Flegles, Inc. v. Truserv Corp., No. 2006-SC-000471-DG.

• Citation: 289 S.W.3d 544
• Decision Date: 19 February 2009
• Docket Number: No. 2007-SC-000155-DG.,No. 2006-SC-000471-DG.
• Parties: FLEGLES, INC., Appellant/Cross-Appellee, v. TRUSERV CORPORATION, Appellee/Cross-Appellant.
• Court: United States State Supreme Court (Kentucky)

289 S.W.3d 544

FLEGLES, INC., Appellant/Cross-Appellee, v. TRUSERV CORPORATION, Appellee/Cross-Appellant.

No. 2006-SC-000471-DG.

No. 2007-SC-000155-DG.

Supreme Court of Kentucky.

February 19, 2009.

Rehearing Denied August 27, 2009.

Jim L. Flegle, Loewinsohn, Flegle & Deary, LLP, Dallas, TX, Michael Wayne, Bardwell, KY, Counsel for Appellant/Cross-Appellee.

Jean Winfield Bird, Virginia Hamilton Snell, Wyatt, Tarrant & Combs, LLP, Louisville, KY, Counsel for Appellee/Cross-Appellant.

Opinion of the Court by Justice ABRAMSON.

Following a five-day trial, a Carlisle County jury awarded Flegles, Inc., a family-owned hardware and lumber business located in Bardwell, Kentucky, $1.3 million in damages allegedly arising from the company's 1999-2000 construction of and move to an expanded store. Flegles claimed that the ill-fated move was induced by fraudulent business projections provided by its wholesale cooperative, TruServ Corporation,¹ and further that TruServ's misrepresentations about its prices and its own operating losses in the late 1990s induced Flegles to remain a member of the cooperative and to proceed with its expansion. Holding that as a matter of law none of the alleged misrepresentations could support a claim for fraud, the Court of Appeals reversed and in effect ordered the dismissal of Flegles' complaint. We granted Flegles' petition for discretionary review to consider its contention that the Court of Appeals misapplied controlling precedent. We also granted TruServ's cross-petition for discretionary review to consider its contention that the trial was tainted by biased jurors. Agreeing with the Court of Appeals that TruServ is entitled to judgment as a matter of law, we affirm that Court's ruling and so need not address TruServ's cross-petition.

RELEVANT FACTS

The Flegles family has operated a hardware and lumber business in Bardwell since the 1920s. In the 1970s, the company joined the Cotter & Company cooperative, and at that time or soon thereafter began using the True Value® trade name. In 1997, when Cotter merged with Servistar Coast to Coast Corporation to form TruServ, Flegles retained its membership in the merged organization and continued to use the True Value® name until late 2002, when TruServ terminated Flegles' membership and it joined the Ace® cooperative.

TruServ is a Delaware corporation with its headquarters in Chicago, Illinois and, as noted, is the wholesaler for, among others, True Value® hardware stores. As a cooperative wholesaler, TruServ does not retain the yearly profits from the sale of merchandise and services to its members, but after deducting its operating expenses from its revenues it distributes any remaining profits to the cooperative's members based on the member's share of the year's purchases. Members thus have use of TruServ's marks and benefit from the group buying power, group billing procedures, and other services TruServ offers.

In the early 1990s, Flegles became desirous of expanding, in part at least to stave off competition in the surrounding area from "box" stores such as Lowe's and Wal-Mart. It acquired land for a new building and in 1996 availed itself of business audits which TruServ—then Cotter and Company—provided free-of-charge to its qualifying members. The audit was to help determine whether an expansion was feasible and if so what form the expansion should take. In 1996 and 1997, TruServ representatives used computer programs to process Flegles' financial and other data and generated a 500-page report with projections indicating that Flegles' desired expansion to a 32,000 square-foot facility could be profitable if the new store included a product rental program, known as "Just Ask" rental (the "1996 Audit"). In 1999, Flegles asked TruServ to update the 1996 Audit, and again using data supplied by Flegles, a TruServ representative generated a "guide" which projected profits for both the rental program and the expanded store (the "1999 Guide"). At that point Flegles proceeded with its expansion, and the new store opened in January 2000. Unfortunately, Flegles encountered higher than expected building costs, which necessitated substantial debt. Also, owing largely to a downturn in the local construction industry, its business during the new store's first three years did not meet TruServ's projections, particularly the projections regarding rental profits.

In the meantime, TruServ's house was not entirely in order. Following the aforementioned 1997 merger with Cotter, inventory accounting problems led TruServ to overstate its profits for fiscal years 1997-99, with the result that in 2000 the errors became public and the company was obliged to declare a $131 million loss.

When the parties "fell out" over Flegles' unpaid cooperative debt in early 2003, Flegles brought this action alleging that its expansion had been fraudulently induced by TruServ's faulty expansion advice as well as its failure to provide accurate financial reports. The misrepresentations, Flegles alleged, caused losses of more than $2 million. At a jury trial in July 2004, Flegles was awarded fraud damages of $1.3 million. As noted above, the Court of Appeals reversed, and Flegles now seeks reinstatement of the trial court judgment. It contends that the Court of Appeals misconstrued the rule that statements of mere opinion or statements about the future will not support a claim of fraud. Convinced that the Court of Appeals correctly applied existing law, we affirm.

ANALYSIS

I. TruServ's Forward-Looking Expansion Advice Did Not Amount To An Actionable Fraudulent Misrepresentation.

In reversing the trial court's judgment and dismissing Flegles' fraud claim, the Court of Appeals correctly observed that in Kentucky such a claim requires proof, by clear and convincing evidence, of the following six elements: (1) that the declarant made a material representation to the plaintiff, (2) that this representation was false, (3) that the declarant knew the representation was false or made it recklessly, (4) that the declarant induced the plaintiff to act upon the misrepresentation, (5) that the plaintiff relied upon the misrepresentation, and (6) that the misrepresentation caused injury to the plaintiff. United Parcel Service Company v. Rickert, 996 S.W.2d 464 (Ky.1999). The plaintiffs reliance, of course, must be reasonable, McHargue v. Fayette Coal & Feed Company, 283 S.W.2d 170 (Ky.1955), or, as the Restatement states, "justifiable." Restatement (Second) of Torts § 537 (1977). The misrepresentation, moreover, must relate to a past or present material fact. "A mere statement of opinion or prediction may not be the basis of an action." McHargue, 283 S.W.2d at 172. This means, as the Court of Appeals held, that forward-looking opinions about investment prospects or future sales performance such as those involved in this case generally cannot be the basis for a fraud claim.

There are, of course, recognized "deception" exceptions to this general rule where the opinion either incorporates falsified past or present facts or is so contrary to the true current state of affairs that the purported prediction is an obvious sham. In Kentucky Electric Development Company's Receiver v. Head, 252 Ky. 656, 68 S.W.2d 1 (1934), for example, a Depression Era case in which securities agents bilked a seventy-year-old woman by grossly misrepresenting the current condition of the company whose stock they were pushing and by making outlandish promises about its future performance, the former Court of Appeals held that a declarant who "falsely represents his opinion of a future happening" could be subject to liability. Id. at 3. In that case, a misrepresentation about prompt future payment of a dividend was actionable because the company was not then financially able to pay dividends, there was no present intention to pay the dividend, and the representation was made to deceive the buyer. Similarly, in Edward Brockhaus Co. v. Gilson, 263 Ky. 509, 92 S.W.2d 830 (1936), the Court recognized that misrepresentations regarding the future listing of a company's stock on a stock exchange and the company's commencement of operations would be actionable if the speaker knew there was no present intent to do so.

As the Head Court emphasized, however, these narrow exceptions do not relieve market participants, particularly experienced participants such as Flegles, of their duty to protect themselves:

It is a settled rule that mere commendation, or even false representation by the seller of stock as to its value, when the purchaser has an opportunity to ascertain for himself such value by ordinary vigilance or inquiry, has no legal effect on the rights of the contracting parties, even when made with the intention to deceive.

68 S.W.2d at 3 (citation omitted). In short, the law imposes upon recipients of business representations a duty to exercise common sense. Accordingly, other courts attempting to delineate the scope of these exceptions have held that absent misrepresentation of objective data, "forward-looking recommendations and opinions are not actionable ... merely because they are misguided, imprudent or overly optimistic." In re Salomon Analyst AT&T Litigation, 350 F.Supp.2d 455, 467 (S.D.N.Y.2004) (citing Stevelman v. Alias Research Inc., 174 F.3d 79, 85 (2nd Cir. 1999)).

Confronted with the unavoidable fact that the 1996 Audit and the 1999 Guide are projections about future events, Flegles maintains that TruServ misrepresented the past or existing facts on which they were based. Flegles complains that TruServ misrepresented the reliability of its business audits in several ways: by characterizing them as "customized" when they were based in part on the average performance of TruServ members; by referring to the "Just Ask" rental program as a "cash cow" and estimating the return from that program on the basis, again, of averages not necessarily reflective of Flegles' circumstances; and in the 1999...