Fraud in the factum
Encyclopedia
Fraud in the Factum is a type of fraud
where misrepresentation
causes one to enter a transaction
without accurately realizing the risks, duties, or obligations incurred. This can be when the maker or drawer of a negotiable instrument
, such as a promissory note
or check
, is induced to sign the instrument without a reasonable opportunity to learn of its fraudulent character or essential terms. Determination of whether an act constitutes fraud in the factum depends upon consideration of “all relevant factors.” Fraud in the factum usually voids the instrument under state law and is a real defense
against even an holder in due course
.
Contrast this with the situation where a trusted employee signs a check without permission. The employer must still honor the check despite the fact that the check was a fraudulent negotiable instrument. Here, the employer had a reasonable opportunity to avoid the obligation by restricting access to the checks.
Fraud in the factum is often contrasted with fraud in the inducement.
In Boro v. Superior Court, 163 Cal. App. 3d 1224 (1985), the defendant called up the victim saying he was "Dr. Stevens" from the hospital and that the victim had a life-threatening disease. He further presented 2 options for treatment: option one was to have a painful surgery costing the victim $9,000; option 2 was to have sex with an anonymous donor costing the victim only $1,000. The victim had intercourse with the defendant believing at the time that her life was threatened and that was the only choice she had to cure the disease. The victim later, upon learning the truth, brought the charges against the defendant for rape. The court held this was fraud in the inducement and therefore there was no rape. It was fraud in the inducement because the deception related not to the thing done - the sexual intercourse - but merely to some collateral matter (cure from a life-threatening disease).
Fraud
In criminal law, a fraud is an intentional deception made for personal gain or to damage another individual; the related adjective is fraudulent. The specific legal definition varies by legal jurisdiction. Fraud is a crime, and also a civil law violation...
where misrepresentation
Misrepresentation
Misrepresentation is a contract law concept. It means a false statement of fact made by one party to another party, which has the effect of inducing that party into the contract. For example, under certain circumstances, false statements or promises made by a seller of goods regarding the quality...
causes one to enter a transaction
Financial transaction
A financial transaction is an event or condition under the contract between a buyer and a seller to exchange an asset for payment. It involves a change in the status of the finances of two or more businesses or individuals.-History:...
without accurately realizing the risks, duties, or obligations incurred. This can be when the maker or drawer of a negotiable instrument
Negotiable instrument
A negotiable instrument is a document guaranteeing the payment of a specific amount of money, either on demand, or at a set time. According to the Section 13 of the Negotiable Instruments Act, 1881 in India, a negotiable instrument means a promissory note, bill of exchange or cheque payable either...
, such as a promissory note
Promissory note
A promissory note is a negotiable instrument, wherein one party makes an unconditional promise in writing to pay a determinate sum of money to the other , either at a fixed or determinable future time or on demand of the payee, under specific terms.Referred to as a note payable in accounting, or...
or check
Cheque
A cheque is a document/instrument See the negotiable cow—itself a fictional story—for discussions of cheques written on unusual surfaces. that orders a payment of money from a bank account...
, is induced to sign the instrument without a reasonable opportunity to learn of its fraudulent character or essential terms. Determination of whether an act constitutes fraud in the factum depends upon consideration of “all relevant factors.” Fraud in the factum usually voids the instrument under state law and is a real defense
Real defense
A real defense is a justification for a maker or drawer not to honor a negotiable instrument even if it has been transferred to a holder in due course because it makes the instrument “void” according to Uniform Commercial Code §3-305 comment 1, thus it can’t be "cut off" by the transfer to an HDC...
against even an holder in due course
Holder in due course
The Holder in Due Course doctrine is a rule in commercial law that protects a purchaser of debt. The doctrine insulates the purchaser of debt, or other obligation to pay, against charges that either party to the original transaction might have had against the other.-Example:Suppose A promised to...
.
Contrast this with the situation where a trusted employee signs a check without permission. The employer must still honor the check despite the fact that the check was a fraudulent negotiable instrument. Here, the employer had a reasonable opportunity to avoid the obligation by restricting access to the checks.
Fraud in the factum is often contrasted with fraud in the inducement.
- Fraud in the factum is a legalLawLaw is a system of rules and guidelines which are enforced through social institutions to govern behavior, wherever possible. It shapes politics, economics and society in numerous ways and serves as a social mediator of relations between people. Contract law regulates everything from buying a bus...
defense, and occurs where A makes/signs an agreement, but either does not realize that it is supposed to be a contract, or does not understand the nature/content of the agreement, because of some false information that B gave to A. For example, suppose John tells his mother that he is taking a college course on handwriting analysis, and for his homework he needs her to read and sign a pretend deed. If Mom signs the deed believing what he told her, and John tries to enforce the deed, Mom can plead "fraud in the factum."
- Fraud in the inducement is an equitable defense, and occurs when A enters into an agreement, knowing that it is supposed to be a contract and (at least having a rough idea) what the agreement is about, but the reason A signed/made the agreement was because of some false information that B gave to A. For example, suppose John tells his mother to sign a deed giving him her property, Mom refuses at first, but then John falsely tells her that the bank will foreclose on the property unless she signs it over to him. If Mom signs the deed because of this statement from John, and John tries to enforce the deed, Mom can plead "fraud in the inducement."
In Boro v. Superior Court, 163 Cal. App. 3d 1224 (1985), the defendant called up the victim saying he was "Dr. Stevens" from the hospital and that the victim had a life-threatening disease. He further presented 2 options for treatment: option one was to have a painful surgery costing the victim $9,000; option 2 was to have sex with an anonymous donor costing the victim only $1,000. The victim had intercourse with the defendant believing at the time that her life was threatened and that was the only choice she had to cure the disease. The victim later, upon learning the truth, brought the charges against the defendant for rape. The court held this was fraud in the inducement and therefore there was no rape. It was fraud in the inducement because the deception related not to the thing done - the sexual intercourse - but merely to some collateral matter (cure from a life-threatening disease).