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hoodwinkIn Thorne v. Riggs, 2013 IL App (3d) 120244-U (September 3, 2013), the trial court rescinded a real estate contract and the Third District affirmed.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 After trial, the trial court rescinded the contract and ordered defendants to return plaintiffs’ $1.2M investment.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.


Fraud in the Execution Dooms Plaintiff’s Specific Performance Claim Against Business Partner

In Chamanara v. Djahanguiri, 2013 IL App (1st) 122885-U, the First District discussed the contours of the fraud in the execution defense in a specific performance suit to enforce a stock purchase agreement.

Facts:  The case involves two adjacent Chicago commercial properties located at 1206 N. State (“1206 Space”) and 1212 N. State St. (“1212 Space”).  Plaintiff rented the 1206 Space from defendant for several years and operated various restaurants on it.

The plaintiff sued to enforce a convoluted agreement involving the two spaces. The agreement called for the parties to become 50/50 shareholders in defendant’s property management firm and share rent proceeds for both the 1206 and 1212 Spaces.  The relationship crumbled and the plaintiff sued to enforce the agreement.  Defendant raised the fraud in the execution defense; saying he never agreed to partner with the plaintiff on the 1212 Space. After a bench trial, the Circuit Court found for defendant and plaintiff appealed.

Held: Affirmed. Defendant proved by clear and convincing evidence that he was tricked into signing the agreement.


Central to the Court’s fraud in the execution finding was the evidence that plaintiff “surreptitiously substituted” the 1212 Space agreement for the 1206 Space agreement (which defendant intended to sign).  This resulted in the defendant unwittingly signing away a 50% interest in both the 1206 and 1212 Space’s future rental stream.

The Court espoused the following key fraud in the execution principles:

(i) fraud in the execution is an exception to the general rule that one who has ample opportunity to read a document can’t later claim he was deceived as to a document’s meaning or content;

(ii) the party claiming fraud in the execution must prove the defense by clear and convincing evidence (a higher burden than the more-likely-than-not preponderance standard); 

(iii) fraud in the execution applies where the instrument is misread to the party signing it,

(iv) where there is surreptitious substitution of one paper for another or where (as here) a party is tricked into signing a document he didn’t mean to sign.

(¶¶ 74-75).

The First District agreed with the trial court that this was classic fraud in the execution.  The defendant’s unchallenged fraud in the execution evidence at trial included (a) testimony from multiple witnesses that the parties’ never came to agreement on the 50/50 partnership; and (b) the suspicious circumstances surrounding defendant’s execution of the 1212 Space agreement – namely, that plaintiff immediately snatched the papers away from defendant after he signed them, precluding defendant from a meaningful opportunity to see what he was signing. (¶¶ 76-81).

And since the plaintiff failed to counter defendant’s evidence at trial, the First District agreed with the trial court and found that defendant met his burden of proving that plaintiff tricked him into signing the stock purchase agreement for the 1212 Space.

Take-aways: Fraud in the execution requires an elevated proof burden burden.  In Chamanara, the defendant offered both testimonial (from multiple sources) and documentary evidence to support his claim that plaintiff hoodwinked him into signing away a 50% interest in his leasing company.  The plaintiff’s inability to counter this evidence made it impossible for him to defeat defendant’s fraud defense.  The case also illustrates a court’s willingness to look into the minute details (i.e., the court discussed at length how plaintiff only showed the documents upside down on his coffee table to defendant at the moment of signing) of circumstances surrounding a document’s execution in order to fully inform its fraud analysis.