HMY – The Aftermath of a Broker’s Worst Nightmare 

The HMY Yachts Sales case caused quite an uproar in the marine brokerage community since a jury verdict was rendered in 2010.  After the verdict in favor of the buyer, an appeal was filed.  However, the parties decided to settle the case rather than wait for the uncertain outcome of the appeal.  As the HMY case was decided by a jury verdict, there is no order from a judge setting out findings of fact and rulings of law that other judges could rely on for guidance.  As a result yacht brokers are left in essentially the same place after the case as they were before. 

More importantly, because the case never made it to the appellate court, there hasn’t been an opportunity for a higher-level court to issue a decision that will bind all of Florida’s federal courts.  That’s good because the facts in the HMY case didn’t lend themselves to making law that is beneficial to brokers.   The downside is that the courts may have missed an opportunity to more clearly define brokers’ obligations.  So in the end the case provided a good scare, but it hasn’t changed the law in any way for yacht brokers.  However, the case does provide a useful real-world framework to analyze some of the issues facing brokers on a day to day basis

Overview of the Facts

The case centered around the sale of a 66’ Custom Carolina boat that was brokered by HMY.  There were a lot of theories that the Buyer set out for recovery, but the theory that the jury believed and provided compensation for was negligent misrepresentation.  A finding for negligent misrepresentation in this case required that the jury believe that the broker and the broker’s agent made some misrepresentation of fact to the buyer that they should have known was untrue.  The misrepresentations that were supposedly made ranged from the mundane (advertising that the boat was “like new”) to the more serious (a statement that two more vessels were in the process of being built when in fact the boat manufacturer had already gone out of business).  The jury did not find that a fraud had occurred, which would have required them to find that the broker made a misrepresentation that they actually knew was untrue, so the level of culpability that was found by the jury was less.  The jury’s verdict attributed 85% of the blame to HMY and 5% to the agent – that amounted to a $1.7M verdict against HMY.     

Representations and Misrepresentations

The crux of the HMY case was misrepresentations, and how they can cause legal trouble for a yacht broker. This article will explore where brokers can get into trouble with representations, and how brokers can protect themselves from liability.

There are three legal theories that fit under the general umbrella of misrepresentations – fraudulent misrepresentations, negligent misrepresentations, and fraudulent concealment.  There are important distinctions between the theories, in terms of what elements must be proven for each, what remedies are available as to each, and what a person can do to protect themselves from liability.

Fraudulent misrepresentation requires that a broker intentionally make a misrepresentation as to a material fact that was known to be false, and the broker knew the ‘fact’ was false.  If a buyer relies on the misrepresentation and is damaged, the broker becomes liable.  A fraudulent misrepresentation occurs when a broker intentionally lies about a boat to close a sale.          

Negligent misrepresentation has a lower level of culpability.  It requires that a broker make a statement about a material fact which he believed to be true, but was in fact false.  The jury also has to find that the broker should have known that the statement was false, that the broker intended for the buyer to rely on the statement, and that the buyer did in fact reasonably rely on the statement to his detriment.  This is occurs when a broker passes on information to a buyer without checking whether the information is correct, and the information turns out to be inaccurate. 

The last area where a broker can get into trouble for misrepresentations is when he fails to disclose a known defect to a buyer that he had a duty to disclose – which is known as fraudulent concealment.  The classic case is where a broker fails to mention important information about a boat that would likely change a buyer’s mind about purchasing that boat.  

Under all of the above theories, the facts which were misrepresented (or which were hidden) must be material to the transaction.  That means that they must be the sort of fact that would cause a reasonable buyer to either buy a boat or not buy a boat.  Typically they are facts that have some bearing on the value of the boat.   For instance, facts relating to a previous collision a vessel had been in would almost certainly be deemed to be material by a court or a jury, while a misrepresentation as to the manufacturer of a macerator pump would probably be low on the list of a buyer’s priorities. 

The remedies available for each cause of action differ to an extent, with the harshest remedies being reserved for the most culpable behavior.  For instance, a finding against a broker for any misrepresentation can result in an award of compensatory damages which is meant to compensate a buyer for actual monetary loss.  However, if actual fraud is found, or if gross negligence is found, punitive damages can be sought as well.  Punitive damages can be many times the amount of compensatory damages, and are meant solely to punish a defendant for bad behavior, not to make a plaintiff whole.  Maybe more importantly, most insurance policies do not cover fraud claims or provide coverage for punitive damage awards, so there is nothing a broker can do to mitigate the risk of those types of claims other than to make sure the claims are never brought in the first place. 

Of the above three theories, probably the most dangerous basis for liability is that of negligent misrepresentation.  It is dangerous because it is somewhat outside of a broker’s control.  A lawsuit for negligent misrepresentation does not relate to a false statement that a broker knows is false, but to a false statement that a jury believes he “should have known” was false – that’s a standard that is hard to define.  Negligent misrepresentation situations typically occur when a broker is provided with information from a third party that is passed along to a buyer.  The obvious difficulty from a broker’s perspective is that it is very difficult to determine if all of the information that is supplied to them is true or not, and to determine which information requires any additional verification before being passed along to a buyer.  Certainly, a broker isn’t required to conduct a full survey of each boat before marketing it, but as the HMY case makes clear there are some instances in which a jury will hold that the broker does have some duty of investigation before passing along information.  The standard is vague, and thus it is difficult to determine when a jury will find that a broker should have known that a particular statement was untrue.

There is a some upside to claims for negligent misrepresentation.  Although they may be the most dangerous because a broker can be held liable for inaccurate information that wasn’t known to be inaccurate, juries tend to be more forgiving in apportioning fault between parties:  if the buyer or some other party can be shown to be partially at fault for the inaccurate information, the court allows the jury to apportion fault between the guilty parties.  This is called comparative fault, and it can be a powerful defense.  The same does not hold true for fraud cases – if the plaintiff is able to show that he justifiably relied on faulty information, each person who is found guilty is equally liable for the full amount of the plaintiff’s damages.  This comparative fault principal was used in the HMY case to find that HMY was only 85% responsible for the Plaintiff’s loss.     

Luckily for brokers, there is at least a limited ability to mitigate the risk associated with negligent misrepresentation claims.  A number of companies now offer errors and omissions insurance policies that partially protect a broker.  E&O policies are professional liability policies that protect against negligence in the operation of a business, similar to a doctor’s or lawyer’s malpractice policy.  They typically cover the cost to defend civil actions that are brought against a broker (often times even if the claims include allegations of fraud) and they will cover an award of damages if it is premised on negligence.  The cost of defending a case alone can be many thousands of dollars, so that protection is very important.  For instance the HMY case was heavily litigated, and at the end of the case the Plaintiff’s lawyers sought over 1 million dollars in attorneys’ fees and costs from HMY, which was in addition to the $1.7M verdict.  The court record doesn’t indicate what HMY spent to defend the case, but it was likely a similar amount.  That is a cost that HMY would be solely responsible for unless they carried an insurance policy that provides for a legal defense. 

The biggest limitation on E&O coverage is that it only covers negligent conduct.  I've never seen a policy that covers any criminal actions, or that covers any type of damage award based on fraudulent conduct.  In fact, I’d be surprised to see one -- Florida courts have typically found that it is against the public policy of the state to allow people to insure themselves against intentional bad acts because that would promote criminality.  The same rule generally applies to punitive damages -- the vast majority of policies do not cover punitive damages, and the law doesn’t allow them to in many cases.  The only exception I’m aware of is where a broker is covering the business for fraud that is committed by an employee.

As an illustration of the usefulness of E&O policies, the type of claim that was successful against HMY was precisely that which is covered under a policy – it was for negligence, not fraud.  So if a broker like HMY maintained a robust E&O policy, and if they were hit with a large judgment, the only out of pocket expense for the broker would be the deductible, and everything else would be paid by the insurer, up to the limits of the policy. 

In conclusion, there are a number of areas where a broker making representations can get into trouble.  But the good news is that with a solid policy on disclosures and an E&O policy that is sufficient for the type of business that you run, the risks associated with disclosures can be greatly minimized.