AMUSEMENT INDUSTRY, INC. v. Stern
786 F. Supp. 2d 758
S.D.N.Y.2011Background
- FRG Corp. and related entities entered a 2007 deal to purchase a portfolio from Colonial Realty and formed FRG LLC prior to closing.
- Amusement wired $13 million into an escrow account at LTA under a Letter of Understanding, relying on representations by Stern, FRG entities, and Friedman regarding equity and financing.
- The escrow funds were later moved from the escrow account to a FRG-controlled account and used to close the portfolio without Amusement's knowledge or consent.
- Defendants delivered promissory notes and deeds after the misappropriation, but Amusement never approved or accepted them, while attempting to negotiate final terms.
- Amusement filed a TAC asserting fraud, negligent misrepresentation, conversion, conspiracy, unjust enrichment, and related equitable claims; defendants moved to dismiss under Rule 12(b)(6).
- Magistrate Judge Gorenstein recommended partial grant and denial; the district court adopted part of the recommendation, granting dismissal on several counts while preserving others.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Fraud claims sufficiency and particularity | Amusement asserts statements 1–13 were false and intended to induce escrow, with indirect reliance through Bankers Capital. | Statements to third parties cannot support direct fraud; lack of reliance and specificity for some statements. | Fraud survives for statements 1–13; statements 14 and 15 dismissed for lack of reliance/causation. |
| Negligent misrepresentation—special relationship | Amusement relied on defendants’ misrepresentations; Frenkel/LTA owed fiduciary duties as escrow agents; Stern/FRG Corp. may have a duty via relationships. | No special relationship with Amusement between Stern/FRG and Amusement; reliance on third parties misrepresents liability. | Dismissed as to Stern/FRG Corp. for lack of a special relationship; Frenkel and LTA may be liable on statement 13 due to escrow fiduciary duties. |
| Equitable relief: liens and trusts viability | Equitable lien, constructive trust, and purchase money resulting trust should rest on misappropriated funds and assets. | No identifiable non-portfolio property or valid fiduciary basis to impose such relief; constructive trust requires confidential relationship. | Equitable lien, constructive trust, and purchase money resulting trust claims dismissed; some related fiduciary duty issues acknowledged for escrow claim. |
| Choice of law for promissory notes | California law governs notes; relied on choice-of-law clauses. | California law applies due to clause invoking California law and lack of fraud/public policy concerns. | California law applied to the promissory note claims. |
| Declaratory judgment viability | Plaintiff seeks a declaratory judgment establishing a security interest in Portfolio assets. | Declaratory judgment claim is unsupported and should be dismissed. | Declaratory judgment claim dismissed. |
Key Cases Cited
- Ashcroft v. Iqbal, 556 U.S. 662 (U.S. 2009) (pleading standard: plausible, not merely possible; reject mere conclusions)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (U.S. 2007) (heightened pleading standard; must plead facts showing plausibility)
- Lerner v. Fleet Bank, N.A., 459 F.3d 273 (2d Cir. 2006) (fraud pleading with particularity; strong inference of intent)
- Krumme v. WestPoint Stevens Inc., 238 F.3d 133 (2d Cir. 2000) (implied consent to governing law in diversity cases)
- Suez Equity Investors, L.P. v. Toronto-Dominion Bank, 250 F.3d 87 (2d Cir. 2001) (assessing duty and reliance factors for special relationships)
- Laub v. Faessel, 297 A.D.2d 28 (1st Dep't 2002) (loss causation and proximate cause in fraud claims)
- M & B Joint Venture, Inc. v. Laurus Master Fund, Ltd., 12 N.Y.3d 798 (N.Y. 2009) (constructive trust prerequisites; fiduciary considerations)
- Thomas H. Lee Equity Fund V, L.P. v. Mayer Brown, Rowe & Maw LLP, 612 F. Supp. 2d 267 (S.D.N.Y. 2009) (choice-of-law in complex contracts; implied consent context)