Tag: promissory fraud

Doctor’s Oral Promise to Retire in Future Not Enough To Sustain Healthcare Plaintiff’s Fraud Claims

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.

 

 

Promissory Fraud: Sporting Goods Maker Pleads Seller’s Scheme to Defraud – IL ND

Maurice Sporting Goods, Inc. v. BB Holdings, Inc., 2017 WL 2692124, ponders the reach of the promissory fraud rule (a broken promise normally doesn’t equal fraud), how to plead around it, and the law of the case doctrine.

After a multi-year business relationship for the sale of sporting goods imploded, the plaintiff distributor sued the defendant manufacturer for breach of a 2015 buy-back agreement that required the manufacturer to “buy back” unsold inventory.

The manufacturer counterclaimed; it claimed the distributor defrauded it and tampered with the manufacturer’s relationship with a key customer.  Partially granting the plaintiff’s motion to dismiss the counterclaims, the Northern District discussed the factual specificity required of a plaintiff to circumvent the general rule that promissory fraud isn’t actionable.

The Court first addressed the distributor’s law of the case argument – the manufacturer was trying to relitigate its earlier failed estoppel defense (that the distributor’s fraud barred it from recovering damages from the manufacturer).  The court previously nixed the manufacturer’s estoppel defense because it failed to link the plaintiff’s fraud to the buy-back agreement.

The law of the case doctrine (LOC) prevents a court from reopening issues it previously decided in the same case.  LOC is a flexible doctrine, though.  A court will refuse to apply LOC if there is a change in the law, new evidence or compelling circumstances.

The court declined to apply the LOC doctrine here because the manufacturer’s stricken estoppel defense was premised on fraud by the plaintiff distributor related to a separate transaction – the original distributor agreement – that differed from the buy-back agreement that underlay plaintiff’s suit.

Next, the court examined whether defendant sufficiently alleged an exception to promissory fraud under Federal pleading rules.  Rule 9(b) of the Federal Rules of Civil Procedure requires heightened factual specificity in fraud claims as the Rule tries to discourage litigants from bootstrapping simple breach of contract claims into tort actions with wide-ranging damages.

Promissory fraud is a false representation of intent concerning future conduct where there is no actual intent to do so.  While promissory fraud is generally not actionable, a plaintiff can plead around it by alleging egregious conduct or a pattern of deception or enticements that reasonably induce reliance.  A fraudulent scheme exists where a party alleges a specific and objective pattern of deception including the who, what, where, and when of the misstatements.

Here, the manufacturer was able to point to three different agents of the distributor who made misstatements in three different phone calls in the same month to support the fraud counterclaim.  These allegations that three distributor employees made false promises in order to sabotage defendant’s relationship with a major retailer were definite enough to meet Rule 9’s pleading requirements for fraud.

Afterwords:

While there is some elemental overlap between an estoppel defense and a promissory fraud counterclaim, the defeat of one won’t always cancel out the other where they relate to different transactions and different underlying facts.

To allege actionable fraud based on a broken promise, a plaintiff must plead a scheme to defraud that equates to a measurable pattern of deception or factual misrepresentations.

Broken Promises In Medical Services Agreement Don’t Equal Fraud – IL Court

An Illinois appeals court recently examined the promissory fraud rule in a medical services contract dispute.

The key principle distilled from the court’s unpublished analysis in Advocate Health and Hospitals Corp. v. Cardwell, 2016 IL App (4th) 150312-U is that where fraud claims are based on false promises of future conduct, the claims will fail.

The plaintiff hospital there sued a former staff doctor for breaching a multi-year written services contract. When the doctor prematurely resigned to join a hospital in another state, the plaintiff sued him to recover about $250,000 advanced to the doctor at the contract’s outset.

The doctor counterclaimed, alleging the hospital fraudulently induced him to sign the contract. He claimed the hospital broke promises to elevate him to a Director position and allow him to develop a new perinatology practice group at the hospital.  Since the promises were false, the doctor claimed, the underlying services contract was void.

Siding with the hospital (it granted the hospital’s summary judgment motion), the Court discussed when a defendant’s fraudulent inducement can nullify a written contract.

In Illinois, to establish fraud in the inducement, a plaintiff must show (1) a false statement of material fact, (2) defendant’s knowledge the statement was false, (3) defendant’s intent to induce the plaintiff’s reliance on the statement, (4) plaintiff’s reasonable reliance on the truth of the statement, and (5) damages resulting from reliance on the statement.

A critical qualification is that the fraud must be based on a misstatement of existing fact; not a future one.  Fraud in the inducement goes beyond a simple breaking of a promise or a prediction that doesn’t come to pass.

Here, the Court found that the hospital’s pre-contract statements all involved future events. The promise of a Directorship for the doctor was merely aspirational. It wasn’t a false statement of present fact.   The Court also determined that the hospital’s representations to the doctor about the development of a perinatology program spoke to a hoped-for future event.

Since the entirety of the doctor’s fraud counterclaim rested on the hospital’s promises of future conduct/events, the Court entered summary judgment against the doctor on his fraud in the inducement counter-claim.

Afterwords:

This is another case that sharply illustrates how difficult it is to prove fraud in the inducement; especially where the alleged misstatements refer to contingent events that may or may not happen.  While a broken promise may be a breach of contract, it isn’t fraud.

For a misstatement to be actionable fraud, it has to involve an actual, present state of affairs. Anything prospective/future in nature will likely be swallowed up by the promissory fraud rule.