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Shively v. Mitchell

United States District Court, Second Circuit

October 24, 2013



PAUL A. ENGELMAYER, District Judge.

Plaintiff Matthew Shively, a furniture designer, alleges that his sometime business partners, Stephen Mitchell and Thomas Ruscica, fraudulently induced him to invest $1 million in a non-existent corporation, Home Remodeling, Inc. (HRI), and then diverted his investment into Designlush, Inc., a corporation they alone controlled. In his Amended Complaint, Shively sues Mitchell, Ruscica, and Designlush, Inc. on eight causes of action. Defendants move to dismiss three in their entirety-for fraudulent inducement, negligent misrepresentation, and mutual mistake-and a fourth, conversion, in part. Defendants acknowledge that Shively's other claims, which sound in contract, state a claim. For the reasons that follow, defendants' motion to dismiss part of the conversion claim is granted. However, the motion to dismiss the other three causes of action is denied.

I. Background

A. Facts Alleged in the Amended Complaint[1]

In 2008, Shively and his family lived on a large horse farm in Kentucky. Am. Compl. ¶¶ 11, 14. That year, he began to design and build high-end furniture and fixtures, working out of a small shop with one full-time employee. Id. ¶ 11. Unlike most fledging furniture designers, however, Shively had a large amount of money at his disposal. Id. ¶ 14.

In May 2010, Shively traveled to New York City to attend the International Contemporary Furniture Fair. Id. ¶ 12. While in New York, Shively went to the New York Design Center, a group of furniture showrooms, where he met Stephen Mitchell at Mitchell's "Designlush" showroom. Id. Mitchell ran a furniture business using the name Designlush. Id. ¶¶ 1, 12. Mitchell expressed interest in Shively's work; the two stayed in touch over the next few months. Id. 12.

On November 11, 2010, Shively traveled to New York to meet with Mitchell about showing his designs under the Designlush brand. Id. ¶ 13. Around that time, Mitchell learned that Shively "had access to a large amount of money." Id. ¶ 14. Shively revealed to Mitchell that he lived on a large horse farm and stayed at expensive hotels in New York; later, in the summer of 2011, Shively told Mitchell that he was considering purchasing and moving into an expensive home in New York to facilitate his entry into the furniture design business. Id.

Around November 2010, Mitchell and his life and business partner, Thomas Ruscica, id. ¶ 1, "put into motion their scheme to defraud Shively" by "taking advantage of Shively's desire to break into major markets with his designs." Id. ¶ 15.

In January 2011, Shively displayed his work at the Designlush booth at the annual Architectural Digest show. Id. ¶ 16. Mitchell charged Shively for his use of the space. Id. Around July 2011, Shively again displayed his work at a Designlush booth and paid for the space. Id. ¶ 17. In July 2011, Shively agreed to pay for cooperative advertising under the Designlush brand. Id. Shively alleges that, unbeknownst to him, these financial arrangements were contrary to standard industry practice. Id. ¶¶ 16-18.

On August 3, 2011, Mitchell and Ruscica took Shively and his wife to dinner "and discussed how they could be instrumental in helping Shively advance his career as a designer." Id. ¶ 21. On August 9, 2011, Mitchell proposed to Shively that he pay $2 to $5 million to obtain an equity interest in the corporation represented by Designlush. Id. ¶ 22. This investment would combine Mitchell and Ruscica's "established business model" with Shively's "equity partnered funding." Id. ¶ 23. The next day, Mitchell sent Shively an email expressing his excitement that the deal "could really springboard your career as a designer and DESIGNLUSH as [sic] company while providing us both a nice security blanket along the way." Id.

Shively alleges that this was not a bona fide investment opportunity, but rather an attempt to defraud him of his money by causing him to invest in a non-existent corporation, HRI, with the intent of then misusing and siphoning off his money. Id. ¶¶ 24, 45, 50.

On August 19 and August 21, 2011, Mitchell emailed Shively a series of spreadsheets purporting to provide financial information for Designlush. Id. ¶ 25. Shively alleges that these spreadsheets were intentionally misleading because there was no corporation named Designlush at that time. Id. Shively further alleges that Mitchell and Ruscica constructed the spreadsheets for the sole purpose of defrauding him. Id.

On September 21, 2011, Mitchell hosted a meeting to discuss the investment proposal at the office of his accountant, Martin Blank. Id. ¶ 27. Shively was joined at that meeting by his family's financial advisor, Will Ollinger, and attorney, Jack Bovay. Id. ¶¶ 26-27. Mitchell represented that Designlush was organized as a Wyoming corporation, HRI, doing business as Designlush. Id. ¶ 27. Mitchell proposed that Shively buy shares in HRI. Id.

On October 11, 2011, Shively told Mitchell that he would not consider a multi-million dollar investment, but would consider investing $1 million. Id. ¶ 29. Shively alleges that Mitchell and Ruscica then "constructed a new set of knowingly false financial spreadsheets" purporting to be "financial projections for a non-existent corporation, " HRI. Id. ¶ 30. Mitchell presented these spreadsheets to Shively. Id.

On November 23, 2011, Mitchell and Ruscica's counsel presented Shively with the draft Shareholders' Agreement. Id. ¶ 31. Minor changes were then made to the agreement. Id. ¶ 35.

In December 2011, Shively, Mitchell, and Ruscica signed the final Shareholders' Agreement.[2] Shively Decl. Ex. A at 1 ("the Shareholders' Agreement" or "the Agreement"). The Agreement states that it is between Mitchell, Ruscica, and Shively, "representing owners of all issued stock of Home Remodeling, Inc., doing business as Designlush... and Home Remodeling, Inc., a corporation organized under the laws of the State of Wyoming and authorized to transact business within the State of New York, with offices for the transaction of business located at 200 Lexington Avenue, Suite 405, New York, New York 10016." Id. at 1. The Agreement recites as consideration "the premises and the mutual agreements contained in this agreement" and "the ongoing business and good will built up by the corporation and the $1, 000, 000 capital contribution to be made by Shively simultaneously with the execution of this agreement." Id. ¶ B. It states that Mitchell, Ruscica, and Shively are the sole shareholders of HRI, and designates 75 shares for Mitchell, 75 shares for Ruscica, and 50 shares for Shively. Id. ¶¶ B, 1.1. Mitchell is President and Treasurer, Ruscica is First Vice President and Secretary, and Shively is Second Vice President. Id. ¶ 2.1. Mitchell's salary is $150, 000; he is in charge of "vendor development, product development, and product design." Id. ¶ 4.1. Ruscica earns $75, 000 as the "creative consultant... in charge of marketing promotions and fashion industry liaison." Id. Shively earns $150, 000 as "the Corporation's in-house fabricator [who] shall collaborate on custom designs and prototypes." Id. The Agreement requires unanimous consent of the shareholders before certain actions can be taken, such as issuing additional shares and incurring financial obligations greater than $10, 000. Id. ¶ 2.5. The Agreement also contains provisions addressing indemnification, dividends, reports and records, restrictions on competitive activities, fringe benefits, confidential information, and the governing law (that of New York). Id. ¶¶ 2.6-4.6.

Unbeknownst to Shively, at the time of the negotiations and agreement, HRI did not exist as a corporation. It had once existed, but, on June 4, 2008, the Wyoming Secretary of State had administratively dissolved it, for failure to file a 2007 annual report. Shively Decl. Ex. B. The Amended Complaint alleges that Mitchell and Ruscica were aware of HRI's dissolution. Am. Compl. ¶ 24.[3]

After the parties signed the Agreement, Shively began work on a number of furniture and lighting pieces for the spring and summer trade shows. Am. Compl. ¶ 45. Between March and July 2012, his work was exhibited under the Designlush brand at multiple events and received critical acclaim. Id. ¶¶ 42-44.

Shively alleges that, after receiving his $1 million investment, Mitchell and Ruscica began misappropriating it. Id. ¶ 39. They paid themselves the salaries provided for in the Agreement, but did not pay Shively until February 2012, after he repeatedly complained. Id. Mitchell and Ruscica also paid their travel expenses out of the company's accounts, but Shively was not similarly reimbursed. Id. ¶ 41. Mitchell and Ruscica also used company assets "(i) to buy over $350, 000 worth of inventory, (ii) to pay their personal car expenses of around $661 per month for a car they kept in Miami, (iii) to pay about $800 per month on a Citibank line of credit, (iv) to pay credit card bills for significant personal expenses, (v) to make payments on a loan where Ruscica was the borrower, and (vi) to throw a party with a cost..of around $10, 000 at the Elle Decor show house in New York City without informing or consulting Shively." Id. ¶ 50. Meanwhile, Mitchell and Ruscica "put[] extreme pressure on Shively to provide even more capital, repeatedly telling him that the company would close without more money from him immediately." Id. ¶ 51.

Around May 30, 2012, without telling Shively, Mitchell and Ruscica formed a corporation, Designlush, Inc., and transferred assets to it from HRI. Id. ¶ 45. "Mitchell and Ruscica were the only shareholders in the new corporation, which operated the Designlush Brand and held the majority of the assets formerly held under the HRI name." Id. [4]

In spring and summer of 2012, Shively began to suspect that Mitchell and Ruscica were taking advantage of him. Id. ¶ 46. He noted that Mitchell was using HRI funds to pay other designers to produce pieces to be displayed under the Designlush brand and that Mitchell did not charge those designers for advertisements, floor space, or other expenses, even though Mitchell had charged Shively for those costs in 2011. Id. Shively also observed that he was still required to pay his own productions costs. Id.

In July 2012, Shively moved from Kentucky to southern Connecticut. Id. ¶ 47. Around that time, he learned that almost all of his $1 million investment in HRI had disappeared; he demanded further information about HRI and its finances. Id. ¶ 48. He later demanded the return of his $1 million investment and of furniture and lighting he designed, which he states is valued at $114, 000. Id. ¶¶ 56-57. ...

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