Opinion ID: 551885
Heading Depth: 2
Heading Rank: 2

Heading: The Fraud Claim Arising From The Peru Test

Text: 107 On cross-appeal, General Poly challenges the district court's ruling directing a verdict in favor of Allied on General Poly's claim for fraud arising from the test of resin in Lima, Peru. At trial, General Poly alleged that Allied knowingly misrepresented the resin sent to Peru in March 1979 as its own, when in fact the resin was made by Solvay and Allied was using it pursuant to a licensing agreement. In directing a verdict against General Poly, the district court ruled that General Poly had failed to show Allied made a knowing misrepresentation with the intent to deceive and, in the alternative, that General Poly's claim was barred by Kansas' two-year statute of limitations because the claim was brought more than two years after the alleged fraud should reasonably have been discovered. R. Vol. 50 at 5682-83. We affirm the district court's order directing a verdict in favor of Allied.
108 The law of fraud is well-established in Kansas: 109 Where one party to a contract or transaction has superior knowledge, or knowledge which is not within the fair and reasonable reach of the other party and which he could not discover by the exercise of reasonable diligence, or means of knowledge which are not open to both parties alike, he is under a legal obligation to speak, and his silence constitutes fraud, especially where the other party relies upon him to communicate to him the true state of facts to enable him to judge of the expedience of the bargain. 110 Wolf v. Brungardt, 215 Kan. 272, 282, 524 P.2d 726, 734 (1974). 111 actionable fraud includes an untrue statement of fact, known to be untrue by the party making it, made with the intent to deceive or recklessly made with a disregard for the truth, where another party justifiably relies on the statement and acts to his injury. 112 K-B Trucking Co. v. Riss Int'l Corp., 763 F.2d 1148, 1156 (10th Cir.1985) (quoting Lentz Plumbing Co. v. Fee, 235 Kan. 266, 270, 679 P.2d 736, 742 (1984)). 113 An action for fraud must be brought within two years of when it accrues, but the cause of action shall not be deemed to have accrued until the fraud is discovered. Kan.Stat.Ann. Sec. 60-513(a)(3) (1983). The Supreme Court of Kansas has interpreted discovery of the fraud under the statute of limitations to mean 114 the discovery by the person defrauded of such facts indicating he had been defrauded as would cause a reasonably prudent person to investigate, and which, if investigated with reasonable diligence, would lead to knowledge of the fraud. 115 Wolf, 215 Kan. at 281, 524 P.2d at 734. Because the modern tendency is to restrict rather than to expand the immunity of one who gains an advantage over another by purposely misleading him, id., [s]ome Kansas cases have rejected statute of limitations contentions when the plaintiff could have discovered the fraud, but the defendant lulled the plaintiff into confidence that nothing was amiss. Wolf v. Preferred Risk Life Ins. Co., 728 F.2d 1304, 1306 (10th Cir.1984); see, e.g., Augusta Bank & Trust v. Broomfield, 231 Kan. 52, 61-62, 643 P.2d 100, 108 (1982).
116 The district court's directed verdict may only be sustained if viewing the evidence most favorably to the party against whom the motion is made, and giv[ing] that party the benefit of all inferences, there is no evidence upon which the jury could properly find a verdict for that party. Hurd v. American Hoist & Derrick Co., 734 F.2d 495, 498-99 (10th Cir.1984) (quotations omitted). In making that determination, we must take into account the burden of proof for the underlying claim. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252, 106 S.Ct. 2505, 2512, 91 L.Ed.2d 202 (1986). Under Kansas law, a claim of fraud must be proven by clear and convincing evidence. Nordstrom v. Miller, 227 Kan. 59, 65, 605 P.2d 545, 552 (1980); see Mackey v. Burke, 751 F.2d 322, 328 (10th Cir.1984). The district court's alternative ground for directing a verdict in favor of Allied was the Kansas two-year statute of limitations. Therefore, we must also take into account Allied's burden of proof for the affirmative defense of the statute of limitations. 117 [A] directed verdict for the party having the burden of proof may be granted only where he has established his case by evidence that the jury would not be at liberty to disbelieve. 118 Hurd, 734 F.2d at 499. 119 The evidence introduced at trial of the parties' original discussions concerning the shipment of experimental HMW resins to Traver's PeruPlast plant in Lima, Peru are set forth in the first subsection discussing General Poly's claim for breach of fiduciary duty. In addition, the following evidence relating to Allied's allegedly fraudulent misrepresentations of the PeruPlast test and the subsequent events which Allied contends should have reasonably caused General Poly to discover the alleged misrepresentations forming the basis of its fraud claim was introduced at trial. 120 On October 28, 1978, Pat Snell added a handwritten note to a memorandum addressed to Singleton from Jecha in which he indicated that he had spoken with Traver about supplying a developmental resin. See Plaintiff's Ex. 99 (Addendum to Appellee's Br., Doc. 3). Snell further explained: 121 (This of course would be the rebagged [Solvay] B5920F). The resin would be ideal. 122 I've told George Jecha of my conversations and he's aware of all developments. 123 This could be a great opportunity to test the BF920F, test an Allied version of the same, and make an entry into the HDPE film market in the U.S. Id; R. Vol. 20 at 1782. 6 124 Pat Snell testified that in late January 1979, he contacted Traver's Houston office concerning the shipment of HMW resin to Traver's PeruPlast plant in Lima, Peru. See R. Vol. 20 at 1729. On February 16, 1979, Snell sent Traver a telegram requesting information on scheduling for the resin trials of the new Allied resin. Plaintiff's Ex. S-114 (Addendum to Appellee's Br., Doc. 60). The shipping invoice which accompanied the five hundred and twenty-five pounds of resin shipped to Traver's PeruPlast plant indicated that the resin was Paxon High Density Polyethylene. Plaintiff's Ex. S-116 (Addendum to Appellee's Br., Doc. 61). Paxon is a registered Allied trademark. See R. Vol. 20 at 1733. 125 The resin shipped by Allied was tested at the PeruPlast facility on March 26-27, 1979. The actual resin which was tested at the PeruPlast facility was not an Allied manufactured resin, but was instead Solvay B5920F purchased by Allied in Europe. See Plaintiff's Ex. 167 (Addendum to Appellee's Br., Doc. 9); Appellant's Br. at 7. The resin packaging did not identify it as a Solvay-manufactured resin because Allied had repackaged it in plain wrappers and placed an Allied internal reference number on it. See R. Vol. 20 at 1735. On September 19, 1979, Snell sent Traver a letter with data from our testing on the film made from Allied chemical's developmental resin 6-100 (7-392) at your plant in Lima, Peru. Plaintiff's Ex. 142 (Addendum to Appellee's Br., Doc. 14). 126 Hans Traver testified that General Poly's executives were unaware that the resin tested at the PeruPlast plant was manufactured by Solvay until discovery in this litigation commenced. R. Vol. 25 at 2262. However, Allied maintains that General Poly should have known by September 1979, that Allied was at that time not yet capable of manufacturing a satisfactory Hoescht-quality HMW resin. 127 Hans Traver testified that in August 1979, he and Pat Snell began to make arrangements for a test of Allied's resin (along with resins from other manufacturers) at an extrusion plant operated in Natick, Massachusetts, by Alpine (a Swiss company). R. Vol. 25 at 2266. A test was conducted at the Alpine plant on August 23, 1979. Id. at 2267. Two representatives of General Poly attended the test. Id. at 2267-68. In a memorandum drafted four days after the test, the two General Poly representatives stated: 128 Began test on Allied Chemical HDPE # 6-412 97. Pat Snell of Allied Chemical was present and coordinated the test with Max Gmahle of Alpine. The HS65 extruder ran satisfactory but the test was a failure due to the melt instability of the test resin. Pat said that he would have to redesign the resin. 129 Plaintiff's Ex. 386 (Addendum to Appellant's Br., Doc. 12). Peter Barber, an extrusion supervisor for General Poly, testified that after the disappointing Alpine test, Pat Snell of Allied explained the adjustments that Allied needed to make in order to improve the resin. See R. Vol. 33 at 3365. Snell told Barber that he thought it was possible for Allied to make the necessary adjustments, although he did not say how much time would be required. Id. 130 In addition to the Alpine test, Allied points to the September 21, 1979 agreement's reference to a one-year development program as proof that General Poly was aware Allied did not yet have a commercially viable HMW resin developed. 131 In February 1980, several Allied experimental HMW resins were tested using General Poly's extrusion equipment. R. Vol. 33 at 3366-69. According to Peter Barber, the Allied resins performed better than the resin tested at the Alpine plant in Massachusetts, but none were equal in quality to the industry standard Hoescht resin. Id. at 3369. Barber testified that Allied's Pat Snell told him Allied was improving, getting closer and near to producing Hoescht-quality resin. Id. at 3369-70. Several other tests of Allied's resin samples were conducted at General Poly in 1980 and 1981, including a test on June 9, 1980 and one on September 18, 1980. See Appellee's Br. at 23, R. Vol. 33 at 3370, 3379. 132 General Poly placed its first orders for off-grade resin from Allied in June 1980. See Defendant's Ex. S-92 (Addendum to Appellant's Br., Doc. 83). A single rail car of resin mixed from several batches (the so-called rainbow car) was shipped to General Poly by Allied and received by General Poly in July. R. Vol. 12 at 778-79. On July 7, 1980, General Poly received an invoice from Allied for resin shipped June 16, 1980, which identified the resin shipped as Paxon Solvay Experimental PW resin. See id. Subsequent shipments of off-grade resin ordered by General Poly from Allied were of inconsistent quality and had to be blended with Hoescht resin in order to be used effectively. R. Vol. 33 at 3237-39.
133 The district court directed a verdict in favor of Allied on General Poly's fraud claim stating that: 134 Solvay product was an Allied developmental product as Allied saw it. They did so knowing it was not true, a test of Nordstrom [v. Miller, 227 Kan. 59, 65, 605 P.2d 545, 552 (1980) ], is not shown, and they did so with an intent to deceive is not shown. I am convinced at this point in the case now, all parties rested, there is no showing nor evidence whatsoever that at any point in time Allied ever intended to deceive anyone. I make those findings as I would construe the relationship of the parties as prospective, probably buyer-sellers in the commercial context, that is, the traditional setting between the parties. 135 Having said that, I needn't address the statute of limitation question, but it would appear to me that again in that setting, this event having occurred somewhere in March 1980 (sic), the parties were in concert with the reaching of some ultimate agreement. The parties were in communication from time to time. The awareness of the state of affairs with regard to the resin was clearly known to representatives of General Poly before even the signing of the agreement, but surely the signing of the agreement itself puts in place the time frame for the statute to run. And if as of that moment General Poly at any time believed they had been misrepresented and that such misrepresentation was deceiving, they were duty bound to proceed. I am convinced as well then that the statute, even should this representation apply, has run. 136 R. Vol. 50 at 5682-83. 7 Although some evidence was introduced from which fraud could be inferred with regard to the Peru test, it is doubtful whether such evidence ever approached a clear and convincing standard. The evidence of intent to defraud was only inferential at best and the evidence of falsity was ambiguous. Moreover, there was certainly evidence that Allied's labeling of the Solvay resin as its own experimental resin was within its rights under its license with Solvay; that the relabeling was within normal practices to ensure blind testing; and that there was no intent to deceive. However, we do not base our affirmance on this ground. Rather, we affirm the court's ruling directing a verdict in favor of Allied because General Poly's claim is barred by the statute of limitations. 137 This alleged fraud took place in March 1979, when the rebagged Solvay resin was tested in Peru. The action for fraud was filed on August 17, 1982. R. Vol. 1, Doc. 1 at 20. Because the statute of limitations runs from the time when the fraud reasonably should have been discovered, the action would only be barred if discovery of the fraud should have reasonably occurred on or before August 16, 1980. 138 We believe that the disappointing results of the HMW resin tests conducted in August 1979, February 1980, and in June, 1980 would cause a reasonably prudent person to investigate, and if investigated with reasonable diligence, would lead to knowledge of the fraud. Wolf, 215 Kan. at 282, 524 P.2d at 734. The subsequent tests of Allied's samples inescapably put General Poly on notice that Allied was as yet incapable of reproducing the resin tested in Peru, and the entire course of conduct between the parties made it clear that, throughout that time period, Allied had not developed for commercial production any successful HMW resin. Yet, there is no evidence in the record indicating that General Poly's executives or engineers ever inquired as to the reason for that significant disparity. 139 This is not a case where the defendant lulled the plaintiff into confidence that nothing was amiss such that the failure to make inquiries is excusable. Wolf v. Preferred Risk Life Ins. Co., 728 F.2d 1304, 1306 (10th Cir.1984); see, e.g., Augusta Bank & Trust v. Broomfield, 231 Kan. 52, 61-62, 643 P.2d 100, 108 (1982). Various Allied representatives made statements which optimistically characterized Allied's progress in its efforts to develop a Hoescht-quality HMW resin. However, General Poly's attempt to portray those statements as false assurances justifying its inaction ignores the fact that General Poly had knowledge of Allied's actual progress by virtue of the test results of Allied's resins. Therefore, this case is distinguishable from cases such as Dreiling v. Home State Life Ins. Co., 213 Kan. 137, 145-46, 515 P.2d 757, 765 (1973), and Augusta Bank & Trust, 231 Kan. at 61-62, 643 P.2d at 108, where the fraud went undetected because the defendant made affirmative misrepresentations such that the plaintiff had no independent reason to make further inquiries. 140 General Poly contends that even though it made no inquiries into the reason for the inconsistent test results obtained from Allied's resin samples, Allied is unable to satisfy its burden of showing that no reasonable jury could conclude that General Poly did not learn of the allegedly fraudulent acts prior to August 1980. See Wolf, 728 F.2d at 1306-07 (in an action for fraudulent representations concerning the coverage of an insurance contract a material factual dispute existed as to whether the fraud was discovered when plaintiff actually learned of the misrepresentations or when the plaintiff reasonably should have discovered the disparity in coverage). General Poly argues that because there is no evidence in the record indicating that Allied would have disclosed that the HMW resin tested in Peru was manufactured by Solvay if General Poly had inquired, discoverability may not be presumed. 141 In Waite v. Adler, 239 Kan. 1, 6-7, 716 P.2d 524, 528 (1986), the Supreme Court of Kansas recognized that in certain circumstances knowledge of allegedly fraudulent acts may be presumed. In Waite, an action was brought against a bank officer for making allegedly fraudulent statements about the credit standing of an automobile dealership in which the plaintiff then invested. Id. at 1-3, 716 P.2d at 524-25. Although the jury returned a verdict for the plaintiff, the court reversed based on the statute of limitations. The court held that the plaintiff should have known of the dealership's precarious financial situation when, more than two years before the action was commenced, the bank took possession of the dealership inventory. Id. at 7, 716 P.2d at 528. Although the repossession of cars did not directly establish the falsity of the earlier statements made by the bank, the court concluded that the earlier statements all went to the general subject of the creditworthiness of the dealership and tended falsely to misrepresent such creditworthiness. The subsequent foreclosure put the plaintiff on notice that the general creditworthiness was not as implied by the earlier statements and, consequently, imposed upon him a duty to investigate the truth of the earlier statements. 142 In this case, General Poly could not have helped but know by August 1980 that Allied was not able consistently to produce or even to reproduce for an isolated test high-grade resin such as that used in the Peru test. Viewing the evidence presented in the light most favorable to General Poly, we hold that no reasonable jury could have properly found that prior to August 1980, General Poly was without knowledge of Allied's inability to produce resin of the quality of that tested in Peru on an ongoing basis. Because General Poly's action for fraud was based entirely on Allied's alleged fraudulent concealment of that information, we affirm the district court's ruling directing a verdict in favor of Allied based on the statute of limitations. 143