California Punitives by Horvitz & Levy

  • Unpublished opinion departs from precedent, gives plaintiff a second chance after failure of proof (Modarres v. Thomas)

    This unpublished opinion reverses a punitive damages award because the plaintiff failed to present meaningful evidence of the defendant’s financial condition at the time of trial.  That holding is nothing unusual.  What is unusual, however, is that the Court of Appeal (Fourth Appellate District, Division Three) gave the plaintiff a do-over on that element of proof.

    Under longstanding California law, plaintiffs who fail to carry their burden of proof are not entitled to a “second bite at the apple.”  (Kelly v. Haag (2006) 145 Cal.App.4th 910, 919-920; see also these four unpublished opinions.)  If the plaintiff had a full and fair opportunity to prove the defendant’s financial condition and failed to do so, there is no reason to give the plaintiff a second chance.  The Court of Appeal should reverse the punitive damages award and direct the trial court to enter judgment for the defendant on that issue.

    In this case, however, the Court of Appeal sends the case back to the trial court to allow the plaintiff to conduct further discovery in order to present the evidence she neglected to present the first time around.  The opinion does not explain why the court departed from the usual rule, which raises the question whether anyone briefed this issue, and whether the Court of Appeal was made aware of the usual rule.  The defendant may want to consider a petition for rehearing.

  • Court of Appeal holds that Probate Code double damages may be punitive in nature, but are not punitive damages (Hill v. Superior Court)

    Last week the California Court of Appeal (First Appellate District, Division Two) issued this published opinion holding that double damages under the Probate Code may be “punitive in nature” and may have a “punitive effect,” but they are not technically “punitive damages.”

    The issue arises at the intersection of Probate Law and punitive damages law.  The plaintiffs in this case sued their stepfather under a Probate Code provision that permits double damages against someone who in bad faith takes property from the estate of a decedent.  Things got complicated, however, when the defendant died and his son was substituted into the case as his successor in interest. The Code of Civil Procedure states that, when a defendant dies, the plaintiffs can recover from the successor in interest all the damages that they could have recovered from the decedent, except for punitive damages.

    The trial court in this case ruled that the plaintiffs could not recover double damages under the Probate Code, because double damages are akin to punitive damages and therefore were no longer available when the decedent was replaced by his successor in interest.

    The plaintiffs petitioned the Court of Appeal for writ relief.  The Court of Appeal granted the petition and reversed the trial court, ruling that double damages, even if similar to punitive damages, are not  punitive damages.  As the court explained: (1) punitive damages require a showing of malice, fraud, or oppression, which is not true for Probate Code double damages; (2) punitive damages are subject to the clear-and-convincing-evidence standard of proof, which Probate Code double damages are not; and (3) punitive damages require proof of the defendant’s financial condition, with Probate Code double damages do not.

    On its way to that conclusion, the Court of Appeal included an interesting aside on the relationship between punitive damages and statutory penalties.  It said that plaintiffs can recover both statutory penalties and punitive damages in the same case.  Many other cases have held, however, that plaintiffs cannot recover both statutory penalties and punitive damages, and must elect one or the other.  The opinion cites one of these cases, Hassoldt v. Patrick Media Group, but the only thing the opinion says about Hassoldt is that “Hassoldt is not a First District case.”

    Ultimately, this case is not really about whether plaintiffs can recover both statutory penalties and punitive damages for the same wrong, so the statements on that issue are dicta.  But this opinion may end up causing some confusion on that point if cited out of context.

  • California Court of Appeal affirms $4 in punitive damages, declines to reinstate jury’s $20 million award (Casey v. Kaiser Gypsum)

    Last week the California Court of Appeal (First District, Division Four) issued this unpublished opinion affirming a punitive damages award just under $4 million.  The jury in this asbestos case originally awarded $20 million in punitive damages, which the trial court reduced in response to the defendant’s post-trial motions.  Both parties appealed and the Court of Appeal affirmed across the board, rejecting the defendant’s request for a new trial and rejecting the plaintiff’s request to restore the jury’s $20 million award.

    We won’t comment on the court’s analysis because our firm represents the defendant.

  • Court of Appeal holds that compensatory damages award does not impact defendant’s financial condition (O’Brien v. AMBS Diagnostics)

    This unpublished opinion from the California Court of Appeal (Second Appellate District, Division Two) affirms a $125,000 punitive damages award. In the process, the court makes a peculiar statement that seems contrary to published authority.

    The defendant argued on appeal that the award was excessive under state law because it was disproportionate to his ability to pay.  According to the defendant, the $427,926 compensatory damages award completely wiped out his net worth, leaving him with no ability to pay an additional award of punitive damages.

    The court refused to consider the compensatory damages award when evaluating the defendant’s financial condition.  The court cited cases stating that the defendant’s financial condition should be measured “at the time of trial.”  Thus, the court concluded that a judgment entered after trial cannot be considered.

    That doesn’t seem quite right.  Under California law, the purpose of considering the defendant’s financial condition is to ensure that a punitive damages award does not destroy the defendant financially.  To figure out whether the defendant will be destroyed, the court needs to consider the impact of the entire judgment.  For example, the Court of Appeal in Washington v. Farlice, in deciding whether a $125,000 punitive damages award was excessive, evaluated the defendant’s financial condition by taking into account the value of the defendant’s interest in real property after the jury found during the first phase of trial that the defendant’s interest should be cut in half.

    The court here was correct to consider the finances “at the time of trial,” but there is no reason why that should not include the verdict that was rendered during the trial.  In any event, this opinion is unpublished and unciteable, leaving Washington v. Farlice as the law of the land on this issue.

  • Court of Appeal orders partial publication of punitive damages case, but leaves punitive damages discussion unpublished (Vardanyan v. AMCO Insurance)

    Last month we reported on the California Court of Appeal’s unpublished decision in Vardanyan v. AMCO Insurance, which reinstated a plaintiff’s claim for insurance bad faith but affirmed the trial court’s order granting a directed verdict on the plaintiff’s claim for punitive damages.  Today that court issued an order certifying part of the opinion for publication, but the published portion does not include the discussion of the directed verdict on punitive damages.

  • Court of Appeal affirms directed verdict on punitive damages in insurance dispute (Vardanyan v. AMCO Insurance)

    This unpublished opinion by the California Court of Appeal concludes that the plaintiff presented some evidence that his insurer made mistakes, but the mistakes were not egregious enough to support punitive damages.

    The plaintiff owned a rental home that had some serious problems.  Parts of the house were sinking, water damage and termite damage were popping up throughout, every room was moldy, and the front door would not open.  The plaintiff’s insurer declined to provide coverage for the needed repairs, on the ground that the damage was caused in party by non-covered hazards.

    When the plaintiff sued for breach of contract and bad faith, the trial court granted a directed verdict for the defense.  The Court of Appeal (Fifth Appellate District) reversed and ordered a new trial, ruling that the plaintiff should have been allowed to argue to the jury that he was entitled to coverage if the damage was predominately caused by a covered hazard.

    The Court of Appeal also ruled, however, that the plaintiff could not seek punitive damages in the retrial.  The court concluded that the plaintiff failed to make a case for punitive damages during the first trial and was not entitled to a do-over on that issue.  According to the court, the plaintiff’s evidence “may be consistent with some improprieties in claims handling, but it does not rise to the level of reprehensibility necessary to support an award of punitive damages.”

    Notably, the Court of Appeal stated it analyzed the plaintiff’s evidence while keeping in mind the “clear and convincing” standard of proof.  Contrast that statement to this recent unpublished opinion, which said that the clear and convincing evidence standard does not apply on appeal.  So far, the docket in that case does not indicate that the defendant has asked the California Supreme Court to review that issue.

  • Another unpublished opinion departs from precedent on the clear and convincing evidence standard (Sharim v. Amin)

    This unpublished opinion from the California Court of Appeal (Second Appellate District, Division Seven) is mostly unremarkable.  It addresses the sufficiency of the evidence to support a $500,000 punitive damages award, and finds ample evidence that the defendant committed fraud within the meaning of Civil Code section 3294.

    Yet one aspect of the court’s reasoning is a bit peculiar.  In a footnote, the court states that the “clear and convincing” evidence standard, which governs California punitive damages claims, does not apply in the Court of Appeal:

    Although the heightened “clear and convincing evidence” standard of proof applied to the trial court’s findings on punitive damages (see Civil Code, § 3294), that does not affect our standard of review on appeal in determining whether there is substantial evidence to support the court’s findings.

    That statement is contrary to the holdings of published cases.  (See, e.g. Shade Foods v. Innovative Products [“since the jury’s findings were subject to a heightened burden of proof, we must review the record in support of these findings in light of that burden . . . . we must inquire whether the record contains ‘substantial evidence to support a determination by clear and convincing evidence’”]; Pfeifer v. John Crane [“we review the evidence in the light most favorable to the Pfeifers, give them the benefit of every reasonable inference, and resolve all conflicts in their favor, with due attention to the heightened standard of proof“].)

    This is not the first time we have seen this.  When another unpublished opinion did this in 2008, the Supreme Court of California granted review on the issue.  That case was later dismissed when the parties settled, and we have since seen other unpublished opinions take the same approach. Nevertheless, we continue to believe that if courts are not going to follow existing law on this issue, they should publish their opinions and explain the basis for their differing view.  It is not as if the Court of Appeal in this case was unaware of the Shade Foods decision—the court cited Shade Foods on another point.

    The court’s footnote cites a 1973 Supreme Court opinion to support the notion that the clear and convincing evidence standard disappears when a case goes up on appeal.  But that opinion no longer reflects the Supreme Court’s view. The modern Supreme Court has taken the clear and convincing evidence standard into account when reviewing factual findings subject to that standard. (See Conservatorship of Wendland (2001) [“The ‘clear and convincing evidence’ test requires a finding of high probability . . . we ask whether the evidence [on the issue before the court] has that degree of clarity”]; Estate of Ford (2004) [finding that certain testimony “was not clear and convincing evidence” on the issue of equitable adoption].)

    If the defendant in this case petitions for review on this issue, it will be interesting to see if the California Supreme Court decides to take it up once again.

  • Punitive damages vacated because senior management did not approve misconduct of lower-level employees (Bryant v. SDG&E)

    This unpublished opinion is a useful reminder of the principle that, under California law, punitive damages are not available against an employer for an employee’s misconduct unless the employer’s upper-level management authorized, ratified, or committed the misconduct.

    In this wrongful termination case, a jury awarded the plaintiff $860,000 in compensatory damages and $1.3 million in punitive damages.  The California Court of Appeal (Fourth District, Division One) vacated the punitive damages award because the plaintiff failed to prove that the employer’s management either participated in or approved the misconduct at issue. At trial, the plaintiff identified a specific member of the employer’s management team who purportedly approved the malicious and oppressive treatment of the plaintiff.  But the plaintiff apparently realized his argument on that point was weak, so on appeal he placed the blame on three additional members of the management team.

    The Court of Appeal, however, refused to consider the three new individuals.  (“We do not consider whether Aguilar, Heiner, and DaSilva were managing agents as they were not presented as such to the jury.”)  That approach is consistent with the general principle of California appellate procedure that a party cannot change its factual theory of the case on appeal.  Our courts will not affirm a jury verdict based on theories not litigated below, because that would unfairly deprive the opposing party of the opportunity to develop the evidence on that new factual issue.

    The Court of Appeal agreed that the one individual identified at trial (Boland) was indeed a managing agent within the meaning of Civil Code section 3294(b).  But the court found no evidence that Boland, who made the final decision to terminate the plaintiff’s employment, had any actual knowledge of any malicious or oppressive conduct by his subordinates who recommended firing the plaintiff.  In the absence of any awareness by the managing agent of the “outrageous character” of the actions of the lower-level employees, the punitive damages could not stand.

  • Court of Appeal reverses $32.5 million punitive damages award due to lack of financial condition evidence (Soto v. Borg-Warner)

    Over the years we have reported on a lot of California appellate opinions that reversed a punitive damages award because the plaintiff failed to present meaningful evidence of the defendant’s financial condition.  This unpublished opinionis especially notable, and not just because it involves an enormous punitive damages award.  The opinion contains a road map for how plaintiffs can conduct discovery of the defendant’s finances without risking the sort of forfeiture that occurred here.

    Readers of this blog are well aware that in California, plaintiffs have the burden of presenting evidence of the defendant’s financial condition as a prerequisite to recovering punitive damages.  But plaintiffs cannot seek pretrial discovery of the defendant’s finances without first obtaining a court order.  To obtain such an order, plaintiffs must demonstrate a substantial probability of prevailing on their punitive damages claim.  (Civil Code section 3295(c).)

    Many plaintiffs choose not to seek a court order.  Instead, they wait until the jury makes a finding that the defendant acted with malice, and then then ask the defendant to immediately produce its financial condition information.

    One problem with that approach is that the defendant, without knowing in advance what information the plaintiffs are seeking, may not be in a position to immediately produce the information that the plaintiffs are seeking.  In this case, for example, the plaintiffs asked the defendant to produce a witness who resides in Michigan and could not reasonably be expected to appear the next day in a California courtroom without any advance notice.

    Another problem is that the defendant may not possess the requested information.  For example, plaintiffs often ask for a balance sheet, but some defendants, especially individuals and closely held corporations, may not have any balance sheet.  Defendants are not required to manufacture evidence in order to respond to a discovery request.  Plaintiffs need to gather whatever documents are available, depose witnesses, and perhaps involve a forensic accountant in order to get an accurate picture of the defendant’s finances.  That is difficult to do in the middle of trial.

    So what is the alternative?  According to this opinion, if a plaintiff does not obtain a court order before trial permitting financial condition discovery, the plaintiff should at least take advantage of the subpoena process provided by Civil Code section 3295(c).  The plaintiff can issue subpoenas to the defendant requiring it to be prepared to produce financial condition information if and when it becomes necessary, and the defendant may be required to identify relevant documents and witnesses who can testify on the issue of financial condition.  Another alternative is to reach a stipulation with the defendant, who would agree to gather specific documents, bring them to trial under seal, and make them immediately available in the event the jury makes a finding of malice.  If the plaintiff sits back and does nothing to initiate financial condition discovery until after the jury’s finding of malice, the plaintiff is at the mercy of the court’s discretion whether to delay the proceedings to permit discovery.

    In this case, the plaintiffs chose the “do nothing” strategy.  They did not seek pretrial discovery of the defendant’s financial condition, did not use the statutory subpoena procedure, and did not reach a stipulation with the defendant.  When the jury found malice and the plaintiffs requested financial information that was not immediately available, the trial court declined to exercise its discretion to delay the trial to permit the plaintiffs to complete their discovery.  (The plaintiffs did not even ask for that—the court raised the idea and then rejected it.)  The best the plaintiffs could do was present an expert to testify about the financial condition of the defendant’s parent company.  That expert was able to provide only a little information about the actual defendant; the expert testified about the defendant’s revenues from one line of business, but could not shed any light on the defendant’s liabilities or expenses.

    The Court of Appeal (Second Appellate District, Division Four) found the plaintiff’s showing wholly inadequate to support an award of punitive damages: the expert’s testimony “at most demonstrated that some portion of [defendant’s] business turned a profit.  It did not provide any of the requisite current information about [defendant]’s overall financial condition outside [that product] line.”

    The Court of Appeal concluded that the plaintiffs, not the defendants, were responsible for this absence of evidence:

     [P]laintiffs erroneously believed the financial information they obtained through publicly available channels would be sufficient until [defendant] pointed out, on the eve of the punitive damages phase, that their expert had analyzed the wrong company. The court was not obligated to accommodate plaintiffs’ last-minute attempt to obtain the correct information through traditional discovery channels. There was no indication that [defendant] in any way hampered or even opposed plaintiffs’ efforts to obtain the information in a more timely fashion. To the contrary, the record reflects that plaintiffs did not undertake any effort to obtain the information at an earlier juncture, whether by issuing a subpoena, seeking a stipulation, or a making a motion pursuant to Civil Code section 3295, subdivision (c). (See Kelly, supra, 145 Cal.App.4th at pp. 919- 920.) Instead, they assumed [the defendant] would simply come forward with the information, unprompted. “Whatever merit there might be to that approach in other cases, it was an unfortunate choice in this one.” (Amoco Chemical Co. v. Certain Underwriters at Lloyd’s of London, England (1995) 34 Cal.App.4th 554, 562.) By all indications, plaintiffs had a full and fair opportunity to engage in discovery but elected to take the wait-and-see approach. They must bear the consequences of the resultant evidentiary shortfall. (See Baxter, supra, 150 Cal.App.4th at p. 681; Kelly, supra, 145 Cal.App.4th at p. 920; contra Mike Davidov Co., supra, 78 Cal.App.4th at pp. 609-610; Green v. Laibco, LLC, supra, 192 Cal.App.4th at pp. 453-454.)

    As a result, the Court of Appeal completely vacated the $32.5 million punitive damages award.  Because the plaintiffs had a chance to conduct proper discovery and failed to do so, they are not entitled to go back and try again.

  • Court of Appeal affirms reduction of punitive damages to a 1-to-1 ratio (Banks v. General Atomics)

    A few years ago, we observed a mini-trend of California courts reducing punitive damages to match the amount of the compensatory damages, at least in cases involving substantial compensatory damages awards.  That trend reached its peak in 2009 when the California Supreme Court imposed a 1-to-1 ratio in Roby v. McKesson.

    Ironically, we haven’t seen many 1-to-1 ratios from the California Court of Appeal in the years since Roby.  But in this unpublished opinion, the Court of Appeal (Fourth District, Division One) affirms a trial court’s decision that ordered a remittitur of a punitive damages award from $5.8 million to $2.9 million, resulting in a 1-to-1 ratio.

    The plaintiff argued on appeal that the trial court went too far in imposing a 1-to-1 ratio.  The plaintiff pointed to provisions in the Labor Code authorizing double damages for comparable misconduct, and cited the U.S. Supreme Court’s statements that courts should defer to legislative judgments regarding the appropriate level of punishment (see State Farm v. Campbell at p. 528). According to the plaintiff, “[Labor Code] section 972’s penalty of double damages contemplates the precise 2-to-1 ratio of punitive to compensatory damages the jury originally awarded.”

    That argument backfired.  The Court of Appeal agreed with plaintiff that Labor Code section 972 offers an appropriate analogy, but the court observed that the plaintiff’s math was wrong.  Double damages result in a 1-to-1 ratio, not a 2-to-1 ratio.  Therefore, the Court of Appeal concluded that the Labor Code only provided further support for the trial court’s imposition of a 1-to-1 ratio.