Maryland Court of Special Appeals Reaffirms Heightened Standard for Recovering Punitive Damages

On June 1, 2016, the Court of Special Appeals of Maryland issued an opinion in 1st Team Fitness, LLC, et al. v. Francesco Illiano, No. 0136, Sept. Term 2015 (Md. Ct. Spec. App. Jun. 1, 2016) reaffirming Maryland’s heightened standard for recovering punitive damages. In Illiano, the appellant, 1st Team Fitness, LLC (“1st Team”), brought a direct and derivative action on behalf of Pozzuoli, LLC (“Pozzuoli”) in the Circuit Court of Carroll County against the appellee, Francesco Illiano (“Illiano”) contending, inter alia, that Illiano misled it regarding the sale of Pozzuoli’s assets and converted and fraudulently transferred Pozzuoli’s assets and proceeds of the sale to himself. Based thereon, 1st Team asserted counts for intentional misrepresentation-concealment or non-disclosure, constructive fraud, breach of contract, and conversion-embezzlement, and sought punitive damages.

At the conclusion of the bench trial, the trial court declined to award punitive damages to 1st Team, finding that while Illiano acted with an intent to deceive, he did not act with “actual malice.” The trial court explained that although Illiano breached his fiduciary duty to 1st Team, which constituted an intentional misrepresentation toward 1st Team, such conduct was insufficient to support a claim for punitive damages because Illiano’s actions were premised only on his “reckless disregard or indifference as to the truth of his representations,” not on any actual knowledge that his representations were false. Therefore, the court concluded, 1st Team failed to establish actual malice and, absent such a showing, Illiano’s intent to deceive was not by itself sufficient to justify an award of punitive damages.

1st Team appealed to the Court of Special Appeals seeking a remand with directions to hold a hearing on punitive damages. On appeal, the Court concluded that the trial court did not err or abuse its discretion in declining to award punitive damages. In tracing Maryland’s jurisprudence on punitive damages, the Court reaffirmed that a plaintiff is required to prove, by clear and convincing evidence, both specific intent to injure and actual malice in order to obtain punitive damages. In affirming the trial court’s decision and underlying rationale, the Court also pointed to Illiano’s assertion that the sale of Pozzuoli’s assets was “nothing personal,” but rather an act to save the company, as evidence tending to prove that Illiano’s conversion of 1st Team’s property was not motivated by actual malice against 1st Team. The Court further reasoned that, assuming 1st Team set forth some evidence warranting punitive damages, the trial court had the discretion to deny punitive damages if 1st Team did not prove actual malice by clear and convincing evidence. Ultimately, the Court held that because 1st Team was unable to prove actual malice by clear and convincing evidence for the reasons stated above, the trial court did not err or abuse its discretion in declining to award punitive damages.

This opinion reaffirms Maryland’s heightened standard for recovery of punitive damages. Plaintiffs who seek to recover punitive damages in Maryland in cases like Illiano bear the hefty burden to establish actual malice—i.e., actual knowledge of the false representations—by clear and convincing evidence. Thus, in cases where plaintiffs fail to plead or prove sufficient facts to meet their burden, Maryland courts will likely decline to award punitive damages.

Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.