Netjets Aviation, Inc. v. Lhc Communications, LLC

• Decision Date: 08 August 2008
• Docket Number: Docket No. 06-3340-cv.
• Citation: 537 F.3d 168
• Parties: NETJETS AVIATION, INC., and NetJets Sales, Inc., Plaintiffs-Appellants, v. LHC COMMUNICATIONS, LLC, and Laurence S. Zimmerman, Defendants-Appellees.
• Court: U.S. Court of Appeals — Second Circuit

537 F.3d 168

NETJETS AVIATION, INC., and NetJets Sales, Inc., Plaintiffs-Appellants, v. LHC COMMUNICATIONS, LLC, and Laurence S. Zimmerman, Defendants-Appellees.

Docket No. 06-3340-cv.

United States Court of Appeals, Second Circuit.

Argued: January 15, 2008.

Decided: August 8, 2008.

Robert T. Barnard, New York, N.Y. (Joseph B. Koczko, Courtney L. Scheinmel, Thompson Hine, New York, NY, O. Judson Scheaf, Scott A. Campbell, Michele L. Noble, Thompson Hine, Columbus, OH, on the brief), for Plaintiffs-Appellants.

Michael F. Schwartz, New York, N.Y. (Penn Proefriedt Schwarzfeld & Schwartz,

New York, NY, on the brief), for Defendants-Appellees.

Before: KEARSE, LEVAL, and CABRANES, Circuit Judges.

KEARSE, Circuit Judge:

Plaintiffs NetJets Aviation, Inc., and NetJets Sales, Inc. (collectively "NetJets"), appeal from so much of a judgment of the United States District Court for the Southern District of New York, Deborah A. Batts, Judge, as summarily dismissed their claims against defendant LHC Communications, LLC ("LHC"), for breach of contract and their claims against defendant Laurence S. Zimmerman, as LHC's alter ego, for breach of contract and account stated. The district court, having granted partial summary judgment in favor of NetJets on account-stated claims against LHC, sua sponte dismissed NetJets's breach-of-contract claims against LHC on the ground that they were duplicative of the account-stated claims. The court sua sponte granted summary judgment dismissing NetJets's claims against Zimmerman on the ground that NetJets had not adduced sufficient evidence to pierce the corporate veil. On appeal, NetJets contends principally that the district court erred (1) in treating its breach-of-contract claims as duplicative of its-account-stated claims, because the pertinent contracts allow NetJets to recover not only the balances due on LHC's accounts but also attorneys' fees, and (2) in concluding that there was not sufficient evidence to support its breach-of-contract and account-stated claims against Zimmerman as LHC's alter ego. Finding merit in NetJets's contentions, we vacate so much of the judgment as dismissed the above claims and remand for further proceedings.

I. BACKGROUND

NetJets is engaged in the business of leasing fractional interests in airplanes and providing related air-travel services. LHC is a Delaware limited liability company whose sole member-owner is Zimmerman. Most of the facts with respect to the relationship between NetJets and LHC are not in dispute.

A. The Contracts Between NetJets and LHC

On August 1, 1999, LHC entered into two contracts with NetJets. In the first (the "Lease Agreement"), NetJets leased to LHC a 12.5 percent interest in an airplane, for which LHC was to pay NetJets a fixed monthly rental fee. The lease term was five years, with LHC having a qualified right of early termination. The second contract (the "Management Agreement") required NetJets to manage LHC's interest in the leased airplane and to provide services such as maintenance and piloting with respect to that airplane, or substitute aircraft, at specified hourly rates. It required LHC to pay a monthly management fee, as well as fuel charges, taxes, and other fees associated with LHC's air travel. The Management Agreement allotted to LHC use of the airplane for an average of 100 hours per year for the five-year term of the lease ("LHC air hours"), and it provided that if the leased airplane were unavailable at a time when LHC wished to use it, NetJets would provide substitute aircraft. NetJets regularly sent LHC invoices for the services provided under the Lease and Management Agreements.

The Lease Agreement provided that "[i]f any action at law or in equity is necessary to enforce the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees in addition to any other relief to which such party may be entitled." (Lease Agreement § 19.) It was agreed that the Lease Agreement would be "governed by and construed in all respects in accordance with the laws of the State of New York." (Id. § 17.) The Management Agreement, which the parties agreed would be governed by Ohio law (see Management Agreement § 21), provided that if LHC failed to pay amounts due under that Agreement, LHC would be liable for the costs of collection, including reasonable attorneys' fees (see id. § 7).

In July 2000, LHC terminated its agreements with NetJets. LHC's chief financial officer ("CFO") James P. Whittier sent a letter, addressed to a NetJets vice president, stating, in pertinent part, that "[t]he present outstanding is $440,840.39 and we are requesting that you apply the deposit of $100,000 against the outstanding and contact this office to resolve the balance." (Letter from James P. Whittier to Ron Miller dated July 24, 2000 ("LHC Termination Letter").)

As requested, NetJets contacted LHC and applied the $100,000 deposit against LHC's debt; however, it did not receive payment of the remaining balance of $340,840.39. In 2001, LHC ceased operations.

B. The Present Action and the Decision of the District Court

NetJets commenced the present diversity action in 2002, asserting claims against LHC and Zimmerman for breach of contract, account stated, and unjust enrichment. In connection with the breach-of-contract claims, NetJets requested an award of attorneys' fees.

Following a period of discovery, NetJets moved for summary judgment against both defendants on the breach-of-contract and account-stated claims. NetJets contended that Zimmerman should be held liable for the debts of LHC as its alter ego based on evidence, described in greater detail in Part II.B. below, of, inter alia, (a) the frequent use of LHC air hours for personal travel by Zimmerman and his friends and family, (b) the frequent transfers of funds between LHC and Zimmerman's other companies, (c) Zimmerman's frequent withdrawal of funds from LHC for his own personal use, and (d) the fact that LHC is no longer in business and has no assets with which to pay its debt to NetJets, a condition that NetJets contends was caused by Zimmerman's withdrawals.

In a Memorandum and Order dated June 12, 2006, the district court granted NetJets's summary judgment motion in part, awarding it $340,840.39 against LHC on the account-stated claims. See NetJets Aviation, Inc. v. LHC Communications LLC, No. 02 Civ. 7441, 2006 WL 1627899 (S.D.N.Y. June 12, 2006). The court concluded that, in light of the LHC Termination Letter, whose authenticity was unchallenged, there was no genuine issue to be tried with respect to LHC's liability to NetJets in the amount of $340,840.39. See 2006 WL 1627899, at *7. The district court denied the remainder of NetJets's motion and dismissed its contract claims against LHC — as well as its unjust enrichment claims. The court concluded that because it had ruled in favor of NetJets against LHC on the theory of account stated, NetJets's claims against LHC "for alternative relief under a breach of contract theory do not survive." Id. The court concluded that NetJets could not recover against LHC for unjust enrichment, a theory alternative to breach of contract, because NetJets's rights were grounded in contracts that were essentially undisputed. See id. at *8.

The district court also denied NetJets's motion for summary judgment on its contract and account-stated claims against Zimmerman. It stated that under Delaware law, in order to recover against Zimmerman for the debts of LHC, NetJets would be required to meet a two-pronged test showing "(1) that the business entity and its owner `operated as a single economic entity' and (2) that [there was] an `overall element of injustice or unfairness.'" Id. at *4 (quoting Fletcher v. Atex, Inc., 68 F.3d 1451, 1458 (2d Cir.1995), which applied Delaware law). The court concluded that although NetJets had "shown that Zimmerman and LHC functioned as a single economic unit," 2006 WL 1627899, at *5, NetJets had not "set forth any facts from which a jury could reasonably conclude that Zimmerman formed LHC with the specific fraudulent intent of evading liability to Plaintiffs," id. at *6. The court noted that while "something other than specific fraudulent intent could satisfy the second prong, wherever courts have given shape to the second prong, they primarily have focused on the need to show fraud or bad faith," id.; it stated that NetJets had "not proven as a matter of law that Zimmerman conducted a sophisticated shell game to the purposeful detriment of creditors, namely NetJets," id. The district court rejected the proposition that the requisite unfairness was shown by the evidence that "Zimmerman allowed LHC to default on its payments to NetJets even as he was siphoning money from the company coffers, transferring funds to other companies he controlled, and making payments through LHC on a mortgage and luxury cars that were in his own name." Id. (internal quotation marks omitted). The court stated that "each of these actions are factors in considering the first prong of the alter ego analysis and cannot simultaneously be used by Plaintiffs to satisfy the second prong. `To hold otherwise would render the fraud or injustice element meaningless....'" Id. (quoting Mobil Oil Corp. v. Linear Films, Inc., 718 F.Supp. 260, 268 (D.Del.1989)).

Although Zimmerman had not moved for summary judgment in his favor, the court sua sponte granted summary judgment dismissing all of NetJets's claims against him.

II. DISCUSSION

On appeal, NetJets contends principally (1) that the district court erred in dismissing its contract claims as duplicative of its account-stated claims, arguing that the pertinent contracts allow NetJets to recover not only the balances due on LHC's accounts but also reasonable attorneys' fees incurred in collecting those debts; and (2) that the evidence as to Zimmerman's operation of LHC for his personal use warranted the entry of summary judgment in NetJets's favor...