Opinion
No. 01 v 1665 (GBD)
April 26, 2002
MEMORANDUM OPINION ORDER
Plaintiff commenced this action for breach of contract, libel, and product disparagement in New York Supreme Court in January, 2001. Defendant removed the case to federal court in February, 2001. In April 2001, defendant filed an answer which included counterclaims for fraud and breach of contract. Plaintiff has moved to dismiss the fraud counterclaim pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. Plaintiff argues that defendant's fraud counterclaim should be dismissed because New York law does not recognize a claim for fraud where the claim is based on the same factual allegations as a claimant's breach of contract claim. Defendant opposes this motion on two grounds. First, defendant argues that, under choice of law principles, California law applies to its fraud counterclaim and California law recognizes fraud claims in connection with breach of contract claims. Second, defendant argues that, New York law recognizes its fraud counterclaim.
In reviewing a motion to dismiss a counterclaim for failure to state a claim, a court must take the allegations in the counterclaim as true.Hospital v. Building Co. v. Trustees of Rex Hospital, 425 U.S. 738, 740 (1976); Miree v. DeKalb County, 433 U.S. 25, 27 n. 22 (1977). All reasonable inferences must be drawn in the claimant's favor. Bolt Electric, Inc. v. The City of New York, 53 F.3d 465, 469 (2d Cir. 1995). However, a court is not required to accept as true "conclusions of law or unwarranted deductions of fact." First Nationwide Bank v. Gelt Funding Corp., 27 F.3d 763, 771 (2d Cir. 1994), cert. denied, 513 U.S. 1079 (1995) (quoting 2A Moore Lucas, Moore's Federal Practice ¶ 12.08 at 2266-69 (2d ed. 1984)). In order to survive a motion to dismiss under Rule 12(b)(6), "the complaint must allege facts that, if true, would create a judicially cognizable cause of action." Kittay v. Kornstein, 230 F.3d 531, 537 (2d Cir. 2000) (internal citations omitted). A motion to dismiss merely addresses the legal sufficiency of a claim. See McCall v. Pataki, 232 F.3d 321, 322 (2d Cir. 2000). A counterclaim should be dismissed only where it appears beyond doubt that the claimant can prove no set of facts in support of his claim entitling him to relief Conley v. Gibson, 355 U.S. 41, 45-46 (1957) (footnote omitted); Goldman v. Belden, 754 F.2d 1059, 1065 (2d Cir. 1985).
This Court must first determine which state's law applies to defendant's fraud counterclaim. The Sponsorship and Advertising Agreement ("Agreement") entered into by the parties contains a "Governing Law" paragraph which states:
This Agreement will be governed by the laws of the State of New York without giving effect to conflict of law principles. Both parties submit to the exclusive personal jurisdiction in New York and agree that any cause of action arising under this Agreement shall be brought in the state and federal courts of the State of New York, New York County.
Sponsorship and Advertising Agreement ¶ 13(D) (emphasis added). Defendant argues that its fraud counterclaim is a non-contractual claim and, therefore, does not arise under the Agreement. This Court disagrees. Defendant's fraud counterclaim alleges that officers and employees of About.com knowingly and intentionally made false representations "regarding About.com's ability to sell advertising inventory . . . at a guaranteed effective rate of $4.00 CPM" in order to induce defendant to enter into the Agreement. Defendant Targetfirst, Inc.'s Answer, Affirmative Defenses, Counterclaims and Jury Demands ¶¶ 81-92. Such an allegation cannot be said to not arise under the Agreement which memorializes the parties rights and obligations. InTurtur v. Rothschild Registry Int'l Inc., 26 F.3d 304, 309 (2d Cir. 1994), the subscription note by which plaintiffs invested in a company contained a choice of law and forum selection provision which is very similar to the paragraph at issue in this case. The provision stated:
[t]his note shall be governed by, and interpreted under, the laws of the State of New York applicable to contracts made and to be performed therein without giving effect to the principles of conflict of laws. The parties hereto consent to the exclusive jurisdiction of the courts of the State of New York to resolve any controversy or claim arising out of or relating to this contract or breach thereofId. (emphasis added). The court held that the provision was broad enough to encompass both contract and tort claims "arising out of or relating to" the subscription. Id. at 310. In contrast, the court in Krock v. Lipsay, 97 F.3d 640, 645 (2d Cir. 1996), held that the choice of law provision at issue there was not broad enough to encompass tort claims. However, the provision in that case was much narrower and merely stated "[t]his Mortgage shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts." Id. See also Champlain Enterprises, Inc. v. United States, 945 F. Supp. 468 (N.D.N.Y. 1996). There was no attendant forum selection clause with "arising under" or "relating to" language as in the Turtur case or the present case. See also Bibeault v. Advanced Health Corp., 1999 WL 301691 (S.D.N.Y. May 12, 1999); Rayapratama v. Bankers Trust Co., 1995 WL 495634 (S.D.N.Y. Aug. 16, 1995). For the foregoing reasons, this Court holds that New York law governs defendant's fraud counterclaim.
Under New York law, "a contract action cannot be convened to one for fraud merely by alleging that the contracting party did not intend to meet its contractual obligations." Rocanova v. Equitable Life Assurance Society, 83 N.Y.2d 603, 614 (1994). Plaintiff argues that defendant's fraud counterclaim should be dismissed under the test elucidated inBridgestone/Firestone, Inc. v. Recovery Credit Services, Inc., 98 F.3d 13 (2d Cir. 1996). In Bridgestone, the court stated that in order to stated a claim for fraud against a party who allegedly made intentionally false statements concerning the party's intent to perform under a contract, the claimant must either: "(i) demonstrate a legal duty separate from the duty to perform under the contract . . . (ii) demonstrate a fraudulent misrepresentation collateral or extraneous to the contract . . . or (iii) seek special damages that are caused by the misrepresentation and unrecoverable as contract damages . . . ." Id. at 20 (internal citations omitted). However, defendant argues that the proper standard is found inChannel Master Corp. v. Aluminum Ltd. Sales, Inc., 4 N.Y.2d 403 (1958). In Channel Master, the court stated that "one `who fraudulently makes a misrepresentation of . . . intention . . . for the purpose of inducing another to act or refrain from action in reliance thereon on [sic] in a business transaction' is liable for the harm caused by the other's justifiable reliance on the misrepresentation." Id. at 407 (citing 3 Restatement, Torts, § 525, at 59). This Court holds that defendant's fraud counterclaim fails under both standards.
The fraud counterclaim at issue in this case does not satisfy any of the requirements of the Bridgestone test. Defendant does not advance any arguments that its claim satisfy the first or third requirements of theBridgestone test. Defendant's only argument is that its claim satisfies the second requirement, namely that plaintiff's alleged misrepresentations are collateral to the contract. Deft.'s Opp. Mem. at 20-22. See also Deft.'s Sur-Reply Mem. at 5-6. Defendant argues that plaintiff's misrepresentations are collateral to the Agreement because they are not set forth in the Agreement. Defendant essentially argues that while the parties were negotiating the terms of the Agreement over several months, plaintiff made representations regarding plaintiffs expected performance under the Agreement. The parties later executed the Agreement, which defendant claims contains terms that differ from plaintiff's prior representations. Defendant is attempting to hold plaintiff accountable for those prior representations. However, the prior representations concern the same matter as the terms of the Agreement, plaintiffs performance. Furthermore, the Agreement contains a merger clause which specifies that "[t]his constitutes the entire agreement between the parties with respect to the subject matter hereof, and no statement, promise, or inducements made by either party or agent of either party that is not contained in this written Agreement shall be valid or binding." Sponsorship and Advertising Agreement ¶ 13(B). Therefore, all binding representations are incorporated into the Agreement, not collateral to the Agreement.
Defendant further argues that "promises of performance made with the intent not to perform are collateral or extraneous to the contract." Deft.'s Opp. Mem. at 21 (citing AM Cosmetics Inc. v. Solomon, 67 F. Supp.2d 312 (S.D.N.Y. 1999); Champion Motor Group. Inc. v. Visone Corvette of Massachusetts, 992 F. Supp. 203 (E.D.N.Y. 1998)). Plaintiff's cited cases are inapposite. In AM Cosmetics, the court sustained a fraud claim as collateral to the contract where there were alleged misrepresentations of fact contained in a stock purchase agreement. 67 F. Supp. 2d at 319-20. Defendant has not asserted that the plaintiff made misrepresentations of fact in the Agreement, but that plaintiff made misrepresentations about its performance prior to the execution of the Agreement which contains performance terms that are different from plaintiff's prior representations. Defendant cannot assert a fraud claim where it did not sign an agreement containing the alleged misrepresentations. In Champion Motor, the court sustained a fraud claim as collateral to the contract where plaintiff was induced to "incur significant expenses . . . in anticipation of a contract that defendants had no intention of entering into . . . ." 992 F. Supp. at 208. A contract did not exist in that case. The court focused on "defendants' inducement of the plaintiff to incur significant expenses", not the promise of performance. Id.
In the present case, defendant alleges that plaintiffs misrepresentations induced defendant to enter into the Agreement. Defendant cannot assert a fraud claim where defendant signed the Agreement containing terms that it alleges are different from plaintiffs prior representations. If defendant wanted to hold plaintiff accountable for those prior representations, defendant should not have executed a contract with different terms.
The fraud counterclaim also fails under Channel Master. The basis of the claim is that plaintiff fraudulently misrepresented its intention to perform under the Agreement in order to induce defendant to enter the Agreement. Defendant alleges that plaintiff knew that the representations were false when it made them. Defendant Targetfirst, Inc.'s Answer, Affirmative Defenses, Counterclaims and Jury Demands ¶ 89. Defendant does not assert any facts to support this conclusory allegation. Rather, defendant's pleading shows that during negotiations plaintiff forecasted its ability to sell advertising inventory and the average price at which the inventory would be sold. This is "a case of prophecy and prediction of something which it is merely hoped or expected will occur in the future," not "a specific affirmation of an arrangement under which something is to occur, when the party making the affirmation knows perfectly well that no such thing is to occur." Channel Master, 4 N.Y.2d at 408. Accordingly, this is not a case of fraudulent misrepresentation of intention.
For the foregoing reasons, plaintiffs motion to dismiss defendant's fraud counterclaim is granted.