Fraud Claims
Fraud claims can arise in a variety of settings. Businesses may be defrauded by owners, managers, employees, or outside parties, such as vendors and customers. Consumers may be victimized by businesses or individuals seeking to steal their money or cause other harm. For perpetrators, liability can be both criminal and civil.
What is Fraud?
Fraud is conduct which deliberately deceives someone with the intent of causing damage. Common types of fraud involve healthcare, tax, bankruptcy, insurance, securities, mail, telemarketing, and wire.
What Are the Requirements for Alleging Fraud?
To plead a claim for fraud, a plaintiff must allege:
- A material misrepresentation of a fact.
- Knowledge of its falsity.
- An intent to induce reliance.
- Justifiable reliance by the plaintiff, and
(5) damages.
The defendant must have made a statement that was false or untrue and the false statement must have been material, meaning that it was about something essential to the transaction. Fraud requires misconduct. As a result, the defendant must have known the statement was false when it was made and had an intent to deceive, manipulate, or defraud the plaintiff, or have acted so recklessly as to constitute an intent to defraud. The plaintiff must show that he or she justifiably relied on the misrepresentation and exercised ordinary intelligence in ascertaining the truth of the representation made by the defendant. Finally, there must be a direct link between the fraudulent act and the loss that the plaintiff alleges.
How Can a Party Defend Against a Claim of Fraud?
There are a variety of defenses to fraud, including the following:
Statement was not false
As noted in the previous section, the plaintiff must demonstrate that the representation was false when it was made. Where there is no evidence that a statement was in fact false, it cannot be inferred.
No intent to deceive
Intent or scienter is typically inferred by the circumstances surrounding the allegedly fraudulent act. For example, in the bankruptcy context, intent to defraud creditors can be shown by certain badges of fraud such as transferring assets for less than fair market value or to insiders (family, friends, etc.). Intent may also be shown by reckless conduct. However, such conduct must be highly unreasonable and represent an extreme departure from the standards of care such as to show an actual intent to defraud.
The misrepresentation required for fraud must be of a present or historical material fact
Generally, statements of opinion, exaggeration, or future expectations do not qualify. They are considered puffery that no reasonable person would take seriously. Examples include claims of being the “best” or having the “lowest” cost. However, it can be difficult to establish when marketing claims cross the line into fraud. Among the considerations are the sophistication of the audience to whom the statements are targeted as well as the nature of the relationship between the parties. Where there are mixed statements of puffery and fact, however, fraud may exist if the misrepresentation of fact meets the requirements of fraud.
Reliance was not justified
As discussed previously, the plaintiff must have justifiably relied on the misrepresentation. Courts look at whether the plaintiff exercised ordinary intelligence in ascertaining the truth of the representation by the defendant. Where the plaintiff is “sophisticated” in the sense of having experience with similar transactions or having access to resources to verify statements by the defendant, this becomes more difficult. Such parties are held to a higher standard and expected to exercise more due diligence in a transaction as compared to someone less accustomed to business dealings. Sophisticated parties must show they took affirmative steps to protect themselves by employing what resources for verification were available at the time.
Fraud claim is duplicative of a breach of contract claim
Where fraud is alleged in the context of a breach of contract claim and arises out of the same facts, the two claims must be separate and not duplicative. The plaintiff must allege (1) that the fraud was collateral or extraneous to the contract, or (2) a breach of duty separate from a breach of the contract, or (3) there are special damages “not recoverable under a contract measure of damages. Essentially, the misrepresentation must involve a promise to undertake some action separate and apart from the party’s obligations under the contract to be viable. Otherwise, the fraud claim will be dismissed as duplicative of the contract claim.
Statute of limitations. The statute of limitations for fraud causes of action is the greater of (1) six years from the date of the fraud, or (2) two years from the date it was discovered or reasonably could have been discovered through due diligence. However, there are instances where the court may “toll,” or extend, the limitations period.
Fraudulent Conveyance in Bankruptcy
When facing financial problems, some individuals may try to preserve assets by transferring title to third parties for little or no money. In this way, they believe they can avoid losing the property in bankruptcy. Alternatively, they may use the money from a sale to pay certain creditors and not others. However, such transfers are not permitted by bankruptcy law because it places those assets outside the reach of all the creditors in bankruptcy.
What is a Fraudulent Conveyance?
When a person files for bankruptcy, a trustee is appointed to determine all the assets of the debtor available to creditors. Among the trustee’s tasks is to review any transfers of property made by the debtor to a third party within a certain period before the bankruptcy filing. Assets transferred or “conveyed” within the designated period with the intent to delay or defraud a creditor are considered fraudulent transfers or fraudulent conveyances. The trustee has the power to set aside such transfers and recover the assets for the benefit of all the creditors of the bankruptcy estate.
There are two types of fraudulent transfers in bankruptcy law. Actual fraud requires an intent to defraud creditors, while constructive fraud, involves a transfer, which is made for less than reasonably equivalent value.
Conclusion
Fraud claims are very fact-specific and require extensive proof. The parties should compile all documentation regarding a transaction in order to substantiate their case and consult experienced counsel for assistance.
Fraudulent conveyance law is complex, and determinations are highly fact-specific. Both debtors and creditors should consult experienced bankruptcy counsel to evaluate their options in refuting or challenging such claims.
