Fraudulent Inducement (Tex and Tex.App.-Houston cites)

THE NATURE OF FRAUDULENT INDUCEMENT AS A CAUSE OF ACTION & THE ELEMENTS THEREOF

A contract is subject to avoidance on the ground that it was induced by fraud. Italian Cowboy Partners, Ltd. v. Prudential Ins. Co. of Am., 341 S.W.3d 323, 331 (Tex. 2011); see also Formosa Plastics Corp. USA v. Presidio Eng’rs & Contractors, Inc., 960 S.W.2d 41, 46 (Tex. 1998) (“As a rule, a party is not bound by a contract procured by fraud.”). Even a written contract containing a merger clause can be avoided for fraud in the inducement, and the parol evidence rule does not stand in the way of proof of such fraud. Italian Cowboy, 341 S.W.3d at 331. Indeed, “the law long ago abandoned the position that a contract must be held sacred regardless of the fraud of one of the parties in procuring it.” Dallas Farm Mach. Co. v. Reeves, 307 S.W.2d 233, 239 (Tex. 1957).

ELEMENTS OF FRAUD

The elements of fraud are: (1) that the speaker made a material misrepresentation (2) that he knew was false when he made it or that he made recklessly without any knowledge of its truth and as a positive assertion (3) with the intent that the other party act upon it and (4) that the other party acted in reliance on the misrepresentation and (5) suffered injury thereby. Italian Cowboy, 341 S.W.3d at 337. A representation is material if “a reasonable person would attach importance to [it] and would be induced to act on the information in determining his choice of actions in the transaction in question.” Italian Cowboy, 341 S.W.3d at 337.

ESSENTIAL ELEMENTS OF FRAUDULENT INDUCEMENT ADDITIONALLY INCLUDE PROOF OF CONTRACT TO WHICH ASSENT WAS PROCURED BY FRAUD

Fraudulent inducement is a particular species of fraud that arises only in the context of a contract and requires the existence of a contract as part of its proof. Haase v. Glazner, 62 S.W.3d 795, 798 (Tex. 2001); Clark v. Power Mktg. Direct, Inc., 192 S.W.3d 796, 799 (Tex. App.—Houston [1st Dist.] 2006, no pet.). That is, with a fraudulent inducement claim, the elements of fraud must be established as they relate to an agreement between the parties. Haase, 62 S.W.3d at 798–99.

THE RELIANCE ELEMENT 

Fraud requires a showing of actual and justifiable reliance. Grant Thornton LLP v. Prospect High Income Fund, 314 S.W.3d 913, 923 (Tex. 2010). In evaluating justification, the court considers 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 Grp., Inc., 919 F.2d 1014, 1026 (5th Cir. 1990)). In the commercial context, the Texas Supreme Court has emphasized that “commercial tenants are entitled to rely on the fact that a landlord will not actively conceal material information.” Italian Cowboy, 341 S.W.3d at 339.

  

SOURCE: HOUSTON COURT OF APPEALS - NO. 01-09-00728-CV - 1/19/12

Fraudulent inducement claim requires contract as one of its elements

   
No viable fraudulent inducement claim in the absence of a contract

  
A fraudulent inducement claim arises solely in the context of a contract and requires the existence of a contract as part of its proof. Haase v. Glazner, 62 S.W.3d 795, 798 (Tex. 2001). The issue of whether a contract was induced by fraud is a dispute involving the parties’ agreement. In re J.D. Edwards World Solutions Co., 87 S.W.3d 546, 550 (Tex. 2002).

SOURCE: Beaumont Court of Appeals - 09-11-00349-CV - 8/11/11


ELEMENTS OF PROOF: FRAUDULENT INDUCEMENT CLAIM 

A contract is subject to avoidance on the ground of fraud. Williams v. Glash, 789 S.W.2d 261, 264 (Tex.1990); see Cecil v. Zivley, 683 S.W.2d 853, 857 (Tex. App.-Houston [14th Dist.] 1984, no writ). To prevail on a fraudulent-inducement contention, a party must establish the elements of fraud "as they relate to an agreement between the parties." Haase v. Glazner, 62 S.W.3d 795, 798-99 (Tex.2001).
 
The elements of fraud are (1) a material misrepresentation, (2) made with knowledge of its falsity or without any knowledge of the truth and as a positive assertion, (3) made with the intention that it should be acted on by the other party, and (4) the other party acts in reliance on the misrepresentation and thereby suffers injury. See Formosa Plastics Corp. USA v. Presidio Eng'rs & Contractors, Inc., 960 S.W.2d 41, 47-48 (Tex.1998).

SOURCE: Houston Court of Appeals -   No. 14-09-00312-CV - 7/26/2011
McLernon v Dynegy, Inc, 347 S.W.3d 315 (Tex.App. - Houston [14th Dist.] 2011)

Avoiding contract based on fraud in the inducement

FRAUDULENT INDUCEMENT AS DEFENSE TO ENFORCEMENT OF CONTRACT

A contract is subject to avoidance on the ground of fraud. Williams v. Glash, 789 S.W.2d 261, 264 (Tex. 1990); see Cecil v. Zivley, 683 S.W.2d 853, 857 (Tex. App.—Houston [14th Dist.] 1984, no writ).

To prevail on a fraudulent-inducement contention, a party must establish the elements of fraud ―as they relate to an agreement between the parties. Haase v. Glazner, 62 S.W.3d 795, 798–99 (Tex. 2001).

The elements of fraud are (1) a material misrepresentation, (2) made with knowledge of its falsity or without any knowledge of the truth and as a positive assertion, (3) made with the intention that it should be acted on by the other party, and (4) the other party acts in reliance on the misrepresentation and thereby suffers injury. See Formosa Plastics Corp. USA v. Presidio Eng’rs & Contractors, Inc., 960 S.W.2d 41, 47–48 (Tex. 1998).

SOURCE: Houston Court of Appeals - 14-09-00312-CV - 7/26/11 - McLernon v. Dynegy Inc.

Fraudulent Inducement claim requires proof of additional element

FRAUD RELATING TO A ENTRY INTO CONTRACT

In a fraudulent inducement claim, the elements of fraud must be established as they relate to an agreement between the parties. Esty v. Beal Bank S.S.B., 298 S.W.3d 280, 303 (Tex.App.--Dallas 2009, no pet.). The elements of fraud are (1) a material false representation, (2) that was made with knowledge or recklessness as to its falsity, (3) with the intent to induce reliance, and (4) that the other party “actually and justifiably relied upon,” causing him injury. Ernst & Young, L.L.P. v. Pac. Mut. Life Ins. Co., 51 S.W.3d 573, 577 (Tex. 2001); Wil-Roye Inv. Co. II v. Wash. Mut. Bank, FA, 142 S.W.3d 393, 411 (Tex.App.--El Paso 2004, no pet.).

RELIANCE ON REPRESENTATION: Was it reasonable, justifiable? 

Whether reliance is justifiable depends on the nature of the contract and the parties’ relationship. Coastal Bank SSB v. Chase Bank of Tex., N.A., 135 S.W.3d 840, 843 (Tex.App.--Houston [1st Dist.] 2004, no pet.). A party must generally exercise ordinary care for the protection of his own interests and is charged with knowledge of all facts that would have been discovered by a reasonably prudent and similarly situated person. Thigpen, 363 S.W.2d at 251; Wil-Roye, 142 S.W.3d at 411. Since he failed to raise a fact issue regarding the existence of a fiduciary duty, Garcia’s avowed subjective trust in Vera is insufficient to show that his reliance was justifiable. See Thigpen, 363 S.W.2d at 253; see also DRC Parts & Accessories, L.L.C. v. VM Motori, S.P.A., 112 S.W.3d 854, 858 (Tex.App.--Houston [14th Dist.] 2003, pet. denied)(“[R]eliance upon an oral representation that is directly contradicted by the express, unambiguous terms of a written agreement between the parties is not justified as a matter of law.”).

 SOURCE: El Paso Court of Appeals - 08-09-00084-CV - 4/29/11

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

How does Fraudulent Inducement Cause of Action differ from Fraud?

    FRAUDULENT INDUCEMENT DEFINED:
    The fraud / fraudulent conduct must be relevant to contract-formation. 

“Fraudulent inducement . . . is a particular species of fraud that arises only in the context of a contract and requires the existence of a contract as part of its proof. That is, with a fraudulent inducement claim, the elements of fraud must be established as they relate to an agreement between the parties.” Haase v. Glazner, 62 S.W.3d 795, 798–99 (Tex. 2001).

Detrimental reliance by Plaintiff on deliberate falsehood by Defendant 

The elements of fraud are that a material representation was made, the representation was false, the speaker knew the statement was false when made, the statement was made to induce reliance, it did induce reliance, the reliance was justifiable, and the relying party suffered injury as a result. See Grant Thornton LLP v. Prospect High Income Fund, 314 S.W.3d 913, 923 (Tex. 2010); Aquaplex, Inc. v. Rancho La Valencia, Inc., 297 S.W.3d 768, 774 (Tex. 2009). [A] party who has actual knowledge of specific facts cannot have relied on a misrepresentation of the same facts. See Camden Mach. & Tool, Inc. v. Cascade Co., 870 S.W.2d 304, 311 (Tex. App.—Fort Worth 1993, no writ) (stating, in case where seller failed to disclose prior foundation repair but buyer discovered foundation settling in independent investigation, “When a person makes his own investigation of the facts, and knows the representations are false, he cannot, as a matter of law, be said to have relied upon the misrepresentations of another.”). The issue, then, is whether the [ name of litigants ] presented any evidence of reliance to support their claim for fraudulent inducement. See Grant Thornton, 314 S.W.3d at 923 (reliance is necessary element of fraud claims); Aquaplex, 297 S.W.3d at 774 (same). In the context of fraudulent inducement, this requires evidence that the claimant would not have entered into the contract but for the alleged misrepresentation or fraudulent nondisclosure. See ISG State Operations, Inc. v. Nat’l Heritage Ins. Co., 234 S.W.3d 711, 716 (Tex. App.—Eastland 2007, pet. denied) (stating that ordinary detrimental reliance is not sufficient to support fraudulent inducement claim; claimant must show that it was induced into executing contract) (citing Haase, 62 S.W.3d at 798); Procter v. RMC Capital Corp., 47 S.W.3d 828, 834 (Tex. App.—Beaumont 2001, no pet.) (holding that home buyer seeking to avoid effect of “as is” clause on basis of fraudulent inducement must put forth some evidence that he would not have assented to “as is” clause in contract but for seller’s misrepresentations about property condition at issue); see also Dallas Farm Mach. Co. v. Reaves, 158 Tex. 1, 12–13, 307 S.W.2d 233, 240 (1957) (adopting the rule: “If one is induced to go through the form of making a contract because of some fraud or misrepresentation made by the other party or his agent, relative to a material element of the agreement, such that if he had known the truth he would not have given his assent, the contract may be avoided by him.”) (quoting 1 Elliot on Contracts § 70 (1913), emphasis added).

SOURCE: Houston Court of Appeals for the First Appellate District – 01-10-00492-CV – 5/19/11

RELATED LEGAL TERMS: fraud vs. fraudulent inducement of contract, fraudulent misrepresentation, fraudulent concealment, failure to disclose material fact,

When Is Fraudulent Misrepresentation Actionable in Texas? - Essential Elements of Fraudulent Misrepresentation as a Tort

FRAUDULENT MISREPRESENTATION AS A CAUSE OF ACTION UNDER TEXAS LAW 

The elements of a fraudulent misrepresentation claim include proof by the plaintiff that (1) the defendant made a material misrepresentation; (2) the representation was false; (3) the defendant knew the representation was false when made or made it recklessly without any knowledge of the truth and as a positive assertion; (4) the defendant made the representation with the intention that it should be acted upon; (5) the representation was in fact justifiably relied upon; and (6) damage to the plaintiff resulted. See Grant Thornton LLP v. Prospect High Income Fund, 314 S.W.3d 913, 923 (Tex. 2010); see also Ernst & Young, L.L.P. v. Pacific Mut. Life Ins. Co., 51 S.W.3d 573, 575 (Tex. 2001).
 
Fraudulent inducement of contract 
 
As a general rule, a party is not bound by a contract procured by fraud. Formosa Plastics Corp. USA v. Presidio Eng’rs & Contractors, Inc., 960 S.W.2d 41, 46 (Tex. 1998); see also Schlumberger Tech. Corp. v. Swanson, 959 S.W.2d 171, 179 (Tex. 1997).
 
Detrimental reliance on false representations
 
A false representation made indirectly to a third party and later relied on by the defrauded party may constitute fraud under certain circumstances. See BP Am. Prod. Co. v. Marshall, 288 S.W.3d 430, 444–45 (Tex. App.—San Antonio 2008, pet. granted) (holding misrepresentations made to one sibling acting as agent for all siblings constituted misrepresentations to all siblings). “[A] person who makes a misrepresentation is liable to the person or class of persons the maker intends or ‘has reason to expect’ will act in reliance upon the misrepresentation.” Ernst & Young, 51 S.W.3d at 578. “Even an obvious risk that a misrepresentation might be repeated to a third party is not enough to satisfy the reason-to-expect standard; rather, the alleged fraudfeasor must ‘have information that would lead a reasonable man to conclude that there is an especial likelihood that it will reach those persons and will influence their conduct.’” Id. at 580 (quoting Restatement (Second) of Torts § 531 cmt. d (1977)) (emphasis added).
 
Deliberate misrepresentation vs. mistake, misunderstanding 
 
Fraud requires proof of an affirmative misrepresentation, not simply a misunderstanding by a party. See Orion Ref. Corp. v. UOP, 259 S.W.3d 749, 771–72 (Tex. App.—Houston [1st Dist.] 2007, pet. denied) (stating misunderstanding and other evidence do not amount to actionable misrepresentations).

SOURCE: Houston Court of Appeals 01-10-00104-CV 4/28/11

Fraudulent Inducement Claim Is Similar to Fraud

FRAUDULENT INDUCEMENT (OF CONTRACT, ETC.) Fraudulent inducement is a type of fraud and, like any cause of action for fraud, requires (1) a material misrepresentation, (2) which was false, (3) which was either known to be false when made or was asserted without knowledge of its truth, (4) which was intended to be acted upon, (5) which was relied upon, and (6) which caused injury. See Formosa Plastics, 960 S.W.2d at 47; Texas S. Univ. v. State St. Bank & Trust Co., 212 S.W.3d 893, 914 (Tex. App.--Houston [1st Dist.] 2007, pet. denied). FRAUDULENT INDUCEMENT AND FRAUD: SHARED ELEMENTS [C]ourts have held that a summary judgment motion--if directed at the element of one cause of action--can be effective against even subsequently pleaded claims if they share that same element. See Wortham v. Dow Chem. Co., 179 S.W.3d 189, 202 (Tex. App.--Houston [14th Dist.] 2005, no pet.); Lampasas v. Spring Center, Inc., 988 S.W.2d 428, 435-37 (Tex. App.--Houston [14th Dist.] 1999, no pet.). Consequently, even though Karbach did not specifically use the term "fraudulent inducement" in his original petition, the district court's order granting summary judgment as to each of Karbach's claims, including fraud, was effective against his later-pleaded fraudulent inducement claim. Even considering the tri-party loan agreement as the basis of the fraudulent inducement claim, as we have discussed, our analysis does not change. SOURCE: 03-06-00636-CV (Third Court of Appeals - Austin) (11/6/09)

How does fraudulent inducement differ from fraud plain and simple?

FRAUD CAUSE OF ACTION VS. FRAUDULENT INDUCEMENT Fraudulent inducement is a particular species of fraud that arises only in the context of a contract and requires the existence of a contract as part of its proof. Haase v. Glazner, 62 S.W.3d 795, 798 (Tex. 2001); Clark v. Power Mktg. Direct, Inc., 192 S.W.3d 796, 799 (Tex. App.--Houston [1st Dist.] 2006, no pet.). That is, with a fraudulent inducement claim, the elements of fraud must be established as they relate to an agreement between the parties. Haase, 62 S.W.3d at 798-99. SOURCE: 01-07-00792-CV (9/10/09)

Element of reliance: reasonable and justified

REASONABLE RELIANCE ELEMENT

Fraud, fraudulent inducement, negligent misrepresentation, and promissory estoppel all require reasonable and justified reliance upon a misrepresentation or promise. See Ernst & Young, L.L.P. v. Pac. Mut. Life Ins. Co., 51 S.W.3d 573, 577 (Tex. 2001) (fraud); TMI, Inc. v. Brooks, 225 S.W.3d 783, 792, 795 (Tex. App.- Houston [14th Dist.] 2007, pet. denied) (fraudulent inducement); Ortiz v. Collins, 203 S.W.3d 414, 421 (Tex. App.- Houston [14th Dist.] 2006, no pet.) (fraud, negligent misrepresentation, and promissory estoppel).
  
When the parties' written agreement addresses the substance of the oral statement and contains language precluding reliance on external representations, Texas courts find reliance on subsequent oral promises unreasonable. See Simpson v. Woodbridge Props., L.L.C., 153 S.W.3d 682, 684 (Tex. App.- Dallas 2004, no pet.) (holding that disclaimer of reliance clause in contract negated reliance on post contract oral misrepresentations); Atlantic Lloyds Ins. Co. v. Butler, 137 S.W.3d 199, 226 (Tex. App.- Houston [1st Dist.] 2004, pet. denied) (holding that reliance on misrepresentation that was easily refutable with reasonable diligence was not justified or reasonable where two opposing parties were engaged in litigation and negotiating from equal bargaining positions); DRC Parts & Accessories, L.L.C. v. VM Motori, S.P.A., 112 S.W.3d 854, 856, 858-59 (Tex. App.- Houston [14th Dist.] 2003, pet. denied) (holding that reliance on both pre- and post-contractual oral representations, directly contradicted by express terms of contract, was not justified as matter of law); Airborne Freight Corp. v. C.R. Lee Enters., Inc., 847 S.W.2d 289, 297 (Tex. App.- El Paso 1992, writ denied) (finding that written contract containing ample cautionary language precluded exclusive reliance by reasonable businessperson on verbal statements contradicting written agreement).

SOURCE: Biosilk Spa, LP v. HG Shopping Centers, LP (Tex.App.- Houston [14th Dist.] May 8, 2008) (Yates) (fraud, fraudulent inducement, negligent misrepresentation, and promissory estoppel, no reasonable reliance)