United States District Court, Southern District of New York
June 4, 2003
MCI WORLDCOM COMMUNICATIONS, INC. FORMERLY KNOWN AS WORLDCOM TECHNOLOGIES, INC., THE SUCCESSOR IN INTEREST TO WORLDCOM, INC., PLAINTIFFS-COUNTERCLAIM DEFENDANT, AGAINST NORTH AMERICAN COMMUNICATIONS CONTROL, INC., DEFENDANT-COUNTERCLAIM PLAINTIFFS, AND JAMES MILANA, THOMAS MILANA, SR., LEN GOLDSTEIN, FRANK CACCAMO, GARY FRAGIN, JACK GLUCK, GRUBER & HEITNER, CERTIFIED PUBLIC ACCOUNTANTS, AND ROBERT GRUBER, ADDITIONAL DEFENDANTS.
The opinion of the court was delivered by: Laura Taylor Swain, District Judge
OPINION AND ORDER
This litigation arises from a dispute concerning an agreement between Plaintiff MCI WorldCom Communications, Inc. ("WorldCom") and Defendant North American Communications Control, Inc. ("NACC") under which WorldCom provided long distance services to NACC, which, in turn, provided long distance services to its customers. WorldCom filed a complaint alleging breach of contract against NACC. Following commencement of discovery, WorldCom amended the complaint to add a fifth cause of action (the "Fifth Cause of Action") against NACC and certain individual shareholders and officers of NACC alleging fraudulent inducement, conspiracy and aiding and abetting claims. Defendants NACC, James Milana, Frank Caccamo, Jack Gluck, Thomas Milana, Sr., Gary Fragin, and Gruber & Heitner, CPA s, and Robert Gruber move to dismiss the Fifth Cause of Action pursuant Rules 12(b)(6) and 9(b) of the Federal Rules of Civil Procedure.
For the reasons set forth below, the motions of Defendants are granted in their entirety.*fn1
The following facts, which are alleged in the complaint, are taken as true for purposes of the motions to dismiss. WorldCom is a provider of long distance telephone services. NACC provides various forms of telecommunications services to it end-user customers. In or about the summer of 1994, WorldCom's predecessor in interest agreed provide telecommunications services to NACC. WorldCom billed NACC for these services on a billing system known as the Oracle System. Subsequently, the billing function for almost all services then being provided was transferred to a billing system known as the AS-400 System commencing with the invoice dated January 1, 1996 for the billing period commencing on December 1, 1995. Certain services then being provided were not transferred to the AS-400 System and continued to be billed on the Oracle System. (Complaint ¶ 18.)
At the time of the transfer of the billing function from the Oracle System to the AS-400 System, NACC's outstanding balances for all services previously provided was not transferred from the Oracle System to the AS-400 System, but remained on the Oracle System as separate accounts that were due and owing from NACC to WorldCom. (Id. ¶ 20.) WorldCom and NACC entered into a Rebiller Service Agreement on or about July 10, 1997 (the "Agreement"), whereby WorldCom agreed to provide certain designated telecommunications services, for which NACC agreed to pay specified rates and charges. (Id. ¶ 21.) The Agreement was amended on or about October 21, 1997. The Amendment reduced certain rates NACC was being charged pursuant to the Agreement (together, the Agreement and the Amendment will be referred to as the "Agreement"). (Id. ¶ 22.)
In November 1997, WorldCom resolved certain billing disputes with NACC by providing NACC with a "a package of credit adjustments for the NACC account" in the aggregate amount of $1,921,911 (the "Credit Adjustment Agreement"). (Id. ¶ 24.) Under the package, an amount of $1,296,554 was credited to NACC's outstanding balance on an invoice dated February 1, 1998, which had been billed on the AS-400 System, and an amount of $625,357 was applied to reduce NACC's balance billed on the Oracle billing system, reducing the amount owed on the Oracle system to $331,425. (Id. ¶ 25.) WorldCom and NACC agreed that the credit package fully addressed, resolved and satisfied all credits that were due NACC from the inception of the relationship up to the date of the Agreement, as well as all credits that were due NACC for the period from the date of the Agreement through October 30, 1997. (Id. ¶ 23.)
The Agreement required NACC to meet certain minimum monthly commitments and not otherwise be in default of the Agreement before WorldCom applied a credit of $400,000 paid in two installments. (Id. ¶ 27.) In connection with the Agreement, WorldCom applied a credit to NACC's account in the amount of $400,000, which was included as part of the $1,296,554 credit in respect of the February 1, 1998 invoice. (Id. ¶ 28.) The Agreement also provided that NACC was to maintain at least $400,000 in monthly revenue. If NACC failed to maintain such revenue, NACC would be assessed a deficiency charge. (Id. ¶ 29.) In addition, under the Agreement, NACC agreed, unconditionally, to pay all undisputed charges billed within 30 days of the invoice. (Id. ¶¶ 30, 31.)
Commencing in May of 1998, at a time when NACC owed WorldCom in excess of $2,596,000 and was in material breach and default of its payment obligations pursuant to the Agreement, WorldCom gave NACC written notice demanding that it cure such breach by paying all monies that were then currently due and owing or suffer the termination of all services being provided. (Id. ¶ 33.) Negotiations between the parties failed to result in the payment of the demanded monies due and owing WorldCom, and NACC continued to refuse to cure such breach. In the latter part of August 1998, WorldCom began to terminate telecommunications services to NACC pursuant to the Agreement. The termination was substantially completed in September of 1998. (Id. ¶ 34.) After crediting NACC's account with all payments made and credits and adjustments given, NACC had an aggregate outstanding balance of $5,605,385 for services provided, consisting of $5,273,960 as evidenced by the invoice dated November 1, 1998, for the billing period commencing on October 1, 1998, and an amount of $331,425 that remained owing for telecommunication services billed on the Oracle System. (Id. ¶ 35.) Furthermore, as the result of NACC's breach of the Agreement, NACC also materially breached its continuing obligations under the section of Agreement requiring that NACC maintain specified monthly commitments. Therefore, NACC was liable for the return of the $400,00 credit previously applied by WorldCom. (Id. ¶ 36.)
In addition, as the result of WorldCom's termination of the Agreement based on NACC's default, NACC is obligated to pay WorldCom a deficiency charge for the unexpired portion of the term, which amounts to ten months, at the rate of $400,000 per month or $4,000,000 in the aggregate. NACC has failed and refused to do without any legal cause or justification. (Id. ¶ 37.)
The Fifth Cause of Action alleges that Defendants NACC, James Milana, Thomas Milana, Sr. ("Milana Sr."), Len Goldstein, Frank Caccamo, Gary Fragin, Jack Gluck, Gruber & Heitner, CPAs ("G& H"), and Robert Gruber conspired and to induce WorldCom to enter into the Agreement.
Defendants Milana, Milana Sr. and Goldstein were the original shareholders, officers and directors of NACC, with Milana being the President and owning 50% of the issued stock, Milana Sr. owning 30% of the issued stock, and Goldstein being the Chief Executive Officer and owing 20% of the issued stock. (Id. ¶ 59.) In or about January of 1996, Fragin and Gluck each purchased a 25% stock interest (50% in the aggregate) in NACC from its then existing shareholders for a purchase price of $1,000,000, of which Milana received $500,000, Milana Sr. received $300,000 and Goldstein received $200,000. (Id. ¶ 60.) Fragin had previously been a successful investment banker with many associates and contacts in the financial community and had been Gluck's business partner in a telecommunications company immediately prior to their purchase of a stock interest in NACC. (Id. ¶ 61.) Gluck had a personal and social relationship with Fragin and had been Fragin's business partner in a telecommunications company immediately prior to their purchase of stock in NACC. (Id. ¶ 62.) In or about January of 1996, Fragin loaned Gluck the $500,000 he used to purchase his 25% stock interest in NACC. (Id. ¶ 63.) Since January of 1996, Fragin has been the Chairman of the Board and a director of NACC and has become the largest owner of NACC stock (holding approximately 38% of the company's stock. (Id. ¶ 64.) Fragin also has approximately $2,000,000 of his personal funds invested in NACC, based on his purchases of NACC stock, loans made to NACC and the purchase of NACC debentures through a private placement that he arranged. (Id. ¶ 65.)
Since January of 1996 Gluck has been a shareholder, officer (until sometime in 1997) and director of NACC and has received compensation as either an employee or consultant. (Id. ¶ 66.)
Goldstein was a shareholder, officer, director and employee of NACC until he left NACC's employ in approximately the latter part of 1997 or early 1998. (Id. ¶ 67.) Caccano was employed by NACC and was its Executive Vice President and is now its President. (Id. ¶ 68.) G & H prepared NACC's corporate tax returns and handled related financial information. (Id. ¶ 69.) Gruber was the partner in charge of NACC's account at G & H, and he provided financial/business advice to NACC. (Id. ¶ 70.) Milana, Caccamo and Goldstein (until he left NACC's employ) and Glock worked at NACC's offices, which are in the Southern District, on a daily basis and were fully informed and knowledgeable as to all material developments and events and day to day activities at NACC. (Id. ¶ 71.)
Fragin and Milana Sr. were kept fully informed and knowledgeable as to all material developments and events at NACC and were kept fully advised as to all material day to day operations and activities at NACC on a regular basis. (Id. ¶ 72.) Milana, Milana Sr., Goldstein (until he left NACC's employ), Caccamo, Fragin and Glock attended NACC Board of Directors meetings and or informal meetings in the Southern District of New York in connection with the business and operations of NACC. (Id. ¶ 73.) Milana, Milana Sr., Goldstein (until he left NACC's employ), Fragin, Gluck and Caccamo were all of the shareholders, officers and directors of NACC. Milana is President, Goldstein is Chief Executive Officer, Caccamo is Executive Vice-President and Fragin is Chairman of the Board of NACC. (Id. ¶ 74.)
One of the main reasons that Fragin and Gluck invested in NACC was that, by increasing NACC's gross monthly revenues, they could sell NACC and/or the shareholders' stock interest in NACC to a third party at a very high multiple of NACC's gross monthly revenues and thereby make a huge personal profit. (Id. ¶ 77.) Gluck, Goldstein and Milana, with the knowledge and consent of the other shareholders, held discussions and negotiations in 1996, 1997 and 1998 with Total-Tel Communications, Inc. ("Total-Tel"), and other third-party companies, relating to the possible sale of NACC and/or the shareholders' stock interest in NACC at a negotiated multiple of NACC's gross monthly revenues. (Id. ¶ 78.) In or about September of 1996, when NACC was negotiating with Total-Tel for the sale of NACC and/or the shareholders' stock interest, NACC's shareholders considered 18 times gross monthly revenues a fair valuation of their NACC stock interest. (Id. ¶ 79.) Prior to the parties' entry into the Credit Adjustment Agreement, on or about July 10, 1997, WorldCom (or a predecessor entity) had been providing NACC with the overwhelming portion of its telecommunications services since the summer of 1994, pursuant to an oral agreement that had been amended from time to time. (Id. ¶ 80.) Before the parties entered into the Credit Adjustment Agreement, NACC had made irregular payments for services, resulting in WorldCom issuing demand and termination letters to NACC that threatened termination of services unless payment was made. NACC thereafter made its payments in order to continue receiving service. (Id. ¶ 81.)
WorldCom also owed NACC credits for certain matters that arose prior to the parties' entry into the Credit Adjustment Agreement. The amount of NACC's past due obligations owed to WorldCom exceeded the aggregate amount of credits NACC was entitled to receive. (Id. ¶ 82.) During the negotiations leading up to the execution of the Credit Adjustment Agreement NACC, Milana, Milana Sr., Caccamo, Goldstein, Fragin and Gluck, "acting singly and in concert conspiring together, knowingly and intentionally," entered into an unlawful scheme that they carried out in this jurisdiction. (Id. ¶ 83.) G&H and Gruber knowingly and intentionally joined in the continuing the conspiracy sometime before September 15, 1999, for the purpose of hiding and covering-up the unlawful and illegal acts of the conspirators and their obligations to pay WorldCom all monies due and owing. (Id. ¶ 84.)
Acting in conjunction with each other, NACC, Milana, Milana Sr., Caccamo, Goldstein, Fragin, Gluck, G & H and Gruber sought fraudulently to induce WorldCom to enter into the Agreement, and sought to have WorldCom continue to serve as the provider of NACC's telecommunications service requirements and to continue to extend credit to NACC. NACC resold these services to its end-user customers at substantial gross profit margins. NACC, however, had no intention of fully paying for the services provided by WorldCom. (Id. ¶ 86.)
The Defendants considered it critical to their plan to sell NACC and/or their stock interest in it, that WorldCom enter into the Agreement and continue to provide telecommunications services and to continue to extend credit to NACC, because WorldCom was a highly recognized national brand name that made its services widely acceptable to NACC's end-user customers in the markets that it was presently in and in those it was attempting to expand into. (Id. ¶ 87.) The individual Defendants sought to use WorldCom's national brand name and its wide acceptance by end-user customers to greatly increase NACC's gross monthly revenues in order to obtain the maximum price for the sale of NACC. (Id. ¶ 88.) NACC's end-user customers were almost all month to month customers who were free to leave NACC at any time if WorldCom discontinued service. If NACC lost customers, it would be unable to increase its gross monthly revenues in order to sell NACC at the maximum price. (Id. ¶ 89.) Milana, Goldstein and Gluck participated in the discussions and negotiations in this District with WorldCom's representatives, including its senior managers Jim Reilly ("Reilly") and John Callari ("Callari"). The discussions and negotiations resulted in the Agreement being entered into by WorldCom based on the co-conspirator's fraudulent statements and representations that were made to WorldCom as part of their preconceived plan to defraud WorldCom.
The co-conspirators represented: (i) that NACC would pay WorldCom's monthly invoices in full on a priority basis; (ii) that NACC would promptly pay WorldCom in full for all past due amounts that had accumulated on the Oracle and AS-400 Systems for services provided prior to the time of entering into the Agreement, upon the application by WorldCom to NACC's accounts of the credits that were due NACC from the inception of the relationship up to the time of the parties' entry into the Agreement; and (iii) that WorldCom's application of the $400,000 credit referred to in section 4 of the Agreement would release WorldCom from claims that had arisen prior to time of the parties' entry into the Agreement. (Id. ¶ 90.)
These false and fraudulent statements and representations were made in the Southern District of New York by Milana, Goldstein and Gluck on behalf of all of the other Defendants and were known by each of them to be fraudulent at the time they were made. (Id. ¶ 91.)
When Milana, Goldstein and Gluck made the foregoing representations they knew full well that: (i) NACC never would make payment to WorldCom of its monthly invoices on a priority basis for the services provided under the Agreement; or (ii) make prompt payment in full to WorldCom of all past due amounts that had accumulated on the Oracle and AS-400 Systems for services provided prior to the time of entering into the Agreement, upon the application by WorldCom to NACC's accounts of the credits that were due NACC from the inception of the relationship up to the time of the parties entering into the Agreement, that were subsequently agreed upon and included as part of the credits in the aggregate amount of $1,875,667 incorporated in the Credit Adjustment Agreement; and (iii) that NACC never intended to abide by its statements and representations that WorldCom's application of the $400,000 credit, which was included as part of the subsequently agreed-upon credits in the aggregate amount of $1,875,667 incorporated in the Credit Adjustment Agreement, would release WorldCom from all claims of every type and kind that had arisen prior to the time of the parties' entry into the Agreement. (Id. ¶ 92.) To overcome WorldCom's reluctance to enter into the Agreement, the co-conspirators caused NACC make payments in the amount of $947,020 to partially reduce its then outstanding balance owed to WorldCom. (Id. ¶ 93.)
WorldCom's representatives did not know that Milana, Goldstein and Gluck had no intention of fully performing the promises made in connection with the Agreements at the time the promises were made. WorldCom's representatives believed Milana, Goldstein and Gluck's statements to be truthful at the time that they were made and WorldCom's representatives relied upon them. Thus, WorldCom was fraudulently induced to enter into the Agreement. (Id. ¶ 95.) If WorldCom had known that the statements and representations made by Milana, Goldstein and Gluck were false and were made with the undisclosed preconceived plan and intention of not fully performing them, WorldCom would not have entered into the Agreement. (Id. ¶ 96.)
Milana, Goldstein and Caccamo had discussions and negotiations with Reilly in this district wherein the parties agreed, after addressing all open credit issues, that the issuance of the credits in the aggregate amount of $1,875,667 as set forth in the Credit Adjustment Agreement was to fully resolve and satisfy all credits that were due NACC from the inception of the parties' relationship through October 30, 1997. WorldCom processed the agreed upon credits in connection with certain matters in the aggregate amount of $1,875,667 as incorporated in the Credit Adjustment Agreement. (Id. ¶ 98.) During the month of January 1998, WorldCom applied credits of $1,921,911 directly to NACC's accounts pursuant to the Credit Adjustment Agreement (which included a credit for an additional month's finance charge) by (i) applying a credit in the amount of $1,296,554 to NACC's invoice dated February, 1, 1998 for the billing period commencing on January 1, 1998 billed on the AS-400 System and (ii) applying a credit in the amount of $625,357 on the then-accumulated outstanding balance NACC owed WorldCom as billed on the Oracle System ($956,783), thereby reducing the current outstanding balance due and owing on the Oracle System to $331,125. (Id. ¶ 99.)
Shortly after these credits were applied to NACC's accounts pursuant to the Credit Adjustment Agreement, WorldCom's representatives Reilly and Maritza Martin informed Milana and Caccamo at different times of the particulars and the specific manner in which the credits had been applied to NACC's accounts. (Id. ¶ 100.) NACC never challenged any of the particulars until after WorldCom sent its demand letter to NACC dated May 29, 1998. (Id. ¶ 101.)
Subsequently, Gluck was also advised by Reilly as to the particulars of the application of the $1,921,911 in credits to NACC's accounts pursuant to the Credit Adjustment Agreement. After the application of the $1,921,911 of credits to NACC's accounts in January of 1998, the co-conspirators immediately breached their representations that they would pay WorldCom's monthly invoices in full on a priority basis. NACC made no payments to WorldCom during the months of January, April, May, July and September of 1998 and made less than the required payments for the other months for the services then being provided. As a result, NACC's outstanding balance to WorldCom on the AS-400 System rose from $2,301,053 on the invoice dated February 1, 1998 (after the credit of $1,296,554 was applied) to $5,273,960 on the invoice dated November 1, 1998, by which time WorldCom had terminated substantially all services. (Id. ¶ 104.) After the application of the $1,921,911 of credits to NACC's accounts in January of 1998, the co-conspirators breached their representations to promptly pay all past due amounts in full that had accumulated on the Oracle and AS-400 Systems for services provided prior to entering into the Agreement. (Id. ¶ 105.) The co-conspirators were using NACC's available cash, funds and resources that should have been used to pay WorldCom to pay off NACC's past due balances that had accumulated on the Oracle and AS-400 Systems for services provided prior to entering into the Agreement to pay to themselves and the many relatives of Fragin, Gluck, Milana, Milana Sr. and Caccamo who were on the payroll, excessive salaries, consulting fees, commissions, reimbursements and other forms of compensation and to make major capital asset purchases in excess of $1,000,000. (Id. ¶ 106.)
WorldCom sent NACC a demand and termination letter dated May 29, 1998 stating in substance that, unless its "past due balance of $2,596,350.00" was paid by June 4, 1998 all services would be terminated. (Id. ¶ 107.) After NACC's receipt of WorldCom's demand and termination letter dated May 29, 1998, Gluck, Milana and Caccamo on behalf of all the co-conspirators entered into a plan to transfer NAAC's customers from WorldCom's services to those of other providers as NACC did not have the available cash, funds or resources to pay WorldCom the monies due and owing for the telecommunications services provided pursuant to the Agreement. (Id. ¶ 108.) Gluck and Milana continued to attempt to sell NACC to Total-Tel in the Summer of 1998. The negotiations did not proceed after Total-Tel insisted that the proceeds of any sale by the then current shareholders (i.e. Fragin, Gluck, Milana and Milana Sr.) would have to be held in escrow pending a resolution of WorldCom's claims for monies due and owing. (Id. ¶ 109.)
Gluck, Milana and Caccamo raised numerous illusory issues for the purpose of delaying WorldCom's termination of the services it was providing pursuant to the Agreement as Amended, including their contention, for the first time, that NACC did not receive all of the $1,875,667 in credits referred to in the November 20, 1997 Memorandum. (Id. ¶ 110.) On August 7, 1998, WorldCom sent another demand and termination letter to NACC, stating that unless "the entire balance due of $4,588,908.05, less any documented disputes" was received by August 13, 1998, all services would be terminated. (Id. ¶ 111.)
Thereafter, Milana delivered a letter to WorldCom dated August 21, 1998 which stated, in part, that: "With reference to our conversations concerning the outstanding balance NACC owes to WorldCom, please note that we are willing to forward to you the sum of $250,000.00 on a weekly basis until this outstanding balance is satisfied. We will also remain current on our August invoice and plan to continue to do so going forward." By letter dated August 26, 1998, Reilly wrote Milana a letter in which after addressing various open issues he states: "This leaves the outstanding undisputed balance at $3,983,963.70." (Id. ¶ 113.) In response to Reilly's letter, and contradicting Milana's earlier promise to make $250,000 weekly payments "until the outstanding balance is satisfied", NACC's attorneys wrote WorldCom on August 28, 1998 stating that NACC "is willing to transfer to WorldCom the $296,322.00 which is not in dispute." This payment by NACC was never made. (Id. ¶ 114.)
After negotiations between WorldCom and NACC did not result in the payment of the demanded monies that were owing, WorldCom in the latter part of August 1998 began to terminate providing all telecommunications services to NACC pursuant to the Agreement as Amended, which termination was substantially completed in September of 1998. (Id. ¶ 115.) On NACC's December 31, 1998 year-end Financial Statement, it lists under "Current Liabilities" that WorldCom is owed "$3,722,191.37." (Id. ¶ 116.) On NACC's revised December 31, 1998 year-end Financial Statement, even though certain other unrelated entries were changed, it still lists under "Current Liabilities" that WorldCom is owed "$3,722,191.37." (Id. ¶ 117.) On NACC's December 31, 1999 year-end Financial Statement it continues to list under "Current Liabilities" that WorldCom is owed "$3,722,191.37." (Id. ¶ 118.)
All of the individual Defendants, including G & H and Gruber, were fully familiar with and aware of the continuing specific reference to WorldCom being owed $3,722,191.37 in NACC's Financial Statements and never caused any restatement or change to be made. G & H and Gruber knowingly and intentionally joined and fully participated in the continuing unlawful and illegal conspiracy, and became co-conspirators sometime before September 15, 1999, which was the latest date by law that NACC had to file its Corporation Income Tax Return for the calendar year 1998 ("1998 Tax Return"). G & H and Gruber intentionally failed to timely file NACC's 1998 Tax Return and, permitted all lawful extensions that they had obtained for NACC to expire, because to file such return based on NACC's own documentation would establish that NACC owed WorldCom at least $3,722,191.37. (Id. ¶ 121.)
On a motion to dismiss for failure to state a claim, the Court should dismiss the complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure only if it appears beyond doubt that the plaintiff can prove no set of facts in support of his complaint which would entitle him to relief. See 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 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). The Court must accept all factual allegations in the complaint as true and draw all reasonable inferences in favor of the plaintiff. See Koppel v. 4987 Corp., 167 F.3d 125, 127 (2d Cir. 1999); 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. See Villager Pond, Inc. v. Town of Darien, 56 F.3d 375, 378 (2d Cir. 1995). Indeed, it is not the Court's function to weigh the evidence that might be presented at trial; instead, the Court must merely determine whether the complaint itself is legally sufficient. Id.
To succeed on a fraudulent misrepresentation claim under New York law, which the parties agree governs WorldCom's fraud claim, a plaintiff must show "(1) that [the defendants] made a misrepresentation (2) as to a material fact (3) which was false (4) and known to be false by [the defendants] (5) that was made for the purpose of inducing [the plaintiff] to rely on it (6) that [the plaintiff] rightfully did so rely (7) in ignorance of its falsity (8) to his injury." Cohen v. Koenig, 25 F.3d 1168, 1172 (2d Cir. 1994) (quoting Murray v. Xerox Corp., 811 F.2d 118, 121 (2d Cir. 1987)).
Failure to fulfill a promise to perform future acts, however, is not a ground for a fraud action unless there existed an intent not to perform at the time the promise was made. Cohen v. Koenig, 25 F.3d at 1172; see also Triangle Underwriters, Inc. v. Honeywell, Inc., 604 F.2d 737, 747 (2d Cir. 1979) (plaintiff not allowed to "dress up" breach of contract claim as a fraud claim). Under New York law, it is well established "that a fraud claim cannot be based on solely the failure to perform a contractual promise. . . . The mere fact that plaintiff alleges that defendant never intended to honor the contractual obligations does not transform a contract claim into a claim of fraud." Rotter v. Institutional Brokerage Corp., 1994 WL 389083, at *3 (S.D.N.Y. July 22, 1994). "A plaintiff sufficiently states a claim upon which relief may be granted only when it alleges fraud that is extraneous to the contract, rather than merely fraudulent non-performance of the contract itself." Todi Exports v. Amrav Sportswear Inc., No. 95 Civ. 6701, 1997 WL 61063 at *2 (S.D.N.Y. Feb. 13, 1997) (citing Triangle Underwriters, Inc. v. Honeywell, Inc., 604 F.2d at 746-47.); see also Bridgestone/Firestone, Inc. v. Recovery Credit Services, Inc. 98 F.3d 13, 20 (2d Cir. 1996) (plaintiff must show a fraudulent misrepresentation or breach collateral or extraneous to the contract). The Court finds that the misrepresentations alleged in the Fifth Cause of Action are not sufficiently collateral or extraneous to the Agreement to support a claim for fraudulent inducement.
WorldCom contends that the alleged misrepresentations in the Fifth Cause of Action are collateral to the Agreement entered into between WorldCom and NACC simply because the misrepresentations are not contained in the Agreement. The Court disagrees. Where courts have found viable fraud claims based on fraudulent misrepresentation, the statements concerned matters separate and distinct from the subject matter of the contract. For example, in Cohen v. Koenig, 25 F.3d 1168, the representations at issue supporting a fraudulent inducement claim concerned defendant's overstatements of their net income and the value of the current assets and property. The misrepresentations as to defendant's financial condition were material misrepresentations extrinsic to plaintiff's agreement to extend credit to defendants and which induced plaintiffs to extend credit to the defendants. Cohen, 25 F.3d at 1172-73. In Deerfield Communications Corp. v. Chesebrough-Ponds, Inc., 68 N.Y.2d 954, 956, 510 N.Y.S.2d 88, 502 N.E.2d 1003 (1986), defendants made representations concerning geographic restrictions limiting product resales that were not contained in the contract, but which were not contradicted by the contract. The court held that the parol representations were "collateral or extrinsic" to the contract, and were thus enforceable. The sellers in Chase v. Columbia Nat'l Corp., 832 F. Supp. 654, 660 (S.D.N.Y. 1993), aff'd, 52 F.3d 312 (2d Cir. 1995), overstated the book value of the business being sold by overstating and double-counting closing inventory of scrap metal and accounts receivable in a manner that made their fraud difficult to detect. The contract provided that the sellers guaranteed the business' net worth, and limited damages to the reduced net worth, or indemnification of the buyer's loss. The court found that these representations were collateral and extraneous to the representations provided by the contract, thus justifying the action for fraud.
The misrepresentations alleged here, by contrast, are closely related to the subject matter of the contract and concern representations of future intent, not a separate, present fact. See Deerfield Communications, Corp. 510 N.Y.S.2d at 89. (misrepresentation of present fact, not future intent may be actionable as a fraud claim). The Fifth Cause of Action alleges the following misrepresentations:
That NACC would pay WorldCom's monthly invoices in
full on a priority basis for the telecommunications
provided pursuant to the Agreement;
that NACC would promptly pay WorldCom in full for all
past due amounts that had accumulated on the Oracle
and AS-400 Systems for services provided prior to the
time of entering into the Agreement, upon the
application by WorldCom to NACC's accounts of the
credits that were due NACC from the inception of the
relationship up to the time of the parties entering
into the Agreement; and
that WorldCom's application of the $400,000 credit
referred to in Section 4 of the Agreement would
release WorldCom from all claims of every type and
kind that WorldCom.wpd 6/04/03 19 had arisen prior to
the time of the parties entering into the Agreement.
(Complaint ¶ 90.)
The Agreement provides, in pertinent part, that: "WorldCom will bill the Customer for the Service . . . on a monthly basis. [NACC] will pay all charges billed by WorldCom within thirty . . . days. . . ." Agreement, Article 6. Paragraph 6.3 of the Agreement provides: "Customer's obligation to pay all undisputed charges billed by WorldCom is absolute and unconditional under any and all circumstances."
Misrepresenting whether NACC would pay WorldCom's invoices in full on a priority basis is not a misrepresentation of a present, material existing fact, nor is it a representation that is collateral or extraneous to the agreement. First, the representation concerning priority payment on its face concerns a promise of future performance. Second, payment of the WorldCom invoices in full is the subject of Article 6 of the Agreement. The alleged misrepresentation concerning priority payment is not sufficiently collateral or extraneous to the Agreement to support a cause of action for fraud.
The representation concerning whether NACC would pay WorldCom past due amounts upon WorldCom's granting credits NACC likewise is not a misrepresentation of a present fact, but depends upon WorldCom's applying future credits to NACC's accounts. Whether WorldCom has properly credited NACC's accounts is a matter of dispute in this case. The issue of WorldCom's credits to NACC's accounts and NACC's payment of past-due amounts is the subject matter of Credit Adjustment Agreement entered into by WorldCom and NACC. Thus, the representation concerning NACC's payment of past due amounts upon WorldCom's application of credits to NACC is not collateral or extraneous to promises made in the Agreement or the amendments thereto.
The representation concerning the $400,000 credit also is not collateral to the Agreement. Article 4 of the Agreement provides for the application of the $400,000 credit to NACC. WorldCom asserts that the Defendants represented that the $400,000 credit in the Agreement was in consideration of a release of all claims against WorldCom arising prior to the Agreement. (Complaint ¶ 27.) These alleged misrepresentations do not concern false representations regarding a present fact separate from the Agreement, but concern the operation of the Agreement itself.
The cases cited by WorldCom in support of its position do not help Plaintiff. In Kelly v. M.D. Buyline, Inc., 2 F. Supp.2d 420, 434-35 (S.D.N.Y. 1998), the collateral misrepresentation at issue concerned a promise to pay attorneys' fees without interruption in return for a reduction in those fees was not made in connection with the original retainer agreement which was the subject of the plaintiff attorneys' breach of contract claim, but was made subsequent to the retainer agreement. In Blank v. Baronowski, 959 F. Supp. 172, 180 (S.D.N.Y. 1997), defendant entered into an oral joint venture agreement in which defendant promised that plaintiff was defendant's partner and that plaintiff would receive certain compensation arising from the acquisition of a company. Defendant made statements as to the existence of the joint venture subsequently to induce plaintiff to extend credit. In determining that plaintiff had a fraud claim against defendant, the district court found that the statements concerning the existence of the joint venture were sufficiently collateral because the fraudulent statements were made after its formation. Id. In Bell Sports v. System Software Associates, 71 F. Supp.2d 121, 127 (E.D.N.Y. 1999), the court determined that the misrepresentations underlying a fraud claim were made in an agreement separate from the contract at issue.
Here, the Defendants' statements concerning NACC's promise to pay monthly invoices, past due amounts, and the release of claims against WorldCom in return for the $400,000 credit, do not concern statements made subsequent to the Agreement, or matters collateral and extraneous to the subject matter of the Agreement. See Hargrave v. Oki Nursury, Inc., 636 F.2d 897, 898-99 (2d Cir. 1980) ("If the only interest at stake is that of holding the defendants to a promise, the courts have said that plaintiff may not transmogrify the contract claim into one for tort.").
Because the Fifth Cause of Action alleges misrepresentations that are not collateral or extraneous to the Agreement, Plaintiffs have not stated a cause of action for fraudulent inducement against the Defendants.
The Fifth Cause of Action in the Third Amended Complaint further alleges that Defendants, including Milana Sr., Caccamo, Fragin, G & H and Gruber conspired to defraud WorldCom.
New York law does not recognize the substantive tort of civil conspiracy. Durante Bros. & Sons, Inc. v. Flushing Nat'l Bank, 755 F.2d 239, 251 (2d Cir. 1985). Under New York law, "`a mere conspiracy to commit a tort is never of itself a cause of action.'" Sado v. Ellis, 882 F. Supp. 1401, 1408 (S.D.N.Y. 1995) (quoting Alexander & Alexander v. Fritzen, 68 N.Y.2d 968, 969, 510 N.Y.S.2d 546, 547 (1986)). Rather, "[a]llegations of conspiracy are permitted only to connect the actions of separate defendants with an otherwise actionable tort." Alexander & Alexander, 68 N.Y.2d at 969, 510 N.Y.S.2d at 547; see also Missigman v. USI Northeast, Inc., 131 F. Supp.2d 495, 517 (S.D.N.Y. 2001) (under New York law, "a claim for civil conspiracy is available only if there is evidence of an underlying actionable tort").
Civil conspiracy requires (i) an agreement between two or more persons, (ii) an overt act, (iii) an intentional participation in the furtherance of a plan or purpose and (iv) resulting damage, and effectively subjects a defendant and his co-conspirators to joint and several liability for joint activity. Kashi v. Gratsos, 790 F.2d 1050, 1054-55 (2d Cir. 1986).
Because the Fifth Cause of Action does not allege sufficiently a fraud claim, there is no underlying tort and WorldCom has no basis for asserting a claim of conspiracy against Defendants Milana Sr., Caccamo, Fragin, G & H and Gruber.
Aiding and Abetting
"To state a claim for aiding and abetting under New York law, a plaintiff must allege: (1) the existence of an underlying fraud; (2) knowledge of this fraud on the part of the aider and abettor; and (3) substantial assistance by the aider and abettor in achievement of the fraud." Gabriel Capital, L.P. v. Natwest Finance, Inc., 94 F. Supp.2d 491, 511 (S.D.N.Y. 2000) (citing Nigerian National Petroleum Corp. v. Citibank, N.A., No. 98 Civ. 4960, 1999 WL 558141, at *8 (S.D.N.Y. July 30, 1999). As indicated, the Third Amended Complaint fails to state a fraud claim against any of the Defendants. Accordingly, there is no basis for WorldCom to assert a claim against any of the Defendants for aiding and abetting.
Because the Court has determined that WorldCom has not stated a cause of action for fraudulent inducement, the Court will not address the parties' arguments concerning Rule 9(b) of the Federal Rules of Civil Procedure.
Accordingly, because the Fifth Cause of Action fails to state a claim for fraudulent inducement, conspiracy or aiding and abetting it is hereby dismissed as against all Defendants other than Goldstein2. The Court shall enter an order herewith scheduling a pretrial conference in this case.