The Curious Case of Constructive Fraud

We’ve blogged before about three common types of fraud (1) deceit/affirmative misrepresentation, (2) concealment/nondisclosure, and (3) false promise/promissory fraud.  These common types of fraud usually require that the alleged victim prove intent to deceive or a reckless disregard for the truth.

But another type of “fraud” also exists that doesn’t require proof of fraudulent intent at all. It’s technically one way a fiduciary duty can be breached that’s treated like fraud–hence the name, constructive fraud. Constructive fraud can come into play whenever a special or fiduciary relationship exists under the law–that is, a relationship where one party places trust or confidence in another (fiduciary). Some classic fiduciary relationships include those between clients and their attorneys, stockbrokers, and real estate brokers (or agents). Corporate officers and partners also come to mind.

Whenever a fiduciary engages in conduct that misleads someone to whom he or she owes a duty and that conduct is a substantial factor in causing harm, a claim for constructive fraud can be found, even if the fiduciary never intended to mislead or deceive anyone. Constructive fraud provides for the same remedies as traditional fraud but is much easier to prove because no fraudulent intent is required.

If you’re a fiduciary, avoid giving rise to constructive fraud by disclosing the truth, the whole truth, and nothing but the truth to those to whom you owe a disclosure obligation. It generally is better to do so in writing too. And if you’re in a relationship with a fiduciary, exercise reasonable diligence when you receive and act on information. And no matter where you fall, get needed legal guidance before it’s too late.

Topics: Business Fraud