Are “consequential damages” available on contract claim against an insurer in an action brought by an insured for breach of a commercial liability policy? In D.K. Prop., Inc. v. National Union Fire Ins.,  a recent case out of the First Department, the answer is a resounding “yes”.  There, the complaint alleged two causes of action, namely, breach of contract for failure to pay for covered losses and branch of the implied covenant of good faith and fair dealing.  Plaintiff sought consequential damages on both claims, and attorney’s fees as to the “bad faith” claim.

The insurer argued that consequential damages were unavailable in a breach of contract claim against a carrier when the policy itself covers only “direct and physical loss” to the building.   Indeed, as the complaint outlines, the insured is claiming damages for the carrier’s “unreasonable” and “burdensome” informational requests during the investigatory period which extended over a three-year period.  Engineering costs, ,water abatement equipment because of delays in repairs, monitoring equipment  and interim repairs were only a few of the “types” of damages alleged.

On a pre-answer motion to dismiss, the defendant insurer sought dismissal of the claim for consequential damages on the ground they did not state a claim, namely, that the pleading did not provide a detailed factual showing of why the damages, which do not flow directly from the breach, are recoverable.  The motion court, the Hon. Robert Reed agreed, and dismissed the claim for consequential damages.  On appeal, the First Department in an unanimous decision, reversed the dismissal and reinstated the claim for consequential damages, holding such claims are not subject to any degree of heightened pleading.  The foreseeability of such damages is not for a motion to dismiss, but rather proof at trial.  The court made clear that an insured has a claim against a carrier for consequential damages when a carrier doesn’t provide coverage “if such damages (“risks”) were foreseen or should have been foreseen when the contract was made.”

In one line, the court also rejected the insurer’s argument that a breach of contract claim and “bad faith” claim were duplicative:  such claims can coexist, so long as the claims allege different conduct which they did here.

The Takeaway:  “consequential” damages need not be particularized in your pleading in connection with contractual based claims (breach of contract or implied covenant).  Don’t worry, neither CPLR 3015 (pleading particularity with respect to specific matters) nor 3016 (pleading particularity in specific actions) apply.    A detailed pleading nevertheless should be alleged setting forth at least the types of damages sought that flow from the claimed breach.

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To welcome the New Year, we venture outside this blog’s traditional realm of commercial division practice and procedure to reflect on the nature of “intent” at the intersection of professional wrestling and insurer coverage liability. No, this is not a surrealist poem, but a recent decision by Justice Peter Sherwood of the Commercial Division for New York County arising from the 2015 publication of scandalous material featuring professional wrestler Terry Bollea (aka Hulk Hogan).

In May of 2016, Bollea filed an action in Pinellas County, Florida (Case No. 16-002861-CI), against Don Buchwald & Assocs. (DBA), Bollea’s former talent agency, and Tony Burton, Bollea’s agent at DBA, among others. In that action, Bollea asserted claims for, among other things, invasion of privacy and intentional infliction of emotional distress, arising from Burton’s alleged role in delivering scandalous footage to the now-defunct website Gawker. A year later, in May of 2017, Bollea filed an amended complaint against DBA for “negligent retention,” alleging that DBA acted negligently by employing Burton when DBA “knew or should have known” that Burton was “predisposed to committing wrongs.”

DBA subsequently sought to have its commercial liability insurer, American Zurich Insurance Company (AZIC), and umbrella liability insurer, Zurich American Insurance Company (ZAIC), provide a defense to DBA and Burton in the Florida action pursuant to certain Primary Policies and Umbrella Policies. These policies provide coverage for “bodily injury” caused by an “occurrence” that takes place during the policy period.

AZIC and ZAIC disclaimed coverage, arguing, among other things, that certain of the claims were ineligible for coverage, and that all of DBA’s and Burton’s actions were allegedly intentional and therefore not caused by an “occurrence,” as defined in the policies. The insurers subsequently filed an action in New York Supreme Court, New York County, Commercial Division, seeking a declaration that, among other things, they have no duty to defend DBA and Burton.

On summary judgment, Justice Sherwood offered a thorough and expansive discussion of the insurers’ obligation to defend the claims against DBA and Burton. First, the “duty to defend” is broader than the “duty to indemnify,” and arises where there is a “reasonable possibility of coverage” (Rhodes v Liberty Mut. Ins. Co., 67 AD3d 881, 882 [2d Dept 2009]). Moreover, “[i]f any of the claims against an insured arguably arise from covered events, the insurer is required to defend the entire action” (Town of Massena v Healthcare Underwriters Mut. Ins. Co., 98 NY2d 435, 443-444 [2002]).

The insurers’ argument that the policies did not cover claims for intentional torts was also rejected, because from the perspective of an insured employer, its employees’ intentional torts would be “unexpected, unusual and unforeseen.” “In that context, New York courts assess whether the insured intended to cause harmful consequences, not whether the insured, as a general matter, intended to act.” Furthermore, even intentional torts might give rise to coverage for “accidental” conduct, “where the plaintiff in the underlying action can succeed on his or her intentional tort claim without actually proving intentional or knowing conduct – i.e., where something less than actual intent suffices to establish liability.”

Applying this principals, the court held that the Florida action gave rise to a duty to defend because, from DBA’s standpoint, Burton’s acts in allegedly aiding and abetting the publication of scandalous footage were unexpected. Moreover, under Florida law, a claim for intentional infliction of emotional distress can be sustained by showing “reckless disregard,” without proving deliberate or intentional harm.

Defendants facing liability for intentional conduct should thus bear in mind that an “intentional” tort can still be “accidental” within the meaning of commercial liability policies, so long as the actor did not intend to achieve the specific harmful results (see Messersmith v American Fid. Co., 232 NY 161, 165-166 [1921]).

It has been almost one year since the New York legislature amended CPLR 503(a) to provide for venue in “the county in which a substantial part of the events or omissions giving rise to the claim occurred.” Yet a recent decision by Commercial Division Justice Andrea Masley shows that some practitioners have either forgotten about the amendments or never got the memo. But have no fear—the court held that a plaintiff who fails to properly designate venue on the summons may nonetheless submit alternative grounds for the original venue designation in an affidavit responding to a demand to transfer venue.

In Faustino v. Amin, the plaintiff asserted derivative claims of theft and misallocation of inventory, including Kanye West’s Adidas Yeezys and Jeff Staple x Nike SB footwear, against co-owners of Lower East Side “sneaker destinationExtra Butter. The summons incorrectly alleged that venue was proper in New York County because the nominal defendant’s principal place of business was New York County. Although Extra Butter’s flagship retail store was in fact located in New York County, the nominal defendant’s articles of incorporation designated Suffolk County as the principal place of business. Accordingly, defendants filed and served a demand to change venue to Nassau County, where the defendants claimed was geographically convenient to the parties and material witnesses.

In response to this demand to transfer venue, the plaintiff filed an affidavit stating that the alleged theft and other relevant events occurred at Extra Butter’s Lower East Side location, and venue was therefore proper under CPLR 503(a). Defendants then moved to transfer venue, without addressing in their motion whether material events occurred in New York County (or even acknowledging the amended language in CPLR 503[a]). Defendants’ argued instead that the plaintiff had forfeited his right to select venue by falsely alleging in the summons that venue was proper based on residence, and that defendants were therefore entitled as of right to transfer venue to Nassau County.

The court rejected defendants’ arguments based on the parties’ residence. Pursuant to CPLR 503(a), as amended in 2017, the events giving rise to the parties’ dispute sufficiently conferred venue in New York County. The court further held that Plaintiff did not forfeit his right to designate venue in New York County by falsely alleging the nominal defendants’ New York County residence as the basis for venue, because Plaintiff’s complaint and affidavit responding to the demand to change venue set forth events giving rise to the claim in New York County. As for the convenience of the parties and witnesses, the Court held that geographic proximity to the parties was not, on its own, a sufficient basis to transfer venue.

The court further addressed inadequacies in defendants’ argument concerning the convenience to witnesses. Because defendants did not provide a detailed account of the proposed witnesses’ identities, the nature and materiality of their anticipated testimony, and the manner in which they would be inconvenienced, the court denied the discretionary request to transfer venue. The court held, citing the First Department’s decision in Hernandez v Rodriguez, 5 AD3d 269, 269-270 [1st Dept 2004], that such a showing was an essential prerequisite to change venue based on inconvenience to witnesses. Fatal to the Defendants’ motion with respect to the inconvenience of witnesses was that there was no evidence in the record that Defendants had ever contacted the witnesses to inquire as to the inconvenience of New York County.

The court’s decision in Faustino v. Amin thus serves as an important reminder to practitioners that parties who conduct business in a far-away county may be required to defend claims there arising out of such business, even if none of the parties or witnesses are residents of that county. To avoid venue based on inconvenience, the movant must offer detailed and compelling proof based on first-hand contact with potential witnesses.

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In Miller v. Brunner, the Appellate Division, Second Department spoke clearly (again) about how to move to dismiss on the defense of release.  In a case arising out of the Commercial Division in Kings County (Hon. Sylvia G. Ash), a question on appeal was whether the defense of release is considered “documentary evidence” under CPLR 3211(a)(1) or instead a motion that should be brought under CPLR 3211(a)(5).  The latter, of course, outlines a list of affirmative defenses, including release.  So in defending an action you believe is barred the release, under which section of 3211 do you move?  Either.

The case arose out of a contractual arrangement between plaintiffs and defendants entered in 2014, which restructured a previous agreement relating to development rights of property located in Greenpoint.  Later that year, plaintiffs lent defendants $4.7 million used as collateral for the issuance of three letters of credit by a lender.  A dispute arose over the use of the funds for collateral, and the parties agreed to an amount to be repaid by defendants in exchange for a release.  Plaintiffs later sued, alleging a variety of breaches and for a declaratory judgment.  (As an aside, see last week’s blog discussing pleading both breach of contract and declaratory judgment claims simultaneously.)

Defendants moved to dismiss under “CPLR 3211(a)”, claiming the release barred the claims.  In their moving brief, defendants relied specifically on CPLR 3211(a)(1), a defense based upon documentary evidence, and not CPLR 3211(a)(5), “release”.  The reply papers similarly relied on that section alone.  The motion court ultimately denied the motion to dismiss with leave to renew following discovery.  On appeal, plaintiffs argued that defendants’ failure to move under 3211(a)(5) was fatal on the defense of release.  The Appellate Division disagreed, modified the order below, and directed the dismissal of the first cause of action based upon the release.

The Appellate panel reasoned that even if the incorrect ground under 3211(a) is advanced, so long as one of the 3211(a) grounds apply, then dismissal is warranted, no matter how the motion is denominated.  The court “‘may treat the motion as having specified the right ground and grant relief, absent prejudice'”, citing Dean R. Pelton Co. v. Moundsville Shopping Plaza, Inc.  This follows what the Second Department did also in Alvarez v. Amicucci, where the court upheld dismissal based upon a release in a motion filed under CPLR 3211(a)(1), see also Marc v. Middle Country Center School Dist. (release may be raised by 3211(a)(1) or (5)).  For a good discussion of the history, development and application of CPLR 3211(a)(1), including the relation to CPLR 3211(a)(5), Fontanetta v. John Doe is a worthy read.

So, which ground under CPLR 3211(a) should one move under when raising the defense of release?  It appears either will work, but no harm in moving under both, although the more common seems to be 3211(a)(1).

 

 

 

Your client wants to recover damages for breach of contract and demands that you assert as many causes of action as possible.  In addition to the breach cause of action, you consider a declaratory judgment claim, right?  Wrong!   The Second Department has held time and time again that “[a] cause of action for a declaratory judgment is unnecessary and inappropriate when the plaintiff has an adequate, alternative remedy in another form of action, such as breach of contract” (see BGW v. Mount Kisco; Stuckey v Lutheran Care Found. Network, Inc.; and Alizio v Feldman).

Recently, the Second Department in Tiffany Tower Condominium, LLC, et al. v Insurance Company of the Greater New York reaffirmed this principle. There, Tiffany Tower Condominium, LLC (“Tiffany Tower”) sustained damage to its condominium during Superstorm Sandy. Insurance Company of the Greater New York (the “insurer”) paid Tiffany Tower’s original claim for the damage sustained to the condominium under Tiffany Tower’s insurance policy but when Tiffany Tower submitted a supplemental claim for the additional losses sustained to the condominium as a result of the storm, the insurer denied coverage. As a result, Tiffany Tower initiated a lawsuit seeking, among other things, to recover damages for breach of contract and for a judgment declaring that coverage for the supplemental claim was improperly denied.  The insurer moved to dismiss Tiffany Tower’s second, third, and fourth causes of action for breach of breach of contract, judgment declaring that coverage was improperly denied, and violation of General Business Law § 349, respectively. Justice Ash denied the insurer’s motion to dismiss these causes of action and the insurer appealed.

In its recent decision, the Second Department held that the Supreme Court erred and should have dismissed Tiffany Tower’s cause of action for a declaratory judgment. The Court held that where plaintiff has an “an adequate, alternative remedy in another form of action,” i.e., the breach of contract claim, the declaratory judgment cause of action is thus “unnecessary and inappropriate.”

Interestingly, the First and Fourth Departments have also dismissed declaratory judgment causes of action where plaintiff had an “adequate, alternative remedy in another form of action, such as breach of contract.”  (see Main Evaluations, Inc. v. State; Apple Records, Inc. v. Capital Records, Inc.) The Third Department, however, has had no similar holdings.

Can substitution of a new plaintiff who has proper standing cause “surprise or prejudice” to a defendant after the statute of limitations would have expired, such that leave to file an amended complaint should be denied? Not if the two plaintiffs are the same person switching from their individual to representative capacity, held the Second Department on August 15, 2018 in D’Angelo v Kujawski.

Plaintiff, “as proposed Administrator [sic]” of her deceased son’s estate, retained Defendants, comprising a law firm, to commence an action against the U.S. Department of Veterans Affairs (“VA”) based on medical malpractice that allegedly resulted in her son’s wrongful death. According to Plaintiff’s complaint, in 2011 Defendants filed a Notice of Claim with the VA’s Office of Regional Counsel, but the Notice of Claim negligently failed to reference the VA’s administration of contraindicated medications. After Defendants withdrew from the representation on December 20, 2013, Plaintiff commenced an action with new counsel that was ultimately dismissed by the US District Court for the Eastern District of New York for failure to timely exhaust administrative remedies. Specifically, the court found that Plaintiff had possessed “vital information bearing on the existence of her claim” that was wrongfully excluded from the Notice of Claim.

On December 15, 2016, five days before the statute of limitations would have expired, Plaintiff commenced an action for legal malpractice against Defendants. However, Plaintiff mistakenly named herself individually as the plaintiff, instead of as Administratrix of the Estate. Defendants moved to dismiss the complaint for lack of an attorney-client relationship with the individual Plaintiff. In response, Plaintiff cross-moved for leave to file an amended complaint, thus setting the stage for the court to determine the applicability of CPLR §§ 305 and 3025 to a request to substitute plaintiffs, as well as whether Plaintiff’s delay in seeking leave past expiration of the statute of limitations would “prejudice or surprise” Defendants.

Relying on Caffaro v Trayna, a 1974 Court of Appeals decision purportedly allowing substitution of plaintiffs and subsequent interposition of time-barred claims in an amended pleading, Commercial Division Justice James Hudson held that Defendants would suffer no prejudice because the original complaint adequately put Defendants on notice of the nature of the claims and allowed the amendment. However, Justice Hudson did not analyze or discuss whether CPLR §§ 305 and 3025 authorized a party without standing to substitute an otherwise time-barred party. Nor did Caffaro, which substituted the estate’s Executrix for the decedent in the decedent’s pending medical malpractice action.

The Second Department affirmed:

“[A]n amendment which would shift a claim from a party without standing to another party who could have asserted that claim in the first instance is proper since such an amendment, by its nature, does not result in surprise or prejudice to the defendants who had prior knowledge of the claim and an opportunity to prepare a proper defense” (JCD Farms v Juul-Nielsen, 300 AD2d 446, 446 [internal quotation marks omitted]; see United Fairness, Inc. v Town of Woodbury, 113 AD3d 754, 755; Matter of Highland Hall Apts., LLC v New York State Div. of Hous. & Community Renewal, 66 AD3d 678, 682; Plotkin v New York City Tr. Auth., 220 AD2d 653, 654).

The Second Department appeared primarily concerned with protecting Defendants from new allegations or claims, rather than whether the “relation back” doctrine codified in CPLR § 203(f) applied in actions commenced by a party without standing. The Second Department did not address authority from the Court of Appeals and other Departments of the Appellate Division that appeared to hold otherwise, such as Nomura Asset Acceptance Corp. v Nomura Credit and Capital, Inc., 139 AD3d 519 (1st Dept 2016). There, the First Department held that an untimely claim could not relate back to a defective summons issued by a plaintiff without standing, “because no valid action was commenced by the filing of that summons.” The Fourth Department held the same in Truty v Fed. Bakers Supply Corp., 217 AD 2d 951 (4th Dept 1995). Both decisions cited Goldberg v Camp Mikan-Recro, 42 NY2d 1029 [1977], in which the Court of Appeals distinguished Caffaro based on the original plaintiff having standing to commence the action.

Practitioners are thus cautioned that between the First and Fourth Departments, on the one hand, and the Second Department, on the other, there appears to be a split as to whether an untimely amended pleading may “relate back” to an earlier action brought by a plaintiff who lacks standing.

In a recent decision handed down just a couple of days ago, the Appellate Division, First Department affirmed Justice Kornreich’s denial of singer and songwriter Kesha Sebert’s (“Kesha”) motion for leave to file second amended counterclaims, meaning Kesha will not be released from her recording contracts with producer Lukasz Gottwald, also known as Dr. Luke (“Gottwald”), and his former label, Kemosabe Records.

In October 2014, Gottwald sued Kesha in the New York County Commercial Division for, among other things, defamation and breach of contract after the singer accused Gottwald of various forms of abuse.  Kesha asserted several counterclaims.  Nearly three years later, Kesha moved for leave to assert second amended counterclaims seeking, among other things, a declaration terminating the agreements on the grounds of impossibility and impracticability of performance, and on the ground that the agreements violate California Labor Code § 2855, a seven-year rule limiting personal service contracts.

In March 2017, Justice Kornreich of the New York County Commercial Division denied Kesha’s motion for leave to amend, finding that Gottwald’s alleged behavior was foreseeable at the time Kesha entered into the recording agreements. As Justice Kornreich noted “[t]he defense of impossibility or impracticability of performance is applied narrowly and excuses contractual performance only when the destruction of the subject matter of the contract or the means of performance makes performance objectively impossible due to an unanticipated event that could not have been foreseen or guarded against in the contract.” Kesha appealed.

The Appellate Division, First Apartment affirmed Justice Kornreich’s decision, holding that Kesha’s counterclaim for a declaration terminating the agreements on the ground of impossibility and impracticability of performance was “speculative” and “contradicted by her own allegations that she had continued performing under the recording agreements.”

The First Department also rejected Kesha’s proposed declaratory judgment counterclaim based on California Labor Code § 2855 because it is barred by the choice of law provisions contained in the recording agreements. Based on the foregoing, the Court agreed with Justice Kornreich, finding Kesha’s proposed amendments were “palpably insufficient and devoid of merit.”

Finally, the First Department upheld Justice Kornreich’s decision compelling Kesha to produce documents held by her public relations firm and former attorney, holding that these communications “do not reflect a discussion of legal strategy relevant to the pending litigation but, rather, a discussion of public relations strategy, and are not protected under the attorney-client privilege.”

 

So a plaintiff obtains a default judgment against a defendant on a promissory note case.  Defendant fails to appear or defend.   On a motion to enter the default pursuant to CPLR 3215, one would assume that without opposition, judgment would be entered for the amount of the loans.  Interestingly, that’s not quite what happened in Power Up Lending Group, Ltd. v. Cardinal Resources, Inc., where a plaintiff lender sought entry of judgment on two loan agreements in the amount of $66,264.90.  So what did happen?

Justice Stephen A. Bucaria, sua sponte, examined the plaintiff’s submission (which the court must), but then determined that certain provisions in the agreements were illegal as violating New York’s criminal usury laws.   As a result, the Court calculated the amount due to the Plaintiff after severing the provisions deemed by the Court to be illegal, which was far less than that sought by plaintiff.  Plaintiff appealed.

The Second Department in Power Up Lending Group, Ltd. v Cardinal Resources, Inc. disagreed with Justice Bucaria’s approach and reversed, concluding that the court erred when it, sua sponte, severed certain provisions of the loan agreements, which it found on its own to be “illegal pursuant to the criminal usury statute.”   Since the defense of usury is an affirmative defense, it must be asserted by the Defendant affirmatively in its answer or as a ground to move to dismiss the complaint.  Otherwise, the defense is waived.  Here, because the Defendant failed to appear or answer or move, the defense was waived.

Two issues spring to mind.  First, the affirmative defense of criminal usury is far different than most affirmative defenses, which do not involve violations of criminal law (e.g., statute of frauds, statute of limitations and the like).  However, where an affirmative defense involves criminal activity, can a court as a matter of public policy have the power to raise the issue, sua sponte, even if it would otherwise be an affirmative defense?

Interestingly, in Youshah v. Staudinger, the defendant defaulted in an action brought by the plaintiff seeking to recover money owed to him by his former business partner for excluding him from an escort and dating service business, which fosters prostitution. The Court determined that although a party concedes liability by defaulting in an action, it would not, on public policy grounds, award judgment to the plaintiff as a result of an illegal enterprise. The Court held that it would not “enforce provisions of agreements which are patently illegal when public policy is at issue.”

Second, although the usury defense is waived if not raised, that very same defense could be advanced later by a defaulting defendant on a motion to vacate the default to establish a “meritorious defense.”   See, e.g., Blue Wolf Capital Fund II LP v. American Stevedoring, Inc. (citing cases).

In sum, in order to obtain a default judgment against an defaulting defendant, the moving party must submit sufficient proof to establish a viable cause of action.   Affirmative defenses, even if otherwise available to a defaulting defendant, should not stand in the way of entry of judgment.  However, on a later motion to vacate, those affirmative defenses can be used to re-open the case, assuming that an excuse for the default has been established.

In a recent Commercial Division decision, Pozner v Fox Broadcasting Company, (2018 NY Slip Op 28102 [Sup Ct, NY County Apr. 2, 2018]), Justice Saliann Scarpulla declined to extend the application of the faithless servant doctrine to a circumstance where no New York court has applied it before.

Cliff Pozner (“Pozner”), a former Executive Vice President at Fox Broadcasting Company (“Fox”), was terminated from his employment based on sexual harassment complaints from several current and former Fox employees.  He then commenced an action against Fox for allegedly breaching his employment agreement and discriminating against him on the basis of his religion.  In response, Fox asserted two counterclaims against Pozner: breach of contract based on Pozner’s alleged failure to abide by the company’s policies regarding sexual harassment, and breach of fiduciary duty, which, according to Fox, included the duty to refrain from conduct inconsistent with Fox’s policies regarding a harassment-free workplace.

Pozner moved to dismiss the counterclaims.  With respect to Fox’s breach of fiduciary duty claim, Pozner argued that he did not violate any duty owed to Fox under the faithless servant doctrine or as a breach of fiduciary duty, since he did not unfairly compete, divert business opportunities, or accept improper kickbacks.

Justice Scarpulla sustained Fox’s first counterclaim for breach of contract, but held that Fox’s breach of fiduciary duty counterclaim was “not tenable.”  As the Court explained, although Pozner, as a Fox executive and employee, owed a duty of loyalty to Fox, that duty “has only been extended to cases where the employee ‘act[s] directly against the employer’s interests – as in embezzlement, improperly competing with the current employer, or usurping business opportunities.’”  Accordingly, the Court held that sexual harassment by an executive, without more, cannot form the basis of a breach of fiduciary duty claim resulting in the employer’s recovery of the employee’s salary under the faithless servant doctrine.

In reaching its conclusion, the Court noted the lack of New York case law on point and easily distinguished the cases relied upon by Fox.  For example, in Astra USA, Inc. v Bildman, (455 Mass 116 [2009]), which the Court acknowledged was not controlling, the Massachusetts court found that the CEO and President of plaintiff’s company had, in addition to engaging in sexual harassment, committed acts directly against the company’s interest, including stealing company funds, financial records and other documents, destroying company property, and erasing data from computers (id. at 123-124, & n 13).

Similarly, in Colliton v Cravath, Swaine & Moore, LLP (2008 WL 4386764, 2008 US Dist LEXIS 74388 [SD NY Sept. 24, 2008]), the Court found the plaintiff’s admitted criminal activity (which resulted in a plea allocution) constituted a violation of his ethical duties under the New York Rules of Professional Responsibility.  Given these ethical violations, the plaintiff in Colliton was not ethically permitted to work as an attorney and thus, “his employment was the product of fraudulent concealment” (id. at *15).

Recognizing Fox’s failure to plead allegations of fraud, financial waste, or embezzlement, Justice Scarpulla declined to extend the faithless servant doctrine to cover instances where the only wrongdoing alleged is sexual harassment.  While it is possible that Fox’s counsel was looking to extend the law in light of recent news events, Justice Scarpulla was not so inclined.

Generally speaking, a fraud claim that is “duplicative” of a breach of contract claim will be dismissed. But when is a fraud claim sufficiently duplicative of a breach of contract claim so as to warrant its dismissal? The New York County Commercial Division (Sherwood, J.) recently answered this question in xLon Beauty, LLC v Day, 2018 NY Slip Op 30142(U) (Sup Ct, NY County Jan. 24, 2018).

In that case, the plaintiff, xLon Beauty, LLC (“Plaintiff”), a manufacturer of an “anti-aging” product (the “Product”), entered into a series of agreements (collectively, the “Contracts”) with the defendant, Doris Day, M.D. (“Defendant”), a publicly-known dermatologist regularly featured on radio and television shows. Pursuant to the Contracts, Defendant granted Plaintiff the right to license and utilize Defendant’s name and likeness to promote the Product in exchange for a 7% royalty fee.

Defendant ultimately sought to terminate the Contracts on the grounds that she (i) was not being adequately compensated, despite her efforts to promote and market the Product; and (ii) was receiving multiple complaints from customers concerning the quality and efficacy of the Product. Thereafter, Plaintiff commenced an action against Defendant alleging, among other things, breach of contract and fraudulent inducement.

Plaintiff’s breach of contract claim alleged that Defendant failed to “make herself available . . . for photographs, speaking engagements and/or commercials in video format” in accordance with the terms of the Contracts. The fraudulent inducement claim centered on Defendant’s purported representations prior to entering into the first agreement that she would use her business connections and acumen to help promote the Product.

Specifically, Plaintiff alleged that prior to entering into the Contracts, Defendant made certain oral promises to Plaintiff that she would “use her media connections to promote the Product if Plaintiff entered into the [Contracts],” but that Defendant was “insincere” because “she did not intend to fulfill her promises to promote the Product when she made them.” However, in a sworn affidavit, Defendant admitted that during that meeting, Defendant “never made any promises or representations to [Plaintiff] – beyond that which [she] agreed to in the written contracts [the parties] entered – concerning [her] endorsement or promotion of [the Product].”

In dismissing Plaintiff’s fraudulent inducement cause of action as duplicative of the breach of contract claim, the Court explained that a fraud claim may only be asserted in conjunction with a breach of contract claim when the alleged misrepresentation is “extraneous to the contract and involve[s] a duty separate and apart from or in addition to that imposed by the contract.” When the only fraud alleged is that the defendant was not sincere when it promised to perform under the contract, the fraud-based cause of action is duplicative of a breach of contract claim, and will be dismissed. Applying these principles, the Court dismissed Plaintiff’s claims, finding that the “alleged deceit here was integral to the contract, not extraneous or collateral to it as is required in order to make out a claim for fraudulent inducement.”

In sum, a cause of action for fraudulent inducement may be sustained on the basis of an allegation that the defendant made a promise to undertake some action separate and apart from his or her obligations under the contract. However, where a fraud claim arises out of the same facts as the breach of contract claim, and the only fraud alleged is that the defendant was not sincere when it promised to perform under the contract, the fraud claim is duplicative and will be dismissed.