Constructive Fraud in California

Definition of Constructive Fraud in California

“Constructive fraud comprises any act, omission or concealment involving a breach of legal or equitable duty, trust or confidence which results in damage to another, even though the conduct is not otherwise fraudulent.” Salahutdin v. Valley of California, Inc. (1994) 24 Cal.App.4th 555, 562; 2 Miller & Starr, Cal. Real Estate (2d ed. 1989), §3:20, p. 120-121; Civ. Code §1573(1). If a fiduciary relationship exists, any concealment of material fact is fraud. Byrum v. Brand (1990) 219 Cal.App.3d 926, 937-938; Main v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (1997) 67 Cal.App.3d 19, 32.

Unlike actual fraud, constructive fraud does not require an intentional deception, an “intent to deceive” being implied from the failure to disclose. Mary Pickford Co. v. Bayly Bros., Inc. (1939) 12 Cal.2d 501, 525. Further, reasonable reliance is presumed upon a nondisclosure of the fiduciary, absent direct evidence of lack of reliance. Estate of Gump (1991) 1 Cal.App.4th 582, 601.

In Salahutdin case, plaintiffs brought an action for negligent misrepresentation against defendant realtor. The trial court found that defendant’s employee breached his fiduciary duty and committed constructive fraud by making false representations to plaintiffs about the property. The Court of Appeal affirmed, finding that the agent knew the size of the property and its ability to be subdivided was critical to plaintiffs’ decision to purchase it, yet he misrepresented that it was more than an acre and could therefore be subdivided and failed to disclose that he had not independently confirmed the accuracy of this information, the Court stating: “The failure of the fiduciary to disclose a material fact to his principal which might affect the fiduciary’s motives or the principal’s decision, which is known (or should be known) to the fiduciary, may constitute constructive fraud.” Salahutdin v. Valley of California, Inc. (1994) 24 Cal.App.4th 555

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