Fraud & Business Litigation
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Recovering For Fraudulent Conduct Under Kentucky Law
In a Kentucky action for fraud, the party claiming harm must establish six elements of fraud by clear and convincing evidence. These six elements are:
(1) a material representation;
(2) false;
(3) known to be false or made recklessly;
(4) made with inducement to be acted upon;
(5) acted in reliance thereon; and
(6) causing injury
A plaintiff can prove these six elements by direct evidence, such as documents and/or through testimony. Fraud may be established by evidence that is wholly circumstantial.
Fraud in Kentucky may be committed by either intentionally asserting false information or by willfully failing to disclose the truth. Stating a mere partial truth can be fraudulent if it is materially misleading.
The most important Kentucky decision on fraudulent conduct published within the last forty years is Rickert v. United Parcel Service of America, Inc., 996 S.W.2d 464 (Ky. 1999). Mr. Shelton was co-lead counsel at the trial of this case, which resulted in a $750,000 compensative damage award to the plaintiff and a $1,000,000 punitive damage award. He was also the lead author of the appellate brief and argued the case in front of the Kentucky Supreme Court. In Rickert, the plaintiff claimed and the jury found that the defendant UPS fraudulent induced him to forgo seeking employment opportunities elsewhere by promising him a job at the start-up UPS airline. The jury found that UPS committed fraud upon Mr. Rickert when it failed to tell him that it would only be hiring a limited number of airline pilots and that he may not necessarily be one of the individuals they hire.
Detrimental reliance is many times the most difficult thing to prove in a fraud case. In order to satisfy this element of fraud, a plaintiff must prove that he/she acted or failed to act due to the fraudulent misrepresentation. A person is entitled to monetary damages resulting from inaction when an untrue statement is made with the intent to induce that person not to do something so long as it can be demonstrated that the false statement produced the inaction.
The Kentucky Court of Appeals recently reversed a $10,000,000 fraud verdict against a bank because it found that the plaintiff had not detrimentally relied upon the bank's alleged fraudulent promises relating to a forbearance agreement. In Branch Bank & Trust Company v. Thompson, a Jefferson County, Kentucky jury found that the plaintiff had justifiably relied upon statements made to him by the defendant bank's loan officer when entering into a forbearance agreement. However, the Court of Appeals held that the plaintiff borrower's reliance was not reasonably justified. Citing Kentucky precedent, the court held that when a recipient of a business representation has an opportunity to ascertain for him/herself the falsity of that business representation through ordinary vigilance or inquiry, the falsity of that business representation is not actionable as fraud, even when made with the intention to deceive. In other words, the recipient of a business representation has a duty to exercise ordinary care or common sense before acting upon an alleged fraudulent statement or promise. The court in Thompson cited with approval the following language from Kaiser v. Nummerdor, 97 N.W. 932, 934 (1904):
[The rule of reasonable reliance] rests on the idea that one cannot be defrauded by an assertion of what he knows to be false, and that courts will presume that an ordinary person does know those things which are obvious to ordinary observation. Hence, courts will deny relief to him who shuts his eyes to that which is clearly apparent, if, knowing it, he could not have been deceived by defendant's misrepresentation.
When a party signs a contract he chooses not to read and thereafter claims that he was fraudulently induced into signing the contract, the jury must decide whether the party claiming fraud exercised ordinary care in relying upon that fraudulent misrepresentation only or if that misrepresentation was accompanied by circumstances reasonably calculated to deceive one who did exercise ordinary care for his/her own protection.
The measure of damages in a fraud case is generally to place the injured plaintiff in the same position he would have been in but for the fraud. For example, if a plaintiff proves that he was fraudulently induced into buying a defective home, that plaintiff would be entitled to rescind the contract and receive a refund at his purchase price. Alternatively, another measure of damages for fraud is known as the "benefit of the bargain." For example, if a person is induced into buying an automobile upon representation that the car is worth $5,000 and the car turns out to be worth only $1,000, then the plaintiff would be entitled to the $4,000 difference.
Finally, Kentucky courts have repeatedly held that a jury may assess punitive damages, in addition to compensatory damages, against a party who has been found to have committed fraudulent acts. While there is no strict mathematical formula restricting the amount of punitive damages a jury may award for fraud, the United States Supreme Court has repeatedly held that punitive damages awards exceeding ten times the amount of the compensatory damage awards are constitutionally suspect.
