Leyendecker v. Daniels ( 2016 )

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1 IN THE COURT OF APPEALS OF THE STATE OF NEW MEXICO
2 HIVANA LEYENDECKER,
3 Plaintiff-Appellee,
4 v. NO. 34,259
5 PAUL A. DANIELS,
6 Defendant-Appellant,
7 and
8 COMMUNICATION ENGINEERING &
9 INSTALLATION, INC. and CEI, INC.,
10 Defendants.
11 APPEAL FROM THE DISTRICT COURT OF DOÑA ANA COUNTY
12 Darren M. Kugler, District Judge
13 Carrillo Law Firm, P.C.
14 Raúl A. Carrillo, Jr.
15 Karen E. Wootton
16 Las Cruces, NM
17 for Appellee
18 Martin, Lutz, Roggow & Eubanks, P.C.
19 David P. Lutz
20 Las Cruces, NM
1 for Appellant
2 MEMORANDUM OPINION
3 SUTIN, Judge.
4 {1} Hivana Leyendecker sued Paul A. Daniels, individually, and CEI, Inc.,1 and
5 obtained judgments against both defendants, jointly and severally, in the sum of
6 $160,313.77. The single-sum award was based on two claims: (1) breach of contract,
7 and (2) a mixed claim of fraud, undue influence, and breach of fiduciary obligations,
8 arising out of investment dealings and relationships between Leyendecker and
9 Daniels.
10 {2} Daniels appeals the district court’s determination that he defrauded
11 Leyendecker. Specifically, Daniels argues that (1) the district court erred in
12 determining that Daniels had committed fraud when the court explicitly found that one
13 of the elements of fraud—intent to defraud—was not met; and (2) alternatively,
14 sufficient clear and convincing evidence did not exist to find Daniels liable for fraud.
15 We hold that the district court’s determination of fraud was erroneous because it
16 found no intent to defraud, which is a necessary element of a fraud claim. We further
1
17 Communication Engineering & Installation, Inc. is also listed as a defendant
18 in the caption of the district court filings. It appears that Communication Engineering
19 & Installation, Inc. is the same company (or is treated as the same company) as CEI,
20 Inc.
2
1 hold to be unavailing (1) Leyendecker’s unpreserved argument on appeal that her
2 claim for fraud should be upheld because it was in fact a claim for constructive fraud,
3 which does not require proof of intent to defraud; and (2) Leyendecker’s apparent
4 argument that the district court’s finding that Daniels’ conduct shocked the conscience
5 of the court was sufficient to support her fraud claim. Because we hold that the district
6 court erred in determining that Daniels committed fraud despite a finding that Daniels
7 lacked the requisite intent, we need not address Daniels’ alternative sufficiency of the
8 evidence argument.
9 BACKGROUND
10 {3} The transaction giving rise to Leyendecker’s suit involved the investment of her
11 funds in CEI, Inc. Daniels had an ownership interest in CEI, Inc., was its president,
12 and was employed by the company. CEI, Inc. failed in its obligation to make
13 payments to Leyendecker on its promissory note to Leyendecker that evidenced the
14 investment. Leyendecker’s complaint alleged that Daniels’ actions in procuring and
15 retaining funds from Leyendecker “were fraudulent[] in that . . . Daniels made
16 representations about the investment he knew or should have known were false.”
17 Leyendecker also alleged that the promissory note was “procured by undue influence”
18 and that Daniels’ actions in procuring and retaining the funds violated his fiduciary
19 duties to Leyendecker.
3
1 {4} The district court’s findings of fact and conclusions of law, with the exception
2 of one conclusion of law, were adopted from Leyendecker’s and Daniels’ respective
3 requested findings of fact and conclusions of law. The district court determined that
4 Daniels had a fiduciary relationship with Leyendecker, violated his fiduciary
5 obligations to Leyendecker, and unduly influenced Leyendecker. Further, after setting
6 out findings of fact in regard to the position of trust and confidence held by Daniels
7 toward Leyendecker and the fiduciary and confidential relationship that existed, the
8 district court entered the following conclusion of law relating to fraud.
9 An omission by a fiduciary is equivalent to civil fraud. State v.
10 Stettheimer, 1980-NMCA-023, ¶ 9, 94 N.M. 149, [607 P.2d 1167], citing
11 to Iriart v. Johnson, 1965-NMSC-147, ¶ 4, 75 N.M. 745, [411 P.2d 226],
12 citing to [Restatement (Second) of Agency § 390 cmt. a (Am. Law Inst.
13 1958)] (noting that a fiduciary owes a duty to disclose his self-interest in
14 the transaction, and “all facts affecting the desirability of sale, such as
15 the likelihood of a higher price being obtained later, the possibilities of
16 dealing with the property in another way, and all other matters which a
17 disinterested and skillful agent advising the principal would think
18 reasonably relevant.”)[.]2
2
19 We read nothing in these cases or the Restatement provision that supports a
20 broad statement that an omission by a fiduciary is equivalent to civil fraud. The cited
21 case of Stettheimer, at most, states that the parties in that case agreed that the alleged
22 omission in that case would be sufficient to form the basis of an action in civil fraud
23 because the defendant had a fiduciary duty to his client. 1980-NMCA-023, ¶ 9.
24 However, even that interpretation is generous, as Stettheimer, was a criminal fraud
25 case that articulated criminal fraud as having an intent element. Id. ¶ 4 (“The
26 defendant . . . misrepresented a fact . . . intending to deceive or cheat[.]”). This is a
27 good example of why a district court should refrain from adopting requested
28 conclusions of law such as this one verbatim. See Los Vigiles Land Grant v. Rebar
4
1 The court also entered a conclusion of law that “Daniels’ violations of his fiduciary
2 obligations to . . . Leyendecker constitute a form of fraud.” The court closed its
3 conclusions of law with this conclusion relating to fraud: “Although the [c]ourt
4 believes that . . . Daniels lacked the subjective intent to defraud . . . Leyendecker, the
5 terms and conditions of the transaction objectively shock the conscience of the
6 [c]ourt.” This was the sole conclusion of law that the court did not adopt verbatim or
7 virtually verbatim from the parties’ proposed conclusions. This conclusion was
8 apparently entered by the court at Daniels’ request based on the following discussion
9 at the close of trial.
10 [Defense]: And, your Honor, the only thing that I’d ask, because
11 I think it’s significant to the [c]ourt’s judgment today, that the judgment
12 include the [c]ourt’s finding that . . . Daniels did not subjectively have
13 an intent at issue, but that the [c]ourt found that the transaction
14 objectively shocked the conscience, because I think that’s significant and
15 should be included in the judgment.
16 [The court]: That would seem appropriate. I truly believe his
17 honest testimony was consistent with that.
18 The foregoing followed this earlier discussion.
19 Haygood Ranch, LLC, 2014-NMCA-017, ¶¶ 2, 14, 317 P.3d 842 (repeating “our
20 continuing concern about the practice of some trial courts of adopting, verbatim, all
21 or virtually all of a prevailing party’s extensive requested findings of fact and
22 conclusions of law in complex cases” which can “result in unsupported, ambiguous,
23 inconsistent, overreaching, or unnecessary findings and conclusions”).
5
1 [The court:] Subjectively, I think . . . Daniels had very good
2 intentions. Objectively, this rises to the shock-the-conscience level. A
3 line of credit without a personal guarantee that is used for his personal
4 benefit based on a personal trust relationship does create knowledge of
5 fiduciary duty, but I do believe rises to the level to shock the conscience.
6 It’s that inappropriate.
7 It’s unfortunate, . . . Daniels, because, subjectively, I don’t believe
8 that was your intention; objectively, that I don’t see where I can come to
9 any other conclusion. It was more in the form of almost a personal loan
10 to you . . . rather than a promissory note on a line of credit, and that’s the
11 unfortunate conclusion that I feel I have no other alternative but to come
12 to.
13 The court entered judgment on Leyendecker’s mixed fraud/undue influence/fiduciary
14 obligation claim against both Daniels and CEI, Inc., jointly and severally. Only
15 Daniels has appealed, and he has appealed only from the fraud aspect of the judgment.
16 {5} Although reversing the fraud portion of the judgment (but not the breach of
17 contract component) would undisputedly leave the monetary judgment undisturbed,
18 the fraud ruling has independent significance insofar as it could impact future
19 proceedings, such as a discharge in bankruptcy. While not ultimately relevant to the
20 outcome of this appeal, it is noteworthy that Leyendecker’s protectiveness of the fraud
21 determination is tied to the fact that fraud judgments are not dischargable in
22 bankruptcy. See 11 U.S.C. § 523(a)(4) (2014). We mention and consider the
23 dischargability issue only to the extent that Daniels relies on Leyendecker’s motive
6
1 of obtaining a non-dischargable judgment as evidence that she sought judgment based
2 on traditional fraud and not constructive fraud.
3 DISCUSSION
4 {6} Daniels contends that because the district court found in his favor on one of the
5 necessary elements of fraud—intent to defraud—this Court should reverse the
6 inconsistent conclusion of law that Daniels committed fraud. See Eckhardt v. Charter
7 Hosp. of Albuquerque, Inc., 1998-NMCA-017, ¶ 55, 124 N.M. 549, 953 P.2d 7228 (“[F]raudulent misrepresentation requires an intent to deceive[.]”); see also Sachs v.
9 Bd. of Trs. of Town of Cebolleta Land Grant, 1976-NMSC-076, ¶ 24, 89 N.M. 712,
10 557 P.2d 209 (“It is a basic rule in New Mexico that where a conclusion conflicts
11 with[] or does not follow[] a finding of fact, the finding of fact controls and the
12 appellate court will apply the proper conclusion of law.”).
13 {7} Leyendecker responds with an argument asserted for the first time on appeal
14 that the district court did not err because the evidence offered at trial and the court’s
15 determinations supported constructive fraud, which does not require an intent to
16 commit fraud or involve intent to deceive. See Snell v. Cornehl, 1970-NMSC-029, ¶ 8,
17 81 N.M. 248, 466 P.2d 94 (“Constructive fraud is . . . a breach of a legal or equitable
18 duty irrespective of the moral guilt of the fraud feasor, and it is not necessary that
19 actual dishonesty of purpose nor intent to deceive exist.”). Leyendecker argues that
7
1 a constructive fraud claim can be based on breach of a fiduciary relationship and that
2 intent is immaterial, particularly when circumstances of the breach shock the
3 conscience of the court. Leyendecker asserts that in overlooking the district court’s
4 findings regarding Daniels’ violation of his fiduciary duties, the brief in chief
5 demonstrates Daniels’ continuing “willful blindness” to his obligations such that the
6 judgment should not be discharged in bankruptcy.
7 {8} In turn, Daniels faults Leyendecker’s new constructive fraud argument as
8 having been neither pleaded nor argued in the district court and also as ineffective
9 because, according to federal bankruptcy law, “constructive fraud cannot support
10 denial of a discharge.” Along this line, Daniels explains that “because . . .
11 Leyendecker’s intent in bringing this fraud claim related . . . solely to an attempt to
12 avoid a discharge, this Court must conclude that [Leyendecker’s claim was based on]
13 intentional fraud” and not constructive fraud. According to Daniels, other indicia that
14 Leyendecker claimed intentional and not constructive fraud is that Leyendecker’s
15 claim “amounted more to a protective measure to assist with collection than anything
16 substantively different from the breach of contract claim” and further that
17 Leyendecker sought punitive damages in connection with her fraud claim, which are
18 not recoverable under constructive fraud. See Martinez v. N. Rio Arriba Elec. Coop.,
19 Inc., 2002-NMCA-083, ¶ 32, 132 N.M. 510, 51 P.3d 1164 (“[The plaintiff] does not
8
1 provide any authority, nor are we aware of any authority, for the proposition that
2 constructive fraud can support . . . punitive damages. Therefore, we do not consider
3 constructive fraud a viable theory to justify any such award.”).
4 {9} We agree with Daniels that the pleadings, evidence offered at trial, and
5 arguments made in closing support the view that Leyendecker pursued a traditional
6 fraud claim. Importantly, at trial, Leyendecker testified that she was not aware that she
7 was suing Daniels for fraud and that she did not believe that it was Daniels’ intent to
8 defraud her. We also agree that Leyendecker’s constructive fraud argument and her
9 apparent argument that a shock-the-conscience finding supports a fraud judgment are
10 not compelling.
11 {10} In closing argument, Leyendecker’s counsel began by stating that “the only
12 question . . . under the law is [whether] Daniels [is] a fiduciary to . . . Leyendecker[.]”
13 Counsel concentrated on facts showing that fiduciary relationship and the breach of
14 it and noted that, under the law, “an omission by a fiduciary is equivalent to a civil
15 fraud[.]” Later, when discussing Daniels’ actions, Leyendecker’s counsel said, “[a]nd
16 whether he thought in his own mind or not, we have a victim of fraud sitting here at
17 the table who doesn’t have much time left to collect.” Leyendecker’s counsel did not
18 elsewhere or otherwise mention fraud in the closing argument, nor did he discuss the
19 claim for punitive damages.
9
1 {11} In closing argument, Daniels’ counsel argued lack of proof of fraudulent intent,
2 and he insightfully explained that “[t]he basic legal problem that [Leyendecker]
3 face[s] and the hurdle [she is] trying to overcome is since [she doesn’t] have the
4 ability to prove what would be a standard of fraud, [she is] trying to then bring in this
5 claim that because there’s some kind of special relationship between the parties, this
6 [c]ourt should legally [forgo] what would otherwise be required to prove a fraud to
7 hold . . . Daniels individually liable.” Leyendecker’s counsel wholly ignored defense
8 counsel’s assertion that intent was required to prove fraud and never argued that intent
9 was irrelevant because Leyendecker’s claim was for constructive fraud.
10 {12} After the trial was concluded, during a discussion of the parties’ pretrial
11 requested findings of fact and conclusions of law, the court rejected Daniels’
12 requested conclusion of law defining the elements of fraud but adopted Daniels’
13 requested conclusion of law that stated each element of fraud must be established by
14 clear and convincing evidence. Leyendecker at no time offered and the court did not
15 independently raise or enter a conclusion of law regarding the elements needed to
16 prove a constructive fraud claim or a conclusion of law that the elements of
17 constructive fraud had been proved.
18 {13} Yet, as indicated earlier in this Opinion, at the close of the district court’s
19 discussions in which it adopted requested findings of fact and conclusions of law, the
10
1 court stated that it did not subjectively believe that Daniels intended to commit civil
2 fraud, but that objectively the court adopted Leyendecker’s proposed conclusion of
3 law that an omission by a fiduciary is equivalent to civil fraud. Then, shortly
4 afterward, when defense counsel asked the district court to enter a finding that Daniels
5 did not subjectively have an intent to defraud Leyendecker, but that the transaction
6 objectively shocked the conscience of the court, the court entered a conclusion of law
7 stating that although it believed that Daniels lacked the subjective intent to defraud,
8 the terms and conditions of the transaction objectively shocked the conscience of the
9 court.
10 {14} In sum, at no time before, during, or following trial did Leyendecker’s counsel
11 or the court mention constructive or innocent fraud. Leyendecker never proposed a
12 conclusion of law that stated the elements of constructive fraud or identified
13 Leyendecker’s particular claim as constructive fraud. There was never an explanation
14 as to what Leyendecker and the court meant in the finding that Daniels’ “violations
15 of his fiduciary obligations . . . constitute a form of fraud.” Nor was the shock-the-
16 conscience determination tied to any notion of constructive or innocent fraud or
17 supported by case authority. At no time did Leyendecker offer constructive fraud case
18 law. Nor did she move the court to allow a claim for and to consider constructive
19 fraud in conformity with the evidence. During closing, despite Daniels’ assertion that
11
1 intent was a necessary element in a civil fraud claim, Leyendecker chose not to
2 address the issue or clarify that her claim was for constructive fraud. On the contrary,
3 the record and briefing shows that Leyendecker initially sought punitive damages in
4 connection with her fraud claim and pursued the fraud claim in order to avoid
5 discharge in bankruptcy—both indications that she was pursuing a traditional fraud
6 claim.
7 {15} Putting all of the foregoing together, we determine that the district court’s fraud
8 determination constituted error. Leyendecker’s vague and broad-sweeping pleading,
9 proof, requested findings and conclusions, and argument did not specifically, clearly,
10 and sufficiently alert the district court that she was abandoning intentional fraud or
11 claiming innocent or constructive fraud as some form of effective unintentional fraud
12 substitute based on Daniels’ wrongful fiduciary conduct and undue influence. The
13 district court took Daniels’ intent out of the picture, apparently attempting to
14 substitute a test or element of “shock the conscience” nowhere shown at trial through
15 case authority to be applicable here as to liability for constructive fraud, much less to
16 intentional fraud. While an argument can be made that, considering all of the
17 circumstances in this case, Leyendecker was actually seeking relief on a claim of
18 constructive fraud or that the district court must have seen Leyendecker’s gambit as
19 one in constructive fraud, under the circumstances of how this case was tried, we feel
12
1 uncomfortable transforming, on our own, Leyendecker’s fraud claim into one of
2 constructive fraud and holding that the court’s determination was that of constructive
3 fraud, requiring no intent to defraud.
4 CONCLUSION
5 {16} We reverse that aspect of the district court’s judgment determining that Daniels
6 defrauded Leyendecker. We therefore instruct the district court to vacate that part of
7 the court’s judgment determining that Daniels was liable for fraud.
8 {17} IT IS SO ORDERED.
9 __________________________________
10 JONATHAN B. SUTIN, Judge
11 WE CONCUR:
12 _______________________________
13 JAMES J. WECHSLER, Judge
14 _______________________________
15 LINDA M. VANZI, Judge
13