Opinion ID: 2585525
Heading Depth: 4
Heading Rank: 1

Heading: prior allegations of fraud

Text: This court has stated: Where it appears that one party has been guilty of an intentional and deliberate fraud, by which, to his knowledge, the other party has been misled, or influenced in his action, he cannot escape the legal consequences of his fraudulent conduct by saying that the fraud might have been discovered had the party whom he deceived exercised reasonable diligence and care. Kang v. Harrington, 59 Haw. 652, 659, 587 P.2d 285, 290 (1978) (quoting Cummins v. Cummins, 24 Haw. 116, 122 (1917)). However, in Kang, the plaintiffs were only required to prove actual, as opposed to reasonable, reliance. Kang, 59 Haw. at 656, 587 P.2d at 289. Other jurisdictions differ as to whether prior allegations of fraud preclude a finding of reasonable reliance. Decisions based upon Florida law indicate that when the parties have been in an adversarial relationship and the plaintiff has made prior allegations of fraud, plaintiffs could not subsequently rely upon the defendant's representations. Mergens, 166 F.3d at 1118; Finn, 821 F.2d at 586; Pettinelli, 722 F.2d at 710. The apparent bright-line rule established in these cases do not recognize an exception to the justifiable reliance rule where the plaintiff's investigations were frustrated or thwarted by the defendant's conduct. Florida Evergreen I, 135 F.Supp.2d at 1295. The United States Courts of Appeal for the Second Circuit and the Virginia Supreme Court similarly hold that prior allegations of fraud against a defendant preclude subsequent reasonable reliance upon the defendant's representations. Finz v. Schlesinger, 957 F.2d 78 (2d Cir.), cert. denied, 506 U.S. 822, 113 S.Ct. 72, 121 L.Ed.2d 38 (1992); Metrocall of Delaware, Inc. v. Continental Cellular Corp., 246 Va. 365, 437 S.E.2d 189 (1993). The rule precluding a finding of reasonable reliance when there have been prior allegations of fraud is not universal. The Illinois Appellate Court recognized the rule followed in Florida and Virginia, but nevertheless stated: This court is reluctant to pronounce a broad rule of law whereby parties, accused of myriad types of fraud and dishonesty, are set loose to live up to the allegations leveled against them while attempting to settle the original dispute. The likely effect of such a rule would be to encourage dishonesty and to drastically reduce the willingness of plaintiffs to settle their fraud claims, because plaintiffs could never hold defendants accountable for any misrepresentations of fact made during settlement negotiations. Sims v. Tezak, 296 Ill.App.3d 503, 230 Ill. Dec. 737, 694 N.E.2d 1015, 1020, reh'g denied, 296 Ill.App.3d 503, 230 Ill.Dec. 737, 694 N.E.2d 1015, appeal denied, 179 Ill.2d 619, 235 Ill.Dec. 576, 705 N.E.2d 449 (1998). Similarly, the United States Court of Appeals for the Eleventh Circuit, applying Colorado law, held that a party is not categorically barred from relying on the representations of the opposing party when negotiating the settlement of a dispute which involves a claim for fraud. Chase, 875 F.2d at 283. [19] The court explained: The public routinely negotiates the settlement of disputes in reliance upon the representations of the other party. While every dispute is adversarial to some degree, the parties must have some assurance of legal recourse if they are induced to settle the dispute on the basis of false representations of material facts. To hold otherwise would discourage parties from settling their disputes out of court. This is true regardless of whether or not the underlying dispute involves an allegation of fraud. Chase, 875 F.2d at 283. The different holdings of other jurisdictions suggest that reasonable minds indeed differ on this issue. More persuasively, however, the other jurisdictions that have addressed this issue have based their conclusions of law upon a more complete factual record than that presented to this court. Based upon the limited record in the present case, we are reluctant to establish a broad holding foreclosing future, potentially meritorious claims.