Fraudulent Misrepresentation

A recent Supreme Court opinion explains what is and is not required to sustain a cause of action for fraudulent misrepresentation.
Butler v. Yusem had a long history of appellate review ending with the opinion of Butler v. Yusem, 35 Fla. L. Weekly S493 (2010).  The case resulted in two opinions from the Fourth DCA and two from the Supreme Court.
The case arose from a business partnership gone awry which resulted in a suit by Butler claiming fraudulent and negligent misrepresentation.  The trial court denied both claims based on what it called “lack of due diligence” on Butler’s part in failing to follow up on certain contract provisions as well as “ask the right questions” to a bank about his partner’s solvency.
The Fourth DCA concluded that the trial court had misapplied the term “lack of due diligence” for what was really “justifiable reliance” and on the basis of the tipsy coachman doctrine affirmed the trial court’s denial of relief on both fraudulent and negligent misrepresentation.
The tipsy coachman principle permits an appellate court to affirm a trial court’s inappropriate reliance on a judicial theory so long as the record reflects ample evidence to support the finding on an alternate principle under the theory that the right result was reached for the wrong reasons.
A unanimous Supreme Court reversed the Fourth DCA with instructions to review each cause of action separately to determine if justifiable reliance really applied to each count.
The Fourth DCA, upon remand, did not obtain additional briefing and merely entered a revised opinion stating it had indeed applied the tipsy coachman principle to each cause of action and again affirmed the trial court.
Upon review of the Fourth DCA’s second opinion, the Supreme Court reversed, explaining that the Fourth DCA had misconstrued its mandate by not analyzing whether justifiable reliance applied to either fraudulent or negligent misrepresentation.
The Supreme Court held that justifiable reliance is not an element of fraudulent misrepresentation.  At S494, the Court concluded:
Justifiable reliance is not a necessary element of
fraudulent misrepresentation.  As we have
stated, there are four elements of
fraudulent misrepresentation:  “(1) a false
statement concerning a material fact; (2)
the representor’s knowledge that the
representation is false; (3) an intention that
the representation induce another to act on it;
and (4) consequent injury by the party acting
in reliance on the representation.”  Johnson,
480 So. 2d at 627 (emphasis added).  This is
consistent with our prior opinion in Besett,
389 So. 2d at 998, holding that in an action
involving fraudulent misrepresentation, the
buyers did not need to allege that they had
investigated the truth of the misrepresentations
because for this claim, “a recipient may
rely on the truth of a representation, even
though its falsity could have been ascertained
had he made an investigation, unless he
knows the representation to be false or its
falsity is obvious to him.”  As we have
explained, “the policy behind our holding
in Besett is to prohibit one who purposely
uses false information to induce another
into a transaction from profiting from such
wrongdoing.”  Gilchrist Timber Co. v.
ITT Rayonier, Inc., 696 So. 2d 334, 336 –
37 (Fla. 1997).
Thus in the case of fraudulent misrepresentation the level of sophistication of the plaintiff is irrelevant as well as any purported negligence in failing to investigate the representations.  Unless there exists actual knowledge on the part of the recipient of the lack of truth of the representations, no amount of negligence on the recipient’s part is relevant.
The same is not true with regard to the theory of negligent misrepresentation.  At S494, the Court holds:
The same reasoning does not apply, however,
when a party transmits false information but is
not aware of the falsehood, giving rise to a
negligent misrepresentation claim.  See Gilchrist,
696 So. 21d at 337.  As to negligent misrepre-
sentation claims, although justifiable reliance on
the misrepresentation is required as an element
of the claim, justifiable reliance on a representation
is not the same thing as failure to exercise due
diligence.  One does not necessarily translate
into the other.  In fact, in Gilchrist, the Court held
that principles of comparative negligence
would apply to negligent misrepresentation
claims.  Id. at 339.  The Court recognized that
while a recipient of information will not have to
investigate every piece of information furnished,
he or she is responsible for “investigating
information that a reasonable person in the
position of the recipient would be expected to
investigate.”  Id.  Thus, a recipient of an
erroneous representation cannot “hide behind
the unintentional negligence of the
misrepresenter when the recipient is likewise
negligent in failing to discover the error.”  Id.
This opinion separates the distinction between fraudulent and negligent misrepresentation and establishes that justifiable reliance is not a necessary element of the former but that comparative negligence applies to the latter.

Originally published in December 2010

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