Opinion
23-CV-1428 (GHW) (KHP)
02-28-2024
THE AMALGAMATED NATIONAL HEALTH FUND, et al., Plaintiffs, v. HICKEY FREEMAN TAILORED CLOTHING, INC., et al., Defendants.
ORDER
KATHARINE H. PARKER, UNITED STATES MAGISTRATE JUDGE
The Amalgamated National Health Fund (“Health Fund”), the National Plus Plan (the “401(k) Plan”), and the Trustees of the Health Fund and 401(k) Plan, (collectively, "Plaintiffs"), bring this action against Hickey Freeman Tailored Clothing, Inc. (“Hickey Freeman”) and Stephen Granovsky (“Granovsky”), (collectively, “Defendants”). This action, brought pursuant to Section 515 of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), 29 U.S.C. § 1145, seeks to enforce the provisions of a collective bargaining agreement (“CBA”) between Hickey Freeman and the Rochester Regional Joint Board, Workers United (the "Union") and to collect delinquent contributions, damages, interest, and attorneys' fees.
Before the Court for a Report and Recommendation is Defendants' partial Motion to Dismiss (the “Motion”). The Motion seeks to dismiss all claims against Granovsky on the basis that the complaint fails to plead a claim for fraud against him. For the reason stated below, I respectfully recommend that the Motion to Dismiss be DENIED.
BACKGROUND
1. Summary of Relevant Allegations in the Complaint
According to the Amended Complaint, Hickey Freeman is a clothing company that manufactures and sells garments in New York. (Am. Compl. ¶ 15.) Granovsky is the chief executive officer and owner of Hickey Freeman, and is Hickey Freeman's Controlling Corporate Official with full operational control of the company. (Id. ¶¶ 15, 18, 62-68.)
The Health Fund and the 401(k) Plan are ERISA-governed employee benefit plans that provide health and welfare coverage and retirement benefits, respectively, to participating employees. (Id. ¶¶ 6-7, 10.) On May 1, 2016, Hickey Freeman entered into collective bargaining agreements with the Union pursuant to which Hickey Freeman was required to make weekly contributions to the Health Fund and 401(k) Plan on behalf of and for the benefit of its covered employees. (Id. ¶¶ 20-24.)
a. Delinquent Health Fund Contributions
Hickey Freeman was delinquent with respect to its contributions owed to the Health Fund for the months of September 2019, November 2019, December 2019, and July 2020 ("Prior Delinquent Contributions"). (Id. ¶ 27.) From May 2020 through July 2020, the Health Fund negotiated a settlement agreement with Granovsky concerning the Prior Delinquent Contributions, but Granovsky refused to execute the agreement or pay the delinquent contributions. (Id. ¶¶ 28, 29.) On October 5, 2020, the Health Fund advised Hickey Freeman that if it did not cure the Prior Delinquent Contributions, the Health Fund would suspend health and welfare coverage to the covered employees. (Id. ¶ 30.) Hickey Freeman then remitted to the Health Fund a series of partial payments that ultimately cured the Prior Delinquent Contributions. (Id. ¶ 31.)
However, Hickey Freeman continued to fail to make its required payments moving forward. Specifically, Hickey Freeman failed to remit its required contributions to the Health Fund for part of October 2020 and all of November 2020 through and including January 2023, totaling $3,653,876.50 in the principal amount (the "Delinquent Health Fund Contributions"). (Id. ¶ 32.)
To avoid terminating health and welfare coverage to the covered employees, the Health Fund negotiated repeatedly with Granovsky and his agent, Alan Peck ("Peck"), Hickey Freeman's Chief Financial Officer, to recover the Delinquent Health Fund Contributions. (Id. ¶ 36.) The Health Fund communicated with Granovsky and/or Peck about the Delinquent Health Fund Contributions on October 21, 2020, November 2, 2020, November 5, 2020, March 8, 2021, April 26, 2021, May 22, 2021, June 14, 2021, June 23, 2021, August 11, 2021, October 28, 2021, November 1, 2021, November 9, 2021, March 1, 2022, March 9, 2022, June 1, 2022, June 3, 2022, and June 6, 2022. (Id. ¶ 37.) During many of these communications, Cyndi Katsaras (“Katsaras”), the Health Fund's Fund Manager, advised Granovsky and/or Peck that the Health Fund would terminate health and welfare coverage if the Delinquent Health Fund Contributions were not cured. (Id. ¶ 38.) During these communications, Granovsky and/or Peck, on behalf of Hickey Freeman, repeatedly promised to pay the Delinquent Health Fund Contributions and routinely requested more time to pay by representing that they needed time to obtain the funds. (Id. ¶¶ 39, 40.) Relying on these representations, the Health Fund continued to provide health and welfare coverage to the covered employees. (Id.)
The Amended Complaint provides additional detail regarding five specific communications between the Health Fund and Granovsky or Peck wherein Granovsky or Peck falsely told Katsaras that Hickey Freeman would imminently pay the Delinquent Health Fund Contributions in an effort to prevent the Health Fund from terminating coverage.
First, the Amended Complaint alleges that on June 23, 2021, Katsaras advised Peck that, if Hickey Freeman did not make a payment toward the Delinquent Health Fund Contributions, the Health Fund would suspend health and welfare coverage and take legal action. (Id. ¶ 41.) Peck responded that Hickey Freeman would make a payment towards the Delinquent Health Fund Contributions, but no payment was made. (Id. ¶¶ 42, 43.)
Then, on March 11, 2022, Peck told Katsaras that Hickey Freeman was applying for a "pandemic relief grant program administered by the USDA" and that it expected to receive the funds by "late April or early May" 2022. (Id. ¶ 44.) Peck indicated that Hickey Freeman would use the funds from the grant to pay the Delinquent Health Fund Contributions. (Id.) On June 1, 2022, Katsaras asked Peck about the status of the promised payment. (Id. ¶ 45.) On June 3, 2022, Peck said he expected to receive the relief funds by the end of July 2022. (Id. ¶ 46.) The Amended Complaint alleges on information and belief that Hickey Freeman received the grant funds, but it did not make a payment to the Health Fund. (Id. ¶ 47.)
Third, on an unspecified date, Granovsky advised Katsaras that he was in the process of selling a building and that he would use the proceeds from the sale of the building to make a payment toward the Delinquent Health Fund Contributions. (Id. ¶ 48.) The Health Fund continued to provide health and welfare coverage in reliance on Granovsky's and Peck's promises that Hickey Freeman would pay the Delinquent Health Fund Contributions. (Id. ¶ 50.) 4
On or about August 2022, Granovsky was awarded $70 million in funding from New York State to convert Hickey Freeman's building located at 1155 N. Clinton Avenue, Rochester, NY 14621 into affordable housing units. (Id. ¶ 49.) However, Hickey Freeman still did not pay the Delinquent Health Fund Contributions. (Id.)
Fourth, on November 4 and 9, 2022, the Health Fund sent Hickey Freeman a demand letter for the payment of the Delinquent Health Fund Contributions, interest, liquidated damages, and attorneys' fees, and advised Granovsky that it would terminate health and welfare coverage due to the delinquency of contributions. (Id. ¶¶ 51, 52.) On November 9, 2022, Granovsky again promised to pay the Delinquent Health Fund Contributions in full. (Id.) In reliance on this promise, the Health Fund did not terminate coverage. (Id.)
Finally, from November 2022 through January 2023, the Health Fund negotiated a second settlement agreement with Granovsky, on behalf of Hickey Freeman, for full payment of the Delinquent Health Fund Contributions, plus interest and liquidated damages. (Id. ¶ 53.) Granovsky gave assurances that he would execute the settlement agreement on behalf of Hickey Freeman, but he did not do so. (Id.)
The Amended Complaint alleges on information and belief that despite making several promises that Hickey Freeman would pay the Delinquent Health Fund Contributions, Granovsky never intended to direct Hickey Freeman to pay the Delinquent Health Fund Contributions or fulfill his representations to that effect. (Id. ¶ 54.) Rather, “Granovsky's and Peck's promises to make payments on the Delinquent Health Fund Contributions were false and intended to stop the Health Fund from terminating health and welfare coverage” to covered employees. (Id. ¶ 55.)
On January 21, 2023, the Health Fund notified Granovsky that it was terminating health and welfare coverage due to Granovsky's persistent failure to pay the Delinquent Health Fund Contributions. (Id. ¶ 57.) On January 23, 2023, the Health Fund notified the covered employees that their health and welfare coverage by the Health Fund would be terminated effective January 31, 2023. (Id. ¶ 58.) On January 24, 2023, Granovsky sent a proposal to the Health Fund, representing that he had received an offer to purchase Hickey Freeman, and requesting that the Health Fund refrain from terminating health and welfare coverage because "[a]ny loss of health benefits will lead to an exodus of employees or worse and will render a deal [to sell Hickey Freeman] impossible." (Id. ¶ 59.) In this letter, Granovsky represented that he was prepared to execute a new settlement agreement with the Health Fund to pay back the Delinquent Health Fund Contributions in full. (Id.) Due to Granovsky's previous allegedly false representations to the Health Fund, the Health Fund refused to entertain this proposal, and it terminated health and welfare coverage to covered employees effective on January 31, 2023. (Id. ¶¶ 60, 61.) The Delinquent Health Fund Contributions remain outstanding.
Plaintiffs assert that Hickey Freeman is liable to the Health Fund for the Delinquent Health Fund Contributions in the principal amount of $3,653,876.50, plus interest, liquidated damages, and attorneys' fees. (Id. ¶¶ 79-82.) Plaintiffs further assert that Granovsky is also personally liable to the Health Fund for the Delinquent Health Fund Contributions, plus interest, liquidated damages, and attorneys' fees, because he is Hickey Freeman's controlling corporate official and because he and Peck fraudulently promised to pay the Delinquent Health Fund Contributions in order to stop the Health Fund from terminating coverage. (Id. ¶¶ 83-90.)
b. Delinquent 401(k) Plan Contributions
Pursuant to the CBA and the 401(k) Plan's participation agreement, Hickey Freeman was, and is, required to remit to the 401(k) Plan each month mandatory contributions on behalf of its covered employees, voluntary payroll deductions from its covered employees, and monthly reports documenting the contributions. (Id. ¶ 69.) Voluntary payroll deduction contributions are from employees that elected to have certain amounts deducted from their pay and contributed on their behalf to the 401(k) Plan. (Id. ¶ 70.) Hickey Freeman was delinquent in its mandatory employer contributions and voluntary deduction contributions from February 2019 through May 2020, and from October 2021 through May 2022. (Id. ¶ 72.)
With respect to voluntary deduction contributions, Hickey Freeman deducted the contribution amounts from its employees' pay, but did not remit those amounts to the 401(k) Plan. (Id. ¶ 73.) The Amended Complaint alleges on information and belief that Hickey Freeman used these deducted contributions for the operation of its business. (Id.) Hickey Freeman also accrued interest and liquidated damages on its previous delinquent contributions to the 401(k) Plan, which remain due and owing. (Id. ¶ 74.)
Plaintiffs assert that Hickey Freeman is liable to the 401(k) Plan pursuant to plan's governing agreements for the delinquent 401(k) Plan contributions in the principal amount of $48,689.93, plus interest, liquidated damages, and attorneys' fees. (Id. ¶¶ 76, 91-97.) Plaintiffs do not assert claims against Granovsky in his individual capacity in relation to the 401(k) Plan.
2. Procedural History
Plaintiffs initiated this action on February 21, 2023 with the filing of the initial complaint. (ECF No. 1.) On April 12, 2023, Plaintiffs filed the Amended Complaint, which is the operative complaint. (ECF No. 28.) On April 26, 2023, Defendants filed the instant Motion and supporting papers. (ECF Nos. 29-31.) Plaintiffs opposed the Motion on May 10, 2023, (ECF No. 36) and Defendants replied on May 24, 2023 (ECF No. 42). On May 16, 2023, following an initial case management conference and in consultation with the parties, I issued a scheduling order pursuant to Federal Rule of Civil Procedure 16. (ECF No. 39.) The Order set July 14, 2023, as the deadline to amend the pleadings and join parties.
LEGAL STANDARDS
For a complaint to survive a Rule 12(b)(6) motion to dismiss, the court must determine that the complaint contains “sufficient factual matter ... to ‘state a claim to relief that is plausible on its face.'” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A claim is considered plausible on its face “when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. While detailed factual allegations are not required, the complaint must contain more than mere “labels and conclusions or formulaic recitation of the elements of a cause of action.” Id. The court must accept all factual allegations in the complaint as true and draw all reasonable inferences in the plaintiff's favor. DiFolco v. MSNBC Cable L.L.C., 622 F.3d 104, 111 (2d Cir. 2010) (citation omitted).
There is a heightened pleading requirement when a claim is grounded in fraud. Rule 9(b) requires that fraud be pled “with particularity.” Harsco Corp. v. Segui, 91 F.3d 337, 347 (2d Cir. 1996). The Second Circuit has “read Rule 9(b) to require that a complaint “(1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent.” Rombach v. Chang, 355 F.3d 164, 170 (2d Cir. 2004) (citation omitted). Under Rule 9(b), “[m]alice, intent, knowledge, and other condition[s] of mind of a person may be averred generally.” Gladstone Bus. Loan, LLC v. Randa Corp., 2009 WL 2524608, at *3 (S.D.N.Y. Aug. 17, 2009) (citing Fed.R.Civ.P. 9(b)).
The purpose of this heightened pleading standard is to put the defendant on notice of the allegations brought against it and the basis for those allegations, as well as to provide the defendant with enough information to properly respond to the allegations. Epstein v. Haas Sec. Corp., 731 F.Supp. 1166, 1176 (S.D.N.Y. Feb. 21, 1990). “Rule 9(b) is satisfied if the complaint gives enough information to enable defendants to frame a responsive pleading and assures that a sufficient basis exists for the allegations made.” Trs. of Plumbers & Pipefitters Nat. Pension Fund v. De-Con Mech. Contractors, Inc., 896 F.Supp. 342, 346 (S.D.N.Y. 1995) (citations omitted).
DISCUSSION
1. Scope of the Motion to Dismiss
As an initial matter, it is helpful to clarify the scope of Defendants' Motion in relation to Plaintiffs' claims. All of Plaintiffs' claims are asserted pursuant to ERISA. ERISA requires an employer to make contributions to multiemployer benefit plans under a collective bargaining agreement in accordance with the agreement's terms. 29 U.S.C. § 1145. To assert a claim pursuant to 29 U.S.C. § 1145 against an employer, there is no need to allege that the employer engaged in fraud, but only that it was obligated to pay contributions and failed to do so. However, to assert the same claim against an individual, the complaint must allege “special circumstances,” such as that the individual “has committed fraud ... or acted in concert with a 9 fiduciary to breach a fiduciary obligation.” Cement & Concrete Workers Dist. Council Welfare Fund v. Lollo, 35 F.3d 29, 36 (2d Cir. 1994). Where individual liability is premised on fraudulent conduct, the plaintiff must also show that the individual defendant is “a controlling corporate official” of the employer. Moore v. N.Y. Concrete Corp., 2019 WL 316402, at *5 (S.D.N.Y. Jan. 24, 2019) (citation omitted).
Alternatively, “plan fiduciaries may be held liable in their personal capacities under ERISA for breach of their fiduciary duties.” Trs. of The Sheet Metal Workers Int'l Ass'n Local No. 38 Vacation Fund v. Katonah Roofing, Inc., 2011 WL 9010113 (S.D.N.Y. Sept. 4, 2011) (citation omitted). Plaintiffs do not allege that Granovsky is a fiduciary of the Health Fund and instead rely on the theory that he is individually liable because of his alleged fraudulent conduct.
Plaintiffs do not assert fraud-based claims against Hickey Freeman, nor do they need to in order to adequately plead claims for ERISA violations against Hickey Freeman, the employer. Defendants do not seek to dismiss the ERISA claims brought against Hickey Freeman, and Plaintiffs' claims against Hickey Freeman are not at issue in the instant Motion. However, Plaintiffs' claim against Granovsky regarding the Delinquent Health Plan Contributions relies on allegations that Granovsky is a controlling corporate official who engaged in fraudulent conduct to induce the Health Fund not to terminate benefits. Specifically, Plaintiffs allege that Granovsky and his agent, Peck, repeatedly stated that Granovsky would pay the Delinquent Health Fund Contributions, including from specific monies that they stated would be imminently available, but, unbeknownst to the Health Fund, Granovsky had no intention of paying the Delinquent Health Fund Contributions. This claim against Granovsky is at issue in the instant Motion.
While Defendants contest the truth of Plaintiffs' allegation that Granovsky is a controlling corporate official, they do not argue that Plaintiffs failed to plead this element, and the allegations in the Amended Complaint are sufficient to plausibly claim that Granovsky is a controlling corporate official. (See Am. Compl. ¶¶ 62-68).
Defendants raise two arguments in support of their motion for dismissal of the claim against Granovsky. First (technically second in their opening brief), Defendants argue that Plaintiffs have failed to allege all of the necessary elements of a fraud claim in accordance with Rule 12(b)(6), and in particular, have failed to adequately allege fraudulent intent or knowledge of falsity. Defendants also argue that Plaintiffs have failed to meet the heightened pleading standard set forth in Rule 9(b) for a fraud claim because they have failed to describe with sufficient particularity the time, place, speaker, or content of any of the allegedly fraudulent statements. I address each argument below.
2. Plaintiffs Have Sufficiently Alleged Fraudulent Intent and Knowledge of Falsity
A claim for common law fraud requires a plaintiff to establish the following elements: (1) a material misrepresentation of an existing fact; (2) made with knowledge that it was not true; (3) intent to induce reliance on that fact; (4) justifiable reliance on the misrepresentation; and (5) damages. Gladstone, 2009 WL 2524608, at *3. Even under the heightened pleading standard of Rule 9(b), scienter “may be averred generally,” but the complaint must plead a factual basis giving rise to a strong inference of fraudulent intent. Fischer v. Tynan, 1993 WL 213025 at *2 (S.D.N.Y. June 16, 1993) (citation omitted).
A promise to perform a future act may form the basis for a fraud claim if “there existed an intent not to perform at the time the promise was made.” Cohen v. Koenig, 25 F.3d 1168, 1172 (2d Cir. 1994); see also Trahan v. Lazar, 457 F.Supp.3d 323, 351 (S.D.N.Y. 2020) (Woods, J.) (finding that the defendant's promise was an actionable misrepresentation where the plaintiff alleged the defendant had no intention of keeping the promise). “[A] present intention not to fulfill a promise is generally inferred from surrounding circumstances, since people do not ordinarily acknowledge that they are lying.” Veerji Exports v. Carlos St. Mary, Inc., 2022 WL 5192897, at *2 (S.D.N.Y. Oct. 5, 2022) (citation omitted) (finding that “surrounding circumstances” alleged in the complaint, including false statements that were apparently made to cover up the fraud, permitted the inference that the defendants' promise was fraudulent).
Defendants argue that the Amended Complaint lacks allegations to support a finding that Granovsky intended to defraud the Health Fund or intentionally made a statement he knew to be false, and that Plaintiffs have thus failed to state a claim for fraud pursuant to Rule 12(b)(6). This argument is unavailing. As set forth in the background section above, the Amended Complaint lists five occasions on which Granovksy or Peck allegedly falsely stated that Hickey Freeman would pay the Delinquent Health Fund Contributions. Specifically:
• First, on June 23, 2021, after Katsaras told Peck that the Health Fund would suspend coverage if Hickey Freeman did not make payments toward the delinquent contributions, Peck told Katsaras that Hickey Freeman would make a payment towards the delinquent contributions. (Am. Compl. ¶¶ 41- 43.)
• Second, on March 11, 2022, Peck told Katsaras that Hickey Freeman was applying for a "pandemic relief grant” and would use the funds from this grant to pay the delinquent contributions. (Id. ¶ 44.)
• Third, on an unspecified date, Granovsky told Katsaras that he was in the process of selling a building and would use the proceeds from the sale of the building to make a payment towards the delinquent contributions. (Id. ¶ 48.)
• Fourth, on November 9, 2022, Granovsky stated that he would pay the delinquent contributions in full. (Id. ¶ 52.)
• Fifth, from November 2022 through January 2023, Granovsky assured the Health Fund that he would execute a settlement agreement pursuant to which he would pay the Delinquent Health Fund Contributions. (Id. ¶ 53.)
These statements are more than just predictions or statements of opinion. In each instance, Granovsky or his agent promised to take a particular, knowable action, namely paying 12 the delinquent contributions and, in some cases, with particular funds. In each instance, Granovsky failed to take the promised action. The Amended Complaint alleges on information and belief that Granovsky “never intended to direct Hickey Freeman to pay the Delinquent Health Fund Contributions or fulfill his representations to that effect, including use of the proceeds from Hickey Freeman's building or from a government grant.” (Id. ¶ 54.) Indeed, the Amended Complaint is rife with factual allegations that combined support a strong inference that Granovsky had no intention of fulfilling his promises at the time he made them.
To start, the allegations in the Amended Complaint demonstrate a pattern by Granovsky of stringing the Health Fund along with promises to pay, with those promises consistently not being met. The sheer number of unfulfilled promises is certainly suspicious and permits an inference of fraudulent intent. See Dornberger v. Metro. Life Ins. Co., 961 F.Supp. 506, 542 (S.D.N.Y. 1997) (inferring that the defendant never intended to carry out its promise based on allegations that it had long sought to avoid compliance with insurance and tax laws). The fact that Granovsky had cured a prior default tempers this inference, but does not negate it.
Moreover, on at least two occasions, Granovsky or Peck promised money from a specific source of funding that was forthcoming, namely a “pandemic relief grant” and a building sale. Yet, when these sources of funding became available, no payment was made. Granovsky's actions immediately upon receiving the promised funds permits an inference that he never intended to use the promised funds toward the delinquent contributions. See CLT Telecomms. Corp. v. Colonial Data Techs. Corp., 1997 WL 409525, at *3 (D. Conn. June 23, 1997) (inferring fraudulent intent from allegations that only seven months after defendants promised to manage a company, they sold the company to a third party).
Defendants note that the building in question was not technically “sold,” but rather was “converted” into affordable housing in exchange for $70 million, and argue that this “confirms that Mr. Granovsky did not make a fraudulent misrepresentation” because he did not promise to pay money from the purported $70 million award from the state. (Mot. 5.) This argument is unpersuasive. The receipt of $70 million in exchange for the conversion of a building to affordable housing is akin to a sale for relevant purposes. In any event, the fact that Granovsky had no intention of selling the building, but rather was in the process of converting it to affordable housing, yet promised the Health Fund that he would sell the building and use the proceeds to pay the delinquent contributions, underscores an inference that his statement to the Fund was false. And, tellingly, despite allegedly coming into $70 million from the conversion of the building, Granovsky still did not pay any portion of the Delinquent Health Fund Contributions.
The Amended Complaint also evinces a motivation for why Granovsky would lie at the time he made the false promises. That is, it can be inferred from the Amended Complaint that Hickey Freeman was struggling financially such that it was using employee 401(K) contributions toward the company's operating costs. (Id. ¶ 73.) Further, Granovsky himself stated that it would be detrimental to the company if the Health Plan terminated coverage, as this could lead to “an exodus of employees.” (Id. ¶ 59.) Moreover, Granovsky apparently was trying to sell the company and feared that the termination of benefits could “render a deal [to sell Hickey Freeman] impossible." (Id.) Thus, Plaintiffs' allegations, accepted as true at this stage, are sufficient to give rise to an inference that Granovsky was motivated to fraudulently induce the
Health Fund not to terminate benefits. This strengthens the inference that Granovsky had no intention of keeping his promises at the time he made them.
Accordingly, Plaintiffs have sufficiently pled fraudulent intent and knowledge of falsity in order to sustain a claim for fraud at this stage.
Plaintiffs have also pled the remaining elements of a fraud claim. That is, the Amended Complaint alleges that Granovsky made the false promises with the intent to induce reliance by the Health Fund and prevent termination of benefits to covered employees. (Id. ¶ 55.) Indeed, many of the false promises immediately followed a threat by the Health Fund to terminate benefits. (See id. ¶¶ 38, 52, 58.) The Amended Complaint further adequately pleads that the Health Fund justifiably relied on the misrepresentations in declining to terminate benefits and that it sustained damages as a result. (See id. ¶¶ 40, 43, 44, 48, 50, 85, 87.)
Accordingly, I respectfully recommend that Defendants' Motion to Dismiss for failure to plead the elements of a fraud claim be denied.
3. Plaintiffs Have Stated the Fraud Claim with Sufficient Particularity
Under Federal Rule of Civil Procedure 8, a complaint need only provide “a short and plain statement of the grounds upon which the court's jurisdiction depends” and “of the claim showing that the pleader is entitled to relief,” as well as “a demand for judgment for the relief the pleader seeks.” Fed.R.Civ.P. 8(a). In addition, Federal Rule of Civil Procedure 9 “contains a number of provisions designed to solve or ameliorate several pleading problems that historically have been dealt with in special ways.” Wright & Miller, Pleading Special Matters- In General, 5A Fed. Prac. & Proc. Civ. § 1291 (4th ed.). “Courts and commentators have traditionally noted that Rule 9 must be read in light of the basic pleading philosophy set forth in 15 Rule 8,” which “has traditionally meant that those portions of Rule 9 that require specific or detailed allegations should not be construed in an unduly strict fashion.” Id. (citations omitted).
As relevant to a claim for fraud, Rule 9(b) states that, in alleging fraud, “a party must state with particularity the circumstances constituting fraud or mistake.” Fed.R.Civ.P. 9(b). In applying rule 9(b), the court “must not lose sight of the fact that it must be reconciled with rule 8.” Felton v. Walston & Co., 508 F.2d 577, 581 (2d Cir. 1974). “The primary purpose of Rule 9(b) is to afford [the] defendant fair notice of the plaintiff's claim and the factual ground upon which it is based.” Novak v. Kasaks, 216 F.3d 300, 314 (2d Cir. 2000). The Second Circuit has read this rule to require that a complaint alleging fraud (1) specifies the statements that the plaintiff contends were fraudulent, (2) identifies the speaker, (3) states where and when the statements were made, and (4) explains why the statements were fraudulent. Rombach, 355 F.3d at 170.
That said, the Rule itself requires only “particularity,” and it is the language of the federal rules, not judicial interpretation, that governs. See Leatherman v. Tarrant Cnty. Narcotics Intel. & Coordination Unit, 113 S.Ct. 1160, 1163 (1993). Therefore, in keeping with the purpose of Rule 9(b), courts tolerate certain ambiguities in a pleading, provided that the allegations about the fraud are sufficient to give notice to the defendant and allow it to prepare its defense. See, e.g., Hansen v. Wwebnet, Inc., 2015 WL 4605670, at *10 (S.D.N.Y. July 31, 2015) (collecting cases, and finding that where the complaint was ambiguous as to the date of the misrepresentation, it nonetheless satisfied Rule 9(b) because other identifying details were provided); Int'l Motor Sports Grp., Inc. v. Gordon, 1999 WL 619633, at *3 (S.D.N.Y. Aug. 16, 1999) (explaining that a plaintiff “need not plead dates, times and places with absolute precision,” so long as the complaint gives “notice to defendants of the claim and the grounds upon which it is based.”). In other words, “Rule 9(b) is satisfied if the complaint gives enough information to enable defendants to frame a responsive pleading and assures that a sufficient basis exists for the allegations made.” De-Con Mech. Contractors, Inc., 896 F.Supp. at 346 (citations omitted).
Defendants argue that Plaintiffs' allegations in support of their fraud theory do not meet Rule 9(b)'s particularity requirements because they do not specify the place, speaker, or content of the alleged false statements.
As an initial matter, the Court agrees with Defendants that certain general allegations in the Amended Complaint do not comport with Rule 9(b), such as the allegation at paragraph 40 that Granovsky “routinely requested more time to pay the Delinquent Health Fund Contributions by representing that he needed extra time to obtain the funds to pay.” This allegation is too vague on its own to constitute a basis for a fraud claim, but it provides a helpful introduction to Plaintiffs' more detailed allegations as to the five specific fraudulent statements identified above. For each of the five specific misrepresentations identified above, the Amended Complaint provides sufficient detail to enable Defendants to frame a responsive pleading and to assure that a sufficient basis exists for the allegations made. Accordingly, the Amended Complaint comports with the purposes of Rule 9(b).
What Statements Were Made. As for each of the five misrepresentations alleged in the Amended Complaint, sufficient detail is provided as to what statement was made. The Amended Complaint pleads that, in each instance, Granovsky or Peck falsely stated that Hickey Freeman would pay the Delinquent Health Fund Contributions. Although the Amended
Complaint does not always provide the exact words used, this level of detail is not needed where, as here, it is clear from the surrounding allegations which conversations the complaint is referring to. See, e.g., Kalin v. Xanboo, Inc, 526 F.Supp.2d 392, 401 (S.D.N.Y. 2007) (“Although the SAC does not provide direct quotations, it sufficiently specifies the content of the fraudulent statements such that RDI can identify the statements alleged to be misleading.”); Jubran v. Musikahn Corp., 673 F.Supp. 108, 112 (E.D.N.Y. 1987) (finding that although the complaint did not state the exact words that were communicated, it provided sufficient detail as to the communications to comport with Rule 9(b)).
As to the fifth alleged misrepresentation, namely Granovsky's false promise that he would execute a settlement agreement pursuant to which he would pay the Delinquent Health Fund Contributions, Plaintiffs do not need to provide additional detail regarding the terms of the settlement agreement, because Plaintiffs do not allege that the settlement agreement itself was a fraudulent statement. It is sufficient that Plaintiffs alleged that Granovsky falsely promised to execute an agreement pursuant to which he would pay the Delinquent Health Fund Contributions.
The Speaker of the Statements. As for each of the five misrepresentations alleged in the Amended Complaint, the Amended Complaint alleges that either Granovsky or his agent, Peck, made the offending statement. Thus, Defendants are on notice of who the alleged speaker is. Defendants take issue with the fact that the heading preceding paragraph 33 of the Amended Complaint states, “Defendants' False Promises to Pay Its Delinquent Contributions,” and argue that the use of the term “Defendants” in reference to the false promises “creates confusion” as to whether the promises were made by Granovsky or Hickey Freeman. (Mot. 4.)
However, the use of the term “Defendants” is not confusing in light of the fact that the allegations themselves make clear that the fraudulent statements were made by Granovsky and Peck on behalf of Hickey Freeman. DiVittorio v. Equidyne Extractive Industs., Inc., 822 F.2d 1242 (2d Cir. 1987), which Defendants cite on this point, is inapposite. There, the court dismissed fraud claims against several individual defendants where there were no allegations linking them to any of the alleged fraudulent misrepresentations. That is not the case here.
When and Where the Statements Were Made. Plaintiffs have pled when the misrepresentations were made. The exact dates are provided for four of the five statements. As to the statement that Hickey Freeman would sell a building and use those proceeds to pay the Health Fund, the Amended Complaint fails to allege the exact date on which this statement was made, but it appears from the complaint that the alleged discussion occurred on or around June 6, 2022, and prior to approximately August 2022. (See Am. Compl. ¶¶ 37, 48, 49.) While the timing of this statement is vague, the allegation is otherwise highly specific and anchored in a general time period, and it provides sufficient notice to Granovsky of the claim. See, e.g., Hansen, 2015 WL 4605670, at *10 (complaint was sufficiently particular even though it alleged that a statement was made on an unspecified date within a one-year period); Mayatextil, S.A. v. Liztex U.S.A., Inc., 1993 WL 51094, at *2 (S.D.N.Y. Feb. 24, 1993) (a 14-month period was sufficiently particular where complementary factual allegations provided defendants with the opportunity to answer).
Defendants also argue that Plaintiffs needed to plead the length of time that the various interactions lasted, but this assertion greatly overreads the requirements of Rule 9(b) and is not supported by any case law.
As to where the statements were made, the Amended Complaint does not provide much detail, but one can infer from the surrounding allegations that the communications were made in New York, as all parties are alleged to be based in New York. (Am. Compl. ¶¶ 3, 4, 14, 15.) See, Kalin, 526 F.Supp.2d at 401 (finding that although the location where the meeting took place was not identified, it could be inferred from surrounding allegations that the meeting was held in the offices of one of the corporate Defendants, and the circumstances were “sufficiently well-defined to identify the event”). In any event, the alleged statements are sufficiently specific that, assuming the statements were made at all, Defendants should be on notice of what statements the Amended Complaint is referring to. See Gordon, 1999 WL 619633, at *3 (finding that although the complaint did not identify “precisely where these alleged misrepresentations and omissions occurred,” it was sufficiently particular because the details of the fraud were clear). It is not credible that Defendants need further elaboration as to precisely where the statements were made in order to adequately respond to the pleading.
There also does not appear to be any question in this case that would render the place where the statements were made particularly material. That is, Defendants do not challenge the Court's specific jurisdiction over the claims or argue that the location where the statements were made is at issue. See Fed.R.Civ.P. 9(f) (“An allegation of time or place is material when testing the sufficiency of a pleading.”).
Finally, Plaintiffs have provided more detail as to where the various statements were made in their opposition brief, noting for example that the June 23, 2021 conversation occurred by phone and the discussions regarding the relief grant occurred by email. Defendants admit that this information adds “the very details” that their Opening Brief stated were missing. (Reply 5.) To dismiss the fraud claim for failure to include information that Defendants have would be to exalt form over substance and encourage motion practice over technicalities. This is not in keeping with the spirit of the Federal Rules, which instruct that technical forms of pleading are not required, and pleadings should be “construed as to do substantial justice.” Fed.R.Civ.P. 8(e), (f); see Nanopierce Techs., Inc. v. Southridge Cap. Mgmt. LLC, 2004 WL 2754653, at *11 (S.D.N.Y. Dec. 2, 2004) (declining to dismiss fraud claim for failure to use the “proper ‘magic words'” in a pleading that contained specific factual allegations in support of the claim). Even if the Court were to find the location of the statements to be insufficiently pled, Plaintiffs could easily cure this defect through further amendment of the complaint.
If the Court disagrees with my Recommendation and dismisses the complaint based on failure to plead fraud with particularity, I respectfully recommend that leave to amend the complaint be granted. Where, as here, the Court-set deadline for amending the pleading has passed, “the lenient standard under Rule 15(a) ... must be balanced against the requirement under Rule 16(b) that the Court's scheduling order ‘shall not be modified except upon a showing of good cause.'” Grochowski v. Phoenix Constr., 318 F.3d 80, 86 (2d Cir. 2003) (quoting Fed.R.Civ.P. 15 and 16). Plaintiffs had a reasonable basis to believe that the Amended Complaint was sufficient, thus providing good cause for their failure to timely amend. And, “[i]n appropriate circumstances, a district court has discretion to grant a motion to amend even where the moving party has not shown diligence in complying with a deadline for amendments.” Covet & Mane, LLC v. Invisible Bead Extensions, LLC, 2023 WL 2919554, at *13 (S.D.N.Y. Mar. 23, 2023) (collecting cases), report and recommendation adopted, 2023 WL 6066168 (S.D.N.Y. Sept. 18, 2023). Amendment would be appropriate here, because Plaintiffs can easily cure any technical deficiencies by adding detail to the complaint, and as discovery has been ongoing, the curative additions will not delay the case.
Why the Statement Was Fraudulent. The Amended Complaint clearly sufficiently pleads why the five alleged misrepresentations were fraudulent - that is, Hickey Freeman allegedly failed to make the promised payments.
Finally, as discussed above, the Amended Complaint adequately pleads scienter with sufficient particularity, because it provides a factual basis that gives rise to a strong inference of fraudulent intent.
Accordingly, I respectfully recommend that Defendants' Motion to Dismiss for failure to meet the standards of Rule 9(b) be denied.
CONCLUSION
For the reason set forth above, I respectfully recommend that the partial Motion to Dismiss be DENIED.
NOTICE
The parties shall have fourteen days from the service of this Report and Recommendation to file written objections to the Report and Recommendation, pursuant to 28 U.S.C. § 636(b)(1) and Rule 72(b) of the Federal Rules of Civil Procedure. See also Fed.R.Civ.P. 6(a), (d) (adding three additional days only when service is made under Fed.R.Civ.P. 5(b)(2)(C) (mail), (D) (leaving with the clerk), or (F) (other means consented to by the parties)).
If any party files written objections to this Report and Recommendation, the other parties may respond to the objections within fourteen days after being served with a copy. Fed.R.Civ.P. 72(b)(2). Objections and responses to objections shall be filed with the Clerk of the Court, with courtesy copies delivered to the chambers of the Honorable Gregory H. Woods at the United States Courthouse, 500 Pearl Street, New York, New York 10007, and to any opposing parties. See 28 U.S.C. § 636(b)(1); Fed.R.Civ.P. 6(a), 6(d), 72(b). Any requests for an extension of time for filing objections must be addressed to Judge Woods. The failure to file these timely objections will result in a waiver of those objections for purposes of appeal. See 28 U.S.C. § 636(b)(1); Fed.R.Civ.P. 6(a), 6(d), 72(b); Thomas v. Arn, 474 U.S. 140 (1985).