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Posted: September 10, 2014

Fraud Claim Dismissed As Duplicative of Breach of Contract Claim

On September 4, 2014, the First Department issued a decision in Beta Holdings, Inc. v. Goldsmith, 2014 NY Slip Op. 06035, dismissing a fraud counterclaim as duplicative of the counterclaim-plaintiffs’ breach of contract claim.

In Beta Holdings, the plaintiffs, entities associated with a private equity fund, filed suit against the principals of a company the fund acquired, asserting claims for fraud and breach of contract arising from alleged misrepresentations regarding the financial condition of the company.  The defendants filed counterclaims, including a claim for fraud, arising from the plaintiffs’ failure to pay amounts due on a note that was issue in connection with the transaction.  New York Commercial Division Justice Jeffrey K. Oing denied the plaintiffs’ motion to dismiss the fraud counterclaim, and the First Department reversed, holding that the fraud claim was duplicative of the breach contract claim because the defendants did not “allege a duty separate from the terms of the agreement that was breached”:

The fraud counterclaims, insofar as based on the alleged misrepresentations by counterclaim defendants that they would honor the terms of the promissory notes, are duplicative of the breach of contract counterclaims; the allegations are essentially that they did not intend to honor the terms of the notes at the time they executed them. The allegations are insufficient to satisfactorily plead that counterclaim defendants, at the time the agreement was entered into, never intended to carry out the terms of the agreement. Neither do they allege a duty separate from the terms of the agreement that was breached by counterclaim defendants so as to support a claim of fraud, or that the damages sought to be recovered are based on lost opportunities arising from counterclaim plaintiffs having been induced to sell their company. Here, plaintiffs claim that counterclaim defendants orally promised to “grow the company” using methods such as geographic expansion, acquisition opportunities and better marketing, and that these promises are specific and not subject to the agreement’s merger provision. However, this overlooks the September 8, 2008 letter of intent, which includes a promise that the buyers “want to continue to grow the Company,” and briefly summaries how this would be done. The terms of the letter of intent are subject to the merger provision. In any event, the alleged promises are of a general nature and insufficiently specific to establish fraudulent inducement, even were they not barred by the agreement’s merger provision.

(Citations omitted.)  This decision illustrates that, under New York law, a claim arising from a failure to perform under an agreement usually sounds in contract not in tort, and the mere allegation that a party “never intended to perform” under the contract is not sufficient to transform a breach a contract claim into a fraud claim.

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