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Court Finds Promise of Future Performance and Anti-Reliance Provision in Merger Clause Preclude Fraudulent Inducement Affirmative Defense

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  • Posted on: Feb 12 2020

On February 6, 2020, Justice Jennifer G. Schecter of the Supreme Court, New York County issued a decision in which she ruled, among other things, that Kesha Rose Sebert (better known by her stage name as Kesha) defamed Lukasz Gottwald (“Gottwald”), the music producer known as Dr. Luke, and Kesha’s former producer, when she claimed, in a text message to Lady Gaga, that he had raped Katy Perry. Gottwald v. Sebert, 2020 N.Y. Slip Op. 30347(U) (Sup. Ct., N.Y. County Feb. 6, 2020) (here). The Court also ruled that Kesha had to pay nearly $374,000 in interest on royalty payments that she delayed paying to Gottwald’s company.

Background

In October 2014, the parties sued each other in separate jurisdictions. Kesha sued Gottwald in California (the “California Action”), alleging, among other things, sexual assault, sexual harassment, gender violence and unfair competition in violation of California law. Gottwald sued Kesha in New York County. After the California court determined that the forum selection clauses in the governing contracts mandated proceeding in New York, Kesha withdrew the California Action. Plaintiffs (Gottwald, Kasz Money, Inc. (“KMI”), and Prescription Songs, LLC (“Prescription”)) filed their first amended complaint in December 2014. In July 2015, Kesha filed counterclaims against plaintiffs and Sony Music (“Sony”), which plaintiffs and Sony moved to dismiss.

In September 2015, Kesha moved for a preliminary injunction, seeking an order permitting her to make music without plaintiffs and releasing her from her agreements with them. About a month later, Kesha amended her counterclaims to include, among other causes of actions, claims that she had previously brought in the California Action. Plaintiffs and Sony moved to dismiss. In February 2016, after oral argument, the court denied Kesha’s preliminary injunction motion. By order dated April 6, 2016, the Court dismissed all but one of Kesha’s counterclaims.

In January 2017, plaintiffs moved for leave to file a second amended complaint and Kesha moved for leave to file amended counterclaims. The Court granted plaintiffs’ motion without opposition. On March 20, 2017, the Court denied Kesha’s motion, holding that her proposed amended counterclaims lacked merit. The Court held that Kesha had failed to perform under the KMI Agreement – the written agreement that Kesha and KMI executed on September 26, 2005 – and that it was not legally impossible for her to perform under her contracts with plaintiffs. The Appellate Division, First Department affirmed. 161 A.D.3d 679 (1st Dept. 2018).

On August 31, 2018, the Court granted plaintiffs’ motion to file a third amended complaint (“TAC”), holding that a reasonable finder of fact could conclude that “the California complaint was a sham maliciously filed solely to defame plaintiffs.” Slip Op. at *9. The First Department affirmed. 172 A.D.3d 445 (1st Dept. 2019). The TAC contained four causes of action: (1) defamation related to Kesha’s assertions that Gottwald sexually assaulted her, (2) defamation related to a statement that Kesha made to Lady Gaga that Gottwald raped Katy Perry, (3) breach of the KMI Agreement, and (4) breach of the Prescription Agreement – the agreement governing the rights of Prescription, a limited liability company controlled by Gottwald, to publish Kesha’s music. Kesha answered the TAC and asserted 39 affirmative defenses in addition to her remaining counterclaim.

Following discovery, both parties moved for partial summary judgment.

Today’s post examines the requirement to pay interest under CPLR § 5001 and the fraudulent inducement affirmative defense – one of the 39 affirmative defenses asserted by Kesha.

The Court’s Decision

Plaintiffs alleged that the KMI Agreement entitled them to unpaid royalties due within 45 days of Kesha’s receipt of certain ancillary income and unpaid tour receipts payable within 30 days of the end of the applicable tour cycle. They claimed that Kesha owed them interest on her delayed royalty payment. Kesha did not dispute that she failed to pay any royalties to plaintiffs between January 1, 2012, and December 31, 2016.

On August 7, 2017 – well beyond the deadlines set forth in the parties’ contract and after the New York action had been commenced – Kesha paid plaintiffs $1,302,043.41 in royalties. Plaintiffs accepted the payment but expressly reserved “the right to seek an award of prejudgment interest on the entire amount Kesha withheld for years.”

Plaintiffs sought summary judgment on the interest due for the belated payment. They claimed that Kesha owed them $373,671.88 in interest on $1,302,043.41 in royalties.

Kesha did not dispute the calculation of the interest. Instead, she claimed that because there was no finding of breach, there was no predicate for an interest award. She maintained that the payments were simply a “good-faith gesture to resolve a dispute without troubling the Court.”

The Court rejected Kesha’s arguments.

The Court held that the tender of payment after the litigation commenced did not defeat plaintiffs’ statutory right to prejudgment interest under CPLR 5001:

By making the August 2017 payments for commissions “as of 12.31.16,” Kesha conceded that she owed those amounts. In fact, even now, she does not dispute that the KMI Agreement entitles plaintiffs to those sums and that she paid late. Nor does she show that plaintiffs’ timeframes and interest calculations are incorrect or otherwise challenge them. Her arguments that the parties modified the time for payment despite the absence of any written agreement and that there was an ongoing waiver of timely payment by plaintiffs is not countenanced by the KMI Agreement, which contains no oral-modification and no-waiver  provisions. Plaintiffs have proven that they were entitled to the over $1.3 million that Kesha paid belatedly after this lawsuit was commenced and there is no legal basis for absolving her of paying statutory prejudgment interest on that amount.

Slip Op. at **27-28 (citations omitted).

“Because plaintiffs demonstrated that Kesha breached the KMI Agreement by not timely making payment,” concluded the Court, “prejudgment interest on the delinquency is mandatory.”

In addition to the foregoing, plaintiffs moved for summary judgment on Kesha’s fraudulent inducement affirmative defense to their breach of contract claim. As explained by the Court, Kesha claimed that she was fraudulently induced to enter into the KMI Agreement based on Gottwald’s alleged promise to renegotiate the contract if her first album was successful.

The Court held that the claim was “not viable because a fraud claim cannot be predicated on a promise of future performance.” Slip Op. at *30 (citing New York Univ. v. Continental Ins. Co., 87 N.Y.2d 308, 318 (1995); Wyle Inc. v. ITT Corp., 130 A.D.3d 438, 439 (1st Dept. 2015). Notably, observed the Court, “Kesha [did] not claim that Gottwald misrepresented any then-present facts.” Id. (citing TIAA Global Invs., LLC v. One Astoria Sq. LLC, 127 A.D.3d 75, 87 (1st Dept. 2015).

Even if the fraud claim was based upon an insincere promise to engage in future conduct, Justice Schecter found that the affirmative defense was not viable. The reason, said the Court, was Kesha’s failure to allege scienter – i.e., the failure “‘to plead specific facts from which it may be reasonably inferred that the defendant did not intend to keep the promise when it was made.’” Slip Op. at *30 (quoting Cronos Group Ltd. v. XComIP, LLC, 156 A.D.3d 54, 72 (1st Dept. 2017).

Additionally, the Court ruled that the fraudulent inducement affirmative defense could not survive because the KMI Agreement contained a merger clause. Slip Op. at *31. A merger clause is a provision in a contract that declares the writing to be the complete and final agreement between the parties. The Court also held that the anti-reliance language within the merger clause further precluded Kesha’s fraudulent inducement affirmative defense. In order for a party to disclaim reliance on extra-contractual representations, an agreement must contain language that makes it clear that the parties are not relying on such representations. The following is an example of a common anti-reliance provision:

Each of the Parties acknowledges that no other party, nor any agent or attorney of any other party, has made any promise, representation, or warranty whatsoever, and acknowledges that the Party has not executed or authorized the execution of this Agreement in reliance upon any such promise, representation or warranty, that is not expressly contained herein.

Courts will enforce anti-reliance language that identifies the specific information on which a party has relied and which forecloses reliance on other information. Danann Realty Corp. v. Harris, 5 N.Y.2d 317, 320 (1959) (finding that the plaintiff purchaser of a building could not assert that it was relying on oral representations made by the seller outside of a contract in which the plaintiff had specifically agreed in writing not to rely on such representations). See also Laxer v Edelman, 75 A.D.3d 584, 585–86 (2d Dept. 2010) (holding a fraudulent inducement claim concerning flooding and mold issues in the building was barred by merger clause that disclaimed reliance on any statements by defendants regarding the condition of premises).

In holding that the anti-reliance provision in the KMI Agreement sufficed to preclude the fraudulent inducement claim, Justice Schecter found that “the KMI Agreement set[] forth that no one ‘made any promise, representation or warranty whatsoever, express or implied, oral or written, not contained’ in the contract itself and that ‘all understandings and agreements’ between the parties were merged into the contract ‘which fully and completely expresse[] their agreement.’” Slip Op. at *31. Therefore, concluded the Court, Kesha “could not reasonably rely on any promise of future performance that was made before the agreement was signed but not included in the final contract.” Id. (citing Schron v. Troutman Sanders LLP, 20 N.Y.3d 430, 436 (2013); see also Matter of Primex Intl. Corp. v Wal-Mart Stores, Inc., 89 N.Y.2d 594, 599-600 (1997); Pate v. BNY Mellon-Alcentra Mezzanine III, LP, 163 AD3d 429, 430 (1st Dept. 2018)).

Takeaway

Gottwald underscores the effect of a merger clause and a no additional representations clause. While the merger clause at issue seems to be too general to be enforceable (i.e., it did not identify the specific representations and communications being integrated into the KMI Agreement), the no additional representations clause underscored the parties’ agreement to be bound only by the terms of the KMI Agreement.

The lesson of Gottwald, therefore, is that parties to an agreement should carefully negotiate and consider the language of their merger clause, and not rely on boilerplate language. In that regard, they should specify the representations and matters being merged or integrated into the agreement. If the parties intend complete integration, then they should ensure that the merger clause clearly articulates their intention. And, if they include anti-reliance language in the merger clause, such language should be specific and identify the representations and matters to be included or excluded.

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