638 N.Y.S.2d 873
Elizabeth BROWN, Plaintiff,
v.
James E. HAMBRIC, Defendant.
City Court of Yonkers.
Nov. 27, 1995.
THOMAS A. DICKERSON, Justice.
The plaintiff, Elizabeth Brown ["Brown"]
wanted to be a travel agent.
Travel agents sell air transportation,
cruises, hotel accommodations, tours and
much, much more. Travel agents are
professionals and fiduciaries and are
expected to be knowledgeable of the
travel services they sell [see e.g.,
Pellegrini v. Landmark Travel Group, 165
Misc.2d 589, 592, 628 N.Y.S.2d 1003
(1995) ("Travel agents are best viewed as
information specialists upon whom
consumers rely for the provision of
accurate information and confirmation of
travel arrangements") ].
To become a professional travel agent,
however, requires years of training and
participation in advanced educational
programs such as those provided by the
Institute of Certified Travel Agents
["ICTA"] and the American Society of
Travel Agents ["ASTA"], accreditation by
supplier organizations such as the Airlines
Reporting Corporation ["ARC"] and the
Cruise Lines International Association
["CLIA"], compliance with state and local
licensing and registration requirements
and obtaining bonding and comprehensive
insurance. [FN1]
FN1. For a discussion of travel
agents; Friedheim, Travel Agents,
Travel Agent Magazine Books,
New York, 1992.
[1] Brown asked the defendant, James E.
Hambric ["Hambric"], for his advise on
how to become a professional travel
agent. Hambric was an Independent
Travel Consultant ["ITC"] working for NU-Concepts In Travel ["NU-Concepts"] with
headquarters in Santa Fe Springs,
California. Hambric was an agent for NU-Concepts and authorized to sponsor and
recruit new ITCs. Hambric convinced
Brown that the NU-Concepts "fast start
plan" would provide her with the kind of
training and education necessary to
become a professional travel agent.
Hambric gave Brown the NU-Concepts In
Travel "Passport To Success" Distributor
Manual ["the Manual"] which described
the NU-Concepts opportunity.... The
Manual promised that NU-Concepts would
provide support, education and training....
*875 In addition to selling travel services
(NU-Concepts Independent Travel
Agents) are strongly encouraged to sell
distributorships ["Or you can make a good
deal more money by developing your
contacts into Independent Distributors of
the NU-Concepts in Travel Independent
Distributor Network ... you teach your
contacts--a firm foundation of 5-7 people
... to follow the simple steps you have
followed ... Then, with your help, they
each teach 5-7 contacts who teach their
contacts.... (and so on and so on) ..."
Relying upon the Manual and Hambric,
Brown purchased the NU-Concepts travel
agent package for $537.75....
NU-Concepts failed and refused to
provide Brown with the support, education
and training promised and paid for.
Neither NU-Concepts nor Hambric
provided the promised supervisory and
training support. In addition, Hambric as
Brown's sponsor, refused to attend
scheduled training sessions, refused to
communicate with NU-Concepts
personnel on Brown's behalf and did not
stay current with NU- Concepts
information ...
As a consequence Brown was forced to
purchase her own educational programs
at a cost of $490.08 ...
DISCUSSION
Based on the foregoing the Court finds
that the plaintiff has asserted the following
cognizable causes of action against the
defendant: (1) breach of contract; (2)
violation of New York State General
Business Law Section 359- fff [pyramid
schemes prohibited]; (3) rescission based
upon (a) want of consideration, (b) failure
of consideration, Copr. unconscionability
and (d) misrepresentations; and (4)
violation of New York State General
Business Law Section 349 [deceptive and
unfair business practices].
Pyramid Schemes
[2][3] There is nothing "new" about NU-Concepts. It is an old scheme [FN2],
simply, repackaged for a new audience of
gullible consumers mesmerized by the
glamour of the travel industry and hungry
for free or reduced cost travel services.
Stripped of its clever disguise as a
recruiter and educator of outside travel
agents, NU-Concepts is nothing more
than a pyramid scheme [see e.g., Nguyen
v. FundAmerica, Inc., 1990 WL 165257
(N.D.Cal.1990), Fed.Sec.L.Rep. 95,498
("(a pyramid scheme) is one in which a
participant pays money to the company or
its representatives and in return receives
(1) the right to sell products, and (2) the
right to earn rewards for recruiting other
participants into the scheme ... "); SEC v.
Steed Industries, Inc., 1974 WL 472
(N.D.Ill.1974), Fed.Sec.L.Rep. 94,917 ("...
a pyramid promotion or endless chain
scheme ... is the recruitment of investors
... who in form will be distributors of ...
products but who in fact will devote their
efforts almost entirely (to locating) ... other
investors ... to recruit ..."); SEC v. Glenn
W. Turner, 474 F.2d 476, 482 (9th
Cir.1973) ("Dare To Be Great ... scheme
is a gigantic and successful fraud "); In
Re Omnitrition, 1993 WL 271466
(N.D.Cal.1993), Fed.Sec.L.Rep. 97,655 ("
... Omnitrition sells distributorships in an
endless chain of recruitment. Through
slick advertising and personal sales
solicitations, Omnitrition misrepresents the
likelihood of achieving financial security
..."); Kugler v. Koscot Interplanetary, Inc.,
120 N.J.Super. 216, 293 A.2d 682 (1972)
(cosmetics fraud); State v. Phase II
Systems, Inc., 109 Misc.2d 598, 440
N.Y.S.2d 454, 455 (1981) (" ... members
... can make money just by bringing into
the organization new people willing to
become a salesperson ..."); Note, New
York Creates A Private Right Of Action To
Combat Consumer Fraud: Caveat
Venditor, 48 Brooklyn L.R. 509, 558-559,
f.n. 209 ("Pyramid solicitations are sham
money making schemes whereby
individuals are induced to participate in a
plan for making money by means of
recruiting others, with the right to
encourage or solicit new memberships in
the pyramid passed on as an inducement
for others to join.")
FN2. See Kugler v. Koscot
Interplanetary, Inc., 120 N.J.Super.
216, 233, 293 A.2d 682 (1972)
(cosmetics pyramid scheme).
"Fraud is infinite in variety. The
fertility of man's invention in
devising new schemes of fraud is
so great, that the courts have
always declined to define it ... All
surprise, trick, cunning,
dissembling and other unfair way
that is used to cheat anyone is
considered as fraud."
Breach Of Contract
[4] Brown wanted to be a professional
travel agent. NU-Concepts and Hambric
*876 knew this and convinced Brown to
become an ITC as a means of fulfilling her
goal. Amongst the many promises made
by NU-Concepts which were relied upon
by Brown was the delivery of "Adequate
training (which included) education
regarding NU-Concepts in Travel Rules
and Regulations, Compensation Plan,
product information, sound business
strategies and ethical behavior." In
addition, Hambric, Brown's ITC sponsor,
was to perform as a "bonafide sales
supervisor and/or sales trainer in the sale
or delivery of products to the ultimate
consumer". NU-Concepts and Hambric
failed and refused to provide the support,
training and education contracted for.
[5] The law in New York State recognizes
a contractual relationship between student
and college, university or trade school
[see e.g., Andre v. Pace University, 161
Misc.2d 613, 620, 618 N.Y.S.2d 975
(1994) (breach of contract to provide
computer programming course); Paladino
v. Adelphi University, 89 A.D.2d 85, 454
N.Y.S.2d 868, 873 (1982) (breach of
contract when school provides no
educational services or fails to provide
specified services); James v. SCS
Business & Technical Institute, N.Y.L.J.,
January 15, 1993, p. 28, col. 4
(N.Y.Civ.1992) (failure to provide
promised educational services or training);
Joyner v. Albert Merrill School, 97 Misc.2d
568, 411 N.Y.S.2d 988, 992 (1978)
(failure to provide promised employment);
Village Community School v. Adler, 124
Misc.2d 817, 478 N.Y.S.2d 546, 548
(1984) (failure to provide tutorial and
guidance services) ].
The courts in New York State are
required to be vigilant and carefully
examine the reality of educational
contracts [see e.g., Andre, supra, at 161
Misc.2d 619, 618 N.Y.S.2d 975; Joyner,
supra, at 97 Misc.2d 574, 411 N.Y.S.2d
988 ("(courts must carefully examine)
commercial consumer transactions to
guard against predatory practices
calculated to take advantage of the
unwary consumer"); Albert Merrill School
v. Godoy, 78 Misc.2d 647, 648, 357
N.Y.S.2d 378 (action against pro se
consumer requires "further probing by the
court "); Educational Beneficial v.
Reynolds, 67 Misc.2d 739, 745, 324
N.Y.S.2d 813 (N.Y.Civ.1971) (concern
that "consumers who are victims of gross
inequality of bargaining power shall be
protected against overreaching") ].
NU-Concepts and Hambric breached
their contract with plaintiff in such a
manner as to strike at the very heart of
the bargain contracted. The defendant is
liable for all appropriate damages flowing
from its breach of contract including, but
not limited to, the cost of obtaining
alternative educational services.
Violation Of G.B.L Section 359-fff
[6] New York State General Business
Law Section 359-fff ["GBL Section 359-
fff"] prohibits "chain distributor schemes"
which are defined as
"... a sales device whereby a person,
upon condition that he make an
investment, is granted a ... right to ...
recruit for profit ... one or more additional
persons who are also granted such ...
right upon condition of making an
investment and may further perpetuate
the chain of persons who are granted
such ... right ..." [McKinneys General
Business Law, Art. 23-A, Section 359- fff
].
Notwithstanding passing reference to the
availability of commissions on the sale of
travel services through Jetaway Travel
[The Manual at p. 4], the primary
compensation for ITCs is from selling
distributorships ["you can make a good
deal more money ... you teach your
contacts ... 5-7 people ... they each teach
5-7 contacts who teach their contacts ..."
(The Manual at p. 19) which must be
divided and passed up the line to a chain
of sponsoring ITCs [The Manual at pp. 20-23]. The promised training and education
is never delivered nor is it intended to be
since NU-Concepts is a pyramid scheme
and not a real recruiter and trainer of
outside travel agents.
As such NU-Concepts violated GBL
Section 359-fff [see e.g. Phase II
Systems, Inc., supra, at 109 Misc.2d 598,
440 N.Y.S.2d 456 ("There is sufficient
indication herein that defendants are
participating in a scheme where the
emphasis is not on the sale of a product,
but on recruiting new organizational rows
to boost existing members."); Compare:
USA v. Bestline Products Corp., 412
F.Supp. 754 (N.D.Cal.1976) (pyramid
scheme; commissions paid to upline
distributors who perform no supervisory
functions violates order); Edmisten v.
Challenge, Inc., 54 N.C.App. 513, 284
S.E.2d 333 (1981) *877 (North Carolina
pyramid scheme statute); Love v.
Durastill of Richmond, 242 Va. 186, 408
S.E.2d 892 (1991) (Virginia pyramid
scheme statute); State v. Ferro, 1988 WL
39996 (Del.Super.1988) (Delaware
pyramid scheme statute) ] and is liable to
Brown for all damages permitted
thereunder.
Demand For Rescission
[7] The failure of NU-Concepts and
Hambric to deliver the promised training
and educational services was so complete
that rescission of the distributorship
agreement is justified. Whether viewed
as a want of consideration or a failure of
consideration, it is clear that Brown
received little of value from NU- Concepts
and Hambric [22 N.Y.Jur.2d, Contracts,
Sections 328, 439, 464].
Rescission may also be granted upon a
showing of unconscionability [see e.g.,
James, supra; Albert Merrill, supra, at 78
Misc.2d 647, 357 N.Y.S.2d 378;
Educational Beneficial, supra, at 67
Misc.2d 739, 324 N.Y.S.2d 813; State v.
ITM, 52 Misc.2d 39, 275 N.Y.S.2d 303,
311 (1966) (endless chain transaction
based on unconscionable contracts) ]
and/or misrepresentations which are
deceptive or fraudulent in nature [see
e.g., Andre, supra, at 161 Misc.2d 620-621, 618 N.Y.S.2d 975; James, supra;
Albert Merrill, supra; Joyner, supra, at 97
Misc.2d 568, 411 N.Y.S.2d 988;
Paladino, supra, at 89 A.D.2d 85, 454
N.Y.S.2d 868].
In this case the failure of NU-Concepts
and Hambric to deliver the promised
support, training and education amounts
to unconscionability and gross
misrepresentations [see e.g., Hertz Corp.
v. Attorney General, 136 Misc.2d 420, 518
N.Y.S.2d 704, 707 (1987) ("The concept
has been employed primarily in the area
of consumer protection, in an attempt to
deal with the 'never ending stream of
consumer gypsters and fraudulent
operators ..'.") ].
Violation of GBL Section 349
[8][9] New York State General Business
Law Section 349 prohibits deceptive
business practices and applies to pyramid
schemes [see e.g., Teller v. Bill Hayes,
Ltd, 213 A.D.2d 141, 630 N.Y.S.2d 769,
773 (1995) (GBL Section 349 applies to
pyramid schemes); Goldberg v.
Manhattan Ford Lincoln-Mercury, Inc.,
129 Misc.2d 123, 492 N.Y.S.2d 318, 321
(1985); Phase II Systems, supra; ITM,
supra; Kugler, supra (New Jersey
Consumer Fraud Act applies to cosmetics
pyramid scheme) ] and to educational
contracts [see e.g., Andre, supra, at 161
Misc.2d 623-624, 618 N.Y.S.2d 975;
James, supra; Matter of State of New
York v. Interstate Tractor Trailer Training,
66 Misc.2d 678, 321 N.Y.S.2d 147, 151-152 (1971) ("The representations ... have
no basis in fact and would clearly tend to
deceive or mislead those persons seeking
to better themselves in a new field of
employment ") ].
[10] GBL Section 349 is a broad,
remedial statute [see e.g., Oswego
Laborer's Local 214 Pension Fund v.
Marine Midland Bank, N.A., 85 N.Y.2d 20,
623 N.Y.S.2d 529, 647 N.E.2d 741
(1995); see also Note: Caveat Venditor,
supra] directed towards giving consumers
a powerful remedy. The elements of a
violation of GBL Section 349 are (1) proof
that the practice was deceptive or
misleading in a material respect and (2)
proof that plaintiff was injured [see
Givens, Practice Commentaries,
McKinney's General Business Law Article
22-A, p. 565; McDonald v. North Shore
Yacht Sales, Inc., 134 Misc.2d 910, 513
N.Y.S.2d 590 (1987); Geismar v.
Abraham & Strauss, 109 Misc.2d 495,
439 N.Y.S.2d 1005 (1981) ]. There is no
requirement under GBL Section 349 that
plaintiff prove that defendant's practices
or acts were intentional, fraudulent or
even reckless. Nor does plaintiff have to
prove reliance upon defendant's deceptive
practices.
[11] Clearly, the many promises made by
NU-Concepts and Hambric [e.g., that NU-Concepts creates tremendous
opportunities for persons interested in
becoming travel agents, that NU-Concepts will provide the training and
education necessary to become a
professional travel agent, that NU-Concepts will provide supervisors and
trainers] were false, misleading and
deceptive. Brown relied upon these
misrepresentations, paid NU-Concepts
and Hambric $537.75 and was forced to
pay an additional $490.08 for educational
services which were not delivered. *878
Hambric has violated GBL Section 349
and is liable to Brown for all damages
permitted thereunder.
DAMAGES
The plaintiff is awarded the following
damages;
First, damages will include $490.08
representing the costs of obtaining the
promised training and educational
services which Hambric refused to deliver;
Second, the Court finds that Hambric has
violated GBL Sections 349 and 359- fff.
Pursuant to GBL Section 349(h) the Court
finds that Hambric has wilfully violated
GBL Section 349. Although the Court
would like to treble plaintiff's actual
damages of $490.08, the maximum
increase permissible [see Hart v. Moore,
155 Misc.2d 203, 587 N.Y.S.2d 477, 480
(1992) ] is $509.92 raising the plaintiff's
recoverable damages to $1,000.
[Portions of opinion omitted for purposes
of publication.]
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