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Current Developments in the Commercial Divisions of the
New York State Courts by Schlam Stone & Dolan LLP
Posted: August 12, 2018

Fraud Claim Dismissed as Duplicative of Contract Claim: No Separate Damages Alleged

On August 6, 2018, Justice Masley of the New York County Commercial Division issued a decision in TJ PRP LLC v. Rag & Bone Holdings LLC, 2018 NY Slip Op. 31880(U), dismissing a fraud claim as duplicative of a contract claim, explaining:

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. Where a fraud claim is supported by allegations that the defendants misrepresented their intentions with respect to the manner in which their contractual duties would be performed, it is appropriately dismissed as duplicative of the breach of contract claim because the fraud is premised on the same facts as those that compose the contract claim, the obligations allegedly breached are not collateral to those imposed by the contract, and the damages sought are identical to those recoverable under the contract cause of action.

Here, TJ PRP alleges in support of its first cause of action for breach of the Operating Agreement against RBH that RBH failed to maintain RBF’s books and records, and failed to provide TJ PRP with financial statements that comported with GAAP and the Operating Agreement’s provisions. TJ PRP further alleges that RBH engaged in inappropriate related-company transactions on unfair terms and without the requisite approval under the Operating Agreement; improperly altered RBF’s annual budget without Price’s consent, and engaged in other various business decisions in violation of the Operating Agreement.

TJ PRP alleges, in support of its fourth cause of action for fraud against RBH and RBI, that RBI violated the Management Agreement, and RBH violated the Operating Agreement, by failing to prepare financial statements for RBF in accordance with GAAP. TJ PRP further alleges that RBH and RBI fraudulently concealed their self-dealing and other misconduct, and fraudulently concealed, and intentionally led TJ PRP to believe, that the financial statements for [RBF] had been prepared in accordance with GAAP and the Operating Agreement, resulting in unspecified damages.

According to paragraph 6 of the amended complaint, RBH misappropriated, converted, and commingled millions of dollars of RBF funds, and caused RBI fraudulently to represent for many years to RBF and TJ PRP that RBF’s financial statements complied with GAAP and the Operating Agreement. TJ PRP also alleges that RBI pre-paid itself exorbitant fees.

Even if the fraud cause of action is sufficiently pleaded, the claim must be dismissed against RBH as duplicative of the claim for breach of the Operating Agreement. The factual allegations that form the breach of the Operating Agreement claim are the same as those which comprise the fraud claim; specifically, the alleged failure of RBF, through its managing member, RBH, and its management services provider, RBI, to maintain separate books of account, and to maintain financial and accounting records for RBF and minority member TJ PRP, in accordance with GAAP.

Though TJ PRP alleges that the improper accounting practices of RBI and RBH concealed RBH’s misappropriation of RBF funds, commingling of assets, self-dealing, and other assorted violations of the Operating Agreement to the detriment of TJ PRP, each of those acts, representations, and/or omissions-accepted for the purposes of this motion as true-demonstrate that RBH violated its obligations under the Operating Agreement. TJ PRP’s allegations that RBH and RBI concealed RBH’s misdeeds and breaches of the Operating Agreement by maintaining and disseminating deceptive accounting and financial records does not create a fraud claim that is distinct from the breach of contract claim; the accounting practices and financial documents were, themselves, breaches of the Operating Agreement, and TJ PRP identifies no damages that resulted from the alleged fraud that are distinct from the damages it would recover under the breach of contract claim.

A repackaged breach of contract claim does not create a sustainable cause of action sounding in fraud. TJ PRP’s arguments to the contrary are unavailing, and its reliance on Wyle Inc. v ITT Corp. (130 AD3d 438 [1st Dept 2015)) is misplaced. While a fraud claim can be based on a breach of contractual warranties notwithstanding the existence of a breach of contract claim, Wyle concerned a plaintiffs’ claim that they were fraudulently induced to purchase a company by defendants’ failure to disclose all ongoing government audits-the existence of which would negatively impact the company’s value-in violation of a warranty in the sale agreement to disclose all audits. The allegations in this action do not involve fraudulent inducement; here, TJ PRP alleges that RBH’s malfeasance and violations of the Operating Agreement were hidden by RBH’s and RBl’s failure to maintain and prepare accounting records and financial documents in compliance with the provisions in the Operating Agreement.

Notably, TJ PRP does not allege that it sustained any extra-contractual damages as a result of the purported fraud; the damages arising from the alleged fraud are precisely those that TJ PRP would be entitled to recover if it prevails on its breach of the Operating Agreement claim. When a fraud claim would only entitle the plaintiff to the very same damages that are recoverable on its breach of contract claim, the claim should be dismissed as duplicative. Moreover, the factual allegations comprising the fraud claim are identical to those forming the breach of contract claim. Accordingly, the fraud claim against RBH is dismissed as duplicative of the breach of the Operating Agreement claim.

(Internal quotations and citations omitted).

Commercial litigation frequently involves fraud-based claims. Such claims have special pleading requirements such as the rule discussed here that a fraud claim cannot be based on a breach of contract. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have a question regarding a fraud-based claim.

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