Essex Capital Corporation v. Garipalli et al
Filing
30
OPINION AND ORDER. For the reasons stated above, Defendants' motion to dismiss Plaintiff's complaint is GRANTED with respect to the claims for breach of contract and promissory estoppel, but DENIED with respect to the two claims of fraudule nt inducement. The Clerk of Court is respectfully directed to terminate the motion docketed at ECF No. 22. So ordered. re: 22 MOTION to Dismiss filed by Winthrop Hayes, Vivek Garipalli, Sequoia Healthcare Services, LLC. (Signed by Judge John F. Keenan on 12/18/2018) (rjm)
Case 1:09-md-02013-PAC Document 57
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
------------------------------------UNITED STATES DISTRICT COURT
X
ESSEX SOUTHERN DISTRICT OF NEW YORK
CAPITAL CORPORATION,
-----------------------------------------------------------x
Plaintiff,
In re FANNIE MAE 2008 SECURITIES
:
LITIGATION
:
-against:
:
VIVEK -----------------------------------------------------------x
GARIPALLI, SEQUOIA HEALTHCARE
SERVICES, LLC, and WINTHROP HAYES,
Filed 09/30/10 Page 1 of 45
USDC SDNY
DOCUMENT
ELECTRONICALLY FILED
DOC #: _________________
DATE FILED: 12/18/2018
08 Civ. 7831 (PAC)
09 MD 2013 (PAC)
No. 17 Civ. 6347 (JFK)
OPINION & ORDER
OPINION & ORDER
Defendants.
HONORABLE PAUL A. CROTTY, United States District Judge:
-------------------------------------
X
APPEARANCES
BACKGROUND1
FOR PLAINTIFF ESSEX CAPITAL CORPORATION
Jeffrey Steven Kramer
The early years of
Casey Brian Howard this decade saw a boom in home financing which was fueled, among
LOCKE LORD LLP
other things, by low interest rates and lax credit conditions. New lending instruments, such as
FOR DEFENDANTS VIVEK GARIPALLI, SEQUOIA HEALTHCARE SERVICES,
subprime mortgages (high
LLC, and WINTHROP HAYES credit risk loans) and Alt-A mortgages (low-documentation loans)
Louis Anthony Modugno
kept Trif
Greg the boom going. Borrowers played a role too; they took on unmanageable risks on the
Michael Rato
assumption that the market would continue to rise and that refinancing options would always be
MCELROY, DEUTSCH, MULVANEY & CARPENTER, LLP
available in the future. Lending discipline was lacking in the system. Mortgage originators did
JOHN F. KEENAN, United States District Judge:
not hold these high-risk mortgage loans. Rather than carry the rising risk on their books, the
Before the Court is a motion by Defendants Vivek Garipalli
originators sold their loans into the secondary mortgage market, often as securitized packages
("Garipalli"), Sequoia Healthcare Services, LLC ("Sequoia"), and
known as mortgage-backed securities (“MBSs”). MBS markets grew almost exponentially.
Winthrop Hayes' ("Hayes") (collectively, "Defendants") seeking
But then the housing bubble burst. In 2006, the demand for housing dropped abruptly
dismissal of Plaintiff Essex Capital Corporation's ("Essex")
and home prices began to fall. In light of the changing housing market, banks modified their
For the reasons below,
first amended complaint ("FAC").
lending practices and became unwilling to refinance home mortgages without refinancing.
Defendants' motion is granted with respect to Plaintiff's claims
for breach of contract and promissory estoppel, but denied with
1
Unless otherwise indicated, all references cited as “(¶ _)” or to the “Complaint” are to the Amended Complaint,
respectdated June 22, 2009. For purposes offraudulent inducement claims.
to Plaintiff's two this Motion, all allegations in the Amended Complaint are taken as true.
1
1
I. Background
A. Factual Background
The following facts and allegations are taken from the FAC
Plaintiff Essex is a
and, at this stage, must be deemed true.
California corporation with its principal place of business in
Santa Barbara, California.
(filed Nov. 2, 2017)
(First Am. Compl.
[hereinafter "FAC"].)
'I[
7, ECF No. 20
Essex is a "sale-
leaseback company" that "purchases equipment from companies in
need of cash flow and then leases that equipment back to them."
(Id.
'I[
16.)
Ralph Iannelli ("Iannelli") is Essex's founder and
its current CEO.
(Id.
'I[
17.)
Defendants Garipalli and Hayes are United States citizens
domiciled in New York.
(Id.
'!['I[
8-9.)
Jersey limited liability company.
Defendant Sequoia is a New
(Id.
'I[
10.)
At all relevant
times, Hayes was President of Passaic Healthcare Services, LLC,
which does business as Allcare Medical ("Allcare"), an entity
"largely owned by defendant Sequoia and its principal, defendant
Garipalli" and ultimately controlled by Garipalli.
21.)
(Id.
'!['I[
19-
Further, Garipalli-through Sequoia-funded Allcare's
operations, making Sequoia not just Allcare's parent company and
controlling shareholder, but also a major creditor.
(Id.
'I[
22.)
Between June 23, 2011 and January 29, 2013, Essex and
Allcare signed six Commercial Lease Agreements ("CLAs") with
nearly identical terms.
(Id.
'!['I[ 25-26.)
2
Under these CLAs, Essex
provided Allcare with nearly $5 million for the titles to
certain All care medical equipment.
(Id. )
Essex then leased this
equipment back to All care in exchange for rent payments.
(Id. )
Allcare initially made all rent payments on time, but, in
April 2013, its payments "became sporadic," prompting Iannelli
to make several inquiries about Allcare's financial stability
throughout the Spring and Summer of 2013.
4 3. )
(Id.
'l['l[
26, 38-39,
Though Allcare was indeed having financial difficulties,
Hayes and Garipalli made misrepresentations to Iannelli that
Allcare was financially stable in an effort to ensure continued
cash flow from Essex.
(Id.
'l['l[
40, 44-46.)
Relying on these
misrepresentations, Essex signed a CLA with Allcare on June 21,
2013 and several subsequent CLAs.
(Id.
'l['l[
45, 77.)
By October 2013, Allcare was failing to cover its debts and
sought additional cash via a credit line from Midcap Financial
Services, LLC ("Midcap").
(Id.
'l['l[
49-50.)
To insure Essex's
continued cash flow via additional CLAs and to counter the
possibility that Essex would put Allcare into default, Garipalli
and Hayes concealed the actual intent of their credit line and
misrepresented to Essex that Midcap would only agree to the
credit line if (1) Essex surrendered its right to default under
the CLAs, and (2) Allcare agreed to only use the money to
facilitate ongoing operations, not to pay its creditors.
51,
53-54,
56.)
(Id.
'l['l[
Relying on these representations, Essex entered
3
into an October 15, 2013 Equipment Lessor Agreement ("ELA")
under which Essex agreed to surrender its right to put Allcare
into default under the CLAs and agreed not to "repossess, sell,
proceed to sale or realize upon any" of the leased equipment.
(Id.
'![
55.)
Also on October 15, 2013, Allcare and Midcap
entered into the Credit and Security Agreement ("Midcap Loan
Agreement").
22-4
(Id.
'![
56; Credit and Security Agreement, ECF No.
(filed Nov. 15, 2017)
[hereinafter "MLA").)
In or around April 2014, Garipalli promised Iannelli that
if Essex refrained from declaring a default under the CLAs, he
would personally contribute the funds necessary to keep Allcare
in business.
( FAC
'!['![
92,
In reliance on this promise,
97.)
Plaintiff did not seek default or take action to enforce its
rights under the CLAs.
(Id.
'!['![
93,
95,
98-99.)
At the end of
2014, after the relevant terms of the ELA had expired, Iannelli
sent a default letter to Garipalli.
(Id.
'![
69.)
Garipalli did
not respond to that letter or follow up text messages.
(Id.)
On December 31, 2014, Passaic, doing business as Allcare,
filed a bankruptcy petition.
(Id.
'![
70.)
B. Procedural History
On April 27, 2017, Essex filed a complaint in the Superior
Court of California, Santa Barbara County which Essex describes
as "extremely similar to the original complaint [it) filed in
this Court." (Mem. of L. in Opp. to Defs.' Mot. to Dismiss at
4
17, ECF No.
25 (filed Jan. 12, 2018)
[hereinafter "Opp."].)
Defendants removed that state court case to the U.S. District
Court for the Central District of California, which dismissed
the complaint for lack of personal jurisdiction over the
Defendants.
(Id.)
On August 21, 2017, Essex filed its initial complaint with
this Court.
On November 2, 2017, Essex filed the FAC which
asserts two claims for fraudulent inducement against all
Defendants; a claim for breach of contract against Defendant
Garipalli; and a claim for promissory estoppel also against
Defendant Garipalli.
(FAC 'll'll 71-100.)
On November 15, 2017, Defendants brought the instant motion
to dismiss the FAC.
II. Legal Standard
To survive a motion to dismiss pursuant to Rule 12 (b) (6),
"a complaint must contain sufficient factual matter.
to
'state a claim to relief that is plausible on its face,'"
Ashcroft v. Iqbal, 556 U.S.
662,
678
(2009)
Corp. v. Twombly, 550 U.S. 544, 570 (2007)).
(quoting Bell Atl.
The Court's charge
in ruling on a Rule 12(b) (6) motion "is merely to assess the
legal feasibility of the complaint, not to assay the weight of
the evidence which might be offered in support thereof."
Eternity Global Master Fund Ltd. v. Morgan Guar. Trust Co. of
N.Y., 375 F.3d 168, 176 (2d Cir. 2004)
5
(quoting Geisler v.
Petrocelli, 616 F.2d 636,
639 (2d Cir. 1980)).
The Court must
construe the complaint in the light most favorable to the
plaintiff, "taking its factual allegations to be true and
drawing all reasonable inferences in the plaintiff's favor."
Harris v. Mills, 572 F.3d 66, 71 (2d Cir. 2009).
The Court,
however, is not required to credit "mere conclusory statements"
or "[t]hreadbare recitals of the elements of a cause of action."
Iqbal, 556 U.S. at 678.
A complaint that offers such "labels
and conclusions" or naked assertions without "further factual
enhancement" will not survive a motion to dismiss. Id.
(citing
Twombly, 550 U.S. at 555, 557).
III. Discussion
Defendants argue that Essex's FAC should be dismissed as
(1) all four of Essex's claims are barred by the applicable
statutes of limitations,
(2) Essex's fraudulent inducement
claims (Claims 1 and 2) are barred by the express terms of
various applicable agreements, and (3) the ELA bars Essex's
contract claims (Claims 3 and 4).
(Defs.' Mem. of L. in Supp. of
Mot. to Dismiss at 5-17, ECF No. 22-1
(filed Nov. 15, 2017)
[hereinafter "Supp."].)
A. Statute of Limitations
A statute of limitations affirmative defense normally
cannot be decided on a motion to dismiss. In re S. African
Apartheid Litig.,
617 F. Supp. 2d 228, 287
6
(S.D.N.Y. 2009).
However, courts in this district have made an exception where
(1) the complaint facially shows noncompliance with the
limitations period, and (2) the affirmative defense clearly
appears on the face of the pleadings. Tesla Wall Systems, LLC v.
Related Companies, L.P., 17-cv-5966 (JSR), 2017 WL 6507110, at
*6 (S.D.N.Y. Dec. 18, 2017)
(citing S. African Apartheid, 617 F.
Supp. 2d at 287); see also McKenna v. Wright, 386 F.3d 432, 436
(2d Cir. 2004)
(statute of limitations bar warrants 12 (b) (6)
dismissal "if the defense appears on the face of the
complaint"); Ghartey v. St. John's Queens Hosp., 869 F.2d 160,
162 (2d Cir. 1989)
("Where the dates in a complaint show that an
action is barred by a statute of limitations, a defendant may
raise the affirmative defense in a pre-answer motion to
dismiss.").
Where a plaintiff's "claims are time-barred on the
face of its own complaint,
[plaintiff] has the burden of
pleading facts sufficient to establish that the statutes of
limitations should be tolled." Voiceone Commc'ns, LLC v. Google
Inc., No. 12 Civ. 9433
Mar. 31, 2014)
Grumman Space
(PGG), 2014 WL 10936546, at *7 (S.D.N.Y.
( quoting OBG Technical Servs., Inc. v. Northrop
&
Mission Sys. Corp., 503 F. Supp. 2d 490, 504
(D.
Conn. 2007)).
1. Fraudulent Inducement (Claims 1 & 2)
Defendants argue that California's statute of limitations
applies to Essex's two claims for fraudulent inducement and
7
requires fraud claims to be brought within three years of "the
discovery, by the aggrieved party, of the facts constituting the
fraud or mistake." (Supp. at 8-9 (quoting Cal Code Civ. Proc. §
338(d)) .)
They further argue that the complaint alleges the
fraud was discovered in June 2014, meaning Essex had until June
2017 to bring these claims.
(Id. at 9 (citing FAC 'II 66).)
As
Essex did not file its complaint in this Court until August 21,
2017, they argue, these claims are time barred.
(Id.)
California's statute of limitations for fraudulent
inducement is three years from the discovery of the fraud.
Precision Orthopedic Implants Inc. v. Limacorporate S.P.A., 16cv-2945-ODW, 2016 WL 7378878, at *4
(C.D. Cal. Dec. 20, 2016)
(citing Cal. Code of Civ. P. § 338(d)).
The FAC, however, is
Defendants argue
silent as to when the fraud was discovered.
that the FAC's paragraph 66 alleges Essex discovered the fraud
in June 2014.
(Supp. at 9.)
It does not.
That paragraph states
only that, in or around June 2014, Hayes "confessed to Iannelli
that Midcap significantly reduced Allcare's credit line because
(FAC 'II 66.)
'the receivables aren't there.'"
This so-called
confession does not pertain to any of the alleged
misrepresentations on which Plaintiff has based its fraud
claims; Plaintiff could not conclude from it that (1) certain
financials were falsified,
(2) Allcare' s recent hires would not
increase revenue, or (3) MidCap would only extend Allcare a new
8
credit line if (i) Allcare agreed to use the money to facilitate
ongoing operations and (ii) Essex agreed not to put Allcare into
default.
(Id.
'!['I[
73, 82.)
As the FAC lacks any allegations from which this Court can
determine the date of the fraud's discovery, there is
insufficient information in the FAC to "facially show
noncompliance with the limitations period." See Tesla Wall
Systems, LLC, 2017 WL 6507110, at *6.
Accordingly, at this
stage, Essex's first and second claims cannot be dismissed as
time barred. Id.; Obanya v. Select Portfolio Servicing, Inc.,
No. 14 Civ. 5255 (NGG) (LB), 2015 WL 5793603, at *6 n.9 (E.D.N.Y.
Sept. 30, 2015).
2. Breach of Contract & Promissory Estoppel (Claims 3
&
4)
Defendants and Plaintiff dispute whether Plaintiff's third
and fourth claims-for breach of contract and promissory estoppel
respectively-are time barred,
Defendants argue that
California's statute of limitations applies, while Plaintiff
argues that either New York or New Jersey law is applicable.
(Supp. at 7-8
(citing Cal. Code Civ. Proc. § 339); Opp. at 18.)
As jurisdiction in this case is predicated on diversity of
citizenship, this Court applies New York's choice of law rules.
Bakalar v. Vavra, 619 F.3d 136, 139 (2d Cir. 2010)
(citing
Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941))
Under New York Civil Practice Law and Rules ("N.Y. C.P.L.R.") §
9
202, "when a nonresident plaintiff sues upon a cause of action
that arose outside of New York, the court must apply the shorter
limitations period, including all relevant tolling provisions,
of either (1) New York or (2) the state where the cause of
action accrued." Tesla Wall, 2017 WL 6507110 at *6 (quoting Thea
v. Kleinhandler, 807 F.3d 492, 497
omitted)).
(2d Cir. 2015)
(quotation
Under this statute, "a business's principal place of
business constitutes the sole residency of that business
entity." Voiceone, 2014 WL 10936546 at *9 (quoting Woori Bank v.
Merrill Lynch,
923 F. Supp. 2d 491, 495 (S.D.N.Y. 2013)).
Further, when the claimed injury is economic, "the cause of
action typically accrues 'where the plaintiff resides and
sustains the economic impact of the loss.'" Portfolio Recovery
Assocs., LLC v. King, 14 N.Y.3d 410, 416 (N.Y. 2010)
(quoting
Global Fin. Corp, 93 N.Y.2d 525 at 529); see also Voiceone, 2014
WL 10936546 at *9 (the cause of action "accrues at the time and
place of the injury" (quoting Global Fin. Corp. v. Triarc Corp.,
93 N.Y.2d 525, 529 (N.Y. 1999))).
Here,
Plaintiff is a California corporation with its
principal place of business in California.
(FAC 'll 7.)
As such,
it is solely a resident of California. Voiceone, 2014 WL
10936546 at *9.
Further, as both the damages alleged and remedy
sought are economic, these claims accrued in California.
Portfolio Recovery Assocs, 14 N.Y.3d at 416.
10
Accordingly,
Plaintiff is a non-resident of New York suing upon a cause of
action that accrued outside of New York and N.Y. C.P.L.R. § 202
applies.
Since, California's two year period of limitations is
shorter than New York's six year period, California's statute of
limitation applies. See N.Y. C.P.L.R. § 202; Warren v. Wells
Fargo & Co., No. 3:16-cv-2872-CAB-(NLS),
(S.D. Cal. Oct. 27, 2017)
2017 WL 4876212, at *5
(citing Cal. Civ. Proc. Code§§ 337);
Huang v. Siam Commercial Bank Public Co. Ltd., 247 F. App'x 299,
301
301 n.2
&
(2d Cir. 2007); St. John's University, New York v.
Bolton, 757 F. Supp. 2d 144, 163 (E.D.N.Y. 2010)
PLC v.
Fred S. James & Co. of New York,
Cir. 1994); Ely-Cruikshank Co.,
N.Y.2d 399,
402
(citing T
&
Inc., 29 F.3d 57,
59
Inc. v. Bank of Montreal,
N
81
(N.Y. 1993); N.Y. C.P.L.R. § 203(a)).
(2d
Under
California law, a claim for breach of contract accrues "when the
plaintiff discovers, or could reasonably have discovered, the
breach and its cause." Wong v. Tomaszewski, No.
MCE-AC, 2018 WL 4628269, at *4
(citing Angeles Chemical Co.,
App.
2:18-cv-00039-
(E.D. Cal. Sept. 27,
Inc. v. Spencer
4th 112, 119 (Cal. Ct. App. 1996)).
&
2018)
Jones,
44 Cal.
The statute of
limitations for a promissory estoppel claim, however, accrues
when the oral contract is created. Parker v. U.S. Bancorp, No.
ED CV 16-70-DMG,
2016)
2016 WL 7495824, at *7
(C.D. Cal. Sept. 13,
(finding a promissory estoppel claim on an oral agreement
11
time barred where the oral promises and representations on which
the claim was based pre-dated the complaint by more than two
years); McMillan v. Bank of America, N.A., No. 14cvl575-MMA
(BLM), 2015 WL 1942743, at *8 (S.D. Cal. Apr. 15, 2015)
(same).
Here, the alleged oral contracts on which both claims are
based were made in or around April 2014.
(FAC
~~
92,
97.)
While
the FAC is unclear on when exactly Essex discovered the breach,
it is clear that it reasonably could have discovered it when
Allcare filed for bankruptcy on December 31, 2014.
(FAC
~
70.)
Accordingly, even if this Court were to hold that Plaintiff's
filing in California State Court on April 27, 2017 was
applicable, both the breach of contract and promissory estoppel
claims would still be time barred under California law.
As Plaintiff has pled no facts sufficient to establish that
the statute of limitation should be tolled (Voiceone, 2014 WL
10936546 at 7, 12), Plaintiff's breach of contract and
promissory estoppel claims are time barred and must be
dismissed.
B. The Applicable Agreements do not bar Plaintiff's Fraudulent
Inducement Claims (Claims 1 & 2)
Defendants argue that, if not time barred, Essex's first
and second claims-both for fraudulent inducement-must be
dismissed as provisions in various applicable agreements
preclude them.
12
1. CLA Fraudulent Inducement
Essex's first claim alleges that Garipalli and Hayes
knowingly made two deliberate misrepresentations that Essex
relied on when it entered into all post-June 20, 2013 CLAs.
~~
75-77.)
(Id.
First, both men told Iannelli that hiring a
competitor's employees would lead to increased revenues of $120
to 150 million.
(Id.
~~
73-74.)
Second, Hayes emailed Iannelli
deliberately doctored Allcare financials which falsely reported
an additional $5.5 million in revenue.
(Id.)
Defendants argue that a merger provision-included with
identical language in every CLA-precludes Essex from now arguing
that it relied on any statement or representation appearing
outside of the contract in entering into the CLAs.
13.)
(Supp. at 12-
As Allcare's alleged misrepresentations were not included
in the CLAs, they argue, Essex cannot use them as part of a
fraudulent inducement claim.
(Id. at 13-14.)
The merger clause in question states that "NEITHER PARTY
RELIES UPON ANY OTHER STATEMENT OR REPRESENTATION, EXCEPT FOR
THE CREDIT APPLICATION AND FINANCIAL STATEMENTS OR LESSEE AND
ANY GUARANTOR PROVIDED IN CONNECTION HEREWITH." (Commercial
Lease Agreement, Art. 18, ECF No. 22-3 (filed Nov. 15, 2017)
(emphasis added).)
Though Defendants concede that this language
makes an exception for reliance on financial statements, they
argue that this exception does not apply to the falsified
13
financial statement mentioned in the FAC as "Essex does not
allege that those 'financial statements' were provided to Essex
'in connection' with Essex's entry into the Lease Agreements.ff
(Supp. at 14-15.)
Here, Plaintiff alleges that Hayes provided Iannelli with
"falsified financialsff and, in the very next paragraph, states
that it relied on "the financials Hayes provided to Essexff when
it entered the June 21, 2013 CLA.
(FAC 'IT'il 44-45.)
Additionally,
Plaintiff alleges that Hayes "emailed Iannelli false financials
for Allcare,ff that Iannelli had "no way of knowing that the
financials provided to him were false,ff and that "Essex entered
into the June 21, 2013 [CLA], and subsequent [CLAs], as a result
of the representations Garipalli and Hayes made to Iannelli.ff
(Id. 'IT'il 73, 76-77.)
Giving every reasonable inference to the
Plaintiff, as the Court is required to do at this stage, the FAC
adequately alleges that Hayes provided the falsified financials
"in connectionff with the relevant CLAs.
As such, the merger
clause does not preclude this allegation and Defendants' motion
to dismiss this first claim for fraudulent inducement is denied.
2. ELA Fraudulent Inducement
Essex's second claim alleges that Garipalli and Hayes made
two misrepresentations to Essex to induce it to enter into the
ELA:
that MidCap would only offer a new credit line if (1)
Essex surrendered its right to put Allcare into default under
14
the CLAs and (2) Allcare agreed to use the money to facilitate
ongoing operations, not to pay Allcare's creditors.
(Id. 'lI 82.)
Relying on these misrepresentations, Plaintiff alleges it
entered into the ELA "under which Essex agreed to surrender its
right to put Allcare into default under the [CLAs] and agreed
not to 'repossess, sell, proceed to sale or realize upon any' of
the leased equipment." (Id. 'lI 83.)
Defendants argue that this claim for fraudulent inducement
is barred as:
(1) the ELA's merger clause bars Essex from
relying on statements outside the agreement, and (2) the MidCap
Loan Agreement specifies that Allcare can use MidCap funds to
pay its creditors.
(Supp. at 10-12.)
a. The ELA
Defendants argue that the ELA's merger clause "bars Essex
from relying upon any representation or statement as its
'inducement' to enter into the ELA that is not expressly
contained in that agreement" under either New York or California
law.
(Id. at 11-12.)
Plaintiff responds that regardless of
whether the Court applies New York or California law, a "general
merger clause" like the one in the ELA "will not bar fraudulent
inducement claims." (Opp. at 22.)
As previously mentioned, this Court must apply New York's
choice of law standard. Bakalar,
619 F.3d at 139.
In New York,
"the first inquiry in a case presenting a potential choice of
15
law issue is whether there is an actual conflict of laws on the
issues presented.
If not, no choice of law analysis is
necessary." Fed. Ins. Co. v. Am. Home Assurance Co., 639 F.3d
557, 566 (2d Cir. 2011)
(internal citations omitted); see also
In the Matter of Allstate Ins. Co., 81 N.Y.2d 219, 223 (N.Y.
1993).
To find an "'actual conflict,' the laws in question must
provide different substantive rules in each jurisdiction that
are 'relevant' to the issue at hand and have a
'significant
possible effect on the outcome of a trial.'" Elmaliach v. Bank
of China Ltd.,
971 N.Y.S.2d 504, 512
(1st Dep't 2013)
(quoting
Finance One Pub. Co. v. Lehman Bros. Special Fin., Inc., 414
F.3d 325, 331 (2d Cir. 2005)
(citations omitted)).
Under California law, a merger or integration clause, like
the merger clause in question, generally does not preclude a
plaintiff's fraud claim. U.S. Bank, N.A. v. Miller, CV 12-05632
MMM (MANx), 2013 WL 12183654, at *5 (C.D. Cal. Sept. 19, 2013);
United Guar. Mortg. Indem. Co. v. Countrywide Financial Corp.,
660 F. Supp. 2d 1163, 1176 n. 15 (C.D. Cal. 2009)
Hinesley v. Oakshade Town Ctr., 135 Cal. App.
Ct. App. 2005)).
(citing
4th 289, 301
(Cal.
Indeed, a "party may claim fraud in the
inducement of a contract containing a provision disclaiming any
fraudulent misrepresentations and introduce parol evidence to
show such fraud." Hinesley, 135 Cal. App.
16
4th at 301 (collecting
cases); see also U.S. Bank, 2013 WL 12183654, at *5 (citing Cal.
Code Civ. Proc. § 1856(f)).
Likewise, under New York law, "a general merger clause does
not, standing alone, preclude a claim of fraudulent inducement.ff
PetEdge, Inc. v. Garg, 234 F. Supp. 3d 477, 488
(S.D.N.Y. 2017)
(quoting Robinson v. Deutsche Bank Tr. Co. Americas, 572 F.
Supp. 2d 319, 323 (S.D.N.Y. 2008)).
A merger clause is
"general" when it resembles "an omnibus statement that the
written instrument embodies the whole agreement, or that no
representations have been made.ff Id.
(quoting Manufacturers
Hanover Trust Co. v. Yanakas, 7 F.3d 310, 315 (2d Cir. 1993))
Preclusion will occur only where the contract disclaims "the
existence of or reliance upon specified representations.ff Id.
(quoting Yanakas, 7 F.3d at 315).
Here, the merger clause in question reads that the ELA
"constitutes the entire agreement and supersedes all other prior
agreements and understandings, both written and oral, among the
parties with respect to the subject matter hereof.ff
9.8.)
(ELA at§
This clause clearly lacks specified representations,
containing instead the type of omnibus language of a general
merger clause. PetEdge, 234 F. Supp. 3d at 488.
As such, this
clause does not preclude Plaintiff's second fraudulent
inducement claim under either New York or California law.
17
Accordingly, Defendants' motion to dismiss Plaintiff's second
fraudulent inducement claim on this basis is denied.
b. The Midcap Loan Agreement
Defendants next argue that, a section of the MidCap Loan
Agreement expressly allows Allcare to use the proceeds of their
loan from Midcap to refinance debt existing on the closing date
of that loan.
(Supp. at 11-12 (citing MLA
§
4. 7).)
Defendants
argue that because this section directly contradicts one of the
misrepresentations Plaintiff alleges Defendants made to induce
it to enter into the ELA, under both New York and California law
this allegation cannot be the basis of a fraudulent inducement
claim.
(Id. at 11-12 (citing Adams v. Intralinks, Inc., No. 03
Civ. 5384 SAS, 2004 WL 1627313, at *7 (S.D.N.Y. July 20, 2004)
(New York); Brinderson-Newberg Joint Venture v. Pac. Erectors,
Inc.,
971 F. 2d 272, 281 (9th Cir. 1992)
(California)).)
Accordingly, they argue, this claim must be dismissed.
Defendants' reliance on Adams and Brinderson is misplaced.
In both cases, the representations that the plaintiffs allegedly
relied on were in direct contradiction to clauses of agreements
the plaintiffs themselves had executed. See Adams, 2004 WL
1627313, at *7; Brinderson, 971 F.2d at 281.
Here, however, the
representation in question is contradicted by an agreement
Allcare made with MidCap to which Plaintiff was not a party.
Accordingly, the terms of this agreement do not preclude
18
Defendant's fraudulent inducement claim and their motion to
dismiss this claim is denied.
IV. Leave to Amend
Rule 15 of the Federal Rules of Civil Procedure instructs
courts to "freely give leave" to amend "when justice so
requires." Fed. R. Civ. P. 15(a) (2).
Amendment is not
warranted, however, "absent some indication as to what [a
plaintiff] might add to [its] complaint in order to make it
viable." Shemian v. Research In Motion Ltd., 570 F. App'x 32, 37
(2d Cir. 2014)
(quoting Horoshko v. Citibank, N.A., 373 F.3d
248, 249 (2d Cir. 2004)).
Accordingly, should Plaintiff wish to amend its complaint,
it must demonstrate (1) how it will cure the deficiencies in its
claims by filing a proposed amended complaint and (2) that
justice requires granting leave to amend.
Such demonstration
shall be filed within 30 days of the date of this Opinion.
Conclusion
For the reasons stated above, Defendants' motion to dismiss
Plaintiff's complaint is GRANTED with respect to the claims for
breach of contract and promissory estoppel, but DENIED with
respect to the two claims of fraudulent inducement.
The Clerk of Court is respectfully directed to terminate
the motion docketed at ECF No. 22.
19
SO ORDERED.
Dated:
New York, New York
December ii, 2018
United States District Judge
20
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?