Opinion ID: 2266268
Heading Depth: 1
Heading Rank: 4

Heading: Equitable Fraud

Text: Zirn contends that the Court of Chancery erred in failing to hold VLI and its directors liable for equitable fraud. The Court of Chancery determined that no equitable fraud had been shown since the alleged misstatements and omissions were not material. In light of the analysis above, however, it is clear that this issue must be revisited. Nevertheless, a review of the facts presented reveals that, despite the presence of a material misstatement in the 14D-9, Zirn has failed to state a prima facie case for equitable fraud. In Gaffin v. Teledyne, Inc., Del. Supr., 611 A.2d 467, 472 (1992), this Court laid down the elements of common-law fraud as follows: 1) a false representation, usually one of fact, made by the defendant; 2) the defendant's knowledge or belief that the representation was false, or was made with reckless indifference to the truth; 3) an intent to induce the plaintiff to act or to refrain from acting; 4) the plaintiff's action or inaction taken in justifiable reliance upon the representation; and 5) damage to the plaintiff as a result of such reliance. Id. (emphasis supplied) (quoting Stephenson v. Capano Dev., Inc., Del.Supr., 462 A.2d 1069, 1074 (1983)). Unlike common law fraud, however, at equity there is no requirement that the defendant have known or believed its statement to be false or to have made the statement in reckless disregard of the truth. Stephenson, 462 A.2d at 1074. Thus, equity provides a remedy for negligent or innocent misrepresentations. To state a prima facie case for equitable fraud, plaintiff must therefore satisfy all the elements of common-law fraud with the exception that plaintiff need not demonstrate that the misstatement or omission was made knowingly or recklessly. Most significant among the elements stated above, at least for purposes of this appeal, is the requirement of justifiable reliance. As VLI properly points out, Zirn did not tender in response to VLI's 14D-9 and did not cash out her shares in response to AHP's Notice of Merger. [6] Thus, on these facts, no reliance has been shown. Having failed to satisfy one of the elements required to demonstrate a prima facie case for equitable fraud, Zirn's claim must fail. Moreover, the class action is a device illsuited to the disposition of claims of equitable fraud: A class action may not be maintained in a purely common law or equitable fraud case since individual questions of law or fact, particularly as to the element of justifiable reliance, will inevitably predominate over common questions of law or fact. Gaffin, 611 A.2d at 474 (citing In re One Bancorp Sec. Litig., D.Me., 136 F.R.D. 526, 533 (1991); Katz v. Comdisco, Inc., N.D.Ill., 117 F.R.D. 403, 412 (1987); Gavron v. Blinder Robinson & Co., E.D.Pa., 115 F.R.D. 318, 325 (1987); Beebe v. Pacific Realty Trust, D.Ore., 578 F.Supp. 1128, 1151-52 (1984)). In light of our holding concerning the applicability of section 102(b)(7), it is also clear that no relief can be afforded to plaintiffs even if a prima facie case of equitable fraud could be shown. Pursuant to the amendment to VLI's Certificate of Incorporation extending to the VLI director defendants the protection authorized by section 102(b)(7), the directors are free from personal financial liability whether monetary damages arise out of legal or equitable theories. Arnold v. Society for Sav. Bancorp, Del.Supr., 678 A.2d 533 (1996) ( Arnold II ) (citing 8 Del.C. § 102(b)(7); Arnold I, 650 A.2d at 1290). As in Arnold, the VLI directors are not now subject to whatever injunctive relief might have been available at an earlier stage of the proceedings. Accordingly, there are no remedies for equitable fraud available to the plaintiff class.