Opinion
01 Civ. 7102 (HB)
January 9, 2002
OPINION ORDER
Defendant Barry Kieseistein-Cord ("BKC") moved to dismiss the complaint in its entirety. At a hearing held on November 20, 2001, I dismissed plaintiffs' fraud claim and the claims against defendant Charger Management Group L.C. ("Charger"), denied BKC's motion to dismiss the promissory estoppel claim, and reserved judgment on BKC's motion to dismiss the breach of contract claim for violation of the Statute of Frauds. This Opinion Order memorializes my decisions with respect to the fraud and promissory estoppel claims, as well as the claims asserted by Charger, and decides the issue on which I reserved judgment. For the reasons discussed below, BKC's motion to dismiss breach of contract claim is granted.
Background
In deciding a motion to dismiss for failure to state a clam upon which relief can be granted, the court "must accept the material facts alleged in the complaint as true." Cohen v. Koenig, 25 F.3d 1168, 1172 (2d Cir. 1994).
The gist of plaintiff's allegations is that BKC, a fashion designer, breached an oral contract with David Kosoy ("D. Kosoy") to buy a membership interest in Kieselstein-Cord of Aspen, a limited liability corporation, (the "LLC"), owned and managed by Kosoy, his wife Colleen Kosoy ("C. Kosoy"), and James McCann ("McCann") (collectively, the "members" of the LLC) to retail fashions designed by BKC. The LLC operated a BKC boutique in Aspen Colorado that sold BKC fashions pursuant to a license agreement ("license agreement") with Kieseistein-Cord Licensing Corp. ("KCLC") that was scheduled to expire on December 31, 2007.
The LLC was formed by D. Kosoy in 1997. Later that year, McCann acquired a 50% interest in the LLC and became a member thereof. In 1998, D. Kosoy transferred half of his remaining interest to C. Kosoy, who became the LLC's third member. LCC's are always owned and frequently managed by their members.
The BKC fashions were developed and manufactured by Barry Kieselstein-Cord Enterprises, Inc.
The license agreement defined the licensed "Merchandise" as: "the full line of couture handbags, belts, fine couture jewelry and other couture accessories manufactured by or on behalf of [Barry Kieselstein-Cord Enterprises, Inc.] "Merchandise" did not include "any line(s) of lower priced products which may be developed by Barry Kieselstein Enterprises, Inc., such as the silver KIESELSTEIN-CORD SPORT line . . . and . . . products that are licensed to third parties to manufacture, distribute and sell worldwide."
Pursuant to the LLC's operating agreement ("operating agreement"), each of the LLC's three members had "buy-sell" rights whereby a member had the right at any time to require the other members either 1) to buy that member's interest in the LLC or 2) sell their membership interests to the member exercising the buy-sell right (operating agreement, ¶ 9.4). On August 23, 1999 McCann notified D. Kosoy and C. Kosoy of his intent to exercise his buy-sell rights, which prompted D. Kosoy to telephone BKC to discuss McCann's exercise and to review D. Kosoy's options. Allegedly, during the phone call BKC stated that Kosoy's continued involvement in the LLC was necessary to its success and promised that if Kosoy bought McCann's interest BKC would re-purchase the interest from D. Kosoy and thereafter assume D. Kosoy's and McCann's responsibilities for managing the Aspen boutique. Nowhere in the papers before me is there an indication, much less a clear allegation, that the telephone conversation between BKC and D. Kosoy included discussion of the financial terms of BKC's repurchase of McCann's interest or how to conform what all agree is at best an oral contract to (a) the terms of the license agreement, which provided that a member of the LLC could not sell his interest without KCLC's written approval (license agreement, ¶ 10.2), or to (b) the requirement in the LLC's operating agreement that all members consent to transfers of membership interests (operating agreement, ¶ 9.1). On October 14, 1999 D. Kosoy directed McCann to assign his 50% interest in the LLC to Charger, a Florida LLC wholly-owned by Kosoy, in consideration of $150,000 and the assumption by Charger of McCann's personal obligations to guarantee certain debts of the LLC. D. Kosoy then notified BKC of the transfer to Charger and of his readiness to re-sell the interest to BKC. BKC refused either to buy the interest or to manage the boutique which has performed poorly ever since.
The governing instrument of a limited liability corporation is the "operating agreement" and is akin to the by-laws of a corporation.
Article 4 of the license agreement sets forth the responsibilities of the LLC to manage the boutique during the term of the license. Additionally, Article 5 of the operating agreement provides that "[t]he management of the Company's business shall be vested in the Members."
D. Kosoy, C. Kosoy and Charger filed suit on July 20, 2001 alleging fraud, promissory estoppel and breach of contract claims. BKC moved to dismiss all three claims. After hearing argument on November 20, 2001 ("hearing"), I dismissed all claims asserted by Charger because Charger was not a party to the alleged contract nor a third-party beneficiary and played no role in the dispute beyond its service as the vehicle for D. Kosoy's purchase and re-sale of McCann's interest. See Hearing Transcript, November 20, 2001, at 17. [Hereinafter "plaintiffs" refers to D. Kosoy and C. Kosoy and excludes Charger.] I also dismissed the fraud claim as a mere restatement of the breach of contract claim. Id. BKC did not commit fraud when it allegedly falsely promised to buy McCann's interest so as to induce D. Kosoy to buy McCann's interest and guarantee his continued involvement in the LLC. See Atla-Medine v. Crompton, 2001 WL 170666, at *3 (S.D.N.Y. 2001) ("It is well settled that a plaintiff cannot convert a contract action into one for fraud merely by alleging that the contracting party did not intend to meet its contractual obligations.").
BKC, who subsequently submitted a letter concerning the promissory estoppel claim, apparently did not appreciate the finality of my decision at the hearing where I stated "I'm going to . . . deny [the motion] with respect to the promissory estoppel [claim]." See Hearing Transcript, November 20, 2001, at 17.
Had BKC not promised to buy McCann's interest to D. Kosoy, D. Kosoy might have elected to sell-out to McCann thereby terminating his role in the LLC and the boutique's management.
Additionally, I denied BKC's motion to dismiss the promissory estoppel claim for failure to state a claim. See Hearing Transcript, November 20, 2001, at 17. "Under Colorado law, the elements of a promissory estoppel claim are: (1) the promisor made a promise to the promisee; (2) the promisor should reasonably have expected that promise would induce action or forbearance by the promisee; (3) the promisee in fact reasonably relied on the promise to the promisee's detriment; and (4) the promise must be enforced to prevent injustice." Berg v. State Board of Agriculture, 919 P.2d 254, 259 (Colo. 1996). Here, the complaint states that: BKC promised to buy McCann's interest and run the boutique; plaintiffs reasonably relied upon that promise, as BKC knew they would; plaintiffs suffered damages; and justice requires that BKC be held to his promise. It is immaterial to this motion that the complaint does not allege that BKC promised to pay a specific price since a claim for promissory estoppel may be applied "where there has not been mutual agreement by the parties on all essential terms of a contract." Vigorda v. Denver Urban Renewal Authority, 646 P.2d 900, 905 (Colo. 1982).
In a letter unilaterally submitted to the Court after the hearing, BKC argued that the promissory estoppel must be dismissed because plaintiffs' injury was not "unconscionable." Notwithstanding the fact that it would be premature at this stage of the litigation to determine whether BKC's injury crosses the unconscionability threshold, the question of whether unconscionability must be shown under Colorado law has not been briefed and I do not reach it here.
With respect to plaintiffs' third claim for breach of contract I reserved judgment see Hearing Transcript, November 20, 2001, at 17, and that claim is discussed below.
Discussion
BKC makes two arguments with respect to the breach of contract claim: (1) failure to state a claim pursuant to F.R.C.P. 12(b)(6) and (2) the claim is barred by the Statute of Frauds.
"It has long been the law in Colorado that a party attempting to recover on a claim for breach of contract must prove the following elements: (1) the existence of a contract, (2) performance by the plaintiff or some justification for nonperformance, (3) failure to perform the contract by the defendant, and (4) resulting damages to the plaintiff." Western Distributing Co. v. Diodosio, 841 P.2d 1053, 1058 (Colo. 1992) (citations omitted). Here, plaintiffs allege that D. Kosoy entered into an oral contract with BKC during a phone conversation that took place between August 23, 1999 and September 3, 1999 wherein D. Kosoy agreed to purchase McCann's interest in the LLC and BKC agreed to repurchase that interest from D. Kosoy and manage the boutique. Kosoy performed on the contract by buying out McCann's interest for $150,000 and indicating his readiness to transfer that interest to BKC and BKC refused to perform his part of the bargain with the result that plaintiffs suffered damages. See Complaint ¶¶ 11-15.
Colorado law governs the breach of contract claim. Kosoy entered into the oral contract in Colorado that concerned ownership of a Colorado LLC. This dispute's only connections to New York are that BKC is a New York citizen and the license agreement includes a choice of law provision that designates New York's law for disputes arising under the license agreement. Here, however, the alleged contract is an oral contract between BKC and D. Kosoy. The possibility that the alleged oral contract claim may constitute a breach of the license agreement if upheld does not render the choice of law provision applicable. As a practical matter, the application of Colorado law rather than New York law is immaterial as they are substantively the same as to this claim.
BKC argues that to the foregoing is inadequate to state a claim for breach of contract. I agree. "Parties must agree on all material terms to create a valid settlement agreement. An agreement cannot be enforced unless the terms are sufficiently definite to allow a court to determine whether the parties have complied with them." DiFrancesco v. Particle Interconnect Corp. 2001 WL 1548652 (Colo.App. 2001) (citations omitted). "Although plaintiff need not precisely state each element of its claims, plaintiff must plead minimal factual allegations on material elements that must be proved." See GRGE Inc. v. Thomas Aircraft Sales, Inc., 2001 U.S. Dist. LEXIS 5647, *3 (10th Cir. 2001). While the court may supply some contractual terms, it cannot make a contract. See Stice v. Peterson, 144 Colo. 219, 355 P.2d 948 (1960). Where the parties fail to "expressly or implicitly agree upon a `reasonable price'" or prescribe a practicable method for determining price, an agreement is too uncertain for enforcement. 1 CORBIN ON CONTRACTS § 4.3 (Rev. ed. 1983).
Here, price is an essential term of the agreement and there is no allegation in the complaint that the parties agreed to either a specific price for McCann's membership interest or a mechanism for its determination. As alleged, the agreement was no more than a promise by BKC to purchase what was formerly McCann's interest at an unspecified time, in an unspecified manner, and for an unspecified price, and then, at an unspecified time, assume responsibility for operating the boutique. The parties spoke no further of the agreement until D. Kosoy made his demand upon BKC sometime after October 14, 1999, which is surprising not only because of the many gaps in the oral contract, but for the additional reason that the oral contract threatened to put both parties in breach of the license agreement. For example, pursuant to the license agreement D. Kosoy was precluded from transferring McCann's interest without prior written approval by KCLC, which he never had.
Since the only parties with direct knowledge of what was agreed to are BKC and D. Kosoy, and D. Kosoy included no additional allegations either in the complaint or in argument before the Court, it is a fair assumption that additional discovery on the issue of what the parties agreed to during the phone conversation is unlikely to reveal other agreed-upon terms favorable to plaintiffs' claim. Additionally, plaintiffs have supplied no further details of the alleged phone conversation between BKC and D. Kosoy, notwithstanding the several opportunities presented in their opposition to BKC's motion, the hearing on that motion, or the flurry of letters submitted to the Court following the hearing.
As a practical matter, obtaining this approval would not have presented a major complication riven BKC's control of KCLC.
Had plaintiffs alleged that BKC agreed to match D. Kosoy's payment to McCann upon demand by D. Kosoy, or even that the parties had agreed to a "reasonable price" or a price to be determined after D. Kosoy negotiated the transfer from McCann to Charger, the alleged contract may not have been fatally indefinite. However, the contract as alleged included none of the foregoing terms, and the bald agreement to purchase a membership interest upon the satisfaction of a condition precedent — i.e., D. Kosoy's successful purchase of the membership interest from McCann — in the absence of any other essential terms is not enforceable in contract.
Plaintiffs invite the Court to fill in the missing price term as the $150,000 that D. Kosoy paid to McCann, but to do so would be merely to speculate. While $150,000 has a certain intuitive appeal, contract law is about holding people to their agreements and there are several reasons to doubt that the parties ever agreed, even implicitly, to $150,000 or to whatever D. Kosoy negotiated with McCann. First, the parties never mentioned this figure, or any other for that matter, and it cannot be derived from the operating agreement or any other document before the Court. Second, BKC agreed not only to buy the McCann's interest but to manage the boutique as well, and in this regard there is no evidence to sustain any figure whatsoever or how any such figure, if there was one, was to figure into BKC's total payment obligations. Third, it is unclear how D. Kosoy's agreement to assume McCann's obligations as guarantor for debts of the LLC would effect the price he demanded from BKC. Fourth, given BKC's concern that D. Kosoy not depart the LLC it is certainly possible that D. Kosoy intended to profit from the transaction.
Therefore, the breach of contract claim is dismissed.
I do not reach the various Statute of Frauds problems that the breach of contract claim would have presented had it not been dismissed for indefiniteness, except to note that even if plaintiffs had stated a claim for breach of contract, the absence of a writing would have limited any available relief to $5,000. A membership interest in a limited liability corporation is personal property, COLO. REV. STAT. § 7-80-702, and an oral contract for the sale of personal property is not enforceable by way of action or defense beyond five thousand dollars.Id. § 4-1-206. Indeed, given BKC's alleged agreement to management the store until the expiration of the license agreement on December 31, 2007 see license agreement § 2.1, the Statute of Frauds may have foreclosed any relief on the breach of oral contract claim. See COLO. REV. STAT. § 38-10-112(a).