The Duplication Doctrine and Justifiable Reliance

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Posted on: Dec 21 2022

In ABN AMRO Capital USA LLC v. AMERRA Capital Mgt., LLC, 2022 N.Y. Slip Op. 07178 (1st Dept. Dec. 20, 2022) (here), the Appellate Division, First Department considered two defenses that are often advanced to dismiss a claim for fraudulent inducement: the absence of justifiable reliance and duplication with a breach of contract claim. We examine those defenses in today’s article.

ABN AMRO involved the extension of $360 million in loans to Transmar Commodity Group Ltd. (“Transmar”), an entity that was once engaged in cocoa trading.

In September 2011, Transmar entered into a senior secured credit facility with the plaintiffs (“BNP Credit Agreement”), a group of financial institutions and senior secured lenders (“Lenders”). The loan was made against Transmar’s “borrowing base”, which was a contractual formula that assigned percentage weights to Transmar’s accounts receivable, inventory, and net unrealized forward gains and losses. The BNP Credit Agreement required that Transmar provide weekly certified reports calculating the borrowing base. Although defendant, a commodities investment manager that was Transmar’s trading partner and a holder of Transmar’s unsecured debt, it was not a lender under the BNP Credit Agreement. Nevertheless, it had access to the reports and other due diligence documents that Transmar provided to the Lenders.

In August 2013, at the same time the parties amended the BNP Credit Agreement, the Lenders also executed a subordination agreement with defendant, Transmar, and other parties related to defendant (“2013 Subordination Agreement”). The 2013 Subordination Agreement “subordinated an existing $10 million unsecured loan from the 2013 Subordinated Funds to Transmar” (the “Subordinated Funds”). Transmar, defendant, and the 2013 Subordinated Funds represented that Transmar’s debt obligations to defendant and the 2013 Subordinated Funds was $10 million and “all such obligations would be memorialized in documents that included an express acknowledgment that the obligations were subordinated to the Lenders’ senior secured debt and not in any other form of documentation.”

In 2016, following talks between the Lenders and Transmar to increase the Lenders’ loan in a new credit facility, the parties entered into the second secured lending facility (“ABN Credit Agreement”). The Lenders participating in the BNP Credit Agreement also participated in the ABN Credit Agreement.

The Lenders “required that Transmar, defendant, and any funds to which Transmar owed money execute a new version of the 2013 Subordination Agreement as a condition precedent to entering into the ABN Credit Agreement. On February 26, 2016, defendants, ABN, as agent for the Lenders, and Transmar entered into an amended Subordination Agreement (“Amended Subordination Agreement”). The Amended Subordination Agreement did not nullify the 2013 Subordination Agreement.

The Lenders alleged that when the parties entered into the Amended Subordination Agreement, Transmar had a debt obligation of $25 million but only represented that no more than $10 million was owed. Like the 2013 Subordination Agreement, Transmar was not permitted to repay the subordinate debt back to defendant or any defendant funds until the Lenders were paid in full. One exception was that Transmar could make a one-time repayment of the entire principal, but there could be no Default or Event of Default under the ABN Credit Agreement.

At the heart of the dispute was defendants’ alleged conspiracy with Transmar to commit a wide array of fraudulent activity over a period of years for the purpose of misrepresenting Transmar’s financial condition to induce plaintiffs to continue to extend credit to Transmar under the credit agreements. For example, the Lenders alleged that defendants created “false and misleading financial statements for Transmar that were intended to be, and were, given to the Lenders with the intention that the Lenders would reasonably rely upon them to their detriment.” The Lenders also alleged that defendants engaged in transactions with Transmar that were “designed to mislead the Lenders about Transmar’s true financial conditions, as well as transactions that were intended to evade the contractual limits on Transmar’s ability to borrow money from the Lenders.”

The Lenders also alleged that Transmar and defendants engaged in another fraudulent loan transaction at the end of 2015 in order to create the “impression that Transmar had much greater profitability and liquidity than it actually did,” by allowing Transmar to pay down its Borrowing Base at year-end. In addition, in August 2016, defendant was allegedly “a conduit for a transfer of approximately $8.4 million of collateral from Transmar to Euromar (the “August 2016 Transaction”) for no consideration.”

Plaintiffs filed suit, alleging, among other things, (1) aiding and abetting fraud; (2) conspiracy to commit fraud; (3) fraudulent inducement; (4) breach of the 2013 Subordination Agreement; (5) breach of the Amended Subordination Agreement; and (6) unjust enrichment.

Defendants moved to dismiss the amended complaint, pursuant to CPLR §§ 3211(a)(1) and (7) and CPLR § 3016(b).

We examine the motion with regard to the fraudulent inducement and breach of contract claims.

The motion court sustained the fraudulent inducement claim and the aiding and abetting claim and granted the motion as to, inter alia, plaintiffs’ request for consequential damages on the breach of contract claim.

Regarding the fraudulent inducement claim, defendants argued that plaintiffs failed to identify any misrepresentation and plead justifiable reliance. Defendants also claimed that the fraudulent inducement claim was duplicative of plaintiffs’ breach of contract claim.

In particular, Defendants maintained that the Amended Subordination Agreement was not false because defendants were owed a debt from Transmar’s German affiliate, Euromar GmbH (“Euromar”), not Transmar. Therefore, said defendants, they were not required to disclose that debt. Moreover, defendants argued that plaintiffs knew Transmar was not a party to the transaction with Euromar, thus, plaintiffs could not have justifiably relied on the alleged misrepresentation.

In response, the Lenders maintained that defendants represented that Transmar would not repay its indebtedness until after Transmar repaid the Lenders (with certain narrow exceptions) and that Transmar only owed $10 million, which “would be memorialized only in documents that expressly subordinated those obligations to the Lenders’ senior secured debt.” The Lenders alleged that defendants knew these representations were false when made. The Lenders claimed that they relied on the $10 million obligation limit representation because that provision was material to the eventual ABN Credit Agreement. The Lenders further contended that defendants made this representation to induce the signing of the ABN Credit Agreement as the Amended Subordination Agreement was a condition precedent to the ABN Credit Agreement. Finally, the Lenders maintained that their reliance was justified because they were unaware of the alleged fraudulent transactions taking place involving defendants, Transmar, and Euromar.

The motion court held that plaintiffs stated a claim for fraudulent inducement. The motion court also held that the claim was not duplicative of the breach of contract claim.

The motion court sustained the breach of contract claims. Although the motion court sustained the claims, it dismissed the request for consequential damages, holding that Section 18 of the Subordination Agreements explicitly barred consequential damages.

On appeal, the First Department modified the motion court’s order with regard to consequential damages to “clarify that recovery of unpaid loan amounts” was “barred as consequential damages”.¹ The Court noted that the motion court “appear[ed] to have held that plaintiffs were contractually barred from seeking consequential damages, without deciding whether the specific damages sought were consequential in nature”.² Addressing that issue, the Court found “that recovery from defendants of the outstanding balance of plaintiffs’ loans to Transmar … would constitute consequential damages.”³ The Court explained that the “final sentence of § 18 of the relevant subordination agreements [did] not create an exemption to the consequential damages bar for unpaid loan amounts, at least not when sought to be recovered from parties other than the ones contractually obligated to pay the loans (i.e., Transmar)”.⁴ The Court also found that there was no evidence that “such damages were foreseeable and contemplated by the parties before or at the time of the agreement[s’] formation”.⁵

The Court held that “[t]he fraudulent inducement claim was properly sustained”.⁶ The Court found that “[p]laintiffs sufficiently alleged that § 4 of the 2016 subordination agreement was false because Transmar owed defendants more than $10 million as a result of the 2014 transaction loans.”⁷ The Court explained that “[a]lthough defendants [were] correct that § 4 makes representations only as to the debt of Transmar, plaintiffs sufficiently alleged that Transmar was the de facto obligor on the 2014 transaction loans.”⁸

The Court also held that plaintiffs “sufficiently alleged reasonable reliance”.⁹ The Court rejected defendants’ argument that the documents defendants relied on “conclusively establish[ed] that plaintiffs knew or should have known the relevant facts prior to execution of the 2016 subordination agreement”.¹⁰

Finally, the Court held that the fraudulent inducement claim was not duplicative of the breach of contract claim, “as the damages sought [were] no longer the same in view of our dismissal of the request for unpaid loan amounts above”.¹¹

Footnotes

Slip Op. at *1.
Id.
Id.
Id.
Id. (citation omitted).
Id. (citation omitted).
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Id. at *1-*2.
Id. at *2.
Id. (citation omitted). In the First Department, the Court has dismissed fraud claims in which the damages sought by the fraud claim are the same as those sought by the breach of contract claim. This is so even where the plaintiff successfully demonstrates that the alleged misrepresentation is collateral to the contract at issue. E.g., Salamone v. EIP Global Fund LLC, 193 A.D.3d 558, 559 (1st Dept. 2021) (here). This Blog wrote about this scenario here, here, and here.

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.