First Union v. Steele Software Systems Corp.

Decision Date17 December 2003
Docket NumberNo. 1061,1061
Citation154 Md. App. 97,838 A.2d 404
PartiesFIRST UNION NATIONAL BANK v. STEELE SOFTWARE SYSTEMS CORPORATION.
CourtCourt of Special Appeals of Maryland

Andrew L. Frey (Lauren R. Goldman, Mayer, Brown, Rowe & Maw, on the brief), all of New York, NY. (Miriam R. Nemetz, Mayer, Brown, Rowe & Maw, on the brief), of Washington, D.C. (James E. Gray, Stephen E. Marshall, Mitchell Y Mirviss, Venable, Baetjer and Howard, L.L.P., on the brief), all of Baltimore, for appellant.

Laurence H. Tribe (Harvard University Hauser Hall, on the brief), of Cambridge, MA. (Stephen L. Snyder, Andrew G. Slutkin, Mark C. Kopec, Snyder, Slutkin, Lodowski & Kopec, on the brief), (Byron L. Warnken, on the brief), of Baltimore, for appellee.

Panel: ADKINS, KRAUSER, and THEODORE G. BLOOM, (Retired, Specially Assigned) JJ. ADKINS, Judge.

In this high stakes business dispute, we are asked to review evidence of a lengthy business negotiation between a large bank and one of its vendors that culminated in a written contract, and the bank's deliberate breach of that contract. We must determine whether the evidence was sufficient to support the vendor's claim that the bank, never intending to perform, fraudulently induced the vendor to enter the contract. In doing so, we differentiate between actionable fraudulent misrepresentations and indefinite generalities that do not support fraud in the context of discussions between two sophisticated businesses. We also analyze whether an ambiguous "best efforts" clause is enforceable in contract, and explore the limits of predicating a fraud claim on the bank's intentions with respect to performance of that clause.

We shall reverse a $39 million jury verdict for compensatory damages and a $200 million verdict for punitive damages, both entered against appellant First Union National Bank ("First Union") in favor of Steele Software Systems Corporation ("3S") on a fraud theory. 3S's theory was that First Union fraudulently induced 3S to enter into a written Service Agreement dated November 29, 1997 ("SA"), under which 3S would provide certain appraisal and title services in connection with residential real estate loans made by First Union to its customers without intending to perform thereunder. We shall affirm a judgment for approximately $37 million against First Union for breach of contract. The recovery by 3S is based on First Union's failure to fulfill its contractual obligation to purchase these real estate settlement services from 3S as called for under the SA.

We answer the following questions presented by First Union:

I. Whether First Union was entitled to judgment on 3S's fraud claim because 3S failed to prove the elements of fraud.
II. Whether First Union is entitled to judgment with respect to 3S's claim that it breached the "best efforts" clause of the SA.
III. Whether the compensatory damages award must be set aside because the circuit court impermissibly limited the cross-examination of 3S's damages expert.
IV. Whether the compensatory damage award must be set aside because it encompassed transactions outside the geographic scope of the SA.

We answer yes to question I, and no to questions II, III, and IV. We do not reach First Union's questions regarding the amount of damages in the fraud claim, or the amount of punitive damages, because of our rejection of 3S's fraud claim. Nor do we reach First Union's contention that 3S's fraud claim was improperly predicated on alleged theft of its business methods and is therefore preempted by the Maryland Uniform Trade Secrets Act.

FACTS1 AND LEGAL PROCEEDINGS
3S Provides Settlement Services To First Union

3S is a settlement service company, founded in 1987, that introduced First Union to a new, centralized and automated system for obtaining title searches and appraisals for home equity loans. First Union, a large bank with multiple branches in the eastern United States, makes a high volume of residential home equity loans. The new system introduced by 3S enabled First Union to move away from a paper-based title search and appraisal system that was individual to each branch, to a computer-based, centralized system.

3S first made a presentation about an automated title and appraisal processing system known as "ATAPS" to Glenn Kinard, manager of First Union's consumer lending business in Washington, D.C., in the fall of 1994. Kinard retained 3S to conduct a pilot program at a few First Union branches in the D.C. region. During the pilot, an email sent by First Union to the branches participating in the pilot said, "You are the pilot group testing this method of processing for the entire company, so your active participation in the use and evaluation of 3S is the cornerstone for our future efforts."

3S later began serving 15 to 20 branches in that area. First Union also retained 3S to automate and centralize a pilot direct mail campaign for home equity loans in Roanoke, Virginia. 3S then performed the title searches and appraisals associated with the transactions generated by the campaign. Scott Steele advised Kinard that 3S could bring centralized, automation technology and standardization to First Union. Kinard was "very excited" about this program.

Kinard told Steele that "this is such a unique opportunity, I want to get you to [First Union's headquarters in] Charlotte sooner [rather] than later." At First Union's request, Steele and another 3S officer flew to Charlotte and made a presentation to First Union officers Tom Muse, Parkes Dibble, Trent Thompson, and Doug Crisp. Parkes Dibble, vice president of Risk Management, told Steele at the meeting "that if everything I had presented, at a high level again, was real, and they had an opportunity to do due diligence and inspect what I had, that they would see this as being a long-term mutually beneficial relationship." According to Steele, Dibble also told him that "if we delivered on our promise to deliver the concept of centralization and automation, executed what we were supposed to do, and helped them in their endeavor, that we would be their long-term partner.... We could be the beneficiary of all the transactions that they could send to us."

At that same meeting Crisp, First Union's senior officer in charge of the Consumer Credit Division, asked Steele whether his firm "could handle 12,000 transactions on a monthly basis."2 Steele told Crisp that he "could not" at that time, but that he "could put together and implement a staged process where [3S] could build to that level." Crisp later told him that Steele's honesty "made [Crisp] feel really good, and he figured he would leave it to Parkes [Dibble] to work out the rest."

In his testimony, Dibble confirmed that he and Steele discussed a potential ten-year relationship, adding, "my term of relationship goes on for a long time." Dibble explained that First Union would attempt to give 3S all the transactions it could handle within First Union's "2,000 approximate branch blueprint": "I would put him in a position to where he could get that. That is correct." "It was not an exclusive, it was not meant to be everything, but that he could handle a significant portion of volume, yes." Dibble considered that a contract between the bank and 3S would be the "first step to a long road partnership." Dibble thought that 3S's system provided a "big competitive advantage to the bank." Doug Crisp, a senior vice president and Dibble's boss, acknowledged that he was aware that Dibble was "discussing a long-term relationship" with 3S.

On January 23, 1995, Dibble brought Muse, Thompson, and other officers of the bank to Baltimore to inspect 3S. Steele told them that the presentation "was confidential in nature and [he] expected them to treat it as such."3 Muse responded, "Don't worry about that. We won't go into this business. We'll just buy the damn thing."

Dibble left First Union in June 1996, and Bill Clewis took over contract negotiations with Steele. Steele testified that when Clewis took over, he told Steele "not to worry. Nothing's changed and he was aware of what I had discussed with Parkes [Dibble] and we were the company and so I trusted these people." Dibble confirmed that, although he never explicitly told Clewis what he said to Steele, "Bill knew pretty much what was going on. It wasn't a one-way communication." Clewis acknowledged that he told Steele, "As we grow, you'll grow." He "expected once we revved up our business, that he would be a vendor, his business would grow with ours." Clewis' supervisor, Crisp, conveyed the same message.

As part of Steele's presentation at the December 8, 1994 and January 23, 1995 meetings, Steele proposed a long term service contract that would have a five-year term with an option for a five-year renewal. According to Dibble, he refused to commit to that term, but said that if 3S delivered on its promises and achieved centralization and automation of home equity loans, 3S would be First Union's "long-term partner."

Dibble said that he believed the competitive advantage that Steele was offering the bank was his electronic method of performing appraisals, "his ability to do on-line appraisals. That was—the bank's attempt was to shorten the home equity cycle by essentially integrating Scott into—from 3S into our application handl[ing] system[.]"

In May 1995, 3S made another presentation to First Union, seeking to sell the bank a range of automated and centralized loan settlement services for all of its offices nationwide. It again proposed that the bank enter into some kind of formal, long-term relationship with it, suggesting that they create a joint venture or that First Union purchase 3S debentures that would give the bank a right of first refusal to acquire the company. Steele explained what a joint venture would mean:

It [was] more of a control business arrangement, where First Union has a volume of transactions that it [is] passing out to third parties today, and
...

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