United States District Court, Eastern District of New York
September 25, 2000
DS CAPITAL, INC., PLAINTIFF,
CARLISLE SPORTS EMPORIUM, INC., DEFENDANT.
The opinion of the court was delivered by: Spatt, District Judge.
MEMORANDUM OF DECISION AND ORDER
In this diversity action, the Plaintiff, DS Capital, Inc.
("DS") alleges causes of action for breach of contract and fraud
against the Defendant, Carlisle Sports Emporium, Inc.
("Carlisle"), resulting from a failed agreement between them
involving a $5.2 million financing deal. Presently before the
Court are motions by Carlisle to dismiss the complaint for
failure to state a claim under Fed.R.Civ.P. 12(b)(6) and to
transfer the case to the Southern District of New York.
According to the complaint, DS is a New York corporation with
its principal place of business in Suffolk County, New York. In
October 1999, DS entered into agreement with Carlisle, a
Pennsylvania corporation, to provide financing to Carlisle in the
amount of $5.2 million. Among the provisions of the agreement is
Upon your acceptance of this proposal, kindly execute
where noted below and remit to DS Capital a due
diligence fee in the amount of $37,800.00, and at
the closing of this transaction, borrower agrees to
pay to DS Capital a total
structuring fee from proceeds in the amount of $100,000.00. Further, borrower expressly agrees that
this structuring fee . . . is considered earned at
such time as DS Capital has provided a final offer to
close and client has accepted such offer in their
sole and absolute discretion . . . In the event that
this transaction is not consummated due to the
borrowers' willful act, neglect, or other contractual
breach the due diligence fee is considered earned by
DS alleges that Carlisle breached the agreement by "misstating
its financial condition, regulatory standing and general business
status," and "failed and/or refused to comply with Plaintiff's
request for documentation and has otherwise failed and/or refused
to provide to Plaintiff, DS Capital, Inc., truthful and accurate
documentation and/or information reasonable and necessary to
structure a credit facility in favor of the Defendant." However,
there is no allegation in the complaint that DS ever "provided an
offer to close" or that Carlisle ever accepted any such offer.
DS commenced this action in New York State Supreme Court,
Suffolk County, on or about December 15, 1999, alleging: (i) a
claim for breach of contract based on Carlisle's alleged
misrepresentation of its financial condition; (ii) a second cause
of action for breach of contract based on Carlisle's alleged
failure to provide necessary documentation; and (iii) a claim for
fraud based on the fact that Carlisle "represented to the
Plaintiff, DS Capital, Inc., that Defendant would not misstate to
Plaintiff its financial condition, regulatory standing, general
business status and would otherwise cooperate with the
Plaintiff." On all three causes of action, DS seeks damages only
for the loss of the structuring fee in the sum of $112,800.
Carlisle now moves to dismiss the complaint pursuant to
Fed.R.Civ.P. 12(b)(6) for failure to state a claim on the grounds
that the contract did not require payment of the restructuring
fee unless and until a "final offer to close" was provided by DS
and accepted by Carlisle. In addition, Carlisle alleges that
venue does not lie in the Eastern District of New York under the
provisions of 28 U.S.C. § 1391, as it is neither a district in
which Carlisle resides, nor where a substantial part of the
events or omissions giving rise to the claim occurred.
In support of its motion, Carlisle attaches an amended copy of
the Agreement, in which the parties purportedly agree to lower
the due diligence fee to $25,000; to raise the structuring fee
to $112,800; and to require the return of the due diligence fee
to Carlisle under certain circumstances. In response, DS does not
argue that the amended agreement should not be considered by the
Court, and indeed, DS claims damages in its complaint of $112,800, the exact amount of the restructuring fee in the amended
A district court may grant a motion to dismiss for failure to
state a claim only if it appears beyond doubt that the plaintiff
can prove no set of facts in support of his claim which would
entitle him to relief. Tarshis v. Riese Organization,
211 F.3d 30 (2d Cir. 2000). The court must accept all factual allegations
in the complaint as true and draw inferences from those
allegations in the light most favorable to plaintiff. McGinty v.
State of New York, 193 F.3d 64, 68 (2d Cir. 1999); Jaghory v.
New York State Dep't of Educ., 131 F.3d 326, 329 (2d Cir. 1997).
The district 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. Tarshis, 211
F.3d at 39; Leonard F. v. Israel Discount Bank of New York,
199 F.3d 99, 107 (2d Cir. 1999).
Here, the agreement between DS and Carlisle is clear and
The "structuring fee" is to be considered earned by DS only upon
DS providing a final offer on the financing package and upon
Carlisle accepting that offer. There is no allegation in the
complaint that DS ever tendered such an offer or that Carlisle
ever accepted one, and thus, the complaint fails to state a cause
of action for breach of contract entitling DS to damages in the
amount of the structuring fee.
In its brief, DS confuses the situation by using the terms "due
diligence fee" and "structuring fee" interchangeably. For
example, in the same paragraph, separated by only one sentence,
DS states that "The Agreement dated October 22, 1999 provides
that the structuring fee will be deemed earned . . . in the
event that this transaction is not consummated as a result of
Borrower's willful act, neglect, or other contractual breach,"
and then that "the Agreement dated October 22, 1999 provided
that the due diligence fee will be considered earned by the
Plaintiff . . . in the event that this transaction is not
consummated as a result of Borrower's willful act, neglect, or
other contractual breach." (Emphasis added). However, the terms
of the agreement are clear, and DS is entitled to consider only
the "due diligence fee" to be earned upon a willful breach by
Carlisle. Even assuming that DS is able to demonstrate such a
breach, the due diligence fee of either $37,800 stated in the
original contract or $25,000 in the amended contract is well
below the $75,000 amount-in-controversy threshold for diversity
jurisdiction under 28 U.S.C. § 1332(a).
Moreover, it is a settled principle of New York State law that,
in order to allege a claim of fraud arising out of a contractual
relationship, a plaintiff must not only allege the basic elements
of fraud — misrepresentation of a material fact, scienter,
justifiable reliance on those misrepresentations, and injury —
but also either "(1) a legal duty separate and apart from the
contractual duty to perform; (2) a fraudulent representation
collateral or extraneous to the contract; or (3) special damages
proximately caused by the fraudulent representation that are not
recoverable under the contract measure of damages."
Bridgestone/Firestone, Inc. v. Recovery Credit Services, Inc.,
98 F.3d 13, 20 (2d Cir. 1996); Pacs Industries v. Cutler-Hammer,
Inc., 103 F. Supp.2d 570, 571-72 (E.D.N.Y. 2000); Bell Sports,
Inc. v. System Software Assocs. Inc., 45 F. Supp.2d 220, 227
(E.D.N.Y. 1999). Nothing in the complaint alleges that Carlisle
had any duty separate and apart from the contract to disclose its
financial condition and "general business status" to DS, nor has
DS alleged the existence of any special damages that would not be
recoverable under a contract theory. Therefore, the fraud cause
of action must be dismissed.
Accordingly, DS fails to state a claim for fraud, and to the
extent that it states a claim for breach of contract — a finding
that this Court does not necessarily make — the Court lacks
subject matter jurisdiction over the claim due to the
insufficient amount in controversy. Therefore, Carlisle's motion
to dismiss the complaint in its entirety is GRANTED. Carlisle's
motion to transfer the case is DENIED AS MOOT. The complaint is
dismissed without prejudice. The Clerk of the Court is directed
to close this case.
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