Clifford v. Janklow

Background

Stephanie Clifford, also known as Stormy Daniels, and Stormy Entertainment, Inc. sued Lucas Janklow and Janklow Partners, LLC, doing business as Janklow & Nesbit Associates (JNA), in a diversity action. The plaintiffs asserted claims for breach of contract and breach of fiduciary duty.

The complaint alleged that Stormy Entertainment and JNA entered into a retainer agreement under which JNA would represent Stormy Entertainment in negotiating rights to a book about Clifford. The agreement stated that JNA would promptly send Stormy Entertainment the book proceeds after deducting its commission. St. Martin’s Press agreed to pay Clifford an $800,000 advance in four installments. The first installment was transmitted to Clifford without incident. The complaint alleged that JNA sent the second and third installments, totaling $350,000, to Michael Avenatti instead of sending them to Stormy Entertainment. Avenatti later transmitted the second installment to Clifford, but did not transmit the third installment. JNA sent the fourth installment to an account controlled by Clifford after she directed it to do so.

The plaintiffs alleged that JNA breached the retainer agreement by redirecting the payments and that Janklow breached a fiduciary duty by failing to communicate with Clifford and concealing the payment diversions. The defendants moved to dismiss under several federal procedural rules, arguing that the plaintiffs lacked standing, had not adequately stated their claims, and had failed to join Avenatti as a required party.

Court’s analysis

The court rejected the standing argument. It explained that constitutional standing requires an injury, a connection between the injury and the defendants’ conduct, and a likelihood that a court decision can remedy the injury. The court held that the plaintiffs’ allegations—that they had an agreement with JNA, that JNA redirected payments, and that Janklow ignored inquiries about the missing money—were sufficient at the motion-to-dismiss stage. Whether the defendants’ conduct legally caused the plaintiffs’ damages was a merits issue, not a standing issue.

The court held that the plaintiffs plausibly alleged a breach-of-contract claim against JNA. Accepting the complaint’s allegation that Stormy Entertainment and JNA entered the retainer agreement, the court interpreted the agreement’s reference to sending proceeds to “you” as requiring payment to Stormy Entertainment. The allegation that JNA instead sent the money to Avenatti was sufficient to state a claim at this stage. The court did not resolve factual disputes about why the payments were redirected, whether payment to Avenatti was authorized, or whether JNA’s conduct caused the claimed damages.

The court dismissed the contract claim against Janklow individually. It explained that a company officer or agent generally is not personally liable on a company contract unless the officer also agreed to be personally bound, and the retainer agreement contained no such language.

The court also dismissed the breach-of-fiduciary-duty claim against both Janklow and JNA. Under New York law, a fiduciary relationship generally does not arise from an ordinary commercial transaction conducted at arm’s length. The court found that the complaint’s general allegations that Clifford trusted Janklow and that he was authorized to act for her did not plausibly establish a fiduciary relationship.

Finally, the court rejected the argument that Avenatti was a required party under Rule 19. The plaintiffs sought damages from the defendants, not from Avenatti, and the defendants did not show that complete relief could not be awarded without him. The defendants also did not show that Avenatti claimed an interest in the action. The court therefore did not need to decide whether the case could proceed without him under the second step of the Rule 19 analysis.

Disposition

Judge Mary Kay Vyskocil granted in part and denied in part the motion to dismiss. The breach-of-contract claim against Janklow was dismissed, and the breach-of-fiduciary-duty claim against both defendants was dismissed. The breach-of-contract claim against JNA was not dismissed. The court also declined to dismiss the case for lack of standing or failure to join Avenatti.