Opinion
06 Civ. 1104 (DLC).
June 26, 2007
For Plaintiffs: Jonathan J. Ross, Labaton Sucharow Rudoff LLP, New York, NY.
For Defendant Tony DeRosa-Grund: Pro Se, Mt. Pocono, PA.
OPINION ORDER
Plaintiffs PSG Poker, LLC ("PSG Poker") and its principal member Phil Gordon ("Gordon") bring this suit against the defendants for breach of contract and fraudulent misrepresentation in connection with a contract for the production of a poker television program. A default has already been entered against the corporate defendants, and the plaintiffs now move for summary judgment against the remaining individual defendant, Tony DeRosa-Grund ("DeRosa-Grund"). Plaintiffs further seek to pierce the corporate veil and find DeRosa-Grund personally liable. DeRosa-Grund opposes the motion for summary judgment, and requests further discovery. For the following reasons, the plaintiffs' motion for summary judgment is denied without prejudice to its renewal. DeRosa-Grund's motion for further discovery is denied.
Background
The following facts are undisputed or are taken in the light most favorable to DeRosa-Grund, unless otherwise noted. In December 2005, plaintiff PSG Poker entered into a contract with defendant Projo Poker Tournament Services, LLC ("Projo"). The contract called for Gordon to act as a co-host and analyst for a television program to be produced by Projo. Projo is a Delaware company with representative address at the Pennsylvania address where DeRosa-Grund resides. Prior to the contract, Gordon had been the co-host and commentator for a cable television program on Bravo. The December contract was signed on behalf of PSG Poker by Gordon, and for Projo by DeRosa-Grund. The total compensation for the contract was $340,000, with $170,000 payable within 15 business days of the execution of the agreement and the remainder paid in installments. There was a fifteen business day cure period for default on the initial payment, with the cure period commencing on the date of receipt of written notice of such default. The contract further provided that in the event of a default, the prevailing party shall recover attorneys' fees and costs.
The only evidence submitted by DeRosa-Grund in opposition to plaintiffs' motion for summary judgment is his own affidavits with no attached exhibits, including an affidavit pursuant toAetna Cas. Sur. Co. v. Aniero Concrete Co., 404 F.3d 566, 573 (2d Cir. 2005), in support of his request for discovery.
In order to be available for the contract with Projo, Gordon initiated litigation to free himself from the Bravo program, and settled with Bravo in November 2005. DeRosa-Grund claims in his affidavit that it was CBS — which was supposed to broadcast the Projo program — that said Gordon first had to be free of his Bravo obligations before signing the contract with Projo, and further suggests that CBS was the driving force behind recruiting and contracting with Gordon for the Projo program. In addition, the affidavit claims that Gordon told DeRosa-Grund that Gordon wanted to get out of his Bravo obligations on his own, and argues that Gordon used the Projo program as only an excuse.
It is not entirely clear from the affidavit how DeRosa-Grund came about his knowledge of CBS's involvement, but he suggests that there were direct communications between CBS and himself regarding Gordon. Furthermore, DeRosa-Grund claims that Gordon told him some of these things in emails, but he does not provide copies of any of these emails.
During the negotiations over the ultimate contract, plaintiffs offer evidence that DeRosa-Grund represented to them that he had obtained commitments from CBS to broadcast the Projo program and that it was "a done deal." Plaintiffs have submitted as exhibits several emails DeRosa-Grund sent Gordon, and DeRosa-Grund does not dispute that he made the reassuring statements in those emails. Thereafter, defendants failed to make the initial payment as required by the December contract, even after plaintiffs provided defendants with a Notice of Default by email on January 10, 2006.
DeRosa-Grund claims in his affidavit that representations were made by CBS, not DeRosa-Grund, and that the plaintiffs knew that the defendant corporations were start-up ventures subject to risk. DeRosa-Grund does not provide any admissible evidence, however, supporting his statements, and instead requests as further discovery admissions from Gordon on these issues. Furthermore, in his 56.1 Statement, DeRosa-Grund quotes from a passage which allegedly was in his contract with CBS, but because he failed to provide a copy of the contract, either in discovery or with his summary judgment opposition, the passage will not be considered here.
DeRosa-Grund denies ever receiving the Notice. Defendant's bare assertions in the face of contrary evidence, however, is not sufficient to raise an issue of material fact. Furthermore, DeRosa-Grund does not deny that he was fully aware that the December contract required initial payment which was not made. Instead, he argues in his memorandum, without support, that the contract is not enforceable because it is illegal.
Plaintiffs commenced this action on February 14, 2006, claiming breach of contract and fraudulent misrepresentation. Defendants initially filed a pro se motion to dismiss, but after being informed by the Court that corporations may not proceed pro se under Pridgen v. Andresen, 113 F.3d 391, 393 (2d Cir. 1997), the motion was withdrawn and counsel retained. Following an initial pretrial conference, a May 16 Scheduling Order set the discovery deadline as October 27. On October 11, defendants' counsel requested to withdraw as counsel for the defendants. The Court ordered that the request would be granted as of the conclusion of discovery, so long as it was supported by an affidavit from DeRosa-Grund acknowledging that a default would be entered against the corporate defendants. The discovery deadline was subsequently extended to December 1 by an October 27 Stipulation and Order. The October 27 Stipulation and Order noted that plaintiffs' document production requests and notice of deposition had been served on September 15, and required the defendants to produce documents in response by November 28 and have DeRosa-Grund's deposition take place on November 30. The defendants produced few documents and DeRosa-Grund did not appear for his deposition.
Following a December 1 ex parte letter from defendants' counsel that has been filed under seal, a December 4 Order granted counsel's request to withdraw without DeRosa-Grund's affidavit and entered defaults against the corporate defendants. The letter indicated that DeRosa-Grund had refused to sign the affidavit, produce all but a few of the documents requested in discovery, or attend his deposition, and that he fired defense counsel. The December 4 Order also confirmed the summary judgment schedule agreed to by the parties in their October 27 Stipulation and Order.
The issue of damages against the corporate defendants was reserved for a later inquest.
Plaintiffs filed their motion for summary judgment on December 15. Remaining defendant DeRosa-Grund was granted an extension to file his opposition, and it was filed, along with an affidavit requesting further discovery, on March 2, 2007. Plaintiffs submitted a Reply Declaration in support of their motion for summary judgment and in opposition to the request for discovery on March 26, and it was accepted for filing on April 18.
Discussion
I. Plaintiffs' Motion for Summary Judgment
Defaults have already been entered against the corporate defendants, and therefore the motion for summary judgment concerns only the individual defendant DeRosa-Grund. Summary judgment may not be granted unless all of the submissions taken together "show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Rule 56(c), Fed.R.Civ.P. The moving party bears the burden of demonstrating the absence of a material factual question, and in making this determination the court must view all facts in the light most favorable to the non-moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247 (1986);Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). When the moving party has asserted facts showing that the non-movant's claims cannot be sustained, the opposing party must "set forth specific facts showing that there is a genuine issue for trial," and cannot rest on the "mere allegations or denials" of the movant's pleadings. Rule 56(e), Fed.R.Civ.P.; accord Sista v. CDC Ixis N. Am., Inc., 445 F.3d 161, 169 (2d Cir. 2006).
A. Breach of Contract
Plaintiffs claim breach of contract based on defendants' failure to pay the amount due under the contract. "Under New York law, an agent who signs an agreement on behalf of a disclosed principal will not be individually bound to the terms of the agreement unless there is clear and explicit evidence of the agent's intention to substitute or superadd his personal liability for, or to, that of his principal." Lerner v. Amalgamated Clothing Textile Workers Union, 938 F.2d 2, 5 (2d Cir. 1991) (citation omitted).
Plaintiffs have relied on New York law to assert their claims, and the pro se defendant has not disputed the law. The parties having consented, that consent is sufficient to end the choice of law inquiry. See 3Com Corp. v. Banco do Brasil, S.A., 171 F.3d 739, 743 (2d Cir. 1999).
New York courts have found individual liability only in rare cases since there must be overwhelming evidence of the signatory's intention to assume personal liability. This rule is supported by the rationale that in modern times most commercial business is done between corporations, not individual stockholders or officers of the corporation.Mason Tenders District Council Welfare Fund v. Thomsen Constr. Co., 301 F.3d 50, 53 (2d Cir. 2002) (citation omitted).
The December 2005 contract was entered into between PSG Poker and Projo. The signature part of the contract shows that DeRosa-Grund signed the contract as the Director of Projo. There is no indication in the contract that DeRosa-Grund was assuming personal liability for the contract, but plaintiffs seek to attach personal liability to DeRosa-Grund by piercing the corporate veil.
In New York, "[q]uestions relating to the internal affairs of corporations . . . are generally decided in accordance with the law of the place of incorporation." United States v. Funds Held in the Name or for the Benefit of Wetterer, 210 F.3d 96, 106 (2d Cir. 2000). Projo is incorporated in Delaware, and therefore, although plaintiffs rely on New York law, the law of Delaware on piercing the corporate veil should be applied.
"Persuading a Delaware court to disregard the corporate entity is a difficult task." Wallace ex rel. Cencom Cable Income Partners II, L.P. v. Wood, 752 A.2d 1175, 1183 (Del.Ch. 1999) (citation omitted). "Piercing the corporate veil under the alter ego theory requires that the corporate structure cause fraud or similar injustice. Effectively, the corporation must be a sham and exist for no other purpose than as a vehicle for fraud." Id. at 1184 (citation omitted). Among the factors to be considered under Delaware law in determining whether to disregard the corporate forum are
whether the corporation was adequately capitalized for the corporate undertaking; whether the corporation was solvent; whether dividends were paid, corporate records kept, officers and directors functioned properly, and other corporate formalities were observed; whether the dominant shareholder siphoned corporate funds; and whether, in general, the corporation simply functioned as a facade for the dominant shareholder.Fletcher v. Atex, Inc., 68 F.3d 1451, 1458 (2d Cir. 1995) (citation omitted).
At this stage, plaintiffs have failed to show that piercing the corporate veil is justified for the breach of contract claim. In support of their argument for veil piercing, plaintiffs point out that DeRosa-Grund admits in defendants' answer to being the sole shareholder, officer, and director of the corporations, and that he supervised and controlled the act of the corporations complained of in this action. Plaintiffs further claim that DeRosa-Grund is the only person who ever communicated with plaintiffs on behalf of the corporations and that the corporations conduct business out of DeRosa-Grund's residence.
Plaintiffs also argue, without providing support, that there is no evidence that any corporation was ever formally established. The statement is directly contradicted by the online records for the State of Delaware Department of State's Division of Corporations, which show that a Limited Liability Company named Projo Poker Tournament Series, LLC was incorporated on August 18, 2005.
These facts alone, however, are not sufficient to satisfy the rigorous standards for piercing the corporate veil under Delaware law. Additional facts are necessary to support plaintiffs' claim for veil piercing, but without the participation of DeRosa-Grund in discovery, it is difficult for plaintiffs to acquire and present those additional facts. Therefore, as further explained below, if DeRosa-Grund continues to refuse to comply with his discovery obligations, adverse inferences will be applied against him on the issue of corporate structure, and DeRosa-Grund will be precluded from presenting any evidence to the contrary. Without veil piercing, there can be no liability on the breach of contract claim for DeRosa-Grund, and therefore at this time, plaintiffs' motion for summary judgment on the breach of contract claim is denied.
Plaintiffs' counsel's declaration states that production was requested for documents on corporate structure, but DeRosa-Grund failed to comply.
B. Fraudulent Misrepresentation
Plaintiffs' fraudulent misrepresentation claim is based on Gordon's litigation to extricate himself from the Bravo contract in reliance on DeRosa-Grund's assurances regarding the viability of the Projo program. Under New York law, "officers and directors of a corporation may be held liable for fraud if they participate in it or have actual knowledge of it." Cohen v. Koenig, 25 F.3d 1168, 1173 (2d Cir. 1994) (citation omitted). Therefore, liability for fraudulent misrepresentation may attach to DeRosa-Grund personally without veil piercing.
Under New York law, a fraud claim will not lie if it arises "out of the same facts as plaintiff's breach of contract claim."Telecom Intl. Am., Ltd. v. AT T Corp., 280 F.3d 175, 196 (2d Cir. 2001) (citation omitted). Even with the addition of the allegation that the "defendant never intended to perform" the contract, "the fraud claim is redundant and plaintiff's sole remedy is for breach of contract." Id. In order to succeed on a fraud claim arising from a breach of contract, a plaintiff must show: (1) "a legal duty separate from the duty to perform under the contract"; (2) "a fraudulent misrepresentation collateral or extraneous to the contract"; or (3) "special damages that are caused by the misrepresentation and unrecoverable as contract damages." Bridgestone/Firestone v. Recovery Credit Servs., 98 F.3d 13, 20 (2d Cir. 1996).
Because plaintiffs' allegations relate to the decision to enter into the contract with Projo, plaintiffs' claim is properly characterized as alleging fraudulent inducement. The elements of fraudulent inducement are: (1) a knowingly false representation of a material fact and (2) detrimental reliance thereon. Fax Telecommunicaciones Inc. v. AT T, 138 F.3d 479, 490 (2d Cir. 1998). The false representation can be either a misrepresentation or the material omission of a fact. Lama Holding Co. v. Smith Barney Inc., 668 N.E.2d 1370, 1373 (N.Y. 1996). Reliance means "reasonable" reliance. Remington Rand Corp. v. Amsterdam-Rotterdam Bank, N.V., 68 F.3d 1478, 1484 (2d Cir. 1995). In assessing whether reliance is reasonable, the entire context of the transaction is considered "including factors such as its complexity and magnitude, the sophistication of the parties, and the contents of any agreements between them."Emergent Capital Inv. Mgmt. LLC v. Stonepath Group, Inc., 343 F.3d 189, 195 (2d Cir. 2003).
Plaintiffs claim that DeRosa-Grund's representations that the program was going forward with CBS and that he had obtained the financial resources to make it happen were false. In support, plaintiffs point out that DeRosa-Grund has failed to produce in discovery copies of any proposed agreements with CBS or any evidence that the necessary capital had been obtained, despite their service of interrogatories and documents requests requesting this information. Plaintiffs have failed at this point to show that DeRosa-Grund made knowingly false representations. Plaintiffs have submitted no evidence that DeRosa-Grund's statements were knowingly false, and instead rely solely upon his failure to produce discovery to the contrary.
It does not appear, however, that plaintiffs made any attempt to request discovery from CBS on the issue of DeRosa-Grund's relationship with CBS.
In support of their position, plaintiffs cite Residential Funding Corp. v. DeGeorge Fin. Corp., 306 F.3d 99, 106-08 (2d Cir. 2002), and argue for an adverse inference that there was no agreement with CBS and that DeRosa-Grund never obtained the financial resources. As noted above, despite the extension of the discovery deadline by the October 27, 2006 Stipulation and Order, defendants failed to produce the necessary documents for the plaintiffs, and DeRosa-Grund also refused to attend his deposition, thereby preventing plaintiffs from obtaining evidence which could have supported their summary judgment motion. Under Rule 37(b)(2) of the Federal Rules of Civil Procedure, "if a party fails to obey a discovery order, the court `may make such orders in regard to the failure as are just.'" Residential Funding Corp., 306 F.3d at 106 (citing Fed.R.Civ.P. 37(b)(2)). "Where, as here, the nature of the alleged breach of a discovery obligation is the non-production of evidence, a district court has broad discretion in fashioning an appropriate sanction, including the discretion to . . . proceed with a trial and give an adverse inference instruction." Id. at 107.
As noted in the Background, the October 27 Stipulation and Order required defendants to produce documents in response to plaintiffs' document requests by November 28, and set the deposition of DeRosa-Grund for November 30.
[W]here, as here, an adverse inference instruction is sought on the basis that the evidence was not produced in time for use at trial, the party seeking the instruction must show (1) that the party having control over the evidence had an obligation to timely produce it; (2) that the party that failed to timely produce the evidence had "a culpable state of mind"; and (3) that the missing evidence is "relevant" to the party's claim or defense such that a reasonable trier of fact could find that it would support that claim or defense.Id. A culpable state of mind includes the knowing or negligent failure to produce evidence. Id. at 108. "The inference is adverse to the destroyer [of evidence] not because of any finding of moral culpability, but because the risk that the evidence would have been detrimental rather than favorable should fall on the party responsible for its loss." Id. (citation omitted).
Plaintiffs raise a strong argument justifying an adverse inference in this case, and the Court is sympathetic to the difficulties plaintiffs have encountered in discovery. Without compliance by DeRosa-Grund in discovery, plaintiffs are seriously hampered in their efforts to gather the facts necessary to support their summary judgment motion.
While DeRosa-Grund should not be rewarded for his noncompliance, the drawing of an adverse inference is premature. Other than the October 27 Stipulation and Order requesting an extension of the discovery deadline, plaintiffs never informed the Court of any discovery disputes. For example, following the failure of discovery on November 30, plaintiffs did not seek a motion to compel discovery, nor did they bring a motion for sanctions. Plaintiffs did not request an extension of the summary judgment deadline set for December 15, but instead brought a motion for summary judgment, requesting adverse inferences in their memorandum of law.
As a consequence this Court has never warned DeRosa-Grund of the serious consequences of failure to comply with discovery orders. He refused to attend a conference scheduled for December 5, 2006, where the issue could have been addressed. In any event, and particularly considering that DeRosa-Grund is now proceeding pro se, it is premature to apply adverse inferences against DeRosa-Grund. Plaintiffs' motion for summary judgment is therefore denied, but without prejudice to its renewal after DeRosa-Grund has had one final opportunity to comply with his discovery obligations and is fully informed of the consequences of his noncompliance. A scheduling order issued with this Opinion provides such notice and opportunity.
Defense counsel, in the ex parte letter filed under seal, indicated that he had warned DeRosa-Grund of the adverse consequences that could follow from failure to comply with discovery, including "preclusion or default . . . or possibly money sanctions," after which DeRosa-Grund fired him.
II. DeRosa-Grund's Request for Discovery
Under Rule 56(f), Fed.R.Civ.P., parties lacking information necessary to oppose a summary judgment motion may seek further discovery. Aetna Cas. Sur. Co. v. Aniero Concrete Co., Inc., 404 F.3d 566, 573 (2d Cir. 2005). To the extent the defendant believes he is entitled to discovery, he must file, with his opposition, an affidavit describing the following information: "(1) what facts are sought and how they are to be obtained; (2) how these facts are reasonably expected to raise a genuine issue of material fact; (3) what efforts the affiant has made to obtain them; and (4) why the affiant's efforts were unsuccessful."Gualandi v. Adams, 385 F.3d 236, 244 (2d Cir. 2004).
Plaintiffs filed their motion for summary judgment on December 15, 2006. In requests dated January 22, 2007, DeRosa-Grund sought an extension to file his opposition, which was due January 19, and discovery under Rule 56(f), Fed.R.Civ.P. A February 1 Order advised him of the legal standard for requesting discovery, and on March 2, he filed, with his opposition to summary judgment, an affidavit in support of his request for discovery. DeRosa-Grund lists documents he seeks which he claims would show that the contract was not enforceable and that would dispute the fraudulent misrepresentation claims. He admits, however, that he had not made any efforts to obtain these facts in discovery because "I knew these facts to be true and it was my expectation that I would have the opportunity to bring out these facts during cross examination of Mr. Gordon at trial." He claims that he was "unaware that my opportunity in this regard might be precluded by the motion that Mr. Gordon has filed."
DeRosa-Grund's request for discovery is denied. This action has been pending since February 2006, and DeRosa-Grund was represented by counsel from at least May 12, when counsel filed a Notice of Appearance, until December 4, when counsel's request to withdraw was granted. During that time, discovery was ongoing, and DeRosa-Grund does not account for his failure to participate in it during that entire time. Furthermore, the December 4 Order granting counsel's request to withdraw included a Notice for Pro Se Litigants Regarding Opposition to a Summary Judgment Motion, which clearly informed DeRosa-Grund of the summary judgment standard. DeRosa-Grund's request for discovery, however, was not submitted until nearly two months later. DeRosa-Grund has not shown that he has been at all diligent in pursuing discovery; instead, he ignored this action until the plaintiffs filed their motion for summary judgment. DeRosa-Grund's bare assertion that he did not know about discovery during the almost full year the action was pending can not be credited.
Conclusion
For the above reasons, plaintiffs' motion for summary judgment is denied without prejudice to its renewal. Defendant DeRosa-Grund's request for discovery is denied.
SO ORDERED: