SECTION 4 MISREPRESENTATION AND NONDISCLOSURE 517

sidewalk, mailed it. Upon receipt the next day, Brenda promptly telegraphed
an acceptance and resold Dasher to Thad, a friend, for $8,000. Later, Sam
telephoned to say that he did not intend to sell Dasher. Is there a contract to
sell Dasher?
(2) Suppose that Sam had indicated an offer to sell Dasher for $6,000,
but his secretary typed “Flasher” instead, and Sam signed the letter without
reading. Upon receipt, Brenda promptly telegraphed “accept your offer to sell
Flasher” and resold Flasher to Thad for $8,000. Is there a contract to sell
Flasher? How about Dasher? Compare Restatement (Second) § 20(2) with
CISG Art. 8(1).
(3) Suppose that Sam went to a telegraph office and on a standard form
clearly wrote the following: “Will sell Dasher to you for $6,000.” The form
contained a limitation of liability approved by the Federal Communications
Commission declaring that the company would not be liable for mistakes or
delays in transmission beyond the sum of $500, unless the message was sent
at repeated message rates or was specially valued. The outer limit of liability
for a repeated message was $5,000. Sam read the limitation and chose not to
pay the extra charge for a repeated or specially valued message. Due to a
mistake of the telegraph company, the telegram as sent offered to sell Dasher
for $5,000. Brenda promptly telegraphed her acceptance and resold Dasher
to Thad for $8,000. Is there a contract to sell Dasher for $5,000? Assuming
that the telegraph company was negligent, what is its liability, if any, to
Sam? To Brenda? To Thad?

4. MISREPRESENTATION AND NONDISCLOSURE

The basic rule for the effect of misrepresentation or nondisclosure on
a contract is fairly simple. As stated in Section 164(1) of the Second
Restatement:
If a party's manifestation of assent is induced by either a
fraudulent or a material misrepresentation by the other party
upon which the recipient is justified in relying, the contract is
voidable by the recipient.
As Section AO Sasa heatSta aaae a bit, a isp‘epresentation
en is m intentionally or sears a:GismonEoseatasatio
iss material “fit wouldbelikelyto induce areasonable person to manifest
his assent.’ ’ The rule in Section 164 sets a lower bar than does the tort of
deceit, which requires that a misrepresentation be both fraudulent and
material. The black-letter rule in contract law is that either is enough.
Farnsworth reports, however, that “although there is no shortage of cases
allowing avoidance where the misrepresentation was both material and
aerial or material but not fraudulent, it is difficult to find cases that
ave done so where the misrepresentation was fraudulent but not
material.” 1 Farnsworth § 4.12, at 481.
While these general rules are fairly easy to state, there are of course
complications. As we will see below, the real action in these cases often
concerns what counts as a misrepresentation under the rule.
518 FORMATION DEFENSES CHAPTER 4

Misrepresentations can also give rise to claims of breach of warranty

and in some cases to tort or statutory liability. We discuss these rules in
Chapter Five, Section 3.
~

Peter Laidlaw v. Hector M. Organ

Supreme Court of the United States, 1817.
PHrUsSew7s:

ERROR to the district court for the Louisiana district.

[Organ, the plaintifffouyer, filed suit against Laidlaw, the
defendant/seller, seeking to recover possessioion of 111 hogsheads of
tobacco that Laidlaw had taken from Organ’s possession. Laidlaw
seller, had peeps sea aliokthe tobacco to
ossessed the tobacco by force sare

| sell. Organ and aleve Had been neeouatinet over thé

tobacco in auceon on the evening of Saturday, February 18, 1815. Late
that same day, messengers “brought from the British fleet the news that
a treaty of peace had been signed at Ghent by the American and British
commissioners,” ending the War of 1812 and consequently the British
blockad Orleans. Having
called Laidlaw (the seller) shortly after
sunrise on Sunday. Laidlaw “asked if there was any news which was
calculated to enhance the price or value of the article about to be
purchased.” Organ a ly remaine ant and “the... purchase was
then and there made.” The news was made public iina handbill that same
ae at 8 NS “ : quence i

distinction oftheforutnof conscience, and the forum of law; Bat he admits

Hi er had not. This news was eee I even ae

| Waehninion ninamore at Noe Orleans, the recent scene of the most
| sanguinary operations of the war. In answer to the question, whether
there was any news calculated to enhance the price of the article, the
€ ihn reserve, when such a question was asked, was
‘iv. etora ta answer, and as much calculated to-deceive as the
manatee of he most re intelligence. Though the plaintiffs
SECTION 4 MISREPRESENTATION AND NONDISCLOSURE 519

in error, after they heard the news of peace,

still went on, in ignorance of
their legal rights, to complete the contract, equity will protect them. * * *
uw KEY, contra. * * * The only real suru inTone cause is,

eA But, onieee he was b¢ to ¢ oS

admitting that his conduct was unlawful, inae eonecieniigg bee that
prove that it was so in the civil forum? Human laws are imperfect in this
respect, and the sphere of morality is more extensive than the limits of
civil jurisdiction. The maxim of caveat emptor could never have crept into
the law, if the province of ethics had been co-extensive with it. There was,
in the present case, no circumvention or manoeuvre practised by the
vendee, unless rising earlier in the morning, and obtaining by superior
diligence and alertness that intelligence by which the price of |
commodities was regulated, be such. It is a romantic equality that is
contended for on the other side. Parties never can be precisely equal in
knowledge, either of facts or of the inferences from such facts, and both
must concur in order to satisfy the rule contended for. The absence of all
authority in England and the United States, both great commercial
countries, speaks volumes against the reasonableness and practicability
of such a rule.
m= INGERSOLL, in reply. Though the record may not show that any thing
tending to mislead by positive assertion was said by the vendee, in
answer to the siege ane by Suk Cae yet it isacase of

was Prmonclized by ie messengers HEE ne British fleet, and not

pee, to the public at large until it was too late for the vendor to save
ethics is the same. It is not a romantic,

question in “this case 1

e vendor The eat isLgeoptnionnat he

e itIt would be difficult to circumscribe the

ot - [Link] thinks that t a aerction of the dee was

erroneous, and that the question, whether any imposition was practised
by the vendee upon the vendor ought to have been submitted to the jury.
520 FORMATION DEFENSES CHAPTER 4

For these reasons the judgment must be reversed, and the cause
remanded to the district court of Louisiana, with directions to award a
ventre facias de novo.
Venire de novo awarded. .

Hector Organ was represented in the Supreme Court by Francis Scott Key. In this
painting, Key beholds the American flag still flying over Fort McHenry at dawn,
September 14, 1814. This event inspired Key to write “The Star-Spangled Banner.”

NOTES
(1) What is the holding of Laidlaw v. Organ? Who won?
On the one hand, Marshall clearly states the rule that the buyer “was
not bound to communicate” the news that the war had ended. On the other,
Marshall also holds that “whether any imposition was practised by the
vendee upon the vendor ought to have been submitted to the jury” and
remands the case on that basis. If the buyer was under no duty to disclose,
what other “imposition” might there have been?
(2) The first holding in Laidlaw, that the buyer did not have a general
duty to disclose that the war had ended, was quite influential in the
Gave rOpinents of U.S. law. It was not at thesecond ae of the th twentieth

the Ninth Geet Pelewrite as nays as 1967, “businessmen dealing at arm’s

length are rarely under a duty to speak.” Simpson Timber Co. v. Palmberg
Constr. Co., 377 F.2d 380, 385 (9th Cir. 1967). Today, courts are more willing
to recognize a duty to disclose in arms-length transactions. For an example,
see Hill v. Jones, later in this section, as well as Restatement (Second) § 161.
SECTION 4 MISREPRESENTATION AND NONDISCLOSURE 521

Laidlaw is unusual because it is a circumstance where a buyer’s non-

disclosure (in response to a question) could be an unlawful imposition.
Typically the law requires disclosures from sellers, not buyers. Even though
we often say caveat emptor, the law by placing few disclosure duties on
buyers creates a marketplace where sellers must beware (caveat venditor).
(3) Laidlaw teaches that by asking a question, one party can create for
the other a duty to disclose. Can a party create such a duty simply by making
a representation herself—a representation that the other knows is false? See
Restatement (Second) § 161(b) (disclosure required if necessary to “correct a
mistake of the other party as to a basic assumption on which that party is
making the contract”).
(4) Ina large “block trade” of securities, a seller may insist on including
a “big boy” provision in the sales contract indicating that the seller is making
no representation concerning whether seller has material non-public
information—so that the buyer cannot later sue for a failure to disclose such
information. Edwin Eshmoili, Big Boy Letters: Trading on Inside
Information, 94 CORNELL L. REV. 133 (2008). If you were a buyer, how would
the existence of such a provision impact your willingness to pay?
Alternatively, buyers sometimes demand an explicit representation from the
seller that seller has no material non-public information concerning the block
trade. In the absence of these provisions, what should be the default seller
(or buyer) representation regarding material non-public information? Does
the existence of both types of provisions suggest that the legal default is
uncertain?

Marina District Development Co., LLC v. Phillip Ivey

United States District Court, District of New Jersey, 2016.
2016 WL 6138239.

[Every breaking wave on the shore

Tells the next one “there'll be one more”
Every gambler knows that to lose
Is what youre really there for
U2, “Every Breaking Wave,’—Eds. |
a HILLMAN, DISTRICT JUDGE
As a general matter, gambling is illegal. This is because the law
considers gambling malum per se, a function of the age-old belief, arising
perhaps from Judeo-Christian doctrine, that gambling is an immoral
vice. Hence, it is prohibited by both the state and the federal government.
But like most vices, which would exist in some measure whether
banned by governments or not, many states choose to allow, regulate,
and tax some versions of it while preserving the ban on unregulated
enterprises. The theory is a simple one. State-sanctioned gambling will
be cleansed of its most unsavory elements and the games will be
conducted under a defined set of published rules overseen by an
administrative body....
522 FORMATION DEFENSES CHAPTER 4

In this case, the uncontroverted facts establish that defendants

Phillip D. Ivey and Cheng Yin Sun, “high-stakes” professional gamblers,
set out to shift the odds of the casino game of Baccarat away from the
house and in their favor. They achieved this, and profited handsomely
from it, by the use of an elaborate and hidden “edge-sorting” scheme to
create, and thereafter use, a deck of cards aligned in such a way as to
reveal to them the face value of a card before it was turned over. Knowing
the value of the card beforehand (here within a range they chose)
dramatically increased the odds their resulting bets would beat the
house. And beat the house they did.
Not surprisingly, when the scheme was revealed, the Plaintiff
Marina District Development Co., LLC, which does business as Borgata
Hotel Casino & Spa in Atlantic City, New Jersey, cried “fraud,” among
other things, and brought this suit. * * * For the reasons expressed below,
the Court will grant-in-part and deny-in-part Ivey and Sun’s motion for
summary judgment and Borgata’s cross-motion for summary judgment.
BACKGROUND
In April 2012, Ivey contacted Borgata to arrange a visit to play high-
stakes Baccarat. Ivey made five requests: (1) a private area or “pit” in
which to play; (2) a casino dealer who spoke Mandarin Chinese; (8) a
guest (defendant Sun) to sit with him at the table while he played; (4)
one 8-deck shoe of purple Gemaco Borgata playing cards to be used for
the entirety of each session of play; and (5) an automatic card shuffling
device to be used to shuffle the cards after each shoe was dealt. Borgata
agreed to Ivey’s requests. In return, Ivey agreed to wire a “front money”
deposit of $1 million to Borgata, and that the maximum bet would be
$50,000 per hand. Under these parameters, Ivey played [four times
winning $9,626,000].
According to [Borgata] the mechanics of “edge sorting” are as follows:
The backs of casino playing cards generally contain a repeating
diamond or geometrical pattern. If the cards are not cut
symmetrically during the manufacturing process, the two long
edges of the cards will not be identical. In other words, one edge
will have more of the geometrical pattern than the other.
SECTION 4 MISREPRESENTATION AND NONDISCLOSURE 523

“large Design” ~ More of the "Small Design” — Less of the

circles are visible on this edge, circles are visible on this edge.

During play, Ivey and Sun used the accommodations they

requested from Borgata to “turn” strategically important cards
so that they could be distinguished from all other cards in the
deck. The dealer would first lift the card so that Sun could see
its value before it was flipped over all the way and placed on the
table. If Sun told the dealer “Hao” (pronounced “how”), which
translates to English as “good card,” he was instructed to
continue to flip the card over so that the orientation of the long
edges of the card would stay on the same side when flipped. * * *
If Sun told the dealer “Buhao” (pronounced “boohow’),
which translates into English as “bad card,” he was instructed
to flip the card side to side, so that the long edges would be
reversed when flipped. * * * By telling the dealer “good card” or
“bad card” in Mandarin, the dealer would place the cards on the
table so that when the cards were cleared and put in the used
card holder, the leading edges of the strategically important
cards could be distinguished from the leading edges of the other
cards in the deck.
[Ivey and Sun “turned” the cards with the highest values],
so that they could be distinguished from all other cards in the
deck... . Ivey and Sun knew that if an automatic card shuffler
was used, the edges of the cards would remain facing in the
same direction after they were shuffled.
Ivey also knew that if the same cards were not reused for
each shoe, there would be no benefit to “edge sorting.” That is
why Ivey requested that the same cards be reused for each shoe.
The leading edge of the first card in the shoe is visible before
the cards are dealt. Once the “edge sorting” was completed, Ivey
and Sun were able to see the leading edge of the first card in the
shoe before it was dealt, giving them “first card knowledge.”
[Their] “first card knowledge” changed the overall odds of the
524 FORMATION DEFENSES CHAPTER 4

game from an approximate 1.06% house advantage to an

approximately 6.765% advantage for Ivey. * * *
(Amend. Compl.)
DISCUSSION
**K*

"1. Borgata’s Claims for Breach of Contract, Breach of Implied

Contract, and Breach of the Implied Covenant of Good Faith and
Fair Dealing
Borgata’s contract-based claims are premised on the contention that
when Ivey and Sun played Baccarat at Borgata, Borgata agreed to fulfill
its obligations to provide a gaming experience in compliance with the
New Jersey Casino Control Act (“CCA”), and Ivey and Sun agreed to play
the game in compliance with the CCA. Because Borgata complied with
the CCA, while Ivey and Sun did not, Ivey and Sun breached their
agreement with Borgata.
In assessing the viability of Borgata’s claim when resolving Ivey and
Sun’s motion to dismiss, the Court observed that the only way gambling
at a casino is lawful is if the patrons and the casino follow the strictures
of the CCA, and that contractual agreements, whether express or
implied, involving casino gambling in New Jersey must therefore include
a provision that both parties agree to abide by the CCA.
KR*

Borgata contends that the turning of the cards was “marking cards,”
the request to use the automatic shuffling machine constitutes a
“cheating device,” and that the edge sorting technique is “cheating and
swindling.” * ** The Court finds that Ivey and Sun breached their
contract with Borgata to play Baccarat in compliance with the CCA by
violating N.J.S.A. 5:12—115(a)(2) and (b) when they knowingly engaged
in a scheme to create a set of marked cards and then used those marked
cards to place bets based on the markings. * * *
In this case, there is no dispute that Ivey and Sun did not mark the
cards used in the Baccarat playing sessions in a traditional way. Ivey and
Sun did not physically touch any of the cards at any time, and they did
not have access to the card decks prior to their playing sessions. These
factors support Ivey and Sun’s argument that they did not mark any
cards or knowingly use or possess any marked cards in violations of the
CCA.
Ivey and Sun’s view of what constitutes a ‘ “marked” card is too
narrow. Such an interpretation would undermine in a fundamental way
the purpose behind the regulatory ban on marked cards. “Marking” a
card is to surreptitiously identify the value of the card to a player—and
that player alone. The physical acts of a card being drawn on, daubed, or
crimped are several ways to inform a player of its value. But, as
demonstrated by Ivey and Sun’s edge sorting technique, a physical act is
SECTION 4 MISREPRESENTATION AND NONDISCLOSURE 525

not necessary to alert a player surreptitiously of a card’s value. Asking a

card dealer to turn a card a particular way so that the pattern on the
edge of the card will distinguish it from other cards such that it will
inform the player of that card’s value also constitutes “marking” within
the meaning and intent of the regulatory ban. The term “marking”
therefore can be defined as having something done to the card that
identifies the value of the card to a player but to no one else.11
Moreover, it is not the act of “marking” a card that violates the CCA,
but rather the “use” or “possession” of the marked card that violates the
CCA. That is because using or possessing a marked card that reveals the
value of that card leads to an artificial adjustment of the set odds in the
player’s favor. * * *
By using cards, they caused to be maneuvered in order to identify
their value only to them, Ivey and Sun adjusted the odds of Baccarat in
their favor. * * * Ivey and Sun’s violation of the card marking provision
in the CCA constitutes a breach of their mutual obligation with Borgata
to play by the rules of the CCA. Consequently, summary judgment must
be entered in Borgata’s favor, and against Ivey and Sun, on Borgata’s
contract-based claims.
2. Borgata’s fraud and RICO conspiracy claims
In addition to its breach of contract claims, Borgata has alleged
fraud, RICO and conspiracy-based claims against Ivey and Sun arguing
that they misrepresented that they intended to abide by the rules of
honest play established and required by the CCA, and they intentionally
misrepresented their true reasons, motivation and purpose for the
playing accommodations they sought. * * *
To state a claim of fraud under the common law, a plaintiff must
allege facts that, if proven, would establish the following: ““(1) a material
misrepresentation of a presently existing or past fact; (2) knowledge or
belief by the defendant of its falsity; (3) an intention that the other person
rely on it; (4) reasonable reliance thereon by the other person; and (5)
resulting damages.’” Hoffman v. Hampshire Labs, Inc., 963 A.2d 849,
855 (N.J. Super. App. Div. 2009). * * *
The parties agree that Baccarat is a game, and all games have rules.
The fundamental tenet of all games is that the players abide by the rules,
otherwise any win garnered through broken rules would be unfair. In
this case, none of the actual rules of Baccarat were broken, and nothing
except for Ivey and Sun’s motivation for certain requests was hidden from
Borgata. ... Therefore, the ultimate question is whether Ivey and Sun
committed fraud by misrepresenting their true reasons for their five
requests and card turning, even while none of the game’s rules had been

11 The basic dictionary definitions of the verb “mark” support this meaning as well. See
Merriam-Webster Dictionary (defining “mark” as “to take notice of, to take careful notice”);
Black’s Law Dictionary (10th ed. 2014) “MARK: A symbol, impression, or feature on something,
usu. to identify it or distinguish it from something else.”).
526 FORMATION DEFENSES CHAPTER 4

technically broken. The Court finds that the answer to that question is
no.
The rules of Baccarat do not prohibit a player from manipulating the
cards. In certain Baccarat games, referred to as “Macau” style, the
customers are allowed to squeeze, crease, bend, or tear the cards.
Baccarat is a casino game well known for unique and superstitious
rituals, including asking dealers to let the players “peek” at cards before
they are placed on the gaming table. Thus, Sun telling the dealer to turn
a card in a certain way did not raise any red flags for Borgata.
Borgata’s fraud claims hinge on Ivey and Sun’s misrepresentation
that their five requests, along with Sun’s instructions to the dealer on
how to turn a card, were because they were superstitious. Obviously, if
Ivey and Sun had explained to Borgata that they were directing the
dealer to turn a card a certain way so that they could later identify the
card’s value by the pattern on the back of the card, the
“misrepresentation” element of establishing fraud would be lacking. And
also obviously, if Ivey and Sun had told Borgata the real reason they
wanted the cards turned, Borgata would have never let them play.
The Court notes these obvious points for a reason—a reason that is
dispositive to the finding that Ivey and Sun did not commit fraud. Even
though Ivey and Sun manufactured an explanation for their instruction
to the dealer to turn the cards, the rulesof Baccarat do not require an
explanation to permit a player to manipulate the cards. In other words,
a player could crease, tear, bend, or have a card turned without any
explanation at all and not violate Baccarat’s rules of play.
To meet the elements of fraud, Borgata must show that Ivey and Sun
made a material misrepresentation and that Borgata relied upon that
misrepresentation to its detriment. Ivey and Sun’s five specific requests
to Borgata, and their instruction to the dealer to turn the cards a certain
way, did not violate any rules or regulations. Ivey and Sun did not need
to claim superstition to make their requests and card turning
instructions permissible—they already were. If Ivey and Sun had simply
made their requests without explanation, Borgata was still empowered
to grant or deny those requests. That Borgata chose to believe that Ivey
and Sun were superstitions does not amount to detrimental reliance,
when no explanation at all could have resulted in the same course of
events. Stated differently, Borgata allowed defendants to give a silly,
nonsensical reason for the card turning. That is tantamount to allowing
defendants to give no reason at all. Borgata is estopped in such
circumstances from alleging that the misrepresentation was material.!9

19 Borgata’s argument devolves into a contention that defendants acted fraudulently

because they did not reveal their fraudulent intent. Fraud is not so easy to prove. It is well to
remember that fraud is both a crime and a tort and the elements are the same. While the
element of a material misrepresentation may be satisfied by an omission under some
circumstances, failing to confess to your victim is not one of them. Such a legal requirement
would certainly be efficient, but it is not our jurisprudence. Rather the law requires either a
misrepresentation that is material or an omission where there is a separate duty to disclose.
SECTION 4 MISREPRESENTATION AND NONDISCLOSURE 527

Borgata casts itself as an innocent victim who altruistically provided

Ivey with his five requests, including allowing Sun to play with him,
because it trusted Ivey. Borgata, however, is a for-profit business whose
commodity is gambling, and whose methodology is to use the odds of
casino games in its favor, among other techniques, to win as much money
from its patrons as it can. Ivey is a professional gambler whose business
is to play high-stakes casino games to win as much of the casino’s money
as he can. In exchange for agreeing to Ivey’s five requests, Borgata
required millions of dollars in front money from Ivey. Borgata also
wanted Ivey to gamble at its casino so that his celebrity status would
attract more gamblers to the casino. Borgata and Ivey had the same goal
when they entered into their arrangement—to profit at the other’s
expense. Trust is a misplaced sentiment in this context.
Even though Ivey and Sun did not reveal to Borgata the true purpose
behind their requests and actions, they were not required to provide a
reason. This does not amount to legal fraud. Ivey and Sun are therefore
entitled to summary judgment on all of Borgata’s fraud-based claims
against them.
CONCLUSION
Ivey and Sun, and perhaps others, view their actions to be akin to
cunning, but not rule-breaking, maneuvers performed in many games,
such as a play-action pass in American football or the “Marshall swindle”
in chess.24 Sun’s mental acumen in distinguishing the minute differences
in the patterns on the back of the playing cards is remarkable.
But, even though Ivey and Sun’s cunning and skill did not break the
rules of Baccarat, what sets Ivey and Sun’s actions apart from deceitful
maneuvers in other games is that those maneuvers broke the rules of
gambling as defined in this state. Borgata and Ivey and Sun were
obligated to follow the proscriptions of the CCA in order to lawfully
gamble in the first place, and then they were also obligated to follow the
rules of Baccarat. Ivey and Sun breached their primary obligation.

NOTES?
(1) Fair Dealing? Does the court’s ruling that edge sorting is a kind of
card marking reasonable? Did Ivey and Sun have reasonable notice of this
restriction?

Here, no duty to disclose why the defendants wanted to turn the cards was imposed by the CCA,
the casino rules of the game, or as a result of the arrangements made with the defendants.
24 Hven though the word “swindle” connotes “a diabolically clever move or combination
that turns the tables on the opponent,” a swindle “is not a kind of cheating or a contravening of
the rules of the game.” Robert Byrne, Chess; The Marshall Swindle, N.Y. Times, January 4,
L987; * **
2 Ivey and Sun argue that the edge sorting technique is just like card counting, which has
not been held to be a violation of the CCA or any casino games. * * * The difference between
card counting and edge sorting is that a card counter uses memory and statistics, not a
manipulation of the cards, to create an advantage for himself.
528 FORMATION DEFENSES CHAPTER 4

(2) The court finds that giving “a silly, nonsensical reason” is

“tantamount to allowing defendants to give no reason at all.” Are all believers
in superstition or the supernatural silly and nonsensical? Is the court’s
reasoning consistent with Laidlaw? Couldn’t misrepresenting their reason
impose upon the casino by throwing them off the trail of uncovering the real
reason for the offered conditions—edge sorting? Is it appropriate for the court
.to decide this issue on summary judgment?
(3) Borgata learned about Ivey’s edge sorting from a media report that
a casino in London, Crockfords, was “withholding £7.3 million won by Ivey
playing Punto Banco, which is essentially the same game as Baccarat.” Ivey
made the same five requests to Crockfords as he had to Borgata. Ivey sued
Crockfords and in 2014 a High Court in London ruled against Ivey finding
that employing the edge sorting technique constituted cheating under
English civil law.

Audrey E. Vokes v. Arthur Murray, Inc.

District Court of Appeal of Florida, Second District, 1968.
212 So.2d 906.

= PIERCE, Suniets eee is ansaulites: bynee Es Vokes, ieersitead poy

Defendant Arthur Murray, Inc., a corporation, authorizes the

operation throughout the nation of dancing schools under the name of
“Arthur Murray School of Dancing” through local franchised operators,
one of whom was defendant J.P. Davenport whose dancing establishment
was in Clearwater.
Plaintiff Mrs. Audrey E. Vokes, a widow of 51 years and without
family, had a yen to be “an accomplished dancer” with the hopes of
finding “new interest in life”. So, on February 10, 1961, a dubious fate,
with the assist of a motivated acquaintance, procured her to attend a
“dance party” at Davenport’s “School of Dancing” where she whiled away
the pleasant hours, sometimes in a private room, absorbing his
accomplished sales technique, during which her grace and poise were
elaborated upon and her rosy future as’ an excellent cone otwas painted
for neein vivid andeens colors. ' lent t : 0]

Thus she embarked upon an almost endless pursuit of the

terpsichorean art during which, over a period of less than sixteen
months, she was sold fourteen “dance courses” totalling in the aggregate
2302 hours of dancing lessons for a total cash outlay of $31,090.45,
all at
Davenport's dance emporium. All of these fourteen courses were
evidenced by execution of a written “Enrollment Agreement—Arthur
Murray’s School of Dancing” with the addendum in heavy black print,
SECTION 4 MISREPRESENTATION AND NONDISCLOSURE 529

“No one will be informed that you are taking dancing lessons. Your
relations with us are held in strict confidence”, setting forth the number
of “dancing lessons” and the “lessons in rhythm sessions” currently sold
to her from time to time, and always of course accompanied by payment
of cash of the realm.
These dance lesson contracts and the monetary consideration
therefor of over $31,000 were eisai from her by means and methods
of ey and his associates which we : d c e

santract aah tie dancing athe in February, 1961, she was influenced
unwittingly by a constant and continuous

she had * ‘srace and poise’; that she was

g in her ee skill”; that the
1a | beautiful dancer, capable of
cine with the most Reed mies ie she was “rapidly
progressing in the development of her devnliars. skill and gracefulness”,
etc., etc. She was given “dance aptitude tests” for the ostensible purpose
of “determining” the number of remaining hours of instructions needed
by her from time to time.
At one point she was sold 545 additional hours of dancing lessons to
be entitled to award of the “Bronze Medal” signifying that she had
reached “the Bronze Standard”, a supposed designation of dance
achievement by students of Arthur Murray, Inc.
Later she was sold an additional 926 hours in order to gain the
“Silver Medal’, indicating she had reached “the Silver Standard”, at a
Cost or $.12:501,35,
At one point, while she still had to her credit about 900 unused hours
of instructions, she was induced to purchase an additional 24 hours of
lessons to participate in a trip to Miami at her own expense, where she
would be “given the opportunity to dance with members of the Miami
Studio”.
She was induced at another point to purchase an additional 126
hours of lessons in order to be not only eligible for the Miami trip but also
to become “a [Link]« Studio”, carrying
with it
ost of. $1,752:30.
At another point, while she still had over 1,000 unused hours of
instruction she was induced to buy 151 additional hours at a cost of
530 FORMATION DEFENSES CHAPTER 4

$2,049.00 to be eligible for a “Student Trip to Trinidad”, at her own

expense as she later learned.
Also, when she still had 1100 unused hours to her credit, she was
prevailed upon to purchase an additional 347 hours at a cost of $4,235.74,
to qualify her to receive a “Gold Medal” for achievement, indicating she
_ had advanced to “the Gold Standard”.
On another occasion, while she still had over 1200 unused hours, she
was induced to buy an additional 175 hours of instruction at a cost of
$2,472.75 to be eligible “to take a trip to Mexico”.
Finally, sandwiched in between other lesser sales promotions, she
was influenced to buy an additional 481 hours of instruction at a cost of
$6,523.81

All the foregoing sales promotions, illustrative of the entire fourteen

separate contracts, were procured by defendant Davenport and Arthur
Murray, Inc., by false representations to her that she was improving in
her dancing ability, that she had excellent potential, that she was
responding to instructions in dancing grace, and that they were
developing her into a beautiful dancer, whereas in truth and in fact she
did not develop in her dancing ability, she had no “dance aptitude”, and
in fact hadee in 1 nan, the musical beat”. The Sra ene alleged
thats entatior in fac Si

was evened that the iadane were id to her “ in total

en to the true physical, rhythm, and mental ability of the
plamtitr’. In other words, while she first ee that suewas 3 entering

The ancient le caelthat the Court decree the dance contracts to

be null and void and to be cancelled, that an accounting be had, and
judgment entered against the defendants “for that portion of the
$31, 090. 45 not
INS SEE SUS WOES ofASRS OEE given to the

The material allegations of the complaint must, of course, be

peceueed as true for the Leese of Se its oe LO ON
SECTION 4 MISREPRESENTATION AND NONDISCLOSURE 531

It is true that “generally a misrepresentation, to be actionable, must

be one of fact rather than of opinion.” Tonkovich v. South Florida Citrus
Industries, Inc., 185 So.2d 710 ([Link]. 1966); Kutner v. Kalish, 173
So.2d 763 (Fla. App. me?) Be easyee nee Ses eae)

renee67 Fla. 7 9 (1914). As stated by Judge Allen of this Conn in Rane!

v. Chasebrook Construction Co., 135 So.2d 876 ([Link]. 1961):
“* * * A statement of a party having * * * superior knowledge
may be regarded as a statement of fact although it would be
considered as opinion if the parties were dealing on equal |Z
terms.” —
8

It could be reasonably supposed here that defendants had “superior

knowledge” as to whether plaintiff had “dance potential” and as to
whether she was noticeably improving in the art of terpsichore. And it
would be a reasonable inference from the undenied averments of the
complaint that the flowery eulogiums heaped upon her by defendants as
a prelude to her contracting for 1944 additional hours of instruction in
order to attain the rank of the Bronze Standard, thence to the bracket of
the Silver Standard, thence to the class of the Gold Bar Standard, and
finally to the crowning plateau of a Life Member of the Studio, proceeded
as much or more from the urge to “ring the cash register” as from any
honest or realistic appraisal of her dancing prowess or a factual
representation of her progress.
Even in contractual situations where a party to a transaction owes
no duty to disclose facts SEE oeanon. or to answer ee.

Leen eect to defendants that her vast side of cash for the
many hundreds of additional hours of instruction was not justified by her
slow and awkward progress, which she would have been made well aware
of if they had spoken the “whole truth.”
In Hirschman v. Hodges, etc., 59 Fla. 517 (1910), it was said that—
“*** what is plainly injurious to good faith ought to be
considered as a fraud sufficient to impeach a contract,”
ey wet Se F

and that an a
“*** hopad

ies are ( galing-on. a contractual basisat

se nerently Witeacticns employed,
532 FORMATION DEFENSES CHAPTER 4

our view,raion the ona? hradeninhee complaint, plaintiff

is entitled to
inCourt.
dayr
he
It accordingly follows that the
prejudice should be an

Lek Atha Muaeeny tesateSao te éoaee ~~ - — oe hly~-wew onsy reat hen),

Phan¢ gem, ¥ LYS it be B ay

wly slow
‘ i ¥ Loday, Vea

“ARTHUR MURRAY SYSTEM Studie 14 290 Broadway, N.Y. City

1922 advertisement

NOTES
(1) What exactly were the alleged misrepresentations in Vokes v.
Murray? What does the court need to assume to make them actionable? Is
the procedural posture of this case relevant?
(2) Fraud: . Consider the following classical
statement of Hae need taea| broad ruleforfraud. “Fraud is kaleidoscopic,

\ N essieurs, the fraud- feasors, would like nothin el

so well as for courts to say they would go thus far, and no further in its
pursuit. * * * Accordingly definitions of fraud are of set purpose left general
and flexible, and thereto courts match their astuteness against the versatile
inventions of fraud-doers.” Stonemets v. Head, 248 Mo. 243, 263 (1918).
Sam Buell has argued that criminal fraud functions to deter and punish
novel wrongful acts that evade narrow legal definitions, and therefore it
must remain adaptive. “Open-textured law that grows and innovates in
competition with those who seek to evade it appears to be characteristic of
any legal order that seeks to control harmful human behavior, at least in any
society mature enough to have a large economy.” Samuel W. Buell, Novel
SECTION 4 MISREPRESENTATION AND NONDISCLOSURE 533

Criminal Fraud, 81 N.Y.U. L. Rev. 1971, 1991 (2006). But see Skilling v.
United States, 561 U.S. 358 (2010) (adopting a narrow interpretation of
federal mail and wire fraud statutes).
(3) Statutory Protection. Not only is fraud “kaleidoscopic,” so are the
judicial attempts to reach the varieties of deceptive practices. The court in
Vokes a upon a tradition of case law under which the agreement might
be rescinded. In a similar case, a Texas court awarded treble damages and
Mistheys fees, pursuant to a statute entitled “Deceptive Trade Practices—
Consumer Protection Act.” Bennett v. Bailey, 597 S.W.2d 532 ([Link].
1980). Statutes of this type figure prominently in contemporary litigation,
granting additional rights not only to consumers but, in some instances, to
commercial parties as well.
(4) Isit relevant that the plaintiff in the instant case was a woman?
It is difficult to ignore the fact that people resisting contract
enforcement in many canonical undue influence cases are female.
In Vokes v. Arthur Murray Dance Studios, the plaintiff was a lonely
widow tricked into buying $31,000 of dance lessons by high praise
for her nonexistent dancing abilities from Arthur Murray Dance
Studios. Does it matter that this doctrine tends to protect women?
In particular, does it undercut autonomy-based definitions of
contract? Is it significant that American law protects these parties
without explicitly referring to their gender, while English law
explicitly extends “special tenderness” to wives in guarantee cases?
Martha M. Ertman, Legal Tenderness: Feminist Perspectives on Contract
Law, 18 Yale J. L. & Feminism 545, 570—71 (2006).
(5) Bah, Humbug! Many people think that the term, humbug, is a
synonym for“nonsense.” But when Ebenezer Scrooge deployed the term, he
was not saying that Christmas traditions were merely devoid of sense, he
was suggesting they were verging on the fraudulent. P.T. Barnum, who
styled himself the “Prince of Humbugs,” took issue with Webster’s definition
that “humbug, as a noun, is an ‘imposition under fair pretences; and as a
verb, it is ‘to deceive; to impose on.’” Instead, Barnum defined the term by
example:
An honest man who arrests public attention will be called a
“humbug,” but he is not a swindler or an impostor. If, however, after
attracting crowds of customers by his unique displays, a man
foolishly fails to give them a full equivalent for their money, they
. very properly denounce him as a swindler, a cheat, an impostor;
they do not, however, call him a “humbug.” He fails, not because he
advertises his wares in an outre manner, but because, after
attracting crowds of patrons, he stupidly and wickedly cheats them.
P.T. BARNUM, THE HUMBUGS OF THE WORLD AN ACCOUNT OF HUMBUGS,
DELUSIONS, IMPOSITIONS, QUACKERIES, DECEITS AND DECEIVERS GENERALLY,
IN ALL AGES (1866). For Barnum, a certain degree of deception in inducement
was honorable so long as the customer was in some sense in on the deception
and so long as the humbug gave “a full equivalent of their money.” Is it
possible that Arthur Miller Dance Studies was selling humbug?
534 FORMATION DEFENSES CHAPTER 4

(6) Tellin’ Fortunes Better Than They Do. In 2015, a fortune teller,
Christina Delmaro was indicted for grand larceny after taking more than
$700,000 from a client over the course of two years. The client alleged that
Delmaro first promised to reunite him with an unrequited love interest, then
promised to resurrect a dead love interest and also to return most of the
money when she had completed her psychic tasks. A Manhattan
. Fortuneteller Cost Him Fortune After Fortune, N.Y. TIMES (June 5, 2015).
Since 1967 New York has made fortune telling for a fee a Class B
misdemeanor:

p
C

o7
o
IVC d yr to exorcise. 1ntlu

vil spirits or curses; except that this section does not apply to a
person who engages in the afore described conduct as part of a show
or exhibition solely for the purpose of entertainment or amusement.
New York Penal Law § 165.35

Comment: Misrepresentation, Rescission and Restitution

What is a misrepresentation? A misrepresentation is a falsehood, “an
assertion that is not in accord with the facts.” Restatement (Second)
§ 159. The apparent simplicity of this definition masks the complexity of
its judicial application.
To begin with, as noted in Vokes, courts have held that the
misrepresentation must be an assertion or affirmation of an existing fact,
as distinguished from an expression of opinion, a promise to do something
in the future, or a prediction of future events. But as Vokes shows, a
statement of opinion can be a misrepresentation if the parties are in a
special relationship of trust or the speaker has superior knowledge. See
Restatement (Second) § 169. A statement of opinion also represents at
least that the speaker holds that opinion, which is to say “that the facts
known to that person are not incompatible with his opinion.”
Restatement (Second) § 168. Similarly, a prediction, while it is arguably
neither true nor false at the time it is made, at least represents
something about the speaker’s present beliefs. And, as we will see with
the doctrine of promissory fraud, discussed in Chapter Five, section 3(B),
a promise typically implicitly represents that the speaker presently
intends to perform the promised act.
A statement might also be literally true but contain false
implications in context. The classic example of this is the half-truth. For
example, in V.S.H. Realty, Inc. v. Texaco, Inc., 757 F.2d 411, 414-15 (1st
Cir. 1985), after repeated inquiries by the buyer of an oil storage facility,
the seller disclosed the existence of one leak but not others of which it
allegedly knew. The First Circuit held that the disclosure of the one leak
carried with it “some implication of exclusivity,” that is, an implication
SECTION 4 MISREPRESENTATION AND NONDISCLOSURE 535

that Texaco knew of no other leaks. For more on the doctrine of half-
truths, see Donald C. Langevoort, Half-Truths: Protecting Mistaken
Inferences by Investors and Others, 52 Stan. L. Rev. 87 (1999). Half-
truths are only one species of implicit misrepresentation. Consider again
the facts and holding in Laidlaw v. Organ. Here, where the seller
allegedly asked whether there was any news, the buyer’s mere silence
may have implicitly misrepresented what he knew.
Courts have interpreted “misrepresentation” so broadly as to also
include acts of concealment and failures to disclose. Concealment is the
covering up of some fact, such as painting over water damage on
basement walls or hiding evidence of termite damage. While concealment
is not exactly a falsehood—the seller might not say a word about leaks or
termites—courts have held that such acts constitute actionable
falsehoods. See, e.g., Salzman v. Maldaver, 24 N.W.2d 161, 167 (Mich.
1946) (seller allegedly placed undamaged aluminum plates on the top of
bundles to conceal corroded ones beneath). Finally, as we will see in Hill
v. Jones, even the failure to disclose some fact, where there is a duty to
do so, can count as a misrepresentation. See Restatement (Second) § 161.
For more on the _ different ways that the law identifies
misrepresentations, see Gregory Klass, Meaning, Purpose and Cause in
the Law of Deception, 100 Geo. L.J. 449 (2012).
The Consequences of Misrepresentation. Once the court has
identified a misrepresentation, there are several other elements required
for the defense. The other side must have justifiably relied on that
misrepresentation in deciding to enter into the contract, and the
misrepresentation must be either fraudulent or material.
The usual effect of wrongful misrepresentation is to render the
contract “voidable” by the deceived party. But courts have identified a
kind of fraud in the “execution,” as distinguished from the ordinary fraud
in the “inducement,” that precludes the formation of any contract at all.
An example is where a party secures another’s signature by
misrepresenting the character of the document. See Restatement
(Second) § 1638.
A good statement of the law of “innocent misrepresentation” is found
in Norton v. Poplos, 443 A.2d 1, 4-5 (Del. 1982):
Essentially, the equitable remedy of rescission results in
abrogation or “unmaking” of an agreement, and attempts to
return the parties to the status quo. Common grounds for
rescission of a contract for the sale of real property include
fraud, misrepresentation and mistake.... But in addition to
rescission for fraudulent misrepresentation, rescission also may
be granted under certain circumstances for innocent
misrepresentations made by a seller. Thus, as stated by
Professor Williston:
536 FORMATION DEFENSES CHAPTER 4

“It is not necessary, in order that a contract may be

rescinded for fraud or misrepresentation, that the party
making the misrepresentation should have known that it
was false. Innocent misrepresentation is sufficient for
though the representation may have been made innocently,
it would be unjust and inequitable to permit a person who
has made false representations, even innocently, to retain
the fruits of a bargain induced by such representations.”
Williston on Contracts § 1500, at 400-401 (8d ed. 1970).
Similarly, ... Restatement (Second) of Contracts, § 164, states
that,
“If a party’s manifestation of assent is induced by either a
fraudulent or material misrepresentation by the other
party upon which the recipient is justified in relying, the
contract is voidable by the recipient.” (Emphasis added.)
See also Restatement (First) § 476 (1932). Most American
jurisdictions which have addressed this issue appear to
recognize that an innocent material misrepresentation by a
vendor which induces the sale of the property is ground for
rescission of the contract. ... In addition to ordering rescission,
a court will generally direct that a down payment by a buyer be
returned on a theory of restitution. ...
Remedies. One remedy for misrepresentation is to rescind the
contract. The purpose of rescission, whether through a legal or equitable
action, is restitutionary; 1.e., there is a dissolution or “undoing” of the
contract and a restoration of the parties to their pre-contract positions
(status quo ante). Originally, rescission was exclusively an equitable
remedy, but eventually law courts recognized the right to utilize
rescission as a way of securing appropriate restitutionary relief. Whether
equitable or legal rescission, an “adjustment of the equities” of the parties
is a matter of major concern. For example, “when a party elects to rescind
the contract, he is only entitled to a return to the status quo. This usually
requires a plaintiff to restore any benefit he received under the contract,
including a return in specie of any property received and a reasonable
rental value for the use of the property, plus damages for waste if any.
Likewise, the defendant must restore any money paid by the plaintiff
under the contract plus interest, monetary reimbursement for reasonable
repairs, expenditures and improvements made on the property by the
plaintiff, and, where a business has been sold, a reasonable amount of
compensation for the value of the plaintiff's labor and services rendered
during the period of time which he operated and possessed the property.”
Smeekens v. Bertrand, 262 Ind. 50, 58 (1974) (emphasis in original).
Express Warranties. So far we have identified two possible legal
effects of a misrepresentation made in the course of formation. The
misrepresentation might give rise to an action in tort, and it might also
or instead give the deceived party the power to rescind the contract. In
 SECTION 4 MISREPRESENTATION AND NONDISCLOSURE 537

the next Chapter, we discuss yet a third. Sometimes a statement of fact

made during negotiations can create a warranty, giving the other party
an action for breach should that representation turn out to be false. For
example, in contracts for the sale of goods, a seller’s “affirmations of fact”
to the buyer about the nature or quality of the goods which become part
of the “basis of the bargain” constitute express warranties even if they
are innocently mistaken. They are terms of the contract. UCC § 2-313. If
the goods do not conform to the express warranties, the buyer may reject
the goods upon tender, recover so much of the contract price as has been
paid and sue the seller for breach of contract damages. UCC § 2-711.
Why does the law give contracting parties these three separate types of
protection against falsehoods?

Warren G. and Gloria R. Hill v.

Ora G. and Barbara R. Jones
Court of Appeals of Arizona, 1986.
151 Ariz. 81.

= MEYERSON, JUDGE. Must the seller of a residence disclose to the buy rQ

facts pe taining to past termite infestation?
This is the primary question YESH vy,
Un
presented in thisPlaintiffs
appeal. Warren G. Hill and Gloria R. Hill
(buyers) filed suit to
rescind
an agreement to purchase
a residence.
Buyers alleged that Ora G. Jones and Barbara R. Jones (sellers) had an Sue gy A Por
made misrepresentations concerning termite damage in the residence ~”© ep. ONnurnr,
and had failed to disclose to them the existence of the amines ahd history U4 mtte Clarie
of termite Hue in the residence. The trialcourt a Ae

arguing that they had no duty to disclose information pertaining_to_

termite infestation and that even if they did, the record failed to show all
oe the Wen: necessary for fraudulent concealment. The trial court ‘

>The
rf’ oral peneararded eellers or000.00 in
i Pateomiey? S fees:
Buyers acd appealed from the judgment and sellers have cross-appealed
from the trial court’s ruling on attorney’s fees.
I. FACTS
In 1982, buyers entered into an agreement to purchase sellers’
residence for $72,000. The agreement was entered after buyers made
_
several visits to thehome. The purchase agreement provided that sellers —
were to pay for and place in escrow a termite inspection report stating
that the property was free from evidence of termite infestation. Escrow
was scheduled to close two months later.
One of the central features of the house is a parquet teak floor
covering the sunken living room, the dining room, the entryway and