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First Department Affirms Dismissal of Fraud Claim Because Damages Alleged Were Speculative

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  • Posted on: Jun 28 2019

Since the early 20th century, a plaintiff alleging fraud in New York can recover only the actual pecuniary loss sustained as a result of the misrepresentation or omission, i.e., the plaintiff’s out-of-pocket damages. Reno v. Bull, 226 N.Y. 546 (1919); see also Continental Cas. Co. v. PricewaterhouseCoopers, LLP, 15 N.Y.3d 264 (2010). The damages recoverable under the out-of-pocket rule are intended to compensate plaintiffs for what they lost because of the fraud, not for what they might have gained. See Lama Holding v. Smith Barney, 88 N.Y.2d 413, 421 (1996); Clearview Corp. v. Gherardi, 88 A.D.2d 461, 468 (2d Dept. 1982) (“the defrauded party is entitled solely to recovery of the sum necessary for restoration to the position occupied before the commission of the fraud”) (citations omitted). The rule not only prohibits the recovery of lost profits or lost business or investment opportunities (see Foster v. Di Paolo, 236 N.Y. 132, 134 (1923)), but also pain and suffering damages that are often sought in other tort actions. Williams v. Mann, 143 A.D.3d 813 (2d Dep’t 2016).

Notably, however, “out of pocket considerations do not … prevent recovery of other consequential damages proximately caused by reliance upon the misrepresentation.” Clearview, 88 A.D.2d at 468 (citations omitted). Therefore, a plaintiff may recover “expenditures which would not otherwise have been incurred” had s/he not relied on the false information. Id.

When the misrepresentation or omission is willful, wanton, or malicious, a plaintiff may be entitled to punitive damages. Chase Manhattan v. Perla, 65 A.D.2d 207, 211 (4th Dept. 1978). However, to recover such damages, the plaintiff must demonstrate that the purpose of seeking punitive damages is to “not only … punish the defendant but to deter him, as well as others who might otherwise be so prompted, from indulging in similar conduct in the future.” Walker v. Sheldon, 10 N.Y.2d 401,404 (1961).

On June 27, 2019, the Appellate Division, First Department, affirmed the dismissal of fraud-based claims because the plaintiff failed to allege an “actual pecuniary loss” resulting from the alleged fraud. Sapienza v. Becker & Poliakoff, 2019 N.Y. Slip Op. 05218 (1st Dept. June 27, 2019). A copy of the decision can be found here.

Background

[Ed. Note: The facts discussed below are based upon the papers and pleadings before the motion court.]

Sapienza involved allegations of, among other things, legal malpractice and fraud. The case arose from the Defendant law firm’s representation of Total Office Planning Services, Inc. (“TOPS”) in connection with the wind down of the business by its two equal shareholders, Francis Sapienza (“Sapienza”) and James Fenimore (“Fenimore”). In addition to TOPS, Sapienza and Fenimore were the sole and equal members of F&J Realty Enterprises LLC (“F&J”), a realty holding company that acquired an office cooperative unit in Manhattan.

In or about 2014, Sapienza’s health began to deteriorate. According to the amended complaint, as Sapienza’s health worsened in 2014, Fenimore and his son, James Fenimore Jr., formed Office Solutions Group LLC (“OSG”) and Office Solutions Installation LLC (“OSI”) with the assistance of the Defendant law firm, Becker & Poliakoff (“B&P”). Plaintiff maintained that shortly after their formation, OSI and OSO generated approximately $4.4 million dollars in revenues; by the end of 2015, that number increased to $22 million dollars. Plaintiff alleged that the revenues were generated from customers who were diverted to OSI and OSO from TOPS.

Relevant to the First Department’s decision, Plaintiff alleged that B&P failed to disclose the details of the work that it performed for Fenimore prior to and/or after Sapienza retained B&P, including, but not limited to, the formation of OSI and OSG. Plaintiff maintained that the omission was a material and ongoing fraud with the intent of inducing Sapienza to retain B&P and sign a letter of intent that defined the relationship between Fenimore and Sapienza in advance of a formal Plan of Dissolution in which TOPS’s assets would be accounted for and distributed. Plaintiff further maintained that B&P’s alleged fraud provided Fenimore with an opportunity to direct clients to OSI and OSG and allowed him the ability to divide TOPS’s and F&J’s assets for his benefit. Finally, Plaintiff alleged that as a consequence of the alleged fraud, Plaintiff sustained millions of dollars in lost business opportunities and surreptitiously transferred client assets.

Defendants moved to dismiss the amended complaint, which the motion court granted. Plaintiff appealed.

The First Department’s Decision

In a short decision, the First Department held that the motion court properly dismissed the amended complaint because, among other reasons, Plaintiff failed to plead out-of-pocket damages. In that regard, the Court found that “[t]he alleged ‘lost opportunity’ damages [were] too speculative to support a recovery, since a plaintiff cannot be compensated under a fraud cause of action ‘for what [he] might have gained.’” Slip Op. at *1, quoting Connaughton v. Chipotle Mexican Grill, Inc., 29 N.Y.3d 137, 142 (2017) (internal quotation marks omitted).

Takeaway

In Connaughton, relied upon by the Sapienza court, the Court of Appeals explained that under the out-of-pocket damages rule, damages should compensate the plaintiff “for what [he/she] lost because of the fraud,” not “what [he/she] might have gained.” 29 N.Y.3d at 142. Consequently, “there can be no recovery of profits which would have been realized in the absence of fraud.” Id. (citations omitted). The Court underscored this point by noting that it had “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.” Id. at 142-143, quoting Dress Shirt Sales v. Hotel Martinique Assoc., 12 N.Y.2d 339, 344 (1963).

In following Connaughton, the Sapienza Court made it clear that a plaintiff alleging fraud cannot recover lost opportunity damages. Such damages are too speculative to be quantified. Thus, the plaintiff in Sapienza could only recover for what she lost because of the alleged fraud, not for what she might have gained (i.e., lost opportunity damages).

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