Receivables Purchasing Co. v. Engineering & Professional Services, Inc.
2008 WL 53262, 2008 U.S. App. LEXIS 88, 510 F.3d 840 (2008)
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Rule of Law:
Under Arkansas law, the scienter element of fraud is satisfied not only when a defendant makes a representation knowing it to be false, but also when the defendant makes a representation without knowledge of whether it is true or false.
Facts:
- Engineering and Professional Services, Inc. (EPS) was the general contractor on a construction project, and RJS Utility Construction, Inc. (RJS) was a subcontractor.
- Receivables Purchasing Company, Inc. (Receivables) had a business arrangement to purchase invoices from RJS for work RJS performed for EPS.
- Before purchasing each invoice, Receivables telephoned Richard D. Getts, Jr., the project manager for EPS, to confirm that the work had been completed and that EPS had approved the invoice for payment.
- During these calls, Getts represented to Receivables that the specific invoices had been approved for payment.
- Relying on Getts's representations, Receivables purchased the invoices from RJS.
- EPS subsequently refused to pay four of the invoices it had previously confirmed were approved, citing problems with the work RJS had performed.
- Separately, EPS entered into an agreement with RJS for a five-percent discount on future invoices that EPS paid directly to RJS.
Procedural Posture:
- Receivables Purchasing Company, Inc. sued Engineering and Professional Services, Inc. (EPS) in a U.S. District Court (trial court) for fraud and tortious interference with contract.
- EPS filed a motion for summary judgment on both claims.
- The district court granted summary judgment in favor of EPS on both claims.
- Receivables Purchasing Company, Inc. (appellant) appealed the district court's grant of summary judgment to the U.S. Court of Appeals for the Eighth Circuit, against EPS (appellee).
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Issue:
Does a defendant possess the requisite scienter for a fraud claim under Arkansas law if they make a representation without knowing whether it is true or false, even if they do not have actual knowledge that the representation is false?
Opinions:
Majority - Arnold, Circuit Judge
Yes. Liability for fraud under Arkansas law attaches not only when a defendant makes a representation knowing it is false, but also when the defendant asserts a representation as true without knowing whether it is, in fact, true or false. The court reasoned that Arkansas law on fraud includes as a key element 'knowledge that the representation is false or that there is insufficient evidence upon which to make the representation.' While Arkansas does not recognize the tort of negligent misrepresentation (a 'should have known' standard), it does hold defendants accountable for knowingly ignorant misrepresentations, which are distinct from negligence. The court found that circumstantial evidence, such as Getts's motive to keep RJS financially afloat to continue work, created a genuine issue of material fact as to whether he had the requisite scienter by representing the invoices were approved without knowing if that was true.
Analysis:
This decision clarifies a crucial ambiguity in Arkansas fraud law regarding the scienter (intent) requirement. By distinguishing between negligent misrepresentation (not a tort in Arkansas) and knowingly ignorant misrepresentation (actionable as fraud), the court provides a clearer path for plaintiffs. It establishes that a defendant cannot escape fraud liability by claiming ignorance if they made a positive assertion of fact without a sufficient basis for believing it to be true. This holding strengthens claims where direct proof of a defendant's knowledge of falsity is unavailable, allowing juries to infer fraudulent intent from circumstantial evidence of recklessness as to the truth.
