Christopher's AZ v. Duncan ( 2000 )

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
CHRISTOPHER'S ARIZONA
TRANSPORTATION SERVICE,
INCORPORATED, an Arizona
Corporation; CHRISTOPHER E.
MULLIN, JR.,
Plaintiffs-Appellants,
v.
JOSEPH DUNCAN; BONNIE DUNCAN;
DOVE AIR, INCORPORATED, a/k/a
Dove, Incorporated, a North No. 99-1721
Carolina Corporation; THE DUNCAN
FAMILY LIMITED PARTNERSHIP, a
South Carolina Limited Partnership,
Defendants-Appellees.
and
SILVER STATE AVIATION,
INCORPORATED, a Nevada
Corporation,
Defendant.
Appeal from the United States District Court
for the Western District of North Carolina, at Asheville.
Max O. Cogburn, Magistrate Judge.
(CA-97-327-1-C)
Argued: March 1, 2000
Decided: July 6, 2000
Before MICHAEL, Circuit Judge, G. Ross ANDERSON, Jr.,
United States District Judge for the District of
South Carolina, sitting by designation, and
James H. MICHAEL, Jr., Senior United States District Judge
for the Western District of Virginia, sitting by designation.
Reversed and remanded by unpublished per curiam opinion.
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COUNSEL
ARGUED: David Hywel Leonard, CARLTON, FIELDS, WARD,
EMMANUEL, SMITH & CUTLER, P.A., Tampa, Florida, for
Appellants. Sharon Tracey Barrett, PATLA, STRAUS, ROBINSON
& MOORE, P.A., Asheville, North Carolina, for Appellees. ON
BRIEF: Stephen Williamson, VAN WINKLE, BUCK, WALL,
STARNES & DAVIES, P.A., Asheville, North Carolina, for Appel-
lants. Mark C. Martin, PATLA, STRAUS, ROBINSON & MOORE,
P.A., Asheville, North Carolina, for Appellees.
_________________________________________________________________
Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).
_________________________________________________________________
OPINION
PER CURIAM:
Christopher's Arizona Transportation, Inc. and Christopher Mullin,
Jr. (the "appellants") appeal from the district court's grant of judg-
ment as a matter of law for Joseph Duncan, Bonnie Duncan, Dove
Air, Inc., and the Duncan Family Limited Partnership (the "appel-
lees") on the appellants' fraud claim. The district court concluded that
(1) the appellants failed to establish the reliance element of their fraud
claim, and alternatively (2) had reliance been established, the jury
award for fraud constituted a double recovery and thus was stricken
under the doctrine of election of remedies. Based on these findings,
the district court entered a revised judgment for the compensatory
claims awarded to the appellants under their fraudulent conveyances
claim only. We reverse and remand.
I.
In the mid-1980's, the appellants and the appellees were parties to
a venture to purchase, then resell a large jet aircraft. The appellants
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provided the funds, and Appellee Joseph Duncan, supposedly, was to
provide the expertise in marketing the aircraft. Duncan also was to
distribute the proceeds from the sale of the aircraft. Instead, Duncan
misappropriated the appellants' share of the proceeds. The appellants
subsequently filed suit in the United States District Court in Arizona
in 1988 to recover the lost proceeds.
Before the case went to trial, however, Joseph Duncan (joined by
his wife Bonnie) declared bankruptcy in Tampa in October 1991. At
that time, the Duncans were Florida residents. The bankruptcy court
lifted the automatic stay to permit the Arizona court to proceed to
judgment and to liquidate the appellants' claims against the Duncans.
In January 1992, acting on the parties' stipulation, the Arizona court
entered a $1,500,000 judgment against Joseph Duncan.
Shortly thereafter, the appellants filed an adversary proceeding in
the Florida bankruptcy court seeking a determination that some or all
of Duncan's debt was non-dischargeable. In April 1993, the bank-
ruptcy court declared that $498,452.45 of Duncan's $1,500,000 debt
to the appellants was non-dischargeable because it represented
amounts Duncan converted illegally. Final judgment to that effect was
entered in January 1994.
The appellants then began a long effort to collect the $498,452.45
from Duncan. The Duncans, however, proved uncooperative and
unscrupulous. To avoid paying what he owed to the appellants,
Joseph Duncan engineered a series of sham financial transactions
with his wife and his corporation to conceal his true financial worth
and to create the appearance of being judgment-proof. After three
years of this calculated deceit, in May 1997, a federal district court
in Asheville, North Carolina, ordered the Duncans to produce their
business and financial records, on threat of contempt. After the Dun-
cans complied, and the appellants had an opportunity to review the
Duncans' financial records, the Duncans' subterfuge came to light.
On November 6, 1997, the appellants filed the lawsuit that gave
rise to the appeal in the instant case in the United States District Court
for the Western District of North Carolina. The appellants stated two
claims against the appellees, both arising under the law of North Car-
olina. The first was a claim for fraudulent conveyance, alleging that
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Appellees Bonnie Duncan, Dove Air, Inc., and The Duncan Limited
Family Partnership were the recipients of a series of fraudulent trans-
fers from Joseph Duncan. The second was a claim for common law
fraud, alleging that all of the appellees engaged in an orchestrated
campaign of deception, in furtherance of a scheme to frustrate the
appellants from locating assets to satisfy a judgment Joseph Duncan
owed them. The appellees requested a jury trial, and both parties con-
sented to have a Magistrate Judge preside.
On March 10, 1999, the jury found for the appellants on the fraudu-
lent conveyance claim, awarding $660,212.89 in compensatory dam-
ages. With respect to the common law fraud claim, the jury awarded
the appellants $165,053.22 in compensatory damages against each of
the four appellees, as well as $200,000 in punitive damages against
each of the following three of the appellees: Joseph Duncan, Bonnie
Duncan, and Dove Air, Inc. Following the verdict, the appellees filed
a motion for judgment as a matter of law. The court granted the appel-
lees' motion in part, striking the compensatory damages award on the
common law fraud claim. According to the court, the appellants failed
as a matter of law to establish a crucial element of a North Carolina
fraud claim: namely, "reasonable reliance" by the appellants upon the
appellees' deceptive conduct. Had the appellants sufficiently proved
reasonable reliance to the court, the appellants still would not have
received the jury award for fraud as the court held that the corre-
sponding $165,053.22 compensatory damages award against each
appellee constituted a "double recovery," and therefore should be
stricken on election of remedy principles.1 Consequently, the court
entered a revised judgment for $660,212.89 in compensatory dam-
ages. The court, however, left undisturbed the punitive damages
award, despite the fact that such damages were engendered by the
jury's erroneous finding on the common law fraud claim.
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1 The appellees had declared bankruptcy, and only $498,452.45 of their
debt to the appellants was eligible for recovery as non-dischargeable debt
(the $660,212.89 damage cap represented the $498,452.45 plus interest).
Because the appellants had already recovered the full amount to which
they were entitled in a separate compensatory damages award for fraudu-
lent conveyance, the court treated the additional $165,053.22 awarded
against each appellee for the fraud claim as an improper "double recov-
ery."
4
On March 29, 1999, the appellees filed a separate motion to amend
or correct the court's judgment, arguing that the court also should
have stricken the punitive damages award, because such damages
were parasitic on the defective fraud claim. On this theory, the infir-
mity in the fraud claim was fatal to both the fraud claim and the
resulting punitive damage award. The court agreed. On April 29,
1999, the court struck the punitive damages award and entered a
revised judgment consisting of only the $660,212.89 compensatory
damages award for the fraudulent conveyance claim.
II.
Absent some statute or prevailing authority directing otherwise,
fraud is a creature of the common law, i.e., "Common law fraud." The
common law of fraud requires in North Carolina, as in many states,
the plaintiff to prove to the satisfaction of the trier of fact five ele-
ments, as set out infra. When there is not evidence proving one or
more of these factors, it is the obligation of the court to hold that these
have been a failure to prove common law fraud. When there is evi-
dence of each of these elements, however, the decision as to the pro-
bity and weight of that evidence is clearly a matter within the
province of the fact finder and the court should exercise great caution
in interfering with that decision. While the amount or the nature of the
evidence supporting each of these elements may be, in the eyes of the
judge, unsatisfactory or too weak, the weight and effect of that evi-
dence is committed to the fact-finder, and especially is this so where
there is conflicting evidence or evidence from which conflicting infer-
ences and conclusions may be drawn. It is against this analysis that
the question here presented must be decided.
III.
The appellants appeal from the lower court's decision to grant the
appellees' motion for judgment as a matter of law, which decision
invalidated the jury's finding that the appellees were guilty of com-
mon law fraud. A judgment as a matter of law rests on pure issues of
law and is therefore subject to de novo review on appeal. See Tools
USA Equip. v. Champ Frame Straightening Equip., 87 F.3d 654, 657
(4th Cir. 1996). The test for determining whether judgment as a mat-
ter of law (formerly JNOV) is appropriate is "whether, viewing the
5
evidence in the light most favorable to the nonmoving party (here, the
appellants), there is substantial evidence in the record to support the
jury's findings." Wilhelm v. Blue Bell, 773 F.2d 1429, 1433 (4th Cir.
1985). If the evidence indicates that the jury's conclusion is plausible,
the court must deny the motion for judgment as a matter of law. See
Siegfried Constr., Inc. v. Gulf Ins. Co., No. 98-2808, 2000 WL
123944, at * 2 (4th Cir. Feb. 2, 2000).
For purposes of the instant case, the pertinent question is whether
the jury had sufficient evidence to conclude that the appellants suc-
cessfully proved common law fraud. Because this case is in federal
court on diversity grounds, North Carolina state law of fraud provides
the controlling substantive legal principles. See Erie R.R. v. Tompkins,
304 U.S. 64 (1938). To establish fraud under North Carolina law, a
plaintiff must prove five elements: (1) a false representation or con-
cealment of a material fact; (2) which is reasonably calculated to
deceive (i.e., made with knowledge of its falsity); (3) which is made
with an intent to deceive (scienter); (4) which does in fact deceive the
plaintiff (reliance); and (5) which results in injury to the plaintiff
(damages). See Rowan County Bd. of Educ. v. United States Gypsum
Co., 418 S.E.2d 648, 658 (N.C. 1992); Werner v. Alexander, 502
S.E.2d 897, 901 (N.C. App. 1998). It is black letter law, recognized
by North Carolina courts that "fraud embraces`all multifarious means
which human ingenuity can devise, and which are resorted to by one
individual to get advantage over another by false suggestions or by
suppression of truth, and includes all surprise, trick, cunning, dissem-
bling, and any unfair way by which another is cheated.'" Rowan
County Bd. of Educ. v. United States Gypsum Co., 407 S.E.2d 860,
865 (N.C. App. 1991) (quoting BLACK'S LAW DICTIONARY 594 (5th ed.
1979)).
The jury in the instant case concluded that the appellants carried
their burden of proof on all five elements. The court conceded that the
appellees engaged in blatant misrepresentations deliberately calcu-
lated to deceive the appellants by concealing assets and obstructing
the appellants' efforts to collect a binding legal judgment. The single
disputed element, however, is whether the appellants reasonably
relied to their detriment on the false representations and concealments
made by the appellees. In ruling that "reliance" had not been estab-
lished, the court held that Mr. Mullin, the most prominent appellant,
6
was such a vigilant creditor and was so attuned to the appellees' sub-
terfuge that he did not "rely" on the deceptions, in the legal sense of
the word.
The appellants responded with two arguments. First, despite their
knowledge of the appellees' general proclivity toward dishonesty, the
appellants argue that they were not aware of the specifics of the
appellees' deception until well into the litigation. Second, the appel-
lants argue that, had they known of the deception sooner, they would
have taken different, more effective measures to collect the judgment
the appellees owed them. This foregone opportunity, the appellants
argue, represents the detrimental reliance induced by the appellees'
falsehoods.
An individual is unable to recover damages "for fraud upon a rep-
resentation which he knows to be false, for he cannot be deceived by
that which he knows." Cox v. Johnson, 40 S.E.2d 418, 419 (N.C.
1946). The appellees assert, and the trial judge found, that the appel-
lants, specifically Mr. Mullin, knew of the appellees' dishonesty and
thus were not deceived. However, the appellants' suspicions did not
amount to the level of knowledge necessary to nullify the reliance ele-
ment of a fraud claim. In Patton v. Champion Fibre Co., 140 S.E. 734(N.C. 1927), the North Carolina Supreme Court affirmed a trial
court's decision to grant judgment as a nonsuit when the plaintiff
failed to show he relied on the defendant's estimates about the quan-
tity of timber on the property. Though the defendant falsely informed
the plaintiff about the quantity of timber, the plaintiff declined the
defendant's original offer to sell and insisted upon investigating the
property himself. See id. at 736. The court held that in investigating
the land, the plaintiff's offer to buy the property was based upon his
own independent investigations, and not upon the defendant's esti-
mates of timber quantity. See id. Accordingly, the plaintiff failed to
establish reliance.
The present case can be distinguished from Patton. Here, we have
appellants, suspicious that the appellees were being dishonest with
them regarding their financial situation but were, however, unable to
ascertain with certainty such dishonesty. Moreover, unlike the plain-
tiff in Patton, the appellants did not have the opportunity to investi-
gate the appellees' personal records to determine, in fact, whether the
7
appellees were being deceptive. As soon as the district court afforded
the appellants such opportunity through a contempt order against the
appellees, the appellants discovered that their suspicions were correct
and filed this suit. Had the appellants, upon learning of the trickery,
continued to remain inactive in recovering their judgment, then this
court could hold that the appellants did not rely on the appellees'
statements. However, such a finding could not be made until the
appellants had the opportunity to investigate the appellees' records
and determine that their suspicions of dishonesty were indeed correct.
The determination that the appellants did not possess the level of
knowledge necessary to void the reliance element is supported by
public policy. If courts were to adopt the appellees' argument that
suspicion of falsity destroys reliance on the false statement,
unabashedly deceitful debtors like the appellants always could insu-
late themselves from common-law fraud actions by portraying their
victims as diligent, "street smart" operators fully cognizant of the sub-
terfuge being committed against them. In this scenario, culpable debt-
ors could create a "safe harbor" from common law fraud claims by
manipulatively extinguishing the element of reliance. Based on this
public policy combined with the case law, this court finds that the
appellants' suspicions did not rise to the level of knowledge necessary
to prevent the appellants from establishing the reliance element.
Next, the appellants assert that they relied on the appellees' state-
ments regarding their financial status, as can be evidenced from the
fact that the appellants refrained from taking more assertive actions
to recover their judgment against Joseph Duncan. This is a complex
case to determine whether there was actual reliance evidenced by
inaction, but only because the paradigm case of fraud looks very dif-
ferent from what happened to the appellants. In the paradigm case,
Party A sells a house to Party B and tells a deliberate falsehood that
the plumbing is in perfect working condition, when in fact it malfunc-
tions on a regular basis. In reliance on this false representation, Party
B agrees to buy the house without doing a thorough check of the
plumbing system. When the pipes malfunction, Party B is stuck with
a $15,000 repair bill. This constitutes actionable fraud because Party
B reasonably and detrimentally relied on the misrepresentation about
the plumbing. That is to say, upon hearing the falsehood, she
refrained from a detriment-avoiding course of action (getting the
8
plumbing checked) that she would have taken had Party A been hon-
est. See generally Johnson v. Owens, 140 S.E.2d 311 (N.C. 1965).
In the present case, during the four year period between 1993 and
1997, the appellees engaged in a host of misrepresentations and con-
cealments (in the form of false deposition testimony) designed to dis-
guise their total assets and manufacture a facade of judgment-
proofness. In Joseph Duncan's July 1994 deposition, Duncan deliber-
ately failed to produce records relating to a bank account he had set
up with the brokerage house of Raymond James, despite the fact that
he had received a federal court subpoena to produce his financial
records for 1992-94. At trial, Joseph Duncan explained that the failure
to produce the Raymond James statements in 1994 was"an error on
[his] part." During the same deposition he lied when he claimed that
his wife was the source of funds to buy back some of his assets from
the bankruptcy trustee. Bonnie Duncan also lied to the appellants
about the source of the funds used to pay the trustee to repurchase the
assets in her 1995 deposition. She claimed the funds came from her
mother--a deception necessary to hide the true source, Joseph Dun-
can--as well as the existence of the Raymond James account. At trial
she conceded that the funds came from a commission for aircraft sold
by her husband. Seeking to explain away her prior sworn statements,
Bonnie informed the jury that her earlier inaccurate explanations
"weren't intentional." Of course, such disclosures would have
destroyed the shield created by the appellees and opened the path for
the appellants to seize the stock and assets of Duncan Aircraft Parts
as well as other assets the Duncans had retrieved. Without a document
trail, the appellants were stymied and were forced to rely, as Joseph
Duncan intended, on his misstatements and concealments.
It was not until 1997, when the court forced Duncan to produce a
series of records and accountings, that the appellants became aware
of the deception the appellees had been practicing to avoid paying the
judgment. Once the appellants realized what was happening, they
immediately filed the present lawsuit, alleging common law fraud and
fraudulent conveyances. Had the appellants known of the deception
earlier, they could have adopted a different, perhaps more effective,
strategy to collect the judgment (attaching property, garnishing
wages, seizing stock, intercepting other payments due to Joseph Dun-
can, etc.). Because the appellants did not know about all the appel-
9
lees' assets, however, this course of action was foreclosed. As a
result, the appellants contend that they relied on the appellees' decep-
tion to their detriment, thereby satisfying the"reliance" element of
their common law fraud claim.
North Carolina courts have acknowledged that reasonable reliance
can be proved by acting or by "refraining from action" because of the
fraudulent misrepresentation. See Rowan County Bd. of Educ. v.
United States Gypsum Co., 407 S.E.2d 860, 863 (N.C. App. 1991)
(citing W. Prosser, HANDBOOK OF THE LAW OF TORTS §§ 105,108 (5th
ed. 1984)); RESTATEMENT (SECOND) OF TORTS § 537 (1977)); J.G. Fox
v. Southern Appliance, Inc., 141 S.E.2d 522, 526 (N.C. 1965); Ram-
sey v. Wallace, 6 S.E. 638, 643 (N.C. 1888). 2 As such, the appellants'
forbearance in not taking more effective steps to recover judgment
against the appellees may be considered reasonable reliance. More-
over, as the question of reasonable reliance is more appropriate for a
jury, and the jury in the present case found such reliance, this court
should be extremely cautious in determining as a matter of law that
reliance did not exist. See Fox, 141 S.E.2d at 526 (recognizing ques-
tion of reliance on seller's representations is for the jury); Rowan, 418
S.E.2d at 658 ("[I]t is inappropriate to grant motions for directed ver-
dict and judgment notwithstanding the verdict if there is evidence that
supports the plaintiff's prima facie case in all its constituent ele-
ments."). Accordingly, the jury verdict finding fraud should be rein-
stated.
Though reliance has been established, it does not end the inquiry
of whether the appellants are entitled to fraud damages as the trial
judge alternatively ruled that judgment as a matter of law was granted
based on election of remedy principles. Under North Carolina law, "if
the jury awards damages based upon two or more mutually exclusive
theories of recovery, plaintiff[s] should choose between these damage
awards." Smith v. Childs, 437 S.E.2d 500, 510 (N.C. App. 1993). The
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2 The case of Fields v. Mans , 516 U.S. 59 (1995), illustrates that simple
creditor forbearance in the face of misleading statements may constitute
"reliance." Though not dispositive of the reliance issue in the present
case because Mans dealt with the meaning of"reliance" within the fed-
eral bankruptcy code, instead of the North Carolina common law of
fraud, the Mans decision is persuasive.
10
purpose of the election of remedies doctrine "is not to prevent
recourse to any remedy, but to prevent double redress for a single
wrong." Mehovic v. Mehovic, 514 S.E.2d 730, 733 (N.C. App. 1999)
(quoting Smith v. Gulf Oil Corp., 79 S.E.2d 880, 885 (N.C. 1954)).
As made clear during oral argument, there are two wrongs in the pres-
ent case. The fraudulent conveyances are one wrong and would have
been recognized as a wrong had the appellees never communicated
with the appellants. Additionally, the fraudulent statements during
various depositions and the concealment of documents were a sepa-
rate wrong recoverable by an action of fraud. As such, the claims of
fraud and fraudulent conveyances are not mutually exclusive in the
present case and thus are not subject to the doctrine of election of
remedies. Accordingly, the appellants are entitled to the compensa-
tory damages from the fraudulent conveyance claim as well as the
compensatory and punitive damages from the fraud claim. Of course,
the district court should insure that the total compensatory damages
recovery is limited to the agreed-upon cap of $660,212.89.
IV.
For the foregoing reasons, we conclude that the district court erred
in awarding the appellees judgment as a matter of law. The judgment
of the district court is reversed and remanded for further proceedings
consistent with this opinion.
REVERSED AND REMANDED
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