Fraud Claims Don't Get Past Go: Alleged Lost Profits Not Recoverable, No Justifiable Reliance And Alleged Misrepresentations Not Material

• Published date: 27 May 2025
• Law Firm: Meyer Suozzi English & Klein
• Author: Kevin Schlosser

A new decision of the Appellate Division, First Department (Burden v Pamplona Capital Mgt. LLP, 2025 NY Slip Op 02716 (1^st Dep't Decided May 6, 2025) affirmed the dismissal of an amended complaint, agreeing with the New York County Commercial Division (Schecter, J.) that the fraudulent inducement claims of the sophisticated plaintiffs did not stand a chance.

The transaction at issue was a bit of a twist from the usual fraud scenario. Typically, it is the buyer in an acquisition transaction who claims the seller somehow misrepresented material facts or information that thereby induced the buyer to acquire the assets, or some other interest, in the selling entity. In Burden, however, plaintiffs sold a controlling interest in their own company, called Logicworks, an internet service provider. At the heart of the alleged fraud was plaintiffs' claim that the acquiring defendants failed to reveal or otherwise misrepresented "that defendant entities were merely a 'front for powerful Russian oligarchs.'"

More specifically, plaintiffs asserted "that Logicworks' value was immediately harmed upon defendants' acquisition because the Russian oligarchs' near-complete ownership and full control of defendants subjected Logicworks to various risks" that allegedly reduced its value.

On defendants' motion to dismiss the amended complaint, Justice Schecter of the Commercial Division seemed to take of a page out of Supreme Court Justice Potter Stewart's book, in effect, observing during oral argument that she knows what a fraud claim looks like and this one simply did not amount to cognizable fraud. See the transcript of the decision.

As shown by both Justice Schecter and the First Department in Burden, claiming "lost profits" on a fraud claim is nearly always the death knell of the claim. When courts hear that the plaintiff is claiming any sort of lost profits arising from fraud, it appears all kinds of alarms go off.

Measure of Damages for Fraud

Courts often maintain that recoverable damages for fraud are limited to the pecuniary loss or out-of-pocket damages directly resulting from the alleged fraudulent misrepresentations. I have explained these principles in numerous posts. See,e.g., New York's High Court Has Little Appetite for Fraud Claim Against Chipotle Due to Lack of Pecuniary Damages.

As concisely stated by the New York Court of Appeals in Connaughton v Chipotle Mexican Grill, Inc., 29 NY3d 27 (2017):

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 N.Y.2d at 421, quoting Reno v. Bull, 226 N.Y. 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 N.Y. 132 [1923], AFA Protective Sys. v. American Tel. & Tel. Co., 57 N.Y.2d 912 [1982], and Cayuga Harvester, Inc. v. Allis-Chalmers Corp., 95 A.D.2d 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...