Commercial Division Blog

Posted: March 3, 2017 / Categories Commercial, Fraud/Misrepresentation

No Fraud Claim for Lost Profits

On February 23, 2017, the First Department issued a decision in Norcast v. Castle Harlan, Inc., 2017 NY Slip Op. 01479, affirming the dismissal of a fraud claim seeking lost profits damages, explaining:

This action arises from the sale of a business by plaintiffs to a special purpose vehicle part-owned by defendant. Plaintiffs claim that defendant fraudulently induced them to sell the business for the deflated purchase price of $190 million by concealing the true identity of the buyer, a competitor business.

Plaintiffs' fraud-based claims (including fraud, conspiracy to defraud, fraud in the inducement, negligent misrepresentation, and aiding and abetting fraud) were properly dismissed because the damages sought were impermissibly speculative. Damages for fraud are calculated according to the "out-of-pocket" rule and must reflect the actual pecuniary loss sustained as the direct result of the wrong. Damages may only properly compensate plaintiffs for what they lost because of the fraud, not 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 seek to recover the profits they might have gained had the true identity of the buyer been revealed. But there is no way of knowing what purchase price would have been agreed upon had the buyer's identity been known. Nor is there any suggestion that the agreed price was unfair, as it was voluntarily accepted by plaintiffs, who had their own financial advisors, as the result of a competitive bidding process and was $20 million higher than the next highest bid.

(Internal quotations and citations omitted) (emphasis added).