Chapter 1-4 Common Law Fraud

• Jurisdiction: United States

1-4 Common Law Fraud

1-4:1 Overview

Common law fraud in the United States is a tort that is derived from the original English action of deceit. In sum, a plaintiff bringing a common law fraud claim must plead with specificity and particularity that the opposing party intentionally or recklessly represented a material and false past or existing fact with the intent to cause the plaintiff to act in accordance with the representation and that the plaintiff ignorantly and reasonably relied upon the representation to her injury.

1-4:1.1 Related Causes of Action

Statutory Fraud, Fraud by Non-Disclosure, Uniform Fraudulent Transfer Act (UFTA), Negligent Misrepresentation, Breach of Fiduciary Duty

MUST READ CASES

Italian Cowboy Partners, Ltd. v. Prudential Ins. Co. of Am., 341 S.W.3d 323 (Tex. 2011)

Grant Thornton LLP v. Prospect High Income Fund, 314 S.W.3d 913 (Tex. 2010)

Formosa Plastics Corp. U.S.A. v. Presidio Eng'rs & Contractors, Inc., 960 S.W.2d 41 (Tex. 1998)

1-4:2 Elements

(1) A material representation was made.¹⁰¹

• A fraudulent representation may be made to the plaintiff either directly or indirectly, and a person intending to defraud another may make the representation to that person, or he may make such representation to another with the intent that it should be repeated to the intended party for the purpose of deceiving him,¹⁰² or with knowledge of "an especial likelihood" that it will reach and influence the conduct of a specific party.¹⁰³

(2) The representation was false.¹⁰⁴

• A promise of future performance constitutes an actionable misrepresentation only if the promise was made with no intention of performing at the time it was made and with the intent to deceive.¹⁰⁵
• An actionable misrepresentation may be expressed by conduct or by a combination of words and conduct.¹⁰⁶

(3) When the representation was made, the defendant knew it was false or made it recklessly without any knowledge of the truth and as a positive assertion of fact.¹⁰⁷

• Proof that a defendant made a statement knowing of its falsity or without knowledge of its truth may be proved by direct or circumstantial evidence.¹⁰⁸

(4) The defendant made the representation with the intent that the other party should act upon it.¹⁰⁹

• The requirement of showing an intent to induce reliance is not satisfied by evidence that a misrepresentation may be read in the future by some unknown member of the public or of a specific industry; the "reason-to-expect standard requires more than mere foreseeability . . ."¹¹⁰

(5) The plaintiff acted in reliance on the representation.¹¹¹

• The plaintiff must show actual and justifiable reliance on the misrepresentation, and "a person may not justifiably rely on a representation if 'there are "red flags" indicating such reliance is unwarranted.'"¹¹²
• Evidence the plaintiff conducted an independent investigation can indicate the absence of reliance, but evidence only of the opportunity to investigate, by itself, does not negate reliance.¹¹³

(6) The plaintiff thereby suffered injury.¹¹⁴

• Damages for fraud may vary from what is recoverable for fraudulent inducement, which is a particular species of fraud that arises only in the context of an existent contract.¹¹⁵
• Tort damages for fraudulent inducement are recoverable regardless of whether the representations are later subsumed in a contract or whether the defrauded party suffers only economic loss related to the contract.¹¹⁶
• The economic loss rule may bar recovery of damages for fraud other than fraudulent inducement when the damages are the subject of a contract.¹¹⁷

1-4:3 Damages and Remedies

1-4:3.1 Actual Damages

Actual damages for fraud may be either the direct damages which compensate for the necessary and usual result of the fraud (including benefit-of-the-bargain damages or out-of-pocket damages), or consequential damages which result naturally, but not necessarily, from the act and which must be specially pleaded.¹¹⁸ See Chapters 10 and 11.

1-4:3.1a Benefit-of-the-Bargain

Under the benefit-of-the-bargain measure, lost profits on the fraudulent bargain may be recovered if proved with reasonable certainty, but only to the extent of profits that would have been made if the bargain had been performed as promised.¹¹⁹ See Chapter 11, Section 11-2. The benefit-of-the-bargain measure of damages may be barred by the economic loss rule, however, unless the plaintiff can demonstrate a source of duty independent of the contract.¹²⁰ See Chapter 12, Section 12-3.

1-4:3.1b Out-of-Pocket

Out-of-pocket damages are recoverable to the extent they are caused by the fraud.¹²¹ See Chapter 11, Section 11-3.

1-4:3.1c Damages to Personal Property

Damages for repair costs of personal property are recoverable.¹²²

1-4:3.1d Mental Anguish

Mental anguish damages are recoverable.¹²³

1-4:3.2 Exemplary Damages

Exemplary damages are recoverable.¹²⁴

Exemplary damages are not recoverable for constructive fraud.¹²⁵ See Chapter 11, Section 11-12.

1-4:3.3 Equitable Remedies

For the equitable remedies of rescission or reformation of contracts obtained through fraud, see Chapter 8, Sections 8-4 and 8-5.

1-4:3.3a Rescission

Rescission is available to avoid the defendant's unjust enrichment.¹²⁶ A party must rescind within a reasonable time from discovering the grounds for rescission.¹²⁷ See Chapter 8, Section 8-4.

1-4:3.3b Reformation

Reformation is available as an equitable remedy to conform the contract to the original intent of the parties.¹²⁸ See Chapter 8, Section 8-5.

1-4:3.4 Interest

See Chapter 11, Section 11-13:1.

1-4:3.5 Costs

See Chapter 11, Section 11-13:2.

1-4:4 Defenses

1-4:4.1 Statute of Limitations

Limitations:

• The four-year limitations period applies.¹²⁹
• Generally, causes of action accrue, and statutes of limitation begin to run, when facts come into existence that authorize a claimant to seek a judicial remedy, but a person cannot be permitted to avoid liability for his actions by deceitfully concealing wrongdoing until limitations period has run.¹³⁰ Limitations period applicable to claim of fraudulent inducement does not start to run until the fraud with

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