STATE of Maine v. Frederic D. WEINSCHENK et al.
Supreme Judicial Court of Maine
Feb. 15, 2005
2005 ME 28
Argued: Nov. 16, 2004.
David M. Hirshon, Esq., Marshall J. Tinkle, Esq. (orally), Tompkins, Clough, Hirshon & Langer, P.A., Portland, for defendant.
Panel: CLIFFORD, RUDMAN, DANA, ALEXANDER, CALKINS, and LEVY, JJ.
Majority: CLIFFORD, RUDMAN, DANA, and ALEXANDER, JJ.
Dissent: CALKINS, and LEVY, JJ.
ALEXANDER, J.
[¶1] Frederic D. Weinschenk and Ric Weinschenk Builders, Inc. (RWB) appeal from a judgment and order of the Superior Court (Kennebec County, Studstrup, J.) finding that they violated the Unfair Trade Practices Act (UTPA),
I. CASE HISTORY
[¶2] Frederic Weinschenk has been involved in the construction business for forty years. After moving to Maine in the early 1980s, Weinschenk built what he described as “high-end” single-family houses. In the early 1990s, Weinschenk developed a plan to create moderately priced, compact, custom-designed single-family houses. By lowering construction costs, Weinschenk was able to build houses costing twenty-five to thirty percent less per square foot than the “high-end” houses he had previously built. Weinschenk then formed RWB. With RWB, Weinschenk created several housing developments in the Portland area. Although buyers con
[¶3] While some buyers were pleased with their newly constructed houses, and nearly all were satisfied with the intricate design, buyers in three of the developments experienced significant problems with their houses shortly after moving in. Homeowners reported severe leaks from the windows and roofs, bursting pipes, leaking toilets, and cracks in tiles and in the foundation.
[¶4] Complaints from homeowners led the Attorney General to investigate Weinschenk and RWB‘s trade practices. Upon inspection of fifteen houses, the State‘s consulting еngineer identified several common defects in the houses. He reported that the stairs did not comply with applicable building codes, the roofs and windows compromised the weather tightness of the houses, and overall, the houses were “poorly built.” The State then commenced an action against Weinschenk and RWB pursuant to the UTPA,
[¶5] A non-jury trial was held in Superior Court. A number of individuals who owned houses designed by Weinschenk and constructed by RWB testified about problems in their houses. Several of the homeowners who testified at trial were “indirect purchasers,” that is, they were the second or third buyers of the homes rather than the original purchaser. The indirect purchasers did not contract with RWB for construction purposes, nor did they consult with Weinschenk regarding the design of their houses.
[¶6] The Superior Court found that Weinschenk and RWB violated the UTPA by engaging in a pattern or practice of unfair or deceptive acts by selling houses that were defective and that did not comply with generally accepted construction practices, and by misrepresenting to consumers the quality of the construction of the houses. The court ordered Weinschenk and RWB to pay $221,256 in restitution, through the Attorney General, for the benefit of nine of the homeowners. Five of these homeowners were indirect purchasers, and four purchased their homes directly from Weinschenk and RWB. The Superior Court also issued injunctions against Weinschenk and RWB, requiring them to meet a number of requirements before building any residential dwelling in the State. In addition, the court dismissed the counterclaim, finding that the State had not waived sovereign immunity.
[¶7] Weinschenk and RWB appeal.
II. STANDARD OF REVIEW
[¶8] Whether a trade practice is unfair or deceptive is a question of fact determined by the fact-finder. Binette v. Dyer Library Ass‘n, 688 A.2d 898, 906 (Me. 1996). Accordingly, we review findings of violations of the UTPA for clear error. State v. Shattuck, 2000 ME 38, ¶ 13, 747 A.2d 174, 178. Findings of fact are clearly erroneous only when no compe
[¶9] When there is a challenge to a court ordered injunction, we review the issuance of the injunction for a sustainable exercise of the court‘s discretion; Bates v. Department of Behavioral and Developmental Services, 2004 ME 154, ¶ 38, 863 A.2d 890, 901; we review the factual findings underlying the exercise of that discretion for clear error. State v. DeCoster, 653 A.2d 891, 895 (Me. 1995).
[¶10] A motion to dismiss pursuant to
III. LEGAL ANALYSIS
A. The Unfair Trade Practices Act
[¶11] Maine‘s UTPA,
1. The Attorney General‘s Authority to Commence an Action Pursuant to the UTPA
[¶12] Weinschenk and RWB contend that the Attorney General did not have the authority to commence an action against them pursuant to the UTPA because the claims arose out of separate, single home construction contracts. They assert that these separate, individual transactions cannot be aggregated to create an unfair or deceptive trade practice. Title
[¶13] Because the State had evidence to support the claim that Weinschenk and RWB were engaged in the unfair practice of dеsigning, constructing, and selling defective houses, and because it is in the interest of the public to prevent builders from engaging in deceptive marketing practices and placing deficient houses into the stream of commerce, the Attorney General properly commenced the action against Weinschenk and RWB pursuant to the UTPA.
[¶14] Weinschenk and RWB also assert that the UTPA does not apply to some transactions because industry operatiоns are separately regulated by state or federal law.
[¶15] Weinschenk and RWB contend that they did not engage in unfair or deceptive acts or practices in violation of the UTPA. The UTPA does not contain a definition of either the term “unfair” or “deceptive.” Shattuck, 2000 ME 38, ¶ 13, 747 A.2d at 178. Determination of whether an act or practice is “unfair or deceptive” in violation of the UTPA must be made by the fact-finder on a case-by-case basis. Binette, 688 A.2d at 906. In determining what constitutes an unfair or deceptive act pursuant to the UTPA, we are guided by the interpretations given by the Federal Trade Commission (FTC) and the federal courts.
[¶16] To justify a finding of unfairness, the act or practice: (1) must cause, or be likely to cause, substantial injury to consumers; (2) that is not reasonably avoidable by consumers; and (3) that is not outweighed by any cоuntervailing benefits to consumers or competition. Tungate v. MacLean-Stevens Studios, Inc., 1998 ME 162, ¶ 9, 714 A.2d 792, 797; FTC v. Crescent Publ‘g Group, Inc., 129 F. Supp. 2d 311, 322 (S.D.N.Y. 2001);
[¶17] To determine whether Weinschenk and RWB engaged in a deсeptive act or practice, within the meaning of the UTPA, we are guided by the “clear and understandable standard” articulated by the FTC and the federal courts. In re Cliffdale Assocs., Inc., 103 F.T.C. 110, 164 (1984). An act or practice is deceptive if it is a material representation, omission, act or practice that is likely to mislead consumers acting reasonably under the circumstances. Id. at 164-65; Novartis Corp. v. FTC, 223 F.3d 783, 786 (D.C. Cir. 2000). A material representation, omission, act or practice “involves information that is imрortant to consumers and, hence, likely to affect their choice of, or conduct regarding, a product.” Cliffdale Assocs., Inc., 103 F.T.C. at 165. An act or practice may be deceptive, within the meaning of Maine‘s UTPA, regardless of a defendant‘s good faith or lack of intent to deceive. Binette, 688 A.2d at 906.
[¶18] The record supports the conclusion that through advertisements and personal contacts with consumers, Weinschenk and RWB made material representations to consumers who purchased new houses. Because these representations provided consumers with information that likely affected their decision to purchase houses designed by Weinschenk and constructed by RWB, they are material. The Superior Court properly found that Weinschenk and RWB‘s design and construction practices were unfair trade practices and that material representations, made by Weinschenk and RWB, were deceptive aсts, in violation of the
3. Individual Liability
[¶19] Weinschenk contends that because he did not personally make actual misrepresentations or commit fraud, the court erred in finding that he violated the UTPA and erred in finding him jointly and severally liable, with RWB, for the payment of restitution and costs. The record indicates that Weinschenk engaged in direct personаl dealings with each of the original buyers and that he personally designed the homes found to be defective. Further, although corporations are separate legal entities with limited liability, courts may disregard the corporate entity, “when used to cover fraud or illegality, or to justify a wrong.” Anderson v. Kennebec River Pulp & Paper Co., 433 A.2d 752, 756 n. 5 (Me. 1981). A court may pierce the corporate veil if a plaintiff establishes that: “(1) the defendant abused the privilege of a separate corporate identity; and (2) an unjust or inequitable result would occur if the court recognized the separate corporate existence.” Johnson v. Exclusive Properties Unlimited, 1998 ME 244, ¶ 6, 720 A.2d 568, 571. See also Wm. Passalacqua Builders, Inc. v. Resnick Developers South, Inc., 933 F.2d 131, 139 (2d Cir. 1991).
[¶20] The court properly disregarded RWB as a separate legal entity and found Weinschenk personally liable for his corporation‘s actions because: (1) Weinschenk, the principal representative of RWB, had direct, personal dealings with eaсh of the original purchasers and personally misrepresented the quality of the houses; (2) RWB was thinly capitalized and insolvent at the time of trial; (3) Weinschenk, as the only officer and director of RWB, had pervasive control over RWB; and (4) holding only the bankrupt RWB liable would lead to an unjust and inequitable result for the injured homeowners.
B. Remedies
[¶21] Weinschenk and RWB claim that the Superior Court erred in awarding restitution to indirect purchasers and in issuing the injunctions. The Legislature has provided the courts with express authority to issue monetary awards to consumers for violations of the UTPA and to issue temporary or permanent injunctions to restrain and prevent violations.
1. Restitution to Indirect Purchasers
[¶22] Indirect purchasers are individuals who do not deal directly with those engaging in the unfair trade practice or activity. Rather, indirect purchasers are injured when the “costs of illegal activities are passed down the distribution chain.” Robert F. Roach, Revitalizing Indirect Purchaser Claims: Antitrust Enforcement Under New York Law, 13 PACE L. REV. 9, 11 (1993). The United States Supreme Court addressed the issue of indirect purchaser recovery in Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977), and in California v. ARC America Corp., 490 U.S. 93 (1989).
[¶23] In Illinois Brick Co., indirect purchasers2 brought an antitrust action against manufacturers of concrete blocks.
[¶24] In California v. ARC America Corp., Alabama, Arizona, California, and Minnesota alleged that cement manufacturers had engaged in a nationwide consрiracy to fix cement prices. 490 U.S. at 97. The states, which were indirect purchasers of the cement, asserted that their respective state antitrust laws permitted indirect purchasers to recover all of the overcharges passed on to them by the direct purchasers. Id. at 98. Alabama, California, and Minnesota‘s antitrust laws expressly authorize recovery to indirect purchasers. Id. at 98 n. 3. Arizona‘s antitrust statute, like Maine‘s UTPA, is guided by federal law. Id. The Supremе Court determined that although antitrust recovery is limited to direct purchasers under federal law, indirect purchasers may recover under state antitrust laws. Id. at 101-03.
[¶25] In FTC v. Mylan Laboratories, Inc., 62 F. Supp. 2d 25 (D.D.C. 1999), the District Court addressed the issue of indirect purchaser recovery under Maine‘s UTPA. In that case, the FTC and thirty-two states brought an action against drug companies for federal and state antitrust law violations. Id. at 32. The District Court initially found that indirect purchasers in Maine were not entitled to recovery under the UTPA. Id. at 48. Upon a motion for reconsideration, the Mylan court reinstated “Maine‘s claims for restitution on behalf of ... indirect purchasers under the Maine Unfair Trade Practices Act (UTPA).” FTC v. Mylan Laboratories, Inc., 99 F. Supp. 2d 1, 7 (D.D.C. 1999).
[¶26] ARC and Mylan establish that indirect purchasers may recover pursuant to Maine‘s UTPA. In addition,
[¶27] There is evidence that the direct purchasers of Weinschenk/RWB houses reasonably relied on Weinschenk and RWB‘s representations to them that their houses would be of good quality and that they sustained a substantial injury when the houses delivered were not of the promised construction quality. There is no evidence that the indirect purchasers relied on Weinschenk or RWB‘s misrepresentations or that the indirect purchasers sustained either a substantial injury or an ascertainable loss as a result of Weinschenk and RWB‘s misrepresentations. Rather, indirect purchasers had the opportunity to inspect the houses before purchasing them. The indirect purchasers may have relied on representations made by the original purchasers, but they did not rely on misrepresentations made by Weinschenk or RWB. Furthermore, while direct purchasers may have overpaid for Weinschenk/RWB houses, because they believed they were purchasing high quality houses free from substantial defects, there is no evidence that the overcharge was passed on to thе indirect purchasers. The indirect purchasers may have received a discounted price as a result of the indicated defects. If so, they would have suffered no ascertainable loss, and a restitution payment would be a windfall.
[¶28] Only the direct purchasers, Mullen, Tufts, Thibodeau, and Novotny, are entitled to recover restitution.
2. Injunctions
[¶29] Weinschenk and RWB assert that the injunctions imposed upon them by the Superior Court, requiring them to hire a registered engineer to сonfirm that their building and construction plans comply with applicable codes, and to submit their advertising materials and building contracts to the Attorney General‘s office for review, are overbroad. In fashioning appropriate remedies for violations of the UTPA, courts are given broad discretion “to do complete justice.” Bob Chambers Ford, Inc., 522 A.2d at 366. An injunction issued pursuant to the UTPA is to be remedial in nature.
C. Counterclaim
[¶30] Weinschenk and RWB contend that the court erred in dismissing their counterclaim against the State. The court granted the State‘s motion to dismiss the counterclaim pursuant to
The entry is:
Judgment vacated with respect to the court‘s restitution award to the indirect purchasers. Remanded for recalculation of the restitution only to direct purchasers. The judgment is affirmed in all other respects.
LEVY, J., with whom CALKINS, J., joins, concurring in part, and dissenting in part.
[¶31] I join the Court‘s opinion except for the portion that vacates the award of restitution to the indirect purchasers.
[¶32] The sole reason asserted by Weinschenk and RWB on appeal for setting aside the trial court‘s award of restitution to the indirect purchasers is their argument that restitutiоn can be awarded only for consumers from whom Weinschenk and RWB directly acquired money or property as a result of an unfair or deceptive trade practice. The Court properly rejects this argument, citing California v. ARC America Corp., 490 U.S. 93, 97 (1989); and FTC v. Mylan Laboratories, Inc., 99 F. Supp. 2d 1, 7 (D.D.C. 1999). Nonetheless, the Court vacates the restitution awarded to the indirect purchasers, relying on reasons not raised before the trial court and not addressed in the parties’ briefs.
[¶33] The trial court based its restitution award for both the dirеct and indirect purchasers on competent evidence of the estimated cost of replacing the defective roofs and windows, and of other specific repairs at the homes of the direct and indirect purchasers. In its written decision, the trial court carefully evaluated the conflicting expert testimony regarding the cost of repairing the defects in each home. The Court concludes, however, that there was no evidеnce “that the indirect purchasers sustained either a substantial injury or ascertainable loss,” and that they “may have received a discounted price as a result of the indicated defects.”
[¶34] Neither of the Court‘s conclusions are compelled by the record evidence in this case. The Court should instead defer to the trial court‘s assessment of the significance of the evidence and the reasonable inferences to be drawn. See Stickney v. City of Saco, 2001 ME 69, ¶ 13, 770 A.2d 592, 600.
[¶35] Of even greater concern is the Court‘s assignment of error to the absence of “evidence that the indirect purchasers relied on Weinschenk or RWB‘s misrepresentations.” The Court does not cite a single authority to support this newly announced construction of
[¶36] I would affirm the judgment in all respects.