Gordon B. Dempsey, P.C.
Jeffrey A. Modisett
Mary Ann Wehmueller
ATTORNEYS FOR APPELLEE
Attorney General of Indiana
Deputy Attorney General
Gordon B. Dempsey, P.C.
Jeffrey A. Modisett
Mary Ann Wehmueller
The Indiana Deceptive Consumer Sales Act (the "Act"), Ind. Code §§ 24-5-0.5-1 to
-10 (1993 & Supp. 1997),See footnote
provides remedies to consumers and the attorney general for
practices that the General Assembly deemed deceptive in consumer transactions. We granted
transfer to consider the requirements of certain claims under the Act. We hold that intent on
the part of the violator is required under the Act for "incurable" deceptive acts, but is not
required for most other "deceptive acts." We further hold that the construction contracts in
this case were not transactions in real property. As a result, the provision in the Act
requiring an "incurable" deceptive act before the attorney general may sue a supplier of real
estate does not apply in this case. However, we hold that Indiana Trial Rule 9(B) -- which
requires that fraud be pleaded with "particularity" -- applies to actions under the Act that are
"grounded in fraud." Because the State's complaint did not distinguish between its
allegations of "incurable deceptive acts" (which require intent) and "deceptive acts" (which
do not) the entire complaint was subject to Rule 9(B) but did not meet its requirements.
Accordingly, McKinney's motion to dismiss or to make more specific should have been
granted. We remand with directions to grant McKinney's motion to make more specific, but
to grant the State leave to amend its complaint.
Marion County. The State of Indiana filed suit against McKinney and other defendants in
October 1985, alleging the Act was violated by McKinney's representations with respect to
the construction of the homes. McKinney responded to the State's complaint with a Motion
to Dismiss for Failure to State a Claim and a Motion for More Definite Statement. The
motions alleged, among other things, that the State failed to allege an intent to mislead, and
failed to plead with particularity as required by Indiana Trial Rule 9(B). The trial court
denied McKinney's motions. Eight years later, in July 1994, the State filed a motion for
summary judgment,See footnote
which the trial court granted. The court entered an injunction against
making various representations and awarded a $15,000 judgment of restitution and $1250
for the costs of investigating and prosecuting the action pursuant to §§ 4(c)(2) and 4(c)(3)
of the Act.See footnote
On appeal, McKinney contended, inter alia, that the trial court erred in failing to grant his motions to dismiss and for a more definite statement, and compounded the error by granting the State's motion for summary judgment. McKinney contended that the consumer transactions at issue were transactions in real property, and that § 4(c) of the Act limited the State's authority with respect to real property to "incurable deceptive acts." Because the Act defines "incurable" deceptive acts as those done with "intent to defraud or mislead," McKinney contended that the trial court's grant of summary judgment was erroneous
because the State had failed to prove intent. The Court of Appeals affirmed the trial court
as to the pre-trial motions, but reversed the grant of summary judgment. Specifically, the
Court of Appeals held that a "deceptive act," whether "incurable" or not, is one undertaken
with the intent to mislead. McKinney v. State, 683 N.E.2d 1362 (Ind. Ct. App. 1997)
(unpublished table decision). In other words, in the view of the Court of Appeals, intent is
an element of every claim under the Act. The court concluded that not only had the State
failed to establish intent, but also questions of fact precluded summary judgment. The State
sought transfer, contending that intent to deceive is not an element in every action under the
Act. We granted transfer to consider this issue.
it. If a cure is accomplished in a reasonable time that is the end of the matter. However, if
either the defect is intentional, or the supplier does not supply goods or services conforming
to the representations, the consumer has a claim under the Act and may recover attorneys
fees among other remedies. In addition, even if no consumer sues, the State may sue under
the Act for injunctive relief and, if the acts are intentional, for civil penalties. §§ 4(c), 4(g),
The mechanics of this scheme are spelled out through several defined terms. Specifically, the Act provides for two kinds of actionable deceptive acts: "uncured" deceptive acts and "incurable" deceptive acts.See footnote 5 An uncured deceptive act means "a deceptive act . . . with respect to which a consumer who has been damaged by such act has given notice to the supplier," but the supplier either fails to offer to cure within thirty days or does offer to cure but fails to cure within a reasonable time after the consumer accepts the offer. § 2(6). An incurable deceptive act "means a deceptive act done by a supplier as part of a scheme, artifice, or device with intent to defraud or mislead." § 2(7). Intent to defraud or mislead is thus clearly an element of an incurable deceptive act. But just as clearly intent is not essential to every deceptive act. If it were, every deceptive act would be "incurable" because virtually any intentional misleading would qualify as a "scheme, artifice or device." This would plainly obliterate the statutory purpose to permit cure without resort to the courts for
large numbers of acts that, if uncured, become the basis for a suit under the Act.
This conclusion is borne out by an analysis of the remaining provisions of the Act. Section 3(a) of the Act defines "deceptive act." As of 1985, of the twelve deceptive acts listed at that time, ten defined the required mental state as what the supplier "knows or should reasonably know," or similar language.See footnote 6 Accordingly, for example, a supplier commits a deceptive act under § 3(a)(1) if the supplier represents that a product in a consumer transaction has characteristics the supplier should reasonably know it does not have. "Should reasonably know" is plainly a lesser standard than "knowingly violate" or "intend to mislead." Under the explicit language of the statute, however, it is sufficient to constitute a deceptive act under § 3(a)(1) and several other subsections of § 3(a).
This conclusion is further supported by the fact that the Act provides for two affirmative defenses, either of which would be superfluous if intent were an element of every "deceptive act." Section 3(c) provides that if a supplier can show "by a preponderance of the evidence that an act resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adopted to avoid the error," then the act is not deceptive. Section 3(d) provides a defense if the act was made in good faith without knowledge of its falsity in reliance upon certain representations made by others. For either defense to be meaningful, some acts must be "deceptive" and therefore actionable even if unintentional or unknowing.
Spaulding v. International Bakers Servs., Inc., 550 N.E.2d 307, 309 (Ind. 1990) ("Where
possible, every word must be given effect and meaning, and no part is to be held meaningless
if it can be reconciled with the rest of the statute.").
the Act. McKinney cites § 4(c) and contends that for consumer transactions in real
only the attorney general may bring an action under the Act and he may seek relief
only for incurable deceptive acts. Although we agree with McKinney's construction of §
4(c), we conclude that the transaction in this case was not a transaction in real property.
Accordingly, the State was not required to allege or prove intent.
Section 4(c) reads in part: "The attorney general may bring an action to enjoin a deceptive act. However, the attorney general may seek to enjoin patterns of incurable deceptive acts with respect to consumer transactions in real property." Taken literally, this section does not seem to prohibit the attorney general from enjoining deceptive acts involving consumer transactions in real property. On its face, it simply expressly permits the attorney general to enjoin incurable deceptive acts involving real property. As a matter of syntax, the first sentence is a blanket grant of authority that is not explicitly diminished by the second sentence. However, the second sentence has no meaning unless it is taken as a restriction on the attorney general's authority as to real estate transactions. This conclusion is supported by the Act's legislative history. Until 1982 the Act applied to consumer transactions in "goods" or "services." Ind. Code § 24-5-0.5-2(1) (1976). In 1982, this was changed to "personal property, real property, intangibles" or services. 1982 Ind. Acts, P.L. 152, § 1. At the time the General Assembly subjected real estate to the Act, it also added the provisions giving unique treatment to real estate transactions. The following sentence was
added to § 4(a), which established a cause of action for consumers who rely on a deceptive
act: "This subsection does not apply to a consumer transaction in real property, except for
purchases of time shares and camping club memberships." The same language was added
to § 4(b), which authorizes class actions against suppliers. Section 4(c), which authorizes
actions by the attorney general, was also changed. Before 1982 § 4(c) stated simply: "The
attorney general . . . may bring an action to enjoin a deceptive act." The General Assembly
added the following sentence: "However, the attorney general may seek to enjoin patterns
of incurable deceptive acts with respect to consumer transactions in real property." We can
see no purpose to this additional sentence except to reflect the legislature's intent to limit the
attorney general's authority under the Act as to the newly included category of real property.
Accordingly, although the Amendment was inartfully drafted, we conclude that McKinney
is correct that § 4(c) limits the authority of the attorney general in consumer transactions
involving real property to seeking relief only for incurable deceptive acts.See footnote
transactions in real property, and therefore intent is not required. The State cites J.E. Pierce
v. Drees, 607 N.E.2d 726 (Ind. Ct. App. 1993) in support of the proposition that construction
contracts are not "transactions in real estate" under the Act. In Pierce, a consumer entered
into a construction contract whereby the contractor agreed to demolish the consumer's garage
and build a new garage on the same site. The contractor also agreed to pour a concrete patio
next to the consumer's home. The court held that the construction contract involved both
the sale of goods and the performance of services and was not a transaction in real property
for purposes of the Act.See footnote
The State concedes that unlike the contract in Pierce and the authority Pierce cited, the consumers' transactions with McKinney included the purchase of real estate. According to the State, this is irrelevant because the alleged deceptive acts stemmed from misrepresentations regarding the provision of products and services. Specifically, the State alleges that for each consumer, McKinney agreed to build a home according to certain specifications of standard, quality, or grade. Further, the construction contracts contained a warranty that guaranteed all labor and materials against defects in workmanship for one year (excepting normal wear and tear). The State contends that the deceptive acts at issue relate to McKinney's failure to construct homes in accord with the terms of the construction agreements and to conform to express warranties in the construction of the homes. Like
Pierce, the State concludes, the issues relate to the performance of construction agreements.
We agree that a construction contract is not a "transaction in real estate" as the term is used in the Act. We assume that the sale of an existing structure will normally be a transaction in real property under the Act. In this case, however, the buyers selected a model home to be built on a plot of land which they also chose and purchased. Judging from the affidavits, there was a separate "Building Contract" that did not involve the sale of land.See footnote 10 The "Building Contract" was not for an existing structure and, for purposes of the Act, was therefore not exclusively a contract for real property. As far as can be determined from the record, each contract involved the assembly of a house and the provision of services to maintain the house. The contract explicitly says that "the Contractor agrees to construct for the Buyers a home." Unlike the sale of an existing structure, which a consumer is at liberty to inspect for defects, the promise to build a structure forces consumers to rely on a variety of representations that the builder is far more capable of evaluating. Section 1(a) of the Act provides: "This chapter shall be liberally construed and applied to promote its purposes and policies." Consistent with this directive, we hold that the construction contract at issue in this case was not a "transaction in real property" under the Act. Accordingly, the State may seek relief for both incurable and other deceptive acts of McKinney.
argued that the State did not aver facts showing the time, place, and content of the asserted
misrepresentations -- i.e., the "circumstances constituting fraud," Dutton v. International
Harvester Co., 504 N.E.2d 313, 318 (Ind. Ct. App. 1987) -- or allege that any of the
misrepresentations were false at the time they were made. Instead, McKinney claimed, the
State simply recited statutory language without the support of operative facts. The State
responded that Rule 9(B) does not apply to deceptive acts under the Act. Rather, the State
contended, Rule 9(B) applies to common law or actionable fraud but not to a statutory action
where statutory remedies are sought.See footnote
Further, the State continued, actionable fraud requires
five elements -- representation, falsity, scienter, reliance, and injury -- whereas deceptive acts
under the Act meet a lower threshold.
Application of Rule 9(B) to actions under the Act is a question of first impression. There are, however, useful analogs. For example, § 11 of the Securities Act of 1933 generally provides that any person acquiring a security issued under a registration statement that contained an untrue statement of a material fact can bring an action on the basis of the misrepresentation. 15 U.S.C. § 77k(a) (1994). Similarly, § 12(2) of the 1933 Act generally provides that persons who offer or sell a security by means of a prospectus which includes an untrue statement of material fact are liable to the purchaser. 15 U.S.C. § 77l(a)(2) (1997). Scienter is not an element under either provision. Claims under sections 11 and 12, like
actions under the Act, are based on misrepresentations of material fact and do not require
proof of intentional deception on the part of the seller or offeror. Despite the absence of
scienter as an element in these 1933 Act claims, however, Rule 9(b) of the Federal Rules of
Civil Procedure has been held to apply, at least when the claim "sounds in fraud" or is
"grounded in fraud." In re Stac Elecs. Sec. Litig., 89 F.3d 1399, 1404-05 (9th Cir. 1996);
Shaw v. Digital Equip. Corp., 82 F.3d 1194, 1122-23 (1st Cir. 1996); Melder v. Morris, 27
F.3d 1097, 1100 n.6 (5th Cir. 1994) ("When 1933 Securities Act claims are grounded in
fraud rather than negligence as they clearly are here, Rule 9(b) applies."); accord Shapiro v.
UJB Fin. Corp., 964 F.2d 272, 288 (3d Cir. 1992); Goldsmith v. Technology Solutions Co.,
1994 WL 323317, at *5 (N.D. Ill. June 27, 1994) (if the nub of the allegations sound in
fraud, then Rule 9(b) applies); Todd v. Oppenheimer & Co., 78 F.R.D. 415, 419 n.4
(S.D.N.Y. 1978) (in action under § 12, Rule 9(b) applies when complaint sounds essentially
in fraud); but see In re NationsMart Corp. Sec. Litig., 130 F.3d 309, 315 (8th Cir. 1997)
(holding that Rule 9(b) does not apply to claims under § 11 because proof of fraud or mistake
is not a prerequisite to establishing liability).
The reasoning behind most of these decisions is that although fraud is not an element of the action, the action is nonetheless based on fraud. For example, a complaint under the 1933 Act need not prove fraud to prevail, but the allegations in the complaint often accuse the defendant of knowingly, wilfully, or intentionally misrepresenting information. This type of action is "grounded in fraud" and Rule 9(b) applies for the same reason it applies in
typical "averments of fraud."See footnote
Federal Rule 9(b), like its Indiana counterpart, serves the
objectives of deterring groundless suits and providing defendants with sufficient information
in the complaint to enable them to prepare a defense. See generally 5 Charles Alan
Wright & Arthur R. Miller, Federal Practice and Procedure § 1296 (2d ed. 1990).
Accordingly, in securities fraud cases, the plaintiff must plead the circumstances of fraud,
what is false or misleading about a statement, and that the statement was false or misleading
at the time it was made. In re Stac, 89 F.3d at 1404. But where the claim is based on
negligence or innocent misrepresentations of fact, Rule 9(b) does not apply. Id. at 1405 n.3;
Shaw, 82 F.3d at 1222-23 (complaint which asserted that defendants possessed information
they did not disclose did not aver fraud and Rule 9(b) did not apply); Shapiro, 964 F.2d at
288 (court does not decide whether Rule 9(b) applies to negligence violations). Cf. Sears v.
Likens, 912 F.2d 889, 892-93 (7th Cir. 1990) (holding that Rule 9(b) applies to § 12(2)
without distinguishing between negligent or fraudulent based claims).
The State did not meet the requirements of Rule 9(B) in its complaint in this case. The complaint alleged that McKinney made representations described in the complaint and alleged in conclusory terms that they were "false and misleading and constitute deceptive acts and incurable deceptive acts." By alleging the acts to be incurable, the State alleged intent and asserted a basis for civil penalties. Accordingly, Rule 9(B) applied. Perhaps the
State could have alleged as a separate claim a right to injunctive relief based on a lesser
mental state, but it did not do so. Rather, the complaint did not distinguish between the
allegations of "deceptive acts" and "incurable deceptive acts." As a result, the entire
complaint must be judged by Rule 9(B) standards. Cf. In re Stac, 89 F.3d at 1405 n.2
(complaint alleging §§ 11, 12, and 10(b) violations of the 1933 and 1934 Acts specifically
disclaimed fraud with respect to § 11, but Rule 9(b) applied to all claims because the
"gravamen of the complaint was plainly fraud and no effort was made to show any other
Under the standards of Rule 9(B), at least major portions of the complaint are deficient. Affidavits attached to and incorporated in the complaint supply some of the required information, but not all. Treating the complaint and affidavits as one document, they do not state with specificity what the representations were, who made them,See footnote 13 or when or where they were made. Most importantly, in most cases they do not plead what the statements were that were false, and in what respect they were false. In many instances they amount to an assertion that McKinney made promises -- sometimes in the form of warranties and guarantees -- and then failed to perform.See footnote 14 Although these allegations may support a breach of contract claim, without more flesh these bare bones do not state claims under the Act. A broken promise is not ipso facto a false representation. Cf. Anderson v. Indianapolis
Ind. Aamco Dealers Adver. Pool, 678 N.E.2d 832, 837 (Ind. Ct. App. 1997) (actual fraud
may not be based on representations of future conduct, on broken promises, or on
representations of existing intent that are not executed), trans. denied. A promise can be
made without knowledge or reason to believe that it will be broken, but a statement that is
false for purposes of the Act must be false when made. The State's complaint also contains
some allegations that suggest misrepresentations of then currently existing state of affairs,
but these are quite general.See footnote
Even unfulfilled promises can also support allegations of
misrepresentation or misdescription of the product if the facts at the time support the
conclusion that fulfillment of the promise was problematic. Cf. R.R.S. II Enterprises, Inc.
v. Regency Assocs., 646 N.E.2d 56, 59 (Ind. Ct. App. 1995) (representation that shopping
mall would have double lane traffic access was misrepresentation of existing fact, where it
was known at time that double lane was impossible and a construction plan for single lane
had been approved). These allegations may very well be expandable to assert claims under
the statute, but are not pleaded with sufficient particularity to be evaluated, and do not pass
Trial Rule 9(B) muster.
complaint in this case alleged incurable acts (that require intent) and sought civil penalties
(that require a "knowing violation" or proof of incurable acts) but failed to meet the
requirements of Indiana Trial Rule 9(B). Accordingly, we remand to the trial court to grant
McKinney's motion to make more specific with leave to the State to amend. Because we
determine the applicability of Rule 9(B) for the first time to claims under the Act, leave to
amend to conform the pleading requirements should be liberally granted. Because the
motion to dismiss or to make more specific should have been granted, the trial court erred
in granting the State's motion for summary judgment and that judgment is vacated. With
respect to McKinney's other contentions -- that the trial court erred in dismissing
McKinney's counterclaim and defenses -- we summarily affirm the Court of Appeals. Ind.
Appellate Rule 11(B)(3).
SHEPARD, C.J., and DICKSON and SELBY, JJ., concur.
SULLIVAN, J., concurs in Parts I through IV of the opinion but dissents from Part V, believing the allegations were pled with sufficient particularity to meet the requirements of Indiana Trial Rule 9(B).
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