New York Court Finds That Trustee’s Complaint Flunks Heightened Pleading Requirements
January 18, 2022, Western District of New York – The facts of the case as summarized in the opinion are: Plaintiff Thar Process, Inc., a hemp processor, brought a “breach of contract” claims against Defendant Sound Wellness, LLC when Sound Wellness refused to pay for CBD oil that Thar had processed. Sound Wellness, in turn, brought counterclaims against Thar, alleging that Thar committed fraud and breached the parties’ contract when it failed to inform Sound Wellness that the oil it processed would be of low potency and then supplied Sound Wellness with that low-quality oil. Sound Wellness also brought third-party claims against the original sellers of the hemp – Third-Party Defendants Plant Science Laboratories, LLC, and Michael Barnhart (collectively “PSL”) – alleging that they fraudulently induced Sound Wellness to buy low-potency hemp, among other things.
PSL argued that Sound Wellness’s “fraudulent-inducement” claim cannot go forward because it was duplicative of its “breach-of-contract” claim; that Sound Wellness did not state a claim for “fraudulent inducement;” that Sound Wellness failed to allege its claims with sufficient particularity. Accordingly, both PSL and Thar filed motions to dismiss Sound Wellness’s third-party claims and counterclaims.
The Court highlighted that a complaint alleging fraud must satisfy the heightened pleading requirements of FRCP 9(B) by stating the circumstances constituting fraud with particularity. The Court also noted, “a cause of action for fraud may be maintained where a plaintiff pleads a breach of duty separate from, or in addition to, a breach of the contract.” Accordingly, the Court found that Sound Wellness’s claim was beyond a mere claim that PSL “never intended to provide CBD oil” and concerned a material “misrepresentation” of a fact presented on an allegedly false certificate of analysis. Accordingly, the Court ruled that the “fraudulent inducement” and contract claims were not duplicative and rejected PSL’s argument.
Next, citing RKB Enters Inc. v. Ernst & Young, 182 A.D.2d 971, 582 N.Y.S.2d 814 (App. Div. 1992), the Court highlighted that “If a plaintiff alleges that it was induced to enter into a transaction because a defendant misrepresented material facts, the plaintiff has stated a claim for fraud even though the same circumstances also give rise to the plaintiff’s breach of contract claim.” Accordingly, the Court found that Sound Wellness sufficiently alleged that PSL made a material “misrepresentation,” with knowledge of its falsity and intent to induce Sound Wellness to enter a contract, on which Sound Wellness reasonably relied, and as a result, Sound Wellness suffered harm.
However, the Court dismissed Sound Wellness’s fraud claim based on PSL’s failure to disclose a result because Sound Wellness did not plead a duty on PSL’s part to disclose Thar’s test result. Next, the Court granted Thar’s motion to dismiss all of Sound Wellness’s amended counterclaims with leave to amend because the Court found that Sound Wellness did not state a claim for “breach of contract”, “fraud”, or “constructive fraud” in contract against Thar.
Thar Process, Inc. v. Sound Wellness, LLC, 2022 U.S. Dist. LEXIS 8789