Salameno v. Rawlings

THERESA SALAMENO, Individually andon Behalf of the Estate of Lawrence Salameno, Plaintiffs, v. BRITTANY RAWLINGS, SMARTBOSS, INC., andFASHIONBOSS LLC, Defendants.

19 Civ. 4442 (PGG) (BCM)

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

March 22, 2021

ORDER

PAUL G. GARDEPHE, U.S.D.J.:

In this action, Plaintiffs Lawrence and Theresa Salameno assert claims for breach of contract, fraud, and an accounting against Defendants Brittany Rawlings, SmartBoss, Inc., and FashionBoss LLC.¹ (Cmplt. (Dkt. No. 1) ¶¶ 55-75) Defendants moved to dismiss (Dkt. No. 44) and for Rule 11 sanctions (Dkt. No. 53). This Court referred Defendants' motions to Magistrate Judge Barbara Moses for a Report and Recommendation ("R&R"). (Dkt. Nos. 52, 59) Judge Moses has issued a 47-page R&R recommending that this Court dismiss Plaintiffs' fraud claim and claim for an accounting, dismiss in part Plaintiffs' breach of contract claim, and administratively close Defendants' Rule 11 sanctions motion. (Dkt. No. 76) For the reasons stated below, Defendants' motion to dismiss will be granted in part and denied in part, and Defendants' motion for sanctions will be denied without prejudice.

BACKGROUND

I. FACTS

At all relevant times, Lawrence and Theresa Salameno were married residents of New Jersey and well-known philanthropists. (Cmplt. (Dkt. No. 1) ¶ 12)

In or about 2013, Defendant Brittany Rawlings became acquainted with the Salamenos, and she began "soliciting" financial support from them for her startup business, FashionBoss, which she described as a "fashion business consulting company" that served as "'a comprehensive educational resource and digital tool for creative entrepreneurs' who were fashion designers." (Id. ¶ 19, 22) According to Rawlings, FashionBoss was following a business model that had proven successful for other websites. (Id. ¶ 25) She presented herself as a lawyer and an entrepreneur operating a profitable startup, and told Plaintiffs that "she had devoted her entire life and savings to FashionBoss." (Id. ¶¶ 22, 25) In regular emails to and meetings with the Salamenos, Rawlings described her business plans. (Id. ¶¶ 23-24)

Persuaded by Rawlings' pitch, the Salamenos began sending money to Rawlings in or about January 2014. (Id. ¶ 26) Rawlings told the Salamenos that she would use their money "for the business of FashionBoss," including to cover expenses for numerous videos that would be displayed on the FashionBoss website. (Id. ¶ 27) By the end of 2014, the Salamenos had provided Rawlings with $170,000. (Id. ¶ 26)

Although the Salamenos repeatedly asked to see examples of the finished videos that had been prepared for the FashionBoss website, Rawlings never provided them. (Id. ¶ 28) In or about 2014, she told the Salamenos that she had launched the FashionBoss website, but that it was in "'beta testing.'" (Id. ¶ 29) As a result, "FashionBoss did not yet have paying clients or any revenue." (Id.) Although Rawlings claimed that the website would generate "substantialrevenue . . . once beta testing was complete[,]" the website "remained in 'beta' mode, and FashionBoss generated no revenue." (Id. ¶¶ 29-30)

Plaintiffs further allege that Rawlings never followed through with the FashionBoss business plan that she had described to them, and that she used only a portion of their money for FashionBoss business expenses, spending the rest on "personal and social expenses." (Id. ¶¶ 30-33)

In or about 2016, Rawlings told the Salamenos that she was pursuing a different business plan for a new start-up - "SmartBoss, Inc." (Id. ¶ 34) She described SmartBoss as an artificial intelligence-based "'software and management platform where entrepreneurs and freelancers can benefit from a software that thinks and acts like an executive team.'" (Id.) In emails and in meetings, Rawlings again solicited the Salamenos for money. (Id. ¶ 35) In order to induce the Salamenos to invest in her new venture, Rawlings told them

a. that identified other investors would invest in SmartBoss after a lead investor, i.e. the Salamenos, committed to invest hundreds of thousands of dollars;

b. that she had scheduled meetings with three venture capital funds;

c. that SmartBoss's "current valuation is around $10 million";

d. that Rawlings' mother, a Florida attorney, had invested $10,000;

e. that SmartBoss had a chief operating officer, lead developer, and numerous other employees, including interns and contractors, and a data scientist consultant;

f. that Rawlings was building an interactive website, and in doing so had "implemented a zero-bug environment, which means we do not build or improve features until all critical, foundational features are completed"; [and]

g. that she and others with whom she was working had made "tremendous progress," with results that work "like magic."

(Id.)

On April 4, 2016, Rawlings told the Salamenos that the SmartBoss website would launch the following month. (Id. ¶ 36) She also claimed that venture capital investors were willing to make a "seed investment" in SmartBoss after a lead investor committed $200,000. (Id.) The Salamenos sent Rawlings an additional $230,000 on or about April 11, 2016. (Id. ¶ 37) By June 2016, the Salamenos had provided Rawlings with $500,000. (Id. ¶ 38)

On or about June 10, 2016, Rawlings and Lawrence Salameno executed an agreement entitled "Smartboss Inc. Terms of Issuance of Series Seed Preferred Stock" (the "SmartBoss Contract"). (Id. ¶ 39) The SmartBoss Contract recounts, inter alia, that Mr. Salameno had previously provided "aggregate proceeds" in the amount of $500,000, of which $260,000 constituted loans and $240,000 constituted investments, "'in connection with the development of the business in FashionBoss, LLC (the "Predecessor").'" (Id. ¶ 40 (quoting SmartBoss Contract (Dkt. No. 51-2) at 1)) The SmartBoss Contract also states that these "[p]revious loans and investments" in FashionBoss are "converted into Series Seed Shares as provided herein," and that SmartBoss stock will be issued to Mr. Salameno. (Id. ¶¶ 40-41 (quoting SmartBoss Contract (Dkt. No. 51-2) at 1)) The SmartBoss Contract further provides that the funds supplied by Mr. Salameno will be used for SmartBoss's "'[w]orking capital needs, including salaries, R&D, rent, sales, [and] legal.'" (Id. ¶ 41 (quoting SmartBoss Contract (Dkt. No. 51-2) at 1)) Finally, the SmartBoss Contract provides that Rawlings is "'responsible for management and day to day operations'" of SmartBoss, and that Mr. Salameno "'will receive standard information and inspection rights' from SmartBoss." (Id. (quoting SmartBoss Contract (Dkt. No. 51-2) at 2))

In or about July and August 2016, Rawlings again solicited the Salamenos for financial support, describing SmartBoss's progress in emails and in a PowerPoint presentation. (Id. ¶ 42) Rawlings told the Salamenos the following:

a. that SmartBoss's "Team" comprised not only Rawlings, but a data scientist and engineer, a chief marketing officer, a data and digital strategist, a chief financial officer, and a chief operating officer;

b. that SmartBoss also had a "Dev Team," comprising six educated and credentialed software engineers;

c. that SmartBoss was creating an "invite only beta site," and that it had more than a thousand users on it, and had been "collecting their credit cards" in order to later charge them $45 per month on average to use the site;

d. that Rawlings had numerous other investors interested in investing in SmartBoss, including five venture capital funds with which she was meeting in September, "the other 8 VCs as well, and the 12 early stage VCs";

e. that in 2012 Rawlings had made a $100,000 investment;

f. that in 2013 to 2015 Rawlings had obtained an investment she called a "Friends and Family Investment: $1.5M $300,000 [sic] over 24 months in form of Convertible Note"; and

g. that her monthly expenses for "developer salaries, patents, and rent" were approximately $50,000.

(Id.) On September 7, 2016, the Salamenos sent Rawlings another $50,000. (Id. ¶ 43)

"In or around late 2016 and early 2017, Rawlings' communications with the Salamenos became significantly less frequent." (Id. ¶ 44) In a January 5, 2017 email to Rawlings, Mrs. Salameno alluded to this decline in communication: "We hope everything is ok with you as we have not heard from you in months. Larry and I have been reaching out to you since early November because we would like to go over the continuing launch and talk about how SmartBoss is growing." (Id.) On February 10, 2017, the Salamenos sent $5,000 to Rawlings, and on August 24, 2017, they sent her $6,000. (Id. ¶ 45) In or about August 2017,Rawlings met with the Salamenos and told them "that SmartBoss was going well" and "that the SmartBoss launch would be soon[.]" (Id. ¶ 46)

After the August 2017 meeting, Rawlings did not communicate again with the Salamenos for approximately a year and a half. (Id. ¶¶ 47-49) The Salamenos contacted Rawlings during this period, and asked that she provide information concerning the status of SmartBoss and the money they had provided to her. Rawlings did not respond. (Id. ¶¶ 47-48) In an April 2018 email to Rawlings, Ms. Salameno referred to the lack of communication: "I hope things are well with you and nothing unexpected has happened, either with your health, your family or business, we are very concerned that we have not been able to speak with you in over 8 months." (Id. ¶ 48)

In a January 27, 2019 letter to the Salamenos, Rawlings apologized for her lack of communication, explaining "that a problem had arisen with a software developer[,]" Toptal LLC: "'[l]ong story short, the developer had caused the software to be open to the world wide web and a "hacker" walked in and took control of the server.'" (Id. ¶ 49) As a result, "[Toptal] then quit, and the SmartBoss website never launched." Rawlings further claimed that she had hired a lawyer to sue Toptal, and "that a lawsuit would be filed shortly[.]" (Id.)

SmartBoss never issued stock to the Salamenos (id....