In a fraud action involving a real estate loan, a jury awarded $2.7 million in compensatory damages and $762,000 in punitive damages (two separate awards of $381,000 each against two defendants).  The defendants appealed and the California Court of Appeal (Fourth Appellate District, Division Three) issued an unpublished opinion rejecting all of their arguments except one: that the punitive damages were excessive in relation to the defendants’ ability to pay.

The court began its discussion by observing that, while some courts have held that a defendant’s net worth should not be the sole measure of a its financial condition because net worth is too easily subject to manipulation, “it is also true that California courts have ‘disfavored’ awards tending to exceed 10 percent of net worth.”  One of the awards in this case approached 100 percent of that defendant’s net assets, without even considering his substantial liabilities.  To distinguish this record from cases involving “manipulated” net worth, the court observed that the that the defendant’s liabilities were real, and did not represent money transferred to “some surreptitious investment or secret stash.”  The other defendant had even more limited assets, and had never earned as much as $10,000 in a single year.  Based on that record, the court concluded that the plaintiffs had not carried their burden of proving the defendants’ ability to pay the punitive damages awards.