June 10, 2008

Price v. Gingrich: Unpublished CA Court of Appeal Opinion Reinstates $500,000 Punitive Damages Award

In this unpublished opinion, the California Court of Appeal (Fourth District, Division Two) reinstated a $500,000 punitive damages award that had been declared void by the trial court.

This is a fraud case in which the defendant was accused of running a Ponzi scheme and defrauding the plaintiff of $500,000. The jury awarded $500,000 in compensatory damages and $500,000 in punitive damages. Over a year later, the defendant moved to vacate the judgment, arguing that the plaintiff had failed to meet his burden of presenting evidence of the defendant's financial condition. The trial court agreed and vacated the award on the ground that the trial court did not have jurisdiction to award punitive damages in the absence of evidence of the defendant's financial condition.

The Court of Appeal reversed. While acknowledging that a party can move to vacate a void judgment at any time, the court concluded that this particular judgment was not void. A plaintiff's failure to present evidence of the defendant's financial condition is not a jurisdictional issue - - it is a collateral attack on the judgment that must be raised either by a timely posttrial motion or on a direct appeal. Accordingly, the court erred in granting the motion to vacate. The Court of Appeal went on to say that, aside from the procedural problem, the trial court's ruling was substantively erroneous because the plaintiff did in fact present sufficient evidence of the defendant's financial condition to demonstrate that the award was not excessive.

The Court of Appeal's procedural analysis seems correct, but the analysis of the substantive issue is a little troubling. The court focuses on evidence that the defendant had sufficient unencumbered assets to pay a $500,000 punitive damages award. The court's analysis suggests that a $500,000 is not excessive so long as the defendant has $500,000 in liquid assets. But California courts have traditionally applied a different standard. The California Supreme Court has said that courts should consider whether the award is disproportionate to the defendant's ability to pay, not merely whether the award exceeds the defendant's ability to pay. (See Adams v. Murakami (1991) 54 Cal.3d 105, 112.) Applying that standard, the lower courts have adopted a 10 percent "rule of thumb" - - an award is disproportionate to the defendant's ability to pay if the award exceeds 10 percent of the defendant's net worth. (See Michelson v. Hamada (1994) 29 Cal.App.4th 1566, 1596 [“Punitive damages constitute a windfall. [Citation.] Such awards generally are not allowed to exceed 10 percent of the net worth of the defendant”].)

Under the 10 percent rule, the award in this case appears to be excessive, since the opinion indicates that the defendant had a net worth of $1.8 million. That wouldn't make any difference to the ultimate outcome of this appeal because the defendant failed to raise the issue in a timely fashion. Nevertheless, it is a little troubling to see the Court of Appeal departing from traditional principles of California punitive damages law, even if the entire discussion is dictum in an unpublished opinion.