Case Name: Wyle Inc. et al., Respondents, v. ITT Corporation et al., Appellants
Court: New York Supreme Court, Appellate Division
Jurisdiction: New York
Decision Date: 2015-07-07
Citations: 130 A.D.3d 438
Docket Number: 
Parties: Wyle Inc. et al., Respondents, v ITT Corporation et al., Appellants.
Judges: 
Reporter: Appellate Division Reports
Volume: 130
Pages: 438–450

Head Matter:
Wyle Inc. et al., Respondents, v ITT Corporation et al., Appellants.
[13 NYS3d 375]

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 alleged 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 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, 81 AD3d 77, 81 [1st Dept 2010], lv dismissed 17 NY3d 782 [2011]). In the context of a contract case, the pleadings must allege misrepresentations of present fact, not merely misrepresentations of future intent to perform under the contract, in order to present a viable claim that is not duplicative of a breach of contract claim (id.). Moreover, these misrepresentations of present fact must be "collateral to the contract and [must have] induced the allegedly defrauded party to enter into the contract" (Orix Credit Alliance v Hable Co., 256 AD2d 114, 115 [1st Dept 1998]). Therefore, "[a]s a general rule, to recover damages for tort in a contract matter, it is necessary that the plaintiff plead and prove a breach of duty distinct from, or in addition to, the breach of contract" (Non-Linear Trading Co. v Braddis Assoc., 243 AD2d 107, 118 [1st Dept 1998] [internal quotation marks omitted]).
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., 243 AD2d 422 [1st Dept 1997]). Unlike the dissent, however, we find the cases cited by defendants turn on facts that distinguish them from the present case.
For example, in ESBE Holdings, Inc. v Vanquish Acquisition Partners, LLC (50 AD3d 397 [1st Dept 2008]), we held that the fraud causes of action were duplicative of the contract causes of action because they arose from the written provisions of the several agreements entered into by the parties (id. at 398). Significantly, however, we also found that the misrepresentations were not extraneous to those agreements because "none of [the] misrepresentations caused the actual investment losses" (50 AD3d at 399). Here, the failure to disclose the General Services Administration audit as required by the contract directly resulted in the losses claimed. As discussed in further detail herein, a fraud claim can be based on a breach of contractual warranties notwithstanding the existence of a breach of contract claim (Jo Ann Homes at Bellmore v Dworetz, 25 NY2d 112, 120-121 [1969]).
Similarly, in RGH Liquidating Trust v Deloitte & Touche LLP (47 AD3d 516 [1st Dept 2008], lv dismissed 11 NY3d 804 [2008]), we found that the fraud claims were duplicative of the breach of contract claim because they were based on alleged fraudulent misrepresentations related to the defendants' obligation under the agreement to conduct audits of financial statements with reasonable care. However, this is not the factual case before us. The representation in RGH involved future performance, i.e., the duty to conduct reliable audits, which was, we found, "in essence a claim of professional malpractice" (47 AD3d at 517). The misrepresentation was thus not one of present fact, as we concededly have in this case, but one of future intent, and the cause of action for fraud in RGH was thus properly dismissed.
The second line of cases on this issue hews closer to the facts before us.
In First Bank of Ams. v Motor Car Funding (257 AD2d 287 [1st Dept 1999]), the plaintiff bought used car loans from defendant Motor Car Funding (MCF). The agreement contained warranties that the loans would comply with certain underwriting guidelines. MCF allegedly misrepresented the quality of the loans, inducing First Bank to purchase less valuable loans, which ultimately resulted in losses to the plaintiff. We sustained the fraud claim, finding that the allegations that the defendants misrepresented certain facts about the loans "cannot be characterized merely as an insincere promise of future performance" (id. at 292). We went on to hold that "a cause of action for fraud may be maintained where a plaintiff pleads a breach of duty separate from, or in addition to, a breach of the contract (Non-Linear Trading Co. v Braddis Assoc., 243 AD2d 107, 118). For example, if a plaintiff alleges that it was induced to enter into a transaction because a defendant misrepresented material facts, the plaintiff has stated a claim for fraud even though the same circumstances also give rise to the plaintiff's breach of contract claim . . . Unlike a misrepresentation of future intent to perform, a misrepresentation of present facts is collateral to the contract (though it may have induced the plaintiff to sign the contract) and therefore involves a separate breach of duty (Deerfield Communications Corp. v Chesebrough-Ponds, Inc., 68 NY2d 954, 956 [(1986)]) . . .
"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)" (257 AD2d at 291-292 [emphasis added]).
Similarly, in another case involving false representations involving present contract warranties as to the quality of certain loans 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., 87 AD3d 287, 293 [1st Dept 2011], citing First Bank). In reaching our conclusion, we noted that the allegations in the complaint must, on a CPLR 3211 motion (like the one presently before us), be accepted as true. That being the case, we went on to hold that "[b]ecause MBIA alleges misrepresentations of present facts, and not future intent, made with the intent to induce MBIA to insure the securitizations, the fraud claim survives. It is of no consequence that some of the allegedly false representations are also contained in the agreements as warranties and form a basis of the breach of contract claim" (87 AD3d at 294 [citations omitted]). Such a rule makes sense, for, as we noted in MBIA, " '[i]t simply cannot be the case that any statement, no matter how false or fraudulent or pivotal, may be absolved of its tortious impact simply by incorporating it verbatim into the language of a contract' " (id., quoting In re CINAR Corp. Sec. Litig., 186 F Supp 2d 279, 303 [ED NY 2002]).
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 purchase those loans. They were designed to be relied on to arrive at an accurate value of the loans, and the value of the company being purchased here. These misrepresentations did not merely evince "an insincere promise of future performance [but were] instead . . . misrepresentation[s] of then present fact[s] that [were] collateral to the contract, and thus plaintiff sufficiently alleged a cause of action sounding in fraud" (Go-Smile, Inc. v Levine, 81 AD3d at 81; see also Merrill Lynch & Co. Inc. v Allegheny Energy, Inc., 500 F3d 171, 184 [2d Cir 2007]; RKB Enters. v Ernst & Young, 182 AD2d 971, 972 [3d Dept 1992]). To hold otherwise would be a far too restrictive application of our precedents. Concur — Mazzarelli, J.P., Sweeny, DeGrasse and Manzanet-Daniels, JJ.