IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA
October 5, 2010
ERNESTO LEONE, ANGELO DUVA, PLAINTIFFS,
ANTHONY CATALDO, DEFENDANT.
The opinion of the court was delivered by: Anita B. Brody, J.
Plaintiffs Angelo Duva ("Duva") and Ernesto Leone ("Leone") bring suit against Anthony Cataldo ("Cataldo"), raising five claims: (1) breach of contract; (2) common law fraud; (3) intentional misrepresentation; (4) negligent misrepresentation; and (5) breach of the implied covenant of good faith. Cataldo counterclaims asserting a breach of contract. Both parties now move for summary judgment. For the reasons that follow, I will GRANT in part and DENY in part Defendant's Motion for Summary Judgment, and DENY Plaintiffs' Motion for Summary Judgment.*fn1
On March 14, 2006, Cataldo ran an advertisement in the Italian-language newspaper America Oggi for the sale of an Italian restaurant (the "Oggi advertisement"). The Oggi advertisement represented that the restaurant earned $60,000 in gross weekly sales. The advertisement did not disclose the name or location of the restaurant for sale, but directed all inquires to a real estate agency in Little Ferry, New Jersey. Duva, an experienced restauranteur who owned multiple restaurants in Pennsylvania and New Jersey, saw the advertisement while reading the March 14 issue of the newspaper. Considering a purchase, Duva called the listed real estate agency to inquire about the restaurant. The agency informed him that the advertisement referred to Tony's Italian Grill (the "Pizzeria"), a pizzeria in Endicott, New York owned by Cataldo Pizzeria & Restaurant, Inc.
On April 24, 2006, Duva and his brother met with Cataldo-the owner of Cataldo Pizzeria & Restaurant Inc. in Endicott, New York. Duva alleges that Cataldo unequivocally stated at this meeting that the Pizzeria earned $60,000 in gross income per week. Cataldo contends that he made clear that the Oggi advertisement did not accurately reflect the Pizzeria's income. Duva and Cataldo met multiple times over the next several weeks. In May 2006, Duva brought Leone, who owned several restaurants in Pennsylvania, into the deal as an equal partner.
From this point on, Leone became the point person for the venture, and led the discussions that ensued. Id.
In June 2006, Duva and Leone telephoned attorney Donald Cofsky ("Cofsky"), asking him to represent them in closing the deal. Cofsky agreed to represent Duva and Leone, and on June 27, 2006, Cofsky sent Cataldo a letter outlining the terms of the deal as he understood them. On July 11, 2006, Fred Griffen ("Griffen"), an attorney representing Cataldo, contacted Cofsky to discuss the terms that Cofsky proposed. Cofsky and Griffen negotiated the deal over the next several months.
After negotiations had completed, the parties eventually signed four relevant contracts:
(1) a Sales Agreement; (2) a Lease Agreement; (3) a Post-Closing Agreement; and (4) a Note financing Duva and Leone's obligation under the Sales Agreement (the "Note"). On October 6, 2006, the parties signed the first of these contracts-the Sales Agreement. The basic terms of the Sales Agreement were as follows:
The Purchaser Price shall be One Point One Million Dollars ($1,100,000.00) payable as follows: Fifty Thousand Dollars ($50,000.00) on signing of this Agreement; Five Hundred Fifty Thousand Dollars ($550,000.00) payable at closing; and the balance in the amount of Five Hundred Thousand Dollars ($500,000) payable at six percent (6%) interest over a six (6) year period amortized over six (6) years.
The Sales Agreement also included a representation and warranty concerning the Pizzeria's gross weekly income, and permitting Duva and Leone to conduct due diligence on this warranty:
The Seller represents and warranties that the gross income of the restaurant is Fifty Thousand Dollars ($50,000.00) per week. Upon signing of this Agreement Buyer shall have two (2) weeks to verify said representation and Seller will cooperate in enabling Buyer to do so. If the representation proves to be false then at the option of the Buyer this Agreement can be cancelled. If the representation is true and if Buyer decides not to purchase then the Fifty Thousand Dollars ($50,000.00) paid upon signing of this Agreement shall be forfeited and belong to the Seller.
Finally, the Sales Agreement included a general merger clause that incorporated specific sections of an attached letter from Cofsky to Griffen (the "Cofsky Letter"), an early offer from Cofsky which had since been rejected:
This Agreement reflects the agreement of the parties and any matter contained in the attached [Cofsky Letter] NOT incorporated herein is not part of this Agreement.
The Sales Agreement did specifically incorporate the restrictive covenant in the Cofsky Letter that provided:
Seller shall provide Buyer with a covenant not to compete as part of this transaction, the terms of which will be included in the Agreement of Sale, but shall generally provide that it will cover a ten mile radius and will continue for six years which is the term of the note.
In his Letter, Cofsky also stated that Duva and Leone "are not willing to guarantee the obligations" in the Cofsky Letter. This statement was not explicitly incorporated into the Sales Agreement.
Upon signing the Sales Agreement, Plaintiffs immediately hired Frank Grasmuck ("Grasmuck"), a restaurant owner who had previously worked for Leone, to observe the Pizzeria and perform the requisite due diligence. Both parties dispute what happened during due diligence. Duva and Leone allege that Cataldo did not cooperate with them sufficiently to allow them to conduct a rigorous due diligence. Specifically, Cataldo allegedly withheld information that would have raised questions about the $50,000 representation, and also allegedly prevented Grasmuck from accessing important data and documents. Cataldo disputes Duva and Leone's account arguing that he provided accurate information and did not impede Grasmuck's due diligence in any way.
Duva and Leone did not opt out of the Sales Agreement at the close of the two-week due diligence period. On November 30, 2006, the parties signed a Lease Agreement for the premises. Article 21 of the Lease Agreement laid out the terms governing default of the Lease Agreement, and how Cataldo might terminate the lease, providing as follows:
Tenant shall not be held in default of any term or provision of this Lease unless:
(a) It shall have defaulted in its payment of any rental or additional rental due as per Article 7 hereunder and within fifteen days after receipt of written notice of default sent to it by Landlord, said default remains uncured; or
(b) Unless it shall have failed to undertake and reasonably pursue a cure of any other default within thirty (30) days after receipt of written notice from Landlord; or . . .
(d) The Premises are vacant and no business is being conducted as a restaurant thereon
(e) In the event that Tenant's premises shall be vacant or closed at any time during the term of this Lease for more than thirty (30) days, . . . Landlord shall have the right to terminate the said Lease by giving thirty (30) days notice in writing of such termination, which, if not reopened at the expiration of the thirty (30) days the Lease shall be terminated.
(f) In the event of such termination, Landlord may enter into possession of said premises and lease such premises to another tenant. . . .
(g) In the event of any default, Tenant shall be responsible to reimburse the Landlord for all of Landlord's costs of collection . . . . In the event of such default, Landlord may declare upon fifteen (15) days written notice, the term of this Lease terminated, if the default remains uncured at the expiration of the fifteen (15) days. Landlord may then enter into possession of said premises with or without judicial process including self help without process of law and remove Tenant's effects and take complete possession of the Premises. Landlord further shall have all rights granted to it under the laws of the state in which the Premises are located including but not limited to padlocking the Premises.
On December 1, 2006, after the due diligence period had concluded and the Lease Agreement had been signed, the parties closed the deal by signing the remaining two relevant documents: the Note and the Post-Closing Agreement. The Note financed the six-year, $500,000 commitment described in the Sales Agreement. The Note specified that it provided for a loan from Cataldo to Cataldo Pizzeria & Restaurant, Inc., rather than to Duva and Leone individually. Leone signed the Note on behalf of Cataldo Pizzeria & Restaurant, Inc.
Finally, as part of the closing, the parties also signed a Post-Closing Agreement. The Post-Closing Agreement opened with the following two "whereas" clauses:
WHEREAS, the parties have performed the requirements under this [Sales] Agreement and executed various documents in relation to this transaction, and WHEREAS, the parties wish to set forth their continued understanding and agreements post closing and to acknowledge that certain terms and conditions of the Agreement shall survive closing.*fn3 The Post-Closing Agreement also included an iteration of the restrictive covenant from the Sales Agreement, providing:
A Restrictive Covenant as referred to in the Agreement has been entered into and which provides generally for a six (6) year proscribed period and for a radius of ten (10) miles, but with a provision that the name "Tony's Italian Grill" or any variation thereof may not be used for the same six (6) year period. . . . Said Covenant is attached hereto and made a part hereof.
The Post-Closing Agreement did not include the $50,000 gross weekly income representation in the Sales Agreement.
On December 1, 2006, after the deal had closed, Duva and Leone took possession of the Pizzeria. What happened afterwards is also in dispute. Duva and Leone allege that the Pizzeria quickly began to underperform. Notably, their gross weekly income in January 2006 was allegedly well below $50,000, in the range of $30,000--$40,000. Duva and Leone allege that the Pizzeria's gross income remained in that range from February 2006 until they vacated the premises, likely in or around September 2007.*fn4 Duva and Leone further allege that while they operated the Pizzeria, Cataldo worked in his brother's restaurant, Nick's, in Endicott, New York, within the ten-mile radius prohibited by the restrictive covenant in the Post-Closing Agreement.
Cataldo admits that the Pizzeria's income decreased over time, but attributes that decrease to management decisions made by Duva and Leone. Specifically, Cataldo notes that in January 2007, Duva and Leone changed the Pizzeria's signature recipes, replaced the head chef, and regularly yelled at staff and customers. Cataldo also summarily states that he did not violate the restrictive covenant, and did not work at Nick's while Duva and Leone operated the Pizzeria.
Finally, in August 31, 2007, the deal broke down and Duva and Leone filed the instant suit. In September 2007, Duva and Leone stopped paying the money owed under the Sales Agreement. On October 4, 2007, after Duva and Leone missed their payments for September and October, Cataldo sent Duva and Leone a notice of delinquency.*fn5 It is unclear exactly when Duva and Leone actually abandoned the Pizzeria, but by October 21, 2007 the premises were vacant. On October 21, 2007, without any further notice, Cataldo retook possession of and reopened the Pizzeria. Both parties move for summary judgment on the various claims and counterclaims.
II. LEGAL STANDARD
Summary judgment will be granted "if the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c). There is a "genuine" issue of material fact if the evidence would permit a reasonable jury to find for the non-moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). The "mere existence of a scintilla of evidence will be insufficient." Id. at 252.
The moving party must make an initial showing that there is no genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). This does not mean that the moving party has to provide evidence negating the claims, but merely that the moving party must identify "factually unsupported claims or defenses." Id. The non-movant must then "make a showing sufficient to establish the existence of [every] element essential to that party's case, and on which that party will bear the burden of proof at trial." Id. at 322; see also Fed. R. Civ. P. 56(e)(2). The non-moving party must "do more than simply show that there is some metaphysical doubt as to the material facts." Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986). In determining whether the non-moving party has established each element of its case, the court must draw all reasonable inferences in the non-moving party's favor. Id. at 587.
Because the two Cross-Motions require opposing factual inferences to be drawn, I consider each Motion separately.
A. Cataldo's Motion for Summary Judgment
Cataldo moves for summary judgment on all of Duva and Leone's five remaining claims:
(1) breach of contract; (2) fraudulent inducement; (3) intentional misrepresentation; (4) negligent misrepresentation; and (5) breach of the implied covenant of good faith.*fn6 I consider each claim in the order asserted.
1. Breach of Contract
Ultimately, Duva and Leone are claiming breaches of three different clauses in the various agreements signed in this deal: (1) the $50,000 gross income warranty clause in the Sales Agreement; (2) the restrictive covenant in the Post-Closing Agreement and the Sales Agreement; and (3) Article 21 of the Lease Agreement. Under New York law, "[t]he elements of a breach of contract claim are: '(1) a contract; (2) performance of the contract by one party; (3) breach by the other party; and (4) damages.'" Arakelian v. Omnicare, Inc., 2010 WL 3260061, at *6 (S.D.N.Y. Aug. 18, 2010) (quoting Terwilliger v. Terwilliger, 206 F.3d 240, 246 (2d Cir. 2000)).*fn7 Duva, Leone, and Cataldo signed a Sales Agreement, a Post-Closing Agreement, a Note, and a Lease Agreement. The parties agree that the first element is established with respect to all of these agreements-that each is a binding, enforceable contract. The parties dispute the substance of the contracts, and whether the parties performed or breached.
In New York, when the issue is the interpretation of contract language, summary judgment is appropriate only "[w]here the contract language is wholly unambiguous . . . . Where the language is ambiguous, the contract's meaning becomes an issue of fact, precluding summary judgment. The key question of whether the contract language is ambiguous is a question of law to be decided by the court." Sarinsky's Garage Inc. v. Erie Ins. Co., 691 F. Supp. 2d 483, 485-86 (S.D.N.Y. 2010) (internal citations omitted). Contractual language is ambiguous "if the terms could suggest more than one meaning when viewed objectively by a reasonably intelligent person who has examined the context of the entire integrated agreement and who is cognizant of the customs, practices, usages and terminology as generally understood in the particular trade or business." Id. at 486 (internal quotation marks and citations omitted).
The parties may present extrinsic evidence regarding their actual intent. If the extrinsic evidence is so one-sided that no reasonable person could decide the contrary, the court can decide the issue as a matter of law. Id. Thus, if the contractual language is unambiguous, or where that ambiguous language must be construed in a certain way as a matter of law a court can grant summary judgment.
(a) Breach of the Warranty Clause
The warranty clause of the Sales Agreement provides: The Seller represents and warranties that the gross income of the restaurant is Fifty Thousand Dollars ($50,000.00) per week. Upon signing of this Agreement Buyer shall have two (2) weeks to verify said representation and Seller will cooperate in enabling Buyer to do so. If the representation proves to be false then at the option of the Buyer this Agreement can be cancelled. If the representation is true and if Buyer decides not to purchase then the Fifty Thousand Dollars ($50,000.00) paid upon signing of this Agreement shall be forfeited and belong to the Seller.
Duva and Leone claim two breaches of this clause: (1) a breach of the $50,000 warranty itself; and (2) a breach of Cataldo's obligation to cooperate in enabling Duva and Leone to perform due diligence in order to verify the warranty.
Duva and Leone claim that Cataldo breached the first sentence of the clause-the warranty "that the gross income of the restaurant is Fifty Thousand Dollars ($50,000.00) per week." In response, Cataldo offers facts tending to show that when he ran the Pizzeria, it earned $50,000 in gross income each week. At the summary judgment stage, the legal question is whether this language is ambiguous, and under this language, whether the warranty that the Pizzeria's gross weekly income was $50,000 survives the two-week due diligence period in the contract. In other words, can Duva and Leone can bring suit for a breach of this warranty after they failed to cancel the contract during the due diligence window? If the warranty clause survives after their failure to cancel, Duva and Leone can bring a claim for damages under the clause, at which point Cataldo's evidence relating to his cooperation during due diligence may be material. If the warranty clause does not survive, Duva and Leone have no claim.
Duva and Leone also claim that Cataldo breached the second sentence of the clause providing that "Buyer shall have two (2) weeks to verify said representation and Seller will cooperate in enabling Buyer to do so." Duva and Leone argue that Cataldo did not cooperate in enabling them to perform their due diligence in order to verify the $50,000 warranty. Again, Cataldo responds by marshaling evidence of his cooperation. The initial question with this claim is whether Duva and Leone can claim a failure to cooperate after failing to cancel the contract within the two-week due diligence window.
Both of these claims require a close examination of the warranty clause, and the effect of the two-week window in the second sentence of the clause. The language of the clause is ambiguous. The clause allows Duva and Leone to cancel the contract, but makes no mention that cancellation is the only remedy available to them. The clause does not explicitly prevent Duva and Leone from closing the deal, losing the ability to regain their $50,000 deposit, and then suing for damages. The clause also does not explicitly state that Duva and Leone cannot complain of a failure to cooperate after the close of the two-week due diligence window. Given the ambiguous language, the effect of the two-week window and the construction of the warranty clause are issues of fact.
Cataldo urges that the two week window in the warranty clause be construed as a limitation of liability provision governing both the complaints about the warranty and the failure to cooperate. He argues that the two week window was intended to provide Duva and Leone with a singular remedy should they be unable to sufficiently verify the warranty during the due diligence period-cancellation of the contract and a return of the initial deposit. Cataldo further argues that "a limitation of liability provision in a contract represents the parties' agreement on the allocation of the risk of economic loss in the event that the contemplated transaction is not fully executed, which the courts should honor." DynCorp v. GTE Corp., 215 F. Supp. 2d 308, 317 (S.D.N.Y. 2002). This argument, however, requires a particular construction of the warranty clause-a clause that is ambiguous and open to interpretation. Cataldo has pointed to no law requiring that the warranty clause be construed as a limitation of liability provision. The clause's construction, and thus whether Duva and Leone's claims relating to the warranty and Cataldo's failure to cooperate survive despite failing to cancel the agreement during the two-week window, remain open questions of fact.*fn8
Finally, Cataldo argues that Duva and Leone are estopped from asserting a breach of the due diligence clause because the Post-Closing Agreement supposedly acknowledged in a "whereas" clause that the parties "performed the requirements" of the Sales Agreement. Because the Sales Agreement required Cataldo to "cooperate in enabling" Duva and Leone to perform their due diligence, Cataldo argues that the above clause should be read as an acknowledgment that Cataldo performed his duties under the warranty clause of the Sales Agreement. Such an acknowledgment could apply regardless of how the warranty clause is construed, thus precluding Duva and Leone from proving a breach.
Under New York law, a party cannot bring a breach of contract action where that party "acknowledged . . . performance in clear unambiguous language, and cannot now refute its representation." Wells Fargo Bank Minn. v. BrooksAmerica Mortgage Corp., 2004 WL 2072358, at *7 (S.D.N.Y. Sept. 14, 2004); Credit Alliance Corp. v. David O. Crump Sand & Fill Co., 470 F. Supp. 489, 492 (S.D.N.Y. 1979). Where the party acknowledges performance in writing and subsequently sues for breach of contract, that party will be "bound by its contrary written representation that the [seller] had performed 'fully and satisfactorily.'" Wells Fargo Bank Minn., Nat'l Ass'n v. CD Video, Inc., 802 N.Y.S.2d 423, 424 (N.Y. App. Div. 2005); Infilco Degremont, Inc. v. Carland Constr. Co., Inc., 579 N.Y.S.2d 405, 406 (N.Y. App. Div. 1992) (signing "a service report acknowledging completion of plaintiff's contractual obligations and acceptance of performance" barred a subsequent suit).
Here, however, the supposed acknowledgment of performance only appears in a "whereas" clause, as opposed to the body of the contract. New York law reads "whereas" clauses with skepticism, and generally hesitates to read them as creating a right or obligation. Grand Manor Health Related Facility, Inc. v. Hamilton Equities Inc., 885 N.Y.S.2d 255, 256 (N.Y. App. Div. 2009) ("Although a statement in a 'whereas' clause may be useful in interpreting an ambiguous operative clause in a contract, it cannot create any right beyond those arising from the operative terms of the document."); Moore v. Kopel, 653 N.Y.S.2d 927, 929 (N.Y. App. Div. 1997) ("whereas" clause "merely [listed] one of the objectives of the contract" as opposed to expressly creating an obligation); Gittleson v. Dempster, 539 N.Y.S.2d 46, 47 (N.Y. App. Div. 1989) (statements in a "whereas" clause did "not alter or qualify the defendant's obligation to pay [under the contract]."). That is, under New York law, a "whereas" clause may be evidence of a contract's meaning, but will generally not create a binding obligation.
Therefore, at the summary judgment stage, this "whereas" clause cannot be read to foreclose a breach of contract claim as a matter of law. I will therefore deny Cataldo's Motion for Summary Judgment as to Duva and Leone's claims for breach of the $50,000 warranty, as well as Duva and Leone's claims relating to Cataldo's failure to cooperate during due diligence.*fn9
(b) Breach of the Restrictive Covenant
Duva and Leone claim that Cataldo breached the restrictive covenant in the Sales Agreement and Post-Closing Agreement by working at his brother Nick's restaurant. The language in the restrictive covenant is not ambiguous, and neither party has called into question the meaning of the clause. Rather, the parties dispute whether Duva and Leone have produced evidence sufficient to show a breach. Cataldo argues that Duva and Leone have offered no actual proof that Defendant worked at Nick's aside from Leone's testimony that he thought Cataldo worked there.
The only evidence supporting this claim is Leone's testimony that Cataldo must have been working at Nick's, because "all my help from Tony's Italian Grill, they went over there. The pizza man, the waitress, a lot of people went there. And I think Tony was partner with the brother." (Leone Dep. 181:11-16). When asked if he had any actual evidence that Cataldo was working at Nick's restaurant, Leone said no. (Id. 182:2-8). In other words, Duva and Leone have offered evidence of the following four facts: (1) Cataldo's brother owned Nick's; (2) Nick's was also located in Endicott, New York-the same town as the Pizzeria; (3) Cataldo was a partner at Nick's, with his brother; and (4) a large contingent of the Pizzeria's staff migrated from the Pizzeria to Nick's after Duva and Leone took over. The only evidence of these two facts-that Cataldo was a partner at Nick's, and that staff left the Pizzeria to work at Nick's-is Leone's speculation in his deposition testimony.
This deposition testimony is vague and lacks detail. Duva and Leone have pointed to no other evidence supporting these facts, or clarifying Leone's testimony in any manner. No reasonable factfinder could find a breach here based exclusively on two unsupported pages of Leone's deposition testimony. I will thus grant Cataldo's Motion for Summary Judgment on these claims.
(c) Breach of the Lease Agreement
Finally, Duva and Leone claim that by re-entering the Pizzeria after they abandoned it, Cataldo breached Article 21(f) of the Lease Agreement, providing that "[i]n the event of termination, Landlord may enter into possession of said premises and lease such premises to another tenant." Duva and Leone argue that under Article 21, Cataldo needed to terminate the lease before he could retake possession of the Pizzeria.*fn10
In order to prove a breach by Cataldo, however, Duva and Leone must be able to prove that they performed under the Agreement. Under the terms of Article 21, Plaintiffs defaulted as soon as they vacated the Pizzeria, regardless of whether they were provided notice. It is clear that Duva and Leone vacated the premises prior to October 27, 2007, when Cataldo retook possession. As such, by October 27, 2007 at the latest, Duva and Leone had defaulted on the Lease Agreement. Additionally, Duva and Leone admit that they stopped paying rent under the Lease Agreement starting in September 2007.*fn11 Both of these events occurred long before November 29, 2007, when Duva and Leone filed their Second Amended Complaint.*fn12
By defaulting on the Lease Agreement, Duva and Leone have necessarily failed to perform. Black's Law Dictionary 417 (6th ed. 1990) (defining default as a "failure to perform a legal or contractual duty . . . or to perform an agreement." (citing Eastman v. Morgan, 43 F. Supp. 637, 641 (S.D.N.Y. 1942))). Duva and Leone have also presented no evidence excusing performance. Because Duva and Leone cannot establish the requisite element of performance under the Lease Agreement, Duva and Leone cannot prove all of the elements of their claim for breach of the agreement. I will therefore grant Cataldo's Motion for Summary Judgment as to those claims.
2. Common Law Fraud
Duva and Leone's second claim is for common law fraud. Duva and Leone base this claim both on Cataldo's alleged $60,000 gross weekly sales representation in the Oggi advertisement and repeated during Duva's first meeting with Leone, as well as the $50,000 warranty in the warranty clause of the Sales Agreement.*fn13 Initially, it is clear that the claim premised on the warranty clause is duplicative of their breach of contract claim for the same warranty. Under New York law, a fraud claim is duplicative of a breach of contract claim where there is no legal duty apart from the contract, and where the misrepresentation is not extraneous to the contract. Bridgestone/Firestone, Inc. v. Recovery Credit Servs., Inc., 98 F.3d 13, 20 (2d Cir. 1996); see also Guilbert v. Gardner, 480 F.3d 140, 148 (2d Cir. 2007) (holding that a complaint "fails to support a claim of fraud under New York law because it is duplicative of the breach of contract claim" where both claims arose out of the same essential facts and duties); Brown v. Brown, 785 N.Y.S.2d 58, 59 (N.Y. App. Div. 1991) (holding that a fraud claim was "precluded by the fact that a simple breach of contract claim may not be considered a tort unless a legal duty independent of the contract - i.e., one arising out of circumstances extraneous to, and not constituting elements of, the contract itself - has been violated."). Parts of Duva and Leone's contract claim and their fraud claim relate to the same warranty, and thus the same contractual duty. As a result, Duva and Leone's fraud claim premised on the $50,000 representation is duplicative of their related contract claim. Duva and Leone's fraud claim based on the $60,000 representation in the Oggi Advertisement and repeated at Duva's first meeting with Cataldo, however, is independent from the Sales Agreement and requires a closer substantive examination.
In order to make out a fraud claim in New York, a plaintiff must "prove, by clear and convincing evidence, a misrepresentation, which was false and known by the defendant to be false, made for the purpose of inducing the plaintiff to rely upon it, justifiable reliance and injury." Tanzman v. La Pietra, 778 N.Y.S.2d 199, 200 (N.Y. App. Div. 2004). Cataldo argues that Duva and Leone could not have justifiably relied on the $60,000 representation.
Under New York law, a party generally cannot justifiably rely on a representation prior to a contract where that representation is absent from the final agreement, and where the final agreement has a valid merger clause. ATSI Comms., Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 105 (2d Cir. 2007) ("Where the plaintiff is a sophisticated investor and an integrated agreement between the parties does not include the misrepresentation at issue, . . . [the] causes of action [ ] based on alleged misrepresentations made during negotiations preceding the defendants' investment . . . are barred by the merger clauses."); Dallas Aerospace, Inc. v. CIS Air Corp., 2002 WL 31453789, at *4 (S.D.N.Y. Oct. 31, 2002) (holding that plaintiff "cannot establish justifiable reliance on any [prior] representation . . . [where] the Agreement states that '[t]his Agreement contains the entire understanding of the parties with respect to the purchase and sale of the engine . . . ."); Grupo Sistemas Integrales de Telecomunicacion S.A. de C.V. v. AT & T Commc'ns, Inc., 1996 WL 312535, at *7 n.3 (S.D.N.Y. June 10, 1996) (holding that because "a merger clause puts parties on special notice that reliance on statements extrinsic to the contract is generally unwarranted . . . [fraud] claims would, in the overwhelming majority of instances, fail . . . for lack of justifiable reliance."). Additionally, "[w]here sophisticated businessmen engaged in major transactions enjoy access to critical information but fail to take advantage of that access, New York courts are particularly disinclined to entertain claims of justifiable reliance." Grumman Allied Indus., Inc. v. Rohr Indus., Inc., 748 F.2d 729, 737 (2d Cir. 1984); Kinsey v. Cendant Corp., 588 F. Supp. 2d 516, 518 (S.D.N.Y. Nov. 6, 2008) ("[T]he sophistication of a party is relevant to the reasonableness of his asserted reliance on a defendant's representations."); Matsumura v. Benihana Nat'l Corp., 542 F. Supp. 2d 245, 257 (S.D.N.Y. 2008) (holding that plaintiffs could not justifiably rely on a prior representation where they were "sophisticated entrepreneurs who built a successful restaurant franchise . . . and managed numerous other restaurant ventures").
Here, the Sales Agreement included a general merger clause. Yet neither the Sales Agreement, nor any of the draft agreements communicated between attorneys Cofsky and Griffen, contained any reference to a $60,000 gross representation in the Oggi Advertisement and repeated during Duva's first meeting with Cataldo. Given that the merger clause explicitly disclaimed any conditions not specifically incorporated into the Sales Agreement, Duva and Leone could not justifiably rely on the prior $60,000 gross weekly sales representation in the Oggi Advertisement and repeated during Duva's first meeting with Cataldo. See Dallas Aerospace, 2002 WL 31453789, at *4 ("[A] party cannot justifiably rely on a representation that has been explicitly disclaimed in the agreement."). Moreover, both Duva and Leone have owned or managed several restaurants, and Duva has participated in a number of restaurant sales prior to the instant transaction. Given their experience in conducting these transactions, Duva and Leone could not justifiably rely on the $60,000 gross weekly sales representation where the Sales Agreement did not include the representation, and in fact included a merger clause disclaiming any external representations. Because Duva and Leone cannot establish the element of justifiable reliance, I will grant Cataldo's Motion for Summary Judgment as to their claim for common law fraud (Count II).
3. Intentional Misrepresentation
Duva and Leone claim intentional misrepresentation, based on Cataldo's alleged $60,000 representation. The "elements of common-law fraud and intentional misrepresentation under New York law are the same." B & M Linen, Corp. v. Kannegeiser, U.S., Corp., 679 F. Supp. 2d 474, 480 (S.D.N.Y. 2010) (citing Indep. Order of Foresters v. Donaldson, Lufkin & Jenrette, Inc., 157 F.3d 933, 940 (2d Cir. 1998)); Ho Myung Moolsan Co., Ltd. v. Manitou Mineral Water, Inc., 665 F. Supp. 2d 239, 259(S.D.N.Y. 2009). Here, Duva and Leone have already claimed common law fraud. Both of these claims are premised on Cataldo's alleged $60,000 representation. There is no difference between the two claims, either in terms of legal elements, or factual allegations. As such, the two claims are identical, and "the plaintiffs' [intentional] misrepresentation cause of action is duplicative of their fraud claim." Nwagboli v. Teamwork Transp. Corp., 2009 WL 4797777, at *6 (S.D.N.Y. Dec. 7, 2009); see also Jackson Nat'l Life Ins. Co. v. Ligator, 949 F. Supp. 200, 204 (S.D.N.Y. 1996) (finding that claims for misrepresentation and fraud were "supported by the same legal theories" and thus was not permitted, as it would result in a double recovery). I will grant Cataldo's Motion for Summary Judgment as to Duva and Leone's intentional misrepresentation claim (Count V).
4. Negligent Misrepresentation
Duva and Leone next claim negligent misrepresentation, again premised on Cataldo's alleged $60,000 representation. In order to make out a negligent misrepresentation claim in New York, a plaintiff must prove that "(1) the defendant had a duty, as a result of a special relationship, to give correct information; (2) the defendant made a false representation that he or she should have known was incorrect; (3) the information supplied in the representation was known by the defendant to be desired by the plaintiff for a serious purpose; (4) the plaintiff intended to rely and act upon it; and (5) the plaintiff reasonably relied on it to his or her detriment." SEC v. Lee, 2010 WL 2594280, at *5 (S.D.N.Y. June 18, 2010) (citing Hydro Investors, Inc. v. Trafalgar Power, Inc., 227 F.3d 8, 20 (2d Cir. 2000)).
The first element requires that the defendant be "in a special position of confidence and trust with the injured party such that reliance on the negligent misrepresentation is justified." Eternity Global Master Fund Ltd. v. Morgan Guar. Trust Co. of N.Y., 375 F.3d 168, 187 (2d Cir. 2004) (quoting Kimmell v. Schaefer, 675 N.E.2d 450, 454 (N.Y. 1996)). Under New York law, this "special relationship" requires "a closer degree of trust and reliance than that of the ordinary buyer and seller." Am. Protein Corp. v. AB Volvo, 844 F.2d 56, 63-64 (2d Cir. 1988) (citing Coolite Corp. v. American Cyanamid Co., 384 N.Y.S.2d 808, 811 (N.Y. App. Div. 1976)); Congress Fin. Corp. v. John Morrell & Co., 790 F. Supp. 459, 474 (S.D.N.Y. 1992) ("Courts generally find that an ordinary contractual relationship alone is insufficient to constitute a special relationship."). Notably, New York courts have declined to allow negligent misrepresentation claims arising out of a ""one-time, buyer-seller relationship between two sophisticated entities." Dallas Aerospace, Inc. v. CIS Air Corp., 2002 WL 31453789, at *3 (S.D.N.Y. Oct. 31, 2002).
Here, Duva and Leone have not shown any special duty independent from the contracts signed in the course of this deal. The only duties Duva and Leone cite to in their Second Amended Complaint arise out of the Sales Agreement, the Post-Closing Agreement, the Lease Agreement, and the Note. Even construing the facts in the light most favorable to Duva and Leone, this is precisely the type of "ordinary contractual relationship" which cannot support a claim of negligent misrepresentation under New York law. I will grant Cataldo's Motion for Summary Judgment as to Duva and Leone's claim for negligent misrepresentation (Count VI).
5. Breach of the Implied Covenant of Good Faith
Finally, Duva and Leone claim that by failing to "cooperate in enabling" them to perform due diligence on the $50,000 warranty, Cataldo breached the implied covenant of good faith. In New York, a claim for a breach of the implied covenant of good faith cannot survive "when it is based on the same facts as the breach of contract claim . . . [unless] it is based on allegations different from those underlying the accompanying breach of contract claim." Goldblatt v. Englander Commc'ns, LLC, 2007 WL 148699, at *5 (S.D.N.Y. Jan. 22, 2007) (quoting Siradas v. Chase Lincoln First Bank, N.A., 1999 WL 787658, at *6 (S.D.N.Y. Sept. 30, 1999)); Piven v. Wolf Haldenstein Alder Freeman & Herz LLP, 2010 WL 1257326, at *8 (S.D.N.Y. Mar. 12, 2010) ("New York law 'does not recognize a separate cause of action for breach of the implied covenant of good faith and fair dealing when a breach of contract claim, based upon the same facts, is also pled.'" (quoting Harris v. Provident Life & Accident Ins. Co., 310 F.3d 73, 81 (2d Cir. 2002))); Tex. Liquids Holdings, LLC v. Key Bank Nat'l Ass'n, 2007 WL 950136, at *2 (S.D.N.Y. Mar. 27, 2007).
The obligation to cooperate in enabling Duva and Leone to perform due diligence arose out of the warranty clause of the Sales Agreement. Duva and Leone's good faith claim is thus based on the same contractual clause as their breach of contract claim. Duva and Leone not only premise their good faith claim on the same duty as their contract claim, but even point to the same conduct by Cataldo in both claims. Under New York law, then, Duva and Leone are prohibited from recovering for a breach of the implied covenant of good faith because this claim is duplicative of their breach of contract claim. I will therefore grant Cataldo's Motion for Summary Judgment as to Duva and Leone's claim for breach of the implied covenant of good faith (Count VII).
B. Plaintiffs' Motion for Summary Judgment on Defendant's Counterclaim
Duva and Leone also move for Summary Judgment on Cataldo's Counterclaim for the balance of the six-year, $500,000 commitment in the Sales Agreement. Duva and Leone point to the Note financing this $500,000 commitment, arguing that because Leone only signed the Note on behalf of Cataldo Pizzeria, Inc., and because Duva and Leone did not personally guarantee the Note, Cataldo cannot now sue them individually for the remaining balance. Cataldo responds that he is suing for a breach of the Sales Agreement, which Duva and Leone signed personally, as opposed to a breach of the Note. In adjudicating Duva and Leone's Motion for Summary Judgment, then, I must determine whether Cataldo can sue Duva and Leone individually for the sum owed under Sales Agreement, despite the fact that they did not guarantee the Note designed to pay off that agreement.
As discussed in Part III.A.1 supra, a breach of contract under New York law has four elements: "(1) a contract; (2) performance of the contract by one party; (3) breach by the other party; and (4) damages." Arakelian, 2010 WL 3260061, at *6. Once again, there is no dispute that there was a contract between the parties. The contested elements are again the second and third elements-performance and breach. Cataldo claims that he performed his end of the Sales Agreement and that Duva and Leone breached their obligation to pay the balance of the $500,000 obligation under the Sales Agreement. Duva and Leone of course disagree.
Considering the Sales Agreement in isolation, Cataldo has raised a genuine issue of material fact as to both performance and breach. Cataldo has presented evidence that he cooperated with Duva and Leone in performing their due diligence as required by the contract. Cataldo has also provided evidence that Duva and Leone breaches their financial obligation of $500,000 over six years under the Sales Agreement. Duva and Leone do not dispute that they have not paid the balance of the $500,000 required under the Sales Agreement.
The more difficult question, however, is whether the Sales Agreement can indeed be read in isolation for the purposes of assessing Duva and Leone's personal liability. Specifically, Duva and Leone argue that their failure to personally guarantee the Note should be read along with the Sales Agreement, and should protect Duva and Leone from personal liability for breach of the Sales Agreement because they both agreements were executed together, on December 1, 2006. Additionally, Duva and Leone argue that the Cofsky Letter's statement that Duva and Leone "are not willing to guarantee the obligations" in the Cofsky letter should be read with the Sales Agreement, because the Cofsky Letter was attached to the agreement. If either document is read together with the Sales Agreement, it might preclude Duva and Leone from being held personally liable for the $500,000 obligation in the Sales Agreement.
In New York, whether a contract should be read in conjunction with other related documents depends on the intent of the parties. See Bank of N.Z. v. Peers Holdings, Inc., 1991WL 221122, at *2 (S.D.N.Y. Oct. 16, 1991) ("The question whether the court should read the letter and the guarantee together as part of one agreement turns on the intention of the parties."); Barclays Bank of N.Y. v. Goldman, 517 F. Supp. 403, 409 (S.D.N.Y. 1981) ("Whether two agreements should be read together clearly turns on the intention of the parties."). The intent of the parties is a question of fact. Barclays Bank of N.Y. v. Goldman, 517 F. Supp. at 409 (citing Lowell v. Twin Disc, Inc., 527 F.2d 767, 769-70 (2d Cir. 1975)).
Duva and Leone cite to Ameritrust Co. Nat'l Ass'n v. Chanslor, 803 F. Supp. 893, 896 (S.D.N.Y. 1992) for the proposition that "under the law of New York, 'where two or more written instruments between the same parties concerning the same subject matter are contemporaneously executed, they will be read and interpreted together.'" Ameritrust Co. Nat'l Ass'n v. Chanslor, 803 F. Supp. at 896. There, however, the court restricted its holding to the facts of the case, where the contract in question was a form document, and the Note executed with the contract was "specifically prepared for the transaction in question." Id. The Court specifically noted that given other facts, a triable issue may still exist. Id.
Cataldo has presented sufficient evidence that the Cofsky Letter and the Note were not intended to be read with the Sales Agreement to raise such a triable issue. The Sales Agreement and the Note were signed on different dates,*fn14 and there are no cross-references in either document. Similarly, the Sales Agreement explicitly excludes any part of the Cofsky Letter which was not specifically incorporated into the Sales Agreement. These facts, in the light most positive to the Cataldo, are sufficient to allow a reasonable factfinder to conclude that the parties did not intend for the documents to be read together. I will therefore deny Duva and Leone's Motion for Summary Judgment on Cataldo's Counterclaim.
ANITA B. BRODY, J.