Sunday, February 3, 2013

Employers Can Be Held Responsible For Punitive Damages Under Vicarious Liability

          The Maryland Court of Special Appeals recently published an opinion on the issue of vicarious liability and punitive damages.  The issue before the Court was whether a mortgage broker could be held liable and assessed punitive damages for the tortious conduct of its employees.  The Court held that an employer may be liable for punitive damages under vicarious liability and affirmed the trial court’s award of punitive damages. 

            Fidelity First Home Mortgage Company, Inc. (“Fidelity First”), a mortgage broker, hired James Dan and James Fox as loan officers.  Loan officers received commission for each loan that was closed successfully.  Dan admitted that he did not successfully close many loans and that he was an active alcoholic.  Approximately one year after hire, Dan was terminated due to the problems that his alcoholism produced.  He completed an alcohol rehabilitation program and was rehired by Fidelity First.  Dan was told that he needed to produce loans that brought in $15,000.00 in origination fees or that he would be terminated again.  Dan was eventually terminated for lack of production and forging pay history.  Fox was a successful producer but was also caught forging documents on at least three occasions.  Fox was suspended for his third forgery offense, but he was not terminated. 

           Fox and Dan began to engage in foreclosure rescue schemes approximately one year following Dan’s termination from Fidelity and while Fox was still employed with the company.  Fox would contact homeowners who were unable to qualify for traditional mortgage refinancing, typically due to low credit ratings, but who owned equity in their homes.  Fox and Dan offered to assist the homeowners in refinancing their mortgages by using Fox or Dan’s own credit.  The homeowners were convinced and sold their homes to either Fox, Dan or a third party and remained in the homes as tenants to allow the homeowners the period needed to increase their credit score and buy back their homes at a favorable rate.  Many of the homeowners did not understand that they were in fact selling their property.  Dan and Fox advised the homeowners that they would be able to reacquire title to their properties after the period of six months to one year when Dan and Fox would be paying the mortgages.  Fox and Dan would pay the mortgages for a period of time, but would eventually cease paying, thereby causing the mortgages to go into default.   

           Charlene Williams owned property in Capital Heights, Maryland.  She received correspondence from Fidelity First offering to lower the interest rate on her mortgage balance.  Williams contacted Fidelity First and spoke with James Fox.  Williams, Fox and Dan met, and Williams eventually executed a contract in which she sold her property to Dan for $225,000.00.  Williams does not recall signing said document.  Dan applied for a mortgage loan with an Arizona bank.  Fidelity First was the mortgage broker and James Fox was the loan officer.  Despite Dan’s numerous misrepresentations on the loan application, a Fidelity First loan processor approved the application.  During settlement, Williams signed a deed conveying the property to Dan, along with a contingent deed reconveying the property to Williams. 

            Williams thought that monies held in escrow by Dan and Fox were being used to pay her mortgage loan.  Fox informed Williams that he would be make the monthly mortgage payments on her behalf.  Eventually Dan and Fox ceased making payments on the mortgage.  It was not until Williams received an eviction notice that she realized that she was a tenant and that the mortgage was in foreclosure.  Her attempts to contact the mortgage lender were unsuccessful because her name was not on the loan.   

            Williams filed suit against Fidelity First, James Dan and James Fox in the Circuit Court of Maryland for Prince George’s County.  Williams alleged that Dan and Fox caused her to lose title to her home as well as be deprived of equity in the same.  Williams alleged that Fidelity First was vicariously liable for the fraudulent conduct of Dan and Fox, breached its fiduciary duty, violated provisions of the Homeowners in Foreclosure Act, and negligently supervised/retained Fox.  Williams voluntarily dismissed her claims against Dan and Fox on the first day of trial, leaving Williams’ claims against Fidelity First.  At the close of all evidence, judgment was entered in favor of Williams.  She was awarded $70,000.00 in compensatory damages and $150,000.00 in punitive damages, for a total of $220,000.00.  Post-judgment motions were filed and Williams was awarded an additional $80,034.50 in fees and $3,902.90 in costs. 

            Fidelity First presented five questions on appeal.  One of the issues before the Court was whether the trial court erred in allowing the jury to award punitive damages against Fidelity First solely on the basis of respondeat superior.   Fidelity First contended that it was error for the Circuit Court to permit the jury to award punitive damages solely on the theory of vicarious liability.  In Maryland, punitive damages are awarded only upon a showing that the Defendant acted with actual malice.  In other words, the Defendant must be aware of the wrongdoing.  Fidelity First argued that the employer did not have the requisite state of mind to be liable for punitive damages. 

            The Court of Special Appeals cited the case of Embrey v. Holly, 293 Md. 128 (1982) in which the Maryland Court of Appeals held that an employer may be liable for punitive damages as a result of its employees’ tortious conduct.  The employer is liable for the employee’s tortious conduct if the employee was working for the employer’s benefit and in the scope of his employment. Although the employer did not authorize, participate in, or ratify the employee’s conduct, the employer is still liable. The Court’s rationale was that the employer knows or should know the kind of person that he is giving authority to act on his behalf.  If the wrong act is done while the employee is acting on the employer’s behalf, the act is seen as an act of the employer.

            The Court of Special Appeals affirmed the trial court’s award of punitive damages. 

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