LAMA HOLDING COMPANY v. SMITH BARNEY INC, N.Y. App. Div., Judgment, Law, casemine.com

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Factual and Procedural Background

The action arose from the 1987 merger of Smith Barney Inc. into Primerica Inc. At that time plaintiff Lama Holding Company was the record owner of 24.9% of Smith Barney's outstanding shares. A shareholders' agreement with defendant Smith Barney prevented Lama from selling the shares acquired in 1982 for four years. Lama was owned by the other plaintiffs, entities formed solely to acquire the shares in a manner intended to take advantage of the General Utilities Doctrine (a tax-related strategy repealed by the Tax Reform Act of 1986) to permit an eventual sale without incurring capital gains tax.

The complaint alleged that defendants prevented Lama from exploiting the General Utilities Doctrine through fraudulent and misleading conduct that thwarted plaintiffs' attempts to sell the stock to third parties. Plaintiffs referred to a May 19, 1987 meeting at which individual defendants obtained a consent to the sale of the Smith Barney shares to Primerica as part of the merger; plaintiffs alleged that the consent was fraudulently and improperly obtained because Lama, as a minority shareholder, was not informed that it could have blocked the merger.

The trial court granted defendants' motion to dismiss with prejudice all causes of action except those for breach of fiduciary obligations and breach of contract. On appeal, the Appellate Division states that it "now grant[s] the motion in its entirety."

Legal Issues Presented

Whether plaintiffs may recover damages for fraud or negligent misrepresentation measured by the greater profit they claim they would have made but for the alleged misrepresentations, rather than indemnity for actual pecuniary loss.
Whether plaintiffs' claims for tortious interference with contract and prospective contract survive dismissal where (a) there was no contract interfered with and (b) the prospect of a contract was alleged to be speculative.
Whether plaintiffs may recover additional damages for lost additional profit on claims for breach of fiduciary obligations and breach of contract based on the shareholders' agreement, given that plaintiffs actually realized substantial profits from the sale of the Smith Barney stock.

Arguments of the Parties

The opinion does not contain a detailed account of the parties' legal arguments.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Kensington Publ. Corp. v Kable News Co., 100 A.D.2d 802	Establishes that damages for fraud or negligent misrepresentation are limited to indemnity for actual pecuniary loss and do not include hypothetical greater profit that could have been made but for the false representations.	The court applied this principle to bar plaintiffs from recovering the greater profit they alleged they would have made; plaintiffs' recovery for fraud or negligent misrepresentation was therefore limited and insufficient to support their claimed damages.

Court's Reasoning and Analysis

The court began from the factual allegations: plaintiffs formed entities to hold Smith Barney shares and sought to use a tax doctrine to avoid capital gains, but allege defendants' conduct prevented that plan by obtaining consent to the merger without informing Lama that it could have blocked the merger.

On the fraud and negligent misrepresentation claims, the court relied on the rule (citing Kensington Publ. Corp. v Kable News Co., 100 A.D.2d 802) that damages under those theories are confined to indemnity for actual pecuniary loss and do not encompass the larger speculative profit plaintiffs claim they might have achieved. Because plaintiffs actually realized "huge" profits on their investment, the court concluded they could not recover the additional hypothetical profit lost due to the alleged misrepresentations.

The court rejected the tortious interference with contract and prospective contract claims on the ground that there was no contract that had been interfered with and that any prospective contract was too speculative to support such a claim.

Finally, even assuming the truth of plaintiffs' remaining allegations (breach of fiduciary obligation and breach of contract based on the shareholders' agreement), the court found that plaintiffs' receipt of "enormous profits" from the sale of the stock rendered any claim for further damages based on additional hypothetical profit entirely speculative.

Holding and Implications

Holding: The Appellate Division granted the defendant's motion in its entirety, thereby dismissing all causes of action asserted by plaintiffs.

Implications: The direct effect is dismissal of plaintiffs' fraud, negligent misrepresentation, tortious interference, breach of fiduciary duty, and breach of contract claims. The court applied existing precedent to limit recovery for fraud/negligent misrepresentation to actual pecuniary loss and rejected speculative claims for additional hypothetical profit; the opinion does not purport to announce a new rule of law beyond its application of cited authority.

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LAMA HOLDING COMPANY et al., Appellants-Respondents, v. SMITH BARNEY INC. et al., Respondents-Appellants.

The action arises from the merger of Smith Barney Inc. into Primerica Inc. in 1987. At the time, plaintiff Lama Holding Company was the record owner of 24.9% of the outstanding shares of Smith Barney. A shareholders' agreement with defendant Smith Barney prevented Lama from selling the shares acquired in 1982 for four years. Lama was owned by the other plaintiffs, who were formed solely to acquire the shares in a manner meant to take advantage of tax laws, known as the General Utilities Doctrine and repealed by the Tax Reform Act of 1986, that would allow for an eventual sale of the stock without incurring capital gains. The complaint alleges that defendants prevented Lama from taking advantage of the General Utilities Doctrine through fraudulent and misleading conduct that thwarted plaintiffs' efforts to sell the stock to third parties. Specifically, plaintiffs refer to a May 19, 1987 meeting wherein the individual defendants obtained a consent to the sale of the Smith Barney shares to Primerica as part of the merger. That consent, it is alleged, was fraudulently and improperly obtained since withheld from Lama, as minority shareholder, was the fact that Lama could have blocked the merger. The trial court granted the motion to dismiss with prejudice all causes of action except those for breach of fiduciary obligations and breach of contract. We now grant the motion in its entirety.

Plaintiffs' investors, who made a huge profit on their investment, may not recover damages in fraud or negligent misrepresentation since damages under those theories are limited to indemnity for actual pecuniary loss, and do not include the greater profit that could have been made but for the false representations (Kensington Publ. Corp. v Kable News Co., 100 A.D.2d 802). The claims for tortious interference with contract and prospective contract must fail since there was no contract interfered with and the prospect of one was too speculative. Finally, assuming the truth of plaintiffs' allegations relating to the claims for breach of fiduciary obligation and breach of contract based on the shareholders' agreement, not dismissed by the IAS Court, the fact remains that plaintiffs received enormous profits from their sale of the Smith Barney stock, and the claim for further damages in that more profit could have been made is entirely speculative.

Concur — Sullivan, J.P., Ellerin, Rubin, Williams and Tom, JJ.

LAMA HOLDING COMPANY v. SMITH BARNEY INC