September 18, 2009

Gullwing Int'l v. Ostermeier: $1 Million in Punitive Damages Affirmed

I have some doubts about the analysis in this unpublished opinion issued yesterday by the California Court of Appeal (Second Appellate District, Division Two).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

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