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O.F.I. Imports Inc. v. General Electric Capital Corp.

United States District Court, S.D. New York

July 20, 2017

O.F.I. IMPORTS INC., a California corporation, Plaintiff,
v.
GENERAL ELECTRIC CAPITAL CORPORATION, a Delaware corporation; and DOES 1-20, inclusive, Defendants.

          ORDER

          VALERIE CAPRONI, United States District Judge

         O.F.I. Imports, Inc. (“OFI”), alleges that it was fraudulently induced to purchase frozen food and other assets originally owned by Contessa Premium Foods, Inc. (“Contessa”). OFI alleges that the defendants, General Electric Capital Corporation and twenty unnamed individuals acting as its agents (collectively “GE Capital”), provided it with false documentation regarding Contessa's inventories and accounts receivable, thereby causing OFI to overpay for Contessa's assets. On September 26, 2016, the Court granted in full GE Capital's motion to dismiss. See O.F.I. Imports, Inc. v. Gen. Elec. Capital Corp., No. 15-CV-7231 (VEC), 2016 WL 5376208 (S.D.N.Y. Sept. 26, 2016) (“Op.”). In a “never say die” move, OFI has moved for leave to amend to cure the defects identified in its original claims and to add new claims for breach of contract and declaratory relief. Pl.'s Mot. for Leave to Amend (Dkt. 63) (“Mot.”). For the reasons that follow, OFI's motion for leave to amend is DENIED.

         BACKGROUND

         The Court assumes familiarity with the background of this case, which is set forth fully in the Court's opinion granting GE Capital's motion to dismiss. See Op. at *1-3. In brief, OFI purchased “virtually all” of Contessa's assets in May 2014. First Amended Complaint (Dkt. 52) (“FAC”) ¶ 13. To execute the transaction, OFI entered into two contracts: an asset purchase agreement (the “APA”) with Contessa's liquidators, Development Specialists, Inc. (“DSI”), and a credit agreement (the “Credit Agreement”) with GE Capital. Pursuant to the Credit Agreement, GE Capital provided OFI with a revolving credit facility intended in part to finance the purchase of Contessa's assets. FAC ¶ 23. OFI alleges that it was misled by “detail reports” of Contessa's accounts, provided by DSI, which allegedly overstated Contessa's accounts receivable and inventories by approximately $5.1 million. Brichacek Decl. (Dkt. 56) Ex. D; FAC ¶¶ 29, 50, 57. Although the APA provides that the purchase was on an “as is, where is” basis, FAC Ex. B (“APA”) § 6.1, and although Section 9.20(b) of the Credit Agreement releases GE Capital from “any and all claims . . . at law or in equity in respect of all prior discussions and understandings, oral or written, relating to the subject matter of [the Credit Agreement] and the other Loan Documents, ” FAC Ex. A (“Credit Agrmt.”) § 9.20(b), OFI alleges that GE Capital orally represented that there would be a “post-closing adjustment” of the purchase price to reconcile any discrepancies between the detail reports and the actual value of the underlying Contessa assets. FAC ¶¶ 14, 28-29.[1]

         After closing, OFI uncovered the alleged discrepancies in the value of Contessa's assets and demanded that GE Capital adjust the purchase price to account for the lower, true value of the assets. Not surprisingly, GE Capital refused. FAC ¶ 53. Thereafter OFI instituted this action.

         GE Capital moved to dismiss relying on the release in the Credit Agreement. Def.'s Mem. in Supp. of Mot. to Dismiss the FAC (Dkt. 55) at 14-16. OFI effectively conceded that the release applies to its claims, but argued that the release is invalid because it was induced by a separate fraud, namely GE Capital's promise of a post-closing purchase price adjustment. Pl.'s Mem. in Opp'n to Mot. to Dismiss the FAC (Dkt. 57) at 5-9; FAC ¶¶ 28-34. The Court disagreed and found that OFI had not alleged any fraud separate from the subject matter of the Credit Agreement's release. Op. at 4-5. Although the Court viewed it as “highly likely” that leave to amend would be futile, the Court dismissed the FAC but permitted OFI to move for leave to amend. See Op. at 8.

         OFI's proposed second amended complaint (Dkt. 64-1) (“SAC”) presents a revised “separate fraud” theory and asserts two new claims for breach of contract and declaratory relief. SAC ¶¶ 60-63, 107-21. Central to OFI's new theory is that the Credit Agreement had multiple purposes, including financing the Contessa purchase and providing working capital for OFI's ongoing operations.[2] SAC ¶ 60. OFI alleges that, because the revolving credit facility under the Credit Agreement is asset-based, GE Capital's misrepresentation of the value of the Contessa assets “swindled OFI of working capital that should have rightfully been available” and “undercut OFI's ability to rely upon its assets to repay the facility.” SAC ¶¶ 62-63. Put differently, OFI alleges that GE Capital's “manipulat[ion of] the value of the assets not only constituted a fraud in negotiating the purchase price, but constituted a separate fraud in . . . the entirely independent purpose of the Credit Agreement of providing working capital.” SAC ¶ 61.[3]

         OFI also seeks to add a new breach of contract claim. OFI alleges that GE Capital has refused to release its lien on OFI's assets, despite the fact that OFI has paid all debt owed to GE Capital. SAC ¶ 112. OFI further alleges that it “has performed (except for any act which performance by OFI has been prevented by GE Capital or any act which performance would have been futile) all acts under the Credit Agreement.” SAC ¶ 114.

         GE Capital opposes leave to amend. It argues that, like the FAC, the SAC fails to allege a separate fraud. Def.'s Mem. in Opp'n to Mot. for Leave to Amend (Dkt. 65) (“Opp'n”) at 14-15. As to OFI's new contract claims, GE Capital argues that OFI has not and cannot adequately allege its own performance under the Credit Agreement. Opp'n at 20-21.[4]

         DISCUSSION

         Rule 15(a) of the Federal Rules of Civil Procedure provides that “[t]he court should freely give leave” to a party to amend its complaint “when justice so requires.” Fed.R.Civ.P. 15(a)(2). “Leave may be denied ‘for good reason, including futility, bad faith, undue delay, or undue prejudice to the opposing party.'” TechnoMarine SA v. Giftports, Inc., 758 F.3d 493, 505 (2d Cir. 2014) (quoting McCarthy v. Dun & Bradstreet Corp., 482 F.3d 184, 200 (2d Cir. 2007) (additional citations omitted)). In this case, Defendant argues only that the motion should be denied because it is futile. Opp'n at 13. “A proposed amendment to a complaint is futile when it ‘could not withstand a motion to dismiss.'” Balintulo v. Ford Motor Co., 796 F.3d 160, 164-65 (2d Cir. 2015) (quoting Lucente v. IBM Corp., 310 F.3d 243, 258 (2d Cir. 2002)). To survive a motion to dismiss for failure to state a claim upon which relief can be granted, “a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.'” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). The Court must also accept as true all factual allegations contained within the complaint, however this tenet “is inapplicable to legal conclusions.” Iqbal, 556 U.S. at 678.

         1. Separate Fraud

         As noted above, OFI concedes that the plain text of the Credit Agreement release bars its common law fraud claims. As it did in the FAC, however, OFI argues that the release is invalid because it is the product of a “separate fraud.” Settled New York law allows a party to rescind an otherwise binding release if that release was induced through a “separate fraud from the subject of the release.” Centro Empresarial Cempresa S.A. v. Am. Movil, S.A.B. de C.V., 17 N.Y.3d 269, 276 (2011); Pappas v. Tzolis, 20 N.Y.3d 228, 233 (2012) (“[A] party that releases a fraud claim may later challenge that release as fraudulently induced if it alleges a fraud separate from any contemplated by the release.”). This exception must be narrowly construed, however, to avoid “convert[ing a release] into a starting point for litigation except under circumstances and under rules which would render any other result a grave injustice.” Morefun Co. v. Mario Badescu Skin Care Inc., No. 13-CV-9036 (LGS), 2014 WL 2560608, at *5 (S.D.N.Y. June 6, 2014) (internal quotations omitted). In order to allege a separate fraud, a plaintiff must allege some fraudulent act that induced the signing of the release and is “separate from the subject of the release” itself. JFK Hotel Owner, LLC v. Hilton Hotels Corp., 986 N.Y.S.2d 866 (Sup. Ct. 2014) (quoting Centro, 17 N.Y.3d at 276).

         OFI's revised theory does not allege a separate fraud. The release provision of the Credit Agreement applies to “any and all claims . . . at law or in equity in respect of all prior discussions and understandings, oral or written, relating to the subject matter of th[e] [Credit] Agreement.” Credit Agrmt. § 9.20(b) (emphasis added). According to OFI, the SAC alleges a separate fraud because the alleged misrepresentation of the value of the Contessa assets had an impact not only on the purchase price but also on the availability of credit for working capital under the Credit Agreement. Mot. at 12. But that distinction does not allege a fraud that is separate from the subject matter of the Credit Agreement. See Centro, 17 N.Y.3d at 276; Pappas, 20 N.Y.3d at 233; Morefun Co., 2014 WL 2560608 at *5; JFK Hotel, 986 N.Y.S.2d 866. Plaintiff's current theory depends on the Court drawing an artificial distinction between two results of GE Capital's alleged manipulation of the value of the ...


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