Iowa Court of Appeals Upholds Fraud Judgment

Overview

The Iowa Court of Appeals recently upheld a $212,340 verdict in favor of an Iowa businessman in his fraudulent misrepresentation lawsuit against a former employer.

Facts

The defendants included a chemical company and its CEO. The company manufactured chemicals for industrial and agricultural use. The plaintiff was a businessman who had lost his job and was searching for other employment. The company approached him about becoming its president and chief operating officer. At the time, the plaintiff was also evaluating a job offer from another company. After the defendants made various disclosures to the plaintiff and the plaintiff conducted due diligence (including hiring an attorney and an accountant), the plaintiff agreed to work with the company. He began his work with the company on May 23, but resigned by June 19, alleging fraud. Specifically, the plaintiff contended that the defendants had fraudulently misrepresented the financial condition of the company and that he never would have taken the position had he known its true state of affairs. Although the defendant had agreed to purchase 25 percent of the company’s stock as part of the parties’ agreement, the plaintiff had not paid for the stock at the time of his departure.

The plaintiff filed a lawsuit against the defendants, alleging that he was harmed by their fraudulent misrepresentations. After a bench trial, the trial court found that the defendants had committed fraud and awarded $212,340 in damages to the plaintiff.

Iowa Court of Appeals

The Iowa Court of Appeals affirmed the judgment. Before examining whether substantial evidence supported the judgment, the court ruled that the defendants had not preserved for review their claims of waiver or failure to state a claim. The court also found that the defendants had not preserved for review their claim that a non-reliance clause in the employment contract barred the action. Nonetheless, the court stated that under Iowa law, contractual disclaimers are ineffective to bar a plaintiff from asserting a claim for fraudulent inducement.

In turning to the actual fraud claim, the court ruled that the evidence supported a finding of fraud.

The court agreed that all eight elements were shown by clear and satisfactory evidence:

1. The defendants made a representation to the plaintiff.
2. The representation was false.
3. The representation was material.
4. The defendant knew the representation was false.
5. The defendant intended to deceive the plaintiff.
6. The plaintiff acted in justifiable reliance on the truth of the representation.
7. The representation was a proximate cause of the plaintiff’s damage.
8. The amount of damage.

Although the representations made by the defendants were “projections” of future business, they were based upon representations of current clients and pricing data. Neither of those key facts was accurately disclosed to the defendant. While negotiating with the plaintiff, the company had just lost three key customers and the price it had to pay for its primary product had just tripled.  The court found that the defendants’ concealment of those facts constituted a false representation. The defendants failed to correct their financial projections for the company based upon this vital information. The court held that an intent to defraud could be inferred from this omission. At the very least, the defendants acted with reckless disregard as to whether their representations were true. In analyzing the justifiable reliance prong of the claim, the court noted that the plaintiff walked away from another lucrative job offer in reliance upon the defendants’ representations. He could not have been expected to ascertain the information that the defendants failed to disclose to him.

Finally, the court ruled that although the damages were “somewhat speculative” in nature, the district court did not abuse its considerable discretion. The district court had limited damages to 12 months of pay from the position the plaintiff forfeited, plus a promised sign-on bonus and end-of-year performance bonus.

Conclusion

Although fraud claims are generally difficult to prove, this case illustrates that it is possible, even when the person defrauded is a sophisticated business person.  The case also provides a good overview of Iowa law with respect to this claim.