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Damages in a Holder Claim Found to Be Too Speculative For Recovery

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  • Posted on: May 14 2018

A client contacts you about a potential fraud claim. The client tells you that because of alleged false statements, she decided to hold her securities rather than sell them. She says that as result of the false statements she was deprived of the opportunity to sell at a higher price and, therefore, suffered damages when the securities declined upon the disclosure of the truth. Does she have a case?

Recently, Justice Shirley Werner Kornreich of the Supreme Court, New County, Commercial Division, held, in an analogous situation (i.e., forbearance from taking action because of the defendant’s misrepresentations and omissions) that she does not. Q Chiuna Holdings, Ltd. v. TZG Capital Ltd., 2018 N.Y. Slip Op. 30797 (Sup. Ct., N.Y. County, Apr. 23, 2018) (here)

The Problems with Holder Claims

In a holder claim, the plaintiff alleges that he/she had taken no action because of information provided by the defendant that was materially false or misleading. When the truth is disclosed, the plaintiff claims damages because he/she was deprived of the opportunity to secure the benefit of the transaction or event for which he/she took no action.

As the above hypothetical indicates, a holder claim is often alleged as a fraud or a negligent misrepresentation cause of action.

In New York, to plead and prove a cause of action for fraud, a plaintiff must demonstrate the following: a material misrepresentation of a fact, knowledge of its falsity, an intent to induce reliance, justifiable reliance by the plaintiff, and damages. E.g., Eurycleia Partners, LP v. Seward & Kissel, LLP, 12 N.Y.3d 553, 559 (2009). To plead and prove a claim for negligent misrepresentation, the plaintiff must demonstrate: (1) the existence of a special or privity-like relationship imposing a duty on the defendant to impart correct information to the plaintiff; (2) that the information was incorrect; and (3) reasonable reliance on the information. Mandarin Trading Ltd. v. Wildenstein, 16 N.Y.3d 173, 180 (2011) (citations omitted).

In holder claims cases, the plaintiff is often unable to demonstrate justifiable reliance and damages.

Courts that have recognized holder claims have held that the holder’s forbearance from taking action (e.g., selling his/her securities) because of the defendant’s misrepresentations or omissions satisfies the reliance element of a common law fraud and negligent misrepresentation cause of action. They have found that the holder’s inaction (e.g., his/her retention of the security) is the equivalent of an action (e.g., the sale of a security) and, therefore, amounts to reliance on another’s misstatement or omission.

In 1927, the Appellate Division, First Department, recognized the viability of a holder claim under circumstances in which the plaintiff could claim out-of-pocket damages. Continental Insurance Co. v. Mercadante, 222 A.D. 181, 183 (1st Dept. 1927). The plaintiffs in Continental Insurance alleged that, as a result of being fraudulently induced to refrain from selling their bonds, they were ultimately left with instruments that were “substantially worthless.” Id. at 182. Thus, because the bonds had virtually no value, Continental Insurance suffered an out-of-pocket loss, specifically, the loss of its investment in the bonds.

More than 80 years later, the First Department called into question “the continued viability of such claims.…” Starr Found. v. Am. Int’l Grp., 76 A.D.3d 25, (1st Dept. 2010). In Starr, the plaintiff alleged that the defendants’ misrepresentations regarding its exposure to losses in its CDS portfolio caused the plaintiff to hold its stock rather than sell it. Id. at 26-27. The plaintiff sought to recover the value it would have realized for its shares if the defendants had accurately reported the risk. Id. The court rejected the plaintiff’s fraud claim and held that the “plaintiff did not suffer any out-of-pocket loss as a result of retaining its [] stock.” Id. at 28.

Since Starr, New York courts have reinforced the rule that holder claims in which only hypothetical lost profit damages are pled, with no supporting factual allegations concerning actual, out-of-pocket damages, are insufficient as a matter of law. See, e.g., Tradex Global Master Fund SPC v. Titan Capital Group III LP, 95 A.D.3d 586, 587 (1st Dept. 2012) (citing Starr, the First Department held that a holder claim based solely upon hypothetical lost profit was barred “under the out-of-pocket rule by which the true measure of damages for fraud is indemnity for the actual pecuniary loss sustained as a direct result of the wrong”); Universal Inv. Advisory SA v. Bakrie Telecom Pte, Ltd., 2016 N.Y. Slip Op. 50631 (Sup. Ct. New York County, Apr. 18, 2016). The courts reason that such claims are impermissibly speculative because it is impossible to know what the plaintiff would have received for his/her forbearance had he/she not been induced to do so. Connaughton v. Chipotle Mexican Grill, Inc., 135 A.D,3d 535, 538 (1st Dept. 2016), aff’d, 29 NY3d 137, 142-43 (2017) 142-43 (“[T]his Court has consistent[ly] refus[ed] 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.”) (internal citations and quotation marks omitted). Thus, where the damages sought are based on what the plaintiff might have received had it taken action but for the fraud, the fraud claim must be dismissed because there can be no recovery for such a hypothetical injury. See Varga v. McGraw Hill Fin., Inc., 147 A.D.3d 480, 481 (1st Dept. 2017).

The other problem with holder claims cited by New York courts is the inability of the plaintiff to satisfy the justifiable reliance element of the fraud cause of action. In New York, to plead justifiable reliance, the plaintiff must demonstrate “with the required detail . . . how [it] changed [its] position or otherwise relied upon any purported misrepresentations or omissions to [its] detriment.” Waggoner v. Caruso, 68 A.D.3d 1, 6 (1st Dept. 2009), aff’d, 14 N.Y.3d 874 (1st Dept. 2010). Merely alleging that forbearance is the equivalent of action does not satisfy the reliance element for a fraudulent misrepresentation claim.

Q Chiuna Holdings, Ltd. v. TZG Capital Ltd.


The Plaintiff, Q Chiuna Holdings, Ltd. (“QCH”), brought action to recover millions of dollars arising from the Defendants’ alleged unauthorized sale of a business venture in China and $5 million arising from the Defendants’ alleged fraudulent conduct to hide and misappropriate the proceeds of that sale.
QCH alleged that the Defendants covertly sold 70% of Q-TZG Leasing Financial (China) Company Limited (“Leasing”) – a company the parties jointly owned, but in which the Defendant, TZG Capital Limited (“TZG Capital”), held the controlling share – to Shanghai Yu’an Investment Group Company, Limited, a Chinese state-owned enterprise (“Shanghai Yu’an”), on December 31, 2015 for the equivalent of $18,396,794, or approximately $1.10 per share (the “Sale”).

QCH claimed that the sale agreement prohibited execution of the transaction without its prior written approval, and that the Defendants neither sought nor received QCH’s authorization to sell Leasing and did not report to QCH the $18 million sale price. QCH maintained that after carrying out the Sale, the Defendants hid all of the proceeds in a bank account that the Defendants opened for the sole purpose of concealing the sale proceeds from QCH.

QCH alleged that, following the Sale, the Defendants began a fraudulent cover-up. On January 22, 2016, less than one month after the Defendants sold Leasing at $1.10 per share, the Defendants allegedly offered to “purchase” QCH’s stake at approximately $0.77 per share (a 30% discount to the price Shanghai Yu’an had paid the Defendants), which would have allowed the Defendants to defraud QCH of over $5 million.

QCH claimed that it spent weeks attempting to negotiate better terms with the Defendants but could not convince them to pay QCH a higher price. Thereafter, according to QCH, Defendants falsely claimed that Shanghai Yu’an was an interested buyer (even though Shanghai Yu’an had already purchased Leasing months earlier). On May 13, 2016, despite explicit instructions from QCH not to sell unless a certain price was achieved, the Defendants represented that Shanghai Yu’an closed the purchase of 70% of Leasing for the equivalent of $11,276,879, on May 13, 2016 – almost 40% lower than the actual price at which Defendants had sold Leasing to Shanghai Yu’an on December 31, 2015.

QCH eventually discovered that the Sale had occurred in December 2015 (through “documents filed with the Chinese government”). QCH never sold its stake in Leasing to TZG Capital.

On December 7, 2016, QCH commenced the action by filing a complaint in which it asserted claims against TZG Capital, Hsiang I Ben Tsen (“Tsen”), and other individuals. On August 31, 2017, QCH filed a third amended complaint, in which it asserted causes of action for: (1) fraud; (2) breach of contract; (3) breach of fiduciary duty; and (4) fraudulent concealment. On October 2, 2017, the Defendants filed a motion to dismiss the first, third, and fourth causes of action.

With regard to the fraud claims, the Defendants argued that QCH failed to plead justifiable reliance, noting that QCH did not identify any act QCH had taken, or refrained from taking, in reliance on the Defendants’ statements regarding the Sale or the alleged May 2016 buy-out of the Plaintiff’s remaining shares in Leasing. The Defendants claimed that QCH was unable to allege with particularity, how its reliance on Tsen’s communications about the timing and sale price of the Leasing transaction, or the proposed buy-out transaction, actually manifested in any of QCH’s actions, or inactions.

Justice Kornreich granted the Defendants’ motion.

The Court’s Ruling

In granting dismissal of the fraud claim, the Court found that QCH failed to plead justifiable reliance with the requisite particularity:

[T]he alleged fraud consisted of the misrepresentations about the status of the Sale, which had actually occurred in December 2015 but which was represented to not have closed until May 2016. QCH does not allege it engaged in any action to its detriment in reliance on these untruths. To be sure, had QCH actually sold its stake in the Company based on the understanding that the Sale had not yet occurred, perhaps it might have a claim for being induced to sell based on a material misrepresentation about the value of the Company. However, QCH never sold its stake.

Footnote omitted.

The Court also found that QCH did not allege that it suffered any out-of-pocket damages, noting that QCH conceded at oral argument that the damages it suffered as a result of the alleged fraud was forbearance. Justice Kornreich held that such damages were “impermissibly speculative” because it was “impossible to know what” QCH “would have received” for its stake in Leasing “had it not been induced to hold onto it.” Citing, Connaughton, 29 N.Y.3d at 142-43.

Given the foregoing, the Court described Q’s claim as “a quintessential ‘holder’ claim that is not permitted under New York law,” and dismissed the claims. Citing, Bank Hapoalim B.M. v. WestLB AG, 121 A.D.3d 531, 535 (1st Dept. 2014).


While the First Department has called into question the continued viability of a holder claim, cases like Q Chiuna demonstrate the difficulty in pleading and proving such a claim. Indeed, Q Chiuna shows that pleading such a fraud-based claim, can be almost insurmountable.

Perhaps, then, the lesson of Starr and its progeny (such as, Q Chiuna) is that holder claims should be viewed as typical common law fraud cases dependent upon the facts and circumstances of the matter before the court. See Universal Inv. Advisory SA (holding that “Starr stands for the proposition that holder claims in which only hypothetical lost profit damages are pled, with no supporting factual allegations concerning actual, out-of-pocket damages, are insufficient as a matter of law,” and finding that the plaintiffs alleged “a definite, measurable, out-of-pocket loss … due to the alleged false post-offering representations.”). Viewed in that way, rather than as an ironclad rejection of such claims, the courts can examine holder claims as fraud-based causes of action dependent upon satisfaction of the elements of such a claim.

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