Lead Opinion
Order, Supreme Court, New York County (Charles E. Ramos, J.), entered October 23, 2013, which denied defendants’ CPLR 3211 (a) (1) and (7) motion to dismiss plaintiffs’ amended complaint asserting fraudulent inducement, affirmed, without costs.
The court properly concluded that the fraudulent inducement claim was not duplicative of the breach of contract claim.
The underlying facts of this case are adequately set forth in the dissent and need not be repeated here. Moreover, we have little disagreement with our dissenting colleague’s review of the two lines of cases addressing the issue of whether a fraudulent inducement claim аlleged in a complaint is duplicative of a breach of contract claim. Where we differ is in the application of those precedents to the facts before us.
It is axiomatic that in order to state a claim for fraudulent inducement, “there must be a knowing misrepresentation of
Here, defendants on appeal concede that the intentional failure to disclose an ongoing audit is a misrepresentation as to a present fact. They argue, however, that, since the nondisclosure is a breach of a contractual warranty contained in a specific provision of the contract itself, the misrepresentation is not collateral to the contract, thus making plaintiff’s fraudulent inducement claim duplicative of its breach of contract claim. Plaintiffs, on the other hand, contend that misrepresentation of a contractual warranty may form the basis of a separate fraudulent inducement claim, particularly where, as here, the misrepresentation concerns the core value of a business or asset in the contract. Both parties cite precedent in support of their positions. Therefore we must, as did the dissent, examine the two lines of cases cited to determine where this case falls.
We agree with the dissent that in order to sustain the fraud cause of action, there must be a breach of a duty separate from or in addition to the contract duty (see e.g. J.E. Morgan Knitting Mills v Reeves Bros.,
For example, in ESBE Holdings, Inc. v Vanquish Acquisition Partners, LLC (
Similarly, in RGH Liquidating Trust v Deloitte & Touche LLP (
The second line of cases on this issue hews closer to the facts before us.
In First Bank of Ams. v Motor Car Funding (
“Nor is the fraud claim rendered redundant by the fact that these alleged misrepresentations breached the warranties made by MCF in the Agreement . . . The core of plaintiff’s claim is that defendants intentionally misrepresented material facts about various individual loans so that they would appear to satisfy these warranties . . . This is fraud, not breach of contract. A warranty is not a promise of performance, but a statement of present fact. Accordingly, a fraud claim can be based on a breach of contractual warranties notwithstanding the existence of a breach of contract claim (see, Jo Ann Homes at Bellmore v Dworetz, 25 NY2d 112, 120-121)” (
Similarly, in another case involving false representations involving present contract warranties as to the quality of certain lоans which were relied on by an insurer of those loans in its decision to insure those loans, we held that “[a] fraud claim will be upheld when a plaintiff alleges that it was induced to enter into a transaction because a defendant misrepresented material facts, even though the same circumstances also give rise to the plaintiff’s breach of contract claim” (MBIA Ins. Corp. v Countrywide Home Loans, Inc.,
Although the dissent contends that the false representations in First Bank and MBIA were separate from the warranties contained in the contract, those representations were in fact warranted to be accurate at the time the contract was entered into and made for the purposes of inducing the plaintiffs to
Dissenting Opinion
dissents in a memorandum as follows: The issue presented in this case is far less clear cut than the majority memorandum would suggest. In fact, when considering whether a misrepresentation of a contractual warranty сan sufficiently support a separate cause of action for fraud, or whether the allegation of a fraudulent misrepresentation merely duplicates a claim for breach of contract, this Court has reached different results depending on the specific facts presented. Because I believe that under the applicable line of cases, the misrepresentation here supports a claim for breach of contract but not a separate claim for fraud, I respectfully dissent.
This action arises from alleged misrepresentations by defendant ITT Corporation in connection with its sale of nonparty CAS, Inc. to plaintiffs Wyle Inc. and Wyle Services Corporation (collectively, Wyle). According to the allegations in the complaint, ITT acquired CAS’s parent company, nonparty EDO Corporation, but planned to sell CAS, as CAS was not profitable for ITT’s business.
CAS, a defense contractor, provided engineering, scientific, and technical services to the federal government, and earned most of its revenue through defense contracts with the government. Payment for CAS’s work under its contracts with the federal government was governed by a Professional Engineering Services schedule (PES schedule), which CAS negotiated with the government’s General Services Administration (GSA). A PES schedule set forth the basic terms and conditions, including pricing and rate ceilings, by which the federal government
Plaintiff alleges that in early 2010, the GSA notified CAS that it intended to extend one of CAS’s PES schedules, which provided the labor rates for CAS’s largest contract with the government. The GSA requested that CAS submit new proposed rates, and CAS did so. On March 1, 2010, the OIG sent CAS a letter apprising CAS that the government had chosen CAS’s PES schedule for a “pre-award” audit.
During the OIG audit, Wyle decided to buy CAS. The terms of the sale were memorialized in a Stock Purchаse Agreement (SPA), dated August 7, 2010, under which Wyle agreed to pay EDO $235 million to acquire all of CAS’s capital stock. Before agreeing to pay the purchase price, however, Wyle insisted that EDO agree to a series of representations allegedly designed to ensure that the potential risks associated with CAS’s government contracts were disclosed. According to Wyle, these representations were important because anything that could negatively affect CAS would impair the value of the company.
Thus, Wyle alleged in the complaint, Wyle required EDO to disclose all audits that were ongoing when the parties entered into the contract. Specifically, article III of the SPA governs “Representations and Warranties of the Seller [i.e., EDO] and the Company [i.e., CAS].” The SPA required EDO and CAS to make certain representations and warranties, including a representation that CAS would disclose whether any of its contracts were under audit as of the date of the SPA. To that end, the SPA stated: “Section 3.15 (c) (v) of the [accompanying] Company Disclosure Schedule lists each Government Contract or Government Bid to which the Company is a party which, to the Company’s knowledge, is as of the date hereof under audit by any Governmental Authority or any other Person that is a party to such Government Contract or Government Bid.” EDO, however, allegedly failed to disclose OIG’s ongoing audit.
Ultimately, the sale transaction closed on September 8, 2010, without disclosure of the OIG audit. Six months later, on March 4, 2011, GSA announced the results of OIG’s audit; the audit
In December 2011, after unsuccessful demands for contractual indemnification of the loses arising from EDO’s breach of section 3.15 (c) (v) of the SPA, Wyle commenced this action, asserting a breach of contract claim for breaching the warranty that required disclosure of the OIG audit, and for refusing to indemnify Wyle for losses caused by that breach. Wyle argued that had it known about the OIG audit, it would have paid less for CAS. By order entered November 14, 2012, the court granted ITT’s motion to dismiss the complaint, concluding that Wyle failed to comply with the notice requirements of the indemnification clause.
Pending an appeal from that order, Wyle amended its complaint to add a second cause of aсtion for fraudulent inducement, the subject of this appeal. In the amended complaint, Wyle alleged that ITT had misrepresented in the SPA that all ongoing audits of every CAS government contract had been disclosed and that, relying on that misrepresentation, Wyle was induced to enter into the agreement and sustained damages in an amount more than $20 million. Wyle also sought punitive damages.
In April 2013, ITT moved to dismiss the amended complaint, arguing that the fraud claim was duplicative of the breach of contract claim because the alleged misrepresentation was a misrepresentation in the SPA itself, and was not collateral to the contract. In opposition, Wyle argued that the misrepresentation was one of present fact, and that the misrepresentation of present fact had induced it to enter into the contract. Wyle also pointed out that the notice requirements in the indemnification clause did not apply to situations of intentional misrepresentation or fraud. Further, Wyle argued, ITT had “superior knowledge” of the OIG audit and had made a partial, and thus misleading, disclosure.
In October 2013, the motion court denied ITT’s motion to dismiss the fraud claim. The court concluded that ITT’s misrеpresentation of the existence of the OIG audit was one of present fact, and not one of future performance. The motion court also noted that a warranty was not a promise of performance, but one of present fact, and that a fraud claim can be based on a breach of contractual warranties. The court also found that Wyle had sufficiently pleaded justifiable reliance and damages.
ITT concedes that its alleged misrepresentation — namely, its failure to disclose existence of the OIG audit — was one of present fact. The parties, however, dispute whether the misrepresentation was collateral to the SPA, or rather, whether it was part of the SPA itself. ITT argues that without allegation of a misrepresentation collateral and extraneous to the contract, the claim was essentially a breach of contract claim, and the motion court should have dismissed it. ITT also asserts that Wyle sought the same measure of damages for both its breach of contract and fraud claims.
For its part, Wyle points to case law holding that misrepresentation of a contractual warranty constitutes a misrepresentation collatеral to the contract. Wyle also asserts that the SPA itself contemplates a separate claim for fraud based on any intentional misrepresentation in the SPA, as the indemnification clause provides that the contractual damages and indemnification limitations do not apply “in the event of fraud or intentional misrepresentation.” Finally, Wyle notes that the damages it seeks on the fraud claim are different from damages sought from the breach of contract claim, as it also seeks punitive damages.
To state a claim for fraudulent inducement, a plaintiff must allege “a knowing misrеpresentation of material present fact, which is intended to deceive another party and induce that party to act on it, resulting in injury” (GoSmile, Inc. v Levine,
This Court has produced two lines of cases addressing breach of contract claims vis-a-vis fraud claims. One line of cases holds that a fraud claim is duplicative of a breach of contract claim where the fraud claim arises wholly from the written provisions of an agreement. For example, in J.E. Morgan Knitting Mills v Reeves Bros. (
Likewise, in ESBE Holdings, Inc. v Vanquish Acquisition Partners, LLC (
We took a similar view in RGH Liquidating Trust v Deloitte & Touche LLP (
For example, in First Bank of Ams. v Motor Car Funding (
Thus, in First Bank, the fraud claim was based upon representations entirely separate from the ones in the contract. Here, in contrast to the situation in First Bank, the duty to disclose the audit arose solely from the terms of the parties’ agreement. Therefore, the frаud cause of action here presents no duty separate from, or in addition to, the one created by the contract documents. On the contrary, the second cause of action is based on a duty having its only origin in the SPA; according to the SPA, ITT promised to inform Wyle of any ongoing audits, yet it did not so do. Thus, this case differs from First Bank in that Wyle alleges no misrepresentation outside the scope of the contract.
Similarly, in MBIA Ins. Corp. v Countrywide Home Loans, Inc. (
In sum, there is a difference between cases in which appellate courts have upheld fraud claims, on the one hand, and cases in which courts have dismissed claims as duplicative of a breach of contract claim, on the other. Specifically, in cases when we have sustained a fraud claim on a motion to dismiss in addition to the breach of contract claim, the fraud claim has been based upon facts outside the contract terms.
Here, as noted above, the fraudulent inducement claim arises from, and is directly related to, section 3.15 (c) (v) of the SPA, which governs representations and warranties. Indeed, Wyle alleges no more and no less that ITT breached its contractual duties as set forth in the representations and warranties of the SPA by failing to disclose the pre-award audit. This allegation does not state any noncontractual misrepresentation; rather, the misrepresentation made under the relevant contract provision also forms the basis for the breach of contract claim (see Torchlight Loan Servs., LLC v Column Fin., Inc.,
The majority notes that the allegedly false representations in this case were warranted to be accurate when the parties entered into the contract, and that EDO made the representations for the purpose of inducing Wyle to purchase the loans. Thus, the majority concludes, EDO made “misrepresentation[s] of then present fact[s] that [were] сollateral to the contract,” thus sufficiently stating a cause of action sounding in fraud.
Our holding in First Bank does not contradict this position. In that case, the warranties in the purchase and sale agreement stated that certain loans to be offered to the plaintiff would comply with certain underwriting guidelines. The fraudulent representations in First Bank involved subject matter— namely, quality of collateral, credit history, and amount оf down payments — extraneous to the contract warranties themselves (see First Bank,
Thus, under the line of cases discussed above — namely, the line of cases beginning with J.E. Morgan Knitting Mills — I would hold that the motion court should have dismissed Wyle’s fraud claim as duplicative of the breach of contract claim.
What is more, the measure of damages Wyle is seeking here — namely, the difference between the price it paid and the price that it would have paid had ITT disclosed the OIG audit — is the same for both the fraud and breach of contract claims. This fact also supports the conclusion that the fraud claim merely duplicates the breach of contract claim (see e.g. Coppola v Applied Elec. Corp.,
There is also no merit to Wyle’s assertion that because it seeks punitive damages on the fraud claim, that claim seeks damages different from those in the breach of contraсt claim. Indeed, it would make little sense to hold that merely asking for punitives necessarily creates a meaningful difference between a contract claim and a fraud claim; otherwise, a party could sustain a fraud claim merely by tacking on a request for punitive damages.
Notes
. Defendants Exelis Inc. and Xylem Inc. are successor entities to defendant ITT; nonparty EDO, CAS’s parent company, was a predecessor entity Exelis. For ease of reference, all defendants are referred to collectively as "ITT."
. The indemnification clause states in full: “no limitation or condition of liability provided for in this Article VIII shall apply in the event of fraud or intentional misrepresentation.”