Commercial Division Blog

Posted: May 5, 2017 / Categories Commercial, Fraud/Misrepresentation

Court of Appeals Affirms Dismissal of Fraudulent Inducement Claim for Failure to Plead "Actual Pecuniary Loss"

On May 2, 2017, the Court of Appeals issued a decision in Connaughton v. Chipotle Mexican Grill, Inc., 2017 NY Slip Op. 03445, affirming the dismissal of a fraudulent inducement claim based on the plaintiff’s failure to plead an "actual pecuniary loss" resulting from the alleged misrepresentations.

Connaughton arose from an agreement the plaintiff entered into with Chipotle to develop a ramen restaurant. Plaintiff alleged that Chipotle fraudulently induced him to sign the agreement by failing to disclose that it had entered into an earlier agreement with another chef to open a similar restaurant and was bound by a non-disclosure agreement. In a decision we blogged about here, a divided panel in the First Department affirmed the motion court’s dismissal of the complaint for failure to plead out-of-pocket damages.

The Court of Appeals agreed with the majority in the Appellate Division, explaining:

In New York, as in multiple other states, the true measure of damage [on a fraud claim] 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. Under that rule, 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. There can be no recovery of profits which would have been realized in the absence of fraud. Moreover, this Court has consistently refused to allow damages for fraud based on the loss of a contractual bargain, the extent, and indeed the very existence of which is completely undeterminable and speculative.

Here, plaintiff’s pleading is fatally deficient because he did not assert compensable damages resulting from defendants’ alleged fraud. The complaint alleges that in reliance on defendants’ fraudulent omissions, plaintiff stopped soliciting potential buyers. However, the complaint fails to allege that, in doing so, he rejected another prospective buyer’s offer to purchase the concept. Instead, plaintiff avers that once Ells showed an interest in his ramen restaurant idea, plaintiff turned to selling the concept to Chipotle. These are factual assertions of the quintessential lost opportunity, which are not a recoverable out-of-pocket loss. As this Court has repeatedly stated, such damage is disallowed as too speculative a recovery.

Similarly inadequate to satisfy his pleading burden are plaintiff’s allegations that he might incur litigation expenses and potential loss of reputation if named in a civil action by the other chef. These are not claims of actual out-of-pocket loss but speculative claims of possible future damages, and fare no better than his lost profits claim. There are also no facts alleged in the complaint to support allegations of reputational harm. For example, plaintiff did not assert or provide facts from which it could be inferred that he lost standing within the restaurant industry, or that he is unemployable as a result of his
association with Chipotle.

(Citations omitted).