Opinion
060071/2013
08-27-2019
DULCETTE TECHNOLOGIES LLC, Plaintiff, v. MTC INDUSTRIES, INC., and Unichem Enterprises, Inc., Defendants.
WHITE CIRRITO & NALLY, LLP, 58 Hilton Avenue, Hempstead, NY 11550 KEVIN K. TUNG, ESQ., 136-20 38th Avenue, Suite 3D, Flushing, NY 11354 HARWOOD LLOYD, LLP, 350 Fifth Ave, Suite 3304, New York, NY 10118
WHITE CIRRITO & NALLY, LLP, 58 Hilton Avenue, Hempstead, NY 11550
KEVIN K. TUNG, ESQ., 136-20 38th Avenue, Suite 3D, Flushing, NY 11354
HARWOOD LLOYD, LLP, 350 Fifth Ave, Suite 3304, New York, NY 10118
James Hudson, J.
"Ex dolo malo non oritur actio "- Fraud never gives a right of action ( Church v. Proctor , 66 F. 240, 244 (1st Cir. 1895) ; Cowper's English Kings Bench Reports p. 343). The matter before us demonstrates that this venerable doctrine is ever viable and applies equally to those who defend an action as well as prosecute it.
The case at bar is an action sounding variously in breach of warranty and fraud. It arose from a contract between the Parties whereby the Plaintiff was to receive a certain quantity of the artificial sweetener known as "Sucralose" from the Defendant. Plaintiff contends that a shipment of the sweetener was adulterated, mislabeled and unfit for human consumption. The Defendant denies this assertion. The differing averments of the Plaintiff and Defendant necessitated a non-jury trial to resolve these issues.
Prior to our analysis of the law and facts, the Court wishes to thank Mr. Cirrito and Mr. Tung for the excellence of their Briefs and their conduct during the trial. Such advocacy as demonstrated by respective Counsel does honor to the profession of law.
Plaintiff's first witness was Doctor Melvin Blum. In addition to being a managing member of the Plaintiff Dulcette Technologies ("Dulcette"), he was qualified as an expert in the field of chemical analysis and the manufacture and distribution of food additives. Dulcette was a distributor of Sucralose, an artificial sweetener. Not a manufacturer itself, Dulcette initially obtained this product via a company named Camlin Fine Chemicals Ltd. ("Camlin"). At one time, Camlin owned 51 (fifty-one) % of the Plaintiff. Over time, Dulcette was unable to procure Sucralose from Camlin and entered into an agreement with the Defendant MTC whereby the latter would supply Dulcette with the Sucralose necessary for its business (Plaintiff's Exhibits 6 and 7). Plaintiff also contracted with the Defendant Unichem Enterprises Inc. ("Unichem") to supply it with Sucralose. MTC did not manufacture its own product. Instead, it received the Sucralose from a Chinese company, ZMC, and forwarded it to the Plaintiff.
The claims against Unichem were dismissed by the Court (Pines J.) by Order dated September 24th, 2013 because of a failure to establish a nexus between Unichem and the State of New York. Accordingly our discussion of salient facts will confine itself to the actions vis-à-vis Dulcette and MTC.
Pursuant to their contract, the Defendant MTC provided Plaintiff with 1,000 kilograms of Sucralose at a cost of $99,000.00. The Plaintiff had a contract to supply Sucralose to Raritan Pharmaceuticals Inc. ("Raritan"), a purveyor of energy drinks. When the Defendant had provided Dulcette with the 1,000 kilograms, Plaintiff delivered it (in 25 kilogram containers) to Raritan. Between August 13th and September 14th, 2012, Dulcette shipped these containers of MTC Sucralose to Raritan. Unichem provided the Plaintiff with 400 kilograms of the sweetener which was forwarded to Raritan. Shortly thereafter, Dulcette received a communication from Raritan that the product was discolored and had an offensive odor. Ultimately, Raritan did not pay for the Sucralose and 10 (ten) % of the containers were returned. Dr. Blum added that Raritan had not done business with Dulcette since the incident. A series of emails (Plaintiff's Exhibit 9) was exchanged between the Parties informing the Defendant of problems with the product and that it had been rejected by the purchaser. Interestingly, neither the Defendant nor the Plaintiff wished to relay this information to the United States Food and Drug Administration ("USFDA").
The transactions between Plaintiff and Defendant were reflected in a series of invoices which contained language stating that a rejection of product had to be made within 7 (seven) days of delivery (Plaintiff's Exhibit 7). Although the rejection was not made in writing, Dr. Blum averred that a telephone call to this effect was made within (7) seven days. A series of e-mails between Dulcette's Vice President, Dr. Luke Verdet and Mr. Giancarlo Denegri of MTC was introduced during Dr. Blum's testimony which evidences the fact that Plaintiff quickly communicated with the Defendant on the rejection of the containers of Sucralose (Plaintiff's Exhibit 9). The Defendant never requested an opportunity to test the contents of the returned containers.
Dr. Blum admitted that although Raritan did not pay for any of the Sucralose, only four drums were returned to Plaintiff and remain in its possession. Two of the drums were selected at random and subjected to chemical analysis. Ultimately, 400 kilos were returned to Unichem who provided the Plaintiff with a $38,000.00 credit. A container of Sucralose was entered into evidence which the Court, with the Defendant's consent, substituted with photographs so the original could be returned (Plaintiff's Exhibit 10).
In purchasing the Sucralose from the Defendant, Dr. Blum stated that Dulcette relied on information in a document provided by MTC, namely the Certificate of Analysis, hereinafter referred to as the CofA (dated 07/2/2012, Plaintiff's Exhibit 12). The CofA reflects a series of tests on a product required by Federal Regulation (CFR Title 21 Part 172, Plaintiff's demonstrative Exhibits 4 and 5). It must be checked for mold, Staphylococcus as well as E Coli. An analysis without checking for their presence is inadequate and the product would not be considered saleable under the procedures set forth in the Federal Food Codex (Plaintiff's Exhibit 3, Trial transcript p. 33). Testing is usually performed via high performance liquid chromatography ("HPLC"). Plaintiff's Exhibit 5 is a description of the analysis necessary for Sucralose products. (Transcript p. 42).
According to Dr. Blum's testimony, it is standard operating procedure to merely copy the previous company's CofA. (Transcript pps. 43 and 333). However, the MTC CofA and its predecessor had several discrepancies. The purity of the Sucralose on the ZMC certificate was 99.38, on the MTC it was 99.8. The MTC certificate listed the optical rotation as 87.2 degrees, the ZMC certificate listed it as 86.4. Furthermore, the MTC certificate reports the results of organic tests, for E. Coli and Staph infection, and others, which were never actually conducted on the material in question. (Transcript p.80).
Plaintiff also offered a CofA from ZMC (Plaintiff's Exhibit 13) purporting to be a test of the same Sucralose which was the subject of the test related in Plaintiff's Exhibit 11. During Dr. Blum's testimony, a series of documents showing chemical analysis were received into evidence. Plaintiff's, Exhibits 12, 14 and 16 were MTC analysis of containers of Sucralose. Plaintiff's Exhibits 13, 15 and 17 were ZMC analysis, purportedly of the same containers. They were remarkably different. The ZMC analysis did not indicate that testing for yeast, mold, E Coli, Salmonella or Staph infection had been performed. Dr. Blum testified that he would not put a product into the stream of commerce that had been evaluated in such a fashion. (Transcript pp. 55-58).
On cross-examination, Dr. Blum was shown an MTC invoice (Plaintiff's Exhibit 7) and acknowledged language on the document which limited liability unless rejection of non-conforming goods was made within (7) seven days. The witness reiterated that although a written rejection was never made, this had been at Mr. Wang's request and that an oral rejection, communicated via the telephone, had been made within the requisite time period. Dr. Blum did admit, however, that Dulcette had possession of only four drums of the Defendant's Sucralose. (Transcript p. 242).
Mr. Shankar Bhattacharyya then testified for the Plaintiff. After being qualified as an expert in the field of chemical analysis, Mr. Bhattacharyya told the Court that he had performed a high performance liquid chromatography test of a drum containing Sucralose which had been rejected by the Plaintiff's customer, Raritan. (Transcript pp.104-110, Plaintiff's Exhibit 11). The test indicated a purity level of 96 (ninety-six) %. (Transcript p.124). As described by Mr. Bhattacharyya, this 2 (two) % difference is a significant deviation from acceptable levels of purity. Since 98 (ninety-eight) % is the minimum under the Codex (CFR Title 21) this rendered the Sucralose unfit for human consumption. (Transcript p.124). On cross-examination, it was emphasized that the witness had not personally performed the chemical analysis. Instead, he was interpreting his colleague's report. (Plaintiff's Exhibits 11, and 18). The questioning of the witness by Mr. Tung, though a credit to the Lawyer's art, did not disturb the utility of Mr. Bhattacharyya's testimony.
Pursuant to CPLR 3117, the deposition transcript (Plaintiff's Exhibit 19) of Dr. Vin Naya was offered. Dr. Naya is the President of Raritan Pharmacutical, the ultimate bulk customer who desired to use the Sucralose in an energy drink to be supplied to the public. The deposition transcript of Dr. Naya indicated that his Company had ordered Sucralose from the Plaintiff to insure that they would not infringe on the patent for this product. Unfortunately, he discovered quality issues with the delivered product. The Sucralose was discolored and malodorous. Dr. Maya consequently returned a portion of the material to Dulcette. (Transcript pages 14-17).
Plaintiff draws the Court's attention to the Notice to Admit served on the Defendant ( CPLR Sec. 3123 ). In response, Defendant MTC admitted that it had received full payment of $99,330.00 for 1,000 kilograms of Sucralose shipped between April 3rd, 2012 and August 7th, 2012. Defendant also admitted to having provided Plaintiff with the MTC CofAs submitted as Plaintiff's Exhibits 12, 14 and 16.
In presenting its evidence, the Defense also called Dr. Blum as a witness. In addition to his testimony on the Plaintiff's case in chief, Mr. Tung's questioning elicited the fact that Dulcette was the sole distributer of Camlin products. Mr. Nat Levine (MTC's CEO) told Dr. Blum that MTC would supply Sucralose only from Camlin approved manufacturers. Dr. Blum stated, however, that this discussion was never reduced to writing.
Mr. Giancarlo Denegri testified for the Defendant. He is employed in the sales department of MTC and was informed, via e-mail, of a Sucralose delivery which resulted in the product being rejected as unsuitable. (Transcript pp. 279-281). He then spoke with a Dr. Luke Verdet at Dulcette and discussed the matter. Mr. Denegri never saw the drums of rejected Sucralose nor did he check to see if there were more bad batches of same. He did not know if MTC contacted other customers to find out if the Sucralose sent to them was sub-standard. He also informed the Court, however, that MTC did not receive any complaints from other customers.
On cross-examination, Mr. Denegri was shown Plaintiff's Exhibit 13, the ZMC CofA and admitted that testing had not been performed on the containers of Sucralose. He did not personally check MTC's inventory for other suspected containers of contaminated Sucralose. (Transcript pp. 306-309).
Dr. Jimmy Wang was the final witness for the defense. In addition to being the principal of the Defendant, he was qualified as an expert in the field of chemistry. (Trial Transcript p. 409). As such, he was asked to opine on the purity analysis of the Sucralose offered by the Plaintiff's expert. Dr. Wang, testified, inter alia , that Shankar Bhattacharyya's testing was flawed for several reasons. First, that the Plaintiff's testing was not done in accordance with USFDA methodologies. (Transcript p. 421). Secondly, the tests performed by Plaintiff's expert were not anhydrous, (i.e. in the absence of water). This, according to Dr. Wang, was in violation of the Federal Drug Administration ("FDA") protocol which required tests to be on an anhydrous basis. (Transcript p.423 and Defendant's Exhibit E). He also indicated that there were insufficient samples of the suspected material to form the basis of an accurate analysis. In sum, Dr. Wang's opinion was that the testing performed by the Plaintiff's expert was not reliable, not consistent and hence, not accurate enough to be of use to the Court.
On cross-examination, Mr Cirrito's questioning cast some of Dr. Wang's statements into doubt. Dr. Wang admitted that Sucralose, in its approved form, is white and without odor. If it had a smell as described by Dr. Blum, that would be indicative of contamination. Dr. Wang also claimed that he sought to subject the drums (Plaintiff's Exhibit 10) to a Chromatic Graphic examination. We find this statement to be inconsistent with the other proof adduced at trial. He also stated that MTC's policies and procedures did not include the use of a Government Certified Laboratory for testing.
Since the testimony of the Plaintiff's witness and the Defendants are at a variance, the Court must sift the differing averments and find the truth.
In a non-jury trial, it falls to the Court to determine the veracity of the proof. We begin with a review of the testimony. Determination of credibility of witnesses is viewed as the province of the Trial Judge ( Morales v. Inzerra , 98 AD3d 484, 485, 949 N.Y.S.2d 433, 436 (2nd Dept. 2012) ; Tornheim v. Blue & White Food Prod. Corp. , 88 AD3d 867, 868, 931 N.Y.S.2d 340, 341 (2nd Dept. 2011). Plaintiff cites to Latora v. Ferreira , 102 AD3d 838, 958 N.Y.S.2d 727 [2nd Dept. 2013] and Hom v. Hom , 101 AD3d 816, 955 N.Y.S.2d 630 [2nd Dept.2012].
"As to the quality of any given witness, the flavor of the testimony, its quirks, the witness' bearing, mannerisms, tone and overall deportment cannot be fully captured by the cold record; the fact-finder, of course, enjoys a unique perspective for all of this, and the ability to absorb any such subtleties and nuances" ( J & K Parris Const., Inc. v. Roe Ave., Assoc., Ltd. , 47 Misc 3d 1227(A), 18 N.Y.S.3d 579 (NY Sup. Ct. 2015).
After reviewing all the testimony and observing the demeanor of the witnesses, the Court finds Dr. Blum and Mr. Bhattacharyya to be more credible than the witnesses called by the Defense.
Plaintiff alleges four causes of action: (1) breach of express warranty (UCC Sec.2-313); (2) breach of implied warranty of merchantability (UCC Sec.2-314); (3) breach of implied warranty of fitness for a particular purpose (UCC Sec.2-315); and (4) fraud.
In support of its claims under the Uniform Commercial Code, Plaintiff cites to the statutes themselves. As to the claim of fraud, Plaintiff relies on the holdings in Introna v. Huntington Learning Ctrs., Inc. 78 AD3d 896, 898, 911 N.Y.S.2d 442 (2nd Dept. 2010) and Fromowitz v. W. Park Assoc., Inc. , 106 AD3d 950, 951, 965 N.Y.S.2d 597 [2nd Dept. 2013] ).
In its defense, MTC contends that the Plaintiff's claims under the Uniformed Commercial Code are barred by a limitation of liability clause contained in the respective invoices and that the Plaintiff has failed to prove any breach of warranty, express or implied. Moreover, the Defense argues that the claim of fraud is duplicative of Plaintiff's breach of contract claim and must be dismissed.
In order to sustain a claim for breach of an express warranty, a plaintiff must first prove any of the following elements:
"(1) an affirmation of fact or promise made by the seller to the buyer that relates to the goods and becomes part of the basis of the bargain; or (2) any description of the goods that is made part of the basis of the bargain; or (3) any sample or model that is made part of the basis of the bargain" ( UCC 2-313 [1] ).
Once that has been established, the Plaintiff/Purchaser must then show that the Defendant/Seller's product fails to conform with the initial description or the other statutory requirements.
Defendant claims that breach of express warranty has not been proven, citing to UCC Sec.2-313 and Sears, Roebuck & Company v. Galloway , 195 AD2d 825, 600 N.Y.S.2d 773 (3rd Dept.1993). Indeed, it is well settled law that the burden of proof is on the buyer to establish breach with respect to goods accepted (UCC Sec.2-6074). The Plaintiff contends that it has satisfied the statutory criteria by proving that the description of the Sucralose in the CofAs provided by MTC were untrue as some tests had never been performed and other test results had been altered. As noted supra , the Court has determined that Dr. Blum testified accurately and truthfully as to the CofAs provided by the Defendant and that he relied upon them.
UCC Sec.2-313 states that:
"...express warranties by the seller are created by (a) any affirmation of fact ... made by the seller to the buyer which relates to the goods [that] becomes part of the basis of the bargain creates an express warranty that the goods shall conform to the affirmation or promise"; and (b) "any description of the goods which is made part of the basis of the bargain creates an express warranty that the goods shall conform to the description."
Defendant's protestations to the contrary, the Court finds that the believable testimony adduced at trial establishes this by a fair preponderance of the credible evidence. Dr. Blum's and Mr. Bhattacharyya's testimony convinces the Court as to the essential nature of a CofA reflecting testing as to the purity of the Sucralose and the obvious necessity of the product to be pure under the requisite Government Regulations (CFR Title 21).
The CofA "was part of the basis of the bargain and induced Plaintiff to purchase" the Sucralose from the Defendant ( Kraft v. Staten Island Boat Sales, Inc. , 715 F. Supp. 2d 464, 473 (S.D.NY 2010). This express warranty was breached by the Defendant in two fashions, (1) the CofA was inaccurate; and (2) the product was not in accord with CFR Title 21 regulations.
A claim sounding in breach of implied warranty of merchantability arises from UCC Sec.2-314 which defines merchantable goods as having certain characteristics. These include the ability to:
"...(a) pass without objection in the trade under the contract description; and (b) in the case of fungible goods, are of fair average quality within the description; and (c) are fit for ordinary purposes for which goods are used; and (d) run, within the variations permitted by the agreement, of even kind, quality and quantity within each unit and among all units involved; and (e) are adequately contained, packaged, and labeled as the agreement may require; and conform to the promise or affirmations of fact made on the container or label if any."
Plaintiff claims that this has been proven by the Defendant's supplying fictitious CofAs so that they were unfit for ordinary purposes. Once again, the finding of fact which establishes the first cause of action also sustains the second. The mislabeling of the CofA must be coupled with our finding of fact that the Plaintiff has also demonstrated that the Sucralose was substandard and unfit for human consumption.
The third cause of action is predicated on Uniform Commercial Code § 2-315 which states:
"Where the seller at the time of contracting has reason to know any particular purpose for which the goods are required and that the buyer is relying on the seller's skill or judgment to select or furnish suitable goods, there is unless excluded or modified under the next section an implied warranty that the goods shall be fit for such purpose."
The facts adduced before us show that Dulcette clearly informed MTC of the intended use of the Sucralose and that MTC shipped its product accordingly. The rejection of four containers by Raritan and the inaccuracies of the CofA's relating to those containers give the necessary proof that the Defendant's product was unfit for the mutually contemplated purpose of same, namely its use in a food product.
The Court must now discuss the viability of the defenses put forth by MTC.
Initially, the Defendant claims that the Plaintiff failed to demonstrate that the purity of the Sucralose failed the USFDA 98% purity standard. The basis of this argument is that the laboratory tests performed by Mr. Bhattacharyya should be considered inconclusive, relying on the holdings in Frye v. US 293 F.1013 (D.C. Ct. App.1923); People v. Wesley , 83 NY2d 417, 611 N.Y.S.2d 97 [1994] ; and Parker v. Mobil Oil Corp. , 7 NY3d 434, 824 N.Y.S.2d 584 [2006] ).
Defense Counsel also takes the intriguing position that although the standards found in Daubert v. Merrell Dow Pharmaceuticals, Inc. 509 U.S. 579,113 S.Ct.2786 (1993) and FRE 702 are not binding, they should be used to guide admissibility of an expert's opinion. The Court chooses not to adopt this view, leaving it instead to the appellate courts to make such a weighty decision, witness the maxim via trita est tutissima (10 Coke, 142 "The trodden path is the safest").
A review of the relevant case law indicates that the Defendant's argument concerning Mr. Bhattacharyya's testing is chimerical. The Court in Parker v. Mobil Oil Corp. , supra , in applying the Frye test, stated that "The introduction of novel scientific evidence calls for a determination of its reliability" ( Id. at 446). In the matter at hand, however, the Parties never seriously disputed that the basis of the tests performed on the questioned Sucralose was generally accepted in the scientific community ( State v. Hilton C. , 158 AD3d 707, 708, 70 N.Y.S.3d 565, 567 [2nd Dept. 2018], appeal withdrawn , 31 NY3d 1077, 79 N.Y.S.3d 98 [2018] ). Instead, and this is the critical distinction, the Defendant claims that Mr. Bhattacharyya performed the requisite tests improperly. In order for the Court to accept this view, we would be constrained to accept the testimony of Dr. Wang over that of Dr. Blum and Mr. Bhattacharyya. As noted above, the Court has taken a contrary interpretation of the evidence, to the detriment of the Defendant's cause.
We now must address the effect of the limitation of liability written on the MTC invoices. These documents (Exhibit 7) all contain the following language:
"All customers are responsible for confirming quality and quantity. All discrepancies must be reported to MTC within seven days of receipt. No materials should be used without first approved by customer's QC laboratories. Once the materials are used in production, customer has assumed full approval for the materials and the payment is required in full."
Such language is governed generally by UCC § 2-316 (1) which states in relevant part:
"Words or conduct relevant to the creation of an express warranty and words or conduct tending to negate or limit warranty shall be construed wherever reasonable as consistent with each other; but subject to the provisions of this Article on parol or extrinsic evidence (Section 2-202) negation or limitation is inoperative to the extent that such construction is unreasonable."
The Defendant also argues that UCC Secs. 2-207 (Additional Terms in Acceptance or Confirmation) and 2-719 (Contractual Modification or Limitation of Remedy) render the limitation of liability clause enforceable. Defense Counsel also cites to the case of Suzy Phillips Originals, Inc. v. Coville, Inc. , 939 F.Supp.1012 (E.D.NY 1996). This authority is distinguishable from the facts in this case.
In order to successfully disclaim an implied warranty, the language of the purported limitation must be "conspicuously delineated" ( Arnold v. New City Condominiums Corp ., 78 AD2d 882, 882, 433 N.Y.S.2d 196, 198 [2nd Dept. 1980] ). The language must also specifically include the term "merchantability" (see UCC§ 2—316 [2] ; Kraft v. Staten Island Boat Sales, Inc. , 715 F. Supp. 2d 464, 472 [S.D.NY 2010] ). Finally, the print of the disclaimer must be larger than the type used in the rest of the document or printed in bold "or other contrasting type or color" ( UCC § 1—201[10] ; Nassau Suffolk White Trucks, Inc. v. Twin County Transit Mix Corp. , 62 AD2d 982, 403 N.Y.S.2d 322 [2d Dept. 1978] ; Direct Capital Corp. v. New ABI Inc. , 13 Misc 3d 1151, 1162-63, 822 N.Y.S.2d 684, 693 [Sup. Ct. Kings Co. 2006] ).
A fair reading of the disclaimer relied upon by the Defendant shows that it fails to satisfy any of the criteria listed above. Accordingly, this Court finds the limitation of liability language in the Defendant's invoices to be unenforceable.
We now turn to the remaining defenses of MTC concerning the first three causes of action.
The Defendant is correct in its assertion that once a buyer accepts and uses non-conforming goods the buyer is under an obligation to pay for same ( Zappala & Co., Inc. v. Pyramid Company of Glens Falls , 81 AD2d 983, 439 N.Y.S.2d 765 [3rd Dept. 1981] ; UCC Sec.2-606[1][c] ).
It is also well settled that when non-conforming goods are delivered, a purchaser has the following options: Rejection (UCC Sec.2-602); Revocation of acceptance upon discovery of non-conformity (UCC Sec.2-608) or; Accepting the goods and seeking damages (UCC Sec.2-714[1]; Cliffstar Corp. v. Elmar Indus. , 254 AD2d 723, 724, 678 N.Y.S.2d 222 [4th Dept.1998] ; B. Milligan Contracting, Inc. v. Andrew R. Mancini Assoc., Inc. , 174 AD2d 136, 139, 578 N.Y.S.2d 931 [3rd Dept. 1992] ). The law, however, aids the vigilant and a buyer must notify the seller that the delivered product is non-conforming within a reasonable time after discovery of breach (or when a reasonable person should have discovered the breach) or they are barred from recovery ( UCC 2-607 [3][a] ; 2-602[1] ).
In his excellent Brief, Mr. Tung also cites to the holdings of Ask Technologies, Inc. v. Cablescope, Inc. , 51 UCC Rep.Serv.2d (Callaghan) 1028, 2003 WL 22400201 [S.D.NY 2003] ; Sears, Roebuck & Company v. Galloway , 195 AD2d 825, 600 N.Y.S.2d 773 [3rd Dept. 1993] ; UCC Sec.2-607[4]; Fanok v. Carver Boat Corp. LLC. , 576 F.Supp2d 404 [E.D.NY 2008] ; Y & N Furniture Inc. v. Nwabuoku , 190 Misc 2d 402, 734 N.Y.S.2d 382, 190 Misc 2d 402, 734 N.Y.S.2d 382 [Civ.Ct. Kings Co. 2001] ; UCC Sec.2-606[1][b]; Randazzo v. Cherry Valley Tile & Stone , 2005 NY Slip Op. 50748U, 7 Misc 3d 135A [App.Term, 2nd Dept. 2005] ), for the principle that communication of the non-conforming nature of the goods must be unequivocal.
Applying the above mentioned statutes and case law, the Defendant urges the Court to find that the Plaintiff has not proven a timely rejection of the Sucralose ( Sears, Roebuck & Company v. Galloway , supra ; F.D.Rich Hous.Corp. v. KPJ Assocs. , 93 AD2d 878, 461 N.Y.S.2d 422 [1983] ). This argument is persuasive to a limited degree.
As indicated in our discussion of the relevant testimony, the Court has found the Plaintiff's witnesses to be decidedly credible wherever the proof was at a variance. In one respect, however, the Parties agreed.
Although Dr. Nayak of Raritan Pharmaceutical indicated that he had returned 40 containers (representing $50,000) of Sucralose to the Plaintiff, Dr. Blum's testimony at trial indicated that Dulcette received only four MTC containers of Sucralose back from Raritan. (Transcript pp. 53,65-66, 220, and 222). Not including the Sucralose provided by Unichem, 1,000 kilograms of the sweetener was sent by Dulcette to Raritan. Raritan informed Dulcette that the product was suspect, refused to pay any outstanding balance and demanded a refund. Dulcette, in an effort to show good faith, complied with this demand. Ninety (90) % of the product shipped from Dulcette to Raritan remains unaccounted for. When asked as to the whereabouts of the remaining Sucralose which Raritan did not return, Dr. Blum stated that it had been "undoubtedly consumed by Raritan" (Transcript p. 359). It must be noted that Dulcette never sued Raritan for the cost of the Sucralose which was never returned.
The four drums recovered by Dulcette contained 100 kilograms of Sucralose and MTC was paid $10,000.00 for same (Transcript pp. 242-246). The foregoing facts illustrates that although the Court finds the Plaintiff's evidence to be credible, it is limited. The fair preponderance of the evidence has proven that the Defendant breached the express warranty, implied warranty of merchant ability and implied warranty of fitness for a particular purpose relating to the Sucralose but only as to the four containers of product evidenced in Plaintiff's Exhibit 10. To go beyond this amount would be to engage in speculation at best or shift the claim of a business loss onto MTC which should have been answered by a party who the Plaintiff made a considered decision not to subject to litigation. Thus, recovery under these three causes of action must be limited to ten (10) % of the $144,000.00 claimed by the Plaintiff as its loss for the entire transaction.
We now turn our attention to the Plaintiff's fourth cause of action-fraud. In its analysis of the evidence, the Court must point out that the claims sounding in breach of warranty were held to a standard of proof by "..a fair preponderance of the credible evidence." ( PJI 1:23 ; Prop. Clerk of New York City Police Dept v. Ferris , 77 NY2d 428, 430, 227, 568 N.Y.S.2d 577 [1991] ).
By contrast, the elements of fraud must be proven by clear and convincing evidence ( Orbit Holding Corp. v. Anthony Hotel Corp. , 121 AD2d 311, 314, 503 N.Y.S.2d 780 [1st Dept. 1986] ; PJI 3:20 ; accord , Colavito v. NY Organ Donor Network, Inc. , 438 F.3d 214, 222 [2nd Cir.2006]. It is against this standard that we must set the proof.
"To establish a claim for fraudulent misrepresentation, a plaintiff must establish that there was an affirmative misrepresentation which was false and known to be false by defendant, made for the purpose of inducing the other party to rely upon it, justifiable reliance of the other party on the misrepresentation or material omission, and injury" ( MBIA Ins. Corp. v. J.P.Morgan Sec. LLC , 43 Misc 3d 1221(A), 997 N.Y.S.2d 99 (NY Sup. Westchester Co. 2014) citing Mandarin Trading Ltd. v. Wildenstein , 16 NY3d 173, 178, 919 N.Y.S.2d 465 [2011] ; Lama Holding Co. v. Smith Barney Inc. , 88 NY2d 413, 421, 646 N.Y.S.2d 76 [1996] ; MBIA Ins. Corp. v. Countrywide Home Loans, Inc. , 87 AD3d 287, 293, [1st Dept 2011] ; Orlando v. Kukielka , 40 AD3d 829, 831, 836 N.Y.S.2d 252 [2d Dept 2007] ; see also Banque Arabe et Internationale D'Investissement v. Md. Natl. Bank , 57 F.3d 146, 153 [2nd Cir.1995] ; see Pasternack v. Lab. Corp. of Am. Holdings , 27 NY3d 817, 37 N.Y.S.3d 750 [2016] ).
The differences between the MTC CofAs and the ZMC CofAs are without explanation as to how they came about. They cannot be considered transcription or typographical errors because the MTC document contains affirmations of facts that are absent from the original. Applying the criteria found in PJI1:70, the Court finds that this is circumstantial evidence of the Defendant's deliberate misstating of the tests performed on the Sucralose. The Plaintiff is under no obligation to prove the absence of "remote possibilities" as to the cause of the discrepancy ( Bernstein v. City of New York , 69 NY2d 1020, 1022, 517 N.Y.S.2d 908 [1987] ). In turn, this deliberate act of deception has consequences.
The Defendant argues that the Plaintiff's claim of fraud must be dismissed because it's duplicative of the breach of contract claim. To further this contention, MTC's Counsel relies primarily on two cases. The Defendant cites Wegman v. Dairylea Cooperative, Inc. , 50 AD2d 108, 376 N.Y.S. 2d 728 (4th Dept. 1975), to highlight New York Courts' refusal to allow a cause of action for fraud when it is duplicative of a breach of contract. (Defendant's Post Trial Brief p. 30). Wegman is starkly different from the instant case. In Wegman , the Plaintiff claimed that his employment was terminated because he refused to assist in the illegal standardization of milk his employer was conducting. ( Id. at 732 ). He alleged that his employer misrepresented the term of Plaintiff's employment, his salary, and the employer's compliance with rules and regulations. ( Id. at 734 ). In other words, the Plaintiff alleged that the Defendant misrepresented the essential terms of the contract. ( Id. at 735 ). This is not analogous to the instant case. The Defendant did not misrepresent the market price of the Sucralose, or the duration of their business relationship, instead it misrepresented the product being sold. MTC portrayed unsalable Sucralose as a substance that met expected quality standards to induce the Plaintiff's purchase of same. This is the misrepresentation of a presently-existing fact, unlike the failure to perform in Wegman .
The Defendant also asks the Court to adopt the rule found in Miller v. Volk & Huxley, Inc. , 44 AD2d 810, 355 N.Y.S 2d 605 (1st Dept. 1974). In Miller , the Plaintiff was an employee of the Defendant company who was enticed to remain with the company, after a merger, by promises of an increased salary and other offers of compensation. The Court rightly dismissed a fraud action which attempted to sue for these fraudulent representations which were, ostensibly, contract negotiations. ( Id. at 607 ). In both Wegman and Miller , the truth of the Defendants' representations depended upon their contemplated actions. Failure to make these representations a reality was a broken promise of behavior in futuro and is therefore dealt with under the branch of law devoted to broken promises-contract law. The instant case is distinguishable from Miller for the same reason that it is distinguishable from Wegman . MTC's CofAs did not promise future performance, but assured Dulcette of the then-existing quality of a product. An assurance that was false.
A clear distinction is drawn between claims for breach of contract and fraud, the former dealing with failure to fulfill obligations created by promises of future actions, and the latter dealing with misrepresented presently-existing facts. Although New York Courts are hesitant to sustain a cause of action for fraud and a breach of contract claim, the two are not necessarily mutually exclusive. "If a plaintiff alleges that it was induced to enter into a transaction because a defendant misrepresented a material fact, the plaintiff has stated a claim for fraud even though the same circumstances also give rise to the plaintiff's breach of contract claim" ( First Bank of Americas v. Motor Car Funding, Inc. , 257 AD2d 287, 690 N.Y.S.2d 17, 21 [1st Dept. 1999] ; see Wyle Inc. v. ITT Corp. 130 AD3d 438, 13 NY S.3d 375 [1st Dept. 2015] ).
In the case of First Solar, Inc. v. Absolute Process Instruments, Inc. , No. 17-CV-8518 (JSR), 2018 WL 1166632 (S.D.NY Feb. 8, 2018), the Court opined on separating a fraud claim from a cause of action sounding in breach of contract:
"Unlike a misrepresentation of future intent to perform, a misrepresentation of present facts is collateral to the contract, though it may have induced the plaintiff to sign the contract and therefore involves a separate breach of duty" ( First Bank of the Americas v. Motor Car Funding, Inc. , 257 AD2d 287, 690 N.Y.S.2d 17, 21 [1st Dept. 1999] ; see also Merrill Lynch & Co. Inc. v. Allegheny Energy, Inc. , 500 F.3d 171, 184 [2d Cir. 2007]. "New York distinguishes between a promissory statement of what will be done in the future that gives rise only to a breach of contract cause of action and a misrepresentation of a present fact that gives rise to a separate cause of action for fraudulent inducement" ( Id. at *3).
A fraud claim is warranted if a party engages in tortious conduct distinct from its failure to perform its contractual obligations ( Wyle Inc. v. ITT Corp. , supra at 378). Furthermore, if a party has "breached a duty of reasonable care distinct from its contractual obligations or when it has engaged in tortious conduct separate and apart from its failure to fulfill its contractual obligations," then a separate fraud claim is properly made ( New York Univ. v. Continental Ins. Co. 87 NY2d 308, 639 N.Y.S.2d 283 [1995] ).
In the oft-cited case of First Bank of Ams. v. Motor Car Funding , supra , the Court reinstated a previously dismissed cause of action for fraud, reasoning that "Unlike a misrepresentation of future intent to perform, a misrepresentation of present facts is collateral to the contract (though it may have induced the plaintiff to sign the contract) and therefore involves a separate breach of duty" ( Id. at 19). In Motor Car Funding the Plaintiff and Defendant entered into a sales agreement detailing how the Defendant would sell used car loans to the Plaintiff, First Bank of the Americas. This agreement included "warranties to the effect that the loans would comply with certain underwriting guidelines" such as quality of the collateral, the credit history individual borrowers, and their amount in down payments. ( Id. ). The mere fact that the Defendant's product also breached the warranties did not preclude it in the action from properly being labeled fraud. ( Id. at 21). This is because a warranty does not promise future performance, rather it is a statement verifying existing facts. "Accordingly, a fraud claim can be based on a breach of contractual warranties notwithstanding the existence of a breach of contract claim" ( Id. ).
The Plaintiff Dulcette's claim of fraud arises from the discrepancies between MTC's CofA and the certificate from ZMC, their supplier. The Plaintiff has proven, by clear and convincing evidence, that the Defendant fictionalized the results of organic tests on Sucralose, tests which were never performed, and that they falsely altered the analysis of the previous distributor to improve the Sucralose's apparent purity. Dulcette's claims for breach of express warranty, breach of implied warranty of merchantability, and breach of implied warranty of fitness for a purpose, would exist regardless of these misrepresentations. The fraud allegation is not based on mere failure to perform promises of future acts, but on misrepresentations of the analysis already performed on the Sucralose. This is a misrepresentation of a presently-existing fact, and is not duplicative of the breach of contract.
A cause of action for fraud is meant to address violations of the duty of honest and fair dealing imposed on persons when transacting with one another, apart from the liability assumed by persons when entering a contractual relationship ( 60A NY Jur. 2d Fraud and Deceit § 7 ). Had MTC not fabricated the organic tests done, it would have violated the UCC's express warranty provision merely by providing an inaccurate CofA ( UCC 2-313 [1][b] ). The Defendant, however, fictionalized the results of tests which appear on their CofA and not on the documentation from their previous distributor ZMC. MTC misrepresented the Sucralose as tested and certifiably pure on their CofA, the primary instrument of inducing reliance within the industry. In the Plaintiff's cross-examination of Mr. Denegri, he admitted to the importance of the CofA. (Transcript p. 302). Upon this reliance, Dulcette shipped the Sucralose to Raritan.
The misrepresentations on MTC's CofAs clearly violate a duty of good faith and honest dealing outside the duties arising from their contractual relationship with Dulcette. There can be no doubt that the representations of quality and testing on the CofAs induced Dulcette to purchase the Sucralose, since the very function of such a certificate within the industry was to induce a buyer's reliance. The CofA must be seen in two lights. Initially, the certificate operates as a warranty, and its breach is governed by the UCC. The fabrication of results on the CofA, however, is another matter entirely. The representing of an unsalable product as a quality one and inventing the results of tests never conducted, violate the good faith duty imposed on all transacting parties. New York Courts are wisely hesitant to sustain a cause of action for fraud in breach of contract cases, for fear of redundancy. When there is a clear case of violation of a separate duty, outside the boundaries of a particular contract, however, the law does not hesitate to recognize a separate claim. "It simply cannot be the case that any statement, no matter how false or fraudulent or pivotal, may be absolved of its tortious impact simply by incorporating it verbatim into the language of a contract" ( MBIA Ins. Corp. v. Countrywide Home Loans, Inc. , supra at 294 quoting in re CINAR Corp. Sec. Litig. , 186 F.Supp.2d 279, 303 [E.D.N.Y.2002] ). To not recognize such action as a separate claim for fraud would give carte blanche to opportunistic parties who, unable to perceive a legal deterrent to perfidious conduct, put their devious designs into the four corners of a contract in order to disguise their dishonesty as incompetence, or even shrewdness. New York law, and the sanctity of future contracts demands that this deceit must be recognized as fraud and not a breach of contract.
New York case law, and the dictates of sound commercial policy obliges us to find that Dulcette's fourth cause of action be sustained. The clear and convincing evidence submitted before this Court proves that the claim for fraud is not duplicative of the Plaintiff's breach of warranty claims. Instead, this Court finds, once again by the necessary quantum of evidence indicated above, that Defendant made intentional misrepresentations of presently-existing facts, namely the false entries on the CofAs which described incorrect levels of quality and non-existent tests. This was made with the intent of the Defendant to induce Dulcette to purchase its product. When the purchase had taken place, the Plaintiff suffered injury due to the rejection of the substandard Sucralose, by Raritan. The only limitation the Court finds as to the Plaintiff's claim is that, as in the case of the claims for breach of warranty, the claim for fraud has been proven only as to the four containers represented in Plaintiff's Exhibit 10.
Having decided the question of liability in favor of the Plaintiff and against the Defendant, we next move on to the measure of damages. Plaintiff contends that the "..amount of Plaintiff's actual damages should be its lost profits" (Plaintiff's Post Trial Memorandum). The warranty causes of action are governed by UCC § 2-714 which states "The measure of damages for breach of warranty is the difference at the time and place of acceptance between the value of the goods accepted and the value they would have had if they had been as warranted, unless special circumstances show proximate damages of a different amount" (see F.D.Rich Hous.Corp. v. KPJ Assocs. , 93 AD2d 878, 461 NYS2d 422 [2nd Dept. 1983] ). As stated hereinbefore the Sucralose in question was accompanied by false CofAs and the material itself even failed a visual test for use. It cannot safely be ingested. The Court would be remiss if it was assigned any value at all. The breach of warranty claims, however, are limited to the four containers of MTC Sucralose returned by Raritan to Dulcette. Thus, recovery under these three causes of action must be limited to ten (10) % of the $144,000.00 proven by the Plaintiff as its loss for the entire transaction. The Court will award a Judgment in Plaintiff's favor in the amount of $14,400.00 with interest from November 1st, 2012.
We now turn to the matter of the Defendant's fraudulent conduct and the proper remedy to afford the Plaintiff.
As to damages for fraud, Plaintiff asks for punitive damages in the sum of $432,000.00 representing three times its claim of actual loss plus interest from November 1st, 2012.
In deciding whether the Court may consider punitive damages, we are mindful that this form of redress is:
"not available for a private wrong ( Garrity v. Lyle Stuart, Inc. , 40 NY2d 354, 358, 386 N.Y.S.2d 831, 386 N.Y.S.2d 831 [1976], breach of contract ( Garrity v. Lyle Stuart, Inc. , supra ), and ordinary fraud ( Walker v. Sheldon , 10 NY2d 401, 405, 223 N.Y.S.2d 488, 223 N.Y.S.2d 488 [1961] )" ( Mom's Bagels of New York, Inc. v. Sig Greenebaum, Inc. , 164 AD2d 820, 823, 559 N.Y.S.2d 883, 885 [1st Dept. 1990] ).
In the case of Walker v. Sheldon , supra at 404, the Court stated:
"Punitive or exemplary damages have been allowed in cases where the wrong complained of is morally culpable, or is actuated by evil and reprehensible motives, not only to punish the defendant but to deter him, as well as others who might otherwise be so prompted, from indulging in similar conduct in the future (citations omitted)" ( Id. at 404).
The Court is also guided by New York Univ. v. Cont'l Ins. Co. , 87 NY2d 308, 639 N.Y.S.2d 283, 639 N.Y.S.2d 283 (1995) wherein it was held that:
"Punitive damages are available only in those limited circumstances where it is necessary to deter defendant and others like it from engaging in conduct that may be characterized as "gross" and "morally reprehensible," and of " ‘such wanton dishonesty as to imply a criminal indifference to civil obligations.’ "( Id. 315-316 ; see Mayline Enterprises, Inc. v. Milea Truck Sales Corp. , 641 F. Supp. 2d 304, 311 [S.D.NY 2009] ).
When a claim for punitive damages has at its source a breach of contract, a plaintiff must prove the following:
"(1) [The] defendant's conduct must be actionable as an independent tort; (2) the tortious conduct must be of the egregious nature set forth in Walker v. Sheldon , supra ; (3) the egregious conduct must be directed to plaintiff; and (4) it must be part of a pattern directed at the public generally ( Rocanova , 83 NY2d, 603, 612, 613, N.Y.S.2d 339 [1994]; New York Univ. v. Cont'l Ins. Co. , supra 316). The threshold task for a court considering ...punitive damages is to identify a tort independent of the contract" ( Id. at 316).
Here Dulcette has proven, by clear and convincing evidence, a fraud independent of its contract with MTC. It was directed at the Plaintiff to induce it to buy its product. Whether it is egregious and "directed at the public generally" warrants further discussion.
As noted in Walker , supra :
"The list of actions in which punitive damages have been permitted in this State is long (see, e.g. , Toomey v. Farley , 2 NY2d 71, 156 N.Y.S.2d 840, (libel); Gostkowski v. Roman Catholic Church, etc. , 262 NY 320, 186 N.E. 798 [1933] (desecration of a grave); Pickle v. Page , 252 NY 474, 169 N.E. 650, 72 A.L.R. 842 [1930], affg . 225 App.Div. 454, 459-460, 233 N.Y.S. 461, 466-467 [4th Dept. 1929] (forcible abduction of a minor child); Kujek v. Goldman , 150 NY 176, 179, 44 N.E. 773, 774 [1896] (fraud and deceit); see also , 1 Clark, New York Law of Damages (1925), p. 104; McCormick, Damages (1935), pp. * * *491 286-287; Note, 70 Harv.L.Rev. 517 ), for, as this court observed in the Hamilton case (53 NY 25, 30, supra ), ‘It is not the form of the action that gives *405 the right to the jury to give punitory damages, but the moral culpability of the defendant" ( Id. at 404-405).
The Court has found that the Defendant intentionally mislabeled a food additive to ensure its sale to an unsuspecting party. The law is not silent on the necessity for accurate description of food products. "When the buying public is protected by reliable labeling, it has faith and confidence in the merchandise bought. This simplifies ready purchase and promotes the salability of goods" ( Purofied Down Prod. Corp. v. Nat'l Ass'n of Bedding Manufacturers , 201 Misc. 149, 154-55, 105 N.Y.S.2d 132, 137-38 [Sup. Ct. NY Co. 1951] ). "Surely, it is too fundamental to require elaboration that the public welfare demands that consumers be properly informed as to the type and quality of the food they eat and that they not be mulcted by gross misrepresentations" ( Miltenberg & Samton, Inc. v. Mallor , 1 AD2d 458, 461-62, 151 N.Y.S.2d 748, 751 [1st Dept 1956] ).
This sentiment is simply expressed in the case whose latin admonition begins our decision, Church v. Proctor when the learned Court stated "Humanity is entitled to know what it buys and consumes" ( supra at 245).
That a misidentified food additive should concern the Court beyond the adjudication of the rights of plaintiff and defendant is demonstrated by the late Judge Traynor's concurrence in Escola v. Coca Cola Bottling Co. of Fresno , 24 Cal.2d 453, 462, 150 P.2d 436, 441 (1944), "... it is to the public interest to discourage the marketing of products having defects that are a menace to the public" (see Randy Knitwear, Inc. v. Am. Cyanamid Co. , 11 NY2d 5, 11, 226 N.Y.S.2d 363 [1962] ).
The Defendant's position was that of a supplier to a supplier (Dulcette) to the manufacturer (Raritan) of a product (energy drinks) that would then be supplied to the public. Since the Sucralose is a substance that was known to be intended for human use, MTC's degrees of removal from the purchasing public is of no significance. It acted without regard to the possible consequences of its adulterated product being ingested by unsuspecting consumers. Such fraudulent behavior can only be considered egregious and directed at the public. Accordingly punitive damages are warranted and shall be imposed.
"Imposing exemplary damages on the corporation when its agent commits intentional fraud creates a strong incentive for vigilance by those in a position to guard substantially against the evil to be prevented" ( Pac. Mut. Life Ins. Co. v. Haslip , 499 U.S. 1, 14, 111 S. Ct. 1032, 1041, 113 L. Ed. 2d 1 [1991], citing Louis Pizitz Dry Goods Co. v. Yeldell , 274 U.S. 112, 116, 47 S.Ct. 509, 510, 71 L.Ed. 952 [1927] ).
MTC's conduct could have had catastrophic consequences and this Court is tasked with crafting an award "to punish and deter others from acting in a similar manner" ( Laurie Marie M. v. Jeffrey T.M. , 159 AD2d 52, 58, 559 N.Y.S.2d 336, 340 [2nd Dept 1990], aff'd sub nom. Laurie Marie M. v. Jeffery T.M. , 77 NY2d 981, 571 N.Y.S.2d 907 [1991] citing Hartford Acc. & Ind. Co. v. Village of Hempstead , 48 NY2d 218, 226, 422 N.Y.S.2d 47 [1979] ; Restatement 2d of Torts § 908 ).
Applying this criteria, it is essential for the Defendant to lose all the "benefit of the bargain" it gained from the transaction with Dulcette. MTC must not be able to apply a cost-benefit analysis and decide that it can repeatedly mislabel its products to avoid the cost of testing same. At the same time, such an award to Plaintiff must not appear so excessive "as to show by its very exorbitancy that it was actuated by passion" ( Nardelli v. Stamberg , 44 NY2d 500, 504, 406 N.Y.S.2d 443 [1978] citing 1 Clark, New York Law of Damages , § 56, p. 102; accord Restatement of Torts, Comment d, § 908 ; 14 N.Y.Jur., Damages, § 188] ).
The evidence at this trial demonstrates that the Defendant received $99,000.00 from the Plaintiff for its product. This must be rendered up, and more, if punitive damages are to have a salubrious effect on the Industry in particular and society in general. It is the finding of this Court that in order for MTC's example "to serve as a warning to others" and for it to receive an appropriate " punishment for gross behavior for the good of the public," punitive damages in the amount of $200,000.00 (with interest from November 1st, 2012) are fair and necessary ( Toomey v. Farley , supra at 83; see PJI Sec. 2:278).
Therefore, the Court will enter a Judgment in favor of the Plaintiff and against the Defendant for compensatory damages in the amount of $14,400.00 on its first, second and third causes of action and $200,000.00 as punitive damages on its fourth cause of action. This award of damages shall be with statutory interest from November 1st, 2012.
This Memorandum also constitutes the Order of the Court.
Settle judgment.