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Court Dismisses Fraud Counterclaim as Being Duplicative of Contract Claim

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  • Posted on: May 3 2019

In Siwiec v. United Rest. Group Inc., 2019 N.Y. Slip Op. 31152(U) (Sup. Ct. Kings County Apr. 11, 2019) (here), the Court reminds litigants that if they want to bring a fraud claim along with a contract claim, they must allege misrepresentations that are collateral or extraneous to the contract.

Siwiec involved a dispute over the management of a restaurant. According to the complaint, the parties met in May 2016, when Defendant, Christian Vega (“Vega”), the Chairman and Chief Executive Officer of Defendant, United Restaurant Group, Inc. (“URG”), allegedly approached Plaintiffs about entering into a partnership whereby Defendants would manage a soon-to-be-opened restaurant in Brooklyn. Vega purportedly represented that he and URG owned and operated several successful restaurants in New York City.

On June 9, 2016, Plaintiff, El Sotano and URG executed an “Operating Agreement” pursuant to which URG would be an operating partner and help run and manage the restaurant.

Plaintiffs claimed that Defendants were not successful restaurateurs. According to the complaint, Defendants were engaged in a stock-swapping, pyramid-type scheme in which Defendants (and others associated with them) would approach restauranteurs and propose a partnership, equity, or management relationship. Defendants would then allegedly use the relationship with the restauranteur as a basis to enter into a new one with another restauranteur to create the impression that Defendants were successfully managing multiple restaurants.

Plaintiff commenced the action alleging numerous causes of action, including breach of contract and fraud. Defendants counterclaimed alleging, among other things, breach of contract, conversion, unjust enrichment and fraud.

Plaintiff moved to dismiss the counterclaims, contending that Defendants failed to set forth the elements of each claim and that the fraud claim was duplicative of the contract claim.  The Court sustained the breach of contract and conversion claims.

Breach of Contract

To succeed on a breach of contract claim, the plaintiff must establish the existence of a contract, the plaintiff’s performance, the defendant’s breach and resulting damages. Harris v. Seward Park Housing Corp., 79 A.D.3d 425 (1st Dept. 2010). In addition, the plaintiff must identify the specific provision of the contract alleged to have been breached. Gianelli v. RE/MAX of New York, 144 A.D.3d 861 (2d Dept. 2016).

The Court held that Defendants satisfied the foregoing requirements. In particular, the Court found that Defendants properly identified the provisions of the operating agreement that were “were allegedly violated by the plaintiff.” Slip Op. at *3. The Court rejected Plaintiffs’ argument that merely “listing the titles of the alleged[ly] breached sections of the contract, without the text of those sections and without incorporating an attached copy of the agreement,” left the Court without sufficient information “as to what essential terms of the Operating Agreement at issue [were] allegedly breached by Plaintiffs.” Id. (internal quotation marks omitted). In doing so, the Court noted that “there is no requirement the text of a contractual provision must be included within a pleading.” Id. Accordingly, the Court denied the motion to dismiss the breach of contract counterclaim.

Conversion

To allege a claim for conversion, the plaintiff must show the legal right to an identifiable item(s) and that the other party had exercised unauthorized control and ownership over the item(s). Fiorenti v. Central Emergency Physicians, PLLC, 305 A.D.2d 453 (2d Dept. 2003). Further, a conversion does not occur until the owner makes a demand for the return of the property and the one in possession refuses to do so. Matter of Asch, 164 A.D.3d 787 (2d Dept. 2018).

According to Defendants, Plaintiff entered the restaurant and removed various items, including, but not limited to, furniture, antique decor, custom made items, place settings, imported crystal, and other equipment. Defendants claimed to have purchased the items in question. Defendants also alleged that their prior attorney demanded the return of the items.

The Court found that Defendants had stated a claim for conversion. Slip Op. at **3-4.

Fraud

To succeed on a claim of fraud, the plaintiff must demonstrate that there was a material misrepresentation of fact, made with knowledge of the falsity, the intent to induce reliance, reliance upon the misrepresentation and damages. Cruciata v. O’Donnell & Mclaughlin, Esqs, 149 A.D.3d 1034 (2d Dept. 2017). These elements must each be supported by factual allegations containing details constituting the wrong alleged. JPMorgan Chase Bank, N.A. v. Hall, 122 A.D.3d 576 (2d Dept. 2014).

Moreover, where a fraud claim is alleged along with a breach of contract claim, the misrepresentations must be collateral or extraneous to the terms of the parties’ agreement. McKernin v. Fanny Farmer Candy Shops Inc., 176 A.D.2d 233(2d Dept. 1991).

The Court found that the “fraud allegations [were] essentially further elaborations of the breach of contract counterclaim.” Consequently, the Court granted the motion to dismiss the fraud counterclaim.

Takeaway

Siwiec serves a reminder to litigants who allege both a contract claim and fraud claim in the same pleading that the two can stand side-by-side as long as the subject misrepresentations are collateral or extraneous to the terms of the contract. One way to do so is to allege a misrepresentation of present fact. First Bank of Ams. v. Motor Car Funding, 257 A.D.2d 287, 292 (1st Dept. 1999), citing Deerfield Commc’ns Corp. v. Chesebrough-Ponds, Inc., 68 N.Y.2d 954, 956 (1986). Another way is to allege a breach of duty separate from, or in addition to, a breach of the contract. Id. at 291. In any event, merely elaborating on the contract claim, as in Siwiec, is insufficient to withstand a motion to dismiss.

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