The opinion of the court was delivered by: Spatt, District Judge.
MEMORANDUM DECISION AND ORDER
This case involves allegations by the Plaintiffs that the
Defendants engaged in securities fraud by selling assets of the
closely-held corporation OSCM One-Stop. com, Inc. ("OSCM").
Presently before the Court are motions by Defendants OSCM, AMCI
International, Inc. ("AMCI") and Gerard Conca to dismiss the
complaint for lack of subject matter jurisdiction under
Fed.R.Civ.P. 12(b)(1) and failure to state a claim under Rule
12(b)(6). Defendants Rosenfeld, Adler, Merrell, Brown, Activinet,
Ltd. and Activinet, S.A. have not yet appeared.
According to the complaint, Plaintiff Integrated Technologies
and Development ("ITD") is a Delaware corporation solely owned by
Plaintiff Israel Letzter with its principal place of business in
Tel-Aviv, Israel. In May 1998, ITD acquired nearly 1.9 million
shares of stock in OSCM, a Florida corporation with a principal
place of business in New York. At the same time, Letzter
personally acquired an additional 2.7 million shares of OSCM, and
Defendant Activinet, Ltd., an Israeli corporation of which
Letzter is majority owner, also acquired nearly 1.9 million OSCM
shares. The sole asset of OSCM is its 80% ownership in a company
called "CCM Computer Associates" ("CCM"), along with its option
to purchase the remaining 20% of CCM shares. OSCM's shares are
not registered with the Securities and Exchange Commission, and
carry restrictions on their sale.
In August 1999, Defendants Rosenfeld and Adler, who were
officers of Activinet, Ltd., transferred Activinet Ltd.'s OSCM
stock (Activinet, Ltd.'s only significant asset) to Defendant
Activinet, S.A., a party that is identified in the complaint only
as "a corporation formed and existing under the laws of a foreign
nation which is owned
by Mr. Rosenfeld and/or Mr. Adler." According to the Plaintiffs,
the transfer of Activinet Ltd.'s shares in OSCM to Activinet,
S.A. was made without adequate consideration, and without
Letzter's knowledge or consent, and without an Activinet, Ltd.
At some point in or about October 1999, Defendants Rosenfeld,
Adler, and Conca, all directors of OSCM, entered into an
agreement with Defendant AMCI International ("AMCI") and its
directors Defendants Brown and Merrell, to sell OSCM's ownership
in CCM — OSCM's only significant asset — to AMCI in exchange for
60% of AMCI's stock and $5,000,000 in cash. The Plaintiffs
contend that OSCM's sale of its CCM stock to AMCI was done
without notice to OSCM's shareholders, and that it served no
business purpose other than to deliberately "remove OSCM's assets
from any influence, oversight, or control by Letzter." The
Plaintiffs sought a preliminary injunction before this Court to
prevent the sale of OSCM's assets to AMCI, but later withdrew
that request after stipulating that the sale was consummated in
In November 1999, Letzter sought to remove the restrictions on
the sale of his OSCM stock and to put the shares up for sale.
OSCM's directors, Defendants Rosenfeld, Adler, and Conca, refused
to waive the restrictions on the sale of the OSCM shares held by
Letzter. According to the Plaintiffs, OSCM's directors had no
legal justification to refuse Letzter's request, and their
motivation was actually to manipulate OSCM's stock price and to
"ensure that Mr. Letzter's proposed sales of his stock not
adversely affect its market price."
The Plaintiffs then commenced this lawsuit, setting forth five
causes of action. The first cause of action alleges breach of
fiduciary duty against Defendants OSCM, Adler, and Rosenfeld,
relating to their refusal to remove the restrictions on the sale
of Letzter's OSCM shares. The second cause of action is a
shareholder derivative claim by Letzter for conversion and breach
of fiduciary duty against Adler, Rosenfeld, and Activinet, S.A.
relating to the sale of Activinet, Ltd.'s assets to Activinet,
S.A. The third cause of action is a derivative claim of
securities fraud against Adler, Rosenfeld, Conca, AMCI, Merrell,
and Brown, alleging that the sale was accompanied by fraudulent
filings with the SEC by OSCM that the sale was in OSCM's best
interests and by AMCI that AMCI had secured financing that
justified the share price it used in entering into the sale with
OSCM. The fourth and fifth causes of action allege breach of
fiduciary duties against OSCM and AMCI respectively.
Defendants OSCM, AMCI, and Conca now move to dismiss the
complaint for lack of subject matter jurisdiction and failure to
state a claim. They contend that this Court lacks diversity
jurisdiction over the case pursuant to 28 U.S.C. § 1332 on the
grounds that neither Letzter, a non-domiciliary of the United
States, nor ITD, a foreign corporation, have residence in the
United States so as to support diversity jurisdiction. In
addition, the Defendants contend that the sole federal cause of
action by the Plaintiffs — the securities fraud claim — fails to
state a cause of action separate from the breach of fiduciary
duty claim, and that this Court therefore lacks federal question
jurisdiction over the case pursuant to 28 U.S.C. § 1331.
The Plaintiffs contend that diversity exists, at least as to
ITD, as it is a Delaware Corporation operating overseas, and is
thus a citizen only of Delaware for diversity purposes. OSCM is a
Florida corporation with its place of business in New York.
Rosenfeld and Adler are citizens and residents of Israel, while
Conca, Merrell, and Brown are all U.S. citizens residing in New
York State. AMCI is a Utah corporation doing business in New
The court may not dismiss a complaint under Fed.R.Civ.P.
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. King
v. Simpson, 189 F.3d 284, 286 (2d Cir. 1999); Bernheim v.
Litt, 79 F.3d 318, 321 (2d Cir. 1996). The court must accept as
true all factual allegations in the complaint as true and draw
all reasonable inferences in favor of plaintiff. Id.; Jaghory v.
New York State Dep't of Educ., 131 F.3d 326, 329 (2d Cir. 1997).
The issue to consider is not whether a plaintiff will ultimately
prevail but whether the claimant is entitled to offer evidence to
support the claims. Villager Pond, Inc. v. Town of Darien,
56 F.3d 375, 378 (2d Cir. 1995). The court must confine its
consideration "to facts stated on the face of the complaint, in
documents appended to the complaint or incorporated in the
complaint by reference, and to matters of which judicial notice
may be taken." Leonard F. v. Israel Discount Bank of N.Y.,
199 F.3d 99, 107 (2d Cir. 1999); Hayden v. County of Nassau,
180 F.3d 42, 54 (2d Cir. 1999).
A. As to diversity jurisdiction
Federal courts have subject matter jurisdiction based on
diversity of citizenship in actions between (1) citizens of
different states or (2) citizens of a state and citizens of a
foreign nation. 28 U.S.C. § 1332(a). However, citizens of the
United States domiciled abroad are neither citizens of a state of
the United States, for purposes of § 1332(a)(1), nor citizens of
a foreign nation for purposes of § 1332(a)(2). Cresswell v.
Sullivan & Cromwell, 922 F.2d 60, 68 (2d Cir. 1990). Such
citizens may not maintain an action in federal court based solely
on diversity jurisdiction. Id. Moreover, diversity jurisdiction
requires that ...