Pleading Constructive Fraud Claims: Intent to Deceive Is Not Required

Constructive fraud, not to be confused with constructive trust, “is a breach of a legal or equitable duty, which irrespective of the moral guilt or intent of the party charged, the law declares fraudulent because of its tendency to deceive others, to violate public or private confidence or to injure public interest.” Rhoads v. Harvey Publications, Inc., 145 Ariz. 142, 148–49 (App. 1984) (citations omitted); see also Standard Chartered PLC v. Price Waterhouse, 190 Ariz. 6, 24 (App. 1996) (“Our case law distinguishes a fiduciary relationship from an arm’s length relationship… A fiduciary relationship is a confidential relationship whose attributes include great intimacy, disclosure of secrets, or intrusting of power.”). Unlike actual fraud, intentional dishonesty or intent to deceive is not an essential element of constructive fraud. Id; see also Green v. Lisa Frank Inc., 221 Ariz. 138, 155-56, ¶¶ 53, 54 (App. 2009) (contrasting actual fraud from constructive fraud).

When pleading constructive fraud, a complaining party must show 

1. A duty existing by virtue of a relation of trust between the parties; 
2. representations or omissions made in violation of that duty; 
3. reliance by the complaining party; and
4. injury to the complaining party as a proximate result thereof.

See Ferneau v. Wilder, 256 Ariz. 68, at ¶ 17 (App. 2009); see also Mullen v. Cogdell, 643 N.E.2d 390, 401 (Ind. Ct. App. 1994) (also requiring “the gaining of an advantage by the party to be charged at the expense of the complaining party”).

As noted above, pleading constructive fraud does not require a pleading of actual fraud. See Ironman Med. Properties, LLC v. Chodri, 836 S.E.2d 682, 692 (N.C. Ct. App. 2019) (fraud does not include constructive fraud unless an element of intent is present). It does, however, require a fiduciary or confidential relationship between the parties. Ferneau, 256 Ariz. at ¶ 17 (App. 2023). To establish a fiduciary and/or confidential relationship, the relation must be approximating a business agency, professional relationship, or family tie. See Rhoads, 145 Ariz. at 49. A breach of such duty is actionable at law irrespective of moral guilt. In re McDonnell’s Estate, 64 Ariz. 248, 252, 179 P.2d 238, 241 (1974); see also e.g., Ferneau, 256 Ariz. at ¶ 18 (director owed a fiduciary duty not to engage in conduct harmful to company); see also Taeger v. Catholic Family and Community Services, 196 Ariz. 285, 295, ¶ 30 (App. 1999) (adoption agency may have a fiduciary relationship with adoptive parents); Beatty v. Haggard, 184 S.W.3d 479, 487 (Ark. Ct. App. 2004) (vendor of a home’s failure to disclose settlement issues constitutes constructive fraud); Kirkpatrick v. Reeves, 22 N.E. 139, 140 (Ind. Sup. Ct. 1889) (seller made unqualified statements in order to induce another to make a purchase).

Further, representations may constitute constructive fraud when the party making the statements does not know their falsity but makes them recklessly when they have a duty to ascertain the truth before speaking. Rice v. Tissaw, 57 Ariz. 230, 237 (1941). Thus, lack of knowledge of the falsity of representation is not a defense to liability. See Beatty, 184 S.W.3d at 485 (it is said constructive fraud generally involves a mere mistake of fact); see also Rhoads, 145 Ariz. at 148–49 (where one places peculiar reliance in the trustworthiness of another based on a relation of trust and confidence, misrepresentations or concealment of facts bares grounds for liability).

Overall, under a constructive fraud theory, the law infers fraud from the relationship of the parties and circumstances that surround them. When evaluating potential claims, lawyers should consider whether a constructive fraud cause of action may exist when dealing with an opposing party’s dishonest conduct in the context of a fiduciary or confidential relationship. Doing so may provide clients a straighter line to liability, and a path around what is one of the more-difficult-to-establish elements for civil practitioners.