Vis Vires Group, Inc. v. Endonovo Therapeutics, Inc. et al
Filing
37
MEMORANDUM OF DECISION & ORDER - Based on the foregoing, the Court grants in part and denies in part the Defendants 32 motion to dismiss the amended complaint. In particular, for the reasons set forth above, to the extent the Defendants seek to di smiss the first, third, fourth, fifth, and sixth causes of action, their motion to dismiss is denied. However, to the extent the Defendants seek to dismiss the second cause of action based on fraudulent inducement, their motion to dismiss is granted. This matter is respectfully referred to United States Magistrate Judge Anne Y. Shields for discovery. So Ordered by Judge Arthur D. Spatt on 10/24/2016. (Coleman, Laurie)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
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VIS VIRES GROUP, INC.,
Plaintiff,
-againstENDONOVO THERAPEUTICS, INC. and ALAN COLLIER,
Memorandum of
Decision & Order
16-cv-470 (ADS)(AYS)
Defendant.
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APPEARANCES:
Naidich Wurman LLP
Attorneys for the Plaintiff
111 Great Neck Road, Suite 214
Great Neck, NY 11021
By: Richard S. Naidich, Esq.
Bernard S. Feldman, Esq.
Robert P. Johnson, Esq., Of Counsel
Ellsworth & Young LLP
Attorneys for the Defendants
1164 Manhattan Avenue, Suite 100
Brooklyn, NY 11222
By: Robert J. Young, Esq., Of Counsel
SPATT, District Judge:
Presently before the Court in this diversity breach of contract and tortious interference
action is a motion by the Defendants Endonovo Therapeutics, Inc. (“Endonovo”) and Alan Collier
(“Collier,” together with Endonovo, the “Defendants”), seeking an order pursuant to Federal Rule of
Civil Procedure (“FED. R. CIV. P.”) 12(b)(6) dismissing the amended complaint filed by the Plaintiff
Vis Vires Group, Inc. (the “Plaintiff”) on the ground that it fails to state a claim upon which relief
may be granted.
For the reasons that follow, the motion to dismiss is granted in part and denied in part.
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I.
BACKGROUND
Unless otherwise noted, the following facts are drawn from the amended complaint and
construed in favor of the Plaintiff.
A.
The July 2015 Agreement
On July 9, 2015, Endonovo, a Delaware corporation with a principal place of business in
California, entered into a contract, styled a Securities Purchase Agreement (the “July Loan
Agreement”) with the Plaintiff, a domestic corporation with a principal place of business in Great
Neck.
Although the July Loan Agreement is not annexed to the amended complaint; and although,
in general, extrinsic evidence may not be consulted in connection with a motion to dismiss under
Rule 12(b)(6), in resolving this motion, the Court, in its discretion, will consider the July Agreement,
which was previously submitted in connection with an earlier motion. See Jan. 28, 2016 Affidavit of
Seth Kramer in Support of Motion for Provisional Remedies (“Kramer Aff.”), DE [5-1], at Ex. “B”.
In the Court’s view, this document and the other documents forming the basis of the
Plaintiff’s claims, are plainly integral to, and incorporated by reference in the amended complaint.
See Global Network Communs., Inc. v. City of New York, 458 F.3d 150, 157 (2d Cir. 2006) (observing that a
common example of the material properly considered on a 12(b)(6) motion is “a contract or other
legal document containing obligations upon which the plaintiff’s complaint stands or falls”).
Pursuant to the July Loan Agreement, the Plaintiff made a loan to Endonovo in the amount of
$33,000. To ensure repayment of the loan, Endonovo executed a convertible promissory note (the
“July Note”), with a maturity date of April 13, 2016, in an equal amount in favor of the Plaintiff.
Again, although the July Note is not attached to the amended complaint, it is also contained in the
Court record from a prior motion, and, for substantially the same reason as outlined above, will be
considered here. See Kramer Aff., Ex. “A.”
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The Plaintiff alleges that the July Note “provided for certain issuance of, and conversion
rights in and to common stock of [Endonovo].” Am. Compl. ¶ 17. In particular, by the terms of the
July Note, the Plaintiff alleges that it was entitled to elect to convert the outstanding balance due on
the loan into shares of Endonovo common stock (the “Debt-to-Equity Option”).
In relevant part, the July Note provides, in part, the following:
[§] 1.1 Conversion Right. The [Plaintiff] shall have the right from time to time, and at
any time during the period beginning on the date which is one hundred eighty (180) days
following the date of this Note [January 5, 2016] and ending on the later of: (1) the Maturity
Date [April 13, 2016] and (ii) the date of payment of the Default Amount (as defined in
Article III) pursuant to Section 1.6(a) or Article III, each in respect of the remaining
outstanding principal amount of this Note to convert all of any part of the outstanding and
unpaid principal amount of this Note into full paid and non-assessable shares of Common
Stock, as such Common Stock exists on the Issue Date, or any shares of capital stock or other
securities of [Endonovo] . . .
*
*
*
[§] 1.4 Method of Conversion.
(a) Mechanics of Conversion. Subject to Section 1.1, this Note may be converted by
the [Plaintiff] in whole or in part at any time from time to time after the Issue Date, by
(A) submitting to [Endonovo] a Notice of Conversion . . .
(d) Delivery of Common Stock Upon Conversion. Upon receipt by [Endonovo] from
the [Plaintiff] of . . . a Notice of Conversion meeting the requirements for
conversion . . . [Endonovo] shall issue and deliver or cause to be issued and delivered to or
upon the order of the [Plaintiff] certificates of the Common Stock issuable upon such
conversion within three (3) business days after such receipt . . .
(e) Obligation of Borrower to Deliver Common Stock. . . . If the [Plaintiff] shall have
given a Notice of Conversion as provided herein, [Endonovo]’s obligation to issue and deliver
the certificates for Common Stock shall be absolute and unconditional, irrespective of the
absence of any action by the [Plaintiff] to enforce the same, any waiver or consent with
respect to any provision thereof, the recovery of any judgment against any person or any
action to enforce the same, any failure or delay in the enforcement of any other obligation of
[Endonovo] to the holder of record, or any setoff, counterclaim, recoupment, limitation or
termination, or any breach of alleged breach by the [Plaintiff] of any obligation to
[Endonovo] in connection with such conversion.
Kramer Aff., Ex. “A,” at pp. 5-6, 20.
Further, the terms of the July Note set forth various events constituting a default, including
the following “Events of Default” referenced in the amended complaint:
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ARTICLE III. EVENTS OF DEFAULT.
*
*
*
[§] 3.1 Failure to Pay Principal or Interest. [Endonovo] fails to pay the principal
hereof or interest thereon when due on this Note, whether at maturity, upon acceleration or
otherwise.
[§] 3.2 Conversion and the Shares. [Endonovo] fails to issue shares of Common Stock
to the [Plaintiff] (or announces or threatens in writing that it will not honor its obligation to
do so) upon exercise by the [Plaintiff] of the conversion rights of the [Plaintiff] in accordance
with the terms of this Note, fails to transfer or cause its transfer agent to transfer . . . any
certificate for shares of Common Stock issued to the [Plaintiff] upon conversion of or
otherwise pursuant to this Note as and when required by this Note, [Endonovo] directs its
transfer agent not to transfer or delays, impairs, and/or hinders its transfer agent in
transferring . . . any certificate for shares of Common Stock to be issued to the [Plaintiff]
upon conversion of or otherwise pursuant to this Note as and when required by this
Note . . . and any such failure shall continue uncured . . . for three (3) business days after the
[Plaintiff] shall have delivered the Notice of Conversion . . .
*
*
*
[§] 3.15 Replacement of Transfer Agent. In the event that [Endonovo] proposed to
replace its transfer agent, [Endonovo] fails to provide, prior to the effect date of such
replacement, a fully executed Irrevocable Transfer Agent [Letter] in a form as initially
delivered pursuant to the [July Loan] Agreement . . . signed by the successor transfer agent to
[Endonovo] . . .
Id. at pp. 14-16.
Article III goes on to state, in pertinent part, that the occurrence of any Event of Default set
forth in §§ 3.1, 3.2 and/or 3.15 would result in, among other penalties, the Promissory Notes becoming
immediately due and payable. See id. at p. 17.
B.
The August 2015 Agreement
On August 10, 2015, Endonovo entered into a second contract with the Plaintiff, again styled
a Securities Purchase Agreement (the “August Loan Agreement,” together with the July Loan
Agreement, the “Loan Agreements”).
Pursuant to the August Loan Agreement, the Plaintiff made a second $33,000 loan to
Endonovo, in exchange for which Endonovo executed a second convertible promissory note (the
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“August Note,” together with the July Note, the “Promissory Notes”) in an equal amount in favor of
the Plaintiff.
Other than the maturity date of the August Note, which was not provided to the Court, it
allegedly contained the same relevant language as the July Note regarding: (1) the Debt-to-Equity
Option; and (2) the Plaintiff’s entitlement to an Irrevocable Transfer Agent Letter.
C.
The Allegations of Default
On January 21, 2016, the Plaintiff sought to partially exercise its Debt-to-Equity Option
under the July Note by converting $15,000 of the remaining balance due under the July Loan
Agreement to 95,663 shares of Endonovo common stock. In this regard, the Plaintiff allegedly
executed and delivered to Endonovo a Notice of Conversion, in accordance with the terms of the
July Note.
However, allegedly at the direction of its chief executive officer, namely, the individual
Defendant Collier, Endonovo refused to effectuate the conversion. According to the Plaintiff, this
failure constitutes an Event of Default under Article III of the July Note.
In this regard, the Plaintiff alleges that, in directing Endonovo to breach its obligations under
the July Note, Collier was acting outside the scope of his role as a corporate officer and for his own
personal benefit. Therefore, according to the Plaintiff, Collier’s conduct constitutes tortious
interference with the July Loan Agreement.
The Plaintiff further alleges that, on an unspecified date after the execution of the Promissory
Notes, without providing the required notice to the Plaintiff, Endonovo replaced its stock transfer
agent with a corporation called Clear Trust LLC, and then instructed Clear Trust LLC not to honor
the Plaintiff’s otherwise valid Notice of Conversion. According to the Plaintiff, each of these actions
constituted an independent Event of Default under Article III of the Promissory Notes.
5
The Plaintiff further alleges that, to date, no part of the August Promissory Note, which
secured repayment of the amount loaned pursuant to the August Loan Agreement, has been repaid –
itself an independent breach of the contract and a default under the related payment instrument.
The complaint appears to allege that these defaults were premeditated and that Endonovo,
at the direction of Collier, never intended to comply with its obligations under the Loan Agreements
and/or the Promissory Notes. See, e.g., Compl. ¶ 27 (alleging that Endonovo’s failure to comply with
the terms of the contracts evidences “fraudulent intent from the very inception of the transactions at
issue”); id. ¶¶ 34-35 (alleging that, by assenting to the terms of the contracts, when, in actuality, they
had “no intention to honor [their] obligations,” the Defendants fraudulently induced the Plaintiff to
enter the transactions).
Based on these allegations, the Plaintiff alleges causes of action sounding in: (1) promissory
note default; (2) fraudulent inducement; (3) breach of contract; and (4) tortious interference with a
contract. By this action, the Plaintiff seeks monetary damages and penalties under the contracts,
together with interest, liquidated damages, attorneys’ fees, and costs. The Plaintiff also seeks
equitable relief in the form of a mandatory injunction compelling the Defendants to comply with
their obligations under the Loan Agreements and the Promissory Notes.
II.
RELEVANT PROCEDURAL HISTORY
On January 29, 2016, the Plaintiff commenced this action by filing a summons and complaint,
together with an order to show cause, seeking certain provisional remedies. In particular, similar to
the ultimate relief outlined in the complaint, the Plaintiff’s proposed order to show cause sought to
immediately compel the Defendants to comply with their obligations under the Loan Agreements
and the Promissory Notes.
Following oral argument and briefing by the parties, on March 1, 2016, the Court issued a
Memorandum of Decision & Order (the “March Opinion”), denying the Plaintiff’s motion in its
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entirety and sua sponte dismissing the original complaint without prejudice to refiling. See Vis Vires
Grp., Inc. v. Endonovo Therapeutics, Inc., 149 F. Supp. 3d 376 (E.D.N.Y. 2016) (Spatt, J.).
In relevant part, in the March Opinion, the Court determined that it lacked subject matter
jurisdiction over the Plaintiff’s claims. In particular, the Plaintiff alleged that original jurisdiction
existed under 28 U.S.C. § 1331, namely, “federal question jurisdiction,” insofar as at least one of the
claims in the original complaint arose under Section 10(b) of the federal Securities Exchange Act of
1934.
However, the Court held that this claim – which was premised on a tenuous theory of
market manipulation arising solely from the Defendant’s broken promise to fulfill their obligations
under the Loan Agreements and the Promissory Notes – did not plausibly allege a violation of federal
law. Thus, since the Plaintiff’s remaining causes of action alleged only theories of New York
common law, all of which involved claims and remedies revolving around the interpretation of a
contract, the Court found that it lacked “federal question jurisdiction” under 28 U.S.C. § 1331.
Alternatively, the Plaintiff argued that original jurisdiction existed under 28 U.S.C. § 1332,
namely, “diversity jurisdiction,” in that the parties reside in different States and the amount in
controversy exceeds $75,000. The Court disagreed, noting that, although the original complaint had
alleged the State in which the individual Defendant Collier “resided,” the parties’ complete diversity
of citizenship could not be determined without an allegation or other demonstration of Collier’s
“domicile” – a separate legal concept.
Therefore, the Court determined that it lacked subject matter jurisdiction over the Plaintiff’s
claims, and, on its own motion, dismissed the complaint. Nevertheless, even assuming that
jurisdiction did exist, the Court went on to explain why the preliminary injunctive relief sought by
the Plaintiff would still be unwarranted.
In that regard, the Court noted that the Plaintiff had failed to demonstrate that it would
suffer irreparable harm in the absence of an injunction because adequate remedies at law, in the form
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of money damages and penalties under the contracts, existed to compensate the Plaintiff for its
alleged losses. The Court’s reasoning was not altered by the Plaintiff’s argument that the corporate
Defendant was on the brink of insolvency, raising the likelihood that an eventual money judgment
would go unsatisfied. Nor was the Court persuaded by language contained in the underlying
agreements purporting to concede that, in the event of a breach, money damages would be
inadequate.
Ultimately, despite denying the motion for provisional remedies and dismissing the original
complaint, the Court expressly granted the Plaintiff leave to file an amended complaint curing the
jurisdictional deficiencies on or before March 31, 2016.
On March 9, 2016, the Plaintiff filed an amended complaint.
On March 30, 2016, the Defendants filed the present motion seeking to again dismiss the
action under Fed. R. Civ. P. 12(b)(6).
III.
A.
DISCUSSION
The Standard of Review
Under FED. R. CIV. P. 8(a)(2), a pleading that states a claim for relief must contain “a short
and plain statement of the claim showing that the pleader is entitled to relief.”
The pleading
standard announced in Rule 8 “does not require ‘detailed factual allegations,’ but it demands more
than an unadorned, the-defendant-unlawfully-harmed-me accusation.” Ashcroft v. Iqbal, 556 U.S. 662,
677-78, 129 S. Ct. 1937, 173 L. Ed. 2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555,
127 S. Ct. 1955, 167 L. Ed. 2d 929 (2007)). “A pleading that offers ‘labels and conclusions’ or ‘a
formulaic recitation of the elements of a cause of action will not do.’ ” Id. at 678 (quoting Twombly,
550 U.S. at 555).
Rather, to survive a motion to dismiss under Rule 12(b)(6), “a complaint must contain
sufficient factual matter, accepted as true, to ‘state a claim for relief that is plausible on its face.’ ” Id.
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(quoting Twombly, 550 U.S. at 557). The “[f]actual allegations must be enough to raise a right to relief
above the speculative level.” Twombly, 550 U.S. at 557.
Furthermore, claims based on fraud are subject to the heightened pleading standard found in
FED. R. CIV. P. 9(b).
In particular, a party asserting fraud “must state with particularity the
circumstances constituting fraud or mistake.” FED. R. CIV. P. 9(b). “Rule 9(b) is satisfied when the
complaint specifies ‘the time, place, speaker, and content of the alleged misrepresentations;’ how the
misrepresentations were fraudulent; and the details that ‘give rise to a strong inference that the
defendant[ ] had an intent to defraud, knowledge of the falsity, or a reckless disregard for the
truth.’ ” Schwartzco Enters. LLC v. TMH Mgmt., LLC, 60 F. Supp. 3d 331, 344 (E.D.N.Y. 2014) (Spatt, J.)
(quoting Cohen v. S.A.C. Trading Corp., 711 F.3d 353, 359 (2d Cir. 2013)).
B.
As to the Defendants’ Renewed Objections to the Court’s Subject Matter Jurisdiction
Before turning to the merits of the Defendants’ Rule 12(b)(6) motion, the Court notes that
the Defendants also appear to raise a renewed question surrounding the Court’s subject matter
jurisdiction. In particular, the Defendants argue that the Promissory Notes at issue in this case have
a combined value of just $66,000, which is below the monetary threshold necessary for invoking the
Court’s original diversity jurisdiction. The Court disagrees.
Initially, this argument was raised for the first time in the Defendants’ reply, apparently in
violation of the well-established rule against doing so. See Colon v. City of New York, No. 11-cv-173, 2014
U.S. Dist. LEXIS 46451, at *28-*30 (E.D.N.Y. Apr. 2, 2014) (collecting cases for the proposition that
“[t]he Second Circuit has clearly stated that arguments raised for the first time in reply papers or
thereafter are properly ignored”).
In any event, this argument lacks merit. The Second Circuit has made clear that “[s]ince the
diversity statute confers jurisdiction over ‘civil actions’ rather than specific claims alleged in a
complaint, a plaintiff is permitted to aggregate claims in order to satisfy the amount in controversy
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requirement.” Wolde-Meskel v. Vocational Instruction Project Community Servs., Inc., 166 F.3d 59, 62 (2d Cir.
1999) (citing Snyder v. Harris, 394 U.S. 332, 335, 89 S. Ct. 1053, 22 L. Ed. 2d 319 (1969) (“[A]ggregation
is permitted in cases in which a single plaintiff seeks to aggregate two or more claims against a single
defendant”)).
In this case, the Plaintiff has apparently aggregated the first, second, third, fourth, and sixth
causes of action to arrive at a damages figure exceeding the $75,000 threshold. Contrary to the
Defendants’ contention, which is unsupported by a citation to relevant legal authority, there is
nothing improper about this approach.
Accordingly, to the extent the Defendants seek to dismiss the amended complaint on the
ground that it fails to sufficiently establish a basis for the Court’s jurisdiction, their motion is denied.
C.
As to Whether the Amended Complaint States a Plausible Claim Based on Defaults
Under the Promissory Notes
As noted above, the amended complaint alleges that at least four discrete occurrences
constituted Events of Default under the Promissory Notes:
(1) Endonovo’s failure to issue shares of common stock upon delivery of the Plaintiff’s January
21, 2016 Notice of Conversion, in violation of § 3.2 of the July Note;
(2) Endonovo’s failure to repay any portion of the principal due on the August Note, in violation
of § 3.1 of the August Note;
(3) Endonovo’s failure to provide the Plaintiff with a fully-executed Irrevocable Transfer Agent
Letter prior to replacing its existing transfer agent with Clear Trust LLC, in violation of
§ 3.15 of both Promissory Notes; and
(4) Endonovo’s failure to cause Clear Trust LLC to honor the Plaintiff’s Notice of Conversion
and/or its affirmative directive to Clear Trust LLC not to honor the Plaintiff’s Notice of
Conversion, also in violation of § 3.2 of the July Note.
The Defendants set forth a two-part argument in support of dismissing the Plaintiff’s first
cause of action based on these alleged defaults.
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First, the Defendants contend that the Promissory Notes have not fully matured, so that the
principal amounts due under the Loan Agreements are not yet owed. Therefore, the Defendants
argue that they cannot have defaulted on an obligation that is yet to arise. The Court disagrees.
Notwithstanding the specific maturity dates assigned to the Promissory Notes, the language
contained in those instruments unambiguously provides that, upon the occurrence of any Event of
Default, the amounts owed become immediately due and payable. Construing the alleged facts in
favor of the Plaintiff, the Court concludes that the Defendants apparently failed to comply with
various contractual obligations, each of which constituted an Event of Default, and therefore, an
independent basis for accelerating the maturity date of the notes. Accordingly, the Defendant’s
motion to dismiss the first cause of action on this ground is denied.
Second, the Defendants contend that the payment instruments at issue in this case do not
satisfy the legal definition of a “promissory note.” In particular, the Defendants rely on New York
appellate court cases they assert stand for the proposition that, in order to be valid, a promissory
note must provide solely for the payment of money. Therefore, the Defendants argue that the
convertible promissory notes at issue in this case, which provide for the payment of money, or,
alternatively, an equivalent amount of stock, are not true promissory notes under the law. In the
Court’s view, this argument is misguided.
The cases relied upon by the Defendants, namely, Lugli v. Johnston, 78 A.D.3d 1133, 1134, 912
N.Y.S.2d 108 (2d Dep’t 2010), and Comforce Telecom, Inc. v. Spears Holding Co., Inc., 42 A.D.3d 557, 558, 840
N.Y.S.2d 145 (2d Dep’t 2007), do not, as the Defendants contend, stand for the general proposition
that a valid promissory note must call solely for the payment of money. Rather, in relevant part,
those cases involve a provision of New York procedural law, namely, CPLR 3213, entitled “Motion
for summary judgment in lieu of complaint,” which states that, “[w]hen an action is based on an
instrument for the payment of money only . . . the plaintiff may serve with the summons a notice of
motion for summary judgment and the supporting papers in lieu of a complaint.”
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This rule is premised on the view that genuine issues of fact for trial will generally be less
likely to exist – and therefore, traditional litigation will be obviated – where the entire action is
based on an instrument promising to pay a sum of money. See David D. Siegel, New York Practice
§ 288 (5th ed. 2011) (“CPLR 3213 recognizes that some claims have greater presumptive merit than
others and should have easier access to the courts than an ordinary plenary action gets”).
Thus, in Lugli and Comforce, applying CPLR 3213, the Appellate Division of the New York
State Supreme Court considered only whether the promissory notes at issue in those cases
constituted “instruments for the payment of money only” so that the plaintiffs would be entitled to
summary judgment at the outset, rather than filing a complaint. However, CPLR 3213, and by
extension, the cases cited by the Defendants, have no application here.
In the Court’s view, it would be a bridge too far to read these cases as supporting the broad
proposition that a payment instrument can never be considered a promissory note if it allows for the
principal amount owed to be repaid in securities rather than traditional currency.
Nor can the Court endorse the ultimate conclusion that the Defendants apparently seek to
draw, namely, that a cause of action based on a default under a promissory instrument fails, as a
matter of law, simply because it calls for alternative methods of repayment, namely, by methods
other than the payment of “money only.”
Indeed, even where courts have found that the instrument at issue does not meet the “money
only” standard under CPLR 3213, the result is not dismissal of the claim; it is simply that litigation
regarding any disputed factual issues proceeds in the ordinary course. See, e.g., Alpha Capital Anstalt v.
bioMetrix Inc., No. 26036/2009, 2010 NY Slip Op 30045(U), 2010 N.Y. Misc. LEXIS 1265, at *2, *12
(Suffolk Cnty. Sup. Ct. Jan. 6, 2010) (in a case involving a similar convertible promissory note,
denying a motion for summary judgment in lieu of a complaint under CPLR 3213 and directing that
the motion papers be deemed the pleadings); see also Siegel, New York Practice at § 289 (noting that a
12
plaintiff who wishes to enforce commercial paper that does not precisely fit the requirements of
CPLR 3213 may still “bring[ ] an ordinary action and simply wait[ ] until the answer is in” to make a
motion on notice for summary judgment).
In this case, the Defendants fail to identify any authority for the proposition that a claim
based on default is not cognizable at law simply because the instrument at issue permits payment to
be made in the form of stock. Nor has the Court’s independent research revealed any. Thus, even
assuming, as the Defendants contend, that the Promissory Notes in question call for more than the
payment of “money only,” that fact alone cannot serve as a sufficient basis for dismissal under Rule
12(b)(6).
Accordingly, the Defendants’ motion to dismiss the first cause of action based on
promissory note defaults is denied.
D.
As to Whether the Amended Complaint States a Plausible Claim Based on Fraudulent
Inducement
The second cause of action alleges that the Defendants fraudulently induced the Plaintiff to
enter into the Loan Agreements and Promissory Notes by falsely claiming that they intended to fully
perform their contractual obligations, when, in actuality, they did not.
The Defendants appear to argue that this claim is impermissibly duplicative of the first cause
of action based on promissory note defaults. In this regard, they rely on caselaw standing for the
proposition that, in order “[t]o recover damages for fraud based on a contract, a plaintiff must prove
a breach of a duty distinct from or in addition to the breach of contract.” Defs. Memo of Law at 6
(citing Courageous Syndicate, Inc. v. People-To-People Sports Committee, Inc., 141 A.D.2d 599, 600 (2d Dep’t
1988)).
The general principle invoked by the Defendants is well-settled: “The Second Circuit has
noted that, under New York law, where a fraud claim hinges on the same factual allegations as a
breach of contract claim, with the additional allegation that the defendant intended to breach, ‘the
fraud claim is redundant and plaintiff’s sole remedy is for breach of contract.’ ” Rodriguez v. It’s Just
13
Lunch, Int’l, No. 07-cv-9227, 2010 U.S. Dist. LEXIS 16622, at *13 (S.D.N.Y. Feb. 23, 2010) (quoting
Telecom Int’l Am., Ltd. v. AT&T Corp., 280 F.3d 175, 196 (2d Cir. 2001)).
However, the Defendants’ duplicity argument fails to account for certain exceptions that
have been carved out of the basic rule, including situations where, as here, the Plaintiff has alleged “a
fraudulent misrepresentation collateral or extraneous to the contract.” Bridgestone/Firestone, Inc. v.
Recovery Credit Servs., Inc., 98 F.3d 13, 20 (2d Cir. 1996). Applying this exception, other courts in this
Circuit have recognized that “ ‘a claim based on fraudulent inducement of a contract is separate and
distinct from a breach of contract under New York law,’ ” Rodriguez, 2010 U.S. Dist. LEXIS 16622, at
*14 (quoting Merrill Lynch & Co. Inc. v. Allegheny Energy, Inc., 500 F.3d 171, 184 (2d Cir. 2007)), and
therefore, a “fraudulent inducement claim satisfies the [ ] Bridgestone exception [stated above] and is
not barred as duplicative of the breach of contract claim.” Id.; see Linares v. Richards, No. 08-cv-3243,
2009 U.S. Dist. LEXIS 68753 (E.D.N.Y. June 22, 2009) (Report and Recommendation) (“ ‘A claim for
fraudulent inducement[,]’ however, ‘is separate and distinct from a claim for breach of contract
under New York law, and a plaintiff may plead both causes of action’ ” (quoting Rosen v. Spanierman,
894 F.2d 28, 35 (2d Cir. 1990)), adopted, 2009 U.S. Dist. LEXIS 66948 (E.D.N.Y. Aug. 3, 2009).
In the Court’s view, though factually similar, the Plaintiff’s first cause of action based on a
promissory note default, and its second cause of action based on fraudulent inducement, implicate
separate and distinct legal theories which may be pled together. Accordingly, the Defendant’s
motion to dismiss the second cause of action on this ground is denied.
However, even assuming that the fraudulent inducement claim is not barred, a closer
question is whether, as the Defendants contend, the Plaintiff failed to plead this fraud-based claim
with sufficient specificity to survive scrutiny under the heightened pleading standard found in Rule
9(b). The Court answers this question in the negative.
14
As noted above, crucial to a fraud-based claim is a sufficiently-detailed allegation regarding a
misrepresentation made by the Defendants and relied upon by the Plaintiff. Sufficient detail in this
context includes allegations by the Plaintiff which: “(1) specify the statements that the plaintiff
contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were
made, and (4) explain why the statements were fraudulent.” Rombach v. Chang, 355 F.3d 164, 170 (2d
Cir. 2004) (quoting Mills v. Polar Molecular Corp., 12 F.3d 1170, 1175 (2d Cir. 1993)).
Although Rule 9(b) “permits plaintiffs to allege fraudulent intent generally,” HCFA Assocs.
Corp. v. Grossman, 960 F. Supp. 581, 585 (E.D.N.Y. 1997 (Spatt, J.), the Second Circuit has recognized
that “ ‘[g]eneral allegations that defendant entered into a contract while lacking the intent to
perform it are insufficient to support [the] claim,’ ” Wall v. CSX Transp., Inc., 471 F.3d 410, 416 (2d Cir.
2006) (quoting New York Univ. v. Cont’l Ins. Co., 87 N.Y.2d 308, 318, 639 N.Y.S.2d 283, 622 N.E.2d 763
(1995)); see AXA Versicherung AG v. N.H. Ins. Co., 348 F. App’x 628, 630 (2d Cir. 2009) (“While a
misrepresentation that is collateral to the contract may support a fraud in the inducement claim
distinct from a breach of contract, the non-disclosure of collateral aims, such as allegations about
defendants’ states of minds used to support the contention that they intended to breach the
contract . . . is insufficiently distinct from the breach of contract claim” (internal citation, quotation
marks, and alteration omitted)); Space, Inc. v. Simonwitz, No. 08-cv-2854, 2008 U.S. Dist. LEXIS 51782,
at *17 (S.D.N.Y. July 8, 2008) (finding allegations that one party to a contract misrepresented its
future intent to perform “is patently insufficient to support a claim for fraud under New York law”).
In this case, the amended complaint contains no particularized allegations regarding any
false representation other than the Defendants’ overall assent to take part in the agreements. In this
regard, the allegations of fraudulent inducement are vague, and amount to a single conclusory
accusation that, because the Defendants breached their obligations under the Loan Agreements and
the Promissory Notes, that must have been their intention all along. See, e.g., Am. Compl. ¶¶ 34-35
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(alleging, as a basis for the fraud claim, that the Defendants’ falsely promised not to breach the
contracts). Based on the authorities discussed above, this falls far below what is required under
Rule 9(b).
Accordingly, the Defendant’s motion to dismiss the second cause of action based on fraud in
the inducement is granted. Having so held, the Court need not reach the Defendants’ alternative
argument based on res judicata.
E.
As to Whether the Amended Complaint States a Plausible Claim Based on Breach of
Contract
The third and fourth causes of action allege that the Defendants breached their obligations
under the Loan Agreements, entitling the Plaintiff to contractual remedies in the form of lost profits,
attorneys’ fees, and costs.
Here, again, the Defendants argue that these causes of action are duplicative of the first cause
of action based on promissory note defaults. However, in the Court’s view, the claims are clearly
distinguishable inasmuch as the breach of contract claims apparently seek to enforce obligations and
remedies under the Loan Agreements, whereas the first cause of action arose solely under the
Promissory Notes.
The Defendants also substantively dispute the Plaintiff’s entitlement to the damages it seeks.
However, “[this] argument at best raises a factual dispute . . . which cannot be resolved on a
Rule 12(b)(6) motion.” Navigant Consulting, Inc. v. Kostakis, No. 07-cv-2302, 2007 U.S. Dist. LEXIS
74460, at *15 (E.D.N.Y. Oct. 4, 2007).
Accordingly, the Defendant’s motion to dismiss the third and fourth causes of action based
on breach of contract is denied.
F.
As to Whether the Amended Complaint States a Plausible Claim Based on Tortious
Interference
The sixth cause of action alleges that the individual Defendant Collier personally caused the
company to breach the Loan Agreements and default under the Promissory Notes. According to the
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amended complaint, despite Collier’s official position as the chief executive officer of Endonovo, he
tortiously interfered with the contracts in question for his own personal benefit – specifically, “to
maintain a higher . . . stock value for his own holdings,” Am Coml. ¶ 60 – and not for the benefit of
the corporation.
The Defendants argue that these allegations lack enough supporting facts to make it
plausible that Collier is personally liable for the misconduct alleged. The Court disagrees.
“To state a claim for tortious interference with contract under New York law, a plaintiff
must demonstrate ‘the existence of a valid contract between the plaintiff and a third party,
defendant’s knowledge of that contract, defendant’s intentional procurement of the third-party’s
breach of the contract without justification, actual breach of the contract, and damages resulting
therefrom.” SymQuest Group, Inc. v. Canon U.S.A., Inc., No. 15-cv-4200, 2016 U.S. Dist. LEXIS 64432, at
*17 (E.D.N.Y. May 16, 2016).
“In New York, officers, directors or employees of a corporation cannot be personally liable
for inducing the corporation to breach a contract with a third party if they act on behalf of the
corporation and within the scope of their duties.” Dagen v. Cfc Group Holdings, No. 00-cv-5682, 2002
U.S. Dist. LEXIS 25767, at *76-*77 (S.D.N.Y. Mar. 7, 2002) (Report and Recommendation) (citing
cases), adopted, 2003 U.S. Dist. LEXIS 1225 (S.D.N.Y. Jan. 24, 2003). “Personal liability will be
imposed only if the plaintiff shows that the officer or employee acted outside the scope of his
employment by committing an independent tort or by pursuing a personal interest.” Id. at *77
(citing Foster v. Churchill, 87 N.Y.2d 744, 751, 642 N.Y.S.2d 583, 587, 665 N.E.2d 153 (1996)).
In this regard, “[a] cause of action seeking to hold corporate officials personally responsible
for the corporation’s breach of contract is governed by an enhanced pleading standard,” namely, “ ‘a
pleading must allege that the acts complained of, whether or not beyond the scope of the [officer’s]
corporate authority, were performed with malice and were calculated to impair the plaintiff’s
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business for the personal profit of the officer.’ ” IMG Fragrance Brands, LLC v. Houbigant, Inc., 679
F. Supp. 2d 395, 407-08 (S.D.N.Y. 2009) (quoting Joan Hansen & Co. v. Everlast World’s Boxing
Headquarters Corp., 296 A.D.2d 103, 109-10, 744 N.Y.S.2d 384 (1st Dep’t 2002)).
Applying these standards, the Court finds that the amended complaint alleges sufficient
facts to pass muster under Rule 12(b)(6).
Initially, it is undisputed that valid contracts, namely, the Loan Agreements, existed between
the Plaintiff and Endonovo. It is further undisputed that Collier, as the chief executive officer of
Endonovo and the individual who signed the Loan Agreements on behalf of the corporation, had
actual knowledge of the contracts and their operative terms. See Kramer Aff., Ex. “B,” at p. 23.
Further, construing the alleged facts in favor of the Plaintiff, the amended complaint
sufficiently demonstrates that the Loan Agreements were actually breached when Endonovo failed
to honor the Notice of Conversion; failed to provide the requisite notice of its change in stock
transfer agent; and otherwise failed to comply with the repayment terms in the Promissory Notes.
These alleged facts, if proven, would also sufficiently support the conclusion that the Plaintiff was
damaged by the breaches.
Thus, the only remaining question is whether the amended complaint sufficiently alleges
facts to make it plausible that: (1) Collier intentionally procured Endonovo’s breach of the Loan
Agreements; and (2) he did so in pursuit of a personal interest. In the Court’s view, a review of the
amended complaint requires this question to be answered affirmatively.
Consistent with its enhanced pleading burden under New York law, the Plaintiff specifically
alleged that Collier “intentionally and with malice aforethought caused [Endonovo] to breach its
contractual agreements”; and that, driven by a desire to preserve the value of his own personal assets,
he acted “for his own financial benefit, and not for the benefit of [Endonovo].” Am. Compl. ¶ 59. In
the Court’s view, this is sufficient to state a claim for tortious interference with contract.
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Accordingly, the Defendants’ motion to dismiss the sixth cause of action based on tortious
interference is denied.
G.
As to Whether the Amended Complaint States a Plausible Claim for Equitable Relief
Finally, the fifth cause of action seeks equitable relief in the form of a mandatory injunction
compelling the Defendants to comply with their obligations under the Loan Agreements and the
Promissory Notes.
The Defendants rely on principles of res judicata for their contention that equitable relief is
barred in this case by the Court’s prior holdings in the March Opinion. In particular, as described
more fully above, the Court denied an earlier motion by the Plaintiff for provisional remedies,
including a temporary restraining order and preliminary injunction, partly on the ground that the
Plaintiff apparently would not suffer irreparable harm in the absence of preliminary equitable relief.
Now, the Defendants argue that any claim for a permanent injunction is estopped for this same
reason. The Court disagrees.
Although “Fed. R. Civ. P. 12(b)(6) is an appropriate procedural vehicle for testing a
complaint with the defense of res judicata,” Hackett v. Storey, No. 03-cv-395, 2003 U.S. Dist. LEXIS
23366, at *5-*6 (D. Conn. Dec, 30 2003), that doctrine only applies to “make[ ] a final, valid
judgment conclusive on the parties . . . as to all matters, fact and law, [that] were or should have been
adjudicated in [an earlier] proceeding,” Waldman v. Village of Kiryas Joel, 207 F.3d 105, 108 (2d Cir.
2000) (quotation marks and citation omitted)); see Amalgamated Sugar Co. v. NL Indus., Inc., 825 F.2d
634, 639 (2d Cir. 1987) (noting that “[r]es judicata will preclude relitigation of a claim where the
earlier decision was a final judgment on the merits rendered by a court of competent
jurisdiction . . . ”).
Recognizing the limited scope of the doctrine, the Second Circuit has noted that preliminary
injunctions are “tentative by nature,” and therefore, orders resolving motions for such relief “[are]
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not final judgment[s] for purposes of res judicata.” Shulz v. Williams, 44 F.3d 48, 55 n.6 (2d Cir. 1994)
(citing Goodheart Clothing Co. v. Laura Goodman Enters., 962 F.2d 268, 273-74 (2d Cir. 1992)); see Irish
Lesbian & Gay Org. v. Giuliani, 143 F.3d 638, 644-45 (2d Cir. 1998) (collecting cases for the proposition
that, “[o]rdinarily, findings of fact and conclusions of law made in a preliminary injunction
proceeding do not preclude reexamination of the merits at a subsequent trial”).
Guided by these authorities, the Court finds that its prior analysis of the Plaintiff’s
entitlement to preliminary equitable relief was not a final judgment sufficient to trigger the
preclusive effect of the res judicata doctrine. Accordingly, the Defendants’ motion to dismiss the fifth
cause of action seeking equitable relief is denied.
IV.
CONCLUSION
Based on the foregoing, the Court grants in part and denies in part the Defendants’ motion to
dismiss the amended complaint.
In particular, for the reasons set forth above, to the extent the Defendants seek to dismiss the
first, third, fourth, fifth, and sixth causes of action, their motion to dismiss is denied. However, to
the extent the Defendants seek to dismiss the second cause of action based on fraudulent
inducement, their motion to dismiss is granted.
This matter is respectfully referred to United States Magistrate Judge Anne Y. Shields for
discovery.
It is SO ORDERED:
Dated: Central Islip, New York
October 24, 2016
/s/ Arthur D. Spatt____________________________________________
ARTHUR D. SPATT
United States District Judge
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