Synergy Financial, L.L.C. v. Zarro

• Decision Date: 12 July 2004
• Docket Number: No. CIV. 1:04CV41.,CIV. 1:04CV41.
• Citation: 329 F.Supp.2d 701
• Court: U.S. District Court — Western District of North Carolina
• Parties: SYNERGY FINANCIAL, L.L.C, and NYNC, LLC, Plaintiffs, v. Francis A. ZARRO, Jr.; American Pastime Holdings, Inc.; Z-HeMa, LLC; Herzfeld & Rubin, P.C., and Arthur Strauss, Defendants.

329 F.Supp.2d 701

SYNERGY FINANCIAL, L.L.C, and NYNC, LLC, Plaintiffs, v. Francis A. ZARRO, Jr.; American Pastime Holdings, Inc.; Z-HeMa, LLC; Herzfeld & Rubin, P.C., and Arthur Strauss, Defendants.

No. CIV. 1:04CV41.

United States District Court, W.D. North Carolina, Asheville Division.

July 12, 2004.

COPYRIGHT MATERIAL OMITTED

Edward L. Bleynat, Jr., Michael L. Burton, Ferikes & Bleynat, Asheville, NC, for Plaintiffs.

Francis A. Zarro, Jr., Bondville, VT, pro se.

Jim W. Phillips, Jr., Alexander Elkan, Brooks, Pierce, McLendon, Humphrey & Leonard, LLP, Greensboro, NC, for Defendants.

ORDER

THORNBURG, District Judge.

THIS MATTER is before the Court on the motion of Defendants Herzfeld & Rubin, P.C., and Arthur Strauss (collectively "H & R") to dismiss, which is opposed by the Plaintiffs.

I. PROCEDURAL HISTORY

On March 9, 2004, H & R removed this action from the General Court of Justice, Superior Court Division, of Buncombe County, North Carolina. Notice of Removal, filed March 9, 2004. On April 5, 2004, Francis Zarro, acting in a pro se capacity, joined in the removal from state court on behalf of himself and Defendants American Pastime Holdings, Inc., and Z-HeMa, L.L.C.¹ Joinder in Removal, filed April 5, 2004. Removal is based on diversity jurisdiction and the presence of a federal claim.

II. STANDARD OF REVIEW

"A complaint should not be dismissed for failure to state a claim upon which relief may be granted unless after accepting all well-pleaded allegations in the plaintiff's complaint as true and drawing all reasonable factual inferences from those facts in the plaintiff's favor, it appears certain that the plaintiff cannot prove any set of facts in support of his claim entitling him to relief." De'Lonta v. Angelone, 330 F.3d 630, 633 (4th Cir.2003).

Defendant H & R has attached as exhibits to its motion copies of certain contracts which are referenced in the complaint. Normally, in ruling on a motion to dismiss for failure to state a claim, a court may not consider matters outside the scope of the pleadings. Fed.R.Civ.P. 12(b)(6). "Because [the Plaintiffs] rel[y] on the agreement[s] in [their] complaint, it [i]s proper for the district court to consider [them] in ruling on the motion to dismiss." Darcangelo v. Verizon Communications, Inc., 292 F.3d 181, 195 n. 5 (4th Cir.2002) (citing New Beckley Mining Corp. v. Int'l Union, UMWA, 18 F.3d 1161, 1164 (4th Cir.1994)). "`[A] district court ruling on a motion to dismiss may consider a document the authenticity of which is not contested, and upon which the plaintiff's complaint necessarily relies.'" Stewart v. Pension Trust of Bethlehem Steel Corp., 12 Fed.Appx. 174, 176 (4th Cir.2001) (quoting Parrino v. FHP, Inc., 146 F.3d 699, 706 (9th Cir.1998)). Here, the Plaintiffs do not dispute that the documents are authentic; their claim is that the documents were fraudulently induced. The undersigned does not find that this warrants exclusion of the documents in connection with this motion. "[I]f a plaintiff does not incorporate by reference or attach a document to its complaint, but the document is referred to in the complaint and is central to the plaintiff's claim, a defendant may submit an indisputably authentic copy to the court to be considered on a motion to dismiss." GFF Corp. v. Associated Wholesale Grocers, Inc., 130 F.3d 1381, 1384 (10th Cir.1997).

III. ALLEGATIONS OF THE COMPLAINT AND EXHIBITS

Synergy Financial, L.L.C. (Synergy) was formed to develop real estate into a golf course and residential development known as Walnut Cove in Buncombe County, North Carolina. Complaint, ¶ 8. In order to carry out the development, Synergy needed investors to infuse money into the project and/or financing. Id. Defendant Zarro represented to Synergy that he had substantial experience in golf course development and financing. Id., ¶ 9. On February 6, 2001, Synergy entered into a "Letter Agreement" with American Pastime Holdings, Inc. (APH), a New York corporation which is controlled by Zarro. Id., ¶ 10. On the same date, a Commitment Letter was executed between Synergy and Z-HeMa, a Connecticut limited liability corporation controlled by Zarro, pursuant to which Z-HeMa was to provide the financing. Id., ¶ 12. On February 19, 2001, Synergy and APH entered into a "First Amendment Investment Banking and Consulting Agreement" which contained the following pertinent provisions:

Under this Investment Banking & Consulting Agreement, APH will provide investment banking and consulting services to the Company [Synergy], including, but not limited to, a review of business plans, financial statements, projections, development plans and project schedules regarding the Project [Walnut Cove]. In addition, APH will consult with your financial and legal advisors regarding the Project.... APH will use its reasonable good faith efforts to arrange and structure First Mortgage Financing (the "Financing") for the subject property in the amount of Thirty-Six Million Five Hundred Dollars ($36,500,000) inclusive of interest reserve, taxes, insurance, any required construction bonds, approval costs, closing costs, fees, and permits, which may be incurred to complete the financing at closing and either disbursed at closing or placed in escrow for future disbursements, as appropriate, in the discretion of APH[.]

. . . . .

As consideration for arranging and structuring the Financing you agree to (i) pay APH an investment banking and consulting fee equal to three percent (3%) of the principal amount of the Financing, exclusive of any fees, costs or expenses charged by the Lender/Investor or any third party or parties ... and (ii) convey a 5% equity interest in the Project.

. . . . .

It is also agreed that you will wire transfer to APH the sum of Fifty Thousand Dollars ($50,000) and you will wire an additional sum of One Hundred Thirty-Two Thousand Five Hundred Dollars ($132,500) to the escrow account of the law firm of Herzfeld and Rubin, P.C. for a total sum of One Hundred Eighty-Two Thousand Five Hundred Dollars ($182,500) (one half percent (1/2%) of the total principal amount of the Financing) upon your execution of this Investment Banking and Consulting Agreement to defray, in part, the time expended and costs and expenses incurred by APH in connection with the foregoing, which sum shall be credited against sums due to APH at closing. The parties hereto agree that the Fifty Thousand Dollars ($50,000) that is wired to APH is non-refundable. The parties hereto further agree that the One Hundred Thirty-Two Thousand Five Hundred Dollars ($132,500) in escrow is non-refundable (except in the event that Lender fails to fund after Borrower's Full compliance with all Lender requirements) and may be utilized by APH in its sole discretion at any time as of the date of this agreement and [H & R] is authorized to disburse these funds pursuant to instructions from APH. To the extent so disbursed, [H & R] shall have no responsibility for repayment of such funds and any refund due to Borrower pursuant to this agreement or the commitment letter shall be made directly by APH or the Lender, respectively.

. . . . .

The parties hereto agree that in the event of a dispute between them, regarding the subject matter of this Investment Banking & Consulting Agreement, such dispute shall be resolved by arbitration in Asheville, North Carolina under the auspices of and in accordance with the rules governing commercial disputes of the American Arbitration Association.

Exhibit C, attached to Defendants' Motion to Dismiss, filed April 12, 2004 (emphasis added). The only parties to the three contracts were Synergy, APH and Z-HeMa.² Id., Exhibits A and B, attached to Defendants' Motion.

Plaintiffs allege that they transferred a total of $565,000.00 to Zarro as fees for arranging the financing; however, Zarro never obtained any actual funding, investors or financing for the project. Complaint, ¶¶ 18, 19, 20. The complaint also alleges:

[H & R], in the course of negotiations and discussions regarding the Walnut Cove project, provided legal counsel for the parties herein, along with counsel provided by North Carolina attorneys, and participated in the preparation of documents for the proposed funding and the transactions in general.³

Plaintiffs were not directly responsible for the fees incurred to [H & R]; as agreed between Zarro and plaintiffs, plaintiffs would pay local North Carolina counsel for their services while Zarro and other defendants were to pay [H & R].

Id., ¶¶ 23, 24 (footnote added). The allegation that the Plaintiffs were not responsible for any legal fees owed to H & R comports with its representation of Zarro and his entities. Moreover, the allegation that Plaintiffs were not responsible for H & R's fees comports with the language of the agreement providing that any disbursement to H & R which was later to be recovered must be recouped from Zarro and/or his entities.

Plaintiffs allege that H & R knew, or should have known, that Zarro had no ability to make the arrangements for which the parties contracted and, in fact, never intended to do so. Id., ¶¶ 25-28. It is also alleged that H & R owed a duty to the Plaintiffs to disclose Zarro's fraudulent scheme and his lack of financial expertise. Id., ¶ 29.

Synergy wired $100,000.00 to the trust account of H & R and claims that it never authorized the release of those funds.⁴ Id., ¶ 32. H & R, it claims, converted the money to its own use. Id., ¶¶ 33-34.

IV. DISCUSSION

Plaintiffs' first cause of action is for constructive fraud. H & R argues there was no fiduciary relationship between the Plaintiffs and H & R and thus, no such claim may be raised. Plaintiffs respond that H & R represented that the $100,000 wired into H & R's trust account would be applied toward financing for the project. "That defendants H & R and plaintiffs had no formal attorney-client relationship is irrelevant and did not absolve defendants H & R from owing a...