Common Law Fraud Claims

[weishaupt1776]

By V. John Ella




From the Cardiff Man to Enron, fraud has always been part of the human condition, and it finds increasing notoriety in today’s headlines.* Common law fraud crops up in disputes of all kinds, and is therefore a critical tool of the general litigator.* Yet few law schools teach a specific course on fraud, and few commentators have written on the topic in Minnesota.* In preparing a chapter for a forthcoming treatise on consumer fraud to be issued by Minnesota Continuing Legal Education,1 the author had an opportunity to survey the history and future of common law fraud in Minnesota.* This article summarizes some key points for any practicing litigator in the state.



There are many types of fraud — insurance fraud, welfare fraud, election fraud, healthcare fraud, securities fraud, bank fraud, immigration fraud, consumer fraud, internet fraud, patent fraud, accounting fraud, tax fraud, and mail fraud — to name a few.* But for the most part, all fraud-type claims have similar elements.* Recently much attention has been paid to the expansion of various consumer fraud statutes in Minnesota, which are outside the scope this article.* The litigator should certainly be familiar with these statutes (which allow claims for attorneys fees), but in order to understand these laws and how they alter the common law, it is helpful to review the history of basic fraud, which is often pled alongside statutory claims.



From the Latin fraus meaning “deceit,” fraud has ancient roots as the independent tort of deceit, but it has been and continues to be closely intertwined with contract law as well.* According to Professor Prosser, there was an old writ of deceit known in England as early as 1201, but tort and contract law were not clearly distinguished at that time.2* Building upon these English origins, fraud has been recognized as a tort at common law in Minnesota since the 1800s.3




“Fraud” & “Misrepresentation”



The difference between fraud and misrepresentation is that not all misrepresentations are fraud, but almost all fraud involves a misrepresentation.* Fraud is an intentional misrepresentation, and thus it requires an element of intent, also known as scienter.* Various courts have referred to this claim as “fraud,” “intentional misrepresentation,” or “deceit.”* Minnesota courts use the terms “interchangeably.”4* Negligent misrepresentation, on the other hand, can occur without intent to deceive and is therefore technically not fraud.* To add to the confusion, some courts use the term “fraud” to denote a general category of misrepresentation claims.5



In a complaint or counterclaim, therefore, fraud might be pled alternatively as “fraud,” “deceit,” “common law fraud,” “misrepresentation,” “intentional misrepresentation,” “fraudulent misrepresentation,” or “fraud and misrepresentation.”* Collusion is a term that sometimes arises in cases involving fraudulent conduct and is defined by Black’s as “an agreement between two or more persons to defraud a person.”




Elements of Fraud



Then-8th Circuit Court judge and later U.S. Supreme Court Justice Harry Blackmun was the first jurist to articulate the 11-part test for fraud in Minnesota in Hanson v. Ford Motor Co., 278 F.2d 586 (8th Cir. 1960). The 11 elements of common law fraud in Minnesota as he set them out are as follows:



1. there must be a representation;
2. that was false;
3. having to do with a past or present fact,
4. that is material;
5. and susceptible to knowledge;
6. and the representor knows it to be false or asserted the fact without knowledge ofwhether it was true;
7. with the intent to induce the other person to act;
8. and the other person was induced to act;
9. in reliance on the representation;
10. and the victim suffered damages
11. attributable to the misrepresentation.6



The same 11-part fraud test has been reduced to five elements by several Minnesota courts, as well as by the model jury instructions.7* The five-part test is defined as follows:* there must have been:




1. a false misrepresentation of a past or present material fact;
2. knowledge by the person making the false assertion that it is false or ignorance of the truth of the assertion;
3. an intention to induce the claimant to act or to justify the claimant to act;
4. the claimant must have been induced to act or justified in acting in reliance on the representation; and
5. the claimant must suffer damage proximately caused by the misrepresentation.8



Plaintiffs may favor the five-part test while defendants may prefer to apply the 11-part test, but the essential elements are the same.*




False Misrepresentation



Even if a party thinks that a statement is false at the time it is offered with the intention that it be relied on to the detriment of another, if the representation in fact turns out to be true, and therefore there is no damage to the relying party, then there can be no cause of action for fraud.* In other words, as with defamation, truth can be a defense.



A fraud claim cannot properly be based on a misrepresentation that is contingent on a future event, even if the representation was knowingly false at the time it was made.9* Vague or indefinite statements such as “I’ll look into it,” or “I’m working on it” provided by management in response to an employee’s request for severance benefits have been held not to support a misrepresentation claim because the words are not specific enough to include an actual representation of fact.10* In the context of product guarantees, statements such as “years of trouble-free performance” have been determined to be too “vague and abstract” to constitute a misrepresentation.11* Similarly, in a dispute involving custom software a court held that statements that the software was “virtually complete,” that it would be available by a certain date, and that it “would be as reliable, stable, and fully-functional as” its predecessor software, were “representations of future events rather than statements of past or present fact” and therefore could not, as a matter of law, support fraud claims.12* Facts which are fraudulently misrepresented or omitted must be “material” in order to support a claim for fraud.* Whether a representation is material often depends upon whether a party relies on it or believes it to be important.13



Defendants may want to characterize statements or alleged representations as “puffing,” which has been widely held not to constitute a basis for a misrepresentation claim.14 There are exceptions to the “puffing” argument, however.* One court concluded that some statements of opinion, that may be categorized as “puffing” from a “used car salesman,” may be considered statements of fact, and therefore actionable, when emanating from a pharmaceutical salesman because public policy requires a stricter standard for those who sell pharmaceutical and presumably other products which are meant “to be inserted into the human body.”15



Some key buzz words to be on the lookout for when evaluating a fraud claim include: opinion, estimate, appraisal, prediction, prophecy, expectation, intent or intention, promise,* projection, readiness, capacity, capability, will, may, could, might, ought, should, future, and hope.* Most of these concepts have been held by the courts as not sufficient to sustain a fraud claim.16



Statements of Law



Statements of law have also been held to be improper as the basis of a fraud claim, as “the law is presumed to be equally within the the [sic] knowledge of both parties.”17* However, “an attorney who makes affirmative misrepresentations to an adversary may be liable for fraud.”18



Negligent Misrepresentation



A person who, through his or her profession, business, or employment, or in any transaction in which he or she has a pecuniary interest, fails to exercise reasonable care or competence in obtaining or communicating information, and thereby supplies false information while guiding others in their business transactions, is liable for any pecuniary loss caused by the claimant’s justifiable reliance on the information.19* This is known as negligent misrepresentation.



Florenzano v. Olson, 387 N.W.2d 168 (Minn. 1986), and M.H. v. Caritas Family Servs., 488 N.W.2d 282 (Minn. 1992), are probably the two most often cited cases in Minnesota on the definition of both common law fraud and negligent misrepresentation.* In both cases, only the negligent misrepresentation claim survived.



In Florenzano, an insurance agent hired by Mrs. Florenzano advised her that she would be a “fool” not take the “once-in-a-lifetime” opportunity to withdraw from the social security program because she would still receive coverage under her husband’s social security benefits.* Mrs. Florenzano relied on this advice and withdrew from the social security system.* She subsequently became totally disabled due to multiple sclerosis.* However, because she had followed the insurance agent’s advice and withdrawn from the program, neither she nor her two children were eligible for social security disability or dependent benefits.* Had she continued to participate in the social security system, she and her children would have been eligible for those benefits. The insurance agent conceded that he did not research or verify the information.* At trial, a jury found that the defendant-agent was liable for misrepresentation, but also found that the plaintiff, Mrs. Florenzano, was 62.5 percent negligent.* The issues on appeal were (1) whether the comparative fault doctrine should apply to claims for negligent misrepresentation, and (2) whether the claim proven at trial was one for negligent misrepresentation or intentional misrepresentation.* The Minnesota Supreme Court reversed the Court of Appeals and held that the facts supported only a finding of negligent misrepresentation, and that the claim was subject to the comparative fault doctrine, meaning that Mrs. Florenzano recovered nothing.20* In so holding, the Florenzano court reaffirmed its adoption of the Restatement (Second) of Torts definition of negligent misrepresentation.



In Caritas, plaintiffs adopted a child from Caritas Family Services.* The agency had informed the plaintiff-parents that there was a “possibility of ****** in the family.”* The parents responded “Well, it’s a baby.* We’re happy.* As long as it’s in the family, it didn’t affect him.”* A Caritas worker also warned them that the baby may have abnormalities related to the ****** in his “background.”* The plaintiffs testified that throughout the baby’s childhood he had serious emotional and behavioral problems, violent tendencies, and had been diagnosed with attention deficit disorder.* When the boy’s psychologist requested more information regarding his genetic background, Caritas revealed that the boy’s parents were a 17-year-old boy and his 13-year-old sister.* The father was “borderline hyperactive,” and had been seen at the local mental health center but discharged due to his refusal to cooperate with the therapist.* The plaintiffs sued Caritas for negligently failing to disclose information about the genetic history of the child’s parents.* The Minnesota Supreme Court held that after the agency had disclosed genetic information about the child’s biological parents, it owed a duty to the adoptive parents not to negligently withhold additional information in such a way as to mislead the adoptive parents.21* The intentional misrepresentation claim was defeated, however, because the Court concluded that the facts that were provided by Caritas were true, and that if it had meant to lie it would have never mentioned the baby’s ******uous background in the first place.22



Intentional vs Negligent



The distinction between intentional misrepresentation and negligent misrepresentation may be critical to the viability of a plaintiff’s claim.* If the representor did not have a duty to provide complete and timely information, or provides a waiver, a negligence claim may not survive where an intentional claim would.23* On the other hand, if intent to deceive cannot be shown, a negligence claim is often an easier alternative.24* The choice of claim can also affect the type of damages available under the economic loss doctrine as well as the comparative fault doctrine.25



Reckless Misrepresentation



In his concurring opinion in Florenzano, Justice Simonett set forth a third type of fraud claim — “reckless misrepresentation” — which he defined as “when the representor asserts a fact as of his own knowledge without knowing whether it is true or false.”26* Three years later, the Court of Appeals discussed the claim in Schuler v. Meschke but declined to formally recognize it.27* However, since then the claim has been recognized implicitly in several more cases.28* Finally, it should be noted that the Minnesota Economic Loss Statute, Minn. Stat. §604.101, as amended by the Legislature in 2001, specifically refers to “reckless misrepresentation.”



Misrepresentation By Omission



There are four elements of fraudulent nondisclosure, also known as misrepresentation by omission:* (1) a party conceals a material fact; (2) the fact is within the concealing party’s knowledge; (3) the concealing party knows that the acting party will rely on this nondisclosure on the presumption that the fact does not exist; and (4) the concealing party has a legal/equitable duty to communicate the fact.29



The fourth element, the duty to communicate (also called a duty of disclosure), has been divided by some courts into three subcategories.* Under this approach, courts have found a duty to exist:



— when a confidential or fiduciary duty relationship exists
— when disclosure is necessary to clarify misleading information already disclosed; or
— when one party has “special knowledge” of material facts to which the other party does not have access.30



Before a claim based on misrepresentation by omission can be made, there must exist a duty to disclose the omitted fact to the plaintiff.31* As a general rule, one party to a transaction has no duty to disclose material facts to the other.32* Even parties within close relationships are not required to disclose everything to each other.33



A duty of disclosure most often arises in the arena of commercial transactions, but Minnesota courts have established a duty of disclosure in other contexts as well, such as where someone has herpes.34* Courts are generally more willing to find a duty where the nondisclosing party has superior knowledge and the other party is inexperienced and vulnerable.35



Third-Party Misrepresentation



The issue often arises as to where the line should be drawn limiting liability if a misrepresentation is communicated to parties other than those reasonably anticipated to rely on its contents.* An accountant’s duty, for example, may extend beyond that of the client when the accountant is aware that other parties will rely on the work product.36* The Restatement of Torts limits liability to the loss “suffered by a person or one of the persons for whose benefit and guidance [the person] intends to supply the information, or knows that the recipient intends to supply it.”



Defenses



A variety of defenses are available to counter common law fraud claims.* Prominent among these is failure to plead with particularity.* Pursuant to both Rule 9.02 of the Minnesota Rules of Civil Procedure and Rule 9 of the Federal Rules of Civil Procedure, “the circumstances constituting fraud … shall be stated with particularity.”* Each element can become the focus of a legal battle, therefore, as the defendant need only knock out a single element or show that the fraud is not pled with sufficient detail in order to defeat the claim.



The “specificity” requirement of the Rules provides a useful weapon for defendants in fraud claims.* The requirement has been justified as necessary to “safeguard” potential defendants from “lightly made claims charging the commission of acts that involve some degree of moral turpitude,” although others have opined that the “costs of requiring particularized pleading of fraud [may] outweigh the benefits.”37



The reference in Rule 9 to “circumstances” is to matters such as the time, place, and contents of the false representations, as well as the identity of the person making the misrepresentation and what he obtained thereby.”38** Courts generally allow plaintiffs to amend deficient pleadings under Rule 15.39* But where a proposed amended complaint merely recites the generic elements of fraud, it may properly be denied.40



Defenses based on the statute of limitations or the economic loss doctrine may also be germane.* The statute of limitations on fraud claims in Minnesota is generally six years from the time the fraud was discovered pursuant to Minn. Stat. §541.05, Subd. 1(6). 41* A negligent misrepresentation claim based on a contract for the sale of goods or services may be barred or limited by the economic loss doctrine, Minn. Stat. §604.101, Subd. 4 (2001).* Intentional or “reckless” misrepresentations are not barred.



Calculating Damages



Determining damages claims in fraud actions can be nettlesome.* Nationally, there are two distinct methods for calculating the damages that arise in a fraud claim:* (1) the “out-of-pocket” rule; and (2) the “benefit-of-the-bargain” rule.42* Minnesota is generally considered to follow the “out-of-pocket” rule.43* However, there are important exceptions to this rule, which may allow a plaintiff to recover greater damage awards under the “benefit-of-the-bargain” rule.



In Minnesota, the victim in a fraud action is entitled to damages equivalent to the victim’s “out-of-pocket” loss, that is “the difference between the actual value of the property received and the price paid for the property, along with any special damages naturally and proximately caused by the fraud prior to its discovery, including expenses incurred in mitigating the damages.”44



Minnesota courts have refrained from adopting the “benefit-of-the-bargain” rule, which would allow the plaintiff to recover the difference between the value of the property received and the value to the plaintiff that the property would have had if the representation had been true.45* This method of calculation is attractive to plaintiffs because, in addition to out-of-pocket expenses, it allows for the recovery of lost profits that would have been realized absent the defendant’s fraudulent representations.* Although Minnesota does not generally recognize this approach, the courts do acknowledge there are situations in which “a party cannot be placed back in the status quo position by the out-of-pocket rule.”46* In these situations, the court will recognize an exception to the out-of-pocket rule, and allow for recovery under the benefit-of-the-bargain rule.47



Conclusion



As Justice Wahl noted in Florenzano, fraud is a “protean legal concept, assuming many shapes and forms.”* Common law fraud is flexible enough to be applied to many different situations, but it is subject to a wide variety of attacks as well under its multipart test and the strictures of Rule 9.* Practitioners should therefore be prepared to confront these issues in advance.



Notes
1 Consumer Fraud and Deceptive Trade Practice Regulation, Prentiss Cox, ed. (forthcoming 2006)



2 Young B. Smith & William L. Prosser, Cases and Materials on Torts, (2d ed. 1957).



3 See, e.g., Lynch v. Mercantile Trust Co., 18 F. 486 (C.C.D. Minn. 1883).



4 Michael K. Steenson & Peter B. Knapp, Minnesota Jury Instruction Guides, Minnesota Practice Series, at 446 (4th ed. 2002).



5 See, e.g., Williams v. Tweed, 520 N.W.2d 515, 517 (Minn. App. 1994) (“Three types of misrepresentations fall under [the] broad category of fraud: reckless misrepresentation, negligent misrepresentation, and deceit.”).



6 Hanson v. Ford Motor Co., 278 F.2d 586, 592 (8th Cir. 1960).* See also M.H. v. Caritas Family Servs., 488 N.W.2d 282, 289 (Minn. 1992); Florenzano v. Olson, 387 N.W.2d 168, 174 n. 4 (Minn. 1986); Davis v. Re-Trac, 149 N.W.2d 37, 38 (Minn. 1967).



7 4 Minn. Dist. Judges Ass’n, Minnesota Practice, Jury Instruction Guides-Civil, CIVJIG 57.10 (4th Ed. 1999) (citing, inter alia, Specialized Tours, Inc. v. Hagen, 392 N.W.2d 520, 532 (Minn. 1986)).*



8 Martens v. Minn. Mining & Mfg. Co., 616 N.W.2d 732, 747 (Minn. 2000).* See also Vandeputte v. Soderholm, 216 N.W.2d 144, 146 (Minn. 1974).



9 Schoenhals v. Mains, 504 N.W.2d 233, 236 (Minn. App. 1993)



10 Swedeen v. Swedeen, 134 N.W.2d 871, 875 (Minn. 1965); Martens, 616 N.W.2d at 747.*



11 Chase Resorts, Inc. v. Johns-Manville Corp., 476 F. Supp. 633, 639 (E.D. Mo. 1979), aff’d. 620 F.2d 203 (8th Cir. 1980).*



12 Taylor Inv. Corp. v. Weil, 169 F. Supp. 2d 1046, 1063 (D. Minn. 2001).



13 State Bank of Hamburg v. Stoeckmann,*417 N.W.2d 113, 116*(Minn. App. 1987).



14 Sportmart, Inc. v. Hargesheimer, CX-97-161, 1997 WL 406386 at *2 (Minn. App. 07/22/97).



15 Kociemba v. G.D. Searle & Co., 707 F. Supp. 1517, 1525 (D. Minn. 1989).



16 See 22 Dunnel’s Minnesota Digest, Fraud §2.00(b) (collecting cases).*



17 Miller v. Osterlund, 154 Minn. 495, 496, 191 N.W. 919, 919 (1923).



18 L & H Airco v. Rapistan Corp., 446 N.W.2d 372, 380 (Minn. 1989). *



19 Restatement of Torts (Second) §552 (1979).*



20 Florenzano v. Olson, 387 N.W.2d 168, 176 (Minn. 1986).*



21 M.H. v. Caritas Family Servs., 488 N.W.2d 282, 288 (Minn. 1992).



22 Id. at 289.



23 See e.g. Dakota Bank v. Eiesland, 645 N.W.2d 177, 181 (Minn. App. 2002).



24 Caritas, 488 N.W.2d at 285.



25 Florenzano, 387 N.W.2d at 176.



26 Florenzano, 387 N.W.2d at 25 n.2.*



27 435 N.W.2d 156, 163 (Minn. App. 1989).



28 See, e.g., Williams v. Tweed, 520 N.W.2d 515, 517 (Minn. App. 1994); Olson v. Kyllonen, C0-00-1623, 2001 WL 379045, at *3 (Minn. App. 04/17/01).



29 Richfield Bank & Trust Co. v. Sjorgren, 244 N.W.2d 648, 650 (Minn. 1976).



30 Id. See also CIVJIG 57.30; Taylor Inv. Corp. v. Weil, 169 F. Supp. 2d 1046, 1064 (D. Minn. 2001).*



31 Richfield Bank and Trust Co., 244 N.W.2d at 648.



32 L & H Airco, Inc. v. Rapistan Corp., 446 N.W.2d 372, 380 (Minn. 1989).



33 Piekarski v. Home Owners Sav. Bank, F.S.B., 956 F.2d 1484 (8th Cir. 1992).* See also Stowman v. Carlson Cos., 430 N.W.2d 490, 493 (Minn. App. 1988).*



34 R.A.P. v. B.J.P., 428 N.W.2d 10 (Minn. App. 1988).



35 Jacobs v. Farmland Mutual Ins., 377 N.W.2d 441, (Minn. 1985).



36 Bonhiver v. Graf, 248 N.W.2d 291 (Minn. 1976).



37 5 Charles Alan Wright & Arthur R. Miller, Treatise on Federal Practice and Procedure, §1296, at 577-81.



38 Id. at 590.



39 Id. at 661 n.1 (collecting cases).* Cf. Martens, 616 N.W.2d at 747.*



40 Schumaker v. Schumaker, 627 N.W.2d 725 (Minn. App. 2001).



41 See, e.g., Bonhiver, 248 N.W.2d at 116-117 .



42 Am. Jur. 2d, Fraud and Deceit §384.*



43 Lewis v. Citizens Agency of Madelia, Inc.,*235 N.W.2d 831, 835 (Minn. 1975).* See also 4 Minn. Dist. Judges Ass’n, Minnesota Practice, Jury Instruction Guides-Civil, CIVJIG 57.25 (4th Ed. 1999).*



44 B.F. Goodrich Co. v. Mesabi Tire Co., Inc.,*430 N.W.2d 180, 182*(Minn. 1988).*



45 Id.



46 Lewis,*235 N.W.2d 831, 835*(Minn. 1975).*



47 Brooks v. Doherty, Rumble & Butler, 481 N.W.2d 120, 128-129 (Minn. App. 1992)* Lewis, 235 N.W.2d at 835; Goodrich, 430 N.W.2d at 182.







V. JOHN ELLA is a shareholder at Mansfield, Tanick & Cohen P.A.* He is the author of the Summary Guide To “Fraud, Misrepresentation and Deceptive Trade Practices” and twice served as chair of a CLE on the same topic.