United States District Court, S.D. New York
OPINION AND ORDER
JESSE M. FURMAN, District Judge.
Plaintiff New Earthshell Corporation ("New Earthshell" or "Plaintiff") brings this suit against Defendants Jobookit Holdings Ltd. ("Jobookit"), Viumbe, LLC ("Viumbe" and, together with Jobookit, the "Corporate Defendants"), and Rafi Shkolnik (together with the Corporate Defendants, "Defendants"), alleging breach of contract, fraud, and other related claims. Pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, Defendants move to dismiss the Third Amended Complaint ("Complaint") in its entirety and seek attorneys' fees. For the reasons explained below, Defendants' motion, including the request for attorneys' fees, is GRANTED.
The following facts, taken from the Complaint and attached exhibits, are assumed to be true for purposes of this motion. See, e.g., Gonzalez v. Hasty, 651 F.3d 318, 321 (2d Cir. 2011).
Viumbe is a digital media company that owns several websites. (Third Am. Compl. ("TAC") (Docket No. 13) ¶ 8). Selling advertising is its primary source of revenue. (Id. ). In April 2014, New Earthshell sold Viumbe to Jobookit for $2.5 million. (Id. ¶ 9). Pursuant to the parties' purchase agreement (the "Purchase Agreement"), Jobookit paid New Earthshell $1 million at closing, and New Earthshell loaned Jobookit the remaining $1.5 million. (Id. ¶ 9). The loan, which was secured by Viumbe's equity and assets, was due twenty-four months after closing, although Jobookit had the right to extend it for another four months. ( Id. ¶¶ 10, 12).
At the same time that Jobookit was negotiating with New Earthshell, it was also negotiating with another company, Digital Ybrant Group ("Ybrant"), for the right to operate and manage Viumbe's websites. (Id. ¶¶ 13-14). Ultimately, Ybrant and Jobookit entered into an agreement - effective upon Jobookit's purchase of Viumbe - whereby Ybrant invested $1 million in Jobookit and agreed to manage Viumbe's web sites in exchange for shares of Jobookit and a varying percentage of the websites' advertising revenue. (Id. ¶¶ 16-17; id., Ex. C at 2). Specifically, Ybrant was entitled to seventy percent of the websites' advertising revenue until it had received $1 million, fifty percent of the revenue for two years after that, and thirty-five percent of the revenue thereafter. (Id. ¶¶ 16-17; id., Ex. C at 2).
New Earthshell admits that it knew that Jobookit was ncegotiating with Ybrant for the right to manage Viumbe's websites at least as early as March 2014. (Id. ¶¶ 11, 14-15). At that time, Jobookit filed a notice with the Israeli Securities Regulator and the Tel Aviv Stock Exchange stating that it and Ybrant had reached a memorandum of understanding providing that Ybrant would purchase $1 million of Jobookit's common stock in exchange for management rights to the leading website owned by an "American company" that Jobookit was acquiring. (Id. ¶ 14). When Plaintiff asked Jobookit about the terms of the Ybrant agreement, however, Jobookit's Chief Executive Officer, Defendant Rafi Shkolnik, told Plaintiff that Ybrant would receive only thirty-five percent of Viumbe's revenue and that Ybrant's investment in Jobookit was an "equity" investment that would not be repaid. (Id. ¶ 15). Although Plaintiff asked to see a copy of the agreement between Jobookit and Ybrant, Shkolnik refused, citing a confidentiality agreement. (Id. ). Plaintiff alleges that, if it had known the true terms of Jobookit's deal with Ybrant, it never would have agreed to loan the $1.5 million to Jobookit. (Id. ¶ 12).
Plaintiff filed this lawsuit on May 20, 2014, and alleges (1) fraud (against Jobookit and Shkolnik) (Id. ¶¶ 26-28; Docket No. 1); (2) securities fraud (against Jobookit and Shkolnik) (Id. ¶¶ 29-36); (3) negligent misrepresentation (against Jobookit and Shkolnik) (Id. ¶¶ 37-38); (4) breach of contract (against Jobookit and Viumbe) (Id. ¶¶ 39-43); (5) breach of the implied covenant of good faith and fair dealing (against all Defendants) (Id. ¶¶ 44-48); and (6) conversion (against Jobookit) (Id. ¶¶ 49-50). The Court will address each claim in turn.
A motion pursuant to Rule 12(b)(6) challenges the sufficiency of the allegations in the complaint. See ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007). To survive the motion, the complaint must "state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). A claim is facially plausible "when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing Twombly, 550 U.S. at 556). More specifically, the plaintiff must allege sufficient facts to show "more than a sheer possibility that a defendant has acted unlawfully." Id. If the plaintiff has not "nudged [his or her] claims across the line from conceivable to plausible, [the] complaint must be dismissed." Twombly, 550 U.S. at 570.
A. Fraud and Negligent Misrepresentation
Plaintiff's first claims are for fraud and negligent misrepresentation. To state a cause of action for fraud under New York law - which the parties agree applies in this case ( see, e.g., Defs.' Mot. To Dismiss Third Am. Compl. Pursuant Fed.R.Civ.P. 12(b)(6) ("Defs.' Mem.") (Docket No. 15) 14-19 (citing New York law); Pl.'s Br. Opp'n Def.'s Mot. To Dismiss Third Am. Compl. ("Pl.'s Mem.") (Docket No. 18) 8-9, 13-15 (same)) - a plaintiff must allege "a representation of material fact, the falsity of the representation, knowledge by the party making the representation that it was false when made, justifiable reliance by the plaintiff and resulting injury." Lerner v. Fleet Bank, N.A., 459 F.3d 273, 291 (2d Cir. 2006) (internal quotation marks omitted). To state a claim for negligent misrepresentation, on the other hand, a plaintiff must allege "(1) the existence of a special or privity-like relationship imposing a duty on the defendant to impart correct information to the plaintiff; (2) that the information was incorrect; and (3) reasonable reliance on the information.'" Crawford v. Franklin Credit Mgmt. Corp., 758 F.3d 473, 490 (2d Cir. 2014) (quoting J.A.O. Acquisition Corp. v. Stavitsky, 8 N.Y.3d 144, 148 (2007)). Thus, for each claim, a plaintiff must plead and prove reasonable reliance. "[W]hether a plaintiff has adequately pleaded justifiable reliance can be a proper subject for a motion to dismiss." Granite Partners, L.P. v. Bear, Stearns & Co. Inc., 58 F.Supp.2d 228, 259 (S.D.N.Y. 1999).
In this case, Plaintiff fails to plausibly allege reasonable reliance. Plaintiff maintains that Jobookit and Ybrant misrepresented "material facts of their revenue split with Viumbe, that Plaintiff would receive a first priority security interest in all of Viumbe's assets, Viumbe would not transfer Plaintiff's Collateral, Ybrant's investment was solely an equity' investment and Ybrant would not be entitled to be repaid." (TAC ¶ 27). Even accepting those allegations as true, however, Plaintiff has failed to plausibly plead that it justifiably relied on those misrepresentations. "[A]s a matter of law, a sophisticated plaintiff cannot establish that it entered into an arm's length transaction in justifiable reliance on alleged misrepresentations if that plaintiff failed to make use of the means of verification that were available to it." HSH Nordbank AG v. UBS AG, 941 N.Y.S.2d 59, 66 (App. Div. 1st Dep't 2012) (internal quotation marks omitted); see also Global Minerals & Metals Corp. v. Holme, 824 N.Y.S.2d 210, 215 (App. Div. 1st Dep't 2006) ("New York law imposes an affirmative duty on sophisticated investors to protect themselves from misrepresentations made during business acquisitions by investigating the details of the transactions and the business they are acquiring."). New Earthshell contends that the relevant facts were peculiarly within Defendants' knowledge and that it did everything it could to verify the details of the Ybrant transaction by asking Shkolnik about the terms of the Ybrant deal several times. (Pl.'s Mem. 8-9). But Plaintiff could have insisted on seeing the Ybrant contract before going through with the sale. Alternatively, if a confidentiality agreement did actually preclude Defendants from sharing the contract, Plaintiff could have "insert[ed] appropriate language in the [Purchase A]greement for its protection, " such as a provision forbidding Jobookit from granting third parties the right to receive more than thirty-five percent of Viumbe's revenue in exchange for goods or services. Global Minerals, 824 N.Y.S.2d at 215-16; see also Ventur Grp. LLC v. Finnerty, 892 N.Y.S.2d 69, 70-71 (App. Div. 1st Dep't 2009) (finding that the plaintiff could not have justifiably relied on oral statements even in the face of a confidentiality agreement). Plaintiff did neither.
Equally unavailing is Plaintiff's claim that it justifiably relied on the public securities filings made in Israel. (Pl.'s Mem. 6). Those filings - which the Court may consider on a motion to dismiss, see, e.g., In re Thelen LLP, 736 F.3d 213, 219 (2d Cir. 2014) - stated that Ybrant and Jobookit had signed a Memorandum of Understanding, but did not mention that Ybrant would receive a percentage of Viumbe's revenue. (Decl. A. Jeff Ifrah, Esq. ("Ifrah Decl.") (Docket No. 16), Ex. D at 1). Because Plaintiff had ...