Advanced Oxygen Therapy Inc. v. Orthoserve Inc.

572 F.Supp.3d 26

ADVANCED OXYGEN THERAPY INC., Plaintiff,

v.ORTHOSERVE INC., Angela Babakhanov, Danil Babakhanov, and Jonathan Babakhanov, Defendants.

21 Civ. 2089 (ER)

United States District Court, S.D. New York.

Signed November 17, 2021

Jason Robert Rottner, Alston & Bird, Atlanta, GA, Christopher Borchert, Alston & Bird, LLP, New York, NY, for Plaintiff.

Benjamin Robert Blum, Howard M. Rubin, Goetz Fitzpatrick LLP, New York, NY, for Defendants.

OPINION & ORDER

Ramos, D.J.:

Advanced Oxygen Therapy, Inc. brought this action against Orthoserve, Inc., Angela Babakhanov, Danil Babakhanov, and Jonathan Babakhanov (collectively, "Defendants"), alleging breach of contract, breach of the implied covenant of good faith and fair dealing, breach of fiduciary duty, conversion, and unjust enrichment. Defendants now move to dismiss all but the claim for breach of contract. For the reasons set forth below, the motion is GRANTED in part and DENIED in part.

I. BACKGROUND

a. Factual Background

Advanced Oxygen is a medical device and technology company which provides in-home treatments of its patented Topical Wound Oxygen ("TWO₂") therapy to patients suffering from severe and chronic wounds such as burn wounds and pressure ulcers. Doc. 1 ¶ 20-21. Advanced Oxygen is incorporated in Nevada, with its principal place of business in California. Id. ¶ 10. In August 2017, Advanced Oxygen opened a New York City office to support its growth in the region. Id. ¶ 23. At the time, Advanced Oxygen had not yet received the necessary regulatory authorization to provide its services and sell its durable medical equipment ("DME") directly to patients in New York, so it contracted with Orthoserve to act as an intermediary. Id. ¶¶ 3, 24. Orthoserve is an authorized New York DME supplier, and is incorporated in New York, with its principal place of business in the Bronx, New York. Id. ¶¶ 3, 11. Danil Babakhanov is the president of Orthoserve, Angela Babakhanov is the general manager of Orthoserve, and Jonathan Babakhanov is an Orthoserve executive. Id. ¶¶ 12-14.

In approximately September 2017, Advanced Oxygen and Orthoserve entered into a contract whereby they agreed that Orthoserve would purchase and re-sell Advanced Oxygen's products and services to New York Medicaid Managed Care customers and insurers. Id. ¶ 25-26. Orthoserve was to act as an intermediary and coordinate with the Medicaid Managed Care insurers through billing intermediary Integra Partners to process insurance claims and collect payments. Id. ¶ 28. Orthoserve would receive the insurance claim payments, retain 15% of such payments, and forward the remaining 85% to Advanced Oxygen on a weekly basis. Id. ¶ 25-26. The contract also provided that in instances where the insurance companies would pay Orthoserve amounts that exceeded the contract rates, the insurers would correct this by recouping from Orthoserve the full amount already paid and then repaying the correct amount. Id. ¶ 29. Orthoserve would wait to pay the 85% owed to Advanced Oxygen until after this recoupment and reconciliation process was completed by the insurers. Id. ¶ 31.

On October 24, 2018, Jonathan Babakhanov emailed Advanced Oxygen's director of operations for New York, and notified him that they would be holding $250,000 of fully reconciled claim payments owed to Advanced Oxygen in escrow in order to protect the company in the event of future recoupments. Id. ¶ 32-33. Angela Babakhanov consented to the email being sent and was copied on the email. Id. ¶ 33. Following a phone conversation between Advanced Oxygen's chief executive officer and Jonathan and Angela Babakhanov, the CEO emailed Angela and Jonathan on November 5, 2018 to memorialize their escrow agreement. Id. ¶ 34. The agreement detailed that Orthoserve would hold back payments to Advanced Oxygen in order to build up a temporary escrow of $250,000, the purpose of which was to mitigate potential risk to Orthoserve related to overpaid claims. Id. Per the agreement, once the $250,000 was established, Orthoserve would return to making all further claim payments to Advanced Oxygen weekly as established by the parties' prior agreement. Id. The agreement made explicit that it was "not the intention of Orthoserve to retain any funds, or delay paying any monies" due to Advanced Oxygen once the overpayments were reconciled by the insurer. Id. Pursuant to the escrow agreement, Defendants established a $250,000 escrow by withholding the following payments due to Advanced Oxygen from insurer Healthfirst:

a. Payment due the week of October 8, 2018, totaling $53,570.40.

b. Payment due the week of October 15, 2018, totaling $36,427.88.

c. Payment due the week of October 22, 2018, totaling $50,460.56.

d. Payment due the week of October 29, 2018, totaling $26,788.91.

e. Payment due the week of November 5, 2018, totaling $64,371.42.

f. Payment due the week of November 13, 2018, totaling $13,781.83.

g. Payment due the week of November 19, 2018, totaling $4,599.00.

Id. ¶ 35. As of September 22, 2020, all of the claims that produced the payments making up the $250,000 escrow have been fully reconciled by the insurance company and are therefore owed to Advanced Oxygen per the parties' agreements. Id. ¶ 37-38. Advanced Oxygen alleges that Orthoserve has refused to deliver these payments, as well as fully reconciled amounts from additional Healthfirst insurance claims dating back to 2017 and 2018, totaling an additional $360,073.90. Id. ¶ 39-40. In approximately September and October 2020, Advanced Oxygen repeatedly sent the United Parcel Service to Orthoserve to collect these additional payments and Orthoserve failed to make the payments. Id. ¶ 42. Advanced Oxygen further alleges that Orthoserve is withholding its portion of claim payments from other insurers, including but not limited to Fidelis Care and WellCare, and Orthoserve has refused to say whether these claims have been reconciled and are therefore due to Advanced Oxygen, constituting a breach of the parties' original agreement. Id. ¶44-46. Advanced Oxygen seeks damages "in no event less than $610,073.90, plus prejudgment and post-judgment interest." Id. at 13.

b. Procedural Background

On March 10, 2021, Advanced Oxygen filed the instant complaint, asserting claims for breach of contract, breach of the implied covenant of good faith and fair dealing, and unjust enrichment against Orthoserve, and asserting claims for breach of fiduciary duty and conversion against all defendants. Doc. 1. On May 26, 2021, Defendants moved to dismiss all claims asserted by Advanced Oxygen, save for the breach of contract claim. Doc. 26.

II. LEGAL STANDARD

"To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ " Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly , 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ). A claim is facially plausible "when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. (citing Twombly , 550 U.S. at 556, 127 S.Ct. 1955 ). The plaintiff must allege sufficient facts to show "more than a sheer possibility that a defendant has acted unlawfully." Id. (citing Twombly , 550 U.S. at 556, 127 S.Ct. 1955 ). However, this "flexible ‘plausibility standard’ " is not a heightened pleading standard, In re Elevator Antitrust Litig. , 502 F.3d 47, 50 n.3 (2d Cir. 2007) (quotation marks and citation omitted), and "a complaint ... does not need detailed factual allegations" to survive a motion to dismiss, Twombly , 550 U.S. at 555, 127 S.Ct. 1955.

The question on a motion to dismiss "is not whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims." Sikhs for Justice v. Nath , 893 F. Supp. 2d 598, 615 (S.D.N.Y. 2012) (quoting Villager Pond, Inc. v. Town of Darien , 56 F.3d 375, 378 (2d Cir. 1995) ). "[T]he purpose of Federal Rule of Civil Procedure 12(b)(6) is to test, in a streamlined fashion, the formal sufficiency of a plaintiff's statement of a claim for relief without resolving a contest regarding its substantive merits" or "weigh[ing] the evidence that might be offered to support it." Halebian v. Berv , 644 F.3d 122, 130 (2d Cir. 2011) (internal quotation marks and citations omitted). Accordingly, when ruling on a motion to dismiss pursuant to Rule 12(b)(6), the Court accepts all factual allegations in the complaint as true and draws all reasonable inferences in the plaintiff's favor. Nielsen v. Rabin , 746 F.3d 58, 62 (2d Cir. 2014) ; see also Twombly , 550 U.S. at 556, 127 S.Ct. 1955 ("[A] well-pleaded complaint may proceed even if it strikes a savvy judge that actual proof of those facts is improbable ..."). "For purposes of this rule, the complaint is deemed to include any written instrument attached to it as an exhibit or any statements of documents incorporated in it by reference." Chambers v. Time Warner, Inc. , 282 F.3d 147, 152 (2d Cir. 2002) (internal quotation marks and citations omitted).

III. ANALYSIS

A. Claim for Breach of the Implied Covenant of Good Faith and Fair Dealing

Under New York law, the duty of good faith and fair dealing "is implied in every contract, to the effect that neither party ‘shall do anything which has the effect of destroying or injuring the right of the other party to receive the fruits of the contract.’ " CCR Int'l, Inc. v. Elias Grp., LLC , No. 15 Civ. 6563 (PAE), 2021 WL 1253892, at *4 (S.D.N.Y. Apr. 5, 2021) (citing Thyroff v. Nationwide Mut. Ins. Co. , 460 F.3d 400, 407 (2d Cir. 2006) ). There is a presumption that all parties act in good faith, so the burden of proving a breach of the covenant rests with the party asserting the absence of good faith. Tractebel Energy Mktg., Inc. v. AEP Power Mktg., Inc. , 487 F.3d 89, 98 (2d Cir. 2007) (citing 23...