Real Estate Fraud 101: Litigation Basics
A real estate litigation lawyer in California must prove five elements in a real estate fraud lawsuit. Generally an attorney must prove the following elements: (1) a misrepresentation (such as a false representation, concealment or non-disclosure), (2) knowledge of falsity (called ‘scienter’ in legalese), (3) intent to defraud or induce reliance, (4) justifiable reliance, and (5) resulting damage. All of these elements must be alleged in the complaint.
First there must be the lie. It can be an actual lie (or ‘misrepresentation’) or it can be the concealment of a material fact relating to the property or the transaction. The easier real estate fraud case to prove would involve a document by the defrauding person that is simply not true. In a recent case we have been handling, a seller of a shopping center provided the buyer with a signed and certified rent roll that simply misstated the amount of rent the tenants were providing.
The misrepresentation can also be the knowing concealment of a material fact. In our shopping center fraud case, the seller had the tenants sign false tenant estoppel certificates. While the tenants should not have signed false certificates, the seller still presented the estoppels to the buyer and actively concealed the fact that he knew these certificates were false. This too is fraud.
The next element is knowledge of falsity. That is to say that the person allegedly committing the fraud must know that the information he is presenting is false. In our examples above, it would not be enough to prove to a jury that the rent statements or estoppel certificates were false. As plaintiffs we would have to prove that the seller knew they were false. We would show that these sellers were active in the management of the center, were involved in leasing the spaces, knew how much money they were receiving each month and had even reached agreements with the tenants to lower their rents.
The third element of real estate fraud requires that a plaintiff show that the defendant had an intent to defraud or induce reliance. This can be done by showing, for example, that the seller was trying to maximize the sales price by misrepresenting and concealing key facts. The seller did not tell the truth for fear that it would ruin the transaction. This element involves argument and a compelling story.
Misrepresentations do not rise to the level of fraud if the person hearing the misrepresentations does not rely on them. Therefore, the fourth element of a cause of action for fraud requires that the plaintiff have justifiably relied on the lies. In our shopping center case, the seller has cleverly admitted that his rent roll was false, that the estoppel certificates were inaccurate and that the operating statements he provided were untrue, but, he argues, he disclosed this all to the buyer before the close of escrow.
The point of this argument is that if the buyer knew these facts before he purchased the property, he cannot now sue for damages for fraud. If he knew, the buyer should just not have closed the transaction. The weakness in this argument, of course, is that it destroys the defendant’s credibility with a somewhat arrogant argument: “Sure, I lied and fabricated documents, but you knew I was a liar.”
Just as a real estate fraud case will not work if the plaintiff did not rely on the misrepresentations, it will similarly not work if plaintiff was lied to but was not damaged by those lies. In our shopping center case, the actual rental income turned out to be only about a third of the income that was promised. That is true damage. However, there are cases where the misrepresentation does not actually cause any true damage. While it is upsetting to have been lied to, the courts do not necessarily punish bad morals. They only award money if there was some actual damage.
For lawyers and real estate investors with potential real estate fraud lawsuits, make sure that all of these elements are present before filing your lawsuit. In California the absence of even one of these elements will destroy your case.