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.
OPINION & ORDER
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
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
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
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,
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
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
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
IT IS SO ORDERED.
*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
*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
*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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