capability that induced PdP to enter into the distribution agreement. The complaint also alleges that after the agreement was signed, Kay notified the plaintiff in January of 1994 that he had "become partners" with Cherukuri and that Kay's company, KMI had changed its name to International Designer Fragrances, Inc. PdP alleges that Kay sought to amend the distributorship contract to reflect the name change. A written "contract amendment" document is annexed to the complaint and reads as follows: "The trading name of Kay Merchandising International Ltd. has changed in the contract and will forthwith be known as: International Designer Fragrances Inc." This document was signed by Barry Kay over the name International Designer Fragrances Inc. on March 12, 1994 and executed by the plaintiff on April 28, 1994. The complaint alleges that the name change was a misrepresentation and that KMI and IDF at all times remained separate and distinct entities. The complaint further alleges that Kay and Cherukuri sought to substitute IDF as a party to the distributorship so that Cherukuri could obtain a $ 70,000.00 loan that was contingent on it having the distributorship and using the goods that PdP shipped to KMI as security for the loan.
The complaint alleges that in July, 1994, Cherukuri falsely stated to PdP that he had no involvement with the goods that had been shipped to KMI. The complaint further alleges that at the time Cherukuri was disclaiming involvement with the goods, he and Kay were actually selling the goods on the "Israeli grey market" for $ 50,000, when the fair market value of which goods was allegedly $ 79,000.00. PdP alleges that sale of the goods at below market value on the Israeli grey market injured PdP's reputation as a "legitimate vendor of high-quality designer perfumes" and diverted profits on legitimate PdP goods.
A. Standard guiding a motion to dismiss
On a motion to dismiss for failure to state a claim, "the court should not dismiss the complaint pursuant to Rule 12(b)(6) unless it appears 'beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief'". Goldman v. Belden, 754 F.2d 1059, 1065 (2d Cir. 1985) (quoting Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957)); see also IUE AFL-CIO Pension Fund v. Herrmann, 9 F.3d 1049, 1052-53 (2d Cir. 1993). The Second Circuit stated that in deciding a Rule 12(b)(6) motion a Court may consider "only the facts alleged in the pleadings, documents attached as exhibits or incorporated by reference in the pleadings and matters of which judicial notice may be taken". Samuels v. Air Transport Local 504, 992 F.2d 12, 15 (2d Cir. 1993); see also Rent Stabilization Ass'n of the City of New York v. Dinkins, 5 F.3d 591, 593-94 (2d Cir. 1993) (citing Samuels, 992 F.2d at 15).
It is not the Court's function to weigh the evidence that might be presented at a trial, the Court must merely determine whether the complaint itself is legally sufficient, see Goldman, 754 F.2d at 1067, and in doing so, it is well settled that the court must accept the allegations of the complaint as true, see LaBounty v. Adler, 933 F.2d 121, 123 (2d Cir. 1991); Procter & Gamble Co. v. Big Apple Indus. Bldgs, Inc., 879 F.2d 10, 14 (2d Cir. 1989), cert. denied, 493 U.S. 1022, 107 L. Ed. 2d 743, 110 S. Ct. 723 (1990), and construe all reasonable inferences in favor of the plaintiff. See Scheuer v. Rhodes, 416 U.S. 232, 236, 40 L. Ed. 2d 90, 94 S. Ct. 1683 (1974); Bankers Trust Co. v. Rhoades, 859 F.2d 1096, 1099 (2d Cir. 1988), cert. denied, 490 U.S. 1007, 104 L. Ed. 2d 158, 109 S. Ct. 1642 (1989).
The Court is mindful that under the modern rules of pleading, a plaintiff need only provide "a short and plain statement of the claim showing that the pleader is entitled to relief", Fed. R. Civ. P. 8(a)(2), and that "all pleadings shall be so construed as to do substantial justice". Fed. R. Civ. P. 8(f).
B. Standard for pleading fraud
Fed. R. Civ. P. 9(b) states that fraud allegations must be stated with particularity, except that malice intent knowledge or other state of mind may be averred generally. The purpose of this Rule is to provide the defendant with fair notice of the claim, to protect the defendant's reputation against improvident charges of wrongdoing and to protect a defendant against strike suits. See O'Brien v. National Property Analysts Partners, 936 F.2d 674 (2d Cir. 1990). Plaintiffs are permitted to demonstrate the scienter element by inference, but they must plead a factual basis which gives rise to a strong inference of fraudulent. Id. Speculation and conclusory allegations do not fulfill the pleading requirements of Rule 9. Id.
Rule 9(g) requires that special damages must be specifically stated. Special damages are those that are not the necessary result of the complained of act and the plaintiff should allege facts upon which to predicate recovery of such damages. See Steinberg Press v. Charles Henry Publications, 68 N.Y.S.2d 793 (Sup. Ct. Kings Co. 1947).
C. The elements of fraud
Both defendants' motions seek dismissal of the fraud claims against them. Under New York law, the elements of fraud are (1) a misrepresentation (2) as to a material fact (3) which was false (4) and was known to be false by the defendant (5) that was made for the purpose of inducing the plaintiff to rely on it (6) that the plaintiff did rely upon (7) not knowing of its falsity (8) to his injury. See e.g. Cohen v. Koenig, 25 F.3d 1168 (2d Cir. 1994). The Court will review each of the challenged claims to determine whether these elements have been pleaded.
Both defendants argue that the complaint seeks special damages with regard to harm to reputation, but fails to describe how its reputation has been damaged. The defendants contend that in this way the complaint fails to meet the requirements of Rule 9(g), which provides that special damages must be specifically stated.
The Court declines to dismiss the complaint based on alleged pleading defects with regard to damages. Failure to state the correct measure of damages in a fraud action does not entitle the defendant to dismissal for insufficiency. See 60 N.Y.Jur.2d § 226 Fraud and Deceit (citations omitted).
The Court notes, however, that to recover damages for fraud, a plaintiff must establish that the misrepresentations caused him a direct and proximate injury, which is independent of other causes. Kregos v. Associated Press, 3 F.3d 656 (2d Cir. 1993). "New York law awards only 'out-of-pocket' expenses in fraud cases, entitling plaintiffs to damages solely for their actual pecuniary losses." Id. Neither speculative nor remote claims are recoverable in fraud. Id.; see also Del Cor Laboratories v. Cosmair, 169 A.D.2d 639, 564 N.Y.S.2d 771 (1st Dep't 1991) (out of pocket losses and consequential damages available in fraud action "but loss of future profits is noncompensable as a matter of law").
E. The sixth cause of action, which is against Kay only
Kay first argues that the sixth cause of action, which claims that Kay fraudulently induced PdP to enter the distribution agreement. The complaint alleges that Kay stated to PdP that KMI was capable of marketing PdP's products in the U.S. through a network of independent contractors and consultants. PdP alleges that this is a material misrepresentation in that KMI had no such marketing network and that the misstatement was made by Kay with the intent of having PdP rely upon it. The complaint also alleges that PdP shipped more than $ 100,000 in goods to KMI in reliance on the stated marketing capability and as a result has suffered damage to its U.S. market and to its business reputation. The Court finds that the complaint sets forth all of the elements of fraud, namely an intentional false material misrepresentation by the plaintiff, upon which the plaintiff relied resulting in damages.
Kay argues that the complaint merely alleges that he made statements to the plaintiffs about his intentions, expectations and anticipations with regard to marketing PdP's products, and that such allegations do not constitute actionable fraud. Kay is correct that mere puffery or opinions as to future events do not state a claim for fraud. See Cohen, supra, 25 F.3d 1168. However, where a concrete misrepresentation is made, it will support a fraud claim. Id.; see also Stewart v. Jackson & Nash, 976 F.2d 86 (2d Cir. 1992). The complaint alleges that Kay stated falsely that he had a network of independent consultants and contractors. Such a statement relates to an existing fact, not a future event, and therefore can support the fraud claim.
Kay also argues that PdP had no right to rely on his representations as to his marketing capabilities, when such information was readily available to PdP and could have been discovered had PdP investigated. In determining whether a party should be able to rely on the seller to make full disclosure in a particular case, the Second Circuit observed that there is a
tendency in New York to apply the rule of "superior knowledge" in an array of contexts in which silence would at one time have escaped criticism. [citations omitted]. 'It is no longer acceptable, if it ever was, to conclude in knowing silence, a transaction damaging to a party who is mistaken about its basic factual assumptions when . . . he would reasonably expect a disclosure.' Gaines Serv. Leasing Corp. v. Carmel Plastic Corp., 105 Misc. 2d 694, 697, 432 N.Y.S.2d 760 (N.Y.Civ. Ct. 1980), aff'd without opinion, 113 Misc. 2d 752, 453 N.Y.S.2d 391 (N.Y. App. Term 1981). New York has joined other jurisdictions in limiting the "privilege to take advantage of ignorance," Restatement [Second, of Torts] § 551 cmt. 1; accord Chiarella v. United States, 445 U.S. 222, 247-48, 63 L. Ed. 2d 348, 100 S. Ct. 1108 (1980) (Blackmun, J., dissenting), and has rejected "the dubious business ethics of the bargaining transactions with which deceit was first concerned," Prosser [Handbook on the Law of Torts] at 696; accord Gaines Serv., 105 Misc. 2d at 697.