Opinion ID: 2639411
Heading Depth: 2
Heading Rank: 1

Heading: the fraud allegations in the complaint

Text: ¶ 13 We first review the trial court's refusal to grant Harrison's motion for summary judgment. A trial court's decision to grant or deny a motion for summary judgment is a legal one and will be reviewed for correctness. Therefore, [this issue] will be reviewed de novo, giving no deference to the trial court's conclusions. Salt Lake City v. Silver Fork Pipeline Corp., 913 P.2d 731, 733 (Utah 1995) (citations omitted). ¶ 14 Prior to trial, Harrison filed a motion for summary judgment claiming, among other things, that AFIE's complaint failed to plead fraud [4] with the factual particularity required by rule 9(b) of the Utah Rules of Civil Procedure. She now asserts that the denial of the motion was error. She argues that AFIE failed to plead fraud with particularity in its complaint against her because it focused on RSI's actions, not hers. Furthermore, she argues that any attempt in the complaint to piggy-back liability onto her by virtue of her corporate responsibilities should have failed absent an alter ego allegation. ¶ 15 AFIE responds that its complaint was sufficiently particular to comply with rule 9(b). Specifically, AFIE argues that it was only obligated to plead the elements and basic facts of the fraud to satisfy the particularity requirement. Additionally, AFIE asserts that it properly pleaded fraud in its complaint because Harrison is personally liable for fraudulent acts that she herself committed or that others committed at her direction.
¶ 16 Rule 9(b) of the Utah Rules of Civil Procedure specifies that [i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. The elements that a party must allege to bring a claim sounding in fraud are (1) that a representation was made (2) concerning a presently existing material fact (3) which was false and (4) which the representor either (a) knew to be false or (b) made recklessly, knowing that there was insufficient knowledge upon which to base such a representation, (5) for the purpose of inducing the other party to act upon it and (6) that the other party, acting reasonably and in ignorance of its falsity, (7) did in fact rely upon it (8) and was thereby induced to act (9) to that party's injury and damage. Gold Standard, Inc. v. Getty Oil Co., 915 P.2d 1060, 1066-67 (Utah 1996) (citations omitted); Educators Mut. Ins. Ass'n. v. Allied Prop. & Cas. Ins. Co., 890 P.2d 1029, 1032 (Utah 1995); accord Crookston v. Fire Ins. Exch., 817 P.2d 789, 800 (Utah 1991). However, the mere recitation by a plaintiff of the elements of fraud in a complaint does not satisfy the particularity requirement. In other fraud cases, `[w]e have stressed, and continue to hold, that mere conclusory allegations in a pleading, unsupported by a recitation of relevant surrounding facts, are insufficient to preclude ... summary judgment.' Franco v. Church of Jesus Christ of Latter-day Saints, 2001 UT 25, ¶ 36, 21 P.3d 198 (quoting Chapman v. Primary Children's Hosp., 784 P.2d 1181, 1186 (Utah 1989)). The relevant surrounding facts `must be set forth with sufficient particularity to show what facts are claimed to constitute such charges.' Williams v. State Farm Ins. Co., 656 P.2d 966, 971 (Utah 1982) (quoting Heathman v. Hatch, 13 Utah 2d 266, 268, 372 P.2d 990, 991 (1962)). ¶ 17 AFIE failed, however, to allege in its complaint relevant facts supporting its claim that Harrison personally committed or participated in any fraudulent acts. In its complaint, AFIE's first claim for relief was fraud. This section of its complaint contains only two paragraphs, which allege as follows: 33. Defendants made false representations concerning present existing material facts, which representations they either knew to be false or were made recklessly, and defendants omitted material facts despite their duty fully to disclose, all for the purpose of inducing action on the part of plaintiff. 34. Plaintiff actually and justifiably relied upon the false representations and material omissions to its injury and detriment, in an amount to be determined at trial. These paragraphs merely recite the elements of fraud, however, and, as we have already noted, such conclusory allegations alone fail to allege fraud with sufficient particularity. See Franco, 2001 UT 25 at ¶ 36, 21 P.3d 198. ¶ 18 Even if we examine the complaint as a whole, it fails to recite any relevant facts connecting Harrison personally to the alleged fraud. The complaint mentions several examples of RSI's representations, but it contains nothing regarding Harrison personally making or directing others to make these representations. The only time Harrison is mentioned in the complaint at all is in one of the complaint's opening paragraphs, where she is identified as one of the parties. There she is listed as the President and owner of RSI ... [who] is responsible for the entire business operation of RSI, oversees and is responsible for its billing practices and is personally responsible to see that the project referenced herein is and was handled professionally, honestly and with the utmost care. This allegation may be a relevant fact, but it is insufficient to support fraud liability absent other facts linking Harrison directly to the fraud.
¶ 19 Initially, we note that [a]n officer or director of a corporation is not personally liable for torts of the corporation or of its other officers and agents merely by virtue of holding corporate office, but can only incur personal liability by participating in the wrongful activity. 3A William Meade Fletcher, Fletcher Cyclopedia of the Law of Private Corporations § 1137, at 209 (rev. ed.2002). When fraud is alleged, a director or officer of a corporation is individually liable for fraudulent acts or false representations of his own or in which he participates, even though his action in such respect may be in furtherance of the corporate business. 37 Am.Jur.2d Fraud and Deceit § 322 (1968) (emphasis added). ¶ 20 Other states, considering the issue of corporate officer liability, have found that an officer cannot hide his or her own fraudulent acts behind the corporate veil. For example, Colorado courts hold that [t]o permit an agent of a corporation, in carrying on its business, to inflict wrong and injuries upon others, and then shield himself from liability behind his vicarious character, would often both sanction and encourage the perpetration of flagrant and wanton injuries by agents of insolvent and irresponsible corporations. Snowden v. Taggart, 91 Colo. 525, 17 P.2d 305, 307 (1932) (citation omitted). In Mecham v. Benson, 590 P.2d 304, 308 (Utah 1979), this court noted that a defendant, by attempting to hide behind the corporate entity, would not exculpate himself by proving that he was acting as agent of a corporation; he would only additionally inculpate his corporate principal. Thus, Harrison can be held liable for fraudulent acts that she personally committed or in which she participated, but she cannot be held liable for fraudulent acts that she did not know of or participate in that were committed by other agents of the corporation or by the corporation itself. ¶ 21 Harrison's position as a corporate officer whose duties generally included overseeing the business activities of the corporation does not alone establish facts supporting a claim that she is personally liable for fraud. However, in the complaint, this is the only fact pleaded to inculpate Harrison in RSI's fraudulent activities. In its memorandum in opposition to RSI and Harrison's motion for summary judgment, AFIE had the opportunity to allege additional facts establishing Harrison's personal involvement in RSI's fraud. However, the additional facts contained in AFIE's memorandum focus exclusively on RSI's actions and do not supply any information regarding Harrison's personal participation in fraud. Standing alone, AFIE's complaint fails to allege fraud against Harrison with the particularity required by rule 9(b). Because AFIE failed to allege facts in its complaint supporting its claim that Harrison personally committed fraud or that she personally directed any fraud committed by RSI, the trial court erred in failing to grant the motion for summary judgment.
¶ 22 We next consider whether this error was harmless. If the error was harmless, that is, if the error was sufficiently inconsequential that there is no reasonable likelihood that it affected the outcome of the case, then a reversal is not in order. Price v. Armour, 949 P.2d 1251, 1255 (Utah 1997) (citing State v. Robertson, 932 P.2d 1219, 1227 (Utah 1997)); see also Utah R. Civ. P. 61 ([N]o error or defect in any ruling or order ... by the court ... is ground for granting a new trial or otherwise disturbing a judgment or order, unless refusal to take such action appears to the court inconsistent with substantial justice.). In State v. Germonto, 868 P.2d 50, 57-58 (Utah 1993), a criminal case, the defendant argued that the trial court inappropriately denied a motion to modify an information and allowed the trial to go forward on a technically deficient charging statement. We held that we will look to see whether the error, if any, should have been obvious and whether it was cured procedurally and thereby rendered harmless. Id. at 58. In effect, we are dealing with the same situation in the instant case. ¶ 23 Since AFIE's complaint failed to plead fraud with particularity, the trial court should have granted summary judgment for Harrison and dismissed the case. However, it is unlikely that the trial court's failure to take this action affected the outcome. According to rule 15(a) of the Utah Rules of Civil Procedure, a party may amend his pleading ... by leave of court or by written consent of the adverse party; and leave shall be freely given when justice so requires. Utah R. Civ. P. 15(a). AFIE indicated in its oral argument that it would have moved to amend its complaint had the complaint been dismissed. Under our rule, the trial court is obligated to freely allow motions to amend. Indeed, some jurisdictions hold that it is an abuse of discretion to deny such a motion. See Caputo v. Pfizer, Inc., 267 F.3d 181, 191 (2d Cir.2001) (holding plaintiff should have been allowed to amend complaint to plead fraud with the particularity required by rule 9(b) of the Federal Rules of Civil Procedure). [5] Therefore, it is unlikely that the trial court's error affected the outcome of this case. ¶ 24 In addition, rule 15(b) of the Utah Rules of Civil Procedure, which provides for amendment of the pleadings to conform to the evidence, furnishes the procedural cure to the trial court's error. It states that [w]hen issues not raised by the pleading are tried by express or implied consent of the parties, they shall be treated in all respects as if they had been raised in the pleadings. Such amendments of the pleadings as may be necessary to cause them to conform to the evidence and to raise these issues may be made upon motion of any party at any time, even after judgment; but failure so to amend does not affect the result of the trial of these issues. Utah R. Civ. P. 15(b). AFIE presented evidence at trial concerning Harrison's personal participation in fraud. Harrison responded by presenting evidence in her own defense on this issue. Since Harrison knew about the fraud allegations against her and was able to present her own evidence at trial to challenge those allegations, she was not prejudiced by the technical failings of AFIE's pleadings. While AFIE, in fact, made no motion to amend its complaint to conform to the evidence, [t]he failure of the trial court to fully amend the pleadings to this effect is non-prejudicial. Seamons v. Andersen, 122 Utah 497, 502, 252 P.2d 209, 212 (1952). Because the issue was tried, it must be treated as if it were properly raised in the pleadings. ¶ 25 This result is much preferred to the alternative of dismissal, especially where a trial has proceeded to conclusion on the existing pleadings and where the defendant has suffered no prejudice by reason of any deficiency in the pleadings. Gill v. Timm, 720 P.2d 1352, 1353 (Utah 1986). Thus, though the trial court erred in denying Harrison's motion for summary judgment, this error does not require us to overturn the result of the trial. It is not reasonably likely, given the amendment procedure in rule 15(a), that the trial court's error would have affected the outcome of the case. Accordingly, Harrison has suffered no prejudice because of the deficiency of the pleadings. Since the court's error was harmless, we now review Harrison's other claims of error.