WHITE WINSTON SELECT ASSET FUNDS, LLC v. INTERCLOUD SYSTEMS, INC.
OPINION filed. Signed by Judge Freda L. Wolfson on 8/19/2014. (mmh)
*NOT FOR PUBLICATION*
UNITED STATES DISTRICT COURT
DISTRICT OF NEW JERSEY
WHITE WINSTON SELECT ASSET FUNDS,
Civil Action No. 13-7825(FLW)
INTERCLOUD SYSTEMS, INC.,
WOLFSON, United States District Judge:
This matter comes before the Court upon a Complaint filed by Plaintiff White Winston
Select Asset Funds, LLC (“WWSAF” or “Plaintiff”) seeking damages against Defendant
InterCloud Systems, Inc. (“InterCloud” or “Defendant”) for allegedly breaching contractual
obligations between the two parties related to a financing arrangement. In particular, Plaintiff
asserts claims of: (1) breach of contract; (2) breach of the implied duty of good faith and fair
dealing; and (3) promissory estoppel. Defendant moves to dismiss the Complaint pursuant to
Federal Rule of Civil Procedure (12)(b)(6) for failure to state a claim upon which relief can be
granted. In that regard, Defendant argues that Plaintiff’s claims fail because there is no binding,
enforceable agreement between the parties. For the following reasons, Defendant’s Motion to
Dismiss is granted.
In or about May 2013, WWSAF and InterCloud entered into negotiations regarding a
proposed secured financing (the “Financing”), whereby WWSAF would invest up to five million
dollars in InterCloud to be advanced towards redemption of outstanding shares of InterCloud’s
preferred stock and general working capital. See Complaint at ¶¶ 7-8. On July 24, 2013,
InterCloud agreed to and accepted a “Term Sheet” prepared by WWSAF outlining the principal
terms of the proposed secured financing. Id. at 1. Under the Term Sheet, InterCloud was to issue
WWSAF a senior secured convertible debenture (the “Debenture”) with a term of one year in the
amount of five million dollars. Id. at ¶ 9.
In that connection, the particular provisions of the Term Sheet relevant to the present action
are as follows. First, following the proposed offer and sale of InterCloud’s common stock pursuant
to a Registration Statement on Form S-1 (the “Offering”), WWSAF would have the right to convert
the Debenture into shares of InterCloud’s common stock at a premium price; in the event that the
Offering did not close, WWSAF would still have the right to convert the Debenture into shares of
InterCloud’s common stock at fixed price. Id. at ¶ 13. Second, as a condition precedent to the
Financing, WWSAF was required to enter into an inter-creditor agreement with MidMarket
Capital Partners, LLC (“MidMarket”). Id. at ¶ 20. 2 Third, the Term Sheet included a “Termination
In reviewing this motion to dismiss, factual allegations are taken from Plaintiff’s
Complaint, and those exhibits attached to the Complaint, including the Term Sheet discussed
herein, and are assumed to be true. Pension Benefit Guar. Corp. v. White Consol. Indus., 998 F.2d
1192, 1196 (3d Cir. 1993) (noting that on motion to dismiss, court may consider undisputedly
authentic documents that relate to the claims in the complaint).
At the time the Term Sheet was drafted, WWSAF had already entered into discussions with
MidMarket and had obtained MidMarket’s agreement in principal to the terms of the intercreditor
agreement prior to InterCloud’s acceptance of the Term Sheet. Id. at ¶ 21. InterCloud was aware
of the negotiations between WWSAF and MidMarket, and InterCloud had also obtained
MidMarket’s agreement in principal to the terms of the intercreditor agreement prior to executing
the Term Sheet. Id. at ¶¶ 22-23.
Date” that stipulated that the contemplated agreement between the parties “shall terminate upon
the earlier of the following: (a) a date which is thirty days (30) after [InterCloud] shall have
provided [WWSAF] by written notice that it does not wish to proceed with the Financing; or (b)
November 15, 2013.” Term Sheet, ¶ 22; Complaint, ¶ 24. The Term Sheet further provided that
all obligations of the parties would be deemed null and void as of the Termination Date, with the
exception of Sections 17(d), 18, and 19. Term Sheet, ¶ 22; Complaint, ¶ 24. Fourth, and in relation
to the Termination Date, the Term Sheet contained a break-up fee provision in Paragraph 17(d),
which required InterCloud to pay WWSAF “if, within 45 days of the Termination Date, WWSAF
was prepared to close the Financing under substantially the same terms and conditions as set forth
[in the Term Sheet], but InterCloud failed to close with WWSAF because InterCloud arranged
financing through another source.” Complaint, ¶ 25. In that event, InterCloud was required to pay
WWSAF a break-up fee as follows:
(i) if [InterCloud] closes the Offering within such 45 day period, then InterCloud
shall pay WWSAF the sum of … $100,000.00; or (ii) if [InterCloud] closes with
any other lender, investor, or other party (separate from a closing under the S-1
Registration) within such 45 days, then [InterCloud] shall pay [WWSAF] . . .
$500,000.00. In the event both (i) and (ii) of the preceding sentence applies,
[InterCloud] shall pay a Break-Up Fee of $500,000. The Break-Up Fee shall be
immediately due and payable by InterCloud to WWSAF.
Term Sheet at ¶ 17(d). Additionally, Paragraphs 18 (the “Reimbursement Provision”) and 19 of
the Term Sheet, which also survived the Termination Date, obligated InterCloud to fully reimburse
WWSAF for “any and all legal or other expenses” incurred by WWSAF in connection with the
proposed Financing, as well as expenses incurred in the collection of amounts due to WWSAF
pursuant to the Term Sheet if the proposed Financing did not close. Complaint, ¶¶ 31-32.
Following the execution of the Term Sheet, at all relevant times, including through the
Termination Date, WWSAF was willing and prepared to close the Financing under substantially
the same terms and conditions as set forth in the Term Sheet. Id. at ¶¶ 33, 35. Indeed, throughout
the summer and fall of 2013, WWSAF diligently prepared to close the Financing by working in
good faith with InterCloud, and neither InterCloud nor WWSAF ever served written notice that
either party did not wish to proceed with the Financing. Id. at ¶ 34, 36.
On or about November 5, 2013, InterCloud closed the Offering, triggering WWSAF’s
rights under the Term Sheet. Id. at ¶¶ 13, 37. However, in September, 2013, and without
WWSAF’s knowledge, InterCloud entered into an agreement with PNC Bank, N.A. (“PNC”),
which provided InterCloud with a revolving credit facility in a principal amount of up to
$10,000,000.00 (the “PNC Facility”). Id. at ¶ 38. The PNC Facility, which is secured by
substantially all of InterCloud’s assets and the assets of InterCloud’s subsidiaries, made it
unnecessary for InterCloud to close the Financing with WWSAF. Id. at ¶¶ 39-40. In a parallel
agreement, InterCloud entered into an amendment to its loan agreement with MidMarket without
informing WWSAF, through which InterCloud obtained MidMarket’s consent to grant PNC a
senior security interest in InterCloud’s assets. Id. at ¶ 41. InterCloud’s amendment of its loan
agreement with MidMarket precluded WWSAF from entering into the intercreditor agreement
with Midmarket on the terms in the Term Sheet. Id. at ¶ 42. Subsequently, on or about December
13, 2013, InterCloud completed the sale of convertible debentures within forty-five days of the
Termination Date, without any involvement by WWSAF. Id. at ¶¶ 45-46. In other words,
InterCloud’s agreement with PNC and the sale of debentures negated the contemplated Financing
with WWSAF. Id. at ¶ 47.
Because WWSAF was prepared to go through with the Financing, WWSAF demanded,
via letter dated November 15, 2013, from InterCloud a break-up fee in the amount of $100,000,
pursuant to the Term Sheet as a result of the closing of the Offering on November 5, 2013, and an
additional break-up fee in the amount of $500,000 as a result of InterCloud’s consummation of the
PNC Facility, the grant to PNC of a senior security interest in InterCloud’s assets, and the sale of
its debentures. Id. at ¶¶ 48-50. In response, InterCloud, by letter dated November 24, 2013,
refused to pay any break-up fee. Id. at ¶ 51. Thereafter, WWSAF filed this action in December,
2013, asserting claims for breach of contract, breach of the duty of good faith and fair dealing, and
promissory estoppel. InterCloud subsequently filed the instant motion to dismiss for failure to
state a claim upon which relief can be granted.
STANDARD OF REVIEW
When reviewing a motion to dismiss on the pleadings, courts “accept all factual allegations
as true, construe the complaint in the light most favorable to the plaintiff, and determine whether,
under any reasonable reading of the complaint, the plaintiff may be entitled to relief.” Phillips v.
County of Allegheny, 515 F.3d 224, 233 (3d Cir. 2008) (citation and quotations omitted). In Bell
Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), the Supreme Court clarified the 12(b)(6) standard.
The factual allegations set forth in a complaint “must be enough to raise a right to relief above the
speculative level.” Id. at 555. As the Third Circuit has stated, “[t]he Supreme Court’s Twombly
formulation of the pleading standard can be summed up thus: ‘stating . . . [a] claim requires a
complaint with enough factual matter (taken as true) to suggest’ the required element. This ‘does
not impose a probability requirement at the pleading stage,’ but instead ‘simply calls for enough
facts to raise a reasonable expectation that discovery will reveal evidence of’ the necessary
element.” Phillips, 515 F.3d at 234 (quoting Twombly, 127 U.S. at 556); see also Covington v.
Int’l Ass’n of Approved Basketball Officials, 710 F.3d 114, 118 (3d Cir. 2013) (“[A] claimant does
not have to ‘set out in detail the facts upon which he bases his claim.’ . . . The pleading standard
‘is not akin to a ‘probability requirement,” . . . to survive a motion to dismiss, a complaint merely
has to state a ‘plausible claim for relief.’” (Citations omitted.)).
In affirming that Twombly’s standards apply to all motions to dismiss, the Supreme Court
explained several principles. First, “the tenet that a court must accept as true all of the allegations
contained in a complaint is inapplicable to legal conclusions.” Ashcroft v. Iqbal, 556 U.S. 662,
663 (2009). Second, “only a complaint that states a plausible claim for relief survives a motion to
dismiss.” Id. Therefore, “a court considering a motion to dismiss can choose to begin by
identifying pleadings that, because they are no more than conclusions, are not entitled to the
assumption of truth.” Id. at 679. Ultimately, “a complaint must do more than allege the plaintiff’s
entitlement to relief. A complaint has to ‘show’ such an entitlement with its facts.” Fowler v. U
PMC Shadyside, 578 F.3d 203, 211 (3d Cir. 2009). However, “a district court ruling on a motion
to dismiss may not consider matters extraneous to the pleadings . . . [although a] limited exception
exists for documents that are integral to or explicitly relied upon in the complaint.” W. Penn
Allegheny Health Sys., Inc. v. U PMC, 627 F.3d 85, 97 n.6 (3d Cir. 2010) cert. denied, 132 S.Ct.
98 (2011) (citation and internal quotation marks omitted).
WWSAF’s Complaint raises several claims arising from InterCloud’s actions following
the execution of the Term Sheet. In Count I, WWSAF brings a breach of contract claim against
InterCloud, asserting that the Term Sheet constitutes a binding enforceable agreement that
InterCloud breached. Id. at ¶ 52-68. Within that claim, WWSAF first asserts that the break-up
fee, as set forth in Paragraph 17(d) of the Term Sheet, survived the Termination Date as a valid
and enforceable obligation. Id. at ¶¶ 54-55. WWSAF claims that because of InterCloud’s
agreement with PNC and the sale of the its debentures, InterCloud failed to close the Financing
with WWSAF. Id at ¶¶ 56-58. As a result, WWSAF claims that InterCloud was and is required
to pay WWSAF the $500,000 break-up fee, which InterCloud has failed and refused to do, despite
WWSAF’s demands. Id. at 60-61. Second, WWSAF claims that InterCloud failed to reimburse
WWSAF for expenses, pursuant to Paragraph 18 of the Term Sheet. Id. at ¶ 62-63. Specifically,
WWSAF contends that it incurred approximately $33,000 in expenses, and that InterCloud has
breached its obligation to reimburse WWSAF for those expenses. Id. at ¶¶ 65-68.
Under Count II, WWSAF avers that InterCloud is also liable for breaching the implied duty
of good faith and fair dealing. Id. at ¶¶ 69-73. In particular, WWSAF claims that “InterCloud
owed WWSAF an implied duty of good faith and fair dealing separate from InterCloud’s
obligations under the express terms of the Term Sheet,” and that the parties failed to close the
Financing as a result of InterCloud’s failure to deal with WWSAF in good faith. Id at ¶¶ 70-73.
Lastly, in Count III, WWSAF brings a promissory estoppel claim, alleging that InterCloud
promised to reimburse WWSAF’s expenses and costs pursuant to Paragraph 18 of the Term Sheet,
and that WWSAF reasonably relied upon this promise. Id. at ¶¶ 75-78. WWSAF argues that
InterCloud understood that this promise, and others made in the Term Sheet, “would induce
WWSAF to devote time and resources, and take steps and incur significant costs to proceed with
the Financing with the expectation that the Financing would close and that WWSAF would be
reimbursed its expenses.” Id. at ¶ 76. Accordingly, WWSAF claims that it has suffered losses as
a result of InterCloud’s failure and refusal to close the Financing with WWSAF and that InterCloud
must reimburse WWSAF for the expenses incurred in connection with preparing for the Financing.
Id. at ¶¶ 78-80.
InterCloud moves to dismiss all of WWSAF’s claims pursuant to Federal Rule of Civil
Procedure (12)(b)(6) for failure to state a claim upon which relief could be granted as follows: (1)
WWSAF’s breach of contract claim must be dismissed because the Term Sheet is a non-binding
and unenforceable agreement; (2) WWSAF’s claim for breach of the implied duty of good faith
and fair dealing must be dismissed as duplicative of the breach of contract claim; and (3)
WWSAF’s claim for promissory estoppel must be dismissed as duplicative of the breach of
contract claim. I address each of these arguments in turn.
Breach of Contract Claim
“To state a claim in federal court for breach of contract under New York law, 3 a complaint
need only allege (1) the existence of an agreement, (2) adequate performance of the contract by
the plaintiff, (3) breach of contract by the defendant, and (4) damages.” Harsco Corp. v. Segui,
91 F.3d 337, 348 (2d Cir. 1996). “[T]he words employed in the agreement must be given their
plain meaning, and the agreement must be construed to accord a meaning and purpose to each of
its parts.” EQT Infrastructure Ltd. v. Smith, 861 F. Supp. 2d 220, 226 (S.D.N.Y. 2012) (quoting
Siebel v. McGrady, 566 N.Y.S.2d 736, 738 (3d Dep’t 1991)) (internal quotation marks omitted).
Because the parties agree that they did not execute any final agreement for the Financing, the issue
is whether the Term Sheet constitutes a binding preliminary agreement.
“Parties to proposed commercial transactions often enter into preliminary agreements,
which may provide for the execution of more formal agreements.” Adjustrite Sys., Inc. v. GAB
Bus. Serv., Inc., 145 F.3d 543, 547 (2d Cir. 1998). “When they do so and the parties fail to execute
a more formal agreement, the issue arises as to whether the preliminary agreement is a binding
contract or an unenforceable agreement to agree.” Id. Here, the parties dispute the enforceability
of the break-up fee and the reimbursement provision in the Term Sheet. Plaintiff asserts that the
The parties agreed that the Term Sheet would be governed by New York law. See Term
Sheet, ¶ 10.
Term Sheet was an enforceable preliminary agreement, while Defendant argues that the Term
Sheet was an unenforceable agreement to agree.
Under New York law, “[o]rdinarily, where the parties contemplate further negotiations and
the execution of a formal instrument, a preliminary agreement does not create a binding contract.”
Adjustrite Sys., Inc. at 548. However, “in some circumstances . . . preliminary agreements can
create binding obligations.” Id. “The extent of the obligations created depends on the preliminary
agreement in question, though, in general, ‘binding preliminary agreements fall into one of two
categories.’” Brown v. Cara, 420 F.3d 148, 153 (2d Cir. 2005) (quoting Adjustrite Sys., Inc., 145
F.3d at 548). The first type of preliminary agreement (“Type I”) “occurs when the parties have
reached complete agreement (including the agreement to be bound) on all the issues perceived to
require negotiation.” Teachers Ins. & Annuity Ass’n of Am. v. Tribune Co., 670 F. Supp. 491, 498
(S.D.N.Y. 1987). “Such an agreement is preliminary only in form—only in the sense that the
parties desire a more elaborate formalization of the agreement.” Id; Adjustrite Sys., Inc., 145 F.3d
at 548. Therefore, a Type I preliminary agreement “binds both sides to their ultimate contractual
objective in recognition that, ‘despite the anticipation of further formalities,’ a contract has been
reached.” Adjustrite Sys., Inc., 145 F.3d at 548 (quoting Tribune Co., 670 F. Supp. at 498); see
Brown, 420 F.3d at 154 (“The hallmark of a Type I agreement is that the parties have agreed to all
necessary elements of the contract and are, therefore, bound to the ultimate objective despite the
fact that a more formal or elaborate writing has yet to be produced.”). Consequently, “a party may
lawfully demand performance of the transaction even if no further steps have been taken following
the making of the ‘preliminary’ agreement.” Tribune Co., 670 F. Supp. at 498; Adjustrite Sys.,
Inc., 145 F.3d at 548.
The second type of preliminary agreement—sometimes called a preliminary
commitment—recognized by New York courts (“Type II”) is “binding only to a certain degree,”
in that it “expresses mutual commitment to a contract on agreed major terms, while recognizing
the existence of open terms that remain to be negotiated.” Adjustrite Sys., Inc., 145 F.3d at 548;
Tribune Co., 670 F. Supp. at 498. Unlike Type I preliminary agreements, Type II preliminary
commitments only obligate the parties “to negotiate the open issues in good faith in an attempt to
reach the alternate objective within the agreed framework.” Tribune Co., 670 F. Supp. at 498.
Thus, where a Type II preliminary commitment exists, a party may lawfully demand that “his
counterparty negotiate the open terms in good faith toward a final contract incorporating the agreed
terms.” Id. In sum, Type II preliminary agreements do not commit the parties to “their ultimate
contractual objective,” and merely require the parties to negotiate in good faith. Adjustrite Sys.,
Inc., 145 F.3d at 548; Tribune Co., 670 F. Supp. at 498 (explaining that the obligation to negotiate
in good faith “bar[s] a party from renouncing the deal, abandoning the negotiations, or insisting
on conditions that do not conform to the preliminary agreement.”).
Here, the parties agree that the Term Sheet was not a Type I preliminary agreement, see Pl.
Opp., 17; however, Plaintiff argues that the Term Sheet was a Type II preliminary commitment
that obligated the parties to negotiate in good faith. In that regard, Plaintiff contends that
Defendant failed to negotiate in good faith, and, as a result, that Defendant is required pay the
break-up fee and reimburse Plaintiff for expenses incurred in preparation for the Financing. See
id. at 17-18. Plaintiff argues that while the ultimate goal of Financing was a non-binding provision,
the break-up fee provision in paragraph 17(d) of the Term Sheet was a binding obligation in the
preliminary agreement. In that regard, Plaintiff relies on the court’s opinion in FCS Advisors, Inc.,
v. Fair Finance Co., Civ. No. 07-6456, 2009 WL 1403869 (S.D.N.Y. May 19, 2009), for the
proposition that contracts may include both binding and non-binding parts.
In general, New York courts look to five factors when considering whether a Type II
preliminary agreement exists:
(1) whether the intent to be bound is revealed by the language of the
agreement; (2) the context of the negotiations; (3) the existence of open
terms; (4) partial performance; and (5) the necessity of putting the
agreement in final form, as indicated by the customary form of such
Brown v. Cara, 420 F.3d at 157; Tribune Co., 670 F. Supp. 499-503; Arcadian Phosphates, Inc.
v. Arcadian Corp, 884 F.2d 69, 72 (2d Cir. 1989). Furthermore, in determining whether a Type II
agreement exists, the intention of the parties as revealed by the language of the agreement is of
primary importance. Adjustrite Sys., Inc., 145 F.3d at 548-49; EQT Infrastructure Ltd. v. Smith,
861 F. Supp. 2d 220, 229 (S.D.N.Y. 2012) (“The first factor, the intent to be bound as evidenced
by the language of a preliminary agreement, is the most important.”). “Thus, ‘if the language of
the agreement is clear that the parties did not intend to be bound, the Court need look no further.’”
Singer v. Xipto Inc., 852 F. Supp. 2d 416, 424 (S.D.N.Y. 2012) (quoting Cohen v. Lehman Bros.
Bank, 273 F. Supp. 2d 524, 528 (S.D.N.Y. 2003)); see Beekman Inv. Partners, L.P., Civ. No. 058746, 2006 WL 330323, at *7 (S.D.N.Y. Feb. 14, 2006) (holding Type II preliminary agreement
did not exist where memorandum of intent included clear expression of intent not to be bound);
Network Enterprises, Inc. v. APBA Offshore Prod., 427 F. Supp. 2d 463, 483 (S.D.N.Y. 2006)
(“The obligation to negotiate in good faith that a Type II preliminary agreement would otherwise
impose upon a party may, of course, be negated by a sufficiently clear expression that the parties
are not bound to each other in any way until a formal written contract is executed by both.”).
In this case, a plain reading of the disclaimer language in the Term Sheet evidences a clear
intent not to be bound. In fact, the parties explicitly stated their intention not to be bound by the
Term Sheet in the disclaimer provision:
This Term Sheet is intended for use only as the basis for continued discussion
between the company and the investor, and does not constitute a commitment letter,
an agreement to enter into a commitment letter, or an offer to enter into a
commitment letter and shall not be deemed to obligate the investor, its affiliates,
partners, or principals to close the financing under any terms or circumstances.
Term Sheet, at 10. Additionally, the Term Sheet specifically contemplates “continued discussions
between the company and investor,” and the parties recognized that the Term Sheet served as a
mere summary of “the principal terms of a proposed secured financing.” Term Sheet, at 1, 10
(emphasis added). Finally, the Term Sheet in this case is clearly distinguishable from the letter of
intent in FCS Advisors. In FCS Advisors, the letter of intent “expressly provide[d] that it [was]
not a legally binding contract except for sections 6 through 12. FCS Advisors, Inc., 2009 WL
1403869 at *2 (emphasis added). Conversely, here, neither the reimbursement provision nor the
break-up fee contain explicit language stating that those provisions were binding or otherwise
enforceable. Accordingly, this Court finds that the Term Sheet as a whole was not a Type II
preliminary commitment, and thus Plaintiff cannot obligate Defendant to any of the provisions in
the Term Sheet, including the break-up fee provision. Cf. id.
Even assuming arguendo that the Term Sheet could be interpreted as a Type II preliminary
agreement, this would still not permit Plaintiff to impose the break-up fee obligation on Defendant.
As explained above, the sole obligation that arises under a Type II preliminary agreement is the
obligation between the parties Defendant to negotiate in good faith. Adjustrite Sys., Inc., 145 F.3d
at 548 (explaining that Type II preliminary agreements do not commit the parties any “ ultimate
contractual objective,” and merely require the parties to negotiate in good faith). Thus, even
assuming that Defendant was obligated, but failed, to negotiate in good faith, Plaintiff’s argument
that the penalty for Defendant’s breach of that obligation is found in the non-binding Term Sheet
is not supported by law or reason. See id. Put differently, Plaintiff cannot argue, as it does, on the
one hand that the Term Sheet as a whole was non-binding—and, significantly, nowhere contained
any language regarding specific provisions being binding—but that Defendant’s failure to
negotiate in good faith triggered the break-up fee/reimbursement provisions. Plaintiff’s argument,
taken to its logical end, would eviscerate the difference between preliminary binding and nonbinding agreements established under New York law, as it would allow a party to get the benefit
of selectively enforcing an otherwise non-binding provision to the detriment of the other party. In
sum, under the Term Sheet, Plaintiff “only had to the right to demand that [Defendant] negotiate
the terms of the [Financing] in good faith,” and did not obligate Defendant to any specific term or
provision, including the break-up fee and reimbursement provision. See Bear Stearns Inv. Prod.,
Inc. v. Hitachi Auto. Prod. (USA), Inc., 401 B.R. 598, 628 (S.D.N.Y. 2009). Accordingly, because
there is no enforceable agreement in this case, Plaintiff’s breach of contract claim is dismissed.
Duty of Good Faith and Fair Dealing
In Count II, Plaintiff brings a claim for breach of the implied duty of good faith and fair
dealing, arguing that Defendant owed Plaintiff duties separate and independent from those under
the breach of contract claim, and that Plaintiff violated those duties. First, Plaintiff claims that the
break-up fee expressly provided that Defendant would be liable to Plaintiff for entering into
another financing arrangement within 45 days of the Termination Date, and that Defendant did
enter into such agreements while Plaintiff was performing its due diligence. Second, Plaintiff cites
several acts of Defendant that were allegedly made in bad faith, including Defendant’s failure to
disclose to Plaintiff the intended sale of its debentures, Defendant’s failure to disclose its
negotiations with MidMarket, and other acts of Defendant allegedly undertaken in secrecy and
intentionally withheld from Plaintiff.
In response, Defendant argues that Plaintiff’s cause of action for breach of the implied duty
of good faith and fair dealing must be dismissed because the Term Sheet was not a binding
contract, and Defendant’s alleged conduct is not separate from Plaintiff’s breach of contract claim.
Defendant asserts that New York law “does not recognize a separate cause of action for breach of
the implied covenant of good faith and fair dealing when a breach of contract claim, based upon
the same facts, is also pled.” Def. Br., 16. In sum, Defendant argues that Plaintiff’s claim for
breach of the implied duty of good faith and fair dealing is duplicative of the breach of contract
claim, and, as a result, must be dismissed.
“There is implicit in all contracts . . . an implied covenant of fair dealing and good faith.”
Van Walkenburgh, Nooger & Neville, Inc. v. Hayden Publ’g Co., 30 N.Y.3d 34, 45 (1972). See
Dalton v. Educ. Testing Serv., 87 N.Y.2d 384, 389 (1995). “Integral to a finding of a breach of
the implied covenant is a party’s action that directly violates an obligation that may be presumed
to have been intended by the parties.” M/A-COM Sec. Corp. v. Galesi, 904 F.2d 134, 136 (2d Cir.
1990). Thus, a claimant’s breach of the implied covenant of good faith and fair dealing claim must
arise out of an agreement between the parties. See Bank of N.Y. v. Sasson, 786 F.Supp. 349, 354
(S.D.N.Y. 1992) (“[T]he implied covenant of good faith and fair dealing is limited to performance
under a contract and does not encompass future dealings or negotiations between the parties.”);
Broder v. Cablevision Sys. Corp., 418 F.3d 187, 198-99 (2d Cir. 2005) (“The implied covenant
can only impose an obligation consistent with other mutually agreed upon terms in the contract.”
(Citations omitted.)). Accordingly, the implied covenant “does not ‘add . . . to the contract a
substantive provision not included by the parties.’” Broder, 418 F.3d at 199 (quoting Green v.
Quantum Chem. Corp., 832 F. Supp. 728, 732 (S.D.N.Y. 1993).
I have already found that the Term Sheet is not a binding preliminary agreement, and thus
Plaintiff’s implied covenant claim fails for lack of a valid and binding contract from which such a
duty would arise. FCOF UB Securities v. MorEquity, Inc., 663 F. Supp. 2d 224, 231-32 (S.D.N.Y.
2009) (applying New York law); see also Beekman Inv. Partners, L.P. v. Alene Candles, Inc., Civ.
No. 05 Civ. 8746, 2006 WL 330323, at *7 (S.D.N.Y. Feb. 14, 2006). “A cause of action for breach
of an implied duty of good faith and fair dealing . . . [is] properly dismissed for lack of a valid and
binding contract from which such a duty would arise.” American-European Art Assocs., Inc. v.
Trend Galleries, Inc., 227 A.D.2d 170, 641 N.Y.S.2d 835, 836 (1st Dep’t 1996). Accordingly,
Plaintiff’s claim for breach of the implied covenant of good faith and fair dealing claim is
Moreover, Plaintiff’s implied covenant claim must be dismissed even if, arguendo, the
Term Sheet constitutes a binding agreement. New York law “does not recognize a separate cause
of action for breach of the implied covenant of good faith and fair dealing when a breach of contract
claim, based upon the same facts, is also pled.” Harris v. Provident Life and Accident Ins. Co.,
310 F.3d 73, 81 (2d Cir. 2002). It is clear from the Complaint that Plaintiff’s claim for breach of
the implied covenant of good faith and fair dealing is based on the same predicate facts underlying
Plaintiff’s breach of contract claim. Although Plaintiff contends that Defendant owed Plaintiff an
implied duty separate and independent of Defendant’s obligations under the Term Sheet, this
aspect of Plaintiff’s claim is pled in a conclusory fashion, with no additional facts to substantiate
it. Accordingly, even assuming that the Term Sheet constitutes a binding preliminary agreement—
which, for the reasons above, I find that it does not—I would nevertheless dismiss Plaintiff’s claim
for breach of the implied duty of good faith as being duplicative of its contract claim. See In re
Houbigant, Inc. v. ACB Mercantile, Inc., 914 F. Supp. 964, 989 (S.D.N.Y. 1995) (explaining that
claim for breach of the implied covenant “will be dismissed as redundant where the conduct
allegedly violating the implied covenant is also the predicate for a claim for breach of covenant of
an express provision of the underlying contract”).
In Count III, Plaintiff brings a claim for promissory estoppel. In that connection, Plaintiff
argues that Defendant made a clear and definite promise to reimburse Plaintiff for the expenses
incurred in preparation for the Financing. Furthermore, Plaintiff alleges that Defendant understood
that this promise would “induce WWSAF to devote time and resources, and take steps and incur
significant costs to proceed with the Financing with the expectation that the Financing would close
and WWSAF would be reimbursed for its expenses.” Complaint at ¶ 76. Plaintiff claims that
Defendant neither closed the Financing nor reimbursed Plaintiff, and, as a result, Plaintiff has
suffered damages. In response, Defendant argues that while Plaintiff may be able to plead a claim
for promissory estoppel in the alternative, here, Plaintiff’s claim must be denied because the
underlying basis for the claim is dependent on the Term Sheet. In that regard, Defendant argues
that Plaintiff has failed to allege any duties independent of the Term Sheet, and, therefore,
Plaintiff’s promissory estoppel claim must be dismissed as redundant of the breach of contract
“A cause of action for promissory estoppel under New York law requires the plaintiff to
prove three elements: 1) a clear and unambiguous promise; 2) reasonable and foreseeable reliance
on that promise; and 3) injury to the relying party as a result of the reliance.” Kaye v. Grossman,
202 F.3d 611, 615 (2d Cir. 2000); see Readco, Inc. v. Marine Midland Bank, 81 F.3d 295, 301 (2d
Cir.1996). “Because it is a quasi-contractual claim, however, promissory estoppel generally
applies only in the absence of a valid and enforceable contract.” 5 Kwon v. Yun, 606 F. Supp. 2d
344, 368 (S.D.N.Y. 2009). In this case, having determined that the Term Sheet is not a valid and
For this reason, Defendant’s contention that Plaintiff’s promissory estoppel claim must be
dismissed as “duplicative” of the breach of contract claim is misplaced.
enforceable contract, the issue is whether Plaintiff has adequately pled the elements for promissory
Review of the Complaint reveals that Plaintiff’s promissory estoppel claim must be
dismissed. Plaintiff’s claim is based solely on the provisions set forth within the Term Sheet. As
noted above, the disclaimer language at the end of the Term Sheet clearly evinces that all promises
and provisions within the Term Sheet were contingent upon the signing of a future contract. Thus,
Plaintiff could not reasonably rely on the Term Sheet as an “unambiguous promise” in support of
a promissory estoppel claim. See, e.g., Reprosystem, B.V. v. SCM Corp., 727 F.2d 257, 265 (2d
Cir. 1984) (dismissing promissory estoppel claim for lack of a clear and unambiguous promise
where “[t]he negotiations of the parties as reflected in the draft agreements made it clear that the
obligations of both SCM and Muller were contingent upon execution . . . of the formal contract
documents.”); R.G. Group, Inc. v. Horn & Hardart Co., 751 F.2d 69, 79 (2d Cir. 1984) (holding
that because the parties negotiations made it clear that any promise or agreement was conditional
upon the signing of a written contract, there was never a clear or unambiguous promise); Frutico
S.A. de C.V., Itex, Inc. v. Bankers Trust Co., 833 F. Supp. 288, 299 (S.D.N.Y. 1993). Plaintiff does
not allege any duties on Defendant that are independent of the Term Sheet, and thus, as pled,
Plaintiff fails to state a claim for promissory estoppel claim. Accordingly, Count III of the
Complaint is dismissed.
For the foregoing reasons, the Court determines that Plaintiff fails to state a claim upon
which relief can be granted in all Counts of the Complaint. The Court therefore grants Defendant’s
motion to dismiss.
Dated: August 19, 2014
/s/ Freda L. Wolfson
Hon. Freda L. Wolfson
United States District Judge
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