Not what you're
looking for? Try an advanced search.
Buy This Entire Record For
HOUBIGANT, INC. v. DEVELOPMENT SPECIALISTS
September 30, 2002
HOUBIGANT, INC., ETABLISSEMENT HOUBIGANT, PLAINTIFF,
DEVELOPMENT SPECIALISTS, INC., ET AL., DEFENDANTS
The opinion of the court was delivered by: Laura Taylor Swain, United States District Judge
Attorneys for Plaintiffs, Houbigant, Inc. and Etablissement Houbigant:
MORRISON COHEN SINGER & WEINSTEIN, LLP, By: Edward P. Gilbert, Esq.
from New York, New York. With PATTON BOGGS, LLP, By: John Schryber, Esq.
and Read K. McCaffrey, Esq. from Washington, D.C.
Attorneys for Defendants, Development Specialists, Inc., William A.
Brandt, Jr., and David H. Tolly: GREGORY P. JOSEPH LAW OFFICES, LLC, By:
Pamela Jarvis, Esq. from New York, New York.
Attorneys for Defendant, Nicholas J. Miller: BIEDERMANN, HOENIG,
MASSAMILLO & RUFF, P.C., By: Anthony W. Eckert III, Esq. from New
York, New York. With ROOKS, PITTS AND POUST, By: Robert K. Villa, Esq.
from Chicago, Illinois.
LAURA TAYLOR SWAIN, United States District Judge
Houbigant, Inc. and Establissement Houbigant ("Plaintiffs") bring this
action, alleging trademark infringement in violation of the Lanham Act,
15 U.S.C. § 1114, 1117 and 1125, and asserting a variety of common
law claims*fn1 against Development Specialists, Inc. ("DSI") and its
employees William A. Brandt Jr. ("Brandt") and David H. Tolly ("Tolly")
(collectively "Defendants"), as well as Nicholas J. Miller ("Miller" or
"Defendant"), Administrator of Dana U.K. Limited ("Dana U.K."). This
matter comes before the Court on the motions of Defendants Development
Specialists, Inc. ("DSI"), William A. Brandt Jr. ("Brandt") and David H.
Tolly ("Tolly") pursuant to Rule 12(b)(6) of the Federal Rules of Civil
Procedure to dismiss the complaint for failure to state a claim upon
which relief may be granted and, pursuant to Rule 12(b)(1) of the
Federal Rules of Civil Procedure, to dismiss the complaint for lack of
subject matter jurisdiction. Defendant Nicholas J. Miller ("Miller") has
also moved for dismissal of the complaint pursuant to Rules 12(b)(1),
(2), (3) and (6) of the Federal Rules of Civil Procedure and for
dismissal, in deference to a pending foreign action, of Counts VII
through XI of the Complaint.
Plaintiffs assert that the Court has jurisdiction of this matter
pursuant to 28 U.S.C. § 1331, 1367 and 1338.
The Court has considered thoroughly all submissions and arguments
related to these motions. For the following reasons, the motion of
defendants DSI, Brandt and Tolly to dismiss is granted in part and denied
in part; defendant Miller's motion to dismiss is denied.
Plaintiffs allege that they are the owners of various trademarks for
perfume products licensed to Dana Perfumes Corporation ("Dana U.S."),
Houbigant Limitee ("Limitee") (collectively, the "Licensees") and the
Licensees' parent corporation, Renaissance Cosmetics, Inc. ("RCI" and,
together, with the Licensees, the "Company"). (Compl. ¶¶ 1, 16-19,
74.) In August of 1998, the Company retained defendants DSI and DSI's
employees Brandt and Tolly as consultants to manage a "financial crisis."
(Id. ¶ 38) In June of 1999, the Company filed voluntarily for
protection under Chapter 11 of the Bankruptcy Code in federal court in
Delaware (the "Bankruptcy Proceeding"). (Id. ¶ 76) Defendant Miller
was the Administrator in receivership of Dana U.K., a wholly owned
subsidiary of Dana U.S. (Id. ¶ 12)
In their Complaint, Plaintiffs allege that "the Licensees in the Spring
of 1997 began a campaign of infringement of the Houbigant marks and the
sale of Houbigant goods through the gray market." (Id. ¶ 36.)
Plaintiffs assert that the infringement was a principal cause of the
Company's "financial crisis" that led, among other things, to a June 1998
public disclosure that the Company had negative net worth and was
insolvent. (Id. ¶¶ 2, 38.) Defendants DSI, Brandt and Tolly were hired
as "crisis managers" by the Company in August 1998, pursuant to a
professional services contract between DSI on the one hand, and RCI and
the Licensees, on the other. (Id. ¶ 38-40.) Brandt and Tolly became
officers and directors of the Company. (Id. ¶ 38, 44.) They were
not, however, put on the Company's payroll. Rather, their services to the
Company were billed by DSI as professional services at rates ranging from
$230-330 per hour. (Id. ¶ 45.) DSI, Brandt and Tolly also, according
to the Complaint, caused the Company to hire and compensate outside
advisors to whom the Company paid high fees and retainers. (Id. ¶
Plaintiffs assert that defendants DSI, Brandt and Tolly took full
control of RCI and the Licensees and, as a result of that undertaking,
owed affirmative duties to Plaintiffs to preserve the value of Houbigant
brands and to avoid actions resulting in breaches of the licensing
agreements. According to Plaintiffs, they retained such control through
August 1999. (Id. ¶¶ 38, 41, 42.) Plaintiffs claim that DSI, Brandt
and Tolly had a duty to eliminate the infringement of Houbigant
trademarks and the wasting of the license asset. (Id. ¶ 41.)
Plaintiffs allege that DSI, Brandt and Tolly instead escalated the
Licensees' infringement of the Houbigant marks (id. ¶ 49) and that
Miller, who was designated Administrator of Dana U.K. after that company
entered British Administration proceedings on or about October 12, 1998,
exercised control over Dana U.K. that included "the direction of Dana
U.K.'s unauthorized production and sale of counterfeit Houbigant products
and infringement of the Houbigant marks." (Id. ¶ 58.) They assert
that Miller's compensation rate was artificially inflated pursuant to a
scheme among DSI, Brandt, Tolly and Miller. (Id. ¶ 64.) Plaintiffs
further allege that Defendants DSI, Brandt, Tolly and Miller facilitated
the manufacturing and distribution of counterfeit Houbigant products by
unlicensed third-parties including Dana U.K. (Id. ¶ 56, 57); that
defendants DSI, Brandt, Tolly and Miller induced numerous breaches of the
Houbigant licensing agreements (id. ¶ 66); and that none of the acts
of infringement or breaches of licensing agreements was disclosed to
Houbigant by Defendants. (Id. ¶ 70.) Plaintiffs also allege that Dana
U.K. "and its componentry customers in the U.K. and the U.S." sold
approximately $35 million of counterfeit goods, which arose principally
through a transaction documented in a certain U.K. Asset Sale and
Purchase Agreement dated March 12, 1999 (the "U.K. Agreement"). (Id.
¶ 62.) Brandt, Tolly and DSI are alleged to have affirmatively misled
Houbigant as to the level of the Company's assets and its compliance with
the Licenses. (Id. ¶ 71-72.)
MOTION TO DISMISS BY DEFENDANTS DSI, BRANDT AND TOLLY PURSUANT TO
RULES 12(b)(1) AND 12(b)(6)
Defendants DSI, Brandt and Tolly move to dismiss the Complaint on
several grounds. They assert that Plaintiffs lack standing to sue Brandt
and Tolly for breach of fiduciary duty and that Plaintiffs' infringement
allegations do not state a fiduciary duty claim. These Defendants further
assert that Plaintiffs' professional negligence claim fails as a matter
of law because DSI, Brandt and Tolly are not professionals within the
meaning of New York law and because DSI did not owe a duty of
professional care to Plaintiffs. Defendants argue that Plaintiffs cannot
claim third-party beneficiary status with respect to the professionals'
contractual obligations to the Company under certain retainer agreements
dated August 1998 (the "August Retainer Agreement") and June 1999
(together, the "Retainer Agreements"), and that res judicata bars
Houbigant's trademark infringement claims (Counts IV through IX) because
Houbigant has already had a full and fair opportunity to litigate them in
the Delaware Bankruptcy Proceeding. Defendants also contend that
Houbigant's trade secret misappropriation claim must be dismissed because
Plaintiffs fail to plead that the subject information was secret, and
further argue that the misappropriation claim is barred by res judicata.
Finally, Defendants assert that Houbigant's tortious interference
allegations fail to state a claim.
Motion to Dismiss Breach of Fiduciary Duty
Claim Pursuant to Fed. R. Civ. P. 12(b)(1)
Arguing that, as creditors, Plaintiffs lack standing to assert a breach
of fiduciary duty claim against Brandt and Tolly for actions taken in
connection with their work for the Company, these defendants assert that
the Court lacks subject matter jurisdiction of the fiduciary breach claim
asserted in Count I of the Complaint. A case is properly dismissed for
lack of subject matter jurisdiction under Rule 12(b)(1) of the Federal
Rules of Civil Procedure when the district court lacks the statutory or
constitutional power to adjudicate it. See Makarova v. United States,
201 F.3d 110, 113 (2d Cir. 2000). A plaintiff asserting subject matter
jurisdiction generally has the burden, once challenged, of proving by a
preponderance of the evidence that jurisdiction exists. See id.
Plaintiffs assert that Defendants "by virtue of their positions as
officers and directors of the insolvent entities" owed Plaintiff, as
creditors, affirmative duties "to preserve the value of the Houbigant
brands and to avoid actions resulting in breaches of the Licensing
Agreements as well as to eliminate the infringement of the Houbigant
trademarks and the wasting of the license asset, its intrinsic value,
equity, sales, reputation and goodwill." (Compl. ¶ 48.)
Plaintiffs allege that Defendants breached these duties by escalating and
inducing the infringement and related improper conduct of the Company and
third parties (id. ¶¶ 49, 66, 69), thus diluting the value of the
Company's right to use the Plaintiffs' trademarks and reducing the value
of the Company as a whole, to the detriment of Plaintiffs and all other
creditors. Id. ¶¶ 49-69.) Defendants assert that Plaintiffs lack
standing to assert their breach of fiduciary duty claim because any
claims against management arising from diminution of the Company's assets
belong to the Company as debtor-in-possession in a pending Chapter 11
bankruptcy proceeding.*fn2 Defendants argue that, because standing is a
jurisdictional issue, it can be analyzed under 12(b)(1) of the Federal
Rules of Civil Procedure, implicating subject matter jurisdiction.
The parties generally agree that management of an insolvent entity
stands in a fiduciary relationship to creditors. They disagree, however,
as to whether such relationship supports a cause of action that
Plaintiffs have standing to assert. In evaluating whether a creditor has
standing to assert a cause of action for harm to its obligee, courts in
this Circuit invoke a "special injury" test. Standing is found only if
the plaintiff alleges an injury that is either "separate and distinct
from that suffered by other shareholders, or a wrong involving a
contractual right." In re Ionosphere Clubs, Inc., 17 F.3d 600, 604 (2d
Cir. 1994) (citing Moran v. Household Int'l., Inc., 490 A.2d 1059, 1069
(Del. Ch.), aff'd 500 A.2d 1346 (Del. 1985)). If the wrong sought to be
redressed is one remediable by relief to the corporation, the claim is
derivative and a creditor or shareholder lacks standing to assert it
against a third party. Where, however, the "wrong can be rectified only
by relief to [the would-be plaintiff . . . because the corporation has
not been injured," relief to the corporation would not be effective and
the plaintiff has standing. Ionosphere Clubs, 17 F.3d at 605-06; cf. St.
Paul Fire and Marine, 17 F.2d at 701-02 (analyzing whether claims, if
proven, would bring property into bankruptcy estate for purpose of
determining applicability of property of the estate and standing).
"Whether the rights [at issue] belong to the debtor or the individual
creditors is a question of state law." Id. at 700 (citation omitted).
In Solow v. Stone, 994 F. Supp. 173, 177 (S.D.N.Y. 1998), aff'd
163 F.3d 151 (2d Cir. 1998) the Court, in granting a Rule 12(b)(1)
motion, applied a similar analysis and held that since the corporate
defendant in that case was a chapter 11 debtor, a suit by an individual
creditor could only be maintained if the suit did not involve the
property of the estate.*fn3 The Solow plaintiff, a landlord, had sued the
administrators of a bankrupt company's parent for breach of fiduciary
duty and tortious interference, alleging that the defendants had engaged
in acts of waste and
mismanagement. Id. at 176. The Solow Court held that
plaintiff would have standing "only if the breach of fiduciary duty claims
are not property of the estate." Id. at 178. In that case, the plaintiff
was held to lack standing because his claims against the defendant were
premised on his inability to recover the full value of judgment against
the parent company. His injury was thus "tan indirect consequence of the
harm" suffered by the parent company and, therefore, was not "separate or
distinct" under the applicable state law. Id. at 179.
Count I of Plaintiffs' Complaint alleges generally that Brandt and
Tolly, as Company officers and directors "at a time when the Licensees
were insolvent or on the verge of insolvency[,] . . . owed a fiduciary
duty to Houbigant as a creditor of the Licensees" and that Brandt and
Tolly "breached their fiduciary duties to Houbigant," resulting in
damages to Houbigant. (Compl. ¶¶ 84-86.) In connection with the
instant motion Plaintiffs have characterized the nature of this harm as
twofold: Brandt's and Tolly's alleged improper actions "served to
diminish the brand equity of the Houbigant marks, thus wasting the
Companies' ability to utilize its greatest asset and return to a state of
solvency;" and that "Plaintiffs were damaged by . . . a diminution in the
value of their trademarks caused by this breach." (Pl.'s Opp'n at 15.)
Plaintiffs argue that their harm is "particularized" in that they seek
damages "for the . . . detrimental effects that . . . [the] breaches . . .
had on Houbigant's trademarks," (id. at 16), pointing out that
"[n]either a trustee or other creditor could recover for the diminution
in value of plaintiffs' trademarks or any of the other unique damages
claimed by plaintiffs." Id. at 17.
To the extent Plaintiffs' damages claim is premised on the wasting of
the Licensees assets, it is clearly common to all creditors, and is one
that could be asserted by the Licensees themselves. Plaintiffs, as
individual creditors, thus lack standing to assert a direct claim. Cf.
Solow, 994 F. Supp. at 178-79. The Court lacks subject matter
jurisdiction of the aspect of the claim that alleges wasting of the
Licensees' assets, and dismissal pursuant to Rule 12(b)(1) is
warranted. Furthermore, to the extent the cause of action is for harm to
Plaintiffs' specific trademark or other property rights, it does not
arise from the manager-creditor fiduciary relationship and Count I fails
to state a claim upon which relief can be granted and therefore must be
dismissed pursuant to Rule 12(b)(6).*fn4 Count I will therefore be
dismissed in its entirety.
Motion to Dismiss Complaint Pursuant to Fed. R. Civ. P. 12(b)(6)
Defendants' collective motion also seeks dismissal of the Complaint
pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. In
deciding a motion to dismiss for failure to state a claim upon which
relief may be granted under 12(b)(6) of the Federal Rules of Civil
Procedure, a court must accept as true the material facts alleged in the
complaint and draw all reasonable inferences in plaintiffs favor. Grandon
v. Merrill Lynch, 147 F.3d 184, 188 (2d Cir. 1998). The court must not
dismiss the action unless "it appears beyond doubt that the plaintiff can
set of facts in support of his claim which would entitle him to
relief." Cohen v. Koenig, 25 F.3d 1168, 1172 (2d Cir. 1994) (quoting
Conley v. Gibson, 355 U.S. 41, 45-46 (1957)); Sims v. Artuz, 230 F.3d 14,
20 (2d Cir. 2000).
In Count II of the Complaint, Plaintiffs assert a claim denominated as
one for professional negligence. Plaintiffs allege that Defendants
"provided their work product and the benefits of their professional
services" to Plaintiffs, intended Plaintiffs to rely on those services
for Plaintiffs' "assessment of the Licensees' performance under the
Licensing Agreements," and that Defendants "evinc[ed] their recognition
of [Plaintiffs'] reliance upon their services" by meeting with and making
"representations" to Plaintiffs. (Compl. ¶ 88.) Plaintiffs go on to
allege that, "as a result," Defendants owed Plaintiffs a duty to exercise
reasonable care "in the professional management of RCI and the Licensees
and the administration of the Licensing Agreements," that Defendants
breached this duty "in the execution of their professional services," and
that Plaintiffs suffered damages as a proximate cause of that alleged
breach. (Id. ¶¶ 89, 90.) Defendants argue that Plaintiffs'
professional negligence claim fails as a matter of law because Defendants
are not "professionals" within the meaning of New York law and that, even
if the Defendants did owe a duty of professional care, such duty would
extend only to the Company because the Defendants have no relationship of
privity or near-privity with Plaintiffs. (Memo. of Law in Supp. of Mot. of
Defs.' to Dismiss Compl. at 8.)
Under New York law, a plaintiff asserting a claim for negligence, or
malpractice by a professional, must make a showing that: defendant owed a
duty to the plaintiff, defendant breached that duty, there is "a
reasonably close causal connection between the contact and the resulting
injury," and "actual loss, harm or damage" resulted from the breach.
Cromer Finance, Ltd. v. Berger, 137 F. Supp.2d 452, 495 (S.D.N.Y. 2001).
Under New York law, the establishment of the underlying duty requires "a
showing that there was either actual privity of contract between the
parties or a relationship so close as to approach that of privity."
Prudential Ins. Co. v. Dewey, Ballantine, Bushby, Palmer, Wood,
80 N.Y.2d 377, 382 (1992). There is no allegation of privity as between
Plaintiffs and Defendants; the inquiry thus turns to whether Plaintiffs
have alleged a relationship of "near-privity" with Defendants sufficient
to support a cause of action for damages for professional negligence.
Such a "special relationship" or "near-privity" has been found where
accountants or lawyers have made "negligent misrepresentations to known
third parties whom the professional knew would rely on the
misrepresentations." Bastys v. Rothschild, 2000 WL 1810107, *53
(S.D.N.Y. Nov. 21, 2000). This exception to the privity rule has been
construed narrowly. See, e.g., Doehla v. Wathne, No. 98 Civ. 6087 (CSH),
1999 WL 566311, *20 (S.D.N.Y. Aug. 3, 1999). Plaintiffs must establish:
(1) an awareness by the maker of the statement that
it is to be used for a particular purpose; (2)
reliance by a known party on the statement in
furtherance of that purpose; and (3) some conduct by
the maker of the statement linking it to the relying
party and evincing its understanding of that
Prudential Ins. Co. v. Dewey, Ballantine, 80 N.Y.2d 377, 382 (1992);
State of California Public Employees' Retirement System v.
Shearman & ...