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New York County Commercial Division Holds That Only Fraud Claims Collateral To Contract Claims Can Survive A Motion To Dismiss

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  • Posted on: Oct 12 2018

Courts do not hesitate to dismiss fraud claims when they are merely contract claims “dressed in the garb of a fraud count.”  Songbird Jet Ltd., Inc. v. Amax Inc., 581 F. Supp. 912, 924 (S.D.N.Y. 1984).  “It is well settled that a cause of action for fraud does not arise, where the only fraud alleged relates to a contracting party’s alleged intent to breach a contractual obligation.”  (Caniglia v. Chicago Tribune-New York News Syndicate Inc., 204 A.D.2d 233, 34 (1st Dep’t 1994) (citation omitted).)  “[A] fraud claim that arises from the same facts as an accompanying contract claim, seeks identical damages and does 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.  Thus, where a fraud claim was supported by allegations that the defendants had misrepresented…their intentions with respect to the manner in which they would perform their contractual duties, we dismissed the fraud claim as duplicative of plaintiffs’ contract claim because the fraud claim was based on the same facts that underlie the contract cause of action, was not collateral to the contract, and did not seek damages that would not be recoverable under a contract measure of damages.”  (Cronos Group Limited v. XCOMIP, LLC, 156 A.D.3d 54, 63 (1st Dep’t 2017) (citations, internal quotation marks and internal brackets omitted).)

Justice Sherwood (New York County—Commercial Division) addressed these issues in his September 21, 2018 decision in Bryan v. SlothowerThe individual defendant (Slothower) in Bryan was plaintiff’s investment advisor at Merrill Lynch.  Slothower left Merrill and started his own firm, corporate defendant Battery Private, Inc.  Slothower forged Bryan’s name on, among other documents, an account application with a brokerage firm and an investment advisory agreement with Battery.  Bryan sent money to Slothower to invest and, in turn, Slothower reassured Bryan that his investments were doing well.  To support these reassurances, Slothower would, from time-to-time, send Bryan “dividend” payments, some of which payments came from Slothower’s own funds.

At some point, Slothower was instructed to sell Bryan’s stock position in Alibaba.  Slothower responded by advising that he never purchased Alibaba stock for Bryan and, instead, purchased options “which did not pan out” and that all of Bryan’s money was gone.

To resolve their dispute, Bryan and Slothower entered into a “Settlement Agreement” pursuant to which Slothower was to pay Bryan $775,000 two months later.  Slothower defaulted under the Settlement Agreement by failing to make the payment.  As a result, Bryan sued Slothower and Battery and asserted, among other causes of action against them: (1) fraudulent inducement as to the Settlement Agreement (to the extent that Slothower never intended to make the required settlement payment); (2) fraud against Slothower and Battery for “untrue statements of material fact or omissions;” and, (3) breach of contract (to the extent that Slothower failed to make the required settlement payment).

Bryan sought to void the Settlement Agreement because Slothower misrepresented his intention to make the settlement payment, that he forged Bryan’s signatures and that at the time the settlement was reached, Bryan was unaware of Slothower’s misrepresentations and omissions, including that he forged Bryan’s signature on several documents.

In dismissing the fraudulent inducement claim, Justice Sherwood relied on a line of authorities holding that “[i]n a fraudulent inducement claim, the alleged misrepresentation should be one of then-present fact, which would be extraneous to the contract and involve a duty separate from or in addition to that imposed by the contract and not merely a misrepresented intent to perform”  (citations, internal quotation marks and ellipses omitted).  In order to sustain a fraud claim, “a mere misrepresentation of an intention to perform under the contract is insufficient” and “a present intent to deceive must be alleged” (citations, internal quotation marks and brackets omitted).

Bryan relied on White v. Davidson, 150 A.D.3d 610 (1st Dep’t 2017), to support his claim that a “preconceived intent not to perform is sufficient to sustain the fraud in the inducement claim.” [EDITOR’s NOTE – The Law Offices of Jeffrey M. Haber, the predecessor firm to Freiberger Haber LLP, argued the appeal for Matthew White in White v. Davidson.]  In White, the First Department found that several of the misrepresentations that defendant promised or claimed in conjunction with the parties entering into an exclusive music recording agreement (i.e., that defendant:  (1) was highly successful and previously successfully represented famous recording artists; (2) would promote White’s music to radio broadcasting venues; (3) would organize marketing events to promote plaintiff’s single; (4) would organize a radio tour; and, (5) would promote the re-release of the single around Valentine’s Day 2015) were collateral to the underlying recording contract entered into by the parties.  White, 150 A.D.3d at 611.  As to item no. 1, the White Court found that the representations were neither opinion nor puffery, but were specific misrepresentations concerning defendants’ experience in promoting performing artists.  White, 150 A.D.3d at 611.  As to the remaining four items, the White Court found that “the complaint adequately alleges that defendants made specific representations concerning the actions that they would undertake to promote plaintiff’s single in order to induce him to self-fund their promotional campaign while never intending to perform, and were, in effect, engaging in a Ponzi scheme.”  White, 150 A.D.3d at 611.

In Bryan, Justice Sherwood found that, unlike the situation in White, the subject representation regarding the payment of settlement funds was not collateral to the Settlement Agreement but was an actual term of the Settlement Agreement.

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