Non-Linear Trading Co., Inc. v. Braddis Associates, Inc.

• Decision Date: 02 June 1998
• Docket Number: NON-LINEAR,N-LINEAR
• Citation: 675 N.Y.S.2d 5,243 A.D.2d 107
• Parties: , 1998 N.Y. Slip Op. 5167, 1998 N.Y. Slip Op. 5168 TRADING COMPANY, INC., Plaintiff-Appellant, v. BRADDIS ASSOCIATES, INC., Defendant-Respondent.
• Court: New York Supreme Court — Appellate Division

Page 5

675 N.Y.S.2d 5

243 A.D.2d 107, 1998 N.Y. Slip Op. 5167,

1998 N.Y. Slip Op. 5168

NON-LINEAR TRADING COMPANY, INC., Plaintiff-Appellant, v. BRADDIS ASSOCIATES, INC., Defendant-Respondent.

Supreme Court, Appellate Division,

First Department.

June 2, 1998.

Cori Sherman, of counsel (Rodney A. Brown, on the brief, Brown & Fox, P.C., attorneys), for plaintiff-appellant.

Anthony M. Grandinette, of counsel (Grandinette & Serio, P.C., attorneys), for defendant-respondent.

Before SULLIVAN, J.P., and ELLERIN, NARDELLI, RUBIN and MAZZARELLI, JJ.

RUBIN, Justice.

In this action, plaintiff Non-Linear Trading Company seeks to recover its initial capital contribution in a partnership that was unsuccessful in achieving the main purpose for which it was formed. Supreme Court dismissed the complaint, finding the agreement sued upon to be indefinite. While this Court concludes that the contract is enforceable, the terms of the agreement afford plaintiff no right to relief and, therefore, the cause of action for breach of contract was properly dismissed. The defect in performance alleged to comprise the breach--the failure to deliver a marketable product--is not promised in the subject agreement but, rather, is expressly disclaimed. This deficiency obviously occurred to plaintiff because, in opposing defendant's motion for dismissal, plaintiff cross moved to amend the complaint to change the theory of breach from failure to produce the product to failure to devote sufficient resources to its development. The original and the proposed amended complaint both allege that defendant falsely represented its intention to accomplish the purpose of the partnership agreement, thereby fraudulently inducing plaintiff to enter into the agreement.

Having concluded that the partnership agreement is enforceable, as plaintiff contends, it remains to be decided whether Supreme Court erred in denying plaintiff's motion insofar as it seeks to amend the complaint and to conduct further discovery. That the contract between the parties is enforceable and that the enterprise failed in pursuit of its purpose do not compel the conclusion that plaintiff has stated a valid claim for recovery of its investment.

On January 12, 1993, plaintiff Non-Linear Trading Company and defendant Braddis Associates entered in to an agreement to form "a joint venture partnership" for the purpose, inter alia, of developing a software-based commodities trading system. The agreement recites:

The business of the partnership shall include, but not be limited to, (a) the use of Braddis' existing research by a discretionary commodity interest trader or traders, (b) the development and use of additional research, signals and indicators by a discretionary commodity interest trader or traders, and (3) the development of a mechanically-driven software system or systems for the trading of commodity interests based on the Partnership's proprietary market research, signals and indicators (collectively, the "Partnership's Products").

These provisions reflect the terms of a letter of intent dated November 24, 1992 drafted by James Park, an attorney and principal of plaintiff Non-Linear Trading Company (although it is referred to in the letter as "the SUMA group").

Paragraph 3 of the partnership agreement provides that plaintiff will make an initial capital contribution of $80,000 and that "the first $400,000 of net operating profits earned by the Partnership (without reduction for the $80,000 expended pursuant to this Paragraph 3) shall be used by the Partnership to fund additional research". With respect to recoupment of plaintiff's investment, paragraph 5 of the agreement provides that "the next $80,000 of net profits shall be allocated to [plaintiff] NLTC". These provisions likewise mirror those contained in Mr. Park's letter of intent with respect to the funding of the joint venture and the return of plaintiff's initial capital contribution. However, paragraph 3 of the partnership agreement adds, in conclusion: "Nothing in this agreement shall be construed as a warranty or representation by Braddis that research and development activities will lead to the actual development of products, or if actually developed, that there will be a commercially usable product."

The agreement grants a license to the partnership, plaintiff, SUMA Capital Corporation and their affiliates to use research and reports assembled by defendant, and provides that any profit derived from their use "shall promptly be paid to the Partnership." With this exception, the agreement is silent with respect to the source of the anticipated $400,000 in operating revenue to be applied to development of the software trading system.

Plaintiff made the initial capital contribution of $80,000 under the agreement early in 1993. By early 1994, it is apparent that plaintiff regarded defendant's efforts to produce the software as unavailing. In a letter dated February 7, 1994 bearing the letterhead of Paradigm Capital Management, Mr. Park makes reference to a conversation in which Ron Brandes, president of defendant Braddis Associates, indicated that the software had not been completed as "promised both in our contract and in continuing conversations over the past year." The letter expresses misgivings at a suggestion by Mr. Brandes that "you and I together attempt to trade the signals that Braddis Associates has been generating." It continues, "Neither of us is a trader (as each of us has proven in the past). Moreover, the whole purpose of the collaboration was for you to create a system of mechanical trading signals that would be valuable (i.e., saleable) to a discretionary trader". Mr. Park goes on to suggest that "it would be best for us to agree that the project has been unsuccessful and move on to other endeavors by retroactively voiding our contract--you would return to us the $80,000, and we would tear up the agreement." He concludes, anomalously, "The obligations that were created under the contract, however, must be satisfied before we can go on. I now believe that the return of the $80,000 is in order."

When the proposed repayment was not forthcoming, plaintiff commenced this action seeking dissolution of the partnership, rescission of the partnership agreement and damages for breach of fiduciary duty. The original complaint dated April 20, 1994 alleges that defendant "failed to perform" its obligation pursuant to the contract, having "failed to develop Partnership Products." It seeks rescission based upon fraudulent inducement (second cause of action) and recovery of expenses based upon breach of fiduciary duty (third cause of action). The complaint seeks recovery of plaintiff's initial capital contribution of $80,000, together with an additional $75,000 in unspecified related expenses.

In response to defendant's motion to dismiss the complaint, plaintiff, in separate cross motions, sought leave to amend the complaint and to compel completion of discovery prior to the determination of the motion for summary judgment. The proposed amended complaint dated December 27, 1995 likewise seeks dissolution of the partnership, rescission of the partnership agreement and damages for breach of fiduciary duty. In both instances, the third cause of action alleging breach of fiduciary duty restates the assertions of the second cause of action seeking rescission, merely adding the claim for expenses incurred in performing plaintiff's obligations under the agreement. However, recovery of damages for breach of contract under the proposed amended complaint is predicated on the ground that defendant Braddis Associates "failed to use its best efforts, expend sufficient time and effort, and allocate sufficient staff to research and develop Partnership Products, and has not in fact developed Partnership Products".

Defendant's notice of motion for summary judgment purports to be submitted pursuant to CPLR 3212. While a summary judgment motion is premature prior to joinder of issue (CPLR 3212[a] ), the affidavit of Ron Brandes, defendant's principal, makes it clear that the motion is directed at the sufficiency of the complaint. Specifically, defendant notes that the breach of performance asserted in the original complaint is contradicted by the plain language of the partnership agreement, which specifically disclaims any representation either that a software trading system can be developed or that it will prove to be marketable. The original complaint, stripped of its equitable trappings, asserts a cause of action for breach of a promise to produce "Partnership Products" and, the recitation of the notice of motion notwithstanding, defendant's application seeks dismissal for failure to state a cause of action (CPLR 3211[a][7]; CPLR 104).

In his affidavit in support of the motion to dismiss, Mr. Brandes contends that the partnership agreement reflects the understanding that $480,000 "was the minimum financial amount necessary to accomplish the partnership goals." It goes on to charge that plaintiff breached its obligations under the agreement by failing to secure "the necessary investors through marketing of the partnership to produce profits which, in turn, could be used to conduct research and develop a usable computer program capable of forecasting the market." With respect to the merits of the complaint, the affidavit states that, following execution of the partnership agreement, "myself and my employees spent at least half of our work week working toward the development of the Partnership Products. Even after the resources to fund the project were depleted, my employees and I spent at least thirty-five cumulative hours a week on the project until approximately February 1994."

Defendant's motion for summary judgment was precipitated when, in October 1995, plaintiff served a subpoena duces tecum on defendant's bank for the purpose of determining how the $80,000 capital contribution had been applied to partnership...