Horowitz v. National Gas & Electric, LLC et al
Filing
42
OPINION AND ORDER re: 26 MOTION to Dismiss with Prejudice Counts I and IV of the Amended Complaint, and Any Claim for Punitive or Consequential Damages. filed by Spark Energy, Inc., National Gas & Electric, LLC. For the foregoing reasons, Defendants motion to dismiss is GRANTED as to the claim for fraudulent inducement against NGE and DENIED as to the claims for tortious interference and for punitive or consequential damages. Defendants shall file answers to the remaining claims within 21 days of the date of this order. The Clerk of Court is directed to close the motion at Docket Number 26. SO ORDERED. (Signed by Judge J. Paul Oetken on 9/24/2018) (jca)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
SAUL HOROWITZ, as sellers’
representative,
Plaintiff,
17-CV-7742 (JPO)
OPINION AND ORDER
-vNATIONAL GAS & ELECTRIC, LLC,
and SPARK ENERGY, INC.,
Defendants.
J. PAUL OETKEN, District Judge:
Plaintiff Saul Horowitz filed this action against Defendant National Gas & Electric, LLC
(“NGE”) for fraudulent inducement and breach of contract and against Defendant Spark Energy,
Inc. (“Spark”) for tortious interference with contract and breach of contract. Defendants jointly
move to dismiss Horowitz’s fraudulent inducement claim against NGE, his tortious interference
claim against Spark, and his claims for punitive or consequential damages against both
Defendants. For the reasons that follow, the motion to dismiss is granted in part and denied in
part.
I.
Background
In 2016, the former owners of three companies known collectively as Major Energy sold
their ownership shares to Defendant NGE. (Dkt. No. 22 (“Am. Compl.”) ¶¶ 1–2.) The parties
agreed that NGE would pay $80 million for the purchase of Major Energy, partly in cash up front
and partly in earnings-based future payouts. (Id.) NGE then turned around and sold Major
Energy to its affiliate and co-Defendant, Spark. (Am. Compl. ¶¶ 4, 11.) Plaintiff Saul Horowitz,
one of the initial owners of Major Energy, alleges that this second sale of Major Energy to Spark
was barred by the initial contract of sale and negatively impacted the earnings-based payouts
1
owed under that initial contract. (Am. Compl. ¶ 1.) Horowitz sues as the designated
representative of a group of Major Energy’s initial owners (collectively, “Sellers”). (Am.
Compl. ¶ 8.)
The nub of the Sellers’ claim is that NGE was in cahoots with Spark when it purchased
Major Energy and that neither party intended to abide by the promises made in the initial
contract of sale. The Sellers allege that there was an agreement to keep Major Energy private,
but that despite that agreement NGE turned around and sold Major Energy to its affiliate Spark, a
public company. (Am. Compl. ¶¶ 59–61.) The Sellers also insist that in basing the purchase
payments on future earnings, it was understood and agreed that Major Energy would retain the
same structure and business practices as before, but NGE and Spark nevertheless have
restructured Major Energy’s business for their own gain and at the Sellers’ expense. (Am.
Compl. ¶¶ 48–50.) Finally, the Sellers also allege that Spark improperly calculated the earningsbased payments due to the Sellers for the year 2016. (Am. Compl. ¶¶ 112–15.)
Plaintiff filed this suit alleging various tort and contract claims against NGE and Spark.
Defendants jointly move under Federal Rule of Civil Procedure 12(b)(6) to dismiss the Sellers’
fraudulent inducement and tortious interference claims. (Dkt. No. 26.) Defendants also move to
dismiss the Sellers’ claims for punitive or consequential damages and to limit the Sellers to
direct compensatory damages on their breach of contract claims. (Id.)
II.
Legal Standard
To survive a motion to dismiss for failure to state a claim, plaintiffs must plead “only
enough facts to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly,
550 U.S. 544, 570 (2007). A claim is facially plausible when plaintiffs plead facts that would
allow “the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft
v. Iqbal, 556 U.S. 662, 678 (2009). “The Court must accept as true all well-pleaded factual
2
allegations in the complaint, and ‘draw [ ] all inferences in the plaintiff’s favor.’” Goonan v.
Fed. Reserve Bank of New York, 916 F. Supp. 2d 470, 478 (S.D.N.Y. 2013) (quoting Allaire
Corp. v. Okumus, 433 F.3d 248, 249–50 (2d Cir. 2006)).
III.
Discussion
The Complaint asserts a mix of tort and contract claims: (1) fraudulent inducement
against NGE (Am. Compl. ¶¶ 120–27); (2) breach of contract against NGE (Am. Compl. ¶¶ 128–
33); (3) breach of contract against Spark (Am. Compl. ¶¶ 134–42); and (4) tortious interference
with a contract against Spark. (Am. Compl. ¶¶ 143–150.)
Defendants move to dismiss the first and fourth claims. Defendants also move to dismiss
the Sellers’ claims to the extent that they seek punitive and consequential damages.
A.
Fraudulent Inducement
Plaintiff’s first cause of action alleges that NGE fraudulently induced the Sellers into
entering a deal which it had no intention to keep, including by promising that Major Energy
would remain a private company and would continue to run as before. (Am. Compl. ¶¶ 120–27.)
NGE argues that this claim should be dismissed as duplicative of Plaintiff’s breach of contract
cause of action.
“[U]nder New York law, ‘where a fraud claim arises out of the same facts as [a] breach
of contract claim, with the addition only of an allegation that defendant never intended to
perform the precise promises spelled out in the contract between the parties, . . . plaintiff’s sole
remedy is for breach of contract.’” Telecom Intern. America, Ltd. v. AT & T Corp., 280 F.3d
175, 196 (2d Cir. 2001) (quoting Sudul v. Comput. Outsourcing Servs., 868 F. Supp. 59, 62
(S.D.N.Y. 1994). While allegations that a party entered into a contract with no intention of
performing usually will not support an action for fraud, “[a] fraud action is permitted . . . where
the plaintiff alleges that the defendant engaged in other fraudulent conduct besides entering the
3
contract with no intention to perform.” Grappo v. Alitalia Linee Aeree Italiane, S.p.A., 56 F.3d
427, 434 (2d Cir. 1995) (emphasis in original). The operative distinction is between “a
promissory statement of what will be done in the future” and “a misrepresentation of a present
fact.” Merrill Lynch & Co. Inc. v. Allegheny Energy, Inc., 500 F.3d 171, 184 (2d Cir. 2007).
While the former does not give rise to a separate fraudulent inducement claim, the latter does.
In an apparent blurring of this distinction, the New York Court of Appeals has held that
“a promise made with a preconceived and undisclosed intention of not performing it constitutes a
misrepresentation” that may be sufficient to support a parallel claim of fraud. Deerfield
Commc’ns Corp. v. Chesebrough–Ponds, Inc., 68 N.Y.2d 954, 956 (1986) (quoting Sabo v.
Delman, 3 N.Y.2d 155, 160 (1957)). See also Graubard Mollen Dannett & Horowitz v.
Moskovitz, 86 N.Y.2d 112, 122 (1995) (“A false statement of intention is sufficient to support an
action for fraud, even where that statement relates to an agreement between the parties.”).
“While these decisions would seem to contradict the broader rule that a fraud claim cannot be
pleaded based on a failure to fulfill contractual promises, courts have reconciled the two
principles by requiring an additional showing in order to maintain the fraud action.” Low v.
Robb, No. 11 Civ. 2321, 2012 WL 173472, at *5 (S.D.N.Y. Jan. 20, 2012). Specifically, parallel
fraud and contract claims may be brought:
if the plaintiff (1) demonstrates a legal duty separate from the duty
to perform under the contract; (2) points to a fraudulent
misrepresentation that is collateral or extraneous to the contract; or
(3) seeks special damages that are unrecoverable as contract
damages.
Merrill Lynch & Co., 500 F.3d at 183–84 (citing Bridgestone/Firestone, Inc. v. Recovery Credit
Servs., Inc., 98 F.3d 13, 20 (2d Cir. 1996)).
Here, the Sellers rely on the exception for fraudulent misrepresentations that are
“collateral or extraneous to the contract.” (Dkt. No. 28 (“Pl. Opp.”) at 12.) “For a fraudulent
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misrepresentation to be collateral or extraneous to a contract, it must be a promise to do
something other than what is expressly required by the contract.” W.B. David & Co., Inc. v.
DWA Communications, Inc., No. 02 Civ. 8479, 2004 WL 369147, at *5 (S.D.N.Y. Feb.26,
2004). In other words, the Sellers must show that their “fraud claim [is] based on an oral
assertion going beyond the four corners of—and therefore collateral to—the contract.” Trend &
Style Asia HK Co. Ltd. v. Pac. Worldwide, Inc., No. 14 Civ. 992, 2015 WL 4190746, at *8
(S.D.N.Y. July 10, 2015).
The Sellers specifically contend that NGE’s “repeated representation that Major Energy
would continue operating as a private entity and not become part of Spark (a public entity)” was
“collateral to the contract and independent of its breach of contract claim against NGE.” (Pl.
Opp. at 15.) But far from being “something other than what is expressly required by the
contract,” W.B. David & Co., 2004 WL 369147, at *5, the transfer of Major Energy from a
private to a public entity was, in the Sellers’ own words, “a blatant breach of NGE’s ‘businessas-usual’ obligations under the [relevant contracts].” (Am. Compl. ¶ 67.) Indeed, the Sellers
point to numerous provisions in their contracts with NGE that they construe to have “expressly”
integrated NGE’s promise to keep Major Energy private. 1 (Am. Compl. ¶¶ 41, 48, 62, 67.) New
1
The most relevant provisions of the contracts, and the most damning for purposes
of the Sellers’ parallel fraud claims, include:
(1) Section 11.7 of the Membership Interest Purchase Agreement,
which codified the parties’ agreement that “[n]o assignment of this
Agreement or of any rights or obligations hereunder may be made
by any Company, any Seller or Buyer, directly or indirectly (by
operation of Law or otherwise), without the prior written consent of
the other Parties”; and
(2) Section 2.7 of the Earnout Agreement, which codifies NGE’s
promise to “operate the Business of [Major Energy], in all material
respects, throughout the Target Years such that [Major Energy is]
operated consistently with how the Senior Management Team
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York law does not allow the Sellers to assert separate fraud and contract claims on the grounds
that this conduct was both an express breach of the parties’ contracts and a breach of a promise
collateral to that contract. Because the Sellers’ “fraud claim arises out of the same facts as [their]
breach of contract claim, . . . the fraud claim is redundant and [Sellers’] sole remedy is for breach
of contract.” Telecom Intern. America, 280 F.3d at 196 (quoting Sudul, 868 F. Supp. at 62).
Seeking to evade this outcome, the Sellers appear to argue that any promises made with a
preconceived and undisclosed intention of being broken are necessarily collateral to a related
contract. (Pl. Opp. at 12–13 (“New York courts have repeatedly held that where a defendant
made promises with a preconceived and undisclosed intention of not performing them, those
representations “are collateral to the agreement, and can form the basis of a fraudulent
inducement claim.”) (emphasis in original).) It is true that New York law might in some
circumstances allow for a “false statement of intention . . . to support an action for fraud, even
where that statement relates to an agreement between the parties.” Graubard, 86 N.Y.2d at 122.
But again, these types of false statements can support related fraud and contract claims only
when “the fraud claim [is] based on an oral assertion going beyond the four corners of—and
therefore collateral to—the contract.” See Trend & Style, 2015 WL 4190746, at *8 (discussing
Graubard). See also Telecom Intern. America, 280 F.3d at 196. In other words, while the mere
relation of an extraneous promise to a contract may not doom a parallel fraudulent inducement
operated [Major Energy] before the Closing and/or how the Senior
Management Team suggests operating [Major Energy] going
forward . . . .”
(Dkt. No. 22-1 at 67; Dkt. No. 22-2 at 6–7.) According to the Sellers, NGE “blatantly breached”
the former provision when it sold Major Energy to Spark (Am. Compl. ¶ 41), and in the latter
provision “NGE expressly agreed that it would operate Major Energy . . . as a private company”
(Am. Compl. ¶ 62 (emphasis in original)).
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claim, the explicit incorporation of such promises into the plain text of the contract will. 2 Here,
the Sellers assert that “NGE’s agreement to keep Major Energy operating as a private company
at least during the almost year deferred payment period is evident from the acquisition
documents executed by the Sellers and NGE.” (Am. Compl. ¶ 61.) Their doing so belies their
attempt to also construe NGE’s promise to keep Major Energy private as “something other than
what is expressly required by the contract.” W.B. David & Co., 2004 WL 369147, at *5.
In short, in relying on the same facts and allegations to support both their fraud and
breach of contract claims, the Sellers are “simply dressing up a breach of contract claim by
further alleging that the promisor had no intention, at the time of the contract’s making, to
perform its obligations thereunder,” which as a matter of New York law “is insufficient to state
an independent tort claim.” See Telecom Intern. America, 280 F.3d at 196 (quoting Best Western
Int’l, Inc. v. CSI Int’l Corp., No. 94 Civ. 360, 1994 WL 465905, at *4 (S.D.N.Y. Aug. 23, 1994).
Accordingly, the fraudulent inducement claim against NGE must be dismissed.
B.
Tortious Interference
The Sellers allege that Spark tortiously interfered with the Sellers’ and NGE’s contract
“when it negotiated and executed the purchase of Major Energy from NGE” despite being “fully
2
In support of their broader understanding of “collateral,” the Sellers cite cases
involving promises of performance that extended beyond the relevant contract’s plain bargainedfor terms. See, e.g., Deerfield Commc’ns Corp., 68 N.Y.2d at 956 (permitting fraudulent
inducement claim premised on representations “not contained in the written contract”); CCM
Rochester, Inc. v. Federated Investors, Inc., No. 14 Civ. 3600, 2014 WL 6674480, at *6
(S.D.N.Y. Nov. 25, 2014) (allowing fraudulent inducement claim where “the terms of the
[contract] do not impose any obligation on [defendant]” with respect to the alleged false
promises); White v. Davidson, 55 N.Y.S.3d 223, 611–612 (App. Div. 1st Dep’t 2017) (“[The]
misrepresentations are collateral to the agreement, and can form the basis of a fraudulent
inducement claim . . . since [the agreement] makes no reference to the particular
misrepresentations allegedly made here.” (quoting Laduzinski v. Alvarez & Marsal Taxand LLC,
16 N.Y.S.3d 229, 233 (App. Div. 1st Dep’t 2015)).
7
aware of the foregoing Agreements and NGE’s contractual obligations” not to sell Major Energy
to a private entity. (Am. Compl. ¶ 145.) Spark raises three challenges to the Sellers’ tortious
interference claim: (1) that Spark was not a third party to the contract of sale of Major Energy, a
requirement for tortious interference claims; (2) that Spark’s interference with the Sellers’ and
NGE’s contract was privileged because of Spark’s economic interest in NGE’s affairs; and (3)
that the Sellers’ tortious interference claims against Spark are duplicative of their breach of
contract claims. 3 (Dkt. No. 27 (“Def. Mem.”) at 16–23.) The Court addresses each of these
arguments in turn.
1.
Whether Spark Was a Party to the Contract Between Sellers and
NGE
“Under New York law, the elements of tortious interference with contract are (1) ‘the
existence of a valid contract between the plaintiff and a third party’; (2) the ‘defendant’s
knowledge of the contract’; (3) the ‘defendant’s intentional procurement of the third-party’s
breach of the contract without justification’; (4) ‘actual breach of the contract’; and (5) ‘damages
resulting therefrom.’” Kirch v. Liberty Media Corp., 449 F.3d 388, 401–02 (2d Cir. 2006)
(quoting Lama Holding Co. v. Smith Barney Inc., 646 N.Y.S.2d 76, 82 (1996)). “It is well
established that only a stranger to a contract, such as a third party, can be liable for tortious
interference with a contract.” Koret, Inc. v. Christian Dior, S.A., 554 N.Y.S.2d 867, 869 (App.
3
In its reply brief, Spark argues for the first time that the Sellers cannot hold Spark
liable in connection with the initial contract of sale between Sellers and NGE because of a
provision in that contract barring “all claims or causes of action (whether in contract or in tort, in
law or in equity) . . . [against any] Person who is not a named party to this Agreement, including
any Affiliate, agent, attorney, or representative of any Party . . . arising under, in connection
with, or related to this Agreement.” (Dkt. No 32 (“Def. Rep.”) at 6–7; Dkt. No. 22-1 at 51.) As
a general rule, courts “ordinarily will not consider issues raised for the first time in a reply brief.”
McBride v. BIC Consumer Prod. Mfg. Co., 583 F.3d 92, 96 (2d Cir. 2009). Accordingly, the
Court declines to address the enforceability of this provision on this motion to dismiss. Spark is
not precluded from raising this argument at a different stage of the litigation.
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Div. 1st Dep’t 1990). Thus, “a plaintiff bringing a tortious interference claim must show that the
defendants were not parties to the contract.” Finley v. Giacobbe, 79 F.3d 1285, 1295 (2d Cir.
1996) (collecting cases) (emphasis in original).
Spark argues that the Sellers’ allegations regarding Spark’s role in the negotiations
between the Sellers and NGE establish that Spark was not a third party to the contract for
purposes of the Sellers’ tortious interference claim. It points to Koret, which held that a parent
company is not liable for tortious interference with its subsidiary’s contract where the same
corporate executive employed by both the parent and subsidiary “played a role in negotiation of
the joint venture agreement, and executed [the] same.” Koret, 554 N.Y.S.2d at 857. It is true
that the Sellers’ allegations are similar in that an executive common to NGE and Spark played a
role in the negotiation of the contract at issue. (See Am. Compl. at ¶¶ 12, 73–74.) But unlike in
Koret, here the Sellers explicitly disclaim that Spark and NGE share a parent-subsidiary
relationship. (Am. Compl. at ¶ 11 (“Spark is an affiliate of NGE, but has no direct ownership
interest in NGE.”).) Spark points to no case establishing that affiliates of contracting parties do
not qualify as “third parties” for purposes of a tortious interference claim. The mere fact that
Spark is “affiliated” with NGE does not establish that Spark was a party to the contract, signed
only by NGE, for purposes of the tortious interference claim.
Spark also asserts that it is immune from tortious interference claims as a successor-ininterest to the contract at issue. (Def. Mem. at 17–18.) “[A] successor in interest . . . cannot be
liable for interfering with its own contract.” LHR, Inc. v. T-Mobile USA, Inc., 977 N.Y.S.2d 816,
821 (App. Div. 4th Dep’t 2013). Therefore, it may be true that if Spark is ultimately liable to the
Sellers for breach of contract as a successor-in-interest to the Sellers’ contract with NGE, then
the Sellers’ tortious interference claim against Spark must fail. But the Sellers do not concede
9
that Spark is a successor-in-interest to the contact. Instead, the Sellers explicitly call into
question the validity of NGE’s assignment to Spark of its contractual interests in Major Energy.
(See, e.g., Am. Compl. ¶¶ 41, 138.) In fact, the Sellers seek a declaratory judgment voiding that
assignment, which, if granted, would moot Spark’s successor-in-interest argument entirely.
(Am. Compl. at 150.) In simultaneously seeking relief under these mutually exclusive theories,
the Sellers are validly pleading alternative bases for Spark’s liability in connection with their role
in the two sales of Major Energy. See Fed. R. Civ. P. 8(d). See also Henry v. Daytop Village, 42
F.3d 89, 91 (2d Cir. 1994) (“[T]he Federal Rules of Civil Procedure explicitly authorize pleading
in the alternative.”). The outcome of these claims may ultimately turn on whether Spark validly
assumed NGE’s obligations under the contract with the Sellers as a successor-in-interest. But
until that question is answered, the Sellers’ tortious interference claim against non-party Spark
remains viable.
2.
Whether Spark’s Interference with Sellers’ and NGE’s Contract was
Privileged as a Matter of Law
When faced with claims of tortious interference with contract, New York courts seek “to
strike a balance between two valued interests: protection of enforceable contracts, which lends
stability and predictability to parties’ dealings, and promotion of free and robust competition in
the marketplace.” VR Optics, LLC v. Peloton Interactive, Inc., No. 16 Civ. 6392, 2017 WL
3600427 (S.D.N.Y. Aug. 18, 2017) (quoting White Plains Coat & Apron Co. v. Cintas Corp., 8
N.Y.3d 422, 425(N.Y. 2007)). To serve these two interests, “New York courts have . . .
developed an ‘economic interest defense’ to claims of tortious interference with contract.” Id.
This defense is available where: (1) defendant sought to protect an economic interest in the
breaching party’s business, and (2) plaintiff makes no showing that defendant acted maliciously,
fraudulently, or illegally. See Benihana of Tokyo, LLC v. Angelo, Gordon & Co., L.P., 259 F.
10
Supp. 3d 16, 29–30 (S.D.N.Y. 2017). “[T]he defense . . . only applies when the alleged
interfering parties have acted to protect their interest in the breaching party’s business . . . [and]
not their own.” Dell’s Maraschino Cherries Co. v. Shoreline Fruit Growers, Inc., 887 F. Supp.
2d 459, 484 (E.D.N.Y. 2012). For purposes of Rule 12(b)(6) motions, all of the elements of a
defendant’s economic interest defense must be discernable on the face of the complaint in order
to warrant dismissal of the underlying tortious interference claim. Benihana of Tokyo, 259 F.
Supp. 3d at 30.
It is a close question whether the Amended Complaint’s description of the relationship
between NGE and Spark is sufficient to establish an economic interest defense. The New York
Court of Appeals has noted the wide array of circumstances in which “the defense has been
applied, for example, where defendants were significant stockholders in the breaching party’s
business; where defendant and the breaching party had a parent-subsidiary relationship; where
defendant was the breaching party’s creditor; and where the defendant had a managerial contract
with the breaching party at the time defendant induced the breach of contract with plaintiff.”
White Plains Coat & Apron, 8 N.Y.3d at 426. At its broadest, the defense has also been upheld
in cases involving “tightly interrelated affiliates,” where evidence of common ownership and a
closely knit relationship was fully developed in the record. Masefield AG v. Colonial Oil Indus.,
No. 05 Civ. 2231, 2006 WL 346178, at *2, *8 (S.D.N.Y. Feb. 15, 2006).
Though the Amended Complaint describes an executive common to both Spark and NGE
and uses the word “affiliate” to describe their relationship, it does not provide any specifics
regarding the nature of the parties’ economic relationship (beyond explicitly disclaiming any
direct ownership interest between the two). (Am. Compl. ¶¶ 11–12 (“Spark is an affiliate of
NGE, but has no direct ownership interest in NGE.”); see also id. ¶¶ 73–74.) In scenarios like
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this, courts commonly “refuse[] to apply the economic interest defense at the pleading stage to
dismiss complaints for tortious interference with contract, explaining that the facts of the
pleadings were not sufficiently developed to show entitlement to the defense.” Hildene Capital
Mgmt., LLC v. Friedman, Billings, Ramsey Grp., Inc., No. 11 Civ. 5832, 2012 WL 3542196, at
*9 (S.D.N.Y. Aug. 15, 2012) (collecting cases).
In any event, the economic interest defense is not yet available to Spark because the
Sellers have not alleged that Spark’s interference with the contract between the Sellers and NGE
was for anyone’s benefit other than Spark’s own. See V.R. Optics, 2017 WL 3600427 at *5
(“The defense of economic interest does not apply, however, where the allegedly interfering
parties acted to protect their own interest instead of their interest in the breaching party’s
business.”) The Sellers do not assert that Spark acted to protect NGE’s economic interests, but
in fact allege just the opposite. (Am. Compl. ¶ 74 (“Spark was secretly using NGE to complete
the transaction with the Sellers for the benefit of Spark’s business.”) (emphasis added).) Spark
fails to identify any allegations describing its conduct as motivated by NGE’s economic interests,
and instead falls back on the Amended Complaint’s ambiguous description of Spark and NGE as
“affiliates.” (Def. Rep. at 9 & n.7.) Absent more concrete allegations regarding Spark’s
economic interest in NGE and the motives behind Spark’s interference with NGE’s obligations
to Sellers, the economic interest defense is not yet available to Spark.
3.
Whether Sellers’ Tortious Interference Claim is Duplicative of their
Contract Claim
Finally, Spark urges that the Sellers’ “tortious interference claim should be dismissed for
the additional and independent reason that it is based on the same set of facts as [their] breach of
contract claim against Spark.” (Def. Mem. at 22.) “As a general rule, tortious interference
claims that are duplicative of contract claims are precluded.” Choquette v. Motor Info. Sys., Inc.,
12
15 Civ. 9338, 2017 WL 3309730, at *6 (S.D.N.Y. Aug. 2, 2017) (collecting cases). That general
rule, however, does not categorically prohibit parallel tortious interference and breach of contract
claims; instead, it requires that plaintiffs show that their tort claim is based on “a duty that
‘spring[s] from circumstances extraneous to and not constituting elements of, the [parties’]
contract.’” Id. (alterations in original) (quoting Clark-Fitzpatrick, Inc. v. Long Island R.R. Co.,
70 N.Y.2d 382, 389 (1987)).
The Sellers have met that burden here. Their tortious interference claim can stand
entirely on Spark’s alleged interference with NGE’s obligations to the Sellers under a contract to
which Spark was a third party. (Am. Compl. ¶¶ 144–149; Pl. Opp. at 22.) Regardless of
whether Spark later assumed separate contractual duties to the Sellers when it purchased Major
Energy from NGE, its alleged tortious conduct prior to executing that purchase was a breach of
its independent legal duty not to interfere with the Sellers’ and NGE’s contract. Cf. S & S Hotel
Ventures Ltd. Partnership v. 777 S.H. Corp., 489 N.Y.S.2d 478, 481 (App. Div. 1st Dep’t 1985)
(vacating dismissal of claim for tortious interference with contract where plaintiff “allege[d] a
breach of duty by defendant to refrain from interfering with plaintiff’s contracts of sale [with
third-parties], separate and distinct from [defendant’s] breaches of duty” under contracts with
plaintiff). The mere fact that Spark may have later assumed separate and independent
contractual obligations to the Sellers does not establish that its earlier conduct was not a breach
of its preexisting legal duty not to interfere with the Sellers’ contract with NGE.
It should also be noted that where tortious interference claims are dismissed as
duplicative of breach of contract claims, courts often look to whether it is “undisputed that the
relationship between the parties [is] defined by a written contract.” See Clark-Fitzpatrick, Inc.,
70 N.Y.2d at 389. See also Allerand, LLC v. 233 E. 18th St. Co., L.L.C., 798 N.Y.S.2d 399, 402
13
(App. Div. 1st Dep’t 2005) (dismissing tortious interference claim after first finding that “[t]he
parties’ rights and obligations respecting the matter in dispute are governed by their contract”).
But in this case, the Sellers have not conceded “the validity of [the] direct or indirect
assignment” to Spark of NGE’s obligations to the Sellers. (Am. Compl. ¶ 138.) If, as the Sellers
urge, NGE’s sale of Major Energy to Spark is deemed void, then this case will become readily
distinguishable from those cases involving duplicative tortious interference and breach of
contract claims, because the Sellers would have no contract claims at all against Spark. Thus at
this stage of the litigation, the Sellers may plead in the alternative both breach of contract and
tortious interference claims.
C.
Special Damages
Defendants move to dismiss the Sellers’ claims to punitive and consequential damages
pursuant to a limitation of liability clause in the initial contract of sale between the Sellers and
NGE. The relevant provision of the contract states that “no Party will be obligated to any other
Party or Person for any consequential, incidental, indirect, special, exemplary or punitive
damages.” 4 (Dkt. 22-1 at 61.) The Sellers do not dispute Defendants’ interpretation of the scope
4
The relevant provision, Section 9.9 of the Membership Interest Purchase
Agreement between NGE and Sellers, states in full:
Notwithstanding any other term herein, no Party will be obligated to
any other Party or Person for any consequential, incidental, indirect,
special, exemplary or punitive damages or Losses based thereon,
including damages or Losses with respect to loss of future revenue,
income or profits, diminution of value or loss of business reputation
or opportunity, and no Party will be obligated to any other Party or
Person for any Losses or damages determined as a multiple of
income, revenue or the like, relating to the breach of any
representation, warranty, covenant or agreement herein (except and
to the extent that the Indemnified Party has been required to pay
such damages to any third Person).
14
of the limitation of liability clause, but instead argue that: (1) Defendants cannot avail
themselves of the clause because their fraudulent conduct “smacks of intentional wrongdoing”;
and (2) Spark cannot avail itself of the clause because Spark is not a party to the contract
between Sellers and NGE. (Pl. Opp. at 23–24.)
“New York courts have routinely enforced liability-limitation provisions when contracted
by sophisticated parties, recognizing such clauses as a means of allocating economic risk in the
event that a contract is not fully performed.” Process America, Inc. v. Cynergy Holdings, LLC,
839 F.3d 125, 138 (2d Cir. 2016). “But the [New York] Court of Appeals has also explained that
‘an exculpatory agreement . . . will not exonerate a party from liability under all circumstances.
. . . [I]t will not apply to exemption of willful or grossly negligent acts . . . [or when] the
misconduct for which it would grant immunity smacks of intentional wrongdoing.’” Net2Globe
Intern., Inc. v. Time Warner Telecom of N.Y., 273 F. Supp. 2d 436, 450 (S.D.N.Y. 2003)
(alterations in original) (quoting Kalisch-Jarcho, Inc. v. City of New York, 58 N.Y.2d 377, 384–
85 (1983).
Conduct that “smacks of intentional wrongdoing . . . is conduct that evinces a reckless
indifference to the rights of others.” Id. (quoting Sommer v. Federal Signal Corp., 79 N.Y.2d
540, 554 (1992)). To pierce a limitation-of-liability clause under this standard, a plaintiff must at
least establish that the defendant’s breaching conduct was performed “in bad faith,” which
“connotes a dishonest purpose.” Kalisch-Jarcho, 58 N.Y.2d at 385 & n.5. While a plaintiff may
pierce such a clause “even absent any evidence of malice,” id. at 385, courts have refused to void
such clauses where a party’s intentional breach “is motivated exclusively by its own economic
self-interest,” see Metropolitan Life Ins. Co. v. Noble Lowndes Intern., Inc., 84 N.Y.2d 430, 439
(Dkt. No. 22-1 at 61.)
15
(1994), or when the breach follows an unforeseen change in circumstances that “render[s]
performance economically unfeasible for” the breaching party. Net2Globe Intern., 273 F. Supp.
2d at 452 (“[The breaching party] did not anticipate the [changed circumstances] at the time the
parties’ contracts were negotiated and executed . . . . Accordingly, the conclusion by the New
York Court of Appeals that such behavior does not constitute intentional misrepresentation,
willfulness, or gross negligence extends to the present dispute.”).
The Sellers have alleged facts sufficient to show that Defendants NGE and Spark may
have been acting intentionally and in bad faith. The Sellers allege that NGE “deceiv[ed]” the
Sellers throughout the period of contract negotiations, and that “[u]nbeknownst to the Sellers,
NGE . . . had no intention whatsoever” of fulfilling its contractual obligations. (Am. Compl. ¶¶
3, 65.) The Sellers also allege that Spark intentionally sowed an atmosphere of “chaos and
confusion” at Major Energy, and that Spark has both failed to “act in good faith” and has even
acted “maliciously.” (Am. Compl. ¶¶ 78, 141, 147.)
These allegations distinguish this case from those involving intentional breaches
motivated only by unanticipated “changed circumstances at the time the parties’ contracts were
negotiated and executed,” which “do[] not constitute intentional misrepresentation, willfulness,
or gross negligence.” Net2Globe Intern., 273 F. Supp. 2d at 452. Instead, the Sellers’ Amended
Complaint alleges facts that Defendants anticipated their breach at the time they negotiated this
limitation of liability clause, which “betokens [NGE’s and Spark’s] reckless indifference to the
rights of” the Sellers. To be sure, there is a “high[] mark at which New York courts place the bar
. . . [for] wrongful conduct sufficient as a matter of law to nullify a limitations of liability clause
in contract,” Net2Globe Intern., 273 F. Supp. 2d at 454. But if proven, these allegations of
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deception could be sufficient to establish that NGE entered into and eventually breached its
contract with Sellers in bad faith.
Finally, whether Spark can avail itself of the limitation on liability clause in the contract
will ultimately turn on whether Spark can establish that it is in fact a party to that contract. To
the extent that the assignment of NGE’s contractual obligations and benefits to Spark is voided
or deemed invalid, Spark cannot avail itself of the limitation of liability clause. Accordingly,
dismissal of the Sellers’ claims to punitive and consequential damages against Spark would be
inappropriate at this stage of the litigation, regardless of whether Spark’s alleged conduct smacks
of intentional wrongdoing sufficient to pierce the clause.
IV.
Conclusion
For the foregoing reasons, Defendants’ motion to dismiss is GRANTED as to the claim
for fraudulent inducement against NGE and DENIED as to the claims for tortious interference
and for punitive or consequential damages.
Defendants shall file answers to the remaining claims within 21 days of the date of this
order.
The Clerk of Court is directed to close the motion at Docket Number 26.
SO ORDERED.
Dated: September 24, 2018
New York, New York
____________________________________
J. PAUL OETKEN
United States District Judge
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