Opinion
No. 06-1816-cv.
October 4, 2007.
UPON DUE CONSIDERATION, it is hereby ORDERED, ADJUDGED AND DECREED that the judgment of the district court is AFFIRMED in part and VACATED and REMANDED in part.
For Plaintiff-Appellee: RICHARD I. WOLFF, Law Offices of Richard I. Wolff, New York, New York.
For Defendants-Appellants: E. MICHAEL ROSENSTOCK, Law Offices of E. Michael Rosenstock, P.C., Rockville Centre, New York.
PRESENT: HON. PIERRE N. LEVAL, HON. SONIA SOTOMAYOR, HON. ROBERT A. KATZMANN, Circuit Judges.
Defendants-appellants LD Wholesale ("LD") and Frank Schmaeling appeal from an amended judgment of the United States District Court for the Southern District of New York (Owen, J.) entered on March 17, 2006, following a bench trial on claims of breach of contract and fraud brought against them by plaintiff-appellee MCI Worldcom Communications, Inc. ("MCI"). We assume the parties' familiarity with the underlying facts and procedural history of the case.
Defendants argue that the district court improperly found that both LD and Schmaeling were liable to MCI for fraudulent concealment and fraudulent misrepresentation. We hold that, as a matter of New York law, defendants are not liable under either theory. See Oscar Gruss Son, Inc. v. Hollander, 337 F.3d 186, 193 (2d Cir. 2003) (noting that, on appeal from a bench trial, we review the district court's conclusions of law de novo and its findings of fact for clear error). The district court erred in finding defendants liable for fraudulent concealment in failing to notify MCI that MCI had erroneously billed LD at an incorrect lower rate because defendants had no duty to disclose such information. Because MCI's own billing information was readily available to it at all times, the "special facts" doctrine — providing that a duty to disclose arises when "one party possesses superior knowledge, not readily available to the other, and knows that the other is acting on the basis of mistaken knowledge," Aetna Cas. Sur. Co. v. Aniero Concrete Co., 404 F.3d 566, 582 (2d Cir. 2005) (per curiam) (quotation marks omitted) (emphasis added) — is not applicable. See also Jana L. v. West 129th Street Realty Corp., 802 N.Y.S.2d 132, 135 (1st Dep't 2005) (holding that the "special facts" doctrine requires that the information be "peculiarly within the knowledge" of the defendant and not discoverable by the plaintiff through the "exercise of ordinary intelligence" (quoting Black v. Chittenden, 69 N.Y.2d 665, 669 (1986)). Likewise, the mere fact that defendants discussed other billing, credit and payment issues with MCI and did not reveal the billing error did not make their statements fraudulent "half-truths." See Aetna Cas. Sur. Co., 404 F.3d at 582 (explaining that there is a duty to disclose in certain circumstances "where a party has made a partial or ambiguous statement" with respect to a specific issue).
In a previous summary order, this Court affirmed the district court's breach of contract finding, but we specifically stated that we did not evaluate the district court's findings with regard to the fraud claims. Although this issue was not briefed to the prior panel, both parties now assert that a judgment for fraud potentially carries greater consequences than a judgment for breach of contract alone, in that a judgment based on fraud is not dischargeable in bankruptcy. As both parties now assert that the separate judgment for fraud will have serious consequences, we proceed to consideration of that judgment.
The district court also erred in finding defendants liable for fraudulently misrepresenting LD's December 31, 2000 year-end financial statement, current cash positions and the nature of LD's business. Assuming the district court correctly found these statements to be fraudulent, MCI failed to prove it was damaged by such misrepresentations. See Kregos v. Associated Press, 3 F.3d 656, 665 (2d Cir. 1993) (explaining that a fraud claim requires proof that the misrepresentations caused the plaintiff's damages). Had LD not made these misrepresentations, MCI asserted that it would have required a $1.5 million security rather than a $500,000 security. But with either amount, MCI admitted that the deadline for LD to provide the security — after which time service would be immediately terminated — was March 16, 2001, three days after MCI actually terminated service when it discovered its billing error. As a result, it was clear error for the district court to find that the misrepresentations damaged MCI.
In its brief, MCI points to one piece of evidence as support for the proposition that it detrimentally relied on the fraudulent financial statement — being MCI employee Esther Hale's testimony that if she had believed Schmaeling was proceeding in "bad faith," or if Schmaeling had stated that he had "no intention of posting the requested $500,000," she would have recommended to her supervisor that LD's service be terminated. Hale's testimony addresses what she would have done on receipt of other communications, but does not show detrimental reliance on the false financial statement.
The breach of contract judgment that we previously affirmed remains intact. However, because Schmaeling's liability is based on the theory that he is LD's "alter ego," the district court should enter a single judgment against both LD and Schmaeling for which they are joint and severably liable. The amended judgment erroneously awards duplicative damages against both LD and Schmaeling.
For the foregoing reasons, the judgment of the district court is AFFIRMED in part and VACATED and REMANDED in part.