Businesses can suffer losses due to fraud just like individuals can be defrauded by companies. Every year, there are over 200,000 reports of fraud in Texas. Many of these offenses target individuals. However, there are many other instances in which a business can suffer losses, either due to the fraudulent actions of an individual or another business. If your business has been defrauded, you may have the right to a legal remedy, either under common law or Texas statutes. First, you should contact an experienced business fraud lawyer to learn more about your legal options.
For businesses, one of the common areas where there is fraud is in contracts and other agreements. Both parties to a contract owe each other a duty of good faith and fair dealing. In fact, there is a presumption that each party will act in good faith. Certainly, they must not defraud each other.
When someone violates their duties and commits fraud, the law can severely punish them. Even if they are not criminally liable, they could pay a serious financial price. An individual or business that has violated its duties and has committed fraud can be subject to damages in a civil lawsuit.
Common Examples of Business Fraud
There are numerous ways that a business or individual can commit fraud. Here are some examples of fraud in the business context:
- Fraudulent misrepresentation is when someone causes a transaction to happen through actual fraud. The defendant knowingly makes a false statement or acts with recklessness toward the truth of a false statement.
- Constructive fraud is when someone breaches a legal duty through conduct that would be considered fraudulent because it has a tendency to deceive. Certain types of behaviors are so deceptive by their nature that the law would consider them fraud regardless of any actual intent to defraud.
- Fraudulent nondisclosure occurs when someone violates their duty to disclose something material to a transaction that would affect both the terms of the deal and whether another party would agree to it in the first place. Here, the wrongdoer knows something that is material to the transaction that they have a duty to disclose, but they do not disclose it.
- Fraudulent inducement is similar to fraudulent misrepresentation and is a common law-type fraud that arises in the case of contracts.
- Statutory fraud occurs when someone engages in a type of fraud that is governed by state or federal statutes. For example, someone may be liable for fraud in a real estate transaction, which is controlled by its own set of laws. Another example of statutory fraud may be insurance fraud due to the extensive legal requirements of the Texas Insurance Code.
- Fraudulent transfer occurs when a creditor is defrauded by another party that takes illegal actions to move certain assets out of their reach. For example, a creditor may obtain a judgment against an individual or another business who then transfers assets to avoid having to pay that judgment.
Common Examples of Transactions that Can Be Tainted by Fraud
Fraud can permeate practically any type of transaction. For example, your business may have bought another company. Even though you perform due diligence prior to the transaction closing, the acquisition target may have taken steps to hide certain liabilities that could have affected the deal. In this case, you may have grounds to file a lawsuit if you learn of the fraud after the transaction has closed.
Examples of transactions in which businesses may be defrauded include:
- Real estate transactions
- Vendor contracts
- Mergers and acquisitions
- Licensing agreements
- Shareholder agreements
- Franchise agreements
- Customer contracts
Even though fraud can arise in many contexts, the consequences and cost to your business are largely the same. Fraud can cost you money and your business’ reputation. No matter what type of fraud your business is a victim of, you still have legal rights.
You Must Take Legal Action to Address Fraud
Once you learn that your business has been defrauded, you should immediately take legal action. Your remedy would be to hire a business fraud attorney to file a civil lawsuit in which you would need to prove fraud. The legal system does not take accusations of fraud lightly, but you cannot recover any money that you lost until you take affirmative legal action to go after the party that defrauded you.
Given the potentially severe penalties, there is a high legal standard you must meet in order to prove fraud.
The elements of business fraud are as follows:
- The defendant made a representation of a fact
- The fact was false
- The defendant knew that the fact was false at the time they represented it, or acted with a reckless disregard for its truth
- The fact was material to the decision being made
- The person who made the false representation intended for the recipient to act on it
The Failure to Disclose Can Also Be Fraud
You may even be able to prove fraud when someone had a duty to say something or disclose a certain fact but they did not. In some cases, another person or business may conceal key facts and not say anything to you when the law says that they must. This type of fraud often comes into play in real estate transactions when the seller knows of a defect but says nothing. The buyer then finds out after they have purchased the property that there is a material defect that would have either caused them to not buy the property or pay a lower price.
Not Every False Statement Is Actionable Fraud
Note that not every false statement made in the course of a business transaction rises to the level of fraud. For example, if someone made a false statement that would not impact the terms of the transaction if the other person knew it was false, it would not be considered material. In addition, someone must intend to deceive you into entering into the transaction.
Further, you may not automatically be able to recover compensation, even if you were defrauded. Texas law imposes on businesses the duty to do their own reasonable diligence to protect their interests. In other words, a business may not justifiably rely on a misrepresentation, assuming that its representatives did some of their own homework. For example, if the fraud specifically contradicted the explicit terms of a contract, a person claiming there was a fraudulent act may not be able to win their case. In this situation, their business fraud attorney may need to defend their client’s own actions in protecting their interest despite the claim revolving around another person’s alleged wrongful conduct.
In a business fraud case, a business is assumed to have some level of sophistication. If the business ignored obvious red flags and contradictions, it may not be able to sue for fraud. Some things may be so blatantly false that a court would actually deny compensation if some level of common sense would have kept the plaintiff from falling victim to the fraud.
Business Fraud Cases Can Be Tough to Prove
Part of the challenge of proving a business fraud case is that you need to show that there was some sort of intent. You would need evidence that shows the other party knew exactly what they were doing. Even if you do not have this evidence at the outset of your case, it is possible to gather it at some point after filing a lawsuit. In any civil lawsuit, you would have the ability to conduct discovery during which you could gain access to corporate records and other evidence that is in the possession of the defendant. Your business fraud attorney can gather the necessary information by being aggressive during the discovery phase.
You Can Still Recover Compensation Even Without Proving Intent
Even if you are not able to prove fraud in your case, there are related causes of action that could entitle you to financial compensation. While fraud requires intent, you may be able to win a case for negligent misrepresentation. This particular cause of action requires that you prove the following:
- The defendant made a representation in the course of its business or in a matter in which it has a financial interest
- The representation turned out to be false
- The defendant did not exercise reasonable care in obtaining or communicating the information
- You suffered a monetary loss from the incorrect information
Thus, even if you are not able to prove the defendant knew the representation was false or they intended to deceive you, there is still a way to obtain financial compensation for your losses.
Damages in a Business Fraud Lawsuit
Even though fraud is not always easy to prove, you can and should take legal action when you believe someone has done something to defraud your company. Not only may they face criminal penalties, but you can also file a civil lawsuit. If you are able to prove your case, you could even potentially receive compensation that exceeds your actual losses. In a fraud case, you may be able to recover the following damages:
- Economic damages that represent your actual losses from the fraud, including your lost profits
- Statutory damages, if you have sued for fraud under a certain law
- Punitive damages, if the judge and/or jury decides to award them based on their severe reactions to egregious conduct and to discourage the defendant and others from engaging in that kind of conduct in the future
Equitable Remedies in Fraud Cases
In addition to financial damages, you may also be entitled to an equitable judgment from the court. For example, you may have been induced into a transaction through fraud or concealment. Although an equitable judgment is an extraordinary remedy that courts do not often order, a judge may rescind the transaction in which you were defrauded if monetary damages alone will not compensate you. As another example, you may have purchased a business that is worth nothing because of fraud, and voiding the entire transaction is the only way to make you whole. In addition, the court may issue an injunction to put a stop to the fraudulent behavior.
You Need an Experienced Business Fraud Attorney
Fraud cases can be complex. You need an attorney who understands business and how to obtain the necessary evidence to prove your case. In many cases, proving fraud is about following the money. Your business attorney may need to unravel a complex set of facts to make the most effective case on your behalf. In many cases, the party responsible for the business fraud is sophisticated and has taken steps to cover its tracks. However, a determined lawyer who knows how to work with the right experts can uncover the truth and help you hold the wrongdoers responsible.
The business fraud attorneys at Feldman & Feldman can vigorously represent your entity when you have been defrauded by another party, either in a transaction or under other circumstances. We will fight to hold the other party legally responsible in court. Fraud cases may require you to take quick action, so this you should make a call to a business lawyer sooner rather than later.