Keep Your Friends Close: What to do When a Friend and Business Partner Allegedly Defrauds You
When entering into business transactions, it’s always important to know the terms of the agreement. The importance of being aware of the exact terms of an agreement cannot be overstated. Sometimes, even more important than the writing, is what is conveyed from one party to another is. A material misrepresentation or omission within a fiduciary relationship will most likely amount to fraud.
In Hassan v. Yusuf, 408 Ill. App. 3d 327, 944 N.E.2d 895 (1st Dist. 2011), Yusuf, the defendant, entered into an agreement regarding the purchase of a gas station together with Hassan, the plaintiff. Hassan claimed that pursuant to the parties’ agreement, he would receive one-third of the interest in a gas station along with interest in the real estate which was secured by a mortgage. These terms had allegedly been dictated to Hassan by Yusuf, who was Hassan’s good friend and one of three investors in the gas station venture. Later, after having invested significant funds, Hassan learned that Yusuf had allegdly duped him into believing that he would receive an interest in the real estate. Hassan then filed suit against Yusuf and the other defendant alleging fraud, breach of fiduciary duty, breach of contract, and sought an accounting and declaratory judgment.
In determining whether or not fraud was committed by Yusuf, the Illinois Appellate Court first addressed whether a fiduciary relationship existed between the parties. In Illinois, the law is clear that “[i]n order to prove fraud by the intentional concealment of a material fact, it is necessary to show the existence of a special or fiduciary relationship, which would raise a duty to speak.” Id. at 912.
The Court identified several facts support a fiduciary relationship, including: (1) that Hassan and Yusuf were each equal shareholders; and (2) that Hassan and Yusuf had been close personal friends for approximately ten years. The trial court had previously found that these facts were not sufficient to establish a fiduciary relationship, but the Appellate Court overturned this finding. The Appellate Court held:
“[T]here is sufficient evidence on the record to establish that such a finding would be against the manifest weight of the evidence and therefore reversible given the fact that a fiduciary relationship exists in all certainty based on their business venture together.”
The Appellate Court even found that the parties’ friendship and their joint venture was “overwhelming” evidence of a fiduciary relationship.
After finding that a fiduciary relationship existing between the parties, the Appellate Court’s concluded that there was a material omission giving rise to a breach of fiduciary duty. The trial court had previously found that Yusuf’s testimony that he told Hassan that Hassan would not receive interest in the property lacked credibility. The trial court had also found that Hassan credibly testified that he understood he would be receiving an equal share in the gas station and real estate. The Appellate Court therefore held: “[c]onsequently, Yusuf’s omission that [Hassan] would not acquire an interest in the real estate amounts to a misrepresentation upon which [Hassan’s] claim of fraud may be based.”
The Illinois Appellate Court’s decision in Hassan v. Yusuf reinforces the importance of committing oral agreements to writing. Had the parties done so, a lawsuit would likely not have been needed or it would not have turned on questions of witness credibility. The decision also reinforces that when an oral agreement is at issue, witness credibility will often be one of the most important factors. Continue reading