To sue a business for fraud in Virginia, a plaintiff must allege (and eventually prove) (1) a false representation, (2) of a material fact, (3) made intentionally and knowingly, (4) with intent to mislead, (5) reliance by the party misled, and (6) resulting damage to the party misled. When a business breaches a contract, it is not necessarily indicative of fraud. Broken promises are covered by the law of contracts rather than the law of fraud. Some courts have recognized, however, that if a corporation, at the time of making a contractually-enforceable promise, had no intention of ever actually making good on that promise, an aggrieved party could sue for fraud on the theory that the defendant impliedly misrepresented its true intentions.
This does not mean that a plaintiff can convert any ordinary breach-of-contract case into a fraud case. It would be all to easy to simply claim, any time a contract with your company is breached, and with the benefit of hindsight, that the party breaching the contract must have never had any intention of ever performing it. Under Rule 9(b), fraud claims must be pled with particularity so that well-meaning defendants who are unable to perform contractual obligations don’t suffer undue harm to their reputations or have to defend against frivolous lawsuits. To file a fraud complaint on the mere assumption that a breaching party must have committed fraud based solely on its lack of performance is inviting the court to dismiss the case for failure to state a claim.
Case in point: Thomas Lapham v. Trolley Pub of North Carolina, LLC, decided last week in the Eastern District of Virginia. The dispute arose out of Thomas Lapham’s investments in a “trolley pub” business venture. According to the allegations of the complaint, Lapham had discussions with Trolley Pub of North Carolina as well as a managing entity regarding investment in, and operation of, a pedal-powered trolley business to offer tours of bars in cities and towns across the United States. Lapham was promised ownership and intellectual property rights in exchange for certain capital contributions. When he determined that he did not receive the benefit of what he believed had been promised to him, he sued for fraud (among other claims).
In support of his fraud claim, he argued that at the time the promises were made, the defendants “had no intention to perform those promises.” What was missing from the complaint were the particulars that Rule 9(b) requires, i.e., a description of the time, place, and contents of the false representations, as well as the identity of the person making the misrepresentation and what he obtained thereby. While true that misrepresenting a present intent to perform can sometimes give rise to a valid fraud claim, what the court here found lacking was factual support for that theory. “Without any facts to support this legal conclusion,” the court held, “the claims must fail.”
In other words, for this legal theory to work, a plaintiff needs facts that demonstrate to the court that fraud is not only possible but plausible. The court must be able to draw a reasonable inference that the defendant never intended to perform the promise at the time it was made. It’s not enough to simply point to the fact that the promise was not performed.
Here, the court observed that “[t]here is no allegation of side dealings with other companies, conspiracies, embezzlement, misstatements of bank records, misrepresentations of profitability, improper auditing procedures, or any of the other telltale signs of fraud. To the contrary, the Complaint suggests that all parties intended for this business relationship to endure.” Without such evidence, the court held, if the defendants did not fulfill their promises, the plaintiff should turn to the law of contracts, not the tort of fraud.