Duplication or No Duplication? That is the Question Decided by The Second Department

• Posted on: Jul 12 2021

A recurring theme in the jurisprudence concerning claims of fraud and breach of contract is duplication – that is, whether the fraud claim duplicates the breach of contract claim.

It is well settled that “[a] cause of action to recover damages for fraud will not lie where the only fraud claimed arises from the breach of a contract.” Gorman v. Fowkes, 97 A.D.3d 726, 727 (2d Dept. 2012); see also Selinger Enters., Inc. v. Cassuto, 50 A.D.3d 766, 768 (2d Dept. 2008); Tiffany at Westbury Condominium v. Marelli Dev. Corp., 40 A.D.3d 1073, 1076 (2d Dept. 2007). “Mere unfulfilled promissory statements as to what will be done in the future are not actionable as fraud and the injured party’s remedy is to sue for breach of contract.” Brown v. Lockwood, 76 A.D.2d 721, 731 (2d Dept. 1980) (citation omitted). However, if the plaintiff alleges a misrepresentation of “present facts that [are] collateral to the contract and served as an inducement to enter into the contract, [then] a cause of action alleging fraudulent inducement is not duplicative of a breach of contract cause of action.” Did-it.com, LLC v. Halo Group, Inc., 174 A.D.3d 682, 683 (2d Dept. 2019). [Ed. Note: This Blog examined Did-it.com here.]

In Emby Hosiery Corp. v. Tawil, 2021 N.Y. Slip Op. 04214 (2d Dept. July 7, 2021) (here), the Appellate Division, Second Department, affirmed the denial of a motion to dismiss the plaintiff’s fraudulent inducement claim, holding that the claim contained misrepresentations of present fact that were collateral to the contract before it and, therefore, was not duplicative of the breach of contract cause of action.  

Emby arose from the failure by defendants to pay for products they had ordered from plaintiff, an importer and distributor of goods. In addition to alleging breach of contract (i.e., the failure to pay), plaintiff alleged that the individual defendants induced it to continue selling and shipping products to the corporate defendants by misrepresenting to plaintiff that the corporate defendants would pay their debts to plaintiff. Thereafter, defendants stopped payment on checks previously tendered to plaintiff and allegedly gave false statements to various credit card companies so that the companies would reverse payments made to plaintiff. 

Plaintiff filed suit, asserting the following causes of action: an account stated against the corporate defendants as the first cause of action; breach of contract as the second cause of action; implied and/or quasi contract against the corporate defendants as the third cause of action; unjust enrichment against the corporate defendants as the fourth cause of action; fraud as the fifth cause of action; and defamation as the sixth cause of action.

Defendants moved to dismiss the complaint. The individual defendants moved to dismiss the complaint in its entirety and the corporate defendants moved to dismiss the third, fourth, fifth, and sixth causes of action. The motion court denied the motions to dismiss. Defendants’ appealed.

The Second Department affirmed.

Among other things, defendants argued that since the facts and circumstances supporting the fraud claim were the same as the breach of contract claim, the former claim was duplicative of the latter one. The Court rejected that argument, noting that “[a]lthough both causes of action [were] based on the same facts, the plaintiff’s fraud cause of action” was based on a misrepresentation that was collateral to the contract, “i.e., that the defendants would pay the plaintiff all of the monies owed with respect to prior orders despite knowing that the corporate defendants’ bank accounts did not have sufficient funds to cover those costs.” Slip Op. at *2. Thus, concluded the Court, “the fraud cause of action [was] not duplicative of the breach of contract cause of action.” Id.

The Court also held that plaintiff alleged sufficient facts to pierce the corporate veil necessary to allege wrongdoing on the part of the individual defendants. Id. at *2-*3. “To survive a motion to dismiss the complaint, a party seeking to pierce the corporate veil must allege facts that, if proved, establish that the party against whom the doctrine is asserted (1) exercised complete domination over the corporation with respect to the transaction at issue, and (2) through such domination, abused the privilege of doing business in the corporate form to perpetrate a wrong or injustice against the plaintiff such that a court in equity will intervene.” Olivieri Constr. Corp. v. WN Weaver St., LLC, 144 A.D.3d 765, 767 (2d Dept. 2016) (citations omitted).

Finally, the Court held that plaintiff adequately alleged that the individual defendants, as officers of the corporate defendants, were liable for the alleged fraud by participating in or having knowledge of the misrepresentations that were made to plaintiff. Id. at *3 (citations omitted): “The plaintiff alleged specific misrepresentations, intentionally made by the individual defendants in the context of purchasing more goods from the plaintiff despite outstanding balances owed to the plaintiff, and that the plaintiff relied upon that misrepresentation to its detriment.” Id.

Takeaway

As this Blog has noted previously, New York 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.” Clark-Fitzpatrick v. Long Is., 70 N.Y.2d 382 (1987). However, where, as in Emby, “a legal duty independent of the contract itself has been violated[,]” or where the misrepresentation is “collateral or extraneous to the terms of the parties’ agreement,” a fraudulent inducement claim can stand side-by-side with “a simple breach of contract” claim.  Dormitory Auth. v. Samson Constr. Co., 30 N.Y.3d 704 (2018) (citation omitted).

Emby is interesting because the Court did not address whether the damages sought by the fraud claim were the same as those sought by the breach of contract claim. See also Did-it.com, supra. In the First Department, the Court has dismissed fraud claims in which the damages sought by the fraud claim are the same as those sought by the breach of contract claim. This is so even where the plaintiff successfully demonstrates that the alleged misrepresentation is collateral to the contract at issue. E.g., Salamone v. EIP Global Fund LLC, 2021 N.Y. Slip Op. 2372 (1st Dept. 2021). This Blog wrote about this scenario here, here, and here. Whether there is a split between the Departments, or the facts underlying the decisions in the Second Department did not lend themselves to examination of the damages sought, is unclear. This Blog will continue to examine the duplication of claims doctrine in the two Departments to see if there is, in fact, a split between them.