Real Estate Broker Agent Constructive Fraud Misrepresentation Law Elements Defenses Lawyer
Definition.
Constructive fraud by a real estate broker consists of a breach of the broker’s duty to his or her principal, without actual fraudulent intent, where the broker gains an advantage by misleading the principal to his or her prejudice. (Cal. Civ. Code, § 1573; Tindell v. Murphy (2018) 22 Cal.App.5th 1239, 1250.) Like an action for fraud, constructive fraud must be pled with specificity. (Schauer v. Mandarin Gems of Cal., Inc. (2005) 125 Cal.App.4th 949, 960-961.)
Confidential and fiduciary relations are in law, synonymous and may be said to exist whenever trust and confidence is reposed by one person in another. (Barrett v. Bank of Am. (1986) 183 Cal.App.3d 1362, 1369.)
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Constructive Fraud Law: Cal Civ Code § 1573
Constructive fraud consists:
Constructive Fraud Elements
The elements of constructive fraud as “(1) a fiduciary or confidential relationship; (2) nondisclosure (breach of fiduciary duty); (3) intent to deceive, and (4) reliance and resulting injury (causation).” (See, e.g., Prakashpalan v. Engstrom, Lipscomb & Lack (2014) 223 Cal.App.4th 1105, 1131.) However, these elements conflict with the statute in at least two ways. First, the statute clearly states that no fraudulent intent (or intent to deceive) is required. Second, the statute is not limited to nondisclosure; it extends to information that is disclosed, but misleading.
The California Jury Instruction may be applicable, see below.
Jury Instruction Constructive Fraud, CACI 4111
Paula claims that she was harmed because Daniel misled her by failing to provide Paula with complete and accurate information. To establish this claim, Paula must prove all of the following:
(1) that Daniel was Paula’s real estate broker;
(2) that Daniel acted on Paula’s behalf for purposes of purchasing a residential property;
(3) that Daniel knew, or should have known, that the residential property was not more than 1 acre like the seller had represented;
(4) that Daniel misled Paula by providing Paula with information that was inaccurate/incomplete; and
(5) that Paula was harmed and Daniel’s conduct was a substantial factor in causing Paula’s harm.
Element 1: Fiduciary Relationship
To state an action for constructive fraud, the parties must be in a fiduciary relationship. (Jones v. Wagner (2001) 90 Cal.App.4th 466, 471.) The relationship between a broker and a principal is fiduciary in nature and imposes on the broker a duty of the highest good faith and undivided loyalty and service toward the principal. (Field v. Century 21 Klowden-Forness Realty (1998) 63 Cal.App.4th 18, 25.)
Duty of Good Faith:
With broker status comes fiduciary duties, including the obligation to act in good faith and honesty, and the broker is precluded from assuming a position adverse to the seller without the seller’s consent. (Gray v. Fox (1984) 151 Cal.App.3d 482, 489 [broker’s failure to disclose to seller that broker was buying property only to convey it immediately to another buyer for $24,000 more than broker paid was breach of fiduciary duty supporting action for constructive fraud].)
A real estate broker has the same obligation of undivided service and loyalty to his principal that a trustee has in favor of a beneficiary. (Roberts v. Lomanto (2003) 112 Cal.App.4th 1553, 1563.)
Duty to Fully Disclose Material Facts:
A fiduciary must tell its principal of all information it possesses that is material to the principal’s interests. A fiduciary’s failure to share material information with the principal is constructive fraud, a term of art obviating actual fraudulent intent. (Michel v. Moore & Associates, Inc. (2007) 156 Cal.App.4th 756, 762.)
A broker is charged with the duty of fullest disclosure of all material facts concerning the transaction that might affect the principal’s decision. (Alhino v. Starr (1980) 112 Cal.App.3d 158, 169.)
A broker has a duty to learn the material facts that may affect the principal’s decision by placing himself in the principal’s position, determining the type of information required for the principal to make a well-informed decision, and disclosing to the principal all reasonably obtainable material information. (Field v. Century 21 Klowden-Forness Realty (1998) 63 Cal.App.4th 18, 25.)
A broker’s fiduciary duty includes inspecting the property and fully disclosing any material defects to his principal or other material facts that might affect the principal’s decision. (Coldwell Banker Residential Brokerage Co. v. Superior Court (2004) 117 Cal.App.4th 158, 164.)
A real estate broker has a duty not to misrepresent material facts of the amount of rental income of property. (Ford v. Cournale (1973) 36 Cal.App.3d 172, 182.)
Fiduciary vs. Other Types of Relationships:
Constructive fraud does not require a fiduciary relationship; a non-fiduciary confidential relationship will suffice, provided that one party places trust and confidence in the integrity and fidelity of another. (Tyler v. Children’s Home Society (1994) 29 Cal.App.4th 511, 549; Exxess Electronixx v. Heger Realty Corp. (1998) 64 Cal.App.4th 698.)
More than friendship or mere confidence in another’s integrity is required for constructive fraud purposes. (McDonald v. Jones (1954) 129 Cal.App.2d 519, 522 [broker who loaned money to plaintiffs and assigned note to a third party who foreclosed was not liable for constructive fraud; parties’ relationship was merely that of debtor/creditor, and was not confidential].)
Scope of Fiduciary Duty:
Depending on the circumstances, the broker’s duty as a fiduciary may be much broader than the broker’s duty to visually inspect the property under California Civil Code section 2079. (Field v. Century 21 Klowden-Forness Realty (1998) 63 Cal.App.4th 18, 25 [duty may include obligation to inspect public records and/or title and use permits for the property].)
Once a fiduciary relationship exists, the scope of the broker’s fiduciary duty varies with the facts of the relationship. (Rosenthal v. Great Western Fin. Sec. Corp. (1996) 14 Cal.4th 394, 425 [securities brokers were not liable for constructive fraud in failing to alert customers to existence and meaning of arbitration clause because no fiduciary relationship had yet been formed].)
Burden of Proof:
Once plaintiff in a constructive fraud case shows a fiduciary duty existed, the burden shifts to the defendant to prove that there was no breach of this duty. (Roberts v. Lomanto (2003) 112 Cal.App.4th 1553, 1557.)
Element 2: Breach of Duty
Constructive fraud is a unique species of fraud applicable only to a fiduciary or confidential relationship. As a general principle, constructive fraud comprises any act, omission or concealment involving a breach of legal or equitable duty, trust or condense which results in damage to another even though the conduct is not otherwise fraudulent. (Mark Tanner Constr. v. Hub Internat. Ins. Servs. (2014) 224 Cal.App.4th 574, 588.)
Most acts by an agent in breach of his fiduciary duties constitute constructive fraud. The failure of the fiduciary to disclose a material fact to his principal which might affect the fiduciary’s motives or the principal’s decision, which is known (or should be known) to the fiduciary, may constitute constructive fraud. (Mark Tanner Constr. v. Hub Internat. Ins. Servs. (2014) 224 Cal.App.4th 574, 588.)
What Constitutes Constructive Fraud?
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. Constructive fraud exists in cases in which conduct, although not actually fraudulent, ought to be so treated—that is, in which such conduct is a constructive or quasi fraud, having all the actual consequences and all the legal effects of actual fraud. (Prakashpalan v. Engstrom, Lipscomb & Lack (2014) 223 Cal.App.4th 1105, 1131.)
The failure of the fiduciary to disclose a material fact to his principal which might affect the fiduciary’s motives or the principal’s decision, which is known (or should be known) to the fiduciary, may constitute constructive fraud. Also, 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, 415.)
Examples of Breach/No Breach
A broker breached his fiduciary duty to a seller where the broker, upon the buyer’s request, encouraged the seller to accept an unsecured note from the buyer, did not disclose to the seller that such note omitted standard attorneys’ fees and acceleration clauses, and misrepresented the buyer’s financial situation. (Alhino v. Starr (1980) 112 Cal.App.3d 158, 169.)
A prima facie case of breach of fiduciary duty existed where a broker represented both the buyers and the seller of a residence and failed to disclose to seller that the buyers were investors who intended to quickly resell the property at a profit and that the broker had a substantial personal stake in striking a good bargain for the buyers. (Jorgensen v. Beach ‘N’ Bay Realty, Inc. (1981) 125 Cal.App.3d 155, 160-61.)
Brokers with no knowledge (either actual or imputed) of construction defects within a planned unit development or the existence of litigation had no fiduciary duty to inquire of the homeowner’s association about such facts, and no duty arose simply because the property was within a planned unit development. (Padgett v. Phariss (1997) 54 Cal.App.4th 1270, 1283, 1286 [statutory standard regarding broker’s duty to investigate and disclose under Civil Code § 2079 was sufficient to analyze broker’s fiduciary duty in this case].)
Element 3: Broker Gains Some Advantage
To state a cause of action for constructive fraud, the principal must show that the broker obtained an advantage over the principal in a transaction that occurred by virtue of the broker’s agency. (Jorgensen v. Beach ‘N’ Bay Realty, Inc. (1981) 125 Cal.App.3d 155, 161; Alhino v. Starr (1980) 112 Cal.App.3d 158, 169.)
The very existence of a fiduciary or confidential relationship precludes the party in whom the trust is placed from participating in profit or advantage resulting from the parties’ dealings. (Devers v. Greenwood (1956)139 Cal.App.2d 345, 348 [broker hired to refinance plaintiff’s property was liable for constructive fraud where he had plaintiff sign various blank loan documents, and without plaintiff’s knowledge, directed payment of certain funds to himself for commissions, escrow fees, and other charges]; but see Rodes v. Shannon (1963) 222 Cal.App.2d 721, 725-27 [agent may be allowed to retain profts from self-dealing with the subject matter of the agency as long as he fully discloses to his principal the facts regarding his self-dealing].)
Element 4: Justifiable Reliance
A representation in the context of a trust or fiduciary relationship creates a rebuttable presumption of reasonable reliance subject to being overcome by substantial evidence to the contrary. (Edmunds v. Valley Circle Estates (1993) 16 Cal.App.4th 1290, 1302.)
This rebuttable presumption implements the long recognized public policy of imposing fiduciary duties upon partners in their relationship to one another. Indeed, this policy is lodged in the statutory and case law of this state. It is more than the simple shifting of the burden of proof to facilitate the determination of a particular action. Consequently, defendant had the burden of proving by substantial evidence that plaintiff did not rely on the alleged false statement. (Edmunds v. Valley Circle Estates (1993) 16 Cal.App.4th 1290, 1302.)
To be actionable, a misrepresentation or concealment must induce justifiable reliance. (Magpali v. Farmers Group, Inc. (1996) 48 Cal.App.4th 471, 482.)
Reliance exists when the misrepresentation or nondisclosure was an immediate cause of the plaintiff’s conduct which altered his or her legal relations, and when, without such misrepresentation or nondisclosure, he or she would not, in all reasonable probability, have entered into the contract or other transaction. (Alliance Mortgage Co. v. Rothwell (1995) 10 Cal.4th 1226, 1239.)
Except in rare cases where the undisputed facts leave no room for a reasonable difference of opinion, the issue of plaintiff’s reasonable or justifiable reliance on the constructive fraud ordinarily is a question of fact. (Alliance Mortgage Co. v. Rothwell (1995) 10 Cal.4th 1226, 1239.)
In determining if reliance is justifiable, the issue is whether the person was justified in believing the representation in light of his or her own knowledge or experience. (Gray v. Don Miller & Assoc., Inc. (1984) 35 Cal.3d 498, 503-04 [buyer reasonably relied on broker’s representation that sellers had accepted buyer’s offer, where buyer had some experience in purchasing real estate, but had never used a broker before].)
Plaintiff’s Duty to Investigate:
The nature of the confidential or fiduciary relationship relaxes the plaintiff’s duty to inquire into circumstances surrounding the defendant’s alleged fraud and entitles the plaintiff to rely on the fiduciary even if plaintiff is aware of facts that would ordinarily call for investigation. (Alliance Mortgage Co. v. Rothwell (1995) 10 Cal.4th 1226, 1239.)
If the plaintiff becomes aware of facts which would make a reasonably prudent person suspicious, a duty to investigate arises and the plaintiff may be charged with knowledge of facts which would be discovered by such an investigation. (Lee v. Escrow Consultants, Inc. (1989) 210 Cal.App.3d 915, 921; see also Bedolla v. Logan & Frazer (1975) 52 Cal.App.3d 118, 132-35 [duty to investigate arose where partners in partnership had notice of numerous facts regarding accounting firm’s wrongdoings].)
Plaintiffs’ complete reliance on securities brokers’ assurances that plaintiffs need not read the written brokerage agreements because they were just a formality and merely restated what the brokers had already told the plaintiffs was not reasonable when the plaintiffs had an ongoing relationship with the bank affiliated with the defendant securities corporation, and were given reason to believe the defendant’s securities brokers worked for the bank, but had no actual ongoing or agency relationship with the securities corporation. (Rosenthal v. Great Western Fin. Sec. Corp. (1996) 14 Cal.4th 394, 425-27.)
Element 5: Causation and Damage
No matter what the nature of the fraud, the plaintiff will have no cause of action unless he or she suffers some detriment. (Hill v. Wrather (1958) 158 Cal.App.2d 818, 825.) Plaintiff must show that the damage was sustained by reason of the fraud and should show a cause and effect relationship between the fraud and the damage. Plaintiff must show that his or her damage was sustained by reason of the fraud and should show a cause and effect relationship between the fraud and the damage. (Ibid.)
Remedies
Actual or Out-of-Pocket Damages
General measure of damages in fraud cases involving purchase, sale or exchange of property. (Cal. Civ. Code, § 1343.)
Amounts Paid in Reliance on Fraud
Amounts paid for escrow fees, moving to and from property, building permits, telephone connections, fences, yard cleaning, garage materials, door locks, shrubbery, taxes, rent and labor were recoverable under Civil Code section 1343 when reasonably expended in reliance on fraud. (Cal. Civ. Code, § 1343, subd. (a)(1); Hardy v. Carmichael, 207 Cal.App.2d 218, 228.)
Loss Proximately Caused by Fraud
Recovery limited to losses proximately caused by defendant’s misrepresentations. (Cal. Civ. Code, § 1343, subd. (a)(2).)
Consequential Damages
Even if plaintiff suffers no “out-of-pocket” loss, as long as he or she can show consequential or additional damages of a type prescribed by California Civil Code section 1343, that amount is recoverable. (Ford v. Cournale (1973) 36 Cal.App.3d 172, 184.)
“Benefit of the Bargain” Damages
Where broker breached duty as broker and foreclosure consultant by having his wife loan plaintiff money and then foreclosing on loan, plaintiff was entitled to damages in the amount of the difference between what defendant paid at the foreclosure sale and the fair market value at the time. (Onofrio v. Rice (1997) 55 Cal. App. 4th 413, 422-23.)
Note: The split in authority on damages for constructive fraud has been explained by some commentators as a distinction between cases involving the fiduciary’s fraud, where the broader “benefit of the bargain damages” were available, and cases involving only the fiduciary’s negligence, where the narrower “out-of-pocket” damages were available. (See Alliance Mortgage Co. v. Rothwell (1995) 10 Cal.4th 1226, 1239.)
Deceit Damages
Defrauded plaintiff is entitled to recover “any damage which he thereby suffers.” (Cal. Civ. Code, § 1709.)
Prejudgment Interest
Availability of prejudgment interest from date of loss in a constructive fraud case is left to trier of fact’s discretion. (Cal. Civ. Code, §§ 1287-88; Pepitone v. Russo (1976) 64 Cal.App.3d 685, 690.)
Rescission
Where plaintiff simply exchanged his money for property that is equivalent in value, he cannot get damages; his only remedy is to rescind and get back his money. (Ford v. Cournale (1973) 36 Cal.App.3d 172, 184.)
Punitive Damages Generally Not Available
Punitive damages are not available in absence of intentional misrepresentation. (Alliance Mortgage Co. v. Rothwell (1995) 10 Cal.4th 1226, 1239.)
Statute of Limitations
The statute of limitations for breach of fiduciary duty is four years. (Cal. Civ. Proc. Code, § 343; Stalberg v. Western Title Ins. (1991) 230 Cal.App.3d 1223, 1230.) Where the gravamen of the complaint is that defendant’s acts constituted actual or constructive fraud, the applicable statute of limitations is the California Code of Civil Procedure section 338, subdivision (d) three-year limitations period, governing fraud even though the cause of action is designated by the plaintiff as a claim for breach of fiduciary duty.” (Thomson v. Canyon (2011) 198 Cal.App.4th 594, 607.)
To be sure, section 340.6, subdivision (a), exempts claims of ‘actual fraud’ from its limitations period – but the exemption does not extend to claims of constructive fraud. (Austin v. Medicis (2018) 21 Cal.App.5th 577, 587.)
Breach of fiduciary duty not amounting to fraud or constructive fraud is subject to the four-year “catch-all statute” of California Code of Civil Procedure section 343. Fraud is subject to the three-year statute of limitations under California Code of Civil Procedure section 338. However, a breach of a fiduciary duty usually constitutes constructive fraud. (William L. Lyon & Associates, Inc. v. Superior Court (2012) 204 Cal.App.4th 1294, 1312, 1313.) “The statute of limitations for breach of fiduciary duty is three years or four years, depending on whether the breach is fraudulent or nonfraudulent.” (American Master Lease LLC v. Idanta Partners, Ltd. (2014) 225 Cal.App.4th 1451, 1479.)
Affirmative Defense
Utmost Good Faith and Full Disclosure
When the principal questions the acts done by the agent in the course of the agency the burden is cast upon the latter to prove that he acted with the utmost good faith toward the principal and that prior to the transaction he made a full disclosure of all the facts relating to the acts under attack. (Horiike v. Coldwell Banker Residential Brokerage Co. (2016) 1 Cal.5th 1024.)
Statute of Frauds Is Not a Defense
Statute of frauds does not bar recovery for constructive fraud because a constructive trust arises by operation of law when a fiduciary or confidential relationship is violated. (Warren v. Merrill (2006) 143 Cal.App.4th 96, 113, citing Mazzera v. Wolf (1947) 30 Cal.2d 531.)