RICHARD J. ARCARA, District Judge.
The above-referenced case was referred to Magistrate Judge Leslie G. Foschio, pursuant to 28 U.S.C. § 636(b)(1)(B). On June 4, 2012, Magistrate Judge Foschio filed a Report and Recommendation, recommending that third-party defendants John Giardino and Adam Greenberger's motion to dismiss be granted.
The Court has carefully reviewed the Report and Recommendation, the record in this case, and the pleadings and materials submitted by the parties, and no objections having been timely filed, it is hereby
SO ORDERED.
LESLIE G. FOSCHIO, United States Magistrate Judge.
This matter was referred to the undersigned for all pretrial matters by order of Hon. Richard J. Arcara on December 13, 2010 (Doc. No. 31). It is now before the court on Third-Party Defendants' Motion to Dismiss filed October 4, 2011 (Doc. No. 119).
This action was initially commenced on September 1, 2010 by Plaintiff's subsidiary MarCone APW, LLC ("Mar-Cone APW") in the Eastern District of Missouri (St. Louis) alleging inter alia breach of contract and fiduciary duty against Defendant Michael Mangan ("Mangan") and tortious interference, unfair competition and conversion claims against Mangan and the Servall Company ("Servall"). The case was transferred to this district on December 10, 2010, for lack of personal jurisdiction over Mangan and improper venue (Doc. No. 27). Plaintiff's motion for leave to file a second amended complaint was granted by Decision and Order filed April 28, 2011 (Doc. No. 59).
Following filing, on May 15, 2011 (Doc. No. 65), of an answer to the Second Amended Complaint with counterclaims Mangan moved as required by Fed. R.Civ.P. 14(a), on June 7, 2011, for leave to serve a Third-Party Complaint (Doc. No. 69), which was granted on August 9, 2011 (Doc. No. 102). Mangan's Third-Party Complaint was filed on August 11, 2011 (Doc. No. 105) ("Third-Party Complaint") against Third-Party Defendants John Giardino ("Giardino") and Adam Greenberger ("Greenberger") (together "Third-Party Defendants").
By papers filed October 4, 2011, Third-Party Defendants moved, in lieu of answer, pursuant to Fed.R.Civ.P. 12(b)(1), 12(b)(6), and 12(c), to dismiss the Third-Party Complaint (Doc. No. 119) ("Third-Party Defendants' motion"). At the same time, Third-Party Defendants filed the Declaration of Edward Fogarty, Jr. in Support of Motion to Dismiss Third-Party Complaint ("Fogarty Declaration") (Doc. No. 120) together with Exhibits A-H ("Fogarty Declaration Exh(s). ____")
On November 4, 2011, in opposition to the Third-Party Defendants' motion, Mangan filed the Affidavit of Patricia Gillen (Doc. No. 126) ("Gillen Affidavit") and the Affidavit of Michael G. Mangan ("Mangan Affidavit") (Doc. No. 126-1) together with Exhibits A-D ("Mangan Affidavit Exh(s). ____")
A.P. Wagner, Inc. ("APW"), based in Depew, New York, was a major supplier of appliance replacement parts to wholesalers located in the Northeast region of the United States. Second Amended Complaint ¶ 8. Mangan joined APW in 1990, becoming executive vice-president in 2006 and later its president. Id. ¶ 10; Mangan Affidavit I ¶¶ 2-3. In June 2006, APW was acquired by APW Holding, Inc. ("APW Holding"), a Delaware corporation of which Giardino and Greenberger were majority shareholders, at which time Mangan received 75 shares of APW Holding constituting 1.709% of this company's stock. Mangan Affidavit II ¶¶ 4, 6; Third-Party Complaint ¶¶ 20-21; Fogarty Declaration Exh. E ¶ 1 (Subscription Agreement for Non-Voting Common Stock of APW Holding, Inc. ("Subscription Agreement")).
Mar-Cone is also a major distributor of appliance replacement parts headquartered in St. Louis, Missouri. Second Amended Complaint ¶ 1. Servall, headquartered in Michigan, is one of Mar-Cone's prime competitors. Id. ¶ 9. In January 2010, Mar-Cone acquired all of the assets of APW Holding particularly APW and its customer lists and goodwill. Id. ¶ 11; Mangan Affidavit I ¶ 4.
In connection with Mar-Cone's asset purchase of APW, Mangan signed, on December 30, 2009, a Non-Disclosure Agreement with Mar-Cone APW, LLC as a shareholder of APW Holding, Fogarty Declaration Exh. F ("Non-Disclosure Agreement"), which required Mangan to maintain as confidential Mar-Cone's proprietary information including APW's customer lists and prospective customer information acquired by Mar-Cone through its purchase of APW Holding's assets pursuant to a purchase agreement between Mar-Cone APW LLC and APW Holding ("the Purchase Agreement").
Giardino and Greenberger became principal shareholders of APW Holding and APW in 2006, and allowed Mangan to acquire, pursuant to a stockholders agreement, a 1.8% stock ownership interest in APW
Mangan further alleges that had he known the APW sale was to be an asset sale, he could have, under the New York Business Corporation Law, objected to the sale and elected to require APW to repurchase his shares, again avoiding Mohawk Doctrine restrictions. Id. ¶ 37. Based on these allegations, Mangan asserts Giardino and Greenberger breached their "fiduciary duties" to Mangan rendering them subject to contribution for any damages imposed on Mangan under Mar-Cone's Mohawk Doctrine claim against Mangan. Id. ¶ 40.
For a second contribution claim, Mangan alleges Greenberger's misrepresentation regarding the stock nature of the expected APW sale was false and material which induced Mangan into a belief his employment with Mar-Cone was secure, and that he had no right to demand APW to "repurchase his shares prior to the sale of APW to Mar-Cone." Id. ¶¶ 43-44. According the Mangan, his reliance on Greenberger's misrepresentation was justifiable and Greenberger therefore is subject to a claim for contribution in the event Mangan is held liable to Mar-Cone for violation of Mar-Cone's rights under the Mohawk Doctrine. Id. ¶¶ 45-46.
Although Third-Party Defendants moved pursuant to Fed.R.Civ.P. 12(b)(1)
Third-party claims, including as in this case, for contribution, brought pursuant to Fed.R.Civ.P. 14(a), require a basis for the exercise of subject matter jurisdiction by a district court. Steven Baicker-McKee, William M. Jenssen, John B. Carr, FEDERAL CIVIL RULES HANDBOOK (West-Thomson Reuter 2012) at 535. Here, as Mangan and Third-Party Defendants are all domiciled in New York, no basis for diversity jurisdiction under 28 U.S.C. § 1332 for Mangan's Contribution Claims exists. Nor, as Mangan's Contribution Claims are founded on N.Y. C.P.L.R. § 1401 ("§ 1401") do they constitute claims arising under federal law creating federal claim subject matter jurisdiction pursuant to 28 U.S.C. § 1331. Accordingly, as Mangan asserts, Third-Party Complaint ¶ 14 (court "has ancillary jurisdiction over" third-party complaint), subject matter jurisdiction for Mangan's Contribution Claims must be based upon the court's supplemental jurisdiction pursuant to 28 U.S.C. § 1367(a). See Grimes v. Mazda North American Operations, 355 F.3d 566, 573 (6th Cir.2004). "Third-party claims by defendants for contribution against a third-party under Federal Rules of Civil Procedures 14(a) generally ... fall within the court's supplemental jurisdiction if the impleaded defendant's actions share a `common nucleus of operative fact' with the case already before the court." Grimes, 355 F.3d at 572; Federman v. Empire Fire and Marine Ins. Co., 597 F.2d 798, 811 (2d Cir.1979) (subject matter jurisdiction over contribution claims based on professional negligence available under court's ancillary jurisdiction arising out of same transaction as alleged in complaint asserting securities fraud where third-party defendant was alleged to have assisted in preparation of materially false registration statement upon which plaintiff's claims against defendant were based). See also Metro Foundation Contractors, Inc. v. Arch Ins. Co., 2011 WL 2150466, *4 (S.D.N.Y. May 31, 2011) (absent diversity of citizenship between plaintiff and third-party defendant subject matter jurisdiction over third-party defendant's cross-claim against plaintiff must be exercised under court's supplemental jurisdiction pursuant to 28 U.S.C. § 1367(a)). Joining a third-party defendant non-diverse to plaintiff in the underlying action based on diversity of plaintiff and defendant does not destroy subject matter jurisdiction grounded on the court's diversity jurisdiction over plaintiff's claim. See Spring City Corporation v. American Buildings Company, 193 F.3d 165, 169 (3rd Cir.1999) (presence of third-party defendant non-diverse to plaintiff and third-party plaintiff does not destroy subject matter jurisdiction over plaintiff's claim); Metro Foundation Contractors, Inc., 2011 WL 2150466, *4 (limitations of 28 U.S.C. § 1367(b) applicable only to claims by plaintiff against third-party defendant).
As discussed, Discussion, infra, at 368-69, a diversion of business good will by a seller of a business is considered an actionable business tort under New York law. As alleged in the Third-Party Complaint, the sale of APW, including its customer good will, to Mar-Cone as an asset of APW Holding was accomplished without notice and the participation of Mangan as a part owner of APW through his minority shareholder position in APW Holding, an entity controlled by Giardino and Greenberger. Third-Party Complaint ¶¶ 21, 31, 33, 36. Mangan does not dispute that he received significant financial consideration for his shares as part of the asset sale transaction which resulted in the merger of APW's assets including its good-will into Mar-Cone. Mangan's Contribution Claims turn on the theory that Giardino and Greenberger violated certain legal duties owed Mangan under fiduciary obligations imposed by New York law upon majority shareholders intending to sell the assets of a closely-held corporation and that Greenberger committed a misrepresentation actionable under New York law. As a result, according to Mangan, had Giardino and Greenberger not violated such duties Mangan could have avoided any violation of the Mohawk Doctrine by disposing of his ownership in APW prior to its sale to Mar-Cone and therefore Giardino and Greenberger's violations of such duties contributed to Mar-Cone's damages sought against Mangan.
The key fact common to both Mar-Cone's Mohawk Doctrine claim and Mangan's Contribution Claims is the sale of APW to Mar-Cone, a transaction that indisputably involved the transfer of the ownership interests of Mangan, Giardino and Greenberger in APW represented by their respective positions as minority and majority shareholders of APW Holding.
Nor should the court decline to exercise jurisdiction pursuant to 28 U.S.C. § 1367(c) ("§ 1367(c)"). Section 1367(c) authorizes the court to decline to exercise supplemental jurisdiction if the claim "raises a novel or complex issue of state law," "substantially predominates over the claim or claims over which the district court has original jurisdiction," the court "has dismissed all claims over which it has original jurisdiction," or "in exceptional circumstances, there are other compelling reasons for declining jurisdiction." 28 U.S.C. § 1367(c). Here, although whether a violation of New York's Mohawk Doctrine qualifies as tortious conduct as a prerequisite to support a potential contribution claim brought pursuant to § 1401 may raise a question of first impression under New York law, in light of the Second Circuit's recent definitive statement that the doctrine is one sounding in New York tort law, Discussion, infra, at 369 (quoting Bessemer Trust Co., 618 F.3d 76, 80 (2d Cir.2010)), and as this court, unlike a New York State court, is bound by Second Circuit precedent on point, this threshold issue cannot be said to be "novel or complex," § 1367(c)(1). Further, whether Mangan's assertions of breach of a fiduciary duty, imposed by New York corporation law, by Giardino and Greenberger, APW Holding's majority shareholders, as well as an actionable misrepresentation by Greenberger which Mangan asserts contributed to Mar-Cone's damages attributable to Mangan's Mohawk Doctrine violations may, for purposes of Third-Party Defendants' motion, be deemed sufficiently plausible to state a claim under Rule 12(b)(6), involves the application of readily discernable provisions of the New York Business Corporation law and related caselaw and established New York caselaw defining a claim of misrepresentation. Discussion, infra, at 372-75. Accordingly, the court finds the validity of Mangan's Contribution Claims do not raise "novel or complex" issues of state law requiring dismissal pursuant to § 1367(c).
Nor do Mangan's Contribution Claims predominate. Mar-Cone's claims against Mangan raise several independent grounds for liability against Mangan for infringing Mar-Cone's rights to APW's good will and misuse of confidential information quite apart from, albeit related to, its Mohawk Doctrine Claim, as well as a separate and potentially significant tortious interference claim against Servall, an entity whose alleged misconduct is not, thus far, alleged to be directly related to Mar-Cone's Mohawk Doctrine Claim against Mangan. Therefore, Mangan's Contribution Claims hinge upon the merits of only one of several other substantive claims asserted by Mar-Cone against Mangan and Servall, all equally based, like the Mangan's Contribution Claims, on New York law and therefore cannot be
Finally, although there are several related claims currently filed by Mar-Cone pending in New York Supreme Court, Erie County, there is no indication that such claims are duplicative of the claims in this instant action, or that to exercise jurisdiction over Mangan's Contribution Claims would "`frustrate judicial economy.'" Metro Foundation Contractors, Inc., 2011 WL 2150466, *5 (quoting SST Global Tech., LLC v. Chapman, 270 F.Supp.2d 444, 459 (S.D.N.Y.2003)). Relevantly, Mar-Cone's Mohawk Doctrine claim is pleaded in this court only, and its other claims against Mangan, while related, do not directly duplicate or overlap Mar-Cone's claims against Mangan in the state action (Doc. No. 142 at 3). Mangan does not dispute that Mar-Cone's Mohawk Doctrine claim is not asserted in the state court action but notes that there is a degree of overlap between the two cases in the sense that the scope of available damages against Mangan may be similar to those sought by Mar-Cone in the state action against Mangan and other defendants. Therefore, given the circumstances of this case, "it is not clear that judicial resources would be preserved by declining to exercise supplemental jurisdiction over the state [contribution] claim[s] in this case." Id. (bracketed material added).
In this action, Mar-Cone alleges, inter alia, that as a result of Mar-Cone's acquisition of APW's assets, Mangan sold his ownership interest in APW to Mar-Cone for substantial consideration.
Based on his position as a minority non-voting shareholder of APW Holding, Mangan maintains Mar-Cone's Third Claim fails to state a claim in that the sale of his APW Holding shares to Mar-Cone APW LLC was involuntary, rendering the Mohawk Doctrine inapplicable to this transaction. Mangan Affidavit II ¶¶ 3-4; ¶ 11 ("the sale of APW's assets was involuntary on my part"), ¶ 13 ("[the sale of APW] was not a voluntary decision on my part"), ¶ 14 ("involuntary sale [of good will] forced upon minority shareholder does not impose duty on that shareholder to refrain from soliciting former customers of selling company").
In the Third-Party Complaint, Mangan asserts liability against Third-Party Defendants based on indemnity and contribution in the event Mangan should be found liable to Mar-Cone under its Third Claim alleging Mangan's liability to Plaintiff under the Mohawk Doctrine. Third Party Complaint ¶¶ 40, 46. However, as Mangan has, subsequent to Third-Party Defendants' motion, withdrawn his claim based on indemnification, Gillen Affidavit ¶ 4 ("Mangan concedes that he does not have a claim for indemnification"), the court's consideration of Third-Party Defendants' motion is limited to Mangan's First and Second Claims based on contribution alone.
Mangan maintains that New York law applies to whether Mangan's Contribution Claims, as pleaded, are viable. Third-Party Plaintiff's Memorandum at 4-5; Gillen Affidavit ¶ 5(1)-(2). Specifically, Mangan contends his contribution claims against Giardino and Greenberger are predicated on New York law, specifically N.Y.C.P.L.R. § 1401 ("§ 1401"), as required under New York choice of law rules. Third-Party Plaintiff's Memorandum at 5 (citing O'Brien v. Marriot Int'l, Inc., 2006 WL 1806567, at **2-3 (E.D.N.Y. June 29, 2006) (claim for contribution is a "loss allocating rule requiring application of forum law"). Third-Party Defendants contend that under either New York or Delaware law, which Third-Party Defendants argue is applicable based on the fact that APW Holding is a Delaware corporation, Mangan may not maintain contribution claims against them as both state's contribution law requires a third-party defendant must be shown to have breached a legally cognizable duty owed to plaintiff in the main underlying action and Mangan has failed to allege either Giardino or Greenberger owed or breached any such duty to Mar-Cone. Third-Party Defendants' Memorandum at 13 (citing New York and Delaware caselaw). In addition to his reliance upon New York's Business Corporation Law, Third-Party Complaint ¶¶ 32-33; 37, Mangan also asserts, in opposition to Third-Party Defendants' motion, Third-Party Defendants' breach of fiduciary corporate duties owed to him as a minority shareholder of APW Holding arise under Delaware law. Gillen Affidavit ¶ 5(3). Further, Third-Party Defendants
Under Delaware law, contribution is limited to cases where the underlying action asserts claims based on the same liability against a defendant as well as the contributing party. See Walker v. Patterson, 325 F.Supp. 1024, 1026 (D.Del. 1971) (no contribution in absence of a "common liability to injured person and unless injured person has possible remedy against two or more persons." (citing Lutz v. Boltz, 100 A.2d 647, 648 (Del.Super.1953) (construing Delaware's Uniform Contribution of Tortfeasors Act, Del.Code Ann. tit. 10, §§ 6301-6308 (1953))). New York, by contrast, permits contribution where a contributing party's breach of duty to a defendant differs from the duty asserted by the plaintiff against the defendant. Raquet v. Braun, 90 N.Y.2d 177, 659 N.Y.S.2d 237, 681 N.E.2d 404, 407 (1997) (citations and internal quotation marks omitted). It is "well-established" New York law that "a defendant may seek contribution from a third party even if the injured plaintiff has no direct right of recovery against that party" provided "there has been a breach of duty that runs from the contributor to the defendant who has been held liable" and that this breach "had a part in causing or augmenting the injury for which contribution is sought." Id. Therefore, based on Mangan's allegations, Third-Party Complaint ¶ 4, alleging that Mar-Cone has asserted a violation of the Mohawk Doctrine against Mangan, whether contribution may be sought against Giardino and Greenberger depends on whether they may be required to contribute to Mangan's potential liability to Mar-Cone based on a breach of duty owed by them to Mangan which differs from that asserted by Mar-Cone against Mangan, Mar-Cone's Mohawk Doctrine Claim, a possibility available under New York law but not Delaware. This difference results from the more expansive approach to permitting contribution claims in New York without regard to whether a plaintiff has chosen to sue a potential defendant or whether plaintiff's action against such putative third-party may be barred by substantive or procedural rules. See Raquet, 659 N.Y.S.2d 237, 681 N.E.2d at 407 (third parties "insulated from liability" based on "lack of duty," and "procedural bars and special defenses," not exempt from potential contribution claim); Garrett v. Holiday Inns, Inc., 58 N.Y.2d 253, 460 N.Y.S.2d 774, 447 N.E.2d 717, 719, 720 (1983) (contribution may lie against third party despite plaintiff's failure to join third-party as a defendant) (citing Klinger v. Dudley, 41 N.Y.2d 362, 393 N.Y.S.2d 323, 361 N.E.2d 974, 980 (1977)). See also Dole v. Dow Chem. Co., 30 N.Y.2d 143, 331 N.Y.S.2d 382, 282 N.E.2d 288 (1972) (chemical manufacturer permitted to implead employer despite workers compensation bar preventing plaintiff's action against employer). Thus, New York courts "recognize[] that contribution rules have developed to remedy an injustice to joint tort-feasors, who were permitted no general apportionment rights under prior law." Garrett, 460 N.Y.S.2d 774, 447 N.E.2d at 719 (citing Klinger, 393 N.Y.S.2d 323, 361 N.E.2d at 980) (underlining added). Accordingly, as the outcome of Third-Party Defendants' motion — contribution or no contribution — depends on whether New York or Delaware law applies to the requirements for Mangan's Contribution Claims as alleged in the Third-Party Complaint, an actual conflict
In a diversity action such as the instant case, contribution rules are considered substantive in nature requiring the court to apply forum conflicts of law rules to decide which competing jurisdiction's contribution rules should apply. See White v. ABCO Engineering Corp., 221 F.3d 293, 307 (2d Cir.2000) (state contribution law considered substantive in diversity cases (citing Overseas Nat'l Airways, Inc. v. United States, 766 F.2d 97, 100-02 (2d Cir.1985) (FTCA requires application of state contribution law to contribution claim against United States))). See also Steinberg v. Sherman, 2008 WL 2156726, at *6 (S.D.N.Y. May 8, 2008) (§ 1401 applies to contribution rights for state claims based on diversity jurisdiction); Comer v. Titan Tool, Inc., 888 F.Supp. 605, 608-09 (S.D.N.Y.1995) (contribution rules in diversity action are substantive and require application of forum law including choice-of-law rules — applying New York law based on decedent's prior contacts with New York); Mascarella v. Brown, 813 F.Supp. 1015, 1018-19 (S.D.N.Y.1993) (in diversity action court applies New York contribution rules based on New York domicile of third-party plaintiff and New York as situs of negligence) (Sotomayor, J.). Thus, because state substantive law governs Mangan's claim for contribution, ABCO Engineering Corp., 221 F.3d at 307, New York conflicts of law principles are used to determine whether New York or Delaware law applies.
Under New York choice of law rules, when a conflict concerns a loss-allocating rule, including a claim for contribution or indemnification, the court applies the three-part interest analysis rule established in Neumeier v. Kuehner, 31 N.Y.2d 121, 335 N.Y.S.2d 64, 286 N.E.2d 454, 457-58 (1972) (applying Ontario guest statute), to determine the state with the greatest interest or concern with the specific issues raised in the litigation. Stichting Ter Behartiging Van de Belangen Van Oudaandeelhouders In Het Kapitaal Van Saybolt International B.V. v. Schreiber, 407 F.3d 34, 50 (2d Cir.2005). Generally, under New York's choice of law rules, the law of the state in which the wrong occurs applies to issues of substantive law. Cooney v. Osgood Machinery, Inc., 81 N.Y.2d 66, 595 N.Y.S.2d 919, 612 N.E.2d 277, 280 (1993). In the instant case, all of the alleged wrongs alleged against Giardino and Greenberger by Mangan occurred in New York.
Mangan's First Claim alleges Mangan's right to contribution based on Third-Party Defendants' breach of Mangan's right as a minority non-voting shareholder under the New York's Business Corporation Law to be given a factually correct and prior notice of a sale of the assets of APW Holding by Third-Party Defendants as majority shareholders. Third-Party Complaint ¶¶ 31-33. According to Mangan, Greenberger also misrepresented to Mangan that the sale of APW Holding and APW was to be a "stock sale" and that had Greenberger correctly advised Mangan that the sale of APW Holding was to be an asset sale, Mangan "would have had the right to terminate his employment and obtain a fair price for his shares from APW and/or the majority shareholders [Third-Party Defendants as majority shareholders of APW Holdings]." Id. ¶ 36 (underlining added). As such, Mangan asserts he would not thereby have become a seller of his minority ownership interest in APW to Mar-Cone and thus would not have been subject to the Mohawk Doctrine applicable to such a selling shareholder or owner of APW. Id.; Third-Party Plaintiff's Memorandum at 7. Mangan also alleges that Third-Party Defendants' failure to correctly inform Mangan of the asset nature of the APW sale prevented him from filing an "objection" or "notice of dissent" to the sale and electing to have his shares "repurchased by APW" or "the majority shareholders," Giardino and Greenberger, at "fair value" thereby avoiding any permanent obligations not to solicit APW customers following the sale of APW to Mar-Cone and his later employment by Servall. Third-Party Complaint ¶ ¶ 37-38. Based on these alleged breaches of corporate fiduciary duties owed to Mangan by Third-Party Defendants, Mangan asserts he is entitled to contribution from Third-Party Defendants in proportion to the amount of damages found to be suffered by Mar-Cone as a result of Mangan's violation of the Mohawk Doctrine under Mar-Cone's Third Claim. Id. ¶¶ 38-40.
Before addressing the merits of Mangan's First Claim based on Third-Party Defendants' alleged breach of fiduciary duty applicable to majority shareholders such as Giardino and Greenberger, the court considers whether New York or Delaware law applies to this issue. Third-Party Defendants argue that as APW Holding is a Delaware corporation, New York's choice of law rules require that Delaware law applies to questions of internal corporate affairs, such as the fiduciary duties of majority shareholders like Giardino and Greenberger and protections afforded a minority shareholder like Mangan.
Regarding Mangan's Second Claim alleging that Greenberger misrepresented the correct nature — stock or asset — of the APW sale to Mar-Cone, Mangan contends that New York law applies to this issue. Third-Party Plaintiff's Memorandum at 4-5 (citing Robinson v. Avis Rent-A-Car, Inc., 1999 WL 342037, at *3 (E.D.N.Y. May 24, 1999) (New York choice of law requires application of the law of place of injury, not place where misrepresentation or fraud occurred)). Third-Party Defendants do not specifically respond to this argument; rather, Third-Party Defendants assert only that Mangan has abandoned any claim to contribution under Delaware law. Third-Party Defendants' Reply at 3 n. 1. New York courts hold that a cause of action for tort accrues where its economic impact is felt, which generally is the plaintiff's residence. Ceres Partners v. GEL Associates, 918 F.2d 349, 353 (2d Cir.1990) (citing Sack v. Low, 478 F.2d 360, 366 (2d Cir.1973) (citing Myers v. Dunlop Tire & Rubber Corp., 40 A.D.2d 599, 335 N.Y.S.2d 961 (1st Dep't 1972))). In any event, based on the pleadings it is apparent that Greenberger's alleged misrepresentations to Mangan took place in New York. Third-Party Complaint ¶ 42. Further, as New York contribution law applies, whether the misrepresentations are tortious requires the application of New York law as well. Accordingly, the court applies New York law to Mangan's Second Claim based on the alleged misrepresentation by Greenberger.
Third-Party Defendants move to dismiss Mangan's contribution claims pursuant to Fed.R.Civ.P. 12(b)(1) — lack of jurisdiction, 12(b)(6) — failure to state a claim, and 12(c) — judgment on the pleadings. As the court finds that supplemental jurisdiction pursuant to 28 U.S.C. § 1367(a) is available to support subject matter jurisdiction over Mangan's Contribution Claims, Discussion, supra, at 356-60, and as Third-Party Defendants proffer no arguments that Third-Party Defendants are
The same analysis applicable to a Fed. R.Civ.P. 12(b)(6) ("Rule 12(b)(6)") motion to dismiss applies to a Fed.R.Civ.P. 12(c) motion for judgment on the pleadings. Sheppard v. Beerman, 18 F.3d 147, 150 (2d Cir.1994). In particular, "`[o]n a motion to dismiss or for judgment on the pleadings, [the court] must accept all allegations in the complaint as true and draw all inferences in the non-moving party's favor.'" LaFaro v. New York Cardiothoracic Group, PLLC, 570 F.3d 471, 475 (2d Cir. 2009) (quoting Miller v. Wolpoff & Abramson, L.L.P., 321 F.3d 292, 300 (2d Cir.2003) (bracketed material added and additional quotation omitted)). On a motion to dismiss under Rule 12(b)(6), the court looks to the four corners of the complaint and is required to accept the plaintiff's allegations as true and to construe those allegations in the light most favorable to the plaintiff. Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 40 L.Ed.2d 90 (1974); Goldstein v. Pataki, 516 F.3d 50, 56 (2d Cir.2008) (court is required to liberally construe the complaint, accept as true all factual allegations in the complaint, and draw all reasonable inferences in the plaintiff's favor). "To survive a motion to dismiss, a complaint 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, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)).
The Second Circuit has made clear that "for the purposes of deciding a motion to dismiss pursuant to Rule 12(b)(6), `the complaint is deemed to include any written instrument attached to it as an exhibit or any statements or documents incorporated in it by reference.'" Mangiafico v. Blumenthal, 471 F.3d 391, 398 (2d Cir.2006) (quoting Chambers v. Time Warner, Inc., 282 F.3d 147, 152-53 (2d Cir.2002)). "`Even where a document is not incorporated by reference, the court may nevertheless consider it where the complaint relies heavily upon its terms and effect, which renders the document integral to the complaint.'" Id. "Furthermore, `the harm to the plaintiff when a court considers material extrinsic to a complaint [on a Rule 12(b)(6) motion to dismiss] is the lack of notice that the material may be considered.'" Id. As such, "`where plaintiff has actual notice of all the information in the movant's papers and has relied upon these documents in framing the complaint the necessity of translating a Rule 12(b)(6) motion into one under Rule 56 is largely dissipated.'" Id.
Here, although Third-Party Defendants include in their motion papers various documents, including, inter alia, the Non-Disclosure Agreement, the Subscription Agreement, the Stockholders' Agreement, and the Revised Employment Agreement, all such documents are either incorporated by reference into, or attached as exhibits to the Third-Party Complaint. See Third-Party Complaint (Doc. No. 105), ¶ 12 (certificate of merger); ¶¶ 19, 24-25, 35 (Revised Employment Agreement); ¶¶ 21-23 ("Stock Subscription Agreement and Stockholders' Agreement"); and Third-Party Complaint, Exh. A (Second Amended Complaint referencing the Revised Employment Agreement ¶ 34) and the Non-Disclosure Agreement ¶ ¶ 16, 43-44), and Exh. B (Answer to Second Amended Complaint, with Defenses, Counterclaims. Accordingly, Mangan, by incorporating by reference or attaching such documents to the Third-Party Complaint, has established Mangan had actual notice of such documents, upon which Mangan has relied in framing the Third-Party Complaint,
Because, as discussed, Discussion, infra, at 367-68, § 1401 is limited to providing apportionment of damages among contributing tort-feasors in relation to an action brought by a plaintiff against a defendant based on defendant's commission of a tort, if Mar-Cone's Mohawk Doctrine claim does not arise in tort, § 1401 contribution is inapplicable. Moreover, although New York recognizes possible contribution based on a breach of duty owed to a defendant different from that alleged by plaintiff against the defendant, because contribution under § 1401 is limited to joint, successor and other tort-feasors, unless the differing duty asserted in support of contribution also is tortious in nature, so as to render the third-party defendant a tortfeasor, such asserted duty will similarly render § 1401 unavailable. The court thus examines whether Mar-Cone's Mohawk Doctrine Claim is based on tort and whether each fiduciary duty Mangan alleges was violated by Giardino and Greenberger are, or are not, also tortious in nature.
Under New York law, contribution pursuant to § 1401 may be sought against concurrent, successive, independent, alternative and even intentional tort feasors, Raquet, 659 N.Y.S.2d 237, 681 N.E.2d at 407, provided that the contributing party is shown to have breached a duty to the defendant which caused or increased plaintiff's injury. Id. "Generally, apportionment [contribution] rights among wrongdoers arise when `two or more tort-feasors share in responsibility for an injury, in violation of duties they respectively owed to the injured person.'" Garrett, 460 N.Y.S.2d 774, 447 N.E.2d at 719 (underlining added) (quoting Smith v. Sapienza, 52 N.Y.2d 82, 436 N.Y.S.2d 236, 417 N.E.2d 530, 532 (1981), and citing Holodook v. Spencer, 36 N.Y.2d 35, 364 N.Y.S.2d 859, 324 N.E.2d 338 (1974), and Rogers v. Dorchester Assoc., 32 N.Y.2d 553, 347 N.Y.S.2d 22, 300 N.E.2d 403 (1973)). Although New York law bars contribution for purely economic losses based on a breach of contract, Sommer v. Federal Signal Corporation, 79 N.Y.2d 540, 583 N.Y.S.2d 957, 593 N.E.2d 1365, 1369 (1992); Sargent, 523 N.Y.S.2d 475, 517 N.E.2d at 1364, where the contributing party is alleged to have negligently performed a contract based on a duty arising from a contract of "public policy," such tortious misconduct will suffice to support a contribution claim pursuant to § 1401. Sommer, 583 N.Y.S.2d 957, 593 N.E.2d at 1370-71. Contribution therefore may be sought where the underlying action "sounds both in contract and tort." Stratagem Development Corp. v. Heron Int'l N.V., 153 F.R.D. 535, 551 (S.D.N.Y.1994) (citing Sommer, 583 N.Y.S.2d 957, 593 N.E.2d at 1373).
New York also recognizes contribution will lie "in favor of tort-feasors against third parties as to whom plaintiffs had no direct right of recovery due either
"Under New York common law, a seller has an `implied covenant' or `duty to refrain from soliciting former customers, which arises upon the sale of the `good will' of an established business.'" Bessemer Trust Co., 925 N.Y.S.2d 371, 949 N.E.2d at 468 (quoting Mohawk, 437 N.Y.S.2d 646, 419 N.E.2d at 329-30). Such implied covenant is required in order to prevent the seller from committing a "`fraud on the contract [of sale]'" that would arise were a seller allowed to divert customer good will, or expected sales from existing customers and that would otherwise accrue to the purchaser. Bessemer Trust Co., 925 N.Y.S.2d 371, 949 N.E.2d at 468 (quoting Von Bremen, 93 N.E. at 189 (quoting Trego v. Hunt, [1896] AC 7)). New York courts recognize that such violation of the implied covenant not to interfere with the purchaser's expectation of future business from established customers of the business "sounds in breach of an implied covenant of the contract of sale that the seller will permanently refrain from soliciting his prior customers." Borne Chem. Co., Inc., 445 N.Y.S.2d at 413.
In Mohawk, the New York Court of Appeals stated that "... it may be somewhat misleading to describe the duty of the seller [of a business's good will] to refrain from soliciting his former customers
Additionally, in certifying questions to the New York Court of Appeals on how a court should assess post-sale conduct by a seller of an investment services business interest as prohibited solicitations within the scope of the Mohawk Doctrine, the Second Circuit, as noted, Discussion, supra, at 14, recently stated that "[t]he principal legal question before us depends not on interpretation of contract law, but an application of a branch of New York tort law, the Mohawk Doctrine." Bessemer Trust Company, 618 F.3d at 80. Significantly, in responding to the questions certified by the Second Circuit, nowhere in its decision did the New York Court of Appeals indicate any disagreement with the Second Circuit's classification of a Mohawk Doctrine claim as one based on tort, not contract. See Bessemer Trust Company, N.A. v. Branin, 16 N.Y.3d 549, 925 N.Y.S.2d 371, 949 N.E.2d 462 (2011) (passim).
Given the consistent recognition by the New York Court of Appeals that a seller's duty to refrain from any solicitation of present customers following the sale of a business arises from one imposed by law, Mohawk, 437 N.Y.S.2d 646, 419 N.E.2d at 329; Hyde Park Prods. Corp., 491 N.Y.S.2d 302, 480 N.E.2d at 1086, as an incident of the contract of sale constituting an impairment or diversion of the good will transferred by the seller, and the very recent and explicit acknowledgment of this legal classification by the Second Circuit that the Mohawk Doctrine is a species of New York tort law, the court finds that Mar-Cone's Third Claim states a claim sounding in tort and arising from Mangan's intentional misconduct in violation of the duty implied by law incident to the sale of APW including its good will. As such, Mangan's status as an alleged
Nevertheless, in order for contribution to lie against a third party, § 1401 additionally requires, as relevant to this case, that alleged tortfeasors also be "subject to liability for damages for the same... injury to property." N.Y.C.P.L.R. § 1401.
"Goodwill is a valuable property right derived from a business's reputation for quality and service." Levitt Corporation v. Levitt, 593 F.2d 463, 468 (2d Cir.1979) (affirming grant of injunctive relief against seller's infringement of trademark which included seller's well-known name in housing construction market (citing Hanover Star Milling Co. v. Metcalf, 240 U.S. 403, 412-13, 36 S.Ct. 357, 60 L.Ed. 713 (1916); and Clairol, Inc. v. Asaro, 1975 Trade Cas. P 60,350 at 66,473, 1975 WL 898 (E.D.Mich.1975))). Good will includes a purchaser's "right to expect that the firm's established customers will continue to patronize the business" sold by the seller. Mohawk, 437 N.Y.S.2d 646, 419 N.E.2d at 329 (affirming grant of trial on claim for money damages and permanent injunction for diversion of customer's goodwill following sale of business (citing People ex rel. Johnson Co. v. Roberts, 159 N.Y. 70, 53 N.E. 685, 688-89 (1899); Churton v. Douglas, Johns Eng Ch., p. 174; and Cruttwell v. Lye, 17 Ves, Jr. 335, 346)).
New York law has long determined that business good will in the form of continued customer patronage is a valuable and transferrable property right entitling the transferee to both equitable and compensatory remedies for its protection. Mohawk, 437 N.Y.S.2d 646, 419 N.E.2d at 329 (citing and quoting Von Bremen, 93 N.E. at 188 (citing authorities)). See also In re Brown, 242 N.Y. 1, 150 N.E. 581, 582
Moreover, although Third-Party Defendants argue that Mar-Cone's damages caused by Mangan's Mohawk Doctrine violations do not constitute property damage under § 1401, Third-Party Defendants' Reply at 7, Third-Party Defendants cite to no authority for this proposition and the court's research reveals none. Third-Party Defendants' reliance on Sargent, holding that "purely economic losses," Sargent, 523 N.Y.S.2d 475, 517 N.E.2d at 1363, do not represent an "injury to property" as that term appears in § 1401 and as such do not support Mangan's Contribution Claims, Third-Party Defendants' Reply at 7, is also misplaced. Inasmuch as in Sargent, the building project's architect's attempt to seek impleader from the project's general contractor based on plaintiff's damage claim arising from a defective and leaky roof alleging breach of contract against both parties was precluded as one not arising from tortious conduct, whether an impairment, upon any legal basis, of business good will, a threshold issue in the present case, by a seller constituted an "injury to property" under § 1401 caused by tortious conduct was not addressed by the court. Accordingly, Mangan's Contribution Claims against Giardino and Greenberger satisfy this element of § 1401 based on a violation of Mar-Cone's right under the Mohawk Doctrine to obtain relief arising from Mangan's alleged wrongful impairment of the APW good will asset acquired by Mar-Cone. Thus, had Mar-Cone accused Giardino and Greenberger as well as Mangan of violating its Mohawk Doctrine rights in the Second Amended Complaint, there would be no question that Mangan could have sought contribution against them pursuant to § 1401. However, because this factor is not present, the court turns to the question of whether Mangan's Contribution Claims satisfy the other conditions necessary for a valid contribution claim under § 1401 in this case, namely, whether Mangan has plausibly alleged any breach of different duty of a tortious nature owed to him by Giardino and Greenberger which, along with Mangan's own Mohawk Doctrine violations, may be found to have contributed to Mar-Cone's damages to its acquired APW good will as a form of property under New York law.
According to the Third-Party Complaint, Mangan, as a non-voting minority shareholder, was entitled under the New York Business Corporation Law to be given notice of any vote by majority shareholders, Giardino and Greenberger, of APW Holding to sell the assets of the corporation and Giardino and Greenberger "had a fiduciary duty to Mangan to disclose that a sale of substantially all of the assets of APW was being considered [in the fall of 2009 by Giardino and Greenberger]." Third-Party Complaint ¶ ¶ 22-23; 27, 31-33. Mangan further alleges that prior to the sale Greenberger falsely informed Mangan that the expected sale was to be a stock sale, id. ¶ 34, and that had Mangan received timely notification of the asset sale as "required by the New York Business Corporation Law," Mangan could have terminated his employment with APW, filed an objection or notice of dissent, and "elected to have his shares repurchased by APW and/or the majority shareholders at fair value" thereby avoiding his potential liability to Mar-Cone under the Mohawk Doctrine. Id. ¶ 36-37. Mangan concludes that Giardino and Greenberger, by their alleged "willful concealment" of the fact of the asset nature of the APW sale and not a stock sale as Mangan claims he had been misled into believing, "breached their fiduciary duties to Mangan," id. ¶ 38, thus exposing Mangan to "liability" and "damages" to Mar-Cone under Mar-Cone's Third Claim based on the Mohawk Doctrine in the event Mangan solicited his former APW customers. Id. Mangan's First Claim fails on its face for several reasons.
First, it is basic that to plausibly allege a cause of action arising under a statute or other legal ground relied upon by a party asserting such claim, here Mangan as the
For example, pursuant to Section 910 of New York Business Corporation Law ("N.Y. Bus. Corp. Law"),
A careful review of the Third-Party Complaint and related documents demonstrates the absence of any allegations that such an agreement containing a put, or mandatory buy-back, applicable to Mangan's shares existed. The only allusion to an agreement regarding Mangan's shares is in paragraph 24 which states that under his employment agreement with APW Mangan was required to "sell his stock to APW." Third-Party Complaint ¶ 24 (underlining added). Thus, Mangan concedes that instead of a put, the only agreement mentioned in the Third-Party Complaint regarding any potential repurchase of Mangan's stock, whether in APW itself, or as more likely the case based on the allegations in the Third-Party Complaint taken as a whole, APW Holding, in actuality provides a "call"
Further, under New York law, shareholders of a closely held corporation, like APW Holding, may elect to dissolve a corporation based on oppressive conduct, N.Y. Bus. Corp. Law § 1104-a, and enforce a provision in a shareholders agreement calling for a mandatory purchase of their shares based on a stated formula. Gallagher v. Lambert, 74 N.Y.2d 562, 549 N.Y.S.2d 945, 549 N.E.2d 136, 137-38 (1989) (buy-back of stock requirement in shareholders agreement for stock in closely-held corporation enforceable). A fair reading of the Third-Party Complaint shows that Mangan makes no allegation that any relevant shareholders agreement granted him such rights and protections. Significantly, although Mangan alleges that upon his termination, in the face of an asset sale, he could have obtained "a fair price" for his shares, Third-Party Complaint ¶ 36, Mangan also alleges that under the Revised Employment Agreement, he was required to sell his shares to APW
Contrary to Mangan's assertion, the result is the same even if Delaware law applies, Third-Party Plaintiff's Memorandum at 7, as Third-Party Defendants contend. Third-Party Defendants' Memorandum at 12 n. 3. Specifically, under Delaware law, the sale of assets of a Delaware corporation does not trigger any appraisal rights for a dissenting shareholder. See Tanzer v. International General Industries, Inc., 402 A.2d 382, 390 (Del.Ch.1979) (appraisal rights for minority shareholders are not available on a sale of corporate assets). Nor, as indicated in its discussion of New York law pertaining to this issue, Discussion, supra, at 373-75, has the court's research revealed any Delaware law that provides a minority non-voting shareholder, like Mangan, with a right to demand repurchase of shares by the corporation's other shareholders in the event of an asset sale absent a provision granting such right in an enforceable shareholders agreement. Significantly, as discussed, Discussion, supra, at 372, although Mangan alleges that had he been correctly informed that the sale was an asset sale he could have terminated his employment and "obtained fair value" for his shares, Third-Party Complaint ¶ 36, the allegation fails to expressly state that APW, APW Holding or the majority shareholders would thereupon be required to repurchase Mangan's shares. Notably, Mangan's only allegation regarding the relationship of his possible termination and a possible stock repurchase or buy-back requirement, states that under the Revised Employment Agreement APW enjoyed a right to compel Mangan to sell his stock to APW, a call, not a right or put enuring to Mangan to sell his stock to APW, APW Holding or Giardino and Greenberger. Mangan's insistence that such repurchase rights existed as he has attempted to plead them in the Third-Party Complaint is therefore wholly illusory and illusory allegations by definition cannot be considered as plausible. Accordingly, Mangan fails to plausibly allege facts upon which the court can conclude that Third-Party Defendants owed Mangan any special duty upon which to predicate a contribution claim because under neither New York nor Delaware corporation law, as specified by Mangan, does such a duty exist. "To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to `state a claim to relief that is plausible on its face.'" Iqbal, 129 S.Ct. at 1949 (quoting Twombly, 550 U.S. at 570, 127 S.Ct. 1955). "A claim has facial plausibility
Mangan's First Claim fails for a second reason. Even if the fiduciary duties applicable to the relationship between majority and minority shareholders, as alleged by Mangan, could be found to exist under New York or Delaware law, New York law also requires that to claim contribution the predicate special duty owed to a defendant by a third-party, like the breach of duty alleged by the plaintiff against the defendant in the main action, must also arise in tort so as to render, in the event of breach by the party from whom contribution is sought, such party a "joint," "concurrent, successive, independent, alternative [or] ... intentional tort feasor." Sargent, 523 N.Y.S.2d 475, 517 N.E.2d at 1364 (citing authorities) (underlining added). Thus, unless the special duty asserted against the contributing third-party by a defendant sounds in tort, the third-party, even if a breach is established, does not become a tortfeasor for purposes of § 1401, and the allegations fall outside the scope of § 1401. Id. ("the existence of some form of tort liability is a prerequisite to application of [§ 1401]."). In considering whether a duty is created by tort, and thus within § 1401 or by contract, and thus without § 1401, id. (potential liability to plaintiff for "contractual benefit" does not qualify as grounds for related contribution claim) or in combination and so within § 1401, depends, first, on whether the duty asserted arises by operation of law "as a matter of social policy," Sommer, 583 N.Y.S.2d 957, 593 N.E.2d at 1368, "the nature of the injury, the manner in which the injury occurred and the resulting harm," id., 583 N.Y.S.2d 957, 593 N.E.2d at 1369, i.e., whether the claim was one for a "personal injury or property damage," as result of an "abrupt," or "cataclysmic occurrence," or one for enforcement of a "bargain." Id. "The determining factor as to the availability of contribution is not the theory behind the underlying claim but the measure of damages sought." N.Y. Jur.2d Contribution, Indemnity and Subrogation Vol. 23 § 52 at 87 (quoting Rothberg v. Reichelt, 270 A.D.2d 760, 705 N.Y.S.2d 115, 118 (3d Dep't 2000) (quoting Rockefeller Univ. v. Tishman Const. Corp. of N.Y., 240 A.D.2d 341, 659 N.Y.S.2d 460 (1st Dep't 1997), lv. denied, 91 N.Y.2d 803, 668 N.Y.S.2d 558, 691 N.E.2d 630 (1999))). See also Barbagallo v. Marcum LLP, 2012 WL 1664238, at *11-12 (E.D.N.Y. May 11, 2012) (holding contribution not available for breach of fiduciary duty where damages sought were limited to "purely economic loss" which did not constitute injury to property), and Stratagem Development Corporation, 153 F.R.D. at 551 (court to consider "nature of injury, the manner in which the injury occurred and the resulting harm" in determining whether claim alleges tort or contract breach for purposes of finding contribution claim valid under § 1401). Additionally, New York law defines `injury to property' as `an actionable act, whereby the estate of another is lessened, other than a personal injury or the breach of a contract.'" Sargent, 523 N.Y.S.2d 475, 517 N.E.2d at 1364, n. 2 (quoting N.Y. Constr. Law § 25-b).
Regulations affecting corporate governance and ownership interests represent a balancing of public and private interests, and actions to enforce such rules do not necessarily arise from misconduct involving a breach of duty of a tortious nature. Rather, such violations often seek redress for economic losses or to enforce other benefits arising from a shareholder agreement or statutory rights similar to the stock repurchase rights alleged by Mangan to constitute a fiduciary duty as a predicate to his Contributions Claims. Compare Alpert v. 28 Williams Street Corp., 63 N.Y.2d 557, 483 N.Y.S.2d 667, 473 N.E.2d 19, 28-29 (1984) (freeze-out merger by majority shareholders adopted without regard to best interest of corporation as a whole including interest of minority violates fiduciary duty warranting equitable relief including recission) with Vernon v. Rock-Ledge House, Inc., 49 Misc.2d 98, 266 N.Y.S.2d 556, 558 (S.Ct.N.Y.Cnty.1966) (action by minority shareholder for accounting of illegal transfers of corporation property and funds is one for waste of corporation assets and an action "for injury to property sounding in tort."). See also Theodore Trust U/A Dated December 30, 1971 v. Smadbeck, 277 A.D.2d 67, 717 N.Y.S.2d 7, 8 (1st Dep't 2000) ("Pursuant to Business Corporation Law § 623, the right to appraisal is the exclusive remedy for stockholders dissenting to the terms upon which a corporation has offered its shares for sale in the context of a corporate merger, except that an action in equity is permissible to challenge fraudulent or illegal corporate activity."), lv. to appeal denied, 96 N.Y.2d 703, 723 N.Y.S.2d 130, 746 N.E.2d 185 (2001). Thus, because Mangan's breach of fiduciary duty against Giardino and Greenberger based on lack of prior notice of the APW sale and a lost opportunity to effect a stock buy-back particularly prior thereto does not involve an injury to any property interest of Mangan or, more relevantly, Mar-Cone warranting tort-like compensatory damages, Mangan's relief for such breaches would be limited to equitable relief to place, through recission, his stock ownership position in a status which excluded a possible application of the Mohawk Doctrine. Specifically, as noted, Mangan does not assert the value of his shares were reduced, or his personal assets impaired, as a result of Giardino and Greenberger's alleged breaches of their fiduciary duties to Mangan nor does he allege such breaches triggered a loss of Mar-Cone's good will acquired in its purchase of APW. In fact, Mangan continued to be employed by Mar-Cone after the sale and joined Servall in July 2010. Thus, such fiduciary duties do not protect against an injury to property as a result of an "abrupt" or cataclysmic occurrence "the avoidance of which is the objective of a duty imposed as a matter of "social policy." Sommer, 583 N.Y.S.2d 957, 593 N.E.2d at 1368-69. Moreover, treating Mangan's
Mangan relies on In re Crazy Eddie Securities Litigation, 802 F.Supp. 804 (E.D.N.Y.1992) in support of his Contribution Claims. Third-Party Plaintiff's Memorandum at 10. In this securities fraud case, defendant Peat Marwick, a public accounting firm accused of securities law violations, sought contribution from a third-party accountant responsible for the books and records of the business entity at the center of the lawsuit, In re Crazy Eddie Securities Litigation, 802 F.Supp. at 814, based on third-party plaintiff's theory that the third-party defendant had falsely represented that the business's financial records upon which Peal Marwick had relied were complete and accurate. Id. In sustaining the contribution claim, the court found that although the alleged fraudulent conduct arose from a contractual relationship, the third-party defendant had an independent duty not to engage in fraudulent misconduct in the course of the relationship, id. at 815, conduct constituting a "proper claim in tort" under New York law and therefore a valid predicate for contribution. Id. By contrast, as the misconduct attributed to Giardino and Greenberger as the basis for Mangan's Contribution Claims arises from a breach
Mangan's First Claim also fails for a third reason. In order to impose contribution upon a third party based on a violation of a special duty owed to the defendant, it must be established by the defendant seeking contribution that "the breach of duty by the contributing party... had a part in causing or augmenting the injury for which contribution is sought." Nassau Roofing & Sheet Metal Co., 528 N.Y.S.2d 516, 523 N.E.2d at 805 (1988). A fair reading of Mangan's First claim indicates that nowhere does Mangan allege any facts which, assuming their truth, plausibly explain how Giardino and Greenberger's supposed violations of their fiduciary duties, even assuming their existence under applicable law and their sufficiently tort-like nature, could conceivably have resulted in any enlargement of Mar-Cone's injuries to its good will based on Mangan's violations of the Mohawk Doctrine. Rather, after asserting Giardino and Greenberger's breach of the alleged fiduciary duties under New York law, the Third-Party Complaint alleges in conclusory fashion that any liability to Mar-Cone imposed against Mangan under the Mohawk Doctrine "will have been caused and brought about, in whole or in part, by the breach of fiduciary duties owed by Greenberger and/or Giardino," Third-Party Complaint ¶ 40, thus entitling Mangan to contribution. Under New York law, "[a] showing of proximate cause requires plaintiffs to demonstrate that defendant's alleged negligent acts were a substantial cause of the event which produced plaintiffs' injuries." Licci v. American Express Bank, Ltd., 704 F.Supp.2d 403, 410 (S.D.N.Y.2010) (citing Derdiarian v. Felix Contracting Corp., 51 N.Y.2d 308, 434 N.Y.S.2d 166, 414 N.E.2d 666, 670 (1980)). Here, no facts are posited by the Third-Party Complaint which illuminate the path of Mangan's logic as to how, even if it is assumed Giardino and Greenberger violated a fiduciary duty with respect to a required correct notice of the APW asset sale and the existence of Mangan's right to obtain repurchase of his shares, following the APW sale, Mangan was instigated or impelled to violate his ensuing Mohawk Doctrine duties to Mar-Cone's detriment as a proximate result of Giardino and Greenberger's breaches of such fiduciary duties. For instance, Mangan fails to allege that Giardino and Greenberger somehow encouraged or even were aware of and condoned such subsequent misconduct by Mangan as Mar-Cone alleges, nor does Mangan attempt to assert Giardino and Greenberger duped Mangan into engaging in the prohibited solicitations of former customers and other violations of his agreements with Mar-Cone or that they had any reason to suspect or reasonably foresee prior to their supposed fiduciary violations that following the sale, Mangan would feel justified in violating or otherwise be likely to violate his Mohawk Doctrine duties as a seller of APW's good will as a result of their breaches. While Mangan maintains that as an involuntary seller he was advised "he was not subject to the Mohawk Doctrine," Mangan Affidavit II ¶ 14, Mangan does not allege he was so advised prior to the sale or that Giardino and Greenberger were made aware of this advice. In short, the Third-Party Complaint is bereft of any facts upon which the requisite contribution to Mar-Cone's Mohawk Doctrine claims for loss of APW goodwill could plausibly be found to have resulted from Giardino and Greenberger's alleged breach of any fiduciary duty, even assuming they were sufficiently tortious in nature for § 1401 purposes, owed to Mangan. Mangan's contention that his decision to violate the Mohawk Doctrine by
Mangan's Second Claim for contribution, directed against Third-Party Defendant Greenberger, alleges Greenberger misrepresented to Mangan that the sale of APW to Mar-Cone was a stock sale, a material fact upon which Mangan reasonably relied to his detriment in failing to divest himself of his ownership interest in APW prior to its sale, thereby rendering Greenberger liable for any damages against Mangan that may be awarded to Mar-Cone resulting from Mangan's subsequent violation of Mar-Cone's rights based on the Mohawk Doctrine as alleged under Mar-Cone's Third Claim. Third-Party Complaint ¶ ¶ 42-46. As with Mangan's First Claim, under which Mangan maintains he could have escaped application of the Mohawk Doctrine by compelling Third-Party Defendants or APW Holding to buy out his ownership interest in APW prior to the asset sale to Mar-Cone, Third-Party Complaint ¶ 36, in support of his Second Contribution Claim Mangan alleges Greenberger's misrepresentation was intended to mislead or lull Mangan into believing that the sale of APW to Mar-Cone was in fact a
In opposition, Third-Party Defendants argue Mangan has failed to allege "specific acts" by either Giardino or Greenberger which could support a finding that Greenberger's misrepresentation to Mangan rendered Mangan subject to the Mohawk Doctrine and a substantial factor in prompting Mangan's subsequent violation of the Mohawk Doctrine. Third-Party Defendants' Reply at 5. Third-Party Defendants contend that the pleadings demonstrate Mangan was not misled as to the asset nature of the APW sale, Mangan did not reasonably rely on Greenberger's representation, and Mangan failed to allege facts upon which he could have avoided Mohawk Doctrine liability. Third-Party Defendants' Memorandum at 1; Third-Party Defendants' Reply at 8-11. Third-Party Defendants further assert Mangan has failed to sufficiently plead any causal relationship between the alleged breaches of duty on the part of Giardino and Greenberger and Mar-Cone's damages resulting from Mangan's violation of the Mohawk Doctrine. Third-Party Defendants' Memorandum at 13-15. Mangan's Second Claim fails on each of these grounds.
Under New York law, a claim for intentional or negligent misrepresentation requires the plaintiff to demonstrate (1) the existence of a special or privity-like relationship imposing a duty on the defendant to impart correct information to the plaintiff; (2) that the information was materially incorrect; and (3) reasonable reliance on the misinformation to plaintiff's detriment. J.A.O. Acquisition Corp. v. Stavitsky, 8 N.Y.3d 144, 831 N.Y.S.2d 364, 863 N.E.2d 585, 587 (2007). The elements of an intentional misrepresentation claim include "misrepresentation of a material fact, falsity, scienter, deception and injury." Callahan v. Callahan, 127 A.D.2d 298, 514 N.Y.S.2d 819, 821 (3d Dep't 1987). Accord New York University v. Continental Insurance Co., 87 N.Y.2d 308, 639 N.Y.S.2d 283, 662 N.E.2d 763, 769 (1995) ("The essential elements for a cause of action for [intentional] fraud are `representation of a material existing fact, falsity, scienter, deception and injury.'" (quoting Channel Master Corp. v. Aluminium Limited Sales, Inc., 4 N.Y.2d 403, 176 N.Y.S.2d 259, 151 N.E.2d 833, 835 (1953) (bracketed material added))).
As discussed, Discussion, supra, at 377-78, majority shareholders have a fiduciary duty to candidly advise minority shareholders of the terms of a proposed merger involving cancellation of the minority's shares in the corporation and to structure the proposed transaction fairly in the best interest of the corporation as a whole. See Alpert, 483 N.Y.S.2d 667, 473 N.E.2d at 26-27. Further, majority shareholders in a closely held corporation owe a fiduciary
Assuming, arguendo, that the alleged duty Greenberger owed to Mangan was tortious and not solely of a fiduciary nature, to be cognizable the alleged misrepresentation attributable to Greenberger must be pleaded as being material. A misrepresentation of fact is material if, in the context of the information known to the recipient, the correctness of the alleged fact would have made a difference to the recipient in deciding upon future action. See List v. Fashion Park, Inc., 340 F.2d 457, 462 (2d Cir.1965) (describing test for "materiality" as "whether `a reasonable man would attach importance (to the fact misrepresented) in determining his choice of action in the transaction in question'" (citing Restatement, Torts § 538(2)(a))); Lama Holding Co. v. Smith Barney Inc., 88 N.Y.2d 413, 646 N.Y.S.2d 76, 668 N.E.2d 1370, 1373 (1996) ("In an action to recover damages for fraud, the plaintiff must prove a misrepresentation or a material omission of fact which was false and known to be false by defendant, made for the purpose of inducing the other party to rely upon it, justifiable reliance of the other party on the misrepresentation or material omission, and injury." (citing cases)); Black's Law Dictionary 1091 (9th ed. 2009) (defining "material misrepresentation" in the context of torts as "[a] false statement to which a reasonable person would attach importance in deciding how to act in the transaction in question or to which the maker knows or has reason to know that the recipient attaches some importance" (citing Restatement (Second) of Torts § 538 (1979))).
Here, Mangan does not assert that Greenberger's alleged misrepresentation
Additionally, Mangan has failed to plausibly allege he reasonably relied on Greenberger's misrepresentation concerning the asset nature of the APW sale. Because, as explained, Discussion, supra, at 381-83, Mangan's position as a seller of his ownership interest in APW could not have been avoided regardless of whether the sale was structured as an asset or stock sale, Mangan's reliance upon the misrepresentation is based on a mistaken belief, reflected repeatedly in his allegations, that he could have compelled a repurchase, or put, of his APW Holding or APW shares if he had realized the transaction was an asset sale. However, allegations
Finally, even if Mangan has adequately alleged tortious misrepresentation against Greenberger, thus creating a duty owed to Mangan based on tort, where the contributing party is not sued by a plaintiff, in addition to a breach of duty owed to a defendant rendering the third party a tortfeasor, § 1401 requires that such wrongdoer's conduct be shown to have caused or enhanced the plaintiff's injury and damages. Nassau Roofing & Sheet Metal Co., 528 N.Y.S.2d 516, 523 N.E.2d at 803. Mangan, however, makes no attempt to allege facts upon which it could conceivably be found that Greenberger's misrepresentation somehow caused Mangan to violate his duty to refrain from soliciting existing APW customers following its sale to Mar-Cone and upon joining Mar-Cone's competitor Servall. Rather, Mangan merely states in conclusory terms that, based on Greenberger's misrepresentation regarding the nature of the APW sale, Mangan is entitled to contribution from Greenberger for any damages assessed upon Mar-Cone's Mohawk Doctrine claim against Mangan. Third-Party Complaint ¶ 46. Mangan's contention, Third-Party Plaintiff's Memorandum at 10-14, that the relationship between Greenberger's alleged misrepresentation and Mangan's alleged violation presents solely a question of causation for the jury ignores the paucity of allegations demonstrating any facts upon which such asserted causality could conceivably be established. See Manza, 470 Fed.Appx. at 9-10 (2d Cir.2012) (conclusory pleadings insufficient to state plausible cause of action); Kiobel, 621 F.3d at 192 (same). For example, Mangan's subsequent discovery of Greenberger's alleged misrepresentation following the sale of APW and prior to Mangan's decision to join Servall is not alleged by Mangan to have compelled or induced Mangan to violate Mar-Cone's rights under the Mohawk Doctrine and Mangan makes no allegation that his alleged violation was other than voluntary. Nor has Mangan alleged that prior to the Greenberger misrepresentation Greenberger had reason to believe that because of the alleged misrepresentation, Mangan was likely to violate the Mohawk Doctrine. As noted, Mangan does not assert he was even aware of the Mohawk Doctrine prior to the sale. Thus, Mangan has failed to allege facts permitting the court to conclude that it was plausible that Mar-Cone's damages proximately resulting from Mangan's Mohawk Doctrine violations were enlarged by Greenberger's violation of a duty owed to Mangan as a substantial factor in causing such damages. See Licci, 704 F.Supp.2d at 410-11 (issue of proximate cause subject Iqbal-Twombly plausibility test).
Based on the foregoing, Third-Party Defendants' motion (Doc. No. 119) should be GRANTED.
Let the Clerk send a copy of this Report and Recommendation to the attorneys for the Plaintiff and the Defendants.
SO ORDERED.
June 4, 2012
