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Kosowsky, et al. v. Willard Mountain, Inc., et al.¸--- N.Y.S.2d ----, 2011 WL 5984277, 2011 N.Y. Slip Op. 08709 (3d Dept. December 1, 2011) presents some interesting issues involving the interplay between fraud and contract claims, as well as the potential slippery slope created when seeking to hold a corporate officer personally liable for an alleged breach of contract by a corporation.

Defendant Willard Mountain, Inc. is a corporation which operated a ski resort upon land owned by the plaintiffs. Plaintiffs leased the property to Defendant under a lease which provided for: (i) computation of rental payments as a percentage of Defendant's sales and income, (ii) required Defendant to provide plaintiffs with an annual accounting, and (iii) prohibited assignment or subletting without plaintiffs' consent. Defendant's owner also operated a separate company offering concessions services at the ski area.

Plaintiffs claimed that Defendant had been paying less than the full amount of rent due under the lease because its president (and owner) had packed down its annual income through "slick" bookkeeping, thereby resulting in lower rental payments. Defendant claimed that the rental amount paid was proper because its own income was a function of the income received by the concessions company pursuant to a separate agreement (which had never been disclosed to the plaintiffs). Plaintiffs claimed that this agreement with the concession company violated the lease's prohibition against assignment. Plaintiffs asserted seven causes of action, including breach of contract and fraud, as well as claims against defendant's owner (individually) and against the concessions company.

Defendants moved to dismiss all the claims (except the breach of contract claim) for failure to state a cause of action under CPLR § 3211(a)(7), and to dismiss all the claims as time-barred under CPLR § 3211(a)(5) (or at least cap the recoverable period). Plaintiffs cross-moved for leave to file an amended complaint.

The Supreme Court granted defendants' motion pursuant to CPLR § 3211(a)(7), in part, by dismissing the causes of action (i) seeking an accounting, (ii) alleging unjust enrichment, and (iii) alleging breach of the implied covenant of good faith and fair dealing. The Supreme Court also held that the claims were not time-barred, and granted plaintiffs' motion for leave to amend their complaint. Defendants appealed and plaintiffs cross-appealed.

Fraud Claim Not Duplicative Of The Cause Of Action For Breach Of Contract
Defendants argued on appeal that the Supreme Court erred in failing to dismiss plaintiffs' fraud claim because: (i) it was duplicative of the cause of action for breach of contract and (ii) it failed to contain allegations of justifiable reliance and special damages.

Generally, a misrepresentation premised directly on the same actions giving rise to a breach of contract does not give rise to a separate cause of action for fraud. Id. at *1 (citing Salvador v. Uncle Sam's Auctions & Realty, 307 A.D.2d 609, 611 (2003)). The Third Department, however, held that because of distinctions among the named parties (neither defendant's owner or the concessions company were parties to the lease) the breach of contract claim was not directed against the owner and could not be considered duplicative as to him. Further, as it was disputed that the concessions company was bound by the lease, the fraud claim against the concessions company could also proceed.

Moreover, the claim against Defendant Willard Mountain, Inc. could also proceed as plaintiffs claimed "that, after the contract was entered into, defendant [through the acts of its agent] repeatedly misrepresented or concealed existing facts" by failing to disclose the existence of the separate agreement with the concessions company and falsifying the annual income reports in order to (i) deceive them as to the true amount of rent owed, (ii) induce them to accept improperly low payments. Further, despite the absence of a fiduciary relationship, defendants allegedly breached a "duty of candor" (independent from their duty to perform under the contract) in that they had superior knowledge unavailable to plaintiffs and knew plaintiffs were relying on the information they supplied (citing Intl. Elecs., Inc. v. Media Syndication Global, Inc., 2002 WL 1897661, *2, 2002 U.S. Dist LEXIS 15200, *5-*6 (SD N.Y.2002)). The Third Department concluded that the conduct alleged in the fraud cause of action was sufficiently discrete from that underlying the breach of contract claim to state a viable separate cause of action.

Fraud Claim Not Lacking Allegations Of Justifiable Reliance And Special Damages
The Third Department also rejected defendants' contention that the fraud claim should have been dismissed for failure to plead the required elements of justifiable reliance and special damages (citing Dube-Forman v. D'Agostino, 61 AD3d 1255, 1257 (2009)). Plaintiffs alleged that they had relied upon the income figures provided by defendants in accepting the rent payments. They also claimed special damages (in addition to lost rent under the contract) as the alleged fraud prevented them from exercising their right to terminate the lease upon a breach of its terms, and thereby deprived them of other business opportunities and of the use and enjoyment of their property.

Tortious Interference Claim Permitted To Proceed Against Defendant's Owner Individually
Plaintiffs' claim against owner for tortious interference with contract was also not subject to dismissal for failure to satisfy the "enhanced pleading standard" that applies when a plaintiff seeks to hold a corporate officer personally liable for a corporation's breach of contract (citing Joan Hansen & Co. v. Everlast World's Boxing Headquarters Corp., 296 A.D.2d 103, 109 (2002)). Plaintiffs were required to allege that owner's actions "either were beyond the scope of [his] employment or, if not, were motivated by [his] personal gain, as distinguished from gain for the corporation" (citing Petkanas v. Kooyman, 303 A.D.2d 303, 305 (2003)).

The Third Department held that the owner's alleged actions (deliberately deceiving plaintiffs by allegedly falsifying the income figures of the corporations that he controlled) cannot be construed as within the scope of his corporate responsibilities (citing Murtha v. Yonkers Child Care Assn., 45 N.Y.2d 913, 915 (1978)). Moreover, the Court stated that the complaint alleged that he took these actions in bad faith for his personal pecuniary gain (citing BIB Constr. Co. v. City of Poughkeepsie, 204 A.D.2d 947, 948 (1994)). As such, plaintiffs were permitted to proceed with a claim for tortious interference with contract against defendant's owner individually.

Breach Of Implied Covenant Of Good Faith And Fair Dealing Claim Permitted To Proceed
Plaintiffs asserted a claim against Defendant Willard Mountain, Inc. and the concessions company for breach of the implied covenant of good faith and fair dealing. "This implied obligation encompasses any promise which a reasonable person in the position of the promisee would be justified in understanding was included" in a contract and "is breached when a party to [the] contract acts in a manner that, although not expressly forbidden by any contractual provision, would deprive the other party of the right to receive the benefits under their agreement" (citing Just-Irv. Sales v. Air-Tite Bus. Ctr., 237 A.D.2d 793, 794 (1997)). The Third Department stated that this claim should not have been dismissed as the allegations, taken as true, provided sufficient traction for the claim to move forward.

Unjust Enrichment Permitted To Proceed Against Concessions Company
However, the Court held that the unjust enrichment claim was properly dismissed as to Defendant Willard Mountain, Inc. because recovery in quasi contract is precluded where, as here, there is no dispute as to the validity and enforceability of the contract governing the dispute (citing M/A-Com, Inc. v. State of New York, 78 AD3d 1293, 1293-1294 (2010)). By contrast, where a disagreement exists as to "whether the scope of an existing contract covers the disagreement between the parties, a party will not be required to elect his or her remedies and may proceed on both quasi contract and breach of contract theories" (citing id., 78 AD3d at 1294). The Court, therefore, held that plaintiffs should be allowed to proceed upon their unjust enrichment claim against concessions company.

Accounting Claim Not Permitted To Proceed In Absence of Fiduciary Relationship
Finally, plaintiffs' cause of action seeking an accounting required "factual allegation[s] or evidence of a fiduciary relationship" between plaintiffs and defendants (citing Village of Hoosick Falls v. Allard, 249 A.D.2d 876, 879 (1998)). As plaintiffs did not allege the existence of a confidential relationship, and no such relationship was created by the lease, the Court held that this claim was properly dismissed.

Defendants Not Estopped From Asserting Statute Of Limitations
Defendants further contended that Supreme Court erred in finding that they were estopped from asserting a statute of limitations defense. Under the doctrine of equitable estoppel, a defendant may not rely on the statute of limitations defense when the plaintiff was prevented from commencing a timely action by reasonable reliance on the defendant's fraud, misrepresentation or other affirmative misconduct (citing Zumpano v. Quinn, 6 NY3d 666, 673-674 (2006)). However, "'equitable estoppel does not apply where the misrepresentation or act of concealment underlying the estoppel claim is the same act which forms the basis of [the] plaintiff's underlying substantive cause[s] of action'" (citing Robare v. Fortune Brands, Inc., 39 AD3d 1045, 1046 (2007)).

Here, the Court noted that the misrepresentations that allegedly prevented plaintiffs from filing a timely action--that is, defendants' falsified annual income reports--were also the basis for their substantive claims. Thus, despite the nefarious nature of the allegations against the defendants, the Court held that defendants were not precluded from asserting that plaintiffs' claims were time-barred (citing Lucas-Plaza Hous. Dev. Corp. v. Corey, 23 AD3d 217, 218 (2005)).

In turning to the merits of the claims, the Court applied the relevant statutes of limitation and capped plaintiffs' cause of action for breach of contract as subject to the applicable six-year statute of limitations (citing CPLR § 213(2)), and capped plaintiffs' tortious interference with contract as subject to the applicable three-year limitations period (citing CPLR § 214(4)). The fraud claim, however, was left intact as plaintiffs alleged that they did not discover the fraud until they learned of the falsified reports less than two years before this action was filed (citing CPLR § 213(8)).

Heath J. Szymczak, Esq.

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