Merritt v. Craig

Court of Special Appeals of Maryland, 2000 130 Md.App. 350, 746 A.2d 923; certiorari denied, 359 Md. 29, 753 A.2d 2, 2000

Facts

In the fall of 1995, during their search for a new residence, the plaintiffs, Benjamin and Julie Merritt, advised the defendant, Virginia Craig, that they were interested in purchasing Craigs property contingent upon a satisfactory home inspection. On November 5, 1995, the plaintiffs, their inspector, and the defendants husband Mark Craig conducted an inspection of the cistern and water supply pipes in the basement. The examination revealed that the cistern had been used to store a water supply reserve but was not currently utilized. There were also two water lines that entered into the basement. One of the lines came from an eight-hundred-foot well that was located on the property, and the other line came from a well located on the adjacent property. The well located on the adjacent property supplied water to both the residence and a guesthouse owned by Craig. The existence of the adjacent well was not disclosed to the plaintiffs.

On December 2, 1995, plaintiffs and Craig executed a contract of sale for the property, along with a Disclosure Statement signed by Craig and acknowledged by the plaintiffs affirming that there were no problems with the water supply to the house. Between November 5, 1995, and June 1996, Craig caused the water line from the guesthouse to the house purchased by the plaintiffs to be cut, and the cistern reactivated to store water from the existing well. On May 18, 1996, Craigs husband advised Dennis Hannibal, one of the real estate agents involved in the deal, that he had spent $4,196.79 to upgrade the water system on the property. On June 14, 1996, the plaintiffs and Craig closed the sale of the property. Later that afternoon, Craigs husband, without the plaintiffs knowledge, excavated the inside wall of the house and installed a cap to stop a leaking condition on the water line that he had previously cut.

Upon taking possession of the house the plaintiffs noticed that the water supply in their well had depleted. The plaintiffs met with Craig to discuss a solution to the water failure problem, agreeing with Craig to conduct a flow test to the existing well and to contribute money for the construction of a new well. On October 29, 1996, the well was drilled and produced only one-half gallon of water per minute. Subsequently plaintiffs paid for the drilling of a second well on their property, but it failed to produce water. In January 1997, appellants contacted a plumber, who confirmed that the line from the guesthouse well had been cut flush with the inside surface of the basement wall and cemented closed. Plaintiffs continued to do further work on the house in an effort to cure the water problem. The plaintiffs brought suit against Craig, seeking rescission of the deed to the property and contract of sale, along with compensatory and punitive damages. The trial judge dismissed plaintiffs claim for rescission on the ground that they had effectively waived their right to rescission. The jury returned a verdict in favor of the plaintiffs, awarding compensatory damages in the amount of $42,264.76 and punitive damages in the amount of $150,000. The plaintiffs appealed the trial courts judgment denying their right to rescind the contract. The defendant cross-appealed on the award of punitive damages.

Decision

Judgment of the trial court reversed, and the case is remanded.

Opinion

Davis, J. Under Maryland law, when a party to a contract discovers that he or she has been defrauded, the party defrauded has either a right to retain the contract and collect damages for its breach, or a right to rescind the contract and recover his or her own expenditures, not both. [Citations.] These rights [are] inconsistent and mutually exclusive, and the discovery put[s] the purchaser to a prompt election. [Citation.] A plaintiff seeking rescission must demonstrate that he [or she] acted promptly after discovery of the ground for rescission, otherwise the right to rescind is waived. [Citations.] ***

In [this] case ***, appellants [plaintiffs] claim that they were entitled to a rescission of the subject contract of sale and deed and incidental damages. Appellants also claim that they were entitled to compensatory and punitive damages arising from Craigs actions. Appellants, however, may not successfully rescind the contract while simultaneously recovering compensatory and punitive damages. Restitution is a partys unilateral unmaking of a contract for a legally sufficient reason, such as the other partys material breach and it in effect restores the parties to their pre-contractual position. [Citation.] The restoration of the parties to their original position is incompatible with the circumstance when the complaining party is, at once, relieved of all obligations under the contract while simultaneously securing the windfall of compensatory and punitive damages beyond incidental expenses.

***

In sum, although whether appellants promptly repudiated the contract was not squarely before the court, we are not persuaded by appellees assertion that appellants did not seek rescission in a timely fashion. We hold that, under the facts of this case, appellants must elect the form of relief, i.e., damages or rescission, *** . ***

***

We hold that *** the appellants are entitled to be awarded punitive damages resulting from Craigs actions. A [p]laintiff seeking to recover punitive damages must allege in detail in the complaint the facts that indicate the entertainment by defendant of evil motive or intent. [Citation.] The Court of Appeals has held that punitive damages may only be awarded in such cases where the plaintiff has established that the defendants conduct was characterized by evil motive, intent to injure, ill will or fraud ***. [Citation.] In cases of fraud that arise out of a contractual relationship, the plaintiff would have to establish actual malice to recover punitive damages. [Citation.] Finally, we have stated that actual or express malice requires an intentional or willful act (or omission) and has been characterized as the performance of an act without legal justification or excuse, but with an evil or rancorous motive influenced by hate, the purpose being to deliberately and willfully injure the plaintiff. [Citation.]

***

The jury believed that the representations made by Craig were undertaken with actual knowledge that the representations were false and with the intention to deceive appellants. The Court of Appeals, in [citation], held that a persons actual knowledge that the statement is false, coupled with his or her intent to deceive the plaintiffs by means of that statement, constitutes the actual malice required to support an award for punitive damages. [Citation.] Moreover, the record reflects that the jury could reasonably infer Craigs intention to defraud appellants by her representation in the Disclosure Statement that there were no problems with the water supply, and by subsequently making substantial changes in the water system by cutting off a water line which supplied water to appellants residence immediately after appellants inspector examined the system. Therefore, we hold that the circuit court was not in error in finding facts from the record sufficient to support an award of punitive damages.

Craig also challenges the punitive damages award on the basis that the amount of the award was excessive. ***

In the case at hand, the trial judge undertook the appropriate review of the jurys award. It is clear from the courts comments at the hearing that the courts decision not to disturb the jurys verdict was based on the evidence presented at trial and was not excessive under the criteria set forth in [citation]. Craigs conduct toward appellants was reprehensible and fully warranted punitive damages. Her conduct in willfully misrepresenting the condition of the water system in the Disclosure Statement, coupled with her actions and those of her husband in interfering and diverting the water flow subsequent to the inspection and sale of the property, constitute egregious conduct. As a result of Craigs conduct, appellants were forced to employ extreme water conservation practices due to an insufficient water supply and they attempted to ameliorate the problem by having two new wells drilled on the property which proved to be unproductive. Moreover, the lack of water supply to appellants property clearly reduced its market value. ***

Interpretation

A defrauded party may rescind a contract induced by fraud but may lose that power if he affirms the contract or delays unreasonably in exercising the power of rescission.

Critical Thinking Question

• What is the policy reason for requiring a defrauded party to elect between rescission and damages? Explain.