Breach of Contract Claim Dressed Up in The Garb of a Fraud Cause of Action

• Posted on: Jan 24 2024

By: Jeffrey M. Haber

As readers of this Blog know, we have written about the duplication doctrine on numerous occasions. E.g., here, here, and here. Courts apply the doctrine when a plaintiff alleges a breach of contract claim and a fraud claim that arise from the same facts and circumstances. In that regard, a fraud claim will be deemed duplicative of a contract claim when the fraud claim arises from the same facts, seeks the same damages and does not allege a breach of any duty collateral to or independent of the parties’ agreements.¹ Moreover, “[a] fraud-based claim [will be deemed to be] duplicative of a breach of contract claim when the only fraud alleged is that the defendant was not sincere when it promised to perform under the contract.”² 

In Eastern Effects, Inc. v. 3911 Lemmon Ave. Assoc., LLC, 2024 N.Y. Slip Op. 00268 (1st Dept. Jan. 23, 2024) (here), the Appellate Division, First Department affirmed the dismissal of fraudulent inducement claim on the grounds that it was duplicative of the plaintiff’s breach of contract claim.

[Eds. Note: the factual discussion below comes from the motion court’s decision and the parties briefing on appeal.]

Eastern Effects involved a commercial lease (“Lease”) for space in a building located in the Gowanus section of Brooklyn (“the Premises”). Eastern Effects, Inc. (“EEI”) is a film and television company that operated a soundstage under the Lease with Defendants 3911 Lemmon Avenue Associates LLC, Esbond Realty LLC, and Eponymous Gowanus LLC (collectively, the “Landlord”). Shortly after the tenancy began, the Environmental Protection Agency (“EPA”) designated the Gowanus Canal a Superfund Site. According to EEI, the Landlord believed that the designation would allow it to terminate the Premises’ below-market leases, like the one with EEI, and transform the Premises into a luxury high-rise apartment complex from which it could obtain significant profits. 

The EPA gave the Landlord and other property owners a choice between (i) allowing the Gowanus Canal Environmental Remediation Trust #2 (the “Trust”) to perform the necessary remediation work, or (ii) performing the work themselves. EEI claimed that only the Landlord chose to perform the work. 

EEI further claimed that the Landlord chose the second option so that it could remediate the contaminants that had eroded some of the Premises’ foundation and exploit the termination clause in the Lease that would enable it to evict EEI. 

To permit the Landlord and the Trust to complete the work required by the EPA, the parties entered into a Settlement Agreement and Release, dated September 15, 2021 (the “Settlement Agreement”). Among other things, the Settlement Agreement provided that EEI would temporarily vacate the Premises and allow the Landlord to perform the work in exchange for compensation from the Trust and rent abatement from the Landlord. EEI alleged that, at the time of the negotiations, the Landlord made a series of material misrepresentations and omissions to induce it into entering the Settlement Agreement. EEI maintained that the Landlord concealed its plan to use the Settlement Agreement to orchestrate EEI’s eviction from the Premises. 

According to EEI, soon after the work began, the Landlord claimed that the work had damaged the Premises and that it was terminating the Lease, causing the Trust to stop its business-interruption payments. EEI said that it incurred significant damages without a soundstage to service its film and television clients, and without the Trust’s payments.

EEI filed a summons and complaint, asserting claims against the Landlord for declaratory judgment, specific performance of the Lease, specific performance of the Settlement Agreement, breach of the Lease, breach of the Settlement Agreement, unjust enrichment, and fraudulent inducement of the Settlement Agreement. 

Thereafter, EEI amended its complaint. In its amended complaint, EEI asserted claims for breach of the Lease against Landlord, breach of the Settlement Agreement against the Trust (which EEI added as a defendant in the action), declaratory judgment against the Landlord based on the Landlord’s alleged breach of the Settlement Agreement, fraudulent inducement of the Settlement Agreement against the Landlord, and conversion against the Landlord. 

The Landlord moved to dismiss all claims alleged in the amended complaint, except for EEI’s claim for breach of the Lease and Settlement Agreement. Soon thereafter, the Trust moved to dismiss the breach of contract claim asserted against it. 

The motion court granted the Landlord’s motion to dismiss with respect to EEI’s cause of action for fraudulent inducement and its request for punitive damages against the Landlord and granted the Trust’s motion to dismiss EEI’s cause of action for breach of contract against it.

On appeal, the First Department unanimously modified the motion court’s order to reinstate EEI’s breach of contract cause of action against the Trust, and otherwise affirmed the order. We examine the Court’s decision with respect to the fraudulent inducement cause of action.

The First Department held that EEI’s fraudulent inducement claim was duplicative of its breach of contract claim against the Landlord. The Court explained that EEI “identifie[d] no independent duty outside the contract to support a fraud claim.”³ “The fraud claim,” said the Court,” was “based on alleged misrepresentations and omissions regarding the timing and performance of the [remediation] work, plaintiff’s compensation for vacating the premises and lost business, [the] landlord’s duty to make repairs, and the termination of the lease.”⁴ The Court concluded that “[t]hese [misrepresentations and omission] are all issues that are contemplated by the [S]ettlement [A]greement, the [L]ease, or both, which can be relied upon to make plaintiff whole if it prevails on its breach of contract cause of action.”⁵ 

Takeaway

A fraud claim, which arises from the same facts, seeks identical damages and does not allege a breach of any duty collateral to or independent of the parties’ agreement, is duplicative of a contract claim. What constitutes “a legal duty independent of a contract” is not a question easily answered.⁶ In trying to answer the question, the courts make the distinction between a misrepresentation of intention and a misrepresentation of present fact.⁷ The former will result in dismissal, while the latter will not.⁸ The courts also look to the damages sought to ascertain if they are the same.⁹ In Eastern Effects, Plaintiff could not demonstrate any difference between the duty to perform under the agreements at issue and the duty underlying the alleged misrepresentations and omissions. As a result, the Court found that Plaintiff merely alleged a breach of contract claim dressed up in the garb of a fraud cause of action.¹⁰

Footnotes

1. Havell Capital Enhanced Mun. Income Fund, L.P. v. Citibank, N.A., 84 A.D.3d 588, 589 (1st Dept. 2011).
2. Manas v. VMS Assoc., LLC, 53 A.D.3d 451, 453 (1st Dept. 2008); see also Cronos Group Ltd. v. XComIP, LLC, 156 A.D.3d 54, 64-65 (1st Dept. 2017); HSH Nordbank AG v. UBS AG, 95 A.D.3d 185, 206 (1st Dept. 2012); Metropolitan Life Ins. Co. v. Noble Lowndes Intl., 192 A.D.2d 83, 88 (1st Dept. 1993).
3. Slip Op. at *1.
4. Id.
5. Id.
6. Cronos Group, 156 A.D.3d at 56 (referring to the question as a “recurring” one).
7. Id. at 63.
8. Gosmile, Inc. v. Levine, 81 A.D.3d 77 (1st Dept. 2010).
9. Mosaic Caribe, Ltd. v. AllSettled Group, Inc., 117 A.D.3d 421, 422-423 (1st Dept. 2014) (fraud claim was insufficient as “duplicative of the breach of contract claim” because it sought “the same [compensatory] damages as the breach of contract claim”).
10. Songbird Jet Ltd., Inc. v. Amax Inc., 581 F. Supp. 912, 924 (S.D.N.Y. 1984).

Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. 

This article is for informational purposes and is not intended to be and should not be taken as legal advice.