Fraud Claim Not Duplicative of Contract Claim Because it Was Alleged Misrepresentation Made Before Contract and Was Collateral to It

On February 5, 2019, the First Department issued a decision in Dynamic-Hakim, LLC v. Maloney, 2019 NY Slip Op. 00836, holding that a fraud claim was not duplicative of a breach of contract claim because the alleged misrepresentation was made before the contract was entered into and was collateral to it, explaining:

The complaint alleges that defendant Kevin Maloney induced plaintiffs to turn over to him and defendant Property Markets Group, Inc. for full financing, development and construction a real estate project that plaintiffs Dynamic-Hakim, LLC and Brad Zackson had conceived of, created, and made a reality, by misrepresenting to them that his and Property Markets Group's experience gave them the wherewithal to complete the project. Contrary to defendants' contention, the alleged misrepresentation is a misrepresentation of a material present fact, and is therefore sufficient to state a cause of action for fraud in the inducement against Maloney and Property Markets Group. However, there are no facts alleged that would establish that this misrepresentation should be imputed to defendant KM QPP Equity, LLC. Although the complaint alleges that Maloney dominated defendant KM QPP Equity and controlled the project through KM QPP Equity as the managing member of one of the joint venture partners, it does not allege that defendant KM QPP Equity made any representations to plaintiffs to induce their participation in the project.

Contrary to defendants' further contention, the complaint also adequately pleads justifiable reliance by alleging that the facts underlying the fraud were peculiarly within Maloney and Property Markets Group's knowledge.

The fraud cause of action is not duplicative of the breach of contract cause of action, because it alleges that the misrepresentation was made before the drafting of the contracts, to which plaintiffs are in any event not party, and thus is collateral to the promises to perform contained in the contracts.

(Internal citations omitted).

Commercial litigation frequently involves fraud-based claims. Such claims have special pleading requirements such as the rule discussed here that a fraud claim cannot be based on a breach of contract. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have a question regarding a fraud-based claim.