Popular in Business Torts
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Date Created: 10/09/15
What are Business Torts Generic term to describe torts that arise in a business or economic setting Tend to cause businesseconomic losses The ConTort Problem 0 Tort law first year tends to deal with Personal InjuryProperty Damages 0 Business Torts deal with economic injurieslosses Tends to arise between the boundary of tort law and contracts 0 Economic loss ruleContort Doctrine There are doctrines that say you cannot bring both a tort action and a contractual breach action due to the allocation of liability in a contract wouldn t be respecting the bargain the made previously 0 Why do we care if it s characterized as a tort or a breach of contract 1 Attomev s fees with breach of contract but not with torts 2 Punitive damages are allowed with torts but not with contracts 3 Emotional distress and mental anguish is allowed in torts but not contracts 4 In breach of contract you have to prove material breach consideration look at privity statute of frauds parol evidence while tort causes of action don t have all these contract doctrines 5 Statute of limitations are shorter for torts than for contracts Usually 2 v 4 6 IntentionalUnintentional a Contract law has nothing to do with fault or punishment 7 Consequential Damages a Contract i Consequential damages available if injury foreseeable at the time of contract ii Consequential damages available if injury was foreseeable at the time of wrong doing Punitive Damages are not recoverable for a breach of contract unless the conduct constituting the breach is also a tort for which punitive damages are recoverable because torts allow punitive damages 0 Why are punitive damages not allowed in contracts The purpose of awarding contract damages is to compensate the injured party not to provide a windfall The position you would have been in had the other party performed sometimes a breach of contract isn t even bad different perspective 0 Why are punitive damages allowed in tort law For intentional or egregious behavior It s about society trying to proscribe behavior that is deemed bad Hopeful deterrence Dignitary Harm may cause emotional harm or demean the plaintiff eX libel Emotional Disturbance allowed in torts but not usually allowed in contracts Difficult to establish and measure Only if it was known that the breach of contract was likely to cause serious emotional disturbance eX proper disposition of dead bodies Tort Actions 9 Out of PocketReliance Damages 1 Allow for a Punitive damages b Mental anguishemotional damages Contract actions 9 Benefit of the BargaiMEXpectation 1 DO NOT ALLOW a Generally no recovery for punitive damages i Purpose of K damages is to make you whole again compensate not punish 1 No moral censure 2 No fault component ii No distinction between intentional and unintentional breach iii However 1 Punitive damages may be available if conduct constituting breach is also a tort for which punitive damages are available iv Generally no recovery for mental anguisl emotional harm 1 Unless a Breach causes bodily harm or serious emotional disturbance was particularly likely consequence of breach rstmt 353 above 2 Statute of Frauds a Classic concern of K law with no application to tort action Advantages of tort action over Breach of K action 1 No statute of frauds 2 No worries about parol evidence rule 3 No concerns about eXistence of consideration 4 No worries about contract being illegal per se 5 Potentially longer statute of limitations due to tolling only upon discovery of the injury depending on tort 6 Avoid limited liability language in a contract 2 7 Avoid contract defenses 8 May avoid necessity of joining parties to a joint contract in one action 9 Punitive damages may be available V Recipient may have a cause of action in both tort and contract Tort law is not limited to cases of physical injury Economic losses in negligence are allowed so long as you have personal injury or property damage eX car accident and you have to take off work lost wages What happens if someone commits negligence with no physical injury but pure economic loss 0 EX you have an accident and shut down the bridge so no one can cross it The day laborer can t get to his job site so the general contractor can t get his bid delivered on and on 0 EX Power Company shuts down power for tons of people and causes loss Pure Economic Harn Loss eco loss rule In the absence of personal injury or property damage a plaintiff cannot sue in negligence to recover economic losses 0 This is harm that costs the plaintiff money without causing him physical injury If the harm is pure economic loss the courts think more seriously that liability should be limited Arises when a person suffers pecuniary loss not consequent upon injury to his person or property 0 No duty owed to you These cases can be either 1 Negligent misrepresentation or misstatement causing economic loss and 2 Negligent acts causing economic loss two ships collided and released chemicals into the environment which suspended a lot of business around the area P s sued in negligence for pure economic loss 0 Testbank Rule reaffirm economic loss rule This is a bright line rule It is very predictable and easier to have a bright line rule in the business area 0 More restrictive than normal tort law which extends liability to foreseeable harms O Exceptions certain torts have been carved out of the Testbank rule as exceptions Such as negligent misrepresentation and fraud 0 Testbank is only a rule in negligence does not apply to intentional actions torts Does not only apply to admiralty cases or mass disaster cases 0 The economic loss rule applies to what kind of torts Negligence Testbank shifts the scope of liability Who can better protect themselves The victims in this case because of Insurance If plaintiffs could recover for pure economic loss the cost of transacting business would become so high because of potential liability so peoplebusinesses might leave the marketplace Liability insurance 3rd par 31 you buy insurance to cover you from 3rd parties who sue you because of something you did is unsure and hard to measure What about capping the insurance policy Well then you still don t know anything or what premium to charge due to total amount of potential exposure 0 Open ended scope of liability so insurance companies may decline to insure because they don t know how to write the policy Too many socially useful businesses would go out of business because they couldn t get insurance Even when the tortfeasor is not liable the court believes that first partv or loss insurance would cover the economic losses This is insurance you buy to cover damage to your own stuff EX home owners policy You can insure your own stuff which is not open ended and quantifiable you know what you re businesseconomic loss is worth 0 Getting insurance for the victim is not as hard as getting insurance for the defendants Designed to protect plaintiffs from these sorts of problems page 6g even though the pure economic loss bright line rule kind of screws over those injured Policy for Limiting Pure Economic Loss 0 Predictability If there were no bright line rule the court thinks that there would be no determinable measure on the limit of foreseeability and thus the court would have to make arbitrary judgments Frustrates business eXpectations Indeterminate liability Economic loss rule is a further restriction on what you can recover in negligence you can t even recover for all the foreseeable injuries 0 The pragmatic objection or the slippery slope physical harm tends to have some limited and defined effects but pure economic losses seem to be more of a cascading effect Open ended scope of liability Small negligent act potentially causes chain of economic loss 0 ndeterminate liability the idea that economic losses proliferate more than physical losses that cause injury The exact courses for physical injury may be 4 hard to predict but are limited Economic harm is not self limiting unending threat of liability 0 Lack of insurabilitv third partv insurance it is easier for a potentially harmed individual party to insure because they can more easily quantify their potential losses first party insurance allows you to cover your own stuff your apt burns down 0 Fostering Economic Activitv protection of businesses otherwise open ended liability will deter companies from offering the risky service Consider property damages ensuing from power outage Motivates victims to get insurance to protect themselves If businesses can t get insurance they go out of business 0 Criticism for limiting recovery of pure economic loss maybe some cannot get insurance or protect themselves insurance costs 33 Rule favors tortfeasors over victims Victims will not be made whole which departs from traditional tort principles of foreseeability and proximate cause 0 No deterrence the tortfeasor can go commit negligence and injure someone foreseeably yet not be liable 0 However you would still be liable to your business or your customers because of lost product people you caused property damage to or people you caused personal injury to A lot of business torts do not involve personal injury or property damage but negligence Business torts has carved out negligent tort exceptions with no P1 or property damages like negligent misrepresentation This course will be a lot of exceptions to the economic loss rule Misrepresentation is the name of a family of torts All misrepresentations are based on false statements Technically encompasses 3 torts of misrepresentation 1 Fraud or fraudulent misrepresentation intentional torts i Also known as deceit ii Tort you can bring in almost every context because we expect people not to outright lie in a business context or transaction 2 Negligent misrepresentation negligence in tort i Only shows up in certain cases where we believe you should use reasonable care generally in advice giving role 3 Innocent Misrepresentation Strict liability version i Minority recognize this ii Functional equivalent to breach of contract iii Very few permissible situations 0 Not every single false statement you make in a business setting is actionable The law tends to follow expectations In a business setting there is an expectation that there will not be bald faced lies told when negotiating You would expect them to use probable care but this is not always the case You cannot reasonably expect business people to tell the truth every single time on every topic so not much strict liability 0 However misrepresentation was born from whenever you pay for professional advice and the professional gives careless advice FRAUDULENT MISREPRESENTATION V NEGLIGENT MISREPRESENTATION Fraudulent Negligent Statement False statement of material fact OR False statement of failure to disclose a material fact material fact Omission Culpability Scienter intent to deceive Negligence duty breach causation harm Liability Who Intended for rt to rely or had reason Intended to supply can be It to expect highly foreseeable information to rt or limited constructive kno wledge more group actual knowledge potential liability required other approaches exist R2T 552 Reliance justi able reliance subjective Reasonable reliance reliance only required 1 don t subjective and objective have to investigate even if reliance reasonable P would 2 if A preyed Must act as reasonable rt on your vulnerability still justi able would even if not reasonable 9 Contributory Negligence 9 Contributory Negligence not is available as a defense defense but can still challenge the rt s reasonableness as part of their claim for a prima facie case Damages Bene t of the bargain expectation Out of pocket damages punitive damages reliance Defendant Fraud applies to anyone Courts USUALLY only apply negngnt misrepresentation to professionals but 552 is not explicitly limited to professionals as a type of misrepresentation Five Prima facie elements of fraud 1 False statement of material fact or failure to disclose a material fact based on a duty to disclose a Anyone can be a A in fraud action no privity requirement 2 Scienter or intent to deceive mental state 3 Speaker intended plaintiff to rely or had reasons to expect that the plaintiff would rely broader than NM 4 Fl Justifiably relies on the A s statement 5 H is damaged by his justifiable reliance a bene t of the bargain is the usual measure 6 Who can be a defendant a Basically anyone who makes a fraudulent statement in a commercial context 0 All misrepresentations are based on false statements 0 False Statement can be i Oral or written communication ii Physical Acts that convey words Actionsconduct can be just as misleading as words affirmative acts and count as statements Actions are the functional equivalent of words 1 EX someone covering a hole in the wall with a picture This is called fraudulent concealment iii Silence is not actionable unless there is a positive duty to disclose 0 What could constitute a legitimate fraud claim False Statements i Misleading Half Truth when you say something but you don t say everything The part that you didn t say makes what you did say misleading 1 Not necessarily a false statement rst 539 2 Stating that half truth which the maker knows or believes to be materially misleading because of its incompleteness is a fraudulent misrepresentation 1 EX this car was driven by a sweet little old lady but you don t mention that she drove it in demolition derbies 3 Defense against this may to be sell as is ii Outright false statement or representation Concealment l The buyer should seek information and ask the seller questions If the seller then lies or acts falsely then you can sue them for fraud Rst liability for fraudulent concealment 2 Two common instances of concealment active concealment of defect facts or knowledge Or preventing another party from making an investigation 1 Preventing the plaintiff from acquiring information as to the condition of the house No act of prevention reference to rest I iii Fiduciary or Confidential Relationship page 14 Materiality i Whether the fact would affect the recipient s conduct in the transaction at hand ii The matter is material if 1 a a reasonable man would attach importance to its eXistence or nonexistence in determining his choice of action in the transaction in question or 2 b the make of the representation knows or has reason to know that its recipient regards or is likely to regard the matter as important in determining his choice of action although a reasonable man would not so regard it iii Lying about immaterial matters is not actionable It is much harder to bring a fraud claim for failure to disclose than for making a false statement Swinton v Whitinsville Sav Bank seller knows house is infested with termites and doesn t tell the buyer Buyer finds out later and has an eXpensive repair and sues for fraud Seller purely failed to disclose a material fact Seller says he should win because there is no cause of action for fraud here Court agrees and rules that the seller was not liable and had no duty to disclose Swinton is a Caveat Emptor rule buyer beware 8 Policv Arguments for and against Swinton Rule no duty to disclose Against Swinton is not the right rule because a lay person might not know what to look for or how to find it Maybe the rule should instead be that you have to disclose all material information you know that the other party doesn t This would make things easier from the buyer s standpoint Seller has more information and should therefore be disclosing that information Buyer protection For It is the right rule because otherwise there d be a lot of information being thrown by both parties Perhaps sellers wouldn t investigate so they don t have to know Also buyers would then have to disclose all they know to the seller This is not judicially or economically efficient If the buyers are worried and want information then they should attempt to get it themselves Places onus on individual parties to do proper research and ask the right questions We need the Swinton rule to garner information Incentive the production of information needs to be profitable otherwise people won t do it Also re ects the social judgment that there is a difference between nondisclosure and affirmative fraud lying Is there any middle ground Look to who has better access to the information and then that party has to divulge But then usually the seller has the most information Buyers would still be protected Texas Real Estate Statute Exception residential real estate by statute has mandatory disclosure Legislature has forced you to disclose ipping of the Swinton rule This is a statutory solution When the information you have is the product of a costly search time eXpense you do not have to disclose it Information is valuable People who spend money on it can keep it to themselves Note 4 to Swinton affirmative act of concealment may constitute an act sufficient on which to base liability horse cribber and wind sucker example Ex stacking aluminum sheets so as to hide corrosive ones liability Misrepresentation concealment like the picture Affirmative act liability for nondisclosure silence page 14 Exceptions to Swinton 1 When is there a duty to disclose and silence becomes fraudulent 0 If you failed to disclose a fact termites that may justifiably induce the other to act or refrain from acting you are subject to the same liability as if you had represented the non existence of the matter there are no termites here 0 One who fails to disclose to another a fact that he knows may justifiably induce the other to act or refrain from acting in a business transaction is subject to the same liability to the other as though he had represented the nonexistence of the matter that he has failed to disclose IF BUT ONLY IF he is under a duty to the other to exercise reasonable care to disclose the matter in question a Treats silence as if it s a lie but only it you have a duty to disclose 2 One party to a business transaction is under a duty to exercise reasonable care to disclose a You have a fiduciary duty or some other similar relation of trust and confidence examples on page 6R b Matters known to you are necessary to prevent your partial or ambiguous statement from being misleading also in Rest 529 half l le is there a truth as a misleading affirmative statement a c You know through subsequent information that you made an untrue or Bury tn DISEIDSE 39 misleading previous representation that was when made was believed to be true once you ve started talking you can t stop or withhold changed information I Called the Duty to Update note that this duty ends the minute the transactioncontract is signed or finished d The falsity of the representation not made with the expectation that it would be acted upon if he subsequently learns that the other is about to act in reliance upon it in a transaction with him I If you make a statement that you know if false and then you find out that they will rely on it you cannot keep silent 10 e They are if he knows that the other is about to enter into it under a mistake as to them and that the other because of the relationship between them the customs of the trade or other objective circumstances would reasonably expect a disclosure of those facts have to have 3 facets before you have to disclose Facts that are assumed by the parties as a basispurpose for the transaction itself Not simply something which affects the value of the transaction A fact that goes to the basis or essence of the transaction and is an important part of the substance of what is bargained for or dealt with comments definition Extrinsic factors are not basic to transaction Illustrations I 3 A sells to B a dwelling house without disclosing to B the fact that the house is riddled with termites This is a fact basic to the transaction I 4 B mistakenly believe there is a highway planned and will enhance the value A knows this is not true but does not disclose This is not a fact basic to the transaction I Differences O 3 Subject matter in the house whereas 4 house but is more concerned with an extrinsic highway and has nothing to do with the house 0 3 Certain v 4 speculative If there is no relationship that would reasonably affect disclosure even if it s a basic fact then he doesn t have to speak Don t have to disclose strength of a legal claim Access to information it s more likely to be viewed as a basic fact that has to be disclosed if the other side doesn t have the ability to figure out the truth themselves 11 I Basic facts element is the restatement attempts to lead the common law by charting new territory Applied in instances of extreme unfairness tantamount to a swindle I POLICY may show an interest in ensuring that both parties understand the purpose of the transaction weak argument for efficiency I Texas has not explicitly adopted 55 1 False Stmt V Silence if a false statement then you don t have to worry about whether a duty was present and don t have to worry about whether it is a basic fact to the case 2 i Scienter is hallmark of fraud Basically when D makes a knowingly false statement or a knowingly ignorant statement Fraud requires a showing that the false representation was made either 1 Knowingly 2 Without belief in its truth or 3 Recklessly careless whether it may be true or false 0 gt This definition of scienter was given to us by Derry v Peek Peek relied on prospectus which was wrong invests in company which fails He claims they lied P has to prove that the D has scienter mental state elements in order to prevail in a fraud claim 0 You are liable if you made the statement and l knew it was false OR 2 if you didn t knowbelieve the statement was true 0 2 is a knowingly ignorant statement This means the court looks to means of knowledge EX if a person had shut their eyes to the facts or purposely abstained from inquiring into them then he could be held just as fraudulent as if he had knowingly stated that which was false because he did not have an honest belief o A misrepresentation is fraudulent if the make a knows or believes that the matter is not as he represents it to be b does not have the confidence in the accuracy of his representation that he states or implies or c knows that he does not have the basis for his representation that he states or implies 0 Moll s Example Abby owned a house for 2 years Abby tells Bob the prospective purchaser the roof was replaced three years ago This was false Is there scienter under these hypos according to PeekRestatement 526 12 0 She knew the statement was false Liable under both 526a and Peek 1 0 When she made the statement she believed that it was false but doesn t know Scienter under 526b and Peek 2 0 She neither knew that it was false nor believed that it was false She knew that the roof had been replaced but had no idea when the replacement occurred Scienter under 526b no confidence in the accuracy of her statement and Peek 2 0r 3 no belief in its truth careless of whether it may be true or false 0 She believed that it was true but she doesn t know for sure whether it occurred three years ago Scienter under 526b doesn t have confidence of accuracy no firm conviction Not really scienter under Peek because she has an honest belief that it s true But you know that you re not certain so perhaps it could fit under Peek a O Abby states I believe that the roof was replaced three years ago and she believes this Abby knows Bob thinks the basis for her statement is because Abby talked to the former owner but Abby just heard from some reliable neighbors Scienter under 526c implied basis for statement not accurate it is implied that the owner told her so she knows the basis for her statement is false So arguably scienter under Peek a ii A is liable if there is an intention to mislead deceive regardless of whether there is an intention to do harm iii Scienter and motive are different scienter is not a bad motive l Scienter is the intent to deceive or reckless action constituting deception 2 Motive is concerned with why you did something an intent to cause harm l Motive is relevant with regard to punitive damages BUT not relevant with regard to liability inquiry iv Knowledge of falsity is not essential 1 It is enough if A believes the representation to be false v Testing one s belief in Truth jalsity of a statement 1 Whether a reasonable man in the same situation as A with A s knowledge and means to knowledge might well believe what the A claims to have believed and consider that representation as substantially true 13 l Unreasonableness of a A s belief may signal that the A probably didn t not possess such a belief i Still subjective test vi When It Is Not Fraud 1 Making a false statement that the actor believes is true 1 No scienter eXists 2 Negligently making a false statement 1 Must be at least reckless EX When the P knows that the D could not have any definite knowledge no justifiable reliance because it s not reasonable for the P to have relied They obviously knew something was wrong with what the D was saying 3 D INTENTED THAT P RELY ON STATEMENT OF MATERIAL FACT OR HAD REASON To EXPECT P WOULD RELY 0 Reliance generally Usually must show subjective reliance and objective reliance O Subjective reliance Actual in fact reliance by the H on the misrepresentation 0 Objective reliance Whether reasonable person would have so relied 0 Materiality Best to think of materiality as separate element of the tort Cannot rely on something that is not material 0 Liability for fraudulent misrepresentation p 21 0 One who makes a fraudulent misrepresentation is subject to liability to the persons or class of persons does not have to be specific person whom he intends or has reason to expect to act or refrain from action in reliance upon the misrepresentation for pecuniary loss suffered in the type of transaction in which he intends or has reason to eXpect their conduct to be in uenced O Actor has purpose or desire to bring about a certain result A result is intended if the actor either acts with the desire to cause it or acts believing that there is a substantial certainty that the result will follow from his conduct 0 Reason to expect Highly foreseeable I Reasonably foreseeable is insufficient has to be more because virtually any misrepresentation is capable of being transmitted or repeated to third persons 14 0 Maker of misrepresentation must have information that would lead a reasonable man to conclude that there is an especial likelihood that it will reach those persons and will in uence their conduct Class of persona actual identity not required Someone who A intended to rely or someone that the A had reason to eXpect to rely highly foreseeable 0 Type of transaction limitation Loss must occur with respect to type of transaction contemplated Small differences in transaction details are allowed There are no definite rules stated but one must look to each case and whether the transaction that in fact results is sufficiently similar to that which the defendant has reason to eXpect to hold him responsible for the loss incurred in it page 201 developer bought land sold to builders who sold houses to homeowners Developer knew of saline condition of the soil which causes nothing to grow Purchasers brought action for fraudulent concealment 0 Fraud does not require privitv But the D in a fraud claim is liable to anybody or class of persons whose reliance they intended to induce or to anybody whose reliance they had reason to eXpect 0 Jenkins Rule when seller has knowledge of defect not within reach of reasonable diligence by buyer the silence and failure of the vendor to disclose constitutes actionable fraudulent concealment This is slightly different than what the court says restriction is that the buyer couldn t discover the defect themselves 0 The court then mentions facts basic to the transaction interpreted as what the subject matter of the transaction is and whether or not it is defective In this case yes 0 6th ELEMENT If you premise a fraud case based on silence you also have to establish a dutv to disclose This can be much harder 0 It would be easier in this case if it s based on affirmative acts D developed the land in a manner that it was impossible for a purchaser to discover the presence of the salt area same as the picture over the hole in the wall particular to fraudulent misrepresentation p 20A and H The recipient of a fraudulent misrepresentation can recover against its maker for pecuniary loss resulting from it if but only if i He relied on the misrepresentation in acting or refraining from action and ii His reliance is justified 15 0 One who fraudulently makes a misrepresentation of fact opinion intention or law for the purpose of inducing another to act or to refrain from action in reliance upon it is subject to liability to the other in deceit for pecuniary loss caused to him by his justifiable reliance upon the misrepresentation Has to meet two components objective a reasonable person would have relied and subjective that you the actual P did in fact rely Williams v Rank amp Son Buick Inca saw an ad for a car that had ac salesman repeated representation and P got to test drive it for an hour and a half P buys the car never pushed the button that said ac then later discovers there is no ac so he sues for fraud wins at the trial level 0 P loses on appeal Why If the falsity of the statement is obvious then you can t rely on it I This shows there is no objective reliance 0 What was so obviously false Court says it s because it was SO easy to figure out that it was false the mere ip of a knob would show there was no ac Obviously false because it was so easy to detect i However if he was driving the car when it was March in Michigan the air would have seemed cold even without NC The recipient of a fraudulent misrepresentation is not justified in relying upon its truth if he knows that it is false or its falsity is obvious to him i Comment what is obvious Means it can be detected through your senses If a mere cursory glance would have notified you of the falsity ii You can t be blind to something that is right in front of you There is NO Duty for the P to Investigate it is not defense to a fraud claim that the P should have figured out that the D was lying by investigating even a minimal and simple one 0 You don t have to investigate even if it s easy but under 541 if you can see smell or hear it then you can be held to it 0 Rest 540 seems to be saying you don t have a duty to investigate when you are the receiver of a fraudulent statement so long as there is nothing that raises suspicion Red Flags 0 When suspicions are raised an objectively reasonable person would look into it But what happens if the P in a fraud case does investigate 16 0 D could argue that the P then should have known If they should have known as a reasonable person then they could not have objectively relied Also suggests that they should have subjectively known if they found out what the problem was They should be held responsible for that discovery 541 if it s obvious to them own investigation could count as being obvious 0 If you did do your own investigation it implies that you DID NOT rely on the defendant s statement Older cases say that it is a perversion to claim that you relied on both your own investigation and D s misrepresentation 0 Is this still true Not really it s called partial reliance they are seeking verification and making sure for themselves 0 Current When you see the P doing their own investigation that is evidence of them not relying on the D s statements but it is not conclusive Simply goes to the weight of the evidence one who justifiany relies upon a fraudulent misrepresentation is not barred from recovery by his contributorv negligence in doing so 0 Contributory negligence is not a defense to fraud 0 Does not say reasonably rely What is the difference J ustifiably requires objective and subjective J ustifiably allows the plaintiff to act in an objectively unreasonable fashion However 99 of the time reasonablyjustifiable O EX when you don t investigate even though a reasonable person would have 0 When D preys upon a known deficiency of the P which makes the P incapable of conforming to the conduct of the normal man I A is a believer in spiritualism B purports to be a medium B tells A to buy certain worthless stock using fake dead husband A may be acting unreasonably but B knows and is taking advantage of that fact lustifiable reliance is a lesser standard than reasonable reliance only because it allows for two exceptions l H does not have a to investigate even if reasonable P would or 2 If A preyed on H s vulnerability or gullibility H may still be justified in his reliance EVEN though it was NOT reasonable iii Standard is justifiable so that even a gullible person may recover in the event of a fraud client can act a little dumber recipient of fraudulent misrepresentation of fact may be justified in relying upon it although he believes the maker to have an adverse interest in the transaction 17 0 covers pecuniary loss resulting from a fraudulent misrepresentation and not physical harm resulting from the misrepresentation which is in 0 The maker of a fraudulent misrepresentation is subject to liability for pecuniary loss to another who acts in iustifiable reliance upon it if the misrepresentation although not made directly to the other is made to a third person and the make intends or has reason to eXpect that its terms will be repeated or its substance communicated to the other and that it will in uence his conduct in the transaction a Traditional CONTRA CT damages 1 Damage Calculation Difference between what was promised and what was actually received i Same Formula used to assess damages in Contract Cases Seek to compensate Tl as if transaction had been carried out as represented A bit unusual for tort damages Bene t of the bargain damages usualy result in greater damages Go beyond making you whole l39l normally prefers benefit of the bargain damages i EXCEPTION 1 A bad deal which was not going to be fruitful Some Jurisdictions allow us to choose between benefitof the bargain damages or outofpocket damages Texas Why would you ever want reliance rather than expectationbene t of the bargain i If you struck a bad bargain you don t want to handle it using expectation damages and you would prefer reliance damages Traditional TORT damages 5 Damage calculation Price you paid value of what you got Recoupment of actual losses i More consistent with tort law 6 Situations when bad bargain took place OOP damages could be preferred most of the time BOB will be better 18 lf you pay 62500 for a piece of land i The value actually ends up being 27500 ii The value as represented was 50000 1 Bene t of the Bargain 50000 27500 22500 2 Reliance Damages 6250027500 35000 Consequential damag damages that were foreseeable at the time of the tortuous conduct Punitive wanton callous disregard even if you meet prima facie elements of fraud does not mean you can get punitive damages 0 ln fraud cases punitive given if you intended to HURT 0 Much broader than NM Basically anyone who makes a fraudulent statement in a commercial context Minion law and intention Applicable to both Fraud and Negligent Misrepresentation The distinguishing feature between Fraud and Negligent Misrepresentation is scienter Negligent Misrepresentation is an exception to the Testbank rule that there can be no recovery in a negligence based action for pure economic loss Negligent misrepresentation is most always associated with professionals accountants auditors attorneys etc 1 Every jurisdiction will allow a suit against an expertprofessional for NM 2 Expectation that professionals will speak with care 3 Professionals usually have measurable standard of performance Published standards of conduct exist 0 Many jurisdictions do NOT recognize NM action against laypersons in arm s length transactions 4 For arm slength transaction there is no baseline standard of conduct Justification for limiting NM to professionals 5 Texas likely would allow NM action against laypersons 1 False statement of material fact or failure to disclose a material fact 2 Negligence lower level of culpability 3 Speaker intended to supply information to H or limited group of which the H is a member who can be a H or knew that recipient did 4 J ustifiable reliance closer to reasonable reliance on the information 19 5 H is harmed damages usually out of pocket damages 6 Generally limited to A professionals who can be a defendant 552l anybody who gives information in business or any transaction in which they have a pecuniary action much narrower class than fraud You can always bring a Negligent Misrepresentation Action against someone resulting in physical harm or property damage This is broader liability than just pecuniary loss 0 Ex someone tells you it s safe to step on the ladder but it s not and you get hurt 0 Ex Truck driver motions that you can go around but you try and get in a wreck because someone else is coming that you couldn t see What about Negligent Misrepresentation that just causes only economic loss Generally not allowed to recover Similar to the economic loss rule Rationale who can best protect themselves by contract Victims trustbank Expectations in a business transactions expect them not to lie but can t really expect everyone to not be negligent When do we expect people to be careful when they are speaking When they are hiring experts for their professional advice Paying them for their representations lawyer accountant and engineers Seems like an exception to the economic loss rule Courts have been very careful by not allow it for economic loss only because there would be an unending stream of liability A lot of these some from accounting errors client prepares financial statements they ll bury fraud and accountants will come and look and bless the statements The client will then show the statement to banks and investors They will then blame the accountants because they relied on their approval Client goes bankrupt so the banks and investors will try and get from the accountants F Lots of cases have developed in the area of negligent misrepresentation regarding accounting mistakes Four Approaches Ultramares Near Privitv Rule Credit Alliance Citizens 552 The court held that accountants are immune from negligence suits prosecuted by third parties with whom the accountants are not in contractual privity The ultramares strict privity rule was recently modified in to expand relief to third parties enjoying a relationship to the professional accountants that sufficiently approaches privity The law right now holds accountants liable to nonclients but only to the extent that the accountants know that their financial reports are to be used for a particular purpose However some states hold 20 accountants liable for their defective work product to the extent that damages incurred by nonclients are reasonably foreseeable The represents the moderate View allowing only a restricted group of third parties to recover for pecuniary losses attributable to inaccurate financial statements This restricted group includes third parties whom the accountants intended to in uence and those whom the accountants knew their clients intended to in uence Accountants Love Ultramares Medium Love Credit Alliance Accountants Hate Citizens Bank Medium Hate Restatement 552 Third party must be in privity with negligent actor in order to impose liability Policy i Without privity limitation accountants would be eXposed to liability in an indeterminate amount for an indeterminate time to an indeterminate class 1 Liability would be much too wide ranging Testbank problem Wt ii on here rom does not re com6 under Ultramares It is not just reasonably foreseeable must meet the requirements Near Privity Test i To hold accountants liable to nonparties II must show these requirements 1 21 a Requires some sort of interaction between accountantprofessional and nonprivity 3rd party i Favors actual knowledge of the party over constructive knowledge b Direct communication meetings personal representations specific arrangements giving a copy to 3rd party ii Last element seems to be super uous boot strapping 1 Less strict than Ultramores but still restrictive 2 Most likely this case overrules Ultramares but didn I wont to overth overrule Cardozo 3 Third element just there so we can be comfortable saying that the accountant KNEW what they were getting into Glanzer opinion Where a plaintiff intends reliance on information directly transmitted it creates a bond so Closely resembling privity that it is in practical effect virtually indistinguishable therefrom Rationale for near privitv i Assumption of risk auditors possess some degree of knowledge that there is reliance associated with their audit and possible exposure Where they assume the risk they should be liable for it 1 As long as there is no linkage you can know about them and the purpose and be fine 2 Accountant should efficiently address potential riskliability How to Avoid Risk Accountants can avoid the risk if they want by not doing that specific audit When they know the party and the purpose and have a link they can be held liable They could Charge a higher price or get more insurance because there s greater exposure Criticism Not fair to expose auditor to untold amounts of liability i Clients are generally more culpable than auditor 1 Clients provide the faulty financials either intentionally or negligently 22 Credit Alliance Corp page 33 Ps brought suit against D for failure to conduct investigations in accordance with proper auditing standards when Ps relied on D s financial reports in lending money to another party Court ruled in favor of the Defendant HELD there was no privity and the Defendant could not have known that a form report which it presented to its client would eventually be relied upon by Plaintiff European Am Bank v Strahs amp Kaye page 33 the bank brought suit against D for exaggeration of another company s assets which P relied on in lending money to an insolvent company Court rules in favor of the Plaintiff on the grounds that Defendant knew or should have known that Plaintiff was relying on their statements HELD the Defendant knew it was preparing reports that would be used to obtain credit and they were liable to Plaintiff to the extent of their reliance NEAR PRIVITY Credit Alliance HYPOS 0 Assume client hires accountant and says I need you to audit my financial statements Accountant does and it is later shown to some investor who in reliance makes a bad loan Client fails and accountant was negligent Investor wants to sue accountant 0 Under the credit alliance test the investor cannot successfully bring a negligent representation suit The accountant was not told the purpose of the audit no known party they did not know who the client was going to show it to no known purpose and there was no linking conduct to the investor 0 Add 1 need to get a loan Still not neg rep suit because accountant does not know the party of have linking conduct 0 Add 1 need you to prepare an audit statement for me so I can go get a loan from Wells Fargo 0 Known purpose yes Known party yes Conduct linking accountant to Wells Fargo apparently yes I Minimal amount of linking conduct you could attempt to make the argument that they were told it s for the use of Wells Fargo so they were aware and assumed the risk It does not take much to satisfy the third element f Citizens Approach Reformist Approach Severe Minority View No privity requirement as long as foreseeable auditor can be liable This is much broader and confers a lot more liability on accountants Completely removes U ltramares restraints 23 Accountants are no different than anyone else who makes a negligent representation UNLESS court decides that recovery should be denied as a matter of public policy such as l Injury too remote from negligent act 2 Injury is wholly out of proportion to the culpability of the negligent tortfeasor 3 In retrospect it appears too highly extraordinary that the negligence should have brought about the harm ie not reasonably foreseeable 4 Allowing recovery would place too unreasonable a burden on the negligent tort feasor 5 Allowance of recovery would be too likely to open the way for fraudulent claims 6 Allowance of recovery would enter a field that has no sensible or just stopping point 1 Indeterminate liability language similar to Testbank Policy Rationale Who benefits Protection for innocent 3rd parties relying on the accuracy of the financial statements Deterring accountants from negligent practices 1 Unless liability is imposed third parties who rely upon the accuracy of the financial statements will not be protected Unless an accountant can be held liable this negligence will not be deterred BUT other reasons eXist for accountants to act prudently Moll points out that there are other reasons for accountants to not want to be negligent their business reputation Without imposition of liability cost of credit will go up as banks pass cost to consumer 1 Banks spend more on more credit reports Accountants can spread the risk through liability insurance 1 bc risk is not quantifiable and often speculative it is difficult to ascertain a premium 24 a how to you write a policy to cover reasonably foreseeable damage 2 Costs will get passed down to the creditors seeking the audits Problems with Citizen s Bank i Increased auditor liability might lead to a decrease in availability of audits decrease in lending ii Different costs to creditors iii Liability out of proportion to fault 1 Client retains primary control of financial reporting and may be true fraudulent actors 2 Difficult to quantify liabilitys iv Massive Liability imposed for a negligence tort V Obstacles to attaining Insurance Citizens State Bank v Timm Schmidt amp Co page 438 Accountants may be held liable to third parties when it is foreseeable that they will rely on the accountant s reporting Court rules that the absence of privity alone should not bar negligence actions by relying on third parties against accountants Texas intermediate aDDroach Rule liability attaches to one who in the course of his business profession employment or in any other transaction in which he has a pecuniary interest fails to exercise reasonable care and supplies false information to another for guidance in a business transaction Liability attaches when i Loss is suffered by the person or one of a limited group of persons for whose benefit and guidance he intends to supply the information or knows that the recipient intends to supply it and ii He intends that information to in uence such persons in a certain transaction or a substantially similar transaction iii Basically unintentionally supplying false information in a transaction in which they have pecuniary interest How to qualify as 11 or A i A must to supply info to 11 or A lltnew client was going to give it to II 1552121ng 25 1 Transactions you intended to in uence or knew the client intended to in uences 2 Compare with Credit Alliance near privity don t care about what A s intention is just what he knew party or person This is in the course of business profession employment or in any other transaction in which he has a pecuniary interest 1 Pecuniary interest usually found if information is given in context one one s business employment or profession a Restatement comment suggest pecuniary interest modifies the first part business profession employment b Not everything done in course of profession or employment is actionable bc possibly no pecuniary gain Has to be monetary gain 0 BUT court says giving business advice is suf cient indication he has a pecuniary interest even without consideration but not conclusive 2 Pecuniary interest may be indirect a Giving info in the course of your business is good evidence of pecuniary interest but its not conclusive Easily blurred line which may be argued both ways 0 It is unclear how attenuated the interest can be i Ex give advice business card 3F iii Negligent misrepresentation must be part of Substantially Similar transaction 1 Whether departure from contemplated transaction is so major and so significant that if cannot be regarded as essentially the same transaction a Difference in the loan size or amount b Different purpose than initially represented to the accountant 0 Ordinary business practices and attitude taken into account d Whether the departure from the contemplated transaction is so major and so significant that it cannot be regarded as essentially the same transaction 2 Notice requirement to the auditor iv 1 Does not have to be a specific party no exact identity required 2 Limited group a A limited group has got to be less than every single person in the universe Group must be defined as something that excludes b Restatement comment suggests banks is a limited group Illustration 7 Has to have some kind of charter limiting 0 Potential Investors is NOT a limited group 5th Cir Everyone with a dollar in their pocket can be an investor this is not a limiting group 26 d Illustration 4 1000 prospective purchasers limited group and auditor subject to liability 60 3 Compare with Credit Alliance near privity rule which requires you know the exact identity of 11 v M of 11 groupindividual and transaction a Actual knowledge of group and transaction or substantially similar transaction i Constructive knowledge insufficient ii Customary use insufficient iii Ever present possibility of repetition is insufficient b Not liable to every foreseeable consumer of financial information 2 When does professional have actual knowledge a or b a Actual knowledge is measured at point of inception of the arrangement between accountant and client 0R i Risk assessed at time of signing the contract ii When you sign the contract with the client when you ve had time to deliberate and set prices get insurance and how to staff iii Clause if material changes occur then accountants reserve the right for different time of delivery with different costs b Liability attaches when content of audit is published not by the foreseeable path of harm envisioned by jurists years after an unfortunate business decision i Molls does not like this rule dicta bc of changing conditions that do not let auditors assess risk Illustration 14 on page 55 accountant A not liable to Corporation C for faulty financial statement If you change the risk assessment of the transaction it is not fair to hold them liable for the business transactions of the other party ii EX 50000 loan versus a 50 million loan There were other things the accountant perhaps would have done to protect themselves Liability would have been out of proportion to fault Nothing in 552 limits negligent misrepresentation to professionals than Credit Alliance near privity rule 6 bc broader class of potential Us Policy i Confront the risk Allows auditorsprofessionals to address risks and imposes liability commensurate with those risks 27 1 Makes auditor aware of potential exposure notice and then can decide based on magnitude of exposure if he wants to conduct the audit ii Extends liability without the harsh effects of the Citizens Bank Rule no privity should be foreseeable 1 Limits liability to specific persons or limited groups iii Does not promote exclusive reliance on auditors 1 Reasonable investors should be encouraged to conduct some investigation deeper than just auditor report 2 Investor may commission its own audit or establish direct communication with the auditors 3 Auditor is not an insurer for bad investments iv Companyclient is actually responsible and engages in fraudulent activity 1 Books can be cooked very well fraud tough to detect 2 Client is real wrongdoer possesses primary responsibility for scandal 3 At best accountant is secondary watch dog V Easy for 3rd party to lie and say they relied solely on the audit report in decision making process when actually it was one of many factors Vi Burdening auditors will effect economic development they will avoid businesses with high risk of failure like start ups need protection so they can go in and conduct audits Negligent misrepresentation under the restatement or any of the approaches is not ONLY applicable to accountants It can be brought against anyone who gives information in a transactiondeal in which they have a pecuniary interest First National Bank of Commerce v Monco Court decides to use section 552 when deciding whether that section contemplates an accountant s actual knowledge It is not enough that the misinformer merely knows of the ever present possibility that the information will be repeated to others who will rely upon it 0 Loss caused by an inaccurate financial report is limited to persons for whose benefit and guidance accountant intended to supply the information or to whom accountant knew that client intended to supply it The account must have had ACTUAL knowledge not constructive Bily v Young Court concludes that an auditor owes no general duty of care regarding the conduct of an audit to persons other than the client An auditor may however be held liable for negligent misrepresentations in an audit report to those who act in reliance upon the misrepresentations in a transaction which the auditor intended to in uence in accordance with the rule of rest 552 Additionally an auditor may also be held liable to reasonably foreseeable third persons for intentional fraud in the preparation and dissemination of an audit report Citizens State Bank Rule 28 0 Bily Court says that liabilitv would be out of proportion to fault if you allow the reasonable foreseeability test 0 Also an audit report is only one thing that lenders look at and not solely the basis of the loan 0 Requiring lenders to get their own audit report is a good thing and requiring them to diversify is a good thing People should protect themselves i ii iii i1 No reason that 552 should not apply to attorneys Courts generally acknowledge that representation is not reliable when it occurs in adversarial context Inevitably this affects attomey s advocacy for their clients divided loyalty to 3rd parties 1 Rule imposes a duty to non clients I There will be instances where duty to non client and fiduciary duty come into con ict b Some argue lawyers are different bc supposed to zealously advocate for client 2 Communications to non clients will affect representation of client Lawyers can limit liability through disclaimers Example of something a third party might rely on from a lawyer an opinion letter normally for discreet transactions and are usually addressed to a particular person and are stale pretty quick There isn t really a similar cascading liability for lawyers like there is for accountants ATTORNEY EXAMPLE iii Your client negligently tan a red light and hit a pedestrian Client asks you to try and settle the case You call the pedestrian who isn t represented yet and they say well what do cases like this typically settle for You tell them around 100000 and you believe that However you were wrong and it was really around 250000 a material amount You settle and then they find out and sue you 0 What are the lawsuits chances under 552 Seems to be allowable under 552 No pecuniary interest because the pedestrian isn t paying you however you have an indirect pecuniary interest because it s part of the case your client is paying you for The pedestrian is a person you intended to give guidanceinformation to McCamiSh v Appling Interests Does the absence of an attorney client relationship preclude a third party from suing an attorney for negligent misrepresentation under 552 NO the court sees no reason why 552 should not apply to attorneys 0 The general rule is that persons who are not in privity with the attorney cannot sue the attorney for legal malpractice 29 0 Under the tort of negligent misrepresentation liability is not based on the breach of duty a professional owes his or her clients in priVity but on an independent duty to the nonclients based on the professional s manifest awareness of the nonclient s reliance on the misrepresentation and the professional s intention that the nonclient so rely 0 Section 552 is the most widely adopted standard of negligent misrepresentation in attorney liability cases and economic negligence cases generally NM to lawyers and other professionals bc they have standards of care which you can use to measure their actions by and determine if their conduct was negligent 1 Only Professionals Weisman argues failure to exercise due care only creates economic loss and you need more to impose tort liability 2 Everyone 552 does not limit to scope to professionals Available in arms length transactions i Facially 552 applies anywhere the requirements are met but whether court will actually accept its application is unclear Moll thinks it should be limited to professionals for policy reasons bc there are clear standards we can hold them to Weisman v Connors Defendant must owe a duty of care to the plaintiff in order to be held liable for negligent misrepresentation 0 Even without a contract Court thinks the jury could have found from the eVidence that the circumstances under which the two men came together for precontractual negotiations created a sufficiently close nexus or relationship as to impose a duty on Weisman not to negligently make statements about the present or past facts regarding the business Winter 1 GP Putnam 5 Sons Ps ate mushrooms in the woods according to book they read and relied on supposed to tell you if they re poisonous or not They get poisoned and have to have a liver transplant They sue the publisher for negligent misrepresentation not saying the publisher did it on purpose but that they were careless 0 How is this different Physical injury not economic loss 0 Court looks to the gentle tug of the first amendment 0 The court rules that a publisher does not have a duty to act as a guarantor for the contents of all books that it publishes 0 What would happen if they made the publisher liable Would have a significant effect on what is written and published would constrain free speech and any how to books for fear of liability They would either not publish certain books or just charge a whole lot 0 Page 74D basically when you make negligent statements that lead to physical harm or property damage when the P reasonably relies on them then you are liable 3 O O Argument for why 311 would not apply Publisher did not give the false information the author did Publisher just took the manuscript put it in a cover and reproduced it 0 Could Ps just go after the author Yes 311 would apply to them if they gave false information negligently But it s likely the court wouldn t uphold it simply for policy reasons Negligent Misrepresentation amp l Tort law is essentially state common law a Always policy reasons to limit or restrict common law torts 2 First Amendment b Concerns about holding publishersauthors liable for negligent misrepresentations c Chilling Effect i Restricting dissemination of ideas for fear of broad liability 3 No duty for publishers to investigate content of publications 0 Reasonable reliance includes i Subjective reliance actual in fact based on the misrepresentation ii Objective reliance whether reasonable person would have so relied 1 If 11 acts unreasonably then H loses bc prima facie elements of case are not met Tort fails 0 Materiality Best to think of materiality as separate element of the tort cannot rely on something that is not material 0 The recipient of a negligent misrepresentation is barred from recovery for pecuniary loss suffered in reliance upon it if he is negligent in so relying not fraudulent contributorv negligence 0 When the D is negligent not fraudulent the plaintiff is held to the standard of care knowledge intelligence and judgment of a reasonable man even though he does not possess the qualities necessary to enable him to conform to that standard 0 Contributory negligence is a complete affirmative defense You can also use it to prove that the P does not meet the justifiably rely element 0 Negligent unreasonable I Contrast with fraud where CN is not a defense 0 for Negligent Misrepresentation relianceout of Dock ct l Out of Pocket Damages Damages for negligent misrepresentation are measured as out of pocket damages i Difference between value of what is received and value of what is exchanged Usually results in less damages than benefit of the bargain damages i Re ects less culpable mental state for negligent misrepresentation R2T 552B Damages for Negligent Misrepresentation 31 Texas has adopted out of pocket damages as measure of damages for negligent misrepresentation 2 Consequential Damages Consequential damages may also be available but may be harder to get than in fraud case No mental anguish emotional damages available 4 Punitive damages may be available for gross negligence Substantial Minority Rule IM is a tort claim If the P is seeking to rescind a contract an IM that is material is basis for relief Critics say contract gets swallowed in a sea of tort E Richard v A Waldmcm and Sons Inc P bought house D provided survey of where house sit on plot Survey was mistaken and falsely represented the position of the house Surveyor gets sued lower court says D was false and reckless SC treats this case as innocent misrepresentation 0 An innocent misrepresentation may be actionable if the D has the means to know ought to know or has the duty of knowing the truth Moll says this sounds a lot like negligent misrepresentation 0 Actual knowledge of the falsity of the representation need not be shown under the circumstances nor must the plaintiffs allege fraud or bad fait 0 It was never the case that you could bring a suit for damages based on innocent misrepresentation Note 2 very rare I Measure of Damages sufficient evidence that Ps were entitled to the measure of damages of the value of the property as it was represented minus the value of the property they got I This is the financial equivalent of performance What you eXpected v what you got eXpectation damages I According to Waldman there is no difference between the remedy awarded to the tort claim of innocent misrepresentation and the breach of contract cause of action 0 Why is IM better for the P Because they can get the same damagesremedy and don t have to comply with statute of frauds parole evidence any contract doctrines or what they bargained for 0 Why is IM not a great policy rule The seller relied on the contract they bargained for but with IM there is a way to get around that Very threatening to contract There is no point to negotiations and dealings and 32 bargaining whenever the P could just circumvent it by bringing the IM tort claim This minority approach IM has been adopted in the restatement Second of torts section Restatement is attempting to limit IM to sale rental or exchange transactions Still strict liability The restatement has not completely eliminated the utility of breach of contract because the damages are not exactly the same as in Waldman But Moll still doesn t like this rule 1 One who in a sale rental or exchange transaction with another makes a misrepresentation of a material fact for the purpose of inducing the other to act or to refrain from acting in reliance upon it is subject to liability to the other for pecuniary loss caused to him by his justifiable reliance upon the misrepresentation even though it is not made fraudulently or negligently 2 Damages recoverable under the rule stated in this section are limited to the difference between the value of what the other has parted with minus the value of what he has received in the transaction 0 The measure of damages provided by this section of the restatement differ from the traditional measure of damages for breach of warrantycontract and IM under common law 0 Under this section damages are solely restitutionary in character Can call this reliance damages or out of packet damages Just have to give what would make the P whole 552C v the Law of Restitution the plaintiff is permitted to retain what he has received and recover damages under 552C rather than rescind and seek restitution in which case he must return what he had received This rule is limited to the immediate parties involved in the sale rental or exchange There is no application in favor of a third person who is not a party to the transaction even if he acts according to the expectations in taking action or refraining from it in reliance upon the misrepresentation 0 The third party may recover only if the misrepresentation is fraudulent or negligent and thus is within a rule stated in 531 or 552 gtkYou cannot premise a fraud claim on an opinionilt purported by SC but this statement is wrong There are times when you can bring a fraud claim based on an opinion 33 0 It would not meet the element of material fact to prove prima facie fraud because an opinion is not a fact 0 Hogwash Moll thinks this rule is a conclusion An opinion can be factual and an opinion can be relied on However most of the time we don t think people justifiably rely on opinions 0 If there is a situation where the opinion can be justifiably reliable then you can sue Addressed in When you sue based on an opinion they are usually not actionable They are usually generally relative phrases andor the opinion is not verifiable and probably biased An opinion is just what someone thinks of believes not objective truth Saxby v Southern Land C0 misrepresentation must be of an existing fact and not the mere eXpression of an opinion Opinions do not ordinarily deceive or mislead An indefinite representation ought to put the person to whom it is made on inquiry We should all know that it s just someone s thoughts Moll thinks it isn t true than an opinion is not a fact 0 A person can lie about their opinion saying his shirt is great when he really doesn t think so It is a factual statement that it really is their opinion If they re lying and saying it s their opinion when it is not then it s a lie like any other Court gave 2 reasons for whv vou can t relv on an opinion 1 An opinion is not a fact 2 It is not reasonable for people to rely on opinions 0 However restatement says in certain situations it is reasonable for people to rely on opinions 0 You can treat an opinion as an opinion and it still be actionable because it is justifiable to rely on that opinion look to provisions 542 543 and 539 OPINION OF AN ADVERSE PARTY The recipient of a fraudulent misrepresentation solely the maker s opinion is not justified in relying upon it in a transaction with the maker unless the fact to which the opinion relates is material and the maker a Purports to have special knowledge of the matter that the recipient does not have or b Stands in a fiduciary or other similar relation of trust and confidence to the recipient or c Has successfully endeavored to secure the confidence of the recipient or 34 d Has some other special reason to expect that the recipient will rely on his opinion 0 As a general matter the P is not allowed to rely on opinions made by adverse parties because you know they re just trying to sell their product looking out for their own interest Exceptions a d when you can rely 0 EX car salesman says this car is really good Al it s a Jim dandy P buys the car it doesn t work and P sues based on fraud 0 How would the salesman defend It s an opinion statement wasn t very definite very vague and conjectural it was just using puffery and industry custom this is an adverse party situation so the Ps guard should be up There has to be some allowance given for puffing because they are trying to sell a product 0 P would try to use an exception that the D had special knowledge of the car where the P did not 0 If both parties have equal competence then they must each trust their own judgment If one is somewhat more converse and just knows a little more than the P that does not mean the P can automatically rely on their opinions 0 It s not just any time you have less knowledge that you can rely on their opinion Comment f compleXity and specialization of commercial life training necessary for judgment These are situations where opinion is being given by an eXpert eX jeweler telling you what quality the diamond is What is 0 These vacuum cleaners are absolutely perfect in even the smallest detail puffery exaggeration general statements that can t really be tested or proven 0 These vacuum cleaners have never been on the market before verifiable specific The more specific the statement the more likely it is to be found as actionable If there is some standard or benchmark it is verifiable 0 Oral v Written oral cuts to be more like puffing Written is assumed to be more thought out and detailed Oral statements are sometimes made quickly and in the heat of the moment Written is more deliberate 0 542 comment e and 539 comment c when it comes to puffing or sales talk as a general matter that is the kind of opinion that the court doesn t think is justifiable to rely on You should recognize that the statement is not justifiable reliable OPINION OF APPARENTLY DISINTERESTED PERSON 35 The recipient of a fraudulent misrepresentation of opinion is justified in relying upon it if the opinion is that of a person whom the recipient reasonably believes to be disinterested and if the fact that such person hold the opinion is material 0 As a general matter it is more reasonable to rely on the opinion of a disinterested party because they have no incentive to push or persuade you either way Your guard isn t up So you probably can rely on their opinions Hanberry v Hearst Corp women slips in new shoes and injures herself She complains they were slippery and brings action against Good Housekeeping who gave their seal of approval to the shoes as good ones 0 P claims Good Housekeeping negligently misrepresented the shoes Court rules liability may eXist in a case like this where D has an indirect pecuniary interest and lacked reasonable care fulfilling elements of NM 0 D claims they were merely stating an opinion so it wasn t actionable The D was a disinterested party 543 The court ruled that D represented to the public that they possessed superior knowledge and special information concerning the product they endorsed 0 Has to be material it is in this case because good housekeeping holds this opinion as an independent party that tests these products 0 If the P could prove that good housekeeping did no testing or examination then it could fall under restatement 539 They would be conveying implied facts 0 No basis for Ds opinion D represented themselves as disinterested 3prd party REPRESENTATION OF OPINION IMPLYING JUSTIFYING FACTS l A statement of opinion as to facts not disclosed and not otherwise known to the recipient may if it is reasonable to do so be interpreted by him as an implied statement a That the facts known to the maker are not incompatible with his opinion and b That he knows facts sufficient to justify him in forming it 2 In determining whether a statement of opinion may reasonably be so interpreted the recipient s belief as to whether the maker has an adverse intent is important 0 Sometimes when people state an opinion that opinion actually carries with it implied factual statements Like the maker telling you there s not anything contradicting their opinion or the maker saying they have a basis to form that opinion O In cases like these you can sue for fraud misrepresentation of material facts 36 Misrepresentation of Law Modern View Factual misrepresentations as to law are actionable can verify as true or false If the misstatement of law conveys an opinion then it is treated like an opinion and you go to restatement 542 543 and 539 0 A lot of old cases say you cannot sue based on a misrepresentation of law Why you used to not be able to rely on a statement of law every man is presumed to know the law already so you should know when someone is making a misrepresentation no justifiable reliance Also no man can be eXpected to know the law without special training so the P must have understood that the D was giving them no more than an opinion Statement of Prediction Must be a statement of present or eXisting fact and not one of future prediction they are speculative A prediction is just a subset of an opinion All modern cases treat prediction like an opinion and you typically cannot succeed unless you fall under opinion restatement section 542 543 or 539 Misrepresentation of Intention l A representation of the maker s own intention to do or not to do a particular thing is fraudulent if he does not have that intention 2 A representation of the intention of a third person is fraudulent under the conditions stated in 526 0 State of a man s mind is as much a fact as anything else 0 The instant you enter into a contract at that very moment there is at a minimum an implied assertion that you intend to comply with whatever the contract says If it wasn t your intent then you lied about your intent when signing the contract Have to have the intent the moment you enter into the contract 0 EX party entered into contract and breached Is this enough for an action for deceit No although there is implicit intention for compliance with contract the tort of deceit is different They might not have been lying when they signed the contract but later changed their mind or became unable to perform 0 Burgdorfer v Thielemann the gist of the fraud consists in the false representation of the existence of an intention which in truth and in fact has no eXistence Scienter present there was an intent to deceive because they knew they had no intention Statement of Intention This recipient of a fraudulent misrepresentation of intention is justified in relying upon it if the eXistence of the intention is material and the recipient has reason to believe that it will be carried out Damages for Fraud 37 Benefit of the Bargain damages are expectation damages value of good as represented to you value of the good you actually got This is to put you in the position you would have been in had there been no fraudulent statement This is the majority rule of the damages for fraud 0 Generally speaking you would rather get benefit of the bargain damages than out of pocket damages It is the financial benefit of your bargain 0 Price paid 5000 Value of good 3000 Value of representation 7000 0 Benefit of Bargain 4000 0 Out of Pocket 2000 Minority Rule for fraud Out of Pocket Damages value of what you paid normally the price the value of what you got Just trying to make you whole 0 Only time you d want out of pocket damages is if you got a really bad deal You don t want the benefit of the bargain when the bargain sucks Punitive damages are also available if the D not only has scienter and knows they are deceiving but only if they are trying to intentionally hurt and in ict harm on them Have to have malice Damages for Negligent Misrepresentation l Damages recoverable for a NM are those necessary to compensate the plaintiff for the pecuniary loss to him of which the misrepresentation is a legal cause including a The difference between the value of what he has received in the transaction and its purchase price or other value given for it ie out of pocket b Pecuniary loss suffered otherwise as a consequence of the Plaintiff s reliance upon the misrepresentation ie consequential damages 2 The damages recoverable for a negligent misrepresentation do not include the benefit of the plaintiff s contract with the defendant ie benefit of the bargain Federal Land Bank Association of Tyler v Sloane As to NM the bank had the duty to use reasonable care and misrepresented an existing fact rather than a promise of future conduct 0 Court declines to extend damages to something other than pecuniary loss as put forth by restatement 552B There is also no benefit of the bargain damages What the Ps would have madeanticipated from their contract with Pilgrim 3 Pride 0 The tort of interference with existing or prospective contractual relations is an intentional tort It is intentional in the sense that the defendant must have either desired to bring about the harm to the plaintiff or have known that this result was substantially certain to be 38 produced by his conduct see There are also recognized sets of circumstances under which the defendant s conduct is treated as justified if he proves requisite facts 0 The term malice used in Lumley is not used in the literal sense requiring ill will towards the plaintiff Instead many court come to call this legal malice which means that the in iction of the harm must be intentional and without justification Lumley v Gye court ruled action would lie where a 3rd party maliciously procured opera singer s abandonment of a contract to perform exclusively at the P s theatre O Gye interfered with economic relationship between the two parties Gye caused the singer to breach her contract by offering her more money no assault or tortious conduct There was nothing particularly shady about what he did which is why this was such a break from common law tradition O Rests on case precedent stemming from an action by a master against a person who procures that servant should unlawfully leave his service 0 What if opera singer was kidnapped by Gye No breach of contract because of impossibility Or where one party was bankrupt and couldn t fulfill their end of the bargain You can recover consequential damages in breach of contract suit such as lost ticket sales However lost customer good will would be very difficult to quantify Consequential damages must be proven with reasonable certainty Why would tort action be any better Because it allows for the possibility of punitive damages However it still does not give direct recovery for speculative harms Intentional Interference with Performance of existing Contract by Third Person One Gye who intentionally and improperly interferes with the performance of a contract except a contract to marry between another Lumley and a third person opera singer by inducing or otherwise causing the third person opera singer not to perform the contract is subject to liability to the other Lumley for the pecuniary loss resulting to the other Lumley from the failure of the third person opera singer to perform the contract 0 This is at least a three party relationship It s all about an outsider not a contracting party who attempts to interfere 0 The elements appear to involve 3 PS for a prima facie case then D can prove that his action was properiusti ed then the P has to prove that it was improper 0 Intent interference injury and interference has to be improper O under restatement generally it is the purpose or desire to do the thing Purpose of desire to interfere with the performance of the contract also even if 39 there is not a purpose or desire the D can be liable if they knew with substantial certainty that the result would occur I P must prove that the D knew of the contract intent O because the contract was broken and not performed we can tell he interfered O has to have something to do with the fact that there is already a contract I Some believe it should mean something beyond normal competition It is not really competition whenever two parties already have a contract If one party induces someone to choose them over the other before contracting then it is competition Burden of Proof Intent interference and injury has to be shown by the P for a prima facie case Intentional interference with an eXisting contract is assumed improper until proven it was not This is not as serious an issue for this restatement as it is for prospective There is not similar competition in a case where there is already an eXisting contract as opposed to a prospective contract 0 Restatement comment e greater definiteness of the others eXpectancy and the stronger claim to security for it Existing contract Greater protection is given to interest in an eXisting contract than the interest in acquiring a prospective contract Does this tort screw up the concept of efficient breach 0 A contracts to sell apples to B for 10 Market price is 11 C will buy A s apples for 15 some special feature that C wants so they re willing to pay more 0 Some breaches of contract aren t wrong in the sense that torts are Breach of contract doesn t have connotation of societal wrong You can either perform or breach and pay damages the law doesn t care we know this because breach doesn t allow punitives 0 Economic insight don t want to punish breaches because some of them are good These are efficient breaches where no one is made worse off and usually someone is made better off I B can go out in the market and buy them for 11 with injury of 1 A is going to make 15 and pay breach to B they wind up with 14 C then gets the apples which they wanted I A is better off and B is not hurt C values the resource the most economic theory they will eXploit that resource the best 40 0 If you believe efficient breach is a good thing the tort of interference would allow B to sue C C is going to be worried about approaching A and being sued so you can t quantify how much the apples would now cost This tort prevents efficient breach and could even make C liable for punitive damages Fungible V Services The ruining of efficient breach theory is a sizeable critique whenever dealing with intentional interference of contracts that deal with fungible goods ie when you can really make no one worse off This is not the same when dealing with someone s services Partially because there is no evaluation of how much the advice is worth or how it affected damages It is hard to be sure that they are made whole therefore the whole concept of efficient breach is moot With services based hurts it is hard to tell exactly how much one party is damaged So maybe there should be a tort for intentional interference at least in cases where efficient breach doesn t really work 0 Moll services contracts do not get in the way of efficient breach Intentional Interference with Another s Performance of His Own Contract One stockyard owner who intentionally and improperly interferes with the performance of a contract except a contract to marry between another employee and a third person employer by preventing the other employee from performing the contract or causing his performance to be more eXpensive or burdensome is subject to liability to the other employee for the pecuniary loss resulting to him employee If the plaintiff s performance has intentionally been made more burdensome or more eXpensive by the actor the cost that he incurs in order to obtain the performance by the third party has increased and the net benefit from the third person s performance has been correspondingly diminished You can sue if the D prevented you from performing your contract Also you can sue if you were able to perform contract but the D caused the performance to be more eXpensive or burdensome 766A claims are broader Comment G P is under contract to maintain highway for owner of the road D truck driver is liable if he drives over the road when he wasn t supposed to cause the truck weighed too much and damaged the road P sues because truck driver interfered with his performance to maintain the road costs P more to maintain and fiX Bacon 1 St Paul Union Stockyards Co D owned stock yard where the P worked D barred P from entering So how is this an interference cause of action D preventing P from continuing and fulfilling his employment contract D interfered with the P s own performance Has D done anything tortious here We need to know if it is improper and if he intended to keep the P outinterfere 41 Intentional Interference with Prospective Contractual Relation One who intentionally and improperly interferes with another s prospective contractual relation Except a contract to marry is subject to liability to the other for the pecuniary harm resulting from loss of the benefits of the relations whether the interference consists of a Inducing or otherwise causing a third person not to enter into or continue the prospective relations or b Preventing the other from acquiring or continuing the prospective relation Same four I s as 766 elements intent injury interference and improper What is a contract Must be an economic relations between the plaintiff and another containing a probable future economic benefit or advantage to plaintiff Has to be more likely than not that it would have become a contract Who can be a P Either the party to perform or the party who eXpected performance from the other More controversial restatement regarding interference because it could impede competition Burden of proof P has burden of proving intent interference and injury prima facie case Burden then shifts to D to raise the affirmative defense of propriety had a good reason for interference or the D loses However P s burden for intent interference and injury caused a lot of problems for 766B prospective contract interference discouraged normal competition because it is way easier for the P to prove their case EX family member convinces another to stop smoking and gets sued by the tobacco company Even though it s a silly hypo they could prove intent interference and injury 0 If prima facie is just intent interference and injury the burden is so easy that it encourages lawsuits for otherwise properokay behavior What does the Penna court do to make it harder to establish a prima facie case Make the P prove that the D committed wrongful improper acts element 4 O Penna court doesn t tell us I Maybe the means of interference was unlawful independently tortious criminal already law to govern I Conduct that the court does not want to encourage 42 What about unethical conduct Harder to define would depend on a case by case analysis Ethics are vaguer and not as well established Can be wrongful by reasons of a statute or other regulation or a recognized rule of common law or perhaps an established standard of a trade of profession Penna citing Top Service case Broader 39 motive is shaky foundation wrongfulness should be defined by improper means not motive This is objective conduct and consequences The tort of 766B requires objective and unlawful conduct or consequences The tort may be satisfied by intentional interference with prospective economic advantage by independently tortious means 0 Court looks to Improper Means how the D interfered Was that conduct unlawful 0 Should we define improper as including under 766B ie your goal was to hurt or injure the other side Problems subjective in the person s head From an evidentiary standpoint it is not the easiest thing to prove motive 0 Maybe the D has mixed motives it is competition and they also hate the P All or any of the motive has to be improper Or does it just have to be the primary motive 51 or more There are lots of ways to think about what an improper motive means What if D is a corporation Then it s even harder to come up with their motive So many people would be involved in the business and the decision making process 0 Coke v Pepsi hate each other Coke markets and does business in an attempt to run Pepsi out of business Coke s sole motive is to hurt Pepsi 0 They are still competing which is not bad So is bad motive necessarily correlated with bad conduct NO It can even be socially useful because it lowers prices for consumers Ex Non compete if anyone leaves the company you can t sell in Houston for a certain amount of time One person quits and then starts selling in the Houston area They sue to implement the non compete not because he s hurting their business at all but just because they don t like him 43 0 Would this be bad conduct Not really just suing to enforce contract But including improper motive then it would be improper 0 Is this the kind of lawsuit we want to go forward Do we care what the motive is as long as it is lawful and a perfectly enforceable legal right Della Penna v Toyota Motor Sales USA elements page 140 footnote 0 Facts Penna eXports Lexus to Japan Toyota doesn t want this and inserts no eXport clauses Toyota releases list of offenders and warned dealers of working with these people with gradual sanctions 0 Argument Penna sues Toyota for intentionally interfering with prospective contracts 766B 0 Holding SC of California held that Penna had to show that Toyota s interference with his business was a wrongful act or conduct jury instruction Ruled in favor of Toyota Competition as Proper or Improper Interference 1 one who intentionally causes a third person not to enter into a prospective contractual relation with another who is his competitor or not to continue an eXisting contract terminable at will does not interfere improperly with the other s relation if a The relation concerns a matter involved in the competition between the actor and the other and b The actor does not employ wrongful means and c His action does not create or continue an unlawful restraint of trade and d His purpose is at least in part to advance his interest in competing with the other 2 The fact that one is a competitor of another for the business of a third person does not prevent his causing a breach of an eXisting contract with the other from being an improper interference if the contract is not terminable at will 0 Mixed motive approach under as long as the motive is at least in part to compete then it is not improper Even if it is 1 to compete and 99 because you hate them Adler Barish Daniels Levin and Cresko v Epstein D contacts clients and tells them he s leaving the firm allowed and wants them to follow him by giving them self addressed and stamped envelopes not allowed Sued by law firm for intentional interference with existing contracts 44 Court cites definition of Improper from Harper and James you are okay as long as your interference is sanctioned by the rules of the game which society has adopted and to the area of socially acceptable conduct which the law regards a privilege Moll thinks this is an awful definition Look to restatement 767 for what should be considered in determining improper conduct Factors in Determining Whether Interference is Improper In determining whether an actor s conduct is intentionally interfering with a contract or a prospective contractual relation of another is improper or not consideration is given to the following factors a b g The nature of the actor s conduct what we called improper means The actor s motive what we called improper motive if the sole motive is to injure then it weighs heavily on the scale It it s the primary motive not the sole motive it can still carry weight in the balancing test If it s a casual improper motive maybe less than 50 that can still be significant but not as important The interests of the other with which the actor s conduct interferes existing contract v prospective contract The interests sought to be advanced by the actor just for competition reasons is less improper or for picketing which is representative of your 1st amendment rights The social interests in protecting the freedom of action of the actor and the contractual interests of the other public policy first amendment public health or interest The proximity or remoteness of the actor s conduct to the interference B has contract with C A interferes If B sues A is it a direct interference and B has proximity with A which weighs heavily for improper BUT what if B has contract with C B turns around and sells to D A interferes with C to B contract which effects D When D sues A then it is considered less proximate because there is less of a relationship to the interference The interference is more remote and less improper and The relations between the parties arm s length transaction always done rare allowed this kind of conduct in the past 0 criticism of the restatement approach doesn t lend itself to predictability 0 Comment I the real question is just whether the actor s conduct was fair and reasonable under the circumstance 45 0 Instances when interference is okay similar to d or e a reasonable and disinterested motive for the protection of other individuals or the public will justify intentional interference with contract Caverno v Fellows 0 Examples picketing acting to protect ethical standards boycott activity to prevent racial discrimination Leigh Furniture v Isom P intentionally interferes with D s prospective business bugs the crap out of D and says they re in default P keeps showing up at his place of business and threatens him while he has customers in the store 0 Jury finds completely for Isom SC says the P had to prove that the l D intentionally interfered with existing or potential economic relations 2 for an improper purpose or by improper means and 3 causing injury Court sets forth the four 1 s 0 Court says it can either be improper purpose or by improper means They do not adopt the restatement approach PrivilegeJustification is still an affirmative defense even if the P meets that 4 1 s 0 whenever the predominant purpose was to harm or injure the plaintiff Same thing as improper motive I The Utah SC found that the Leigh s predominant purpose was an economic interest in reselling the business after they drove Isom out Treating Isom badly was just a stepping stone to later economic interest 0 Where the means used to interfere with a party s economic relations are contrary to law such as violations of statutes regulations or recognized common law rules Such acts are illegal or tortious in themselves and hence are clearly improper means of interference I A deliberate breach of contract is not by itself alone an improper means 0 Why not You don t need a tort for this problem They can just sue for breach of contract in that case Would also ruin efficient breach I Also a bad motive that isn t the predominate motive doesn t count as allowing tort However the two tOgether l breach of contract and 2 a motive to injure doesn t have to be a predominant motive like improper Durpose allow vou to fulfill the element of improper for the interference m courts pretty much see trying to be mean as being improper I Leighs Instances of Improper Means 46 0 Court says that by forcing Isom to defend two groundless lawsuits the Leighs were clearly employing an improper means of interference with Isom s business Using litigation as a tool to injure Rule 11 groundless frivolous lawsuits not allowed could be seen as a violation of an established standard of a trade of profession 0 Court sustains the jury s verdict for Isom because of improper means using judiciary as a weapon to damage another s business can even give rise to independent cause of action in tort for abuse of process and the tort of malicious prosecution 0 Why did Isom countersue the Leighs Because they had a contract together Said the Leighs intentionally interfered with their eXisting contract Can a party to a contract bring an intentional interference claim against the other party to the contract No not by itself Usually always involves an outside 3 party Isom can however sue Leigh Furniture for intentional interference with prospective relationships with customers Why can t X sue Y for intentional breach of a contract between X and Y Because he is a party to the contract Interference torts have to be done by an outside 3 party who is not a party to the contract 0 Policy reason for not allowing X to sue Y 0 Because every time there was a breach of contract there would be an interference claim Then a lot of contract actions would also involve a tort action So what I Could allow for the P to double recover I Decimates the idea of efficient breach with the possibility of punitive damages I Undermines whole purpose of contract law There s no point to negotiations in contract allocations of risk whenever a tort would just cover it Contracts allocate the risks of nonperformance and how the parties want to regulate things whereas a tort would just be able to be used anyways bargains would not be respected 0 You can assert a legal right in good faith as a defense to a claim of interference A Must prove that he was privileged to interfere with the contract 0 Texas Justi cation Defense Legal Right motivation does not matter Colorable Legal Right Good faith claim Good Motive 47 0 Public Policy Public health constitutionally protected right free speech 0 mal Rights Defense R2T 773 Asserting bona de claim Richardson v La Rancherita m La R leases to a company called Breg The lease has a clause that says Breg tenant is allowed to assign the lease if they want to whoever they want but it requires consent of La R Breg wants to assign lease to Bomze and La R says no unless Bomze is willing to pay more for the lease Instead Breg corporation shareholders sell their stock to Bomze so Breg is still the lessee but now Bomze is the owner of Breg La R delayed selling of stock for 2 months which later happened 0 Breg winds up suing La R on the claim that they intentionally interfered with his existing contract to sell stock to Bomze Is this a 766 766a or 766b 766a because the P was the person who was supposed to perform by transferring over their shares interference with their own performance Contract was still performed just in a more burdensome or expensive way 766 requires the contract performance never happened 0 Court mentions restatement 773 as a defense for La R 0 La R s contract with Breg is a 0 Did they assert it in good faith This means you have to let the other party know and actually believe that you have a legal right La R believes this because of their legal counsel they hired lawyers and said P was acting wrongly Shows they really believed it Moll s Definition does La R really believe their claim I However the court says something other than sincerity and honest conviction are required before justification for his conduct on the grounds of good faith can be established There has to be an objective basis for belief which requires more than reliance on counsel It is the opinion of counsel that must be examined I Policy for court s interpretation of good faith 0 Maybe the court doesn t want to give blanket immunity to people that go and hire lawyers 0 Good Faith has something to do with motive Court doesn t like that La R just wanted more money from Bomze 0 Therefore for good faith to be fulfilled you must 1 actually believe you have a legal right and 2 it must have a good motive which has to do with the purpose for legal right in the first place One of the Defenses for Interference is Asserting a Bona Fide Claim 48 One who by asserting in good faith a legally protected interest of his own or threatening in good faith to protect the interest by appropriate means intentionally causes a third person not to perform an existing contract or enter into a prospective contractual relation with another does not interfere improperly with the other s relation if the actor believes that his interest may otherwise be impaired or destroyed by the performance of the contract or transmission 0 Narrow scope Under 773 it seems that good faith means you really believe you have a legal right 0 Motive only comes in a little under the last clause of 773 so it doesn t seem to care about it too much There is a motive inquiry but this does not stem from the good faith requirement but rather the last clause that you have to believe your interest will be impaired or destroyed O Moll if you have a protected legal right what does it matter what your motive is O For example La R did not seem to be concerned about their legal right at all when it comes to the latter part of 773 believing that their interest may otherwise be impaired or destroyed Brimelow v Casson acting troupeprostitution the D had intent to interfere they did interfere and there was an injury so it fulfills the prima facie case 0 However this old case shows that there is an exception to liability for interference some kind of right to interfering when it is for the public good about a living wage prostitution immorality public health Prevails on some amorphic ground Harmon v Harmon Interference tort is extended to any economic relationship other than contract and prospective contract like a will This is a minority approach 0 The court treats an instance like this as a prospective contract Reasonable likelihood that he would have received prospective inheritance from the will 0 We conclude that where a person can prove that but for the tortious interference of another he would in all likelihood have received a gift or a specific profit from a transaction he is entitled to recover for the damages thereby done to him RULE for both of the interference torts the interferer cannot be the same person as the breacher However that creates tension within a case in which an agent of a corporation persuades the corporation to breach a contract 1 How did Texas get around this problem 49 a They said that you can sue the agent for interference if the agent was acting solely for his own personal gain Holloway V Skinner 2 If a principal does not complain about its agent s actions then an agent cannot be held to have only acted for its own interest Powell Indus v Allen a If the principal does complain that complaint is not conclusive Personal Gain Must show that the A acted in a fashion so contrary to the corporation s best interest that his actions could only have been motivated by personal interests Holloway 0 A is liable if when serving as an agent his interference was solely in the furtherance of his own personal interests 0 and Must show that defendant s actions could only have been motivated by personal interests 0 A mixed motive is NOT sufficient to create sole personal motive I Still a motive inquiry O Motive must be shown to be so contrary that the motive could only be defendant s personal interest Holloway v Skinner Holloway pres of company decides on behalf of the company that they have to stop paying Skinner with whom they have a contract 0 Easiest avenue Skinner could sue the corporation for breach of contract He didn t get any money from the company because they filed for bankruptcy So Skinner brought this secondary suit against Holloway for interference with his eXisting contract with the company 0 A personal guarantee is basically a secondary contract If the primary guarantor company doesn t pay then the P Skinner can go after the 3rd party Holloway These contracts are extremely common when dealing with edgling businesses In this case Holloway did not give a personal guarantee 0 Hollowav s Argument D claims there isn t really 3 parties here for interference because Holloway is acting as an agent of the company The law views agent s decisions as if the company made them Agent s actions the corporation s action The agent is simply an extension of the corporation 0 The court points out that by definition of the cause of action the person who induces the breach cannot be a contracting party If this was allowed then any party who breaches a contract could be said to induce their own breach and would therefore be liable for tortious interference All breach of contract claims would become a tort claim Then what s the point of negotiating out the terms of a 50 contract It would undermine the purpose of contracts This will make contract drown in a sea of tort I Also this would discourage efficient breach because you can t estimate damages if every time you breach you could be hit with an intentional court 0 How could the D possibly be sued for interference If D was acting solely for his own personal interests this would be if it was shown that he acted willfully and intentionally so contrary to the interests of the corporations This would show the separation between the D and the corporation 0 In this case the D was trying to conserve money to save the company from bankruptcy but also was paying himself A mixed motive is fine As long as one of the motives is to benefit the corporation then the D is not liable Personal reasons have to be the ONLY motive behind the Ds actions 0 Concurrence Justice Hecht thinks that the agent can be liable if the agent exceeds the scope of his authority Moll thinks this is wrong because it cannot be right that if an agent acts with no corporate purpose he can t be acting in the scope of his employment However scope of authority is frequently a legal question so perhaps Hecht was motivated to convert the test into a summary judgment decision Scope of authoritv test not accepted Page 201 gives the Texas articulation of elements for interference with existing contract Does not say anything about the P having to prove improper but gives the other 3 PS Burden presumably shifts to the D Powell Industries v Allen m CFO Allen had employment contract and the CEO Powell wanted the CFO to use corporate money to pay for CEO s personal expenses CFO went to board and complained but the board told CEO to take whatever action he deemed necessary to deal with the situation 0 Easiest choice for Allen to sue the corporation because that s who his employment contract is with Usually they can only be fired for cause which usually include insubordination He loses on the breach of contract claim so he brings action against the CEO for tortious interference with employment contract 0 Was the CEO s action intentionally or willfully contrary to the corporations interests 0 NO It was not solely for his own personal interest 0 The mere existence of a personal stake in the outcome is insufficient to show that the D committed an act of willful or intentional interference 0 What does the court add to this lawsuit we didn t get out of Holloway 51 0 If a corporation does not complain about its agent s actions then the agent cannot be held to have acted contrary to the corporation s interests The P needs the corporation to complain If they do not then the agent cannot be held to act opposite to corporate interests even if it is shown that the agent acted solelv in his own interests I This is a crazy standard to try and reach for a P Extremely high threshold to meet I How does a corporation complain Majority of the board of directors have to complain perhaps Or maybe a major officer I If the corporation complains about the agent s action then they are lending weight to the P s breach of contract action against them Also the agent is connected with all the higher ups and board of directors could be family members Conscious choice by the Texas SC to eliminate these causes of action This rule is designed to kill off these claims tortious interference with contract Even if the P does get the principle to complain the P still doesn t automatically win it s not conclusive they just get to move forward with their case Texas Beef Cattle Co v Green TX SC seller of cattle Green sued beef cattle co for tortious interference with contract he had with Cargill Trial Court Findings 1 O Brien was legally justified in interfering with the contract between Green and Cargill However 2 jury found that O Brien acted with Malice intent to injure So the trial Judge disregarded the justification finding because it was inconsistent with the finding that O Brien was legally justified O Intent interference and iniurv are elements of tortious interference with existing contract prima facie case Burden then shifts to D to prove justification Texas common law does recognize an established privilegejustification defense The exercise of the justification defense is based on one s own legal rights or I a good faith claim to a colorable legal right even though that claim proves to be mistaken O Justification defense 1 is determined by the Judge as a matter of law I SC rules that actual malice does not vitiate the defense of justification So good faith is not relevant to the justification defense when the D 52 establishes its legal right to act as they did SC reverses trial court and rules in favor of Texas Beef Cattle Co I Motive does not matter in this instance Improper motives cannot transform lawful actions into actionable torts I What about restatement 773 You have to assert in good faith your legal right maaaybe this means a good motive but it s a little ambiguous Also 773 has end clause which talks about assertion of legal right when you re afraid that legal right will be threatened So you have to actually believe the other party s actions will threaten your legal rights 0 Justification defense 2 is determined by the jury on the good faith aspect Only when mistaken but colorable claims of legal rights are asserted is the good faith of the actor legally significant 0 CONCLUSION Motive to injure malice does not affect defense of justification when you have a legal right to act 1 With 2 then jury determines good faith Bad motive is irrelevant if this is a type 1 defense but this is a type 2 defense because O Brien did not have a legal right 0 Argument in a type 2 defense you have to prove you exercised an incorrect legal right in good faith This does not automatically mean having a good motive It means you just thought that you had the legal right 0 Moll s answer for 2 s good faith requirement and a bad motive a person can have mixed motives You can want someone to fail yet still be asserting what you believe is your legal right You don t only have to have one motive either good or bad Affirmative Defense can satisfy in two ways I One s own legal right to interfere your legal right to do something is as important as someone s existing contract But what if you re wrong about your legal right I Then it depends on whether or not your asserted legal right was made in good faith Colorable legal right just means it had the appearance of being correct Calvillo v Gonzalez TX SC Anesthesiologist sues hospital and chief of department for tortiously interfering with his business relations with the hospital by refusing to schedule him for anesthesiology work SC held that department chief s interference with P s prospective business relations with hospital was justified 0 A D s motivation behind the assertion of a legal right is irrelevant since the right conclusively establishes the justification defense Bad motive doesn t matter 53 0 Tx Beef Cattle was an existing contract case justification defense applies to existing contract cases TX SC also Sterner 1 Marathon Oil Co Tx SC also said justification was an affirmative defense and mentions prospective contracts like Calvillo You just have to prove prospective contracts were reasonably likely to become real contracts 0 In this case an action exists for tortious interference with employment contact terminable atwill D has burden of proving affirmative defense or justification 0 But is there such a thing as interfering with already terminable at will contracts 0 comment g terminable at will contracts are still legitimate contracts If someone interferes with it and makes it end before it was supposed to then they can be sued It is treated more like a prospective contract than an existing contract because it is not as strong in regards to legal assurance because it is primarily an interest in future relations between the parties Bennett 1 Computer Associates International 0 A even if it proves to be ultimately mistaken is defined as the appearance of right which would lead others without inquiry to suppose the existence of the right claimed 0 Court concludes that a right is colorable if it appears without further inquiry genuine truthful valid or existing Walmart Stores Inc v Starges III TX SC 2001 court rules the burden should be moretougher for prospective contracts than for existing contracts totally restructure the doctrinal elements of the tort of intentional interference with prospective contracts Existing and Prospective contracts now split and differentiated 0 Changes prima facie case for prospective contracts only intentional interference injury Added element that actual interference had to be improper 0 What does improper mean in Texas It has to be independently tortious or unlawful conduct or conduct that violates a statute or common law I Improper does not mean bad motive O P must prove that it was harmed by D s conduct that was either independently tortious or unlawful Independently tortious means conduct that would violate some other recognized tort duty either under common law or statute I Ex What about unethical conduct independently tortious Sometimes can be sanctioned Ambiguous area 54 I EX What if you violate an established standard of the trade Not tortious not wrongful under common law or statute so hard to see how it could be wrongful I EX What about breach of contract Not prohibited by statute there is a right to breach a contract but you could argue either way if you breach it violates the other contracting party s rights If we said breach of contract was unlawful then they could be held liable for an intentional tort of interference with a prospective contract Breach of contract is seen to be a morally neutral act unlike torts 0 You can t use it anymore If the P proves the 4 I s prima facie case and the contract was more likely than not then the P wins Moll simplistic and wrong way to read this gtkEven though there is no affirmative defense of justification anymore what happens if the D had the legal right to do what they did Then the interference would not be improper The burden does not shift to the D The D has the ability to rebut the P s prima facie case by claiming that the interference was not improper because of their eXisting legal right pg 227P It s not a violation of common law or statute whenever there was a legal eXisting right for the D to do what they did IT S STILL ALIIIIVE 0 What about Other Defenses for Interference 0 Public policy or public health defense for eXisting contract NO Brimelow v Casson Texas Beef only gives you a legal right defense Public PolicyCompetition for prospective contract YES allowed to show you did not act independently tortiousimproper Hill v Heritage Resources For prospective contracts being protected from interference one must show 1 reasonable probability the contract would have been entered into 2 an intentional malicious intervention 3 without privilege of justification and 4 resulting in actual damage or loss Must be more than mere negotiations 0 American Medical Int l v Giarintano same elements for prospective contracts Breach of contract is not a tort and not treated as a wrong But can a bad faith breach of contract count as tortious In certain areas of the law bad faith breaches of contract are treated as torts This is especially true of insurance When insurers breach their contract it is usually treated as a 55 l 2 Intersection between insurance and tort is critical affects who to sue why to sue how to try a case how to plead North Star Mutual Ins v R W Issue whether TF s home owner s insurance policy provided coverage for the negligent transmission of herpes through voluntary sexual intercourse Yes Procedure RW sues TF 9 TF sends this to his home owner s insurance policy North Star There are three different lawsuits usually in cases like this 1 RW v TF 2 North Star v TF 3 TF v North Star 0 Why Because 3 party insurance was included in his homeowner s policy in this case the insurer said they would cover all bodily injury or property damage for which the insured is legally liable to a 3rd party North Star denies coverage completely so they won t provide them with a defense and they won t indemnify Then North Star brings suit against TF asking the court for declaratory judgment that North Star is correct that the lawsuit does not fall within the scope of the policy coverage so they don t have to defend or indemnify Insurance companies want to know how much they need to set aside for liability coverage they re hoping that through a quick ruling they will know if they have to pay or not 0 North Star argues that this is an intentional tort which they would not have to cover because the transmission of a sexual disease is never an accident 0 Some jurisdictions do not allow insurance companies to bring suit because then the insured would have to defend two suits But if they do allow the suit then the court only rules on the duty to defend claim not the duty to indemnify O In this case the court stays North Star s suit regarding their duty to indemnify Have to see whether or not RW claims win against TF first RW claims TF gave her herpes but he did not know that he had it at the time Therefore it could be an accident under the coverage policy definitely not intentional tort Also herpes is within the definition of bodily injury and not specifically excluded from the policy Therefore the court rules that the insurance company has a duty to defend 0 So what if RW wins on a negligent claim against TF Then North Star would deny coverage and TF would have to sue North Star to get them to indemnify But why isn t North Star collaterally estopped because RW already won on that claim Because North Star was not a party to the first lawsuit between RW and TF 56 Types of Insurance gt First Party Insurance when the insurer by contract says I will pay you insured for harm that you insured suffer Insures them for their own losses to person or property Example health insurance covers you propertyauto mobile insurance homeowner s insurance if you re house burns down gt Third Party Insurance also known as liability insurance when the insurer promises the insured to pay some third party for third party injuries caused by the insured This is when the insured causes loss or harm to someone else or someone else s stuff There are two obligations of the insurer both are part of a homeowner s policv l to pay up to policy limits the injured party or indemnify the insured for his payments to the injured party for any tort judgment obtained against the insured so long as the judgment is within the scope of the policy s coverage 0 The mere duty to defend does not trigger the duty to indemnify Rather the insurance co would only have to pay if 1 the court entered a tort judgment against the D and 2 the tort judgment were for an injury that was in fact within the scope of the insurance policy negligent rather than intentional 0 The duty to pay is only predicated on the jury findings and the proven facts If the court rules that there is no duty to pay that does not mean that there is no duty to defend However if there is no duty to defend there is most likely no duty to pay 2 to provide a defense to the insured when the insured is sued on a claim potentially within policy coverage even if the claim is frivolous This is basically litigation coverage which the insurer will pay 0 Dutv to Defend Test If any part of the claim is arguably or potentially within the scope of the policy s coverage the insurer has a duty to defend Any doubt should be resolved in favor of the insured Not any doubt pleading cannot be totally inconclusive and come within ambit of insurance policy Moll Must eXhibit some causal connection between injury and subject of insurance ie operation of a vehicle Merchants Fast Motor Lines 0 Duty is triggered by factual allegations in plaintiff s petition Concerned with factual allegations not legal theories such as negligence If a suit gets tossed during summary judgment it s generally the lawyer s fault for poor pleading Moll 0 Insured has to establish that claim is covered burden is on H to prove claim is within the scope of coverage Insurer has the burden to establish the exclusion 0 for whether the duty to defend exists the eight comer rule looks to four corners of policy and four corners of the pleadingsallegations in the lawsuit to see 57 whether the facts alleged coincide with the coverage listed in the policy You have to accept the allegations as true 0 Discovery has not happened yet so there are no proven facts So this first determines whether there would be coverage at all This is something the insured needs to know because they might not be able to afford a defense on their own Focus on potential liability 0 It is the insured s burden to prove that their claim falls within the language of the coverage 0 Duty to defend when there are claims of negligence and intentional so long as the P pleads one claim that is potentially within policy coverage negligence then the insurer must provide a defense 0 In many child molestation cases court usually infer intent as a matter of law from the basic facts and thus hold that there is no potential for coverage notwithstanding plaintiff s allegations that the defendant was negligent 0 Breach of duty to defend is seen as a contract action not tort and can get you consequential damages Such as the attomey s fees in lawsuit when you have to sue the insurance company and the attorney s fees for your defense Exclusions lets homeowners choose what kind of policy they want and group they do not want to be insured as a part of ex products liability coverage Also intentional injury is usually excluded as a moral hazard Exclusions are tailored risks 0 Intentional injuries are heavily in the control of insureds and are less predictable for insurance companies Also if intentionally caused losses were insured it would allow the insured to destroy his own property whenever insurance proceeds would exceed the value of the property 0 Many states also disallow the coverage of punitive damages 0 Common exclusion products liability When the law does not allow exclusions it increases costs for everyone Why does the insurance company want exclusions Because it lowers the price for the insured and lessens risk for the insurance company The insured chooses the risks they want to assume and the risks they want to make sure the insurance company will cover Employment practices liability insurance can cover employment discrimination sexual harassment and wrongful termination Some courts have disallowed this on public policy grounds 58 National Union Fire Ins Co v Merchants Fast Motor Lines Issue whether a truck driver s allegedly negligent discharge of a firearm killing a passenger in another vehicle triggers a duty to defend under the truck owner s vehicle liability policy No TX SC ruled no duty to defend 0 Insurance company does not cover intentional harm this is probably why the Ps were pleading negligent discharge 0 Court applies 8 corners rule look to petition and policy 0 Policy provides that they will cover all injury caused by an accident and resulting from the ownership maintenance or use of a covered auto the truck In this case the pleadings did not allege that the injury was caused by an accident resulting from the use of a covered auto Therefore it could not be coveredtriggered under the policy 0 If a petition does not allege facts within the scope of coverage an insurer is not legally required to defend a suit against its insured They only pled that the accident was at the site of the truck which is not enough there needs to be a causal connection Taylor v Travelers Ins Co requires the trier of fact to examine only the allegations in the complaint and the insurance policy in determining whether a duty to defend exists Four corners of the insurance policy and four corners of the plaintiff s petition 0 Also it is not required under law for the insurance company to investigate into the lawsuit before declining to defend TriCoastal Contractors 1 Hartford Underwriters Ins Co court rules that they should not consider extrinsic evidence in determining an insurer s duty to defend ie worker s comp benefits 0 Most jurisdictions only look to eight corners no extrinsic evidence or affidavits CullenFrost Bank of Dallas v Commonwealth Lloyd s Ins Co Under the eight corners rule the court only looks to the pleadings and the insurance policy to determine whether the duty to defend exists The duty to defend is not affected by the facts of the case ie they do not consider the truth or falsity of the allegations in the pleadings Any doubt as to whether the complaint states a covered cause of action is resolved in the insured s favor Breach of Duty to Settle brought as a action Duty to settle breach is seen as a tort Duty to settle comes from the implied covenant of good faith and fair dealing in every contract which would make it a breach of contract So why is it also seen as a tort 59 What else justifies this being a tort Nature of insurance contracts used to prevent distress from having to go to court or all the hassle of accidents you are contracting for peace of mind If the insurer breaches then there s no doubt it s going to cause mental anguish They need to make it a tort so people can recover mental anguish damages Downside of making it a tort bad for insurance companies increased premiums for consumers when it is a tort they have to assume a higher risk of punitive damages mental anguish and excess judgments They re now more inclined to settle even frivolous claims What if it wasn t a tort Then insurance companies would just breach if they wanted to regardless of what s best for the insured At worst the insurer would have to pay policy limits because that s what the insured contracted forwas expecting If they went to trial and won they d pay nothing But if they lose then the insured could be on the hook for huge amount They need tort action to make insurance companies behave and consider the best interest of the insured 0 With breach of contract in order to make the insurance company pay an excess judgment then it would have to be foreseeable at the time of contracting However is it foreseeable that if they breach then it could lead to an excess judgment Yes 0 Normal rationales say without the stick of tort there is not enough damages to make the insurer be good With breach of contract there is no exemplarymental anguishpunitives In almost every jurisdiction it is a tort Crisci 1 Security Insurance C0 of New Haven Conn trial court awarded Crisci because she suffered a judgment in a personal injury action after her insurer D refused to settle the claim Her policy obligated the D to defend the suit against her and authorized the company to make any settlement it deemed expedient tenant of the apt complex fell through steps and was injured 0 Originally the jury awarded injured party 100000 of which D paid 10000 and injured brought claim against Crisci for the rest 0 Court rules that whenever an insurer receives an offer to settle within the policy limits 10000 and rejects it the insurer should be liable in every case for the amount of any nal judgment whether or not within the policy limits This stems from an implied covenant within the contract 0 In this case the D insurance company knew that there was considerable risk of substantial recovery beyond the policy limits over 100000 and they did not 60 give as much consideration to the insured as they did to themselves This is all that is required for the court to award Crisci her damages 91000 because insurer had a con ict of interest The original settlement ask was only 10000 and Crisci offered to pay 2500 of it 0 Best option for insurer 10000 worst option for insurer 10000 plus costs of defense Best option for insured 2500 worst option for insured over 100000 Court decided they must make insurance companies treat settlement offers and jury determinations as if it was their own money 0 Court says that recovery can be based on the insurance company s unwarranted reiection of a reasonable settlement offer and that the absence of evidence circumstantial or direct showing dishonesty fraud or concealment is not fatal to Crisci s cause of action 0 Good Faith In Crisci the court looked to whether the D insurance company acted in good faith whether an insurer has given consideration to the interests of the insured test is whether a prudent insurer without policy limits would have accepted the settlement offer Court says that bad faith is the equivalent of dishonesty fraud and concealment 0 Mental Suffering of Crisci Allowed For every wrong there is a remedy and in this case mental suffering constitutes an aggravation of damages when it naturally ensues from the act complained of tortious conduct of the D anticipated or not by the D it doesn t matter 0 Court clarifies that not every breach of contract claim may recover mental damages But here the breach also constitutes a tort and the mental suffering stemmed from the losses caused by the D I Once you know it s a tort you can recover mental anguish damages There is a duty to settle in an appropriate case Where does the duty to settle come from Express terms of the policy do not usually include duty to settle Every an implied covenant of good faith and fair dealing What does this mean That neither party will do anything to injure the other or take away the other s right to receive benefits under the contract A benefit from an insurance policy is settlement Duty to settle only comes up in 3rd party context In Texas the duty to settle comes from agency law Insurance company is agent of the insured In California the duty to settle comes from implied covenant of good faith and fair dealing that is found in every contract NOTE No implied duty of good faith and fair dealing in Texas contracts except UCC Texas is never eager to wade into a good faith situation because it is too unpredictable 61 1 Texas Stowers Stowers Duty to Settle Requirements i Claim against insured is within scope of coverage I ii Demand is within policy limits 1 Demand policy above policy limits even if TEXAS reasonable does not trigger Stowers duties 399 iii Terms of demand are such that an ordinarily l prudent insurer would accept it considering the insured s potential exposure to excess judgment Expected value analysis i Expected Claim Value 1 Probability ofJudgment x Judgment Amount Attorney s Fees II I39F hn F FInmnnI nFFnr rnmnr in Inuunr Il n EvnnrInnl II II 3 LL n VI I III a IIII H I LII lb uU a U a ull I Irla Lau Claim Value a reasonably prudent insurer would accept the settlement 2 California and many otherjurisdictions CrSCI cal39forn39a Whether a prudent insurer without policy limits would have accepted the settlement offer i Question of fact ii Does not take into consideration whether demand it limits unip Texas 3 Strict Liability MINORITY RULE If original settlement demand was within policy limits and judgment exceeds policy limits excess judgment insurer is liable for entire judgment policy limit excess 0 Why does the court think we need a duty to settle There is a con ict of interest between the insurer and the insured that is caused by a policy limit because it s not their money Whereas if it was your money you would settle anything that would put you in a difficult spot You would take the calculations and considerations more seriously perhaps If there s any chance the insurance company doesn t have to pay anything then they re going to want to risk it and go to trial Whereas the insured is worried about an excess judgment 62 0 First look at the settlement offer and compare it to how much it would cost to go to court and the potential liability 0 You take the probability of event and multiply it by the magnitude of that event which sums up all potential outcomes I 80 chance of plaintiff s verdict 40000 judgment 20 chance of defendant s verdict 0 32000 20000 52000 If the P offers a settlement offer of less than 52000 than the rational person would take it 0 However consider if you have an insurance policy of 100000 and they offer you a settlement of 99000 0 The insurer would prefer to go to trial because the risk is 52000 Also even if the jury gives the P a million dollar judgment the insurer is still only on the hook for 100000 that s their cap 0 The insured would prefer to settle because that s why they paid their premium None of the 99000 would come out of the insured s pocket The insured just wants to get rid of the lawsuit because if it goes to trial and there is a judgment against him then the remaining excess judgment would fall to him to pay How do we de ne the duty to lt l Amicus Curiae argues that the standard should be whenever an insurer gets an offer to settle within policy limits and rejects it they should be liable in any case for the amount of any final judgment whether or not within policy limits This is a strict liability standard So far this view has been rejected by every court 0 Con it should depend on whether or not the case has any merit If the insurance company really believes the P won t get any money out of a trial then they shouldn t be on the hook for a settlement agreement even within policy limits The claim could be worth 0 0 Pro policy limits should be available to you the insured no matter what because you re paying for it That limit is money for you 2 Crisci Standard and Maioritv View Whether a prudent insurer within policy limits would have accepted the settlement offer 0 Settlement agreement within policy limits can only be rejected if it is in good faith and reasonable for the insurance company to do so Insurance company only has the duty to settle appropriate cases not every single case 63 0 Assume 90 chance P will win and expected judgment is 200000 Assume 20000 estimate of defense costs going into trial 9 200000 180000 20000 200000 I Assume a settlement demand comes in for 99000 Compared to 200000 a reasonable person would settle I This standard allows an insurance company to turn down a settlement demands within policy limits ex trial would be 38500 but settlement is for 50000 policy limit is 100000 There are four applicable standards that a Judge could use when determining if the insurance company correctly rejected a settlement offer 1 Did the insurer act with reasonable care in evaluating settlement demands 2 Did the insurer act with good faith in evaluating settlement demands 3 Did the insurer give equal consideration to the interest of the insured and the insurer when evaluating settlement demands 4 Did the insurance company when evaluating a settlement demand view the situation as it would if there was no policy limit applicable to the claim GA Stowers Furniture Co v American Indemnity C0 D insured P for 5000 and any injuries accidentally suffered by someone as a result of P s ownership of automobiles in their policy Employee of P was driving truck but it could no longer be operated so he left it on the side of the street Ms Bichon was driving rapidly on the street and ran into the truck and was injured She brought suit against P for 20000 D took charge of defense in accordance with the policy 0 Miss Bichon offered to accept 4000 in settlement D insurance co would not pay more than 2500 even though their policy bound them to pay 5000 They went to court and Ms Bichon was awarded 1410715 D knew that she was likely to get more than 5000 Admitted they willfully and negligently refused to make the settlement and did not act in good faith American Physicians Ins Exchange v Garcia Texas value analysis not activated by settlement demand unless three prerequisites are met 1 the claim against the insured is within the scope of coverage 2 the demand is within the policy limits and 3 the terms of the demand are such that an ordinarily prudent insurer would accept it considering the likelihood and degree of the insured s potential exposure to an excess judgment 0 Therefore in Texas if the settlement demand is not within policy limits you don t have to worry about it 64 Covenant Not to Execute Tort Plaintiff agrees not to never execute a judgment against the insured in return for an assignment of part or all of insured s claims against the insurer for failure to settle or failure to defend Do we over consume liability insurance I Some people claim that less insurance is actually better EX surgeon chooses high liability insurance because they don t want to pay patient s damages themselves Why would a doctor not want high insurance Because if they don t have as much insurance then less people will come after them perhaps Insurance is just something people will try to sue for target on your back I However if you as a doctor have money then it is a huge risk to not have insurance because they can just come after your assets income cars the insurance company s right to go after the tortfeasor right to sue the wrongdoer who caused them to have to pay out Normally an expressed term in the policy They can step into the insured s shoes and sue whoever caused the injury I EX neighbor negligently burned down your house 200000 claim and insurance co has to pay We want to go after the wrongdoer the insured may not sue because they already got their money So the insurer retains the insured s right to sue the neighbor Maybe they can get back some of the money they had to pay the insured Also it is meant to prevent a windfall to the insured get money from insurer and neighbor 0 Forms of Subrogation If not contractual ct will generally impose equitable O Contractual right of subrogation contained in insurance policy I Policies will always include a subrogation clause I Is this a good policy or is this now an adhesion contract 0 Equitable Subrogation I Court imposed subrogation I Court wants to avoid double recovery windfall to plaintiff I Makes sense when there is a finite damages number ie property damages I Makes less sense when damages cannot be easily quantified ie health insurance to cover lingering health problems 0 No double recovery because insured is in constant need of resources 65 0 Make Whole Doctrine I If plaintiff has not been made whole no equitable subrogation 0 TX Supreme Court has not applied Make Whole Doctrine to contractual subrogation Different cause of action that can be asserted against insurance company Texas Special Relationship Texas law does not impose duty of good faith and fair dealing on every contract 0 EXCEPT ION contracts covered by UCC o BUT Texas will impose duty of good faith and fair dealing where quotspecial relationshipquot exists Insurer and Insured example of special relationship TORT DUTY OF GOOD GIATH AND FAIR DEALING EXISTS Texas courts have found quotspecial relationshipquot between insurer and insured Characteristics of InsurerInsured Relationship 0 Unequal bargaining power 0 Insurer has exclusive domain over evaluation processing and denial of claims 0 Insurance company can advance a little of the requested money and then get a release from liability 0 Insurance company can twist arms to force settlement by paying pennies on the dollar 0 Insurance companies only subject to cost of claims interest in damages 0 quotSpecial trustquot Aranda 0 Insurance is a quasipublic service Courts want to impose a tort duty to keep insurance companies in check 0 Consequence of liberal justices of 19805 Moll Liberal justices trust in courts and juries to do what is fair Moll Conservative justices favor more predictability in the law disfavor juries Moll Conservative justices will eschew common law rules when statutes address the situation Aranda dissent Statutory causes of action against insurers do exist in Texas Texas Insurance Code TX DTPA i Statutory causes of action level the playing eld somewhat Plaintiff lawyers seek a quotspecial relationshipquot in many different contexts Special relationship duty of good faith and fair dealing tort claim Aranda Court has found Worker s compensation insurance carrier owes duty of good faith and fair dealno to insured employee 66 For breach of duty employee must establish i An absence of a reasonable basis for denying or delaying payment and ii That carrier knew or should have known that there was not a reasonable basis for denying or delaying payment Special relationship despite statutory protections No special relationship between franchisor franchisee Crm Truck Clt391ifltgtmilt39i Foley 0 Special relationship does not exist between employeremployee Unlike insured employee has more options more potential selfhelp remedies i Employee can nd a new job ii Employer is not providing a quasipublic service iii Interest between employer and employee are usually aligned as contrasted to interest between insurer and insured There are arguments that a quotspecial relationshipquot does exist between employer and employee There is trust between the parties There is one sided bargaining power 0 Better argument that employeremployee relationship just is not equivalent to insurerinsured relationship Common Law Examples Arnold v National County Mutual Fire Ins C0 motorcyclist Arnold had policy that included uninsured motorist protection and a policy limit of 10000 Arnold finally got his 10000 after a legal dispute 3 years later and then brought action for breach of duty of good faith and fair dealing in its handling of the claim Trial court granted SJ for D 0 Duty for good faith is applicable in lSt party instances ie insured suing insurer Court holds that such a duty of good faith and fair dealing exists An indemnity company is held to that degree of care and diligence which a man of ordinary care and prudence would exercise in the management of his own business 0 Cause of action for this breach is stated when it is alleged that there is 1 no reasonable basis for denial of a claim or delay in payment or 2 a failure on the part of the insurer to determine whether there is any reasonable basis for the denial or delay Standard in Texas and most jurisdiction today 0 Also exemplary damages and mental anguish damages are recoverable for a breach of the duty of good faith and fair dealing under the same principles allowing recovery of those damages in other tort actions 0 Some courts think this duty of good faith stems from insurance contract implied covenant 67 0 Texas does not recognize implied covenant of good faith and fair dealing this is a small minority They get their applicable duty of good faith through Which in the Arnold case is the insurance contract 0 What is a special relationship In the insurance context there is an unegual bargaining power which would allow the insurers to take advantage of their insureds Without the Arnold cause of action then insurers would be able to arbitrarily deny coverage and delay payment of claim with no more penalty than interest on the amount owed Needed to make insurance companies behave 0 Because it is a tort they are then liable for punitive damages andor exemplarymental anguish damages gt kIn most jurisdictions the court has recognized the tort of bad faith breach of insurance policy In 3 party context if you don t settle appropriately it s a tort And in a 1St party context if you delay processing and pay out of claim then it s a tort These are really breaches of the insurance contract but they are so significant they are tortious In 3 party context insured and insurer interests are aligned But in the 1St party context you are in opposition Insurer now wants money from the insured and insured wants the claim to go away So how is there a fiduciary duty whenever you are on opposite sides No tort duty in the 1St party context while there is in the 3rd party context because of the fiduciary duty PENALTIES Arnold court was not correct where they said that the only penalty without tort would be interest There are a lot of statutory provisions here that could make insurers behave not just a tort Insurance Code Administrative fines and state can bring actions against insurance companies for improper practices 1995 and beyond theses gave private causes of action 2121 claim 0 Insurance company also has to worry about attorney s fees and costs if they want to go to court and fight it Texas code 38001 pay the other side s attorney s fees as well if you lose 0 Post judgment and pre judgment interest if you should have paid the claim two years ago they owe interest for that entire time period Same for the time period after the court decision 0 So why does this need to be a tort One argument says it doesn t need to be with all of these damages available Aranda v Ins Co of North America TX SC action against workers comp carriers for failure to negotiate a claim for benefits in violation of a duty of good faith and fair dealing Workers comp is strict liability but you give up your right to sue 68 Both potential employers agree that one of them needs to pay but doesn t decide who so they delay 0 SC said is this an insurerinsured lSt party Yes duty of good faith see Arnold Have they been delaying good faith Yes so it s a tort O Dissent there is an entire statutory structure set up here for workers comp There is no unfair bargaining power here And the insurance companies here have the right to delay under statute but common law tort says they cannot delay the claim I TX SC overruled Aranda in the last couple of years So workers comp cases no longer present tort actions Court says that the P must establish breach of the duty of good faith and fair dealing by l the absence of a reasonable basis for denying or delaying payment of the benefits of the policy and 2 that the carrier knew or should have known that there was not a reasonable basis for denying the claim or delaying payment of the claim Standard in Texas and most jurisdictions today 0 The first element of this test requires an objective determination of whether a reasonable insurer under similar circumstances would have delayed or denied the claimant s benefits 0 The second element balances the right of the insurer to reject an invalid claim and the duty of the carrier to investigate and pay compensable claims Where else can there tort duties be extended Foley v Interactive Data Corporation SC CA P was fired because he believes he told his former supervisor that the new supervisor was under investigation by the FBI for embezzling from Bank of America P was told he might be demoted but not fired if he chose not to move to another branch He was then told that he could either resign or be fired P wants the court to find that the breach of the implied covenant in emplovment contracts also gives rise to an action seeking an award of tort damages Court points out that every contract imposes a duty of good faith and fair dealing in performance and enforcement however since the covenant is a contract term compensation for breach is almost always limited to contract remedies not tort remedies Why are insurance contracts special allowing tort 0 Court looks to previous cases mostly insurance contracts where they have extended good faith and fair dealing to tort actions But they make it seem the 69 reason that they did this was because it encompassed qualities of decency and humanity inherent in the responsibilities of a fiduciary Basically the insurance companies are performing a vital service that is quasi public in nature Also insurance companies and their insured have an inherently unbalanced relationship in which the company has superior bargaining power Insurance is vitally important to the public s welfare 0 Ex Contractu implied covenant of GP and FD is an allegation of breach of an obligation namely one arising out of the contract itself It is read into contracts in order to protect express covenants or promises of the contract NOT to protect some general public policy interest not directly tied to the contract s purpose 0 This is why insurance cases were a major departure from traditional principles of contract law 0 Should the court extend it even further to employment cases NO 0 Is there a special relationship like in insurance cases No insured cannot take to the marketplace to find another insurance company willing to pay for loss already incurred Insureds are in a more vulnerable place whenever they are screwed over by the insurer The wrongfully terminated employee however can mitigate damages Also employer does not sell protection to employee and does not provide a public service protection from calamity ie critical to people s welfare 0 Fundamentallv different relationships In insurance the insurer s and insured s interest are financially at odds lSt party context However as a general rule it is to the employer s economic benefit to retain good employees The interests of employer and employee are most frequently in alignment Therefore there is not as much of a need for the law to place disincentives on employer conduct as there is for insurer conduct I Also there is already legislative employee rights in place in regarding discrimination and employer s right to discharge employees 0 Reasons for why tort remedies should be extended to employment cases page 315 But the court does not do this Contractual remedies remain the sole avenue available for breaches of implied covenant of GD and FD 0 Reasons predictability of consequences of actions related to employment contract commercial stability employers need discretion to dismiss employee without fear of potential tort remedy freedom to make economically based decisions tort remedies for employment contacts have potentially enormous consequences for businesses 70 Extremely important business tort A fiduciary is someone who has undertaken to act for and on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence Highest duty imposed by the law Says that if I owe you a fiduciary duty I have to put your interests ahead of my own not equal ahead If you owe a fiduciary duty you look out solely for their interest WhV is this a good P s cause of action Can sometimes allow for recovery against party that wouldn t have been liable otherwise under contract Crim Also this is the closest a tort can come to just being unfairness It is a tort so there is a higher damages potential Jury Charge If you re in Texas and you can show they owe your client a fiduciary duty the jury charge is heavily weighted in favor of the P Basically it is a list of requirements of a fiduciary duty Most loaded plaintiff friendly jury instruction ever Moll a To show that one has complied with his fiduciary duty one must show i Transactions in question were fair and equitable to the beneficiary ii Fiduciary made reasonable use of confidence placed in him iii Fiduciary acted in utmost good faith and exercised scrupulous honesty iv Fiduciary placed interests of beneficiary before his own interests did not use his position as fiduciary to gain any advantage for himself and did not place himself in any position where his self interest con icted with his obligations as a fiduciary and v Fiduciary fully and fairly disclosed all important information to the beneficiary There is a presumption of unfairness if the fiduciary benefits of profits in any way from a transaction with the beneficiary Then the burden shifts to the fiduciary or party claiming validity of benefits of the transaction to show that the transaction was fair and equitable to the beneficiary 1St question Does a duciary duty exist 0 There are two ways the law recognizes a fiduciary duty 1 relationships that exist as a matter of law historic ones like attorneyclient principalagent business partners trusteebeneficiary corporate directorscorporation and insurersinsureds where some special relationship gives rise to GF and FD a In Texas shareholders do NOT owe each other a fiduciary duty as a matter of law 71 b In Texas franchisor franchisee relationship does not automatically give rise to a fiduciary relationship Crim Track 2 confidential relationships where one person trusts in and relies upon another whether the relation is a moral social domestic or merely personal one The existence of a confidential relationship is usually a question of fact But when there is no evidence it is a question of law a Stems from some kind of relationship of trust and confidence in Texas Texas law had made it virtually impossible to establish an informal fiduciary relationship Moll 9 Examples of a showing of trust and confidence but little of this stuff actually works to prove informal relationship Can look to length of the party s relationship The longer you ve known them and had the relationship the more reasonable it is that you had trust and confidence in them Familyfriendship v general business fiduciary in favor of the family or friendship not arms lengths business transactions Contractual language express or conveys trust Unequal bargaining power if there is a great disparity it suggests you trusted that person when entering into the relationship otherwise you might not have agreed Absence of a written contract trust in the other person enough to treat you fairly in business because you didn t feel the need to write up a contract How do you show that your client trusted in the D and their relationship Access to bank accounts P testifies to that fact subjective assertions Crim Track amp Tractor Co v Navistar Int l Transportation Corp SC TX Navistar franchise gave Crims franchise owners a chance to cure alleged breach by signing and returning new sales contract which obligated purchase and use of computer equipment that would implement a new dealer communications network system Crims never signed and returned the contract Because they never complied with mandatory new system D terminated the franchise agreement 0 Issue Whether there is evidence of a confidential informal relationship giving rise to a fiduciary duty between the parties to a franchise agreement No Franchisor can 72 unilaterally terminate the agreement as long as the franchisee breaches under the terms of the contract Crims examples of instances constituting an informal relationship 0 Contract language says that this was an agreement of personal trust and confidence in assignment section court says no this was boiler plate language to keep franchisee from assigning contract to someone else 0 Length of relationship court says the fact that the relationship has been long one does not confer a confidential relationship 0 Unequal bargaining agreement without franchise agreement they have no business Claim it s similar to insurance take it or leave it no negotiations The court does not say this is irrelevant but thinks it s not enough to justify a confidential relationship not needed because the legislature has already addressed this issue with franchise statutes and laws Existing regulatory scheme Texas Motor Vehicle Commission Code Texas Deceptive Trade Practices Act and Congress imposed duty of GF in terminating automobile franchise agreements O Subjective Assertions put P on the stand and Crim said he believed it was a relationship of mutual trust and confidence Court says this is not enough to constitute a fiduciary relationship I Mere subjective trust alone is not enough to transform an arms length dealing into a fiduciary relationship I Court says the fact that one businessman trusts another and relies upon his promise to perform a contract does not rise to a confidential relationship Dutv imposed bv Confidential Relationship a duty on the D to not seek only their own economic interests but to put the Crims interests before its own Fiduciary 0 Court specifically rejects implication of a general duty of GF and FD in all contracts but says that even if there was breach of that duty it would give rise to breach of contract action not an independent tort cause of action I The duty of GF and FD does not automatically confer a fiduciary duty It merely requires the parties to deal fairly with one another Fiduciary duty on the other hand has to put the other party s interests ahead of their own more onerous I Court says the franchise relationship does not have the same characteristics as an insurance relationship so does not see a GF and FD breach claim 73 0 Even if the court had found there was a fiduciary duty then the P would still have to have proven that there was a breach Two part process D most likely had the right terminate the contract under the terms terminated for perfectly good reasons not arbitrary Dissent disagrees 0 Failure to perform the terms of a contract is a breach of contract not tort However when one party enters into a contract with no intention of ever performing then that misrepresentation may give rise to an action in fraud That is not the case here 0 Dissent thinks franchisors will abuse local businesses with no repercussions Claims unassignability of a contract indicates a confidential relationship evidence of trust and confidence Thinks that the same principle of Arnold should be applied in franchisor cases Meyer v Cathey Cathey sued Meyer business associates alleging that Meyer failed to pay him amounts promised for work on real estate developments Texas SC says there is legally insufficient evidence that Meyer owed a fiduciary duty to Cathey 0 Cathey claiming an informal duty in this case However here the Court does not think a friendship and prior business dealings 3 years constitute a fiduciary duty The prior business dealings were only arms lengths transactions for mutual benefit the court says The fact that Cathey trusted Meyer does not transform their business arrangement into a fiduciary relationship 0 Ratification court says Cathey ratified Meyer s fraud A party that does not have a continuing obligation to perform under a contract but nevertheless continues to perform after learning of a fraud ratifies the fraud and therefore cannot recover damages for the period of time when the party knew of the fraud 0 For proof of partnership look to Control and Profit Sharing In this case Cathey had no control and Meyer would make all the decisions When there is evidence of partnership it is much easier to prove formal fiduciary duty Moll thinks Cathey should have pushed for a partnership which would have given him a formal relationship and a fiduciary duty What is sufficient for an informal fiduciary duty F lanary v Mills TX court of appeals very hard to find a SC TX case upholding an informal relationship giving rise to a fiduciary duty In this case the appellate court rules in favor of Mills claiming that Flanary breached his fiduciary duty from an informal relationship 0 Two parties were family and very close Went into construction business together no written agreement Supposed to be an equal share of profits and Mills entrusted Flanary 74 with the finances Flanary spent money for personal expenses and tried to rip Mills off giving him around 7000 instead of almost 150000 Flanary would never show Mills the books 0 Arguably the relationship existed prior to the subject matter of the dispute idea set forth in Crim and Meyer However working in the oil fields in the 80s as an employee would be an arm s length transaction But they also had a roofing business together in which there used to be a fiduciary relationship no longer a partnership so this argument could work for or against does it continue or was it a conscious choice to stop 0 Is there a formal relationship here No because this was not a partnership it was a corporation Shareholders of business corporations generally do not owe each other a fiduciary duty but they may in some cases when a confidentialinformal relationship exists Court rules there was a confidential relationship here 0 Does the nature of the relationship matter Possibly usually family would tend to be who is most likely to look out for your interests and put your welfare first If it means anything blood is thicker than water Family is a trust relationship although you could enter countervailing evidence if you had a very dysfunctional family In other jurisdictions family is almost a formal fiduciary relationship But we don t know how the Texas SC would rule on this issue an informal fiduciary duty is a relationship of trust and confidence but this is clearly not true Just because you trust does not mean it will rise to the level of a confidential relationship You have to have much more than just a trusting relationship to have the highest duty imposed by law putting someone else s interests above your own 0 Does an informal fiduciary relationship make sense where both parties go into business together People don t automatically think to put someone else s interest above their own in a business context You expect BOTH parties to be treated equally and not pull one over on the other party Navistar having to put Crim Truck s interest before their own can never be right TX SC is sending the message that informal fiduciary relationship do not make sense in a business context contracting parties entering into business always put their own interests first Shareholder Oppression Doctrine seeks to safeguard the close corporation lacks a market for its stock minority investor from the improper exercise of majority control Narrower doctrine than fiduciary doctrine which applies to any breach of trust and confidence theoretically A Close Corporation is a business organization typified by a small number of stockholders the absence of a market for the corporation s stock and substantial shareholder participation in the management of the corporation 75 Whv do thev need protection 0 An oppressed minority shareholder in a close corporation has no way to financially escape from the situation because they can t sell their stock worth anything They are stuck and there is no market eXit Person who owns the majority of the stock basically owns and runs the company 0 The board is ordinarily controlled by the shareholders holding a majority of the voting power Majority shareholder also elects the board Through the control of the board the majority shareholder has the ability to take actions that are harmful to the minority shareholder s interest 0 Freeze out majority shareholder in a small closely held corporation has the power to freeze the minority shareholder out of the financial aspects of the business and participatory aspects like being on the board or having a say What can courts do to help minority shareholders being oppressed 1 First many state legislatures have amended their corporate dissolution statutes to include oppression by the controlling shareholder as a ground for involuntary dissolution of a corporation a if the director has engaged in oppressive illegal or fraudulent conduct the minority shareholder can get some relief dissolution or a receiver assignment this is Texas route 2 Second particularly in states without an oppression triggered dissolution statute some courts have imposed a fiduciary duty among close corporation shareholder and have allowed an oppressed shareholder to bring a direct cause of action for this breach of duty Does not work in Texas So what constitutes oppressive conduct 0 Measuring Oppression 1 Court must determine when oppressive conduct has occurred m i Burdensome harsh and wrongful conduct TX courts have used this 1 A visible departure from the standards of fair dealing and fair play upon which every shareholder is entitled to rely a Good plaintiff s de nition vague standard ii Breach of the enhanced duciary duty or iii Frustration of the reasonable expectation of shareholders TX courts also use this 76 rmir E1 E1 7 7 7 2 Frustration of Reasonable Expectations MAjORITY mostapproved approach to de ning oppressive conduct quotMajority conduct that unjusti any frustrates the minority s reasonable expectationsquot No longer the law in Texas since this summer but is the law in upwards of 30 states or so Occurs when majority substantially defeats expectations that objectively viewed were both reasonable under the circumstances and central to the petitioner s decision to join the venture i EXAMPLES No management participation Termination of employment No access to records No ability to receive dividends Refusal to recognize the shareholder as a shareholder U39lbUUNl l ii Disappointment alone does not equal oppression Alternative remedies to dissolution less drastic court ordered buyout of oppressed shareholder by the corporation or the oppressive majority individual most common remedy now Davis v Sheerin small closely held corporation Trial court ruled that Sheerin had a 45 share in a corporation and Davis had a 55 share Davis claims that Sheerin gifted his stock to him a long time ago never happened Sheerin had brought suit against Davis based on allegations of oppressive conduct toward Sheerin as a minority shareholder and breach of fiduciary duty 0 Trial court ordered Davis to Sheerin s 45 interest Davis appeals and claims 1 the remedy of a buy out is not available to a minority shareholder under Texas law and 2 the facts of this case are not appropriate for a buy out remedy Texas only speaks to receivership 0 Patton Case TX SC said that as part of equitable authority when there was no statute they have the power to order dissolution While Texas does not expressly provide for the remedy of a buy out in the Texas business corporation act they note that courts of other jurisdictions have recognized a buy out as an appropriate remedy even in the absence of express statutory or contractual authority 0 Texas courts under their general equity power may decree a buy out in an appropriate case where less harsh remedies are inadequate to protect the rights of 77 the parties This is nationally the most prevalent remedy for oppression in the US today 0 Was a buy out appropriate in this specific case Jury found Davis conspired to deprive Sheerin of his stock ownership that he willfully breached his fiduciary duty wasted corporate funds but no malicious suppression of dividends and no excessive salaries 0 Court says that where one party conspires to deprive one of his ownership of stock in a corporation along with willful breach of fiduciary duty is enough to support conclusion that oppressive conduct would continue into the future Therefore a buyout is the appropriate to protect the rights of Sheerin the minority Shareholder O Frustration of reasonable expectations is a part of proving oppressive conduct What were Sheerin s reasonable expectations He asked to view company s books and records That he would be recognized and treated as a shareholder That Davis would not basically steal from the company dividends for himself Most dissolution actions lead to courtordered buy outs or elected buyouts Why is a buyout so attractive P gets financial compensation instead of being put back in their situation It creates a market for the P s stock the D probably wants it anyways Biggest problem it will drain a lot of the business cash to effectuate the buyout They might have to sell assets if they don t have enough money Rationale for issuing a buyout under statute receivership is basically dissolution liquidation courts have said that the legislature has by statute given them the power to dissolve a corporation surely if they have the power to kill a corporation they can do anything that would rectify the problem short of killing the corporation 0 is whenever the court sells the business and divides the profits to the two shareholders It gets them out of the situation and compensates the minority and lets them go their separate ways Buyout is a less intense remedy A dissolution only statute is the minority rule this is when the courts only authorization is to dissolve the corporation and the court cannot do anything short of dissolution 0 Courts and parties usually don t like dissolution because it is often a fire sale not fair value proceeds Almost like the sale of a foreclosed home It is not a market transaction and there is less uncertainty about what they re getting 0 Alternative remedies for oppression are allowed in most places except Texas and Virginia 0 Equitable remedies are exible and courts have a lot of discretion There have been cases where the minority bought out the shares of the majority because the majority was the passive one Highly unusual 78 Election Statutes p 29 if a shareholder petitions for dissolution or other relief on the grounds of oppressive conduct the majority can circumvent dissolution by electing to buy out the petitioning shareholder Is useful when they want to circumvent litigation and move straight to the remedy 0 Some say an election statute like this makes filing a petition a high risk proposition How Petitioner loses control because D can now choose what to do If the P does not want to be bought out then they just took a big risk D can choose to buy out within a certain time frame However if the D chooses to fight then the P has to prove their case that their reasonable expectations were thwarted 0 Hetherington and Dooley s Mandatory Buyout Proposal This is the theory that we should give the minority shareholder the right to say that majority has to buy them out no matter what Even without oppression As of yet no state has adopted the mandatory buyout statute 0 Con gives minority too much power Majority may not have the assets to buy them out right now Can also cause the minority hold up problem they can say I ll make you buy me out unless you do this The 1 remedy for oppressive conduct today is a buy out of the oppressed investor s shares What is the price of that buy out Fair Value but what does fair value mean 0 1st approach Fair value equates to fair market value What would a hypothetical purchaser would pay for the shares on the open market What would a willing buyer pay a willing seller when there is no distress O DISCOUNTS I The majority shareholder gets a based on actual economics that people will pay less for a minority block of stock because it lacks control of the corporation 0 People would pay less for minority shares so why should the controlling shareholder pay more Because it s worth more to them it gives them more control over their own corporation and consolidates 0 What if it is the corporation making the purchase Then that stock effectively just disappears The corporation does not then own a share there are just less shares to go around The other holder s percentages of ownership change when shares disappear 79 0 Moll thinks the Minority Discount doesn t really make sense when a buy out is the remedy in oppression situations Almost every court across the country has decided to reject minority discounts in the oppression context 0 This approach differentiates between the value of minority share and majority shares Majority shares are empirically more valuable because you have control I Majority can also get a based on the premise that all closely held corporation stock is less liquid that other corporation s stock harder to convert it to cash Does not differentiate between minority and majority shareholders F ollett Average of marketability discount of minority stock in a closely held corporation is around 35 50 0 Discount based on economic reality that people pay less for illiquid stock difficult to turn it into cash All closely held corporation stock is by definition less liquid For example even if the controlling party held 100 of the stock it is still harder to sell than shares on the open market However presumably it is easier to sell a controlling block of closely held share than a minority block of closely held shares 0 Argument for a small discount Controlling shareholders will not be left lacking control it will still be illiquid but they will have control so it s easier to sell and the valuations are based on the difficulty of sale 0 Against marketability discount Punishment rationale majority is the bad guy and did the oppression so they shouldn t get a marketability discount and get cheaper shares Moll doesn t like this because the discount is an economic reality 0 EX Corporation worth 10 million minority has 25 Majority would discount it by 30 minority discount so minority would get 175 million However then they could use a marketability discount for say another 30 so the minority would get 1225000 These discounts can be even higher than 30 0 2nd approach Enterprise Value Approach The meaning of fair value is defined as a pro rata share of the company s overall value 0 EX If the corporation is worth 10 million dollars and the minority holds 25 then the minority should be bought out for 25 million 0 You want enterprise approach to get out of discounts Preferred by plaintiffs 80 The differences in these two methods can be well over 50 Given how quickly a company s fortunes can change the question of when to measure fair value is a critical inquiry in and of itself as the choice of date can have a significant impact on the ultimate fair value conclusion How do you define fair value Some jurisdictions that pick fair market value approach use the definition the price at which property would change hands between a willing buyer and a willing seller with no obligations 0 This does not sounds like a typical oppression situation Majority shareholders do not normally seem like willing buyer minority could be seeking a buyout though Although they could also be selling because they re oppressed not cause they re wanting to sell Majority shareholder could also be willing because maybe that s why they were oppressing the minority in the first place 0 One argument is I don t know if the oppression lawsuit meets the definition for fair market value This is not usually compelling or compulsion in a fair market proceeding Fear of lawsuits and dissolution does not lend itself to fair market value If there is a statute which says the buy out should be at fair value what is the It says fair value not fair market value Since they didn t say that they must mean something else The court knows what fair market value is Argument for Enterprise If you saw a statute that said a buyout is at fair value one good place to investigate is other statutes in your jurisdiction using those words do other statutes say fair value and what does it mean 0 Appraisal statute dissenter s statute around for 100 years Says for certain statutorily defined events always major corporate changes any shareholders can choose to opt out and be bought out at fair value Fair value in these circumstances means no discounts Enterprise approach Brown v Allied Corrugated Box C0 Allied 49 charged Brown 51 with various acts of fraud and unfairness oppressive conduct so they wanted involuntary dissolution 0 Issue How much is allied s stock worth Majority commissioner report said 27195 while minority commissioner report said 147596 Divergent conclusions were caused because one side used the fair market value approach and the other side used the enterprise value approach 0 Court tried to remedy this by making both parties agree on a third party appraiser Total of 3 appraisers And then whichever approach 2 of the 3 appraisers agree with should apply 81 Court reverses the award of 27195 thinks it lets the majority shareholder oppress them even more Also lack of control inherent in plaintiff s minority shares would substantially decrease their value if they were placed on the open market court says that a minority shareholder who brings an action for involuntary dissolution should not by virtue of the controlling shareholder s invocation of the buy out remedy receive less than he would have received had the dissolution been allowed to proceed O This assumes that if they allow discounts the buy out will pay less than what you would have gotten at a dissolution sale assumes that dissolution would bring a chunk of change which is not sure cause it s a fire sale This is very unclear and unsure so this argument about getting less in a buy out than in a dissolution sale is just speculation no eXperts O Moll does not think this is a strong argument The legislature provided the dissolution remedy by this logic one could also claim that dissolution is the ceiling and you shouldn t get any more not the oor and you shouldn t get less Advanced Communication Design v F ollett issue in a court ordered buy out of a minority shareholder should a marketabilitv discount be applied to the value of the share Yes in this case A marketability discount adjusts for a lack of liquidity in one s interest in an entity Reasoning because the illiquid nature of the corporation s shares impact the value of the corporation as a whole a marketability discount should be applied to avoid unfairly burdening the oppressed shareholder purchasing the stock Remedy should be fair and equitable to all parties Court does not want to adopt a bright lined rule on this issue but use discretion to decide on a case by case basis Absent extraordinary circumstances fair value in a court ordered buy out means a pro rata share of the value of the corporation without discount for lack of marketability Why are there two completely opposing views proposed by two side s eXperts 30000 v 300000 They re not independent bought and paid for by the attorneys Valuations are more of an art than a science There is not just one way to value a business eX adding up assets what would it sell for What income does it bring in each year What is its cash ow Once you know what fair value means what is the date at which we measure the fair value of the company 82 1 Many jurisdictions have handled oppression by statute which usually say the buyout is as of the date the minority filed their petition for relief The day you ask for judicial relief 2 As of the date of oppression seen as less manipulable However there is usually not just one day where oppression starts usually a long process 0 In Texas there is no answer to this question One of these two options probably 0 What about the date of the trial Not practical Experts have to evaluate the company before trial Texas since 1986 has had a shareholder oppression doctrine Frustration of reasonable expectations standard Buyout was allowable and most common remedy Did not say what fair value meant or when to value 0 This summer Texas said no more there is still an oppression doctrine but all the legislature said was that you could get a receivership No buy out which basically kills the doctrine because people want out Court also changed the standard from frustration of reasonable expectations to proving a bunch of other stuff and that the corporation was harmed 0 Also in Texas no fiduciary duty to shareholder as a matter of law either so you d have to argue informal theories Breach of Contract ANDOR Tort Economic loss rule basically said unless you had personal injury or property damage you can t recover in negligence or anything less no strict liability Testbank This is one branch of the economic loss rule between strangers ie non contracting parties What we are about to study is also called the economic loss rule but is a different branch the nonstrangers parties that have a contract Can you bring a tort claim when all you have is economic loss in this instance The difference is a contract Something about the fact that people have a contract makes courts more reluctant to extend it to tort 0 State of Texas Law when the same set of facts gives rise to both a breach of contract claim and a tort claim 1 m certainly engage in a duty analysis 15 there a TORT dutv independent from the contract breach 2 May have to engage in nature of the injury analysis Texas S Ct may require a nature of the injury analysis on a tort by tort basis whenever they feel like the distance between the tort claim and the K claim is too close there is a great EXAS CONTORT TE 83 chance that every contract claim will give rise to or be converted into that certain tort then court will evaluate the nature of the injury in determining if actionable under tort i Is there personal injury or property damage in addition to that which stems from the contract 1 NO TORT if H only incurs Economic loss from contract breach 2 Nature of analysis may still be applicable for 3 certain torts negligent misrepresentation 4 Will NOT be relevant with fraud Formosa The Con Tort Problem contracting parties that want to bring tort actions against the other as well as or instead of breach of contract Texas History Step 1 every single contract has tort duty of care inside Mont Ward If they were negligent you could bring a negligence claims Step 2 Nature of the injury if you want to have a tort claim you have to have an independent tort injury Jim Walter Reed person or property not part of contract Step 3 you can bring a tort claim but source cannot be the contract itself DeLanney contract doesn t give you the tort duty Also tort injury is instructive don t know if required Step 4 independent tort duty not to commit fraud even with no tort injury and only economic injury Formosa Duty matters most so the absence of a special tort injury does not preclude a fraud claim Step 5 DSA negligent misrepresentation claim must fail for lack of any independent injury Jim Walter Homes Requirement not fraud like in Formosa Was there a personal injury no Was there property injury yes the school but that was to the subject of the contract therefore it is covered by the contract remedy Remember the Basic Purpose Contract law to enforce intent of the parties and the bargain Tort law to vindicate social policy Historically English courts used to distinguish between the two on misfeasance affirmatively performed some act could be a tort or a contract claimants choice or non feasance didn t perform some act omission always a breach of contract claim standards 84 Montgomery Ward v Seharrenbeek SC TX 1947 Scharrenbeck sues Ward for the burning down of their house due to negligence tort as an employee of corporate defendant fixing their hot water heater They had a contract for repairs Court ruled in favor of the P Allegations P claims that there was a failure to regulate or keep a proper watch on the heater to prevent it from catching the house on fire misfeasance D claims that the Ps did not state any facts on which a negligence claim can be based fails to state what the D did or should not have done and does not allege breach of duty non feasance 0 Court does not agree with these theories Court says you can have a tort duty through negligent performance or negligent non performance so this is not the test Torts can be based on non feasance of the act of commission 0 How do you find a duty of care There has to at least be a minimum of fault and negligence Breach of contract does not require fault P 363 HNl A contract may create the state of things which furnishes the occasion of a tort Accompanying every contract is a commonlaw duty to perform with care skill reasonable expedience and faithfulness the thing agreed to be done and a negligent failure to observe any of these conditions is a tort as well as a breach of contract 0 HELD A person who contracts to make repairs can be held liable for his negligence in doing the work In this case the duty to not create a dangerous condition existed independent of any contractual relationship which is why it could be a tort too O Failure to exercise proper care in regards to a contract also called negligent performance of a contract Accompanying every contract is an implied covenant of GP and FD so we ve seen that breach of contracts can be tortious in insurance cases not in Texas But this is a very broad duty Gross Negligence Recklessness can get you punitives probably Mental anguish is also theoretically recoverable in tort and contract but only in contract if the contract has something to do with private things like dead bodies There could be limitations of remedy if there are only contractual damages People also negotiate over this kind of stuff less remedy and lower prices All the things that have been negotiated being circumvented by a tort claim does not seem fair for the D Tort opens up possibility of more damages for the P Jim Walter Homes v Reed SC TX 1986 P brought suit seeking damages arising out of the sale and construction of the house by Jim Walter Homes Claimed gross negligence and breach of contract jury gave them punitive damages for gross negligence claim 85 0 Issue Whether there is an independent tort to support an award of exemplary punitive damages No 0 Court quotes from Montgomery Ward and adds that This case can only be characterized as a breach of contract which cannot support recovery of exemplarypunitive damages 0 This is very restrictive compared to Montgomery Ward which basically said all breaches of contract could be torts too I Why did they completely change it Want to stop every breach of contract from becoming a tort claim But why is this bad Renders contractual negotiations moot However tort requires fault while breach does not so one does not automatically include the other 0 There has to be personal or property damage to something other than the subject of the contract itself When no physical injury has occurred to persons or property it is an economic loss governed by contract products cases rule extended to non product cases like Jim Walter Homes 0 Policy Argument should be limited to breach of contract damages when a product doesn t work non stranger context because there can be warranties negotiations returning of the product This is what contract law is all about default rights and remedies if the product does not meet your eXpectations Shouldn t be able to undermine the deal for tort damages Tort claim between contracting parties they should have their own ability to create their remedy and maybe they already did or the default rules of contract will Tort would override deal that they struck Why would they negotiate a deal if it doesn t matter Tort law is designed for personal injury and property not purely economic losses Southwestern Bell Telephone Co v DeLanney SC TX P sued D for negligence in failing to publish his directory advertisement phone line was attached to directory ad does not bring a breach of contract action because of limitations of liability clause remedy would be just getting his money back 0 Whether there can be a cause of action in tort as well as contract No DeLanney sought damages for breach of duty under the contract rather than a duty imposed by law so the claim should only sound in contract 0 Obligations imposed by the law are tort obligations imposed by bargainingagreement are contract implied or eXpress 86 0 Court thinks it is instructive to looks to the nature of the P s loss don t know if this is mandatory Only harm was DeLanney contracted for something and Bell didn t perform pure economic loss 0 Now what matters is if you have some independent tort duty conduct regardless of contract Later interpretation of Montgomery Ward Common law tort duty not to repair something in a way that would injure person or property EX repairing water heater and burned down the house unquestionably a tort claim This is why Montgomery Ward has a common law tort duty not because all contracts do Revisionist history when that is obviously not what they said in the first place basic fraud Formosa Plastics Corp v Presidio Eng amp Contractors SC TX Contractor Presidio brought suit against project owner Formosa alleging fraud and breach of contract 0 Issue Can you sue for fraud when you are contracting parties and it is just economic loss Yes there is an independent duty not to engage in fraud 0 This court rejects the application of DeLanney to preclude tort damages in fraud cases because Texas law has long imposed a duty to abstain from inducing another to enter a contract through the use of fraudulent misrepresentations Also the legal duty to not fraudulently procure a contract is separate and independent from the duties established by the contract itself Page 380 D SA v Hillsboro Ind School Dist school district sued contractor hired to build the elementary school for breach of contract and negligent misrepresentation Trial court gave the school punitive damages But can a negligent misrepresentation claim with a breach of contract issue get punitive damages No 0 Can they even bring a negligent misrepresentation claim Normal neg mis claim was when a P was suing some expertprofessional and the P was usually not in privity with that person However DSA was giving information for their own pecuniary interest so it does fit restatement 552 on its face Even though it fits rstm it is highly unusual 0 Held a party cannot recover benefit of the bargain damages and punitive damages for negligent and grossly negligent misrepresentations made by the other party in pre contractual negotiations 87 0 Jim Walter Homes Requirement Was there personal injury no Was there property injury yes the school but that was to the subject of the contract it is covered by the contract remedy 0 School tries to argue under Formosa but the court holds that Formosa s rejection of the independent injury reguirement in fraudulent inducement claims does not extend to claims for negligent misrepresentation o 1 out of pocket damages are allowed for negligent misrepresentation those necessary to compensate the plaintiff for the pecuniary loss the difference between the value of what he has received in the transaction and its purchase price and pecuniary loss based on reliance on the misrepresentation 2 don t get benefit of the bargain damages 0 HISD brought the wrong damages claim they asked for benefit of the bargain when they should have asked for out of pocket The only thing they brought that could get them benefit of the bargain damages was breach of contract Breach of Contract no fault 9 negligent misrepresentation med fault 9 Fraud maX fault So just because you breached a contract does not mean a party could bring a negligent misrepresentation claim they still have to satisfy the level of fault So not every single K claim could turn into a tort claim So what to do if you want to bring a tort 0 Find an independent tort duty 0 Do you also have to show a tort injury If fraud then no Formosa But if negligent misrepresentation then yes BSA 0 What would be the most successful torts against parties they have a contractual relationship with Probably intentional torts because they re the ones that have some kind of intent requirement which is far away from breach of contract 0 Origin of economic loss rule intended for the prohibition of negligent claims or strict liability not intentional torts So maybe in this way DSA makes sense Rationale all negligence claims of any species or variety you cannot bring when you have a breach of contract claim against a party When you contract you are already protected from breach and negligent breach Fundamental reminder if you have a contract with someone and you breach negligently intentionally or innocently it does not matter it is no fault No punitives Insurance cases are the starting point for all of this 88 Seaman 5 Direct Buying Service Inc 1 Standard Oil C0 of Cal SC CAL 1984 Contract between the two parties for Standard to provide oil to Seamans Gov Fed Regulations said you can only sell oil to existing contractual parties Seamen s goes and gets a concession from a federal agency as long as Standard Oil says they have an existing contract Standard ended up refusing and claimed they never actually had a contract so they could sell the oil for a higher price to someone else Seamans won on their breach of contract and breach of the implied covenant of GF and FD claims trial court gave them punitives 0 Issue Whether a breach of the implied duty of GF and FD in a commercial contract may give rise to an action in tort to support punitive damages 0 In general in Cal every contract includes an implied covenant of GF and FD This covenant requires that neither party do anything which will deprive the other of the benefits of the agreement 0 It is a well established principle of law that the parties reasonable expectations should govern the determination of what conduct constitutes a tortious breach of the implied covenant of GF and FD 0 Court rules against Seaman for breach of GD and FD because there is no proof that Standard denied the existence of the contract with bad faith ie need independent showing of bad faith Seaman still got breach of contract 0 In California if you breach a contract and then deny in bad faith that the contract exists that is a tort This decision is almost instantly criticized There is no standard I Not every slight every wrong ought to have a tort remedy There is an intrusion into courts regarding business relationships it trivializes the law and generated serious costs and uncertainties After Seaman there is a bad faith denial of contract tort What about the difference between denying the existence of a contract and disputing the terms of the contract Would bad faith denial apply to this second situation No it does not encompass defenses raised in bad faith it would only be a breach of contract Court afraid that if they extend it to this it would open up defenses to breach of contract liability to more tort actions Don t want to chill D s ability to raise defenses 0 Seaman S tort ONLY applies when the D straight up says in bad faith that there is NO contract Take away If you deny in bad faith the existence of a contract that is a tort What constitutes a bad faith denial is less clear Seaman s say that this is not premised on the breach of 89 an implied covenant of GF and FD in a contract So where do they get this notion It offends accepted notions of business ethics This was the law until Freeman Crim Truck explicitly rejects the implication of a general duty of GF and FD in all contracts Breach of contractual duty of GF and FD gives rise only to a cause of action for breach of contract and not an independent tort cause of action Why are tort actions available for breach of covenant in the insurance context The special relationship between insurer and insured characterized by elements of public interest adhesion and fiduciary responsibility Court says there are no doubt other relationships with similar characteristics and deserving of similar legal treatment but don t tell us what they are 11 years after Seaman Freeman amp Mills 1 Belcher Oil C0 SC CAL CPAs want to get paid Law firm was agent who hired CPA for Belcher Belcher claims they didn t give permission for law firm to hire CPA CPA brings breach of contract and tort for bad faith denial of eXistence of a contract 0 HELD Oil Company s denial of contract with insurance company did not create a remedy in tort Explicitly overrules Seaman s decision and does not recognize a tort cause of action based on the D s bad faith denial of the eXistence of a contract between the parties 0 Why did Freeman kill the Seaman S tort Makes it unpredictable to enter into contracts you don t know what your damagesremedy would be Concern that if you breach you could get hit with a tort Also deters efficient breach if you can t determine damages then you can t efficiently breach other party could be worse off 0 Stare Decisis you re supposed to be able to rely on precedent Don t want courts changing the law very often Not as important when there are reasons the court believes to be more important such as killing Seamans 0 Should they have so eXplicitly overturned Seaman s Mosk says they should just have reformulate Seamans into 3 scenarios where breach of contract in those areas should be tortious l the breach is accompanied by traditional common law tort 2 the means used to breach the contract are tortious and 3 when one party intentionally breaches the contract intending or knowing that breach will cause severe harm in the form of mental anguish substantial hardship or consequential damages 0 Tort is all about saying you don t want that kind of conduct it should be punished and it does not encourage efficient breach Most thinks Seamans is a good case for this type of tort This is the type of scenario we want to discourage mean breach where you know it will cause the other party severe harm Insurance area is still intact but because of special instances related to insurance not because of breach of implied covenant of GD and FD in contracts 9O Hypo assume your client is minority Shareholder in a closely held corporation and is being treated unfairly by controlling group 1 What is problem with breach of duciary duty in Texas Standing problem 91 SH DO NOT OWE each other formal duciary duty in Texas as a matter of law Too bad bc jury instructions for fiduciary duty are very favorable for TI and it s a tort pun Damages available 2 Do not give up Try an informal duciary duty claim heoretically possible but realistically not very possible i Bringing this claim is a gigantic gamble these days bc tx supreme ct has written a lot of statements that make it dif cult to recover for this claim 1 A probably will bring summary judgment claim 3 What is different about oppression context NO STANDING ISSUE Statute You can bring a cause of action for oppression under statute and seek dissolution i Ct has equitable discretion to grant whatever remedies it feels appropriate 1 Buyout is most common remedy ii Better to ask for buyout under guise of oppression rather then breach of duciary duty action which is likely to fail amp probably waste of time BUT What if T is not a minority SH in corporation i Tough luck you then may have to try wild card breach of duciary duty NOW in TEXAS we have statute that says oppression statute applies to ALL business organizations LLC Some states like partnership so members owe each other duty Texas doesn t have this CHCs don t owe each other duty so LLC members don t either Basically two causes of action that are functionally the same theoretically both police unfairness but as far as practitioners are concerned doctrines rule and they result in one being very simple and the other almost impossible reated as different causes of action IAnd different doctrinal purposes ls oppression considered a tort Answer should be yes but no de nite answer in Texas lf tort then punitive damages likely Compare with breach of duciary duty which is de nitely tort Texas Concerns May Apply to OtherJurisdictions What Does Fair Value Mean When is Fair Value Measured No authority in Texas Other jurisdictions peg the date as the date on which lawsuit was led 92
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