§ 6.1.1 Fraudulent Misrepresentation
Fraud is a "universal legal prohibition."1889 With tireless repetition, Arizona courts have enforced the prohibition on fraud, listing nine elements of proof required for fraudulent misrepresentation.1890 Each must be proved by clear-and-convincing evidence.1891
Misrepresentations most commonly are based on false statements of fact. But legally actionable falsehoods may also arise out of statements of opinion, intention, and law,1892 or communications that create a false impression.1893 A speaker who claims special expertise or superior knowledge may be held accountable for a misleading opinion.1894 Misrepresentations also include statements of intention that the speaker has no intention of honoring.1895 Even a misstatement concerning a legal matter like taxation or zoning may amount to a fraudulent statement.1896
An actionable misrepresentation may be one that induces a transaction or one that causes the plaintiff to refrain from acting.1897 For instance, a misrepresentation that induces shareholders not to sell their shares may be actionable.1898
Misleading inducements to hold a losing investment are particularly insidious. People have difficulty accepting losses.1899 They are predisposed to hold losing investments too long and sell winners too soon.1900 Because of this behavioral bias, investors are unusually vulnerable to false assurances intended to persuade them to hold their investments. The common law provides a remedy for these deceptive, post-sale inducements to hold an investment.1901
Whether the person to whom a misrepresentation is made is justified in relying on the representation has proved a fertile source of litigation.1902 Some statements, even if false, are so obviously unimportant that they do not meet the test of materiality.1903 In other cases, the facts are such that the plaintiff should have been alerted to the misrepresentation and cannot, therefore, have justifiably relied upon the defendant's statement.1904 On the other hand, courts are hesitant to impute knowledge to the plaintiff.1905 Arguments that fraud victims should have discovered the fraud through public records have been rejected,1906 as have arguments that the information was available to the plaintiff.1907 In this respect the law of fraud is efficient: "It allows the less informed party to forego the costly and duplicative process of factual investigation and information discovery, thereby reducing transaction costs."1908
Reliance does not require privity.1909 Direct contact between the plaintiff and defendant is not needed for fraud liability.1910 The plaintiff's reliance may be indirect.1911 This happens, for example, when a fraudulent statement is made to an investor's agent who then repeats the statement to the investor or makes an investment decision on the investor's behalf.1912 In short, the defendant need not be the face of the fraud for liability to follow.
Causation can present knotty issues.1913 The plaintiff must prove not only that the fraud was a cause in fact of his or her loss but also that it was a proximate one.1914 The Court of Appeals has used the securities-law concept of loss causation in a case involving common-law issues.1915 Given the prevalence of loss-causation terminology and analysis in the securities context, its continued use in common-law fraud litigation seems likely.1916
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Notes:
[1889] Richard A. Epstein, Torts § 20.1, at 545 (1999).
[1890] See, e.g., Nielson v. Flashberg, 101 Ariz. 335, 338-39, 419 P.2d 514, 517-18 (1966) (referring to a "long line of decisions" and describing the elements of fraud as follows: "(1) A representation; (2) its falsity; (3) its materiality; (4) the speaker's knowledge of its falsity or ignorance of its truth; (5) his intent that it should be acted upon by the person and in the manner reasonably contemplated; (6) the hearer's ignorance of its falsity; (7) his reliance on its truth; (8) his right to rely thereon; (9) his consequent and proximate injury." (quoting Moore v. Meyers, 31 Ariz. 347, 354, 253 P. 626, 628 (1927)) (internal quotation marks omitted)); see also Revised Arizona Jury Instructions (Civil) Commercial Torts 24 (5th ed. 2013) (providing a jury instruction for common-law fraud); 3 Dobbs, Hayden & Bublick, supra note 907, § 664 n.1, at 643 (explaining that Arizona's nine elements parallel the shorter formulation in Restatement (Second) of Torts § 525 (1977)).
[1891] See Am. Pepper Supply Co. v. Fed. Ins. Co., 208 Ariz. 307, 309 ¶ 11, 93 P.3d 507, 509 ¶ 11 (2004) ("The clear and convincing burden imposed on fraud claims . . . stems from the societal importance of an untarnished reputation."); Dunlap v. Jimmy GMC of Tucson, Inc., 136 Ariz. 338, 343, 666 P.2d 83, 88 (Ct. App. 1983).
[1892] See Restatement (Second) of Torts § 525; cf. Caruthers v. Underhill, 230 Ariz. 513, 524 ¶ 45, 526 ¶ 53, 287 P.3d 807, 818 ¶ 45, 820 ¶ 53 (Ct. App. 2012) (discussing the materiality on claims of common-law fraud, breach of fiduciary duties, and securities fraud of soft information (e.g., projections, estimates, opinions, motives, and intentions) and stating (at ¶ 45) that "[t]he materiality of soft information depends on the facts of each case, the dispositive factors being 'the nature of the undisclosed information and its importance, reliability, and investor impact'" (quoting Thorne v. Bauder, 981 P.2d 662, 664 (Colo. App. 1998))).
[1893] Cf. Allstate Life Ins. Co. v. Robert W. Baird & Co., 756 F. Supp. 2d 1113, 1166 (D. Ariz. 2010) (applying Arizona law and holding that: "Where a defendant discloses some facts, but negligently omits others, that defendant is liable if its disclosures create a misleading or false impression."); Wells...
