Constructive Fraud

When Does Constructive Fraud Occur?

Constructive fraud occurs if there is an act, an omission or a concealment of material facts. The act, omission, or concealment of material facts must be in violation of legal duty, fiduciary duty, or any other relationship of trust.

When someone claims constructive fraud, the victim is not required to show intentional deception. Instead, constructive fraud can happen even when an individual or entity’s conduct isn’t considered fraudulent, as long as the offending party violated some type of duty and, as a result, caused damage to the victim.

Constructive fraud breaches civic interest and is usually limited to civil cases. Therefore, if a person or business suffers damages because of constructive fraud, that individual or business has the right to pursue a claim in civil court to seek damages.

Once the claim proceeds to civil court, the plaintiff aims to prove that constructive fraud occurred and recover damages. Suppose the party can successfully prove that they suffered damages as a result of the misrepresentation, omission, or act of the other party. In that case, there is a good chance the plaintiff can recover damages in some form.

What Are Examples of Constructive Fraud?

One hypothetical example of constructive fraud could occur between a supplier and a buyer. For example, if the supplier is dishonest about how much raw product he has to compel a potential buyer to sign a contract, this action could constitute constructive fraud.

Below are some additional examples of constructive fraud:

• A real estate agent who wrongly informs clients who intend to split a property into sections that subdivision is acceptable without confirming that partitioning the property is permissible.

• A real estate agent who provides false statements about the income that a property will produce because he knows that the potential buyer is purchasing the property to create profits. The real estate seller also knows the buyer relies on the agent’s statements to purchase.

• A furniture manufacturer who fails to tell clients about product problems.

• A business buying a product for less than the product’s market value because the business is aware of the other party’s dire economic situation.

• A stockbroker carrying on trading stocks even though the poor state of the market conditions should have forced him to stop trading, therefore negatively impacting clients who own the stock.

These examples underscore the main trait of constructive fraud: intent does not have to be present.

By definition constructive fraud centers on how an individual can exploit another due to adverse conditions, such as challenging financial circumstances or a unique relationship.

In a resulting civil court case, the plaintiff must provide enough proof that the other party breached an obligation through an act, concealment, or omission. In addition, the plaintiff must also prove that because of that act, he or she suffered damages.

What Conditions Create Constructive Fraud?

When one person violates their fiduciary obligation to another individual, this act can create a constructive fraud scenario. Other actions that can create constructive fraud include:

• Breaches of public and private trusts

• Using unnecessary influence to obtain a benefit and, in doing so, harming the other person

Constructive fraud is not always available to the plaintiff, however. When a court considers the case, it will seek to find out if the two parties have a unique, trusting relationship.

The court will also decide whether one party placed their confidence in the other party, and if so, constructive fraud may be present.

What Types of Relationships Result in Constructive Fraud?

• Relationship between the manufacturer of goods and the buyer of the goods.
• Relationship between the trustee and the trust’s beneficiaries.
• Relationship between a lawyer and the client.
• Relationship between broker and the client.
• A majority stock holder and the company.

Some constructive fraud cases occur when the factors for traditional fraud do not exist because the intent to deceive cannot be proven. In this case, constructive fraud may be available if a special association exists, such as the relationships referenced above.

Constructive fraud may exist when an individual manipulates their special relationship with another person to gain a benefit, such as money or a company advantage. Another factor that helps establish constructive fraud is identifying if the victim suffered monetary damages or a damaged reputation.

What Are the Legal Ramifications of Constructive Fraud?

In cases of constructive fraud, the defendant might have to pay monetary damages to the victim if the court deems it so. Additionally, the defendant may have to return any property that belonged to the plaintiff or pay the property’s value.

In cases of constructive fraud, the legal penalties on the state’s laws, the court’s decision, and the power of the defendant’s legal strategies.

What Are the Main Defenses in a Constructive Fraud Case?

The main defenses in a constructive fraud case are:

• The defendant may claim that the parties were not involved in a trusting relationship

• The defendant may claim that no damages existed as a result of the defendant’s actions