Commercial Division Blog

Posted: August 7, 2015 / Categories Commercial, Fraud/Misrepresentation, Damages

Fraud Claim Dismissed Because Claimed Damages Violated Out-of-Pocket Rule

On July 24, 2015, Justice Scarpulla of the New York County Commercial Division issued a decision in Kumiva Group, LLC v. Garda USA Inc., 2015 NY Slip Op. 31388(U), dismissing a fraud claim based on the out-of-pocket rule.

In Kumiva Group, the plaintiff sued the defendant in connection with the defendant's acquisition of an armored car company from the defendant. The plaintiff "is a representative of [the acquired company's] former shareholders." The defendant asserted various counterclaims. The plaintiff moved for summary judgment on the defendant's fraud counterclaim arguing, among other things, that the defendant had not showed that it suffered any damages. The court granted the motion, explaining:

Under the out-of-pocket rule, the true measure of damages for fraud is indemnity for the actual pecuniary loss sustained as a direct result of the wrong, and there can be no recovery of profits which would have been realized in the absence of fraud. Here, as [the defendant] has failed to submit a valuation of [the acquired company] at the time of the acquisition, it has presented no evidence that it had any out-of-pocket loss as a result of acquiring [it], i.e., that it paid more for [the company it acquired] than it was worth. Instead, it seeks to prove that it could have made an even more profitable deal if not for the alleged misrepresentations. As these are not proper fraud damages."

(Internal quotations and citations omitted).