plaintiff, while the remaining 51% of the outstanding share capital had been issued to Sam, and (iv) plaintiff was required to attend the closing of the purchase of the Pharmacy and to bring with him the sum of $ 45,250. Id. P 10.
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.
On March 19, 1993, plaintiff brought suit in the United States District Court for the Eastern District of New York asserting the following claims: (1) common-law fraud; (2) rescission; (3) negligent misrepresentation; (4) federal securities fraud; (5) violations of the federal racketeering statute (RICO); (6) unlawful practices under the New York General Business Law; (7) violations of New York State's racketeering statute; (8) a request for declaratory relief; and (9) a request for an accounting. Upon oral argument before Judge Amon, the original complaint was dismissed by Order dated December 3, 1993 for failure to plead fraud with particularity in accordance with Rule 9(b) of the Federal Rules of Civil Procedure. The Order also granted plaintiff "leave to amend the complaint by pleading facts underlying the alleged fraud with sufficient particularity to satisfy the requirements of Rule 9(b)," and further authorized the plaintiff to substitute counsel if he so elected. Order at 1 (docket entry #17). Subsequent to this Order, new counsel was procured and an amended complaint was filed.
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 to Dismiss
A district court should grant a motion to dismiss under Fed. R. Civ. P. 12(b)(6) for failure to state a claim only if "'it is clear that no relief could be granted under any set of facts that could be proved consistent with the allegations.'" H.J. Inc. v. Northwestern Bell Tel. Co., 492 U.S. 229, 249-50, 109 S. Ct. 2893, 2906, 106 L. Ed. 2d 195 (1989) (quoting Hishon v. King & Spalding, 467 U.S. 69, 73, 104 S. Ct. 2229, 2232, 81 L. Ed. 2d 59 (1984)). In applying this standard, a district court must "read the facts alleged in the complaint in the light most favorable" to the plaintiff, and accept these allegations as true. Id. at 249, 109 S. Ct. at 2906; see Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S. Ct. 1683, 1686, 40 L. Ed. 2d 90 (1974).
2. Rule 10b-5 Federal Securities Fraud Claims
In addition to assailing the plaintiff's pleading of fraud with particularity, which has already been discussed, the defendants offer two arguments in support of their motion to dismiss plaintiff's Rule 10b-5 claims. First, the defendants argue that the plaintiff's securities fraud claims assert a mere breach of contract in connection with the failure to issue stock, and therefore are not within the purview of the antifraud provisions of the federal securities laws.
Second, the defendants contend that the plaintiff's 10b-5 claims are barred by the statute of limitations.
With respect to the defendants' first contention, the Court disagrees with their narrow characterization of plaintiff's securities fraud claims insofar as the amended complaint unequivocally alleges that the defendants' failure to issue stock was in the furtherance of a scheme to appropriate from the plaintiff the monies that he had invested in HAGH. See Amended Complaint P 24. According to the amended complaint, Sam, intending to rescind his commitment, promised the plaintiff that HAGH would issue him stock in exchange for his capital investment therein. This allegation clearly comes within the purview of Rule 10b-5. See Sulkow v. Crosstown Apparel Inc., 807 F.2d 33, 36 (2d Cir. 1986) (alleged fraud in connection with failure to issue stock of closely-held corporation pursuant to a purchase agreement). Indeed, "[a] person who has made material misrepresentations in inducing another to part with something of value for the purchase of a security may not escape liability under Rule 10b-5 simply by refusing to issue a written instrument evidencing the security."
Id.; see also Luce, 802 F.2d at 55 ("Making a specific promise to perform a particular act in the future while secretly intending not to perform that act may violate Section 10(b) where the promise is part of the consideration for the transfer of securities."). Thus, the plaintiff's federal securities fraud claims are cognizable under Rule 10b-5.
The defendants next argue that the plaintiff's Rule 10b-5 claims are barred by the statute of limitations. According to the defendants, the plaintiff should have become aware of the possibility of fraud as early as September 1991 in view of his failure to receive a stock certificate evidencing his ownership interest in HAGH notwithstanding Sam's prior representations suggesting that the plaintiff should have expected to receive the stock certificates by that time. The defendants contend that the federal securities fraud claims therefore should have been brought one year later, that is, by September 1992.
The Supreme Court has held that "litigation instituted pursuant to § 10(b) and Rule 10b-5 . . . must be commenced within one year after the discovery of the facts constituting the violation and within three years after such violation." Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350, 111 S. Ct. 2773, 2782, 115 L. Ed. 2d 321 (1991) (emphasis added).
The three-year period of repose from the date of violation serves as a definitive cutoff for bringing a 10b-5 claim; no equitable tolling of this period is permitted. See id. Further, the one-year prong of this statute of limitations may be triggered through constructive or inquiry notice, as well as through actual notice. See Menowitz v. Brown, 991 F.2d 36, 41-42 (2d Cir. 1993). The plaintiff need not actually learn of the possibility of fraud to trigger the one-year limitations period; rather, the one-year prong becomes operative upon the date in which the plaintiff is placed on notice of those facts "'which in the exercise of reasonable diligence, would have led to actual knowledge'" of the possibility of fraud. Id. (quoting Kahn v. Kohlberg, Kravis, Roberts & Co., 970 F.2d 1030, 1042 (2d Cir.), cert. denied, 121 L. Ed. 2d 432, 113 S. Ct. 494 (1992)). The running of the earlier of the one-year and three-year prongs extinguishes a plaintiff's 10b-5 claim.
In the instant case, the Court regards Sam's repudiation of the prior agreement for the purchase of stock, which occurred on or about January 15, 1993, to be the triggering event for the commencement of the statute of limitations. To hold otherwise in the context of a closely-held corporation would allow a perpetrator of fraud to insulate himself from liability under Rule 10b-5 by accepting consideration for stock with the intent of never issuing it, making continuing representations to mitigate suspicion, and finally repudiating the stock-purchase agreement on its third anniversary. While the Court recognizes that in the typical commercial context where the parties are dealing at arms length, events could arise prior to repudiation (e.g., failure to issue stock certificates) to place the aggrieved party on inquiry notice of fraud (thus triggering the one-year prong of the statute of limitations),
where the determination of whether there exists a reasonable suspicion of fraud is colored by a family relationship and the heightened degree of trust that it may imbue,
the procedural posture indicates against concluding inquiry notice of fraud on a Rule 12(b)(6) motion to dismiss. Cf. In re Ames Dep't Stores, Inc. Note Litig., 991 F.2d 968, 980 (2d Cir. 1993) (genuine issue of fact concerning notice of fraud precluded summary judgment).
Employing January 15, 1993 as the date of violation, the plaintiff's Rule 10b-5 claim against Sam comes within both the one-year and three-year limitation periods. The 10b-5 claim against HAGH fails, however, under the one-year limitations prong because the plaintiff admits to knowledge of the alleged fraud, on or about January 15, 1993, see Amended Complaint P 19, but did not serve the amended complaint upon HAGH until January 21, 1994--more than one year later. Accordingly, Sam's motion to dismiss the federal securities fraud count pursuant to Rule 12(b)(6) is denied, while HAGH's motion is granted.
3. Fair Labor Standards Act [FLSA] Claim
Defendant HAGH moves to dismiss plaintiff's FLSA claim, which seeks to recover minimum wage pay for regular hours, as well as overtime pay, liquidated damages, and attorney's fees. In this claim, the plaintiff alleges that in response to Sam's request that he work in the business of HAGH as a principal, he was employed without compensation from approximately February 1, 1991 through January 15, 1993. See Amended Complaint PP 16-19, 40-41. HAGH argues that this claim must be dismissed; according to HAGH, the plaintiff--in view of (i) his allegation that he was a signatory, as officer of the corporation, on HAGH's corporate bank account at Citibank, see Amended Complaint P 51(c), and (ii) his belief that he was a 49% shareholder of HAGH and would be compensated for his work accordingly--either was not an employee within the meaning of the FLSA, or if an employee, was exempted from coverage under the FLSA as a principal employed in either an administrative or executive capacity. HAGH further argues that even if the plaintiff were entitled to protection under the FLSA, much of the relief he requests would be barred by the statute of limitations.
Section 13(a)(1) of the FLSA, 29 U.S.C. § 213(a)(1), exempts from the minimum wage and maximum hours provisions of the Act workers "employed in a bona fide executive administrative, or professional capacity," as those terms are "defined and delimited from time to time by regulations of the Secretary." 29 U.S.C. § 213(a)(1); see Reich v. State of New York, 3 F.3d 581, 587 (2d Cir. 1993), cert. denied, 127 L. Ed. 2d 537, 114 S. Ct. 1187 (1994). The putative employer--HAGH in this case--bears the burden of proving that the plaintiff's duties place him within an exemption to coverage. See Reich, 3 F.3d at 586. In view of the Act's remedial purposes, the FLSA exemptions are not expansively construed. See id.
The regulations to the FLSA make clear that representations made by an employer prior to an individual's commencement of employment are not dispositive to the determination of whether such individual is employed in an executive or administrative capacity. See 29 C.F.R. § 541.201(b)(1), (2). Rather, noting the insufficiency of titles as yardsticks, the regulations require "the exempt or nonexempt status of any particular employee [to] be determined on the basis of whether his duties, responsibilities and salary meet all the requirements of the appropriate section of the regulations . . . ." 29 C.F.R. § 541.20l(b)(2). Further, consistent with the fact-intensive nature of the inquiry, an employee's ownership interest in the enterprise by which he is employed will not automatically negate an employee's coverage under the Act. See 29 C.F.R. § 541.114.
29 C.F.R. § 541.1 establishes six specific criteria, all of which must be met (except for the fifth criterion in the case of an employee who owns more than a 20% interest in the employer), before an employee who earns less than $ 250 per week
may be exempted from coverage under the FLSA as an "executive" employee. The regulations provide as follows:
The term employee employed in a bona fide executive . . . capacity in section 13(a)(1) of the Act shall mean any employee: