Texas Causes of Action & Affirmative Defenses

Texas Causes of Action & Affirmative Defenses

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Monday, May 23, 2011

How to prove fraud in the inducement of sale-purchase agreement


ELEMENTS OF FRAUD 

CAUSE OF ACTION FOR FRAUD, FRAUDULENT INDUCEMENT OF CONTRACT - 

WHAT DOES THE PLAINTIFF HAVE TO PROVE? 
 
A party commits fraud by (1) making a false, material representation (2) that the party either knows to be false or asserts recklessly without knowledge of its truth (3) with the intent that the misrepresentation be acted upon, (4) and the person to whom the misrepresentation is made acts in reliance upon it and (5) is injured as a result. Ernst & Young, L.L.P. v. Pac. Mut. Life Ins. Co., 51 S.W.3d 573, 577 (Tex. 2001); All Am. Tel., Inc. v. USLD Commc’ns, Inc., 291 S.W.3d 518, 527 (Tex. App.—Fort Worth 2009, pet. denied).
 
MATERIALITY OF THE FRAUDULENT REPRESENTATION 
 
A fact is material if it would likely affect the conduct of a reasonable person concerning the transaction in question. Miller v. Kennedy & Minshew, Prof’l Corp., 142 S.W.3d 325, 345 (Tex. App.—Fort Worth 2003, pet. denied). Materiality thus centers on whether a reasonable person would attach importance to and would be induced to act on the information in determining his choice of actions in the transaction in question. Burleson State Bank v. Plunkett, 27 S.W.3d 605, 613 (Tex. App.—Waco 2000, pet. denied).

Proof that a defendant made a statement knowing of its falsity or without knowledge of its truth may be proved by either direct or circumstantial evidence. Johnson & Higgins of Tex., Inc. v. Kenneco Energy, Inc., 962 S.W.2d 507, 526 (Tex. 1998). Intent may be inferred from a party’s actions before and after the fraudulent conduct and may also be established by either direct or circumstantial evidence. Spoljaric v. Percival Tours, Inc., 708 S.W.2d 432, 434–35 (Tex. 1986). A defendant who acts with knowledge that a result will follow is considered to intend the result. Ernst & Young, L.L.P., 51 S.W.3d at 579.
 
DETRIMENTAL RELIANCE BY DECEIVED PARTY

The plaintiff must show actual and justifiable reliance on the misrepresentation. See Grant Thornton LLP v. Prospect High Income Fund, 314 S.W.3d 913, 923 (Tex. 2010). To determine justifiability, courts inquire whether, “given a fraud plaintiff’s individual characteristics, abilities, and appreciation of facts and circumstances at or before the time of the alleged fraud[,] it is extremely unlikely that there is actual reliance on the plaintiff’s part.” Id. (quoting Haralson v. E.F. Hutton Group, Inc., 919 F.2d 1014, 1026 (5th Cir. 1990)). In other words, a person may not justifiably rely on a representation if there are “red flags” indicating such reliance is unwarranted. Id. (quoting Lewis v. Bank of Am. NA, 343 F.3d 540, 546 (5th Cir. 2003)); see Gen. Motors Corp., Pontiac Motor Div. v. Courtesy Pontiac, Inc., 538 S.W.2d 3, 6 (Tex. Civ. App.—Tyler 1976, no writ) (citing Prosser on Torts for the contention that a person of ordinary intelligence may not “put faith in representations which any such normal person would recognize at once as preposterous . . . or which are shown by facts within his observation to be so patently and obviously false that he must have closed his eyes to avoid discovery of the truth”).
   
REMEDIES FOR FRAUDULENT INDUCEMENT OF CONTRACT 
 
“[I]t is well settled that one who is induced by fraud to enter into a contract has his choice of remedies. ‘He may stand to the bargain and recover damages for the fraud, or he may rescind the contract, and return the thing bought, and receive back what he paid.’” Dallas Farm Mach. Co. v. Reaves, 158 Tex. 1, 10, 307 S.W.2d 233, 238–39 (Tex. 1957). We agree with Hannon’s observation that “rescission was the remedy sought to be crafted by the court in this case.” Rescission is an equitable remedy that extinguishes legally valid contracts that must be set aside because of, among other things, fraud. City of The Colony v. N. Tex. Mun. Water Dist., 272 S.W.3d 699, 732 (Tex. App.—Fort Worth 2008, pet. dism’d).

Upon rescission, the rights and liabilities of the parties are extinguished; any consideration paid is returned, together with such further special damage or expense as may have been reasonably incurred by the party wronged; and the parties are restored to their respective positions as if no contract had ever existed. Baty v. ProTech Ins. Agency, 63 S.W.3d 841, 855 (Tex. App.—Houston [14th Dist.] 2001, pet. denied); see Johnson v. Cherry, 726 S.W.2d 4, 8 (Tex. 1987); Smith v. Nat’l Resort Cmtys. Inc., 585 S.W.2d 655, 660 (Tex. 1979); Holt v. Robertson, No. 07-06-00220-CV, 2008 WL 2130420, at *6 (Tex. App.—Amarillo May 21, 2008, pet. denied) (mem. op.).

While a trial court may not grant relief to a party in the absence of pleadings to support that relief, Texas courts have traditionally construed pleadings liberally, and in the case of rescission, at least one court has held that “factual allegations in the petition, coupled with a prayer for general relief, are sufficient to support a decree granting rescission.” Green Tree Acceptance, Inc. v. Pierce, 768 S.W.2d 416, 421 (Tex. App.—Tyler 1989, no writ); see Tex. R. Civ. P. 301. Moreover, when the claims and defenses are those which contemplate a particular remedy, a party may be entitled to that remedy despite a failure to specifically plead for such relief. See Perez v. Briercroft Serv. Corp., 809 S.W.2d 216, 218 (Tex. 1991).

SOURCE: Fort Worth Court of Appeals - 02-10-00012-CV

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