Court erred in damages calculation, award of attorney’s fees

A circuit court erred by awarding attorney’s fees without having awarded equitable relief to the prevailing plaintiff in a fraudulent inducement case, and by calculating damages without a reasonably certain measure of actual pecuniary loss, the Court of Appeals of Virginia has held.

While the plaintiff appealed the circuit court’s decision to award only half of the compensatory damages it sought, the defendants contended that it was plainly wrong to have found in favor of the plaintiff and an abuse of discretion to award attorney’s fees.

Judge David Bernhard affirmed the circuit court’s judgment for the plaintiff but found that it erred in the method it used to calculate damages.

“While the circuit court correctly identified two formulas for measuring compensatory damages in fraud cases — out-of-pocket losses and benefit-of-the-bargain damages — it erred in applying a proportional replacement-cost methodology unsupported by evidence of actual property values,” he wrote.

Further, Bernhard said the circuit court erred by awarding attorney’s fees.

“Without an award of equitable relief, the circuit court lacked authority under [Prospect Development Co. v.] Bershader to award attorney fees, regardless of the circumstances surrounding the fraudulent acts or the nature of the legal damages awarded,” the judge wrote.

Senior Judge Robert J. Humphreys and Judge Mary B. Malveaux joined Bernhard in reversing for a recalculation of damages in Mule-Hide Products Co. Inc. v. Midlantic Builders VA LLC (VLW 026-7-011).

Attorneys for the parties did not respond to requests for comment.

Defective coating

Midlantic Builders contracted with Subconsciously Precise Construction (SPC) and Nigel Miles to coat a shopping center’s roof with the silicone coating product sold by Mule-Hide Products and distributed by American Builders & Contractors Supply Co., or ABCS.

After the installation proved to be defective,
Midlantic’s owner, James Bickford, alleged that he was fraudulently induced to contract by the assurances of Jim Lessig, a Mule-Hide employee, and Joey Gargaro, an SPC employee, that Miles was trained and certified to install the coating.

After a six-day bench trial, the circuit court found the adhesion problems with Miles’ installation were incurable without first removing the improperly installed system.

Based on expert testimony that neither applying new coating nor replacing the defective coating were good options given the risks of further damage to the roof, the court ruled that the most viable solution for Miles’ defective installation was a full roof replacement for $229,856.

But the court felt that awarding the full cost would put Midlantic in an even better position than it would have been in absent the fraud, thus it awarded $114,928 by halving the replacement cost and treating that quotient as Midlantic’s benefit of the bargain.

The court also awarded $445,000 in attorney’s fees to Midlantic. Both sides appealed.

Substantial deference

According to Mule-Hide and ABCS, the circuit court was plainly wrong to find clear and convincing evidence that Bickford relied on Lessig’s misrepresentations about Miles’ training and credentials.

A circuit court judgment shall be set aside under Code § 8.01-680 only if “it appears from the evidence that such judgment is plainly wrong or without evidence to support it.”

“Factual findings receive significant deference because the circuit court observed the witnesses’ demeanor, inflection, and body language, factors that cannot be captured in a written record,” Bernhard said.

“‘[I]ssues of witness credibility may be disturbed on appeal only when we find that the witness'[s] testimony was “inherently incredible, or so contrary to human experience as to render it unworthy of belief,”’” the judge said, looking to Brown v. Commonwealth.

“‘Evidence is not “incredible” unless it is “so manifestly false that reasonable [persons] ought not to believe it” or “shown to be false by objects or things as to the existence and meaning of which reasonable [persons] should not differ,”’” he added.

Reliance

Whereas the reliance element here focused on Bickford’s subjective mental state, the circuit court credited his testimony that despite taking numerous preparatory actions, he did not make the final decision to hire Miles until after hearing Lessig vouch for Miles’ credentials.

“This credibility determination is entitled to substantial deference on appellate review,” Bernhard said. “Thus, Mule-Hide’s and ABCS’s argument rests primarily on a determination that Bickford’s testimony is inherently incredible.”

That argument failed for two reasons.

“First, the testimony is not ‘so manifestly false that reasonable [persons] ought not to believe it,’” Bernhard opined, pointing out that Bickford’s contemporaneous actions supported his testimony that he only decided to sign the contract in reliance on Lessig’s assurances.

The panel rejected Mule-Hide’s and ABCS’ objective evidence suggesting that Bickford decided to hire Miles before the meeting in which Lessig vouched for Miles.

“[V]iewing the evidence in the light most favorable to Midlantic, the prevailing party, the court’s view amounts to a reasonable inference that Bickford obtained financing and made preliminary arrangements while still requiring additional information before committing to execute the contract,” the judge wrote.

Nor was Bickford’s testimony shown to be false by objects or things as to the existence and meaning of which reasonable persons should not differ.

“Plainly, the evidence relied upon does not conclusively negate reliance,” Bernhard noted, adding that Bickford’s email announcing a meeting to sign the contract indicated his intent to proceed, but did not establish that he made an irrevocable final decision.

“Contrary to Mule-Hide’s and ABCS’s summation of the circuit evidence, its existence and meaning produce different reasonable interpretations about Bickford’s subjective mental state, including the court’s view that he had not decided to sign the contract before the meeting and had relied on Lessig’s representations concerning Miles’s credentials and training,” he found.

“Requiring appellate courts to draw lines regarding the sufficiency of documentary evidence needed to render testimony inherently incredible would improperly substitute this Court’s judgment for that of the circuit court and would undermine the deferential ‘plainly wrong’ standard mandated by Code § 8.01-680,” Bernhard warned.

And while evidence existed which the circuit court did not expressly discuss, Bernhard said its presence did not render Bickford’s testimony inherently incredible; therefore, the court’s findings were proper.

Betterment

The Supreme Court of Virginia said in Dominion Resources Inc. v. Alstom Power Inc. that “[d]amages in both tort and contract … exist only to compensate a plaintiff for the injury suffered, not to leave that plaintiff better off because of the injury.”

Bernhard explained how that principle “prevents betterment — placing the defrauded party in a better position than they would have occupied had the fraud not occurred.”

“‘[R]ecipients of fraudulent misrepresentation may recover “the pecuniary loss to [them] of which the misrepresentation is a legal cause, including (a) the difference between the value of what [they have] received … and its purchase price … and (b) pecuniary loss suffered otherwise as a consequence of the recipient’s reliance upon the misrepresentation,”’” he said.

While it was appropriate to avoid betterment, the circuit court’s calculation amounted to an approximation of what the roof might have been worth if Miles had adequately installed the silicone coating, rather than a reasonably certain measure of Midlantic’s actual pecuniary loss.

Quoting Prospect Development Co. v. Bershader, Bernhard said the Supreme Court of Virginia “has ‘not permitted this measure of damages in a fraud case,’ recognizing that ‘the replacement cost rule could permit a landowner to recover compensation which far exceeds the value of the real property.’”

Whereas the record here established neither the value of the roof had Miles properly installed the coating, nor the diminished value of the roof as installed, the circuit court erred by applying a proportional replacement-cost methodology unsupported by evidence of actual property values.

Thus, the panel reversed and remanded for a determination of compensatory damages “grounded in evidence of actual pecuniary loss proven with reasonable certainty, not in approximations derived from lifespan ratios applied to replacement costs.”

Attorney’s fees

While a limited exception to the American Rule grants discretion to award attorney’s fees to a defrauded party, Bernhard said that “Virginia courts have consistently interpreted Bershader attorney’s fees as being available, in the court’s discretion, only when equitable relief is granted.”

“In St. John v. Thompson, the Supreme Court clarified that Bershader ‘fees are proper if the circuit court, exercising its discretion in a fraud case, awards equitable relief, and further determines that the circumstances surrounding the fraudulent acts and the nature of the relief granted compel an award of attorney[] fees,’” he pointed out.

Midlantic did not request equitable relief, and the circuit court didn’t grant any form of it, such as rescission, restitution, constructive trust or injunctive relief, the judge wrote.

Without an award of equitable relief, Bernhard said the circuit court “lacked authority under Bershader to award attorney fees, regardless of the circumstances surrounding the fraudulent acts or the nature of the legal damages awarded.”