The Duplication Doctrine and Another Dismissal of a Fraud Claim

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Posted on: Mar 20 2024

As we have often explained in the articles in which we have examined the duplication doctrine, fraud claims that are nothing more than contract claims dressed up in fraud clothing, are subject to dismissal. E.g., here, here, here, and here. Thus, courts will apply the doctrine when a plaintiff alleges a breach of contract claim and a fraud claim that arise from the same facts and circumstances. When that happens, the fraud claim will be deemed duplicative of the contract claim not only because the fraud claim arises from the same facts as the contract claim, but also because the fraud claim seeks the same damages and does not allege a breach of any duty collateral to or independent of the parties’ agreements.¹ Moreover, “[a] fraud-based claim [will be deemed to be] duplicative of a breach of contract claim when the only fraud alleged is that the defendant was not sincere when it promised to perform under the contract.”²

In Colle Capital Partners LP v. Automaton, Inc., 2024 N.Y. Slip Op. 01504 (1st Dept. Mar. 19, 2024) (here), the Appellate Division, First Department considered the duplication doctrine when it reversed the motion court’s order granting leave to amend a complaint to add a fraud claim.

[Eds. Note: the factual discussion for Colle Capital comes from the parties’ briefing on appeal.]

Colle Capital involved a claim against Automaton, Inc. (“Automation”) for breach of a stock sale and purchase agreement (“Sale Agreement”), which governed the sale to Colle Capital Partners LP and Colle Logistics Associates, LLC (collectively, “Colle”) of Automaton shares that had been awarded to defendant Michael Murphy (“Murphy”), a former Automaton employee, on terms set forth in a separate restricted stock award agreement (“Stockholder Agreement”).

The breach of contract claim concerned Section 5(a) of the Sale Agreement, which provided that Automaton “fully consent[ed] to the transfer of the Shares under this Agreement”. Spencer Hewett (“Hewett”), Automation’s Chief Executive Officer, was alleged to have signed the agreement on Automaton’s behalf. Colle based its breach of contract claim on Automaton’s alleged refusal to effectuate the share transfer contemplated by the agreement notwithstanding Colle having paid the purchase price to Murphy, on the ground that the transaction had not been approved by Automaton’s board of directors (the “Board”) as required by the Stockholder Agreement.

The proposed amended complaint also asserted a fraud claim against Automaton, based upon Hewett’s alleged misrepresentation that “Automaton and Hewett would … broker the sale of Murphy’s shares in the company to Colle at a discounted price” if Colle would buy a $250,000 promissory note held by SB Media Capital LLC, that the holder had called and which “Automaton [allegedly] lacked sufficient capital to repay”.

Colle alleged that it was led to believe by Hewett that he had authority to make the deal and had obtained all requisite approvals by the Board. Colle also maintained that Hewett represented that Automation’s outside counsel reviewed the terms of the transaction.

When it came time for Automaton and Hewett to transfer Murphy’s shares to Colle, Hewett allegedly informed Colle that he had not received, nor would he seek, consent from Automaton’s Board for the share sale unless Colle agreed to purchase additional convertible notes on non-market terms. When Colle approached Murphy with the problem, Colle claimed that Murphy fraudulently induced Colle to pay Murphy for his shares by representing that all requisite consents were obtained to sell his shares.

Colle sought leave to amend its complaint. The motion court granted the motion, allowing plaintiff to amend its allegations with respect to the fraud and breach of sale agreement claims and to add Hewett and Murphy as defendants.

The Appellate Division, First Department modified the motion court’s order to deny the motion with respect to the fraud claim.³

In a brief decision, the Court held that “[l]eave to amend the fraud claim should, … , have been denied because this claim, even as amended, was duplicative of the breach of sale agreement claim.”⁴ The Court explained that “[t]he alleged misrepresentations were not collateral to the subject matter of the sale agreement; indeed, some of them were explicitly contained therein.”⁵ Finally, said the Court, as alleged, the damages sought by the fraud claim were the same as those alleged with respect to the contract claim: “[a]lthough plaintiffs could theoretically have suffered damages separate from their payment for shares they never received, they did not allege any other losses.”⁶

Footnotes

Havell Capital Enhanced Mun. Income Fund, L.P. v. Citibank, N.A., 84 A.D.3d 588, 589 (1st Dept. 2011).
Manas v. VMS Assoc., LLC, 53 A.D.3d 451, 453 (1st Dept. 2008); see also Cronos Group Ltd. v. XComIP, LLC, 156 A.D.3d 54, 64-65 (1st Dept. 2017); HSH Nordbank AG v. UBS AG, 95 A.D.3d 185, 206 (1st Dept. 2012); Metropolitan Life Ins. Co. v. Noble Lowndes Intl., 192 A.D.2d 83, 88 (1st Dept. 1993).
Slip Op. at *1.
Id.
Id. (citations omitted).
Id. (citation omitted).

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.