Constructive Fraud in Indiana

The Indiana Court of Appeals recently shed more light on what constitutes a “special relationship” necessary for a plaintiff to establish constructive fraud without proving the five traditional elements of constructive fraud. American Heritage Banco, Inc. v. Cranston, 928 N.E.2d 239 (Ind. Ct. App. 2010).

Indiana case law on constructive fraud is, quite frankly, a mess. There are at least two types of constructive fraud. One form of constructive fraud requires five elements. The five elements include:

(i) a duty owing by the party to be charged to the complaining party due to their relationship; (ii) violation of that duty by the making of deceptive material misrepresentations of past or existing facts or remaining silent when a duty to speak exists; (iii) reliance thereon by the complaining party; (iv) injury to the complaining party as a proximate result thereof; and (v) the gaining of an advantage by the party to be charged at the expense of the complaining party.

Strong v. Jackson, 777 N.E.2d 1141, 1145-6 (Ind. Ct. App. 2002).

The second form of constructive fraud relies on a confidential or fiduciary relationship. These cases do not necessarily list the five elements and do not explicitly require reliance. These cases require only a misrepresentation and not intent to defraud-“conduct which if sanctioned by the law, would secure an unconscionable advantage.” Lawshe v. Glen Park Lumber Co., 375 N.E.2d 275, 278 (Ind. Ct. App. 1978). See also Grubb v. Estate of Wade, 768 N.E.2d 957 (Ind. Ct. App. 2002); Lucas v. Frazee, 471 N.E.2d 1163 (Ind. Ct. App. 1984).

These two lines of cases and much dicta in Indiana case law imply that a plaintiff need not prove the five elements where there is a confidential or fiduciary relationship. As a result, constructive fraud has been used as a “catch-all” cause of action when a party cannot prove actual fraud, promissory estoppel, or breach of contract. Plaintiffs that cannot prove the five elements often argue that their relationship with the defendant constituted a “confidential or fiduciary” relationship such that the five elements are not needed. See Scott v. Boder, Inc., 571 N.E.2d 313 (Ind. Ct. App. 1991); Mullen v. Cogdell, 643 N.E.2d 390 (Ind. Ct. App. 1994)

In Cranston, the Court of Appeals limited the scope of the second form of constructive fraud by more narrowly defining what constitutes a “confidential or fiduciary relationship”. The court held the plaintiff and defendant did not have a “special relationship” that could support a claim of constructive fraud because the only evidence of any relationship between the parties was a prior transaction between the parties involving the sale, lease and re-purchase of office equipment, the sale or lease of a building owned by one party, and the prior transactions were mutually beneficial. Id. at 247. The Court noted that there was no evidence to support any finding of a special or fiduciary relationship between the parties “that would remove their dealings from an ordinary arms length business transaction”. Id. Moreover, the Court held that “a positive business experience, without more” does not necessarily “give rise to fiduciary obligations in future transactions between the same parties.” Id. citing Epperly v. Johnson, 734 N.E.2d 1066 (Ind. Ct. App. 2000). The Cranston court confirmed that when a plaintiff bases its constructive fraud claim on a buyer/seller relationship (and not a fiduciary relationship) the plaintiff must prove all five elements of constructive fraud. Id. at 247. Importantly, the court stated that no presumption of constructive fraud arises from a buyer/seller relationship. Id.

Erin Casper Borissov was an associate (now partner) at Parr Richey Obremskey Frandsen & Patterson. The statements contained herein are for information purposes only and are not to be considered legal advice and should not be construed to form an attorney-client relationship. If you have questions regarding this article, please contact an attorney.