Integrity Worldwide, Inc. v. Int'l Safety Access Corp.

• Decision Date: 19 March 2015
• Docket Number: C/A No. 0:14-CV-0213-MBS
• Court: U.S. District Court — District of South Carolina
• Parties: INTEGRITY WORLDWIDE, INC. AND JOHN MELIC, Plaintiffs, v. INTERNATIONAL SAFETY ACCESS CORPORATION; KLEAR-KNIT, INC.; ULF BOSHAMER; AND ROGER SCHWARTZ; Defendants.

INTEGRITY WORLDWIDE, INC. ANDJOHN MELIC, Plaintiffs, v. INTERNATIONAL SAFETY ACCESS CORPORATION; KLEAR-KNIT, INC.;ULF BOSHAMER; AND ROGER SCHWARTZ; Defendants.

C/A No. 0:14-CV-0213-MBS

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF SOUTH CAROLINA ROCK HILL DIVISION

March 19, 2015

ORDER AND OPINION

This matter is before the court on a motion to dismiss and strike complaint filed pursuant to Fed. R. Civ. P. 12(b)(6) by Defendants International Safety Access Corporation ("ISAC"); Klear-Knit, Inc. ("Klear-Knit"); Ulf Boshamer ("Boshamer"); and Roger Schwartz ("Schwartz") (collectively "Defendants") on June 5, 2014. ECF No.12. Also on June 5, 2010, Defendants filed a separate motion to strike Plaintiffs' demand for a jury trial pursuant to Fed. R. Civ. P. 39. ECF No. 13. Plaintiffs Integrity Worldwide, Inc. ("Integrity") and John Melic ("Melic") filed a memorandum in opposition to both motions on July 14, 2014. ECF No. 17.

FACTS

This action arises out of Plaintiffs' difficulty in enforcing the judgment against Defendants in a previous lawsuit. Integrity and Melic along with ISAC were parties to a Distributor Agreement dated April 2006 that granted ISAC the exclusive right to sell Integrity's edge protection system in the United States and obligated ISAC to make certain minimum purchases. ECF No. 1 at ¶¶ 14-15. Subsequently, ISAC expressed a desire to terminate the Distributor Agreement, but the parties wereunable to reach an agreement on the termination. ISAC filed a lawsuit against Integrity and Melic in the Court of Common Pleas of York County, South Carolina. Integrity and Melic later moved that action to this court. On June 8, 2011, a jury returned a verdict in favor of Integrity and Melic on their counterclaim in the amount of $287,000. See International Safety Access Corp. v. Integrity Worldwide Inc., No. 0:09-cv-315 (D.S.C. June 8, 2011). On June 10, 2011, this court entered a judgment against ISAC consistent with the jury's verdict. ISAC filed a number of post-trial motions that were ultimately denied by this court on December 28, 2011. At some time thereafter, Plaintiffs conducted discovery in aid of execution and learned that Klear-Knit whose majority shareholder is Boshamer-also ISAC's chief shareholder-had loaned money to ISAC in a series of Demand Promissory Notes. ECF No. 1 at ¶ 44. The notes were dated between 2006 and 2010. Id. at ¶ 45. Schwartz signed the Promissory Notes on behalf of ISAC, and Boshamer signed most of the Promissory Notes on behalf of Klear-Knit. Id. at ¶¶ 46-47. On January 18, 2011, ISAC and Klear-Knit entered into a Uniform Commercial Code ("UCC") Security Agreement that purported to secure the promissory notes with a significant portion of ISAC's assets. Id. at ¶ 51. As a consequence of the security agreement between ISAC and Klear-Knit, Plaintiffs were unable to execute upon any of ISAC's assets to collect the judgment entered in their favor on June 10, 2011.

Subsequently, on January 24, 2014, Plaintiffs brought this action against Defendants, alleging that the purpose of the claimed security interest between Klear-Knit and ISAC was to prevent Plaintiffs from collecting upon a potential judgment against ISAC. Specifically, Plaintiffs assert claims for Fraudulent Conveyance, Count 1; Attachment and Constructive Trust, Count 2; Declaratory Judgment, Count 3; Conspiracy to Defraud Creditors, Count 4; and Action to Pierce the Corporate Veil, Count 5. ECF No. 1. Plaintiffs also request relief in the form of attorneys' fees,compensatory damages, punitive damages, enforcement of the previous judgment, and a declaration setting aside the security interest between Klear-Knit and ISAC. ECF No. 1 at ¶ 113. Additionally, Plaintiffs request a jury trial. Id. at 14. In their motion to dismiss, Defendants request that this court dismiss counts 3 and 4. ECF No. 12. Defendants also request that this court strike Plaintiffs' requests for attorneys fees, compensatory damages, punitive damages, and a jury trial. ECF Nos. 12, 13.

LEGAL STANDARDS

A. Standard of Review

A Rule 12(b)(6) motion to dismiss for failure to state a claim upon which relief can be granted tests the legal sufficiency of a complaint. Schatz v. Rosenberg, 943 F.2d 485, 489 (4th Cir. 1991). While the complaint need not be minutely detailed, it must provide enough factual details to put the opposing party on fair notice of the claim and the grounds upon which it rests. Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007) (citing Conley v. Gibson, 355 U.S. 41, 47 (1957)). In order to withstand a motion to dismiss, a complaint must contain factual content that allows the court to reasonably infer that the defendant is liable for the alleged misconduct. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). The court must accept the allegations in the complaint as true, and all reasonable factual inferences must be drawn in favor of the party opposing the motion. Id. at 679. If the court determines that those factual allegations can "plausibly give rise to an entitlement to relief," dismissal is not warranted. Id.

B. Applicable Law in Diversity Actions

In an action that commences in federal court based on diversity of citizenship, the court must apply state law. See Erie R. Co. v. Tompkins, 304 U.S. 64, 78 (1938) ("Except in matters governedby the Federal Constitution or by acts of Congress, the law to be applied in any case is the law of the state."). Since this action arose in South Carolina, this court must apply the law of the state of South Carolina in order to resolve this dispute. See Klaxon Co. v. Stentor Electric Mfg. Co., 313 U.S. 487 (1941) (holding that a federal court sitting in diversity must apply the choice of law rules of the state in which it sits); see also Lister v. NationsBank of Delaware, N.A., 494 S.E.2d 449, 454 (S.C. Ct. App. 1997) (noting that under traditional South Carolina choice of law principles, the substantive law governing a tort action is determined by the state in which the injury occurred).

ANALYSIS

A. Fraudulent Conveyance (Count 1)

Plaintiffs request relief in the form of attorneys' fees in association with their fraudulent conveyance claim. ECF No. 1 at ¶ 80. Defendants assert that Plaintiffs' requests for attorneys' fees should be stricken from the complaint because attorneys' fees are recoverable in South Carolina only if authorized by contract or statute. Since there is no contract or statute at issue that would permit Plaintiffs to recover attorneys' fees, Defendants contend that attorneys' fees are not recoverable in this case.

Generally, a party cannot recover attorneys' fees unless authorized by contract or statute. Judy v. Judy, 742 S.E.2d 672, 676 (S.C. Ct. App. 2013) (internal citations omitted). In Judy, the South Carolina Court of Appeals affirmed a circuit court order finding that conveyances of land between family members after being sued and knowing their case would be called for trial were fraudulent and violated the Statute of Elizabeth. However, the court reversed the circuit court's decision to assess attorneys' fees against the defendants for vexatious and fraudulent conduct, andheld that such an award was an abuse of discretion. Id. In reversing, the court noted that "if that behavior is a sufficient basis for an award of attorney's fees, fees would be appropriate in any Statute of Elizabeth case and our legislature has not provided for such by statute." Id. In this case, Plaintiffs allege that the security agreement between ISAC and Klear-Knit was entered into after Defendants knew that the case would soon be called for trial. ECF No. 1 at ¶ 54.

As in Judy, Plaintiffs assert their fraudulent conveyance claim pursuant to the Statute of Elizabeth, codified as S.C. Code § 27-23-10. Because the Statute of Elizabeth does not provide for attorneys' fees and South Carolina courts have declined to award attorneys' fees under allegations similar to the fraudulent conveyance allegations before this court, Plaintiffs' request for attorneys' fees associated with their fraudulent conveyance claim shall be stricken from the complaint. Defendants' motion to dismiss is granted as to this issue.

B. Conspiracy to Defraud Creditors (Count 4)

Defendants contend that Plaintiffs' claim for conspiracy to defraud creditors should be dismissed because Plaintiffs failed to plead special damages and additional acts in furtherance of the conspiracy. Specifically, Defendants contend that Plaintiffs' claim for conspiracy to defraud creditors is merely a restatement of their fraudulent conveyance claim. Plaintiffs counter that they did plead special damages and that the acts alleged in the complaint render the complaint sufficient to pass Rule 12(b)(6) muster. This court will analyze Plaintiffs' claim for conspiracy to defraud creditors as a claim for civil conspiracy.

In order to state a claim for civil conspiracy, Plaintiffs must allege that (1) two or more persons acted together, (2) for the purpose of injuring them, and (3) caused them special damage. See Benedict Coll. v. Nat'l Credit Sys., Inc., 735 S.E.2d 518,521 (S.C. Ct. App. 2012). Because"an unexecuted civil conspiracy is not actionable," Plaintiffs must allege additional actions taken in furtherance of the conspiracy. Todd v. South Carolina Farm Bureau, 278 S.E.2d 607, 611 (S.C. 1981) (internal citations omitted). Put another way, Plaintiffs cannot plead the same set of facts for the actionable wrong and the civil conspiracy, then expect to recover damages for both. See id. Moreover, in order to sustain an action for civil conspiracy, Plaintiffs must allege special damages, which "are the natural, but not the necessary or usual, consequence of the tortfeasor's conduct." Benedict Coll., 735 S.E.2d at 523 (holding that the civil conspiracy at issue would not have necessarily required a law suit by the plaintiffs, so the attorney's fees and costs could be considered special damages) (internal quotations omitted). Dismissal of a claim for civil...