I have some doubts about the analysis in this unpublished opinion issued yesterday by the California Court of Appeal (Second Appellate District, Division Two).

The jury in this fraud case awarded $17.1 million in punitive compensatory damages and $1 million in punitive damages. Obviously that’s not the sort of ratio that raises eyebrows. Nevertheless, the defendant argued that the Court of Appeal should reverse the punitive damages award because the plaintiff failed to present evidence of the defendant’s net worth. As readers of this blog are aware, California punitive damages awards are commonly reversed on that basis.

The Court of Appeal’s opinion here acknowledges that “‘[n]et worth’ has become the guidepost of punitive damages” in California. The opinion then goes on to say that the plaintiff sufficiently proved the defendant’s net worth by presenting evidence that the defendant received several million dollars in cash from the plaintiff, owned several airplanes, and sold a piece of commercial property for $2.1 million.

The opinion makes no mention of any evidence regarding the defendant’s liabilities or expenses. It is well established under California law that evidence of income and assets alone, without evidence of liabilities and expenses, is not sufficient to prove net worth. (See Kelly v. Haag (2006) 145 Cal.App.4th 910, 917 [reversing punitive damage award with directions when plaintiff introduced evidence of the defendant’s assets, but “there was no evidence of any encumbrances on the [defendant’s] properties at the time of trial, or of other liabilities [defendant] may have had”].)

Since we launched this blog in 2008, three other opinions have reversed punitive damages awards because the plaintiff’s evidentiary presentation did not include evidence of the defendant’s liabilities and expenses. This opinion stands alone in affirming an award without such evidence. Perhaps the plaintiff presented such evidence and the court simply didn’t mention it in the opinion. But if the plaintiff presented no such evidence, the opinion’s analysis is inconsistent with existing law.

Also, the opinion seems to overlook the effect of the $17.1 million compensatory damages award on the defendant’s financial condition. Other California courts have said that the effect of the jury’s verdict should be considered when evaluating the defendant’s ability to pay punitive damages. (See Washington v. Farlice (1991) 1 Cal.App.4th 766, 776.) The size of the compensatory verdict in this case dwarfs all the other evidence of the defendant’s assets discussed by the Court of Appeal, but the opinion does not seem to take that into account.

Fortunately, this opinion is unpublished, so the aspects of the opinion that seem to depart from existing law will not have any precedential effect.

The California Court of Appeal (Second Appellate District, Division One) issued this unpublished opinion yesterday, reversing a punitive damages award because the plaintiff failed to introduce sufficient evidence of the defendants’ financial condition. The punitive damages awards, against 5 different defendants, totaled $6.6 million.

The plaintiff, apparently aware of California’s rule requiring plaintiffs to present meaningful evidence of the defendant’s financial condition, introduced some evidence of the defendants’ finances. The evidence showed the defendants had some large cash receipts for their business operations, but it also showed that the defendants’ had massive debts, and that some of the defendants had declared bankruptcy. Apparently, the plaintiffs offered no forensic accountant or other expert to estimate the defendants’ net worth.

After a bench trial, the trial court awarded punitive damages awards based on its conclusion that none of the defendants’ testimony regarding their net worth was worthy of belief. Thus, the trial court seemed to mistakenly believe that the defendants, rather than the plaintiffs, had the burden of proof on this issue.

The Court of Appeal reversed. It ordered all the punitive damages awards stricken from the judgment because the plaintiffs had failed to present evidence of the defendants’ net worth. By my quick count, this is the seventh unpublished California opinion this year reversing a punitive damages award because of the plaintiffs’ failure to present meaningful financial condition evidence.

Here’s yet another unpublished opinion from the California Court of Appeal (Fourth Appellate District, Division Two) reversing a punitive damages award because the plaintiff failed to meet its burden of introducing sufficient evidence of the defendant’s financial condition. This seems to happen about once a month.

We’ve been blogging recently about the slew of cases reversing punitive damages awards because the plaintiff failed to present meaningful evidence of the defendant’s financial condition.

Here’s a change: in an unpublished opinion, the California Court of Appeal (First Appellate District, Division Three), reverses a trial court’s determination that the plaintiff’s evidence of the defendant’s financial condition was insufficient. The Court of Appeal concluded the evidence established a net worth of $2.5 million, more than enough to support a $100,000 award. The Court of Appeal faulted the trial court improperly weighing evidence and considering evidence not before the jury.

The California Court of Appeal (Third Appellate District) issued this unpublished opinion reversing $1.1 million in punitive damages because the plaintiff failed to introduce meaningful evidence of the defendant’s financial condition. The plaintiff put on evidence regarding the plaintiff’s income and bank deposits, but no evidence of the defendant’s liabilities and expenses. The court found that without such evidence, the jury had no basis for determining the defendant’s net worth or ability to punitive damages, especially since many of the defendant’s assets would be needed to satisfy the compensatory damages award.

This is the third case in the past week in which a punitive damages award was reversed on this basis. (See our posts about the other two cases here and here.) It would have been four cases if the defense counsel in this case had not bailed out the plaintiff by presenting evidence of net worth after the plaintiff failed to do so.

I have lost count of how many unpublished cases we have seen on this issue since we launched this blog in January 2008. Perhaps its time for the courts to publish a few of these decisions, to remind trial lawyers of the importance of presenting meaningful evidence of the defendant’s financial condition.

The California Court of Appeal (4th District, Division 3) issued an unpublished opinion today, reversing a $500,000 punitive damages award as excessive.

In this sexual harassment case, the defendant asked the Court of Appeal to reverse the punitive damages award in its entirety because the plaintiff failed to meet her burden of introducing meaningful evidence of the defendant’s financial condition. As readers of this blog are well aware, this unique feature of California law is a trap for many an unwary plaintiff’s attorney. (See, for example, these two decisions last week reversing punitive damages awards on this basis.)

The Court of Appeal here agreed that plaintiff’s counsel failed to present adequate evidence of the defendant’s financial condition. (Typed opn., at p. 13 [“If all we had in this record was the evidence that Magana proffered as to Charlie’s financial condition, we would have to reverse and there would be no possibility of punitive damages on retrial . . . “].) Ordinarily, the plaintiff’s failure to present such evidence would have doomed the punitive damages award. But in this case, the court concluded that defense counsel had elicited evidence that the defendant’s net worth was at least $600,000. Based on that testimony, the court concluded that the record could support an award of some punitive damages, but not an award of $500,000 (83 percent of the defendant’s net worth).

Having concluded that the award was excessive, the court was then faced with the question of the proper remedy. The court acknowledged that California law allows appellate courts in this situation to simply reduce the amount of punitive damages without ordering a new trial. Following this approach, the court could have used the “rule of thumb” that punitive damages cannot exceed 10 percent of the defendant’s net worth, and reduced the punitive damages to $60,000. (See Michelson v. Hamada (1994) 29 Cal.App.4th 1566, 1596.)

Instead, the court chose to send the case back to the trial court to allow the jury to decide the proper amount of punitive damages in the first instance. But the court made clear that, for purposes of the retrial, the defendant’s net worth is established at $600,000.

A retrial of this nature seems to offer little upside for the plaintiff. She must incur the expense of a retrial, during which the jury will have to hear much of the evidence from the first trial in order to assess the proper amount of punitive damages. The plaintiff runs the risk that the jury will not award any punitive damages, and even if she wins, any award larger than $60,000 can be challenged as excessive.

I happened to be present in the courtroom when this case was argued. (I was arguing a different punitive damages case that has not yet been decided.) The plaintiff was represented on appeal by Norm Pine, a well-respected appellate specialist. Mr. Pine was asked by the court during argument what remedy the court should order if the court concluded that the defendant’s net worth was $600,000, based on the evidence in the record. My recollection is that Mr. Pine requested a new trial, to allow the plaintiff to present further evidence regarding the defendant’s finances. I don’t think Mr. Pine contemplated a retrial in which the defendant’s net worth would be fixed at $600,000.

We are a bit behind on the blog this week as our main blogger, Curt Cutting, is on a well deserved vacation. I just posted a few minutes ago about a decision last week reversing a punitive damage award for lack of financial condition evidence. In going through the stack of punitive damage cases, I just came across this one which is yet another reversal for the same defect in plaintiff’s case. Here, the California Court of Appeal (Second District, Division One) issued an unpublished opinion reversing a $500,000 punitive damage award because “at trial, [plaintiff] presented no meaningful evidence of [defendant’s] financial condition.” It seems like a reversal on these ground happens at least once a month.

The California Court of Appeal (Fourth District, Division Three), in an unpublished opinion, reversed a $50 million punitive damages award on the ground that plaintiff failed to put forward evidence of defendant’s net worth. This is a common mistake plaintiff’s lawyers make, as seen in our prior post here. The court went on to point out that a plaintiff may be able to get around this failure of proof in situations where “net worth may be subject to manipulation, requiring the court to consider other financial indicators of a defendant’s ability to pay.” As an example, the court cited Zaxis Wireless Communications, Inc. (2001) 89 Cal.App.4th 577, 582-583 for the proposition that a “$300,000 punitive damage award [can be] upheld despite large negative net worth where defendant had annual gross revenues in excess of $100 million and cash on hand of $19 million.” By contrast, the punitive damage award in this case had to be reversed because: “Here, plaintiffs point to the income calculations for [defendant] used in supporting their compensatory damages claim, in which they determined [defendant] earned $8,128,800 per year in net income. Viewed in this light, the $50 million punitive damage award represented approximately six times [defendant’s] annual income. Such an award would be ruinous to any company, not to mention its owners.”

Will plaintiff’s lawyers learn their lessons?

The Fourth Appellate District, Division One, issued this unpublished opinion last week affirming a trial court order that reduced a $5 million punitive damages award to $1.4 million.

The trial court reduced the punitive damages based on California’s longstanding rule that punitive damages generally cannot exceed 10 percent of the defendant’s net worth. (See Michelson v. Hamada (1994) 29 Cal.App.4th 1566, 1593.) On appeal, the plaintiff challenged that ruling on several grounds.

First, the plaintiff argued that trial court failed to consider whether factors other than the defendant’s net worth, such as future dividend income, made it possible for the defendant to pay the judgment. The Court of Appeal ruled that, although the Supreme Court has declined to adopt a rigid rule that net worth is the only appropriate measure of a defendant’s ability to pay punitive damages, net worth is the appropriate measure in the vast majority of cases. The few cases where courts looked to other measures involved exceptional circumstances. (See Zaxis Wireless Communications, Inc. v. Motor Sound Corp. (2001) 89 Cal.App.4th 577, 582-583 [defendant’s negative net worth was due primarily to accumulated depreciation and a note to its sole shareholder, while it had annual sales exceeding $250,000,000, cash of $19,000,000, and a $50,000,000 line of credit, evidencing its ability to pay punitive damages award of $300,000]; Rufo v. Simpson (2001) 86 Cal.App.4th 573, 579, 621, 623-624 [reprehensibility of defendant’s conduct (i.e., two deliberate, vicious murders) provided exceptional circumstances].)

Second, the plaintiff argued that the trial court should have viewed the defendant’s testimony about his own net worth with suspicion. The Court of Appeal rejected that argument on the ground that the plaintiff bore the burden of proving that the defendant had a greater net worth, and she failed to carry that burden. For example, while defendant owned an apartment, plaintiff failed to rebut defendant’s evidence that defendant owed more money on the apartment than it was worth.

Third, the plaintiff argued that the 10 percent rule should not apply when the defendant’s conduct is especially reprehensible. The Court of Appeal rejected that argument as a matter of law:

[Plaintiff] does not cite any apposite case showing, or otherwise persuade us,
such conduct is so reprehensible that the general rule limiting punitive
damages to 10 percent of a defendant’s net worth should not apply. In any
event, as the California Supreme Court stated, a punitive damages “award can
be so disproportionate to the defendant’s ability to pay that the award is
excessive for that reason alone” regardless of the reprehensibility
of the defendant’s conduct. (Adams v. Murakami [(1991)] 54 Cal.3d [105,] 111.)

Full disclosure: Horvitz & Levy participated in this case, representing one of the defendants on appeal (the defendant who was subject to the punitive damages award).