Disner v. Westinghouse Electric Corp.

CELEBREZZE, Senior Circuit Judge. In this diversity of citizenship case, defendant-appellant Westinghouse Electric Company. (Westinghouse) appeals from a jury verdict awarding the sum of $99,241.95 to plaintiff-appellee, Burton A. Disner. Disner claimed that, as a result of certain misrepresentations, he was fraudulently induced to enter into an exclusive real estate brokerage agreement and a subsequent settlement of claims arising from that agreement. Both the agreement and the settlement were made with Urban Systems Development Company (USDC), a wholly owned Westinghouse subsidiary.1 The district court instructed the jury to return a verdict in favor of Disner if he was able to establish, by a preponderance of the evidence, that he was fraudulently induced to enter into the brokerage agreement and subsequent settlement. Because fraud must be established by the stricter standard of clear and convincing evidence, we reverse. [1108] The parties entered into a written agreement which granted Disner the exclusive right to find a buyer for a parcel of land, located in West Bloomfield, Michigan.2 Paragraph (D) of the agreement provided that Disner was entitled to receive a commission for the sale of the West Bloomfield property only if he previously registered the purchaser’s name with USDC. Disner was precluded from registering the names of prospective purchasers with whom Westinghouse had previous contact. Prior to signing the agreement, Disner asked Terrell E. Busby, -USDC Assistant to the President, if he knew of any prospective buyer with whom USDC “previously had contact”. Busby indicated that he knew of no one who, at that time, would be covered by the provision. According to Disner, Busby’s statement fraudulently induced him to enter into the brokerage agreement. On December 1, 1976, Disner discussed the West Bloomfield property with Harold Beznos, a partner in a local developing concern, Beztak Company. Disner thereafter registered with USDC a number of prospective buyers, including Beznos and Beztak. USDC Controller, Byron R. Koste, informed Disner that all prospects registered for the West Bloomfield property had been accepted, except for Beznos and Beztak. The stated reason for USDC’s refusal to register either Beznos or Beztak was that USDC personnel, including Busby, had “extensive prior interface and property discussion” with Beznos regarding the West Bloomfield property. Accordingly, USDC invoked that portion of the agreement which prevented Disner from registering prospective purchasers with whom USDC “previously had contact.” However, Koste offered to extend the exclusive agency agreement; Dis-ner accepted the extension.3 Following USDC’s refusal to register either Beznos or Beztak, a series of letters were exchanged between the parties. In a letter dated February 21,1977, Koste wrote Disner: “As discussed with you previously, if a sale is ever consummated with Mr. Beznos, or Beztak, (which prospects are quite clouded) USDC is willing to pay you $2,500.00 in order to dispose of and settle the matter without further Beznos/Beztak related effort on your part.” (emphasis added). Disner’s second allegation of fraudulent misrepresentation is based on Koste’s assertion that the prospects of a sale to either Beznos or Beztak were “quite clouded”. Disner accepted the proposed settlement offer.4 On September 13, 1977, an agreement of sale was entered into between USDC and Beztak. Pursuant to the settlement agree [1109] ment, USDC sent Disner a check in the amount of $2,500.00. Disner rejected the check and commenced this lawsuit. The primary issue raised in this appeal concerns the burden of proof required to establish a claim of fraud in Michigan. Courts in various states have disagreed concerning whether a higher standard of proof is appropriate in cases involving fraud. Compare, Barrett v. Shanks, 382 Ill. 434, 47 N.E.2d 481 (1943), with Clinton v. Smith, 268 Cal.App.2d 550, 74 Cal.Rptr. 745 (1968) and Household Finance Corp. v. Altenberg, 5 Ohio St.2d 190, 214 N.E.2d 667 (1966). In this diversity case, we are bound by the substantive law of Michigan. Erie R.R. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938); Batesole v. Stratford, 505 F.2d 804 (6th Cir.1974) (In reviewing jury instructions given by the district court in a diversity action, the substantive content is governed by state law.). If substantial error exists in an instruction to a jury and a party is prejudiced by such error, a reviewing court must grant a new trial. E.g., Camden Fire Insurance Company v. Kaminski, 352 Mich. 507, 90 N.W.2d 685 (1958). See Weekes v. Michigan Chrome & Chemical Company, 352 F.2d 603 (6th Cir. 1965).5 According to Disner, Michigan law requires that fraud be established by a preponderance of the evidence.6 Indeed, Disner contends that the burden of proof required in all Michigan civil cases is the preponderance of the evidence. There are but two classes of cases recognized .as requiring different rules of proof — criminal eases, where a conviction is warranted only by proof beyond a reasonable doubt; and cases not criminal, where a preponderance of proof satisfies the legal requirement. White v. Production Credit Association, 76 Mich.App. 191, 256 N.W.2d 436, 438 (1977), quoting Stephenson v. Golden, 279 Mich. 710, 276 N.W. 849 (1937). We disagree. The overwhelming majority of Michigan courts which have considered the quantum of proof required to establish fraud have applied the clear and convincing evidence standard.7 E.g., Hi-Way Motor Company v. International Harvester Company, 398 Mich. 330, 336, 247 N.W.2d 813 (1976); Youngs v. Tuttle Hill Corp., 373 Mich. 145, 128 N.W.2d 472 (1964); Gorman v. Soble, 120 Mich.App. 831, 328 N.W.2d 119 (1983); Higgins v. Lawrence, D.P.M., P.C., 107 Mich.App. 178, 309 N.W.2d 194 (1981). See, United States For Use of U.S. Steel v. Construction Aggregates Corporation, 559 F.Supp. 414, 426 (E.D.Mich.1983); U.S. Fibres, Inc. v. Proctor & Schwartz, Inc., 358 F.Supp. 449, 460 (E.D.Mich.1972), aff’d, 509 F.2d 1043 (6th Cir.1975). Moreover, and of substantial significance, the most recent Michigan Supreme Court pronouncement concerning this issue indicates that fraud must be proven by “clear, satisfactory and convincing evidence.”8 Hi-Way Motor [1110] Company v. International Harvester Company, 398 Mich. 330, 247 N.W.2d 813, 816 (1976). A standard of proof serves two interrelated functions. First, it allocates the “risk of error” between the parties. Addington v. Texas, 441 U.S. 418,423, 99 S.Ct. 1804,1807, 60 L.Ed.2d 323 (1979). Second, it indicates “the relative importance attached to the ultimate decision.” Id. Courts have recognized, perhaps because the nature of the evidence in cases involving allegations of fraud is often circumstantial, that claims of fraud can be fabricated easily. See Herman & MacLean v. Hud-dlesten, 459 U.S. -, 103 S.Ct. 683, 74 L.Ed.2d 548 (1983). Thus, there is a high risk that an error will be made in determining whether a defendant has committed fraud. Even the early Chancery courts recognized the high risk of error and required that fraud be established by clear and convincing evidence.9 Eg., Maxwell Land-Grant Case, 121 U.S. 325, 381, 7 S.Ct. 1015, 1028, 30 L.Ed. 949 (1887) (“We take the general doctrine to be, that when in a court of equity it is proposed to set aside ... a written instrument for fraud ... in the execution of the instrument itself, the testimony on which this is done must be clear, unequivocal, and convincing, and that it [1111] cannot be done upon a bare preponderance of the evidence which leaves the issue in doubt.”). As a general principle, one responsibility of the legal process is to promulgate rules which will serve to minimize the risk of error. Accordingly, the higher standard of clear and convincing evidence is justified precisely because it guards against the risk of error inherent in cases involving allegations of fraud. The higher standard of proof also serves to protect interests deemed to be of particular importance.10 A determination that the defendant has committed either an intentional or innocent misrepresentation implicates the defendant’s reputation. Although a defendant’s pecuniary interest in fraud litigation may not be burdensome, the damage to his reputation may be great. Reputation is an interest of particular importance and, accordingly, Michigan has chosen to “reduce the risk to the defendant of having his reputation tarnished erroneously by increasing the plaintiff’s burden of proof.” Addington v. Texas, 441 U.S. 418, 424, 99 S.Ct. 1804, 1808, 60 L.Ed.2d 323 (1979). In summary, the higher burden of proof which Michigan requires is justified because of the “risk of error” and the “importance of the interests” involved in fraud litigation. Although the clear and convincing evidence standard which Michigan has adopted requires a higher degree of proof than the preponderance of the evidence standard, see, e.g., Addington v. Texas, 441 U.S. 418, 99 S.Ct. 1804, 60 L.Ed. 323 (1979); Hobson v. Eaton, 399 F.2d 781, (6th Cir.1968), cert, denied, 394 U.S. 928, 89 S.Ct. 1189, 22 L.Ed.2d 459 (1969); Marlene Industries Corporation v. NLRB, 712 F.2d 1011 (6th Cir. 1983); Baker v. Baker, 411 Mich. 567, 309 N.W.2d 532 (1981), Michigan courts have not defined precisely what clear and convincing evidence means. As one court noted, “both the ‘preponderance’ and ‘clear and satisfactory’ phrases appear in Michigan decisions without any indication of varying meanings.” Strand v. Librascope, Inc., 197 F.Supp. 743, 756 (E.D.Mich. 1961). Generally, when clear and convincing evidence is required, juries should be instructed that they must be persuaded that the truth of the contention is highly probable, as opposed to more likely than not. See United States v. State of Michigan, 653 F.2d 277, 279 (6th Cir.), cert, denied, 454 U.S. 1124, 102 S.Ct. 971, 71 L.Ed.2d 110 (1981). The district court gave an incorrect instruction regarding the quantum of proof required to establish fraud by instructing the jury that fraud may be established by a preponderance of the evidence. Michigan requires that fraud be established by clear and convincing evidence. Hi-Way Motor Company v. International Harvester Company, 398 Mich. 330, 247 N.W.2d 813 (1976). Clearly, prejudicial error exists when a court permits a claim to be established by a degree of proof less than that required by law. Accordingly, the district court’s decision is reversed and this case is remanded for proceedings not inconsistent with this opinion.11 Footnotes [1] USDC, which was dissolved in 1977, was part of the Westinghouse real estate development group. [2] The agreement provides: (D) ... During the term of this agreement, BROKER shall notify USDC in writing of any prospective purchaser to whom the property has been presented by the BROKER with the following information: 1) Name of individual and position 2) Name of company 3) Address (full) where presented Only those prospective purchasers who are registered in writing with USDC on or before the expiration hereof shall be considered “registered purchasers” for the purpose of Paragraph (E). USDC must notify BROKER in writing within fifteen (15) days of receipt of BROKER’S notice of prospective purchaser if USDC has previously had contact with such prospective purchaser and said prospective purchaser is not to be considered a “registered purchaser”. (F) USDC hereby retains the right to do any or all of the following at any time without incurring liability to the BROKER for any commission: 1) Contract with and/or sell to any prospective purchaser who is not a “registered prospect”. In the event BROKER wishes to present property to any prospective purchaser who has previously had contact with USDC, then BROKER must obtain written permission from USDC for BROKER to present said property to such prospective purchaser. [3] Disner subsequently approved further extensions of the agreement to June 30, 1978. [4] Disner introduced evidence which revealed that a USDC internal memorandum, dated February 15, 1977, was sent by USDC President Ross Obley to Koste. In the memorandum, Obley characterized his conversations with Beznos as “inconclusive due to the inability to agree upon terms and conditions.” Koste wrote back in the margin, “I think they’ll come around. Hold your ground.” [5] The district court instructed the jury to return a verdict for the plaintiff if the jury found that plaintiff “established each element of fraud by a preponderance of the evidence.” The court further instructed the jury that plaintiff should prevail “if the evidence as a whole produces in your mind a belief that what is sought to be proved is more likely true than not true.” The record indicates that Westinghouse made a timely objection to the court’s jury instruction concerning the standard of proof. Westinghouse proposed an instruction which would have applied the clear and convincing evidence standard. Thus, Westinghouse properly preserved the right to challenge the jury instruction. Fed.R.Civ.P. 51. [6] Customarily, civil cases are resolved by a preponderance of the evidence. A preponderance of the evidence has been defined as that proof which leads the fact finder to conclude “that the existence of a fact is more probable than its nonexistence.” In re Winship, 397 U.S. 358, 371, 90 S.Ct. 1068, 1076, 25 L.Ed.2d 368 (1970) (Harlan, J., concurring), quoting F. James, Civil Procedure 250-251 (1965). [7] The statement quoted from Stephenson has been rejected by Michigan courts as “inaccurate”. Beachum v. Bay Valley Associates, 120 Mich.App. 412, 328 N.W.2d 54, 57 (1982) (The court indicated that the clear and convincing standard “is an integral part of the civil jurisprudence of this state”.). See note 10, infra. [8] The dissent asks that Hi-Way Motor not be applied “woodenly”. While acknowledging that the same burden of proof should be applied regardless of whether a case is tried to a [1110] judge or jury, the dissent argues that Hi-Way Motor and its progeny are not “wholly disposi-tive” because, unlike the case at bar, they did not involve jury trials. We believe that the function of a jury instruction is to state correctly the law. Although a trial court need not instruct a jury using the precise terminology embodied in legal opinions, it must nevertheless state correctly the appropriate burden of proof. The dissent maintains that only a “broad reading” of Hi-Way Motor would permit the conclusion that Michigan requires clear and convincing evidence to establish fraud and that the Hi-Way Motor statement .concerning the burden of proof was made “casually”. On the contrary, the language of the Supreme Court of Michigan is unambiguous: Fraud will not be presumed but must be proven by clear, satisfactory and convincing evidence. Hi-Way Motor Company v. International Harvester Company, 398 Mich. 330, 247 N.W.2d 813, 816 (1976). Accordingly, we need not determine what “weight” to assign to a case decided by the Supreme Court of Michigan: we are bound by its pronouncement of substantive law. In this regard, our decision does not represent an attempt by a federal court to interfere with the development of state law, but rather, an attempt to defer to precedent established by the highest court in Michigan. [9] The dissent agrees with Disner that, the standard of proof in equity cases is higher than the standard of proof in actions at law for money damages. We disagree. The Michigan Supreme Court case which held the clear and convincing evidence standard applicable to cases of fraud involved a case for money damages. Hi-Way Motor Company v. International Harvester Company, 398 Mich. 330, 247 N.W.2d 813 (1976). The essence of the dissent’s objection in this regard is that if, in fact, Hi-Way Motor applied the clear and convincing standard to actions at law, it would overrule “a considerable body of case law” which arose out of Watkins v. Wallace, 19 Mich. 57 (1869). The Watkins court, according to the dissent, rejected the clear and convincing evidence standard when applied to an action at law tried to a jury. We believe that the dissent has misinterpreted Watkins. In Watkins, the Supreme Court of Michigan rejected a jury instruction which indicated that “fraud will not be presumed from slight circumstances, the proof must be clear and conclusive.” Watkins v. Wallace, 19 Mich. 57, 77 (1869). (Emphasis in original). The Watkins court objected to the word “conclusive” because it conveyed the erroneous impression that the jury must be free of all doubt. In fact, the Watkins court was concerned that application of the “clear and conclusive” standard would actually require the jury to decide the case beyond a reasonable doubt. And as there is a well settled popular understanding of the different degrees of proof required in civil and criminal trials as a basis of conviction, a jury instructed to act only on conclusive evidence could hardly fail to suppose they must disregard all balancing of evidence, and require a case absolutely free from any doubt. No such rigid rule prevails in any civil case. Common sense teaches every one to be cautious in arriving at conclusions which are prejudicial to character and honesty, but if the testimony produces a rational belief, a civil jury cannot be required to discard it because it is not conclusively established. Id. Clearly, the objection in Watkins focused on the jury instruction that “clear and conclusive” evidence is required to establish fraud. In this case, however, there is no dispute as to whether “conclusive” evidence is required to establish fraud. Michigan requires that fraud be established by clear and convincing evidence. [10] Michigan has required a higher burden of proof when particularly important rights are at stake, see, e.g., Baker v. Baker, 411 Mich. 567, 309 N.W.2d 532 (1981) (child custody award to be established by clear and convincing evidence as opposed to a mere preponderance of the evidence); Woolner v. Layne, 384 Mich. 316, 181 N.W.2d 907 (1970) (to reform a written contract, facts must be proved by clear and convincing evidence and not by a preponderance), but has found the preponderance of the evidence standard sufficient for protection of other rights. See, e.g., In re Posler, 390 Mich. 581, 213 N.W.2d 133 (1973) (no reason to change the burden of proof from a preponderance of the evidence to clear and convincing evidence in disciplinary proceedings against at-tomeys). Thus, even though Michigan has not defined precisely what clear and convincing evidence means, it has indicated that the clear and convincing standard requires more than a mere preponderance of the evidence.' [11] The parties appear confused as to what elements must be established in order to prevail on a claim of fraud. We believe that this issue requires clarification. The general rule is that to constitute actionable fraud it must appear: (1) That defendant made a material representation; (2) that it was false; (3) that when he made it he knew that it was false, or made it recklessly, without any knowledge of its truth, and as a positive assertion; (4) that he made it with the intention that it should be acted upon by [1112] plaintiff; (5) that plaintiff acted in reliance upon it; and (6) that he thereby suffered injury. Candler v. Heigho, 208 Mich. 115, 121, 175 N.W. 141, 143 (1919); Hi-Way Motor Company v. International Harvestor Company, 398 Mich. 330, 336, 247 N.W.2d 813 (1976); Gorman v. Soble, 120 Mich.App. 831, 328 N.W.2d 119 (1982). Application of the general rule is limited to cases involving intentional misrepresentation. The general rule is altered in cases involving “innocent misrepresentation”, a doctrine recognized by Michigan courts when consequences to the plaintiff are as serious as they would be if the misrepresentation was intentional. E.g., Kroninger v. Anast, 367 Mich. 478, 116 N.W.2d 863 (1962). When innocent misrepresentation is alleged the plaintiff need not establish all six requirements set forth by the general rule. United States Fidelity and Guarantee Company v. Black, 412 Mich. 99, 313 N.W.2d 77, 84 n. 8 (1981) (“So that there will not be any confusion as to this state’s position concerning the doctrine of innocent misrepresentation we specifically overrule Candler insofar as it purports to hold that all six common-law requirements of fraud must be proven in an innocent misrepresentation case.”). In order to establish a case of innocent misrepresentation, the plaintiff must prove that the misrepresentation occurred between parties in privity and that the representation was false. Plaintiff must further establish that he was actually deceived and that he relied on the misrepresentation to his detriment. Finally, plaintiff must demonstrate that his loss inured to the benefit of the one who made the misrepresentation. Phillips v. General Adjustment Bureau, 12 Mich.App. 16, 20, 162 N.W.2d 301 (1968). In summary, the innocent misrepresentation rule applies only when the misrepresentation arises in a transaction between parties in privity. The general requirement of scienter, necessary to establish a claim of intentional misrepresentation, is not an element of innocent misrepresentation. Similarly, the general rule that a misrepreséntation must be made with the intention that it be acted upon is not an element of innocent misrepresentation. Finally, under the innocent misrepresentation rule the plaintiff must not only suffer an injury, but the injury must inure to the benefit of the other contracting party. United States Fidelity and Guarantee Company v. Black, 412 Mich. 99, 313 N.W.2d 77 (1981).