The opinion of the court was delivered by: JOANNA SEYBERT
In the instant case, plaintiff Iraj Lavian sues his nephew Shahram Haghnazari [hereinafter "Sam"] asserting a number of causes of action, both federal and state, in connection with a purported scheme whereby Sam fraudulently induced his uncle to invest substantial sums of money, and considerable time and labor, in a closely-held corporation named Hagh Prescription Headquarters, Inc. [hereinafter "HAGH"], only to be told by his nephew, more than two years after the initial investment, that he had no interest therein. Federal question jurisdiction is asserted under the Securities Exchange Act of 1934, as amended, The Fair Labor Standards Act [FLSA], and the Racketeer Influenced and Corrupt Organizations Act [RICO].
Pending before the Court are the defendants' motion to dismiss the amended complaint, and the plaintiff's cross-motion to add HAGH as a defendant to this action. In their motion to dismiss, the defendants assail plaintiff's federal causes of action, both substantively and for failure to plead fraud with particularity pursuant to Rule 9(b) of the Federal Rules of Civil Procedure, and further contend that the dismissal of these federal claims leaves the Court without subject matter jurisdiction to adjudicate plaintiff's common-law fraud and breach-of-contract claims. The defendants further direct the Court's attention to an earlier proceeding in this action before Judge Amon, on December 3, 1993, wherein plaintiff's original complaint was dismissed without prejudice to replead pursuant to Fed. R. Civ. P. 9(b). The defendants argue that the plaintiff has failed to heed Judge Amon's instructions concerning the pleading of fraud with particularity, and moreover has exceeded the scope of his leave of Court by now asserting a FLSA claim in the amended complaint, and by seeking to add HAGH as a defendant to this action.
The following facts are set forth in plaintiff's amended complaint, and therefore are accepted as true in analyzing the defendants' motion to dismiss.
Defendant Sam is the plaintiff's nephew and for a period of time prior to March 1990 resided as a guest in the plaintiff's home. Amended Complaint P 7. In or about April 1989, Sam, who is a licensed pharmacist, proposed to plaintiff the purchase of a pharmacy in Manhattan for which plaintiff would contribute funds needed for the purchase price and working capital and would become a 49% owner in the corporation which acquired the pharmacy (HAGH); Sam meanwhile assured his uncle of a position within the pharmacy by reason of which he would be "set for life." Id. P 8.
During the period between April 1989 and July 1990, Sam discussed with the plaintiff the prospect of purchasing various pharmacies. Ultimately, in July 1990, Sam and the plaintiff agreed in principle to the purchase of a pharmacy located at 369 First Avenue in Manhattan [the "Pharmacy"]. Id. P 9.
In reliance upon Sam's representations, plaintiff attended the closing on September 7, 1990 and delivered to Sam a bank cashiers' check for $ 45,250 payable to the order of Sam, which Sam then endorsed to the order of 371 First Avenue Corporation. Id. P 11. Thereupon, title to the Pharmacy was transferred to HAGH. At the closing, Sam also instructed the plaintiff to deliver an additional sum of $ 30,000 to him on or before September 10, 1990. Id. P 12.
In reliance upon Sam's representations, plaintiff, on or about September 10, 1990, withdrew the sum of $ 30,000 from his Insured Market Rate Account at Citibank and deposited that sum in Sam's checking account at Citibank, Account No. 70979568. On September 13, 1990, Sam issued a check in the amount of $ 23,782.50 to Hasan Chaudrey drawn on this account in payment of a portion of the purchase price for the Pharmacy. Id. P 13.
After the closing, plaintiff repeatedly inquired of Sam about receiving a certificate for shares representing a 49% interest in HAGH. On each occasion, Sam assured the plaintiff that the certificate for his 49% interest in HAGH was forthcoming but that it takes between six months and a year for the papers to be issued out of Albany. In early 1991, Sam delivered to the plaintiff a blank check that Sam had signed, drawn on account number 70979568 at Citibank, and stated to plaintiff that this check would guarantee the issuance to plaintiff of his shares in HAGH and the repayment to plaintiff of any loans made by plaintiff to Sam. Id. P 14.
In reliance upon Sam's representations, plaintiff agreed to await the delivery of the certificate representing his 49% interest in HAGH and, on three separate occasions, in September and October of 1990, made cash loans to Sam aggregating $ 7,000. In addition, at Sam's request, plaintiff used the cash flow generated by his separate jewelry business to pay the salary of Alex, Sam's brother, in the aggregate amount of $ 8,750, for Alex's work in the Pharmacy from September 15, 1990 through January 15, 1991. Id. P 16.
In or about January 1991, Sam asked the plaintiff if he could work for HAGH. Sam stated to plaintiff that HAGH's business required the supervision of a principal over clerks, stock persons, and cashiers, and needed the presence of a principal on Saturdays, when Sam's brother Alex took a day off, and on Sundays, when Sam took a day off. Sam stated to plaintiff that he would be paid for his services compensation that would reflect his status as a principal of HAGH. Id. P 16.
On or about February 1, 1991, plaintiff commenced work for HAGH and continued in such employment for approximately sixty hours per week until about January 31, 1992, and for approximately thirty-six hours per week thereafter until about January 15, 1993. During this time, plaintiff received no compensation for his services. Id. P 17. Rather, whenever plaintiff requested compensation, Sam told him that compensation could not be drawn because cash flow had to be dedicated to the purchase and maintenance of inventory. Id. P 18.
On or about January 15, 1993, plaintiff confronted Sam concerning Sam's failure to compensate him for his services and to repay his loans in view of the Pharmacy's prosperity. Plaintiff also demanded receipt of his share certificate. In response to these requests, Sam told the plaintiff that the Pharmacy would not pay him for his services, or repay his loans, and that the plaintiff was not a shareholder of HAGH, and lacked any interest therein. Sam further told the plaintiff that he should no longer come to work for the Pharmacy. Id. P 19. Plaintiff's subsequent demands for payment, including his proportionate share of HAGH's profits, likewise were refused by Sam. Id. P 20.
The amended complaint differs from the original complaint in a number of respects. First, the amended complaint names HAGH as a codefendant to this action; the original complaint did not name HAGH as a party defendant. Second, the amended complaint asserts the following claims: (1) common-law fraud against Sam; (2) federal securities fraud against both Sam and HAGH; (3) breach of contract against Sam; (4) breach of contract against HAGH; (5) a violation of the Fair Labor Standards Act against HAGH; and (6) a cause of action under civil RICO against both Sam and HAGH. Third, the amended complaint adds new factual allegations concerning the details of the alleged fraud and the claim for nonpayment of wages, and deletes several factual allegations from the original complaint that had pertained to the valuation of HAGH's assets.
I. Plaintiff's Cross-Motion to Add HAGH as a Defendant
Recognizing his failure to obtain leave of Court prior to naming HAGH as a codefendant in the amended complaint, the plaintiff has cross-moved to add HAGH as a party defendant retroactive to January 21, 1994, the date that the summons directed to HAGH in connection with the service of the amended complaint was filed with the Clerk of this Court. HAGH opposes this cross-motion on the ground that the plaintiff failed to procure a court order prior to service.
Rule 21 authorizes a federal district court to add parties "on motion of any party or of its own initiative at any stage of the action and on such terms as are just." Fed. R. Civ. P. 21. In the instant action, a retroactive joinder of HAGH effective upon its receipt of service would promote a merit-based resolution of the entire controversy between the parties, and would cause HAGH no prejudice because it ostensibly has been aware of this lawsuit, through Sam, since the commencement of the action. In addition, resolution of the claims against Sam will not be delayed insofar as discovery has not yet commenced. Accordingly, plaintiff's cross-motion to add HAGH as a party defendant is granted.
II. Defendants' Motion to Dismiss the Amended Complaint
A. Fed. R. Civ. P. 9(b): Pleading Fraud with Particularity
The defendants contend that this action should be dismissed because the plaintiff has failed to plead his allegations of fraud with particularity pursuant to Rule 9(b) of the Federal Rules of Civil Procedure. It was upon this ground that Judge Amon predicated her dismissal of the original complaint with leave to replead.
Rule 9(b) of the Federal Rules of Civil Procedure provides an exception to the general rule governing pleadings set forth in Fed. R. Civ. P. 8. In contrast to the liberal policy of Rule 8 which simply requires the pleading to set forth "a short and plain statement of the claim showing that the pleader is entitled to relief," Fed. R. Civ. P. 8(a), Rule 9(b) provides as follows:
In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge and other condition of mind of a person may be averred generally.
Fed. R. Civ. P. 9(b). Thus Rule 9(b) constitutes an exception to the general approach of the federal rules that assigns to the pleadings the limited function of providing summary notice to the other party of the event being sued upon, and entrusts the disclosure of facts to discovery. See 5 Charles A. Wright & Arthur R. Miller, Federal Practice and Procedure § 1202, at 69, 76 (2d ed. 1990). This exception for fraud serves the twofold purposes of "safeguarding potential defendants from lightly made claims charging commission of acts that involve some degree of moral turpitude," and assisting the defendant in preparing an answer to the allegation. Id. § 1296, at 577-78, 580. Nevertheless, Rule 9(b) should "be read in conjunction with Rule 8 [inasmuch as] a plaintiff is not required to prove his case in his complaint." GLM Corp. v. Klein, 684 F. Supp. 1242, 1247 (S.D.N.Y. 1988) (citing Schlick v. Penn-Dixie Cement Corp., 507 F.2d 374, 379 (2d Cir. 1974), cert. denied, 421 U.S. 976, 44 L. Ed. 2d 467, 95 S. Ct. 1976 (1975)).
The "circumstances constituting fraud" that Rule 9(b) requires to be particularized refers to such matters "as the time, place, and contents of the false representations, as well as the identity of the person making the misrepresentation and what he obtained thereby." Wright & Miller, supra, § 1297, at 590. Mere conclusory allegations of fraud within a complaint that "fail to specify the time, place, speaker, and . . . content of the alleged misrepresentations, lack the 'particulars' required by Rule 9(b)." Luce v. Edelstein, 802 F.2d 49, 54 (2d Cir. 1986).
Upon review of the allegations of fraud within the amended complaint, the Court finds that the plaintiff has pled these matters with sufficient precision to apprise the defendants of the claims against them and the acts relied upon as constituting the fraud charged. The allegations within the amended complaint provide a running chronology of the alleged fraudulent scheme, Sam's representations in the furtherance thereof, and the financial instruments and transactions employed in the scheme's perpetration. Further, the failure of the amended complaint to reiterate each allegation set forth in the original complaint does not detract from the overall effectiveness of the notice provided; rather, any conflicting representations may be tested through discovery and addressed by the court on motion for summary judgment. Moreover, the amended complaint does not assert that any individuals other than Sam made fraudulent representations or promises to the plaintiff; therefore Sam is not left to guess as to what representations are attributed to him. Thus, for example, with respect to the predicate acts of mail fraud and wire fraud relevant to the plaintiff's RICO claim, the defendants are sufficiently informed of the nature of the communications, the speaker, and their approximate time and place, to allow them to prepare their answer without confusion or prejudice. See Amended Complaint P 51; infra Discussion § B.4 (reproducing P 51 in substantive analysis of RICO count). Accordingly, the defendants' motion to dismiss the plaintiff's common-law fraud, federal securities fraud, and RICO causes of action pursuant to Rule 9(b) is denied.
B. Fed. R. Civ. P. 12(b)(6) Motion to Dismiss
1. Standards Governing Rule 12(b)(6) Motion ...