Summary
In One Step, the court found that a third- party plaintiff failed to plead an alter ego claim where it alleged that Adjimi "directed One Step to act," but did not allege "that One Step lacks the formalities and paraphernalia that are part and parcel of the corporate existence, or that One Step was inadequately capitalized, or that Adjmi deposited and withdrew One Step funds for personal rather than corporate purposes."
Summary of this case from Int'l Ass'n of Bridge, Structural, Ornamental & Reinforcing Iron Workers Union Local 361 v. McNultyOpinion
21-CV-539
04-13-2022
ONE STEP UP LTD., Plaintiff, v. EMPIRE APPAREL LLC, and ASSAF COHEN, Defendants.
REPORT AND RECOMMENDATION TO HON. PAUL A. CROTTY: MOTIONS TO AMEND
ROBERT W. LEHRBURGER, United States Magistrate Judge.
After a falling out in the parties' relationship, Plaintiff One Step Up Ltd. (“One Step”) filed this action against Empire Apparel LLC (“Empire”) and its principal Assaf Cohen (“Cohen”) alleging trademark infringement and unfair competition. The parties have now filed cross-motions to amend their pleadings. Pursuant to Federal Rule Of Civil Procedure (“Rule”) 15, One Step seeks to amend its Complaint to add Stephanie Goldman (“Goldman”) as a defendant and assert claims for fraud and unjust enrichment against both Cohen and Goldman. Invoking both Rules 15 and 16, Defendants seek to add a breach of contract claim against One Step's principal, Harry Adjmi (“Adjmi”). For the reasons that follow, I recommend that One Step's motion be GRANTED and Defendants' motion be DENIED.
As initially filed, Defendants' motion also sought to add claims against Plaintiff's attorneys, but that request has since been withdrawn. See Dkt. 33 at 1 (“Based on the documents submitted by Plaintiff in opposition to Defendants' Motion, Defendants will withdraw their claim against Mr. Lazarus and his firm Lazarus & Lazarus, P.C.”). The Court deems the claim withdrawn and will not address it further.
FACTUAL BACKGROUND
The background facts are drawn from the Complaint (“Compl.” Dkt.1). Facts from the proposed amended pleadings will be set forth in the discussion of each motion as they must be accepted as true for the purposes of their respective motion.
One Step, located in New York, New York, is a wholesale apparel company that designs, manufactures, and distributes branded clothing and footwear. (Compl. ¶ 6.) Empire, also located in New York, New York, is also a wholesaler and distributor of branded apparel. (Compl. ¶ 8.) Cohen is the sole member and president of Empire. (Compl. ¶ 9.) One Step alleges that Cohen is the alter-ego of Empire and the “moving, active and conscious force” behind its improper activities. (Compl. ¶¶ 15, 18, 35.)
In 2013, One Step agreed to employ Cohen “through” Empire as an executive in a division of One Step to be known as its Empire Division. (Compl. ¶ 15.) The agreement provided that Empire “would be named an employee” of One Step. (Compl. ¶ 16.) “In connection with the Empire Division,” One Step, “through Cohen,” applied for and received a federal trademark registration for the mark “BUSHWICK INDUSTRIES.” (Compl. ¶ 19.) One Step owns and uses the BUSHWICK INDUSTRIES mark, as well as the common law mark “ESSENZA,” in connection with its sale of apparel. (Compl. ¶¶ 2025.)
On June 5, 2020, Empire and Cohen resigned from One Step. (Compl. ¶ 27.) Since termination of the parties' relationship, Empire and Cohen continue to use One Step's intellectual property, sourcing and manufacture information, and customer lists, among other resources. (Compl. ¶ 28.) Prior to leaving One Step, Empire and Cohen applied for a federal registration in the trademark “BUSHWICK SUPPLY” and began sourcing and manufacturing apparel under that trademark. (Compl. ¶¶ 29-31.) On January 19, 2021, the United States Patent and Trademark Office denied registration of “BUSHWICK SUPPLY” due to likelihood of confusion with One Step's “BUSHWICK INDUSTRIES” trademark. (Compl. ¶ 32.) Defendants nonetheless continue to manufacture, distribute, and sell apparel under the BUSHWICK SUPPLY mark, as well as under One Step's ESSENZA mark. (Compl. ¶ 33, 36-38.)
The Complaint asserts claims for trademark infringement under 15 U.S.C. § 1114, unfair competition under 15 U.S.C. § 1125(a), those statutes' common law analogs, and dilution and deceptive practices in violation of New York State law.
PROCEDURAL BACKGROUND
One Step filed its Complaint on June 18, 2021. Defendants filed their answer, without asserting any counterclaims or third-party claims, on August 19, 2021. (Dkt. 16.) On September 24, 2021, the parties submitted a proposed case management order, which the Court entered on September 29, 2021. (Dkt. 21.) The order set a deadline of November 15, 2021 for the parties to move to amend their pleadings. (Dkt. 21 ¶ 5.)
On December 27, 2021, the parties filed a request to extend discovery deadlines and submitted a proposed revised scheduling order. (Dkt. 22-1.) The proposed order did not change the deadline for amending pleadings. (Dkt. 22-1 ¶ 5.) The Court entered the revised scheduling order on January 12, 2022. (Dkt. 24.) Just two weeks later, on January 26, 2022, Defendants filed their motion to amend the answer to assert third-party claims. (Dkt. 25.) One Step cross-moved to amend its Complaint on February 16, 2022. (Dkt. 27.) The motions were fully briefed as of March 16, 2022 and have been referred to me for report and recommendation. (Dkt. 35.)
On April 6, 2022, the case was reassigned from the Honorable Alison J. Nathan, U.S.D.J., to the Honorable Paul A. Crotty, U.S.D.J.
On March 29, 2022, the parties requested a further extension of discovery deadlines and submitted another proposed revised scheduling order. (Dkt. 39.) The Court entered the revised scheduling order the same day. Pursuant to that order, all fact discovery shall be completed by August 15, 2022. (Dkt. 40 ¶ 8(a).) The parties currently are engaged in document production. (Def. Mem. at 2-3.)
LEGAL STANDARDS
Motions to amend principally are governed by Rule 15(a). Under Rule 15(a)(2), “[t]he court should freely give leave when justice so requires.” Fed.R.Civ.P. 15(a)(2); see Aetna Casualty And Surety Co. v. Aniero Concrete Co., 404 F.3d 566, 603 (2d Cir. 2005). A district court, however, “has discretion to deny leave for good reason.” McCarthy v. Dun And Bradstreet Corp., 482 F.3d 184, 200 (2d Cir. 2007). The Second Circuit has held that a Rule 15(a) motion “should be denied only for such reasons as undue delay, bad faith, futility of the amendment, and perhaps most important, the resulting prejudice to the opposing party.” Aetna Casualty, 403 F.2d at 603-04 (quoting Richardson Greenshields Securities, Inc. v. Lau, 825 F.2d 647, 653 n.6 (2d Cir. 1987)). Delay alone generally is an insufficient justification for the denial of a motion to amend under Rule 15(a). Block v. First Blood Associates, 988 F.2d 344, 350 (2d Cir. 1993).
Delay becomes more significant, however, when a party files a motion to amend after the deadline for doing so established in a court's scheduling order. Under Rule 16(b), leave to amend requires “good cause” following expiration of the deadline. Fed.R.Civ.P. 16(b). That is a more exacting standard than Rule 15(a): “Under Rule 16(b), a party moving to amend after the applicable deadline must demonstrate good cause. Whether good cause exists depends on the diligence of the moving party. In other words, the movant must show that the deadlines [could not have been] reasonably met despite its diligence.” Volunteer Fire Association Of Tappan, Inc. v. County Of Rockland, No. 09-CV-4622, 2010 WL 4968247, at *3 (S.D.N.Y. Nov. 24, 2010) (internal citations and quotation marks omitted); accord Parker v. Columbia Pictures Industries, 204 F.3d 326, 340 (2d Cir. 2000) (“despite the lenient standard of Rule 15(a), a district court does not abuse its discretion in denying leave to amend the pleadings after the deadline set in the scheduling order where the moving party has failed to establish good cause. Moreover, we agree that a finding of ‘good cause' depends on the diligence of the moving party”).
The burden of showing diligence is borne by the moving party. Fresh Del Monte Produce, Inc. v. Del Monte Foods, Inc., 304 F.R.D. 170, 175 (S.D.N.Y. 2014) (citation omitted). “A party is not considered to have acted diligently where the proposed amendment is based on information that the party knew, or should have known, in advance of the motion deadline.” Id. at 174-75. Although “the primary consideration is whether the moving party can demonstrate diligence,” however, “[i]t is not ... the only consideration.” Kassner v. 2nd Avenue Delicatessen Inc., 496 F.3d 229, 244 (2d Cir. 2007). Rather, the district court, “in the exercise of its discretion under Rule 16(b), also may consider other relevant factors including, in particular, whether allowing the amendment of the pleading at this stage of the litigation will prejudice [the answering party].” Id.
Here, both parties have moved to amend after the deadline to do so elapsed. Accordingly, both parties must demonstrate “good cause” to amend. Neither party argues that each other's proposed amendment was asserted in bad faith or would cause undue prejudice. Nor does either argue that the other unduly delayed or failed to act diligently. Rather, each party argues that the other party's proposed amendments are futile.
PLAINTIFF'S MOTION TO AMEND
One Step's proposed Amended Complaint (“Amend. Compl.”) appears at Dkt. 305. The proposed amendment adds as a defendant Stephanie Goldman, a former One Step employee and current office manager of Empire, and asserts claims for fraudulent misrepresentation and unjust enrichment against both Cohen and Goldman. The amendment should be permitted.
A. Facts Relevant To Plaintiff's Proposed Amendment
In 2018, Cohen devised a scheme in which he would have One Step overpay for goods purchased by the Empire Division from a supplier, Bow Wow Style 1, Inc. (“Bow Wow”). Goldman cooperated with Cohen in carrying out the scheme. Cohen and/or Goldman then pocketed the overpayment. (Amend. Compl. ¶¶ 31-33.)
Cohen (or Goldman) carried out the scheme by inputting falsely inflated prices for certain items on One Step's computer-generated purchase orders and payment systems. Relying on those purchase orders, One Step paid Bow Wow the inflated prices. The “overpaid sums” were then “paid by Bow Wow to Cohen via cash or check,” and Cohen and Goldman “pock[et]ed the difference.” (Amend. Compl. ¶¶ 34-36.) One Step alleges that the amount Bow Wow paid directly to Cohen on account of One Step's overpayment totals over $100,000. (Amend. Compl. ¶ 39.) The amended pleading alleges, on information and belief, that the Defendants “may have” collaborated on similar schemes with other vendors or manufacturers. (Amend. Compl. ¶ 40.)
According to One Step, it did not learn of the alleged scheme until January 2022. (Pl. Mem. at 2, 14.) One Step has submitted a declaration of Abraham Sultan (“Sultan Decl.”), President of One Step's Aggressive Apparel Division, in support of One Step's motion. (Dkt. 38.) The declaration attaches copies of electronic screenshots and emails purportedly evidencing the scheme. (Sultan Decl. ¶¶ 3-5 and Exs. 1-2.) Empire has submitted the declaration of Stephanie Goldman, who denies the allegations. (Dkt. 34.)
“Pl. Mem.” refers to the “Memorandum Of Law In Opposition to Defendants' Motion To Amend And In Support of Plaintiff's Motion to Amend” (Dkt. 28).
B. Discussion
Defendants contend that One Step's proposed claims against Cohen and Goldman are futile. “[L]eave to amend will be denied as futile only if the proposed new claim cannot withstand a 12(b)(6) motion to dismiss for failure to state a claim ....” Milanese v. RustOleum Corp., 244 F.3d 104, 110 (2d Cir. 2001) (citing Ricciuti v. New York City Transit Authority, 941 F.2d 119, 123 (2d Cir. 1991)). To survive a Rule 12(b)(6) motion, a plaintiff must plead sufficient facts “to state a claim to relief that is plausible on its face.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 1974 (2007). A claim is facially plausible “when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 1949 (2009) (citing Twombly, 550 U.S. at 556, 127 S.Ct. at 1955). Under that standard, the Court accepts as true the well-plead allegations of the asserted claim and draws reasonable inferences in favor of the party seeking to assert it. See Lotes Co. v. Hon Hai Precision Industry Co., 753 F.3d 395, 403 (2d Cir. 2014).
Defendants advance two primary arguments as to why the proposed claims against Cohen and Goldman are futile. First, they assert that the fraud allegations fail to satisfy the heightened pleading requirements of Rule 9(b), which requires that in alleging fraud, “a party must state with particularity the circumstances constituting fraud or mistake.” Fed.R.Civ.P. 9(b). In describing what Rule 9(b) requires, the Second Circuit has explained that a complaint asserting fraud must “(1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent.” DiMuro v. Clinique Laboratories, LLC, 572 Fed.Appx. 27, 30 (2d Cir.2014) (quoting Mills v. Polar Molecular Corp., 12 F.3d 1170, 1175 (2d Cir.1993)). “Put another way, Rule 9(b) ‘requires that a plaintiff set forth the who, what, when, where and how of the alleged fraud.'” Minnie Rose LLC v. Yu, 169 F.Supp.3d 504, 511 (S.D.N.Y. 2016) (quoting U.S. ex rel. Kester v. Novartis Pharmaceutical Corp., 23 F.Supp.3d 242, 252 (S.D.N.Y.2014)).
The proposed amendment satisfies those requirements. The fraudulent statements identified are the allegedly inflated prices in Bow Wow purchase orders, for which the Amended Complaint references purported examples. (Amend. Compl. ¶¶ 34, 37.) The pleading identifies the “speaker” in that Cohen and Goldman are alleged to have input the allegedly falsely inflated prices. (Amend. Compl. ¶ 34.) The “where” is identified as One Step's computer systems, and the “when” is for a period of time starting in 2018. (Amend. Compl. ¶¶ 33, 34, 37.) As for “why” the statements were fraudulent, the Amended Complaint explains that the invoices contained inflated prices misrepresenting the actual prices for the Bow Wow goods purchased. (Amend. Compl. ¶¶ 33-35.) The Amended Complaint explains how the allegedly fraudulent scheme worked (Amend Compl. ¶¶ 33-36) and the alleged amount of money received, at least by Cohen, as a result of the scheme (Amend. Compl. ¶ 39.)
Defendants' suggestion that One Step's allegations are merely “conclusory” (Def. Reply at 7) and lacking in sufficient detail thus are wide of the mark. See Minnie Rose, 169 F.Supp.3d at 516 (finding claim of creating fraudulently inflated invoices was adequately plead); Rana v. Islam, 305 F.R.D. 53, 58 (S.D.N.Y.2015) (“To satisfy Rule 9(b), a plaintiff need not plead dates, times, and places with absolute precision, so long as the complaint gives fair and reasonable notice to defendants of the claim and the grounds upon which it is based”) . Details about specific conversations and the extent of any ill-gotten gains are likely only to be within Defendants' possession. Under those circumstances, “pleading requirements may be relaxed ... as long as the plaintiff has adequately set forth the factual basis for the allegations.” Minnie Rose, 169 F.Supp.3d at 517 (quoting Lavastone Capital LLC v. Coventry First LLC, No. 14-CV-7139, 2015 WL 1939711, at *9 (S.D.N.Y. Apr. 22, 2015). As explained above, One Step has done so here.
“Def. Reply” refers to the “Memorandum Of Law In Further Support Of Defendants' Motion To Amend Their Answer To Add Third Party Claims And In Opposition To Plaintiff's Motion TO Amend The Complaint” (Dkt. 33).
Defendants' second line of argument is that the alleged inflated-price scheme “makes no sense.” (Def. Reply at 8; see also id. at 7 (characterizing the claim as “convoluted and far-fetched”).) Defendants assert that any inflated price paid by One Step would reduce profits on Empire Apparel. (Def. Reply at 8.) That may be so, which might make the scheme illogical if One Step knew about it, but that is not what the pleading alleges; to the contrary, it alleges that One Step relied on the falsely inflated pricing information to pay Bow Wow. (Amend. Compl. ¶ 35.)
Defendants also fault One Step for “fail[ing] to explain why Bow Wow or Goldman would agree to such a plan” since, “according to Plaintiff's explanation,” neither Bow Wow nor Goldman benefitted from the scheme. (Def. Reply at 8.) In doing so, Defendants mischaracterize One Step's “explanation.” The proposed amendment alleges that Goldman may have benefitted in that “Cohen and/or Goldman would pocket the difference” between the actual and inflated prices. (Amend. Compl. ¶ 33.) Although the pleading also alleges that Bow Wow paid money directly to Cohen (Amend. Compl. ¶ 39), that is not inconsistent with Goldman also receiving some portion of the payments from Cohen or receiving some other benefit. Regardless, alleging why either Goldman or Bow Wow would participate in such a scheme is not necessary to pleading fraud, and such information is likely uniquely within Defendants' and Bow Wow's knowledge, not One Step's.
A further shortcoming in Defendants' argument is that it is premised in large part on disputing the alleged facts based on a declaration from Goldman denying One Step's assertions. (See Def. Reply at 8.) As futility is judged under the standards of Rule 12(b)(6), the well-plead allegations of the pleading must be accepted as true and reasonable inferences drawn in favor of One Step, not Defendants. While sworn testimony from One Step contradicting its own allegations may be appropriate to consider (none has been presented), the factual averments of the non-moving party are not. See Ottah v. National Grid, No. 19-CV-8289, 2020 WL 2543105, at * 11 (S.D.N.Y. April 27, 2020) (court cannot consider factual contentions set forth in declaration submitted in opposition to motion to dismiss), R & R adopted, 2020 WL 2539075 (S.D.N.Y. May 19, 2020); Kwok Sze v. Pui-Ling Pang, No. 15-CV-447, 2015 WL 6867134, at *3 (S.D.N.Y. Nov. 9, 2015) (“affidavits submitted by defendants and containing material outside the pleadings cannot be considered on a Rule 12(b)(6) motion to dismiss”) (citing Friedl v. City Of New York, 210 F.3d 79, 83-84 (2d Cir. 2000)).
Discovery could well reveal that there was no scheme as alleged by One Step. But as set forth in the proposed Amended Complaint, One Step's claim for fraudulent misrepresentation is sufficiently plead so as not to be futile. Defendants do not challenge One Step's assertion that One Step only recently learned of the alleged scheme. Nor does One Step claim prejudice. One Step has demonstrated good cause, and its motion to amend should be granted.
DEFENDANTS' MOTION TO AMEND
Defendants' proposed Amended Answer with Third-Party Claim (“Third PartyClaim”) appears at Dkt. 25-2. The proposed amendment adds One Step's principal, Adjmi, as a third-party defendant and asserts a claim against him for breach of contract. Defendants' motion should be denied as futile.
A. Facts Relevant To Defendants' Proposed Amendment
Empire's Third-Party Claim characterizes the parties' relationship differently than One Step's proposed amendment. Whereas One Step alleges that Cohen/Empire was employed by One Step, Empire alleges that One Step and Empire orally agreed to a joint venture in 2013 and a second joint venture in 2016. (Third-Party Claim ¶¶ 12, 18.) According to Defendants, the first joint venture agreement (the “Agreement”) included a mutual non-circumvent clause added by Cohen. As the proposed amendment asserts, “Adjmi, through one Step, agreed that he would not independently contact Empire's suppliers and Empire and Cohen agreed to not independently contact One Step's suppliers.” (Third-Party Claim ¶ 16; see also id. ¶ 61.)
In 2019, the parties' relationship deteriorated, and in June 2020, Empire terminated the joint venture. (Third-Party Claim ¶¶ 33, 37.) After termination, Empire continued to work with the vendors and retailers that it had introduced to and shared with One Step under the joint venture. One of those vendors, Bow Wow, had worked with Empire for 15 years and continued selling and producing apparel for Empire after termination of the joint venture. (Third-Party Claim ¶¶ 38-39.)
“Upon information and belief,” after termination of the joint venture, Adjmi “directed One Step” to contact Empire's suppliers “in order to have Empire's suppliers abandon Empire and ship product to One Step instead.” (Third-Party Claim ¶ 62.) As an example, One Step engaged Bow Wow to ship “vast amounts of product” to One Step, and, following commencement of this action, Bow Wow has ceased doing business with Empire. (Third-Party Claim ¶¶ 63-64.) Also, on information and belief, Adjmi “through One Step and its affiliated companies” has sought business information about Empire for use against Empire and has provide misinformation about Empire. (Third-Party Claim ¶¶ 65, 68.) For instance, Adjmi's nephew, Mr. Sultan, contacted Empire's vendor at Amanly International trying to extract confidential information about Empire and accusing Empire of theft. (Third-Party Claim ¶ 62.)
The proposed Third-Party Claim alleges that Adjmi “so dominates and controls One Step that it only acts upon his specific direction.” (Third-Party Claim ¶ 60.) The allegations against Adjmi culminate in a claim of breach of the Agreement and its noncircumvent clause.
Empire has submitted a declaration from Cohen essentially parroting the allegations of the Third-Party Claim. (Dkt. 25-4.) Cohen asserts that he became aware of Adjmi's alleged misconduct during discovery in this action. (Dkt. 25-4 ¶¶ 27-31.)
B. Discussion
One Step opposes Defendants' motion to add the breach of contract claim against Adjmi based on futility. As noted above, futility will be found only if the proposed new claim cannot withstand a 12(b)(6) motion to dismiss for failure to state a claim. Milanese, 244 F.3d at 110; Ricciuti, 941 F.2d at 123.
Defendants' allegations against Adjmi fail that test. The allegations do not establish any contractual relationship between Defendants and Adjmi personally. Rather, the allegations reflect a contractual joint venture relationship between One Step and Empire. The proposed Third-Party Complaint thus alleges that “Empire and One Step, orally agreed to enter into [the] Joint Venture” (Third-Party Claim ¶ 12); as part of that same joint venture, “Adjmi, through One Step, agreed that he would not independently contact Empire's suppliers” (Third-Party Claim ¶ 16); “One Step has engaged Bow Wow to ship vast amounts of product to One Step ... in violation of the Agreement” (Third-Party Claim ¶ 63). Cohen's declaration in support of the motion is to the same effect: “When Empire and One Step entered into the Joint Venture, the Agreement contained a noncircumvent clause which prohibited One Step from contacting suppliers ..” (Dkt. 25-4 ¶ 26); “Mr. Adjmi, through One Step and its affiliated companies, has maliciously and intentionally solicited Bow Wow ....” (Dkt. 25-4 ¶ 29).
In defense of its claim against Adjmi, Defendants seize upon a snippet of one allegation from the Third-Party Claim: “Mr. Adjmi and Cohen entered into the Joint Venture.” (Def. Reply at 5.) When read in context of the full allegation, however, the language excerpted by Defendants does not support their argument that Adjmi entered into the Agreement on his personal behalf as distinct from One Step. In full, the allegation reads: “When Adjmi and Cohen entered into the Joint Venture, the Agreement contained a non-circumvent clause which prohibited One Step from contacting suppliers brought by Empire and Empire contacting suppliers brought by One Step.” (Third-Party Claim ¶ 61.) Tellingly, Cohen's own declaration avers the very same sentence referencing only One Step and Empire, not Adjmi: “When Empire and One Step entered into the Joint Venture, the Agreement contained a non-circumvent clause which prohibited One Step from contacting suppliers brought by Empire and contacting suppliers brought by One Step.” (Dkt. 25-4 ¶ 26). Defendants cannot plausibly state a claim based on sound bite from their proposed pleading that is inconsistent with all other relevant allegations of the pleading and with the sworn testimony of the sole individual Defendant to the contrary. See Luck v. Westchester Medical Center, No. 17-CV-9110, 2019 WL 416333, at *5 (S.D.N.Y. Feb. 1, 2019) (“When confronted with sworn testimony that contradicts allegations in a complaint, courts should accept sworn testimony”); Thomas v. Westchester County Health Care Corp., 232 F.Supp.2d 273, 279 (S.D.N.Y. 2002) (“Faced with [a] confounding contradiction [between plaintiff's allegations in her complaint and her sworn testimony], the Court has no basis for accepting as true the vague statements in [the] [c]omplaint as opposed to [plaintiff's] sworn testimony ....”).
The only authority cited by Plaintiff in support of its claim against Adjmi personally is entirely inapt as the proposition for which it is cited addresses who may enforce a contract, not whom it can be enforced against. See Def. Reply at 5 (citing Bausch And Lomb Inc. v. Mimetogen Pharmaceuticals, Inc., Case No. 14-CV-6640, 2016 WL 2622013, at *6 (W.D.N.Y. May 5, 2016) (“Under New York law, the general rule is that ‘only parties in privity of contract may enforce terms of the contract'”) (quoting, Freeford Ltd. v. Pendleton, 857 N.Y.S.2d 62, 67, 53 A.D.3d 32, 38 (1st Dep't 2008)).
In the absence of a claim against Adjmi for personally entering into the joint venture Agreement, Defendants assert that they have sufficiently plead a claim for piercing the corporate veil that would make Adjmi personally liable. (Def. Reply at 6.) The Court disagrees.
Under New York law, “the courts will disregard the corporate form, or, to use accepted terminology, pierce the corporate veil, whenever necessary to prevent fraud or to achieve equity.” Morris v. New York State Department Of Taxation And Finance, 82 N.Y.2d 135, 140, 603 N.Y.S.2d 807, 810 (1993) (internal quotation marks omitted) (quoting Walkovszky v. Carlton, 18 N.Y.2d 414, 417, 276 N.Y.S.2d 585, 587 (1966)). To pierce the corporate veil, a plaintiff must establish both: (1) “that the owner exercised complete domination over the corporation with respect to the transaction at issue” and (2) “that such domination was used to commit a fraud or wrong that injured the party seeking to pierce the veil.” Thrift Drug, Inc. v. Universal Prescription Administrators, 131 F.3d 95, 97 (2d Cir. 1997) (internal quotation marks omitted) (quoting American Fuel Corp. v. Utah Energy Development Co., 122 F.3d 130, 134 (2d Cir. 1997)). Courts are “extremely reluctant” to pierce the corporate veil. United States v. Funds Held In The Name Or For The Benefit Of Wetterer, 210 F.3d 96, 106 (2d Cir. 2000).
The Second Circuit has identified a variety of factors to consider in determining whether an individual or other entity exercises complete domination over a corporation, including:
(1) the absence of the formalities and paraphernalia that are part and parcel of the corporate existence, i.e., issuance of stock, election of directors, keeping of corporate records and the like, (2) inadequate capitalization, (3) whether funds are put in and taken out of the corporation for personal rather than corporate purposes, (4) overlap in ownership, officers, directors, and personnel, (5) common office space, address and telephone numbers of corporate entities, (6) the amount of business discretion displayed by the allegedly dominated corporation, (7) whether the related corporations deal with the dominated corporation at arms length, (8) whether the corporations are treated as independent profit centers, (9) the payment or guarantee of debts of the dominated corporation by other corporations in the group, and (10) whether the corporation in question had property that was used by other of the corporations as if it were its own.William Passalacqua Builders, Inc. v. Resnick Developers South, Inc., 933 F.2d 131, 139 (2d Cir. 1991). Courts are not required to find that every factor is present, and no one factor is dispositive. New York State Electric And Gas Corp. v. FirstEnergy Corp., 766 F.3d 212, 225 (2d Cir. 2014); Sentry Insurance v. Brand Management Inc., 120 F.Supp.3d 277, 288 (E.D.N.Y. 2015) (“[l]t is not required that every single factor weigh in favor of piercing the corporate veil - a district court need only find that, as a matter of law, the balance of Passalacqua factors weighs in favor of either party ....” (internal quotation marks omitted) (quoting Feitshans v. Kahn, No. 06-CV-2125, 2007 WL 2438411, at *7 (S.D.N.Y. Aug. 24, 2007)), aff'd sub nom., Sentry Insurance Mutual Co. v. Weber, 720 F.
App'x 639 (2d Cir. 2017).
Defendants correctly observe that piercing the corporate veil is a fact-intensive inquiry. (Def. Reply at 6); see MAG Portfolio Consultant, GMBH v. Merlin Biomed Group LLC, 268 F.3d 58, 64 (2d Cir. 2001) (“determining whether to pierce the corporate veil is a very fact specific inquiry involving a multitude of factors”). But for that very reason, the proposed claim against Adjmi is insufficiently alleged - the Third-Party Claim lacks facts to plausibly assert a veil-piercing claim.
First, Defendants allege that Adjmi exercised complete domination over One Step in only the most conclusory fashion. (Third-Party Claim ¶ 60 (“Upon information and belief, Adjmi so dominates and controls One Step that it only acts upon his specific direction”).) Defendants do assert a number of actions taken by Adjmi in which he directed One Step to act - both in entering into the Agreement and in contacting and soliciting Empire customers. (E.g., Third-Party Claim ¶¶ 62, 65, 66.) But they allege none of the indicia courts are to consider in evaluating a veil-piercing claim. Even putting aside the several Passalacqua factors that are less relevant where an individual (and not another business entity) is alleged to be liable from veil-piercing, the Third-Party Claim is silent as to those factors that are directly relevant here. The proposed pleading thus does not allege that One Step lacks the formalities and paraphernalia that are part and parcel of the corporate existence, or that One Step was inadequately capitalized, or that Adjmi deposited and withdrew One Step funds for personal rather than corporate purposes. If simply directing a company to take certain action were enough to establish veil-piercing, then virtually every CEO would be subject to personal liability. That is not the law.
Second, Defendants do not allege any facts to support the second required element of veil-piercing; i.e., that Adjmi's alleged domination was used to commit a fraud or wrong. The Third-Party Complaint does not allege that Adjmi operated One Step for a fraudulent purpose or that there was any abuse of the corporate form. Rather, it merely alleges that One Step, at the direction of Adjmi, breached the parties' non-circumvent agreement. (See, e.g., Third-Party Claim ¶ 62 (“Adjmi directed One Step to contact Empire's suppliers”; ¶ 66 (“As a result of One Step's interference, as directed by Adjmi ...”).) Such allegations are not enough. Mirage Entertainment, Inc. v. FEG Entretenimientos S.A., 326 F.Supp.3d 26, 34 (S.D.N.Y. 2018) (dismissing veil-piercing counterclaim and stating: “Critically, the wrongful or unjust act must consist of more than merely . the breach of contract that is the basis of the [party's] lawsuit”) (internal quotation marks and citations omitted); see also Pado, Inc. v. SG Trademark Holding Co., LLC, 537 F.Supp.3d 414 (E.D.N.Y. 2021) (dismissing veil-piercing claim because “plaintiffs do not allege sufficient additional facts to support a finding of domination. They do not allege, for example, that the Individual Defendants failed to observe corporate formalities, that the corporations were inadequately capitalized, that the Individual Defendants comingled funds with the corporations, that the corporations were not treated as independent profit centers, or that the Individual Defendants paid or guaranteed the debts of the corporations.”) (internal quotation marks and citation omitted); Allison v. Clos-ette Too, LLC, No. 14-CV-1618, 2014 WL 4996358, at *5 (S.D.N.Y. Sept. 15, 2014) (dismissing veil-piercing claim in part because “[n]one of the factors for analyzing complete domination [were] alleged: the complaint makes no reference to lack of corporate formalities, intermingling, or personal use of corporate funds”), R & R adopted sub nom., Ellison v. Clos-ette Too, LLC, No. 14-CV-1618, 2014 WL 5002099 (S.D.N.Y. Oct. 7, 2014).
Accordingly, the proposed Third-Party Claim fails to sufficiently plead a claim for Adjmi's personal liability for breach of contract. The claim is therefore futile; good cause has not been shown; and the motion to amend should be denied without prejudice.
CONCLUSION
For the foregoing reasons, I recommend that the Court GRANT Plaintiff's motion to amend the complaint and DENY Defendants' motion to amend their answer to assert third-party claims.
DEADLINE FOR OBJECTIONS AND APPEAL
Pursuant to 28 U.S.C. § 636(b)(1) and Rules 72, 6(a), and 6(d) of the Federal Rules Of Civil Procedure, the parties have fourteen (14) days to file written objections to this Report and Recommendation. Such objections shall be filed with the Clerk of Court, with extra copies delivered to the Chambers of the Honorable Paul A. Crotty, United States Courthouse, 500 Pearl Street, New York, New York 10007, and to the Chambers of the undersigned, 500 Pearl Street, New York, New York 10007. FAILURE TO FILE TIMELY OBJECTIONS WILL RESULT IN WAIVER OF OBJECTIONS AND PRECLUDE APPELLATE REVIEW..
SO ORDERED.