Opinion ID: 1733175
Heading Depth: 1
Heading Rank: 6

Heading: Liability of Iowa Realty for Exemplary Damages.

Text: Iowa Realty's last argument concerns the award of exemplary damages. Subsequent to the trial of this case, we decided Briner v. Hyslop, 337 N.W.2d 858 (Iowa 1983). There we affirmed the fact that in this jurisdiction we follow the so-called complicity rule with respect to the award of exemplary damages against a principal because of the actions of an agent. This is the rule articulated in Restatement (Second) of Torts section 909 (1979) and mirrored in Restatement (Second) of Agency section 217C (1958). Iowa Realty, in its motion for a directed verdict in the district court and in its objections to the court's instructions, cited and relied on the foregoing Restatement rules and urged that the evidence which had been presented was insufficient to permit any award of exemplary damages against it. The trial court overruled these contentions and submitted the issue of exemplary damages to the jury. After the jury had returned an award of exemplary damages against Iowa Realty, it again urged the insufficiency of the evidence to support such award in its post-trial motions. These motions were overruled by the trial court. Under the Restatement rule which we approved in Briner, exemplary damages can properly be awarded against a principal because of an act by an agent only if (a) a managerial agent of the principal authorized or ratified the act, (b) the agent himself is shown to have been acting in a managerial capacity, or (c) the principal is shown to have been reckless in retaining an unfit agent. Defendant has properly preserved in the trial court and raised on this appeal the issue of the sufficiency of the evidence to satisfy the foregoing requirements. We therefore face the task of deciding the sufficiency of plaintiffs' proof according to the rule of the Restatement. This requires consideration of both the East 40th Street transaction and Grand Avenue transactions. As to the East 40th Street transaction, it is plaintiffs' claim that they told the agent, Hart, that they had to have property zoned for auto salvage and that she advised them that the East 40th Street property met this test. Plaintiffs assert that in so doing the agent either deliberately misrepresented the applicable zoning restrictions on the property or deliberately acted with a reckless disregard of the truth. We conclude that when the evidence is viewed in the light most favorable to plaintiffs it sustains their claim that Hart, acting as agent for Iowa Realty, misrepresented the zoning restrictions on the East 40th Street property. We find no evidence, however, that a managerial agent of Iowa Realty authorized or ratified such misrepresentation. Hart herself was not acting in a managerial capacity, and no showing has been made that she was known by Iowa Realty to be an incompetent agent prior to the transactions in question. Plaintiffs' proof therefore fails to establish the elements necessary to render Iowa Realty liable for exemplary damages as a result of Hart's acts in the East 40th Street transaction. Turning to the Grand Avenue properties, the elements of fraud and self-dealing which plaintiffs assert in support of their claims for exemplary damages on that transaction concern the preparation of the documents of sale by Hart and the failure of Hart or Iowa Realty to protect plaintiffs from Hart's insolvency. As to the first of these claims, the situation concerning Hart taking an absolute deed to the property rather than an installment contract was determined in Hart v. Kimmel to have been the result of mutual mistake. This adjudication was consistent with plaintiffs' allegations in that case and was the subject of a consent decree which plaintiffs concede they agreed to. We have held in division I, however, that this circumstance does not create a claim preclusion in the present action as to all elements of the Grand Avenue transaction. While there was opinion testimony from attorneys and realtors that, given the nature of this transaction, an installment contract with forfeiture clause would have been the most common way of handling the documentation, and would have better served to protect the sellers' interest, we do not think this supports a finding of ratification of fraud at a management level. The initial closing documents (later reformed by court decree) complied with the written offer made by Virdon's Variety and accepted by the Kimmels. If there was fraud in this transaction, it necessarily had to flow from some act by Hart which misled the Kimmels as to the provisions of Virdon's offer. There is no evidence that if this occurred Iowa Realty had knowledge at a management level that the offer which the Kimmels accepted did not in fact comport with the agreement of the parties. Given these circumstances, the preparation of the contract documents provide the Kimmels no basis for claiming exemplary damages in the present case. With respect to the alleged failure of Hart or Iowa Realty to protect the plaintiffs against the consequences of Hart's insolvency, the evidence would support a finding that Iowa Realty, acting at a management level, knew that Hart was the principal buyer of this property, was facing a potential conflict of interest in the transaction, and that her personal financial picture was certainly not good. The time when this knowledge was acquired is somewhat uncertain. Some rather unusual arrangements had to be made concerning the share of both Hart and Iowa Realty on the commission from the sale in order to alleviate Hart's financial burdens. Contrary to plaintiffs' assertions, however, the contract was not purely executory when the Iowa Realty management was first contacted by the Kimmels concerning insufficient funds checks given them by Hart. There was at this time a binding contract of sale as a result of the Kimmels' acceptance of the written offer made by Virdon's Variety. That contract was also in force prior to any knowledge by Iowa Realty of a federal tax lien on Hart's commissions. In Holcomb v. Hoffschneider, 297 N.W.2d 210, 213-14 (Iowa 1980), also involving liability of a real estate company for acts of its agent, we held that breach of fiduciary duty, even if technically qualifying as fraud, will not justify exemplary damages unless malicious, deliberate, gross, or wanton. This rule is tempered by our holdings that the determination of malice may involve either actual malice or legal malice. First National Bank v. One Craig Place, Ltd., 303 N.W.2d 688, 699-700 (Iowa 1981); Feeney v. Scott County, 290 N.W.2d 885, 892 (Iowa 1980). To establish legal malice, it need only be shown that wrongful or illegal conduct was committed or continued with a reckless disregard of another's rights. Feeney, 290 N.W.2d at 892. Tested by these principles, we conclude that the evidence in the present case falls somewhat short of the culpability level needed to sustain an award of exemplary damages. At best, the evidence shows knowledge by Iowa Realty that Hart was perhaps a risky buyer. There is no showing that it knew she would be unable to complete the transaction. Every indication was that it was Hart's intention to resell this property to the Pinters at the earliest opportunity; a circumstance which could have provided the basis for the payments to the Kimmels which were due in full within one year and four months of the sale to Virdon's Variety. Reviewing the transaction in its entirety, we find that the trial court erred in submitting any issue of exemplary damages to the jury. In reaching the result which we do, we have considered and rejected plaintiffs' argument that its claim for exemplary damages is based upon direct corporate action rather than the acts of an agent. This distinction and its effect on liability of corporations for exemplary damages under the complicity rule is discussed in detail in Ellis, Punitive Damages in Iowa Law: A Critical Assessment, 66 Iowa L.Rev. 1005, 1039-41 (1981). We find it sufficient to state that no acts of Iowa Realty as a corporate entity have been shown in the present case which satisfy the purposes of exemplary damages which were approved in our Briner decision. In Muchmore Equipment Inc. v. Grover, 315 N.W.2d 92, 101 (Iowa 1982), where exemplary damages were improperly included in a judgment, we followed the procedure on appeal of modifying the judgment so as to comport with that which should have been entered and remanding the case to the district court for entry of the proper judgment. We follow that procedure in the present case. The correct judgment should have been in the sum of $50,000 plus costs and interest at the statutory rate from the date of the filing of plaintiffs' petition. MODIFIED, AFFIRMED, AND REMANDED WITH DIRECTIONS.