City of Richmond, Va. v. Madison Management Group, Inc., s. 89-2748

Citation918 F.2d 438
Decision Date06 November 1990
Docket NumberNos. 89-2748,89-2798 and 89-2801,89-2776,s. 89-2748
Parties, 31 Fed. R. Evid. Serv. 697 CITY OF RICHMOND, VIRGINIA, Plaintiff-Appellee, v. MADISON MANAGEMENT GROUP, INC.; GHA Lock Joint, Inc., Defendants-Appellants (Two Cases). CLEVEPAK CORPORATION; Marbro Company, Inc., Defendants & Third Party Plaintiffs, v. WHITMAN, REQUARDT AND ASSOCIATES, Third Party Defendant (Two Cases). CITY OF RICHMOND, VIRGINIA, Plaintiff-Appellant, v. MADISON MANAGEMENT GROUP, INC.; GHA Lock Joint, Inc.; Marbro Company, Inc., Defendants-Appellees. CLEVEPAK CORPORATION, Defendant & Third Party Plaintiff, v. WHITMAN, REQUARDT AND ASSOCIATES, Third Party Defendant. CITY OF RICHMOND, VIRGINIA, Plaintiff-Appellee, v. MARBRO COMPANY, INC., Defendant & Third Party Plaintiff-Appellant, and Madison Management Group, Inc.; GHA Lock Joint, Inc., Defendants. CLEVEPAK CORPORATION, Defendant & Third Party Plaintiff, v. WHITMAN, REQUARDT AND ASSOCIATES, Third Party Defendant.
CourtUnited States Courts of Appeals. United States Court of Appeals (4th Circuit)

Robert Franklin Brooks, Sr., Hunton & Williams, Richmond, Va., Stephen Joseph Annino, Kasimer & Ittig, P.C., Falls Church, Va., argued (Joseph H. Kasimer, Kasimer & Ittig, P.C., Falls Church, Va., G.H. Gromel, Jr., Matthew J. Calvert, Hutton & Williams, Richmond, Va., Kent E. Mast, Alan M. Wolper, Peter H. Strott, Scott R. Phillips, Hunton & Williams, Atlanta, Ga., on the brief), for defendants-appellants.

David Henry Worrell, Jr., McGuire, Woods, Battle & Boothe, Richmond, Va., argued (E. Duncan Getchell, Jr., William G. Broaddus, Jr., J. William Boland, Charles Wm. McIntyre, Jr., McGuire, Woods, Battle & Boothe, Richmond, Va., G. Timothy Oksman, City Atty., Michael K. Jackson, David B. Kearney, Asst. City Atty., Richmond, Va., on the brief), for plaintiff-appellee.

Before HALL and MURNAGHAN, Circuit Judges, and TILLEY, United States District Judge for the Middle District of North Carolina, sitting by designation.

MURNAGHAN, Circuit Judge:

Interpace Corporation ("Interpace") was a manufacturer of concrete pipe. Interpace sold some of its pipe to Marbro Company, Incorporated ("Marbro"), for use in a contract between Marbro and the City of Richmond ("the City"), under which Marbro was to construct a water transmission main. Some of that pipe has proved to be defective. The case before us concerns the City's attempts to impose liability for the defective pipe upon Marbro and two entities, GHA Lock Joint, Incorporated ("GHA"), and Madison Management Group ("Madison"), which are alleged to be Interpace's successors in interest. For the reasons set forth in the lengthy opinion that follows, we affirm the jury's finding that Madison and GHA are liable for fraud and that Marbro is not liable for breach of contract. We also affirm the award of punitive damages against Madison and GHA. However, we remand the case for a new trial as to damages on the fraud count. Marbro shall not be required to defend in the additional proceedings.


At the center of the controversy is a water transmission line that runs through Henrico County, Virginia, and services the City of Richmond. A vital component of the line, obviously, is concrete pipe, an essential element of which is wire. The function of wire is to provide the pipe with structural strength.

Wire is classified in two ways: by class number, which measures strength, and by gauge number, which measures width. Wire strength has two aspects. Longitudinal or tensile strength measures the wire's resistance to breaking if pulled at its ends; ductile strength measures a wire's ability to bend without breaking. Wire that possesses low ductility is said to be "brittle."

Wire is made by drawing a metal rod through dies. Evidence presented at trial indicated that the speed with which wire is drawn can affect both the ductile and tensile strength of the wire. Evidence also showed that a wire producer could create a wire of sufficiently high tensile strength while using less steel if the wire is drawn more quickly.

Interpace produced pipe that was made with Class IV wire. Some of the wire was 6-gauge and some was 8-gauge. During the 1970s, Interpace sold its Class IV wire to various purchasers, some of whom experienced difficulties in the form of pipe ruptures. Evidence presented at trial suggested that the pipe ruptures resulted from the wire's alleged inadequate ductility, which made the wire brittle and created longitudinal splits. Evidence also indicated that Interpace was aware that some of its pipe was defective and that the drawing process in producing the Class IV wire may have been the cause of the defects.


On February 2, 1979, the City issued an invitation to bid on the contract for construction of the water transmission line. Interpace apparently began to review the bid invitation documents shortly thereafter. On March 9, 1979, Interpace supplied to Marbro, at that time a potential recipient of the general contract, a proposal to manufacture and supply the pipe for the project. On March 15, 1979, Marbro submitted its bid on the project. The firm of Whitman, Requart & Associates ("WRA"), the City's engineers, recommended to the City that the contract be awarded to Marbro, whereupon Marbro and Interpace orally agreed that Interpace would supply the pipe provided that Marbro was ultimately awarded the contract. In the course of the City's determination regarding award of the contract, the City reviewed Interpace's specifications to ensure that Interpace could supply pipe that would conform to the project's needs. On April 30, 1979, Marbro and Interpace formed a contract under which Interpace agreed to supply conforming pipe. On May 8, 1979, the City awarded Marbro the general contract. On May 16, 1979, Interpace "certif[ied]" to Marbro that it would supply pipe that "will be manufactured in accordance with the Contract Specifications." App. at 1480. Marbro ultimately commenced constructing the pipeline.


On July 2, 1981, GHA acquired Interpace's pipe manufacturing assets. Interpace remained in business although it no longer manufactured pipe. In September 1982, mortar spalling was discovered on a portion of the transmission line. Spalling is the separation of sections or pieces of the exterior mortar coating that protects the wire used in making the pipe. For reasons that are discussed in more detail infra, GHA assisted in the repair of the spalling. That spalling was not the problem that ultimately gave rise to the lawsuit.

On August 14, 1987, after completion of the project, 1 one segment of the pipe supplied by Interpace burst. On October 14, 1988, another segment of the pipe burst. There have been no subsequent failures of any of the pipe in the transmission line. It is these two pipe failures that prompted the City to bring the instant lawsuit.


The procedural history of the City's suit is somewhat complex and includes details that need not concern us. For our purposes, it is enough to note the following. The City sought recovery from Madison, GHA, and Marbro. Through a variety of corporate maneuvers, Madison had become an acknowledged successor in interest of Interpace, and the City sought to hold Madison liable for Interpace's actions on a successor in interest liability theory. The City also sought successor in interest recovery against GHA. Pretrial motions disposed of various claims and the City ultimately went to trial asserting fraud and breach of contract by Interpace, for which Madison and GHA were alleged to be liable, and breach of contract against Marbro. As damages, the City sought the cost of replacing the pipeline. The case was tried before a jury.

The jury found that Interpace had committed fraud. It further found that Madison and GHA were liable for Interpace's fraud. The jury also found that Interpace had breached its contract and it found that Madison and GHA were liable for that breach. Finally, the jury found that Marbro was not liable for breach of contract. 2

As to damages, the jury found that, despite the presence of liability, the City was entitled to nothing on its breach of contract claim against Madison and GHA. On the fraud claims, the jury indicated on both the verdict form for the suit against Madison and the verdict form for the suit against GHA that it had awarded $5,000,000 in compensatory damages and $500,000 in punitive damages. Upon motion by both parties for clarification of the jury award, the district court ruled that the jury intended to award $10,000,000 in compensatory damages jointly and severally, and $500,000 severally against Madison and GHA.

The jury result has produced the appeal that we must now resolve. Madison and GHA, to which we shall refer collectively as "the Pipe Defendants," have alleged eleven errors below, several of which apply only to GHA. Marbro has made a conditional appeal. Marbro, obviously, hopes that we do not disturb the result reached below. However, if we grant the Pipe Defendants a new trial, Marbro asserts, we should not grant the City a new trial as against Marbro. For its part, the City also has made a conditional appeal. Should we grant a new trial, the City claims, we should include Marbro as a defendant and we should allow the City to proceed against the Pipe Defendants on a constructive fraud theory. We now begin our descent into the fourteen rings of City of Richmond v. Madison, GHA and Marbro.


The Pipe Defendants argue that, for several reasons, the district court should not have allowed the City's fraud claim to reach the jury. First, they contend that the claim is time-barred. Second, they point out that the City sought to recover the cost of replacing the pipe system and that such damages constitute economic loss. They argue that Virginia law, which governs the controversy, does not allow for the recovery of economic loss damages in tort actions such as the City's. Third, they argue...

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