PHILADELPHIA – In litigation where defendants were accused of not providing more than 151,000 COVID-19 test kits or a refund to a retailer who paid it nearly $2 million, third-party defendants named in a later version of the complaint have lost their attempt to be dismissed from it.
American Environmental Enterprises, Inc. (doing business as “TheSafetyHouse.com” Peripheral Vision) first filed suit in the U.S. District Court for the Eastern District of Pennsylvania on Feb. 23, 2022 versus Manfred Sternberg, Esq., and Manfred Sternberg & Associates, P.C., and Charlton Holdings Group, LLC and Samuel Gross.
“On or about Jan. 21, 2022, Safety House agreed to purchase 151,200 iHealth COVID-19 Antigen Rapid two-pack test kits from CHG and its managing member, defendant Gross, for a payment of $1,965,600. Defendants represented and promised to Safety House that they could sell and quickly deliver the COVID test kits, because they alleged they had access to the COVID test kits on the ground, ready to sell, in the United States,” the suit said.
“The agreement required plaintiff to deposit the $1,965,600 purchase price into the attorney escrow account of the Sternberg attorney defendants. These funds were not to be released from escrow until after a bill of sale was delivered to plaintiff and the COVID test kits were delivered to a common carrier for delivery to plaintiff, and the bill of lading and shipping documents also delivered to plaintiff.”
The plaintiff said after making the requested deposit, it never received the necessary shipping documents, the test kits (which it was then unable to provide to its customer, an unnamed public school district) or a refund of the $1.965 million from the defendants.
“Plaintiff believes and therefore avers defendants had no ability to provide plaintiff with the COVID test kits and intended, instead, to abscond with plaintiff’s $1,965,600. Plaintiff and plaintiff’s counsel each demanded the immediate return of the $1,965,600 purchase price. To date, however, the $1,965,600 purchase price has not been refunded to plaintiff, and the COVID test kits have not been delivered,” the suit stated.
“As a result of defendants’ wrongful conduct, plaintiff is being forced to locate and purchase COVID test kits from other sources to fulfill its contractual obligations to plaintiff’s customers and has incurred damages in doing so. The conduct of defendants was intentional and knowing and deliberate, and so outrageous and extreme, so as to entitle plaintiff to an award of punitive damages.”
The defendants filed a motion to dismiss the complaint on April 1, 2022, charging that the plaintiff violated the parties’ agreement’s forum selection clause and should thus be dismissed.
“First, the clause is valid because it was fairly agreed upon by all parties and based on such agreement, this plain and unambiguous language was placed in the sale and purchase agreement. Plaintiff cannot overcome this crucial fact. Second, the clause is valid because it is clear in its meaning and interpretation. It specifically states that the SPA shall be governed by the laws of the State of Texas and that the Texas District Courts of Harris County, Texas or other seller designated venue shall have exclusive jurisdiction of any dispute arising out of or related to the SPA. Thus, there is no question that the parties did not intend for a lawsuit to be filed in this venue, thereby further warranting the dismissal of plaintiff’s complaint,” the dismissal motion stated, in part.
“Third, pursuant to the above-cited case law, it is defendants’ position that plaintiff waived its ability to argue that venue is improper as a result of the existence of the parties’ valid forum selection clause. However, assuming for the sake of argument that plaintiff has not made such a waiver, and the parties’ forum selection clause is not valid, which it obviously is for the reasons stated above, plaintiff cannot meet its burden of overcoming the forum selection clause by making a strong showing that the clause is unreasonable. In this regard, the clause was not added to the agreement as the result of fraud or is overreaching. Consistent with the foregoing, plaintiff’s complaint does not make such an allegation. Plaintiff instead alleges that the SPA was in fact a valid agreement by virtue of its breach of contract cause of action. Simply put, by alleging in the complaint that the parties had a valid contract between them, plaintiff has conceded to the fact that the clause is valid as part of their valid contract.”
The defendants thus wanted the case to be heard in Harris County, Texas District Court.
In an April 29, 2022 response, the plaintiffs maintained that since the defendants’ actions were predicated on fraud, there was no contract in actuality and the lack of such an agreement can’t be used to dismiss their claims.
“Safety House was defrauded by defendants, who never signed and returned to plaintiff, and who never intended to perform under, the alleged fraudulent contract that they sent to Safety House as a ruse, in order to obtain the payment of $1,965,600 from plaintiff, without providing the promised 151,200 iHealth COVID-19 Antigen Rapid two-pack test kits. Defendants now argue that based on a forum selection clause in the fraudulent and never signed contract, the complaint should be dismissed,” according to the plaintiff’s response.
“However, as fraud was the basis of defendants’ actions, there is no valid contract to enforce and they cannot now use the fraudulent unsigned contract as a basis to dismiss plaintiff’s claims. Similarly, even if the fraudulent unsigned contract was found to be enforceable, neither defendants Samuel Gross nor Martin Sternberg not Martin Sternberg Associates are parties to the fraudulent unsigned contract, and Safety House should not be compelled to litigate its claims against defendants Gross, Sternberg and MSA in a foreign forum. Furthermore, defendants have the burden to disprove that venue is not proper in the Eastern District of Pennsylvania, and have failed to meet that burden because their argument instead seeks to prove that venue is proper in Texas.”
The plaintiff further pointed out that under federal law, venue can be proper in more than one state – but added that if the Court were to disagree with its argument, then the suit should not be dismissed, but instead transferred to the U.S. District Court for the District of South Texas, Houston Division.
“While the alleged forum selection clause indicates that Texas state courts have jurisdiction, the forum selection clause cannot trump Safety House’s statutory right to the diversity jurisdiction of the federal courts,” the plaintiff’s rationale said.
On Aug. 2, U.S. District Court for the Eastern District of Pennsylvania Judge John M. Younge rejected the defendants’ dismissal motion predicated upon an argument of improper venue and/or forum non conveniens.
Young found that the plaintiff “has sufficiently pled, with particularity, facts of fraud such that the entire contract, including the forum selection clause’s validity, is called into question.”
“Plaintiff has alleged that the defendants’ actions giving rise to plaintiff’s claims occurred in the Eastern District of Pennsylvania and that defendants conduct business in this District. These facts are sufficient to make venue proper under 18 U.S.C. Section 1391. A court considering a request to transfer generally conducts a balancing test, that weighs various private and public interests, which may include (1) Plaintiff’s choice of forum as evidenced by the original filing; (2) Defendant’s preferred forum; (3) Where the claim arose; (4) Convenience of the parties and witnesses; (5) The location of the evidence; and (6) The public’s interest in enforcing the judgment, holding expeditious and inexpensive trials and deciding local controversies at home,” Younge said.
“Beyond the contract in dispute, the only factor defendants cite in support of venue in Texas is a ‘strong public policy…[that] would be violated by permitting the Court and local attorneys for both parties, none of whom are admitted to practice law in the state of Texas, to attempt to interpret Texas law.’ This Court is routinely called upon to consider the law of other jurisdictions, and the fact that under conflicts of law principles, Texas law, may or may not apply, does not counsel against venue in the Eastern District of Pennsylvania. Ultimately, defendants bear the burden of showing venue is improper or that a venue transfer is appropriate. Defendants have not sustained that burden. The Eastern District of Pennsylvania has jurisdiction over the parties and the events giving rise to this action occurred in this District. Accordingly, the Court finds that venue is appropriate in the Eastern District of Pennsylvania.”
When a later version of the complaint filed on Nov. 29 named Gary Weiss and A. Solar, LLC as third-party defendants and added claims of contribution and indemnity against them, said defendants motioned to be dismissed from the case on Feb. 3.
“There are no allegations supporting the third-party plaintiffs’ claims for contribution or indemnification. There are no allegations of any action, inaction, or wrongdoing by third-party defendants. There are no allegations that third-party defendants were involved, in any way, in the transactions and occurrences alleged by either plaintiffs or defendants/third-party plaintiffs. There are no allegations, whatsoever, that form the basis of any cause of action against third-party defendants. Accordingly, the third-party complaint is woefully deficient and must be dismissed failure to state a claim upon which relief can be granted,” the dismissal motion stated.
The motion explained that under Pennsylvania law, contribution and indemnity are each separate and distinct causes of action.
“Accordingly, to maintain a cause of action of contribution, the third-party plaintiffs must, at the very least, allege that third-party defendants engaged in some tortious conduct with third-party plaintiffs. To maintain a cause of action of indemnification, third-party plaintiffs must, at the very least, allege that they had some contractual agreement with third-party defendants whereby the claim for indemnification arose,” the motion continued.
“Third-party defendants are at a grave disadvantage given that the third-party complaint, even with its incorporation of 157 allegations, does not assert a single fact to support any claim against third-party defendants or identify any wrongful conduct for which the third-party defendants could be liable. As a result, the third-party complaint fails to state a claim upon which relief can be granted and must be dismissed.”
UPDATE
Younge ultimately denied the dismissal motion aimed at the third-party amended complaint on May 25.
“Upon consideration of the motion to dismiss the third-party amended complaint for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6) filed by third-party defendants Gary Weiss and A. Solar, LLC, and all papers submitted in support thereof and in opposition thereto, it is hereby ordered that said motion shall be denied,” Younge ruled.
For counts of fraud in the inducement, fraud, civil conspiracy, piercing the corporate veil, participation theory, breach of contract and unjust enrichment/quantum meruit, the plaintiff is seeking damages, individually, jointly and severally, for an amount in excess of $2,000,000, plus additional compensatory damages, consequential damages and special damages, as well as punitive damages, attorney’s fees and costs and interest on all amounts and for such other and further relief as the Court deems just and proper, to the maximum extent allowed by applicable law.
The plaintiff is represented by Gary P. Lightman and Glenn A. Manochi of Lightman & Manochi, in Plymouth Meeting.
The defendants are represented by Seth L. Laver and Jason S. Kaner of Goldberg & Segalla, in Philadelphia.
The third-party defendant is represented by Rebecca J. Price of Norris McLaughlin & Marcus, in Allentown.
U.S. District Court for the Eastern District of Pennsylvania case 2:22-cv-00688
From the Pennsylvania Record: Reach Courts Reporter Nicholas Malfitano at nick.malfitano@therecordinc.com