Opinion
01 Civ. 10206 (JSm)
July 16, 2002
OPINION
This diversity action arises out of the termination of a contractual relationship between Plaintiff, Peter Clifton, and his employer, Vista Computer Services. Plaintiff filed a complaint asserting breach of contract, fraud, negligent misrepresentation, and breach of fiduciary duty and self-dealing. Plaintiff has also moved for attorney's fees and punitive damages. Defendant has moved to dismiss all but Plaintiff's contract claim pursuant to Fed.R.Civ.P. 9(b) and 12(b)(6). For the reasons set forth below, Defendant's motion is granted.
Factual Background
Pursuant to an employment agreement, Defendant hired Plaintiff on or about January 26, 1998 to run Defendant's PubEasy business. PubEasy was a division of Vista that created and sold software and services for electronic ordering in the global publishing industry. (Compl. ¶ 9.)
On May 10, 1999, Plaintiff and Defendant entered into a second employment agreement. Under the second agreement, Plaintiff continued to act as CEO of the PubEasy Division. (Compl. ¶ 22.) In August 1999, Defendant informed Plaintiff that it was considering operating PubEasy as a separate corporation. Plaintiff asked Defendant to modify his employment agreement.
In August, 2000, Defendant agreed to enter into a third employment agreement (the "Employment Agreement"). Plaintiff was to be employed as CEO of the PubEasy Division until such time as those assets were transferred to a new entity, called PubEasy Delaware. (Compl. ¶ 29.) Prior to the signing of the Employment Agreement, Defendant formed PubEasy.com, Inc., a Delaware Corp. (Compl. ¶ 30), and told Plaintiff that Defendant would transfer the assets of the Division into the new entity. (Compl. ¶ 33.) Defendant also represented that the company was about to secure $3 million in financing to fund PubEasy. (Compl. ¶ 34.) They told Plaintiff that these funds would be available to PubEasy Delaware and could be "used solely to finance, grow and develop" PubEasy Delaware. (Compl. ¶ 35.) Defendant also stated that Plaintiff would receive 5% of the shares of PubEasy Delaware. (Compl. ¶ 38.)
In reliance on these representations, Plaintiff signed the Employment Agreement and worked in the company until April 11, 2001, when he was discharged. (Compl. ¶ 40.)
Discussion
Defendant's motion to dismiss can be granted only if it "appears beyond doubt that the plaintiff can prove no set of facts in support of his claim that would entitle him to relief." Cooper v. Parskv, 140 F.3d 433, 440 (2d Cir. 1998) (quoting Conlev v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 102 (1957)). The factual allegations set forth in the complaint must be accepted as true, Zinermon v. Burch, 494 U.S. 113, 118, 110 5. Ct. 975; 979 (1990), and all reasonable inferences must be drawn in favor of the plaintiff. See Thomas v. City of New York 143 F.3d 31, 37 (2d Cir. 1998). "The issue is not whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims." Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 183, 1686 (1974).
I. Fraud
Plaintiff alleges that he was fraudulently induced to enter the Employment Agreement when representatives of Vista stated "that Defendant was about to secure a $3,000,000 financing commitment to fund the Business." (Compi. ¶ 34.) Defendant also represented "that the proceeds of the Committed Financing would be available to PubEasy Delaware and used solely to finance, grow and develop the Business and PubEasy Delaware." (Compl. ¶ 35.) Plaintiff alleges that Defendant knew these "[r]epresentations were false and fraudulent when made" (Compl. ¶ 91) and were made "with the intent to induce Plaintiff to enter into the Third Employment Agreement." (Compl. ¶ 87.)
It is black letter law in New York that a claim for common law fraud will not lie if the claim is duplicative of a claim for breach of contract. BridQestone/Firestone, Inc. v. Recovery Credit Servs., Inc., 98 F.3d 13, 19— 20 (2d Cir. 1996). A claim for fraud is actionable, however, if a "party made a misrepresentation, collateral or extraneous to the contract, that induced plaintiff to enter into such a contract." Four Star Capital Corp. v. Nynex Corp., 183 F.R.D. 91, 109 (S.D.N.Y. 1997).
To maintain a claim for fraud, a plaintiff must allege: "1) the defendant made a material false representation, 2) the defendant intended to defraud the plaintiff thereby, 3) the plaintiff reasonably relied on the representation, and 4) the plaintiff suffered damage as a result of such reliance." Banoue Arabe et Internationale D'Investissement v. Maryland Nat'l Bank, 57 F.3d 146, 153 (2d Cir. 1995).
Applying the liberal pleading rules required on a motion to dismiss, Plaintiff makes out three of the four basic elements of a fraud claim. Plaintiff alleges that Defendant made a material false representation when representatives of Defendant misstated their intention to acquire funding and to give Plaintiff sole discretion to manage it. (Compl. ¶ 34-35.) There is a distinction between "promissory statement[s] as to what will be done in the future, which give rise only to a breach of contract claim, and . . . false representation[s] of present fact, which give rise to a separable claim of fraudulent inducement." Stewart v. Jackson Nash, 976 F.2d 86, 89 (2d Cir. 1992) (internal citations omitted). Although the promise to allow plaintiff to direct the $3 million in financing seems to be a future promise, "if a promise was actually made with a preconceived and undisclosed intention of not performing it, it constitutes a misrepresentation of material existing fact" upon which a fraudulent inducement action may be predicated. Stewart, 976 F.2d at 89 (citing Sabo v. Delman, 3 N.Y.2d 155, 160, 164 N.Y.S.2d 714, 716 (1957)). Liberally construed, Plaintiff's complaint alleges that Vista's promises were false at the time they were made and that Vista had no intention of performing them. Plaintiff also alleges intent (Compl. ¶ 87) and damages (Compl. ¶ 92). Plaintiff also alleges reliance. (Compl. ¶ 88).
As discussed below, because the-promises on which Plaintiff relied were-not extraneous to the contract, Plaintiff cannot prove any set of facts to show his reasonable reliance.
In addition to the basic four elements of a fraud claim, when the fraud is committed to induce someone to sign a contract, Plaintiff must also allege one of three additional elements to ensure that the party breaching the contract engaged in "deceit independent of the contract." Volk v. Liggett Group, Inc., 96 civ. 1921, 1997 WL 107458, at *3 (S.D.N.Y. March 11, 1997). See also Bridgestone/Firestone, 98 F.3d at 19-20. A plaintiff must allege either "1) a legal duty separate and apart from the contractual duty to perform, 2) a fraudulent representation collateral or extraneous to the contract, or 3) special damages proximately caused by the fraudulent representation that are not recoverable under the contract measure of damages." Papa's-June Music, Inc. v. McLean, 921 F. Supp. 1154, 1161 (S.D.N.Y. 1996) (citations omitted).
In order to determine whether the alleged promises are "collateral or extraneous to the terms of the parties' agreement," the Court needs to look at the contract.
Although this is a motion to dismiss and the complaint does not have the contract attached, both parties have submitted it; it is referred to extensively in Plaintiff's complaint and the Court can deem it incorporated by reference. See e.g., San Leandro Emergency Med. Group Profit Sharing Plan v. Philip Morris Co., 75 F.3d 801, 808-09 (2d Cir. 1996).
The promises that allegedly induced Plaintiff to sign the contract are based on the same facts and subject matter as Plaintiff's claim for breach of contract. See McKernin v. Fanny Farmer Candy Shops, Inc., 574 N.Y.S.2d 58, 59 (2d Dept. 1991) (finding no fraud claim when representations are not collateral to contract). Plaintiff states that he signed the contract because of the promise that he would manage $3 million in the PubEasy business. (Compl. ¶ 88.) The contract expressly acknowledges the possibility of acquiring the funding: "[t]he parties hereto acknowledge that Vista and the Company expect that Vista and the Company will succeed in obtaining, directly or indirectly, additional financing in the amount of approximately $3,000,000 from existing shareholders of Vista . . ." Employment Agreement ¶ 3(b)(ii). The contract states that Defendant "expects" to obtain the financing, not that they have already acquired or that they will acquire it. The contract even explicitly deals with the possibility that Vista will not transfer the PubEasy division assets into a new company, and if that eventuality is realized how Plaintiff will be compensated:
In the event that Vista does not transfer the assets and intellectual property of its PubEasy.com division to a new legal entity as contemplated herein and that Vista sells, transfers or otherwise disposes of any or all of its interest in its PubEasy.com division or the assets thereof during the term of this Agreement or within (6) six months after the expiration of the term of this Agreement or the date on which this Agreement is earlier terminated by Vista or the Company other than for Cause or by the Employee for Good Reason, the Employee shall be entitled to receive 5% of the gross proceeds thereof.
Employment Agreement ¶ 8(d).
The only alleged promise that comes close to being collateral to the subject matter of the contract is the promise that the $3 million in financing "would be available to PubEasy Delaware and used solely to finance, grow and develop the Business and PubEasy Delaware." (Compl. ¶ 35.) Nonetheless, a promise that the financing will be available solely to PubEasy depends on there being financing. The contract specifically deals with the possibility that there will not be financing. If the contract acknowledges the possibility that there will be no financing, a promise about what will happen to that financing cannot be "extraneous" to the contract.
In a similar case, Advanced Marine Techs., Inc. v. Burnham Sec., Inc., 16 F. Supp.2d 375, 382 (S.D.N.Y. 1998), Judge Kaplan found that when a company promised to find investors and failed to live up to its promise, plaintiff had "merely append[ed] allegations about [defendant's] state of mind to the claim for breach of contract." (citing Met. Transp. Auth. v. TriumphAdv. Prods., Inc., 497 N.Y.S.2d 673, 675 (15t Dept. 1986). But when the company also stated that they had investors who had responded positively, this statement went beyond a best efforts promise and the alleged misrepresentation was sufficiently collateral at the pleading stage to maintain the claim. Advanced Marine, 16 F. Supp. at 383. In the instant case, Plaintiff alleges only that Defendant said they were about to secure the financing and that Plaintiff would have control over it. There are no allegations of collateral promises made that went beyond what was specifically stated in the contract expressing the company's belief and expectation that it was about to obtain financing. (Compl. ¶ 34.)
When a promise is not extraneous to the terms of the contract, a plaintiff with this level of business sophistication cannot make out a claim that he reasonably relied on those promises. Republic Nat'l Bank v. Hales, 75 F. Supp.2d 300, 315 (S.D.N.Y. 1999), aff'd HSBC Bank v. Hales, no. 00— 7622, 2001 WL 99830 (2d Cir. Feb. 6, 2001) ("[amy reliance by . . . a sophisticated businessman, upon representations contrary to the plain language of the agreements he was signing would therefore be patently unreasonable"). "Under New York law, reasonable reliance is precluded when "an express provision in a written contract contradicts a prior alleged oral representation in a meaningful fashion.'" Republic Nat'l Bank, 75 F. Supp.2d at 315 (citing Villa Mann Chevrolet v. General Motors Corp., No. 98 cv. 6167, 1999 WL 1052494, *5 (E.D.N.Y. Nov. 18, 1999)). See also Emergent Capital Invest. Mgmt, LLC v. StoneZath Group, 165 F. Supp.2d 615, 623 (S.D.N.Y. 2001) (citing Harsco Corp. v. Segui, 91 F.3d 337, 345 (2d Cir. 1996); Citibank, N.A. v. Plapinger, 66 N.Y.2d 90, 94-95, 495 N.Y.S.2d 309 (1985). This Plaintiff cannot maintain a claim for reasonable reliance on an oral representation that he would be solely responsible for managing the $3 million dollars in soon-to-be obtained financing when the contract includes a provision detailing what will happen if the company does not obtain the financing.
Because Plaintiff's promises are not extraneous to the contract and he cannot, as a reasonably sophisticated businessman, rely on them, Plaintiff fails to make out the initial reliance element of his fraud claim. The Court does not need to reach whether he alleges either of the other two extra elements-a duty separate from the contract or special damages of a fraudulent inducement claim, because he has failed to make out the reliance element of his fraud action. For this reason, Defendant's motion to dismiss Plaintiff's fraudulent inducement claim is granted.
II. Negligent Misrepresentation
Plaintiff alleges that Defendant misrepresented that Vista was about to obtain $3 million in funding. When the alleged misrepresentation is a promise and not a statement of fact, "a special relationship must exist between the parties in order for a promissory misrepresentation to give rise to a justiciable claim." Philips Credit Corp. v. Regent Health Group, Inc., 953 F. Supp. 482, 523 (S.D.N.Y. 1997) (citing Frutico, S.A. de C.V., Inc. v. Bankers Trust Co., 833 F. Supp. 288, 300 (S.D.N.Y. 1993)). See also Stewart, 976 F.2d at 90. Plaintiff has alleged no facts to support a claim of a fiduciary relationship between the parties and Defendant's motion is granted.
III. Punitive Damages
Defendants also move that Plaintiff's claim for punitive damages be dismissed. The prevailing standard is set out in Roconova v. Equitable Life Assurance Soc'y of the United States, 83 N.Y.2d 603, 613, 6.12. N.Y.S.2d 339 (1994). Punitive damages are not available for ordinary breach of contract. "Where the breach of contract also involves a fraud evincing a high degree of moral turpitude and demonstrating such wanton dishonesty as to imply a criminal indifference to civil obligations, punitive damages are recoverable if the conduct was aimed at the public generally." Roconova, 83 N.Y.2d at 613. Plaintiff has failed to state a claim for fraud and Plaintiff has alleged no facts indicating a harm to the public generally. Therefore, Defendant's motion with respect to punitive damages is granted.
IV. Breach of Fiduciary Duty and Self-Dealing
Plaintiff also alleges a breach of fiduciary duty. The complaint states that "[d]efendant, as the majority shareholder in PubEasy Delaware, was required to adhere to fiduciary standards of conduct and exercise its responsibilities in good faith when undertaking the Asset Transfers." (Compl. ¶ 102.) Plaintiff further alleges that Defendants transferred assets from PubEasy Delaware to PubEasy Limited and assigned less than the fair market value for those assets.
Under Delaware law, if a claim alleges a breach of fiduciary duty resulting in a loss of stock value to a company, the alleged wrongdoing harms the corporation and therefore-because they own the corporation-the shareholders derivatively." Weinberger v. Lorenzo, Civ. No. 10692, 1990 WL 156529, at *2 (Del.Ch. Oct. 12, 199.0). In order to assert a direct action, a shareholder must allege "special injury." In re Ionosphere Clubs, Inc. v. Am. Nat'l Bank Trust Comp., 17 F.3d 600, 604 (2d Cir. 1994). Special injury has evolved into a two-prong test under Moran v. Household Int'l, Inc., 490 A.2d 1059, 1070 (Del.Ch.), aff'd 500 A.2d 1346 (1985). The plaintiff must either allege "(1) an injury which is separate and distinct from that suffered by other shareholders, or (2) a wrong involving a contractual right of a shareholder, which exists independent of any right of the corporation." Weinberger, 1990 WL 156529, at *3. See also, In re Ionosphere, 17 F.3d at 604; Byington v Vega Biotechnologies, Inc., 869 F. Supp. 338, 344 (D. Md. 1994). While Plaintiff did suffer an injury that the majority shareholders did not suffer in that the majority shareholders owned the corporation into which the PubEasy Delaware assets were transferred, this does not constitute a "special injury" under Delaware law. Delaware law is clear that when plaintiff's "primary claim is that defendants' actions reduced the value of their stock and stock options," the remedy is a shareholder derivative action. Byington, 869 F. Supp. at 344. In In re Ionosphere Clubs, Inc., the Second Circuit, applying Delaware law, faced a strikingly similar situation. In that case, plaintiffs tried to allege special injury by alleging that the transfer of assets impacted them differently from other shareholders because other shareholders had an interest in the company into which the assets were transferred. In re Ionosphere Clubs, 17 F.3d at 604. The court found that because all the shareholders suffered the same injury "in their role as shareholders," the action had to be brought derivatively. Id. at 603-04. It did not matter that some of the shareholders might have recouped their loss in their role in another company; as the shareholder in the transferring company all shareholders were harmed with the loss in value of their stock. Id. at 604. See also, MOran v. Household Int'l, Inc., 490 A.2d 1059, 1070 (Del.Ch. 1985); Solow v. Stone, 994 F. Supp. 173, 179 (S.D.N.Y. 1998) ("[i]f the harm is to the corporation and therefore affects the entire corporate structure, an individual plaintiff has not suffered a particularized injury"). Plaintiff, therefore, does not have an individual action for breach of fiduciary duty.
V. Attorney's Fees
Defendant has moved to have Plaintiff's claim for attorney's fees dismissed. The Employment Contract states that:
The Company and Vista agree to pay, to the full extent permitted by law, all legal fees and expenses which the Employee may reasonably incur as a result of any litigation brought by the Company and/or Vista contesting the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereunder.
Employment Agreement ¶ 10.
Defendant argues that the paragraph is unambiguous and an obligation to pay fees only arises if the Company instigates the litigation. Plaintiff argues that such a reading makes no sense because there is no reason why the Defendant would bring an action against Plaintiff. Plaintiff argues that to give meaning to the paragraph, one has to read the contract to say that Vista is liable for attorney's fees "as a result of any litigation brought (by reason of] the Company and/or Vista contesting . liability under . . . the contract."
The Court finds this argument unconvincing. The Employment Agreement includes a covenant not to compete, thus providing a plausible explanation for why Vista might sue the Plaintiff. When the language of the contract is unambiguous, the Court should not add language to change the meaning. Krumme v. Westpoint Stevens Inc., 238 F.3d 133, 139 (2d Cir. 2000) (citing cases). Therefore, Defendant's motion is granted with respect to attorney's fees.
For the reasons stated above, Defendant's motion is granted.