Tag: justifiable reliance

The ‘Justifiable Reliance’ Element Of A Fraud Claim (Illinois Law)

In Siegel Development, LLC v. Peak Construction, LLC, 2013 IL App (1st) 11973, the First District affirmed summary judgment in favor of a building seller and contractor in the building buyers’ fraud suit.

Facts: The building buyers (plaintiffs) and defendants entered into a contract for the purchase of a four-unit apartment building that plaintiffs planned to convert to condominiums.  Plaintiffs forecasted spending about $700,000 to buy the building and then another $180K in renovation costs.  The renovation figure was based on a spreadsheet provided by the defendant contractor which outlined the projected costs.  The contractor also informed the plaintiffs that it could perform all renovation work under a limited repair-and-replacement permit from the City.

Before closing, an architect repeatedly told the plaintiffs that the building needed more extensive repairs than were estimated by the contractor and that plaintiffs would need a “full permit” (as opposed to repair-and-replacement one) to complete the repairs.  Plaintiffs ignored the architect’s suggestion and  proceeded to closing without securing a full permit and also opted against a pre-closing property inspection.

After plaintiffs bought the building, the contractor informed them that it couldn’t proceed with the spreadsheet repairs and  couldn’t perform the work under a repair and replacement permit.  Plaintiffs also discovered numerous structural defects in the building which required repair costs far exceeding the contractor’s spreadsheet estimates.  Plaintiff sued the seller and contractor (and its agents) for fraud, rescission and breach of contract.

Trial court and appeals court holdings: The trial court entered summary judgment for the defendants.

Reasoning:

Plaintiffs failed to raise a genuine issue of fact on whether defendants made an actionable misrepresentation to plaintiffs concerning the building and failed to show justifiable reliance on any of defendants’ building representations.

Illinois law requires a fraud plaintiff to establish (1) a misrepresentation or false statement of material fact; (2) by one who knows or believes the statement to be false; (3) made with the intent to induce action by another in reliance on the statement, (4) action by the other in reliance on the truthfulness of the statement; and (5) injury resulting from the reliance.  ¶ 111

Plaintiffs’ misrepresentation claim was premised on the contractor’s spreadsheet document that estimated building repairs at about $180K.  The Court found the document too indefinite to bind the defendants since there was no meeting of the minds on the project specifics and scope of work. 

The Court also affirmed the trial court’s finding of no justifiable reliance as a matter of law.  Fraud reliance must be reasonable.  To determine whether reliance is reasonable, the Court considers all facts known to the plaintiff and all facts which the plaintiff could have learned through the exercise of ordinary prudence. A fraud plaintiff cannot enter a transaction “with his eyes closed” and later claim he was deceived.  But where a representation concerns a fact that is uniquely within the speaker’s knowledge, the recipient can rely upon it without investigation.  ¶ 114

In finding no justified reliance as a matter of law, the First District cited record evidence that plaintiffs decided to purchase the property without a signed repair contract or a pre-closing inspection.  ¶ 114.

The Court also found that the sales contract’s written warranty prevented the plaintiff from claiming it relied on the defendants’ oral statements about the building’s structueral integrity.  Note: the opinion references that plaintiff’s breach of warranty claim against the seller remains pending and was not subject of the appeal.

Take-aways: Peak Construction illustrates how difficult it is for a plaintiff to prove fraud; especially where the plaintiff is a sophisticated business person or entity.  The case also shows that proving justifiable reliance is particularly hard where the plaintiff and defendant are on an equal bargaining footing and the plaintiff has an ample opportunity to investigate the truth of a supposedly false statement. 

 

 

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.