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Fraud Complaint That Seeks Damages Different From Contract Found Not To be Duplicative of Contract Claim

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  • Posted on: Mar 10 2021

In the past, this Blog has examined cases in which the plaintiff brings a breach of contract claim and fraud claim in the same proceeding. [E.g., here, here, here, and here.] Those cases show that where the two claims arise from the same facts and circumstances and seek the same relief, the fraud claim will be dismissed as duplicative of the contract claim.  

Indeed, as this Blog has explained previously, New York courts will not permit a fraud claim to survive a motion to dismiss when the claim arises from a breach of contract. Courts routinely dismiss a fraud claim where “[t]he existence of a valid and enforceable written contract govern[s] a particular subject matter” and the recovery sought arises out of the same facts and circumstances. Clark-Fitzpatrick v. Long Is., 70 N.Y.2d 382 (1987). 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 fraud 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). See also McKernin v. Fanny Farmer Candy Shops, Inc., 176 A.D.2d 233, 234 (2d Dept. 1991).

In today’s article, we examine GSCP VI EdgeMarc Holdings, L.L.C. v. ETC Northeast Pipeline, LLC, 2021 N.Y. Slip Op. 01356 (1st Dept. Mar. 9, 2021) (here), a case in which the Appellate Division, First Department addressed the duplication issue, finding that the fraud claim, in part, duplicated plaintiffs’ breach of contract claim. In addition to duplication, the Court also addressed the particularity requirement of CPLR § 3016(b), finding that the complaint provided “specific facts from which it [was] possible to infer defendant’s knowledge of the falsity of its statements.”

GSCP VI EdgeMarc Holdings, L.L.C. v. ETC Northeast Pipeline, LLC

[Ed. Note: the discussion of the facts and motion court’s ruling are derived from the parties’ briefing on appeal.]

GSCP involved a lawsuit by the equity owners of EdgeMarc Energy Holdings, LLC (“EdgeMarc”), a Pennsylvania oil-and-gas company, who invested $850 million in the company. Plaintiffs alleged that they incurred significant losses from their investments in defendant ETC Northeast Pipeline, LLC (“Energy Transfer”), a company that designs, builds and operates pipelines.

Plaintiffs claimed that beginning in August 2017, Energy Transfer made representations about the progress of the pipeline system (e.g., that it was progressing on schedule) and its availability for commercial use (e.g., when it would be ready for commercial service). Based on those representation, plaintiffs alleged that they invested $50 million in EdgeMarc. 

Plaintiffs also alleged that in late 2017, prior to making additional investments in EdgeMarc, Energy Transfer certified that there was no delay in the development, construction or completion of the system and that, as such, commercial service would be ready by July 1, 2018. According to plaintiffs, Energy Transfer provided three such certifications. Relying of those certifications, plaintiffs claimed that they invested $100 million more in EdgeMarc in early 2018.

In September 2018, the pipeline exploded. As a result, regulators ordered a shut-down of the project. Plaintiffs maintained that the explosion exposed the truth about Energy Transfer’s prior representations concerning the project and the system. Plaintiffs alleged that at the time of each representation, Energy Transfer had knowledge and notice of material flaws in its pipeline system that would delay and prevent completion and commercial service of the pipeline system. According to plaintiffs, years before the explosion, Energy Transfer was informed of the area’s “high susceptibility to slope failure” — which is what happened in September 2018 — yet it never disclosed that information, including to the engineers responsible for approving the system’s design. Instead, alleged plaintiffs, Energy Transfer represented to them, without qualification, that the project was on track for completion and commercial service.

After the explosion, the Pennsylvania Department of Environmental Protection cited Energy Transfer for legal violations and imposed a $30.6 million civil penalty on the company. Plaintiffs claimed that Energy Transfer did not disclose any of the violations and flaws with the pipeline system prior to the explosion, notwithstanding one of the contractual provisions in the funding commitments in which the company certified the absence of legal violations. Plaintiffs alleged that they funded $100 million of commitments to EdgeMarc on that provision (i.e., that Energy Transfer had complied with applicable law).

As a result, plaintiffs filed suit, bringing claims for breach of contract (based on Energy Transfer’s contractual certifications and other breaches), fraud, unjust enrichment and negligent misrepresentation. Energy Transfer moved to dismiss the complaint. 

The motion court denied the motion as to the breach of contract claim and granted it as to the fraud, unjust enrichment and negligent misrepresentation claims.

Both parties appealed.

The Court’s Holding

The First Department modified the motion court’s order as to the fraud claim, in that it reinstated part of the claim.

With regard to the $100 million investment in 2018, the Court held that the fraud claim duplicated the breach of contract claim. Slip Op. at *1 (“To the extent the fraud claim alleges that plaintiffs invested a total of $100 million in 2018 based on defendant’s false and misleading statements made on January 18, 2018, March 2, 2018, and April 16, 2018, representing there was no Project Delay, the claim is duplicative of the breach of contract claim.”) (citations omitted). 

With regard to the $50 million investment in 2017, the Court held that the fraud claim did not duplicate the contract claim. Id. The Court reasoned that the fraud claim was predicated on representations that were “not alleged in the breach of contract claim and [were] not covered by the Commitment Letters.” Id. 

The Court also held that the motion court erred in dismissing the fraud claim for failing to plead fraud with particularity under CPLR § 3016(b). Id. at *1-*2. The Court found that plaintiffs provided “‘specific facts from which it [was] possible to infer defendant’s knowledge of the falsity of its statements,’ including that the dangers and extensive violations of regulations and laws would result in delay beyond July 1, 2018.” Id. at *2 (quoting Houbigant, Inc. v Deloitte & Touche, 303 A.D.2d 92, 99 (1st Dept. 2003); other citation omitted). The Court explained that the complaint

alleges that at meetings in Pennsylvania on August 23 and 24, 2017, defendant’s Director — Business Development made false, misleading, and incomplete statements to plaintiffs’ representatives that the pipeline was on track to be fully complete by January 2018 and ready for commercial service by July 1, 2018, when defendant knew it was not on track. It also includes factual allegations that allow the inference that defendant knew those representations were false, including that defendant knew since 2015 that the area near the site of the September 2018 explosion included a landslide area with “dangerous and unstable hillslope terrain,” and that the Pennsylvania DEP’s January 2020 consent order noted that as early as January 2016, defendant knew the area had a “high susceptibility to slope failure” but did not disclose that issue to its engineers or correct it. 

Id. at *2.

The Court held that the foregoing allegations satisfied “CPLR 3016(b)’s purpose, ‘to inform a defendant with respect to the incidents complained of.’” Id. (quoting Pludeman v. Northern Leasing Sys., Inc., 10 N.Y.3d 486, 491 (2008)). 

In Pludeman, the New York Court of Appeals “cautioned that section 3016 (b) should not be so strictly interpreted as to prevent an otherwise valid cause of action in situations where it may be impossible to state in detail the circumstances constituting a fraud.” 10 N.Y.3d at 491. Thus, where “it would work a potentially unnecessary injustice to dismiss a case at an early stage where any pleading deficiency might be cured later in the proceedings,” the courts should deny a dismissal motion. Id. at 491-92 (internal quotation marks and citations omitted). (citation and quotation marks omitted). In other words, a pleading satisfies CPLR § 3016(b) “when the facts are sufficient to permit a reasonable inference of the alleged conduct.” Id. at 492; accord Eurycleia Partners, LP v. Seward & Kissel, LLP, 12 N.Y.3d 553, 559 (2009); Epiphany Cmty. Nursery Sch. v. Levey, 171 A.D.3d 1, 9 (1st Dept. 2019).

The First Department also held that plaintiffs were “not required to plead damages for fraud with particularity.” Slip Op. at *2 (citing Solomon Capital, LLC v. Lion Biotechnologies, Inc., 171 A.D.3d 467, 469 (1st Dept. 2019)).

Takeaway

GSCP makes clear how facts and the degree of specificity with which those facts are alleged matter, both in terms of the duplication of claims doctrine and the particularity requirement under CPLR § 3016(b). 

As to the former, plaintiffs were able to plead facts showing the existence of an independent tort that was not bound up in their breach of contract claim. For that reason, the First Department was able to make the distinction between the fraud claim for events both before and during 2018.

As to the latter, the Court found, without explicitly saying so, that plaintiffs adequately described the “who, what, when, where, and how” of the fraud, or “the first paragraph of any newspaper story.” United States ex rel. Lubsy v. Rolls-Royce Corp., 570 F.3d 849, 853 (7th Cir. 2009) (internal quotation marks omitted). They provided “specific facts from which it [was] possible to infer defendant’s knowledge of the falsity of its statements.” Slip Op. at *2. Since the complaint sufficed “to inform … defendants with respect to the incidents complained of” (Pludeman, 10 N.Y.3d at 491), the Court found that plaintiffs satisfied the overarching purpose of CPLR § 3016(b): to give defendants notice of the alleged fraud. 

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