Promissory Fraud in Tennessee

Having handled several promissory fraud cases over the years, I would characterize it as a tough tort to prove, but, under the right facts, certainly not impossible.  Promissory fraud was not recognized as a cause of action in Tennessee until relatively recently, and, therefore, there is not nearly the amount of case law discussing promissory fraud in Tennessee as there is discussing other fraud causes of action.

To prove promissory fraud, a plaintiff must prove three of the same elements that must be proven for a fraud claim (fraud is now to be referred to in Tennessee as “intentional misrepresentation”).  First, the plaintiff must prove that the defendant made an intentional misrepresentation of a material fact. Second, the plaintiff must prove that the defendant knew that the fact was false when he stated the fact. Third, the plaintiff must have suffered a loss based on the plaintiff’s reasonable reliance on the material fact at issue. Where the causes of action of intentional misrepresentation and promissory fraud differ are in the fourth element of each tort.

The fourth element of the tort of intentional misrepresentation requires that the plaintiff prove that the misrepresentation related to an existing fact, e.g., that the defendant represented the value of her assets were $2 million on a financial statement presented to the plaintiff when, in fact, they were $1 million.  The fourth element of the tort of promissory fraud requires that the plaintiff prove that the defendant made a promise of future action, but at the time he made it, he had no intention to perform it. For example, let’s assume that the defendant represented to the plaintiff that “if you will sign this royalty contract and allow me to sell your product, I will not terminate it as long as your product is selling.” If the defendant, years later, terminated the contract even though the plaintiff’s product was still selling, a promissory fraud claim might be successful provided that the plaintiff could also provide the type of proof discussed below.

In my estimation, by far, the most critical point to understand about the tort of promissory fraud is that you cannot prove it by relying just on the fact that the defendant subsequently did not keep his promise. See, Farmers & Merchants Bank v. Petty, 664 S.W.2d 77, 80-81 (Tenn. Ct. App. 1983) If the only proof you can muster is that the defendant subsequently did not do what he said he would do, you will likely be on the losing end of a motion for summary judgment, or maybe even a motion to dismiss or a motion for judgment on the pleadings. The plaintiff in Farmers & Merchants Bank alleged that a bank officer had stated that the plaintiff would never have to repay a loan the bank had made to the plaintiff.  The court in that case held that, as a matter of law, such a statement, standing alone, was insufficient to support a claim for promissory fraud since there was “no evidence, circumstantial or otherwise that the representation was false when made.”

This rule makes sense. Without it, in every instance in which someone did not follow through with promised action, they could be subject to a judge or jury deciding whether their failure to perform amounted to fraud.  Given the uncertainty of juries’ decisions, that would be a harsh outcome given that businesses and people often don’t perform promises for countless reasons other than that it was never their intent to perform them.

So, what evidence does a plaintiff have to produce in addition to a subsequent failure to perform to survive a dispositive motion so that the plaintiff’s case can advance to trial (where a judge or jury can determine whether the defendant did not intend to perform and is, therefore, liable)?  There is not much Tennessee case law to help answer this question. The seminal Tennessee case on promissory fraud, Brungard v. Caprice Records, Inc., 608 S.W.2d 585 (Tenn. Ct. App. 1980), does provide some guidance on this issue.

In the Brungard case, there was evidence that, in addition to making promises about future actions (which the defendant never took), at the time the defendant made the representations about its promised future actions, it also made some misrepresentations about presently existing facts. In the Brungard case, the misrepresentations about existing facts, which were in addition to the defendant’s failure to do what it said it would do, were enough to carry the day for the plaintiff.

Or firm had a promissory fraud case in federal court a few years ago in which the defendant filed a motion for judgment on the pleadings and argued that our case should be dismissed.  The defendant argued dismissal was proper because the only evidence we had to prove that the defendant did not intend to keep his promise, at the time he made it, was that he subsequently did not keep it. In that case, we were able to point to other representations of existing material facts that the defendant had made at the time he made the statement about what he intended to do in the future. The defendant’s motion was denied.

Where a plaintiff has a potential claim for promissory fraud, it is almost certain that she will have a claim for promissory estoppel, which is a cause of action available to a plaintiff in Tennessee (unlike estoppel, which can only be used defensively). While promissory estoppel is not an intentional tort which has the potential of supporting an award of punitive damages and personal liability, as promissory fraud does, it is much easier to prove.  For business litigation lawyers and their clients, I hope to explore and write about that cause of action in an upcoming blog.


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