April 13, 2009

Sukumar v. Sukumar: Court of Appeal Reaffirms Rule that Punitive Damages Cannot Exceed 10 Percent of Defendant's Net Worth

The Fourth Appellate District, Division One, issued this unpublished opinion last week affirming a trial court order that reduced a $5 million punitive damages award to $1.4 million.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