Miller Bldg. Supply, Inc. v. Rosen

• Citation: 503 A.2d 1344,305 Md. 341
• Decision Date: 07 February 1986
• Docket Number: No. 51,51
• Parties: MILLER BUILDING SUPPLY, INC. v. Jack F. ROSEN et al. Sept. Term 1985.
• Court: Court of Appeals of Maryland

Page 341

305 Md. 341

503 A.2d 1344

MILLER BUILDING SUPPLY, INC. v. Jack F. ROSEN et al.

No. 51 Sept. Term 1985.

Court of Appeals of Maryland.

Feb. 7, 1986.

Joseph W. Pitterich (William H. Schladt and Pitterich & Snedegar, P.C., on brief), Chevy Chase, for appellant.

Mark J. Wishner, Washington, D.C. (David S. Greene, on brief, Rockville, for appellee.

Argued before MURPHY, C.J. and SMITH, ELDRIDGE, COLE, RODOWSKY, COUCH and McAULIFFE, JJ.

RODOWSKY, Judge.

In this case we revisit H & R Block, Inc. v. Testerman, 275 Md. 36, 338 A.2d 48 (1975) which held that in actions of tort arising out of a contract, actual malice is a necessary predicate of punitive damages. Petitioner, an employer whose disloyal employees diverted profits to themselves, contends that its fraud action is not subject to the Testerman rule or, if it is, that this Court should change the law to exclude fraud actions from the Testerman rule. We shall reject these arguments for reasons stated below.

The petitioner, and plaintiff in the Circuit Court for Montgomery County, is Miller Building Supply, Inc. (Miller). It sells kitchen appliances and cabinets at wholesale and retail. Respondents, Jack Rosen and Bernard Hollander, were employed by Miller as salesmen. The stage was set for the events leading to this litigation by the variable pricing of Miller's products. The price from Miller to a wholesale customer was approximately 40% below the listed retail price for the same item. The listed retail prices, however, were themselves subject to negotiation. While salesmen for Miller were expected to exert their best efforts to obtain the list price in retail transactions, salesmen had the authority to sell below list in order to make the sale.

Miller did not install products sold by it, but many homeowner customers desired installation in addition to the products. Consequently Miller would, through its sales force, arrange for installation by a contractor approved by Miller. Transactions of this type, which we shall call Type I, would result in two contracts: one between the homeowner and Miller for the purchase and sale of products, and the other between the homeowner and a contractor for installation services. Miller's sales representatives, as part of the services rendered by them in conjunction with the sale of Miller's products, usually did the design or layout work for the installation, coordinated delivery and labor, and also handled customer complaints.

On the wholesale side of its business, Miller sold to builders, developers, home improvement contractors, and the like. These sales were at prices discounted from retail and known as the contractors' price. If a contractor produced a customer for a kitchen remodeling job in a home and the job called for Miller products, there would be a contract between the homeowner and the contractor which covered both supplies and services and a contract between Miller and the contractor for the sale by Miller of the products involved. We shall call this a Type II transaction.

One of the installers recommended by Miller in Type I transactions, and who purchased from Miller in Type II transactions, was David B. Kerr (Kerr) who did business as Glenn Dale Contracting (Glenn Dale). Beginning no later than 1973, the respondents and Glenn Dale entered into the following scheme, which we shall call a Type III transaction. It involved homeowner customers who desired to purchase Miller products and to have them installed and who were willing to pay for both goods and services in an amount which exceeded the total of Glenn Dale's charge for services and Miller's price for goods at the contractors' price. In Type III transactions, the homeowner paid the total contract price to Glenn Dale from which Glenn Dale deducted, in its accounting with respondents, its cost of products purchased from Miller at the contractors' price. Glenn Dale also retained from the homeowner's contract price its compensation for installation services. The balance of the contract price paid by the homeowner to Glenn Dale was paid by Glenn Dale to the respondents, trading as Buildco Associates. Customers in a Type III transaction could have been prospects located by respondents or by Glenn Dale. Kerr estimated that 85% of the customers in the Type III transactions were produced by the respondents and 15% by him. In either event, respondents dealt with the customer in negotiating the contract between the homeowner and Glenn Dale. Kerr's charges for installation in Type III transactions did not vary depending on whether or not he had procured the customer.

From Miller's standpoint, a Type III transaction looked like a Type II transaction. Glenn Dale appeared to Miller to be a contractor who had sold a kitchen remodeling job calling for Miller equipment and who was thus entitled to the 40% discount. Until 1981, the loyal agents of Miller did not have actual knowledge that there were contracts between Glenn Dale and homeowners which in effect called for a price for equipment in excess of Miller's contractors' price and that the excess was being paid by Glenn Dale to respondents.

Miller uncovered this scheme in the latter part of 1981. Kerr cooperated in the investigation conducted by Miller and furnished copies of Internal Revenue Service Forms 1099 issued by Kerr to Buildco Associates, i.e., to respondents, for each of the years 1973 through 1981. They totaled $258,612.42. Miller fired the respondents and brought this lawsuit.

The allegations in Miller's declaration were stated in three counts which the pleader parenthetically labeled "Fraud," "Civil Conspiracy," and "Breach of Fiduciary Duty." At the close of the evidence in the jury trial, respondents moved for a directed verdict as to punitive damages. They argued that since any tort the jury might find would have had to have arisen out of a contract, actual malice was required to support a claim for punitive damages and that there had been no evidence of actual malice. The trial court reserved decision (Maryland Rule 2-519(d)) and submitted punitive damages to the jury.

There were no exceptions to the court's instructions to the jury which are material to the issues now before us. The trial judge instructed the jury on each of the three theories of fraud, conspiracy, and breach of fiduciary duty. Fraud was defined in terms of the elements of an action of deceit. The explanation of compensatory damages given to the jury was applicable whether the jury found for the plaintiff on one, two, or all three of the liability theories. The jury was further instructed that there could be no award of punitive damages unless the jury found for Miller on the fraud count. The punitive damage instructions permitted such an award if the jury found implied malice. ¹

In a special verdict the jury found for Miller on each of the three counts. Because, under the instructions, compensatory damages were common to all counts, the jury made a single award of compensatory damages. They were in the amount of $3,231. On the fraud count it awarded punitive damages in the amount of $150,000.

Respondents moved for a judgment n.o.v. After further considering the reserved ruling, the trial court concluded that the Testerman principle applied. Judgment notwithstanding the verdict was entered in favor of Miller for the compensatory damages only. Miller's motion for a new trial (Rule 2-533(a)) was denied. The Court of Special Appeals affirmed. Miller Building Supply, Inc. v. Rosen, 61 Md.App. 187, 485 A.2d 1023 (1985).

We granted Miller's petition for certiorari which raised the following questions, which we have renumbered.

1. Whether the verdict for punitive damages should be reinstated because the jury was properly instructed.

2. Whether the distinction between implied malice and actual malice should be abolished with respect to punitive damages in fraud cases.

3. Whether the plaintiff is entitled to a new trial where the jury specifically found a breach of fiduciary obligation, but did not award damages in conformance with the law, the court's instructions or the evidence.

I

Miller's first point is that under present Maryland law it need not have shown actual malice, but needed only to have shown implied malice to support the award of punitive damages. Accordingly, Miller submits, the jury was correctly instructed and the punitive damage verdict should be reinstated. To find actual malice requires finding "the performance of an unlawful act, intentionally or wantonly, without legal justification or excuse but with an evil or rancorous motive influenced by hate; the purpose being to deliberately and wilfully injure the plaintiff." Drug Fair v. Smith, 263 Md. 341, 352, 283 A.2d 392, 398 (1971). To find implied malice, however, does not require finding that conduct has been motivated by hatred or spite. In certain torts conduct of an extraordinary or outrageous character may be considered the legal equivalent of actual malice. For example, wanton or reckless disregard for human life in the operation of a motor vehicle, with the known dangers and risks attendant to such conduct, can be the legal equivalent of actual malice. Smith v. Gray Concrete Pipe Co., 267 Md. 149, 168, 297 A.2d 721, 731 (1972).

It is the law in Maryland and the general rule elsewhere that punitive damages are not allowed for breach of contract. See St. Paul at Chase Corp. v. Manufacturers Life Insurance Co., 262 Md. 192, 236, 278 A.2d 12, 33, cert. denied, 404 U.S. 857, 92 S.Ct. 104, 30 L.Ed.2d 98 (1971); 5 Corbin on Contracts § 1077 (1964); Restatement (Second) of Contracts § 355. In certain tort actions in which the tort arises wholly independently of any contract, punitive damages may be awarded based on implied malice. See, e.g., Gray, supra. But there is an area between pure tort and pure contract in which "the tort found its source in the contract without which the wrong would not have been committed." Wedeman v. City...