The Duplication of Claims Doctrine Strikes Again

• Posted on: Oct 28 2020

Readers of this Blog know that, as a general matter, New York courts will not permit a fraud-based claim (i.e., fraudulent inducement) to survive a motion to dismiss when the claim arises from a breach of contract. Indeed, courts routinely dismiss a fraud claim 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 fraudulent inducement 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).

What constitutes “a legal duty independent of a contract” is not a question easily answered.  Cronos Group Ltd. v. XComIP, LLC, 156 A.D.3d 54, 56 (1st Dept. 2017) (referring to the question as a “recurring” one). In trying to answer the question, the courts make the distinction between a misrepresentation of intention and a misrepresentation of present fact. Id. at 63. See also Demetre v. HMS Holdings Corp., 127 A.D.3d 493, 494 (1st Dept. 2015) (common law fraud is duplicative of breach of contract where the only misrepresentation alleged concerns an “intent to perform the contractual obligations at the time they were made.”). The former will result in dismissal, while the latter will not. Gosmile, Inc. v. Levine, 81 A.D.3d 77 (1st Dept. 2010).

In 3P-733, LLC v. Davis, 2020 N.Y. Slip Op. 06043 (1st Dept. Oct. 27, 2020) (here), the Appellate Division, First Department affirmed the dismissal of a fraud claim because it was “duplicative of part of the [plaintiffs’] contract claim.” Slip Op. at *1. 

[Ed. Note: the facts of 3p-733 are taken from the motion court court’s decision (here).]

3P-733 arose from an alleged real estate development joint venture between plaintiff Piyush Bhardwaj, through his company, plaintiff 3P-733, LLC (“3P”), and defendant Tawan Davis (“David”), through defendant CPG Invest, LLC (“CPG”), a company in which Davis is one of three ownership members. 3P, as 40% member, and CPG, as 60% member, formed a new company, non-party Carbyne Property Group (“Carbyne”), to invest in and develop real estate.

According to plaintiffs, Carbyne began operating under a new name, The Steinbridge Group, LLC (“Steinbridge”) under the same terms as Carbyne’s operating agreement. Steinbridge was formed on March 31, 2016 “with the intent of causing the provisions of [Carbyne’s] Operating Agreement, as written, to govern [Steinbridge]”; however, “no actual operating agreement was ever prepared” for Steinbridge.

In or about the Summer of 2017, the relationship between Bhardwaj and Davis began to deteriorate. Plaintiffs claimed that in August 2017 Davis “‘unilaterally and without notice cut off … Bhardwaj’s access to … Bhardwaj’s Steinbridge email account and to the Steinbridge shared computer drive’, and, ultimately, ‘Bhardwaj was fraudulently ejected from his forty percent … minority stake” in Steinbridge.’”

Defendants moved to dismiss, among other claims, the fraud claim. Defendants argued that the fraud claim was duplicative of, inter alia, plaintiffs’ breach of contract claim.

Plaintiffs opposed, arguing that the fraud claim was adequately pleaded in that Davis: (1) materially misrepresented to Bhardwaj that the Carbyne agreement would carry over to Steinbridge word-for-word; (2) caused Bhardwaj to contribute considerable labor into building Steinbridge’s real estate business; (3) ousted Bhardwaj from the joint venture under the false pretext of petty theft; and (4) reaped the benefits of Steinbridge’s transactions himself, to the exclusion of plaintiffs.

The motion court held that the fraud claim was duplicative of the breach of contract claim as it was “premised on precisely the same facts and alleged the same injuries: CPG, through one of its members (Davis), made misrepresentations to Bhardwaj regarding the transition to and agreements to be utilized for Steinbridge, then falsely accused Bhardwaj of petty theft in a scheme to expel 3P from the business.” Thus, concluded the motion court, “the injury that Bhardwaj sustained was only that sustained by 3P, as plaintiffs allege[d] that the membership interest in Carbyne/Steinbrdige was held by 3P, not by Bhardwaj individually.”

The court rejected plaintiffs contention that damage to Bhardwaj’s reputation in the real estate industry sufficed to “establish an adequate extracontractual injury”: “The only glimmer of extra-contractual injury plaintiffs allege in connection with the purported fraud is injury to Bhardwaj’s reputation in the real estate business, and those injuries are the subject of various other claims (i.e., for defamation and tortious interference with an unrelated contract) that are distinct from the fraudulent misrepresentation here (application of the Carbyne agreement terms to Steinbridge) and do not establish an adequate extracontractual injury.” The motion court explained that “[t]he reputational and future business injuries plaintiffs assert are not injuries that arise from the purported reliance on the fraudulent misrepresentations: the defamation and tortious interference claims/injuries relate to articles published and one letter sent after the ouster.” “Rather,” said the motion court, “the injuries arising from misrepresentations as to the membership and operating agreement terms applicable to Steinbridge resulted in only those injuries sustained directly by 3P, not by Bhardwaj individually.”

Accordingly, the motion court dismissed plaintiffs’ fraud claim.

Defendants appealed.

As noted, the First Department affirmed. The Court held that the “fraud claim [was] duplicative of part of [plaintiffs’] contract claim.” Slip Op. at *1 (citing, Cronos, 156 A.D.3d at 62-63). The Court explained that “[c]ontrary to plaintiffs’ contention on appeal that the contract claim relate[d] solely to the written operating agreement for nonparty Carbyne Property Group, LLC” the record below demonstrated that “the contract claim also encompassed an oral agreement between plaintiff 3P-733, LLC (3P) — acting through its managing member, plaintiff Piyush Bhardwaj — and defendant CPG Invest, LLC (CPG Invest) — acting through its ultimate managing member, defendant Tawan Davis — that the CPG Operating Agreement would be ‘transposed over to’ The Steinbridge Group, the name under which CPG would allegedly later operate.” Id. Thus, concluded the Court, the fraud claim was duplicative of plaintiffs’ contract claim. Id.

The Court also found that plaintiffs’ fraud claim was premised on a misrepresentation of defendants’ intentions with respect to the performance of their contractual obligations: “Davis — both individually and through CPG Invest — misrepresented to Bhardwaj — both individually and through 3P — that the CPG Operating Agreement was being transposed into an operating agreement for Steinbridge.” Slip Op. at *1. Such a claim, reasoned the Court, is appropriately dismissed as duplicative of a breach of contract claim because the alleged fraud was based on the same facts as those set forth in the contract claim, i.e., the fraud was not collateral to the obligations imposed by the contract. Id.

Finally, the Court held that “the relief sought under both causes of action — at least as pleaded in the [second amended complaint] — [was] identical.” Id.

Takeaway

A fraud claim, which arises from the same facts, seeks identical damages and does not allege a breach of any duty collateral to or independent of the parties’ agreement, is duplicative of a contract claim. While the principle seems clear enough, its application is not always so clear. And, because of the absence of clarity, plaintiffs often find it difficult to demonstrate a legal duty that is collateral to or independent of the contract at issue. 3P-733 highlights this difficulty.