Opinion
00 Civ. 5585 (DLC).
January 3, 2001.
Bing Li, Esq., Raymond H. Wong, P.C., New York, NY, for plaintiff.
Chris X. Lin, Esq., Chen, Lin, Li Jiang, LLP, New York, NY, for defendants.
On July 27, 2000, plaintiff Xuchang Rihetai Human Hair Goods Co., Ltd. ("Human Hair"), a Chinese corporation, filed this diversity action against defendant, Hanyu International USA Inc. ("Hanyu"), a New York corporation, and defendants Chuanyu Xie ("Xie") and Hongjun Sun ("Sun"), directors and shareholders of Hanyu and citizens of New York State. On October 30, 2000, defendants moved to dismiss plaintiff's fifth cause of action, "Fraud in Inducement," for failure to state a cause of action and failure to plead with particularity, pursuant to Rules 12(b)(6) and 9(b), Fed.R.Civ.P. For the following reasons, defendants' motion to dismiss is granted.
BACKGROUND
The following facts are alleged by plaintiff and accepted as true for the purpose of deciding this motion. Between December 1998 and July 1999, plaintiff Human Hair and defendant Hanyu entered into negotiations that ultimately resulted in five contracts ("Contracts") for the sale of human hair products at a total price of $369,611.90. At least 304 cartons of human hair products were delivered in five shipments between December 1998 and April 1999. The Contracts provide that, in the event Human Hair sells Hanyu nonconforming goods, Hanyu has thirty days to assert claims concerning the quality, quantity, or weight of the goods. Defendants made no such claims within thirty days of receiving any of the five shipments and, indeed, defendants Xie and Sun repeatedly affirmed to Human Hair "that the goods sold were of conforming quality," "marketable and profitable," and requested sale of additional Human Hair products.
Defendants submitted an affidavit by defendant Xie in support of defendants' motion to dismiss. Since the motion is addressed to the face of the complaint, the affidavit has not been considered.
By September 1999, Hanyu had paid a total of $79,930.00 towards the total sale price, leaving a balance of $294,671.90. To satisfy the remaining balance, Hanyu issued five negotiable instruments payable to two of Human Hair's exporting agents, but these negotiable instruments were dishonored and, therefore, did not satisfy Hanyu's debt.
At or about the end of 1999, six months after defendants accepted plaintiff's final shipment of human hair products, defendants first informed plaintiff that the products were nonconforming. On December 1, 1999, in a written memorandum ("Memorandum"), Human Hair agreed to accept the return of the non-conforming goods and Hanyu agreed to pay the outstanding balance, credited by the value of any goods that were returned. Defendants have made no additional payments, nor have they returned any non-conforming goods to plaintiff under the terms of the Memorandum.
Human Hair's complaint asserts five causes of action, including breach of contract and fraudulent inducement. Defendants have filed a counter-claim, alleging breach of contract on the grounds that Human Hair's products contained "little or no human hair."
Defendants previously brought an action as plaintiffs in the Eastern District of New York, but withdrew that action in order to bring it as a counterclaim to this action.
DISCUSSION
Defendants' motion to dismiss plaintiff's cause of action for fraudulent inducement, filed after the close of responsive pleadings, is properly brought under Rule 12(c), rather than under Rule 12(b)(c). The standard applied to decide both types of motions, however, is the same: a court must "accept the allegations contained in the complaint as true and draw all reasonable inferences in favor of the nonmoving party . . . [and] dismiss the complaint only if `it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.'" Burnette v. Carothers, 192 F.3d 52, 56 (2d Cir. 1999) (quoting Conley v. Gibson, 355 U.S. 41, 45-46 (1957)Rule 9(b) of the Federal Rules of Civil Procedure additionally requires that "[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." An allegation of fraud must specify: "(1) those statements the plaintiff thinks were fraudulent, (2) the speaker, (3) where and when they were made, and (4) why plaintiff believes the statements fraudulent." Koehler v. Bank of Bermuda (New York) Ltd., 209 F.3d 130, 136 (2d Cir. 2000).
Because this is a diversity action, state law must govern the terms of the agreements. Hogan v. Wal-Mart Stores, Inc., 167 F.3d 781, 783 (2d Cir. 1999). To determine which state's law should apply, a federal court sitting in diversity must apply the choice of law rules of the forum state. See Klaxon Co. v. Stentor Elec. Mtg. Co., 313 U.S. 487, 496 (1941). The parties have not addressed what law applies in this case, but they have applied New York law in their briefs and thereby have consented to its application here. See American Fuel Corp. v. Utah Energy Development Co., 122 F.3d 130, 134 (2d Cir. 1997). Furthermore, in tort actions, "New York applies the law of the state with the most significant interest in the dispute," Lee v. Bankers Trust Company, 166 F.3d 540, 545 (2d Cir. 1999) (citation omitted), and New York is the state with the most significant interest in this dispute: the contracts were performed in New York, the human hair products are located in New York, and one of the parties is incorporated in New York, see White v. ABCO Engineering Corp., 221 F.3d 293, 301 (2d Cir. 2000). Therefore, New York law governs.
Under New York law, the elements of fraudulent inducement are: (1) a knowingly false representation of a material fact; and (2) detrimental reliance thereon by the defendant. See National Union Fire Ins. Co. v. Worley, 690 N.Y.S.2d 57, 61 (1st Dept. 1999). Where a fraud claim is brought alongside a breach of contract claim, the plaintiff must distinguish the two by (1) demonstrating a legal duty separate from the duty to perform under the contract, (2) demonstrating a fraudulent misrepresentation collateral or extraneous to the contract, or (3) seeking special damages caused by the misrepresentation and unrecoverable as contract damages. See Bridgestone/Firestone, Inc. v. Recovery Credit Services, Inc., 98 F.3d 13, 20 (2d Cir. 1996). Human Hair has asserted neither that defendants had a legal duty separate from their duty to perform under the contract, nor that defendants' allegedly fraudulent inducement resulted in special damages. In order to withstand defendants' motion to dismiss plaintiff must, therefore, plead facts sufficient to support a claim that defendants made fraudulent misrepresentations that were collateral or extraneous to the Contracts.
Plaintiff seeks the same amount of damages in its breach of contract and fraudulent misrepresentation claims, and its claim for punitive damages as a result of the allegedly fraudulent misrepresentation are not "special damages." See Excalibur Systems. Inc. v. Aerotech World Trade. Ltd., No. 98 Civ. 1931, 1999 WL 1281496 at *3 n. 2 (E.D.N.Y. Dec. 30, 1999).
Although "a valid fraud claim may be premised on misrepresentations that were made before the formation of the contract and that induced the plaintiff to enter the contract,"Cohen v. Koenig, 25 F.3d 1168, 1173 (2d Cir. 1994), an assertion that defendants made intentionally false statements regarding their intent to fulfill the terms of the contract does not constitute a misrepresentation collateral or extraneous to a contract. See Bridgestone/Firestone, 98 F.3d at 19. See also Transtech Electronics Pte Ltd. v. NAS Electronics, Inc., No. 98 Civ. 1209 (JGK), 2000 WL 381428, at *4, (Apr. 13, 2000); Wilmoth v. Sandor, 686 N.Y.S.2d 388, 391 (1st Dept. 1999)
Human Hair's complaint makes three assertions in support of its claim:
¶ 51. At the time when defendants contacted [Human Hair] for plaintiff's human hair products in or about October 1998, defendants knew that they were financially unable to meet their contractual obligations on the negotiated sales contract with plaintiff.
¶ 52. At the time when defendants entered into the 12/21/98 sales contract with [Human Hair], defendants had actually engaged in such a fraudulent scheme so as to induce plaintiff into agreeing with defendants in selling the goods to defendants on the payment terms of D/A.
¶ 53. By issuing the negotiable instruments at the various contract times for the specified contract prices, defendants created such an impression that defendants were unconditionally agreeing to pay or order to pay the fixed amount of money.
Plaintiff has asserted nothing more than that defendants' representations were intended to lull the plaintiff into a false sense of security that the contract would be performed. These assertions are inseparable from plaintiff's breach of contract claim and were precisely the sort of fraud claims rejected by the Second Circuit in Bridgestone/Firestone, 98 F.3d at 19.
The cases supplied by plaintiff do not support a contrary conclusion. Several of the cases cited by plaintiff do not concern the sufficiency of fraud claims when asserted alongside claims for breach of contract. See, e.g., Murray v. Xerox Corp, 811 F.2d 118 (2d Cir. 1987) (promises to an employee regarding promotion and transfer). In the other cases cited by plaintiff, the fraudulent representations at issue concerned matters that were collateral to the contracts signed by the parties. See e.g.,Hargrave v. Oki Nursery, Inc., 636 F.2d 897, 899 (2d Cir. 1980);Deerfield Communications Corporation v. Chesebrough-Ponds, Inc., 68 N.Y.2d 954, 956 (1986). Human Hair's allegations that defendants never intended to fulfill its obligations under the Contracts are insufficient as a matter of law to sustain a cause of action for fraudulent inducement alongside a claim for breach of contract.
CONCLUSION
Defendants' motion to dismiss plaintiff's cause of action for fraudulent inducement is granted. Any motion to amend in order to re-plead this cause of action must be made by January 19, 2001.
SO ORDERED: