Opinion ID: 154324
Heading Depth: 1
Heading Rank: 1

Heading: Fraud by Silence

Text: 6 Terminix uses the district court's grant of partial summary judgment on plaintiffs' actual fraud claim to attack the judgment for fraud by silence. It reasons, absent an intent to deceive or a special relationship, as a matter of law, plaintiffs could show no evidence Terminix had a duty to disclose information which they characterized as concealed. Terminix maintains the alleged hearsay statement from the seller to Mr. Stotts about the first inspector's findings cannot spawn an intent to deceive. Nor, Terminix insists, can plaintiffs' status metamorphose into that of the sellers to establish the requisite contractual or fiduciary relationship underpinning a duty to disclose. When the absence of these two elements is coupled with the irrefutable fact Terminix gained no advantage by concealing information from plaintiffs, treatment services representing the profitable side of the business, and it had no interest in the real estate transaction, Terminix contends the court misread Kansas law to hold otherwise. Terminix relies on DuShane v. Union National Bank, 223 Kan. 755, 576 P.2d 674 (1978), which it interprets narrowly to require a fiduciary relationship in which the information provider deals directly with the plaintiff and the former receives an advantage by failing to disclose the omitted information to the latter. 7 In Kansas, to prove a cause of action for fraud by silence, plaintiff must set forth by clear and convincing evidence: 8 (1) that defendant had knowledge of material facts which plaintiff did not have and which plaintiff could [not] have discovered by the exercise of reasonable diligence; (2) that defendant was under an obligation to communicate the material facts to the plaintiff; (3) that defendant intentionally failed to communicate to plaintiff the material facts; (4) that plaintiff justifiably relied on defendant to communicate the material facts to plaintiff; and (5) that plaintiff sustained damages as a result of defendant's failure to communicate the material facts to the plaintiff. 9 Eckholt v. American Business Information, Inc., 873 F.Supp. 510, 519-20 (D.Kan.1994). In Wolf v. Brungardt, 215 Kan. 272, 524 P.2d 726, 736 (1974), the Kansas Supreme Court described the claim: 10 Where one party to a contract or transaction has superior knowledge, or knowledge which is not within the fair and reasonable reach of the other party and which he could not discover by the exercise of reasonable diligence, or means of knowledge which are not open to both parties alike, he is under a legal obligation to speak, and his silence constitutes fraud, especially when the other party relies upon him to communicate to him the true state of facts to enable him to judge of the expedience of the bargain. 11 Key to this cause of action, we think, is the unequal relationship in which the claimant seeks particular information from a specialist upon which the recipient intends to rely or act. Under Kansas law, that interaction in those circumstances may create a fiduciary relationship. Moreover, although Kansas law does not specifically define the nature of that unequal relationship, we are satisfied its concept of a fiduciary relationship embraces it. In Denison State Bank v. Madeira, 230 Kan. 684, 640 P.2d 1235, 1243 (1982), the court quoted from a venerable Kansas case: 12 A fiduciary relation does not depend upon some technical relation created by, or defined in, law. It may exist under a variety of circumstances, and does exist in cases where there has been a special confidence reposed in one who, in equity and good conscience, is bound to act in good faith and with due regard to the interests of the one reposing the confidence. 13 .... 14 The courts have consistently refused to give an exact definition to, or to fix definite boundaries of, that class of human relations which, by principles of common honesty, require fair dealing between the parties, and which is commonly known as fiduciary relations. 15 Lindholm v. Nelson, 125 Kan. 223, 232, 264 P. 50 (1928). 16 Kansas law, then, looks to the facts and circumstances of each case to determine whether the parties are bound by a contractual or fiduciary relationship. Indeed, DuShane says no more. 17 In that case, Mr. DuShane, who himself had handled credit inquiries and worked for a Texas oil and gas company, contacted a bank official to inquire about the financial status of an individual from whom Mr. DuShane contemplated purchasing oil and gas drilling ventures. In addition to Mr. DuShane's prior banking experience, the court distinguished, [t]he inquiry by DuShane was not in the course of any business between him and the Union National Bank. It did not concern a possible purchase of any specific oil and gas interest of [the individual] on which the bank held a past due mortgage. 576 P.2d at 679. Consequently, the court observed, 18 [w]here a plaintiff and defendant are not bargaining with each other and the defendant obtains no advantage from suppressing or concealing information about a third party the law has generally absolved the defendant of liability unless he has made a statement which induced the plaintiff to act, knowing that the statement was false or at least making it recklessly. 19 Id. (citations omitted). 20 In contrast, this record discloses, as the district court found, Terminix employees know that home buyers rely on the termite inspection report in making the decision whether to purchase a home. Plaintiffs had no experience or ability to detect termite activity themselves. They relied on the report supplied by the sellers and signed by Terminix. Surely, knowing the prospective purchase is termite free or poised to emit a swarm of these winged pests can fairly be characterized as material information leading a purchaser to accept the bargain or abandon the deal. See Lynn v. Taylor, 7 Kan.App.2d 369, 642 P.2d 131, 134 (1982) (A matter is material if it is one to which a reasonable person would attach importance in determining his choice of action in the transaction in question.) (citation omitted). Here, undertaking that obligation for the sellers for the benefit and use of the prospective buyers who would have no ability to detect a problem even with the exercise of reasonable diligence creates a duty to disclose. Consequently, the essence of a fiduciary relationship under Kansas law is created mandating Terminix to disclose that information its superior position controlled or to face liability for its concealment. 21 Thus, Terminix's effort to distinguish the facts of this case from those of other Kansas termite recovery cases must fail. While each may have involved sellers or buyers directly contracting with the termite service or realtor, recovery was premised on the failure to communicate when the superior knowledge sought assisted the seeker in judging the expediency of the bargain. See Ettus v. Orkin Exterminating Co., 233 Kan. 555, 665 P.2d 730 (1983); Grove v. Orkin Exterminating Co., 18 Kan.App.2d 369, 855 P.2d 968 (1992); Lynn v. Taylor, 7 Kan.App.2d 369, 642 P.2d 131 (1982). Moreover, none transforms the duty to disclose into a specific intent to deceive. It is the silence in the face of the specific undertaking to speak that is actionable. The duty the speaker assumes arises from the particularized interaction, and Kansas law does not infuse that duty with a specific intent to deceive. 22 Instead, Kansas law indicates an expansion of the nexus required to constitute a duty to disclose. In Griffith v. Byers Construction Co. of Kansas, Inc., 212 Kan. 65, 510 P.2d 198 (1973), the Kansas Supreme Court extended the liability of the vendor to a third party for the nondisclosure of defects announced in Jenkins v. McCormick, 184 Kan. 842, 339 P.2d 8 (1959), 2 to permit home buyers to recover from the developer of a housing addition although each had dealt only with separate building contractors. Plaintiffs alleged the developer had fraudulently concealed the fact that the homesites were part of an abandoned oil field containing salt water deposits that would not support vegetation. The developer graded the properties in a certain way to conceal the salt areas. The court found because the developer had knowledge of the saline content of the soil, his silence and failure to disclose this defect in the soil condition to the purchasers could constitute actionable fraudulent concealment under the rule in Jenkins v. McCormick. Griffith, 510 P.2d at 204. The court added, Liability for misrepresentation is not necessarily limited to the person with whom the misrepresenter deals, and reminded, [o]f course, the fraudulent concealment to be actionable [sic] has to be material to the transaction. Id. at 203, 204. 23 Hence, under the law of fraud by silence in Kansas, construing the evidence and inferences in plaintiffs' favor, we cannot say the evidence was not susceptible to the inferences the jury drew. Not only do we reject Terminix's effort to insert the element of a specific intent to deceive in a cause of action for fraud by silence, 3 but also we find its interpretation of Kansas law of what constitutes a fiduciary relationship is too wooden.