Martens Chevrolet, Inc. v. Seney

Digges, J., delivered the opinion of the Court. In this action we consider whether there still exists in Maryland a tort suit for negligent misrepresentation independent of one for deceit. The case arose when appellant Martens Chevrolet, Inc. 1 instituted in the Circuit Court for Montgomery County this action against the appellees, Loving Chevrolet, Inc. and its sole stockholders, Franklin Loving and Howard F. Seney, alleging in separate counts breach of contract, deceit and negligent misrepresentation arising from the sale of an automobile dealership. On the apparent belief that no such action exists in Maryland, the trial judge granted at the close of appellant’s case the defendants’ motion for a directed verdict on the negligent misrepresentation count; a directed verdict was also granted in favor of the defendants on the breach of contract claim. 2 ³³¹ The remaining count, sounding in deceit, was, however, submitted to the jury for its consideration, but that body returned a verdict in favor of Loving, Seney and their company.

After the appellant noted its appeal to the Court of Special Appeals, we granted certiorari on our own motion, prior to consideration of the matter by that court, primarily to clarify seeming confusion in the law of this State concerning the existence of an action for negligent misrepresentation. 3 For reasons which we will explore presently, we conclude that the tort of negligent misrepresentation is viable in Maryland. Consequently, as the issue presented here arose in the context of a motion for directed verdict, the evidentiary background will be stated in a light most favorable to the plaintiff-appellant. Impala Platinum v. Impala Sales, 283 Md. 296, 328 , 389 A.2d 887, 905-06 (1978). In February, 1976, Imperial Investment Company through its officers, Harry J. Marten, Jr. and his son, Harry J. Marten, III, initiated negotiations for the purchase of a Chevrolet automobile dealership owned in corporate form by Franklin Loving and Howard F. Seney.

Throughout the bargaining period, the Martens informed the sellers that they intended to continue the operation of the Chevrolet franchise after the sale, and therefore desired accurate information concerning the past profitability of the enterprise. When asked during the first meeting of the parties about the financial status of the dealership, Mr. Seney responded by handing the buyers a handwritten financial "trend” sheet and stating, "this pretty well depicts the trends of how we have been doing.” This sheet received by the Martens contained a list of the "net profit” figures for each year the dealership had been in operation, including a figure showing $2,211 profit for the previous year, 1975. Unknown to the buyers, this sum failed to incorporate adjustments for such items as bonuses and taxes which are routinely reflected in audited financial statements. After examining the trend sheet, the accountant ³³² for the buyers asked during the negotiating period to inspect the audited financial statements of the dealership for 1975, but he was told by Mr. Seney that they had not been prepared.

In a subsequent meeting, the Martens’ accountant once more sought to review the audited financial statements, but again he was informed by Seney that no such documents existed. Throughout the negotiations Loving and Seney failed to mention any other financial documents to the Martens which pertained to the profitability inquiry, and the sellers continually reassured the buyers that they could rely on the trend sheet as it accurately reflected the financial status of the dealership. Since this sheet revealed the Loving operation to be mildly profitable, the buyers, in reliance on it, concluded that with their industriousness and management efficiency they could substantially improve the profitability of the business. Accordingly, acting on behalf of their corporation, the Martens entered into an agreement with the owners of Loving Chevrolet for the purchase of the dealership on May 6, 1976.

After the franchise operated as Martens Chevrolet, Inc. for six months, the accountant for the new company presented its owners with a statement revealing a $187,000 loss. The Martens were baffled as to the reason for the dealership’s financial plunge until its comptroller, who had formerly worked in that capacity for the seller, divulged a 1975 year-end financial statement which he had prepared for Loving Chevrolet listing a deficit for that year of $39,153.00, instead of a $2,211 profit as reflected in the 1975 trend sheet. In addition, the comptroller gave the new owners a financial statement completed by a certified accountant, following an audit, which stated that the losses sustained by the former dealership in that year were not $39,153, but, rather, $69,000. Both of these documents had been prepared well before the date of sale, but the sellers had neglected to inform the buyers of their existence.

On the basis of this newly received information, the Martens brought the present action against Loving, Seney and their company. ³³³ (i) With the relevant factual predicate in hand, we turn now to address the question of whether there is presently cognizable in Maryland a tort action for negligent misrepresentation. We begin our inquiry by noting that initially under the common law there existed no separate tort of negligent misrepresentation. Thus, if a party was injured by the false representations of another, his only recourse in tort, if there was one, compelled the bringing of an action for deceit and proving all the elements of that tort. Buschman v. Codd, 52 Md. 202 (1879); Lamm v. Port Deposit Homest’d Asso., 49 Md. 233 (1878); McAleer v. Horsey, 35 Md. 439 (1872).

The requirements for a successful deceit suit, as they have evolved in Maryland, were stated by this court in Gittings v. Von Dorn, 136 Md. 10, 15-16 , 109 A. 553, 554 (1920), over fifty years ago, and they remain the same to this day: To entitle the plaintiff to recover it must be shown: (1) that the representation made is false; (2) that its falsity was either known to the speaker, or the misrepresentation was made with such a reckless indifference to truth as to be equivalent to actual knowledge; (3) that it was made for the purpose of defrauding the person claiming to be injured thereby; (4) that such person not only relied upon the misrepresentation, but had a right to rely upon it in the full belief of its truth, and that he would not have done the thing from which the injury resulted had not such misrepresentation been made; and (5) that he actually suffered damage directly resulting from such fraudulent misrepresentation. The critical element of the tort of deceit that distinguishes it from others arising from false representation is scienter on the part of the defendant — intent to deceive the other party. In formulating the contours of this state of mind requirement, our predecessors in Cahill v. Applegarth, 98 Md. 493 , 56 A. 794 (1904), essentially embraced the view established ³³⁴ in the landmark English case, Derry v. Peek, 14 App. Cas. 337, 374 (1889), where Lord Herschell announced: First, in order to sustain an action of deceit, there must be proof of fraud, and nothing short of that will suffice. Secondly, fraud is proved when it is shown that a false representation has been made (1) knowingly, or (2) without belief in its truth, or (3) recklessly, careless whether it be true or false.

Although I have treated the second and third as distinct cases, I think that the third is but an instance of the second, for one who makes a statement under such circumstances can have no real belief in the truth of what he states. To prevent a false statement being fraudulent, there must, I think always be honest belief in its truth.[ 4 ] The teachings of Cahill were reemphasized one year later in Donnelly v. Baltimore Trust & Guarantee Co., 102 Md. 1, 13 , 61 A. 301, 306 (1905), where this Court asserted that "[t]he foundation of the [deceit] action is actual fraud, and nothing short of this will suffice. Consequently, a misrepresentation believed by the speaker to be true, though induced by his ignorance or negligence, will not sustain an action for deceit.” Our later cases have adhered to this principle. See Appel v. Hupfield, 198 Md. 374, 379 , 84 A.2d 94, 96 (1951); Holt v. Kolker, 189 Md. 636, 639 , 57 A.2d 287, 288 (1948).

Realizing the inequities stemming from the strictures imposed for recovery in a deceit action, and being cognizant of the development of this area of the law in our sister jurisdictions, this Court in 1938 recognized for the first time the existence in this State of an action for negligent misrepresentation. Virginia Dare Stores v. Schuman, 175 ³³⁵ Md. 287, 1 A.2d 897 (1938). 5 In Virginia Dare, the plaintiff, who was employed to clean the walls of a store, stepped upon a dress display case in reliance upon negligently made statements of assurance from the agent of the proprietor-defendant that it was safe, but because the case was unable to support the weight, it promptly collapsed, causing serious personal injury. In allowing recovery for the negligent misrepresentation, as a cause of action separate from one in deceit, this Court stated: No Maryland case has been found directly upon the subject, but the weight of authority in other jurisdictions seems to be that such action is not necessarily confined to injuries arising from contractual relations; that the action lies for negligent words, recovery being permitted where one relies on statements of another, negligently volunteering an erroneous opinion, intending that it be acted upon, and knowing that loss or injury are likely to follow if it is acted upon. [Id. at 291-92, 1 A.2d at 899 .] ³³⁶ Subsequent cases referred to the Virginia Dare opinion as one recognizing a recovery for negligent statements if personal injury results, Holt v. Kolker, supra, 189 Md. at 639 , 57 A.2d at 288 ; Piper v. Jenkins, 207 Md. 308, 313 , 113 A.2d 919, 921 (1955), but any implication that the action was confined to cases involving personal injury was put to rest in Brack v. Evans, 230 Md. 548 , 187 A.2d 880 (1963), where we held that pecuniary loss is compensable under an action for negligent misrepresentation. 6 Accordingly, we reaffirm that, in Maryland, there exists a cause of action for negligent misrepresentation separate from that of deceit. The only one of our many decisions in this area which in any way impinges upon this just announced reaffirmation is Delmarva Drill Co. v. Tuckahoe, 268 Md. 417 , 302 A.2d 37 (1973), where certain statements and the result there reached seemingly portended the elimination of negligent misrepresentation as a viable tort cause of action in this State.

See Geo. Byers Sons, Inc. v. East Europe Import Export, 488 F. Supp. 574, 586 (1980); Leonard v. Sav-A-Stop Services, 289 Md. 204 , 213 n.7, 424 A.2d 336, 240 (1981); Note, Deceit and Negligent Misrepresentation in Maryland, 35 Md. L. Rev. 651 , 671-73 (1976). Although, when compared with our prior cases in this area, Tuckahoe apparently supports the view that the tort has been eliminated, we nevertheless intended no such departure in that case and have subsequently recognized the existence of the cause of action. See Vance v. Vance, 286 Md. 490 , 408 A.2d 728 (1979).

Thus, to the extent that Tuckahoe , when viewed in light of its factual background, casts any doubts on the existence of negligent misrepresentation as an avenue for tort recovery in Maryland, we hereby overrule it. We summarize and clarify. The principal elements of the tort of negligent misrepresentation, as formulated in ³³⁷ Virginia Dare, supra, and subsequent cases decided by this Court, may be outlined as follows: (1) the defendant, owing a duty of care to the plaintiff, negligently asserts a false statement; (2) the defendant intends that his statement will be acted upon by the plaintiff; (3) the defendant has knowledge that the plaintiff will probably rely on the statement, which, if erroneous, will cause loss or injury; (4) the plaintiff, justifiably, takes action in reliance on the statement; and (5) the plaintiff suffers damage proximately caused by the defendant’s negligence. In this regard, see Virginia Dare Stores v. Schuman, supra; Holt v. Kolker, supra; Piper v. Jenkins, supra; Brack v. Evans, supra; St. Paul at Chase v. Mfrs.

Life Insur., 262 Md. 192 , 278 A.2d 12 (1971); Vance v. Vance, supra; Note, 35 Md. L. Rev. supra at 662; see generally Geo. Byers Sons, Inc. v. East Europe Import Export, supra at 586; James, Gray, Misrepresentation, 37 Md. L. Rev. 286 (part I), 488