August 3, 2011

XTC Investments, LLC v. Bluenose Trading, Inc.: California Court of Appeal affirms $318,551 punitive damages award (1:1 ratio) for financial tort

In this unpublished opinion, the California Court of Appeal (Second District, Division Four) affirmed a punitive damages award against an individual defendant (Sanford Gaum) and a corporate defendant (Bluenose Trading, Inc.) based on evidence that Gaum used Bluenose to conceal assets from creditors such as the plaintiff investment company, which had made a loan guaranteed by Guam. The trial court found Gaum had diverted his own earnings to another company, "making it impossible for [creditors] to learn about, attach or garnish the monies that were due Gaum. At the same time, Gaum held himself out to the plaintiff (and the community he lived in) as having title to all the assets that he had transferred to [the other company], creating the impression that he was a sound investment partner."

The court awarded $318,551 in compensatory damages on a fraudulent conveyance theory and the same amount in punitive damages, awarded jointly and severally against the defendants. The court found that Gaum had acted with malice, oppression and fraud, and added that defendant Bluenose "possesses sufficient assets . . . and derives sufficient income to support punitive damages in an amount equal to the actual damages and that a multiplier of 1 to 1 is entirely appropriate and reasonable."

On appeal, the defendants argued there was insufficient evidence of defendants' financial condition, which plaintiffs bear the burden of producing. The Court of Appeal dispensed with this argument in one sentence. After briefly quoting the trial court's summary of income evidence, the court stated simply, "Defendants cite no authority to suggest that evidence of Bluenose's income and of the value of real property it owns is insufficient to support a punitive damages award."

Of course, plenty of authority indicates that net worth is the best measure of financial condition, and evidence of income and property value alone is not meaningful evidence of a defendant's financial condition without taking into account liabilities as well as assets. (E.g., Baxter v. Peterson (2007) 150 Cal.App.4th 673, 680 [“Normally, evidence of liabilities should accompany evidence of assets, and evidence of expenses should accompany evidence of income”]; Kenly v. Ukegawa (1993) 16 Cal.App.4th 49, 58 [“Without evidence of the actual total financial status of the defendants, it is impossible to say that any specific award of punitive damages is appropriate"]; see Adams v. Murakami (1991) 54 Cal.3d 105, 109-110, 114 [jury must not be left to “speculate” on the extent of the defendant's ability to pay a punitive damages award, and appellate court has a duty to independently evaluate the evidence to ensure plaintiff introduced meaningful evidence of financial condition relating to ability to pay].)

Recent related posts:

Nguyen v. Do: $50,000 punitive damages award reversed for lack of meaningful financial condition evidence

Tran v. Lecong: $100,000 in punitive damages vacated due to lack of meaningful financial condition evidence

LeFlore v. MTA: $150,000 in punitive damages vacated due to lack of meaningful financial condition evidence