Airlines Reporting Corp. v. Aero Voyagers, Inc.

• Decision Date: 19 September 1989
• Docket Number: No. 89 Civ. 0808 (RWS).,89 Civ. 0808 (RWS).
• Citation: 721 F. Supp. 579
• Parties: AIRLINES REPORTING CORPORATION, Plaintiff, v. AERO VOYAGERS, INC., Gurmet Singh and Anupam K. Sharma, Defendants.
• Court: U.S. District Court — Southern District of New York

721 F. Supp. 579

AIRLINES REPORTING CORPORATION, Plaintiff, v. AERO VOYAGERS, INC., Gurmet Singh and Anupam K. Sharma, Defendants.

No. 89 Civ. 0808 (RWS).

United States District Court, S.D. New York.

September 19, 1989.

Richard A. Cooter, Alexandria, Va., Coffinas, Coffinas & Zahakos, Brooklyn, N.Y. by George G. Coffinas, of counsel, for plaintiff.

Slatt and Lane, New York City by Abner P. Slatt, of counsel, for defendants.

OPINION

SWEET, District Judge.

Defendants Aero Voyagers, Inc. ("Aero"), Gurmet Singh ("Singh"), and Anupam K. Sharma ("Sharma") (collectively, the "Defendants") have moved pursuant to Rules 12(b)(6) and 9(b), Fed.R.Civ.P., for an order dismissing the complaint's claims for fraud, violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq. (1982 & Supp. IV 1986), negligence, and punitive damages and pursuant to Rule 11, Fed.R. Civ.P., for sanctions. For the reasons set forth below, the motion to dismiss is granted in part and the motion for sanctions is denied.

The Parties

Plaintiff Airlines Reporting Corporation ("ARC"), a Delaware corporation maintaining its principal place of business in Washington, D.C., is the assignee of all claims Air Traffic Conference of America ("ATCA") has against the Defendants. ARC and ATCA serve as agents for various air carriers, providing services "relating to the control, distribution and processing of airline tickets, to the maintenance of a list of eligible recipients of such tickets, and to the processing and settlement of airline ticket transactions." Complaint ¶ 1.

Aero is a New York corporation with its principal place of business — a travel agency — located in New York City. Singh is a New Jersey citizen, and Sharma is a New York citizen. Both Singh and Sharma serve as officers and directors of Aero.

The Facts

In June 1984, Aero and ATCA entered a contract that authorized Aero to order airline tickets from ATCA and sell those tickets to the general public. The contract required Aero on a weekly basis to report to and pay ATCA for all airline tickets Aero had sold the preceding week. It also required Aero to hold all funds and credit card billings, less applicable commissions, in trust for ATCA until Aero paid those monies to ATCA.

According to the complaint, Aero failed to report or pay for $75,334.95 worth of airline tickets sold from November 1986 through December 1987. The complaint alleges that the Defendants used that money for their own purposes, although ATCA and ARC repeatedly demanded payment.

Prior Proceedings

On February 3, 1989, ARC sued the Defendants for breach of contract, breach of fiduciary duty, conversion, RICO violations, fraud, and negligence seeking compensatory and punitive damages. On May 9, 1989, the Defendants moved for an order dismissing the claims for fraud, RICO violations, negligence, and punitive damages and sanctioning ARC under Rule 11. Oral argument was heard, and the motion was considered fully submitted on May 19, 1989.

Discussion

A. Motion to Dismiss

Standard for a Motion to Dismiss

A court should dismiss a complaint for failure to state a claim under Rule 12(b)(6), Fed.R.Civ.P., only if it appears beyond doubt that the plaintiff can prove no set of facts supporting its claim that entitles it to relief. See H.J. Inc. v. Northwestern Bell Tel. Co., ___ U.S. ___, 109 S.Ct. 2893, 2906, 106 L.Ed.2d 195 (1989); Hishon v. King & Spalding, 467 U.S. 69, 73, 104 S.Ct. 2229, 2232-33, 81 L.Ed.2d 59 (1984); Dahlberg v. Becker, 748 F.2d 85, 88 (2d Cir. 1984), cert. denied, 470 U.S. 1084, 105 S.Ct. 1845, 85 L.Ed.2d 144 (1985). A court must construe the complaint's allegations in the light most favorable to the plaintiff and accept those allegations as true. See Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90 (1974); Dacey v. New York County Lawyers' Assoc., 423 F.2d 188, 191 (2d Cir.1969), cert. denied, 398 U.S. 929, 90 S.Ct. 1819, 26 L.Ed.2d 92 (1970).

Fraud

The complaint's fifth cause of action charges the Defendants with fraud. It identifies two allegedly false representations: 1) the Defendants "represented to the plaintiff, through the filing of weekly reports as required by the contract, that they had sold airline tickets in a certain dollar amount" that fell below the actual amount collected (Complaint ¶ 32) and 2) the Defendants "represented to the plaintiff, through the completion and issuance of airline tickets, that they had sold airline tickets for cash or on valid credit card accounts and that they intended to remit the proceeds of those sales to the plaintiff" (Complaint ¶ 33). ARC seeks $75,3334 in compensatory damages and $500,000 in punitive damages for the purported fraud.

ARC has failed to plead a cause of action for fraud. The contract required the Defendants to report airline ticket sales and remit payment weekly, and the alleged fraudulent representations amount to no more than a claim that the Defendants failed to perform these contractual obligations. New York courts have held that "a cause of action for fraud will not arise when the only fraud charged relates to a breach of contract." Trusthouse Forte (Garden City) Mgt., Inc. v. Garden City Hotel, Inc., 106 A.D.2d 271, 483 N.Y.S.2d 216, 218 (1st Dep't 1984); see also Scally v. Simcona Elec. Corp., 135 A.D.2d 1086, 523 N.Y.S.2d 307, 308 (4th Dep't 1987) (absent duty between parties separate and distinct from contract, alleged breach does not give rise to claim of fraud); Freyne v. Xerox Corp., 98 A.D.2d 965, 470 N.Y.S.2d 187, 188 (4th Dep't 1983) (because "alleged fraudulent representations are, in essence, restatements of plaintiff's contract cause of action they do not state separate causes of action in fraud"); Regnell v. Page, 54 A.D.2d 540, 387 N.Y.S.2d 253 (1st Dep't 1976) ("the fraudulent breach of contract does not give rise to an action for fraud"); Cranston Print Works Co. v. Brockmann Int'l A.G., 521 F.Supp. 609, 614 (S.D.N.Y.1981) (a claim for fraud "cannot be based solely upon the failure to perform the promises of future acts which constitute the contractual obligations themselves").

The fraud claim also is dismissed for failure to plead fraud with particularity. Rule 9(b) provides: "In all averments of fraud ..., the circumstances constituting fraud ... shall be stated with particularity." This requirement serves several purposes:

The first is to "protect potential defendants from the harm that comes to their reputations when they are charged with the commission of acts involving moral turpitude." Gross v. Diversified Mortgage Investors, 431 F.Supp. 1080, 1087 (S.D.N.Y.1977). Second, Rule 9(b) serves to ensure that the allegations of fraud are concrete and particularized enough to give notice to the defendants of "what conduct is complained of and to prepare a defense to such claim of misconduct." Rich v. Touche Ross & Co., 68 F.R.D. 243, 245 (S.D.N.Y.1975). Finally, ... Rule 9(b) is intended to "inhibit the filing of a complaint as a pretext for discovery of unknown wrongs." Gross, 431 F.Supp. at 1087.

Goldman v. Belden, 98 F.R.D. 733, 735-36 (S.D.N.Y.1983).

Paragraphs 32 and 33 — which describe the purported false representations — are quoted above. The complaint alleges the remaining elements of a fraud cause of action as follows:

34. That the defendants knew or should have known that the aforementioned representations were false.

35. That the defendants made the aforementioned representations with the intention of deceiving and defrauding the plaintiff and of depriving the plaintiff of monies properly due and owing to it.

36. That the plaintiff was ignorant of the falsity of the aforementioned representations and believed them to be true.

37. That the plaintiff relied upon the aforementioned representations of the defendant to its detriment.

38. That as a direct and proximate result of the aforementioned misrepresentations of the defendants, the plaintiff suffered damages in the amount of $75,334.95.

These allegations represent nothing more than a recitation of the essential elements of a fraud cause of action and therefore lack the degree of particularity Rule 9(b) requires.

RICO Violations

In its fourth cause of action, ARC charges the Defendants with violating RICO, stating:

In furtherance of the scheme and artifice to defraud the plaintiff, the defendants knowingly used and caused to be used the mail facilities of the United States Postal Service, all as proscribed and prohibited by 18 U.S.C. § 1341 (relating to mail fraud). During the months of November 1986 through December 1987, the defendants sold a quantity of airline tickets to the public and received cash or other valuable consideration in return. Defendants failed to account to the plaintiff for the monies and other valuable consideration received in return for the airline tickets, and instead filed and transmitted by United States Mail, false and misleading reports of the monies and valuable consideration actually received. Defendants omitted sales of airline tickets from their reports to the plaintiff; said omissions constitute a pattern of racketeering activity. Defendants employed the United States Mails for the purpose of representing to the plaintiff that they had sold airline tickets for cash or on valid credit card accounts and that they intended to remit the proceeds of those sales to the plaintiff. In addition, they employed the United States Mails for the purpose of representing that they had preserved the plaintiff's monies derived from those sales in a bank account from which plaintiff could draws sic them. The defendants did not remit the proceeds of those sales and/or did not receive cash or valid credit card charges in exchange for those airline tickets as completed or issued by them, nor did they maintain the plaintiff's monies in said bank account, and the plaintiff was accordingly deprived of its rightful monies through this pattern of racketeering...