Here we go again. The intersection between the causes of action for fraud and breach of contract was traversed again in the recent decision of the Appellate Division, First Department, in New York City Waterfront Dev. Fund II, LLC v Pier A Battery Park Assocs., LLC, 2022 NY Slip Op 04127 (1st Dep’t Decided June 28, 2022). And the inconsistencies in this area of law continue to abound.
“Duplicative” Claims or Simply Non-Existent Claims?
I have commented on the ill-advised and confusing use of the term “duplicative” when it comes to adjudging the legal viability of different causes of action. See my post: “First Department Sustains Ostensible “Duplicative” Fraud/Contract Claims, Allowing Pleading in the Alternative.” Since parties in New York have the right to plead “in the alternative,” technically, a cause of action should not be dismissed simply because it may be deemed “duplicative” of another claim. If two independent causes of action arise from the same facts and circumstances, both claims should be permitted to be pursued in litigation, although, of course, the plaintiff cannot recover double or “duplicative” damages for the same underlying wrong.
As it relates to fraud and breach of contract causes of action, when the courts rule that a fraud claim should be dismissed because it is “duplicative” of a breach of contract claim, what they are really saying is that the attempt to dress up a simple breach of contract as the tort of fraud fails because the allegations do not satisfy the elements of the cause of action for fraud. That is, no viable claim for fraud is alleged, not that it is “duplicative” of the contract claim. On the other hand, if the facts as alleged satisfy all of the elements of a fraud claim, then it is not fatal to that claim that what happened also amounts to a breach of contract, so long as the remedies and/or damages are not the same. For example, as I have explained, breach of express representations and warranties contained in a contract can give rise to a fraud claim as well under the rights circumstances. See my posts: “Representations and Warranties in LLC Buyout Contract Save Fraud Claim” and “Breach of Contractual Warranty Also Amounts to Fraud.”
Pier A Decision
In Pier A, the underlying subject of dispute was plaintiff’s $16.5 million loan to one of the defendants (defined as “Borrower” by the First Department). Two agreements were at issue: One was the underlying loan agreement, and the other was a lease with a non-party. Plaintiff attempted to allege claims for fraudulent inducement, fraud, aiding and abetting fraud, negligent misrepresentation, and veil-piercing. The lower court dismissed all of these claims and the First Department unanimously affirmed that ruling in its entirety.
The First Department’s decision was sparse on the applicable facts on which it rendered its conclusions, and gave little explanation of the law. The conclusions reached by the court could easily have gone the other way, based upon existing law and previous decisions.
In addressing the subject of whether fraud was alleged from breach of the loan agreement, the First Department first observed:
The complaint alleges that defendants fraudulently induced plaintiff to extend the loan to Borrower by furnishing false financial projections. However, Borrower expressly represented in section 3.10 of the loan agreement that those projections were prepared in good faith upon assumptions believed to be reasonable at the time (see Thomas v McLaughlin, 276 AD2d 440 [1st Dept 2000]). As the essence of the allegations is that defendants did not comply with that provision, the only claim stated is breach of contract (see MMCT, LLC v JTR Coll. Point, LLC, 122 AD3d 497, 499 [1st Dept 2014]).
This reasoning is not entirely sound since breach of a contractual representation can also form the basis of a fraud cause of action. However, a mere financial projection could be viewed as nothing more than a reasonable prediction rather than a material misrepresentation of existing fact, so the conclusion reached by the First Department in this section of its decision would appear to be valid.
The First Department then continued:
The complaint states that on November 1, 2018, Borrower and [non-party] BPCA amended their lease agreement. Plaintiff contends that defendants fraudulently induced it to consent to the lease amendments and forbear from enforcement actions with false assertions that Borrower was committed to honoring its obligations and taking steps to enable it to do so.
The sixth cause of action sounding in fraud with respect to the pre-loan misrepresentations is duplicative of the breach of contract claim (see e.g. MMCT, LLC v JTR Coll. Point, LLC, 122 AD3d 497 [1st Dept 2014]; OP Solutions, Inc. v Crowell & Moring, LLP, 72 AD3d 622 [1st Dept 2010]). The seventh cause of action, for fraud as to the alleged misrepresentations prior to entering into the lease amendments is, similarly duplicative. Finally, the representations that were allegedly made after entering into the lease amendments are not misrepresentations of defendants’ ability to perform (cf. Shear Enters. LLC v Cohen, 189 AD3d 423 [1st Dept 2020]; Man Advisors, Inc. v Selkoe, 174 AD3d 435 [1st Dept 2019]). Moreover, plaintiff does not allege that it sustained damages that would not be recoverable under the breach of contract cause of action (Shear Enters., 189 AD3d at 309; MaÑas v VMS Assoc. LLC, 53 AD3d 451, 454 [1st Dept 2008]).
While the First Department used the “duplicative” terminology, it appears that it meant that the allegations did not amount to fraud claims, but simply claims for breach of contract. The Court’s citation to the Shear decision would bear this out since in that case, the First Department did sustain fraud claims because they amounted to fraud, even though the facts could have also constituted a breach of contract, rejecting the argument that they were duplicative. See my post : “First Department Sustains Ostensible “Duplicative” Fraud/Contract Claims, Allowing Pleading in the Alternative” for a full commentary of the Shear decision and the applicable legal principles. The facts and law as the First Department explained in Shear could easily have been applied to the Pier A case and if applied, could have led to the opposite result.
The intersection between breach of contract and fraud will continue to produce a great deal of litigation and potentially inconsistent and/or confusing judicial conclusions. It is likely that case law can be found to support either side of the argument, given any particular factual scenario. It is critical, therefore, for counsel to find the right decisions and understand the nuances in order to position such cases in a posture that is favorable to its client’s side.