Chapter 5 - § 5.2 • MISREPRESENTATION AND CONCEALMENT

• Jurisdiction: Colorado

§ 5.2 • MISREPRESENTATION AND CONCEALMENT

A false representation is "any oral or written words, conduct, or combination of words and conduct that creates an untrue or misleading impression in the mind of another."⁴³⁸ A person may be liable for a misrepresentation or concealment even if that person did not directly communicate the misrepresentation or concealment to the claimant.⁴³⁹

§ 5.2.1—Intentional Misrepresentation and Concealment

Actionable fraud by a builder-vendor requires proof that, (1) the builder-vendor made a false representation of a past or present fact; (2) the fact was material; (3) the builder-vendor made the representation knowing it to be false or was aware that he or she did not know whether it was true or false; (4) the builder-vendor made the representation with the intent that the prospective home buyer (or a group of persons of which the prospective home buyer was a member) act or decide not to act in reliance on the representation; (5) the prospective home buyer relied on the representation; (6) the prospective home buyer's reliance was justified; and (7) this reliance caused damage to the prospective home buyer.⁴⁴⁰

Actionable concealment by a builder-vendor requires: (1) proof that the builder-vendor concealed a past or present fact, or failed to disclose a past or present fact that he or she had a duty to disclose; (2) the fact was material; (3) the builder-vendor concealed or failed to disclose the fact with the intent of creating a false impression of the actual facts in the mind of the prospective home buyer; (4) the builder-vendor concealed or failed to disclose the fact with the intent that the home buyer take a course of action he or she might not take if he or she knew the actual facts; (5) the home buyer took such action or decided not to act relying on the assumption that the concealed/undisclosed fact did not exist or was different from what it actually was; (6) the home buyer's reliance on the assumption that the concealed or undisclosed fact did not exist or was different from the actual fact was justified; and (7) this reliance caused damage to the home buyer.⁴⁴¹

Fraud may be shown by circumstantial evidence, including evidence of other similar transactions in the course of a systematic way of doing business.⁴⁴² All details of the transaction at issue are relevant; all circumstances should be considered.⁴⁴³ Direct evidence of reliance is unnecessary; reliance may be proven through circumstantial evidence.⁴⁴⁴ Fraudulent non-disclosure generally requires "proof of reasonable reliance on 'the assumption that the concealed fact does not exist' or 'was different from what it actually was.'"⁴⁴⁵

Actionable fraud may be established where a builder fails to disclose to a purchaser that latent defects exist in a structure because of violations of the building code.⁴⁴⁶ While mere "puffing" or "trade talk" or similar opinions may not give rise to a fraud claim,⁴⁴⁷ opinions as to estimates of future charges or expenses may give rise to such a claim depending on the circumstances.⁴⁴⁸

§ 5.2.2—Negligent Misrepresentation and Concealment

Colorado recognizes the tort of negligent misrepresentation in two circumstances: first, where the negligent provision of false information causes physical harm to the plaintiff's person or property;⁴⁴⁹ second, where the negligent provision of false information occurs during the course of a business transaction, causing financial loss.⁴⁵⁰ The negligent omission of material information constitutes a negligent misrepresentation as well.⁴⁵¹

"The duty of care owed by the supplier of information is measured by the use to which the information will be put, weighed against the magnitude and probability of loss that might attend that use if the information proves to be incorrect" or incomplete.⁴⁵²

§ 5.2.3—Concealment and Non-Disclosure Distinguished

Generally speaking, "concealment" involves an active effort to withhold information from another; it means "more than the simple act of remaining silent when there is a duty to speak, which is the usual meaning of 'nondisclosure.'"⁴⁵³ Fraudulent non-disclosure or concealment each requires proof of the same elements.⁴⁵⁴

A party can be aware of a material fact yet accidentally fail to disclose it without "scienter" or an intent to defraud. Thus, a defendant may simply, and negligently, fail to disclose material information because he or she has forgotten it or lost track of it in a mass of documentation. It is logical to conclude that a negligent failure to disclose is more likely to occur when the defendant is a corporation, as are many production builder-vendors. This is because material information may become known to a particular employee or agent of the corporation who is responsible for soils and construction issues, but the information is not shared with, disseminated to, or appreciated by another employee or agent who is responsible for making necessary disclosures to home buyers.⁴⁵⁵ Since a corporation is constructively deemed to have all the knowledge of its employees and agents,⁴⁵⁶ facts that the corporation has a duty to disclose may be negligently omitted or intentionally withheld from communications with prospective home buyers.

The Colorado Supreme Court has noted in dicta, "[I]f there is a concealed defect in [real property] known to the seller, or which by the exercise of ordinary prudence should have been known by him, and which an ordinarily prudent examination would have discovered, the seller is bound to reveal it to the purchaser. . . ."⁴⁵⁷ Colorado's appellate courts have not yet addressed whether a builder-vendor's failure to disclose adverse material facts that "should have been known" to it through reasonable investigation gives rise to a cause of action.⁴⁵⁸

For a more detailed discussion of a vendor's duty to disclose latent defects, see Sandgrund & Sullan, "Duty to Disclose Latent Defects When Selling a Home."⁴⁵⁹

§ 5.2.4—Concealment

A builder-vendor conceals a fact known to it if, by written or oral words, conduct, or a combination of words and conduct, the builder-vendor creates a false impression of the actual fact in the mind of another by covering up the truth, or by preventing the other person from discovering the actual fact for himself or herself.⁴⁶⁰ A concealment or non-disclosure also constitutes a misrepresentation.⁴⁶¹

§ 5.2.5—Scope of Duty to Disclose

An actionable concealment requires the existence of a duty to disclose. Such duty may arise under various circumstances. A builder-vendor has a duty to disclose all material facts known to him or her that "in equity and good conscience should be disclosed."⁴⁶² When dealing with another, a builder-vendor has a duty to disclose a material fact if it is known to the builder-vendor, and (1) the builder-vendor and the other person are in a confidential/fiduciary relationship; or (2) the builder-vendor states facts that are true but that the builder-vendor knows will create a false impression of the actual facts in the mind of the other person if the material fact is not disclosed; or (3) the builder-vendor knows that by its own unclear or deceptive words or conduct it has created a false impression of the actual facts in the mind of the other person; or (4) the builder-vendor knows that the other person is not in a position to discover the true facts for himself or herself; or (5) the builder-vendor has stated a material fact that was true or that it honestly believed to be true at the time it was stated, but that the builder-vendor later learned had become untrue, and the builder-vendor knows the other person is acting under an impression that the fact as originally stated is still true; or (6) the builder-vendor makes a promise or states an intention to perform a future act and there are other facts that it does not disclose that make the performance of that future act unlikely.⁴⁶³ A New Jersey court held that a condominium developer's failure to disclose the existence of a lease obligation owed by the condominium association may constitute fraudulent concealment in the face of a fiduciary duty to disclose.⁴⁶⁴ "[T]he existence of a fiduciary relationship is not required to prove a claim for constructive fraud."⁴⁶⁵

"[O]ne party to a business transaction has a duty to disclose to the other 'facts basic to the transaction, if he knows that the other is about to enter into it under a mistake as to them, and that the other, because of the relationship between them, the customs of the trade, or other objective circumstances, would reasonably expect a disclosure of those facts.'"⁴⁶⁶ In Mallon Oil Co. v. Bowen/Edwards Associates, Inc., the Colorado Supreme Court held that a geologist did not commit geophysical trespass when he shared lawfully obtained information with his new employer regarding the level of coal bed methane gas reserves on certain land for sale.⁴⁶⁷ The court also held that the purchaser and geologist had no duty to disclose to the land's vendor their knowledge of potential coal bed methane gas reserves because no "objective circumstances" created a disclosure duty.⁴⁶⁸

§ 5.2.6—Vicarious Liability

A disclosed principal may be held liable in deceit for a misrepresentation by an agent within the scope of the transaction the agent was authorized to effect.⁴⁶⁹ In limited circumstances in fraud cases, it may be necessary to show that the agent intended to benefit the principal by its fraud, that the agent committed the fraud while acting within his or her apparent authority, or that the principal ratified the agent's acts.⁴⁷⁰ For a more complete discussion of a vendor's vicarious liability for the misrepresentations and omissions of its agent, see "Vendor's Vicarious Liability" in § 5.2.12.

The Colorado Court of Appeals held that a general contractor's knowledge that a home was built in a floodplain could not be imputed to the homeowner-seller for purposes of establishing the scienter (actual knowledge) element of a...