Trodale Holdings LLC et al v. Bristol Healthcare Investors, L.P. et al

Filing 101

OPINION AND ORDER: re: 96 LETTER MOTION for Discovery addressed to Judge Katherine Polk Failla from Jeffrey Fleischmann dated May 29, 2018 filed by Trodale Holdings LLC, 85 MOTION to Dismiss Second Counterclaim filed by Trodale Holdings LLC . For the foregoing reasons, Plaintiff's motion to dismiss is GRANTED. The parties are reminded that the period for fact discovery has been extended to June 29, 2018, but will be extended no further. At the pretrial conference in the matter held on June 7, 2018, the Court advised the parties that it would take under advisement the parties' request for motion practice pursuant to Fed. R. Civ. P. 56 that would precede trial in the matter. The Court accepts the parties' arguments tha t summary judgment motions are likely to narrow the issues for trial and accordingly ORDERS the parties to propose a schedule for cross-motions within seven (7) days of the date of this Opinion and Order. In particular, the parties are instructed to meet and confer to discuss ways to avoid needless or duplicative briefing, as, for example, by proposing a schedule that eschews reply briefs. SO ORDERED., ( Discovery due by 6/29/2018.) (Signed by Judge Katherine Polk Failla on 6/14/2018) (ama)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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:
TRODALE HOLDINGS LLC,
:
:
Plaintiff,
:
:
v.
:
:
BRISTOL HEALTHCARE INVESTORS L.P.; :
LYNCHBURG HEALTHCARE INVESTORS, :
L.P.; DEMQUARTER HEALTHCARE
:
INVESTORS, L.P.; SALEM NURSING &
:
REHABILITATION CENTER OF REFORM,
:
INC.; DOUGLAS K. MITTLEIDER.
:
:
Defendants. :
:
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USDC SDNY
DOCUMENT
ELECTRONICALLY FILED
DOC #: _________________
DATE FILED: June 14, 2018
______________

16 Civ. 4254 (KPF)
OPINION AND ORDER

KATHERINE POLK FAILLA, District Judge 1:
This Opinion is the Court’s second to address claims arising from an
Asset Purchase Agreement (“APA”) entered into on February 6, 2014, between
Plaintiff Trodale Holdings LLC (“Plaintiff” or “Purchaser”) and Defendants
Bristol Healthcare Investors, L.P.; Lynchburg Healthcare Investors, L.P.;
DemQuarter Healthcare Investors, L.P.; and Salem Nursing & Rehabilitation
Center of Reform, Inc. (together, the “Sellers”). Execution of the APA triggered
a due diligence period, after which Plaintiff could either back out of the deal or
move forward to buy four nursing homes from Sellers for a total of
$30,600,000. Douglas K. Mittleider (together with the Sellers, “Defendants”) is

1

Fangyuan (Sophia) Song, a rising second-year student at the Benjamin N. Cardozo
School of Law and an intern in my Chambers, provided substantial assistance in
researching and drafting this Opinion.

alleged to be the owner — through a constellation of corporate entities — of the
nursing homes to be sold under the APA.
For reasons detailed previously in the Court’s November 29, 2017
Opinion and Order, the deal contemplated by the APA ultimately fell apart. See
Trodale Holdings LLC v. Bristol Healthcare Investors, L.P., No. 16 Civ. 4254
(KPF), 2017 WL 5905574, at *2-3 (S.D.N.Y. Nov. 29, 2017) (“Trodale I”).
Plaintiff tendered a Notice of Default under the APA on April 21, 2016, and this
action followed a few weeks later. After the Court granted in part and denied in
part denied Defendants’ motion to dismiss in Trodale I, Defendants filed an
Answer that included counterclaims for breach of contract and fraud. Plaintiff
now moves to dismiss Defendants’ fraud claim; for the reasons that follow, the
Court grants the motion.
BACKGROUND 2
A.

Factual Background
The APA provided that Plaintiff would purchase the assets and

underlying real estate associated with four nursing homes: (i) The Cambridge
House in Bristol, Tennessee; (ii) The Carrington in Lynchburg, Virginia; (iii) The
Stratford House in Chattanooga, Tennessee; and (iv) Reform Nursing and

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The Court draws its facts from the Second Amended Complaint (Dkt. #58 (“SAC”)) and
Defendants’ Answer, Affirmative Defenses and Counterclaims (Dkt. #81 (“Countercl.”)).
For ease of reference, the Court refers to Plaintiff’s moving brief (Dkt. #89), as “Pl. Br.”;
to Defendants’ opposition (Dkt. #90), as “Def. Opp.”; and to Plaintiff’s reply brief (Dkt.
#93), as “Pl. Reply.” Because the APA forms the basis of Plaintiff’s claims, is appended
to the SAC as an exhibit, and is integral to Defendants’ counterclaims, the Court will
consider it in resolving Defendants’ motion. Int’l Audiotext Network, Inc. v. Am. Tel. &
Tel. Co., 62 F.3d 69, 72 (2d Cir. 1995) (“The complaint is deemed to include any written
instrument attached to it as an exhibit or any statements or documents incorporated in
it by reference.” (internal quotation marks and alteration omitted)).

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Rehab in Reform, Alabama (together the “Purchased Assets”). (SAC ¶¶ 29-30).
Paragraph 4(a) of the APA provided that Plaintiff would have 75 days (the “Due
Diligence Period”) to investigate the operation and financial condition of the
Purchased Assets. (Countercl. ¶¶ 7-8). During the Due Diligence Period,
Plaintiff had the right, “at reasonable times and on reasonable prior notice to
Seller, to enter upon the Property to conduct [ ] inspections, investigations,
tests and studies as [Plaintiff] shall reasonably deem[s] necessary, including …
environmental site assessments, … physical examinations of the Property, 3 due
diligence investigations and feasibility studies.” (APA ¶ 4(a)). Plaintiff also had
the right to tour the nursing homes, to review “books and records related to the
financial condition and the operations” of the nursing homes, and “to observe
the day-to-day operations and management” of the nursing homes. (Id.).
If after completing its due diligence, “Purchaser shall not be so
satisfied[,]” and if “Purchaser notifies Seller thereof in writing on or prior to the
end of the Due Diligence Period, [the APA] shall be null and void and the Title
Company shall refund the Deposit plus any accrued interest to [Plaintiff].”
(APA ¶ 4(a)). But, “[i]f [Plaintiff] fails to give such notice to Seller upon or prior
to the expiration of the Due Diligence Period, it shall be conclusively presumed
that [Plaintiff] is satisfied with its due diligence review and this contingency
shall be deemed satisfied, [the APA] shall continue in full force and effect.”
(Id.).

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“Property” is defined in the APA to include the land, buildings, personal property and
fixtures.

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The Due Diligence Period was initially set to expire on April 22, 2014 —
75 days after the APA was signed. (Countercl. ¶ 8). At Plaintiff’s request, the
Due Diligence Period was extended numerous times, concluding on April 12,
2016. (Id. at ¶¶ 15, 17). 4 Defendant alleges that Plaintiff did indeed conduct
due diligence. (Id. at ¶ 10). For example, Plaintiff “install[ed] a representative
at … The Cambridge House, who was involved in leadership and daily
operations for approximately five [ ] months[.]” (Id. at ¶ 11).
Defendants allege that after the Due Diligence Period finally expired,
Plaintiff “did not close on the transactions[,]” “did not issue a Notice of
Default … within the extended time[,]” “did not indicate [timely] that there were
any unsatisfied conditions to closing the contemplated transactions[,]” and
“failed to deliver … the purchase price as required by the APA.” (Countercl.
¶¶ 20-24). These facts form the basis of Defendants’ breach of contract claim.
Defendants believe they are entitled to keep the earnest money deposits that
remain in escrow as damages. (Id. at ¶¶ 26-29).
Separately, Defendants bring a fraud claim. They allege that “[w]ith each
request for an extension of the Due Diligence Period,” Berel Karniol, Plaintiff’s
sole member, represented that Plaintiff: (i) “was satisfied with the information it
received from Sellers and about the subject skilled nursing home facilities”;
(ii) “had a genuine interest in the Purchased Assets and the wherewithal to
complete the transactions”; (iii) “was making good faith efforts to secure

4

Plaintiff’s pleadings indicate that it thought the extension was until April 21, 2016.
(SAC ¶ 116).

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appropriate financing and lease arrangements”; and (iv) “but needed the
additional time to complete the arrangements for its financing or … lease[.]”
(Countercl. ¶¶ 31-32). Defendants allege that these representations regarding
Plaintiff’s “present intentions, and wherewithal and efforts were material” and
“false,” and that “Karniol knew they were false[.]” (Id. at ¶¶ 33-34). Defendants
further allege that they were damaged by Karniol’s representations because the
Purchased Assets were tied up by Plaintiff from February 2014, until the
termination of the APA in April 2016; Defendants assert that these damages go
“beyond the extent of and [are] not contemplated by the liquidated damages
provision.” (Id. at ¶ 36).
B.

Procedural Background
Plaintiff filed the SAC on January 27, 2017. (Dkt. #58). The parties

appeared for a pre-motion conference with the Court on February 2, 2017, and
Defendants filed a motion to dismiss on March 10, 2017. (Dkt. #73). On
November 29, 2017, the Court granted in part and denied in part Defendants’
motion to dismiss. (Dkt. #79). Defendants answered the SAC on December 15,
2017, and denied the Plaintiff’s allegations. (Dkt. #81). In the Answer,
Defendants brought counterclaims against Plaintiff for breach of contract and
fraud. On January 24, 2018, Plaintiff filed the instant motion to dismiss
Defendants’ fraud claim under Federal Rule of Civil Procedure 12(b)(6). (Dkt.
#85, 88-89). On February 20, 2018, Defendants filed their memorandum of
law in opposition (Dkt. #90), and on March 9, 2018, briefing concluded when
Plaintiff filed its reply brief. (Dkt. #93).

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DISCUSSION
A.

Applicable Law
1.

Motions to Dismiss Under Federal Rule of Civil
Procedure 12(b)(6)

A motion to dismiss a counterclaim under Federal Rule of Civil Procedure
12(b)(6) is subject to the same standard as a motion to dismiss a complaint.
Lokai Holdings LLC v. Twin Tiger USA LLC, No. 15 Civ. 9363 (ALC), — F. Supp.
3d —, 2018 WL 739435, at *2 (S.D.N.Y. Feb. 6, 2018) (quoting Orientview
Techs. LLC v. Seven for All Mankind, LLC, No. 13 Civ. 538 (PAE), 2013 WL
4016302, at *2 (S.D.N.Y. Aug. 7, 2013)). When reviewing the sufficiency of
counterclaims, the Court is required to “draw all reasonable inferences in [the
non-moving party’s] favor, assume all well-pleaded factual allegations to be
true, and determine whether they plausibly give rise to an entitlement to relief.”
Faber v. Metro. Life Ins. Co., 648 F.3d 98, 104 (2d Cir. 2011) (internal quotation
marks omitted) (quoting Selevan v. N.Y. Thruway Auth., 584 F.3d 82, 88 (2d
Cir. 2009)). Thus, “[t]o survive a motion to dismiss, a [counterclaim] must
contain sufficient factual matter, accepted as true, to ‘state a claim to relief
that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)
(quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)).
“Where a [counterclaim] pleads facts that are merely consistent with [the
moving party's] liability, it stops short of the line between possibility and
plausibility of entitlement to relief.” Iqbal, 556 U.S. at 678 (internal quotation
marks omitted) (quoting Twombly, 550 U.S. at 557). Of importance here, “the

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tenet that a court must accept as true all of the allegations contained in a
[counterclaim] is inapplicable to legal conclusions. Threadbare recitals of the
elements of a cause of action, supported by mere conclusory statements, do
not suffice.” Id. at 678.
2.

Pleading Fraud Claims Under Federal Rule of Civil
Procedure 9(b)

State-law fraud claims brought in a diversity action must be pleaded
with particularity pursuant to Rule 9(b). Premium Mortg. Corp. v. Equifax, Inc.,
583 F.3d 103, 108 (2d Cir. 2009). Specifically, “the [claim] must: [i] specify the
statements that the plaintiff contends were fraudulent, [ii] identify the speaker,
[iii] state where and when the statements were made, and [iv] explain why the
statements were fraudulent.” Lerner v. Fleet Bank, N.A., 459 F.3d 273, 290 (2d
Cir. 2006) (internal quotation marks and citation omitted). Additionally, to
satisfy Rule 9(b), a claim must “allege facts that give rise to a strong inference
of fraudulent intent.” Berman v. Morgan Keenan & Co., 455 F. App’x 92, 95 (2d
Cir. 2012) (summary order) (internal quotation marks omitted) (quoting Acito v.
IMCERA Grp., Inc., 47 F.3d 47, 52 (2d Cir. 1995)). “The requisite ‘strong
inference’ of fraud may be established either [i] by alleging facts to show that
defendants had both motive and opportunity to commit fraud, or [ii] by alleging
facts that constitute strong circumstantial evidence of conscious misbehavior
or recklessness.” Lerner, 459 F.3d at 290-91 (internal quotation marks and
citations omitted). The pleading standard under Rule 9(b) “serves to ‘provide a
defendant with fair notice of a plaintiff's claim, to safeguard a defendant’s
reputation from improvident charges of wrongdoing, and to protect a defendant
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against the institution of a strike suit.’” Rombach v. Chang, 355 F.3d 164, 171
(2d Cir. 2004) (quoting O’Brien v. Nat’l Prop. Analysts Partners, 936 F.2d 674,
676 (2d Cir. 1991)).
B.

Analysis
1.

Defendants’ Fraud Claim Is Not Duplicative of Their Breach of
Contract Claim

The gravamen of Defendants’ counterclaim for fraud is that Plaintiff’s
representations regarding its intention to consummate the transactions
proposed under the APA induced Defendants to consent to numerous
amendments to the APA in reliance on those representations. This claim is,
more precisely, one for fraudulent inducement insofar as Defendants allege
that Plaintiff misrepresented its then-present intention to close the deal in
order to prompt Defendants to agree to extensions of the Due Diligence period.
See 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.”).
To state a claim for fraud in the inducement under New York law, a
counterclaim-plaintiff must show that: “[i] a representation of fact, [ii] which is
untrue and either known by defendant to be untrue or recklessly made,
[iii] which is offered to deceive and to induce the other party to act upon it,
[iv] and which causes injury.” PetEdge v. Garg, 234 F. Supp. 3d 477, 490

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(S.D.N.Y. 2017) (quoting Suez Equity Inv’rs, L.P. v. Toronto-Dominion Bank, 250
F.3d 87, 104 (2d Cir. 2001)).
Resolution of Plaintiff’s motion turns on the interplay between
Defendants’ fraud and breach of contract claims. “Where a fraud claim is
premised upon an alleged breach of contractual duties, and the supporting
allegations do not concern representations which are collateral or extraneous
to the terms of the parties’ agreement, a cause of action sounding in fraud does
not lie.” Cont’l Petroleum Corp. v. Corp. Funding Partners, LLC, No. 11 Civ. 7801
(PAE), 2012 WL 1231775, at *10 (S.D.N.Y. Apr. 12, 2012) (brackets and
internal quotation marks omitted) (quoting McKernin v. Fanny Farmer Candy
Shops, Inc., 574 N.Y.S.2d 58, 59 (2d Dep’t 1991)). Despite this general rule,
fraud and breach of contract claims can coexist in certain circumstances. Wall
v. CSX Transp. Inc., 471 F.3d 410, 416 (2d Cir. 2006) (“[N]ot every fraud claim
is foreclosed in an action also involving a contract.”). To maintain a claim for
fraud that does not merge with a breach of contract claim, Defendants must
either “(i) demonstrate a legal duty separate from the duty to perform under the
contract; or (ii) demonstrate a fraudulent misrepresentation collateral or
extraneous to the contract; or (iii) seek special damages that are caused by the
misrepresentation and unrecoverable as contract damages.”
Bridgestone/Firestone, Inc. v. Recovery Credit Servs., Inc., 98 F.3d 13, 19-20
(2d Cir. 1996); see also Merrill Lynch & Co. Inc. v. Allegheny Energy, Inc., 500
F.3d 171, 183 (2d Cir. 2007); Wild Bunch, S.A. v. Vendian Entertainment, LLC,
256 F. Supp. 3d 497, 502 (S.D.N.Y. 2017).

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Given the brevity of Defendants’ allegations, the Court finds the facts as
stated to be roughly in equipoise. While the Court ultimately concludes that
Defendants’ fraud and breach of contract claims have not merged, the daylight
between the two claims is vanishingly small. For example, Defendants do not
allege a legal duty separate from the duty to perform under the contract. In
their opposition brief, Defendants argue that Plaintiff “had an independent
duty to be truthful with Sellers because it made a partial statement regarding
its efforts to perform[.]” (Def. Opp. 5). To be sure, New York law recognizes
that a party to a business transaction has a duty to speak truthfully “where the
party has made a partial or ambiguous statement, on the theory that once a
party has undertaken to mention a relevant fact to the other party it cannot
give only half of the truth[.]” Brass v. Am. Film Techs, Inc., 987 F.2d 142, 150
(2d Cir. 1993). 5 But this theory does not appear to advance Defendants’
argument. For starters, the Counterclaim does not make any mention of
partial statements about efforts to perform that were left uncorrected. (See
Countercl. ¶¶ 30-37). Perhaps Defendants believe this to be implicit in the
allegation that the APA was amended numerous times in reliance on Plaintiff’s
statements that it was still working to get financing and close the deal, but this

5

New York law also provides that parties to a business transaction must speak truthfully
“where one party possesses superior knowledge, not readily available to the other, and
knows that the other is acting on the basis of mistaken knowledge.” Brass v. Am. Film
Techs., Inc., 987 F.2d 142, 150 (2d Cir. 1993). Defendants’ counterclaim does not plead
any facts about the parties’ comparative knowledge or what information was or was not
accessible to them, nor do they make this point in their brief. Perhaps Defendants
believe these facts to be implied — Plaintiff obviously knows more than Defendants
concerning its due diligence efforts. But, again, Defendants do not adequately explain,
beyond a conclusory statement that Karniol’s representations were false, that they were
acting on the basis of mistaken knowledge.

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is far from clear, and Defendants may not amend their pleadings through legal
argument in an opposition brief. See Maxim Grp. LLC v. Life Partners Holdings,
Inc., 690 F. Supp. 2d 293, 308 (S.D.N.Y. 2010). At most, what the
Counterclaim says is that Plaintiff made false representations many times. But
it does not say in what regard these statements were untrue. The Court has
trouble discerning from the Counterclaim what Plaintiff told Defendants and
how, if at all, its story changed over time.
Defendants fare better with their argument that Plaintiff’s statements
were collateral or extraneous to the contract. Defendants allege that Plaintiff
misrepresented the status of its efforts with respect to the tasks it needed to
complete before the transactions closed by securing financing and lease
arrangements. Defendants argue that these were statements of present
existing fact that went to Plaintiff’s present actions and state of mind, not to a
future promise to perform or not. (Def. Opp. 5-6). The Court agrees.
Defendants allege that they would not have agreed to the extensions of the Due
Diligence Period if they had known that Plaintiff had not been truthful about its
efforts. Though Defendants’ allegations in this regard are terse at best, these
statements are separable from Plaintiff’s statements about what will be done in
the future. See Stewart v. Jackson & Nash, 976 F.2d 86, 89 (2d Cir. 1992).
Finally, Defendants arguably plead special damages that are
distinguishable from their alleged contractual damages. “For a claim of ‘special
damages’ to permit assertion of both fraud and contract claims premised on
similar facts, [Defendants] must show not that [their] damages were merely

11

atypical, but that they were ‘a special consequence of the fraud and can be
separated from the damages they can claim because of the alleged breach of
contract.’” Maricultura Del Norte v. World Bus. Capital, Inc., 159 F. Supp. 3d
368, 378-79 (S.D.N.Y. 2015). Defendants claim that they were damaged
inasmuch as the Purchased Assets owned by Sellers were tied up in the APA
from 2014 to 2016, and that these damages fell outside of the scope of the
liquidated damages provision. (Countercl. ¶ 36). The Court takes no position
as to whether losses flowing from Defendants’ alleged inability to resell the
Purchased Assets are recoverable under their breach of contract claim. That
said, the Court finds the Counterclaim to allege plausibly that these damages
are separable from those sought under the breach of contract claim. Because
Defendants have indicated that Plaintiff’s alleged misrepresentations were
collateral to the initial agreement and give rise to arguably different damages,
the Court finds that the breach of contract claim and fraud claim may exist
together.
2.

Defendants Fail to Plead Fraud with Particularity

The preceding discussion is, of course, only half of the inquiry, and the
Court now considers the adequacy of Defendants’ pleadings. As set forth
herein, even though the fraud claim is not duplicative of the breach of contract
claim, it is insufficiently pleaded under Rule 9(b).
To review, the Court counts four representations by Karniol that
Defendants challenge in their fraud counterclaim: (i) Plaintiff was satisfied with
the information it received from the Sellers, including information about the

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Purchased Assets; (ii) Plaintiff had a genuine interest in the Purchased Assets
and the ability to complete the transactions contemplated by the APA;
(iii) Plaintiff was making good-faith efforts to secure appropriate financing and
lease arrangements, and (iv) Plaintiff needed the additional time to complete
the arrangements for its financing or an enforceable lease agreement with a
tenant. (Countercl. ¶¶ 31-32). Defendants allege that these representations
were false; that Karniol knew them to be false; and that Plaintiff neither had a
present intention to complete the transactions nor engaged in good-faith efforts
to secure appropriate financing and lease arrangements. (Id. at ¶ 34). These
allegations, however, are but a bare recital of the elements of a fraud claim.
Defendants do not allege sufficient facts to satisfy Rule 9(b). While an
alleged breach of contract may provide some measure of circumstantial
evidence of fraudulent intent, it is not enough to give rise to a “strong
inference” of fraud under Rule 9(b). “Contractual breach, in and of itself, does
not bespeak fraud, and generally does not give rise to tort damages.” Mills v.
Polar Molecular Corp., 12 F.3d 1170, 1176 (2d Cir. 1993) (affirming dismissal of
fraud claims under Rules 12(b)(6) and 9(b)). Defendants claim fraudulent
intentions by merely stating that “[Plaintiff] did not have the present intentions
to complete the transactions.” (Countercl. ¶ 34). Without more, the Court
cannot infer fraudulent intent, especially given that the failure to close the
transaction may be undertaken for “legitimate business reasons.” Mills, 12 F.3d
at 1176 (declining “to infer fraudulent intent from the fact that [defendant]

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made a number of contracts ... and never performed any of them” because “[a]
contract may be breached for legitimate business reasons”).
Defendants do not explain why they believe Plaintiff’s statements to be
untrue, or how and when did they came to learn that Plaintiff did not have the
genuine interest, financing, or tenant arrangement needed to close the deal.
Defendants appear to assume that because the deal did not close, all of
Karniol’s statements were false. This is conceivable, to be sure. But that is not
enough. Defendants “have not nudged their claims across the line from
conceivable to plausible,” In re Elevator Antitrust Litig., 502 F.3d 47, 50 (2d Cir.
2007) (quoting Twombly, 550 U.S. at 570), and for this reason the Court
dismisses their fraud claim.
CONCLUSION
For the foregoing reasons, Plaintiff’s motion to dismiss is GRANTED. The
parties are reminded that the period for fact discovery has been extended to
June 29, 2018, but will be extended no further.
At the pretrial conference in the matter held on June 7, 2018, the Court
advised the parties that it would take under advisement the parties’ request for
motion practice pursuant to Fed. R. Civ. P. 56 that would precede trial in the
matter. The Court accepts the parties’ arguments that summary judgment
motions are likely to narrow the issues for trial and accordingly ORDERS the
parties to propose a schedule for cross-motions within seven (7) days of the
date of this Opinion and Order. In particular, the parties are instructed to

14

meet and confer to discuss ways to avoid needless or duplicative briefing, as,
for example, by proposing a schedule that eschews reply briefs.
SO ORDERED.
Dated:

June 14, 2018
New York, New York

__________________________________
KATHERINE POLK FAILLA
United States District Judge

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