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PHOENIX RACING v. LEB. VALLEY AUTO RACING

June 30, 1999

PHOENIX RACING, LTD. AND WRAITH AUTOMOBILE RACING, INC., PLAINTIFFS,
v.
LEBANON VALLEY AUTO RACING CORPORATION, HOWARD COMMANDER, AND SHAKER FLATS CORPORATION, DEFENDANTS.



The opinion of the court was delivered by: Kahn, District Judge.

      DECISION AND ORDER

This diversity action, brought by Plaintiffs Phoenix Racing Ltd. ("Phoenix Racing") and Wraith Automobile Racing, Inc. ("Wraith"), arises out of an agreement in which Plaintiffs agreed to lease an automobile racing facility owned by the Defendants. Plaintiffs now allege that Defendants induced them to enter the lease by misrepresenting the facility's suitability for improvement and expansion and that Defendants have breached the lease in numerous respects regarding performance. Defendants counter that Plaintiffs have breached the lease by failing to pay rent and Plaintiffs' share of real estate taxes and overhead costs.

In their amended complaint, Plaintiffs allege claims for breach of contract, breach of the covenant of good faith and fair dealing, unjust enrichment and promissory estoppel. Defendants Lebanon Valley Auto Racing Corporation ("Lebanon Valley") and Shaker Flats Corporation ("Shaker Flats") have answered and filed three counterclaims: breach of contract, unjust enrichment and a request for a declaratory judgment.*fn1 Presently pending is a motion by Defendants Lebanon Valley and Shaker Flats for (1) summary judgment on part of Plaintiffs' first and second claims and on Plaintiffs' third and fourth claims in their entirety and (2) summary judgment on Defendants' counterclaims. Also pending is Plaintiffs' cross-motion to file a second amended complaint adding a claim for fraudulent inducement to contract. For the reasons discussed below, Plaintiffs' cross-motion to amend is denied, Defendants' motion for partial summary judgment on Plaintiffs' claims is granted-in-part and denied-in-part and Defendants' motion for summary judgment on their counterclaims is granted-in-part and denied-in-part.

I. Background

In the context of Defendants' motion for summary judgment, the facts are viewed in the light most favorable to the Plaintiffs as non-movants. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986).

This action arises out of an agreement in which Plaintiffs leased certain tangible and intangible property associated with a racing car drag strip located at the Lebanon Valley Speedway ("the Speedway"). The Speedway is a auto racing operation in West Lebanon, New York, which includes, among other things, a drag strip (the "Dragway") and a circle-track (the "Circle-Track").*fn2 The Speedway is owned by Defendants Lebanon Valley and Shaker Flats, both of which are New York corporations of which Howard Commander ("Commander") is the president and sole or principle shareholder.*fn3

Plaintiffs Phoenix Racing and Wraith are affiliated companies in the business of promoting and operating automobile racing events. Previously, Vincent Barletta ("Barletta") was the president and sole owner of both companies. Mullen AffEx. F, ¶ 1. Since the time of Barletta's death in January of 1998, the stock in Wraith has been held by Barletta's estate and Timothy Barletta, Barletta's son, is currently the owner of Phoenix Racing and the president of both companies.

Around March 12, 1994, Phoenix Racing entered into a written agreement (hereinafter "the Agreement") with Lebanon Valley and Commander to lease for eighteen years all tangible and intangible property used in conjunction with the Dragway. This property included, inter alia, real estate on which the Dragway was located, certain abutting real estate, physical assets used by the existing Dragway and the permits held by Commander to run the Dragway. The Agreement refers to all of this property together as the "Dragway Facility."*fn4

Plaintiffs' purpose in entering into the Agreement was to develop and improve the Dragway Facility into a National Hot Rod Association ("NHRA") sanctioned drag racing facility in order to obtain NHRA approval to host national NHRA drag racing events. For several years prior to 1994, Barletta and an associate, Joseph Henry ("Henry"), had been looking for a site in Massachusetts where they could develop a drag racing facility capable of hosting such national NHRA-sponsored events. They had frequently met opposition either from the board controlling the usage of the property or else from local property owners. Their last attempt in Massachusetts involved a property in Warrensburg. Although successful in obtaining a special use permit from the town board, they were halted in their development efforts when abutting property owners appealed the grant.

At sometime in 1993, their efforts to build a drag strip in Massachusetts came to Commander's attention. Around December of 1993, he directed an employee named Donald Kline ("Kline"), at that time working as manager of the Dragway, to contact Henry.*fn5 See Mullen Aff.Ex. Ex. J at 55-56. After being contacted by phone, Henry indicated an interest in making use of the Speedway. Henry subsequently spoke by phone with Commander on December 31, 1993. Mullen Aff.Ex. K, Vol I. at 37, 211. Commander proposed that Henry and Barletta consider making use of the Dragway. Henry stated that they "were only interested in looking at property that will host a national event. . . ." Id. at 38. After an extended discussion about the Dragway, Commander suggested that the parties meet to talk further. The parties had several subsequent meetings, the first of which was attended by Commander, Barletta, Henry and Kline. See Mullen Aff.Ex. J at 59.

Both in his initial phone conversations and at the subsequent meetings, Commander made a number of representations regarding the Dragway and its suitability for further development. He represented that although the Dragway used only 150 acres, the surrounding property in his ownership consisted of 600 acres, and that Plaintiffs could "just start paving it over" or doing "anything [they] wanted." Mullen Aff.Ex. K, Vol. I at 214. At the first meeting, he represented that the "recreational commercial zone can expand to use a total of 600 acres." Id. This would suggest that Commander was not claiming that the zone currently encompassed 600 acres. However, Henry has also stated in deposition that Commander told them at the first meeting that they "had access to commercial recreational facility of six hundred acres." Id. at 202 (emphasis added). Further, during their December 31 conversation, Commander allegedly stated that the 600 acres was already zoned for recreational commercial use. See Mullen Aff.Ex. K, Vol. I at 59 ("Howard was explaining that he had 600 acres that was under recreational zoning"); see also Mullen Aff.Ex. K, Vol. I at 74-75.

Concerning the need for town board approval of further development, Commander represented that "any permit needed to expand could be obtained from the town," Mullen Aff.Ex. I, Vol. II at 23-24, and indicated that obtaining such permits would be no problem because "the board members were in his pocket by a majority." Mullen Aff.Ex. K, Vol. I at 217. Regarding the possibility of opposition from local landowners, Commander allegedly stated: "[Y]ou are not going to have to deal with what you have been doing in the past, with these other groups that are trying to stop you. We have been here, we are running, that is not going to be an issue." Mullen Aff.Ex. K, Vol. II at 25.*fn6

Relying on these representations, Barletta acting on behalf of Phoenix Racing entered into the Agreement on or around March 12, 1994. Under the terms of the Agreement, Phoenix Racing leased the Dragway Facility for a period of 18 years, while Lebanon Valley retained the right to use the Circle-Track. Among many additional terms of the Agreement, Phoenix Racing agreed to pay for the capital costs of improving the facility, and would have the rights to income generated by the Dragway Facility and all sponsorship income except for certain existing sponsorship contracts. Lebanon Valley retained the exclusive right to run food and beverage concessions at the Dragway, although the parties agreed to split profits above $150,000. Pursuant to paragraph 2.0 of the Agreement, Phoenix Racing designated Wraith as the operating company which would operate the business of the Dragway Facility. Mullen Aff.Ex. F, ¶ 4. After the signing of the Agreement, Plaintiffs began efforts to develop the Dragway Facility, ultimately expending more than $3,000,000 on improvements. Mullen Aff.Ex. F at ¶ 18.

However, in the process, Plaintiffs also discovered a number of impediments to the development of the Dragway Facility. Two of these related to land on the north side of the Kinderhook Creek, the side opposite to that on which the Dragway was located. Plaintiffs intended to use this north land as an expanded pit area, where racing cars would be parked. However, they discovered that the land was zoned for residential use only. They also learned that there was a fishing easement all along the Kinderhook Creek which prevented them from building a bridge across it as necessary to make the north land accessible from the Dragway.*fn7

Plaintiffs ran into additional difficulty from a local opposition group named the Concerned Residents of New Lebanon ("CRONL"). Around the summer or early fall of 1995, this group initiated a lawsuit claiming that both the Circle-Track and the Dragway, even in their current state, were public nuisances. Mullen Aff.Ex. I, Vol. III at 40. As of April 2, 1998, this litigation was ongoing. Id. at 42. The litigation and CRONL's direct pressure on the Town Board significantly increased the difficulty in upgrading the Dragway Facility and at some point in 1996, Plaintiffs ended their attempts to do.

Since 1996, the relationship between Plaintiffs and Defendants has largely collapsed into acrimony. Plaintiffs have continued to run races at the Dragway. However, Defendants allege that Plaintiffs have not paid the rent, property taxes or overhead charges (specifically, charges for electricity) which they owe under the Agreement. Plaintiffs in turn allege that Defendants have breached the Agreement in numerous ways respecting their obligations of performance. Among other alleged breaches of the Agreement, Plaintiffs allege that Defendants have interfered with Plaintiffs' use and enjoyment of the property (including cutting off electrical power to the Dragway scoreboard during racing events),*fn8 that Defendants have refused to allow Plaintiffs to investigate the business and operations of Lebanon Valley, that Defendants have refused to operate concession stands in the manner requested by Plaintiffs, that Defendants have understated concession income, that Defendants' lease of certain portions of the Dragway Facility to a third party for use as an asphalt plant and current attempts to re-lease the plant to a new operator have prevented Plaintiffs from using that land, and that Defendants have withheld income from sponsorships owned to Plaintiffs under the Agreement.

After the commencement of this action, Defendants delivered a letter dated May 5, 1997 to Phoenix Racing stating that it was in default of its obligations under the Agreement based on its failure to pay rent, electric charges and taxes. Under the terms of the Agreement, Plaintiffs then had a 30-day period to cure the default, at the end of which Defendants would be entitled to terminate the lease and retain possession of all property improvements. Mullen Aff.Ex. A at 5, ¶ 3.9. On June 24, 1997, Plaintiffs filed a motion for an injunction tolling the running of the cure period pending resolution of this action (referred to as a "Yellowstone injunction" after the case First Nat'l Stores v. Yellowstone Shopping Ctr., Inc., 21 N.Y.2d 630, 290 N.Y.S.2d 721, 237 N.E.2d 868 (N.Y. 1968)). Commander also filed a motion, seeking dismissal of the complaint against him on the grounds that he had not signed the Agreement in his individual capacity and thus could not be individually sued under it.

By Memorandum-Decision and Order filed August 19, 1998, this Court granted Plaintiffs' motion for a Yellowstone injunction but required Plaintiffs to pay all rent due including rent in arrears. See Dkt. No. 76, Memorandum-Decision and Order at 7, 12. This Court also denied Commander's motion to dismiss.*fn9 The pending motions were filed shortly thereafter. On April 19, 1999, this Court held a conference at which the parties consented to the trial of this action before the Honorable David R. Homer, Magistrate Judge, pursuant to 28 U.S.C. § 636(c)(1). However, this Court retained jurisdiction over the pending motions.

II. Discussion*fn10

A. Plaintiffs' Cross-Motion to Amend

Plaintiffs have cross-moved to amend the Amended Complaint to add a claim for fraudulent inducement. Fed.R.Civ.P. 15(a) provides that leave to amend a pleading "shall be freely given when justice so requires." However, "it is within the sound discretion of the court whether to grant leave to amend." John Hancock Mutual Life Insurance Co. v. Amerford Int'l Corp., 22 F.3d 458, 462 (2d Cir. 1994). Denial is appropriate where there is "undue delay, bad faith or dilatory motive . . ., repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of the allowance of the amendment, [or] futility of amendment." Foman v. Davis, 371 U.S. 178, 182, 83 S.Ct. 227, 9 L.Ed.2d 222 (1962); accord Hemphill v. Schott, 141 F.3d 412, 420 (2d Cir. 1998).

While "[m]ere delay . . . does not provide a basis for a district court to deny the right to amend," Block v. First Blood Assocs., 988 F.2d 344, 350 (2d Cir. 1993), a court may properly deny a motion for leave to amend "where the motion is made after an inordinate delay, no satisfactory explanation is offered for the delay, and the amendment would prejudice the defendant." Cresswell v. Sullivan & Cromwell, 922 F.2d 60, 72 (2d Cir. 1990). The burden is on the movant to provide a satisfactory explanation for their delay and the court is free to conclude that ignorance of the law is no excuse. Id.

In this case, the record demonstrates that Plaintiffs have delayed for a substantial period of time. The procedural history is undisputed. Plaintiffs filed their original complaint on April 9, 1997. After obtaining permission from the Court, Plaintiffs filed an Amended Complaint on October 6, 1997. Pursuant to the Uniform Pretrial Order issued by Magistrate Judge Homer, see Dkt. No. 23, the deadline for filing further requests to amend the pleadings was set at December 1, 1997. Id. at ¶ 5. The deadline for completion of discovery was ultimately set at June 1, 1998. See Dkt. No. 58. Defendants served Plaintiffs with their dispositive motion on June 17, 1998. Plaintiffs served, with their opposition papers, a cross-motion to amend on or about July 23, 1998, fifteen months after filing their complaint, more than seven months after the deadline for motions to amend had passed,*fn11 almost two months after the close of discovery and more than one month after Defendants had served the Plaintiffs with their motion for summary judgment. Such a delay, absent a valid excuse, is clearly inordinate. See Cresswell, 922 F.2d at 72 (finding no abuse of discretion where leave was denied for motion to amend filed more than 17 months after bringing suit, more than six months after filing first amended complaint, and more than one month after filing of motion for summary judgment, and where only explanation for delay was ignorance of law.).

Plaintiffs argue that the delay is excusable because they only discovered the facts supporting an element of their claim for fraudulent inducement around April of 1998. The elements of fraud include "(1) false representation(s) of (2) material fact with (3) intent to defraud thereby [scienter] and (4) reasonable reliance on the representation (5) causing damage to plaintiff." Foxley v. Sotheby's Inc., 893 F. Supp. 1224, 1228 (S.D.N.Y. 1995) (alterations in original). Plaintiffs assert that they only recently uncovered evidence which would support a pleading of scienter. Specifically, they point to Kline's deposition, which took place on April 24, 1998, at which the following exchange took place:

  Q:  Did Mr. Commander tell you whether he was
      concerned that he didn't want to have a
      competing dragway in Massachusetts?
A:  Yes.
  Q:  What did you discuss about that issue, Mr.
      Kline, with Mr. Commander?
  A:  That we didn't need a drag strip right next
      door but we didn't know where Warren,
      Massachusetts, was.

Mullen Aff. Ex. J at 57. Plaintiffs assert that Kline's testimony reveals that Commander sought to persuade Plaintiffs into entering the lease in order to avoid having them as proximate competitors. Plaintiffs assert that this is evidence of motive for fraud, and that motive may be used to support an assertion of scienter.

It is true that evidence of motive to commit fraud may play an important role in pleading a valid claim for fraudulent inducement. See Shields v. Citytrust Bancorp. Inc., 25 F.3d 1124, 1128 (2d Cir. 1994). To make out a valid fraud claim, a plaintiff may allege fraudulent intent generally, see Fed.R.Civ.P. 9(b), but must still allege facts raising a "strong inference of fraudulent intent." Shields, 25 F.3d at 1128. That inference may be raised "either (a) by alleging facts to show that defendants had both motive and opportunity to commit fraud, or (b) by alleging facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness." Id.

Facts demonstrating motive must show "concrete benefits that could be realized by one or more of the false statements and wrongful nondisclosure alleged." Id. The avoidance of competition might be considered a concrete benefit which resulted from inducing Plaintiffs to enter into the Agreement. However, as the alleged result of the fraud was to induce Plaintiffs to enter the Agreement, any of the concrete benefits of the Agreement would by the same reasoning have provided some evidence of motivation. For example, Plaintiffs could as easily have relied on the fact that under the Agreement, the property owned by Defendants would be enhanced in value at Plaintiffs' expense. Indeed, Plaintiffs themselves assert that Commander's alleged fraud was partly motivated by the prospect of receiving Barletta's capital investments. See Pl. Reply at 6. It is clear that Plaintiffs were aware from the beginning of the action that this benefit attached to the formation of the Agreement. Thus, the discovery of an additional motivation later on does not provide a reasonable basis for delaying the assertion of fraud.

Moreover, the record belies an assertion that Plaintiffs had even a subjective belief that there was insufficient evidence prior to July 23, 1998 to support a fraud claim. In fact, Plaintiffs asserted fraud on November 5, 1997, as a defense to Defendants' counterclaims. See Pl. Reply to Counterclaims at 8. In doing so, Plaintiffs relied upon the allegations in their original complaint. Thus, they clearly considered their original allegations sufficient to support an assertion of fraud.

The timing of Plaintiffs' cross-motion to amend also suggests that the cross-motion was not prompted by Kline's testimony. Plaintiffs did not file their motion to amend promptly after hearing Kline's testimony. Rather, they waited for over two months until after Defendants had served Plaintiffs with motion papers to initiate their cross-motion. The timing of the cross-motion and the earlier allegation of fraud demonstrate that Plaintiffs' cross-motion was not prompted by newly discovered evidence.

The record is more consistent with the conclusion that Plaintiffs filed their cross-motion to amend in response to a belated conclusion that the added claim was necessary to support their existing unjust enrichment claim. Plaintiffs stated in their Memorandum In Opposition To Def. Motion For Summary Judgment ("Pl.Mem.Opp.") that "[o]rdinarily, unjust enrichment is a quasi-contractual claim not available where an express contract exists." Pl.Mem.Opp. at 16. They noted, however, that "Plaintiffs' proposed fifth cause of action for fraudulent inducement would have the effect of vitiating the contract, which would make the unjust enrichment remedy available." Id.*fn12

It is clear that Plaintiffs did not perceive this problem when they filed their amended complaint, since they would surely not have filed an unjust enrichment claim that they knew was invalid. Thus, Plaintiffs only subsequently discovered the need to demonstrate the invalidity of the Agreement. Given that the cross-motion came proximate receiving Defendants' dispositive motion, which undoubtedly prompted Plaintiffs to perform additional legal research, it strongly appears that Plaintiffs cross-moved to amend in July, 1998 reacting to newly discovered law, not newly discovered evidence. As noted above, legal ignorance provides no excuse for delay. Cresswell v. Sullivan & Cromwell, 922 F.2d 60, 72 (2d Cir. 1990); cf. PI, Inc. v. Quality Products, Inc., 907 F. Supp. 752, 764 (S.D.N.Y. 1995) ("When it appears that leave to amend is sought in anticipation of an adverse ruling on the original claims, . . . the court is free to deny leave to amend."). Therefore, Plaintiffs have not satisfied their burden of demonstrating a valid excuse for their delay.

Since mere delay is an insufficient grounds for denying a motion to amend, this Court must still consider whether the Defendants will suffer prejudice if the motion is granted. The burden is on the non-movant to demonstrate that the amendment would be prejudicial. See Fariello v. Campbell, 860 F. Supp. 54, 70 (E.D.N.Y. 1994). In determining what constitutes "prejudice," a court considers "whether the assertion of the new claim would: (i) require the opponent to expend additional resources to conduct discovery and prepare for trial; [or] (ii) significantly delay the resolution of the dispute. . . ." Block v. First Blood Assocs., 988 F.2d 344, 350 (2d Cir. 1993) (citations and internal quotations omitted). "[T]he longer the period of an unexplained delay, the less will be required of the non-moving party in terms of a showing of prejudice." Id.

Defendants argue that they will be substantially prejudiced because the amendment comes after the close of discovery and after they served their motion papers, and because it substantially alters Plaintiffs' theory of the case. Plaintiffs argue that Defendants have suffered no prejudice because, except for the allegations supporting scienter, the fraud claim rests on facts already alleged in the Amended Complaint, i.e. the misrepresentations, and that issues related to these alleged misrepresentations were pursued in discovery.

Plaintiffs' argument has some merit. Certainly, Defendants are prejudiced less by the addition of a claim closely related to the existing facts than to the addition of a wholly unrelated claim. It does not follow, however, that they suffer no prejudice. Plaintiffs' current claims rest solely on the falsity of Commander's representations. By adding the claim of fraud, Plaintiffs would put Commander's knowledge of that falsity at issue. It is clear that an allegation that Commander knew of the falsity of a fact would justify discovery that might not be pursued in response to the mere allegation of an erroneous statement. Further, although prejudice is defined as having to conduct additional discovery, the fact that the time for discovery in this case is closed does not, of course, eliminate the concern. To the contrary, a finding of prejudice is further warranted where as here discovery and motion deadlines have passed and a case is trial-ready. Cf. Dluhos v. Floating and Abandoned Vessel, 162 F.3d 63, 70 (2d Cir. 1998) (finding no "undue prejudice . . . given that the litigation did not appear to be anywhere near substantive resolution at the time of the . . . decision.").

Prejudice is also suggested by the fact that the cross-motion was made after the serving of a motion for summary judgment. Courts have often found that a motion to amend made after a summary judgment motion is filed, particularly when discovery is also closed, raises concerns of prejudice that justify denial of the motion. See Ansam Assoc., Inc. v. Cola Petroleum, Ltd., 760 F.2d 442, 446 (2d Cir. 1985) (upholding a denial of leave to amend a complaint in part because "permitting the proposed amendment would have been especially prejudicial given the fact that discovery had already been completed and (the defendant) had already filed a motion for summary judgment"); CL-Alexanders Laing & Cruickshank v. Goldfeld, 739 F. Supp. 158, 167 (S.D.N.Y. 1990) ("When the motion [to ...


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