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Hoffman v. Stamper: Large Verdict in Flipping Lawsuit

January 1, 2006

Maryland’s highest court has considered whether the evidence supported a large verdict against a real estate company, appraiser, and mortgage lender for their participation in a conspiracy where dilapidated properties would be bought and quickly resold to buyers who would not otherwise be financially qualified to purchase the properties.

Robert and Suzanne Beeman (“Beemans”), operating through their real estate company “A Home of Your Own, Inc.” (“Company”), located dilapidated properties, made a few cosmetic repairs, and then put them up for sale at a price far exceeding what they had paid for the property, usually around triple the purchase price. The Beemans would then find unsophisticated buyers with poor credit histories and convince them that the homes had been rehabbed. The Beemans completed nine of these transactions.

The Beemans would also help the buyers obtain 100% federally insured loans on these overpriced properties through Irwin Mortgage (“Mortgage Lender”), working through loan officer Joyce Wood (“Wood”). Since the buyers could not pay the closing costs for the sale (a requirement for FHA loans), the Beemans arranged, with the knowledge of Wood, to have “gifts” cover the closing costs. The “gift letter” scheme worked in the following manner: the buyers found a friend or relative with a bank account. These individuals would then fill out a “gift letter” generated by Wood stating that they were giving the buyer a certain amount of money towards a downpayment. Beeman would then give the “gift” amount to the donor in cash, who would then deposit the amount in her/her bank account. Thereafter, the donor would obtain a certified check payable to Beeman. Wood also improperly generated “Good Faith Estimates” for buyers based on income, not on the property’s price, misleading buyers about their mortgage payment costs.

As required under FHA regulations, the properties were then appraised by Arthur Hoffman (“Appraiser”) before the loans were finalized. When the Appraiser could not justify the high contract sale price, he used properties as comparables which were not actually comparable to the homes the buyers were purchasing. The Appraiser’s appraisals also did not take into account the fact that most of these properties had been purchased at a substantially lower price just a few months earlier and now were being sold with only minor cosmetic alterations.

Soon after moving into their homes, the buyers experienced serious problems, including lack of heat, faulty plumbing, and nonfunctioning appliances. They called the Beemans, but received no response. One buyer never moved into the property, and five more lost their properties to foreclosure.

The nine buyers brought a lawsuit against the Beemans, the Company, the Lender, and the Appraiser for engaging in a conspiracy to defraud, fraud, violations of the state’s consumer protection act (“Act”), and negligent misrepresentation. A civil conspiracy to defraud occurs when a combination of two or more people agree to accomplish an unlawful act or to use unlawful means to accomplish a legal act that results in damages to the plaintiff. The jury ruled that there was a conspiracy and the buyers were victims of fraud, and the Lender was also found to have violated the Act. The jury awarded economic damages of varying amounts to each of the buyers based on the inflated price amount they paid for their home, and noneconomic damages for emotional distress of $145,000 to each buyer. The total verdict was $1,434,020 against all three defendants. In addition, a separate award of $200,000 in punitive damages to each of the buyers was entered against the Beemans and the Company, and the jury also awarded the buyers another $195,591 in attorney’s fees. The Lender and the Appraiser appealed, and the appellate court affirmed the compensatory damages but reversed the lower court’s punitive damage ruling. The Lender and the Appraiser appealed to the state’s highest court.

The Court of Appeals of Maryland partially affirmed the lower courts and remanded the case to the trial court for further proceedings. The court first considered whether the Appraiser could be liable for fraud. The Appraiser argued that there was no evidence that any of the buyers relied upon the appraisal report in making their decision to purchase the property. To prove fraud, a defendant must make a false statement that the defendant either knows is false or recklessly does not try to confirm as true; the statement must have been made with the intent to defraud; the statement must be relied upon; and the other party suffers damages. The court found that the phony appraisals were prepared by the Appraiser as part of the conspiracy, and were relied upon by the buyers at least implicitly in making their purchases.

Next, the court considered the awards of $145,000 in noneconomic damages. The defendants argued that the noneconomic damages are not allowed in cases where there is no physical harm, while the buyers argued that physical harm limitation only applied in negligence cases, not in cases involving intentional torts. Looking at the relevant law across the nation, the court found that there was a split in opinion as to whether noneconomic damages could be recovered in a case not involving physical harm. The court determined that some of manifestation of physical harm is required for an award of noneconomic damages in Maryland and so the court vacated the award of $145,000 to eight of the buyers (one of the buyers had manifested physical harm caused by the emotional distress, and so could pursue the claim of $145,000).

Finally, the court considered the award of punitive damages. The appellate court had ruled that the trial court had improperly instructed the jury on the standard needed to support a punitive damage award, namely that the defendants had deliberately participated in the wrongdoing. The trial court had found that while the Appraiser and Lender may have acted with conscious disregard of the false statement made to the buyers, there was no evidence that they had actual knowledge of the Beeman’s fraud and so the trial court did not submit the punitive damage claims against the Appraiser and the Lender to the jury. The appellate court had reversed this determination and sent the case back to the trial court for further proceedings on this issue, determining that these claims should have been submitted to the jury so it could determine what the evidence showed. The high court agreed, and affirmed the appellate court’s ruling that the question of whether the Lender and the Appraiser could be liable for punitive damages should be submitted to the jury for resolution. Therefore, the court partially reversed and partially affirmed the lower courts, sending the case back to the trial court for further proceedings.

Hoffman v. Stamper, 867 A.2d 276 (Md. 2005).