1. Chapter 1: FRAUD
a. 4 elements of fraud:
i. 1) Misrepresentation of existing fact (beyond mere puffing)
ii. 2) Scienter (whether defendant knew or should have known that statement was false, or reckless disregard for truth)
iii. 3) Justifiable reliance (level of sophistication regarding the parties is an important factor)
iv. 4) Actual damages
b. Fischer v. Division West Chinchilla Ranch:
i. “Defendant created the impression in its potential customers that chinchilla ranching was an easy undertaking and that there was not a requirement for any special skills, experience, knowledge or special features in order to become a successful chinchilla rancher. This court is convinced that that it was fraudulent for defendant to sell the chinchillas to people that whom they knew or well should have known most likely would be unable to successfully raise chinchillas because of their lack of skills, proper environment and/or experience. The defendants own witness testified that the raising of chinchillas is to some extent an art, and that the environment they are raised in must be carefully controlled as to temperature, humidity and noise.”
-Sophistication of parties is important. “The question is whether the representation were of such a character and were made under such circumstances that they were reasonably calculated to deceive, not the average man, but a person of the capacity and the experience if the particular individual who was the recipient of the representations”
-Good counter argument would be that it was a business transaction (ie purchase not for personal/family/ household use).
-Fact that disclaimed warranties does not matter in a fraud case. Matters only in contract breach.
DAMAGES in fraud – punitive damages are allowed in common law fraud. Punish the wrong doer and curtail future wrongful acts. We allow for attorney’s fees in certain circumstances when there has been a showing of fraud.
a. Majority Rule: Benefit of bargain (expectancy)
i. Allowing him to recover what he would have received if the representations he relied upon been true.
1. The plaintiffs, here, want to recover the money they EXPECTED to make (the lost profits).
b. Minority Rule: Out of Pocket (reliance)
i. The difference of the value between what he gave as consideration and what he actually received
c. South Carolina Rule:
i. Difference between actual value at time of sale(if they had been in conformance with the representation) AND the value that you expected to have had this failure/omission not occurred
d. UCC §2-714 says that you can calculate a reasonable amount of damages. Value Received – Value Promised.
Lawson v. Citizens and Souther Nat. Bank of SC 1971 (SC damages)(not in book)
e. Rule: SC awards Difference in Actual Value at Sale and the Value as Expected. This called the Benefit of the Bargain rule but it looks a lot like Out-of-Pocket (reliance)
f. Facts: plnt claims against def developer based on the developer failing to disclose to the purchasers that the land that they purchased, and upon which they built a home, contained a ravine that had been filled and capped by the developer prior to the sale to the purchasers.
g. Holding: It was only necessary for the purchasers to allege sufficient facts to support a claim against the developer, which they did by alleging that he had failed to disclose that there was a ravine on the property that the developer had filled prior to their purchase of the property and the developer was liable in damages for the difference between the value of the property in its defective condition and the purchase price, as well as incidental damages associated with the sale and the consequences of the defect.
i. The court further held that the fact that the purchasers were divorced and the husband no longer owned the property was not a basis for granting a demurrer.
Problem 1 (p,12): (unconfirmed by professor): clear example of fraud (Red Bomb example).
Von Hoffman v. Prudential Insurance Co.: failure to disclose case. Failed to disclose something that would be material to transaction.
Many extraneous complicated facts involving “vanishing life insurance” policy and that the calculations used to determine it were changed. Summary: “A reasonable jury could certainly conclude that this omitted information was material, that a reasonable investor would have wanted to know that the method used to generate the twenty years worth of results was not longer being used and that a new, perhaps less favorable method was going to be used instead.
Justifiable reliance: Contract: person in your circumstances, it would be reasonable to rely. Not the case with fraud most of the time. Being lied to is being lied to, a false statement is still false statement regardless of intelligence of person. If you already know the bad facts though, then you are out of luck.
PROBLEM 2 (P. 23): Question: Hans Toothpick told Gerald Gullible that he (Hans) owned the Brooklyn Bridge, and Gerald agreed to buy it for $40,000. He gave Hans a $4000 down payment. When Hans proved to lack title, Gerald sued to recover the down payment, asking punitive damages for fraud. Hans defended stating that Gerald’s reliance was not reasonable since no reasonable person would have believed that Hans owned the Brooklyn Bridge. Is this a good defense?
Answer: No. As long as Gerald did not actually know that Hans was lying, than he can recover. The fact that a reasonable person would know better is irrelevant. Court probably would not impose punitive but could. Factors for punitiv
and said, “look this is big business, and when you have transfers of cars with odometer readings that are incorrect, that has a significant impact on the value of those cars.”
ii. Why do you think the federal government found it necessary to have statutory provisions instead of relying on common law fraud?
1. It’s such a big deal that the government thought it was important to direct its intention to this particular type of conduct.
2. The damages that are available at common law (most cases you have to pay your own attorneys fees). By having a statute saying you can get three times your actual damages…just having that alone may actually deter this kind of behavior from taking place. It also specifically says that an attorney can recover attorneys fees. That encourages attorneys from taking up these types of cases.
3. It creates a shift of a burden on who has to prove what. In common law fraud, it’s the π’s responsibility to prove all the elements. But now, there seems to be a shift of the burden on to the Δ, to NOT prove certain elements.
o Federal Odometer Act (FAO):
2. Preventing Tampering
3. Service, Repair, and Replacement
4. Disclosure Requirements on Transfer of Motor Vehicles
a. Must disclose either actual mileage or that the mileage is not known (Allows consumer to change the bargain based on accurate expectations)
1. Prohibits giving a false statement in making mileage disclosures
5. Inspections, Investigations, and Records
6. Administrative Warrants
7. Confidentiality of Information
8. Penalties and Enforcement
a. Civil Penalties: no more than $2k per violation up to $100k maximum, separate violations for each act,
b. Criminal Penalties: knowing or willing violation could be imprisoned and/or fined
c. Civil Actions by Attorney General:
d. Civil Actions by States
9. Civil Actions by Private Persons
a. Violation and Amount of Damages: when violation has occurred w/ intent to defraud, liability is for 3 times the actual damages (value received –value paid) or $1500, whichever is greater
10. Relationship to State Law
o Federal Odometer Regulations: § 580