Two recent decisions of the New York Appellate Division, First Department, address interesting principles concerning damages recoverable for fraud and who has the right to sue for underlying fraudulent conduct:  SureFire Dividend Capture, LP v Industrial & Commercial Bank of China Fin. Servs. LLC, 2023 NY Slip Op 02841(1st Dep’t Decided May 25, 2023)(addressing fraud standing) and NMR e-Tailing LLC v Oak Inv. Partners, 2023 NY Slip Op 02830 (1st Dep’t Decided May 25, 2023)(pecuniary damages).

Pecuniary Damages

As I have chronicled, the type of damages recoverable in an action for fraud are known as “pecuniary damages.”  The New York Court of Appeals in Connaughton v Chipotle Mexican Grill, Inc., 29 NY3d 137, 142 (2017) nicely summarized the law as follows:

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 speculative” (Dress Shirt Sales v. Hotel Martinique Assocs., 12 N.Y.2d 339, 344 [1963] ).

Fraud Standing

The factual scenario raising fraud standing issues—that is, who can sue to recover such pecuniary damages—is as follows:  A party invests in a certain venture or makes a loan of some sort and receives a note back from the borrower and then sells, transfers and/or assigns the rights from those contractually-based transactions to another party.  Can the party who acquires those rights then seek remedies for fraud claims related to or arising from the contractually-assigned transactions?  That is an issue of standing to sue.

As the Court of Appeals explained in Commonwealth of Pennsylvania Pub. School Employees’ Retirement Sys. v Morgan Stanley & Co., Inc., 25 NY3d 543, 550 (2015)(certain citations omitted):

To be sure, fraud claims are freely assignable in New York (see Banque Arabe, 57 F.3d at 151–153; Glen Banks, New York Contract Law § 15:4 [28 West’s N.Y. Prac. Series]; see also General Obligations Law § 13–101). It has long been held, however, that the right to assert a fraud claim related to a contract or note does not automatically transfer with the respective contract or note … . Thus, where an assignment of fraud or other tort claims is intended in conjunction with the conveyance of a contract or note, there must be some language—although no specific words are required—that evinces that intent and effectuates the transfer of such rights … . Without a valid assignment, “only the … assignor may rescind or sue for damages for fraud and deceit” because “the representations were made to it and it alone had the right to rely upon them” … .

As the Court recognized in this Morgan Stanley decision, the law provides different rights and remedies for claims based on contractual transactions and “tort” based claims.  Tort claims are a set of judicially-created rights based upon principles of public policy and justice, rather than an agreement made between two parties to a contract.  Since the rights arising from these contexts are derived from different sources of legal principles, they have separate requirements, consequences and remedies.

The assignee of the contractual rights can of course enforce the underlying contractual obligations assigned, but if the assignor was defrauded into entering into the assigned contract in the first instance, the remedies for such fraud do not automatically or necessarily follow with the assignment to the assignee.  This sets up an interesting state of affairs.  Two parties could potentially have two different set of rights stemming from the same investment or note:  On the one hand, the assignee who acquired the contract in question may pursue any available claims for breach of contract. On the other hand, the original party to the contract could potentially sue the counter-party to that contract for any loss sustained from any fraudulent conduct that induced the contract.

So, let’s say the assignment covered some sort of investment vehicle. The amount of the original investment was $10 million.  The investor/assignor then sells the rights under the investment to the assignee for $5 million, and does not including any language in the assignment evincing any intention to assign the tort rights, including claims of fraud, relating to the investment.  The underlying investment then goes bust.  Both the assignor and assignee have been aggrieved.

If the failed investment was due to a breach of any contractually-based obligations in the investment transactional agreements, the assignee can sue to recover damages flowing from such breach. In addition, the assignor could potentially seek its “pecuniary damages” from any fraud inducing the original investment—the difference between the consideration it received from the assignee ($5 million) and the total amount of its investment ($10 million).

SureFire Decision

In the recent First Department decision in SureFire, the New York County Commercial Division and the First Department both found that the underlying assignment did not include the fraud-based rights or claims.  The transfer document only recited the right to recover the remaining balance due under the contract, thereby omitting any fraud claims:

Defendant met its burden of establishing that plaintiff lacked standing to bring its fraud-based claims on behalf of nonparties Aalii Fund, LP and Alpha Capital Partners, LC (together, the “A Funds”) (see e.g. DLJ Mtge. Capital v Mahadeo, 166 AD3d 512, 513 [1st Dept 2018]). While fraud claims in New York are freely assignable, “the right to assert a fraud claim related to a contract or note does not automatically transfer with the respective contract or note” (Commonwealth of Pennsylvania Pub. Sch. Employees’ Retirement Sys. v Morgan Stanley & Co., Inc., 25 NY3d 543, 550 [2015]). Thus, where a plaintiff alleges fraud-based claims as a successor-in-interest under New York law, there must be “some language — although no specific words are required — that evinces that intent and effectuates the transfer of such rights” (id. at 550).

Here, the one-paragraph subscription agreement provided only for the transfer of the “full balance of [A Funds’] interest in Broad Reach Capital LP to Sure Fire Dividend Capture SPV5 . . . for the purposes of facilitating an in-kind subscription to the Fund in the amount of its 2/28/19 balance.” This plain language was unambiguous and did not evince an intent to assign the fraud-based claims (id.; see also Dexia SA/NV v Morgan Stanley, 135 AD3d 497, 497 [1st Dept 2016], lv denied 28 NY3d 903 [2016]). Rather, the transfer of the “amount of its 2/28/19” balance plainly refers to the transfer of the amount invested in the fund, with nothing more. Nor may plaintiff insert extra-contractual allegations of intent into an agreement that is unambiguous on its face (see Ark Bryant Park Corp. v Bryant Park Restoration Corp., 285 AD2d 143, 150 [1st Dept 2001]).

In the Dexia case cited above, the Court also explained that not only did the assignee fail to obtain the fraud rights, but the original investor/assignor, who sued as well, could not recover any pecuniary damages for the fraud because it obtained the entire amount of its investment in consideration of the assignment:  “Because [assignor] FSAM received from the [assignee] Dexia plaintiffs the same amount it originally paid for the securities, FSAM cannot establish damages (see Lama Holding Co. v Smith Barney, 88 NY2d [*2]413, 421 [1996]; see also Small v Lorillard Tobacco Co., 94 NY2d 43, 57 [1999]).”

NMR Decision on Pecuniary Damages

In NMR, the First Department affirmed the decision of the New York County Commercial Division awarding the entire amount of an investment that was lost due to the defendant’s fraud, thereby representing the required “pecuniary” damages resulting from the fraud:

Damages resulting from fraudulent inducement are meant to indemnify a plaintiff “for the actual pecuniary loss sustained as the direct result of the wrong” (Lama Holding Co. v Smith Barney, 88 NY2d 413, 421 [1996][internal quotation marks omitted]). “[D]amages are calculated to compensate plaintiffs for what they lost because of the fraud, not for what they might have gained in the absence of fraud” (Connaughton v Chipotle Mexican Grill, Inc., 135 AD3d 535, 538 [1st Dept 2016] citing Lama Holding Co., 88 NY2d at 421). Such damages are limited to an amount necessary to restore the plaintiff to the position it occupied before the commission of the fraud (see Hotaling v Leach & Co., 247 NY 84 [1928]; Alpert v Shea Gould Climenko & Casey, 160 AD2d 67, 71-72 [1st Dept 1990]).

Here, plaintiff NMR E-Tailing LLC (NMR) asserts that but for Ahmed’s false representations, it would have never agreed to participate in the Series B offering for Choxi.com, Ahmed coerced it into making the Series B investment, all while intending to convert the majority of the funds, and that it lost its entire investment when Ahmed’s fraud was unearthed, causing the company to file for bankruptcy. These allegations are deemed admitted by virtue of the default (see Woodson v Mendon Leasing Corp., 100 NY2d 62, 70 [2003]). NMR’s entire investment, and the loss thereof, was a result of the established fraudulent scheme (see Whittemore v Yeo, 117 AD3d 544, 545 [1st Dept 2014]).


As I have often reflected, the civil tort of fraud never ceases to raise fascinating and stimulating legal issues. As a creature of tort law, the cause of action for fraud presents a host of issues for the courts to consider and decide.  As the above shows, what kind of damages to award, and who has the right to seek and recover those damages are part of the intriguing mix.