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FRAUD
AND DECEIT: LEGALLY, WHAT ARE THEY AND HOW DO YOU PROVE THEM?
Introduction:
Such
terms as “fraud” are used loosely by most people and are
generally meant to include wrongful acts ranging from outright thievery
to simply not telling the whole story to someone in order to make a deal
happen. Legally, the concepts of Fraud and Deceit are much more complex
and specific torts that require proof of specific wrongful acts in order
to achieve appropriate remedy.
The
reader should first review our basic article on Torts, Intentional
and Negligent for a discussion of the characteristics of
such causes of action in general. This article shall only discuss the
elements necessary to constitute the specific torts of Fraud and Deceit. It shall be assumed for the purposes of
this article that the larger article has already been read.
Definitions and General Law of
Fraud and Deceit
THE
LAW AND DEFINITIONS
Actual
Fraud is normally contractual
in nature and is defined in the California Civil Code (CC) Section 1572. Deceit,
which is not necessarily based on a contract, is described at CC 1709 and
1710.
CC 1572
Actual fraud…consists in
any of the following acts, committed by a party to the contract, or with
his connivance, with intent to deceive another party thereto, or to
induce him to enter into the contract:
1. The suggestion, as a fact,
of that which is not true, by one who does not believe it to be true;
2. The positive assertion, in
a manner not warranted by the information of the person making it, of
that which is not true, though he believes it to be true;
3. The suppression of that
which is true by one having knowledge or belief of the fact;
4. A promise made without any intention of
performing it; or,
5. Any other act fitted to
deceive.
CC 1709
One who willfully deceives
another with intent to induce him to alter his position to his injury or
risk, is liable for any damage which he thereby suffers
CC 1710 specified four kinds
of deceit within the meaning of CC 1709:
(a) Intentional misrepresentation which is “the suggestion,
as a fact, of that which is not true, by one who does not believe it to
be true;”
(b) Negligent misrepresentation which is “the assertion,
as a fact, of that which is not true by one who has no reasonable ground
for believing it to be true”
(c) Concealment, which is “the suppression of a fact by one
who is bound to disclose it or who gives information of other facts which
are likely to mislead for want of communication of that fact” and
(d) False Promise which is “a promise made without any
intention of performing it.”
Aside
from the above statutes, the California courts have long held the
following elements as essential to prove in fraud: a) misrepresentation;
b) knowledge that the misrepresentation is false; c) intent to deceive;
d) justifiable reliance by the victim; and e) resulting damages.
The
above criteria must all be met. If I make a false statement to you but do
not know it is false or even if I make a misstatement knowing it to be
false but it did not harm you, no action lies.
NO
BENEFIT TO WRONG DOER NECESSARY
Note
that it is NOT necessary that the wrongdoer benefited from the fraud. It
is enough that the above criteria are met and you were damaged.
MISSTATEMENT
OF FACT REQUIRED
Usually,
the misrepresentation must be an affirmation of a fact. Statements
regarding opinion are usually NOT actionable. Stating a belief or
suspicion can seldom result in liability for fraud even if you misstate
your actual opinion. Thus if I state, “The house has no defects and
is worth two hundred thousand dollars” when I know it has bad
foundations and is worth next to nothing could make me liable but if I
state, “I believe there are no problems with the house and I think
it may be worth two hundred thousand dollars,” is probably not. (WARNING: WHEN PEOPLE PHRASE THEIR
STATEMENTS IN BELIEF MODE, CHECK THE TRUTH OF THE OPINION BY YOURSELF!)
Further
the representation, to be actionable, must ordinarily be as to past or
existing facts: predictions as to future events or future action by some
third parties are often deemed opinions and seldom actionable fraud.
However,
despite this general rule, misrepresentations as to opinions can result
in liability if the defendant held him or herself out as be
“specially qualified” and the hearer is situated as to be regarded
as reasonably relying on that expertise, fraud may lie. (Typically, if I indicate I have lived
in the house for ten years and think the paint is lead free that may
result in a complaint in fraud if I intentionally misstated that opinion
to a new buyer.)
Further,
if one states an opinion not as an opinion but as a fact that may create
liability for fraud.
If
one is in a fiduciary
capacity, one’s opinion may be treated as grounds for fraud if
improperly given. The reader should review the definitions and types of fiduciaries
that exist on the article on this web site but suffice to state that most
professional relationship, family relationships, employee-employer
relationships, etc, can create that type of duty.
An
old issue has been whether a misstatement of intention to perform
constitutes fraud since it relates to future action, not present fact,
and may even be considered an opinion. The courts now normally allow that
to be actionable fraud if the misstatement relates to a false
presentation of current intentions. If you falsely state you intend to
perform, that may constitute fraud. (Consider how hard that is to prove
since you are trying to prove what is going on inside of someone’s
head. Most such cases use proof by using evidence of conflicting
statements of intent made to different people at the same time.)
THE
CRITERIA OF INTENT
For
fraud and deceit it is usually necessary to prove that the defendant meant to induce action by some
particular person or persons in reliance upon a false statement. While there is a particular cause of
action called “negligent misrepresentation,” that is not an
intentional tort (thus unlikely to ever allow punitive damages) and has
its own stringent requirements as to what elements must exist to make it
a valid cause of action. Negligent
misrepresentation is treated in other articles on this website.
Note
that the misrepresentation may be indirect. If I know you will tell
another my misrepresentation and intend that he or she shall act upon it,
I may be liable for fraud even if I did not directly tell the third party
the misrepresentation. And one who
makes a statement intending to defraud an entire class of people or the
public is deemed to have made an intentional misrepresentation to each
person in the class. However, if
the persons relying on the misrepresentation are not reasonably
foreseeable, some courts have held that the requisite intent has not been
established.
REASONABLE
RELIANCE
It
must be shown that the injured party actually relied upon the
misrepresentation, e.g. that the representation was “an immediate
cause of the injured party’s conduct and that without such
representation, the injured party would not, in all reasonable
probability, have entered into the contract or other transaction.” Obviously, then, if the statements were
not known to the injured party until after he or she acted, no fraud
would lie.
Further,
if the injured party discovered the truth or had easy access to the
necessary information to show the truth, many courts have held that no
fraud could lie since there was no reasonable reliance on the
misstatements. (a fiduciary relationship to the injured party by the
wrong doer can obviate this.)
However,
in a remarkable exception, the existence of recorded title documents that
would mitigate against the fraud do NOT bar an action against the person
who misrepresented the state of title. “Such public recordation is
to protect bona fide purchasers, not people who commit fraud.” (Seeger
v Odell (1941) 18 C2d, 409).
AND
THE DAMAGES?
In an
action based on contract, the injured party normally has the choice to
rescind (eliminate) the contract or affirm the contract. If rescinded,
the injured party gets back any consideration paid for the contract and
the contract is voided. If affirmed, the injured party is entitled to the
damages that are suffered and that usually means the contract is treated
as if the misstatements of fact were actually true and the injured party
gets the “benefit of the bargain.” Thus, if you advise me the
machine you are selling is worth 500,000 but the hidden defect will cost
150,000 to repair, I may get 150,000 in damages.
And,
in certain circumstances, “punitive damages” to punish the
person who defrauded may be levied and those are usually related to the
actual losses suffered, the degree of malice and deceit shown and the
anger of the judge or jury. Despite articles in the newspapers, punitive
damages do NOT constitute a constant portion of jury verdicts though they
do get levied from time to time. Our firm has obtained ten million
dollars in punitive damages based on actual contractual damages of only
four million dollars (thus a fourteen million dollar verdict in all.) If
you are a defendant, you must consider them as possible. If you are a
plaintiff, you should try for them, but do not assume they are automatic
by any means.
And
damages based on fraud (and other intentional torts) are quite often not
dischargeable in bankruptcy which gives the judgment holder a tremendous
advantage over other creditors of the defendant.
Conclusion:
All
too often, in an effort to intimidate opponents or due to emotion, people
throw fraud causes of action into purely contractual disputes, asking for
massive punitive damages and alleging copious misrepresentations. The
courts and arbitrators, now used to “over pleading” routinely
discount such allegations and we normally do not recommend such over
pleading to our clients.
However,
if misrepresentation leading to damages has occurred, fraud is a powerful
and effective cause of action, albeit far more complex to plead and prove
than most people believe. It allows for additional compensation than one
obtains in a typical breach of contract action, allows for punitive
damages being possible, and expands the scope of discovery available to
plaintiffs so that they may determine far more of the events that
transpired that led to the damages.
If
fraud has been pled against you, do not overreact. A careful analysis of
the elements of fraud as described above should indicate that what many
people consider fraud is often not. Quite often a plaintiff will start
litigation because he heard the defendant comment casually as to his or
her opinion as to what might happen and the plaintiff claims such opinion
was intentionally wrong. As seen above, that is usually not fraud. Close
analysis and good legal advice must be sought by the parties before they
embark on what can be costly…and often useless…litigation.
But
in those instances in which fraud truly occurs, it can form the single
largest element of damages awarded to the injured plaintiff. When our
clients do sue for fraud and obtain damages, it is common to receive an
award of punitive damages many times higher than the contractual
damages-and recall, bankruptcy may not be available to void those
damages. See our web article on Bankruptcy: the Constitutional
Right to Start Over.
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