Rule 11 Sanctions Granted For Frivolous Damages Claim


The plaintiff, a jewelry merchant, sustained damage when its inventory was destroyed in a fire in a BMW. Plaintiff sued BMW for damages and sought $5,677,114 in lost profits. The District Court granted the motion and sanctioned plaintiff $5,000 because the law is well settled that the merchant can only recover the replacement cost of the merchandise. The reasoning is provided below:

The claim for full retail value had absolutely no chance of success under governing precedents.[4] Where property is partially destroyed, the plaintiff may recover the lesser of: (1) the difference between the market value of the property before and after the harm was inflicted;[5] or (2) the replacement cost.[6] Hartshorn v. Chaddock, 135 N.Y. 116, 31 N.E. 997, 998 (1892)see also In re Sept. 11th Litig.,590 F. Supp. 2d 535, 541 (S.D.N.Y. 2008). Where the plaintiff’s property is totally destroyed, the measure of damages is its reasonable market value. Gass v. Agate Ice Cream, Inc., 264 N.Y. 141, 144, 190 N.E. 323 (1934)Reed v. Cornell Univ.,138 A.D.3d 816, 818 (N.Y. App. Div. 2016).[7]

Crucially, “[t]he market value of a merchant’s goods is the price at which they could be replaced in the market, not the retail price at which they could be sold.” Ever Win, Inc. v. 1-10 Indus. Assoc., 111 A.D.3d 884, 886, 976 N.Y.S.2d 123 (N.Y. App. Div. 2013) (quoting Wehle v. Haviland, 69 N.Y. 448, 450 (1877)). Recovery of the retail value, including the merchant’s lost profits, is only permissible in limited cases which do not apply here—for instance, if the merchandise was already under contract for a specified price and awaiting delivery, or if the goods were stolen by the defendants. Reed, 138 A.D.3d at 818Wehle v. Butler, 61 N.Y. 245, 245 (1874).

In opposing Rule 11 sanctions, Plaintiff’s counsel concedes that “after reviewing the available evidence” its client could not plausibly be entitled to damages based on retail value or lost profits. (ECF No. 109, “Pl’s Opp’n” at 5, 9-10). However, Plaintiff’s counsel nonetheless urges this Court to deny the motion on mootness grounds, citing a December 6, 2019 email he sent to Defendant’s counsel:

“In performing our review and analysis … we believe that the plaintiff can establish its damages based on the diminution in value of the business … and will seek permission from the court to amend our claim accordingly, and to produce expert analysis establishing a lost valuation claim of $1.5 Million. In the event the Court denies our motion to so amend and produce expert analysis, we agree to amend our complaint by withdrawing the claim for lost profits, and proceed with a claim based upon replacement cost….”

(Id. at 5). The Court is perplexed by Plaintiff’s counsel’s interpretation of his own email. He insists this email proves that Plaintiff accepted Defendant’s request to calculate damages based on replacement cost. (Id.). But his purported acceptance is no acceptance at all. It is a counteroffer, conditioned in part upon this Court’s uncertain permission to reopen discovery based on a new theory of damages.[8]

Accordingly, Defendant’s Rule 11 motion is granted.[9] Sanctions are imposed in the amount of $5,000, payable to the Clerk of the Court, to be paid within 30 days of this order.

Comment: the lawyer attempted to avoid the sanctions issue by writing an email to opposing counsel offering to withdraw the allegation. Instead, the lawyer should have simply withdrawn the allegation within the safe harbor period.

Zsa Zsa Jewels, Inc. v. BMW of North America, LLC, No. 15-cv-6519 (E.D. NY April 2, 2020).

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s