United States District Court, S.D. New York
July 13, 2004.
DUPONT FLOORING SYSTEMS, INC., Plaintiff,
DISCOVERY ZONE, INC., Defendant.
The opinion of the court was delivered by: SIDNEY STEIN, District Judge
OPINION & ORDER
Dupont Flooring Systems, Inc. brought this action in 1998 to
recover $1.1 million allegedly due to it by Discovery Zone, Inc.
as a result of a breach of contract. Discovery Zone counter-sued
on six causes of action alleging, inter alia, the destruction
of its business and lost profits resulting from Dupont's failure
to perform under the contract. Plaintiff now moves pursuant to
Fed.R.Civ.P. 56 for summary judgment dismissing Discovery Zone,
Inc.'s fifth counter-claim for destruction of business and second
and sixth counter-claims sounding in fraud. For the reasons set
forth below, plaintiff's motion is granted.
Discovery Zone was a Delaware corporation that owned and
operated more than 300 "pay-for-play children's entertainment
centers" called "FunCenters." (Def. 56.1 State. ¶ 3). In March
1996, Discovery Zone went into Chapter 11 bankruptcy and emerged
in 1997. (Def. 56.1 State. ¶ 36). In 1998, this action was
initiated by plaintiff, and in 1999 Discovery Zone again went
into Chapter 11 bankruptcy, and subsequently entered Chapter 7
Before entering bankruptcy in 1999 Discovery Zone filed
counter-claims in this action seeking to recover $9 million in
damages based on Dupont's alleged failure to perform adequately pursuant to a contract by which Dupont was to
install flooring in certain of the FunCenters. In 2001, Discovery
Zone amended its counter-claims to seek over $20 million in
damages caused by the destruction of its business.
A. Discovery Zone's Emergence from Bankruptcy in 1997
Discovery Zone emerged from its first bankruptcy in 1997 with a
plan to reopen remodeled FunCenters with certain features that
had not been present in the original stores (Def. 56.1 State. ¶
4; Fontak Aff. ¶ 16), including laser tag and karaoke facilities.
Discovery Zone also planned to improve the quality of food served
and increase food sales revenues by installing Pizza Hut
franchises at the centers. (Not. Mot., Exh. F, ("Nicholson
Depo."), p. 14). Discovery Zone also reduced the number of stores
in its chain from 326 to 205. (Def. 56.1 State. ¶ 3). Because
Discovery Zone's most lucrative season typically extended from
Christmas day through April, Discovery Zone planned to remodel
prior to December 25, 1997. (Def. 56.1 State. ¶¶ 3, 4, 36).
Discovery Zone hired David Nicholson in 1997 as Vice President of
Design and Construction to oversee the implementation of the
renovation plans for the FunCenters. (Def. 56.1 State. ¶ 8).
The remodeling project was scheduled to take place in three
phases. (Plt. 56.1 State. ¶ 9; Nicholson Depo. p. 49). The first
phase was to include the installation of the "soft play"
equipment. During the second phase, the FunCenters would be
closed for the heavy construction. In the third and final phase
the phase that involved Dupont the flooring and other
incidentals would be completed. (Id.).
The third phase included Discovery Zone's plan to install a
special type of rubber flooring manufactured by Gerbert Limited
in three areas. (Def. 56.1 State. ¶¶ 5-7; Fontak Aff. ¶ 22, Exh.
F, 93-94). The first area would be a laser tag room that would
require drywall partitions extending to the ceiling and rubber flooring.
(Def. 56.1 State. ¶ 5). The panels were to be moveable, and
therefore installed on top of the flooring, so that the room
could be reconfigured to create different courses for laser tag.
(Def. 56.1 State. ¶ 6). Additionally, the same rubber flooring
would be installed in both the "toddler area" and in the area for
older children, known as the "cage." (Def. 561. State. ¶ 7).
B. Negotiations between Dupont and Discovery Zone
The negotiations between Dupont and Discovery Zone were
initiated in October of 1997 when Nicholson called Ronald Cassin,
Vice President of Dupont. (Def. 56.1 State. ¶ 8; Fontak Aff.
137). Discovery Zone claims that Cassin "falsely represented to
Mr. Nicholson at that time that Dupont was a national
organization of many years experience that could immediately
address the flooring work at all of the Discovery Zone fun
centers . . ." when in fact Dupont had only come into existence
that year. (Def. 56.1 State. ¶ 8). Discovery Zone further alleges
that Cassin sent Discovery Zone a list of forty-six national
retail chains and falsely claimed that he had "national
contracts" with those chains. (Def. 56.1 State. ¶ 9; Discovery
Zone Aff. Opp., Exh. 3).
Subsequently, Nicholson and Cassin met in White Plains, New
York. (Def. 56.1 State. ¶ 11). According to Dupont, at that
meeting, Nicholson told Dupont that Discovery Zone had already
hired architects, general contractors and suppliers, and that
Dupont would only be responsible for installing "Gerbert rubber
flooring" and vinyl tile, in coordination with those other
parties. (Fontak Aff. Exh. M, "Master Flooring Installation
According to Discovery Zone, at that meeting Dupont was told
the scope of the renovation project and "the critical nature of
having the work completed by December 22, 1997, the related advertising schedule, that time was of the
essence in the performance of the work, the anticipated quantity
of new flooring material involved, and the types of flooring
involved." (Def. 56.1 State. ¶ 11). Discovery Zone claims that
Dupont made further false representations about its ability to
manage the project at the meeting in White Plains. (Id.; Def.
56.1 State. ¶ 38).
C. The Flooring Installation Contract
On October 26, 1997, Nicholson signed a flooring installation
agreement prepared by Cassin. (Fontak Aff. Exh. M, "Master
Flooring Installation Proposal"). The Master Flooring
Installation Proposal ("Flooring Installation Plan") describes
the duties that Dupont contracted to perform. In that agreement,
Dupont agreed to "manage, supervise and perform all aspects of
the flooring project including the demolition of the old flooring
system and installation of the new flooring system, all in
conjunction with Discovery Zone's General Contractors, Architect
and Material Suppliers." (Def. 56.1 State. ¶ 13; Fontak Aff. Exh
M.). The plan provided that Dupont would be involved in this work
at 180 of the 205 Discovery Zone locations. (Fontak Aff. Exh. M).
The Master Flooring Installation Proposal establishes a
"cost-plus" pricing method whereby Dupont was to be paid for the
cost of labor, materials and installation plus an additional 10%
for overhead and 22% for profit and Dupont was to submit an
estimate particular to each location before beginning work.
(Fontak Aff. Exh. M).
Subsequent to that agreement, Dupont sent out a memorandum to
its branch offices stating that it needed to complete the work in
the Discovery Zone FunCenters by December 22, 1997, and that all
work would be completed within two weeks of commencement. (Def.
56.1 State. ¶ 15; Def. Aff. Opp., Exh. 5, 6). On November 19, Discovery Zone, Dupont and other parties
involved in the renovation of the FunCenters met in Chicago to
discuss the project. (Def. 56.1 State. ¶ 16). Discovery Zone
alleges that Dupont was further made aware at that meeting that
Dupont controlled the construction schedule because it had to be
the first party to complete its work before other elements of the
project could be completed. (Id.). At that meeting, Dupont was
also made aware of the importance of finishing the project before
Christmas because Discovery Zone expected to have its highest
revenues in the first quarter of the following year, and because
Discovery Zone was scheduling an advertising campaign to
coordinate with the start of the year, the FunCenter re-openings,
and certain movie openings. (Def. 56.1 State. ¶ 17).
D. The Construction
Dupont hired David Alpy as Sales Account Manager to take charge
of the installation program. (Def. 56.1 State. ¶ 18). Discovery
Zone alleges that Alpy promised he would complete construction on
100 FunCenters by December 1997. (Id.). In December, general
contractors had begun working on 109 FunCenters (Def. 56.1 State.
¶ 19), and those locations were available to Dupont and "over
half had flooring material on hand at that time for Dupont."
(Def. 56.1 State. ¶ 19). Thus, Discovery Zone alleges that Dupont
could have begun flooring installation in at least fifty
locations in December. However, Discovery Zone alleges that
Dupont only began construction on twelve locations before 1998.
(Def. 56.1 State. ¶ 19). By February 1998, Discovery Zone alleges
that over 100 stores were available for Dupont to commence work,
but that only twenty-two renovation projects had been commenced
by Dupont. (Def. 56.1 State. ¶ 20). The parties further agree that Discovery Zone was responsible
for at least some of that delay. Nicholson of Discovery Zone
testified that in December 1997, he felt "there were enough
mitigating circumstances with respect to supply and with respect
to drawings that [Dupont] could be excused for the lack of
installed flooring at a lot of the Funcenters" prior to 1998.
(Fontak Aff. Exh. H at 187).
Sometime in February 1998, Dupont halted work because of unpaid
bills, and then discovered after an internal audit that the bill
it had submitted to Discovery Zone was inflated by 10%.
(Whitfield Aff. ¶¶ 41-42). Discovery Zone alleges that this
temporary halt in the work caused further damages.
Dupont made representations in March and April of 1998 that all
construction would be finished in May of that year. (Def. 56.1
State. ¶ 28). Those representations also turned out to be false
because work had not even begun on forty-three locations in May
1998. (Def. 56.1 State. ¶ 29). Where work had begun, it was,
according to Discovery Zone, "deficient at virtually all
locations." (Def. 56.1 State. ¶ 29).
E. Lost Profit and Destruction of Business Damages
Discovery Zone claims that Dupont's failure to complete the
flooring installations had disastrous consequences for it
including causing unsafe conditions, unsatisfactory building
inspections and costly changes to the construction plans. (Def.
56.1 State. ¶ 24). One of those changes was that the laser tag
particle boards were installed directly into the floors, and
therefore could not be moved, contrary to the project design.
(Def. 56.1 State. ¶ 25). Another negative impact was that the
Discovery Zone customer base was depleted by the ongoing
unavailabity or incomplete state of FunCenters, and this
allegedly caused damages to the reputation of the company. (Def.
56.1 State. ¶ 26). Discovery Zone experienced an increase in income for the first
quarter of 1998 (Def. 56.1 State. ¶ 32), which it attributes to
the advertising campaign it had launched to coincide with the
completion of renovations. After that first quarter, revenues
began to decrease again. (Id.). Discovery Zone attributes that
decrease to customer base erosion as customers realized that
construction was not completed and that the FunCenters were in
"deplorable condition." (Def. 56.1 State. ¶ 32). Discovery Zone's
income did not increase again until the Spring of 1999. (Id.).
Discovery Zone alleges that if Dupont had completed its work,
Discovery Zone would have enjoyed increasing revenues, and would
not have entered bankruptcy. (Def. 56.1 State. ¶ 33). Because the
other contractors performed in a timely fashion, Dupont was to
blame for construction delays. (Def. 56.1 State. ¶ 34).
Discovery Zone alleges that the damages can be calculated with
reasonable certainty because in the Chapter 11 bankruptcy,
Discovery Zone closed 105 "under performing" FunCenters, and that
the 205 that remained open had successful track records prior to
Dupont submitted, as attachments to its motion for summary
judgment, two documents prepared for Discovery Zone that indicate
various causes of its financial failure. First is Discovery
Zone's Form 10K for the year ending in December 1997, which was
submitted to the Securities and Exchange Commission, and includes
statements indicating that the profitability of Discovery Zone
remained uncertain for the upcoming year: "The Company's future
revenues will depend to a significant extent upon its ability to
respond to changes in consumer tastes. The performance of
individual FunCenters may be affected by a variety of local
factors. . . ." (Plt. 56.1 State. ¶ 20). Among the factors that Discovery Zone listed as causing
uncertainty were the tastes of local customers and the
competition in the market for family leisure spending. (Id.).
Dupont also provided an investment solicitation memorandum,
prepared by the investment bank Ladenburg Thalman & Co. Inc.,
that listed factors that had affected Discovery Zone's
profitability. (Not. Mot., Exh. J). That publication indicates
that customers did not perceive Discovery Zone's services to be a
good value, and attributes this to two factors: (1) competitors
offered "pay-as-you-go" options, while Discovery Zone charged a
flat-rate entrance fee, and (2) Discovery Zone increased its
prices between twenty-five and forty percent in 1998. To address
the negative public perception of Discovery Zone's pricing, the
memorandum states that Discovery Zone planned to return to "more
competitive pricing" and thereby rebuild attendance. (Not. Mot.
Exh J., p. 30). The report also attributed the financial
difficulties in 1998 to "significant cost overruns and store
disruptions resulting from the inadequate planning and execution
of the renovations. This, coupled with 25% to 40% increases in
the price of general admissions in the renovated stores, resulted
in negative attendance trends after the first quarter of 1998."
(Id. p. 2). Also, Dupont has submitted to the Court with its
summary judgment motion customer complaint records indicating
that at least some of the disappointed customers complained about
a variety of issues such as quality of food, length of the games,
prices, and scheduling issues. (Fontak Aff. Exh. C).
F. Procedural History
As set forth above, Dupont brought this action to recover $1.1
million for unpaid flooring services provided by it to Discovery
Zone. After Discovery Zone entered bankruptcy, the action was
dismissed without prejudice by U.S. District Court Judge John Martin in April 1999. Discovery Zone was permitted to amend its
Answer and Counter-Claims in 2001, and discovery proceedings
recommenced in 2002. In 2003, this action was officially
In its Amended Answer and Counter-Claims, filed in 2001,
Discovery Zone asserted new counter-claims seeking more than $20
million in damages for destruction of business and lost profits.
Dupont now seeks summary judgment in its favor on those claims
pursuant to Fed.R.Civ.P. 56.
A. Summary Judgment Standard
Summary judgment may be granted "only when the moving party
demonstrates that `there is no genuine issue as to any material
fact and that the moving party is entitled to a judgment as a
matter of law.'" Allen v. Coughlin, 64 F.3d 77, 79 (2d Cir.
1995) (quoting Fed.R.Civ.P. 56(c)); accord Celotex Corp. v.
Catrett, 477 U.S. 317, 322, (1986). The Court must "view the
evidence in the light most favorable to the non-moving party and
draw all reasonable inferences in its favor, and may grant
summary judgment only when `no reasonable trier of fact could
find in favor of the nonmoving party.'" Allen, 64 F.3d at 79
(citation omitted) (quoting Lund's, Inc. v. Chem. Bank,
870 F.2d 840, 844 (2d Cir. 1989)).
Though the non-movant enjoys the benefit of all reasonable
inferences drawn in its favor, to survive a motion for summary
judgment, the non-movant may not rest upon the mere allegations
in its pleadings but "must set forth specific facts showing that
there is a genuine issue for trial." Fed.R.Civ.P. 56(e); see
also Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248
(1986). In short, a nonmoving party must set forth sufficient evidence supporting its version of "the claimed factual dispute
. . . to require a jury or judge to resolve the parties'
differing versions of the truth at trial." Id. at 249 (internal
A. Discovery Zone Has Not Shown It Is Entitled to Damages for
the Destruction of its Business
This action is before this Court on diversity jurisdiction, and
therefore the substantive law of New York will apply. Typically,
in a breach of contract action where one party breaches a
construction contract, the other party is entitled to "the market
price of completing or correcting the performance." Bellizzi v.
Huntley Estates, Inc., 3 N.Y.2d 112, 115-16, 143 N.E.2d 802,
164 N.Y.S.2d 395 (1957); Halsey v. Connor, 287 A.D.2d 597,
731 N.Y.S.2d 760, 761 (2d Dep't 2001). Here, Discovery Zone seeks
additional damages because it alleges that Dupont is liable for
the lost profits flowing from the destruction of Discovery Zone's
In order to recover damages for the destruction of business
resulting from a contractual breach, a party must show three
things: (1) "it must be demonstrated with certainty that such
damages have been caused by the breach," (2) "the alleged loss
must be capable of proof with reasonable certainty," and (3)
"there must be a showing that the particular damages were fairly
within the contemplation of the parties to the contract at the
time it was made." Kenford Co. v. County of Erie, 67 N.Y.2d 257,
261, 493 N.E.2d 234, 502 N.Y.S.2d 131, 132 (1986) (Kenford I);
see also Ashland Mgt. v. Janien, 82 N.Y.2d 395,
624 N.E.2d 1007, 604 N.Y.S.2d 912 (1993); Route 7 Mobil Inc. v. Machnick
Builders Ltd. 296 A.D.2d 809, 810, 745 N.Y.S.2d 336, 338 (3d
Dep't 2002). Discovery Zone fails to satisfy the requirements set
forth in Kenford I as a matter of law. 1. Discovery Zone Cannot Demonstrate that Its Destruction of
Business Damages Have Been Caused by Dupont's Breach
In order to recover damages due to the destruction of business,
Discovery Zone must show that Dupont's failure to perform the
flooring contract was the cause of Discovery Zone's damages. The
harm must be "directly traceable" to the breach; the damages
cannot be the result of other intervening causes. Kenford I, 67
N.Y.2d at 261.
The evidence submitted by both parties make it manifest that a
farrago of factors contributed to construction delays, and
Discovery Zone's eventual financial failure. Dupont was one of
many contractors, as Discovery Zone concedes. Moreover, Discovery
Zone was only able to provide to Dupont a maximum of fifty-five
FunCenters that were ready for flooring installation before
Christmas. (See e.g., Nicholson Aff., p. 17). Thus, Dupont was
not solely responsible for the fact that the renovations had not
been completed by Christmas of 1997, so that the advertising
campaign could coordinate with the opening of the improved
In fact, Nicholson of Discovery Zone testified that he did not
hold Dupont responsible for the failure to install flooring until
sometime after January 1998 in part because of Nicholson's own
failure to obtain construction permits. (Id.). He further
testified at his deposition that he assigned Dupont less than 75%
of the blame associated with the failure to complete construction
on the approximately 100 stores that were made available to it.
(Nicholson Aff. p. 17-18). Nicholson, and information contained
in a document prepared by Discovery Zone, indicate that at least
some blame lay with the manufacturer of the flooring materials,
Gerbert. (Nicholson Aff. p. 17; Aff. Opp. Exh. 11). Customer
complaints also indicate that a certain amount of the customer
dissatisfaction that Discovery Zone alleges stemmed from the
incomplete renovations was in fact caused by the nature and quality of services offered
by Discovery Zone. (Fontak Aff. Exh C.).
Moreover, Discovery Zone itself perceived that its financial
difficulties stemmed in part from price increases that were
implemented in 1998 at the renovated centers as Ladenburg Thalman
reported in the investment solicitation memorandum prepared in
1998: "Attendance rates at Discovery Zone's FunCenters have
steadily declined over the last several years due to a number of
factors, including Discovery Zone's inability to invest in new
entertainment offerings and marketing and its inability to
complete the renovation of its stores. Additionally, the Company
believes that the increase in general admission prices has had a
negative impact on overall admissions. Management believes that a
reduction in the admission price should increase attendance
levels which, in turn, would result in higher food, game and
retail purchases." (Fontak Aff., Exh. J, p. 6).
In similar actions, the New York courts have refused to award
damages for lost profits due to a defendant's delay in completing
construction where a plaintiff was unable to prove that the delay
in construction caused the lost profits. For example, in Teramo
v. O'Brien-Sheipe Funeral Home, 283 A.D.2d 635, 637, 725 N.Y.S.2d 87,
90 (2d Dep't 2001) the Appellate Division held that
"defendant's unsubstantiated claim that it lost business due to
delay in completing construction of the extension to the funeral
home is too speculative to allow recovery." See also Movitz v.
First Nat'l Bank, 148 F.3d 760 (7th Cir. 1998).
Discovery Zone relies largely on inapposite and distinguishable
cases in making its claim that it can prove that Dupont's
breaches destroyed Discovery Zone's business. For example, in
Perini Corp. v. Great Bay Hotel & Casino, Inc., 129 N.J. 479,
499-500, 610 A.2d 364, 374 (1992), the causation of lost profits was clear
because there was one contractor responsible for the job; in
contrast, Dupont was not the only contractor working in the
Therefore, Discovery Zone has not shown that a material issue
of fact exists as to whether it can prove that Dupont's failure
to install flooring in a timely fashion caused Discovery Zone's
reentry into bankruptcy.
2. Discovery Zone Cannot Prove Its Losses with Reasonable
Before a party can recover lost profits, the amount of lost
profits must be proven with "reasonable certainty," although they
do not have to be proven with "mathematical precision." See
Ashland Mgmt Inc. v. Janien, 82 N.Y.2d at 403. The lost profits
cannot be "merely speculative, possible or imaginary." Kenford
I, 67 N.Y.2d at 261.
Additionally, a stricter standard is applied to a "new
business" attempting to demonstrate lost profits: "Evidence of
lost profits from a new business venture receives greater
scrutiny because there is no track record upon which to base an
estimate." Schonfeld v. Hilliard, 218 F.3d 164, 172 (2d Cir.
2000); Kenford I, 67 N.Y.2d at 261.
Discovery Zone did not have one profitable quarter from
1995-1997. While Discovery Zone was not a "new" business in 1997,
it was emerging from bankruptcy, streamlining its operations, and
preparing to enter a new market with newly remodeled stores, new
prices, and new services. It was also trying to enter new
segments of the market by appealing to older children with laser
tag and karaoke. Moreover, after bankruptcy, Discovery Zone had
closed one third of its facilities. It could not have accurately
predicted how successful its new business strategies would be.
Cf. Coastal Aviation, Inc. v. Commander Aircraft Co.
937 F. Supp. 1051, 1070 (S.D.N.Y. 1996). Discovery Zone fails to establish, as a new business, or
otherwise, any reliable measure of its lost profits. Courts
repeatedly have rejected claims for lost profits that rest on a
"series of assumptions and projections." Kidder, Peabody & Co.,
Inc. v. IAG Intern. Acceptance Group N.V., 28 F. Supp.2d 126,
133-134 (S.D.N.Y. 1998); see also Summit Tax Exempt L.P. II v.
Berman, No. 88 Civ. 5839, 1989 WL 152796 (S.D.N.Y. July 19,
1989); Trademark Research Corp. v. Maxwell Online, Inc.,
995 F.2d 326 (2d Cir. 1993) (lost profit claim could not have been
proven as a matter of law because it was a "network of
conjecture" despite the fact that "proof of lost profits was
Discovery Zone claims at least $20 million in damages for the
destruction of its business. It also seeks to recover, in
addition to lost profits, damages for "lost business opportunity,
media and advertising costs, extended overhead, escalation costs,
costs of storing equipment and materials, interest and financing
costs, and depreciation, and other consequential damages
including loss of good will, damages to Discovery Zone's business
reputation and ultimately the complete loss of business." (Am.
Ans. and Counter-Claims, p. 17). Of the total damage, Discovery
Zone alleges that $7,691,391 of lost profits was caused by its
inability to implement a new pricing structure. (Nicholson Aff.
p. 19). To support that claim, Discovery Zone presents various
records of revenues by store. (Aff. Opp. Exh. 18).
Discovery Zone provides the testimony of Nicholson and
Whitfield, former Discovery Zone employees, to support the
contention that Discovery Zone would have been profitable.
(Whitfield Aff, Nicholson Aff.). Essentially, those two former
Discovery Zone employees testified that after the advertising
campaign in the first quarter of 1998, profits began to increase. However "as the customer base
recognized that Discovery Zone's stores during this time were in
deplorable condition and Discovery Zone was unable to keep its
commitments to its customers due to the stalled refurbishing
project, in or about the 17th week of 1998, the revenue
declined as compared to the same periods in 1997. Indeed it was
not until the spring of 1999 after construction that the
income for the first time exceeded the previous year's income. By
then, it was too late and Discovery Zone was essentially
bankrupt." (Nicholson Aff. ¶ 56). Discovery Zone further alleges
that it spent $3,325,000 on media purchases and did not realize
the benefit of 65% of that spending, but provides no specific
method whereby it arrived at the figure of 65%. (Nicholson Aff.
p. 19). Whitfield stated that the planned cost of the advertising
program was "somewhere over nine millon dollars" but does not
state what portion of that was actually spent. (Whitfield Aff. ¶
Aside from figures indicating increased sales in the first
quarter of every year, Discovery Zone has not provided any
information to support its conjectures about how the timing of
advertising and construction would have operated to create a
positive customer reaction. Discovery Zone has not provided the
analysis of any expert who actually calculated economic harm
caused by Dupont; it is unclear which assumptions were used in
arriving at the $20 million lost profits figure.
At a minimum, a number of obvious assumptions are necessary to
support Discovery Zone's claim that it would have been profitable
if Dupont had completed construction in a timely fashion. In
general, lost profits could not be determined without assuming
that Discovery Zone's post-bankruptcy reorganization plan would
have been successful, and an assumption would further have to be
made as to how successful it would have been. A calculation of lost profits would necessarily
include projections about the numbers of customers who would have
used Discovery Zone's facilities, the prices they would have
paid, the impact of the economy and the competition on Discovery
Zone's business and Discovery Zone's ability to attract customers
who did not prefer the competitors' pay-as-you-go model of
service. Further, it requires projections about those customers'
food and retail purchases. It would also require information
about the profitability of the few stores Discovery Zone did
complete in time, and the stores that Discovery Zone did not work
in at all, so that the profitability of those stores could be
subtracted from the damages. None of that exists in this record.
As set forth above, Discovery Zone has no ability to provide
reliable profit information based on past earnings. It has failed
to present any method of calculating future earnings based on its
own sales. Moreover, Discovery Zone's claim of entitlement to
lost profits cannot fall within the precedent of the few cases
where new businesses have been awarded lost profits based on the
earnings of comparable third parties in the same industry because
Discovery Zone could not present information of comparable
competitors' profitability. See Care Travel Co., Ltd. v. Pan
Am. World Airways, Inc., 944 F.2d 983, 994-95 (2d Cir. 1991),
Travellers Int'l v. Trans World Airlines, Inc., 41 F.3d 1570,
1579 (2d Cir. 1994); Americana Fabrics, Inc. v. Liebhardt Mills,
Inc., 2000 WL 245889, *2 (S.D.N.Y. 2000). Discovery Zone used a
different pricing structure than its competitors, and therefore
no such comparison is possible. (Exh. J p. 4 "Discovery Zone's
closest national competitor, CEC Entertainment, Inc., . . . has
an in-store focus on food and game revenue, and does not charge a
general admission fee."). Discovery Zone has only provided a conclusory allegation that
it would have made a profit had Dupont not breached the contract
and it has failed to support its lost profits calculation with
anything but conjecture. Discovery Zone has, in sum, failed as a
matter of law to prove its losses with reasonable certainty.
3. Lost Profits and Destruction of Business Damages Were Not
Within the Reasonable Contemplation of the Parties
It is a bedrock principle of contract law that a breaching
party is only responsible for consequential damages flowing from
a breach of contract to the extent those damages are within the
contemplation of the parties at the time of contracting, or are
reasonably foreseeable. Hadley v. Baxendale, 9 Ex. 341, 156
Eng.Rep. 145 (1854); see also Kenford Company, Inc. v. Erie,
73 N.Y.2d 312, 316-17, 537 N.E.2d 176, 177, 540 N.Y.S.2d 1, 2
(1989) ("Kenford II").
Thus, before Discovery Zone is entitled to survive Dupont's
motion for summary judgment, it must show that a material issue
of fact exists as to whether lost profit and destruction of
business damages were within the "reasonable contemplation" of
the parties. "In determining the reasonable contemplation of the
parties, the nature, purpose and particular circumstances of the
contract known by the parties should be considered . . . as well
as `what liability the defendant fairly may be supposed to have
assumed consciously, or to have warranted the plaintiff
reasonably to suppose that it assumed, when the contract was
made.'" Kenford II, 73 N.Y.2d at 319 (cited in Coastal
Aviation, Inc. v. Commander Aircraft Co. 937 F. Supp. 1051, 1065
While Discovery Zone alleges that Dupont knew that time was of
the essence in the completion of the contract and that the target
completion date for the project was Christmas, 1997, Discovery
Zone has not presented any evidence to indicate that it could make a showing at trial that the parties contemplated that a
failure to perform would threaten the entire Discovery Zone
business. Where a construction contract states that the work must
be performed by a date certain, that is insufficient to show that
the parties contemplated potential economic loss caused by delays
as a basis for damages. See Maimis Knox Group, Ltd. v. Grand
Central Zocalo, LLC, 5 A.D.3d 129, 771 N.Y.S.2d 888, 2004
N.Y.S.lip Op. 01339 (1st Dep't, Mar. 2, 2004). There is no evidence of
discussions on the subject in the contract negotiations, nor in
the contract itself. Thus Discovery Zone has not shown that the
lost profit damages were contemplated. See Maimis-Knox,
771 N.Y.S.2d 888.
Discovery Zone cites cases where courts have awarded lost
profits damages based on similar failures to complete
construction; however, Discovery Zone's reliance is misplaced
because in cases such as Ashland Mgmt. Inc. v. Janien,
82 N.Y.2d 395, 604 N.Y.S.2d 912 (1993) and Harbor Hill
Lithographing Corp. v. Ditler Bros, 76 Misc.2d 145,
348 N.Y.S.2d 920 (Nassau Co., 1973) the consequential damages flowing
from a breach were explicitly contemplated by the parties. Here,
there is no indication that Dupont could reasonably foresee
destruction of business or lost profits resulting from its
failure to install flooring materials in accordance with the
contract, nor is there any indication that Dupont agreed to
accept responsibility for such damages when it agreed to perform
work for Discovery Zone.
B. The Fraud Claim Is Impermissibly Duplicative of the Breach
of Contract Claim
In the second and sixth counter-claims, Discovery Zone alleges
that Dupont engaged in actionable fraud when it misrepresented
its ability to perform the contract in order to induce Discovery
Zone to enter into that contract. Specifically, Discovery Zone alleges that Dupont intentionally misrepresented its ability to
complete the work in a timely fashion by claiming to be a
national contractor when in fact Dupont was not established as a
national flooring installer, had only been formed in 1997, and
had no national contacts. Discovery Zone further alleges that if
it had known that Dupont lacked a national presence and did not
have the experience to coordinate the renovation project, it
would not have entered the contract. Pursuant to New York law, "a
simple breach of contract is not to be considered a tort unless a
legal duty independent of the contract itself has been violated."
Clark-Fitzpatrick, Inc. v. Long Island RR Co., 70 N.Y.2d 382,
389, 521 N.Y.S.2d 653, 656, 516 N.E.2d 190, 193 (N.Y. 1987));
see also Bridgestone/Firestone, 98 F.3d 13, 20 (2d Cir.
1996); Multi-Juice, S.A. v. Snapple Beverage Corp., 2003 WL
1961636, at *4 (S.D.N.Y.).
Therefore, in order to bring a claim for fraud based on a
misrepresentation supporting a claim for breach of contract, a
plaintiff must either: "(i) demonstrate a legal duty separate
from the duty to perform under the contract; or (ii) demonstrate
a fraudulent misrepresentation collateral or extraneous to the
contract; or (iii) seek special damages that are caused by the
misrepresentation and unrecoverable as contract damages."
Bridgestone/Firestone, 98 F.3d at 20; John Paul Mitchell Sys.
v. Quality King Distrib., Inc., No. 99 Civ. 9905, 2001 WL
910405, at *4 (S.D.N.Y. Aug. 13, 2001).
Discovery Zone has not seriously contended that it is entitled
to damages under the first or third methods set forth in
Bridgestone/Firestone; it has not alleged that Dupont owed it a
legal duty separate from the contract for flooring, and it has
not alleged that it is due the type of special damages that are
not recoverable in breach of contract, and that entitle it to
pursue a fraud claim. The damages alleged by Discovery Zone are
unlike those sought in cases such as Lam v. Am. Exp. Co. 265 F. Supp.2d 225
(S.D.N.Y. 2003) where the plaintiff was entitled to pursue
a cause of action for fraud where misrepresentation caused harms
that were extraneous to the contract, and not recoverable in a
breach of contract action. All of Discovery Zone's alleged
injuries can be remedied through damages available for the breach
of contract action against Dupont.
Discovery Zone primarily attempts to demonstrate an entitlement
to bring a tort claim based on the second category of actionable
fraud set forth in Bridgestone/Firestone "a fraudulent
misrepresentation collateral or extraneous to the contract"
based on Dupont's representations that it had a "national
presence" and had experience in installing flooring. Thus, the
question is whether those alleged misrepresentation was
"collateral or extraneous" to the flooring and carpeting
"[A] valid fraud claim may be premised on misrepresentations
that were made before the formation of the contract and that
induced the plaintiff to enter the contract." See e.g.
Astroworks, Inc. v. Astroexhibit, Inc., 257 F. Supp.2d 609, 616
(S.D.N.Y. 2003) (citing Cohen v. Koenig, 25 F.3d 1168, 1173 (2d
Cir. 1994)); Vtech Holdings Ltd. v. Lucent Technologies, Inc.,
172 F. Supp.2d 435, 439 (S.D.N.Y. 2001) (citing Grappo v.
Alitalia Linee Aeree Italiane, S.p.A., 56 F.3d 427, 434 (2d Cir.
1995); Rocanova v. Equitable Live Assurance Soc'y of the United
States, 83 N.Y.2d 603, 614, 612 N.Y.S.2d 211, 211 (1997)).
For example, in First Bank of the Americas v. Motor Car
Funding, Inc., 257 A.D.2d 287, 292, 690 N.Y.S.2d 17, 21 (1999),
plaintiff's fraud claim survived alongside its contract claim
because defendants mischaracterized facts about loans sold to the
plaintiff. In a similar case, Stewart v. Jackson & Nash,
976 F.2d 86, 89 (2d Cir. 1992), the U.S. Court of Appeals for the Second Circuit allowed a fraud
claim to survive alongside a breach of contract claim where the
law firm hiring the plaintiff falsely induced him to accept their
offer of employment by making a collateral false statement that
it served a particular client and was developing a practice in an
area of law in which the plaintiff specialized.
Generally, for a misrepresentation of present fact to give rise
to a claim for fraudulent inducement, it must be collateral or
extraneous to the contract, and it must be made to induce a party
to enter the contract. See e.g., Cougar Audio, Inc. v. Reich,
No. 99 Civ. 4498, 2000 WL 420546, at *6 (S.D.N.Y. 2000). For
example, a promise to promote a prospective employee after
hiring, which was not included in the employment contract, was an
integral part of that employee's inducement to enter the
contract, and therefore gave rise to a separate claim for
fraudulent inducement. See Hirsch v. Columbia University,
College of Physicians and Surgeons, 293 F. Supp.2d 372, 380
A representation that in essence is merely a promise to perform
under the contract is different from a misrepresentation inducing
a party to enter a contract, and is not actionable in fraud. Jo
Ann Homes at Bellmore, Inc. v. Dworetz, 25 N.Y.2d 112,
250 N.E.2d 214, 302 N.Y.S.2d 799 (1969); see also Deutsche Asset
Mgmt, Inc. v. Callaghan, No. 01 Civ. 4426 2004 WL 758303, at *10
(April 7, 2004); Slapshot Beverage Co., Inc. v. Southern
Packaging Mach., Inc., 980 F. Supp. 684, 690 (E.D.N.Y. 1997);
Rolls-Royce Motor Cars, Inc. v. Schudroff, 929 F. Supp. 117, 123
The various misrepresentations that Dupont allegedly made were
not "collateral or extraneous to the contract." Promises "such as
representations of expertise and resources, are not considered collateral to the contract because
they `simply underscore the defendant's purported intention and
ability to perform the contract' and are thus `simply part and
parcel of the intention to perform.'" John Paul Mitchell Sys.,
2001 WL 910405, at *4 (citing Crabtree, 776 F. Supp. at 162-63.
For example, in Rolls Royce, where the false statements
concerned the defendant's ability to pay the sums due under the
contract, thus its ability to perform, there was no cause of
action for fraud. Rolls-Royce Motor Cars, Inc. v. Schudroff,
929 F. Supp. 117, 124 (S.D.N.Y. 1996).
Discovery Zone has failed to meet its burden as a non-movant of
showing any material issue of fact that, if resolved in its
favor, would entitle it to recover destruction of business and
lost profit damages at trial. As set forth above, the second and
six causes of action, seeking to recover for fraudulent
inducement, are impermissibly duplicative of the breach of
contract claims. Discovery Zone also fails to raise an issue of
fact on its claim for destruction of business damages and lost
profits because it has presented no method of calculating the
value of the business, nor has it indicated that it can refute
Dupont's showing that a variety of causes contributed to
Discovery Zone's eventual bankruptcy. Accordingly, Dupont's
motion for summary judgment dismissing the second, fifth and
sixth counter-claims is granted in whole.
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