Thursday, May 4, 2017

ALLEGING DAMAGES IN FRAUD CASES



Connaughton v Chipotle Mexican Grill, Inc. 2017 NY Slip Op 03445 Decided on May 2, 2017 Court of Appeals:

To allege a cause of action based on fraud, plaintiff must assert "a representation 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" (Lama Holding Co. v Smith Barney Inc., 88 NY2d 413, 421 [1996] [internal citation omitted]). Critically, "[a] false representation does not, without more, give rise to a right of action, either at law or in equity, in favor of the person to whom it is addressed. To give rise, under any circumstances, to a cause of action, either in law or equity, reliance on the false representation must result in injury . . . . If the fraud causes no loss, then the plaintiff has suffered no damages" (Sager v Friedman, 270 NY 472, 480-481 [1936]).

In New York, as in multiple other states, "'[t]he 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" (Lama Holding, 88 NY2d at 421, quoting Reno v Bull, 226 NY 546, 553 [1919]). Under that rule, "[d]amages 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 . . . . [T]here can be no recovery of profits which would have been realized in the absence of fraud" (id. at 421, citing Foster v Di Paolo, 236 NY 132 [1923], AFA Protective Sys. v American Tel. & Tel. Co., 57 NY2d 912 [1982], and Cayuga Harvester, Inc. v Allis-Chalmers Corp., 95 AD2d 5 [4th Dept 1983]). Moreover, this 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" (Dress Shirt Sales v Hotel Martinique Assocs., 12 NY2d 339, 344 [1963]).

Here, plaintiff's pleading is fatally deficient because he did not assert compensable [*5]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 (see Lama Holding, 88 NY2d at 422). As this Court has repeatedly stated, such damage is "disallowed as too speculative a recovery" (Dress Shirt Sales, 12 NY2d at 344; see also Lama Holding, 88 NY2d at 422).

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.

Nor is plaintiff entitled to nominal damages under this Court's holding in Kronos, Inc. v AVX Corp. (81 NY2d 90, 95 [1993]). In that case, the Court explained that while nominal damages are typically available in a contracts case to vindicate a party's contractual rights, nominal damages are only available in tort actions to "protect an important technical right" (id. at 96, quoting Note, Damages Recoverable in an Action for Inducing Breach of Contract, 30 Colum L Rev 232, 238 [1930] [internal quotation marks omitted]). Nominal damages are not available when actual harm is an element of the tort (Restatement [Second] of Torts § 907; accord 16 NY Practice Series, NY Law of Torts §§ 1:74, 21:2 [2016]). Conversely, nominal damages may be available in an intentional tort case where the plaintiff need not allege harm to maintain an action against defendant (see Kronos, 81 NY2d at 95 [explaining that nominal damages are available for trespass, which does not require a showing of harm]). Since actual harm is an element of fraudulent inducement (see Eurycleia Partners, LP v Seward & Kissel, LLP, 12 NY3d 553, 559 [2009]), and there is no compelling reason to carve out an exception for such cause of action, as a general matter or specifically in this case, plaintiff is not entitled to nominal damages.[FN2]

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Footnotes

Footnote 1: Plaintiff also alleged a cause of action for unjust enrichment against Chipotle for its failure to compensate him for his restaurant concept. Plaintiff does not challenge the dismissal of this cause of action on appeal to our Court.

Footnote 2: Based on our conclusion that the cause of action was properly dismissed because plaintiff failed to plead compensable damages, we have no reason to address defendants' alternative argument that plaintiff's at-will status bars his action for fraudulent inducement against his former employer."


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