Charles David Killion v. Johnny Huddleston

IN THE COURT OF APPEALS OF TENNESSEE

AT NASHVILLE

August 8, 2001 Session

CHARLES DAVID KILLION v. JOHNNY HUDDLESTON

Appeal from the Chancery Court for Davidson County

No. 99-3360-III Ellen Hobbs Lyle, Chancellor

No. M2000-02413-COA-R3-CV - Filed September 19, 2001

This is an action for damages for negligent misrepresentation. The plaintiff invested $50,000.00 in

Eureka Vacuum Cleaner Company at the advice and urging of the unlicensed defendant who was

to receive a substantial commission. The investment was a scam. Recovery for the loss was

allowed. We affirm.

Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court Affirmed

WILLIAM H. INMAN, SR. J., delivered the opinion of the court, in which BEN H. CANTRELL, P.J., M.S.

and WILLIAM C. KOCH, JR., J., joined.

Harry R. Cash, Chattanooga, Tennessee, for the appellant, Johnny Huddleston.

Wayne Detring, Hendersonville, Tennessee, for the appellee, Charles David Killion.

OPINION

I.

Each of these parties was victimized by one Fulton, a friend and partner of the defendant,

who unwittingly but negligently participated in a Ponzi-like scheme devised by Fulton.

The defendant and plaintiff were acquainted by virtue of their landlord-tenant relationship.

The defendant owned certain real estate leased to the plaintiff who operated a Dairy Queen business.

In October 1999 the defendant approached the plaintiff about investing money in the Eureka

Vacuum Cleaner Company. The investment was discussed in general terms.

The defendant explained to the plaintiff that he had a partner and that they were arranging

investments with Eureka, which was based in Illinois. The defendant and his partner, Fulton, were

selling “commodities or contracts” when Eureka “needed money up front for manufacturing

purposes.” The defendant demonstrated in writing how an investment worked, and undertook to

explain to the plaintiff how he could sell the Dairy Queen business and invest the proceeds in

Eureka. The defendant projected the success of such an investment by diagraming its value in

increments of four, eight, and twelve months, based on a return of 18 percent every four months.

After the closing of the Dairy Queen sale, the plaintiff advised the defendant - who attended

the sale - that he would invest in Eureka. The defendant instructed the plaintiff to make the check

payable to his partner, Fulton. The plaintiff believed he was to receive a certificate from Eureka, but

was given a note for $50,000.00 signed by Billy Fulton as President of Airways Vacuum Corp. On

May 6, 1998 the defendant called the plaintiff and told him that Fulton died on May 5, 1998 and that

the investment was a scam.

The defendant also invested a substantial sum with his partner, Fulton. Significantly, the

defendant was to receive a commission of 32 percent on the $50,000.00 investment, which was not

revealed to the plaintiff.

The defendant solicited investments in Eureka, through Fulton, from fifteen individuals

commencing in October 1997. These investments amounted to more than one million dollars, and

the defendant admits that funds received from new investors were used to pay earlier investors. He

admits that he made no investigation of Fulton, or the scheme, but simply accepted his word. He

admits that he represented himself to be an “authorized representative” of Eureka, and that the

“plaintiff did have faith in me.”

II.

The foregoing recitation forms the basis of the complaint.1 The defendant denied the

allegations by answer, notwithstanding he later admitted, either by discovery or in-court testimony,

the essential facts. He pleaded, alternatively, that the plaintiff was himself negligent, and that his

comparative fault bars a recovery. He also pleaded the bar of an unspecified statute of limitations,

laches, and lack of consideration.

III.

The Chancellor dismissed the claim based on the Securities Act, finding that the one-year

statute of limitations barred the action. The claims based on breach of contract, breach of fiduciary

duty, and fraudulent misrepresentation were also dismissed for failure of the plaintiff to sustain his

burden of proof.

1

Which alleged various grounds for recovery, including breach of contract, breach of fiduciary duty, negligent

misrepresentation, fraud, and violations of the Tennessee Securities Act. None of these grounds was sustained by the

Chancellor except negligent misrepresentation.

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The Chancellor found that the plaintiff proved by a preponderance of the evidence that the

defendant was guilty of negligent misrepresentation and awarded damages of $50,000.00 plus pre-

judgment interest.

IV.

The defendant appeals and presents for review the issue of whether the court erred in finding

him liable under the theory of negligent misrepresentation. The plaintiff presents for review the

issues of whether the Chancellor erred in dismissing his claims based on fraud and breach of

contract. Our review is de novo on the record with a presumption of correctness unless the evidence

preponderates against the judgment. Rule 13(d) Tenn. R. App. P.

V.

The tort commonly known as negligent misrepresentation is recognized in Tennessee.

Tartera v. Palumbo, 453 S.W.2d 780 (Tenn. 1970). Section 552 of the Restatement (Second) of

Torts is the standard for negligent misrepresentation. Robinson v. Omer, 952 S.W.2d 423, 427

(Tenn. 1997) (“Tennessee has adopted Section 552 ‘as the guiding principle in negligent

misrepresentation actions’”) (citing Bethlehem Steel Corp. v. Ernst& Whinney, 822 S.W.2d 592,

595 (Tenn. 1991)).

Section 552 of the Restatement (Second) of Torts, in pertinent part, provides:

(1) One who, in the course of his business, profession or employment, or in any

other transaction in which he has a pecuniary interest, supplies false

information for the guidance of others in their business transactions, is

subject to liability for pecuniary loss caused to them by their justifiable

reliance upon the information, if he fails to exercise reasonable care or

competence in obtaining or communicating the information.

This section can be reduced to four distinct elements:

(1) The defendant must be acting in the course of his or her business or

profession, or in a transaction in which he or she has a pecuniary interest;

(2) The defendant must supply false information to the plaintiff and must intend

that this information guide the defendant in a business transaction;

(3) The defendant must fail to exercise reasonable care in obtaining or

communicating the information; and

(4) The plaintiff’s reliance upon the information must be justifiable.

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John Martin Co. v. Morse/Diesel, Inc., 819 S.W.2d 428 (Tenn. 1991).

The first element allows recovery only in situations where the defendant is receiving some

financial incentive. If the defendant is acting in the course of his employment, Section 552 will

apply. However, no direct monetary reward with regard to the transaction involving the alleged

faulty information is required. Attorneys have been held liable to non-clients for erroneous advice

given in real estate transactions. Collins v. Binkley 750 S.W.2d 737 (Tenn. 1988); Stinson v.

Brand, 738 S.W.2d 186 (Tenn. 1987). Accountants have been held liable to non-clients for faulty

audit information. Bethlehem Steel Corp., supra; John Martin Co., supra (construction manager

held liable to subcontractor for faulty information); Tartera, supra, 453 (land surveyor held liable

to non-client purchaser of property for faulty property description in deed). The test for whether the

information fits within the parameters of Section 552 is not privity, nor is it direct financial gain.

The test is whether the information was given in a business transaction. Since the defendant

admitted that he had a pecuniary interest in the transaction - a 32 percent commission - the first

element is satisfied.

The second element required is that the information must be false and must be given to the

plaintiff with the intent that it guide him or her in a business transaction. The requirement of falsity

means simply that the court must look at the exact information provided and determine if it is true

or not. The statement made by the defendant must be a statement of a material past or present fact.

McElroy v. Boise Cascade Corp., 632 S.W.2d 127, 130 (Tenn. Ct. App. 1982). However,

statements of opinion are not actionable. Brungard v. Caprice Records, 608 S.W.2d 585, 590

(Tenn. Ct. App. 1980); Brown v. Brown, 863 S.W.2d 432, 434 (Tenn. Ct. App. 1993). Conjecture

or representations about future events are not actionable, even if the statements later turn out to be

false. McElroy, supra, 130.

In addition, the statement must be given in a business transaction setting. In the cases cited

above where non-clients are allowed to recover from certain professionals, the information was given

in transactions where the professional knew it was likely that others would use it as a decision

making reference point. For example, land surveyors know that property descriptions used in deeds

in purchase transactions will be relied upon by non-client buyers of the property. In the same

manner, accountants know that the audit information they provide to their clients is likely to be

relied upon by non-clients. The proof clearly established that the information provided to the

plaintiff by the defendant was false and that it was intended to guide the plaintiff to an investment

in Eureka.

The third element of negligent misrepresentation requires that the defendant must have failed

to exercise reasonable care in obtaining or communicating the alleged false statements. The

Supreme Court addressed this element and stated that:

[t]he burden is always on the plaintiff to establish that the supplier violated his duty

to exercise due care and competence in obtaining or communicating the information.

Foreseeability by the provider of the information and reliance by the user of the

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information are important safeguards. Negligence by the user of the information may

be a bar to recovery.

John Martin, supra, 435.

The defendant admitted that he failed to exercise due care and proper judgment.

The final element of a negligent misrepresentation under Section 552 is whether the

plaintiff’s reliance upon the information was justified. To determine this issue, we look at the

relative positions of the parties. The plaintiff reposed the utmost trust in the defendant, who

acknowledged this fact. While it is true, the defendant argues, that the plaintiff could have

investigated the matter, the means of knowledge were not readily available to him and he did not

know Fulton. From all the circumstances we believe the proof justified the conclusion that the

plaintiff justifiably relied upon the information given to him by the defendant.

VI.

The defense of comparative negligence will prevent the plaintiff from recovering if his own

fault was equal to or greater than that of the defendant. John Martin, supra, 435. The defendant

argues that the plaintiff’s refusal to meet with Fulton constitutes comparative negligence. The

plaintiff admitted that he declined to travel to Chattanooga to meet Fulton before investing his funds,

because he was doing business with the defendant, not with Fulton.

It may well be argued that the plaintiff was naive, but his position in this scenario was clearly

junior to that of the defendant. We agree with the Chancellor that the plaintiff’s reliance on the

defendant was justified and that such reliance was not negligence. The evidence does not

preponderate against the judgment allowing a recovery for negligent misrepresentation.

VII.

We have considered the issues presented by the plaintiff respecting his claims for fraudulent

misrepresentation and fraud of contract, and find that the evidence does not preponderate against the

judgment.

The judgment is affirmed at the costs of the appellant, Johnny Huddleston.

___________________________________

WILLIAM H. INMAN, SENIOR JUDGE

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