Court Allows Fraudulent Inducement Claim to Stand with Breach of Contract Claim

• Posted on: Feb 7 2019

Commercial litigation practitioners know that, as a general matter, courts will not permit a fraudulent inducement claim to survive a motion to dismiss when the claim arises from a breach of contract. Indeed, courts routinely dismiss a fraudulent inducement claim where “[t]he existence of a valid and enforceable written contract govern[s] a particular subject matter” and the recovery sought arises out of the same facts and circumstances. Clark-Fitzpatrick v. Long Is., 70 N.Y.2d 382 (1987). However, where “a legal duty independent of the contract itself has been violated[,]” a fraudulent inducement claim can stand side-by-side with “a simple breach of contract” claim.  Dormitory Authority v. Samson Construction Co., 30 N.Y.3d 704 (2018) (citation omitted).

What constitutes “a legal duty independent of a contract” is not a question easily answered.  Cronos Group Ltd. v. XComIP, LLC, 156 A.D.3d 54, 56 (1st Dept. 2017) (referring to the question as a “recurring” one). In trying to answer the question, the courts make the distinction between a misrepresentation of intention and a misrepresentation of present fact. Id. at 63. See also Demetre v. HMS Holdings Corp., 127 A.D.3d 493, 494 (1st Dept. 2015) (common law fraud is duplicative of breach of contract where the only misrepresentation alleged concerns an “intent to perform the contractual obligations at the time they were made.”). The former will result in dismissal, while the latter will not. Gosmile, Inc. v. Levine, 81 A.D.3d 77 (1st Dept. 2010).

In Gosmile, the First Department explained: “that a misrepresentation of present fact, unlike a misrepresentation of future intent to perform under the contract, is collateral to the contract, even though it may have induced the plaintiff to sign it, and therefore involves a separate breach of duty.” 81 A.D.3d at 81 (citing Deerfield Communications Corp. v. Chesebrough-Ponds, Inc., 68 N.Y.2d 954, 956 (1986); First Bank of Ams. v. Motor Car Funding, 257 A.D.2d 287, 291-292 (1st Dept. 1999) (concurrent causes of action for fraud and breach of contract may lie where the plaintiff alleges it was induced to enter into a contract based on defendant’s misrepresentation of material fact)). Thus, a fraud claim that is premised on a misrepresentation of a prior or existing fact will not be dismissed “as an insincere promise of future performance” and, therefore, as duplicative of a breach of contract claim. First Bank v. Motor Car Funding, Inc., 257 A.D.2d 287, 292 (1st Dept. 1999) (citing Tompkins PLC v. Bangor Punta Consol. Corp., 194 A.D.2d 493, 493-494 (1st Dept. 1993) (misrepresentation of specific product gives rise to fraud claim as well as breach of contract claim)).

In Silverman v. Rosenbaum, 2019 N.Y. Slip Op. 30233(U) (Sup. Ct. N.Y. County Jan. 25, 2019) (here), the Court sustained a fraudulent inducement claim that was challenged as duplicative of the plaintiff’s breach of contract claim because the former was predicated on the breach of an independent legal duty.

Silverman involved an agreement concerning the filming of a documentary about the construction of the World Trade Center Memorial and Museum (“Museum”). According to Silverman, he had shot film at the Museum construction site and filmed interviews with senior staff of the Museum in furtherance of his job as a cameraman for defendant Steven Rosenbaum (“Rosenbaum”), a well-known filmmaker, author, and journalist.

In May 2010, Silverman and defendant Magnify Media, LLC (“Magnify”) entered into a written Deferred Payment and Profit Sharing Agreement (the “Agreement”), pursuant to which Silverman agreed to film the construction of the Museum in exchange for agreed-upon compensation.

To induce Silverman to enter the Agreement, Silverman alleged that Rosenbaum falsely represented to him that he had exclusive access to Museum staff and people involved in the creation of the Museum, that he had negotiated exclusive rights to fully produce and distribute the film, that he planned for the film to be screened at festivals and win awards, that he would produce and deliver the film in connection with the Museum’s official public opening, and that the film would be made available for purchase in the Museum gift shop. Relying on these and other representations (e.g., Defendants would secure funding for, and produce the film, in exchange for Silverman’s continued camerawork documenting the Museum’s building and development), as well as Rosenbaum’s experience in the documentary film industry, Silverman entered into the Agreement.

Silverman agreed to defer his payments until the defendants raised funds necessary to complete the film, upon the condition that he would be the first paid from those funds. Under the Agreement, Silverman would be entitled to 7% of the film’s net profits.

Silverman alleged that the defendants did not use the footage he created for the intended purpose – i.e., making the documentary. Instead, Silverman claimed that the defendants used the footage in connection with an iPad application and a “TED Talk” given by Rosenbaum.

Silverman ceased work in May 2012, when he allegedly realized that the defendants did not secure or even attempt to secure funding for the film.

Silverman commenced the action seeking damages for breach of contract, fraudulent inducement, unjust enrichment, and promissory estoppel. The defendants moved to dismiss the complaint, asserting that Silverman’s first, third, fourth, and fifth causes of action sounding in fraudulent inducement, promissory estoppel, unjust enrichment, and breach of the implied covenant of good faith and fair dealing, respectively, were inadequately plead because they were duplicative of Silverman’s second cause of action seeking to recover for breach of contract. The Court denied the motion as to the fraudulent inducement claim.

The Court found that, although some of the alleged misrepresentations concerned statements of intention, other statements alleged to be false involved statements of prior or existing fact. In that regard, the Court found that the following alleged misrepresentations to be “expressions of future intent rather than misrepresentations of present fact,” and therefore “not support[ive of] a separate claim for fraudulent inducement”: (1) “Rosenbaum planned for the film to be at festivals and win awards”; (2) “Rosenbaum planned to produce and deliver the film in connection with the Museum’s public opening”; and (3) “the film would be made available for purchase in the Museum gift shop.” Slip Op. at *7. However, the statements that (1) “the defendants had exclusive access to Museum staff and people involved with the creation of the Museum[,]” and (2) Rosenbaum had negotiated exclusive rights to fully produce and distribute the film in exchange for his library of film content” were actionable because they were alleged to be “false when made,” and “with the purpose of inducing” Silverman to “the enter the Agreement….” Such allegations, the Court held, sufficed to withstand a motion to dismiss. Id. (citing Shugrue v. Stahl, 117 A.D.3d 527 (1st Dept. 2014); Gosmile, supra).

Takeaway

To plead a cause of action sounding in fraud, a plaintiff must allege: a material misrepresentation of an existing fact, made with knowledge of the falsity, an intent to induce reliance thereon, justifiable reliance upon the misrepresentation, and damages. The cases show that general allegations concerning a defendant who enters into an agreement with the intent not to perform are not sufficient to support a cause of action sounding in fraud. However, where, as in Silverman, the misrepresentations concern existing facts that serve as an inducement to enter into a contract, a claim for fraudulent inducement will survive a motion to dismiss.