The Second Circuit Court of Appeals affirmed the Southern District of New York’s dismissal of a complaint by South Cherry Street, LLC, alleging that Hennessee Group LLC breached an oral contract to provide investment advisory services. Hennessee, an investment advisor, had recommended that South Cherry invest with Bayou Accredited Fund L.L.C. South Cherry alleged that Hennessee’s failure to learn of and disclose that Bayou was operated as a Ponzi scheme was a breach of its contractual duty to perform due diligence with respect to the investments it recommended.
Hennessee asserted that the breach of contract claim was barred by New York’s Statute of Frauds, which voids any agreement that is not evidenced by a signed writing and which cannot be performed in one year. Although it was entitled to a fee for the investments it recommended as long as they were held by South Cherry, Hennessee had no ability to terminate the contract at will (or at any time within one year from its making). Relying on language from a 1984 New York Court of Appeals decision that stated that a contract “is not within the Statute of Frauds ‘[w]here one or both parties have... an explicit option to terminate their agreement within one year,’” South Cherry asserted that since it had the option to terminate the contract at any time, the contract was not covered by the Statute of Frauds.
The Second Circuit affirmed the District Court’s finding that, despite the language relied upon by South Cherry, the contract at issue was within the Statute of Frauds and unenforceable. The Court held that to fall outside the statute, the possibility of performance within one year must be within the control of the party to be charged, not solely with the plaintiff. Thus, the Court ruled that “because the possibility of performance of the alleged oral agreement within one year depended solely on the will and actions of South Cherry, the party seeking to enforce the agreement,” the oral agreement was barred by the Statute of Frauds. (South Cherry Street, LLC v. Hennessee Group LLC, No. 07-3658-cv, 2009 WL 2032133 (2d Cir. July 14, 2009))