Mouawad National Co. v. Lazare Kaplan International Inc.

Citations: 476 F. Supp. 2d 414; 2007 U.S. Dist. LEXIS 16485; 2007 WL 675481Docket: 03 Civ. 3103(RJH)

Court: District Court, S.D. New York; March 6, 2007; Federal District Court

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Mouawad National Company and Al-Dorar Trading Establishment, both Saudi Arabian corporations, have initiated a diversity action against Lazare Kaplan International Inc. (LKI), a Delaware corporation based in New York, concerning a transaction involving a processed pink diamond valued at $1.5 million. The diamond was sold in October 2000 by POCL, N.V., a Belgian company, to Al-Dorar, acting as a purchasing agent for Mouawad. After being unable to sell the diamond, plaintiffs attempted to return it to POCL, which refused to accept the return or credit the plaintiffs' account. Plaintiffs allege that POCL acted as LKI's agent in this transaction.

LKI has moved to dismiss the Amended Complaint under Federal Rules 12(b)(1) and 12(b)(3), or alternatively, for summary judgment under Rule 56, asserting that it is not a proper party to the lawsuit. In response, plaintiffs have sought permission to file a second amended complaint under Rule 15(a). The court ruled in favor of both motions, allowing the amendment and denying LKI's motion to dismiss or for summary judgment after permitting limited discovery into the relationship between POCL and LKI. The background includes the involvement of a GE subsidiary that developed a patented process to enhance the value of diamonds, which relates to LKI's subsidiaries known for manufacturing and selling these processed diamonds under an exclusive agreement with GE.

Pegasus established a wholly owned subsidiary, Pegasus Overseas LLC (POLLC), to manage the invoicing, shipping, and transfer of the Bellataire diamonds. LKI created two additional companies for marketing these diamonds: POCL, targeting overseas markets, and Bellataire Diamonds, Inc. (BDI), a direct subsidiary for domestic markets. POCL, incorporated in Belgium, is a subsidiary of LK Belgium, which is indirectly owned by LKI. POLLC and BDI are Delaware corporations based in LKI's New York offices. Key personnel share roles across these entities, including LKI's president Leon Tempelsman and vice president William Moryto, who hold positions in Pegasus and POCL.

In June 1999, Robert Mouawad expressed interest in merchandising the Bellataire diamonds, leading to the May 2000 Agreement that granted Al-Dorar exclusive rights to sell colorless Bellataire diamonds in the Middle East and Asia. Al-Dorar purchased over $22.7 million worth of these diamonds, with POCL invoicing the purchases and receiving direct payments. During negotiations, Mouawad was offered a pink Bellataire diamond valued over $1.5 million but was hesitant due to concerns about marketability. An oral agreement allegedly allowed for the return of the pink diamond if it did not sell. After processing, the diamond was shipped to Mouawad, with POCL invoicing Al-Dorar for the sale, which included a 2.5% commission on sales. The pink diamond was returned to Mouawad in late 2001 for a credit after being unsuccessfully trialed by one of his customers.

Plaintiffs were involved in a dispute with Georges regarding the return of colorless diamonds purchased under the May 2000 Agreement. They claimed the right to exchange ten percent of the diamonds based on diamond trade practices. As the dispute extended into 2002, Georges engaged Moryto and Tempelsman, and ultimately others from Lazare Kaplan and GE, to assist in communication. Unable to resolve the matter, plaintiffs filed a lawsuit on May 2, 2003, seeking credit for a returned pink diamond and four colorless Bellataire diamonds returned to POCL.

Subsequently, on March 26, 2004, POCL sued plaintiffs in Belgium for $1,326,110.02 related to unpaid invoices and the collection of the returned diamonds. Mouawad and Al-Dorar contested the Belgian court's jurisdiction, citing a clause in the May 2000 Agreement that designated Swiss law and the Courts of Geneva for disputes. On September 22, 2005, the Belgian court dismissed the case, affirming that Geneva courts had jurisdiction.

Defendant LKI then moved to dismiss the Amended Complaint, citing lack of subject matter jurisdiction and improper venue under Rules 12(b)(1) and 12(b)(3), arguing that the plaintiffs were obligated to bring the dispute before Swiss courts. Alternatively, LKI sought summary judgment, contending that no factual basis supported the plaintiffs' breach-of-contract claim. The court's analysis regarding the motion to dismiss focused on the applicability of the forum selection clause from the May 2000 Agreement, stating that the moving party must demonstrate an applicable clause and that the burden then shifts to the plaintiff to prove a valid reason for not adhering to it. The parties acknowledged that the May 2000 Agreement did not govern the sale of the pink diamond, but LKI argued that the claims related to the colorless diamonds fell under the Agreement's terms.

Plaintiffs have indicated that the pink diamond is central to their case but have not formally abandoned their claims regarding the colorless diamonds, nor have they sought to amend their complaint to withdraw those claims. They argue that the colorless diamonds are part of the dispute because POCL initially credited Mouawad's account for their return but later retracted this credit after the pink diamond was returned. However, this retraction does not negate the applicability of the forum selection clause from the May 2000 Agreement, which remains enforceable concerning the colorless diamonds. As the plaintiffs failed to provide sufficient evidence supporting New York as the appropriate venue for their claims related to the colorless diamonds, these claims are dismissed under Rule 12(b).

Additionally, the defendant seeks summary judgment on the basis that POCL was not acting as its agent during the sale of the pink diamond. Under New York law, a disclosed principal may be liable on a contract made by an agent acting within its authority, provided proper conditions are met. Summary judgment is appropriate when there are no genuine issues of material fact that warrant a trial. The determination of agency is a mixed question of law and fact; if material facts are undisputed, the court can decide the issue. New York law does not automatically hold a corporate parent liable for a subsidiary's actions, unless under a veil-piercing theory or agency principles. While a parent can appoint a subsidiary as an agent, New York courts are generally reluctant to disregard corporate entities.

To hold a corporate parent liable for its subsidiary's actions through veil-piercing, the plaintiff must demonstrate that the parent exerted "complete domination" over the subsidiary in the specific transaction, leaving the subsidiary without independent will. Factors to assess this domination include: failure to adhere to corporate formalities, inadequate capitalization, commingling of funds, shared ownership and management, common office space, lack of arm's length transactions, treatment as independent profit centers, and the parent's involvement in the subsidiary's financial obligations. Additionally, the parent’s domination must have been used to commit fraud or wrongdoing against the plaintiff, directly causing their injury.

Conversely, under an agency theory, the plaintiff does not need to prove that the parent used the subsidiary to commit fraud. An agency relationship is established through evidence of consent, fiduciary duty, lack of gain or risk to the agent, principal control, and the agent's ability to affect legal relations between the principal and third parties. In this case, the plaintiffs assert that LKI should be considered a party due to the conduct of individuals associated with both LKI and POCL, which led them to perceive LKI as the principal and POCL as its agent. Specific instances, such as introductions and statements made by Georges and Tempelsman regarding decision-making authority and dependence on LKI, support this claim. Control by the principal and the agent's capacity to alter legal relationships are emphasized as crucial elements of the agency relationship.

Georges communicated with Tempelsman regarding a dispute over the return policy by faxing Mouawad's letter marked with 'Help.' When Pascal Mouawad sought information about the return of the pink diamond, Georges directed him to consult with individuals in New York, implying significant decision-making was centralized there. Pascal subsequently met with Meyer and Moryto in New York. The plaintiffs' actions suggested inconsistency in believing they were dealing solely with LKI, as Robert Mouawad and Georges negotiated the diamond sale, with POCL invoicing all sales and Al-Dorar making payments directly to POCL. 

Upon Mouawad's attempt to return the diamond, he first contacted Georges, raising questions about LKI’s control over POCL. However, LKI could not act through POCL for the sale of the pink diamond since LKI never owned it; ownership transferred through a chain from LK Belgium to POLLC and then to POCL after the plaintiffs’ purchase. The plaintiffs lacked evidence that LKI benefited from the sale, and thus POCL could not have been acting as LKI's agent.

Although the plaintiffs argued that POCL earned a commission on the sale, typically, a buyer reselling goods is not deemed an agent unless explicitly agreed to act for the principal's benefit. Although POCL's commission supports potential agency, the transfer of title to POCL indicates it acted for its own benefit. If POCL were an agent, POLLC or LK Belgium would be more plausible principals, as they held title to the diamond; however, neither entity served as a satisfactory principal.

The plaintiffs rejected the idea that Pegasus was the principal, asserting it never owned the diamonds. The text suggests that a veil-piercing theory might be more effective for the plaintiffs than an agency theory, as it would allow them to hold LKI liable for POCL’s actions based on alleged domination. Evidence supporting this includes POCL sharing resources with LK Belgium, directors from LKI managing POCL, and POCL operating through Georges, who was employed by LK Belgium. Key decisions regarding the diamond sale involved consultation with LKI executives, further indicating LKI’s control over POCL.

Plaintiffs claim they would not have purchased the pink diamond from POCL if they had known that a Lazare Kaplan entity other than LKI was the principal. They allege that LKI is the real party in interest, asserting that POCL operates as a sham without employees, with LKI exercising control over its subsidiaries. Plaintiffs previously sought to prove an alter-ego theory, which was abandoned after the defendant indicated that this would compromise diversity jurisdiction, as both plaintiffs are Saudi Arabian corporations. The Court ruled that LKI could not be considered POCL's principal, as it lacked the authority to sell the diamond, leading to a grant of summary judgment for the defendant on this matter. 

Plaintiffs now seek to amend their complaint to include POLLC, a Delaware corporation, as a potential principal. However, the Court indicated that POLLC may also be acting as an agent and not a proper party to the suit, as agents of disclosed principals are typically not liable for contracts unless explicitly agreed. Despite this, the Court permits plaintiffs to amend their complaint, contingent on the possibility of uncovering evidence supporting claims against POLLC after further discovery.

Plaintiffs' Amended Complaint is dismissed without prejudice, granting them thirty days to file a second amended complaint. The document notes that Pegasus was allegedly formed solely for a venture with a GE subsidiary. LK Belgium, a subsidiary of LK Europe, is also mentioned, with LK Europe being wholly owned by defendant LKI. The complaint involves "GE/POL" diamonds, linked to LKI, but plaintiffs acknowledge that payment was made directly to POCL by Al-Dorar. The court presumes that New York law applies, based on the parties' assumptions. Evidence suggests plaintiffs primarily engaged with POCL, not LKI, as indicated by their dealings under the May 2000 Agreement. The defendant asserts that Pegasus and GE share revenues from Bellataire diamond sales and that POLLC serves merely to facilitate transactions. The defendant previously contended that Pegasus was the principal in these dealings, with LKI, POLLC, and LK Belgium acting as agents. The excerpt also references the alter ego doctrine, which could impact jurisdictional diversity if a parent company is sued for a subsidiary's activities.