News & Noteworthy

Authored - NJ Contract Law Update - Contract-Substitute Claim Against Company's Principal
JULY 24, 2013 | Windels Marx - Commercial Litigation

In Sun Products Corp. v. Bruch, 2013 WL 49468 (2d Cir. 2013), affirming 2011 WL 5120307 (S.D.N.Y.) (2011), the Court upheld a claim against a company's principal personally, arising out of alleged breach of contract and other alleged breaches of duty by the principal's company. The case is of interest because (1) it involves a tort arising out of a contract, and thus involves the Economic Loss Doctrine (or "ELD"); (2) the District Court found that New Jersey and New York law were the same on these issues; and (3) the District Court's ruling on this issue survives on this issue because the issue does not appear to have been raised on appeal.

The key issue involved alleged evasion of license royalties due from the defendant's corporation (alternatively known as "High Point" and "ABC"), and the accusation that the company's principal--defendant Bruch--personally committed torts by virtue of his involvement in the breach.

Default had been entered against the company, and the only remaining issue was whether the principal could be liable in tort.

Accordingly to the District Court's Opinion, Bruch admitted enough in deposition to indicate that he had personally under-reported royalties (in 'representing' a lower figure to the plaintiff), and had caused them to be underpaid.

The District Court's analysis proceeded along these lines:

(1) New York and New Jersey law appeared to be aligned.

(2)(a) Although New Jersey federal diversity cases say that under the EDL, "a party to a contract may only bring a claim for fraud that is extraneous to the contract", that principle should not be applied under either New Jersey or New Jersey law to the principal of the company, if guilty of fraud or the like.

(b)(i) The Court reconciled the ELD with New Jersey cases indicating that an agent is jointly and severally liable for his/her own fraudulent acts or false representations, even when they are in furtherance of the corporate business.

(b)(ii) The Court cited Maertin v.Armstrong World Industries, Inc. 241 F.Supp.2d 434, 459 (D.N.J. 2002); but could equally have cited a number of state-court cases, such as Van Dam Egg Co. v. Allendale Farms, Inc., 199 N.J.Super. 452 (App.Div. 1985).

(3) The Sun Court, in so attempting to reconcile the law, indicated that the claim was not based on piercing the corporate veil, but rather on personal torts that could stand on their own. Thus, it held, the ELD was no bar.

Sun presents an interesting variant of the various ELD analyses in Alpert, Guide to N.J. Contract Law (ICLE Second Edition 2011); and in the Third Edition, soon to be published.

Contact & Legal Disclaimer

Clark Alpert is the author of Guide to New Jersey Contract Law, published by the New Jersey Institute for Continuing Legal Education, originally published in 2007 and updated in November 2011. His updates on New Jersey contract law are based in recent issues and practical methods for addressing similar situations in your practice or business. They are not intended to serve as legal advice. Clark welcomes your questions and comments.

Windels Marx helps you harness opportunity and mitigate risk with a team that provides your business with the service, quality and value essential to a trusted relationship.