Disner v. Westinghouse Elec. Corp.

• Citation: 726 F.2d 1106
• Decision Date: 23 March 1984
• Docket Number: No. 82-1078,82-1078
• Parties: Burton A. DISNER, doing business as Burton A. Disner, Realtors, Plaintiff-Appellee, v. WESTINGHOUSE ELECTRIC CORPORATION, a Pennsylvania corporation qualified to do business in Michigan, Defendant-Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 1106

726 F.2d 1106

Burton A. DISNER, doing business as Burton A. Disner Realtors, Plaintiff-Appellee, v. WESTINGHOUSE ELECTRIC CORPORATION, a Pennsylvania corporation qualified to do business in Michigan Defendant-Appellant.

No. 82-1078.

United States Court of Appeals, Sixth Circuit.

Argued Oct. 6, 1983.

Decided Jan. 30, 1984.

Rehearing and Rehearing En Banc Denied March 23, 1984.

W.A. Steiner, Jr., argued, Dykema, Gossett, Spencer, Goodnow & Trigg, Detroit, Mich., for defendant-appellant.

William R. Vanderkloot, argued, Bloomfield Hills, Mich., for plaintiff-appellee.

Before CONTIE, Circuit Judge, PHILLIPS and CELEBREZZE, Senior Circuit Judges.

CELEBREZZE, Senior Circuit Judge.

In this diversity of citizenship case, defendant-appellant Westinghouse Electric Company (Westinghouse) appeals from a jury verdict awarding the sum of $99,241.95 to plaintiff-appellee, Burton A. Disner. Disner claimed that, as a result of certain misrepresentations, he was fraudulently induced to enter into an exclusive real estate brokerage agreement and a subsequent settlement of claims arising from that agreement. Both the agreement and the settlement were made with Urban Systems Development Company (USDC), a wholly owned Westinghouse subsidiary. ¹ The district court instructed the jury to return a verdict in favor of Disner if he was able to establish, by a preponderance of the evidence, that he was fraudulently induced to enter into the brokerage agreement and subsequent settlement. Because fraud must be established by the stricter standard of clear and convincing evidence, we reverse.

The parties entered into a written agreement which granted Disner the exclusive right to find a buyer for a parcel of land, located in West Bloomfield, Michigan. ² Paragraph (D) of the agreement provided that Disner was entitled to receive a commission for the sale of the West Bloomfield property only if he previously registered the purchaser's name with USDC. Disner was precluded from registering the names of prospective purchasers with whom Westinghouse had previous contact. Prior to signing the agreement, Disner asked Terrell E. Busby, USDC Assistant to the President, if he knew of any prospective buyer with whom USDC "previously had contact". Busby indicated that he knew of no one who, at that time, would be covered by the provision. According to Disner, Busby's statement fraudulently induced him to enter into the brokerage agreement.

On December 1, 1976, Disner discussed the West Bloomfield property with Harold Beznos, a partner in a local developing concern, Beztak Company. Disner thereafter registered with USDC a number of prospective buyers, including Beznos and Beztak. USDC Controller, Byron R. Koste, informed Disner that all prospects registered for the West Bloomfield property had been accepted, except for Beznos and Beztak. The stated reason for USDC's refusal to register either Beznos or Beztak was that USDC personnel, including Busby, had "extensive prior interface and property discussion" with Beznos regarding the West Bloomfield property. Accordingly, USDC invoked that portion of the agreement which prevented Disner from registering prospective purchasers with whom USDC "previously had contact." However, Koste offered to extend the exclusive agency agreement; Disner accepted the extension. ³

Following USDC's refusal to register either Beznos or Beztak, a series of letters were exchanged between the parties. In a letter dated February 21, 1977, Koste wrote Disner: "As discussed with you previously, if a sale is ever consummated with Mr. Beznos, or Beztak, (which prospects are quite clouded ) USDC is willing to pay you $2,500.00 in order to dispose of and settle the matter without further Beznos/Beztak related effort on your part." (emphasis added). Disner's second allegation of fraudulent misrepresentation is based on Koste's assertion that the prospects of a sale to either Beznos or Beztak were "quite clouded". Disner accepted the proposed settlement offer. ⁴

On September 13, 1977, an agreement of sale was entered into between USDC and Beztak. Pursuant to the settlement agreement USDC sent Disner a check in the amount of $2,500.00. Disner rejected the check and commenced this lawsuit.

The primary issue raised in this appeal concerns the burden of proof required to establish a claim of fraud in Michigan.

Courts in various states have disagreed concerning whether a higher standard of proof is appropriate in cases involving fraud. Compare, Barrett v. Shanks, 382 Ill. 434, 47 N.E.2d 481 (1943), with Clinton v. Smith, 268 Cal.App.2d 550, 74 Cal.Rptr. 745 (1968) and Household Finance Corp. v. Altenberg, 5 Ohio St.2d 190, 214 N.E.2d 667 (1966). In this diversity case, we are bound by the substantive law of Michigan. Erie R.R. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938); Batesole v. Stratford, 505 F.2d 804 (6th Cir.1974) (In reviewing jury instructions given by the district court in a diversity action, the substantive content is governed by state law.). If substantial error exists in an instruction to a jury and a party is prejudiced by such error, a reviewing court must grant a new trial. E.g., Camden Fire Insurance Company v. Kaminski, 352 Mich. 507, 90 N.W.2d 685 (1958). See Weekes v. Michigan Chrome & Chemical Company, 352 F.2d 603 (6th Cir.1965). ⁵

According to Disner, Michigan law requires that fraud be established by a preponderance of the evidence. ⁶ Indeed, Disner contends that the burden of proof required in all Michigan civil cases is the preponderance of the evidence.

There are but two classes of cases recognized as requiring different rules of proof--criminal cases, where a conviction is warranted only by proof beyond a reasonable doubt; and cases not criminal, where a preponderance of proof satisfies the legal requirement.

White v. Production Credit Association, 76 Mich.App. 191, 256 N.W.2d 436, 438 (1977), quoting Stephenson v. Golden, 279 Mich. 710, 276 N.W. 849 (1937). We disagree. The overwhelming majority of Michigan courts which have considered the quantum of proof required to establish fraud have applied the clear and convincing evidence standard. ⁷ E.g., Hi-Way Motor Company v. International Harvester Company, 398 Mich. 330, 336, 247 N.W.2d 813 (1976); Youngs v. Tuttle Hill Corp., 373 Mich. 145, 128 N.W.2d 472 (1964); Gorman v. Soble, 120 Mich.App. 831, 328 N.W.2d 119 (1983); Higgins v. Lawrence, D.P.M., P.C., 107 Mich.App. 178, 309 N.W.2d 194 (1981). See, United States For Use of U.S. Steel v. Construction Aggregates Corporation, 559 F.Supp. 414, 426 (E.D.Mich.1983); U.S. Fibres, Inc. v. Proctor & Schwartz, Inc., 358 F.Supp. 449, 460 (E.D.Mich.1972), aff'd, 509 F.2d 1043 (6th Cir.1975). Moreover, and of substantial significance, the most recent Michigan Supreme Court pronouncement concerning this issue indicates that fraud must be proven by "clear, satisfactory and convincing evidence." ⁸ Hi-Way Motor Company v. International Harvester Company, 398 Mich. 330, 247 N.W.2d 813, 816 (1976).

A standard of proof serves two interrelated functions. First, it allocates the "risk of error" between the parties. Addington v. Texas, 441 U.S. 418, 423, 99 S.Ct. 1804, 1807, 60 L.Ed.2d 323 (1979). Second, it indicates "the relative importance attached to the ultimate decision." Id.

Courts have recognized, perhaps because the nature of the evidence in cases involving allegations of fraud is often circumstantial, that claims of fraud can be fabricated easily. See Herman & MacLean v. Huddlesten, 459 U.S. ----, 103 S.Ct. 683, 74 L.Ed.2d 548 (1983). Thus, there is a high risk that an error will be made in determining whether a defendant has committed fraud. Even the early Chancery courts recognized the high risk of error and required that fraud be established by clear and convincing evidence. ⁹ E.g., Maxwell Land-Grant Case, 121 U.S. 325, 381, 7 S.Ct. 1015, 1028, 30 L.Ed. 949 (1887) ("We take the general doctrine to be, that when in a court of equity it is proposed to set aside ... a written instrument for fraud ... in the execution of the instrument itself, the testimony on which this is done must be clear, unequivocal, and convincing, and that it cannot be done upon a bare preponderance of the evidence which leaves the issue in doubt."). As a general principle, one responsibility of the legal process is to promulgate rules which will serve to minimize the risk of error. Accordingly, the higher standard of clear and convincing evidence is justified precisely because it guards against the risk of error inherent in cases involving allegations of fraud.

The higher standard of proof also serves to protect interests deemed to be of particular importance. ¹⁰ A determination that the defendant has committed either an intentional or innocent misrepresentation implicates the defendant's reputation. Although a defendant's pecuniary interest in fraud litigation may not be burdensome, the damage to his reputation may be great. Reputation is an interest of particular importance and, accordingly, Michigan has chosen to "reduce the risk to the defendant of having his reputation tarnished erroneously by increasing the plaintiff's burden of proof." Addington v. Texas, 441 U.S. 418, 424, 99 S.Ct. 1804, 1808, 60 L.Ed.2d 323 (1979). In summary, the higher burden of proof which Michigan requires is justified because of the "risk of error" and the "importance of the interests" involved in fraud litigation.

Although the clear and convincing evidence standard which Michigan has adopted requires a higher degree of proof than the preponderance of the evidence standard, see, e.g., Addington v. Texas, 441 U.S. 418, 99 S.Ct. 1804, 60 L.Ed. 323 (1979); Hobson v. Eaton, 399 F.2d 781, (6th Cir.1968), cert. denied, 394 U.S. 928, 89 S.Ct. 1189, 22 L.Ed.2d 459 (1969); Marlene Industries Corporation v. NLRB, 712 F.2d 1011 (6th Cir.1983); Baker v. Baker, 411 Mich. 567, 309 N.W.2d 532 (1981), Michigan courts have not...