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Treeline Investment Partners, LP v. Koren

July 3, 2007

TREELINE INVESTMENT PARTNERS, LP AND DAVID JAROSLAWICZ, PLAINTIFFS,
v.
GARY KOREN AND KILLY KOREN, DEFENDANTS.



The opinion of the court was delivered by: Denise Cote, District Judge

OPINION & ORDER

Plaintiffs Treeline Investment Partners, LP ("Treeline") and David Jaroslawicz ("Jaroslawicz") bring this action against defendants Gary Koren ("Koren") and Killy Koren ("Killy"), who are husband and wife, for fraud and breach of contract in relation to two sales of shares of a company in 2005. Defendants have filed a motion to dismiss this action for lack of personal jurisdiction under Rule 12(b)(2), Fed. R. Civ. P.; for insufficiency of service of process under Rule 12(b)(4); for failure to state a claim upon which relief can be granted under Rule 12(b)(6); and for failure to plead fraud with particularity as required by Rule 9(b). For the following reasons, the defendants' motion is denied.

Background

The following facts are undisputed or taken from the complaint, unless otherwise noted. Defendant Koren is an Israeli domiciliary and the chairman and CEO of SpaceLogic Ltd. ("SpaceLogic"), an Israeli company involved in airport security. In at least one meeting*fn1 in late 2004 and 2005, Koren, who was seeking to raise money, made representations regarding SpaceLogic to plaintiff Jaroslawicz, a New York resident, and Sean Deson ("Deson"), the person who makes investment decisions for plaintiff Treeline, a Delaware limited partnership with principal place of business in New York.*fn2 Koren represented to Jaroslawicz and Deson that SpaceLogic had a solid legacy business of numerous customers with approximately $4-5 million a year in revenue; that a contract with the United States Transportation Security Administration ("TSA") was imminent; that SpaceLogic was professionally managed; and that its new technology would generate $2-3 million a year in revenue. Furthermore, Koren represented that if Deson and Jaroslawicz assisted him in raising money, SpaceLogic could establish a United States infrastructure and add staff for United States sales and marketing.

Based on Koren's representations, Treeline and Jaroslawicz each purchased SpaceLogic shares on May 11, 2005, for a total of $250,000 and $349,000, respectively. According to the complaint, however, Koren's representations were deliberately false: There was no legacy business or TSA contract; the company was not being properly managed; and in fact, Koren and other executives were stealing money from the company. Furthermore, Koren never revealed that he was seeking to raise money for personal use, and that he had previously been involved in a bribery and corruption scandal in Israel involving pay-offs. Plaintiffs' first cause of action for fraudulent inducement, which is only against Koren, claims that but for Koren's fraudulent statements and misrepresentations, plaintiffs would not have purchased the shares from SpaceLogic, and seeks to recover the purchase price and punitive damages.

Following the May purchase, Koren represented to Jaroslawicz and Deson in June or July 2005 that the company was doing well, that more contracts were being entered into, and that he would give them an opportunity to invest further by purchasing shares he personally owned at a discount. "Upon information and belief, these shares were owned by Koren and his wife," Killy, who is also an Israeli domiciliary. Koren also represented that the shares would be registered. Based on these representations, Treeline and Jaroslawicz purchased 150,000 shares each, for $48,000 each. The defendants never delivered these shares to the plaintiffs, and Koren never arranged for these shares to be registered. Plaintiffs' second cause of action against both Korens claims that because of the defendants' breach of contract, plaintiffs are entitled to recover the purchase price of $48,000 plus interest.

Plaintiffs' complaint was originally filed on November 15, 2006, in New York state court. Defendants removed the action to federal court on March 7, 2007, based on diversity of citizenship, and filed this motion to dismiss a week later.

Discussion

Each of the four grounds that defendants raise in support of their motion to dismiss is considered here in turn. None of them succeeds.

I. Personal Jurisdiction

Plaintiffs argue that there is personal jurisdiction over the defendants pursuant to New York's Civil Practice Law and Rules Section 302(a) ("CPLR 302(a)").*fn3 In a diversity case, the issue of personal jurisdiction must be determined according to the law of the forum state. D.H. Blair & Co., Inc., v. Gottdiener, 462 F.3d 95, 104 (2d Cir. 2006). A district court may exercise jurisdiction over any defendant who would be subject to the jurisdiction of a court of general jurisdiction in the state in which the district court is located. Fed. R. Civ. P. 4(k)(1)(a); Wiwa v. Royal Dutch Petroleum Co., 226 F.3d 88, 94 (2d Cir. 2000). Any exercise of personal jurisdiction over the defendants must also comport with the Due Process Clause. D.H. Blair, 462 F.3d at 104; Grand River Enters. Six Nations, Ltd. v. Pryor, 425 F.3d 158, 165 (2d Cir. 2005). "In order to survive a motion to dismiss for lack of personal jurisdiction, a plaintiff must make a prima facie showing that jurisdiction exists." Best Van Lines, Inc. v. Walker, 04-3924-cv, slip op. at 5, --- F.3d ----, 2007 WL 1815511 (2d Cir. June 26, 2007) (citation omitted). Where, as here, there has been no discovery, the plaintiff need only make "legally sufficient allegations of jurisdiction" through its pleading and affidavits in order to survive a motion to dismiss. In re Magnetic Audiotape Antitrust Litig., 334 F.3d 204, 206 (2d Cir. 2003) (per curiam).

A. CPLR 302(a)(1)

The plaintiffs rely on several provisions of New York's long arm statute, but it is only necessary to address one of those. In order to establish specific jurisdiction under CPLR 302(a)(1), courts must decide "(1) whether the defendant 'transacts any business' in New York and, if so, (2) whether this cause of action 'arises from' such a business transaction." Best Van Lines, slip op. at 15 (citation omitted). Transacting business has been defined as "purposeful activity -- 'some act by which the defendant purposefully avails itself of the privilege of conducting activities within the forum State, thus invoking the benefits and protections of its laws.'" Id. at 16 (citing McKee Elec. Co. v. Rauland-Borg Corp., 229 N.E.2d 604, 607 (N.Y. 1967)). This inquiry is a fact-specific one, and "[c]courts look to the totality of the defendant's activities within the forum." Id. at 15 (citation omitted). New York courts have held that a claim "arises from" a particular transaction when there is "some articulable nexus between the business transacted and the cause of action sued upon, or when there is a substantial relationship between the transaction and the claim asserted." Sole Resort, S.A. de C.V. v. Allure Resorts Mgmt., LLC, 450 F.3d 100, 103 (2d Cir. 2006) (citation omitted); see also Agency Rent A Car Sys., Inc. v. Grand Rent A Car Corp., 98 F.3d 25, 31 (2d Cir. 1996).

In non-defamation cases, "proof of one transaction, or a single act, in New York is sufficient to invoke long-arm jurisdiction, even though the defendant never enters New York." Best Van Lines, slip op. at 18-19 (citation omitted and collecting cases). Furthermore, while telephone contacts between a nondomiciliary defendant and a New York party are insufficient by themselves to confer jurisdiction under CPLR 302(a)(1), Fiedler v. First City Nat'l Bank, 807 F.2d 315, 317-18 (2d Cir. 1986), a nondomiciliary defendant will be subject to jurisdiction if the defendant uses these telephone communications deliberately to ...


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