Blogs

Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts by Schlam Stone & Dolan LLP
Posted: September 11, 2020

Breach of Contract and Fraud Claims Cannot Co-Exist if They Are Based on the Same Underlying Facts

On August 24, 2020, Justice Masley issued a Commercial Division decision addressing when a fraud claim is duplicative of a contract claim warranting dismissal under CPLR 3211. In 5 E. 59th Realty Holding Co., LLC v. Leahey, 2020 NY Slip Op. 32751(U), Justice Masley confirmed longstanding New York precedent that a fraud claim and a breach of contract claim cannot co-exist in a litigation if they are based on the same underlying facts and seek the same remedy.

In 5 E. 59TH Realty Holding Co., LLC vs. Leahey, et al., Case No. 452192/2018 (Westchester Cty. Sup. Ct. 2018), Defendant MIP 5 East 59th Street, LLC (“MIP”), paid Plaintiff 5 East 59th Realty Holding Company, LLC (“59th Realty”) $37.25 million to acquire a nine-story commercial building on East 59th St. that formerly housed the Playboy Club (“Building”).

In a prior case, 59th Realty was found liable to a broker hired to market the Building under a contract after introducing 59th Realty to a Brazilian principal of MIP (the “Brazilian Group). After multiple attempts by 59th Realty and the Brazilian Group to enter into a transaction for the Building, the deal fell apart. However, at a later date the building was sold to MIP, who is an undisputed affiliate of the Brazilian Group, but for whom 59th Realty allegedly was not aware of such affiliation. Litigation followed after 59th Realty refused to pay a commission to the broker on the grounds that the original contract did not cover the sale to MIP, and on September 24, 2015, the court in the prior litigation granted summary judgment in the amount of $820,013.62 against 59th Realty.

59th Realty brought the current action for, among other things, fraud and breach of contract, seeking indemnification from the judgment on the theory that MIP knew that 59th Realty would not have executed the contract for sale of the Building if it had known that MIP was an affiliate of the Brazilian Group. 59th Realty alleged fraud on the grounds that MIP schemed to conceal the existence of a straw buyer disguising the Brazilian Group as the true purchaser.

The contract claim in the current action was based on a representation in the contract for sale that MIP had not hired, retained or dealt with any broker, consultant or intermediary in connection with the contract. MIP argued that because the fraud claim and contract claim sought identical damages, the fraud claim must be dismissed as duplicative of the breach of contract claim.

In granting the motion to dismiss the fraud claim the Court held that “a fraud claim that arises from the same facts as an accompanying contract claim[], seeks identical damages and does not allege a breach of any duty collateral to or independent of the parties’ agreements is subject to dismissal as redundant of the contract claim.” Cronos Group Ltd. V. XComIP, LLC, 156 A.D. 3d 54, 62-63 (1st Dep’t 2017).

Ultimately, the Court ruled that the fraud claim “must be dismissed as duplicative of the contract claim” citing as evidence, among other reasons, that both claims sought identical damages, and noting that “[c]learly, this issue of whether the brokers were involved in the transaction was contemplated and addressed in the contract.” Accordingly, the Court found the breach of contract claim and fraud claim were duplicative and dismissed the fraud claim from the action.

The attorneys at Schlam Stone & Dolan have extensive experience in high-stakes litigation that frequently involves resolution of issues at the motion to dismiss and summary judgment stage of litigation. Contact Schlam Stone & Dolan attorney Chris Dyess at cdyess@schlamstone.com if you or a client have questions regarding a dispute relating to a contract where you also feel that you have been defrauded.

Click here to subscribe to this or another of Schlam Stone & Dolan’s blogs.

View posts