11 Constructive Fraud

• Library: Elements of Civil Causes of Action (SCBar) (2015 Ed.)

11 Constructive Fraud

A. Definition

Constructive fraud had been described as a breach of a legal or equitable duty that the law pronounces fraudulent because it tends to deceive, violate public or private confidence, or injure public interests.¹ It has the same legal effect as actual fraud.² Constructive fraud is distinguished from fraud by the absence of the element of intent to deceive.³

B. Elements

Unlike actual fraud, neither intent to deceive nor actual dishonesty is an element of constructive fraud,⁴ instead it is sufficient that it be alleged the defendant ought to have known the falsity of the misrepresentation.⁵

The elements that must be proved to recover in an action for constructive fraud are:

(1) a representation
(2) falsity
(3) the speaker ought to have known of the falsity
(4) materiality
(5) intent that the representation be acted upon
(6) the hearer's ignorance of its falsity
(7) the hearer's reliance on its truth
(8) the hearer's right to rely thereon
(9) the hearer's consequent and proximate injury⁶

C. Elements Defined

1. A Representation

The representation must be a statement or "communicative actions"⁷concerning an existing fact.⁸ Conduct as well as express words may fulfill the element.⁹ Generally such things as "puffing"¹⁰ or "sales talk," statements of opinion,¹¹ predictions of future events,¹² promises¹³ or statements of law¹⁴ are not actionable.

2. Falsity

Where a statement is literally true, but can within the context of events, result in misrepresentation it may be considered a false representation if its maker knows the statement can be interpreted in a way that is false.¹⁵ Silence may also be considered a false representation where there is a duty to disclose facts.¹⁶ While ordinarily there is no duty to disclose, there are exceptions: (1) a fiduciary relationship;¹⁷ (2) a party knows material facts that cannot be discovered by the other party;¹⁸ (3) the nature of a transaction calls for good faith and fair dealing.¹⁹

3. The Speaker Ought to Have Known of the Falsity

It does not appear that any South Carolina case has actually delineated the elements of a cause of action for constructive fraud. The South Carolina Supreme Court has held neither intent to deceive nor actual dishonesty is an element.²⁰ The Court of Appeals has said all elements of fraud except intent must be proved for constructive fraud to be established,²¹and that it is sufficient that it be alleged the defendant ought to have known the falsity of the misrepresentation.²²

4. Materiality

A representation will be considered material where an objective, reasonable person would have viewed it as sufficiently important and significant that it would have played a role in the decision to enter the transaction.²³

5. Intent That the Representation Be Acted Upon

In order for this element to be met, the defendant must intend for the plaintiff to rely on the statement.²⁴ The defendant may intend the plaintiff to rely on the representation without dishonesty of purpose or intending that it deceive him or her.²⁵

6. The Hearer's Ignorance of Its Falsity

Ignorance of the falsity of the misrepresentation is an element because the plaintiff could not have relied on the truth of the statement if he or she knew it was false.²⁶

7. The Hearer's Reliance on Its Truth

If the plaintiff would have entered the transaction regardless of the truth of the representation,²⁷ or only did what was legally required then there is no fraudulent inducement.²⁸

8. The Hearer's Right to Rely Thereon

Reliance on the misrepresentation must be reasonable or legitimate Whether reliance is justified depends on the circumstances of each case.²⁹ In a constructive fraud case involving an arms length transaction between mature educated individuals, there is no right to rely absent a confidential or fiduciary relationship.³⁰ Courts evaluate fraud cases by considering "the respective intelligence, experience, age and mental and physical condition of the parties and the relation and respective knowledge and means of knowledge of the parties."³¹ An early case held that where one who pleads fraud contributes as a proximate cause to the injury by willful or reckless misconduct, no recovery should be permitted.³²Where the falsity of the misrepresentation could have been discovered, courts generally apply the "just doctrine"³³ although different tests have been employed.³⁴ Generally, there is a right to rely so long as the reliance is not reckless or grossly negligent; however, even where reliance might be characterized as reckless, it must be shown the recklessness caused the reliance.³⁵

9. The Hearer's Consequent and Proximate Injury

There must be injury before an action in tort for constructive fraud will lie.³⁶

Recovery will be denied where the damages are too speculative³⁷ or where the injury is not shown clearly.³⁸

D. Defenses

The applicable statute of limitations for fraud is six years for actions arising prior to April 15, 1988, and three years for those arising on or after that date.³⁹ The discovery rule is applicable,⁴⁰ and where the action is brought after the statutory limit, the plaintiff must allege the fraud was not discovered until a time within which the action could be brought.⁴¹

The right to sue for fraud may be waived by conduct inconsistent with the intention to sue; however, there can be no waiver where the plaintiff did not know of the fraud and had no means of discovering it.⁴²

Common law causes of action, including misrepresentation may be preempted by the federal Employment Retirement Income Security Act (ERISA) of 1974.⁴³

Other defenses include contractually required arbitration,⁴⁴ estoppel and laches.⁴⁵

The South Carolina Tort Claims Act⁴⁶ waives the immunity of the State, its agencies, political subdivisions, and governmental entities from liability in tort. It contains, however, many limitations on liability and damages which may preclude or restrict a plaintiffs cause of action.⁴⁷ The Act is the exclusive and sole remedy for any tort committed by an employee of a governmental entity while acting within the scope of his or her official duty and must be liberally construed in favor of limiting the liability of the governmental entity.⁴⁸ A limitation specifically applicable to an action for fraud is that governmental entities⁴⁹are not liable for a loss resulting from "employee conduct ... which constitutes actual fraud .. .".⁵⁰ Whether the limitation applies to constructive fraud is unclear.⁵¹

E. Remedies

Actual⁵² and punitive⁵³ damages may be awarded in fraud cases. Generally, the plaintiff is entitled to recover damages that will place him or her in the position occupied before being defrauded, however, ". only damages which are the natural and proximate consequence of the fraudulent misrepresentations of the defendant and can be clearly defined and ascertainable are recoverable.⁵⁴ An award of punitive damages does not require the knowledge of the defendant that the representations were false; it is only necessary that the defendant was "conscious or chargeable with consciousness" of the wrongdoing.⁵⁵

A constructive trust is also a potential remedy for fraud.⁵⁶ It may be invoked even though based on an agreement which is not legally enforceable.⁵⁷

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Notes:

^[1] Greene v. Brown, 199 S.C. 218, 19 S.E.2d 114 (1942) (fraud is a deception intended to induce someone to part with property or surrender a legal right); Woods v. State, 314 S.C. 501, 431 S.E.2d 260 (Ct. App. 1993); Giles v. Langford & Gibson, Inc. 285 S.C. 285, 328 S.E.2d 916 (Ct. App. 1985).

^[2] State ex rel. Daniel v. Strong, 185 S.C. 27, 192 S.E. 671 (1937); Designer Showrooms, Inc. v. Kelley, 304 S.C. 478, 405 S.E.2d 417 (Ct. App. 1991); Armstrong v. Collins, 366 S.C. 204, 621 S.E.2d 368 (Ct. App. 2005).

^[3] Singleton v. Mullins Lumber Co., 234 S.C. 330, 108 S.E.2d 414 (1959); Designer Showrooms, Inc. v. Kelley, 304 S.C. 478, 405 S.E.2d 417 (Ct. App. 1991).

^[4] Greene v. Brown, 199 S.C. 218, 19 S.E.2d 114 (1942); Woods v. State, 314 S.C. 501, 431 S.E.2d 260 (Ct. App. 1993); Designer Showrooms, Inc. v. Kelley, 304 S.C. 478, 405 S.E.2d 417 (Ct. App. 1991); Giles v. Langford & Gibson, Inc. 285 S.C. 285, 328 S.E.2d 916 (Ct. App. 1985). See also Cheney Bros., Inc. v. Batesville Casket Co., Inc., 47 F.3d 111, 114 (4th Cir. 1995) ("The elements of constructive fraud are the same [as for fraud], with one exception, to recover for constructive fraud, a plaintiff does not have to prove intentional misrepresentation.").

^[5] Giles v. Langford & Gibson, Inc. 285 S.C. 285, 328 S.E.2d 916, 918 (Ct. App. 1985) (plaintiff met requirement by alleging insurer "knew or should have known" falsity of statement that Builder's risk policy would provide requested coverage for loss).

^[6] Woods v. State, 314 S.C. 501, 431 S.E.2d 260 (Ct. App. 1993).

^[7] Carter v. Boyd Construction Co., 255 S.C. 274, 178 S.E.2d 536 (1971).

^[8] Woods v. State, 314 S.C. 501, 431 S.E.2d 260 (Ct. App. 1993) (alleged representation must be one of existing fact; constructive fraud case); Moye v. Wilson Motors, Inc., 254 S.C. 471, 176 S.E.2d 147, 152 (1970) (fraud must relate to a present or existing fact).

^[9] Satcher v. Berry, 299 S.C. 381, 385 S.E.2d 41 (Ct. App. 1989) ("misrepresentations by conduct, as well as by express words, will support an action for fraud."). See also Sparrow v. Toyota of Florence, Inc., 302 S.C. 418, 396 S.E.2d 645, 647 (Ct. App. 1990). In Sparrow, a dealer sold a car knowing it was used but misrepresented it as new by placing it on a new car lot, writing the word new on the window sticker, and giving a false explanation of the mileage. The court held the jury could have found the dealer knowingly and falsely represented the vehicle by words and conduct.

^[10] Jones v. Cooper, 234 S.C. 477, 109 S.E.2d 5, 10 (1959) (advertisement with statements about the possibilities of profit from hot dog machines was merely "dealer talk" or "puffing" and could not be construed as fraud and deceit). But see Satcher...