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dismissing alter ego allegations that were "unsupported by anything but plaintiff's bare, conclusory allegations"
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09 Civ. 4070 (SHS).
April 21, 2010
OPINION ORDER
Plaintiff Betty White, on behalf of a putative class, brings this action against National Home Protection, Inc. ("NHP") and three of its principals, Leo Serrur, David Seruya, and Victor Hakim, raising claims of breach of contract, fraudulent and negligent misrepresentation, unjust enrichment, deceptive business practices in violation of N.Y. Gen. Bus. L. §§ 349 and 350 and violation of the Magnuson-Moss Warranty Act. Specifically, plaintiff contends that defendants "perpetrated an ongoing, massive fraud" by luring plaintiff and "tens of thousands" of others nationwide into purchasing warranties that purportedly covered the cost of repairing home appliances and mechanical systems when, in fact, defendants had no intention of honoring the terms of those warranties. (Am. Compl. ¶¶ 1-7.)
Defendant Leo Serrur, a "principal" of NHP, has now moved to dismiss the complaint with respect to himself, contending principally that the complaint fails to allege any basis for holding him personally liable for the alleged misconduct of the corporation and therefore fails to state a claim with respect to him. See Fed.R.Civ.P. 12(b)(6). Plaintiff opposes that motion, arguing that the complaint, which was amended specifically to add three principals of NHP — Serrur, Seruya, and Hakim — as defendants, amply alleges a basis for piercing the corporate veil and holding each of the individuals personally liable.
Because the Court finds that the amended complaint fails to state a claim against any of the individual defendants, Serrur's motion to dismiss is granted with respect to the three individual defendants.
I. BACKGROUND
Unless otherwise noted, the following facts are taken from the amended complaint ("complaint") and are presumed to be true:
A. The Parties
Plaintiff Betty White is a resident of Panama City, Florida. White purchased an NHP warranty plan in June 2008. (Am. Compl. ¶¶ 15, 41.)
Defendant NHP is a New York corporation and "one of the nation's largest Service Contract providers." (Id. ¶ 16.) NHP markets, sells, and issues "home warranty plans" which are supposed to "ensure protection against exorbitant expenses incurred when repairing or replacing existing home appliances and mechanical systems that deteriorate or malfunction from everyday use." (Id. ¶ 23.)
Defendants Serrur, Seruya, and Hakim are alleged to be "principal[s]" of NHP, residing in New Jersey and New York, respectively. (Id. ¶¶ 17-19.)
B. White's Purchase of an NHP Warranty
In June 2008, White purchased a "Major Systems Plan" policy from NHP. According to the complaint, for an annual premium of $447, that policy covered the repair or replacement of a home's mechanical systems and major built-in appliances — including plumbing systems, water heaters, dishwashers, sinks, and garbage disposals — regardless of age, make or model. (Id. ¶¶ 24-25, 47.)
According to the complaint, the warranty was supposed to work as follows: if plan holders had a problem with covered systems or appliances, they were to submit a claim directly to NHP. Once NHP received a claim, it would then select a local contractor from its network to fix the problem. (Id. ¶ 33.) NHP represented that its claims department "is available to take your calls 24 hours a day, 7 days a week" and, that if a covered appliance or system "is on the fritz," a warranty holder could contact NHP via its toll-free number and have a contractor dispatched to handle the claim. (Id. ¶ 44.)
White contends those representations were false. Specifically, White alleges that when she experienced difficulties with her kitchen sink less than a month after purchasing the warranty, she was unable to reach NHP through its toll-free number. According to the complaint, after several unsuccessful attempts to contact NHP regarding the problem, she was forced to retain a local contractor-non-party "PlumbBetter" — herself to repair her sink. (Id. ¶¶ 48-49, 60.) White then submitted a claim to NHP pursuant to NHP's "Customer Reimbursement Procedures" for the $406.33 PlumbBetter charged plaintiff for the repair. However, despite the fact that the sink is covered by White's plan, NHP refused to pay the amount due, forcing White to pay PlumbBetter herself. (Id. ¶¶ 47, 49-53.)
Moreover, according to the complaint, NHP also promised White a $50 gift card to either Home Depot or Lowe's if she purchased the warranty, but White never received such a gift card. (Id. ¶¶ 28, 37, 45, 62.)
C. Putative Class Allegations
According to the complaint, White's experience was not unique to her. Instead, the complaint alleges that while NHP issues similar warranties nationwide, those warranties are all "unfair and deceptive" because, much as was the case for White, "[d]efendants systematically delay, hinder, deny, and obstruct consumers from receiving service and making warranty claims." (Id. ¶ 28.)
The complaint further alleges that NHP's representation that it is available to handle claims "24 hours a day, 7 days a week" is false and that "if a homeowner seeks assistance . . . after regular working hours and/or on weekends, the homeowner's call is immediately directed to an answering machine." Even assuming customers do finally reach NHP, "they are greeted with frustration, as many claims guaranteed to be covered are ignored." (Id. ¶ 59.)
Similarly, the complaint alleges that while NHP promises a $50 gift card to every customer that purchases an NHP home warranty plan, that promise is a "lie[]" and NHP "systematically fails to fulfill its promises" because it "never sends its customers the promised gift cards." (Id. ¶ 40.)
Accordingly, the complaint seeks to raise claims not only on behalf of White but on behalf of "tens of thousands of similarly situated individuals" nationwide. (Id. ¶ 1.)
D. This Action
On April 24, 2009, plaintiff commenced this action by filing a complaint naming NHP as the lone defendant and raising state law claims of breach of contract, fraudulent and negligent misrepresentation, unjust enrichment, deceptive business practices in violation of N.Y. Gen. Bus. L. §§ 349 and 350 and a federal claim brought pursuant to the Magnuson-Moss Warranty Act, 15 U.S.C. § 2301 et seq.
Specifically, count one alleges various breaches of the warranty contract, including failure to repair White's sink and failure to provide her with the promised gift card. Count two alleges that defendants' failure to honor the warranties and representations made in that contract additionally violated the federal Magnuson-Moss Warranty Act, 15 U.S.C. § 2301 et seq. (Id. ¶¶ 95-102.) Based on the same alleged course of conduct, counts three, four, and five raise state law claims for fraudulent misrepresentation, negligent misrepresentation, and unjust enrichment.
Finally, counts six and seven raise claims pursuant to New York's General Business Law. Count six alleges unfair or deceptive business practices in violation of section 349, and count seven alleges false advertising in violation of section 350. See N.Y. Gen. Bus. L. §§ 349-50.
On June 30, 2009, plaintiff filed an amended complaint with the same claims as in the original complaint but adding Serrur, Seruya, and Hakim as defendants. The amended complaint alleges that each of the three individual defendants can be held personally liable because the three were "principals" of NHP who "completely dominated" the company and "use[d] NHP to commit their fraudulent scheme." (Am. Compl. ¶¶ 66, 70.) According to the amended complaint, that scheme consists of "creat[ing] underfunded corporations that could not possibly perform the services they provide" and "when the defrauded consumers figure out [defendants'] scheme, the Principals close up shop and file for bankruptcy, using the Corporation to protect them." The amended complaint further alleges that defendants "have already done this once with" another company "United Home Warranty." (Id. ¶ 70.)
Serrur has now moved to dismiss the amended complaint, contending principally that the complaint fails to state a claim with respect to him because it fails to allege a basis for piercing the corporate veil and holding him personally liable. Plaintiff opposes the motion.
Serrur also moves to dismiss the complaint pursuant to Fed.R.Civ.P. 12(b)(1), contending this Court lacks subject-matter jurisdiction over this action because it does not satisfy the requirements of either the Magnusan-Moss Act or the Class Action Fairness Act ("CAFA"). While the complaint does fail to meet the jurisdictional requirements of the Magnusan-Moss Act insofar as "the number of named plaintiffs is less than one hundred," 15 U.S.C. § 2310(d)(3)(C), it does satisfy CAFA because it alleges, to a "reasonable probability," that "that there is the necessary minimal diversity and that the amount in controversy exceeds $5 million." Blockbuster, Inc. v. Galeno, 472 F.3d 53, 59 (2d Cir. 2006). Specifically, with request to the amount in controversy, which is the only requirement Serrur challenges as unmet, the complaint alleges that "tens of thousands" of customers purchased warranties costing roughly $500 each (am. compl. ¶¶ 1, 12, 22, 43), allegations, that, if true, create a reasonable probability that the amount in controversy exceeds $5 million.
II. DISCUSSION
A. The Motion to Dismiss Standard
On a Rule 12(b)(6) motion to dismiss for failure to state a claim, a court assumes the truth of all facts asserted in the complaint and draws all reasonable inferences from those facts in favor of the plaintiff. See Global Network Commc'ns, Inc. v. City of New York, 458 F.3d 150, 154 (2d Cir. 2006); S.E.C. v. Lyon, 529 F. Supp. 2d 444, 449 (S.D.N.Y. 2007).
However, to survive a motion to dismiss, a plaintiff must plead "enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp v. Twombly, 550 U.S. 544, 570 (2007); see also Ashcroft v. Iqbal, ___ U.S. ___, 129 S.Ct. 1937, 1950 (2009). For a claim to be plausible, a complaint's "[f]actual allegations must be enough to raise a right to relief above the speculative level." Twombly, 550 U.S. at 555. Thus, if a plaintiff "ha[s] not nudged [its] claims across the line from conceivable to plausible, [its] complaint must be dismissed." Id.
B. Veil-Piercing Liability
As a general rule, a corporation "exists independently of its owners, as a separate legal entity." Morris v. State Dep't of Taxation and Fin., 82 N.Y.2d 135, 140 (1993) (collecting cases). As such, "owners are normally not liable for the debts of the corporation," and, indeed, "it is perfectly legal to incorporate for the express purpose of limiting the liability of the corporate owners." Id.
New York courts "are reluctant to disregard the corporate entity[,]"Wm. Wrigley Jr. Co. v. Waters, 890 F.2d 594, 600 (2d Cir. 1989), and a party seeking such relief bears a "heavy burden." TNS Holdings, Inc. v. MKI Sec. Corp., 92 N.Y.2d 335, 339 (1998). However, courts will disregard the corporate form and "pierce the corporate veil" whenever "necessary to prevent fraud or to achieve equity." JSC Foreign Econ. Ass'n Technostroyexport v. Int'l Dev. Trade Svcs., 386 F. Supp. 2d 461, 464 (S.D.N.Y. 2005) (quoting Walkovszky v. Carlton, 18 N.Y.2d 414, 417 (1966)).
While there is "no definitive rule" that governs when courts will pierce the corporate veil because the inquiry is necessarily dependent on the "attendant facts and equities," Morris, 82 N.Y.2d at 141, "[g]enerally . . . piercing the corporate veil requires a showing 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." Id.
In determining whether the owners "exercised complete domination" of the corporation, New York courts look to factors such as "(1) the absence of the formalities . . . that are part and parcel of the corporate existence, i.e., issuance of stock, election of directors, keeping of corporate records and the like, (2) inadequate capitalization, (3) whether funds are put in and taken out of the corporation for personal rather than corporate purposes . . . (7) whether the [allegedly dominating parties] deal with the dominated corporation at arms length . . . (9) the payment or guarantee of debts of the dominated corporation by [allegedly dominating parties] (10) whether the corporation in question had property that was used by [the allegedly dominating parties as if it were its own." Wm. Passalacqua Builders, Inc. v. Resnick, 933 F.2d 131, 139 (2d Cir. 1991); see also MAG Portfolio Consultant, GMBH v. Merlin Biomed Group, LLC, 268 F.3d 58, 63 (2d Cir. 2001) (same).
Here, plaintiff makes absolutely no allegations respecting any of the factors except the first two. With respect to the first, the complaint alleges that defendants "purposefully misrepresented the size of the corporation," designing NHP "to appear to be a large corporation" when, in fact, "NHP has 5 employees" and "[t]here [are] . . . no publicly traded stocks, nor shareholder meetings." (Am. Compl. ¶¶ 72-73.) With respect to the second, the complaint alleges that NHP is "identical" to United Home Warranty, another corporation allegedly associated with defendants that "ceased operations . . . because of the fraud it was committing" and that, as such, NHP is part of a pattern by which defendants "create underfunded corporations that could not possibly perform the services they claim to provide." (Id. ¶¶ 69-70.) Plaintiff otherwise provides no allegations with respect to the funding of NHP, nor any allegations respecting United Home Warranty or the alleged "pattern." Nevertheless, based on the above, plaintiff would have the Court conclude that "Principals Leo Serrur, David Seruya, and Victor Hakim exert complete domination over NHP" sufficient to justify disregarding the corporate form. (Id. ¶ 73.)
Those allegations, standing alone, and unsupported by anything but plaintiff's bare, conclusory assertions, are insufficient to establish, as a matter of law, the sort of "complete domination" necessary to warrant veil piercing. See, e.g. Am. Fuel Corp. v. Utah Energy Dev. Co., 122 F.3d 130, 134-35 (2d Cir. 1997) (findings that corporation "fail[ed] to observe corporate formalities . . . had no contracts, no employees, and no independent office space . . . had no separate bank account . . . [and] no capital or assets at the time of trial" insufficient to warrant finding of "domination"); Gartner v. Snyder, 607 F.2d 582, 586-87 (2d. Cir. 1979) (findings that corporation was "inadequately capitalized" and had "no books, files, or office" insufficient to warrant finding of "domination"); Favour Mind Ltd. v. Pac. Shores, Inc., No. 98 Civ. 7038, 2004 U.S. Dist. LEXIS 637, at *13-14 (S.D.N.Y. Jan. 16, 2004) (same).
Indeed, plaintiff makes no allegation that the individual defendants intermingled personal and corporate funds, failed to deal with NHP on an arms-length basis, or in any meaningful way abused or disregarded the corporate form. Accordingly, White has failed to allege facts sufficient to state a plausible claim for domination, and thus, for veil piercing liability.
Moreover, even if her allegations were sufficient with respect to domination, "complete domination of the corporation . . . standing alone, is not enough." Morris, 82 N.Y.2d at 142. Rather "[t]he party seeking to pierce the corporate veil must establish that the owners, through their domination, abused the privilege of doing business in the corporate form to perpetrate a wrong or injustice against that party such that a court in equity will intervene." Id. Here, plaintiff makes no such allegation, contending solely that the corporation — as a corporation — perpetrated a fraud. Such allegations do not warrant veil piercing. Id. at 143-44.
Plaintiff, thus, has failed to plead sufficient facts in support of a plausible claim for piercing the corporate veil and holding Serrur, Seruya, or Hakim individually liable.
The Court takes note of the similar conclusion of Justice Peter Sherwood, who dismissed claims raised by the New York State Attorney General against the same individual defendants after finding that the complaint failed to allege a basis for holding Serrur, Seraya, or Hakim personally liable for NHP's misconduct. Specifically, that Court found that a complaint raising very similar claims to those raised here "f[e]ll far short of the requirements" for holding Serrur, Seruya, and Hakim individually liable because it failed to allege "that the individual respondents made specific representations with the required scienter" or to otherwise identify "the fraud perpetuated by each respondent." People v. Nat'l Home Protection, Inc., No. 40043 1/2009, slip. op. at 8 (N.Y. Sup. Ct. Dec. 8, 2009).
C. Individual Tort Liability
Where a plaintiff asserts tort claims such as for fraud or fraudulent misrepresentation, there is no need to pierce the corporate veil in order to hold corporate officers or employees individually liable for their own acts of fraud. DER Travel Servs. v. Dream Tours Adventures, Inc., No. 99 Civ. 2231, 2005 U.S. Dist. LEXIS 25861, at *38 (Oct. 28, 2005) (collecting authorities). Instead, "[a] corporate officer is individually liable for fraudulent acts or false representations of his own, or in which he participates, even though his actions in such respect may be in furtherance of the corporate business." Tomoka Re Holdings, Inc. v. Loughlin, No. 03 Civ. 4904, 2004 U.S. Dist. LEXIS 8931, at * 19 (S.D.N.Y. May 19, 2004).
Here, any attempt by plaintiff to pursue such a theory of individual liability fails for at least two reasons. First, neither the complaint nor plaintiff's papers submitted in opposition to this motion asserts such a basis for individual liability, focusing instead solely on veil-piercing liability.
Second, and related, the complaint contains no allegation that any of the individual defendants personally made or participated in any of the allegedly fraudulent or negligent misrepresentations, all of which were contained in either NHP's advertisements or contracts, or on NHP's website. Nor does the complaint otherwise allege that the principals were personally responsible for any of the alleged tortious conduct. Indeed, the complaint does not make any allegations respecting the individual defendants' role at NHP or what their work entailed or what their responsibilities consisted of, thereby leaving no basis for a finding that any of the individuals were personally involved in or responsible for the allegedly tortious corporate conduct. Plaintiff's bare assertion that Serrur and other principals "ferment[ed] the intentional misrepresentations" to "line[] their own pockets" is simply insufficient to state a plausible claim for individual tort liability of any of the directors.
Moreover, as defendant correctly argues in his motion, each of plaintiff's tort claims likely fails as a matter of law either because it is duplicative of the core breach of contract claim, see, e.g., Telecom Int'l Am., Ltd. v. AT T Corp., 280 F.3d 175, 296 (2d Cir. 2001) (fraudulent, negligent misrepresentation claims duplicative);Clark-Fitzpatrick, Inc. v. Long Island Rail Road Company, 70 N.Y.2d 382, 388 (1987) (unjust enrichment claim duplicative), or because it alleges violations of New York law based on conduct that did not occur within the state and is therefore not actionable pursuant to the relevant statutes.See, e.g., Goshen v. Mut. Life Ins. Co., 98 N.Y.2d 314, 325 (2002) ("[T]o qualify as a prohibited act under [N.Y. Gen. Bus. L. §§ 349-50], the deception of a consumer must occur in New York"). Accordingly, plaintiff's tort claims would be incapable of supporting an independent basis for holding Serrur or any of the individual defendants personally liable.
Although only Serrur has moved to dismiss the complaint with respect to himself, the complaint is similarly deficient with respect to defendants Hakim and Seruya. Plaintiff makes no additional factual allegations with respect to either of them, nor does she assert any additional basis for holding Hakim or Seruya individually liable for the alleged malfeasance of NHP. Accordingly, the complaint must also be dismissed with respect to them.
As noted, both Hakim and Seruya assert in declarations that this Court lacks personal jurisdiction over them because they were not properly served with process. Although those declarations are not motions, because the Court has an independent duty to assure itself of its jurisdiction over the parties, it does note that with respect to both Hakim and Seruya, plaintiff's submissions in conjunction with her motion for a default judgment amply demonstrate that, with respect to both defendants, plaintiff served each by way of "nail and mail" — that is, by affixing the complaint to the door of, and also mailing a copy of the complaint to, each defendant's last known address. Moreover, plaintiff did so after making three, unsuccessful attempts to personally serve each defendant at their last known address over a period of several months. (Exs. B and C to Aff. of John G. Balestriere dated Feb. 9, 2010 ("Balestriere Aff.").) Having thus exercised "due diligence" in attempting personal service, effecting service by way of "nail and mail" is permissible under New York law. See N.Y. C.P.L.R. § 308(4); see also Beller Keller v. Tyler, 120 F.3d 21, 24-25 (2d Cir. 1997). Moreover, plaintiff's submissions also indicate that Seruya and Hakim personally corresponded with plaintiff's counsel in September and October 2009, after each was served with the amended complaint as detailed above, and each represented that he intended to answer or otherwise appear in this action. (Exs. H and I to Pl.'s Mem. of Law in Further Supp. of Pl.'s Mot. for a Default J.). Accordingly, the Court is satisfied that both were properly served with process and were properly on notice of this litigation.
III. CONCLUSION
Because the Court finds that the complaint fails to allege a plausible claim for individual liability against Serrur, his motion to dismiss the complaint pursuant to Fed.R.Civ.P. 12(b)(6) is granted. Because the complaint is similarly deficient with respect to defendants Hakim and Seruya, the complaint must be dismissed with respect to them as well.