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granting summary judgment on fraud claim where "the only fraud alleged arises out of the same facts that serve as the basis for the breach of contract claim"
Summary of this case from Waterville Investment, Inc. v. Homeland Sec. NetworkOpinion
07 Civ. 8005 (KNF).
February 4, 2009
MEMORANDUM AND ORDER
INTRODUCTION
Greenstreet Financial, L.P. ("Greenstreet") brings this contract action, pursuant to the court's diversity jurisdiction, against CS-Graces, LLC ("CS-Graces") and RH Lodging Services, LLC ("RH Lodging"). Greenstreet contends it was damaged by the Sheryl Smul Grantor Annuity Trust's ("Smul Trust" or "the Trust") transfer of the Trust's 50% interest in RH Lodging, which had been pledged as security to Greenstreet in exchange for a loan, to CS-Graces. A Third-Party Complaint was filed in this action by CS-Graces and RH Lodging ("third-party plaintiffs"), against Sheryl Smul ("Smul"), the Smul Trust, and Alan G. Friedberg ("Friedberg") (collectively, "third-party defendants"), asserting claims for breach of contract and fraud. Before the Court is the third-party defendants' motion for summary judgment, made pursuant to Fed.R.Civ.P. 56. The third-party plaintiffs oppose the motion; it is addressed below.
BACKGROUND
On September 4, 2003, an "Amended and Restated Operating Agreement" ("the ARO Agreement") was entered into by Smul, as trustee of the Smul Trust, and CS Graces, which provided, inter alia, that the Smul Trust and CS Graces each held a 50% interest in RH Lodging.
In December 2004, Greenstreet and Friedberg entered into a loan agreement, under which Greenstreet agreed to loan $1,000,000.00 to Friedberg, and, in exchange, Friedberg executed a Note ("the Note") in favor of Greenstreet in the same amount. The Note provided that, upon default by Friedberg, any outstanding balance and all other sums due under the Note would become due and payable immediately to Greenstreet. Two commercial security agreements were created to secure the loan, one of which was the "Smul Security Agreement," which provided that: (1) Smul and the Smul Trust granted to Greenstreet a security interest in, inter alia, the Smul Trust's 50% interest in RH Lodging ("the Smul Interest"); and (2) upon default by Friedberg, Greenstreet was entitled to foreclose on the Smul Interest. In January 2005, Greenstreet filed a Uniform Commercial Code ("UCC") UCC-1 Financing Statement with the Florida Security Transaction Registry, to record its security interest in the Smul Trust. In October 2005, Friedberg defaulted on the Note, by failing to pay the full amount due to Greenstreet.
In January 2006, the Smul Trust entered into a written agreement ("Divestiture Agreement") by which the Smul Interest was sold to CS-Graces. The Divestiture Agreement contained, inter alia, a clause referencing the ARO Agreement as setting forth the "rights and obligations of the Smul Trust, CS-Graces and [RH Lodging]," and an additional provision stating that the "aforementioned [] clause[] [is] incorporated into and made a part of this Agreement, and each of the recitals and agreements therein set forth are agreed to by the parties."
In the third-party complaint, the third-party plaintiffs allege the third-party defendants breached the Divestiture Agreement, by failing to transfer the Smul Interest "free and clear" of any liens and encumbrances, despite the third-party plaintiffs' performance of their obligations under the Divestiture Agreement. In addition, the third-party plaintiffs assert a fraud claim, based upon Friedberg's alleged misrepresentation that the Smul Interest would be transferred "free and clear" of any liens, claims and encumbrances ("Friedberg's misrepresentation"). In support of the fraud claim, the third-party plaintiffs allege reliance was placed upon Friedberg's misrepresentation and the "import of the [Divestiture Agreement], [which] . . . provided for the transfer of the entire unencumbered interest of the Smul Trust in RH Lodging to CS-Graces." The third-party plaintiffs request: (1) monetary damages, "in excess of $200,000" for the breach of contract claim, and (2) "compensatory damages in an amount to be determined but in excess of $200,000.00, punitive damages, costs and disbursements," for the fraud claim.
The third-party defendants moved for summary judgment, arguing: (1) the Smul Trust was under no contractual obligation to transfer the Smul Interest "free and clear of liens and encumbrances," as the Divestiture Agreement contained no "covenant," "representation[]," or "warranty" that the membership interest would be transferred free of any liens or encumbrances; and (2) the fraud claim should be dismissed because Greenstreet's security interest in the Smul Interest was duly recorded in Florida, by the filing of a UCC-1 Financing Statement, and, therefore, the third-party plaintiffs' reliance on Friedberg's alleged oral representation was not reasonable.
For their part, CS-Graces and RH Lodging contend, by letter dated January 5, 2009, that paragraph 31 of the ARO Agreement, which governs the sale of an interest in RH Lodging, provides,inter alia, that:
In their initial motion papers, CS-Graces and RH Lodging relied upon an unsigned and annotated copy of the ARO Agreement, and contended that ¶ 29 of the ARO Agreement, entitled "Encumbrance," placed limitations on the transfer of an encumbered interest in RH Lodging by the Smul Trust. Thereafter, the third-party defendants submitted to the Court a signed copy of the ARO Agreement, which did not contain ¶ 29. In response, the third-party plaintiffs submitted a letter in which they acknowledged the signed agreement, noted that it did not contain ¶ 29, and argued that ¶ 31(d)(i) of the signed ARO Agreement provided that an interest in RH Lodging shall be sold and transferred "free and clear of all liens, claim[s] and encumbrances."
(d). . . . At the Closing, the following shall occur:
(i) The Seller shall transfer and assign to the Buyer, free and clear of all liens, claim[s] and encumbrances, with covenants of general warranty, the interest being transferred, and shall execute and deliver to the Buyer all documents which may be required to give effect to the acquisition of such Interest. . . .
The third-party plaintiffs contend this provision obligated the third-party defendants to transfer the Smul Interest "free and clear of all liens, claim[s] and encumbrances." Additionally, the third-party plaintiffs maintain their fraud claim should not be dismissed since it was reasonable for the third-party plaintiffs to rely upon the Divestiture Agreement and implied warranties of "good and unencumbered title," and that it was incumbent upon the third-party defendants to disclose Greenstreet's claim on the interest being transferred to CS-Graces.
DISCUSSION
Standard of Review for Summary Judgment
Summary judgment may be granted in favor of the moving party "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." See Fed.R.Civ.P. 56(c); see also D'Amico v. City of New York, 132 F.3d 145, 149 (2d Cir. 1998), cert. denied, 524 U.S. 911, 118 S. Ct. 2075 (1998). When considering a motion for summary judgment, "[t]he court must view the evidence in the light most favorable to the party against whom summary judgment is sought and must draw all reasonable inferences in his favor." L. B. Foster Co. v. America Piles, Inc., 138 F.3d 81, 87 (2d Cir. 1998) (citingMatsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S. Ct. 1348, 1356).
The moving party bears the burden of showing that no genuine issue of material fact exists. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S. Ct. 2548, 2552 (1986). Once the moving party has satisfied its burden, the non-moving party must come forward with "specific facts showing that there is a genuine issue for trial." Fed.R.Civ.P. 56(e)(2); see Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250, 106 S. Ct. 2505, 2511 (1986).
In order to defeat a motion for summary judgment, the non-moving party cannot merely rely upon the allegations contained in the pleadings that raise no more than "some metaphysical doubt as to the material facts." Matsushita, 475 U.S. at 586, 106 S. Ct. at 1355. "[T]he mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment." Anderson, 477 U.S. at 247-48, 106 S. Ct. at 2510. The non-moving party must offer "concrete evidence from which a reasonable juror could return a verdict in his favor."Anderson, 477 U.S. at 256, 106 S. Ct. at 2514. Summary judgment should only be granted if no rational jury could find in favor of the non-moving party. See Heilweil v. Mount Sinai Hospital, 32 F.3d 718, 721 (2d Cir. 1994).
The third-party defendants contend they are entitled to summary judgment because the Divestiture Agreement did not require that an interest be transferred "free and clear" of any liens, claims or encumbrances. Additionally, the third-party defendants assert that a fraud claim cannot lie since the filing of a UCC-1 Financing Statement was sufficient to put the third-party plaintiffs on notice of Greenstreet's interest, and, therefore, it was unreasonable for the third-party plaintiffs to rely on any representations by Friedberg.
Breach of Contract Claim
To prevail on a claim for breach of contract, under New York law, a plaintiff must prove: (1) the existence of a contract between the plaintiff and defendant; (2) performance of the contract by the plaintiff; (3) breach of the contract by the defendant; and (4) damages resulting from the breach. See First Investors Corp. v. Liberty Mutual Ins. Co., 152 F.3d 162, 168 (2d Cir. 1998); Feldman v. Talon Paint Products, Inc., No. 01 Civ. 5657, 2002 WL 31385826, at *4 (S.D.N.Y. Oct. 22, 2002). "In interpreting a contract under New York law, `words and phrases . . . should be given their plain meaning,' and the contract `should be construed so as to give full meaning and effect to all of its provisions.'" LaSalle Bank Nat'l Ass'n v. Nomura Asset Capital Corp., 424 F.3d 195, 206 (2d Cir. 2005) (quoting Shaw Group, Inc. v. Triplefine Int'l Corp., 322 F.3d 115, 121 [2d Cir. 2003]). "Whether a contract is clear or ambiguous is a question of law." Allianz Ins. Co. v. Lerner, 416 F.3d 109, 113 (2d Cir. 2005). "An ambiguous term is one about which reasonable minds could differ." Consarc Corp. v. Marine Midland Bank, N.A., 996 F.2d 568, 573 (2d Cir. 1993). "If a contract is unambiguous, courts are required to give effect to the contract as written and may not consider extrinsic evidence to alter or interpret its meaning." Id.
Here, there is no dispute that a contract existed between the third-party plaintiffs and the third-party defendants, and that the third-party plaintiffs performed their obligation(s) under the contract. The issue presented is whether the third-party defendants breached the Divestiture Agreement by selling the Smul Interest to CS-Graces while the Smul Interest was encumbered by Greenstreet's security interest in the Smul Trust's 50% interest in RH Lodging.
Although the third-party defendants contend the Divestiture Agreement did not contain any provision prohibiting the transfer of an interest in RH Lodging subject to a lien, claim or encumbrance, the third-party plaintiffs have identified ¶ 31(d)(i) of the ARO Agreement, which was incorporated into the Divestiture Agreement, by reference, as providing such a prohibition. Specifically, ¶ 31(d)(i) states that: "[t]he Seller shall transfer and assign to the Buyer, free and clear of all liens, claim[s] and encumbrances, . . . the interest being transferred. . . ." In light of this unambiguous provision, the third-party defendants' transfer of the Smul Interest to CS-Graces while it was encumbered by Greenstreet's security interest, violated the Divestiture Agreement. As a result, "giv[ing] effect to the contract as written," the third-party defendants are not entitled to summary judgment, on the breach of contract claim. Consarc Corp., 996 F.2d at 573.
Fraud
"Proof of fraud under New York law requires a showing that (1) the defendant made a material false representation, (2) the defendant intended to defraud the plaintiff thereby, (3) the plaintiff reasonably relied upon the representation, and (4) the plaintiff suffered damage as a result of such reliance." Wall v. CSX Transp., Inc., 471 F.3d 410, 415-16 (2d Cir. 2006) (internal quotations and citations omitted). In order to assert a claim of fraud arising out of a contractual relationship, a plaintiff must either: "(i) demonstrate a legal duty separate from the duty to perform under the contract . . .; or (ii) demonstrate a fraudulent misrepresentation collateral or extraneous to the contract . . .; or (iii) seek special damages that are caused by the misrepresentation and unrecoverable as contract damages."Bridgestone/Firestone, Inc. v. Recovery Credit Services, Inc., 98 F.3d 13, 20 (2d Cir. 1996). "Even an allegation of an intentionally false statement that meets all the elements of a proper fraud claim cannot support a cause of action where a fraud claim is premised upon an alleged breach of contractual duties and the supporting allegations do not concern representations which are collateral or extraneous to the terms of the parties' agreement." Great Earth Int'l Franchising Corp. v. Milks Dev., 311 F. Supp. 2d 419, 425 (S.D.N.Y. 2004) (internal quotations and citations omitted).
According to the third-party complaint, the fraud claim alleged is based upon: (1) an oral representation by Friedberg, made to the third-party plaintiffs, that "the membership interest of the Smul Trust in RH Lodging was free and clear of any liens and encumbrances"; and (2) a reliance upon "the import of the [Divestiture Agreement, which, when] interpreted as a whole, provided for the transfer of the entire unencumbered interest of the Smul Trust in RH Lodging to CS-Graces." Pursuant to the Divestiture Agreement, the terms of the ARO Agreement were incorporated therein, and, thus the parties to the Divestiture Agreement were subject to ¶ 31(d)(i) of the ARO Agreement, providing for the transfer of the Smul Interest "free and clear of all liens, claim[s] and encumbrances, with convenants of general warranty." Friedberg's misrepresentation regarding the encumbered status of the Smul Interest did not implicate "a legal duty separate and apart from the contractual duty to perform," nor was his "fraudulent representation collateral or extraneous to the contract" because, perforce of ARO Agreement ¶ 31(d)(i), no transfer of an encumbered Smul Interest could be effected.Papa's-June Music, Inc., v. McLean, 921 F. Supp. 1154, 1161 (S.D.N.Y. 1996); see also Bridgestone/Firestone, Inc., 98 F.3d at 19 (finding that "representations . . . intended to lull [the non-breaching party] into a false sense of security" of the breaching party's intent to perform under a contract, are "not sufficient to support a claim of fraud under New York law").
With regard to whether any "special damages proximately caused by the fraudulent representation that are not recoverable under the contract measure of damages" exist, the damages recoverable based upon Friedberg's representation would be identical to the damages recoverable for breach of contract, as both claims are based upon the third-party defendants' failure to transfer the Smul Interest free of any liens, claims or encumbrances.Papa's-June Music, Inc., 921 F. Supp. at 1161. The third-party plaintiffs have not identified any "special" damages flowing directly from Friedberg's fraudulent representation, that do not flow from the alleged breach of contract. Inasmuch as "the only fraud alleged arises out of the same facts that serve as the basis for the breach of contract claim," the fraud allegation in the third-party complaint fails to state a cause of action for fraud. Id. at 1162. Since no genuine issue of material fact exists with respect to the fraud claim, because the third-party complaint fails to state a cause of action for fraud, the third-party defendants are entitled to summary judgment on the third-party plaintiffs fraud claim. See Telecom Int'l Am., Ltd. v. AT T Corp., 280 F.3d 175, 196 (2d Cir. 2001) ("under New York law, where a fraud claim arises out of the same facts as plaintiff's breach of contract claim, with the addition only of an allegation that defendant never intended to perform the precise promises spelled out in the contract between the parties, the fraud claim is redundant and plaintiff's sole remedy is for breach of contract") (internal quotations omitted).
CONCLUSION
For the reasons set forth above, the third-party defendants' motion for summary judgment, Docket Entry No. 51, is denied with respect to the third-party plaintiffs' breach of contract claim, and granted with respect to the third-party plaintiffs' fraud claim.
SO ORDERED: