§ 7.1.1

• Jurisdiction: Arizona

§ 7.1.1 Fraudulent Misrepresentation

Fraud is a "universal legal prohibition."¹⁹⁷⁹ With tireless repetition, Arizona courts have enforced the prohibition on fraud, listing nine elements of proof required for fraudulent misrepresentation.¹⁹⁸⁰ Each must be proved by clear-and-convincing evidence.¹⁹⁸¹

Misrepresentations most commonly are based on false statements of fact. But legally actionable falsehoods may also arise out of statements of opinion, intention, and law,¹⁹⁸² or communications that create a false impression.¹⁹⁸³ A speaker who claims special expertise or superior knowledge may be held accountable for a misleading opinion.¹⁹⁸⁴ Misrepresentations also include statements of intention that the speaker has no intention of honoring.¹⁹⁸⁵ Even a misstatement concerning a legal matter like taxation or zoning may amount to a fraudulent statement.¹⁹⁸⁶

An actionable misrepresentation may be one that induces a transaction or one that causes the plaintiff to refrain from acting.¹⁹⁸⁷ For instance, a misrepresentation that induces shareholders not to sell their shares may be actionable.¹⁹⁸⁸

Misleading inducements to hold a losing investment are particularly insidious. People have difficulty accepting losses.¹⁹⁸⁹ They are predisposed to hold losing investments too long and sell winners too soon.¹⁹⁹⁰ Because of this behavioral bias, investors are unusually vulnerable to false assurances intended to persuade them to hold their investments. The common law provides a remedy for these deceptive, post-sale inducements to hold an investment.¹⁹⁹¹

Whether the person to whom a misrepresentation is made is justified in relying on the representation has proved a fertile source of litigation.¹⁹⁹² Some statements, even if false, are so obviously unimportant that they do not meet the test of materiality.¹⁹⁹³ In other cases, the facts are such that the plaintiff should have been alerted to the misrepresentation and cannot, therefore, have justifiably relied upon the defendant's statement.¹⁹⁹⁴ On the other hand, courts are hesitant to impute knowledge to the plaintiff.¹⁹⁹⁵ Arguments that fraud victims should have discovered the fraud through public records have been rejected,¹⁹⁹⁶ as have arguments that the information was available to the plaintiff.¹⁹⁹⁷ In this respect the law of fraud is efficient: "It allows the less informed party to forego the costly and duplicative process of factual investigation and information discovery, thereby reducing transaction costs."¹⁹⁹⁸

Reliance does not require privity.¹⁹⁹⁹ Direct contact between the plaintiff and defendant is not needed for fraud liability.²⁰⁰⁰ The plaintiff's reliance may be indirect.²⁰⁰¹ This happens, for example, when a fraudulent statement is made to an investor's agent who then repeats the statement to the investor or makes an investment decision on the investor's behalf.²⁰⁰² In short, the defendant need not be the face of the fraud for liability to follow.

Causation can present knotty issues.²⁰⁰³ The plaintiff must prove not only that the fraud was a cause in fact of his or her loss but also that it was a proximate one.²⁰⁰⁴ The Court of Appeals has used the securities-law concept of loss causation in a case involving common-law issues.²⁰⁰⁵ Given the prevalence of loss-causation terminology and analysis in the securities context, its continued use in common-law fraud litigation seems likely.²⁰⁰⁶

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Notes:

^[1979] Richard A. Epstein, Torts § 20.1, at 545 (1999).

^[1980] See, e.g., Nielson v. Flashberg, 101 Ariz. 335, 338-39, 419 P.2d 514, 517-18 (1966) (referring to a "long line of decisions" and describing the elements of fraud as follows: "(1) A representation; (2) its falsity; (3) its materiality; (4) the speaker's knowledge of its falsity or ignorance of its truth; (5) his intent that it should be acted upon by the person and in the manner reasonably contemplated; (6) the hearer's ignorance of its falsity; (7) his reliance on its truth; (8) his right to rely thereon; (9) his consequent and proximate injury." (quoting Moore v. Meyers, 31 Ariz. 347, 354, 253 P. 626, 628 (1927)) (internal quotation marks omitted)); accord Royston v. Waychoff, 2020 WL 4529621, at *1 ¶ 4 (Ariz. Ct. App. Aug. 6, 2020); see also Revised Arizona Jury Instructions (Civil) Commercial Torts 24 (5th ed. 2013) (providing a jury instruction for common-law fraud); 3 Dobbs, Hayden & Bublick, supra note 987, § 664 n.1, at 643 (explaining that Arizona's nine elements parallel the shorter formulation in Restatement (Second) of Torts § 525 (1977)).

^[1981] See Am. Pepper Supply Co. v. Fed. Ins. Co., 208 Ariz. 307, 309 ¶ 11, 93 P.3d 507, 509 (2004) ("The clear and convincing burden imposed on fraud claims . . . stems from the societal importance of an untarnished reputation."); Dunlap v. Jimmy GMC of Tucson, Inc., 136 Ariz. 338, 343, 666 P.2d 83, 88 (Ct. App. 1983).

^[1982] See Restatement (Second) of Torts § 525; cf. Caruthers v. Underhill, 230 Ariz. 513, 524 ¶ 45, 526 ¶ 53, 287 P.3d 807, 818, 820 (Ct. App. 2012) (discussing the materiality on claims of common-law fraud, breach of fiduciary duties, and securities fraud of soft information (e.g., projections, estimates, opinions, motives, and intentions) and stating (at ¶ 45) that "[t]he materiality of soft information depends on the facts of each case, the dispositive factors being 'the nature of the undisclosed information and its importance, reliability, and investor impact'" (quoting Thorne v. Bauder, 981 P.2d 662, 664 (Colo. App. 1998))).

^[1983] Cf. Allstate Life Ins. Co. v. Robert W. Baird & Co., 756 F. Supp. 2d 1113, 1166 (D. Ariz. 2010) (applying Arizona law and holding that: "Where a defendant discloses some facts, but negligently omits others, that defendant is liable if its...