Hitachi Data Sys. Credit Corp. v. Precision Discovery, Inc., 17-CV-6851 (SHS)

• Decision Date: 07 September 2018
• Docket Number: 17-CV-6851 (SHS)
• Citation: 331 F.Supp.3d 130
• Parties: HITACHI DATA SYSTEMS CREDIT CORPORATION, Plaintiff, v. PRECISION DISCOVERY, INC., a New York corporation f/k/a Precision Discovery, LLC, Defendant.
• Court: U.S. District Court — Southern District of New York

331 F.Supp.3d 130

HITACHI DATA SYSTEMS CREDIT CORPORATION, Plaintiff,

v.PRECISION DISCOVERY, INC., a New York corporation f/k/a Precision Discovery, LLC, Defendant.

17-CV-6851 (SHS)

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

Signed September 7, 2018

John Armando Boudet, Gray Robinson P.A., Orlando, FL, Richard Paul Kaye, Anthony Galano, III, Ellenoff Grossman & Schole, LLP, New York, NY, for Plaintiff.

Douglas Holden Wigdor, Lawrence Michael Pearson, Kenneth Daniel Walsh, Renan F. Varghese, Wigdor LLP, New York, NY, for Defendant.

OPINION & ORDER

SIDNEY H. STEIN, United States District JudgeThis case concerns a contract under which defendant Precision Discovery, Inc., leased certain data storage equipment from plaintiff, Hitachi Data Systems Credit Corporation ("HDSCC"). HDSCC alleged in its initial complaint that Precision had breached the contract by failing to make the required monthly rent payments. Precision responded to the complaint with not only an answer, but also nine separate counterclaims and third-party claims which alleged in sum that the contract was a sham and that HDSCC – conspiring with third-party defendants Cold Creek Solutions, Inc., and Hitachi Vantara Corporation¹ – had procured Precision's agreement to the leasing contract through improper means. The motions of HDSCC, Hitachi Vantara, and Cold Creek to dismiss these counterclaims and third-party claims are now before the Court. Because this Court cannot assert personal jurisdiction over the third-party defendants, Precision's third-party claims must be dismissed. Because Precision has failed to state any claim against HDSCC, Precision's counterclaims must also be dismissed. The case will thus revert to being what it truly is: a breach of contract action between a lessor and a lessee.

I. Background

The following facts are drawn from Precision's amended counterclaims and third-party complaint (ECF Doc. 56). The Court assumes the truth of the factual allegations in that document for purposes of these motions to dismiss. The Court also relies on the contract at issue, which was attached to HDSCC's original complaint and is integral to Precision's counterclaims and third-party claims. See Nicosia v. Amazon.com, Inc. , 834 F.3d 220, 230-31 (2d Cir. 2016).

Around January 2012, HDSCC and Precision entered into a lease agreement defining the terms under which Precision would lease equipment from HDSCC to be identified in attached schedules. (Def.'s Am. Answer, Counterclaims, and Am. Third-Party Compl. ("Am. Third-Party Compl."), ECF Doc. 56, ¶¶ 34-35.) These schedules were negotiated "from time to time" beginning in January 2012. (Id. ) All appeared to be well with the arrangement for approximately the next five years. However, in November 2016 an email from a Hitachi Vantara employee made clear that Schedule J, which had been signed by Precision and HDSCC two months earlier, in September 2016, posed serious problems for Precision. (Id. ¶¶ 81, 107-108.)

Through the terms of Schedule J, Precision had, according to it, agreed to lease from HDSCC only outdated equipment that could not support Precision's data storage needs, and had further agreed to return all of the other equipment it had previously leased from HDSCC under other schedules, or else pay an additional fee to keep it. (Id. ¶¶ 67-68, 77-81, 86-87, 89, 107-108.) As a result, in order to continue running its business, Precision would need to pay significant rent for outdated equipment inadequate for its needs, as well as additional fees in order to keep using the acceptable equipment it had been using previously. (Id. ¶¶ 86-88, 107-108.) Precision states that it subsequently discovered that Howard Holton, Precision's Chief Information Officer, had been engaged in what Precision calls an "improper arrangement" with the third-party defendants in this case. (Id. ¶ 44.)

Third-party defendant Hitachi Vantara Corporation is the hardware and software company whose products were leased to Precision under the schedules. (Id. ¶¶ 14, 37.) (HDSCC, the lessor in the contract at issue, was the finance company that Hitachi Vantara utilized for lease transactions. (Id. ¶ 34.) ) Third-party defendant Cold Creek Solutions, Inc. is an authorized equipment reseller for Hitachi Vantara. (Id. ¶ 23.) According to Precision, both Hitachi Vantara and Cold Creek were closely involved in the negotiation of Schedule J, despite the fact that only lessor HDSCC and lessee Precision are parties to Schedule J and the original lease agreement. (Id. ¶¶ 34-38.)

Precision's Chief Information Officer Howard Holton was a negotiator and signatory of Schedule J for Precision. (Id. ¶¶ 44, 58, 81.) Over the months prior to and immediately after the signing of Schedule J, Holton had several interactions with Cold Creek and Hitachi Vantara that Precision characterizes as demonstrating an improper and unethical relationship that created "obvious, irreconcilable and irrevocable conflicts of interest[.]" (Id. ¶¶ 44-65.) For instance, while Holton was employed by Precision, he was also secretly earning additional income as a consultant or contractor for Cold Creek. (Id. ¶¶ 46-47.) Without Precision's knowledge, Hitachi Vantara and Cold Creek also provided Holton with various expensive gifts allegedly including lavish meals, alcohol, and tickets to sports events. (Id. ¶¶ 52-56, 65.) Holton had a particularly close relationship with one Hitachi Vantara employee, Billy Metting, who allowed Holton to borrow his truck, eventually selling it to him. (Id. ¶¶ 58-63.)

Precision alleges that Cold Creek and Hitachi Vantara, working with HDSCC, leveraged these improper interactions to induce Holton into executing Schedule J on Precision's behalf, all the while knowing that the equipment they were providing was unsuitable for Precision. (Id. ¶¶ 36-43, 64, 66-91.) Precision also alleges that a Cold Creek employee induced Holton to fraudulently sign an installation certificate claiming that the equipment had been installed, when in fact it had not been, in order for the Cold Creek and Hitachi Vantara sales teams to be able to receive their commissions. (Id. ¶¶ 92-106.)

Finally, Precision alleges that with the help of forensic accountants, it discovered that in addition to improperly inducing Holton to execute Schedule J and sign the installation certificate, HDSCC, Cold Creek, and Hitachi Vantara had "perpetrated a scheme to defraud Precision Discovery into making approximately $2.5 million in overpayments over the prior six years." (Id. ¶¶ 112.). Precision provides very few details about this scheme, only alleging that "the overpayments were extremely difficult to detect, as they were the result of HDSCC's business practice of rolling Precision Discovery's existing leases into new leases, and then overcharging Precision Discovery large amounts on equipment that was actually included in the prior leases." (Id. ¶ 3.)

Based on the above facts, Precision asserts five causes of action against both plaintiff HDSCC and third-party defendants Hitachi Vantara and Cold Creek; two causes of action solely against HDSCC; and two causes of action solely against the third-party defendants. Against both HDSCC and the third parties, Precision asserts a claim of fraudulent inducement with regard to Schedule J; a claim of fraud and fraudulent misrepresentation regarding Schedule J; a civil RICO claim based on use of interstate mail and wires to defraud Precision; a civil conspiracy claim; and a claim for breach of the implied warranty of good faith and fair dealing. (Id. ¶¶ 115-151.) Against only HDSCC, Precision asserts a claim of conversion regarding the funds it paid to HDSCC pursuant to Schedule J before discovering it was fraudulent, and an unjust enrichment claim regarding those same funds. (Id. ¶ 152-167.) Against only Hitachi Vantara and Cold Creek, Precision asserts a claim of tortious interference with contract and business relations, arguing that Hitachi Vantara and Cold Creek caused Precision to breach the Schedule J agreement by fraudulently inducing Precision to execute it, and a claim of aiding and abetting HDSCC's conversion. (Id. ¶¶ 168-177.)

As relief for these claims, Precision requests a declaration that Schedule J is unenforceable; an injunction barring HDSCC, Cold Creek, and Hitachi Vantara from seeking Schedule J's enforcement; and money damages. (Id. at 36-37.)

HDSCC has now moved to dismiss all of Precision's claims against it for failure to state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6), and third-party defendants Hitachi Vantara and Cold Creek have also moved to dismiss all third-party claims against them. The third party-defendants move both for failure to state a claim pursuant to Rule 12(b)(6) and for lack of personal jurisdiction over them pursuant to Rule 12(b)(2). This Court subsequently permitted Precision to file an amended version of its counterclaims and third-party complaint meant to respond to the personal jurisdiction arguments raised by Cold Creek and Hitachi Vantara, specifying that the pending motions to dismiss would remain in place. See Order dated Mar. 19, 2018, ECF Doc. 55.

II. Legal Standards

As noted above, HDSCC moves pursuant to Rule 12(b)(6), while Hitachi Vantara and Cold Creek move pursuant to both Rule 12(b)(6) and Rule 12(b)(2).

When considering a Rule 12(b)(6) motion to dismiss, a court must "draw all reasonable inferences in [the non-movant's] favor, assume all well-pleaded factual allegations to be true, and determine whether they plausibly give rise to an entitlement to relief." Faber v. Metro. Life Ins. Co. , 648 F.3d 98, 104 (2d Cir. 2011) (internal quotation marks omitted). In other words, "[t]o survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ " Nicosia v. Amazon.com, Inc. , 834 F.3d 220, 230 (2d Cir. 2016) (quoting Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (200...