Flaxer, not individually but solely in his capacit v. Control Risks Group LLC

UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
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In re: 	Chapter 11
LEHR CONSTRUCTION CORP. 	Case No. 11-10723 (SHL)
Debtor,
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JOHANTHAN L. FLAXER, not individually but
solely in his capacity as chapter 11 trustee for
LEHR CONSTRUCTION CORP.,
Ad. Pro. No. 13-01256-SHL
Plaintiff,
v.
CONTROL RISKS GROUP LLC,
Defendant.
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MEMORANDUM OF DECISION
APPEARANCES:
GOLENBOCK EISEMAN ASSOR BELL & PESKOE LLP
Attorneys for Jonathan L. Flaxer, Chapter 11 Trustee for Lehr Construction Corp.
437 Madison Avenue
New York, NY 10022
By: 	Douglas L. Furth, Esq.
Michael S. Weinstein, Esq.
SHEPPARD, MULLIN, RICHTER & HAMPTON LLP
Attorneys for Defendant Control Risks Group LLC
30 Rockefeller Plaza
New York, NY 10112
By: 	Daniel L. Brown, Esq.
Malani J. Cademartori, Esq.
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SEAN H. LANE
UNITED STATES BANKRUPTCY JUDGE
Before the Court is a motion (the “Motion”) (ECF Nos. 7 & 8) by Defendant Control
Risks Group LLC (“Defendant” or “Control Risks”) seeking to dismiss the Chapter 11 Trustee
Jonathan L. Flaxer’s amended complaint (the “Amended Complaint”) (ECF No. 6) filed in the
above-captioned adversary proceeding (the “Adversary Proceeding”). The Amended Complaint
alleges that Control Risks breached its contract by (i) failing to fully or properly perform the
consulting services that Control Risks had contracted to perform for Debtor Lehr Construction
Corporation (“Lehr”), and (ii) failing to properly advise Lehr about whether a “bona fide
business-oriented security concern” existed for Lehr’s executives. Amended Compl. ¶ 39.
Control Risks now seeks dismissal of the Amended Complaint, arguing that: (1) the Trustee
failed to allege a particular provision or promise that Control Risks breached; (2) the Trustee has
not sufficiently pled proximate cause and cannot plausibly do so; and (3) the Trustee’s claims
sound in tort law, rather than contracts, and are therefore time-barred. The Trustee opposes the
Motion but clarifies that it seeks relief based only on breach of contract, not negligence. For the
reasons stated below, the Motion is granted.
BACKGROUND
The Trustee filed this Adversary Proceeding alleging breach of contract against Control
Risks. In April 2013, the Trustee filed the Amended Complaint, changing the alleged amount of
damages from $6.2 million to $6.1 million. Amended Compl. ¶ 33. The following facts are
alleged in the Amended Complaint.
Lehr is a New York corporation that specialized in interior construction for corporate
clientele. Amended Compl. ¶ 5. In or about April 2006, Lehr retained Control Risks, a security
consulting company, under a document titled Proposal to Review Executive Security (the
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“Contract”).1 Amended Compl. ¶¶ 6, 11; see also Contract (Amended Compl. Ex. 1) (ECF No.
6-1). Under the Contract, Control Risks was “to assist [Lehr] in assessing the security/threat
exposure of senior executives/board members, review[] [the] applicability of IRS Regulation #
132 and [develop] a formalized Executive Protection Program (EPP) to support such
applicability.” Amended Compl. ¶ 13.
IRS Treasury Regulation 132 (“Regulation 132”)2 outlines which fringe benefits, paid by
a company on an employee’s behalf, can be excluded from the employee’s income. Id. at ¶ 14;
see 26 CFR § 1.132-0 et seq. Regulation 132 discusses certain exclusions for employer-provided
transportation where there exists a bona fide business-oriented security concern. Amended
Compl. ¶¶ 14–15; see 26 CFR § 1.132-5(m). “[I]f an employee travels on a personal trip in an
employer-provided aircraft for bona fide business-oriented security concerns, the employee may
exclude the excess, if any, of the value of the flight over the amount the employee would have
paid for the same mode of transportation, but for the bona fide business-oriented security
concerns.” Amended Compl. ¶ 15; 26 CFR § 1.132-5(m)(1).
A bona fide business-oriented security concern exists “only if the facts and circumstances
establish a specific basis for concern of the employee’s safety. A generalized concern for an
employee’s safety is not a bona fide business-oriented security concern.” Amended Compl. ¶ 16;
1 	In its papers, Control Risks characterized this document as merely a proposal, but did not dispute the
existence of a contract. See Motion at 4 (ECF No. 8). In any event, the Amended Complaint alleged that Lehr
entered into a written contract with Control Risks, Amended Compl. ¶ 37, and the Court must accept as true the
allegations in the complaint when evaluating a motion to dismiss. See Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009);
Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007).
2 	The parties use the term “Regulation 132” in the Amended Complaint and in their briefs to refer to
Treasury Regulation Section 1.132. For this decision, the Court adopts the parties’ terminology and will refer to
Treasury Regulation Section 1.132 as “Regulation 132.”
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26 CFR § 1.132-5(m)(2). The regulation identifies factors that are cause for a security concern.3
Amended Compl. ¶ 17; 26 CFR § 1.132-5(m)(2). The regulation further advises
The value of transportation-related security provided pursuant to a
security study that meets the requirements of this paragraph (m)(2)(iv)
may be excluded from income if the security study conclusions are
reasonable and, but for the bona fide business-oriented security
concerns, the employee would not have had such security. No exclusion
from income applies to security provided by the employer that is not
recommended in the security study.
26 CFR § 1.132-5(m)(2)(iv).
Lehr agreed to pay Control Risks $17,600 to conduct an executive security review (the
“Security Review”) and determine appropriate security measures. Amended Compl. ¶¶ 11, 13,
34. Pursuant to the Contract, Control Risks was required to provide a written report
summarizing its findings and recommendations to Lehr (the “Report”). Amended Compl. ¶ 20;
see also Report (Amended Compl. Ex. 2) (ECF No. 6-2). On or about July 17, 2006, Control
Risks delivered the Report to Lehr. Amended Compl. ¶ 20. The Report concluded that Gerald
Lazar and Frederick Coffey, two Lehr executives, “face a higher than usual potential of being a
target of various criminal activities,” citing several general factors to support that conclusion.
Amended Compl. ¶ 21.
The Report recommended that Lehr formalize an executive protection program “for
Lazar and Coffey that provided for company-sponsored security transportation, including (i)
chauffeured vehicles for both personal and business travel and (ii) use of corporate/chartered
aircraft for business reasons that may also be available for personal use.” Amended Compl. ¶ 30.
The Report was “predicated on [Control Risks’] review as an independent security consultant”
3 	Security concerns include threat of death, kidnapping, or serious bodily harm to the employee or a similarly
situated employee because of either the employee’s status as an employee of the employer or a recent history of
violent terrorist activity in the geographic area in which transportation is provided. See Amended Compl. ¶ 17; 26
CFR § 1.132-5(m)(2).
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and stated that “[Control Risks] feel[s] the program is consistent with the requirements set out
under IRS Reg. 132.” Amended Compl. ¶ 32. Following the Report, Lehr expended over $6.1
million in private jet travel for Lazar and Coffey. Amended Compl. ¶ 33. The Contract and the
Report included a disclaimer stating that “[a]dvice given and recommendations made do not
constitute a warranty of future results by any company in the Control Risks group . . . No express
or implied warranty is given in respect of any judgment made or to changes or any unforeseen
escalation of any factors affecting any such judgment.” Contract at 8 (ECF 6-1); Report at 5
(ECF 6-2). 4
Through the Adversary Proceeding, the Trustee now seeks to recover the $6.1 million the
Debtor spent on the executive protection program, alleging in hindsight that the Report failed to
provide specific, objective reasons why Lazar and Coffey face a higher risk of violence than any
other executive. Amended Compl. ¶ 22.
DISCUSSION
A. 	Legal Standard
Rule 8(a) of the Federal Rules of Civil Procedure, made applicable here by Bankruptcy
Rule 7008, requires that the complaint contain a “short plain statement of the claim showing that
the pleader is entitled to relief.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). Federal
Rule of Civil Procedure 12(b)(6), made applicable by Bankruptcy Rule 7012, provides that a
complaint must be dismissed if it fails to state a claim upon which relief can be granted. To
survive a Rule 12(b)(6) motion to dismiss, the complaint “must contain sufficient factual matter,
accepted as true, to state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556
U.S. 662, 678 (2009) (citing Twombly, 550 U.S. at 570). A claim is plausible on its face when
4 	Both the Contract and the Report are attached to the Complaint. As only some sections of the Report have
page numbers, citations to the Report refer to the PDF page number for the Report.
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the plaintiff pleads factual content that allows the court to draw the reasonable inference that the
defendant is liable for the misconduct alleged. Id. This plausibility standard requires more than
a sheer possibility that a defendant acted unlawfully, yet does not require detailed factual
allegations. Id.; see also Eastman Chem. Co. v. Nestlé Waters Mgmt. & Tech., 2012 U.S. Dist.
LEXIS 141281, at *13–14 (S.D.N.Y. Sept. 28, 2012) (citing Talley v. Brentwood Union Free
Sch. Dist., 2009 U.S. Dist. LEXIS 5357, at *11–12 (E.D.N.Y. June 24, 2009)). The court must
determine “whether the well-pleaded factual allegations, assumed to be true, plausibly give rise
to an entitlement to relief.” Hayden v. Paterson, 594 F.3d 150, 161 (2d Cir. 2010) (citing Iqbal,
556 U.S. at 679).
A Rule 12(b)(6) motion is addressed to the face of the pleading. Goldman v. Belden, 754
F.2d 1059, 1065–66 (2d Cir. 1985). Pursuant to Federal Rule of Civil Procedure 10(c), the
pleading is deemed to include any document attached to it as an exhibit or any document
incorporated in it by reference. Id.; see also Cortec Indus., Inc. v. Sum Holding, L.P., 949 F.2d
42, 47 (2d Cir. 1991).
An action for a breach of contract under New York law requires proof of: (1) a contract,
(2) performance of the contract by one of the parties, (3) a breach by the other party, and (4)
damages. 5 Rexnord Holdings Inc. v. Bidermann, 21 F.3d 522, 525 (2d Cir. 1994) (citing Bank
Itec N.V. v. J. Henry Schroder Bank & Trust Co., 612 F. Supp. 134, 137 (S.D.N.Y. 1985)).
Merely stating that the agreement was breached is insufficient to sustain a breach of contract
claim. Berman v. Sugo LLC, 580 F. Supp. 2d 191, 202 (S.D.N.Y. 2008). Under New York law,
dismissal of a contract claim is also proper where a plaintiff fails to plead facts from which
5 	As the parties both cite New York cases in their briefs, they appear to agree that New York substantive law
applies to this dispute.
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damages attributable to a defendant’s conduct might be reasonably inferred. Arcidiacono v.
Maizes & Maizes, LLP, 778 N.Y.S.2d 270, 270 (App. Div. 1st Dep’t 2004).
B. 	The Breach of Contract Claim
The Defendant argues that dismissal is appropriate because the Trustee failed to allege a
particular provision or promise of the Contract that was breached and because the Trustee has
not plausibly pled proximate cause. Accordingly, the Court must examine the pleadings to
determine whether the Trustee alleges sufficient facts regarding a breach and causation,
considering both the Amended Complaint and the terms of the Contract attached to the Amended
Complaint. See Cortec Indus., 949 F.2d at 47.
As a threshold matter, Control Risks argues that the Trustee does not and cannot allege
any specific provision of the Contract that was breached. The Trustee contends that he need not
point to a specific provision, but nonetheless cites several key provisions that Control Risks
allegedly did not fully perform. See Trustee’s Opposition at 7 (ECF No. 14) (citing Amended
Compl. ¶¶ 13, 21–31, 39). But the Trustee does not allege, nor does the Court find, any
provision in the Contract that required the Report or the recommendations contained therein to
comply with Regulation 132 or any other standard. The Contract simply contained a promise to
conduct a security review and deliver a report of recommendations, but it did not require any
level of specificity. The Trustee only alleges, for example, that Control Risks breached the
Contract by “failing to (i) fully or properly perform the consulting services that Control Risks
had contracted to perform; [and] (ii) properly advise Lehr concerning whether a ‘bona-fide
business-oriented security concern’ existed with respect to either Lazar or Coffey.” Amended
Compl. ¶ 39. Similarly, paragraph 13 of the Amended Complaint merely quotes the objective of
the Security Review. The other allegations, paragraphs 21 through 31, do not actually refer to
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the Contract, but rather allege Control Risks’ failings in the Report. For example, the Trustee
alleges that the Report did not provide specific, objective reasons why Lazar and Coffey faced a
heightened security risk. Amended Compl. ¶ 22.
Given these allegations, the Court agrees with the Defendant that the Amended
Complaint does not state a cause of action for breach of contract. “[W]here the party rendering
services can be shown to have expressly bound itself to the accomplishment of a particular result,
the courts will enforce that promise.” Milau Assocs., Inc. v. North Ave. Dev. Corp., 42 N.Y.2d
482, 487 (1977) (citing Robins v. Finestone, 308 N.Y. 543 (1955); Frankel v. Wolper, 169
N.Y.S. 15 (App. Div. 2d Dep’t 1918), aff’d 228 N.Y. 582). New York does not, however,
recognize a cause of action based upon implied warranty where the warranty arises from a
contract for services and only economic loss is claimed. See Fireman’s Fund Ins. Co. v. New
York Gen. Mech., Inc., 1992 U.S. Dist. LEXIS 7481, at *10 (W.D.N.Y. May 22, 1992) (citing
Gordon v. Holt, 65 412 N.Y.S.2d 534, 537 (App. Div. 4th Dep’t 1979); Held v. 7-Eleven Food
Store, 108 Misc.2d 754, 757 (N.Y. Sup. Ct. 1981)). Where a transaction is predominantly
service-oriented, “neither the code nor the common law of this State can be read to imply an
undertaking to guard against economic loss stemming from the nonnegligent performance by a
construction firm which has not contractually bound itself to provide perfect results.” Milau, 42
N.Y.2d at 487 (citations omitted).
Much like Milau, the Contract here is service-oriented. If the Contract expressly
provided a standard or a particular result, then the Trustee might have stated a claim for relief.
But New York law does not provide a basis for the Court to read into the Contract an implied
warranty to comply with Regulation 132. Milau, 42 N.Y.2d at 487. Indeed, the disclaimer in
both the Contract and the Report supports the conclusion that no such warranty was intended.
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Thus, neither the allegations in the Complaint nor the attached contract provide a basis for any
express warranty regarding the Report.
The Trustee relies on several New York State cases to argue that allegations of
inadequate performance are sufficient to state a claim for breach of contract. See Trustee’s
Opposition at 8 (ECF No. 14) (citing Cooling Tower Specialties, Inc. v. Yaro Enters., Inc., 889
N.Y.S.2d 347 (App. Div. 4th Dep’t 2009); Wiernik v. Kurth, 873 N.Y.S.2d 673 (App. Div. 2d
Dep’t 2009); Westminster Constr. Co. v. Sherman, 554 N.Y.S.2d 300 (App. Div. 2d Dep’t
1990)). Of these cases, only Cooling Tower Specialties directly deals with a breach of contract
cause of action.6 In that case, the court reversed a dismissal of the defendant’s counterclaim for
breach of contract, finding that the allegations of the plaintiff’s inadequate performance of
repairs were sufficient to sustain the counterclaim. Cooling Tower Specialties, 889 N.Y.S.2d at
348. But that case and the two others cited by the Trustee are distinguishable because they all
involve contracts to perform specific work that can be judged on an objective scale, such as
building a home or repairing machinery. See Cooling Tower Specialties, 889 N.Y.S.2d 347
(agreement to repair cooling tower); Wiernik, 873 N.Y.S.2d 673 (architectural service contract in
connection with certain renovations to plaintiff’s home); Westminster, 554 N.Y.S.2d 300
(contract to construct residence). The same cannot be said with the Contract here. Control Risks
was contracted to assess Lehr’s security risk, which is a subjective assessment unlike
construction or repair work. Thus, the Trustee’s allegations here amount to little more than a
6 	The facts of the other two cases shed no light on the dispute in this case. In Wiernik, the court reversed the
order of the trial court and granted one individual defendant’s motion to dismiss the complaint. 873 N.Y.S.2d at
676. The defendant in question was the office manager of the architectural firm, and the court found that, as the
firm’s employee, he could not be held personally liable for the firm’s alleged breach of contract. Id. at 675. The
court in Westminster affirmed the trial court’s order dismissing a third party cause of action for fraud because that
cause of action was based solely upon the failure to perform contractual promises of future acts. 554 N.Y.S.2d at
302.
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claim for breach of an implied warranty, which is not an action recognized under New York law
for service contracts.
Even if the Trustee had sufficiently alleged a breach, the Trustee did not allege facts
showing how the purported breach was the cause of any damage to Lehr. A party must prove
damages to establish a cause of action for breach of contract. Rexnord, 21 F.3d at 525. In the
absence of any allegations of fact showing damage, mere allegations of breach of contract are not
sufficient to sustain a complaint, and the pleadings must set forth facts showing the damage upon
which the action is based. Gordon v. Dino De Laurentiis Corp., 529 N.Y.S.2d 777, 779 (App.
Div. 1st Dep’t 1988) (dismissing cause of action where complaint alleged in boilerplate fashion
that defendant disclosed confidential information to a third party and that as a consequence
plaintiffs were damaged in amount of $35 million). The court in Gordon found that the
complaint was fatally deficient because it did not demonstrate how the alleged breach of the
parties’ confidentiality agreement caused plaintiffs any injury. Id. Extraordinary damages do
not directly flow from a breach of contract, and thus “are recoverable only upon a showing that
they were foreseeable and within the contemplation of the parties at the time the contract was
made.” See American List Corp. v. U.S. News & World Report, Inc., 75 N.Y.2d 38, 43 (1989).
The Trustee asserts that Control Risks failed to deliver a report that complied with the
requirements of Regulation 132. As discussed above, Regulation 132 provides guidelines for
employees who seek to exclude certain security-related travel expenses from their income. With
respect to damages, the Trustee merely alleges that “[f]ollowing the date of the Report, Lehr
expended over $6.1 million in private jet travel for Lazar and Coffey,” and that “Control Risk’s
[sic] conduct was a proximate cause of damages suffered by Lehr in an amount not less than
$6,111,283.99.” Amended Compl. ¶¶ 33, 35. Much like Gordon, however, the Trustee has not
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alleged facts that demonstrate how Control Risks’ alleged failure to comply with Regulation 132
caused $6.1 million in damages. Instead, the Trustee relies on the conclusory statement that
Control Risks’ conduct was “a proximate cause” of damages suffered. Gordon, 141 A.D.2d at
436. Notably, the Trustee did not allege that, but for the Report, Lehr would not have expended
any of the $6.1 million on private jet travel. In fact, the Report suggests that Lehr was already
providing private jet travel for Lazar and Coffey before Control Risks’ Security Review. See
Report at 9 (“expenditures relating to the company provided . . . private aircraft . . . should be
maintained”); id. at 10 (“Travel Security” section reviewing security protocol at the time). Given
this background, the Amended Complaint’s deficiency on damage allegations is problematic,
particularly given the significant amount of alleged damages—$6.1 million—compared with the
far more modest sum of $17,600 paid by Lehr for the services by Control Risks. See American
List Corp., 75 N.Y.2d at 43 (extraordinary damages must have been foreseeable and within the
contemplation of the parties at the time the contract was made).7
The issue of damages to Lehr becomes even less clear upon review of Regulation 132,
which only advises when an employee can exclude the excess costs of the security measures
from his income. The Amended Complaint did not allege that Coffey or Lazar excluded such
expenses on their tax returns or whether the IRS took issue with such an exclusion. Nor did the
Trustee allege if or how the exclusion of these costs from an employee’s income had any
negative impact on Lehr. In sum, the Trustee did not plead sufficient facts to demonstrate how
Control Risks’ alleged failure to produce a report compliant with Regulation 132 caused Lehr the
$6.1 million in damages claimed.
7 	While not relevant for the Court’s determination on the Motion, the Amended Complaint does not identify
who at Lehr approved these travel expenditures. This fact might become relevant to the merits of the dispute given
questions of impropriety and corruption at Lehr, which resulted in the appointment of a Chapter 11 trustee at the
beginning of this case.
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CONCLUSION
For the reasons set forth above, Control Risks’ motion to dismiss is granted. The
Defendant is directed to settle an order on three days’ notice.
Dated: New York, New York
May 27, 2014
/s/ Sean H. Lane
UNITED STATES BANKRUPTCY JUDGE
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