control over the agent in the matter ( Kreutter v McFadden Oil Corp., 71 NY2d 460, 467). However, "[t]o make a prima facie showing of control,' a plaintiff's allegations must sufficiently detail the defendant's conduct so as to persuade a court that the defendant was a primary actor' in the specific matter in question; control cannot be shown based merely upon a defendant's title or position within the corporation, or upon conclusory allegations that the defendant controls the corporation" ( Karabu Corp. v Gitner, 16 F Supp 2d 319, 324 [SD NY 1998]).
If a court determines that a defendant has transacted business pursuant to CPLR 302 (a) (1), then it must further ascertain whether the exercise of jurisdiction comports with due process ( LaMarca v Pak-Mor Mfg. Co., 95 NY2d 210, 216). Due process is not offended "[s]o long as a party avails itself of the benefits of the forum, has sufficient minimum contacts with it, and should reasonably expect to defend its actions there . . . even if not present' in that State" ( Kreutter, 71 NY2d at 466, citing McGee v International Life Ins. Co., 355 US 220, 222-23). To satisfy the minimum contacts requirement, it is essential that there be "some act by which the defendant purposefully avails itself of the privilege of conducting activities within the forum State, thus invoking the benefits and protections of its laws" ( Hanson v Denckla, 357 US 235, 253).
There are insufficient factual allegations as to purposeful activity by any of the defendants or their purported agents in New York. Despite the repeated mis-characterization of the Potter affidavit by plaintiffs' counsel in their opposing memorandum of law, Potter does not discuss at all the material details of communications between Potter and Jenkins (whether they were in person, in New York, Colorado or elsewhere, or by telephone, facsimile, e-mail or instant messaging). Potter does not say how or where he first met with Jenkins, and does not offer any information regarding where and how his alleged January 24, 2006 conversation with defendant Leder occurred. Indeed, plaintiffs' counsel appears to admit that Jenkins never set foot in New York ( see Plaintiffs' Mem., at 11 ["It is of no import that Jenkins' activity was conducted entirely outside of New York"]). The only contacts with New York are the apparent location here of Monarch Capital, the fact that four of the seventeen plaintiffs happen to be located in New York, and that the Securities Purchase Agreement, which is not an agreement that the Director Defendants signed, has a New York choice-of-law and forum-selection clause.
There is no factual support for the assertions by plaintiffs' counsel that "Jenkins contacted Potter numerous times by telephone and email to discuss the investment, each time relaying the conversations back to the Director Defendants and taking his instructions from them" (Plaintiffs' Mem, at 10; see also id. at 12).
Plaintiffs' counsel, in their opposing memorandum of law and during oral argument of these motions, contended that the company is located in New York, and no defendant challenges this assertion. In addition, the court notes that section 9 of the Securities Purchase Agreement provides that notices to Monarch Capital, as the placement agent, be sent to it at 500 Fifth Avenue, Suite 2240, New York, New York 10110 (Potter Aff., Ex. C, at 30).
"While electronic communications, telephone calls or letters, in and of themselves, are generally not enough to establish jurisdiction, they may be sufficient if used by the defendant deliberately to project itself into business transactions occurring within New York State ( Deutsche Bank Sec., Inc. v Montana Bd. of Investments , 21 AD3d 90 , 94 [1st Dept 2005], affd 7 NY3d 65, cert denied, 549 US 1095; see, e.g., Parke-Bernet Galleries, Inc. v Franklyn, 26 NY2d 13 [defendant transacted business for long-arm purposes by participating in an auction held in New York through receiving and transmitting bids over the telephone]; Courtroom Television Network v Focus Media, Inc., 264 AD2d 351, 354 [1st Dept. 1999] [defendant took advantage of "New York's unique resources in the entertainment industry" by creating tapes of advertisements to be broadcast from a New York studio and sending them to New York with the intention that the performance occur in New York]).
In this case, plaintiffs have failed to allege sufficient details regarding the transaction such that the court can conclude that the conduct of Jenkins and/or Ogden, acting on behalf of or at the behest of any of the Director Defendants, evidences a level of purposeful involvement in New York business sufficient to satisfy CPLR 302 (a) (1).
Likewise, plaintiffs have failed to allege sufficient facts to establish the existence of long-arm jurisdiction under CPLR 302 (a) (2). While a tortious act is deemed to have occurred in New York when a defendant knowingly sends false or misleading documents into this State, with the intention that those documents should be relied upon to the injury of a resident of the state, there are no allegations regarding how or where the alleged fraudulent misrepresentations were made ( Travelers Indem. Co. v Inoue, 111 AD2d 686, 687 [1st Dept. 1985]).
Finally, long-arm jurisdiction pursuant to CPLR 302 (a) (3) is clearly unwarranted, because even assuming that the Director Defendants committed a tortious act outside of New York that caused injury to persons in New York, plaintiffs fail to allege any facts showing that these individuals derive substantial revenue from interstate commerce ( see, e.g., Best Cellars Inc. v Grape Finds at Dupont, Inc., 90 F Supp 2d 431, 448 [SD NY 2000]).
Dismissal of the complaint as against defendants Rodger R. Krouse, Marc J. Leder, Clarence E. Terry, M. Stephen Liff, Stephen G. Marble, T. Scott King, C. Daryl Hollis, and George R. Rea pursuant to CPLR 3211 (a) (8) for lack of personal jurisdiction is, therefore, granted. Fraud By the Director Defendants
To plead a claim for common-law fraud, a plaintiff must assert the misrepresentation of a material fact, that was known by the defendant to be false and intended to be relied on when made, and that there was justifiable reliance and resulting injury ( Gaidon v Guardian Life Ins. Co. of Am., 94 NY2d 330, 348; Friedman v Anderson , 23 AD3d 163 , 166 [1st Dept 2005]). In pleading these elements, the plaintiff must comply with the requirements set forth in CPLR 3016 (b), namely that "the circumstances constituting the wrong shall be stated in detail." Section 3016 (b) imposes a more stringent standard of pleading than the generally-applicable notice of the transaction rule of CPLR 3013 ( Ramos v Ramirez , 31 AD3d 294 , 294-95 [1st Dept 2006]; Megaris Furs, Inc. v Gimbel Bros., Inc., 172 AD2d 209, 209-10 [1st Dept 1991]).
The complaint fails to allege fraud or aiding or abetting fraud as against any of the Director Defendants with the necessary detail required by CPLR 3016 (b). While it alleges various acts by the former officers of Sanz, namely misrepresentations relating to financial projections and the future profitability of the company, and the officers' promise to personally invest in the private placement, plaintiffs' pleading sweeps the Director Defendants into this action with bald, conclusory allegations that each of the Director Defendants collectively were "aware" of these false representations and "participated in, approved of and lent support to" the alleged fraud (Complaint ¶ 19). The only specific actions attributed to the Director Defendants is their approval of bonuses for senior management on condition that they be invested in the private placement. Plaintiffs' fraud case is particularly weak against defendants Holloway, Hollis and Rea, none of whom are alleged to be employees of Sun Capital. It is only the six Director Defendants employed by Sun Capital that were allegedly aware that Sanz would be unable to repay the substantial sums that it owed Sun Solunet, and that, in order to keep Sanz alive, "they" joined in and supported the deceptions perpetrated by the management defendants ( see Complaint ¶ 19).
With the exception of defendant Marc J. Leder, even the Potter affidavit does not allege that any of the Director Defendants made a single misrepresentation of a material fact or otherwise or had any contact with Monarch Capital or any of the plaintiffs individually. Even where it is alleged that a document containing misrepresentations was prepared with the "knowledge, consent, authority, and/or assistance" of all defendants, plaintiffs must plead facts sufficient to establish how each defendant came to know that it contained misrepresentations at the time it was distributed ( see, e.g., Hughes v BCI Intl. Holdings, 452 F Supp 2d 290, 312-33, 317 [SD NY 2006] [investor stated fraud claim against corporate directors who approved, in writing, private placement memorandum allegedly containing material misrepresentations, but not against individual who became a director of the company months later]).
The Potter affidavit does not cure the deficiencies in the complaint. Mr. Potter fails to identify how any individual member of Sanz's board participated in the alleged fraud. His conclusory assertions, based solely on hearsay and speculation, of their involvement in the alleged fraud by the management defendants do nothing more than mimic the conclusions in paragraph 19 of the complaint. There are no details regarding who Jenkins was seeking instruction and/or approval from; no e-mails, letters or faxes demonstrating any one of the Director Defendants was copied on any communication between Potter and Jenkins or Ogden; and no claim that any meetings or telephone conferences were held regarding board approval of the proposed private placement or any conditions Monarch Capital was placing on the deal. Potter's description of his January 24, 2006 conversation between Leder is also very general; he merely states that the two men discussed the "terms and conditions of the private placement" (Potter Aff ¶ 10), but fails to say whether they discussed the management investment condition or any of the allegedly false earnings models and other financial analyses provided by Jenkins and Odgen.
While the court is mindful that CPLR 3016 (b) must not be so strictly interpreted as to prevent an otherwise valid cause of action in situations when it is impossible to state in detail the circumstances constituting the fraud, because information related to the fraud is within the defendants' exclusive knowledge ( Pludeman v Northern Leasing Systems, Inc. , 10 NY3d 486 , 491-92), this is not a situation, such as in Pludeman, where an inference was permitted that the defendant company's top management, who operated the day-to-day business of the corporate defendant, was consequently involved in or knew about the concealment of key provisions of its form equipment lease. In this case, despite whatever due diligence was performed by Monarch Capital on plaintiffs' behalf prior to the execution of the Securities Purchase Agreements, there is no claim, at least by anyone with personal knowledge, that the Director Defendants were involved in the day-to-day management of Sanz, a public company. The fact that the Director Defendants approved the payment of bonuses to senior management in 2006 on condition that they be invested in their company's private placement is insufficient to raise an inference of fraud, absent some claim that the payment of bonuses in 2006, the amounts paid, or the condition placed on their investment was out of the ordinary in some way.
Plaintiffs' counsel states that "[t]he directors operate the daily business of [Sanz]" (Plaintiffs' Mem, at 19), without any support for this statement.
With respect to defendant Marc J. Leder, the Potter affidavit relays one conversation he had with Leder on January 24, 2006 in which Leder allegedly stated that "the company and its management were strong" ( id. at ¶ 10). This statement cannot form the basis of any claim of fraud, because "[o]pinions of value or future expectations" are "little more than mere puffery" and "do not constitute actionable fraud" ( Elghanian v Harvey, 249 AD2d 206 [1st Dept 1998]; see also DH Cattle Holdings Co. v Smith, 195 AD2d 202 [1st Dept 1994] [statement by financial agents that investment was "safe" was not actionable statement of fact, but mere opinion and puffery]).
For these reasons, the complaint fails to state a claim with sufficient particularity against any of the Director Defendants sounding in common law fraud. Leave to Replead
As plaintiffs' allegations, if accompanied by sufficient detail, might be adequate to support long-arm jurisdiction against the Director Defendants and a fraud claim at this juncture, the court grants plaintiffs leave to replead ( EBC I, Inc. v Goldman Sachs Co., 5 NY3d 11, 23; Fiala v Metropolitan Life Ins. Co. , 6 AD3d 320 , 323 [1st Dept. 2004]).
Accordingly, it is
ORDERED that the motions (seq. nos. 001 and 003) to dismiss the complaint as against defendants Rodger R. Krouse, Marc J. Leder, Clarence E. Terry, M. Stephen Liff, Stephen G. Marble, T. Scott King, Gary F. Holloway, C. Daryl Hollis, and George R. Rea are granted; and it is further
ORDERED that plaintiffs are granted leave to serve an amended complaint within 30 days after service on plaintiffs' attorney of a copy of this order with notice of entry. In the event that plaintiffs fail to serve and file an amended complaint within such time, leave to replead shall be deemed denied, the claim against these defendants is severed and the Clerk is directed to dismiss the action with prejudice and costs and disbursements as against these defendants.