Rhee v. HIGHLAND DEVELOPMENT CORP.

⁵²⁰ EYLER, DEBORAH S., J. In the Circuit Court for Howard County, James and Linda Rhee, the appellants, sued Highland Development Corporation, Richard Demmitt, Fisher Collins & Carter, Inc., and Ronald Carter, the appellees, for fraud. The Rhees are subsequent purchasers of a house the appellees built and sold to initial purchasers. The Rhees alleged that, when the appellees originally built and sold the house, they fraudulently concealed, by desecration and other acts of misconduct, the presence of an abandoned cemetery on the property. The appellees filed a motion to dismiss, which the circuit court granted, with prejudice, on the ground that the appellees did not owe the Rhees a legal duty. 1 On appeal, the Rhees challenge the court’s decision to dismiss the fraud claim, posing two questions for review, which we have consolidated and rephrased: 2 Did the circuit court err in granting the appellees’ motion to dismiss the appellants’ claim for fraudulent concealment?

For the following reasons, we shall reverse the judgment of the circuit court and remand the case to that court for further proceedings not inconsistent with this opinion. FACTS AND PROCEEDINGS The first amended complaint is the operative pleading for our purposes. It contains the following allegations of fact. ⁵²¹ The Rhees own and live in a single-family house at 13809 Lakeside Drive, in Clarksville (“the Property”). The Property is part of Brighton Pines, a residential housing development.

It is identified as “Lot 20” in the subdivision plan for Brighton Pines filed in the Howard County Land Records. “In the 1980’s,” Highland Development Corporation (“Highland”) and Fisher, Carter & Collins (“FCC”) oversaw construction of the Brighton Pines Development. 3 At all relevant times, Richard Demmitt was president of Highland and Ronald Carter was a principal in FCC. When the appellees were in the process of developing Brighton Pines, they discovered on the land comprising Lot 20 a small cemetery consisting of more than twenty headstones, many dating to the 1700’s. The cemetery, which appeared to have been abandoned, is not depicted in the Howard County Land Records. Demmitt and others acting at his direction removed the headstones so the area no longer was identifiable to the naked eye as a cemetery.

Carter then moved the “building restriction lot lines for Lot 20 so that the [now desecrated and not visible] cemetery was included in an area where no construction was allowed.” Finally, “[i]n order to fraudulently conceal that there was a cemetery” on Lot 20, Carter “removed any references to the cemetery before the worksheets [necessary for the subdivision approval] were submitted to any State or County agencies. As such, nothing in connection with the subdivision is recorded with any ... agency reflecting the presence of the cemetery” on Lot 20. Lot 20 was sold to the initial purchasers as the Property. 4 The initial purchasers never knew that there was a desecrated cemetery on the Property. On March 14, 1991, the initial purchasers sold the Property to the Rhees.

When the Rhees ⁵²² purchased the Property, they knew nothing about the desecrated cemetery. ’ Thirteen years later, on May 24, 2004, the Rhees learned there was a desecrated cemetery on the Property from a person who had been involved in developing Brighton Pines. 5 According to the Rhees, the appellees’ fraudulent concealment of the desecrated cemetery induced the Rhees to purchase the Property; and the value of the Property with the desecrated cemetery is “significantly less than it otherwise would be absent the cemetery being located thereon.” In dismissing the Rhees’ fraud claim, the court reasoned: It is clear that with a fraud, whether it be misrepresentation or a concealment claim, there has to be a duty to the particular plaintiff. There needs to be, certainly, statements made to a particular- plaintiff and I think that to extend that beyond to a class of plaintiffs is certainly not appropriate in this case. The Rhees noted a timely appeal. DISCUSSION Contentions The Rhees contend the appellees’ duty, as developer/sellers of the Property, not to fraudulently conceal the presence of the cemetery on the Property extended to them, as subsequent purchasers.

They argue that, just as the Court of Appeals held in Diamond Point Plaza Ltd. Partnership v. Wells Fargo Bank, N.A., 400 Md. 718 , 929 A.2d 982 (2007), that a defendant’s duty to refrain from fraudulently misrepresenting a material fact extends not only to the other party to the pertinent transaction but also to the people or “class of people” the defendant has “reason to expect” will rely upon the misrepresentation, a defendant developer/seller’s duty to refrain from fraudulently concealing a materially adverse condition of real property also extends beyond the initial purchas ⁵²³ er of the property to the people or “class of people” the defendant has “reason to expect” will rely upon the concealment. The appellees respond first that, in Maryland, an essential element of a cause of action sounding in fraud is the communication, verbal or non-verbal, of a misrepresentation by the defendant to the plaintiff. Here, there was no such communication, and so the fraud claim must fail. They further argue that, if it were otherwise, a developer/seller’s liability in fraud would extend to any number of subsequent purchasers of real property with whom the developer/seller had no contact and who did not have an ownership or possessory interest in the property when the acts of fraudulent concealment took place.

The appellees further maintain that the presence of the cemetery on the Property was not a material defect affecting valuation, and for that reason they did not owe any duty to disclose it, either to the initial purchasers or to any subsequent purchasers. Finally, the appellees argue that in any event the Rhees did not sufficiently plead damages so as to state a claim for fraudulent concealment. Standard of Review On appeal from a decision to grant a motion to dismiss for failure to state a claim upon which relief can be granted, “ ‘we must determine whether the [operative] complaint, on its face, discloses a legally sufficient cause of action.’ ” Schisler v. State, 177 Md.App. 731, 742-43 , 938 A.2d 57 (2007) (quoting Md. Rule 2 — 322(b)(2); Fioretti v. Md. State Bd. of Dental Exam’rs, 351 Md. 66, 72 , 716 A.2d 258 (1998)). We “ ‘determine whether the trial court was legally correct, examining solely the sufficiency of the pleading.’ ” Pendleton v. State, 398 Md. 447, 459 , 921 A.2d 196 (2007) (quoting Ricketts v. Ricketts, 393 Md. 479, 492 , 903 A.2d 857 (2006)).

In doing so, “we accept all well-pled facts in the complaint, and reasonable inferences drawn from them, in a light most favorable to the non-moving party.” Sprenger v. Pub. Serv. Comm’n of Md., 400 Md. 1, 21 , 926 A.2d 238 (2007) (quoting Converge Servs. Group v. Curran, 383 Md. 462, 475 , 860 A.2d 871 (2004)). “We ⁵²⁴ will only find that dismissal was proper ‘ “if the alleged facts and permissible inferences, so viewed, would, if proven, nonetheless fail to afford relief to the plaintiff.” ’ ” Id.

(quoting Pendleton, supra, 398 Md. at 459 , 921 A.2d 196 ). 6 Analysis In Maryland, the essential elements of a cause of action for fraudulent concealment are: “(1) the defendant owed a duty to the plaintiff to disclose a material fact; (2) the defendant failed to disclose that fact; (3) the defendant intended to defraud or deceive the plaintiff; (4) the plaintiff took action in justifiable reliance on the concealment; and (5) the plaintiff suffered damages as a result of the defendant’s concealment.” Lloyd v. Gen. Motors Corp., 397 Md. 108, 138 , 916 A.2d 257 (2007) (quoting Green v. H & R Block, 355 Md. 488, 525 , 735 A.2d 1039 (1999)). Each element must be proven by clear and convincing evidence. Md. Envtl.

Trust v. Gaynor, 370 Md. 89, 97 , 803 A.2d 512 (2002). In the context of the sale of real property, nondisclosure of a material fact ordinarily is not actionable, but fraudulent concealment of a material fact is: Non-disclosure is a failure to reveal facts. It may exist where there is neither representation nor concealment. Except in a few special types of transactions, such as insurance contracts and transactions between a fiduciary and his beneficiary, there is no general duty upon a party to a transaction to disclose facts to the other party.

To create a cause of action, concealment must have been intentional and effective — the hiding of a material fact with the attained object of creating or continuing a false impression as to that fact. The affirmative suppression of the truth must have been with intent to deceive. ⁵²⁵ Fegeas v. Sherrill, 218 Md. 472, 476-77 , 147 A.2d 223 (1958) (internal citations and quotations omitted) (emphasis added). In discussing the fraudulent concealment of a cause of action, the Court of Appeals has observed: “Absent a fiduciary relationship ... a plaintiff seeking to establish fraudulent concealment must prove that the defendant took affirmative action to conceal the cause of action and that the plaintiff could not have discovered the cause of action despite the exercise of reasonable diligence and that ... the affirmative act on the part of the defendant must ... be some act intended to exclude suspicion and prevent injury, or there must be a duty on the part of the defendant to disclose such facts, if known.” Id. (quoting Frederick Road v. Brown & Sturm, 360 Md. 76 , 100 n. 14, 756 A.2d 963 (2000)) (citations omitted) (emphasis added).

In other words, “fraudulent concealment — without any misrepresentation or duty to disclose — can constitute common-law fraud.... Although silence as to a material fact (nondisclosure), without an independent disclosure duty, usually does not give rise to an action for fraud, suppression of the truth with the intent to deceive (concealment) does.” United States v. Colton, 231 F.3d 890, 899 (4th Cir.2000). This is so because, as the Supreme Court has explained, a fraudulent concealment is “equivalent to a false representation.” Stewart v. Wyoming Cattle Ranche Co., 128 U.S. 383, 388 , 9 S.Ct. 101 , 32 L.Ed. 439 (1888). See also Hoffman v. Stamper, 385 Md. 1 , 28 n. 12, 867 A.2d 276 (2005) (fraud may consist of suppression of the truth as well the assertion of a falsehood); Schnader v. Brooks, 150 Md. 52, 57-58 , 132 A. 381 (1926) (concealment may amount to fraud “where it is effected by misleading and deceptive talk, acts, or conduct, or is accompanied by misrepresentations, or where, in addition to a party’s silence, there is any statement, word, or act on his part, which tends affirmatively to the suppression of the truth, or to a covering up or disguising of the truth, or to a withdrawal or distraction of a party’s ⁵²⁶ attention from the real facts”); Colton, supra, 231 F.3d at 898-99 (fraudulent concealment may be common-law fraud when the concealment consists of “deceptive acts or contrivances intended to hide information, mislead, avoid suspicion, or prevent further inquiry into a material matter”); Restatement (Second) op Torts § 550 (1977) (“One party to a transaction who by concealment or other action intentionally prevents the other from acquiring material information is subject to the same liability to the other, for pecuniary loss as though he had stated the nonexistence of the matter that the other was thus prevented from discovering.”); W. Page Keeton et al., Prosser and Keeton on Torts § 106 (5th ed. 1984) (“Any words or acts which create a false impression covering up the truth, or which remove an opportunity that might otherwise have led to the discovery of a material fact ... are classed as misrepresentation, no less than a verbal assurance that the fact is not true.”).

Cf. Sass v. Andrew, 152 Md.App. 406, 430 , 832 A.2d 247 (2003) stating in dicta that, even in the absence of a duty to disclose, the suppression of facts “which materially qualify representations made to another” may support a claim for fraud (quoting Finch v. Hughes Aircraft Co., 57 Md.App. 190, 239 , 469 A.2d 867 (1984)). Thus, in Maryland, a cause of action for fraudulent concealment will lie in favor of a purchaser of real property against the seller when, in the absence of any independent duty' to disclose, the seller actively and with the intent to deceive conceals a material fact about the property; the purchaser justifiably relies upon the concealment in buying the property; and, as a proximate result, the purchaser suffers damages. Here, apart from the disputed issues of extension of duty, materiality of defect, and damages, the factual allegations in the first amended complaint — that the appellees desecrated the cemetery and then affirmatively acted to hide its presence on Lot 20, intending to conceal, and in fact concealing, its presence — sufficiently state a cause of action for fraudulent concealment.

See Elsey v. Lamkin, 156 Ky. 836, 838 , 162 S.W. 106 (1914) (affirming judgment in favor of purchaser of real property against seller for fraud based upon ⁵²⁷ the seller’s concealing the existence of a cemetery on the property by disclosing the presence of one cemetery on the property and not the other, thereby “creating upon the mind of the vendee a false impression that full disclosure has been made and the whole truth told”). 1. Scope of Duty not to Conceal The primary issue in this appeal is whether a real property developer/seller’s duty to refrain from actively, intentionally concealing a material defect in the property can extend beyond his immediate purchaser, to a subsequent purchaser. That question is one of law. Gourdine v. Crews, 405 Md. 722 , 955 A.2d 469 , 2008 WL 4068177 , No. 134, September Term, 2007, slip op. at 7 (filed September 4, 2008); Doe v. Pharmacia & Upjohn Co., 388 Md. 407, 414 , 879 A.2d 1088 (2005).

As noted, the Rhees rely upon Diamond Plaza Ltd. Partnership v. Wells Fargo Bank, N.A., supra, 400 Md. 718 , 929 A.2d 932 , to argue that the duty does so extend, i.e., that a developer/seller of real property may be liable for fraudulent concealment not only to the initial purchaser, with whom he transacted the sale, but also to “the persons or class of persons” he either intended to influence or had “reason to expect” would act based upon the concealment. They maintain that, as subsequent purchasers of the Property, they are members of a class of people the appellees had reason to expect would purchase the Property in ignorance of the desecrated cemetery, and therefore to whom the appellees owed a duty to refrain from fraudulently concealing the presence of the cemetery on the Property. In Diamond Point, a partnership that owned a shopping center was seeking to refinance a loan when it learned that one of its anchor tenants was planning to move out. As part of its loan application, it submitted a “Certificate of Borrower,” falsely asserting that, among other things, it had no knowledge that any current tenant intended to vacate the premises.

On the basis of the information submitted in the loan application, the lender extended a non-recourse loan to the partnership. After the loan closed, the lender assigned it ⁵²⁸ to Paine Webber Real Estate Securities, Inc., which, in turn, bundled it with similar loans and sold the package to Wells Fargo Bank, N.A. (“Wells Fargo”). Ultimately, the partnership defaulted on the non-recourse loan.

Wells Fargo sued the partnership alleging breach of contract and several tort claims, including fraudulent misrepresentation. It claimed that the partnership had intentionally omitted the negative information about the anchor tenant from its “Certificate of Borrower.” The partnership defended on the ground that it had had no communication with Wells Fargo and there was no evidence that Wells Fargo relied on the “Certificate of Borrower.” The circuit court rejected that argument and, in a bench trial, rendered a verdict in favor of Wells Fargo on the fraud claim. The Court of Appeals affirmed the fraudulent misrepresentation judgment. In doing so, it adopted the principles set forth in sections 531 and 533 of the Restatement (Second) of Torts.

Section 531 states, as a general rule: One who makes a fraudulent misrepresentation is subject to liability to the persons or class of persons whom he intends or has reason to expect to act or to refrain from action in reliance upon the misrepresentation, for pecuniary loss suffered by them through their justifiable reliance in the type of transaction in which he intends or has reason to expect their conduct to be influenced. (Emphasis added.) Section 533 states with respect to a representation made to a third person: The maker of a fraudulent misrepresentation is subject to liability for pecuniary loss to another who acts in justifiable reliance upon it if the misrepresentation, although not made directly to the other, is made to a third person and the maker intends or has reason to expect that its terms will be repeated or its substance communicated to the other, and that it will influence his conduct in the transaction or type of transaction involved. (Emphasis added.) The Diamond Point Court noted that the partnership was a sophisticated real estate investor and the mortgage documents ⁵²⁹ it executed expressly stated that the loan might be sold on the secondary market. Thus, the Court held, the partnership “had more than good reason to expect” that the misrepresentation (by omission) in its “Certificate of Borrower” would be relayed to and relied upon by future purchasers of the mortgage in that market.

For that reason, it could be held liable for pecuniary loss sustained by a future purchaser (Wells Fargo) in justifiable reliance upon the misrepresentation. Diamond Point, supra, 400 Md. at 741, 929 A.2d 932 . See also Hoffman, supra, 385 Md. at 29-30 , 867 A.2d 276 (appraiser who knowingly prepared inflated appraisals as part of a property “flipping” scheme could be held liable for fraudulent misrepresentation to the purchasers of the properties; even though the purchasers were not given the appraisals, they relied upon contract documents assuring them that the values of the homes being bought were at least equal to their respective appraisals); Sempione v. Provident Bank of Md., 75 F.3d 951, 962-63 (4th Cir.1996) (holding that the Court of Appeals of Maryland would adopt the principles stated in sections 531, 532, and 533 of the Restatement (Second) of Torts and allow a secondary beneficiary of a letter of credit to recover for fraudulent misrepresentation against the issuer of the letter of credit 7 ). The appellees are quick to emphasize that Diamond Point involved an affirmative misrepresentation of material fact (albeit by omission), not a concealment of material fact.

In the case at bar, by contrast, there was no affirmative misrepresentation by the appellees to the Rhees and indeed no communication between them at all, only (allegedly) the intentional concealment of information about the Property. More ⁵³⁰ over, to the extent information was concealed, it was concealed from the initial purchasers, not from the Rhees. In response, the Rhees point to the following out-of-state cases in which courts have held developers or contractors liable for pecuniary loss to subsequent purchasers of real property for the tort of fraudulent concealment. In Barnhouse v. City of Pinole, 133 Cal.App.3d 171 , 183 Cal.Rptr. 881 (1982), the California Court of Appeal, First District, relying upon section 533 of the Restatement (Second) op Torts, held that a property developer could be held liable to a subsequent (i.e., not the initial) purchaser of residential property for fraudulently concealing the existence of defective subsurface soil conditions, including seeps, springs, and slides.

The court explained: Here, the jury could have inferred that [the developer] failed to make the initial disclosures [i.e., to the initial purchasers] with the intention that subsequent purchasers would also act in ignorance. It was foreseeable that in a development of relatively inexpensive suburban tract homes, some would change hands. While an affirmative misrepresentation might not be repeated, a nondisclosure must necessarily be passed on. Only [the developer] knew what his soils engineers had found and it was unlikely that others would find out on their own.

It was also possible that resulting damage would be delayed depending on the extent of rainfall. Under these circumstances it would be anomalous if liability for damages resulting from fraudulent concealment were to vanish simply because of the fortuitous event of an intervening resale. Ultimately in such a case it is the subsequent purchaser who is directly damaged by the initial nondisclosure. We find no difficulty in extending the law of deceit to the situation presented here.

Although a developer does not know that there will be subpurchasers, it is foreseeable that there will be and that they will be the ones to suffer damage. The developer has every reason to expect that if there are ⁵³¹ subpurchasers, a nondisclosure abo,ut subsurface soil conditions will be passed on to them. Perhaps most important, the rule we announce does not extend the vendor’s liability at all — it merely fails to reduce it. At the same time, without such a rule, the subpurchaser has no remedy because he or she can only turn to the vendor with knowledge for recovery.

Id. at 192-93 , 183 Cal.Rptr. 881 (citations omitted) (emphasis added). The holding in Bamhouse was modified somewhat in Geernaert v. Mitchell, 31 Cal.App.4th 601 , 37 Cal.Rptr .2d 483 (1995). There, the fourth owners of a residential property sued the previous owners for fraudulent misrepresentation and concealment. The plaintiffs alleged that the first two owners (or one of them) had fraudulently concealed, and also made misrepresentations about, the existence of defective subsurface soil conditions on the property.

The lower court dismissed the suit against the prior owners on the ground that neither one owed a legal duty to the plaintiffs. The appellate court reversed. Noting that the standard for imposing liability under section 531 of the Restatement is more than mere “foreseeability,” the court quoted comment d, as follows: “Virtually any misrepresentation is capable of being transmitted or repeated to third persons, and if sufficiently convincing may create an obvious risk that they may act in reliance upon it.... This risk is not enough for the liability covered in this Section.

The maker of the misrepresentation must have information that would lead a reasonable man to conclude that there is an especial likelihood that it will reach those persons and will influence their conduct.” Id. at 607 , 37 Cal.Rptr.2d 483 (quoting Restatement (Second) of Torts, section 531 comment d) (emphasis by court in Geemaert). The Geemaert court held that, for a seller of real property to be liable for pecuniary loss caused by fraudulent concealment or misrepresentation, it is not sufficient that it merely is foreseeable that his concealment or misrepresentation will be ⁵³² passed on to subsequent purchasers. The seller must have special reason to expect that the concealment or misrepresentation will be passed on to, and relied upon by, the subsequent purchaser. “[W]ith each intervening resale and with each passing year between the occurrence of the original fraud and the lawsuit,” that will be more difficult to prove. Id. at 608 , 37 Cal.Rptr.2d 483 .

For that reason, the plaintiff must allege “ultimate facts showing that the defendant intended or had reason to expect reliance by the plaintiff or the class of persons of which he is a member.” Id. The court concluded that the subsequent purchaser’s allegations were legally sufficient and therefore the question whether the owner had special reason to expect that his fraudulent misrepresentation or concealment would be passed on to and relied upon by a subsequent purchaser was one of fact. Id. at 608-09 , 37 Cal.Rptr.2d 483 . In an analogous situation, in Woodward v. Dietrich, 378 Pa.Super. 111 , 548 A.2d 301 (1988), property owners hired a plumbing contractor to connect sewer lines from their house to a municipal authority’s sanitary sewer system, in accordance with particular specifications and regulations.

For one of the lines, the plumber intentionally made no connection but doctored his work so it looked like he had. Two years later, the owners sold the house. The new owners discovered the deceit when a clogged drain flooded the basement, thereby revealing the absence of the line connection. They sued the plumbing contractor for fraudulent concealment.

The lower court dismissed the action on the ground that the contractor had not dealt directly with the new owners and therefore did not owe them a legal duty. The Superior Court of Pennsylvania reversed. It cited sections 531 and 533 of the Restatement (Second) of Torts and traced the erosion of the early common law requirement that tort liability for fraud depend upon privity of contract. The court observed that, [i]n our present mobile society, estates in land are transferred freely and regularly.

Thus, while [the contractor] may not have known that the [owners with whom he dealt] ⁵³³ would sell their home, the possibility of such a sale during the useful lifetime of a sewer connection was certainly quite foreseeable. Woodward, supra, 378 Pa.Super. at 131 , 548 A.2d 301 . Accordingly, the court explained, the contractor “would have had special reason to foresee that any subsequent purchaser would be unaware of the material latent defect [he] allegedly concealed.” Id. at 131-32 , 548 A.2d 301 . Because the reliance of the new owners upon the fraudulent concealment was specially foreseeable and the legal requirement of privity of contract no longer applied, the court could see no reason why the ... sale of the home to the [new owners] should absolve [the contractor] from liability....

When fraud creates or conceals a, latent defect, transfer of the defective chattel or realty to an innocent third party should not absolve the wrongdoer from liability for damages caused by that undiscovered fraud. Id. at 141 , 548 A.2d 301 (emphasis added). The appellees argue that Bamhouse and Geemaert are not persuasive because in California, unlike in Maryland, the seller of real property has a duty to disclose all material facts to his immediate purchaser, and therefore may be held liable to that purchaser for damages caused by a mere non-disclosure. Compare Fegeas, supra, 218 Md. at 477 , 147 A.2d 223 (“Unless the seller of real estate, because of fiduciary or other similar relations of trust, is under a duty to disclose facts as to the property known to him but not to the buyer, generally he need not do so.... ”). 8 Assuming this distinction in the laws of the two states exists, it is not dispositive.

The factual allegations here are not of a mere non-disclosure, so that, in the absence of a legal duty to the initial purchaser to disclose a material defect, there would be no foundation to extend such a legal duty to a subsequent purchaser. The allegations are of intentional (and as we shall discuss, illegal) conduct actively undertaken to conceal the existence of the cemetery on Lot 20: Removing ⁵³⁴ the headstones, redrawing the building envelope so as to avoid construction in the area of the desecrated cemetery, thereby hiding it further, and removing all reference to the cemetery from the worksheets necessary for subdivision approval, so that its existence would not become known to any State or County agencies involved in approving construction in Brighton Pines. These are not alleged acts of non-disclosure but of active suppression. To be sure, in a state that has abolished the doctrine of