Levy v. Levy et al

Filing 24

MEMORANDUM & OPINION - For the foregoing reasons, Plaintiffs Motion for Summary Judgment will be denied. Because the sale issue before the Court is Plaintiffs Motion for Summary Judgment on Defendants' Counterclaim for fraudulent inducement, the Court will not address the factual dispute as to whether Rick and Fred ever created an oral contract for Fred and Pazzo to buyout Rick's interest in Pazzo. Aseparate Order follows. Signed by Honorable Robert D. Mariani on 1/3/13. (jfg)

THE UNITED STATES DISTRICT COURT

FOR THE MIDDLE DISTRICT OF PENNSYLVANIA

RICHARD LEVY

Plaintiff

v.

3:11·CV·364
(JUDGE MARIANI)

FREDERICK LEVY, PAZZO, INC.

Defendants
MEMORANDUM OPINION

I. Introduction
Before the Court is Plaintiffs Motion for Summary Judgment on Defendants'
Counterclaim for Fraudulent Inducement (Doc. 18). For the reasons that follow, the Court
will deny Plaintiffs motion.

II. Statement of Undisputed Facts
Plaintiff Richard Levy ("Rick") and Defendant Frederick Levy ("Fred") are first cousins
who were formerly equal shareholders in Defendant Pazzo, Inc. ("Pazzo"), a wholesaler of
women's shoes. Before forming Pazzo, they "had worked together for more than twenty
(20) years in the family-owned business known as B. Levy & Son." (Plaintiffs Statement of
Facts ("SOF"), Doc. 18, Ex. 1, ~ 9). In approximately March 1997, Fred founded Pazzo,
which was formally incorporated on March 26,1997. (Id. at mI 10-11). Pazzo is in the
business of selling and distributing shoes. (Id. at ~ 12).

I

1
f

"In or about May, 1997, B. Levy &Son's lender liquidated the merchandise and

inventory of B. Levy & Son by, inter alia, selling some of the remaining merchandise and
inventory to Pazzo, Inc." (Id. at 1f 13). Soon thereafter, "Plaintiffs employment at B. Levy &
Son ceased," and he "invested $250,000.00 in Pazzo, Inc., which was the same amount
invested by Defendant Fred Levy when he had formed Pazzo, Inc. approximately two (2)
months earlier." (Id. at 1m 14-15). Plaintiff and Defendant "agreed that they owned the
Company in equal shares." (/d. at1f 16).
Plaintiff and Defendant "worked together at Pazzo, Inc. for ten (10) years but then,
during 2007, for a variety of business and financial reasons, Plaintiff suggested to
Defendant Fred Levy that the business operations of Pazzo, Inc. be wound-Up and the
business be dissolved." (Id. at 1f 18).
In September 2007, Fred believed that he and Rick had reached an agreement by
which Rick would sell his interest in Pazzo to Fred. The parties relied on their uncle, Irwin
Levy, "to draft the terms of their agreement based upon telephone discussions with their
uncle." (/d. at1f 19). On September 25,2007, Irwin Levy sent a draft Memorandum
Agreement incorporating the terms to which he believed Rick and Fred had agreed.
(Comp!., Ex. A). Although the parties agree that they never signed a final written
agreement, they dispute whether an orally binding contract was ever created.
In September 2007, Plaintiffs employment at Pazzo ceased, but he continued to
engage in efforts to collect outstanding accounts receivable of Pazzo so he could obtain his

2

collateral back from Milberg Factors, Pazzo's financing company. (SOF at ~ 20). Fred

advised Pazzo's financing company, Milberg Factors, that he had bought out Plaintiff's
interest in Pazzo and requested Milberg to release Plaintiff's posted collateral. (/d. at ~ 28).
Defendants counterclaimed for fraudulent inducement and are seeking damages in
excess of $250,000. (Counterclaim, Doc. 9, at ~ 10). Fred admitted that he, as President of
Pazzo, filed federal tax returns that declared he and Plaintiff each owned fifty percent (50%)
of Pazzo for tax years 2006 and 2007. (SOF at ~ 26). However, Fred declared that he
owned one hundred percent (100%) of Pazzo for tax year 2008. (ld. at ~ 27). Fred has
admitted that he has never paid Plaintiff any amount of money to purchase Plaintiff's fifty
percent (50%) ownership interest in Pazzo. (/d. at ~ 30).
III. Analysis

a. Standard on Motion for Summary Judgment

Through summary adjudication the court may dispose of those claims that do not

present a"genuine issue as to any material fact." FED. R. CIV. P. 56(a). "As to materiality, ...
[o]nly disputes over facts that might affect the outcome of the suit under the governing law will

;

!
f

properly preclude the entry of summary judgment." Anderson v. Liberty Lobby, Inc., 477 U.S.

I

242,248, 106 S. Ct. 2505, 2510,91 L. Ed. 2d 202 {1986}. The party moving for summary

l

judgment bears the burden of showing the absence of agenuine issue as to any material fact.
Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S. Ct. 2548, 2552,91 L. Ed. 2d 265 (1986).

t

I

I

Once such ashowing has been made, the non-moving party must offer specific facts

I
3

contradicting those averred by the movant to establish agenuine issue of material fact. Lujan
v. Nat'l Wildlife Fed'n, 497 U.S. 871, 888, 110 S. Ct. 3177, 111 LEd. 2d 695 (1990).

"Inferences should be drawn in the light most favorable to the non-moving party, and where the
non-moving party's evidence contradicts the movant's, then the non-movant's must be taken as
true." Big Apple BMW, Inc. v. BMW of N. Am., Inc., 974 F.2d 1358, 1363 (3d Cir. 1992), cert.
denied 507 U.S. 912 (1993).

b. Discussion
Defendant's sale counterclaim against Plaintiff is for common law fraudulent
inducement. Plaintiff advances two arguments in support of his motion for summary
judgment on Defendant's counterclaim: (1) Defendant cannot assert fraudulent
misrepresentation for failure to perform afuture act and (2) Defendant's claim is barred by
the "gist of the actionll doctrine. Both of these arguments are assertions of law which the
Court can address without resolving the facts of this case.

I

!

f
t

To establish a fraudulent inducement claim under Pennsylvania law, Defendant must
prove the following elements:
(1) a representation; (2) which is material to the transaction at hand; (3) made
falsely, with knowledge of its falsity or recklessness as to whether it is true or

false; (4) with the intent of misleading another into relying on it; (5) justifiable

reliance on the misrepresentation; and (6) the resulting injury was proximately

caused by the reliance.

Eigen v. Textron Lycoming Reciprocating Engine Div" 874 A.2d 1179, 1185 (Pa. Super. Ct.

2005). Defendant must prove the elements of fraud with clear and convincing evidence.

I
I

I

I

I
4

EBC, Inc. v. Clark Bldg. Sys., Inc., 618 F.3d 253,275-76 (3d Cir. 2010) (citing Skurnowicz v.

Lucci, 798 A.2d 788, 793 (Pa. Super. Ct. 2002)). "Scienter, or the maker's knowledge of the
untrue character of his representation, is a key element in 'finding fraudulent
misrepresentation." Ira G. Steffy & Son, Inc. v. Citizens Bank of Pennsylvania, 7 A.3d 278,
290 (Pa. Super. Ct. 2010).
"It is well-established that the breach of a promise to do something in the future is
not actionable in fraud." Id. (internal citations and quotation marks omitted). However, "[a]
statement as to future plans or intentions is not fraudulent under Pennsylvania law unless it
knowingly misstates the speaker's true state of mind when made." Nat'l Data Payment Sys.

Inc. v. Meridian Bank, 212 F.3d 849, 858 (3d Cir. 2000) (citing College Watercolor Group,
Inc. v. William H. Newbauer, Inc. 360 A.2d 200, 206 (Pa. 1976)) (emphasis added).
Defendant has alleged that Plaintiff
represented to Fred that he would sign a written agreement incorporating the
terms to which they agreed during the Fall 2007 after Fred obtained the
release of his $150,000 collateral from Milberg knowing that his
representation was false when he made it and with the sole intent that Fred
would rely on it.
(Counterclaim, Doc. 9, 1f 9). The counterclaim rests on Defendant's contention that Plaintiff
misrepresented his true state of mind when he promised to sign a written agreement in the
future. Because Defendant has alleged more than a mere failure to perform afuture act,
Plaintiffs argument fails. The misrepresentation, if true, was a "misrepresentation of a ...

5

present material fact" because the statement was false when made. See Krause v. Great

Lakes Holdings, Inc., 563 A.2d 1182, 1187 (Pa. Super. Ct. 1989).
Furthermore, Defendant's counterclaim is not barred by the "gist of the action"
doctrine, which "is designed to maintain the conceptual distinction between breach of
contract claims and tort claims. As a practical matter, the doctrine precludes plaintiffs from
re-casting ordinary breach of contract claims into tort claims." Mirizio v. Joseph, 4 A.3d
1073, 1079 (Pa. Super. Ct. 2010). "While the gist of the action doctrine may bar a tort claim
arising from the performance of a contract it does not bar afraud claim stemming from the
fraudulent inducement to enter into a contract." Id. at 1085 (emphasis added).
Fred has claimed that Rick "refused to sign any agreement memorializing the terms
for Pazzo's purchase of his interest until Milberg released his collateral." (Counterclaim, 11

f

4). In reliance on Rick's promise to sign awritten agreement after Milberg released Rick's

I

collateral to Rick, IIFred provided $150,000 additional collateral to Milberg to obtain the

~

release of Richard's $150,000 collateral from Milberg. Richard's collateral was released to
him on or about January 8, 2008." (ld. at 11 5). Thereafter, Rick "refused to sign the formal,
written agreement with Pazzo incorporating the terms upon which he and Fred had
previously agreed for Pazzo's purchase of Richard's interest. Rather, Richard denied that
there was ever any agreement on the terms for Pazzo's purchase of his interest." (ld. at 11

6

t

1

I

6). These allegations are collateral to whatever contract Rick and Fred may have entered,1
and thus, Defendant's counterclaim is not barred by the "gist of the action" doctrine.

IV. Conclusion
For the foregoing reasons, Plaintiffs Motion for Summary Judgment will be denied.
Because the sale issue before the Court is Plaintiffs Motion for Summary Judgment on
Defendants' Counterclaim for fraudulent inducement, the Court will not address the factual
dispute as to whether Rick and Fred ever created an oral contract for Fred and Pazzo to
buyout Rick's interest in Pazzo. A separate Order follows.

obert D. Mariani
United States District Court Judge

1 As stated before, Plaintiff claims that he and Defendant Fred Levy reached an oral agreement, whereas
Fred claims that they never resolved an essential term to the contract, meaning they never reached an agreement. If
they never formed a contract, then Defendant's counterclaim would not be barred by the "gist of the action" doctrine
because there is no possibility of bringing a redundant claim. If they did form a contract, the doctrine still would not
bar Defendant's counterclaim, because Fred asserts that Plaintiff's promise of a written agreement incorporating the
essential terms Fred desired (i.e., that Rick would bear half of any contingent liabilities incurred but undiscovered
during Rick's period of ownership) induced him to obtain the release of Plaintiff's collateral by Milberg Factors.
(Fred Levy Dep., Doc. 18, Ex. B, at 94:5~95:4).
The draft Memorandum Agreement (Compl., Ex. A, 11 2) does not place any time limitations on Rick's
potential contingent liabilities, which is what Fred insists he and Rick agreed upon, whereas Fred testified that Rick
sent him multiple e-mails in January 2008 (which are not part of the record) disputing that Rick could potentially
remain liable for contingencies indefmitely. (Fred Levy Dep., at 155:2-158:10) (quoting from Rick's e-mail, "It has
been nearly six months so everything should have popped up by now."). Furthermore, Rick sent two proposed
Memorandum Agreements to Fred in 2008 and 2009 which placed time limitations on any contingencies for which
Rick might be liable (id. at 92:9-95:4; see also Rick Levy Dep., Doc. 18, Ex. C, at 104:23-105:24). Finally, Rick
acknowledged that Fred was concerned about potential, yet undiscovered, liabilities for which Rick might be
responsible. (Rick Levy Dep., at 88:18-22; 91:19-92:21). There are material issues offact that preclude any finding
as to the existence of an oral agreement between Rick and Fred that makes the instant motion inappropriate for
resolution on summary judgment.

7

f

I