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A New Year, Same Result: Fraud Claim Dismissed as Duplicative of Contract Claim

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  • Posted on: Jan 6 2021

A “recurring question” courts in New York grapple with is whether the facts alleged in a complaint give rise to sustainable claims for both breach of contract and fraudulent inducement. Cronos Grp. v. XComIP, LLC, 156 A.D.3d 54, 56 (1st Dept. 2017). Readers of this Blog know that a fraud claim, which “ar[ises] from the same facts [as an accompanying contract claim], s[eeks] identical damages and d[oes] not allege a breach of any duty collateral to or independent of the parties’ agreements[,] is subject to dismissal as redundant of the contract claim.” Id. at 63 (quoting Havell Capital Enhanced Mun. Income Fund, L.P. v Citibank, N.A., 84 A.D.3d 588, 589 (1st Dept. 2011) (internal quotation marks omitted). See also HSH Nordbank AG v. UBS AG, 95 A.D.3d 185, 206 (1st Dept. 2012). As the First Department noted in Cronos Group, “[t]here is no shortage of recent decisions by this Court holding to similar effect.” 156 A.D.3d at 63 & n.8 (citing cases).

Sometimes, a plaintiff alleges a duty independent of the contract but, nevertheless, has his/her complaint dismissed because the damages sought are the same as those sought by the contract claim. The reason has to do with the purpose of the damages sought. MBIA Ins. Corp. v. Credit Suisse Sec. (USA) LLC, 165 A.D.3d 108, 114 (1st Dept. 2018); Mañas v. VMS Assoc., LLC, 53 A.D.3d 451, 454 (1st Dept. 2008). Fraud damages are meant to redress a different harm than damages for breach of contract. The latter damages are meant to restore the nonbreaching party to as good a position as it would have been in had the contract been performed; the former damages are meant to indemnify losses suffered as a result of the fraud. MBIA, 165 A.D.3d at 114; Mañas, 53 A.D.3d at 454. Thus, where all the damages are remedied through the contract claim, the fraud claim is duplicative and must be dismissed. MBIA, 165 A.D.3d at 114. This is so even where the plaintiff sufficiently alleges breach of an independent duty owed them separate and apart from the contract. Id.; Chowaiki & Co. Fine Art Ltd. v. Lacher, 115 A.D.3d 600, 600-601 (1st Dept. 2014) (dismissing fraud claim seeking duplicative damages even where the plaintiff sufficiently alleged breach of an independent duty owed them independent of the contract).

In Demurjian v. Demurjian, 2021 N.Y. Slip Op. 00008 (1st Dept. Jan. 5, 2021) (here), the Appellate Division, First Department affirmed the dismissal of a fraud cross-claim as duplicative of a contract cross-claim because the damages sought were the same notwithstanding the alleged independent duty owed to the cross-claim plaintiff.  

[Ed. Note: the factual discussion comes from the parties’ briefs on appeal.]

Demurjian concerned the ownership of six parcels of real property (the “Subject Properties”) in Washington Heights. Defendant/Cross-Claim Plaintiff, 187 Street Mazal Manager LLC (“Mazal”) alleged that it entered into a purchase agreement, dated September 24, 2012 (the “Purchase Agreement”), whereby Mazal purchased the Subject Properties from Cross-Claim Defendant, Michael Demurjian (“Michael”), and Cross-Claim Defendant, 661 West 187 Street LLC (“661”). 

In the Purchase Agreement, both Michael and 661 represented and warrantied that the Subject Properties were owned in fee simple and that they had the power and authority to convey the Subject Properties to Mazal. 

David and Richard Demurjian (collectively, the “Demurjian Brothers”) sued Mazal, claiming that they did not transfer their interests in the Subject Properties to 661. In response, Mazal asserted that to the extent the Demujian Brothers’ allegations were true, and Michael and 661 did not own the Subject Properties free and clear at the time of the Purchase Agreement, Michael and 661 breached their representations and warranties to Mazal to the contrary in the Purchase Agreement.

Mazal asserted cross claims for breach of contract, fraud, and indemnification/contribution against Michael and 661. Michael and 661 West moved to dismiss the fraud and indemnification/contribution cross-claims. Relevant to the title of today’s post, the motion court dismissed the fraud cross-claim, finding the fraud cross-claim to be duplicative of the breach of contract cross-claim: “the fraud claim is based upon the same alleged misrepresentation from which the breach of contract cause of action arises” and “is not collateral to the contract, since the question of Michael’s ownership was expressly incorporated into the terms of the Purchase Agreement.” 

The First Department affirmed.

Although the Court agreed with the motion court that the fraud cross-claim was duplicative of the breach of contract cross-claim, it based its decision on the damages sought rather than the underlying theory of the claims: “Mazal claim[ed] identical quanta and measures of damages.” Slip Op. at *1 (citing MBIA, supra).  In doing so, the Court rejected Mazal’s argument that the damages claimed were not identical because it sought punitive damages, holding that dismissal was appropriate “even though Mazal also demand[ed] an additional category of punitive damages for the fraud claim.” Id. (citing MBIA, 165 A.D.3d at 115).

Moreover, the Court found Mazal’s cross-claim for indemnification to be duplicative of its breach of contract cross-claim as it “[arose] from the same facts and again [sought] the same damages as Mazal’s second cross claim for breach of contract.” Id. The Court explained that “if Mazal is ultimately entitled to indemnification from Michael, it can only be because Michael breached the Purchase Agreement.” Id. “Accordingly,” concluded the Court, “the indemnification cross claim should be dismissed as duplicative of the breach of contract cross claim.” Id. (citing Best v. Law Firm of Queller & Fisher, 278 A.D.2d 441, 442 (2d Dept. 2000), cert. denied, 534 U.S. 1080 (2002)).

Takeaway

Demurjian is notable because it shows that the determining factor as to the viability of a fraud claim may not be the theory behind the claim, but the measure of damages sought. Thus, although a plaintiff may allege a duty independent of a contract, the fraud claim may nevertheless be redundant of the breach of contract claim, if both claims seek the same damages. 

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