Sonnenberg v. Security Management Corp.

RODOWSKY, Judge. The issue presented here on the pleadings is whether a deceit action will lie where the plaintiffs, who allegedly were fraudulently induced to contract to purchase realty, closed on their transactions after discovery of the fraud. The defendant dresses its argument in the garb of reliance, contending that consummation of the contract with full knowledge of the facts precludes, as a matter of law, reliance on any misrepresentation. This Court rejected the same argument more than a century ago when it was garbed somewhat differently, and we again reject the argument for the reasons set forth below.

Appellants, who were plaintiffs in the trial court, are Jeanne G. Sonnenberg, Thomas Turnbow, Titus and Sharon Ledbetter (the Ledbetters), and Paul and Beth Weber. They respectively own four townhouse properties in Montgomery Meadows, a residential development in Gaithersburg, Maryland owned by the appellee, and defendant in the trial court, Security Management Corporation (Security). ¹²⁰ The plaintiffs entered into contracts to purchase their respective properties between March 16 and May 18, 1988. Security had purchased Montgomery Meadows in November 1979. In April 1980 Security granted a right of way to Colonial Pipeline Company (Colonial) over a portion of the Montgomery Meadows property for the construction of an underground oil and gas pipeline.

As granted, the right of way was to run adjacent to, and on the far side of, a line that became the rear yard property line of the lots sold to the plaintiffs, but Colonial actually laid the pipeline on the near, or rear yard, side of that line. When the plaintiffs contracted to purchase their properties, the encroachment of the pipeline was unknown to them and could not be observed by an inspection of the premises. Settlements on the plaintiffs’ contracts of purchase were originally scheduled for the early fall of 1988, but were postponed by Security, which gave construction delays as the reason for postponing. The plaintiffs first learned of the pipeline encroachment from a letter dated October 25, 1988, written to each of them by counsel for Security.

Security advised that Colonial had erroneously located its pipeline approximately four feet inside the rear boundary of the plaintiffs’ lots, at a depth of approximately fourteen feet. Security brought suit on June 1, 1988, in the Circuit Court for Montgomery County to require Colonial to relocate the pipeline within the right of way, as granted, and Colonial counterclaimed to condemn a right of way where the pipeline was actually located. The October 25 letter referred to the possibility that the plaintiffs would be joined as defendants to that counterclaim. Between October 25, 1988, and January 30, 1989, the plaintiffs closed on their home purchases.

On January 30 Security’s counsel again wrote, suggesting to the plaintiffs the possibility of being paid $500 per lot by Colonial for a fifteen foot easement. Security asked the plaintiffs to authorize that arrangement by February 3. None of the plaintiffs did so, and Colonial, on February 6, amended its ¹²¹ counterclaim in condemnation to join the plaintiffs. 1 Plaintiffs say that the easement sought to be condemned would constitute virtually the entirety of their rear yards. The instant matter was filed by the plaintiffs against Security in the Circuit Court for Baltimore County.

The initial complaint alleged deceit and a violation of the Maryland Consumer Protection Act, Md.Code (1975, 1990 Repl. Vol.), Title 13 of the Commercial Law Article (CL). Security’s motion to dismiss for failure to state a claim was granted by Judge Leonard S. Jacobson who reasoned that plaintiffs’ “going to settlement with the knowledge of the alleged fraud bars them from maintaining the present suit.” Availing themselves of leave to do so, plaintiffs filed an amended complaint. It added a count alleging breach of contract, but the contract documents are not exhibits to, nor quoted in, the amended complaint.

Security again moved to dismiss, and that motion was granted, after hearing, by Judge Joseph F. Murphy, Jr., substantially for the reason given by Judge Jacobson. The plaintiffs appealed to the Court of Special Appeals, and we granted the writ of certiorari on our own motion prior to consideration of the matter by the intermediate appellate court. We shall address the sufficiency of the allegations of each of the three counts of the amended complaint. In doing so, however, we limit our consideration to the claimed deficiencies raised in the trial court by Security or by the trial judge.

See Maryland Rule 8-131(a). I In the claim for deceit plaintiffs allege that they were unaware of the pipeline encroachment until receipt of the October 25, 1988, letter, but that Security was aware of the encroachment, and of Colonial’s threatened condemnation, when each of the plaintiffs signed their contracts to ¹²² purchase. Plaintiffs allege that Security did not inform any plaintiff of any of these facts, and that “[t]o the contrary, Security affirmatively represented to the Ledbetters that the pipeline did not encroach on the property they had contracted to buy.” Explaining why they closed on their contracts to purchase, the plaintiffs alleged: “In reliance upon Security’s announced schedule of settlements which, since spring of 1988, had consistently been set for early fall, plaintiffs made arrangements to move to their new homes, secured loan commitments, and terminated their current living situations, including selling their previous homes. When plaintiffs received the October 25, 1988, letter from Security’s counsel they had no reasonable or practicable option but to go forward with the contracts, and could not have rescinded the contracts without severe prejudice.” Security contends that the amended complaint reveals the absence of an essential element of the tort of deceit, namely, reliance.

Security submits that, because the plaintiffs knew the pipeline’s location when they paid the balance of their purchase prices and took their deeds, they could not have been acting in reliance on a misrepresentation of no encroachment. Thus plaintiffs’ alleged loss, measured by the difference between the value of the property as it was represented to be and its actual value, could not have been caused by misrepresentation by Security. Although Security’s argument resembles waiver, it is not true waiver for which Security contends. Security does not argue that the plaintiffs voluntarily relinquished or abandoned a known right to sue in deceit.

The emphasis in Security’s argument is on the fact that the plaintiffs discovered the alleged fraud before the contracts to purchase their lots were fully performed. Security recognizes that a deceit action will lie at the instance of a party who has been fraudulently induced to contract where that party has not discovered the fraud until the contract has been fully performed. Discovery of the fraud while the contract is still ¹²³ executory, however, is said by Security to terminate the element of reliance, as a matter of law, so that any completion of performance by the defrauded party, and any alleged loss, cannot legally be attributed to the misrepresentation. As supporting its analysis of the law, Security points to Savings Banks Retirement Sys. v. Clarke, 258 Md. 501 , 265 A.2d 921 (1970), and Ryan v. Brady, 34 Md.App. 41 , 366 A.2d 745 (1976).

The plaintiffs, on the other hand, submit that the only per se legal consequence which flows from their completing performance of the contracts to purchase, after they had acquired knowledge of the encroachment, is that they are precluded from rescinding the contracts on the ground of fraud in the inducement. So long as they have not in fact waived their deceit claims, by knowingly and intentionally relinquishing or abandoning them, the plaintiffs say that they may fully perform the contracts, in lieu of rescinding them, and recover damages for the fraud. The debate between the parties in this case is not new in the law. The two schools of thought are described in an Annotation, Proceeding Under Executory Contract After Discovering Fraud as Waiver of Right to Recover Damages for the Fraud, 13 A.L.R.2d 807 (1950).

The editors summarize and comment in part, as follows: “A rule which is very widely if not universally accepted runs to the effect that where a contract has been procured by fraud the defrauded party on discovery of the fraud is presented with a choice of rights and remedies in that he may either (1) rescind, or (2) ‘affirm’ and recover damages. The rule, however, as will be observed, is not specific as to whether or not it applies to situations in which the contract was still in part, or wholly, unexecuted when the fraud was discovered____ “The great majority of the cases support the rule that where the defrauded party has in part, or at least in substantial part, performed the contract at the time of discovering the fraud, he may go on with performance and also recover or have the appropriate allowance of ¹²⁴ damages. And the decisions are very strongly to the effect that there is no waiver by the mere going on with the contract if, when the fraud was discovered, a stopping or abandonment of performance was not reasonably practicable, or, to express a similar idea, if the defrauded party was then in a situation from which he was unable to recede without prejudice. “On the other hand, a minority of cases, with more or less distinctness, and with some incidental variations in doctrine, may be regarded as supporting a general rule to the effect that the choice presented to the defrauded party is to rescind or to take the contract as it is without reservation, and that he cannot proceed under it and have damages if when the fraud was discovered the contract had been executed in part only, and most especially if little or nearly nothing had been done in performance, or if knowledge of the fraud was obtained in season to permit him to recede — but whether the latter specification means in season to recede without any loss or injury at all, or without serious or substantial injury is a matter of some uncertainty.” Id. at 811-13 (footnotes omitted). To illustrate the division of authority outside of this State on the issue compare Mertens v. Wolfeboro Nat’l Bank, 119 N.H. 453 , 402 A.2d 1335 (1979) (tort action allowed despite purchaser’s closing on contract after discovery of misrepresentation), and Collier v. Nolan, 125 Vt. 82 , 211 A.2d 265 (1965) (same) with Mirenda v. Steinhardt, 350 So.2d 499 (Pla.App.1977) (closing on contract after discovery of fraud is waiver when contract was “executory” at discovery), cer t. denied, 360 So.2d 1250 (Fla.1978).

Maryland law is in accord with the majority position described above. Persons who discover that they have been induced into a contract by fraud must decide, or the law will decide for them, whether unilaterally to rescind the contract or to ratify the contract and seek damages, either affirmatively or by recoupment. Our reports abound with cases in ¹²⁵ which parties to contracts, after discovering fraudulent inducement, were denied unilateral rescission because their conduct, including delay, constituted an affirmance of the contract. See Wolin v. Zenith Homes, Inc., 219 Md. 242 , 146 A.2d 197 , cert. denied, 361 U.S. 831 , 80 S.Ct. 81 , 4 L.Ed.2d 73 (1959); Ortel v. Upper Ashburton Realty Co., 171 Md. 678 , 190 A. 239 (1937); Telma v. Gingell, 157 Md. 411 , 146 A. 221 (1929); Levin v. Hurwitz, 148 Md. 249 , 129 A. 218 (1925); Latrobe v. Dietrich, 114 Md. 8 , 78 A. 983 (1910); Byrd v. Rautman, 85 Md. 414 , 36 A. 1099 (1897); Foley v. Crow, 37 Md. 51 (1872).

Failure promptly to rescind does not preclude other remedies for fraud in the inducement. The defrauded party, in effect, must elect between inconsistent and mutually exclusive rights. The party is “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.” Telma v. Gingell, 157 Md. at 413 , 146 A. at 222 .

See also Piper v. Jenkins, 207 Md. 308 , 113 A.2d 919 (1955) (tort action for fraudulent misrepresentation of boundaries brought after discovery following closing). Further, where the plaintiff purchased the rights to exploit an invention and discovered the fraud before the entire purchase price had been paid, the plaintiff could await suit by the seller for the balance and rely upon the fraud in defense. Groff v. Hansel, 33 Md. 161 (1870). Contrary to Security’s contentions, where the allegedly defrauded party has affirmed the contract by conduct and then sued for damages, our cases have permitted a deceit action even though the fraud was discovered while the contract was executory.

Brager v. Friedenwald, 128 Md. 8 , 97 A. 515 (1916), is on point. Indeed, there this ¹²⁶ Court rejected, over a dissent by two judges, the position which Security urges on us here. The dispute in Brager involved the $4 million (in 1910 dollars) estate of a decedent who had thirteen children. The plaintiff, one of the children, brought a deceit action against certain of her siblings, the essence of which was that her assignment to the defendants of her rights to participate in the estate had been obtained by fraudulent representations concerning the evidence available to set aside a will of the decedent under which the plaintiff took nothing.

After the will was set aside in proceedings at which the plaintiff learned of the available evidence, the plaintiff nevertheless demanded and received the amount agreed to be paid to her for the assignment of her interest. In the deceit action the trial court granted a motion for judgment in favor of the defendants, but this Court concluded that there was sufficient evidence to permit jury consideration of the plaintiffs claim. The dissenters in Brager would have affirmed because the plaintiff accepted payment with knowledge of the facts. They would have applied a rule stated in 20 Cyclopedia of Law and Procedure 92 as follows: “ ‘Although an action of deceit based upon fraud in the procurement of a contract proceeds upon the theory of affirmance of the contract by the defrauded party an important distinction exists with respect to acts done in affirmance of the contract after discovery of the fraud.

If the defrauded party acquires knowledge of the fraud while the contract remains executory and thereafter does any acts in performance or affirmance of the contract or exacts performance from the other party, he thereby condones the fraud and waives his right of action. Under such circumstances a recovery would be largely if not entirely for self inflicted injuries and the maxim volenti non fit injuria, applies.’ ” 128 Md. at 40-41 , 97 A. at 526 . The five judge majority in Brager held that the plaintiff could either have repudiated the settlement or “with full ¹²⁷ knowledge of the facts,” ratified it and recovered damages at law. Id. at 34 , 97 A.2d at 524.

The plaintiff had chosen the latter course. The majority then quoted from Weaver v. Shriver, 79 Md. 530, 543 , 30 A. 189, 190 (1894), which quoted from Groff v. Hansel, 33 Md. at 166 , which in turn had quoted from Whitney v.