Determining Materiality of a Statement When Pursuing a Fraud Claim

In order to have a viable claim for fraud, there must be a false statement made which is material to a transaction between two individuals or entities. The mere fact that one party lied to the other is not sufficient—the statement must have been of material importance to the transaction, or it must have actually caused the injured party to enter into the transaction.

The United States Court of Appeals for the 9th Circuit discussed the “materiality” requirement for fraud in the case of United States v. Peterson, 538 F.3d 1064, (9th Cir. 2008). In Peterson, the defendants ran a home building business and subsidized the down payments of several home buyers. The subsidy was not permitted by HUD, so the defendants submitted letters to HUD indicating that the down payments were gifts from friends or family members of the home buyers. Several buyers later defaulted on their mortgage payments, and HUD assumed repayment of the loans.

A jury instruction was given at trial stating that the defendants’ false statements were material if “it could have influenced the agency’s decisions or activities.” The jury found defendants guilty of making false statements to a government agency.

On appeal, defendants challenged the jury instruction re materiality.  The court noted that this definition of materiality was derived from a Supreme Court case that found materiality present when a statement “has a natural tendency to influence, or was capable of influencing, the decision of the decision-making body to which it was addressed.” Kungys v. United States, 485 U.S. 759, 770, 108 S. Ct. 1537 (1988). The court upheld the jury instructions, noting that this definition of materiality looked at the intrinsic ability of the statement to influence a decision. It did not consider the actual probability of the statement influencing the decision. In other words, it is an objective test.

Note that there is a difference between the materiality and relevance of a statement. In the case of fraud, the decision being made is whether or not to enter into a transaction under its specific terms. A statement that influences this decision is material. Some statements, while relevant to the transaction, may not be sufficiently material enough to influence a party’s decision to agree to the transaction.

Chernoff Law handles litigation matters throughout Arizona, including litigations regarding fraud. Contact us by calling 480-719-7307 to discuss your legal needs.