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WHITNEY HOLDINGS v. GIVOTOVSKY

December 24, 1997

WHITNEY HOLDINGS, LTD., Plaintiff, against SERGEI GIVOTOVSKY a/k/a SERGEI I. GIVETOVSKY, Defendant.


The opinion of the court was delivered by: KAPLAN

 LEWIS A. KAPLAN, District Judge.

 Plaintiff Whitney Holdings, Inc. brings suit against its former director, general counsel and founding shareholder, Sergei Givotovsky, for breach of fiduciary duty and for fraud. Simply put, Whitney alleges that Givotovsky personally performed services for and received compensation from a Whitney client in violation of his duty of loyalty to the firm. The fact that Givotovsky failed to disclose his individual arrangement with the client, as his fiduciary status allegedly required, forms the basis of Whitney's fraud claim.

 Givotovsky moves for summary judgment. He asserts that the Court lacks subject matter jurisdiction because the requisite amount in controversy is lacking, no admissible evidence exists to support the complaint, and the statute of limitations bars the action.

 Facts

 Plaintiff Whitney Holdings Inc. ("Whitney"), a small merchant and investment banking firm, was founded in 1984 by five shareholders, among them defendant Sergei Givotovsky. *fn1" Until his resignation, Givotovsky owned one-sixth of Whitney's outstanding shares and served as a director of the firm, as well as its secretary and general counsel. *fn2"

  Whitney's business includes providing financial and consulting services to clients and making equity investments in them. During 1987 and 1988, Whitney solicited the business of Audre Recognition System, Inc. ("Audre"), a computer imaging company. *fn3" Efforts by Givotovsky and others to induce Audre to retain Whitney for financial consulting services ultimately failed. However, based in part on Givotovsky's recommendation, Whitney decided in March 1988 to make a $ 23,000 equity investment in Audre. *fn4"

 On November 30, 1988, Givotovsky resigned from Whitney. *fn5" On the same day, and unbeknownst to Whitney, Audre confirmed by letter its offer for Givotovsky to become a director of Audre. *fn6" The letter confirmed also Audre's agreement to pay Givotovsky $ 5,000 in the form of a note in consideration for past consulting services and its agreement to accept the note in exchange for 300,000 shares of Audre common stock. *fn7" By letter dated December 14, 1988, Givotovsky confirmed the agreement with Audre. *fn8"

 In 1991, Whitney sold its Audre investment at approximately a tenfold profit. *fn9" Audre stock continued to appreciate substantially after that sale.

 Givotovsky sued Whitney in April 1994 in New York State Supreme Court for compensation he claimed was due him for identifying the Audre investment. At some point during the course of that litigation, Givotovsky produced a copy of Audre's November 30, 1988 letter. *fn10" Based on the letter, Whitney applied for leave to amend its answer and assert a claim against Givotovsky for diversion of a corporate opportunity. Givotovsky opposed the amendment, and Whitney withdrew its request, stating that it would pursue the matter in a separate lawsuit. *fn11"

 At the conclusion of the bench trial, Justice Charles Ramos ruled in favor of Whitney on Givotovsky's claim for compensation with respect to Whitney's Audre investment. He rejected Givotovsky's contract claim, finding that there was no agreement to pay him compensation. *fn12" Additionally, Justice Ramos rejected Givotovsky's quantum meruit claim, by which Givotovsky asserted that he was entitled to be paid the value of his services (a) as a finder, and (b) for services rendered. The court held that there had been no agreement to pay Givotovsky a finder's fee and, it appears, that Givotovsky rendered no services other than as a finder. *fn13" In the course of his remarks, Justice Ramos made clear his view that Givotovsky had breached his fiduciary duty by diverting an opportunity to provide consulting services to Audre. *fn14"

 On November 8, 1996, Whitney brought this action against Givotovsky asserting two causes of action. First, Whitney claims a breach of fiduciary duty in that Givotovsky (a) diverted the alleged corporate opportunity to perform consulting services for Audre, and (b) failed to disclose the opportunity to Whitney. Second, Whitney alleges fraud in that Givotovsky failed to disclose his compensation arrangement with Audre.

 Discussion

 Subject Matter Jurisdiction

 Defendant alleges that this Court lacks subject matter jurisdiction because plaintiff can prove damages of only $ 5,000, well below the $ 75,000 required by 28 U.S.C. ยง 1332. *fn15" The Court disagrees.

  The burden of proving jurisdiction lies with the party asserting it, in this case the plaintiff, but the party at this stage must make only a prima facie showing. *fn16" In the absence of an evidentiary hearing, the Court must "construe jurisdictional allegations liberally and take as true uncontroverted factual allegations." *fn17" The Court will dismiss for lack of jurisdiction on amount in controversy grounds only if it "appear[s] to a legal certainty that the claim is really for less than the jurisdictional amount." *fn18" In this Circuit, "even where [plaintiff's allegations] leave grave doubt about the likelihood of a recovery of the requisite amount, dismissal is not warranted." *fn19" Measured by this capacious standard, plaintiff has amply satisfied its burden.

 Breach of Fiduciary Duty Claim

 Under New York law, the impression of a constructive trust on the diverted assets is among the remedies for diversion of a corporate opportunity by a fiduciary. *fn20" The value of the diverted asset is the amount plaintiff would have received but for the defendant's wrongful interference, "including opportunities for profit on the accounts diverted from it through defendant's conduct." *fn21"

 In this case, Whitney's allegedly diverted corporate opportunity was the right to receive the note from Audre as compensation for past consulting services and the proceeds the note might have yielded -- namely, the 300,000 Audre shares. The fact that Givotovsky never received the 300,000 shares in exchange for the note is immaterial. The relevant consideration is that he had the right to receive the shares or some other form of compensation for the consulting services. Moreover, the fact that Givotovsky never received the shares does not mean that Whitney never would have received them or their equivalent. Assuming that Givotovsky was entitled to some form of compensation, measured by the value of the shares, then he arguably held that right in trust for Whitney's benefit. Assuming that the value of the shares could be shown to exceed $ 75,000, *fn22" there is no jurisdictional problem.

 Fraud Claim

 New York measures damages in fraud cases based on the out-of-pocket loss suffered by plaintiff, but does not include lost profits. *fn23" The damages "must be the direct, immediate, and proximate result of the fraudulent misrepresentations." *fn24" Therefore, the appropriate measure of damages on Whitney's fraud claim would be the out-of-pocket loss proximately caused by Givotovsky's allegedly fraudulent failure to disclose his deal with Audre.

 The complaint suggests that the alleged out-of-pocket loss to Whitney may have been substantial. The out-of-pocket loss to Whitney, if it prevails on this theory, would be at least the value of Audre's obligation to Givotovsky as of November 30, 1988, i.e., the value of a note convertible into 300,000 shares of Audre stock.

 The Court surely cannot say to a legal certainty that the note was worth $ 75,000 or less given its exchangeability for the stock. In fact, on July 31, 1988, Whitney agreed to purchase 40,776 units of an Audre private placement, each unit representing two shares and a warrant, for $ 23,000. Even assuming that each warrant was worth the same amount as a share, which of course is most unlikely, the per share value on that date would have been about 19 cents. *fn25" Thus, even on assumptions very favorable to the defendant, the 300,000 shares for which the note was exchangeable were worth at least $ 57,000, valued as of July 31, 1988, less the amount of the note. *fn26" Were the value of the warrants less than the value of the Audre shares, or if the value of Audre shares appreciated between July and November, plaintiff well might recover more than $ 75,000. Accordingly, defendant is not entitled to summary judgment for lack of subject matter jurisdiction. *fn27"

 Summary Judgment on the Merits

 Givotovsky argues also that he is entitled to summary judgment on the merits because (a) he denies having performed any consulting services for Audre, and thus that he diverted any corporate opportunity, and (b) the only evidence to support the corporate opportunity and fraud claims is hearsay and therefore inadmissible pursuant to Fed. R. Civ. P. 56(e). Whitney does not address these arguments, asserting instead that Givotovsky is collaterally estopped from relitigating the corporate opportunity and fraud issues by virtue of Justice Ramos's decision in the prior state court action.

 Issue Preclusion

 Whitney's issue preclusion argument is misguided. Under New York law, *fn28" an issue will not be precluded in a subsequent action unless "(1) the issue in question was actually and necessarily decided in a prior proceeding, and (2) the party against whom the doctrine is asserted had a full and fair opportunity to litigate the issue in the first proceedings." ...


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