Only Out-of-Pocket Damages Allowed in Fraud Action (Re: a Real Estate Purchase Agreement)

The Third Department affirmed a judgment in favor of the plaintiffs stemming in large part from the fraudulent representation (re: a property information sheet) that a septic system, which failed, was “new.” The court noted the out-of-pocket rule for damages based upon fraud (lost profits/rents, etc. not recoverable):

[D]efendants’ realtor prepared a property information sheet — to be given to prospective buyers — bearing the notation, “Septic system totally new — le[a]ch field totally replaced — new 5000 gallon holding tank,” as well as the general qualification that “all information [was] deemed reliable but not guaranteed.” …[P]laintiffs … entered into a purchase and sale contract for the property. The contract, which reflected a purchase price of $545,000 and indicated that the buildings on the premises would be sold “as is,” also contained a waivable septic system contingency. Plaintiffs ultimately did not avail themselves of this contingency–a decision purportedly based, in part, upon plaintiffs’ belief that the property contained a new septic system. * * *

…[T]he case law makes clear that where, as here, a cause of action for fraud has been asserted, “[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. . . . 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. Under the out-of-pocket rule, there can be no recovery of profits which would have been realized in the absence of fraud” … . Revell v Guido, 2015 NY Slip Op 00411, 3rd Dept 1-15-15