Brown v. Stewart

• Decision Date: 19 November 2001
• Docket Number: No. 3408.,3408.
• Citation: 557 S.E.2d 676,348 S.C. 33
• Court: South Carolina Court of Appeals
• Parties: Sue BROWN, as Personal Representative of the Estate of James E. Brown, III, Respondent, v. John M. STEWART and J. David Gibson, Appellants.

348 S.C. 33

557 S.E.2d 676

Sue BROWN, as Personal Representative of the Estate of James E. Brown, III, Respondent, v. John M. STEWART and J. David Gibson, Appellants.

No. 3408.

Court of Appeals of South Carolina.

Heard September 6, 2001.

Decided November 19, 2001.

Rehearing Denied January 16, 2002.

Harry A. Swagart, III, and Robert L. Reibold, both of Swagart, Walker & Reibold, of Columbia, for appellants.

Michael H. Montgomery and Douglas L. Novak, both of Montgomery, Patterson, Potts & Willard, of Columbia, for respondent.

CURETON, Judge:

James E. Brown, III brought this action against John M. Stewart and J. David Gibson (collectively, Appellants) alleging they made misrepresentations in securing his investment in Mid-Atlantic Administrators, Inc. and managed the corporation for their own benefit. Brown also sought an injunction to prevent the proposed sale of Mid-Atlantic's assets. Appellants appeal from a jury verdict in favor of Brown. We affirm in part and reverse in part.

FACTS

Mid-Atlantic was a South Carolina corporation formed in 1995 by Frank Altier (President), J. David Gibson (Vice President), John M. Stewart (Secretary/Treasurer), and John Silvers, with each holding a 25% ownership interest. The corporation operated as a third-party health insurance administrator (TPA).

In April 1996, Brown purchased a 20% interest in Mid-Atlantic, a total of seventy-five shares, for $100,000. Altier, Gibson, Stewart, and Silvers each retained a 20% interest in the corporation.

In a Letter of Intent dated December 5, 1997, Carolina Benefit Administrators, Inc. (CBA) offered to purchase the assets of Mid-Atlantic for $1,000,000, of which $300,000 was to be paid as consulting fees to Gibson, Silvers and Stewart, "the three principal producers." In a subsequent Letter of Intent dated January 12, 1998, CBA offered to purchase the assets of Mid-Atlantic for $725,000 including the consulting fees of $300,000 to be paid to Gibson, Silvers, and Stewart. The proposed sale was scheduled to take place on January 22, 1998.

After reviewing the terms of the proposed sale, Brown concluded Appellants had used his money to cash out their own investments and they were receiving excessive consulting fees. Brown instituted this lawsuit in January 1998 to recover the full value of his shares plus a return on his investment, alleging numerous misrepresentations had been made to him regarding Mid-Atlantic. He further alleged he relied on the representations in deciding to make his investment. Brown asserted claims for, among other things, fraud, negligent misrepresentation, and breach of fiduciary duty. He also sought a temporary restraining order (TRO) to prevent the proposed sale of Mid-Atlantic's assets. Appellants answered and counterclaimed for tortious interference with prospective contractual relations and sought actual damages of at least $555,000, as well as punitive damages.

On January 20, 1998, the trial court granted Brown's request for a TRO until a hearing could be held. The order provided, among other things, that Appellants were enjoined from individually collecting any funds for the sale of Mid-Atlantic but that "the corporation may collect the sales proceeds and deposit them in its account to be later distributed in accordance with orders of this court[.]" [Emphasis added.] On February 13, 1998, the court, with the consent of Appellants' counsel, continued the provisions of the TRO until further order.

At trial in October 1999, the court granted Brown's motion for a directed verdict on Appellants' counterclaim. The jury returned a verdict for Brown jointly and severally against Appellants for $50,000 actual damages on each of the three remaining causes of action for fraud, negligent misrepresentation, and breach of fiduciary duty.¹

Appellants filed motions for (1) a JNOV or new trial, and (2) election of remedies. The trial judge denied the motion for a JNOV or new trial. By separate order, the court granted Appellants' motion for an election of remedies, ruling Brown "is entitled to recovery on the breach of fiduciary duty verdict and either the fraud or the negligent misrepresentation verdict." The court stated Brown "must elect between remedies on the fraud and negligent misrepresentation awards, choosing to recover $50,000 in damages on only one of those verdicts." The court noted Brown's "recovery of damages on the breach of fiduciary duty verdict is unaffected by his election of remedies regarding the other verdicts." This appeal followed.²

LAW/ANALYSIS³

I. Fraud and Negligent Misrepresentation

Appellants first contend the trial court erred in denying their motions for a directed verdict, JNOV, or new trial on Brown's claims for fraud and negligent misrepresentation. We disagree.

The trial court, in ruling on motions for directed verdict and JNOV, is required to view the evidence and the inferences that reasonably can be drawn therefrom in the light most favorable to the party opposing the motions and deny the motions where either the evidence yields more than one inference or its inference is in doubt. Strange v. S.C. Dep't of Highways & Pub. Transp., 314 S.C. 427, 429-30, 445 S.E.2d 439, 440 (1994). "The trial court can only be reversed by this Court when there is no evidence to support the ruling below." Id. at 430, 445 S.E.2d at 440.

"A motion for JNOV may be granted only if no reasonable jury could have reached the challenged verdict." Gastineau v. Murphy, 331 S.C. 565, 568, 503 S.E.2d 712, 713 (1998). If more than one inference can be drawn from the evidence, the grant of a JNOV is improper and the case must be left to the jury's determination. Id. "The verdict will be upheld if there is any evidence to sustain the factual findings implicit in the jury's verdict." Shupe v. Settle, 315 S.C. 510, 515, 445 S.E.2d 651, 654 (Ct.App.1994).

A party asserting a claim for fraud in the inducement to enter into a contract must establish "(1) a representation, (2) its falsity, (3) its materiality, (4) knowledge of its falsity or reckless disregard of its truth or falsity, (5) intent that the representation be acted upon, (6) the hearer's ignorance of its falsity, (7) the hearer's reliance on its truth, (8) the hearer's right to rely thereon, and (9) the hearer's consequent and proximate injury." Parker v. Shecut, 340 S.C. 460, 482, 531 S.E.2d 546, 558 (Ct.App.2000). As noted in Parker:

The failure to prove any one of these elements is fatal to the claim. Generally, the representation must relate to a present or pre-existing fact rather than a statement of future events or an unfulfilled promise. An exception to the general rule is recognized for unfulfilled promises which were made by a party who never intended to fulfill the promise and only made it to induce the performance of another party.

Id. (citations omitted). "Fraud is not presumed, but must be shown by clear, cogent, and convincing evidence." Ardis v. Cox, 314 S.C. 512, 515, 431 S.E.2d 267, 269 (Ct.App.1993).

A plaintiff in a negligent misrepresentation action, must prove (1) the defendant made a false representation to the plaintiff, (2) the defendant had a pecuniary interest in making the statement, (3) the defendant owed a duty of care to see that he communicated truthful information to the plaintiff, (4) the defendant breached that duty by failing to exercise due care, (5) the plaintiff justifiably relied on the representation, and (6) the plaintiff suffered a pecuniary loss as the proximate result of his reliance on the representation. Hurst v. Sandy, 329 S.C. 471, 481, 494 S.E.2d 847, 852 (Ct.App.1997).

Thus, a key difference between fraud and negligent misrepresentation is that fraud requires the conveyance of a known falsity, while negligent misrepresentation is predicated upon transmission of a negligently made false statement. Gruber v. Santee Frozen Foods, Inc., 309 S.C. 13, 20, 419 S.E.2d 795, 799 (Ct.App.1992) ("Recovery in negligent misrepresentation cases is based upon negligent conduct and predicated upon a negligently made false statement where a party suffers either injury or loss as a consequence of relying upon the misrepresentation. It is not a fraud and deceit action; it is a negligence action. . . .") (citation omitted).

To support his claims for fraud and negligent misrepresentation, Brown alleges the following misrepresentations were made to him to induce him to invest $100,000 in Mid-Atlantic. First, Appellants told him that they (Gibson and Stewart) along with Silvers had each "invested" approximately $25,000 in the company and were given equal shares (25%) of the stock, and that Altier was given an equal amount of stock (25%) as "sweat equity" based on his expertise in running TPAs. However, Brown later discovered that Appellants had characterized their funds as "loans" instead of stock equity, and they had used his investment to repay the loans to themselves with interest of nearly 16%. Second, Appellants falsely represented to him that his investment would be used for computers, computer software, marketing, and additional personnel. However, as noted above, Brown's invested capital went instead to pay back the "loans" from Appellants. Third, appellant Gibson gave Brown a letter dated February 20, 1996 from Altier, Mid-Atlantic's president, which made specific representations about the number of employee lives and groups that were currently covered by Mid-Atlantic and its plans for acquiring certain other groups. The letter also stated that Mid-Atlantic was "in the final stages of linking our computers and expect[ed] to be operational by April 1, 1996."

As additional examples of Appellants' misrepresentations, Brown testified that when he asked Gibson for additional financial information after receiving the Altier letter, Gibson took Brown down the hall to see Stewart, who gave him a balance sheet. According to Brown, Stewart told him Mid-Atlantic was having cash flow problems, Appellants had...