Opinion
654433/2019
07-02-2020
Stephen YU, Plaintiff, v. BUYERGENOMICS TECHNOLOGIES LLC, Michael Ferranti, and Endai Marketing Growth Inc., Defendants.
Mavronicolas & Dee LLP, New York, NY (Peter C. Dee of counsel), for plaintiff. Brustein Law PLLC, New York, NY (Evan Brustein of counsel), for defendants.
Mavronicolas & Dee LLP, New York, NY (Peter C. Dee of counsel), for plaintiff.
Brustein Law PLLC, New York, NY (Evan Brustein of counsel), for defendants.
Gerald Lebovits, J.
The following e-filed documents, listed by NYSCEF document number (Motion 001) 1, 2, 3, 4, 5, 7, 8, 9, 10, 11 were read on this motion to DISMISS.
This is an action by plaintiff Stephen Yu against defendants Endai Marketing Growth Inc. (Endai), BuyerGenomics Technologies LLC (BGT), and Michael Ferranti for fraud and breach of contract arising out of a dispute over an executive-employment agreement. Defendants move to dismiss; the motion is granted in part and denied in part.
BACKGROUND
Endai is a Delaware corporation with its principal place of business in New York. BGT is a Delaware limited-liability company that shares office space with Endai in New York. Ferranti is BGT's executive officer. Ferranti and plaintiff entered into an employee agreement in May 2018, whereby plaintiff became the chief product officer of the company. The agreement included a two-percent commission on all net new sales from business generated after plaintiff's start date. It also included an exclusive investment opportunity that would enable plaintiff to grow his stake in BGT. In August 2018 plaintiff invested $100,000 in BGT in the form of a promissory note. BGT promised plaintiff that the note would either be converted into equity if certain benchmarks were met or would be made payable with interest in 2025.
Plaintiff alleges that Ferranti intentionally misled him to believe that Endai had or would capitalize BGT with $250,000, in order to induce him to enter into the employee agreement and invest his own money.
Ferranti terminated plaintiff from BGT in March 2019. Plaintiff now seeks to recoup his $100,000 investment plus interest from BGT, and also from Ferranti and Endai on an alter-ego theory of liability. And plaintiff seeks a declaration that a restrictive covenant in his employment agreement is unenforceable.
DISCUSSION
CPLR 3211 (a) (7) allows a party to move for judgment dismissing a claim for failure to state a cause of action. On a CPLR 3211 (a) (7) motion, the court must "accept the facts as alleged in the complaint as true, accord plaintiff[ ] the benefit of every possible favorable inference, and determine only whether the facts as alleged fit within any cognizable legal theory." ( Connaughton v Chipotle Mexican Grill, Inc. , 29 NY3d 137, 141 [2017] [internal quotation marks omitted].)
CPLR 3016 imposes a heightened pleading standard on claims of fraud. (See CPLR 3016 [b] ; Edison Stone Corp v 42nd St. Dev. Corp. , 145 AD2d 249, 257 [1st Dept 1989].) When a plaintiff asserts a fraud-based cause of action, the "the circumstances constituting the wrong must be stated in detail" in the complaint. ( New York Fruit Auction Corp. v City of NY , 81 AD2d 159, 161 [1st Dept 1981].)
I. Breach of Promissory Note
Plaintiff's first cause of action asserts that BGT breached the terms of the promissory note. Defendants' motion to dismiss this claim is denied.
To maintain a cause of action for breach of contract, a plaintiff must allege (1) the existence of a contract; (2) the plaintiff's performance under the contract; (3) the defendant's breach of the contract; and (4) resulting damages. ( US Bank N.A. v Lieberman , 98 AD3d 422, 423 [1st Dept 2012].)
Here, the existence of the contract, plaintiff's performance, and the damages from a breach (if one occurred) are not in question. The key issue is whether plaintiff has sufficiently alleged that BGT breached the terms of the promissory note. Plaintiff argues that he has met this requirement by alleging that BGT failed to pay the principal amount of the note when it became due upon BGT's (alleged) default. This court agrees.
As described in the complaint, § 5.1 (b) of the note provides that BGT will be in default if it becomes insolvent or cannot pay its debts as they mature. Section 5.2 (b) provides that upon a default, the outstanding principal amount of the note will be accelerated and become immediately due and payable. The complaint alleges that BGT could not pay plaintiff the salary and commissions to which he was entitled under his employment agreement, and that BGT was instead reliant on Endai to cover those obligations. As a result, the complaint alleges, the principal amount of the note became due then (rather than in 2025), but BGT failed to pay as required. These allegations suffice to state a breach-of-contract claim with respect to the promissory note.
BGT does not dispute plaintiff's allegations about the terms of the promissory note, nor the allegation that Endai, rather than BGT, paid plaintiff's salary and commissions. At most, BGT argues that it should not be treated as having been insolvent or unable to pay its debts within the meaning of § 5.1 of the note. BGT relies on plaintiff's allegation in support of his veil-piercing theory that Endai and BGT were alter egos; it asserts that Endai's undisputed solvency should therefore be imputed to BGT for purposes of § 5.1. This court disagrees. BGT's argument, in essence, is that because two entities are alleged to be alter egos for purposes of assessing liability on a contract, those entities should be treated at the pleading stage as interchangeable for purposes of interpreting the meaning of the contract itself. But BGT identifies no authority for this creative proposition. Indeed, it would be odd to say that as a practical matter an entity should be treated as not subject to obligations under a contract if—unbeknownst to the contractual counterparty—the entity is merely an empty shell dominated by a third party.
II. Breach of Implied Covenant of Good Faith and Fair Dealing
Plaintiff's second cause of action asserts that defendants breached the promissory note's implied covenant of good faith and fair dealing. Defendants' motion to dismiss this claim is granted.
Inherent in every contract is an implied covenant of good faith and fair dealing. This covenant "is breached when a party to a contract acts in a manner that ... would deprive the other party of the right to receive the benefits under their agreement." ( Jaffe v Paramount Communs. , 222 AD2d 17, 22 [1st Dept 1996].) "For a complaint to state a cause of action alleging breach of an implied covenant of good faith and fair dealing, the plaintiff must allege facts which tend to show that the defendant sought to prevent performance of the contract, or to withhold its benefits from the plaintiff." ( Aventine Inv. Mgmt., Inc. v Canadian Imperial Bank of Commerce , 265 AD2d 513, 514 [2d Dept 1999].)
Here, plaintiff alleges only that defendants breached the implied covenant of good faith and fair dealing by misrepresenting that BGT was raising funds from investors, and that BGT had business opportunities that did not exist. These allegations do not establish that defendants either sought to prevent performance of the contract or sought to withhold its benefits from plaintiff—merely that they improperly induced him to invest $100,000. That is not sufficient to state a claim.
III. The Enforceability of the Restrictive Covenant
Next, plaintiff seeks a declaration that a restrictive covenant in § 7 of the employment agreement is unenforceable. Defendants' motion to dismiss this claim is denied.
"New York has adopted [a] prevailing standard of reasonableness in determining the validity of [restrictive covenants]." ( BDO Seidman v Hirshberg , 93 NY2d 382, 389 [1999].) These restrictive covenants "may be enforced only to the extent that they are reasonable in geographic scope." ( Mohawk Maintenance Co. v Kessler , 52 NY2d 276, 282 [1981].)
Here, plaintiff alleges that the restrictive covenant contained in § 7 of the agreement is not limited geographically. Thus, as pleaded, this restrictive covenant would bar plaintiff from working in a similar capacity anywhere in the world. Such a restriction is overbroad and unreasonable. (See Sussman Educ., Inc. v Gorenstein , 175 AD3d 1188, 1189 [1st Dept 2019] ; Crippen v United Petroleum Feedstocks, Inc. , 245 AD2d 152, 153 [1st Dept 1997].)
BGT contends that because it "is an internet-based service provider, its business is conducted worldwide to a global customer base," rendering a worldwide noncompete agreement reasonable. (NYSCEF No. 7 at 11.) This conclusory assertion hardly establishes at the pleading stage that an agreement categorically barring plaintiff from working in his chosen specialty is limited to the breadth necessary to protect BGT's legitimate interests and avoids imposing undue hardship on plaintiff. (See BDO Seidman , 93 NY2d at 388-389.)
BGT relies on a federal trial-court decision, MasterCard Intl. Inc. v Nike, Inc. (164 F Supp 3d 592 [SDNY 2016] ). But that decision is not binding on this court. In any event, it was issued in the context of a nonrecruitment clause. As MasterCard itself reflects (see id. at 600-602 ), nonrecruitment/nonsolicitation clauses are generally scrutinized less stringently than noncompete clauses because they are less likely to "prevent a former employee from pursuing his or her livelihood." ( Ashland Mgt., Inc. v Altair Invs. NA, LLC , 59 AD3d 97, 104 [1st Dept 2008] [internal quotation marks omitted].)
IV. Fraud
Plaintiff's fourth cause of action seeks damages for fraud. Defendants' motion to dismiss this claim is denied.
To survive a motion to dismiss a fraud claim, plaintiff must allege, in detail: (1) a representation of material fact, (2) the falsity of that representation, (3) knowledge by the party who made the representation that it was false when made, (4) justifiable reliance by the plaintiff, and (5) resulting injury. ( Global Mins. & Metals Corp. v Holme , 35 AD3d 93 [1st Dept 2006].) However, an alleged misrepresentation will not form a basis for a fraud claim if it consists of "mere puffery [and] opinions of value, rather than false statements of value." ( Sidamonidze v Kay , 304 AD2d 415, 416 [1st Dept 2003].)
Here, plaintiff alleges several instances of knowing misrepresentations: for example, Ferranti falsely leading Yu to believe that Endai would capitalize BGT with $250,000, and falsely asserting that plaintiff would soon receive an investor executive summary. Contrary to defendants' contention, these alleged misrepresentations are statements of fact, not mere puffery. (Cf. DH Cattle Holdings Co. v Smith , 195 AD2d 202, 208 [1st Dept 1994] [rejecting a fraud defense to a claim on a note where the alleged fraudulent misrepresentation was that an investment was "safe"].)
Plaintiff also alleges that he justifiably relied on Ferranti's misrepresentations, and as a result forfeited other business opportunities and moved his family closer to BGT's headquarters. In response, defendants argue that plaintiff could not have justifiably relied on Ferranti's misrepresentations because he made the decision to invest without seeing the executive summary, and because he had enough information beyond Ferranti's statements to have made an informed investment decision. But plaintiff's fraud claim is not based only on alleged misrepresentations made to induce him to invest $100,000 in BGT, but also on misrepresentations aimed at getting him to sign on as BGT's chief product officer. And defendants do not provide any evidence—only a memorandum of law prepared by counsel—about what information plaintiff would (or would not) have had about BGT's financial situation and prospects prior to investing. This court concludes that at the pleading stage, plaintiff's allegations satisfy the requirements of CPLR 3016 (b).
V. Alter-Ego Liability
Plaintiff also seeks to hold Ferranti and Endai liable on an alter-ego theory. Ferranti and Endai's motion to dismiss plaintiff's claims against them under this theory is granted. To succeed under an alter-ego theory, the party that seeks to "pierce the corporate veil" must plead that "(1) the owners exercised complete domination of the corporation in respect to the transaction attacked, and (2) that such domination was used to commit a fraud or wrong against the plaintiff which resulted in plaintiff's injury." ( Morris v State Dep't of Taxation & Fin. , 82 NY2d 135, 141 [1993].)
Here, plaintiff has not adequately alleged an alter-ego claim as to Ferranti and Endai. Plaintiff's alter-ego allegations are largely conclusory, made solely on information and belief, or both. The only specific fact plaintiff asserts is that BGT and Endai shared the same office space. That allegation alone is not sufficient. (See Board of Mgrs. of the Modern 23 Condominium v 350-52 W. 23, LLC , 171 AD3d 433, 434 [1st Dept 2019].)
Accordingly, for the foregoing reasons it is hereby
ORDERED that defendants' motion to dismiss under CPLR 3211 is granted as to plaintiff's claim for breach of the implied covenant of good faith and fair dealing and plaintiff's claims brought under an alter-ego theory of liability, and is otherwise denied; and it is further
ORDERED that plaintiff is directed to serve a copy of this order with notice of its entry on all parties; and it is further
ORDERED defendant is directed to serve an answer within 40 days after service of notice of entry; a copy of this order with notice of its entry; and it is further
ORDERED that the parties shall confer and prepare a joint request for a preliminary conference with this court, as set forth in the Remote Conference Protocol available on this court's website, http://ww2.nycourts.gov/courts/1jd/supctmanh/index.shtml.