Stanley Works Israel Ltd. v. 500 Group, Inc. et al
Filing
38
RULING (see attached) granting in part and denying in part Defendants' 26 Motion to Dismiss. Defendants are directed to file their answer to the 24 Amended Complaint on or before August 17, 2018. Signed by Judge Charles S. Haight, Jr. on 8/1/2018. (Kaczmarek, S.)
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF CONNECTICUT
THE STANLEY WORKS ISRAEL LTD.
f/k/a ZAG INDUSTRIES, LTD.,
Plaintiff,
3:17-cv-01765 (CSH)
v.
500 GROUP, INC. and PAOLO TIRAMANI,
AUGUST 1, 2018
Defendants.
RULING ON MOTION TO DISMISS
HAIGHT, Senior District Judge:
The Stanley Works Israel Ltd., f/k/a ZAG Industries, Ltd. ("Plaintiff"), an Israeli limited
liability company, brings this diversity action against Defendants 500 Group, Inc., a New York
corporation, and Paolo Tiramani, a citizen of Nevada (collectively, "Defendants"). Plaintiff and
Defendant 500 Group were parties to certain product license agreements that related generally to
patent rights owned by 500 Group. Plaintiff's claims against Defendants arise from a dispute over
monies paid pursuant to a settlement agreement between the parties.
Defendants now move pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure to
dismiss the Amended Complaint for failure to state a claim upon which relief can be granted, Doc.
26. Plaintiff has resisted the motion, Doc. 29, and Defendants have filed a reply brief, Doc. 32. This
Ruling resolves Defendants' motion.
I.
BACKGROUND
The following facts are derived from Plaintiff's Amended Complaint, and are assumed true
1
for the purposes of this motion.
Plaintiff and Defendant 500 Group were parties to certain product license agreements and
a letter agreement (collectively, the "License Agreements"), which related generally to patent rights
owned by 500 Group. Amended Complaint, Doc. 24 ¶ 7. The License Agreements were silent on the
tax treatment of royalty payments made under their terms. Id. ¶ 8. However, under Israeli law,
Plaintiff was required to withhold certain percentages of such royalty payments to 500 Group, and
to then remit that amount to the Israeli tax authority to satisfy 500 Group's tax obligations in Israel.
Id. Therefore, during the term of the License Agreements, with 500 Group's consent and agreement,
Plaintiff withheld the appropriate amounts from 500 Group's royalty payments, and remitted the tax
to the Israeli tax authority. Id.
Disputes between the parties relating to the License Agreements arose; these disputes resulted
in a demand for arbitration. Id. ¶ 9. The disputes were then negotiated and the parties ultimately
reached a settlement. Id. ¶ 10. Plaintiff and 500 Group entered into a Settlement Agreement on
March 31, 2017, which provided, among other things, that Plaintiff would pay a sum of ten million
dollars to Defendant 500 Group. Id. ¶¶11-12. The parties agreed that of this total, six million dollars
constituted payment for Plaintiff's purchase of 500 Group's patent rights; the remaining four million
dollars constituted royalty payments to 500 Group. Id. ¶ 12.
Plaintiff was required to withhold a portion of total amount payable under the Settlement
Agreement for tax purposes, and then remit the tax to the Israeli tax authority on behalf of 500
Group. Id. ¶ 13. In this situation, pursuant to Israeli law, Plaintiff was required to withhold
$2,500,000, or 25% of the total payment amount, unless the parties obtained prior approval from the
Israeli tax authority for a different withholding arrangement. Id. ¶ 14. 500 Group would then be
2
responsible to seek a refund of any portion of the withheld amount that was not taxable directly from
the Israeli tax authority. Id. ¶ 14.
The parties decided to delay the payment of the amount due under the Settlement Agreement
so that they could obtain pre-approval from the tax authority for "structuring a reduced amount of
withholding, in view of the agreed-upon structure of the Settlement Agreement." Id. ¶ 15. This
agreement was made in mutually-signed electronic writings. Id. The parties believed that under
Israeli law, the six million dollar patent rights payment should not be taxed, and the four million
dollar royalty payment should be taxed at the prior royalty rate of 15%. Id. Thus, if pre-approval was
obtained, 500 Group's total tax burden would be $600,000. Id. According to the signed electronic
agreements between the parties, that amount would be withheld by Plaintiff and remitted to the
Israeli tax authority. Id.
500 Group hired Ernst & Young to act on its behalf to assist in obtaining the aforementioned
pre-approval. Id. ¶ 17. Defendant Tiramani and other agents of 500 Group confirmed the parties'
agreement relating to the tax withholdings multiple times in writing, including in emails signed by
Tiramani and other agents of 500 Group. Id. ¶ 18. Tiramani was personally involved in efforts to
further the parties' tax withholdings agreement, and agreed that the parties should continue to seek
approval for the withholdings under the current Settlement Agreement, rather than re-execute the
Agreement to explicitly split the payments into two categories. Id. ¶ 20.
Pre-approval was ultimately obtained by Ernst & Young, acting on behalf of 500 Group for
the parties' proposal. Id. ¶ 21. 500 Group agreed that Plaintiff was to retain $600,000 from the
payment total under the Settlement Agreement. The parties' agreement to seek preapproval and
proceed with withholding 15% of the royalty payment was "acted on to completion." Id. 500 Group's
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agreements, representations and conduct regarding the tax withholding issue induced Plaintiff's
reliance, in that Plaintiff aided 500 Group to obtain the preapproval, and Plaintiff performed its
obligation under the agreement by remitting $600,000 to the Israeli tax authority in satisfaction of
500 Group's tax obligations. Id. ¶ 22.
Under the Settlement Agreement, 500 Group was to provide Plaintiff with instructions for
wiring the payment from Plaintiff to 500 Group called for by the Agreement. Id. ¶ 23. 500 Group
instructed Plaintiff to wire the payment to its account at Patriot Bank in Stamford, Connecticut. Id.
¶ 24. The settlement funds were wired to this bank account on June 1, 2017. Id. ¶ 25. However,
Plaintiff mistakenly failed to deduct $600,000 from the total as the agreed-upon tax withholdings.
Id. Thus, Plaintiff overpaid 500 Group by $600,000. Id.
On June 5, 2017, Plaintiff's bank requested that the funds which were erroneously transmitted
be recalled; this request was denied. Id. ¶ 26. On or about June 7, 2017, Plaintiff explained to 500
Group that it had mistakenly overpaid, and asked 500 Group to return the $600,000 overpayment.
Id. ¶ 27. 500 Group "failed to diligently respond" to Plaintiff's request. Id. ¶ 28. Plaintiff then made
multiple follow-up requests to 500 Group for it to return the money. Id. ¶ 29. Although Tiramani
initially indicated by email that he intended to return the funds and asked about the logistics of such
a transfer, all of Plaintiff's follow-up communications and requests were either ignored or refused,
without any legal explanation by Defendants. Id. ¶ 30.
Plaintiff was still liable on behalf of 500 Group to the Israeli tax authority for the full amount
of the pre-approved withholdings under the Settlement Agreement. Id. ¶ 31. Accordingly, Plaintiff
paid $600,000 to the tax authority on or about August 15, 2017. Id. Defendants continue to refuse
to return Plaintiff's $600,000, despite continued and repeated requests and demands. Id. ¶ 32.
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II.
STANDARD OF REVIEW
"On a motion to dismiss, the issue is 'whether the claimant is entitled to offer evidence to
support the claims.'" Patane v. Clark, 508 F.3d 106, 111 (2d Cir. 2007) (quoting Scheuer v. Rhodes,
416 U.S. 232, 236 (1984)). "To survive a motion to dismiss, a complaint must contain sufficient
factual matter, accepted as true, to 'state a claim that is plausible on its face.'" Ashcroft v. Iqbal, 556
U.S. 662, 678 (2009) ("Iqbal") (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007)
("Twombly")). This pleading standard creates a "two-pronged approach," Iqbal, 556 U.S. at 679,
based on "[t]wo working principles." Id. at 678.
First, all factual allegations in the complaint must be accepted as true and all reasonable
inferences must be drawn in the favor of the non-moving party. See id.; see also Gorman v.
Consolidated Edison Corp., 488 F.3d 586, 591-92 (2d Cir. 2007) (citation omitted). The presumption
of truth does not extend, however, to "legal conclusions" or "[t]hreadbare recitals of the elements of
a cause of action supported by mere conclusory statements[.]" Iqbal, 556 U.S. at 678. Second, "a
complaint that states a plausible claim for relief" will survive a motion to dismiss and "[d]etermining
whether a complaint states a plausible claim for relief will . . . be a context-specific task that requires
the reviewing court to draw on its judicial experience and common sense." Harris v. Mills, 572 F.3d
66, 72 (2d Cir. 2009) (quoting Iqbal, 556 U.S. at 679) (quotation marks omitted). "Dismissal under
Federal Rule of Civil Procedure 12(b)(6) is appropriate when 'it is clear from the face of the
complaint, and matters of which the court may take judicial notice, that the plaintiff's claims are
barred as a matter of law.'" Associated Fin. Corp. v. Kleckner, 480 F. App'x 89, 90 (2d Cir. 2012)
(quoting Conopco, Inc. v. Roll Int'l, 231 F.3d 82, 86 (2d Cir. 2000)).
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III.
DISCUSSION
Plaintiff's Amended Complaint raises counts sounding in breach of contract, unjust
enrichment, unfair trade practices, conversion, and civil theft. The Court will address each of
Defendants' arguments for Rule 12(b)(6) dismissal of the claims asserted by Plaintiff, based on the
well-pled factual allegations of the Amended Complaint.
A.
Choice of Law
Defendants argue that New York law should apply to all of the claims in this matter, and on
this ground, move to dismiss Plaintiff's CUTPA and tort claims. The Court addresses the choice of
law analysis as an initial matter.
A federal court sitting in diversity follows the choice of law principles of the forum state.
Bigio v. Coca-Cola Co., 675 F.3d 163, 169 (2d Cir. 2012) (citation omitted). When evaluating choice
of law questions sounding in tort, Connecticut courts apply the 'most significant relationship' test
from the Restatement (Second) of Conflict of Laws, § 145. W. Dermatology Consultants, P.C. v.
VitalWorks, Inc., 322 Conn. 541, 558 (2016). The relevant factors that are considered are: (1) the
place where the injury occurred; (2) the place where the conduct causing the injury occurred; (3) the
domicile, residence, nationality, place of incorporation, and business of the parties, and (4) the place
where the relationship, if any, between the parties is based. Otis Elevator Co. v. Factory Mut. Ins.
Co., 353 F. Supp. 2d 274, 285 (D. Conn. 2005).
Here, the Settlement Agreement contains a choice of law clause, which provides that the
"Agreement and Mutual Release shall, in all respects, be interpreted, enforced, and governed under
the laws of the State of New York without regard to its conflicts of laws principles." Doc. 24-1 at
8. The parties are in agreement that pursuant to this provision, New York law governs Plaintiff's
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breach of contract claim. The parties are also in apparent agreement that New York law should apply
to the unjust enrichment and conversion claims.1 Plaintiff cites to Connecticut law in arguing against
dismissal of its CUTPA and civil theft claims.
To determine which law to apply, the Court first addresses whether the aforementioned
clause in the Settlement Agreement controls the choice of law analysis for the remaining CUTPA
and civil theft claims. Courts in this District have held that general choice of law provisions in
contracts must be sufficiently broad to encompass tort claims. See In re Trilegiant Corp., Inc., 11
F. Supp. 3d 132, 144-45 (D. Conn. 2014) (noting that in this District, courts have found that "general
choice-of-law provisions in contracts must explicitly include tort claims to prevent a plaintiff from
bringing a cause of action under CUTPA" and finding that the choice of law provision in certain
credit card agreements was not so broad as to bar the Plaintiff's tort causes of action under CUTPA
(citing Country Club Assocs. v. Shaw's Supermarkets, Inc., 643 F. Supp. 2d 243, 252-55 (D. Conn.
2009))). See also Country Club Assocs., 643 F. Supp. 2d at 252-55 (construing a contractual choice
of law provision narrowly as to not explicitly encompass tort claims); Aviamax Aviation Ltd. v.
Bombardier Aerospace Corp., No. 3:08-CV-1958(CFD), 2010 WL 1882316, at *2-4 (D. Conn. May
10, 2010) (finding an analogous choice of law provision "too narrowly drawn" to encompass the
1
Plaintiff does not address the choice of law issue in regards to the unjust enrichment
claim, but cites New York law in arguing against dismissal. Further, while Plaintiff "believes that
Connecticut law applies" to its conversion claim, it notes that there does not appear to be a
conflict of laws between New York and Connecticut law on this issue, and so, "for the avoidance
of further unnecessary dispute, Stanley Israel will cite to New York law." Doc. 29 at 23 n.3. This
is sufficient for the Court to apply New York law in analyzing these claims. See Prince of Peace
Enterprises, Inc. v. Top Quality Food Mkt., LLC, 760 F. Supp. 2d 384, 397 (S.D.N.Y. 2011)
("The parties have consented to application of New York law by briefing all issues under the law
of New York." (citations omitted)); see also Motorola Credit Corp. v. Uzan, 388 F.3d 39, 61 (2d
Cir. 2004) ("Here, the parties' briefs assume that New York law controls this issue, and such
implied consent is sufficient to establish choice of law." (quotation marks and citation omitted)).
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"closely related" tort claims).
Here, the choice of law clause in the Settlement Agreement is similar to the provisions
detailed in the cases cited above. It states that it applies to the Agreement and the mutual release; not
to all claims arising thereof. The Court follows these courts in deciding that the choice of law
provision here is too narrow to encompass the CUTPA or civil theft claims.
Thus, the Court turns to the 'most significant relationship' test. According to the allegations
in the Amended Complaint, Plaintiff is an Israeli entity, with its principal place of business in Israel.
It is owned by a Dutch company, which, in turn, is owned by a Canadian corporation. Defendant 500
Group is a New York corporation with its principal place of business in Nevada. It maintains a
regular place of business in Connecticut. Defendant Tiramani is a citizen of Nevada. Tiramani
previously resided in Connecticut and maintains a place of business in Connecticut. It is unclear from
the record before the Court where the relationship between the parties is centered; there are no
allegations as to where the contract was signed. While it appears that the injury was felt in Israel, the
allegations of the Amended Complaint do not shed light on whether the injury-causing conduct
occurred in Nevada, New York, or Connecticut.
It appears that it would be premature to undertake this analysis at this early stage in the
litigation. The record before the Court on this motion to dismiss does not contain the necessary
information to determine where the relationship between the parties was based; where the Settlement
Agreement was signed; and where the injury-causing conduct took place. See Bristol–Myers Squibb
Co. v. Matrix Labs. Ltd., 655 F. App'x 9, 13 (2d Cir. 2016) (noting that "[n]umerous district courts
in this Circuit have concluded that choice-of-law determinations are fact-intensive inquiries that
would be premature to resolve at the motion-to-dismiss stage" (collecting cases)). See also Meserole
8
v. Sony Corp. of Am., No. 08-CV-8987(RPP), 2009 WL 1403933, at *5 n.6 (S.D.N.Y. May 19, 2009)
(noting that a detailed choice of law analysis would be premature to undertake in ruling on a motion
to dismiss); First Union Nat. Bank v. Paribas, 135 F. Supp. 2d 443, 453 (S.D.N.Y. 2001) (declining
to decide whether New York or English law applies on a motion to dismiss, because "because it is
not yet clear that there is a conflict between New York and English law and because the litigation
is at a preliminary stage" (footnotes omitted)), aff'd sub nom., FUNB v. Arab African Int'l Bank, 48
F. App'x 801 (2d Cir. 2002).
Accordingly, the Court will not grant Defendants' motion to dismiss the CUTPA and civil
theft claims on choice of law grounds at this time. Based on the apparent agreement of the parties,
however, the Court will apply New York law to Plaintiff's claims of breach of contract, unjust
enrichment, and conversion.
B.
Breach of Contract
Defendants move to dismiss Plaintiff's breach of contract claim on the grounds that it is
contrary to the express terms of the Settlement Agreement, which "plainly establishes" that ten
million dollars is the amount Plaintiff was required to pay. Defendants argue that Plaintiff failed to
identify a provision of the Settlement Agreement that states that a portion of the settlement amount
would be withheld for tax purposes, and the parties' prior course of dealing cannot contradict the
plain language of the Settlement Agreement. Defendants claim that Plaintiff has failed to allege an
enforceable agreement that would require 500 Group to refund the $600,000 payment.
For its part, Plaintiff argues that the Amended Complaint plausibly alleges that 500 Group
was contractually obligated to allow for the tax withholding, because: (1) the Settlement Agreement
is silent on the issue, and therefore ambiguous; (2) there exist subsequent, signed writings in which
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500 Group agrees to the tax withholdings, thereby amending the operative contract; (3) the parties
acted on this understanding to, at a minimum, partial completion; and (4) Plaintiff relied on the tax
agreement to its detriment, thus, 500 Group is equitably estopped from evading its responsibilities.
1.
Ambiguity
"It is well established that settlement agreements are contracts and must therefore be
construed according to general principles of contract law." Collins v. Harrison-Bode, 303 F.3d 429,
433 (2d Cir. 2002) (quotation marks and citation omitted). In New York, a breach of contract claim
requires proving four elements: "the making of an agreement, performance by the plaintiff, breach
by the defendant, and damages suffered by the plaintiff." Greenberg v. Greenberg, 646 F. App'x 31,
32 (2d Cir. 2016) (quotation marks and citation omitted). "Under New York law the initial
interpretation of a contract is a matter of law for the court to decide. Included in this initial
interpretation is the threshold question of whether the terms of the contract are ambiguous."
Alexander & Alexander Servs., Inc. v. These Certain Underwriters at Lloyd's, London, England, 136
F.3d 82, 86 (2d Cir. 1998) (quotation marks and internal citations omitted).
A contract is unambiguous if "the contract language has a definite and precise meaning and
concerning which there is no reasonable basis for a difference of opinion." Orchard Hill Master
Fund Ltd. v. SBA Commc'ns Corp., 830 F.3d 152, 157 (2d Cir. 2016) (quoting Law Debenture Tr.
Co. of New York v. Maverick Tube Corp., 595 F.3d 458, 467 (2d Cir. 2010)). "It is axiomatic that
where the language of a contract is unambiguous, the parties' intent is determined within the four
corners of the contract, without reference to external evidence." Feifer v. Prudential Ins. Co. of Am.,
306 F.3d 1202, 1210 (2d Cir. 2002) (citation omitted). Thus, "[i]f the contract is unambiguous, that
is, only susceptible to one reasonable interpretation, the court must give effect to the contract as
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written." Madeleine L.L.C. v. St., 757 F. Supp. 2d 403, 405 (S.D.N.Y. 2010) (quotation marks and
citation omitted).
On the other hand, "[c]ontract language is ambiguous if it is 'capable of more than one
meaning when viewed objectively by a reasonably intelligent person who has examined the context
of the entire integrated agreement.'" Collins, 303 F.3d at 433 (quoting Compagnie Financiere de CIC
et de L'Union Europeenne v. Merrill Lynch, Pierce, Fenner & Smith Inc., 232 F.3d 153, 158 (2d Cir.
2000)). "[T]he question of ambiguity vel non must be determined from the face of the agreement,
without reference to extrinsic evidence." Id.
"At the motion to dismiss stage, a district court may dismiss a breach of contract claim only
if the terms of the contract are unambiguous." Orchard Hill Master Fund Ltd.., 830 F.3d at156; see
also Maniolos v. United States, 741 F. Supp. 2d 555, 567 (S.D.N.Y. 2010) ("Where a contract's
language is clear and unambiguous, a court may dismiss a breach of contract claim on a Rule
12(b)(6) motion to dismiss. . . . However, when the language of a contract is ambiguous, its
construction presents a question of fact, which of course precludes summary dismissal on a Rule
12(b)(6) motion." (quotation marks and citations omitted) (collecting cases)), aff'd, 469 F. App'x 56
(2d Cir. 2012). "[W]hile a court is not obliged to accept the allegations of the complaint as to how
to construe a contract, it should resolve any contractual ambiguities in favor of the plaintiff on a
motion to dismiss." Maniolos, 741 F. Supp. 2d at 567 (quotation marks and citation omitted).
In the present case, the Settlement Agreement is attached to the Amended Complaint. The
language of the contract requires Plaintiff to wire a sum of ten million dollars to Defendants; it
makes no provision for any withholding from that sum for tax purposes. Plaintiff does not point to
any clause that states otherwise; to the contrary, Plaintiff argues that the Settlement Agreement is
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silent on the issue of tax treatment. See, e.g., Doc. 29 at 9. Plaintiff contends, however, that the
silence of the contract on the issue of the tax treatments renders the Agreement ambiguous,
precluding dismissal of its breach of contract claim.
In support for its position, Plaintiff refers the Court to the Second Circuit's decision in White
v. White Rose Food, a Div. of DiGiorgio Corp., 237 F.3d 174 (2d Cir. 2001) ("White Rose"). This
case involved, in part, a settlement agreement resolving a labor dispute between an employer and
a union that represented a group of striking employees. Id. at 176-77. The settlement agreement
provided that the employer, White Rose, would place a sum of $1.5 million into an escrow account
to be distributed to the now-former employees. Id. at 177. The agreement was "silent on the issue
whether such payroll taxes could be drawn from the Settlement Fund, and who was to pay those
taxes." Id.2 After White Rose deducted payroll taxes from the Settlement Fund, the employees
brought the action, alleging, inter alia, a breach of the settlement agreement for deducting the taxes.
After a bench trial, the district court granted judgment in favor of the plaintiffs. White Rose
appealed.
The Second Circuit held that the district court erred in its initial conclusion "that the
Settlement Agreement '[b]y its terms' provided that the $1.5 million Settlement Fund was
'net'—rather than inclusive—of the $193,000 in payroll taxes that would be owed on that amount."
2
Similar to the Agreement in the present case, the Settlement Agreement in White Rose
provided:
Fund Amounts: Immediately at the conclusion of the one hundred twenty (120) day
period set forth in Paragraph 1, [White Rose] shall deposit one million dollars
($1,000,000) in an escrow account naming Joint Council 16 [a division of Local
138's national union] as Escrow Agent. One hundred twenty days thereafter, [White
Rose] shall deposit an additional five hundred thousand dollars ($500,000) in the said
escrow account.
237 F.3d at177 n.1.
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Id. at 179. The Court stated, "[t]he Agreement is silent on the 'net vs. inclusive' issue; at most, it is
ambiguous on this issue. As regards the Agreement's silence on this issue, we note that it would have
been futile for the district court to have implied a term or clause to the Agreement to fill this gap."
Id. at 180. The Second Circuit held that the District Court erred in concluding that the agreement
unambiguously provided that the fund was net of payroll taxes; and because the plaintiffs did not
present any extrinsic evidence relevant to "resolving such ambiguity," and only "chose to argue that
the Agreement unambiguously provides that the Settlement Fund is net of payroll taxes," the district
court could not "be faulted for failing to resolve this ambiguity in [plaintiffs'] favor by considering
extrinsic evidence." Id.
White Rose appears to speak to the issue we encounter in this case: a Settlement Agreement
that says nothing at all about the tax treatment of the settlement sum. The present Settlement
Agreement provides that Plaintiff "agrees to pay the sum of Ten Million U.S. Dollars . . . to 500
Group within fourteen (14) business days," six million of which constitutes payment for Plaintiff's
purchase of all patents, and four million of which constitutes a fixed-fee payment for future royalties.
Doc. 24-1 at 3. The Agreement further states that payment of the sum of one million dollars should
be wired to one account, and payment of the sum of nine million dollars should be wired to another.
There is no mention of deductions or withholdings from those amounts.
In White Rose, the Second Circuit found that silence on this similar issue could be
characterized as an ambiguity in the contract; reading the contract to state otherwise, without more,
was reversible error. To be sure, there are several differences between White Rose and the present
case which can ultimately serve to distinguish that case from the circumstances here. Importantly,
however, one must remember that the present case is in its initial stages. On a motion to dismiss, the
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Court is not only required to accept Plaintiff's allegations as true, but also to draw all reasonable
inferences in favor of Plaintiff. Guided by those principles, Plaintiff has sufficiently alleged that the
Agreement's silence on the tax issue is an ambiguity.
The cases that Defendants cite do not lead me to a different conclusion. In support of the
proposition that a court will not modify a settlement agreement to account for taxes, Defendants refer
the Court to a series of cases that involve the confirmation of arbitration awards. See Doc. 32 at 4,
4 n.1. However, a district court's review of an arbitration award is "severely limited." R & Q
Reinsurance Co. v. Utica Mut. Ins. Co., 18 F. Supp. 3d 389, 392 (S.D.N.Y. 2014).
Although Defendants repeatedly contend that in such cases, the district court "refused" to
modify the arbitration award, those courts in fact found that they were without power to do so under
the Federal Arbitration Act. See Pyne v. IMG Coll., LLC, No. 8:14-CV-340-T-17(EAJ), 2014 WL
5810981, at *4 (M.D. Fla. Nov. 7, 2014) (in finding that the defendants' "actions of withholding
taxes resulted in an impermissible, unilateral modification of the arbitration award," the Florida
Court noted that it was "powerless to vacate, modify, or correct the original arbitration award, and
must confirm it in its present form"); Hudson v. Merrill Lynch Int'l Fin. Inc., No. CIV.A. 12-052,
2012 WL 5877960, at *3 (E.D. La. Nov. 20, 2012) (noting that the moving party had "not argued or
established that the award is subject to modification by the Court for any of the narrow reasons set
out in the Federal Arbitration Act," the court declined to address modification); Barker v.
Halliburton Co., No. CIVA H-07-2677, 2010 WL 1791107, at *1 (S.D. Tex. May 4, 2010) (finding
that the court was without power to vacate or modify an arbitration award to account for taxes under
the Federal Arbitration Act, noting that "[e]ven if the arbitrator was incorrect—and this court does
not so hold—regarding the distribution of the award between the plaintiff and the federal
14
government, that mistake of law would be insufficient grounds to vacate or modify the award").
Here, the case arises from the implementation of a Settlement Agreement – which, as noted above,
is a contract. The cases cited by Defendants are inapposite. In the case at bar, this Court is not subject
to or bound by the Federal Arbitration Act; the Court is simply guided by the principles underlying
the common law.
Defendants also cite to an unreported Northern District of California case as authority for the
proposition that a settlement agreement that is silent on the issue of tax withholdings should be read
to require the sum net of the taxes to be paid. Ruling on a motion to enforce a settlement agreement,
the Magistrate Judge in Pizza v. Fin. Indus. Regulatory Auth., Inc., No. 13-CV-0688(MMC)(NC),
2015 WL 1383142, at *1 (N.D. Cal. Mar. 19, 2015) found that the settlement terms in that case
failed to set forth the parties' tax obligations. Citing Ninth Circuit law, the Court ordered the
defendant to pay the full amount provided for under the terms of the agreement. While the case
appears analogous, I am bound by the law of the Second Circuit, and I find the reasoning in the White
Rose case to be more persuasive and on point.
The Court finds that Plaintiff has sufficiently alleged that there exists ambiguity in the terms
of the Settlement Agreement. Accordingly, Plaintiff's breach of contract claim is not ripe for
dismissal. See Orchard Hill Master Fund Ltd., 830 F.3d at 156.
2.
Modification
Plaintiff's Amended Complaint also alleges that the Settlement Agreement was modified by
subsequent signed electronic writings, a point that Defendants contest.
"Under New York law, 'parties may modify a contract by another agreement, by course of
performance, or by conduct amounting to waiver or estoppel.'" Kaplan v. Old Mut. PLC, 526 F.
15
App'x 70, 72 (2d Cir. 2013) (quoting Dallas Aerospace, Inc. v. CIS Air Corp., 352 F.3d 775, 783 (2d
Cir.2003)). "Contract modification requires proof of each element requisite to the formation of a
contract, including a manifestation of mutual assent sufficiently definite to assure that the parties are
truly in agreement with respect to all material terms." Kaplan, 526 F. App'x at 72 (quoting Express
Indus. & Terminal Corp. v. N.Y. State Dep't of Transp., 93 N.Y.2d 584 (1999)).
Where a contract prohibits oral modifications, any subsequent modification must not only
be in writing, but also must be signed by the party against whom enforcement is sought. N.Y. Gen.
Oblig. Law § 15-301 ("A written agreement or other written instrument which contains a provision
to the effect that it cannot be changed orally, cannot be changed by an executory agreement unless
such executory agreement is in writing and signed by the party against whom enforcement of the
change is sought or by his agent."). The Settlement Agreement in suit contains such a prohibition.
Paragraph 6(a) mandates: "This Agreement and Mutual Release may not be modified except by a
writing signed by both Parties hereto." Doc. 24-1 at 8. In New York, a contract can be modified by
the exchange of emails, as emails may constitute "signed writings" within the meaning of the statute
of frauds. Stevens v. Publicis, S.A., 50 A.D.3d 253, 254-55 (2008). See also Rubinstein v. Clark &
Green, Inc., 395 F. App'x 786, 788 (2d Cir. 2010) ("While an exchange of emails may constitute a
binding contract under New York law, that is not the case where the parties contemplate further
negotiations and the execution of a formal instrument." (quotation marks and citations omitted)).
Here, Plaintiff plausibly alleges that through the exchange of signed electronic writings – or
emails – after the execution of the Settlement Agreement, the parties modified the Agreement to
account for the withholding of funds for tax purposes. Plaintiff alleges that in mutually-signed
electronic writings, the parties agreed: (1) to delay payment of the amount due under the Settlement
16
Agreement so that the parties could obtain pre-approval from the Israeli government for structuring
a reduced amount of withholding; (2) that the four million dollar payment for royalties should be
taxed at a rate of 15%; (3) that the six million dollar payment for patent rights should not be taxed;
(4) that if the pre-approval was obtained, the total tax burden of $600,000 would be withheld by
Plaintiff and remitted to the Israeli tax authority; (5) to continue to seek preapproval for the tax
withholdings under the Settlement Agreement as originally executed, rather than re-execute the
Agreement to account for separate payments; and (6) that Defendant Tiramani would return the
$600,000 overpayment.
Accepting the above allegations as true for the purposes of this motion, they are sufficient
to assert a claim of breach of contract based on a modification of the original Settlement Agreement.
Plaintiff has alleged the existence of a written agreement that the sum in question would be withheld
from the amount due under the Settlement Agreement, and that the parties did not contemplate the
execution of an additional formal agreement. Plaintiff has further alleged that following the mistaken
overpayment, the parties agreed that Defendants would return the money. These agreements were
memorialized in written form, signed by the parties. Under prevailing New York law, together with
the remaining allegations concerning performance, breach, and damages, Plaintiff's allegations
regarding the formation of the agreement are sufficient to support a claim for breach of contract.
Defendants' arguments on this point are unavailing. Defendants contend that the allegations
in the Amended Complaint fall short of alleging a modification of the Settlement Agreement,
because, inter alia, Plaintiff "fail[s] to identify a single mutually-signed writing containing" the terms
of the modification. Doc. 32 at 5. I do not agree. The allegations in the Amended Complaint clearly
state that the "parties' agreement relating to the tax withholdings" was "confirmed . . . multiple times
17
in writing, such as in emails signed by Tiramani and other agents of 500 Group." Doc. 24 ¶18.
Further, "[i]n a signed electronic writing on behalf of 500 Group, Tiramani agreed" to not re-execute
the Settlement Agreement and instead "seek preapproval for the tax withholdings under the
Settlement Agreement as originally executed." Id. ¶ 20. "[I]f pre-approval was obtained, 500 Group's
total tax burden would be $600,000, which, according to signed electronic agreements between the
parties, would be withheld by Stanley Israel and remitted to the Israeli tax authority."Id. ¶ 15. Once
pre-approval for withholding 15% of the royalty payment under the Settlement Agreement was
obtained from the Israeli tax authority, "500 Group agreed that Stanley Israel was to retain $600,000
from the payment total under the Settlement Agreement to fulfill 500 Group's tax obligations and
its pre-approval arrangements with the Israeli tax authority." Id. ¶ 21.
Plaintiff also alleges that the parties agreed for Defendants to refund the sum erroneously
transferred to Defendants. The Amended Complaint states that after Plaintiff mistakenly wired the
overpayment of $600,000 to 500 Group, Defendant Tiramani "indicated, in a signed electronic
writing, an intention to return the $600,000 and inquired regarding the logistics of the return. . . .
Stanley Works answered Tiramani's logistical inquiry and reached agreement on how the money
should be returned. . . ." Doc. 30 ¶ 30 (emphasis added). These allegations, taken together, clearly
state the existence of signed writings, and set forth the terms of the modifications. At the pleading
stage, such allegations are sufficient to survive dismissal.
Defendants also argue that a valid modification would have to identify the consideration for
the modification. However, "[w]hile consideration is required for a contract to be valid,
modifications to a contract need not be supported by additional consideration when the modification
is in writing and signed by the party against whom it is sought to be enforced." LaRoss Partners,
18
LLC v. Contact 911 Inc., No. 11-CV-1980(ADS), 2015 WL 2452616, at *7 (E.D.N.Y. May 21,
2015) (quoting Deutsche Bank Sec., Inc. v. Rhodes, 578 F. Supp. 2d 652, 660 (S.D.N.Y. 2008)
(quotation marks omitted).
Defendants also take issue with the fact that Plaintiff did not attach the alleged signed
writings to the Amended Complaint, arguing that the failure to do so is "fatal to its claim that the
parties entered into an enforceable agreement to modify the terms of the Settlement Agreement."
Doc. 32 at 6; see also Doc. 27 at 11, 16. Defendants' argument on this point suggests that Plaintiff
was under a heightened duty to attach said writings to the Amended Complaint, upon learning of
Defendants' grounds for dismissal of the original complaint. In a clearly aggrieved tone, Defendants
state that
Notably, Plaintiff does not identify a single writing evidencing an agreement to
modify the terms of the Settlement Agreement and for Plaintiff to pay 500 Group any
amount less than the Compensation Amount. This omission is particularly glaring
given the procedural posture of this case. . . . Plaintiff's Amended Complaint and the
various allegations relating to emails . . . is a direct response to Defendants' motion
to dismiss the original complaint. Plaintiff, knowing Defendants' arguments in
support of dismissal, took the opportunity to amend its complaint to marshal all of
its factual support for the existence of . . . an agreement to modify the plain terms of
the Settlement Agreement. The paucity of specific allegations in Plaintiff's Amended
Complaint demonstrates the futility of its claim.
Doc. 27 at 29.3
3
To the extent that Defendants are arguing that Plaintiff's inclusion of additional factual
allegations in response to Defendants' original motion to dismiss was somehow improper, the
Court notes that under the Federal Rules, such an amendment is not only permissible, it is
encouraged. The Federal Rules of Civil Procedure provide that a party may amend its pleading
once, as a matter of course, within "21 days after service of a responsive pleading or 21 days after
service of a motion under Rule 12(b), (e), or (f), whichever is earlier." Fed. R. Civ. P. 15(a)(1).
This Rule "reinforces one of the basic policies of the federal rules—that pleadings are not an end
in themselves but are only a means to assist in the presentation of a case to enable it to be
decided on the merits." 6 Charles Alan Wright & Arthur R. Miller, Federal Practice and
Procedure § 1473 (3d ed. 2018) (footnotes omitted). Indeed,
19
Defendants' position does not find support in the pleading standard. Under the Federal Rules
of Civil Procedure, a complaint must only contain "a short and plain statement of the claim showing
that the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2). As the Second Circuit has stated,
"although Twombly and Iqbal require factual amplification where needed to render a claim plausible,
. . .Twombly and Iqbal [do not] require the pleading of specific evidence or extra facts beyond what
is needed to make the claim plausible." Arista Records, LLC v. Doe 3, 604 F.3d 110, 120–21 (2d Cir.
2010). Thus, in deciding a motion to dismiss, the Court's function "is not to weigh the evidence that
might be presented at a trial but merely to determine whether the complaint itself is legally
sufficient." Goldman v. Belden, 754 F.2d 1059, 1067 (2d Cir. 1985).
In line with these principles, although the court may consider a document incorporated by
reference to the complaint in evaluating the plausibility of the claims alleged, Chambers v. Time
Warner, 282 F.3d 147, 153 (2d Cir. 2002), there is no general requirement that a plaintiff attach to
the complaint the documents it relies upon in bringing suit. Thus, a plaintiff is not required to attach
a copy of a contract to a complaint that alleges breach of that contract. Stratton Grp., Ltd. v.
a Rule 15(a)(1) amendment cannot prejudice an opposing party in any significant
way. . . . If the amendment is made 21 days after a responsive pleading or a Rule
12 motion, the amended response may reduce the number of issues to be decided
and expedite other pretrial proceedings, as well as the determination of the issues
involved.
Id. at § 1480 (footnote omitted).
"The Federal Rules reject the approach that pleading is a game of skill in which one
misstep by counsel may be decisive to the outcome and accept the principle that the purpose of
pleading is to facilitate a proper decision on the merits." Foman v. Davis, 371 U.S. 178, 181–82
(1962) (quotation marks omitted) (quoting Conley v. Gibson, 335 U.S. 41, 48 (1957)). Thus,
Plaintiff's decision to replead its claims in response to Defendants' motion to dismiss is not just
proper, it is prescribed and promoted by the Federal Rules. Moreover, if the original complaint
was subject to dismissal for reasons that could be cured, any dismissal would have been without
prejudice, giving Plaintiff an opportunity to replead those claims.
20
Sprayregen, 458 F. Supp. 1216, 1218 (S.D.N.Y. 1978). See also In re Argo Commc'ns Corp., 134
B.R. 776, 790 (Bankr. S.D.N.Y. 1991) ("Courts in this jurisdiction follow the general rule that in a
breach of contract action, the plaintiff must plead provisions of the contract upon which the claim
is based, but the plaintiff is not required to attach a copy of the contract or plead its terms verbatim."
(citations omitted)). Ultimately, it may be shown that the subject "signed writings" do not evidence
that which Plaintiff claims; but Plaintiff is under no obligation to offer them as evidence of its claims
at the pleading stage.
3.
Oral Modification
Plaintiff also argues that the Amended Complaint alleges a valid oral modification of the
Settlement Agreement, which the parties acted upon to completion, or partial completion. Relying
on a New York Court of Appeals case, Rose v. Spa Realty Associates, 42 N.Y.2d 338, 343 (1977),
Plaintiff contends that the following allegations found in the Amended Complaint evidence the
parties' performance under an oral agreement: The fact that the parties worked together to achieve
approval from the Israeli tax authority for the agreed-upon withholding amount; and the fact that
Plaintiff remitted $600,000 to the Israeli tax authority. Plaintiff argues that Defendant 500 Group's
actions in hiring a third party to assist it in obtaining preapproval for a specific withholding amount
demonstrate the existence of such an agreement, and the parties' performance in seeking preapproval
for 15% of the four million dollar sum is referable to the claimed modification.
Defendant contends that these allegations do not support performance of an agreement for
Plaintiff to pay less than the ten million dollar sum under the Settlement Agreement. Defendant
argues that Plaintiff's failure to initially withhold the money and its later claim that payment of the
full amount was a mistake do not show partial performance that is unequivocally referable to the oral
21
modification, as Rose requires.
Rose held that "[p]artial performance of an oral agreement to modify a written contract, if
unequivocally referable to the modification, avoids the statutory requirement of a writing." 42
N.Y.2d at 341. The Court in Rose explained:
Parties to a written agreement who include a proscription against oral modification
are protected by subdivision 1 of section 15-301 of the General Obligations Law.
Any contract containing such a clause "cannot be changed by an executory agreement
unless such executory agreement is in writing and signed by the party against whom
enforcement . . . is sought." Put otherwise, if the only proof of an alleged agreement
to deviate from a written contract is the oral exchanges between the parties, the
writing controls. Thus, the authenticity of any amendment is ensured.
On the other hand, when the oral agreement to modify has in fact been acted upon to
completion, the same need to protect the integrity of the written agreement from false
claims of modification does not arise. In such case, not only may past oral
discussions be relied upon to test the alleged modification, but the actions taken may
demonstrate, objectively, the nature and extent of the modification. Moreover, apart
from statute, a contract once made can be unmade, and a contractual prohibition
against oral modification may itself be waived. Thus, section 15-301 nullifies only
"executory" oral modification. Once executed, the oral modification may be proved.
Where there is partial performance of the oral modification sought to be enforced, the
likelihood that false claims would go undetected is similarly diminished. Here, too,
the court may consider not only past oral exchanges, but also the conduct of the
parties. But only if the partial performance be unequivocally referable to the oral
modification is the requirement of a writing under section 15-301 avoided.
Id. at 343–44 (internal citations omitted). The "unequivocally referable" requirement has been
explained as thus: "[T]he performance must be such as will admit of no other possible explanation
except one pointing directly to the existence of the oral agreement claimed." Bright Radio Labs., Inc.
v. Coastal Commercial Corp., 4 A.D.2d 491, 494 (1957), aff'd sub nom. Bright Radio Labs., Inc v.
Costal Commercial Corp., 4 N.Y.2d 1021 (1958).
Here, Plaintiff sufficiently alleges the existence of an oral modification to the Settlement
Agreement that was partially performed. The facts alleged in the Amended Complaint tell of an
22
agreement to "delay the payment of the amount due on the Settlement Agreement so that the parties
could obtain pre-approval for structuring a reduced amount of withholding," and if pre-approval was
obtained, $600,000 "would be withheld by Stanley Israel and remitted to the Israeli tax authority."
Doc. 24 at ¶ 15. Plaintiff alleges that there was partial performance of this agreement, as the payment
on the Settlement Agreement was due "within fourteen (14) business days of the Effect Date of [the]
Agreement and Mutual Release," Doc. 24-1 at 4, but payment was not effectuated until June 1, 2017,
Doc. 24 at ¶ 25, inconsistent with the terms of the original Settlement Agreement. Plaintiff alleges
that but for Plaintiff's accidental overpayment, such payment should have been for $9,400,000, a sum
less than the amount due under the plain terms of the Settlement Agreement, so that Plaintiff could
effectuate the remainder of terms of the oral modification - to remit the $600,000 to the Israeli tax
authority on behalf of 500 Group. Assuming the truth of these allegations, they are sufficient to
establish the existence of a valid oral modification.
4.
Equitable Estoppel
Finally, Plaintiff contends that Defendant 500 Group is equitably estopped from denying the
existence of an oral modification regarding the tax withholdings. In Rose, the Court of Appeals
stated that "when a party's conduct induces another's significant and substantial reliance on the
agreement to modify, albeit oral, that party may be estopped from disputing the modification
notwithstanding the statute." Rose, 42 N.Y.2d at 341. However, "for conduct to amount to a waiver
or estoppel, it must not otherwise be compatible with the agreement as written; rather, the conduct
of the parties must evidence an indisputable mutual departure from the written agreement." Dallas
Aerospace, Inc., 352 F.3d at 783 (quotation marks and citations omitted); see also Aircraft Servs.
Resales LLC v. Oceanic Capital Co., 586 F. App'x 761, 763 (2d Cir. 2014) ("To invoke equitable
23
estoppel, the parties' conduct must not otherwise be compatible with the agreement as written."
(quotation marks and citation omitted)).
Plaintiff argues that Defendant 500 Group induced Plaintiff's substantial reliance on the
parties' understanding regarding the tax treatment of the royalty payment made under the Settlement
Agreement. Plaintiff points to the allegations that Plaintiff assisted Defendant in obtaining
preapproval for the withholding amount, and "thereby obligated itself to later remit $600,000 to the
Israeli authority." Doc. 29 at 18. For its part, Defendant contends that its refusal to return a portion
of the settlement payment was consistent with the four corners of the Settlement Agreement.
Defendant also argues that the allegations establish that Plaintiff remitted the money to the Israeli
tax authority after Defendant 500 Group refused Plaintiff's demand to return the alleged
overpayment; thus, Plaintiff cannot allege to have relied on 500 Group's representations to its
detriment.
Assuming the truth of the well-pleaded facts, the Court finds that Plaintiff has adequately
alleged the existence of an oral modification of the Settlement Agreement, which induced Plaintiff
to ultimately remit $600,000 on behalf of Defendant 500 Group to the Israeli tax authority. Drawing
all inferences in Plaintiff's favor, Plaintiff has sufficiently alleged it was induced by Defendants'
agreement to allocate $600,000 of the four million dollar royalty payment to the Israeli tax authority.
Accordingly, accepting Plaintiff's allegations as true and drawing all plausible inferences in
Plaintiff's favor, Plaintiff has sufficiently alleged a claim of breach of contract. Defendants' motion
to dismiss the breach of contract claim will be denied.
C.
Unjust Enrichment
In the alternative, Plaintiff contends that the Amended Complaint sufficiently alleges a claim
24
for unjust enrichment. Defendant argues for dismissal of this claim, contending that since the claim
arises under an enforceable written contract, it fails as a matter of law.
Unjust enrichment is doctrine derived from equity. "The basis of a claim for unjust
enrichment is that the defendant has obtained a benefit which in equity and good conscience should
be paid to the plaintiff." Corsello v. Verizon New York, Inc., 18 N.Y.3d 777, 790 (2012). To state
a claim for unjust enrichment under New York law, Plaintiff must allege that "(1) the defendant was
enriched, (2) at the expense of the plaintiff, and (3) that it would be inequitable to permit the
defendant to retain that which is claimed by the plaintiff." Agerbrink v. Model Serv. LLC, 155 F.
Supp. 3d 448, 458 (S.D.N.Y. 2016) (quotation marks and citation omitted).
[U]njust enrichment is not a catchall cause of action to be used when others fail. It
is available only in unusual situations when, though the defendant has not breached
a contract nor committed a recognized tort, circumstances create an equitable
obligation running from the defendant to the plaintiff. Typical cases are those in
which the defendant, though guilty of no wrongdoing, has received money to which
he or she is not entitled. An unjust enrichment claim is not available where it simply
duplicates, or replaces, a conventional contract or tort claim.
Corsello, 18 N.Y.3d at 790 (quotation marks and internal citations omitted). Thus, in New York, a
claim for unjust enrichment "is barred if there is a valid contract governing the subject matter of the
dispute, even if one of the parties to the claim is not a party to that contract." Mueller v. Michael
Janssen Gallery Pte. Ltd., 225 F. Supp. 3d 201, 207 (S.D.N.Y. 2016) (quotation marks and citation
omitted) (collecting cases).
Here, the parties dispute whether the Settlement Agreement covers the subject matter of the
unjust enrichment claim: the $600,000 tax withholding/overpayment. While Plaintiff has alleged that
Settlement Agreement – as originally executed or as modified – obligated it to withhold a certain
sum for tax purposes, and it is therefore entitled to a refund of the overpayment, Defendants contend
25
that the Settlement Agreement contains no reference to withholding any portion of the settlement
sum for the payment of taxes, and thus, there was no overpayment, and there exists no obligation
under the contract for Defendant to return any funds. The parties are therefore at odds as to whether
the Settlement Agreement governs the parties dispute.
In the event that the fact-finder disagrees with Plaintiff that the Settlement Agreement
contemplated tax withholding, Plaintiff is entitled to pursue a claim for unjust enrichment, in the
alternative. See Singer v. Xipto Inc., 852 F. Supp. 2d 416, 426 (S.D.N.Y. 2012) ("While a party
generally may not simultaneously recover upon a breach of contract and unjust enrichment claim
arising from the same facts, it is still permissible to plead such claims as alternative theories."
(citations omitted)). In situations similar to the case at hand, courts have permitted such pleading in
the alternative. See, e.g., DeWitt Stern Grp., Inc. v. Eisenberg, 14 F. Supp. 3d 480, 487 (S.D.N.Y.
2014) ("[I]f the contractual language in the [contract] is unenforceable, or if discovery yields
evidence that [the alleged misconduct occurred] extraneously to and independently of the
Employment Agreement, it is possible that [Defendant] benefited . . . , and that equity and good
conscience might require restitution. . . . Thus, [Plaintiff's] unjust enrichment claim may stand in the
alternative to its contractual claims."); Union Bank, N.A. v. CBS Corp., No. 08-CV-08362(PGG),
2009 WL 1675087, at *8 (S.D.N.Y. June 10, 2009) (declining to dismiss the claim for unjust
enrichment where the contracts at issue did not unambiguously address the precise issue in dispute);
Bridgeway Corp. v. Citibank, N.A., 132 F. Supp. 2d 297, 305 (S.D.N.Y. 2001) ("Generally,
quasi-contractual relief, such as unjust enrichment, is not permitted when an express agreement
exists that governs the dispute between the parties. Because there is a dispute as to defendant's
obligations under the contract, however, plaintiff's unjust enrichment claim survives, although solely
26
as an alternative to the breach of contract claim." (internal citation omitted) (collecting authorities));
ESI, Inc. v. Coastal Power Prod. Co., 995 F. Supp. 419, 436 (S.D.N.Y. 1998) ("Should a jury decide
that these contracts did not grant [plaintiff] enforceable rights against the defendants, [plaintiff]
could still seek recovery on the alternative, quasi-contract theory of unjust enrichment.").
Accordingly, Defendants are not entitled to dismissal on Plaintiff's claim for unjust
enrichment.
D.
Unfair Trade Practices
Plaintiff's Amended Complaint alleges that Defendants' conduct violates the Connecticut
Unfair Trade Practices Act ("CUTPA"), Conn. Gen. Stat. § 42-110b et seq. Defendants argue that
CUTPA does not apply to this case because the choice of law principles dictate an application of
New York law, and because Plaintiff's claim does not involve trade or commerce occurring in
Connecticut. Defendants also argue that the CUTPA claim fails because the Amended Complaint
does not plausibly allege that violative conduct occurred in the primary trade or commerce of either
party.
CUTPA prohibits any person from engaging in "unfair methods of competition and unfair
or deceptive acts or practices in the conduct of any trade or commerce." Conn. Gen. Stat. §
42-110b(a). The statute defines 'trade' and 'commerce' as "the advertising, the sale or rent or lease,
the offering for sale or rent or lease, or the distribution of any services and any property, tangible or
intangible, real, personal or mixed, and any other article, commodity, or thing of value in this state."
Id. at § 42-110a(4). To prevail its CUTPA-based claim, Plaintiff must prove that: "(1) [Defendants]
engaged in 'unfair or deceptive' acts or practices in the conduct of trade or commerce, and that (2)
[Plaintiff] has suffered an 'ascertainable loss of money or property.'" Indiaweekly.com, LLC v.
27
Nehaflix.com, Inc., No. 07-CV-0194 (TLM), 2011 WL 13228167, at *12 (D. Conn. Jan. 19, 2011)
(citations omitted).
It is well settled that in determining whether a practice violates CUTPA [the Supreme
Court of Connecticut has] adopted the criteria set out in the cigarette rule by the
Federal Trade Commission for determining when a practice is unfair: (1) Whether
the practice, without necessarily having been previously considered unlawful, offends
public policy as it has been established by statutes, the common law, or
otherwise—in other words, it is within at least the penumbra of some common law,
statutory, or other established concept of unfairness; (2) whether it is immoral,
unethical, oppressive, or unscrupulous; (3) whether it causes substantial injury to
consumers, competitors or other businesspersons. All three criteria do not need to be
satisfied to support a finding of unfairness. A practice may be unfair because of the
degree to which it meets one of the criteria or because to a lesser extent it meets all
three. Thus a violation of CUTPA may be established by showing either an actual
deceptive practice or a practice amounting to a violation of public policy. In order to
enforce this prohibition, CUTPA provides a private cause of action to any person
who suffers any ascertainable loss of money or property, real or personal, as a result
of the use or employment of a prohibited method, act or practice.
Ulbrich v. Groth, 310 Conn. 375, 409–10 (2013) (quotation marks, citation and alterations omitted).4
A strict reading of the statute supports the conclusion that CUTPA requires that the violative
conduct complained of occur in Connecticut. Courts addressing the issue, however, have permitted
an out-of-state violation to serve as the basis for a CUTPA claim where the violation itself "is tied
to a form of trade or commerce intimately associated with Connecticut, or if, where Connecticut
choice of law principles are applicable, those principals dictate application of Connecticut law."
Victor G. Reiling Assocs. & Design Innovation, Inc. v. Fisher-Price, Inc., 406 F. Supp. 2d 175, 200
(D. Conn. 2005) (quotation marks and citations omitted), opinion adhered to as modified on
reconsideration, 409 F. Supp. 2d 112 (D. Conn. 2006). See, e.g., Edwards v. N. Am. Power & Gas,
4
Conn. Gen. Stat. § 42-110b(b) provides in relevant part that "the commissioner and the
courts of this state shall be guided by interpretations given by the Federal Trade Commission and
the federal courts to Section 5(a)(1) of the Federal Trade Commission Act (15 USC 45(a)(1)), as
from time to time amended."
28
LLC, 120 F. Supp. 3d 132, 145 (D. Conn. 2015); Bulldog New York LLC v. Pepsico, Inc. 8 F. Supp.
3d 152, 166 (D. Conn. 2014); PTI Assocs., LLC v. Carolina Int'l Sales Co., No. 3:09-CV849(WWE), 2010 WL 363330, at *5-6 (D. Conn. Jan. 26, 2010), order clarified on reconsideration,
No. 3:09-CV-949(WWE), 2010 WL 617374 (D. Conn. Feb. 18, 2010); Titan Sports, Inc. v. Turner
Broad. Sys., Inc., 981 F. Supp. 65, 71 (D. Conn. 1997); Uniroyal Chem. Co. v. Drexel Chem. Co.,
931 F. Supp. 132, 140 (D. Conn. 1996).
The Court has already addressed Defendants' contention regarding the choice of law, and has
determined that such an inquiry is premature. Accordingly, the Court will not dismiss Plaintiff's
CUTPA claim on the basis that the violation in question did not occur in Connecticut, or that
Connecticut law does not apply.
The Court turns to Defendants' second argument for dismissal: That the alleged violation did
not arise out of Defendants' primary trade or commerce. Defendant argues that the Amended
Complaint solely alleges conduct that occurred in connection with the retention of funds arising from
the settlement of an arbitration; litigation or arbitration is not Defendants' primary trade or
commerce. Plaintiff responds that the "receipt of royalty payments and the monetization of
intellectual property rights represent the very core of [Defendant 500 Group's] business" and thus,
the transaction is within Defendants' primary trade or commerce. Doc. 29 at 22.
In connection with its claim for a violation of CUTPA, Plaintiff's Amended Complaint
alleges that 500 Group's unfair retention of the $600,000 overpayment was directed by Defendant
Tiramani, who "holds a malicious grudge against Stanley Israel arising out of a nearly decade-long
dispute . . . evidenced in Tiramani's written communications . . . ." Doc. 24 ¶ 45, 49. Defendants
knew they were not entitled to keep the overpayment, but "resolved to attempt to illegally retain" the
29
sum "without justification." Id. ¶ 50. Plaintiff concludes that the refusal to return the money was
made "out of malice and in bad faith for the sole purpose of unlawfully harming Stanley Israel." Id.
¶ 52.
"[A] CUTPA violation may not be alleged for activities that are incidental to an entity's
primary trade or commerce." McCann Real Equities Series XXII, LLC v. David McDermott
Chevrolet, Inc., 93 Conn. App. 486, 523 (2006), cert. denied, 277 Conn. 928 (2006).
In applying the holding of McCann to CUTPA claims arising out of litigation
activity, it is . . . consistent with prior caselaw and . . . reasonable to ask whether the
subject matter of the underlying litigation activity is merely incidental to the
defendant's primary trade or whether by engaging in such litigation the defendant
sought to obtain some benefit directly related to its primary trade. On this approach,
litigation may be adequately related to one's primary trade to satisfy the rule in
McCann even though litigation itself is not one's primary trade.
Passaro-Henry v. Allstate Ins. Co., No. 3:10-CV-450(JCH), 2010 WL 5174405, at *10 (D. Conn.
Dec. 15, 2010) (emphasis supplied). Passero-Henry dealt primarily with a CUTPA claim based the
filing of frivolous lawsuits; it was the fact of the underlying lawsuit itself that formed the basis of
the CUTPA claim. I find the approach taken in Passero-Henry persuasive here.
In the present case, the Amended Complaint alleges that the subject matter of the underlying
arbitration and resultant settlement was directly related to Defendants' primary trade. The Settlement
Agreement provided for a payment of six million dollars for Defendant 500 Group's patent rights and
four million dollars as a royalty payment. The Amended Complaint likens the Settlement Agreement
to the parties' prior License Agreements. Accepting Plaintiff's allegations as true, as I am bound to
do, the conduct that forms the basis of the CUTPA claim – the wrongful retention of the money
associated with the settlement sum– is directly connected to the Defendants' primary trade of "the
receipt of royalty payments and the monetization of intellectual property rights." Doc. 24 ¶ 32.
30
Accordingly, the Court will not dismiss the CUTPA claim on this basis.
Finally, Defendant appears to raise the argument that Plaintiff's CUTPA claim fails because
the factual allegations supporting the CUTPA claim are identical to those which form the basis for
Plaintiff's breach of contract claim. A "simple contract breach is not sufficient to establish a violation
of CUTPA, particularly where the count alleging CUTPA simply incorporates by reference the
breach of contract claim and does not set forth how or in what respect the defendant's activities are
either immoral, unethical, unscrupulous or offensive to public policy." Boulevard Assocs. v.
Sovereign Hotels, Inc., 72 F.3d 1029, 1039 (2d Cir. 1995) (quotation marks and citation omitted)
(collecting cases). Applying that principle to the facts of the case before it, the Second Circuit
continued: "Because a breach of contract standing alone does not offend public policy, to invoke
CUTPA, Boulevard was required to show that the defendants engaged in some conduct that was
more offensive than simply not paying the rent." Id. at 1039.
Thus, following Boulevard Associates, "Connecticut courts have permitted a CUTPA cause
of action based on a breach of contract where there are aggravating circumstances attending the
breach . . . ." Caires v. JP Morgan Chase Bank, N.A., 880 F. Supp. 2d 288, 300 (D. Conn. 2012).
"Significant aggravating circumstances can be the refusal to perform under the contract while
retaining the benefits, modification under duress, misrepresentations in formation, and egregious
breach." Halo Tech. Holdings, Inc. v. Cooper, No. 3:07-CV-489(SRU), 2010 WL 1330770, at *7
(D. Conn. Mar. 31, 2010) (internal citations omitted).
In the present case, Plaintiff's Amended Complaint plausibly alleges that Defendants'
malicious and intentional retention of Plaintiff's funds is "more offensive than simply not paying"
Plaintiff the money owed to it under the Settlement Agreement. Boulevard Assocs., 72 F.3d at 1029.
31
The CUTPA claim alleges that Defendant Tiramani acted out of bad faith and malice in retaining
the overpayment, due to a "malicious grudge" that Tiramani holds against Plaintiff "arising out of
the nearly decade-long dispute" under the License Agreements. Doc. 24 ¶ 49, 51. Further,
Defendants "knew that they were not entitled to retain the $600,000 overpayment," and Tiramani had
"initially expressed an intention to return" the money in question, "before he stopped responding to
Stanley Israel's requests and resolved to attempt to illegally retain the $600,000 without
justification." Id. ¶ 50.
Such allegations are sufficient at the present stage in the litigation to state a claim under
CUTPA, separate and apart from the breach of contract claim. Accordingly, Defendants' motion to
dismiss the CUTPA claim will be denied.
E.
Conversion
Defendants also move to dismiss the count alleging the tort of conversion. Conversion is the
"unauthorized dominion over personal property in interference with a plaintiff's legal title or superior
right of possession." LoPresti v. Terwilliger, 126 F.3d 34, 41 (2d Cir. 1997) (quotation marks and
citation omitted). To state a claim for conversion under New York law, a plaintiff must allege that
"(1) the party charged has acted without authorization, and (2) exercised dominion or a right of
ownership over property belonging to another, (3) the rightful owner makes a demand for the
property, and (4) the demand for the return is refused." Pac. M. Int'l Corp. v. Raman Int'l Gems, Ltd.,
888 F. Supp. 2d 385, 396 (S.D.N.Y. 2012) (quotation marks and citation omitted).
Defendants contend that Plaintiff's conversion claim fails because it is duplicative of the
breach of contract claim, and because "Plaintiff fails to allege a specific, identifiable fund" to which
it is entitled. Doc. 27 at 41. Plaintiff contends that by alleging that the retention of the money was
32
done in bad faith, it has sufficiently established that Defendants' actions were beyond a simple breach
of contract. Plaintiff also argues that it has sufficiently alleged the existence of specifically
identifiable funds that were the subject of conversion.
"As a general rule, a breach of contract claim is not actionable in tort in the absence of special
additional allegations of wrongdoing which amount to a breach of a duty distinct from, or in addition
to, the breach of contract." Carroll v. Bayerische Landesbank, 150 F. Supp. 2d 531, 535 (S.D.N.Y.
2001) (quotation marks and citations omitted); see also Morrison v. Buffalo Bd. of Educ., No.
17-3496-CV, 2018 WL 3455910, at *3 (2d Cir. July 17, 2018) (noting that "tort liability requires a
legal duty independent of the contract itself" which "must spring from circumstances extraneous to,
and not constituting elements of, the contract, although it may be connected with and dependent
upon the contract" (quotation marks and citations omitted)).
Thus, a "conversion action cannot be predicated on an equitable interest or a mere breach
of contractual obligation." Traffix, Inc. v. Herold, 269 F. Supp. 2d 223, 228 (S.D.N.Y. 2003)
(citations omitted); see also Moses v. Martin, 360 F. Supp. 2d 533, 541 (S.D.N.Y. 2004) ("[A]n
action for conversion cannot be validly maintained where damages are merely being sought for
breach of contract. Rather, a plaintiff must show acts that were unlawful or wrongful as opposed to
mere violations of contractual rights." (quotation marks and footnotes omitted)).
Here, Plaintiff's Amended Complaint identifies no separate legal duty, sounding in tort,
independent of the contractual relations that has been violated. Plaintiff's conversion claim rests on
the same set of facts that underlie Plaintiff's claims for breach of contract, or, in the alternative,
unjust enrichment. The money that is claimed to be wrongfully retained is the same money Plaintiff
claims was due under the parties' agreement.
33
Moreover, if Plaintiff prevails on the breach of contract claim – or, in the alternative, its
unjust enrichment claim – it will be fully compensated. Accordingly, the conversion claim is
duplicative. See Citadel Mgmt. Inc. at 149; AD Rendon Commc'ns, Inc. v. Lumina Americas, Inc.,
No. 04-CV-8832(KMK), 2006 WL 1593884, at *5 (S.D.N.Y. June 7, 2006) ("Where no additional
damages would be awarded for prevailing on the conversion claim, it cannot be distinct from the
breach of contract claim." (citations omitted)).5
Accordingly, the claim for conversion will be dismissed.
F.
Civil Theft Claim
Defendants move to dismiss Plaintiff's claim for civil theft on two grounds: that Connecticut
law does not apply, and for the same reasons Defendant raises in connection with Plaintiff's claim
for conversion.
5
In AR Rendon Commc'ns, Inc., the court notes that where a plaintiff seeks punitive
damages under a conversion claim, it can qualify as a unique recovery, thereby making the claim
independent of the contractual claim. In New York, a court will permit a claim for punitive
damages arising from a breach of contract where: (1) the defendant's conduct is actionable as a
tort independent of the contract; (2) the tortious conduct is sufficiently egregious; (3) the
egregious conduct is directed at plaintiff; and (4) the conduct is part of a pattern directed at the
public generally. Id. at *6 (citing New York Univ. v. Cont'l Ins. Co., 87 N.Y.2d 308, 316 (1995));
see also Icebox-Scoops, Inc. v. Finanz St. Honore, B.V., 715 F. App'x 54, 56 (2d Cir. 2017)
(same). "In determining whether the fourth requirement is satisfied, the New York Court of
Appeals has invoked a distinction between a gross and wanton fraud upon the public and an
isolated transaction incident to an otherwise legitimate business, the latter of which does not
constitute conduct aimed at the public generally." Pyskaty v. Wide World of Cars, LLC, 856 F.3d
216, 226 (2d Cir. 2017) (quotation marks and citations omitted). Here, Plaintiff seeks punitive
damages based on CUTPA and "the common law." However, there are no allegations that the
conduct is part of a pattern directed at the public. As this dispute is clearly between the parties –
"an isolated transaction incident to an otherwise legitimate business" – and as the alleged
wrongful retainment of money was not aimed at the public generally, the request for punitive
damages does not serve to make the conversion claim independent of the breach of contract
claim. See TVT Records v. Island Def Jam Music Grp., 412 F.3d 82, 93 n.10, 94–95 (2d Cir.
2005) (setting aside a jury's award of punitive damages on a breach of contract claim as the
conduct was not directed at the public generally, and not actionable as an independent tort).
34
In Connecticut, statutory or civil theft is synonymous with larceny, and makes liable for
treble damages any person who steals any property of another, or knowingly receives and conceals
stolen property." Vossbrinck v. Eckert Seamans Cherin, & Mellott, LLC, 301 F. Supp. 3d 381, 391
(D. Conn. 2018) (quotation marks and citation omitted).6 "The elements of civil theft are largely the
same as the elements to prove the tort of conversion, but theft requires a plaintiff to prove the
additional element of intent over and above what he or she must demonstrate to prove conversion."
Id. (quotation marks omitted) (quoting Sullivan v. Delisa, 101 Conn. App. 605 (2007)). See also
Kopperl v. Bain, 23 F. Supp. 3d 97, 108–09 (D. Conn. 2014) ("Conversion can be distinguished from
statutory theft in two ways. . . : First, statutory theft requires an intent to deprive another of his
property; second, conversion requires the owner to be harmed by a defendant's conduct. Therefore,
statutory theft requires a plaintiff to prove the additional element of intent over and above what he
or she must demonstrate to prove conversion." (quotation marks and citation omitted)).7
6
Under Conn. Gen. Stat. § 53a-119, "[a] person commits larceny when, with intent to
deprive another of property or to appropriate the same to himself or a third person, he wrongfully
takes, obtains or withholds such property from an owner."
7
There is no appreciable difference between New York law and Connecticut law in
regards to the tort of conversion. In Connecticut, "[c]onversion is the unauthorized assumption
and exercise of the right of ownership over goods belonging to another, to the exclusion of the
owner's rights." Vossbrinck, 301 F. Supp. 3d at 387 (quotation marks and citation omitted). To
establish a claim of conversion in Connecticut, a plaintiff must allege that (1) the material at
issue belonged to the plaintiff, (2) that the defendant deprived the plaintiff of that material for an
indefinite period of time, (3) that the defendant's conduct was unauthorized and (4) that the
defendant's conduct harmed the plaintiff. News Am. Mktg. In-Store, Inc. v. Marquis, 86 Conn.
App. 527, 545, 862 A.2d 837, 848 (2004), aff'd, 276 Conn. 310, 885 A.2d 758 (2005). As with a
New York claim for conversion, in Connecticut, a "mere allegation to pay money may not be
enforced by a conversion action and an action in tort is inappropriate where the basis of the suit
is a contract, either express or implied." Aztec Energy Partners, Inc. v. Sensor Switch, Inc., 531
F. Supp. 2d 226, 230–31 (D. Conn. 2007) (quotation marks and citation omitted).
35
"If in order to sustain a claim for statutory theft, when coupled with a claim for conversion
arising out of the same facts, a plaintiff must prove the additional element of intent over and above
what he or she must demonstrate to prove conversion, it necessarily follows that a plaintiff who
cannot prove conversion also cannot prove statutory theft." Kopperl, 23 F. Supp. 3d at 109
(quotation marks and citation omitted). Here, Plaintiff fails to sufficiently allege a claim for
conversion; it follows that Plaintiff's claim for civil theft, which arises out of the same facts, cannot
lie. See id.; see also Vossbrinck, 301 F. Supp. 3d at 391 ("For the same reasons that Plaintiff's
conversion claim fails, his civil theft claim fails too.") Accordingly, the fifth count for civil theft will
be dismissed.
IV.
CONCLUSION
For the foregoing reasons, Defendants' Motion to Dismiss is GRANTED in part and DENIED
in part. Plaintiff has adequately alleged a claim for: (1) breach of contract; (2) unjust enrichment; and
(3) violations of CUTPA. Plaintiff's claims for conversion and civil theft are DISMISSED.
Defendants are directed to file their answer to the Amended Complaint on or before August
17, 2018.
It is SO ORDERED.
Dated: New Haven, Connecticut
August 1, 2018
/s/ Charles S. Haight, Jr.
CHARLES S. HAIGHT, JR.
Senior United States District Judge
36
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