The Court grants this motion. In their "Amended Answer with Counterclaims," defendants allege that KML and the counterclaim defendants conspired to undermine and convert ECC's customer base by fraudulently executing the Purchase Agreement without intending to perform. In New York, "an action for fraud will lie if the promisor did not intend to keep his promise at the time he made it." Hotel Constructors, Inc. v. Seagrave Corp., 574 F. Supp. 384, 387 (S.D.N.Y. 1983). See also Sabo v. Delman, 3 N.Y.2d 155, 164 N.Y.S.2d 714, 143 N.E.2d 906 (1957). Here, however, defendants have produced no facts substantiating their claim of fraud.
Perhaps recognizing this failure, in their papers, the Hopper Group abandons the allegations in the counterclaim, contending now instead that KML and the Hopper Group were "aware [at the time of the attempted closing] that the implementation of its plan to install at least three new incinerators at the old Bethpage site was likely to be significantly delayed and possibly rejected by the regulatory agencies." (Def. Mem. at 34-35). Thus, defendants now argue that KML "knew of such impediments and attempted to cleverly use this knowledge to its advantage, concealing it from the Hopper Group and conditioning the release of escrow upon implementation of its plan." (Def. Mem. at 35). Defendants also contend that "it is reasonable to believe" that KML and the Adams Group also knew that had they informed the defendants of the existence of the regulatory impediments, defendants would not have agreed to condition the release of the funds on permit issuance. (Def. Mem. at 35).
The elements of common law fraud are "a material, false representation, an intent to defraud thereby, and reasonable reliance on the representation, causing damage to the plaintiff." Katara v. D.E. Jones Commodities, 835 F.2d 966, 970-971 (2d Cir. 1987). This claim fails because defendants do not contend that KML or the Adams Group made a false representation of fact. (Hopper Dep. 733-737).
Rather, defendants base their fraud claim on fraudulent concealment, a cause of action which requires: (1) a relationship between the parties creating a duty to disclose; (2) knowledge of the material facts by the party bound to make the disclosure; (3) nondisclosure by that party; (4) intent to deceive; (5) reliance; and (6) damages. Dupont v. Brady, 646 F. Supp. 1067, 1075 (S.D.N.Y. 1986), rev'd on other grounds, 828 F.2d 75 (2d Cir. 1987); Leasing Service Corp. v. Broetje, 545 F. Supp. 362, 366 (S.D.N.Y. 1982).
Defendants' fraudulent concealment claim fails because no relationship existed that created a duty to disclose. In negotiations surrounding business transactions, "[a] duty to speak cannot arise simply because two parties may have been on opposite sides of a bargaining table when a deal was struck between them, for under New York law the ancient rule of caveat emptor is still alive and well." Brass v. American Film Technologies, Inc., 987 F.2d 142, 150 (2d Cir. 1993), citing Moser v. Spizzirro, 31 A.D.2d 537, 537, 295 N.Y.S.2d 188 (2d Dep't 1968), aff'd, 25 N.Y.2d 941, 305 N.Y.S. 2d 153, 252 N.E.2d 632 (1969). Rather, as the Brass Court explained, New York law requires a party to a business transaction to speak only when (1) "the party has made a partial or ambiguous statement," Junius Constr. Corp. v. Cohen, 257 N.Y. 393, 400, 178 N.E. 672 (1931), (2) "the parties stand in a fiduciary or confidential relationship with each other," Allen v. WestPoint-Pepperell, Inc., 945 F.2d 40, 44 (2d Cir. 1991), or (3) "one party possesses superior knowledge, not readily available to the other, and knows that the other is acting on the basis of mistaken knowledge." Aaron Ferer & Sons Ltd. v. Chase Manhattan Bank, N.A., 731 F.2d 112, 123 (2d Cir. 1984). Brass, 987 F.2d at 150.
Defendants contend that KML and its principals possessed a duty to disclose the regulatory impediments because they knew that defendants would be injured by their silence. This curious argument, unsupported by evidence, fails in any event because the information that defendants claim KML concealed from them was readily available to defendants. See Heineman v. S. & S. Machinery Corp., 750 F. Supp. 1179, 1186 (E.D.N.Y. 1990); Aaron Ferer & Sons, 731 F.2d at 123; Young v. Keith, 112 A.D.2d 625, 627, 492 N.Y.S.2d 489, 490-91 (3d Dept. 1985). Regulatory pressures on ECC and related difficulties were no secret. (Hopper Dep. 630; Tobin Dep. 117, 229). As the owners and managers of ECC, defendants regularly interacted with regulatory officials and knew all about ECC's regulatory history and the corporation's strained community relations. Indeed, according to defendants, the knowledge that KML purportedly acquired about the regulatory impediments came, not from some secret source available only to ECC, but from discussions with state and county regulatory officials.
Defendants also maintain that KML possessed a duty to disclose because a fiduciary relationship existed between the parties at the time they entered into the escrow agreements. The Court disagrees. According to defendants, since the escrow agreements transferred "management of the corporation" to KML, the "acceptance of the management role created a fiduciary relationship wherein KML and the Adams Group, in managing the corporation, owed a fiduciary duty" to defendants. (Def. Mem. at 37-38). However, even if the escrow agreements ultimately transformed KML and the Adams Group into fiduciaries of the corporation, the parties' relationship at the time they entered into the agreements was merely that of buyer and seller.
The record establishes that, as buyer and seller, they engaged in a mutually beneficial, arms-length commercial transaction. Under New York law, "a conventional business relationship, without more, does not become a fiduciary relationship by mere allegation." Oursler v. Women's Interart Center, Inc., 170 A.D.2d 407, 566 N.Y.S.2d 295, 297 (1st Dept. 1991). Further, when "parties deal at arms length in a commercial transaction, no relation of confidence or trust sufficient to find the existence of a fiduciary relationship will arise absent extraordinary circumstances." National Westminster Bank v. Ross, 130 Bankr. 656, 679 (Bankr. S.D.N.Y. 1991). Defendants have failed to produce any evidence that the parties' dealings were not at arms-length or that extraordinary circumstances giving rise to a fiduciary duty existed at the time the parties entered into the escrow agreements. See also Compania Sud-Americana de Vapores v. IBJ Schroder, 785 F.Supp 411, 425-426 (S.D.N.Y. 1992). Thus, defendants fail in their attempts to base a duty to disclose on the existence of a fiduciary relationship between the parties at the time they entered into the escrow agreements. Accordingly, defendants' fraud claim must be dismissed.
Breach of Fiduciary Duty Claim
Defendants seek summary judgment on the second count of their amended counterclaim which alleges that KML and Ruby Argyro Adams, as director of KML, breached a fiduciary duty owed to defendants. Defendants maintain that after the transaction closed in escrow, KML assumed complete control of ECC and this control created "the same trust relation toward other stockholders that a corporation usually bears to its stockholders." According to defendants, KML mismanaged the corporation and this mismanagement constituted a breach of the fiduciary duty owed to defendants as "fellow shareholders of ECC." KML and Ruby Adams have moved to dismiss this claim, contending that no fiduciary relationship existed and that, even if such a relationship did exist, defendants' conclusory allegations of mismanagement fail to substantiate their claim of breach of fiduciary duty. The Court agrees. Even assuming the existence of a fiduciary relationship, defendants' claim fails. See Kamin v. American Express Company, 86 Misc. 2d 809, 815, 383 N.Y.S.2d 807, 812 (Sup. Ct. 1976), aff'd, 54 A.D.2d 654, 387 N.Y.S.2d 993 (1st Dept. 1976).
Defendants cite six instances of purported "mismanagement" which, according to defendants, "led to the demise of a once flourishing business." (Def. Mem. at 28, 30). Defendants complain that "KML purchased or leased unnecessarily lavish office space," that KML could have saved money by incinerating waste on Long Island rather than transporting it to Quebec, that KML failed to provide ECC's customers with sufficient trailers to transport waste, and that KML should have utilized outside services to make pick-ups from hospitals. (Def. Mem. at 28). In addition, defendants charge that KML delayed its submission of an application for a Consumer Affairs permit, and remarkably they take issue with KML's decision to advise ECC's customers to use competitor firms following notice of the zoning violation. (Def. Mem. at 29).
However, even if defendants could establish that these decisions were unwise or imprudent, errors in judgment alone do not constitute a breach of fiduciary duty. "If a director exercises his business judgment in good faith on the information before him, he may not be called to account through the judicial process, even though he may have erred in his judgment." Rous v. Carlisle, 261 A.D. 432, 434, 26 N.Y.S.2d 197, 200 (1st Dept. 1941), aff'd 290 N.Y. 869, 50 N.E.2d 250 (1943). If KML acted in good faith and in the exercise of honest judgment, as the available evidence surely indicates, defendants cannot now complain simply because they believe that, in retrospect, other courses of action would have been more prudent than the ones taken.
To prevent dismissal, defendants must come forward with some evidence tending to show that KML's actions were so opposed to the true interests of the corporation as to raise an inference that the actions were taken other than in the proper exercise of judgment in corporate affairs. Greenbaum v. American Metal Climax, Inc., 27 A.D.2d 225, 228, 278 N.Y.S. 2d 123, 127 (1st Dept. 1967). Defendants have failed to make this showing. The record reveals ample justifications for each of the business decisions challenged by defendants. Moreover, the descriptions of KML's activities and the after-the-fact critiques of KML's management decisions contained in the affidavits of Dennis Gunstone, a site supervisor at ECC, and Camille Fiume, an executive secretary and office manager for ECC, do not suffice. Although Mr. Gunstone opines that KML "intended to alienate ECC from its customers and divert the customers to other competing businesses at a greater cost to the customers," his affidavit does not explain the factual basis for this curious conclusion nor does any support for this contention appear anywhere in the record. (See Hopper Dep. 615-618). Although defendants' papers reflect similar allegations regarding KML's motives in entering into the transaction and in assuming control over ECC, defendants have produced no facts in support of their theories. Neither their speculation about KML's motives nor their criticism of KML's actions raises any inference or reveals any triable issue of fact sufficient to sustain defendants' claim. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 91 L. Ed. 2d 202, 106 S. Ct. 2505 (1986).
Defendants' Remaining Motions
KML has agreed to dismiss its fraud claims if its motion for summary judgment is granted. Accordingly, the Court need not consider defendants' motion to dismiss these claims.
For the foregoing reasons, the Court grants plaintiff's motion for summary judgment on its rescission claim. Accordingly, the Court orders that the Hopper Group return to KML the proceeds of the escrow account and any funds already released in exchange for KML's release to the Hopper Group of the shares of ECC stock. Further, the Court dismisses defendants' fraud claim, fiduciary duty claim, and breach of contract and negotiable instrument claims.
Dated: Brooklyn, New York
August 13, 1993
RAYMOND J. DEARIE
United States District Judge