This article explains fraudulent misrepresentation, also known as fraud, under the common law. Even though this claim is based on the common law, it remains alive and relevant today.
A common law claim of fraudulent misrepresentation is separate from a claim for fraud brought under Minnesota Statutes. This is because, under the common law, a party could sue for fraudulent misrepresentation (fraud). And when fraud statutes were created, the statutes created new claims (statutory claims) for fraud.
So if you are suing for fraud, you should consider both common law fraud and statutory fraud. And you should also consider negligent misrepresentation, because that has similar elements and defenses but important differences (discussed below).
Elements of Common Law Fraudulent Misrepresentation Claim
Although it has a variety of different names, including just misrepresentation and just fraud, the Minnesota Supreme Court has defined fraudulent misrepresentation as having the following elements:
- A false representation by a party of a past or existing material fact that is susceptible of knowledge,
- The person making the representation made it either a) with knowledge of its falsity, or b) as if he had knowledge but without actually knowing whether it was true or false,
- The representation was made with the intention to induce another party to act in reliance on the representation,
- The representation caused the other party to act in reliance, and
- The other party suffered pecuniary damages as a result of the reliance.
See Hoyt Properties, Inc. v. Production Resource Group, L.L.C., 736 N.W.2d 313, 318 (Minn. 2007).
Representation
Obviously, the first element of fraudulent misrepresentation is having a “representation.” A representation can be made through direct statements or words, or through silence or failure to disclose facts in certain circumstances. Affirmative false statements are straightforward misrepresentations. Concealing or failing to disclose facts that make disclosed facts misleading is also fraudulent, called a “half-truth.”
A representation can be made through words or even through silence in certain circumstances. There are two different kinds of misrepresentations through words; the first is very basic, it is when someone makes an affirmative statement that is false. The second kind of misrepresentation through words is known as telling what is called a “half-truth,” which essentially means that the person conceals or does not disclose certain facts which causes facts that are disclosed to be very misleading. In other words, a true statement may nonetheless be a misrepresentation if that statement omits other material facts that would give the original statement a different meaning.
The second kind of misrepresentation is when there is silence or non-disclosure of facts. As a general rule, a party has no duty to disclose material facts to another, so silence generally does not constitute fraud. L&H Airco, Inc. v. Rapistan Corp., 446 N.W.2d 372, 380 (Minn. 1989). If a non-disclosure of facts is going to be considered fraud, there must be a suppression of facts which one party is under a legal or equitable obligation to communicate to the other and which the other party is entitled to have communicated to him. Wizman v. Lehrman, Lehrman & Flom, 601 N.W.2d 179, 190 (Minn. 1999). To be under a legal or equitable obligation to communicate facts the parties must be involved in one of the following three circumstances.
- One who speaks must say enough to prevent his words from misleading the other party (i.e. “half-truth”),
- One who has special knowledge of material facts to which the other party does not have access, may have a duty to disclose those facts to the other party, and
- One who stands in a confidential or fiduciary relation to the other party to a transaction must disclose material facts.
Put another way, silence or nondisclosure constitutes misrepresentation when:
- The defendant disclosed partial facts that are misleading without full disclosure (the “half-truth” scenario).
- The defendant had special knowledge not available to the plaintiff.
- The defendant owed the plaintiff a fiduciary duty.
See Boubelik v. Liberty State Bank, 553 N.W.2d 393, 399 (Minn. 1996).
It is important to note that if both parties to a transaction or both parties in any type of communication situation are intelligent and fully capable of taking care of themselves, then there is no confidential relationship between the parties and generally no duty to disclose material facts.
It should also be noted that circumstance number two, which is when one person has special knowledge of material facts may have a duty to disclose those facts to the other party, is rarely enforced under Minnesota Law. That is because the general rule is that one party to a transaction has no duty to disclose material facts to the other. In Richfield Bank & Trust v. Sjogren, 309 Minn. 362, 365, 244 N.W.2d 648, 650 (1976), the Minnesota Supreme Court held that it was fraud for a bank to not disclose to a borrower that a bank depositor with whom the borrower was dealing was insolvent and was engaging in fraudulent business practices when the bank had actual knowledge of the fraudulent activities. Compare that to L&H Airco, Inc. v. Rapistan Corp., 446 N.W.2d 372 (Minn. 1989), where the Minnesota Supreme Court held that an attorney did not have a duty to disclose known facts to his client’s adversary in the litigation context.
Falsity and Past or Present Fact
The representation must be false to support a fraud claim. Truth is a complete defense. Rien v. Cooper, 1 N.W.2d 847, 851 (Minn. 1942).
The representation must relate to a past or present fact. Statements about the future, opinions, or legal conclusions generally cannot support a fraud claim. However, statements about the future can constitute fraud if the speaker knows them to be false when made. Similarly, statements of opinion or law can be fraudulent if knowingly false or implying knowledge of facts justifying the opinion. Martens v. Minnesota Min. & Mfg. Co., 616 N.W.2d 732, 747 (Minn. 2000); Hoyt Properties, Inc. v. Production Resource Group, L.L.C., 736 N.W.2d 313, 318 (Minn. 2007).
To put it another way, fraudulent misrepresentation in and of itself must be predicated on a falsity and to be a misrepresentation a statement must relate to a past or existing fact. Any statements regarding future events such as predictions, intentions, or expectations are not normally actionable. This does not mean that in every instance a statement regarding a future event is not actionable. A statement regarding a future event or prediction can be a misrepresentation to the extent that the representation was untrue at the time it was made and if it satisfies the other requirements of fraudulent misrepresentation. For example; if someone is going to break a contractual promise that does not necessarily constitute fraud unless the promisor never actually had any intention to perform at the time that the promise was made.
Materiality
The false representation must be material – relevant or important enough to influence the plaintiff’s conduct. A fact is material if it “naturally affects” the plaintiff’s judgment. Rien v. Cooper, 1 N.W.2d 847, 851 (Minn. 1942); Nave v. Dovolos, 395 N.W.2d 393, 398 (Minn. Ct. App. 1986).
Susceptible of Knowledge
The representation must be about facts that are “susceptible of knowledge.” If a matter cannot reasonably be known to be true or false, there is no fraudulent misrepresentation. Kennedy v. Flo-Tronics, Inc., 143 N.W.2d 827, 828 (Minn. 1966).
Scienter/Intent
The defendant must have known the representation was false or lacked confidence in its truth. This establishes the intent to mislead the plaintiff. An innocent mistake is not fraudulent. But reckless disregard for the truth can satisfy this element. Florenzano v. Olson, 387 N.W.2d 168, 173 (Minn. 1986).
Actual Reliance
The plaintiff must show that he or she actually relied on the false representation. Evidence of reliance is generally required. Hoyt Properties, Inc. v. Production Resource Group, L.L.C., 736 N.W.2d 313, 320-21 (Minn. 2007).
Justifiable Reliance
The plaintiff must also show that his or her reliance was reasonable under the circumstances. This is judged by the plaintiff’s particular intelligence and experience. A plaintiff generally can rely on a representation without verifying its truth. But knowledge of facts contradicting the representation, or an investigation revealing the truth, undercuts reasonable reliance. Hoyt Properties, Inc. v. Production Resource Group, L.L.C., 736 N.W.2d 313, 321 (Minn. 2007); Murphy v. Country House, Inc., 240 N.W.2d 507, 512 (Minn. 1976).
Damages
The plaintiff must suffer actual monetary damages proximately caused by reasonable reliance on the fraudulent misrepresentation. Minnesota follows the “out-of-pocket” rule, limiting damages to the difference between what the plaintiff gave up and the actual value received. Special damages directly caused by the fraud prior to discovery are also recoverable. B.F. Goodrich Co. v. Mesabi Tire Co., 430 N.W.2d 180, 182 (Minn. 1988).
Proximate Cause
The fraudulent misrepresentation must have substantially contributed to causing the plaintiff’s damages. It need not be the only cause. Davis v. Re-Trac Mfg. Corp., 149 N.W.2d 37, 39 (Minn. 1967).
Special Pleading Requirements for Fraud
Fraud claims must be pled with particularity under Minn. R. Civ. P. 9.02. General recitation of the elements is insufficient. Specific details constituting the alleged fraud must be pleaded. Great Plains Trust Co. v. Union Pacific R. Co., 492 F.3d 986, 995 (8th Cir. 2007).
Defenses
Fraudulent misrepresentation has limited defenses since it is an intentional tort. Comparative fault and negligence defenses generally do not apply. Accord and satisfaction, release, statute of limitations, and similar affirmative defenses can potentially apply.
Statute of Limitations
Claims for fraudulent misrepresentation must be brought within 6 years of when the fraud was discovered or reasonably should have been discovered under the discovery rule. Minn. Stat. § 541.05, subd. 1(6); Toombs v. Daniels, 361 N.W.2d 801, 809 (Minn. 1985).
Fraudulent Misrepresentation vs. Breach of Contract
Fraudulent misrepresentation and breach of contract are distinct claims. A breach of contract, even in bad faith, does not constitute fraud. But fraudulently inducing a party to enter a contract can support rescission or a defense against a breach of contract claim. Hanks v. Hubbard Broad., Inc., 493 N.W.2d 302, 308 (Minn. Ct. App. 1992); Vandeputte v. Soderholm, 216 N.W.2d 144, 146 (Minn. 1974).
Fraudulent Misrepresentation vs. Negligent Misrepresentation
Fraudulent misrepresentation and negligent misrepresentation are two related but distinct torts under Minnesota common law.
Elements for Negligent Misrepresentation
Fraudulent negligent misrepresentation and negligent misrepresentation have different elements. Negligent misrepresentation has the following elements:
- The defendant, in the course of business, profession, or employment, or a transaction with a pecuniary interest, supplies false information for the guidance of others in a business transaction.
- The defendant failed to exercise reasonable care or competence in obtaining or communicating the information.
- The plaintiff justifiably relied on the information.
- The plaintiff suffered pecuniary loss caused by that justifiable reliance.
The defendant’s liability is limited to losses suffered by the people the information was intended to benefit or influence. Liability for gratuitous advice given outside of business generally does not exist because reliance would be unjustified.
Defenses
Negligent misrepresentations are subject to defenses like comparative negligence, also known as comparative fault. Florenzano v. Olson, 387 N.W.2d 168, 175-76 (Minn. 1986). Fraudulent misrepresentation has stronger intent requirements, but is not subject to negligence defenses. Bonhiver v. Graff, 248 N.W.2d 291, 298-99 (Minn. 1976); Florenzano v. Olson, 387 N.W.2d 168, 174 (Minn. 1986).
Statutes of Limitation
Claims for fraudulent or negligent misrepresentation must be brought within 6 years of when the fraud was discovered or reasonably should have been discovered under the discovery rule. Minn. Stat. § 541.05, subd. 1(6); Toombs v. Daniels, 361 N.W.2d 801, 809 (Minn. 1985).
Economic Loss Doctrine
The economic loss doctrine does not bar fraudulent misrepresentation claims. It may limit negligent misrepresentation claims involving the sale of goods between merchants under Minn. Stat. § 604.10.
Burden of Proof
The burden of proof for fraudulent and negligent misrepresentation claims are subject to the normal civil standard – a preponderance of the evidence. Punitive damages have a higher clear and convincing evidence standard. State by Humphrey v. Alpine Air Products, Inc., 500 N.W.2d 788, 790-91 (Minn. 1993); Minn. Stat. § 549.20.
Negligent Misrepresentation
Go here to learn more about negligent misrepresentation in Minnesota.
Frequently Asked Questions
What are the elements of fraudulent misrepresentation in Minnesota?
The elements of fraudulent misrepresentation in Minnesota are:
- A false representation of a past or present material fact susceptible of knowledge.
- The defendant knew the representation was false or lacked confidence in its truth.
- The defendant intended to induce reliance on the representation.
- The plaintiff did rely on the representation.
- The plaintiff suffered damages from that reliance.
What is negligent misrepresentation in Minnesota?
Negligent misrepresentation occurs when, during business or employment, the defendant negligently supplies false information intending to influence the plaintiff, the plaintiff justifiably relies on it, and suffers economic loss as a result.
What is the statute of limitations for fraud in Minnesota?
Fraud claims must be brought within 6 years of when the fraud was discovered or reasonably should have been discovered under the discovery rule.
How specifically must fraud be pleaded under Minnesota law?
Minnesota Rule of Civil Procedure 9.02 requires fraud to be pleaded with particularity. The specifics of the alleged fraud must be stated, not just the elements recited.
What defenses are available against fraudulent misrepresentation claims?
Fraudulent misrepresentation has limited defenses since it is an intentional tort. Comparative fault and contributory negligence defenses generally do not apply. Affirmative defenses like accord and satisfaction, release, and statute of limitations can apply.
Does the economic loss doctrine bar fraudulent misrepresentation claims in Minnesota?
No, the economic loss doctrine does not apply to fraudulent misrepresentation claims under Minn. Stat. § 604.10. It may limit negligent misrepresentation claims involving the sale of goods between merchants.