noting that “plaintiff failed to allege any special injury that they have incurred as a result of the [underlying litigation]”Summary of this case from Liberty Synergistics, Inc. v. Microflo Ltd.
98 CV 7477 (EHN)
June 29, 2000
REPORT AND RECOMMENDATION
On December 4, 1998, plaintiffs Leslie J. Kaslof, Ralph Kaslof, and Ellon U.S.A., he. ("Ellon U.S.A.") filed this action alleging that defendants Global Health Alternatives, Inc. ("GHA") and Ellon, Inc. ("Ellon") had breached certain written employment and consulting agreements and committed fraud. By Notice of Motion dated November 23, 1999, plaintiffs seek an order: 1) compelling defendants to deposit into the court all base salary payments due to Leslie Kaslof under his employment agreement with defendants and all unpaid installment amounts due under the asset agreement between the parties; 2) compelling defendants to indemnify the Kaslofs for their legal fees and costs relating to the Maine action, pursuant to Section 145(c) of the General Corporation Law of Delaware, Del. C. Ann. tit. 8, § 145(c) (1999) and N.Y. Bus. Corp. Law §§ 722-724 (McKinney 1998 Supp.); and 3) for indemnification pursuant to the provisions of the various agreements between the parties. By Order dated August 16, 1999, this motion was referred to the undersigned to prepare a Report and Recommendation.
By Notice of Motion dated September 24, 1999, defendant GHA moves to dismiss Counts Six, Fifteen, Sixteen, Seventeen, Eighteen, and Twenty of plaintiffs' complaint for failure to state a claim pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, and for failure to plead fraud and special damages with particularity. By Order dated December 22, 1999, that motion was also referred to the undersigned to prepare a Report and Recommendation.
I. FACTUAL BACKGROUND
As set forth in detail in this Court's Report dated July 13, 1999, familiarity with which is presumed, on October 15, 1996, plaintiffs entered into a number of agreements with defendant GHA in connection with the sale of the assets of Ellon U.S.A., a corporation formerly controlled by Leslie and Ralph Kaslof. According to plaintiffs' complaint, following the execution of the agreements, GHA allegedly defaulted on its obligations under the agreements. Specifically, plaintiffs allege that GHA failed to provide certain benefits promised to Ralph Kaslof in accordance with the consulting agreement he had with defendants (the "Consulting Agreement") and, in closing the Lynbrook, Long Island office of Ellon, violated certain provisions of the employment agreement entered into between Leslie Kaslof and defendants (the "Employment Agreement"). Plaintiffs also allege that defendants have failed to make certain payments due and owing under the asset purchase agreement entered into between the parties (the "Asset Agreement").
Although the parties attempted to negotiate a settlement of these claims prior to the filing of any litigation, GHA commenced a declaratory action in the United States District Court in Maine (the "Maine action") on October 27, 1998, seeking to void the agreements with the Kaslofs, and alleging as a basis the claim that Ralph Kaslof had sexually harassed a female employee of Ellon and that the plaintiffs had otherwise failed to perform their obligations under their respective agreements with GHA. On March 24, 1999, Magistrate Judge David M. Cohen from the District of Maine issued a Report recommending that the Maine action be transferred to this district pursuant to 28 U.S.C. § 1406(a) and/or 1631, or, in the altemative, that the case be dismissed for lack of personal jurisdiction and improper venue. The District Court in Maine subsequently adopted Magistrate Judge Cohen's recommendation, and the case was transferred to this district.
Thereafter, this Court, in its Report dated July 13, 1999, recommended that defendants' motion to dismiss plaintiffs' later-filed action be denied; that plaintiffs' action be permitted to proceed; and that defendants' claims in the Maine action be stayed and that defendants be permitted to proceed on their claims as counterclaims to plaintiffs' actions. By Order dated August 16, 1999, the district court adopted this Court's findings, but dismissed the transferred Maine action outright.
II. PLAINTIFFS' MOTIONS
Plaintiffs now contend in their pending motion that under the Asset Agreement and the Employment Agreement between the parties, defendants, prior to commencing the Maine action, were contractually obligated to deposit any disputed amounts into an escrow account until the dispute was resolved. (Pls.' Mem. of Law at 8). Plaintiffs also contend that under both the corporations laws of Delaware and New York, plaintiffs are entitled to complete indemnification for all expenses, including attorney's fees, that were reasonably incurred in connection with the Maine action. In the alternative, plaintiffs seek indemnification as to the Maine action based on provisions in the Employment and Consulting Agreements.
In response, defendants dispute plaintiffs' interpretation of the contractual provisions relating to the need to place the amounts in dispute in escrow. They also contend that plaintiffs are not entitled to indemnification for the defense of the Maine action under either state's law or under the agreements.
A. MOTION FOR ESCROW ORDER
Plaintiffs contend that under certain provisions in the Asset Agreement and in Leslie Kaslofs Employment Agreement, GHA is required to deposit into an escrow account all amounts in dispute under the Agreements. Specifically, plaintiffs cite to Section 6.07 of the Asset Agreement, which provides:
Set-Off. Any undisputed amounts owing by any Seller Party to Purchaser or any other of the Purchaser's Indemnified Persons under Section 6.01 and 7.04 may be satisfied by Purchaser . . . by setting-off such amounts against amounts owing [to Seller under various provisions of the agreements]. Any undisputed amounts owing by either Purchaser Party to Seller or any other of the Seller's Indemnified Persons under Section 6.02 and 7.04 may be satisfied by Seller . . . by setting-off such amounts against amounts owing, in the order in which such amounts become due, by any Seller Party under Section 6.01 or 7.04 hereof, as Seller may elect. . . . Any disputed amounts will be put into an escrow account until such dispute has been resolved.
(Asset Agreement § 6.07; Pls.' Hr'g Ex. 1).
Additionally, plaintiffs refer to Section 3(F) of the Employment Agreement, which
Set-Off. Any undisputed amounts owed by the Executive to the Company or any Affiliated Company may be satisfied by the Company (as set forth in Section 6.07 of Asset Agreement) by setting-off such amounts against all amounts due to the Executive under this Section 3 and any other amounts that the Company may owe to the Executive, except that the Executive shall at all times be entitled to receive his Base Salary payments. Any disputed amounts will be paid into an escrow account until such dispute has been resolved.
(Employment Agreement § 3(F); Pls.' Hr'g Ex. 4).
Based upon the last sentence of each of these provisions, plaintiffs argue that GHA is required to place into an escrow account all disputed funds that are allegedly owed to plaintiffs Ralph and Leslie Kaslof under the agreements.
Defendants argue that plaintiffs have taken this language out of context and that the paragraphs in which these provisions appear govern the mechanics of applying a set-off of monies owed to the Kaslofs under other specific contractual provisions relating to finders' and brokers' fees and do not apply to the current dispute. Defendants also argue that the language of the two provisions at issue in the Asset and Employment Agreements is not ambiguous; that parol evidence is not required to discern the clear intent of the parties; and that in relying on the final sentence in the set-off provisions without reference to the remainder of the provisions, plaintiffs are attempting to create an ambiguity where one does not actually exist. Moreover, even if these provisions were to apply, defendants contend that because plaintiffs have breached their duties under the contracts, GHA is excused from performance and thus has no duty to pay the disputed monies into escrow.
1. Applicable Law
Under New York law, the intent of the parties as expressed in a written contract governs, and the intent must be ascertained from the plain meaning of the language employed. See Painewebber Inc. v. Bybyk, 81 F.3d 1193, 1199 (2d Cir. 1996); Cruden v. Bank of New York, 957 F.2d 961, 976 (2d Cir. 1992). It is well-established that "`[a] contract should be construed so as to give full meaning and effect to all of its provisions,'" Painewebber Inc. v. Bybyk, 81 F.3d at 1199 (citations omitted), and "`[w]ords and phrases are given their plain meanitig.'" Id. (citations omitted); see also Federal Deposit Ins. Corp. v. Bernstein, 786 F. Supp. 170, 178 (E.D.N.Y. 1992). When the parties' intent can be determined from the plain language of the agreement, extrinsic evidence may not be considered. See Cruden v. Bank of New York, 957 F.2d at 976. "The parol evidence rule `is premised upon the idea that "when the parties have deliberately put their engagements into writing . . . it is conclusively presumed, that the whole engagement of the parties, and the extent and manner of their understanding, was reduced to writing. After this, to permit oral testimony, or prior or contemporaneous conversations, or circumstances, or usages [etc.], in order to . . . contradict what is written, would be dangerous and unjust in the extreme."'" Petereit v. S.B. Thomas, Inc., 63 F.3d 1169, 1177 (2d Cir. 1995) (quoting TIE Communications, Inc. v. Kopp, 218 Conn. 281, 288, 589 A.2d 329, 333 (1991) (citation omitted)), cert. denied, 517 U.S. 1119 (1996).
The determination of whether a contract is ambiguous is a question of law for the court. See Readco, Inc. v. Marine Midland Bank, 81 F.3d 295, 299 (2d Cir. 1996); Seiden Assocs., Inc. v. ANC Holdings, Inc., 959 F.2d 425, 429 (2d Cir. 1992). "[A]mbiguous language" is defined as language "which is "`capable of more than one meaning when viewed objectively by a reasonably intelligent person who has examined the context of the entire integrated agreement and who is cognizant of the customs, practices, usages and terminology as generally understood in the particular trade or business.'"" Seiden Assocs., Inc. v. ANC Holdings, Inc., 959 F.2d at 428 (citations omitted); accord Nowak v. Ironworkers Local 6 Pension Fund, 81 F.3d 1182, 1192 (2d Cir. 1996); see also Roberts v. Consolidated Rail Corp, 893 F.2d 21, 24 (2d Cir. 1989) (defining a provision as ambiguous "where a natural and reasonable reading of its language allows for two or more possible meanings") (citing Kemelhor v. Penthouse Int'l. Ltd., 689 F. Supp. 205, 212 (S.D.N.Y. 1988), aff'd, 873 F.2d 1435 (2d Cir. 1989)). A contract provision is not ambiguous, however, simply because the parties offer different interpretations of the language. See Sayers v. Rochester Tel. Corp. Supplemental Mgt. Pension Plan, 7 F.3d 1091, 1095 (2d Cir. 1993); Seiden Assocs., Inc. v. ANC Holdings, Inc., 959 F.2d at 428. "Nor does ambiguity exist where one party's view `strain[s] the contract language beyond its reasonable and ordinary meaning.'" Seiden Assocs., Inc. v. ANC Holdings, Inc., 959 F.2d at 428; see also Scelsa v. City University of N.Y., 76 F.3d 37, 41 (2d Cir. 1996) (citations omitted).
In determining whether a provision is ambiguous, the court must consider the entire contract in order to avoid adopting an interpretation that would result in an inconsistency between provisions or that would render a particular provision superfluous. See Cruden v. Bank of New York, 957 F.2d at 976; Monaghan v. SZS 33 Assocs., L.P., 875 F. Supp. 1037, 1043 (S.D.N.Y. 1995). Similarly, a basic principle of contract construction is that particular language prevails over general language in determining the meaning of a contract provision. See United States v. Local 6A, Cement and Concrete Workers, Laborers Int'l Union of North America, 832 F. Supp. 674, 679-80 (S.D.N.Y. 1993). Moreover, the court "`should construe ambiguous language against the interest of the party that drafted it.'" Painewebber Inc. v. Bybyk, 81 F.3d at 1199 (quotingMastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 62 (1995)).
If a contract provision is found to be ambiguous, a court may look to the acts of the parties and the circumstances surrounding the drafting of the disputed provision to determine the parties' intent. See Roberts v. Consolidated Rail Corp., 893 F.2d at 24; General Electric Capital Corp. v. Eva Armadora S.A., 821 F. Supp. 1530, 1545 (S.D.N.Y. 1993), rev'd on other grounds, 37 F.3d 41 (2d Cir. 1994). Thus, where a contract term is ambiguous, parol evidence may be admitted to explain, but not to modify, the terms of the agreement. See General Electric Capital Corp. v. Eva Armadora S.A., 821 F. Supp. at 1545-46; Stratford Group, Ltd. v. Interstate Bakeries Corp., 590 F. Supp. 859, 864 (S.D.N.Y. 1984).
2. Section 6.07 of The Asset Agreement
A close reading of the language of Section 6.07 of the Asset Agreement and a review of the provisions of all five of the agreements between plaintiffs and defendants leads this Court to conclude that the language of Section 6.07 is not ambiguous. In other words, the clear intent of the parties can be ascertained through the plain language of this provision.
The first sentence of Section 6.07 describes the rights of defendants as Purchasers to a set-off against any undisputed amounts owed to the Kaslofs as Sellers under two provisions of the Agreement, Sections 6.01 and 7.04. Thus, if the Kaslofs owed the defendants certain amounts and it was agreed that such amounts were in fact owed by the Kaslofs, GHA would be entitled under the set-off provision to set off these amounts against monies owed by GHA to the Kaslofs — in essence, by deducting these amounts from amounts that would otherwise be paid to the Kaslofs. The scope of the set-off provision is limited, however, by the language "under Section 6.01 and 7.04." This means that the set-off right of GHA only applies to undisputed amounts owed to it by the Kaslofs under Sections 6.01 and 7.04 of the Asset Agreement.
The second sentence of Section 6.07 provides a reciprocal set-off right for plaintiffs. Again, this set-off right is limited to undisputed amounts owed to the Kaslofs by defendants "under Section 6.02 and 7.04." Thus, if GHA owed the Kaslofs certain amounts and it was agreed that such amounts were in fact owed by GHA, the Kaslofs would be entitled to deduct these amounts from any monies the Kaslofs already owed to defendants. Finally, the last sentence of Section 6.07 states that "[a]ny disputed amounts will be put into an escrow account until such dispute has been resolved." (Asset Agreement § 6.07; Pl's. Hr'g. Ex. 1).
The question is whether this final sentence of Section 6.07 applies to a dispute over the payment of either the fixed or contingent amounts described in the Purchase and Sale section of the Asset Agreement, which is set forth in Article I. Although the phrase "[a]ny disputed amounts" in the final sentence of Section 6.07 is not modified or limited by any language contained within the sentence itself, the placement of this sentence at the end of the set-off provision section clearly indicates that this sentence was meant to apply to the disputed amounts referred to in the set-off provision. In other words, the scope of the escrow requirement was meant to be limited to those disputed amounts owed by either defendants or plaintiffs as a result of indemnification under Sections 6.01, 6.02, and 7.04.
Turning first to Section 7.04, that section provides that the parties agree to indemnify or hold each other harmless for any losses incurred that arise out of an agreement with any third-party for "brokerage or finders fees or other commissions" related to this transaction. (Asset Agreement § 7.04; Pl's. Hr'g. Ex. 1). Clearly, the Kaslofs' claims for payments of the fixed purchase price and contingent payments owed under Article I are not included in Section 7.04 since they have no relationship to brokers' or finders' agreements.
However, Section 6.02(a) of the Asset Agreement contains the following language:
Subject to the limitations set forth below . . . the Purchaser Parties [GHA] . . . shall indemnify the Seller Parties [the Kaslofs] and their respective directors, officers, employees and agents . . . against, and hold the Seller's Indemnified Persons harmless from, any and all Losses directly or indirectly incurred, suffered, sustained or required to be paid by any of the Seller's Indemnified Persons resulting from, relating to [or] arising out of:
(1) any breach of any of the representations or warranties of the Purchaser Parties set forth in Section 2.02 hereof or in any other Purchaser Document,
(2) any breach of any covenant or agreement made by either Purchaser Party under this Agreement or any other Purchaser Document, or
Assumed Liability is defined in Section 2(A) of the Bill of Sale.
(Id. § 6.02(a)) (emphasis added). In essence, this provision defines the scope of the Purchasers' indemnification obligation and requires the defendants to indemnify or pay to the Kaslofs any losses resulting from breaches of the representations and warranties in Section 2.02, any breach of the Asset Agreement, and any Assumed Liability. While the defendants' alleged failure to pay the full purchase price agreed to in Article I of the Agreement does not fall within either subsection (1) or (3) of Section 6.02, it is clearly a "breach of any . . . agreement" under the Asset Agreement for which defendants are subject to a claim for losses by the Kaslofs.
The scope of the Sellers' obligation is set forth in Section 6.01.
This reading of the indemnification provisions — Sections 6.01 and 6.02 — is consistent with other provisions in the Asset Agreement. Specifically, Section 6.08 of the Asset Agreement clearly provides that the parties' only recourse for redressing any injuries or losses incurred under the Agreement is through a claim for indemnification under Article VI. Section 6.08 of the Asset Agreement, entitled "Exclusive Remedy," provides:
Each party hereto agrees that the sole liability of any other party hereto for any claim with respect to the transactions contemplated under this Agreement shall be limited to indemnification under this Article VI.
(Asset Agreement § 6.08; Pls.' Hr'g Ex. 1). Thus, Section 6.08 of the Agreement provides that the exclusive remedy for disputes between the parties under the Agreement is through the indemnification provisions of Sections 6.01 and 6.02.
Section 6.08 contains a provision, however, that states "that the foregoing shall not be deemed to prohibit or restrict the availability of any equitable remedies (including specific performance) in the event of any breach [of the] circumstances described in Section 7.12." Section 7.12, which is entitled "Remedies," provides that:
The parties hereto acknowledge that the remedy at law for any breach of their obligations to effect the Purchase and Sale is and will be insufficient and inadequate and that the parties hereto shall be entitled to equitable relief, in addition to remedies at law. . . . Without limiting any remedies that Purchaser or Seller may otherwise have hereunder or under applicable law in the event the other refuses to perform its obligations under this Agreement to consummate the Purchase and Sale, such parties shall have, in addition to any other remedy at law or in equity, the right to specific performance.
(Id. § 7.12) Thus, Section 7.12 provides that in the event there is any breach of the Purchase and Sale provisions of the Agreement, which include the defendants' obligations to make payments to the Kaslofs, the parties have the right to any remedies provided for under Section 6.01 or 6.02, as well as any equitable remedy that may be available under applicable law, including specific performance.
Accordingly, a close reading of these sections in the context of the entire Asset Agreement makes it clear that under Section 7.12, plaintiffs may seek specific performance in the event of defendants' failure to pay under Article I, or plaintiffs may seek indemnification for the breach of the Purchase and Sale provisions of Article I under Section 6.02.
With this understanding, it becomes clear that under Section 6.07, the plaintiffs are entitled to a set-off of any undisputed amounts sought under the indemnification provisions of Section 6.02. However, since the amounts here are clearly in dispute, the final sentence of Section 6.07 comes into play, requiring that these disputed amounts be placed in escrow. To the extent that defendants argue that this language should be limited only to disputes relating to finders' and brokers' fees, their interpretation ignores the reference in Section 6.07 to Sections 6.01 and 6.02 and "strain[s] the contract language beyond its reasonable and ordinary meaning." Seiden Assocs., Inc. v. ANC Holdings, Inc., 959 F.2d at 428.
It should be noted, however, that to the extent that plaintiffs choose to seek to recover damages pursuant to the indemnification provisions of Section 6.02, and seek an order to escrow these disputed amounts under Section 6.07, the amount of plaintiffs' recovery and, consequently, the amount to be escrowed is subject to certain limitations set forth in Section 6.02(b)(1), (2), and (3) of the Asset Agreement. Section 6.02(b)(1) requires the Kaslofs to give written notice of a loss or claim within certain time periods specified in Section 6.05. It is unclear from the papers before this Court whether such notice was given.
More importantly, however, Section 6.02(b)(2) provides that the indemnification provisions of Section 6.02 do not apply unless the claimed loss exceeds $50, 000 and further provides that the Purchaser is not liable for the first $50, 000 of losses incurred. In addition to this $50, 000 deductible, Section 6.02(b)(3) provides an upper limit of $200, 000 for all claims under Section 6.02. Thus, to the extent that plaintiffs seek an order requiring defendants to place into an escrow account all monies allegedly owed to the Kaslofs under Article I, that amount cannot exceed $200, 000 and must first be reduced by the $50, 000 deductible. Although this Court respectfully recommends that the Kaslofs' motion for an order of escrow under the Asset Agreement be granted, this Court is not currently in a position to determine the exact amount to be placed in escrow. Accordingly, it is further recommended that plaintiffs submit a more specific statement as to the amounts claimed so that it can be determined what specific amounts are to be placed in escrow.
Although it is unclear why the parties would have agreed to limit defendants' liability in the event of a failure to pay under the Agreement, it is clear that the parties considered exempting certain types of claims from both the deductible and the loss cap, specifically exempting claims arising under clause (3) of Section 6.02(a), but not clause (2), which is the basis for plaintiffs' current claim.
3. Section 3(F) of The Employment Agreement
With respect to Section 3(F) of the Employment Agreement, however, the plain meaning of the last sentence here is not as clear. Like Section 6.07, Section 3(F) provides defendants with a right to a set-off against monies owed to plaintiff Leslie Kaslof. Unlike Section 6.07, however, Section 3(F) does not provide plaintiff with a reciprocal set-off right. This lack of a set-off right for plaintiff makes sense, given that the transfer of monies under the Employment Agreement is flowing from defendants to plaintiff Leslie Kaslof.
Also unlike Section 6.07, GHA's set-off right in Section 3(F) is limited by the following language: "except that the Executive shall at all times be entitled to receive his Base Salary payments." In other words, any undisputed amounts owed by Leslie Kaslof to GHA cannot be set off against the base salary payments owed by GHA to plaintiff. The last sentence of Section 3(F) is identical to that of Section 6.07 of the Asset Agreement.
Plaintiffs contend that the escrow requirement of the last sentence of Section 3(F) applies to all disputed amounts under the Employment Agreement, including Leslie Kaslofs base salary payments. Defendants, on the other hand, argue that the last sentence refers only to disputed amounts owed by plaintiff to GHA, and not to any disputed salary payments to plaintiff
Although the last sentences of Sections 6.07 and 3(F) are identically worded, the intent of the parties concerning the meaning of the last sentence of Section 3(F) is not clear given the wording and context of Section 3(F). Specifically, the inclusion of the provision protecting plaintiffs salary payments from a set-off by defendants renders the meaning of the last sentence ambiguous in that a reasonable reading of the language allows for both meanings urged by defendants and plaintiffs. Defendants' argument is supported by the fact that Section 3(F) provides a set-off right only for defendants against amounts owed by plaintiff On the other hand, plaintiffs' interpretation is supported by the fact that the final sentence is not explicitly limited to disputed amounts owed by plaintiff. Because this Court finds that the meaning of the final sentence of Section 3(F) is ambiguous, it has considered certain parol evidence offered by the parties to explain the circumstances surrounding the drafting of this disputed provision.
At the hearing held on January 21, 2000, plaintiffs presented the testimony of Robert A. Seibel, Esq., the attorney who represented the Kaslofs during the negotiation of the various agreements with GHA. He testified that Claude Baum, Esq., counsel for GHA, drafted the majority of the documents, submitting drafts for comment to Mr. Seibel (Tr. at 3), and that Mr. Wolfson, chairman of GHA, was largely responsible for negotiating the terms and conditions of the agreements. According to Mr. Seibel, Mr. Wolfson was "the man who really made the deal happen. . . . In fact, he's the man that kind of conducted all the negotiations . . . on the agreements." (Tr. at 6). The negotiations leading up to the final execution of the agreements lasted "at least six months." (Tr. at 7).
Although defendants were afforded the opportunity to present witnesses, they declined to do so based on their position that the contract was not ambiguous.
References to "Tr. at" refer to pages in the transcript of proceedings held before this Court on January 21, 2000.
With respect to Leslie Kaslofs Employment Agreement, Mr. Seibel testified that Mr. Wolfson represented to him that he "had substantial assets, very substantial assets, he was backed by other people with substantial assets" (Tr. at 12), and that "there was nothing to worry about; that the Kaslofs would be taken well — taken well care of" (Tr. at 13). Mr. Seibel testified that he was nevertheless concerned about what would happen if Mr. Kaslofs base salary was not paid or if there was a dispute about the salary payments. (Tr. at 17). Thus, according to Mr. Seibel, the sentence regarding disputed amounts was added at his insistence to Section 3 of the Employment Agreement, providing that if there was a dispute, the amounts in dispute would be deposited into an escrow account. (Tr. at 18-19).
Having reviewed the testimony of Mr. Seibel and the language of the provision, and construing the ambiguity of this provision against GHA as the drafter of the agreements, this Court finds that the parties intended the escrow requirement in the final sentence of Section 3(F) to cover disputed amounts as to Leslie Kaslofs base salary payments. Certainly, under the Employment Agreement, the parties recognized the importance of the base salary payments to Leslie Kaslof, so much so that they explicitly exempted base salary payments from the amounts against which set-offs could be applied. Given that the very next sentence in the provision requires the escrow of amounts in dispute, this Court finds that the parties bargained for and intended this provision to apply not only to disputes over amounts owed by plaintiff to defendants, but also to disputes relating to base salary payments to be made under the Employment Agreement to Leslie Kaslof.
Thus, this Court respectfully recommends that defendants be required to deposit into an interest-bearing escrow account all amounts currently in dispute that plaintiffs claim are owed to Leslie Kaslof as part of his base salary payments under the Employment Agreement.
To the extent that the defendants argue that their claim of breach by plaintiffs vitiates the contract and excuses them from performance under these provisions, the issue before this Court is who first breached these agreements. Plaintiffs allege that it was defendants' initial refusal to pay as required that constituted a breach of the agreements, and that to the extent that defendants have failed to comply with the contractual prerequisites of providing notice of the breach and opportunity to cure, any claim they may have relative to allegations of plaintiffs' breach is barred. Obviously, there are numerous factual issues that need to be resolved with respect to both parties' claims. Nevertheless, there is nothing in the escrow provisions at issue here that would suggest that the parties intended these escrow provisions to be inoperative in the context of a contract dispute. To the contrary, the very purpose of the provisions, as demonstrated by their language and the evidence surrounding the genesis of the Employment Agreement provision, was to provide a mechanism for dealing with payments owed when there was a dispute and to safeguard the parties' interests while the dispute was resolved. It is unreasonable, in light of the nature of the parties' business dealings, to conclude that this type of dispute was not contemplated or was specifically intended to be excluded from coverage under Section 6.07 of the Asset Agreement or Section 3(F) of the Employment Agreement.
B. INDEMNIFICATION UNDER STATE LAW 1. Delaware Law
Plaintiffs contend that since both GHA and Ellon are Delaware corporations, they are required under Section 145 of Delaware's General Corporations Law to indemnify any director, officer, employee, or agent of the corporation who has been successful on the merits or otherwise, in defending against an action brought by the corporation against the individual by reason of his position as a corporate officer, director, or employee. Del. C. Ann. tit. 8, § 145(b), (c); see also Witco Corp. v. Beekhuis, 38 F.3d 682, 691 (3d Cir. 1994). The statute provides for indemnification of expenses, including attorney's fees, reasonably incurred in connection with the defense of litigation. Del. C. Ann. tit. 8, § 145(b), (c). Section 145(c) has been held to be a "mandatory provision that applies to all Delaware corporations and grants an absolute right of indemnification in such situations." Witco Corp. v. Beekhuis, 38 F.3d at 691 (citations omitted).
Section 145(b) provides that:
A corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation . . . against expenses (including attorneys' fees) actually and reasonably incurred by the person in connection with the defense or settlement of such action or suit.
Del. C. Ann. tit. 8, § 145(b)(1999).
Section 145(c) provides that:
To the extent that a present or former director or officer of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding. . ., or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection therewith.
Del. C. Ann. tit. 8, § 145(c).
The purpose of this statutory provision has been expressed as follows:
[T]o `promote the desirable end that corporate officials will resist what they consider' unjustified suits and claims `secure in the knowledge that their reasonable expenses will be borne by the corporations they have served if they are vindicated.' . . . [I]ts larger purpose is `to encourage capable men to serve as corporate directors, secure in the knowledge that the expenses incurred by them in upholding their honesty and integrity as directors will be borne by the corporation they serve.'Galdi v. Berg, 359 F. Supp. 698, 701 (D. Del. 1973) (quoting Ernest L. Folk, III, The Delaware General Corporation Law, p. 98).
The key requirement of the provision, however, is "success on the merits or otherwise." Del. C. Ann. tit. 8, § 145(c). The Second Circuit has stated that "`[s]uccess is vindication,'" insofar as it relates to this section of the Delaware Corporation Law. Waltuck v. Conticommodity Serv's., Inc., 88 F.3d 87, 96 (2d Cir. 1996) (quotingMerritt-Chapman Scott Corp. v. Wolfson, 321 A.2d 138, 141 (Del.Super.Ct. 1974)). Although "vindication, when used as a synonym for `success' under § 145(c), does not mean moral exoneration," there must be a showing that a party "[e]scape[d] from an adverse judgment or other detriment, for whatever reason." Id. Thus, where a director has asserted "a technical defense" to his adversary's claim and, as a consequence, the case is dismissed, he is considered "`successful' in the palpable sense that he has won . . . whether or not the victory is deserved in merits terms." Id.
Plaintiffs contend that they were successful in the Maine action, first by persuading the district court in Maine to transfer the action to New York and then by persuading Judge Nickerson to dismiss the defendants' complaint upon transfer. However, under similar circumstances, the Delaware district court in Galdi v. Berg denied indemnification where the claim pending against a corporate officer in the District of Delaware was dismissed without prejudice but where two separate actions brought by the corporate plaintiff raising the same basic claim were still pending in the Western District of Wisconsin and in Delaware Superior Court. 359 F. Supp. 698. The Delaware District Court specifically noted that it had dismissed the derivative claim without prejudice "[b]ecause Scotten [the corporation] was actively pursuing in good faith its corporate claim for the . . . loss both in the Wisconsin federal court and the Delaware state court." Id. at 701. In denying the corporate officer's claim for indemnification, the court stated:
The dismissal without prejudice of Count V, the only count in which Power [the officer] was involved, did not vindicate Power either on the merits or by a technical defense, such as the statute of limitations. The charge was simply erased in this case because the charge against Power is being litigated by Scotten in other litigation. It was simply unnecessary from the standpoint of sound judicial administration to have the same issue pending in this court. Certainly, a dismissal without prejudice solely because the same charge is being litigated in other presently pending actions does not fall within the underlying purpose of § 145.Id. at 702.
In their Reply Memorandum, plaintiffs attempt to distinguish Galdi from the current case by arguing that in Galdi, the dismissal of Count V as to defendant Power was a "windfall" because Power never even made a motion to dismiss the count. The court, in dismissing the count as to Power's moving co-defendants, dismissed the count as to Power as well, thus disposing of the entire case. Plaintiffs contend that, by contrast, the transfer of the Maine action and its ultimate dismissal here were "the result of the plaintiffs' hard-won success in sustaining a technical defense through intense motion practice." (Pls.' Reply Mem. of Law at 9). They also point to the fact that the other defendants in Galdi, who actually pursued the motion for summary judgment and dismissal, were provided with indemnification for Count V even though it was dismissed without prejudice.
Although plaintiffs are correct in drawing a distinction between the court's treatment of Power and that of his co-defendants in Galdi, a close reading of the decision demonstrates that plaintiffs' arguments as to the reason for this distinction are not supported by the case itself First, to the extent that Power's co-defendants sought indemnification under Section 145(c) for the dismissal of Count V, it should be noted that the corporate entity, Scotten, did not oppose the co-defendants' application for indemnification, but did vigorously oppose Power's application because the corporation was actively pursuing that same claim against Power in another forum. There is nothing in the court's opinion to suggest that the corporation intended to pursue this claim in Count V against any of the other co-defendants. Similarly, there is nothing in the court's decision to suggest that the court, in denying Power's application for indemnification, was concerned with the fact that he had not actively moved for dismissal of Count V.
Rather, it is clear that the court was focused on the purpose of the indemnification provision. Citing the decision in Merritt-Chapman Scott Corp. v. Wolfson, 264 A.2d 358, 360 (Del.Super.Ct. 1970), where the court denied indemnification to corporate officers who were successful on one theory of liability but held liable on other theories, the court inGaldi stated that the "specific facts of the case must be examined" before it can be determined whether to extend the benefit of indemnification to defendants. Galdi v. Berg, 359 F. Supp. at 702. The court in Galdi concluded "that when a case is dismissed without prejudice so that the same issue may be litigated in another pending case, an indemnification award would be premature and contrary to the spirit of the statute." Id.
Although plaintiffs here clearly were successful in persuading the court in Maine to transfer the action to this district both on jurisdictional and venue grounds, at this point, it does not appear that the Maine court's decision has definitively resolved defendants' claims that the plaintiffs breached their respective agreements. Indeed, these same claims may still be pleaded as defenses and counterclaims in the pending action. Given that little, if any, discovery has occurred, it is unclear at this point, who will ultimately prevail on these issues. Thus, this Court finds that to award indemnification now before these issues are adjudicated would be premature. On the other hand, if defendants choose not to pursue these claims or if plaintiffs are ultimately successful on these issues, an indemnification award could be made at a later date under Section 145(c).
Accordingly, in keeping with the "spirit and purpose of the statute and sound public policy," Merritt-Chapman Scott Corp. v. Wolfson, 264 A.2d at 360, this Court respectfully recommends that plaintiffs' motion for indemnification under Section 145(c) of the Delaware General Corporation Law be denied without prejudice to renewal at a later date.
To the extent that defendants appear to argue that Section 145(c) does not provide a right to indemnification when a corporate officer is sued by the corporation, but only when he is acting on behalf of the corporation (Defs.' Mem. of Law at 11), this argument is without merit and contrary to the numerous decisions in this area See e.g., Galdi v. Berg, 359 F. Supp. 698; Green v. Westcap Corp., 492 A.2d 260 (Del.Super.Ct. 1985).
2. New York LawPlaintiffs also rely on New York law to support their application for indemnification. Specifically, they contend that, although GHA and Ellon are or were Delaware corporations and thus subject to Delaware law, the contracts at issue were negotiated, executed, and delivered in New York and the agreements specifically provide that New York law governs the interpretation of the agreements. Plaintiffs cite to a provision in the New York Business Corporation Law, Section 722(c), which provides for indemnification for attorney's fees and reasonable expenses incurred by officers and directors of a corporation who are parties to an action "by or in the right of the corporation to procure a judgment in its favor." N.Y. Bus. Corp. Law § 722(c) (McKinney 1998 Supp.); see also N.Y. Bus. Corp. Law §§ 723(a) and 724.
Again, however, even if New York law were to apply here, the statute requires success on the part of the claimant for indemnification. See N.Y. Bus. Corp. Law §§ 723(a), 724(a). While success on the merits is not required and judgment based on a technical defense will clearly suffice see Tichner v. Andrews, 193 Misc. 1050, 1052, 85 N.Y.S.2d 760, 762 (Sup.Ct. 1949), here the dismissal is merely a temporary procedural success. See discussion supra at pp. 17-20. The claims raised by defendants in the Maine action are not barred and defendants may proceed on these allegations as counterclaims here. In the absence of any authority to suggest that New York's indemnification provision has a broader, more expansive reach than that of Delaware, this Court respectfully recommends that plaintiffs' motion for indemnification be denied without prejudice as premature.
Although it is not clear that New York law governs the issue of indemnification of officers of a Delaware corporation, this Court does not reach the issue because it is clear that under both New York and Delaware law, the plaintiffs' application for indemnification is premature.
C. CONTRACTUAL INDEMNIFICATION
Plaintiffs also assert the right to indemnification based upon language in both the Consulting Agreement and the Employment Agreement. Both agreements contain identical provisions that state:
In the event any party finds it necessary to bring an action at law or other proceedings against the other party to enforce any of the terms hereof, the party prevailing in any such action or other proceeding shall be paid by the other party its reasonable attorneys' fees as well as court costs.
(Employment Agreement ¶ 13; Consulting Agreement ¶ 10; Exs. to Pls.' Mem. of Law).
Plaintiffs contend that since they "prevailed" in the Maine action, they are entitled to be reimbursed for all costs and fees incurred in obtaining the transfer of the Maine action and for fees and costs related to the dismissal of defendants' action in this district. Although defendants do not specifically address this contractual argument in their papers, this Court finds that a reasonable interpretation of the contract provision would be in conformity with the case law describing the nature of the success necessary before a "prevailing" party may seek reimbursement for costs and fees. Although plaintiffs may have prevailed in securing the transfer and subsequent dismissal of the Maine action, they have not prevailed in the sense that the claims that formed the basis of that action have not been finally resolved, whether on the merits or through a dismissal with no opportunity to replead the claims. Thus, this Court respectfully recommends that plaintiffs' request for indemnification under the contract provisions also be denied at this time as premature.
III. DEFENDANTS' MOTION TO DISMISS
By Notice of Motion dated September 24, 1999, defendants move to dismiss seven of the twenty causes of action set forth in plaintiffs' Amended Complaint Specifically, defendants move to dismiss Counts Six, Fifteen, and Sixteen for failure to plead fraud with particularity. In addition, they move to dismiss plaintiffs' causes of action for unjust enrichment (Court Six), for malicious prosecution (Count Seventeen), and abuse of process (Count Eighteen), arguing that plaintiffs have failed to state a claim, pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. Defendants also move to dismiss Count Twenty for failure to sufficiently plead prima facie tort.
A. FRAUD CLAIMS — RULE 9(b)
Defendants' first argument seeks to dismiss three of plaintiffs' causes of action for failure to plead fraud with the particularity required by Rule 9(b) of the Federal Rules of Civil Procedure. In particular, defendants argue that these claims are defective in that certain allegations are based on averments of "information and belief"
Rule 9(b) is an exception to the liberal pleading requirements of Rule 8 of the Federal Rules of Civil Procedure, requiring that when a complaint alleges fraud, "the circumstances constituting fraud or mistake shall be stated with particularity." Fed.R.Civ.P. 9(b); see Luce v. Edelstein, 802 F.2d 49, 54 (2d Cir. 1986) (citing Ross v. A.H. Robins Co., 607 F.2d 545, 557 (2d Cir. 1979), cert. denied, 446 U.S. 946 (1980)); The Limited, Inc. v. McCrory Corp., 645 F. Supp. 1038, 1041 (S.D.N.Y. 1986). Among those "circumstances" that must be alleged with particularity are the "time, place and contents of purportedly false representations, as well as the identity of persons making such representations." Carlucci v. Owens — Corning Fiberglass Corp., 646 F. Supp. 1486, 1489 (E.D.N.Y. 1986). On the other hand, "[m]alice, intent, knowledge, and other condition of mind of a person may be averred generally." Fed.R.Civ.P. 9(b). Thus, under the Rule, even though the requisite intent of the defendant need not be alleged with great specificity, see Cohen v. Koenig, 25 F.3d 1168, 1173 (2d Cir. 1994), the "actual fraudulent statements or conduct and the fraud alleged must be stated with particularity." Chill v. General Electric Co., 101 F.3d 263, 267 (2d Cir. 1996); accord Gold v. Morrison-Knudsen Co., 68 F.3d 1475, 1476-77 (2d Cir. 1995), cert. denied, 517 U.S. 1213 (1996).
Plaintiffs must also allege facts that give rise to an inference of fraudulent intent either: a) by "alleging facts to show that defendants had both motive and opportunity to commit fraud, or b) by alleging facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness." Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1128 (2d Cir. 1994); see also Barclay Arms, Inc. v. Barclay Arms Assocs., 144 A.D.2d 287, 288, 534 N.Y.S.2d 168, 169 (1st Dep't 1988) (noting that the practice of the New York courts to require specificity in the pleading of fraud has been codified in N.Y.C.P.L.R. 3016(b) because "the allegation of fraud necessarily raises a question respecting the subjective intent informing the charged party's conduct," which may be demonstrated through the objective circumstances of the fraud).
Thus, conclusory allegations of fraud are not sufficient under Rule 9(b), see id., and the Second Circuit has held that a court should not allow allegations of fraud to stand unless a plaintiff is both "in a position and is willing to put himself on record as to what the alleged fraud consists of specifically." Segal v. Gordon, 467 F.2d 602, 607 (2d Cir. 1972) (citation omitted). Similarly, courts have held that "[a]llegations of fraud cannot ordinarily be based `upon information and belief,' except as to `matters peculiarly within the opposing party's knowledge.'" Luce v. Edelstein, 802 F.2d at 54 n. 1 (quoting Schlick v. Penn — Dixie Cement Corp., 507 F.2d 374, 379 (2d Cir. 1974),cert. denied, 421 U.S. 976 (1975)).
In plaintiffs' Amended Complaint, they allege that they entered into the Asset Agreement with GHA and Ellon on October 15, 1996, in which defendants made certain promises, including the promise to pay plaintiff Ralph Kaslof the purchase price of $375, 000 in various installments over time; the promise to pay Ralph Kaslof a portion of Ellon's operating profits for a period of up to four years; the promise to issue restricted shares of GHA to both plaintiffs; and an agreement to assume various liabilities of Ellon U.S.A. (Pls.' Am. Compl. ¶ 17). In addition, the defendants agreed in the Asset Agreement to repay certain office loans made to Ellon U.S.A and to make a series of other payments to plaintiffs pursuant to the Consulting Agreement with Ralph Kaslof, the Employment Agreement with Leslie Kaslof, and two other agreements — a Marketing Agreement and a Shareholder Agreement. (Id. ¶¶ 18, 19). Plaintiffs specifically allege that they "were induced to enter into" these agreements "by various promises and representations" made by defendants GHA and Wolfson "leading up to, shortly before, or at the time of the execution and delivery" of the agreements. (Id. ¶ 18-2). These alleged "promises and representations" are set forth in paragraphs 18-2, 19-2, and 20 of the Amended Complaint and include, among others: a) a representation that Ralph Kaslof could retire and be assured of financial security for the rest of his life (id. ¶ 18-2(a); b) a representation that Leslie Kaslof would receive benefits at least equal to the benefit he would have received had he inherited Ellon U.S.A. (id. ¶ 18-2(b); c) that the principal place of business of Ellon would remain in the New York metropolitan area (id. ¶ 18-2(d)); d) that Ralph Kaslof would be employed on a part-time basis by New Ellon and be a member of the Board of Directors, receiving briefings on its operation every two months (id. ¶ 19-2(b), (c)); and e) that Leslie Kaslof would be employed by and receive various employment-related benefits. (Id. ¶ 20).
There is a numbering problem with plaintiffs' Amended Complaint. There appear to be two sets of paragraphs numbered "18 and 19." Citations to "¶ 18-2" or "¶ 19-2" refer to the paragraphs that appear second in the Amended Complaint on pages 6-7.
In Count Six, plaintiffs allege that the various representations enumerated in paragraph 18-2 were "reaffirmed immediately prior to the consummation of the . . . Agreements" by Wolfson and other representatives of the corporate defendants; that they "were false, and, upon information and belief, were known and intended to be false when made." (Id. ¶ 52). Count Six further alleges that "[u]pon information and belief, such representations were made with the intention they would be relied upon by plaintiffs . . . to induce plaintiffs" to enter into an agreement that defendants never intended to abide by so that they could "cheat [plaintiffs] and unjustly enrich themselves by thereafter depriving the [plaintiffs] of the benefits of their bargain through sham accusations and vexation." (Id. ¶ 53). Finally, plaintiffs allege that they did, in fact, rely upon the defendants' representations in entering into these various agreements. (Id. ¶ 54).
Again, there appears to be a numbering error in plaintiffs' Amended Complaint in that there does not appear to be a Count Five, but there are two Count Sixes; the first pleads unjust enrichment and the second, which is addressed here, pleads fraud.
Although the bracketed portions of the quoted material actually state "defendants" in the Amended Complaint, this Court believes that plaintiffs intended to refer to themselves in these areas.
A review of Count Six of the Amended Complaint demonstrates that plaintiffs have adequately alleged the content of the alleged misrepresentations and have identified Wolfson as one of the persons making the purported misrepresentations. However, they fail to identify who the "other authorized representatives of defendants GHA and New Ellon" are and they do not adequately allege which individual or individuals made which of the alleged misrepresentations. (Id. ¶ 52). It is clear that "[w]here multiple defendants are asked to respond to allegations of fraud, the complaint should inform each defendant of the nature of his alleged participation in the fraud." DiVittorio v. Equidyne Extractive Indus., Inc., 822 F.2d 1242, 1247 (2d Cir. 1987). Thus, to that extent, this Court agrees with defendants that more specificity is required by Rule 9(b).
Similarly, to the extent that plaintiffs allege that multiple individuals made these misrepresentations, the time period in which the misrepresentations were allegedly made — namely, during the negotiations leading to the agreements and again at the time of the signing — has not been adequately alleged. Although Rule 9(b) does not require that a specific date and time be alleged as to each misrepresentation, see Lehman Bros. Comm. Corp. v. Minmetals Int'l Non-Ferrous Metals Trading Co., No. 94 CV 8301, 1995 WL 608323, at 2-3 (S.D.N.Y. Oct. 16, 1995) (noting that the purpose of Rule 9(b) is to afford defendants fair notice of the fraud alleged against them and holding that "[w]here the misstatements are alleged to have occurred over a period of time, . . . the pleadings are not required `to provide the date and time of every communication.'" (quoting Pollack v. Laidlaw Holdings, Inc., No. 90 CV 5788, 1995 WL 261518, at 9 (S.D.N.Y. May 3, 1995) (holding that to require the plaintiffs to specify the date and time of every communication that occurred over a five-year period would be "impossible")), several courts have held that simply "outlin[ing] a four-month window during which all of the misrepresentations occurred . . . does not satisfy the pleading standard of rule 9(b)." Sklyon Corp. v. Guilford Mills, Inc., No. 93 CV 5581, 1997 WL 88894, at 2 (S.D.N.Y. Mar. 3, 1997); accord Doehla v. Wathne Ltd., Inc., No. 98 CV 6087, 1999 WL 566311, at 17 (S.D.N.Y. Aug. 3, 1999) (holding that an allegation that statements were made over the course of a four-month period is insufficient for Rule 9(b) purposes).
Here, plaintiffs have alleged that these series of misrepresentations were made throughout the negotiation of the various agreements, which Mr. Seibel testified encompassed a six-month period of time. To the extent that plaintiffs are alleging that various individuals made these misrepresentations, plaintiffs must identify the speaker or writer, specify those statements that he or she allegedly made, explain why they were fraudulent, and state when, where, and to whom these statements were made. See Doehla v. Wathne Ltd., Inc., 1999 WL 566311 at 17.
However, to the extent that defendants have argued that the fraud count should be dismissed in its entirety because plaintiffs have based certain allegations on "information and belief," this Court finds otherwise. A review of the fraud count demonstrates that wherever plaintiffs allege a fact on information and belief, the allegation refers to defendants' state of mind, their intentions, and the state of defendants' knowledge. Since the defendants' state of mind is a "matter peculiarly within [defendants'] knowledge," Schlick v. Penn — Dixie Cement Corp., 507 F.2d at 379, plaintiffs cannot be faulted for framing their complaint in this fashion.
To the extent that plaintiffs have failed to adequately identify the individuals allegedly making the false representations, and have failed to specifically identify when each individual allegedly made such a statement, this Court respectfully recommends that plaintiffs be given an opportunity to amend their complaint to state the nature of the fraudulent representations in Count Six with more particularity. Generally, courts do not dismiss a complaint outright for failure to comply with Rule 9(b) and, "[i]n fact, dismissal of a complaint for failure to satisfy Rule 9(b) without granting leave to amend may, under certain circumstances, be deemed a reversible abuse of discretion." Carlucci v. Owens — Corning Fiberglass Corp., 646 F. Supp. at 1490 (citing Luce v. Edelstein, 802 F.2d at 56-57).
With respect to Counts Fifteen and Sixteen, plaintiffs' allegations as to defendants' intent and state of mind based on information and belief are sufficient under Rule 9(b). In Count Fifteen, plaintiffs allege that from June 1998 to July 1998, Wolfson, in specified correspondence and conversations, made certain misrepresentations to plaintiffs. Among these misrepresentations, plaintiffs allege that Wolfson told them that GHA did not dispute that monies were owed to plaintiffs, and represented that if plaintiffs did not commence an action against defendants, plaintiffs would receive payment of certain amounts that defendants expected to receive from an unrelated securities offering or assets sale. (Am. Compl. ¶ 90). Plaintiffs further allege that defendants falsely represented that if plaintiffs were to institute a suit, it would adversely affect the transactions from which defendants expected to receive funds to pay plaintiffs. (Id. ¶ 90). Plaintiffs allege that based on these representations, they refrained from commencing suit; that the transactions were consummated, but contrary to Wolfson's representations, they received nothing from defendants. (Id. ¶¶ 92, 93). Plaintiffs allege that "upon information and belief" defendants made these representations knowing that they had no intention of paying plaintiffs. (Id. ¶ 94). Count Sixteen alleges these same initial facts and further alleges that at the time Wolfson made these representations, he had already authorized suit against plaintiffs in order to file the Maine action first. (Id. ¶¶ 100, 101).
These allegations sufficiently set forth the circumstances behind plaintiffs' second set of fraud claims, including the nature of the alleged misrepresentations, the timing of the statements, and the identity of the individual making the alleged misrepresentations. Accordingly, this Court respectfully recommends that defendants' motion to dismiss Counts Fifteen and Sixteen based on a failure to sufficiently plead fraud in accordance with Rule 9(b) be denied.
Defendants have raised other arguments seeking dismissal of Counts Six, Fifteen, and Sixteen for failure to state a claim. Those arguments are addressed infra at pp. 35-40.
B. FAILURE TO STATE A CASE OF FRAUD UNDER RULE 12(b)(6)Defendants also move to dismiss all three fraud counts based on plaintiffs' failure to plead the elements of fraud as required under New York law.
When deciding a motion to dismiss a complaint for failure to state a claim, pursuant to Federal Rule of Civil Procedure 12(b)(6), the court should dismiss a complaint only if it "appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief" Conley v. Gibson, 355 U.S. 41, 45-46 (1957);accord International Audiotext Network, Inc. v. American Tel. Tel. Co., 62 F.3d 69, 71-72 (2d Cir. 1995). "The issue is not whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims." Scheuer v. Rhodes, 416 U.S. 232, 236 (1974), overruled on other grounds, Harlow v. Fitzgerald, 457 U.S. 800 (1982); Villager Pond, Inc. v. Town of Darien, 56 F.3d 375, 378 (2d Cir. 1995), cert. denied, 519 U.S. 808 (1996).
The Second Circuit has stated that in deciding a Rule 12(b)(6) motion, a court must "accept as true the factual allegations of the complaint, and draw all inferences in favor of the pleader." Mills v. Polar Molecular Corp., 12 F.3d 1170, 1174 (2d Cir. 1993); accord Scheuer v. Rhodes, 416 U.S. at 236. In addition, the court must give plaintiffs' claims "a liberal construction." Johnson v. New York City Transit Auth., 639 F. Supp. 887, 891 (E.D.N.Y. 1986) (citing Haines v. Kerner, 404 U.S. 519, 520-21 (1972)), judgment aff'd in part, vacated in part, 823 F.2d 31 (2d Cir. 1987). After construing plaintiffs' claims liberally, a court may grant dismissal "only if it is clear that the plaintiff would not be entitled to relief under any set of facts that could be proved consistent with the allegations." Boddie v. Schneider, 105 F.3d 857, 860 (2d Cir. 1997); accord Olkey v. Hyperion 1999 Term Trust, Inc., 98 F.3d 2, 5 (2d Cir. 1996), cert. denied, 520 U.S. 1264 (1997).
In order to state a claim of fraud under New York law, plaintiffs must allege four elements: "`1) the defendant made a material false representation, 2) the defendant intended to defraud the plaintiff thereby, 3) the plaintiff reasonably relied upon the representation, and 4) the plaintiff suffered damage as a result of such reliance.'"Bridgestone/Firestone, Inc, v. Recovery Credit Servs., Inc., 98 F.3d 13, 19 (2d Cir. 1996) (quoting Banque Arabe et Internationale D'Investissement v. Maryland Nat'l Bank, 57 F.3d 146, 153 (2d Cir. 1995)); see also Katara v. D.E. Jones Commodities, Inc., 835 F.2d 966, 970-71 (2d Cir. 1987) (holding that there must be allegations that defendants made "a material, false representation, [with] an intent to defraud thereby," and that plaintiffs reasonably relied on the representation, resulting in injury to plaintiffs) (citing Van Alen v. Dominick Dominick, Inc., 441 F. Supp. 389, 403 (S.D.N Y 1976), aff'd, 560 F.2d 547 (2d Cir. 1977)).
Specifically, defendants first argue that plaintiffs have failed to plead any material misrepresentations under any of the three fraud counts, and further argue that the claims fail to allege intent to deceive on the part of defendants. Defendants also argue that plaintiffs' conclusory assertion that they "in fact relied upon such representations" is not sufficient to allege the element of reasonable reliance in the absence of a statement as to what acts plaintiffs took in reliance on these allegedly false representations. Finally, defendants argue that the only damages alleged under Count Six are for breach of contract, not fraud, and that under Count Fifteen, the only damages alleged are not cognizable damages. Accordingly, defendants seek dismissal of all three counts.
Turning first to defendants' argument that plaintiffs have failed to allege any false representations, plaintiffs cite to the allegations in paragraphs 18-2 and 53 of the Amended Complaint, which set out in detail various representations made by defendants to induce plaintiffs to enter into the agreements with GHA. Defendants argue that because these alleged statements are merely statements of a future intent to perform certain acts under the various agreements, they do not qualify as false representations for purposes of stating a claim of fraud. (Defs.' Mem. of Law at 6-7).
It is well-settled under New York law that "mere allegations of breach of contract do not give rise to a claim for fraud or fraudulent inducement." Sudwl v. Computer Outsourcing Servs., 868 F. Supp. 59, 61-62 (S.D.N.Y. 1994) (internal citations omitted); see also Orix Credit Alliance, Inc. v. R.E. Hable Co., 256 A.D.2d 114, 115, 682 N.Y.S.2d 160, 161 (1st Dep't 1998) (holding that a fraud claim that only restates a breach of contract claim may not be maintained; "a viable claim of fraud concerning a contract must allege misrepresentations of present facts (rather than merely of future intent) that were collateral to the contract and which induced the allegedly defrauded party to enter into the contract"). However, a claim of fraud may survive where the plaintiff can either demonstrate a legal duty separate from the defendants' duty to perform under the contract or can show a fraudulent misrepresentation collateral to or extraneous to the contract, or can establish special damages caused by the misrepresentation that cannot be recovered as contract damages. See Kulas v. Adachi, No. 96 CV 6674, 1997 WL 256957, at 9 (S.D.N Y May 16, 1997); see also Comtomark, Inc. v. Satellite Communications Network, Inc., 116 A.D.2d 499, 500, 497 N.Y.S.2d 371, 372 (1st Dep't 1986) (holding that "[a] contract action may not be converted into one for fraud by the mere additional allegation that the contracting party did not intend to meet his contractual obligation"). Thus, where a party has fraudulently induced another to enter into a contract or engages in conduct in an effort to defeat the contract, that extraneous conduct outside the scope of the contract may support a tort claim. See New York University v. Continental Ins. Co., 87 N.Y.2d 308, 316, 662 N.E.2d 763, 767-68, 639 N.Y.S.2d 283, 287-88 (1995).
Plaintiffs here have alleged that defendants made certain factual representations, apart from their promise to perform under the agreements, that plaintiffs relied upon and that turned out not to be true. Specifically, defendants represented that Ellon would remain in the New York metropolitan area. (Am. Compl. ¶ 18-2(d)). As part of that representation, defendants allegedly promised that Ralph Kaslofs part-time employment would be at the executive offices of Ellon on Long Island (id. ¶ 19-2(b)), and that Leslie Kaslofs employment was to be at the principal office of GHA "located in or near Lynbrook, New York or at such other location in or near the New York, New York metropolitan area." (Id. ¶ 20(b)). Plaintiffstallege that these representations were false when made; that prior to the time the deal was consummated, defendants knew they were not going to maintain the Long Island office; and that they made these representations regarding the Kaslofs' duties in New York in an effort to induce them into signing the agreements.
Where a complaint is based upon alleged misrepresentations of future intent, the plaintiff "must allege facts to show that the defendant, at the time the promissory representation was made, never intended to honor or act on his statement." Lanzi v Brooks, 54 A.D.2d 1057, 1058, 388 N.Y.S.2d 946, 948 (3rd Dep't 1976). While it may be that these representations also arguably reflect defendants' future intent regarding the location of the company, the plaintiffs have alleged a "present intent to deceive," Marcraft Recreation Corp. v. Francis Devlin Co., Inc., 506 F. Supp. 1081, 1087 (S.D.N.Y. 1981), sufficient to survive a motion to dismiss.
Similarly, with respect to Counts Fifteen and Sixteen, plaintiffs' allegations of misrepresentations extend beyond the claim that defendants falsely misrepresented their future intentions as to litigation. Defendants also represented that they did not dispute the Kaslofs' entitlement to the amounts claimed under the agreements and further represented that if plaintiffs did not commence suit, payment would be forthcoming from the expected unrelated business transactions. The defendants' representation that they did not dispute plaintiffs' claims is not a statement of future intent, and even if it were, the fact that a complaint against plaintiffs was allegedly being prepared at the same time the statements were being made sufficiently alleges present intent to deceive.
Defendants also claim that plaintiffs have failed to allege that defendants intended to deceive them. This Court disagrees. As noted above, plaintiffs have alleged that defendants knew at the time they made certain factual representations regarding the location of the company and the plaintiffs' entitlement to certain monies owed that the statements were false and intended to induce plaintiffs to take certain actions to their detriment.
Defendants also contend that plaintiffs' allegations that they relied on defendants' representations are insufficient to plead the element of reliance in their fraud counts. However, in their Amended Complaint, plaintiffs not only generally allege reliance, but they also allege the actions that they took in reliance on these statements. Specifically, in Count Six, plaintiffs allege that they were induced to enter into the agreements and did enter into the agreements in reliance on defendants' statements. In Counts Fifteen and Sixteen, plaintiffs allege that they refrained from taking any legal action against defendants in reliance on Wolfson's representation that there was no dispute as to monies owed to plaintiffs.
Similarly, to the extent that defendants argue that plaintiffs have failed to allege that they suffered losses as a result of the fraud beyond the breach of contract claims, this Court finds that plaintiffs have adequately alleged damages beyond their contract claims sufficient to survive a motion to dismiss at this time.
C. UNJUST ENRICHMENT
Defendants argue that plaintiffs' claim for unjust enrichment must also be dismissed because they have failed to distinguish this claim from their breach, of contract claim.
It is well-settled that "[t]he existence of a valid and enforceable written contract governing a particular subject matter ordinarily precludes recovery in quasi contract for events arising out of the same subject matter." Clark — Fitzpatrick, Inc. v. Long Island R.R. Co., 70 N.Y.2d 382, 388, 516 N.E.2d 190, 193, 521 N.Y.S.2d 653, 656 (1987); accord MacDraw, Inc. v. The CIT Group Equipment Financing, Inc., 157 F.3d 956, 964 (2d Cir. 1997); U.S. East Telecommunications, Inc. v. U.S. West Communications Serv's., Inc., 38 F.3d 1289, 1296 (2d Cir. 1994). As the New York Court of Appeals explained:
Briefly stated, a quasi-contractual obligation is one imposed by law where there has been no agreement or expression of assent, by word or act, on the part of either party involved. The law creates it, regardless of the intention of the parties, to assure a just and equitable result.Bradkin v. Leverton, 26 N.Y.2d 192, 195, 257 N.E.2d 643, 645, 309 N.Y.S.2d 192, 195 (1970). Thus, where a party performs under an existing contract, that party may sue for damages resulting from the other party's breach of the agreement, but "[i]t is impermissible . . . to seek damages in an action sounding in quasi contract where the suing party has fully performed on a valid written agreement, the existence of which is undisputed, and the scope of which clearly covers the dispute between the parties." Clark — Fitzpatrick, Inc. v. Long Island R.R. Co., 70 N.Y.2d at 389, 516 N.E.2d at 193, 521 N.Y.S.2d at 656.
Here, there is no dispute that the sale of the company to GHA and the roles and responsibilities of the Kaslofs were set out in written agreements, which defined all of the various duties and responsibilities of the parties. Although plaintiffs argue that they are seeking damages under a theory of unjust enrichment based on the benefits received by defendants from the "good will" of Ellon USA, which was established through the efforts of the Kaslofs, clearly the "good will" of the company was part of the value and benefit that defendants obtained in exchange for the purchase price of the company. As such, the issue of the value of the good will is governed by the terms of the contract and is not subject to a claim for damages under a theory of unjust enrichment.
Accordingly, this Court respectfully recommends that defendants' motion to dismiss plaintiffs' unjust enrichment claim be granted.
D. MALICIOUS PROSECUTION
In Count Seventeen of the Amended Complaint, plaintiffs allege that defendants initiated the Maine action "in bad faith, with vexatious intent, and without probable cause, solely in order to achieve a strategic advantage for GHA and New Ellon, and/or to harass and overburden the plaintiffs, and disable them in exercising their legitimate rights as creditors of GHA and New Ellon." (Am. Compl. ¶ 104). Plaintiffs further allege that the defendants' accusation of sexual harassment in the Maine action was "totally false" and malicious and that the Maine action was initiated without probable cause. Defendants move to dismiss the malicious prosecution claim, asserting that plaintiffs have failed to state a cause of action in accordance with the elements of state law.
Under New York law, the tort of malicious prosecution has four basic elements: 1) the initiation of a legal action by the defendant against the plaintiff; 2) commenced in the absence of probable cause or a belief that the action will be successful; 3) with malice; and 4) that terminates in favor of plaintiff. See O'Brien v. Alexander, 101 F.3d 1479, 1484 (2d Cir. 1996) (citing Broughton v. State of N.Y., 37 N.Y.2d 451, 457, 335 N.E.2d 310, 373 N.Y.S.2d 87, cert. denied, 423 U.S. 929 (1975)).
Here, plaintiffs have sufficiently alleged facts in support of each of the first three elements. They have alleged that defendants commenced the legal action in Maine "without probable cause" and "in bad faith, with vexatious intent," simply "to achieve a strategic advantage" or "to harass and overburden the plaintiffs." (Am. Compl. ¶ 104). However, plaintiffs have not alleged that the Maine action was terminated in their favor. Indeed, at the time the Amended Complaint was filed in August 1999, plaintiffs sought an injunction restraining defendants "from the further prosecution of the Maine action." (Am. Compl. ¶ 123). Although the Maine action was dismissed by the district court following its transfer from Maine, the underlying claims have not been determined on the merits and could be asserted as counterclaims in this action.
As the court in O'Brien v. Alexander noted, the leading case on the issue of the favorable termination requirement under New York law,Halberstadt v. New York Life Insurance Co., 194 N.Y. 1, 10-11, 86 N.E. 801 (1909), "appears to require either (1) an adjudication of the merits by the tribunal in the prior action, or (2) an act of withdrawal or abandonment on the part of the party prosecuting the prior action." 101 F.3d at 1486. Although, as the court in O'Brien recognized, subsequent cases have "cast doubt on the viability" of the second prong of theHalberstadt test id., it is clear that in this case, plaintiffs have not alleged, nor can they allege, that there has been a determination on the merits of the defendants' claims or a decision by defendants to abandon these claims.
Moreover, while a claim of malicious prosecution may be based on a civil action instituted against another party, see Rosario v. Amalgamated Ladies' Garment Cutters' Union, Local 10, 605 F.2d 1228, 1249 (2d Cir. 1979), there must be a showing of "special injury" as a result of the malicious prosecution. Engel v. CBS, Inc., 93 N.Y.2d 195, 201-05, 711 N.E.2d 626, 629-31, 689 N.Y.S.2d 411, 414-17 (1999). As the court inEngel noted:
The reason was that public policy requires that all persons should freely resort to the courts for redress of wrongs, [and] the law protects them when they act in good faith and upon reasonable grounds. . . . [Moreover,] malicious prosecution claims are not encouraged, and thus, without a clear and satisfactory showing that plaintiffs in the previous action lacked reasonable grounds, the case would be dismissed. . . . To hold otherwise would mean that malicious prosecution cases could be maintained for the unsuccessful prosecution of many of the actions which come upon appeal to this court, and a large proportion of unsuccessful actions could be followed by such an action, and litigation be thus interminably prolonged.93 N.Y.2d at 202, 711 N.E.2d at 629-30, 689 N.Y.S.2d at 415 (citations omitted).
The types of "special injury," beyond the ordinary inconvenience and expense incurred in responding to a frivolous and maliciously prosecuted action, that have been considered sufficient by New York courts include some type of "interference with his [or her] person or property, "Willard v. Holmes, Booth Haydens, 142 N.Y. 492, 495, 37 N.E. 480 (1894), "such as arrest, attachment, or injunction." Kalso Systemet, Inc. v. Jacobs, 474 F. Supp. 666, 670 (S.D.N Y 1979) (citations omitted); accord Mazza v. Hendrick Hudson Central School Dist., 942 F. Supp. 187, 195 (S.D.N.Y. 1996). In the absence of a showing that the person or property of the party seeking to bring a claim of malicious prosecution has been "interfered with by some incidental remedy, such as arrest, attachment or injunction," Sachs v. Weinstein, 208 A.D. 360, 366, 203 N YS. 449, 453 (1st Dep't 1924) (citation omitted), the New York courts have routinely dismissed such claims. See O'Brien v. Alexander, 101 F.3d at 1485 (noting that "New York courts have repeatedly stated that interference from a provisional remedy is a prerequisite to a malicious prosecution claim where the action upon which that claim is founded is a civil action") (citing cases).
Here, plaintiffs have failed to allege any special injury that they have incurred as a result of the filing of the Maine action. They simply seek compensatory and punitive damages plus costs and attorneys' fees. Nowhere in Count Seventeen do they even begin to suggest that they have suffered the special damages required under a claim for malicious prosecution.
Even if plaintiffs had alleged that they incurred costs and fees in defending against the Maine action, that alone does not qualify as the type of "special injury" required to pursue a malicious prosecution claim. Similarly, the fact that plaintiffs may have been delayed in asserting their rights in this lawsuit also does not satisfy their burden of proving special damages. As discussed infra at p. 48-50, the New York Court of Appeals has held that litigation fees and costs are sufficient to satisfy the special damages pleading requirement under a claim for abuse of process. See Parkin v. Cornell University, Inc., 78 N.Y.2d 523, 530, 583 N.E.2d 939, 943, 577 N.Y.S.2d 227, 230 (1991). However, the torts of malicious prosecution and abuse of process have different elements, and no authority could be found extending Parkin's holding in this regard to a malicious prosecution action. Moreover, Parkin involved a criminal proceeding where plaintiffs had faced criminal charges, thus satisfying the showing of interference from a provisional remedy — an element not alleged to be present in this case. However, as noted above, even if Parkin were extended and the plaintiffs' claim for litigation fees and expenses would suffice to support a cause of action for malicious prosecution, plaintiffs have failed to allege that the action terminated in their favor — an indispensable element in pursuing an abuse of process claim.
Accordingly, because plaintiffs have failed to allege that the Maine action was terminated in their favor, and in the absence of a more specific allegation as to some interference with their property or persons by way of attachment or otherwise, this Court respectfully recommends that plaintiffs' malicious prosecution claim be dismissed.
Defendants also argue that plaintiffs have not adequately alleged actual malice or lack of probable cause. Since this Court recommends dismissal on the grounds of failure to plead favorable termination and special injury, there is no need to address these arguments.
E. ABUSE OF PROCESSDefendants move to dismiss Count Eighteen of plaintiffs' Amended Complaint, which sets forth a claim of abuse of process, arguing that plaintiffs have failed to plead the essential elements of this tort.
An abuse of process claim is based on "the misuse or perversion of regularly issued process" to accomplish an improper purpose. Kalso Systemet, Inc. v. Jacobs, 474 F. Supp. at 670. There are three elements that must be shown to establish an abuse of process claim: "1) regularly issued process, either civil or criminal, 2) an intent to dotharm without excuse or justification, and 3) use of the process in a perverted manner to obtain a collateral objective." Curiano v. Suozzi, 63 N.Y.2d 113, 116, 469 N.E.2d 1324, 1326, 480 N.Y.S.2d 466, 468 (1984). "Process," as used in this context, means "a direction or demand that the person to whom it is directed shall perform or refrain from the doing of some described act." Williams v. Williams, 23 N.Y.2d 592, 596, 246 N.E.2d 333, 335, 298 N.Y.S.2d 473, 476 (1969) (citation omitted). In explaining the first element, the New York Court of Appeals has stated that the process must involve `an unlawful interference with one's person or property.'" Curiano v. Suozzi, 63 N.Y.2d at 116, 469 N.E.2d at 1326, 480 N.Y.S.2d at 468 (quoting Williams v. Williams, 23 N.Y.2d at 596, 246 N.E.2d at 335, 298 N.Y.S.2d at 476). Where the only process that issues in a case is a civil summons instituting a lawsuit, the courts have held that this "is not legally considered process capable of being abused."Id. (citing cases); Williams v. Williams, 23 N.Y.2d 592, 246 N.E.2d 333, 298 N.Y.S.2d 473.
Here, plaintiffs' complaint alleges that defendants commenced the Maine action and that process issued in that case, but nowhere do they allege any improper use of the process after it issued. See Curiano v. Suozzi, 63 N.Y.2d at 117, 469 N.E.2d at 1326, 480 N.Y.S.2d at 468 (noting that the "gist of the action for abuse of process" is "the improper use of process after it is issued") (quotation omitted). However, in a subsequent case, Parkin v. Cornell University, Inc., the New York Court of Appeals questioned whether the language in Curiano and earlier decisions referring to the improper use of process after it is issued "should be viewed as a strict and limiting definition of the tort or whether it is merely illustrative." 78 N.Y.2d at 530, 583 N.E.2d at 943, 577 N.Y.S.2d at 230. Parkin involved an abuse of process claim based on a prior criminal proceeding in which the plaintiffs had been fired from their jobs, charged with petit larceny and possession of stolen property, fingerprinted, and given appearance tickets to appear in Town Court. Plaintiffs alleged that the criminal proceeding was initiated by defendants to punish plaintiffs for their union activities. In questioning whether an abuse of process claim could be defeated in the absence of a showing of improper conduct after the issuance of process, the Court of Appeals noted that "nothing in this Court's holdings would seem to preclude an abuse of process claim based on the issuance of the process itself" Id. However, the Court did not resolve the issue, leaving it open for further consideration "because we conclude that this issue was not properly before the Appellate Division and could not serve as a predicate for dismissing the abuse of process cause of action." Id.
At least one decision issued after Parkin has held that "[i]n light of the Court of Appeals' observation in Parkin, proof of a defendant's actions after process has been issued is not required for an abuse of process claim." Giannattasio v. Artuz, No. 97 CV 7606, 2000 WL 335242, at 7 (S.D.N.Y. March 30, 2000); see also Granato v. City of New York, No. 98 CV 667, 1999 WL 1129611, at 7 n. 16 (E.D.N.Y. Oct. 18, 1999) (noting in a footnote that the Court of Appeals "has also expressed doubt that such language should be viewed as a limitation on the definition of the tort") (citing Parkin). These cases, like Parkin, involved an abuse of process claim brought in the context of a prior criminal proceeding where the process that was issued had resulted in the arrest of the plaintiff.
It does not appear to this Court that the Court of Appeals' observations in Parkin regarding the need for a showing of improper use of process after it was issued abrogate in any way the need to demonstrate "an unlawful interference with one's person or property."Williams v. Williams, 23 N.Y.2d at 596, 246 N.E.2d at 335, 298 N.Y.S.2d at 476. As the Court of Appeals in Williams noted, abuse of process has been described as "a `form of extortion"' and only certain types of writs can create an abuse of process cause of action, including "`attachment, execution, garnishment, or sequestration proceedings, or arrest of the person, or criminal prosecution, or even such infrequent cases as the use of a subpoena for the collection of a debt.'" 23 N.Y.2d at 596 n. 1, 246 N.E.2d at 335 n. 1, 298 N.Y.S.2d at 477 n. 1 (quoting Prosser, Torts (3d ed.) pp. 877-78). Where, as here, there has been no arrest or commencement of a criminal proceeding and no interference with plaintiffs' person or property in the form of an extraordinary writ, the filing of a civil action alone in the absence of further improper use of that process is insufficient to sustain a cause of action for abuse of process. See Curiano v. Suozzi, 63 N.Y.2d at 116-17, 469 N.E.2d at 1326, 480 N.Y.S.2d at 468; see also Butler v. Ratner, 210 A.D.2d 691, 693, 619 N.Y.S.2d 871, 873 (3d Dep't 1994) (dismissing cause of action for abuse of process for failure to state a claim, where the "process was both issued . . . and used . . . for its intended purpose)." Apart from instigating the Maine action, plaintiffs do not allege that defendants engaged in an abuse of that process nor is there any allegation that there has been any interference with plaintiffs' person or property.
In pleading litigation fees and costs incurred in defending against the Maine action, plaintiffs have satisfied the special damages pleading requirement under an abuse of process claim. See Parkin v. Cornell University, Inc., 78 N.Y.2d at 530, 583 N.E.2d at 943, 577 N YS.2d at 230; PI, Inc. v. Ogle, No. 95 CV 1723, 1997 WL 37941, at 2 (S.D.N.Y. Jan. 30, 1997).
Accordingly, this Court respectfully recommends that plaintiffs' abuse of process claim be dismissed.
F. PRIMA FACIE TORT
Finally, defendants also move to dismiss plaintiffs' cause of action alleging prima facie tort, arguing that, like the claims of malicious prosecution and abuse of process, plaintiffs' complaint fails to sufficiently allege the elements of this cause of action.
"Prima facie tort" has been defined as "the infliction of intentional harm, resulting in damage, without excuse or justification, by an act or a series of acts which would otherwise be lawful." ATI, Inc. v. Ruder Finn, Inc., 42 N.Y.2d 454, 459, 368 N.E.2d 1230, 1233, 398 N.Y.S.2d 864, 867 (1977) (quotation omitted); accord Kalso Systemet, Inc. v. Jacobs, 474 F. Supp. at 671. The four elements of prima facie tort include: "1) intentional infliction of harm, 2) causing special damages, 3) without excuse or justification, 4) by an act or series of acts that would otherwise be lawful." Curiano v. Suozzi, 63 N.Y.2d at 117, 469 N.E.2d at 1327, 480 N YS.2d at 469. Like the tort of malicious prosecution, plaintiffs seeking to bring a claim of prima facie tort must plead special damages. See id. As the court in Kalso Systemet, Inc. v. Jacobs noted, special damages "must be alleged with sufficient particularity to identify actual losses and be related causally to the alleged tortious acts." 474 F. Supp. at 671 (quotation omitted).
Defendants contend that plaintiffs' claim fails to allege specific intent to harm the Kaslofs and fails to plead special damages. (Defs.' Mem. of Law at 20-23). In response, plaintiffs argue that they have alleged special damages in the form of "severe emotional distress, embarrassment, damage to [Ralph Kaslof s] reputation, disruption in his private life, and further deterioration of his health" as a result of the "intentional," "baseless fabrications" by defendants of sexual harassment on the part of Ralph Kaslof. (Pls.' Mem. of Law at 10).
Regardless of whether these are or are not the types of "special damages" contemplated, it is beyond cavil that "New York Courts have consistently refused to allow lawsuits based on [a] prima facie tort predicated on the malicious institution of a prior civil action" such as here. Curiano v. Suozzi, 63 N.Y.2d at 118, 469 N.E.2d at 327, 480 N.Y.S.2d at 469 (citations omitted). The New York Court of Appeals explained that, as a matter of policy, it would not be prudent to allow parties to pursue these types of actions "for it would constitute a serious misuse of the cause of action for prima facie tort and could lead to inconsistent results, confusion of issues, and a waste of judicial resources." Id. The Court further noted:
[Prima facie tort] should not "become a `catch-all' alternative for every cause of action which cannot stand on its legs. . . ." By using it, plaintiffs seek to avoid the stringent requirements we have set for traditional torts, such as malicious prosecution, requirements which are necessary to effectuate the strong public policy of open access to the courts for all parties without fear of reprisal in the form of a retaliatory lawsuit.Id. at 118-19, 469 N.E.2d at 328, 480 N.Y.S.2d at 470 (quotations omitted).
Thus, for these reasons, it is respectfully recommended that plaintiffs' claim of prima facie tort be dismissed.
This Court respectfully recommends as follows:
1) Plaintiffs' motion to compel defendants to deposit in escrow all disputed amounts under the Asset Agreement be granted, subject to a further submission setting forth the bases for calculating the amounts to be placed in escrow;
2) Plaintiffs' motion to compel defendants to deposit in escrow disputed amounts concerning Leslie Kaslofs base salary payments under the Employment Agreement be granted;
3) Plaintiffs' motion to compel defendants to indemnify the Kaslofs for litigation fees and expenses under New York and Delaware law be denied, without prejudice to renewal at a later date;
4) Plaintiffs' motion to compel defendants to indemnify the Kaslofs under the Agreements also be denied, without prejudice at this time;
5) Defendants' motion to dismiss plaintiffs' fraud claims for failure to plead fraud with particularity in accordance with the requirement of Rule 9(b), and for failure to state a claim under Rule 12(b)(6), be denied as to Counts Fifteen and Sixteen. As to Count Six, it is respectfully recommended that plaintiffs be permitted to amend their claim to provide further specificity as to the identities of the GHA representatives who allegedly made false representations, the nature of those specific misrepresentations and the timing of those misrepresentations; and
6) Defendants' motion to dismiss the claims of unjust enrichment, malicious prosecution, abuse of process, and prima facie tort be granted.
Any objections to this Report and Recommendation must be filed with the Clerk of the Court, with a copy to the undersigned, within ten (10) days of receipt of this Report. Failure to file objections within the specified time waives the right to appeal the District Court's order. See 28 U.S.C. § 636(b)(1); Fed.R.Civ.P. 6(a), 6(e), 72; Small v. Secretary of Health and Human Servs., 892 F.2d 15, 16 (2d Cir. 1989).
The Clerk is directed to mail copies of this Report and Recommendation to the parties.