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upholding hell or high water clause in third-party finance lease for telephone network equipment
Summary of this case from Wells Fargo Bank Northwest, N.A. v. Taca International Airlines. S.A.Opinion
00-CIV-3375(KMW).
March 7, 2001.
ORDER
Plaintiff moved for summary judgment on its claims, pursuant to Fed.R.Civ.P. 56, and to dismiss defendant's counterclaims, pursuant to Fed.R.Civ.P. 12(b)(6). Third- party defendant moved to dismiss the third-party complaint, pursuant to Fed.R.Civ.P. 12(b)(6), for failure to state a claim upon which relief can be granted and, pursuant to Fed.R.Civ.P. 9(b), for failure to plead a fraud claim with particularity. The Court grants partial summary judgment and dismisses the counterclaims. The Court grants in part and denies in part third-party defendant's motion to dismiss.
I. Background
K.S. Telecom, Inc. ("K.S. Telecom" or "defendant") operates private telephone networks between the United States and other countries. In the summer of 1999, defendant solicited proposals from vendors to supply hardware and software for its international telephone networks. See Defendant K.S. Telecom's Statement of Undisputed Facts ["Def.'s Stmnt"], dated Aug. 16, 2000, at ¶ 3. Netrix Corporation ("Netrix Corp." or "third-party defendant") submitted a proposal ("the Netrix Proposal"). See Def.'s Stmnt at ¶ 5. Among its provisions, the Netrix Proposal stated that "Netrix has recently started offering 24 month to 36 month operating leases." See Affirmation of Michael Krzeminski ["Krzeminski Aff."], dated Aug. 15, 2000, at Ex. A (p. 20).
Plaintiff did not submit a response to defendant's Rule 56.1 Statement. The Court deems admitted all material facts contained in an unopposed Rule 56.1 Statement. See Gubitosi v. Kapica, 154 F.3d 30, 31 n. 1 (2d Cir. 1998) (citations omitted).
After the submission of the Netrix Proposal, Michael Krzeminski, the President of K.S. Telecom, and Scott Ledgerwood, the representative of Netrix Corp., engaged in negotiations. See Def.'s Stmnt at ¶ 7. Defendant argues that Ledgerwood made a number of representations during the negotiations that Netrix Corp. would guarantee its work and take full responsibility for the quality of the equipment. See Def.'s Stmnt at ¶¶ 9-11.
Defendant claims that Ledgerwood acted as the sole agent for both Netrix Corp. and Netrix Leasing. See Def.'s Stmnt at ¶¶ 7, 8, 15.
In connection with the Netrix Proposal, on September 30, 1999, K.S. Telecom entered into a Master Equipment Lease Agreement ("Lease Agreement") with Netrix Leasing LLC ("Netrix Leasing") to lease Netrix Corp. telephone network equipment in exchange for monthly lease payments. See Plaintiff's Statement of Material Undisputed Facts ["Pl.'s Stmnt"], dated Aug. 2, 2000, at ¶¶ 3, 8; Def.'s Stmnt at ¶ 12. The Lease Agreement states that it is a "noncancellable net lease" and that defendant "shall not be entitled to any abatement or reduction of payments due under [the] lease for any reason." Pl.'s Stmnt at ¶ 9. The Lease Agreement disclaims the warranties of merchantability, fitness for a particular purpose, design or condition, and workmanship of the equipment. See Pl.'s Stmnt at ¶ 12. The Lease Agreement also states that all such risks are to be borne by the Lessee. See Pl.'s Stmnt at ¶ 14. It states that no claim by the Lessee shall affect the unconditional obligation of the Lessee to make rent payments under the agreement. See Pl.'s Stmnt at ¶ 15. The Lease Agreement states that failure to make payments constitutes a default. See Pl.'s Stmnt at ¶ 20. Upon a declaration of default, the Lessor can require the return of the equipment and the payment of liquidated damages. See Pl.'s Stmnt at ¶ 21.
At about the same time, Krzeminski asked Ledgerwood for a document setting forth in greater detail Netrix Corp.'s maintenance obligations for the telephone equipment but was told that K.S. Telecom could rely on the Netrix Proposal and oral assurances. See Def.'s Stmnt at ¶ 17. On or about September 30, 1999, Donald Noonan, the Vice President of K.S. Telecom, sent a letter to Netrix Corp. that stated that he expected that Netrix Corp. would replace defective products if problems arose and work the situation out with Netrix Leasing. See Def.'s Stmnt at ¶ 14. Ledgerwood wrote back that he would "put some wording together on [the] request." See Krzeminski Aff. at Ex. B.
In October 1999, defendant began to receive the telephone equipment. Initially, the equipment was not complete. See Krzeminski Aff. at Ex. C, D. By late November, the equipment was programmed but was not working properly. See Sur-Sur Reply Declaration of Robert Loonin ["Loonin Sur-Sur Reply Decl."], dated Sept. 27, 2000, at Ex. A. Nonetheless, defendant paid the October, November, and December rents.See Pl.'s Stmnt at ¶ 19; Defendant's Response to Plaintiff's Statement of Undisputed Facts ["Def.'s Resp."], dated Aug. 16, 2000, at ¶ 19. As late as February, the equipment was not working properly.See Krzeminski Aff. at Ex. E. In February, Netrix Leasing provided replacement equipment and requested that defendant return the equipment initially supplied in October. See Pl.'s Stmnt at ¶ 18; Def.'s Resp. at ¶ 18. Defendant did not pay the January, February, or March rents on time. See Pl.'s Stmnt at ¶ 19; Def.'s Resp. at ¶ 19. Consequently, on April 5, 2000, plaintiff sent a letter that declared that defendant was in default and sought the return of the equipment.See Pl.'s Stmnt at ¶ 22; Def.'s Resp. at ¶ 22.
On April 9, 2000, defendant sent a check to plaintiff for $7,755.See Pl.'s Stmnt at ¶ 24; Def.'s Resp. at ¶ 24. The check was accompanied by a schedule of adjustments that listed the amounts that defendant claimed as set offs from past payments due, on account of problems with the equipment. See Pl.'s Stmnt at ¶ 24; Def.'s Resp. at ¶ 24; Affirmation of Robert Loonin ["Loonin Aff."], dated Aug. 2, 2000, at Ex. I. Defendant claims that the April payment fully covered the January, February, and March rents. See Def.'s Resp. at ¶ 19. Plaintiff, on the other hand, claims that the amount due was $78,228.37.See Pl.'s Stmnt at ¶ 24. On May 9, 2000, defendant sent checks to plaintiff for $12,770 for the May rent. Plaintiff claims that the amount due was $16,868. See Pl.'s Stmnt at ¶ 25. On June 1, 2000, defendant sent a check to plaintiff for $12,770 for the June rent. Plaintiff claims that the amount due was $16,868. See Pl.'s Stmnt at ¶ 26. On July 5, 2000, defendant sent a check to plaintiff for $11,225 for the July rent. Plaintiff claims that the amount due was $15,323. See Pl.'s Stmnt at ¶ 27.
On May 3, 2000, plaintiff commenced this action for breach of contract and conversion. On June 19, 2000, defendant answered and filed counterclaims for breach of contract, breach of express warranty, breach of implied warranty, breach of good faith and fair dealing, negligent performance, and deceptive acts and trade practices. On July 11, 2000, defendant filed third-party claims against Netrix Corp., asserting common law fraud, deceptive acts and practices, breach of contract, breach of express warranty, breach of implied warranty of fitness for a particular purpose, breach of good faith and fair dealing, and negligent performance. In the third-party complaint, defendant asserts that it is entitled to judgment against third-party defendant to the extent of its liability to plaintiff. Plaintiff now moves for summary judgment on the breach of contract and conversion claims and to dismiss the counterclaims. Third- party defendant moves to dismiss the third-party complaint.
II. Plaintiff's Motion for Summary Judgment
A. Legal Standard for Summary Judgment
On a motion for summary judgment, a court "cannot try issues of fact; it can only determine whether there are issues to be tried."Donahue v. Windsor Locks Bd. of Fire Comm'rs, 834 F.2d 54, 58 (2d. Cir. 1987) (citation and internal quotation marks omitted). To prevail on a motion for summary judgment, the moving party therefore must show that there are no such genuine issues of material fact to be tried, and that she or he is entitled to judgment as a matter of law. See Fed.R.Civ.P. 56; Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986); Citizens Bank v. Hunt, 927 F.2d 707, 710 (2d Cir. 1991). The party seeking summary judgment "bears the initial responsibility of informing the district court of the basis for its motion," which includes identifying the materials in the record that "it believes demonstrate the absence of a genuine issue of material fact." Celotex, 477 U.S. at 323.
Once a motion for summary judgment is made and supported, the burden then shifts to the non-moving party to set forth specific facts that show that there is a genuine issue to be tried. See id. Although the Court must view all of the evidence in the light most favorable to the non-moving party and must draw all reasonable inferences in that party's favor, Consarc Corp. v. Marine Midland Bank, N.A., 996 F.2d 568, 572 (2d Cir. 1993) (citation omitted), the non-moving party "must do more than simply show that there is some metaphysical doubt as to the material facts." Matsushita Elect. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986) (citations omitted). If the party has set forth sufficient facts to substantiate the elements of the claim, summary judgment is inappropriate. See Celotex, 477 U.S. at 323. With this standard in mind, the Court assesses plaintiff's motion for summary judgment.
B. Breach of Contract Claim
Plaintiff seeks summary judgment on its breach of contract claim. To recover as such under New York law, plaintiff must prove that the undisputed facts establish: the existence of a valid contract, performance by one party, breach by the other party, and damages caused by the breach. See Rexnord Holdings, Inc. v. Bidermann, 21 F.3d 522, 525 (2d Cir. 1994) (citation omitted). Plaintiff argues that defendant breached the Lease Agreement when defendant failed to make full payments for the January, February, March, April, and May rents and when defendant kept the equipment after plaintiff declared defendant to be in default of the Lease Agreement. In support of its breach of contract claim, plaintiff relies on the undisputed fact that the Lease Agreement states that defendant must make payments for the leased equipment under all circumstances and that defendant must return the leased equipment in the event of a default. See Complaint ¶¶ 13, 21. Plaintiff argues that it is entitled to payment of all rent through the term of the Lease Agreement and to the return of the equipment. See Loonin Aff. at Ex. A (¶ 17)
In response, defendant argues that it has not breached the contract. Defendant asserts that the Lease Agreement is an invalid contract and that plaintiff never performed as required under the Lease Agreement. In addition, defendant argues that it has made all payments due under the Lease Agreement. For the reasons set forth below, the Court grants partial summary judgment on the breach of contract claim.
Defendant also opposes summary judgment on the ground that there has not been adequate discovery as to the relevant issues. See Defendant's Memorandum of Law in Opposition to Plaintiff's Motion for Summary Judgment ["Def.'s Mem. in Opp."], dated Aug. 16, 2000, at p. 2-3. Under Fed.R.Civ.P. 56(a), a party can move for summary judgment "at any time after the expiration of 20 days from the commencement of the action or after service of a motion for summary judgment by the adverse party. . . ." Under Fed.R.Civ.P. 56(f), the Court may deny summary judgment or grant a continuance if it "[s]hould . . . appear from the affidavits of a party opposing the motion that the party cannot for reasons stated present by affidavit facts essential to justify the party's opposition . . . ." Defendant submitted an Affirmation of Jeffrey C. Slade ["Slade Affirmation"], dated Aug. 16, 2001, that stated that discovery was not complete in the case and states that there are questions that can not be answered until more discovery has taken place. For many reasons, the Court concludes that this affirmation is not sufficient to bar plaintiff's motion for summary judgment. First, the Slade Affirmation states that its "principal purpose . . . is to put . . . documents before the Court," not to oppose the motion for summary judgment. Second, the Court determines that the terse affirmation does not contain the necessary information as required under Second Circuit law in order to successfully oppose summary judgment. See Hudson River Sloop Clearwater, Inc. v. Department of the Navy, 891 F.2d 414, 422 (2d Cir. 1989) (a party seeking additional discovery prior to disposition of a summary judgment motion must file an affidavit stating: (i) what facts are sought; (ii) how they create a genuine issue of material fact; (iii) what effort has been made to obtain them; and (iv) why the efforts have been unsuccessful). Third, the discovery sought goes primarily to the issue of the relationship between Netrix Leasing and Netrix Corp., an issue that implicates third-party defendant's motion to dismiss, not plaintiff's motion for summary judgment. Fourth, as explained in footnote 6, the information sought would be insufficient to defeat summary judgment.
1. Existence of a Valid Contract
Defendant argues that the Lease Agreement's disclaimer of warranties is invalid because the Lease Agreement: (1) does not qualify as a third-party finance agreement as is necessary in order to contain a valid disclaimer of warranties, and (2) is unconscionable because it does not provide defendant with a remedy for problems that might arise with the leased equipment.
Defendant argues that only a valid third-party finance agreement can contain a disclaimer of warranties and that the Lease Agreement is not a valid third-party finance agreement because the supplier and the lessor do not function at arms- length as required by New York law in order to qualify as a third-party finance agreement. A third-party finance agreement is an agreement whereby a third party agrees to provide the financing between a supplier and a consumer. Under New York law, in order for a lease to qualify as a third-party finance agreement, the lessor must not select, manufacture, or supply the goods. See N.Y. U.C.C. § 2-A- 103(1)(g). According to comment g of the N.Y. U.C.C., the rules of finance leasing do not apply "where the lessor is an affiliate of the supplier." Defendant argues that the equipment supplier, Netrix Corp., and the equipment lessor, Netrix Leasing, are not independent business entities and that the Lease Agreement, therefore, is not a valid third-party finance agreement.
As a general matter of law, third-party finance agreements are given full force and effect. See, e.g., Telecom Int'l America, Ltd. v. ATT Corp., 187 F.R.D. 492 (S.D.N.Y. 1999); General Electric Capital Corp. v. National Tractor Trailer School, Inc., 175 Misc.2d 20 (Sup.Ct. 1997).
N.Y. U.C.C. § 2-A-103(1)(g) defines a "finance lease" as a lease with respect to which: "(i) the lessor does not select, manufacture, or supply the goods; (ii) the lessor acquires the goods or the right to possession and use of the goods in connection with the lease; and (iii) one of the following occurs: (A) the lessee receives a copy of the contract by which the lessor acquired the goods or the right to possession and use of the goods before signing the lease contract; (B) the lessee's approval of the contract by which the lessor acquired the goods or the right to possession and use of the goods is a condition to effectiveness of the lease contract; (C) the lessee, before signing the lease contract, receives an accurate and complete statement designating the promises and warranties, and any disclaimers of warranties, limitations or modifications of remedies, or liquidated damages, including those of any third party, such as the manufacturer of the goods, provided to the lessor by the person supplying the goods in connection with or as part of the contract by which the lessor acquired the goods or the right to possession and use of the goods; or (D) if the lease is not a consumer lease, the lessor, before the lessee signs the lease contract, informs the lessee in writing (a) of the identity of the person supplying the goods to the lessor, unless the lessee has selected that person and directed the lessor to acquire the goods or the right to possession and use of the goods from that person, (b) that the lessee is entitled under this Article to the promises and warranties, including those of any third party, provided to the lessor by the person supplying the goods in connection with or as part of the contract by which the lessor acquired the goods or the right to possession and use of the goods, and (c) that the lessee may communicate with the person supplying the goods to the lessor and receive an accurate and complete statement of those promises and warranties, including any disclaimers and limitations of them or of remedies.
The Court rejects defendant's argument on this point for two reasons. First, plaintiff provides undisputed evidence that Netrix Corp. and Netrix Leasing are independent entities that function at arms-length. Plaintiff offers evidence that the two corporations are independent entities that do not share any owners, directors, or employees in common and that they negotiated the agreements between themselves at arms- length. See Supplemental Affidavit of Robert Loonan ["Loonan Supp. Aff."], dated Aug. 25, 2000, at ¶¶ 2-4. Plaintiff explains that its relationship with Netrix Corp. is governed by a License Agreement, a Financial Services Agreement, and a Master Remarketing Agreement, all of which indicate an arms- length relationship. See id. at ¶ 3.
In opposition, defendant points to an email from Netrix Leasing to Netrix Corp. in which Netrix Leasing states that "[w]e have a bunch [sic] E-1's in the warehouses that could probably be used in replacement." See Krzeminski Aff. at Ex. E. Defendant argues that the use of the word "we" indicates either that Netrix Leasing is more than just a finance entity or that Netrix Leasing and Netrix Corp. were acting in concert. Defendant also argues that Netrix Leasing has a close relationship with Netrix Corp. because it "was formed for the sole purpose of providing leasing services to the customers of Netrix Corp., with Netrix Corp. agreeing that it would `view [Netrix Leasing] as the preferred source for providing Services to Netrix customers' and would `promote only [Netrix Leasing] to Netrix Customers as the preferred source for providing Services'." Def.'s Mem. in Opp. at p. 6 (quoting the Financial Services Agreement). The Court does not accept these hypothetical interpretations absent supporting evidence. Furthermore, the Court rejects defendant's underlying premise that the relationship between Netrix Leasing and Netrix Corp. was to insulate both entities from liability for equipment failure. To the contrary, as explained below, the Court concludes that defendant has a remedy against Netrix Corp., as embodied by the third-party action that defendant brought against the equipment supplier.
Second, assuming arguendo that the two corporations were not independent entities and therefore did not qualify for statutory finance lease arrangements, the Lease Agreement's disclaimer of warranties provision would nonetheless be a valid contract provision as a contractual "hell or high water clause." Comment g to U.C.C. § 2A-103(1)(g) clearly states that if a transaction does not qualify as a third-party finance agreement, then the parties may still achieve the same result by contractual agreement. Based on the plain language of the contract, the Court finds that the parties have such an agreement.
The Court again notes that defendant has argued that it needs further discovery on the issue of the relationship between Netrix Leasing and Netrix Corp. As explained herein, the discovery sought is futile on this issue because the Court concludes that the contract is valid even if the entities did not have an arms-length relationship.
Defendant also argues that the contract is unconscionable because it does not provide it with a remedy for problems that might arise with the leased equipment. The Court concludes that the plain language of the Lease Agreement and the fact that defendant has filed a third-party complaint against the supplier of the equipment shows that defendant has a remedy in this case. Based on the fact that a remedy is available, the Court rejects the argument that the contract is unconscionable for failure to provide a suitable remedy. See General Electric Capital Corp. v. National Tractor Trailer School, 175 Misc.2d 20, 30, 667 N.Y.S.2d 614, 621 (Sup.Ct. 1997) (explaining that a lessee is not without a remedy simply because the lessee is without a remedy against the lessor). Therefore, the Court concludes that a valid contract existed between the parties.
2. Performance by Plaintiff
Defendant also argues that plaintiff did not perform under the contract. The standard for whether plaintiff performed under the contract varies depending on whether the disclaimer of warranties clause in the Lease Agreement is a statutory third-party finance provision or a contractual "hell or high water" provision. The Court does not reach the issue of whether the Lease Agreement contains a statutory or contractual provision because it determines that plaintiff performed under the contract under both standards.
If the disclaimer clause counts as a third-party finance agreement, then the contract becomes effective "upon the lessee's acceptance of the goods." N.Y. U.C.C. § 2-A-407(1). Acceptance of goods occurs after the lessee has had a reasonable opportunity to inspect the goods and "(a) the lessee . . . signifies to the lessor or the supplier that the goods are conforming or that the lessee will take or retain them in spite of their nonconformity; or (b) the lessee fails to make an effective rejection of the goods." N.Y. U.C.C. § 2-A-515. In order to be effective, a rejection of goods must occur "within a reasonable time after tender or delivery of the goods and the lessee seasonably notifies the lessor." N.Y. U.C.C. § 2-A-509(2). Plaintiff sets forth uncontested facts showing that defendant never informed Netrix Leasing that it was rejecting the equipment or attempting to return it.See Loonin Supp. Aff. at ¶ 15. In addition, defendant paid the November and December rents in full. See id. at ¶ 13. The fact that defendant consistently complained about the equipment, see Defendant's Sur-Reply in Further Opposition to Plaintiff's Motion for Summary Judgment, dated Sept. 20, 2000, at p. 11 n. 5, is irrelevant to the issue of Netrix Leasing's performance under the contract because, as per the third-party finance agreement, the problems were the responsibility of the supplier. Therefore, under third-party finance agreement law, the Court finds that plaintiff accepted the goods and the contract became effective.
If the disclaimer clause is read as a contractual "hell or high water" provision, then performance is measured against the contractual language. Under the terms of the contract, the lease began when the equipment "arrive[d] and [was] programmed." See Krzeminski Aff. at ¶ 16. Plaintiff argues that Netrix Corp. programmed all the equipment by late November 1999 and that the lease became effective on that date.See Loonin Supp. Aff. at ¶¶ 11-12; Ex. F. The Customer Activity Reports from November 23, 24, and 25 state that Netrix Corp. unpacked the units, built the database, and downloaded the software. See id.; Loonin Sur-Sur Reply Decl. at Ex. A. Defendant does not present evidence sufficient to preclude summary judgment on this point. Defendant points to the November 23 Activity Report that states that Netrix Corp. "[s]tart[ed] working on the databases" and argues that "starting to work on something is not the same as completing it." See Defendant's Sur-Reply in Further Opposition to Plaintiff's Motion for Summary Judgment, dated Sept. 20, 2000, at p. 11. The Court finds that the November 24 and 25 Activity Reports contradict this assertion. Defendant also relies on an email from February 2000, from Netrix Leasing, that states that the equipment is not fully functional. See Krzeminski Aff. at Ex. E. The Court finds that the fact that the equipment is not fully functional does not provide material proof that it was not delivered and programmed. As explained by plaintiff, the equipment may not have been fully functional for other reasons. See Plaintiff's Sur-Sur Reply Memorandum of Law in Support of Plaintiff's Motions for Summary Judgment and to Dismiss Counterclaims, dated Sept. 27, 2000, at pp. 10-11. Therefore, under the terms of the contract, the Court finds that the undisputed material facts establish that plaintiff performed under the contract.
The Court notes that the Slade Affirmation did not state that more discovery was needed on this issue.
3. Fraudulent Inducement
Defendant further argues that it is not liable for breach of contract because it was fraudulently induced to enter the Lease Agreement. Defendant asserts that it relied on misrepresentations made by the CEO of Netrix Corp. such as that Netrix Corp. was providing the lease financing and that Netrix Corp. and Netrix Leasing are the same entity.See Def.'s Mem. in Opp., at pp. 12-13.
New York law sets forth that a party can not claim fraudulent inducement when the lease at issue "recites that is absolute and unconditional irrespective of any lack of validity or enforceability of the [lease], or any other circumstance which might otherwise constitute a defense available to a [lessor] in respect of the [lease]." Citibank N.A. v. Plapinger, 66 N.Y.2d 90, 92 (1985); see also Centronics Fin. Corp. v. El Conquistador Hotel, 573 F.2d 779, 782 (2d Cir. 1978) (citations omitted) ("if the written contract included a specific disclaimer of the very misrepresentation later alleged to be the foundation for the recission . . . such proof [would] be barred"). Under this law, the allegedly fraudulent statements must be rejected as a defense to plaintiff's action for breach of contract because the statements are contradicted by the Lease Agreement. The Lease Agreement sets forth that the lease is being entered into on behalf of Netrix Leasing, that Netrix Leasing is not the supplier of the equipment, and that Netrix Leasing can not be held liable for any defects in the products.
In addition, defendant argues that the Netrix Proposal, which refers to vendor as opposed to third-party leasing, and the letter from Noonan to Ledgerwood, which indicates that the leased equipment would be covered by some kind of warranty, are incorporated into the Lease Agreement and provide a defense to plaintiff's breach of contract claim. Assuming arguendo that these documents are subject to incorporation, the Court concludes that they do not affect plaintiff's liability under the contract because both the Netrix Proposal and the Noonan letter relate to Netrix Corp.'s, not Netrix Leasing's, responsibilities to K.S. Telecom. As such, these two documents do not affect plaintiff's recourse against defendant for breach of contract.
The integration clause states: "This Agreement, the Riders annexed hereto, the Equipment Schedule and Lease and all related instruments and documents (and any side letters and other written assurances executed or delivered in connection herewith or therewith) constitute the entire agreement between the parties with respect to the subject matter hereof and shall not be rescinded, amended or modified in any manner except by a document executed in writing by both parties." Complaint at Ex. A (p. 21).
4. Breach by Plaintiff and Damages
Plaintiff claims that defendant breached the contract because it did not make full payments and did not return the equipment, as required under the Lease Agreement. Plaintiff claims that defendant is liable for $523,165, for unpaid past rent, accelerated rent through the end of the contract, and the value of the equipment. See Plaintiff's Memorandum of Law in Support of Its Motion for Summary Judgment and to Dismiss Counterclaims, dated Aug. 2, 2000, at p. 10. In response, defendant argues that it paid all rent due, withholding only maintenance and installment payments. See Def.'s Mem. in Opp. at p. 5. Because of this genuine dispute of material fact, the Court is unable to decide the issue of plaintiff's breach or damages on summary judgment.
C. Conversion Claim
The Court also grants partial summary judgment on the conversion claim. Under New York law, conversion is defined as "any unauthorized exercise of domain or control over property by one who is not the owner of the property which interferes with and is in defiance of a superior possessory right of another in the property." Schwartz v. Capital Liquidators, Inc., 984 F.2d 53, 53-54 (2d Cir. 1993) (internal quotation marks and citation omitted). To prove conversion, plaintiff must establish: (1) title to or rights in the property alleged to be converted, (2) conversion by defendant, and (3) damages caused by the conversion. See 23 N.Y. Jur.2d, Conversion, and Action for Recovery of Chattel § 78 (1982). Plaintiff sets forth evidence that it bought and paid for the telephone equipment and therefore is the legal owner of the equipment that defendant possesses. See Loonin Aff. at ¶ 28; Loonin Supp. Aff. at ¶¶ 3, 8-10. Defendant claims that there are unresolved issues regarding whether plaintiff is the true owner of the equipment. The Court rejects this argument, and grants summary judgment on this portion of the conversion claim, because defendant fails to provide facts sufficient to raise a genuine dispute of material fact on this issue.
Plaintiff also sets forth evidence that defendant unlawfully exercised dominion and control over the property. See Loonan Aff. at ¶ 35. However, as explained above, defendant argues that it has fully paid all rent due. Because of this genuine dispute of material fact, the Court can not decide at this point whether there has been a conversion by plaintiff or damages caused by the conversion.
II. Defendant's Counterclaims
In its answer, defendant asserts a number of counterclaims that include breach of contract, breach of express warranty, breach of implied warranty, deceptive acts and practices, breach of good faith and fair dealing, and negligent performance. The Court grants plaintiff's motion to dismiss each of these counterclaims.
A. Legal Standard for 12(b)(6) Motion to Dismiss
Because Fed.R.Civ.P. 12(b) applies equally to claims and counterclaims, a motion to dismiss a counterclaim is evaluated under the same standard as a motion to dismiss a complaint. See New Jersey Steel Corp. v. Bank of New York, 1997 WL 716911 at *1 (S.D.N.Y. Nov. 17) (citations omitted). In considering a motion to dismiss for failure to state a claim upon which relief can be granted, the Court must "determine whether the complaint [or answer and counterclaim] itself is legally sufficient," Goldman v. Belden, 754 F.2d 1059, 1067 (2d Cir. 1985) (citation omitted), accepting as true its factual allegations, see Anatian v. Coutts Bank (Switzerland) Ltd., 193 F.3d 85, 88 (2d Cir. 1999) (citation omitted). The Court's function "is merely to assess the legal feasibility of the complaint [or answer and counterclaim], not to assay the weight of the evidence which might be offered in support thereof."Geisler v. Petrocelli, 616 F.2d 636, 639 (2d Cir. 1980).
The counterclaim should be dismissed only if "it appears beyond doubt that [defendant] can prove no set of facts in support of his claim which would entitle him to relief." Cruz v. Gomez, 202 F.3d 593, 597 (2d Cir. 2000) (internal quotation marks and citation omitted). The Court should draw all inferences in favor of the non-moving party. See id. at 596 (citation omitted).
In making its assessment, the Court is limited to the factual allegations in the answer, documents attached as exhibits or incorporated by reference, matters of which judicial notice may be taken, and documents either in defendant's possession or of which defendant has knowledge and relied on in bringing suit. See Brass v. American Film Technologies, Inc., 987 F.2d 142, 150 (2d Cir. 1993) (citing Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 47-48 (2d Cir. 1991)). The Court may look to additional materials, so long as it does not use them as the basis of the decision. See Hayden v. County of Nassau, 180 F.3d 42, 54 (2d Cir. 1999) (citation omitted). With this standard in clear view, the Court now examines defendant's counterclaims.
B. Breach of Contract and Warranties
The Court dismisses the counterclaims for breach of contract and warranty. As explained above, the Court found that the Lease Agreement is a valid contract that unconditionally waives all claims that defendant might have against plaintiff and expressly disclaims all warranties. Under the terms of the Lease Agreement, defendant can bring suit against the supplier, but not against plaintiff, the lessor.
C. Deceptive Acts and Trade Practices
The Court dismisses the deceptive acts and trade practices counterclaim. New York Business Law § 349 prohibits "[d]eceptive acts or practices in the conduct of any business, trade or commerce or in the furnishing of any service. . . ." In order to state a counterclaim under this section, defendant must allege that: (1) plaintiff engaged in an act or practice that was deceptive or misleading in a material way; and (2) defendant was injured as a result. See S.Q.K.F.C., Inc. v. Bell Atl. Tricon Leasing Corp., 84 F.3d 629, 636 (2d Cir. 1996) (citation omitted). In order to bring this counterclaim, defendant "must, at the threshold, charge conduct that is consumer oriented." New York Univ. v. Continental Ins. Co., 87 N.Y.2d 308, 320, 639 N.Y.S.2d 283 (1995) (citation omitted). In addition, a corporate competitor, as distinct from a private consumer, has standing to rely on this statute only if it can prove that there has been "some harm to the public at large." Securitron Magnalock Corp. v. Schnablock, 65 F.3d 256, 264 (2d Cir. 1995) (internal quotation marks and citation omitted). Because defendant has not pled any harm to either consumers or the public, the Court dismisses the deceptive acts and trade practices counterclaim.
D. Breach of Good Faith and Fair Dealing
The Court dismisses the counterclaim for breach of good faith and fair dealing. Under New York law, the obligation of good faith and fair dealing cannot expand the parties' obligations beyond those agreed upon in an express contract. Moreover, the obligation can not be violated when a party is exercising its rights under the contract. See Harris Trust Sav. Bank v. John Hancock Mut. Life Ins. Co., 767 F. Supp. 1269, 1281 (S.D.N.Y. 1991) (citations omitted); National Westminster Bank v. Ross, 130 B.R. 656, 679 (S.D.N.Y. 1991) (citations omitted). As explained above, the Lease Agreement set forth an unconditional waiver of all claims that defendant might have against plaintiff. On this ground, the Court dismisses this counterclaim.
E. Negligent Performance
The Court also dismisses defendant's counterclaim for negligent performance. Under New York law, to establish negligent performance, defendant must prove that: (1) plaintiff owes defendant a duty of care; (2) plaintiff breached that duty; and (3) defendant suffered damage as a result of the breach. See Stagl v. Delta Airlines, Inc., 52 F.3d 463, 467 (2d Cir. 1995) (citation omitted). As a matter of law, a breach of a contract may not constitute a valid ground for a negligent performance claim. See Logan v. Bennington College Corp., 72 F.3d 1017, 1029 (2d Cir. 1995) (citations omitted). Rather, in order to bring such a claim, defendant must establish that "a legal duty independent of the contract itself has been violated." Id. The answer and counterclaim do not allege any independent legal duty, other than those that may have arisen under the contract.
Therefore, the Court dismisses the counterclaim for negligent performance.
III. Third-Party Defendant's Motion to Dismiss
Defendant, herein referred to as third-party plaintiff, brought a third-party action against Netrix. Corp., arguing that Netrix Corp. is responsible for any liability that it owes to Netrix Leasing. Third-party plaintiff bases its action on its assertions that an agreement exists between K.S. Telecom and Netrix Corp. (i.e., the Netrix Proposal) and that an agreement may exist between Netrix Corp. and Netrix Leasing the warranties of which can be assigned to third-party plaintiff. Third-party defendant moved to dismiss the third- party complaint, pursuant to Rule 12(b)(6), for failure to state a claim upon which relief can be granted, and, pursuant to Rule 9(b), for failure to plead fraud with specificity.
A. Common Law Fraud
The Court dismisses the fraud claim for failure to state a claim upon which relief can be granted. In order to bring a claim for common law fraud, third-party plaintiff must establish: (1) third-party defendant made material misrepresentations; (2) third-party defendant knew the falsity of the statements; (3) third-party defendant possessed an intent to defraud; (4) third-party plaintiff reasonably relied on the misrepresentations; and (5) third-party plaintiff suffered damage as a result of the misrepresentations. See Kaye v. Grossman, 202 F.3d 611, 614 (2d Cir. 2000) (citation omitted).
Third-party defendant sets forth other grounds for dismissal of the fraud claim, including failure to plead with specificity as required by Fed.R.Civ.P. 9(b). The Court does not reach these issues.
In order to survive a motion to dismiss, the "allegations of fraud must be supported by the pleadings of specific facts tending to show that, at the time [third-party defendant] made the asserted representations and promises, it never intended to honor its stated intentions." SKR Resources, Inc. v. Players Sports, Inc., 938 F. Supp. 235, 238 (S.D.N.Y. 1996) (internal quotation marks and citations omitted). The complaint must plead circumstances "giv[ing] rise to a strong inference" that third-party defendant had an intent to defraud. See id. at 239 (citations omitted).
The third-party complaint sets forth four allegedly fraudulent misrepresentations made by the CEO of Netrix Corp. in September 1999 that: (1) the equipment was guaranteed to work and that Netrix Corp. would take full responsibility if it did not; (2) there was no need to perform testing on the equipment before making the system operational; (3) Netrix Corp. would provide a high level of service; and (4) Netrix Corp. would provide a leasing package. See Third-Party Complaint at ¶ 12. The Court finds that these allegations fail to support the elements of a fraud claim. The alleged misrepresentations involve assertions that Netrix Corp. would provide high quality equipment and guarantee its quality. The crux of third-party plaintiff's action is that Netrix Corp. never performed to this standard. Such non-performance does not support fraud absent an allegation that third-party defendant possessed an intent to defraud. As a matter of law, third-party plaintiff can not prove fraud merely by evidence of non-performance of a promise, see Murray v. Xerox Corp., 811 F.2d 118, 122 (2d Cir. 1987) (citations omitted), and can not convert a breach of contract claim into a fraud claim "by merely alleging that a contracting party never intended to fulfill its promise under the agreement," SKR Resources, 938 F. Supp. at 238 (collecting cases).
The third-party complaint states that the misrepresentations were made in September 2000. Based on this pleading, third-party defendant argues that there was no reliance on the misrepresentation because the Lease Agreement was signed on September 30, 1999. The Court rejects this argument, instead accepting, for the purposes of this motion, third-party plaintiff's representation that the pleading contains a typographical error and should state September 1999. See Third-Party Plaintiff's Memorandum of Law in Opposition to Third-party Defendant's Motion to Dismiss the Third-Party Complaint, dated Oct. 9, 2000, at pp. 4-5.
B. Deceptive Acts and Practices
The Court dismisses the New York Business Law § 349 claim against third-party defendant because the third-party complaint does not allege either consumer injury or harm to the public at large, which as explained above are both necessary elements of a proper cause of action.See Securitron Magnalock, 65 F.3d at 264.
C. Breach of Contract
The Court denies third-party defendant's motion to dismiss the breach of contract claim. The third-party complaint states that third-party defendant breached its agreement to provide equipment and services pursuant to the Netrix Proposal. See Third-Party Complaint at ¶ 32. Third- party defendant argues that it is not liable under a breach of contract claim because there is no contract between third- party plaintiff, K.S. Telecom, and third-party defendant, Netrix Corp. Contrary to the allegations in the third-party complaint, third-party defendant asserts that the Netrix Proposal, through which it negotiated to provide telephone equipment to third-party plaintiff, was only an offer and not a binding contractual agreement.
The Court denies third-party defendant's motion to dismiss the breach of contract claim because it finds that the third-party complaint sets forth sufficient allegations to support a claim for breach of contract. As set forth in the third-party complaint, third-party defendant submitted a proposal to third-party plaintiff that set forth the terms of an offer to provide telephone equipment. The Court finds that this proposal had the requisite degree of specificity and definiteness to constitute a valid offer and that a contractual relationship arose when third-party plaintiff accepted the offer. See Independent Order of Foresters v. Donald, Lufkin Jenrette. Inc., 157 F.3d 933, 939 (2d Cir. 1998) (citations omitted). In addition, pursuant to the Netrix Proposal, both parties acted as though there was a valid contractual agreement between them. See Franklin Research Dev. Corp. v. Swift Electrical Supply Co., 340 F.2d 439, 444 (2d Cir. 1964). Third-party plaintiff accepted and relied upon the equipment, while third-party defendant installed the equipment, sent technicians to deal with problems that arose, and replaced malfunctioning software. See Third-Party Complaint at ¶¶ 18-23.
The Court also finds that third-party plaintiff has sufficiently alleged that it is the third-party beneficiary of a contract that may exist between Netrix Corp. and Netrix Leasing. As a general principle, under New York law, a third party may assert a third-party beneficiary claim if an agreement indicates on its face an intent to benefit a third party. See In re Gulf Oil/Cities Serv. Tender Offer Litig., 725 F. Supp. 712, 733 (S.D.N.Y. 1989) (citations omitted). Therefore, the Court rejects third-party defendant's motion to dismiss the breach of contract claim.
Third-party plaintiff also relies on the doctrine of partial performance to establish an enforceable contract. Because the Court denies third-party defendant's motion to dismiss the breach of contract claim on other grounds, the Court does not reach this issue.
D. Breach of Warranty Claims
The Court denies the motion to dismiss the breach of warranty claims. Under New York law, in claims for economic loss, a party must establish privity of contract in order to have a valid claim for breach of warranty. See County of Suffolk v. Long Island Lighting Co., 728 F.2d 52, 62-63 (2d Cir. 1984) (citation omitted); The Gerffert Co., Inc. v. Yipkon Corp., 1989 WL 121057, *3 (E.D.N.Y. Sept. 26) (collecting cases). The Court finds that the third-party complaint meets this burden. As explained above, the third- party complaint alleges both that the Netrix Proposal is a valid contract and that third-party plaintiff may be the beneficiary of contracts that may exist between Netrix Corp. and Netrix Leasing. The Court concludes that third-party plaintiff should have the opportunity to conduct discovery to determine whether relevant agreements exist between Netrix Corp. and Netrix Leasing that set forth specific warranties to which third-party plaintiff is the third-party beneficiary.
E. Breach of Duty of Good Faith and Fair Dealing
The Court denies the motion to dismiss the breach of the duty of good faith and fair dealing claim. Under New York law, every contract contains an implied covenant of good faith and fair dealing in the performance and enforcement of the contract. See Carvel Corp. v. Diversified Mgmt. Group, Inc., 930 F.2d 228, 230 (2d Cir. 1991) (citations omitted). In this case, as explained above, the Netrix Proposal may represent a valid contract, and third-party plaintiff may be the third- party beneficiary of a contract between Netrix Corp. and Netrix Leasing. Therefore, the Court concludes that third- party plaintiff has set forth sufficient allegations to survive a motion to dismiss on its claim for breach of the duty of good faith and fair dealing.
F. Negligent Performance
Third-party defendant also seeks to dismiss the claim that third-party defendant was negligent in promising and failing to provide equipment and services that performed to the specifications of the Netrix Proposal. As explained above, as a matter of law, the breach of a contract may not be the sole basis for a negligent performance claim.See Logan, 72 F.3d at 1029. The third-party complaint does not allege the breach of any duty other than that owed under the Netrix Proposal. Therefore, the Court dismisses this claim for failure to allege a tort other than the breach of the Netrix Proposal.
IV. Conclusion
The Court grants partial summary judgment on plaintiff's breach of contract and conversion claims. The Court dismisses all of defendant's counterclaims. The Court grants third- party defendant's motion to dismiss the third-party claims for fraud, deceptive acts and trade practices, and negligent performance. The Court denies third-party defendant's motion to dismiss the third-party claims for breach of contract, breach of warranties, and breach of the duty of good faith and fair dealing. Within two weeks of this Order, counsel shall fax a joint letter to the Court proposing a Scheduling Order in this case that includes a Ready Trial date. The parties are directed to contact the Court within three weeks of this Order to schedule a conference to discuss further proceedings in this case.
SO ORDERED