HARTFORD UNDERWRITERS INSURANCE COMPANY v. PAYSTAFFING, LLC et al

Filing 16

OPINION. Signed by Judge Claire C. Cecchi on 2/28/17. (cm )

NOT FOR PUBLICATION
UNITED STATES DISTRICT COURT
DISTRICT OF NEW JERSEY

HARTFORD UNDERWRITERS
INSURANCE COMPANY,

I

Civil Action No.: 16-cv-1 128-CCC-JBC

Plaintiff,
OPINION

V.

PAY$TAFFNG, LLC, et at.,

Defendants.

CECCHI, District Judge.
I.

INTRODUCTION

This matter comes before the Court on the motion of defendants Paystaffing, LLC
(“Paystaffing”), Pay2Staff, LLC (“Pay2$taff’), Nadia Khalil (“Kabul”), and Monica Varas
(“Varas”) to dismiss the First, Second, Fourth, and Fifth Counts of Plaintiff Hartford Underwriters
Insurance Company’s (“Hartford”) Complaint. ECF No. 5. Hartford opposes the motion. ECF
No. 10. The motion is decided without oral argument pursuant to Federal Rule of Civil Procedure
78. For the reasons set forth below, the Court denies the motion.
II.

BACKGROUND1

The state of New Jersey has created an involuntary or residual market for workers’
compensation insurance, the New Jersey Workers’ Compensation Insurance Plan (“New Jersey

For the purposes of this motion only, the Court accepts all well-pleaded allegations in the
Complaint as true and draws all reasonable inferences in favor of Defendants. See Fhilli,ps V. Cnty.
ofAllegheny, 515 F.3d 224, 231 (3d Cir. 2008).
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Plan”). Compi.

¶

15. The New Jersey Plan is administered by the New Jersey Compensation

Rating and Inspection Bureau (“CRIB”). Compl.

¶ 17.

On or about July 6, 2010, Paystaffing, a New Jersey limited liability company (Compi.

¶ 2), executed and submitted to CRIB an application for an insurance company to be designated to
provide insurance to it in accordance with the New Jersey Plan. Compi.

¶ 21.

The application

indicated Defendant Khalil was the contact person for books and records concerning Paystaffing
and was the sole owner of Paystaffing. Compl.

¶J 23-24.

Plaintiff Hartford is a Connecticut corporation involved in the provision of workers’
compensation insurance under the New Jersey Plan. Compi.

¶

1, 15, 2$. On May 8, 2013, in a

Notice of Redesignation, CRIB designated Hartford to provide coverage to Paystaffing, effective
July 7, 2013. The Notice of Redesignation directed that a newly completed application should be
completed by Paystaffing within 30 days. Compi.

¶

28-29. On July 7, 2013, Hartford began

providing workers’ compensation and employers liability insurance to Paystaffing. Compl.

¶ 30.

On or about October 10, 2013, Paystaffing submitted an updated application. Compl. ¶ 35.
The updated application indicated Defendant Varas was the contact person for books and records
concerning Paystaffing and was the sole owner of Paystaffing. Compl.

¶J 3 8-39.

The updated

application indicated that there had been no ownership change in the past three years. Compi.

¶

39. The updated application indicated that both the current total wages for Paystaffing and the
projected total wages were $1,765,443. Compl.

¶11 40-4 1.

Tn July 2014, an audit was completed

that indicated Paystaffing had more than $6 million in payroll. Compl.

¶J 42-45.

Subsequently,

Paystaffing entered into a Payment Plan Agreement, under which it agreed to pay Plaintiff
$282,928 in five payments. Compl. ¶ 47. These payments were not made. Compl.

2

¶ 48.

Plaintiff

further alleges that Paystaffing and Varas misclassified employees as working in lower risk
positions than they in fact were. Compi. ¶J 49-50.
Plaintiff alleges that while Paystaffing and Varas disputed the audit and negotiated the
Payment Plan Agreement, “the business of Paystaffing was transferred to Pay2$taff and
Paystaffing ceased operations.” Compl.

¶ 51.

Plaintiff further alleges Paystaffing and Pay2Staff

had the same or substantially similar ownership, clients, websites, operations and employees.
Compl.

¶ 52.
On February 29, 2016, Plaintiff brought suit against Defendants listing five Counts. ECF

No. 1. On April 9, 2016, Defendants moved to dismiss the First, Second, Fourth, and Fifth Counts
of the Complaint. ECF No. 5. Plaintiff submitted a brief in Opposition on May 1$, 2016, ECF
No. 10, and Defendants filed a Reply on June 13, 2016, ECF No. 13.
III.

LEGAL STANDARD

For a complaint to survive a motion to dismiss pursuant to Rule 1 2(b)(6), it “must contain
sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.”
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Belt Ati. Corp. v. Twombly, 550 U.S. 544,
570 (2007)). When evaluating the sufficiency of a complaint, Courts are required to accept all
well-pleaded allegations in the Complaint as true and to draw all reasonable inferences in favor of
the non-moving party.

Phillips v. Cnty. of Allegheny, 515 F.3d 224, 231 (3d Cir. 2008).

furthermore, “[a] pleading that offers labels and conclusions or a formulaic recitation of the
elements of a cause of action will not do. Nor does a complaint suffice if it tenders naked assertions
devoid of further factual enhancement.” Iqbal, 556 U.S. at 678 (internal citations and quotations
omitted). Accordingly, “a complaint must do more than allege the plaintiff’s entitlement to relief.

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A complaint has to ‘show’ such entitlement with its facts.” Fowter v. UPMC Shadyside, 57$ F.3d
203, 211 (3d Cir. 2009).
The Federal Rules of Civil Procedure contain a heightened pleading standard for claims of
fraud. Fed. R. Civ. P. 9(b) (“In alleging fraud or mistake, a party must state with particularity the
circumstances constituting fraud or mistake.”). The Third Circuit has stated that “[t]o satisfy the
particularity standard, the plaintiffmust plead or allege the date, time and place of the alleged fraud
or otherwise inject precision or some measure of substantiation into a fraud allegation.” Feingold
v. Graff, 516 F. App’x. 223, 226 (3d Cir. 2013) (internal quotation omitted).
IV.

DISCUSSION

-

CLAIM 1

The First Count in Plaintiffs complaint is titled “Claim for Workers’ Compensation Fraud
Pursuant to N.J.S.A. 34:15-57.4.” Subsection (b) of section 34:15-57.4 “imposes civil liability
against ‘any person who wrongfully obtains benefits or evades the full payment of benefits or
premiums by means of a violation of the provisions of [34:15-57.4(a)].” Travelers Prop. Cas.
Co. ofAm. v. Quickstiff LLC., No. CV 14-6105 (RBKJJS), 2016 WL 7231605, at *4 (D.N.J. Dec.
14, 2016). Subsection (a) of section 34:15-57.4, makes it a crime where a person “purposely or
knowingly:”
(2) Makes a false or misleading statement, representation or
submission, including a misclassification of employees, or engages
in a deceptive leasing practice, for the purpose of evading the full
payment of benefits or premiums pursuant to R.S.34: 15-1 et seq.; or
(3) Coerces, solicits or encourages, or employs or contracts with a
person to coerce, solicit or encourage, any individual to make a false
or misleading statement, representation or submission concerning
any fact that is material to a claim for benefits, or the payment of
benefits or premiums, pursuant to R.S.34:15-1 et seq. for the
purpose of wrongfully obtaining the benefits or of evading the full
payment of the benefits or premiums.

4

Defendants’ first argument, that this claim should be dismissed “because none of the
Defendants have been found in a criminal action to have violated subsection (a),” is unavailing.
Section 34:15-57.4(b) does not on its face require that plaintiff allege a criminal conviction under
subsection (a) to support a civil claim under the section. Rather, a plaintiff need only allege a
“violation of the provisions” of subsection (a).2 Therefore, a plaintiff in a civil action may recover
even if the elements of the offense could not be proven beyond a reasonable doubt. Singh v.
Cream-O-LandDaiiy, No. A-2468-06T5, 200$ WL 794526, at *6 (N.J. Super. Ct. App. Div. Mar.
27, 2008).

Defendants’ second argument, that the claim should be dismissed because “none of the
Defendants acted purposely or knowingly because it was impossible for them to evade premiums,
or to purposely or knowingly attempt to evade premiums, by making false statements on the
applications” in light of the audit provisions of the policies, ECF No. 5-1 at 4, also fails at this
stage. Under the language of section 34:15-57.4 Plaintiff need not plead that Defendants were
likely to succeed in their alleged fraud, only that they “purposely or knowingly” undertook the
specified actions with the intent to “evad[e] the full payment of benefits or premiums” or to
“wrongfully obtaining the benefits or.

.

.

evad[e] the full payment of the benefits or premiums.”

C’f Travelers Prop. C’as. Co. ofAm., 2016 WL 7231605, at *5 (denying summary judgment to
defendant who argued there could be no liability because there was no injury to the plaintiff in
light of the cancellation of his policy).

2

“The criminal provision of N1S.A. 34:15-57.4 is distinct and separate from the civil penalty
provisions.” $ingh v. Cream-U-Land Daity, No. A-2468-06T5, 2008 WL 794526, at *6 (N.J.
Super. Ct. App. Div. Mar. 27, 2008); see also Travelers Prop. Cas. Co. ofAm., 2016 WL 7231605,
at *4; Virginia Stir. Co. v. Macedo, No. CIV.A. 08-5586 GEB, 2011 WL 1769858, at *16 (D.N.J.
May 6, 2011).
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Plaintiff has specifically alleged facts to support the claim that Defendants “purposely or
knowingly” made false or misleading statements in order to evade the full payment of premiums.
See, e.g., Compi. ¶J40-41, 45, 51, 60-61.

Defendants’ third argument, that the claim should be dismissed because “the statements
and representations that Plaintiff alleges ‘are false and misleading’

..

.

are either (i) not the types

of statements that can even be false and misleading, or (ii) not statements that fall under NiS.A.
34:15-57.4,” also fails. At least some of the statements listed in the Complaint are the type of
statements that can be false and misleading and are statements that fall under N.i$.A. 34:15-57.4.
In particular, Defendants’ claim that subparagraphs (a), (b), and (d) of paragraph 50 of the
Complaint “all relate to future events and are not actionable” fails. See ECF No. 5-1 at 5. As
Defendants acknowledge in their Reply, “a future promise may be fraud when a plaintiff proves
‘by a preponderance of evidence, that at the time the promise was made, the promisor did not
intend to fulfill the promise.” ECF No. 13 at 4 (citation omitted). Here, Plaintiffhas made specific
allegations in subparagraphs (a), (b), and (d) that at the time, Defendants made representations of
cooperation and projections of future wages to Plaintiff, Defendants knew these representations
were incorrect. Compl. ¶J 59-60. Plaintiff has additionally alleged that Defendants, in fact, failed
to comply with the representations of cooperation and that the actual wages subsequently were
significantly more than the projected wages Defendants submitted, suggesting that Defendant’s
projections were intentional misrepresentations. See, e.g., Compl.

¶J 45,

49-50. Accordingly,

Plaintiff has pled sufficient facts to support its claims that Defendants’ future promises were
fraudulent. See Fimbel v. Fimbel Door Corp., No. CIV.A. 14-1915 FLW, 2014 WL 6992004, at
*5 (D.N.J. Dec. 10, 2014) (finding that on a motion to dismiss allegations of subsequent refusal to
fulfill earlier promises were sufficient to support a claim for common law fraud).

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Similarly, the Court does not find compelling Defendants’ argument that “[s]ubparagraph
(c) is not plead with specificity as required by F.R.C.P. 9.” ECF No. 5-1 at 5. Subparagraph (c)
of paragraph 59, and subparagraph (c) of paragraph 60, allege that Defendants made a false or
misleading representation in the Updated Application, by stating that the “current total wages for
Paystaffing was $1,765,443” when total wages were, in fact, “materially more.” Contrary to
Defendants’ assertion that “there is nothing else in the Complaint that provides even a reasonable
basis for such allegation,” ECF No. 5-1 at 5, the Complaint provides sufficient allegations to
survive dismissal at this stage. In particular, the Complaint alleges the “projected total wages”
listed in the Updated Application were also “$1,765,443”, Compi.

¶J 41,

59(d), when an audit

subsequently established that the total payroll was more than $6 million, Compi. ¶ 45.
In light of the foregoing, the Court need not at this time consider whether each particular
alleged statement or representation listed in paragraph 59 was independently sufficient to support
the claim, as it is clear that at least some of the alleged statements or representations were of a type
that could give rise to a claim.
Defendants’ fourth argument, that the claim should be dismissed as to Khalil, also fails at
this stage in the litigation. Defendants’ argue subparagraph (a) of paragraph 59 is the only
reference to an alleged misrepresentation made by Khalil and the alleged misrepresentations in
subparagraph (a) are not misrepresentations under the law. ECF No. 5-1 at 6. For the reasons
discussed above, the Court has concluded that the misrepresentations alleged in subparagraph (a)
may give rise to a claim.
Defendants’ fifth argument is that the count “must be dismissed to the extent it seeks to
hold all of the Defendants jointly and severally liable.” ECF No. 5-1, at 6. Defendants specifically
argue that “{n]one of the allegations against Khalil overlap with the allegations against Varas” and

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there is not “any allegation that [Khalil and Varas] conspired together.” ECF No. 5-1 at 6.
However, the Complaint specifically alleges that in the initial Application Khalil is listed as the
sole owner of Paystaffing, while in the Updated Application Varas is listed as the sole owner of
Paystaffing, and indicates that there had been no change in ownership in the prior three years.
Compi.

¶

39. Taken together with remaining allegations in the Complaint, at this stage this is

sufficient for the claim to proceed to the extent it seeks to hold all of the Defendants jointly and
severally liable.3
Defendants’ sixth argument is that the Updated Application was not submitted until after
the premium rates had already been set, and therefore, could not have been used for the purpose
of evading premiums under the policy. ECF No. 5-1, at 6. This argument appears to rely on the
assumption that the premiums would not or could not be altered based on the information contained
in the Updated Application. This is not clear from the materials before the Court, and certain
documents incorporated into the Complaint suggest it is not the case. See, e.g., ECF No. 1-5.
Having considered all of Defendants’ arguments in support of their motion to dismiss the
First Count, the Court finds that it appropriate for this claim to proceed.
V.

DISCUSSION

-

CLAIM 2

The Second Count in Plaintiffs complaint is titled “Claim Pursuant to the New Jersey
Insurance fraud Prevention Act” and states that it “is brought pursuant to the New Jersey Insurance
fraud Prevention Act, N.J.S.A. 17:33A-1 et seq.” Compi. ¶ 75. The New Jersey Insurance Fraud
Prevention Act, provides a list of activities which violate the Insurance fraud Act, N.J.S.A.

In their Reply Defendants note that Plaintiff did not address this argument in its Opposition. ECF
No. 13 at 5. While it would have been preferred that Plaintiffs had addressed this point, in light
of Defendants’ burden at this stage, and the perfunctory nature of Defendants’ initial argument,
the Court will not treat this matter as waived at this time.
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17:33A-4, and states that “[a]ny insurance company damaged as the result of a violation of any
provision of this act may sue therefor in any court of competent jurisdiction to recover
compensatory damages, which shall include reasonable investigation expenses, costs of suit and
attorneys fees.” N.J.S.A. 17:33A-4. Defendants rely on the same arguments articulated for the
dismissal of claim 1. ECF No. 5-1 at 7. These arguments fail at this stage for the same reasons
discussed above.
VI.

DISCUSSION

-

CLAIM 4

The Fourth Count in Plaintiff’s complaint is titled “Successor Liability Claim with Respect
to Pay2Staff, LLC” and seeks, inter cilia, to hold Defendant Pay2Staff “liable for any and all
liabilities of Paystaffing, LLC to plaintiff.” Compi.

¶

104. Plaintiff alleges that “[t]he principle

asset of Paystaffing was its business relationships with various client companies that Paystaffing
provided labor to,” Compl.

¶

98, that asset was transferred to Pay2Staff in a transaction that

“amounted to a de facto consolidation or merger,” Compl.
continuation of Paystaffing,” Compi.

¶J

100-01, and “Pay2Staff is a

¶ 102.

Defendants argue that Pay2 Staff cannot be held liable because the business relationships
that Plaintiff alleges were transferred to Pay2Staff were not an asset of Paystaffing, but instead
were a personal asset of Varas, ECF No. 5-1 at 8-9, and Plaintiff has not sufficiently alleged a de
facto merger occurred between Paystaffing and Pay2Staff as all of the relevant allegations in the

complaint were “merely conclusions.” ECF No. 13 at 7-8.
In general, “New Jersey corporate law provides that where one company sells or otherwise
transfers all its assets to another company the latter is not liable for the debts and liabilities of the
transferor.” Portfolio Fin. Servicing Co. ex ret. Jacom Computer Servs. v. Sharemax.com, Inc.,

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334 F. Supp. 2d 620, 624 (D.N.J. 2004) (citation omitted). However, there are four recognized
exceptions to the general rule where:
(i)

the purchaser expressly or implicitly agrees to assume the other company’s debts
and obligations;
the purchase is a de facto consolidation or merger;
the purchaser is a mere continuation of the seller; or
the transfer of assets is for the fraudulent purpose of escaping liability.

(ii)
(iii)
(iv)
Id. at 625.

As an initial matter, Defendants dispute that any assets were transferred from Paystaffing
to Pay2Staff. In the Complaint, Plaintiff specifically alleges that “the business of Paystaffing,
consisting primarily of its relationships with the client companies to whom it provided labor, was
transferred to Pay2Staff.” Compi.

¶

99. Defendants point to case law distinguishing personal

goodwill and business goodwill and appear to analogize this to customer lists, stating “the
Paystaffing customer lists were personal to Varas, who developed and maintained the client
relationships.” ECF No. 13, at 7. In contrast, Plaintiff cites law holding that customer lists can
constitute corporate assets. ECF No. 10, at 19-20. Ultimately, as it is clear that this is a factual
dispute, and as Plaintiff has sufficiently pled that the transfer of customer lists was a transfer of a
corporate asset, it is appropriate to allow this question to proceed to discovery.
In its complaint, Plaintiff alleges that “[t]he transaction between Paystaffing and Pay2Staff
amounted to a de facto, consolidation or merger,” “Pay2Staff is a continuation of Paystaffing,”
and “[tJhe transaction between Paystaffing and Pay2 Staff was entered into fraudulently in order to
escape liability to Hartford.” Compi.

¶J 101-03.

In support of these conclusions, Plaintiff alleges

a variety of facts, specifically:
•

“[W]hile Paystaffing and Varas disputed Hartford’s audit and then negotiated and
executed the Payment Plan Agreement, the business of Paystaffing, consisting
primarily of its relationships with the client companies to whom it provided labor,
was transferred to Paystaffing.” Compi. ¶ 99; see also Compl. ¶ 51.
10

•

“Paystafflng and Pay2Staff had the same or substantially similar ownership (Khalil
and Varas), the same or substantially similar management (Khalil and Varas), the
same or substantially similar website, the same or substantially similar clients, [and]
the same or substantially similar operations . . . .“ Compi. ¶ 100; see also Compi.
¶ 52.

While Defendants claim that these allegations are “mere conclusions,” ECF No. 13 at 8,
the Court finds that at this stage these allegations are sufficient to support Plaintiffs claim that
Pay2 Staff can be held liable under a theory of successor liability.

These allegations, go

substantially beyond “a formulaic recitation of the elements” of successor liability, and instead
constitute specific factual allegations, which if subsequently established with evidence could carry
Plaintiffs burden. Accordingly, Defendants’ motion to dismiss claims of successor liability are
denied.
VII.

DISCUSSION

-

CLAIM 5

The Fifth Count in Plaintiffs complaint is titled “Claim for Piercing the Corporate Veil”
and states that the “corporate veil of Paystaffing should be pierced to hold Khalil and Varas
personally liable.” Compl. ¶ 107. “Piercing the corporate veil under Nçw Jersey law is appropriate
where one corporation so dominated another corporation that it had no separate existence and was
merely a conduit of another corporation, and the dominant corporation used the controlled
company to perpetuate a fraud or injustice.” Fort Drivers Fed’n 18, Inc. v. Alt Saints Exp., Inc.,
757 F. Supp. 2d 443, 456 (D.N.J. 2010). In assessing whether the first component of the test is
met courts in New Jersey have identified seven factors that help guide this analysis:
(1) gross undercapitalization; (2) failure to observe corporate
formalities; (3) non-payment of dividends; (4) the insolvency of the
debtor corporation at the time; (5) non-functioning of other officers
or directors; (6) absence of corporate records; and (7) the fact that
the corporation is merely a façade for the operations of the dominant
stockholder or stockholders.
Id. at 457.
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Plaintiff has alleged that the business of Paystafflng was transferred to another entity
entirely owned by Khalil in order to avoid Paystaffing’s liabilities, suggesting the first and fourth
factors weigh in favor of piercing the corporate veil. See Compi. ¶J 9, 51, 103. Plaintiff has further
alleged that Khalil and Varas were members of Paystaffing and occupied high managerial positions
at Paystaffing, and each indicated they were they sole owner of Paystaffing but that there was no
transfer of ownership. Compi.

¶J

8, 11-12, 23-24, 38-39. This indicates a failure to observe

corporate formalities and suggests that the corporation is merely a façade for the operations of the
dominant stockholder or stockholders. Travelers Prop. Cas. Co. ofAm., 2016 WL 7231605, at *9
(piercing the corporate veil on summary judgement where defendant established various
corporations each of which “were mere instrumentalities for his business operation”).
This is further supported by Defendants’ claim in their briefing that the primary business
of Paystaffing was, in fact, a personal asset owned by Varas. See ECF No. 13 at 7. Accordingly,
it appears that Plaintiff has pled sufficient facts to meet the first component of the test for piercing
the corporate veil.
As discussed above, Plaintiff has pled sufficient facts to claim that Varas and Khalil were
using Paystaffing to perpetuate a fraud. Accordingly, at this stage the Court concludes that
sufficient facts have been alleged for this claim to proceed.
VIII. CONCLUSION
For the reasons set forth above, Defendants’ motion to dismiss is denied.

Dated: February 2J’ 2017

HON. CLAIRE C. CECCHI
United States District Judge
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