Fairfax Savings, F.S.B. v. Ellerin

BLOOM, Judge. The predisposition of many persons to use their ingenuity to seek gainful advantage over others often takes some of them on a sojourn of dealings which are tainted by their false assertions or suggestions, or their failure to reveal certain relevant information to their unsuspecting and trusting prey.[ 1 ] ⁶⁸⁹ A jury determination that appellant embarked upon such a “sojourn of dealings,” labeled in the pleadings and referred to in the testimony as “fraud,” is at the heart of this appeal. The principal questions raised at trial were: (1) whether appellant, Fairfax Savings, F.S.B., committed fraud in its dealings with appellees, Charles and Naoma Ellerin and Louis and Gloria Seidel, who guaranteed three loans to Sherwood Square Associates (Sherwood), a limited partnership in which Messrs. Ellerin and Seidel were general partners; and (2) whether punitive damages could and should be awarded upon a finding that fraud was committed.

What is at issue before this Court is whether the jury’s verdicts resulted from one or more judicial errors in rulings made during the trial and in instructing the jury as to the law of the case at the conclusion of the trial. Sherwood, as may be surmised, defaulted on the loans, and Fairfax brought a separate action on each loan against the guarantors in addition to an action against the general partners and, finally, an action against Charles Ellerin, individually. Appellees, as guarantors, filed counterclaims in which they alleged fraud, duress, and negligent misrepresentation and sought compensatory and punitive damages. The action against Ellerin individually resulted in a verdict for him, and is not involved in this appeal.

The judgments appealed from represent the net result of directed verdicts in favor of Fairfax and against the partners and guarantors in the aggregate amount of $4,371,401.96 and jury verdicts in favor of appellees in the aggregate amount of $13,005,-966.08 on the fraud counts in their counterclaims. Two of the issues raised by appellant concern jury instructions; the others concern an evidentiary ruling, denial of appellant’s motion for summary judgment, and a ruling by the court that, as a matter of law, appellant had waived a contractual obligation of the debtor and guarantors. Appellant’s assertion of error in instructing the jury on the elements of fraud was not preserved for appellate review, and we perceive no reversible error in the court’s rulings on the evidence, the summary judgment motion, or the waiver ⁶⁹⁰ issue. We believe, however, that the court’s instruction to the jury with respect to punitive damages was deficient.

We shall vacate the judgment for punitive damages and remand for a new trial on that issue. I FACTUAL BACKGROUND The litigation in this case has a long and complicated history. In December of 1983 Fairfax F.S.B. (then Fairfax Savings Association) made three loans, totalling $5.7 million, to Sherwood Square Associates for the acquisition and renovation of four “shell” buildings located in the City of Westminster.

The buildings were to be renovated into a shopping and office facility. Charles Ellerin and Louis Seidel were the general partners of Sherwood and the owners of Tri-Ess, Inc., the general contractor for the project. Ellerin and Seidel, together with their wives, Naoma Ellerin and Gloria Seidel, and Tri-Ess, Inc., as guarantors, joined with Sherwood in entering into a Development Agreement, a Loan Agreement, and a Completion Guaranty with Fairfax and the city. The city issued two Industrial Revenue Bonds (IRB’s) in the amounts of $3,050,000 and $1,800,000, respectively, which were both subsequently acquired by Fairfax, and Fairfax made an additional conventional loan to Sherwood of $850,000. 2 The Completion Guaranties, two identical sixteen-page documents, required the guarantors to guarantee completion of the facility and repayment of the IRB loans up to $2.3 million (a $1.15 million guaranty on each loan).

The guarantors’ liability would be reduced in proportion to the leasing of the facility, eventually terminating upon its completion and the leasing of 70% of its total square footage, i.e., a “rent roll” formula. The Development Agreement required Sherwood to guarantee completion of the project and to post $50,000 security. ⁶⁹¹ Sherwood defaulted on the loan in November 1985. Fair-fax sued Sherwood and the partners in two cases, seeking $1,671,740 and $2,823,689, the balance on the loans, and sued the guarantors in three other cases. 3 Confessed judgments were docketed, but the guarantors moved to vacate the confessed judgments on the ground that the Completion Guaranty had been altered to extend their liability past the point of actual completion. This alleged alteration took place after the guarantors' attorney had reviewed what were supposed to be final prior drafts of the closing documents but before settlement, when the documents were executed. 4 Sometime between December 23 and December 29, the date of closing, sections 3.1(b), (c) and 8.1 of the Completion Guaranty and section 4.1 of the Loan Agreement were altered to impose $2.3 million in IRB guaranties on the Guarantors and $4.85 million in post-completion guaranties on Ellerin and Seidel as general partners.

The motion to vacate was granted; the guarantors filed an answer and counterclaim alleging fraud, duress, and negligent misrepresentation, claiming $6 million in compensatory and $10 million in punitive damages. The Guaranty and Partnership cases were consolidated. A jury trial began on 2 September 1987 and ended on 2 October 1987 when the jury, having found that Fairfax had fraudulently included a payment guarantee in the Completion Guaranty documents but that the guarantors had ratified the fraud, awarded Fairfax $2,303,946 against the ⁶⁹² guarantors. The court then entered judgment in the amount of $5,263,688.75 against Ellerin and Seidel in the Partnership cases.

An appeal was taken from that judgment, and on 9 February 1989 this Court reversed it. Ellerin v. Fairfax Sav. Ass’n, 78 Md.App. 92 , 552 A.2d 918 , cert. denied, 316 Md. 210 , 557 A.2d 1336 (1989). A fifth suit was filed by Fairfax on 23 December 1988, alleging the use of a fraudulent financial statement by Ellerin.

That case was consolidated and tried with the others. The result was a hung jury. A third trial began on 10 April 1991. At that trial, Fairfax offered testimony to show that the post-completion payment obligation of the borrowers was inadvertently left out of the loan document circulated on 22 December.

Richard Jacobs, the loan officer who prepared the documents for closing, testified that it was always understood that the guarantors would personally guaranty the loan. Jacobs, along with David Blum, the former partner of Weinberg & Green’s real estate department who drafted the loan documents, and Jack Stollof, senior executive vice president of Fairfax Savings Bank, testified that the executed Completion Guaranties contained the terms that were agreed upon during a telephone conference call held one week to ten days before closing. Ellerin and R. Bruce Alderman, Ellerin’s counsel, denied the existence of the alleged conference call. Blum further testified that he personally escorted Aider-man to a reading room on the first day of closing, handed him the corrected Loan Documents, and indicated that Alderman remained in the room for one to two hours.

All of that testimony was denied by Alderman. Ellerin and Seidel offered testimony to the effect that the terms of the personal guaranty were established in three Commitment Letters prepared by Fairfax. Prior to this transaction, Ellerin had rejected a loan with another bank because it required a post-completion guaranty of $1,300,-000. No IRB post-completion guaranties existed in the ⁶⁹³ Loan Documents or Commitment Letters until mid-December, shortly before closing.

Based upon the Commitment Letters, which Ellerin and Seidel believed to control the terms of the loan, and their reliance upon the statement of their attorney that he had reviewed the loan documents, neither partner read or reviewed any of the documents signed at closing. Alderman testified that he did not participate in the alleged conference call prior to settlement and could not recall whether any changes had been brought to his attention by Fairfax. Although it is his practice to inquire of any changes, he could not recall making this inquiry and concluded that, since he did not read the final Loan Documents at closing, he must have made the inquiry and received some indication from Fairfax’s counsel that no changes had been made. David Bielawski, bond counsel for the City of Westminster and the sole unbiased witness of the proceeding, testified that he was unaware of any addition to the Completion Guaranties and did not re-read any of the loan documents at closing.

Under the Loan Agreement, completion of the facility required Sherwood to provide an architect’s certificate to Fairfax indicating that the two larger buildings were completed according to the plans and specifications, and to submit proof that all contractors and subcontractors had been paid. The partners admitted that an architect’s certificate was not filed. At trial, the partners took the position that Fairfax had waived the completion requirements by releasing retainage funds to the guarantors, 5 converting the loans from construction to permanent status, accepting three and three-quarters percent interest in the gross revenues of the project under the Loan Agreement, and accelerating ap ⁶⁹⁴ proval of the Loan Agreement portion of the project for occupancy. Fairfax moved for summary judgment against Messrs.

Ellerin and Seidel on the ground that, because Sherwood failed to complete the facility, Ellerin and Seidel, as partners, were liable for the entire balance of the debt. The court denied the motion, ruling, as a matter of law, that Fairfax had waived completion under the Loan Agreement because it had voluntarily released the retainage funds. The court also ruled that Sherwood’s failure to complete the two smaller buildings was not of sufficient economic import to the overall project for Messrs. Ellerin and Seidel to be held liable under the Development Agreement as general partners.

The partners offered testimony to the effect that the - rehabilitation of the smaller buildings was not part of the Loan Agreement. To support its contention that Sherwood failed to complete under the Development Agreement, Fair-fax proffered that it had inspected the project monthly, that Sherwood had failed to pay Otis Elevator Company, that 100% of the budgeted work was completed, and that the final retainage of $430,000 was released as a business decision so that Fairfax would be able to reduce its loan exposure by $550,000 and receive $900,000 back for the release of the $430,000. The partners, asserting that Fair-fax had waived completion, proffered testimony that no plans or specifications existed for the two small shell buildings, and that Fairfax’s employee, Mr. Strausdaukis, 6 had inspected and approved completion, after which Fairfax paid approximately $4 million, and rolled the loan to permanent status. The trial court accepted these proffers out of the jury’s presence and determined that waiver was not an issue for the jury under these facts. ⁶⁹⁵ The jury found that neither the partners nor their attorney were aware of the altered provisions of the IRB guaranties in the loan documents.

The court directed a verdict in favor of Fairfax and awarded the bank $4,371,401.96 in damages, the amount owing on the loans, against the partners and $2,984,033.20 against the guarantors. On the fraud counterclaims, the jury returned verdicts of $7,022,-096.98 (which included the $4,371,401.96 directed verdict for Fairfax on the loans) and compensatory damages for emotional distress and pre-judgment interest in the amount of $2,650,695.00. The jury also awarded the guarantors $6,000,000 in punitive damages. II INSTRUCTIONS ON FRAUD Fairfax contends that the trial court erred by refusing to give an elemental jury instruction on fraud.

Fairfax further argues that the jury should have determined whether Fairfax made a misrepresentation and whether Ellerin and Seidel reasonably relied upon the misrepresentation in order to find fraud and award damages. Appellees assert that this issue was not properly preserved for appeal. Our review of the record persuades us that appellees are right. Nowhere in appellant’s counsel’s lengthy discourse on the instructions given by the court was there any mention of the elements of fraud, much less an exception to the failure to instruct the jury with respect to the elements of the tort.

The principal complaint about the court’s instructions regarding fraud was the emphasis placed by the court on whether there was a telephone conference call, seven to ten days before settlement, during which changes in the loan guaranty documents were discussed. Appellant’s complaint was that the issue was whether Ellerin or his attorney was aware of the changes at any time before the closing documents were executed, not whether they were made aware of them as a result of the disputed conference call. Counsel expressed the exception to the instruction as follows: ⁶⁹⁶ It does not matter if this conversation (sic) call occurred. It matters what they knew about what was in the documents.

It takes away from Fairfax what occurred at the closing table and whether they discovered certain changes to the documents, or if they were sitting at the closing table and you credit Mr. Epstein’s testimony that the deal changed to become $850,000 conventional loan that they were under a burden to look at the documents. Your Honor has taken away anything that happened at the closing table and placed it on whether a conference call occurred. We would ask the court to instruct the jury essentially and entirely on this issue and tell the jury that what matters is did they know what was in the document. (Emphasis added.) The use of the phrase “instruct the jury essentially and entirely on this issue,” in the context of counsel’s comments about the instructions, cannot possibly be read as a request for an instruction on the essential elements of the tort of fraud.

Md.Rule 2-520(e) is quite explicit: No party may assign as error the giving or the failure to give an instruction unless the party objects on the record promptly after the court instructs the jury, stating distinctly the matter to which the party objects and the grounds of the objection. Appellant’s failure to state distinctly that it objected to the court’s failure to instruct the jury on the elements of the tort of fraud, so that the jury would have to decide whether there was a misrepresentation and, if so, whether appellees reasonably relied on it, precludes appellant from asserting that the court erred in that respect. The issue is not properly before us; we shall not address it. Ill REBUTTAL EVIDENCE Fairfax contends that the trial court erred by refusing to permit Robert Cannon, one of the drafters of the loan ⁶⁹⁷ documents, to testify that Ellerin and Alderman attended a series of syndication meetings in 1983 and neither of them expressed surprise or raised any objection when the post-completion guaranties were discussed in their presence.

We believe that the trial court ruled correctly in refusing to admit the rebuttal evidence. In its case-in-chief, Fairfax offered testimony showing the existence of the loans to Sherwood, the agreement of Sherwood and its partners to repay the loan, the agreement of the guarantors to repay the loan until the facility was complete and 70% leased, the failure of Sherwood to repay the loan, and Ellerin’s and Alderman’s knowledge of the inserted guaranties. The guarantors presented evidence to the effect that they had no knowledge of the post-completion guaranties at the time of closing, that the post-completion guaranties had been fraudulently inserted, and that they did not discover the alleged fraud until 1984. Fairfax argues that under the standard articulated in Riffey v. Tonder, 36 Md.App. 633, 645 , 375 A.2d 1138 (1977), which defines rebuttal evidence as “any competent evidence which explains, is in direct reply to or a contradiction of material evidence introduced by ... a party in a civil action,” Cannon’s testimony should have been admitted.

We disagree. The Court of Appeals first articulated the standard for determining what evidence may be used as rebuttal evidence in Jones v. State, 132 Md. 142 , 103 A. 459 (1918), stating that a presiding judge has great discretion in determining whether to admit rebuttal evidence. When the defendant has concluded his testimony, the plaintiff, in those cases where the burden of proof rests on him and where in chief he has accordingly gone into his whole case, is entitled to introduce what is called rebuttal evidence — that is to say, evidence in regard to such new points and questions as were first opened by defendant’s evidence. The rule is that the plaintiff will be required to go fully into his own case-in-chief on those issues as to which he holds the substantial affirmative, and where, therefore, the burden of proof rests on him; ⁶⁹⁸ and hence, in reply to the case made by the defendant, he will ordinarily be limited to what is strictly rebutting evidence.

Still, it is not always easy to draw the line between what is rebutting evidence and what is evidence properly adducible in chief. The subject is one which is addressed to the sound discretion of the Court; and the appellate Court will not reverse for an error on this point, unless the ruling of the Court below was both manifestly wrong and substantially injurious. Indeed, as a general rule, in such cases no appeal will lie. Id. at 148-49 , 103 A. 459 , citing Poe, 2 Pleading and Practice § 287.

Rebuttal evidence is “any competent evidence which explains, or is a direct reply to, or a contradiction of, any new matter that has been brought into the case by the defense.” Mayson v. State, 238 Md. 283, 289 , 208 A.2d 599 (1965); State v. Hepple, 279 Md. 265, 270 , 368 A.2d 445, 449 (1977). The determination of what constitutes rebuttal evidence rests within the sound discretion of the trial court and its ruling will only be overturned upon proof that it is “manifestly wrong and substantially injurious.” Hepple, 279 Md. at 270 , 368 A.2d 445 ; Mayson, 238 Md. at 289 , 208 A.2d 599 ; Lane v. State, 226 Md. 81, 90 , 172 A.2d 400 (1961), cert. denied, 368 U.S. 993 , 82 S.Ct. 611 , 7 L.Ed.2d 529 (1962); Snowden v. State, 133 Md. 624, 636 , 106 A. 5 (1919); Jones, 132 Md. at 149 , 103 A. 459 . In State v. Hepple the Court of Appeals held that the error committed by the trial court when it erroneously admits testimony as rebuttal testimony is not cured by the fact the court might have properly permitted the testimony in the exercise of its discretion to vary the normal order of proof. Mays v. State, 283 Md. 548, 556 , 391 A.2d 429 (1978) (Eldridge, J., dissenting) (holding that a trial court has no discretion to reach a legally incorrect decision on whether evidence constitutes rebuttal evidence).

Thus a clear error by the trial court in the determination of rebuttal evidence may not be cured through the application of the trial court’s broad ⁶⁹⁹ discretion and may result in a reversal by the appellate court. Fairfax argues that this case is like the factual scenario presented in Riffey v. Tonder, 36 Md.App. at 645 , 375 A.2d 1138 , where this Court held that plaintiff should have been permitted to use expert testimony to rebut defendant’s reliance on an autopsy report because “it was not incumbent upon them to anticipate that appellees would rely upon the autopsy report to negate the presence of a pre-existent embolus or else be foreclosed from responding to such an assault upon their proof.” Riffey is distinguishable from the case at bar. In Riffey, the plaintiff sought to use expert testimony to show that autopsy reports are for the purpose of ascertaining the cause of death and not to explore peripheral questions. Because this was evidence that “truly tended to answer and contradict the testimony offered,” it was appropriate rebuttal testimony.

Riffey, 36 Md.App. at 646 , 375 A.2d 1138 . It was neither evidence that should have been elicited in the plaintiff’s case-in-chief nor cumulative evidence. In this, its third trial, Fairfax anticipatorially rebutted Ellerin’s and Alderman’s testimony that they were unaware of the post-completion guaranties through the testimony of Messrs. Berman, Stollof, Cannon, Blum, and Jacobs.

Cannon’s proposed rebuttal testimony was offered to show that Ellerin and Alderman participated in a series of syndication meetings in 1983 and that discussions of the post-completion guaranties occurred at these meetings. Cannon was also prepared to testify that Ellerin either said something at a meeting in which he acknowledged the completion guaranties or made a tacit admission by silence when someone made a statement that, if untrue, would have prompted a response. Cannon’s testimony is not proper rebuttal testimony for several reasons. First, the issue of whether Ellerin and Alderman knew of the post-completion guaranties was raised in Fairfax’s case-in-chief.

While Fairfax did not raise ⁷⁰⁰ the issue of the syndication meetings at this time, it did raise, through various testimony, the issue of Ellerin’s and Alderman’s knowledge of the terms of the Loan Documents at closing. Second, Cannon’s testimony was cumulative. He had already testified about Ellerin’s and Alderman’s knowledge of the loan documents. Furthermore, Ellerin, Alderman, Berman, Stollof, Blum and Singer were all present at these meetings and all testified during the course of the trial.

Third, this testimony did not explain, respond to, or contradict any new matter introduced by the defense. Fairfax had already sought to show that Ellerin knew of the completion guaranties at closing in its case-in-chief. The trial court correctly phrased this issue as whether the post completion guaranties had been slipped into the loan documents. Regardless of the peripheral issues, Fairfax had already endeavored to prove that Ellerin knew of the guaranties; any alleged admission by Ellerin was proof of this assertion.

Thus, Ellerin’s asserted lack of knowledge was not a new issue when raised by the partners. Fourth, the trial court recognized this delayed attempt to offer in rebuttal evidence that could have been offered earlier as a trial tactic designed to present the last evidence on the subject to the jury. And, finally, it would merely tend to contradict or rebut Ellerin on a matter that did not directly relate to the issue. The essential dispute was whether the partners or their attorney were aware of the alterations in the guaranty documents at the time of settlement in December of 1982, not whether they remained unaware of the alterations until 1984 as Ellerin testified.

IV SUMMARY JUDGMENT Fairfax moved for summary judgment, contending that, regardless of any finding of fraud on its part as to post-completion guaranties, it was entitled to judgment against the partners, Charles Ellerin and Louis Seidel, as a matter ⁷⁰¹ of law. 7 That contention is based upon the fact that the facility was never completed. Therefore, appellant argues, since the partners remained liable for the full amount of the debt under the Development and Loan Agreements until completion, they suffered no loss by virtue of the fact that the altered guarantee documents continued their liability for part of the debt beyond the time originally agreed on for termination of the guaranties. Section 4.1 of the Loan Agreement provides that Ellerin and Seidel are liable as general partners until the Completion Guaranty terminates. 8 According to the altered versions of §§ 3.1 and 8.1 of the Completion Guaranty, termination occurs upon the acquisition of the facility, which requires the improvement of the facility (the land and buildings) in accordance with the plans and specifications. The allegedly fraudulent changes in § 3.1 of the Completion Guaranty altered Ellerin’s and Seidel’s obligation from “during the construction period of the loan” to “until termination of the Completion Guaranty pursuant to § 8.1,” thereby increasing their obligation to $4.85 million until fulfillment of the leasing requirement.

Fairfax relies upon the Completion Guaranty’s reference to the Development Agreement to support its conclusion that the partners were personally liable for the outstanding loan as general partners until the facility was completed in accordance with both the Development Agreement and the Loan Agreement. Completion under the Development Agreement differs from completion under the Loan Agreement and requires distinct elements. To achieve completion under the Loan ⁷⁰² Agreement, Sherwood was required to submit both an architect’s certificate and proof that all contractors and subcontractors had been paid. 9 The Development Agreement required Sherwood to complete construction of all four buildings of the project. Fairfax conceded, however, that the money loaned was for completion of the two main buildings, which was the work provided for in the Loan Agreement.

The Loan Agreement, unlike the Development Agreement, made no provision for work to be done on the smaller buildings. Fairfax argues that, even if certain provisions were fraudulently included in the loan documents, that would not affect Ellerin’s and Seidel’s obligation to pay. In response, the partners argue that Fairfax never requested that any specifications and plans be drawn for the smaller buildings and no additional monies to complete these projects had ever been sought. The partners object to Fairfax’s reliance upon the Completion Guaranty, a document that was found by the jury to contain fraudu ⁷⁰³ lent provisions, to support its claim for judgment against Ellerin and Seidel.

After review of the evidence relating to the completion issue, the trial judge determined that Fair-fax was not entitled to summary judgment. He stated, “I’m not satisfied that the reference to the Development Agreement in the Completion Guarantee entitles Fairfax to a judgment now that the jury has found that the guarantee is fraudulent.” In deciding whether summary judgment may be granted, a trial court determines issues of law, resolving no factual disputes based upon the record. See Maryland Rule 2-501; King v. Bankerd, 303 Md. 98, 111 , 492 A.2d 608, 614 (1985). Even if the underlying facts are undisputed but a conflict arises between the inferences that may be drawn from them summary judgment is not proper.

Porter v. General Boiler Casing Co., 284 Md. 402, 413 , 396 A.2d 1090 (1979). The appropriate standard of appellate review of a trial court’s grant or denial of summary judgment is whether the trial court was legally correct. Heat & Power Corp. v. Air Products & Chemicals, Inc., 320 Md. 584, 591 , 578 A.2d 1202 (1990). In determining the legal correctness of the trial court’s denial of Fairfax’s