A Promise to Perform is Not the Same as A Fraud, Says the First Department

• Posted on: May 17 2021

Readers of this Blog know that to state a cause of action for fraudulent inducement, the complaint must allege “that the defendant intentionally made a material misrepresentation of fact in order to defraud or mislead the plaintiff, and that the plaintiff reasonably relied on the misrepresentation and suffered damages as a result.” Connaughton v. Chipotle Mexican Grill, Inc., 135 A.D.3d 535, 537 (1st Dept. 2016), aff’d, 29 N.Y.3d 137 (2017) (citations omitted).

Significantly, “[a] claim rooted in fraud must be pleaded with the requisite particularity under CPLR 3016 (b).” Eurycleia Partners, LP v. Seward & Kissel, LLP, 12 N.Y.3d 553, 559 (2009). This means that if “sufficient factual allegations of even a single element are lacking,” the claim will be dismissed. RKA Film Fin., LLC v. Kavanaugh, 2018 WL 3973391, at *3 (Sup. Ct., N.Y. County 2018) (quoting Shea v. Hambros PLC, 244 A.D.2d 39, 46 (1st Dept. 1998)).

“To fulfill the element of misrepresentation of material fact, the party advancing the claim must allege a misrepresentation of present fact rather than of future intent.” Perella Weinberg Partners LLC v. Kramer, 153 A.D.3d 443, 449 (1st Dept. 2017) (citation omitted). “General allegations of lack of intent to perform are insufficient; rather, facts must be alleged establishing that the adverse party, at the time of making the promissory representation, never intended to honor the promise.” Id. (citation omitted). See also 627 Acquisition Co., LLC v. 627 Greenwich, LLC, 85 A.D.3d 645, 647 (1st Dept. 2011); Manas v. VMS Assoc., LLC, 53 A.D.3d 451, 453-54 (1st Dept. 2008); Orix Credit All., Inc. v. R.E. Hable Co., 256 A.D.2d 114, 115 (1st Dept. 1998).

This Blog has written about the foregoing principles on numerous occasions, including here, here, and here.

In 320 W. 115 Realty LLC v. All Bldg. Constr. Corp., 2021 N.Y. Slip Op. 03107 (1st Dept. May 13, 2021) (here), the Appellate Division, First Department recently considered and rejected a fraudulent inducement claim because it was based on nothing more than a promise to perform in the future.

320 W. 115 Realty arose out of a dispute over construction renovation work that was to be performed on two adjacent buildings (the “Project”), located at 318-320 West 115th Street, New York, New York (the “Property”). 

Plaintiff, the former owner and developer of the Property, and All Building Construction Corp. (“ABC”) entered into an AIA standard form document A107-2007 agreement, dated November 14, 2014, whereby ABC agreed to perform general contracting management services to renovate the Property for a stipulated sum of $3,313,933. Under the agreement, the Project was to be substantially completed “on or about July 1, 2015.”

In or around May 2015, Edward Campanella (“Campanella”), ABC’s owner and principal, allegedly informed Plaintiff that Defendants could not retain the subcontractors necessary to complete the Project at the price agreed to, and allegedly persuaded Plaintiff that Defendants could substantially complete the Project “on or about November 26, 2015” (the “Substantial Completion Date”) for an additional $819,525.35 (together with the original sum, the “Contract Sum”). In June 2015, Plaintiff and ABC entered into a separate AIA standard form document A107-2007 agreement — also dated November 14, 2014 — reflecting this subsequent agreement. 

Plaintiff alleged that ABC continuously breached the two agreements (collectively, the “Agreements”) by, among other things: failing to complete the Project by the Substantial Completion Date because of ABC’s defective work and unreasonable delays; deviating from approved construction plans and concealing any unauthorized work; failing to complete major construction tasks; providing defective work; and failing to pay subcontractors for work performed while falsely certifying to Plaintiff that the subcontractors were paid. Plaintiff also alleged that ABC failed to pay its subcontractors, as required by the Agreements and the New York State Lien Law (“Lien Law”), and instead used the funds for purposes unrelated to the Project, which substantially delayed the Project.

In addition to alleging breach of contract, Plaintiff alleged that ABC defrauded it by, among other things: misrepresenting and certifying lien waivers that it had paid the subcontractors for their work; fraudulently inflating the Contract Sum by certifying applications for payments that overstated completion costs and submitting false change orders for work already agreed to under the Agreements; and threatening to stop working on the Project and withholding delivery of construction services and materials that were already paid for by Plaintiff unless Plaintiff paid additional funds in excess of the Contract Sum.

ABC allegedly abandoned the Project and the Agreements on August 25, 2016. As a result, Plaintiff maintained that it was required to: retain new contractors at higher prices; secure a new permit from the New York City Department of Buildings; incur additional costs to complete the Project, including accrual of interest on its construction loan; and remediate ABC’s defective work.

Plaintiff brought suit, asserting four causes of action for: (1) fraudulent inducement against Defendants; (2) breach of contract against ABC; (3) negligence against ABC; and (4) breach of the implied covenant of good faith and fair dealing against ABC. Defendants moved to dismiss the first, third, and forth causes of action.

We examine the motion as it pertained to the fraudulent inducement cause of action.

In support of its fraudulent inducement cause of action, Plaintiff alleged that “ABC[]’s myriad of breaches came so early and often that the only inference is that ABC[] intended to breach its Agreements from the start ….” Plaintiff also alleged that Defendants knowingly misrepresented the Contract Sum at the time of contracting and that this misrepresentation induced Plaintiff to enter into the Agreements. Moreover, at a July 25, 2016 meeting, Campanella allegedly admitted to Plaintiff that the Agreements were never a firm number contract, and that the Contract Sum was never the real number.

Defendants argued that the cause of action must be dismissed, in part, because the complaint failed to allege a misrepresentation that induced Plaintiff to enter into the Agreements, it was duplicative of the breach of contract cause of action, and Campanella could not be held personally liable for acts done on behalf of ABC.

The motion court agreed with Defendants and dismissed the fraudulent inducement cause of action (here).

The motion court held that Plaintiff merely alleged that Defendants lacked the intent to perform the Agreements, which, it said, was “clearly a statement of future intent” and, therefore, “not actionable.” (Citations omitted.)

The motion court rejected Plaintiff’s contention that Campanella’s alleged statement that the Contract Sum “was never the real number” showed that Defendants knowingly misrepresented the Contract Sum. The motion court explained that “a review of the Agreements” actually “support[ed] Campanella’s statement.” For example, noted the motion court, “the Agreements specifically provide[d] for the possibility that the Contract Sum [could] increase or change under numerous scenarios” and contained a ‘Project Budget,’ … which [contained] the heading, ‘Estimate Summary.’” 

Finally, with regard to Plaintiff’s other allegations of fraud — such as, ABC fraudulently inflated the Contract Sum by certifying applications for payments that overstated completion costs and submitting false change orders for work already agreed to under the Agreements — the motion court held that they were insufficient to support Plaintiff’s fraudulent inducement claim. The motion court explained that they could not have induced Plaintiff to enter into the Agreements because the activity complained of “allegedly occurred after the parties had already entered into the Agreements.”

“At bottom,” concluded the motion court, “Plaintiff has failed to state sufficient facts to turn the breach of contract cause of action into a cause of action for fraudulent inducement.”

On appeal, the First Department unanimously affirmed.

In a pithy opinion (involving the fraudulent inducement cause of action), the Court held that Plaintiff did not allege a “representation of present fact.” Slip Op. at *1 (quoting Deerfield Communication Corp. v. Chesebrough-Ponds, Inc., 68 N.Y.2d 954, 956 (1986) (internal quotation marks omitted)). Instead, Plaintiff merely alleged a representation of future intent. Id.

Takeaway

It has long been held that “promissory statements as to what will be done in the future are not actionable.” Adams v. Clark, 239 N.Y. 403, 410 (1925). However, when the promissory statement is “made with a preconceived and undisclosed intention of not performing it,” it becomes an actionable misrepresentation of existing fact. Sabo v. Delman, 3 N.Y.2d 155 (1957). As explained by the courts in 320 W. 115 Realty, the alleged misstatements were of the former, not the latter, variety.