To understand constructive fraud, you first need to know what constitutes actual fraud. While it can encompass a variety of actions, a simple definition of fraud is when someone intends to deceive another with the goal of obtaining financial or other valuable gain. This is considered to be a white collar crime.
Fraud can also occur in civil law when someone lies or misrepresents a material fact (an important and essential fact) with the intent to deceive that person, and the person is damaged as a result. The person doing the fraud must know they are making a false statement and the other person will need to rely on said statement.
One example is when a supplier misrepresents how much product they have to a potential buyer in order to get them to sign a supplies contract. This could amount to fraud that would nullify the contract.
Constructive fraud refers to a situation where conduct is treated like fraud under the law because it violates some type of public interest. This is generally only considered in civil cases. The tricky part is that constructive fraud applies even if the person did not intend to deceive another. For constructive fraud, one party only needs to gain some type of advantage over the other that they only could have obtained due to the circumstances.
If you are facing a charge of constructive fraud, then it is important to know the requirements needed for this to exist and possible legal consequences that can result.
What is Required For Constructive Fraud to Exist?
Some examples of actions that could give rise to constructive fraud are violations of fiduciary duties to another person, violations of the terms of a public and private trusts, and applying undue influence to get someone to do what you want.
For example, there is a fiduciary duty between a corporate officer and the corporation’s stockholders that could give rise to constructive fraud if one party uses the relationship to gain a benefit that causes harm to the other party.
However, constructive fraud will not always be available. The main factor a court will look for is whether there is a special relationship between the parties that is based on trust or placing confidence in another party.
Examples of this type of relationship are: 1) a product manufacturer and the consumer who purchases the product and 2) a trustee and the beneficiaries of the trust. If the traditional elements of fraud cannot be met because intent cannot be proved, then the presence of a special relationship will help establish constructive fraud.
The other factors that need to be present are the person committing constructive fraud took advantage of the special relationship to gain something beneficial. This could be money, business advantage, or something else of value. As a result, the other party must have suffered some type of injury. Examples include money damages or a hurt reputation.
What are Some Common Examples of Constructive Fraud?
As noted, constructive fraud generally only occurs in a civil context. Some examples of constructive fraud include the following:
- A product manufacturer failing to disclose product defects to consumers;
- A company purchasing a product carrying out a transaction for way under the product’s fair market value because it knows the other party is in a poor economic situation; and
- A stock broker continuing to trade stocks even though business should have ceased due to market conditions, which in turn caused harm to the client who owned the stock.
These examples illustrate the core concept of constructive fraud — that there does not need to be intent. Instead, it focuses on how a person’s actions can take advantage of someone else due to underlying financial circumstances and the special relationship between the parties.
What are Some Potential Legal Consequences of Constructive Fraud?
In most jurisdictions and situations, the consequences for constructive fraud are basically the same as you can get for committing actual fraud. In a civil case, this typically includes having to pay money damages that resulted from the constructive fraud. If any property was wrongfully transferred due to the constructive fraud, then the defendant may be ordered to return it or pay for the value if it is no longer physically available.
Remember that this list of legal consequences are not exhaustive and will depend on your state’s laws, the strength of your defense, and the court’s decision. The main defenses in a constructive fraud case will be that there was no special relationship between the parties or that the plaintiff did not suffer any damages.
How Can a Lawyer Help with Constructive Fraud?
If you are accused of constructive fraud, then you should contact a local business lawyer to represent you. A lawyer can look at the case and determine if there are any defenses available to get you out of the lawsuit. A lawyer can also help make arguments on your behalf to attempt to settle the case or get a lower award for damages.
If you believe that you were the subject of constructive fraud, then a lawyer can also be helpful to determine if you have a case. Since constructive fraud is not obvious and can be tricky to prove, a lawyer can analyze the evidence and advocate the best on your behalf in court. A lawyer can also increase your chances of a positive outcome and fair award for damages based on the harm that you suffered.