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Kevin Schlosser Authors, "EDNY Dismisses Fraud Claim That is Duplicative of Failed Contract Claim"

Sep 30, 2019Litigation & Dispute Resolution
Courts frequently dismiss claims attempting to allege fraud because they are nothing more than an ineffective attempt to dress up a breach of contract as a fraud. Cases of this nature can be found on this site using the topics index under “Contract Breach, Not Fraud.” On the same day just last week, for example, the New York Appellate Division, First Department, which produces the vast bulk of New York’s decisions on fraud, issued two crisp decisions swiftly rejecting fraud claims because they were nothing more than breach of contract claims -- Ahsanuddin v Addo, 2019 NY Slip Op 06864 (1st Dep’t Decided September 26, 2019)(“The claims for misrepresentation and fraud are dismissed as duplicative of the breach of contract claim (see Cronos Group Ltd. v XComIP, LLC, 156 AD3d 54, 62-63 [1st Dept 2017]), as is the claim for breach of the implied covenant of good faith and fair dealing (see Berkeley Research Group, LLC v FTI Consulting, Inc., 157 AD3d 486, 489 [1st Dept 2018]; Mill Fin., LLC v Gillett, 122 AD3d 98, 104 [1st Dept 2014]).”); Remora Capital S.A. v Dukan, 2019 NY Slip Op 06871 (1st Dep’t Decided September 26, 2019)(“the fraud claims must be dismissed as duplicative of the breach of contract claims because they rest on allegations that the family defendants did not intend to meet their contractual obligations (see e.g. ID Beauty S.A.S. v Coty Inc. Headquarters, 164 AD3d 1186 [1st Dept 2018]; Cronos Group Ltd. v XComIP, LLC, 156 AD3d 54, 62-63 [1st Dept 2017]).”). Occasionally, however, fraud claims do survive even though they intersect with contract claims. In my last post, I discussed a recent decision of the Commercial Division in Suffolk County (Hudson, J.) in which the Court rendered a decision after a bench trial sustaining both the breach of contract claims and fraud claims - Dulcette Tech. LLC v MTC Indus., Inc., 2019 NY Slip Op 51384(U) (Sup. Ct. Suffolk Co. Decided August 27, 2019. In a recent decision of the United States District Court for the Eastern District of New York (Hurley, J.), the fraud claim was dismissed at the pleadings stage because it was deemed to be duplicative of the failed breach of contract claim - K&G Electric Motor & Pump Corporation D/B/A Kg Power Systems v. Ingersoll-Rand Company, 18-Cv-2308 (DRH)(SIL) (EDNY Aug. 27, 2019). Federal courts prefer to cite federal decisions on the substance of a state law claim, even though they must apply state law to diversity claims, so it is always useful to have the standards and principles recited in a number of federal cases. Also, there is a Federal Rule of Civil Procedure for pleading fraud – FRCP 9(b)(“In alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake”) -- so cases interpreting that rule are essential in federal court. The recent decision in K&G is therefore a handy source for the applicable New York law on fraud used in federal court. Facts of K&G Plaintiff was a product distributor of defendants’ products. The relationship between the two was reduced to a written contract. Plaintiff alleged that defendant breached the distribution contract in various ways, which the Court observed to be internally inconsistent and conflicting. Among the breaches alleged was that the defendant falsely accused the plaintiff of submitting fraudulent invoices to show its sales figures (upon which discounts under the contract were based), wrongfully demanding repayment of such amounts, and prematurely terminating the contract in violation of the contract term. In a second amended complaint, plaintiff attempted to allege claims for breach of contract, promissory estoppel, tortious interference with prospective economic advantage and fraud. The District Court dismissed all of these claims. The Court provided a helpful description of the applicable law of each of the causes of action alleged. Dismissal of Fraud Claims On the elements of fraud, the Court noted:

Under New York law, fraud requires proof of “(1) a material misrepresentation or omission of fact, (2) knowledge of that fact’s falsity, (3) an intent to induce reliance, (4) justifiable reliance by the Plaintiff, and (5) damages.” Loreley Fin. (Jersey) No. 3 Ltd. v. Wells Fargo Secs., LLC, 797 F.3d 160, 170 (2d Cir. 2015).

On the standards under FRCP 9(b), the Court explained:

Federal Rule of Civil Procedure 9(b) requires a plaintiff making a fraud claim to state the circumstances constituting the fraud with particularity. Eternity Glob. Master Fund Ltd. v. Morgan Guaranty Tr. Co. of New York, 375 F.3d 168, 187 (2d Cir. 2004). To plead fraud with sufficient particularity, a plaintiff must “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.” Id.

In dismissing the fraud claim, the Court ruled:

Plaintiff argues that Defendant committed fraud when Mr. Highfill [defendant’ director of distribution] knowingly and falsely accused Plaintiff of taking discounts to which it was not entitled, and then threatening to terminate the Agreement if the Plaintiff did not repay the value of those discounts. (SAC ¶ 48.) It also contends that Defendant’s promise to allow Plaintiff to remain a distributor if it paid was fraudulent, for the Defendant truly intended to terminate the Agreement after repayment. (Id. ¶49-50, 52-53.)

Plaintiff’s fraud claims fail on a number of fronts.

First, with regards the fraudulent nature of Mr. Highfill’s representation that Plaintiff took improper discounts no facts are alleged to support that that the discounts were properly taken; the SAC contains only a conclusory allegation. Second, the claim that Defendant intended to terminate the Agreement despite its promise is duplicative of the breach of contract claim. To bring parallel fraud and breach of contract claims, a plaintiff must (1) demonstrate a legal duty separate from the duty under the contract; (2) identify a fraudulent misrepresentation that is collateral or extraneous to the contract or seek special damages that are not recoverable as contract damages. See Merrill Lynch & Co. v. Allegheny Energy, Inc., 500 F.3d 171, 183 (2d Cir. 2007). The SAC contains no allegations regarding these exceptions. In fact, its fraud claim is based on the same allegation as its breach of contract claim, i.e. that [defendant] promised not to terminate the agreement for at least six months to provide Plaintiff an opportunity to meet its sales obligations. Further, no special damages are claimed as Plaintiff seeks as damages on its fraud claim the same amount $282,391.00 that it paid back and seeks for its breach of contract claim.

Commentary Courts are often critical of pleadings that do not help themselves in delineating the factual basis for the elements of a clam. Many complaints are botched up from the start because proper attention is not given to the elements of the claim in presenting and crafting the factual background. The K&G case is a representative example. The Court expressed little patience for the internal inconsistencies in the pleading itself as well as the content of the exhibits plaintiff attempted to rely upon. The fraud claim had no chance of surviving under these circumstances and was summarily dismissed at the pleadings stage, along with all of the other causes of action attempted to be alleged. Click here for Kevin Schlosser's Fraud Blog.