Constructive Fraud Law Definition Elements & Defenses – California

Brad Nakase, Attorney

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The definition of Constructive fraud is a breach of duty, without an actual fraudulent intent, which gains an advantage to the person in fault, by misleading another to his prejudice. Civ. Code §1573.

Element 1: Fiduciary or Confidential Relationship

The breach of duty must be in the context of a confidential or fiduciary relationship. (Prakashpalan v. Engstrom, Lipscomb & Lack (2014) 223 Cal.App.4th 1105.)

The confidential relationship distinguishes constructive fraud from other forms of actual fraud, including negligent misrepresentation, which may occur in any type of relationship. (Molina v. Jeffery (2012) Cal.App.Unpub. LEXIS 4617 (citing (Byrum v. Brand (1990) 219 Cal.App.3d 926).)

When Does A Confidential Relation Exist?

Confidential relations may be said to exist whenever trust and confidence are reposed by one person in the integrity and fidelity of another. (Eisenbaum v. Western Energy Resources, Inc. (1990) 218 Cal.App.3d 314.)

The Existence of a Confidential Relationship is a Question of Fact

The existence of a confidential relationship is generally a question of fact. (Persson v. Smart Inventions, Inc. (2005) 125 Cal.App.4th 1141.)

Examples of Confidential or Fiduciary Relationships

The following persons have been found to be in a confidential or fiduciary relationship:

  • Partners in a Partnership. A partnership is a fiduciary relationship, and partners are held to the standards and duties of a trustee in their dealings with each other. (Enea v. Superior Court (2005) 132 Cal.App.4th 1559.)

  • Real Estate Brokers or Agents and Clients. While real estate brokers owe their own clients fiduciary duties, they owe third parties who are not their clients only those duties imposed by regulatory statutes. (Saffie v. Schmeling (2014) 224 Cal.App.4th 563.)

  • Attorneys and Clients.  The attorney-client relationship is a fiduciary relation of the very highest character imposing on the attorney a duty to communicate to the client whatever information the attorney has or may acquire in relation to the subject matter of the transaction. (Slovensky v. Friedman (2006) 142 Cal.App.4th 1518.)

  • Stockbrokers and Clients. A stockbroker owes a fiduciary duty to his or her customer. (Apollo Capital Fund LLC v. Roth Capital Partners, LLC (2007) 158 Cal.App.4th 226.)

  • Corporate Directors and Shareholders. Corporate directors owe a fiduciary duty to the corporation and its shareholders and must serve “in good faith, in a manner such director believes to be in the best interest of the corporation and its shareholders.” Corp. Code § 309(a).

  • Joint Venturers. The duty and liability as between joint venturers is that of fiduciaries. A joint venturer owes fiduciary duties to his coventurers. (Galardi v. State Bar (1987) 43 Cal.3d 683.)

  • Husbands and Wives. Spouses have fiduciary duties to each other as to the management and control of community property. Fam. Code § 721.

Element 2: Breach of Duty

Any act, omission, or concealment involving a breach of legal or equitable duty, trust, or confidence that results in damage to another, even though the conduct is not otherwise fraudulent. (Michel v. Moore & Associates, Inc. (2007) 156 Cal.App.4th 756.)

Intent to Deceive Not Required

No intent to deceive is necessary for constructive fraud. (Tyler v. Children’s Home Soc’y of Cal. (1994) 29 Cal.App.4th 511.)

It is the duty of one in whom confidence is reposed and who stands in a confidential relation to another to make to the other full disclosure of all material facts in his knowledge relating to the transaction involved, and any concealment of such facts is fraud. (Estate of Louis Silveira (2011) Cal.App.Unpub. LEXIS 5590 (citing Estate of Sanders (1985) 40 Cal.3d 607).)

Failing to Disclose Material Fact May Constitute Constructive Fraud

A fiduciary’s failure to disclose a material fact, which the fiduciary knows or should know might affect the fiduciary’s responsibilities or the principal’s decision, may constitute constructive fraud. (Michel v. Moore & Associates, Inc. (2007) 156 Cal.App.4th 756.)

Careless Misstatements May Constitute Constructive Fraud

A careless misstatement may constitute constructive fraud, even though there is no fraudulent intent. (Assilzadeh v. Cal. Fed. Bank (2000) 82 Cal.App.4th 399.)

Ethical, Principled Professional Defendants

Constructive fraud may involve defendants who are “ethical, principled professionals,” since no intent to deceive is necessary to satisfy the cause of action. (Tyler v. Children’s Home Soc’y of Cal. (1994) 29 Cal.App.4th 511.)

No Bright Line Rule for Breach of Duty

There is no clear line establishing when a fiduciary’s breach of duty will be merely negligent and when it may be characterized as constructive fraud. (Salahutdin v. Valley of Cal., Inc. (1994) 24 Cal.App.4th 555.)

Real Estate Broker Breached Duty by Making False Affirmative Statements

A real estate broker committed a breach of duty constituting constructive fraud by making an affirmative statement to his clients concerning the size and characteristics of real property without confirming the accuracy of such statements. (Salahutdin v. Valley of Cal., Inc. (1994) 24 Cal.App.4th 555.)

Partners Are Required to Disclose Fair and Accurate Accounting

Partners owe fiduciary duties of disclosure to each other regarding the partnership business and assets. A failure to properly account for the business and assets can constitute a breach of duty. (Rosenfeld, Meyer & Susman v. Cohen (1987) 191 Cal.App.3d 1035.)

A salesman employed by a real estate broker, acting for the plaintiff, breached his duty to disclose that an unsecured note given in exchange for the plaintiff’s investment was prohibited by law regardless of the defendant’s ignorance. (Montoya v. McLeod (1985) 176 Cal.App.3d 57.)

Dual Agency

A real estate agent acting as a dual fiduciary has a duty to disclose all information which might affect the principals’ decisions. (Horiike v. Coldwell Banker Residential Brokerage Co. (2016) 1 Cal.5th 1024.)

Attorney Breached Fiduciary Duty for Failing to Disclose Facts Related to Investments

An attorney breached his fiduciary duty to a client by failing to disclose many facts related to investments and dealings on behalf of the client. (Day v. Rosenthal (1985) 170 Cal.App.3d 1125.)

Corporate Officers Owe Duty of Complete Honesty

A corporate officer owes a duty of complete honesty in any disclosure which he makes, regardless of whether statements are fact or opinion. Deliberate withholding of information or producing false information constitutes a breach of that duty. Corp. Code § 309(a).

Joint Venturers Are Fiduciaries

Joint venturers are fiduciaries with a duty of disclosure and liability to account for profits. (Galardi v. State Bar (1987) 43 Cal.3d 683.)

Fiduciary Relationship Between Husband and Wife

In a fiduciary relationship, such as that which exists between husband and wife, one spouse has the unquestioned right to rely upon the direct representations of the other, and there is no duty to inquire. (In re Marriage of Kamgar (2017) 18 Cal.App.5th 136.)

The acts of an agent are judged with almost the same strictness as those of a trustee. A violation of duty should be treated as fraud on the principal. Civ. Code §§ 2229, 2322.

Gratuitous Agents Are Treated Equally as Hired Agents

A gratuitous agent has no greater license to indulge in misrepresentations, concealments, or other breaches of good faith than an agent for hire. (Ramey v. Myers (1952) 111 Cal. App. 2d 679, 685.)

Investment Advisor Breached Duty by Failing to Warn Investors of Risks

An investment advisor breached his duty to unsophisticated investors, by his failure to apprise investors of the risks involved in proposed ventures. (Stokes v. Henson (1990) 217 Cal.App.3d 187.)

Element 3: Advantage Gained

The breach of duty must have led to an advantage gained by the breaching party. Civ. Code § 1573.

Defendant’s Burden to Show Fairness

Once an advantage is gained in a confidential relationship, the defendant has the burden of proving the fairness of the transaction and his or her good faith in all respects. (Fontes v. McCarty (2006) Cal.App.Unpub. LEXIS 11392.)

Husband’s Failure to Disclose Information Is Advantageous to Husband

Failure of husband to disclose information, from which he gained an advantage, constituted concealment of material facts and breach of fiduciary duty with respect to his wife’s interest in community property under his control and management. Advantage gained constituted constructive fraud, whether or not such failure to disclose was accompanied by an actual intent to defraud. (Vai v. Bank of Am. Nat’l Trust & Sav. Ass’n (1961) 56 Cal.2d 329.)

Element 4: Justifiable Reliance

The plaintiff must “justifiably rely” on the defendant’s misrepresentation. (Prakashpalan v. Engstrom, Lipscomb & Lack (2014) 223 Cal.App.4th 1105.)

Constructive Fraud Presumes Reliance

Constructive fraud not only expands the range of conduct that may be characterized as fraudulent, it also presumes the element of reliance, absent substantial evidence to the contrary. (Edmunds v. Valley Circle Estates (1993) 16 Cal.App.4th 1290.)

Element 5: Causation and Damage

Constructive fraud requires a showing that the plaintiff was mis-lead to his or her prejudice. (Tyler v. Children’s Home Soc’y of Cal. (1994) 29 Cal.App.4th 511.)

Constructive fraud need only be proved by a preponderance of the evidence. Evid. Code § 115.

The plaintiff bears the burden of proving all aspects of constructive fraud, including prejudice suffered as a result of the misrepresentation. (Tyler v. Children’s Home Soc’y of Cal. (1994) 29 Cal.App.4th 511.)

REMEDIES FOR FRAUD

Compensatory Damages
The faithless fiduciary is obligated to make good the full amount of the loss of which his breach of faith is a cause. (Salahutdin v. Valley of Cal., Inc. (1994) 24 Cal.App.4th 555.)

Benefit of the Bargain
Under the benefit of the bargain doctrine, the court must consider the loss sustained by the plaintiff rather than the value with which she parted. (Id.)

Out-of-Pocket Damages
Fraud plaintiffs may recover “out-of-pocket” damages in addition to the benefit-of-the-bargain damages.  For example, a fraudulently hired employee may incur a variety of damages separate from a wrongful termination, such as the expense and disruption of moving or loss of security and income associated with former employment. (Lazar v. Superior Court (1996) 12 Cal.4th 631.)

Punitive Damages
Punitive damages are appropriate for breach of fiduciary duty. (Michelson v. Hamada (1994) 29 Cal.App.4th 1566.)

STATUTE OF LIMITATIONS FOR CONSTRUCTIVE FRAUD

The statute of limitations for constructive fraud is three years after the aggrieved party discovers the facts constituting fraud or learns facts sufficient to make a reasonably prudent man suspicious of fraud, thus putting him on inquiry. Civ. Code § 138(d).

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