Horti Americas, LLC v. Steven Produce King, Inc. et al

Filing 21

ORDER granting 12 Motion to Dismiss Second Counterclaim for Failure to State a Claim and for Lack of Standing of Defendant Yosofov. Ordered by Judge I. Leo Glasser on 11/21/2016. (Weitzer, Iliza)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
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HORTI AMERICAS, LLC,
MEMORANDUM AND ORDER
Plaintiff,
16 Civ. 889 (ILG) (RER)
- against STEVEN PRODUCE KING, INC. et al.,
Defendants.
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GLASSER, Senior United States District Judge:
Plaintiff Horti Americas, LLC (“Horti” or “Plaintiff”) initiated this action against
defendants Steven Produce King, Inc. (“SPK”) and Shy Yosofov (“Yosofov”) (together, the
“Defendants”) for violations of the Perishable Agricultural Commodities Act (“PACA”), 7
U.S.C. § 499a et seq., and for breach of contract. Defendants counterclaim for 1.) breach of
contract, and 2.) fraud and material misrepresentation. Horti moves to dismiss the second
counterclaim for failure to state a cause of action under Fed. R. Civ. P. § 12(b)(6) and for lack of
standing as to Yosofov.
BACKGROUND
These facts are taken from the Complaint (ECF 1, hereinafter “Complt.”) and from
Defendants’ Answer with Counterclaims (ECF 8, hereinafter “Ans.”). Because on a motion to
dismiss inferences must be drawn in favor of the non-moving party, I will convey the relevant
facts as alleged by the Defendants, who are the counterclaim plaintiffs here.
Plaintiff Horti is an Arizona LLC that sells wholesale quantities of produce. Complt. at
¶¶ 1-2. SPK is a New York corporation with its principal place of business in Brooklyn, NY. Id.
at ¶ 3. Yosofov is the principal of SPK. Id. at ¶ 4. Horti and SPK are PACA licensed. Id. at ¶¶
15-16.
1

Horti and SPK, through its principal Yosofov, entered into a contract on August 24, 2015
for the sale of Persian pickles (the “Contract”). Complt., Ex. A; Ans. at ¶ 52. Pursuant to the
Contract, Horti was to sell 3,200 cartons of pickles to SPK on a weekly basis from October 15,
2015 through January 15, 2016, at a set price of $13.00 per carton. Id. The Contract sets forth
quality specifications for the pickles, including that the “[q]uality must be #1,” and the “product
must be crunchy and dark green.” Id.
Between November 9, 2015 and December 11, 2015, Horti made ten shipments of pickles
to SPK. Id. at ¶ 54. Defendants allege that each of the shipments was non-conforming to the
Contract specifications. Id. at ¶¶ 53-55. Defendants attempted to sell the non-conforming
pickles in good faith and did so at a loss. Id. at ¶¶ 57, 60. In December 2015, SPK terminated
the Contract, citing Horti’s failure to provide conforming goods. Id. at ¶ 57.
Horti initiated this action asserting various claims related to SPK’s failure to pay for the
pickles. 1 See generally Complt. Defendants counterclaimed for 1.) breach of the Contract by
SPK only, and 2.) fraud and material misrepresentation. See generally Ans. at pp. 11-18. Horti
seeks to dismiss the second counterclaim, arguing that Defendants have failed to state a cause of
action under Fed. R. Civ. P. 12(b)(6), and that defendant Yosofov lacks standing to bring the
claim.

1

Horti asserts four claims, three of which are brought pursuant to PACA. PACA requires
produce buyers to “hold all perishable commodities purchased on short-term credit, as well as
sales proceeds, in trust for the benefit of unpaid sellers.” Am. Banana Co. v. Republic Nat. Bank
of N.Y., N.A., 362 F.3d 33, 37 (2d Cir. 2004) citing 7 U.S.C. § 499e(c). Plaintiff seeks: 1.)
recovery of PACA trust benefits , 2.) recovery for damages for unlawful conduct by SPK under
PACA, 3.) breach of contract as to SPK, and 4.) breach of fiduciary duty as to Yosofov.
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DISCUSSION
A.

Standard of Review

On a motion to dismiss under Rule 12(b)(6), the Court must credit all non-conclusory
allegations and draw all reasonable inferences in favor of the non-moving party. Matson v. Bd.
of Educ. of the City Sch. Dist. of N.Y., 631 F.3d 57, 63 (2d Cir. 2011). “When there are wellpleaded factual allegations, a court should assume their veracity and then determine whether they
plausibly give rise to an entitlement to relief.” Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009). The
same standard applies on a motion to dismiss for lack of standing. Selevan v. N.Y. Thruway
Auth., 584 F.3d 82, 88 (2d Cir. 2009).
B.

Failure to State a Claim Under Fed. R. Civ. P. 12(b)(6)

Under New York law, 2 a fraud claim “may not be used as a means of restating what is, in
substance, a claim for breach of contract.” Wall v. CSX Transp., Inc., 471 F.3d 410, 416 (2d Cir.
2006). For a fraud claim to survive a motion to dismiss when pled with a breach of contract
claim, Defendants must “demonstrate a fraudulent misrepresentation collateral to or extraneous
to the contract . . .” Bridgestone/Firestone, Inc. v. Recovery Credit Servs., Inc., 98 F.3d 13, 20
(2d Cir. 1996) (internal citations omitted); see also Wall, 471 F.3d at 416. 3
The basis of the alleged fraud here is that Horti intentionally misrepresented the quality
of their produce in order to induce Defendants to enter into the Contract. Ans. at ¶¶ 61, 71, 75;
ECF 16, Def. Opp., at ¶ 23. It is well-settled that “[g]eneral allegations that [a party] entered into

2

The parties do not dispute that New York law should govern their common law claims.
Defendants are located in New York, and both parties cite to New York law in their briefs.
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The Defendants may alternatively “demonstrate a legal duty separate from the duty to perform
under the contract” or “seek special damages caused by the misrepresentation that are
unrecoverable as contract damages.” Bridgestone/Firestone, 98 F.3d at 20. Defendants have not
satisfied either of these requirements, nor do they argue that they have.
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a contract while lacking the intent to perform it are insufficient to support” a claim for fraud.
N.Y. Univ. v. Cont'l Ins. Co., 87 N.Y.2d 308, 318 (1995); see also Refreshment Mgmt. Servs.,
Corp. v. Complete Office Supply Warehouse Corp., 89 A.D.3d 913, 914 (2d Dep’t 2011).
Plaintiff’s representation about its ability and intent to sell a certain quality of produce relates
directly to its performance under the Contract. It does not constitute a viable separate fraud
collateral to the Contract. See e.g. Bridgestone/Firestone, 98 F.3d at 19 (granting motion to
dismiss fraud claim and noting that the alleged misrepresentations “amount to little more than
intentionally-false statements by [defendant] indicating his intent to perform under the
contract”).
SPK has stated a cause of action for breach of contract and will be made whole if it
succeeds on that claim. Its counterclaim for fraud and material misrepresentation is duplicative,
and is therefore dismissed.
C.

Lack of Standing as to Yosofov

Yosofov seemingly joins the second counterclaim in his individual capacity. 4 Under
New York law, “a shareholder may bring an individual suit if the defendant has violated an
independent duty to the shareholder, whether or not the corporation may also bring action.”
Powers v. Ostreicher, 824 F. Supp. 372, 378 (S.D.N.Y. 1993) citing Ceribelli v. Elghanayan, 990
F.2d 62, 63 (2d Cir. 1993). Such a duty may be established if Horti “either (a) had reason to
expect or (b) [was] substantially certain that [Yosofov], in his individual capacity, would

4

As Plaintiff correctly states, on the pleadings alone it is unclear whether Yosofov joins SPK in
the second counterclaim. ECF 12-1, Plaintiff Memo of Law, at p. 1. Defendants’ opposition
papers imply that they intended him to join in that claim. Whether the claim is actually pled on
Yosofov’s behalf is inconsequential because he lacks standing to bring it.
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subsequently act in reliance on such misrepresentations.” Powers, 824 F. Supp. at 377; see also
Parrott v. Coopers & Lybrand, L.L.P., 95 N.Y.2d 479, 484 (2000).
Plaintiff argues that Yosofov lacks standing because he does not plead an injury
independent from SPK’s damages. Defendants respond that Yosofov was injured in his capacity
as a PACA-licensee and by Horti’s action for breach of fiduciary duty against him personally.
ECF 16, Def. Opp., at ¶ 26. 5
Yosofov does not have standing to bring the counterclaim. Defendants do not plead an
injury to Yosofov in his individual capacity, and Yosofov’s status as PACA-licensee does not
confer upon him a duty owed by Horti. PACA sellers only are “afforded a highly unusual trust
beneficiary status that permit[s] them, in the case of defaults, to trump the buyers' other
creditors.” Am. Banana Co., 362 F.3d at 38. As such, “individuals who are principals in
corporations which bought produce, but failed to pay, are individually liable for breach of their
fiduciary duties.” Horizon Mktg. v. Kingdom Int'l Ltd., 244 F.Supp.2d 131, 145 (E.D.N.Y.
2003). Horti’s case in chief alleges that Yosofov, the principal of SPK, breached his fiduciary
duty to Horti. Horti, the seller, does not owe Yosofov a corresponding duty. Nor can the mere
assertion of a plausible claim against Yosofov serve as the basis for his standing to allege a
counterclaim.
To the extent Yosofov asserts the second counterclaim, it is dismissed.

5

These allegations are introduced for the first time in Defendants’ opposition papers (ECF 16)
and are not alleged in the counterclaims. Horti states that Yosofov is not a PACA-licensee and
attaches print-outs from the PACA license database to that effect. ECF 17, Exhs. A-D.
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CONCLUSION
For the reasons stated herein, the Plaintiff’s motion to dismiss Defendants’ second
counterclaim, alleging fraud and material misrepresentation, is GRANTED.
SO ORDERED.
Dated:

Brooklyn, New York
November 21, 2016
/s/
I. Leo Glasser
Senior United States District Judge

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