Opinion
12244 Index No. 154084/18 Case No. 2019-5732
10-29-2020
KING PENGUIN OPPORTUNITY FUND III, LLC, Plaintiff–Appellant, v. SPECTRUM GROUP MANAGEMENT LLC also known as, Spectrum Origination LLC, Defendant–Respondent, Mission Capital Advisors, LLC, Defendant.
Petroff Amshen LLP, Brooklyn (James Tierney of counsel), for appellant. Faegre Drinker Biddle & Reath LLP, New York (Andrew L. Van Houter of counsel), for respondent.
Petroff Amshen LLP, Brooklyn (James Tierney of counsel), for appellant.
Faegre Drinker Biddle & Reath LLP, New York (Andrew L. Van Houter of counsel), for respondent.
Manzanet–Daniels, J.P., Mazzarelli, Moulton, Kennedy, JJ.
Order, Supreme Court, New York County (Andrea Masley, J.), entered on or about July 5, 2019, which, inter alia, granted defendant Spectrum's motion to dismiss the complaint, unanimously affirmed, without costs.
Plaintiff failed to plead justifiable reliance so as to state a claim for fraudulent inducement, negligent misrepresentation, and promissory estoppel. "Where a term sheet or other preliminary agreement explicitly requires the execution of a further written agreement before any party is contractually bound, it is unreasonable as a matter of law for a party to rely upon the other party's promises to proceed with the transaction in the absence of that further written agreement" ( StarVest Partners II, L.P. v. Emportal, Inc., 101 A.D.3d 610, 613, 957 N.Y.S.2d 93 [1st Dept. 2012] ). Here, as the term sheet explicitly requires "satisfactory completion of Lender's due diligence and execution of written loan documents" before the parties are contractually bound, it was "unreasonable as a matter of law" for plaintiff to rely upon the representations in the term sheet to proceed with the transaction ( id. ; see also GE Oil & Gas, Inc. v. Turbine Generation Servs., L.L.C., 168 A.D.3d 563, 93 N.Y.S.3d 5 [1st Dept. 2019] ; Prospect St. Ventures I, LLC v. Eclipsys Solutions Corp., 23 A.D.3d 213, 214, 804 N.Y.S.2d 301 [1st Dept. 2005] ).
Plaintiff contends that the nonbinding effect of the term sheet should be ignored because the term sheet did not specifically disclaim reliance on defendant's prior oral representations, which were set forth in the term sheet (see Basis Yield Alpha Fund [Master] v. Goldman Sachs Group, Inc., 115 A.D.3d 128, 137, 980 N.Y.S.2d 21 [1st Dept. 2014] ). A specific disclaimer of reliance, however, is not necessary to find lack of justifiable reliance, as demonstrated in StarVest . Further, plaintiff cannot logically argue that defendant's oral misrepresentations fraudulently induced it to execute the term sheet, which was expressly nonbinding. Plaintiff also contends that it may disclaim reliance on misrepresentations of facts that are peculiarly within defendant's knowledge, (see Basis Yield, 115 A.D.3d at 139, 980 N.Y.S.2d 21 ). Specifically, it claims that it had no way of knowing that defendant had no intention of issuing a loan under the terms delineated in the term sheet. This argument is unavailing, as defendant had made clear in the term sheet that it had no intent to issue a loan until satisfaction of due diligence and execution of written loan documents.
Plaintiff also failed to allege actionable misrepresentations by defendant. "General allegations of lack of intent to perform are insufficient; rather, facts must be alleged establishing that the adverse party, at the time of making the promissory representation, never intended to honor the promise" ( Perella Weinberg Partners LLC v. Kramer, 153 A.D.3d 443, 449, 58 N.Y.S.3d 384 [1st Dept. 2017] ; see Cronos Grp. Ltd. v. XComIP, LLC, 156 A.D.3d 54, 71, 64 N.Y.S.3d 180 [1st Dept. 2017] ). Here, plaintiff has not alleged facts from which it can be reasonably inferred that defendant never intended to offer a loan under the proposed terms in the term sheet (see CPLR 3016[b] ; Pludeman v. Northern Leasing Sys., Inc., 10 N.Y.3d 486, 492, 860 N.Y.S.2d 422, 890 N.E.2d 184 [2008] ).
Plaintiff also has not pleaded a special relationship in support of its promissory estoppel claim. The allegations in the complaint and the term sheet itself is inconsistent with its characterization of the $150,000 it advanced as a "down payment," and of defendant as the "escrow agent." Rather, this matter involves "an arm's length business relationship between sophisticated parties," which does not give rise to a confidential or fiduciary relationship to support a negligent misrepresentation claim ( J.P. Morgan Sec. Inc. v. Ader, 127 A.D.3d 506, 507, 9 N.Y.S.3d 181 [1st Dept. 2015] ; see also MBIA Ins. Corp. v. Countrywide Home Loans, Inc., 87 A.D.3d 287, 297, 928 N.Y.S.2d 229 [1st Dept. 2011] ).
Defendant failed to state a claim for breach of the implied covenant of good faith and fair dealing. No implied covenant of good faith and fair dealing arises in the absence of a contract (see Keefe v. New York Law School, 71 A.D.3d 569, 897 N.Y.S.2d 94 [1st Dept. 2010] ; Jordan Panel Sys., Corp. v. Turner Constr. Co., 45 A.D.3d 165, 180, 841 N.Y.S.2d 561 [1st Dept. 2007] ). Here, the term sheet expressly denied the existence of a binding agreement (see Schneider v. Jarmain, 85 A.D.3d 581, 925 N.Y.S.2d 487 [1st Dept. 2011] ; Prospect St. Ventures I, 23 A.D.3d at 213, 804 N.Y.S.2d 301 ). Contrary to plaintiff's contention, the term sheet was not a binding preliminary agreement that imposes an obligation on the parties to negotiate in good faith. The parties' intent to not be bound is explicit from the language of the term sheet disavowing any "binding commitment to provide credit" and requiring such commitment to be "contingent upon satisfactory completion of Lender's due diligence and execution of written loan documents" (see Zeno Inv., LLC v. Merrill Lynch & Co., Inc., 2009 WL 285402, 2009 N.Y. Misc. LEXIS 4554 [Sup. Ct., N.Y. County 2009] ).
The allegation that defendant charged "excessive due diligence fees against the down payment" is insufficient to plead a claim for breach of the implied covenant of good faith and fair dealing. The implied covenant may not be used to create new contractual obligations that were not bargained for (see Madison Apparel Group Ltd. v. Hachette Filipacchi Presse, S.A., 52 A.D.3d 385, 386, 861 N.Y.S.2d 296 [1st Dept. 2008] ). The term sheet expressly provided for plaintiff to make an "Expense Deposit" for due diligence and underwriting expenses, and defendant Spectrum's use of the funds for due diligence in accordance with the term sheet (see Fesseha v. TD Waterhouse Inv. Servs., 305 A.D.2d 268, 761 N.Y.S.2d 22 [1st Dept. 2003] ). Plaintiff's allegation that the $80,000 charged was grossly excessive is speculative.