Defendants argue that plaintiffs' allegations do not implicate the '34 Act because they did not make any misrepresentations or omissions "in connection with" the purchase or sale of a security. I must agree with the defendants.
Plaintiffs argue, however, that because the alleged misrepresentations pertain to the value of the options, the fraud occurred "in connection with" the purchase or sale of a security. In support of this contention, plaintiffs call my attention to Yoder v. Orthomolecular Nutrition Institute, Inc., 751 F.2d 555 (2d Cir. 1985). In Yoder, the defendant fraudulently induced the plaintiff to convey the assets of her company to him in exchange for his paying her debts, keeping her on as a salaried employee, and issuing to her a maximum of 30,000 shares of his company's stock, where such issuance was to be based on profits generated by the acquisition of her company. Id. at 556. The misrepresentations, which provided the basis for Yoder's 10b-5 action, pertained to the assets, liabilities and earnings of the defendant's company. Id. at 556. As such, the misrepresentations went directly to the value of the security that Yoder would have gotten if the contract had been fully performed.
Unlike the plaintiff in Yoder, however, the plaintiffs here do not allege that the defendants misrepresented the assets, liabilities or earnings of Softkey. In the instant case, the alleged misrepresentations pertain to the conditions under which the defendants would compensate the plaintiffs for their services. As such, plaintiffs do not allege a misrepresentation as to the value of a security. Without such misrepresentations plaintiffs cannot satisfy the "in connection with" language of § 10(b) and Rule 10b-5. While it is possible that defendants alleged misrepresentations pertain to plaintiffs' compensation in connection with their services, these facts certainly do not implicate the '34 Act. Accordingly, the plaintiffs' seventh claim for violation of § 10(b) and Rule 10b-5 is dismissed with prejudice. Additionally, plaintiffs' eighth claim for liability against named defendants Anthony and Perik under § 20(a) of the '34 Act is dismissed with prejudice because plaintiffs have failed to establish the requisite primary violation of the '34 Act.
D. Common Law Fraud and Negligent Misrepresentation
Plaintiffs' ninth and tenth claims, for common law fraud and negligent misrepresentation, respectively, venture to cross the oft blurred line that separates tort from contract. As a general rule, New York courts preclude such actions where the "only fraud charged relates to a breach of contract." Miller v. Volk & Huxley Inc., et al., 44 A.D.2d 810, 810, 355 N.Y.S.2d 605, 606-07 (1st Dep't 1974); see Metropolitan Transportation Authority v. Triumph Advertising Productions, Inc., 116 A.D.2d 526, 527, 497 N.Y.S.2d 673, 675 (1st Dep't 1986). Such a relationship exists where the fraud claims do not allege facts extraneous and collateral to the contract. See Mastropieri v. Solmar Construction Co., 159 A.D.2d 698, 700, 553 N.Y.S.2d 187, 189 (2d Dep't 1990).
To determine whether the fraud claims allege facts extraneous and collateral to the contract, courts should look to the source of the damages alleged. Thus, where a fraud claim seeks to enforce no more then the breached promises and obligations of a contract, rather than additional damages incurred as a result of the breach, the claims are merely redundant and must be dismissed. See Tesoro Petroleum Corporation v. Holborn Oil Company Ltd., 108 A.D.2d 607, 607, 484 N.Y.S.2d 834, 835 (1st Dep't 1985). To defeat a motion to dismiss common law fraud and misrepresentation claims, therefore, a plaintiff must allege that they sustained damages in addition to those they could have anticipated in the event of a breach. Id.
In the instant case, plaintiffs have made no allegations that the alleged misrepresentations caused them any injury for which a breach of contract claim would not provide complete recovery. Plaintiffs' common law claims seek only the compensation they would have received had defendants performed the contract as expected. Compare Compl. PP 74 and 80 with Compl. PP 22 and 37. Thus, plaintiffs have not alleged any facts extraneous and collateral to the breach of contract claim. As such, plaintiffs claims for common law fraud and negligent misrepresentation are dismissed with prejudice as redundant to the contract claims.
E. Punitive Damages
Plaintiffs claim entitlement to punitive damages based on the common law fraud count. Id. at P 75. As I have already dismissed the common law fraud claim, defendants' motion to dismiss the demand for punitive damages is granted. Nevertheless, had I not dismissed the common law fraud count plaintiffs' demand would warrant dismissal for failure to allege that the fraud was perpetrated on the public or that it manifested a gross and wanton departure from the moral norms of society. See e.g., my opinion in, Rosenberg v. GWV Travel, Inc., 480 F. Supp. 95, 97 (S.D.N.Y. 1979) (New York law permits the recovery of punitive damages only where the conduct complained of either affects the public generally or involves a gross departure from moral behavior). See Compl. at P 75.
For the foregoing reasons, this motion to dismiss is granted in its entirety, with leave to replead the contract claims within twenty (20) days hereof. All other claims are dismissed with prejudice. It is expected, however, that such repleading will evoke a motion pursuant to Rule 56, and possibly Rule 11 of the Federal Rules of Civil Procedure.
DATED: New York, New York
February 4, 1993
KEVIN THOMAS DUFFY, U.S.D.J.