# Grynberg v. Citation Oil & Gas Corp. > South Dakota Supreme Court · October 22, 1997 · 573 N.W.2d 493 URL: https://www.frixlaw.com/law-library/cases/9514400 ## Case - **Full name:** Jack J. GRYNBERG, D/B/A Grynberg Petroleum Company; Janex Oil Co., Inc.; Andrew Kugler, Jr.; W.B. Newberry; Janex Oil Co. Reserve Fund 90-7A Ltd.; Headington Oil Properties, Inc.; H.A. Mayor, Jr.,; Carl G. Mammel; Dr. Keith McCorrmic; Preston Investments; And Lloyd Peterson, Plaintiffs and Appellees, v. CITATION OIL & GAS CORP., Defendant and Appellant - **Court:** South Dakota Supreme Court - **Decided:** October 22, 1997 - **Citations:** 573 N.W.2d 493; 1997 SD 121; 1997 S.D. LEXIS 121 - **Precedential status:** Published - **Opinion:** Concurring in part by Amundson - **Judges:** Gilbertson, Miller, Sabers, Amundson, Tucker, Konenkamp - **Cited by:** 60 later opinions in the Frix Law Library ## Citator (automated) - No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases. - Full citator and citing cases: https://www.frixlaw.com/law-library/cases/9514400 ## How later opinions describe it (automated extraction) - stating that “our free market system allows economically efficient breaches of contract, for example, when it costs less for one party to breach an unwise contract and to pay the other party compensatory damages than it would cost to completely perform the contract” - finding duty independent of the obligations under the contract and stating, “[s]imply put, a contract is not a license allowing one party to cheat or defraud the other” - noting the “legal duty which is due from every man to his fellow, to respect his rights of property . . . and refrain from invading them by . . . fraud” ## Opinion text AMUNDSON, Justice (concurring in part and dissenting in part). [¶ 60.] I dissent on Issue One. [¶ 61.] In order to maintain a cause of action for fraud in addition to breach of contract, “the fraud must be extraneous to the contract, rather than a fraudulent nonperformance of the contract itself.” Bevins v. King, 147 Vt. 203 , 514 A.2d 1044, 1045 (1986) (citations omitted). The significance of this distinction is outlined in Bevins [P]rinciples of contract and principles of fraud must be kept separate and distinct for “[i]f every broken promise were to constitute fraud, ... the resulting instability would severely impair the conduct of business.” See also Hertz Commercial Leasing Corp. v. LMC Data, Inc., 73 Misc.2d 1009, 1013 , 343 N.Y.S.2d 689, 694 (Civ.Ct.1973) (“If a party could simply, by alleging that a contracting party never intended to fulfill his promise, create a tor-tious action in fraud, there would be no effective way of preventing almost every contract case from being converted to a tort for jurisdictional purposes.”) *510 Id. at 1046 (citing Union Bank v. Jones, 138 Vt. 115 , 411 A.2d 1338, 1343 (1980)). [¶ 62.] In this case, a duty must exist outside of the contractual relationship in order for the plaintiffs (collectively referred to as Grynberg) to create an independent action for fraud. A party cannot convert a breach of contract cause of action into a tort merely by stating it as such. We recently upheld settled law in this state in Fisher Sand & Gravel v. State. “Tort obligations are in general obligations that are imposed by law on policy considerations to avoid some kind of loss to others. They are obligations imposed apart from and independent of promises made and therefore apart from any manifested intention of parties to a contract or other bargaining transaction. Therefore, if the alleged obligation to do or not to do something that was breached could not have existed but for a manifested intent, then contract law should be the only theory upon which liability would be imposed.” 1997 SD 8 , ¶ 14, 558 N.W.2d 864, 867-68 (quoting Prosser & Keeton on Torts § 92, at 656 (5th ed. 1984)) (emphasis in original). The majority attempts to transform Gryn-berg’s action for breach of contract into an action for fraud by stating the bases for the independent fraud action are false factual representations made by Citation with the intent to deceive Grynberg. ¶¶ 21, 25, supra. However, the Joint Operating Agreements (JOAs) include the promise to adjust the joint account pursuant to the TIPCO audit as well as a promise to step down as operator. Therefore, the JOAs impliedly create the obligation to make true factual representations to Grynberg. There is no duty outside of this contractual duty clearly defined in the JOAs. See, e.g., Fisher Sand & Gravel, 1997 SD at 8, ¶ 18 , 558 N.W.2d at 868-89 (stating, “In order to maintain its tort claim against [defendant], [plaintiff] must show [defendant’s] acts or omissions resulted in the breach of an independent duty not already defined by the contract.”) Grynberg even admits “[t]he JOAs define the relationship and duties of the parties.” Plaintiffs’ Brief on Partial Summary Judgment/Defendants Failure to Keep Adequate Accounting Records, at 4-5. The trial court agreed, stating, “[T]he relationship between the parties to the [JOAs] is controlled by the terms of their agreement voluntarily made.... [T]he JOAs specifically defined the standard by which the operator’s conduct is measured.” [¶ 63.] A similar situation occurred in Brick v. Cohn-Hall-Marx Co., wherein the plaintiff alleged the “defendant kept false books, rendered false statements, and made sales for which it did not account.” 276 N.Y. 259 , 11 N.E.2d 902, 903 (1937). In an action for fraud, the plaintiff sought damages in the form of contract royalties which were not paid due to the defendant’s conduct. The court held the plaintiff’s action sounded in contract, stating: [I]f the defendant owes the plaintiff any money, it is because of the agreement which it made to pay royalties upon sales which were made. Even though the defendant may have falsely stated the amount of the sales and rendered false statements, the fact remains its liability on the actual amount of sales depends upon the contract. Whether the defendant deliberately refused to make payment, thus breaching its contract, or whether through neglect it made false statements, or whether it deliberately made false statements, the action of the plaintiffs is founded and based upon the contract, without which they would have no claim at all. The falsity of these statements and the fraud of the defendant according to the allegations amounted to a breach of the contract and were no more or less a breach of the contract then if the defendant had deliberately refused to pay or had neglected to pay. Id. at 904. See also Wood & Locker, Inc. v. Doran & Assoc., 708 F.Supp. 684, 689 (W.D.Pa.1989) (holding a contract cause of action involving operating agreements is not converted to a fraud cause of action when the plaintiff’s injury is recoverable in the contract action). [¶ 64.] The majority cites Vernon Fire & Casualty Insurance Co. v. Sharp, 264 Ind. 599 , 349 N.E.2d 173 (1976), a bad-faith insurance case, to support its theory that each element of fraud ought to be shown without reference to the breach of contract action in *511 order to determine whether an independent tort exists. Then, applying the elements of deceit, the majority concludes there are sufficient facts to support an independent tort in this case. Regarding the element of injury or damage, the majority states the plaintiffs were “induced to pay excessive nonconsent penalties and to allow Citation to continue as operator.” ¶ 25, supra. Paying nonconsent penalties and allowing Citation to continue in its capacity, however, are damages arising solely from the breach of contract. As we stated in Hoffman v. Louis Dreyfus Corp., “[t]he independent tort must be separate and distinct from the breach of contract.” 435 N.W.2d 211, 214 (S.D.1989) (quoting 22 Am. Jur.2d § 752 (1988)). When contract and fraud claims are asserted, the critical distinction is whether the alleged fraud “occurred before or after the contractual relationship existed[.]” Deutz & Crow v. State Cement Plant Comm’n, 466 N.W.2d 631, 636-37 (S.D.1991). If the fraud occurs before a contractual relationship is formed, an independent tort claim may exist. Id. at 637 . However, if the fraud occurs after the parties enter into a contract, separate claims do not exist. Id. Clearly, each of Grynberg’s allegations involve disputes which occurred after the contractual relationship was formed. No fraudulent inducement claims were alleged by Grynberg. Therefore, there are no separate tort claims. [¶ 65.] Furthermore, the tort of fraud is not separate and distinct from the contract at hand when there are no injuries that arise from fraudulent conduct alone. For example, in Textron Financial Corp. v. Nationwide Mutual Insurance Co., the Ohio Court of Appeals stated: In addition to containing a duty independent of that created by contract, an action arising out of contract which is also based upon tortious conduct must include actual damages attributable to the wrongful acts of the alleged tortfeasor which are in addition to those attributable to the breach of the contract. 115 Ohio App.3d 137 , 684 N.E.2d 1261 (9 Dist.) (citations omitted). Likewise, in Chachere v. Drake, the Court of Appeals of Texas stated: The mere joinder of a claim in contract with a claim in tort does not alter the fundamental rule: breach of contract cannot support the recovery of exemplary damages. It is well settled that a recovery of punitive damages requires a finding of an independent tort with accompanying actual damages. The mere availability of a tort-based theory of recovery is not sufficient; actual damages sustained from an independent tort must be proven before punitive damages are available. 941 S.W.2d 193,197 (Tex.App.1996) (citations omitted) (emphasis added); see also Quinn v. Workforce 2000, Inc., 887 F.Supp. 131, 136 (E.D.Tex.1995) (stating, “The nature of the injury most often determines which duty or duties are breached. When the injury is only the economic loss to the subject of the contract itself, the action sounds in contract alone.”) (quoting Jim Walter Homes, Inc. v. Reed, 711 S.W.2d 617 (Tex.1986)); Cornwell v. Jespersen, 238 Kan. 110 , 708 P.2d 515, 524 (1985) (stating the injuries suffered by the plaintiff flowed from the contract; therefore, the action for fraud was denied). [¶ 66.] A review of the pleadings reveals the actual damages allegedly suffered by Grynberg include: recovery of lease operating expenses in excess of the amount they deemed to be reasonable under the JOAs; reimbursement for additional lease expenses charged to them by reason of the change of allocation method to a volumetric basis; and recovery of nonconsent penalties charged under the JOAs to specific parties. None of these damages consist of “actual damages attributable to the wrongful acts of [Citation] which are in addition to those attributable to the breach of the contract.” Textron Financial Corp., 115 Ohio App.3d 137 at 151 , 684 N.E.2d 1261 at 1271 (emphasis added). Rather, each of these asserted damages is an economic loss incurred as a result of the breach of contract. Without separate actual fraud damages, punitive damages cannot be supported. [¶ 67.] Therefore, I would reverse the tort damage award and remand with instructions to enter judgment on the fraud claim in favor of Citation. [¶ 68.] I concur on Issue Four. --- Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/9514400. Public record. Not legal advice.