Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts
Posted: May 6, 2016

Fraud Claims Dismissed for Failure to Plead Out-of-Pocket Loss

On April 25, 2016, Justice Scarpulla of the New York County Commercial Division issued a decision in Norcast v. Castle Harlan, Inc., 2016 NY Slip Op. 30787(U), dismissing fraud claims for failure to plead that the plaintiff suffered an out-of-pocket loss.

Norcast arose from the plaintiff’s sale of a company, Norcast Wear Solutions, Inc. (“NWS”) to an entity, 0913044 B.C. Ltd. (“BC”), that was created by private equity firm, Castle Harlan, Inc., for the purpose of the acquisition. Following the sale, plaintiffs claimed they were defrauded because Castle Harlan hid the fact that the buyer’s owner was actually not Castle Harland, but a competitor of NWS, Bradken Ltd. (“Bradken”). According to plaintiffs, “Bradken would have bid more if it was participating in the process, [plaintiff] would have negotiated with Bradken to bid more . . ., and other strategic purchasers may have been driven to higher bids if they knew that Bradken was participating in the auction.” Plaintiffs sued Castle Harlan, asserting, inter alia, claims for fraud, conspiracy to defraud, fraud in the inducement, negligent misrepresentation and aiding and abetting fraud.

Justice Scarpulla dismissed all the fraud claims for failure to allege any out-of-pocket loss, explaining:

To state a claim for fraud, a party must plead damages, and, for such a claim, the true measure of damages is indemnity for the actual pecuniary loss sustained as the direct result of the wrong[,] or what is known as the “out-of-pocket” rule. Pursuant to the out-of-pocket rule, damages are the difference between the value of the bargain which a plaintiff was induced by fraud to make and the amount or value of the consideration exacted as the price of the bargain. Importantly, damages are to be calculated to compensate plaintiffs for what they lost because of the fraud, not to compensate them for what they might have gained, and there can be no recovery of profits which would have been realized in the absence of fraud.

Here plaintiffs allege that they were damaged by misrepresentations and omissions because they could have sold NWS for more than the amount for which it sold if they or “other bidders, or would-be bidders” had known that Bradken was the ultimate buyer. Plaintiffs claim that this loss is not speculative and add that “Bradken actually paid more for NWS than Castle Harlan did, and Bradken also paid additional money to compensate Castle Harlan for its role in the conspiracy.”

Plaintiffs do not allege that they sold NWS at a loss because of Castle Harlan’s alleged misrepresentations and omissions. In fact, Castle Harlan’s $190 million bid for NWS was $20 million greater than the next highest bid. Instead, Castle Harlan impermissibly seeks compensation for what they might have gained had they, or other bidders or would-be bidders, known that Bradken was the ultimate purchaser. Such damage – additional, alleged profits that plaintiffs might have reaped if they knew that Bradken was to be the ultimate purchaser of NWS – are not cognizable under the “out-of-pocket” rule.

(Citations omitted.)

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