Berger v. Security Pacific Information Systems, Inc.

• Decision Date: 05 April 1990
• Docket Number: No. 88CA0822,88CA0822
• Citation: 795 P.2d 1380
• Parties: 5 IER Cases 951 Roberta BERGER, Plaintiff-Appellee and Cross-Appellant, v. SECURITY PACIFIC INFORMATION SYSTEMS, INC., Defendant-Appellant and Cross-Appellee. . IV
• Court: Colorado Court of Appeals

Page 1380

795 P.2d 1380

5 IER Cases 951

Roberta BERGER, Plaintiff-Appellee and Cross-Appellant, v. SECURITY PACIFIC INFORMATION SYSTEMS, INC. Defendant-Appellant and Cross-Appellee.

No. 88CA0822.

Colorado Court of Appeals,

Div. IV.

April 5, 1990.

William E. Myrick, P.C., William E. Myrick, Gregory B. Washington, Andrew T. Brake, P.C., Andrew T. Brake, Denver, for plaintiff-appellee and cross-appellant.

Holme Roberts & Owen, Edmond F. Noel, Jr., Katherine J. Peck, Denver, for defendant-appellant and cross-appellee.

Opinion by Judge HUME.

Defendant, Security Pacific Information Services, Inc., (SPIS) appeals the judgment entered on a jury verdict in favor of plaintiff, Roberta Berger, on a claim for fraudulent concealment arising out of her hiring and termination by SPIS. Berger was hired by SPIS in January 1986, and was terminated some eight months later, after the project she had been hired to manage was discontinued. She contended that SPIS had fraudulently failed to disclose a substantial, known risk that the project would be discontinued in the near future. The jury awarded her both actual and punitive damages on her fraudulent concealment claim. We affirm.

SPIS contends that: (1) as a matter of law, it had no duty to disclose information about its plans and financial condition to a prospective employee; (2) even if it had such a duty, there was insufficient evidence to establish a breach; (3) nondisclosure by SPIS was not the cause of Berger's financial losses; and (4) the evidence did not support an award of punitive damages.

The evidence, viewed in the light most favorable to Berger, see Vigil v. Pine, 176 Colo. 384, 490 P.2d 934 (Colo.1971), established the following. Security Pacific Corporation (SPC), the parent corporation of SPIS, acquired SPIS in June 1984 from a corporation that was then in bankruptcy. SPIS was not profitable when acquired by SPC, and a new president, Mitchell, was hired to "turn the company around."

In 1985, in order to use some of SPIS's excess computer capacity, its management personnel decided to offer disaster recovery services to companies dependent on computers in their operations. Disaster recovery services provide backup computer facilities to allow businesses to continue to operate after damage to their computer systems.

SPIS's disaster recovery service, named Recovery Plus, suffered severe financial losses in 1985. SPIS's management personnel knew that its annual revenues fell far short of projections, and that the shortfall amounted to $61,000 for December alone. Recovery Plus's revenues continued to fall short of projections in the first quarter of 1986.

SPIS as a whole also suffered a poor financial performance in 1985. It sustained an after tax loss of $2.3 million despite severe cost cutting measures. Increasing losses in six figures per month continued into 1986.

Despite the poor financial performance of SPIS and Recovery Plus, SPIS's managers began developing a plan for the revitalization of Recovery Plus in the fall of 1985. They knew that starting a disaster recovery service would require "a significant commitment of capital resources," and estimated annual costs at between $700,000 to over $1 million. They estimated that it would take nearly two years to break even. They also questioned whether the expenses would be worth the additional revenue, and whether the funds and resources required could be used in a more profitable venture.

The minutes of a meeting held to discuss the plan on September 11, 1985, conclude with a statement that "Mike [Mitchell] would like to see a detailed plan for disaster recovery from now until March 1, 1986--if we don't meet that plan, we will shut the product down," and a management memo dated October 1, 1985, described the condition of Recovery Plus as "very rough." Thus, from the information available at the end of 1985, SPIS's managers knew there was a substantial risk that Recovery Plus would be discontinued.

In spite of the serious problems in its financial circumstances, SPIS continued its attempts to rehabilitate the Recovery Plus project, and it engaged a corporate recruiter to find a sales manager for that project. On November 15, 1985, the recruiter contacted plaintiff, who was then living in New Orleans where she was working to start her own disaster recovery business. She initially interviewed with SPIS in December 1985.

During the interview, Mitchell told plaintiff that SPIS had recently been acquired from a company in bankruptcy, and that it was losing money, although he did not say how much. When plaintiff asked Mitchell about the company's financial status, he told her that SPIS had no detailed financial records but that it was a wholly owned subsidiary of SPC, and he referred her to an annual report showing SPC to be a multi-million dollar company. Mitchell also referred Berger to a magazine article which stated that SPIS had so many Recovery Plus customers that it had to turn away business.

In fact, SPIS had only two or three regular customers under contract for disaster recovery services. Although Mitchell knew that his own job was at risk because of the company's poor performance, he told Berger that his corporate life at SPIS was just beginning. He also told her he had a strong personal commitment to Recovery Plus, but did not tell her of the risk that the project might be discontinued in March.

After a second interview in January, SPIS offered Berger a position as sales manager for Recovery Plus on January 16, 1986, at an annual salary of $45,000. She accepted, and began work as an at-will employee on February 10, 1986.

On March 31, 1986, some seven weeks after plaintiff started work, SPIS discontinued Recovery Plus because a newly developed accounting system showed that the project was losing $856,000 a year. The new accounting system also showed other unprofitable areas in SPIS. As a result, between May and September 1986, SPIS terminated 38 employees, and sought replacements for only nine.

Because plaintiff expressed concern about her job security, Mitchell assured her that she had nothing to worry about and that she would always have a place with the company. After hearing these assurances, plaintiff bought a house in Denver with financing through SPC. Mitchell gave her temporary assignments including an unsuccessful attempt to start a disaster recovery service limited to users of certain types of equipment. However, SPIS continued to perform poorly, and Mitchell was replaced on September 5, 1986. Berger was terminated six days later.

After her termination, plaintiff defaulted on her home loan, and eventually sold the house for a loss. She incurred expenses moving to the east coast, where her husband had found employment, and was out of work until March 1987. She was intermittently employed until the trial.

I.

SPIS contends that it had no duty to disclose any financial information or plans about Recovery Plus to plaintiff when she interviewed for a position as Recovery Plus sales manager. Under the circumstances presented by this record, we disagree.

To establish a claim for fraudulent concealment or non-disclosure, the plaintiff must show that the defendant had a duty to disclose the information. See Bair v. Public Service Employees Credit Union, 709 P.2d 961 (Colo.App.1985). Whether a defendant had a duty to disclose a particular fact is a question of law. See Van Winkle v. Transamerican Title Insurance Co., 697 P.2d 784 (Colo.App.1984).

Stated generally, a person has a duty to disclose to another with whom he deals facts that "in equity or good conscience" should be disclosed. See Eckley v. Colorado Real Estate Commission, 752 P.2d 68 (Colo.1988). Under Restatement (Second) of Torts § 551(2)(e)(1965), one party to a business transaction has a duty to disclose to the other "facts basic to the transaction, if he knows that the other is about to enter into it under a mistake as to them, and that the other, because of the relationship between them, the customs of the trade, or other objective circumstances, would reasonably expect a disclosure of those facts." Bair v. Public Service Employees Credit Union, supra. More specifically, a party has a duty to disclose if he has stated facts that he knows will create a false impression unless other facts are disclosed. Cahill v. Readon, 85 Colo. 9, 273 P. 653 (1928). See Restatement (Second) of Torts § 551(2)(b) (1965).

Here, there was evidence that Mitchell made statements indicating that SPIS was financially secure because it had the backing of SPC, and that Recovery Plus was a potentially successful project with a bright future. These statements would create a false impression without disclosure of the known, serious financial problems of SPIS and the known, substantial risk that Recovery Plus would be discontinued in the near future. SPIS recruited Berger specifically to manage sales for Recovery Plus, and induced her to move to Denver from New Orleans and give up her attempt to start her own business. Under these circumstances, a substantial, known risk that Recovery Plus would be discontinued in a few weeks was a fact that "in equity or good conscience" should have been disclosed. See Eckley v. Colorado Real Estate Commission, supra. Thus, we conclude that the trial court did not err in submitting the fraudulent concealment claim to the jury.

SPIS argues that imposition of a duty of disclosure to prospective employees undermines the rule that an employee for an indefinite period may be terminated at will. We disagree.

An employer's right to terminate an at-will employee at any time without cause is not inconsistent with an action for fraudulently inducing such employee's acceptance of employment. See Bernoudy v. Dura-Bond Concrete Restoration, Inc., 828 F.2d 1316 (8th Cir.1987); Redies v. Nationwide Mutual Insurance Co., 711 F.Supp. 570 (D.Colo.1989); Sea-Land Service, Inc. v. O'Neal, 224 Va. 343, 297 S.E.2d 647 (1982). But...