Salameno v. Rawlings

Background

Lawrence and Theresa Salameno sued Brittany Rawlings, SmartBoss, Inc., and FashionBoss LLC for breach of contract, fraud, and an accounting. The complaint alleged that Rawlings solicited money for FashionBoss beginning in 2014 and later solicited additional money for SmartBoss. The complaint alleged that the Salamenos provided substantial funds, that Rawlings made statements about the companies’ businesses, investors, employees, websites, and expected progress, and that SmartBoss never issued stock to the Salamenos. The complaint also alleged that Rawlings failed to use all of the money for business purposes and did not provide information and inspection rights required by the SmartBoss Contract.

Lawrence Salameno died after the motion to dismiss was fully briefed, and his estate was substituted as a plaintiff. The court referred the defendants’ motion to dismiss and Rule 11 sanctions motion to Magistrate Judge Barbara Moses, who issued a report and recommendation. The defendants objected to several recommendations, including recommendations concerning jurisdiction, standing, the sufficiency of the contract and fraud claims, leave to amend, and the sanctions motion.

Jurisdiction and standing

The defendants argued that diversity jurisdiction was absent because Lawrence Salameno and FashionBoss were both citizens of New Jersey. The court adopted the finding that the defendants had not shown that Lawrence Salameno was a member of FashionBoss when the complaint was filed. The court therefore found no clear error in the conclusion that complete diversity existed.

The court agreed that Theresa Salameno lacked standing to bring a contract claim in her individual capacity because she was not a party to the SmartBoss Contract. The court nevertheless concluded that the plaintiffs had alleged enough to show Theresa Salameno had a personal stake in the fraud and accounting claims, including allegations and payment records involving funds from her individual or joint account.

The court also upheld the conclusion that the plaintiffs’ claims were direct claims rather than derivative claims brought on behalf of SmartBoss or FashionBoss. The contract allegations concerned obligations allegedly owed directly to Lawrence Salameno, the fraud allegations concerned representations made directly to the plaintiffs, and the accounting claim sought information about the use of the plaintiffs’ funds. The court further held that the Penny Black entities were not indispensable parties and that their absence did not require dismissal.

Motion to dismiss

A Rule 12(b)(6) motion asks whether the complaint alleges enough facts to state a legally plausible claim. The court held that the SmartBoss Contract could be considered because the complaint incorporated it by reference. Although the parties disputed whether Lawrence Salameno had signed the contract, the complaint alleged that both Rawlings and Lawrence Salameno signed it, and copies submitted to the court appeared fully executed at this stage.

The court agreed that the complaint adequately alleged some contract breaches, including the alleged failure to issue stock, use the plaintiffs’ funds for SmartBoss’s business purposes, and provide Lawrence Salameno with standard information and inspection rights. It also agreed that Rawlings could be held individually at the pleading stage because the contract imposed responsibilities on her, including management and day-to-day operations. The court dismissed Theresa Salameno’s individual contract claim and dismissed the contract allegations concerning the alleged failure to launch and operate SmartBoss and the alleged failure to communicate with the plaintiffs after August 2017. The court otherwise denied dismissal of the contract claim.

The court granted dismissal of the fraud claim. It held that the complaint identified many of the alleged statements and their speaker, but generally did not plead facts showing why the statements were false or misleading when made. The court also found that the allegations about misuse of funds and the companies’ investors, personnel, operations, and progress did not satisfy the heightened pleading requirement for fraud.

The court granted dismissal of the accounting claim because the plaintiffs had not adequately alleged a confidential or fiduciary relationship with any defendant. The court noted that a viable portion of the contract claim, and a possible amended fraud claim, could provide discovery about the use of the funds.

Leave to amend and sanctions

The court granted leave to amend the breach of contract and fraud claims because the complaint had not previously been amended and the identified deficiencies might be curable. Although the court had initially agreed that the accounting claim should be dismissed, it also granted leave to amend that claim because it was uncertain whether the amended contract and fraud claims would survive and whether the plaintiffs could allege a qualifying relationship.

The defendants’ Rule 11 sanctions motion was denied without prejudice. The court cited the fact that the case had survived the motion to dismiss and that many documents submitted by the defendants were not properly considered in deciding that motion.

Disposition

The court adopted the report and recommendation as stated in the order. The defendants’ motion to dismiss was granted in part and denied in part. Leave to amend was granted as stated above, and the defendants’ motion for Rule 11 sanctions was denied without prejudice. The court directed that any motion for leave to file an amended complaint be filed by April 5, 2021.