Opinion
No. 603707/08.
2010-08-26
HP HOTEL SPONSOR, LLC, Plaintiff, v. STRATEGIC CAPITAL SOLUTIONS, LLC, Strategic Capital Partners, LLC, SCS–Strategic Capital Solutions, LLC, E & E Consulting, LLC, Randy Abood, Alan Fitter, and Edward Mehrfar, Defendants.
Lawrence Fabian, Esq., New York, for plaintiff. Marc S. Gottlieb, Esq., New York, for defendants.
Lawrence Fabian, Esq., New York, for plaintiff. Marc S. Gottlieb, Esq., New York, for defendants.
DEBRA A. JAMES, J.
The instant action concerns a contemplated business transaction which did not come to fruition. Defendants move to dismiss the second amended complaint, pursuant to CPLR 3211(a)(1) and (7).
It is alleged that defendants Strategic Capital Solutions, LLC, SCS–Strategic Capital Solutions, LLC (SCS), and E & E Consulting, LLC used their names interchangeably in communications with plaintiff HP Hotel Sponsor, LLC. Defendants Randy Abood, Edward Mehrfar, and Alan Fitter are principals of the entity defendants.
The following allegations are taken from the complaint as amplified by plaintiff's opposing affidavit. Plaintiff planned to purchase and renovate a resort and spa in Colorado for $70 million, $44 million of which plaintiff planned to borrow. In June 2008, defendants contacted plaintiff, proposing to lend it $24 million for the project. On June 22, 2008, defendants sent plaintiff an e-mail stating that they would close the loan by July 1, 2008, that defendant Abood would invest his own money in the project, and that defendants were capitalized to make the deal.
Defendants drafted a 13–page Letter of Interest (the Letter) dated June 23, 2008. The Letter stated that it would expire at 5 p.m. the same day if the parties did not agree to it. It stated that defendants were interested in providing $24 million in mezzanine, meaning middle level, financing for the project, subject to the satisfaction of the conditions and terms contained therein. One of the conditions was that plaintiff would arrange for a third party to provide senior financing. The Letter called for plaintiff to pay defendant $35,000 as an expense deposit and $50,000 as an application and processing fee. The parties signed the Letter and plaintiff paid the deposit and fee. Due diligence commenced.
Defendants sent several e-mails to plaintiff representing their eagerness to close the deal. In reliance upon these communications, plaintiff alleges, it expended substantial monies in moving ahead with the project. On July 28, 2008, defendants wrote plaintiff that they would not finance the project.
Defendants contend that they could not close the loan because plaintiff did not obtain a commitment for senior financing. Plaintiff claims that the defendants caused the intended senior financier to back out of the transaction by failing to provide vital information, causing the senior financier to doubt defendants' ability to provide the loan. Plaintiff commenced this action, alleging that defendants breached the Letter and misrepresented their ability to finance the project. Defendants deny entering into a binding agreement and claim that the Letter was an unenforceable agreement to agree or a preliminary agreement.
The first cause of action is for breach of contract based on the Letter and seeks $85,000 in damages. It alleges that plaintiff fulfilled the requirements under the Letter, including providing due diligence, and that defendants breached their obligation under the Letter to complete the transactions. The second cause of action is for breach of the implied covenant of good faith and fair dealing. It alleges that defendants accepted consideration from plaintiff, knowing that they lacked the ability to provide the financing that they promised. The third cause of action is for unjust enrichment and seeks $85,000, in the event that the Letter is determined to be unenforceable.
The fourth, fifth, and sixth causes of action allege fraud against the individual defendants. The seventh cause of action alleges that defendants fraudulently induced plaintiff to sign the Letter. The eighth cause of action is for fraudulent concealment. Allegedly, defendants failed to disclose material information about their ability to fund the project.
The ninth cause of action alleges civil conspiracy against the individual defendants, who allegedly conspired to make plaintiff sign the Letter, knowing that they did not have the ability to fund the project. The tenth cause of action seeks an accounting for the $35,000 expense deposit that plaintiff paid under the Letter.
Defendants maintain that the contract and breach of implied covenant claims may be advanced against SCS only, as the sole defendant to sign the Letter and named therein. In its opposition to the motion, plaintiff withdraws the contractual (first and second) and unjust enrichment (third) causes of action as against all defendants except SCS. Plaintiff also withdraws the claim for civil conspiracy (ninth) as against all defendants.
According to plaintiff, the Letter obligated SCS to provide the loan once due diligence was completed. Other alleged breaches include SCS's failure to complete the transaction by July 1, 2008, misusing the monies that plaintiff paid, and not accounting for use of the expense allowance.
On a CPLR 3211(a)(1) motion, a complaint will be dismissed only if documentary evidence conclusively establishes a defense to the claims as a matter of law. Morgenthow & Latham v. Bank of N.Y. Co., 305 A.D.2d 74, 78 (1st Dept 2003). On a CPLR 3211(a)(7) motion, a complaint will be dismissed only if its allegations utterly fail to manifest any cause of action cognizable under the law. Wiener v. Lazard Freres & Co., 241 A.D.2d 114, 120 (1st Dept 1998). A court may freely consider affidavits submitted by the plaintiff to remedy any defects in the complaint, which the court has done here. Guggenheimer v. Ginzburg, 43 N.Y.2d 268, 275 (1977).
Whether the Letter creates a binding and enforceable contract that can sustain a claim of breach depends upon the parties' intent as expressed in the Letter ( see Adjustrite Sys. v. GAB Bus. Servs., 145 F3d 543, 548 [2d Cir1998] ). The objective of contractual interpretation is to determine what the parties intended by examining the language in the contract itself (Lopez v. Fernandito's Antique, Ltd., 305 A.D.2d 218, 219 [1st Dept 2003] ). Where the agreement is clear and unambiguous, the parties' intent can be determined as a matter of law from the four corners of the agreement (Hartford Acc. & Indem. Co. v. Wesolowski, 33 N.Y.2d 169, 171–172 [1973] ). Thus, the extent to which the Letter forms a binding agreement is a legal question for the court, not a factual question for the factfinder. Vacold LLC v. Cerami, 545 F3d 114, 123 (2d Cir2008).
The Letter provides that its terms are “merely an outline and framework and are not an offer or commitment for financing and are based solely on such limited information we have received to date ... and is [sic] subject to' the lender's complete satisfaction, in all respects and in its sole and absolute discretion,” with all the information provided about the project, including due diligence. The Letter states that it is also subject to “the negotiation, execution and delivery of all required definitive documentation with respect to the contemplated Loan.” The section entitled “Preliminary Closing Conditions” provides that the contemplated loan is anticipated to close simultaneously with the closing of the senior debt, which is scheduled for July 1, 2008, and that the closing of the loan is subject to the Preliminary Closing Conditions and delays that are not in the Lender's control. The closing of the loan is subject to the closing of the senior loan on approved terms, among other conditions. The section entitled “Due Diligence” lists the information that SCS requires. It concludes, “[i]f the lender discovers information which it, in its sole and absolute discretion, believes is negative information with respect to” any aspect of the project or which does not conform to the terms of the contemplated loan in the Letter, “the Lender may, in its sole discretion, suggest alternative financing ... or decline to provide the contemplated Loan or any financing.”
Cautionary and noncommittal language similar to that in the first two pages is repeated on the eleventh page of the Letter, in regular type as well as in bold-faced capital printing. The bold faced section states, in part, that any commitment or obligation of the lender “will only arise upon the mutual execution and delivery of the definitive loan documents or a written commitment letter, which may follow in writing and only upon completion of the application, due diligence, underwriting, and approval process.”
In addition, the terms of the Letter “do not include or purport to summarize all of the terms ... and other provisions that would be contained in definitive legal documentation for the contemplated Loan.” The Letter provides that the plaintiff “acknowledge, understand and agree that SCS ... does not in any way guarantee, commit, covenant, represent or warrant that a commitment for the contemplated Loan ... can or will be provided” under the terms of the Letter or otherwise. “Only upon issuance of a commitment or approval following completion of due diligence can exact terms and amounts be determined.”
The Letter contains a merger clause that states that it constitutes the entire agreement between the parties, that SCS makes no agreements or representations apart from those expressly set forth in the Letter, that the Letter supersedes all prior discussions, and that it can only be amended or supplemented in a writing signed by all parties. The Letter expressly states that the general merger section is stated to be “binding” and survive the termination of the Letter, as are the sections dealing with application and expenses, jurisdiction, venue, governing law.
The Letter further provides that if, after SCS and plaintiff execute a commitment to fund the contemplated loan or SCS is willing to provide the loan on altered terms, plaintiff elects not to proceed with the deal, plaintiff will pay a termination fee of 4% of the maximum loan amount to SCS.
A binding preliminary agreement can be of two types. A “Type I” preliminary agreement reflects a comprehensive meeting of the minds between the parties on every issue necessitating negotiation, leaving only a formal writing to be completed. IDT Corp. v. Tyco Group, S.A.R.L., 54 AD3d 273, 274–75 (1st Dept 2008), affd13 NY3d 209 (2009). The court finds that based upon its terms the Letter is not that kind of agreement, as it relies upon the completion of due diligence, SCS's satisfaction thereof, and other conditions.
A “Type II” preliminary agreement reflects agreement on several major items while leaving other important terms for future negotiations ( id. at 275). Type II agreements do not commit the parties to their ultimate contractual objective, but rather, to the obligation to negotiate the open issues in good faith in an attempt to reach the objective within the agreed framework ( id.). If the parties fail to reach an agreement, after negotiating in good faith, no remaining obligations exist (Vacold, 545 F3d at 124). A Type II preliminary agreement is a “binding preliminary commitment” (Adjustrite, 145 F3d at 548).
The court holds that the Letter is not a Type II binding preliminary commitment. It expressly provides that the parties will not be bound in the absence of a formal, executed writing ( see Vacold, 545 F3d at 125;Adjustrite, 145 F3d at 549). The Letter contains an explicit statement of the parties' intent not to be bound in any other way, except as to the sections where a contrary intent is expressly stated. As stated by the Court, a “letter of intent, which is clearly a preliminary, nonbinding proposal to agree, conclusively negates plaintiff's breach of contract claim” meriting dismissal on the complaint. Aksman v. Xiongwei Ju, 21 AD3d 260, 261 (1st Dept 2005).
The Letter expresses the parties' intentions to negotiate and discuss a transaction within the parameters outlined in the Letter and to limit any negative consequences that might arise out of the discussion or failure to close the transaction. Either party could decide not to go ahead with the transaction for any reason without incurring an obligation to the other party, except that if SCS decided to fund the loan and plaintiff decided not to take the loan, plaintiff had to pay a termination fee. Under these circumstances, plaintiff may not claim that SCS breached the Letter by not concluding the deal. To the extent that plaintiff asserts that SCS breached a duty to negotiate in good faith, that duty is inconsistent with the terms of the Letter, “which makes manifest that [SCS] did not intend to be bound until the deal was finalized” (Pullman Group, LLC. v. Prudential Ins. Co. of Am., 288 A.D.2d 2, 4 [1st Dept 2001] ).
The court now considers plaintiff's contractual claims based upon the two binding sections of the Letter, those dealing with fees and expenses. Plaintiff claims that defendants used the money for purposes not connected with the project. The Letter provides that the $50,000 fee for application and processing its is not refundable under any circumstances and therefore plaintiff has no contractual claim for that amount. Concerning the $35,000 expense deposit, the Letter provides that SCS was to refund any unspent portion. After plaintiff commenced this action, SCS provided it with an expense report showing that all but $297 of the deposit was spent. Plaintiff objects to the report. As the Letter provides for a refund and the parties' dispute what is owed, plaintiff's claim for the unspent expense deposit is not subject to dismissal.
Plaintiff has no claim for an accounting as asserted in its tenth cause of action. A party has a right to an accounting when it has a confidential or fiduciary relationship with the party from whom the accounting is sought (Adam v. Cutner & Rathkopf, 238 A.D.2d 234, 242 [1st Dept 1997] ). Here, none of plaintiff's allegations assert anything but an arm's-length relationship between it and defendants.
Regarding the third cause of action for unjust enrichment (as asserted against SCS), defendants contend that the claim is barred by the terms of the Letter. Unjust enrichment is an obligation the law creates where no agreement exists (Goldman v. Metropolitan Life Ins. Co., 5 NY3d 561, 572 [2005] ). The existence of a valid and enforceable contract generally precludes recovery in quasi-contract for events arising out of the same subject matter as the contract ( id.). The third cause of action must therefore be dismissed, as the damages sought, $85,000 for fees and expenses, are encompassed within plaintiff's cause of action for breach of contract.
The fourth cause of action sounds in fraud as to Abood. Allegedly, Abood falsely represented to plaintiff that he, his partners, and their companies had lengthy experience in principal financing, that they would provide financing for the project by July 1, 2008, that they had the funds to provide the financing, and that Abood would invest his own money in the project. It is also alleged that Abood, alone or in participation with his partners, used the $35,000 for his own purposes instead of for expenses related to the proposed loan. The fifth and sixth causes of action allege the same as to Mehrfar and Fitter, respectively, omitting the part about promising to invest their own money.
The seventh cause of action sounds in fraudulent inducement. It alleges that defendants knowingly made false representations to induce plaintiff to enter into the Letter. The eighth cause of action sounds in fraudulent concealment. Allegedly, defendants failed to disclose material information about their ability to fund the project.
CPLR 3016(b) provides that where a cause of action or defense is based upon fraud, “the circumstances constituting the wrong shall be stated in detail.” Where detailed knowledge of how the fraud was perpetuated must await disclosure, the complaint will survive a motion to dismiss if it contains facts “sufficient to permit a reasonable inference of the alleged conduct.” Pludeman v. Northern Leasing Sys., Inc., 10 NY3d 486, 492 (2008). In this case, the facts alleged are insufficient to support a cause of action for fraud. The plaintiff alleges that the defendants' e-mails contain the allegedly fraudulent statements. Neither the complaint nor the opposing affidavit indicate any other source of fraudulent statements. In regard to the individual defendants, plaintiff does not indicate any reason that they, rather than the companies, are liable for statements made in the e-mails, which were signed by an employee of SCS, as plaintiff acknowledges. For that reason, none of the fraud causes of action asserted against the individual defendants can survive dismissal.
The elements of fraud include a knowing misrepresentation of present fact, made for the purpose of inducing the plaintiff to rely upon it, plaintiff's justifiable reliance and damages resulting therefrom (J.A.O. Acquisition Corp. v. Stavitsky, 18 AD3d 389, 390 (1st Dept 2005). The e-mails that defendant sent after the parties entered into the Letter cannot sustain fraud claims, as the allegedly fraudulent statements therein are contradicted by the express terms of the Letter ( see Raytheon Co. v. AES Red Oak, LLC, 37 AD3d 364, 364 [1st Dept 2007]; Prestige Foods, Inc. v. Whale Securities Co., L.P., 243 A.D.2d 281, 282 [1st Dept 1997] ). The e-mails stated that SCS would make the loan. However, the Letter did not obligate SCS to make the loan and it repeatedly stated that SCS was not liable towards plaintiff unless the parties entered into a definitive agreement for the loan. Even if the statements were fraudulent in that SCS did not intend to make the loan when it made the statements, plaintiff was not reasonable in relying on these statements given the express terms of the Letter.
To plead a viable cause of action for fraud arising out of a contractual relationship, the plaintiff must allege a breach of duty which is collateral or extraneous to the contract, although the breach of duty may be connected with and dependent upon the contract (Syllman v. Calleo Dev. Corp., 290 A.D.2d 209, 210 [1st Dept 2002] ). An allegation that the defendant's promise to perform the contract was a false promise does not state a claim that the plaintiff was fraudulently induced to make the contract. Eastman Kodak Co. v. Roopak Enters., Ltd., 202 A.D.2d 220, 222 (1st Dept 1994). The inducement must be a promise collateral to the contract made with the undisclosed intent not to perform the promise, or a misstatement of present fact ( id.; see also Deerfield Communications Corp. v. Chesebrough–Ponds, Inc., 68 N.Y.2d 954, 956 [1986] ).
The fraudulent inducement claim is based on the e-mail that SCS sent to plaintiff one day before the date of the Letter. It stated that “[t]his is an important deal for us as we are now fully capitalized to do these kinds of deals.” It also said that Abood would invest his own money. The court finds that these statements cannot sustain fraudulent inducement claims because they are lacking in detail and/or constitute mere puffery, opinions of value or future expectations or “representations of fact that should have been subjected to further scrutiny by plaintiff and therefore could not have been relied upon justifiably” (Elghanian v. Harvey, 249 A.D.2d 206, 206 (1st Dept 1998)). In addition, the statement in the e-mail that defendants would make the loan is no more than a promise to perform the contract.
A claim for fraudulent concealment does not lie except where there is a duty to disclose, created through a fiduciary relationship between the parties or through one party's superior knowledge of essential facts that renders nondisclosure inherently unfair (Barrett v. Freifeld, 64 AD3d 736, 738 (2d Dept 2009] ). Plaintiff does not allege facts to support such a duty here and therefore this cause of action must also be dismissed.
In accordance with the foregoing, it is
ORDERED that defendants' motion to dismiss the complaint is GRANTED, except as to plaintiff's first cause of action for breach of contract solely against SCS–Strategic Capital Solutions, LLC, to the extent it seeks a refund for plaintiff's unspent expense deposit; and it is further
ORDERED that SCS–Strategic Capital Solutions, LLC, is directed to serve an answer concerning the expense deposit claim within 20 days after service of a copy of this order with notice of entry; and it is further
ORDERED that the remaining parties shall appear at a preliminary conference on September 28, 2010, at 9:30 A.M, in IAS Part 59, Room 122, 80 Centre Street, New York, NY.
This is the decision and order of the court.