For Various Reasons, Pre- and Post- Contract Misrepresentations Found To Duplicate Breach of Contract Claim

• Posted on: Jun 29 2022

By: Jeffrey M. Haber

The Duplication Doctrine is well-known to readers of this Blog. In a nutshell, the doctrine holds that “[a] cause of action for fraud does not arise when the only fraud charged relates to a breach of contract.”¹ 

“To plead a viable cause of action for fraud arising out of a contractual relationship, the plaintiff must allege a breach of duty which is collateral or extraneous to the contract between the parties.”² A plaintiff must also allege that the recovery sought does not arise out of the same facts and circumstances.³ As we have noted before (here), courts do not hesitate to dismiss fraud claims when they are merely contract claims “dressed in the garb of a fraud count.”⁴   

In December 2020, we wrote an article about Shear Enterprises, LLC v. Cohen, 189 A.D.3d 423 (1st Dept. Dec. 1, 2020) (here), a case in which the plaintiff avoided the duplication of claims doctrine by alleging a misrepresentation about the ability to perform under the contract. As we discussed, representations about the ability to perform are not the same as inactionable promises to perform.

We have also written about the damages aspect of the doctrine. In January 2021, for example, we examined Demurjian v. Demurjian, 2021 N.Y. Slip Op. 00008 (1st Dept. Jan. 5, 2021) (here), a case in which the Court affirmed the dismissal of a fraud cross-claim as duplicative of a contract cross-claim because the damages sought were the same notwithstanding the alleged independent duty owed to the cross-claim plaintiff.  

In today’s article, we examine New York City Waterfront Development Fund II, LLC v. Pier A Battery Park Assocs., LLC, 2022 N.Y. Slip Op. 04127 (1st Dept. June 28, 2022) (here), a case in which the foregoing issues were considered by the Appellate Division, First Department. In particular, the Court examined the distinction between a promise to perform and the ability to perform under a contract, as well as the consequences of seeking the same recovery in both the fraud and contract causes of action notwithstanding the existence of an independent duty. 

[Ed. Note: the factual discussion of Waterfront Development is based on the complaint and the parties’ briefing on appeal.]

In 2011, Plaintiff and defendant Pier A LLC (“Borrower”) entered into a loan agreement to provide funds for the development of a restaurant in New York City. Specifically, plaintiff loaned $16.5 million (the “Loan”) to Borrower for the development of Pier A Harbor House (“Harbor House”), a restaurant located at the southern tip of Battery Park.

The Loan was made pursuant to a loan agreement, dated July 7, 2011 (the “Loan Agreement”). As security for the Loan, Borrower executed and delivered the following documents to plaintiff: (1) a Leasehold Mortgage, Security Agreement and Fixture Filing, dated July 7, 2011 (for a $5 million advance); and (2) a Leasehold Mortgage, Security Agreement and Fixture Filing, dated July 7, 2011 (for a $11.5 million advance). Also on July 7, 2011, plaintiff and Borrower executed a Promissory Note (the “Note”) in accordance with the Loan Agreement (collectively, the “Loan Documents”). 

Prior to executing the Loan Documents, defendants provided plaintiff pro forma financial statements for Pier A’s operations. These financial statements projected EBITDA of over $2.5 million every year for the first six years of operation and revenues from $24 to $27 million annually. After the Loan Agreement was signed, however, defendants allegedly admitted that the “project [was] undercapitalized and over leveraged from the beginning.” Plaintiff maintained that the project’s financial instability was known to defendants and never disclosed to plaintiff prior to execution of the Loan Agreement. Plaintiff claimed that it relied on the financial information, including a representation and warranty from Borrower that the financial projections were “prepared in good faith based upon assumptions believed to be reasonable at the time.”

After the Loan Agreement was executed, plaintiff claimed that defendants falsely represented that they were running the project in a way that would enable them to refinance and repay the Loan, when in fact they were defaulting on their obligations. By allegedly deceiving plaintiff as to their ability to repay, plaintiff maintained that defendants induced it to amend the lease and forbear taking enforcement action. Plaintiff also claimed that defendants continued to misrepresent the state of the business and their ability to repay, in order to further delay any remedial actions by plaintiff.

When the pandemic-related lockdown began, Borrower advised plaintiff that it had “no viable way forward under the current [Loan] and [lease] arrangements,” and would not repay or refinance the loan by the maturity date. On July 14, 2020, Borrower stated that it was surrendering the leasehold. Borrower allegedly admitted that it had not made its quarterly interest payments since January 2020.

On August 15, 2020, Borrower tendered the keys to the premises. On December 8, 2020, plaintiff gave Borrower notice that it was “in default under the Note and Loan Agreement for failure to make any interest payments for calendar year 2020.…”

On December 15, 2020, plaintiff filed the action, seeking to recover damages based on breaches of the Loan Documents, fraudulent and negligent misrepresentations, aiding and abetting fraud, and unjust enrichment and quantum meruit.

On February 26, 2021, defendants moved to dismiss all claims, except for the breach of contract claims asserted against Borrower. On August 20, 2021, the motion court granted defendants’ motion to dismiss, holding that, inter alia, plaintiff’s fraudulent inducement and misrepresentation claims were “baseless”.

The motion court noted that, as to the alleged pre-loan misrepresentations, plaintiff failed to demonstrate scienter (that is, a lack of intention to pay back the loan). In this regard, the motion court explained that plaintiff’s offer in 2017 to pay back the loan negated an inference of fraud: “Even if plaintiff had pleaded facts indicating a lack of intention or capacity to pay back the loan at the outset, in 2017, Borrower actually offered to repay the loan and plaintiff refused.” Thus, concluded the motion court, there was “no basis to infer that any fraud at the outset may have been a reason the loan was not repaid.”⁵ 

The Court also found that the “[p]ost-loan fraud claims [were] duplicative of the breach of contract claims”.⁶ Defendants argued that the post-loan fraud and misrepresentation claims concerned Defendants’ intent or lack thereof to perform under the Loan Agreement – that is, all the claims related to defendants’ purported promises to meet their payment obligations and assurances of performance.

Plaintiff appealed. The Appellate Department, First Department affirmed.

As to the pre-loan fraudulent inducement claim, the Court held that the claim was founded on a breach of contract.⁷ In so holding, the Court avoided the issue of whether plaintiff alleged scienter with the requisite particularity:⁸

The complaint alleges that defendants fraudulently induced plaintiff to extend the loan to Borrower by furnishing false financial projections. However, Borrower expressly represented in section 3.10 of the loan agreement that those projections were prepared in good faith upon assumptions believed to be reasonable at the time.… As the essence of the allegations is that defendants did not comply with that provision, the only claim stated is breach of contract…. Thus, we need not reach the issue of whether the court properly credited defendants’ written request to prepay the loan as irrefutable proof of absence of intent to defraud. [Citations omitted.]

The Court also held that the alleged misrepresentations that were made prior to entering into the lease amendments were similarly duplicative of the contract claims.⁹

Finally, the Court held that the post-lease amendment misrepresentations were “not misrepresentations of defendants’ ability to perform”.¹⁰ Nevertheless, the Court held that those fraud claims were duplicative of the contract claims because plaintiff did “not allege that it sustained damages that would not be recoverable under the breach of contract cause of action”.

Takeaway

As a general matter, New York courts will not permit a fraud-based claim to survive a motion to dismiss when the claim arises from a breach of contract. Indeed, courts routinely dismiss a fraud claim where the existence of a valid and enforceable written contract governs a particular subject matter and the recovery sought arises out of the same facts and circumstances. However, where “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.¹¹

What constitutes “a legal duty independent of a contract” is not a question easily answered.¹² It is a fact dependent examination. Waterfront Development illustrates this point. On the one hand, the facts revealed that the pre-loan and pre-lease amendment representations were duplicative of the Loan Agreement because they pertained to performance obligations. On the other hand, the facts showed that the post-Loan Agreement representations did not pertain to performance obligations; rather, the facts showed that the representations related an ability to perform. 

Waterfront Development also highlights the point that the determining factor as to the viability of a fraud claim may not be whether “a legal duty independent of the contract itself has been violated[,]” or the misrepresentation is “collateral or extraneous to the terms of the parties’ agreement”, but the measure of damages sought. Thus, as in Waterfront Development, although a plaintiff may allege a duty independent of a contract (as in Waterfront Development. with respect to the post-Loan Agreement representations), the fraud claim may nevertheless be duplicative of the breach of contract claim, if both claims seek the same damages.

Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.

This article is for informational purposes and is not intended to be and should not be taken as legal advice.

Footnotes

1. Krantz v. Chateau Stores of Can. Ltd., 256 A.D.2d 186, 187 (1st Dept. 1998) (citations omitted).
2. Id. (citations and quotation marks omitted).
3. Clark-Fitzpatrick v. Long Is., 70 N.Y.2d 382 (1987).
4. Songbird Jet Ltd., Inc. v. Amax Inc., 581 F. Supp. 912, 924 (S.D.N.Y. 1984).
5. Citing, Basis PAC-Rim Opportunity Fund (Master) v. TCW Asset Mgt. Co., 149 A.D.3d 146, 149-50 (1st Dept. 2017).
6. Citing, Manas v. VMS Assoc., LLC, 53 A.D.3d 451, 454 (1st Dept. 2008), and International Dev. Inst., Inc. v.Westchester Plaza, LLC, 194 A.D.3d 411 (1st Dept. 2021).
7. Slip Op. at *1.
8. Id.
9. Id. (citations omitted).
10. Id. (citing, Shear Enters., supra; Man Advisors, Inc. v. Selkoe, 174 A.D.3d 435 (1st Dept. 2019). This Blog examined Man Advisors, Inc. v. Selkoe here.
11. Dormitory Auth. v. Samson Constr. Co., 30 N.Y.3d 704 (2018) (citation omitted).
12. Cronos Group Ltd. v. XComIP, LLC, 156 A.D.3d 54, 56 (1st Dept. 2017) (referring to the question as a “recurring” one).