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noting that 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"
Summary of this case from Le Metier Beauty Inv. Partners LLC v. Metier Tribeca, LLCOpinion
99 CIV. 667 (DLC)
May 17, 2000
Jon L. Norinsberg, for plaintiff.
Esq. Jamie B.W. Stecher, Stecher Jaglom Prutzman, for defendants.
OPINION ORDER
Plaintiff Nadeem Saleemi ("Saleemi") filed this action in January 1999, alleging several causes of action relating to defendants' failure to employ him, having made him an offer of employment in August 1998. Saleemi has withdrawn all but his fraud claim. Discovery having been completed, defendants now move for summary judgment. For the reasons stated, defendants' motion is granted.
BACKGROUND
Unless otherwise noted, the following facts are undisputed Saleemi's Employment Offer from Pencom
Saleemi is a British citizen who is trained as a software engineer. In the summer of 1998, he was 24 years old. He had been employed by Deutsche Bank in Germany until June 1998, when he left Deutsche Bank, married, and moved back to England. He began to look for a new job in July.
In August 1998, Saleemi traveled to New York to interview with defendant Pencom Systems Inc. ("Pencom"). Pencom is a New York corporation whose core business is as a placement agency for software programmers. Saleemi interviewed for a position with Pencom New Technologies ("PNT"), an unincorporated division of Pencom that was formed in 1997, and folded in early 1999. PNT provided information technology services to clients, which principally were financial institutions.
In New York, Saleemi met with a number of Pencom employees, including defendant Stephen Markman ("Markman"). Markman is a Pencom Vice President who ran PNT. Markman told Saleemi that PNT was a growing company that would hire a number of employees in 1999. Markman also told Saleemi that PNT's parent company, Pencom, was a large, successful company.
Pencom offered Saleemi a position at PNT. Markman sent a written offer letter (the "Employment Letter"), dated August 21, 1998, that was unsigned; Saleemi signed the Employment Letter on August 24 and returned it to Pencom. The Employment Letter offered Saleemi a position as a "Member" of PNT, with an annual salary of $54,000, plus eligibility for annual bonuses based in part on PNT's performance. The Employment Letter also stated:
As you know, we are considering doing an Initial Public Offering of the stock of our group at some future date. Once we have a written stock option plan, you will receive 2,000 stock options which, provided that you are working here on the date of our IPO, shall vest in four (4) equal successive annual installments upon your completion of each year of service.
The offer of employment was made contingent on Saleemi's obtaining necessary paperwork, on a reference check, and on Saleemi's entering into an employment agreement.
Pencom also sent Saleemi a letter, dated August 21, 1998, and signed by Wade Saadi, Pencom's President, stating that Pencom would reimburse Saleemi for up to $4,000 in expenses relating to his relocation to New York.
Finally, Saleemi received an unsigned employment agreement (the "Employment Agreement"), dated August 21, 1998, which he signed and returned to Pencom. The Employment Agreement provided for the $54,000 salary, but made no mention of a bonus, an IPO, or stock options. The Employment Agreement provided for termination at will, and contained a merger clause stating that it superseded any prior agreement between Saleemi and Pencom.
Because Saleemi was not a U.S. citizen, his employment offer was contingent on his obtaining a visa. Pencom made an application for an H-1B visa on Saleemi's behalf, and informed Saleemi that it would take between six and eight weeks to obtain the visa.
PNT's Business and Financial Situation
PNT operated at a loss throughout most of 1998. Nevertheless, by August 1998, its revenues had been growing steadily. The market turmoil of late August and September 1998, however, caused a dramatic decline in PNT's revenues. While at any given time during 1998, PNT had employees for whom there was no available billable work — employees said to be "on the beach" — the number of billable hours fluctuated a great deal, and dipped substantially in August and September 1998. PNT hired several new employees between mid-August and mid-November. Pencom did not inform Saleemi in August 1998 that PNT regularly suffered losses, and Pencom did not inform Saleemi of PNT's financial difficulties in the fall of 1998 until December 22, 1998.
In Pencom's offers of employment for PNT, language promising stock options was standard. The qualifying language in Saleemi's letter, that an IPO at "some future date" was being "considered," and that the stock options were contingent on Saleemi's being employed at the time of the IPO, was omitted from several of the earlier letters. None of the letters sets out the total number of shares of PNT to be issued or the percentage of ownership represented by the stock options promised to any employee, and none of the letters indicates the exercise price of the stock options. In August 1998, PNT had not taken any concrete steps towards an IPO such as contacting potential underwriters or advisers, and no stock option plan was in place.
November 1998-January 1999
Pencom did not receive the paperwork relating to Saleemi's visa until November 23, 1998. At Markman's direction, Pencom did not inform Saleemi that his papers had arrived until December 10, 1998, because Markman did not want Saleemi to begin working until January 1999. Then, on December 22, Markman informed Saleemi that because of financial difficulties at PNT, Pencom could no longer guarantee him a position.
By that time, Saleemi and his wife had already purchased non-refundable airplane tickets to New York, and had sold the bulk of their personal belongings in anticipation of their overseas move. Despite Markman's warning, Saleemi and his wife traveled to New York on December 27. On December 30, Markman informed Saleemi that there no longer was a position available for him at Pencom.
Because his visa was valid only if he were employed by Pencom, Saleemi returned to London. He began working at Cambridge Technology Partners on February 4, 1999. PNT ceased doing business in early 1999.
Saleemi's Claims
Saleemi contends that he did not seek alternative employment between August 1998 and January 1999, and sold his belongings and traveled to the United States, in reliance on Pencom's false representations.
Saleemi claims that the following constituted material false representations or omissions by the defendants: (i) Markman's statement that PNT was a growing business that would hire several new employees in the second half of 1998; (ii) Markman's statements that PNT's parent company, Pencom, was a successful company; (iii) the statement in the Employment Letter that Saleemi would be eligible for a bonus based in part on PNT's performance; (iv) the statement in the Employment Letter that PNT was considering an IPO and that Saleemi would be entitled to 2000 stock options; (v) Pencom's failure to inform Saleemi in August 1998 that PNT regularly operated at a loss; (vi) Pencom's failure to inform Saleemi in the fall of 1998 that PNT was experiencing severe financial difficulties; and (vii) Pencom's failure to inform Saleemi promptly that his visa paperwork had arrived.
These allegations and the factual basis for them are summarized in Saleemi's Memorandum of Law in opposition to defendants' motion, at pages 4-5. Saleemi's complaint discusses only the statements in the correspondence from Pencom regarding his salary, bonus, stock options, and relocation expenses; and Pencom's failure to disclose information about its financial troubles in the fall of 1998, and the delay in the processing of Saleemi's visa application.
Saleemi claims the following damages: (i) lost earnings for the period from September 1998 to February 1999, estimated to be $36,000; (ii) earnings expected from his employment at Pencom from October 1998 through September 2001, estimated to be $162,000; (iii) the value of the expected stock options, in an amount to be determined; (iv) the value of the benefits to be provided by Pencom, in an amount to be determined; (v) the expenses of travel to New York, in the amount of $5,309.12; and (vi) $75,000 in compensation for anxiety and distress. Saleemi also seeks punitive damages.
In his opposition papers, Saleemi raises a new basis for damages: the damage to his professional reputation and prospects caused by the length of time he spent unemployed. This is a new theory that is inconsistent with the pleadings and with Saleemi's deposition testimony and responses to interrogatories. Consequently, the Court will not entertain this new theory.
DISCUSSION
Summary judgment may not be granted unless the submissions of the parties taken together "show 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." Rule 56(c), Fed.R.Civ.P. The moving party bears the burden of demonstrating the absence of a material factual question, and in making this determination the Court must view all facts in the light most favorable to the nonmoving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247 (1986); Celotex Corp v. Catrett, 477 U.S. 317, 323 (1986). When the moving party has asserted facts showing that the nonmovant's claims cannot be sustained, the opposing party must "set forth specific facts showing that there is a genuine issue for trial," and cannot rest on the "mere allegations or denials" of his pleadings. Rule 56(e), Fed.R.Civ.P.; accord Rexnord Holdings, Inc. v. Bidermann, 21 F.3d 522, 525-26 (2d Cir. 1994). In deciding whether to grant summary judgment, therefore, this Court must determine (1) whether a genuine factual dispute exists based on the evidence in the record, and (2) whether the fact in dispute is material based on the substantive law at issue.
Under New York law, to prevail on a fraud claim, a plaintiff must show that
Defendants assert that New York law applies in this diversity action, and Saleemi, while not addressing choice of law, relies on New York law to support his position. In a diversity action, the choice of law analysis is based on the forum state's choice of law rules. See Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496-97 (1941). In Babcock v. Jackson, 240 N.Y.S.2d 743, 749 (N.Y. 1963), the New York Court of Appeals adopted a flexible approach to choice of law, focusing on the law of the state with the most significant interest in the dispute. In tort actions, "New York applies the law of the state with the most significant interest in the dispute." Lee v. Bankers Trust Company, 166 F.3d 540, 545 (2d Cir. 1999) (citingPadula v. Lilarn Properties Corp., 84 N.Y.2d 519, 521, 620 N.Y.S.2d 310, 311 (1994)). Where "conduct regulating" rules, rather than "loss allocating" rules, are at issue, "New York law usually applies the law of the place of the tort." Id. See also AroChem International. Inc. v. Buirkle, 968 F.2d 266, 270 (2d Cir. 1992) ("[T]he significant contacts are, almost exclusively, the parties' domiciles and the locus of the tort.").
Saleemi is a British citizen; Pencom is a New York corporation with offices in New York. The terms of Saleemi's employment were negotiated in New York. Based on these factors, and in conjunction with the parties' reliance on New York law, the Court concludes that New York law applies in this case. See, e.g., Walter E. Heller Co. v. Video Innovations. Inc., 730 F.2d 50, 52 (2d Cir. 1984) ("[I]n the absence of a strong countervailing public policy, the parties to a litigation may consent by their conduct to the law to be applied.").
(1) the defendant made a material false representation,
(2) the defendant intended to defraud the plaintiff thereby, (3) the plaintiff reasonably relied upon the representation, and (4) the plaintiff suffered damage as a result of such reliance.Bridgestone/Firestone, Inc. v. Recovery Credit Services. Inc., 98
F.3d 13, 19 (2d Cir. 1996)
A. Saleemi disguises a contract claim as a fraud claim.
In New York, absent an agreement that establishes an employment relationship for a fixed duration, employment is presumed to be at will and terminable by either the employee or the employer at any time. Marfia v. T.C. Ziraat Bankasi, 147 F.3d 83, 87 (2d Cir. 1998). While this presumption is rebuttable, Saleemi does not contend that the very narrow circumstances which are required to rebut the presumption are present here, id. at 88, and consequently has withdrawn his breach of contract claim. A plaintiff may not, however, use an action in tort to circumvent a threshold deficiency in what is essentially a wrongful discharge case. Ligaya v. American Friends of the Hebrew University. Inc., No. 96 Civ. 240, 1998 WL 146227 at *8 n. 4 (S.D.N.Y. Mar. 25, 1998); Ingle v. Glamore Motor Sales, Inc., 538 N.Y.S.2d 771, 774 (N.Y. 1989); Doyle v. Doyle-Koch Agency, Inc., 670 N.Y.S.2d 774, 775 (2d Dept. 1998). Similarly, a plaintiff may not make a fraud claim of a mere breach of contract. See. e.g., Cohen v. Koenig, 25 F.3d 1168, 1173 (2d Cir. 1994); Stewart v. Jackson Nash, 976 F.2d 86, 88 (2d Cir. 1992); New York University v. Continental Ins. Co., 639 N.Y.S.2d 283, 288 (N.Y. 1995).
Although "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,"Cohen, 25 F.3d at 1173, a defendant's intentionally false statements regarding his intent to perform a contractual obligation cannot in themselves constitute fraud. See Bridgestone/Firestone 98 F.3d at 19. See also Turnbull v. Kling, No. 98 Civ. 5925, 1999 WL 672562 at *4 (S.D.N.Y. Aug. 26, 1999); Wilmoth v. Sandor, 686 N.Y.S.2d 388, 391 (1st Dept. 1999) Nor can a defendant's failure to perform promises which would be encompassed by the covenant of good faith and fair dealing implicit in every contract constitute fraud. See New York University, 639 N.Y.S.2d at 289. To state a claim for fraud that is separate from a breach of contract claim, a defendant 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 (internal citations omitted).
Here, summary judgment is appropriate against Saleemi on two of the alleged misrepresentations because Saleemi has shown evidence of nothing beyond a breach of contract. They are the statements in the Employment Letter about Saleemi's entitlement to compensation, to wit, a bonus and stock options. First, there was no fiduciary relationship or special relationship of trust between Saleemi and Pencom that created any duty by Pencom outside of any contractual duties. See. e.g., Bridgestone/Firestone, 98 F.3d at 20. Nor does Saleemi seek special damages that are caused by the misrepresentation and unrecoverable as contract damages — in fact, nearly all of the damages Saleemi seeks are unrecoverable in fraud. See infra; see also Excalibur Systems, Inc. v. Aerotech World Trade, Ltd., No. 98 Civ. 1931, 1999 WL 1281496 at *3 n. 2 (E.D.N Y 1999) (punitive damages not caused by misrepresentation and therefore not "special damages"). Consequently, Saleemi's fraud claim does not fall under the first or the third Bridgestone/Firestone exception.
Moreover, these two representations were not collateral or extraneous to Saleemi's employment, and thus fail to fall within the second Bridgestone/Firestone exception. Saleemi has not shown that he suffered anything other than the non-performance of what he considered to be his employment agreement. Saleemi offers no evidence that he relied on these statements for the expectation of any benefit other than that for which the Employment Agreement or Employment Letter provided: a job, at a certain fixed salary, with an opportunity for bonuses based in part on the performance of the company, and participation in any future initial public offering of the company.
Stewart v. Jackson Nash, 976 F.2d 86 (2d Cir. 1992), upon which Saleemi relies, does not compel a different result. There, the plaintiff, an attorney seeking to pursue a specialty in environmental law, claimed to have joined a lawfirm in reliance upon the firm's false representations regarding the size and strength of its environmental practice. The court held that the plaintiff had stated a claim for fraud because the alleged fraud went to the inducement of the contract, not its breach. See id. at 88. There, however, the false representations related not to the firm's intent to perform under an employment contract, but to opportunities beyond the scope of the contract that induced the plaintiff to enter into the contract. Id. at 89.
B. Saleemi does not meet the elements of fraud with respect to certain representations and omissions.
For a representation regarding a future event or circumstance to be fraudulent, the statement must be more than "mere puffery" or statements of opinion. See Cohen, 25 F.3d at 1172. Thus, an expression of hope for the future performance of a company is not actionable. See Wilmoth v. Sandor, 686 N.Y.S.2d at 391.
Nonetheless, a relatively concrete representation as to a company's future performance, if made at a time when the speaker knows that the represented level of performance cannot be achieved, may ground a claim of fraud.Cohen, 25 F.3d at 1172. When a fraud claim is based on a promise to perform an act in the future, the plaintiff must show that there was no intent to fulfill the promise at the time it was made. See id.; Murray v. Xerox Corp., 811 F.2d 118, 122 (2d Cir. 1987) ("Under New York law, fraudulent intent is not demonstrated by evidence of mere non-performance of a promise."); Perma Research and Development Company v. Singer Company, 410 F.2d 572, 576 (2d Cir. 1979)
Moreover, any inference drawn from the fact that the expectation did not occur is not sufficient to sustain the plaintiff's burden of showing that the defendant falsely stated his intentions.Silver v. NL Industries. Inc., No. 82 Civ. 6875, 1985 WL 241 at *8 (S.D.N.Y. 1985) (quoting Lanzi v. Brooks, 388 N.Y.S.2d 946, 948 (3d Dept. 1976)).
1. Statements regarding PNT's financial situation, Pencom's success
Markman's statements regarding PNT's financial health are insufficient to support Saleemi's fraud claim. First, Saleemi has shown no evidence that the statements were false. The financial documents offered by Saleemi show that in terms of revenues, PNT was a growing company in August 1998; consistent with Markman's statement that PNT expected to make additional hires in the second half of 1998, PNT hired new employees between August and November. Saleemi offers no evidence that Markman made any statement regarding Pencom that was untrue. Moreover, a statement that PNT was a growing company is a classic statement of opinion that is insufficiently concrete to be actionable as fraud. Similarly, Markman's statements regarding Pencom's size and success were statements of opinion that Saleemi does not suggest are false. Thus, they cannot constitute fraudulent misrepresentations.
2. The PNT IPO, stock options, and bonus
Saleemi has not shown evidence sufficient to raise a material issue of fact with respect to Pencom's lack of intent to fulfill its promises regarding Saleemi's compensation. First, Saleemi points to Pencom's statement in the Employment Letter that it was "considering" an IPO at "some future date," and that Saleemi would be entitled to stock options. The evidence offered by Saleemi, that Pencom had not taken any concrete steps towards an IPO, does not raise a question of fact as to whether that very vague and conditional statement was intentionally false when it was made. Similarly, Saleemi offers no evidence that the statement in the employment letter regarding his bonus was untrue. Consequently, the statements about the IPO, the stock options, and the bonus fail to raise a material issue of fact with respect to Saleemi's fraud claim.
C. The only damages sought by Saleemi that can be recovered in a fraud action are unavailable here.
Finally, with the exception of his travel and relocation expenses, none of the damages sought by Saleemi are recoverable in a fraud action.
New York law awards only "out-of-pocket" expenses in fraud cases, entitling plaintiffs to damages solely for their actual pecuniary losses. Those losses must be the direct, immediate, proximate result of the misrepresentation. The damages must also be independent of other causes.Kregos v. Associated Press, 3 F.3d 656, 665 (internal citations omitted). "Under the out-of-pocket rule, there can be no recovery of profits which would have been realized in the absence of fraud." Lama Holding Company v. Smith Barney Inc., 646 N.Y.S.2d 76, 80 (N.Y. 1996). See also Kulas v. Adachi, No. 96 Civ. 6674, 1997 WL 256957 at *10 (S.D.N.Y. May 16, 1997) (damaged reputation and lost business not compensable in fraud). Thus, "the loss of an alternative contractual bargain . . . cannot serve as a basis for fraud or misrepresentation damages because the loss of the bargain was undeterminable and speculative."Lama Holding Company, 646 N.Y.S.2d at 80 (internal quotation marks omitted).
The out-of-pocket rule precludes recovery by Saleemi of anything other than his travel costs, which were his only out-of-pocket expenses. Those costs, however, cannot be recovered here because they are specifically provided for in the August 21 letter provided to Saleemi by Pencom. Saleemi cannot claim that Pencom made any representation regarding the reimbursement of relocation expenses that was collateral to the written understanding. Moreover, Saleemi traveled to the United Statesafter Pencom had informed him that he could not be guaranteed a position.
Finally, Saleemi has not shown evidence sufficient to raise a material issue of fact with respect to the availability of punitive damages. Punitive damages, although generally limited in fraud cases to public harms, are also available where a "very high threshold of moral culpability is satisfied." Turnbull, 1999 WL 672561 at *9 (quoting Giblin v. Murphy, 536 N.Y.S.2d 54, 56 (N.Y. 1988)). Saleemi has not offered any evidence suggesting this high level of moral culpability.
CONCLUSION
For the reasons stated, defendants' motion for summary judgment is granted. The Clerk of Court shall enter judgment for defendants and close the case.
SO ORDERED:
Dated: New York, New York May 16, 2000