Fraudulent Inducement Counterclaim Dismissed for Failure to Allege Out-of-Pocket Damages

On April 12, 2019, Justice Ostrager of the New York County Commercial Division issued a decision in Madeof, LLC v Bronson, 2019 NY Slip Op. 31058(U), dismissing a fraudulent inducement claim for failure to allege out-of-pocket damages, explaining:

In Count IV Fraudulent Inducement, Bronson seeks damages for having divested herself from Bomganic via the Termination Agreement. Specifically, Bronson claims she was fraudulently induced by affirmative misrepresentations and omissions by Bekker and Bonifacino intended to induce Bronson to give up her rights to Bomganic and that she reasonably relied on those misrepresentations and omissions in deciding to sign the Termination Agreement. Although the pleaded damages are circumscribed, the claim has the potential for broad impact, as a finding of fraudulent inducement would invalidate the entire Termination Agreement, including the Release critical to the analysis of Count III Breach of Contract.

To state a legally cognizable claim of fraudulent inducement based on a misrepresentation or omission, the complaint or counterclaim must allege that Bonifacino and/or Bekker intentionally made a material misrepresentation of fact in order to defraud or mislead Bronson, and that Bronson reasonably relied on the misrepresentation and suffered damages as a result.

. . . Bronson has failed to allege compensable damages, which is also an essential element of the counterclaim for fraudulent inducement. As the Court of Appeals recently explained in Connaughton: 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 that rule, damages 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. There can be no recovery of profits which would have been realized in the absence of fraud. Moreover, this Court has consistently refused to allow damages for fraud based on the loss of a contractual bargain, the extent, and indeed the very existence of which is completely underminable and speculative.

The only damages alleged by Bronson are those related to her decision to divest from Bornganic pursuant to the Termination Agreement. Those damages are the quintessential lost opportunity to profit from Bornganic were the company able to proceed, and not a recoverable out-of-pocket loss. Such damages are not available here, just as the Connaughton Court found no compensable damages based on plaintiffs claim that he was fraudulently induced to work with defendant and abandon efforts to solicit others to purchase his restaurant concept on potentially better terms. For these reasons, Bronson cannot pursue Counterclaim IV that she was fraudulently induced to enter into the Termination Agreement.

(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.