Summary
In Abbacor, the plaintiff alleged that the defendant was an "alter ego" of a predecessor organization that had jurisdictionally relevant contacts in New York.
Summary of this case from Lelchook v. Société Générale De Banque Au Liban SalOpinion
01 Civ. 0803 (JSM)
August 31, 2001
David Bolton, Garden City, N Y 11530, Attorney for Plaintiff.
Jonathan Cooperman, Kelley Drye Warren, New York, N Y 10178, Roger Juan Maldonado, Balber Pickard Battistoni, et al., New York, N Y 10019, Attorneys for Defendants.
OPINION and ORDER
Abbacor, Inc. ("Plaintiff") brings this action for breach of contract against Medici Technologies, Inc. and Medici Medical Group, Inc. (collectively "Medici") and against individual defendants Kenneth Miller ("Miller"), David Arnold ("Arnold"), Joe Richardson ("Richardson"), and Edward Cesare ("Cesare") (collectively the "Individual Defendants"). Both Medici and the Individual Defendants move here to dismiss the complaint for lack of personal jurisdiction, and the Individual Defendants move to dismiss for failure to state a claim against them. For the reasons set forth below, Medici's motion to dismiss for lack of personal jurisdiction is denied, and the Individual Defendants' motions to dismiss for failure to state a claim are granted.
I. BACKGROUND
This dispute arises out of a Sponsored Research Agreement ("SRA") that was executed between Plaintiff and Medici for the purpose of developing a closed-chest Heart Assist Balloon Pump ("HABP"). The HABP was invented by Dr. Jacob Segalowitz, President of the plaintiff corporation and a resident of Israel. Medici is in the business of investing in the medical device industry. The plaintiff corporation is incorporated in California, and the Medici corporations are incorporated in Nevada with their principal places of business in Texas.
Also relevant to this action is a group of companies that will be referred to as the "Edge Group," whose exact relationship to Medici is at present unclear. The Edge Group is comprised of several entities that allegedly share common ownership and a centralized cash management system. Plaintiff claims that an entity known as Edge Group, Inc. performs accounting, legal, and financial services for the other entities; an entity known as Edge Management Group, Inc. employs the individual officers and employees of the other entities; and an entity known as Edge Financial Group, Inc. ("Edge Financial") solicits investment opportunities for the Edge Group entities. Edge Financial is admittedly a minority shareholder in Medici. In support of its claim that the Edge Group is in reality an alter ego of Medici, Plaintiff submits documentary evidence suggesting a relationship between them. For example, Plaintiff submits copies of a wire transfer of funds from Edge Financial to Abbacor, (Segalowitz Decl. Ex. D), and facsimiles to Plaintiff on Edge Financial letterhead regarding its agreement to "fund" the HABP project. (Segalowitz Decl. Ex. F.)
Defendant Richardson states in his moving affidavit that Medici Technologies is a wholly owned subsidiary of the Edge Group. (Richardson Aff. ¶ 26.) He appears to retract this statement in his Reply Affidavit. (Richardson Reply Aff. ¶ 3.)
Miller is President of Medici, and he resides in Texas. Cesare is Senior Vice President of Medici and a Vice President of Edge Financial, and he resides in Connecticut. Both gentlemen are also shareholders in Medici. Richardson is Treasurer of Medici, as well as a shareholder, and he resides in Texas. Arnold is the transactional attorney for Medici and the Edge Group, and he resides in Minnesota.
Plaintiff also alleges that some or all of these gentlemen are officers or directors of the various Edge Group entities.
Between December 1995 and March 1996, Cesare and Miller engaged in preliminary contract discussions with Plaintiff regarding the HABP project. During this time, Cesare and Miller were acting on behalf of an entity known as DaVinci Scientific Corp. ("DaVinci"), which Plaintiff alleges was a company within the Edge Group and Medici's predecessor-in-interest. In January 1996, Cesare met with Plaintiff at the offices of Edge Financial in New York, and in February 1996, Miller met with Plaintiff at the St. Regis Hotel. Miller and Cesare also telephoned Plaintiff several times in New York.
Medici responds that DaVinci merely had a borrower-lender relationship with Edge Financial, and that Medici did not purchase any assets of DaVinci. However, a copy of an April 1996 proposal from DaVinci to Dr. Segalowitz states that DaVinci will "incorporate a subsidiary . . . for the sole and explicit purpose of acquiring the Assets [of Plaintiff] and developing and commercializing the technology implicit thereto." (Cesare Supp. Aff. Ex. A.) This certainly suggests that Medici was formed by Miller and Cesare, as agents of Edge Financial and DaVinci, for the purpose of entering into the contract with Plaintiff. Defendant Richardson stated in his moving affidavit that the Edge Group was a shareholder in DaVinci, (Richardson Aff. ¶ 27), although once again he appears to have retracted this statement in his reply affidavit, (Richardson Reply Aff. ¶ 4).
Contract negotiations continued during the summer and fall of 1996, primarily in California. In May 1996, DaVinci was dissolved, and in either May or September 1996, Medici was incorporated. In January 1997, the SRA was executed between Plaintiff and Medici in California. The SRA provided that Medici would fund the development of the HABP in exchange for an increasing ownership interest in the plaintiff corporation.
Plaintiff alleges that a time came when the defendants wished to accelerate their ownership interest and alter negative tax consequences to Medici that resulted from the structure of the SRA. Plaintiff claims that the defendants replaced certain pages of the SRA in order to reduce Medici's payment obligations, and that the defendants then attempted to convince Plaintiff to agree to pass off the alteration as if it were the original version of the SRA. This was purportedly done in order to fool the IRS. In March 1999, Medici sent the allegedly fraudulently altered SRA to Plaintiff in New York, along with a proposed Memorandum of Understanding as to the changes. Plaintiff never agreed to the alleged scheme, and never signed the Memorandum of Understanding. Plaintiff claims that in August 1999, Medici attempted to assert its accelerated equity interest under the altered SRA.
As a result of disputes between the parties, in October 1999, Medici initiated arbitration in New York pursuant to a provision in the SRA that requires arbitration of any disputes in New York. (Cesare Aff. Ex. A ¶ 12.1.) The SRA also provides that any money judgment obtained in the arbitration will be enforceable in New York. The arbitration proceeded until February 2001, when it was suspended because one of the parties refused to pay its share of the costs. Both Plaintiff and Medici claim that it was the other party that refused to pay. That same month, Plaintiff filed this action for breach of contract, alleging that Medici has failed to make payments under the SRA and has failed to use its best efforts to market the HABP technology. Plaintiff also seeks recission and a declaratory judgment that the original SRA is the only version that is legally binding.
II. DISCUSSION A. MEDICI
Medici moves to dismiss the complaint for lack of personal jurisdiction. Prior to discovery or an evidentiary hearing, Plaintiff must make only a prima facie showing that personal jurisdiction exists.See Jazini v. Nissan Motor Co., 148 F.3d 181, 184 (2d Cir. 1998); Beacon Enters., Inc. v. Menzies, 715 F.2d 757, 768 (2d Cir. 1983); In re Sumitomo Copper Litig., 120 F. Supp.2d 328, 333-34 (S.D.N.Y. 2000). The allegations contained in the complaint and supporting affidavits should be construed in favor of Plaintiff, "notwithstanding a controverting presentation by the moving party." A.I. Trade Finance, Inc. v. Petra Bank, 989 F.2d 76, 79-80 (2d Cir. 1993). However, conclusory allegations without an elucidation of supporting facts will not suffice to meet Plaintiff's burden. See Jazini, 171 F.3d at 184-85.
In certain circumstances, a defendant's actions constitute consent to personal jurisdiction, which acts as a waiver of the right to challenge a plaintiff's exertion of jurisdiction over the defendant. See generally Insurance Corp. v. Compagnie des Bauxites, 456 U.S. 694, 703-05, 102 S.Ct. 2099, 2105 (1982). As the Supreme Court noted in Compagnie des Bauxites, "[b]ecause the requirement of personal jurisdiction represents first of all an individual right, it can, like other such rights, be waived." Id. at 703, 102 S.Ct. at 2105. Consent may be either express or implied, and typically takes the form of a contractual agreement containing a New York forum selection clause or the defendant's voluntary participation in certain state processes. See, e.g., Atlantic Mut. Ins. Co. v. M/V Humacao, No. 99 Civ. 10787, 2001 WL 434792, at *2 (S.D.N.Y. Apr. 27, 2001); Augsbury v. Corp. v. Petrokey Corp., 470 N.Y.S.2d 787, 789 (App.Div. 1983).
Plaintiff argues that Medici consented to jurisdiction when it agreed to arbitrate in New York any disputes arising under the SRA, and agreed that any resulting money judgment would be enforceable in New York. It is well-settled that an agreement to arbitrate in New York does not alone constitute consent to personal jurisdiction in suits that are not related to the arbitration itself. See Kahn Lucas Lancaster, Inc. v. Lark Int'l Ltd., 956 F. Supp. 1131, 1138-39 (S.D.N.Y. 1997); Krushin v. Keystone Shipping Co., No. 85 Civ. 0998, 1986 WL 9221, at *3 (S.D.N.Y. Aug. 21, 1986); Sterling Nat'l Bank Trust Co. v. Southern Scrap Exp. Co., 468 F. Supp. 1100, 1103 (S.D.N.Y. 1979); Aero-Bocker Knitting Mills v. Allied Fabrics Corp., 387 N.Y.S.2d 635, 637 (App.Div. 1976). However, in this case, Medici's purposeful contacts with New York are more numerous and substantive than the mere existence of an agreement to arbitrate, and therefore Medici has effectively consented to jurisdiction in New York as to suits relating to breach of the SRA.
Not only did Medici agree to arbitrate disputes arising under the SRA in New York, but it initiated arbitration proceedings and participated in those proceedings for eighteen months. Medici then defaulted on its obligation to pay its arbitration fees and thereby halted the arbitration proceedings. Moreover, Plaintiff alleges that Medici commenced the arbitration proceedings in order to enforce a portion of the SRA that Medici had fraudulently altered. Cf. Cofinco Inc. v. Angola Coffee Co., No. 74 Civ. 5191, 1975 WL 921, at *5 (S.D.N.Y. July 29, 1975) (finding long arm jurisdiction where defendant initiated arbitration in New York to enforce illegally fixed price for coffee). In addition, the allegedly fraudulently altered SRA was sent to Plaintiff in New York, and the SRA provides that New York law governs its validity and interpretation, as well as any disputes arising between the parties. (Cesare Aff. Ex. A. ¶ 11.8.)
Although each party accuses the other of causing the arbitration proceedings to come to an end, Plaintiff's allegations for the purposes of this motion are construed in the light most favorable to it.
Under these circumstances, Medici's agreement to arbitrate in New York and its subsequent initiation of lengthy arbitration proceedings, in part to enforce the allegedly fraudulently altered SRA, are sufficient to constitute consent to personal jurisdiction. Cf. Intermeat Inc. v. American Poultry Inc., 575 F.2d 1017, 1023 (2d Cir. 1978) (considering agreement to arbitrate in context of determining whether minimum contacts existed for purposes of quasi-in-rem jurisdiction); Cofinco, 1975 WL 921, at *5 (considering initiation of arbitration in context of establishing long arm jurisdiction under C.P.L.R. § 302(a)(1)); see also Fireman's Fund Ins. Co. v. Nat'l Bank of Cooperatives, 103 F.3d 888, 893-95 (9th Cir. 1996) (considering agreement to arbitrate as one of the minimum contacts sufficient to confer jurisdiction under California's long arm statute).
In the alternative, Medici is subject to long arm jurisdiction pursuant to N.Y. C.P.L.R. 302(a)(1). This provision of New York's long arm statute extends jurisdiction over a defendant who has transacted business in New York, so long as the cause of action arises out of that transaction. In order to satisfy this basis of jurisdiction, the defendant's activities must be purposeful and there must exist a substantial relationship between the transaction and the claim asserted.See Kreutter v. McFadden Oil Corp., 522 N.E.2d 40, 43 (1988). Courts consider the totality of the defendant's contacts with New York in determining whether jurisdiction exists. See Hanback v. Ocean Ships, Inc., No. 97 Civ. 0025, 1997 WL 419644, at *3 (E.D.N Y July 18, 1997).
In addition to the facts described above, Miller and Cesare, officers of Medici, engaged in initial contract discussions with Plaintiff in New York at the offices of Edge Financial and at the St. Regis Hotel. According to Plaintiff, Miller and Cesare were acting on behalf of DaVinci and the Edge Group at the time. Plaintiff alleges that the Edge Group is an alter ego of Medici, which is evidenced by several documents submitted by the parties indicating that Edge Financial played more than a minor role in the negotiation and funding of the HABP project. New York courts have frequently held that the pre-incorporation acts of a predecessor corporation can be attributed to a successor corporation for the purpose of establishing long arm jurisdiction where "the predecessor and the successor are one and the same." St. Paul Fire Marine Ins. Co. v. Eliahu Ins. Co., No. 96 Civ. 7269, 1997 WL 357989, at *4 (S.D.N.Y. June 26, 1997). Plaintiff has made a sufficient showing at this stage that Medici was a continuation of or successor-in-interest to DaVinci and/or the Edge Group.
Moreover, Plaintiff does not seek to hold Medici in New York based on a cause of action unrelated to the SRA. Rather, Plaintiff's suit arises from a disagreement over a contract that was negotiated at least initially in New York, arbitrated in New York, and over which New York law applies. Thus, Medici's contacts are sufficient to satisfy Section 302(a)(1)
At bottom, the limitations on exertion of personal jurisdiction, as reflected in Section 302(a)(1)'s requirement of purposeful activity, exist to satisfy constitutional requirements of due process. See ESI, Inc. v. Coastal Corp., 51 F. Supp.2d 35, 57 (S.D.N.Y. 1999). Under the familiar standard enunciated in International Shoe, a defendant must have certain "minimum contacts" with the forum state "such that the maintenance of the suit does not offend traditional notions of fair play and substantial justice." International Shoe Co. v. Washington, 326 U.S. 310, 316, 66 S.Ct. 154, 158 (1945). Here, it can fairly be said that Medici purposely availed itself of the privilege of conducting business in New York, and that its agents could reasonably foresee being haled into a New York court in connection with an alleged breach of the SRA. See World-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 297 (1980). Moreover, Medici's initiation of eighteen months of arbitration indicate that defending an action in New York will not be unduly burdensome. Accordingly, Medici's motion to dismiss for lack of personal jurisdiction is denied.
B. INDIVIDUAL DEFENDANTS
Plaintiff also seeks to exert personal jurisdiction over the Individual Defendants pursuant to N.Y. C.P.L.R. 302(a)(1). However, because the Court is granting the Individual Defendants' motion to dismiss for failure to state a claim, the question of personal jurisdiction need not be addressed.
The Individual Defendants move to dismiss the complaint for failure to state a claim against them on the basis that they cannot be held individually liable for Medici's alleged breach of the SRA. They also argue that the complaint does not state an adequate claim of fraud against them.
A shareholder, officer, or director of a corporation is not liable for the corporation's breach of a contract unless he signs the contract in his individual capacity. See Salzman Sign Co. v. Beck, 176 N.E.2d 74, 76 (N.Y. 1961). Plaintiff does not allege that any Individual Defendant signed the SRA in his individual capacity.
A plaintiff can, however, seek to hold a shareholder liable on a corporation's contract by demonstrating the existence of a basis to pierce the corporate veil. See Ferrante Equip. Co. v. Lasker-Goldman Corp., 258 N.E.2d 202, 204 (1970). To do so, Plaintiff must allege that a defendant was a majority shareholder and completely dominated the corporation for the purpose of pursuing his own interests, and that this domination was used to perpetrate a fraud or wrong against the plaintiff. See Sharon Towers, Inc. v. Bank Leumi Trust Co., 673 N.Y.S.2d 138 (App.Div. 199 8). Plaintiff fails to allege with the requisite specificity that any of the four defendants so dominated Medici that the veil should be pierced. See Triemer v. Bobsan Corp., 70 F. Supp.2d 375, 376-78 (S.D.N.Y. 1999). Although the complaint states that Richardson is a 50% shareholder and that he is "able to exert control and influence," mere conclusory restatements of the applicable legal standard do not suffice to meet Plaintiff's pleading burden. See id. at 377.
Richardson responds in his affidavit that he is only a minority shareholder. (Richardson Reply Aff. ¶ 2.)
Finally, the agent of a disclosed principal cannot be personally bound unless he evidences an intent to substitute his liability for that of the principal. See Salzman, 176 N.E.2d at 76. Plaintiff does not allege that either Miller or Cesare evidenced an intent to assume liability on behalf of DaVinci, the Edge Group, or Medici during the contract negotiations or anytime thereafter. Thus, the Individual Defendants cannot be held liable for the acts of Medici in breaching the SRA.
The complaint describes facts that could amount to a fraudulent scheme in which the Individual Defendants attempted to substitute certain pages of the SRA and pass the altered contract off as the original one. However, fraud is not one of plaintiff's enumerated causes of action. In addition, the complaint does not state that Plaintiff relied upon the altered document or suffered any injury from the fraudulent change. For example, Plaintiff does not allege that it paid any monies according to the fraudulent schedule. Rather, the relevance of this scheme is to Plaintiff's cause of action for a declaratory judgment that the original SRA is the legal one. Thus, the Individual Defendants' motion to dismiss is granted.
III. CONCLUSION
For the foregoing reasons, Medici's motion to dismiss for lack of personal jurisdiction is denied, and the Individual Defendants' motions to dismiss for failure to state a claim are granted.