ICD Capital, LLC v. CodeSmart Holdings, Inc., Sharon Franey ( 2021 )

20-2692-cv
ICD Capital, LLC v. CodeSmart Holdings, Inc., Sharon Franey
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
SUMMARY ORDER
RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A
SUMMARY ORDER FILED ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED
BY FEDERAL RULE OF APPELLATE PROCEDURE 32.1 AND THIS COURT’S LOCAL RULE 32.1.1.
WHEN CITING A SUMMARY ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY
MUST CITE EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC DATABASE (WITH THE
NOTATION “SUMMARY ORDER”). A PARTY CITING A SUMMARY ORDER MUST SERVE A COPY
OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL.
At a stated Term of the United States Court of Appeals for the Second Circuit, held at the
Thurgood Marshall United States Courthouse, 40 Foley Square, in the City of New York on the
9th day of April, two thousand twenty one.
Present: ROSEMARY S. POOLER,
RICHARD J. SULLIVAN,
MICHAEL H. PARK,
Circuit Judges.
_____________________________________________________
ICD CAPITAL, LLC, INDIVIDUALLY AND DERIVATIVELY
ON BEHALF OF NOMINAL DEFENDANT CODESMART
HOLDINGS, INC.,
Plaintiff-Appellant,
v. 20-2692-cv
CODESMART HOLDINGS, INC., SHARON FRANEY,
Defendants-Appellees. 1
_____________________________________________________
Appearing for Appellant: Joseph Michael Pastore III, Pastore & Dailey LLC, New York,
N.Y.
Appearing for Appellees: Sameer Rastogi, Sichenzia Ross Ference LLP (Michael H.
Ference, Thomas P. McEvoy, on the brief), New York, N.Y.
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The Clerk of Court is directed to amend the case caption to the above.
Appeal from the United States District Court for the Southern District of New York
(Keenan, J.).
ON CONSIDERATION WHEREOF, IT IS HEREBY ORDERED, ADJUDGED,
AND DECREED that the order of said District Court be and it hereby is AFFIRMED.
ICD Capital, LLC appeals from the July 13, 2020 order of the United States District
Court for the Southern District of New York (Keenan, J.) denying leave to amend its complaint
against CodeSmart Holdings, Inc., and its former chief operating officer, Sharon Franey. We
assume the parties’ familiarity with the underlying facts, procedural history, and specification of
issues for review.
ICD Capital’s proposed second amended complaint (“PSAC”) asserts direct claims
against Franey for negligent misrepresentation and aiding and abetting fraud and derivative
claims on behalf of CodeSmart for breach of fiduciary duty and aiding and abetting Shapiro’s
purported breach of fiduciary duty. After dismissing ICD Capital’s first amended complaint and
providing an opportunity to amend, ICD Cap., LLC v. CodeSmart Holdings, Inc., No. 14-CV-
8355, 2020 WL 815733, at *9 (S.D.N.Y. Feb. 19, 2020) (“CodeSmart I”), the district court
reviewed the proposed second amended complaint (“PSAC”) and denied leave to amend for
futility, ICD Cap., LLC v. CodeSmart Holdings, Inc., No. 14-CV-8355, 2020 WL 3961617, at
*10 (S.D.N.Y. July 13, 2020) (“CodeSmart II”). ICD Capital’s appeal is limited to this denial.
Where a district court denies leave to amend based on futility, we review de novo. See Panther
Partners Inc. v. Ikanos Commc’ns, Inc., 681 F.3d 114, 119 (2d Cir. 2012).
Amending ICD’s claim for negligent misrepresentation would be futile. Under New York
law, a negligent misrepresentation claim requires “(1) the existence of a special or privity-like
relationship imposing a duty on the defendant to impart correct information to the plaintiff; (2)
that the information was incorrect; and (3) reasonable reliance on the information.” Crawford v.
Franklin Credit Mgmt. Corp., 758 F.3d 473, 490 (2d Cir. 2014) (internal quotation marks
omitted). In the commercial context, liability for negligent representation is imposed “only on
those persons who possess unique or specialized expertise, or who are in a special position of
confidence and trust with the injured party such that reliance on the negligent misrepresentation
is justified.” Eternity Glob. Master Fund Ltd. v. Morgan Guar. Tr. Co. of N.Y., 375 F.3d 168,
187 (2d Cir. 2004) (internal quotation marks omitted). Because the transaction at issue is an
arms-length stock purchase between two sophisticated entities, we agree with the district court
that Franey did not owe ICD Capital a special duty.
Amendment would also be futile for ICD’s aiding and abetting fraud claim. “[T]o plead
properly a claim for aiding and abetting fraud, the complaint must allege: (1) the existence of an
underlying fraud; (2) knowledge of this fraud on the part of the aider and abettor; and (3)
substantial assistance by the aider and abettor in achievement of the fraud[.]” Stanfield Offshore
Leveraged Assets, Ltd. v. Metro. Life Ins. Co., 883 N.Y.S.2d 486, 489 (1st Dep’t 2009) (internal
quotation marks omitted). Plaintiffs must allege a defendant’s “actual knowledge” of the
underlying fraud and must do so in accordance with the heightened pleading standards of Rule
9(b). Lerner v. Fleet Bank, N.A., 459 F.3d 273, 292-93 (2d Cir. 2006) (citation omitted).
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Assuming ICD Capital plausibly alleged the existence of an underlying fraud based on
the indictment and guilty plea of Ira Shapiro, CodeSmart’s founder and CEO, its claim against
Franey still fails because no factual allegations connect Franey to the fraud. ICD Capital argues
that CodeSmart’s issuance of a false press release regarding its purported arrangement with
Ramapo College demonstrates Franey’s knowledge of, and substantial assistance with, the fraud.
However, the statements attributed to Franey in the PSAC reflect that Franey was not even aware
of the premature press release until after a Ramapo representative complained and that Franey
then promised that CodeSmart would not issue any more releases on the subject without
Ramapo’s consent. Nothing in the PSAC suggests that Franey knew of the falsity of the press
release before it was issued. Besides the Ramapo College press release, ICD Capital rests its
allegations of fraudulent intent almost entirely on Franey’s status as chief operating officer.
These generalized allegations of fraudulent intent do not satisfy the heightened pleading
standards of Rule 9(b). See Rombach v. Chang, 355 F.3d 164, 176 (2d Cir 2004) (“[A] pleading
technique that couples a factual statement with a conclusory allegation of fraudulent intent is
insufficient to support the inference that the defendant acted recklessly or with fraudulent intent.”
(brackets and internal quotation marks omitted)).
ICD also alleged two derivative claims on behalf of CodeSmart—one for breach of
fiduciary duty and the other for aiding and abetting breach of fiduciary duty. The district court
and the parties agree that Florida law applies as Florida is the state of CodeSmart’s
incorporation. CodeSmart II, 2020 WL 3961617, at *8.
Under Florida law, “[t]he elements of a claim for breach of fiduciary duty are: the
existence of a fiduciary duty, and the breach of that duty such that it is the proximate cause of the
plaintiff’s damages.” Gracey v. Eaker, 837 So.2d 348, 353 (Fla. 2002) (footnote omitted). As for
aiding and abetting a breach of fiduciary duty, a plaintiff must plausibly allege “(1) a fiduciary
duty on the part of the primary wrongdoer, (2) a breach of this fiduciary duty, (3) knowledge of
the breach by the alleged aider and abettor and (4) the aider and abettor’s substantial assistance
or encouragement of the wrongdoing.” AmeriFirst Bank v. Bomar, 757 F. Supp. 1365, 1380
(S.D. Fla. 1991) (citation omitted). Although ICD Capital argues to the contrary, Florida courts
apply Federal Rule of Civil Procedure 9(b) to “torts that are not even necessarily fraudulent—
such as a breach of fiduciary duty—as long as their underlying factual allegations include
averments of fraud.” Ctr. for Individual Rights v. Chevaldina, No. 16-CV-20905, 2018 WL
1795470, at *7 (S.D. Fla. Feb. 21, 2018); see also Solidda Grp., S.A. v. Sharp Elecs. Corp., No.
12-CV-21411, 2012 WL 12863888, at *8 (S.D. Fla. Sept. 27, 2012) (applying Rule 9(b) to
breach of fiduciary duty claim where the alleged breach was based on “committing fraudulent
acts”); Rogers v. Cisco Sys. Inc., 268 F. Supp. 2d 1305, 1310 (N.D. Fla. 2003) (applying Rule
9(b) to breach of fiduciary duty claim). Since ICD Capital itself alleges that “no business
judgment . . . excuses this fraudulent behavior” in support of its derivative claims, App’x at 151
(emphasis added), we review these claims under the pleading standards of Rule 9(b).
The district court correctly dismissed the derivative claims. The PSAC lacks any factual
allegations regarding when or how Franey breached any fiduciary duty to CodeSmart. ICD
Capital argues that the “group pleading doctrine” permits it to plausibly allege Franey’s liability
as part of CodeSmart’s leadership, without further specificity. Appellant’s Br. at 27. This
doctrine states that “the identification of the individual sources of statements is unnecessary
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when the fraud allegations arise from misstatements or omissions in group-published documents,
such as . . . registration statements, press releases, or other ‘group published information’ that
presumably constitute the collective actions of those individuals involved in the day-to-day
affairs of the corporation.” Durgin v. Mon, 659 F. Supp. 2d 1240, 1253 (S.D. Fla. 2009) (citation
omitted). Even assuming the doctrine applies to breach of fiduciary duty claims, ICD Capital
presents only “conclusory allegations regarding the role [Franey] played in [CodeSmart].” Id. at
1254. ICD Capital highlights its allegations that Franey signed some SEC filings and that Franey
was a full-time employee of the company. However, ICD Capital does not allege which SEC
filings Franey signed or what made them false. Additionally, the PSAC does not allege that
Franey signed, created, or presented any of the other allegedly fraudulent statements in the
private placement memorandum, press releases, or interviews. Therefore, ICD Capital has failed
to allege with particularity that Franey was even part of the “group” that committed the fraud.
The same reasoning applies to the aiding and abetting claim because “[c]onclusory statements
that a defendant ‘actually knew’ [about the breach of fiduciary duty] are insufficient to support
an aiding and abetting claim where the facts in the complaint only suggest that the defendant
‘should have known that something was amiss.’” Lamm v. State Street Bank & Tr. Co., 889 F.
Supp. 2d 1321, 1332 (S.D. Fla. 2012) (some internal quotation marks omitted). The PSAC does
not allege more than that. Accordingly, amendment would be futile for these derivative claims.
We find no error in the district court’s denial of leave to amend. We have considered the
remainder of ICD Capital’s arguments and find them to be without merit. Accordingly, the order
of the district court hereby is AFFIRMED.
FOR THE COURT:
Catherine O’Hagan Wolfe, Clerk
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