E. Fraud and Misrepresentation

LibrarySouth Carolina Business Torts (SCBar) (2021 Ed.)

E. FRAUD AND MISREPRESENTATION

The elements of a cause of action for fraud and misrepresentation (also referred to as fraud and deceit in earlier cases) were established under South Carolina common law as early as 1939.218 Broadly speaking, fraud starts as an intentional misrepresentation, concealment, or nondisclosure of a fact that results in damage to another party.

1. Elements, Pleading and Proving

Fraud is never presumed; it must be shown through clear, cogent, and convincing evidence.219 A complaint that fails to allege all the elements of the claim is considered "fatally defective."220 Where the complaint omits allegations of any element of the claim, the trial court should grant a motion to dismiss.221

Fraud claims are subject to heightened burdens throughout the litigation process, from pleading to appellate review. Under Rule 9 of the South Carolina Rules of Civil Procedure, "[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a person may be averred generally."222 To prevail on a fraud claim at trial "generally requires proof by clear and convincing evidence."223 Therefore, unlike most causes of action, "the non-moving party must submit more than a mere scintilla of evidence to withstand a motion for summary judgment" on a fraud claim.224 This heightened burden extends to the appellate court's review of the trial court's decision on such a motion.225

a. The Nine Elements of Fraud

To plead a claim for fraud using the modern elements, a plaintiff must allege the following: (1) a representation; (2) falsity of the representation; (3) materiality of the representation; (4) either defendant's knowledge of its falsity or a reckless disregard of its truth or falsity; (5) intent that the representation be acted upon; (6) the hearer's ignorance of its falsity; (7) the hearer's reliance on the truth of the representation; (8) the hearer's right to rely thereon; and (9) the hearer's consequent and proximate injury.226

(1) Representation. In order to be considered an actionable "representation," the claim must arise from a statement or set of actions concerning an existing fact.227 Further, under South Carolina law, statements of opinion,228 predictions of future events,229 broken promises,230 "casual" statements and representations as to matters of law231 are not actionable as fraud.

Failing to disclose (or remaining silent) can stray into fraud when the party having knowledge of the facts has a duty to reveal the same to the hearer.232 This happens when the concealment is either deliberate or occurs by way of a fraudulent act.233 A fraudulent act has been described by South Carolina courts as "dishonesty in fact, unfair dealing, or the unlawful appropriation of another's property by design."234

(2) Falsity. Generally, for a representation to be actionable, it "must relate to a present or pre-existing fact and be false when made."235 However, even a statement that is technically true may be actionable because "'[t]he telling of but part of the truth may sometimes effectually mislead.'"236 Therefore, a misrepresentation also occurs when a speaker knows a statement, although not untrue, could be interpreted in a way that is false and makes it with the intent to mislead.237

Whether a representation was true or false depends on the circumstances that existed at the time the representation was made or acted upon, not as they may have existed at a later date.238

(3) Materiality. Materiality in fraud typically hinges upon one party's decision being affected by the fraudulent act.239 Here reference is made to the reasonable person standard. That is, if a reasonable person would have considered such representation in making his or her decision, the representation may be deemed material.240 It is not necessary that the representation constitute the sole cause of the hearer entering into the transaction, it need only play a part in inducing the hearer to transact.241

For example, a representation is material where it induces a party to purchase a piece of real estate under terms that, had the representation not been made, she would not have. That is what occurred in Buzhardt v. Cromer,242 where a purchaser was induced to buy land by the fraudulent promise of the seller that either he or the county would construct an access road for the property.243

In another context, in Gaskins v. Southern Farm Bureau Casualty Insurance Co.,244 the South Carolina Supreme Court elaborated on an earlier ruling and held that a release fraudulently obtained by an insurer is material only if the insurer had an obligation to pay under the terms of the policy.245 This requires a party bringing a fraud claim to prove that the insured was responsible for the party's injuries.246 In Gaskins, this meant that to recover, the plaintiff had to "first allege and prove that [the insured] was negligent in the underlying tort."247

(4) Knowledge or Reckless Disregard of Falsity. A plaintiff seeking to prove fraud must show that the defendant knew his or her statement was false or that the statement was made with reckless disregard for the truth.248

If a plaintiff cannot establish this element, he may nonetheless be able to bring a claim for negligent misrepresentation.249

(5) Intent that the Representation Be Acted Upon. The intent to induce by way of deception is an essential component of a fraud claim.250 This refers to "deception, intentionally practiced to induce another to part with property or to surrender some legal right."251

Where every element of a fraud claim is present except for the speaker's intent that the representation be acted upon, i.e., the speaker's intent to deceive, an injured party may be able to assert a claim for "constructive fraud."252

(6) Hearer's Ignorance of Falsity. A statement that the hearer knows is false cannot form the basis for a fraud claim.253 Therefore, in Moorhead v. First Piedmont Bank & Trust Co.,254 the court affirmed a directed verdict where the plaintiff failed to produce evidence that he was ignorant of the truth of the defendant's statements.255 Specifically, the plaintiff alleged that he was induced to purchase a tract of land in Tennessee by the defendant's representation that it was "valuable coal-producing land" when, in fact, "title to the land was defective and the mineral rights had been reserved to another party."256 The court held that the trial judge properly granted a directed verdict because the evidence showed that the plaintiff had "knowledge of the title and value of the real estate involved, from his extensive dealings with Tennessee real estate and from the recitals in the documentary evidence," which precluded any finding of fraud.257

(7) Hearer's Reliance (In Fact) on the Truth of the Matter Asserted. For a misrepresentation to be actionable, the hearer must show that she was induced to act by it, i.e., that she actually acted in reliance on the truth thereof.258 Therefore, a party cannot recover for a fraudulent misrepresentation that induces him to perform an act he already had a legal obligation to perform.259

For example, in M.B. Kahn Construction Co. v. South Carolina National Bank of Charleston,260 a lender falsely represented to a contractor that there were sufficient funds in an account to pay for the completion of a construction project.261 Nonetheless, the court affirmed the dismissal of the contractor's fraud claim because "[the contractor] was obligated by contract to complete construction" and could not have been "fraudulently induced to do so by [the lender's] misrepresentation."262 That being said, in most cases this issue goes to a jury, as issues of "reliance and its reasonableness, going as they do to subjective states of mind and applications of objective standards of reasonableness, are preeminently factual issues for the triers of the facts."263

(8) Hearer's Right to Rely Thereon. The hearer's right to rely upon the fraudulent misrepresentation must be determined in light of the hearer's "duty to use reasonable prudence and diligence under the circumstances" in identifying the truth with respect to the representations made to him.264 What constitutes "reasonable diligence and prudence" should be determined on a case-by-case basis.265

Confidential and fiduciary relationships impact the analysis and greatly support the hearer's right to rely on statements.266 Factors that may be considered "include the form and materiality of the representation; the respective age, experience, intelligence and mental and physical conditions of the parties; and the relations and respective knowledge and means of knowledge of the parties."267

In the event of an arms-length transaction between "mature, educated people" where there is no confidential or fiduciary relationship, there is no hearer's right to rely.268 Circumstances where an individual should have utilized precaution and protection can also negate the hearer's right to rely on a given representation.269

For example, in the case of Florentine Corp. v. PEDA I, Inc.,270 a landlord brought an action for rent and other fees allegedly due under a lease agreement for a shopping mall unit.271 The lease agent informed the tenants prior to signing their lease that there would be "no competition" for their store, The Athlete's Foot, but the lease itself did not include an exclusivity provision.272 A subsequent tenant dealing similar goods, The Athletic Attic, eventually entered the property; thus, the tenants argued fraudulent inducement as a defense to the landlord's claim.273 However, when the case reached the South Carolina Supreme Court, the court held that the tenants did not have the right to rely on representations that competitors would not be allowed into the shopping mall.274 This was because the representation was made during a pre-contract negotiation and the court did not find...

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