A Maryland appeals court overturned the lion's share of one of the largest legal judgments in state history yesterday, finding that First Union National Bank violated its contract with a Catonsville businessman but did not defraud him.
The panel of Court of Special Appeals judges struck down $239 million of the $276 million jury award against the bank, now Wachovia Corp. The judges let the remaining damages stand after affirming the breach-of-contract judgment.
It's a significant setback for software company owner Scott Steele, whose attorneys successfully argued in Baltimore Circuit Court last year that First Union double-crossed him after he sped up its loan approval process with a computerized system.
"We obviously are disappointed but most respectfully feel the Court of Special Appeals was wrong," said Andrew G. Slutkin of the firm Snyder, Slutkin & Kopec, a lead attorney for Steele.
"The jury's verdict was carefully reviewed by the trial judge and upheld in its entirety in a 237-page decision. ... We're carefully considering our options because we believe the jury in the trial court was correct."
Wachovia Corp., which had been stunned by the size of the award, is reviewing its options, too - because the appeals court affirmed $37 million of the judgment.
"We're pleased but not surprised with the Maryland Court of Special Appeals decision on the punitive damages and fraud charges," added Christy Phillips, a spokeswoman for Wachovia, the fifth-largest banking company in the nation.
Steele Software Systems Corp., which signed a contract with First Union in 1997, implemented an automated system for title searches and appraisals for home equity loans. The company at one point nominated Steele for its "Vendor of the Year" award.
But while he was under contract for First Union, the bank started a new company, GreenLink, that used many of the methods in Steele's system and profited handsomely, his attorneys said. They alleged that the bank refused to send hundreds of thousands of transactions to Steele that he was entitled to process and for which he would have earned $80 apiece.
"The fraud in this case was much more extensive than in any prior Maryland case," said Mark Kopec, another lead attorney for Steele.
Said Slutkin: "They induced him into the contract to get him to teach them how to do it, with the plan to kick him out as soon as they learned how."
The contract didn't promise to deal with Steele exclusively but did state First Union "will use its best efforts to direct these transactions" to his company.
Steele's attorneys said he had conversations with First Union officials that clearly indicated he would get most of the transactions. But the judges - while agreeing that First Union didn't hold up its end of the bargain on the contract - said that Steele did not prove fraud.
In the opinion, Court of Special Appeals Judge Sally D. Adkins wrote that "we differentiate between actionable fraudulent misrepresentations and indefinite generalities that do not support fraud in the context of discussions between two sophisticated businesses."
The key is intent, said Michael Van Alstine, a University of Maryland School of Law professor.
"You have to prove that they intended not to perform at the time they signed the contract," said Alstine, who specializes in domestic and international contract and commercial law. "Evidence of intent is always very difficult to prove. ... Fraud cases don't win very often."
Irwin R. Kramer, an attorney who has tried many contract disputes, said the burden of proof for fraud is higher than that for breach of contract. People frequently break contracts without also committing fraud, he said.
"It would seem that one of the court's concerns was that First Union may have gone into the deal with the purest of intentions, meaning every word of what they said to the plaintiff, but that later on they decided to do their business differently," said Kramer, with the Owings Mills firm of Kramer & Connolly.
"That would not be fraud. That would be deciding on a different business plan."