Restat 2d of Torts, § 540

• Restatement of the Law, Second, Torts
• Division 4- Misrepresentation
• Chapter 22- Misrepresentation and Nondisclosure Causing Pecuniary Loss
• Topic 1- Fraudulent Misrepresentation (Deceit)
• Title C- Justifiable Reliance
• § 540 Duty to Investigate

The recipient of a fraudulent misrepresentation of fact is justified in relying upon its truth, although he might have ascertained the falsity of the representation had he made an investigation.

Comment:

a.  The rule stated in this Section applies not only when an investigation would involve an expenditure of effort and money out of proportion to the magnitude of the transaction, but also when it could be made without any considerable trouble or expense. Thus it is no defense to one who has made a fraudulent statement about his financial position that his offer to submit his books to examination is rejected. On the other hand, if a mere cursory glance would have disclosed the falsity of the representation, its falsity is regarded as obvious under the rule stated in § 541.

b.  The rule stated in this Section is applicable even though the fact that is fraudulently represented is required to be recorded and is infact recorded. The recording acts are not intended as a protection for fraudulent liars. Their purpose is to afford a protection to persons who buy a recorded title against those who, having obtained a paper title, have failed to record it. The purpose of the statutes is fully accomplished without giving them a collateral effect that protects those who make fraudulent misrepresentations from liability.

Illustration:

1. A, seeking to sell land to B, tells B that the land is free from all incumbrances. By walking across the street to the office of the register of deeds in the courthouse, B could easily learn that there is a recorded and unsatisfied mortgage on the land. B does not do so and buys the land in reliance upon A's misrepresentation. His reliance is justifiable.

Comment a is supported by King v. Livingston Mfg. Co., 180 Ala. 118, 60 So. 143 (1912); Barnes v. Lopez, 25 Ariz.App. 477, 544 P.2d 694 (1976); Ashburn v. Miller, 161 Cal.App.2d 71, 326 P.2d 229 (1958); Gallon v. Burns, 92 Conn. 39, 101 A. 504 (1917); Burger v. Calek, 37 Idaho 235, 215 P. 981 (1923); Keeshin v. Levin, 31 Ill.App.3d 790, 334 N.E.2d 898 (1975); Hise v. Thomas, 181 Iowa 700, 165 N.W. 38 (1917); Braley v. Powers, 92 Me. 203, 42 A. 362 (1898); Mignault v. Goldman, 234 Mass. 205, 125 N.E. 189 (1919); Buckley v. Buckley, 230 Mich. 504, 202 N.W. 955 (1925); Link v. Cox, 529 S.W.2d 189 (Mo.App.1975); Foxley Cattle Co. v. Bank of Mead, 196 Neb. 1, 241 N.W.2d 495 (1976); Smith v. Pope, 103 N.H. 555, 176 A.2d 321 (1961); Warne v. Finseth, 50 N.D. 347, 195 N.W. 573 (1923); Werline v. Aldred, 57 Okl. 391, 157 P. 305 (1916); Investors Equity Exchange, Inc. v. Whiteley, 269 Or. 309, 524 P.2d 1211 (1974); Handy v. Waldron, 19 R.I. 618, 35 A. 884 (1896).

One of the best statements of the principle is in the opinion of Lamm, J., in Judd v. Walker, 215 Mo. 312, 114 S.W. 979 (1908).

Illustration 1 is based on Pattridge v. Youmans, 107 Colo. 122, 109 P.2d 646 (1941); Citizens Sav. & Loan Ass'n v. Fischer, 67 Ill.App.2d 315, 214 N.E.2d 612 (1966); First Nat. Bank in Lenox v. Brown, 181 N.W.2d 178 (Iowa 1970); Cowles' Ex'r v. Johnson, 297 Ky. 454, 179 S.W.2d 674 (1944); Lynch v. Palmer, 237 Mass. 150, 129 N.E. 374 (1921); Linch v. Carlson, 156 Neb. 308, 56 N.W.2d 101 (1952); Heveriy v. Kirkendall, 257 Or. 232, 478 P.2d 381 (1970); Campanelli v. Vescera, 75 R.I. 71, 63 A.2d 722 (1949); Oben v. Adams, 89 Vt. 158, 94 A. 506 (1915).

Some jurisdictions impose a duty to investigate, especially if there is reason to suspect that the statement is false. E. g., Feak v. Marion Steam Shovel Co., 84 F.2d 670 (9 Cir. 1936), certiorari denied, 299 U.S. 604, 57 S.Ct. 231, 81 L.Ed. 446; Butts v. Dragstrem, 349 So.2d 1205 (Fla.App.1977); Goff v. Frank A. Ward Realty & Ins. Co., Inc., 21 N.C.App. 25, 203 S.E.2d 65 (1974), certiorari denied, 285 N.C. 373, 205 S.E.2d 97; Kaiser v. Nummerdor, 120 Wis. 234, 97 N.W. 932 (1904); White v. Ogburn, 528 P.2d 1167 (Wyo.1974).

ALR Annotations:

Fraud predicated on vendor's misrepresentation or concealment of danger or possibility of flooding or other unfavorable water conditions. 90 A.L.R.3d 568.
Fraud in connection with franchise or distributorship relationship. 64 A.L.R.3d 6.
Consumer class actions based on fraud or misrepresentations. 53 A.L.R.3d 534.
Seller's liability for fraud in connection with contract for the sale of long-term dancing lessons. 28 A.L.R.3d 1412.
Measure of damages for fraudulently inducing employment contract. 24 A.L.R.3d 1388.
Liability of vendor's real estate broker or agent to purchaser for misrepresentations as to, or nondisclosure of, physical defects of property sold. 8 A.L.R.3d 550.
Broker's liability for damages or losses sustained by vendor of real property to vendee because of broker's misrepresentations. 61 A.L.R.2d 1237.
Tort liability for damages for misrepresentations as to area of real property sold of exchanged. 54 A.L.R.2d 660.
Misrepresentation by one other than insurance agent as to coverage, exclusion, or legal effect of insurance policy, as actionable. 29 A.L.R.2d 213.

Digest System Key Numbers:

Fraud 22(1, 2)