United States District Court, S.D. New York
February 25, 2004.
W.B. DAVID & Co., Inc. and SJD, LLC, Plaintiff's, V. DWA COMMUNICATIONS, INC., DIANE WARGA-ARIAS and HENRY ARIAS, Defendants
The opinion of the court was delivered by: BARBARA JONES, District Judge
On or about August 27, 2002, Plaintiff's filed suit in the Supreme
Court of the State of New York, County of New York, alleging common law
claims of fraud, conversion, and breach of contract. Plaintiff's seek in
excess of $300,000 damages for each of these claims and $1 million in
punitive damages for the alleged fraudulent activities of Defendants.
Pursuant to 28 U.S.C. § 1441, Defendants removed the action to this
Court on October 23, 2002.*fn1 On October 30, 2002, Defendants filed a
motion to dismiss
Plaintiff' Complaint against Defendants collectively, or against
Defendants Diane Warga-Arias and Henry Arias individually, pursuant to
Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim
upon which relief may be granted. For the reasons set forth below, this
motion is GRANTED in part and DENIED in part.
In early 2001, W.B. David began preliminary discussions with DWA
Communications, Inc. ("DWA), regarding a potential business arrangement.
(Compl. at ¶ 8). Dianne Warga-Arias, and Henry Arias are the alleged
principals of DWA (collectively "Defendants"). (Compl. at ¶¶ 4-5).
Under the alleged agreement, DWA would promote and market a trade
marketing association to be operated under the name "The Lending Jewelers
of the World" ("LJW"). Id.
On February 26, 2001, DWA submitted a project proposal to W.B. David
concerning the scope and anticipated costs of the promotion and marketing
project, named the "Phoenix Project". (Compl. at ¶ 10). In connection
with the proposal, Defendants made several alleged representations*fn2
to W.B. David and SJD (collectively "Plaintiff's"). Relying upon the
representations made by Defendants, Plaintiff's accepted the proposal and
services of Defendants. (Compl. at ¶ 11).
During the course of the engagement, SJD managed the day-today
operations of LJW and owned the LJW trademark. (Compl. at ¶ 9). Until
December 2001, W.B. David funded all the operations of LJW. (Compl. at
¶¶ 4-5). Defendants regularly billed Plaintiff's for expenses related
to, and work performed for, the Phoenix Project. (Compl. at ¶ 12).
Plaintiff's compensated Defendants for their services, and all
outstanding invoices were paid in full through the end of 2001.
Between February and April of 2002, the Defendants submitted over
$100,000 in invoices to Plaintiff's. Compl. at ¶ 13). Up until this
point, $750,000 had been paid to Defendants under the Phoenix Project.
(Compl. at ¶ 13). W.B. David became concerned that Defendants were
overcharging for services allegedly rendered, and that Defendants had not
performed several services claimed to have been provided. (Compl. at
¶ 14). Upon these suspicions, Plaintiff's hired an independent
accountant to audit the Phoenix Project and the LJW account. (Compl. at
Allegedly, the accountant's report indicated a number of billing
improprieties and inappropriate expenses.*fn3 Of particular concern,
Defendants allegedly charged Plaintiff's for a substantial
number of services that were not performed or undelivered,
including: conceptual design development, color print production, and web
site development. (Compl. at ¶ 16). In May of 2002, Plaintiff's
approached Defendants with the audited report, invited Defendants to
respond to the report and demanded adjustment to their account. (Compl.
at ¶ 17). To date, there has been no response to the substance of the
audited report. (Compl. at ¶ 18). As a result, Plaintiff's brought
suit for breach of contract, fraud and conversion.
When ruling on a Rule 12(b)(6) motion, a District Court must limit
its inquiry to the "facts stated in the complaint." High View Fund,
LP v. Hall, 27 F. Supp.2d 420, 424 (S.D.N.Y. 1998). The Court must
"accept all allegations contained in the complaint as true and draw all
reasonable inferences in favor of the nonmoving party." Sheppard v.
Beerman, 18 F.3d 147, 150 (2d Cir. 1994). However, "conclusory
allegations of the legal status of the defendants' acts need not be
accepted as true for the purposes of ruling on a motion to dismiss."
Frontier-Kemper Constructors, LLC v. American Rock Salt Co.
244 F. Supp.2d 520, 525 (W.D.N.Y. 2002). The Court's function is to assess
the legal feasibility of the complaint, but not to assay the weight of
the evidence that may be offered in support of the claim. American
Inc. v. Defonseca, 1996 U.S. Dist. LEXIS 9160 at *6
(S.D.N.Y. 1996). The motion shall not be granted unless "it appears
beyond doubt that the plaintiff can prove no set of facts in support of
his claim which will entitle him to relief." Conley v. Gibson,
355 U.S. 41, 45-46 (1957).
A. Breach of Contract
To state a claim for breach of contract under New York law, the
complaint must allege (1) the existence of a contract, (2) the
plaintiff's performance of his obligations thereunder, (3) the
defendant's failure to perform his obligations, and (4) resulting damages
to the Plaintiff. See Keady v. Nike, Inc.,
116 F. Supp.2d 428, 438 (S.D.N.Y. 2000); Coastal Aviation, Inc. v.
Commander Aircraft Co., 937 F. Supp. 1051 (S.D.N.Y. 1996).
Defendants contend that the Complaint fails to identify any of the
specific provisions of the parties' agreement which Defendants allegedly
breached, and that the Complaint fails to allege that Plaintiff complied
with their contractual obligations. (Def. Mem. at 4-7; Reply Mem. at
10-11). The Court finds these arguments unpersuasive, and denies
Defendants' 12(b)(6) motion to dismiss Plaintiff's' breach of contract
First, the Complaint properly pleads sufficient facts to establish the
existence of an implied-in-fact contract based upon the conduct of the
parties. "`An agreement implied in fact is founded upon a meeting of
[the] minds, which, although not embodied
in an express contract, is inferred, as a fact, from conduct of the
parties showing, in light of the surrounding circumstances, their tacit
understanding.'"Health & Community Living, Inc. v. Goldis
Financial Group, Inc., 1998 U.S. Dist. LEXIS 3069 at *12-13 (March
13, 1998)(quoting Hercules Inc. v. United States, 516 U.S. 417,
424 (1996)). The Complaint alleges that the Defendants' agreed to promote
and Market "LJW" by performing various services such as conceptual design
development, color print production, and web site development. (Compl. at
¶¶ 10-12, 16). Furthermore, the Complaint alleges that Plaintiff's
agreed to pay, and did pay, Defendants valuable consideration for these
services despite alleged non-performance. (See Compl. at ¶¶ 11-13).
Thus, Plaintiff's properly allege facts that indicate the existence of a
Second, Plaintiff's plead sufficient facts to establish performance of
their obligations under the contract. See Keady,
116 F. Supp.2d at 438. The only meaningful obligation on the part of
Plaintiff's is the obligation to pay for goods and services provided by
Defendants. (Pl. Mem. at ¶ 7). Plaintiff's unequivocally allege
payment of all invoices relating to goods and services provided by
Defendants prior to the time of the alleged non-performance. (Compl. at
¶¶ 12-13). Thus, Plaintiff's properly allege facts that satisfy the
second element of a breach of contract claim.
Third, contrary to Defendants' assertions, the Complaint identifies
several portions of the agreement which were allegedly
breached by Defendants. The Complaint explicitly alleges that
Defendants failed to deliver goods and services bargained for as a part
of their agreement, that Defendants breached the agreement's implied
covenant of good faith and fair dealing, and that Defendants made alleged
expenditures unauthorized by the agreement. (Compl. at ¶¶ 15-16).
Thus, the Complaint properly alleges facts indicating Defendants failure
to perform their obligations under the agreement. See
Keady, 116 F. Supp.2d at 438.
Fourth, Plaintiff's allege damages in excess of $300,000 which resulted
from Defendants alleged breach of contract. (Compl. at ¶ 23). While
Plaintiff's may require additional discovery to determine the exact
amount of damages, the Court finds the allegations sufficient to
establish the final element of a breach of contract claim.
Finally, Defendants move to dismiss the Plaintiff's breach of contract
claim against Defendants Diane Warga-Arias and Henry Arias in their
individual capacity. The general rule is that corporate officers cannot
be held personally liable for a contract of their corporation if they do
not purport to bind themselves individually under the contract. See
Lichtman v. Mount Judah Cemetary, 705 N.Y.S.2d 23, 25 (1st Dep't
2000); Key Bank v. Grossi, 642 N.Y.S.2d 403 (3d Dep't 1996);
Westminster Constr. Corp. v. Sherman, 554 N.Y.S.2d 300, 301 (3d
Dep't 1990). Plaintiff's allege that they engaged the services of all the
Defendants under the Phoenix
Project, and therefore every Defendant was a party to the
agreement. (Compl. at ¶ 11). At this stage, the Court assumes that
the Defendants were parties to the agreement. Therefore, Defendants'
motion to dismiss Plaintiffs' breach of contract is denied in its
New York Law allows a plaintiff to assert a claim for both breach of
contract and fraud arising out of the same transaction. New York
Racing Assoc., Inc. v. Meganews, Inc., 2000 W.L. 307378 at *3
(E.D.N.Y. 2000); see also Carmania Corp., v. Hambrecht
Terrell Int'l., 705 F. Supp. 936, 938 (S.D.N.Y. 1989). However, "New
York law does not recognize claims that are essentially contract claims
masquerading as claims of fraud." Where a fraud claim is connected to the
breach of a contract claim, the plaintiff must either:
(1) demonstrate a legal duty separate from the
duty to perform under the contract; (2)
demonstrate a fraudulent misrepresentation
collateral or extraneous to the contract; or (3)
seek special damages that are caused by the
misrepresentation and unrecoverable as contract
Bridgestone/Firestone v. Recovery Credit Services,
98 F.3d 13, 22 (2d Cir. 1996). Where the alleged fraud arises out of the same
facts that form the basis for a plaintiff's cause of action for breach of
contract, the plaintiff has failed to state a legally sufficient cause of
action for fraud. Locascio v. Aquevella, 586 N.Y.S.2d 78, 79
(4th Dep't 1992). Thus, the Court must determine
whether Plaintiff's have pled sufficient facts to establish a
viable claim of fraud distinct from Plaintiff's' breach of contract
claim. In their Complaint, Plaintiff's allege that Defendants committed
fraud by deliberately submitting fraudulent invoices and documents to
Plaintiff's for services that were never performed or delivered. (Compl.
at ¶ 26). Plaintiff's argue that this claim is distinct from their
breach of contract claim which relates to Defendants defaults "in
relation to the actual performance of their obligations in a manner
inconsistent with the parties' agreement." (Pl. Mem. at 9). Thus,
Plaintiff's contend that Defendants alleged fraudulent misrepresentations
were collateral or extraneous to the parties' agreement.*fn4
The distinction which Plaintiff's attempt to make is unpersuasive.
Plaintiff's' fraud claim is based upon the fact that Defendants allegedly
failed to perform certain duties as required under the Phoenix Project,
yet they billed Plaintiff's for these services anyway. The alleged
misrepresentations complained of (i.e., the alleged improper billing
statements by Defendants) go to the heart of the agreement between the
parties. Namely, the rendering of services for a fee, or as Plaintiff
contends the failure to render services as agreed.
Plaintiff's rely upon Sony Music Entertainment Inc. v. Robinson, 2002
WL 272406 (S.D.N.Y. Feb. 26, 2002), for the proposition that billing
statements for services not actually rendered are "actionable
misrepresentations" because that have no relation to a contract for
services. In Sony, the court denied a motion to dismiss a counterclaim
based upon fraudulent misstatements which related to a collateral
services contract. Sony had a multi-record recording contract with the
defendants, the Dixie Chicks. Sony suggested that the defendants use a
certain producer named Worley to turn out their second album. However,
Sony misrepresented the fee that Worley would deduct from the defendants'
royalties as compensation for his services. The Dixie Chicks argued that
as a result of the misrepresentation, they were overcharged $150,000 for
Worley's services. The court found that the misrepresentations made to
the Dixie Chicks by Sony were collateral to the recording contract
between the parties, and permitted the counterclaim to continue.
The facts and conclusions of Sony are clearly inapplicable to the case
at bar. In Sony, the representation made by the plaintiff about Worley's
fees was incidental to the recording agreement between the parties.
Undoubtedly, the Dixie Chicks could have chosen anyone to produce their
second album, but they relied upon the representations made by Sony
regarding Worley's fees. The decision to choose Worley as producer was
not based upon the
existing contractual relationship between Sony and the Dixie
Chicks, but on the alleged fee Worley would charge. In contrast, the
billing statements in the case at bar are directly related to the
contract between Plaintiff's and Defendants. The billing statements were
the means of establishing fees for services rendered under the contract.
Even if the services were not rendered, as Plaintiff's contend, this fact
alone does not make the billing statements collateral to the parties'
For a fraudulent misrepresentation to be collateral or extraneous to a
contract, it must be a promise to do something other than what is
expressly required by the contract. See Frontier-Kemper
Constructors, Inc. v. Flatiron Constructors, LLC, 224 F. Supp.2d 520,
528 (W.D.N.Y. 2002); see also Hudson Optical Corp. v.
Cabot Safety Corp., 971 F. Supp. 108, 109 (E.D.N.Y. 1997). The mere
fact that Defendants allegedly sent false invoices to the Plaintiff's
after the consummation of their agreement is not sufficient to make these
alleged "statements" collateral or extraneous to the agreement between
the parties. The payment for services rendered, or not rendered, was a
requirement of the contract, and any failure to perform the services paid
results in a breach of contract claim. This fact can be implied from
Plaintiff's own brief which notes that "the only meaningful obligation on
the part of Plaintiff's is the obligation to pay for goods and services
provided by Defendants." (Pl. Mem. at 7).
The alleged fraudulent billing statements rendered by Defendants were a
product of the alleged breach of contract by Defendants. Since the
alleged fraud arises out of the same facts that form the basis for a
Plaintiffs cause of action for breach of contract, Plaintiff's have
failed to state cause of action for fraud. See Locascio v.
Aquevella, 586 N.Y.S.2d 78, 79 (4th Dept. 1992).*fn5 As a result,
Plaintiff's' fraud claim against all Defendants shall be dismissed
pursuant to Rule 12(b)(6).
To withstand a motion to dismiss, a claim for conversion of funds must
allege: (1) an injury caused by an actionable wrong other than a breach
of contract; (2) that the plaintiff owned the funds at the time they were
converted; (3) the defendant exercised unauthorized dominion over the
funds; (4) that the funds were specific and identifiable; and (5) that
the defendant was required to treat the funds in a particular manner, but
failed to do so. Rozsa v. S.G. Cowen Securities Corp.,
152 F. Supp.2d 525, 533 (S.D.N.Y. 2001). Furthermore, a claim for conversion is
deemed redundant, and may be dismissed pursuant to Rule 12(b)(6), where
damages are merely being sought for a breach of contract. See
New York Racing Assoc., Inc. v. Meganews, Inc., 2000 WL 307378,
at *5 (E.D.N.Y. Mar. 21, 2000); see also Key Bank, 642 N.Y.S.2d
at 404 (an
action for conversion cannot be predicated on a mere breach of
Here, the Complaint falls short of properly pleading a claim for
conversion. In particular, Plaintiff's have failed to plead an actionable
wrong distinct from their breach of contract claim.*fn6 See
Rozsa, 152 F. Supp.2d 533. While the Court is uncertain as to
the exact grounds of Plaintiffs conversion claim, it appears to derive
from the money allegedly procured by Defendants for services that were
not rendered. As previously discussed, the wrongful procurement of funds
for services not rendered results in a breach of contract claim.
Since Plaintiff's have failed to properly plead facts that would
entitle them to relief, Defendants' 12(b)(6) motion is granted with
respect to Plaintiff's' conversion claim.
For the reasons stated above, Defendants' motion to dismiss is GRANTED
with respect to Plaintiffs' fraud and conversion claims and DENIED with
respect to Plaintiffs' breach of contract claim.
By separate Order, the Court has referred this case to Magistrate Judge
Fox for General Pretrial Supervision, including an initial pretrial
conference to set a schedule for discovery.