Fraudulent Misrepresentation in California [Elements Examples Cases Defenses]


Fraudulent Misrepresentation Under California Law

Experienced business fraud are regularly called upon to determine whether a case involves actionable fraudulent misrepresentation under California law. To answer this question, it is important to review the elements, examples, cases, and defenses applicable to fraudulent misrepresentation in California courts.

Elements of Fraudulent Misrepresentation in California

Under California law, to establish a claim for fraudulent misrepresentation, the plaintiff must prove:

  1. The defendant represented to the plaintiff that an important fact was true;
  2. That representation was false;
  3. The defendant knew that the representation was false when the defendant made it, or the defendant made the representation recklessly and without regard for its truth;
  4. The defendant intended that the plaintiff rely on the representation;
  5. The plaintiff reasonably relied on the representation;
  6. The plaintiff was harmed; and,
  7. The plaintiff’s reliance on the defendant’s representation was a substantial factor in causing that harm to the plaintiff.
Graham v. Bank of America, N.A. (2014) 226 Cal.App.4th 594, 606 (quoting Perlas v. GMAC Mortgage, LLC (2010) 187 Cal.App.4th 429, 434); see Yamauchi v. Cotterman, 84 F.Supp.3d 993, 1018 (N.D. Cal. 2015) (“In California, the general elements of a cause of action for fraudulent misrepresentation are (1) misrepresentation (false representation, concealment, or nondisclosure); (2) knowledge of falsity (scienter); (3) intent to induce reliance; (4) justifiable reliance; and (5) resulting damage”).

The Species of Fraud in California Under Civil Code §§ 1572 & 1710

Two statutes create the boundaries of fraudulent misrepresentation law in California. Under Civil Code § 1572:
Actual fraud, what. Actual fraud, within the meaning of this Chapter, consists in any of the following acts, committed by a party to the contract, or with his connivance, with intent to deceive another party thereto, or to induce him to enter into the contract:
1. The suggestion, as a fact, of that which is not true, by one who does not believe it to be true;
2. The positive assertion, in a manner not warranted by the information of the person making it, of that which is not true, though he believes it to be true;
3. The suppression of that which is true, by one having knowledge or belief of the fact;
4. A promise made without any intention of performing it; or,
5. Any other act fitted to deceive.
Under Civil Code § 1710:
A deceit, within the meaning of the last section, is either:
1. The suggestion, as a fact, of that which is not true, by one who does not believe it to be true;
2. The assertion, as a fact, of that which is not true, by one who has no reasonable ground for believing it to be true;
3. The suppression of a fact, by one who is bound to disclose it, or who gives information of other facts which are likely to mislead for want of communication of that fact; or,
4. A promise, made without any intention of performing it.

Fraudulent Concealment Elements vs. Fraudulent Misrepresentation Elements

A fraudulent misrepresentation should not be confused with cases where something is not represented, but should have been. In those cases: “The required elements for fraudulent concealment are: (1) concealment or suppression of a material fact; (2) by a defendant with a duty to disclose the fact to the plaintiff; (3) the defendant intended to defraud the plaintiff by intentionally concealing or suppressing the fact; (4) the plaintiff was unaware of the fact and would not have acted as he or she did if he or she had known of the concealed or suppressed fact; and (5) plaintiff sustained damage as a result of the concealment or suppression of the fact.” Bank of America Corp. v. Superior Court (2011) 198 Cal.App.4th 862, 870.

Constructive Fraud Elements vs. Fraudulent Misrepresentation Elements

To establish “constructive fraud,” a plaintiff “must show (1) a fiduciary relationship, (2) nondisclosure, (3) intent to deceive, and (4) reliance and resulting injury. Constructive fraud is any breach of duty that, without fraudulent intent, gains an advantage to the person at fault by misleading another to his prejudice.”  Tindell v. Murphy (2018) 22 Cal.App.5th 1239, 1249–1250 (citing (Civ. Code, § 1573; Stokes v. Henson (1990) 217 Cal.App.3d 187, 197).  Civ. Code, § 1573(1) explains that: “In any breach of duty which, without an actually fraudulent intent, gains an advantage to the person in fault, or any one claiming under him, by misleading another to his prejudice, or to the prejudice of any one claiming under him.” Accordingly, unlike an ordinary fraud, constructive fraud requires a fiduciary relationship, which only exists in a small portion of cases involving allegations of fraud.

Negligent Misrepresentation Elements vs. Fraudulent Misrepresentation Elements

Negligent misrepresentation does not require knowledge of falsity, unlike a cause of action for fraud. Tindell v. Murphy (2018) 22 Cal. App. 5th 1239.

1. Representation of an Important Fact – Material, False Statement Required for Fraudulent Misrepresentation

The first requirement for fraudulent misrepresentation is that the representation have been material, which is another way of saying important. In other words, immaterial, or unimportant, misrepresentations are not actionable as fraud. “Under California law, a fact is material if a reasonable man would attach importance to its existence or nonexistence in determining his choice of action in the transaction in question. In this context, a fact is material, and the jury was so instructed, if there is a substantial likelihood that, under all the circumstances, a reasonable investor would consider it important in reaching an investment decision. Materiality is a question of fact for the jury, “unless the ‘fact misrepresented is so obviously unimportant that the jury could not reasonably find that a reasonable man would have been influenced by it.” Persson v. Smart Inventions, Inc. (2005) 125 Cal.App.4th 1141, 1163 (citing Engalla v. Permanente Medical Group, Inc. (1997) 15 Cal.4th 951, 977).

2. Falsity of the Fraudulent Misrepresentation

“When pleading fraud, a complaint must adequately specify the statements it claims were false or misleading, give particulars as to the respect in which plaintiff contends the statements were fraudulent, state when and where the statements were made, and identify those responsible for the statements.” Glen Holly Entertainment, Inc. v. Tektronix, Inc., 100 F.Supp.2d 1086, 1094 (C.D. Cal. 1999). “[T]he most direct way for a plaintiff to demonstrate the falseness of the charged statements is to plead ‘inconsistent contemporaneous statements or information which were made by or available to the defendants.’…This means that “a plaintiff does not satisfy the falsity requirement by merely asserting that a company’s later revelation of bad news means that ‘earlier, cheerier’ statements must have been false. In fact, these types of allegations are called ‘fraud by hindsight’ and they do not establish falsity.” Glen Holly Entertainment, Inc. v. Tektronix, Inc., 100 F.Supp.2d 1086, 1094 (C.D. Cal. 1999).

3. Intent to Defraud? Intentional Fraud vs. Negligent Misrepresentation

“In contrast to fraud, negligent misrepresentation does not require knowledge of falsity. A defendant who makes false statements honestly believing that they are true, but without reasonable ground for such belief, … may be liable for negligent misrepresentation….” Apollo Capital Fund, LLC v. Roth Capital Partners, LLC (2007) 158 Cal.App.4th 226, 243. Accordingly, fraudulent misrepresentation encompasses two types of torts. Indeed, the California courts explain that the cause of action includes situation where either: “The defendant knew that the representation was false when the defendant made it, or the defendant made the representation recklessly and without regard for its truth.” Graham v. Bank of America, N.A. (2014) 226 Cal.App.4th 594, 606. The first example of a defendant knowing a representation was false when the defendant made it involves actual fraud, sometimes simply known as fraud or intentional fraud. Conversely, the second example of a defendant making the representation recklessly and without regard for its truth is in reference to negligent misrepresentation, which is a hybrid of negligence (an accident) and fraud, which is mistakenly assumed by many to only be available when the misrepresentation was made intentionally.

4. Intent for the Plaintiff to Rely on the Fraudulent Misrepresentation

The law is that: “The representation must have been made with the intent to defraud plaintiff, or a particular class of persons to which plaintiff belongs, whom defendant intended or reasonably should have foreseen would rely upon the representation. One who makes a representation with intent to defraud the public or a particular class of persons is deemed to have intended to defraud every individual in that category who is actually misled thereby.” Murphy v. BDO Seidman (2003) 113 Cal.App.4th 687, 695, as modified on denial of reh’g (Dec. 24, 2003).

5. Reasonable Reliance on the Fraudulent Misrepresentation

A plaintiff must show that they indeed relied on the misrepresentation, and that the reliance was reasonable. The first element in reliance is “actual reliance. A plaintiff asserting fraud by misrepresentation is obliged to plead and prove actual reliance, that is, to establish a complete causal relationship’ between the alleged misrepresentations and the harm claimed to have resulted therefrom.” OCM Principal Opportunities Fund, L.P. v. CIBC World Markets Corp. (2007) 157 Cal.App.4th 835, 864, as modified (Dec. 26, 2007). The second element in reliance is that “a plaintiff must also show ‘justifiable’ reliance, i.e., circumstances were such to make it reasonable for the plaintiff to accept the defendant’s statements without an independent inquiry or investigation. The reasonableness of the plaintiff’s reliance is judged by reference to the plaintiff’s knowledge and experience. Except in the rare case where the undisputed facts leave no room for a reasonable difference of opinion, the question of whether a plaintiff’s reliance is reasonable is a question of fact.” OCM Principal Opportunities Fund, L.P. v. CIBC World Markets Corp. (2007) 157 Cal.App.4th 835, 864, as modified (Dec. 26, 2007).

6. The Plaintiff was Harmed – Damages for Fraudulent Misrepresentation

Damages Required for Fraud

Deception without loss is not actionable as fraud or negligent misrepresentation. Creative Ventures, LLC v. Jim Ward & Associates (2011) 195 Cal.App. 4th 1430. Accordingly, no matter how big the lie may be, there is no cause of action for fraud absent damages.

Election of Remedies for Fraud

“When a party learns that he has been defrauded, he may, instead of rescinding, elect to stand on the contract and sue for damages.” Storage Services v. C.R. Oosterbaan (1989) 214 Cal.App.3d 498, 511. This means that a party may indeed consummate a transaction, then sue for damages.

Only Intentional Misrepresentation Allows for the Recovery of Punitive Damages, Also Known as Exemplary Damages

The law is clear that: “Punitive damages are recoverable in those fraud actions involving intentional, but not negligentmisrepresentations.” Alliance Mortgage Co. v. Rothwell (1995) 10 Cal.4th 1226, 1241 (citing Wyatt v. Union Mortgage Co. (1979) 24 Cal.3d 773, 790; Branch v. Homefed Bank (1992) 6 Cal.App.4th 793, 799 [no punitive damages recoverable for negligent misrepresentation]; Civil Code § 3294)).

7. Causation in Fraudulent Misrepresentation

The final requirement in fraudulent misrepresentation is that the plaintiff’s reliance on the defendant’s representation was a substantial factor in causing that harm to the plaintiff. Said another way, the fraud must have been the cause of the damages claimed by the plaintiff. As courts have explained: “To recover for fraud, a plaintiff must prove loss proximately caused by the defendant’s tortious conduct. (Civ.Code, § 1709; 1 Witkin, Summary of Cal. Law (10th ed. 2005) Torts, § 718, p. 1041.)” Fladeboe v. American Isuzu Motors Inc. (2007) 150 Cal.App.4th 42, 65, as modified (Apr. 24, 2007) (“Deception without resulting loss is not actionable fraud.”)

Defenses to Fraudulent Misrepresentation

There are a number of affirmative defenses to fraud. One such allegation that can be raised in a motion to dismiss is that the plaintiff did not plead fraud with the required pleading of particularity for fraud of who, what, where, why, and how. Even further, misrepresentations of opinion cannot form the basis of fraudulent misrepresentation, meaning the representation cannot be mere puffing. For example, a car dealer can describer a vehicle as a “solid vehicle” even if it may not be in the best of shape.

Contact an Experienced Fraudulent Misrepresentation Attorney in California

If you need legal assistance to establish a fraud claim or defend against a fraud complaint, contact the experienced Talkov Law business litigation attorneys and real estate litigation attorneys with knowledge of fraud claims and defenses for a free consultation by phone at (844) 4-TALKOV (825568) or online.

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