fraud - silence, active concealment
Gnagy Gas and Oil v. Pa. Underground Storage Tank Indemnification Fund – Cmwlth. Court – December 6, 2013
Generally, as a matter of common law, the elements to prove a claim for fraud or deceit are a misrepresentation, a fraudulent utterance thereof, an intention to induce action thereby, justifiable reliance thereon, and damage as a proximate result. Wilson v. Donegal Mutual Insurance Co., 598 A.2d 1310, 1315 (Pa. Super. 1991).4 To be actionable, a misrepresentation need not be in the form of a positive assertion but may be by concealment of that which should have been disclosed. Id. at 1315-16. See Moser v. DeSetta, 527 Pa. 157, 165, 589 A.2d 679, 682 (1991) (concluding that “the concealment of a material fact can amount to a culpable misrepresentation no less than does an intentional false statement.”). However, while active concealment may constitute fraud, mere silence is not sufficient in the absence of a legal duty to disclose information. Wilson, 598 A.2d at 1315-16; Smith v. Renaut, 564 A.2d 188, 192 (Pa. Super. 1989). Otherwise, fraud by omission is actionable “only where there is an independent duty to disclose the omitted information.” Estate of Evasew, 526 Pa. 98, 105, 584 A.2d 910, 913 (1990).
Pennsylvania law recognizes a difference between active concealment and mere silence in the context of common law fraud. Wilson, 598 A.2d at 1315-16; Smith, 564 A.2d at 192; see American Plan Communities, Inc. v. State Farm Insurance Co., 28 F. Supp. 2d 964, 968 (E.D. Pa. 1998) (citing Wilson) (acknowledging that “[c]oncealment alone may create a sufficient basis for finding that a party engaged in fraud so long as the other elements of fraud are present.”); American Plan Communities, Inc., 28 F. Supp. 2d. at 968 (citing Roberts v. Estate of Barbagallo, 531 A.2d 1125 (Pa. Super. 1987) (noting that Pennsylvania common law subsumes and recognizes the tort of fraudulent concealment as stated in the Restatement (Second) of Torts §550, which imposes liability for intentional concealment of material information regardless of any duty to disclose)), and compare with Duquesne Light Company v. Westinghouse Electric Corporation, 66 F.3d 604, 611 (3d. Cir. 1995) (applying Pennsylvania law) (reiterating that Pennsylvania has adopted the Restatement (Second) of Torts §551, which imposes liability for fraudulent nondisclosure in those situations where there is an affirmative duty to speak/disclose, yet noting that Pennsylvania law is unclear as to when such a duty arises). While this Court is unable to locate any authority within our Commonwealth that expounds meaningfully upon the distinction between “active concealment” and “mere silence,” and given the dichotomy evidenced by the above authorities, perhaps the best way to illustrate, on a surface level, the distinction is by comparing §550 and §551 of the Restatement (Second) of Torts. Section 550 states that liability occurs when “[o]ne party to a transaction who by concealment or other action intentionally prevents the other from acquiring material information.”
On the other hand, section 551 imposes liability for nondisclosure of information when the defendant has a specific duty to disclose, which arises only in certain, enumerated circumstances. In United States v. Colton, 231 F.3d 890 (4th Cir. 2000), the United States Court of Appeals for the Fourth Circuit addressed the two legal concepts in a very detailed and scholarly manner. In so doing, the Colton court explained how and why the doctrine of “active concealment” constitutes fraud even if there is no independent legal duty to disclose the information, while the concept of “mere silence” requires the disclosure of information only if there is a positive statutory, regulatory, or legal duty mandating disclosure.
As the Colton court elucidated:
At common law, fraud has not been limited to those situations “where there is an affirmative misrepresentation or the violation of some independently-prescribed legal duty”…. Rather, even in the absence of a fiduciary, statutory, or other independent legal duty to disclose material information, common-law fraud includes acts taken to conceal, create a false impression, mislead, or otherwise deceive in order to “prevent the other [party] from acquiring material information.” Restatement (Second) of Torts § 550 (1977); see also W. Page Keeton et al., Prosser and Keeton on Torts §106 (5th ed. 1984) (“Any words or acts which create a false impression covering up the truth, or which remove an opportunity that might otherwise have led to the discovery of a material fact ... are classed as misrepresentation, no less than a verbal assurance that the fact is not true.”).
Thus, fraudulent concealment, without any misrepresentation or duty to disclose can constitute common-law fraud. This does not mean, however, that simple nondisclosure similarly constitutes a basis for fraud. Rather, the common law clearly distinguishes between concealment and nondisclosure. The former is characterized by deceptive acts or contrivances intended to hide information, mislead, avoid suspicion, or prevent further inquiry into a material matter. The latter is characterized by mere silence. Although silence as to a material fact (nondisclosure), without an independent disclosure duty, usually does not give rise to an action for fraud, suppression of the truth with the intent to deceive (concealment) does. See, e.g., Stewart v. Wyoming Cattle Ranche Co., 128 U.S. 383, 388, 9 S.Ct. 101, 32 L.Ed. 439 (1888).
The Supreme Court in Stewart carefully explained why concealment is “equivalent to a false representation” and so appropriately forms the basis for a common law fraud action: “the concealment or suppression is in effect a representation that what is disclosed is the whole truth. The gist of the action is fraudulently producing a false impression upon the mind of the other party; and if this result is accomplished, it is unimportant whether the means of accomplishing it are words or acts of the defendant, or his concealment or suppression of material facts not equally within the knowledge or reach of the plaintiff.” 128 U.S. at 388, 9 S.Ct. 101; see also … 37 C.J.S. Fraud § 18 (1997) (distinguishing between silence and concealment); 37 Am.Jur.2d Fraud and Deceit §145 (1968) (same). Thus, the common-law principle that, in the absence of an independent disclosure duty, “nondisclosure is not fraudulent, presupposes mere silence, and is not applicable where, by words or conduct, a false representation is intimated or any deceit practiced.” Id. at §174 (and the many cases cited therein); see also Stuart M. Speiser et al., The American Law of Torts §32:73 (1992).
Indeed, we have expressly held that the distinction between simple nondisclosure and concealment “is in accord with traditional principles of common law fraud.” Fox v. Kane-Miller Corp., 542 F.2d 915, 919 (4th Cir. 1976). In Fox, we upheld the district court’s reliance on the following explanation of this principle by Maryland’s highest court: Concealment and non-disclosure are closely related and in any given situation usually overlap.... When [either is] done without intent to mislead and without misrepresentation, it has no effect except where there is a duty of disclosure.... To create a cause of action, concealment must have been intentional and effective - the hiding of a material fact with the attained object of creating or continuing a false impression as to that fact. The affirmative suppression of the truth must have been with intent to deceive. Fegeas v. Sherrill, 218 Md. 472, 147 A.2d 223, 225 (1958) (quoting Restatement of Restitution §8 cmt. b (1937) and citing Restatement of Torts §550 (1938)).
Given this “close relationship” between nondisclosure and concealment, numerous decisions expressly distinguish between passive concealment - mere nondisclosure or silence - and active concealment, which involves the requisite intent to mislead by creating a false impression or representation, and which is sufficient to constitute fraud even without a duty to speak.
In short, at common law, no fiduciary relationship, no statute, no other independent legal duty to disclose is necessary to make active concealment actionable fraud - simple “good faith” imposes an obligation not to purposefully conceal material facts with intent to deceive. Strong v. Repide, 213 U.S. 419, 430, 29 S.Ct. 521, 53 L.Ed. 853 (1909); Tyler v. Savage, 143 U.S. 79, 98, 12 S.Ct. 340, 36 L.Ed. 82 (1892); Stewart, 128 U.S. at 388, 9 S.Ct. 101. Colton, 231 F.3d at 898-99. Accord, e.g., Wells Fargo Bank v. Arizona Laborers, 38 P.3d 12, 21 (Ariz. 2002) (differentiating between mere silence or nondisclosure and intentional concealment and concluding that “[u]nlike simple nondisclosure, a party may be liable for acts taken to conceal, mislead or otherwise deceive, even in the absence of a fiduciary, statutory, or other legal duty to disclose.”).
The Colton court’s in-depth analysis is consistent with the observations made by our Superior Court in Youndt v. First National Bank, 868 A.2d 539 (Pa. 26 Super. 2005), and Baker v. Cambridge Chase, Inc., 725 A. 2d 757 (Pa. Super. 1999). In Youndt, the Superior Court concluded that the tort of fraudulent concealment in the Restatement (Second) of Torts §550 was not applicable because there was no allegation that the defendant in that case engaged in active concealment, but the court also stated that the defendant could be held liable for nondisclosure under the Restatement (Second) of Torts §551 if an enumerated duty to disclose existed. 868 A.2d at 549-51. In Baker, the Superior Court noted that for purposes of the Restatement (Second) of Torts §550, “concealment or other action” occurs, inter alia, when there is “an intentional concealment of true facts which is calculated to deceive the other party.” 725 A.2d at 769. Accordingly, we find the Colton court’s commentary consonant with Pennsylvania law and persuasive.