United States District Court, W.D. New York
For Apace Communications, Ltd., Plaintiff: Bryon L. Gregory, LEAD ATTORNEY, Foley & Lardner LLP - Chicago, Chicago, IL; Peter J. Weishaar, LEAD ATTORNEY, McConville Considine Cooman & Morin, PC, Rochester, NY; James E Griffith, PRO HAC VICE, Foley & Lardner LLP - Chicago, Chicago, IL; Thomas P. Krebs, Foley & Lardner LLP, Chicago, IL.
For Rakesh Aggarwal, Plaintiff: Bryon L. Gregory, LEAD ATTORNEY, Foley & Lardner LLP - Chicago, Chicago, IL; Peter J. Weishaar, LEAD ATTORNEY, McConville Considine Cooman & Morin, PC, Rochester, NY.
For Jeffrey Burke, Defendant: Steven E. Cole, LEAD ATTORNEY, Leclair Korona Giordano Cole LLP, Rochester, NY.
For Michael Benedict, Defendant: William G. Bauer, LEAD ATTORNEY, Woods Oviatt Gilman LLP, Rochester, NY.
For Cephire Technologies, Timothy Beers, Defendants: Paul F. Keneally, LEAD ATTORNEY, Underberg & Kessler LLP, Rochester, NY.
DECISION AND ORDER
DAVID G. LARIMER, United States District Judge.
Plaintiff Apace Communications, Ltd. (" Apace" ) brought this action asserting fraud and other claims against a number of defendants, alleging that Apace was fraudulently induced by defendants to invest in a company named NetSetGo.
The Court has issued several decisions in this case, granting plaintiff leave to amend the complaint, 522 F.Supp.2d 509 (W.D.N.Y. 2007), granting leave to file a second amended complaint, 584 F.Supp.2d 591 (W.D.N.Y. 2008), and dismissing plaintiff's claims against a particular defendant, David Klein. 2009 WL 1748711 (W.D.N.Y. June 19, 2009). Several of the remaining defendants--Steven and Lori Levine (" Levines" ) (Dkt. #168) and Clint Campbell, Cephas Capital Partners, LP, and Jeffrey Holmes (" Cephas defendants" ) (Dkt. #173), have now moved for summary judgment.
The underlying facts of this case have been set forth in the Court's prior decisions, particularly the 2007 decision granting leave to amend, 522 F.Supp.2d at 512-13. The gist of plaintiff's claim is that Apace, acting mostly through one of its principals, Rakesh Aggarwal, was fraudulently induced by defendants to invest millions of dollars in NetSetGo, an internet service provider, and that Apace lost its investment as a result of that fraud.
The Levines and the Cephas defendants were secured creditors of NetSetGo. They, together with the other defendants, allegedly led Aggarwal to believe that NetSetGo's financial condition and outlook were in far better shape than they were. Defendants allegedly convinced Aggarwal that an infusion of cash was all that NetSetGo needed to yield significant profits down the road. Plaintiff alleges that defendants' true purpose in inducing Apace to make further " investments" was not to strengthen NetSetGo, but to recoup their own investments, at Apace's expense.
Plaintiff alleges that on behalf of Apace, and based on assurances and enticements made to Apace by defendants, Aggarwal, for a while, continued to sink Apace's money into NetSetGo. In March 2002-by which time Aggarwal had become the chairman of the board of Apace, Aggarwal Deposition Transcript (" Tr." ) (Dkt. #168 Ex. C) at 448-50-Apace agreed to lend NetSetGo $2.5 million, under a " Bridge Line of Credit Agreement," Dkt. #236-10, and Aggarwal, on behalf of Apace, agreed that Apace's security interest created by that loan would be subordinate to that of Cephas Capital Partners.
At some point, Aggarwal, apparently coming to believe that he was throwing good money after bad, refused to invest more money in NetSetGo. NetSetGo never did become profitable, and its assets were sold at a UCC Article 9 foreclosure sale in December 2002 and bought by defendant Cephire Corp., a company that had been formed by defendants for the purpose of acquiring NetSetGo's assets. Apace sent an " observer" to the sale, and could have but did not bid on NetSetGo's
assets. Plaintiff claims that the sale was not conducted in good faith and was fraudulent, and that Apace lost virtually its entire investment.
Plaintiff also alleges, as explained in more detail below, that defendants led it to believe that if Apace invested in NetSetGo, NetSetGo would engage in substantial business with Cresco Technologies, a sister company of Apace. Plaintiff alleges that NetSetGo never did business with Cresco, and that defendants never intended that it would; those alleged promises, plaintiff alleges, were intended only to induce Apace to invest in NetSetGo.
The second amended complaint (" SAC" ) asserts eight causes of action: (1) fraud; (2) constructive fraud; (3) negligent misrepresentation; (4) breach of fiduciary duty; (5) conspiracy to commit fraud; (6) agency; (7) fraudulent conveyance; and (8) successor liability. Plaintiff seeks $8 million in damages.
The fundamental basis for plaintiff's claims is a theory of fraud. To make out a fraud claim, plaintiff must allege and prove " a material misrepresentation of an existing fact, made with knowledge of the falsity, an intent to induce reliance thereon, justifiable reliance upon the misrepresentation, and damages." McMorrow v. Angelopoulos, 113 A.D.3d 736, 739-40, 979 N.Y.S.2d 353 (2d Dep't 2014)); see Eurycleia Partners, LP v. Seward & Kissel, LLP, 12 N.Y.3d 553, 559, 883 N.Y.S.2d 147, 910 N.E.2d 976). Judging plaintiff's claims against that standard, plaintiff's claims fail.
I. Cephas Defendants
Aggarwal's deposition testimony shows that he became interested in investing in NetSetGo based on the recommendation of " one of [his] close friends, Dr. Chellappa." Tr. at 67. See also Plaintiff's Response to Cephas Defendants' Statement of Material Facts (Dkt. #236-1) ¶ 14 (describing Chellappa as a " good friend of Aggarwal" ). Chellappa (who is not a party to this action), whom Aggarwal considered to be " an 'insider,' a shareholder, and director of NETSETGO" who " had firsthand knowledge of NETSETGO," Dkt. #236-1 ¶ 17, advised Aggarwal that NetSetGo " was a good company with a good track record, excellent ...