DGI-BNSF Corp. v. TRT LeaseCo, LLC

Background

DGI-BNSF Corp. alleged that it owned and controlled TRT LeaseCo, LLC through affiliated entities. TRT owned railroad facilities leased to BNSF Railway Company, and the lease generated substantial rental income. DGI and Kingsway Financial Services, Inc., together with its affiliates, arranged for a Kingsway affiliate to acquire an 81% interest in CMC Industries, Inc., TRT’s parent. The arrangement was intended to allow Kingsway’s more than $800 million in net operating losses to offset income associated with TRT.

DGI alleged that Larry Swets, Kingsway’s negotiator, represented that Kingsway’s 81% interest would be its only compensation and that Kingsway would not require additional payment for TRT and CMC’s use of the tax losses. DGI’s expected benefit was quarterly service-fee payments under a Management Services Agreement. DGI alleged that a later tax-allocation agreement required CMC and TRT to pay Kingsway for the tax savings, diverting income that otherwise would have supported DGI’s service fees. DGI said it learned during discovery that Swets had made the earlier promises while already planning to divert those payments.

DGI initially sued for breach of contract. It then moved under Rule 15 of the Federal Rules of Civil Procedure for permission to add a fraudulent-inducement claim against TRT. Fraudulent inducement is a claim that a party was persuaded to enter an agreement by a knowing false statement about an existing fact. TRT argued that the proposed claim was futile because it duplicated the contract claim and because Swets’s alleged statements could not be attributed to TRT.

Court’s Analysis

The court explained that leave to amend should generally be freely given, but may be denied if the proposed claim could not survive a motion to dismiss. Applying that standard, the court accepted DGI’s factual allegations as true for purposes of the motion.

The court held that the proposed fraud claim was not duplicative of the contract claim. Under New York law, an unfulfilled promise about the future generally belongs in contract law. But a promise made with a concealed plan not to perform can be a false statement about a present fact. The court found that Swets’s alleged promise about Kingsway’s intentions regarding the tax losses was outside the Management Services Agreement and plausibly induced DGI to enter that agreement. The agreement did not address TRT’s obligation, if any, to pay Kingsway for using the tax losses.

The court also found that DGI could potentially plead that Swets was acting as TRT’s agent while negotiating the Management Services Agreement. DGI represented that TRT allowed Swets to select TRT’s counsel and that the selected counsel acted on Swets’s instructions during the negotiation and drafting process. Those allegations could support an inference that TRT authorized Swets to act for it in that transaction. The court noted that an agent’s authority can cover a transaction even when the principal did not specifically authorize every act or statement involved in it.

The court further explained that a corporation is generally responsible for an authorized agent’s conduct within the scope of the agency, including fraudulent conduct. The alleged conflict between Swets’s interests and TRT’s interests did not necessarily eliminate that responsibility because, accepting DGI’s allegations, Swets may also have induced DGI to enter an agreement that gave TRT benefits. The court declined to decide separately whether DGI had adequately pleaded that TRT later ratified Swets’s conduct by knowingly accepting the agreement’s benefits, because the agency theory was sufficient to allow amendment.

Disposition

The court granted DGI’s motion for leave to file an amended complaint to add the fraudulent-inducement claim. The permission was conditioned on DGI alleging additional specific facts supporting a plausible inference that TRT authorized Swets to act as its agent during the negotiation or that TRT accepted the agreement’s benefits with full knowledge of Swets’s alleged fraud.

DGI was required to file the amended complaint by November 15, 2019. The deadlines for the parties’ pretrial filings and the bench trial were adjourned. The parties were directed to propose a new schedule and a new February 2020 trial date. Judge Valerie Caproni did not decide the ultimate merits of the proposed fraud claim.