Overview. The definition of constructive fraud is a breach of duty without actual fraudulent intent, which gains an advantage to the person at fault by misleading another to his prejudice.
California Civil Code §1573 states:
- In any breach of duty which, without an actually fraudulent intent, gains an advantage to the person in fault, or any one claiming under him, by misleading another to his prejudice, or to the prejudice of any one claiming under him; or,
- In any such act or omission as the law specially declares to be fraudulent, without respect to actual fraud.
Therefore, under Civil Code §1573, for a plaintiff to win, the plaintiff must prove the elements for constructive fraud:
- Defendant owed plaintiff a duty under law.
- The defendant breached any duty that was owed to the plaintiff.
- Defendant gains financially or to his advantage.
- Defendant misled the plaintiff to his prejudice i.e. damages.
“The elements for a constructive fraud cause of action did require: (1) a fiduciary relationship; (2) nondisclosure; (3) intent to deceive; and (4) reliance and resulting injury.” Azadpour v. Sun Microsystems, Inc. (N.D. Cal. July 22, 2007), 2007 U.S. Dist. LEXIS 55502.
“Constructive fraud allows conduct insufficient to constitute actual fraud to be treated as such where the parties stand in a fiduciary relationship. The difference between actual fraud and constructive fraud is primarily in the type of conduct which may be treated as fraudulent, such as a failure to disclose material facts within the knowledge of the fiduciary. In its generic sense, constructive fraud comprises all acts, omissions and concealments involving a breach of legal or equitable duty, trust, or confidence, and resulting in damages to another. Whether a fiduciary duty has been breached, and whether conduct constitutes constructive fraud, depends on the facts and circumstances of each case.” In re Marriage of Brandes, 239 Cal. App. 4th 1461.
Major Difference Between Fraud and Constructive Fraud
There are two major differences between fraud and constructive fraud:
Intent to Defraud.
Actual fraud requires the defendant to have intentional deception. “Fraudulent intent is not a necessary element in constructive fraud.” County of Santa Cruz v. McLeod, 189 Cal. App. 2d 222. Constructive fraud does not require the defendant to have intentional deception, an “intent to deceive” being implied from the failure to disclose. Mary Pickford Co. v. Bayly Bros., Inc. (1939) 12 Cal.2d 501, 525.
In every transaction between persons standing in confidential relation, law presumes that he who held influence over other exercised it unduly toward his own advantage. Gross v. Needham (Cal. App. 2d Dist. Sept. 7, 1960), 184 Cal. App. 2d 446,
“It is not true that breach of fiduciary duty can only be characterized as constructive fraud (which does not include fraudulent intent as an element). A misrepresentation that constitutes a breach of a fiduciary or a confidential relationship may, depending on whether an intent to [*266] deceive is present, constitute either actual or constructive fraud. However, the issue is usually discussed in terms of whether the misrepresentation constitutes constructive fraud, because actual fraud can exist independently of a fiduciary or confidential relationship, while the existence of such a relationship is usually crucial to a finding of constructive fraud.” Worthington v. Davi, 208 Cal. App. 4th 263.
No Reliance Necessary for Constructive Fraud
In fraud, the plaintiff must show reasonable reliance. For constructive fraud, the plaintiff does not have to show reasonable reliance because reliance is “presumed” from the fiduciary relationship.
Clear and Convincing Burden of Proof.
Because of broad scope of this provision, evidence in proof of fraud must be clear and convincing. Pinney & Topliff v. Chrysler Corp. (D. Cal. Sept. 17, 1959), 176 F. Supp. 801.
Element 1: Existence of Fiduciary or Confidential Relationship
Existence of confidential relationship precludes party in whom trust and confidence is reposed from participating in profit or advantage resulting from dealings of parties to relationship, and from dealing with other party to relation on terms of his own making. Devers v. Greenwood (Cal. App. 2d Dist. Feb. 20, 1956), 139 Cal. App. 2d 345.
Examples of confidential relationships:
- Partners in a Partnership 
- Real Estate Brokers or Agents and Clients 
- Attorneys and Clients 
- Stockbrokers and Clients 
- Corporate Directors and Shareholders 
- Husbands and Wives 
Confidential and fiduciary relations are in law synonymous and may be said to exist whenever trust and confidence is reposed by one person in integrity and fidelity of another. Stevens v. Marco (Cal. App. 2d Dist. Dec. 31, 1956), 147 Cal. App. 2d 357.
Confidential relationship may arise between two persons though they have no formal relationship, such as affinity or consanguinity, attorney and client, principal and agent, or trustee and beneficiary. Kloehn v. Prendiville (Cal. App. 1st Dist. Oct. 3, 1957), 154 Cal. App. 2d 15.
Mere friendly relations between the parties to a transaction do not constitute confidential relations so as to raise the presumption that such transaction was fraudulent or the result of undue influence. Mead v. Smith (Cal. App. Aug. 9, 1951), 106 Cal. App. 2d 1. Friendship, affection, or even intimacy existing between two parties and repose of confidence by one in other does not necessarily create confidential relationship, and, in action on license agreement, contention that there was confidential and fiduciary relationship between parties because they sometimes prayed together was without merit. Blackburn v. Allen (Cal. App. 2d Dist. July 8, 1963), 218 Cal. App. 2d 30,
Element 2: Breach of Duty
There is breach of fiduciary duty and at least constructive fraud when person in confidential relation to another retains, notwithstanding other’s demand, undue advantage which he knows he obtained because of other’s mistake, even though originally mistake or advantage was not caused by fiduciary. Demetris v. Demetris (Cal. App. May 24, 1954), 125 Cal. App. 2d 440.
A breach of duty includes 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. 
A person (in a confidential relationship as above) has a duty to make full disclosure of all material facts if knows of any relating to the matter involved.
When does constructive fraud occur? 
- When a fiduciary fails to disclose a material fact that they know would affect another’s responsibilities or decision.
- A careless misstatement, even if there is no fraudulent intent. 
- May involve defendants who are “ethical, principled professionals,” since no intent to deceive is necessary to satisfy the cause of action. 
- No clear line establishing when a fiduciary’s breach of duty will be merely negligent versus if constructive fraud. 
Examples of constructive fraud occurring in confidential relationships:
An attorney and his client. An attorney has a strict fiduciary duty and he holds a duty of confidentiality to his client.
- The attorney’s fiduciary duty involves more than refraining from exercising undue influence
- Attorney’s duty is of the very highest character. 
- An attorney breached his fiduciary duty to a client
- He failed to disclose any facts related to investments and dealings on behalf of the client. 
Real estate broker and his client. For example, constructive fraud occurs when a real estate broker told his clients about the size and characteristics of real property without confirming the accuracy of such statements. 
- This is an affirmative statement
- This is a breach of duty
- This is constructive fraud
A salesman employed by a real estate broke. For example, a salesman will breach his duty if he fails to disclose that an unsecured note given in exchange for the plaintiff’s investment was prohibited by law
Partners in business. Partners in business owe fiduciary duties of disclosure to each other regarding the business and assets. For example, a failure to properly account for the business and assets will result in a breach of duty. 
A real estate agent acting as a dual fiduciary. A real estate agent must disclose all information that might affect the principals’ (his boss or his firm) decisions. 
Joint ventures are fiduciaries with a duty of disclosure and liability to account for profits. 
A corporate officer and his corporation. 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. 
Fiduciary duty for husband and wife. One spouse has the unquestioned right to rely upon the direct representations of the other.
Agent and trustee. 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 a fraud on the principal (the boss, the firm, office). 
Investment advisor and client. An investment advisor breached his duty to unsophisticated investors. For example, an investment advisor will breach his fiduciary duty when he fails to apprise investors of the risks involved in proposed ventures. 
Element 3: Defendant Gained Financially or Advantage
The breach of duty must have led to the defendant gaining an advantage over the plaintiff. 
The defendant has the burden of proving the fairness of the transaction and his or her good faith in all respects. 
- What is the advantage gained here? The plaintiff has an advantage in court because the burden of proof falls on the defendant.
- The defendant must work to prove that he was fair (the plaintiff does not have to prove anything; he must simply show that the defendant was not fair).
For example, when a husband fails to disclose information that gave him an advantage in his marital property when the property was under his control and management.
- His failure to disclose the information would constitute the concealment of material facts.
- His failure to disclose the information constitutes a breach of fiduciary duty concerning his wife’s interest in the property.
If any advantage is gained, then this constitutes constructive fraud. It does not matter whether whoever failed to disclose something actually had any intent to lie and defraud. 
Element 4: Causation and Damage
Constructive fraud requires a showing that the plaintiff was misled by deceit.
Constructive fraud need only be proved by a preponderance of the evidence.
- The preponderance of the evidence simply means “more likely than not”.
- Therefore, a plaintiff must show that was it not for the defendant’s deceit, it is “more likely than not” that the plaintiff would not have suffered damage.
Remedies for Constructive Fraud
Where any relation of trust and confidence exists between the parties which demands that information communicated respecting subject of their dealings be full and complete, any concealments or misrepresentations will amount to fraud sufficient to entitle party injured thereby to action for re–examination of account stated. Vance v. Supreme Lodge of Fraternal Brotherhood (Cal. App. Jan. 9, 1911), 15 Cal. App. 178.
One who, in course of his business or profession, supplies information for guidance of others in their business transactions is subject to liability for harm caused to them by their reliance on information if he fails to exercise that care and competence in obtaining and communicating information which its recipient is justified in expecting and harm is suffered by person or one of class of persons for whose guidance information was supplied, because of his justifiable reliance on it in transaction in which it was intended to influence his conduct or in transaction substantially identical therewith. Hawkins v. Oakland Title Ins. & Guaranty Co. (Cal. App. 1st Dist. Nov. 14, 1958), 165 Cal. App. 2d 116,
Compensatory Damages  Money awarded to the plaintiff to compensate for injury or loss that was incurred as a result of negligent misrepresentation.
The Benefit of the Bargain  All damages that the defendant made because of fraud must be paid to the wronged party.
Out-of-Pocket Damages  If the defendant tricked seller into a lower price for the property than the fair market value. The wronged party can recover the difference between the fair price of the property versus the amount that he actually received.
Punitive Damages  Damages that are awarded to punish the defendant for his wrongdoing.
STATUTE OF LIMITATIONS FOR CONSTRUCTIVE FRAUD
The statute of limitations for constructive fraud is three years. The first days starts after the wronged party discovers the facts constituting fraud . This also starts after the wronged party learns facts that are sufficient to make a reasonably prudent man suspicious of fraud. 
PLEADINGS FOR CONSTRUCTIVE FRAUD
Constructive fraud claim failed to comply with the heightened pleading requirements because there was no intent to deceive alleged, and it failed to provide sufficient notice as to the individual roles in an alleged fraudulent scheme; moreover, there was no showing that evidence of the alleged fraud was exclusively in another party’s possession or that there was no knowledge of the relevant facts. Sacramento E.D.M., Inc. v. Hynes Aviation Indus. (E.D. Cal. Aug. 14, 2013), 965 F. Supp. 2d 1141.
Complaint alleging that false representations made by defendant to third person were relied on by him, that they were uttered with the intent to mislead such third party to the prejudice of the plaintiff, that they were made for the purpose, and accomplished the result of gaining “an advantage to the person in fault,” states fraud under this section. Romano v. Wilbur Ellis & Co. (Cal. App. Dec. 3, 1947), 82 Cal. App. 2d 670.
Allegations of constructive fraud were inadequate where plaintiff–teacher set forth no facts to support the conclusion of his confidential relationship with representatives of defendant–school district other than that of employee and employer. Odorizzi v. Bloomfield School Dist. (Cal. App. 2d Dist. Nov. 3, 1966), 246 Cal. App. 2d 123.
Plaintiff’s complaint was sufficient to charge both the actual and constructive fraud of a real estate broker, where it established the agency relationship and alleged, inter alia, that he employed the broker to purchase realty on his behalf and gave him a signed authorization sufficient to subject himself to liability on the commission if he failed to perform, and that the broker then had it conveyed, via an escrow arrangement, to his wife. Gerhardt v. Weiss (Cal. App. 2d Dist. Dec. 9, 1966), 247 Cal. App. 2d 114.
 Byrum v. Brand, 219 Cal. App. 3d 926, 937-938, 268 Cal. Rptr. 609, 617-618 (1990).
 Kloehn v. Prendiville, 154 Cal. App. 2d 156, 160-161, (1957).
 (Rosenfeld, Meyer & Susman v. Cohen, 191 Cal. App. 3d 1035, 1057-59, 237 Cal. Rptr. 14, 26-28 (1987)).
 (Salahutdin v. Valley of Cal., Inc., 24 Cal. App. 4th 555, 561-563, 29 Cal. Rptr. 2d 463, 466-467 (1994)).
 (Day v. Rosenthal, 170 Cal. App. 3d 1125, 1158 -1160, 217 Cal. Rptr. 89, 110-111 (1985)).
 (Black v. Shearson, Hammill & Co., 266 Cal. App. 2d 362, 367, 72 Cal. Rptr. 157, 160 (1968)).
 (Hobart v. Hobart Estate Co., 26 Cal. 2d 412, 433, 159 P.2d 958, 970 (1945)). Joint Venturers (Weiner v. Fleischman, 54 Cal. 3d 476, 482, 286 Cal. Rptr. 40, 43 (1991)).
 Boeseke v. Boeseke, 255 Cal. App. 2d 848, 852, 63 Cal. Rptr. 651, 655 (1967)).
 Salahutdin v. Valley of Cal., Inc., 24 Cal. App. 4th 555, 562, 29 Cal. Rptr. 2d 463, 466 (1994).
 Edmunds v. Valley Circle Estates, 16 Cal. App. 4th 1290, 1298, 20 Cal. Rptr. 2d 701, 705-706 (1993).
 Salahutdin v. Valley of Cal., Inc., 24 Cal. App. 4th 555, 562, 29 Cal. Rptr. 2d 463, 466.
 Salahutdin v. Valley of Cal., Inc., 24 Cal. App. 4th 555, 562, 29 Cal. Rptr. 2d 463, 466.
 Tyler v. Children’s Home Soc’y of Cal., 29 Cal. App. 4th 511, 548, 35 Cal. Rptr. 2d 291, 312 (1994).
 Salahutdin v. Valley of Cal., Inc., 24 Cal. App. 4th 555, 563, 29 Cal. Rptr. 2d 463, 467 (1994).
 Salahutdin v. Valley of Cal., Inc., 24 Cal. App. 4th 555, 561-562, 29 Cal. Rptr. 2d. 463, 466 (1994).
 Rosenfeld, Meyer & Susman v. Cohen, 191 Cal. App. 3d 1035, 1057-59, 237 Cal. Rptr. 14, 26-28 (1987).
 Montoya v. McLeod, 176 Cal. App. 3d 57, 64-65, 221 Cal. Rptr. 353, 358 (1985).
 Jorgensen v. Beach ‘n’ Bay Realty, Inc., 125 Cal. App. 3d 155, 160, 177 Cal. Rptr. 882, 885 (1981).
 Trafton v. Youngblood, 69 Cal. 2d 17, 27, 69 Cal. Rptr. 568, 575 (1968).
 Day v. Rosenthal, 170 Cal. App. 3d 1125, 1159, 217 Cal. Rptr. 89, 110-111 (1985).
 Hobart v. Hobart Estate Co., 26 Cal. 2d 412, 433, 159 P.2d 958, 970 (1945).
 Weiner v. Fleischman, 54 Cal. 3d 476, 482, 286 Cal. Rptr. 40, 43 (1991).
 Boeseke v. Boeseke, 255 Cal. App. 2d 848, 853-854, 63 Cal. Rptr. 651, 656 (1967).
 Estate of Arbuckle v. West, 98 Cal. App. 2d 562, 569, 220 P.2d 950, 955 (1950).
 Stokes v. Henson, 217 Cal. App. 3d 187, 195, 265 Cal. Rptr. 836, 841 (1990).
 Demetris v. Demetris, 125 Cal. App. 2d 440, 444, 270 P.2d 891, 894 (1954).
 Platt v. Wells Fargo Bank American Trust Co., 222 Cal. App. 2d 658, 35 Cal. Rptr. 377 (1963).
 Vai v. Bank of Am. Nat’l Trust & Sav. Ass’n, 56 Cal. 2d 329, 15 Cal. Rptr. 71 (1961).
 Tyler v. Children’s Home Soc’y of Cal., 29 Cal. App. 4th 511, 549, 35 Cal. Rptr. 2d 291, 313.
 Sierra Nat’l Bank v. Brown, 18 Cal. App. 3d 98, 104-06, 95 Cal. Rptr. 742, 746-747 (1971); Cal. Evid. Code §115.
 (Walsh v. Hooker & Fay, 212 Cal. App. 2d 450, 461, 28 Cal. Rptr. 16, 24 (1963)).
 (Salahutdin v. Valley of Cal., Inc., 24 Cal. App. 4th 555, 564-568, 29 Cal. Rptr. 2d 463, 467-470 (1994)).
 (Lazar v. Superior Court, 12 Cal. 4th 631, 646, 49 Cal. Rptr. 2d 377, 386 (1996)).
 (Stokes v. Henson, 217 Cal. App. 3d 187, 197-198, 265 Cal. Rptr. 836, 843 (1990)).
 Cal. Civ. Code §338(d))
 Hobart v. Hobart Estate Co., 26 Cal. 2d 412, 437, 159 P.2d 958, 972 (1945).