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Constructive Fraud for the Consumer Lawyer

Blog article by Tony Taibi
Beverly Addison, a disabled elderly widow, inherited the modest home of her aunt, with whom she had lived for over twenty years. Several months later, Addison realized she was having difficulty paying off some of the debts of the estate, including some liens on the home. Addison's financial difficulties were known to her extended family, including her nephew, Gary Ferrell. After discussions with other family members, Ferrell approached his aunt with a proposal to assist with her financial difficulties. In return, Addison would transfer title to the house to Ferrell and his wife, but she could remain in her home for the rest of her life.
Beverly Addision orally agreed to her nephew's terms, and he soon brought his aunt some papers that deeded the home to him and his wife. Addison is not certain precisely what documents she did or did not sign at the behest or her nephew, nor can she claim that the deed Ferrell recorded is a forgery. She does recall that they executed a second document that Ferrell told her memorialized her right to remain living in the home; but this document was never recorded, and no copy exists.
The following year, after it became apparent that there were additional estate debts of which the parties had been unaware, Beverly Addison and her nephew had a falling out. Soon thereafter, Gary Ferrell brought eviction proceedings against his aunt alleging that he and his wire were owners of the home in fee simple and Beverly Addison was a mere tenant at will. The Ferrells have a recorded deed in fee simple; their purchase was supported by valuable consideration; no document specified any interest of Beverly Addison; there was no evidence that Ferrell intended to deceive his aunt when the panics entered into the agreement; and the transaction was not commereial. What legal cause would support an injunction to stop the eviction?1
Consumer law is often understood as relatively recent statutory public law interventions that restrict traditional private law relationships. Despite the importance of modern regulatory and administrative innovations, however, a variety of traditional common law actions remain important weapons in the consumer lawyer's arsenal. Even in their most traditional forms, the doctrines of freedom of contract and personal responsibility necessarily entail the policing of agreements for the presence of fraud, force, forgery, undue innuence, and the like.
Consumer lawyers' great catch-all causes of action are statutory unfair trade practices acts, such as N.C.G.S. § 75-1.1, that require neither proof of intent to defraud(2) nor panicularity in pleading.3 However, Chapter 75 cases can only be brought for acts "in or affecting commerce" against those engaged in operating a business, commercial, or industrial establishment or enterprise.4 The statute does not subject private vendors of realty to liability,5 nor does it otherwise protect people from being cheated by non-business actors such us family members, pastors, caregivers, and others close to them. Thus, there are a variety or situations in which an unfair trade practices cause of action is of no help to a client in need.
Unfortunately, the traditional common law tort of "fraud"' may be equally unavailing, in practice if not in theory. A common law "fraud" can be difficult both to properly plead, and ultimately, to prove.6 In keeping with common law laissez faire principles, a "fraud" claim requires that the defendant knew that his misrepresentations were untrue when made; that the defendant intended to mislead the victim at the time tile misrepresentation was made; and not only that the victim actually relied upon the defendant's misleading representations, but also that it was "reasonable" of the plaintiff to rely upon them.7 Finally, unlike the general rule for pleadings contained in Rule of Civil Procedure 8 which requires little specificity in pleading a complaint,8 pleading fraud requires that "the circumstances constituting fraud ... shall be stated with particularity.''9 Thus, the consumer lawyer cannot wait until discovery to find out precisely how a client was cheated; a complaint that would be sufficiently specific in its factual allegations to state an ordinary tort claim risks dismissal when pleading fraud.
The common law action of "constructive fraud," however. can be particularly useful in protecting more vulnerable clients from economic injury. Unlike "actual" fraud, constructive fraud does not assume American law's paradigmatic "arms-length transaction," in which no one has any duties beyond the four corners of a contract other than not to engage in purposeful deception. Rather, constructive fraud is based on the principle that people should not enrich themselves at the expense of those in whom they have induced trust. Thus, although North Carolina follows the harsh traditional rule that "the law will not relieve one who can read and write from liability upon a written contract,... [t]his rule cannot be invoked, however, in behalf of one who induces sleep and lulls to security; nor does it require men to deal with each other upon the presumption that they are rascals." 10
Constructive fraud is the appropriate cause of action when the defendant's knowledge and intentions at the time the parties entered into the problematic contract are unclear and difficult to plead with particularity but the relationship of the parties appears to be something closer or more duty-bound than that of strangers doing arms-length business. In other words, an otherwise unexceptional transaction can be said to be tainted with "constructive fraud" when one party seems to have gotten the better of a deal, and the relationship between the parties was such that the loser reasonably relied upon her trust in the winner.
For example, the author has had more than one case in which an elderly widow faced eviction some time after deeding her home to a relative in return for (the client asserted) an unwritten or implicit promise of support and lifetime rights.11 So long as the defendant family member did not intend at the time of the agreement to exercise his right to render his elderly relative homeless, no "fraud" exists and the law of real property seems to preclude relief. This is where the relationship-based analysis of "constructive fraud" can be singularly availing.
Pleading Constructive Fraud
Constructive fraud pleadings need not surmount the factual specificity threshoId of a complaint for ordinary fraud, but the consumer lawyer still must allege more facts than typically would be required of an ordinary tort in order to avoid dismissal. Thus, a successful constructive fraud complaint:
... must allege (1) a relationship of trust and confidence, (2) that the defendant took advantage of that position of trust in order to benefit himself, and (3) that plaintiff was, as a result, injured.12
Unlike ordinary fraud, neither the defendant's bad intent, nor his misrepresentation, nor the reasonableness of the plaintiff's detrimental reliance, are necessary elements of a claim of constructive fraud. Once a relationship of confidence and trust has been established (with allegations of specific facts), that the defendant benefited himself at the expense of the plaintiff is sufficient to state a claim.13 As the North Carolina Supreme Court explained:
Where a confidential or fiduciary relationship exists, it is the duty of the person in whom the confidence is reposed to exercise the utmost good faith in the transaction and to refrain from abusing such confidence by obtaining any advantage to himself at the expense of the confiding party. Should he obtain such an advantage, he will not be permitted to retain the benefit; and the transaction wilI be set aside even though it could not have been impeached had no such relation existed ...14
Pleading constructive fraud requires a somewhat different kind of factual specificity than pleading ordinary fraud. The North Carolina Supreme Court has articulated the Rule 9(b) pleadings particularity requirement for constructive fraud as follows:
[T]he particularity requirement may be met by alleging facts and circumstances (1) which created the relation of trust and confidence, and (2) which led up to and surrounded the consummation of the transaction in which defendant is alleged to have taken advantage of his position of trust to the hurt of plaintiff.15
Thus, the key component in a constructive fraud pleading is the specific allegations establishing the relationship of confidence and trust between the parties. "Put simply, a plaintiff must show (1) the existence of a fiduciary duty, and (2) a breach of that duty."16
The Relationship of Confidence and Trust
The consumer lawyer must take care when pleading the specific allegations of facts that established the relationship of confidence and trust behind a constructive fraud case. Simply asserting the existence of a family or other relationship may be deemed by some judges as insufficiently particular to survive a motion to dismiss. A good complaint should detail facts that create and demonstrate the existence of a relationship of trust.
Of course, certain relationships, paradigmatically that of lawyer and client, are " fiduciary" by their very nature; so if you sell a client your used car, make sure the client gets the better of the deal. Other relationships, such as that of caregiver, neighbor, family friend, relative, or real estate broker, are not so clear or automatic.17 In all but the most obvious cases, the consumer lawyer may assume that the defendant will assert that his relationship with the plaintiff was not ''special'' enough to create fiduciary duties, at least insofar as such duties relate to the transaction at issue.
Although courts will not expansively assume a "special relationship" if the attorney fails to plead sufficient facts, the special relationship of confidence and trust has not been narrowly defined:
The courts have been as reluctant to define a confidential relationship as they have been to define fraud itself .... The courts generally have declined to define the term "fiduciary relation" and thereby exclude from this broad term any relation that may exist between two or more persons with respect to the rights of persons or the property of either .... The relation may exist under a variety of circumstances; it exists in all cases where there has been a special confidence reposed in one who in equity and good conscience is bound to act in good faith and with due regard to the interests of the one reposing confidence.18
Whether a fiduciary relationship exists is determined by the specific facts and circumstances of the case. Generally, "[t]he existence or nonexistence of a fiducia ry duty [is] a question of fact for the jury."19 "For under our law a fiduciary relationship can be found to exist any time one person reposes a special confidence in another, in which event the one trusted is bound to act in good faith and with due regard to the interests of the other.''20
Courts will examine the function performed rather than the title held when determining whether a person or entity is a fiduciary.21 For example, the North Carolina Supreme Court has held that a "mere family friend" could be a fiduciary with respect to an otherwise valid deed execution depending upon the specific facts.22
Thus, when considering whether the circumstances might constitute constructive fraud. the consumer lawyer should not dwell on the term "fiduciary" and the formal relationships with which it is typically associated. Rather, the attorney should focus on the relationship between the parties and whether it appears that the defendant abused the trust that the victim had placed in him. As with undue influence, the relationship and the course of conduct at issue is what really matters.
Constructive Fraud, the Statute of Frauds, and the Parol Evidence Rule
Constructive fraud is particularly useful in those instances in which the victim has been duped into executing a writing that does not reflect her understanding of the entire agreement; this would include almost all matters involving interests in land and most sales of closely-held businesses.23 Although there is plenty of legal precedent supporting the rights of victims who have signed bad agreements, many judges seem deeply averse to overturning a writing not claimed to be a forgery.24
In the common law tradition, if an agreement is complete in its terms, not a forgery, and not procured by coercion or fraud in its inducement, contradictory testimony is inadmissible:
It appears to be well settled in this jurisdiction that parol (i.e., oral] testimony of prior or contemporaneus negotiations or conversations inconsistent with a written contract entered into between the parties, or which tends to substitute a new or different contract for the one evidenced by the writing, is incompetent.25
Similarly, North Carolina real property law forbids selling aside a recorded deed not alleged to be a forgery simply because the grantor did understand the document, and that an oral agreement supplementing a written deed is unenforceable.16 This proposition of real property law would seem to suggest that even if a properly executed deed is procured through fraud. the deed itself is valid (even if money damages may be soug ht). Although these "principles" may continue to hold sway, the consumer lawyer must show the trial court that they are not the applicable law for these cases.
North Carolina follows the traditional caveat emptor rule:
[T]he law will not relieve one who can read and write from liability upon a written contract, upon the ground that he did not understand the purport of the writing, or that he has made an improvident contract. when he could inform himself and has not done so.27
Nevertheless, our courts have always recognized mitigating exceptions to this harsh rule.28 North Carolina law usually precludes a literate person who signs an instrument from asserting that she did not read or understand the instrument.29 However, when allegations of facts arepresent that indicate fraud, misrepresentation, undue influence, breech of fiduciary duty and the like, courts have the power to look beyond the four corners of the document at issue.
One who signs a written contract without reading it, when he can do so understandingly is bound thereby unless the failure to read is justified by some special circumstance.30
Thus, the consumer lawyer must specifically plead and prove that the facts of the case constitute such "special circumstances."31
With the right facts (and the right judge), North Carolina courts can overturn an otherwise valid deed conveying real property from an elderly plaintiff to a family member that was executed with only an implicit understanding that the defendant would care for the grantor. In the 1965 case of Mills v. Dunk, the North Carolina Supreme Court held that not only did the elderly victim indeed have a valid claim, but also that rescission of the improperly procured deed was the appropriate remedy:
[A] deed in proper form will convey the land described therein without any consideration, except as against creditors or innocent purchasers for value ... [I]f there is no fraud or mistake ... failure of consideration alone docs not authorize cancellation of a deed made in consideration of an agreement to support. [However, a] grantor who discovers that the person to whom he has conveyed his land in consideration of such an agreement has secured the deed by false representations clearly indicating his bad faith, should not be relegated to successive actions for damages, even though in such actions the true consideration may be shown by parol. Such a remedy is as unrealistic as it is unjust. ... A misrepresentation such as plaintiff has here alleged would taint the entire transaction with fraud entitling plaintiff to rescind her deed without any specific allegation that defendants did not intend to comply with their promise at the time they made it.32
Unfortunately, some trial judges may not appreciate these exceptions to the otherwise harsh rules of deeds and contracts, so the consumer lawyer should be prepared to brief and fully explain the counter-principles at issue.33
It is not always the unscrupulous business person, predatory lender, mobile home seller, or used car dealer who cheats and abuses those less sophisticated or more vulnerable than he. Sometimes, trusted family members, caregivers, and even spiritual advisors seek to enrich themselves at our clients' expense. In a non-commercial context, and particularly with respect to matters affecting the sale of businesses and real property, a cause of action sounding in constructive fraud may be the consumer lawyer's only effective weapon.
Ensuring that one has adequately pled the case is the first, and often key, component in getting justice for a client. These cases, like most consumer cases, have great jury and public appeal, and they can be very emotionally satisfying in this era of trial lawyer-bashing.34 Getting past judges who will dismiss a case on the slimmest pretext is the only serious impediment to a quick and successful settlement. Once past the preliminary stages, most adversaries will do almost anything to avoid going to trial. Therefore, consumer attorneys must do what we can to ensure that the concluding assumption of the Mills Court is borne out in our superior courts:
Courts will guard with jealous care the rights of the aged and infirm who have conveyed their land in the belief that they were making provision for support and maintenance in their declining years.35