Fraud is a tort and is generally conceptualized as a lie someone tells another in order to profit of the deception. Fraud was recognized by the judges of the old and has been defined by case law ever since its recognition. Grounded in this tradition, Texas has established its definitions and elements of fraud through case law.
Texas defines fraud as “as a general rule, . . . when one party enters into a contract with no intention of performing, that misrepresentation may give rise to an action in fraud.”[1] Texas case law has recognized that to find a defendant guilty of fraud the following elements must be proven:
- Defendant made a material misrepresentation,
- which was false,
- the Defendant knew it was false or was uncertain of its truth,
- with the intent misrepresentation was to be acted upon,
- the injured party acted on the misrepresentation,
- and the misrepresentation caused injury.[2]
ELEMENTS OF FRAUD
Defendants Made a Material Misrepresentation
First, the defendant must make a material misrepresentation, in Italian Cowboy Partners, Ltd v. Prudential Ins. Co. of America the Supreme Court of Texas cited the Dallas Appeal Court decision in Smith v. KNC Optical, Inc. a “[m]aterial [representation] means a reasonable person would attach importance to and would be induced to act on the information in determining his choice of actions.”[3]To determine if the representation was an actionable statement of fact or an opinion is dependent on the circumstances in which the representation was made.[4] The level of knowledge one possesses will weigh in determining if the representation is a fact or opinion.[5] Special or one-sided knowledge that one party knows leans heavily to the conclusion that the representation is one of fact.[6]
That Representation is False
Next, the representation must have been false and the defendant knew it was false or was uncertain of its truth. The Texas Supreme Court held in Prudential Ins. Co. of America v. Jefferson Assoc., Lts. that “[a] statement is not fraudulent unless the maker knew it was false when he made it or made it recklessly without knowledge of the truth.”[7] The key to understanding this element is knowing the difference between “puffing” and a genuine misrepresentation.[8] Id. The line between “puffing” an misrepresentation is blurry and often depends on circumstantial evidence to determine the degree of capability.
The Misrepresentation is Intended to be Acted Upon
Finally, the misrepresentation must have been intended to be acted upon, it was acted on and it caused injury. The standard for intent is illustrated in Blue Bell, Inc. v. Peat, Marwick, Mitchell & Co., where the Court of Appeals of Texas in Dallas held that the element of intent requires a greater degree of culpability than the mere foreseeability the representation will be acted on.[9] In other words, it is not enough that a misrepresentation is foreseeably likely to be acted on, the defendant must have purposely intended for the victim to act in reliance on it.[10] The Texas Supreme Court reinforced this holding in Ernst & Young, LLP. V. Pacific Mut. Life Ins. Co., the court adopted the Second Restatement of Torts approach.[11] In that case, the Court adopted the Restatement’s “Reason to Expect” standard.[12] The Restatement states “one has reason to expect a result if he has information from which a reasonable man would conclude that the result will follow or would govern his conduct upon the assumption.”[13] The final two elements are generally easy enough to decipher, the injured party actually acted on the misrepresentation and suffered some sort of damage.
AN EXAMPLE OF FRAUD
An example of fraud can be illustrated by a hypothetical selling of a house. Suppose a seller contracts with a buyer to sell his home in Austin, Texas but the buyer is buying sight unseen. If the seller, in a bid to close the deal as quick as possible, makes an assurance to the buyer that the house has a massive backyard, but in reality, the house has a much smaller backyard of 100 sq ft yard. The buyer in fear the house will be bought soon because of its yard buys the house well over the asking price of the house.
The buyer would have a cause of action of fraud in Texas. To establish this the buyer would have to establish the following elements:
- The material misrepresentation: Here, the seller made a material misrepresentation. He made a representation that the house has a massive backyard, typically the yard size is a major consideration in buying a house, thus it is material.
- Defendant’s knowledge of the misrepresentation: The seller knew that his statement was false.
- The intent for the misrepresentation to entice action: The seller specifically made this misrepresentation to entice the seller into buying the house.
- The victim party acted on the misrepresentation: Here the buyer specifically bought the house relying on misrepresentation.
- The victim party suffered damages: Here the buyer has suffered the difference in value between a house with a large yard and the value of the house they received.
This is a very simple example of fraud, and it excludes many other factors that may or may not negate certain elements of fraud. However, it is a simple example to visualize what fraud looks like.
OTHER TYPES OF FRAUD
Fraud can come in many forms as well. Some of the other types of fraud include:
- Fraudulent misrepresentation (actual fraud): The quintessential type of fraud, this type of fraud is categorized by purposely misleading another by lying about a material fact.
- Constructive fraud, fraudulent nondisclosure: Similar to actual fraud, this type of fraud is most commonly associated with contract law. The difference between actual fraud and constructive fraud is that constructive fraud does not require knowledge the material fact was false and does require a fiduciary relationship between the parties.
- Fraudulent inducement: This type of fraud occurs when one party tricks another party into signing an agreement or contract by using fraudulent statements about the nature of the contract.
- Statutory fraud: This fraud occurs when the conditions set out by a state’s legislator are met. Typically, the crime of fraud is defined by the history and tradition of a state’s court, however, a state legislator may decide to define fraud in a certain way.
- Negligent misrepresentation (a less culpably actual fraud): Technically this is not fraud, this tort occurs when a party fails to exercise reasonable care or competence to present correct information. The offending party does not need to have the intent to misrepresent.
- Fraudulent transfer: Typically associated with bankruptcy, this type of fraud occurs when a debtor assigns property to another for less than the actual value of the property, this is done to prevent the collector from obtaining the property.
Each of these forms tweaks the formula for fraud in certain ways and allows causes of action to develop when the standard elements of fraud are either not present or not applicable.
For example, constructive fraud, in Hubbard v. Shankle the Court of Appeals of Texas in Fort Worth ruled constructive fraud is a breach of a legal or equitable duty that is fraudulent because it violates a fiduciary relationship.[14] The notable difference is that constructive fraud does not require the element of intent to defraud.[15] So if a plaintiff can prove a fiduciary duty existed between the parties they may have a constructive fraud claim.
Fraud is one of the most common torts in Texas. Insurance scams, bank fraud, and forgery are all examples of common everyday fraud. The common element among all of them is that someone misrepresented something to another and harm occurred. To protect yourself from fraud, you should require everything in writing and have the other party verify the information they present.
Written by:
Mason Moresco
Law Clerk
GUERRA LLP
875 East Ashby Place, Suite 1200
San Antonio, Texas 78212
Phone: (210) 447-0500
Frank Guerra
Board Certified – Personal Injury Law
Texas Board of Legal Specialization
GUERRA LLP
875 East Ashby Place, Suite 1200
San Antonio, Texas 78212
Phone: (210) 447-0500
Be sure to follow us on Instagram and Facebook to see more Guerra LLP news!
