How does Good Faith affect fraud?

Fraud requires knowing and willful conduct carried out with the intent to defraud someone. As such, good faith in one's actions is a defense to the allegations. 

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When is Good Faith a Defense to Fraud?

The good faith defense is that the defendant acted in good faith and did not have the necessary intent to defraud anyone. 

It does not matter that a person's statement or belief is wrong, there is no action for fraud unless the intent is to deceive is present. 

Further, an individual's lack of due care in making a statement is not relevant in determining fraud.

Discussion: How do you feel about the mental intent requirement for a charge of fraud? Do you think a person should be able to escape a criminal fraud charge if she is reckless in her actions? What if she recognizes that her assertions are extremely unlikely, but she leads a customer or client to believe that the unlikely result is reasonably certain?

• Some might argue that fraud and misrepresentation are one in the same. Misrepresentation has the same elements as fraud, without the element of knowingly deceiving another. A mistake of fact would constitute misrepresentation. Even recklessness, which is a conscious disregard of the probability of a negative result from one's actions, might be a defense against fraud. Actively understanding risk and misrepresenting a lower level of risk may still constitute fraud.

Practice Question: Mitchell owns a baseball card of Mickey Mantle. He believes that the card is an original rookie card. He offers to sell the card to Amy for $1,500. Amy buys the card. No long afterward, she has the card inspected and learns that it is simply a reproduction of the original card and is not worth any money. She is angry at Mitchell and asks your opinion on whether she should report the incident to the police. Has Mitchell committed fraud? Why or why not?

• To demonstrate fraud, one must prove that there was intentional motive to deceive. Thus, where the party acted in good faith, their action will not qualify as fraud. Good faith is honesty in a persons conduct during an agreement. In the example from the practice question, Mitchell has not committed fraud because she was unaware of the correct value or state of the property she was selling. She only acted on the innocent understanding that the baseball card was an original rookie card. https://www.americanbar.org/groups/litigation/committees/business-torts-unfair-competition/practice/2016/duty-of-good-faith-fair-dealing/

Academic Research on Good Faith and Fraud

• Fincham, Derek, Towards a Rigorous Standard for the Good Faith Acquisition of Antiquities (August 14, 2009). Syracuse Journal of International Law and Commerce, Vol. 37, Issue 1 . Available at SSRN: https://ssrn.com/abstract=1350649 or http://dx.doi.org/10.2139/ssrn.1350649 
• Schill, Stephan W. and Bray, Heather L, Good Faith Limitations on Protected Investments and Corporate Structuring (March 13, 2017). in Andrew D. Mitchell, M. Sornarajah and Tania Voon (eds.), Good Faith and International Economic Law (Oxford: Oxford University Press, 2015) 88-116; Amsterdam Law School Research Paper No. 2017-16; Amsterdam Center for International Law No. 2017-13. Available at SSRN: https://ssrn.com/abstract=2932140 
• Fox, Irina, Minimizing the Risk of Fraudulent Transfer Avoidance: A Good-Faith Solvency Opinion as the Shield to Protect a Leveraged Transaction (July 19, 2016). Available at SSRN: https://ssrn.com/abstract=2811703 
• Podgor, Ellen S., A New Corporate World Mandates a Good Faith Affirmative Defense (2007). American Criminal Law Review, Vol. 44, No. 4, 2007. Available at SSRN: https://ssrn.com/abstract=1100845