Reserve Solutions Inc. v. Vernaglia,

• Decision Date: 20 June 2006
• Docket Number: No. 05 Civ. 8622(VM).,05 Civ. 8622(VM).
• Citation: 438 F.Supp.2d 280
• Parties: RESERVE SOLUTIONS INC., Plaintiff, v. Mark VERNAGLIA, Defendant/Third-Party Plaintiff v. Bruce Bent, Bruce Bent II and Arthur Bent, Third-Party Defendants.
• Court: U.S. District Court — Southern District of New York

438 F.Supp.2d 280

RESERVE SOLUTIONS INC., Plaintiff, v. Mark VERNAGLIA, Defendant/Third-Party Plaintiff v. Bruce Bent, Bruce Bent II and Arthur Bent, Third-Party Defendants.

No. 05 Civ. 8622(VM).

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

June 20, 2006.

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Melvin Arnold Brosterman, Meredith Lee Strauss, Stroock & Stroock & Lavan LLP, New York City, for Plaintiff.

Brian David Spector, Spector & Ehrenworth, P.C., Florham Park, NJ, for Defendants.

DECISION AND ORDER

MARRERO, District Judge.

Plaintiff Reserve Solutions, Inc. ("Reserve"), commenced this action on October 11, 2005, seeking damages for conversion and breach of fiduciary duty by the defendant, Mark Vernaglia ("Vernaglia"), a New Jersey resident. Vernaglia is a former officer and director, and current shareholder, of Reserve, a closely held Delaware financial services corporation with offices in Manhattan. Vernaglia has filed counterclaims against Reserve and a third-party complaint against Bruce Bent ("Bent"), Bruce Bent II ("Bent II") and Arthur Bent (together, the "Bents"), who are directors, officers and shareholders of Reserve, alleging breach of contract, breach of an implied covenant of good faith and fair dealing, wrongful termination, fraud, inspection of books and records pursuant to Delaware statute, defamation, and oppression of a minority shareholder.

Reserve and the Bents now move to dismiss these counterclaims and the claims contained in the third-party complaint on the grounds that they fail to state a claim upon which relief may be granted, fail to plead fraud with particularity in accordance with Rule 9(b) of the Federal Rules of Civil Procedure ("Rule 9(b)"), and, with respect to the claim for inspection of books and records, lack of subject matter jurisdiction. In turn, Vernaglia moves for leave to file a Second Amended Answer, Affirmative Defenses, Counterclaim and Third Party Complaint (the "Second Amended Answer"). Vernaglia has withdrawn the causes of action for breach of contract, breach of an implied covenant of good faith and fair dealing, and wrongful termination based on violation of public policy. His Second Amended Answer adds a cause of action for conversion to the remaining claims noted above. For the reasons discussed below, the motion of Reserve and the Bents to dismiss the Second Amended Answer herein is GRANTED in part and DENIED in part, and Vernaglia's motion for leave to amend is GRANTED in part and DENIED in part.

I. BACKGROUND

A. FACTS

In ruling upon a motion to dismiss, the Court must accept all well-pleaded facts as alleged by the non-movant as true. Accordingly, the factual recitation that follows is derived from Vernaglia's version of events.

In or about June 2001, Vernaglia, Bent, and Bent II met and agreed to form Reserve. They agreed that Vernaglia would develop new financial programs for Reserve, create patents for the programs, and manage the business with Bent II. Bent and Bent II proposed that in exchange for Vernaglia's efforts and an assignment of Vernaglia's intellectual property rights in the financial programs to Reserve, Vernaglia would be made a director and officer of Reserve and would be granted a 45 percent equity interest in Reserve.

In that same month, Vernaglia became the president and a member of the board of directors of Reserve. In this capacity, and in reliance on Bent's and Bent II's representations, Vernaglia developed intellectual property in the form of financial programs to be used by Reserve. In or before June 2003, Reserve submitted three patent applications for these programs, listing Vernaglia as an inventor. Vernaglia devoted substantial efforts to preparing the patent applications and was instrumental in submitting the applications and supporting documents for approval. The last necessary step of Vernaglia's involvement in the patent application process took place on or about October 4, 2004, when Vernaglia signed and dated a revised patent declaration to be filed by Reserve's outside counsel.

On or about October 18, 2004, Bent II asked Vernaglia to make a working capital contribution to Reserve of $132,000 to show his commitment to Reserve's long-term success. Vernaglia obliged. At the same time, Bent and Bent II represented that they would make capital contributions totaling $3 million. They never actually made these contributions, but recorded their alleged contribution in Reserve's accounts as a loan from shareholders. These contributions would have reduced Vernaglia's equity interest from 45 percent to 13.2 percent.

Thereafter, Reserve began transferring the administration of its books and records to a new, related company, Reserve Funds, Inc., which was administratively controlled by Arthur Bent. Reserve and the Bents directed the Bents' personal accountant to close Reserve's books.

Based on these occurrences, Vernaglia began investigating waste and mismanagement at Reserve in the form of improper reporting and documentation of investments and expenses, improper accounting, improper movement of funds between accounts, failure to complete required forms, and claims regarding $20 million in missing funds.

On Friday April 1, 2005, Bent II called Vernaglia, who was on his way back to the office from a meeting, and told him not to come back to work. On Monday April 4, 2005, Reserve published an announcement stating that it had hired two new sales executives. Vernaglia was formally terminated as president of Reserve on August 30, 2005 and was terminated as a director on September 29, 2005. Reserve thereafter brought suit against Vernaglia, claiming that he converted Reserve's funds for his own personal use by utilizing those funds to pay his personal credit card bills and by paying himself excess wages. Vernaglia maintains that all payments made to him were made with the knowledge, consent, and/or ratification of one or more Reserve officers and that these payments were either compensation or reimbursements for business expenses he charged to his credit card and other expenses, with the knowledge and/or approval of Bent II.

Reserve and the Bents published statements to Reserve employees and its accountant "that [Vernaglia] converted Reserve's funds for his own personal use by using those funds to pay for his personal credit card bills and to pay himself wages in excess of those authorized by Reserve's majority shareholders and Board of Directors." (Second Amended Answer 10, 18.)

B. PROCEDURAL HISTORY

On December 19, 2005, Vernaglia filed a First Amended Answer, Affirmative Defenses, Counterclaim and Third-Party Complaint (the "First Amended Answer"). Thereafter, Reserve and the Bents as third-party defendants filed a motion to dismiss the First Amended Answer, on the grounds that it fails to state a claim upon which relief can be granted, fails to plead fraud with particularity, and that the Court lacks subject matter jurisdiction over the claim for access to corporate books and records. In response, Vernaglia opposed the motion and sought leave to file the Second Amended Answer. Reserve and the Bents oppose Vernaglia's motion for leave to amend.

II. DISCUSSION

A. STANDARD OF REVIEW

Dismissal of a complaint for failure to state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6) ("Rule 12(b)(6)") is proper only where "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Harris v. City of New York, 186 F.3d 243, 247 (2d Cir.1999); see also Swierkiewicz v. Sorema N.A., 534 U.S. 506, 514, 422 S.Ct. 992, 152 L.Ed.2d 1 (2002). In making this determination, a court must accept all well-pleaded factual assertions in the complaint as true and draw all reasonable inferences in favor of the plaintiff. See Hishon v. King & Spalding, 467 U.S. 69, 73, 104 S.Ct. 2229, 81 L.Ed.2d 59 (1984); Jaghory v. New York State Dep't of Educ., 131 F.3d 326, 329 (2d Cir.1997).

"A case is properly dismissed for lack, of subject matter jurisdiction under [Federal] Rule [of Civil Procedure] 12(b)(1) when the district court lacks the statutory or constitutional power to adjudicate it." Makarova v. United States, 201 F.3d 110, 113 (2d Cir.2000). In contrast to the standard for a motion to dismiss for failure to state a claim under Rule 12(b)(6), a "plaintiff asserting subject matter jurisdiction has the burden of proving by a preponderance of the evidence that it exists." Id. A district court may consider evidence outside the pleadings when resolving a challenge to the court's subject matter jurisdiction. Filetech S.A. v. France Telecom S.A., 157 F.3d 922, 932 (2d Cir.1998).

Under Federal Rule of Civil Procedure 15(a), leave to amend "shall be freely granted when justice so requires." Fed.R.Civ.P. 15(a). However, "a district court may properly deny leave when amendment would be futile." Jones v. New York State Div. of Military & Naval Affairs, 166 F.3d 45, 50 (2d Cir.1999) (citing Foman v. Davis, 371 U.S. 178, 182, 83 S.Ct. 227, 9 L.Ed.2d 222 (1962)). Reserve and the Bents argue solely that amendment would be futile here because the Second Amended Answer, like the First Amended Answer, would not survive a motion to dismiss as it is similarly defective. "Determinations of futility are made under the same standards that govern Rule 12(b)(6) motions to dismiss." Nettis v. Levitt, 241 F.3d 186, 194 n. 4 (2d Cir.2001). Accordingly, the Court will consider each counterclaim and third-party claim as it appears in the Second Amended Complaint, as the operative question is whether the claims as set forth in this form would survive a motion to dismiss.

B. APPLICATION

1. Fraud

Reserve and the Bents argue that Vernaglia's fraud claim, in both its current and proposed amended form, fails to plead fraud with particularity as required by Rule 9(b). Rule 9(b) states: "In all averments of fraud or mistake, the circumstances...