Gordon v. Lewis

J. FREDERICK SHARER, J. (Retired, Specially Assigned). In this appeal from a judgment of the Circuit Court for Worcester County we are asked to review the propriety of an arbitration award of punitive damages. Seeking review of the circuit court’s affirmance of the arbitration award, including punitive damages, appellant, Kathy J. Gordon, poses a single question, which, as slightly rephrased, asks: Did the circuit court properly confirm an arbitration award of punitive damages that included an express finding of willful and wanton conduct?

We shall affirm. FACTUAL and PROCEDURAL BACKGROUND Because this appeal implicates only a question of law, we need not provide a detailed explication of the dealings between the parties that gave rise to this litigation. Washington v. State, 190 Md.App. 168 , 988 A.2d 61 (2010). Nonetheless, we shall provide an overview of those facts.

Gordon, one of several defendants below, 1 began doing business with appellees, Tammie L. Lewis and William E. ³⁰² Lewis, Jr., in 1990, initially as a tax preparer. Later, in 2004, she became their financial and investment advisor. Tammie Lewis is a stay-at-home mother with a high school education; William Lewis works as a construction foreman. It is not disputed that the Lewises were unsophisticated investors.

During a prior employment, Tammie Lewis was exposed to asbestos. She developed mesothelioma, for which she received a settlement of $1,467,000. For the benefit of the Lewis children, Gordon established the Tammie L. Lewis Revocable Trust (“the Trust”), funded in large part by the proceeds of the asbestos settlement. Tammie Lewis and William E. Lewis, Jr. served as trustees of the Trust, as did Gordon until her removal in 2006.

On September 26, 2008, the Lewises, individually and as Trustees, filed a complaint in the Circuit Court for Worcester County against Gordon and the other defendants. The complaint alleged that as a result of defendants’ fraud and misrepresentations, appellees invested several hundred thousand dollars in an unsecured, high-risk business venture owned and operated by Gordon’s son. The investment consisted of high risk notes in Pomfret Plantation, LLC, a development property that was then in poor financial condition. Pomfret subsequently filed for bankruptcy, causing appellees to lose then-entire investment.

The complaint alleged that at all relevant times, Gordon was employed by the other defendants and acted as an agent, employee, and representative of each of those entities. The claims asserted by the Lewis parties were: fraudulent misrepresentation, constructive fraud, concealment or non-disclosure, 2 negligent misrepresentation, and negligence. The complaint sought both compensatory and punitive damages. ³⁰³ Appellees alleged specifically that, relying on the advice of Gordon, they purchased two $100,000 notes investing in Pom-fret Plantation, which falsely stated that they were secured by 520 acres of land in Somerset County. Further, Tammie Lewis made a loan to Pomfret Plantation of $50,000, which Gordon personally guaranteed.

On November 21, 2005, Tammie Lewis received a $100,000 promissory note from Pomfret Plantation, assuring payment by June 30, 2006. Appellees never received payment on the Pomfret notes, although Gordon made repeated promises that high interest was being earned on investments in Pomfret Plantation. After June 30, 2006, Gordon’s promises of payment continued, but payment was not forthcoming. What appellees were never told by Gordon, and did not know, was that on May 22, 2006, Pomfret had filed a Chapter 11 bankruptcy petition.

Appellees filed timely claims in the bankruptcy case but, because their notes were unsecured, they were treated as unsecured creditors. After foreclosure on the Pomfret assets, there were no excess funds to satisfy appellees’ claims. In response to appellees’ suit in the Circuit Court for Worcester County, Gordon and the other defendants with whom Gordon had a mutuality of interest, moved to dismiss and filed petitions to compel arbitration before the Financial Industry Regulatory Authority (“FINRA”). 3 Appellees op ³⁰⁴ posed the petition to compel arbitration. Ultimately, on August 21, 2009, the circuit court granted the petition to compel arbitration and referred all claims to FINRA for arbitration.

Proceedings pending in the circuit court were stayed, pending the completion of arbitration. Appellees re-filed their statement of claim before FINRA, in which they asserted the same factual allegations as in the complaint previously filed: fraudulent misrepresentation, constructive fraud, concealment or non-disclosure, negligent misrepresentation, negligence and negligent supervision. 4 Both compensatory and punitive damages were sought. 5 The essence of appellees’ complaint before FINRA is found in Count III, concealment or non-disclosure: 77. As the claimants’ financial advisors and investment advisors, the respondents had a duty to disclose material facts to the Lewises regarding their investments. 78. The respondents failed to disclose material facts regarding the level of risk associated with investing in Pomfret Plantation and Pomfret Plantation’s poor financial condition.

Specifically, the respondents failed to disclose that the investments were unsecured, that there was a high level of risk associated with the investments, that there was a possibility that the Bills and the Note would not be repaid, and that Pomfret Plantation was struggling financially at the time the investments were made. 79. The respondents failed to disclose these material facts with the intent to deceive the claimants. 80. In failing to disclose these material facts, the respondents acted with actual malice, evil motive, an intent to injure claimants, ill will, and an intent to deceive claimants. ³⁰⁵ 81. The respondents knew or should have known that the claimants would not have invested in Pomfret Plantation if they had known of the existence of the undisclosed facts. 82.

The claimants justifiably relied upon the respondents’ misrepresentations because the respondents were their investment advisors and had established a relationship of trust and confidence with the claimants. 83. The claimants suffered economic and noneconomic damages as a direct result of respondents’ fraudulent concealment of material facts. Under Maryland law, the claimants are entitled to recover noneconomic damages that result from the fraud. Hoffman v. Stamper, 385 Md. 1, 38 [ 867 A.2d 276 ] (2005).

FINRA conducted a dispute resolution arbitration hearing from August 2-5, 2010. On August 9, 2010, the FINRA arbitration panel issued its award, as follows: AWARD After considering the pleadings, the testimony and evidence presented at the hearing, the Panel has decided in full and final resolution of the issues submitted for determination as follows: Respondents Gordon, GFS, MISI, TMG and TMAS are found jointly and severally liable and shall pay to Claimants compensatory damages in the amount of $250,000.00, plus interest at the rate of 6% per annum from December 31, 2005 until the date of payment of the award. Respondents Gordon, GFS, MISI, TMG and TMAS are found jointly and severally liable and shall pay to Claimants punitive damages in the amount of $25,000.00. The majority of the Panel found that Respondent Gordon’s actions were willful and wanton as she withheld information she knew about the investment.

Respondents Gordon, GFS, MISI, TMG and TMAS are found jointly and severally liable and shall pay to Claimants the sum of $600.00 representing reimbursement of the non ³⁰⁶ refundable portion of the claim filing fee previously paid by Claimants to FINRA Dispute Resolution. Any and all relief not specifically addressed herein, including Claimants’ request for attorneys’ fees, is denied. (Emphasis added). Neither Gordon nor the other responsible parties moved to modify or correct the arbitration award.

However, on August 31, 2010, Gordon and Gordon Financial Services filed a petition to vacate the award in the Circuit Court for Wicomico County, which, as subsequently noted by the trial court, 6 was not the proper venue. Gordon subsequently filed for bankruptcy, and on September 9, 2010, filed a suggestion of bankruptcy in the Circuit Court for Wicomico County, resulting in a stay of all proceedings, pursuant to Section 362 of the United States Bankruptcy Code. 11 U.S.C. § 362 . On March 25, 2011, the United States Bankruptcy Court for the District of Maryland issued an order lifting the automatic stay solely to permit appellees to go forward with proceedings “to confirm the arbitration award in their favor” against Gordon, as well as any appeals therefrom. Appellees filed a petition to confirm the arbitration award and enter judgment against Gordon on March 29, 2011, in the Circuit Court for Worcester County, the proper venue. 7 Gordon timely responded by opposing confirmation of the award.

They also moved to vacate the arbitration award. Appellees maintained that the arbitration award should be entered pursuant to Md.Code, Courts & Judicial Proceedings (“CJP”) ³⁰⁷ § 3-227(b) (2006 RepLVol.) which provides: “The court shall confirm the award, unless the other party has filed an application to vacate, modify, or correct the award.... ” The court conducted a dispositive hearing on the respective motions, the primary focus being Gordon’s motion to vacate the punitive damages awarded by the FINRA arbitration panel. Gordon argued that the FINRA arbitration panel exceeded its authority in awarding punitive damages. Gordon contended before the circuit court, as she does now, that the withholding of information does not provide grounds for an award of punitive damages.

Her counsel argued: [APPELLANT’S COUNSEL]: Now, as I indicated a moment ago, sir, there were six different counts that the — that were in front of the arbiters. Several of them were counts that could support an award of punitive damages, fraudulent — there was fraud that could, but there were other counts, constructive misrepresentation, concealment, negligent misrepresentation, and negligence, that really cannot support a finding of punitive damages. And, indeed, in two of the counts, negligent misrepresentation and negligence, punitive damages were not even pled. Now, what we have is an award.... [T]his case arose from the investment by the Plaintiffs, by the Lewises, in a failed real estate venture.

They invested money in 2005 and 2006. They invested a total of $250,000. When that money was lost, they filed suit, that later went into arbitration, against people who were involved in the investment, but also against Ms. Gordon, who was their investment adviser. And some of the counts were negligence counts, that she didn’t give them good advice, and then there was a count that was a fraud count.

And the fraud count, of course, is that there is an intentional misrepresentation. The arbiters’ award does not say what count they’re deciding on. Rather, they granted an award of $250,000, which was the amount of the original investment. They denied the further claims that were made for noneconomic ³⁰⁸ damages.

And, on a two-to-one vote, they entered an award of $25,000 of punitive damages because they said that Ms. Gordon withheld information that she knew about the investment. And that is the particular language that this argument, that this question, turns upon. Because withholding — to withhold information is not a basis under Maryland law for a punitive — for a fraud finding or for punitive damages to be awarded. (Emphasis added).

Gordon asserted that the punitive damage award exceeded the authority of the arbiters “based on the clear language of the arbiters’ award.” In response, appellees argued that “concealment of a material fact when there is a duty to disclose is ... a sister tort to fraud by affirmative misrepresentation[,]” so the FINRA award was appropriate. Appellees also argued that the award should be confirmed on the basis of respondeat superior, given that the punitive damages award against GFS had already been confirmed. Counsel maintained that GFS was simply the “corporate veil” for Gordon, pointing out, among other facts, that they were represented by the same counsel throughout arbitration. The court, not willing to imply any facts beyond those stated in the award, and making clear that it did not “have any transcript of the arbitration in front of [it],” rejected appellees’ argument.

After considering the arguments of both parties, and the FINRA award, the court issued the following ruling from the bench: Well, the Court has before it Ms. Gordon’s petition, Motion to Vacate the Arbiters’ Award as to the $25,000 which was entered against her for punitive damages. The only evidence the Court has as to the arbitration proceeding was the award itself, which the Court has taken judicial notice of. And that makes clear that one of the claims that was lodged against Ms. Gordon was a claim of fraud. ³⁰⁹ The arbiters say that, under the award, that Ms. Gordon and others were found jointly and severally liable and shall pay to claimants punitive damages in the amount of $25,000. The majority of the panel found that Respondent Gordon’s actions were willful and wanton and she withheld information she knew about the investment.

Willful, of course, is another way of saying deliberate, intentional withholding of information. The basis upon which the Court can vacate an arbitrator’s award, or part of an arbitrator’s award, is set forth in the Courts & Judicial Proceedings Article 3-224(b). And the one upon which Ms. Gordon is relying is (b)(3), as I understand it, which says that the arbitrators exceeded their powers. Ms. Gordon has the burden of proof with respect to that.

And the argument is that the — the award as to punitive damages was neither factually, nor legally, correct, without any factual or legal basis. The Court doesn’t know the