Fraud Claims
Lawsuits often arise when a plaintiff feels that the defendant has cheated them out of something or lied to them. And so it is natural for a plaintiff to feel that the right word to describe what the defendant did is “fraud.” And while plaintiffs can bring fraud claims against defendants, certain rules apply that limit how they can do so and when a fraud claim can succeed.
Why should you read this post about fraud claims?
Because I had earlier promised you a post about conversion claims.
You want to know what it means to “plead with particularity.”
There are so many fraudsters in the news and you want to know more about the lawsuits against them.
https://en.wikipedia.org/wiki/Fraud#/media/File:Workathomead.jpg
Pleading a Fraud Claim
According to the highest court in New York, the elements of a common law fraud claim are: 1) a false statement of 2) a material fact 3) that the defendant made while knowing it to be false, 4) made for the purpose of inducing the plaintiff to rely on it and 5) injury. In addition to common law fraud, there are other types of fraud claims that are created by statute, such as securities fraud and wire fraud. But for this post, I will concentrate on common law fraud.
Those five elements are a lot. It is not enough to just say that the defendant said something false, which is much of what is needed for a representation and warranties claim. Instead, more is necessary. First, the lie needs to be about something important. Next, the plaintiff needs to prove that the defendant knew the truth and lied anyway (as opposed to having made a mistake). Next the plaintiff has to prove that they could not have reasonably known or discovered the truth themselves and that they were reasonable in believing the defendant. And lastly they need to show that they lost something because of the lie.
Additionally, many courts require plaintiffs to be very specific about what lie the defendant told. For example, Federal Rule of Civil Procedure 9 requires that the “circumstances of fraud” must be pled with “particularity.” This generally means the plaintiff needs to allege what exactly the defendant said that was a lie; they cannot just generally suggest that the plaintiff was dishonest or suggested something that was not true.
Fraud By Omission and Negligent Misrepresentation
Plaintiffs may still hold defendants accountable, even when they cannot prove the defendant knew she was lying or when she cannot identify an express false statement. They can do this through claims for fraudulent omission and through negligent misrepresentation. But proving these claims have specific requirements as well.
A fraudulent omission claim may arise when a defendant hides an important fact from the plaintiff. But since people generally do not have a duty to volunteer important information, different states have different rules about when a defendant can be liable for fraudulent omission. Once situation that may trigger liability is where the defendant accidentally says something wrong and then fails to correct her previous statement.
A negligent misrepresentation claim arises when the plaintiff cannot prove the defendant knew she was lying, but instead alleges that the defendant spoke with a reckless disregard for whether she was telling the truth. These claims may also be difficult to prove, however, since they may only apply when there is a special relationship of trust between the plaintiff and the defendant, such as when the defendant is an expert in a field and the plaintiff relied on her advice.
Contracts May Make Fraud Claims Harder to Bring
The existence of a contract between the plaintiff and the defendant may make it difficult for the plaintiff to assert a fraud claim.
First, courts may dismiss fraud claims when they allege the same misconduct as a breach of contract claim. Accordingly, if a plaintiff alleges that the defendant lied when she promised in contract that something was true, or if the defendant lied that she would perform her contractual duties, a court may dismiss those claims as not “extraneous” to the contract. But courts may permit claims for “fraudulent inducement” if the defendant made a false statement that induced the plaintiff to enter into the contract at all.
Second, many contracts have a “merger clause” that states that the parties affirm that they did not rely on any other representations outside of the contract when entering into the agreement. Such a clause may look something like this:
No prior agreement or representations between the parties not in this contract is binding. All subsequent modifications shall be in a writing signed by the parties.
The practical effect of these clauses is that they may preclude fraud claims because the plaintiff affirms that she did not rely on any representations outside of the contract, and so she may not be able to prove the necessary element of “reliance.”