CH 13 - Fraud & Misrepresentation

Typically "material" involves a $ amount

$500 in a $300M deal is probably NOT material

Opinion - •generally, the law does not protect the naïve buyer who relies on the seller's opinion, but opinions expressed by

-(1) a person who enjoys a relationship of trust and confidence or has superior knowledge, -(2) an expert hired to give advice, or -(3) a person who actually does not have this opinion are all actionable.

2 Major Categories of Fraud

-Actual (Intentional Fraud) -Constructive (negligence or innocent misrepresentation)

Silence

-Most actions for fraud are based on oral or written statements, but numerous other methods are used to deceive. -Actions, failure to act, concealment, and silence may all be employed to mislead another. -In some instances, the seller simply fails to disclose an element important in the transaction. -Sometimes a seller employs some trick or scheme to conceal a condition or fact that is material to the transaction.

•Grace was interested in purchasing a music store from Helen. •Grace's marketing strategy required a large volume of potential customers. •Helen informed Grace that, on average, 250 people came in daily. •Helen knew that this was false. •On several occasions, Grace visited the store, remaining for appreciable periods of time. •After Grace purchased the store, it became apparent that Helen's statement was false. •As a result, Helen sued to rescind. •What would a jury consider in its decision on whether or not to rescind the contract?

How long was Grace there checking out the property?? Can Grace prove that?

•Franks owned property on the outskirts of town. •Although sewer lines had been constructed in the area, Franks's property was not yet connected. •A prospective buyer asked Franks if the property was connected to a sewer. •Franks replied, "The sewer line is across the street." •Later, the buyer discovered that sewage from the house was being piped to the back end of the property into a septic tank. •The buyer sued Franks for the cost of having the property hooked to the sewer. •Franks argued that his statement was true. •How would a court rule?

The court will rule that this Frank committed fraud

What is the duty to speak?

There is a positive obligation to disclose defects that are material and that are not ordinarily discoverable by a reasonably prudent person. Courts call this a duty to speak.

Statute of Frauds

U essentially only have x amount of time before you can sue after the incident occurred

•Rex Todor is purchasing a house in Memphis, Tennessee. The sales associate states, "Elvis Presley's uncle once lived here." -If untrue, would it be material? •Rex Todor is purchasing an inn in Memphis, Tennessee. The sales associate states, "Elvis Presley slept here." -If untrue, would it be material?

Usually tied to the value - whether it is material or NOT

•Leon purchased land in a development called Vanderbilt Hills. •He had a house constructed on this property. •After a few months, the house began to sink. •On investigation, Leon discovered that the developer had filled a large gully with logs, stumps, and other types of debris and covered this with clay. •The land apparently was level, and enough clay had been dumped into the gully so excavation for the foundation did not disclose the fill. •Would Leon be successful against the developer in a suit for fraud?

YES absolutely (this problem would NOT be easily found) so Leon would probably win a lawsuit

•Mrs. Susan sold her house to Bob. •At the time that Bob inspected the property, Susan informed him that the heating unit was new. •Actually, the unit had been installed 10 years earlier. •In a suit for fraud based on the deceit, Bob would be entitled to damages. •Would he be able to sue for the cost of installing a new unit? •Would he be able to sue for a rescission of the contract and recover the expenses involved in replacing the old unit?

Yes Bob would be able to sue It was probably her intent to misrepresent/mislead Bob to encourage him to buy the property

Puffing

also known as dealer's talk, is the use of statements made to induce a purchaser to buy. Puffing is not actionable as fraud, even when false, because courts treat them as expressions of opinions.

•Active effort to hide something usually overcomes any reluctance courts have to refuse relief on the grounds of ...

caveat emptor. "BUYER BEWARE"

Compensatory damages

•"make the plaintiff whole"

Fraud

•A deceptive act or statement deliberately made by one person in an attempt to gain an unfair advantage over another. •Unauthorized and even unintentional misrepresentation by the sales associate may subject the broker to liability, including loss of license.

What makes an act of fraud INTENTIONAL??

•Intention to deceive •Scienter (knowledge of falsity of statement) - often reckless disregard of what truth is will also be found as intentional. •Evil intention is not necessary

Waivers

•Intentional surrender of a known right or privilege •Waiver by the injured party occurs if, after discovery of the fraud, the injured party merely continues to perform. •Completion of the contract and a subsequent suit for damages is an available option, but the injured party's position must be established within a reasonable period of time. Otherwise, the injured party is deemed to have "sat on his rights" and, thus, waived any claim of wrongdoing.

Negligent Misrepresentation

•Supplying false information and failing to exercise reasonable care in obtaining or communicating it. -Punitive damages cannot be recovered if misrepresentation was negligent.

Material Misrepresentation

•The misrepresentation must be material. -A person is not justified in acting on a false statement that is trivial in relation to the entire transaction. -Inconsequential information of this nature is not material and thus not grounds for suit.

Punitive damages

•awarded as punishment to the wrongdoer -In most states, punitive damages will not be awarded unless the action is egregious, oppressive, and committed with ill will.

Intentional Misrepresentation

•injured party may: -Refuse to perform, using the deceit as a defense if sued for breach of contract -Affirm the contract and sue for damages -Ask a court for a decree rescinding the contract, and most states will allow the injured party to also sue for damages.

Innocent Misrepresentation

•majority of courts take the position that the injured party is entitled to rescind the contract but not to collect damages.

Reliance

•to be successful in an action for fraud, the injured party must prove that -he or she acted in reliance on the false information, and -the reliance was justified.