New York Does Not Recognize "Holder Claims"

On April 23, 2018, Justice Kornreich of the New York County Commercial Division issued a decision in Q China Holdings, Ltd. v. TZG Capital Ltd., 2018 NY Slip Op. 30779(U), dismissing a holder claim, that is, a claim for damages for being fraudulently induced not to sell securities, explaining:

QCH has not stated a claim for fraud. It is well settled that claims for both fraud and fraudulent concealment require the pleading of detrimental reliance and out-of-pocket damages. QCH does not plead either element. As discussed, the 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.

Moreover, as QCH's counsel clarified at oral argument, the only damages it allegedly suffered as a result of the fraud is that it held onto its stake in the Company when, perhaps, it might have sold its stake had it not been lied to about the Sale. This is a quintessential "holder" claim that is not permitted under New York law. Damages for being fraudulently induced not to sell securities are not permitted under New York law because, when a claim sounds in fraud, the measure of damages is governed by the out-of-pocket rule, which states that the measure of damages is indemnity for the actual pecuniary loss sustained as the direct result of the wrong. Holder claims are considered impermissibly speculative because it is impossible to know what the plaintiff would have received for its stock had it not been induced to hold onto it. Thus, where, as here, the damages sought are based on what the plaintiff might have received had it sold its stock but for the fraud, the fraud claim must be dismissed because there can be no recovery for such injury under New York law.

(Internal quotations and citations omitted).

Commercial litigation frequently involves fraud-based claims. This decision illustrates a rule created by the New York courts to limit fraud claim relating to securities. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have a question regarding a fraud-based claim.