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Current Developments in the Commercial Divisions of the
New York State Courts by Schlam Stone & Dolan LLP
Posted: February 17, 2019

Fraud Claim Dismissed for Failure to Show Out-of-Pocket Damages

On February 8, 2019, the Fourth Department issued a decision in Southwestern Invs. Group, LLC v. JH Portfolio Debt Equities, LLC, 2019 NY Slip Op. 01035, dismissing a fraud claim for failure to show out-of-pocket damages, explaining:

To allege a cause of action based on fraud, plaintiff must assert a misrepresentation or a material omission of fact which was false and known to be false by defendant, made for the purpose of inducing the other party to rely upon it, justifiable reliance of the other party on the misrepresentation or material omission, and injury. The true measure of damage 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 this rule, the loss is computed by ascertaining the difference between the value of the bargain which plaintiff was induced by fraud to make and the amount or value of the consideration exacted as the price of the bargain.

Here, we conclude that, even as supplemented by the affidavit of plaintiff’s president, plaintiff’s pleading is fatally deficient because it did not assert compensable damages resulting from defendants’ alleged fraud. With respect to the purchase of the subject portfolios, plaintiff received an interest therein worth more than the amount of its alleged investment. Further, contrary to plaintiff’s contention, the allegation that it lost the enhanced collections on the portfolios that defendants purportedly told it that it could receive under the terms of the financing arrangement is a quintessential lost opportunity, which is not a recoverable out-of-pocket loss. Damages are to be calculated to compensate plaintiff for what was lost because of the fraud, not to compensate for what might have been gained. There can be no recovery of profits which would have been realized in the absence of fraud. Plaintiff’s remaining allegations do not assert compensable damages resulting from defendants’ alleged fraud.

(Internal quotations and citations omitted).

Commercial litigation frequently involves fraud-based claims. Such claims have special pleading requirements or rules, including the rule discussed here that a fraud claim can seek only money lost through the fraud (out-of-pocket damages), not the profits the plaintiff hoped to have earned in the absence of the fraud. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client think you have been defrauded, or if someone has accused you or a client of defrauding them.

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