Is there such a thing as "Conspiracy to Commit Constructive Fraud"?
In an opinion released last week, the Court of Appeals took the opportunity to dissect this curious cause of action. In Kincaid v. SouthTrust Bank, a company in default deeded all of its assets to the bank in lieu of having the bank foreclose on the company. As part of this arrangement, the bank agreed to release the owner of the company from his personal guarantee on the obligation. The principal plaintiff in the case, a major stakeholder in the company, alleged that he could have salvaged the company and its assets through a bankruptcy reorganization had the owner and the bank not “conspired” as described above.
The Plaintiff articulated numerous causes of action, but the most interesting one by far was “Conspiracy to Commit Constructive Fraud.” The odd part about this cause of action is that “constructive fraud” (as opposed to fraud) is characterized by the lack of an intent requirement. By contrast “conspiracy,” by definition, is characterized by the intent to form a common design to do the act in question. Accordingly, as recognized by the Court in Kincaid, a number of states have concluded that conspiracy to commit constructive fraud is simply a legal impossibility.
Ultimately, the Court in Kincaid took the position that because the Plaintiff’s claim was deficient in other ways, it was declining to address the issue of whether “conspiracy to commit constructive fraud” was a legally cognizable claim in Tennessee. However, in affirming the dismissal of this claim, the Court went on to observe that because intent was a necessary element of any conspiracy, the Plaintiff had an obligation to prove intent as part of its "conspiracy to commit constructive fraud" claim. Accordingly, even assuming it remains a viable cause of action, there may be little practical difference left between, “conspiracy to commit constructive fraud” and a conspiracy claim involving actual fraud. Something to keep in mind…
Read the full opinion here.