EXCEED TALENT CAPITAL LLC v. DURK DERRICK BANKS LIL DURK ANDREW BONSU ONLY THE FAMILY ENTERTAINMENT INC OTF LABEL TTPMG LLC (2025)

REPORT AND RECOMMENDATION TO HON. GREGORY H. WOODS: MOTION TO DISMISS

Plaintiff Exceed Talent Capital, LLC (“Plaintiff” or “Exceed”) brings this action to recover damages against Durk Derrick Banks (“Banks”), Andrew Bonsu (“Bonsu”), Only The Family Entertainment, Inc. (“OTFEI”), OTF Label (“OTF”), and TTPMG, LLC (“TTPMG”) (collectively, “Defendants”) for common-law fraud and breach of contract. Exceed, a financial technology firm, sought to facilitate a public offering of securities for fractional ownership in an entity that would receive revenues generated by a musical recording made by Banks, a popular hip-hop artist professionally known as Lil Durk. Exceed alleges that it was fraudulently induced into entering an agreement with Defendants to convey the recording's revenue rights to Exceed by false assurances of their transferability. Exceed seeks compensatory and punitive damages. Banks now moves to dismiss for failure to state a claim for relief for fraud pursuant to Federal Rule of Civil Procedure 12(b)(6) (“Rule 12(b)(6)”) and for failure to comply with the pleading standards of Federal Rule of Civil Procedure 9(b) (“Rule 9(b)”). For the reasons that follow, the Court recommends that Banks's motion be GRANTED IN PART and DENIED IN PART.

FACTUAL BACKGROUND 1

As required on a motion to dismiss, the Court accepts as true all well-pled allegations of the Amended Complaint and draws all reasonable inferences in favor of Exceed, the non-moving party. See Doe v. Franklin Square Union Free School District, 100 F.4th 86, 94 (2d Cir. 2024).

Exceed facilitates investment opportunities in assets related to entertainers, social media figures, and athletes. (AC ¶ 14.) In 2022, Exceed endeavored to begin conducting public offerings of investment instruments allowing investors to own fractional shares of entities that receive revenues generated by sound recordings made by popular recording artists. (Id. ¶ 15.) Pursuant to that endeavor, Exceed began discussions in or around the summer of 2022 with Oretha Lee (“Lee”), CEO of consulting firm TTPMG, and Andrew Bonsu, Banks's business manager at the time and owner of OTFEI and OTF.² (Id. ¶ 16.) The discussions concerned the proposed transfer – from OTF, OTFEI, and TTPMG (the “Corporate Defendants”) to Exceed – of the right to receive all revenues generated from the use of a song recorded by Banks entitled “Bedtime” (the “Recording”). (Id.) The purpose of the transaction was for Exceed to conduct a public offering that would allow investors to own fractional shares of an entity that would receive all revenues generated by the Recording (the “Offering”). (Id. ¶¶ 16, 23-24.) During the course of the negotiations of the contemplated transfer, “the [Corporate Defendants] and Bonsu assured Exceed that they possessed the power and lawful authority to convey those rights to Exceed.” (Id. ¶ 16.)

Thereafter, Exceed, on the one hand, and the Corporate Defendants on the other, consummated the negotiations by executing a “Music Revenue Rights Agreement” dated August 3, 2022 (the “Agreement”). (Id. ¶ 17; see generally Agreement (“Agr.”), Dkt. 34-2.) The Agreement provided that in exchange for payment by Exceed to the Corporate Defendants in the sum of $600,000 (paid in three installments), Exceed would receive 100% of the revenue generated by the Recording in perpetuity, and Defendants would cause a certain distributor to release and promote the Recording to the listening public. (Agr. ¶¶ 2, 5.) The Agreement also contained a $600,000 penalty to be paid by any party who materially breaches the agreement. (Id. Ex. A ¶ 6.)

The Agreement contained several “Representations and Warranties,” including that the Corporate Defendants “ha[d] the right, power and authority to enter into this Agreement and to cause [Banks] to fully perform all of [his] obligations hereunder without having to seek or obtain approval or permission from any third party”; that “the performance by [Defendants] of each of their obligations hereunder ․ w[ould] not violate or infringe upon the rights of any third parties”; that “entering into this Agreement w[ould] not violate the terms and conditions of any agreement between [the Corporate Defendants and/or Banks,] and any third party”; and that no third party would be “entitled to receive any Music Revenue.” (Id. Ex. A ¶ 2.) Representatives of Exceed and the Corporate Defendants signed the Agreement. (Id. at ECF 7.) Banks signed the Agreement on the signature page (id.) as well as on a separate page titled “Inducement” appended to the Agreement (the “Inducement”), in which Banks “confirm[ed] the authority of [the Corporate Defendants] to grant the rights and furnish [his] Services in accordance with the provisions thereof” and “agree[d] to abide and be personally bound by the terms and provisions of [the Agreement] as if [he] were a direct party thereto” (id. at ECF 8).

Exceed paid the first two installments required by the Agreement, totaling $450,000, on August 3 and 15, 2022. (AC ¶ 35.) Exceed also “expended significant time, effort and financial resources in registering with the SEC, ensuring compliance with SEC rules and regulations and marketing and promoting” the Offering. (Id. ¶ 45.) During this time, Banks also promoted the Offering on his social media accounts. (Id. ¶ 33.)

On May 24, 2023, Exceed received a demand letter from Alamo Records informing Exceed that, as of April 2021, Alamo alone possessed the right to receive, transfer, or assign the rights to the revenues derived from the Recording pursuant to an exclusive recording agreement between Banks and Alamo (the “Alamo Agreement”). (Id. ¶¶ 37, 38.) Exceed was unaware of the existence of the Alamo Agreement until receiving the letter. (See id. ¶ 40.) Upon receipt of the letter, Exceed notified Defendants of their apparent breach of the Agreement and requested they cure the breach, including by refunding the $450,000 paid pursuant to the Agreement. (Id.) Defendants did not do so. (Id. ¶ 41.)

Exceed claims that Defendants fraudulently induced it into entering into the Agreement, and that Defendants have breached the Agreement. Exceed seeks damages in excess of $12 million for both claims. By the instant motion, Banks seeks to dismiss only the fraud claim against him.

PROCEDURAL BACKGROUND

Exceed commenced this action on December 6, 2023, asserting claims for breach of contract and fraud. (Dkt. 1.) On March 22, 2024, Exceed filed the Amended Complaint in response to Defendants having raised grounds on which they planned to dismiss. (Dkts. 11, 15.) Banks then filed a motion to dismiss the fraud claim on July 26, 2024, supported by the Declaration of Jonathan D. Davis (“Davis Decl.”) and memorandum of law (“Banks Mem.”). (Dkts. 33-35.) Exceed filed its opposition on September 12, 2024 ((“Opp.”) Dkt. 39), and Banks filed his reply on October 3, 2024 ((“Reply”), Dkt. 40). The motion has been referred to me for report and recommendation. (Dkt. 8.)

LEGAL STANDARDS

Under Federal Rule of Civil Procedure 12(b)(6), a pleading may be dismissed for “failure to state a claim upon which relief can be granted.” Rule 12(b)(6). To survive a Rule 12(b)(6) motion, a complaint must plead “enough facts to state a claim to relief that is plausible on its face.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570, 127 S. Ct. 1955, 1974 (2007). A claim is facially plausible when the factual content pleaded allows a court “to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S. Ct. 1937, 1949 (2009).

To state a New York common law fraud claim, Exceed must allege five elements: “(1) a material misrepresentation or omission of fact (2) made by defendants with knowledge of its falsity (3) and intent to defraud, which (4) plaintiffs reasonably relied on, (5) resulting in damage to plaintiffs.”³ Santana v. Adler, No. 17-CV-6147, 2018 WL 2172699, at *9 (S.D.N.Y. Mar. 26, 2018) (citation omitted); see Premium Mortgage Corp. v. Equifax, Inc., 583 F.3d 103, 108 (2d Cir. 2009).

In a federal diversity action asserting a state-law fraud claim, as here, the allegations must be pled with particularity as required by Rule 9(b). Berman v. Morgan Keegan & Co., 455 F. App'x 92, 94-95 (2d Cir. 2012) (citing Fed. R. Civ. P. 9(b); Lerner v. Fleet Bank, N.A., 459 F.3d 273, 292-93 (2d Cir. 2006)). To satisfy Rule 9(b), a plaintiff must plead with particularity both the circumstances of the fraud and the defendant's mental state.⁴ The circumstances of the fraud must “(1) detail the statements (or omissions) that the plaintiff contends are fraudulent, (2) identify the speaker, (3) state where and when the statements (or omissions) were made, and (4) explain why the statements (or omissions) are fraudulent.” Eternity Global Master Fund Ltd. v. Morgan Guaranty Trust Co. of New York, 375 F.3d 168, 187 (2d Cir. 2004) (internal quotation marks and citation omitted). The defendant's mental state may be pled “generally,” but plaintiff must allege facts that give rise to a “strong inference” of scienter, or fraudulent intent. Lerner, 459 F.3d at 290 (internal quotation marks and citation omitted).

DISCUSSION

Banks advances two arguments for dismissal of the fraud claim as against him: 1) the fraud claim is duplicative of Exceed's breach-of-contract claim, and 2) Exceed fails to sufficiently plead fraud. The Court finds that the fraud claim is not duplicative of the contract claim but that it should be dismissed without prejudice for failure to plead the claim with sufficient particularity.

I. Fraud As Duplicative Of Breach Of Contract

Banks argues that Exceed's fraud claim should be dismissed under Rule 12(b)(6) because it is duplicative of its breach of contract claim. (Banks Mem. at 6-10.) The Court disagrees.

Courts in this Circuit routinely dismiss fraud causes of action as duplicative of breach of contract claims where the plaintiff alleges merely that the defendant misrepresented their intent to perform under the agreement. See, e.g., Wall v. CSX Transportation Inc., 471 F.3d 410, 416 (2d Cir. 2006) (“general allegations that defendant entered into a contract while lacking the intent to perform it are insufficient to support [a fraud] claim”); see also Bridgestone/Firestone, Inc. v. Recovery Credit Services, Inc., 98 F.3d 13, 19-20 (2d Cir. 1996) (“where a fraud claim ‘is premised upon an alleged breach of contractual duties and the supporting allegations do not concern representations which are collateral or extraneous to the terms of the parties’ agreement, a cause of action sounding in fraud does not lie’ ”) (citation omitted). However, a plaintiff simultaneously may maintain actions for fraud and for breach of contract if they can “either: (i) demonstrate a legal duty separate from the duty to perform under the contract; or (ii) demonstrate a fraudulent misrepresentation collateral or extraneous to the contract; or (iii) seek special damages that are caused by the misrepresentation and unrecoverable as contract damages.” Bridgestone/Firestone, 98 F.3d at 20 (citations omitted).

“New York distinguishes between a promissory statement of what will be done in the future that gives rise only to a breach of contract cause of action and a misrepresentation of a present fact that gives rise to a separate cause of action for fraudulent inducement.” Merrill Lynch & Co. v. Allegheny Energy, Inc., 500 F.3d 171, 184 (2d Cir. 2007). “[A] misrepresentation of present facts is collateral to the contract (though it may have induced the plaintiff to sign the contract) and therefore involves a separate breach of duty.” Id. When an extracontractual misrepresentation of present fact induces plaintiff into entering into an agreement, the misrepresentation is actionable in fraud – and thus not duplicative of breach of contract – “even when the alleged misrepresentations are incorporated into the contract itself.” Universal Survey Center, Inc. v. Precision Opinion, Inc., No. 16-CV-8259, 2017 WL 11615246, at *1 (S.D.N.Y. June 14, 2017) (citing Merrill Lynch, 500 F.3d at 184).

As articulated by a New York appellate court:

Because [plaintiff] alleges misrepresentations of present facts, and not future intent, made with the intent to induce [plaintiff] to [enter into the agreement], the fraud claim survives. It is of no consequence that some of the allegedly false representations are also contained in the agreements as warranties and form a basis of the breach of contract claim. ․ It simply cannot be the case that any statement, no matter how false or fraudulent or pivotal, may be absolved of its tortious impact simply by incorporating it verbatim into the language of a contract.

MBIA Insurance Corp. v. Countrywide Home Loans, Inc., 87 A.D.3d 287, 293, 928 N.Y.S.2d 229 (1st Dep't 2011) (internal quotation marks and citations omitted); see also A Star Group, Inc. v. Northland Energy Trading, LLC, No. 21-797, 2023 WL 8613525, at *2 (2d Cir. Dec. 13, 2023) (vacating dismissal of fraud claim on the grounds that “[f]raudulent inducement claims can also be based on ‘a breach of contractual warranties notwithstanding the existence of a breach of contract’ ”) (quoting Wyle Inc. v. ITT Corp., 130 A.D.3d 438, 440, 13 N.Y.S.3d 375, 377 (1st Dep't 2015)); Jo Ann Homes at Bellmore, Inc. v. Dworetz, 25 N.Y.2d 112, 119, 302 N.Y.S.2d 799, 803 (1969) (permitting plaintiff to maintain fraud claim alongside breach of contract claim where defendant, prior to contracting, misrepresented facts regarding the present state of his property that were later included in the final agreement).

Providing an apt analogy demonstrating the operation of this rule, one court observed:

Once you have told someone that you hold title to the Brooklyn Bridge to entice that person to buy it, executing a contract to sell it that states that you hold title to the Brooklyn Bridge does not make your prior statement any less fraudulent, nor does it convert the fraud into a breach of contract.

In re CINAR Corp. Securities Litigation, 186 F. Supp.2d 279, 303 (E.D.N.Y. 2002); see also Universal Survey, 2017 WL 11615246, at *2 (quoting id.). That principle applies here. Exceed has pled an extracontractual misrepresentation of present fact: that “[d]uring the course of the parties’ discussions concerning the contemplated transaction, [the Corporate Defendants and Bonsu] assured Exceed that they possessed the power and lawful authority to convey [the revenue] rights [to the Recording] to Exceed.”⁵ (AC ¶ 16.) That the misrepresentation was later memorialized in the warranties and representations section of the Agreement is “of no consequence.” MBIA, 87 A.D.3d at 294.

What is more, Banks signed a separate document, appended to the Agreement, expressly designated as an “Inducement” to Exceed's entry into the Agreement in which he “confirm[ed] the authority of [the Corporate Defendants] to grant the rights and furnish [his] Services in accordance with the provisions thereof.” (Agr. at ECF 8.) The Inducement also states that as a material inducement to Exceed, Banks “agree[d] to abide and be personally bound by the terms and provisions of [the Agreement] as if [he] were a direct party thereto.” (Id. at ECF 7, 8.) Drawing all reasonable inferences in Exceed's favor as the non-moving party, the Inducement evinces Banks’ expressly having confirmed his co-Defendants’ authority to grant the rights at issue as an inducement to Exceed's entry into the Agreement.⁶ For him to now argue that the fraud claim is merely duplicative of the contract claim is a bit disingenuous.

Banks further argues that the alleged misrepresentations pertain to Defendants’ intention and/or ability to perform under the contract and thus cannot form the basis of a fraud claim. (Banks Mem. at 7-9.) As stated above, a lack of intent to perform is not actionable in fraud. But “New York law is clear that, at a minimum, false statements about a party's ․ current ability to perform, made in order to induce a party to enter into a contract, will support a claim of fraudulent inducement. Such statements are ․ ‘misrepresentations of a present fact.’ ” Wild Bunch, SA v. Vendian Entertainment, LLC, 256 F. Supp.3d 497, 506 (S.D.N.Y. 2017) (brackets omitted) (quoting Merrill Lynch, 500 F.3d at 184).

Banks cites two cases to the contrary. The first case, Torchlight Loan Services, LLC v. Column Financial, Inc., is factually inapt because the alleged misrepresentations in that case were uttered in the agreement only; plaintiff did not allege that defendant made misrepresentations prior to contracting that were later included as representations and warranties in the final agreement. See No. 11-CV-7426, 2012 WL 3065929, at *9 (S.D.N.Y. July 25, 2012) (“[plaintiff's] allegations with respect to its claim for fraud recite the purported breaches of representations and warranties in the [agreement]”).

The second case cited by Banks is from the Northern District of New York. See SMG v. Metropolitan Entertainment Consultants, LLC, No. 18-CV-1000, 2019 WL 13123119, at *7 (N.D.N.Y. Nov. 21, 2019). SMG is distinguishable. There, “the contract was, in essence, for a financial performance – to provide certain funds for artist deposits and to share in the resultant profit or loss.” Id. at *7. The plaintiff sought to amend its complaint to add a fraud claim in addition to its breach of contract claim and, as the plaintiff put it, to clarify that the “initial misrepresentations [made before entering into the contract] related to [defendant] and his company's lack of capital to fulfill their duties ․ and intention at the time of entering into the agreement not to honor his written commitments.” Id. at *2. In contrast, here, Plaintiffs do not base their fraud claim on intention not to perform. Rather, Exceed claims it was induced to enter the Agreement by affirmative, collateral pre-contractual representations that Banks's co-Defendants had the power and authority to convey the rights to receive revenue from the Recording.

In denying the motion to amend in SMG, the court equated the alleged misrepresentation made before entering into the contract with the defendants’ intention not to perform. As the court explained, “[p]laintiff's allegations that defendants made misrepresentations about their financial solvency and, thus, ability to financially perform under the contract state nothing more than a breach of the promise to perform under the terms of the contract.” Id. at *8. The court reasoned that the misrepresentation about defendant's solvency was not collateral to the contract, but rather concerned “the terms of the contract itself,” since “the primary subject of the contract was for defendants to provide financial support.” Id.

It appears that the court in SMG overlooked the import of the distinction between a statement of present fact, being collateral to the contract, and a future intent to perform, being non-actionable for fraud, as articulated by the Second Circuit in Merrill Lynch. As Judge Rakoff explained in Wild Bunch:

Merrill Lynch ․ makes clear that it is the precise form the statement takes – present fact versus future intent to perform – that drives the analysis. It is one thing to promise to perform a contract. It is quite something else to induce someone to enter a contract by lying as to one's current financial condition, present ability to perform, and the like. Courts therefore cannot recharacterize statements that are unmistakably about present facts and made for the purpose of inducing a party to enter a contract as being about future intent to perform. Indeed, such an approach would severely undercut the fraudulent inducement cause of action, because lies about one's solvency and abilities to perform are exactly the sorts of lies that would likely induce a counterparty to enter a contract.

256 F. Supp.3d at 506. Here, the alleged misrepresentation attributed to Banks and the other Defendants concern their present ability to perform under the terms of the contract, not their future intention to do so.⁷

To be sure, Banks correctly points out that several of the alleged misrepresentations identified in the Amended Complaint are either recitations of provisions in the Agreement (see, e.g., AC ¶¶ 29, 30), or are forward-looking statements of intention to perform under the Agreement (see, e.g., id. ¶ 61(d), (e), (g)). Those statements cannot form the basis of a fraud claim because they do not allege an extracontractual misrepresentation, and do not concern present facts, respectively. In contrast, the allegation that the Corporate Defendants and Bonsu assured Exceed that they possessed the power and authority to transfer the Recording's revenue rights to Exceed is actionable for fraud.

Because Exceed has satisfied at least one prong of Bridgestone/Firestone, the Court need not address the parties’ arguments concerning whether the damages alleged for fraud are duplicative of that of breach of contract. See Bridgestone/Firestone, 98 F.3d at 20 (listing factors in the disjunctive); Wild Bunch, 256 F. Supp.3d at 507 n.5 (“a fraud plaintiff need only satisfy one of the Bridgestone/Firestone factors”); Taylor Precision Products, Inc. v. Larimer Group, Inc., No. 15-CV-4428, 2018 WL 4278286, at *20 (S.D.N.Y. March 26, 2018) (holding that fraud and breach of contract claims were not duplicative where precontractual misrepresentation of present fact was alleged but damages were seemingly duplicative). Similarly, because the fraud claim is not duplicative of the breach of contract claim, the Court declines to address the parties’ arguments regarding pleading both claims in the alternative.

II. Sufficiency Of The Pleadings

Banks argues that the fraud claim should be dismissed under Rule 12(b)(6) for failure to plead fraud, as well as Rule 9(b) for failure to plead fraud with particularity. He asserts that the Amended Complaint does not adequately plead a material misrepresentation, scienter, or reliance. The Court concludes that Exceed has adequately pled reliance but has not satisfied the heightened pleading requirements of Rule 9(b) because the Amended Complaint fails to plead all elements of a material misrepresentation with particularity. Further, due to the pleading deficiency, the Amended Complaint also fails to establish scienter. The Amended Complaint therefore should be dismissed, but Exceed should be granted an opportunity to amend its pleading to provide the requisite particularity.

A. Material Misrepresentation

As noted above, to satisfy the material misrepresentation element of fraud under Rule 9(b), a plaintiff must “(1) detail the statements (or omissions) that the plaintiff contends are fraudulent, (2) identify the speaker, (3) state where and when the statements (or omissions) were made, and (4) explain why the statements (or omissions) are fraudulent.” Eternity Global Master Fund, 375 F.3d at 187; accord Caputo v. Pfizer, Inc., 267 F.3d 181, 191 (2d Cir. 2001) (allegations of fraud under Rule 9(b) must “specify the time, place, speaker, and content of the alleged misrepresentations”). The Amended Complaint does not sufficiently do so. Indeed, the only allegation directly addressing statements made prior to entry into the Agreement is that in the summer of 2022:

During the course of the parties’ discussions concerning the contemplated transaction, [the Corporate Defendants and Bonsu] assured Exceed that they possessed the power and lawful authority to convey [the revenue] rights to Exceed.

(AC ¶ 16.)

That's it. Everything else alleged in the fact section (prior to the asserted causes of action) that alleges the content and circumstances of misrepresentations comes from the Agreement. The one-sentence allegation of pre-contractual misrepresentation falls woefully short of the specificity required to satisfy Rule 9(b). For instance, what was the actual statement or omission that “assured” Exceed? Were there one or multiple instances in which the alleged assurance was made? If multiple, were the statements (or omissions) identical or different? As between Bonsu and Lee, or some other representatives of the Corporate Defendants, who made the statements? To which representative of Exceed were the statements made? When during the summer were the statements made? Where were the parties when the statements were made?⁸ How were the misrepresentations conveyed – by telephone? Face-to-face meeting? Messaging or other means?

Other than explaining why the purported representation was fraudulent – i.e., the Corporate Defendants and Bonsu did not have exclusive rights to the Recording – Exceed fails to plead with particularity the requisite content and circumstances establishing a fraud claim. That alone requires dismissal. See, e.g., Mills v. Polar Molecular Corp., 12 F.3d 1170, 1175 (2d Cir. 1993) (“Rule 9(b) is not satisfied where the complaint vaguely attributes the alleged fraudulent statements to ‘defendants’ ”); Rodgers-King v. Candy Digital Inc., No. 23-CV-2591, 2024 WL 382092, at *5 (S.D.N.Y. Feb. 1, 2024) (Rule 9(b) not satisfied where amended complaint failed “to specify the location or method of communication of any particular statement”); CBI Capital LLC v. Mullen, No. 19-CV-5219, 2020 WL 4016018, at *8 (S.D.N.Y. July 16, 2020) (misrepresentations that did not “indicate how the[ ] statements were made, such as in person, or by email or phone” did not meet particularity requirement of Rule 9(b)); President Container Group II, LLC v. Systec Corp., 467 F. Supp.3d 158, 165 (S.D.N.Y. 2020) (allegation that misrepresentations took place during “the full [approximately three-month] pre-contract negotiation period” insufficiently specific under Rule 9(b)); Schlenger v. Fidelity Employer Services Co., 785 F. Supp.2d 317, 352 (S.D.N.Y. 2011) (“Plaintiff's failure to name individuals, identify detailed statements, or identify particular dates makes clear that as pleaded this claim lacks the specificity required by Rule 9[(b)]”); Armored Group, LLC v. Homeland Security Strategies, Inc., No. 07-CV-9694, 2009 WL 1110783, at *1 (S.D.N.Y. Apr. 21, 2009) (Rule 9(b) not satisfied where complaint “does not specifically identify the location where the misrepresentations were made,” “does not provide exact dates for the statements,” and “fails to sufficiently identify ‘who’ the speaker is concerning each statement”).

B. Scienter

“Rule 9(b) permits scienter to be averred generally, but ‘[courts] have repeatedly required plaintiffs to plead the factual basis which gives rise to a strong inference of fraudulent intent.’ ” United States ex rel. Tessler v. City of New York, 712 F. App'x 27, 29 (2d Cir. 2017) (quoting O'Brien v. National Property Analysts Partners, 936 F.2d 674, 676 (2d Cir. 1991)).

The Amended Complaint does not allege that Banks himself made any misrepresentations. Instead, Exceed asserts that the Corporate Defendants and Bonsu did so as agents of Banks acting with authority to induce Exceed into entering into the Agreement, and that their alleged fraud should be imputed to Banks. Because the state of mind of the speaker of the alleged misrepresentation is central to the scienter analysis, the Court must determine what statements and state of mind, if any, can properly be imputed to Banks in order to determine whether scienter is adequately pled. Inasmuch as Exceed has not sufficiently pled a material misrepresentation compliant with Rule 9(b) – including who specifically stated what – scienter also has not been adequately pled. See Loreley Financing (Jersey) No. 3 Ltd. v. Wells Fargo Securities, LLC, 797 F.3d 160, 181 (2d Cir. 2015) (“Absent facts plausibly indicating a misrepresentation by [defendant], the complaint necessarily lacks allegations giving rise to a strong inference of scienter on [defendant's] part. ․ Plaintiffs must replead their claim with sufficient particularity to give rise to the requisite inferences of misrepresentation and scienter”); Champions League, Inc. v. Woodard, 224 F. Supp.3d 317, 325 (S.D.N.Y. 2016) (“the facts asserted in Plaintiff's complaint fail to raise a strong inference of scienter because those facts raise no plausible inference of misrepresentation in the first place”) (internal quotation marks, citations, and brackets omitted).

C. Reliance

Although reliance also turns on who made what statements under what circumstances, the Court can address and resolve the issue joined by the parties. Banks argues that Exceed could not have reasonably relied on the alleged misrepresentations of Defendants having power and authority to transfer the Recording's revenue rights because, had Exceed conducted due diligence, it would have discovered that the assurances it allegedly received were untrue. That argument does not stand up to scrutiny.

In assessing whether plaintiff reasonably relied on defendant's representations, courts must “consider the entire context of the transaction, including factors such as its complexity and magnitude, the sophistication of the parties, and the content of any agreements between them.” Emergent Capital Investment Management, LLC v. Stonepath Group, Inc., 343 F.3d 189, 195 (2d Cir. 2003). “As a general matter, dismissals for failure to allege reasonable reliance are heavily disfavored.” Wild Bunch, 256 F. Supp.3d at 507. That is so, according to the Second Circuit, because “the reasonableness of a plaintiff's reliance is a ‘nettlesome’ and ‘fact-intensive’ question, which we, like our Circuit's many district courts, will not lightly dispose of at the motion-to-dismiss stage.” Loreley, 797 F.3d at 186 n.19 (quoting Schlaifer Nance & Co. v. Estate of Warhol, 119 F.3d 91, 98 (2d Cir. 1997)). “Thus, while courts occasionally dismiss fraud claims for failing to allege reliance, that is the exception, not the rule.” Wild Bunch, 256 F. Supp.3d at 507-08 (citation omitted).

No bright-line rule exists as to what level of diligence plaintiffs must conduct in order for their fraud claims not to be dismissed on reliance grounds. JP Morgan Chase Bank v. Winnick, 350 F. Supp.2d 393, 407 (S.D.N.Y. 2004). On the one hand, “where parties have access to information that could expose a misrepresentation, courts will not find their reliance sufficiently justifiable to merit legal protection.” Giannacopoulos v. Credit Suisse, 37 F. Supp.2d 626, 633 (S.D.N.Y. 1999); see also Glidepath Holding B.V. v. Spherion Corp., 590 F. Supp.2d 435, 459 (S.D.N.Y. 2007) (“most cases where courts have granted motions to dismiss because of a failure to adequately plead reasonable reliance have concerned situations where a plaintiff failed to examine readily available information, relied on oral representations of information when it could easily have asked for additional information, or failed to properly investigate a transaction”). But “[d]ecisions holding that reliance on misrepresentations was not justified are generally cases in which plaintiff was placed on guard or practically faced with ․ facts” that suggest fraud may be afoot. See Mallis v. Bankers Trust Co., 615 F.2d 68, 81 (2d Cir. 1980), abrogated in part on other grounds by 115 F.3d 1082 (2d Cir. 1997); see also Schlaifer, 927 F. Supp. at 662 (finding that plaintiff could not show reasonable reliance where agreement itself incorporated documents that suggested that precontractual representations were false and thus plaintiff was “ ‘on guard’ of the potential ․ problems”) (citation omitted).

“[T]he law does not require that a defrauded party go to the ends of the earth to discover the falsity of a statement”; rather, plaintiff must demonstrate that it did not exhibit “patent foolishness.” Banque Franco-Hellenique de Commerce International et Maritime, S.A. v. Christophides, 106 F.3d 22, 26 (2d Cir. 1997). “[A] duty to inquire is [not] necessarily triggered as soon as a plaintiff has the slightest ‘hints’ of any ‘possibility’ of falsehood”; rather, notice of a potential misrepresentation is typically “provided by plaintiff's own direct knowledge of the fraud, by terms of an operative contract, or by circumstances surrounding the parties’ relationship (e.g. litigation) that would normally arouse suspicion.” See JP Morgan, 350 F. Supp.2d at 406-08 (citations omitted).

Exceed claims that it was unaware that the Alamo Agreement existed at the time it entered the Agreement. (See AC ¶ 40.) That is no excuse, Banks argues, because Exceed could have taken advantage of the Agreement's provisions entitling Exceed to “receipt and approval of any documents that affect revenue and evidence to Plaintiff's satisfaction.” (See Banks Mem. at 15 (internal quotation marks and brackets omitted).)

The Court cannot determine as a matter of law that Exceed conducted insufficient diligence to rely on the alleged misrepresentation. There are no facts alleged that suggest that Exceed was on notice of potential misbehavior such that it should have requested to review additional materials to verify the truth, let alone the Alamo Agreement in particular. The Alamo Agreement cannot be said to have been readily available information; nothing before the Court suggests it was provided or even mentioned during the negotiations. Cf. Valassis Communications, Inc. v. Weimer, 304 A.D.2d 448, 448-49, 758 N.Y.S.2d 311, 312 (1st Dep't 2003) (reliance on extracontractual misrepresentations as to financial viability of business not reasonable where plaintiff was provided, but did not verify accuracy of, relevant financial information in advance of executing agreement to purchase business); Abrahami v. UPC Construction Co., 224 A.D.2d 231, 234, 638 N.Y.S.2d 11, 14 (1st Dep't 1996) (reliance on defendant's representations regarding financial solvency not reasonable where defendant had provided plaintiff financial statements showing “reporting of only $54 of cash on hand,” thus putting plaintiffs “on notice of [defendant's] possible precarious financial condition, and the need to conduct an investigation” that plaintiffs chose not to conduct).

Banks argues that “all that Plaintiff had to do was inquire about Alamo or review any third-party agreements in which Mr. Banks is a counterparty.” (Banks Mem. at 17.) That level of diligence exceeds the “minimal diligence or care” required to “negate [Exceed's] own recklessness.” Ward v. TheLadders.com, Inc., 3 F. Supp.3d 151, 166 (S.D.N.Y. 2014) (internal quotation marks and citation omitted). No facts are alleged that put Exceed “on guard” of potential fraud. Therefore, the Court is not persuaded that Exceed had a duty to investigate at a level that Banks claims was necessary – involving requesting documents it did not know existed – in order to reasonably rely on the alleged misrepresentations. See Christophides, 106 F.3d at 26.

Additionally, whether Banks's representatives would have disclosed, if asked directly, the existence of a third-party agreement that would have frustrated the transfer of the Recording's revenue rights – and thus defeated the very purpose of Exceed's entry into the Agreement – is a hypothetical question that involves determinations of credibility and fact. See Swersky v. Dreyer & Traub, 219 A.D.2d 321, 327, 643 N.Y.S.2d 33, 37 (1st Dep't 1996) (declining to dismiss fraud count where plaintiff would have needed to question CEO to determine falsity of representations because it was “unclear from the present record how ․ candid [the CEO] would have been”).

Banks also contends that the existence of the relationship between Banks, a “popular recording artist,” and Alamo was “a matter of public record,” which was easily discoverable through various online sources. (Banks Mem. at 16.) The Court is not in a position on the instant motion to agree with those factual assertions or draw the necessary inferences in favor of Banks. Banks's assertions also miss the point. The representation at issue here concerns who had the power and authority to transfer the Recording's revenue rights. There is no basis on the current record to conclude that the sources to which Banks refers, or any publicly available source, disclosed the nature of Alamo's rights with respect to recordings made by Banks or the inability of Banks (or his agents) to transfer or assign those rights. The existence of a relationship between Banks and Alamo does not necessarily reveal the answer to that inquiry.

Further, the Wikipedia entry for Lil Durk (from June 2022 and January 2025) lists six different “Labels”: Only the Family, Alamo, Geffen, Interscope, Def Jam, and Coke Boys. Putting aside the question of admissibility of that entry on the instant motion,⁹ the scope of Banks's relationships with those entities and the extent to which the agreements Banks might have with those entities coexist, overlap, or conflict with one another with respect to the rights to his recordings remains a mystery, and it is pure speculation what Exceed would have learned through further investigation. The listing of Alamo along with several other “Labels” on a Wikipedia page does not reveal the extent of, or limitations imposed on, the rights regarding the revenues under the Alamo Agreement. As such, it cannot be said that Exceed's level of due diligence or lack thereof by not availing itself of the sources proffered by Banks defeats reasonable reliance.

Banks does not gain any ground by asserting that Exceed is a sophisticated party. While the bar for reliance is higher for sophisticated plaintiffs, see Crigger v. Fahnestock & Co., 443 F.3d 230, 235 (2d Cir. 2006), there would be no basis to conclude as a matter of law on the instant motion that Exceed's reliance was not “reasonable.” Moreover, it is not self-evident from Exceed's allegations that it falls under the “sophisticated” moniker. “Whether a party is sophisticated for the purpose of [the reliance] analysis is determined by looking at representations that it had knowledge and experience” in the industry pertaining to the transaction at hand. Brock Capital Group LLC v. Siddiqui, No. 21-CV-2070, 2022 WL 2047589, at *5 (S.D.N.Y. June 7, 2022) (internal quotation marks, brackets, and elision omitted) (quoting Emergent Capital, 343 F.3d at 196). Exceed describes itself as a “financial technology firm” that operates a “proprietary investment platform” and is involved with “investment opportunities in assets related to entertainers, influencers, creators, athletes and other talent.” (AC ¶ 14.) According to Exceed's allegations, it only began undertaking offerings like the one anticipated in the Agreement in the middle of 2022 (id. ¶ 15), which is approximately the same time that the negotiations for the Agreement took place. There is no allegation that Exceed had conducted a similar offering before, or that Exceed had experience working with recording artists in particular. The Court cannot conclude from Exceed's allegations that it was so well versed in the particular industry involved in the Offering that it should be considered sophisticated as a matter of law. Nor, on the instant motion, can the Court draw an inference about Exceed's sophistication in favor of Banks.

Additionally, Banks points to the Agreement's merger clause, which purported to make the Agreement “supersede[ ] all previous communications, representations, understandings, and agreements ․ with respect to the subject matter of this Agreement,” (Agr. ¶ 9) to argue that the alleged misrepresentations are not actionable. (See Reply at 3.) However, the merger clause identified by Banks is a general merger clause, which does not preclude Exceed from relying on pre-Agreement representations because the clause does not disclaim reliance on any particular prior representations. See, e.g., Karsch v. Blink Health Ltd., 291 F. Supp.3d 503, 508 (S.D.N.Y. 2018) (general merger clause stating that the contract “shall supersede all prior agreements and understandings” not sufficiently specific to overcome reasonable reliance); Century Pacific, Inc. v. Hilton Hotels Corp., 528 F. Supp.2d 206, 228 (S.D.N.Y. 2007) (holding that merger clause preempts fraud action only when it “expressly references a specific subject of prior representations”).

In sum, Exceed has met its pleading burden with respect to reliance. See Wild Bunch, 256 F. Supp.3d at 508 (reliance sufficiently pled where defendant falsely represented it had present ability to invest $3 million without further contingencies or approvals to induce plaintiff into entering agreement).

III. Leave To Amend

While defending the sufficiency of the Amended Complaint, Exceed requests that, in the event the Court finds the allegations insufficient, Exceed “be afforded the opportunity to further expand on those allegations through discovery response or an amendment to its pleading.” (Opp. at 19 n.12.) The Court agrees with Banks that granting discovery at this juncture would be premature. See Diaz v. New York Paving Inc., 553 F. Supp.3d 11, 22 (S.D.N.Y. 2021) (“The purpose of discovery is to find out additional facts about a well-pleaded claim, not to find out whether such a claim exists”) (internal quotation marks and citation omitted). However, Exceed should be granted leave to replead. See Pasternack v. Shrader, 863 F.3d 162, 175 (2d Cir. 2017) (“Complaints dismissed under Rule 9(b) are almost always dismissed with leave to amend”) (internal quotation marks and citations omitted); ATSI Communications, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 108 (2d Cir. 2007) (“District courts typically grant plaintiffs at least one opportunity to plead fraud with greater specificity when they dismiss under Rule 9(b)”).

Banks argues in his reply papers that leave should be denied because Exceed was notified of the deficiencies in the Amended Complaint, and thus had an opportunity to amend its pleadings, following a meet-and-confer session between the parties, a pre-motion conference letter, and the briefing for the present motion. (Reply at 7-8.) Indeed, “[t]hat Plaintiff was provided notice of his pleading deficiencies and the opportunity to cure them is sufficient ground to deny leave to amend.” Payne v. Malemathew, No. 09-CV-1634, 2011 WL 3043920, at *5 (S.D.N.Y. July 22, 2011) (citing Ruotolo v. City of New York, 514 F.3d 184, 191 (2d Cir. 2008)).

However, Banks has not demonstrated how those three events constitute notice of the deficiencies that the Court has identified above. For one, Banks does not elaborate on what occurred at the meet-and-confer session that should have put Exceed on notice. Further, the pre-motion letter submitted by counsel for Banks lacks any reference to alleged pleading deficiencies pertaining to a material misrepresentation. The letter argues only three grounds for dismissal, which are essentially condensed versions of the arguments put forth in instant motion: duplicativeness, scienter, and reliance.¹⁰ (See Dkt. 24.) That Banks raised the issue in its briefing for the present motion but Exceed opposed the motion instead of amending its pleading also does not warrant denying leave to amend. See Loreley, 797 F.3d at 190 (“Without the benefit of a ruling, many a plaintiff will not see the necessity of amendment or be in a position to weigh the practicality and possible means of curing specific deficiencies”).

Nor, having rejected Banks's duplicativeness argument, can the Court conclude that any amendment would be futile. See Milanese v. Rust-Oleum Corp., 244 F.3d 104, 110 (2d Cir. 2001) (“Leave to amend will be denied as futile only if the proposed new claim cannot withstand a 12(b)(6) motion to dismiss for failure to state a claim, i.e., if it appears beyond doubt that the plaintiff can plead no set of facts that would entitle him to relief”).

Banks also argues that leave to amend should be denied because Exceed has not apprised the Court of how it would cure the deficiencies in the Amended Complaint, offering only to “expand on [its] allegations” regarding the “pre-Agreement misrepresentations.” (See Opp. at 19 n.12.) Although leave to amend may be denied “where the request gives no clue as to ‘how the complaint's defects would be cured,’ ” Loreley, 797 F.3d at 190 (quoting Porat v. Lincoln Towers Community Association, 464 F.3d 274, 275 (2d Cir. 2006)), leave to amend still is appropriate here. See Schiro v. Cemex, S.A.B. de C.V., 396 F. Supp.3d 283, 308-09 (S.D.N.Y. 2019) (granting leave to amend despite court's “skeptic[ism] that the flaws in the Amended Complaint can be remedied” because “the Second Circuit has admonished district courts that ‘complaints dismissed under Rule 9(b) are almost always dismissed with leave to amend’ ” and “[p]laintiffs ha[d] not yet had an opportunity to amend in response to a Court order pointing out the deficiencies in their pleading”) (citations and brackets omitted). Exceed's representatives, presumably, were present during the alleged discussions and negotiations leading up to the execution of the Agreement. Notwithstanding the dearth of clues left by Exceed, because it seems to the Court “possible that [Exceed] can plead additional facts to remedy the deficiencies identified in this opinion,” Exceed is granted leave to amend. See Pehlivanian v. China Gerui Advanced Materials Group, Ltd., 153 F. Supp.3d 628, 657 (S.D.N.Y. 2015) (citing Loreley, 797 F.3d at 189-90).

CONCLUSION

For the foregoing reasons, I recommend that Banks's motion to dismiss be GRANTED IN PART and DENIED IN PART. The motion should be denied to the extent it seeks dismissal of Exceed's fraud claim as duplicative of its contract claim. The motion should be GRANTED for failure to plead fraud with particularity and scienter, but Exceed should be given leave to amend.

PROCEDURES FOR FILING OBJECTIONS

Pursuant to 28 U.S.C. § 636(b)(1) and Rules 72, 6(a), and 6(d) of the Federal Rules of Civil Procedure, the parties shall have fourteen (14) days to file written objections to this Report and Recommendation. Any party shall have fourteen (14) days to file a written response to the other party's objections. Any such objections and responses shall be filed with the Clerk of the Court, with courtesy copies delivered to the Chambers of the Honorable Gregory H. Woods, United States Courthouse, 500 Pearl Street, New York, New York 10007, and to the Chambers of the undersigned, at United States Courthouse, 500 Pearl Street, New York, New York 10007. Any request for an extension of time for filing objections must be addressed to Judge Woods. Failure to file timely objections will result in a waiver of the right to object and will preclude appellate review.

Copies transmitted this date to all counsel of record.

FOOTNOTES

2.   The Amended Complaint describes OTFEI as Banks's “furnishing company” that conducts business on Banks's behalf related to his activities as a recording artist. (AC ¶ 21.) OTF is described as an unincorporated business entity that serves as Banks's record label. (Id. ¶ 22.)

3.   The Agreement is governed by New York law. (Agr. Ex. A ¶ 13.)

4.   It is an open question in this Circuit whether the particularity requirement of Rule 9(b) applies to the reasonable reliance element for common-law fraud claims. See Olson v. Major League Baseball, 29 F.4th 59, 76 n.9 (2d Cir. 2022).

5.   Whether the alleged misrepresentation has been adequately pled with particularity is addressed below.

6.   An argument might be made that notwithstanding the “Inducement” being titled as such in its entirety, it was only Banks's agreement to be bound by the Agreement that was a “material inducement” since that language follows the previous statement in which Banks confirmed the power and authority of his co-Defendants to transfer the rights to the Recording. The Court cannot, however, draw that inference on this motion as it must instead draw reasonable inferences in Exceed's favor, and it is reasonable to conclude from the Inducement that Banks's confirmation of power and authority was also meant and understood to induce Exceed to enter into the Agreement.

7.   Although not cited by Banks, several cases in this District have held that a fraud claim cannot be predicated on a misrepresentation regarding defendant's present ability to perform under the contract. See, e.g., Dupont Flooring Systems, Inc. v. Discovery Zone, Inc., No. 98-CV-5101, 2004 WL 1574629, at *12 (S.D.N.Y. July 14, 2004) (defendant's misrepresentation that it “had a ‘national presence’ and had experience in installing flooring” was “simply part and parcel of the intention to perform”) (internal quotation marks and citation omitted); Yoomi Babytech, Inc. v. Anvyl, Inc., No. 20-CV-7933, 2021 WL 4332258, at *11 (S.D.N.Y. Sept. 22, 2021) (misrepresentation that defendants “were competent to perform the contract and had successfully completed projects of similar scope before” amounted to “inten[tion] or ․ capab[ility] of performing under a contract”). But because those cases were not guided by the inquiry of whether the misrepresentations were statements of present fact or promissory statements of future intent, they “cannot be reconciled with Merrill Lynch.” See Wild Bunch, 256 F. Supp.3d at 506.Judge Woods's decisions dismissing fraud claims as duplicative of breach of contract, on the other hand, are harmonious with Merrill Lynch and factually distinguishable from the case at hand. See McKenzie-Morris v. V.P. Records Retail Outlet, Inc., No. 22-CV-1138, 2022 WL 18027555, at *9 (S.D.N.Y. Dec. 30, 2022) (plaintiff alleged that defendants’ “ ‘wanton disregard of their obligations’ under the applicable contracts ‘emanate[d] from their ․ undisclosed intention of not performing them’ ”); State Street Global Advisors Trust Co. v. Visbal, 431 F. Supp.3d 322, 352-53, and 462 F. Supp.3d 435, 441-42 (S.D.N.Y. 2020) (misrepresentation concerned plaintiff's future promise, later memorialized in the agreement, to attribute statue to defendant); PetEdge, Inc. v. Garg, 234 F. Supp.3d 477, 492 (S.D.N.Y. 2017) (alleged misrepresentation “constitute[d] nothing more than a promise to perform a list of tasks under the contract”).

8.   Exceed responds to the “where” deficiency merely by citing the allegation of the Amended Complaint that this Court has personal jurisdiction, inter alia, because “defendants have transacted business in New York ․ including in connection with the Agreement.” (AC ¶ 13.) The Court cannot infer that Defendants’ transacting business in New York in connection with the Agreement amounts to a specific allegation that a misrepresentation was made there. Even if the Court could do so, simply identifying the State in which the alleged misrepresentation was made is hardly sufficient. See Goudis v. American Currency Trading Corp., 233 F. Supp.2d 330, 334 (D. Conn. 2002) (allegation that defendants made misrepresentations “within the State of Connecticut” was “not ‘particular’ under any reasonable definition of that term”).

9.   “The Court may take judicial notice of a fact that can be ‘readily determined from sources whose accuracy cannot reasonably be questioned.’ ․ Wikipedia is a far cry from a source ‘whose accuracy cannot be reasonably questioned.’ ” Johnson v. Giles, No. 23-CV-2444, 2024 WL 4240446, at *11 n.4 (S.D.N.Y. Sept. 16, 2024) (quoting Island Software & Computer Service, Inc. v. Microsoft Corp., 413 F.3d 257, 261 (2d Cir. 2005)). At the same time, the Court may consider such material, not for truth of the matter stated therein, but for the fact that the information, whether true or not, was available. See Finn v. Barney, 471 F. App'x 30, 32 (2d Cir. 2012).

10.   Nor does the record reveal what grounds Defendants raised for a motion to dismiss that led to Exceed's filing the Amended Complaint by stipulation. (See Dkt. 11.)

ROBERT W. LEHRBURGER UNITED STATES MAGISTRATE JUDGE