COKeM International, Ltd. v. MSI Entertainment, LLC

Background

COKeM International, Ltd. worked with MSI Entertainment, LLC, its owner Morris Sutton, and its employee Joseph Faham for about two years. COKeM and MSI entered into a distribution agreement and later modified an agreement involving video-game orders scheduled for delivery in 2018. The agreement required an initial payment of 30%, identified in the opinion as $81,931, followed by a 70% payment of $191,171 to ensure complete delivery.

COKeM alleged that, after the initial payment, defendants made statements in March and April 2018 indicating that the orders were ready to be fulfilled. The complaint specifically attributed to Faham an email sent on March 28, 2018, containing a delivery schedule. COKeM alleged that Faham knew or should have known the schedule was false and that defendants used the statements to induce COKeM to send the remaining payment. COKeM sought $191,171, plus interest, costs, disbursements, and reasonable attorney fees and costs, on its fraud claim against Faham.

The complaint asserted claims against MSI for breach of contract, accounts stated and unpaid, unjust enrichment, and conversion, as well as a fraud claim against all defendants. The court previously entered default judgment against MSI. The opinion states that the claims against Sutton were stalled because he had died and his estate was refusing to appoint a representative. Faham moved for summary judgment on COKeM’s fraud claim.

Legal standard

The court applied the summary-judgment standard under Federal Rule of Civil Procedure 56. Summary judgment is appropriate when there is no genuine dispute about a material fact and the moving party is entitled to judgment as a matter of law. The court must view the evidence in the light most favorable to the nonmoving party, but that party must present admissible evidence showing specific facts that could support a verdict in its favor.

Because the claim involved fraud, the court also applied Federal Rule of Civil Procedure 9(b), which requires fraud to be pleaded with particularity. In practical terms, the complaint must identify the who, what, where, when, and how of the alleged fraud.

Fraud by omission

The court stated that fraud by omission is a viable claim under Minnesota law. But COKeM had not pleaded that theory in its complaint. Because a party may not assert a new claim for the first time in briefing responding to a summary-judgment motion, the court granted Faham’s motion for summary judgment on COKeM’s fraud-by-omission theory.

Negligent or fraudulent misrepresentation

The court concluded that the complaint adequately pleaded at least one potential misrepresentation arising from the March 28, 2018 email. The court treated its analysis as applying to fraudulent misrepresentation and, because the analysis did not turn on state of mind, to negligent misrepresentation as well.

The court rejected COKeM’s attempt to rely on additional communications that were not specifically described in the complaint. The complaint referred generally to other communications, but it did not identify them with enough detail. The court noted that the complaint covered only March and April, while COKeM’s briefing expanded the alleged period to May and June; referred to multiple MSI employees without clearly identifying who made which statements; and did not describe specific fraudulent communications drafted by Faham. The complaint described information created by a third party and forwarded by Faham, while the delivery schedule did not address payment requests. The court held that the March 28 email was not a representative example that gave Faham adequate notice of the broader fraud allegations, so the unpleaded communications could not support the fraud claim.

March 28 email

The court held that the March 28 email could not independently support COKeM’s fraud claim for two reasons. First, the delivery schedule was a future assurance rather than a representation of a past or existing fact. Under the legal rule applied by the court, a promise or expectation about future acts is generally not a basis for fraud merely because the promised event does not occur. A future assurance can support fraud only if there is affirmative evidence that the speaker never intended to fulfill it when the assurance was made.

The court found no such evidence. Two deliveries were completed, which the court viewed as inconsistent with an intent never to comply with the schedule. COKeM relied on communications that were not pleaded and on the short time between the email and the cessation of shipments. The court found that those facts showed that something went wrong later, but did not affirmatively show that Faham or MSI never intended to comply when the email was sent.

Second, the court held that Faham had forwarded information prepared by a third party, identified the source, and provided it to COKeM without claiming it as his own. The court explained that forwarding third-party information can support an honest-belief defense to the required knowledge element of fraudulent misrepresentation. The court acknowledged that liability could still exist if the information were completely improbable, but concluded that the arrival of two deliveries showed that the schedule was not so improbable as to impose liability on Faham. The court also stated that COKeM presented no information showing that Faham failed to use reasonable care in forwarding the email.

Disposition

The court concluded that COKeM failed to adequately plead or support its fraud allegations. It therefore ordered that Defendant Joseph Faham’s Motion for Summary Judgment, Docket No. 159, was GRANTED.