Capa Partners Ltd. v E-Smart Tech., Inc.

[*1] Capa Partners Ltd. v E-Smart Tech., Inc. 2004 NY Slip Op 51408(U) Decided on November 15, 2004 Supreme Court, Nassau County Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on November 15, 2004
Supreme Court, Nassau County

CAPA PARTNERS LIMITED, Plaintiff,

against

E-SMART TECHNOLOGIES, INC., Defendant.



4913-04



COUNSEL FOR PLAINTIFF

David Bolton, P.C.

666 Old Country Road - Suite 509

Garden City, New York 11530

COUNSEL FOR DEFENDANT

Maranda E. Fritz, P.C.

565 Fifth Avenue

New York, New York 10017

Leonard B. Austin, J.

Plaintiff moves for summary judgment on its complaint, to dismiss Defendant's counterclaims and for attorney fees. [*2]

BACKGROUND

Defendant E-Smart Technologies, Inc. ("E-Smart") is a provider of high

technology security systems. E-Smart's shares are publicly traded in an over the counter market.

By agreement dated September 1, 2001, Plaintiff Capa Partners Limited ("Capa") was retained by E-Smart to promote and develop investor interest in E-Smart. The agreement provided that Capa was to assist E-Smart in developing its corporate profile, news releases and mailings, to make presentations to registered representatives, shareholders and members of the investment community to inform them with respect to corporate affairs and to identify registered representatives, stock brokers, and other financial advisers who might be interested in considering E-Smart stock for their customers' portfolios.

The agreement specifically indicates that Capa is not a registered representative or broker-dealer and that it would not be engaged in the sale of any of E-Smart's corporate securities.

Capa was to be compensated for its services by being issued 50,000 shares of E-Smart common stock per month for six months for a total of 300,000 shares. The agreement was for the period of September 1, 2001 through February 28, 2002 at which time the agreement automatically renewed for another six month period unless either party had notified the other in writing at least 30 days prior to the expiration date that the agreement was not being renewed. The agreement also contained a provision that permitted either party to terminate the agreement at any time by providing the other party with 90 days written notice.

In November 2001, E-Smart issued to Capa 300,000 shares of common stock as compensation for the services rendered for the period September 1, 2001 though February 28, 2002.

Neither Capa nor E-Smart served written notice of its intent to cancel the contract more than 30 days prior to February 28, 2002. Therefore, the agreement automatically renewed. Capa continued to perform the services it was obligated to provide pursuant to the terms of the agreement. Despite this, E-Smart never issued Capa the 300,000 shares of E-Smart common stock due to Capa as compensation for the period March 1, 2002 through August 31, 2002.

By letter dated August 26, 2003, Capa formally demanded the issuance of the additional 300,000 shares due to it as compensation for the period March 1, 2002 through August 31, 2002. E-Smart never issued those shares.

Capa commenced this action seeking specific performance of the contract or, alternatively, money damages for the breach of the contract and legal fees as provided in the agreement.

E-Smart appeared, answered and denied all of the essential elements of the complaint. E-Smart further asserted ten affirmative defenses and three counterclaims.

In support of its three counterclaims, E-Smart alleges that Peter Aiello ("Aiello"), Capa's President, was engaged in the securities industry and that, since 1987, Capa has been barred from participating in that industry.

In 2000, E-Smart engaged in a reverse merger wherein it merged with a company previously known as Boppers Holdings Inc.

E-Smart alleges that Aiello, or others acting in concert with him, obtained shares of Boppers, manipulated those shares and attempted to obtain non-public information so that he could engage in insider trading. The counterclaims further allege that Aiello engaged in transactions which [*3]manipulated the value of E-Smart stock.

E-Smart also asserts that Aiello failed to disclose that he had been investigated by the securities industry, that he had been convicted of insider trading and that he had been suspended and then barred from participation in the securities industry. E-Smart alleges that these actions by Aiello constitute violations of 15 U.S.C. §78(j)b in that they constitute material misstatements and omissions and market manipulation.

The failure of Aiello to disclose the foregoing, E-Smart contends, constitutes fraud in the inducement,

Capa moves for summary judgment on its claim for specific performance and to dismiss the counterclaims.

DISCUSSION

A.Standard for Summary Judgment

An agreement that is clear and unambiguous will be enforced in accordance with its terms. Greenfield v. Philles Records, Inc., 98 NY2d 562 (2002); and Russack v. Weinstein, 291 AD2d 439 (2nd Dept., 2002). In this case, the agreement between Capa and E-Smart is clear and unambiguous. Capa is to be compensated for its services by having 300,000 shares of E-Smart common stock issued to it.

The party seeking summary judgment must establish an entitlement to judgment as a matter of law. Alvarez v. Propsect Hosp., 68 NY2d 320 (1986); and Zuckerman v. City of New York, 49 NY2d 557 (1980).

Once the party seeking summary judgment makes a prima facie showing of entitlement to judgment as a matter of law, the party opposing the motion must come forward with proof in evidentiary form to establish the existence of triable issues of fact or must demonstrate an acceptable excuse for its failure to do so. Zuckerman v. City of New York, supra; Davenport v. County of Nassau, 279 AD2d 497 (2nd Dept., 2001); and Bras v. Atlas Construction Corp., 166 AD2d 401 (2nd Dept., 1991).

B.As to the Complaint

E-Smart's opposition consists solely of an attorney's affirmation. The affirmation of an attorney who does not have personal knowledge is insufficient to raise questions of fact sufficient to defeat summary judgment. Worldcom, Inc. v. Dialing Loving Care, Inc., 269 AD2d 159 (1st Dept., 2000); and Siagkris v. K & E Mechanical, Inc., 248 AD2d 458 (2nd Dept., 1998). See also, Zuckerman v. City of New York, supra. While E-Smart's counsel references deposition testimony that allegedly establishes questions of fact, the transcripts of such testimony were not provided to the Court. While deposition testimony may be sufficient to raise questions of fact requiring that a motion for summary judgment be denied, the transcripts of the depositions which contain the testimony which creates questions of fact must be provided to the court on submission of the motion. See, Olan v. Farrell Lines, 64 NY2d 1092 (1985); and Scanlon v. Long Beach Public Schools, 197 AD2d 567 (2nd Dept., 1993).

Although E-Smart's answer asserts that, in December 2001, Wayne Drizin, an officer of E-Smart, advised Capa that E-Smart was terminating the September 1, 2001 agreement, there is no evidence in the record to support this assertion. Additionally, the agreement specifically provides that notice of termination of the agreement must be in writing. E-Smart has failed to place before the Court any evidence that it advised Capa in writing that it was terminating the agreement. E-Smart has not even submitted an affidavit or deposition testimony from Wayne Drizin or any other representative of E-Smart that which demonstrates that E-Smart advised [*4]Capa in writing that the September 1, 2001 agreement was being terminated. Therefore, there is no evidence in the record that the agreement was terminated in accordance with its terms.

Aiello avers in his affidavit that Capa performed the contract during the renewal period. The opposition papers deny such performance. However, the opposition fails to provide evidence in admissible form with regard Capa's alleged non-performance. The attorney's affirmation makes reference to deposition testimony allegedly given by Aiello on behalf of Capa which contradicts Capa's claim of performance. However, the transcript of the deposition containing that testimony has not been provided to the Court. Additionally, E-Smart fails to submit either deposition testimony, an affidavit or documentary evidence from a person with knowledge that would establish that Capa did not perform the contract during the renewal period so as to raise a triable issue of fact. Therefore, E-Smart has failed to place before the Court any evidence in admissible form which would controvert Capa's claim of performance.

Plaintiff has established a prima facie entitlement to judgment as a matter of law on the issue of liability. The burden then shifted to the Defendant to demonstrate the existence of material issues of fact or to explain why it was unable to do so. Alverez v. Prospect Hosp., supra. Defendant has failed to do this. Therefore, Plaintiff's motion for summary judgment on the issue of liability should be granted.

C.As to the Counterclaims

E-Smart's first and second counterclaim are dismissible because the Court lacks subject matter jurisdiction over these claims. CPLR 3211(a)(2).

The first and second counterclaims allege that Capa's actions constitute violations of the Security Exchange Act of 1934; to wit: 15 U.S.C. §78j(b). This statute specifically provides that the federal district court shall have exclusive jurisdiction over all actions brought pursuant to the Act. 15 U.S.C.§78 aa. See also, Baltia Air Lines, Inc. v. CIBC Oppenheimer Corp., 273 AD2d 55 (1st Dept., 2000). Since the United States District Court has exclusive jurisdiction over claims brought pursuant to the Security Exchange Act of 1934, this Court lacks subject matter jurisdiction over these issues. The first and second counterclaims must be dismissed.

The third counterclaim asserts a cause of action for fraud. The counterclaim is premised upon Aiello's alleged failure to disclose that he had been suspended and/or barred from participating in the securities industry and had been convicted on insider trading.

Aiello admits that in 1992, he plead guilty to one violation of the securities law for which he has paid a fine and performed community service. As a result of the conviction, he was prohibited from selling securities in New York for a 3 year period commencing in 1992. He denies that he is currently prohibited from participating in the securities industry. He also denies that his conviction was for insider trading. He further avers that he advised Wayne Drizin of this conviction and suspension months before the September 1, 2001 agreement was executed.

The elements of common law fraud are "...misrepresentation of a material existing fact, falsity, scienter, deception and injury." Channel Master Corp. v. Aluminum Limited Sales, Inc., 4 NY2d 403, 407 (1958). See, Dalessio v. Kressler, 6 AD3d 57 (2nd Dept., 2004).

In this case, E-Smart asserts that Aiello concealed his past history from E-Smart and that E-Smart would not have entered into the contract had it known of Aiello's history. E-Smart alleges a claim for fraudulent concealment.

A party asserting a claim for fraudulent concealment must establish all of the elements of fraud and must further prove the existence of an affirmative duty to disclose. P.T. Bank Central Asia, New York Branch v. ABN AMRO Bank, N.V., 301 AD2d 373 (1st Dept., 2003); Swersky [*5]v. Dreyer and Traub, 219 AD2d 321 (1st Dept., 1996); and George Cohen Agency Inc. v. Donald S. Perlman Agency, Inc., 114 AD2d 930 (1st Dept., 1985). See, E.B. v. Liberation Publications, Inc., 7 AD3d 566 (2nd Dept., 2004). In the absence of a fiduciary relationship, an affirmative duty to disclose arises where one party's knowledge of the facts renders the transaction inherently unfair unless those facts are disclosed. Swersky v. Dreyer and Traub, supra.

The question of whether a duty exists is a question of law to be determined by the Court. Industrial Risk Insurers v. Ernst, 224 AD2d 389 (2nd Dept., 1996).

Assuming that Aiello failed to disclose his past conviction and suspension from selling securities, E-Smart has failed to place before the Court any basis for concluding that Aiello had an affirmative duty to disclose this information or any evidence that the transaction was inherently unfair in the absence of such disclosure. The relationship between the parties was contractual and not fiduciary or confidential. That is, Capa was to perform a service which it apparently did.

E-Smart does not place before the Court any evidence that Aiello engaged conduct which constituted active concealment or deceitful conduct which would have prevented E-Smart from discovering Aiello's conviction or suspension. Aiello avers that he told Wayne Drizin of E-Smart about his past conviction and suspension before the parties entered the September 1, 2001 agreement. E-Smart does not place before the Court any evidence in admissible form denying Aiello's assertion. As a result, E-Smart has failed to establish facts sufficient to establish a claim for either fraudulent concealment or misrepresentation. See, Jae Heung Yoo v. Se Kwang Kim, 289 AD2d 451 (2nd Dept., 2001); and Venezia v. Coldwell Banker Sammis Realty, 270 AD2d 480 (2nd Dept., 2000).

E-Smart's claim that it would not have entered into the contract had it known of Aiello's past is belied by its actions. E-Smart alleges that shortly after the parties entered into the September 1, 2001 agreement, and during the term of that agreement, Wayne Drizin began to uncover Aiello's past criminal problems. Yet, E-Smart took no action to prevent the contract from automatically renewing. E-Smart also took no action to terminate the contract even though it could have done so at any time by providing Capa with 90 days notice of its intent to cancel.

Capa was retained to promote E-Smart to brokers and to raise the public and investors awareness of E-Smart so that it could sell its stock and raise the capital needed to develop, manufacture and sell products based upon its proprietary technology. Capa was not retained to sell or offer for sale E-Smart common stock. Capa performed its contracted public relations services. It has earned its compensation. Therefore, the third counterclaim must be dismissed.

D.Damages

A trial, however, is needed on the issue of damages. Capa alleges causes of action for seeking specific performance of the September 1, 2001 agreement and money damages for breach of the agreement. There are questions of fact as to which is the proper remedy.

A contract for the issuance of stock will not be specifically enforced where the remedy at law is sufficient. 72 NY Jur 2d Investment Securities §99. The remedy at law is sufficient when the stock is traded on the open market and its value can be readily and easily determined. Waddle v. Cabana, 220 NY 18 (1917); Haymarket LLC v. D.G. Jewellery of Canada, Ltd., 290 AD2d 318 (1st Dept., 2002); The Winchester-Simmons Co. v. Simmons, 222 App.Div. 639 (1st Dept., 1928); and Kennedy v. Thompson, 97 App.Div. 296 (2nd Dept., 1904). See also, 72 NY Jur 2d Investment Securities §99.

A contract for the issuance of securities will be specifically enforced where the remedy [*6]at law is inadequate such as where the stock is not easily obtainable or its value cannot be readily ascertained. Waddle v. Cabana, supra; and Haymarket LLC v. D.G. Jewellery of Canada Ltd., supra; Baltimore Realty Corp. v. Alman, 282 App.Div. 714 (2nd Dept., 1953); and The Winchester-Simmons Co. v. Simmons, supra. See also, 72 NY Jur 2d Investment Securities §99.

It is unclear from the papers whether money damages or specific performance is the appropriate remedy. While E-Smart stock is publicly traded, there is no evidence as to the value of the stock or whether a method exists to determine the value of such a large number of shares. There is also no evidence as to whether the number of shares to be issued pursuant to the terms of the September 1, 2001 agreement could be purchased on the open market. There is also no evidence as to whether E-Smart stock was publicly traded at the time that the shares were supposed to be issued. It must be determined the date upon which the stock was to be issued for valuation purposes.

The September 1, 2001 agreement provides for the issuance of the 50,000 per month. It is unclear whether the stock was to be issued on a monthly basis or at one time at the end of the agreement.

Finally, Paragraph 10.3 provides for attorney's fees to a party who prevails in any action brought relating to the agreement.

An agreement to pay legal fees is enforceable. See, Glatter v. Chase Manhattan Bank, 239 AD2d 68 (2nd Dept., 1998). Legal fees are awarded on a quantum meruit basis. See, Simoni v. Time-Line, Inc., 272 AD2d 537 (2nd Dept., 2000); and Borg v. Belair Ridge Development Corp., 270 AD2d 377 (2nd Dept., 2000). Therefore, the matter must be set down for a hearing on the legal fees due. Arent Fox Kintner Plotkin & Kahn, PLLC v. Lurzer GmbH, 297 AD2d 590 (1st Dept. 2002).

Accordingly, it is,

ORDERED, that Plaintiff's motion for summary judgment is granted as to the issue of liability; and it is further

ORDERED, that Plaintiff's motion to dismiss Defendant's counterclaims is granted; and it is further,

ORDERED, that counsel for the parties are directed to appear for a conference on November 29, 2004 at 9:30 a.m. to schedule a trial on the issue of damages and to determine the amount of attorney's fees due.

This constitutes the decision and Order of the Court.

Dated: Mineola, NY _____________________________

November 15, 2004 Hon. LEONARD B. AUSTIN, J.S.C.