Opinion
03 Civ. 1730 (LAK) (GWG)
December 12, 2003
REPORT AND RECOMMENDATION
Plaintiff Sony Financial Services, LLC ("Sony Financial") brought this action against Multi Video Group, Ltd. ("Multi Video"), Rhinoceros Visual Effects Design, LLC ("Rhinoceros") and Cool Beans Digital Audio, Inc. ("Cool Beans") for breach of contract. Multi Video and Rhinoceros (collectively, the "counterclaimants") interposed a counterclaim against Sony Financial and Sony Electronics, Inc. ("Sony Electronics") for fraud and deceit. Additionally, they asserted a counterclaim solely against Sony Electronics for breach of contract. By order dated June 17, 2003, Judge Lewis A. Kaplan dismissed the counterclaims as insufficient but granted leave to replead. Sony Fin. Servs. v. Multi Video Group. Ltd., 2003 WL 21396690 (S.D.N.Y. June 17, 2003). Multi Video and Rhinoceros thereafter reasserted their counterclaims.
Now Sony Electronics and Sony Financial again move for judgment on the pleadings under Fed.R.Civ.P. 12(c) dismissing the counterclaims. Sony Financial also moves to strike one of the affirmative defenses pursuant to Fed.R.Civ.P. 12(f). See Notice of Motion for Judgment on the Pleadings Dismissing Amended Counterclaims and to Strike First Affirmative Defense, filed July 17, 2003 (Docket #26). For the reasons below, their motion should be granted in its entirety.
I. BACKGROUND
The counterclaims in this case involve what the counterclaimants refer to as the "Beta Test Site Agreement." A "beta test" is the second phase of testing for an experimental product. After a product has been through the first, or "alpha," test, but before it is ready for the market, the product is made available to select members of the intended audience, who use the product and provide feedback. See Answer and Amended Counterclaims, filed July 7, 2003 (Docket #24) ("Am. Counted."), ¶ 44(1) n. 1.
In the summer of 1999, Sony Electronics approached Multi Video with an offer to enter into an agreement to beta test new equipment. Am. Countercl. ¶ 44. Sony Electronics would install certain equipment in Multi Video's business premises and the equipment would be "used, studied, upgraded, modified and tailored." Id. ¶ 44(2). In order to enter into this arrangement, however, Sony Electronics required Multi Video to enter into certain equipment leases and a Master Lease "relating to a certain Telecine Suite" with plaintiff Sony Financial.Id. ¶ 44(v). Multi Video entered into these agreements.Id. ¶ 46. In addition, in early 2000, Rhinoceros and Cool Beans each executed a guaranty in favor of Sony Financial. Id. Amended Complaint, filed March 26, 2003 (Docket #7) ("Am. Compl."), ¶¶ 11-12.
Sony Financial's complaint in this action alleges that Multi Video breached the Master Lease by failing to make all payments, Am. Compl. ¶¶ 21-29, and that Rhinoceros and Cool Beans breached their guaranties, id. ¶¶ 30-34. As an affirmative defense, defendants allege that the Master Lease is a product of deceit and was induced by fraud and misrepresentations. Am. Countercl. ¶ 35. In addition, Multi Video and Rhinoceros assert counterclaims for breach of the Beta Test Site Agreement and for fraud related to that agreement.Id. ¶¶ 39-62.
II. APPLICABLE LEGAL STANDARD
In resolving a motion for judgment on the pleadings under Fed.R.Civ.P. 12(c), the standard is the same as that used for a motion to dismiss for failure to state a claim under 12(b)(6). Oneida Indian Nation of N.Y. v. City of Sherrill, 337 F.3d 139, 152 (2d Cir. 2003) (citingBurnette v. Carothers, 192 F.3d 52, 56 (2d Cir. 1999)). Thus, the Court must accept the factual allegations set forth in the non-moving party's pleading as true and draw all reasonable inferences in favor of the non-moving party. Scheuer v. Rhodes, 416 U.S. 232, 236 (1974); Cosmas v. Hassett, 886 F.2d 8, 11 (2d Cir. 1989). Dismissal is not appropriate "unless it appears beyond doubt that the [non-movant] can prove no set of facts in support of [its] claim which would entitle [it] to relief." Conley v. Gibson, 355 U.S. 41, 45-46 (1957).
For purposes of this motion, a party's pleading "is deemed to include any written instrument attached to it as an exhibit or any statements or documents incorporated in it by reference." Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 47 (2d Cir. 1991), cert. denied, 503 U.S. 960 (1992); accord Chambers v. Time Warner, Inc., 282 F.3d 147, 152 (2d Cir. 2002); see also Fed.R.Civ.P. 10(c) ("A copy of any written instrument which is an exhibit to a pleading is a part thereof for all purposes.").
III. THE COUNTERCLAIM FOR BREACH OF CONTRACT
A. The Pleading
The breach of contract counterclaim is brought only against Sony Electronics. It alleges that in the summer of 1999, representatives of Sony Electronics approached Multi Video and offered to enter into a "Beta Test Site Agreement" pursuant to which Sony Electronics would install certain state-of-the-art equipment in the business premises of Multi Video. Am. Countercl. ¶ 44(1). The equipment was to be "used, studied, upgraded, modified and tailored" to the mutual benefit of both parties. Id. ¶ 44(2). As part of the offer, Sony Electronics in substance agreed that:
1. The price given to Multi Video for the equipment would be below the list price for customers once the product was ready for sale to the market.
2. Sony Electronics would develop the equipment with Multi Video for their mutual benefit by enabling Multi Video to use the equipment while Sony Electronics tested, debugged and improved it.
3. Sony Electronics would advertise the availability of such equipment at Multi Video's businesses.
4. Sony Electronics had the available technical know-how, engineers and technical support to provide the service and repairs needed to keep the equipment in working order, allowing Multi Video to enter into contracts with their customers requiring the use of such equipment.See Id. ¶ 44(3)(i)-(iv). The counterclaim goes on to allege that as a condition precedent to accepting Sony Electronics' offer, Multi Video was required to enter into equipment leases with Sony Financial relating to an "HD Edit Room" and a "Telecine Suite," both encompassed in the Master Lease, and to make certain advance payments.Id. ¶ 44(3)(v). Multi Video alleges that no payments were required during the beta test stage and that payments under the equipment leases were only due upon successful completion of the beta test stage. Id. ¶ 44(3)(vi).
Multi Video performed its obligations under the Beta Test Site Agreement by executing the Master Lease and the guaranties and by making the required advance payments. Am. Countercl. ¶ 46. Multi Video also made its premises available for installation. Id. ¶ 47.
The counterclaim alleges that Sony Electronics breached the Beta Test Site Agreement by failing to improve and upgrade the equipment and maintain it in working order. Id. ¶ 48. Sony Electronics repeatedly assured Multi Video that it would render the equipment in working order yet failed to provide technicians with the skill, knowledge or ability to do so. Id. ¶ 49. As a result, Multi Video was unable to provide contracted-for services to its clients. Id. ¶¶ 50, 62.
B. Failure to State a Claim
To state a claim for breach of contract under New York law, a party must allege: (1) the existence of an agreement, (2) adequate performance of the contract by the party alleging the breach, (3) breach and (4) damages caused by the breach. Harsco Corp. v. Segui, 91 F.3d 337, 348 (2d Cir. 1996); Leber Assocs., LLC v. Entm't Group Fund. Inc., 2003 WL 21750211, at *15 (S.D.N.Y. July 29, 2003); R.H. Damon Co. v. Softkey Software Prods., Inc., 811 F. Supp. 986, 991 (S.D.N.Y. 1993). As detailed above, the first amended counterclaim satisfies this standard. Multi Video and Rhinoceros have alleged the terms of the Beta Test Site Agreement, Am. Countercl. Id. ¶¶ 44-45, their performance pursuant to those terms, id. ¶¶ 46-47, the nature of the breach, id. ¶¶ 48-49, and the damages caused by it, id. ¶¶ 50, 62.
The breach of contract counterclaim is based on the Beta Test Site Agreement, an agreement allegedly between Multi Video and Sony Electronics. Multi Video alleges that entering the Master Lease, which is the subject of Sony Financial's complaint in this action, was a condition precedent to, and thus only one aspect of, the Beta Test Site Agreement. See Am. Countercl. ¶¶ 44(3)(v), 46. Sony Electronics contends that there is no "Beta Test Site Agreement" between Sony Electronics and Multi Video, and thus it cannot be the basis of a breach of contract claim. See Memorandum of Law in Support of Motion for Judgment on the Pleadings Dismissing Amended Counterclaims and Motion to Strike First Affirmative Defense, filed July 17, 2003 (Docket #27) ("Counterdef. Mem."), at 12. Sony Electronics' argument is based on a written contract entitled the "System Sales Agreement," which Sony Electronics argues is the only written, fully integrated contract between Sony Electronics and Multi Video. Id. at 12-15. However, Multi Video has not referred to or relied on the System Sales Agreement in its pleading. Because the System Sales Agreement is not properly considered by the Court on this motion for judgment on the pleadings, determining the relationship between the System Sales Agreement and the Beta Test Site Agreement could only await a motion made on a proper record. Accordingly, the claim against Sony Electronics has been properly stated.
C. Whether Sony Electronics Is an "Opposing Party"
Sony Electronics also argues that, even if it is properly alleged, the breach of contract counterclaim must be dismissed because it names only Sony Electronics as a counterdefendant and Sony Electronics is not an "opposing party" within the meaning of Fed.R.Civ.P. 13. See Counterdef. Mem. at 15 (incorporating by reference arguments made in original Memorandum of Law in Support of Motion for Judgment on the Pleadings Dismissing Counterclaims, filed May 12, 2003 (Docket #15), at 3-4). This argument is persuasive.
A counterclaim, whether permissive or compulsory, may be asserted only against an "opposing party." Fed.R.Civ.P. 13(a)-(b). While Rule 13(h) allows additional parties to be joined in accordance with Fed.R.Civ.P. 19 and 20, that subsection permits such additional parties to be joined only where an opposing party is also a party to the counterclaim.See, e.g. Republic Nat'l Bank v. Hales, 75 F. Supp.2d 300, 310 n. 8 (S.D.N.Y. 1999) ("Under Rule 13(h), parties may be properly joined as counterclaim defendants only where at least one party against whom a counterclaim/third-party claim is asserted was a party to the original action." (internal quotations omitted)), aff'd, 4 Fed. Appx. 15 (2d Cir. Feb. 6, 2001); accord FDIC v. Bathgate, 27 F.3d 850, 873-74 (3d Cir. 1994); Various Mkts., Inc. v. Chase Manhattan Bank, 908 F. Supp. 459, 470-71 (E.D. Mich. 1995); 6 Charles Alan Wright, et al., Federal Practice and Procedure § 1435, at 271 (2d ed. 1990) (a counterclaim "may not be directed solely against persons who are not already parties to the original action, but must involve at least one existing party" (citing cases)).
Were it not for this problem, the counterclaim against Sony Electronics is so closely related to this action that it would probably qualify as a compulsory counterclaim under Rule 13(a), since it "arises out of the transaction or occurrence that is the subject matter of Sony Financial's claim. In the amended counterclaim, Multi Video and Rhinoceros have alleged that accepting Sony Electronics' offer to enter the Beta Test Site Agreement was the event that triggered their entering into the Master Lease and the guaranties — the subject matter of Sony Financial's claims. Am. Countercl. ¶¶ 44(3)(v), 46.
The counterclaimants insist that there is a sufficiently close relationship between Sony Financial and Sony Electronics that they in feet constitute a single "opposing party." Indeed, case law reflects that there have been some generous interpretations of the term "opposing party" under which courts have determined that entities that were not actually the party to a lawsuit qualified as an "opposing party" for purposes of Rule 13. See, e.g., Transamerica Occidental Life Ins. Co. v. Aviation Office of Am. Inc., 292 F.3d 384, 390-92 (3d Cir. 2002) ("successor in interest" and assignee of rights of opposing party); Avemco Ins. Co. v. Cessna Aircraft Co., 11 F.3d 998, 1001 (10th Cir. 1993) (insurer deemed to have been subrogated to rights of insured); Banco Nacional de Cuba v. First Nat'l City Bank, 478 F.2d 191, 193 n.l (2d Cir. 1973) (Republic of Cuba and Cuban bank were "one and the same for the purposes of this litigation"). But the Court is aware of no case in which distinct corporate entities have been considered to be identical for purposes of Rule 13 for no reason other than the fact that they were closely related and acted in concert for purposes of effectuating a particular transaction. While Sony Electronics is apparently the sole member of Sony Financial, Am. Compl. ¶ 4, and the counterclaimants allege that the two parties worked in concert to set up the transactions at issue here, Am. Countercl. ¶¶ 44(3)(v), 46, no allegation has been made — let alone evidence presented — that their corporate forms have been disregarded. Rather, it appears that Sony Financial and Sony Electronics are two distinct albeit related corporate entities.
While courts (including this one) are understandably eager to permit or require parties to bring related claims in a single lawsuit as a matter of efficiency, there is a danger in construing "opposing party" under Rule 13 too broadly. Doing so may lead to a future situation where a party is actually barred from bringing suit against the separate entity on the ground that its claim should have been brought as a compulsory counterclaim under Rule 13(a). See, e.g. Avemco, 11 F.3d at 1001. Unless defendants have clear notice as to what entities constitute an "opposing party" under Rule 13, there is a danger that these defendants will later be unwittingly barred from asserting otherwise valid claims. There is no apparent guiding principle reflected in the case law regarding when an entity that is not in fact an opposing party may be deemed actually to have been the "opposing party" within the meaning of Rule 13. Whatever flaws Rule 13 may have in limiting counterclaims to those against an "opposing party," the rule at least has the virtue of clearly informing parties of the situations when they must either bring a claim against such a party or be barred from asserting it in some other proceeding. Here, it seems plain that Sony Electronics is not Sony Financial and the rule has not been satisfied.
Accordingly, the motion to dismiss the breach of contract counterclaim against Sony Electronics should be granted.
Of course, the counterclaimants are free to initiate a separate suit against Sony Electronics on their claim. If properly filed in this Court, such a suit would be a prime candidate for consolidation with the instant action under Fed.R.Civ.P. 42(a).
IV. THE COUNTERCLAIM FOR FRAUD
A. The Pleading
Multi Video and Rhinoceros assert a counterclaim for fraud in the inducement and for continuing fraud and deceit with respect to the Beta Test Site Agreement and the other agreements in this case. Am. Counterel. ¶¶ 51-62. The fraud counterclaim alleges that "representatives of Sony [Electronics], including Robert St. John, Fabio Pansolini, Larry Thorpe, Steven Stubel [sic], George Hale, Rick Harding and others," induced Multi Video to enter into the Beta Test Site Agreement, and in connection therewith the various agreements with Sony Financial, by representing in substance that:
1. Sony Electronics had the capability to develop certain state-of-the-art equipment for the mutual benefit of Sony Electronics and Multi Video.
2. Sony Electronics had available technical expertise and support such that they could service and repair such equipment whenever necessary.
3. The equipment Sony Electronics wished to install for Multi Video's use during the testing stage was state-of-the-art, and was the latest and best development, which would allow Multi Video to expand its scope of services.See id. ¶¶ 52(1)-(3). In reliance on these representations, Multi Video allegedly entered into the Beta Test Site Agreement and the various other agreements, including the Master Lease and the guaranties. Id. ¶¶ 53-54. These representations were repeated on many occasions over the next two years. Id. ¶¶ 52, 56.
The counterclaim also alleges that Multi Video and Rhinoceros "in time discovered that the intentionally false representations . . . Sony [Electronics] made, upon information and belief in concert with Sony Financial,. . . were false and known to be false at the time they were made in that" in substance:
1. Sony Electronics knew that it lacked the capability to support, repair, debug, or improve the equipment and that it had recently failed to successfully complete certain Beta Test projects including one described by an Australian technician "in writing" as a "nightmare."
2. Sony Electronics' sole motive was to benefit itself, and not, as it claimed, to benefit Sony Electronics and Multi Video.
3. Sony Electronics acted in concert with Sony Financial to attempt to place counterclaimants in a position where they would be unable to seek legal redress by virtue of the language of the equipment leases and guaranties.See Am. Countercl. ¶¶ 60(1)-(3).
B. Discussion
Fed.R.Civ.P. 9(b) requires that in "all averments of fraud and mistake, the circumstances constituting fraud or mistake shall be stated with particularity." To satisfy Rule 9(b)'s particularity requirement, "a plaintiff should specify the time, place, speaker, and sometimes even the content of the alleged misrepresentations."Luce v. Edelstein, 802 F.2d 49, 54 (2d Cir. 1986); accord Harsco Corp., 91 F.3d at 347. The pleading must also "allege facts that give rise to a strong inference of fraudulent intent." San Leandro Emergency Med. Group Profit Sharing Plan v. Philip Morris Cos., 75 F.3d 801, 812 (2d Cir. 1996) (citations omitted);accord, e.g. Chill v. Gen. Elec. Co., 101 F.3d 263, 267 (2d Cir. 1996). This can be done "either: (a) by alleging facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness, or (b) by alleging facts to show that defendants had both motive and opportunity to commit fraud." Stevelman v. Alias Research Inc., 174 F.3d 79, 84 (2d Cir. 1999). The Second Circuit has stated that "'[m]otive would entail concrete benefits that could be realized by one or more of the false statements and wrongful nondisclosures alleged.'" Chill, 101 F.3d at 267-68 (quoting Shields v. Citvtrust Bancorp. Inc., 25 F.3d 1124, 1130 (2d Cir. 1994)).
Judge Kaplan previously dismissed the fraud counterclaim because it did not allege fraud with particularity or provide a "sufficient basis for inferring that the speaker knew that what was said was false."Sony, 2003 WL 21396690, at *2. Judge Kaplan observed that "[t]his . . . appears on its face to be a garden variety commercial dispute in which . . . Sony [Electronics] then failed to live up to defendants' expectations." Id. The counter defendants argue that the complaint still does not (1) allege fraud with particularity or (2) plead facts giving rise to a strong inference of fraudulent intent. Counterdef. Mem. at 4-8. As the Court agrees on the second point, it is unnecessary to reach the first.
The only new factual allegation with respect to fraudulent intent is the example of the unsuccessful Australian beta test which is offered to establish Sony Electronics' knowledge that it could not repair, improve or upgrade the equipment at issue. Am. Countercl. ¶ 60(1). Compare Answer Counterclaims, filed April 15, 2003 (Docket #11), ¶ 51, with Am. Countercl. ¶¶ 60. The amended counterclaim refers to a statement "in writing" which allegedly demonstrates Sony Electronics' failures in Australia. Id. The "writing" relied on in the amended counterclaim is a March 2001 e-mail from Eric Whipp to Rich Torpey of Multi Video. See E-mail dated March 30, 2001 ("E-mail") (annexed as Ex. A to Counterdef. Mem.). Multi Video and Rhinoceros proffer this e-mail to support their claim for fraud following the execution of the initial contract. See Counterclaimants' Memorandum of Law in Opposition to Counter defendants' Motion for Judgment on the Pleadings and Motion to Strike First Affirmative Defense, filed August 1, 2003 (Docket #30), at 19. The e-mail, however, does not establish either that the beta test conducted in Australia was unsuccessful or that Sony Electronics knew that the product did not and could not work. To the contrary, the e-mail describes Sony Electronics' ongoing efforts to provide service to the customer.See E-mail (referring to an engineer who was "flying out to help us"). The word "nightmare" was used to describe the writer's last few weeks, in which an engineer left, the company was busy doing a movie-of-the-week and problems with the software occurred, which Sony Electronics was attempting to remedy. Id.
Even if these allegations could be construed as showing that Sony Electronics knew that it could not perform under the Beta Test Site Agreement, the allegations would still be insufficient to support a claim of fraud. The Second Circuit has made clear that an allegation that a party entered into a contract with the intention of breaching it is insufficient to show fraudulent intent. See, e.g., Manning v. Utils. Mut. Ins. Co., 254 F.3d 387, 401 (2d Cir. 2001) (allegedly false "statement of intent to perform under the contract cannot constitute fraud"); Bridgestone/Firestone. Inc. v. Recovery Credits Servs., Inc., 98 F.3d 13, 19-20 (2d Cir. 1996) (dismissing fraud claim where only false statements at issue were "intentionally-false statements . . . indicating [defendant's] intent to perform under the contract"). Accordingly, case law is replete with dismissals of fraud claims that were predicated on allegations that the defendants did not intend to meet their contractual obligations. See, e.g. Alnwick v. European Micro Holdings, Inc., 281 F. Supp.2d 629, 643 (E.D.N.Y. 2003); Marriott Int'l. Inc. v. Downtown Athletic Club of N.Y. City. Inc., 2003 WL 21314056, at *6 (S.D.N.Y. June 9, 2003). The same principles should logically apply to assurances given by a supplier that it intends to continue performance under the contract.
Furthermore, the only "motive" to commit fraud alleged is "to sell such equipment to the Counter defendants [sic] accounting to millions of dollars, for [Sony Electronics'] own personal benefit." Am. Countercl. ¶ 60(2). This too is insufficient as "the Second Circuit has repeatedly held that routine and general benefits that are derived in the ordinary course of business do not constitute the type of 'concrete benefit' that is necessary to allege fraudulent intent under Rule 9(b)."Schmidt v. Fleet Bank, 1998 WL 47827, at *9 (S.D.N.Y. Feb. 4, 1998) fating, inter alia. Chill, 101 F.3d at 268;Shields, 25 F.3d at 1130). Thus, the counterclaim for fraud and deceit must be dismissed.
V. THE MOTION TO STRIKE
Sony Financial also moves to strike the defendants' first affirmative defense, which alleges that the Master Lease was a "product of deceit" and was "induced by intentional acts of fraud and misrepresentation" by Sony Financial. Am. Countercl. ¶ 35. The standard for a motion to strike an affirmative defense under Fed.R.Civ.P. 12(f) is a "mirror image" of the rule governing a motion to dismiss for failure to state a claim.Canadian St. Regis Band of Mohawk Indians ex rel. Francis v. New York, 278 F. Supp.2d 313, 324, 332 (N.D.N.Y. 2003) (Rule 12(f) motion should not be granted unless "it appears to a certainty that plaintiffs would succeed despite any state of the facts which could be proved in support of the defense" (internal quotations omitted)). Accordingly, the motion to strike the first affirmative defense — insofar as it relies on Sony Financial's alleged fraud as its underpinning — should be granted.
Conclusion
For the foregoing reasons, Sony Electronics' and Sony Financial's motion to dismiss the counterclaims and to strike the affirmative defense should be granted.
PROCEDURE FOR FILING OBJECTIONS TO THIS REPORT AND RECOMMENDATION
Pursuant to 28 U.S.C. § 636(b)(1) and Rule 72(b) of the Federal Rules of Civil Procedure, the parties have ten (10) days from service of this Report and Recommendation to file any objections. See also Fed.R.Civ.P. 6(a), (e). Such objections (and any responses to objections) shall be filed with the Clerk of the Court, with extra copies sent to the Honorable Lewis A. Kaplan, 500 Pearl Street, New York, New York 10007, and to the undersigned at 40 Centre Street, New York, New York 10007. Any requests for an extension of time to file objections must be directed to Judge Kaplan. If a party fails to file timely objections, that party will not be permitted to raise any objections to this Report and Recommendation on appeal. See Thomas v. Am, 474 U.S. 140(1985).