In Heartland Women’s Healthcare, Ltd. v. Simonton-Smith, 2021 IL App (5th) 200135-U, the appeals court affirmed summary judgment for an obstetrician sued for fraud based on her alleged verbal promise to retire from her practice at the end of a three-year employment term.
The plaintiff claimed the defendant tricked it into buying her practice by promising to retire. The written agreement resulting from the parties’ negotiations contained neither a non-compete term nor a recital that defendant intended to retire at the agreement’s conclusion.
The trial court granted summary judgment for the defendant on plaintiff’s fraud and negligent misrepresentation claims. Plaintiff appealed.
Affirming, the Fifth District found that the plaintiff failed to produce evidence to support its misrepresentation claims and specifically, to show defendant hatched a “scheme to defraud” the plaintiff.
In Illinois, to state a colorable fraudulent misrepresentation claim, a plaintiff must allege: (1) a false statement of material facts, (2) known or believed to be false by the person making it, (3) an intent to induce a plaintiff to act, (4) action by the plaintiff in justifiable reliance on the truth of the statement, and (5) damage to the plaintiff resulting from the reliance.
A negligent misrepresentation plaintiff must also establish these elements but instead of showing a knowingly false statement, must prove the defendant (i) was careless or negligent in ascertaining the truth of the statement and (ii) owed a duty to the plaintiff to impart accurate information.
In both a fraudulent and negligent misrepresentation claim, the statement must be of an existing or past fact and not merely a promise to do something in the future. The alleged fraud must also be complete at the time of the challenged statement as opposed to an intention to commit a future fraud.
The ‘Scheme to Defraud’ Exception
Where the false representation of future conduct is the scheme or device employed to accomplish the fraud, a court can restore the parties to the positions they occupied before the fraud was committed. And while courts make clear that something beyond a lone broken promise is usually required to trigger the scheme exception, that “plus-factor” is still elusive.
Some courts require a plaintiff to allege a sustained pattern of repeated false representations [see HPI Health Care Services, Inc. v. Mt. Vernon Hospital, Inc., 131 Ill.2d 145 (1989)] while others [Roda v. Berko (401 Ill.335 (1948), Vance Pearson, Inc. v. Alexander, 86 Ill.App.3d 1105 (1980)] have held that a single promise can trigger the scheme exception.
In cases that have recognized the exception in the single broken promise setting, the plaintiff must generally produce evidence of a defendant’s contemporaneous intention not to follow through on the promise. The cases also make clear that whether a plaintiff is proceeding on a course of conduct scheme theory or one that involves only one promise, it must show the defendant’s fraudulent intent existed at or before the time of the promise. [25]
Here, the plaintiff could not prove the defendant promised to retire while, at the same time, never intending to fulfill that promise at the outset. For support, the Court quoted both plaintiff’s agent’s and defendant’s deposition testimony. Both testified that while the defendant’s future retirement was discussed prior to inking the three-year pact, it was never reduced to writing. The plaintiff also could not pinpoint a definite promise by the defendant to retire when the employment contract lapsed.
As further proof that the defendant never unequivocally promised to retire, the plaintiff’s agent testified he even asked the defendant not to retire and that defendant stay beyondthe employment contract’s end date. In the end, Plaintiff’s evidence did not go far enough to establish either an oral promise to retire at the agreement’s conclusion or the defendant’s intention not to fulfill that promise.
Afterwords:
In finding for the doctor defendant, the Heartland Women’s Healthcare Court was careful to respect the boundary between contract and tort law damages – a delineation that, in theory at least, prevents every broken promise from undergirding a fraud claim.
And while the content and outer reaches of the scheme to defraud exception [to the rule that a false promise is not actionable fraud] is still murky, it seems that something beyond a one-off broken promise is generally required. A plaintiff invoking the scheme exception has a better chance of surviving a pleadings motion or summary judgment where it can show a defendant’s pattern of repeated broken promises.
Here, the plaintiff alleged only a single misstatement – defendant’s supposed oral promise to retire at the conclusion of the employment contract. Without evidence of defendant’s contemporaneous intent not to uphold her promise, there wasn’t enough evidence of a scheme to defraud to survive summary judgment.
In hindsight, the Plaintiff should have negotiated and codified both a non-compete provision and defendant’s imminent retirement as material terms of the contract.