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Heightened Pleading Standard For Tortious Interference With Contract Too Difficult to Overcome For Aggrieved Company

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  • Posted on: Jun 21 2017

Since the early 1900s, tortious interference with contractual relations has been a viable cause of action in New York. E.g., S.C. Posner Co. v. Jackson, 223 N.Y. 325, 332 (1918); Lamb v. Cheney & Son, 227 N.Y. 418, 421 (1920).  It occurs when a business or individual who is not a party to a contract intentionally disrupts a business relationship formed by a contract. Lama Holding v. Smith Barney, 88 N.Y.2d 413, 424 (1996).

Under New York law, an action for interference with a contractual relationship requires the existence of a valid, enforceable contract between the plaintiff and a third party, the defendant’s knowledge of that contract, the defendant’s intentional procurement of the third-party’s breach of the contract without justification, an actual breach of the contract, and damages resulting therefrom. NBT Bancorp v. Fleet/Norstar, 87 N.Y.2d 614, 621 (1996); RLR Realty Corp. v. Duane Reade Inc., 145 A.D.3d 444, 445 (1st Dept. 2016).

When the claim involves a corporate officer alleged to have personally interfered with a contract between the corporation and a third party, the plaintiff must satisfy a heightened pleading standard. Joan Hansen & Co. v. Everlast World’s Boxing Headquarters Corp., 296 A.D.2d 103, 108-109 (1st Dept. 2002).  Thus, to plead liability for tortious interference with contract against a corporate officer, the complaint must allege that the officer’s acts were either outside the scope of his/her employment, or, if within the scope of employment, that the officer personally profited from the acts in contravention of the corporation’s interests. Id.; Hoag v. Chancellor, 246 A.D.2d 224, 228 (1st Dept. 1998).

Moreover, “[a] pleading must allege that the acts complained of, whether or not beyond the scope of the defendant’s corporate authority, were performed with malice and were calculated to impair the plaintiff’s business for the personal profit of the defendant.” Joan Hansen & Co., 296 A.D.2d at 110 (internal citations omitted).

TC Tradeco, LLC v. Karmaloop Europe, AG

Dismissal for failure to satisfy the heightened pleading standard was at issue in TC Tradeco, LLC v. Karmaloop Europe, AG, 2017 NY Slip Op. 31217(U), in which Justice Oing of the Supreme Court, New York County, Commercial Division dismissed a case based on, inter alia, a claim of tortious interference with contractual relations by a corporate insider.

Background

The case arose from a dispute relating to an Inventory Supply Agreement (“ISA”) between Karmaloop, Inc. and certain of its subsidiaries (“Karmaloop”) and the plaintiff TC Tradeco, LLC (“Tradeco”), as well as a dispute relating to a Payment Protection Agreement (“PPA”) between Karmaloop and Capstone Partners, LLC (“Capstone Partners”) and Greg Selkoe.

The parties entered into the PPA to provide Tradeco with security after Karmaloop had defaulted on their payment obligations pursuant to the ISA. Defendant Brian Davies (“Davies”) signed the PPA on behalf of Capstone Partners. Defendant Selkoe signed a personal guarantee agreeing to be liable for any breach by Karmaloop of the PPA.

The decision at issue involved a motion to serve a second amended complaint in which, among other claims, Tradeco sought damages against Davies for tortious interference with contract.

The Court’s Ruling

On the tortious interference with contract claim, the Court found that Tradeco failed to satisfy the heightened pleading standard required by the courts:

Here, plaintiff has failed to plead sufficient facts to show that Davies acted for personal profit, independent of any benefit bestowed on CRS Capstone as a corporate entity. In its second proposed amended complaint, plaintiff merely alleges that both defendant Capstone Partners and/or Defendant CRS agreed in [the PPA] that it shall not pre-approve or authorize Karmaloop to make any payment to any person or entity if Karmaloop is not then current on any and all sums then owed. Such an allegation, standing alone, is insufficient to subject defendant Davies to a tortious interference claim. Plaintiff’s allegation that Davies personally profited from his procurement of the breach of the [PPA] does not eliminate the above-noted pleading deficiency. Without more, the proposed pleading is palpably insufficient.

Internal quotations and citations omitted.

Takeaway

As discussed, when seeking to hold corporate officials personally responsible for the company’s breach of contract under a theory of tortious interference with contractual relations, the plaintiff must satisfy “an enhanced pleading standard.” Joan Hansen, 296 A.D.2d at 109. This means that the plaintiff must come to court with facts, not conclusions. Tradeco failed to plead such facts (i.e., facts demonstrating that Davies acted for his personal profit, independent of any benefit bestowed on the company), and learned that its failure to plead the facts necessary to establish the elements of a wrongful and intentional interference with a contractual relationship sufficed to dismiss its claim. Id. at 110. TC Tradeco, therefore, stands as a reminder that “conclusory allegations — claims consisting of bare legal conclusions with no factual specificity — are insufficient to survive a motion to dismiss.” Godfrey v Spano, 13 N.Y.3d 358, 373 (2009).

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