This subject should be discussed with a competent lawyer. 

Definition

Constructive Fraud is a type of Fraud arising from a breach of duty in a fiduciary or confidential relationship, where the breach results in an advantage to the fiduciary or a detriment to the principal.  It does not require actual fraudulent intent.  The broker or agent should have known, based on their professional designation.

Key Elements

• Fiduciary Relationship
• Exists when one party (e.g., broker) owes duties of loyalty, honesty, and full disclosure to another (e.g., client).
• Breach of Duty
• Failure to disclose material facts, failure to investigate, or providing misleading information.
• Reliance and Harm
• The principal relies on the fiduciary’s statements or omissions and suffers damage.
• No Need for Intent
• Unlike actual Fraud, constructive Fraud can occur even if the fiduciary acted negligently or carelessly, not maliciously.

Examples in Real Estate

• A broker tells a buyer that a property is “subdividable” without verifying zoning restrictions.
• An agent omits known defects or fails to disclose facts they should have discovered through reasonable diligence.

Legal Basis

• California Civil Code § 1573 defines constructive Fraud as any breach of duty that gains an advantage by misleading another, even without fraudulent intent.
• Case Law:
• Salahutdin v. Valley of California, Inc. (1994) – Broker misrepresented acreage and subdividability, failed to verify facts → constructive Fraud.
• Easton v. Strassburger (1984) – Broker liable for failing to disclose property defects they should have discovered.

Why It Matters

• Constructive Fraud expands liability beyond intentional wrongdoing.
• Brokers can face civil damages (and, under AB 3108, potentially criminal exposure if knowledge of falsity is proven) even when they did not intend to cause harm.

To prove constructive Fraud, one must establish specific elements that differ from actual Fraud, as intent to deceive is not required.

Elements to Prove Constructive Fraud

• Existence of a Fiduciary or Confidential Relationship
• Show that the defendant owed fiduciary duties (e.g., broker-client relationship).
• Evidence: Listing agreements, agency disclosures, statutory duties under California Civil Code §§ 2295–2322.
• Breach of Fiduciary Duty
• Demonstrate failure to disclose material facts, failure to investigate, or misleading statements.
• Example: Broker misrepresents property size or fails to verify zoning restrictions.
• Evidence: Emails, contracts, MLS listings, testimony showing omission or misrepresentation.
• Materiality of the Fact
• This fact must be significant enough to influence the principal’s decision.
• Example: Acreage, subdividability, structural defects, and loan terms.
• Reliance by the Principal
• Show that the client relied on the broker’s statements or omissions when making decisions.
• Evidence: Buyer’s testimony, transaction documents, timeline of advice, and purchase.
• Resulting Damage
• Prove financial harm or loss caused by reliance.
• Evidence: Appraisals, repair costs, diminished property value, expert testimony.

Key Differences from Actual Fraud

• No intent to deceive required
• Focus is on breach of duty + advantage gained or harm caused
• Often proven through negligence and fiduciary obligations rather than malicious conduct.

Supporting Authority

• California Civil Code § 1573 defines constructive Fraud as any breach of duty that misleads another to their prejudice, even without fraudulent intent.
• Salahutdin v. Valley of California, Inc. (1994): Broker liable for constructive Fraud for failing to verify acreage and subdividability.
• Easton v. Strassburger (1984): Broker liable for nondisclosure of property defects they should have discovered.

Proving Fraud in a real estate or mortgage context, the type of Fraud you might allege:

✅ Checklist for Proving Actual Fraud

• False Representation or Concealment
• Identify a statement, omission, or act that was false.
• Evidence: Emails, contracts, recorded statements, marketing materials.
• Materiality
• Show that the fact was significant enough to influence the transaction.
• Example: Property condition, loan terms, acreage, zoning.
• Knowledge of Falsity
• Prove the defendant knew the statement was false (or acted with reckless disregard).
• Evidence: Internal notes, prior inspections, contradictory documents.
• Intent to Induce Reliance
• Show the defendant intended for you to rely on the false statement.
• Evidence: Sales pitches, instructions, timing of disclosures.
• Justifiable Reliance
• Demonstrate that you reasonably relied on the statement or omission.
• Evidence: Testimony, transaction timeline, absence of contrary info.
• Damages
• Quantify financial harm caused by reliance.
• Evidence: Appraisals, repair costs, lost investment returns.

✅ Checklist for Proving Constructive Fraud

• Fiduciary Relationship
• Confirm the defendant owed fiduciary duties (e.g., broker-client).
• Evidence: Listing agreement, agency disclosure forms.
• Breach of Duty
• Show failure to disclose material facts or verify critical information.
• Evidence: MLS data, inspection reports, zoning records.
• Materiality
• The fact must be significant to the decision-making process.
• Example: Subdividability, structural defects, and loan purpose.
• Reliance
• Prove you relied on the fiduciary’s statements or omissions.
• Evidence: Transaction documents, testimony.
• Damage
• Show measurable harm (financial or property-related).
• Evidence: Closing statements, expert valuations.

✅ Checklist for Proving Statutory Fraud (e.g., AB 3108)

• Document Filed with Recorder
• Identify the recorded instrument (deed, mortgage, lien).
• Material Misstatement or Omission
• The document contained false or misleading information.
• Knowledge (or Intent to Defraud)
• Prove the filer knew of the falsity (or intended to defraud in broker-specific cases).
• Connection to Mortgage Loan Transaction
• Establish the link between the document and the loan process.
• Resulting Harm or Violation
• Demonstrate harm or statutory breach (criminal liability does not require actual damages).

A fiduciary duty is a legal obligation that arises when one party (the fiduciary) is entrusted to act in the best interests of another (the principal).  In real estate and mortgage contexts, brokers and agents owe fiduciary duties to their clients because of the trust and confidence placed in them.

Core Components of Fiduciary Duty

• Loyalty
• Act solely in the client’s best interest, avoiding conflicts of interest.
• Example: A broker cannot secretly represent both buyer and seller without disclosure.
• Full Disclosure
• Reveal all material facts that could affect the client’s decision.
• Example: Disclosing known property defects or zoning restrictions.
• Confidentiality
• Keep the client’s private information secure and do not use it for personal gain.
• Obedience
• Follow the client’s lawful instructions within the scope of the agency agreement.
• Reasonable Care and Diligence
• Perform duties with competence and prudence.
• Example: Verify property details, loan terms, and legal compliance.
• Accounting
• Properly handle and report all funds and property entrusted to the fiduciary.

Legal Basis

• California Civil Code §§ 2295–2322 (Agency Law)
• Real Estate Law (Bus. & Prof. Code § 10176)
• Case Law:
• Easton v. Strassburger (1984) – Broker must inspect and disclose material defects.
• Salahutdin v. Valley of California (1994) – Broker liable for Fraud, constructive Fraud for failing to verify acreage and subdividability.

✅ Why It Matters for AB 3108

If a broker knowingly files a false document or omits material facts, that breach of fiduciary duty can escalate from civil liability to Fraud or constructive Fraud, and then to criminal exposure under AB 3108.

Reasonable care in the context of fiduciary duty means acting with the level of skill, diligence, and prudence that a reasonably competent professional in the same field would exercise under similar circumstances.  It’s about meeting the industry standard of care.

What It Includes for Real Estate Brokers

• Verify Material Facts
• Check property size, zoning, title status, and legal restrictions before making representations.
• Example: Confirm acreage and subdividability (Salahutdin v. Valley of California).
• Inspect and Disclose
• Conduct a reasonably competent and diligent visual inspection of property and disclose observable defects (Easton v. Strassburger).
• Understand and Explain Contracts
• Ensure clients understand terms, contingencies, and risks.
• Follow Statutes and Regulations
• Comply with Real Estate Law, agency disclosure requirements, and anti-fraud statutes.
• Maintain Communication
• Keep clients informed of material developments and respond promptly.
• Avoid Misleading Statements
• Do not make claims without verification; avoid half-truths or omissions.

Legal Standard

• California courts measure reasonable care against what a reasonably prudent broker would do in similar circumstances.
• Failure to meet this standard can result in negligence, breach of fiduciary duty, or constructive Fraud.

Courts define reasonableness as an objective standard—what a hypothetical “reasonable person” or “reasonable professional” would do under similar circumstances.  It’s not about what the defendant personally thought was reasonable, but what society expects as prudent behavior.

Core Principles

• Objective Test
• Courts ask: Would a reasonably prudent person in the same position, with similar knowledge and experience, have acted this way?
• This avoids subjective excuses like “I thought it was fine.”
•   Context Matters
• Reasonableness depends on the situation:
•   The standard for an ordinary person for general negligence.
•   Professional standard for licensed roles (e.g., brokers, doctors).
• For brokers, courts compare conduct to what a competent broker would do under similar market and legal conditions.
•   Foreseeability
• Could a reasonable person foresee harm from their actions or omissions?
• Example: Failing to verify property size when subdivision potential is central to the deal is unreasonable because harm is foreseeable.
•   Balancing Risk vs. Burden
• Courts weigh the likelihood and severity of harm against the effort needed to prevent it.
• If verifying facts is easy and the consequences of error are significant, failing to verify is unreasonable.

In Real Estate Cases

• Easton v. Strassburger (1984): Reasonable care required brokers to inspect and disclose observable defects.
• Salahutdin v. Valley of California (1994): Needed reasonable care verifying acreage and subdividability before making representations.

✅ Bottom Line: Reasonableness = objective, situational, and tied to professional norms.  It’s the benchmark for negligence and for breaches of fiduciary duty.

Comparison Chart: Reasonable Person vs Reasonable Professional