O'HARA v. Kovens

RODOWSKY, Judge. This is a case of alleged fraud on the sellers of corporate stock. In the trial court the defendants obtained summary judgment against all of the sellers based on a statute of limitations defense. Those judgments were affirmed as to certain sellers by the Court of Special Appeals.

O’Hara v. Kovens, 60 Md.App. 619 , 484 A.2d 275 (1984). We granted cross-petitions for certiorari, 303 Md. 20 , 491 A.2d 586 , primarily to consider the respective functions of court and jury in determining whether the plaintiffs knew or should have known of the wrong more than three years before suit. The suit was brought by James Francis O’Hara, III (James) and Michael Patrick O’Hara (Michael), individually and as guardians of the property of their mother, Josephine M. O’Hara (Josephine). Josephine died while the action was pending in the trial court and James and Michael, as her personal representatives, now assert her claim on behalf of her estate.

For a number of years prior to December 31, 1971, the O’Haras were stockholders in Southern Maryland Agricultural Fair Association, Inc. (Marlboro) which owned the Marlboro racetrack. The combined holdings of the O’Haras represented approximately 30% of the then outstanding stock of Marlboro. On December 31, 1971, the O’Haras, together with members of two other families whose holdings in Marlboro represented approximately an additional 52% of the outstanding stock, sold and delivered approximately 82% of Marlboro’s stock to Ernest N. Cory, Jr. for $12 per share, in cash. The sellers knew that Cory, a Prince George’s County, Maryland attorney, was acting in the transaction for an undisclosed principal or principals.

Defendants in this suit are former Governor Marvin Man ²⁸³ del, W. Dale Hess, Harry W. Rodgers, III, William A. Rodgers, Irving T. Schwartz, Eugene B. Casey, Irvin Kovens, and Cory (collectively, the Kovens Group). The complaint, alleging that the Kovens Group engaged in a conspiracy to defraud the plaintiffs in the December 31, 1971 sale, was filed November 22, 1978. 1 Plaintiffs prayed a jury trial. To comply with the statute of limitations, the plaintiffs’ respective causes of action could not have accrued earlier than November 21, 1975. The Circuit Court for Baltimore City held that all three claims were time barred.

In the Court of Special Appeals judgment against Josephine’s estate was reversed, for reasons relating to mental disability, while the other judgments were affirmed. The facts and legal arguments are such that, if Michael’s claim is not barred by limitations, none of the other claims is barred by limitations. There are certain undisputed, historical facts which set the background for the contentions of the parties. Prior to, or during, the 1971 session of the Maryland General Assembly, Marlboro and an entity (Hagerstown) which also conducted horse racing with parimutuel betting had agreed that Hagerstown would sell to Marlboro eighteen racing days theretofore utilized for the Hagerstown meeting.

Those eighteen days, together with eighteen days previously allocated to Marlboro, would allow thirty-six days of racing by Marlboro. Transfer of the Hagerstown days was subject to legislative approval. Approval at either the 1971 ²⁸⁴ or 1972 session of the Maryland General Assembly would have satisfied the approval condition in the contract. H.B. 1128, enacted at the 1971 legislative session, conferred the necessary approval.

On May 28, 1971, then Governor Mandel, expressing concerns about the wisdom and constitutionality of the legislation, vetoed H.B. 1128. 2 Following the ²⁸⁵ sale by the plaintiffs of their stock in Marlboro the General Assembly on January 12, 1972, overrode the veto. Also at the 1972 legislative session a bill which would have increased beyond thirty-six the number of racing days allocated for the benefit of Marlboro died on the last day of the session. In December 1972 Marlboro merged with another corporation (Bowie) which conducted horse racing with parimutuel betting at the Bowie racetrack. On November 24, 1975, the federal government filed indictments against Governor Mandel and others, except Schwartz and Casey, of the Kovens Group.

The events and transactions described above ultimately were the subject of testimony at criminal trials. 3 From at least the time of the veto override on ²⁸⁶ January 12, 1972, through the key limitations date here of November 21, 1975, these events and transactions were also objects of great interest, and subjects of much reporting, on the part of the press. The theory of the O’Haras’ case is that there was a conspiracy between Governor Mandel and others of the Kovens Group which antedated May 28, 1971. Plaintiffs in essence contend that the alleged conspirators planned (1) to have the Mandel veto depress the value of Marlboro stock below the price it would have commanded had H.B. 1128 been signed into law, (2) to acquire the stock at a depressed price, and then (3) to restore its value by having Governor Mandel “himself and through his agents” induce the General Assembly to override the veto. Because defendants’ motion for summary judgment raised only the limitations defense, we are not concerned with the sufficiency of any undisputed facts to prove any element of plaintiffs’ deceit theory, or whether any alleged facts, if proved, would establish a cause of action.

The burden which the defendants assumed by their motion was to show that there was no dispute of any fact material to the limitations issue and that they were entitled to judgment on limitations grounds as a matter of law. Maryland Rule 2-501. general law re limitations The three years within which a civil action at law must be filed measures “from the date it accrues unless another provision of the Code provides a different period of time within which an action shall be commenced.” Md.Code (1974, 1984 Repl.Vol.), § 5-101 of the Courts and Judicial Proceedings Article (Courts Article). Poffenberger v. Risser, 290 Md. 631, 636 , 431 A.2d 677, 680 (1981) held that “the discovery rule [is] applicable generally in all actions and the cause of action accrues when the claimant in fact knew or reasonably should have known of the wrong.” This latter alternative ²⁸⁷ contemplates ... awareness implied from “knowledge of circumstances which ought to have put a person of ordinary prudence on inquiry [thus, charging the individual] with notice of all facts which such an investigation would in all probability have disclosed if it had been properly pursued.” [Id. at 637, 431 A.2d at 681 .] Also relevant is Courts Article § 5-203 which provides: If a party is kept in ignorance of a cause of action by the fraud of an adverse party, the cause of action shall be deemed to accrue at the time when the party discovered, or by the exercise of ordinary diligence should have discovered the fraud. In order to benefit from this statute, a claimant need not show, in addition to the fraud complained of, a separate fraud which conceals the fraud complained of.

Wear v. Skinner, 46 Md. 257, 267 (1877); see also Brack v. Evans, 230 Md. 548 , 187 A.2d 880 (1963); Citizens National Bank v. Leffler, 228 Md. 262 , 179 A.2d 686 (1962); Piper v. Jenkins, 207 Md. 308 , 113 A.2d 919 (1955); Berman v. Leckner, 188 Md. 321 , 52 A.2d 464 (1947); New England Mutual Life Insurance Co. v. Swain, 100 Md. 558 , 60 A. 469 (1905). In James v. Weisheit, 279 Md. 41 , 367 A.2d 482 (1977), we dealt with a defense of limitations to a common law fraud action prior to the general adoption of the discovery rule in Poffenberger, supra. There we said: This Court has determined that deceit actions accrue when the wrong is discovered or when with due diligence it should have been discovered, see Citizens Bank v. Leffler, 228 Md. 262, 269 , 179 A.2d 686, 690 (1962); Sears v. Barker, 155 Md. 323, 330 , 141 A. 908, 911 (1928); cf. Leonhart v. Atkinson, 265 Md. 219, 224 , 289 A.2d 1, 4 (1972) (applying this rule to professional malpractice cases), assuming, of course, that all elements of the cause ²⁸⁸ of action exist at that time. [ 279 Md. at 45 n. 4, 367 A.2d at 485 n. 4.] James and Courts Article § 5-203 literally speak of accrual occurring when the wrong should have been discovered. This phraseology raises the question whether the period required for any investigation which should have been prompted by notice and which would have led to the discovery of the fraud precedes the date of accrual and is to be excluded from the three-year period of limitations.

The facts in our prior cases have not involved a relatively extended period of discovery so that we have not focused on this aspect of the discovery rule. For example, in James , the plaintiff knew for more than three years before suit all of the facts comprising the alleged fraud. Specifically, that plaintiff, the holder of a take-back, second mortgage, knew that the amount of the allegedly fraudulently imposed first mortgage lien greatly exceeded the amount to which the plaintiff had agreed to subordinate. We held that accrual of the deceit action was not postponed until the plaintiff learned whether foreclosure of the first mortgage produced a deficiency on the second mortgage debt.

The Court of Special Appeals, however, has addressed the problem in a medical malpractice case which correctly applies Poffenberger. Lutheran Hospital v. Levy, 60 Md. App. 227 , 482 A.2d 23 (1984). The limitations issue in that case was the subject of a separate trial under former Maryland Rule 501. Following treatment for a broken ankle the plaintiff had been advised in February 1974 to resume walking without crutches.

In April 1974 a doctor at another hospital who examined the ankle told the plaintiff that it “was all messed up,” asked “who the hell told you to walk on that ankle?” and told her the ankle “wouldn’t get any better.” Suit was filed in June 1978. The trial court held the action was timely, after determining that the plaintiff was not on notice until early 1975 after which there was a reasonable period for investigation of six months before accrual. The Court of Special Appeals held the ²⁸⁹ action was barred as a matter of law, based upon the plaintiff’s uncontradicted testimony. Addressing the trial court’s rationale, the intermediate appellate court, through Judge Adkins, said: The trial judge also held that limitations did not begin to run until six months after the date upon which he erroneously found that Ms. Levy had become “suspicious.” This was incorrect as a matter of law.

Under the discovery rule as stated in Poffenberger limitations begin to run when a claimant gains knowledge sufficient to put her on inquiry. As of that date, she is charged with knowledge of facts that would have been disclosed by a reasonably diligent investigation. The beginning of limitations is not postponed until the end of an additional period deemed reasonable for making the investigation ____ From that date the statute itself allows sufficient time — three years — for reasonably diligent inquiry and for making a decision as to whether to file suit. See Pierce v. Johns-Manville Sales Corp., 296 Md. 656, 668 , 464 A.2d 1020 (1983).

This application of the discovery rule serves the legislative policy that underlies the statute of limitations, id. at 665 , 464 A.2d 1020 , and at the same time puts the discovery rule claimant on a par with the claimant who has actual knowledge at the time of the tort, such as the norma) automobile-accident plaintiff. The latter has three years from the date of the accident within which to investigate further, obtain expert opinion, discuss settlement, and file suit. The former is given the same time period within which to do these things, beginning from the date that circumstances have put her to that inquiry which charges her with knowledge of the additional information that might be gleaned from a reasonably diligent investigation conducted within the three-year period. [60 Md.App. at 237-38, 482 A.2d at 27-28 .] ²⁹⁰ defendants’ contentions Applying the foregoing principles to this case, the defendants contend that the plaintiffs knew, as a matter of law, on or before November 21, 1975, of facts from which they should have discovered the alleged fraud. To prove knowledge of the fraud was available to the diligent, the defendants have produced newspaper articles reporting on the actual or ostensible ownership of Marlboro, on racing consolidation proposals, and on a federal investigation of various persons in the Kovens Group.

The potentially relevant articles are those published prior to November 22, 1975. One example is an article appearing in the Baltimore Sun of April 3, 1972. It lead by reporting that “Irving T. Schwartz, a close friend and financial associate of Irvin Kovens — Governor Mandel’s chief fund raiser — owns a minority interest in Marlboro racetrack.” The article reported that the preceding day Kovens had sent telegrams to all sixteen members of the Senate Finance Committee “in which he denied that he [had] any connection, ‘directly or indirectly,’ with Marlboro.” Schwartz was quoted as saying “ ‘Kovens has nothing to do with Marlboro as far as I know.’ ” The article also described Eugene B. Casey as having “bought controlling interest in Marlboro — reportedly more than 80 per cent of the stock — December 31, 1971, for $2.4 million.” The article described as “a surprising turn of events” that “Governor Mandel’s aides, while pressuring legislators not to override the Governor’s vetoes of other bills, did not try to block the successful overturn of his Marlboro veto — requested by Mr. Casey in letters to legislators.” When pressed to select a date by which the plaintiffs’ action necessarily had accrued, the defendants selected October 23, 1975, because of an article appearing that day in the Baltimore Sun. 4 We quote liberally therefrom. ²⁹¹ During the 1972 session of the Legislature, a minor, half-mile track in Prince George’s County suddenly emerged as the dominant force in the politically controlled racing industry in Maryland. While Laurel, Pimlico and Bowie, the three major, mile tracks, had all competed to be the favored facility in past years, their interests became secondary to the advancement of Marlboro race course as the thrust of regulatory and legislative actions became clear.

A series of Mandel administration, racing commission and legislative moves had the effect first of apparently giving Marlboro stockholders a windfall (through a bill granting additional racing dates) and then taking the windfall back (through a Mandel veto of the racing date bill). Then, close friends of Governor Mandel secretly bought into the track at an apparent cut rate, the Legislature uncharacteristically overrode an unprotesting Governor’s veto and two bills — which would further increase the track’s profits — were put before the Legislature by the Racing Commission and heavily lobbied by Mandel aides. Those bills died as the 1972 Legislature adjourned and it is unclear what profits, if any, the new ownership eventually reaped from the series of actions. Marlboro and its stockholders are now a focal point in the federal grand jury investigation into corruption in Maryland, and the grand jury has subpoenaed the testimony of the 42 surviving members of the 1972 state Senate. ²⁹² That same article commented that the “value of the track had apparently been depressed by the veto of the Hagerstown-to-Marlboro transfer.” It reviewed how Casey had “publicly portrayed himself as the majority stockholder” in Marlboro after the December 1971 sale but that “large blocks of stock were acquired by two close associates of Governor Mandel,” Hess and Harry Rodgers who, together with the Governor, had been “notified that they [were] targets of the federal corruption inquiry.” The article reported that Harry Rodgers had borrowed $200,000 from Kovens “to acquire his secret interest in the track” and that the interests of Hess and Rodgers had become known to the press and reported by it in February and March of 1975.

A statement attributed to William Rodgers explained that the interests of Hess and of the Rodgers brothers were kept secret to avoid a controversy which would have caused defeat of the legislation increasing the number of racing days allocated to Marlboro. plaintiffs’ contentions Plaintiffs do not challenge that the legal test is when they were on notice, but they place that date much later than November 21, 1975. Answering an interrogatory asking when he discovered the fraud alleged in the complaint, Michael said that he did so after Schwartz had testified in the first trial of the criminal case involving Governor Mandel. 5 On deposition Michael explained this answer more fully. A trier of fact could have concluded, from the total record before us, that the sequence of events leading to this suit was as follows. As between Michael and James, Michael was better informed on current events taking place in Maryland in the period prior to November 22,1975, even though Michael had resided in Georgia from June of 1973 to June of 1975 and had visited only occasionally in Maryland during that peri ²⁹³ od.

Michael is the prime mover in the decision to consult counsel concerning the three persons’ claims asserted in this law suit. Josephine, due to senility, had needed a guardian to manage her affairs from as early as February 25, 1975. When the O’Haras sold their Marlboro stock in December 1971, they thought the price was fair. They at least suspected that the undisclosed principals represented by Cory were persons with some political “clout” who would attempt to have the General Assembly override the veto.

Because the O’Haras were out of the Marlboro stock at a price which was satisfactory to them, Michael could not have cared less who the specific purchasers were. Similarly, he did not believe that it was his concern if friends of Governor Mandel purchased Marlboro stock or had benefited from the veto override. We shall assume for purposes of this opinion that Michael also knew prior to November 21, 1975, that Schwartz on June 1, 1971, had purchased in his name 15,000 shares of Marlboro stock at $7 per share from the estate of a decedent, Florence Hall. At some time after the criminal trial had started Michael learned of testimony relating to the initials “I.K.” on check-stubs from the checkbook of Schwartz.

The entry indicated that the cash with which Schwartz had purchased Marlboro stock on June 1, 1971, had been obtained, ostensibly as a loan, from Kovens. Michael inferred foreknowledge by Kovens of the May 28, 1971, veto and that he might have been legally wronged by a conspiracy. lower courts’ rationales Before we address the rationales of the courts below, it will be helpful to review the distinction made in common law legal systems between issues of fact and issues of law. 5 R. Pound, Jurisprudence 544 (1959) presents, as the best judicial discussion of the subject, excerpts from the opinion of Lord Denning in British Launderers’ Association v. ²⁹⁴ Borough of Hendon Rating Authority, [1949] 1 K.B. 470, 471-72: “Primary facts are facts which are observed by witnesses and proved by oral testimony or facts proved by the production of a thing itself, such as original documents. Their determination is essentially a question of fact for the tribunal of fact, and the only question of law that can arise on them is whether there was any evidence to support the finding. The conclusions from primary facts are, however, inferences deduced by a process of reasoning from them.

If, and in so far as, those conclusions can as well be drawn by a layman (properly instructed on the law) as by a lawyer, they are conclusions of fact for the tribunal of fact; and the only questions of law which can arise on them are whether there was a proper direction in point of law; and whether the conclusion is one which could reasonably be drawn from the primary facts____ If, and in so far, however, as the correct conclusion to be drawn from primary facts requires, for its correctness, determination by a trained lawyer — as, for instance, because it involves the interpretation of documents or because the law and the facts cannot be separated, or because the law on the point cannot properly be understood or applied except by a trained lawyer — the conclusion is a conclusion of law on which an appellate tribunal is as competent to form an opinion as the tribunal of first instance.” [5 R. Pound, supra, at 549-50 (footnote omitted).] We shall assume, without deciding, that there is no dispute of material, primary fact in the instant case. From the primary facts some tribunal must deduce when the plaintiffs were on notice. That ultimate fact is ordinarily a question for the trier of facts going to the merits. “ ‘[W]hether or not the plaintiffs failure to discover his cause of action was due to failure on his part to use due diligence, or to the fact that defendant so concealed the wrong that plaintiff was unable to discover it by the exercise of due diligence, is ordinarily a question of fact for the ²⁹⁵ jury.’ ” New England Mutual Life Insurance Co. v. Swain, 100 Md. 558, 574 , 60 A. 469, 472 (1905) (quoting Faust v. Hosford, 119 Iowa 97, 100 , 93 N.W. 58, 59 (1903)); see also Herring v. Offutt, 266 Md. 593, 599 , 295 A.2d 876, 880 (1972); Cummings v. Bannon, 8 A. 357 (Md.1887); cf. Palmer Ford, Inc. v. Wood, 298 Md. 484 , 471 A.2d 297 (1984) (whether the facts, as found by the trier of fact, in a malicious prosecution action show the absence or presence of probable cause is a question for the court). Both the trial court and the Court of Special Appeals correctly recognized that the question of when the plaintiffs were on notice was a question of fact.

Nevertheless, the trial court concluded, erroneously, that this question of fact could be decided by the court. The Court of Special Appeals accepted that premise so that it reviewed the circuit court summary judgment under the inapplicable standard of whether the trial judge’s “fact-findings” were clearly erroneous. The circuit court, making a credibility determination, rejected, as “arbitrary and contrived,” Michael’s account of how discovery had come about. The trial judge said that there were substantial “limitations-related facts on which this court can base a determination that plaintiffs’ cause is barred by limitations.” She then found that “on the basis of inference which reasonable persons would have drawn from the news reports,” the plaintiffs, James and Michael, “at least have been put on notice to investigate the alleged wrongs more than three years before their suit was filed.” The Court of Special Appeals affirmed as to Michael and James on the ground that “limitations is still a matter for the judge rather than the jury even if the facts concerning discovery are disputed.” O’Hara v. Kovens, 60 Md. App. at 629, 484 A.2d at 280 .

These holdings cannot be reconciled with fundamental summary judgment law. In reaching their results both courts relied upon Moy v. Bell, 46 Md.App. 364 , 416 A.2d 289 , cert. denied, 288 Md. 740 (1980) and Decker v. Fink, 47 Md.App. 202 , 422 A.2d 389 (1980), cert. denied, 289 Md. 735 (1981). ²⁹⁶ Moy was an appeal from a judgment for the defendants entered on a motion to dismiss granted under former Maryland Rule 535 at the end of the plaintiffs’ case. The judgment was premised on limitations as to which there were conflicting, material, factual inferences. The Moy court affirmed, saying: If there is a legal question raised, which would end it if factually found to apply in the plaintiff’s own case, the judge, while still in his judicial capacity, is charged with deciding the appropriate facts necessary to deciding that legal issue.

Here, when the motion to dismiss was offered raising the statute of limitations as a bar, the trial judge sat in both seats simultaneously. Our review on appeal then must carefully differentiate the purposes for which the facts were found. Because the ultimate issue to be decided on the motion was the applicability of the statute of limitations, we may not set aside the facts found by the trial judge in relation thereto unless he was clearly in error. Md.Rule 1086. [ 46 Md.App. at 368-69 , 416 A.2d at 293 .] We would serve no useful purpose in analyzing whether Moy correctly stated how former Md.R. 535 operated, because the power of the trial court to make factual determinations in ruling on a motion for judgment at the close of a plaintiff’s case in a bench trial is now governed by Rule 2-519(b) which is in part new. 6 Moy , however, went on to say that “[t]he application of a statute of limitations is strictly a legal question and it is