Court Opinion

ID: 9716933
Source: CourtListenerOpinion
Date Created: 2023-08-26 06:54:05.838634+00
Date Added: 2024-06-11T18:23:50.147791
License: Public Domain

PRESIDING JUSTICE MURPHY, concurring in part and dissenting in part: I write separately because I would hold that a “holder” cause of action exists in Illinois. Section 525 of the Restatement (Second) of Torts provides, “One who fraudulently makes a misrepresentation of fact, opinion, intention or law for the purpose of inducing another to act or to refrain from action in reliance upon it, is subject to liability to the other in deceit for pecuniary loss caused to him by his justifiable reliance upon the misrepresentation.” (Emphasis added.) Restatement (Second) of Torts §525, at 55 (1977). See also Restatement (Second) of Torts §531, at 66 (1977) (“One who makes a fraudulent misrepresentation is subject to liability to the persons or class of persons whom he intends or has reason to expect to act or to refrain from action in reliance upon the misrepresentation, for pecuniary loss suffered by them through their justifiable reliance in the type of transaction in which he intends or has reason to expect their conduct to be influenced”); 37 Am. Jur. 2d Fraud & Deceit §243 (1969) (“A person is entitled to damages resulting from inaction when an untrue statement is made with the intent to induce that person to refrain from acting, so long as it can be demonstrated that the false statement produced the inaction”). Illinois cases have also found claims of fraud based on a scheme designed to cause a person to refrain from acting. In Schnidt v. Henehan, 140 Ill. App. 3d 798 (1986), the plaintiffs alleged that the defendant, their attorney, falsely told them that he had arranged for necessary mortgage financing, that they relied on his statement and did not attempt to arrange financing on their own, and that the defendant told them they should not seek financing on their own or they would “screw up” the deal. The court concluded that the plaintiffs stated a cause of action for fraud, as his statement was made for the purpose of inducing the plaintiffs to “refrain from acting.” Schnidt, 140 Ill. App. 3d at 804. See also Chatham Surgicore, Ltd. v. Health Care Service Corp., 356 Ill. App. 3d 795, 804 (2005); Wright v. Chicago Title Insurance Co., 196 Ill. App. 3d 920, 926 (1990). The principle that inducing another to refrain from action is sufficient to state a cause of action for fraud should apply equally to cases where a plaintiff is induced to refrain from selling stock. In Small, the California Supreme Court applied the long-recognized “principle that induced forbearance can be the basis for tort liability” to misrepresentations involving corporate stock. Small, 30 Cal. 4th at 174, 65 P.3d at 1259, 132 Cal. Rptr. 2d at 495. See also Rogers v. Cisco Systems, Inc., 268 F. Supp. 2d 1305, 1313-14 (N.D. Fla. 2003); Gutman v. Howard Savings Bank, 748 F. Supp. 254, 266-67 (D.N.J. 1990). “Lies [that] deceive and injure do not become innocent merely because the deceived continue to do something rather than begin to do something else. Inducement is the substance of reliance; the form of reliance — action or inaction — is not critical to the actionability of fraud.” Gutman, 748 F. Supp. at 264. Elaintiffs must, of course, properly plead reliance, and I agree with the majority that plaintiffs failed to do so. As Small reasoned: “In a holder’s action a plaintiff must allege specific reliance on the defendants’ representations: for example, that if the plaintiff had read a truthful account of the corporation’s financial status the plaintiff would have sold the stock, how many shares the plaintiff would have sold, and when the sale would have taken place. The plaintiff must allege actions, as distinguished from unspoken and unrecorded thoughts and decisions, that would indicate that the plaintiff actually relied on the misrepresentations.” Small, 30 Cal. 4th at 184, 65 P.3d at 1265, 132 Cal. Rptr. 2d at 503. The requirement in a holder action that a plaintiff allege “actions, as distinguished from unspoken and unrecorded thoughts and decisions” (Small, 30 Cal. 4th at 184, 65 P.3d at 1265, 132 Cal. Rptr. 2d at 503), allows the court to separate “plaintiffs who actually and justifiably relied upon the misrepresentations from the general investing public, who, though they did not so rely, suffered the loss due to the decline in share value.” Rogers, 268 F. Supp. 2d at 1314 n.18. However, I disagree with the majority that plaintiffs have failed to adequately plead the element of damage. Elaintiffs alleged that they retained their stocks based on defendant’s misrepresentations and suffered a loss when the true state of affairs was revealed and the stock price crashed. Elaintiffs have alleged a “ ‘loss, hurt, or harm [that] results from the injury.’ ” Giammanco v. Giammanco, 253 Ill. App. 3d 750, 758 (1993), quoting Ballatine’s Law Dictionary 303 (3d ed. 1969). As for the alleged intractability of calculating damages, the benefit-of-the-bargain and out-of-pocket measures of damages are not “in all cases a perfect litmus test for the existence of compensable damage.” Giammanco, 253 Ill. App. 3d at 763. Plaintiffs should be allowed to put several methods before the trier of fact or present expert testimony. “[0]nce a plaintiff holder can show that a portion of the loss is attributable to fraud, difficulty in proving the amount of the damages will not bar a cause of action. Proof will, of course, often require expert evidence. *** Experts may disagree — they often do — but that is no reason to reject a holder’s cause of action.” Small, 30 Cal. 4th at 191, 65 P.3d at 1270, 132 Cal. Rptr. 2d at 508 (Kennard, J., concurring). As the court noted in Giammanco, “Courts administering justice should not be outpaced by creative wrongdoers.” Giammanco, 253 Ill. App. 3d at 763. Finally, I would remand this case to the trial court to give plaintiffs another opportunity to plead reliance with sufficient particularity, as outlined by the majority.