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.