Fraud/Fraudulent Misrepresentation Law

“ABC Coffee Company’s coffee is always imported from the famed Blue Mountains of Jamaica.”

This final hypothetical is what we would be looking for. That is, as a matter of actual fact, ABC Coffee Company either always imports its coffee from the Blue Mountains of Jamaica or it doesn’t. If we could find even a single example of the coffee being purchased from another region of the world, we’d be able to demonstrate that this statement of fact was false (the second element of fraudulent misrepresentation discussed below). As a result, setting aside how one might go about proving that this statement was false, it is, nonetheless, a factual statement of the kind that could lend itself to a claim of fraudulent misrepresentation under Missouri law.

There are some circumstances involving seemingly clear opinions where Missouri’s courts have found the representation to be factual (i.e., a potential basis for a fraud claim). For example, statements that a vehicle or other property is “in excellent condition,” “in good condition,” “in tip-top shape,” and “reliable” have been found to constitute statements of fact. On the other hand, there are some circumstances that would, at first blush, appear to constitute statements of fact, yet Missouri’s courts have held them to be the defendant’s mere opinions. For example, statements concerning the market value of property have been held to largely constitute the opinion of the property owner.

Of course, as is often the case in the law, there are exceptions to exceptions in this regard. For one, as we talked about above, a statement regarding the market value of property could constitute a representation of fact if, for example, the defendant had just obtained an appraisal on the property (i.e., the defendant had specialized knowledge that you weren’t privy to). Additionally, a defendant could be held liable for statements regarding property value if the defendant holds him/herself out as someone with special knowledge as to valuation of the particular property involved in the transaction (e.g., the defendant claims to be an appraiser or to otherwise be an expert in the particular type of property at issue).

There are a few other caveats and things you should know about the types of representations that may (or may not) result in a viable fraud claim. First, a defendant may be liable for fraudulent misrepresentation if he or she made a false statement to a third-party with the intention that the third-party communicate the false statement to you, knowing that you would likely rely upon the false statement. Second, an employer (or other principal) can be held liable for the fraudulent misrepresentations of an employee or other agent, if those statements were made while the employee or agent was acting within the course and scope of his or her employment with the employer.

In order to hold an employer (or other principal) liable for fraud, you must show that the employee or agent know that the representations were false unless you can prove that the employer (or other principal) expressly directed the employee or agent to make the false statements. As a final note on employer/principal liability, corporate officers or employees/agents are generally not personally liable for fraudulent misrepresentations made by the corporation unless they individually participated in the wrong, with actual or constructive knowledge.

Third, as we discussed some above, concealment of a material fact can constitute a false representation that may subject a defendant to liability for fraud. This type of fraudulent misrepresentation is commonly referred to as “fraud by omission,” “misrepresentation by silence,” or “fraudulent concealment.” Importantly, partial disclose of material fact that could lead you to believe that there is no additional, material information to disclose, could also be considered fraudulent misrepresentation. In order for concealment of a material fact to constitute a fraudulent misrepresentation, the defendant must conceal a material fact that he or she had a duty to disclose.

A duty to disclose material facts can occur with the existence of unequal positions between you and the defendant, such as in a confidential (e.g., attorney-client or doctor- patient relationship, etc.)/fiduciary relationship (e.g., business partners) or the defendant’s demonstrably superior knowledge of the omitted fact that is not within your fair and reasonable reach. Absent proof of a confidential/fiduciary relationship, in order to pursue a “fraud by omission” claim, you must demonstrate the following: 1) the omitted fact was not within your fair and reasonable reach (i.e., it would have been very difficult for you to uncover the omitted fact on your own); 2) you were, in fact, unable to discovered the concealed information (i.e., as with all fraud claims, you hadn’t already discovered the truth—here, the omitted information); 3) you exercised reasonable diligence (i.e., you didn’t “bury your head in the sand” with regard to discovering the omitted information); and 4) the defendant knew or should have known about the additional factual information that the defendant failed to disclose to you.

Finally, in business transactions, there are several circumstances in which a duty to disclose can arise prior to the transaction, including when a fiduciary relationship exists between the parties (e.g., business partners). If there is an absence of a direct relationship between the parties, it becomes much harder to prove that the defendant had a duty to fully and completely disclose information to you, and thus, it becomes much harder to win a fraudulent misrepresentation claim based upon omissions made during the course of those types of transactions.

Element 2: The Defendant’s Representation of Fact Must Have Been False. this element is as simple as it sounds. That is, the representation of fact must be, in actuality, untrue. As discussed in Hypothetical 3 above, if ABC Coffee Company purported to purchase all of its coffee from the Blue Mountain region of Jamaica, but in actuality, did not, that would constitute a false representation of fact.

Element 3: The Defendant’s Representation of Fact Must Be Material (i.e., important). A representation is deemed “material” under Missouri’s fraudulent representation laws if the misrepresentation would be likely to induce a reasonable person to agree to a transaction, or the person making the representation knows it would be likely to cause the specific person involved in the transaction to agree to the terms.

Element 4: The Defendant Must Have Known the Representation Was False at the Time the Representation Was Made.  This element requires that the person making the representation must, at the time the representation was spoken.  While, on its face, this element seems simple enough, there are a couple of important things to know about the law with regard to the falsity of a representation.  First, the representation must be false when made and as of the time the defendant intended for the statement to be relied and acted upon.  Second, the falsity element may also be satisfied by proof of the defendant’s reckless disregard towards the truth or falsity of the statement.  That is, this element can be satisfied by proving that any reasonable defendant would have known that the particular representation was false, even if this particular defendant “buried its head in the sand,” so to speak.

Element 5: The Defendant Must Have Intended for You to Rely Upon the Representation.  This particular element is also pretty straightforward, at least from a linguistic standpoint.  The hard part in proving this element is in trying to actually prove the intention of a particular speaker.  That is, what effect did the speaker actually intend a representation to have on the representation’s likely audience? In the real world, we oftentimes have to use circumstantial evidence to prove the intent of a speaker under this element.  Circumstantially proving intent be done in a number of ways, but in general, proving intent can be as simple as demonstrating that the defendant stood to and/or actually did financially gain from a particular representation.

Element 6: You Must Have Been Unaware That the Representation Was False at the Time the Defendant Made the Representation.  Simply put, in order to have a fraud claim under Missouri law, it is not enough that a person knowingly makes a materially false representation to you.  Rather, you must generally believe the representation to be true.  The theory behind this element is, at its core, fundamental fairness.  To be clear, lying to a customer about important aspects of a transaction is, under all reasonable interpretations, both bad for business and a moral failure.  At the same time, if you already knew that the representation was false, how could it have influenced your decision to complete the transaction? Going back to our coffee company example, if you knew that ABC Coffee Company purchased none of its coffee from the Blue Mountains in Jamaica, yet you purchased the coffee anyway, how much did you really care about where the coffee originated?  Put another way, if the coffee’s originals mattered to you (i.e., were material to your decision to purchase the coffee), once you found out the truth, you would have shopped elsewhere.

Element 7: You Must Have Actually (i.e., as a Matter of Fact) Relied Upon the Defendant’s Representation.  This element requires that you reasonably rely upon the truth of the representation made to you.  That is, there must be some realistic connection between the defendant’s representation and the actions you took as a result of believing the false representation.

Your “right to rely” upon a defendant’s representation usually only requires you to show that the defendant made a specific false representation in order to cause you to complete the transaction.  In analyzing this, Missouri’s courts consider a number of factors, including: 

1. Did you have equal access to the facts behind a particular representation as the defendant? 

2. Was the defendant in a particularly advantageous position to know the truth of a representation, while you were in a particularly disadvantageous position? 

3. Does the representation pertain to a latent defect in the merchandise?  By “latent defect,” we mean a problem with the merchandise that would not be obvious to a reasonable buyer (e.g., a crack in a concrete pylon that was hidden by sheetrock or other finishings)? 

4. In order to discover the truth, would you necessarily have to hire a third-party expert to conduct an inspection of the merchandise (e.g., if a dealer represented to use new parts on a vehicle repair, but actually used refurbished parts)? 

If the case involves the sale of property, a buyer has no right to rely on a seller’s misrepresentation if the buyer obtained an independent inspection report, unless: 

1. The buyer only obtained a partial inspection report and relied on both the report and the seller’s misrepresentation; 

2. The buyer lacked equal ability to learn the truth, and the facts are not easily ascertainable, but clearly within the seller’s knowledge (e.g., if the seller filled in a large sinkhole in the property’s back yard if would be incredibly difficult for even the most astute inspector to spot the filled-in sinkhole, but the seller clearly knew of the defect by virtue of having attempted to fix it); 

or 

3. The seller makes a specific and distinct misrepresentation. 

Likewise, you cannot pursue a fraud claim based on unfulfilled promises or statements as to a future event unless the representation pertains to the defendant’s present intentions or concerns a matter directly within the speaker’s control.  For example, you would generally not be able to pursue a fraud claim against a stockbroker who promised you that, by the time you needed the money, the stock market would have gone up by a certain percentage. On the other hand, consider a similar, yet legally very different scenario.  Assume a stockbroker promised you that, if you invested in a particular company, you would be guaranteed to receive a specific return on your investment. 

Unbeknownst to you, however, the stockbroker was actually a majority shareholder in said company, and at the time he promised you a specific return on investment, the stockbroker knew that (by his or her own decision), the company would soon be filing for bankruptcy.  Under this scenario, it is very likely that you would be able to avoid the prohibition against statements as to future events, because the stockbroker both had the present intention (at the time of the statement) to file for bankruptcy, and as a majority shareholder of the company, filing for bankruptcy was within the stockbroker’s control. 

It is important to note in this example that you did not need the statement to be both the defendant’s present intention and within the defendant’s control.  Rather, in order to have a viable fraud claim here, you only needed one of those two things to be true as to the defendant.

Element 8: You Had to Be Within Your Rights to Rely Upon the Defendant’s Representation.  A good example of not having a right to rely upon the defendant’s representation is in most home purchases (unless an exception applies—see above).  Remember that, if you obtain an inspection report as part of a home purchase (nearly always true), you have only a limited right under the law to rely upon any contrary representations made by the defendant.  Like the home purchase example, many of the circumstances that would prevent you from relying upon a defendant’s representation are based in other ordinances, statutes, regulations, etc.

AND

Element 9: As a Direct Result of the Defendant’s Representation, You Suffered Damages.  Here, speculative injury or the mere possibility of suffering injury or damages will not suffice.  Rather, you must be able to demonstrate real and present injury or damages (e.g., emotional distress, economic damages, etc.).