Plaintiff Imaging International, Inc. ("Imaging") brought this lawsuit against Defendants Hell Graphic Systems, Inc. ("Hell Graphic") and its successor in interest, Linotype-Hell Company ("Linotype-Hell"), in 1992. Plaintiff alleged that Hell Graphic made fraudulent misrepresentations [*2]to induce Imaging to purchase certain printing equipment ^[FN1] (the "Hell Graphic equipment") pursuant to a 1989 agreement, and that the Hell Graphic equipment malfunctioned, resulting in injury to Imaging, including the bankruptcy of its business in 1992.

After stop-and-start litigation for over a decade, the liability and damages phases of trial were bifurcated with the consent of the parties. In June 2005, the jury rendered a special verdict on the liability phase of trial, finding Hell Graphic liable on the second cause of action in the complaint, for fraud in the inducement. Defendants filed two post-liability-trial motions, which were both denied in a March 31, 2006 decision. Defendants then filed a motion to reargue and in limine, which was granted as to the motion to reargue (striking part of a footnote from the March 31 decision) and denied as to the motion in limine. On September 7, 2006, I signed an interlocutory judgment of liability in favor of plaintiff as to the second cause of action against defendant Hell Graphic and dismissing all other causes of action and counterclaims, including all claims against defendant Linotype-Hell. A non-jury trial on damages took place in October and November 2006. For the reasons explained below, I now award nominal damages to plaintiff on its second cause of action.

At the damages phase of trial, Imaging presented two witnesses: Jeffrey Randazzo, Imaging's president since 1987, and James Gilbert, plaintiff's expert damages witness.

Plaintiff's first witness was Jeffrey Randazzo. Randazzo testified that the first piece of Hell Graphic equipment he received in 1989, the "1000," did not work as represented and was "basically unusable from the day it came in." (Trans. I ^[FN2] at 375.) The "2000" was prone to "bugs and crashes and systems problems." (Trans. I at 378.) The "3000" was "virtually unusable for the first five months," but within 10-12 months it had reached "pretty close" to its anticipated productivity. (Trans. I at 378.) The "S-kit" was "a problem that was apparent from the minute it came in." (Trans. I at 379.) The "ScriptMaster" was "virtually non-usable." (Trans. I at 379.)

Randazzo testified that the failures of the Hell Graphic equipment generated various costs to Imaging, such as the cost of leasehold improvements, furniture, fixtures, additional equipment, increased rent and electric bills, training expenses, unproductive labor costs, overtime costs, and hiring additional salespeople to support the Hell Graphic equipment, eventually leading to the failure of Imaging. (Trans. I at 9-71, 115-19.) Plaintiff offered into evidence a demonstrative exhibit containing a graphical representation of these expenses. Randazzo acknowledged that the numbers in this exhibit were based entirely on his recollection, on answers to interrogatories, and on other documents in the exhibit book. Most of the numbers, such as the individual hourly wages of Imaging's employees, were based on his recollection alone. (Trans. I at 121-126.)

On cross-examination, Randazzo admitted that Imaging continued to use the Hell Graphic equipment to run its business, despite these problems. (Trans. I at 187.) Randazzo acknowledged [*3]that the Hell Graphic equipment had rental value. (Trans. I at 196-97.) Even after it began malfunctioning, Randazzo refused to let Hell Graphic repossess it. (Trans. I at 190-94.)

Randazzo testified that, while Imaging had at one time possessed the documents that verified Imaging's claimed expenses, these documents had been destroyed or lost sometime after 1992 that is, some time after Imaging had commenced its lawsuit in 1991 and while discovery was ongoing. (Trans. I at 119, 131-36, 230-32.) Randazzo also testified that James Gilbert, Imaging's damages expert, did not have access to the records that were the basis of Imaging's claimed expenses. (Trans. I at 134.) Upon cross-examination, Randazzo admitted that at least one major client left Imaging before Imaging purchased the Hell Graphic equipment because of problems with the old equipment. (Trans. I at 202-03.)

Randazzo also acknowledged that, between 1983 and 1987, he prepared or used false business records in Imaging's business and used them to claim fake tax deductions. He received an IRS subpoena in 1992 two months before Imaging filed for bankruptcy, and was convicted of criminal tax fraud. Randazzo was suspended from a previous job for punching someone else's time card. (Trans. I at 97-102.)

Plaintiff's second witness was its damages expert, James Gilbert. According to Gilbert, his evaluation of Imaging's business damages began with the assumption, based on what Randazzo told him, that the Hell Graphic equipment pushed Imaging into bankruptcy. Working on this assumption, Gilbert opined that Imaging's business damages from the fraud were the value of the business at the time that it bought the Hell Graphic equipment. Gilbert chose March 31, 1989 as the relevant date from which to calculate the value of Imaging's business, because it was the end of the last fiscal year before Imaging began using the Hell Graphic equipment. Using what he called an "ex-ante approach," Gilbert projected the profits that Imaging would have earned during the next five years, based on a set of assumptions, and then discounted those profits back to March 31, 1989. (Trans. I at 245-46.) So his final prediction was based on the estimated value of Imaging on March 31, 1989. Based on this model, Gilbert opined that Imaging's business damages were just over $4 million.

Gilbert's testimony was based on his second expert report, prepared in 2005. But in Gilbert's initial expert report, which he prepared in 2000, Gilbert had estimated that Imaging's business damages exceeded $11 million. Gilbert explained that the difference between the $11 million damages he predicted in 2000 and the $4 million he predicted in 2005 could be accounted for "principally because of the methodology and the prejudgment interest." (Trans. I at 277-78.) Whereas Gilbert had used an "ex-ante approach" in preparing the 2005 report, he had relied on a methodology he called an "ex-post approach" to evaluate Imaging's damages in his 2000 report. Under the latter methodology, Gilbert had valued Imaging in 1990 and then predicted its revenue over the subsequent 15 years; in contrast, in the 2005 report, Gilbert estimated Imaging's value at the end of March 1989 by predicting the profits it would have earned between March 1989 and March 1994, if it had not used the Hell Graphic equipment. (Trans. I at 278-79, 299.)

Gilbert asserted that "the approach changed and the numbers are really not that much different in the big picture.... When you add prejudgment interest even to the second value [i.e., the damages predicted in his 2005 report], it's not that far off. It's not that different. The numbers really do almost coincide within 10 or 20 percent." (Trans. I at 279.)

In preparing both reports, Gilbert worked under the assumption that the Hell Graphic equipment destroyed the company. This assumption, like most of the factual predicates underlying [*4]Gilbert's analyses of business damages, was based on information given to him by Randazzo. For example, Randazzo told Gilbert that, as a result of the malfunctioning Hell Graphic equipment, Imaging's "job turnover slowed, sales declined and customers were lost to such an extent that by the year ending March 31, 1992 the company was operating at an unsustainable loss." (Trans. I at 292.) Gilbert did not independently review any documents to confirm what Randazzo told him or consider whether factors other than the purchase of the Hell Graphic equipment caused Imaging's bankruptcy. Gilbert's "entire assumption... was that the cause of the equipment and the problems thereto [sic] created the business damage," i.e. the collapse of Imaging. (Trans. I at 293.) Gilbert acknowledged that his calculations would be entirely different, if this assumption were incorrect. (Trans. I at 291-93.)

In projecting the profits Imaging would have earned during the five years following March 31, 1989, following the methodology of the 2005 report, Gilbert's analysis also relied on a large number of other assumptions, including assumptions about Imaging's rate of growth, costs of goods sold, and selling expenses from 1989 through 1994. Gilbert assumed that Imaging would have grown at a steady rate of 12%, had it not been for the Hell Graphic equipment. (Trans. I at 252.) He assumed that Imaging's costs of goods sold would have remained a consistent 60%.^[FN3] He assumed that Imaging's selling expenses would have been a constant 7.5% of sales over that period, just as they had been for Imaging or its predecessor company during a previous period of time.^[FN4]

Gilbert derived the 12% growth rate by combining the growth rate of the entire pre-press industry in 1989 1994 with a growth "premium"—the percentage by which he predicted Imaging would have exceeded the industry growth rate during this period. Gilbert chose 4.1% for the growth premium. Gilbert arrived at this percentage by comparing the revenue of Imaging (and its predecessor corporation ^[FN5]) to the revenue of the entire prepress industry during the five preceeding years: 1984 1989. Imaging grew at a rate of 15.3% between March 31, 1984 and March 31, 1985; 22% in 1985 86; 22.7% in 1986-87; 20.8% in 1987-88; and 2.5% in 1988-89.^[FN6] That is, in 1984 89, Imaging and its predecessor corporation grew at a rate of 16-18%, about 6-7% faster than the rate [*5]at which the rest of the pre-press industry grew during that period, which was 10.8%. Gilbert assumed that Imaging would have continued to grow at a faster rate than the rest of its industry between 1989 and 1994, had it not been for the Hell Graphic equipment. Because Gilbert wanted to conservatively estimate the growth premium, he used 4.1%, rather than 6 or 7%. That is, Gilbert assumed Imaging would continue to grow 4.1% faster than the rest of its industry during the relevant time period, 1989 1994. According to the census data, the rest of the pre-press industry grew at a rate of 8.2% during 1989 1994. So Gilbert tacked this 4.1% "premium" onto the industry growth rate for the relevant period, which was 8.2%, and rounded down to the nearest integer, which brought him to 12%. (Trans. I at 252-56.)

In thus predicting Imaging's growth rate, Gilbert was aware that, according to the same census data, the entire pre-press industry's growth rate on average fell by about half during the 20 years between 1982 and 2002. To be more precise: the industry grew at an average of 12% during the period between 1982 and 1987; at an average of 9% between 1987 and 1992; at an average of 7.75% between 1992 and 1997; and at an average of 6% between 1997 and 2002. (Trans. I at 253-56.)

One might imagine that this drop in the growth rate of the entire industry during this time was the reason that Gilbert predicted a more conservative 6% growth rate for Imaging in his 2000 report, rather than the 12% growth rate he predicted in his 2005 report and at trial. (Trans. I at 193, 297.) Indeed, Gilbert admitted that, in the 2000 report, he had predicted an annual sales growth rate of 6% between 1990 and 2005 based on data reporting the growth rate of public companies in the industry.^[FN7] (Trans. I at 297-98.) When questioned at trial about the discrepancy between the growth rates used in the two reports, however, Gilbert did not volunteer this explanation. Instead, he said that the difference in the predicted growth rates of his two reports was due to the different methodologies he employed: that is, that in the 2000 report, Gilbert had projected Imaging's growth over 15 years, whereas, in the 2005 report, he projected Imaging's growth over only five years. (Trans. I at 297-99.)Gilbert asserted that, if he had prepared his 2005 report, following the methodology he had used in the 2000 report, he might have had to adjust the 6% growth rate that he had predicted for Imaging during the 2000 2005 time period, in order to account for changes in the industry due to the "catastrophe" of the September 11 events and the "recession [] thereafter." (Trans. I at 273-75.) Gilbert testified that, had he "stuck with that original report" with "the knowledge that something would have happened, I may have changed those projections in the first report for 2000 to 2005." (Trans. I at 275.) But "[i]t doesn't affect anything in the second report at all, has no bearing whatsoever because it's only looking at a five-year period post 89 to 94." (Trans. I at 275.) In other words, Gilbert would have had to lower the damages he predicted in his first report, in light of his knowledge that Imaging would have suffered the post-September 11 recession along with the rest of its industry.

As sources for his 2005 report, Gilbert relied largely on Imaging's prior financial statements for the years ending March 31, 1987 through 1991, and on U.S. census reports of the pre-press industry. (Trans. I at 304, 312.) Gilbert also looked at International Prepress Association ("IPA") [*6]reports, the source of the data relied upon by defendant's expert, but he testified that these were not a reliable source of growth rates, because they were based on reports by 35 or fewer small companies, rather than the entire industry. (Trans. I at 301-03.)

After Gilbert's testimony, plaintiff rested its case.

The only witness called by Hell Graphic was its expert damages witness, Chelton D. Tanger. Tanger challenged Gilbert's assumption based, of course, on what Randazzo had told him that the use of the Hell Graphic equipment was the sole cause of the bankruptcy. Tanger testified that other facts and circumstances ignored in Gilbert's analysis could explain Imaging's business troubles. (Trans. II at 19, 64-65, 79-80, 130.) One of these factors was the loss of two of Imaging's biggest customers in October 1989 and the early 1990s, for reasons unrelated to the Hell Graphic equipment. (Trans. II at 71-72, 132.) Another was Randazzo's receipt of a subpoena from the Internal Revenue Service ("IRS") two months before Imaging's bankruptcy, leading to his ultimate conviction for criminal tax fraud. Another factor was Randazzo's refusal to make needed staffing changes recommended by a turnaround consultant. (Trans. II at 70.) Yet another was the rapid change in the industry over 1989 1991, as it changed from analog to digital electronic. (Trans. II at 71.)Tanger concluded that he could not attribute any specific damage or the failure of Imaging as a whole to the Hell Graphic equipment by itself. (Trans. II at 78-80.)

Tanger also testified credibly that he was not convinced by Gilbert's analysis and conclusions in part because he would need to verify Randazzo's representations by reviewing the business's records themselves things like customer records, sales records, price lists, pricing data, payroll records, and time sheets. (Trans. II at 79.) None of these documents was made available to either him or Gilbert.

Tanger testified that Gilbert's assessment that Imaging was worth $4 million on March 31, 1989 was speculative. Tanger testified credibly that certain of Gilbert's assumptions were unreasonable and that Gilbert's analysis was extremely sensitive to small changes in these assumptions. (Trans. II at 78-79.)

For example, Tanger criticized Gilbert's prediction that Imaging's sales would have grown at a steady rate of 12% between 1989 and 1994, had it not been for the Hell Graphic equipment. (Trans. II at 30- 31.) Tanger testified that the events of September 11, 2001 could not possibly impact the value of Imaging in 1989 or justify Gilbert's decision to change the projected annual sales growth for Imaging from 6%, as he had predicted in 2000, to 12%, as he predicted during the damages phase of trial. (Trans. II at 20-21, 193.)

Tanger also testified that Gilbert's assumption that Imaging's growth rate would surpass that of its industry by 4.1% between 1989 and 1994 was unreasonable.Tanger testified that the 1984 1989 time period was not the most relevant period of time from which to extrapolate Imaging's future growth rate. Tanger pointed out that 1988 was the first complete year that Randazzo was the owner. Since Randazzo "put in a new formula with new furniture, improvements [and] made a lot of changes," Tanger "viewed the company as somewhat of a new company starting in the 88 timeframe based on many of those changes." (Trans. II at 133-34.) And given the considerable changes in the company in the late-1980s, Tanger credibly reasoned that Imaging's growth rate before those changes was less relevant than its growth rate beginning in the late-1980s, in order to predict its growth rate after 1989. (Trans. II at 134.) In addition to the change in Imaging's management and focus in the late-1980s, the industry itself was changing from analog to digital electronic during the years 1989 1991. (Trans. II at 71.) During the period of time from 1987 to [*7]1991, which Tanger testified was more relevant than earlier time periods, Tanger testified credibly that Imaging was doing no worse or better than the rest of the pre-press industry. (Trans. II at 134.)

Tanger also questioned the 8% industry growth rate used by Gilbert in predicting a 12% growth rate for Imaging. Tanger asserted that Gilbert based the 8% figure on a comparison between the number of pre-press shipments in 1992 and the number in 1997, or 7.75%, which rounds up to 8%. He then testified that Gilbert used the wrong census data to make this comparison and that a correct comparison of the industry growth rates between 1992 and 1997 actually yields a negative-1.6%, rather than 8%, as Gilbert estimated. (Trans. II at 51-54.) But here Tanger has mischaracterized Gilbert's testimony. The source of the 8% figure was not the 7.75% industry growth rate in 1997-2002, considered by Gilbert in another context, (Trans. I at 253), but the 8.2% industry growth rate between 1989 and 1994, which rounds down to 8%. (Trans. I at 256.)

Tanger persuasively testified that the damages predicted under Gilbert's model rested heavily on his assumption that Imaging would grow at a 12% growth rate from 1989 to 1994. For example, Tanger testified that, if one left all of Gilbert's other assumptions in place, but replaced the 12% estimated growth rate with a 1% growth rate, Imaging's lost profits would be reduced by $3.2 million, or down to about $0.8 million; if one replaced the 12% growth rate with a negative-0.6% growth rate, Imaging's lost profits would be reduced by $3.6 million, or over 90%. (Trans. II at 34-36.) The point here is not whether the evidence supports Tanger's substitution of 1% for 12%; the relevance of this testimony is that it persuasively demonstrates how dramatically a change in Gilbert's choice of a growth rate for Imaging would affect the damages predicted under his 2005 model.

Tanger also criticized Gilbert's assumption that Imaging's selling expenses would have remained at a steady 7.5% of sales during 1989 1994, based on Imaging or its predecessor corporation's selling expenses during a previous period of time. Tanger pointed out that this assumption was unrealistic for two cogent reasons: (1) Imaging's selling expenses had in fact increased from 7.5% to 13% between 1989 and 1991; and (2) pre-press companies of a similar size had averaged selling expenses of 15.5% of sales over 1989 1994, with all pre-press companies averaging selling expenses of over 12% of sales. (Trans. II at 39-41.) Tanger opined that 12% would be more realistic.

Tanger also criticized Gilbert's prediction that Imaging's costs of goods sold would remain 60% from 1989 1994 just as they had been in 1987 89. Tanger testified that 64% would be more realistic, given the actual increase in Imaging's costs from 60% to 63.7% between 1989 and 1991, and the fact that companies of a similar size in the industry averaged 64% over 1989 1994. (Trans. II at 30-31, 36-37.) Tanger acknowledged that, in comparing Imaging's cost of goods sold with that of the industry as reported in the IPA data, he had failed to take into account depreciation and amortization. Tanger further stated that, if he took depreciation into account, Imaging's costs of goods sold would have averaged about 64-65% about the same as the rest of the industry during that period. (Trans. II at 147-50.)

In preparing his opinion, Tanger consulted Imaging's financial statements and balance sheets, census data, and the IPA's annual economic reports from the late 1980s through early 1990s. The IPA reports are based on the results of annual surveys sent to the IPA's members, out of which 35% typically respond. (Trans. II at 21-22, 26-29.) Tanger credibly testified that the IPA reports were more reliable than the census data for his purposes, because the IPA data allowed him to focus on companies of the same size as Imaging, which was a relatively small, private-held company. Tanger [*8]compared the IPA data with the census data and concluded that the census data supported the IPA data. (Trans. II at 58-60.)

It is a long-standing rule that a plaintiff must prove its losses caused by fraud by a preponderance of the evidence. Schulze v. Sims Lumber Co., 14 A.D. 274, 43 N.Y.S. 463, 465 (1st Dept. 1897). "A plaintiff seeking compensatory damages has the burden of proof and should present to the court a proper basis for ascertaining the damages he seeks to obtain. They must be susceptible of ascertainment in some manner other than by mere conjecture or guess work." Dunkel v. McDonald, 272 A.D. 267, 270 (1st Dept. 1947), aff'd, 298 NY 586 (1948), overruled in part on other grounds, I. H. P. Corp. v. 210 Central Park S. Corp., 16 AD2d 461, 463-66 (1st Dept. 1962).

Under New York's "out-of-pocket" rule, a defrauded plaintiff's compensatory damages are the actual pecuniary losses it sustained as a result of the wrong. Lama Holding Co. v. Smith Barney Inc., 88 NY2d 413, 421 (1996). The "out of pocket" rule "bars recovery of profits that would have been realized in the absence of fraud, including the loss of an alternative bargain overlooked in favor of the fraudulent one, as inherently speculative and undeterminable." Geary v. Hunton & Williams, 257 AD2d 482, 482 (1st Dept. 1999). A "defrauded party is only entitled to recovery of out-of-pocket' and consequential damages." Orbit Holding Corp. v. Anthony Hotel Corp., 121 AD2d 311, 315 (1st Dept. 1986); see, e.g., Sheth v. NY Life Ins. Co., 308 AD2d 387, 387-88 (1st Dept. 2003) (affirming dismissal of fraud claim by insurance agents against insurance company, where their lost income and commissions were not " out-of-pocket' losses" directly attributable to purported fraudulently induced agency contracts).

Although the line between lost profits and consequential damages is sometimes blurry, courts try to limit the recovery of consequential damages from a fraud "to that which is necessary to restore a party to the position occupied before commission of the fraud." Alpert v. Shea Gould Climenko & Casey, 160 AD2d 67, 71 (1st Dept. 1990). To that end, a defrauded plaintiff's consequential damages are limited to those damages "proximately caused by reliance upon the misrepresentation." Clearview Concrete Prods. Corp. v. S. Charles Gherardi, Inc., 88 AD2d 461, 468 (2d Dept. 1982) (emphasis added). A plaintiff bears the burden of establishing proximate causation and reliance as elements of its proof of consequential damages.

The proximate causation element requires that any recoverable consequential damages must be "a direct consequence of the fraud and would not have occurred without it." Cayuga Harvester, Inc. v. Allis-Chalmers Corp., 95 AD2d 5, 23 (4th Dept. 1983) (defrauded plaintiff was entitled to recover value of existing corn crop destroyed as a result of defective harvesting machine, which plaintiff was fraudulently induced to buy). In order to recover for its losses, a plaintiff must produce evidence that the misrepresentations directly and proximately caused its losses. Laub v. Faessel, 297 AD2d 28, 31 (1st Dept. 2002) (dismissing claims because plaintiff did not allege or prove that misrepresentations caused his investment losses).

The reliance element can be satisfied only if the plaintiff incurred the expenses before discovery of the fraud (or based on an obligation that predated the discovery of the fraud), since a person would no longer rely on a representation after he had discovered that it was fraudulent. See Clearview, 88 AD2d at 468. Consequential damages cannot include the expenses incurred by a plaintiff after discovering the fraud. An example of recoverable consequential damages are those "expenditures which would not otherwise have been incurred" absent the plaintiff's reliance on the fraudulent misrepresentation. Id. [*9]

At the liability phase of trial, the jury rendered a verdict of liability for fraud, which necessitated a finding by the jury that Imaging sustained damages as a result of Hell Graphic's fraud. At the damages phase, plaintiff sought to prove that its consequential damages from Hell Graphic's fraud were equal to the value of its business on March 31, 1989. Plaintiff introduced testimony that Imaging's business gradually suffered over three years, as a result of its use of the Hell Graphic equipment, in reliance on Hell Graphic's misrepresentations, and leading to its bankruptcy in 1992. Based on the testimony of Randazzo and Gilbert, plaintiff asks for consequential damages of $4,042,000, which it claims was the value of Imaging on March 31, 1989, plus 9% prejudgment interest compounded annually.

Before I assess the quality of its proof, I will address the preliminary question of whether the jury's verdict of liability subsumes a finding by the jury that Imaging's business was destroyed by the fraud. If so, the verdict requires me to assume that the damages to which plaintiff is entitled are the value of its business prior to the fraud, and so the only issue for the damages trial would have been to quantify that value. If, on the other hand, the jury verdict meant simply that the jury found Imaging had been damaged by the fraud to an unspecified degree, then plaintiff still bore the burden of proving, at the damages phase of trial, the extent to which it was damaged by the fraud including whether the fraud proximately caused the failure of the business, and the measure of damages to which it was entitled. To answer this question, I must look at the evidence put before the jury, the jury charge, and the verdict itself.

Once the trial had been bifurcated, plaintiff was allowed to "elicit [some] testimony" as to damages at the liability phase, sufficient to make out the elements of fraud, but it was not permitted to introduce the testimony of a damages expert or evidence of the "numerical amounts" of its damages. So the jury heard testimony that Imaging had incurred various costs for additional labor and materials, because of problems with the Hell Graphic equipment. It also heard testimony that these costs contributed to Imaging's failure as a business. But the question of the measure of Imaging's damages was explicitly put off until the damages phase of trial. (Liability Trial Trans. at 267-71, 876-79.)

In my instructions to the jury, I said that Imaging had the burden of proving by clear and convincing evidence that it did "justifiably rely upon a representation and as a result sustained damages." (Liability Trial Trans. at 1688.) The jury was not instructed that a finding of liability required a conclusion that the fraud had caused Imaging's bankruptcy. The verdict sheet asked whether Imaging "justifiably relied on the representation made by Hell Graphic for the purpose of inducing Imaging International to enter into the 1989 Agreement, and as a result sustained damages." (Verdict Sheet at 3 (emphasis added).) The jury answered yes. The jury's verdict did not indicate anything else about what those damages had to be.

While it is possible that the jury concluded that the damages caused by the fraud included Imaging's failure and bankruptcy, it is equally possible that the jury concluded that Imaging was damaged to some degree by the fraud, but the damages did not include the failure of the business. Certainly, the jury concluded that Imaging sustained some damages, but the amount of those damages, under my instructions, was not required to be determined. Based on the jury's verdict of liability, therefore, it is impossible to conclude that the jury found that plaintiff had proven that its business was destroyed by the fraud the jury never addressed this issue, and it was never asked to address it.

Consequently, I conclude that, notwithstanding the jury's verdict of liability, at the damages [*10]phase, plaintiff still bore the burden of proving the nature and extent of the harm caused to Imaging by the fraud including whether the fraud proximately caused its bankruptcy.

There are several problems with plaintiff's proof of damages, but I will focus on just three of them causation, quantification, and reliance.

The first problem concerns causation: did plaintiff meet its burden of proving that the fraud proximately caused the failure of its business? That is, is plaintiff entitled to the value of its business prior to the delivery of the Hell Graphic equipment, as its measure of damages? For the reasons that follow, I conclude that plaintiff has not proven that it is entitled to the value of its business as its measure of damages.

First, I do not find believable Randazzo's testimony that the fraud concerning the Hell Graphic equipment caused the failure of Imaging or any other damages. To me, in light of his record of dishonesty, Randazzo was not a credible witness, and this conclusion is buttressed by Randazzo's admission that, while his lawsuit was pending, he lost or destroyed the documentation that one would expect to corroborate his testimony.

Second, Gilbert's testimony did not fill in the gaps left by Randazzo's testimony. Gilbert did not testify that the Hell Graphic equipment directly caused the failure of the business. Rather, Gilbert assumed that it did so, based on what Randazzo told him, and this assumption was the "entire assumption" on which his expert opinion was based. (Trans. I at 293.) Gilbert acknowledged that he had no first-hand knowledge of Imaging's business damages and was not provided with the documentation to form an independent opinion about it for himself.

Third, I accept Tanger's opinion that many other factors would have to be considered before one could reach the conclusion that Imaging's bankruptcy resulted from the fraud involving the Hell Graphic equipment. Tanger testified credibly that he could not attribute Imaging's bankruptcy or any other specific damage to the Hell Graphic equipment, because of the lack of any corroborating documentation and because of the many other factors that negatively affected Imaging's business during the same period of time: the loss of two of Imaging's biggest customers in October 1989 and the early 1990s; Randazzo's receipt of an IRS subpoena two months before Imaging's bankruptcy; Randazzo's refusal to make needed staffing changes recommended by a turnaround consultant; and the rapid change in the industry over 1989 1991, as it changed from analog to digital electronic.

In its post-trial brief, plaintiff supplemented the evidence offered at the damages phase with some of the testimony offered at the liability phase of trial. For instance, at the liability phase, Raymond F. Cassino, former product manager at Hell Graphic, testified that the "1000" and the "2000" had difficulties "talking to" each other. William Lovisek, a former Imaging employee, testified that Imaging incurred substantial costs in labor and materials because of problems with the Hell Graphic equipment. For the purpose of this decision, I take all of the evidence from the liability phase into consideration and assume that the jury credited all of the testimony that would favor Imaging's position. Even so, this testimony does not go so far as to show that the failure of Imaging's business was a direct consequence of the fraud and would not have occurred without it; it shows only that Imaging was harmed to an unspecified degree by the fraud. In light of Tanger's credible testimony that the evidence was insufficient to support such a conclusion, I will not leap to conclude that the fraud led to the failure of the business. Consequently, I conclude that plaintiff has not met its burden of showing that the failure of Imaging was a direct consequence of the fraud and would not have occurred without it. Plaintiff has not proven that it is entitled to damages equal to the value of the business before the fraud occurred. [*11]

But even if one understood the jury's verdict to require the conclusion that Hell Graphic's fraud destroyed the business, and that plaintiff was therefore entitled to damages in the amount of the value of Imaging before the fraud was committed, plaintiff still bore the burden of presenting evidence of a reliable, non-speculative, reasonably certain way to calculate the value of the business prior to the fraud. This it has utterly failed to do, because, in my judgment, Gilbert's testimony was speculative and not reliable, and plaintiff has not provided me with any other, non-speculative method of calculating the value of its business.

I find Gilbert's testimony unreliable first because he changed his expert opinion between 2000 and 2005 without any analytical justification for doing so. The unexplained change in methodology between Gilbert's 2000 and 2005 reports casts substantial doubt on the reliability of Gilbert's testimony and on the methodology of his 2005 report, on which he based his trial testimony. Evidently, the change in methodology was motivated by the desire to avoid the need to lower the predicted growth rate to account for the September 11, 2001 events. I credit Tanger's testimony that the events of September 11, 2001 could not possibly impact the value of Imaging in 1989 or justify Gilbert's decision to change the projected annual sales growth for Imaging from 6%, as he had predicted in 2000, to 12%, as he predicted during the damages phase of trial.

Second, in contrast to Gilbert, Tanger was a credible witness. Tanger refuted most of the expert opinions offered by Gilbert in support of plaintiff's claimed business damages. His testimony was substantially unshaken by plaintiff's cross-examination. I credit Tanger's testimony that Gilbert's analysis and conclusions as to the value of Imaging are speculative. They were not grounded upon any independent review of Imaging's business records such as customer records, sales records, price lists, pricing data, payroll records, or time sheets, except for a few financial statements. Rather, Gilbert's projections depended heavily on Randazzo's description of his own business and a long list of assumptions. As stated above, I deem Randazzo's statements about Imaging unreliable. In addition, Tanger demonstrated convincingly that two of Gilbert's major assumptions his projections of Imaging's growth rate and selling expenses from 1989 to 1994 were speculative and unwarranted. In particular, I find credible Tanger's testimony that the 4% growth premium was not justified. I credit Tanger's opinion that the change in ownership and the focus of Imaging's business in 1987-88 makes pre-1988 data, on which Gilbert based his 4% premium, not particularly relevant. Tanger testified credibly that Gilbert's projected damages depend heavily on these assumptions. Based on Tanger's credible testimony, Gilbert's projections appear to be not just speculative, but highly unlikely. So plaintiff has failed to prove the reliability of the damages model by which it claims it is entitled to$4, 042,000 in consequential damages plus pre-judgment interest in this lawsuit. And aside from this damages model, plaintiff has provided me with no other method by which I could calculate the value of Imaging, on March 31, 1989 or at any other time.

As its consequential damages, plaintiff has asked only for what it claims was the value of Imaging on March 31, 1989. Plaintiff has not asked for any other measure of damages in the alternative, if I found that it was not entitled to the value of its company. Nevertheless, I will now address whether the evidence presented at the damages phase would support some other award of damages.

The jury also heard testimony that Imaging had incurred various costs in labor and materials due to the Hell Graphic equipment. But none of the witnesses at the liability phase quantified Imaging's costs and expenses or provided any non-speculative basis upon which I could quantify [*12]them.

The only witness who quantified Imaging's costs is Randazzo, at the damages phase. But I find Randazzo's uncorroborated and unverifiable testimony, based largely on his memory, as to the specific costs, expenses, and other damages suffered by Imaging simply unbelievable, in light of Randazzo's record of dishonesty, his lack of credibility as a witness, and his admission that he lost or destroyed all the documents that one would expect to corroborate his testimony.

Plaintiff's damages expert, Gilbert, had no personal knowledge of Imaging's damages; his testimony rested entirely on factual predicates given to him by Randazzo. In any case, Gilbert did not testify as to Imaging's costs and expenses resulting from the fraud he testified only as to the value of Imaging on March 31, 1989.

Moreover, even if plaintiff had quantified its costs, it has not shown to what extent its costs outweighed the benefits it received from using the Hell Graphic equipment. Randazzo acknowledged that Imaging continued to use the Hell Graphic equipment after receiving it in 1989, despite its problems, and Imaging evidently derived some useful benefit from it. Randazzo acknowledged that it had some value. Therefore, Imaging would be entitled to recover damages only in the sum by which its costs exceeded the benefit it received in the form of usable equipment. Plaintiff has not quantified or presented evidence upon which I could quantify the amount by which its costs outweighed the benefits it received.

And this brings me to the third problem of plaintiff's proof of damages: reliance. Plaintiff has not indicated which harms to its business occurred before it discovered the fraud or were based on an obligation that predated the discovery of the fraud. Plaintiff has made no attempt to distinguish between those expenditures that it incurred before it discovered the fraud and those it incurred afterward. Since Randazzo admitted that the problems with the Hell Graphic equipment began right away, it appears that Randazzo discovered the fraud pretty quickly after installing the Hell Graphic equipment. Plaintiff did not offer specific evidence that Randazzo discovered the fraud at any later date. Consequently, plaintiff has not shown which of the damages that it incurred between 1989 and 1992, in connection with the Hell Graphic equipment, were incurred in reliance on the truth of the representations that later proved to be fraudulent.

In summary, while the jury's verdict indicated that plaintiff has proven its entitlement to damages at the liability phase, it remained plaintiff's burden to provide a non-speculative method by which I could quantify its recoverable damages as a result of the fraud. Plaintiff has failed to carry that burden at the damages phase, because it has not proposed any reliable model based on which I could calculate its damages. There is no credible evidence in this record that would allow me independently to assign a value to this business or to put a dollar value on Imaging's other costs and expenses resulting from the fraud. To do so would require pure guess work. Consequently, plaintiff is entitled to only nominal damages on its fraud claim.

Nominal damages "are allowed in tort only when needed to protect an important technical right.'" Kronos, Inc. v. AVX Corp., 81 NY2d 90, 95 (1993). In this case, the important technical right at stake is Imaging's right to a jury trial. Imaging exercised that right at the liability phase of trial but elected to waive that right at the damages phase. At the liability phase, the jury reached a verdict in favor of plaintiff on its fraud claim. Based on the jury's verdict, Hell Graphic is liable to pay at least nominal damages. See Northrop v. Hill, 57 NY 351 (1874) ("[I]t is clear that when a party to a contract is guilty of fraud, he commits a wrong for which he is liable to the defrauded party, to pay, at least, nominal damages."). But at the damages phase of trial, plaintiff utterly failed [*13]to meet its burden of proof; it did not demonstrate any quantifiable amount of damages. The only way to reconcile the jury's verdict that Hell Graphic is liable for fraud with plaintiff's failure to prove actual damages is to award plaintiff nominal damages only. See Clearview, 88 AD2d at 467-68 (counter-claimant was awarded only nominal damages for fraud, where it had "proffered no evidence concerning" its "out of pocket" damages).

Because I have decided to award nominal damages to plaintiff for the reasons set forth above, I do not need to reach Hell Graphic's other arguments.

Accordingly, it is

ORDERED that the Clerk shall enter judgment in favor of plaintiff Imaging International and against Hell Graphic Systems, Inc. on the second cause of action in the complaint, alleging fraud in the inducement, in the sum of $1.00, together with costs and disbursements to be taxed by the Clerk upon submission of an appropriate bill of costs.

DATED:

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J.S.C.