Fraud In the Inducement and Fraudulent Concealment – Illinois Primer

hoodwinkIn Thorne v. Riggs, 2013 IL App (3d) 120244-U (September 3, 2013), the trial court rescinded a real estate contract and the Third District affirmed.  In doing so, the Court examined Illinois fraud in the inducement and fraudulent concealment law and discussed the “special relationship” fiduciary duty rule.

Facts: Plaintiffs sued two LLC members alleging they fraudulently induced them into investing in a realty development.  Plaintiffs claimed the defendants misstated the deal’s status, timing, and whether an easement existed on the property. After trial, the trial court rescinded the contract and ordered defendants to return plaintiffs’ $1.2M investment.

Holding: Appellate Court affirmed trial court.

Reasoning/rules:  Plaintiffs’ fraud claims were premised on defendants’ misrepresentations and concealing material information about the project.

To show fraud in the inducement,  a plaintiff  must show (1) a defendant’s false statement of material fact, (2) known or believed to be false by the defendant; (3) intended to induce the plaintiff to act; (4) plaintiff acted in reliance on the truth of the representation; and (5) resulting damage ¶ 45.

Fraudulent concealment requires a showing that: (1) defendant concealed a material fact under circumstances creating a duty to speak; (2) defendant intended to induce a false belief; (3) plaintiff couldn’t have discovered truth through reasonable inquiry or inspection (or was prevented from doing so); (4) justifiable reliance by the plaintiff; (5) plaintiff would have acted differently if he was aware of the hidden information; and (6) damages. ¶ 62.

A fraudulent concealment plaintiff must also show a fiduciary relationship between him and the defendant.  Fiduciary relationships can exist (a) as a matter of law; or (b) where there is a special or confidential relationship.  The former (as a matter of law) category includes attorneys and clients, principals and agents and partners in a partnership and joint venturers in a joint venture.  Thorne, ¶ 63.

The “special relationship” fiduciary duty rule applies where one party puts trust and confidence in another who stands in a dominant position in terms of age, education, mental status or business acumen. (¶ 64).

Applying these elements, the Court held that the plaintiffs proved fraud in the inducement and fraudulent concealment at trial.

(1) Misrepresentation/concealment: defendants misrepresented status of the project and failed to alert plaintiffs that part of the property was subject to an easement and repurchase agreement (¶¶ 47-63);

(2) Knowledge of falsity – multiple witnesses testified that defendants knew of storm water issues affecting the parcels for several years but never told plaintiffs (¶¶ 52, 57);

(3) Justifiable reliance: defendants controlled the flow of information from the municipality concerning the project’s status.  Defendants divulged only selective information to plaintiffs concerning governmental requirements necessary to complete the project.  The defendants control of information made it reasonable for plaintiffs to rely on defendants.  (¶ 69, 82-83).

The court rejected defendants argument that the information was public record and therefore prevented a finding of justifiable reliance.  The court stressed that plaintiffs were neophyte investors who relied on defendants’ real estate experience.

Another factor relied on by the Court was the absence of record evidence that the easement or the storm water issues were recorded public documents.  (¶ 82).

(4) Fiduciary Duty: while plaintiffs were highly educated, they were real estate novices compared to defendants and completely relied on defendants’ expertise.  This led the Court to sustain the trial court’s “special relationship” fiduciary duty finding.  The Court also found that since defendants controlled the project information they received from the Municipality, they owed plaintiffs a precontractual fiduciary duty.  (¶ 69);

(5) Inducement – there was no other reason for defendants to represent that there were no impediments to plat approval other than to entice plaintiffs to sign the purchase agreement (¶¶ 73-75);

(6) Injury/Damages – plaintiff paid $1.2M for an investment that was promised not to exceed $550,000.  (¶¶ 85-86).

Take-aways: Both plaintiffs had multiple post-graduate degrees.  Still, the court found that they relied on and were in a vulnerable position compared to the defendants, experienced real estate developers.

Thorne also illustrates that where a defendant monopolizes the flow of a deal’s information from outside sources (i.e. a governmental agency), the plaintiff can establish the justifiable reliance prong of his fraud claim.