VF Corp. v. Wrexham Aviation Corp.

ELDRIDGE, Judge. This case, in its present posture, is a deceit action growing out of the sale of an air freight corporation. The buyer alleged, and the jury found, that the seller knowingly misrepresented the financial condition of the air freight corporation. The jury awarded $189,336.61 compensatory damages and $21,400,000.00 punitive damages for the fraud.

The dispositive issue before us is whether there was sufficient evidence of fraud for the case to have been submitted to the jury. I. Prior to May 1988, Wrangler Aviation, Inc., an air freight company, was a wholly owned subsidiary of Blue Bell, Inc., and Blue Bell in turn was a wholly owned subsidiary of VF Corporation. In May 1988, Blue Bell sold Wrangler Aviation, Inc. to W.A. Services, Inc. VF helped finance the sale and took a security interest subordinate to a first lien held by Perpetual Savings Bank. Approximately two years later, in May 1990, Perpetual notified VF that W.A. Services, Inc., was in default and that, unless VF cured the default, the bank was going to foreclose ⁶⁹⁶ and cause W.A.’s assets to be sold.

Having lent W.A. approximately $6.1 million, of which $5.25 million was still outstanding, VF cured the default and took back, through Blue Bell, 100% of Wrangler Aviation’s stock. Up until May 1990, Robert Faia, who had been one of the principals of W.A. Services, Inc., was Chief Executive Officer of Wrangler Aviation. When Blue Bell took back Wrangler in May 1990, Varnell Moore was made Chief Executive Officer of Wrangler, and Faia became Executive Director of Sales of Wrangler. Howard Spradlin, previously an employee of Blue Bell, was installed as Wrangler’s Chief Financial Officer.

Larry Scheevel, Wrangler’s previous Chief Financial Officer, assumed the position of Vice President of Finance. Wrangler was experiencing financial difficulties, and, from May 1990 through October 1990, VF infused approximately $1.76 million into Wrangler to sustain its cash flow. Upon Blue Bell’s acquisition of Wrangler in May 1990, VF immediately began efforts to sell the air freight company. In anticipation of a sale, VF engaged KPMG Peat Marwick to conduct an audit of Wrangler and prepare audited financial statements pursuant thereto for the fiscal year ending June 30, 1990.

The Independent Auditor’s Report stated, inter alia, that Wrangler’s “losses from operations in 1990 and working capital deficiency at June 30, 1990 raise substantial doubt about the entity’s ability to continue as a going concern .... ” Specifically, the audited statement reflected, for the fiscal year ending June 30, 1990, annual operating revenues of $42,595,137.00, and annual expenses of $46,301,486.00, for a net loss of $3,706,349.00. Additionally, the “Statements of Cash Flows” showed that, in spite of VF’s infusion of cash, Wrangler experienced a cash overdraft of $1,233,465.00 for the same period. Finally, the “Notes to the Financial Statement” reiterated Peat Marwick’s apprehension of Wrangler’s ability to continue as a going concern. In October 1990, following extensive negotiations and full disclosure of the above financial information, VF and Blue Bell contracted to sell Wrangler to Wrexham Aviation Corporation.

Frank Pickard, who was VF’s treasurer, oversaw and con ⁶⁹⁷ trolled on behalf of VF and Blue Bell the contract negotiations and the ultimate settlement. Wrexham was organized for the sole purpose of acquiring Wrangler, and executives of its majority stockholder, Parkway Holdings, a large multi-national holding company and conglomerate based in Singapore, negotiated on behalf of Wrexham. The total sale price, which included both a cash payment and Wrexham’s assumption of VF’s liabilities to Perpetual Savings Bank, was approximately $9 million. A Purchase Agreement was executed on Friday, October 19, 1990, that contained, inter alia, the following provisions: “9.

(h) Attached hereto as Schedule 9(h) is a copy of the Company’s financial statements for the fiscal year ended June 30, 1990, which were audited by KPMG/Peat Marwick. To the best of Seller’s knowledge, such financial statements, including any qualifications set forth ... therein, fairly present the Company’s financial condition and results of operation for the Company’s fiscal year ended June 30, 1990. “(m) Subject to the limitations set forth in Section 15(d) hereof, the representations and warranties made by the Seller in this Section 9 or elsewhere in this Agreement shall survive the closing. * * * “As used in this Section 9, the term ‘knowledge’ shall mean the actual knowledge of any of the officers of the Seller and VF.... “13. (a) There shall not be any material error, misstatement or omission in the representations and warranties made by the Seller in this Agreement; all representations and warranties by the Seller contained in this Agreement ⁶⁹⁸ shall be true in all material respects at and as of the Closing as though such representations and warranties were made at and as of said date.... * * * “15. (a) Upon the terms, and subject to the conditions of this section 15, the Seller shall indemnify, defend and hold the Buyer harmless from, against and with respect to any claim, liability, obligation, loss, damage, deficiency, assessment, encumbrance, judgment, cost, and expense ... of any kind or character, arising directly as the result of ... and not including consequential damages (i) any material inaccuracy in any representation ... by the Seller in connection with this Agreement or otherwise made or given in connection with this Agreement and (ii) any material failure by Seller to perform or observe, or to have performed or observed, any covenant, agreement or condition to be performed or observed by Seller under this Agreement, or under any certificates or other documents or agreement executed by Seller in connection with this agreement. “(d) Notwithstanding anything to the contrary in' this Agreement: “(ii) Seller’s total obligation to indemnify, defend or hold Buyer harmless under this Section 15 or otherwise shall not exceed the Purchase Price.... ” “16.

Due Diligence. The Buyer has, prior to the date hereof and to its full and complete satisfaction, conducted and completed a due diligence examination of [Wrangler’s] business, records, properties and assets, and the liabilities, prospects, affairs, financial position, and results of opera ⁶⁹⁹ tions of [Wrangler]____ The Buyer acknowledges that the Seller and [Wrangler] provided the Buyer with full and complete access in completing such due diligence examination. ... In connection with the Buyer’s due diligence examination of the Business of [Wrangler], the Buyer has not relied upon any statement, opinion, representation, or warranty of the Seller, VF, or either of their respective directors, officers, employees, agents, or representatives, express or implied, other than those representations and warranties of the Seller expressly set forth in Section 9 hereof or elsewhere in this Agreement....” In addition, section 7(a)(v) provided that, at settlement, VF would deliver a Closing Certificate stating that representations and warranties in the contract of sale “are true, accurate and complete in all material respects.” Coincidentally, also on Friday, October 19, 1990, Larry Harden, Comptroller of Wrangler, was notified that an audit of Wrangler’s North Carolina sales and use tax filings for the period of May 1, 1988, through June 30, 1990, had been completed by the field auditor. The audit had begun in August 1990.

The field auditor requested an appointment to review the audit, and Harden scheduled the appointment for the afternoon of Monday, October 22nd. Harden met with the auditor on the afternoon of October 22nd and learned that the field audit indicated that Wrangler had improperly applied for and received sales and use tax refunds in the amount of $278,229.22 for the twenty-six month period covered by the audit. Adding penalties and interest, the initial proposed assessment totaled $372,199.45. During the discussion of the proposed assessment several errors in the audit report amounting to approximately $43,000 were immediately identified.

Additionally, the field auditor stated that under certain circumstances the penalties and interest may be abated, that the entire assessment may be appealed, and that portions of the assessment could be reversed. Harden immediately presented the results of the field audit to Scheevel, Wrangler’s Vice President of Financial Affairs. ⁷⁰⁰ Harden testified that he reported the audit results to no one other than Scheevel. Scheevel then informed Wrangler’s Chief Executive Officer, Varnell Moore, of the audit. Thereafter, Frank Pickard was informed by telephone that a field auditor had raised an issue of a potential tax liability.

Pickard conferred with Ernest Choquette, VF’s legal counsel for the Wrangler sale, concerning whether the audit should be disclosed to Wrexham. Pickard testified, without contradiction, that he was neither aware of the period of time the audit covered nor of the components of the audit nor of its finality. Choquette counseled that a tax audit in such a preliminary stage was too indefinite to require disclosure. The sale of Wrangler to Wrexham was completed the next day, on October 23, 1990.

Pursuant to the Purchase Agreement, the following Closing Certificate was signed by Pickard, thus reaffirming the accuracy of the KPMG Peat Marwick Independent Auditor’s report for the fiscal year ending June 30,1990: “The Seller hereby certifies that all of the representations and warranties with respect to the Seller contained in the Purchase Agreement are true, accurate and complete in all material respects on and as of the date hereof. The delivery of this Certificate in no way expands, diminishes or supercedes the warranties and representations of the Seller contained in the purchase agreement.” Immediately following the settlement, Wrexham re-installed Robert Faia as Wrangler’s President and Chief Executive Officer. Moore resumed his previous position with the defendants, and Scheevel resumed his position as Chief Financial Officer for Wrangler. On November 2, 1990, a memorandum concerning the tax audit report, authored by Scheevel and directed to Faia, stated in pertinent part as follows: “The State of North Carolina just completed a sales and use tax audit of Wrangler Aviation for the period of 05/01/88 thru 06/30/90.

The enclosed documents are the result of their audit. As you can see, the total liability they are ⁷⁰¹ claiming is $372,199.45 which includes balance of tax, penalty and interest. “[W]e are not sure how much of [the total liability] is valid and how much we can contest. It is generally felt the penalty portion can be mitigated and we know of one error on their part [that] represents] almost $100,000 of the total. * * ❖ “Our expectation is that the amount will be reduced but by how much is too soon to tell.” Six days later, on November 8, 1990, the State of North Carolina issued a notice to Wrangler stating that “a proposed assessment for sales and use tax” plus interest and penalties for the twenty-six month period ending June 30, 1990, was being made. The proposed assessment totaled $353,984.14 and detailed the amount owed as follows: taxes owed in the amount of $260,013.91; penalties owed in the amount of $65,003.48; interest owed in the amount of $28,966.75.

Wrangler began negotiating with the State of North Carolina, seeking to abate the penalties and specific findings contained in the proposed assessment. Ultimately, the final amount assessed and paid by Wrexham totaled $189,336.61, approximately one-half of the field auditor’s original proposed assessment. The principal amount of sales and use taxes which were improperly refunded for the single fiscal year covered by the KPMG Peat Marwick Auditor’s Report of June 30,1990, was $107,000.00. In March 1991 Wrexham contacted VF and requested that it remit $353,984.14 in connection with the assessment.

VF refused, and on October 21, 1993, Wrexham filed the present action against VF and Blue Bell in the Circuit Court for Baltimore City. In a two count complaint, Wrexham alleged that VF and Blue Bell fraudulently misrepresented Wrangler’s financial status because of the tax liability and that they breached the warranty contained in paragraph 9(h) of the purchase agreement. The plaintiff sought both compensatory and punitive damages. ⁷⁰² Following a six day trial, the jury found that VF was liable for compensatory and punitive damages. Specifically, the jury found that VF and Blue Bell had breached the warranty in the contract of sale, and the jury awarded Wrexham $535,000.00 under the breach of contract count.

In addition, the jury found liability under the tort count charging fraud or deceit, and it awarded $189,336.61 compensatory damages plus prejudgment interest under that count. The jury also determined that VF and Blue Bell were liable for punitive damages and, following a separate penalty phase of the trial, awarded Wrexham $21.4 million in punitive damages. VF filed motions for judgment notwithstanding the verdict, a new trial, and remittitur, which were denied. VF and Blue Bell then appealed to the Court of Special Appeals.

The Court of Special Appeals affirmed the judgments for compensatory damages but vacated the judgment for punitive damages. The intermediate appellate court remanded the case for the circuit court to conduct a post-verdict review of the punitive damages award under the standards of BMW of North America, Inc. v. Gore, 517 U.S. 559 , 116 S.Ct. 1589 , 134 L.Ed.2d 809 (1996), and Pacific Mutual Life Insurance Co. v. Haslip, 499 U.S. 1 , 111 S.Ct. 1032 , 113 L.Ed.2d 1 (1991). See V.F. Corp. v. Wrexham Aviation, 112 Md.App. 703 , 686 A.2d 647 (1996). 1 VF and Blue Bell filed a petition for a writ of certiorari which we granted. V.F. Corp. v. Wrexham Aviation, 346 Md. 28 , 694 A.2d 951 (1997).

The petitioners do not in this Court challenge the award of compensatory damages under the breach of contract count. They do, however, challenge the award of compensatory damages under the tort count charging fraud, arguing that, in light of the elements of a deceit action, there was insufficient evidence for submission of the tort count to the jury. Additionally, VF and Blue Bell attack ⁷⁰³ the punitive damages award on various grounds. The respondent Wrexham did not file a cross-petition for a writ of certiorari challenging the Court of Special Appeals’ judgment vacating the punitive damages award and remanding for post-verdict review.

Because we agree with the petitioners that there was insufficient evidence of fraud for the tort count to have been submitted to the jury, we need not reach the issues raised concerning punitive damages. 2 II. A. This Court has set forth the elements of the tort action of fraud or deceit in numerous opinions. In Nails v. S & R, 334 Md. 398, 415 , 639 A.2d 660, 668 (1994), we summarized as follows: “In order to recover damages in an action for fraud or deceit, a plaintiff must prove (1) that the defendant made a false representation to the plaintiff, (2) that its falsity was either known to the defendant or that the representation was made with reckless indifference as to its truth, (3) that the misrepresentation was made for the purpose of defrauding the plaintiff, (4) that the plaintiff relied on the misrepresentation and had the right to rely on it, and (5) that the plaintiff suffered compensable injury resulting from the misrepresentation.” See, e.g., Alleco v. Weinberg Foundation, 340 Md. 176, 195-196 , 665 A.2d 1038, 1047-1048 (1995); Ellerin v. Fairfax Savings, 337 Md. 216, 229-230 , 652 A.2d 1117 , 1123-1124 ⁷⁰⁴ (1995); Gross v. Sussex, 332 Md. 247, 257-258 , 630 A.2d 1156, 1161 (1993), and cases there cited. Moreover, the plaintiff must establish these elements by clear and convincing evidence.

Gross v. Sussex, supra, 332 Md. at 258 , 630 A.2d at 1161 ; Everett v. Baltimore Gas & Elec., 307 Md. 286, 300 , 513 A.2d 882, 889 (1986), and cases there cited. The requirement concerning knowledge of the falsity or reckless indifference as to the truth of the representation means either the defendant’s actual knowledge that the representation was false or the defendant’s “awareness that he does not know whether the representation is true or false.” Ellerin v. Fairfax Savings, supra, 337 Md. at 231 , 652 A.2d at 1124 . Negligence or misjudgment, “ ‘however gross,’ ” does not satisfy the knowledge element. Ellerin, 337 Md. at 232 , 652 A.2d at 1125 , quoting Cahill v. Applegarth, 98 Md. 493, 502 , 56 A. 794, 796 (1904).

Thus, “a defendant is liable in a tort action of fraud or deceit only if he knows that his representation is false, or is recklessly indifferent in the sense that he knows that he lacks knowledge as to its truth or falsity.” Ellerin, 337 Md. at 232 , 652 A.2d at 1125 . The requirement that the misrepresentation be made with the intent to deceive was described in the leading case of McAleer v. Horsey, 35 Md. 439, 453 (1872), as follows: “ ‘An action cannot be supported for telling a bare naked lie, ie., saying a thing which is false, knowing or not knowing it to be so, and without any design to impose upon or cheat another, and without intention that another should rely upon the false statement and act upon it; but if a falsehood be knowingly told, with an intention that another should believe it to be true and act upon it, and that person does act upon it and thereby suffers damage, the party telling the falsehood is responsible in damages in an action for deceit....’” Thus, as pointed out in several of our decisions, “recovery in a tort action for fraud or deceit in Maryland is based upon a defendant’s deliberate intent to deceive.” Ellerin, 337 Md. at 230 , 652 A.2d at 1124 , and cases there collected. ⁷⁰⁵ B. The plaintiffs theory of the case is that the defendants VF and Blue Bell, by Frank Pickard who was in charge of negotiation and consummation of the sale, “affirmatively represented and ... certified that their prior statements of financial condition remained true and complete and that there were no material errors or omissions as of the date of closing.” (Plaintiff-respondent’s brief in this Court at 17). The plaintiff points out that paragraph 9(h) of the Purchase Agreement signed on October 19, 1990, stated that the Independent Auditor’s Report by KPMG Peat Marwick, “[t]o the best of Seller’s knowledge, ... fairly presents] the Company’s financial condition and results of operation for the Company’s fiscal year ended June 30, 1990.” According to the plaintiff, the Independent Auditor’s Report was not in fact accurate because it failed to reflect that $107,000.00 in sales and use taxes had been improperly refunded to Wrangler for the fiscal year ending June 30, 1990, and that, for future years, Wrangler would have additional expenses of approximately $107,000.00 per year. The plaintiff argues that this omission was “material.” The plaintiff further contends that Frank Pickard gained knowledge of this material inaccuracy when he was told, late in the day on October 22, 1990, of the field audit of Wrangler’s sales and use tax filings.

Therefore, according to the plaintiff, Pickard made a knowing misrepresentation at the settlement on October 23, 1990, when he signed the certificate stating that the “representations and warranties with respect to the Seller contained in the Purchase Agreement are true, accurate and complete in all material respects.” The plaintiff asserts that this misrepresentation was done “intentionally” and that “Pickard intended to induce Wrexham to consummate the purchase ... without any concessions or provisions for satisfying the newly discovered tax claim.” (Plaintiff-respondent’s brief in this Court at 19). The defendants VF and Blue Bell, on the other hand, insist that there was no clear and convincing evidence that Pickard had the requisite scienter to support an action for fraud or deceit. Specifically, they contend that there was insufficient ⁷⁰⁶ evidence that Pickard knew of any falsity in the certificate signed by him on October 28, 1980, and that there was insufficient evidence that Pickard intended to deceive Wrexham. Our review of the record convinces us, particularly in light of the “clear and convincing” standard of proof, that there was insufficient evidence of either the knowledge element or the intent to deceive element for the tort count to have been submitted to the jury.

The evidence is uncontradicted that Pickard was not aware of the sales and use tax audit until late in the day of