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FD PROPERTY HOLDING, INC. v. US TRAFFIC CORP.

June 19, 2002

FD PROPERTY HOLDING, INC. AND FRESH DIRECT, INC., PLAINTIFFS,
V.
US TRAFFIC CORP., WALTER J. ROGERS, BRYAN MULLIGAN, ROBERT J. UNDERWOOD AND GARY COURY DEFENDANTS.



The opinion of the court was delivered by: I. Leo Glasser, District Judge

MEMORANDUM AND ORDER

SUMMARY

Plaintiffs FD Property Holding, Inc. ("Property Holding") and Fresh Direct, Inc. ("Fresh Direct") bring this action against defendants US Traffic Corp. ("US Traffic"); Bryan Mulligan ("Mulligan"), Chief Operating and/or Technology Officer of Display Solutions, Inc. ("Display Solutions"), a wholly-owned subsidiary of US Traffic; Robert J. Underwood ("Underwood"), Vice-President of Facilities of US Traffic; Walter J. Rogers ("Rogers"), the "de facto shareholder" of US Traffic; and Gary Coury ("Coury"), the president of Display Solutions, alleging claims under the Racketeering Influenced and Corrupt Organizations ("RICO") Act, 18 U.S.C.. § 1962(c) and (d), and common law claims for breach of contract and fraudulent inducement.*fn1 Defendants move to dismiss the RICO claims pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, and to dismiss the remaining claims pursuant to 28 U.S.C. § 1367 (c). Plaintiffs oppose the motion and cross-move for leave to amend the complaint.*fn2 For the reasons that follow, the motion to dismiss the amended complaint is granted.

BACKGROUND

The facts summarized here, which are assumed to be true for purposes of this motion, see Dwyer v. Regan, 777 F.2d 825, 828-29 (2d Cir. 1985), are from plaintiffs' amended complaint. Plaintiffs allege that US Traffic, via its officers and defacto shareholder, engaged in three schemes to defraud them of more than $1.3 million. (See Am. Compl. ¶ 1.) The first scheme involved inducing plaintiffs through various acts of wire and mail fraud to enter into a contract with Display Solutions for the purchase and installation of a large electronic sign that would advertise Property Holding's new store, Fresh Direct. The sign was to be placed above Property Holding's headquarters in Long Island City, New York, immediately adjacent to the Queens Midtown Tunnel. (Id.) The second scheme involved concealing and misrepresenting facts from plaintiffs about Display Solutions' progress on the construction of the sign. The third and final scheme involved drawing down the remaining unpaid amount of the contract under a letter of credit by making false representations to the issuing bank. For these alleged acts, plaintiffs seek more than $15 million in damages, including the contract price, the cost of a replacement sign, and the estimated amount for lost advertising revenue. (Id. ¶ 1, 72-74.)

I. The Origins of Fresh Direct

Property Holding and Fresh Direct are affiliated Delaware corporations with their principle places of business in Long Island City, New York. (Id. ¶ 2-3.) Fresh Direct will soon begin marketing and delivering food from 23-30 Borden Avenue in Long Island City, a property owned by Property Holding, to residential customers throughout New York City. (Id. ¶ 3.) In the 1990s, Property Holding's Chief Executive Officer, Joseph Fedele ("Fedele"), purchased a large electronic sign from Display Solutions to advertise its Fairway store on 125th Street in Manhattan. (Id. ¶ 13-14.) Based on the success of that sign as a marketing technique, in October 1999, Fedele contacted Display Solutions (in addition to other vendors) to discuss the construction of a sign for Fresh Direct. (Id. ¶ 14, 16.)

II. The Alleged Fraudulent Scheme to Obtain a Lucrative Contract

Fedele told Display Solutions that he wanted a 90-by-65 foot sign that could display full graphics and video in a range of 16,000,000 authentic colors that could be seen from as far as three miles away, and that he wanted to erect the sign as soon as possible. (Id. ¶ 17-18.) Plaintiffs allege that Display Solutions made the following false statements regarding its abilities and experience to assure plaintiffs that it could build a sign that would meet their expectations. In October and November 1999, Display Solutions' Sales Manager, Michael Rhoads, told Fedele that Display Solutions "leads the industry" in this kind of product, that it had constructed a similar sign in the past and that it had the experience and ability to construct the sign that Fedele wanted. (Id. ¶ 19.) In addition, Rhoads told Fedele that Display Solutions had the ability to complete the sign within the desired time period — "as soon as possible." (Id. ¶ 21.) About a month later, Rhoads sent Fedele a videotape which featured a sign that Display Solutions had built and installed at the Georgia Tech football stadium in Atlanta, Georgia. (Id. ¶ 22.) In early November 1999, Rhoads sent Fedele two versions of the sign with two price quotes and stated: either version will "provide a clearer and more detailed image than the GA Tech video that you have seen. Because of the unique technology that we offer, I am confident that either . . . will have a cleaner and crisper picture . . . than any of the similar products offered by our competitors." (Id. ¶ 23.) Plaintiffs also allege that defendant Mulligan made similar false statements "in one or more phone conversations in December 1999 and January 2000." (Id. ¶ 25.) In those conversations, Mulligan told Fedele "that Display Solutions had a `proven track record,' that they were `fully capable of handling the project,' that they had the "technical know-how to build the sign' and that the project could be completed in the desired time frame." (Id. ¶ 26.) Plaintiffs decided to purchase the sign from Display Solutions.

In the period from the end of 1999 through April 2000, plaintiffs took possession of the property where the sign would be located and obtained a city permit for the sign.*fn3 (Id. ¶ 26.) The contract for the sign was negotiated between May 1 and 9, 2000. (Id. ¶ 28.) Plaintiffs allege that, during the negotiations, defendants continued to make false statements. They allege that Rhoads represented that the sign would be completed within thirteen weeks, which was never possible. (Id. ¶ 27.) A copy of the draft contract that was returned to Property Holding stated that the sign would "equal or exceed the appearance [sic] and capability of the Georgia Tech sign shown in the video," would be "capable of 14,000 NITs" (a measure of brightness), and could display "Standard VHS tape recorder and player," "Standard DVD player" and "Camera Intefface" in "65,000 color mode (Georgia Tech Sign)" and "16.7 color mode."*fn4 (Id. ¶ 30.) However, plaintiffs allege that the Georgia Tech sign was not capable of 65,000 color mode as it could barely perform at the 265 color level. (Id. ¶ 27, 31.) The draft contract also contained a requirement that Property Holding secure its performance with a letter of credit of $500,000. (Id. ¶ 32.) Fedele found this to be objectionable, but was told at a conference call on May 5th by Rogers and Mulligan that US Traffic insisted that the letter of credit be part of the contract. (Id. ¶ 33.)

Before signing the contract, Fedele sent a representative to Atlanta to meet with Display Solutions and to view the Georgia Tech sign. (Id. ¶ 34.) The contract was then signed in New York by Fedele on May 9th, and by Mulligan in Georgia on May 10th, and then again in New York on May 11th. (Id. ¶ 35.) Property Holding made its first of four payments in the amount of $325,000. (Id. ¶ 36.) Defendants proceeded to work on the sign that summer, but were delayed, according to plaintiffs, because the bank did not timely supply the letter of credit. (Id., ¶ 41.) Work on the sign continued thereafter until early September 2000. (Id. ¶ 41-42.)

III. The Alleged Scheme to Hide the Truth About Display Solutions' Progress

In September 2000, Display Solutions represented that the sign was "available for factory acceptance testing . . . and Buyer approval." (Id. ¶ 43.) However, plaintiffs allege that defendants concealed the fact that their procedure for building a sign of such magnitude had never been tested and anyone skilled in the trade would have instantly known that it was completely inadequate to accomplish the task. (Id. ¶ 42.) In any event, plaintiffs sent two representatives to Atlanta to witness the test at Display Solutions' facility, but were told when they arrived that the facility was not capable of testing such a massive sign. (Id. ¶ 45.) Consequently, a test of only two of the twenty-six panels was performed, which plaintiffs allege was a ploy to hide the defect in the sign's design and construction. (Id. ¶ 46.) Because the entire sign was not tested, Fedele refused to release the check for the second payment of $325,000. (Id. ¶ 46.) Mulligan subsequently spoke to Fedele on the telephone and explained to him that Display Solutions did not have sufficient electrical capacity or space at its plant to test the whole sign, and without receiving payment it would stop all work. (Id. ¶ 47.) Fedele then authorized the second payment. (Id.)

In early October 2000, defendants sent the unassembled sign to New York, which Property Holding then erected. (Id. ¶ 48.) Plaintiffs allege that defendants did "virtually nothing" to work on the sign in November and December. (Id. ¶ 49.) Yet, in early December, Display Solutions demanded payment, even though the third installment was due upon "successful installation and operation of the sign." (Id.) Property Holding concluded, however, that it had no other alternative but to make the third payment. (Id. ¶ 50.)

With the sign now in place, Display Solutions sent Kyle Milliken ("Milliken"), a first time project manager and allegedly inexperienced employee, to New York to carry out the New York end of the project. (Id. ¶ 51.) Milliken immediately developed a schedule for the work from early December into the beginning of 2001. (Id. ¶ 52.) However, plaintiffs allege that he soon realized that Display Solutions lacked the ability to complete the sign project. (Id.) Milliken sent Display Solutions an internal email message to that effect and asked how he should deal with it. (Id. ¶ 53.) Plaintiffs allege that Milliken was told to hope that Property Holding did not ask any questions. (Id.)

In January 2001, plaintiffs solicited the help of Robert Slater ("Slater), Fresh Direct's Chief Technology Officer, when it became apparent to them that something was fundamentally wrong with the project. (Id. ¶ 54.) Slater posed questions to Milliken and defendant Underwood, which were answered via email from Kleinjan Deetlefs ("Deetlefs"), US Traffic's Senior Vice-President of Engineering. Deetlefs allegedly told Slater that the problems were software related, that a software revision to correct the problem would be installed upon completion of testing, and that color functionality of the sign "would be compatible to that demonstrated at Georgia Tech." (Id. ¶ 55-56.) Plaintiffs allege that these statements were falsely made to deflect Slater's suspicions. (Id.)

In early March 2001, Mulligan allegedly told Fedele that Display Solutions was short on cash and needed money to continue working on the sign. (Id. ¶ 57.) Because of this alleged "economic coercion," Fedele authorized a partial payment of $125,000. (Id. ¶ 57.) In late March, Fedele spoke to defendant Coury who told Fedele that he was not aware of what was happening with the sign and that he would "get on his people to solve the problem." Plaintiffs allege that Coury ...


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