Court Opinion

ID: 4090243
Source: CourtListenerOpinion
Date Created: 2016-10-18 15:00:41.544686+00
Date Added: 2024-06-11T14:35:18.748594
License: Public Domain

16-0615-cv
ITT Corp., et al. v. Patrick P. Lee, et al.

                                       UNITED STATES COURT OF APPEALS
                                           FOR THE SECOND CIRCUIT
                                                    SUMMARY ORDER
RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A
SUMMARY ORDER FILED ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED
BY FEDERAL RULE OF APPELLATE PROCEDURE 32.1 AND THIS COURT’S LOCAL RULE 32.1.1.
WHEN CITING A SUMMARY ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY
MUST CITE EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC DATABASE (WITH THE
NOTATION “SUMMARY ORDER”). A PARTY CITING A SUMMARY ORDER MUST SERVE A COPY
OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL.

       At a stated term of the United States Court of Appeals for the Second Circuit, held
at the Thurgood Marshall United States Courthouse, 40 Foley Square, in the City of New
York, on the 18th day of October, two thousand sixteen.
PRESENT: JON O. NEWMAN,
         GERARD E. LYNCH,
         CHRISTOPHER F. DRONEY
                    Circuit Judges,

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ITT CORPORATION, ITT ENIDINE INC., INTERNATIONAL
MOTION CONTROL INC.,
                                 Plaintiffs-Appellants,

CLEVELAND MOTION CONTROLS, INC., NOW KNOWN AS
ITT TORQUE SYSTEMS,

                                              Plaintiff,

                                    v.                                              No.    16-0615-cv

PATRICK P. LEE, MICHAEL A. SIINO, E. WAYNE FOLEY,
                                              Defendants-Appellees.
----------------------------------------------------------------------

  FOR PLAINTIFFS-APPELLANTS:                                     RUSSELL S. JONES, JR., (Ronald M.
                                                                 Daignault, on the brief), Polsinelli PC,
                                                                 Kansas City, Missouri and New York,
                                                                 New York.

                                                             1
    FOR DEFENDANTS-APPELLEES:                                   ROBERT J. LANE, JR., (Cynthia Giganti
                                                                Ludwig, on the brief), Hodgson Russ
                                                                LLP, Buffalo, New York.

      Appeal from the February 8, 2016 judgment of the United States District Court for
the Southern District of New York (Forrest, J.).

    UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, ADJUDGED,
AND DECREED that the judgment of the district court is AFFIRMED.

        On September 7, 2007, ITT Corporation acquired International Motion Control
Inc. (“IMC”), and its subsidiaries Enidine Incorporated (“Enidine”) and Cleveland
Motion Controls, Inc., through a merger agreement (the “Agreement”). The Agreement
transferred the rights to numerous patents, including U.S. Patent No. 7,131,367 (“the ’367
Patent”),1 to ITT. IMC warranted that, “to the Knowledge of the Company,” those patents
were valid and enforceable. App’x at 37. “Knowledge of the Company” was defined as
“the actual knowledge, after reasonable investigation . . . of responsible managerial
employees” including the defendants, who were executives of the acquired companies.
Id. at 86. In 2012, defendant Patrick P. Lee became associated with Kyntec Corporation
and is now Chairman of Kyntec’s Board of Directors. At the time of the Agreement, Lee
was Chairman and CEO of IMC, as well as its “Stockholders’ Representative,” and
signed the Agreement in those capacities. Id. at 131.

        In April 2014, Kyntec commenced an action in the Western District of New York,
seeking a declaratory judgment that the ’367 Patent and its claims were invalid and
unenforceable.2 In response, the plaintiffs brought the instant suit on April 8, 2015
against the defendants—alleging (1) breach of contract, (2) intentional breach of contract,
(3) fraud, and (4) breach of fiduciary duty—in connection with the defendants’ alleged
obligation under the Agreement to make a reasonable investigation of IMC’s patents’
validity and enforceability. The Plaintiffs-Appellants appeal the district court’s grant of
the defendants’ motion to dismiss all claims. We assume the parties’ familiarity with the
underlying facts and procedural history of this case.

      “We review the grant of a motion to dismiss de novo.” Fahs Constr. Grp, Inc. v.
Gray, 725 F.3d 289, 290 (2d Cir. 2013) (per curiam). We “accept all factual claims in the
complaint as true, and draw all reasonable inferences in the plaintiff’s favor.” Id. (quoting

1
 The ’367 Patent concerns a recoil damper design for firearms. App’x at 169.
2
 On January 25, 2016, the United States Patent and Trademark Office issued an Ex Parte Reexamination
Certificate, confirming the patentability of all the ’367 Patent’s claims. The parties filed a joint notice in the
declaratory judgment action in which ITT Enidine Inc. represented that it would not appeal the Office’s
confirmation of the patentability of the ’367 Patent to any court or agency. See Joint Notice ¶ 4, Kyntec Corp. v. ITT
Enidine Inc., No. 14 Civ. 271 (W.D.N.Y. Jan. 26, 2016), ECF No. 73.

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Anschutz Corp. v. Merrill Lynch & Co., 690 F.3d 98, 107 (2d Cir. 2012)) (internal
quotation marks omitted).

       1. Obligations Under the Agreement

       In Section 3.12 of the Agreement, IMC warranted that “to the Knowledge of the
Company,” the intellectual property being transferred was valid and enforceable. App’x
at 37. The Agreement defined “Knowledge of the Company” as “the actual knowledge,
after reasonable investigation” of various managerial employees including the
defendants. Id. at 86. Notably, Section 11.8 stated that no past, present, or future officer,
employee, or stockholder “shall have any liability for any obligations or liabilities of the
Company or the Stockholders’ Representative under this Agreement.” Id. at 78.

       The plaintiffs contend that Section 11.8 does not bar their claims, because they
allege that defendants breached their own obligations under the Agreement, rather than
IMC’s. Indeed, each count of the Amended Complaint alleges that the defendants
breached individual obligations and duties under the Agreement to perform reasonable
investigations of patent validity. The defendants contend that no such individual
obligations exist under the contract. We agree. Section 3.12—which plaintiffs allege
created a duty for the defendants—specifically sets out the “Representations and
Warranties” of IMC, not the defendants. Article IV of the Agreement specifies the
“Representations and Warranties” of the stockholders individually and does not include
any obligation to reasonably investigate the validity of any intellectual property. Id. at
48–50. Meanwhile, although the “Definitions and Defined Terms” section of the
Agreement contemplates “reasonable investigation” by the defendants, it does not
explicitly impose any obligation on the defendants to engage in such investigation. We
therefore hold that the Agreement did not impose an obligation on defendants to
reasonably investigate the intellectual property’s validity. Since the plaintiffs’ claims are
premised upon the existence of such an obligation, their claims necessarily fail.

       2. Statute of Limitations

       Even assuming arguendo that the defendants did have obligations to reasonably
investigate, we agree with the district court that the plaintiffs’ claims are time-barred.

       The merger closed on September 7, 2007. Plaintiffs commenced this action on
April 7, 2015—over seven years later. Section 9.4(f) of the Agreement stipulates that
representations and warranties of the Parties survive for two years after the closing date,
or five years for warranties and representations regarding “Fundamental Matters.” Id. at
71. Section 9.4(g) provides an exception in cases of fraud, intentional breach, or willful
misconduct—in which case a longer statute of limitations could govern. Even assuming
that Section 9.4(g) applies, plaintiffs commenced this action outside of New York’s six-
year statute of limitations for breach of contract, see N.Y. C.P.L.R. § 213(2).

                                             3
       Plaintiffs contend that their breach of contract claims are nonetheless timely
because ITT did not know of the alleged breach until 2014. However, New York does not
apply the discovery rule to the statute of limitations in contract actions. ACE Sec. Corp. v.
DB Structured Prods., Inc., 36 N.E.3d 623, 628 (N.Y. 2015). Instead, the limitations
period “begins to run from the time when liability for [the] wrong has arisen even though
the injured party may be ignorant of the existence of the wrong or injury.” Id. (internal
quotation mark omitted).

       Plaintiffs further argue that their breach of contract claims are timely because they
are subject to equitable tolling. The district court declined to equitably toll the plaintiffs’
claims. We review that decision for abuse of discretion. Zerilli-Edelglass v. New York
City Transit Auth., 333 F.3d 74, 81 (2d Cir. 2003). Equitable tolling is warranted only in
rare and exceptional circumstances. Harper v. Ercole, 648 F.3d 132, 136 (2d Cir. 2011).
A litigant seeking equitable tolling must establish: “(1) that he has been pursuing his
rights diligently, and (2) that some extraordinary circumstance stood in his way.” A.Q.C.
ex rel. Castillo v. United States, 656 F.3d 135, 144 (2d Cir. 2011) (quoting Pace v.
DiGuglielmo, 544 U.S. 408, 418 (2005)). We find that the district court did not abuse its
discretion in concluding that the plaintiffs had not alleged such an extraordinary
circumstance, especially where the plaintiffs have failed both on appeal and below to
allege any diligence during the limitation period. Thus, we find the plaintiffs’ contract
claims untimely.

       Plaintiffs seek to avoid the time bar by pleading an actual fraud claim. Under New
York law, actions based on fraud have a limitations period of six years or two years from
the time the plaintiff discovered the fraud. N.Y. C.P.L.R. § 213(8). However, “[w]hen a
fraud claim is incidental to another asserted claim, the claim does not sound in fraud for
purposes of taking advantage of the longer limitations period.” Corcoran v. New York
Power Auth., 202 F.3d 530, 545 (2d Cir. 1999). A fraud action is not incidental to another
claim “only when: (1) the fraud occurred separately from and subsequent to the injury
forming the basis of the alternate claim; and (2) the injuries caused by the fraud are
distinct from the injuries caused by the alternate claim.” Id. The alleged fraud did not
occur separate from and subsequent to the alleged breach of contract. In fact, the claims
rest upon violation of the exact same contractual provisions, and the plaintiffs allege no
subsequent fraudulent conduct. Moreover, the alleged injuries caused are plainly not
distinct, given that the Amended Complaint lists identical damages for the fraud and
breach of contract claims. Therefore, the plaintiffs are not entitled to take advantage of
the longer limitations period for fraud claims.

        The plaintiffs further claim that their intentional breach of contract claims sound in
tort. In New York, “a tort cause of action cannot accrue until an injury is sustained.”
Kronos, Inc. v. AVX Corp., 612 N.E.2d 289, 292 (N.Y. 1993). Plaintiffs’ claims might be

                                              4
deemed timely under that standard.3 However, their claims do not sound in tort. “A
breach of contract is not to be considered a tort unless a legal duty independent of the
contract itself has been violated.” Bd. of Managers of Beacon Tower Condo. v. 85 Adams
St., LLC, 25 N.Y.S.3d 233, 239 (N.Y. App. Div. 2016); see also New York Univ. v. Cont’l
Ins. Co., 662 N.E.2d 763, 767 (N.Y. 1995) (“[D]efendant may be liable in tort when it
has breached a duty of reasonable care distinct from its contractual obligations, or when it
has engaged in tortious conduct separate and apart from its failure to fulfill its contractual
obligations.”). The plaintiffs allege no such independent legal duty. Their claims are
based on the defendants’ alleged breach of their purported contractual duty to perform a
reasonable investigation of IMC’s intellectual property. Since the plaintiffs’ claims do not
sound in tort, they are not entitled to the statute of limitations applicable to tort claims.
See Corcoran, 202 F.3d at 544–45 (“In applying a Statute of Limitations it is basic that
one look[s] to the essence of plaintiff’s claim and not to the form in which it is pleaded.”
(quoting State v. Cortelle Corp., 341 N.E.2d 223, 224 (N.Y. 1975)) (internal quotation
marks omitted)).

       Lastly, the plaintiffs’ fiduciary duty claim is also time-barred. In New York,
breach of fiduciary duty claims seeking money damages are subject to a three-year statute
of limitations under N.Y. C.P.L.R. § 214(4). IDT Corp. v. Morgan Stanley Dean Witter &
Co., 907 N.E.2d 268, 272 (N.Y. 2009). However, “where an allegation of fraud is
essential to a breach of fiduciary duty claim,” courts have instead applied N.Y. C.P.L.R.
§ 213(8)—which includes a two-year discovery rule. Id. Plaintiffs assert that their
fiduciary duty claim is based on an allegation of fraud. We disagree. As with plaintiffs’
other claims, plaintiffs’ fiduciary duty claim is, in essence, a breach of contract claim,
refashioning alleged violations of purported contractual obligations as breaches of
fiduciary duty. Fraud is not essential to the claim.

      We have considered the Appellants’ remaining arguments and find them to be
without merit. Accordingly, we AFFIRM the judgment of the district court.

                                             FOR THE COURT:
                                             Catherine O’Hagan Wolfe, Clerk of Court

3
  The plaintiffs argue that their alleged tort action is timely because they were “unaware of Appellees’ intentionally
fraudulent conduct” prior to Kyntec’s filing suit in April 2014. Appellant’s Br. at 16. However, in New York, tort
claims accrue at the date injury was sustained rather than the date plaintiff discovered the injury. Kronos, 612
N.E.2d at 292. Plaintiffs’ alleged injuries include “significant patent maintenance fees and other fees paid in
connection with the Registered Intellectual Property.” App’x at 149. If such alleged injuries occurred more than six
years prior to commencement of this action, the plaintiffs’ claims would be untimely even if construed as tort
claims.

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