Bur-Tex Hosiery Inc v. World Tech Toys Inc

Background

Bur-Tex Hosiery, Inc. alleged that World Tech Toys, Inc., INOV8 Marketing LLC, Jack Safdeye, David Linker, Kev Kouyoumijan, World Trading 23, Inc., and others failed to provide gloves that were 100% nitrile as agreed. Bur-Tex had agreed to sell such gloves to Cintas Corporation. According to the First Amended Complaint, Linker, Safdeye, and INOV8 represented that the gloves were 100% nitrile, while the gloves delivered to Cintas were allegedly a blended composition. Cintas cancelled pending orders and returned approximately 150,000 boxes, causing Bur-Tex to allege losses of more than $2 million, along with storage, interest, insurance, and freight costs.

On March 4, 2021, INOV8 and Bur-Tex entered into an agreement that included a conditional promise to return approximately $1.7 million in deposits and a broad mutual release. The agreement also included a New York choice-of-law provision and a forum provision stating that the parties consented to personal jurisdiction in courts located in New York City. Bur-Tex alleged that Linker, Safdeye, and INOV8 induced its agent to sign quickly by stating that a third-party buyer would purchase the nonconforming gloves. The case was transferred here from a California federal court after that court found the forum-selection clause enforceable.

Release and alleged fraudulent inducement

The defendants argued that the release barred all claims in the First Amended Complaint. The court denied that part of the motion to dismiss. It explained that a release is an affirmative defense, meaning a defense that generally does not justify dismissing a complaint unless the defense is clear from the complaint itself. The court also found that the First Amended Complaint plausibly alleged that the agreement was procured by fraud.

Under New York law, a release can be challenged if it was obtained through fraud, duress, illegality, or mutual mistake. The court concluded that the alleged statement about a third-party buyer concerned the procurement of the agreement and release, rather than merely the underlying glove transaction. The allegations therefore supported a plausible inference that Safdeye and Linker made a false statement, that Bur-Tex reasonably relied on it because of the time pressure, and that Bur-Tex was injured.

The court also held that the fraud allegation met the heightened pleading requirements of Federal Rule of Civil Procedure 9(b). The complaint identified the alleged statement, the speakers, the approximate date, and why the statement was allegedly fraudulent. The court found that the agreement’s merger, no-representation, and no-subsequent-discovery provisions were general disclaimers and did not specifically disclaim reliance on the alleged statement about the third-party buyer. The court further held that the earlier California transfer decision did not decide whether the First Amended Complaint adequately pleaded fraudulent inducement under New York law, so that decision did not control this issue.

Personal jurisdiction

The court granted the motion to dismiss for lack of personal jurisdiction over Linker, World Trading 23, Inc., and Kouyoumijan. Personal jurisdiction is a court’s authority over a particular defendant. Bur-Tex relied on three theories: consent through the agreement, an alter-ego relationship with defendants subject to jurisdiction, and participation in a conspiracy involving conduct in New York.

The court rejected the consent theory because the agreement defined its parties as Bur-Tex and INOV8. Linker, World Trading 23, Inc., and Kouyoumijan were not signatories. The court found that the allegations showed, at most, business relationships with INOV8 and that the allegations concerning Linker described him as a broker or intermediary, which was insufficient to bind him to INOV8’s consent to jurisdiction.

The court also rejected the alter-ego theory. Although the First Amended Complaint alleged that Kouyoumijan was an owner, director, officer, or managing agent of World Tech Toys and was a decision maker for World Tech Toys and World Trading 23, Inc., the court found those allegations and the assertions that the companies ignored their separate identities to be conclusory. The conspiracy theory also failed because the First Amended Complaint did not allege a conspiracy, conduct in New York, or the other facts required to establish jurisdiction on that basis.

Sanctions and disposition

Bur-Tex requested sanctions based on the defendants’ filing of an exhibit that exceeded the page limits in the court’s Individual Rules. The exhibit was Bur-Tex’s own First Amended Complaint and attachments. The court denied the sanctions request because nothing suggested bad faith and the excess pages did not place new information before the court.

The court’s final disposition was that the motion to dismiss was denied, except as to Linker, World Trading 23, Inc., and Kouyoumijan, as to whom the motion to dismiss was granted for lack of personal jurisdiction. Bur-Tex may seek leave to file a second amended complaint solely to address personal jurisdiction over those three defendants. The order did not state that any dismissal was with or without prejudice.