19.7 Fraud

• Library: Virginia Law and Practice: A Handbook for Attorneys (Virginia CLE) (2020 Ed.)

19.7 FRAUD

19.701 In General. Although fraud has its roots in the common law writ of deceit, we tend to think of fraud in terms of the elements of actual fraud, which are: (i) misrepresentation (including silence or suppression) of a, (ii) material fact, (iii) made intentionally and knowingly, (iv) with intent to mislead, (v) reliance by person misled, (vi) damage. ³⁷⁸

Situations that give rise to fraud claims include:

1.	Representations and warranties in commercial sales, house sale, etc. 379
2.	Fraudulent inducement. 380
3.	Projections of future profitability.
4.	Failure to disclose hidden defects in house. 381
5.	Failure to disclose that a shopping center is going to be built on the "park" next door.
6.	False reports in construction cases. 382
7.	Promises about working condition of mechanical devices, automobiles, etc.

A. Types of Fraud.

1. Actual Fraud.

a. Elements of Proof. In order to recover in an action for actual fraud, a plaintiff must prove (i) a false representation; (ii) of a material fact; (iii) made intentionally and knowingly by the defendant or the defendant's

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agent; (iv) with intent to mislead; (v) upon which the plaintiff reasonably relied; (vi) resulting in damage to the plaintiff. ³⁸³

b. Fraudulent Misrepresentations. Generally, under Virginia law, for statements to amount to fraud, they must be "positive statements of fact and not mere expressions of opinion." ³⁸⁴ A matter "susceptible of exact knowledge when the statement is made, is usually considered as a matter of fact." ³⁸⁵ The misrepresentation cannot be vague or inconclusive, or a mere expression of opinion. ³⁸⁶ To determine if a statement is fact or opinion, "'each case must in a large measure be adjudged upon its own facts, taking into consideration the nature of the representation and the meaning of the language used as applied to the subject matter and as interpreted by the surrounding circumstances.'" ³⁸⁷

Additionally, the alleged misrepresentation "must relate to a present or pre-existing fact, and cannot ordinarily be predicated on unfulfilled promises, or statements as to future events" ³⁸⁸ But one recognized exception to the general rule that "statements about future events" cannot form the predicate for a fraud claim is where a promise is made with the "present intention not to perform" or fraud in the inducement, which is described later. ³⁸⁹

Further, the misrepresented fact is "material" only when it "influences a person to enter into a contract, when it deceives him and induces him to act, or when, without it, the transaction would not have occurred." ³⁹⁰ Importantly, fraud may be based on concealment, as well as on

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affirmative misstatements. "[C]oncealment of a material fact by one who knows that the other party is acting upon the assumption that the fact does not exist, constitutes actionable fraud." ³⁹¹ In addition, concealment by "half-truths" constitutes a statement of fact on which a fraud claim can be based. ³⁹² However, "[p]roof of fraud by nondisclosure 'requires evidence of a knowing and deliberate decision not to disclose a material fact.'" ³⁹³

Moreover, a successful plaintiff must prove that his or her reliance on the misrepresented fact was reasonable. The relevant question for the element of reliance is not whether the allegedly defrauded party might have acted otherwise had he known the truth, but whether that party actually relied on the misrepresentations to his detriment and if such reliance was reasonable. ³⁹⁴ In the context of real estate transactions, Virginia courts have held that when a party undertakes an investigation of the facts surrounding the underlying misrepresentation, that party may be charged with the knowledge that the investigation has or should have revealed and that such knowledge may tend to prove that the party's reliance was not reasonable. ³⁹⁵ In the context of settlement agreements, the Virginia Supreme Court has stated that "parties to a settlement agreement that were in an adversarial relationship and represented by counsel at the time of negotiation and settlement, will be strictly held to this reasonable reliance standard under Virginia law when seeking to vitiate the settlement based on claims of detrimental reliance on the misrepresentations and/or omissions of information by the adversary." ³⁹⁶

Finally an "allegation of fraud in the abstract does not give rise to a cause of action; it must be accompanied by allegation and proof of damage." ³⁹⁷ Thus, "'there is no damage where the position of the complaining party is no worse than it would be had the alleged fraud not been committed.'" ³⁹⁸ Furthermore, it is not sufficient that the plaintiff demonstrate

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they have been damaged, but they must also show the damage was proximately caused by the defendant's alleged misrepresentation. ³⁹⁹ Similarly, there must be an allegation of existing damage rather than allegations that the plaintiff may be damaged in the future as a result of the fraud. ⁴⁰⁰

2. Constructive Fraud. Just like actual fraud, a successful cause of action for constructive fraud requires proof of a false representation of a material fact relied upon by the damaged party to his detriment. Only the intent of the misrepresenting party distinguishes constructive fraud from actual fraud. In a case of actual fraud, the misrepresenting party makes a false statement with the intent to mislead another through the information provided or omitted. By contrast, in a case of constructive fraud, the injured party need only prove that a misrepresentation of a material fact was made innocently or negligently, with the intent of inducing the other to rely upon the information provided. ⁴⁰¹ Further, Virginia courts have recognized constructive fraud claims based upon omissions of fact. ⁴⁰² "However, concealment can give rise to constructive fraud only in cases in which there is a duty to disclose the concealed fact." ⁴⁰³

Although constructive fraud and actual fraud are distinct torts with, at least in theory, incompatible requirements of proof, it is permissible to plead both in the same action. ⁴⁰⁴ "Under no circumstances, however, will a promise of future action support a claim of constructive fraud." ⁴⁰⁵

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3. Fraud in the Inducement. "Fraud in the inducement of a contract is a tort action, which arises from the relationship between the parties before the formation of the contract. . . ." ⁴⁰⁶ "In order to state a cause of action for fraud in the inducement of a contract, a party must allege that the misrepresentations were 'positive statements of fact, made for the purpose of procuring the contract; that they are untrue; that they are material; and that the party to whom they were made relied upon them, and was induced by them to enter into the contract.'" ⁴⁰⁷

While failure to perform a term of a contract clearly does not constitute fraud, when a defendant "makes a promise, intending not to perform, his promise is a misrepresentation of present fact, and if made to induce the promisee to act to his detriment, is actionable as actual fraud." ⁴⁰⁸ In other words, "'[T]he state of the promisor's mind at the time he makes the promise is a fact, and . . . if he represents his state of mind . . . as being one thing when in fact his purpose is just the contrary, he misrepresents a then existing fact.'" ⁴⁰⁹ Moreover, the general rule holds that "one cannot, by fraud and deceit, induce another to enter into a contract to his disadvantage, then escape liability by saying that the party to whom the misrepresentation was made was negligent in failing to learn the truth." ⁴¹⁰

4. Conspiracy to Defraud.

a. Common Law Conspiracy. Under Virginia's common law, a civil conspiracy is a combination of two or more persons, by some concerted action, to accomplish some criminal or unlawful purpose, or to accomplish some purpose, not in itself criminal or unlawful, by criminal or unlawful means. ⁴¹¹ While there can be no conspiracy to commit an act which the law allows, the Virginia Supreme Court has identified non-criminal unlawful acts, such as breach of contract and torts, including fraud, that can form the basis for a claim for common law civil conspiracy. ⁴¹² In a case of civil

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conspiracy, "[a]ll parties to a conspiracy are liable for all overt acts illegally done in pursuance thereof whether active participants or not." ⁴¹³

b. Statutory Conspiracy. Pursuant to Va. Code § 18.2-499, it is a Class 1 criminal misdemeanor to "combine, associate, agree, mutually undertake or concert together for the purpose of . . . willfully and maliciously injuring another in his reputation, trade, business or profession by any means whatever." ⁴¹⁴ Pursuant to Va. Code § 18.2-500 (although part of the criminal code), a private civil cause of action is expressly created in favor of any person who has been injured by a violation of Va. Code § 18.2-499. Courts generally have limited the use of this statute to corporations and individuals who own or operate a business. ⁴¹⁵ In fact, the Virginia Supreme Court has stated that Va. Code §§ 18.2-499 and 18.2-500 "apply to business and property interests, not to personal or employment interests." ⁴¹⁶

In order to recover in an action for conspiracy under this statute, a plaintiff must prove, by clear and convincing evidence, (i) there were a combination of two or more persons; (ii) who acted together for the purpose of injuring plaintiff's business; (iii) willfully and maliciously; and (iv) damage resulted. ⁴¹⁷

Importantly, a corporation is generally not legally capable of conspiring with itself or with its own agents or employees. ⁴¹⁸ Further, a parent corporation and its wholly owned subsidiary are also not legally capable of conspiring to violate this statute. ⁴¹⁹ An exception to this general rule does exist: if the managers, directors, or officers of a corporation are...