Plaintiffs must prove that they “reasonably relied” on fraudulent misstatements of material facts to win their cases. Defendants often argue (1) the plaintiff did not sufficiently investigate the truth of the misstatements; or (2) the misstatements were so unbelievable that no reasonable person could have relied upon them.
Failure to Investigate: The law does not protect people who failed to protect themselves. Or to quote an Illinois court “The law will not allow a person to enter into a transaction with eyes closed to material facts and then claim fraud by deceit.”
This is particularly true as the “importance” of the statement increases. Importance has two different meanings in this context. First, importance can mean whether the false statement was an essential one in the decision making process. Misrepresentations about ancillary facts are irrelevant. Attorneys must be prepared to inform their clients not only were they defrauded, they could not even discern which statements they should have relied upon when reaching their decision. On the other hand, defense attorneys get to tell their clients that their lies were actually harmless despite their intent to commit fraud.
Second, importance can mean the amount of money involved in the transaction. Courts rightfully expect parties to engage in more due diligence when the stakes are higher. It is hard to argue against the concept that the greater the financial impact, the less excusable a failure to engage in due diligence is perceived. In the same vein, courts look at the sophistication and level of advice the plaintiff received to determine what the proper level of investigation should have been.
The failure to investigate is particularly troublesome when (1) the failure is the failure to review publicly available information such as deeds and liens; and (2) there was ample time to investigate before making a decision. It is not easy to ask a client “did you really not look at the underlying records or documents?”
Unbelievability of the Statement: Defendants like to argue that “you should not have believed me–what I said could not have been true.” Ideally, this is not the lead defense in a defendant’s theory of the case but it can be an effective one. Ironically, many defendants use this defense by arguing that the plaintiff knew the defendant was a habitual liar and fraudster; therefore, the plaintiff should not have believed a word that was said. Plaintiffs cannot believe such an argument could be asserted, so be ready to answer them with jokes about the law not always being rational.
A more viable defense is that the statement was not believable on its face. Again, the level of knowledge and sophistication of the plaintiff is analyzed. For example, real estate investors who have bought property in certain markets are expected to have a working knowledge of pricing, costs of management, taxes, and other costs in those markets. Likewise, a baseball fan should know baseball cards for all-time greats are worth more than baseball cards for current utility players. Other times, the plaintiff is expected to have common knowledge and common sense at the time they took action in reliance on the false statement.
In short, the law’s position is what our grandparents told us: if something is too good to be true, then it is probably not true.
David Seidman is the principal and founder of Seidman Law Group, LLC. He serves as outside general counsel for companies, which requires him to consider a diverse range of corporate, dispute resolution and avoidance, contract drafting and negotiation, and other issues.
He can be reached at david@seidmanlawgroup.com or 312-399-7390.
This blog post is not legal advice. Please consult an experienced attorney to assist with your legal issues.
