Testerman v. H & R BLOCK, INC.

Powers, J., delivered the opinion of the Court. The posture in which this case reaches us, substantially in the words of both briefs, is this: Mr. and Mrs. Glenn B. Testerman sued H & R Block, Inc. and Joseph B. Dunn in the Circuit Court for Montgomery County, in a three count declaration. One count alleged that the defendants negligently, wantonly, maliciously, and intentionally prepared incorrect income tax returns for the Testermans for the years 1967 and 1968, and claimed compensatory and punitive damages. The second and third counts claimed damages for breach of contract.

In a non-jury trial completed on 6 June 1973, Judge H. Ralph Miller, after having granted in part, as to punitive damages, a motion for a dismissal, awarded the Testermans compensatory ³²³ damages under the tort count. Judgment was entered under count one for damages in the amount of $690.65 and costs. Judgment was entered for the defendants under counts two and three, “to avoid a double recovery”. Mr. and Mrs. Testerman noted an appeal, and they are the appellants here.

H&R Block, Inc. and Dunn noted a cross appeal, but later dismissed it. What we have before us, then, is a judgment in favor of the appellants, not questioned by the appellees. Appellants, although it was in their favor, have appealed from the judgment and complain of two rulings that they feel restricted the amount of damages they should have been entitled to recover. McAlister v. Carl, 233 Md. 446 , 197 A. 2d 140 (1964).

They are: 1. The court’s ruling that as a matter of law, appellants were not entitled to have the question of punitive damages considered by the court in its capacity as finder of the facts. 2. The court’s ruling that evidence of mental anguish was not admissible as an element of compensatory damage. When the Testermans completed their evidence, H&R Block and Dunn moved for a dismissal.

Maryland Rule 535. Judge Miller ruled that the evidence not only made out an adequate case on breach of warranty, in support of counts two and three, but established a prima facie case of negligence under the tort count. He invited argument on the question of punitive damages, and after hearing argument, granted the motion to dismiss as to the claim for punitive damages. In ruling, Judge Miller said: “Now, the test for exemplary or punitive damages has no doubt been somewhat extended in the last few years in Maryland and it is no longer necessary to show actual malice, or an intentional tort. “Any extraordinary or outrageous behavior that ³²⁴ puts anything beyond the line of simple negligence or any willful or wanton conduct or any deliberate act of course constitutes a cause of action for punitive damages. * * * “ * * * I personally have always favored high . standards in not only all the professions, but all the businesses and all the trades, and I personally resent everything but that, but it is not up to this Court to legislate that everyone who prepares or fills out a tax return must necessarily have 30 hours of accounting at a university or any other judgment of that type. “The evidence in this case was that both of the people who filled out the returns had had some prior experience in doing tax returns and had both taken the Block course and had worked even prior to their employment with.

Block in filling out tax returns. “Mrs. Weisberg had had a course that was conducted by the Federal government some years ago. “There being no standard, and perhaps there should be, but that is a matter for the State Legislature, the courts have uniformly held that a member of a learned profession, and for that matter anyone who -undertakes employment because of his profession, have exceptional skill, * * * that he represents that he possesses the degree of skill usually possessed by those-in good standing practicing their specialties in the same locality. He impliedly agrees to use his best judgment, but does not guarantee results. . “It goes on to say that anyone who uses bad faith, that would be another thing, but in a case, St. Paul versus Manufacturers Life Insurance, decided by the Court of Appeals in 262 Md. at 192 the Court said that even though in cases like this, the plaintiff ³²⁵ was injured for no more reason than allowing the other party to make a profit, that that would not entitle them to punitive damages, that this was merely negligence for failing to exercise the standard of care that one would normally exercise. “Now, while there is evidence, looking at it again in the best light for the plaintiff, that the standard of care was not exercised, there is nothing more that would entitle the plaintiffs to any punitive damages unless you look at the theory of the advertising, coupled with the employment of people who were less than skilled.” “The Court sees no basis at all under the law of Maryland as it exists at this time for the award of punitive damages and there is no evidence upon which that can be based, and the Court grants the motion to dismiss on the claim for punitive damages.” The motion for a dismissal made by H & R Block and Dunn at the close of the evidence offered by the Testermans asked Judge Miller to rule that upon the facts and the law the Testermans had shown no right to relief. Maryland Rule 535. For that purpose the evidence stood undisputed, and the Testermans were entitled to have the judge consider the evidence and all logical and reasonable inferences deducible therefrom in a light most favorable to them.

Allen v. Steinberg, 244 Md. 119 , 223 A. 2d 240 (1966), Price v. Levin, 248 Md. 158 , 235 A. 2d 547 (1967), Shoreham Developers, Inc. v. Randolph Hills, Inc., 248 Md. 267 , 235 A. 2d 735 (1967). The legal sufficiency of the evidence was to be tested just as the evidence in a jury case would be appraised upon the filing of a motion for a directed verdict. Isen v. Phoenix Assurance Co., 259 Md. 564 , 270 A. 2d 476 (1970). We read Judge Miller’s reasons as being based more upon the view that under Maryland law there is no right to recover punitive damages in such a case as this, than upon ³²⁶ the view that the law recognizes the right, but that the evidence 1 in this case was not sufficient to support it.

In either event we disagree. Judge Miller made the proper test, but we think he arrived at the wrong answer. We hold that there is such a right, and that the evidence in this case was sufficient to invoke that right, and to require that the trier of the facts determine whether to allow punitive damages, and, if allowed, the amount. The Facts of This Case We shall now detail some of the evidence favorable to the Testermans which we consider sufficient to have entitled them to have the question of punitive damages submitted to the judge as the trier of the facts.

The Testermans began the operation, in August, 1967, of a gasoline service station on Route 40, at Mt. Airy. In March, 1968, they took all of the records of the business for 1967, and their personal records, to the H & R Block office in Frederick. They went to Block because of their advertisements that they were tax experts.

They saw Mr. Dunn. From the information they gave him he prepared the required returns, which showed a loss for 1967. In March of 1969 they again went to the Block office, taking all of their business and personal records for the year 1968. A Mrs. Weisberg took care of them.

The returns she prepared showed a loss. She also prepared an amended return for 1965, taking the benefit of the 1968 loss as a “carryback”, to obtain a refund of taxes paid for 1965. Mr. Testerman questioned the result reached by Mrs. Weisberg. He told her he didn’t see how they lost money — they made a living and had drawn cash out of the business for their personal use.

Mrs. Weisberg replied that everybody loses money the first couple of years in business, and that ³²⁷ the money they transferred was their hard earned cash and was not taxable. In January 1970 the Testermans were contacted by an Internal Revenue Agent for an audit. His report showed that the audit was ordered because of the loss carryback claim. They gave the agent the same box of records they had taken to the Block office.

A few weeks later the agent called and told Testerman he had put $10,000 of the business receipts in his pocket without reporting them. The agent said he would get the figures. After another call in March, Testerman went to the IRS office in Frederick and got his records and “the figures”. He took them to Block’s.

He was told that a Mrs. Brown would handle it. Later in March 1970 when he went back to Block’s, Testerman was told by Mrs. Brown that she cleared up one correction with IRS, but that she wasn’t educated enough to go any further, and she suggested that he hire a tax expert. On that same occasion Testerman spoke to Dunn and said he was getting upset. Dunn said why don’t you talk to a lawyer.

The Testermans did see a lawyer, and later a Certified Public Accountant. The CPA went over their records, and the IRS report, and concluded that the IRS was right, and the tax returns were wrong. The Testermans saw another accountant, to take over their books and records, as well as to check the 1967 and 1968 returns, and the IRS report. Upon the advice of both, the Testermans paid the additional taxes, and the penalties assessed, and interest.

The CPA testified at the trial. He said that the returns on their face were not reasonable, even from the point of view of common sense. He said that without an explanation, disbursements could not exceed income, which was the case on both of these returns, and that if a client of his could give no explanation, with additional records or otherwise, he would tell the client to get someone else to prepare the return. The CPA gave as his opinion that before a person is competent to prepare tax returns involving investments or a business, his training must include 30 semester hours of ³²⁸ background accounting and 6 semester hours of courses in income taxation.

Both the CPA and the other accountant said that the errors were in understatement of gross income, as the IRS found. The understatement was caused in each of the two years in two ways. One resulted when Block deducted “off the top” from gross income the funds that the Testermans had drawn periodically from the business for personal use. The other resulted when Block failed to include in gross income the expenses paid from cash at the station which, for that reason, were never reflected in a bank deposit.

All such transactions were, however, reflected in the Testermans’ records which they brought on each occasion to the Block office. The report of the IRS agent was sent to the Intelligence Division because the agent concluded that the understatement was deliberate, with the intent to file a false return. The Intelligence Division evaluated the report, and giving weight to Testerman’s limited education, recommended against prosecution. The accountant engaged by the Testermans testified that after they had paid the penalties and interest to the IRS, he made an appointment with Dunn to discuss reimbursement.

All met at Dunn’s office. Dunn insisted that he had made no error, and that the H & R Block, Inc. office in Baltimore had told him not to pay the penalties and interest. Apparently some tempers rose, and Dunn called the Testermans troublemakers, ordered them all to get the hell out of his office, and said that if they wanted anything from him they would have to sue. The accountant testified that he had reviewed both returns, and both were incorrect.

He said that a return that shows an unexplainable loss is not complete, and you are begging the IRS to come back and complete it for you. He said that all the tax practitioners he knew would refuse to accept such a return and would not send it in. He also agreed with the CPA in his opinion of the training required for competence to prepare business tax returns. ³²⁹ There was evidence that Dunn, who had gone to the 11th grade in high school, and had some years of work experience, including some bookkeeping, had answered an advertisement of H & R Block, Inc. in Baltimore in 1963, for tax consultants. The ad said that no experience was necessary — Block will train you.

He took the 72 hour course taught by a Block employee, and began work as a tax consultant in the 1964 tax season. He taught Block’s course in Baltimore in 1965 and 1966, and then became Block’s franchisee in Frederick. He advertises for recruits, and teaches the tax consultants who work for him, including Mrs. Weisberg, who began as a part time consultant in 1969. Dunn’s franchise prepared 4,400 tax returns in the 1968 season and 4,800 returns in the 1969 season.

The agency of Dunn for H & R Block, Inc. and of Mrs. Weisberg for both were conceded. A Block advertisement in evidence says, “And when Block does your return, you’ll know it’s done right”, and also says, “We guarantee accurate preparation of every return”. The guarantee is stated, “If we make any errors that cost you any penalty or interest, we will pay the penalty or interest”. Dunn described some of the material in the Policy and Procedure book issued by Block, which franchisees and employees must observe.

They are told to refer to themselves as tax consultants. They are told never to refer to themselves' as tax experts, but if someone else does, do not worry. If asked about training, they are instructed to state that their tax men have been trained in H & R Block schools, and are qualified. They are told also that if someone asks them how long you have been preparing tax returns, they are to answer that Block has been preparing tax returns for over 20 years.

They are instructed not to suggest that their full time or part time men are not veterans in the field. They are told also that fees are not refundable, but if gross errors are made causing clients dissatisfaction, they are to issue a gift certificate for next year. Both Dunn and Mrs. Weisberg emphasized that they take the figures that the client gives them — that they do not ³³⁰ audit, and Mrs. Weisberg added that the only thing guaranteed was the accuracy of her computations. In the face of the IRS audit and even at the trial, Dunn and Mrs. Weisberg insisted that the returns were prepared correctly, based on the information given them.

The Law of Punitive Damages We now inquire into the authorities dealing with the law of punitive damages; what they are, why they are allowed, and when they are allowed. In 22 Am. Jr. 2d, Damages, § 236, it is stated: “Exemplary, or punitive, damages are generally defined or described as damages which are given as an enhancement of compensatory damages because of the wanton, reckless, malicious, or oppressive character of the acts complained of. Such damages go beyond the compensatory damages suffered in the case; they are allowed as a punishment of the defendant and as a deterrent to others.

The terms ‘exemplary,’ ‘punitive,’ and ‘vindictive’ damages are used interchangeably.” In the same text it is said, in § 237: “In most jurisdictions exemplary damages are allowed and awarded as a punishment to the defendant and as a warning and example to deter him and others from committing like offenses in the future. Under this theory such damages are allowed on grounds of public policy and in the interest of society and for the public benefit, not as compensatory damages, but rather in addition to such damages. It has been said that they are imposed in view of the enormity of the offense rather than as a measure of compensation to the plaintiff.” In 25 C. J. S., Damages, § 117, the authors say: “The theory of exemplary, punitive, or vindictive damages, or ‘smart money,’ as they are sometimes ³³¹ called, involves a blending of the interests of society in general with those of the aggrieved individual in particular. According to the more generally accepted doctrine, such damages are allowed not because of any special merit in the injured party’s case, but are awarded by way of punishment to the offender, and as a deterrent, warning, or example to defendant and others, or even, it has been said as an expression of the indignation of the jury.” “Further, the view has been taken that punitive or exemplary damages have reference to the future, rather than to the past, conduct of defendant, and that they are imposed in order to admonish him not to repeat the wrongful act and to deter others from the commission of like ills.” And Restatement, Second, Torts (Tentative Draft 1973), § 908 says: “(1) Punitive damages are damages, other than compensatory or nominal damages, awarded against a person to punish him for his outrageous conduct, and to deter him and others like him from similar conduct in the future.” “(2) Punitive damages may be awarded for conduct which is outrageous, because of the defendant’s evil motives or his reckless indifference to the rights of others.” An early and oft-cited discussion of punitive damages by the Court of Appeals of Maryland is found in Philadelphia, W. & B. R. R. Co. v. Hoeflich, 62 Md. 300 (1884).

In a dispute over the fare of the plaintiffs younger sister, the railroad company’s conductor had ejected the plaintiff, whose fare had been paid, from a train. The trial judge granted a punitive damage prayer requested by the plaintiff. From a judgment against it, the railroad company appealed. The Court of Appeals reversed, saying at 306-09: “We come now to the only question, about which ³³² we think there can be any difficulty in this appeal, and that is the question in regard to the rule of damages laid down by the court.

If the plaintiff was wrongfully ejected from the train, she was unquestionably entitled to recover such damages as the jury might think, under all the circumstances, a proper compensation for the unlawful invasion of her rights as a passenger, and the injury to her person and feelings. To so much of the plaintiffs prayer, there can be no objection. But in addition to such damages as these, the court instructed the jury, if the plaintiff was forcibly and deliberately ejected, they might give such exemplary damages, as they might think a proper punishment for the conduct of the defendant. The force and deliberation with which the wrongful act is done, are not necessarily the tests by which the question of punitive damages is to be determined.

On the contrary, to entitle one to such damages there must be an element of fraud, or malice, or evil intent, or oppression entering into and forming part of the wrongful act. It is in such cases as these that exemplary or punitive damages are awarded as a punishment for the evil motive or intent with which the act is done, and as an example or warning to others. But where the act, although wrongful in itself, is committed in the honest assertion of a supposed right — or in the discharge of duty, or without any evil or bad intention, there is no ground on which such damages can be awarded. “In R. R. Co. v. Quigley, 21 How. 202, 214 , Mr. Justice Campbell says: ‘Whenever the injury complained of has been inflicted maliciously or wantonly, and with circumstances of contumely or indignity, the jury are not limited to the ascertainment of a simple compensation for the wrong committed against the aggrieved person. But the malice spoken of in this rule is not merely the doing of an unlawful or injurious act.

The word ³³³ implies that the act complained of was conceived in the spirit of mischief, or of criminal indifference to civil obligations.’ “And in the still later case, in the same court, of R. R. Co. v. Arms, 1 Otto, 489 , 493, Mr. Justice Davis said: ‘Redress commensurate to such injuries should be afforded. In ascertaining its extent, the jury may consider all the facts which relate to the wrongful act of the defendant, and its consequences to the plaintiff; but they are not at liberty to go farther, unless it was done wilfully, or was the result of that reckless indifference to the rights of others which is equivalent to an intentional violation of them. The tort is aggravated by the evil motive, and on this rests the rule of exemplary damages.’ “We might multiply the cases on this subject if necessary, all concurring that exemplary damages are awarded as a punishment for the evil motive, or intention with which the unlawful act is done, and as a warning or example to others. “The mere fact, that one is forcibly and deliberately ejected from a railroad car, does not necessarily imply that it was done wantonly, or wilfully, or with a bad motive, although the act may be in itself unlawful. Conceding then that the female plaintiff was wrongfully ejected from the car, the fact that it was forcibly and deliberately done are not the tests by which the plaintiffs’ right to recover punitive damages is to be determined.

On the contrary, before resorting to so extreme a measure, it was but proper that the conductor should have acted deliberately and not hastily or inconsiderately; and if the plaintiff refused to leave the car on being requested to do so, the use of force became absolutely necessary, the only question being whether the force thus used was excessive. “The case of Turnpike Co. v. Boone, 45 Md. 344 , on which the instruction of the court is based ³³⁴ differs widely from the one now before us. There the company in violation of its charter, had exacted illegal and excessive fares, and passengers were compelled either to pay the same, or subject themselves to be expelled from the cars. It was under these circumstances, the court held, that public policy required the corporation should be liable to the highest measure of damages, for the deliberation and force accompanying its illegal conduct. But there are no considerations of public policy that require the application of such a rule in a case like the one now under consideration.

On the contrary, to entitle the plaintiff to recover punitive damages, according to all the decisions both in this country and in England, the jury must find that the wrongful act was done wantonly, or wilfully, or in the spirit of oppression. It is the evil motive or intention with which the wrongful act is done, say the Supreme Court, on which rests the rule of punitive damages.” In Heinze v. Murphy, 180 Md. 423 , 24 A. 2d 917 (1942), the Court of Appeals modified a judgment entered by the judge in a non-jury trial below by reducing a judgment for $1,000.00, which included punitive damages, to a judgment for $25.00 for compensatory damages only. Heinze, a police officer, was sued by Murphy for malicious prosecution after disorderly conduct charges brought against Murphy were dismissed. Heinze had arrested Murphy and placed the charge because of an incident that arose out of an investigation being conducted by Heinze of a traffic accident in which Murphy’s wife was involved.

The evidence was undisputed that Heinze thought, though mistakenly, that it was his duty as a policeman to bring the charge. The Court, citing Philadelphia, B. & W. R. Co. v. Green, 110 Md. 32 , 71 A. 986 (1909) and citing and quoting from Hoeflich, supra, said, at 429: “The allowance of exemplary damages must be justified by circumstances of aggravation. A wrong ³³⁵ motive must accompany the wrongful act, and without proof of malice or some other aggravation, exemplary damages cannot be recovered. Sedgwick on Damages, 9th Ed., Yol. 1, Sec. 363.

In this State the awarding of exemplary damages has been fully discussed, and the rule settled.” The appellant in Dennis v. Baltimore Transit Co., 189 Md. 610 , 56 A. 2d 813 (1948), appealed from a judgment below in his favor for compensatory damages, claiming that the trial judge, who tried the case without a jury, erred in refusing to award punitive damages. Dennis and a companion became involved with the conductor of a street car in Baltimore in a dispute about a fare. The conductor stopped the car and went for a policeman who, at the conductor’s request, arrested Dennis and his companion on charges of disorderly conduct. The charges were dismissed the next morning by the police magistrate.

In affirming the trial court’s refusal to award punitive damages the Court of Appeals said, at 616-17: “We further hold in this State that if an injury has been inflicted maliciously or wantonly, the jury are not restricted to an award of compensatory damages, but may award in addition thereto such punitive damages as the circumstances of the case may warrant as a punishment for the wrong done and as an example to others. Sloan v. Edwards, 61 Md. 89, 100 ; Bernheimer Bros. v. Becker, 102 Md. 250, 256 , 62 A. 526 , 3 L. R. A., N. S., 221, 111 Am. St. Rep. 356 . Thus punitive damages may be awarded to a passenger where he was ejected maliciously and wantonly, if the conductor acted within the general scope of his employment.

Likewise, if an arrest of a passenger is made upon the conductor’s request with the primary object of injuring and oppressing him, the jury may go beyond the rule of compensation, and award such additional damages as they may deem proper. Bernheimer Bros. v. Becker, 102 Md. 250 , 62 A. 526 , ³³⁶ 3 L. R. A., N. S., 221, 111 Am. St. Rep. 356 . As we stated in Heinze v. Murphy, 180 Md. 423 , 24 A. 2d 917 , deliberation and unnecessary violence do not necessarily form the basis for allowance of punitive damages.

The word ‘malice,’ as used in the rule for imposition of punitive damages, signifies that the defendant was influenced by hatred and spite and that he indulged in deliberate and wilful mischief to injure the plaintiff. Philadelphia, W. & B. R. Co. v. Quigley, 21 How. 202 , 16 L. Ed. 73, 77 . The word ‘wanton’ means characterized by extreme recklessness and utter disregard for the rights of others. Baltimore Transit Co. v. Faulkner, 179 Md. 598, 602 , 20 A. 2d 485 .

We specifically hold that, in a suit for damages brought by a passenger for false arrest made upon request of the conductor, it must be shown by the pláintiff in order to recover punitive damages that the conductor not only acted wrongfully but without just cause or excuse, and with the evil motive to injure and oppress, or at least with a reckless disregard of the rights of the person injured. Smith v. Philadelphia, W. & B. R. Co., 87 Md. 48 , 38 A. 1072 ; Fotheringham v. Adams Express Co., 36 F. 252 , 1 L. R. A. 474. Where the jury determine in a suit for false arrest that the arrest, even though unjustifiable, was requested in the honest assertion of a supposed right while in the discharge of duty, and was not from malice, punitive damages should not be awarded. Philadelphia, W. & B. R. Co. v. Hoeflich, 62 Md. 300, 307 , 50 Am.

Rep. 223 .” The Court of Appeals further considered the character of malice which must be shown before punitive damages may be submitted to a jury, in Drug Fair v. Smith, 263 Md. 341 , 283 A. 2d 392 (1971), where Judge Digges, speaking for the Court, said, at 351-52: “Drug Fair claims error was committed when the trial judge failed to instruct the jury that it must ³³⁷ find actual malice before awarding punitive damages. Appellant correctly accepts the general rule, applicable to all personal injury cases, that if the injuries are ‘inflicted maliciously and wantonly, the jury is not restricted to actual or compensatory damages but may give in addition thereto such punitive or exemplary damages as the circumstances of the case will warrant.’ Galusca v. Dodd, 189 Md. 666, 670 , 57 A. 2d 313 (1948). However, relying on prior decisions of this Court appellant then concludes that such an award can only result if actual, not implied, malice is proved. Dennis v. Baltimore Transit Co., 189 Md. 610 , 56 A. 2d 813 (1948) (wrongful ejection and false imprisonment); Heinze v. Murphy, 180 Md. 423 , 24 A. 2d 917 (1942) (assault and false imprisonment); Knickerbocker Co. v. Gardiner Co., 107 Md. 556 , 69 A. 405 (1908) (wrongful interference with contract) and Bernheimer v. Becker, 102 Md. 250 , 62 A. 526 (1905) (assault and false imprisonment).

It claims that here the jury instructions did not give the definition of actual or express malice but instead described implied malice. Without discussing the issue of whether punitive damages can be based on implied malice we, nevertheless, disagree with the appellant’s conclusion that the jury instruction did not explicitly delineate the necessary elements of actual malice. Actual or express malice may be characterized as the performance of an unlawful act, intentionally or wantonly, 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. Associates Discount v. Hillary, 262 Md. 570 , 278 A. 2d 592 (1971); Vancherie v. Siperly, 243 Md. 366 , 221 A. 2d 356 (1966); Galusca v. Dodd, supra; Dennis v. Baltimore Transit Co., supra; Heinze v. Murphy, supra; Prosser, Law of Torts, 9-14, § 2, Ch. 1 (3d ed. 1964).” ³³⁸ In a line of cases having their genesis in the area of contract law, the Court of Appeals has considered the propriety of