Lie Now, Pay Less: The Hidden Leniency in New York Fraud Damages
By John J. Thompson, Partner
Fraud is one of the few civil wrongs that can also land a person in prison. Yet in a New York civil lawsuit, the money a fraud victim can recover is often less than what an ordinary breach-of-contract plaintiff would get, even though a contract can be breached in complete good faith. New York limits fraud damages to the victim's actual out-of-pocket loss. It sets a very high bar for punitive damages. And it provides no general right to recover attorneys' fees. Fraud claims still carry real advantages, but most of them lie outside the damages calculation. Getting full value out of a fraud case requires a detailed understanding of this nuance, and often the most critical decisions are made at the very outset of the case.
The Default Rule: You Get Back What You Lost, Not What You Were Promised
A deliberate lie used to take someone's money can be prosecuted as larceny or a scheme to defraud under the New York Penal Law. It is widely treated as one of the more morally blameworthy things one party can do to another. You might expect civil law to match that seriousness. It doesn't.
Breaking a promise in a contract, by contrast, requires no bad intent at all. A company that misses a delivery date because its supplier went bankrupt has breached its contract just as surely as one that walked away out of spite. Contract law usually doesn't care why.
The difference shows up in how damages are measured.
Breach of contract uses expectation damages, often called "benefit of the bargain." The goal is to put the plaintiff where they would have been if the promise had been kept.
Fraud in New York uses the out-of-pocket rule. The goal is only to restore the plaintiff to where they stood before the transaction. The Court of Appeals confirmed in Lama Holding Co. v. Smith Barney (1996) that fraud damages compensate for what the plaintiff actually lost, not for what the plaintiff would have gained if the lie had been true. Lost profits the deal would have produced are generally off the table.
An example. A buyer pays $1 million for a business after the seller falsely claims it is worth $1.5 million. In reality the business is worth $600,000.
As a fraud claim, the buyer recovers the difference between what they paid and what they got: $400,000.
As a breach of warranty claim, if the purchase agreement guaranteed the value, the buyer recovers the difference between what was promised and what was delivered: $900,000.
The claim that requires proof of intentional deception is worth less than half as much. Lawyers use the word scienter for that intent, meaning knowledge that a statement was false, or reckless disregard of whether it was true. Proving scienter is hard. The law makes the plaintiff do it and then pays them less for the effort.
"Amplifiers" Exist, But the Bar Is Very High
New York law does provide a few tools that can increase a fraud recovery beyond out-of-pocket loss. But the standards for these are extremely high. In practice, however, most plaintiffs never reach them.
Punitive damages. Punitive damages are meant to punish and deter, not to compensate. Proving that the defendant lied on purpose is not enough. The Court of Appeals requires conduct showing a high degree of moral turpitude, a level of dishonesty so wanton that it suggests a criminal indifference to civil obligations. When the fraud arises from a contract relationship, courts often add a further requirement: the misconduct must be part of a pattern aimed at the public, not just at the plaintiff. In Ross v. Louise Wise Services (2007), the defendant admitted it had intentionally misrepresented material facts, and the Court of Appeals still held that punitive damages were unavailable. For the typical one-on-one business fraud, punitive damages are a long shot.
Attorneys' fees. New York follows the American Rule: each side pays its own lawyers unless a contract or statute says otherwise. There is no general statute shifting fees in common-law fraud cases. A victim who spends $150,000 in legal fees to recover $400,000 nets far less than they lost.
Prejudgment interest. One amplifier is automatic and underappreciated. Under CPLR 5001, interest is mandatory where fraud deprived the plaintiff of property, running from the date of the loss at New York's 9% statutory rate. In a case that takes years to resolve, that adds up. It is still interest, though, not punishment.
The Legislature Has Built Stronger Amplifiers Elsewhere
The weak amplifiers for fraud stand out against what the Legislature has done in other areas, sometimes where the defendant did nothing intentional at all. Consider these examples:
Wage-and-hour claims. Under Labor Law § 198, an employee who proves underpayment recovers the unpaid wages, mandatory attorneys' fees, prejudgment interest, and liquidated damages of 100% of the unpaid amount. The employer can avoid the liquidated damages only by proving it had a good-faith basis for believing it was complying with the law. Certain willful violations raise the liquidated damages to 300%. Separate statutory damages apply to paperwork failures, such as not providing the required wage notices.
Timber trespass. Under RPAPL § 861, a person who cuts trees on a neighbor's land without permission can owe treble damages.
Attorney deceit. Judiciary Law § 487 imposes treble damages on an attorney who engages in deceit or collusion. The Legislature has decided that deceit deserves triple damages, but only when a lawyer commits it.
The closest general-purpose counterpart for fraud is General Business Law § 349, which covers deceptive practices aimed at consumers. Its treble-damages provision is capped at $1,000, and it doesn't reach most business-to-business disputes.
There is a reasonable policy explanation for this pattern. Wage claims tend to be small and brought by people with limited resources, so a multiplier is often what makes the claim viable. Business fraud claims are usually large enough to litigate on their own. Still, the result is an odd hierarchy. An employer's good-faith payroll mistake it cannot prove can double its liability, while a deliberate lie that costs a business partner $400,000 usually costs the liar $400,000.
Apart from Damages, Fraud Claims Do Have Their Strengths
The weak damages rule doesn't make fraud claims weak. The real value of a fraud claim usually lies outside the damages calculation.
It gets past contract protections. Limitation-of-liability clauses, damages caps, and exculpatory provisions generally do not protect a party against its own fraud. A defendant cannot contract its way out of liability for lying.
It reaches individuals. Corporate officers and employees who personally participate in a fraud can be held personally liable, even if they signed nothing in their own name. That matters when the corporate defendant is an empty shell.
It survives bankruptcy. Debts arising from fraud are generally not dischargeable under the Bankruptcy Code (11 U.S.C. § 523(a)(2)). A defendant cannot simply file for bankruptcy and walk away from a fraud judgment.
It can freeze assets early. Fraud is among the grounds for an order of attachment under CPLR 6201(3), which lets a plaintiff restrain a defendant's assets before judgment in appropriate cases.
It allows more time to sue. Fraud claims must be brought within six years of the fraud or two years from when it was, or reasonably could have been, discovered, whichever is later (CPLR 213(8)).
It can undo the deal. A fraud victim may be able to seek rescission, which unwinds the transaction entirely. That can be worth more than damages when the deal was a bad one to begin with.
Fraud claims also carry real hurdles. They must be pleaded with particularity under CPLR 3016(b), and courts routinely dismiss fraud claims that simply restate a breach-of-contract claim. A well-drafted fraud claim has to identify a misrepresentation or harm separate from the contract promise itself.
Why Fraud Victims Need Experienced Counsel
Because the fraud damages rule is so limited, the claims asserted alongside fraud often decide what a case is worth. Depending on the facts, experienced counsel will consider claims such as:
Breach of fiduciary duty. Where the wrongdoer was a partner, agent, trustee, or employee (someone legally obligated to act in the victim's interest), remedies can include disgorgement, which forces the defendant to give up profits it made from the breach. Under New York's faithless servant doctrine, a disloyal employee or agent can also be required to forfeit compensation earned during the period of disloyalty.
Civil RICO. The federal Racketeer Influenced and Corrupt Organizations Act allows treble damages and attorneys' fees for injuries caused by a "pattern" of racketeering activity, which can include repeated mail or wire fraud. RICO claims face heavy judicial scrutiny and demanding pleading requirements, and securities fraud generally cannot serve as the basis. In the right case, though, they can triple the recovery.
Breach of contract and warranty. Where a contract exists, pleading breach alongside fraud may unlock expectation damages that fraud alone cannot, as the example above shows.
Aiding and abetting fraud. This claim can reach third parties, such as banks, professionals, or insiders, who knowingly helped carry out the scheme. They often have deeper pockets than the primary wrongdoer.
Fraudulent conveyance (voidable transaction) claims. These let a creditor unwind transfers a defendant made to hide assets from collection.
Constructive trust and unjust enrichment. These can trace specific property or funds into the hands of the wrongdoer or others who received them.
Choosing the right combination of claims, and pleading them to survive a motion to dismiss, is often the difference between recovering a fraction of a loss and recovering all of it, or more.
Frequently Asked Questions
Can I recover punitive damages for fraud in New York? Possibly, but rarely. You must show more than intentional deception: conduct so egregious that it reflects a high degree of moral turpitude. In disputes arising from a contract, courts often also require that the conduct be directed at the public.
Will the defendant pay my attorneys' fees if I win a fraud case? Generally not. New York follows the American Rule, so each side pays its own fees unless a contract or statute provides otherwise. Some related claims, such as civil RICO, do allow fee recovery.
Why would I bring a fraud claim if contract damages are higher? Because fraud claims offer things contract claims don't. They can override liability caps, reach individual wrongdoers, survive the defendant's bankruptcy, and support pre-judgment asset freezes. In many cases the best approach is to bring both.
Our Experience
Thompson & Skrabanek litigates fraud and related claims on both sides: we represent victims seeking to recover their losses and defendants facing fraud allegations. Our work has included fraudulent inducement claims, breach of fiduciary duty, fraudulent conveyance and asset-tracing actions, and post-judgment enforcement against defendants who try to move assets out of reach. Seeing these cases from both sides informs how we approach every case.
If you believe you have been defrauded, or you are facing fraud allegations, contact us to discuss your situation.
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