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United States District Court, S.D. New York

February 25, 2004.


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 Page 2

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 engaged the Page 3 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. Id.

  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 ¶ 14).

  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 Page 4 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 Arbitration Association, Page 5 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 claim.

  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 Page 6 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 contract.

  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 Page 7 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 Page 8 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 entirety.

 B. Fraud

  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 damages.
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 Page 9 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 (Pl. Mem. at 9).

  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. Page 10

  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 Page 11 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' agreement.

  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). Page 12

  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).

 C. Conversion

  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 Page 13 action for conversion cannot be predicated on a mere breach of contract).

  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. Page 14


  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.


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