Misrepresentations Concerning Intent Not to Perform Are Not The Same As Misrepresentations Concerning The Ability to Perform For Duplication Purposes

• Posted on: Dec 2 2020

“A cause of action for fraud does not arise when the only fraud charged relates to a breach of contract.” Krantz v. Chateau Stores of Can. Ltd., 256 A.D.2d 186, 187 (1st Dept. 1998) (citations omitted). 

“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.” Id. (citations and quotation marks omitted). One way to satisfy this requirement is to allege a present intent to deceive. In doing so, however, the plaintiff cannot allege “a mere misrepresentation of an intention to perform under the contract.” WIT Holding Corp. v. Klein, 282 A.D.2d 527, 528 (2d Dept. 2001) (citation omitted); see also Gorman v. Fowkes, 97 A.D.3d 726, 727 (2d Dept. 2012). Another way to satisfy the requirement is to allege a misrepresentation of material fact, which is collateral to the contract (id. at 528 (citation omitted)), such as a misrepresentation about the ability to perform under the contract. 

In today’s article, we examine Shear Enters., LLC v. Cohen, 2020 N.Y. Slip Op. 07149 (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. 

[Ed. Note: The facts discussed below were taken from the amended complaint and the motion papers submitted in the trial court.]

Shear arose from commercial transactions between plaintiff, Shear Enters., LLC, and defendant, Tres Joli Accessories, Ltd. (“TJ”).

For over ten years, plaintiff and TJ did business together whereby TJ manufactured apparel for plaintiff and shipped it to plaintiff’s customers. During this period of time, the parties developed a credit line pursuant to which TJ manufactured and sold apparel to Plaintiff. 

In February 2018, plaintiff placed two orders with TJ to manufacture apparel that was ordered by one of plaintiff’s customers (the “Orders”). Among other things, plaintiff told defendants the date by which the Orders had to be shipped to the customer. If the Orders were not shipped by that date, then the customer could cancel the Orders.

Defendants allegedly represented that TJ had the ability to timely fill and ship the Orders as requested and that a cash down payment was necessary to secure plaintiff’s payment for the Orders. Defendants also allegedly represented that TJ was financially sound and had the ability to timely fill and ship the Orders. 

Plaintiff alleged that the foregoing representations were false and made with the intent of inducing plaintiff to place the Orders – orders that defendants allegedly knew TJ would not fill – and make the down payment – a payment that they allegedly never intended to earn or return.

According to plaintiff, TJ did not, for various reasons, timely fill and ship the Orders. As a result, plaintiff’s customer cancelled the Orders. Defendants did not return the down payment, saying that they would re-pay it by crediting it against future orders until the down payment was returned in full. Defendants allegedly reassured plaintiff that TJ was not in financial trouble and had the financial ability to timely ship additional orders and return the down payment.

Thereafter, Plaintiff placed additional orders with TJ (the “Additional Orders”). After Plaintiff placed the Additional Orders, defendants allegedly told plaintiff that an additional payment of $110,000 was required for TJ to continue working on the Additional Orders. Among other things, defendants allegedly represented that (1) TJ had the ability to timely fill and ship further orders, (2) they were in the process of working on the Additional Orders, and (3) the Additional Orders were on schedule to be timely produced and shipped. Plaintiff claimed that it made the additional payment in reliance on defendants’ alleged false representations. 

Defendants moved to dismiss, arguing, inter alia, that plaintiff’s fraud cause of action duplicated its contract cause of action. The motion court agreed. On appeal, the Appellate Division, First Department reversed.

The Court held that the motion “court should not have dismissed the cause of action for fraud as duplicative of the cause of action for breach of contract.” Slip Op. at *2. The Court explained that the “gravamen of the allegations supporting the [fraud] claim [was] not, as in Cronos Group, Ltd. v XComIP, LLC (156 AD3d 54, 62 [1st Dept 2017]), that defendants ‘made a promise while harboring the concealed intent not to perform it.’” Slip Op. at * 2. “Rather,” said the Court, “plaintiff assert[ed] that defendants misrepresented their very ‘ability to perform,’ an allegation that support[ed] a non-duplicative fraudulent inducement claim.” Id. (citing Man Advisors, Inc. v. Selkoe, 174 A.D.3d 435, 435 (1st Dept. 2019)).

The Court also rejected defendants’ argument that the fraud claim was duplicative because “the damages [were] the same under either theory.” Id. The Court reasoned that “given this early procedural stage of the action, plaintiff should be permitted to plead the cause of action in the alternative pursuant to CPLR 3014.” Id. (citation omitted). 

Takeaway

We have noted in the past that New York courts do not allow a fraud claim to survive a motion to dismiss when the claim arises from an alleged breach of contract or failure to perform an obligation under the contract. Indeed, the New York Court of Appeals has made it clear that a fraud claim should be dismissed 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).

Shear provides an example of the type of misrepresentation that courts consider to be collateral to the performance obligations under a contract. 

Since courts routinely dismiss fraud claims as being duplicative of contract claims (e.g., Clark Constr. Corp. v. BLF Realty Holding Co., 28 A.D.3d 367, 368-369 (1st Dept. 2006)), Shear is noteworthy because of the Court’s invocation of CPLR § 3014, which permits “[c]auses of action or defenses [to] be stated alternatively or hypothetically.” While it may be due to the circumstances of the case (see Slip Op. at *2 (“[w]e hold that, under the circumstances,…”)), the decision not to dismiss even though the relief sought was duplicative remains an interesting result.