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HOUBIGANT, INC. v. DEVELOPMENT SPECIALISTS

September 30, 2002

HOUBIGANT, INC., ETABLISSEMENT HOUBIGANT, PLAINTIFF,
V.
DEVELOPMENT SPECIALISTS, INC., ET AL., DEFENDANTS



The opinion of the court was delivered by: Laura Taylor Swain, United States District Judge

    OPINION AND ORDER

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.

BACKGROUND

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. ¶ 46.)

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, brand 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 prove no 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).

Negligence Claim

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 reliance.

Prudential Ins. Co. v. Dewey, Ballantine, 80 N.Y.2d 377, 382 (1992); State of California Public Employees' Retirement System v. Shearman & ...


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