Opinion
No. 152153/15.
10-22-2015
VFP INVESTMENTS I LLC, Plaintiff, v. FOOT LOCKER, INC., Kathleen Smith, and Robert Rainier, Defendants.
In motion sequence number 002, defendant Foot Locker, Inc. (Foot Locker), moves to dismiss the complaint of plaintiff VFP Investments I LLC (VFP), for failure to state a legally cognizable cause of action.
Background
The factual allegations set forth herein are taken from the plaintiff's complaint.
VFP is an asset-based lender. Foot Locker is an athletic footwear and apparel retailer. Non-party G3K Displays, Inc. (G3K) is a custom manufacturer that supplied Foot Locker with in-store marketing materials, such as advertising signage, shoe displays, and other fixtures for Foot Locker's retail stores.
Defendant Kathleen Smith (Smith) was employed by Foot Locker at its headquarters, where she served as Foot Locker's Director of In–Store Marketing until her termination in January 2013. Defendant Robert Rainier (Rainier) is employed by Foot Locker at its headquarters, where he serves as Foot Locker's Divisional Vice President of Franchise Development. Steven Kaitz (Kaitz), Latchmee Mahato (Mahato), and Jonathan Wheeler (Wheeler) were the co-owners of G3K. Joseph MacLellan (MacLellan) was G3K's in-house general counsel.
On July 18, 2012, as part of a field examination of G3K's eligible accounts receivable (receivables), VFP's auditor, Freed Maxick ABL Services, LLC, asked Smith to confirm that eight specific numbered invoices from G3K were in Foot Locker's system and unpaid. Smith responded through her Foot Locker e-mail account that the outstanding invoices and their unpaid amounts were "accurate information to what my records indicate." VFP e-mailed a confirmation request to Smith on August 20, 2012 asking her to confirm "account balances and/or invoice amounts G3 Display is showing as owing to them." Smith replied that "the invoices and amounts are accurate." Contrary to her verifications, several of the invoices from July and August were fake or already paid.
G3K obtained a multi-million dollar asset-based, revolving loan facility from VFP mpursuant to a loan and security agreement, to provide for ongoing working capital and finance the everyday business operations of G3K. Under the terms of the agreement, VFP agreed to make revolving loans to G3K on the basis of a defined borrowing base determined by a formula utilizing the dollar amount of G3K's receivables. The receivables were collateral for the loan.
In January 2013, Smith incorrectly verified additional invoice amounts purportedly due and owing to G3K by Foot Locker through e-mail correspondence with VFP. Shortly after the January 2013 confirmation request, Smith was fired from Foot Locker for engaging in wrongful activities. Foot Locker did not inform VFP of Smith's termination or of the commission by Smith or others of any wrongful activities.
In late 2013, G3K sought a subordinated loan facility from another lender, MVC Financial Services, Inc. (MVC), and an increase in its line of credit with VFP. Conditioned upon G3K's closing on the MVC facility, VFP agreed that it would amend the Loan and Security Agreement and provide an additional term loan for transactions that would later take place in April 2014. As a condition of obtaining the MVC facility, G3K's financial statements were audited by McGladrey LLP (McGladrey). As part of the audit process of G3K's receivables, McGladrey asked Foot Locker in a February 2014 email correspondence to confirm that certain invoices from G3K to Foot Locker were outstanding receivables as of December 31, 2013.
Rainier confirmed to McGladrey via an email from his Foot Locker account, dated February 28, 2014, that 68 invoices purportedly owed by Foot Locker to G3K as of December 31, 2013 were outstanding, stating that "I can now confirm that the invoices attached are outstanding and our accounting team is in the process of approving them to be paid." Most of the invoices were fabrications, while others were paid before December 31, 2013 and thus were not outstanding. After Rainier's confirmation, VFP advanced more than $3 million to G3K, and amended the Loan and Security Agreement in April 2014 to increase the line of credit to $15 million and make a $400,000 term loan to G3K.
VFP learned in late April 2014 that certain funds deposited as payments on G3K's purported receivables into a lockbox maintained for VFP were actually deposited by an entity created and controlled by G3K's principals, not the account debtor. Subsequent investigation revealed that these payments were part of a circular payment scheme designed by G3K's owners to hide their fraudulent creation of false invoices and 13 documents of title and to obtain loan advances by submitting reports falsely representing G3K's receivables.
In January 2015, Smith, Kaitz, Mahato, and Wheeler were criminally indicted by the Grand Jury of the United States District Court for the Southern District of New York and arrested on suspicion of defrauding G3K's lenders, including VFP, into lending millions of dollars to G3K.
Discussion
In deciding a motion to dismiss, the court must consider whether there can be a legally cognizable cause of action based on the allegations (Ackerman v. 305 East 40th Owners Corp., 189 A.D.2d 665, 666 [1st Dept 1993] ). All facts alleged in the pleading must be accepted as true, and the court must accord a plaintiff the benefit of every possible favorable inference (id. ).
For the reasons set forth below, VFP has failed to state a legally cognizable cause of action.
I. Respondeat Superior Liability
To succeed on a respondeat superior theory of vicarious liability, the plaintiff "must show that the agent was acting in furtherance of the [principal's] business and within the scope of employment" ' (Parlato v. Equitable Life Assur. Soc. of U.S., 299 A.D.2d 108, 113–14 [1st Dept 2002]. Guidelines for assessing whether an employee's conduct falls within the scope of employment include: "the connection between the time, place and occasion for the act; the history of the relationship between employer and employee as spelled out in actual practice; whether the act is one commonly done by such an employee; the extent of departure from normal methods of performance; and whether the specific act was one that the employer could reasonably have anticipated" (Riviello v. Waldron, 47 N.Y.2d 297, 303 [1979] ). There is no vicarious liability under respondeat superior for acts committed solely for the employee's personal motives unrelated to the furtherance of the employer's business (Judith M. v. Sisters of Charity Hosp., 93 N.Y.2d 932, 933 [1999] ).
The pleadings fail to establish that the verification of receivables fits within the scope of Smith's or Rainier's roles as Foot Locker employees. VFP makes conclusory statements in its complaint that Smith's and Rainier's confirmations were within the scope of their employment with Foot Locker, but there are no factual allegations in the complaint that the verification of receivables is within the scope of employment of either defendant. As a sophisticated lender, VFP should know that outstanding invoices are typically verified by a corporation's accounting department. A reasonable person would not confer from Smith's or Rainier's job titles—"Director of In–Store Marketing" and "Divisional Vice President of Franchise Development," respectively—that either defendant's job duties included the verification of receivables, since neither defendant was an accountant nor purported to be an accountant.
Furthermore, VFP's allegations fail to establish that Smith and Rainier verified false or paid receivables to further Foot Locker's business. VFP alleges that G3K was able to continue its operations into 2014 and thereby provide Foot Locker with in-store materials at favorable prices because of defendants' false verifications. However, this statement is wholly conclusory and entirely unsubstantiated—VFP does not allege that G3K would have gone out of business but for defendants' verifications, nor does it allege that the prices that G3K offered Foot Locker were more favorable than those of other vendors. Instead, the pleadings demonstrate that Smith and Rainier acted solely for their own benefit, unrelated to furthering Foot Locker's business. If Smith and Rainier acted solely for their own benefit, their acts were outside the scope of employment as a matter of law.
Therefore, VFP has not stated a legally cognizable claim against Foot Locker for fraudulent misrepresentation based on respondeat superior.
II. Liability Based On Actual Authority
Under New York law, actual authority arises from a direct manifestation of consent from the principal to the agent (Wen Kroy Realty Co. v. Pub. Nat. Bank & Trust Co. of New York, 260 N.Y. 84, 89 [1932] ). It may be either express (conveyed orally or in writing) or implied based on circumstances (see, e.g., Site Five Hous. Dev. Fund Corp. v. Estate of Bullock, 112 AD3d 479, 480 [1st Dept 2013] ). Implied actual authority is dependent on verbal or other acts by a principal which the agent reasonably believes give her the authority to conduct the transaction (Greene v. Hellman, 51 N.Y.2d 197, 204 [1980] ).
VFP has not adequately alleged express authority. VFP makes conclusory statements in ¶¶ 30 and 52 of the complaint that Smith's representations were made with "actual authority (express or implied)." However, VFP does not allege that Rainier's representations were made with actual authority, nor does VFP allege that Foot Locker gave Smith or Rainier actual authority to verify receivables orally or through writing.
The complaint also fails to show that Smith or Rainier had implied actual authority to verify receivables for VFP. VFP's allegations do not demonstrate that Foot Locker acted in a manner that caused Smith or Rainier to reasonably believe that they had the authority to engage in the underlying activity that resulted in the tortious conduct. The fact that Smith and Rainier had regular dealings with G3K is not enough to show that they reasonably believed that Foot Locker authorized them to verify receivables for VFP, MVC, or their auditors.
Therefore, VFP has not stated a legally cognizable claim against Foot Locker for fraudulent misrepresentation based on actual authority.
III. Liability Based On Apparent Authority
In order for there to be apparent authority, there must be "words or conduct of the principal, communicated to a third party, that give rise to the appearance and belief that the agent possesses authority ..." (Hallock v. State, 64 N.Y.2d 224, 231 [1984] ). The agent cannot "by his own acts imbue himself with apparent authority" (id. ). Rather, "the existence of apparent authority' depends upon a factual showing that the third party relied upon the misrepresentation of the agent because of some misleading conduct on the part of the principal—not the agent" (id. ). A third party with whom the agent deals may rely on an appearance of authority only to the extent that such reliance is reasonable (id. ).
The only words or conduct by Foot Locker regarding Smith's and Rainier's apparent authority to verify receivables that VFP relied on are the defendants' job titles and the Foot Locker letterheads and addresses in their e-mails. As discussed previously, "Director of In–Store Marketing" or "Divisional Vice President of Franchise Development" are not titles that, to the reasonable person, confer authority regarding accounting matters. VFP merely had to contact Foot Locker's accounting department to learn that Smith and Rainier were not authorized to verify receivables.
Also, the fact that Smith and Rainier communicated to VFP and its auditors via Foot Locker email addresses does not connote apparent authority to the reasonable person. Based on the alleged facts, VFP's reliance on Smith's and Rainier's authority was unreasonable and thus not apparent.
Therefore, VFP has failed to state a legally cognizable claim against Foot Locker for fraudulent misrepresentation based on apparent authority.
IV. Liability Based On Authority By
Estoppel person or corporation "who is not otherwise liable as a party to a transaction purported to be done on his account, is nevertheless subject to liability to persons who have changed their positions because of their belief that the transaction was entered into by or for him, if (a) he intentionally or carelessly caused such belief, or (b) knowing of such belief and that others might change their positions because of it, he did not take reasonable steps to notify them of the facts" (Heffernan v. Marine Midland Bank, N.A., 267 A.D.2d 83, 84 [1st Dept 1999], citing Restatement [Second] of Agency § 8B ). "Reasonable reliance is essential to establishing such authority" (id. ).
VFP does not make factual allegations showing that Foot Locker intentionally or carelessly caused VFP's belief that Smith or Rainier had the authority to verify receivables. VFP makes conclusory statements that Foot Locker conspired with Smith and Rainier to help G3K defraud VFP, MVC, and their auditors, but there are no factual allegations regarding Foot Locker's intentions, nor does VFP establish that Foot Locker owed any duty to VFP allowing it to have acted carelessly toward VFP by not informing it of Smith's wrongful actions.
The complaint also fails to demonstrate that Foot Locker knew of VFP's mistaken belief in Smith's or Rainier's authority to verify receivables. Beyond a conclusory statement that Foot Locker conspired with Smith and Rainier to defraud VFP, there are no factual allegations regarding Foot Locker's knowledge of VFP's communications with Smith or Rainier. Thus, Foot Locker could not have taken reasonable steps to notify VFP that Smith and Rainier lacked authority to verify receivables.
Additionally, VFP has not shown reasonable reliance on Foot Locker's silence regarding Smith's wrongful acts. By failing to make a single inquiry with Foot Locker regarding Smith's disappearance, VFP relied unreasonably rather than reasonably on Foot Locker's silence.
Therefore, VFP has failed to allege a legally cognizable claim against Foot Locker for fraudulent misrepresentation based on authority by estoppel.
V. Aiding And Abetting Fraud
In order to plead properly a claim for aiding and abetting fraud, a plaintiff must allege the following in her complaint: "(1) the existence of an underlying fraud; (2) knowledge of this fraud on the part of the aider and abettor; and (3) substantial assistance by the aider and abettor in achievement of the fraud" (Stanfield Offshore Leveraged Assets, Ltd. v. Metro. Life Ins. Co., 64 AD3d 472, 476 [1st Dept 2009]. A high degree of scienter is necessary to extend fraud liability under an aiding and abetting theory (see National Westminster Bank USA v. Weksel, 124 A.D.2d 144, 150 [1st Dept 1987] ). The elements of aiding and abetting fraud must be alleged in detail in the complaint (id. at 149 ).
VFP has not made any factual allegations supporting its conclusion that Foot Locker had knowledge of Smith's or Rainier's false verifications of receivables. VFP only makes conclusory statements that Foot Locker knew of the fake invoices, that it "knew" or "should have known" of Smith's misrepresentations, and that Foot Locker had knowledge of the fraud through its agents. Conclusory allegations that the defendant "knew or should have known" of the fraud without specific facts to support the conclusions are insufficient to overcome a motion to dismiss a cause of action for aiding and abetting fraud (see Gregor v. Rossi, 120 AD3d 447, 448 [1st Dept 2014] ).
Nor has VFP made any factual allegations showing that Foot Locker provided substantial assistance to Smith's and Rainier's achievement of the fraud. Substantial assistance occurs when a defendant affirmatively assists, helps conceal or fails to act when required to do so (Stanfield Offshore Leveraged Assets, Ltd. v. Metropolitan Life Ins. Co., 64 AD3d 472, 476 [1st Dept 2009] ). Mere failure to act is not sufficient to establish substantial assistance where there is no fiduciary relationship or where the defendant owes no duty to the plaintiff (see Pomerance v. McGrath, 124 AD3d 481 [1st Dept 2015] ).
The complaint does not allege that Foot Locker affirmatively concealed Smith's or Rainier's wrongful acts, but rather, that it failed to warn VFP, MVC, and their auditors that the receivables were wrongly verified after learning of Smith's fraudulent verifications. Foot Locker was not in a fiduciary relationship with VFP, nor did it owe VFP a fiduciary duty, since the parties were not in privity and the pleadings are devoid of contacts between VFP and Foot Locker beyond Smith's and Rainier's verifications of receivables (see National Westminster, 124 A.D.2d at 629 [finding that "the pleading is barren of any allegation of even the most minimal contact or relationship between the law firm and the bank" and "there was no independent duty to act on the part of defendant law firm ... there was no fiduciary relationship between the law firm and the bank"] ). It follows that Foot Locker's failure to act as alleged by VFP is insufficient to establish substantial assistance of fraud.
Therefore, VFP has not alleged a legally cognizable claim against Foot Locker for aiding and abetting fraud.
VI. Negligent Supervision
In order to prevail on a negligence cause of action, "it must be established that defendant owed plaintiff a duty, that defendant, by act or omission, breached such duty, that such breach was the proximate cause of plaintiff's injuries, and that plaintiff sustained damages" (Salvador v. N.Y. Botanical Garden, 71 AD3d 422, 423 [1st Dept 2010] ). "While the absence of privity does not foreclose recognition of a duty, it is still the responsibility of courts, in fixing the orbit of duty, to limit the legal consequences of wrongs to a controllable degree" ' (Strauss v. Belle Realty Co., 65 N.Y.2d 399, 402 [1985] ).
VFP's factual allegations do not establish that Foot Locker owed VFP any sort of duty to provide information regarding G3K's receivables. Foot Locker was not in privity with VFP or MVC at any point in connection to their loans to G3K. Furthermore, the pleadings do not indicate that Foot Locker owed VFP any sort of duty, since Foot Locker was unaware of VFP's, MVC's, and the auditors' communications with Smith and Rainier, and VFP did not contact Foot Locker regarding the false verifications.
Therefore, VFP has not alleged a legally cognizable claim against Foot Locker for negligent supervision.
Accordingly, it is hereby
ORDERED that plaintiff VFP Investments I LLC's complaint is dismissed as to defendant Foot Locker, Inc.
This constitutes the decision and order of the Court.