Stanley Works Israel Ltd. v. 500 Group, Inc.

          RULING ON MOTION TO DISMISS

          CHARLES S. HAIGHT, JR. SENIOR UNITED STATES DISTRICT JUDGE

         The Stanley Works Israel Ltd., f/k/a ZAG Industries, Ltd. ("Plaintiff"), an Israeli limited liability company, brings this diversity action against Defendants 500 Group, Inc., a New York corporation, and Paolo Tiramani, a citizen of Nevada (collectively, "Defendants"). Plaintiff and Defendant 500 Group were parties to certain product license agreements that related generally to patent rights owned by 500 Group. Plaintiff's claims against Defendants arise from a dispute over monies paid pursuant to a settlement agreement between the parties.

         Defendants now move pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure to dismiss the Amended Complaint for failure to state a claim upon which relief can be granted, Doc. 26. Plaintiff has resisted the motion, Doc. 29, and Defendants have filed a reply brief, Doc. 32. This Ruling resolves Defendants' motion.

         I. BACKGROUND

         The following facts are derived from Plaintiff's Amended Complaint, and are assumed true for the purposes of this motion.

         Plaintiff and Defendant 500 Group were parties to certain product license agreements and a letter agreement (collectively, the "License Agreements"), which related generally to patent rights owned by 500 Group. Amended Complaint, Doc. 24 ¶ 7. The License Agreements were silent on the tax treatment of royalty payments made under their terms. Id. ¶ 8. However, under Israeli law, Plaintiff was required to withhold certain percentages of such royalty payments to 500 Group, and to then remit that amount to the Israeli tax authority to satisfy 500 Group's tax obligations in Israel. Id. Therefore, during the term of the License Agreements, with 500 Group's consent and agreement, Plaintiff withheld the appropriate amounts from 500 Group's royalty payments, and remitted the tax to the Israeli tax authority. Id.

         Disputes between the parties relating to the License Agreements arose; these disputes resulted in a demand for arbitration. Id. ¶ 9. The disputes were then negotiated and the parties ultimately reached a settlement. Id. ¶ 10. Plaintiff and 500 Group entered into a Settlement Agreement on March 31, 2017, which provided, among other things, that Plaintiff would pay a sum of ten million dollars to Defendant 500 Group. Id. ¶¶11-12. The parties agreed that of this total, six million dollars constituted payment for Plaintiff's purchase of 500 Group's patent rights; the remaining four million dollars constituted royalty payments to 500 Group. Id. ¶ 12.

         Plaintiff was required to withhold a portion of total amount payable under the Settlement Agreement for tax purposes, and then remit the tax to the Israeli tax authority on behalf of 500 Group. Id. ¶ 13. In this situation, pursuant to Israeli law, Plaintiff was required to withhold $2, 500, 000, or 25% of the total payment amount, unless the parties obtained prior approval from the Israeli tax authority for a different withholding arrangement. Id. ¶ 14. 500 Group would then be responsible to seek a refund of any portion of the withheld amount that was not taxable directly from the Israeli tax authority. Id. ¶ 14.

         The parties decided to delay the payment of the amount due under the Settlement Agreement so that they could obtain pre-approval from the tax authority for "structuring a reduced amount of withholding, in view of the agreed-upon structure of the Settlement Agreement." Id. ¶ 15. This agreement was made in mutually-signed electronic writings. Id. The parties believed that under Israeli law, the six million dollar patent rights payment should not be taxed, and the four million dollar royalty payment should be taxed at the prior royalty rate of 15%. Id. Thus, if pre-approval was obtained, 500 Group's total tax burden would be $600, 000. Id. According to the signed electronic agreements between the parties, that amount would be withheld by Plaintiff and remitted to the Israeli tax authority. Id.

         500 Group hired Ernst & Young to act on its behalf to assist in obtaining the aforementioned pre-approval. Id. ¶ 17. Defendant Tiramani and other agents of 500 Group confirmed the parties' agreement relating to the tax withholdings multiple times in writing, including in emails signed by Tiramani and other agents of 500 Group. Id. ¶ 18. Tiramani was personally involved in efforts to further the parties' tax withholdings agreement, and agreed that the parties should continue to seek approval for the withholdings under the current Settlement Agreement, rather than re-execute the Agreement to explicitly split the payments into two categories. Id. ¶ 20.

         Pre-approval was ultimately obtained by Ernst & Young, acting on behalf of 500 Group for the parties' proposal. Id. ¶ 21. 500 Group agreed that Plaintiff was to retain $600, 000 from the payment total under the Settlement Agreement. The parties' agreement to seek preapproval and proceed with withholding 15% of the royalty payment was "acted on to completion." Id. 500 Group's agreements, representations and conduct regarding the tax withholding issue induced Plaintiff's reliance, in that Plaintiff aided 500 Group to obtain the preapproval, and Plaintiff performed its obligation under the agreement by remitting $600, 000 to the Israeli tax authority in satisfaction of 500 Group's tax obligations. Id. ¶ 22.

         Under the Settlement Agreement, 500 Group was to provide Plaintiff with instructions for wiring the payment from Plaintiff to 500 Group called for by the Agreement. Id. ¶ 23. 500 Group instructed Plaintiff to wire the payment to its account at Patriot Bank in Stamford, Connecticut. Id. ¶ 24. The settlement funds were wired to this bank account on June 1, 2017. Id. ¶ 25. However, Plaintiff mistakenly failed to deduct $600, 000 from the total as the agreed-upon tax withholdings. Id. Thus, Plaintiff overpaid 500 Group by $600, 000. Id.

         On June 5, 2017, Plaintiff's bank requested that the funds which were erroneously transmitted be recalled; this request was denied. Id. ¶ 26. On or about June 7, 2017, Plaintiff explained to 500 Group that it had mistakenly overpaid, and asked 500 Group to return the $600, 000 overpayment. Id. ¶ 27. 500 Group "failed to diligently respond" to Plaintiff's request. Id. ¶ 28. Plaintiff then made multiple follow-up requests to 500 Group for it to return the money. Id. ¶ 29. Although Tiramani initially indicated by email that he intended to return the funds and asked about the logistics of such a transfer, all of Plaintiff's follow-up communications and requests were either ignored or refused, without any legal explanation by Defendants. Id. ¶ 30.

         Plaintiff was still liable on behalf of 500 Group to the Israeli tax authority for the full amount of the pre-approved withholdings under the Settlement Agreement. Id. ¶ 31. Accordingly, Plaintiff paid $600, 000 to the tax authority on or about August 15, 2017. Id. Defendants continue to refuse to return Plaintiff's $600, 000, despite continued and repeated requests and demands. Id. ¶ 32.

         II. STANDARD OF REVIEW

         "On a motion to dismiss, the issue is 'whether the claimant is entitled to offer evidence to support the claims.'" Patane v. Clark, 508 F.3d 106, 111 (2d Cir. 2007) (quoting Scheuer v. Rhodes, 416 U.S. 232, 236 (1984)). "To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to 'state a claim that is plausible on its face.'" Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) ("Iqbal") (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007) ("Twombly")). This pleading standard creates a "two-pronged approach," Iqbal, 556 U.S. at 679, based on "[t]wo working principles." Id. at 678.

         First, all factual allegations in the complaint must be accepted as true and all reasonable inferences must be drawn in the favor of the non-moving party. See id.; see also Gorman v. Consolidated Edison Corp., 488 F.3d 586, 591-92 (2d Cir. 2007) (citation omitted). The presumption of truth does not extend, however, to "legal conclusions" or "[t]hreadbare recitals of the elements of a cause of action supported by mere conclusory statements[.]" Iqbal, 556 U.S. at 678. Second, "a complaint that states a plausible claim for relief" will survive a motion to dismiss and "[d]etermining whether a complaint states a plausible claim for relief will . . . be a context-specific task that requires the reviewing court to draw on its judicial experience and common sense." Harris v. Mills, 572 F.3d 66, 72 (2d Cir. 2009) (quoting Iqbal, 556 U.S. at 679) (quotation marks omitted). "Dismissal under Federal Rule of Civil Procedure 12(b)(6) is appropriate when 'it is clear from the face of the complaint, and matters of which the court may take judicial notice, that the plaintiff's claims are barred as a matter of law.'" Associated Fin. Corp. v. Kleckner, 480 Fed.Appx. 89, 90 (2d Cir. 2012) (quoting Conopco, Inc. v. Roll Int'l, 231 F.3d 82, 86 (2d Cir. 2000)).

         III. DISCUSSION

         Plaintiff's Amended Complaint raises counts sounding in breach of contract, unjust enrichment, unfair trade practices, conversion, and civil theft. The Court will address each of Defendants' arguments for Rule 12(b)(6) dismissal of the claims asserted by Plaintiff, based on the well-pled factual allegations of the Amended Complaint.

         A. Choice of Law

         Defendants argue that New York law should apply to all of the claims in this matter, and on this ground, move to dismiss Plaintiff's CUTPA and tort claims. The Court addresses the choice of law analysis as an initial matter.

         A federal court sitting in diversity follows the choice of law principles of the forum state. Bigio v. Coca-Cola Co., 675 F.3d 163, 169 (2d Cir. 2012) (citation omitted). When evaluating choice of law questions sounding in tort, Connecticut courts apply the 'most significant relationship' test from the Restatement (Second) of Conflict of Laws, § 145. W. Dermatology Consultants, P.C. v. VitalWorks, Inc., 322 Conn. 541, 558 (2016). The relevant factors that are considered are: (1) the place where the injury occurred; (2) the place where the conduct causing the injury occurred; (3) the domicile, residence, nationality, place of incorporation, and business of the parties, and (4) the place where the relationship, if any, between the parties is based. Otis Elevator Co. v. Factory Mut. Ins. Co., 353 F.Supp.2d 274, 285 (D. Conn. 2005).

         Here, the Settlement Agreement contains a choice of law clause, which provides that the "Agreement and Mutual Release shall, in all respects, be interpreted, enforced, and governed under the laws of the State of New York without regard to its conflicts of laws principles." Doc. 24-1 at 8. The parties are in agreement that pursuant to this provision, New York law governs Plaintiff's breach of contract claim. The parties are also in apparent agreement that New York law should apply to the unjust enrichment and conversion claims.^[1] Plaintiff cites to Connecticut law in arguing against dismissal of its CUTPA and civil theft claims.

         To determine which law to apply, the Court first addresses whether the aforementioned clause in the Settlement Agreement controls the choice of law analysis for the remaining CUTPA and civil theft claims. Courts in this District have held that general choice of law provisions in contracts must be sufficiently broad to encompass tort claims. See In re Trilegiant Corp., Inc., 11 F.Supp.3d 132, 144-45 (D. Conn. 2014) (noting that in this District, courts have found that "general choice-of-law provisions in contracts must explicitly include tort claims to prevent a plaintiff from bringing a cause of action under CUTPA" and finding that the choice of law provision in certain credit card agreements was not so broad as to bar the Plaintiff's tort causes of action under CUTPA (citing Country Club Assocs. v. Shaw's Supermarkets, Inc., 643 F.Supp.2d 243, 252-55 (D. Conn. 2009))). See also Country Club Assocs., 643 F.Supp.2d at 252-55 (construing a contractual choice of law provision narrowly as to not explicitly encompass tort claims); Aviamax Aviation Ltd. v. Bombardier Aerospace Corp., No. 3:08-CV-1958(CFD), 2010 WL 1882316, at *2-4 (D. Conn. May 10, 2010) (finding an analogous choice of law provision "too narrowly drawn" to encompass the "closely related" tort claims).

         Here, the choice of law clause in the Settlement Agreement is similar to the provisions detailed in the cases cited above. It states that it applies to the Agreement and the mutual release; not to all claims arising thereof. The Court follows these courts in deciding that the choice of law provision here is too narrow to encompass the CUTPA or civil theft claims.

         Thus, the Court turns to the 'most significant relationship' test. According to the allegations in the Amended Complaint, Plaintiff is an Israeli entity, with its principal place of business in Israel. It is owned by a Dutch company, which, in turn, is owned by a Canadian corporation. Defendant 500 Group is a New York corporation with its principal place of business in Nevada. It maintains a regular place of business in Connecticut. Defendant Tiramani is a citizen of Nevada. Tiramani previously resided in Connecticut and maintains a place of business in Connecticut. It is unclear from the record before the Court where the relationship between the parties is centered; there are no allegations as to where the contract was signed. While it appears that the injury was felt in Israel, the allegations of the Amended Complaint do not shed light on whether the injury-causing conduct occurred in Nevada, New York, or Connecticut.

         It appears that it would be premature to undertake this analysis at this early stage in the litigation. The record before the Court on this motion to dismiss does not contain the necessary information to determine where the relationship between the parties was based; where the Settlement Agreement was signed; and where the injury-causing conduct took place. See Bristol-Myers Squibb Co. v. Matrix Labs. Ltd., 655 Fed.Appx. 9, 13 (2d Cir. 2016) (noting that "[n]umerous district courts in this Circuit have concluded that choice-of-law determinations are fact-intensive inquiries that would be premature to resolve at the motion-to-dismiss stage" (collecting cases)). See also Meserole v. Sony Corp. of Am., No. 08-CV-8987(RPP), 2009 WL 1403933, at *5 n.6 (S.D.N.Y. May 19, 2009) (noting that a detailed choice of law analysis would be premature to undertake in ruling on a motion to dismiss); First Union Nat. Bank v. Paribas, 135 F.Supp.2d 443, 453 (S.D.N.Y. 2001) (declining to decide whether New York or English law applies on a motion to dismiss, because "because it is not yet clear that there is a conflict between New York and English law and because the litigation is at a preliminary stage" (footnotes omitted)), aff'd sub nom., FUNB v. Arab African Int'l Bank, 48 Fed.Appx. 801 (2d Cir. 2002).

         Accordingly, the Court will not grant Defendants' motion to dismiss the CUTPA and civil theft claims on choice of law grounds at this time. Based on the apparent agreement of the parties, however, the Court will apply New York law to Plaintiff's claims of breach of contract, unjust enrichment, and conversion.

         B. Breach of Contract

         Defendants move to dismiss Plaintiff's breach of contract claim on the grounds that it is contrary to the express terms of the Settlement Agreement, which "plainly establishes" that ten million dollars is the amount Plaintiff was required to pay. Defendants argue that Plaintiff failed to identify a provision of the Settlement Agreement that states that a portion of the settlement amount would be withheld for tax purposes, and the parties' prior course of dealing cannot contradict the plain language of the Settlement Agreement. Defendants claim that Plaintiff has failed to allege an enforceable agreement that would require 500 Group to refund the $600, 000 payment.

         For its part, Plaintiff argues that the Amended Complaint plausibly alleges that 500 Group was contractually obligated to allow for the tax withholding, because: (1) the Settlement Agreement is silent on the issue, and therefore ambiguous; (2) there exist subsequent, signed writings in which 500 Group agrees to the tax withholdings, thereby amending the operative contract; (3) the parties acted on this understanding to, at a minimum, partial completion; and (4) Plaintiff relied on the tax agreement to its detriment, thus, 500 Group is equitably estopped from evading its responsibilities.

         1. Ambiguity

         "It is well established that settlement agreements are contracts and must therefore be construed according to general principles of contract law." Collins v. Harrison-Bode, 303 F.3d 429, 433 (2d Cir. 2002) (quotation marks and citation omitted). In New York, a breach of contract claim requires proving four elements: "the making of an agreement, performance by the plaintiff, breach by the defendant, and damages suffered by the plaintiff." Greenberg v. Greenberg, 646 Fed.Appx. 31, 32 (2d Cir. 2016) (quotation marks and citation omitted). "Under New York law the initial interpretation of a contract is a matter of law for the court to decide. Included in this initial interpretation is the threshold question of whether the terms of the contract are ambiguous." Alexander & Alexander Servs., Inc. v. These Certain Underwriters at Lloyd's, London, England, 136 F.3d 82, 86 (2d Cir. 1998) (quotation marks and internal citations omitted).

         A contract is unambiguous if "the contract language has a definite and precise meaning and concerning which there is no reasonable basis for a difference of opinion." Orchard Hill Master Fund Ltd. v. SBA Commc'ns Corp., 830 F.3d 152, 157 (2d Cir. 2016) (quoting Law Debenture Tr. Co. of New York v. Maverick Tube Corp., 595 F.3d 458, 467 (2d Cir. 2010)). "It is axiomatic that where the language of a contract is unambiguous, the parties' intent is determined within the four corners of the contract, without reference to external evidence." Feifer v. Prudential Ins. Co. of Am., 306 F.3d 1202, 1210 (2d Cir. 2002) (citation omitted). Thus, "[i]f the contract is unambiguous, that is, only susceptible to one reasonable interpretation, the court must give effect to the contract as written." Madeleine L.L.C. v. St., 757 F.Supp.2d 403, 405 (S.D.N.Y. 2010) (quotation marks and citation omitted).

         On the other hand, "[c]ontract language is ambiguous if it is 'capable of more than one meaning when viewed objectively by a reasonably intelligent person who has examined the context of the entire integrated agreement.'" Collins, 303 F.3d at 433 (quoting Compagnie Financiere de CIC et de L'Union Europeenne v. Merrill Lynch, Pierce, Fenner & Smith Inc., 232 F.3d 153, 158 (2d Cir. 2000)). "[T]he question of ambiguity vel non must be determined from the face of the agreement, without reference to extrinsic evidence." Id.

         "At the motion to dismiss stage, a district court may dismiss a breach of contract claim only if the terms of the contract are unambiguous." Orchard Hill Master Fund Ltd.., 830 F.3d at156; see also Maniolos v. United States, 741 F.Supp.2d 555, 567 (S.D.N.Y. 2010) ("Where a contract's language is clear and unambiguous, a court may dismiss a breach of contract claim on a Rule 12(b)(6) motion to dismiss. . . . However, when the language of a contract is ambiguous, its construction presents a question of fact, which of course precludes summary dismissal on a Rule 12(b)(6) motion." (quotation marks and citations omitted) (collecting cases)), aff'd, 469 Fed.Appx. 56 (2d Cir. 2012). "[W]hile a court is not obliged to accept the allegations of the complaint as to how to construe a contract, it should resolve any contractual ambiguities in favor of the plaintiff on a motion to dismiss." Maniolos, 741 F.Supp.2d at 567 (quotation marks and citation omitted).

         In the present case, the Settlement Agreement is attached to the Amended Complaint. The language of the contract requires Plaintiff to wire a sum of ten million dollars to Defendants; it makes no provision for any withholding from that sum for tax purposes. Plaintiff does not point to any clause that states otherwise; to the contrary, Plaintiff argues that the Settlement Agreement is silent on the issue of tax treatment. See, e.g., Doc. 29 at 9. Plaintiff contends, however, that the silence of the contract on the issue of the tax treatments renders the Agreement ambiguous, precluding dismissal of its breach of contract claim.

         In support for its position, Plaintiff refers the Court to the Second Circuit's decision in White v. White Rose Food, a Div. of DiGiorgio Corp., 237 F.3d 174 (2d Cir. 2001) ("White Rose"). This case involved, in part, a settlement agreement resolving a labor dispute between an employer and a union that represented a group of striking employees. Id. at 176-77. The settlement agreement provided that the employer, White Rose, would place a sum of $1.5 million into an escrow account to be distributed to the now-former employees. Id. at 177. The agreement was "silent on the issue whether such payroll taxes could be drawn from the Settlement Fund, and who was to pay those taxes." Id.^[2] After White Rose deducted payroll taxes from the Settlement Fund, the employees brought the ...