Republic Leasing Co v. Restaurant Equipment

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
REPUBLIC LEASING COMPANY,
Plaintiff-Appellee,
v.
RESTAURANT EQUIPMENT MARKETING
SPECIALISTS, INCORPORATED,
Defendant-Appellant,
and
COLONIAL PACIFIC LEASING
CORPORATION; MARK A. KERRUTT,
Defendants,
No. 98-2414
AMSTAT CORPORATION, d/b/a
American States Leasing,
Defendant &
Third Party Plaintiff,
v.
UNIVERSAL HOSPITALITY
CORPORATION; ULTRA-VEND,
INCORPORATED; R. JOSEPH COSTANZO,
JR.,
Third Party Defendants.
Appeal from the United States District Court
for the District of South Carolina, at Columbia.
Joseph R. McCrorey, Magistrate Judge.
(CA-96-3132-3-19BC)
Argued: September 22, 1999
Decided: December 30, 1999
Before TRAXLER, Circuit Judge, HAMILTON,
Senior Circuit Judge, and Joseph R. GOODWIN,
United States District Judge for the
Southern District of West Virginia, sitting by designation.
_________________________________________________________________
Affirmed by unpublished per curiam opinion.
_________________________________________________________________
COUNSEL
ARGUED: Lionel John Postic, POSTIC & BABB, L.L.C., Marietta,
Georgia, for Appellant. Robert P. Wood, ROGERS, TOWNSEND &
THOMAS, P.C., Columbia, South Carolina, for Appellee.
_________________________________________________________________
Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).
_________________________________________________________________
OPINION
PER CURIAM:
In this diversity action, defendant Restaurant Equipment Marketing
Specialists, Inc. ("REMS") appeals various rulings of the district court
made before, during, and after a trial in which the jury awarded plain-
tiff Republic Leasing Company ("Republic Leasing") actual and puni-
tive damages for negligent misrepresentation under South Carolina
law. We affirm.
I.
This dispute arose from a business venture into"food courts" by
Universal Hospitality, Inc. ("Universal"), a company already in the
business of operating airport restaurants. In the fall of 1994, Universal
2
decided to expand its airport restaurant business into the mall food
court business. To finance the venture, Universal obtained short-term,
high-interest financing for up to $1.5 million from Enterprise Finan-
cial Corporation ("Enterprise"), giving Enterprise a blanket security
interest in all assets, then owned or later-acquired, of Universal.
In connection with the initial project, a mall food court in Tuscola,
Illinois (the "Tuscola project"), Universal ordered approximately
$110,000 in restaurant equipment from defendant REMS and made a
$60,000 down payment. In connection with this sale, REMS prepared
invoice #8124, directed to Universal, which reflected the total pur-
chase price, the down payment, and a balance due of approximately
$50,000. The equipment was delivered and installed in Tuscola and,
pursuant to the financing agreement, Enterprise received a security
interest in the equipment.
Intending for the Enterprise loan to be only a "bridge" loan, Uni-
versal soon began to seek permanent financing at a more attractive
interest rate. It seemingly attained this goal through Amstat Corpora-
tion ("Amstat"), which gave Universal a written commitment to pro-
vide $1.7 million in permanent financing for its expanded business
venture.
In February 1995, and in an apparent attempt to meet part of its
financial obligation to Universal, Amstat asked REMS to prepare an
invoice listing equipment totaling $49,970. REMS complied, issuing
invoice #8232. The requested invoice included the equipment which
had previously been invoiced to Universal, but reflected the ship-to
address as being Hartsfield Airport in Atlanta, Georgia, the sold-to
entity as being Amstat, and the shipping date as being February 13,
1995. No such equipment was sold to Amstat, however, or shipped
to Hartsfield Airport, and the amount of the new invoice matched the
amount due for the Tuscola project under the original invoice to Uni-
versal.
With new invoice in hand, Amstat made the equipment the subject
of a lease between Universal and Amstat, which was, in turn, assigned
to Colonial Pacific Leasing Company ("Colonial Leasing") -- an
equipment leasing company willing to purchase and lease the equip-
ment to Universal. In return, Colonial Leasing issued a check to
3
REMS for the amount due under the false invoice. REMS applied the
$49,970 in Colonial funds to the original invoice issued to Universal
for the Tuscola equipment, which was still subject to the security
interest of Enterprise.
A similar plan was then instituted to obtain approximately
$150,000 from Republic Leasing. According to Republic Leasing,
Universal was pressuring Amstat for more money so that Universal
could pay off the expensive bridge loan to Enterprise and rid itself of
the short-term financier. In February 1995, Amstat obtained from
Universal a list of all equipment that Universal had purchased for the
Tuscola project, regardless of the identity of the vendor. The list
included, but was not limited to, the equipment already twice-
invoiced by REMS. Nevertheless, REMS prepared a third invoice
totaling $149,987 -- Invoice #8324. This invoice was provided to
Republic Leasing, who sent a check directly to REMS for the total
amount due and received an assignment of a lease agreement for the
equipment entered between Amstat and Universal. Although the
check itself did not bear Republic Leasing's name, the check was sent
via Federal Express, in an envelope marked with Republic Leasing's
name, address, and telephone number. Upon receipt, REMS negoti-
ated the check, applied approximately $1,300 to the outstanding bal-
ance of the original Universal invoice, and refunded the balance of
approximately $148,600 directly to Universal as an"overpayment
from lease company." J.A. 1034-35.
The end result was that REMS obtained a payoff of its original
invoice to Universal and Amstat was able to meet approximately
$150,000 of its additional financing commitment to Universal. The
result was achieved, however, by virtue of the false invoices gener-
ated by REMS in conjunction with Amstat. The bookkeeper for
REMS, who prepared the invoice paid by Republic Leasing, testified
that he did so at the direction of the president of REMS and that he
assumed the invoice was necessary to "keep the paperwork going on
getting the funding." J.A. 1019. The president of REMS denied any
knowledge of this false invoice, whereas the president of Amstat testi-
fied that REMS knew the invoice was going to be used to obtain
financing.
Eventually, in late 1995 or early 1996, Universal fell into default
under its lease with Republic Leasing and Republic Leasing declared
4
all sums due and payable. It was at this point that the scheme unrav-
eled. Republic Leasing learned that Colonial Leasing had paid the
second REMS' invoice for $49,970, which included some of the same
equipment that was included in the third REMS' invoice paid by
Republic Leasing. Republic Leasing and Colonial Leasing then
agreed to cooperate on the sale of the equipment, which netted
$34,764, and the proceeds were escrowed. Republic Leasing then
learned that the property was not only the subject of the invoices paid
by it and by Colonial Leasing, but that it was also the subject of the
security interest held by yet another company -- the successor in
interest to the short-term financier Enterprise-- pursuant to the first
invoice. Accordingly, the escrowed proceeds were turned over to this
first holder of the security interest.
Republic Leasing initially brought an action against Amstat and
Colonial Leasing. Subsequently, Republic Leasing deposed the presi-
dent of REMS and filed an amended complaint adding Amstat's pres-
ident, Mark Kerrutt ("Kerrutt") and REMS as defendants. Having
abandoned its claim to any interest in the proceeds of the sale, Colo-
nial Leasing was eventually dropped from the lawsuit. Amstat, which
brought in Universal and several of its affiliated parties (collectively
"Universal") as third-party defendants, obtained a default judgment
against them, and thereafter settled with Republic Leasing by agree-
ing to pay $100,000 pursuant to a two-year payment schedule and to
confess judgment in the amount of $288,681.34.
This left these claims of Republic Leasing against REMS: (1)
breach of warranty of title; (2) breach of contract; (3) civil conspir-
acy; (4) fraud; and (5) negligent misrepresentation. Essentially, the
case boiled down to the fact that Republic Leasing, based upon an
invoice created by REMS, believed that it had purchased nearly
$150,000 in restaurant equipment which it had leased to Universal for
the latter's food court venture. However, $110,000 of the equipment
was the subject of the original invoice issued by REMS to Universal,
$49,970 of the equipment was the subject of both the original invoice
sent to Universal and the second invoice generated by REMS and sent
to Colonial Leasing; and approximately $40,000 of the invoiced
equipment was never sold to Universal by REMS in the first place.
5
The magistrate judge granted summary judgment to REMS on
Republic Leasing's claims of breach of warranty and breach of con-
tract, and the remainder of the claims were tried to a jury.1 Following
a six-day trial, the jury returned a verdict for REMS on the claims of
civil conspiracy and fraud, but for Republic Leasing on the claim for
negligent misrepresentation. The jury awarded actual damages of
$150,000 and punitive damages of $150,000. Post-trial motions were
denied and this appeal followed.
II.
We review the decision of the district court to deny judgment as
a matter of law de novo. See Konkel v. Bob Evans Farms Inc., 165
F.3d 275, 279 (4th Cir.), cert. denied, 68 U.S.L.W. 3106 (U.S. Oct.
4, 1999) (No. 99-180). In so doing, we must view the evidence in the
light most favorable to the prevailing party and draw all reasonable
inferences in its favor without weighing the evidence or assessing the
witnesses' credibility. See Sales v. Grant, 158 F.3d 768, 775 (4th Cir.
1998).
III.
A.
REMS first contends that the district court erred in denying its
motion for judgment as a matter of law on Republic Leasing's claim
for negligent misrepresentation. We disagree.
In order to establish a claim for negligent misrepresentation under
South Carolina law, the plaintiff must prove that:
(1) the defendant made a false representation to the plain-
tiff;
(2) the defendant had a pecuniary interest in making the
statement;
_________________________________________________________________
1 The district court referred the case to the magistrate judge by consent
for all proceedings and trial.
6
(3) the defendant owed a duty of care to see that he com-
municated truthful information to the plaintiff;
(4) the defendant breached that duty by failing to exercise
due care;
(5) the plaintiff justifiably relied on the representation; and
(6) the plaintiff suffered a pecuniary loss as the proximate
result of reliance on the representation.
Fields v. Melrose Ltd. Partnership, 439 S.E.2d 283, 285 (S.C. Ct.
App. 1993). We also look to Section 552 of the Restatement (2d) of
Torts, which provides additional guidance in cases where the repre-
sentation is not made directly to the plaintiff. It provides as follows:
(1) One who, in the course of his business, profession or
employment, or in any other transaction in which he has a
pecuniary interest, supplies false information for the guid-
ance of others in their business transactions, is subject to lia-
bility for pecuniary loss caused to them by their justifiable
reliance upon the information, if he fails to exercise reason-
able care or competence in obtaining or communicating the
information.
(2) [T]he liability stated in Subsection (1) is limited to loss
suffered
(a) by the person or one of a limited group of
persons for whose benefit and guidance he intends
to supply the information or knows that the recipi-
ent intends to supply it; and
(b) through reliance upon it in a transaction that
he intends the information to influence or knows
that the recipient so intends or in a substantially
similar transaction.
Restatement (Second) of Torts § 552 (1977); see ML-Lee Acquisition
Fund, L.P. v. Deloitte & Touche, 489 S.E.2d 470, 471 n.3 (S.C. 1997)
7
(adopting Section 552 as the law in South Carolina in negligent mis-
representation cases).
Asserting that Republic Leasing failed to prove that REMS knew
Amstat wanted the false invoice for the purpose of obtaining money
from Republic Leasing, or that REMS knew about Republic Leasing
at all, REMS contends that it is entitled to judgment as a matter of law
on Republic Leasing's negligent misrepresentation claim. This is
because, the argument goes, Republic Leasing failed to prove that
REMS made a direct representation to Republic Leasing, failed to
prove that Republic Leasing was the intended recipient of the
$149,987 invoice, and failed to prove that Republic Leasing was
within a class of individuals the invoice was designed to influence. In
this regard, REMS also asserts that its receipt of payment of the false
invoice was not sufficient to place it on specific notice of Republic
Leasing's existence because, although the envelope had Republic
Leasing's name on it, the check did not. We are unpersuaded, to say
the least. REMS, a distributor of restaurant equipment, prepared a
false invoice at Amstat's request listing equipment that it had already
sold to Universal, and for which it had been partially paid, as well as
for equipment that had been sold to Universal by other vendors. There
was evidence that REMS knew that Amstat needed the false invoice
for funding purposes and, of course, REMS received a check in full
payment of the admittedly false invoice, in an envelope marked with
Republic Leasing's name, but proceeded to negotiate the check and
"refund" the "overpayment" to Universal. Under the circumstances,
we are satisfied that the evidence supported the jury's verdict in favor
of Republic Leasing on its claim for negligent misrepresentation.
REMS' alternative argument is dispensed with even more easily.
REMS attempts to assert that it is entitled to judgment as a matter of
law because Republic Leasing failed to prove that the invoice con-
tained a representation that no other person had a security interest in,
or lien on, the equipment securing the lease funded by Republic Leas-
ing. The "invoice" apparently did not say whether or not it had been
paid, nor whether any other entity had a security interest in the prop-
erty. However, there was nothing to alert the buyer to the fact that the
invoice was for a transaction that never took place and, we believe,
the conclusion that the invoice was for an unpaid bill for unencum-
8
bered property or goods is certainly consistent with the common
understanding of invoices.
Accordingly, we find no error in the district court's refusal to grant
judgment as a matter of law to REMS on Republic Leasing's claim
for negligent misrepresentation.
B.
REMS next contends that the district court improperly allowed the
jury to award actual damages which were not proximately caused by
REMS' conduct. Specifically, REMS contends that Republic Leasing
should have been limited to actual damages in the amount of $34,764
-- the amount of funds that Enterprise received as a result of its origi-
nal security interest. This limitation is required, REMS asserts,
because Republic Leasing would have suffered its additional damages
whether or not REMS had generated the false invoice.
The flaw in REMS' argument is that the evidence fully supported
a finding that, absent the false invoice, Republic Leasing would have
suffered no damages. As a result of the false invoice prepared by
REMS, Republic Leasing issued a check for $149,987 for payment of
the invoice in return for assignment of the leasing agreement between
Universal and Amstat. Accordingly, the evidence supported the con-
clusion that the false invoice proximately resulted in the issuance of
the full amount of the check. Accordingly, we find no error in the dis-
trict court's refusal to limit damages to the amount recovered from the
actual sale of the equipment, or in its refusal to remit the verdict for
actual damages.
C.
REMS next contends that the district court erred in allowing the
jury to award punitive damages, asserting that punitive damages are
not recoverable in a negligent misrepresentation case as a matter of
law. We disagree.
In order for Republic Leasing to recover punitive damages under
South Carolina law, "there must be evidence [that REMS'] conduct
9
was wilful, wanton, or in reckless disregard of[Republic Leasing's]
rights." McCourt v. Abernathy, 457 S.E.2d 603, 607 (S.C. 1995); see
F. Patrick Hubbard & Robert L. Felix, The South Carolina Law of
Torts 364 (2d ed. 1997) (noting that under South Carolina law gov-
erning negligent misrepresentation cases, "[p]unitive damages would
appear to be allowed where defendant is also reckless"); cf. Lengel v.
Tom Jenkins Realty, Inc., 334 S.E.2d 834, 837 (Ct. App. 1985);
Pittman v. Galloway, 313 S.E.2d 632, 634 (S.C. Ct. App. 1984). Wil-
ful, wanton, or reckless conduct constitutes "`[a] conscious failure to
exercise due care,'" id. (quoting McCourt, 457 S.E.2d at 607), "com-
mitted in such a manner or under such circumstances that a person of
ordinary reason and prudence would have been conscious of it as an
invasion of the plaintiffs rights," Nesbitt v. Lewis, 517 S.E.2d 11, 15
(S.C. Ct. App. 1999). Evidence of such conduct must be "clear and
convincing." S.C. Code Ann. § 15-33-135 (Law. Co-op. Supp. 1998).
Here, there was substantial evidence on the record to support the
award of punitive damages. Furthermore, the fact that the jury found
for REMS on Republic Leasing's fraud claim is not dispositive. The
nine specific elements required to prove fraud under South Carolina
law2 differ from those necessary to prove a claim for negligent mis-
representation, and plaintiff must prove every element of fraud by
"clear, cogent and convincing evidence." Charleston Lumber Co., Inc.
v. Miller Hous. Corp., 458 S.E.2d 431, 436 (S.C. App. 1995). Accord-
ingly, the jury could have concluded that Republic Leasing failed to
prove each of the nine elements of fraud by clear, cogent, and con-
vincing evidence, but that plaintiff did prove that REMS' conduct was
_________________________________________________________________
2 In order to establish a claim of fraud in South Carolina, the plaintiff
must prove:
(1) a representation; (2) its falsity; (3) its materiality; (4) either
knowledge of its falsity or reckless disregard of its truth or fal-
sity; (5) intent that the representation be acted upon; (6) the hear-
er's ignorance of its falsity; (7) the hearer's reliance on its truth;
(8) the hearer's right to rely thereon; and (9) the hearer's conse-
quent and proximate injury.
Charleston Lumber Co., Inc. v. Miller Hous. Corp. , 458 S.E.2d 431, 436
(S.C. App. 1995).
10
sufficiently willful, wanton, or reckless to warrant the imposition of
punitive damages.3
D.
REMS' next two issues on appeal arise from the settlement agree-
ment entered between Republic Leasing and Amstat during the pen-
dency of the suit. We reject them as well.
First, the original agreement between Republic Leasing and Amstat
contained language releasing all other jointly liable businesses.
REMS did not participate in the settlement, but nevertheless contends
that it is entitled to the benefit of the release. We disagree.
REMS did not plead accord and satisfaction as an affirmative
defense, see Fed. R. Civ. P. 8(c), nor did it raise this issue until post-
trial motions. And, it appears, these failures are unsurprising. It is
undisputed that the parties to the settlement agreement did not intend
to release REMS from the pending claims against it, see Scott by
McClure v. Fruehauf Corp., 396 S.E.2d 354, 356 (S.C. 1990) (noting
that "[t]he release of one tortfeasor does not constitute a release of
others who contributed to the plaintiff's injuries unless the parties
intended such a release or the plaintiff received full satisfaction"), and
the settling parties later executed a modified release which specifi-
cally reserved all claims that the plaintiff had against REMS, Univer-
sal, and the principals of these non-settling defendants. Accordingly,
REMS was not entitled to dismissal on this basis.
Second, REMS claims is that it is entitled to a set-off against the
$150,000 actual damages verdict against it for the amounts paid and
payable under the settlement agreement between Amstat and Republic
Leasing. Specifically, under that agreement, Amstat agreed to pay
$100,000 over a two-year period, and to execute a confession of judg-
ment in the amount of $288,681.34 which could be filed when and if
_________________________________________________________________
3 For example, the jury could have concluded that Republic Leasing
proved the first five elements of fraud, which speak directly to REMS'
conduct, by clear, cogent, and convincing evidence, but that Republic
Leasing either failed to prove one or more of the remaining four elements
or only proved them by a preponderance of the evidence.
11
Amstat failed to make the agreed-upon payments. REMS contends
that it is entitled to a set-off in the amount of the present-day value
of $100,000 -- the full amount owing under the agreement. The dis-
trict court denied the motion. We affirm.
Under South Carolina law, REMS is entitled to a pro tanto reduc-
tion in judgment for the same cause of action, see Atlas Food Sys. &
Serv., Inc. v. Crane Nat. Vendors, Inc., 99 F.3d 587, 596 (4th Cir.
1996); see also Powers v. Temple, 156 S.E.2d 759, 761 (S.C. 1967),
a rule "rest[ing] on the almost universally held [principle] that there
can be only one satisfaction for an injury or wrong." Atlas, 99 F.3d
at 596 (internal quotation marks omitted) (second alteration in origi-
nal). At the time REMS made a request for a set-off, there had been
no satisfaction of any part of the $150,000 judgment rendered against
it. Accordingly, at the time the request was made, the district court
did not err in refusing to grant a set-off to REMS. We express no
opinion, however, as to whether REMS would now be entitled to a
set-off; this is a matter which can be addressed by the district court
when and if it becomes an issue.
E.
The final issue on appeal concerns the lower court's award of attor-
ney's fees. When added as a defendant in this case, REMS initially
moved to dismiss the complaint on the grounds that it had no contacts
with the State of South Carolina and, therefore, that South Carolina
lacked personal jurisdiction over it. Additionally, REMS denied con-
tacts with the state in discovery responses.
Republic Leasing, following an investigation into REMS' business
contacts within the state, moved to compel truthful answers to its dis-
covery requests propounded on the issue of personal jurisdiction, and
moved for sanctions. REMS then admitted that the court had personal
jurisdiction over it, abandoned its jurisdictional motion, and answered
the complaint.
At the conclusion of the trial, the court awarded Republic Leasing
attorney's fees in the amount of $6,472.59 for REMS' discovery
abuse under Rule 37(a)(4)(A), which provides that if a motion to
compel discovery is granted, or discovery is provided as a result of
12
the motion, the court may award "reasonable expenses incurred in
making the motion, including attorney's fees." REMS appeals this
award, contending that, while Republic Leasing was entitled to
recover attorney's fees incurred in preparing the motion to compel, it
was not entitled to recover attorney's fees incurred as a result of
efforts to ascertain the falsity of REMS' discovery responses.
We find no error. Even if we were to conclude that"reasonable
expenses incurred in making [a] motion [to compel]" under Rule
37(a)(4)(A), do not include expenses associated with ascertaining the
basis for the motion, we are satisfied that the magistrate judge, under
the circumstances, possessed the inherent power to award those
expenses pursuant to Rule 26(e), which mandates that a party correct
any disclosure known to be materially incorrect. See Buffington v.
Baltimore County, 913 F.2d 113, 132-33 n. 15 (4th Cir. 1990).
Accordingly, we affirm the lower court's award of attorney's fees and
expenses.
IV.
For the foregoing reasons, the judgment of the district court is
hereby affirmed.
AFFIRMED
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