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Donald Dean & Sons, Inc. v. Xonitek Systems Corp.

August 31, 2009


The opinion of the court was delivered by: Thomas J. McAVOY, Senior United States District Judge



Plaintiff commenced this diversity action on February 11, 2008 alleging claims of breach of contract, negligent misrepresentation, unjust enrichment, breach of the covenant of good faith and fair dealing, and economic duress against Defendants XONITEK SYSTEMS CORPORATION ("SYSTEMS") and XONITEK CORPORATION ("XCORP"). See generally Compl. dkt. # 1. Plaintiff's claims arise from Defendants' "development, marketing, selling, and provision of consulting services concerning computer software systems or programing" for Plaintiff's business. Id. ¶ 9. Plaintiff contends that the services provided and paid for were faulty and ineffective, thereby causing Plaintiff to incur damages including the loss of business. See generally id.

Defendant X-CORP filed an Answer on March 24, 2008, see Ans. dkt. # 5, but Defendant SYSTEMS did not answer and a default was entered against it by the Clerk of the Court on May 21, 2008. See Entry of Default, dkt. # 11. On September 23, 2008, the Court issued a Default Judgment as to liability against SYSTEMS, leaving for later determination the amount of damages. See 9/23/08 Dec. & Ord., dkt. # 16.

On November 18, 2008, pursuant to the parties' stipulation that was "So Ordered" by the Hon. David E. Peebles, U.S. Magistrate Judge, Plaintiff filed an Amended Complaint. See Am. Compl.. dkt # 21; Stip., dkt. # 26. The Amended Complaint adds Defendant PARIS CONSULTING GROUP INTERNATIONAL LLC ("PCGI"), and asserts, in addition to the claims in the Complaint, claims sounding in fraudulent conveyance, successorship liability, and alter ego liability. See generally Am. Compl.

Defendants X-CORP and PCGI now move for summary judgment seeking to dismiss various claims pursuant to Fed. R. Civ. P. 56. See Motion, dkt. # 27. Plaintiff opposes the motion.


Plaintiff is a corporation engaged in the assembly, production, manufacture and sale of wood products, including custom cabinet doors and drawer fronts. In the spring of 2001, Plaintiff decided to invest in an information technology ("IT") management system to aid its business operations. Plaintiff sought a system that would be able to, among other things, account for and efficiently manage its inventory, orders, production, sales and expenses, and related business and financial needs. SYSTEMS was a corporation formed in 1985 that was engaged in the business of providing consulting, programing, and services for IT systems. Def. Statement of Material Facts Pursuant to Local Rule 7.1(a)(3) ("Def. SMF"), ¶ 3.*fn2 Plaintiff contacted SYSTEMS to set up a meeting to consult about the implementation of an IT software system for its business. Unknown to Plaintiff at the time, SYSTEMS did not have any employees of its own. Pl. Additional Undisputed Facts Pursuant to Local Rule 7(a)(3) ("Pl. Facts"), ¶ 42.

In late 2001, Plaintiff met with Joseph Paris, the owner and sole principle of SYSTEMS, see Def. SMF ¶ 2,*fn3 and with employees of PCGI, to inquire about the installation of the IT system that Plaintiff desired. PCGI is a corporation formed in 1992 of which Paris is the sole principle and owner. Id. PCGI and SYSTEMS "share the same location and place of business." Pl. Facts ¶ 52. Since its formation, PCGI "has primarily engaged in the business of consulting customers with respect to information technology systems." Def. SMF ¶ 3. Plaintiff contends that it was unaware that the individuals that it was meeting with were PCGI employees, and that when it met with these individuals they held themselves out "as representatives of" SYSTEMS. Am. Compl. ¶ 10. Based on representations that SYSTEMS could implant a fully functional IT software package that would be customized to accommodate Plaintiff's needs and requirements, and that the individuals who would do the installation possessed the unique and specialized expertise to accomplish the installation, Pl. Facts ¶ 43, Plaintiff selected SYSTEMS as the vendor for the goods and services for its IT system installation project.

On November 21, 2001, Plaintiff entered a written agreement with SYSTEMS through which SYSTEMS agreed to provide programming and consulting services to Plaintiff in connection with the installation of an IT system referred to as a Macola IT system. Def. SMF ¶ 6. Paris promised to install the Macola IT system, including material and labor, at a cost not to exceed $240,312.30. Pl. Facts ¶ 45. Paris also promised that there would be no additional charges for: (1) milage and other related expenses by SYSTEMS' representatives; (2) integration services for the hardware to be installed; and (3) "installation of the hardware such that the delivered result [would be] an operational entity, with all interoperabilities established." Id. ¶ 44. At the same time, Plaintiff executed a Support Agreement under which SYSTEMS agreed to provide additional technical support and consulting services for a one year period through December 31, 2002. Def. SMF ¶ 7. There is no dispute that all services for the Macola IT system installation were performed by employees of PCGI although SYSTEMS never disclosed to Plaintiff that the individuals performing such services were PCGI employees. Pl. Facts ¶ ¶ 46-48. There is also no dispute that PCGI had no written sales representative or independent contractor agreements with SYSTEMS; that Plaintiff never received a bill for services directly from PCGI; and that Plaintiff never paid any monies directly to PCGI. Id.

Plaintiff contends that after several years of customization and technical support efforts, SYSTEMS was not been able to meet Plaintiff's business requirements as originally planned. Plaintiff further contends that:

31. Despite these failures to deliver a fully functioning Macola IT system as originally promised, representatives of [PCGI] and/or [SYSTEMS] represented to Plaintiff on numerous occasions between 2001 and 2005 that the Macola IT system could be implemented with additional customization and technical support from said defendant(s).

32. Due to the failure of [PCGI] and/or [SYSTEMS] to install a fully functioning Macola IT system as originally agreed, Plaintiff was forced to enter into a number of separate "support agreements" with [SYSTEMS] at considerable additional expense during the period 2002 through 2007.

Am. Compl. ¶¶ 31, 32.

Plaintiff asserts that it repeatedly entered these additional support agreements, and paid additional amounts above the agreed upon contract price, because representatives of SYSTEMS made threats to cease all work on installation and implementation of the Macola IT system "unless payments from Plaintiff continued." Id. ¶ 35. While Plaintiff admits that it contacted Exact Corp., the company from which the Macola IT system originated, and was told that, for a fee, Exact Corp. could provide support services for a Macola IT system (or could recommend other companies that could provide such services), Plaintiff felt that it was under "duress" to stay with SYSTEMS because it "was indebted to SYSTEMS and relied on continued representations made by SYSTEMS/PCGI that they could properly implement the Macola IT system." Pl. Facts at ¶19.

Because Plaintiff had fallen behind in its payment obligation to SYSTEMS,*fn4 in November 2004 Plaintiff's "trade account debt was converted into a promissory note" in the principle amount of $130,000.00. Def. SMF ¶¶ 10-11. Plaintiff's satisfaction with the Macola IT system did not improve, however, and in July 2005 Susan Dean, one of Plaintiff's corporate officers, sent SYSTEMS an email in which she threaten to file a lawsuit on Plaintiff's behalf "for SYSTEMS' failure to install a fully functioning Macola IT system as promised and for the agreed upon price." Dean Aff., ¶ 24. Nonetheless, when Plaintiff fell behind on its payments under the promissory note, Plaintiff executed a judgment note in November of 2005 to redress the then-existing arrearage of $115,500.00. The judgment note contained a payment schedule and a confession of judgment.

There is no dispute that Plaintiff paid all amounts billed by SYSTEMS arising from the original contract, the subsequent support agreements, the 2004 promissory note, and 2005 judgment note. Def. SMF ¶ 16. Plaintiff contends that, "[i]n all, [it] paid [SYSTEMS] more than $750,000.00 despite the fact that said defendant failed to ever deliver a fully functioning Macola IT system as promised in the Agreement." Am. Compl. ¶ 34.

Defendants assert that, "in June 2007," Paris decided to dissolve SYSTEMS and to begin to "wind down" the operations of SYSTEMS in preparation to formal dissolution.

Def. SMF ¶ 22. However, on June 6, 2007, PCGI and SYSTEMS commenced a civil action in New York state court contending that a "former employee" breached a non-compete covenant. Def. SMF ¶ 26. It is unclear whether the defendant in the state action, Dana S. Ellis, was a former employee of PCGI, of SYSTEMS, or both.*fn5

On June 12, 2007, Corning Glass Corp. commenced a breach of contract action in New York state court against SYSTEMS. Id. ¶ 27. Corning Glass Corp. sought in excess of $700,000.00 "in connection with a Macola IT system." Am. Compl. ¶ 43.

On June 26, 2007, Paris formed X-CORP, a corporation "in the business of consulting its customers with respect to information technology issues as well as management and administrative projects." Def. SMF ¶ 5. Paris is the sole principal and owner of X-CORP. Id. ¶ 2. Paris asserts that he formed X-CORP "[c]oncurrent with the decision to wind down the operations of SYSTEMS,... intending to concentrate its operations within the realm of consulting." Id. ¶ 23; Pl. Resp. to Def. SMF ¶ 23. X-CORP shares "the same location and place of business" as SYSTEMS and PCGI. Pl. Facts, ¶ 52

In May 2008, Corning Glass Corp. obtained a default judgment against SYSTEMS in the amount of $781,687.01 plus costs and interest, and entered that judgment on May 13, 2008. Def. SMF ¶ 32; Def. Ex. P. On October 1, 2007 SYSTEMS assigned the then-remaining value of Plaintiff's judgment note to X-CORP ($16,861.97) and, in exchange, XCORP assumed the obligations of servicing the existing pre-paid service agreements of SYSTEMS' customers valued at $73,566.75 as well as paying certain of SYSTEMS' accounts payable totaling $10,607.50. Def. SMF ¶ 24. Plaintiff commenced this action on February 11, 2008. SYSTEMS filed its formal Certificate of Dissolution and received the consent of the New York State Commissioner of Taxation and Finance for dissolution on October 14, 2008. Def. SMF ¶ 35. As indicated above, SYSTEMS has defaulted in this action.


Rule 56 of the Federal Rules of Civil Procedures governs motions for summary judgment. It is well settled that on a motion for summary judgment, the Court must construe the evidence in the light most favorable to the non-moving party, see Tenenbaum v. Williams, 193 F.3d 581, 593 (2d Cir.1999), and may grant summary judgment only where "there is no genuine issue as to any material fact and... the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). An issue is genuine if the relevant evidence is such that a reasonable jury could return a verdict for the nonmoving party. Anderson v. Liberty Lobby, 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). A party seeking summary judgment bears the burden of informing the court of the basis for the motion and of identifying those portions of the record that the moving party believes demonstrate the absence of a genuine issue of material fact as to a dispositive issue. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). If the movant is able to establish a prima facie basis for summary judgment, the burden of production shifts to the party opposing summary judgment who must produce evidence establishing the existence of a factual dispute that a reasonable jury could resolve in her favor. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. ...

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