Miller Building Supply, Inc. v. Rosen

GARRITY, Judge. This appeal primarily involves the interrelationship between the laws governing the availability of punitive damages for fraud arising out of a contract and for fraud that induces a contractual relationship. The appellant, Miller Building Supply, Inc. (Miller), sued its former employees, Jack F. Rosen and Bernard Hollander, for breach of fiduciary duty, fraud, and civil conspiracy. Appellant also sought punitive damages for fraud.

Miller claimed that Rosen and Hollander, the appellees, in concert with David Kerr of Glenn Dale Contracting (Glenn Dale), defrauded the company out of profits totaling $258,612.42. Appellees moved at the close of all the evidence for a directed verdict as to the issue of punitive damages asserting that since the action for fraud arose out of their employment contract, Miller had to prove actual malice to prevail. The trial court reserved its decision on this matter and permitted the issue to go to the jury based upon the following instructions: Proof of actual malice is not necessary to justify an award of punitive damages in an action for fraud. There is no exact rule by which to determine the amount of punitive damages, but you may fix such amount as in the exercise of your discretion as a jury you would find it ¹⁹⁰ would be to punish the defendant and deter others from similar acts.

For the plaintiff to recover punitive damages for fraud, it must be proved by clear and convincing evidence that an element of aggravation evidenced by malicious, deliberate, gross or wanton conduct is accompanied in the fraud. The jury returned a verdict in favor of the appellant in the amount of $3,231.00 compensatory damages and $150,-000.00 punitive damages. After the jury’s verdict, the appellees moved for judgment N.O.V. The trial court granted appellees’ motion for judgment N.O.V. after finding that actual malice was the appropriate standard to support an award of punitive damages for fraud arising out of a contract, and that the evidence presented did not establish actual malice. Appellant asserts that the court erred in denying its motion for reconsideration of the judgment N.O.V. and a new trial, contending that as its contracts with Glenn Dale were induced by fraud, the applicable standard for punitive damages in this case should be implied malice.

The appellant further asserts that the compensatory damages awarded to the appellant for the secret profits taken by the appellees in breach of their fiduciary duty did not conform with the court’s instructions, the law and the evidence. The Facts Miller has been in the wholesale business of selling kitchen cabinets and appliances to the building trade and the retail public for over forty years. Prior to 1958, Miller had also been in the business of installing kitchen cabinets and kitchen remodeling. Miller hired Jack Rosen and Bernard Hollander, the appellees, as salesmen in 1954 and 1961, respectively.

Both men were discharged in January of 1982. ¹⁹¹ As salesmen for Miller, appellees sold kitchen cabinets and appliances based on a salary plus commission basis. Sales people were given two price lists to use in determining how much they would charge a customer for the kitchen equipment. The individual or list price was generally 40% higher than the contractor or builder price. Although sales people at Miller had authority to offer cabinets and appliances to individuals at the discounted contractor’s price, they were expected to negotiate the best possible price since any additional profit obtained from the sale, with the exception of the sales person’s commission, would accrue to Miller.

The testimony of several of Miller’s sales people revealed that they could and usually did sell the inventory to an individual at the discounted contractor’s price in order to be competitive with other appliance stores. Besides selling the cabinets and appliances, some of the other duties performed by sales people at Miller included designing the kitchen, having blue prints prepared, and assisting with any problems that arose during the installation. In order to close a sale with an individual customer, the sales person would often have to refer the customer to a contractor who could install kitchen cabinets or appliances that the customer had purchased, a service that Miller did not provide. Under this arrangement, the prospective purchaser would enter into an agreement with Miller to purchase the equipment and then sign a separate contract with the recommended contractor who would perform the installation work.

In the case sub judice, however, the appellees would refer a customer to David Kerr of Glenn Dale Contracting before they sold the customer the cabinets or appliances. The appellees would also provide Kerr with the plan of what the customer needed. Kerr would then contract with Miller to purchase the equipment that the customer required at the discounted contractor’s price and resell the same equipment at the inflated list price. The customer, therefore, would sign only one contract with Kerr to buy the cabinets or appliances and have them installed. ¹⁹² The difference between the contractor’s price and the price charged the customer for the cabinets or appliances would be paid to the appellees under the name of Buildco.

The appellees claim this difference was not a profit from the sale of the merchandise, but rather their compensation from Kerr for the value of their services. Indeed, Kerr considered the appellees to be his part-time employees. Furthermore, the appellees claim that there was not written policy prohibiting a sales person at Miller from engaging in part-time employment. The president of Miller testified, however, that there was a policy that when sales people were hired, they were told that they could not engage in other part-time employment.

In 1981, Warren Miller, the president of Miller Building Supply, Inc., received a telephone call from one of his vice-presidents informing him of a report that he had received concerning possible improprieties being committed by the appellees in the performance of their job. To confirm these rumors, Mr. Miller had James Fitzpatrick, a captain in the Prince George’s County Police Department, and his wife pose as potential customers for one of the appellees. Mrs. Fitzpatrick testified that Mr. Rosen explained to her: ... if I bought cabinets from a Mr. Kerr of Glenn Dale Contracting, that I would be getting a discount because this gentleman was a builder, and builders get a discount when they go to places like Miller Building Supply Company. That if I bought the cabinets through Mr. Rosen from the floor of Miller Building, directly from Miller Building just as a customer, a private citizen, that I would pay more.

When Captain Fitzpatrick asked Mr. Rosen to provide him with a breakdown of the costs, Mr. Rosen indicated that the cabinets and appliances would cost $5,075.00 and that the cost for installation would be $825.00. In fact, the cost of the cabinets and appliances to Glenn Dale Contracting was $3,555.80, a difference of $1,519.20, which would subsequently be paid to Mr. Rosen as “compensation”. Mean ¹⁹³ while, Miller was under the assumption that it was selling the cabinets and appliances to Glenn Dale Contracting and not to a homeowner who had initially been its customer. After confirming the suspicions expressed by Mr. Miller, Captain Fitzpatrick contacted Mr. Kerr.

Kerr gave Captain Fitzpatrick a statement explaining his relationship with the appellees in return for a promise that he would not be sued by Miller. Based upon this information, the appellant brought suit against the appellees for $258,612.42, the payments made to the appellees (Buildco) by Mr. Kerr over a nine-year period. I. Punitive Damages for Fraud The appellant contends that the trial court erred in granting appellees’ motion for judgment N.O.V. after finding that the fraud arose out of a contractual relationship and that the proper standard to support punitive damages, therefore, was actual malice. The appellant argues that proof of implied malice was sufficient to recover punitive damages in its action for fraud because the fraud induced the contracts with Glenn Dale Contracting.

Specifically, the appellant claims that the fraud committed by the appellees was in deceiving Miller into believing that Glenn Dale was the true customer, thereby inducing Miller to contract with Glenn Dale. In determining the propriety of granting a motion for judgment N.O.V., the trial court must accept as true the evidence of the non-moving party and draw all natural and legitimate inferences that appear logical after review of such evidence. Any conflicts in evidence must be resolved in favor of the non-moving party. Harrison v. Mayor and City Council of Baltimore, 247 Md. 583 , 234 A.2d 135 (1967); Burns v. Goynes, 15 Md.App. 293 , 290 A.2d 165 , cert. denied, 410 U.S. 938 , 93 S.Ct. 1398 , 35 L.Ed.2d 603 (1972).

Since there is no dispute that the evidence did not support a finding of actual malice, we need only focus on whether the trial court was correct in ruling that actual ¹⁹⁴ malice was the appropriate standard to apply in the instant case. The law is clear that while punitive damages may be recovered in any pure tort action upon a showing of malice, punitive damages are not awarded for a mere breach of contract. American Laundry Machinery Industries v. Horan, 45 Md.App. 97, 115 , 412 A.2d 407 (1980). The duty imposed upon individuals in tort is based upon law and social policy, and not necessarily the will or intention of individual parties.

Permitting punitive damages for torts fosters the societal objective of deterring reprehensible conduct. Prosser, Law of Torts, Section 92 (4th Ed.1971). The duties in contract, however, are imposed through the consent of the parties, and apply only to the parties to the contract. Id.

Therefore, pecuniary compensation has been held to be sufficient to compensate the aggrieved parties who have subjected, themselves by consent to the risk of a breach of a contractual duty. St. Paul at Chase Corp. v. Manufacturers Life Insurance Co., 262 Md. 192 , 278 A.2d 12 , cert. denied, 404 U.S. 857 , 92 S.Ct. 104 , 30 L.Ed.2d 98 (1971). Where punitive damages serve their most obvious deterrent purpose are in instances of tortious conduct involving fraud. Those who attempt to engage in deliberately fraudulent conduct for profit are more likely to pause and consider the consequences if made aware that they may be compelled to pay more than they may have gained through their deceitful scheme.

Wedeman v. City Chevrolet Co., 278 Md. 524, 531-32 , 366 A.2d 7 (1976). Problems arise, however, with the issue of punitive damages when the tort of fraud and a contract action are merged into a single lawsuit. Specifically, an act of breaching a contractual obligation may give rise to a separate cause of action in tort. In addressing the issue of punitive damages for fraud in connection with contractual relationships, the Court of Appeals has considered the availability of punitive damages ¹⁹⁵ and the differing standards of proof by which such damages may be awarded.

From these cases, this Court in American Laundry Machinery Industries v. Horan, supra, distilled the following general guidelines: (1) Punitive damages are not recoverable at all in actions for breach of contract. H & R Block, Inc. v. Testerman, 275 Md. 36, 44 [ 338 A.2d 48 ] (1975) — hereafter referred to as Testerman . (2) Such damages are recoverable in tort actions if malice is shown. The type of degree of malice required depends upon the nature of the tort.

(3) Actual or express malice requires an intentional or willful act (or omission). It “has been characterized as the performance of an act without legal justification or excuse, but with an evil or rancorous motive influenced by hate, the purpose being to deliberately and wilfully injure the plaintiff.” Testerman [275 Md.], at p. 43 [ 338 A.2d 48 ]; Drug Fair v. Smith, 263 Md. 341 [ 283 A.2d 392 ] (1971). (4) Implied malice, on the other hand, involves something less than actual malice. 1 (7) Where the tort arises out of a contractual relationship, actual, rather than implied, malice is required. Testerman, supra, 275 Md. at 44 [ 338 A.2d 48 ].

See also Aeropesca Limited v. Butler Aviation International Inc., 44 Md.App. 610 [ 411 A.2d 1055 ] (1980). (8) In the context of awarding punitive damages, a tort will be deemed to arise out of a contractual relationship only if “the tortious conduct and the contract were so intertwined that one could not be viewed in isolation from the other,” or, in other words, if, “[i]n one form or ¹⁹⁶ another, then, the tort arose directly from performance or breach of the contract.” General Motors Corp. v. Piskor, 281 Md. 627, 637 [ 381 A.2d 16 ] (1977). Restated again in Piskor [281 Md.] at 640 [ 381 A.2d 16 ]: “In order, then, for an alleged wrong to constitute a ‘tort arising out of a contractual relationship/ thereby necessitating proof of common law actual malice to permit recovery of punitive damages, we require that there be a direct nexus between the tortious act and performance or breach of the terms and conditions of the parties’ underlying contract.” (Emphasis supplied). These guidelines can be further simplified for the purposes of this case to mean that if the tort of fraud arose out of the contract, the plaintiff would have to establish actual malice to recover punitive damages. 2 In H & R Block, Inc. v. Testerman, 275 Md. 36 , 338 A.2d 48 , a married couple sought punitive damages from a tax preparer who negligently prepared their income tax return.

The plaintiffs alleged that the preparer had acted in a negligent, wanton and intentional manner. The lower court dismissed the plaintiffs’ request for punitive damages and limited their recovery to compensatory damages. Although this Court reversed the trial court’s decision, the Court of Appeals found that the trial court’s dismissal was appropriate since the tort arose out of a contract, and the plaintiffs ¹⁹⁷ failed to establish that the preparer acted with “express malice.” By contrast, if tortious conduct induced an individual to enter into a contract, a showing of implied malice would be sufficient to recover punitive damages. Wedeman v. City Chevrolet Co., 278 Md. at 532 , 366 A.2d 7 ; National Micrographics Systems, Inc. v. OCE-Industries, Inc., 55 Md.App. 526, 543 , 465 A.2d 862 (1983), cert. denied, 298 Md. 395 , 470 A.2d 353 (1984).

In Wedeman, supra, the plaintiff purchased an automobile based