Article

Note: Richard Shelton (Developer) entered into a contract to purchase land and structures in Galesburg, Illinois that he intended to use for the development of a retirement community which he predicted would return a USD 20,000,000 profit after sixty months. Burgis Sethna (Broker) informed Developer that in exchange for USD 35,500, Developer would receive a USD 500,000 letter of credit, the proceeds of which could be put into a USD 2,000,000 LC for his development project. Broker told Developer to send him USD 17,000, payable to Bank Card New York (Broker's Company) which Broker would use to purchase a shell corporation for facilitating acquisition of the USD 500,000 LC. Developer sent the requested money to Broker, and they entered into an agreement where in exchange for USD 35,500, Broker would secure an LC to be issued by Latin Tiger Funding LLC (Alleged Issuer). Developer sent the additional USD 35,500 to Broker, but never received the LC. Broker, however informed Developer that he was now required to pay USD 87,500 for a USD 500,000 LC. After Broker was inconsistent with additional information and potential new agreements, Developer refused to sign any agreement or pay additional funds. Developer never recovered the USD 52,500 paid to Broker.

Developer sued Broker for fraud, breach of contract, money paid quantum meruit, unjust enrichment, breach of good faith and fair dealings, and deceptive acts, seeking the recovery of the USD 52,500 he paid to Broker, USD 5,000 he paid to extend the purchase of the land for development and USD 2,000,000 in lost profits. Developer moved for summary judgment, and Broker also moved for summary judgment and, alternatively, to dismiss for failure to state a claim and lack of subject matter jurisdiction.

The United States District Court for the Southern District of New York, Griesa, J., dismissed Developer's motion for summary judgment, Broker's cross-motion for summary judgment, and Broker's motion to dismiss for lack of subject matter jurisdiction. The Judge granted Broker's motion to dismiss for failure to state a claim regarding fraud and breach of the implied covenant of good faith and fair dealings, but denied Broker's motion to dismiss Developer's claims for unjust enrichment and quantum meruit on the ground that Developer had sufficient claims to present an argument of the existence of a quasi-contract.

The Judge noted that in order to state a claim for fraud it is necessary to plead with particularity and sufficiency facts indicating a material, factual misrepresentation or omission that was made with knowledge that it was false and with intent to defraud that is reasonably relied on to the damage of the party seeking relief. Furthermore, the Judge noted that under New York law a false statement that a party intends to perform a contract is not sufficient to plead or show fraud but gives rise to a claim for breach. The Judge indicated that Developer "must 1) allege a fraud concerning a 'legal duty separate from the duty to perform under the contract,' 2) allege a fraud concerning 'a misrepresentation collateral or extraneous to the contract,' or 3) seek 'special damages that are caused by the misrepresentation and unrecoverable as contract damages'" (quoting Bridgestone/Firestone v. Recovery Credit Servs., 98 F.3d 13, 20 (2d Cir. 1996)).

The Judge noted that claims that Broker did not intend to obtain an LC do not support a fraud claim but did add that statements that the LC could not be obtained without a shell corporation and that it had to be purchased immediately might support such a claim. Developer, however, did not allege that those statements were false or explain why they were false.

[JEB/agj]

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