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Aboushanab v. Janay

September 26, 2007

HAMED ABOUSHANAB AND BAHIGA MOHAMED, HUSBAND AND WIFE, TONINO SPINUCCI, SOHEIR RAMADAN, SAMIR M. EL-GAZZAR AND AFAF A. SHALABY, HUSBAND AND WIFE, VICENTE HOLANDAY, GERALD S. ROYAL AND MARY E. ROYAL, HUSBAND AND WIFE, PLAINTIFFS,
v.
GAD JANAY, MARLENE JANAY, RESQNET.COM, INC., TRADEPAQ, INC., CSI COMPLEX SYSTEMS, INC., JOHN AND JANE DOES 1-10 AND XYZ CORPORATIONS 1-10, DEFENDANTS.



The opinion of the court was delivered by: Alvin K. Hellerstein, U.S.D.J.

OPINION AND ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTION TO DISMISS

Plaintiffs' Second Amended Complaint ("SAC") alleges breach of contract and fraud claims arising out of Defendants' transfer of substantially all assets from ResQNet.com, Inc. ("ResQNet"), a company in which Plaintiffs had invested, to Tradepaq, Inc. ("Tradepaq") and CSI Complex Systems, Inc. ("CSI"), companies in which Plaintiffs had no interest. Defendants moved to dismiss the complaint pursuant to Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure, arguing that Plaintiffs have not pleaded their allegations of fraud with requisite specificity, and that in any event, all of Plaintiffs' allegations are barred by the applicable statute of limitations. For the reasons stated below, Defendants' motion is granted in part and denied in part.

I. Background

A. The Sale of Series A Preferred Stock and Subsequent ResQNet Agreements

Defendant Gad Janay ("Janay") is the Chief Executive Officer of ResQNet, Tradepaq, and CSI. Together with his wife, defendant Marlene Janay, Janay owns a majority of the common stock of ResQNet. SAC ¶ 20. Janay owns 90% of Tradepaq and 100% of CSI. SAC ¶¶ 20--21. ResQNet develops computer software; Tradepaq and CSI license computer software. SAC ¶¶ 28--30.

During the fall of 1999, ResQNet distributed an Offering Memorandum offering for sale "Series A Preferred Stock." SAC ¶ 36. As set forth in the Offering Memorandum, Plaintiffs purchased "Series A Preferred Stock" pursuant to a Certificate of Designation. SAC ¶ 38. Section 6(f) of the Certificate of Designation provides in part:

[If ResQNet] sells, transfers, exchanges, or otherwise disposes of all or substantially all of its property, assets, or business . then each holder of the Series A Preferred Stock shall be given a written notice . and each holder . shall have the right thereafter to receive, upon conversion of the Series A Preferred Stock . the number of shares of stock or other securities, property or assets of [ResQNet] . or cash receivable as a result of such . sale, transfer, exchange or disposition by a holder .

SAC ¶ 39. Plaintiffs allege that the Certificate of Designation is a contract between ResQNet and each of them. See SAC ¶¶ 95--103.

Soon after the sale of Series A Preferred Stock, Janay began stripping ResQNet of its business by transferring ResQNet's business and clients to Tradepaq and CSI. SAC ¶ 43. On November 17, 1999, ResQNet entered into a Licensing Representation Agreement with Tradepaq. SAC ¶ 45. The Tradepaq Agreement gave Tradepaq the best available terms for licensing ResQNet software regardless of volume of business. SAC ¶ 48. On December 2, 1999, ResQNet entered into a Licensing Representation Agreement with CSI. SAC ¶ 46. The CSI Agreement gave CSI a flat 50 percent discount on ResQNet software products. ResQNet also performed custom enhancements to meet CSI requirements at no cost to CSI. In some instances, paying customers waited for modifications to their software while ResQNet engineers performed free modifications for CSI. SAC ¶ 55.

ResQNet, CSI, and Tradepaq engaged in inter-company transactions and allocations of resources. CSI leased the eighth and ninth floors at 33 Maiden Lane in Manhattan. ResQNet subleased the eighth floor from CSI, and Tradepaq subleased a portion of that space of ResQNet. SAC ¶ 60. The entities shared a single accounting department, a common receptionist, office manager, and conference rooms. Id. Janay allocated expenses such as insurance among the three companies, and directed that interest-free loans be made among the three companies. SAC ¶¶ 61--62.

On October 28, 2002, Janay met with minority shareholders. He did not mention the agreements or transactions as between ResQNet and Tradepaq and CSI. SAC ¶ 70. Janay assured shareholders that ResQNet would receive 70 percent of his time; that deals with various local governments might be realized; and that ResQNet's existing revenue streams would be sufficient to pay back the minority shareholders' investment. Id. Janay met with the ResQNet Board of Directors on December 5, 2002. He did not disclose that he planned to transfer all of ResQNet's assets, and instead represented that he would consider the options the Board proposed to improve ResQNet's financial condition. SAC ¶ 77.

B. The January 2003 Events

In January 2003, Janay terminated 34 of ResQNet's employees, rehiring 21 of them at CSI or Tradepaq. SAC ¶ 79. CSI and Tradepaq did not give ResQNet any form of consideration for the transfer of employees. SAC ¶ 80. Janay then transferred "the vast majority" of ResQNet's customer contacts to Tradepaq through the execution of an Assumption and License Agreement dated January 31, 2003. SAC ¶ 82. The Assumption Agreement transferred all of ResQNet's customer contacts to Tradepaq except for its contacts with IBM and a company called Zephyr, SAC ¶ 82, and pursuant to the Agreement, Tradepaq assumed the revenue streams from ResQNet customers, and ResQNet's duties to service those customers. SAC ¶ 83. Thus in 2004, Tradepaq received $673,205.57 in fees from former ResQNet customers, and paid only $78,328.79 of that amount to ResQNet. SAC ¶ 86.

At a meeting with the Board of Directors on January 31, 2003, Janay confirmed that he had terminated all of ResQNet's employees and transferred many of them to Tradepaq and CSI. SAC ¶ 88. Janay also confirmed that he transferred customer contacts to Tradepaq, and by letter to the ResQNet board dated February 27, 2003, accepted responsibility for the transfers. SAC ¶ 89.

C. Consequent Litigation

On March 31, 2006, Justice Richard B. Lowe, III, filed a 24-page "Decision After Trial" in the matter of Harris Venture Partners, L.P. v. Gad Janay, No. 603560/03 (N.Y. Sup. Ct. 2006). See SAC ΒΆ 91; Ex. to First Amended Complaint (document no. 2). Justice Lowe held defendants Gad Janay, Marlene Janay, Charles Griffis, and ResQNet liable for breach of fiduciary duty in the amount of $1.7 million plus interest, and for breach of contract in the amount of $850,000 plus interest, on facts substantially similar to those recited above. Plaintiffs allege that Justice Lowe's written decision served as the first notice they ...


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