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United States District Court, S.D. New York

March 9, 2004.

N.B. GARMENTS (PVT.) LTD., Plaintiff -against- KIDS INTERNATIONAL CORP., Defendant

The opinion of the court was delivered by: HAROLD BAER, JR., District Judge[fn1] [fn1] Etienne Dor, a Spring 2004 intern in my Chambers and a second-year law student at New York Law School, provided substantial assistance in the research and drafting of this Opinion.


Defendant Kids International Corp. ("Kids") moves pursuant to Federal Rules of Civil Procedure ("Fed.R. Civ. P.") 9(b) and 12(b)(6) to dismiss Count II of plaintiff's amended complaint ("Am. Compl."). Defendant contends that plaintiff N.B. Garments (PVT.) Ltd. ("NB Garments") failed to plead with sufficient particularity the elements necessary to states cause of action for common law fraud. Kids further asserts that NB Garments failed to make out a claim for common law fraud. For the foregoing reasons, Kids' motion is granted.


 A. Factual Background

  This case arises out of a dispute between NB Garments, an apparel manufacturer with its operations in Nepal, and Kids, an apparel importer and wholesaler, based in New York. NB Garments alleges that on or about January 30, 2002, it shipped orders of apparel worth approximately $338,000.00 from Calcutta, India to Kids' in Long Beach, California. At NB Garments' request, to facilitate such transaction, Kids opened a letter of credit to the Nepal Bangladesh Bank through the Bank of New York ("BNY") naming BNY as consignee*fn2 on the Page 2 bill of lading.*fn3 Am. Compl. ¶ 2.

  NB Garments alleges that in March 2002, it issued five invoices to Kids — encompassing the entire $338,000.00 order.*fn4 According to NB Garments, Kids never contested these invoices. Am. Compl. ¶ 18. NB Garments asserts that on or about March 30, 2002, Kids instructed its agent, Orient Consolidation Service (H.K.) Ltd. ("OCS"), a customs broker, to draft the bill of lading and freight receipt, to reflect the consignee's name as "Kids International, Corp." instead of BNY, for the express purpose of inducing BNY to deliver the goods to Kids. Am. Compl. ¶¶ 12-14. Furthermore, the amended complaint alleges that BNY relied on this alteration and delivered the goods to Kids' agent, OCS. Am. Compl. ¶¶ 15-18, 24. NB Garments claims that Kids has refused to pay for the goods despite repeated demands. Am. Compl. ¶¶ 18-19. Count II of the amended complaint alleges that by instructing its agent to falsify the bill of lading and freight cargo receipt, Kids "perpetrated a fraud." Am. Compl. ¶ 24.

 B. Procedural History

  NB Garments filed its complaint in this action on October 10, 2003 seeking, inter alia compensatory and punitive damages and reasonable attorneys' fees stemming from Kids' alleged fraud. On December 31, 2003, Kids' current motion to dismiss was fully-briefed.


  A. Sufficiency of Pleading

  A Fed.R.Civ.P. 12(b)(6) motion should not be granted "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." Ad-Hoc Comm. of Baruch Black & Hispanic Alumni Ass'n. v. Bernard M. Baruch College, 835 F.2d 980, 982 (2d Cir. 1987), citing Conley v. Gibson, 355 U.S. 41,45-46 (1957). Pursuant to Rule 9(b), "[in] all averments of fraud and mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a person may be averred generally." Therefore, "a complaint must adequately specify the statements it claims were false or misleading, give particulars as to how the statements were fraudulent, state when and where the statements were made, and identify Page 3 those responsible for the statements." Cosmas v. Hassett, 886 F.2d 8, 11 (2d Cir. 1989); see also DiVittorio v. Equidyne Extractive Indus., Inc., 822 F.2d 1242, 1247 (2d Cir. 1987); Hudson v. Larouche, 579 F. Supp. 623, 628 (S.D.N.Y 1983).

  The requirement that the pleadings for fraud be stated with sufficient particularity is relaxed under certain circumstances, including situations when (a) "[t]he pleader is asserting that third persons have been defrauded, and (b) "when facts are peculiarly within the opposing party's knowledge." Segal v. Gordon, 467 F.2d 602, 607 (2d. Cir. 1972). See also Dominicus American Bohio v. Gulf & Western Indus., Inc., 473 F. Supp. 680, 693 (S.D.N.Y. 1979) (When plaintiff is claiming damages resulting from defendant's misrepresentation to a third-party and the circumstances surrounding such transaction are peculiarly within defendant's knowledge, the particularity requirement will be relaxed). When the standard is relaxed, the allegations may be pled based on information and belief, but "must be accompanied by a statement of the facts upon which the belief is founded." Id. "However, even the so-called relaxed standard does not eliminate the particularity requirement, although we recognize that the degree of particularity required should be determined in light of such circumstances as whether the plaintiff has had an opportunity to take discovery of those who may possess knowledge of the pertinent facts., A complaint . . . which fails to adduce any specific facts supporting an inference of knowledgeable participation in the alleged fraud, will not satisfy even a relaxed standard." Devaney v. Chester, 813 F.2d 566, 569 (2d Cir. 1987).

  In order to sustain a cause of action for common law fraud, the plaintiff must establish with sufficient particularity that the defendant "(1) made a material false statement; (2) knowing that the statement was false; (3) acting with intent to defraud; that plaintiff (4) reasonably relied on the false representation and (5) suffered damage proximately caused by the defendant's actions." Morris v. Castle Rock Entm't, Inc., 246 F. Supp.2d 290, 296 (S.D.N.Y, 2003). In this case, while the relaxed pleading standard is applicable because NB Garments is asserting that a third-party has been defrauded (Segal, 467 F.2d at 607), NB Garments' amended complaint fails even this less rigorous test.

  The amended complaint asserts only that (1) on or about March 30, 2002, at the instruction of Kids, OCS altered the bill of lading and freight cargo receipt to reflect Kids, Page 4 instead of BNY, as consignee (Am. Compl. ¶ 12), (2) the bill of lading conflicts with the letter of /credit, which properly names BNY as the true consignee (Am. Compl. ¶ 10), (3) Kids "caused the alternation to be done without the knowledge, authorization or consent of NB Garments" (Am. Compl. ¶ 13), (4) the alteration "was done for the purpose of inducing the Bank of New York to deliver the goods to Kids International" (Am. Compl. ¶ 14), (5) BNY delivered the goods to OCS, as Kids' agent (Am. Compl. ¶ 15), (6) Kids eventually received the goods and the invoices issued by NB Garments (Am. Compl. ¶ 17), and (7) Kids never "protest[ed] those invoices or raise[ed] any defense with respect to the quality of the goods" but has refused to pay for the goods "despite due demand" (Am. Compl. ¶¶ 18-19). Notably, with respect to the fraud claim, the complaint fails, among other things, to (1) identify the specific individual within Kids who instructed "OCS", an entity, to alter the bill of lading and cargo receipt, (2) identify the specific individual within OCS who received this instruction and actually performed the alteration, (3) provide the circumstances by which "Kids" convinced "OCS" to alter the document, or (4) explain where or how the alteration occurred. Consequently, NB Garments' amended complaint fails to satisfy two of the primary purposes of Rule 9(b) — to "provide a defendant with fair notice of a plaintiff's claim" and "to safeguard a defendant's reputation from improvident charges of wrongdoing." O'Brien v. Nat'l Prop. Analysts Partners, 936 F.2d 674, 676 (2d Cir. 1991) (internal citations omitted).

  Although NB Garments' amended complaint is currently insufficient, "Fed.R.Civ.P. 15(a) provides that leave to amend `shall be freely given when justice so requires.'" Devaney, 813 F.2d at 569, citing Fed.R.Civ.P. 15(a). In Rule 9(b) cases such as this one, where a plaintiff has not already attempted to correct a particularity deficiency, and when discovery has not yet ensued, Courts typically grant leave to amend. See Devaney, 813 F.2d at 569 (citing cases). Therefore, NB Garments' fraud claim is dismissed, with leave to replead within thirty days from the date of entry of this Opinion and Order.

 C. Third-Party Reliance

  While Kids' motion to dismiss is granted, and therefore the Court need not address Kids' remaining contention regarding third-party reliance, because NB Garments has been granted leave to replead, the Court finds it efficient to resolve this disagreement now. Kids argues, with Page 5 powerful support from the Second Circuit (see Cement & Concrete Workers District Council Welfare Fund v. Lallo, 148 F.3d 194, 196-197 (2d Cir. 1998)), that NB Garments' fraud claim should be dismissed because a claim for common law fraud may not be based on third-party reliance. While Cement & Concrete Workers has not been overruled, it conflicts with century old New York Court of Appeals cases, which, at the time that Cement & Concrete Workers was decided, and arguably still today, represent the law of New York. See, e.g., Eaton, Cole & Burnham Co. v. Avery, 83 N.Y. 31, 33-34 (1880) (third party reliance is sufficient to sustain a cause of action for common law fraud); Rice v. Manley, 66 N.Y. 82, 87 (1876) (same); Bruff v. Mali, 36 N.Y. 200, 205-206 (1867) (same) (hereinafter referred to collectively as "the Eaton line"). Therefore, I am in the curious position of choosing between dueling pronouncements of New York law made by two Courts to whom I am obliged to defer.

  By way of history, about a century after the Eaton line of cases, without any reference to binding authority from their parent court, lower New York state courts began to hold that common law fraud was not cognizable when based on the reliance of a third-party. See Garelick v. Carmel, 529 N.Y.S.2d 126, 128 (2d Dep't. 1988); Orlin v. Torf, 513 N.Y.S.2d 870, 872 (3d Dep't 1987); Escoett & Co. v. Alexander & Alexander, Inc., 296 N.Y.S.2d 929 (1st Dep't. 1969); Ryan Ready Mixed Concrete Corp. v. Coons, 267 N.Y.S.2d 627, 629 (2nd Dep't. 1966) (hereinafter referred to collectively as "the Garelick line"). Then, the snowball effect began to take further hold, and courts in this district cited exclusively to the Garelick line (without reference to the Eaton line) to conclude that in New York "a claim of fraud will not lie when premised on reliance of a third-party." See, e.g., Shaw v. Rolex Watch, U.S.A., Inc., 673 F. Supp. 674,682 (S.D.N.Y., 1987). And, to make matter's worse, the Second Circuit followed this conclusion, with reliance on the Garelick line (still, without citation to or discussion of the Eaton line). See Cement & Concrete Workers, 148 F.3d at 196-197; Kelly v. L.L. Cool J., 145 F.R.D. 32, 39 n.8 (S.D.N.Y. 1992), aff'd, 23 F.3d 398 (2d Cir. 1994)). While this Court is bound by the Second Circuit's holdings, "a federal court sitting in diversity must apply the law of the forum state and it must defer to the voice of that state's highest court — however antiquated its view of the law may seem" (Levesque v. Kelly Communications, Inc., 91 Civ. 7045, 1993 U.S. Dist. LEXIS 791, at *15 (Jan. 25, 1993)) because "[t]he highest state court is the final authority on Page 6 state law" (Field v. Fidelity Union Trust Co., 311 U.S. 169, 177 (1940).*fn5 Therefore, NB Garments' fraud claim, though deficiently pled, raises a cognizable claim under New York law.

 D. Conversion to Summary Judgment

  NB Garments argues that the Court should ignore the extrinsic material, submitted by Kids in conjunction with its motion to dismiss, and refrain from converting the motion to one for summary judgment, pursuant to Fed. R. Civ. P. 56. It is undisputed that in the context of a Rule 12(b)(6) motion, when a District Court is provided with additional materials outside of the pleadings, the Court may either "exclude the additional materials and decide the motion on the complaint alone or convert the motion to one for summary judgment under Fed.R.Civ.P. 56 and afford all parties the opportunity to present supporting material." Kopec v. Coughlin, 922 F.2d 152, 154 (2d Cir. 1994) (citations omitted). Because I have granted NB Garments leave to replead, I decline to convert the motion to one for summary judgment at this juncture.


  For the foregoing reasons, NB Garments' common law fraud claim is dismissed, with leave to replead within 30 days from the date of entry of this Opinion and Order. NB Garments' request for attorneys' fees is denied as it has provided no basis for an award of fees, especially considering the outcome of this motion. The Clerk is requested to close this motion.


 *fn2 A consignment is "nothing more than a bailment for sale. The entrusting of goods to another, to a carrier for delivery to a consignee designated or to one who is to sell the goods for the consignor." BALLENTINE'S LAW DICTIONARY (3d ed. 1969) (citations omitted). A consignee is defined as a "person to whom a carrier is to deliver a shipment of goods; the person named in a bill of lading to whom or to whose order the bill promises delivery. The term itself implies an agency." Id

 *fn3 A bill of lading is a "document acknowledging the shipment of a consignor's goods for carriage by sea." Id.

 *fn4 There were two invoices dated March 15, 2002 (one for $94,656.00 and the other for $170,000.00), two dated March 17, 2002, (one for $54,000.00 and the other for $16,000.00), and one dated March 20, 2002 (for $3,264.00).

 *fn5 Further, the fact that the First and Second Departments have, subsequent to the Second Circuit's decision in Cement & Concrete Workers, altered their stance, and held in accord with the Eaton line — even citing to the century old Court of Appeals decisions, lends further support for the determination that New York law has, since the 1800's, allowed for fraud claims based on third-party reliance. See Desser v. Schatz, 581 N.Y.S.2d 796, 797 (1st Dep't 1992), citing, inter alia, Eaton, 83 N.Y. at 33-34; Buxton Mfg. Co. v. Valiant Moving & Storage, 657 N.Y.S.2d 450, 451 (2nd Dep't 1997), citing, inter alia, Eaton, 83 N.Y. at 33-34; Rice, 66 N.Y. at 87.


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