periods and the residual value of the equipment at the end of the renewal periods) and thus asked him to reconsider the appraisal. Land's third and final report, dated September 8, 1995, set the fair market rental value at $ 275,000, and the residual value of the equipment at $ 200,000 (the purchase option price). Both parties dispute the correctness of this final Land appraisal.
On November 28, 1995, Sauer told Xerox he was terminating the lease based on the alleged defaults listed in Sauer's earlier notice of default. On December 28, 1995, Xerox sent Sauer a check for $ 602,636.72, representing the back rent as set forth in the final Land appraisal, plus interest at the rate set forth in the user lease for late payments. Xerox denied any wrongdoing and reserved its rights to challenge the final Land appraisal. Sauer continued to disavow the arbitration process altogether; however, he cashed Xerox's check "in mitigation of damages."
I. Xerox's Motion to Dismiss/Sauer's Motions for Summary Judgment/Xerox's Cross-Motion for Summary Judgment
A. Sauer's Second Cause of Action -- Xerox's Allegedly Fraudulent Concealment/Misrepresentation of Information Regarding Nonseverable Modifications.
In his second cause of action Sauer complains that Xerox wrongfully and fraudulently prevented both Sauer's appraisers and the AAA appraiser, Land, from obtaining information and misrepresented information regarding nonseverable improvements (upgrades) to the photoreceptor line. Specifically, Sauer contends Xerox told the final appraiser, Land, that there were no nonseverable improvements made to the photoreceptor line when, in fact, there were such improvements. He maintains that information regarding these improvements was "in the unique and exclusive possession of Xerox," and that it was necessary to an accurate appraisal of the value of the photoreceptor line. He contends that Xerox's failure to provide the appraisers with this information resulted in an artificially low fair market rental value and fair market value in each of the appraisals rendered.
Xerox contends that the complained of conduct constitutes no more than breach of contract and may not be converted into a fraud claim. In the alternative, Xerox argues that Sauer has failed to plead fraud with particularity, as required by Federal Rules of Civil Procedure, Rule 9(b).
In New York, it is well-settled that a tort obligation is "'apart from and independent of promises made and therefore apart from the manifested intention of the parties' to a contract." New York Univ. v. Continental Ins. Co., 87 N.Y.2d 308, 316, 639 N.Y.S.2d 283, 662 N.E.2d 763 (1995) (quoting Prosser and Keeton on the Law of Torts § 92, at 655 (5th ed.)). "Thus, [a] defendant may be liable in tort when it has breached a duty of reasonable care distinct from its contractual obligations, or when it has engaged in tortious conduct separate and apart from its failure to fulfill its contractual obligations." Id. Conversely, a tort claim does not lie where a party is attempting simply to enforce its rights under a contract.
To state a cause of action for common law fraud under New York Law, a plaintiff must allege that "(1) the defendant made a material false representation, (2) the defendant intended to defraud the plaintiff thereby, (3) the plaintiff reasonably relied upon the representation, and (4) the plaintiff suffered damage as a result of such reliance." Banque Arabe et Internationale D'Investissement v. Maryland Nat. Bank, 57 F.3d 146, 153 (2d Cir. 1995); see Albert Apartment Corp. v. Corbo Co., 182 A.D.2d 500, 582 N.Y.S.2d 409 (1st Dep't 1992). An additional element is required to state a claim based on fraudulent concealment -- a duty to disclose.
Banque Arabe, 57 F.3d at 153; see Young v. Keith, 112 A.D.2d 625, 626-27, 492 N.Y.S.2d 489 (3rd Dep't 1985). A duty to disclose arises where: "(1) one party has superior knowledge of certain information; (2) that information is not readily available to the other party; and (3) the first party knows that the second party is acting on the basis of mistaken knowledge."
Banque Arabe, 57 F.3d at 155 (citations omitted).
In the instant case, Sauer's second cause of action appears to allege more than mere breach of contract. He does not contend that Xerox simply failed to comply with the appraisal provisions, but that it attempted to deceive the appraisers (in particular, Land) by withholding or misrepresenting information necessary for an accurate appraisal. Thus, Sauer alleges that Xerox breached a duty which, although it arises from the parties' contractual relationship, is separate from its obligations under the contract. See New York Univ., 87 N.Y.2d at 316-17; North Shore Bottling Co., Inc., v. Schmidt & Sons, Inc., 22 N.Y.2d 171, 179, 292 N.Y.S.2d 86, 239 N.E.2d 189 (1968).
Further, the basic facts alleged by Sauer appear to satisfy the pleading requirements for a cause of action sounding in fraud. He contends that Xerox misrepresented or concealed material information necessary to a proper appraisal of the photoreceptor line. He argues that Xerox's actions were intended to, and in fact did, result in harm -- artificially low appraisal values. Although Sauer has not, with regard to the fraudulent concealment portion of his claim, expressly pled the existence of a duty to disclose owed by Xerox to Integrated, he does allege that the information in question was "in the unique and exclusive possession and control of Xerox." (Amended Complaint, P 79.) This is sufficient, at least at the pleading stage, to establish Xerox's superior knowledge, and accordingly, its duty to disclose. See Polycast Technology Corp. v. Uniroyal, Inc., 792 F. Supp. 244, 269-70 (S.D.N.Y. 1992) (upon review of the complaint, the court concluded that if the basic facts alleged were sustained by the evidence, the trier of fact could find the existence of a duty to disclose). Further, the allegation that Xerox possessed superior knowledge is also sufficient to establish, for purposes of the motion to dismiss, that Sauer's reliance was reasonable.
Finally, Xerox contends that Sauer's failure to identify the speaker of the alleged misrepresentation (that there were no nonseverable improvements) is fatal to his claim under Rule 9(b). However, the cases upon which it relies are inapposite. In Hershfang v. Citicorp, 767 F. Supp. 1251, 1256 (S.D.N.Y. 1991) and In re Time Warner Inc. Securities Litigation, 9 F.3d 259, 264-66 (2d Cir. 1993), cert. denied, U.S. , 114 S. Ct. 1397 (1994), the respective courts held that statements contained in press releases, most of which were attributable to unknown company sources, were not actionable under federal securities laws.
In the instant case, Sauer is not alleging that he (or Integrated before him) relied on statements contained in some unidentified or unsubstantiated press release, but on the representations made directly by Xerox during the appraisal process. It may well be that, following discovery, Sauer is unable to produce sufficient evidence to support his claims. However, at this stage of the proceedings, it appears that "an ample factual basis . . . [has] been supplied to support the charges." See O'Brien v. National Property Analysts Partners, 936 F.2d 674, 676 (2d Cir. 1991). Accordingly, Xerox's motion to dismiss Sauer's second cause of action is denied.
B. Sauer's First Cause of Action -- Breach of the Obligation to Pay Rent
In light of my decision to deny Xerox's motion to dismiss Sauer's second cause of action alleging fraud in connection with the arbitration process, I am compelled to deny Xerox's motion to dismiss Sauer's first cause of action for breach of the obligation to pay rent. I note that absent the fraud issue, it appears that Xerox complied with its obligations under the contracts concerning the appraisal process, while Sauer failed to do so. However, in view of the extant fraud claim, a final determination on this cause of action must be reserved for a later date.
For this same reason -- i.e., that numerous factual issues remain to be determined regarding Xerox's allegedly fraudulent conduct during the arbitration process, and that these issues necessarily relate to Sauer's breach of contract claim for the nonpayment of rent -- Sauer's motion for summary judgment on this first cause of action is also denied.
C. Sauer's Third Cause of Action -- Failure to Report and Pay Casualty Losses
In his third cause of action, Sauer contends that since the installation of the photoreceptor line in 1985, certain components of that line have suffered casualty losses. Under the terms of the lease agreements, Xerox was required to timely report such losses and reimburse Sauer for the lost equipment according to a schedule attached to the user lease agreement. Sauer alleges that Xerox has failed to timely report and pay for these losses as required by the lease agreements.
In moving for summary judgment, Sauer contends that Xerox has conceded that by February 1993, some of the equipment sustained casualty losses totalling in excess of $ 200,000. He contends that by letter dated July 21, 1995, Xerox received notice of default, identifying three separate defaults by Xerox, including its failure to timely pay casualty losses. Xerox allegedly denied that they were in default for the failure to pay rent, but was silent regarding its alleged failure to timely notify Sauer of Events of Loss or make casualty payments.
Finally, Sauer contends that Xerox received written notice of termination of the lease agreements based on its failure to cure the defaults set forth in the notice of default. Accordingly, he contends that, as a matter of law, Xerox is in breach of its obligation to report and pay casualty losses, and Sauer is therefore entitled to judgment and the return of his equipment.
Xerox, in opposing Sauer's motion, denies that it has breached its obligation to report and pay casualty values and alleges that it made several offers of payment from February 1993 through the summer of 1995. It argues that these offers were ignored by Integrated, and ultimately Sauer. Xerox contends that Integrated never considered the casualty losses to be an important issue, and instead, focused on the appraisal value dispute. It further contends that Sauer, himself, advised Xerox in March 1995, that its proposed offer on the Casualty Value was "within the range of reason." Xerox contends it heard nothing more on this issue from Sauer until July, 20, 1995, when Sauer filed his original complaint. The next day, Sauer served Xerox with notice of default for Xerox's alleged failure to pay rent and casualty losses.
In cross-moving for summary judgment, Xerox argues that it, and not Sauer, is entitled to judgment on this claim due to Sauer's alleged failure to comply with the contractually bargained-for notice and opportunity to cure provisions. Xerox contends, and Sauer apparently concedes, that the commencement of a lawsuit terminates the defaulting party's right to cure. Xerox contends that Sauer's actions -- giving notice of the alleged defaults after the filing of the complaint -- were designed to deny Xerox an opportunity to cure any such defects in clear violation of it's contractual rights. Accordingly, it argues that Sauer is in breach and that Xerox is entitled to judgment as a matter of law. In the alternative, Xerox contends that at the very least, Sauer's motion for summary judgment should be denied due to the existence of numerous factual issues.
As a preliminary matter, I note that this litigation is in its infancy. No answer has been filed and no discovery has been conducted. Moreover, as the above-recitation of the parties differing positions indicates, and as their colloquy at oral argument on the original motions regarding the various "missing" and "destroyed" items demonstrates, there are many material factual issues yet to be determined on this cause of action. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 91 L. Ed. 2d 202, 106 S. Ct. 2505 (1986) (trial court should not allow trial by affidavit, and must use caution in deciding whether to grant summary judgment). Accordingly, both parties' motions for summary judgment on this cause of action are denied as premature.
D. Sauer's Fourth through Seventh Causes of Action -- Conversion Claims)
Sauer's fourth, fifth, sixth and seventh causes of action each allege Xerox committed the tort of conversion by "trading-in" two pieces of equipment, "scrapping" ten pieces of equipment and willfully destroying "certain of the components of the Photoreceptor Line" owned by Sauer. Xerox denies any wrongdoing and argues that Sauer's claims allege no more than breach of contract and that Xerox's possession of the equipment was not unlawful.
The user lease contains three provisions pertinent to Sauer's conversion claims. The first provision defines, in relevant part, an "Event of Loss" as "loss of the Leased Equipment or of the use thereof due to theft, disappearance, destruction, damage beyond repair or rendition of such Leased Item permanently unfit for commercial operation for any reason whatsoever . . . ."
The second provision, under the heading "Loss or Destruction: Requisition of Use " provides that upon the occurrence of an "Event of Loss," the lessee must notify the lessor of the loss in a timely manner (as set forth in the provision) and is required to purchase the equipment on an "'as is', 'where is' basis" at a "Casualty Value" set according to a schedule attached to the user lease.
The third provision, under the heading "Replacement Parts," provides, in relevant part:
. . . the Lessee, at its own cost and expense, will promptly replace all Parts or Leased Items . . . which may from time to time become worn out, lost, stolen, destroyed, seized, confiscated, damaged beyond repair, permanently rendered unfit for use for any reason whatsoever . . . . The Lessee shall notify the Lessor of any Replacement Part having a per item cost of $ 50,000 or more. In addition, in the ordinary course of maintenance, service, repair, overhaul or testing, the Lessee may, at its own cost and expense, remove any Parts, whether or not worn out, lost, stolen, destroyed, seized, confiscated, damaged beyond repair or permanently rendered unfit for use, provided that the Lessee shall, at its own cost and expense, replace such Parts as promptly as practicable.
The user lease also contains a narrowly drawn choice-of-law provision which states, "This Lease has been negotiated and delivered in the State of New York and shall be governed by, and construed in accordance with, the laws of the State of New York." Because this case was transferred from the Central District of California on motion by Xerox, this Court must apply California choice-of-law rules to determine the viability of this provision. See Van Dusen v. Barrack, 376 U.S. 612, 639, 11 L. Ed. 2d 945, 84 S. Ct. 805 (1964) (following a transfer initiated by a defendant under § 1404(a), the transferee court must apply the choice-of-law rules of the transferor court); Computer Assocs. Int'l, Inc. v. Altai, Inc., 22 F.3d 32, 35 n.3 (2d Cir. 1994).
California honors contractual choice-of-law provisions "unless (1) the chosen state has no substantial relationship to the parties or transaction; or (2) such application would be contrary to a California public policy or evade a California statute." General Signal Corp. v. MCI Telecommunications Corp., 66 F.3d 1500, 1506 (9th Cir. 1995) (citing Nedlloyd Lines B.V. v. Superior Court, 3 Cal. 4th 459, 834 P.2d 1148 (1992)). Neither of these concerns are presented here. Accordingly, the choice-of-law provision is controlling.
Although, as set forth above, the contract provisions must be interpreted in accordance with New York law, the equipment in question is located in Oklahoma, thus presenting a choice-of-law issue. Both parties rely almost exclusively on New York law. A choice-of-law analysis is unnecessary here, however, because the law of conversion in Oklahoma and New York is the same. In both states, a mere breach of contract may not be converted into a tort. A separate duty arising from the contractual relationship must be violated before an action sounding in tort will lie. See, e.g., Burton v. Juzwik, 524 P.2d 16, 18 (Okla. 1974) (simple breach of contract does not constitute conversion); Woods Petroleum Corp. v. Delhi Gas Pipeline Corp., 700 P.2d 1023, 1027 (Okla. Ct. App. 1983); Yeterian v. Heather Mills N.V. Inc., 183 A.D.2d 493, 494, 583 N.Y.S.2d 439 (1st Dep't 1992); see also Kubin v. Miller, 801 F. Supp. 1101, 1118 (S.D.N.Y. 1992) citing Matzan v. Eastman Kodak Co., 134 A.D.2d 863, 521 N.Y.S.2d 917 (4th Dep't 1987) (breach of contract, without more, does not give rise to tort liability); Albemarle Theatre, Inc. v. Bayberry Realty Corp., 27 A.D.2d 172, 174, 277 N.Y.S.2d 505 (1st Dep't 1967).
In Woods Petroleum Corp., 700 P.2d at 1026-28, the plaintiff, an owner of a gas pipeline, brought suit against a pipeline company claiming that the company had converted its gas. The pipeline company had entered into a contract with the plaintiff to purchase the gas produced from the pipeline. The pipeline company was also required, by the terms of the contract, to operate the metering equipment used to measure the volume of gas taken. The plaintiff claimed that the pipeline company willfully changed the size of the opening of the metering device in order to take a higher volume of gas without paying for it. Id. The pipeline company argued that the complained-of conduct constituted no more than a breach of its contractual obligations. The Oklahoma Court of Appeal disagreed, finding that the intentional mismeasurement of the gas sounded in tort as well as contract. Id. at 1027.
In Albemarle Theatre, Inc. v. Bayberry Realty Corp., 27 A.D.2d at 173-74, the plaintiff, a lessor of a theater, brought suit against the lessee for breach of contract and conversion. The plaintiff claimed the lessee and others conspired to destroy the value of the theater by agreeing to run b-grade, rather than first-run movies, as required by the lease agreement. As in Woods Petroleum Corp., the defendant in Albemarle argued that at most, its actions constituted a breach of contract. The Albemarle court disagreed, finding that:
The amended complaint . . . contains allegations far beyond a mere assertion of conspiracy by the defendants not to carry out the contract. It is alleged that the defendant contracting parties, in order to improve the operating position of other theatres owned by them and run in competition to plaintiff's Albemarle Theatre, . . . not only failed to operate the Albemarle Theatre responsibly pursuant to the contract, but affirmatively, intentionally and wilfully set out in conjunction with other defendants to destroy the value and utility of the Albemarle Theatre henceforth as a theatre. Such allegations state a valid cause of action in tort against the contracting parties.