First Department Finds Fraud Claim Duplicative of Contract Claim Even Though Plaintiff Stated A Duty Independent of The Contract

• Posted on: Apr 21 2021

A “recurring question” New York courts grapple with is whether the facts alleged in a complaint give rise to claims for both breach of contract and fraudulent inducement. Cronos Grp. v. XComIP, LLC, 156 A.D.3d 54, 56 (1st Dept. 2017). Readers of this Blog know that a fraud claim, which “ar[ises] from the same facts [as an accompanying contract claim], s[eeks] identical damages and d[oes] not allege a breach of any duty collateral to or independent of the parties’ agreements[,] is subject to dismissal as redundant of the contract claim.” Id. at 63 (quoting Havell Capital Enhanced Mun. Income Fund, L.P. v. Citibank, N.A., 84 A.D.3d 588, 589 (1st Dept. 2011) (internal quotation marks omitted). See also HSH Nordbank AG v. UBS AG, 95 A.D.3d 185, 206 (1st Dept. 2012). As the First Department noted in Cronos Group, “[t]here is no shortage of recent decisions by this Court holding to similar effect.” 156 A.D.3d at 63 & n.8 (citing cases).

Sometimes, a plaintiff alleges a duty independent of the contract but, nevertheless, has his/her complaint dismissed because the damages sought are the same as those sought by the contract claim. The reason has to do with the purpose of the damages sought. MBIA Ins. Corp. v. Credit Suisse Sec. (USA) LLC, 165 A.D.3d 108, 114 (1st Dept. 2018); Mañas v. VMS Assoc., LLC, 53 A.D.3d 451, 454 (1st Dept. 2008). Fraud damages are meant to redress a different harm than damages for breach of contract. The latter damages are meant to restore the nonbreaching party to as good a position as it would have been in had the contract been performed; the former damages are meant to indemnify losses suffered as a result of the fraud. MBIA, 165 A.D.3d at 114; Mañas, 53 A.D.3d at 454. Thus, where all the damages are remedied through the contract claim, the fraud claim is duplicative and must be dismissed. MBIA, 165 A.D.3d at 114. This is so even where the plaintiff sufficiently alleges breach of an independent duty owed them separate and apart from the contract. Id.; see also Salamone v. EIP Global Fund LLC, 2021 N.Y. Slip Op. 02372 (1st Dept. Apr. 20, 2021) (here); Chowaiki & Co. Fine Art Ltd. v. Lacher, 115 A.D.3d 600, 600-601 (1st Dept. 2014) (dismissing fraud claim seeking duplicative damages even where the plaintiff sufficiently alleged a breach of duty independent of the contract).

[Ed Note: this Blog recently wrote about the foregoing scenario here and here.]

In Salamone v. EIP Global Fund LLC, the Appellate Division, First Department recently affirmed the dismissal of a fraud claim because the damages alleged were the same of those sought by plaintiff’s breach of contract claim.

Salamone concerned a loan by plaintiff Kenneth Salamone to defendants Sridhar Chityala (“Sridhar”) and EIP Global Fund, LLC (“EIP”) for $2,000,000.

On October 10, 2019, Sridhar and EIP asked Salamone for an emergency loan of $5 million. Salamone offered a $2 million loan, if he got certain information and assurances. Salamone made the loan on October 11, 2019, pursuant to a thirty-day demand note (the “Demand Note”), which Sridhar signed personally and on behalf of EIP. The Demand Note provided for 10% interest, with the principal to be paid back either on November 10, 2019, or on demand. The Demand Note was not paid. 

On November 11, 2019, Salamone made a written demand for repayment. Sridhar and EIP asked Salamone to forebear from taking further action, promising payment on November 21, 2019. 

Over the next weeks, payment was not tendered but promises were made about the availability of funds. On November 27, 2019, Salamone, Sridhar, and EIP entered into a Forbearance and Security Agreement (the “Forbearance Agreement”) by which Sridhar and EIP agreed to pay Salamone $2,369,918.50, plus interest on or before December 17, 2019, in exchange for Salamone agreeing to forbear exercising his rights under the Demand Note. Sridhar signed the Forbearance Agreement individually and on behalf of EIP. Salamone also received a security interest in Sridhar’s interests in EIP, Vedas Group, LLC (“Vedas”), and CKL Partners, LLC (“CKL”) (the “Membership Interests”), entities that were owned and managed by Sridhar and defendant Shreyas Chityala (“Shreyas”), pursuant to a Pledge Agreement dated November 22, 2019 (the “Pledge Agreement”). Sridhar and EIP did not pay the money required by the Forbearance Agreement on December 17, 2019. 

On December 18, 2019, Salamone notified Sridhar and EIP of the default and demanded payment and delivery of the Membership Interests. Neither was done.

Plaintiff filed suit, asserting claims for, inter alia, breach of contract and fraudulent inducement. Pursuant to the former, plaintiff claimed that Sridhar and EIP breached the Demand Note and Forbearance Agreement by failing to repay the loan and the amount required by the Forbearance Agreement and by failing to deliver the Membership Interests, and pursuant to the latter, that Sridhar and Shreyas fraudulently induced Salamone to enter into the Demand Note and the Forbearance Agreement by making false statements about their need for the loan, the availability of funds to repay it, and their intent to do so.

Defendants moved to dismiss (here). The motion court granted the motion with regard to the fraudulent inducement claim and the breach of contract claim only to the extent it sought damages for breach of the Forbearance Agreement. The Court denied the motion to dismiss the contract claim as it pertained to the Demand Note.

With regard to the fraudulent inducement claim, the motion court found that it was “based on an undisclosed intent not to perform” and, therefore, was duplicative of plaintiff’s contract claim.

On appeal, the First Department affirmed the motion court’s dismissal of the fraud claim, though for different reasons (i.e., modified on the law, but otherwise affirmed). Slip Op. at *1.

The Court held that the fraudulent inducement claim was not based “merely on an undisclosed intention not to pay,” as the motion court found. Id. Instead, it was based “on false written statements by defendant [Sridhar] as to the imminent receipt of funds by the corporate borrower that would allow repayment of the loan.” Id.

Notwithstanding the presence of a duty collateral to, or independent of, the contracts, the Court held that “the only damages plaintiff claim[ed] beyond those under the contracts [were] the opportunity costs of providing the funds to defendants for the loan.…” Id. Such damages, held the Court, “are not recoverable in fraud.” Id. (citing Lama Holding Co. v. Smith Barney, 88 N.Y.2d 413, 422 (1996) (noting that in fraud, “[t]he true measure of damage is indemnity for the actual pecuniary loss sustained as the direct result of the wrong” or what is known as the “out-of-pocket” rule”) (citation and internal quotation marks omitted)). Thus, the Court concluded, “the fraud claim, which otherwise arose from the same facts as those on which the contract claim is based, is duplicative of the contract claim.” Id. (citing Halliwell v. Gordon, 61 A.D.3d 932, 934 (2d Dept. 2009).