(15) Fraud

What is fraud (deceit)?

A knowing misrepresentation of a material fact made with the intent to induce the plaintiff's justifiable reliance, resulting in damages.

What are the elements of fraud?

A material misrepresentation, knowledge of falsity, intent to induce reliance, justifiable reliance, and resulting damages.

How should fraud generally be analyzed on a Remedies essay?

First analyze fraud as a tort and apply tort remedies unless the call of the question directs otherwise; then analyze fraud as the basis for contract remedies.

Why should fraud usually be analyzed as a tort before contract remedies?

Because the plaintiff's primary remedies generally arise from the tort of deceit before considering equitable contract remedies.

What are the two principal measures of general damages for fraud?

The benefit-of-the-bargain measure and the out-of-pocket measure.

What is the benefit-of-the-bargain measure of fraud damages?

The difference between the value actually received and the value the property would have had if the representation had been true.

What interest does the benefit-of-the-bargain measure protect?

The plaintiff's expectation interest.

What is the out-of-pocket measure of fraud damages?

The difference between what the plaintiff paid and the actual value received.

Which fraud damage measure protects the plaintiff's expectancy?

The benefit-of-the-bargain measure.

Which fraud damage measure restores the plaintiff's actual economic loss?

The out-of-pocket measure.

What are special damages in a fraud action?

Consequential damages, such as lost profits, caused by the fraud.

What three requirements must special damages satisfy?

They must be proven with reasonable certainty, proximately caused by the fraud, and not be too remote.

What burden does the plaintiff have when seeking lost profits in a fraud action?

The plaintiff must prove the amount with reasonable certainty.

May reliance damages be recovered in a fraud action?

Yes.

May punitive damages be awarded in a fraud action?

Yes.

Why are punitive damages available for fraud?

Because fraud is an intentional tort.

What is the purpose of restitution in a fraud case?

To prevent the defendant from retaining unjust gains obtained through fraud.

What legal restitution remedy may be used in a fraud action?

Assumpsit using the appropriate common count.

What equitable restitution remedy may impose ownership of specific property obtained through fraud?

A constructive trust.

What equitable restitution remedy may secure repayment through specific property?

An equitable lien.

May the plaintiff recover the defendant's profits when the misrepresentation is innocent?

No.

Why is recovery of the defendant's profits unavailable for innocent misrepresentation?

Because restitution of profits generally requires wrongful conduct.

What special restitution problem arises when a bona fide purchaser acquires fraudulently transferred property?

The plaintiff cannot recover the property from the bona fide purchaser.

If a bona fide purchaser acquires fraudulently transferred property without notice, what restitution is available?

The plaintiff is generally limited to recovering the consideration the bona fide purchaser paid the defendant.

What equitable remedy commonly allows recovery of the bona fide purchaser's payment?

A constructive trust.

Are donees considered bona fide purchasers?

No.

Are creditors considered bona fide purchasers for restitution purposes?

No.

May rescission be a remedy for fraud?

Yes.

When fraud exists in the execution of a contract, what is the proper remedy according to the outline?

Reformation.

What type of fraud exists when the written instrument does not accurately reflect the parties' agreement?

Fraud in the execution.

What type of fraud exists when the plaintiff understands the transaction but is induced to enter it through misrepresentation?

Fraud in the inducement.

What remedies are generally available for fraud in the inducement?

Damages or rescission.

Does fraud in the inducement generally justify reformation?

No.

What special rule applies to fraud involving securities?

Scienter is not required.

What three measures of compensatory damages may be available in securities fraud cases?

Market value at the time and place of the taking, the highest intermediate value between the taking and trial, and the highest value between notice and a reasonable replacement period.

Besides compensatory damages, what statutory remedies commonly exist in securities fraud cases?

Interest and attorney's fees.

May reformation be available in securities fraud cases?

Yes.

May rescission be available in securities fraud cases?

Yes.

If the defendant refuses to perform after rescission and restoration in a securities fraud case, what remedy should be considered?

Specific performance.

Why does specific performance become available after rescission in some securities fraud cases?

Because rescission followed by nonperformance effectively brings specific performance in through the "back door."

Testable Issue: What is the difference between benefit-of-the-bargain and out-of-pocket damages?

Benefit-of-the-bargain protects the plaintiff's expectancy, while out-of-pocket damages compensate only the plaintiff's actual economic loss.

Testable Issue: What is the difference between fraud in the execution and fraud in the inducement?

Fraud in the execution concerns an inaccurate written instrument and is remedied by reformation, while fraud in the inducement involves misrepresentations leading to agreement and is remedied by damages or rescission.

Testable Issue: Why can't the plaintiff recover the defendant's profits for innocent misrepresentation?

Because restitution of profits generally requires wrongful conduct, not innocent misrepresentation.

Essay Rule: How should you analyze fraud remedies?

First analyze fraud as an intentional tort and determine the proper measure of compensatory damages, then consider consequential, reliance, punitive, restitutionary, and equitable remedies, including rescission or reformation depending on the type of fraud.

Master Synthesis: What remedies are generally available for fraud?

Compensatory damages, consequential damages, reliance damages, punitive damages, restitution, rescission, reformation where appropriate, and specific performance in limited circumstances following rescission.