Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_03-cv-01003/USCOURTS-cand-3_03-cv-01003-0/pdf.json

Nature of Suit Code: 290
Nature of Suit: Other Real Property Actions
Cause of Action: 28:1441 Petition for Removal- Property Damage

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United States District Court

For the Northern District of California

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UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

SCANLAN KEMPER BARD COMPANIES, an

Oregon corporation, ROYAL INSURANCE

COMPANY OF AMERICA, an Illinois

corporation,

Third-Party Plaintiffs,

 v.

EMG, INC., a Maryland corporation,

Third-Party Defendant. 

AND RELATED CROSS-ACTION

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No. C-03-1003 SC

ORDER DENYING

DEFENDANT'S MOTION

FOR SUMMARY JUDGMENT

AND GRANTING

DEFENDANT'S MOTION

FOR SUMMARY

ADJUDICATION

I. Introduction

Third-Party Plaintiff Scanlan Kemper Bard ("Plaintiff" or

"SKB") and its insurer Royal Insurance Company of America

("Royal") seek to recover from Third-Party Defendant Environmental

Management Group, Inc. ("EMG" or "Defendant") monies that SKB and

Royal paid to settle an action brought by property owners against

SKB.

Defendant EMG now moves for summary judgment on each of the

contract-based claims against it, on the basis that an antiassignment and exculpatory clause forecloses any liability based

on the subject of the contract. EMG also moves for summary

judgment on Plaintiff's fraudulent inducement claim on the grounds

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that Plaintiff has failed to demonstrate that an issue of material

fact exists with regard to these claims. Finally, in the event

that the Court does not grant summary judgment in EMG's favor, EMG

also seeks summary adjudication of several issues in advance of

trial, including whether Maryland law applies to every claim

against EMG and whether a limitation of liability clause in the

contract caps EMG's potential liability at $50,000.

Plaintiff SKB opposes EMG's motion in its entirety and argues

that each claim should proceed to trial. Moreover, SKB denies

that the limitation of liability clause applies to either the

negligent misrepresentation or fraudulent inducement claims, and

that — despite a choice of law provision in favor of Maryland law

— California public policy favors applying a California statute

prohibiting exculpatory clauses from exempting liability for

fraud.

Having reviewed the parties' moving papers, as well as the

additional evidentiary submissions and supplementary papers and

declarations, and for the reasons discussed further herein, the

Court denies Defendant's motion for summary judgment as to each of

the four claims brought by Plaintiff. The Court grants

Defendant's motion for summary adjudication as to several issues.

II. Background

Plaintiff SKB is a real estate merchant bank located in

Portland, Oregon. SKB identifies potential commercial real estate

investment properties and lines up investors to acquire the

properties. Defendant EMG is a firm that conducts property

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condition assessments and evaluations for prospective purchasers

of commercial real estate.

In 2000, SKB identified the Orinda Theater Square as a

potential investment. The Orinda Theater Square is a large

commercial complex located in Orinda, California. It includes the

Orinda Theater as well as several other buildings housing business

and retail tenants. 

In order to purchase the Orinda Theater Square, SKB secured

43 separate investors. Most investors contributed capital to

Orinda Investments, LLC, a limited liability company established

specifically to facilitate the purchase of the Orinda Theater

Square property. Orinda Investments, LLC joined with Main Street

Holdings, the LLC of the largest individual investor, Steven

Thomas, to purchase the property for $18.275 million. 

SKB entered into a purchase agreement (the "purchase

agreement") with the sellers of the Orinda property dated June 8,

2000. As part of the due diligence prior to purchase, SKB hired

EMG to conduct a property inspection of the Orinda Theater Square

property. SKB and EMG entered into a written contract (the

"property inspection contract"), and SKB agreed to pay EMG $6,000

for its property inspection services. On April 5 and 6, 2000, an

EMG representative conducted the inspection of the Orinda property

and subsequently prepared a "Property Condition Evaluation" dated

July 20, 2000. The evaluation stated that the building was in

"good overall condition" and estimated that the property warranted

$17,855 in immediate repair costs, $17,500 in short term

expenditures and $173,000 in long term reserves. Pl. Ex. A. 

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Under the purchase agreement, the due diligence period lasted

through August 25, 2000. Although SKB was initially designated as

the purchaser of the property, prior to closing SKB assigned its

rights under the purchase agreement to Main Street Holdings and

Orinda Investments. Main Street Holdings and Orinda Investments

became the owners of the Orinda property, and remain so today. 

Under the terms of the assignment, SKB retained a limited equity

interest in the property.

In the Fall of 2001, extensive water damage was discovered

throughout the Orinda property. This damage has been repaired at

a cost of at least $3 million. In 2003, Investors Steven Thomas

and Main Street Holdings sued SKB for failing to conduct adequate

due diligence. SKB, through its insurer Royal, settled with the

investors for $3 million. As part of this settlement, Main Street

Holdings, Steven Thomas and Orinda Investments assigned to Royal

any and all claims they might have against the property inspector,

EMG.

SKB and Royal in turn filed a complaint against EMG. In the

second amended complaint, SKB and Royal allege breach of the

property inspection contract, negligence, negligent

misrepresentation and fraud in the inducement of the property

inspection contract. Now before the Court is EMG's motion for

summary judgment, or in the alternative, summary adjudication of

these claims. SKB opposes EMG's motion in its entirety.

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III. Legal Standard

A. Summary Judgment

The standards for considering a motion for summary judgment

are well settled. Summary judgment is proper only when there is

no genuine issue of material fact and, when viewing the evidence

in the light most favorable to the nonmoving party, the movant is

clearly entitled to prevail as a matter of law. See Fed. R. Civ.

P. 56(c); Cleary v. News Corp., 30 F.3d 1255, 1259 (9th Cir.

1994). The moving party bears the initial burden of informing the

Court of the basis for the motion, and identifying portions of the

pleadings, depositions, answers to interrogatories, admissions, or

affidavits that demonstrate the absence of a triable issue of

material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323

(1986). Once a summary judgment motion is made and properly

supported, the nonmoving party may not rest on the mere

allegations of its pleadings, but must set forth specific facts

showing that there is a genuine issue for trial. See Fed R. Civ.

P. 56(e); Celotex, 477 U.S. at 323. In addition, to withstand a

proper motion for summary judgment, the nonmoving party must show

that there are “genuine factual issues that properly can be

resolved only by a finder of fact because they may reasonably be

in favor of either party.” Anderson v. Liberty Lobby, Inc., 477

U.S. 242, 250 (1986).

The standard applied to a motion seeking partial summary

judgment is identical to that for a motion seeking summary

judgment of the entire case. Medrano v. D'Arrigo Bros. of

California, 336 F. Supp. 2d 1053, 1056 (N.D. Cal. 2004). 

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Moreover, the Court may grant partial summary judgment to

determine that certain issues shall be deemed established in

advance of the trial. "[T]he purpose of summary judgment is met

when the summary adjudication of preliminary issues ... helps to

focus the issues to be litigated, thus conserving judicial

resources." Advanced Semiconductor Materials America, Inc. v.

Applied Materials, 1995 WL 419747 (N.D. Cal. 1995). A grant of

partial summary judgment is an interlocutory — not final —

decision, and accordingly may be reviewed by this Court at any

time prior to entry of judgment. National Rural

Telecommunications Co-op. v. DIRECTV, Inc., 319 F.Supp.2d 1059

(C.D. Cal. 2003). 

B. Choice of Law

When a case comes before a federal court under its diversity

jurisdiction, the court applies the conflict of law principles of

its forum state. Sarlot-Kantarjian v. First Pennsylvania Mortgage

Trust, 599 F.2d 915, 917 (9th Cir. 1979). Under California choice

of law principles, when a contract contains a valid choice of law

provision, California will apply the substantive law designated by

the contract unless the transaction falls under either of two

exceptions contained in the Restatement (Second) of Conflict of

Laws § 187(2). Nedlloyd Lines B.V. v. Superior Court, 3 Cal.4th

459 (Cal. 1992). Under section 187(2), the choice of law

provision will not be applied when 1) "the chosen state has no

substantial relationship to the parties or the transaction and

there is no other reason for the parties choice" or 2)

"application of the law of the chosen state would be contrary to a

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1

EMG also moves for summary adjudication that Maryland law

governs each issue in this case. Neither party disputes that the

contract at issue contains a valid choice-of-law provision

designating the law of Maryland. Moreover, Plaintiff SKB objects

to the application of Maryland law only as to its claim for

negligent misrepresentation. Finding the choice-of-law provision

enforceable under California choice-of-law rules, this Court will

apply Maryland law to the resolution of all other issues without

further discussion. The law applicable to Plaintiff's claim for

negligent misrepresentation is discussed more fully herein.

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fundamental policy of a state which has a materially greater

interest than the chosen state in the determination of the

particular issue and which ... would be the state of the

applicable law in the absence of an effective choice of law by the

parties." Restatement (Second) of Conflict of Laws § 187(2)

(1988). A separate choice-of-law inquiry must be made with

respect to each issue in a case. S.A. Empresa De Viacao (Varig

Airlines) v. Boeing Co., 641 F.2d 746, 749 (9th Cir. 1981). 

IV. Discussion

EMG moves for summary judgment on several grounds: 1) that

anti-assignment and exculpatory clauses in its contract with SKB

bar most claims made against EMG; 2) that a limitation of

liability clause in the contract limits EMG's potential liability

to an aggregate of $50,000; and 3) that no genuine issue of

material fact exists to support the claim for fraudulent

inducement of contract. The Court will discuss each of these in

turn.1

A. Anti-assignment and Exculpatory Clauses

EMG inspected the Orinda Property pursuant to a written

agreement with SKB. This property inspection contract includes a

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clause entitled "Reliance; Assignment," which states:

The Services, the reports and other related work product

provided by EMG may not be relied upon by any person or

entity, other than the Client, without the advance

written consent of EMG. No third party beneficiaries

are intended. The Client shall not assign the Proposal,

any report or any related work product, without the

prior written consent of EMG. Any unauthorized reuse or

redistribution of EMG's work product or reports shall be

at the Client's and recipient's sole risk, without

liability to EMG. EMG shall not assign its obligations

under the Proposal; however, EMG may employ, by

subcontract, suitably trained persons or entities

acceptable to EMG to perform the Services.

Def. Ex. A. at 15. EMG asserts that SKB's assignment of its

rights under the purchase agreement to Main Street Holdings and

Orinda Investments was a violation of this clause in the property

inspection contract, exculpating EMG from any liability based on

the contract. For several reasons, this position in untenable. 

To begin, EMG has produced no evidence that SKB's assignment

of its rights under the purchase agreement included an assignment

of SKB's rights under the entirely separate property inspection

contract. Moreover, prior to assigning its rights under the

purchase agreement, SKB represented to Main Street Holdings and

Orinda Investments that it had completed due diligence and had

ascertained that the property was free of significant defect. As

a result, Main Street Holdings and Orinda Investments relied on

the representations of SKB, and were limited to recovering for

their damages from SKB for failure to conduct adequate due

diligence — which, in fact, they did. That SKB is now seeking to

recover from EMG for breach of the property inspection contract

undercuts EMG's argument that SKB assigned away its rights under

this contract. Because EMG has not proved that any assignment of

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its contract with SKB was made, it is not entitled to summary

judgment based on the anti-assignment clause.

EMG further argues that, notwithstanding the anti-assignment

clause, the above language also contains an "exculpatory"

provision which absolves EMG of liability if any third party

"relies" on EMG's work product without prior authorization. 

Maryland law clearly permits parties to include exculpatory

clauses in their agreements, and Maryland courts will generally

enforce such agreements absent public policy or statutory

conflicts. See, e.g., Wolf v. Ford, 335 Md. 525, 521 (1994). 

However, "[b]ecause such clauses bring about harsh results,

Maryland narrowly construes exculpatory clauses...." Cornell v.

Council of Unit Owners Hawaiian Village Condominiums, Inc., 983

F.Supp. 640, 643 (D. Md. 1997). Based on the language of the

clause in the property inspection contract, the Court finds that

EMG would be relieved of liability only if it could affirmatively

show 1) that SKB reproduced the EMG report and redistributed it to

the investors in order to induce them to invest in the property,

and 2) that the investors specifically relied on the EMG report in

deciding to purchase the Orinda property. This Court finds that

EMG has not demonstrated any such redistribution and reliance. At

most, EMG has shown that the managing agent of Orinda Investments

was also vice-president of SKB, and as such was familiar with the

EMG report. However, SKB has demonstrated that it had sole

responsibility for conducting due diligence and for evaluating and

relying on EMG's report prior to the assignation of its rights

under the purchase agreement to the investors. Pl. Opp. at 14.;

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2As the movant, EMG bears the burden of demonstrating the

absence of a triable issue of material fact on each claim for which

it seeks summary judgment. Celotex, 477 U.S. at 323. Beyond its

argument that the anti-assignment and exculpatory clauses in the

contract bar SKB's breach of contract, negligence and negligent

misrepresentation claims, EMG failed to produce any evidence

tending to show an absence of issues of material fact. 

Accordingly, this Court finds that issues of material fact exist as

to these claims, which also preclude summary judgment.

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Pl. Ex. L, M. The available evidence indicates only that the

investors relied on SKB to conduct the due diligence, which is not

prohibited under the property inspection contract. Consequently,

EMG has failed to show that there was any "unauthorized reuse or

redistribution of EMG's work product or reports," and summary

judgment on this ground is inappropriate.2

B. Limitation of Liability

EMG also moves for summary adjudication that SKB cannot

recover more than $50,000 for claims related to the property

inspection contract because that contract contains a valid

limitation of liability clause. The relevant clause, entitled

"Professional Liability," states:

EMG's liability, and that of its officers, directors,

employees, agents and subcontractors, to the Client or

to any third party, due to any negligent professional

acts, errors or omissions, or breach of contract by EMG,

shall be limited to an aggregate of $50,000, or EMG's

total charges for its Services (whichever is

greater)....

Def. Ex. A. As noted above, Maryland law presumes such clauses to

be valid based on a public policy favoring freedom of contract. 

Adloo v. H.T. Brown Real Estate, Inc., 344 Md. 254, 259 (1996). 

In fact, SKB does not deny that the limitation of liability clause

applies to its claims for breach of contract and negligence. For

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its part, EMG concedes that the limitation of liability clause

cannot apply to the claim for fraudulent inducement, as courts

generally do not allow parties to contract out of liability for

their fraudulent or intentional conduct. See, e.g., Wolf, 335 Md.

at 526. Accordingly, this Court finds that the limitation of

liability clause operates to limit EMG's potential liability to

SKB for breach of contract and negligence to a maximum of $50,000. 

Additionally, this Court finds that the limitation of liability

clause is inapplicable to SKB's fraudulent inducement claim.

i. Negligent Misrepresentation

The question of whether the limitation of liability clause in

the property inspection contract is applicable to the remaining

claim for negligent misrepresentation requires further analysis. 

EMG asserts that Maryland law controls, and in Maryland, a

limitation of liability clause is enforceable as to a claim for

negligent misrepresentation. SKB seeks to avoid this conclusion

by applying California law, which it reads to disallow such a cap

on liability for negligent misrepresentation.

In California, courts have found that negligent

misrepresentation "requires intent to induce reliance" and is thus

a "subspecies or variety of fraud...." Chatton v. National Union

Fire Ins. Co., 10 Cal.App. 4th 846 (1992). Accordingly,

California courts have invalidated contractual clauses exempting a

party from liability for negligent misrepresentation pursuant to

California Civil Code § 1668, which makes contracts exempting one

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3Section 1668 states, "All contracts which have for their

object, directly or indirectly, to exempt anyone from

responsibility for his own fraud, or willful injury to the person

or property of another, or violation of law, whether willful or

negligent, are against the policy of the law." Cal. CCP § 1668.

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from liability for one's own fraud unlawful.3 Blankenhiem v. E.F.

Hutton & Co., 217 Cal.App.3d 1463, 1472-73 (9th Cir. 1999); Cal.

Civ. Code § 1668. 

On the other hand, Maryland law deems negligent

misrepresentation a "form of negligence," Sheets v. Brethren

Mutual Insurance Company, 342 Md. 634, 646 (1996), and Maryland

courts have "repeatedly refused to expand the tort [of fraud] to

encompass liability for negligent or grossly negligent

representations." Ellerin v. Fairfax Savings, 337 Md. 216, 238-

239 (1995). Thus, Maryland courts enforce contractual provisions

limiting liability for negligent misrepresentation.

Whether the limitation of liability clause applies to the

negligent misrepresentation claim, therefore, will depend on which

state's law applies. Although the property inspection contract

contains a choice of law provision specifying that Maryland law

will govern any disputes based on the contract, Plaintiff argues

that California's strong interest in applying § 1668 trumps this

provision. This Court finds that the circumstances of this case

do not indicate that California has such an interest in applying

its law that it should override the parties' own choice of law

provision. 

To begin, Plaintiff correctly notes that this Court, sitting

in diversity, must apply the choice of law rules of California,

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the forum state. Ticknor v. Choice Hotels Int'l., 265 F.3d 931,

937 (9th Cir. 2001). Because California choice of law rules

generally enforce contractual choice of law provisions, Maryland

law presumably applies to the instant matter. However, as was

noted above, an exception to this general rule may be made where

application of the chosen law would contravene a fundamental

policy of the state whose law would have applied absent the choice

of law provision. Nedlloyd Lines B.V. v. Superior Court, 3 Cal.

4th 459, 465-466 (1992). In such a case, the law of the state

whose public policy is threatened will apply, provided that this

state also has a materially greater interest in regulating the

issue at hand. Id. Consequently, California law will be applied

to this issue only if California's public policy is threatened and

California has a materially greater interest than Maryland in

regulating the issue at hand.

Plaintiff asserts that Civil Code section 1668 reflects "the

express statutory policy" of California. Neubauer v. Goldfarb,

108 Cal.App.4th 47, 56 (2003). However, the Ninth Circuit has

observed that section 1668 was designed to protect California's

citizens. S.A. Impressa de Viacao, 641 F.2d at 753. This Court

finds that application of Maryland law will not necessarily

contravene California's public policy, where no California

citizens are involved.

On the other hand, Maryland clearly has a strong interest in

having its law applied to this matter. This case involves two

corporate citizens hailing from the states of Maryland and

Washington. These private, sophisticated parties contracted in

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advance to have any disputes arising under the contract governed

by the law of Maryland, despite the fact that the subject of the

contract is property located in California. As Defendant EMG is a

Maryland corporation, Maryland has a strong interest in seeing

that the legitimate expectations of its citizen are upheld.

The interest of California, on the other hand, is less

compelling. California has no citizens to protect, and this

private contract does not implicate the public interest. Cf.

Neubauer, 108 Cal.App.4th at 56 ("the buying and selling of

corporate stock are transactions which affect a public interest"). 

In S.A. Impressa de Viacao, where neither party was a California

citizen, the Ninth Circuit held that Washington state, whose law

had been designated by the contractual choice of law provision and

whose citizen was a party to that contract, had a greater interest

in having its law applied than did California. S.A. Impressa de

Viacao, 641 F.2d at 753. 

This Court finds that, in the present dispute, Maryland's

interest in having its law applied is materially greater than that

of California. Section 1668 does not provide a compelling

interest in this case because Section 1668 was not designed to

protect foreign citizens purchasing land in California. Moreover,

to impose California's law on these parties would frustrate their

valid contractual expectations. And although California clearly

has some interest in regulating contracts to be executed within

California, under these circumstances, California's interest is

not materially greater than Maryland's interest in having the

legitimate contractual expectations of a Maryland citizen upheld. 

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C. Fraudulent Inducement

Finally, we turn to SKB's claim against EMG for fraudulent

inducement of contract. Plaintiff's potential recovery for this

claim is unaffected by the limitation of liability clause in the

property inspection contract, because under Maryland law, one may

not contract away one's liability for intentional, fraudulent or

grossly negligent conduct. Nevertheless, EMG moves for summary

judgment on this claim, asserting that no material issue of fact

exists on which to proceed to trial. 

Under Maryland law, to prove fraud in the inducement of a

contract, Plaintiff must prove: 1) that the defendant made a

false representation to the plaintiff; 2) that its falsity was

either known to the defendant or that the representation was made

with reckless indifference as to its truth; 3) that the

misrepresentation was made for the purpose of defrauding the

plaintiff; 4) that the plaintiff relied on the misrepresentation

and had the right to rely on it; and 5) that the plaintiff

suffered compensable injury resulting from the misrepresentation. 

Sass v. Andrew, 152 Md.App. 406, 429 (Md. App. 2003)(citations

omitted). For a claim of fraudulent inducement in the contract,

"a plaintiff can successfully bring a tort action for fraud that

is based on false pre-contract promises by the defendant even if

... the pre-contractual promises that constitute the fraud are not

mentioned in the written contract." Greenfield v. Heckenbach, 797

A.2d 63, 76 (Md. App. 2002).

Plaintiff supports this claim with evidence of

representations made in EMG's written proposal to Plaintiff

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concerning the extent of the property inspection services that

Defendant would provide if hired. Specifically, Plaintiff

demonstrates that EMG's proposal promised a "higher level of

discovery" than other property evaluations and that EMG's service

would "reduce uncertainty regarding unknown physical

deficiencies." Plaintiff's Ex. H. Further, EMG acknowledged that

SKB, as an equity investor, had "more intense interests in

discovery than the interests of other due diligence clients," and

represented that its inspector would be "specifically trained" in

the type of equity investigation required. In marketing material,

EMG also represented that the Property Condition Evaluation, which

it was marketing to SKB and which SKB eventually purchased, was

fundamentally different from the less expensive Property Condition

Assessment. In contrast to the Property Condition Assessment, the

Property Condition Evaluation required a higher "level of

investigation, research, and validation of information..." 

Plaintiff's Ex. E. This material stated:

Given the sensitive nature of property transfers,

additional time is apportioned to communicate with the

Client prior to, throughout, and following the

engagement, in order to ensure specific Client

sensitivities are addressed, the appropriate level of

due diligence is conducted, and a proactive approach is

taken to identifying potential issues.

Id. To carry out this mandate, the Property Condition Evaluation

was said to involve a series of conference calls between the

inspector and client. 

Plaintiff alleges that EMG's representations were

demonstrably false at the time they were made, by contrasting them

with statements made by EMG's own inspector, Paul DesMarais. Mr.

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DesMarais maintains that EMG's Property Condition Evaluation is

not meant to include "discovery" or to "reduce uncertainty

regarding unknown physical deficiencies." Plaintiff's Ex. O. 

Rather, Mr. DesMarais insisted that his responsibility under the

contract was only to document "visually observable" problems. Id.

EMG never provided the promised conference calls with SKB, and Mr.

DesMarais indicated that he had no idea of Plaintiff's status as

an equity investor. 

In Maryland, "[A] fraud action can only be predicated on

misrepresentation of past or existing fact; breach of future

promises lies in the realm of contract." Call Carl, Inc., et al.

v. BP Oil Company, 554 F.2d 623, (4th Cir. 1977). As a result,

EMG's broken promises, without more, are insufficient to support

SKB's fraudulent inducement claim. However, "the

misrepresentation of one's own intention may constitute the

misrepresentation of a present fact...." Weisman v. Connors, 312

Md. 428 (1988). If a jury believes that EMG had no intention of

performing to the higher standards set out in EMG's proposals and

marketing material, than an action for fraud would lie. Taking

this evidence in the light most favorable to Plaintiff, this Court

holds that a jury could find that EMG intentionally or recklessly

misrepresented the extent of the services its inspector was

prepared to provide under the property inspection contract. 

Accordingly, summary judgment on SKB's claim for fraudulent

inducement of contract is not warranted. 

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V. Conclusion

For the reasons articulated above, Defendant's Motion seeking

summary judgment on all causes of action in the Second Amended

Third-Party Complaint of Plaintiff Scanlon Kemper Bard is HEREBY

DENIED. Neither the anti-assignment nor the exculpatory clause in

the property inspection contract precludes SKB from bringing its

claims against EMG. Additionally, issues of material fact exist,

which preclude summary judgment on the negligence, breach of

contract, negligent misrepresentation and fraudulent inducement

claims. The Court finds, however, that a limitation of liability

clause in the property inspection contract is valid and applies to

limit EMG's potential liability for the breach of contract,

negligence and negligent misrepresentation claims to an aggregate

of $50,000. This clause does not apply to SKB's claim for

fraudulent inducement.

IT IS SO ORDERED.

Dated: May 18, 2005

 /s/ Samuel Conti 

UNITED STATES DISTRICT JUDGE

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