Opinion
603325/09.
Decided October 25, 2010.
Murray, Frank Sailer LLP, New York, New York, By: Gregory Linkh, Esq., Brian P. Murray, Esq., for Plaintiff.
Sichenzia, Ross Friedman Ference LLP, New York, New York, By: Christopher P. Milazzo, Esq., for Defendants OmniReliant Holding, Inc., Paul Morrison and Richard Diamond.
Zimmet Bieber LLP, New York, New York, By: Bruce Bieber, Esq., For Defendants Kevin Harrington and Timothy Harrington.
Capital Master Fund and Vicis Capital, LLC, Rottenberg Lipman Rich, PC, New York, New York, By: Thomas E. Chase, Esq., Quarles Brady LLP, Milwaukee, Wisconsin, By: Matthew J. Flynn, Elizabeth B. Chamberlin, Jonathan W. Hackbarth, For Defendants Chris Phillips, Vicis.
Motions Sequences Nos. 004, 005 and 006 are consolidated for disposition.
Plaintiff, an investment company headquartered in the Cayman Islands, seeks to recover for what it describes as the looting of nonparty ResponzeTV PLC (RETV), a dissolved British company, of which defendants, and brothers, Kevin Harrington (Kevin) and Timothy Harrington (Timothy), were both officers and directors. RETV was in the infomercial business. Plaintiff alleges that it acquired RETV's rights and assets, prior to the company's involuntary dissolution, including RETV's claims against defendants.
Kevin and Timothy (together, the Harringtons) move, pursuant to CPLR 3211, for an order dismissing the complaint on the grounds that the court lacks personal jurisdiction over them (CPLR 3211 [a] [8]) and that the claim may not be brought in New York due to contractual forum selection clauses. Defendants OmniReliant Holding, Inc. (Omni), Richard Diamond, Paul Morrison, Chris Phillips, Vicis Capital Master Fund and Vicis Capital, LLC move for an order dismissing the complaint for failure to state a cause of action (CPLR 3211 [a] [7]) and for failure to meet the particularity requirements of CPLR 3016.
The following is taken from the complaint. The Harringtons were the co-founders of publicly-held Omni, with each owning approximately 10% of Omni's common shares, and were Omni directors from January 2007 until their July 2008 resignation. Defendants Diamond and Morrison are Omni directors and Morrison is Omni's president (together with Omni, the Omni Defendants).
Omni is owned and controlled by defendant Vicis Capital Master Fund (Vicis Master). In its public filings, defendant Vicis Capital, LLC (Vicis Capital) states that it may be deemed to beneficially own Vicis Master's Omni common stock. Defendant Phillips, an Omni Director since November 2006, was also Omni's interim CEO and CFO until January 2008, at which point he became the managing director of the two Vicis entities. In 2006, Phillips was instrumental in bringing together Vicis Master and Vicis Capital (together with Phillips, the Vicis Defendants) with the Omni Defendants and the Harringtons.
Plaintiff alleges that Vicis Master was the owner of 95.98% of the common stock of Omni and does not make clear how this allegation comports with its allegation that the Harringtons' each had a 10% ownership interest in Omni.
In January 2007, RETV acquired nonparty Reliant International Media, LLC (Reliant) from the Harringtons (the Acquisition). As a result of the Acquisition, the Harringtons received 25% of RETV's shares, with the right to earn additional shares, entered into an employment agreement, and became RETV directors and officers. Prior to the Acquisition, the Harringtons provided to RETV figures stating Reliant's profits for the first half of 2006 as $3.4 million, but omitted revised figures for the second half of 2006 that demonstrated a $3.4 million net loss. Plaintiff alleges that had RETV known this, it would not have gone forth with the Acquisition on the same terms, or at all.
In 2006 and 2007, Omni entered into a consulting agreement with the Harringtons' company, Harrington Business Development, LLC (HBD), whereby Omni would pay HBD $15,000 a month. Plaintiff contends that, due to this relationship with Omni, the Harringtons served as agents and representatives of Omni in their dealings as officers of RETV. Omni's public filings indicated that the Harringtons were its representatives on RETV's board. Diamond, Phillips and Morrison all had central roles in Omni, and the Harringtons' dealings with RETV. Phillips also had a central role in the Vicis entities' dealings with RETV.
In October 2007, through Omni's purchase of additional RETV shares, Omni and the Harringtons had a combined 34% ownership interest in RETV. This purchase was instigated by Omni, the Harringtons, and Phillips, and allowed Omni and the Harringtons to further entrench themselves into and exercise substantial influence over RETV. As a result of RETV share purchases, and RETV's purchase of an Omni cosmetics line, Phillips and Diamond received commission and warrants from Omni, commission from RETV, and RETV shares for Omni's investment.
Plaintiff alleges that the Harringtons looted RETV until an internal investigation against them was commenced in May 2008. More specifically, plaintiff alleges that Kevin fraudulently requested reimbursement from RETV for business expenses that were really personal expenses, that an RETV officer caught Kevin attempting to divert an RETV licensing fee payment from the Thane Direct Group (Thane) to the Harrington's company, HBD, and that the Harringtons attempted to divert payments to themselves that were intended for RETV. Also in May 2008, Phillips admitted to RETV's chairman of the board that the Harringtons needed to be watched because they structured deals to obtain personal kickbacks.
On May 15, 2008, an English accountant called RETV's chairman expressing suspicions and concerns about the Harringtons' expenditures, their conflicts of interests in contracting, and their under-reporting of product returns. With the authority of its independent directors, RETV's chairman immediately arranged to commence an internal investigation, flew to Florida and hired external private investigators and security personnel to assist. The Harringtons immediately attempted to disrupt the investigation, were uncooperative, and RETV employees and consultants received threats from persons believed to be associated with the Harringtons. Kevin allegedly refused to hand over his company computer. Timothy, and other employees believed to be connected with the Harringtons, also refused to cooperate with the investigation.
By May 22, 2008, RETV's CEO determined that there were sufficient grounds to suspect that the Harringtons had engaged in fraudulent activity. RETV's CEO was advised to and did request immediate suspension in the trading of RETV's shares, which were traded on London's Alternative Investment Market (AIM Exchange), and made an official announcement of this. Plaintiff maintains that the investigation revealed that the Harringtons: misused RETV resources; approved business service agreements that were not competitively priced; improperly amended contracts previously approved by RETV's board and senior management; generally disregarded RETV internal reporting procedures; engaged in improper and/or illegal activities with service providers and vendors, including kickback payments; and removed RETV property, including computers and records, thereby interfering with the investigation.
The Harringtons resigned in July 2008 and received a limited release. As a result of the issues raised in the investigation, and the failure of the Harringtons to cooperate in the completion of RETV's audit, the company's 2007 audit would have required significant additional funds to complete that RETV did not have. Consequently, the audit was not completed. Because the audit was not completed, RETV was unable to satisfy the AIM Exchange requirements to lift the trading suspension, which led to the permanent de-listing of RETV shares from the exchange. After RETV s shares were de-listed, the companies registry of the United Kingdom dissolved RETV. As a result, RETV securities, valued at $61 million before suspension of trading, were rendered worthless.
In its first cause of action, plaintiff alleges that the Harringtons breached their fiduciary duties of care, loyalty, candor, good faith and independence to RETV by failing to cooperate, and intentionally interfering, with the RETV investigation, which led to RETV's dissolution, and by misusing RETV resources, approving inappropriate service agreements, improperly amending contracts previously approved by RETV's board and senior management, disregarding RETV internal report procedures, and engaging in kickback schemes and other unspecified improper or illegal activities.
Plaintiff claims that Phillips, Diamond and Morrison visited RETV's office in Florida, and were aware of the RETV internal investigation. In its second cause of action, plaintiff alleges that the Omni Defendants and the Vicis Defendants aided and abetted the Harringtons by failing to require them to cooperate with the internal investigation, which led to RETV's collapse.
In the third cause of action, plaintiff alleges that the Harringtons engaged in fraud against RETV by using deception to improperly take monies from RETV and engage in business dealings that benefitted themselves at the expense of RETV, acting in an intentional, malicious, vindictive or reckless manner. Plaintiff alleges that RETV relied on the Harringtons' representations that they were acting honestly and in its best interests, and was harmed.
In the fourth cause of action, plaintiff claims that the Omni Defendants and the Vicis Defendants knew of the Harringtons' fraud and provided substantial assistance to advance it.
In the fifth cause of action of the complaint, plaintiff claims that as a result of the conduct previously described, all of the defendants have unjustly enriched themselves at RETV's expense. Plaintiff seeks disgorgement of "all these funds" (Complaint, ¶ 48).
The Harringtons and Phillips argue that they are not subject to the jurisdiction of this court. Jurisdiction is a threshold issue ( Wyser-Pratte Mgt. Co., Inc. v Babcock Borsig AG , 23 AD3d 269 [1st Dept 2005]), and CPLR 3211 (a) (8) permits a party to dismiss claims against a defendant on the ground that "the court has not jurisdiction of the person of the defendant." The exercise of personal jurisdiction over a defendant must be both authorized by the CPLR and in accordance with "traditional notions of fair play and substantial justice" required by the Due Process Clause of the United States Constitution ( International Shoe Co. v State of Washington, 326 US 310, 316). A court must view the jurisdictional allegations in a light most favorable to the plaintiff and resolve all doubts in its favor ( see Sokoloff v Harriman Estates Dev. Corp., 96 NY2d 409, 414 [regarding CPLR 3211 (a) (7]; Brandt v Toraby, 273 AD2d 429, 430 [2d Dept 2000]).
The Harringtons and Phillips have each submitted an affidavit demonstrating that they are not residents of New York, and thus these defendants are not subject to personal jurisdiction in New York unless plaintiff proves that New York's long-arm statute confers jurisdiction over them by reason of their contacts within the State ( Copp v Ramirez , 62 AD3d 23 , 28 [1st Dept], lv denied 12 NY3d 711), or proves another basis for jurisdiction. While the burden to demonstrate the existence of jurisdiction over a defendant rests on the plaintiff ( id.), to defeat a pre-answer motion to dismiss, a plaintiff need only demonstrate that facts may exist which would provide a jurisdictional basis over a defendant ( Brinkmann v Adrian Carriers, Inc. , 29 AD3d 615 , 616 [2d Dept 2006]). Where a plaintiff does not do so, however, or presents only a frivolous jurisdictional basis, the plaintiff is not entitled to discovery ( Peterson v Spartan Indus., 33 NY2d 463, 467; Mandel v Busch Entertainment Corp., 215 AD2d 455 [2d Dept 1995]; Lancaster v Colonial Motor Frgt. Line, 177 AD2d 152, 155 [1st Dept 1992]).
The Harringtons aver that they were each 50% owners of Reliant, which was always located in Florida, and that during the time that they were directors and shareholders of Omni, which was a minority shareholder of RETV, Omni operated from its office in Florida, and they never knew it to have a New York office. The Harringtons state that the stock purchase agreement memorializing the Acquisition was presented to them Florida, where they negotiated and entered into employment agreements. The Harringtons both state that they never lived in New York, had an office or bank account, owned real estate or paid taxes here and that, and during their employment and association with Reliant, RETV and Omni, they conducted business from a Florida office. They further state that the investigation and all events and communications also took place in Florida, and that the stock purchase agreement, employment agreements and releases provide for exclusive jurisdiction of legal disputes in Florida. The Harringtons assert that while Reliant, RETV and Omni conducted insignificant business in New York, via direct response television, they did not conduct any personal business there and are minority shareholders of Omni. The Harringtons admit to occasional trips to New York, but claim that there is no substantial relationship between those contacts, activities or transactions and the claims.
In opposition, plaintiff argues that New York jurisdiction over the Harringtons is conferred pursuant to CPLR 302 (a) (1). CPLR 302 (a) (1) provides that a court may assert jurisdiction over a non-domiciliary when that party "transacts any business within the state" and the cause of action arises out of that business transaction ( see Kreutter v McFadden Oil Corp., 71 NY2d 460, 467 [requiring substantial relationship between New York transaction and the claim]; Longines-Wittnauer Watch Co. v Barnes Reinecke, 15 NY2d 443 [claim must arise from the very transaction or acts upon which jurisdiction is being asserted])." [P]roof of one transaction in New York is sufficient to invoke jurisdiction . . . so long as the defendant's activities here were purposeful and there is a substantial relationship between the transaction and the claim asserted'" ( Deutsche Bank Sec., Inc. v Montana Bd. of Invs. , 7 NY3d 65 , 71, quoting Kreutter, 71 NY2d at 467). Moreover, due process is not offended where an out-of-state defendant transacts business in New York if the defendant "avails itself of the benefits of the forum, has sufficient minimum contacts with it, and should reasonably expect to defend its actions there'" ( id., quoting Kreutter, 71 NY2d at 466).
The Harringtons object to the plaintiff's submission of, among other things, copies of e-mail messages and web sites without a supporting affidavit from a person with knowledge concerning the origin or authenticity of the documents. The cases to which the Harringtons cite to support their objection are not applicable here because they do not concern a motion to dismiss, but discuss the requirement of a showing of a meritorious claim to avoid dismissal for want of prosecution pursuant to CPLR 3126 ( Wasielewski v Town of Cheektowaga, 281 AD2d 944 [4th Dept 2001]), and the production of admissible evidence necessary to avoid summary judgment ( Bendik v Dybowski, 227 AD2d 228 [1st Dept 1996] [attorney affidavit not based on personal knowledge insufficient as opposition to summary judgment]). While pure conclusory allegations, devoid of evidentiary facts, do not suffice to demonstrate jurisdiction ( see e.g. Badger v Lehigh Valley R.R. Co., 45 AD2d 601, 602 [4th Dept 1974]), plaintiff's submissions are not so limited, and the question is whether or not, based on the facts asserted, plaintiff demonstrates a basis for jurisdiction, or has made a sufficient start toward that end.
While certain defendants challenge the sufficiency of the jurisdictional allegations of the complaint, jurisdictional allegations are not required to be in the complaint ( Fischbarg v Doucet , 9 NY3d 375 , 381 n 5 [2007]).
Plaintiff contends that the Harringtons are subject to jurisdiction pursuant to CPLR 302 (a) (1) because they transacted significant business within New York in connection with their roles or involvement with RETV, including business related to the claims in this case. In support, plaintiff asserts that the Harringtons were in New York on two occasions in 2007 and two in early 2008, and provide submissions in support of this contention. Plaintiff maintains that during one 2007 visit to New York, the Harringtons conducted specific RETV business and that the other visit involved a proposed investment by the Vicis entities in RETV, which was eventually made by or through Omni. Plaintiff states that, as a direct result of these meetings, Omni made investments in RETV, the Harringtons became Omni's representatives on the Board of RETV, and Omni and its owners, the Vicis entities, came to exercise significant and substantial influence over RETV.
Plaintiff submits an e-mail that references Thane, a company that allegedly provided funds intended for RETV that Kevin attempted to or did divert to HBD, but plaintiff does not explain how the e-mail referencing Thane, without more, demonstrates that the claim is substantially related to the moving defendants' New York contacts.
According to the complaint, the Harringtons became RETV's executive officers after RETV acquired Reliant. The claims against the Harringtons concern alleged misrepresentations and breaches of their duties of care and loyalty to RETV. The claims asserted against the Harringtonsdo not arise out of Omni's investment in RETV, or the specific RETV business that plaintiff contends the Harringtons conducted at one of their 2007 New York meetings. That the Harringtons were in New York concerning matters that do not relate, or are only tangentially related, to the claims asserted against them is not enough to confer jurisdiction over the them ( see McGowan v Smith, 52 NY2d 268).In their memorandum of law, plaintiff states that the Harringtons also traveled to New York in January and March 2008 for a meeting with representatives of the Franklin Mint, a New York entity. Plaintiff contends that in November 2007, prior to the Harrington's January and March 2008 New York trips, RETV entered into an agreement with the Franklin Mint whereby RETV would have the right of first refusal for all Franklin Mint business involving commemorative coins. Plaintiff further contends that in June 2008, while the internal investigation was being conducted at RETV, Omni commenced discussions about buying this business from RETV, but did not proceed with the purchase, with the Harringtons and Omni, instead stepping into the business relationship with the Franklin Mint without payment or consideration to RETV. Plaintiff states that Harringtons were unjustly enriched as evidenced by their having entered into an agreement with Omni to consult regarding the Franklin Mint on the next business day after they resigned from RETV in July 2008.
As previously discussed, plaintiff claims that RETV was defrauded by the Harrington's misrepresentation of Reliant's financial figures and that they improperly used RETV's funds for their personal expenses, diverted payments intended for RETV, approved inappropriate service agreements and improperly amended contracts previously approved by RETV's board and senior management, disregarded RETV's internal report procedures, engaged in kickback schemes, and failed to cooperate with and obstructed the internal investigation.
The first issue is that the complaint contains no factual allegations about the Franklin Mint, or even general allegations concerning plaintiff's contention that the defendants in essence misappropriated or otherwise wrongfully interfered with RETV's business opportunity, or improperly received a benefit from products developed or promoted by RETV thereby making plaintiff entitled to compensation. Thus, plaintiff seeks to amend the complaint through an opposition brief, which is not permissible ( see Rubin v Nine West Group. Inc., 1999 WL 1425364, *4, 1999 NY Misc Lexis 655 [Sup Ct, Westchester County 1999] [citation omitted] ["A claim for relief may not be amended by the briefs in opposition to a motion to dismiss'"]; see also Rosenberg v Home Box Off., Inc., 2006 NY Slip Op 30358[U] [Sup Ct, NY County, affd 33 AD3d 550 [1st Dept 2006]).
Plaintiff notes in its opposition brief that these allegations are not in the complaint, but states that they would be included in any amended complaint.
Considering, however, arguendo, plaintiff's contentions that in June 2008 defendants stepped into RETV's shoes concerning the Franklin Mint business, and that the Harrington's executed a consulting agreement with Omni in July 2008, plaintiff provides no explanation as to how this alleged conduct substantially related to, or arises from, the Harrington's New York contacts with Franklin Mint that plaintiff claims occurred in January and March of 2008, three and six months prior to the alleged conduct that is the subject of the plaintiff's claim. Plaintiff does not imply that the Harringtons improperly obtained the Franklin Mint business or the consulting contract with Omni through the New York contacts it describes. In fact, there is no record support from which the conclusion may be drawn that the Harringtons' New York trips are substantially related to plaintiff's claims, or that there is a factual basis for jurisdiction over the Harringtons pursuant to CPLR 302 (a) (1).
In plaintiff's memorandum of law it claims that the defendants' retention of the fruits of the Franklin Mint business, and other business, is inequitable or unjust because defendants stepped into RETV's shoes without compensating RETV, but does not provide facts of a relationship between the described conduct of taking or misappropriating RETV's business opportunity or failing to justly compensate RETV and defendants' New York contacts.
Plaintiff seeks to assert jurisdiction against Kevin, pursuant to CPLR 301, claiming that Kevin is "doing business" in New York. Thus, "[t]he essential factual inquiry is whether the defendant has a permanent and continuous presence in the State, as opposed to merely occasional or casual contact with the State" ( see Holness v Maritime Overseas Corp., 251 AD2d 220, 222 [1st Dept 1998] [concerning corporation]), and engagement in occasional or casual business in New York does not suffice under CPLR 301, nor generally does mere solicitation of New York customers ( see Laufer v Ostrow, 55 NY2d 305; Miller v Surf Prop., 4 NY2d 475). While CPLR 301 has been used as the statutory predicate for jurisdiction concerning individuals ( see FCNB Spiegel Inc. v Dimmick, 163 Misc 2d 152 [Civ Ct, NY County 1994, Stallman, J.], citing ABKCO Indus. v Lennon, 52 AD2d 435 [1st Dept 1976] [Ringo Starr "doing business" in New York]; Lancaster v Colonial Motor Frgt. Line, Inc., 177 AD2d at 159]; but see Matter of Nilsa B.B. v Blackwell H, 84 AD2d 295 [2d Dept 1981] [child support case], superseded by statute Matter of Shirley D. v Carl D., 224 AD2d 60 [2d Dept 1996]), an individual cannot be subject to jurisdiction under CPLR 301 unless he or she is carrying on business for him or herself, rather than on behalf of a corporation ( see Laufer, 55 NY2d at 313; Brinkmann, 29 AD3d at 617).
Plaintiff contends that Kevin engaged in numerous New York business ventures, apart from his dealings with RETV, and is doing business in New York. Plaintiff asserts that Kevin posted on a blog that he recently traveled to New York to meet with someone regarding a fitness infomercial, advertised a seminar on a website that he planned to give in Manhattan on December 3, 2009, and boasted on his website that, after 2005, he raised more than $20 million from a New York hedge fund.
Plaintiff states that Kevin regularly conducted business in New York and has demonstrated that facts exist showing that Kevin engages in some publicity or public relations and other work and contacts, apparently on behalf of himself, within the state ( see Frummer v Hilton Hotels Intl., 19 NY2d 533). However, Kevin characterizes his contacts with this State as only occasional. This conflict will be referred to a special referee for a hearing, under whose supervision additional discovery as to this matter is to be conducted as necessary, as plaintiff has made a sufficient start toward demonstrating that facts may exist to support a basis for jurisdiction under CPLR 301 and its submissions reflect that further review of facts about Kevin's website and his alleged raising of funds in New York is warranted. The remainder of Kevin's motion is to be held in abeyance pending my receipt of the special referee's report on the issue of jurisdiction.
In support of his motion to dismiss, Phillips submits an affidavit in which he states that he is a Florida resident, has lived there for 25 years, works for the Vicis entities out of the Florida office, and does not have New York bank accounts or real estate, or pay New York taxes. Phillips avers that he has occasionally traveled to New York for meetings related to Omni, but not RETV, Omni's interest in RETV, or the RETV internal investigation of the Harringtons. Phillips further avers that he has conducted no transactions or activities in New York that have a substantial relationship to the claims asserted in the complaint, and argues that plaintiff has not alleged otherwise.
Plaintiff alleges that Phillips aided and abetted the Harringtons' breach of fiduciary duty by failing to require them to cooperate in RETV's internal investigation and that he was unjustly enriched in having received warrants, commissions and shares in conjunction with Omni's investments in RETV. Omni is alleged to have invested in RETV in October 2007 (Complaint, ¶ 17) and possibly before. Plaintiff submits an e-mail message that reflects that Phillips was present at a meeting in New York on September 17, 2007 involving a proposed investment by the Vicis entities in RETV that plaintiff maintains was eventually made through Omni. However, plaintiff does not claim that Omni made its investment in RETV in New York, or that Phillips received warrants, commissions or shares in New York. Plaintiff also submits another e-mail message, dated October 17, 2007, but nothing in it indicates that Phillips was in New York concerning something that is related to plaintiff's claims.
Finally, plaintiff submits an e-mail to demonstrate that on March 18, 2008, Phillips traveled to New York to discuss RETV with others at Vicis. These New York contacts do not allege a transaction of business in New York because "mere solicitation of business within the state does not constitute the transaction of business within the state, unless the solicitation in New York is supplemented by business transactions occurring in the state" ( O'Brien v Hackensack Univ. Med. Ctr., 305 AD2d 199, 201 [1st Dept 2003]; Cardone v Jiminy Peak, 245 AD2d 1002, 1003 [3rd Dept 1997]). Moreover, physical presence in the state alone also does not transform a business dealing into a business transaction under CPLR 302 ( see Bill-Jay Mach. Tool Corp. v Koster Indus., Inc. , 29 AD3d 504 [2d Dept 2006]; Brandt v Toraby, 273 AD2d 429 [2d Dept 2000]). That Phillips came to New York once to discuss the Vicis entities' potential investment or to discuss RETV, without more, does not constitute a business transaction in New York, but even if it constitutes purposeful contacts, plaintiff has not sufficiently demonstrated that its claim against Phillips arises out of or is substantially related to Phillip's New York contacts.
Phillips is also one of the Vicis Defendants, but plaintiff points to no New York contracts by Phillips substantially related to his alleged enrichment after RETV's dissolution through the marketing of RETV developed products. Thus, these allegations would not aid plaintiff in demonstrating New York jurisdiction.
While plaintiff contends that Omni made its investment in RETV as a result of a New York meeting, and Omni and the Vicis entities, through the Omni investment, came to exercise significant and substantial control over RETV, the gravamen of plaintiff's claim against Phillips is not about investments made in RETV, or Omni and the Vicis Defendants' alleged control over RETV. The basis of plaintiff's claims against the Omni Defendants and the Vicis Defendants, including Philips, is their alleged failure to require the Harringtons to cooperate with, and not disrupt, the RETV investigation or their failure to conduct the investigation themselves. Plaintiff alleges that the investigation commenced in May or June of 2008, months after Phillips' alleged New York contacts. Plaintiff does not allege that any of the New York contacts concerned the investigation, or any alleged failure or action or inaction or other wrongful conduct on the part of Phillips, who is based in Florida, concerning the investigation. Consequently, plaintiff has not meet its burden to demonstrate that its claims arise out of or bear a substantial relationship to Phillip's New York contacts. As plaintiff has not demonstrated a statutory basis for the exercise of jurisdiction over Phillips, it is unnecessary to address his arguments about constitutional due process protections and traditional notions of fair play and substantial justice.
CPLR 3211 (a) (7) and 3016
The Omni Defendants and the Vicis Defendants argue that the complaint should be dismissed because the facts alleged do not state the knowledge or substantial assistance elements of the aiding and abetting claims under New York Law (CPLR 3211 [a] [7]), and because the complaint is not sufficiently particularized (CPLR 3016). On a motion to dismiss pursuant to CPLR 3211 (a) (7), the court must "accept the facts as alleged in the complaint as true, accord plaintiffs the benefit of every possible favorable inference, and determine only whether the facts as alleged fit within any cognizable legal theory" ( Leon v Martinez, 84 NY2d 83, 87-88). However, "bare legal conclusions, as well as factual claims either inherently incredible or flatly contradicted by documentary evidence, are not presumed to be true and accorded every favorable inference" ( M B Joint Venture, Inc. v Laurus Master Fund, Ltd. , 49 AD3d 258 , 260 [1st Dept 2008], affd as mod 12 NY3d 798 [internal quotation marks and citation omitted]). "Where liability for fraud is to be extended beyond the principal actors, to those who, although not participants in the fraudulent scheme, are said to have aided in and encouraged its commission, it is especially important that the command of CPLR 3016 (b) be strictly adhered to" ( National Westminster Bank USA v Weksel, 124 AD2d 144, 149 [1st Dept 1987]).
The Vicis Defendants argue that plaintiff has alleged only that they knew or should have known of the Harringtons' alleged misconduct, which, they argue, does not demonstrates their actual knowledge. They further argue that plaintiff's attempts to imply that they knew of the Harringtons' purported fraud due to the Vicis entities' investment in Omni, and Phillips' senior position with Omni is conclusory. The defendants also contend that their alleged inaction does not state an aiding and abetting claim because they owe no fiduciary duty to plaintiff.
No determination as to whether or not a claim has been stated against Phillips is made here as there has been no showing that he is subject to the jurisdiction of a New York court.
In opposition, plaintiff contends that the law of England and Wales (English Law) is controlling. Plaintiff asserts that English Law does not require actual knowledge and can include liability based on a defendant's inaction, or failure to act, regardless of whether or not the defendant owes a fiduciary duty directly to the plaintiff. Defendants argue that the case may not be decided under English Law because plaintiff has not met the requirements of CPLR 3016 (e) or CPLR 4511.
CPLR 4511 discusses judicial notice of the law of foreign countries and provides that a court must take judicial notice of such foreign law if a party both requests it and furnishes the court with sufficient information to enable it to comply with the request (CPLR 4511 [b]). To meet CPLR 4511's second prong, plaintiff submits a few cases on the English Law claim of dishonest assistance, and a short excerpt from a treatise. Plaintiff, however, has not availed itself of the opportunity afforded it to submit the affidavit of an English lawyer or an expert on this area of English Law. I am reluctant to rely on plaintiff's limited submissions alone to take judicial notice of the law of a foreign nation concerning what are complicated issues of law ( see e.g, Matter of Edwards, 114 Misc 2d 703, 708 [Sur Ct, Onondaga County 1982] [concluding that "[t]o take judicial notice without certainty of what the law of Mexico is on the subject . . . may be an abuse of discretion"]; see also Ponnambalam v Ponnambalam , 35 AD3d 571 [2d Dept 2006] [court did not err in failing to apply foreign law where the party seeking its application did not plead its substance or provide the court with sufficient information to enable it to take judicial notice of the law at issue]; Warin v Wildenstein Co., 297 AD2d 214 [1st Dept 2002] [French law expert did not explain the interplay between the time limits in the Ordinances and those in the generally applicable French Civil Code or provide French jurisprudence interpreting the Ordinances, as he did with the Civil Code]; see also Reinli v Davi, 2009 NY Slip Op 31110[U] [Sup Ct, NY County 2009]). If a party fails to prove the substance of foreign law, it consents to application of New York law ( see Bank of New York v Nickel, 14 AD3d 140 [1st Dept 2004]). Consequently, New York law will be applied here, and that plaintiff did not comply with CPLR 3016 (e), which concerns the particularity of pleading when a cause of action is based upon the law of a foreign country, need not be addressed.
It is not clear that these cases address factual circumstances similar to those pleaded in this case.
The parties engage in a dispute over the choice of law, and the conflict of law analysis applicable, in this case. The Court of Appeals has made clear that New York conducts an interest analysis in tort cases, and has rejected the automatic application of the internal affairs doctrine where another jurisdiction has an overriding interest in the issue to be determined ( see Greenspun v Lindley, 36 NY2d 473 [1975]). RETV's aiding and abetting claims do not involve strict corporate governance, such as a corporate stock split, or RETV's " current officers, directors, and shareholders" ( Edgar v MITE Corp., 457 US 624, 645 [1982] [emphasis supplied]), such that application of the internal affairs doctrine is necessary. The alleged wrongful conduct, as concerns both the Omni Defendants and the Vicis Defendants, converges at or through Omni, which has its principal executive office in Florida. Many of the parties are also Florida residents or have strong connections to Florida, where RETV had an office. Thus, while it would appear that Florida would have the paramount interest in regulating alleged tortious conduct within its borders, plaintiff does not prove, or even raise, a conflict between Florida and New York law ( see International Bus. Mach. Corp. v Liberty Mut. Ins. Co., 363 F3d 137, 143 [2d Cir 2004]).
Under New York law, a claim for aiding and abetting of a breach of fiduciary duty has three elements: "(1) a breach by a fiduciary of obligations to another, (2) that the defendant knowingly induced or participated in the breach, and (3) that [the] plaintiff suffered damage as a result of the breach" ( Kaufman v Cohen, 307 AD2d 113, 125 [1st Dept 2003]). For such a claim to survive, a plaintiff must allege that the defendant had actual knowledge of the breach of duty, as constructive knowledge is insufficient to impose liability, but the First Department has recently stated "that actual knowledge need only be pleaded generally" ( Oster v Kirschner, ___ AD3d ___, 2010 NY Slip Op 05981 [1st Dept 2010]).
"A person knowingly participates in a breach of fiduciary duty only when he or she provides substantial assistance to the primary violator," by which is meant "when a defendant affirmatively assists, helps conceal or fails to act when required to do so, thereby enabling the breach to occur. However, the mere inaction of an alleged aider and abettor constitutes substantial assistance only if the defendant owes a fiduciary duty directly to the plaintiff" ( Kaufman, 307 AD2d at 126, quoting King v George Schonberg Co., 233 AD2d 242, 243 [1st Dept 1996] [citations and internal quotation marks omitted]).
Plaintiff has not stated a claim under New York law against any of the Omni Defendants or the Vicis Defendants as its claim is not sufficiently particularized as to the roles played by each of the individual defendants, or their knowledge of the Harrington's alleged wrongs, or the nature of the investigation. Plaintiff does not state facts that demonstrate that the Omni Defendants or the Vicis Defendants had knowledge of the Harringtons' bad acts, such as Kevin's alleged attempt to expense an item of jewelry for his wife or his alleged attempt to divert an advance meant for RETV. At most, the complaint alleges that the other defendants would have learned of these types of alleged acts through the investigation, and that this conduct occurred only until then. The complaint does not indicate that the Omni Defendants and the Vicis Defendants had knowledge all along of the Harringtons' alleged conduct that gave rise to the need for the investigation.
While plaintiff alleges that Phillips stated that the Harringtons needed to be watched because they structured deals so that they got kickbacks, plaintiff does not allege facts indicating that the Harringtons took a kickback.
Other than the Harringtons' conduct before the investigation, what remains concerning the aiding and abetting cause of action is plaintiff's allegation that Omni did not require the Harringtons, their representative to RETV's board, to cooperate with the investigation, and that the Harringtons' alleged fraud and/or breaches of fiduciary duty increased the cost of conducting RETV's annual audit, so that it was prohibitively expensive, which resulted in RETV remaining delisted from the AIM Exchange, leading to the company's eventual dissolution by British authorities. Plaintiff contends that the defendants had the ability to mitigate the damage caused by the Harringtons' acts, thereby preventing the subsequent chain of events that led to RETV's dissolution. Whether or not plaintiff has sufficiently pleaded defendants' actual knowledge of the investigation, clearly plaintiff alleges only inaction on the part of the Omni Defendants and the Vicis Defendants and this does not state a claim for relief ( Kaufman, 307 AD2d at 126). Therefore, plaintiffs' aiding and abetting claims must be dismissed, and it is unnecessary to address the defendants' argument that they were not the proximate cause of RETV's injury.
The complaint states no facts to indicate any involvement or knowledge by the other defendants with the Harringtons' alleged conduct concerning Reliant's financial statements, Kevin's alleged use of RETV money for personal expenses or his alleged attempt to divert payments from Thane or any other entity. Any complaint allegations from which the Harringtons' fraud might be inferred are not sufficiently particularized as to how the Omni Defendants and Vicis Defendants aided and abetted the conduct (CPLR 3016). As discussed, the facts in the complaint indicate only that these defendants may have had knowledge of these events through the commencement of the investigation, after which plaintiff does not allege that the conduct continued.
The remaining claim of the complaint is for unjust enrichment. "To prevail on a claim of unjust enrichment, a party must show that (1) the other party was enriched, (2) at that party's expense, and (3) that it is against equity and good conscience to permit the other party to retain what is sought to be recovered" ( Old Republic Natl. Title Ins. Co. v Luft , 52 AD3d 491 , 491-492 [2d Dept 2008]). As plaintiff did not move to amend its pleading to include allegations concerning the Franklin Mint, or any other business that defendants allegedly wrongfully appropriated or benefitted from at plaintiff's expense, the cause of action is dismissed against Omni, Diamond, Morrison, Vicis Fund and Vicis Master, because plaintiff does not identify any benefit unjustly received by these defendants. Therefore, I need not reach defendants' arguments that no unjust enrichment claim is stated because they were also injured in losing their investment in RETV and received no benefit from the Harringtons' alleged conduct that should be returned in equity. Finally, since the claims against Morrison and Diamond have been dismissed for other reasons, I need not reach their reply arguments that corporate officers and directors can not be held liable for a corporation's torts in instances where only a failure to act is alleged, as discussed in Peguero v 601 Realty Corp. , 58 AD3d 556 , 558 [1st Dept 2009]).
Accordingly, it is
ORDERED that the motion of defendants Kevin Harrington and Timothy Harrington to dismiss the complaint (Motion Sequence number 004) is granted to the extent that the complaint is dismissed as against Timothy Harrington, and the complaint is severed and dismissed as against Timothy Harrington with costs and disbursements to said defendant as taxed by the Clerk of the Court and the Clerk is directed to enter judgment accordingly; and it is further
ORDERED that the issue of the court's personal jurisdiction over defendant Kevin Harrington is referred to a Special Referee to hear and report with recommendations; except that, in the event of and upon the filing of a stipulation of the parties, as permitted by CPLR 4317, the Special Referee, or another person designated by the parties to serve as referee, shall determine the aforesaid issue, and it is further
ORDERED that this matter is hereby referred to the Special Referee Clerk (Room 119 M) for placement at upon the calendar of the Special Referees Part (Part SRP), which, in accordance with the Rules of that Part shall assign this matter to an available Special Referee to hear and report as specified above, and it is further
ORDERED that counsel shall immediately consult one another and counsel for plaintiff shall, within 15 days from the date of this Order, submit to the Special Referee Clerk by fax (212-401-9186) containing all the information called for therein and that, as soon as practical thereafter, the Special Referee Clerk shall advise counsel for the parties of the date fixed for the appearance of the matter upon the calendar of the Special Referees Part, and it is further
ORDERED that the parties shall appear for the reference hearing, including with all witnesses and evidence they seek to present, and shall be ready to proceed, on the date first fixed by the Special Referee Clerk subject only to any adjournment that may be authorized by the Special Referees Part in accordance with the Rules of that Part, and it is further
ORDERED that, the hearing will be conducted in the same manner as a trial before a Justice without a jury and, except as otherwise directed by the assigned Special Referee for good cause shown, the trial of the issues specified above shall proceed from day to day until completion, and it is further
ORDERED that any motion to confirm or disaffirm the Report of the Special Referee shall be made within the time and in the manner specified in CPLR 4403 and Section 202.44 of the Uniform Rules for the Trial Courts, and it is further
ORDERED that defendants' motion as against Kevin Harrington is held in abeyance pending receipt of the report and recommendations of the Special Referee and a motion pursuant to CPLR 4403 or receipt of the determination of the Special Referee or designated referee and the determination of this court thereon; and it is further
ORDERED that the motion of Chris Phillips, Vicus Capital Master Fund and Vicis Capital, LLC to dismiss the complaint as against them (Motion Sequence number 005) is granted and the complaint is severed and dismissed as against said defendants with costs and disbursements to said defendants as taxed by the Clerk of the Court and the Clerk is directed to enter judgment accordingly; and it is further
ORDERED that the motion of Omnireliant Holding, Inc. Richard Diamond and Paul Morrison to dismiss the complaint as against them (Motion Sequence number 006) is granted and the complaint is severed and dismissed as against said defendants with costs and disbursements to said defendants as taxed by the Clerk of the Court and the Clerk is directed to enter judgment accordingly.