GLENN T. SUDDABY, Chief District Judge.
Currently before the Court, in this breach-of-contract action filed by Thomas Zdanowski ("Plaintiff") against Digital Health Department, Inc. ("Defendant"), is Defendant's motion to dismiss Plaintiff's Complaint with prejudice for failure to state a claim pursuant to Fed. R. Civ. P. 12(b)(6), and Plaintiff's cross-motion to amend pursuant to Fed. R. Civ. P. 12(b)(6). (Dkt. Nos. 7, 10.) For the reasons set forth below, Defendant's motion to dismiss is granted in part and denied in part, and Plaintiff's cross-motion to amend is denied without prejudice.
Generally, liberally construed, Plaintiff's Complaint alleges as follows: (1) on February 8, 2008, Plaintiff entered into an invoicing agreement (the "Agreement") with Garrison Enterprises; (2) pursuant to the Agreement, Plaintiff would loan $100,000 to Garrison Enterprises at an annual interest rate of eighteen percent; (3) the Agreement matured on December 31, 2012; (4) since that time Plaintiff has not been paid the principal or interest due according to the Agreement; (5) in February 2013, all or substantially all of Garrison Enterprises' assets were sold to Defendant, which has refused to pay Plaintiff; (6) because of the continuity of ownership, management, personnel, and general business operation, the uninterrupted continuation of business after Garrison Enterprises was acquired and the dissolution of Garrison Enterprises, a de facto merger occurred between Garrison Enterprises and Defendant; (7) because a de facto merger occurred, Defendant is liable for the debts of Garrison Enterprises, including the liability to Plaintiff for breaching the Agreement; and (8) Defendant is in debt to Plaintiff for the original $100,000 loan plus $57,978.12 in interest pursuant to the Agreement. (See generally Dkt. No. 2 [Plf.'s Compl.].) Based on these factual allegations, Plaintiff's Complaint asserts a claim of breach of contract. (Id.) Familiarity with the factual allegations supporting this claim in Plaintiff's Complaint is assumed in this Decision and Order, which is intended primarily for the review of the parties. (Id.)
Generally, in support of its motion to dismiss, Defendant argues as follows: (1) Defendant was not a party to the Agreement and is not restricted by its terms; (2) Plaintiff has not alleged facts plausibly suggesting all four elements of the de facto merger theory of successor liability; (3) with respect to the first element (i.e., the continuation of management, personnel, physical location, assets, and general business operations of the seller), Plaintiff has named only one person; (4) with respect to the second element (i.e., the continuity of shareholders achieved by paying for the acquired assets via transfer, to the seller's shareholders, of shares in the purchasing corporation), continuity of shareholders between the transferor and the transferee did not exist as Plaintiff has inferred because Defendant paid cash for Garrison Enterprises, which was easily discoverable with the pre-lawsuit inquiry; (5) with respect to the third element (i.e., the seller ceasing its ordinary business operations, liquidating, and dissolving as soon as legally and practically possible), Plaintiff has not alleged that Garrison Enterprises ceased its ordinary business operations, liquidated, and dissolved as soon as legally and practically possible after the sale; (6) with respect to the fourth element (i.e., the assumption by the purchaser of those liabilities and obligations of the seller ordinarily necessary for the uninterrupted continuation of normal business operations of the seller), a provision in the Agreement that binds "successors and assignees" does not prove that a stranger to the Agreement is bound by its terms. (See generally Dkt. No. 7, Attach. 3 [Def.'s Memo. of Law].)
Generally, in Plaintiff's response to Defendant's motion, he argues as follows: (1) Defendant's denial of the truth of Plaintiff's allegation is unavailing because the allegations in Plaintiff's Complaint must be taken as true for the purposes of a claim under Fed. R. Civ. P. 12(b)(6); (2) the original Complaint alleges enough facts to plausibly suggest a de facto merger between Defendant and Garrison Enterprises; (3) if the Court does not find the original claim survives a motion to dismiss, Plaintiff alleges in his Amended Complaint another exception to the rule against successor liability, i.e., the mere-continuation theory of successor liability; (4) at the time of the sale, the officers and directors of both Garrison Enterprises and Defendant were the same, including Rahul Saxena serving as CEO of both companies, satisfying the first element of mere continuation (only one corporation remained after the transfer); (5) at the time Garrison Enterprises sold all or substantially all of its assets to Defendant, Seraph Group was the same shareholder of both Defendant and Garrison Enterprises, satisfying the second element (identity of stockholders and directors between the two corporations); (6) the sale of all of the assets of Garrison Enterprises was for less than fair market value, satisfying the third element (inadequate consideration for the purchase); (7) Defendant and Garrison Enterprises entered into the sale in order to avoid paying Plaintiff, satisfying the fourth element (lack of some elements of a good faith purchaser for value). (See generally Dkt. No. 10, Attach. 4 [Plf.'s Opp'n Memo. of Law].)
Generally in its reply, Defendant argues as follows: (1) Plaintiff has done nothing to cure the pleading defects in his breach-of-contract claim under a de facto merger theory of successor liability; (2) Plaintiff's Complaint is a formulaic recitation of the four elements of a merecontinuation theory of successor liability, and Plaintiff's allegations are unwarranted deductions of fact; (2) with regard to the first element (i.e., the existence of only one corporation remaining after the transfer of assets), Plaintiff failed to allege any facts plausibly suggesting that only one corporation remained after the transfer of assets; (3) with regard to the second element (i.e., the identify of stockholders and directors between the two corporations), the identity of one person does not satisfy the requirement of the identify of stockholders and directors between corporations; (4) with regard to the third element (i.e., the existence of inadequate consideration for the purchase), Plaintiff does not allege any facts plausibly suggesting inadequate consideration for the sale of Garrison Enterprises (and he does specify what constitutes adequate consideration for the sale of Garrison Enterprises); and (5) with regard to the fourth element (i.e., the lack of some of the elements of a good-faith purchaser for value), Plaintiff has failed to allege facts plausibly suggesting that Defendant was not a good-faith purchaser. (See generally Dkt. No. 11 [Def.'s Reply Memo. of Law].)
Generally, in support of its motion to amend, Plaintiff argues as follows: (1) pursuant to Fed. R. Civ. P. 15(a)(1)(B), he is allowed to amend the complaint as a matter of right within twenty one days after the service of his complaint; (2) absent undue delay, bad faith, or undue prejudice, leave to amend should be freely given; (3) leave to amend must be given so the case may be resolved on the merits, as the Federal Rules intend; and (4) leave is necessary for Plaintiff to allege new facts in support of an additional claim, mere continuation. (See generally Dkt. No. 10 [Plf.'s Reply Memo. of Law].)
Generally, in Defendant's response to Plaintiff's motion, he argues as follows: (1) Plaintiff has failed to satisfy the standard to amend his Complaint; (2) Plaintiff's proposed amendments with respect to the de facto merger theory of successor liability have done nothing to correct the pleading deficiencies of his breach-of-contract claim, rendering the claim futile; (3) Plaintiff's proposed amendment to add a mere continuation claim is also futile because he has not alleged facts plausibly suggesting that theory; and (4) although the Court must take Plaintiff's amended claims as true, the majority of them are false, and a reasonable pre-suit inquiry would reveal the falsity of those claims. (See generally Dkt. No. 11 [Def.'s Reply Memo. of Law].)
It has long been understood that a dismissal for failure to state a claim upon which relief can be granted, pursuant to Fed. R. Civ. P. 12(b)(6), can be based on one or both of two grounds: (1) a challenge to the "sufficiency of the pleading" under Fed. R. Civ. P. 8(a)(2); or (2) a challenge to the legal cognizability of the claim. Jackson v. Onondaga Cnty., 549 F.Supp.2d 204, 211, nn.15-16 (N.D.N.Y. 2008) (McAvoy, J., adopting Report-Recommendation on de novo review).
Because such dismissals are often based on the first ground, a few words regarding that ground are appropriate. Rule 8(a)(2) of the Federal Rules of Civil Procedure requires that a pleading contain "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2) [emphasis added]. In the Court's view, this tension between permitting a "short and plain statement" and requiring that the statement "show[]" an entitlement to relief is often at the heart of misunderstandings that occur regarding the pleading standard established by Fed. R. Civ. P. 8(a)(2).
On the one hand, the Supreme Court has long characterized the "short and plain" pleading standard under Fed. R. Civ. P. 8(a)(2) as "simplified" and "liberal." Jackson, 549 F. Supp. 2d at 212, n.20 (citing Supreme Court case). On the other hand, the Supreme Court has held that, by requiring the above-described "showing," the pleading standard under Fed. R. Civ. P. 8(a)(2) requires that the pleading contain a statement that "give[s] the defendant fair notice of what the plaintiff's claim is and the grounds upon which it rests." Jackson, 549 F. Supp. 2d at 212, n.17 (citing Supreme Court cases) (emphasis added).
The Supreme Court has explained that such fair notice has the important purpose of "enabl[ing] the adverse party to answer and prepare for trial" and "facilitat[ing] a proper decision on the merits" by the court. Jackson, 549 F. Supp. 2d at 212, n.18 (citing Supreme Court cases); Rusyniak v. Gensini, 629 F.Supp.2d 203, 213 & n.32 (N.D.N.Y. 2009) (Suddaby, J.) (citing Second Circuit cases). For this reason, as one commentator has correctly observed, the "liberal" notice pleading standard "has its limits." 2 Moore's Federal Practice § 12.34[1][b] at 12-61 (3d ed. 2003). For example, numerous Supreme Court and Second Circuit decisions exist holding that a pleading has failed to meet the "liberal" notice pleading standard. Rusyniak, 629 F. Supp. 2d at 213, n.22 (citing Supreme Court and Second Circuit cases); see also Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949-52 (2009).
Most notably, in Bell Atlantic Corp. v. Twombly, the Supreme Court reversed an appellate decision holding that a complaint had stated an actionable antitrust claim under 15 U.S.C. § 1. Bell Atlantic Corp. v. Twombly, 127 S.Ct. 1955 (2007). In doing so, the Court "retire[d]" the famous statement by the Court in Conley v. Gibson, 355 U.S. 41, 45-46 (1957), that "a complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Twombly, 127 S. Ct. at 1968-69. Rather than turn on the conceivability of an actionable claim, the Court clarified, the "fair notice" standard turns on the plausibility of an actionable claim. Id. at 1965-74. The Court explained that, while this does not mean that a pleading need "set out in detail the facts upon which [the claim is based]," it does mean that the pleading must contain at least "some factual allegation[s]." Id. at 1965. More specifically, the "[f]actual allegations must be enough to raise a right to relief above the speculative level [to a plausible level]," assuming (of course) that all the allegations in the complaint are true. Id.
As for the nature of what is "plausible," the Supreme Court explained that "[a] claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009). "[D]etermining whether a complaint states a plausible claim for relief . . . [is] a context-specific task that requires the reviewing court to draw on its judicial experience and common sense. . . . [W]here the well-pleaded facts do not permit the court to infer more than the mere possibility of misconduct, the complaint has alleged-but it has not show[n]-that the pleader is entitled to relief." Iqbal, 129 S.Ct. at 1950 [internal quotation marks and citations omitted]. However, while the plausibility standard "asks for more than a sheer possibility that a defendant has acted unlawfully," id., it "does not impose a probability requirement." Twombly, 550 U.S. at 556.
Because of this requirement of factual allegations plausibly suggesting an entitlement to relief, "the tenet that a court must accept as true all of the allegations contained in the complaint is inapplicable to legal conclusions. Threadbare recitals of the elements of a cause of action, supported by merely conclusory statements, do not suffice." Iqbal, 129 S. Ct. at 1949. Similarly, a pleading that only "tenders naked assertions devoid of further factual enhancement" will not suffice. Iqbal, 129 S.Ct. at 1949 (internal citations and alterations omitted). Rule 8 "demands more than an unadorned, the-defendant-unlawfully-harmed-me accusation." Id. (citations omitted).
This pleading standard applies even to pro se litigants. While the special leniency afforded to pro se civil rights litigants somewhat loosens the procedural rules governing the form of pleadings (as the Second Circuit has observed), it does not completely relieve a pro se plaintiff of the duty to satisfy the pleading standards set forth in Fed. R. Civ. P. 8, 10 and 12.
Finally, a few words are appropriate regarding what documents are considered when a dismissal for failure to state a claim is contemplated. Generally, when contemplating a dismissal pursuant to Fed. R. Civ. P. 12(b)(6) or Fed. R. Civ. P. 12(c), the following matters outside the four corners of the complaint may be considered without triggering the standard governing a motion for summary judgment: (1) documents attached as an exhibit to the complaint or answer, (2) documents incorporated by reference in the complaint (and provided by the parties), (3) documents that, although not incorporated by reference, are "integral" to the complaint, or (4) any matter of which the court can take judicial notice for the factual background of the case.
The decision whether to grant a motion to amend a complaint lies within the discretion of the Court. Fed. R. Civ. P. 15(a). Granting leave to amend a complaint "`shall be freely given when justice so requires.'" Forman v. Davis, 371 U.S. 178, 182 (1962), quoting Fed. R. Civ. P. 15[a]). Leave to amend a complaint should be denied only in the face of undue delay, bad faith, undue prejudice to the non-movant, futility of amendment, or where the movant has repeatedly failed to cure deficiencies in previous amendments. Forman, 371 U.S. at 182, 83; Kropelnicki v. Siegel, 290 F.3d 118, 130 (2d Cir. 2002) (citing Chill v. Gen. Elec. Co., 101 F.3d 263, 271-72 [2d Cir. 1996]).
Because the parties to this action have demonstrated, in their memoranda of law, an accurate understanding of the legal standards governing Plaintiff's theories of liability in this action, the Court will not recite, in their entirety, those legal standards in this Decision and Order, which (again) is intended primarily for the review of the parties.
After carefully considering the matter, the Court answers this question in the affirmative generally for the reasons stated in Defendant's memoranda of law. See, supra, Part I.B. of this Decision and Order. To those reasons, the Court adds only two points.
First, for Plaintiff to state a claim under a theory of successor liability (specifically, a de facto merger theory of successor liability), Plaintiff must allege facts plausibly suggesting the four elements of a de facto merger. Lattimore & Assocs, LLC v. Steakhouse, Inc., 10-CV-14744, 2012 WL 1925729, at *11 (N.C. Super. Ct. May 25, 2012). Plaintiff has not done so here-specifically, with regard to the fourth element (i.e., the assumption by the purchaser of the liabilities and obligations of the seller) and part of the first element (i.e., the continuation of management personnel).
Second, although Plaintiff's breach-of-contract claim is deficient, the Court believes it may be possible for Plaintiff to amend his Complaint to sufficiently allege the elements of a theory of successor liability (specifically, a de facto merger theory of successor liability). As a result, the Court will afford Plaintiff a reasonable opportunity to correct the pleading deficiencies in this breach-of-contract claim. See Cresci v. Mohawk Valley Cmty. Coll., No. 15-3234, 2017 WL 2392470, at *3 (2d Cir. June 2, 2017) ("[T]he District Court . . . [erred in] denying Cresci an opportunity to amend after the court . . . [granted] Defendant's motion to dismiss.").
After carefully considering the matter, the Court answers this question in the negative. Plaintiff originally filed his Amended Complaint as an unsigned attachment to a cross-motion to amend. However, the Amended Complaint was filed within the twenty-one days of the service of Defendant's motion to dismiss, as permitted by Fed. R. Civ. P. 15(a)(1)(A). Therefore, a signed Amended Complaint could have been filed as of right. However, Plaintiff did not sign his Amended Complaint; rather, proceeding by counsel, he chose to file a motion to amend. As a result, the Court must decide that motion.
While the Court finds no undue delay, bad faith, undue prejudice, or repeated failure to cure pleading deficiencies, one of the prongs of the legal standard governing a motion to amend regards an examination of whether the proposed pleading is futile (i.e., whether the proposed claim states a claim upon which relief can be granted). See, supra, Part II.B. of this Decision and Order. As a result, the Court will analyze whether Plaintiff's proposed claim is futile.
After carefully considering the matter, the Court answers this question in the affirmative generally for the reasons stated in Defendant's memoranda of law. See, supra, Part I.B. of the Decision and Order. To those reasons, the Court adds two points.
First, for Plaintiff to state a claim under a theory of successor liability (specifically, a mere-continuation theory of successor liability), Plaintiff must allege facts plausibly suggesting four elements of a mere continuation. Plaintiff has not done so here-specifically, with regard to the third element (i.e., the existence of inadequate consideration for the purchase) and the fourth element (i.e., the lack of some of the elements of a good-faith purchaser for value).
Second, although Plaintiff's proposed claim is deficient, the Court believes it may be possible for Plaintiff to amend his Complaint to sufficiently allege the elements of a theory of successor liability (specifically, a mere-continuation theory of successor liability). As a result, the Court will afford Plaintiff a reasonable opportunity to correct the pleading deficiencies in this proposed breach-of-contract claim.
