No. 1298 Philadelphia 1981, APPEAL FROM THE JUDGMENT ENTERED OF MAY 18, 1981 IN THE COURT OF COMMON PLEAS OF PHILADELPHIA COUNTY, TRIAL DIVISION, LAW, NO. 4264 AUG. TERM, 1976
Henry Ruth, Philadelphia, for appellant.
Leonard Schaeffer, Philadelphia, for appellees.
Spaeth, Rowley and Cirillo, JJ. Spaeth, J., files a concurring and dissenting opinion.
[ 318 Pa. Super. Page 101]
This is an appeal from a judgment entered on a verdict for $70,000 compensatory damages and $750,000 punitive damages in favor of plaintiff/appellees and against defendant/appellant. The appellees involved in this suit are Edmund J. Delahanty (hereinafter "Delahanty"), his wife Margaret A. Delahanty, and Cascade Car Corporation (hereinafter "Cascade"). Cascade is a closely held Pennsylvania corporation formed by Delahanty and seven other shareholders in April 1973 to conduct an auto leasing business. Appellant is First Pennsylvania Bank (hereinafter "Bank"), a state chartered bank, which is a member of the Federal Reserve and a nationally chartered banking association. The Bank had financed appellee's used car business, Delahanty Auto Sales (hereinafter "Auto Sales"), and new leasing business, Cascade. Appellees alleged and, in the view of the trial judge, proved that fraudulent misrepresentations by Bank officials had caused the destruction of their existing used car business and new leasing business.
In August 1976, appellees commenced an action in trespass alleging fraud against the Bank. Appellees alleged that the Bank had fraudulently induced them to enter into the auto leasing business and subsequently caused the destruction of that business and its used car business by refusing to extend further financing, calling the loans previously extended, repossessing the cars in inventory and commencing its own competing automobile leasing business, "LEASEIT". The Bank denied liability to appellees and filed a counter-claim for debts due on promissory and demand notes made and guaranteed by appellees.
Appellant asserts on appeal that 1) the trial court erred as a matter of law in finding that the Bank engaged in fraudulent conduct; 2) the trial court erred in awarding
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Delahanty "anticipated lost profits" as part of compensatory damages; 3) the award of punitive damages was both improper and excessive and must be stricken; and 4) the trial court erred in entering judgment against the Bank on its counterclaims. For the reasons which follow, we reduce the amount of compensatory damages from $70,000 to $40,000 and the punitive damages from $750,000 to $440,000. We affirm the lower court's finding of fraud but partially reverse the judgment against the Bank on its counterclaims.
A narration of the factual background of this appeal begins with Delahanty, in September 1972, investigating the prospect of automobile leasing directed at blue and white collar individual consumers, that portion of the general public who normally purchase automobiles. Delahanty, with twenty-five years of experience in the automobile business, including ownership of Auto Sales for the past six years, noticed several changes in the retail and leasing business which spurred his interest in this marketing concept. Delahanty's extensive research supported the conclusion that there was a market in the blue and white collar worker which had never been tapped by the leasing industry. Up to this time, leasing had primarily been offered to two distinct markets, Commercial and Professional. Commercial leasing consisted mainly of large fleets of cars available to corporations. Professional leasing was directed at the higher income bracket professionals who could use the leasing of a luxury car as a tax deduction.
Delahanty's unique and novel method of leasing automobiles included the tapping of a new market, an on-site inventory to choose from and an immediate profit to the automobile dealer. Under prior leasing business practice, the dealer would finance the lease and would not realize a profit until the end of the lease when the automobile would be sold. Additionally, the dealer was responsible for the collection of the monthly payments on the lease. Delahanty's plan called for the bank, or financial institution supplying the loan for the floor plan, to purchase and receive an
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assignment of the lease at the outset, thus producing an immediate profit for the automobile dealer. Furthermore, the bank would be responsible for the collection of the monthly payments, which it was in a much better position to handle considering its structure and access to credit personnel.
In January 1973, pursuant to his exhaustive research, Delahanty prepared a document entitled "Financial Aspects of the Personal Leasing Industry". Delahanty had several preliminary discussions with various officers of the Bank, including John Kearney (hereinafter "Kearney"), Vice-President in charge of the Bank's Installment Loan Department, John Plumley (hereinafter "Plumley"), Administrator of the Installment Loan Department, and Mr. Tulskie (hereinafter "Tulskie"), Dealer Representative of the Installment Loan Department, to see if the Bank would be interested in financing his plan through capital and operating loans. Delahanty's relationship with the Bank began in 1971 when it provided financing for Auto Sales through a capital loan and floor plan line of credit. Delahanty had previously dealt with Kearney and Plumley, who was under Kearney's supervision. When Delahanty explained his proposal, Kearney expressed an interest in the concept and felt that it was a unique method for leasing automobiles. Accordingly, a number of meetings followed between Delahanty and various members of the Bank to discuss the venture.
In February 1973, an initial meeting was held at the Bank's offices at 30th and Market Streets. Delahanty presented the financial pamphlet to the Bank officials in attendance -- Plumley, Tulskie, Len Becci (hereinafter "Becci"), Credit Supervisor of the Installment Loan Department, and Mr. Hennion, Sales Manager of Auto Sales for the Installment Loan Department. All of these officials were under Kearney's supervision and reported to him.
Later in February 1973, a second meeting was scheduled with Delahanty, Plumley and Tulskie, which was held at a restaurant in Delaware. Delahanty presented a second publication, "Marketing," in which he elaborated on the
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implementation and marketing of his leasing proposal. The Bank officials were impressed and expressed the belief that the marketing department of the Bank would most certainly be interested in his ideas.
In late February/early March 1973, a third meeting was held at the Bank's offices at 30th and Market Streets. It was attended by Delahanty, Plumley and Becci. In addition, Frank Dynan (hereinafter "Dynan"), Assistant of the Bank's Marketing and Services Department, was present. At this meeting, a third pamphlet, "Philosophy," was presented and Delahanty made his pitch to secure financing from the Bank for the leasing corporation. At the end of the meeting, Plumley told Delahanty that the Bank was interested in "backing your company" and not interested "in being in the leasing business" itself.
In March 1973, Delahanty met with Plumley and Kearney to obtain additional capital for Auto Sales. An additional $27,000 was granted bringing Auto Sales capital loan to $50,000.
A final meeting was held in April 1973, and Delahanty and his accountant, Mr. Rosenberg, presented a Pro Forma Report, to Kearney, Plumley and Becci, which set forth the final details of the new leasing business. No documents were signed at this meeting, but it was agreed that Delahanty would sign personally for a $50,000 loan for base capitalization, obtain credit from the Bank for the individual lease financing and obtain $300,000 for a floor plan line of credit. The original proposal, submitted by Delahanty, required a $150,000 line of credit.
At this final meeting, Kearney insisted that Delahanty commence business in the spring of 1973. Delahanty objected and stated that he wanted to start in the Fall of 1973 because he would benefit from the new car announcements and less inventory would be needed due to the 4-6 weeks availability on new car orders. Delahanty felt that starting in the Spring presented problems because it was the end of the 1973 model year which meant that by the end of the summer there might be an inadequate supply of cars and to
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prevent that problem he would be forced to begin with a larger inventory. Relying on Kearney's representations of the Bank's support, "What are you worred about? Look at the money we are putting behind it" Delahanty reluctantly agreed to commence business in the spring, fearing he would lose the opportunity if he did not follow Kearney's suggestion. In late April/early May 1973, Cascade was formed and entered a lease agreement for property in the Drexeline Shopping Center. On May 17, 1973, Cascade opened its doors for business.
On June 6, 1973, Plumley and Ed Bove (hereinafter "Bove"), Operations Officer of the Installment Loan Department, invited Delahanty to play golf and informed him, at that time, that the Bank had decided to enter the leasing business itself. Delahanty expressed deep concern, but Plumley told him not to worry that the Bank "was not going to do anything to hurt him." The following day, June 7th, Delahanty signed the master contracts with the Bank for the lease financing. All of the loans extended were personally guaranteed by Delahanty and his wife.
Though Cascade had ordered 300 cars in April 1973, it only received 135. Of those cars received, Cascade leased a total of 42 between May and December 1973 (breakdown of the number of leases signed: June -- 9, July -- 13, August -- 5, September -- 3, October -- 8, and November -- 4). In July/August 1973, Delahanty sent a letter to Kearney requesting additional operating capital for Cascade. Delahanty's payments on all of the loans, both Auto Sales' and Cascade's, were paid to date until September 1973. In September/October 1973, Delahanty had a meeting with Kearney and Plumley and presented financial statements on both businesses to support his earlier request for additional working capital. In November 1973, after refusing to extend his financing, Plumley requested that Delahanty voluntarily surrender all cars in inventory of both businesses. Plumley admitted that the loans were not called because they were in default, but due to the fact that the Bank felt that Cascade had not leased enough cars. All cars were
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surrendered at the end of December 1973. Plumley sold the cars through word of mouth to employees of the Bank and individual dealers, rather than at public auction. A public offering would have insured that the highest possible figure would be received for the cars, so as to mitigate the amount of damages. Delahanty was never given notice of the manner in which the inventory was sold or a list of the individual prices received for each car.
During the extensive negotiations between Delahanty and the Bank, no disclosure was made of the Bank's intentions to enter the leasing business on its own, despite the fact that it had been investigating the possibility since 1969. In 1969, Dynan, who was then in the Bank's Installment Loan Department, began an inquiry into the auto leasing business to determine the feasibility of the Bank entering the field. As early as August 5, 1971, Dynan authored a memorandum to his superior, Charles Shanahan (hereinafter "Shanahan"), Chief Administrator of the Installment Loan Department, which gave a comprehensive overview of the automobile leasing industry and the difficulties the Bank would encounter in entering the field. The memo mentioned that Kearney had advised Dynan that the independent automobile dealers would initially be upset by the Bank's entry into the business. It also recommended that Plumley, who had many years of experience in auto financing, be considered in centralizing control over the Bank's auto leasing project. In May 1972, Shanahan directed Dynan to ask the rest of the Installment Loan Department what they thought of the auto leasing idea. On May 15, 1972, a second memorandum by Dynan to Shanahan confirmed Kearney's active involvement with Shanahan and Becci in developing the auto leasing idea. In August 1972, Shanahan and Dynan were transferred to the Marketing Department, and Kearney later became Vice-President in charge of the Installment Loan Department.
On April 10, 1973, Shanahan received a letter from First National Leasing Systems (hereinafter "NLS"), offering their computer services in setting up the Bank's leasing
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business. Shanahan sent this letter to Dynan, requesting that he look into the matter immediately. On May 5, 1973, Dynan, Plumley and Bove went to California to meet with NLS. On June 6, 1973, Plumley and Bove advised Delahanty of the Bank's decision to enter auto leasing itself, though the official decision was allegedly not made until July 30, 1973. Dynan, Plumley and Becci decided that a committee should be formed to handle the auto leasing project. Dynan was made the project manager, and the committee included Bove, Bob Vandergrift, officer in the Installment Loan Department, and George Martirosan, a computer expert in the Bank. In November 1973, the Bank signed an agreement with NLS. From September to December 1973, the Bank held seminars with dealers concerning their new business. On December 14, 1973, a press release announced the formation of "LEASEIT" by the Bank. On January 21, 1974, the Bank opened its indirect auto leasing business. On April 1, 1974, the Bank opened its direct auto leasing business.
Before considering appellant's first contention, we note that fraud can take many forms. The courts should be quick to look for fraud, but not as quick to declare it. Edelson v. Bernstein, 382 Pa. 392, 115 A.2d 382, 384 (1955). Fraud consists of anything calculated to deceive, whether by single act or combination, or by suppression of truth, or suggestion of what is false, whether it be by direct falsehood or by innuendo, by speech or silence, word of mouth, or look or gesture. Frowen v. Blank, 493 Pa. 137, 425 A.2d 412 (1981). It has been said that fraud may induce a person to assent to something which he would not otherwise have done, or it may induce him to believe that the act which he does is something other than it actually is. Greenwood v. Kadoich, 239 Pa. Super. 372, 357 A.2d 604 (1976). To be actionable, the misrepresentation need not be in the form of a positive assertion. Shane v. Hoffman, 227 Pa. Super. 176, 324 A.2d 532 (1974). It is any artifice by which a person is deceived to his disadvantage. McClellan's Estate, 365 Pa. 401,
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A.2d 595 (1950). It may be by false or misleading allegations or by concealment of that which should have been disclosed, which deceives or is intended to deceive another to act upon it to his detriment. Baker v. Rangos, 229 Pa. Super. 333, 324 A.2d 498 (1974). It is well settled that fraud is proved when it is shown that the false representation was made knowingly, or in conscious ignorance of the truth, or recklessly without caring whether it be true or false. Warren Balderston Co. v. Integrity Trust Co., 314 Pa. 58, 170 A. 282 (1934). It has also been established that "the deliberate nondisclosure of a material fact amounts to a culpable misrepresentation no less than does an intentional affirmation of a material falsity." Neuman v. Corn Exchange National Bank & Trust Co., 356 Pa. 442, 450-52, 51 A.2d 759, 764 (1947). Yet, a misrepresentation innocently made is also actionable if it relates to a matter material to the transaction involved; while if the misrepresentation is made knowingly or involves a non-privileged failure to disclose, materiality is not a requisite to the action. Shane v. Hoffmann, 227 Pa. Super. 176, 324 A.2d 532 (1974). A misrepresentation is material when it is of such a character that if it had not been made, the transaction would not have been entered into. Greenwood, 239 Pa. Super. at 378, 357 A.2d at 607. One deceived need not prove that fraudulent misrepresentation was the sole inducement to the investment of money, a material inducement is sufficient. Neuman 356 Pa. at 454, 51 A.2d at 765.
The elements of fraud are as follows: "'there must be (1) a misrepresentation, (2) a fraudulent utterance thereof, (3) an intention by the maker that the recipient will thereby be induced to act, (4) justifiable reliance by the recipient upon the misrepresentation, and (5) damage to the recipient as the proximate result.'" Scaife Co. v. Rockwell-Standard Corp., 446 Pa. 280, 285, 285 A.2d 451, 454 (1971), cert. denied, 407 U.S. 920, 92 S.Ct. 2459, 32 L.Ed.2d 806, quoting Neuman, 356 Pa. at 442, 51 A.2d at 763; See e.g. Edelson v. Bernstein, 382 Pa. 392, 115 A.2d 382 (1955); Gerfin v. Colonial Smelting & Refining co., 374 Pa. 66, 97
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A.2d 71 (1953); Shane v. Hoffman, 227 Pa. Super. 176, 324 A.2d 532 (1974); Laughlin v. McConnel, 201 Pa. Super. 180, 191 A.2d 921 (1963).
One of the primary issues of this appeal by the Bank is whether there is sufficient evidence of fraudulent misrepresentation to justify 1) the judge's refusal to grant the Bank's motion for a non-suit and concluding, as a matter of law, that the evidence met the standard required to support submission of the case to the fact-finder, and 2) the judge's finding, sitting as the trier of fact, of fraud. Of course, if the evidence does not establish the Bank's liability, we need not reach the issue presented concerning the amount of damages awarded.
Initially, we will consider whether the trial court erred in denying the Bank's motion for a non-suit at the conclusion of appellees' case, allowing it to proceed.
In determining what burden Pennsylvania law places on those attempting to prove fraud, the Third Circuit Court of Appeals recently found in Beardshall v. Minuteman Press International, Inc., 664 F.2d 23, 26 (3rd Cir. 1981) that:
In a recent decision the Supreme Court of Pennsylvania held that fraud or intent to defraud must be proved by "'evidence that is clear, precise and convincing.'" Snell v. Pennsylvania, 490 Pa. 277, 281, 416 A.2d 468, 470 (1980) (citations omitted). In earlier cases the terminology varied. For example, in Gerfin v. Colonial Smelting & Refining Co., 374 Pa. 66, 73, 97 A.2d 71, 74 (1953), two formulations for the burden of proof were used, "clear and convincing or . . . clear, precise and indubitable." Whatever the formulation, it is evident that under Pennsylvania law fraud must be proved by a higher standard than the preponderance of the evidence standard . . .
The Court went on to note:
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A.2d 658, 661 (1971)] Those cases stand only for the proposition that the trial judge must decide as a matter of law before he submits a case to the jury whether plaintiffs' evidence attempting to prove fraud is sufficiently clear, precise and convincing to make out a prima facie case; they do not hold that once that burden is met, the jury may apply a lesser standard of proof in determining which evidence is true. Thus, if the trial judge determines there is sufficient evidence from which the jury could reasonably find that the plaintiffs have proven fraud according to this standard of proof, the judge may submit the case to the jury. "'Whether the evidence is true is a question of fact . . . but whether it meets the required standard which justifies its submission to the jury . . . is always a question of law . . .'" Aliquippa National Bank ex rel. Woodlawn Trust Co. v. Harvey, 340 Pa. 223, 231, 16 A.2d 409, 414 (1940), quoted in Gerfin v. Colonial Smelting & Refining Co., 374 Pa. 66, 68, 97 A.2d 71, 72 (1953); M.H. Davis Estate Oil Co., v. Sure Way Oil Co., 266 Pa. Super. 64, 68, 403 A.2d 95, 97 (1979).
Thus, in cases where fraud is the basis of the claim, the initial inquiry for the judge is whether the proof of every element of fraud has met the exacting standard, justifying a refusal to grant a non-suit and its submission to the fact-finder. What the standard requires was addressed in Gerfin, 374 Pa. at 72, 97 A.2d at 74, quoting Stafford v. Reed, 363 Pa. 405, 407, 410-11, 70 A.2d 345, 346 (1949):
What is meant by the statement that the evidence must be clear, precise and indubitable? It means that the witnesses must be 'credible, . . . distinctly remember the facts to which they testify, and narrate the details exactly', that the evidence 'is not only found to be credible, but of such weight and directness as to make out the facts alleged beyond a reasonable doubt'; that 'the witnesses must be found to be credible, that the facts to which they testify are distinctly remembered and the details thereof narrated exactly and in due order, and that their testimony
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is so clear, direct, weighty and convincing as to enable the jury to come to a clear conviction without hesitancy, of the truth of the precise facts in issue.' (citations omitted)
Accord: Edelstein, 220 Pa. Super. at 303, 286 A.2d at 661.
Of course, it must be remembered that fraud can be established by the evidence of a single witness and there is no necessity that it be proven by the testimony of two witnesses, or by that of one witness, with corroborating circumstances. City of Pittsburgh v. Ihrig, 256 Pa. 410, 100 A. 957 (1917).
In reviewing the propriety of the lower court's actions in refusing to grant a non-suit, we must employ the test set forth in O'Callaghan v. Weitzman, 291 Pa. Super. 471, 473, 436 A.2d 212, 214 (1981):
Reviewing the record in the above light, we find that Delahanty's testimony concerning the elements of fraud is brief, clear and direct. He testified that he was assured by the Bank officials that the Bank was behind him 100 percent and that the Bank had no interest in entering the leasing business itself. Delahanty was never informed of the Bank's intentions to run a competing company until after he had started his own. The purpose of the representations and non-disclosures was to induce Delahanty to begin the new leasing business in the spring of 1973 rather than in the fall of 1973. Appellee relied on these representations and commenced Cascade in May 1973. The Bank used Delahanty's concept and entered a competing business. As a result of the misrepresentations, appellees lost
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Auto Sales and Cascade when the Bank refused to advance additional financing when it was needed in the fall of 1973.
It is clear that the judge could find these losses to be compensable in an action in fraud. The record, which appellee made, taken as a whole, is clear and convincing or clear, precise and indubitable. Consequently, appellee's evidence does measure up to the standard required to prove fraud and the judge properly refused to grant a non-suit at the conclusion of appellee's ...