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Edward Lowry
Difficulties in Alleging and Proving Fraud

by EDWARD LOWRY

     The area of fraud contains perhaps more pitfalls and minefields for the unwary than any other. It is technical to the point of being at times hyper-technical and not always intuitive. This section will endeavor to point out a number of the abysses and mines and suggestions on how they may be avoided.

     First, while they are defined elsewhere in these course materials, the following definitions of actual and constructive fraud will provide a ready reference for use in this section.

1. Actual Fraud.

The Supreme Court of Virginia has repeatedly stated that:

[A] “litigant who prosecutes a cause of action for actual fraud must prove by clear and convincing evidence: (1) a false representation, (2) of a material fact, (3) made intentionally and knowingly, (4) with intent to mislead, (5) reliance by the party misled, and (6) resulting damage to the party misled.” (Citations omitted).

Prospect Development Company v. Bershader, 258 Va. 75, 85, 515 S.E.2d ; Bryant v. Peckinpaugh, 241 Va. 172, 175, 400 S.E.2d 201, 203 (1991); Winn v. Aleda Constr. Co., 227 Va. 304, 308, 315 S.E.2d 193, 195 (1984) 291 (1999);

2. Constructive Fraud.

Similarly, constructive fraud has been consistently defined in a long list of cases. For example, in Prospect Development Company v. Bershader, 258 Va. 75, 515 S.E.2d 291 (1999) the court summarized as follows:

In Blair Constr., Inc. v. Weatherford, 253 Va. 343, 346-47, 485 S.E.2d 137, 138-39 (1997), we stated: [T]he elements of a cause of action for constructive fraud are a showing by clear and convincing evidence that a false representation of a material fact was made innocently or negligently, and the injured party was damaged as a result of his reliance upon the misrepresentation. Evaluation Research Corp. v. Alequin, 247 Va. 143, 148, 439 S.E.2d 387, 390 (1994); accord Nationwide Mut. Ins. Co. v. Hargraves, 242 Va. 88, 92, 405 S.E.2d 848, 851 (1991); Kitchen v. Throckmorton, 223 Va. 164, 171, 286 S.E.2d 673, 676 (1982). Additionally, “[a] finding of . . . constructive fraud requires clear and convincing evidence that one has represented as true what is really false, in such a way as to induce a reasonable person to believe it, with the intent that the person will act upon this representation.” Alequin, 247 Va. at 148, 439 S.E.2d at 390.’ Mortarino v. Consultant Eng. Services, 251 Va. 289, 295, 467 S.E.2d 778, 782 (1996).

Id., at 86.

3. Present intention not to perform.

    As a general proposition:

[A]n action based upon fraud must aver the misrepresentation of present pre-existing facts, and cannot ordinarily be predicated on unfulfilled promises or statements as to future events. Were the general rule otherwise, every breach of contract could be made the basis of an action in tort for fraud. To permit an action for damages in favor of one who has no other ground for complaint, except an unfulfilled promise . . ., that is upon a broken contract, would ignore essential elementary distinctions, and in effect nullify the statute of frauds.

Lloyd v. Smith, 150 Va. 132, 145, 142 S.E. 363 (1928). Nevertheless, the Court has recognized that there are “some real and apparent exceptions.” Notably:

[T]here is much authority to the effect that an action in tort for deceit and fraud may sometimes be predicated on promises which are made with a present intention not to perform them, or on promises made without any intention to perform them. It has been stated that the gist of fraud in such case is not the breach of the agreement to perform, but the fraudulent intent.

Id. See also Restatement (Second) of Torts § 530 comment c (1977); Sea-Land Service, Inc. v. O'Neal, 224 Va. 343, 351, 297 S.E.2d 647 (1982), Boykin v. Hermitage Realty, 234 Va. 26, 29, 360 S.E.2d 177, 178-79 (1987); Colonial Ford v. Schneider, 228 Va. 671, 677, 325 S.E.2d 91, 94 (1985).

     The Court applied the exception in Elliott v. Shore Stop, Inc., 238 Va. 237, 245, 384 S.E.2d 752 (1989), in which the defendant allegedly promised to permit the plaintiff to retain her job if she took a certain test. It was a promise he did not intend to perform at the time it was made. “Thus, contrary to the trial court's view, [the defendant’s] promise was a misrepresentation of a present fact, and if made to induce the employee to act to her detriment, is actionable as an actual fraud.” Boykin v. Hermitage Realty, 234 Va. 26, 30, 360 S.E.2d 177 (1987) provides another example of the application of the Lloyd exception. The plaintiffs in Boykin expressly informed the defendant that they were especially interested in privacy. The Court interpreted the defendant’s representations “promises of privacy made in reply to express inquiries. The inquiries were unambiguous, and the promises were responsive, unconditional, and reinforced by the map displayed on the wall of the agent's office.” When the representations were made, the defendant was aware that a wooded area near the property the plaintiffs were interested in was actually slated to for development as a playground. This was enough to satisfy the requirements of the exception.

     See also, the discussion of Sea-Land Service, Inc. v. O'Neal, 224 Va. 343, 297 S.E.2d 647 (1982) and Sartin v. Mazur, 237 Va. 82, 85-85, 375 S.E.2d 741 (1989) in the section entitled “Separation of Fraud and Contract”, infra.

     The key, of course, is proving (by clear and convincing evidence) that the defendant never intended to honor the promise. It is important in pleading such a case to go to pains to lay out just why this is not just a case of a promise unfulfilled. There should be a clear statement that the defendant made the promise not intending to honor it and, whatever evidence is available to support that conclusion should be alleged as well. When resisting the inevitable demurrer that will follow, it is also important to stress to the court that motivation and intent are questions of fact for the jury to determine. As will be seen, the courts in Virginia are very restrictive when it comes to fraud. Juries may well bring more of a community sense to an evaluation of intent, depending on the facts of individual cases.

     As will be seen below, the Court has not always been in all ways consistent on what meets the requirements of the exception.

     Note that a present intention not to perform a promise may only support a cause of action for actual fraud. Since constructive fraud is the innocent or negligent misstatement of a material fact, it cannot logically be consistent with a present wrongful intent at the time the representation is made. Blair Construction v. Weatherford, 253 Va. 343, 348, 485 S.E.2d 137 (1997).

4. Existing Fact vs. Opinion, Puffing or Promise as to Future Event.

Joined at the hip with the issue of present intention not to perform are the analyses of what constitutes “existing fact,” statements of opinion, puffing and promises as to future events.

In Cohn v. Knowledge Connections, Inc., 266 Va. 362, 585 S.E.2d 578 (2003), the Court laid out the dichotomy in this fashion:

Furthermore, although “[i]t is not always an easy matter to determine whether a given statement is one of fact or opinion,” Mortarino v. Consultant Engineering Services, Inc., 251 Va. 289, 293, 467 S.E.2d 778, 781 (1996), the evidence fails to show that [defendant’s] statement was about a matter of “material fact” as opposed to an opinion. “It is well settled that a misrepresentation, the falsity of which will afford ground for an action for damages, must be of an existing fact, and not the mere expression of an opinion.” Id.

Id., at 368.

    Puffing is nothing more than another word for a type of opinion. While the Court has expressed a healthy humility in considering just what may constitute puffing:

We have not, however, established a bright line test to ascertain whether false representations constitute matters of opinion or statements of fact.

Lambert v. Downtown Garage, Inc., 262 Va. 707, 553 S.E.2d 714 (2001), the Court has gone forward with the proposition that:

Nonetheless, we have recognized that “[c]ommendatory statements, trade talk, or puffing, do not constitute fraud because statements of this nature are generally regarded as mere expressions of opinion which cannot rightfully be relied upon, at least where the parties deal on equal terms.”

Id. A7 712-713 (citations omitted). In Lambert, a Consumer Protection Act case, the Court determined that the defendant car salesman’s statement “that the vehicle was in ‘excellent’ condition cannot be viewed as anything more than an opinion. Merely stating that property is in excellent condition, without more, is clearly a matter of opinion in the manner of puffing.” Id.

     While the typical car salesman’s statements in Lambert may be classic puffing language, the Court was faced with what should be a closer call in McMillion v. Dryvit Systems, Inc., 262 Va. 463, 552 S.E.2d 364 (2001). There the Court held that the alleged misrepresentations identified by the plaintiffs, “when taken in context,” were merely statements of opinion about how [the defendant’s system] would perform in the future if utilized in constructing a home.” Id., at 472. In order to clarify the distinction between that and an assertion of fact, the Court stated:

To illustrate the difference between a statement of opinion and one of existing fact, we point to another representation in Dryvit's advertising brochure. On the same page of the brochure upon which the second alleged misrepresentation appeared, Dryvit stated that it uses only 100 percent acrylic polymer formula in its finish coating. That statement, if false, would be a misrepresentation of existing fact because it pertains to the present quality or character of Dryvit's EIFS.

Id. Assuming that the former statement, found to be puffing or opinion, was based on purported testing and experience, why is it seen as an opinion as to future performance rather than assertion as to “its present quality or character?”

     A similar conundrum appears in Tate v. Colony House Builders, Inc., 257 Va. 78, 508 S.E.2d 597, 600 (1999). There, the Court held that statements that: “‘the new dwelling house was free from structural defects; . . . the new dwelling house was constructed in a workmanlike manner and; . . . the new dwelling house was fit for habitation’ are representations of the present quality or character of the property and, thus, are statements of fact and not mere expressions of opinion.” Id., at 83-84.

     Query: How are the statements in Tate substantively different than the statements in Lambert?

     In Lumbermen's Underwriting v. Dave's Cabinet, Inc., 258 Va. 377, 520 S.E.2d 362 (1999) the Court held that the defendant’s statement that the company’s policy requirement for reporting and treating all work-related injuries would eventually reduce the cost of workers' compensation insurance coverage for the plaintiff “was merely an unfulfilled promise as to a future event and not a statement concerning an existing or pre-existing fact.” Id., at 382. The Court quoted its opinion in Patrick v. Summers, 235 Va. 452, 454, 369 S.E.2d 162, 164 (1988) for the supporting proposition that “fraud must relate to a present or a pre-existing fact, and cannot ordinarily be predicated on unfulfilled promises or statements as to future events.” Why is it that a statement purportedly based on existing data and statistics is merely an opinion rather than assertion of fact?

     Nationwide Ins. Co. v. Patterson, 229 Va. 627, 331 S.E.2d 490 (1985) is a case which shows that facts rule. Plaintiff bought an insurance policy through defendant company's agent. Some years later, defendant revised the policy. The agent advised plaintiff of the policy changes but misinformed plaintiff, stating that the policy would cover all medical expenses in excess of a certain sum. Plaintiff accepted the new policy upon the agent's representations. Plaintiff later became ill and had to be hospitalized. His hospital bills exceeded the sum in question, but the defendant refused to pay all the expenses. The Court laid out the essential facts as follows:

Nationwide further submits that Huffman's statement was not actionable because it was a mere expression of opinion. Nationwide relies on a letter written by Huffman after the fact in which he stated that his description of the policy to Patterson was merely his interpretation of the policy. At trial, Patterson said he never heard Huffman use the word “interpretation” during the conversation in which the misrepresentation was made. The trial court believed Patterson.

Id., at 631. Based on other decisions one might anticipate a defendant’s decision here based on opinion. This, however, was not the case. The Court analyzed the particular facts of the case and held as follows:

[W]here the parties are on unequal terms even an opinion can be actionable. In Cerriglio v. Pettit, we quoted Grim v. Byrd, 73 Va. (32 Gratt.) 293, 301-02 (1879), as follows:
“Even a matter of opinion may amount to an affirmation, and be an inducement to a contract, especially where the parties are not dealing upon equal terms, and one of them has, or is presumed to have, means of information not equally open to the other.”
113 Va. at 541, 75 S.E. at 307 (additional citation omitted). Here, Huffman was an insurance professional, a longtime Nationwide agent, while Patterson, his customer, was a layman. On this record, Huffman must be presumed to have means of information about the policy not equally available to Patterson.

Id.

     The lesson from these cases is to pay close attention to the details in pleading facts. What made all the difference in Patterson was attention to the relationship of the parties. As a result, an exception to the rule was carved out.

5. Pleading with Particularity/Specificity.

     The basic rule is as follows:

Initially, we observe, that “‘[w]here fraud is relied on, the [pleading] must show specifically in what the fraud consists, so that the defendant may have the opportunity of shaping his defense accordingly, and since [fraud] must be clearly proved it must be distinctly stated.’” Ciarochi v. Ciarochi, 194 Va. 313, 315, 73 S.E.2d 402, 403 (1952) (quoting Alsop v. Catlett, 97 Va. 364, 370, 34 S.E. 48, 50 (1899)) (additional citations omitted).

Mortarino v. Consultant Eng. Services, 251 Va. 289, 295, 467 S.E.2d 778 (1996).

     In pleading fraud with adequate specificity, the identities of the individuals or their agents, officers, and employees who are alleged to have perpetrated the fraud must be revealed, as well as the details of the time and place where the fraudulent acts occurred and the specific acts complained of. Tuscarora v. B.V.A., 218 Va. 849, 858, 241 S.E.2d 778 (1978) (citations omitted). For those reasons, in Tuscarora, the plaintiff’s allegations of “actual or constructive fraud on the part of [the defendant] in making an advance which it knew would not be used for construction purposes, in representing to [one of the trustees] that the loan to be accorded priority was a construction loan, and in not advising [the trustee] that the advance would not be used to pay for the land” were found to “lack the specificity required to make out a case of fraud.”

Providing adequate specificity is a particularly vexatious problem. Often, the acts were remote in time and therefore difficult to pin to a precise date; oral rather than written and therefore difficult to quote with absolute precision; and many pertinent facts are hidden within the records of the defendant, or otherwise uniquely within the knowledge of the defendant or uncooperative witnesses, and therefore difficult to pin down. The rule is so strong, however, that trial courts are reluctant to provide any leeway for the need to resort to discovery to flesh out the specificity. The result can be that fraud might go unredressed because of the successful stealth of a wrongdoer. Since court assisted investigative discovery is not available in our system, one must simply do the best one can to investigate and plead all available facts to move the case to a point where discovery is possible. At times, if non-fraud theories are available, it may be best to start the case with those theories, conduct discovery, and then seek to amend after more evidence is uncovered.

6. Omission of Fact/Failure to Disclose.

     Parties to a contract do not have an automatic duty to disclose to each other everything they know which may be relevant to the contract.

Hence, generally speaking, if the parties have equal means of information, so that, with ordinary prudence or diligence, either may rely on his own judgment, they are presumed to have done so; or, if they have not done so, they must abide the consequence of their own folly or carelessness.”

Costello v. Larsen, 182 Va. 567, 571, 29 S.E.2d 856 (1944). Nevertheless, the Supreme Court of Virginia has held that where the concealment is intentional, it may give rise to a cause of action in fraud:

Proof of fraud by nondisclosure “requires evidence of a knowing and deliberate decision not to disclose a material fact.” (citations omitted). “A contracting party's willful nondisclosure of a material fact that he knows is unknown to the other party may evince an intent to practice actual fraud.” Spence v. Griffin, 236 Va. 21, 28, 372 S.E.2d 595, 599 (1988).

Cohn v. Knowledge Connections, Inc., 266 Va. 362, 368, 585 S.E.2d 578 (2003).

[f]or purposes of an action for fraud, concealment, whether accomplished by word or conduct, may be the equivalent of a false representation, because concealment always involves deliberate nondisclosure designed to prevent another from learning the truth. A contracting party's willful nondisclosure of a material fact that he knows is unknown to the other party may evince an intent to practice actual fraud.

Van Deusen v. Snead, 247 Va. 324, 328, 441 S.E.2d 207 (1994) . Therefore, the Court has required either an allegation or evidence of a knowing and a deliberate decision not to disclose a material fact.

     At least one federal court in Virginia has held that there must be a duty to disclose before omission is actionable. Rambus, Inc. v. Infineon Tech. AG, 220 FRAT 264, 279 (E.D.Va. 2004) (quoting Rambus, Inc. v. Infineon Tech. Ag, 318 F.3d 1081, 1084-86 (Fed. Cir. 2003)).

     While a party entering a contract is required under Virginia law to exercise due diligence in conducting its own investigation, the rule may be abrogated where the other party takes action to prevent discovery of material facts.

[T]here is a very important exception to the rule that a purchaser is bound to discover the true condition for himself if he has information which would excite the suspicions of a reasonably prudent man. That exception is that the vendor must not say or do anything to throw the purchaser off his guard or to divert him from making the inquiries and examination which a prudent man ought to make. Lake v. Tyree, 90 Va. 719, 724, 19 S.E. 787.

Horner v. Ahern, 207 Va. 860, 864, 153 S.E.2d 216 (1967). It seems to me that this precedent has application not only where there is an affirmative misrepresentation, but also where the defendant says something to throw the plaintiff off the scent to prevent the plaintiff from discovering undisclosed information.

     These cases leave one in a bit of a quandary. The Virginia cases seems to say there is no automatic duty to disclose, but Van Deusen imposes a duty to disclose at least where non-disclosure would constitute a knowing act of concealment with the intent to deceive. Cohn seems to go further by indicating that, where a contracting party simply knows a material fact and deliberately decides not to disclose it, fraud may occur. Nevertheless, from a pleading standpoint, it is advisable to allege more than just knowledge of a material fact and a decision not to disclose it. If it is a fact as easily accessible to the plaintiff as to the defendant, the case will fail. Since Rambus, a federal case applying Virginia law, asserts there is a specific requirement that a duty exist on the part of the defendant, it is also wise to assert at least that a duty exists not to conceal information or to disclose information necessary in order not to make other statements misleading.

     Where appropriate, allegations should include: that the information was not readily accessible to the plaintiff in a due diligence investigation, that the defendant did something to throw the plaintiff off the scent, that there was a disparity in expertise that implies a greater duty on the defendant in the particular case, or that the defendant did something to actively hide the information.

     Note that concealment can only can give rise to a claim of actual fraud - not constructive fraud, since concealment is an intentional act. See Cohn, 266 Va. at 367. The essence of constructive fraud is negligent misrepresentation. Id., at 369 See also Richmond Met. Auth. v. McDevitt Street Bovis, Inc., 256 Va. 553, 507 S.E.2d 553 (1998). Fraud by concealment "always involves deliberate nondisclosure designed to prevent another from learning the truth." Spence v. Griffin, 236 Va. 21, 28, 372 S.E.2d 595, 598, 599 (1988) (emphasis added).

     Query: Why would innocent or negligent omission not be actionable, at least where disclosure is necessary in order to make other statements not misleading?

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