Merritt v. Craig

DAVIS, Judge. In February 1997, appellants Benjamin K. and Julie S. Merritt, owners of real property located at Pergin Farm Road, ³⁵⁴ Swanton, Maryland, in Garrett County, filed a five-count complaint against appellees Virginia S. Craig (Craig), David Huebner, d/b/a Coldwell Banker/Deep Creek Realty, Dennis Hannibal, Edward Knight, and Thomas N. Janes, Trustee for First Federal Savings Bank of Western Maryland, seeking rescission of the contract of sale and the deed to the property along with compensatory and punitive damages. 1 The first two counts of appellants’ complaint were against Craig for fraudulent and negligent misrepresentation. In Count III, appellants claimed that Craig violated Maryland’s Consumer Protection Act by fraudulently and negligently misrepresenting the property in Garrett County. 2 Following discovery, appellants filed a motion requesting a jury trial. In response, appellees filed a motion seeking a court trial on the grounds that rescission is an equitable remedy and does not entitle the litigants to a jury trial.

On April 21, 1998, the Circuit Court for Garrett County denied appellees’ motion, and the claim proceeded to trial. At the conclusion of the trial, the jury returned a verdict in favor of appellants and awarded compensatory damages in the amount of $42,264.76 and punitive damages in the amount of $150,000. Subsequently, appellants filed a Motion to Alter or Amend Judgment, requesting the court to consider their rescission claim. Appellees filed a Motion for Judgment Notwithstanding Verdict regarding the issue of punitive damages.

After a hearing, the trial court denied both motions. Appel ³⁵⁵ lants timely noted this appeal and present for our review one question, which we restate as follows: I. Did the circuit court err in denying the remedy of rescission based on appellants’ election of a jury trial? Appellees timely filed a cross-appeal presenting the following question, which we restate: II. Did the circuit court err by allowing the jury award for punitive damages to stand, and was the award excessive?

We answer the first question in the affirmative and therefore reverse the circuit court’s judgment; we address the second question for guidance of the lower court on remand. FACTUAL BACKGROUND In the fall of 1995, during their search for a new residence, appellants inspected Craig’s property located at Pergin Farm Road in Garrett County. After viewing the residence, appellants advised Craig that they were interested in purchasing the property; however, their offer was contingent upon a satisfactory home inspection. On November 5, 1995, appellants, their inspector, and appellee’s husband Mark Craig conducted an inspection of the basement area of the residence, during which there was an examination of cistern and water supply pipes.

The examination revealed that the cistern had been used to store a water supply reserve, but was not currently utilized. The inspector advised appellants that the system he had observed was one which utilized a submersible pump in the well from which water flowed to a pressure tank in the basement. The pressure tank distributed water through the internal piping system of the house. There were also two water lines that entered into the basement area.

One of the lines came from an 800-foot well that was located on the property, and the other line came from a well located on the adjacent property. 3 The well located on the adjacent property ³⁵⁶ supplied water to both appellants’ residence and a guest house owned by Craig. The existence of the adjacent well was not disclosed to appellants. On December 2, 1995, a contract of sale for the property was executed between appellants and Craig, along with a “Disclosure Statement” signed by Craig on June 9, 1994, and acknowledged by appellants on November 2, 1995, affirming that there were no problems with the water supply to the dwelling. Between November 5, 1995 and June 1996, Craig caused the water line from the guest house to appellants’ residence to be cut, and the cistern reactivated to store water from the existing well on appellants’ lot.

On May 18, 1996, Craig’s husband advised Dennis Hannibal, one of the real estate agents involved in the deal, that he had spent $4,196.79 to upgrade the water system on appellants’ property and to restore the cistern and remove appellants’ house from the second well on Craig’s guest house property. On June 14, 1996, appellants and Craig had settlement on the property. Later that afternoon, Craig’s husband, without appellants’ knowledge, excavated the inside wall of appellants’ house and installed a cap to stop a leaking condition on the water line that he had previously cut. Subsequently, appellants, while attempting to fill a water bed, noticed that the water supply in their well had depleted.

On July 18, 1996, appellants met with Craig to discuss a solution to the water failure problem, believing that Craig was responsible for cutting a water line to their house. Appellants agreed with Craig to conduct a flow test to the existing well and contribute money for the construction of a new well. On October 29, 1996, the well was drilled and produced only one-half gallon of water per minute. On December 13, 1996, appellants paid for the drilling of a second well on their property, but it failed to produce water.

In January 1997, appellants contacted a plumber, Robert Warnick, who confirmed that the line from the guest house well to appellants’ residence had been cut flush with the inside surface of the basement wall and cemented closed. Appellants continued to ³⁵⁷ do further work on the house in an effort to cure the water problem. On February 11,1997, appellants brought suit against Craig and other appellees in the Circuit Court for Garrett County, seeking rescission of the deed to the property and contract of sale, along with compensatory and punitive damages. During the course of the trial, the judge dismissed appellants’ claim for rescission on the ground that they had effectively waived their right to rescission based on their election for a jury trial.

At the close of trial, the jury returned a verdict in favor of appellants and awarded compensatory damages in the amount of $42,264.76. Appellants were also awarded punitive damages in the amount of $150,000. Subsequently, appellants filed a motion to alter or amend the judgment requesting the court to grant rescission of the contract of sale and the deed, which the circuit court denied on June 17, 1998. Craig moved for judgment notwithstanding the verdict on May 8, 1998, which was also denied by the circuit court.

Following the circuit court action, this appeal ensued. DISCUSSION I Appellants contend that the trial court erred in denying the remedy of rescission based on their election of a jury trial. Appellants argue that success on both legal and equitable claims depended upon whether Craig committed fraudulent acts, and because fraudulent conduct is common to both the rescission claims in Count I and II and the Maryland Trade Practices claim in Count III, the jury is entitled to hear the case before the court decides the claim for rescission. Appellants further assert that they timely and properly pleaded their claim for relief in equity in their complaint, and thus are entitled to be heard by the court on this claim after the jury trial was conducted.

In response, appellees argue that appellants may pursue either rescission or damages, but not both and, because they elected to have their claim for damages ³⁵⁸ presented to a jury, they had waived their right to pursue a claim in equity for rescission of the deed and contract. Appellees raise as a rejoinder to appellants’ claim that the court erred in denying the right to pursue rescission, that the court erred in not finding the attempt to rescind by appellants to be untimely. In oral argument before us, counsel for appellants acknowledged that incidental expenses would have been recoverable had appellants been allowed to pursue their claim for rescission; however, in the ensuing colloquy between the court and both counsel, appellants’ counsel maintained that the action for recovery for damages could be maintained simultaneously with a claim for the equitable relief of rescission, whereas appellees’ counsel contended that an election must be made. i Appellees’ argument that the trial court erred in its indirect finding that appellants promptly sought rescission addresses the question of whether, upon discovery of the alleged fraud, they promptly sought to rescind the contract; this issue is obviously to be distinguished from whether appellants timely made known their election of remedies once the proceedings commenced before the lower court. The law is clear that, [i]n this State, as well as in other jurisdictions, it is settled that when a party to a contract discovers a fraud has been perpetrated upon him [or her], he [or she] is put to a prompt election to rescind the contract or to ratify it and claim damages.

Acts by a purchaser which constitute acquiescence, ratification or estoppel will preclude him [or her] from rescinding the contract. Wolin v. Zenith Homes, Inc., 219 Md. 242, 250-51 , 146 A.2d 197 (1959), cert. denied, 361 U.S. 831 , 80 S.Ct. 81 , 4 L.Ed.2d 73 (1959) (citations omitted). Citing Telma v. Gingell, 157 Md. 411, 413 , 146 A. 221 (1929), the Court of Appeals further opined in Wolin : ³⁵⁹ Upon the discovery ... of the fraudulent misrepresentation, the purchaser had to elect between two rights. He was put to the choice of repudiating or ratifying the conveyance, although the transaction had been fully completed by conveyance and payment.

If he adopted the first alternative he repudiated the conveyance and sought its rescission and a restoration of his situation before the contract; but if he chose the second, he ratified the grant but could obtain damages to redress the injury inflicted by the false and fraudulent representation. These rights were inconsistent and mutually exclusive, and the discovery put the purchaser to a prompt election. It appears from the court’s comments that it addressed only whether appellants made a timely election to pursue rescission or damages at trial rather than whether there had been a ratification of the contract by failure to promptly repudiate it. The court said: Now prompt decision, I don’t believe the ..

I don’t think the [appellants] did anything inaccurate or wrong in law making a decision, but they elected a jury to decide this issue and as I’ve indicated before, figuratively speaking, it’s like coming to a cross road. If we went left, we would go to the court of equity and seek rescission and incidental damages. If we go to the right, we would go to the court of law and we elect a jury and we ask them to penalize or pay for the damages as a result of the fraud of the [a]ppellee[s]. I think clearly in this case we’ve come to that cross roads and we’ve turned left.

We’ve gone to seek the remedy of the jury and damages for the conveyance, and I do not think rescission of the contract is available.... In the case sub judice, the contract for the sale of the subject property was executed between the parties on December 2, 1995, accompanied by a “disclosure statement” signed by Craig on June 9, 1994, affirming that there were no problems with the water supply to the dwelling. On June 14, 1996, appellants and Craig settled on the property and, after experiencing problems with the water flow to the property, ³⁶⁰ appellants contacted a plumber, Robert Warnick, in January 1997. The instant suit was filed on February 11, 1997; therefore, approximately one month passed from the time they discovered the alleged fraud through confirmation by the plumber and the date upon which they filed suit seeking rescission.

Discussing the requirement of prompt repudiation, we said in Cutler v. Sugarman Organization, Ltd., 88 Md.App. 567, 578 , 596 A.2d 105 (1991): The right to rescind may be waived by not acting promptly on discovery of the facts from which it arises. The right to waive must be exercised within a reasonable time, which is determined, in large part, by whether the period has been long enough to result in prejudice. Rescission requires at a minimum that the party exercising a right to rescind notify the other party and demonstrate an unconditional willingness to return to the other party both the consideration that was given and any benefits received. (Citations omitted.) In Sugarman, the vendors neither tendered a return of the $1,000 deposit nor offered to pay in quantum meruit for the work that had been performed to develop the property or in any way disgorge themselves of the benefits of the agreement.

Maryland decisions which have found that there was a waiver of the right to rescind do so on the basis of an affirmative act of ratification of the contract or some other act which evidences an intent to benefit from the transaction or which renders restoring the parties to their original position impossible or difficult. Although there is some question as to whether the trial judge directly addressed the promptness, vel non, of appellants’ repudiation, their actions upon discovery of the fraud do not constitute waiver of their right to pursue rescission. u Appellants sought damages in the case at hand under Md.Code (1990 Repl.Vol., 1999 Supp.), Comm. Law (C.L.) ³⁶¹ § 13-101, et seq. (Maryland Consumer Protection Act), attorney’s fees, -compensatory and punitive damages for fraud, negligent misrepresentation, and rescission.

Prior to the merger of law and equity in 1984, a party seeking only damages could sue at law whereas one seeking equitable relief was required to go into a court of equity, where expenses incidental to the equitable relief could also be awarded. Judge McAuliffe, writing for the Court of Appeals in Higgins v. Barnes, 310 Md. 532, 540-41 , 530 A.2d 724 (1987), explained: Prior to the comprehensive rules change that became effective July 1, 1984, the historical separation of law and equity had been scrupulously maintained in this State. Civil actions were required to be filed as either law or equity actions. With few exceptions jury trials were unavailable in cases filed on the equity side of the court, and equity relief was unavailable in law actions.

The concept of equitable “clean-up” allowed a chancellor in equity to decide virtually all issues that legitimately found their way into the equity court, whether by claim, counterclaim, cross-claim, or third-party action, and whether the issues were historically legal or equitable in nature. This situation gave rise to concern that expansion of equity jurisdiction and the concomitant increase in the exercise of “clean-up” powers not only threatened, but in fact had eroded the right to a jury trial guaranteed by Article 23 of the Maryland Declaration of Rights. (Citations omitted; footnote omitted.) In considering the options where legal and equitable claims are presented to a trial court, the Higgins Court observed: Now that the merger of law and equity has been accomplished, and parties may join legal and equitable claims in a single civil action to be decided by a court no longer divided into law and equity sides, this Court must determine the impact the rules change shall have upon the availability of trial by jury. A review of the cases decided by courts of other states that have accomplished the merger of law and equity reveals a variety of approaches and philosophies, ranging from a jealous protection of the right of jury trial to ³⁶² a preference for the “efficiency” of having a judge determine all issues in any case involving a legitimate equitable claim.

A middle ground of cases makes the right to jury trial depend upon whether the issues in the case are predominantly legal or predominantly equitable in nature. Id. at 541 , 530 A.2d 724 . Thus, it was the concern that the authority vested in the equity court under the concept of equitable “clean-up” resulting in an erosion of the right to a jury trial as to legal issues that, in large measure, prompted the merger of law and equity. In Mattingly v. Mattingly, 92 Md.App. 248, 255 , 607 A.2d 575 (1992), citing Higgins v. Barnes, 310 Md. at 544 , 530 A.2d 724 , we observed that “both the Supreme Court and the Court of Appeals have directed that when ‘the existence of both legal and equitable issues within the same case requires election between the jury and the court as the determiner of common issues, the discretion of the trial court is very narrowly limited and must, wherever possible, be exercised to preserve jury trial.’ ” Judge Motz, writing for this Court in Mattingly , explained: Thus, as a result of the “merger of law and equity” it is often difficult to determine whether a particular case contains at least some legal claim and so entitles the litigants to a jury trial, or is wholly equitable, and so carries no entitlement to a jury trial.

The Court of Appeals has directed that “we turn to the federal case law for guidance in defining the scope of the right to jury trial in Maryland.” [Higgins v. Barnes,] 310 Md. at 543 , 530 A.2d 724 . The Supreme Court has set forth three factors to be considered when examining whether a particular claim gives rise to a jury trial: (1) the customary manner of trying such a cause before the merger of law and equity; (2) the kind of remedy sought by the plaintiff; and (3) the abilities and limitations of a jury in deciding the issue. Ross v. Bernhard, 396 U.S. 531, 538, n. 10 , 90 S.Ct. 733, 738, n. 10 , 24 L.Ed.2d 729 (1970). ³⁶³ Mattingly, 92 Md.App. at 256 , 607 A.2d 575 . Appro pos to appellants’ claim, we said in Mattingly : Analysis of the more important second Ross factor also leads to this conclusion because the “relief requested” in the complaint is exclusively equitable in nature.

The principal relief requested is rescission. It is well-settled in Maryland that rescission is a purely equitable remedy. Creamer v. Helferstay, 294 Md. 107, 114 , 448 A.2d 332 (1982) (“It is beyond dispute that the authority of a court to rescind or cancel a contract is purely equitable”). Id. at 258, 607 A.2d 575 .

Finally, citing Chauffeurs, Teamsters and Helpers, Local No. 391 v. Terry, 494 U.S. 558 , 110 S.Ct. 1339 , 108 L.Ed.2d 519 (1990), we pointed out that the Supreme Court has specifically recognized that damages which are “restitutionary,” e.g., “disgorgement of improper profits” or “incidental or intertwined with” certain equitable relief, e.g., an injunction, may be equitable. We concluded that where any prayer for a legal remedy is inexorably intertwined with the equitable nature of the claim made and the relief sought, the litigants are not entitled to a jury trial. The Court of Appeals in Calabi v. Government Employees Ins. Co., 353 Md. 649, 655-56 , 728 A.2d 206 (1999) (citing Chase v. Winans, 59 Md. 475, 479 (1883)), observed: An issue of fact from a court of equity to be tried by a jury is not a matter of right, at any stage of the proceeding....

Indeed there is no doubt that a court of equity has the power and full right to decide every question of law or fact which may arise out of the subject-matter before it, and over which it has jurisdiction, and the trial by issue forms no necessary incident to the proceedings of such court. Ultimately, the Court of Appeals in Calabi held that “[i]n the instant matter the determinative factor on the issue of entitlement to a jury trial is the nature of the relief sought.” Id. at 656 , 728 A.2d 206 . Had appellants proceeded on their claim for rescission, the court could have addressed any incidental expenses attendant to the conveyance of the subject property under the ³⁶⁴ concept of equitable “clean-up” powers. The error made by the trial court in first observing that “this case has mixed questions, both in equity and in law,” and then proceeding to submit initially the legal issues to the jury, was that, the instant case does not require a selection between the jury and the trial court as the “determiner of common issues” during the trial of the case, but rather a selection between two distinct and mutually exclusive forms of relief, one equitable and one legal, one inherently within the province of the court