CeltixConnect Equity Investors LLC v. Sea Fibre Network Ltd T/A CeltixConnect, Diana Hodnett, Redwood Capital Group, LLC, and RCG, LLC, Index No. 653340/2014, 7/19/16 (Kornreich, J.)

CPLR 327(a), Forum Non Conveniens, Negligent Misrepresentation, Negligence, Fraudulent Inducement, Breach of Fiduciary Duty, Breach of Warranty, Motion to Dismiss, Failure to State a Claim, CPLR 3016(b), Scienter

By: Ivelina Popova | Staff Writer

Defendant Sea Fibre Network Ltd (“SFN”) is an Ireland company incorporated in Ireland. SFN sought to construct, own, and operate a sub-sea telecommunications between Ireland and Whales. SFN, therefore, hired Defendant Redwood Capital Group, LLC and RCG, LLC, an international investment bank (collectively “Redwood”) to solicit investors on its behalf. Later, Redwood solicited investor and Plaintiff CeltixConnect Equity Investors LLC (“Celtix”), to invest in SFN. SFN allegedly stole a telecommunications cable plan and intellectual property from its competitor – Geo Networks Limited (“Geo”) and also made false promises regarding its market position, sales strategy and products. The discovery of the theft, the threat of litigation posed by Geo, and the fact that Geo laid its own cable in direct competition with SFN lead to SFN’s subsequent lack of customers and overall business failure, causing Celtix to lose its investment.

As a result, Celtix filed suit against SFN, SFN’s CEO Diane Hodnett (“Hodnett”), and Redwood in New York alleging claims of: (1) fraudulent inducement of its investment against all three defendants; (2) negligent misrepresentation against all three defendants; (3) negligence against all three defendants; (4) breach of fiduciary duty against Hodnett; (5) breach of warranty against Hodnett and SFN for their failure to disclose the dispute with Geo. In response, Redwood moved to dismiss the claims for failure to state a claim and, in the alternative, that the forum was not convenient and posed undue hardship under the doctrine of forum non conveniens. SFN and Hodnett also moved to dismiss the complaint for forum non conveniens on the same basis.

The Court granted the motions. First, the Court found SFN and Hodnett’s forum non conveniens motion had sufficient merit. Under CPLR 327(a), the court has the discretion to stay or dismiss the action in whole or in part if it finds that it is in the interest of substantial justice that the action be heard in another forum. A court reviews a number of factors: the burden on the New York courts, the potential hardship to the defendant, the unavailability of an alternative forum in which the plaintiff may bring suit, the residence of the parties, and the location of the transaction. Here, the Court could not find any meaningful connections between Celtix’ claims and New York except for an isolated meeting occurring early on in New York. Simply put, the majority of the transactions occurred in Ireland, the contract was governed by Irish law, Ireland had an interest to adjudicate this action, and subsequent discovery from Geo would be more conveniently done in Ireland. Weighing the factors against Celtix, the Court dismissed Celtix’ claims against SFN and Hodnett, provided that they stipulate to submit to Irish jurisdiction and waive any statute of limitation defense.

Second, the Court granted Redwood’s motion to dismiss for failure to state a claim as to Celtix’ claim for negligent misrepresentation. A claim for negligent representation requires a plaintiff to demonstrate: (1) existence of a privity-like relationship imposing a duty to on the defendant to impart correct information to the plaintiff; (2) the information was incorrect; (3) reasonable reliance on such information. Here, the Court found that Celtix could not establish privity between Redwood and Celtix because Redwood was working for SFN as SFN’s agent, not Celtix. The Court did see a need to delve into the other elements and, therefore, dismissed Celtix’s claim.

Third, the Court dismissed Celtix’s fraud claim because it failed to plead scienter as required CPLR 3016(b). To survive a motion to dismiss for failure to state fraud, the plaintiff must plead: (1) a material misrepresentation of a fact; (2) knowledge of its falsity or scienter; (3) intent to induce reliance; (4) justifiable reliance by the plaintiff; and (5) damages. Here, the Court found Celtix’ allegations were conclusory and insufficient to prove scienter. Moreover, Celtix could not satisfy the other elements such as Redwood’s intent to defraud or Redwood’s knowledge of the alleged misrepresentations. The mere fact that Redwood received a fee for soliciting Celtix’ investment could not be used to infer intent to defraud. Lastly, since Celtix was a sophisticated investor who conducted extensive due diligence of Redwood’s operations and finances, it could not claim justifiable reliance. Therefore, the Court granted Redwood’s motion to dismiss.

CeltixConnect Equity Investors LLC v. Sea Fibre Network Ltd T/A CeltixConnect, Diana Hodnett, Redwood Capital Group, LLC, and RCG, LLC, Index No. 653340/2014, 7/19/16 (Kornreich, J.)


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