“Civil law claims for fraud punish false statements that are intended for others to move or act and rely on the false statement generally related to economic activity or causes some kind of economic harm.”
I. The principles and basics behind fraud
Fraud is a lie. The law and society frowns on lies and fraud because of the damage it causes. Fraud can affect the economy and individuals in a negative way. In our economy, businesses and individuals hold out to have certain services and products as a means to sells those products for a gain. If the product or services aren’t what was actually represented, then the individual does not get the fair-market value for the product or service they thought they would receive.
In the criminal area, there is fraud where someone takes an individual’s identity, such as a social security number, identification card or credit card and holds out to be that person for a personal or financial gain or to avoid negative consequences for telling the truth. Because fraud has a negative effect on our economy the law penalizes individuals that commit fraud. Fraud and lies are also hard to combat. If somebody says something as to something they claimed to have witnessed or observed or denies that something occurred that someone else claims then those lies can be hard to combat.
This is especially true if the person that makes the claim is the only person that has enough knowledge about the situation. Fighting a lie can be like fighting a dragon and it can take a lot of leg-work and effort to claim that what a person claims is false. A lie is fiction. What makes it hard is that people lie to make it appear that it is non-fiction. It can be so subtle and discreet that it can mislead people. The purpose of a lie is to in fact mislead people from the actual circumstances. It is a fact that is non-existent in the real world. At times, it can be hard to fight a fact that is non-existent in the real world. This is especially true if the lie is discreet. It is most especially hard to prove a lie in court.
A judge and or a jury have not spend the amount of time an attorney has on a case to understand the facts and circumstances surrounding the case let alone the client himself. Individuals can be good about covering up the facts and putting on appearance of truthfulness on the stand. There are individuals who based on their lifestyle, their desires and wants disregard the norms of society as it relates to the truth and hold out their desires and wants as more value than their reputation. When one is used to telling a lie the internal struggle within someone isn’t as someone who isn’t as used to telling a lie.
As a result, when someone sits on the stand, what they represent to the court and to the judge can come-off as genuine. There are ways to combat lies in a court-setting. An individual can use documents to contradict a statement. They can use prior statements made to contradict a statement. They can also use a criminal history that relates to a “crime of dishonesty” to contradict a statement. This can include crimes such as theft, burglary, robbery, fraud, money laundering, embezzlement, tax evasion, benefits fraud, bribery and corruption, intellectual property crime and online crimes. Perjury is committed more often than people think which makes it hard to enforce and most perjured statements on the stand go unpunished.
Usually someone tells a lie when they think the benefits outweigh any other consequences for telling the truth. Usually people don’t just lie to lie. There is a purpose for the lie. There is some-kind of pressure on that person to tell a lie. It could be to avoid criminal consequences or social consequences such as the loss of a job, the loss of a personal relationship and the potential to be found guilty of a serious crime. It could also be because of the financial advantage they may obtain for a misrepresentation, this could include the sell of a product that is not up to par as it actually is or a service where the actual services rendered are not what was actually as advertised. Someone who typically doesn’t make a false statement may do so under that kind of pressure.
Sadly, our society in a way focuses a lot on deceit for financial gain. When someone sells a vacuum, they won’t tell you all of the flaws or concerns that people have experienced as a result of the vacuum. When a company does an Ad, what the product looks like on the Ad, may not actually be an “eatable” product with how they dress it up. The people and models used for the Ad may also be “touched-up” digitally to entice people to purchase the item. Used car salesmen can take a picture of a vehicle with a view that hides some important blemishes in it. They can also “clean-up” the vehicle to make it look more valuable than it really is.
Statements with the item may also be “fluffed up” such as “The best sandwich ever” or “a sandwhich that will make your mouth water” or “this is a great car.” The law allows types of “puffery” language to make businesses appear and look in a way and have a particular image. This is also a type of deceit and misrepresentation but it is not punished until it clearly passes a threshold that waives a red flag as to types of communication that is not accepted in society.
However, something that crosses the line is something such as in the extreme case where someone falsely claimed to have found a finger in their Wendy’s chili cup which gained national attention. They did this to seek financial gain against Wendy’s for a civil claim against them. It was later found that the claim was false. The representation of which seriously damaged the reputation of Wendy’s and its chili cups.
II. How the civil law punishes fraud
On the civil side, and not the criminal side, the law punishes fraud if it damages an individual. A civil action is an action by an individual against another individual or entity for economic loss. Fraud claims arise in all areas of the economy such as the sale of a home, the sale of a car, the sale of any other goods and the warranties made on those goods, the services rendered from a business such as a plumber, a construction company a doctor, a lawyer, the purchase or sale of stocks or of a business, employment contracts, promises made in an employment setting such as bonuses and wages and other benefits, the misrepresentations of an individual that may be in charge of a trust fund. An individual can also claim that a contract they had entered into is unenforceable because they entered it or were fraudulently induced to enter it based on representations of the other party.
Fraud can also interact with other causes of action such as defamation of character, injurious falsehood, false light, intentional interference with economic relations and intentional infliction of emotional distress.
a. Fraud of omission
There is also fraud for omitting material portions of a deal that an individual needs to be aware. This comes into play when that individual has a legal duty to disclose a material portion related to the services or sale. In most cases in law school, fraud of omission cases come up in the property and real estate classes. In those cases, a realtor has a duty to represent to an individual material issues of a house that an individual may not become aware of through reasonable inspection.
So if someone can spot the issue through inspection, then there is no fraud of omission. This is why it is important to have an inspector come and look at the home. The issues that arises the most are issues with the foundation or with the roof or possible plumbing issues. Also, the real estate agent or seller must also know about the defect in order for it to constitute fraud as it has to be based on a lie or omission of truth, it can’t be based on a failure to seek out the truth, unless it can be proven that they reasonably should-have known about the defect on their inspection.
The most famous case in law school for fraud of omission is where a court decided that ghosts do in fact exist legally. The case involved a house where everyone in the neighborhood and area knew it to be a “haunted” house. The court in its opinion and what made it so famous as related to its pop culture references such as Ghostbusters. The court found that since a claim that a house is haunted known throughout the area would financially affect the value of the home and if the realtor knew that it was known to be haunted then they had a duty to report that fact since it is not anything that a reasonable person could find on their own through inspecting the home. As a result, the court determined that ghosts do exist as it relates to the financial aspects of a home.
b. The story of a used care salesman
I had an issue a few years back where I went and bought a car from a used car dealership. We took the car out for a spin twice and decided that we liked it. We just drove it down the road around the area of the dealership. A big issue I learned from this incident, is that car dealers can do their own inspections on their cars which can create a huge conflict of interest. When we took the car out for a spin it didn’t seem like there were any issue.
We only noticed a few blemishes on the car which weren’t too much of a concern. There was a door that also had issues opening and closing. The windshield was also apparently cracked from the cold. I raised my concerns to the dealer and he said that he would fix the door and the windshield. There were the only two concerns so if they fixed it, I planned on purchasing the car.
I went with my wife to purchase the vehicle after we were told the door and the windshield was fixed and we placed our children in the new car. My wife started taking off for the freeway when I notice that the door that had issues cracked open while she was driving. I honked her down and we pulled over and could not get the door to shut all the way. I also noticed at that point that the left blinker didn’t work. We also noticed that the left blinker didn’t work at that point.
I wasn’t very happy at that point knowing that they had held out that the car had past a safety inspection when a blinker wasn’t functional and a door would not close all the way. I went back to the dealer and said that I wanted to cancel the deal. He put up a fit at first. He knew I was an attorney and mentioned as much and said, “You know I don’t have to do that right.” I told him again I wanted the contract revoked without getting into legal jargon and in the end he agreed.
I would not have gotten the benefit of the bargain if he represented that he fixed the left door and had a blinker that would not pass a safety inspection. I would have had to pay additional money to have the door fixed and the blinker fixed and any other safety inspection claims he had. It put my children and wife in danger, with the fact that the door could have flown open while traveling down a busy freeway.
The false representations that the door was fixed and that the car had passed a safety inspection were representations that induced me to buy the vehicle that I materially relied on in purchasing the vehicle. So in fraud, you have to prove that the individually knowingly made a false representation. If the dealer had a duty under a safety inspection to ensure that the vehicle cars’ blinker was working, then the representation that it passed a safety inspection could be said to have been false. The representation that the door was fixed when it still had troubles could have been said to be false.
They could claim they didn’t know the left blinker didn’t work, but I could say the inspection made it so they should-have known that the blinker didn’t work. They could also say that I should-have known that the left blinker didn’t work before purchasing the vehicle, however, I could claim that I could materially rely on the inspection. They could also say that they thought that they had actually fixed the door and note the work they did into fixing the door. Based on what they did to fix the door, I could claim that it was a false statement.
If they did a half-baked job, then I could claim they actually did not make a good-faith effort to fix the door. I think they told me that they had put “grease” on the door to fix it. Since the door still had issues, it was obviously more of a mechanical issue on the door shutting all the way and not a matter of ease on how the door opened and closed. So I could also claim that the statement they fixed the door was false with how they went about fixing it and also the fact that the door continued to have the same problems it had prior.
Fraud can be intentional or can be negligent. Negligent is based more on the premise that the individual that made the false statement failed to use reasonable care to determine if the statement was true or not and was in a better position than the other individual to know if the claim was true or not.
c. Elements to prove a civil claim for fraud
Under a claim of fraud, one must prove that an individual made a false statement with the intent to induce someone to act or refrain from acting. Obviously, if I told them I was interested in buying the car and the only issue I had was the door and they said they would fix it then the representation induced me to act.
One must also prove that the statement was material to the purchase of the vehicle of which the person relied on. If the issue was something that was not as material to the purchase of the vehicle such as claiming they would vacuum the car or put new wiper fluid in, then that might not be material enough to claim that it induced me to purchase the car unless there were some nasty stuff in the car that needed cleaning up. The comment that the door was fixed was something that I materially relied on as well as the safety inspection.
One must also claim that they were damaged in someway. So in my car situation, my damages would be the fair market value of the car with a working door and with passing safety inspection.
d. Fraud in contracts
Also, since my situation involved a contract, I could claim that I was fraudulently induced to enter into the contract and based on that, claim that the contract was invalid. If I entered the contract based on a false statement, then there cannot be mutuality. Mutuality, means that both parties, based on the circumstances, both thought it was a good idea to enter into the contract.
e. Damages based on fraud
If the contract was entered based on fraud, then I could claim that I entered the contract based on false circumstances and that the contract lacked mutuality. So if I could prove I bought bought the car based on fraud I could have it returned and get my money back. I could also ask for damages on any consequential damages I lost such as interest with the money I used to purchase the vehicle.
Also, if it was a house, and the house is deemed unlivable and I have to live elsewhere, they could be liable for damages for those additional living expenses I had to pay as well as moving fees ect. The damages must be foreseeable, meaning that it should be reasonably known that such damages would be caused as a natural consequence. If somehow a dog died as a result of the moving, that may not be a foreseeable damage.
Damages could also be operating costs and expenses, if the car was to be a company car and I couldn’t use it, I could claim it was an operating cost or if it was a machine I needed for a company that made my product. I could also claim lost profits in connection to operating costs. I could also claim damages for expenses for the investigation. There may also be emotional distress and damages to one’s reputation as a result of a fraudulent comment. This can include pain and suffering and actual medical expenses incurred as a result of the distress past and future.
A person may also seek punitive damages, which is a penalty fee to deter future conduct and the penalize the conduct with the situation at hand. These damages are assessed based on the severity of the conduct, whether or not the conduct had been continuous and it also focuses on the company’s ability to pay any punitive damages. The first $50,000 goes to the individual that prevails while the rest of any damages is split between the state and the individual. It is best not to rely on this type of damage when calculating a case for potential recovery.
f. Fraud in employment settings
Fraud can occur in employment settings. An individual could make a promise of a bonus payment or wage payment and then revoke which one could claim was as a result of a false misrepresentation. It can occur based on the language of a contract or promises made in entering into a contract. It could be made based on a promise of a length of stay in a company or a promise of a position in the company or a promise to abstain from doing something.
There are also statutes under Utah Law that protect consumers from false advertising and other fraudulent and deceptive business schemes to induce people to purchase their products or services.
So in sum a civil action for fraud is focused in an individual who makes or omits a false statement with the intent to have an individual act in a particular way based on that false statement and when that person does act in that particular way. So again, it is focused on false statements that have a negative impact on the economy and keeps people from getting the benefit of the bargain or damages goods and services based on those false statements. So the law focuses and penalizes a false statement where someone moves and acts as a result of that false statement. If you think you have a potential issue related to fraud, feel free to reach out to us.
Brian K. Jackson, LLC 