Cohen v. Koenig

• Decision Date: 20 June 1994
• Docket Number: No. 1375,D,1375
• Citation: 25 F.3d 1168
• Parties: Stanley COHEN, Gerald A. Garfinkle, Eastern Artists and Drafting Materials, Inc., Plaintiffs-Appellants, v. Elliott KOENIG, and Robert Koenig, Defendants-Appellees. ocket 93-9175.
• Court: U.S. Court of Appeals — Second Circuit

Page 1168

25 F.3d 1168

29 Fed.R.Serv.3d 989

Stanley COHEN, Gerald A. Garfinkle, Eastern Artists and Drafting Materials, Inc., Plaintiffs-Appellants, v. Elliott KOENIG, and Robert Koenig, Defendants-Appellees.

No. 1375, Docket 93-9175.

United States Court of Appeals,

Second Circuit.

Argued March 28, 1994.

Decided June 20, 1994.

Gary J. Langer, New York City (Deborah A. Sullivan, Forest Hills, NY, on the brief), for plaintiffs-appellants.

Regina A. Matejka, New York City (Edwards & Angell, on the brief), for defendants-appellees.

Before: TIMBERS, KEARSE, and CARDAMONE, Circuit Judges.

KEARSE, Circuit Judge:

Plaintiffs Stanley Cohen, Gerald A. Garfinkle, and Eastern Artists and Drafting Materials, Inc. ("Eastern"), appeal from a judgment entered in the United States District Court for the Southern District of New York, Loretta A. Preska, Judge, dismissing their suit seeking damages against defendants Elliott and Robert Koenig (the "Koenigs") for fraud in connection with the Koenigs' purchase of the assets of Eastern. The district court dismissed the amended complaint pursuant to Fed.R.Civ.P. 12(b)(6) for failure to state a claim upon which relief can be granted, and pursuant to Fed.R.Civ.P. 9(b) for failure to plead fraud with particularity. On appeal, plaintiffs contend that these rulings were erroneous or that the court should at least have allowed them to replead. We conclude that the dismissal was erroneous, and we therefore vacate the judgment and remand for further proceedings.

I. BACKGROUND

Prior to June 1, 1989, Cohen and Garfinkle were the sole officers, directors, and shareholders of Eastern. The Koenigs were officers, directors, majority shareholders, and employees of Koenig Corporation, a company engaged in selling artist and drafting supplies and materials. Koenig Corporation had a number of subsidiaries, including Koenig Artist Supplies, Inc. ("KAS"), Koenig Management Services, Inc. d/b/a Koenig Art Emporium ("KMS"), and Art Management Services, Inc., (collectively, the "Koenig Group").

In early 1989, the Koenigs sought to acquire the assets of Eastern, which included various physical equipment, and the goodwill associated with Eastern's name. The Koenigs sought to make the purchase on credit; Cohen and Garfinkle requested cash. The transaction was consummated on June 1, 1989, in part on credit. Plaintiffs contend that Cohen and Garfinkle were induced to extend credit to the Koenigs because of fraudulent representations repeatedly made to them by the Koenigs during the 1989 negotiations. The amended complaint alleged the following misrepresentations.

A. The Events as Alleged in the Amended Complaint

The Koenigs first proposed to acquire Eastern in a meeting held in Eastern's offices on February 24. At that meeting, Robert Koenig described the Koenig Group's sales, net income, and recent acquisitions. After the meeting, in an attempt to persuade Cohen and Garfinkle to extend them credit in connection with the proposed acquisition of Eastern, the Koenigs sent Cohen and Garfinkle financial statements for the companies in the Koenig Group for the fiscal years ended June 30, 1987, and June 30, 1988 (collectively "Financial Statement").

Thereafter, in a meeting on April 1, Elliott and Robert "represented to the plaintiffs that the Financial Statement was certified and set forth a true and accurate depiction of the sound financial condition of the [Koenig Group]." (Amended Complaint p 24.) The Koenigs also represented that "the financial condition had substantially improved for the year since the last period covered by the Financial Statement." (Id.) With respect to the year ended June 30, 1988, they represented that the value of the Koenig Group's "current assets, defined as assets reasonably expected to be realized in cash, sold, or consumed during the normal operating cycle of the business, was $2,270,096.00," that the value of its "property and equipment was $3,961,528.00," and that its "net income was $1,035,139.00." (Id.) The Koenigs also represented that the Koenig Group's net income "would be substantially greater for the year about to end on June 30, 1989." (Id.) In response to the insistence of Cohen and Garfinkle on an all-cash transaction or at least on personal guarantees from the Koenigs, the Koenigs repeated these representations at meetings held with plaintiffs on April 10 At the closing, in reliance on the Koenigs' repeated assurances as to the financial condition of the Koenig Group, Cohen and Garfinkle dropped their demands for an all-cash transaction and for the Koenigs' personal guarantees and agreed to a part-credit sale. Eastern's assets were sold to KMS for $2,194,000, with $1,550,000 paid in cash and the balance of $644,000 financed by $322,000 loans from Cohen and Garfinkle, respectively, to be repaid by KMS. In addition, Cohen entered into a four-year consulting agreement with KAS, pursuant to which he was to be paid a gross salary of $31,250 per year, and a two-year employment agreement with KMS, pursuant to which he was to be paid a base salary of $150,000 per year plus reimbursement for expenses of up to $18,000. Garfinkle entered into a four-year consulting agreement with KAS, pursuant to which he was to be paid a gross salary of $31,250 per year, and he entered into a seven-month employment agreement with KMS.

May 17, and May 31, and again at the closing on June 1.

Cohen and Garfinkle later learned that the Koenig Group's June 30, 1988 financial statements given to plaintiffs prior to the April 1, 1989 meeting, as well as the Koenigs' repeated representations throughout the spring of 1989 that those statements were accurate, were materially false in the following respects: (1) as of June 30, 1988, the Koenig Group's current assets had a value of $1,730,096, not $2,270,096 as represented; (2) as of June 30, 1988, the Koenig Group's property and equipment had a value of $3,311,528, not $3,961,528 as represented; (3) as of June 30, 1988, the Koenig Group's net income was $326,139, not $1,035,139 as represented; and (4) for the year ending June 30, 1989, the Koenig Group's net income was not substantially greater than the $1,035,139 figure that the Koenigs had presented as the fiscal 1988 net income; rather, the 1989 net income was only $107,251, a small fraction of even the actual 1988 net income.

The complaint alleged that at the time the misrepresentations were made by the Koenigs, plaintiffs believed the representations, did not know they were false, and relied on them in lending money for the Koenig Group's purchase of the assets of Eastern and in giving up their profitable interests and positions in Eastern to accept employment with the Koenig Group. The complaint alleged that the Koenigs, who were officers, directors, and majority shareholders of the Koenig Group, were hands-on managers active in the Koenig Group's day-to-day operations, and that the Koenigs knew their representations to be false but made them with intent to deceive and defraud plaintiffs and to induce Cohen and Garfinkle to, inter alia, extend credit for the transaction.

In March 1991, KMS, KAS, and Koenig Corp. filed for bankruptcy. Cohen and Garfinkle were unsecured creditors in those proceedings. There were insufficient assets to satisfy the claims of even the secured creditors, and ultimately all of the companies in the Koenig Group were liquidated.

B. The Proceedings in the District Court

Plaintiffs commenced this action in 1992, alleging fraud and misrepresentation in connection with the Koenigs' purchase of Eastern's assets. The Koenigs moved to dismiss the complaint pursuant to Rules 12(b)(6) and 9(b). The district court granted the motion but granted plaintiffs leave to replead. Plaintiffs filed their amended complaint, the principal allegations of which are described above.

The Koenigs moved pursuant to Rules 12(b)(6) and 9(b) to dismiss the amended complaint. Without elaboration, the district court granted the motions to dismiss "[f]or the reasons stated in defendants' well-argued memoranda of law." (Order dated August 20, 1993.) The court also denied plaintiffs "[f]urther leave to replead ... in view of plaintiffs' access to discovery and prior opportunity to replead fraud with greater specificity." (Id.)

This appeal followed. For the reasons below, we reverse.

II. DISCUSSION

A. The Rule 12(b)(6) Dismissal

When ruling on a motion pursuant to Rule 12(b)(6) to dismiss for failure to state To prevail on a fraudulent misrepresentation claim under New York law, which the parties agree governs this diversity action, a plaintiff must show "(1) that [the defendant] made a misrepresentation (2) as to a material fact (3) which was false (4) and known to be false by [the defendant] (5) that was made for the purpose of inducing [the plaintiff] to rely on it (6) that [the plaintiff] rightfully did so rely (7) in ignorance of its falsity (8) to his injury." Murray v. Xerox Corp., 811 F.2d 118, 121 (2d Cir.1987); see also Brown v. Lockwood, 76 A.D.2d 721, 730, 432 N.Y.S.2d 186, 193 (2d Dep't 1980). The failure to fulfill a promise to perform future acts is not ground for a fraud action unless there existed an intent not to perform at the time the promise was made. See Murray v. Xerox Corp., 811 F.2d at 121; Chase Manhattan Bank, N.A. v. Perla, 65 A.D.2d 207, 210, 411 N.Y.S.2d 66, 68 (4th Dep't 1978). Similarly, statements will not form the basis of a fraud claim when they are mere "puffery" or are opinions as to future events. See, e.g., Quasha v. American Natural Beverage Corp., 171 A.D.2d 537, 537, 567 N.Y.S.2d 257, 257 (1st Dep't 1991). Nonetheless, a relatively concrete representation as to a company's future performance, if made at a time when the speaker knows that the represented level of performance cannot be achieved, may ground a claim of fraud. See, e.g., Goldman v. Belden, 754 F.2d 1059, 1068-69 (2d Cir.1985); Elkind v. Liggett & Myers, Inc., 635 F.2d 156, 164 (2d...