Fraud

Fairfax Injury Lawyer Brien Roche Addresses Fraud Cases

Brien Roche

When we think of fraud, the tendency is to think exclusively of fraud in the inducement to enter into a contract.  There is more to fraud than the inducement. There is fraud in the factum. Hayes v. Virginia Mut. Protection Ass’n, 76 Va. 225 (1882) and there is what some call promissory fraud.

Fraud in the inducement consists of a misrepresentation of a material existing or past fact which is intentionally made to procure a contract and upon which the Plaintiff justifiably relies to enter into the contract.  Max Meadows, etc., Co. v. Brady, 92 Va. 77, 22 S.E. 247 (1895).

Fraud in the factum (performance) is seen in instances such as substituting a phony contract for a bona fide contract or some other such behavior.

Promissory fraud is seen in instances where the person making the promise has the present intention of not performing the promise when the promise is entered into.

Elements of a Fraud Claim

In analyzing a fraud claim the first thing that must be done is determine whether or not a duty in tort even exist.  In the 2007 case of Augusta Mutual Insurance Company v. Mason, 274 Va. 199, 645 S.E.2d 290 (2007) the Virginia Supreme Court defined the scope of fraud claims.  In Augusta the insurance carrier claimed that its agent defrauded it by filing an insurance application for a client in which the agent misrepresented significant facts.  The agent owed certain duties to the insurance company based upon the agent’s contract with the company and each alleged misrepresentation related to a duty or obligation that was called for by the contract.  Augusta failed to allege any duties other than contractual duties.  Because of that the Court said that there was no duty in tort but rather simply a contract duty and therefore no basis for a fraud claim.  A similar narrow interpretation of the duty in tort is found in Atlas Partners II, L.P. v.  Brumberg, Mackey & Wall, PLC, 2006 U.S. Dist. Lexis 983 (W.D.Va. 2006).  As such, the initial analysis before even getting to the elements of a fraud claim must be whether or not a duty in tort even exists or is the duty purely a contractual duty thereby limiting the breadth of the claim.

For a free consultation about your fraud claim, please contact us.

Fraud Involves Misrepresentation

Typically, that misrepresentation comes in the form of a false statement.  It may, also, come in the form of concealment or non-disclosure of facts.  Concealment or non-disclosure of material facts may exist where there is evidence of a deliberate decision not to disclose a material fact and knowledge by that party that the other party is acting on the assumption that the fact does not exist.  Allen Realty Corp. v. Holbert, 227 Va. 441, 450, 318 S.E.2d 592, 597 (1984); Cohn v. Knowledge Connections, Inc., 266 Va. 362, 368, 585 S.E.2d 578, 581 (2003); Spence v. Griffin, 236 Va. 21, 28, 372 S.E.2d 595, 599 (1988).

A lingering question relating to claims based upon concealment or non-disclosure is whether or not there must be first a duty to disclose.  There is no Virginia Supreme Court decision that imposes an absolute duty to disclose.  In Van Deusen v. Snead, 247 Va. 324, 328, 441 S.E.2d 207 (1994) the Court said there was a duty to disclose where non-disclosure would be the equivalent of a knowing act of concealment with the intent to deceive.  To survive a Demurrer a claim based upon concealment should allege that:

  1. The information was not equally accessible to the Plaintiff.
  2. The Defendant did or said something to throw the Plaintiff off guard
  3. The Defendant had a greater level of expertise than the Plaintiff in regards to the particular transaction.
  4. The Defendant actively concealed or suppressed the information.

Fraud Involves Material Existing or Past Fact

The second element of a fraud claim is that the misrepresentation must be of a material existing or past fact.  Materiality in this context is much the same as it is in regards to a breach of  contract, i.e. it must be what influences the person to enter into the contract.  Packard Norfolk, Inc. v. Miller, 198 Va. 557, 563, 95 S.E.2d 207, 211-12 (1956).  To put it in the context of a breach of contract claim to be material the misrepresentation must go to the heart of the deal.

The “fact” that is the subject of the misrepresentation is something that is susceptible of “exact knowledge when the statement is made”.  Poe v. Voss, 196 Va. 821, 86 S.E.2d 47, 49 (1955).  To put the issue of “fact” in the context of defamation claims, to be a “fact” it must be something that is provably true or false.  Raytheon Tech Servs. Co. v. Hyland, 273 Va. 292, 641 S.E.2d 84 (2007).

There are several examples that arise in the case law of instances of things that are not assertions of fact:

  1. Commendatory statements, trade talk or puffing.  Tate v. Colony House Builders, 257 Va. 78, 84, 508 S.E.2d 597, 600 (1999).
  2. An assertion that an object was in excellent condition.  Lambert v. Downtown Garage, Inc., 262 Va. 707, 553 S.E.2d 714 (2001).
  3. How synthetic stucco would perform in the future if used in constructing a home.  McMillion v. Dryvit Systems, Inc., 262 Va. 463, 552, S.E.2d 364 (2001).
  4. Insurer’s statement that the company’s insurance policy requirement for reporting and treating all work related injuries would eventually reduce the cost of workers’ compensation coverage to the Plaintiff.  Lumbermen’s Underwriting v. Dave’s Cabinet, Inc., 258 Va. 377, 520 S.E.2d 362 (1999).

Instances of factual assertion that have been recognized by the Virginia Supreme Court are:

  1. The assertion by Dryvit that it uses only 100% acrylic polymer formula in its coating.  McMillion, Supra.
  2. The new dwelling house was free from structural defect, constructed in a workmanlike manner and was fit for habitation.  Tate v. Colony House Builders, Inc., 257 Va. 78, 508 S.E.2d 597, 600 (1999).
  3. Defendant agent’s advice to the Plaintiff that the revised insurance policy would cover all medical expenses in excess of a certain sum.  Even though to some extent this was a matter of opinion the Court held that it was a factual assertion since the insurance professional presumably had information available to him about the policy that was not equally available to the lay customer.  Nationwide Ins. Co. v. Patterson, 229 Va. 627, 331 S.E.2d 490 (1985).
  4. The car was in perfect condition.  Packard, Supra.

The facts that are pled must be either past or present facts as opposed to future facts.  The only exception to the future fact prohibition is where the Defendant makes a promise which is made with a present intention not to perform (promissory fraud).  Sea-Land Service, Inc. v. O’Neal, 224 Va. 343, 297 S.E.2d 647 (1982); Lloyd v. Smith, 150 Va. 132, 145, 142 S.E. 363 (1928); Elliott v. Shore Stop, Inc., 238 Va. 237, 245, 384, S.E.2d 752 (1989).

The pleading of these “facts” must be with specificity which ideally should include the identity of the individual who perpetrated the fraud as well as the time and place of the fraudulent act.  Tuscarora v. B. V. A., 218 Va. 849, 858, 241 S.E.2d 778 (1978).

Fraud Requires Intent

The third element of fraud is that the representation must be made intentionally for the purpose of procuring the contract.  It is the element of intent that distinguishes an actual fraud claim from a constructive fraud claim.  With constructive fraud the misrepresentation may be innocent or negligent.  As is true with actual fraud claims, a constructive fraud claim may be based either upon an overt misstatement or an omission or concealment of facts where there is a duty to disclose.  Nationwide Mutual Ins. Co. v. Hargraves, 242 Va. 88, 405 S.E.2d 848 (1991)

The unusual aspect of a constructive fraud claim is that to the extent that the misrepresentation is innocent then it in effect becomes a strict liability claim.  That is, without proof of any fault the Plaintiff may recover even though the misrepresentation is purely innocent.  For instance, if an agent receives information from a principal and then conveys that information to a third-party believing that it is true, that innocent misstatement may become the basis of a constructive fraud claim.  In general, strict liability is not recognized in Virginia.  Harris v. T. I., Inc., 243 Va. 63, 413 S.E.2d 605 (1992).  The one exception to that is dynamite blasting cases.  Pope v. Overbay, 196 Va. 288, 83 S.E.2d 365 (1954).  The logic of allowing strict liability in regards to a blasting case is that the activity is inherently dangerous.  There is nothing within a constructive fraud claim that typically would involve any element of inherent danger and as such there is some question as to whether or not an innocent misrepresentation could withstand close scrutiny as being the basis for constructive fraud liability.

Fraud Involves Justifiable Reliance

The fourth element of a fraud claim is that of justifiable reliance.  Justifiable reliance, in this context, becomes somewhat akin to proximate cause.  That is, was it the misrepresentation that caused the resulting damage or did the Plaintiff in fact rely upon other facts such as the Plaintiff’s known prior experience or have other motives to engage in the transaction.

Justifiable reliance should not be overlooked as a key element in a fraud case and frequently is the soft spot in a plaintiff’s case.  Murayama 1997 Trust v. NISC Holdings, LLC, 284 Va. 234, 246, 727 S.E.2d 80, 86 (2012).

Fraud Involves Detriment or Damage

The final element of a fraud claim is detriment or damage.  Any detriment or damage in the context of fraud must be looked at in the greater framework of the purpose of a tort claim, i.e. to compensate the Plaintiff for violations of certain common law or statutory duties involving the safety of persons and property.  Filak v. George, 267 Va. 612, 618, 594 S.E.2d 610, 613 (2004).  Tort law is not designed to compensate parties for losses resulting from the breach of an agreement.  Sensenbrenner v. Rust, Orling & Neale, Architects, Inc., 236 Va. 419, 425, 374 S.E.2d 55, 58 (1988).  The economic loss rule which precludes tort recovery for economic losses where parties are not in privity is not applicable to a fraud in the inducement claim since fraud in this context precedes the formation of the contract.  Filax, Supra.

The types of recovery allowable where fraud has been proved by clear and convincing evidence are:

  1. Delay damages.  Jefferson Standard Life Ins. Co. v. Hedrick, 181 Va. 824, 835, 27 S.E.2d 198, 203 (1943).
  2. Damages for embarrassment and humiliation and mental anguish.  Sea-Land Serv., Inc. v. O’Neal, 224 Va. 343, 297 S.E.2d 647 (1982); Humphreys v. Baird, 197 Va. 667, 90 S.E.2d 796 (1956).
  3. In cases dealing with property the damages are the difference between the actual value of the property at the time the contact was made and the value that the property would have possessed if the representation had been true.  Prospect Development Company, Inc. v. Bershader, 258 Va. 75, 91, 515 S.E.2d 291, 300 (1999).  Repair or replacement costs are not the proper measure of damages in these cases.  Klaiber v. Freemason Assocs, Inc., 266 Va. 478, 486, 587 S.E.2d 555, 559 (2003).
  4. Loss of potential future earnings.  Sea-Land Serv., Inc. v. O’Neal, 224 Va. 343, 297 S.E.2d 647 (1982).
  5. Attorney’s fees.  Prospect Development Company, Inc. v. Bershader, 258 Va. 75, 92, 515 S.E.2d 291, 300 (1999).
  6. Punitive damages.  Jordan v. Sauve, 219 Va. 448, 452, 247 S.E.2d 739, 741 (1978).
  7. Rescission, Ashmore v. Herbie Morewitz, Inc., 252 Va. 141, 148 (1996).

Although the elements of fraud in general must be proven by clear and convincing evidence the amount of damage need only be proven by the greater weight of the evidence.  Jefferson Standard Life Ins. Co. v. Hedrick, 181 Va. 824, 835, 27 S.E.2d 198, 203 (1943).

Other Types Of Fraud

The second type of fraud is what is called fraud in the factum.  Factum literally means “doing” or “done”.  Fraud in the factum might be found in a forgery of a signature on a contract that had been previously agreed to or an alteration of contract terms unilaterally without the knowledge of the other party.  Fraud, however, can go beyond the execution of the oral contract and may relate to either performance of the contract or, in some instances, be totally non-contractual.  For instance, suppose a home builder builds a home and as part of that construction process represents that a deck has been constructed in a workman-like manner when in fact he knows it has not been.  The homeowner relies upon that representation and uses the deck and while using it the deck collapses.  Certainly in that context the homebuilder may be liable in tort.  The representation at issue did not cause the homeowner to enter into a new contract, it simply caused the homeowner to use the deck that was built pursuant to the contract.  The builder’s duty, in part, arose from contract as was the case in Augusta.  However, in Augusta the agent had certain fiduciary duties to the company he worked for.  The builder in this context probably has no fiduciary duty to the homeowner.

Fraudulent inducement to perform a contract may exist where the contract is executory and one party induces the other party to perform by concealing some fact which otherwise would excuse performance by the latter  party.  Ware v. Scott, 220 Va. 317, 257 S.E.2d 855 (1979).

It is conceivable that fraud can be found in a totally non-contractual circumstance.  For instance, a sinister motorist stops in his lane of traffic to allow a left turning vehicle to turn in front of him knowing that there is a speeding vehicle coming up on his right that the left turning motorist does not see.  The left turning motorist completes the turn and then is struck by the fast moving vehicle in the  lane to the right of the sinister motorist.  Have the elements of fraud been satisfied?  The action of the sinister motorist in waving the left turning motorist through constitutes a false representation of a material existing fact done intentionally to mislead and upon which the left turning motorist justifiably relies all to his detriment.  In that context there is fraud, there is an inducement but there is no contract.

The point to be made is that the claim of fraud is considerably broader than simply fraud in the inducement.  Indeed, the fraud may relate to the performance of a contract or in some instances it may even be non-contractual.

The final category of fraud is what is called promissory fraud which is referenced above.  In the context of promissory fraud, the misrepresentation must be intentional (there is no such thing as constructive fraud within this context) and it is that intent or state of mind that constitutes the “existing fact” which is an element of fraud.  Super Value, Inc. v. Johnson, 276 Va. 356, 666 S.E.2d 335 (2008).

The Defense of Fault In Fraud Claims

An affirmative defense to a fraud claim may be what is called in pari delicto i.e., in equal fault.  If the party claiming to have been defrauded was in fact part of the overall scheme of fraud then that constitutes illegality and may be a bar to the claim.  If however the parties are not in pari delicto then the defense of illegality may not bar the claim.  Waller v. Eanes’ Adm’r, 156 Va. 389, 396 (1931).  For instance if one party is less blame-worthy than the other than the defense of illegality may not be a bar to the claim.  The parties are not in pari delicto if they don’t have the same level of knowledge, the same level of willingness or the same wrongful intent in terms of engaging in the transaction.  Likewise if the undertakings of each of the parties are not equally blame-worthy then the parties may not be in pari delicto.

The Fault May Be Compared

In the Waller case the Court endorsed two factual situations in which such inequality exists.  One of those situations is where there is evidence of imposition, oppression, duress, threats, undue influence or taking advantage of the necessities or weakness of the other party.  A second instance where such inequality may exist is where even though the contract is illegal, the position of one of the parties is less illegal and blame-worthy than those of the others.

Where a party has entered into a transaction with the intent of defrauding, hindering or delaying creditors then the court will not provide that party with any legal relief.  Cline v. Berg, 273 Va. 142, 147 (2007).  In Boggs v. Snoddy, 146 Va. 325 (1926) the plaintiff, facing financial difficulties, placed bonds in the name of a third party to prevent them from being seized in a collection process.  He later sued to recover the bonds and the court rebuked him, saying that the party stood  in pari delicto and no relief would be provided.

In a fraud case the plaintiff must show some degree of diligence. In Lake v. Tyree, 90 Va. 719, 724 (1894) the Court noted that the law of fraud does not indemnify one against the consequences of indolence, folly or careless indifference to the ordinary and accessible means of information.  If a party has received information that would excite suspicion then that party cannot ignore it.  Crowder v. Crowder, 125 Va. 80, 87 (1919).  The plaintiff may not ignore warning signs and proceed blindly with a transaction and then claim to have been defrauded.  Harris v. Dunham, 203 Va. 760, 768-769 (1962).  In this latter case a business purchaser made partial investigation of the business but did not follow through and discover the full details.  Likewise in Costello v. Larsen, 182 Va. 567, 571 (1994)  the court noted that it is the duty of the party to make use of ordinary care and prudence to protect himself.  The law will leave that party where the law has found them if that positioning is a product of their own imprudent confidence.  Such conduct may lead to a defense of unclean hands which may be a bar to any equitable relief.  Barry v. Commonwealth, 280 Va. 572, 580 (2010).

If you have been the victim of fraud contact our office.

Brien Roche is a tort lawyer who has been serving the Northern Virginia and D.C. area for over 40 years. Feel free to contact him today or read more about his expertise in terms of helping you with your fraud case or other intentional torts. For more information about fraud see the pages on Wikipedia.

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Fraud

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Contact Us For A Free Consultation