482, 488, 420 N.E.2d 363 (1981). Therefore, Defendants' first
argument is insufficient to support a motion for summary
In support of their claim that Smolev's agreement is void
because it violates the Statute of Frauds, Plaintiffs rely on
American Federal Group Ltd. v. Rothenberg, 136 F.3d 897 (2d
Cir. 1998). Defendants argue that Rothenberg rendered all
non-written covenants not to compete void in New York. However,
Defendants Statute of Frauds defense is inapplicable to this
case. First, Rothenberg focused on a covenant not to compete
pertaining to a post-employment period. Here, Smolev's alleged
agreement concerned the period of her employment. Second,
Defendants failed to plead the Statute of Frauds as an
affirmative defense in their answer. Rule 8(c) of the Federal
Rules of Civil Procedure requires a party filing a responsive
pleading to set forth all affirmative defenses. "Failure to plead
an affirmative defense in the answer results in the waiver of
that defense and its exclusion from the case." Satchell v.
Dilworth, 745 F.2d 781, 784-85 (2d Cir. 1984) (citation
omitted.) Thus, neither of Defendants' arguments regarding
Plaintiffs' breach of contract and breach of the duty of good
faith and fair dealing claims are sufficient to support a motion
for summary judgment on Count Seven of the Complaint.
Misrepresentation of Fact/Fraud Claims
Counts Five and Nine of the Complaint charge Solomon and
Smolev, respectively, with misrepresentations of fact. Count
Twelve of the Complaint charges both Defendants with fraud.
Plaintiffs claim that Defendants misrepresented that they would
honor the terms of both the stock purchase agreement and their
respective employment agreements. Plaintiffs further claim that
both Defendants gave misleading factual information contained in
sections 2.27 and 2.29 of the stock purchase agreement. Count
Twelve's allegation of fraud arises out of the alleged
misrepresentations of fact. Defendants move for summary judgment
on the misrepresentation claim arguing that Plaintiffs cannot
identify any facts allegedly misrepresented. Defendants also
argue that summary judgment is appropriate on the fraud claim
because Plaintiffs may not simultaneously bring an action for
breach of contract and fraud.
To state a claim for misrepresentation, Plaintiffs must show
that the Defendants made a promise with a preconceived and
undisclosed intention of not performing it. See Deerfield Comm.
Corp. v. Chesebrough-Ponds, Inc., 68 N.Y.2d 954, 510 N.Y.S.2d 88,
502 N.E.2d 1003 (1986). Under New York law, there are five
elements required to prove fraud: (1) misrepresentation of a
material fact; (2) the falsity of that misrepresentation; (3)
scienter, or intent to defraud; (4) reasonable reliance on that
representation; and (5) damage caused by such reliance. Lind v.
Vanguard Offset Printers, Inc., 857 F. Supp. 1060, 1067 (S.D.N Y
1994) (citing May Dep't Stores Co. v. International Leasing
Corp., 1 F.3d 138, 141 (2d Cir. 1993); Katara v. D.E. Jones
Commodities, Inc., 835 F.2d 966, 970-71 (2d Cir. 1987); Jo Ann
Homes at Bellmore, Inc. v. Dworetz, 25 N.Y.2d 112, 119,
302 N.Y.S.2d 799, 250 N.E.2d 214 (1969)).
Plaintiffs identify specific deposition testimony that
allegedly demonstrates that Solomon and Smolev deliberately
withheld knowledge that Plaintiffs' customers, "were going to
source directly with nail polish fillers," in an attempt to
retain as much of the cash flow as possible resulting from these
transactions. See Plaintiffs' Statement ¶ 271. Therefore, the
claim that Solomon and Smolev disclosed confidential information
they acquired through the agreement is supported by evidence
obtained through discovery.
Nevertheless, Defendants maintain that Plaintiffs' evidence may
not serve as the basis for a fraud action. Defendants, citing
Oei v. Citibank, N.A., 957
320 F. Supp. 492, 519-20 (S.D.N.Y. 1997), argue that "where an express
contract exists governing the relations between the parties, a
theory of fraud or misrepresentation of the facts is not
available." However, not all fraud actions arising out of a
contractual relationship are precluded. Although 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," Sudul v. Computer Outsourcing Servs., 868 F. Supp. 59,
61-62 (S.D.N.Y. 1994) (citations omitted), a fraud claim may
survive, where "the allegations contained [in the fraud claim]
are separate and distinct from those giving rise to the breach of
contract claim." Tuck Indus., Inc. v. Reichhold Chems., Inc.,
151 A.D.2d 565, 566, 542 N.Y.S.2d 701 (2d Dep't 1989); see also
Smehlik v. Athletes and Artists, Inc., 861 F. Supp. 1162, 1171
(W.D.N.Y. 1994). Here, Plaintiffs' fraud claim is distinct from
their breach of contract claim. Plaintiffs' fraud claim is based
on an alleged misrepresentation of fact made by the Defendants
before the execution of the stock purchase agreement, while
Plaintiffs' breach of contract claim is based on Defendants'
alleged conduct during their employment. Therefore, Plaintiffs'
allegations may also support a fraud claim. Accordingly,
Defendants' motion for summary judgment on Counts Five, Nine and
Twelve is denied.
Breach of Fiduciary Duty
Counts Six and Ten of the Complaint charge Solomon and Smolev,
respectively, with breaching their fiduciary duty to Plaintiffs.
Defendants move for summary judgment based on the argument that
neither Solomon nor Smolev can be considered fiduciaries of
Plaintiffs. Plaintiffs contend that through both the stock
purchase and consulting agreement Solomon and Smolev acquired a
degree of knowledge and bud from the Plaintiffs that placed them
in a fiduciary relationship with the Plaintiffs.
An employer-employee relationship is not fiduciary in nature.
See Van Brunt v. Rauschenberg, 799 F. Supp. 1467, 1474 (S.D.N Y
1992); Ingle v. Glamore Motor Sales, Inc., 140 A.D.2d 493,
528 N.Y.S.2d 602, 604 (2d Dept. 1988), aff'd, 73 N.Y.2d 183,
538 N.Y.S.2d 771, 535 N.E.2d 1311 (1989). Moreover, an arms-length
lender-borrower or creditor-debtor contractual relationship
generally may not give rise to a fiduciary obligation on the part
of the lender or creditor. See Wiener v. Lazard Freres & Co.,
241 A.D.2d 114, 122, 672 N.Y.S.2d 8 (1998); Landes v. Sullivan,
235 A.D.2d 657, 660, 651 N.Y.S.2d 731 (3rd Dep't 1997); Banque
Nationale de Paris v. 1567 Broadway Ownership Assocs.,
214 A.D.2d 359, 360, 625 N.Y.S.2d 152 (1st Dep't 1995). A fiduciary
relationship does not need to be formalized in writing, however,
and any inquiry into whether such obligation exists is
necessarily fact-specific to the particular case. See Wiener,
241 A.D.2d at 122, 672 N.Y.S.2d 814. Thus, beyond what may be
memorialized in writing, to determine whether a fiduciary
relationship exists, a court may examine whether a party reposed
confidence in another and reasonably relied on the other's
superior expertise or knowledge. See Chester Color Separations
v. Trefoil Capital Corp., 222 A.D.2d 276, 636 N.Y.S.2d 613
(1995); Mandelblatt v. Devon Stores, Inc., 132 A.D.2d 162,
167-68, 521 N.Y.S.2d 672 (1987); Manufacturers Hanover Trust Co.
v. Yanakas, 7 F.3d 310, 318 (2d Cir.), motion to vacate
denied, 11 F.3d 381 (2d Cir. 1993). Thus, ongoing conduct
between parties may give rise to a fiduciary relationship that
will be recognized by the courts. See, e.g., Kern v. Robert
Currie Assocs., 220 A.D.2d 255, 632 N.Y.S.2d 75 (1995).
Here, Solomon and Smolev were not hired as traditional
employees of Plaintiffs. Rather, Plaintiffs reposed in Defendants
a degree of trust and confidence necessary for a fiduciary
relationship. Solomon and Smolev allegedly had intimate
formula and product knowledge of Plaintiffs' products. The
confidentiality and non-compete provisions of the various
agreements entered into by the parties also suggested a fiduciary
relationship. Furthermore, the remedy provisions contained within
the stock purchase agreement reads, in part:
The parties hereto acknowledge that the remedy at law
for any breach of the obligations undertaken by the
parties hereto may be insufficient and inadequate and
that the parties hereto shall be entitled to
equitable relief, in addition to remedies at law. In
the event of action to enforce the provisions of this
Agreement, Sellers and Buyers shall waive the defense
that there is an adequate remedy at law.
Therefore, sufficient evidence exists which could persuade a
reasonable trier of fact to find that a fiduciary relationship
existed between Plaintiffs and Defendants. Accordingly,
Defendants' motion for summary judgment on Counts Six and Ten is
Unfair and Deceptive Practices Claims
Count Eleven of the Complaint alleges' that the Defendants
engaged in unfair and deceptive trade practices. Defendants
maintain that this common law claim, requires deception of a
purchaser in a business transaction. Defendants then argue that
because Plaintiffs cannot show that its customers were misled
into purchasing items from Smolev, summary judgment is
appropriate. However, Defendants overlook a statutory basis for
New York General Business Law (GBL) § 349 prohibits
"[d]eceptive acts or practices in the conduct of any business,
trade or commerce or in the furnishing of any service." The
statute affords a private right of action to any person injured
by the deceptive acts or practices committed by a business. See
GBL § 349(h). Again, Smolev's and Lewis' deposition testimony
could persuade a reasonable trier of fact to find that Defendants
violated GBL § 349, to wit, Smolev allegedly attempted to sell
her own cosmetics while employed by Plaintiffs. Therefore,
Defendants' motion for summary judgment on Count Eleven is
Count Thirteen alleges that Defendants tortiously interfered
with Plaintiffs' prospective economic advantage. Defendants argue
that no evidence exists to prove that either Solomon or Smolev
competed with Plaintiffs. In order to show that a party
tortiously interfered with another's prospective economic
advantage, the injured party must prove: (1) Plaintiff conducted
business with a third party; (2) Defendants interfered with those
relations; (3) Defendants acted with the sole purpose of harming
the Plaintiff, or used dishonest, unfair, or improper means; and
(4) injury to Plaintiffs' relationship with the third party. See
Purgess v. Sharrock, 33 F.3d 134, 141 (2nd Cir. 1994).
Here, several contested material facts exist concerning
Smolev's relationship with Plaintiffs' clients, particularly with
Townley Jewelry. Furthermore, because Smolev's and Lewis'
deposition testimony suggests that Smolev had interacted with
certain of AM's customers to an extent that could support a claim
of tortious interference, Defendants motion for summary judgment
on Count 13 is denied.
Conspiracy and Aiding and Abetting Conspiracy
Count Fifteen alleges that Defendants entered into a conspiracy
to defraud Plaintiffs, and Count Sixteen alleges that Defendants
aided and abetted each other in executing the conspiracy.
Defendants argue that summary judgment is appropriate on these
claims because New York law does not recognize an independent
tort of civil conspiracy. See Sado v. Ellis, 882 F. Supp. 1401,
1408 (S.D.N.Y. 1995).
However an underlying actionable tort may sustain a cause of
civil conspiracy under New York law. See Baker v. R.T.
Vanderbilt Co. Inc., 260 A.D.2d 750, 688 N.Y.S.2d 726, 729
(1999). Furthermore, Plaintiffs may plead the existence of a
conspiracy in order to connect the actions of the individual
Defendants with an actionable, underlying tort, and establish
that those actions were a part of a common scheme. See Litras v.
Litras, 254 A.D.2d 395, 681 N.Y.S.2d 545 (1998). Here,
Plaintiffs have alleged multiple independent tortious claims.
Thus, a claim of civil conspiracy is proper under New York law.
Accordingly, Defendants motion for summary judgment on Counts
Fifteen and Sixteen is denied.
Count Seventeen alleges that Plaintiffs were unjustly enriched
by their actions at Plaintiffs' expense. In order to satisfy a
claim of unjust enrichment, a plaintiff must prove that: (1) a
party received a benefit, and (2) an injustice would result if
the defendant retained the benefit without paying for it. See
Seiden Assocs. Inc. v. ANC Holdings, Inc., 754 F. Supp. 37, 38
(S.D.N.Y. 1991). Defendants contend that the various employment
and stock agreements govern Plaintiffs' claims, and therefore an
action for recovery in quasi-contract cannot lie.
Plaintiffs argue that Federal Rule of Civil Procedure 8(e)(2)
specifically allows a party to plead alternative facts and
theories regarding the same subject matter. Thus, Plaintiffs
argue that they are permitted to allege breach of an implied
contract as well as breach of an express contract, because
Defendants received benefits from their inappropriate conduct,
and equitable relief may be sought where legal relief is
unavailable. Thus, under Rule 8(e)(2), Plaintiffs may allege
alternative theories, and Defendants' summary judgment motion on
Count 17 is denied.
II Defendants' Counterclaim
Breach of the Employment Agreement
Count One of Defendants' Counterclaim charges Plaintiffs with
breaching Solomon's employment agreement, and Count Two asks for
declaratory relief with respect to the same. Specifically,
Defendants allege that Solomon was fired without proper cause or
notice, and was not paid for his work in accordance with the
employment agreement. Defendants maintain that the express terms
of Solomon's employment agreement obligated AM to provide Solomon
with 30 days notice of termination for cause, and that AM
remained obligated to pay Solomon monthly compensation for the
remaining term set forth in the agreement, even after his
termination. Defendants argue that these actions constituted an
anticipatory breach of the employment agreement, and that because
the terms of the employment agreement are unambiguous, they are
entitled to summary judgment on Counts One and Two of their
Plaintiffs argue that Solomon's employment agreement itself was
terminated, rather than Solomon being terminated pursuant to the
employment agreement, because Solomon breached his employment
agreement by violating a non-compete clause with AM. The
non-compete clause includes, but is not limited to, actions taken
through wives, children, parents, siblings or any other
relatives, friends, trustees, agents or employees, subsidiaries,
holding companies, business entities, or affiliates. See
Defendants' Statement of Undisputed Facts, ¶ 62. Plaintiffs argue
that Solomon violated this clause by assisting his wife, Smolev,
in forming her own cosmetics and consulting companies, Myra
Smolev Consulting and Just Having Fun, Inc., and by attempting to
steal both clients and revenue from Plaintiffs.
"Where contractual language is susceptible to at least two
fairly reasonable interpretations, this presents a triable issue
of fact, and summary judgment is inappropriate." Ametex Fabrics
Inc. v. Just In Materials, Inc., 140 F.3d 101, 107 (2d Cir.
1998) (quoting Garza v. Marine
Transport Lines, Inc., 861 F.2d 23, 26, (2d Cir. 1988)). Here,
the extent of Solomon's involvement in Myra Smolev Consulting and
Just Having Fun, Inc., is difficult to ascertain. Plaintiffs have
presented evidence, including deposition testimony and letters
from Smolev's customers that could permit a rational trier of
fact to find that Solomon breached his employment agreement by
violating the non-compete clause. If so, Plaintiffs' termination
of the employment agreement may be justified, as a party is
relieved from contractual performance under a contract where
another party's breach is material. See In re Lavigne,
114 F.3d 379 (2d Cir. 1997). However, a literal reading of Smolev's
employment agreement does not specifically prohibit Smolev from
engaging in business endeavors. Thus, whether Solomon assisted
his wife in her enterprises, and whether his conduct amounted to
a breach of his employment agreement is one best left to a jury.
Therefore, Defendants' summary judgment motion for affirmative
relief on the first two counts of Defendants' Counterclaim is
Count Eight of Defendants' Counterclaim alleges that AM
breached its duty of good faith and fair dealing both in
purchasing RH and executing Solomon's promissory note. Count
Fifteen of Defendants' Counterclaim alleges that Plaintiffs
defaulted on the same instrument.
Defendants allege that Plaintiffs breached their duty to deal
in good faith because they attempted to exercise an offset
provision contained within the Note, and therefore sought to
avoid payment to Solomon under its terms. Specifically,
Defendants allege that Plaintiffs deliberately and unilaterally
entered into agreements with creditors in order to prevent
payment to Solomon under a subordination provision contained in
the Note. See Defendants' Brf. in Support of Motion for Partial
Summary Judgment at 11.
With respect to Count Fifteen of the Counterclaim, Defendants
allege that Plaintiffs' declaration on July 2, 1997, that it had
incurred superior indebtedness constituted an anticipatory breach
under the express terms of the Note. This declaration, according
to Defendants, also constituted a clear default on the terms of
the Note, entitling Solomon to summary judgment. In response,
Plaintiffs argue that the express terms of the Note entitle them
to unilaterally terminate their scheduled payments under the
Note, when those payments would be inferior and subordinate to an
agreement entered into with another party. See Plaintiffs' Brf.
in Opposition to Motion for Partial Summary Judgment at 11-12.
Plaintiffs also deny that Solomon's consent was required to
change the terms of the Note under the express terms of the Note,
or governing law. Sections 2.1 and 2.2 of the Note state, in
2.1 Superior Indebtedness. Anything in this Note to
the contrary notwithstanding, the indebtedness
evidenced by this Note shall be subordinate and
junior in right of payment, in the manner
hereinafter set forth, to indebtedness of Obligor
for money borrowed, whether outstanding at the date
of this Note or incurred after the date of the
Note. . . .
2.2 Suspension of Payment in Certain Circumstances.
Anything in this Note to the contrary
notwithstanding, no payment of principal or
interest on this Note may be made by Obligor at any
time where the making of such payment by Obligor
would be in violation of the terms or provisions of
any credit or loan documents relating to any
Superior Indebtedness or the holders thereof.
Subordination agreements are generally upheld. See, e.g., In re
Southeast Banking Corp.,