Opinion ID: 538925
Heading Depth: 1
Heading Rank: 3

Heading: Finding of Fraud

Text: 24 Having determined that plaintiff's fraud claim is not barred by the applicable statute of limitations, we now address the merits of that claim. First State challenges the district court's decision by arguing that the court's finding that it committed fraud against First Alabama is clearly erroneous. Alabama has codified the common law of fraud in sections 6-5-100 to 6-5-104 of the Alabama Code. See Ellis v. Zuck, 409 F.Supp. 1151, 1157 (N.D.Ala.1976), aff'd, 546 F.2d 643 (5th Cir.1977); Jim Short Ford Sales, Inc. v. Washington, 384 So.2d 83, 86 (Ala.1980). In Ellis, the court set out a concise description of the scope of Alabama fraud: 25 [L]iability may arise from a willful deception, an innocent misrepresentation concerning an existing fact, a reckless misrepresentation made without knowledge of its falsity, or the suppression of a material fact rather than an active misstatement. See Standard Oil Co. v. Myers, 232 Ala. 662, 169 So. 312 (1936) (willful deception); Birmingham Broadcasting Co. v. Bell, 259 Ala. 656, 68 So.2d 314 (1953) (innocent misrepresentation); Southern Bldg. & Loan Ass'n v. Holmes, 227 Ala. 1, 149 So. 861 (1933) (statements recklessly made); Groover v. Darden, 259 Ala. 607, 68 So.2d 28 (1953) (suppression actionable). However, it is clear that before liability for nondisclosure or suppression of facts will arise there must be special circumstances which give rise to an obligation to disclose. Hall Motor Co. v. Furman, 285 Ala. 499, 234 So.2d 37 (1970). 26 The critical elements of an action for fraud generally include: 27 (a) a false representation concerning an existing material fact, Birmingham Broadcasting ...; 28 (b) a representation which (1) the defendant knew was false when made, or (2) was made recklessly and without regard to its truth or falsity, or (3) was made by telling plaintiff that defendant had knowledge that the representation was true while not having such knowledge, Hockensmith v. Winton, 11 Ala.App. 670, 66 So. 954 (1914); 29 (c) reliance by the plaintiff on the representation and that he was deceived by it, Bynum v. Rucker, 235 Ala. 353, 179 So. 241 (1938); 30 (d) reliance which was justified under the circumstances, Fidelity & Casualty Co. v. J.D. Pittman Tractor Co., 244 Ala. 354, 13 So.2d 669 (1943); 31 (e) damage to the plaintiff proximately resulting from his reliance, Smith v. Smith, 266 Ala. 118, 94 So.2d 863 (1957). Ellis, 409 F.Supp. at 1157; see ALA.CODE Sec. 6-5-101 to Sec. 102 (1975). 32 Furthermore, the fraud of suppression of facts has additional requirements. In order for the suppression of facts to be actionable, there must be a duty to speak. See Ellis, 409 F.Supp. at 1157. A duty to disclose often arises when there is a confidential or fiduciary relationship between the parties. Id. The Alabama courts do not seem to focus on the designation of the relationship, such as vendor-vendee, etc., but instead look to the relative bargaining positions of the parties. Id. (citing Furman, 234 So.2d at 41, Metropolitan Life Ins. Co. v. James, 238 Ala. 337, 191 So. 352 (1939)) (cited with approval in Jim Walter Homes, Inc. v. Waldrop, 448 So.2d 301, 305 (Ala.1983) (per curiam)); Jim Short Ford Sales, 384 So.2d at 87. Even when a confidential relationship between the parties does not exist, the particular circumstances of a situation can give rise to an obligation to disclose. Mann, 556 F.2d at 297; ALA.CODE Sec. 6-5-102 (1975). When the accused has superior knowledge or expertise not shared by the plaintiff, the obligation to disclose is compelling. Mann, 556 F.2d at 297 (citing Chapman v. Rivers Constr. Co., 284 Ala. 633, 227 So.2d 403, 410-13 (1969)); Ellis, 409 F.Supp. at 1157-58. In order to determine whether a duty to disclose exists, we must examine the facts of each individual case; a rigid approach is impossible, and, indeed, the words of the statute itself counsel flexibility. Jim Short Ford Sales, 384 So.2d at 87. Finally, even if one is not under a duty to speak, if he decides to do so, he must make a full and fair disclosure, without concealing any facts within his knowledge. Ellis, 409 F.Supp. at 1158 (citing Jackson Co. v. Faulkner, 55 Ala.App. 354, 315 So.2d 591 (1975)). 33 The trial judge, as the finder of fact, found that First Alabama Bank is entitled to recover against First State for egregious fraud based upon its misrepresentation and failure to disclose material facts. District Court's Memorandum Opinion (Feb. 20, 1987), Rec. 188, at 33. A finding of fraud is a finding of fact, which we will not set aside on appeal unless it is clearly erroneous. Citibank, N.A., v. Citibanc Group, Inc., 724 F.2d 1540, 1544 (11th Cir.1984); United States v. Fernon, 640 F.2d 609, 613 (5th Cir. Unit B Mar. 1981). 6 After a thorough review of the record, we conclude that the district court's finding of fraud is not clearly erroneous.
34 First State challenges the district court's finding of fraud by arguing that certain elements of an action for fraud are missing under the facts of the instant case. Specifically, the company argues that the December 10 letter from First State to Johnson & Higgins was true, and thus not misleading. Second, it contends that First Alabama's reliance on its representation that it could not offer prior acts coverage was not reasonable and that the bank should have searched for this coverage elsewhere. Third, First State argues that its representation was not the proximate cause of plaintiff's damages because the representation was made in 1976, while plaintiff's claim for indemnity in Martin-Gerson falls under the 1978 policy. We will address each of these arguments in turn. 35 A review of the record indicates that First Alabama communicated its desire for E & O insurance with prior acts coverage to First State in their October 1976 Boston meeting and at subsequent times. See Tr. at 102, 373. In fact, Ted Oxholm's handwritten notes from their 1976 Boston meeting demonstrate that First Alabama requested quotes on unlimited prior acts coverage and prior acts coverage dating back to January 1, 1975. See Plaintiff's Exhibit No. 42. Furthermore, Mosley testified at trial that the bank was willing to pay a higher premium to obtain prior acts coverage. Tr. at 373, 399. 36 At trial, Grinstead testified that in response to First Alabama's requests for prior acts coverage, First State said that it would see what [it] could do, but that it was an issue that London would decide. Id. at 105. Grinstead further testified that the bank was under the impression, and [it was] led to believe that First State or Cameron & Colby were basically wholesalers, and that the entire issue was up to London. Id. at 107. 7 37 After its discussions with First Alabama, First State prepared a rating sheet for the bank with an additional ten percent premium for prior acts coverage back to January 1, 1975, and a twenty percent additional premium for unlimited prior acts coverage, which it submitted to Bowring in London. See Plaintiff's Exhibit No. 42. The contract 548 reinsurers agreed to provide prior acts coverage for additional premiums of twenty percent and thirty percent respectively. See Plaintiff's Exhibit No. 124. Following the Marsh syndicate's decision to provide reinsurance for prior acts coverage for one million dollars of coverage, Bowring presented the proposal to the Minnis syndicate. The Minnis syndicate also agreed to reinsure prior acts coverage, but one of its members, Weavers, whose approval was necessary for reinsurance at this level, was reluctant. Bowring's telex to Vincent dated December 1, 1976, states: 38 First Alabama Bancshares [your] 11/104 548/excess layer agree terms. However Weavers group consider premium inadequate and full rating should be applied with modest discount for overall limit although considers this offset to large extent by virtue quicker erosion underlying aggregate. Also unenthusiastic about providing retro[active] cover on applicants with claims history noting they feel best avoid providing such cover if possible and then only on risks with clear record and if essential for order. Please advise. 39 Plaintiff's Exhibit No. 126 (emphasis added). 40 Shortly thereafter, on December 10, 1976, Frank Vincent of First State sent a letter to Pat Green of Johnson & Higgins, who relayed the information to First Alabama. The letter states, [a]fter rather prolonged negotiations with our reinsurers, we have finally placed the necessary reinsurance. We are unable to offer any prior acts coverage. Plaintiff's Exhibit No. 53. The district court found that the letter sent to Johnson & Higgins was so misleading as to constitute fraud. District Court's Memorandum Opinion (Feb. 20, 1987), Rec. 188, at 36. We agree. 41 Rather than state that it could obtain only a limited amount of prior acts coverage from London or that it was unwilling to provide the coverage, First State sent an inherently misleading letter to Johnson & Higgins. In rebuttal, First State argues that the letter was not misleading because Geoffrey Harrison's deposition testimony indicates that Weavers refused to reinsure prior acts coverage. This argument misses the point. The record conclusively establishes that London was willing to provide prior acts coverage up to $1 million. Thus, even if Weavers had decided not to offer the coverage, the Marsh syndicate had already agreed to provide prior acts coverage up to a limit of $1 million. Second, a telex, written at the time of the negotiations, saying that Weavers was unenthusiastic and wanted to avoid providing prior acts coverage if possible, is a better indication of Weaver's position than deposition testimony given years later in anticipation of pending litigation. 42 Judge Guin concluded that a fair reading of First State's letter gives the impression that First State was willing; however, its reinsurers in London would not agree to reinsure with prior acts coverage included. District Court's Memorandum Opinion (Feb. 20, 1987), Rec. 188, at 36. In fact, this is precisely the impression that Grinstead received. Grinstead, who Green called to discuss the contents of the letter, testified in his deposition that he believed it was a take it or leave it proposition. Grinstead Deposition at 118. Since the bank definitely wanted the coverage and believed that there were no other markets available, First Alabama decided to accept the First State policy with a retroactive date of December 14, 1976. First State's letter was a false representation which resulted in damage to the plaintiff because it was induced to accept the insurance without the coverage it desired.
43 In addition to sending First Alabama a misleading letter, First State also failed to disclose to the bank that it was its decision, not London's, not to offer the prior acts coverage. In his deposition, Frank Vincent testified that [w]e made a final determination at Cameron & Colby as unwriter [sic] for First State Insurance Co., ... that we were unwilling to provide prior acts.... Vincent Deposition at 221. In light of the fact that First State had previously indicated to First Alabama that whether it could get prior acts coverage was up to London, First State committed fraud by not disclosing that it, rather than London, had made the decision not to offer the coverage. Since First State failed to disclose that it made the decision not to offer the coverage, First Alabama was lulled into not discussing the matter with First State or seeking coverage elsewhere, as it would have done had all the facts been disclosed. District Court's Memorandum Opinion (Feb. 20, 1987), Rec. 188 at 37. 44 Under the particular circumstances of the instant case, we believe that First State had an obligation to disclose that it had made the decision not to offer the coverage, rather than London. The parties were not dealing at arms length because First State, a leading insurer of bank trust department E & O insurance, had better knowledge about the availability of this coverage than did its client, First Alabama. See Mann, 556 F.2d at 297; Ellis, 409 F.Supp. at 1157-58. When First Alabama inquired about obtaining prior acts coverage from First State, the company told the bank that the decision would be up to London. Once First State knew that London had agreed to provide the coverage, it concealed this fact from the bank and told it that prior acts coverage was unavailable. Thus, under the facts of the instant case, we believe that the district court was justified, as a matter of law, in concluding that First State was under a duty to disclose the facts to First Alabama. See Jim Walter Homes, 448 So.2d at 306 (holding that the seller had a duty to disclose to the buyer that there was a pending lawsuit on the property for sale). See also State Farm Mut. Auto Ins. v. Ling, 348 So.2d 472, 475 (Ala.1977) (stating that an agent's engendering of trust and confidence imposes a duty to disclose material facts). Finally, even if First State was not under a duty to disclose, once it chose to speak and told the bank that the decision would be up to London, it was required to make a full and fair disclosure. Ellis, 409 F.Supp. at 1158. 45 First State argues that the bank's reliance on its misrepresentations was unreasonable. We disagree. At trial, Bohannon testified that Pat Green of Johnson & Higgins had told him that there was only one company that was writing [prior acts] coverage, that being First State. Tr. at 91. When First Alabama presented its request for retroactive coverage to First State, it was told that the decision would be left up to London.... Id. at 102. Given the nature of the facts that First State concealed from the bank, we agree with the district court that First Alabama was lulled into not discussing the matter with First State or seeking coverage elsewhere ..., District Court's Memorandum Opinion (Feb. 20, 1987), Rec. 188 at 37, because it believed its efforts would have been futile, see Tr. at 104-05, 201. Although the bank desperately wanted E & O insurance with prior acts coverage, it accepted the policy without the coverage because it believed that First State was unable to write prior acts and that there were no other markets for this type of coverage. 46 First State next argues that its representation was not the proximate cause of plaintiff's injury because the representation was made in 1976, while the bank's claim for indemnity because of its loss in Martin-Gerson occurred during the 1978 policy year. We do not find this argument persuasive. The testimony presented at trial indicates that First Alabama made its desire for prior acts coverage known to First State in 1976 as well as in subsequent years. Bohannon and Mosley both testified that they discussed the bank's need for retroactive coverage at a 1977 meeting and possibly at a 1978 meeting. Id. at 109, 428. Furthermore, the evidence indicates that if First Alabama had obtained prior acts coverage as it requested in 1976, it would have continued to have this coverage in its 1977 and 1978 policies. See id. at 329-330. The record indicates that in over ninety percent of the cases when First State wrote a bank trust E & O policy with prior acts coverage, it continued to offer this coverage when the policies were renewed. See Plaintiff's Exhibits Nos. 86-88. In fact, policies with prior acts coverage were renewed in later years even when the banks had poor claims histories. See id. 47 As part of its proximate cause argument, First State also argues that First Alabama would not have qualified for prior acts coverage in 1978 because of its poor claims history and because of misrepresentations it made in its applications for coverage. The district court thoroughly examined these contentions and dismissed them saying there is no evidence that the Martin-Gerson claim or any circumstances which might give rise to that claim were known to First Alabama Bank at the time the applications were submitted. District Court's Memorandum Opinion (Feb. 20, 1987), Rec. 188, at 39. The court further added that First Alabama Bank made known to First State all matters which were alleged to have been concealed in the renewal applications from 1976 through 1980. Id. at 40. After a careful review of the record, we agree with the court's findings on this issue. Since the district court adequately addressed these arguments and because we find that the record supports the court's findings on this issue, we decline to address these same issues again. 8 C. Punitive Damages 9 48 In addition to challenging the trial court's finding of fraud, First State also contends that the court abused its discretion by awarding the plaintiff punitive damages. In American Honda Motor Co. v. Boyd, 475 So.2d 835 (Ala.1985), the Alabama Supreme Court announced its new standard for awarding punitive damages in intentional fraud cases. In that case, the court held that punitive damages are recoverable when the evidence establishes an intent to deceive or defraud.... Id. at 839. The Alabama Supreme Court clarified its earlier decisions by explaining that the intent to deceive is sufficient to trigger the possibility of the imposition of punitive damages, without the additional requirement of a showing of maliciousness, oppressiveness, or grossness. Id. at 838. Furthermore, the imposition of punitive damages is always discretionary with the trier of fact. See Ford Motor Credit Co. v. Washington, 420 So.2d 14, 17 (Ala.1982) (citing Neil Huffman Volkswagen Corp. v. Ridolphi, 378 So.2d 700 (Ala.1979)). 49 In the instant case, the district court found that First State intended to mislead and did successfully mislead plaintiff. District Court's Memorandum Opinion (Feb. 20, 1987), Rec. 188, at 37. Judge Guin further found that the representations made and the failure to disclose material facts by First State were an attempt to gain a negotiating advantage by concealment of a very material fact--egregious fraud--the kind deserving of punishment by the imposition of punitive damages. Id. at 45. After carefully reviewing the record, we do not believe that the court abused its discretion by awarding punitive damages under the facts of this case. First State misrepresented to First Alabama that prior acts coverage was not available even though it knew that contract 548 and all, but one member of contract 549, had approved this coverage. Second, after telling the bank that the decision on whether to offer the coverage was London's, it failed to disclose the fact that it, not London, had made the decision not to offer the coverage. First State intended to deceive First Alabama by inducing it to rely on its representations that prior acts coverage was not available and by inducing it to accept an E & O policy without the coverage it desired, which was relatively risk-free for First State, see Griffin Deposition at 77. First Alabama, subsequently, was damaged when First State refused to indemnify it for the loss it sustained in the Martin-Gerson case.