Opinion
03 Civ. 0015 (RWS).
July 7, 2006
GREENBERG TRAURIG, LLP. Attorneys for Third-Party Plaintiffs E-21 Global, Inc., Craig Franco and Maxx International, Inc. New York, NY, By: JAMES H. DONOIAN, ESQ. GREGORY A. NYLEN, ESQ. VALERIE W. HO, ESQ. Of Counsel
VERNON GINSBURG Attorney for Plaintiff/Counterclaim Defendant BCC; Additional Counterclaim Defendant TSV; Third-Party Defendant John Loata New York, NY, By: MEL B. GINSBURG, ESQ. Of Counsel
HOGAN HARTSON Attorneys for Defendant/Counterclaimant Capitolo di San Pietro in Vaticano New York, NY, By: DAVID DUNN, ESQ. Of Counsel
ROBERT M. ROSENBLITH, ESQ. Attorney for Third-Party Defendants Gerald P. Colapinto and Second Renaissance Chestnut Ridge, NY.
OPINION
The third-party defendants John Loata ("Loata"), Bangkok Crafts Corporation ("BCC"), and Treasures of St. Peter's in the Vatican, Ltd. ("TSV") (collectively, the "Loata Defendants") have moved pursuant to Rule 9(b) and Rule 12(b)6, Fed.R.Civ.P., to dismiss the Second Amended and Restated Third Party Complaint ("SARTPC") of E-21 Global, Inc. ("E-21"), Craig Franco ("Franco"), and Maxx International, Inc. ("Maxx"). Gerald P. Colapinto ("Colapinto") and Second Renaissance, LLC ("SRLLC") (the "Colapinto Defendants") have moved for summary judgment pursuant to Rule 56(b), Fed.R.Civ.P., and to dismiss the SARTPC pursuant to Rule 9(b) and 12(b)6, Fed.R.Civ.P. For the reasons set forth below, the motions are granted in part and denied in part.
Prior Proceedings
BBC initiated this action against Capitolo di San Pietro in Vaticano ("Capitolo") in the Supreme Court of the State of New York, County of New York. The action was removed to this Court on January 2, 2003.
Capitolo's motion for partial summary judgment dismissing the Loata Defendants' counterclaim was granted on June 28, 2004 (the "June Opinion"). Extensive motion practice and discovery ensued.
By decision dated August 24, 2004, Bangkok Crafts Corp. v. Capitolo di San Pietro in Vaticano, 331 F. Supp. 2d 247, the third-party complaint was dismissed as against Colapinto and SRLLC, the third-party complaint having failed to satisfy the particularity requirement for pleading fraud, to state an unfair competition claim under New York law, and to state a claim for unjust enrichment. Thereafter by decision dated December 29, 2004, this Court granted Loata's motion to dismiss similar claims stating:
The fraud claim lacks particularity, the unfair competition claim lacks adequate allegation, public confusion and injury, and the unjust enrichment claim fails to adequately allege piercing the corporate veil.Bangkok Crafts Corp. v. Capitolo di San Pietro in Vaticano, No. 03 Civ. 0015 (RWS), 2004 WL 3019771 (S.D.N.Y. Dec. 29, 2004).
On August 17, 2005, the 72-page SARTPC was filed describing the parties (SARTPC ¶¶ 1-8), the facts (SARTPC ¶¶ 11-19), and the allegations. Count (A) alleged the E-21 fraud claim (SARTPC ¶¶ 20-31) relating to the Internet Sublicense Agreement; Count (B) alleged the E-21 fraud claim relating to revised internet sublicense and 7 additional sublicenses (SARTPC ¶¶ 32-41); Count (C) alleged fraudulent representations to E-21 lenders and investors (SARTPC ¶¶ 42-52), (D) alleged fraudulent representation to induce E-21 and Franco to develop products. (SARTPC ¶¶ 53-64).
Count I(B) alleged Franco's fraud claim (SARTPC ¶¶ 65-83); Count I(C) alleged the Maxx fraud claim against the Loata Defendants (SARTPC ¶¶ 84-97); Count II(A) alleged the E-21 negligent misrepresentation claim (SARTPC ¶¶ 98-110); Count II(B) alleged the Franco negligent misrepresentation claim (SARTPC ¶ 111); and Count II(C) alleged the Maxx negligent misrepresentation claim (SARTPC ¶¶ 124-135).
Count III alleged unjust enrichment (SARTPC ¶¶ 136-139); Count IV(A) alleged the E-21 conversion claim against Loata Defendants (SARTPC ¶¶ 140-149); Count IV(B) alleged the Franco conversion claim against Loata Defendants (SARTPC ¶ 150); Count IV(C) alleged the Maxx conversion claim against Loata Defendants (SARTPC ¶¶ 159-167).
Count V(A) alleged the E-21 claim against Loata Defendants for money had and received (SARTPC ¶¶ 168-173); Count V(B) alleged the Franco claim against Loata Defendants for money had and received (SARTPC ¶¶ 174-178); Count V(C) alleged the Maxx claim for moneys had and received (SARTPC ¶¶ 179-183).
Count VII alleged the E-21, Franco, and Max claims against BCC and TSV for unfair competition (SARTPC ¶¶ 184-187) and Count VII alleged the E-21 Franco, Maxx claims for rescission against BCC and TSV (SARTPC ¶¶ 188-193).
The motions by the Loata Defendants and Colapinto Defendants were marked fully submitted on January 4, 2006.
The Facts As Alleged The Parties
E-21 is a New York corporation with its principal place of business located in Malverne, New York.
Maxx is a Utah corporation with its principal place of business located in Melville, New York, and with offices in Beverly Hills, California.
Loata is the president and chief executive officer of BCC. He is a resident of the State of New Jersey. Loata also is the president of TSV. BCC and TSV are alleged to be alter egos of Loata.
BCC is a New York corporation with its principal place of business located in New York, New York.
TSV is a New York corporation with its principal place of business located in New York, New York.
SRLLC is a California limited liability company with its principal place of business located in Corona, California.
Colapinto is the president and managing member of SRLLC and is a resident of the State of California. SRLLC is alleged upon information and believe to be the alter ego of Colapinto.
The Transactions Alleged
On or about February 8, 1996, BCC entered into a license with Capitolo in which Capitolo granted to BCC the exclusive rights to manufacture and sell reproductions of artwork owned by Capitolo (the "1996 License"). The 1996 License permitted BCC to sublicense the rights granted in the license. The 1996 License required BBC to pay royalties to Capitolo. (SARTPC ¶¶ 11-12).
On or about August 15, 1997, Loata and BCC/TSV hired Colapinto and his company, SRLLC, and his daughter, Sandra Nutt ("Nutt"), to serve as the exclusive management, sales, and marketing representatives for selling sublicenses under the 1996 License. (Id. ¶ 14).
Prior to February 9, 1999, Capitolo and its representatives advised Loata and BCC/TSV that the 1996 License would not be renewed or extended because of BCC/TSV's failure to comply with the terms of the license. Capitolo complained that BCC/TSV had materially and repeatedly breached the 1996 License by failing to submit royalty payments, failing to provide certified statements of net sales, and failing to submit copies or samples of licensed products for review. (Id. ¶¶ 25a-e, 26 67-70).
In the June opinion granting Capitolo's motion for partial summary judgment, this Court found: "BCC provided no accounting for sales, and no royalty payments at all during the first 15 months that the 1996 License was in effect . . ." June Opinion at 4-5. The Court also found: "Capitolo's counsel wrote to BCC's counsel on September 3, 1998, stating expressly that Capitolo's contractual relationship with BCC would conclude at the expiration of the original five-year term on February 7, 2001."Id. at 6-7. As a result, the Court ruled that, "BCC's failures to timely and adequately report and pay . . . constituted material breaches of the 1996 License and afforded Capitolo the right to terminate the 1996 License." Id. at 20. The Court also noted that, "BCC concedes that it made no attempt to renew the 1996 License until June 13, 2001, more than four months after the 1996 License had expired." Id. at 18.
On February 4, 2000, E-21 entered into a sublicense with BCC/TSV whereby E-21 was granted the right to be the exclusive internet site for the sale and marketing of products bearing images of Capitolo's artworks (the "Internet Sublicense"). E-21 paid to BCC/TSV and Loata an advance royalty of $250,000. (SARTPC at ¶¶ 21, 30).
Loata, in a letter to Mahr dated February 4, 2000, represented that there were no grounds that existed upon which Capitolo might cause the 1996 License to be cancelled or terminated, that the 1996 License was in good standing under the terms and conditions of the license, and that BCC/TSV was duly authorized to convey the sublicense to E-21. (Id. ¶ 24a). Loata also represented to E-21 that he had extended the term of the 1996 License and was therefore able to grant a sublicense to E-21 that extended beyond the original terms of the 1996 License. (Id. ¶ 24b). All of these representations are alleged to be false. Id. ¶¶ 25-26).
Colapinto, acting as the exclusive marketing and sales agent for Loata and BCC/TSV, falsely represented numerous facts to E-21, including stating that: BCC/TSV had caused the 1996 License to be extended by five years to 2006 by a 2000 license; major manufacturers such as Echo, Lladro, and Waterford were in the process of negotiating sublicenses with BCC/TSV; BCC/TSV were about to launch a nation-wide retail store program to sell reproductions of Capitolo's artworks; sublicensees would be able to obtain images of the artwork for product development; the sublicenses had to be approved by Capitolo; and a portion of the proceeds from the sublicenses would be used for preserving Capitolo's artworks. (Id. ¶ 22).
In September 2000, E-21 entered into a revised internet sublicense and seven additional sublicenses with BCC/TSV for candles, chocolates, confections, flowers, fundraising, greeting cards, and stamps. E-21 paid Loata and BCC/TSV an additional $80,000. (Id. ¶ 37).
During the negotiations regarding these sublicenses, Colapinto falsely represented numerous facts to induce E-21 to enter into the agreements, including the representations detailed in the previous section. (Id. ¶ 33). These statements are alleged to be false, for the reasons set forth above and in the SARTPC. (Id. ¶¶ 33-36).
By no later than October 2000, Colapinto knew that Capitolo considered the 2000 License to be a forgery. (Id. ¶¶ 42-43). However, at no time from December 2000 to April 2003 did Colapinto notify E-21 that the 2000 License was considered to be a forgery by Capitolo, that the September sublicenses issued to E-21 by BCC/TSV were considered to be invalid, or that the 1996 License had not been renewed. Colapinto, still acting as Loata's and BCC/TSV's agent, continued to represent to E-21 and its investors that the 1996 License was valid and in good standing and had been renewed by BCC/TSV as a result of the 2000 License. (SARTPC ¶¶ 45-49). E-21 relied on Colapinto's representations and borrowed $1,700,000 to develop its business which was based entirely on the validity of the sublicenses.
On February 9, 1999, Franco entered into a sublicense with BCC/TSV for the manufacture and sale of coins, medallions, and crosses that bear images of Capitolo's artwork. Franco paid $150,000 to Loata and BCC/TSV for the sublicense. (Id. ¶¶ 66 83).
Colapinto made numerous false representations to Franco to induce him to execute the sublicense. Colapinto represented that the proposed advance royalty fee for Franco's sublicense was very reasonable given that BCC/TSV had sold a confections sublicense to Terry May for an advance royalty fee of $50,000, that Franco would be given access to the Vatican's world-wide mailing, and that there was an infrastructure in place to assist and support the marketing efforts of the sublicensees. (Id. ¶ 67).
All of the representations made by Colapinto to Franco are alleged to be false. (Id. ¶¶ 16-19 67). Even after Colapinto became aware that the 1996 License had not been renewed, he never informed Franco of this fact and from February 2001 to April 2003, continued to represent to him during that his sublicense was valid and enforceable. Colapinto continued to encourage Franco to develop and market products under the sublicense. As a result, Franco continued to expend large sums of money to develop and market his products and was left with an inventory of products bearing images owned by Capitolo that he could not sell. (Id. ¶¶ 76-81).
By no later than October 2000, Loata and Colapinto knew that Capitolo considered the 2000 License to be a forgery. (Id. ¶¶ 42-43). However, at no time from December 2000 to April 2003 did Colapinto or Loata notify E-21 that the 2000 License was considered to be a forgery by Capitolo and that the 1996 License had not been renewed. Colapinto, still acting as Loata's and BCC/TSV's agent, continued to represent to E-21 and its investors that the 1996 License was valid and in good standing and had been renewed by BCC/TSV as a result of the 2000 License. (Id. ¶¶ 45-49). E-21 relied on Colapinto's representations and borrowed $1,700,000 to develop its business which was based entirely on the validity of the sublicenses.
Applicable Standards
The applicable standards for summary judgment and dismissal have been set forth in this Court's previous opinions, familiarity with which are assumed. See Bangkok Crafts Corp. v. Capitolo di San Pietro in Vaticano, 331 F. Supp. 2d 247 (S.D.N.Y. 2004); Bangkok Crafts Corp. v. Capitolo di San Pietro in Vaticano, No. 03 Civ. 0015 (RWS), 2005 U.S. Dist. LEXIS 13514, at *7-9 (S.D.N.Y. July 11, 2005). Claims for Fraud Have Been Adequately Alleged
Under New York law, the elements of a fraud claim are: (1) that the defendant made a material false representation, (2) that the defendant intended to defraud the plaintiff thereby, (3) that the plaintiff reasonably relied upon the representation, and (4) that the plaintiff suffered damage as a result of such reliance.Manning v. Utils. Mut. Ins. Co., 254 F.3d 387, 400 (2d Cir. 2001) (quoting Bridgestone/Firestone, Inc. v. Recovery Credit Servs., 98 F.3d 13, 19 (2d Cir. 1996)); see also Lama Holding Co. v. Smith Barney, Inc., 88 N.Y.2d 413, 421, 646 N.Y.S.2d 76, 80, 668 N.E.2d 1370, 1373 (1996).
Federal Rule of Civil Procedure 9(b) provides that "[i]n averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a person may be averred generally." Fed.R.Civ.P. 9(b) In accordance with Rule 9(b), a claim for fraud must allege "the time, place, speaker, and sometimes even the content of the alleged misrepresentation."Ouaknine v. MacFarlane, 897 F.2d 75, 79 (2d Cir. 1990).
The SARTPC has addressed all of the deficiencies identified by the Court when it granted Loata's previous motion to dismiss. E-21 details each misrepresentation that was made, the dates on which each misrepresentation was made, the locations at which each misrepresentation was made, and the speakers and recipients of each misrepresentation. (SARTPC ¶¶ 22a-c, 24a-b, 25a-e, 26, 33a-g, 34, 35, 45a-e, 46a-g, 47a-d, 48-49, 53-54, 67a-g, 68a-c, 69a-e, 70 76). As such, the plaintiffs adequately pled fraud by alleging the fraudulent statements, the parties who made the statements, and why the statements were false. See Flash Electronics, Inc. v. Universal Music Video Distribution Corp., 312 F. Supp. 2d 379, 402 (E.D.N.Y. 2004).
The Loata Defendants have contended that a "period of months is not sufficient identification of time of the statements for 9(b) purposes." However, "Rule 9(b) does not require that a complaint plead fraud with the detail of a desk calendar or a street map. Nor should the word `particularity' be used as a talisman to dismiss any but a finely detailed fraud allegation brought in a federal court." Gelles v. TDA Indus., Inc., No. 90 Civ. 5133 (MBM), 1991 WL 39673, at *6 (S.D.N.Y. 1991); see also Sears Petroleum Transport Corp. v. Ice Ban America, Inc., No. 99 Civ. 704, 2001 WL 834849, at *10 (N.D.N.Y. 2004) ("Although plaintiff may not have pinpointed the exact time and place of every representation, they have given sufficient notice of the time period during which these representations were made. This appears sufficiently specific in the present case to give defendants adequate notice of the claims against them for fraud and fraudulent intent, and to prepare an effective defense."). Lomaglio Associates Inc. v. LBK Marketing Corp., 876 F. Supp. 41, 44 (S.D.N.Y. 1995), cited by the Loata Defendants, is distinguishable. In Lomaglio, the plaintiff alleged that the misrepresentations "may have been made at any date prior to and/or including September 1, 1993." Here, E-21 has provided sufficient notice to the Loata Defendants of the time, place, and content of the misrepresentations. In fact, with respect to misrepresentations made by Loata, E-21 provided exact dates,e.g., February 4, 2000. (SARTPC ¶ 24a).
In addition to alleging that Colapinto was acting in his capacity as Loata's and BCC/TSV's agent when he made numerous misrepresentations to E-21, the SARTPC also alleges that Loata himself made a number of misrepresentations to induce third-party plaintiffs to enter into the sublicenses. (Id. ¶¶ 24a-b, 34a-b, 35, 68 (misrepresentations made by Loata personally)). Regardless of whether Colapinto was acting as Loata's agent and whether Loata is the alter ego of BCC/TSV, Loata is individually liable for the misrepresentations he personally made. See Cohen v. Koenig, 25 F.3d 1168, 1173 (2d Cir. 1994) ("A corporate officer is individually liable for fraudulent acts or false representations of his own, or in which he participates . . .").
Colapinto has also argued that summary judgment is appropriate because the representations that he made were not factual in nature. Under New York law a defendant cannot be held liable for fraud or negligent misrepresentation unless "the alleged misrepresentation [is] factual in nature and not promissory or relating to future events that might never come to fruition." Hydro Investors, Inc. v. Trafalgar Power, Inc., 227 F.3d 8, 20-21 (2d Cir. 2000).
Prior to entering into the February 2000 sublicense, Colapinto made the following representation to E-21 to induce E-21 to enter into the February sublicense:
a. The 1996 license had been extended. (SARTPC ¶¶ 22(a) (vi), (b) (vi), and (c) (vi).
b. Certain major manufacturers were about to sign sublicenses with BCC/TSV. (SARTPC ¶¶ 22 (a) (i), (b) (i), and (c) (i).
c. A nation-wide retail store program was about to be launched. (SARTPC ¶¶ 22 (a) (ii), (b) (ii), and (c) (ii).
d. Colapinto had a close relationship with the Capitolo and, therefore, could assist sublicensees in obtaining commercial grade images of the artwork from the Capitolo. (SARTPC ¶¶ 22 (a) (iii), (b) (iii), and (c) (iii)).
e. A portion of the proceeds from the royalties paid by sublicensees would be used to restore and preserve the artwork. (SARTPC ¶¶ 22 (a) (iv), (b) (iv), and (c) (iv)).
f. Sublicenses had to be approved by the Capitolo and Colapinto would use his approval to secure approval for E-21's sublicenses. (SARTPC ¶¶ 22 (a) (v), (b) (v), and (c) (v)).
As this Court found in its opinion granting summary judgment to Capitolo, Capitolo had stated beginning in 1997 that the 1996 License would not be extended and that Loata never attempted to extend the 1996 License until after the License had expired in 2001.
Likewise, Colapinto's representations that certain major retailers were about to sign sublicenses and that a retail store program was about to be launched are also statements of existing facts.
Similarly, Colapinto's statements concerning his close relationship with Capitolo and his ability to use this relationship to secure images for sublicensees and obtain sublicense approval from Capitolo is a present representation of an existing fact. Colapinto's statement that a portion of the royalties would be used to restore and preserve Capitolo's artwork also is a present representation of an existing fact, namely that part of the royalties to be paid by E-21 as well as the royalties previously paid by other sublicensees were designated by Capitolo to be used for a specific purpose.
At the time he made these representations, Colapinto had no close relationship or influence with Capitolo, had never attempted to get any sublicenses approved by Capitolo, and could not assist sublicensees in obtaining images or access to Capitolo's artwork. (Id. ¶¶ 4, 10). A claim for fraud can be based on "a relatively concrete representation as to a defendant's future performance, if made at a time when the speaker knows that the represented performance cannot be achieved." Goldman v. Belden, 754 F.2d 1059, 1068-69 (2d Cir. 1985). At the time Colapinto made these representations not only could he not perform these representations, but he had not been able to do so for more than 18 months.
Prior to entering into the September 2000 sublicenses, Colapinto is alleged to have repeated to E-21 on numerous occasions the false representations concerning his close relationship with Capitolo, the assistance he could provide to secure images of Capitolo's artwork and secure Capitolo's approval of the sublicenses, and the use by Capitolo of a portion of the royalty payments to restore and preserve its artwork. In addition, Colapinto represented to E-21 on numerous occasions that the proposed advanced royalty fees that E-21 would have to pay for its new sublicenses were very reasonable given that BCC/TSV had sold a confection license to Terry May for an advance royalty fee of $150,000. (SARTPC ¶¶ 33 (a) (iv), (b) (iv), (c) (iv), (d) (iv), (e) (iv), (f) (iv), and (g) (iv)). At the time Colapinto made this representation, he knew it was false.
Although Colapinto and SRLLC fail to address this misrepresentation in their brief with regard to the claim of E-21, they do contend that with regard to Franco's claims for fraud, it was a mere representation of value. Arguably, this might be true had Terry May paid anything for the sublicense. Colapinto affirmatively represented she had paid something for the sublicense, when in fact she had paid nothing and he knew she had paid nothing. This was an alleged factual misrepresentation by Colapinto about the amount paid by May, and not a representation of value. This misrepresentation, as well as the other representations repeated by Colapinto, are sufficient to support claims based on fraud.
By December 2000, Colapinto was aware that Capitolo had advised BCC/TSV that the 2000 License was a forgery, that the September 2000 sublicenses issued to E-21 were invalid, and that the 1996 License had terminated. Although Colapinto had frequent contacts with representatives of E-21, he never disclosed to them the problems with the sublicenses, the 1996 License, or the 2000 License, nor did he ever suggest to E-21 that it limit or reduce its efforts to commercially exploit its sublicenses. Rather, from December 2000 to April 2003, he encouraged E-21 to continue to exploit its sublicenses by securing additional funding from lenders and investors to fund E-21's operations.
During this period, Colapinto appeared at meetings with E-21's investors and lenders and participated in telephone conferences with them. During these meetings and telephone conferences, Colapinto represented that the 1996 License was valid, in good standing, and had been extended; that the 2000 License was valid, in good standing, and had a term of 45 years; that E-21's sublicenses were valid and in good standing; that a portion of the proceeds from the royalty fees would be used to restore and preserve Capitolo's artwork; and that he had significant control and influence over Capitolo's licensing program. Each of these representations was false when made, and Colapinto knew they were false when he made them. (SARTPC ¶¶ 44-49).
Colapinto and SRLLC contend that they are not liable for any fraudulent statements they made after E-21 entered into the September 2000 sublicenses. E-21 asserts that this additional $1,700,000 in indebtedness was incurred by it as a direct result of the fraudulent statements, omissions, and encouragements of Colapinto that were made after December 2000. These actions and omissions are alleged to have been undertaken by Colapinto to prevent E-21 from discovering the true status of its sublicenses and Capitolo's licensing program.
Whether the representations made by Colapinto set forth above are deemed to be false statements of existing facts (e.g., the 1996 License had been extended, the payment by Terry May, the existence of a program to restore Capitolo's artwork, the access to images), promises made of future performance where the promised future performance cannot be achieved, or a combination thereof, they are sufficient to support claims based on fraud.
Colapinto and SRLLC also argue that E-21 was not damaged by the payment of the first $200,000 of the $250,000 advance royalty fee paid for the February 2000 sublicense because the $200,000 was paid by "an apparently distinct entity known as Fiora [sic, Fidra] Holdings, Ltd. (Colapinto/SRLLC Br., p. 23). E-21 has alleged in the SARTPC that it paid the $250,000 royalty fee. (SARTPC ¶¶ 21, 30, 141, 144). Colapinto and SRLLC's assertion that E-21 was not damaged in the amount of $250,000 as a result of entering into the February 2000 sublicense at most raises an issue of fact.
A plaintiff suing for fraud need only allege that he relied on the misrepresentations made by the defendant in order to overcome a motion to dismiss. Indeed, "the reasonableness of his reliance implicates factual issues whose resolution would be inappropriate at this early stage." Internet Law Library, Inc. v. Southridge Capital Management, 223 F. Supp. 2d 474, 485 (S.D.N.Y. 2002). E-21 has adequately alleged its reliance on Loata's and Colapinto's representations. (SARTPC, ¶¶ 27, 37, 52).
The Loata Defendants argue that Loata's February 4, 2000 letter "contain[ed] no misrepresentations" and that there was no reliance on these representations because the "sublicenses preceded the letter." However, it has been concluded that by February 4, 2000, Loata repeatedly had been informed by Capitolo, both orally and in writing, that BCC/TSV was in material default under the terms and conditions of the 1996 License; that BCC/TSV had failed to provide accountings and to submit royalty checks; and that the 1996 License would not be extended. (The June Opinion, pp. 18-22).
However, evidence has been submitted that the letter was initially drafted by BCC/TSV's counsel in late January 2000, later revised after being reviewed by E-21 and its counsel, and then reduced to a final version and signed by Loata in conjunction with the execution of the February 4, 2000 sublicense.
In addition to his February 4, 2000 letter, Loata signed E-21's sublicense. Loata had been informed by Capitolo that the 1996 Sublicense would not be extended past February 7, 2001. According to E-21, by granting the sublicense to E-21 for a term longer than the initial term of the 1996 License, Loata represented to E-21 that the 1996 License had been extended, that the 1996 License was in good standing, and that BCC/TSV had the ability to extend the 1996 License for an additional five years.
After the execution of the sublicenses, Loata and Colapinto not only failed to disclose that Capitolo had not renewed the 1996 License and had considered the 2000 License to be a forgery, but also continued to represent to E-21 and its investors that the sublicenses were valid and in good standing, causing E-21 to incur debt and other obligations in excess of $1.7 million. In addition, Colapinto continued to encourage E-21 to develop products using images of Capitolo's artwork, thereby causing E-21 to incur additional development and marketing costs. (Id. ¶¶ 42-52 53-63).
Finally, the Loata Defendants assert that E-21 cannot be said to have relied on the misrepresentations of Loata and BCC/TSV because E-21 hired counsel in Rome to determine the validity of the 2000 License and to conduct its own due diligence. First, these assertions relate only to E-21's purchase of the September 2000 sublicenses and have no bearing at all on the purchase of the February 4, 2000 sublicense. Additionally, according to E-21, the opinion letter that was issued without the benefit of facts that were uniquely in the possession of Loata. In any event, this constitutes a factual dispute that is not properly resolved on this motion.
Colapinto and SRLLC also contend that Franco had an affirmative duty to discover that their representations were not credible prior to relying upon them. However, contrary to Colapinto's and SRLLC's assertions, if the matters are peculiarly within the defendant's knowledge, a plaintiff may rely on the representations without prosecuting an investigation. Mallis v. Bankers Trust Co., 615 F.2d 68, 80 (2d Cir. 1980). As such, Colapinto's and SRLLC's contentions in this regard lack merit.
Furthermore, a plaintiff suing for fraud need only allege that he relied on the misrepresentations made by the defendant to overcome a motion to dismiss "since the reasonableness of his reliance implicates factual issues whose resolution would be inappropriate at this early stage." Internet Law Library, Inc. v. Southridge Capital Management, 223 F. Supp. 2d 474, 485 (S.D.N.Y. 2002). Here, Franco provides detailed explanations in the SARTPC of why he relied on Colapinto's representations. (SARTPC, ¶¶ 71, 78).
The Agency Of Colapinto Has Been Adequately Alleged
The Third-Party Plaintiffs have alleged a fraud claim against the Loata Defendants based on an agency theory and the representations or omissions of Colapinto. BCC/TSV and Loata contend that they should not be held liable for any representations or omissions made by Colapinto because he was not an agent of either BCC/TSV or Loata.
"It is well-settled that the false representations need not have been made by the defendant personally. `If he authorized and caused it to be made it is the same as though he made it himself.'" Flash, 312 F. Supp. 2d at 402; see also American Soc'y of Mech. Eng're, Inc. v. Hydrolevel Corp., 456 U.S. 556, 566 (1982) ("[A] principal is liable for an agent's misrepresentations that cause pecuniary loss to a third party, when the agent acts within the scope of his apparent authority.").
Here, Third-Party Plaintiffs allege that Colapinto and SRLLC were hired to act as the exclusive agent for marketing and selling sublicenses under the 1996 License (SARTPC ¶ 14). They further allege that Colapinto was acting within the apparent course and scope of his agency for Loata and BCC/TSV when he falsely represented material facts regarding the 1996 License and BCC/TSV's licensing program (id. ¶¶ 22, 25, 28, 33, 38, 45-49 72) and that Loata knew Colapinto was making false representations to potential sublicensees. (Id. ¶¶ 23, 25, 28, 38, 50). Under Hydrolevel and its progeny, these allegations are sufficient to allege Loata's liability on an agency theory.
Loata cites no authority for the proposition that agency allegations have to be pled with heightened specificity. Furthermore, questions regarding the scope and existence of the agency are not properly the subject of a motion to dismiss. See Heredia v. United States, 887 F. Supp. 77, 80 (S.D.N.Y. 1995) ("New York courts have held that `where the circumstances alleged in the pleading raise the possibility of a principal-agency relationship,' . . ., questions as to the existence and scope of the agency are issues of fact and are not properly the basis of a motion to dismiss"). Accordingly, these issues also involve triable issues of fact. The Claim For Negligent Misrepresentation Is Dismissed
Under New York law, the elements of a claim for negligent misrepresentation are that:
(1) the defendant had a duty, as a result of a special relationship, to give correct information; (2) the defendant made a false representation that he or she should have known was incorrect; (3) the information supplied in the representation was known by the defendant to be desired by the plaintiff for a serious purpose; (4) the plaintiff intended to rely and act upon it; and (5) the plaintiff reasonably relied on it to his or her detriment.Greenberg v. Chrust, 198 F. Supp. 2d 578, 584 (S.D.N.Y. 2002) (citing Hydro Investors, Inc. v. Trafalgar Power Inc., 227 F.3d 8, 20 (2d Cir. 2000)).
This Court has previously held that, under New York law, liability for information negligently furnished requires privity of contract or "a relationship closely approaching it," Sazerac Co., Inc. v. Falk, 861 F. Supp. 253, 259 (S.D.N.Y. 1994) (quoting Willaims Sons Erectors v. South Carolina Steel, 983 F.2d 1176, 1181 (2d Cir. 1993), in what is often described as a bond that is so close as to be the "functional equivalent of contractual privity." Id. at 1182 (citing New York cases).
Unless a prior relationship existed between the defendant and plaintiff, the defendant is not liable for negligent misrepresentation. See Village on Canon v. Bankers Trust Co., 920 F. Supp. 520, 531 (S.D.N.Y. 1996) ("Under New York law, there is no action for negligent misrepresentation of a promise of future conduct unless there is a special relationship between the parties.")
Third-Party Plaintiffs have failed to show that Loata, BCC, or TSV had a special relationship, i.e., a relationship so close as to be the "functional equivalent of contractual privity" between the Third-Party Plaintiffs and Loata, BCC, and TSV when the alleged negligent misrepresentations were made. Many of the alleged misrepresentations were not made by Loata, BCC, or TSV at all, but by Colapinto — with whom the Third-Party Plaintiffs had almost exclusive contact. Moreover, the Second Circuit has held that when sophisticated business parties engaged in major transactions fail to exercise care in their affairs, "New York courts are particularly disinclined to entertain claims of justified reliance." Lazard Freres Co. v. Protective Life Ins. Co., 108 F.3d 1531, 1541, 1543 (2d Cir. 1997). Such parties "will not be heard to complain that [they were] induced to enter into the transaction by misrepresentations." Schumaker v. Mather, 133 N.Y. 590, 596, 30 N.E. 755 (1892). Accordingly, it is concluded that neither BCC/TSV nor Loata had a duty to the Third-Party Plaintiffs before they became sublicensees. The Conversion Claim Is Adequately Alleged
The elements of a conversion claim are: (1) defendant's intent, (2) to interfere with plaintiff's property to the exclusion of plaintiff's rights in the property, and (3) plaintiff's right of possession in the property. See San Sung Korean Methodist Church v. Professional USA Constr. Corp., 2004 WL 1563255, at *2 (N.Y.Sup.Ct. 2004). In Hoffman v. Unterberg, 780 N.Y.S.2d 617, 619 (App.Div. 2004), the Court stated:
Money may be the subject of conversion if it is specifically identifiable and there is an obligation to return it or treat it in a particular manner. When funds are provided for a particular purpose, the use of those funds for an unauthorized purpose constitutes conversion. Further, where possession of the property is initially lawful, conversion occurs when there is a refusal to return the property after a demand. . . .
(Citations Omitted).
Here, Third-Party Plaintiffs have alleged that on specific dates Loata and BCC/TSV received specific sums of money in advance royalty payments. (SARTPC ¶¶ 140-158). They allege that the funds were either wired or deposited into specific and identifiable bank accounts in the name of BCC/TSV. (Id.). They allege that prior to these dates they or their investors and lenders owned and possessed these funds. (Id.). They allege that Loata and BCC/TSV are currently exercising wrongful dominion over these funds and Loata and BCC/TSV intended to convert these funds. (Id.). Therefore, Third-Party Plaintiffs allege all of the elements for a conversion claim.
The Money Had And Received Claim Is Adequately Alleged
In order to state a claim for money had and received, a plaintiff must allege that: (1) defendant received money belonging to plaintiff, (2) defendant benefitted from the receipt of the money, and (3) under principles of equity and good conscience, defendant should not be permitted to keep the money.ATT Co. v. North Am. Indus., Inc., 772 F. Supp. 777, 789,amended by 783 F. Supp. 810 (S.D.N.Y. 1991).
Here, Third-Party Plaintiffs have alleged that they paid BCC/TSV specific sums of money in advance royalty fees, that BCC/TSV benefited from the receipt of such funds, and that BCC/TSV and Loata are required to return the funds under principles of equity and good conscience. (SARTPC ¶¶ 168-178).
According to the Loata Defendants, the payments made by E-21 were made to TSV, not to BCC or to Loata individually. E-21 alleges payments made to a specific and identifiable account of TSV's on March 3, 2000, March 31, 2000, September 18, 2000, September 28, 2000, October 16, 2000, October 19, 2000, and November 21, 2000. According to the Loata Defendants, Franco alleges making payments from Pacific Rarities, Inc. in three checks, each made payable to TSV, not to BCC or to Loata individually. Maxx alleges that checks written from Area Investment and Development Corp. dated on or about June 22, 2000, were made payable to TSV. Area Investment transferred money to TSV on August 31, 2000, and Area Investment transferred money to TSV on September 7, 2000. Itex Corp. wired money in late August or early September to TSV. Moreover, none of the payments were made by Maxx but instead were made from Area Investment and Development Corp. and Itex Corp. However, the SARTPC has alleged payments by Franco and Maxx. The pleading is adequate whether or not a factual issue may be presented.
The Unfair Competition Claim Is Dismissed
For the same reasons that the unfair competition claim was dismissed as against Colapinto in Bangkok Crafts Corp. v. Capitolo di San Pietro in Vaticano, 331 F. Supp. 2d 247, 255, 256, it is dismissed here. No facts are alleged concerning misappropriation of Third-Party Plaintiffs commercial good will or that the consuming public is in any way confused as a result of Third-Party Plaintiffs allegations. This contention by the Loata Defendants is not substantially opposed.
The Rescission Claim Is Adequately Alleged
Recission is an equitable remedy posed in the interest of justice where there is no action at law. Rescission is not available where there is an adequate remedy at law and must be based on some equitable ground justifying relief. A plaintiff must show the equitable ground justifying rescission and tender or offer to tender what it has received. An election to rescind a contract which is claimed to be induced by fraud has to be made promptly. See General Motors Acceptance Corp. v. Berg Duffy, 118 Misc.2d 525, 460 N.Y.S.2d 899. The grounds for rescission of a contract include duress and undue influence in situations where the complaining party is compelled to agree to the contract by means of a wrongful threat which precludes the exercise of free will. See Barata v. Kozlowski, 94 App. Div. 2d 454, 464 N.Y.S.2d 803 (2d Dept. 1983).
As stated by the New York Appellate Division, First Department, in Sokolow, Dunaud, Mercadier Carreras, LLP v. Lacher, 299 A.D.2d 664, 747 N.Y.S.2d 441 (1st Dept. 2000):
The equitable remedy of rescission "is to be invoked only when there is lacking complete and adequate remedy at law and where the status quo may be substantially restored" Generally a party cannot rescind a contract if that would injure the party against whom rescission is sought because, under the contract, that party has changed his position and cannot be returned to the status quo ante For instance, where restoration of the status quo ante is made impractical by a substantial change of position, the remedy of rescission will not be available.
(internal citations omitted).
According to the Third-Party Plaintiffs, the equitable remedy of rescission is available where a party has been induced by a misrepresentation to enter into a contract. Telford v. Metropolitan Life Ins. Co., 223 A.D. 175, 177 (1928). Third-Party Plaintiffs allege that they were induced by the misrepresentations of Loata and Colapinto to enter into the sublicenses and were not aware of the fraudulent misrepresentations until they became parties to this litigation in April 2003. According to Third-Party Plaintiffs, as a result of these misrepresentations, Loata and BCC/TSV received specific sums of money in advance royalty fees, and they should be required to return the funds under principles of equity and good conscience. (SARTPC ¶¶ 188-193).
Defendants contend that Plaintiffs cannot seek recission under the doctrine of caveat emptor. In support of this argument, they cite Stambovsky v. Ackley, 169 A.D.2d 254, 572 N.Y.S.2d 672 (App.Div. 1st Dept. 1991) for the following:
The doctrine of caveat emptor requires that a buyer act prudently to assess the fitness and value of his purchase and operates to bar the purchaser who fails to exercise due care from seeking the equitable remedy of rescission (see, e.g., Rodas v. Manitaras, 159 A.D.2d 341, 552 N.Y.S.2d 618).
However, the issue of whether Plaintiffs acted prudently raises factual issues. Therefore, for the reasons set forth with respect to their claims for conversion and money had and received, Plaintiffs have adequately alleged a claim for recission. The Corporate Veil Piercing Allegations Are Dismissed
To pierce the corporate veil, a plaintiff must allege (1) complete dominance and control of a company such that the company became a mere instrumentality of the individual; (2) such control was used to commit fraud or other wrong; and (3) the fraud or wrong resulted in unjust loss or injury to plaintiff. See Wm. Passalacqua Builders, Inc. v. Resnick Devs. S., Inc., 933 F.2d 131, 138 (2d Cir. 1991). "Under New York law it has been further held that when a corporation is used by an individual to accomplish his own and not the corporation's business, such a controlling shareholder may be held liable for the corporation's commercial dealings as well as for its negligent acts." Id. "The critical question is whether the corporation is a `shell' being used by the individual shareowners to advance their own `purely personal rather than corporate ends.'" Id.
Here, Third-Party Plaintiffs allege that Loata is the president of BCC/TSV, which were a "mere shell, instrumentality, and conduit through which Loata carried on his business in the corporate name of BCC and TSV." They further allege that "Loata exercised control and dominance of BCC and TSV to such an extent that any individuality or separateness between BCC, TSV and Loata does not, and at all relevant times, did not exist." (SARTPC ¶ 4).
The conclusory language used by Third-Party Plaintiffs is insufficient to sustain a cause of action. See Cusumano v. Iota Industries, Inc., 100 A.D.2d 892, 474 N.Y.S.2d 579 (2d Dept. 1984); see also Cresser v. American Tobacco Co., Inc., 174 Misc.2d 1, 5 6, 622 N.Y.S.2d 374 (1997).
In order for complainants to meet the legal threshold for imposing liability upon corporate parents, plaintiffs must plead sufficient facts to demonstrate that the parent exercised complete dominion of the corporation and that such dominion was used to commit fraud or wrong against the plaintiff. Id. (citing Morris v. Dept. of Taxation Finance, 82 N.Y.2d 135, 141, 603 N.Y.S.2d 807 (1993)). Furthermore, as the court in EED Holdings v. Palmer Johnson Acquisition Corp., 2004 WL 2348093 (S.D.N.Y. 2004), stated:
Under New York law . . . it is well established that `purely conclusory allegations cannot suffice to state a claim based on veil-piercing or alter-ego liability, even under [Rule 8(a) `s] liberal notice pleading standard.' In re Currency Conversion Fee Antitrust Litig., 265 F. Supp. 2d at 426; see also DeJesus v. Sears, Roebuck Co., 87 F.3d 65, 70 (2d Cir. 1996) (dismissing alter-ego claim where complaint was `devoid of any specific facts or circumstances supporting' plaintiff's conclusory allegations concerning defendant's domination of its subsidiary; [case cited] (dismissing alter ego claim on the grounds that `[c]omplaint was conclusory at best and fail[ed] to please to requisite elements of an alter ego theory."
Here, the Third-Party Plaintiffs have failed to allege any details of the first element of the veil-piercing claim, i.e., how Loata supposedly dominated BCC and TSV. In addition, Third-Party Plaintiffs have failed to properly allege the second element of veil-piercing, how the domination was used to commit fraud and wrongdoing against the Third-Party Plaintiffs resulting in Plaintiff's injury.
As the Loata Defendants have noted, corporate officers and directors are not liable for fraud unless they participate in the misrepresentations or have actual knowledge supported by clear and convincing evidence. See Prudential-Bache Metal Co., Inc. v. Binder, 121 A.D.2d 923, 504 N.Y.S.2d 646 (1st Dep't 1986). InPrudential-Bache, the court found no liability for shareholders and officers in absence of substantive allegations that they personally participated in or had actual knowledge of the alleged fraud. That issue has yet to be resolved with respect to Loata individually.
Conclusion
For the reasons set forth above, Defendants' motion to dismiss Third-Party Plaintiffs' fraud claims against BCC/TSV and Loata is denied. Defendants' motion to dismiss Count IV for conversion, Counts V for money had and received, and Count VII for recission is denied. Defendants' motion is granted with respect to Counts II(A), (B), and (C) for negligent misrepresentation and Count VII for unfair competition. Additionally, it is concluded that Plaintiffs' allegations are not sufficient to pierce the corporate veil.
It is so ordered.