Fraudulent inducement in the sale of counterfeit Akers Silver Lady watches

Arkansas Fraud Case

Schnur, Tarpley & Taylor, P.A.

PRIVILEGED ATTORNEY WORK PRODUCT

Lindsay Tarpley, Partner

Associate

Howard v. Chastain, File # 2010-325

Under the Arkansas law does a seller commit fraudulent inducement when that seller represents that she is selling an authentic item, in response to a solicitation specifically seeking to purchase said authentic item, and the item turns out to be a fake/reproduction?

Tim Howard will likely have a viable claim for against Chastain, however, he will have difficulty in proving two elements, Chastains knowledge of that she made a false statement and whether his reliance on Chastain's representation was justifiable in light of his failure to use due diligence prior to finalizing the sale.

Thesis/Introduction

Client appears to have a valid claim for fraud against Seller, provided he can establish that Seller knew the watch was not authentic and that he would not have detected the watch was not real by using due diligence. While legal definitions will vary in different jurisdictions, an action for fraud will generally be found where one intentionally deceives another with the intent for personal gain or to cause damage to another individual. Evidence of intent to deceive or mislead is the essential requirement for finding fraud and such evidence can include manipulation of documents and facts and the failure to communicate information. In the matter of Tim Howard (Client) and Brandi Chastain (Seller), this memo will identify and explain the elements of fraud, the likelihood of Client succeeding in such a claim and the obstacles to be overcome in order for him to prevail.

Rule

Based on current Arkansas law, the tort of fraud is based on five elements, all of which must be present for a plaintiff to prevail in a civil suit. Each of the five traditional elements of fraud must be established by evidence with unique particularity and not equally consistent with either honesty or deceit (37 Am. Jur. 2d Fraud and Deceit §23 and Fausett & Co., Inc. v.

Bullard et. ux., 217 Ark. 176, 229 S.W.2d 490). The elements are 1) a false representation; in reference to a material fact; 2) made with knowledge of its falsity or with insufficient evidence upon which to make the representation;; 3) with the intent to induce action in reliance upon the representation; 4) and on which an action is taken in justifiable reliance upon the representation; and 5) where damages are suffered as a result (Ibid).

Explanation

To prove the first element of fraud (false representation; in reference to a material fact); a plaintiff must prove the falsity and materiality of a fact asserted by the defendant (Fausett & Co., Inc. v. Bullard et. ux., Supra). In general, a false statement will be considered as "material" if it has the natural tendency to influence, or is capable of influencing, the decision of the decision-making body to which it was addressed (37 Am. Jur. 2d, Fraud and Deceit §236). A withheld fact will likewise be "material" if the plaintiff would have acted differently had he or she been aware of it (Ibid.)

The question of whether the defendant had knowledge of the falsity of the statement (the second element of fraud) is strictly a factual question to be determined by the trier of fact (Medlock v. Burden, 321 Ark. 269, 900 S.W. 2nd 552 (Ark. 1995). Questions of credibility as to parties and witnesses and the weight attributed to inferences made regarding the knowledge of a party are part of the factual question and also determined by the trier of fact Wheeler Motor Co., v. Roth, 315 Ark. 318, 867 S.W. 446 (Ark. 1993). The courts have held that knowledge can be determined from the entirety of the circumstances, including character evidence and circumstantial evidence.

Whether a defendant has the intent to deceive is also a question of fact. Failing to speak or disclose known facts will also be construed as an intentional misrepresentation or fraudulent concealment and "amounts to fraud just as much as an affirmative falsehood" ( Floyd v. Koenig, 274 S.W.3d 339 (2008)). Thus, intent can be established by an affirmative false statement, as well as by concealing a facts that would prevent a buyer from consummating a transaction.

The fourth element requires that reliance on the misrepresentation be justifiable. The courts have taken a more limited view of this element. For instance, according to the Arkansas Supreme Court, if a plaintiff might have detected the fraud by the exercise of reasonable diligence, he is presumed to have had reasonable knowledge of it (Delanno, Inc. v. Peace, 366 Ark. 542, 237 S.W.3d 81 (2006)). However, it was held in Myers v. Martin (168 Ark. 1028, 272 S.W. 856 (Ark. 1925)), that the buyer may credit the statements of a seller who has peculiar knowledge of the subject matter of the sale. Therefore, while the buyer has some responsibility to prevent a fraud, he is not expected to investigate every statement of a seller who has specific knowledge regarding the sale.

To prove damages, the plaintiff must show the false statement was made with intent to have the other party act upon them to his injury, and such must be their effect (Jarratt v. Langston et al., 99 Ark. 438, 138 S.W. 1003 (Ark. 1911)). In most cases, monetary damages will be in the form of a buyer spending money for an item he did not receive or not receiving full value in return for a purchase price.

Application

In order for Client to prevail on a claim for fraud against Seller, Client will have to present clear and cogent evidence that all five of the elements have been met. Client will likely easily succeed in establishing the first, third and fifth element and struggle to establish elements two and four.

The first element, a false representation involving a material fact, is obviously present. Client solicited the sale of a genuine Akers Silver Lady watch and Seller, in her initial correspondence, clearly identifies that she has an "Akers Silver Lady" in very good condition that she is willing to sell for $12,500.00. While the words "real," "authentic" or "genuine" were not used by either party, it is reasonable to assume that the finder of fact will conclude that the silence as this term implies authenticity given the price of the sale and the subject matter (watches are known to be expensive items that are often copied). It can also be reasonably concluded that the implied representation induced Client to purchase the watch as he would not have paid $12,500.00 for a watch that was a fake. As the watch was not a real Beckham watch, but instead a cheap copy, Seller's representation that she had an Akers Silver Lady watch was a false representation about a material fact which induced Client to act in reliance thereon. Thus, the first and third elements of fraud are satisfied.

The second element of Seller's knowledge of the false representation will be more difficult to establish. Client will argue that this element is satisfied for a number of reasons. First, Client will contend that Seller had prior actual knowledge that the watch was not a real Beckham and will have to prove this through the evidence, such as testimony from her friends or relatives that she knew its actual value. Even if Client cannot prove this, however, he will show that Seller knew the watch a fake based on the specialized information the fact she acquired from working in a watch shop. Such a job should have given her knowledge to identify a fake watch, which can then circumstantially be used to prove that she knew the watch was not real, or at least that she did not whether or not the watch was real. Evidence to this effect can be established via the testimony of her supervisors, co-workers and former customers at the shop.

It will be quite difficult for Client to prove the fourth element, that his action was not just in reliance on Sellers false representation, but justifiable as well. As stated above, Arkansas courts will not find fraud has occurred when the plaintiff through the exercise of reasonable diligence might have detected that the watch was a fake. Client determined that inspecting the watch in person, or even seeing a photograph of the back of the watch would be wise, yet he does neither prior to purchasing the watch. In fact, upon stating this to Seller, Seller does not affirm the authenticity of the watch and Client still purchases it. As a result, it will be quite difficult indeed for Client to overcome the presumption that through due diligence he would not have followed through with the deal.

Client will counter this by arguing two things. First, he likely would have not been able to determine the watch's authenticity even if he had seen it prior to sale. Second, he was allowed to rely on the implied statement of authenticity by Seller based on her position of specialized knowledge of watches and her silence as to authenticity of the watch. There is a strong likelihood that Client's reliance on the representation will be justified based on these facts and the totality of the circumstance.

That Client was damaged, the fifth element of establishing a fraud cause of action, is self-evident. He paid $12,500.00 for a watch valued at only $100.00 and therefore has damages at least in the amount of $12,400.00. If the remaining elements can be established, he can certainly make a claim for damages.

Conclusion

Client has significant, though not insurmountable, obstacles to overcome in order to establish a claim for fraud. First, Client must produce evidence that proves that Seller had prior knowledge that the watch was a fake. Second, Client must show that he did not waive his right to a fraud action by failing to use due diligence prior to the sale. While by no means an open and shut case, Client is likely to succeed in doing this and prevail in his action for fraud.