Perma Research and Development Co. v. Singer Co.

• Decision Date: 25 April 1969
• Docket Number: No. 407 and 408,Dockets 32716 and 32754.,407 and 408
• Citation: 410 F.2d 572
• Parties: PERMA RESEARCH AND DEVELOPMENT COMPANY, Appellant, v. The SINGER COMPANY, Appellee.
• Court: U.S. Court of Appeals — Second Circuit

410 F.2d 572 (1969)

PERMA RESEARCH AND DEVELOPMENT COMPANY, Appellant, v. The SINGER COMPANY, Appellee.

Nos. 407 and 408, Dockets 32716 and 32754.

United States Court of Appeals Second Circuit.

Argued January 22, 1969.

Decided April 25, 1969.

Morris Chertkov, Washington, D. C., (Law Offices of Worth Rowley, Washington, D. C., Eugene J. Metzger, Washington, D. C., Steven K. Yablonski, Silver Spring, Md., on the brief; Maltese, Titone & Anastasi, New York City, of counsel), for appellant.

William C. Chanler, New York City, (Winthrop, Stimson, Putnam & Roberts, New York City, James T. Boorsch, New York City, on the brief), for appellee.

Before SMITH and HAYS, Circuit Judges, and HENDERSON, District Judge.^*

J. JOSEPH SMITH, Circuit Judge:

The plaintiff Perma Research & Development Company ("Perma"), brought this action for breach of contract in the United States District Court for the Southern District of New York, alleging that substantial numbers of an automobile anti-skid braking device assembled by the defendant, The Singer Company ("Singer"), were "defective due to inadequate quality control." Judge Bryan granted partial summary judgment in favor of Singer in the action for breach of contract, and dismissed an injunction action brought the same day to enjoin Singer from shipping any of the units thus assembled.¹ For the reasons stated below, we agree with the disposition of these cases, and affirm.

I.

In June, 1964, Perma and Singer entered into a contract (the "June contract") for the manufacture of the "Perma Anti-Skid Device." Invented by Frank A. Perrino, the president of Perma, the product was said to have "a "fail-safe feature which will automatically revert to the standard braking system in case of failure."² By the terms of the June contract, the parties agreed that Singer would assemble the product in accordance with specifications and blue-prints provided by Perma, and that Singer would use "diligent quality control in the production, assembly, testing and packaging" of the product.

As a condition precedent to the June contract, Singer purchased an inventory of specified component parts at a cost of $1,000,000.³ During the first few months of attempted production, Singer complained that a large number of component parts were defective in various ways, and depending on the parts involved, Perma either arranged for their correction, waived the deviations, or ordered replacements. Singer also suggested modifications in the basic design of the product, and Perma responded by making some twelve design changes.⁴

In December, 1964, the parties entered into a second contract (the "December contract") which terminated the June contract⁵ and assigned all patent rights on the product to Singer. In return Singer agreed to manufacture and market the product and pay royalties to Perma.⁶ In addition Singer paid $24,000 in cash, gave Perma an interest-free loan of $209,000,⁷ and assumed contractual obligations of Perma in the amount of $85,000. Singer also promised to pay $9,800 a month under a six-month technical services contract with Perma.

In August, 1965, Singer concluded that the product could not be made "fail-safe," and commenced a retrieval program to get back those units already on the market. At the same time Singer advised Perma that it was abandoning the project until the "fail-safe" problem could be resolved.

Perma then commenced this action for breach of the June contract. While admitting that the December contract purported to terminate the June contract, Perma alleged that Singer entered into the December contract with an intention not to perform, and asked the court to set aside the December contract on account of fraud. In the alternative, Perma asked for damages for breach of the December contract. Singer, in turn, counterclaimed for $4,000,000 on the theory that Perma had fraudulently misrepresented the "fail-safe" features of the product.

On Singer's motion for summary judgment, Judge Bryan dismissed the action to set aside the December contract on account of fraud.⁸ He held that Perma failed to produce any evidence showing a fraudulent intent on the part of Singer, and further held that a fraudulent intent, even if proved, would not give rise to an action for rescission under New York law.⁹ Having concluded that there was no actionable fraud, Judge Bryan dismissed the claim for breach of the June contract on the ground that any such claim was barred by the valid December contract. This left the claim for breach of the December contract, as well as the counterclaim by Singer, and as to these claims Judge Bryan denied summary judgment. He then certified that there was "no just reason for delay," and entered final judgment on the dismissed claims.¹⁰

On appeal Perma insists that a contractual promise made without any intention of performing it is fraudulent, and that Judge Bryan erred in holding that a contract induced by fraudulent promises could not be rescinded under New York law. In addition, Perma urges that there was a triable issue of fact on the fraud claim, and that summary judgment was improperly granted. We need not reach the summary judgment question, of course, if Judge Bryan was correct in holding that proof of an intention not to perform would not give rise to an action for rescission under New York law.

II.

Since the New York Court of Appeals has specifically held that "a contractual promise made with the undisclosed intention not to perform it constitutes fraud," Sabo v. Delman, 3 N.Y.2d 155, 162, 164 N.Y.S.2d 714, 718, 143 N.E. 2d 906, 909 (1957), we think that Judge Bryan erred in dismissing the fraud claim on the theory that it would not support an action for rescission. "If a promise was actually made with a preconceived and undisclosed intention of not performing it, it constitutes a misrepresentation of `a material existing fact' upon which an action for rescission may be predicated." Id. at 160, 164 N.Y.S.2d at 716, 143 N.E.2d at 908.

In dismissing the fraud claim, Judge Bryan quoted approvingly from Briefstein v. P. J. Rotondo Co., 8 A.D.2d 349, 351, 187 N.Y.S.2d 866, 868 (1st Dept. 1959), where it was said: "To say that a contracting party intends when he enters into an agreement not to be bound by it is not to state `fraud' in an actionable area, but to state a willingness to risk paying damages for breach of contract." Judge Bryan distinguished Sabo on the ground that the fraud there resulted from misrepresentations as to "collateral matters" which had not been reduced to writing. Since Singer did not make any promises "outside the terms of the contract," Judge Bryan concluded that Briefstein, and not Sabo, was controlling. We disagree.

While the contract in Sabo may have been fraudulently induced by "collateral" promises not reduced to writing, there is nothing in the Sabo opinion which suggests that the result would have been any different if the fraudulent promises had been included within the actual terms of the contract itself. As a matter of plain logic, we fail to see why there is any less fraud in the inducement if the false promises are made a part of the contract itself, and indeed, Sabo speaks of contractual rather than collateral promises. Since Briefstein was not decided by the highest appellate court in New York, and since there is good reason to think that the New York Court of Appeals would not follow the somewhat aberrational holding of that case,¹¹ we think that Sabo is controlling in this diversity action, see Commissioner of Internal Revenue v. Bosch's Estate, 387 U.S. 456, 87 S.Ct. 1776, 18 L.Ed.2d 886 (1967), and hold that Judge Bryan erred in dismissing the fraud claim on the basis of Briefstein.

III.

Having concluded that the fraud alleged here, if true, would support an action for rescission, we must decide whether Judge Bryan was correct in holding that there were no triable issues of fact on the fraud claim. We agree that the fraud claim is without any substance, and affirm on this ground.

The only allegation of fraud in the entire Perma complaint is the statement that the December contract "was procured by fraud and misrepresentations on the part of Singer and its agents as to its intentions and ability to market said product." By itself this allegation is plainly insufficient to state a claim for fraud under Rule 9(b), Fed. R.Civ.P.¹² Nor does the deposition of Perrino, the president of Perma, provide any factual basis for the fraud alleged in the complaint. Except for repeated references to Singer's unsatisfactory performance under the December contract, Perrino was unable to point to any evidence of an intention not to perform, and as Judge Bryan properly observed, actionable fraud depends on more than a showing of non-performance. See Restatement, Torts § 530, comment c; Restatement, Contracts § 470, comment e; Adams v. Clark, 239 N.Y. 403, 410, 146 N.E. 642 (1925). Moreover, it appears from the deposition that there was substantial performance under the December contract, at least until Singer concluded that the product was not "fail-safe" and hence unmarketable. Indeed, Perrino admitted in his deposition that the parties were engaged in joint efforts to solve the "fail-safe" problem as late as six months after the December contract was negotiated.

The only difficult question is whether any of the statements made by Perrino in an affidavit opposing summary judgment are sufficient to raise material issues of fact. In that affidavit Perrino said:

At the time I entered into the contract of December 21, 1964 on behalf of Perma with Singer, Perma was in desperate financial straits because of the delays in deliveries of the product under the June contract. Mr. Kloby of Singer told me that Singer was waiting for Perma to become insolvent so that they could take over the rights to manufacture and market the product under the most satisfactory conditions or get out of their obligations to Perma entirely. Mr.

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