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. As a result, there is not nearly as much 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 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 it. 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 is 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. For example, a defendant might represent that her assets were worth $2 million on a financial statement when, in fact, they were worth only $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, assume the defendant represented to the plaintiff: “If you 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 later terminated the contract even though the product was still selling, a promissory fraud claim might succeed—provided that the plaintiff could also provide the type of proof discussed below.
In my estimation, the most critical point to understand about promissory fraud is that you cannot prove it by relying only on the fact that the defendant later 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 have is that the defendant did not do what he said he would do, you will likely lose on a motion for summary judgment—or even on a motion to dismiss or for judgment on the pleadings.
In Farmers & Merchants Bank, the plaintiff alleged that a bank officer had stated that the plaintiff would never have to repay a loan. The court held that 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, every time someone failed to follow through with a promised action, they could be subject to a judge or jury deciding whether their failure amounted to fraud. Given the uncertainty of jury decisions, that would be a harsh outcome—since businesses and individuals often fail to perform promises for reasons other than an intent never to perform.
So, what evidence must a plaintiff produce, in addition to a failure to perform, to survive a dispositive motion and advance to trial? Unfortunately, Tennessee case law does not provide much guidance.
The seminal Tennessee case on promissory fraud, Brungard v. Caprice Records, Inc., 608 S.W.2d 585 (Tenn. Ct. App. 1980), offers some direction.
In Brungard, there was evidence that, in addition to making promises about future actions (which were never performed), the defendant also made misrepresentations about presently existing facts at the time those promises were made. Those misrepresentations of existing facts, combined with the failure to act, were enough for the plaintiff to prevail.
Our firm had a promissory fraud case in federal court a few years ago where the defendant filed a motion for judgment on the pleadings, arguing that our case should be dismissed. The defendant claimed dismissal was proper because the only evidence we had was that he subsequently failed to keep his promise.
In response, we pointed to other representations of existing material facts that the defendant had made at the same time as his promise of future action. Because of that evidence, the defendant’s motion was denied.
Where a plaintiff has a potential claim for promissory fraud, it is almost certain that she will also have a claim for promissory estoppel. Unlike estoppel (which can only be used defensively), promissory estoppel is a recognized cause of action in Tennessee.
While promissory estoppel is not an intentional tort that can support punitive damages and personal liability—as promissory fraud can—it is much easier to prove.
For business litigation lawyers and their clients, I plan to explore and write about promissory estoppel in an upcoming blog.