The opinion of the court was delivered by: Honorable Richard J. Arcara United States District Judge
On December 23, 2010, plaintiffs Allen Berman, Gloria Berman (individually and as executrix of the estate of Murray Berman), M&G Berman, Inc., and Cut Your Credit Card Rates, LLC filed a complaint against defendants James and Diana Rotterman, Strategic Credit, LLC, JRCG Holdings, LLC, and Warlord Media, LLC. Plaintiffs alleged six counts against defendants related to fraudulent sales of credit card payment processing businesses. On February 1, 2011, defendants filed a motion to dismiss part of the first and second and all of the fourth, fifth, and six counts of the complaint under Rules 9(b)(6) and 12(b)(6) of the Federal Rules of Civil Procedure ("FRCP"). On February 22, 2011, plaintiffs invoked their right under FRCP 15(a)(1)(B) to amend their complaint once as a matter of course, to address some of the points that defendants raised in their motion. The Court permitted defendants to update their motion papers as they saw fit in response to the amended complaint. During the filing of updated motion papers, plaintiffs conceded that Gloria Berman, in her individual capacity, should be dismissed from Count I. On March 22, 2011, the parties agreed to dismiss Diana Rotterman from the case.
The parties now have completed filing updated papers concerning defendants' pending motion. The Court has deemed the motion submitted on papers pursuant to FRCP 78(b). For the reasons below, the Court grants the part of the motion that plaintiffs have conceded but otherwise denies the motion.
This case concerns allegations that James Rotterman ("Rotterman") fabricated tax returns, client lists, online auctions, and other documents to trick plaintiffs into giving him nearly $2 million to buy businesses that never existed. According to the amended complaint, Rotterman and the corporate defendants, all owned by Rotterman, advertised through the World Wide Web in March 2008 that he was selling businesses that provided services for credit card payment processing. That month, plaintiff Allen Berman ("Allen"), a Connecticut resident who is affiliated with Connecticut-based Cut Your Credit Card Rates, LLC, saw the advertisement and contacted Rotterman. Allen disclosed to Rotterman, who resides in Orchard Park, New York, that he knew nothing about credit card processing but that he was interested in entering the industry. Rotterman proceeded to tell Allen about his credit card processing businesses, including a representation that Rotterman had numerous banks and financial institutions as clients and that his businesses earned over $900,000 per year as income. Rotterman offered to sell Alan 68% of his businesses. Notably, Rotterman allegedly told Allen that if he "decided to become involved in the credit card processing business [then] Rotterman could and would train and instruct [him] to become knowledgeable and proficient in the business, and in doing so advised plaintiff that [Rotterman] would act as their agent." (Dkt. No. 18 ¶ 33.)
In the spring of 2008, Allen met with Rotterman to pursue further his interest in buying Rotterman's businesses. Allen met Rotterman at Rotterman's corporate offices in Williamsville, New York. The meeting lasted three hours. During the meeting, Rotterman gave Allen more details about his credit card processing businesses and showed him what appeared to be proprietary software that helped process credit card transactions. Allen asked Rotterman for documentation of his businesses. Rotterman declined to provide a customer list but provided what appeared to be corporate tax returns demonstrating the revenue streams that he had described to Allen. The meeting ended with Allen telling Rotterman that he would tell his father Murray Berman ("Murray") about the possible purchase, including all the information about the businesses that Rotterman gave Allen.
Rotterman spent the next two years giving Allen more information about his credit card processing businesses while Allen persuaded his family to help fund the purchase. Allen discussed the possible purchase with Murray, who in turn relayed all of Rotterman's information to his wife Gloria Berman ("Gloria"). Rotterman also sent Murray e-mail messages directly that contained the same information that he had discussed with Allen. Meanwhile, Rotterman gave Allen and his parents numerous documents between March 2008 and July 2010 that looked like a client list and details of relationships that Rotterman had with various financial institutions. During this time, Rotterman also told Allen and his parents about an online auction that they should enter to buy an additional credit card processing business that would guarantee them a steady stream of revenue from HSBC Bank. Based on Rotterman's advice and the agency/fiduciary relationship that they developed with him, Allen and his family ultimately decided to submit a winning bid for the online auction and to buy the 68% stake in Rotterman's businesses. As part of these purchases, Allen gave Rotterman a total of $823,919.88. Murray and Gloria gave Rotterman a total of $1,017,640. After paying Rotterman, Allen and his family expected to receive a formal transfer of ownership in the newly acquired businesses. Allen and his family also expected to be able to visit a certain website that Rotterman said would give them details about the online auction that they supposedly won. Instead, Allen and his family never received anything from Rotterman and discovered that the credit card processing businesses that they supposedly purchased never existed. Additionally, the website that supposedly would display the results of the online auction was a fabrication that Rotterman himself created.
Plaintiffs commenced this action once they realized that they never would receive anything in exchange for the money that they gave Rotterman. The amended complaint contains six counts. Count I is a claim for rescission of all contractual agreements that plaintiffs entered with defendants. Plaintiffs claim that they never would have entered any agreements with defendants had they known the truth about Rotterman's alleged scam. Count II is a claim for fraud based on defendants' allegedly intentional misrepresentations about nonexistent credit card processing businesses. Count III is a claim of unjust enrichment based on plaintiffs' transfer of almost $2 million to defendants without receiving anything in return. Count IV is a claim of conversion of the money that plaintiffs gave defendants, money that plaintiffs possessed and otherwise would continue to possess. Count V seeks the imposition of a constructive trust against defendants to prohibit them from transferring plaintiffs' money to others. Count VI seeks an accounting of all of the money that plaintiffs gave defendants as part of the allegedly fraudulent transactions that Rotterman proposed.
Defendants do not challenge plaintiffs' claim for unjust enrichment (Count III) at this time through their motion, and also do not challenge Counts I or II to the extent that any plaintiff other than Gloria-in her individual capacity-is advancing them. Defendants do, however, seek dismissal of the rest of the amended complaint. Specifically, defendants seek to dismiss Counts I and II as against Gloria individually because Gloria never had a contractual relationship with them, and because plaintiffs do not allege any misrepresentations made specifically to Gloria. Defendants seek to dismiss Count IV because a conversion claim concerning money requires that the money be specifically identified and segregated its own account, with an obligation to return the money or to treat it in a particular manner. Defendants seek to dismiss Counts V and VI because no fiduciary relationship existed between plaintiffs and defendants that would form the basis for the imposition of a constructive trust and of an accounting. Plaintiffs have conceded that Gloria had no contractual relationship with defendants and have withdrawn her in her individual capacity from Count I. Plaintiffs generally oppose defendants' other arguments by noting specific bank accounts into which they disbursed funds and by noting that their trust in Rotterman led them to offer consideration for credit card processing businesses that never existed.
A. FRCP 12(b)(6) and 9(b)(6) Generally
In general, defendants challenge the legal sufficiency of Counts I and II as to Gloria individually, and Counts IV through VI in their entirety. "A pleading that states a claim for relief must contain . . . a short and plain statement of the claim showing that the pleader is entitled to relief." FRCP 8(a)(2). FRCP 8(a)(2) requires a plaintiff to state, in concise but plausible fashion, what he currently thinks a defendant actually did to him, subject to revision during later discovery. "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. The plausibility standard is not akin to a probability requirement, but it asks for more than a sheer possibility that a defendant has acted unlawfully." Ashcroft v. Iqbal, ___ U.S. ___, 129 S. Ct. 1937, 1949 (2009) (internal quotation marks and citations omitted). Courts assess the legal sufficiency of a claim while "accepting all factual allegations in the complaint as true, and drawing all reasonable inferences in the plaintiff's favor." Peter F. Gaito Architecture, LLC v. Simone Dev. Corp., 602 F.3d 57, 61 (2d Cir. 2010) (internal quotation marks and citation omitted).
The legal sufficiency of a fraud claim requires additional specificity. "In alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person's mind may be alleged generally." FRCP 9(b). "A complaint of fraud satisfies Rule 9(b) if it sets forth who made the fraudulent statements, the dates and places at which the alleged fraudulent statements were made, the manner in which the statements were false and upon which statements plaintiffs relied. Plaintiffs need not, at this stage, plead scienter with great specificity, and conclusory allegations of scienter are adequate where a complaint provides a minimal factual basis that gives rise to a strong inference of fraudulent intent. This 'strong inference' may be demonstrated by showing that defendants had a motive and opportunity to commit fraud or strong circumstantial evidence of conscious misbehavior. When ...