Eed Holdings v. Palmer Johnson Acquisition Corp.

• Decision Date: 20 October 2004
• Docket Number: No. 04 Civ. 0505(RWS).,04 Civ. 0505(RWS).
• Parties: EED HOLDINGS, Plaintiff, v. PALMER JOHNSON ACQUISITION CORP. and Andrew J. McKelvey, Defendants.
• Court: U.S. District Court — Southern District of New York

387 F.Supp.2d 265

EED HOLDINGS, Plaintiff, v. PALMER JOHNSON ACQUISITION CORP. and Andrew J. McKelvey, Defendants.

No. 04 Civ. 0505(RWS).

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

October 20, 2004.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Friedman, Wittenstein & Hochman, New York, NY (Stuart I. Friedman, Ivan O. Kline, of counsel), for plaintiff.

Levi Lubarsky & Feigenbaum, New York, NY (Steven B. Feigenbaum, of counsel), for defendants.

OPINION

SWEET, District Judge.

The defendants Palmer Johnson Acquisition Corp. ("PJAC") and Andrew J. McKelvey ("McKelvey") (collectively the "Defendants") have moved under Fed.R.Civ.P. 12(b)(6) and 9(b) to dismiss the complaint of plaintiff EED Holdings ("EED") against McKelvey and under Rule 12(b)(2), Fed.R.Civ.P., to dismiss the claim against PJAC for lack of jurisdiction, and, alternatively, under 28 U.S.C. § 1404(a) to transfer the claim to the Eastern District of Wisconsin. For the reasons set forth below, the motion to dismiss the claims against McKelvey is granted in part and denied in part. The motion to dismiss PJAC for lack of jurisdiction is denied with leave to move for summary judgment after jurisdictional discovery.

I. Prior Proceedings

This diversity action was filed on January 22, 2004. On that day, a complaint was filed against defendants McKelvey and PJAC by EED, a Cayman Island corporation whose chief asset is a Cayman Island flag vessel. The above-referenced motions were heard and marked as fully submitted on June 2, 2004.

II. Facts Alleged In The Complaint

The allegations of the complaint, which are accepted as true for the purpose of these motions, describe the relationship of the parties and the nature of the dispute.

For several decades prior to 2000, Palmer Johnson, Inc. ("PJI") constructed yachts in Wisconsin. (Compl.¶ 7). In 2000, McKelvey formed PJAC, and on September 29, 2000, PJAC acquired 100% of the stock of PJI and two other Palmer Johnson companies (the "PJAC Acquisition"). (Compl.¶ 8). McKelvey has at all times been the sole shareholder and director of PJAC. (Compl.¶ 9).

For some time prior to the PJAC Acquisition, PJI had experienced considerable financial and operating difficulties. (Compl.¶ 8). Following the acquisition, PJI's condition worsened. PJI incurred operating losses in the amounts of approximately $1.7 million during the last three months of 2000, and $8.5 million during 2001. (Compl.¶ 11). In addition, during 2001, PJI was required to recognize a loss of approximately $12.4 million, consisting of 100% of its goodwill, so that PJI's total loss for 2001 was approximately $20.9 million. (Compl.¶ 11).

In the spring of 2001, Marc Goldman ("Goldman"), the sole owner of EED, met with McKelvey at the New York Yacht Club in Manhattan. Goldman, who was considering several yacht construction companies, discussed with McKelvey the type of yacht he wanted. (Compl.¶¶ 13, 14). McKelvey was then aware that PJI was undercapitalized, was facing significant financial difficulties, and would not be able to properly perform under a yacht construction agreement. (Compl.¶ 15). Nonetheless, in order to convince Goldman to contract with PJI, McKelvey spoke at length about the attributes of PJI, and specifically stated that it had the capability and wherewithal to properly construct in a timely manner the yacht Goldman sought. (Compl.¶ 14). McKelvey also assured Goldman that PJI would be building the "greatest boats" and that he was personally "committed to PJI." Id. In reliance on these representations, Goldman decided to have EED contract with PJI. (Compl.¶ 16).

EED entered into a Yacht Construction and Sale Agreement (the "Construction Agreement") with PJI on August 3, 2001, pursuant to which PJI agreed to construct and deliver to EED, on or before November 30, 2002, an aluminum alloy motor yacht (the "Yacht") in accordance with specifications and plans for a fixed price of $10,785,000. The Construction Agreement provided that if PJI failed to complete the Yacht on time, it would owe EED liquidated damages of $2,000 per day for each day of delay in delivery of the Yacht, beginning on the thirty-first day following the due date. (Compl.¶ 16).

The Construction Agreement contained a number of warranties by PJI, including a warranty to repair or replace any defects in workmanship and/or materials for a period of thirty-six months following delivery of the Yacht, and warranties with respect to the speed of the Yacht. (Compl.¶ 17). The Construction Agreement further provided for the sale of an existing yacht (the "Interim Vessel") to EED for use while the Yacht was being constructed. (Compl.¶ 18). EED paid $2.2 million to PJI for the Interim Vessel, which was delivered to EED after execution of the Construction Agreement. (Compl.¶ 18). The Construction Agreement provided that EED would return the Interim Vessel for repurchase by PJI when the Yacht was complete or near completion, and EED would thereupon receive a $2.2 million credit to be applied to the last several payments by EED to PJI for the Yacht. (Compl.¶ 18).

In order to further induce EED to contract with PJI, PJAC executed a Parent Guaranty dated August 3, 2001 (the "Guaranty"), pursuant to which PJAC unconditionally and irrevocably guaranteed to EED the performance of, and compliance with, all obligations, covenants, warranties, and undertakings of PJI in the Construction Agreement. (Compl.¶ 19). The Guaranty provided that PJAC's liability to EED would not be affected as a result of any agreement entered into by EED and PJI, or by the cessation for any reason of the liability of PJI to EED, other than through completion and delivery of the Yacht pursuant to the Construction Agreement. Id.

After a number of months, PJI fell behind on its performance. (Compl.¶ 20). By the end of 2002, PJI was in default on various obligations under the Construction Agreement, and by early 2003, it was unable to continue to work on the Yacht without EED making additional payments not owed under the terms of the Construction Agreement. (Compl.¶ 21).

In February 2003, a representative of PJI advised Goldman that PJI would likely soon be in bankruptcy, and suggested that EED agree to immediately accept title to the Yacht, release PJI from further obligations under the Construction Agreement, and then contract with PJI to continue work on the Yacht on a time and material basis. (Compl.¶ 22). To effectuate this, EED assigned all of its rights, title, and interest in and to the Construction Agreement to MG Vessel Construction LLC ("MG Vessel"), a limited liability company owned by Goldman (Compl.¶ 23), and PJI transferred title to the Yacht to MG Vessel in satisfaction of its obligations to MG Vessel under the Construction Agreement. (Compl.¶ 24). Notably, PJAC consented to the assignment, acknowledged and agreed that PJI was in default under the Construction Agreement, and irrevocably agreed that the Guaranty would remain "in full force and effect." (Compl.¶ 23).

On March 6, 2003, an involuntary petition under the Bankruptcy Code was filed against PJI in the United States Bankruptcy Court for the Eastern District of Wisconsin. (Compl.¶ 25). MG Vessel thereafter contracted with PJI for the completion of the Yacht on a time and material basis, with MG Vessel making certain payments to PJI and other payments directly to third party vendors. (Compl.¶ 26). In late April 2003, the Yacht, although still not completed, was floated at Sturgeon Bay, and brought to a facility in Michigan for further work by PJI. On or about July 1, 2003 — approximately six months after the completion date in the Construction Agreement as extended by change orders — MG Vessel took possession of the Yacht from PJI in Michigan, though additional work was still required. (Compl.¶ 27).¹

Because of PJI's financial condition, it was not able to accept the return of the Interim Vessel and provide a credit to EED or MG Vessel in the amount of $2.2 million as provided in the Construction Agreement. (Compl.¶ 28). Instead, EED was forced to retain possession of the Interim Vessel, and incurred additional expenses in connection therewith after it had the use of the Yacht. Id. In December 2003, EED was able to sell the Interim Vessel, but for less than half of the $2.2 million credit that was to have been provided by PJI. (Compl.¶ 29).

The Yacht, as delivered, failed to meet certain specifications and warranties in the Construction Agreement, including some for which the agreement provides liquidated damages. PJI has also not complied with its warranty for the repair of defects thereby requiring EED to make further payments to third parties. (Compl.¶ 30). As a result of PJI's numerous breaches, including those related to the Interim Vessel, EED has incurred damages in excess of $2.45 million. (Compl.¶¶ 31, 32).

III. Discussion

Four causes of action have been asserted by EED in the complaint: (1) a breach of guaranty claim against PJAC (Compl.¶¶ 35-39), (2) a claim of piercing the corporate veil and alter ego liability against McKelvey (Compl. ¶¶ 40-46), (3) a fraud claim against McKelvey, (Compl.¶¶ 47-50), and (4) a negligent misrepresentation claim against McKelvey (Compl.¶¶ 51-53).

As stated above, defendants PJAC and McKelvey have moved under Fed.R.Civ.P. 12(b)(6) and 9(b) to dismiss EED's complaint against McKelvey and under Fed.R.Civ.P. 12(b)(2) to dismiss the claim against PJAC for lack of jurisdiction, and, alternatively, under 28 U.S.C. § 1404(a) to transfer the claim to the Eastern District of Wisconsin.

A. Standard of Review

A motion to dismiss pursuant to Rule 12 must be denied "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 40 L.Ed.2d 90 (1974) (quoting Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957)). For purposes of a Rule 12 motion,...