Circuit stated in Artvale, it is not difficult for lawyers to
insert into an agreement language making clear that the parties
intend for the bringing of a lawsuit in breach of the agreement
to give rise to liability for attorney's fees. The parties here
were both sophisticated in commercial matters, and they did not
use any terms expressing such an intent.
I also find that Xerox's claim for interest that was allegedly
incurred as a result of Sauer's delay of the appraisal process
does not state a cognizable claim. Although the agreement did
obligate the parties to abide by that process, nowhere does it
state or imply that actions by one party that might prolong the
process would render that party liable for accrued interest paid
to it by the other party. The agreement contains other, separate
sections dealing with interest, by the terms of which Xerox
apparently considered itself bound, since it did pay Sauer
interest at the contractual rate. Again, the plain language of
the agreement itself betrays no intention to permit recoupment of
those payments based on delays by Sauer.
Accordingly, I find that Xerox's allegations and the evidence
in the record fail to supply the fourth element of Xerox's breach
of contract claims: damages. Although in the ordinary sense of
the term, Xerox could be said to have been "damaged" by having to
incur litigation expenses, it is self-evident that the damages
needed to satisfy this element of a breach of contract claim must
be recoverable under New York law. Since a legal entitlement to
the types of "damages" sought here could, under the facts of this
case, arise only out of the lease agreement, and because that
agreement contains no suggestion that the parties intended to
make such damages available for the types of breach that occurred
here, these claims must be dismissed.
II. Breach of Covenant of Good Faith and Fair Dealing
Xerox also asserts a counterclaim alleging that Sauer breached
his duty of good faith and fair dealing under New York law. The
factual basis for this claim is the same as that underlying
Xerox's claims regarding the appraisal process and notice and
cure provisions. Sauer contends that although such a duty is
implied by law in every contract, an alleged breach of that duty
does not give rise to a separate, independent cause of action.
Xerox disputes this assertion.
"[T]he duty of good faith and fair dealing between the parties
to a contract is well recognized" under New York law. Mark
Patterson, Inc. v. Bowie, 237 A.D.2d 184, 186, 654 N.Y.S.2d 769
(1st Dep't 1997) (citing New York Univ. v. Continental Ins.
Co., 87 N.Y.2d 308, 318, 639 N.Y.S.2d 283, 662 N.E.2d 763 (1995)
("implicit in every contract is a covenant of good faith and fair
dealing")). There is, however, ample authority that "a breach of
that duty will be dismissed as redundant where the conduct
allegedly violating the implied covenant is also the predicate
for a claim for breach of covenant of an express provision of the
underlying contract." Houbigant, Inc. v. ACB Mercantile, Inc.,
914 F. Supp. 964, 989 (S.D.N.Y. 1995) (citing Geler v. National
Westminster Bank USA, 770 F. Supp. 210, 215 (S.D.N.Y. 1991)).
See, e.g., New York Univ. v. Continental Ins. Co., 87 N.Y.2d 308,
319, 639 N.Y.S.2d 283, 662 N.E.2d 763 (1995) ("The cause of
action [for breach of implied covenant of good faith and fair
dealing] is duplicative of the first cause of action for breach
of contract and should have been dismissed"); accord Engelhard
Corp. v. Research Corp., 268 A.D.2d 358, 702 N.Y.S.2d 255, 256
(1st Dep't 2000); Business Networks of New York, Inc. v.
Complete Network Solutions Inc., 265 A.D.2d 194, 696 N.Y.S.2d 433,
435 (1st Dep't 1999); MTI/The Image Group, Inc. v. Fox
Studios East, Inc., 262 A.D.2d 20, 23, 690 N.Y.S.2d 576 (1st
Dep't 1999); Ezrasons, Inc. v. American Credit Indemnity Co.,
257 A.D.2d 447, 448, 683 N.Y.S.2d 264 (1st Dep't 1999); Odingo
v. Allstate Ins. Co., 251 A.D.2d 81, 672 N.Y.S.2d 727
(1st Dep't), leave to appeal denied, 92 N.Y.2d 810,
680 N.Y.S.2d 55, 702 N.E.2d 840 (1998); Canstar v. J.A. Jones Const.
Co., 212 A.D.2d 452, 453, 622 N.Y.S.2d 730 (1st Dep't 1995). In
fact, in 1996 a district court in this circuit stated that in
every case that it had found in which the plaintiff alleged both
breach of contract and breach of a covenant of good faith and
fair dealing, the court had dismissed the latter claim as
duplicative. See W.S.A., Inc. v. ACA Corp., Nos. 94-1868,
94-1493, 1996 WL 551599 at *9 (S.D.N.Y. Sept. 27, 1996),
modified on other grounds on reconsideration, 1996 WL 735508
(S.D.N.Y. Dec.20, 1996). See also Murphy v. American Home
Products Corp., 58 N.Y.2d 293, 461 N.Y.S.2d 232, 448 N.E.2d 86
(1983) (implied obligation is simply "in aid and furtherance of
other terms of the agreement of the parties"); N.Y.U.C.C. § 1-203
Official Comment ("This section does not support an independent
cause of action for failure to perform or enforce in good faith.
. . . [T]he doctrine of good faith merely directs a court towards
interpreting contracts within the commercial context in which
they are created, performed, and enforced, and does not create a
separate duty of fairness and reasonableness which can be
Although Xerox has cited cases in which courts have upheld
causes of action for breach of the duty of good faith and fair
dealing, see BGW Development Corp. v. Mount Kisco Lodge No.
1552, 247 A.D.2d 565, 566, 669 N.Y.S.2d 56 (2d Dep't), leave to
appeal denied, 92 N.Y.2d 813, 681 N.Y.S.2d 474, 704 N.E.2d 227
(1998); Fourth Branch Associates Mechanicville v. Niagara Mohawk
Power Corp., 235 A.D.2d 962, 965, 653 N.Y.S.2d 412 (3d Dep't
1997), those cases appear to be in the minority. Moreover, as the
court noted in Fourth Branch Associates, this implied covenant
"is breached when a party to a contract acts in a manner that,
although not expressly forbidden by any contractual provision,
would deprive the other party of the right to receive the
benefits under their agreement.'" 235 A.D.2d at 965-66,
653 N.Y.S.2d 412 (quoting Jaffe v. Paramount Communications,
222 A.D.2d 17, 22-23, 644 N.Y.S.2d 43 (1st Dep't 1996)). This
suggests that such a claim may be brought, if at all, only where
one party's conduct, though not breaching the terms of the
contract in a technical sense, nonetheless deprived the other
party of the benefit of its bargain. To put it another way, a
"party may maintain a claim for breach of the duty of fair
dealing only if it is based on allegations different than those
underlying the accompanying breach of contract claim." Siradas
v. Chase Lincoln First Bank, N.A., No. 98 Civ. 4028, 1999 WL
787658 *6 (S.D.N.Y. Sept.30, 1999).
In the case at bar, I see no difference between the factual
underpinnings of Xerox's breach of contract claims and its claim
for breach of the implied covenant of good faith and fair
dealing. Indeed, the section of Xerox's memorandum of law
discussing the latter claim mostly simply repeats and paraphrases
its prior allegations regarding the contract claims. I therefore
find that this claim is duplicative of Xerox's claims for breach
of contract, and wholly subsumed within those two claims.
Accordingly, Xerox's motion for summary judgment on this claim is
denied, and Sauer's cross-motion for summary judgment on this
claim is granted.
III. Breach of Implied Covenant of Quiet Enjoyment
Under New York law, a covenant of quiet enjoyment is implied in
every lease. The covenant "is simply a promise by the lessor that
it will not interfere with the rights granted" under the lease.
Trans Pacific Leasing Corp. v. Aero Micronesia, Inc.,
26 F. Supp.2d 698, 706 (S.D.N.Y. 1998). In order to establish such a
claim, the plaintiff must show actual or constructive eviction.
Saewitz v. Epstein, 6 F. Supp.2d 151, 158-59 (N.D.N.Y. 1998).
Although claims brought under this theory usually arise in the
context of a real property
lease, it appears that the doctrine does apply to chattel leases
as well. See, e.g., Colorado Interstate Corp. v. CIT
Group/Equipment Financing, Inc., 993 F.2d 743, 747 (10th Cir.
1993) (lease of computer equipment; applying Texas law); In re
Atlantic Computer Systems, Inc., 135 B.R. 463, 469
(Bankr.S.D.N.Y. 1992) (same; applying New York law).
Xerox contends that Sauer breached this covenant because his
interference with the appraisal process and his failure to comply
with the agreement's notice and cure provisions have deprived
Xerox of the beneficial use and enjoyment of its leasehold. After
reviewing the record, however, I am not persuaded that Xerox has
presented sufficient evidence to support this claim.
Although Sauer's conduct certainly caused some problems for
Xerox, I fail to see how it interfered with Xerox's rights under
the lease so as to give rise to a cause of action for breach of
the implied covenant of quiet enjoyment. Xerox remained in
possession of the equipment throughout its dispute with Sauer,
and although Sauer may have caused some delays in the appraisal
process, that process did proceed to a conclusion.
There is support for Xerox's position that it need not show
actual abandonment or removal of the leased equipment to
establish a claim for damages (as opposed to forgiveness of
rent). See Lovick v. Nigro, No. LPLCV 940542473S, 1997 WL
112806 *8 (Conn. Sup.er.Ct. Feb.24, 1997); Hidden Ponds of
Ontario, Inc. v. Hresent, 209 A.D.2d 1025, 622 N.Y.S.2d 168 (4th
Dep't 1994); Benitez v. Restifo, 167 Misc.2d 967, 641 N.Y.S.2d 523
(1996). Nevertheless, Xerox must show that Sauer's actions
"substantially and materially deprived [Xerox] of the beneficial
use and enjoyment" of the leased property. Hidden Ponds, 209
A.D.2d at 1027, 622 N.Y.S.2d 168. It has not done so. Xerox's
argument that Sauer "prevented Xerox from obtaining the simple
renewal and buy-out for which it had bargained," Xerox's
Memorandum of Law at 12, stretches this legal doctrine too far.
To accept Xerox's argument would mean that virtually any
landlord-tenant dispute could give rise to a claim for breach of
the covenant of quiet enjoyment on the theory that the tenant or
lessee did not get what it had bargained for. This claim is
therefore dismissed as well.
IV. "Bad Faith" Exception to American Rule
Although not pleaded as a separate cause of action, defendant
also asserts an entitlement to attorney's fees under the "bad
faith" exception to the American rule. As explained by the Second
Circuit in Dow Chem. Pacific Ltd. v. Rascator Maritime S.A.,
782 F.2d 329, 344 (2d Cir. 1986): "While the `American Rule' is
that the prevailing party in federal court litigation generally
cannot recover attorneys' fees, the court does have the power to
award attorneys' fees to a successful litigant when his opponent
has commenced or conducted an action `in bad faith, vexatiously,
wantonly, or for oppressive reasons'" (quoting F.D. Rich Co. v.
United States ex rel. Industrial Lumber Co., 417 U.S. 116, 129,
94 S.Ct. 2157, 40 L.Ed.2d 703 (1974)) (citation omitted).
The Second Circuit went on to state, however, that [t]o ensure
. . . that fear of an award of attorneys' fees against them will
not deter persons with colorable claims from pursuing those
claims, we have declined to uphold awards under the bad-faith
exception absent both "clear evidence" that the challenged
actions "are entirely without color and [are taken] for reasons
of harassment or delay or for other improper purposes," and `a
high degree of specificity in the factual findings of [the] lower
courts.' Id. at 344 (quoting Weinberger v. Kendrick,
698 F.2d 61, 80 (2d Cir. 1982), cert. denied, 464 U.S. 818, 104 S.Ct.
77, 78 L.Ed.2d 89 (1983)). More recently, the Second Circuit has
observed that it has "interpreted the bad faith standard
restrictively. . . ." Eisemann v. Greene, 204 F.3d 393, 396 (2d
Applying this standard here, I decline to award Xerox
attorney's fees under the "bad faith" exception. Although I have
found all of Sauer's claims to be meritless, I am not convinced
that there is "clear evidence" that those claims were both
"entirely without color" and that they were asserted only "for
reasons of harassment or delay or for other improper purposes."
Therefore, to the extent that Xerox moves for an award of
attorney's fees based on the bad-faith exception to the American
rule, its motion is denied.
V. Tortious Interference with Contract
Sauer moves for summary judgment dismissing Xerox's fifth
counterclaim, which alleges that Sauer tortiously interfered with
Xerox's contract with Integrated Equipment Leasing Corporation
("Integrated"), which was the original purchaser/lessor under the
lease agreement. Sauer acquired all of Integrated's interests in
the agreement in 1995. Xerox alleges that Sauer interfered with
the contract in various ways, generally by injecting himself into
the appraisal process and pressuring Integrated's appraisers to
arrive at an inflated figure.
"Tortious interference with contract requires the existence of
a valid contract between the plaintiff and a third party,
defendant's knowledge of that contract, defendant's intentional
procurement of the third-party's breach of the contract without
justification, actual breach of the contract, and damages
resulting therefrom." Lama Holding Co. v. Smith Barney Inc.,
88 N.Y.2d 413, 424, 646 N.Y.S.2d 76, 668 N.E.2d 1370 (1996)
(citations omitted). I find that Xerox has not presented evidence
showing the existence of genuine issues of fact as to this claim,
and that the claim must be dismissed.
First, it is not clear what the alleged breach is here.
Although Xerox alleges that Sauer caused delays in the appraisal
process, and that due to his efforts, Integrated's appraisers
came up with grossly inflated figures on the equipment's fair
market and rental values, I do not see evidence that Integrated
actually breached its obligations under the agreement.
The more fundamental problem with this claim, however, is that
it suffers from the same defect as Xerox's breach of contract
claims: there are no legally recoverable damages. The only
damages claimed by Xerox are its attorney's fees (which cannot be
attributed to Integrated's conduct), and the interest that Xerox
paid to Sauer. For the same reasons given with respect to Xerox's
claims for breach of contract, I find that the element of damages
is missing here, and that this claim must be dismissed.
Xerox also argues that aside from compensatory damages, it is
entitled to an award of punitive damages on this claim. "Under
New York law, an injured party can recover punitive damages when
the tortious act complained of involved a wanton or reckless
disregard of the plaintiff's rights," Universal City Studios,
Inc. v. Nintendo Co., Ltd., 797 F.2d 70, 77 (2d Cir. 1986),
cert. denied, 479 U.S. 987, 107 S.Ct. 578, 93 L.Ed.2d 581
(1986), or where the liable party's actions amount to "gross,
wanton, or willful fraud or other morally culpable conduct."
Cohen v. Davis, 926 F. Supp. 399, 405 (S.D.N.Y. 1996); see also
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) (punitive damages for conduct
that may be "characterized as `gross' and `morally reprehensible'
and `of such wanton dishonesty as to imply a criminal
indifference to civil obligations'"); Guard-Life Corp. v. S.
Parker Hardware Mfg. Corp., 67 A.D.2d 658, 659, 412 N.Y.S.2d 623
(1st Dep't 1979) (punitive damages may be available on proof of
"`actual malice or ill will,' a wrong `morally culpable' . . . or
a wrongful act `done wilfully, wantonly or maliciously'"),
aff'd, 50 N.Y.2d 183, 428 N.Y.S.2d 628, 406 N.E.2d 445 (1980)
(citations omitted). Where
these factors exist, punitive damages may also be awarded on a
claim for tortious interference with contract. International
Minerals & Resources, S.A. v. American General Resources, Inc.,
No. 87 Civ. 3988, 2000 WL 97613 *2 (S.D.N.Y. Jan.27, 2000).
Even viewing the evidence in the light most favorable to Xerox,
the nonmoving party on this claim, I find no basis upon which a
trier of fact could conclude that Sauer's actions in connection
with the appraisal process during the time that Integrated was
still a party to the agreement rose to a level of "wanton
dishonesty" or other moral culpability sufficient to support a
claim for punitive damages. Even if Sauer injected himself into a
process with which he had no business becoming involved, I do not
believe that a factfinder could reasonably conclude that he acted
with reckless disregard of Xerox's rights or with a "criminal
indifference" to his civil obligations.
Sauer also moves for summary judgment on Xerox's sixth
counterclaim, which alleges that Sauer committed fraud in the
appraisal process in order to inflate the appraised value of the
leased equipment. In order to establish this claim, Xerox must
show: a material, false representation; intent to defraud;
reasonable reliance on the representation; and damage to Xerox as
a result. Banque Arabe et Internationale D'Investissement v.
Maryland Nat'l Bank, 57 F.3d 146, 153 (2d Cir. 1995); Keywell
Corp. v. Weinstein, 33 F.3d 159, 163 (2d Cir. 1994); Katara v.
D.E. Jones Commodities, Inc., 835 F.2d 966, 970-71 (2d Cir.
I find that this claim must be dismissed as well. For one
thing, there is no evidence that Sauer defrauded Xerox; the
alleged misrepresentations were made to Integrated's and Sauer's
appraisers. Although Xerox alleges that Sauer sent a
"fraudulently inflated appraisal to Xerox, knowing that Xerox
would rely on it in determining its negotiation position on the
Leased Equipment . . .," Xerox's Memorandum of Law at 8, there is
no evidence that Xerox did "rely" on that appraisal to its
detriment. On the contrary, Xerox did not accept the appraisal
submitted to it by Sauer, and therefore sought the appointment of
a neutral appraiser by the AAA.
In addition, once again legally recoverable damages are
missing. While Xerox again contends that its attorney's fees
represent its damages on this claim, not only is that not
correct, as already explained, but I fail to see how Xerox's
attorney's fees and other expenses related to this litigation can
fairly be attributed to Sauer's alleged fraud in procuring an
inflated appraisal. Xerox has incurred those costs not because of
the appraisal submitted by Sauer or Integrated, but because of
Sauer's commencement and prosecution of this lawsuit. I also
reject Xerox's contention that it can seek punitive damages on
this claim, for the same reasons stated with respect to the
tortious-interference claim. While the relationship between Sauer
and Xerox has been filled with acrimony, I do not believe that a
finder of fact could reasonably conclude that Sauer's involvement
in the appraisal process rose to the level of moral culpability
required to support an award of punitive damages.
I also note that a "separate cause of action for fraud is not
stated where, as here, the alleged fraud relates to the
defendant's breach of contract." Towne Ford v. Marowski,
251 A.D.2d 1075, 1076, 674 N.Y.S.2d 213 (4th Dep't 1998). To the
extent that the fraud alleged here forms part and parcel of
Xerox's contractual claims, this claim is dismissed for that
reason as well.
Defendant's Motion for Partial Summary Judgment (Docket Item
260) is denied. Plaintiff's Cross-Motion for Summary Judgment
(Docket Item 270) is
granted, and defendant's counterclaims are dismissed.
IT IS SO ORDERED.