Cherotti v. Exphand, Inc.

Background

Timothy Cherotti and Rosebud Ventures LLC sued Exphand, Inc. and Frank Nemirofsky. The complaint alleged that the defendants used misleading representations about Exphand’s patent portfolio and promises of repayment to obtain at least $1,352,237.31 from the plaintiffs. The original complaint asserted claims including breach of contract, breach of fiduciary duty, unjust enrichment, conversion, negligent misrepresentation, violation of New York Debtor and Creditor Law § 276, and requests for an equitable lien and constructive trust.

The defendants moved to dismiss the complaint. While that motion was pending, the plaintiffs sought permission to file a first amended complaint. The proposed amendment described the transactions primarily as loans allegedly induced by promises of repayment, added allegations involving Mrs. Nemirofsky, sought to add fraud and civil-conspiracy claims under New York law, withdrew the breach-of-fiduciary-duty and negligent-misrepresentation claims, and sought to remove Rosebud as a plaintiff.

The plaintiffs also asked the court to hold a discovery conference concerning Frank Nemirofsky’s deposition and moved for a certificate of default and contempt after he did not respond to the discovery request. Exphand had previously been placed in default after its counsel withdrew and no replacement counsel appeared. New counsel later appeared for the defendants.

Amendment ruling

The court held that the stricter federal scheduling-rule requirement of showing “good cause” did not apply because the case-management plan did not set a deadline after which amendments were prohibited. The court therefore applied the more flexible rule governing amendments, under which permission should generally be given unless there is a substantial reason such as undue delay, prejudice, bad faith, or futility. “Futility” means that the proposed amendment would fail as a matter of law even if its factual allegations were accepted as true.

The court found no sufficient prejudice, undue delay, or bad faith. It also rejected the defendants’ argument that the proposed fraud claim was futile because Cherotti supposedly would not have made the loans without documents. That argument challenged the truth of the allegations, rather than their legal sufficiency, and truthfulness is generally not decided at the amendment stage.

The court agreed, however, that adding Mrs. Nemirofsky as a defendant would be futile. It found that the proposed complaint did not plausibly allege her involvement in the financial transactions and that the attached documents showed the transfers went to Exphand or to the law firm involved in the earlier lawsuit. The court also found the proposed civil-conspiracy claim futile because the plaintiffs did not allege facts showing an agreement between Mr. and Mrs. Nemirofsky or an action taken to advance such an agreement. Under New York law, civil conspiracy is not an independent tort and requires, among other things, an underlying tort, an agreement concerning that tort, and an overt act in furtherance of the agreement.

Accordingly, the Motion to Amend was GRANTED IN PART and DENIED IN PART. The requests to add Mrs. Nemirofsky as a defendant and to add a New York civil-conspiracy claim were denied as futile. The amendment request was otherwise granted, including the request to remove Rosebud as a plaintiff. Rosebud’s claims were dismissed without prejudice under Federal Rule of Civil Procedure 41(a)(2), and Cherotti was directed to file the revised first amended complaint by June 17, 2022.

Other rulings

Because the court granted leave to amend, the defendants’ Motion to Dismiss was DENIED as moot. The court explained that this approach avoided deciding the dismissal motion against the original complaint, particularly because the defendants relied on a valuation document outside the pleadings that the court could not consider in deciding whether the original complaint stated a claim.

The plaintiffs’ Discovery Conference Motion was GRANTED. The court scheduled a telephone conference and directed the parties to meet and confer and submit a proposed schedule for remaining fact and expert discovery.

The certificate of default against Exphand was VACATED in anticipation of the amended complaint and the appearance of counsel for Exphand. The plaintiffs’ Contempt Motion against Frank Nemirofsky was DENIED without prejudice because counsel had appeared for him.

Disposition

The order did not decide the truth of the plaintiffs’ allegations or resolve the underlying claims. It governed amendment of the pleadings, discovery, default, and contempt. The case therefore remained pending subject to Cherotti’s revised complaint and the defendants’ response.