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Breach of Contract, Duplication of Claims and the Statute of Frauds: An Interesting Mix

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  • Posted on: Jul 22 2020

Over the past several months, this Blog has examined cases in which plaintiffs brought contract claims and fraud claims in the same action (here, here and here). As discussed in those posts, the courts dismissed the cases because the plaintiffs failed to allege an independent basis upon which the claims could stand side-by-side. 

Similarly, this Blog has examined cases involving veil piercing and the Statute of Fraud. As to the former, the courts dismissed the actions because the plaintiffs failed to demonstrate with particularity the abuse of the corporate form by the corporate officer or shareholder. As to the latter, the disposition of many of the actions depended upon whether the plaintiffs could demonstrate the capability of the agreement being fulfilled within one year. 

In Osman v. Brown, 2020 N.Y. Slip Op. 32319(U) (Sup. Ct., N.Y. County July 17, 2020) (here), the subject of today’s post, the foregoing issues were considered by the Court. 

Osman v. Brown

Osman arose out of a commercial transaction involving the purchase of Defendant J. Streicher & Co., LLC (the “Company”). To effectuate the transaction, Plaintiff J. Streicher, LLC (the “Buyer”) was formed by Plaintiff Bulent Osman (“Osman”), Defendant J. Streicher Group, LLC (the “Seller”) and Defendant Spiorad Capital Partners, LLC (“Spiorad”), with the founders holding 80%, 10%, and 9% of the Buyer’s ownership interest, respectively. 

The Buyer and the Seller signed the Purchase Agreement on October 24, 2017, which provided for the completion of the purchase through two closings. 

Plaintiffs alleged de facto compliance with all obligations set forth in the Purchase Agreement; specifically, transferring $200,000 to Defendants on March 11, 2017, paying $850,000 to third-party ALC Manufacturing, and providing assistance to Defendants in connection with a $2,500,000 deal with another third-party. 

Osman alleged that Defendant Thomas Brown stated that a final $150,000 payment would then be sufficient to complete the Second Closing. Plaintiffs alleged that they complied, with Osman personally transferring the requested amount to Brown, but that Defendants became “unavailable” after receiving the transfer and failed to deliver the 100% ownership interest in the Company. 

Defendants delivered to Osman a notice of termination of the Purchase Agreement on August 29, 2018. The notice of termination contained numerous exhibits detailing Company meetings, Company emails with FINRA, and a proposed contract delivered by Osman detailing “a new source of recapitalization from a third party” that deviated from the terms of the Purchase Agreement. Slip Op. at *2. Osman was then removed as a member of the Buyer entity by board resolution on December 17, 2018, with Spiorad and the Seller absorbing his ownership interest. 

Plaintiffs filed suit on May 20, 2019, alleging claims for 1) breach of contract; 2) specific performance; 3) injunctive relief; 4) fraud; 5) negligent misrepresentation; 6) unjust enrichment; 7) breach of contract against Thomas Brown; 8) unjust enrichment against Thomas Brown; and 9) civil conspiracy. 

Defendants moved to dismiss. The Court granted the motion in part and denied it in part. We look at the Court’s decision with respect the contract claims and the fraud claim.

The Court’s Decision

Defendants moved to dismiss the contract claims alleged against the individual defendants (i.e.,  Brown, Plum, Frey, and Pickett) and the corporate defendants (i.e., Spiorad and the Company (J. Streicher & Co., LLC)), on the grounds that the members of a corporation are not individually liable for the corporation’s breach of a contract. The Court granted the motion.

Generally, “[a] director is not personally liable for a corporation’s breach of an agreement merely by virtue of his or her decisions or actions that resulted in the corporation’s promise being broken.” Hixon v. 12-14 E. 64th Owners Corp., 107 A.D.3d 546, 547 (1st Dept. 2013). “[O]nly parties to a contract can be sued for breach.” Shapiro v. Ninah Consulting, Inc., 2019 WL 3854919, at *2 (Sup. Ct., N.Y. County 2019) (citing Leonard v. Gateway II, LLC, 68 A.D.3d 408 (1st Dept. 2009)).

“Under New York law, the corporate veil can be pierced where there has been, inter alia, a failure to adhere to corporate formalities, inadequate capitalization, use of corporate funds for personal purpose, overlap in ownership and directorship, or common use of office space and equipment.” Forum Ins. Co. v. Texarkoma Transp. Co., 229 A.D.2d 341, 342 (1st Dept. 1996). “Given the courts’ reluctance to disregard the corporate form, a plaintiff must allege, with the requisite ‘particularized statements detailing fraud or other corporate misconduct,’ facts that would warrant piercing the corporate veil.” State Ins. Fund v. Iovine, 2007 WL 2175523 (Sup. Ct., N.Y. County 2007) (quoting Sheridan Broadcasting Corp v. Small, 19 A.D.3d 331, 332 (1st Dept. 2005)).

[Ed. Note: This Blog wrote about veil piercing here, here, here and here.]

The Court found that the complaint “fail[ed] to include any specific allegations that these eight Defendants exercised complete domination and/or abused the corporate form to commit wrongdoing.” Slip Op. at *6. “Rather,” said the Court, “Plaintiffs merely allege[d] that ‘Plaintiffs entered into the valid Agreement with Defendants under which Defendants were obligated to sell the Company to Plaintiffs pursuant to the terms of the Agreement dated October 24, 2017’, despite the fact that the Purchase Agreement was signed only by the Buyer (J. Streicher, LLC) and Seller (J. Streicher Group, LLC).” Id. (citations to record omitted).

The Court concluded that “[b]ecause these … Defendants were not signatories to the Purchase Agreement and Plaintiffs [had] failed to sufficiently plead facts showing a basis to pierce the corporate veil,” the contract claims against Defendants Brown, Plum, Frey, Pickett, Spiorad, and the Company (J. Streicher & Co., LLC) could not stand.

In addition, Plaintiffs alleged that Defendant Brown breached an oral agreement to repay a loan. The claim involved an alleged meeting between Osman and Brown in which Brown asked Osman for a loan of $100,000 to pay off legal bills. Osman alleged that he provided two loans to Brown, both in the amount of $15,000. Defendants moved to dismiss the claim for breach of contract on the grounds that the alleged contract was an oral contract of an infinite duration and was therefore unenforceable pursuant to the Statute of Frauds.

“Under the statute of frauds, an oral agreement that cannot be performed within a year of its creation is void.” Cohen v. HDS Trading Corp., 2014 WL 2195401, at *1 (Sup. Ct., N.Y. County 2014) (citing General Obligations Law § 5-701)). “Wherever an agreement has been found to be susceptible of fulfillment within that time, in whatever manner and however impractical, this court has held the one-year provision of the Statute to be inapplicable, a writing unnecessary, and the agreement not barred.” D & N Boening, Inc. v. Kirsch Beverages, Inc., 63 N.Y.2d 449, 455 (1984).

[Ed. Note: This Blog wrote about the Statute of Frauds here, here, here and here.]

The Court found that the “alleged loan contract could have been completed, i.e. repaid, within one year.” Slip Op. at *8. “As such,” concluded the Court, “the motion to dismiss based on the Statute of Frauds is denied.” Id. 

The Court also held that Plaintiffs sufficiently alleged a claim for breach of contract against J. Streicher Group, LLC (the Seller). The Court explained that there was “at least an attempted performance of the First Closing obligations” by Plaintiffs and an allegation “that Seller became unavailable and terminated the contract, resulting in damages.” Id. At the pleading stage, such allegations were enough to withstand a challenge.

Having sustained most of the contract claims, the Court turned its attention to the fraud claim. As this Blog has noted in numerous posts, “[a] fraud claim should be dismissed as redundant when it merely restates a breach of contract claim, i.e., when the only fraud alleged is that the defendant was not sincere when it promised to perform under the contract.” First Bank of Americas v. Motor Car Funding, Inc., 257 A.D.2d 287, 291 (1st Dept. 1999). “A fraud-based cause of action may lie, however, where the plaintiff pleads a breach of a duty separate from a breach of the contract.” Manas v. VMS Assocs., LLC, 53 A.D.3d 451, 453 (1st Dept. 2008).

The Court held that “the allegations in the Complaint [were] insufficient to withstand the motion to dismiss.” Slip Op., at *10. The Court found that the complaint “merely [included] boilerplate language and fail[ed] to identify any specific misrepresentation of a material fact made by Defendants that Plaintiffs relied upon to their detriment.” Id. “Further,” observed the Court, “the claim for fraud [was] duplicative of the claim for breach of contract because Plaintiffs fail[ed] to identify a separate breach of duty aside from the Defendants’ nonperformance of the Purchase Agreement.” Id. Accordingly, the Court dismissed the fraud cause of action.

Finally, the Court addressed the issue of derivative standing by Osman. 

Business Corporation Law § 626 provides that a derivative action may be brought on behalf of a corporation by a shareholder, but the plaintiff must be a shareholder both “at the time of bringing the action and … at the time of the transaction of which he complains[.]” BCL § 626 (a), (b). This requirement is known as the “contemporaneous ownership rule” and is “strictly enforced” by the courts (Honzawa Holding Co. v. Hiro Enterprise USA, Inc., 291 A.D.2d 318, 318 (1st Dept. 2002)) because “only current shareholders have a continuing interest in the welfare of the company” (Zentz v. Intl. Foreign Exch. Concepts, L.P., 33 Misc. 3d 1212[A], at *8 (Sup. Ct., Kings County 2011)). See Schorr v. Steiner, 46 AD3d 435, 436 (1st Dept. 2007) (“the individual plaintiffs’ lack of legal capacity to pursue a derivative action was demonstrated by, inter alia, their failure to adduce any evidence that they were … shareholders or “beneficial” owners at the time of the alleged fraud and when they commenced this action”) (emphasis in original)).

The Court held that Osman lacked the capacity to bring the action on behalf of the Buyer. Slip Op. at *4. The Court explained that Osman had been removed as a member of the Buyer on December 17, 2018, by written consent of its other members, JSG and Spiorad, resulting in the splitting up of Osman’s ownership interest among those remaining members. Id. “Despite his removal,” said the Court, “Osman commenced this lawsuit on behalf of both himself and the Buyer entity on May 20, 2019.” Id. Such action violated the “contemporaneous ownership rule”, concluded the Court. Id.

[Ed. Note: This Blog wrote about derivative standing and the “contemporaneous ownership rule” here and here.]

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