MARGO K. BRODIE, District Judge.
Plaintiff Liberty Synergistics, Inc. ("Liberty") commenced the above-captioned action in California state court against Defendants Microflo Ltd. ("Microflo"), Edward Malkin, Ecotech Limited and certain unknown individuals, Does 1 through 20, alleging malicious prosecution of a prior litigation brought by Microflo against Liberty. (Docket Entry No. 1.) The action was removed to the Central District of California and later transferred to the Eastern District of New York by stipulation. (Docket Entry No. 15.) On August 16, 2011, Defendants filed an Amended Motion to Strike the Complaint ("motion to strike") pursuant to California Code of Civil Procedure § 425.16, otherwise known as California's "anti-SLAPP" statute. (Docket Entry No. 34.) Defendants seek (1) to dismiss this action as a strategic lawsuit against public participation, or "SLAPP," and (2) an award of sanctions against Plaintiff. (Id.) By Amended Report and Recommendations ("R & R") dated December 17, 2013, Magistrate Judge William D. Wall recommended that Defendants' motion to strike the Complaint be granted, and that the action be dismissed pursuant to California's anti-SLAPP statute. (R & R, Docket Entry No. 134.) Judge Wall further recommended that should the Court adopt the R & R, the parties "be given an opportunity to brief the application for sanctions." (Id. at 1.) Plaintiff timely filed objections to the R & R, (Pl. Obj. to R & R ("Pl. Obj."), Docket Entry No. 136), and Defendants filed a response to Plaintiff's objections, (Def. Mem. in Opp. ("Def. Resp."), Docket Entry No. 137). For the reasons set forth below, the Court adopts in part, and rejects in part, Judge Wall's R & R. The Court adopts Judge Wall's R & R as to the determination that the issue of which substantive law applies to Plaintiff's malicious prosecution claim is the law of the case, but declines to adopt the portion of Judge Wall's R & R which found that Plaintiff does not have a reasonable probability of prevailing on its malicious prosecution claim. The Court also denies Defendants' motion for sanctions.
On June 24, 2008, Microflo commenced an action in the Supreme Court of the State of New York, County of Nassau ("New York Supreme Court"), against Dan Foy, Julie Swink, Ronald N. Green, Ravi Krish, Rick Cole, Gary Green, Michael Tumis (a/k/a Mike Tumis), Walgreen Company ("Walgreen") and Plaintiff, alleging fraud, unfair trade practices, unjust enrichment, breach of contract and breach of duty of good faith and fair dealing, tortious interference with prospective economic advantage, and violations of the Racketeer Influenced and Corrupt Organizations Act of 1970, 18 U.S.C. § 1961 et seq. ("RICO") (the "Underlying Litigation"). Complaint, Microflo v. Liberty Bearing Corp., No. 08-011622 (N.Y.Sup.Ct. June 24, 2008).
According to the Underlying Litigation, Microflo sells "re-usable filters or non-disposable filters used in the processing of photographs" in one-hour photo labs.
At an August 23, 2004 meeting, Tumis and Malkin agreed to a price of $16.00 per filter, however, Tumis further instructed Malkin that the filters were to be sold by Microflo to Liberty, and then sold by Liberty to Walgreen. Id. ¶ 74. On or about August 27, 2004, Malkin met with representatives of Liberty regarding "what Liberty would need to do in connection with the roll out or distribution of the [f]ilters" to Walgreen. Id. ¶ 81. At the August 27, 2004 meeting, believing that Walgreen was proceeding with the purchase of Microflo's filters, Malkin answered inquiries from Liberty regarding the construction and composition of the filters, "thereby divulging to Liberty confidential trade secret information." Id. ¶¶ 83-84. Liberty representatives also asked to be paid one-third of the gross receipts from the sales of the filters to Walgreen. Id. ¶ 87. Microflo objected to the price and by letter dated September 20, 2004, advised Walgreen that it was not interested in proceeding with the sale of the filters. Id. ¶¶ 89-92.
In October 2004, Tumis, on behalf of Walgreen, advised Malkin that Walgreen was interested in doing business directly with Microflo. Id. ¶ 94. In December 2004, Liberty expressed a willingness to conduct the sale and distribution of the filters between Microflo and Walgreen at a "reasonable price," ultimately offering to conduct the sale and distribution at a 10% gross margin. Id. ¶ 102. In January 2005, Liberty and Microflo continued to discuss the sale. Id. ¶¶ 106-110. By email and a letter dated February 17, 2005, Liberty advised Microflo that while Liberty "had `not been idle on the matter of the contemplated arrangement between Liberty and Walgreens concerning the Microflo filters' ... `[it] had been unable to conclude an arrangement with Walgreens to supply Microflo Filters to Walgreens.'" Id. ¶ 115. The letter further stated that Liberty would thereby not be entering into a contract with Microflo for the purchase of the filters. Id. Microflo then contacted Walgreen and offered to provide the filters to Walgreen directly. Id. ¶ 116. Tumis informed Microflo that it had not yet decided on a final vendor for the filters and that the vendor "may or may not turn out to be Microflo." Id. ¶ 117. In May 2006, Malkin learned that Liberty offered to sell Wal-Mart, "Microflo's largest single customer of many years standing," washable, reusable filters for its photo processing machines. Id. ¶ 120.
Microflo asserted in the Underlying Litigation that, on information and belief, Liberty never intended to enter into an agreement for the purchase of Microflo's filters and that it used the samples Microflo provided to Walgreen, to "reverse engineer the [f]ilters so that Liberty could design and manufacture its own [f]ilters" to compete with Microflo. Id. ¶¶ 121, 123. In the Underlying Litigation, Microflo alleged among other causes of action, fraud, civil RICO violations and unfair trade practices.
After the Underlying Litigation was filed in the New York Supreme Court, it was subsequently removed to the Eastern District of New York. See Notice of Removal,
On September 17, 2010, Liberty commenced the above-captioned action in California state court alleging malicious prosecution against Defendants for bringing the Underlying Litigation. (Compl., annexed to Notice of Removal, Docket Entry No. 1, as Ex. A.) The action was removed to the Central District of California by the Defendants on the basis of diversity jurisdiction. (Docket Entry No. 1.) The parties subsequently stipulated to transfer the case to the Eastern District of New York as the appropriate venue pursuant to 28 U.S.C. § 1404(a). (Docket Entry No. 15.)
Plaintiff alleges that Defendants prosecuted the Underlying Litigation without a "reasonable basis in fact or any probable cause."
On August 16, 2011, Defendants filed a Special Motion to Strike the Complaint under California's anti-SLAPP statute, seeking dismissal and sanctions. (Docket Entry No. 42.) According to Defendants, they had a reasonable basis to commence the Underlying Litigation because Liberty had "engaged in a series of acts and representations that led Microflo to conclude that Liberty had not acted in good faith and fairly, [and] engaged in unfair trade practices," among other specified wrongful conduct. (Id. at 2.) Defendants also claimed that the prosecution of the Underlying Litigation was "protected activity" under the statute, and Plaintiff could not establish a reasonable probability of prevailing on its malicious prosecution claim. (Id. at 15-16, 18-23.) Plaintiff argued that it met its burden under the anti-SLAPP statute by showing a reasonable probability of success.
The Honorable Sandra J. Feuerstein referred Defendants' motion to Magistrate Judge E. Thomas Boyle for a report and recommendation.
By Report and Recommendation dated October 18, 2011 ("October 2011 R & R"), Judge Boyle recommended that Judge Feuerstein deny Defendants' motion to strike based on New York law.
Defendants appealed Judge Feuerstein's decision to the Second Circuit. Defendants argued that Judges Feuerstein and Boyle should have applied California's anti-SLAPP statute. (Brief and Special Appendix for Defendants-Appellants, Liberty Synergistics v. Microflo Ltd., No. 12-CV-108.) The Second Circuit agreed and determined that, under the governing choice-of-law principles, California's anti-SLAPP statute did apply.
The Second Circuit explained that:
Id. at 151-52 (internal citations omitted). Considering the first issue, the Second Circuit noted that Plaintiff originally filed suit in California before transferring the case to the Eastern District of New York pursuant to 28 U.S.C. § 1404(a). Id. at 153. "[I]n such circumstances, the governing law `does not change following a transfer of venue under § 1404(a).'" Id. (quoting Ferens v. John Deere Co., 494 U.S. 516, 530, 110 S.Ct. 1274, 108 L.Ed.2d 443 (1990)). Thus, the Second Circuit held that "the federal court in New York must pretend, for the purpose of determining the applicable state rules of decision, that it is sitting in California." Id. at 154.
As to the determination of "[w]hether a particular state rule of decision is `substantive' under [the] Erie [doctrine]," such determination "is a question of federal law," id. at 152 (emphasis in original), and depends on:
Id. at 152 (quoting Gasperini v. Ctr. for Humanities, Inc., 518 U.S. 415, 428 n. 8, 116 S.Ct. 2211, 135 L.Ed.2d 659 (1996) (second alteration in original)). The Second Circuit noted that it is "immaterial" whether the state rule of decision "is labelled by state law as `procedural,' `substantive,' both, or neither." Id. Rather, "if
The Second Circuit determined that it "h[ad] no reason to doubt that a California state court would apply California's anti-SLAPP rule as a matter of its own procedural rules ...." (Id. at 154.) The Court noted that the anti-SLAPP rule is in California's Code of Civil Procedure, has been described by courts in California as a "procedural remedy" and the "text of the rule is not limited to causes of action that arise under California law." Id. The Court further noted that California courts have also "repeatedly held, as a matter of state law, that California's anti-SLAPP rule is `procedural' in nature and therefore applies in California courts regardless of which source of law governs a plaintiff's claim." Id. Accordingly, the Second Circuit held that since "California's anti-SLAPP rule would apply to this suit if the claim were proceeding in California state court.... the District Court erred with respect to this issue." (Id. at 156.) The Second Circuit vacated Judge Feuerstein's decision and remanded the case to the Court for further consideration of the motion to strike. (Id. at 156.)
On June 14, 2013, the Court referred Defendants' motion to strike to Judge Boyle for a new report and recommendation consistent with the Second Circuit's decision. (Order referring motion dated June 14, 2013.) Magistrate Judge William D. Wall replaced Judge Boyle on this matter on July 15, 2013.
In his R & R, Judge Wall recommended that the Court dismiss this action pursuant to California's anti-SLAPP statute. (R & R, Docket Entry No. 134.) Judge Wall concluded that Plaintiff could not meet its prima facie burden under the anti-SLAPP statute to show a "reasonable probability" that it would prevail in its malicious prosecution claim against Defendants. In particular, Judge Wall found that Plaintiff could not establish a favorable termination in the Underlying Litigation, a required element to prove a malicious prosecution claim under New York law. Judge Wall determined that the Underlying Litigation ended when the parties filed a stipulation of voluntary dismissal pursuant to Rule 41(a)(1)(ii), and concluded that the termination of the Underlying Litigation under those circumstances — specifically, by such an agreement between the parties and without an adjudication on the merits — did not amount to a favorable termination under New York law.
On January 7, 2014, Plaintiff filed objections to Judge Wall's R & R, arguing that the R & R ignores certain facts supporting a finding of favorable termination. (Pl.
A district court reviewing a magistrate judge's recommended ruling "may accept, reject, or modify, in whole or in part, the findings or recommendations made by the magistrate judge." 28 U.S.C. § 636(b)(1)(C). When a party submits a timely objection to a report and recommendation, the district court reviews the parts of the report and recommendation to which the party objected under a de novo standard of review. 28 U.S.C. § 636(b)(1)(C); see also Larocco v. Jackson, No. 10-CV-1651, 2010 WL 5068006, at *2 (E.D.N.Y. Dec. 6, 2010). The district court may adopt those portions of the recommended ruling to which no timely objections have been made, provided no clear error is apparent from the face of the record. 28 U.S.C. § 636(b)(1)(C); see also Larocco, 2010 WL 5068006, at *2. The clearly erroneous standard also applies when a party makes only conclusory or general objections, or simply reiterates its original arguments. See Rahman v. Fischer, No. 10-CV-1496, 2014 WL 688980, at *1 (N.D.N.Y. Feb. 20, 2014) ("If no objections are made, or if an objection is general, conclusory, perfunctory, or a mere reiteration of an argument made to the magistrate judge, a district court need review that aspect of a report-recommendation only for clear error." (citations omitted)); Time Square Foods Imports LLC v. Philbin, No. 12-CV-9101, 2014 WL 521242, at *2 (S.D.N.Y. Feb. 10, 2014) (clearly erroneous standard applies when party reiterates arguments made to the magistrate judge); see also DePrima v. City of New York Dep't of Educ., No. 12-CV-3626, 2014 WL 1155282, at *3 (E.D.N.Y. Mar. 20, 2014) (collecting cases).
California's anti-SLAPP statute was "designed to allow courts to promptly expose and dismiss meritless and harassing claims seeking to chill protected expression." Mindys Cosmetics, Inc. v. Dakar, 611 F.3d 590, 595 (9th Cir.2010) (citing Bosley Med. Inst., Inc. v. Kremer, 403 F.3d 672, 682 (9th Cir.2005)). The statute generally provides for "pre-trial dismissal of `SLAPPs': `Strategic Lawsuits against Public Participation....'" which are "lawsuits that `masquerade as ordinary lawsuits' but are brought to deter common citizens from exercising their political or legal rights or to punish them for doing so." Batzel v. Smith, 333 F.3d 1018, 1023 (9th Cir.2003) (citing Wilcox v. Superior Court, 27 Cal.App.4th 809, 33 Cal.Rptr.2d 446, 450 (1994), overruled on other grounds, Equilon Enter. v. Consumer Cause, Inc., 29 Cal.4th 53, 124 Cal.Rptr.2d 507, 519, 52 P.3d 685 (2002)) (internal citation omitted). California's anti-SLAPP statute provides in pertinent part that:
Cal. C.C.P. § 425.16. "Acts in furtherance of the right of petition include `any written or oral statement or writing made in connection with an issue under consideration or review by a ... judicial body.'" Graham-Sult v. Clainos, 756 F.3d 724, 735 (9th Cir.2014) (alteration in original) (quoting Cal.C.C.P § 425.16(e)(2)). An action for malicious prosecution may be challenged under California's anti-SLAPP law. Jarrow Formulas, Inc. v. LaMarche, 31 Cal.4th 728, 3 Cal.Rptr.3d 636, 74 P.3d 737, 742 (2003) ("The anti-SLAPP statute is not ambiguous with respect to whether its protection of `any act' furthering protected rights encompasses suing for malicious prosecution.").
"In order to prevail on an anti-SLAPP motion, the defendant is required to make a prima facie showing that the plaintiff's suit arises from an act by the defendant made in connection with a public issue in furtherance of the defendant's right to free speech ...."
In assessing an anti-SLAPP motion under California law, a court must consider "the pleadings, and supporting and opposing affidavits ... upon which the liability or defense is based," but may not "weigh credibility [nor] compare the weight of the evidence .... [r]ather, [the court] accept[s] as true the evidence favorable to the plaintiff ... and evaluate[s] the defendant's evidence only to determine if it has defeated that submitted by the plaintiff as a matter of law." Roger Cleveland Golf Co., Inc. v. Krane & Smith APC, 225 Cal.App.4th 660, 170 Cal.Rptr.3d 431, 449 (2014) (quoting Nygard, Inc. v. Uusi-Kerttula, 159 Cal.App.4th 1027, 72 Cal.Rptr.3d 210, 215 (2008)). A plaintiff is not required to prove the merits of a particular claim on an anti-SLAPP motion but must "demonstrate that the complaint is both legally sufficient and supported by a sufficient prima facie showing of facts to sustain a favorable judgment if the evidence submitted by the plaintiff is credited." Burrill v. Nair, 217 Cal.App.4th 357, 158 Cal.Rptr.3d 332, 348 (2013) (quoting Oasis West Realty, LLC v. Goldman, 51 Cal.4th 811, 124 Cal.Rptr.3d 256, 262, 250 P.3d 1115 (2011)). It is not a court's task on a
The Court agrees with Judge Wall that the question of which substantive law applies to the determination of whether Plaintiff can sustain its malicious prosecution claim against Defendants is not properly before the Court. The Court therefore adopts this portion of the R & R. However, the Court disagrees with Judge Wall's conclusion that, because the stipulation of dismissal filed in the Underlying Litigation was signed by the parties and "agreed to," Plaintiff cannot show a favorable termination of the Underlying Litigation, and therefore fails to meet its burden under California's anti-SLAPP statute. The Court declines to adopt this portion of the R & R.
Plaintiff argues that the Amended R & R "disregards the choice of law analysis applied by the Second Circuit with regard to the choice of law determination for the malicious prosecution claim." (Pl. Obj. 9.) Plaintiff contends that the Second Circuit's analysis "is instructive" to the "choice of law analysis application to this case's unique posture," and if the Court were to apply the Second Circuit's analysis, "it would yield a different result," than the result previously reached by Judge Feuerstein and Judge Boyle. (Id. at 9.) Judge Wall determined that the issue of the substantive law applicable to Plaintiff's malicious prosecution claim was not before the Court on this "renewed motion" to strike. (R & R 10.) Judge Wall explained that Judge Boyle previously considered this issue "in detail," Judge Feuerstein agreed and adopted his ruling, and the Second Circuit "specifically avoided considering the issue" as it was not a collateral order suitable for Defendants' interlocutory appeal. (Id. at 11.) Accordingly, Judge Wall determined that the application of New York law to the malicious prosecution claim is the law of the case. (Id.) The Court agrees.
"The law of the case doctrine `commands that when a court has ruled on an issue, that decision should generally be adhered to by that court in subsequent stages in the same case,' unless there has been `an intervening change in law, availability of new evidence, or the need to correct a clear error or prevent a manifest injustice.'" Thompson v. Choinski, 374 Fed.Appx. 222, 223 (2d Cir.2010) (citing Johnson v. Holder, 564 F.3d 95, 99-100 (2d Cir.2009)). In the October 2011 R & R, Judge Boyle considered the issue of whether, under California's choice of law rules, New York substantive law or California substantive law governs Plaintiff's malicious prosecution claim and determined that New York substantive law applies. (October 2011 R & R 19.) Notwithstanding Plaintiff's objection to this choice of law conclusion, Judge Feuerstein accepted it "in its entirety." (Feuerstein decision 3.)
Moreover, the Second Circuit in Liberty Synergistics explicitly did not address whether California or New York substantive law should be applied to the merits of the malicious prosecution claim. Liberty Synergistics, 718 F.3d at 149 ("[W]e are
Judge Wall concluded that Plaintiff could not meet its burden under California's anti-SLAPP law of showing a "reasonable probability" of prevailing in this action because Plaintiff could not show that the Underlying Litigation was terminated in its favor — an element that is necessary to sustain a malicious prosecution claim under New York law.
To state a claim under New York law for the malicious prosecution of a civil action, a plaintiff must show "1) the initiation of an action by the defendant against [him], 2) begun with malice, 3) without probable cause to believe it can succeed, 4) that ends in failure or, in other words, terminates in favor of the plaintiff" and 5) causes special injury. Engel v. CBS, 145 F.3d 499, 502 (2d Cir.1998) (quoting O'Brien v. Alexander, 101 F.3d 1479, 1484 (2d Cir.1996) (internal quotation marks omitted)); Castro v. East End Plastic, Reconstructive & Hand Surgery, P.C., 47 A.D.3d 608, 850 N.Y.S.2d 483, 485 (2008). The Court first reviews the stipulation of dismissal in the Underlying Litigation, and then examines each of the elements of a malicious prosecution claim to determine whether Plaintiff has a reasonable probability of prevailing on its claim.
The Underlying Litigation was terminated by a stipulation of dismissal filed pursuant to Rule 41(a)(1)(ii) of the Federal Rules of Civil Procedure.
Under New York law, there are two ways to establish favorable termination: "(1) `an adjudication of the merits by the tribunal in the prior action,' or (2) `an act of withdrawal or abandonment on the part of the party prosecuting the prior action.'" Morgan v. Nassau County, No. 03-CV-5109, 2009 WL 2882823, at *8 (E.D.N.Y. Sept. 2, 2009) (quoting O'Brien, 101 F.3d at 1486); Castro, 850 N.Y.S.2d at 485 ("The favorable termination element must be established by evidence that the court passed on the merits of the charge or claim ... under circumstances as to show ... nonliability,' or evidence that the action was abandoned under circumstances which `fairly imply the plaintiff's innocence.'") (citation and internal quotation marks omitted). The Court finds that Plaintiff has alleged sufficient facts to establish that the Underlying Litigation was favorably terminated through an act of withdrawal or abandonment.
The parties dispute whether the stipulation of dismissal was the product of a settlement agreement between the parties or reflected an abandonment of the claims in the Underlying Litigation by Defendant Microflo. Defendants argue that the stipulation of dismissal was filed pursuant to a settlement agreement between Defendant Microflo and Plaintiff and that in fact, Plaintiff initiated the prospect of settlement via the stipulation of dismissal. (Def. Supp. Mem. 1 6.) Plaintiff contends that while it offered to settle the Underlying Litigation between February 27, 2009 and December 22, 2009, each of those settlement offers were ignored, and thus, lapsed, or were outright rejected by Defendant Microflo. (Pl. Supp. Mem. 12-13.) Thus, Plaintiff argues that the stipulation of dismissal was not the result of a settlement or compromise but instead, reflects Defendant Microflo's voluntary dismissal of the Underlying Litigation. (Id. at 11-12.)
It is well-settled that an action terminated by settlement cannot sustain a malicious prosecution claim. Smith-Hunter, 95 N.Y.2d at 196, 712 N.Y.S.2d 438, 734 N.E.2d 750; Rubin, 906 N.Y.S.2d at 783; see also Tray Wrap, Inc. v. Pacific Tomato Growers Ltd., 18 Misc.3d 1122(A), 856 N.Y.S.2d 503, 2008 WL 222495, at *13 (Sup.Ct. Bronx Cnty. Jan. 25, 2008) (citing Aquilina, 59 A.D.2d 454, 399 N.Y.S.2d 919 and Louis J. Sigl, Inc. v. Bresnahan, 216 A.D. 634, 215 N.Y.S. 735 (1926) for the proposition that "discontinuance by plaintiff in a prior action ... was a favorable termination when and if the evidence demonstrated that the discontinuance was not induced by the defendant in the prior action or was the result of a compromise"). Thus, if the stipulation of dismissal reflects a settlement agreement between the parties, Plaintiff cannot state a claim for malicious prosecution. The stipulation of dismissal states that "the Plaintiff in [the Underlying Litigation] hereby stipulates and agrees that the action herein is hereby dismissed with prejudice and with each party bearing its (their) own costs." (Stipulation of Dismissal, Sabourin Decl. Ex. G.) The stipulation of dismissal does not indicate that the parties reached a settlement agreement.
Under New York law, "[w]hen a termination is indecisive because it does not address the merits of the charge," and there is a dispute as to the facts surrounding the termination of the action, the question of whether the underlying action was terminated in favor of the plaintiff is a question of fact, requiring a trial on the merits of the case. Tommy Hilfiger Lic., Inc. v. Bradlees, Inc., 2002 WL 737477, at *5 (S.D.N.Y. Apr. 25, 2002); see also Rounseville v. Zahl, 13 F.3d 625, 629 (2d Cir.1994) ("[W]hen the grounds for the dismissal of a criminal proceeding are unclear, New York courts consider whether the proceeding was terminated in plaintiff's favor to be a question of fact that prevents summary judgment.").
Here, the parties dispute whether there was a settlement. Since the language of the stipulation of dismissal does not indicate a settlement and the parties disagree as to whether there was a settlement, crediting Plaintiff's factual allegations that the stipulation of dismissal was not the result of a settlement agreement with Defendant Microflo, as the Court is required
Plaintiff argues that "a voluntary dismissal that is not the result of a settlement or compromise is a favorable termination." (Pl. Supp. Opp. 11.) Defendants argue that even if the stipulation of dismissal was not the result of a settlement agreement, "the procedural background [of the Underlying Litigation] proves that the dismissal still could not be deemed a `favorable termination.'" (Def. Supp. Mem. 22.) Defendants contend that because Plaintiff's motions to dismiss the Underlying Litigation for failure to state a claim and for lack of jurisdiction were denied, except for one claim, the complaint in the Underlying Litigation "stated a viable cause of action." (Id.) Defendants further argue that this "record confirms" that the Underlying Litigation was terminated as a result of practical considerations including the "state of the industry" and the expenses involved in prosecuting the action, not as Plaintiff claims, because "the merits of the action would not result in a favorable termination." (Id. at 23.)
The Court rejects Defendants' arguments. First, the fact that Plaintiff's motions to dismiss the Underlying Litigation were denied is not determinative of whether the Underlying Litigation was terminated in favor of Plaintiffs. Determining whether a proceeding ended in a favorable termination requires the Court to evaluate the circumstances under which the underlying action was terminated. It does not necessarily require the Court to assess the viability of the underlying claims.
Plaintiff's argument that a "voluntary dismissal that is not the result of a settlement or compromise is a favorable termination" is supported by New York case law. Aquilina, 399 N.Y.S.2d at 921; Mobile Training & Educ., Inc. v. Aviation Ground Schools of America ("Mobile Training"), 28 Misc.3d 1226(A), 958 N.Y.S.2d 61 (Sup.Ct.N.Y.Cnty.2010). In Aquilina, the Third Department rejected the argument that an action discontinued with prejudice "is not a favorable termination sufficient to support a later cause of action ... for malicious prosecution." 399 N.Y.S.2d at 921. Instead, the court stated that "the more realistic view, as well as the weight of authority," demonstrates that "in the absence of a compromise or inducement offered by the defendant in the primary action, the voluntary discontinuance by the plaintiff therein is tantamount to a successful termination of such action in favor of the defendant therein." Id. (citations omitted). Similarly, in Mobile Training, 28 Misc.3d 1226(A), a New York County Supreme Court decision, the court noted that "[t]he question of whether ... a voluntary dismissal qualifies as termination in favor of the plaintiff is unresolved in New York," but concluded that as long as the voluntary dismissal did not stem from a settlement or compromise between the parties, it was sufficient to state a
The "formal abandonment" of an action under circumstances "not inconsistent with innocence" can also satisfy the favorable termination element of a malicious prosecution claim. Cantalino v. Danner, 96 N.Y.2d 391, 395-96, 729 N.Y.S.2d 405, 754 N.E.2d 164 (2001). The question of whether an abandonment of a prosecution, "resulting in a termination `with prejudice' ... constitutes a termination favorable to the accused ... generally depends on the cause of the abandonment." Murphy v. Lynn, 118 F.3d 938, 949 (2d Cir.1997). Where the abandonment "was the result of a compromise ... an act of mercy requested or accepted by the accused, or misconduct by the accused, it is not" a favorable termination. Id. Where, however, the action was terminated by abandonment under circumstances not "inconsistent with innocence," it is a favorable termination. See Mangino v. Incorporated Village of Patchogue, 739 F.Supp.2d 205, 228 (E.D.N.Y.2010) ("New York law does not require a malicious prosecution plaintiff to prove her innocence, or even that the termination of the... proceeding was indicative of innocence. Instead, the plaintiff's burden is to demonstrate a final termination that is not inconsistent with innocence."). Thus, under certain circumstances, a voluntary dismissal can be a favorable termination, depending on the cause of the dismissal. Chimurenga v. City of New York, 45 F.Supp.2d 337 (S.D.N.Y.1999) (collecting cases).
Here, there is a reasonable probability that the Underlying Litigation was favorably terminated. First, the stipulation of dismissal on its face indicates that Defendant Microflo terminated the Underlying Litigation with prejudice by voluntary dismissal, without any settlement or compromise since none is mentioned, and, crediting Plaintiff's factual allegation, the Underlying Litigation was not terminated pursuant to a settlement. As the courts in Aquilina and Mobile Training found, this alone is sufficient to create a triable issue of fact as to whether there is a favorable termination. In addition, the stipulation of dismissal was filed six months after Plaintiff's last settlement offer but one month after the court sua sponte dismissed Defendant
Under the circumstances of this case, Plaintiff has sufficiently alleged disputable issues of fact as to whether the Underlying Litigation was abandoned by Defendant Microflo and thus, terminated in Plaintiff's favor.
Having found that there is a reasonable probability that Plaintiff can establish that the Underlying Litigation was terminated in its favor, and finding Defendants' arguments insufficient as a matter of law to defeat Plaintiff's claim of favorable termination, the Court addresses the additional elements of Plaintiff's malicious prosecution claim. To sustain its prima facie burden, Plaintiff must also show a lack of probable cause, malice, and special injury.
To sustain a malicious prosecution claim, Plaintiff must also show "an entire lack of probable cause." Engel v. CBS, Inc., 93 N.Y.2d 195, 204, 689 N.Y.S.2d 411, 711 N.E.2d 626 (1999). Probable cause is defined as "such facts and circumstances as would lead a reasonably prudent person in like circumstances to believe plaintiff guilty." Perryman, 839 N.Y.S.2d at 292. "Because obviously less in the way of grounds of belief will be required to justify a reasonable man in bringing a civil rather than a criminal suit, when the underlying action is civil in nature, the want of probable cause must be patent." Butler v. Ratner, 210 A.D.2d 691, 619 N.Y.S.2d 871, 873 (1994) (citations and internal quotation marks omitted). Thus, if a defendant "had probable cause to assert some of their causes of action, [a] plaintiff[] [cannot] maintain a malicious prosecution claim." Perryman, 839 N.Y.S.2d at 292. A presumption of probable
Plaintiff claims that Defendants' allegations in the Underlying Litigation were made "without any reasonable basis in fact or any probable cause." (Compl. ¶ 25.) According to Plaintiff, with respect to each of the causes of action alleged in the Underlying Litigation, there was no factual basis and/or Defendants knew or should have known that there was no factual support for any of their claims. (Id. ¶ 25a-g.) Plaintiff further argues that the underlying conflict between the parties was "simply a breakdown in business negotiations, and nothing more" and that Malkin "conceded [during his deposition that] he had no basis for filing a lawsuit against" Plaintiff. (Pl. Supp. Opp. 15.) In support of this argument, Plaintiff submitted excerpts of the transcript of Malkin's deposition in which Malkin admits that his allegations were either based on "speculation" or that he had no actual knowledge or facts. (Id. at 15-18.) Defendants dispute Plaintiff's argument with a Declaration from Malkin which Defendants claim "establishes that [Malkin] and Microflo had a good faith and reasonably based belief that Microflo had been wronged by Liberty and that the Underlying [Litigation] was pursued in a reasonable attempt to recover for that wrong and for no other purpose." (Def. Supp. Reply 17.) This Declaration reiterates Defendants' allegations in the Underlying Litigation that Plaintiff's conduct in the negotiations regarding the sale of the photo filters amounted to unfair trade practices, fraud and other wrongful conduct.
The arguments of the parties setting forth their understanding and interpretation of the meaning of certain statements are disputed issues of fact that cannot be resolved by the Court. Since the parties agree that these statements are material to a determination of whether Defendant Microflo had probable cause to commence the Underlying Litigation, this issue must be decided by the trier of fact. While Plaintiff argues that Defendant Microflo had no basis in fact to pursue its claims in the Underlying Litigation and the conflict at the heart of the Underlying Litigation amounted to nothing more than a "potential business deal [which] fell through for a multitude of reasons," Defendants argue that they had a basis to assert that Plaintiff's conduct in the Underlying Litigation was "not legal" and illicit. Thus, the parties dispute several issues of fact bearing on the issue of probable cause — whether Defendants disclosed "trade secrets" in negotiations with Plaintiff, the reason why the negotiations between the parties failed, and whether Microflo had a basis to believe that Plaintiff "reverse-engineered" its filters in order to produce its own. Construing the evidence in Plaintiff's favor, as the Court is required to do, the Court concludes there are disputed issues of fact that preclude a finding that Plaintiff has
Plaintiff must also show that Microflo acted with malice in commencing the Underlying Litigation. Plaintiff argues that "[i]t is undisputed that Defendants acted with conscious falsity when, after little to no investigation, they filed suit based on speculation." (Pl. Supp. Opp. 18.) Plaintiff further alleges that "Malkin's [deposition] testimony supports an inference under ... New York law, because there are no facts supporting probable cause to pursue Liberty in the Underlying Litigation." (Id.)
Malice "may be shown by proving that the prosecution complained of was undertaken from improper or wrongful motives, or in reckless disregard of the rights of the plaintiff." Daly v. Ragona, No. 11-CV-3836, 2013 WL 3428185, at *7 (E.D.N.Y. July 9, 2013) (citing Pinsky v. Duncan, 79 F.3d 306, 313 (2d Cir.1996)). "A lack of probable cause generally creates an inference of malice." Id. Moreover, once there is an issue of fact as to probable cause, "the element of malice also becomes an issue of material fact as well." Boyd v. City of New York, 336 F.3d 72, 77 (2d Cir.2003); Zahrey v. City of New York, No. 98-CV-4546, 2009 WL 54495, at *20 (S.D.N.Y. Jan. 7, 2009). Because the Court finds that there is an issue of fact on the issue of probable cause, there is also an issue of fact as to the issue of malice.
Plaintiff argues that it sustained the following "special damages" as a result of the Underlying Litigation: significant legal fees which affected Plaintiff's ability to purchase a competitor and to borrow capital, strained relationships with distributors and customers, loss or projected sales revenues, and "decreased availability of funds and higher borrowing costs." (Pl. Supp. Opp. 18; Am. Compl. ¶ 28.) Plaintiff also claims that it disclosed the Underlying Litigation during discussions with potential buyers and while it held discussions with
A special injury is a "highly substantial and identifiable interference with person, property or business and must entail some concrete harm that is considerably more cumbersome than the physical, psychological or financial demands of defending a lawsuit." Dudick v. Gulyas, 277 A.D.2d 686, 716 N.Y.S.2d 407, 410 (2000); Engel, 93 N.Y.2d at 205, 689 N.Y.S.2d 411, 711 N.E.2d 626 ("[W]hat is special about special injury is that the defendant must abide some concrete harm that is considerably more cumbersome than the physical, psychological or financial demands of defending a lawsuit."). Courts have recognized special injuries in the form of arrests, loss of business, suspension without pay, and provisional remedies such as an attachment of bank accounts or an injunction. Minasian v. Lubow, 49 A.D.3d 1033, 856 N.Y.S.2d 255, 257 (2008) (arrest); Dudick, 716 N.Y.S.2d at 410 (loss of business); Honzawa v. Honzawa, 268 A.D.2d 327, 701 N.Y.S.2d 411, 413 (2000) (attachment); Groat v. Town Bd. of Town of Glenville, 73 A.D.2d 426, 426 N.Y.S.2d 339, 341 (1980) (suspension without pay). In order for a claim of lost business to meet the special injury standard, it must be specific and verifiable. See Engel v. CBS, Inc., 182 F.3d 124, 132 (2d Cir.1999) (noting that "[e]ven though we can foresee specific, verifiable loss of business providing the necessary grievance [for special injury], the loss of one client along with vague allegations of reputational loss, given [the plaintiff's] established practice, are not sufficient"); Korova Milk Bar of White Plains, Inc. v. PRE Properties, LLC, No. 11-CV-3327, 2013 WL 417406, at *14 (S.D.N.Y. Feb. 4, 2013) ("New York law recognizes loss of business as a special injury in a case for malicious prosecution, as long as [the] [p]laintiff sufficiently identifies the specific business lost as a result of the civil proceeding.").
Plaintiff claims that the significant cost of legal fees in defending the Underlying Litigation, "brought [Plaintiff's] negotiations to purchase a competitor to a halt due to [Liberty's] inability to borrow capital as a result of a covenant breach during the first quarter of 2009." (Pl. Supp. Opp. 18.) This claim is insufficient to allege a special injury. "[A]ttorneys' fees and cost associated with defending a lawsuit do not rise to the level necessary to show special damages." McCaul v. Ardsley Union Free School Dist., 514 Fed.Appx. 1, 6 (2d Cir.2013) (claim that plaintiff "spent thousands of dollars to retain an attorney and suffered distress and anxiety" is not special injury (citing Engel, 93 N.Y.2d at 205, 689 N.Y.S.2d 411, 711 N.E.2d 626)); Sankin v. Abeshouse, 545 F.Supp.2d 324, 328 (S.D.N.Y.2008) ("[A]ttorneys' fees and cost associated with defending a lawsuit do not rise to the level necessary to show special damages." (citing Engel, 93 N.Y.2d at 205, 689 N.Y.S.2d 411, 711 N.E.2d 626)); Engel, 93 N.Y.2d at 205, 689 N.Y.S.2d 411, 711 N.E.2d 626 (noting that special injury must involve harm "more cumbersome" than "financial demands of defending a lawsuit"); Mobile Training, 28 Misc.3d 1226(A), 958 N.Y.S.2d 61 ("[T]he expense of defending against the [underlying] lawsuit... is decidedly not special."); Zhang v. Goff, 18 Misc.3d 1134(A), 2008 WL 465290 at *3 (Sup.Ct. Queens Cnty.2008)
Plaintiff's claim that negotiations to purchase a competitor ceased due to its "inability to borrow capital as a result of a covenant breach during the first quarter of 2009," (Pl. Supp. Opp. 18), also fails to satisfy the special injury element. Plaintiff has not specified how the Underlying Litigation caused the unspecified covenant breach which then caused Plaintiff to be unable to borrow capital. To meet the special injury requirement, the injury must have "resulted because of the [Underlying Litigation]." Goodstein v. Jones, No. 114335/2006, 2008 WL 4903863, 2008 N.Y. Misc. LEXIS 10574, at *2-3, 2008 N.Y. Slip Op. 33018U (Sup.Ct.N.Y.Cnty. Nov. 10, 2008). Accordingly, this allegation does not meet the special injury standard.
Plaintiff claims that "Microflo's pursuit of baseless claims caused strained relationships the [sic] Liberty's distributors and customers and caused Liberty to receive requests for reimbursements of legal fees for costs associated with subpoenaed information in the [Underlying Litigation]." (Am. Compl. ¶ 28.) First, the "requests for reimbursements" constitute costs related to the defense of the Underlying Litigation, and as explained above, cannot meet the special injury standard. Moreover, Plaintiff's vague claim of "strained relationships," as a result of the Underlying Litigation is also insufficient to state a special injury. The limited case law that addresses whether a claim of "strained relationships" can satisfy the special injury requirement suggests that such a claim is insufficient. See Engel, 93 N.Y.2d at 207, 689 N.Y.S.2d 411, 711 N.E.2d 626 (finding that "the loss of one client along with vague allegations of reputational loss ... are not sufficient" to meet special injury requirement); Campion Funeral Home, Inc. v. State of New York, 166 A.D.2d 32, 569 N.Y.S.2d 518, 521 (1991) ("Injury to reputation ... fails to satisfy [special injury] requirement."); Rubin, 906 N.Y.S.2d 783 (Sup.Ct.N.Y.Cnty.2009) ("conclusory claim of reputational harm" insufficient to state special injury); Loftus v. Arthur, 16 Misc.3d 1126(A), 847 N.Y.S.2d 902 (Sup.Ct. Madison Cnty.2007) (noting that "incidental damage to [a] plaintiff's reputation is insufficient" to state a special injury). Thus, Plaintiff's allegation of "strained relationships" as a result of the Underlying Litigation also fails to meet the special injury standard.
Plaintiff claims that it sustained "substantial loss of projected sales revenues" in the amount of $745,097 "as a direct result of Microflo's conduct." (Pl. Supp. Opp. 19.) Plaintiff specifies that its net projected lost sales was $486,662 to Walmart, $53,561 to Costco, $26,781 to Independent photo labs, and $382,368 to Noritsu Labs at Walgreens. (Id.) Plaintiff elaborates that with regard to projected
In order to meet the special injury element, a lost business claim must be specific and verifiable. While Plaintiff provides specific figures for its alleged losses, with respect to its lost sales from Walmart, Costco, and Independent photo labs, Plaintiff has not provided any facts explaining how these losses were caused by the Underlying Litigation, merely alleging that these losses were "a direct result of [Defendant] Microflo's conduct." Plaintiff must allege "facts that would establish that" the Underlying Litigation caused its claimed special injury. Kaye v. Trump, 58 A.D.3d 579, 873 N.Y.S.2d 5, 6 (2009) (rejecting plaintiff's claim of special injury where plaintiff alleged that "she was forced by defendants' `acts' to sell her condominium unit and move from the building [but] assert[ed] no facts that would establish that the [underlying litigation] caused her to move"); see also Kaslof v. Global Health Alternatives, Inc., No. 98-CV-7477, 2000 U.S. Dist. LEXIS 21053, at *68 (E.D.N.Y. June 29, 2000) (noting that "plaintiff failed to allege any special injury that they have incurred as a result of the [underlying litigation]"). With respect to the losses from Walmart, Costco and Independent photo labs, Plaintiff has not provided any specific allegations as to how these losses were caused by the Underlying Litigation; therefore, these losses do not constitute special injury.
With respect to its loss from sales to Noritsu Labs, Plaintiff states that it was "unable to provide reusable filters which could be manufactured to the specifications necessary for use in Noritsu photo developing machines upon disclosure of the [Underlying Litigation]." (Pl.Supp. Opp. 19.) Although lacking in details, because Plaintiff alleges what the lost business is, and that the lost business is as a result of the Underlying Litigation, it arguably satisfies the special injury standard under New York law. See In re Eerie World Entm't., LLC, No. 00-CV-13708, 2006 WL 1288578, at *8 (S.D.N.Y. Bankr. Apr. 28, 2006) (plaintiff alleged special injury when plaintiff pled loss of business from a specific entity that was the result of initiation and prosecution of the prior action); Strumpf v. Asdourian, No. 110141/06, 2006 WL 6348824, 2006 N.Y. Misc. LEXIS 3976, at *10 (Sup.Ct.N.Y.Cnty. Dec. 12, 2006) (finding that plaintiff sufficiently alleged special injury by claiming "the loss of certain clients whom she was compelled to advise regarding the [prior] [law]suit").
To state a claim for malicious prosecution, Plaintiff must show that Defendants commenced the Underlying Litigation. Sankin v. Abeshouse, 545 F.Supp.2d 324, 327 (S.D.N.Y.2008) (plaintiff failed to state malicious prosecution claim where plaintiff did not show that underlying litigation "was initiated by either [d]efendant"); Loftus v. Arthur, 16 Misc.3d 1126(A), 847 N.Y.S.2d 902 (Sup.Ct.2007) ("It has been held that the key to the first element of [a malicious prosecution claim] is the defendant's commencement the underlying proceeding."). It is undisputed that the Underlying Litigation against Plaintiff was commenced by Defendant Microflo only. Thus, Plaintiff must allege a basis for liability against Defendants Ecotech, Malkin, and the unknown Defendants, Does 1-20. Plaintiff alleges that Malkin and Ecotech are "alter egos" of Defendant Microflo, and the Court should therefore "pierce the corporate veil" and hold them liable for malicious prosecution of the Underlying Litigation.
"Alter ego liability exists when a parent or owner uses the corporate form to achieve fraud, or when the corporation has been so dominated by an individual or another corporation (usually a parent corporation), and its separate identity so disregarded, that it primarily transacted the dominator's business rather than its own." OOO "Garant-S" v. Empire United Lines Co., Inc., 557 Fed.Appx. 40, 45 (2d Cir. 2014) (quoting Kiobel v. Royal Dutch Petroleum Co., 621 F.3d 111, 195 (2d Cir. 2010)). A party seeking to pierce the corporate veil under New York law and hold another entity or individual liable on a claim against a corporation must show: (1) the alleged alter ego "exercised complete domination over the corporation with respect to the transaction at issue; and (2) such domination was used to commit a fraud or wrong that injured the party seeking to pierce the corporate veil." MAG Portfolio Consult, GMBH v. Merlin Biomed Grp., LLC, 268 F.3d 58, 63 (2d Cir.2001) (quoting Am. Fuel Corp. v. Utah Energy Dev. Co., 122 F.3d 130, 134 (2d Cir.1997)). Courts consider ten equitable factors in determining whether the first requirement — domination — has been met. They are:
JSC Foreign Econ. Ass'n Technostroyexport v. Int'l Dev. & Trade Servs., Inc., 386 F.Supp.2d 461, 464-65 (S.D.N.Y.2005) (quoting Wm. Passalacqua Builders, Inc. v. Resnick, 933 F.2d 131, 139 (2d Cir. 1991)). If the domination requirement is met, the plaintiff must then fulfill the second requirement by showing (1) "the existence of a wrongful or unjust act toward that party," and (2) that "the act caused the party's harm." JSC Foreign Econ. Ass'n Technostroyexport, 386 F.Supp.2d at 465. "The party seeking to pierce the corporate veil must establish that the owners of the corporation, through their dominance of the corporation, `abused the privilege of doing business in the corporate form to perpetrate a wrong or injustice against that party such that a court in equity will intervene.'" Id. (quoting Morris v. N.Y. Dep't of Taxation and Fin., 82 N.Y.2d 135, 141, 603 N.Y.S.2d 807, 623 N.E.2d 1157 (1993)); see also MAG Portfolio Consultant, GMBH v. Merlin Biomed Group LLC, 268 F.3d 58, 64 (2d Cir.2001) ("Without a finding that the domination occurred for the purpose of committing a wrong, the second element of a veil-piercing analysis has not been met."). The Court considers each Defendant below.
Defendants contend that Plaintiff cannot establish a reasonable probability of success against Ecotech, because there is "no law" under which a "subsidiary or dominated party" has been held liable for the acts of its parent, controlling shareholder, or dominating party based on an alter ego theory. (Def. Supp. Reply 18; Def. Supp 23.) Defendants are incorrect. Although uncommon, New York law recognizes "reverse veil-piercing," where, as here, a party seeks to hold a subsidiary liable for the actions of its parent or shareholders. Ross Univ. School of Medicine, Ltd. v. Brooklyn-Queens Health Care, Inc., No. 09-CV-1410, 2013 WL 1334271, at *13 n. 3 (E.D.N.Y. Mar. 28, 2013) ("[T]he doctrine of `reverse' veil-piercing is applicable where ... a party attempts to hold a subsidiary corporation ... liable for the actions of its parent."); Miramax Film Corp. v. Abraham, No. 01-CV-5202, 2003 WL 22832384, at *7 (S.D.N.Y. Nov. 25, 2003) ("Although reverse veil piercing is rare, it may be appropriate in cases where the alter ego is being used as a `screen' for the dominating entity." (citing Kingston Dry Dock Co. v. Lake Champlain Transp. Co., 31 F.2d 265, 267 (2d Cir.1929))); Securities Investor Protection Corp. v. Stratton Oakmont, Inc., 234 B.R. 293, 323 (Bankr.S.D.N.Y.1999) (noting that "reverse veil piercing may be rare ... but not impossible"); see also Am Fuel Corp. v. Utah Energy Dev. Co., Inc., 122 F.3d 130, 134 (2d Cir.1997) ("New York law recognizes `reverse' piercing ... seek[ing] to hold a corporation accountable for actions of its shareholders." (citing State v. Easton, 169 Misc.2d 282, 647 N.Y.S.2d 904, 908-09 (Sup.Ct.1995))).
"As with conventional veil-piercing claims, in a reverse veil-piercing claim, the plaintiff must allege (1) that the owner exercised complete domination over the corporation with respect to the transaction at issue; and (2) that such domination was used to commit a fraud or wrong that injured the party seeking to pierce the veil." JSC Foreign Economic Ass'n Technostroyexport, 295 F.Supp.2d at 379. Courts consider the same ten equitable factors outlined above in determining
In its Amended Complaint, Plaintiff makes several allegations in support of its alter ego theory, including that:
(Am. Compl. ¶ 6a-g.) Plaintiff claims that Ecotech does not observe corporate formalities, as evidenced by Malkin's "conce[ssion]" that, when assigning his 100% interest in Ecotech to Microflo, he did not require "any additional stock in Microflo Ltd. be issued to [him] in exchange." (Pl. Supp. Opp. 22-23.) Plaintiff also alleges that the entities were inadequately capitalized and that Malkin "did not (and could not) make timely payments [owed from Ecotech to Microflo] because Malkin failed to issue instructions among his various entities to generate invoices." (Id. at 23.) Plaintiff also contends that Malkin admitted in documents exchanged in litigation that he used corporate funds for personal expenses.
These allegations — alleging a lack of corporate formalities, undercapitalization, failure to issue periodic reports, and the use of corporate funds for personal use — are sufficient, if accepted as true, to establish domination. United States v. Hued, No. 87-CV-7740, 1992 WL 346877, at *3 (S.D.N.Y. Nov. 10, 1992) (finding a triable issue of fact on alter ego claim where plaintiff alleged that corporate entity was undercapitalized and alleged alter ego could not recall whether corporation had ever issued an annual report); Horizon Inc. v. Wolkowicki, 55 A.D.3d 337, 865 N.Y.S.2d 195 (2008) (finding triable issue of fact precluding summary judgment where alleged alter ego "ignored the corporate form by transferring monies in and out ... without any documentation or formalities"); Forum Ins. Co. v. Texarkoma Transp. Co., 229 A.D.2d 341, 645 N.Y.S.2d 786, 786 (1996) ("Under New York law, the corporate veil can be pierced where there has been, inter alia, a failure to adhere to corporate formalities, inadequate capitalization, use of corporate funds for personal purpose, [and] overlap in ownership and directorship....").
Plaintiff argues that Malkin should be held liable for Microflo's malicious prosecution of the Underlying Litigation, based on similar allegations as those against Ecotech. Plaintiff contends that Malkin "is the sole shareholder, director, officer, and full-time employee of Microflo," that Microflo is undercapitalized and that Malkin used Microflo's corporate funds for his personal use. (Pl. Supp. 22-23.) Plaintiff also alleges that all of Microflo's business is directed by Malkin, and that Microflo is used as the "corporate pocket book for Malkin and his individual interests." (Am. Compl. ¶¶ 6b, 6f.) Defendants argue that Plaintiff's allegations are insufficient to show an alter ego relationship between Malkin and Microflo, relying on corporate records to demonstrate that Microflo "acted in its own name from 2003 through 2008." (Def. Supp. Reply 19.) Defendants also assert that Plaintiff has failed to submit any proof demonstrating inadequate capitalization, use of corporate funds for personal purposes, and fails to demonstrate a "factual basis" for its alter ego theory or the presence of any other factor typically used by courts in assessing "complete domination" by alleged alter egos. (Id. at 19-23.)
Plaintiff is not required to prove its claims in order to defeat Defendants' motion to strike. Burrill, 158 Cal.Rptr.3d at 347-48 ("[T]he anti-SLAPP statute does not require the plaintiff to prove the specified claim to the trial court." (citation and internal quotation marks omitted)). Rather, the Court is required to credit Plaintiff's factual allegations. (Id. (Courts should "accept as true all evidence favorable to the plaintiff.")). Crediting Plaintiff's allegations, there appears to be at least a triable issue of fact as to the issue of domination of Microflo by Malkin, particularly as Plaintiff alleges a use of corporate funds for personal use. The improper use of funds is sufficient to support an alter ego claim. See Dolco Inv., Ltd. v. Moonriver Dev., Ltd., 526 F.Supp.2d 451, 454-455 (S.D.N.Y.2007) (citing Wajilam Exps. (Singapore) Pte. Ltd. v. ATL Shipping Ltd., 475 F.Supp.2d 275, 283 (S.D.N.Y.2006) and Strojmaterialintorg v. Russian Am. Commercial Corp., 815 F.Supp. 103, 105 (E.D.N.Y.1993)).
Plaintiff also satisfies the second veil-piercing prong which considers whether the alter ego used its domination to commit fraud or another wrong — that is, "to perpetrate the violation of a ... positive legal duty or a dishonest or unjust act in
Plaintiff has not addressed the liability of the unknown Defendants ("Doe Defendants") in any of its briefing submitted in connection with the instant motion. In the Amended Complaint, Plaintiff states that it believes that "Does 1 through 20 were responsible in some manner for the acts and transactions hereby alleged and are liable to Plaintiff." (Am. Compl. ¶ 8.) Plaintiff does not proffer any alter ego allegations against the Doe Defendants, though Plaintiff alleges vaguely that "each of the Defendants was the agent, employee, licensee, invitee, assignee and/or subordinate of the remaining Defendants." (Id. ¶ 9.) Because Plaintiff has not sufficiently alleged a basis for liability against the Doe Defendants, the Court grants Defendants' anti-SLAPP motion as to the Doe Defendants.
In view of the Court's decision denying Defendants' motion to strike, the Court denies Defendants' motion for sanctions.
For the reasons set forth above, the Court adopts Judge Wall's R & R as to the determination that the issue of which substantive law applies to Plaintiff's malicious prosecution claim is the law of the case, but declines to adopt the portion of Judge Wall's R & R which found that Plaintiff does not have a reasonable probability of prevailing on its malicious prosecution claim. The Court finds that Plaintiff has a reasonable probability of prevailing on its malicious prosecution claim as to the named Defendants. Therefore, California's anti-SLAPP statute does not preclude Plaintiff's claim against the named Defendants. Accordingly, the Court denies Defendants' motion to strike the Complaint as to the named Defendants. The Court grants Defendants' motion to strike the Complaint as to Does 1 through 20. The Court also denies Defendants' motion for sanctions.
SO ORDERED.
However, since O'Brien, the New York Court of Appeals has clarified the issue, stating that its "holdings in ... Hollender and MacFawn stand only for the proposition that dispositions inconsistent with innocence, like the ones in those cases, cannot be viewed as favorable to the accused." Smith-Hunter v. Harvey, 95 N.Y.2d 191, 199, 712 N.Y.S.2d 438, 734 N.E.2d 750 (2000). The court in Smith-Hunter found that a dismissal without prejudice "qualifies as a final, favorable termination" if it reflects "the formal abandonment of the proceedings by the public prosecutor." Id. at 198, 712 N.Y.S.2d 438, 734 N.E.2d 750. Moreover, recent cases confirm that a favorable termination can still be established by showing that the underlying action was abandoned. See Hudson Val. Mar., Inc. v. Town of Cortlandt, 79 A.D.3d 700, 912 N.Y.S.2d 623, 626 (2010) ("The favorable termination element must be established by evidence that the `court passed on the merits of the charge or claim ...' or evidence that the action was abandoned under circumstances `which fairly imply the plaintiff's innocence.'" (quoting Castro v. East End Plastic, Reconstructive and Hand Surgery, P.C., 47 A.D.3d 608, 850 N.Y.S.2d 483, 485 (2008))); Furgang & Adwar, LLP v. Fiber-Shield Indus., Inc., 55 A.D.3d 665, 866 N.Y.S.2d 250, 251 (2008) ("To show a termination in [its] favor, the plaintiff must prove that the court passed on the merits of the charge or claim against [it] under such circumstances as to show [its] innocence or nonliability, or show that the proceedings were terminated or abandoned at the instance of the defendant under circumstances which fairly imply the plaintiff's innocence." (emphasis added) (alterations in original) (quoting Pagliarulo v. Pagliarulo, 30 A.D.2d 840, 293 N.Y.S.2d 13, 15 (1968))). The Court follows the more recent case law from the New York state courts in concluding that a plaintiff may establish a favorable termination by showing an abandonment or withdrawal by the prosecuting party.
