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@Wireless Enterprises, Inc v. Ai Consulting

May 13, 2011


The opinion of the court was delivered by: Charles J. Siragusa United States District Judge



This is a diversity action for breach of contract and related state-law torts, arising from a franchise agreement between @Wireless Enterprises, Inc. ("@Wireless") and AI Consulting LLC ("AI")*fn1 , involving the operation of a retail cellular telephone services shop. Now before the Court are the following motions: 1) a motion (Docket No. [#50]) by @Wireless for summary judgment on all counterclaims against it; 2) a motion [#54] by Craig J. Jerabeck ("Jerabeck") for summary judgment as to all claims against him; 3) a motion [#64] by Jerabeck for Rule 11 sanctions; 4) a motion [#69] by 5Linx ("5Linx") for summary judgment on the one claim against it; and 5) a cross-motion [#76] by AI to strike Jerabeck's. For the reasons that follow, the motions by @Wireless, Jerabeck, and 5Linx are granted, the cross-motion by AI is denied, and all counterclaims and third-party claims are dismissed.


Unless otherwise stated, the following are the undisputed facts of this case, viewed in the light most-favorable to Plaintiffs. At all relevant times, Cellco Partnership doing business as Verizon Wireless ("Verizon"), was a wireless communications service provider, which sold cellular radio service and equipment through its own retail stores, as well as through agents. @Wireless was a seller of cellular communications services. In August 2000, Verizon and @Wireless entered into an "Authorized Agency Agreement" ("the Verizon Agreement") (Docket [#16-5]), in which Verizon appointed @Wireless as a "non-exclusive sales agent" for Verizon's cellular radio service. The agreement was for a term of three years. However, the agreement further provided that Verizon could terminate the agreement, "without cause, upon six (6) months written notice to" @Wireless. Id. at ¶ 9.1 (emphasis added). Additionally, the agreement stated that Verizon could "immediately terminate" the agreement upon written notice to @Wireless, if @Wireless breached the agreement. Id. § 9.1.1. Significantly, in that regard, the agreement indicated that: 1) @Wireless could only sell Verizon's products within specified geographic areas; 2) @Wireless could not sell the products of Verizon's competitors; and 3) @Wireless could not sell Verizon's products over the internet. See, Fitzsimmons Affidavit [#59-9] ¶ ¶ 4, 6-7.

The Verizon Agreement provided that @Wireless could delegate its obligations under the contract to "a subcontractor or sub-agent," by written contract, subject to the express written approval of Verizon. The agreement further stated: "Personnel employed by, or acting under the authority of, Agent shall not be or be deemed to be employees or agents of Verizon Wireless, and Agent assumes full responsibility for their acts and shall have sole responsibility for their supervision and control." Agency Agreement § 2. The Verizon Agreement included an addendum, entitled "Addendum Permitting Agent [@Wireless] to Distribute Cellular Radio Service Through Sub-Agents." Pl. Memo of Law (05-CV-6176, Docket No. [#72-5], Ex. C). Such addendum ("the Sub-agency Addendum") indicated that @Wireless could contract with sub-agents to sell Verizon's services, subject to Verizon's approval. Verizon was designated as "the beneficiary" of the addendum. Id. at ¶ 3(f). The addendum indicated that the Verizon Agreement would be attached to, and incorporated by reference into, any agreement between @Wireless and its sub-agents. However, the addendum further stated that @Wireless could "delete from [the copy of the Verizon Agreement provided to the subagent] all references to commissions, quotas, and related confidential information." Id. at ¶ 5. Finally, the addendum stated: "Except to the extent set forth herein, Verizon Wireless shall not be considered a party to any contract or [illegible] between Agent [@Wireless] and sub-agent and shall assume no obligations or liabilities under any such contracts." Id.

Subsequently, in March 2002,@Wireless entered into a franchise agreement [#1-3] with AI ("the Franchise Agreement"), in exchange for a $145,000 franchise fee payment from AI to @Wireless. Specifically, pursuant to the Franchise Agreement, AI obtained the right to sell "cellular telephones, pagers and accessories and . . . cellular telephone services, pager services and other related goods and services." Franchise Agreement ¶ 1.1. AI agreed that it would sell @Wireless's "authorized products" and services. See, e.g., id. at ¶ 8.1.3. The agreement did not, though, indicate that AI was specifically obtaining the right to sell Verizon products.*fn2 In fact, the Franchise Agreement does not mention Verizon or any other particular service provider. The agreement also indicated that franchisees were considered independent contractors, and that no fiduciary relationship existed between the parties. Id. at ¶ 16.1. The Franchise Agreement was signed by Andrew Iorio on behalf of IA, and by Michael Battaglia, @Wireless's Vice President of Franchise Development. The Franchise Agreement did not mention, and was not signed by, Jerabeck, who was President of @Wireless at all relevant times.

AI subsequently operated a retail outlet as an @Wireless franchisee in Southington, Connecticut. On a few occasions during the course of the business relationship between AI and @Wireless, AI dealt directly with Jerabeck. According to AI, Jerabeck told AI that he would "protect the interests of AI." (Third Party Complaint ¶ 14).

Unbeknownst to AI, between 2002 and 2004, @Wireless breached its agreement with Verizon by, for example, selling products and services of Verizon's competitors. See, Affidavit of Timothy Fitzsimmons [#59-9] ¶ ¶ 10-21. Defendant 5Linx, of which Jerabeck was the President and sole shareholder in addition to being President of @Wireless, and which was "affiliated" with @Wireless, also made unauthorized sales of Verizon's products on its website during this period. Verizon complained to Jerabeck about the actions of both @Wireless and 5Linx, and Jerabeck admitted that @Wireless had breached its agreement with Verizon, and indicated that @Wireless and 5Linx would cease making unauthorized sales. Id. However, both @Wireless and 5Linx continued to make unauthorized sales of Verizon's products. Id. Jerabeck did not inform AI of the unauthorized sales by @Wireless and 5Linx, or of the resulting warnings from Verizon. For example, Jerabeck did not inform AI that, on July 30, 2004, Verizon sent Jerabeck a "cease and desist" letter, which stated, in pertinent part, that: 1) @Wireless was breaching the agreement with Verizon; 2) that @Wireless was required to immediately cease and desist from breaching the agreement; and 3) that "[s]hould [@Wireless] continue its current practice, Verizon Wireless will consider its options." AI Memo of Law in Opposition to Summary Judgment, Exhibit I [#72-11], New Jersey Complaint, Exhibit B. Instead, on or about September 10, 2004, Jerabeck sent an email to AI, stating that @Wireless was in the process of negotiating a new contract with Verizon, which would not affect AI's "day to day operations." It is undisputed that @Wireless was in fact attempting to negotiate such a contract with Verizon.

However, on or about September 16, 2004, Verizon cut off service to @Wireless and its franchisees, including AI. Verizon purportedly terminated its agreement with @Wireless because of the aforementioned breaches of the Verizon Agreement by @Wireless, including the sale of competitors' products, and the sale of Verizon's products over the internet. (AI Memo of Law in Opposition to Summary Judgment, Exhibit I [#72-11], New Jersey Complaint, Exhibit C). Verizon also simultaneously commenced an action against @Wireless in United States District Court for the District of New Jersey. Id. On or about September 21, 2004, @Wireless counter-sued Verizon in New York State Supreme Court, Monroe County. @Wireless and Verizon subsequently settled the lawsuits and terminated their agreement. In connection with the settlement, Verizon reinstated service to @Wireless's franchisees, including AI, through November 24, 2004. After that date, AI and other franchisees were not able to sell Verizon products or services as subagents for @Wireless. @Wireless offered franchisees some type of monetary compensation for business that was lost during the period that Verizon service was cut off. Additionally, @Wireless attempted to negotiate new agreements with service providers other than Verizon.*fn3 However, AI decided to terminate its relationship with @Wireless. On January 4, 2005, @Wireless stopped doing business.

Subsequently, @Wireless commenced the subject proceeding against AI, seeking monies allegedly owed pursuant to the parties' franchise agreement and accompanying asset purchase agreement. AI answered the complaint and asserted the following eight counterclaims against @Wireless: 1) constructive fraud; 2) actual fraud; 3) constructive trust; 4) breach of contract; 5) breach of good faith and fair dealing; 6) interference with contractual relationships; 7) violation of New York General Business Law § § 349-350; and 8) negligent misrepresentation.

AI also commenced the subject third-party action against Jerabeck, 5Linx, and Verizon. In the Third-Party Complaint ("TPC"), AI alleges eight causes of action against Jerabeck, for: 1) constructive fraud; 2) actual fraud; 3) constructive trust; 4) breach of contract; 5) breach of implied covenant of good faith and fair dealing; 6) interference with contractual relationship; 7) violation of New York State General Business Law ("GBL") § § 349-350; and 8) negligent misrepresentation. As to these claims, AI alleges that, at all relevant times, Jerabeck was the "President, Chief Executive Officer (CEO), owner and alter egos of @Wireless and 5Linx" (TPC ¶ 9), and that he intentionally and/or negligently made various false statements which induced AI to enter into and remain in the franchise agreement with @Wireless, caused @Wireless to breach the agreement with Verizon, and ultimately led to the demise of AI's business.

AI alleged the same eight causes of action separately against 5Linx, and in that regard, contended that 5Linx, @Wireless, and Jerabeck were alter egos, and that 5Linx ratified and approved Jerabeck's actions. Finally, AI asserted all but the negligent misrepresentation claim separately against Verizon.

Verizon and 5Linx subsequently filed motions to dismiss the third-party complaint, pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. Jerabeck did not move against the complaint. On November 1, 2006, the Court issued a Decision and Order [#33], dismissing all claims against Verizon, and dismissing all claims against 5Linx, except the claim that 5Linx tortiously interfered with the contract between @Wireless and AI.

Consequently, the claims remaining in this action are as follows: 1) @Wireless's first-party claim against AI for breach of contract; 2) AI's counterclaims and third-party claims against @Wireless and Jerabeck, respectively, for constructive fraud, actual fraud, constructive trust, breach of contract, breach of implied covenant of good faith and fair dealing, interference with contractual relationship, violation of New York State General Business Law ("GBL") § § 349-350, and negligent misrepresentation; and 3) AI's third-party claim against 5Linx for tortious interference with contract.

Following a period of pretrial discovery, the parties filed the subject motions. @Wireless, 5Linx, and Jerabeck all move for summary judgment. Additionally, Jerabeck moves for Rule 11 sanctions against AI's attorney. AI opposes the motions, and in addition, cross-moves to strike Jerabeck's affidavit submitted in support of the summary judgment motions, as a sanction for spoliation of evidence.


Rule 56

Summary judgment may not be granted unless "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). A party seeking summary judgment bears the burden of establishing that no genuine issue of material fact exists. See, Adickes v. S.H. Kress & Co., 398 U.S. 144, 157 (1970). "[T]he movant must make a prima facie showing that the standard for obtaining summary judgment has been satisfied." 11 MOORE'S FEDERAL PRACTICE, § 56.11[1][a] (Matthew Bender 3d ed.). "In moving for summary judgment against a party who will bear the ultimate burden of proof at trial, the movant may satisfy this burden by pointing to an absence of evidence to support an essential element of the nonmoving party's claim." Gummo v. Village of Depew, 75 F.3d 98, 107 (2d Cir. 1996)(citing Celotex Corp. v. Catrett, 477 U.S. 317, 322?23 (1986)), cert denied, 517 U.S. 1190 (1996). Once that burden has been established, the burden shifts to the non-moving party to demonstrate "specific facts showing that there is a genuine issue for trial." Fed. R. Civ. P. 56(e); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250 (1986). To carry this burden, the non-moving party must present evidence sufficient to support a jury verdict in its favor. Anderson, 477 U.S. at 249. The parties may only carry their respective burdens by producing evidentiary proof in admissible form. Fed. R. Civ. P. 56(e). The underlying facts contained in affidavits, attached exhibits, and depositions, must be viewed in the light most favorable to the non-moving party. U.S. v. Diebold, Inc., 369 U.S. 654, 655 (1962). However, it is well settled that the party opposing summary judgment may not create a triable issue of fact "merely by submitting an affidavit that disputes his own prior sworn testimony." Rule v. Brine, Inc., 85 F.3d 1002, 1011 (2d Cir. 1996)(citations omitted). Rather, such affidavits are to be disregarded. Mack v. United States, 814 F.2d 120, 124 (2d Cir. 1987) (citations omitted). Summary judgment is appropriate only where, "after drawing all reasonable inferences in favor of the party against whom summary judgment is sought, no reasonable trier of fact could find in favor of the non-moving party." Leon v. Murphy, 988 F.2d 303, 308 (2d Cir.1993).

AI's Motion to Strike Jerabeck's Affidavit

At the outset, AI contends that the Court should strike Jerabeck's affidavit submitted in support of summary judgment, as a sanction for spoliation of evidence. In that regard, Jerabeck testified at his deposition that certain corporate records were either lost or thrown away in or about 2007. Specifically, Jerabeck testified that he "assumed" that certain documents were thrown away or misplaced, because he did not personally have possession of any documents, except certain documents of which copies had already been produced to AI's attorney, and certain documents in the possession of Jerabeck's attorney. Because of such testimony, AI maintains that Jerabeck could not have personal knowledge about the matters set forth in his affidavit concerning @Wireless's corporate workings:

[I]t is manifestly impossible for Jerabeck to make the statements that he does in his Affidavit in support of his and @Wireless's motions for summary judgment, particularly in Paragraph 9 thereof, and Paragraph 6 of his Statement of Material Facts Not in Dispute filed in support of his and @Wireless's motions for summary judgment. As but one example thereof is the statement "Minutes were kept of all corporate meetings." (AI Motion to Strike [#76] at 3). Although AI refers to paragraph 9 of Jerabeck's Statement of Facts, it appears that AI is actually referring to paragraph 10 of that document, which states, in pertinent part:

The business of @Wireless was run totally separately and independently from any personal work or activities of Jerabeck. This clear distinction between the business of @Wireless and the personal activities of Jerabeck is reflected by the following. (Jerabeck Aff., ΒΆ 9). A. Corporate meetings were held on a regular basis during the years that @Wireless was actively engaged in business, and at all times relevant to this litigation. B. Minutes were kept of all corporate meetings. C. Shareholders' assets were not used in conducting the business of @Wireless. D. @Wireless maintained corporate records. E. @Wireless maintained substantial assets and inventory for the conducting of its business. F. @Wireless had bank accounts separate from Jerabeck and other corporate officers and was sufficiently capitalized such that it was able to conduct business from the time of its inception until is ceased active operations. G. All of the business of @Wireless was conducted in its corporate name. H. All payments for corporate obligations were made from the corporate checking account of @Wireless. I. The business in which @Wireless was engaged was never conducted by Jerabeck in his personal capacity. J. All assets, of every kind used in the business, were titled in the name of ...

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