United States District Court, S.D. New York
August 10, 2005.
DOUGLAS KINSEY, Plaintiff,
CENDANT CORPORATION, FAIRFIELD RESORTS INC., and FFD DEVELOPMENT COMPANY, L.L.C., Defendants.
The opinion of the court was delivered by: ROBERT SWEET, Senior District Judge
The plaintiff Douglas Kinsey ("Kinsey") has moved pursuant to
Rule 15(a), Fed.R.Civ.P., for leave to file a Second Amended
Complaint ("SAC") against the defendants Cendant Corporation
("Cendant"), Fairfield Resorts Inc. ("Fairfield") and FFD
Development Company, L.L.C. ("FFD") (collectively the
"Defendants"). The Defendants have moved to sanction Kinsey
pursuant to Rule 11, Fed.R.Civ.P. For the reasons set forth
below, both motions are denied.
Kinsey commenced this action on January 26, 2004 by filing a
complaint (the "Complaint") against Fairfield, FFD, Cendant and
the Cendant Corporation Employee Stock Purchase Plan
(collectively the "Initial Defendants"), alleging a violation of
ERISA, securities fraud in violation of Section 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder, and various common law claims, as well as a state law
claim against the Initial Defendants for their purported failure
to pay Kinsey for accrued, unused vacation benefits.
The Initial Defendants moved to dismiss the Complaint on March
26, 2004. Kinsey filed an Amended Complaint on April 23, 2004 in
which he abandoned, inter alia, the ERISA claims and dropped the Cendant Corporation Employee Stock Purchase Plan as a
defendant, and the Defendants moved to dismiss the claim for
securities fraud (Count 1), breach of fiduciary duty (Count 3),
breach of the implied duty of good faith and fair dealing (Count
4), fraud and deceit (Count 5), unjust enrichment (Count 8) and
the negligence claim (Count 7) to the extent that claim was based
on gross negligence.
In an opinion and order issued on November 16, 2004 (the
"November 16 Opinion"), familiarity with which is assumed, the
Court granted Defendants' motion in full, dismissing Counts 1, 3,
4, 5 and 8 of the Amended Complaint and Count 7 in part. See
Kinsey v. Cendant Corp., No. 04 Civ. 0582, 2004 WL 2591946, at
*19 (S.D.N.Y. Nov. 16, 2004). Kinsey also was granted leave to
move to file a second amended complaint. See id.
On December 16, 2004 Kinsey moved for leave to file the SAC
which abandoned the claim for securities fraud and common law
claims for breach of the implied duty of good faith and fair
dealing and unjust enrichment and restated the claims for breach
of fiduciary duty (Count 2), fraud and deceit (Count 3), and
gross negligence (Count 5). (See SAC ¶¶ 107-133, 146-52). The
remaining claims in the SAC were included in the Amended
Complaint and were not the subject of Defendants' motion to
dismiss. They include claims for breach of contract (Count 1),
negligent misrepresentation (Count 4), failure to pay wages
(Count 6) and declaratory judgment (Count 7).
The Defendants moved for sanctions, and both motions were heard
and marked fully submitted on March 23, 2005.
The facts set forth in the November 16 Opinion derived from the
Complaint remain essentially unchanged as alleged in the SAC. The
additional allegations in the SAC will be discussed below.
The Applicable Standard For Amendment
Rule 15(a) of the Federal Rules of Civil Procedure provides
that leave to amend a complaint "shall be freely given when
justice so requires." The federal courts, however, have
interpreted Rule 15 to permit such amendments only when (1) the
party seeking the amendment has not unduly delayed, (2) when that
party is not acting in bad faith or with a dilatory motive, (3)
when the opposing party will not be unduly prejudiced by the
amendment, and (4) when the amendment is not futile. See Foman
v. Davis, 371 U.S. 178, 182, 83 S.Ct. 227, 9 L.Ed.2d 222 (1962);
see Mackensworth v. S.S. Am. Merchant, 28 F.3d 246, 251 (2d
Cir. 1994); Prudential Ins. Co. v. BMC Indus., Inc.,
655 F. Supp. 710, 711 (S.D.N.Y. 1987). "[I]t is well established that leave to amend a complaint need
not be granted when amendment would be futile." Ellis v. Chao,
336 F.3d 114, 126 (2d Cir. 2003) (citing Foman,
371 U.S. at 182). See Nowakowski v. Kohlberg, No. 89 Civ. 5621, 1991 U.S.
Dist. LEXIS 107, at *5 (S.D.N.Y. Jan. 8, 1991). An amendment is
considered futile if the amended pleading fails to state a claim
or would be subject to a successful motion to dismiss on some
other basis. See, e.g., S.S. Silberblatt, Inc. v. East
Harlem Pilot Block, 608 F.2d 28, 42 (2d Cir. 1979); Freeman v.
Marine Midland Bank-New York, 494 F.2d 1334, 1338 (2d Cir.
More specifically, a proposed amendment to a pleading is deemed
to be futile if "it could not withstand a motion to dismiss
pursuant to Rule 12(b)(6)." Oneida Indian Nation of New York v.
City of Sherrill, 337 F.3d 139, 168 (2d Cir. 2003) (citing
Ricciuti v. N.Y.C. Transit Auth., 941 F.2d 119, 123 (2d Cir.
1991)). See Aniero Concrete Co. v. New York City Construction
Auth., Nos. 84 Civ. 9111, 95 Civ. 3506, 1998 WL 148324, at *7
(S.D.N.Y. Mar. 30, 1998); Finlay v. Simonovich, No. 97 Civ.
1455 (AJP) (DAB), 1997 WL 746460, at *4 (S.D.N.Y. Dec. 2, 1997).
For the purposes of evaluating futility, the 12(b)(6) standard is
applied: All well pleaded allegations are accepted as true, and
all inferences are drawn in favor of the pleader. See Mills v.
Polar Molecular Corp., 12 F.3d 1170, 1174 (2d Cir. 1993).
Kinsey has acknowledged that amendment is futile if the proposed amended complaint would not survive a motion to dismiss.
See Pl. Mem. at 2; Nowakowski, 1991 U.S. Dist. LEXIS 107, at
*5. According to the Defendants, the claims for fraud, breach of
fiduciary duty and gross negligence in the SAC are legally
defective under Rules 9(b) and 12(b)(6), Fed.R.Civ.P.,
requiring consideration of each of these claims.
I. The SAC Fails To Allege Fraud Adequately
A. The Standard
The Second Circuit has made clear that Rule 9(b) has three
salutary objectives: to "provide a defendant with fair notice of
a plaintiff's claim, to safeguard a defendant's reputation from
improvident charges of wrongdoing, and to protect a defendant
against the institution of a strike suit." Campaniello Imports,
Ltd. v. Saporiti Italia S.p.A., 117 F.3d 655, 663 (2d Cir. 1997)
(internal quotations omitted); Shields v. Citytrust Bancorp,
Inc., 25 F.3d 1124, 1128 (2d Cir. 1994).
Rule 9(b) requires that to allege a claim for fraud adequately,
a complaint must contain particularized facts that "give rise to
a strong inference" of scienter on the part of the defendant.
Id. at 663; see also id. at 664 (affirming dismissal of fraud claims where "allegations, even taken together, [were]
insufficient to raise a strong inference of fraudulent intent").
The requisite "strong inference" of scienter may be established
"(a) by alleging facts to show that defendants had both motive
and opportunity to commit fraud, or (b) by alleging facts that
constitute strong circumstantial evidence of conscious
misbehavior or recklessness." See Shields, 25 F.3d at 1128
(2d Cir. 1994). The November 16 Opinion stated, "although Rule
9(b) provides that the requisite state of mind may be `averred
generally' . . . rule 9(b) is not a `license to base claims of
fraud on speculation and conclusory allegations.'" See
Kinsey, 2004 WL 2591946, at *17 (citing Acito v. Imcera Group,
Inc., 47 F.3d 47, 52 (2d Cir. 1995) (quoting Wexner v. First
Manhattan Co., 902 F.2d 169, 172) (2d Cir. 1990) (internal
B. The Additional Allegations
According to Kinsey:
Cendant formed FFD, an "off-balance sheet" entity, to
perpetuate a "fraudulent scheme to hide the assets
and debt acquired with the Fairfield acquisition."
(SAC ¶¶ 22, 26).
Kinsey's "designation" as an employee of FFD was
"fraudulent," and "an essential element of the
fraudulent scheme to maintain the fiction concerning
FFD was to ensure that Plaintiff could not exercise
his options." (Id. ¶ 26).
The value of stock options awarded to Cendant's CEO
were "artificially inflated by the scheme to hide the
newly-acquired assets of Fairfield in an off balance
sheet company." (Id. ¶ 28).
At the time it acquired Fairfield in April 2001,
Cendant sought to "mislead the public regarding the
value of the company" by "failing to recognize the
stock options issued to its executives as an expense"
and, as part of a "scheme" to understate its supposed
liabilities for its employee stock options, sought to
maintain FFD as a separate "off-balance sheet"
company. (Id. ¶¶ 29-30). In order "to increase its
chances of prevailing" in securities fraud litigation
unrelated to Fairfield, the bulk of which was settled
in 1999, and "to salvage its [tarnished] public
image," Cendant "sought to maintain the false
impression the FFD was a separate company . . ."
(Id. ¶¶ 27, 30); and
After Cendant announced in August 2002 it would
reduce awards of employee stock options, it needed to
ensure Kinsey would be unable to exercise his options
in order to, in turn, ensure that Cendant would not
become "embroiled in further scandal or lawsuits in
connection with its scheme." (Id. ¶ 71).
As the November 16 Opinion stated, even accepting arguendo
Kinsey's allegations about a scheme to hide assets "off balance
sheet" and improperly account for stock option awards, "there are
no allegations in the Amended Complaint suggesting how the
purported misrepresentations to Kinsey concerning the exercise
period for his Awarded Options, later the converted stock
options, could have furthered that scheme." See Kinsey, 2004
WL 2591946, at *11.
The SAC seeks to overcome this motivational lack by asserting: Cendant determined that if Plaintiff [Kinsey] was
allowed to exercise his stock options pursuant to his
stock option agreement, it would demonstrate that FFD
was in fact not an independent entity, and that
Cendant should not have placed Fairfield's assets and
liability [sic] in FFD on an off-balance sheet basis.
(SAC ¶ 124).
C. Particularized Facts Showing Motive and Opportunity to
Commit Fraud Have Not Been Alleged Adequately
The SAC is silent on how or why Kinsey's mere exercise, while
he was employed by FFD (or after he left FFD), of 33,918 options
granted to him while he worked for Fairfield would have
undermined FFD's independence from Cendant or shown that Cendant
should not have placed Fairfield's assets and liabilities in FFD
"on an off-balance sheet basis."
Furthermore, according to Kinsey's own allegations, this motive
to commit fraud did not arise until August 2002, when Kinsey
alleges "Cendant determined that it would take any action to
ensure that it was not embroiled in further scandal or lawsuits
in connection with its scheme to hide the assets and liabilities
of Fairfield in an off-balance sheet company, FFD," and that
Cendant, "[i]n order to succeed" in its scheme, "needed to ensure
that Plaintiff remained unable to exercise his stock options."
(See id. ¶ 71). The purported "scheme," as described in the
SAC could not have been a motive for the alleged fraud about
which Kinsey complains, which supposedly occurred in the course of his
purported negotiations with Defendants concerning his employment
with FFD from December 2000 through April 2001 and his alleged
communications with Greg Bendlin in July and August 2001. (See
id. ¶¶ 34-35, 52-55).
The November 16 Opinion conclusions that the allegations in the
Amended Complaint with respect to motive were insufficient under
Rule 9(b) remain equally applicable to the instant motion. In the
Amended Complaint, Kinsey made nearly identical allegations
"concerning Cendant's `questionable accounting practices' . . .
at or around the time of the merger and Cendant's `scheme to
understate its liabilities for off balance sheet entities and its
employee stock options.'" Kinsey, 2004 WL 2591946, at *11
(quoting Amended Complaint); see id. at *17. The November 16
Opinion concluded that such "allegations of general wrongdoing
and the reduction in the award of employee stock options have no
discernible bearing on any motive that the Defendants may have
had to misrepresent to Kinsey the relevant exercise period for
his converted stock options." Id. at *11; see id. at *17.
This conclusion was further supported by the "timing" of Kinsey's
allegations concerning the August 2002 announcement by Cendant
that it would begin recording stock option awards as expenses in
January 2003 and reduce the issuance of employee stock options in
the future, which the Court noted "came well after the summer of
2001, when the only misleading statements alleged with sufficient particularity purportedly occurred." Id. at *11.
The Court's previous conclusion that scienter had not been pled
adequately has not been altered by the additional allegations in
D. Particularized Facts Showing Conscious Misbehavior Or
Recklessness Have Not Been Alleged Adequately
When a plaintiff cannot demonstrate a motive to commit fraud,
an even stronger inference of recklessness is required. See
Chill v. Gen. Elec. Co., 101 F.3d 263, 269 (2d Cir. 1996)
("[R]eckless conduct is, at the least, conduct which is highly
unreasonable and which represents an extreme departure from the
standards of ordinary care . . . to the extent that the danger
was either known to the defendant or so obvious that the
defendant must have been aware of it." (internal quotations
omitted) (citing Rolf v. Blyth, Eastman Dillon & Co.,
570 F.2d 38, 47 (2d Cir. 1978) (alteration in original and quotation
omitted), op. am., Nos. 77-7104, 77-7124, 1978 WL 4098 (2d Cir.
May 22, 1978), cert. denied, 439 U.S. 1039, 99 S.Ct. 642,
58 L.Ed.2d 698 (1978)); see also Kalnit v. Eichler,
264 F.3d 131, 142 (2d Cir. 2001) (same).
The November 16 Opinion concluded that with respect to Kinsey's
allegations concerning the e-mails purportedly sent by Bendlin in
the summer of 2001, the "Amended Complaint [does not] offer particularized facts from which to conclude? that Bendlin
acted knowingly or recklessly when he made the representations at
issue." See Kinsey, 2004 WL 2591946, at *13. In an effort to
cure the deficiencies of this point identified by the Court,
Kinsey alleges that Berk and certain unidentified "other
Fairfield executives" had "access to the correct information"
concerning the expiration date of his awarded options. (See SAC
However, conclusory allegations that a corporate officer had
"access" to information that contradicted the alleged
misstatements are insufficient to raise a strong inference of
recklessness. See In re Health Mgmt. Sys., Inc. Sec. Litig.,
No. 97 Civ. 1865 (HB), 1998 WL 283286, at *6 (S.D.N.Y. June 1,
1998) (allegations that, "because of defendants' . . . executive
managerial positions, they had access to information" that
contradicted allegedly misleading statements were "insufficient
to establish actual intent or conscious recklessness"); Glickman
v. Alexander & Alexander Servs., Inc., No. 93 Civ. 7594 (LAP),
1996 WL 88570, at *14 (S.D.N.Y. Feb. 29, 1996) (mere access to
information "is an inadequate basis for scienter" given that it
"would expose virtually any CEO, by virtue of his or her position
alone, to liability"); see also Lipton v. Pathogenesis
Corp., 284 F.3d 1027, 1036 (9th Cir. 2002) (conclusory
allegations of access to data insufficient to establish that
officers had knowledge that would cause representations to be
"consciously misleading") (internal quotations omitted). Further, the proposition that knowledge, as opposed to
recklessness, would be ascribed to Defendants based on
allegations that certain corporate officers may have had
knowledge or information concerning the expiration date of
Kinsey's options at or around the same time that other officers,
such as Berk or Bendlin, allegedly misled Kinsey as to the
exercise period for the options has already been rejected by the
Court. See Kinsey, 2004 WL 2591946, at *13.
For the foregoing reasons, the SAC fails to allege adequately
its asserted fraud claims.
II. The SAC Fails To Allege Adequately A Breach Of Fiduciary
The November 16 Opinion concluded, "[t]he law . . . will not
imply a fiduciary relationship based merely on Kinsey's status as
an employee." See Kinsey, 2004 WL 2591946, at *14 (citing
cases); see also Onanuga v. Pfizer, Inc., No. 03 Civ. 5405
(CM), 2003 WL 22670842, at *3 (S.D.N.Y. Nov. 7, 2003) ("[A]n
employer-employee relationship is not fiduciary in nature
. . ."). Nor does Kinsey's status as a contractual option holder
of Fairfield or Cendant shares suffice to create a fiduciary
relationship. See Glinert v. Wickes Cos., No. 10407, 1990 WL
34703, at *9 (Del.Ch. Mar. 27, 1900), aff'd, 586 A.2d 1201
(Del. 1990) ("under our law, the option feature of these
instruments does not qualify for the protections that flow from a
fiduciary duty."); see also In re Cendant Corp. Sec. Litig., 76 F. Supp. 2d 539, 549-50 (D.N.J.
1999) (employee was not owed fiduciary duty under stock option
The proposed breach of fiduciary duty claim appears to be
predicated on the theory that Defendants owed Kinsey a fiduciary
duty at the time of alleged misrepresentations concerning the
exercise period for his Awarded Options "[b]ased upon the
business and personal relations" Kinsey alleges he had with Franz
Hanning, the president and CEO of Fairfield. (See SAC ¶ 108).
The November 16 Opinion rejected this theory, holding that
alleged "business and personal relations" between Kinsey and
certain officers, directors and executives of the Defendants "are
not sufficient allegations of fact to demonstrate the existence
of a fiduciary relationship" between Kinsey and the Defendants.
See Kinsey, 2004 WL 2591946, at *14; see also Freedman
v. Perlman, 706 N.Y.S.2d 405, 271 A.D.2d 301, 305 (1st Dep't
2000) (allegations that employee "trusted" employer "to treat him
fairly . . . does not give rise to a fiduciary duty").
The SAC appears to allege that Fairfield or Cendant violated a
fiduciary duty they owed Kinsey because Hanning allegedly failed
in April 2003, after Kinsey's dispute with Cendant and Fairfield
concerning the exercise period for the awarded options arose, to
assist Kinsey in "resolving the problems surrounding the exercise
of his shares." (See SAC ¶¶ 79-82, 108). Even if a fiduciary
relationship existed in theory, there is no legal basis for applying it to resolve the dispute in Kinsey's
favor and to Fairfield's and Cendant's detriment.
No fiduciary duty is established based on Cendant's adoption of
an "Employer of Choice" program in October 2001. "Employer of
Choice" is a human resources concept. There is no provision in
the "Employer of Choice" program cited by Kinsey to create a duty
for Cendant to resolve its dispute with Kinsey over his options
in Kinsey's favor, nor is there authority cited for such a
proposition arising out of Cendant's designation of itself as a
desirable place to work.
As such, the elements of a fiduciary claim have not been
alleged adequately in the SAC.
III. The SAC Has Not Adequately Alleged A Claim For Gross
The November 16 Opinion concluded that a claim for gross
negligence was not established when no facts had been alleged to
show "why this supposed transmission of misinformation alone
establishes the want of scant care, or suggests that Defendants'
purported failure to provide accurate information to Kinsey
`smacks' of intentional wrongdoing." See Kinsey, 2004 WL
2591946, at *18 (citing cases).
The conclusory allegation that Defendants "acted recklessly and/or with conscious disregard" (see SAC ¶ 150),
does not meet the standard required to adequately plead a gross
negligence claim. See Ruffolo v. Oppenheimer & Co., No. 90
Civ. 4593 (SWK), 1991 WL 17857, at *2 (S.D.N.Y. Feb. 5, 1991)
(mere recitations of "conclusory, boiler-plate allegations that
defendants were `reckless' or `negligent'" do not "comply with
the minimal pleading requirements of Rule ?8"), aff'd,
987 F.2d 129 (2d Cir. 1993); Tevdorachvili v. Chase Manhattan Bank,
103 F. Supp. 2d 632, 644 (E.D.N.Y. 2000) (claim for gross
negligence and recklessness dismissed where plaintiff "allege[d],
albeit by nothing more than a rhetorical flourish, that
[defendant] was `reckless'" because "in the absence of factual
allegations showing more, heated language and indignation will
Furthermore, to the extent Kinsey's gross negligence claim
appears to be based on the allegations that Defendants had access
to information concerning the expiration period for his awarded
options and failed to accurately convey that information to him,
(see SAC ¶ 150), it may be sufficient to demonstrate ordinary
negligence, at most, but it does not meet the heightened standard
necessary to state a claim for gross negligence. See Sutton
Park Dev. Corp. Trading Co. v. Guerin & Guerin Agency, Inc.,
745 N.Y.S.2d 622, 297 A.D.2d 430, 431 (3d Dep't 2002) (stating that
"[g]ross negligence . . . differs in kind as well as degree from
ordinary negligence" and requires "factual averments alleging
conduct of [an] aggravated character"). To conclude otherwise would convert an allegedly negligent transmission of information
into one for gross negligence, a proposition without any
authority advanced by Kinsey.
The standard for pleading gross negligence has not been met by
IV. The Motion For Sanctions Is Denied
While the allegations of the SAC have been found wanting and
the conclusions of the November 16 Opinion reaffirmed, the
Defendants have failed to establish bad faith, harassment, intent
to delay or to increase the cost of litigation on the part of
Kinsey. Although the question is a close one, it is resolved in
Kinsey's favor in this instance.
The motion for sanctions is denied. Conclusion
The motion for leave to file the SAC is denied, as is the
motion for sanctions. The parties will meet and confer on a
discovery and trial schedule.
It is so ordered.
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