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INTEGRATED TECHNOLOGY & DEVELOPMENT, INC. v. ROSENFIELD

May 24, 2000

INTEGRATED TECHNOLOGY & DEVELOPMENT, INC. AND ISRAEL LETZTER, PLAINTIFFS,
V.
ISRAEL ROSENFIELD, RAMI ADLER, GERARD CONCA, DAVID MERRELL, AMCI INTERNATIONAL, INC., MICHAEL C. BROWN, OSCM-ONE STOP.COM, INC., ACTTIVINET, LTD., AND ACTIVINET, S.A., DEFENDANTS.



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.

BACKGROUND

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. shareholder's vote.

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 October 1999.

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 York.

DISCUSSION

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 ...


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