Fraudulent Inducement, Merger Clauses and Duplication

• Posted on: Oct 23 2023

By: Jeffrey M. Haber

A couple of months ago, we examined NW Media Holdings Corp. v. IBT Media Inc., 2023 N.Y. Slip Op. 30875(U) (Sup. Ct., N.Y. County Mar. 22, 2023) (here), a case in which a lower court addressed the question whether the destruction of millions of pages of data on a Google Workspace states a claim for trespass to chattels or conversion (here). As discussed in that article, the court concluded that the allegations concerning the destruction of such data sufficed to state a claim for conversion.

NW Media was again the subject of an article by this Blog, this time in the context of board deadlock – that is, when the members of a company’s board of directors are deadlocked regarding the vote on a matter of corporate concern. NW Media Holdings Corp. v. IBT Media Inc., 2023 N.Y. Slip Op. 03288 (1st Dept. June 15, 2023) (here). As discussed in that article, the Court held that the “motion court correctly granted IBT’s motion to dismiss the complaint” because defendant “Pragad [as president of NW Media Holdings Corp. (“NW Media”), which owned Newsweek LLC and related entities] lost his presumptive authority to initiate th[e] action in the corporation’s name because NW Media’s board was deadlocked.”

NW Media is once again the subject of an article, this time in the context of a motion to dismiss certain causes of action alleged against the defendants. IBT Media Inc. v. Pragad, 2023 N.Y. Slip Op. 05315 (1st Dept. Oct. 19, 2023) (here).

In late 2016, plaintiff IBT Media, Inc. became the subject of a criminal investigation by the Manhattan District Attorney’s office. In 2018, when it appeared that plaintiff and its principal would be indicted, plaintiff decided to sell its membership interest in nonparty Newsweek to defendant NW Media, a company owned partially by defendant Dev Pragad and formed for the purpose of buying plaintiff’s interest in Newsweek. The transaction was documented in a September 2018 purchase agreement between plaintiff and NW Media. The purchase agreement, which contained a merger clause, stated that plaintiff agreed to sell its membership in Newsweek to NW Media free and clear of any claims or restrictions, and that the transaction would convey good title in Newsweek to NW Media. In or around late 2021, Pragad stated that he would not return NW Media’s ownership interest in Newsweek to plaintiff.

Plaintiff sued, asserting a number of causes of action including declaratory relief (first cause of action), anticipatory breach of oral agreement (second cause of action), promissory estoppel (third cause of action), unjust enrichment (fourth cause of action), fraudulent inducement (fifth cause of action), breach of fiduciary duty (eighth cause of action), constructive trust (ninth cause of action), and equitable accounting (tenth cause of action). Defendants moved to dismiss the foregoing causes of action. The motion court granted the motion and plaintiff appealed.

The Appellate Division, First Department affirmed.

The Court held that the motion court properly dismissed plaintiff’s claim for a declaratory judgment, finding that the plain terms of the purchase agreement barred plaintiff from obtaining the relief sought. In that regard, the Court stated that the purchase agreement was “clear and therefore must be enforced according to its plain terms.”¹ As such, the merger clause, which was included in the agreement, “foreclose[d] the introduction of parol evidence to vary or contradict the terms of the writing.”²

[Eds. Note: A merger clause is a provision in a contract that declares the writing to be the complete and final agreement between the parties. 

Merger clauses typically are found at the end of a contract or agreement, among the other “boilerplate” provisions, and, as such, are often neglected or ignored during negotiations. Boilerplate merger clauses are given little weight by the courts. However, when the merger clause evidences a negotiation by the parties, courts accord such clauses more weight in determining the parties’ intent.

In New York, the courts have required the parties to specify the agreements and matters being merged or integrated into their agreement. Without such specificity, the courts have allowed parol evidence to be used to explain the parties’ intent, especially in cases involving claims of fraudulent inducement.³] 

The Court also held that the motion court properly dismissed the promissory estoppel (third cause of action) and unjust enrichment (fourth cause of action) causes of action.⁴ The Court reasoned that those claims were premised on the existence of the agreement between the parties – i.e., the purchase agreement. Since “a valid written contract exists, and the relationship between the parties is therefore governed by that written agreement,”⁵ plaintiff’s quasi-contract claims could not stand.⁶

[Eds. Note: Generally, quasi-contractual remedies are unavailable where there exists a valid and enforceable agreement governing the particular subject matter at issue.⁷ However, “where there is a bona fide dispute as to the existence of a contract or the application of a contract in the dispute in issue, a plaintiff may proceed upon a theory of quasi contract as well as breach of contract, and will not be required to elect his or her remedies.”⁸]

The Court further held that the motion court properly dismissed the fraudulent inducement claim because plaintiff did “not allege facts establishing that in August and September 2018, when the parties were negotiating the terms of the purchase agreement, Pragad had no intention of honoring his promises with respect to that agreement.”⁹ “General allegations of lack of intent to perform are insufficient; rather, facts must be alleged establishing that the adverse party, at the time of making the promissory representation, never intended to honor the promise.”¹⁰ “At most,” said the Court, “plaintiff allege[d] facts establishing that around three years later, in the fall of 2021, Pragad stated that he would not return Newsweek to plaintiff.”¹¹ 

Finally, the Court held that the motion court “correctly dismissed the causes of action for breach of fiduciary duty and equitable accounting.”¹² To plead both causes of action, a plaintiff must allege a fiduciary relationship. The Court found that plaintiff failed to do so, citing authority that stands for the proposition that a fiduciary relationship does not exist when parties merely negotiate an agreement at arm’s length.¹³ 

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. 

References

1. Slip Op. at *1 (citing W.W.W. Assoc., Inc. v. Giancontieri, 77 N.Y.2d 157, 162 (1990)).
2. Id.
3. Danann Realty Corp. v. Harris, 5 N.Y.2d 317, 320-21 (1959); Laduzinski v. Alvarez & Marsal Taxand LLC, 132 A.D.3d 164, 169 (1st Dept. 2015). 
4. The Court noted that “[d]ismissal of the cause of action for unjust enrichment compel[ed] dismissal of the cause of action for constructive trust because ‘the purpose of a constructive trust is prevention of unjust enrichment.’” Slip Op. at *2 (quoting Genger v. Genger, 121 A.D.3d 270, 278 (1st Dept. 2014) (internal quotation marks omitted)).
5. Slip Op. at *2 (citing Wilson v. Dantas, 173 A.D.3d 460, 461 (1st Dept. 2019), lv. denied, 34 N.Y.3d 909 (2020); Fariello v. Checkmate Holdings, LLC, 82 A.D.3d 437, 438 (1st Dept. 2011)).
6. Id. (citing Kramer v. Greene, 142 A.D.3d 438, 441 (1st Dept. 2016)).
7. See MG W. 100 LLC v. St. Michael’s Prot. Episcopal Church, 127 A.D.3d 624, 626 (1st Dept. 2015).
8. Goldman v. Simon Prop. Grp., Inc., 58 A.D.3d 208, 220 (2d Dept. 2008).
9. Slip Op. at *2 (citing King Penguin Opportunity Fund III, LLC v. Spectrum Grp. Mgt. LLC, 187 A.D.3d 688, 690 (1st Dept. 2020)).
10. Perella Weinberg Partners LLC v. Kramer, 153 A.D.3d 443, 449 (1st Dept. 2017); Cronos Group Ltd. v. XComIP, LLC, 156 A.D.3d 54, 71 (1st Dept. 2017).
11. Slip Op. at *2 (citing Braddock v. Braddock, 60 A.D.3d 84, 89 (1st Dept. 2009), appeal withdrawn, 12 N.Y.3d 780 (2009)).
12. Id.
13. Id. (citing Eden v. St. Luke’s-Roosevelt Hosp. Ctr., 96 AD3d 614, 615 (1st Dept. 2012)).