Magnacoustics, Inc. v. Integrated Comput. Sols., Inc.

MAGNACOUSTICS, INC., Plaintiff, v. INTEGRATED COMPUTER SOLUTIONS, INC. AND PETER WINSTON, Defendants.

INTEGRATED COMPUTER SOLUTIONS, INC. Plaintiff-in-Counterclaim, v. MAGNACOUSTICS, INC., Defendant-in-CounterclaimandADMINISTRATOR FOR THE ESTATE OF WAYNE LEDERER, Third-Party Defendant.

No. 17-CV-4967 (RER)

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF NEW YORK

July 17, 2020

MEMORANDUM & ORDER

RAMON E. REYES, JR., U.S.M.J.:

Before the Court are two cross motions to dismiss.¹ Plaintiff Magnacoustics, Inc. ("Magnacoustics") brought this action against Defendants Integrated Computer Solutions, Inc. ("ICS") and its CEO Peter Winston ("Winston") (collectively, the "ICS Parties") alleging various claims based in contract and fraudulent inducement. (Dkt. No. 1 ("Compl.")). Earlier in this action, the ICS Parties filed a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) ("Rule 12") for failure to state a claim, challenging the fraudulent inducement claim as well as the entire suit on jurisdictional grounds. (Dkt. No. 38 ("ICS Parties' Mot. to Dismiss")). While the Court addressed the jurisdictional issues, the challenge to the fraudulent inducement claim was temporarily set aside. (Dkt. No. 53 ("Jurisdictional Order") at 5 n.2).

In answering the Complaint, ICS asserted counterclaims against Magnacoustics and brought a Third-Party Complaint against Wayne Lederer ("Lederer")² for similar claims based in contract and fraud. (Dkt. No. 55 ("Third Party Compl. & Countercl." or "Answer")). Subsequently, Magnacoustics and Lederer (collectively, "the Magna Parties") also brought a motion under Rule 12(b)(6) seeking to dismiss the Third-Party Complaint against Lederer in its entirety as well as certain counterclaims. (Dkt. No. 67 ("Magna Parties' Mot. to Dismiss")).

For the reasons discussed below the ICS Parties' motion to dismiss the fraudulent inducement claim is granted and Magnacoustics' motion to dismiss is granted in part and denied in part.

FACTUAL BACKGROUND

Lederer is the "sole officer and director" of Magnacoustics, a corporation that manufactures and sells MRI music systems that "allow patients to listen to music while in an MRI machine." (Compl. ¶¶ 1, 8; Third-Party Compl. & Countercl. ¶¶ 10-11). Beginning in 2013, Magnacoustics sought to update its MRI music systems in various ways. (Compl. ¶¶ 17-19; Third-Party Compl. & Countercl. ¶ 12). The updated music system is called MagnaTouch. (Compl. ¶ 17).

Winston is the CEO of ICS, a corporation that provides "software development services." (Compl. ¶¶ 3, 9, 21; Answer ¶¶ 9, 21). In January 2016, Magnacoustics hired ICS to assist with upgrading the MagnaTouch software for a fixed price of $7,500. (Compl. ¶ 24; Third-Party Compl. & Countercl. ¶¶ 2, 15). The parties continued to work together on this project until July 2017. (Compl. ¶ 34; Third-Party Compl. & Countercl. ¶ 50). The events that occurred during this time are in dispute and the subject of this action.

Magnacoustics alleges it hired ICS "to deliver the software needed to operate MagnaTouch." (Compl. ¶ 26). Magnacoustics alleges that between February 2016 and July 2017, ICS "attempted to develop the software" but that aspects of it were defective. (Id. ¶¶ 27-29). Despite promises by ICS to fix the defects, Magnacoustics alleges ICS continually failed to deliver the software and eventually "quit the project and the contract." (Id. ¶¶ 31-34). Magnacoustics alleges that its client, General Electric Health Care ("GEHC"), agreed to purchase MagnaTouch and that Magnacoustics promised to deliver MagnaTouch to GEHC by July 1, 2016. (Id. ¶¶ 35-36). However, because ICS allegedly did not deliver the software by the deadline, Magnacoustics had to continually move the delivery date back. (Id. ¶¶ 37-41). Eventually, Magnacoustics alleges it hired a "replacement vendor to develop the software" in order to finish the project. (Id. ¶ 42). As a result, Magnacoustics alleges it suffered approximately $1,000,000 in damages. (Id. ¶ 43).

ICS alleges it was initially hired "to help convert [Magnacoustics'] MagnaTouch software system from a Windows-based system to a Linux-based platform for a fixed price" of $7,500. (Third-Party Compl. & Countercl. ¶¶ 2, 15). "ICS [alleges it] based its initial price for the project on Magnacoustics' representations regarding the readiness of the hardware and the applicability of certain software, which . . . turned out to be false." (Id. ¶ 3). ICS further alleges that "[o]nce it was clear that the amount of work required to achieve the conversion to a Linux-based system was far higher than what Magnacoustics had represented, ICS began working on an hourly basis, regularly invoicing Magnacoustics twice-monthly for its services." (Id. ¶ 4). ICS alleges "Magnacoustics paid those invoices until approximately October 2016, when" Magnacoustics made its last full and timely payment. (Id. ¶¶ 5, 51). Even so, ICS alleges it continued working on the project at the direction of Magnacoustics, receiving "small partial payments" and relying on assurances from Magnacoustics that the "outstanding balance would be paid." (Id. ¶¶ 6, 55-57). In July 2017, ICS alleges it completed the project. (Id. ¶ 50). ICS alleges that "[a]s of the filing of [ICS'] Counterclaim, Magnacoustics has an outstanding balance of $489,920.21." (Id. ¶ 7).

PROCEDURAL HISTORY

The procedural history of this action is long and complex. On August 11, 2017, Magnacoustics brought this action against ICS and Winston alleging (1) breach of contract, (2) breach of implied-in-fact contract, (3) promissory estoppel, (4) breach of the implied covenant of good faith and fair dealing, (5) unjust enrichment, and (6) fraud in the inducement. (See Compl.). Four days thereafter, ICS brought a similar action against Magnacoustics and Lederer in the United States District Court for the District of Massachusetts (the "Massachusetts Action") alleging (1) breach of contract, (2) breach of the covenant of good faith and fair dealing, (3) fraud and misrepresentation, (4) violation of the Massachusetts Consumer Protection Act, and (5) quantummeruit/unjust enrichment. (See Complaint ("Mass. Compl."), Integrated Comput. Sols., Inc. v. Magnacoustics, Inc., No. 17-CV-11512 (D. Mass. Aug. 15, 2017), Dkt. No. 1).

In this action, ICS and Winston filed a motion to dismiss for failure to state a claim, arguing the fraudulent inducement claim was without merit and challenging the entire action on jurisdictional grounds. (ICS Parties' Mot. to Dismiss at 1-2). At the same time, Magnacoustics filed a motion to change venue, requesting that the Massachusetts Action be transferred to the Eastern District of New York. (Dkt. No. 42). After briefings by the parties on both motions, Judge Azrack, who previously presided over this case, issued an order addressing both motions. (See Jurisdictional Order). Judge Azrack ruled on the parties' competing jurisdictional claims and ordered the Massachusetts Action be transferred to this Court. (Id. at 5). Accordingly, the Massachusetts Action was transferred to the Eastern District of New York (the "Transferred Action"). (See Dkt. Entry dated 1/8/2019, Integrated Comput. Sols., Inc. v. Magancoustics, No. 19-CV-116 (E.D.N.Y. Jan. 8, 2019)).

Judge Azrack did not, however, resolve ICS's and Winston's challenge to the fraudulent inducement claim, which, being the only claim against Winston, determines his status as a party to this action. (See Jurisdictional Order at 5 n.2; Answer at 1 n.1). Rather, Judge Azrack expressly noted that the fraudulent inducement issue would be addressed in a separate order. (Jurisdictional Order at 5 n. 2). On March 25, 2019, after Judge Azrack's ruling, both this action and the Transferred Action were reassigned and the parties in both actions consented to this Court's jurisdiction pursuant to 28 U.S.C. § 636(c). (Dkt. No. 65; Consent to Jurisdiction, Integrated Compu. Sols., Inc., No. 19-CV-116, Dkt. No. 35).

In its answer, ICS³ also raised third-party claims against Lederer and asserted several counterclaims against Magnacoustics, tracking its original complaint in the Massachusetts Action. (Compare Mass. Compl., Integrated Comput. Sols., Inc., No. 17-CV-11512 with Third-Party Compl. & Countercl.). As such, the Magna Parties and ICS agreed that the Transferred Action was duplicative of this action. Therefore, the parties—Lederer, Magnacoustics, and ICS—filed a joint motion for voluntary stipulation of dismissal in the Transferred Action. (Integrated Compu. Sols., Inc., No. 19-CV-116, Dkt. No. 36). In their motion, the parties note the duplicative nature of the two actions and propose the Transferred Action "should be dismissed to avoid the unnecessary and inefficient use of resources by the parties and this Court." (Id. at 2). Importantly, the parties requested the Transferred Action be dismissed "without prejudice to the adjudication of the parties' dispute and rights by and through" this action. (Id.). The motion was granted and the Transferred Action closed. (Order Granting Mot. to Dismiss, Integrated Compu. Sols., Inc., No. 19-CV-116, Dkt. No. 37). Around the same time that the parties stipulated to dismiss the Transferred Action, Magnacoustics and Lederer filed in this action a Rule 12(b)(6) motion to dismiss for failure to state a claim. (See Magna Parties' Mot. to Dismiss).

Thus, currently before the Court are (1) the ICS Parties' motion to dismiss the fraudulent inducement claim and (2) Magnacoustics' motion to dismiss the Third-Party Complaint against Lederer and certain counterclaims.

LEGAL STANDARD

To survive a motion to dismiss pursuant to Rule 12(b)(6) "[a] claimant must plead 'enough facts to state a claim to relief that is plausible on its face.'" United States v. Tishman Constr. Corp., No. 12-CV-03862 (DLI) (RER), 2017 WL 9481015, at *4 (E.D.N.Y. Feb. 2, 2017) (citing Fed. R.Civ. P. 12(b)(6), R & R adopted by 2017 WL 1093190 (Mar. 23, 2017); Bell Atlantic Corp. v. Twombly, 550 U.S....