Steven K. HILGEDICK et al., Plaintiffs, Respondents and Cross-appellants, v. KOEHRING FINANCE CORPORATION et al., Defendants, Appellants and Cross-respondents.
Defendants Koehring Finance Corporation and Koehring Company (collectively “defendants”) have appealed from a judgment after trial partly to the court and partly to a jury. Plaintiffs Steven Hilgedick, Hilgedick Rental Company and Bigelow–Manufacturing Company, doing business as Pacific Manufacturing, (collectively “plaintiffs”) also have appealed from portions of the judgment. We have ordered these appeals consolidated in this proceeding.
STATEMENT OF THE CASE
Plaintiffs' complaint alleged five causes of action for declaratory relief, quieting title, interference with business relations, bad faith and breach of contract. The parties stipulated that the declaratory relief, quiet title and breach of contract causes of action would be submitted to the court for decision. The cause of action for interference with business relations was submitted to the jury. The court granted defendants' motion for nonsuit on the bad faith cause of action.
The jury returned a verdict in favor of plaintiffs for compensatory damages in the sum of $730,482.10. In accordance with a stipulation of the parties for a bifurcated trial on the issue of exemplary damages, the jury was then informed that the net worth of defendants was $159 million and it was instructed on the issue of exemplary damages; the jury returned a verdict of punitive damages in the identical amount of the compensatory damages. Thereafter, the court ruled in favor of defendants on the declaratory relief, quiet title and breach of contract causes of action, awarding defendants $1,986,025 on the declaratory relief cause of action together with interest on that amount at 18 percent from March 31, 1981, to the date of judgment. The court denied plaintiffs' motion for a new trial on the causes of action submitted to the court. The court granted defendants' motion for a new trial on the issue of exemplary damages only.
The second jury trial on the issue of exemplary damages began on April 21, 1987, before a different trial judge and a different jury.1 The jury returned a verdict in favor of plaintiffs in the sum of $11 million. Judgment was then entered providing as follows: (1) plaintiffs are to recover compensatory damages of $730,482.10 with interest thereon at 10 percent from December 27, 1982; (2) plaintiffs are to recover exemplary damages totalling $11 million with interest thereon at 10 percent from the date of the verdict of the second jury on May 14, 1987; (3) the deeds of trust and other security documents executed by plaintiffs are valid and enforceable against them in the amount of $1,986,025; (4) plaintiffs are entitled to a credit against the $1,986,025 debt owing to defendants in an amount equal to the compensatory jury verdict and defendants are entitled to interest on the difference at the rate of 18 percent; (5) no part of the exemplary damages awarded to plaintiffs is available to defendants as an offset; and (6) there is added to the judgment an amount equal to any amount recovered by defendants in the bankruptcy proceeding entitled In re Steven Hilgedick, United States Bankruptcy Court, Northern District of California, No. 4–83–02174–H, to the extent defendants' recovery in that proceeding comes from funds that would not have existed but for the award of exemplary damages in this action.
Defendants filed before the court presiding at the second exemplary damage trial, motions to vacate the judgment, for a new trial and for judgment notwithstanding the verdicts. The court denied the motion for judgment notwithstanding the verdicts but ruled the exemplary damages award in favor of Steven Hilgedick excessive by $2.5 million and granted a new trial subject to his consent to a remittitur in that amount. Hilgedick consented to the remittitur. Plaintiffs and defendants have appealed from those portions of the judgment adverse to them.
We rendered our initial decision in this matter on August 30, 1990. Defendants petitioned for rehearing of our decision, and on October 1, 1990, we issued an order modifying our opinion and denying rehearing. After defendants' petition for review was denied by the California Supreme Court, they petitioned the United States Supreme Court for a writ of certiorari. On April 22, 1991, ––– U.S. ––––, 111 S.Ct. 1614, 113 L.Ed.2d 713, the Supreme Court granted the writ, vacated the judgment in this matter, and remanded the case to us for further consideration in light of Pacific Mut. Life Ins. Co. v. Haslip (1991) 499 U.S. 1, 111 S.Ct. 1032, 113 L.Ed.2d 1 (hereafter Haslip ). The parties have submitted supplemental briefing addressing the Haslip decision. As directed by the Supreme Court, we consider the impact of Haslip below.
Plaintiffs and defendants have challenged determinations reached in the first liability trial and in the second trial on the issue of exemplary damages. Since the evidence presented at each trial differs somewhat, we shall discuss the issues with respect to each trial separately.
The First TrialA. Statement of Facts
This trial commenced on December 13, 1982 and lasted eight days. Plaintiff Steven Hilgedick testified he bought 75 percent of Pacific Trencher & Equipment, Inc. in 1972. Between 1973 and 1979 Pacific Trencher's gross sales of construction equipment and of replacement parts for trenchers grew from over $1 million to over $10 million and the number of its employees increased from nine to about 70. In 1979 over 50 percent of its gross sales came from sales of used construction equipment.
Hilgedick also purchased an interest in Bigelow–Hilgedick Manufacturing Company which did business under the name Pacific Manufacturing Company. This company designed and built a new trencher called the P–40 which it sold to Pacific Trencher which in turn retailed the trenchers. Between 1973 and 1978 the annual sales volume of Pacific Manufacturing grew from $60,000 to over $1 million.
Hilgedick Rental Company, a sole proprietorship of Steven Hilgedick, bought construction machinery and made it available to Pacific Trencher for rental purposes. If Pacific Trencher had a rental customer for a machine owned by Hilgedick Rental, Pacific Trencher would rent the machine from Hilgedick Rental. Hilgedick Rental would then invoice Pacific Trencher for the rental. By 1978 Hilgedick Rental had a sales volume between $700,000 and $1 million.
Defendant Koehring Finance is a wholly owned subsidiary of Koehring Company. Koehring Finance finances sales of equipment manufactured by various divisions of Koehring Company and sold by Koehring Company or its distributors.
By 1977 Pacific Trencher was selling new lines of equipment, including machines from one of Koehring Company's divisions known as Speedstar. In late 1977 the Lorraine division of Koehring Company approached Hilgedick about selling its cranes. Hilgedick agreed to sell the cranes if he could also sell excavating equipment and backhoes produced by another division of Koehring. At the time Koehring Company had no Northern California dealer for this equipment. Agreement was reached in January 1978. In order to handle the new lines, Pacific Trencher hired additional employees and moved to a larger facility on Washington Street in San Leandro which Hilgedick purchased and leased to Pacific Trencher. The Rexnord line of construction equipment was added later with Koehring Company's agreement.
To finance this expansion, Hilgedick obtained a $1.5 million line of credit with United California Bank (“UCB”) and arranged for “flooring” credit with Koehring Finance Corporation. The flooring arrangement between Pacific Trencher and Koehring Finance provided for one year without any payments for unsold equipment followed by six months of payments of interest only.
The Koehring Company cranes and tractors did not sell well. In March 1979 Pacific Trencher had to begin borrowing an average of $14,000 a month against its accounts receivable to pay interest on the unsold equipment and other operating costs.
About this time, Pacific Manufacturing began making successful bids on government contracts. Pacific Trencher acted as financial guarantor for these contracts.
In mid 1979 the bank officer who handled Pacific Trencher's line of credit at UCB left. The new bank officer did not understand the debt-to-net-worth ratio in the construction equipment industry. UCB lowered the line of credit from $1.5 million to $750,000 and dropped the advance on eligible accounts receivable from 80 to 60 percent, cutting cash flow and making it impossible for Pacific Trencher to pay its bills.
Hilgedick discussed this problem with Koehring Finance representatives at an annual convention in early 1980. In January 1980 the construction equipment industry was weakening and sales were dropping off causing concern to Koehring Finance. Rexnord and the Westinghouse Credit which floored the Rexnord line for Pacific Trencher both gave Hilgedick a three month moratorium on payments. UCB then directed Pacific Trencher's creditors to pay money owed Pacific Trencher directly to UCB, effectively cutting off Pacific Trencher's cash flow completely.
Ray Lackenbauer, president of Koehring Finance, telephoned a representative of UCB to attempt to change UCB's payment procedure. Lackenbauer was concerned about the ability of Pacific Trencher to survive as a result of UCB's new procedure.
Koehring Finance offered to loan Pacific Trencher $1 million. Lackenbauer and Clarence Miller, credit manager of Koehring Finance, visited Pacific Trencher and determined that, in their opinion, it had an excellent chance of staying in business if the loan from Koehring Finance were made.
At the time of the loan from Koehring Finance, Pacific Trencher had paid down the UCB loan to about $400,000. Hilgedick was under the impression the $1 million would be used to pay off UCB with the balance to be used for operating capital. There was no discussion of paying Koehring Finance with the proceeds of the loan. In March 1980 the value of the collateral of Pacific Trencher was approximately $5 million.
The actual loan documents, however, provided that the loan proceeds would be used to pay UCB and all amounts owing any division of Koehring. The loan documents included personal guarantees of everything Hilgedick owned, including a stock pledge of the 3000 shares of Pacific Trencher issued to Hilgedick. The subordination agreement signed by Hilgedick provided loans he made to Pacific Trencher could not be repaid until defendants had been paid in full.
At the time of the loan, Lackenbauer determined Pacific Trencher needed $1.4 million to pay its accounts payable, including Koehring Finance in the sum of $360,000. Koehring Finance wanted to loan Pacific Trencher enough to pay UCB and itself, leaving $240,000 due on other accounts payable which Koehring Finance believed could be paid from cash flow.
In April 1980 Koehring Company terminated Pacific Trencher's Lorraine distributorship and transferred it to a competitor. The reason given was Pacific Trencher was not selling enough Lorraine products. Koehring Company declined to take back the Lorraine inventory on hand at Pacific Trencher because it was no longer new equipment since it had been transferred to Hilgedick Rental. It was now impossible for Pacific Trencher to sell the cranes because it no longer had the distributorship and could not provide parts or service.
After the $1 million loan was made, the nature of Pacific Trencher's business changed drastically. Its main profit had come from sales of used equipment. Now Koehring Finance refused to finance used equipment sales or to allow Pacific Trencher to seek financing of sales of used equipment from Credit Alliance which had previously financed such sales. Pacific Trencher had to let its top used equipment salesman go.
During the summer of 1980 Koehring Finance's representatives periodically reviewed Pacific Trencher's books. Miller appeared on a monthly basis and Lackenbauer made two visits to review the books. Lackenbauer recommended a new controller to replace the one who had left. The marketing condition in the industry did not improve as Koehring Finance had predicted.
Pacific Trencher's cash flow problems resulting from lack of sales continued through the summer of 1980 into the fall. In order to raise cash, Pacific Trencher agreed to sell its Southern California operation to its employees. In order to consummate the sale, Koehring Finance had to release its security interest in the assets to be sold. Rather than filing a partial release of their security which was all that was necessary, Koehring Finance mistakenly filed a termination of security interest. Lackenbauer testified this termination “kill[ed] the file” with the Secretary of State which meant that Koehring Finance no longer had a security interest in the assets of Pacific Trencher.
In October 1980, with the rainy season only a few months away, Koehring Finance realized the impact the rainy season would have on sales would compound Pacific Trencher's cash flow problems. On October 6, 1980, Koehring Finance informed Hilgedick it was accelerating the indebtedness Pacific Trencher owed it and was assuming control of Pacific Trencher pursuant to the stock pledge signed by Hilgedick. Koehring Finance called a stockholders' meeting for October 16, 1980. Hilgedick was fired as president and new directors were appointed, the majority of whom were Koehring Finance representatives. As of April 14, 1981, Koehring Finance had not informed the shareholders of Pacific Trencher that Koehring Finance's security interest in assets of Pacific Trencher mistakenly had been terminated.
Hilgedick had prolonged conversations with Lackenbauer about his intentions in taking over Pacific Trencher. Lackenbauer denied any intention of liquidating the company. Hilgedick explained that if the company were to be liquidated it should be done at this time since the selling period for the year was over and it made no sense to allow interest costs to mount until the company was later liquidated. Lackenbauer replied Koehring Finance was not liquidating the company.
Ronald Mullins of Koehring Finance was placed in charge of collection of accounts receivable of Pacific Trencher. All monies collected from sales of Koehring equipment was sent to Koehring Finance, including at times the California sales tax collected from the consumer which then had to be paid by Pacific Trencher out of other revenue.
On December 9, 1980, Hilgedick wrote Lackenbauer stating he was revoking his personal guarantees. Lackenbauer testified that sometime in December 1980 he became aware of the fact that Koehring Finance had mistakenly filed a termination statement with the Secretary of State which was being treated as a release of Koehring Finance's security interest in all of the collateral pledged by Pacific Trencher. Koehring Finance attempted to reinstate its UCC–1 filing to reperfect its security interest. Koehring Finance also urged Hilgedick to reinstate his guarantees. Hilgedick refused to reinstate his guarantees unless his Pacific Trencher stock was returned to him.
In December 1980 Koehring Company, including Koehring Finance, was being acquired by AMCA International Corporation. AMCA was setting up a reserve to offset losses on loans on Koehring Finance's books. Lackenbauer's analysis of Pacific Trencher's assets sent to AMCA showed Pacific Trencher's collateral was sufficient to pay Koehring Finance at that time.
Lackenbauer testified that in December of 1980 he understood that if Pacific Trencher went into bankruptcy within four months of Koehring Finance's second UCC–1 filing, it could be claimed the new filing was of no effect because it would be considered a preference. He understood he should prevent Pacific Trencher's bankruptcy from occurring within the four-month period.
Although Lackenbauer was assuring Hilgedick he had no intention of liquidating Pacific Trencher, on December 22, 1980, Lackenbauer sent a letter to his superior at AMCA stating “the final decision to liquidate the distributorship will be made in January, pending audited financial statements and more importantly, the finding of an alternative distribution.” Lackenbauer wrote the same superior again on January 16, 1981, that since Hilgedick was cooperating in the orderly liquidation of the company, there was no need to force Pacific Trencher into voluntary liquidation as Koehring Company had no alternate distributor available in Northern California at this time. On the other hand, in February 1981 Lackenbauer told Pacific Trencher's Board of Directors the major impediment to Koehring's extending further credit to Pacific Trencher was Hilgedick's refusal to reinstate his guarantees.
After October 16, 1980, Hilgedick Rental was not paid any rental payments by Pacific Trencher for machines it rented. No money was paid to Pacific Manufacturing for the P–40 trenchers purchased by Pacific Trencher.
Pacific Manufacturing was low bidder on two Navy contracts which required a guarantee from Pacific Trencher for Pacific Manufacturer to be awarded the contracts. Lackenbauer refused to give his permission for Pacific Trencher to sign the guarantee.
On April 3, 1981, Rexnord cancelled its dealership with Pacific Trencher and picked up its inventory. On April 1, 1981, Hilgedick received a notice of a meeting of the Board of Directors which stated Koehring Finance wished to discuss the possibility of liquidating Pacific Trencher. Hilgedick prepared financial statements to show the company could still be viable. He had not been informed Koehring Finance was planning to terminate Pacific Trencher's distributorship agreement with Koehring Company, which it did at the April 14, 1981 Board of Directors meeting. Hilgedick agreed that without the distributorship, Pacific Trencher could not continue.
On April 15, 1981, Hilgedick served Pacific Trencher with a three-day notice to pay $42,000 in rent past due for the months of November 1980 through April 1981 on the Washington Street facility or quit the premises. Koehring Finance employees caused Pacific Trencher's assets to be removed from the property. Some inventory of parts and all the books and ledgers were thrown in boxes and hauled away. Operable equipment was also removed. On April 22, 1981, the shareholders voted to put the company into bankruptcy.
The Second TrialA. Statement of Facts
This trial commenced on April 21, 1987, before a different trial judge. On May 13, 1987, the jury returned a verdict awarding Hilgedick $5 million, Pacific Manufacturing $5 million and Hilgedick Rental $1 million in exemplary damages. After the judgment was entered, the court granted defendants' motion for new trial subject to Hilgedick's consent to a remittitur in the amount of $2.5 million; Hilgedick agreed to the remittitur. The difference between the evidence presented at the liability trial and that presented at the second exemplary damage trial is primarily one of emphasis on certain acts of defendants; however, new evidence of defendants' motives for their actions was presented.
Much more detail was offered concerning Pacific Manufacturing's government contracts. Pacific Manufacturing's first government sale was a huge trencher to be used to build 5,000 miles of tunnels for underground placement of MX missiles. Pacific Manufacturing designed the trencher and the concrete machine for this project. Hilgedick recognized that government business was not vulnerable to business cycles and Pacific Manufacturing's government contracts could tide the allied businesses over periods of general downturn. Hilgedick hired a new general manager for Pacific Manufacturing who had experience in government bidding and contracts. Within a few months, Pacific Manufacturing was the successful bidder on a $3.9 million government contract for Hollings wenches. The government required Pacific Trencher to provide a performance guarantee of Pacific Manufacturing's contract, which was done.
When UCB cancelled Pacific Trencher's line of credit, Hilgedick did find replacement financing at least in part from two other sources but he considered the interest rate charged by one source as too high. Koehring volunteered to loan Pacific Trencher $1 million. This loan was secured by everything Hilgedick owned as well as by the guarantees of Hilgedick, Hilgedick Rental and Pacific Manufacturing. After paying UCB and Koehring, Pacific Trencher had left from the proceeds of the loan only about $300,000 with which to meet accounts payable in the range of $700,000. Lackenbauer, the president of Koehring Finance who was an accountant with considerable experience, had calculated Pacific Trencher needed a loan of $1.4 million in order to be sound but he did not tell this to Hilgedick. One month after the loan was made, Koehring, without warning, cancelled its Lorraine distributorship with Pacific Trencher stating the reason was Pacific Trencher's financial condition.
In April 1980, Pacific Trencher received two orders for used tractors. Each order was for nearly $1 million. Hilgedick found the equipment and then sought short-term financing for about three to four weeks until Pacific Trencher would be paid. During the earlier loan negotiations, Lackenbauer had said Koehring Finance would be Pacific Trencher's banker in place of Credit Alliance. The loan documents provided Pacific Trencher could no longer use Credit Alliance as a source for borrowing funds. Lackenbauer had said Koehring Finance could loan more money if a deal looked legitimate. Yet, when Hilgedick asked Lackenbauer to finance these sales of used equipment, Lackenbauer replied “We don't want to loan you any more money.” Hilgedick had to let go his used equipment salesman who had been with him for several years. With the sales of used equipment, formerly the chief source of income, stopped almost completely, cash became scarce.
On October 6, 1980, Hilgedick was sitting in his office when representatives of Koehring Finance came in and threw a bunch of papers down on his desk. They told him they were going to fire him and take over the company. He was so shocked he could not comprehend everything that was happening. They did not tell Hilgedick they had made a mistake and terminated their UCC–1 security interest in all Pacific Trencher's assets. Instead, when Hilgedick asked Lackenbauer why Koehring Finance had taken over Pacific Trencher, Lackenbauer replied “we're just trying to help you.” Koehring Finance also gave as its pretext for taking over Pacific Trencher that the books of the company were in bad shape. Koehring Finance, however, had been in control of Pacific Trencher's books for months before the takeover. Lackenbauer also said he was not intending to liquidate the business to pay its debts but wanted to get the business back on its feet. Hilgedick was told to spend his time selling inventory. When he sold a piece of Koehring equipment, the total money that came in went to Koehring Finance and Pacific Trencher had to pay the sales tax and the sales commission from other money.
The government somehow found out that Hilgedick no longer owned Pacific Trencher so it required Pacific Trencher to renew its guarantee of Pacific Manufacturing's performance of the contracts. Hilgedick proposed to Lackenbauer that if he would let Pacific Trencher sign the guarantee which did not require any collateral of Pacific Trencher and would not obligate Koehring Finance in any way, then Hilgedick would agree to pay Koehring 10 percent of the monthly progress payments received by Pacific Manufacturing estimated to be about $50,000 per month and, in addition, Hilgedick would take a smaller salary and would lower the monthly rent to Pacific Trencher on the Washington Street property and pay those amounts to Koehring Finance. Hilgedick wanted to get Koehring Finance paid off so he could get his stock back. Hilgedick explained to Lackenbauer that Pacific Manufacturing definitely needed the cash flow from the government contracts. Lackenbauer said he was not interested in getting involved; he declined to allow Pacific Trencher to sign the performance guarantee. Hilgedick could never understand why his proposal was not accepted.
In December 1980, Hilgedick gave notice to Koehring Finance that he revoked his personal guarantees. Lackenbauer tried to get him to reinstate the guarantees. In order to get his stock back, Hilgedick sought a loan from the Bank of America to pay off Koehring Finance. Ron Mullins heard about the application, called the bank and told someone, “Steve Hilgedick doesn't negotiate the loan. He doesn't own the stock in the company.”
During the months of January through March 1981, Hilgedick complained repeatedly to Lackenbauer and other Koehring Finance people that the refusal to allow payments to Pacific Manufacturing for equipment purchased by Pacific Trencher, the refusal to allow rent payments to Hilgedick Rental so it could meet installment payments on the equipment and the refusal to pay Hilgedick rent on the property so he could make the mortgage payments was causing serious problems. The Koehring representatives were not a bit concerned with plaintiffs' problems caused by defendants' refusal to pay them any money.
In early April 1981, Eric Hammer, the credit manager of Rexnord, called Hilgedick and told him Koehring Finance was making plans concerning Pacific Trencher but he would not tell Hilgedick what the plans were. A few days later, Hammer told Hilgedick he was terminating Rexnord's distributorship with Pacific Trencher. Hammer said Koehring Finance people had told him to close the distributorship at that time.
Janet O'Hanis, Pacific Trencher's office manager, testified she went to the Bank of America with Hilgedick and they both told Mullins they had obtained a line of credit. Mullins told them they had no right to negotiate a loan and then he called Koehring Finance and told someone there what had happened. The next day an officer of the Bank of America called to say the bank could not make the loan.
Clarence Miller, an employee of Koehring Finance, told Janet O'Hanis that if Hilgedick did not reinstate his guarantees, he would find himself in a lawsuit he could not win and he would lose everything. Miller repeated this threat to Hilgedick while Pacific Trencher was vacating the Washington Street buildings saying, “you are never going to be able to afford this lawsuit.”
After Pacific Trencher was closed down, O'Hanis found herself in trouble with the IRS. She had signed Pacific Trencher's payroll checks. The IRS filed a $36,000 tax lien against her personally because Koehring Finance had not paid Pacific Trencher's payroll taxes.
3. Whether the Award of Exemplary Damages Was Excessive as a Matter of Law
Defendants argue the punitive damage award is excessive as a matter of law because it is “grossly out of proportion to the severity of the offense” (Haslip, supra, 111 S.Ct. at p. 1045), bears no “understandable relationship to compensatory damages” (ibid.), and constitutes too large a percentage of their combined net worth.
“When faced with a challenge to the amount of a punitive damages award, our traditional function has been to determine whether the award is excessive as a matter of law or raises a presumption that it is the product of passion or prejudice.” (Adams v. Murakami (1991) 54 Cal.3d 105, 109–110, 284 Cal.Rptr. 318, 813 P.2d 1348.) 5 In making this determination, we have looked to three factors: (1) the reprehensibility of the defendant's conduct, (2) the relationship between the punitive damage award and the compensatory damage award, and (3) the relationship between the punitive damage award and the defendant's wealth. (Id. at p. 110, 284 Cal.Rptr. 318, 813 P.2d 1348; see also Neal v. Farmers Ins. Exchange (1978) 21 Cal.3d 910, 928, 148 Cal.Rptr. 389, 582 P.2d 980.) 6 Our review is guided by the purpose of punitive damages. “That purpose is a purely public one. The public's goal is to punish wrongdoing and thereby to protect itself from future misconduct, either by the same defendant or other potential wrongdoers. [Citation.]” (Adams v. Murakami, supra, 54 Cal.3d at p. 110, 284 Cal.Rptr. 318, 813 P.2d 1348.) Our review is designed to ensure that the amount of punitive damages does not exceed the amount necessary to accomplish this objective. (Ibid.)
Reprehensibility of Defendants' Conduct
Defendants' argument that their acts were not sufficiently reprehensible to warrant the punitive damages awarded in this case is based entirely on their version of the facts presented at the second trial. Their argument is of no value to this court whatsoever since it is contrary to the requirements of our standard of review. (Hasson v. Ford Motor Co. (1982) 32 Cal.3d 388, 402, 185 Cal.Rptr. 654, 650 P.2d 1171.) In fact, the evidence presented at the second trial clearly establishes that defendants engaged in a self-serving course of deceitful conduct.
Koehring Finance negligently released its security interest in the assets of Pacific Trencher. Then, rather than candidly acknowledging its error to Pacific Trencher and taking legitimate steps to remedy it, Koehring Finance took over Pacific Trencher and milked the company of its assets. To make matters worse, Koehring Finance lied about its motives in taking over Pacific Trencher. When Hilgedick inquired as to the reasons for the takeover, Ray Lackenbauer, the president of Koehring Finance, told him “we're just trying to help you. You know, we feel that we can help you by—by running the company.” In order to ensure that Hilgedick could not challenge its takeover of Pacific Trencher in court, Koehring Finance wrongfully withheld monies due Hilgedick so that he would “never ․ be able to afford this lawsuit” and interfered with Hilgedick's efforts to obtain an alternative line of credit. Koehring Finance also lied about its reasons for failing to liquidate Pacific Trencher, telling Hilgedick “that's not the intention. We had planned on—on continuing the company and, you know, getting it back on its feet and making it healthy again.” In fact, the real reason Koehring Finance did not put Pacific Trencher into bankruptcy was that it had negligently released its security interest in the assets of Pacific Trencher and, as a result, was no longer a secured creditor. In the words of Koehring Finance's president, “[i]n a bankruptcy we would certainly not be paid from the proceeds of Pacific Trencher.”
Even at this late date, defendants have not come to terms with the reprehensibility of their conduct. Instead, they boldly assert their actions “arose out of a single arm's-length transaction between sophisticated business entities and did not affect society at large.” Again, a review of the evidence presented at the second trial demonstrates this is not the case. Not only did defendants' actions adversely affect the plaintiffs, but they also displayed gross indifference as to whether the state and federal governments would be paid sales and payroll taxes owed them. Koehring Finance collected all of the money coming in on Pacific Trencher's sales of Koehring equipment, including monies collected from customers as state sales tax. And, with equally callous indifference, Koehring Finance failed to pay Pacific Trencher's payroll taxes, resulting in a $36,000 tax lien being filed personally against one of Pacific Trencher's employees. (See Haslip, supra, 111 S.Ct. at p. 1044 [court properly considered impact of defendant's conduct on innocent third parties].)
Relationship Between Punitive Damages and Compensatory Damages
We turn next to the relationship between the punitive damage award and the compensatory damage award. The ratio of the total punitive damage award ($8.5 million) to the total compensatory damage award ($730,482) is 11.6 to 1. Defendants are correct in their assertion that such a ratio is large. However, it is not, as defendants contend, “unprecedented.” (E.g., Neal v. Farmers Ins. Exchange, supra, 21 Cal.3d 910, 148 Cal.Rptr. 389, 582 P.2d 980 [74:1 ratio]; Finney v. Lockhart (1950) 35 Cal.2d 161, 217 P.2d 19 [2000:1 ratio]; Chodos v. Insurance Co. of North America (1981) 126 Cal.App.3d 86, 178 Cal.Rptr. 831 [39:1 ratio]; Downey Savings & Loan Assn. v. Ohio Casualty Ins. Co. (1987) 189 Cal.App.3d 1072, 234 Cal.Rptr. 835 [33:1 ratio]; see also Haslip, supra, 111 S.Ct. at p. 1046 [200:1 ratio between punitive damage award and plaintiff's out-of-pocket expenses].)
Our concern with the punitive damage award in this case lies not with the ratio of the total punitive damage award to the total compensatory damage award but rather with the disparity in the ratios among the individual plaintiffs. As remitted by the trial court, the ratio of punitive damages to compensatory damages is 3.82 to 1 as to Hilgedick Rental, 11.73 to 1 as to Pacific Manufacturing, and 59.52 to 1 as to Hilgedick.7 There is no basis for such a disparity. As the trial court found in its remittitur order, “the amount of punitive damages which will have a deterrent effect on the defendants in the light of defendants' financial condition does not differ between the different plaintiffs.” Further, as the trial court found, “the reprehensibility of the defendants' conduct toward all three plaintiffs was essentially the same ․”
In its remittitur order, the trial court suggested that “a continuing course of reprehensible conduct towards Steven Hilgedick after the first jury trial” might provide some basis for increasing the punitive damage award in favor of Hilgedick. We disagree. As the trial court properly noted in earlier oral comments, the second jury was not asked to determine whether defendants' conduct after the first trial was wrongful in any way. Thus, that conduct cannot provide a basis for imposing additional punitive damages.
Our dissenting colleague, while acknowledging defendants' conduct after the first trial is not relevant in and of itself, suggests the conduct “was admitted not to show new wrongful conduct, but to show harm which was a natural and probable consequence of conduct already found wrongful in the first trial.” (Dis. opn., post, pp. 107–108, emphasis in original.) There are two major problems with this argument. First, the record demonstrates the trial court did, in fact, consider defendants' conduct after the first trial as an independent basis for imposing punitive damages. In its remittitur order, the trial court specifically referred to “a continuing course of reprehensible conduct towards Steven Hilgedick after the first jury trial.” (Emphasis added.) The court went on to state “[a]lthough it can be argued that defendants' conduct introduced into evidence relative to Steven Hilgedick between 1982 and 1987 can be the basis for increasing the award of punitive damages in favor of plaintiff Steven Hilgedick, the Court is of the opinion that those additional acts do not justify a ratio ten times higher than the punitive damages awarded to Pacific Manufacturing and 30 times higher than the ratio of punitive damages to compensatory damages awarded to Hilgedick Rentals.” (Emphasis added.) Thus, in spite of the trial court's earlier acknowledgment defendants' conduct after the first trial could not provide a basis for imposing additional punitive damages, the trial court considered the conduct for precisely this purpose.
Second, the premise underlying our dissenting colleague's analysis—namely, that we should look beyond the relationship between the punitive damage award and the compensatory damage award to the relationship between the punitive damage award and “actual harm”—is itself mistaken. In Gagnon v. Continental Casualty Co. (1989) 211 Cal.App.3d 1598, 1603, 260 Cal.Rptr. 305, the court explained “the ‘reasonable relation’ rule is usually applied by calculating the ratio between the amount of the punitive and compensatory damages.” (See also Little v. Stuyvesant Life Ins. Co. (1977) 67 Cal.App.3d 451, 469, 136 Cal.Rptr. 653.) This general rule is incorporated in BAJI No. 14.71, which provides “[t]hat the punitive damages must bear a reasonable relation to the actual damages.” (See BAJI No. 14.71 (7th ed. 1986 bound vol.) p. 205, emphasis added.) It has also been endorsed by the California Supreme Court. (See Adams v. Murakami, supra, 54 Cal.3d at pp. 110–111, 284 Cal.Rptr. 318, 813 P.2d 1348 [focusing on “the amount of compensatory damages” and endorsing the version of BAJI No. 14.71 contained in the 1986 bound volume].)
In certain cases, courts have found it necessary to depart from this general rule. For example, in Gagnon v. Continental Casualty Co., supra, 211 Cal.App.3d at p. 1603, 260 Cal.Rptr. 305, the trial court refused to give the reasonable relation portion of BAJI No. 14.71. “The court apparently was concerned that because the instruction required a reasonable relation between punitive and compensatory damages but plaintiff in her representative capacity was not entitled to compensatory damages either for further disability benefits or emotional distress ․ the jury might feel compelled to keep the amount of punitive damages low.” (Ibid.) The trial court also refused an alternative instruction proposed by the defendant, which would have focused the jury's attention on “ ‘actual harm or injury’ ” rather than on “ ‘actual damages.’ ” (Ibid., emphasis added.) The court of appeal reversed, holding “where, as here, punitive but not compensatory damages are available to the plaintiff, the defendant is entitled to an instruction that punitive damages must bear a reasonable relation to the injury, harm, or damage actually suffered by the plaintiff and proved at trial.” (Id. at p. 1605, 260 Cal.Rptr. 305, emphasis added.)
This case does not fall within the exception addressed in Gagnon. This case is not a case in which compensatory damages were unavailable because of the untimely death of a party or were otherwise demonstrated to be inadequate. To the contrary, the first jury awarded compensatory damages of $261,682 to Hilgedick Rental, $426,300 to Pacific Manufacturing, and $42,000 to Hilgedick. And, contrary to the suggestion made by our dissenting colleague, neither the second jury nor the trial court considered the “actual harm ” to plaintiffs. (Dis. opn., post, p. 107, emphasis added.) Rather, the second jury was properly instructed “[t]hat the punitive damages must bear a reasonable relationship to the actual damages.” (Emphasis added.) (See generally BAJI No. 14.71 (7th ed. 1986 bound vol.) p. 205.) Immediately following this instruction, the second jury was informed of the amount of compensatory damages awarded by the first jury. Likewise, the trial court, sitting in its capacity as a thirteenth juror, focused on the requirement “[t]hat the punitive damages must bear a reasonable relation to the actual damages.” (Emphasis added.) Our dissenting colleague, acting as juror fourteen, would consider the relationship between the punitive damage award and “actual harm,” something that was considered by neither the jury nor the trial court. This we decline to do.
On the record before us, particularly the trial court's express finding “the reprehensibility of the defendants' conduct toward all three plaintiffs was essentially the same,” 8 we can perceive no sound public policy basis for the ratios of punitive damages to compensatory damages as to Pacific Manufacturing and Hilgedick to exceed the ratio as to Hilgedick Rental. Accordingly, we reverse the punitive damage award to Pacific Manufacturing unless it accepts a remittitur of the award to $1,628,466; we reverse the punitive damage award to Hilgedick unless he accepts a remittitur of the award to $160,440. (See Gerard v. Ross (1988) 204 Cal.App.3d 968, 980, 251 Cal.Rptr. 604 [“It is well established that a reviewing court should examine punitive damages and, where appropriate, modify the amount in order to do justice. [Citation.]”].) These remitted awards reflect the 3.82 to 1 ratio of punitive damages to compensatory damages awarded to Hilgedick Rental.9
Relationship Between Punitive Damages and Defendants' Wealth
If Pacific Manufacturing and Hilgedick accept remittiturs, the overall punitive damage award will be $2,788,906. This amounts to 1.9 percent of defendants' combined net worth, which was $150 million at the time of the second trial. Such a ratio is well within a range approved by other appellate courts. (E.g., Storage Services v. Oosterbaan (1989) 214 Cal.App.3d 498, 514–517, 262 Cal.Rptr. 689 [remitting punitive damages to between 10 and 13.3 percent of defendant's net worth]; Goshgarian v. George (1984) 161 Cal.App.3d 1214, 1228, 208 Cal.Rptr. 321 [10.7 percent of defendant's net worth]; Burnett v. National Enquirer, Inc. (1983) 144 Cal.App.3d 991, 1012, 193 Cal.Rptr. 206 [remitting punitive damages to 5.8 percent of defendant's net worth]; Zhadan v. Downtown Los Angeles Motor Distributors, Inc. (1979) 100 Cal.App.3d 821, 835, 161 Cal.Rptr. 225 [6.8 percent of defendant's net worth].) Moreover, the ratio is wholly justified in light of the evidence presented at the second trial. As our Supreme Court has noted, “the wealthier the wrongdoing defendant, the larger the award of exemplary damages need be in order to accomplish the statutory objective.” (Bertero v. National General Corp. (1974) 13 Cal.3d 43, 65, 118 Cal.Rptr. 184, 529 P.2d 608.) 10 To this very day, defendants continue to assert they did nothing wrong. Given defendants' substantial net worth of $150 million and given defendants' failure to come to terms with the fact their conduct was reprehensible, only an award of punitive damages of the magnitude awarded here will be sufficient to accomplish society's goals of punishing defendants and deterring defendants and others from engaging in such reprehensible conduct in the future.
4. Whether the Award of Exemplary Damages Violated the United States and/or California Constitutions
Defendants argue that the punitive damage award against them violates the excessive fines clauses of the Eighth Amendment of the United States Constitution and Article I, section 17 of the California Constitution. This argument was recently rejected by the United States Supreme Court, which ruled that punitive damages do not violate the “excessive fines” clause of the Eighth Amendment. (Browning–Ferris Industries v. Kelco Disposal (1989) 492 U.S. 257, 273–276, 109 S.Ct. 2909, 2919–2920, 106 L.Ed.2d 219.)
Defendants also assert the punitive damage award violates their right to due process under the Fourteenth Amendment of the United States Constitution and Article I, section 7 of the California Constitution. As of the date of our initial decision in this matter, California courts had uniformly affirmed the constitutional validity of punitive damage awards under Civil Code section 3294, California's punitive damage statute. (Hasson v. Ford Motor Co., supra, 32 Cal.3d at p. 402, fn. 2, 185 Cal.Rptr. 654, 650 P.2d 1171.) The United States Supreme Court had never addressed the issue of whether punitive damage awards implicate the due process clause of the Fourteenth Amendment. (Browning–Ferris Industries v. Kelco Disposal, supra, 492 U.S. at pp. 276–277, 109 S.Ct. at p. 2921.) Shortly after we rendered our decision, however, the Supreme Court addressed the due process issue in Haslip, supra, 111 S.Ct. 1032. The Supreme Court has remanded this case to us for further consideration in light of Haslip.
In Haslip, the Supreme Court rejected a due process challenge to a punitive damage award rendered by an Alabama jury. In evaluating the due process challenge, the Supreme Court considered three factors: (1) the instructions given to the jury, (2) the post-trial review of the punitive damage award by the trial court, and (3) the appellate review of the punitive damage award by the Alabama Supreme Court. (Haslip, supra, 111 S.Ct. at pp. 1044–1046.) Considering these same three factors, we conclude that defendants' due process challenge must likewise be rejected.
In evaluating the defendant's due process challenge in Haslip, the Supreme Court looked first to the jury instructions given by the trial court. The trial court instructed the jury that the purpose of punitive damages was “ ‘not to compensate the plaintiff for any injury’ but ‘to punish the defendant’ and ‘for the added purpose of protecting the public by [deterring] the defendant and others from doing such wrong in the future.’ ” (Haslip, supra, 111 S.Ct. at p. 1044.) The trial court then instructed the jury that if it decided to award punitive damages it “ ‘must take into consideration the character and the degree of the wrong as shown by the evidence and necessity of preventing similar wrong.’ ” (Ibid.) The Supreme Court found that although these instructions “gave the jury significant discretion in its determination of punitive damages,” they imposed “reasonable constraints” on the jury's discretion and, thereby, “reasonably accommodated [the defendant's] interest in rational decisionmaking and [the state's] interest in meaningful individualized assessment of appropriate deterrence and retribution.” (Ibid.)
In their supplemental briefing, defendants do not challenge the sufficiency of the instructions given to the jury in this case under Haslip. The fact defendants have not challenged the adequacy of the jury instructions under Haslip, however, does not render a review of those instructions unnecessary. To the contrary, a review of the instructions given to the jury in this case reveals the instructions went much further towards ensuring due process in the initial instance than those given in Haslip. Not only was the jury here informed as to the nature and purpose of punitive damages, but it was also instructed that “[i]n arriving at any award of punitive damages, you are to consider the following: [¶] The reprehensibility of the conduct of the defendant, [¶] The amount of punitive damages which will have a deterrent effect on the defendant in the light of defendants' financial condition, [¶] That the punitive damages must bear a reasonable relationship to the actual damages.” (See generally BAJI No. 14.71 (7th ed. 1986 bound vol.) p. 205.) Unlike the jury in Haslip, the jury here was expressly instructed that the deterrent effect of any punitive damage award was to be measured by reference to the defendants' financial condition and that any award of punitive damages must be reasonably related to actual damages. These instructions placed greater constraints on the jury's discretion than the instructions in Haslip and, in so doing, did more to ensure due process in the initial instance.
After reviewing the instructions given to the jury in Haslip, the Supreme Court then considered the post-trial review given to the jury's punitive damage award by the trial court. In Alabama, a trial court reviews a jury's award in light of the culpability of the defendant's conduct, the desirability of discouraging similar conduct on the part of others, and the impact on the parties, including innocent third parties. (Haslip, supra, 111 S.Ct. at p. 1044.) The Supreme Court found that this review “ensures meaningful and adequate review by the trial court whenever a jury has fixed the punitive damages.” (Ibid.)
In their supplemental briefing, defendants do not challenge the manner in which the trial court conducted its post-trial review in this case. Instead, defendants focus on the results of that review, claiming that even after the trial court's reduction the punitive damage award is still excessive as a matter of law, a claim we have already addressed. (Majority opn., ante, pp. 84–88.) Defendants' failure to challenge the manner in which the trial court conducted its post-trial review is significant. Like the instructions given to the jury, the post-trial review conducted by the trial court in this case did more to ensure due process than the post-trial review conducted in Haslip. The trial court in Haslip afforded the jury's award of punitive damages a “ ‘presumption of correctness.’ ” (Haslip, supra, 111 S.Ct. at p. 1063 (dis. opn. of O'Connor, J.).) In California, by contrast, a trial court “sits not in an appellate capacity but as an independent trier of fact.” (Neal v. Farmers Ins. Exchange, supra, 21 Cal.3d at p. 933, 148 Cal.Rptr. 389, 582 P.2d 980.) In this capacity, “ ‘[t]he trial court may disbelieve witnesses, reweigh evidence and draw reasonable inferences that are contrary to those drawn by the jury.’ [Citation.]” (Sanchez v. Hasencamp (1980) 107 Cal.App.3d 935, 944, 166 Cal.Rptr. 118.)
After considering the jury instructions and the post-trial review in Haslip, the Supreme Court next considered the appellate review given to the punitive damage award by the Alabama Supreme Court. In Alabama, an appellate court reviews a punitive damage award to ensure “that the punitive damages are reasonable in their amount and rational in light of their purpose to punish what has occurred and to deter its repetition.” (Haslip, supra, 111 S.Ct. at p. 1045.) In conducting this review, the appellate court takes the following factors into account: “(a) whether there is a reasonable relationship between the punitive damages award and the harm likely to result from the defendant's conduct as well as the harm that actually has occurred; (b) the degree of reprehensibility of the defendant's conduct, the duration of that conduct, the defendant's awareness, any concealment, and the existence and frequency of similar past conduct; (c) the profitability to the defendant of the wrongful conduct and the desirability of removing that profit and of having the defendant also sustain a loss; (d) the ‘financial position’ of the defendant; (e) all the costs of litigation; (f) the imposition of criminal sanctions on the defendant for its conduct, these to be taken in mitigation; and (g) the existence of other civil awards against the defendant for the same conduct, these also to be taken in mitigation.” (Ibid.) The Supreme Court found the application of these factors placed sufficient constraints on the reviewing court's discretion to satisfy due process. (Ibid.)
Defendants complain the level of review given to punitive damage awards by California appellate courts is insufficient under Haslip. Defendants correctly assert that the Supreme Court expressed some concern as to whether a “passion and prejudice” standard of review is sufficiently meaningful to ensure due process. (Haslip, supra, 111 S.Ct. at p. 1045, fn. 10.) In fact, after the decision of the United States Supreme Court in Haslip, the California Supreme Court expressly declined to decide “whether the traditional California ‘passion and prejudice’ standard of review is constitutionally sufficient under Haslip.” (Adams v. Murakami, supra, 54 Cal.3d at p. 118–119, fn. 9, 284 Cal.Rptr. 318, 813 P.2d 1348.) Having carefully reviewed the United States Supreme Court's decision in Haslip, we conclude the level of appellate scrutiny given to punitive damage awards in California is sufficient to ensure due process.
As a preliminary matter, we are compelled to note it is not appellate review alone that ensures due process. In Haslip, the Supreme Court considered both jury instructions and post-trial review in the trial court to be important components of due process as well. (Haslip, supra, 111 S.Ct. at p. 1044.) As discussed above, the jury instructions and post-trial review in this case did much more to ensure due process than those in Haslip. (Majority opn., ante, pp. 89–90.)
Moreover, we disagree with the underlying premise of defendants' argument—namely, that “deferential appellate review of punitive damages verdicts will not survive due process scrutiny.” The jury's punitive damage award in Haslip enjoyed a “ ‘presumption of correctness' ” before the Alabama Supreme Court. (Haslip, supra, 111 S.Ct. at p. 1063 (dis. opn. of O'Connor, J.).) Nonetheless, the majority of the Supreme Court found that that court's review was sufficiently meaningful to ensure due process. (Haslip, supra, 111 S.Ct. at p. 1045.)
The degree of appellate scrutiny given to punitive damage awards in California is similar to that given to such awards in Alabama. “[A]pplication of the ‘passion and prejudice’ standard does not occur in a vacuum, but is measured against the identical criteria utilized by the jury: reprehensibility of defendant's misdeeds, the ratio between the compensatory and punitive damages, and the relationship between the punitive damages and defendant's net worth. [Citations.]” (Las Palmas Associates v. Las Palmas Center Associates (1991) 235 Cal.App.3d 1220, 1258, 1 Cal.Rptr.2d 301.) Furthermore, the basic structure of California's “passion and prejudice” standard of review is sufficiently flexible to permit an appellate court to scrutinize a punitive damage award under precisely the same factors enumerated in Haslip (see majority opn., ante, p. 90) in an appropriate case. (Las Palmas Associates v. Las Palmas Center Associates, supra, 235 Cal.App.3d at pp. 1258–1259, fn. 9, 1 Cal.Rptr.2d 301.)
In short, we find the appellate scrutiny given to punitive damage awards in California is sufficient to comply with the mandate of Haslip. (Las Palmas Associates v. Las Palmas Center Associates, supra, 235 Cal.App.3d at pp. 1258–1259, 1 Cal.Rptr.2d 301.) Like the appellate review conducted by the Alabama Supreme Court in Haslip, our review ensures “that the punitive damages are reasonable in their amount and rational in light of their purpose to punish what has occurred and to deter its repetition.” (Haslip, supra, 111 S.Ct. at p. 1045; see also Adams v. Murakami, supra, 54 Cal.3d at p. 110, 284 Cal.Rptr. 318, 813 P.2d 1348.) And, like the standards employed by Alabama appellate courts, the standards employed by California appellate courts have “real effect when applied ․ to jury awards” and have resulted in the reduction of punitive damage awards. (Haslip, supra, 111 S.Ct. at p. 1045.) (E.g., majority opn., ante, pp. 84–88; Storage Services v. Oosterbaan, supra, 214 Cal.App.3d at p. 517, 262 Cal.Rptr. 689; Burnett v. National Enquirer, Inc., supra, 144 Cal.App.3d at p. 1012, 193 Cal.Rptr. 206.)
The portion of the judgment awarding Pacific Manufacturing $5,000,000 in punitive damages is reversed unless it consents to a remittitur reducing the punitive damages to $1,628,466. The portion of the judgment awarding Hilgedick $2,500,000 in punitive damages is reversed unless he consents to a remittitur reducing the punitive damages to $160,440. As modified in the published and unpublished portions of this opinion, the judgment is affirmed. Each party to bear its own costs on this appeal.
I concur with the result announced in Justice Benson's well written lead opinion and, in particular, with his view that, on the facts of this case, appellate oversight and review of the punitive damages awarded by the jury, and reduced by the trial judge, necessitate further modification by this court in the particulars he has announced. The emphasis of Pacific Mut. Life Ins. Co. v. Haslip (1991) 499 U.S. 1, 111 S.Ct. 1032, 113 L.Ed.2d 1 (Haslip ) on extensive appellate oversight of punitive damages awards, as a basis for concluding that due process was afforded appellant in that case, also requires us to apply a nondeferential standard of review here. Reducing punitive damages to equalize their ratio to compensatory damages awarded each plaintiff is well within the scope of that standard of review.1
I write separately, however, because I would utilize the opportunity this case presents to address two issues which I believe have too long remained dormant in the case law concerning punitive damages: (1) Should an allocation of punitive damages awards be made to the public for whose benefit and purposes the damages are imposed? (2) Should evidence of a defendant's wealth be kept from the jury considering imposition of punitive damages, and be introduced only at post trial proceedings before the trial and reviewing courts? As hereinafter discussed, unless contrarily persuaded by further briefing of the parties, I would decide both issues affirmatively.
A. Concurrence Is Appropriate Under Existing Precedents
Although Justice Scalia's concurrence in Haslip complained the majority opinion would perpetuate “the uncertainty” of whether procedures of other states in assessing and reviewing punitive damages were “sufficiently ‘reasonable’ ” to meet due process standards, that prediction has not been particularly borne out. (499 U.S. at p. ––––, 111 S.Ct. at p. 1047.) Haslip has been construed as not proscribing multiple punitive damages schemes, varying from that of Alabama, in subsequent judicial decisions considering the question of whether due process is afforded to defendants. (See the analysis contained in Wollersheim v. Church of Scientology, supra, 4 Cal.App.4th at p. 1083, fn. 4, 6 Cal.Rptr.2d 532. California courts of appeal after Haslip have uniformly upheld the constitutionality of our punitive damages process. (Las Palmas Associates v. Las Palmas Center Associates (1991) 235 Cal.App.3d 1220, 1 Cal.Rptr.2d 301; Wollersheim v. Church of Scientology, supra, 4 Cal.App.4th at p. 1083, fn. 4, 6 Cal.Rptr.2d 532.
Our Supreme Court has denied review in Las Palmas after having previously expressly left open, in Adams v. Murakami (1991) 54 Cal.3d 105, 118–119, footnote 9, 284 Cal.Rptr. 318, 813 P.2d 1348, the issue (in view of Haslip 's remand of this case and others) of “whether the traditional California ‘passion and prejudice’ standard of review is constitutionally sufficient under Haslip ․” I believe concurrence is appropriate here in light of the actions of our Supreme Court—first in deciding Adams and, thereafter, in denying review and leaving published the decision of the Second District in Las Palmas.
I recognize some uncertainty may exist as to the effect of denial of review of a decision of the Court of Appeal by the Supreme Court while leaving that decision published. Many appellate courts have shared the view that “court of appeal decisions in which hearings were denied [are] weightier precedents than those in which no hearing was sought.” (9 Witkin, Cal. Procedure (3d ed. 1985) Appeal, § 775, pp. 743–745, and cases cited there.) The Advisory Committee's comment on California Rules of Court, rule 28, as amended May 6, 1985, citing People v. Davis (1905) 147 Cal. 346, 350, 81 P. 718 and People v. Triggs (1973) 8 Cal.3d 884, 890–891, 106 Cal.Rptr. 408, 506 P.2d 232, observes, inter alia, that “a denial of hearing is not an expression of the Supreme Court on the merits of the cause․ or on the correctness of any discussion in the Court of Appeal opinion.”
Davis states: “[T]he denial [of review] in any case ․ is not to be taken as an expression of any opinion by this court, or as the equivalent thereof, in regard to any matter of law involved in the case and not stated in the opinion of that court, nor, indeed, as an affirmative approval by this court of the propositions of law laid down in such opinion.” (147 Cal. at p. 350, 81 P. 718, emphasis added.)
Triggs added a caveat: “Preliminarily we declare that our refusal to grant a hearing in a particular case is to be given no [emphasis in original] weight insofar as it might be deemed that we have acquiesced in the law as enunciated in a published opinion of a Court of Appeal when such opinion is in conflict with the law as stated by this court [emphasis added].” (8 Cal.3d at p. 890, 106 Cal.Rptr. 408, 506 P.2d 232.)
In 1962, the Supreme Court took a “middle position which perhaps indicates a change of thought.” (9 Witkin, Cal. Procedure, op. cit. supra, Appeal, § 776, p. 746.) In DiGenova v. State Board of Education (1962) 57 Cal.2d 167, 178, 18 Cal.Rptr. 369, 367 P.2d 865, the court opined: “Although this court's denial of a hearing is not to be regarded as expressing approval of the propositions of law set forth in an opinion of the District Court of Appeal or as having the same authoritative effect as an earlier decision of this court ․, it does not follow that such a denial is without significance as to our views ․” (Emphasis added.) This emphasized statement has never been repudiated by our high court and has been repeatedly cited by the courts of appeal. (See, e.g., In re Eli F. (1989) 212 Cal.App.3d 228, 234–235, 260 Cal.Rptr. 453; People v. Jones (1991) 234 Cal.App.3d 1303, 1311, fn. 5, 286 Cal.Rptr. 163.)
Las Palmas is not “in conflict with the law” post Haslip (People v. Triggs, supra, 8 Cal.3d at p. 890, 106 Cal.Rptr. 408, 506 P.2d 232) since the Supreme Court in Adams reserved decision on the constitutionality of California's review standard for punitive damages awards (54 Cal.3d at p. 118, fn. 9, 284 Cal.Rptr. 318, 813 P.2d 1348); and the Supreme Court's denial of review of the Court of Appeal's published decision in Las Palmas, coming on the heels of Adams, is clearly not “without significance” as to the high court's views on, and its tacit approval of, the constitutionality of the procedure by which this state permits the imposition of punitive damages awards and provides for their review.2 In light of existing precedents, I, therefore, concur.
B. The Need for Reform
This case illustrates to an unusual degree the irrationality of California's punitive damages scheme. Its history is a classic example of the inconsistent, unpredictable, and whimsical manner in which punitive damages are required to be determined, reviewed, and paid.
1. The Bizarre History of This Case
The first jury hearing this case, in 1982, returned a compensatory damages verdict of $730,482.10 and awarded punitive damages of an equal amount. The trial court vacated the punitive damages award in its entirety, ruling insufficient evidence had been offered to support it: “Viewing the record as a whole, there is a lack of evidence of malice or oppression, and the Court is now of the opinion that it should not have submitted this issue to the jury at all.” (Emphasis added.) Citing the opinion of this court (Division Two) in Moore v. City & County of San Francisco (1970) 5 Cal.App.3d 728, 734, 85 Cal.Rptr. 281, the trial court granted a new trial on the punitive damages issue alone, misinterpreting Moore as precluding judgment notwithstanding the verdict on the punitive damages award because it believed such action would violate the rule against multiple judgments in a single action.3
A second jury and new judge heard the retrial of punitive damages in 1987. The plaintiffs, appearing with a different lawyer, relied on essentially the same evidence the first jury heard, some details of which were more extensive. The second jury returned a verdict for punitive damages against defendants in the sum of $11,000,000 ! The second trial judge remitted this award to $8,500,000.
We have examined the record and, for reasons announced by Justice Benson, have further remitted the total punitive damages awarded against defendants to $2,788,906.
Thus, the scoreboard on punitive damages on the same case, as to which the same principal facts relating to punitive damages were consistently established before finders of fact and reviewing courts, is:
These results make superfluous any further comment on the whimsy, irrationality, and utter unpredictability infecting punitive damages awards in this state. This situation, unless reformed, will obviously continue to exist in California under our punitive damages scheme, which apparently remains constitutionally intact after Haslip.
2. Controlling Windfalls to Plaintiffs
No case in California, however, has addressed an important and neglected issue: why an award of punitive damages, assessed in the public interest to punish and deter a defendant's outrageous and egregious conduct, and not to reward further a plaintiff who is made whole by the compensatory damages received, is uniformly paid to that plaintiff—thereby patently rewarding him, despite the constant disclaimer of reviewing courts that such result occurs or is intended.
An award of punitive damages in this state may well be, and frequently is, recognized by a reviewing trial court or appellate court as appropriate to punish the defendant for its conduct, since the award furthers the public purpose of addressing and deterring such conduct and, by that example, deters similar conduct of others. (Adams v. Murakami, supra, 54 Cal.3d at p. 110, 284 Cal.Rptr. 318, 813 P.2d 1348.) Yet such an award may concededly constitute an “ ‘excessive’ ” and undeserved windfall to the plaintiff, rewarded through receipt of such punitive damages. (Ibid.) The confidence of the public in a system where we systematically reject the purpose of punitive damages as the untoward enrichment or reward of a plaintiff, while enriching him nonetheless by allocating to him all punitive damages ultimately adjudged in the litigation in which he is involved, cannot long endure.
While this concern is unquestionably capable of legislative solution, none has been forthcoming. I, therefore, turn to an analysis of the availability and propriety of its solution by the courts.
3. Analyzing Haslip
In Haslip, the federal Supreme Court expressed a variety of views concerning the constitutionality of Alabama's punitive damages scheme, which was challenged “as the product of unbridled jury discretion and as violative of ․ due process rights.” (499 U.S. at p. ––––, 111 S.Ct. at p. 1037.)
The precise constitutional question in Haslip was whether the punitive damages assessed in that case, under Alabama law, violated the due process clause of the Fourteenth Amendment. “Unfortunately, the Court's opinion in [Haslip] did not make clear which elements of a system of awarding punitive damages are constitutionally necessary․ At the end of the opinion, all that is clear is that Alabama's system of awarding punitive damages is constitutional; it is unclear exactly why this is so or what other set of procedures would also meet the requirements of due process.” (The Supreme Court, 1990 Term—Leading Cases (1991) 105 Harv.L.Rev. 177, 225–226.)
However, in the various Haslip opinions, the members of the U.S. Supreme Court do appear to have reached unanimity on one point: They all recognized the power of state courts, as well as state legislatures, quite independently of federal due process concerns, “to restrict or abolish the common-law practice of punitive damages․” (499 U.S. at p. ––––, 111 S.Ct. at p. 1054 (conc. opn. of Scalia, J.).)
The majority opinion in Haslip recognized that Alabama's courts have restricted common law practices involving punitive damages by the standards judicially established for post trial appellate review by the Supreme Court of Alabama, which “surely are as specific as those adopted legislatively in [other states].” (499 U.S. at p. ––––, 111 S.Ct. at p. 1046.) “Were we sitting as state court judges, the size and recurring unpredictability of punitive damages awards might be a convincing argument to reconsider those [common law] rules or to urge a reexamination by the legislative authority.” (Id. at p. ––––, 111 S.Ct. at p. 1056 (conc. opn. of Kennedy, J.), emphasis added.) “I would require Alabama to adopt some method, either through its legislature or its courts, to constrain the discretion of juries in deciding whether or not to impose punitive damages and in fixing the amount of such awards.” (Id. at p. ––––, 111 S.Ct. at p. 1067 (dis. opn. of O'Connor, J.), emphasis added.)
4. From Haslip to Li: The Route to Reform
The view that reform of punitive damages is necessary, of course, is consistent with the rationale of our Supreme Court in the case of Li v. Yellow Cab Co. (1975) 13 Cal.3d 804, 828–829, 119 Cal.Rptr. 858, 532 P.2d 1226, in which the long standing and time honored “ ‘all or nothing’ ” rule of contributory negligence in this state, derived from the common law, was superseded by a new rule of comparative negligence, assessing tort liability in proportion to fault.
A precise parallel exists between contemporary criticism of the common law punitive damages scheme and the criticism of the common law defense of contributory negligence highlighted in Li. “ ‘[T]he process [of applying contributory negligence in assessing fault] is at best a haphazard and most unsatisfactory one’ ” (Li v. Yellow Cab Co., supra, 13 Cal.3d at p. 811, 119 Cal.Rptr. 858, 532 P.2d 1226); this is a statement doubly applicable to the punitive damages process in this state, where the size and unpredictability of such awards have reached alarming proportions.
The impediment Li saw to “public confidence in the ability of law and legal institutions to assign liability on a just and consistent basis” (13 Cal.3d at p. 812, 119 Cal.Rptr. 858, 532 P.2d 1226), on continued application of the doctrine of contributory negligence, unquestionably applies to the erosion of public confidence in the ability of the law and legal institutions to assign punitive damages on a just and consistent basis, as this case patently illustrates.4
Urging a change in the law of contributory negligence had to be legislatively, not judicially made, respondent in Li argued the enactment of section 1714 of the Civil Code in 1872 codified that doctrine, which had its genesis in the English common law, “render[ing] it invulnerable to attack in the courts except on constitutional grounds.” (13 Cal.3d at p. 813, 119 Cal.Rptr. 858, 532 P.2d 1226.) In rejecting this argument, Li held the enactment of Civil Code section 1714 (the foundation of the defense of contributory negligence), “as well as other sections of that Code declarative of the common law,” was not intended “to insulate the matters therein expressed from further judicial development; rather it was the intention of the Legislature [in 1872] to announce and formulate existing common law principles and definitions for purposes of orderly and concise presentation and with a distinct view toward continuing judicial evolution. ” (P. 814, 119 Cal.Rptr. 858, 532 P.2d 1226, emphasis added.)
Li concluded “that the time for a revision of the means for dealing with contributory fault in this state is long past due and that it lies within the province of this court to initiate the needed change by our decision in this case.” (13 Cal.3d at p. 826, 119 Cal.Rptr. 858, 532 P.2d 1226, emphasis added.) 5 That statement, in my view, is wholly applicable to the California punitive damages scheme.
Further, additional authority suggests that, aside from the common law evolution rationale of Li, courts have “inherent authority” to allocate punitive damages by directing the defendant against whom they are assessed to pay all or some portion thereof to entities other than plaintiff. (Fuller v. Preferred Risk Life Ins. Co., supra, 577 So.2d at pp. 886–887 (conc. opn. of Shores, J. [discussed post ] ).)
The Supreme Court's denial of review in Las Palmas clearly does not foreclose judicial reconsideration, on the Li rationale, of the important question of how a punitive damages award should be allocated. That question was never expressly considered in either Adams or Las Palmas.6
Both Adams and Las Palmas discuss the established California procedure of presenting evidence to a jury of a defendant's financial condition for its consideration in fixing punitive damages; and those cases may be urged to have foreclosed judicial modification of this procedure because of its implicit, if not express, approval attendant to such discussion.
Haslip, however, has approved as constitutionally sound a procedure where such evidence is restricted to post verdict consideration by reviewing trial and appellate courts, a far less inflammatory and more equitable process. I believe the evolving common law rationale of Li can and should be applied to reevaluate the procedure of presentation of proof of a defendant's wealth in our punitive damages scheme, even if it is assumed arguendo that the present procedure was directly or tacitly approved in Adams and Las Palmas.
This case should be utilized to evolve the common law punitive damages scheme in this state—first, by prospectively requiring such damages, after deductions hereinafter outlined, to be paid to the general fund of the State of California to benefit the public, for whose protection and aid they are always imposed; and second, by prospectively excluding evidence of defendant's wealth from the jury, but requiring such proof to be presented on post trial review of punitive damages awards by trial and appellate courts.
5. Courts in California in Appropriate Cases Should Be Authorized to Allocate All or a Portion of Punitive Damages to the Public Benefit
a. The Purpose of Punitive Damages
The purpose of punitive damages is starkly simple. They are assessed, when allowable, “for the sake of example and by way of punishing the defendant.” (Civ.Code, § 3294, subd. (a).) “ ‘The relevancy of such evidence [of the offending defendant's wealth] lies in the fact that punitive damages are not awarded for the purpose of rewarding the plaintiff but to punish the defendant.’ ” (Las Palmas Associates v. Las Palmas Center Associates, supra, 235 Cal.App.3d at p. 1243, 1 Cal.Rptr.2d 301, emphasis added.) “[T]he quintessence of punitive damages is to deter future misconduct by the defendant ․” (Adams v. Murakami, supra, 54 Cal.3d at p. 110, 284 Cal.Rptr. 318, 813 P.2d 1348, emphasis added.)
Our courts uniformly instruct juries, by contrast, that the compensatory damages the plaintiff receives are those sufficient to provide recovery for any and all legally compensable injuries incurred as a result of defendant's actions, the subject of the lawsuit. (See BAJI No. 14.00.)
The U.S. Supreme Court has equated a plaintiff's receipt of punitive damages to a “windfall recovery ․ likely to be both unpredictable and, at times, substantial․” (Newport v. Fact Concerts, Inc. (1981) 453 U.S. 247, 270–271, 101 S.Ct. 2748, 2761–2762, 69 L.Ed.2d 616.) That court has also stated punitive damages constitute “private fines levied by civil juries” furthering the objectives of government. (Gertz v. Robert Welch, Inc. (1974) 418 U.S. 323, 350, 94 S.Ct. 2997, 3012, 41 L.Ed.2d 789.)
Despite the avowed purpose of punitive damages, and particularly the disclaimer of Las Palmas and all cases dealing with the subject, that they are not awarded for the purpose of rewarding the plaintiff, the California plaintiff is, in fact, always the only one rewarded, as in this case, with a windfall frequently exceeding that produced by a winning lottery ticket.
Punitive damages are, in theory, assessed for the public purpose of protecting society from the malicious and oppressive acts of defendants by thereby punishing them, and concomitantly deterring them and others similarly situated from repetition of that conduct. It is time to take that theory seriously. If the plaintiff has already been made whole by his compensatory damages award, as our law provides, and if he is not to be rewarded through acquisition of punitive damages, why, logically, should he receive the punitive damages “windfall”? Whether labeled reward or “windfall,” the money received from the defendant to further a legitimate public interest, in frequently huge amounts, winds up in the bank account of the plaintiff while our courts persist in the fiction he is not thereby rewarded. The longevity of this practice does not lend it continuing credibility in light of the present-day reality of the frequency and amounts of punitive damages awards.
b. Allocation of Punitive Damages Where Necessary to Avoid a Windfall to Plaintiff While Vindicating the Public Interest in Punishing and Deterring Defendant's Conduct
A federal court decision in Kansas and a series of opinions from the Alabama Supreme Court have undertaken innovative steps in avoiding, or recommending avoidance of, the types of windfall characteristic of punitive damages awards to plaintiffs in California.
In Miller v. Cudahy Co. (D.Kan.1984) 592 F.Supp. 976, 1006, the United States District Court sat in equity, deciding the “indifferent, persistent maintenance of a nuisance [destruction by intentional salt pollution of an aquifer which property owners depended on for ground water] ․ is an appropriate basis for imposition of [$10,000,000 in] punitive damages [under Kansas law].” The court, however, in recognition of the deterrent effect of punitive damages, reserved entry of judgment for that sum (and concomitant interest) dependent on defendants' post decision good faith efforts to define and remedy the pollution they caused; the court also warned that the failure of such efforts by defendants may “activate[ ]” the punitive damages judgment “in whole or in part.” (Id. at p. 1009.) The clear implication of this decision was, thus, that punitive damages, imposed to punish or deter, would be held in abeyance and perhaps remitted in whole or in part if defendants resolved the pollution problem for which they were sued.
Justice Shores of the Alabama Supreme Court, likewise, has written a significant opinion, in a special concurrence, involving a punitive damages award for $1,000,000 against a health and hospitalization insurer. She was joined by two justices in observing that “sometimes an award does constitute an undeserved windfall to the plaintiff,” a fact which “has no bearing on the question of whether the award exceeds an amount appropriate to punish the defendant for the wrong committed and to deter others from similar conduct in the future.” (Fuller v. Preferred Risk Life Ins. Co., supra, 577 So.2d at p. 886 (conc. opn. of Shores, J.).)
“If the court concludes that the amount is not so excessive as to deprive the defendant of his property in contravention of § 13, Ala. Constitution 1901,7 it nevertheless may also determine that it would be in the best interest of justice to require the plaintiff to accept less than all of the amount and to require the defendant to devote a part of the amount to such purposes as the court may determine would best serve the goals for which punitive damages are allowed in the first place: vindication of the public and deterrence to the defendant and to others who might commit similar wrongs in the future. In such cases the court has the discretion to order the defendant to devote a portion or all of the amount to efforts to eliminate the conditions that caused the plaintiff's injury.” (Fuller v. Preferred Risk Life Ins. Co., supra, 577 So.2d at p. 886 (conc. opn. of Shores, J.), citing Miller, supra, emphasis added.)
“In my opinion, the court may also order the defendant to pay part of the award either to the state general fund or to some special fund that serves a public purpose or advances the cause of justice. [Citations to the statutes of several states so providing.] [¶] The states just referred to allocate punitive damages pursuant to statute. The courts, however, have inherent authority to allocate punitive damages, with jurisdiction over both plaintiff and defendant, by reducing the amount that the plaintiff is to receive to less than the full amount of the verdict, and directing the defendant to pay a part of a punitive damages award to the state general fund or any special fund devoted to the furtherance of justice on behalf of all the people. To do so in proper cases could serve the purpose for which punitive damages were authorized to a greater degree than would allowing the plaintiff to receive the entire amount.” (Fuller v. Preferred Risk Life Ins. Co., supra, 577 So.2d at p. 887 (conc. opn. of Shores, J.), emphasis added.)
This position was reiterated by concurring members of the Alabama Supreme Court in two post Haslip cases—Principal Financial Group v. Thomas (Ala.1991) 585 So.2d 816, 819–820 (conc. opn. of Houston, J.); and Southern Life and Health v. Turner (Ala.1991) 586 So.2d 854, 859 (conc. opn. of Houston, J.).
I too believe the fiction that a huge, frequently multi-million dollar punitive damages award, wholly paid to a plaintiff, never rewards that plaintiff with an undeserved windfall defies common sense and should be wholly rejected in a modern judicial evolution of our common law damages scheme. (See Li v. Yellow Cab Co., supra, 13 Cal.3d at pp. 821–823, 119 Cal.Rptr. 858, 532 P.2d 1226.)
I do not, however, make the suggestion which the court in Las Palmas rejected: “that there should be a fixed ceiling on punitive damage liability regardless of whether that amount would punish and deter․” (235 Cal.App.3d at p. 1259, 1 Cal.Rptr.2d 301.)
I would instead find that the common law concept of punitive damages should be judicially evolved to make every punitive damages award in California mandatorily subject, on proper motion, to post trial review and disposition by the trial court, subject to a further review de novo 8 by appellate courts, both of which, while considering the established criteria for such review, should be required to make the following further analysis:
(1) For purposes of conditional additur, the court must consider whether the award is so insufficient it fails in the public interest to punish defendant adequately for the wrongful conduct committed, or to deter similar future conduct.
(2) For purposes of conditional remittitur, the court must consider whether the amount of the award deprives defendant of property without due process of law, by exceeding an amount required in the public interest to punish defendant adequately for the wrongful conduct committed, or to deter similar future conduct.
(3) If the court finds the amount of the award is not so excessive as to deprive defendant of property without due process of law, the court must determine what portion—if any—of the punitive damages award should be paid to the plaintiff, in compensation only for his reasonable costs and time as a litigant expended before and during trial, and allocable solely to plaintiff's claim for punitive damages. After payment of that sum to plaintiff, the court must order defendant to pay the balance of the punitive damages award, less payment therefrom of attorney fees as hereinafter set forth, to the general fund of the State of California for the benefit of the public, the vindication of whose interest justified the imposition of those punitive damages.9
c. Attorney Fees and Costs Considerations on Allocation of Punitive Damages Awards to Entities Other Than Plaintiff
Lawyers are entitled to reasonable monetary compensation for their professional efforts in successfully obtaining a judgment for punitive damages after long, grueling hours of preparation and trial. Consequently, when a court orders some portion of the punitive damages award it finally approves allocated to the general fund of the state,10 plaintiff's counsel responsible for the representation producing that award should first be paid therefrom for those costs expended for which the court finds neither the attorneys nor plaintiff have been reimbursed, the term “costs” not to include attorney fees.
Additionally, the court should order reasonable attorney fees to be first paid to plaintiff's attorneys from the punitive damages award as finally determined before any remainder sums therefrom are paid to the state general fund. In determining the reasonable amount of such fees, the court may consider, but should not be bound by, the terms of any fee agreement between plaintiff and counsel concerning the litigation as a whole or any phase of the litigation generating the punitive damages award. For purposes of determining a reasonable attorney fee, the court should mandatorily consider a punitive damages award as arising from an action where such fees should be paid only from the punitive damages recovery, if any; and Code of Civil Procedure section 1021.5, consequently, would be by its terms inapplicable to the court's determination of such fees.11
C. Evidence of the Wealth of the Defendant Should Be Excluded from the Jury's Consideration
A comparison of the Alabama punitive damages system discussed in Haslip and that of this state is instructive, in view of the conclusion of the Haslip majority, which found no federal constitutional infirmity in Alabama's punitive damages scheme. The main distinguishing feature of the Alabama and California schemes—noted prominently by the federal Supreme Court—is that juries in Alabama are prohibited from receiving evidence of defendant's wealth in assessing punitive damages. (Southern Life & Health Ins. Co. v. Whitman (Ala.1978) 358 So.2d 1025, 1026–1027.)12
Conversely, California demands that such proof be presented to the jury. “Also to be considered is the wealth of the particular defendant; obviously, the function of deterrence ․ will not be served if the wealth of the defendant allows him to absorb the award with little or no discomfort․” (Neal v. Farmers Ins. Exchange, supra, 21 Cal.3d at p. 928, 148 Cal.Rptr. 389, 582 P.2d 980; see BAJI No. 14.71 [“In arriving at any award of punitive damages, you are to consider the following: [¶] ․ [¶] (2) The amount of punitive damages which will have a deterrent effect on the defendant in the light of defendant's financial condition.” Emphasis added.].) Plaintiff, in California, has the burden of establishing defendant's financial condition at trial. (Adams v. Murakami, supra, 54 Cal.3d at p. 123, 284 Cal.Rptr. 318, 813 P.2d 1348.)
I agree that evidence of the defendant's financial condition must, under existing precedent, be examined and weighed by the jury in California's punitive damages scheme before final judgment is rendered. (Neal v. Farmers Ins. Exchange, supra, 21 Cal.3d at p. 928, 148 Cal.Rptr. 389, 582 P.2d 980; Bertero v. National General Corp. (1974) 13 Cal.3d 43, 65, 118 Cal.Rptr. 184, 529 P.2d 608.) Haslip teaches, however, that no constitutional proscription exists in the presentation of such evidence to a court, while excluding it from jury consideration.
I would hold that modern evolution of this common law doctrine (Li v. Yellow Cab Co., supra, 13 Cal.3d at pp. 821–823, 119 Cal.Rptr. 858, 532 P.2d 1226), equitable considerations, and common sense require that California prospectively adopt the practice of confining presentation of such evidence to post trial consideration by trial and appellate courts.
It is routine, today, for almost every complaint filed in the superior courts of this state to contain allegations supporting, and a prayer demanding, punitive damages. A defendant whose deep pockets are exposed by net worth statements of large sums is invariably faced with a “sock it to them—they can afford it” argument, as plaintiff's counsel blackboards and argues the relative insignificance of the amount of punitive damages he is requesting when measured against the defendant's proven wealth. The defendant's wealth—not his conduct—frequently becomes the principal, albeit implicit, rationale for any punitive damages award.
1. The Strange History of the Admissibility of Evidence of a Defendant's Wealth
All existing California authority allowing the introduction of evidence of the defendant's wealth to the jury, as relevant to the imposition of punitive damages, ultimately appears to be derived from the misinterpretation of ambiguous language in a single obscure slander case, Barkly v. Copeland (1887) 74 Cal. 1, 15 P. 307. In Barkly, the plaintiff had been accused by a rich man, the defendant Copeland, of being a cattle rustler. It appears that the accusation was in fact true; certainly numerous witnesses testified that Barkly was, to their certain knowledge, a cattle rustler. (Id. at pp. 3–4, 6, 15 P. 307.) The jury heard all the defense evidence as to Barkly's prior dealings with other people's cattle and awarded him damages of precisely $1. (Id. at p. 3, 15 P. 307.)
The major issues on appeal were evidentiary questions which need not concern us. However, the trial court also ruled that the plaintiff could not place before the jury evidence as to the defendant Copeland's wealth, which apparently exceeded $100,000, a very substantial sum at the time. (Barkly v. Copeland, supra, 74 Cal. at p. 7, 15 p. 307.) The Supreme Court held such evidence was admissible in a slander case, on the issue of compensatory damages: “In actions of slander and libel, such evidence has been held admissible in many of the states. [Citations.] [¶] Such evidence is admitted on the ground that defendant's wealth is an element in his social rank and influence, and therefore tends to show the extent of the injury suffered from defendant's words․” (Ibid.)
Almost as an afterthought, and perhaps in recognition that this rationale for admission of evidence of the defendant's wealth in a slander action was a bit unconvincing, the Supreme Court added: “[W]here punitive or exemplary damages are allowed [in a slander action], the evidence is admitted by which to graduate the punishment. [Citing a slander case from Connecticut.] In this case, if the jury had rejected the evidence of the mitigating circumstances [i.e., that many other people had told the defendant that plaintiff was a cattle rustler], it might have found punitive or exemplary damages.” (Barkly v. Copeland, supra, 74 Cal. at p. 7, 15 P. 307.)
History and common sense have long since swallowed up the anomalous holding of Barkly, that the defendant's wealth is admissible in any slander action. However, the “graduate the punishment” rubric, which appears to have been dictum, took on a life of its own, torn from its original context of a slander action in which evidence of the defendant's wealth was admissible in any event. (See, e.g., Greenberg v. Western Turf Assn. (1903) 140 Cal. 357, 364, 73 P. 1050 [Where plaintiff was wrongfully excluded from a racetrack, evidence of the defendant's wealth would be proper as relevant to punitive damages, “for the purpose of graduating the amount which it was proper to award.” Citing Barkly, supra.]; Marriott v. Williams (1908) 152 Cal. 705, 710, 93 P. 875 [“Hence it is proper to show [defendant's] wealth at the time of trial․”]; Coy v. Superior Court (1962) 58 Cal.2d 210, 222–223, 23 Cal.Rptr. 393, 373 P.2d 457 [tracing the notion, that evidence of the defendant's wealth is proper in a case alleging punitive damages, back to Barkly, Greenberg, andMarriott ]; Bertero v. National General Corp., supra, 13 Cal.3d at p. 65, 118 Cal.Rptr. 184, 529 P.2d 608 [following Coy and Marriott ]; Neal v. Farmers Ins. Exchange, supra, 21 Cal.3d at p. 928, 148 Cal.Rptr. 389, 582 P.2d 980 [following Bertero ].) What this examination of precedent reveals is that evidence of the defendant's wealth was independently admissible inBarkly, and once admitted might be used by the jury to “graduate the punishment”—whatever that meant. Subsequent cases simply repeated and distorted the Barkly slogan without recognizing its unique factual and legal context, and without acknowledging the prejudicial effect of such evidence when it would not otherwise be admissible. This is the actual route of mistake and misinterpretation—never actually discussed out of judicial embarrassment, yet perfectly clear from the case law—by which evidence of the defendant's wealth became admissible before the jury in California.
It must be conceded that prior decisions of our own court (Division Two) have also simply parroted the party line without meaningful analysis. For instance, in Wetherbee v. United Ins. Co. of America (1971) 18 Cal.App.3d 266, 270–271, 95 Cal.Rptr. 678, we also repeated the precept that “the jury was entitled to consider the wealth of the defendant” in the assessment of punitive damages. We did so based upon inappropriate citations to MacDonald v. Joslyn (1969) 275 Cal.App.2d 282, 79 Cal.Rptr. 707, in which evidence of the defendant's wealth did not go to the jury because there was no jury, and to Finney v. Lockhart (1950) 35 Cal.2d 161, 217 P.2d 19, in which there was apparently no evidence of the defendant's wealth before the jury either—but in which our Supreme Court did formulate the classic statement of the former highly deferential review of an award of punitive damages: There, our Supreme Court managed to uphold a punitive damages award which was 2,000 times the award of compensatory damages, where the defendant had committed the truly heinous offense of criticizing the quality of the plaintiff's dog food, as “unfit for canine consumption․” (Id. at p. 162, 217 P.2d 19.) One wonders what overriding societal goal was accomplished by such an award. In Wetherbee we also approved a punitive-to-compensatory damages ratio of about 200 to 1, opining that such a ratio was “identical” to the 2000 to 1 ratio in Finney—thus illustrating the truly lackadaisical nature of our scope of review under the old standard. (18 Cal.App.3d at p. 271, 95 Cal.Rptr. 678.)
2. The Reality of Prejudice from, and the Unreality of the Need for Evidence of, a Defendant's Wealth
Experience, however, has confirmed that juries are indeed quite likely to be prejudiced by evidence of the defendant's wealth. As our Supreme Court recently observed in Adams, supra, in the specific context of allocating the burden of proof as to wealth: “Under current Civil Code section 3295, subdivision (d), the jury is asked to decide at the same time whether to impose punitive damages and, if so, in what amount.” (54 Cal.3d at p. 121, 284 Cal.Rptr. 318, 813 P.2d 1348, emphasis in original.) Such evidence of wealth “may improperly taint the jury's decision whether to impose punitive damages in the first instance.” (Ibid.) “We need not blind ourselves to this reality of trial dynamics that is well understood by the bar and our colleagues on the trial bench.” (Ibid.; see also Las Palmas Associates v. Las Palmas Center Associates, supra, 235 Cal.App.3d at pp. 1242–1243, 1 Cal.Rptr.2d 301.)
The most perceptive scholarly examination of the problem remains that undertaken by the author of a 1931 Harvard Law Review article: “Punitive damages [under the present system] go to the private purse of an individual. A person who is to profit by the punishment of another is likely to prefer severe punishment to admonition which will best serve social ends, and the two are not necessarily synonymous. The plaintiff's position is analogous to that of the prosecuting attorney whose pay is determined by the number of convictions he is able to secure. Past experience seems to indicate that such prosecutors have a tendency to be more interested in sending people to the penitentiary than in punishing the guilty. The plaintiff in a punitive damage case not only profits by securing the admonition of the defendant; he profits more by heavy punishment than by light. So it would not be surprising if plaintiffs in punitive damages cases attempted to introduce evidence which might influence juries to give high awards and which has little or no bearing on the proper admonition of defendants.” (Morris, Punitive Damages in Tort Cases (1931) 44 Harv.L.Rev. 1173, 1178, emphasis added.)
“The reason usually assigned for this practice [of allowing evidence of the defendant's wealth] is that it aids the jury in determining how large the punitive damage award should be. The theory is that a penalty which would be sufficient to reform a poor man is likely to make little impression on a rich one; and therefore the richer the defendant is the larger the punitive damage award should be. But it is probable that this very evidence, instead of aiding the jury to assess a proper verdict, may prejudice them against the defendant and prevent an impartial judgment, not only on the size of the verdict, but in deciding who shall win the case. It is a good guess that rich men do not fare well before juries, and the more emphasis placed on their riches, the less well they fare.” (Morris, Punitive Damages in Tort Cases, supra, 44 Harv.L.Rev. at p. 1191.)
It is also critically important, in evaluating the necessity for a resort by the jury to such prejudicial and inflammatory evidence concerning the defendant's wealth, to note that California juries apparently had no trouble determining punitive damages awards for about 40 years prior to the deformation of the law which occurred, by mistake, when the Barkly case first made evidence of a defendant's wealth admissible. Moreover, for 15 years after the enactment in 1872 of Civil Code section 3294, which restated the prior California practice, such evidence of a defendant's wealth appears to have been inadmissible.
Finally, the practice in Alabama and other jurisdictions, of keeping evidence of wealth from the jury, demonstrates that such prejudicial evidence is not really necessary. Evidence of the defendant's wealth should, logically, be treated the same as evidence of the defendant's insurance coverage: It should be kept from the jury because it is irrelevant and overly prejudicial, in that it discloses the extent to which the defendant can or cannot bear the cost of a verdict, providing a strong temptation to a jury (whether consciously or not) to simply redistribute wealth without regard to the facts or law. Such evidence should be considered only by the trial court, as in Alabama, in ruling on any post trial motions concerning punitive damages. This practice would be consistent with Haslip. Such evidence of defendant's wealth would simply be treated and considered similarly to evidence of other verdicts, awards, and penalties against the defendant. A fair and nonprejudicial practice would be thus initiated, and an appropriate record made in the trial court, sufficient for purposes of due process and appellate review, eliminating the need and practice of instructing a California jury to concentrate on and consider how rich a defendant is before deciding whether to impose punitive damages.
Reform of the law of punitive damages is necessary in California to deal with what the federal Supreme Court has identified in Haslip as the most troubling problem with punitive damages awards—that “plaintiffs ․ enjoy a windfall because they have the good fortune to have a defendant with a deep pocket” (499 U.S. at p. ––––, 111 S.Ct. at p. 1045), and to eliminate the recognized taint of jury consideration of evidence of defendant's wealth in imposing such damages. The rationale for judicial imposition of such reforms is present in Li; the necessity for such judicial reform is equally if not more pressing than was the common law scheme of contributory negligence which Li addressed.13
I join my colleagues in all but one section of the lead opinion. I respectfully dissent from the part where they apply the previously unknown doctrine of “disparate ratios” to facts improperly reweighed, which results in a reduction of the punitive damages award. They do this without warning, briefing or cause ․ and, therefore, without me.
Jurors in the 1983 trial awarded compensatory damages of $42,000 to Steven Hilgedick (Hilgedick), $261,682 to Hilgedick Rental Company (Hilgedick Rental) and $426,000 to Pacific Manufacturing (Pacific). An aggregate award of about $730,000 in punitive damages fell to the grant of a defense motion for new trial, which was appealed by plaintiffs. The appeal was abandoned, and jurors in the 1987 retrial of punitive damages awarded Hilgedick $5 million, Hilgedick Rental $1 million and Pacific $5 million. The judge at the retrial reweighed the evidence on a motion for new trial, found the award excessive as to Hilgedick only and conditionally granted a new trial subject to Hilgedick's consent to a reduction by half, from $5 to $2.5 million.1 Hilgedick consented to the remittitur.
We review punitive damages awards to ensure that they substantially serve society's interest in punishing wrongdoing and thereby protecting the public from future misconduct, either by the same defendants or other potential wrongdoers. (Adams v. Murakami (1991) 54 Cal.3d 105, 110, 284 Cal.Rptr. 318, 813 P.2d 1348.) We reverse only where the award appears excessive as a matter of law or is so grossly disproportionate as to raise a presumption that it was a result of passion or prejudice. (Neal v. Farmers Ins. Exchange (1978) 21 Cal.3d 910, 927–928, 148 Cal.Rptr. 389, 582 P.2d 980.) Guidelines in that analysis are (1) the reprehensibility of the conduct, (2) the degree of actual harm it caused and (3) the defendant's wealth. (Id., at p. 928, 148 Cal.Rptr. 389, 582 P.2d 980.)
My colleagues find abundant evidence of a self-serving course of deceitful conduct by which defendants harmed not only plaintiffs but, through gross indifference to sales and payroll tax matters, the state and federal governments and an individual employee of Pacific Trencher. They also find the overall ratio of the punitive and compensatory awards (11.6 to 1) valid under established precedent. I concur up to that point.
However, they then invalidate the award because of disparity between the individual ratios of plaintiffs' punitive and compensatory awards. They find no problem with any of the three ratios individually, and I agree with that conclusion. However, my colleagues are offended by the comparative disparity, and to cure this supposed problem, they take the lowest of the three ratios and reduce the other two to match, gutting the total, already-remitted punitive award of $8.5 to less than $2.8 million. There is no legal precedent for such a reduction.
My first objection to the approach of the majority has to do with basic procedural fairness. To reverse a judgment on a ground which no party has advanced or been given an opportunity to brief violates state law (Gov.Code, § 68081; Adoption of Alexander S. (1988) 44 Cal.3d 857, 864–865, 245 Cal.Rptr. 1, 750 P.2d 778) and generates confusion about the actions of this court. This is especially true when the proposed ground is novel, as it is here.
Nowhere in the initial appeal, the state and federal high courts, or these remand proceedings has any party urged a problem of “disparate” ratios. They have raised disproportion between the total compensatory and punitive awards, but never comparative disparity in the individual awards. Nor was the theory suggested in our earlier, now-vacated opinion.
The first hint of it came from the bench during the most recent oral argument, when plaintiffs' counsel was asked about the ratios being different for each plaintiff. Counsel replied in part that defendants had never asked jurors to look at each plaintiff separately and that he did not understand the trial court's remittitur reasoning to require identical ratios. Suggestions at oral argument do not satisfy our mandate to allow parties an opportunity to respond through supplemental briefs. (Adoption of Alexander S., supra, 44 Cal.3d 857, 864, 245 Cal.Rptr. 1, 750 P.2d 778.) Our duty to review awards in light of the public interests they serve may justify raising issues on our own (see, e.g., Adams v. Murakami, supra, 54 Cal.3d 105, 115, fn. 5, 284 Cal.Rptr. 318, 813 P.2d 1348) but not without warning the parties and giving them a chance to submit supplemental briefs.
Nor is the issue somehow before us under the federal high court's remand direction to reconsider the case in light of Pacific Mut. Life Ins. Co. v. Haslip (1991) 499 U.S. 1, 111 S.Ct. 1032, 113 L.Ed.2d 1 (Haslip ). My colleagues correctly conclude that our state system of punitive damages is constitutional under Haslip (accord Wollersheim v. Church of Scientology (1992) 4 Cal.App.4th 1074, 1080–1094, 6 Cal.Rptr.2d 532; Las Palmas Associates v. Las Palmas Center Associates (1991) 235 Cal.App.3d 1220, 1257–1259, 1 Cal.Rptr.2d 301), and I do not understand them to say that “disparate ratios” create any constitutional problems. Even on a more basic issue of proving a defendant's financial condition, for example, our state Supreme Court has been careful to impose such a requirement based on state-law rather than constitutional grounds. (Adams v. Murakami, supra, 54 Cal.3d 105, 116–118, 284 Cal.Rptr. 318, 813 P.2d 1348.)
Therefore, my first objection is that a nearly $5 million reduction in the judgment is being accomplished by a new legal theory which the parties have been given no opportunity to brief.2
I also find no basis for disturbing the judgment on “comparative disparity” grounds. I recognize that a gross disparity in the ratio of damages awarded to different plaintiffs might, if not justified by the evidence and if all other factors were equal, suggest passion or prejudice, such as an irrational bias for one plaintiff over another. However, the trial judge in this case, reweighing the evidence on a motion for new trial, has already reduced the award here because of precisely that concern. Rather than defer to the trial judge, my colleagues undertake an unwarranted weighing of the evidence.
On review of a punitive damages award conditionally reduced as excessive on a motion for new trial, we presume the correctness of the order and uphold the remitted award “ ‘unless it plainly appears that [the trial judge] abused his discretion․’ ” (Neal v. Farmers Ins. Exchange, supra, 21 Cal.3d 910, 932–933, 148 Cal.Rptr. 389, 582 P.2d 980.) In all factual matters, we review for substantial evidence. Thus when there is a material conflict of evidence regarding the extent of damage, for instance, “ ‘the imputation of such abuse is repelled, the same as if the ground of the order were insufficiency of the evidence to justify the verdict.’ [Citations.] The reason for this is that the trial court, in ruling on the motion, sits not in an appellate capacity but as an independent trier of fact.” (Id., at p. 933, 148 Cal.Rptr. 389, 582 P.2d 980.)
The punitive-compensatory ratios in this case before the remittitur modification were about 4 to 1 for Hilgedick Rental, 12 to 1 for Pacific and 119 to 1 for Hilgedick. Concerned about the disparity between Hilgedick's ratio and the others, the judge found that the reprehensibility of defendants' conduct was “essentially the same” toward all three plaintiffs except for “some evidence to indicate a continuing course of reprehensible conduct towards Steven Hilgedick after the first jury trial.” However, in the judge's view the conduct between trials did not justify ratios 10 times higher than for Pacific and 30 times higher than for Hilgedick Rental. The court also felt that jurors may have been improperly swayed by the fact that Steven Hilgedick was a natural person while the others were companies. He therefore reduced Hilgedick's punitive award by half, making that ratio about 60 to 1 but leaving the other ratios as they were. (Fn. 1, ante.)
Our role in reviewing the modified judgment is to uphold it if it is supported by law and reasonable inferences and substantial evidence in the record as a whole. I find such support, and, thus no need to equalize the three ratios, for the following reasons.
First, I respect the trial judge's unique position to observe the jury. He was able to detect subtle tendencies such as the jury's improperly favoring a personal plaintiff over a commercial or corporate plaintiff. I presume that the reduction fully corrected this and any other problems found by him, acting with independent judgment as a thirteenth juror on the motion for new trial. (Code Civ.Proc., §§ 657, 662.5, subd. (b).)
Second, the judge found that the reprehensibility of defendants' conduct toward all three plaintiffs was “essentially the same with the exception that there was some evidence to indicate a continuing course of reprehensible conduct towards Steven Hilgedick after the first jury trial.” (Fn. 1, ante.) From this I gather two things: (1) defendants' conduct was “essentially,” not “exactly,” the same toward each plaintiff prior to the first trial; and (2) the continuing conduct toward Hilgedick afterward was an important difference.
The record confirms that defendants' conduct was only “essentially” the same toward each plaintiff before the first trial. Defendants' conduct in taking over and then financially destroying Pacific Trencher led, with roughly equal force, to the damage of all three plaintiffs, since all three depended on Pacific Trencher for their own success. However, it was Steven Hilgedick, the individual, whom defendants ousted from control and then falsely assured of helpful intentions while working the company's ruin, piece by piece, and making it impossible for him to get the credit and contracts he needed. It takes no detailed summary of the evidence to appreciate that their conduct before the first trial was significantly more reprehensible as to him than as to plaintiffs Hilgedick Rental and Pacific.
Post-first-trial conduct differed more dramatically. Part of this was because Pacific was driven out of business by September 1983, and Hilgedick Equipment, which Hilgedick formed to absorb and salvage what was left of Hilgedick Rental, met the same fate shortly after Hilgedick himself filed for Chapter 11 bankruptcy in June 1983. Only he was left.
The trial judge admitted this type of post-first-trial evidence on two grounds: first, as a course of conduct showing circumstantially that the earlier-adjudicated conduct was done with malice, and second, as showing the harm which the earlier conduct continued to cause.3 Both grounds were proper and are not challenged on appeal. Also, the trial judge in reweighing the evidence on the new trial motion was presumably aware that a continuing course of reprehensible conduct, as opposed to an isolated instance, dictates that a higher award is needed to deter. (See Moore v. American United Life Ins. Co. (1984) 150 Cal.App.3d 610, 637–638, 197 Cal.Rptr. 878.)
Thus the reprehensibility of defendants' conduct did differ in degree and kind between Hilgedick and the others. The judge found that those differences did not justify the disparate ratios handed down by the jury, but he impliedly found that they did justify some of the disparity remaining after remittitur.4
The trial judge on the motion was also entitled to consider intervening harm between the first and second trials. My colleagues sweep that evidence aside with the observation that jurors were not asked to decide whether the intervening conduct was itself wrongful. This is true but beside the point for two reasons. First, we are reviewing an award fixed by the trial judge exercising his independent judgment on the evidence on a new trial motion, not the award as rendered by the jury. Second, the post-first-trial evidence was admitted not to show new wrongful conduct, but to show harm which was a natural and probable consequence of conduct already found wrongful in the first trial (see fn. 3, ante ).
The fact that compensatory damages had been fixed at the first trial and could not be relitigated at the second did not prevent considering intervening harm in fixing punitive damages. Punitive damages must bear a reasonable relation to the actual harm caused by a defendant's reprehensible acts. The compensatory award is often, but not always, a reliable indicator of actual harm, and California law recognizes that distinction. In cases where some fortuity limits the compensatory damages to less than what a plaintiff has actually suffered, jurors may consider the full extent of actual harm. The ratio of punitive-to-compensatory damages may be upheld in those cases despite seeming disproportion. (See, e.g., Neal v. Farmers Ins. Exchange, supra, 21 Cal.3d 910, 928–929, 148 Cal.Rptr. 389, 582 P.2d 980 [a higher compensatory award was likely had the plaintiff not died before trial]; Werschkull v. United California Bank (1978) 85 Cal.App.3d 981, 1004–1005, 149 Cal.Rptr. 829 [jury finding of unspecified actual damages supported punitive damages for fiduciary's diversion of funds]; see also Gagnon v. Continental Casualty Co. (1989) 211 Cal.App.3d 1598, 1604–1605, 260 Cal.Rptr. 305, discussing precedent on awards of nominal damages and purely equitable relief.)
“The rule that the exemplary should bear a reasonable relation to the actual damages is only for the purpose of guarding against excess. [Citations.] ․ [T]here is no fixed ratio by which to determine the proper proportion between the two classes of damages.” (Finney v. Lockhart (1950) 35 Cal.2d 161, 164, 217 P.2d 19.) A compensatory award often fails to reflect the full harm and hence the full policy need to deter. “Thus, to meaningfully apply the ‘reasonable relation’ rule, the trier of fact (and reviewing court) should not focus on some bottom-line amount of an award of compensatory damages but on the nature and degree of the actual harm suffered by the plaintiff (and perhaps others). [Citation.]” (Gagnon v. Continental Casualty Co., supra, 211 Cal.App.3d 1598, 1604, 260 Cal.Rptr. 305.)
My colleagues concede as much when they conclude that the seven factors at issue under Alabama law in Haslip are consistent with California law. The first is “whether there is a reasonable relationship between the punitive damages award and the harm likely to result from the defendant's conduct as well as the harm that actually has occurred” (Haslip, supra, 499 U.S. 1, ––––, 111 S.Ct. 1032, 1045, 113 L.Ed.2d 1, 22), a standard which assumes that not all harm is reflected proportionally in a compensatory damage award.5 They also concede that harm to innocent third parties is a valid consideration (accord Wollersheim v. Church of Scientology, supra, 4 Cal.App. 4th 1074 at p. 1096, 6 Cal.Rptr.2d 532), a factor which is never reflected proportionally in a plaintiff's compensatory award. (See, e.g., Downey Savings & Loan Assn. v. Ohio Casualty Ins. Co. (1987) 189 Cal.App.3d 1072, 1098–1099, 234 Cal.Rptr. 835; Moore v. American United Life Ins. Co., supra, 150 Cal.App.3d 610, 637–638, 197 Cal.Rptr. 878; see also Haslip, supra, 499 U.S. at p. ––––, 111 S.Ct. at p. 1044, 113 L.Ed.2d at p. 21 [impact on innocent third parties a factor under Alabama law].) I do not understand why my colleagues ignore such evidence here.
Hilgedick suffered far greater actual harm than his $42,000 compensatory award reflected. The fortuity of a new trial order ultimately created a four-year gap before punitive damages were finally determined. Defendants had the benefit of showing that their net worth was $150 million, down from a stipulated $159 million at the first trial. Hilgedick was entitled to show the intervening impact of their reprehensible acts.
The compensatory award represented six months' back rent which defendants, who controlled Pacific Trencher, did not pay after Hilgedick in April 1981 gave them three-day notice to pay or quit the company's Washington Street premises. Their response was to shut Pacific Trencher down, firing all employees without notice, taking the books and liquidating all inventory. In the parking lot during the liquidation, Clarence Miller, who had discovered defendant's mistaken release of their security interest and had been pressuring Hilgedick to reinstate his personal guarantees, told him, “You know, you are never going to be able to afford this lawsuit.” Hilgedick was later served by defendants with notice of foreclosure on his properties in an amount over $2.25 million. His net worth in April 1981, when defendants placed Pacific Trencher in bankruptcy and caused him to lose his vice president position there, had been between $3.5 and $4.5 million. A year later, when he got the foreclosure notice, it was down to $1.5, less than the foreclosure amount.
The domino effect which defendants' maliciously motivated takeover and liquidation of Pacific Trencher would bring was barely set in motion by the first trial. Within months afterward, Hilgedick and both company plaintiffs would be out of business. Hilgedick tried to save the business of his sole proprietorship, Hilgedick Rental, by immediately forming the corporation Hilgedick Equipment. It was able to provide some work for Pacific, in which he was principal stockholder. However, the Pacific Trencher bankruptcy had precipitated “a stack of lawsuits” naming him and his business interests, with calamitous effects. Hilgedick had to defend each one, at great legal expense and trouble, even ones against Pacific Trencher for which he was able in the end to prevail on grounds that he held no interest in the company when the debts arose. At the same time, the Internal Revenue Service was on him “constantly,” wanting payment for withholding taxes which defendants failed to pay while controlling Pacific Trencher. (See Rest.2d Torts, § 908, com. e [the trier may consider that the plaintiff has been put to trouble and expense in protecting his interests, in this or other suits].) Suppliers suddenly denied him credit, operating strictly C.O.D. with his new company, and he could not get credit anywhere. He testified, it “devastated my ability to run the business.”
Pacific, meanwhile, suffered fallout by losing two contracts, worth $12.6 million, on which it had been low bidder, and all its government contract sources dried up. Some residual work for Lockheed remained and some new contracts were obtained. However, it was not enough to sustain the operation. Hilgedick and Steve Amarol were the only employees left by 1983, and they folded in September. Hilgedick Equipment was profitable for just six months. It shut down in June 1983 after Hilgedick, faced with imminent foreclosure, filed a Chapter 11 bankruptcy on the advice of counsel. He had tried to sell his condominium in Hayward but was unable to pass title. Defendants had a $1 million lien on the property and refused his offers to allow its sale. Hilgedick had to put everything he owned into the bankruptcy, and it remained there as of the second trial.
Substantial evidence supports an implied finding that the post-first-trial collapse of Pacific, Hilgedick Rental (and Hilgedick Equipment) and Hilgedick's own net worth all flowed naturally and probably from the reprehensible conduct which was the subject of the first trial. The court presumably took this into account when it created a reduced punitive-to-compensatory ratio of 60 to 1 for Hilgedick personally. The harm to him was far greater than it was to the other plaintiffs. It ruined him despite constant efforts to repair the damage. The court could also find that while his status as a real person did not legally distinguish him from the other plaintiffs, it did support a distinction in how defendants' conduct harmed him. He was, after all, the single live conduit through which defendants effected the ruin of all three.
Adding to that personal justification for a high ratio is the fact that a hundred or more jobs were lost through the ruin of these businesses, casting innocent third parties out of work, many without notice. Pacific had 30 to 40 employees. Pacific Trencher employed 30 to 40 in the Bay Area and another 30 to 35 in Los Angeles. Perhaps the most harm was to a Pacific Trencher secretary who was left with a $36,000 personal federal tax lien. Pacific Trencher had been taken over by defendants and so was not itself a plaintiff. The trial judge could logically view Hilgedick as the proper recipient of damages for harm to the Pacific Trencher employees since he spent most of his energies working at that business.
Given the record's substantial evidence of disparate reprehensibility and harm, I find support for the 60–to–1 ratio of Hilgedick's awards, despite the lesser ratios of 4 to 1 for Hilgedick Rental and 12 to 1 for Pacific.
The relatively minor disparity between the ratios for Hilgedick Rental and Pacific is easily justified. Hilgedick Rental went out of business earlier, its ongoing business being sound enough to be carried on for about a year thereafter by the entity Hilgedick Equipment, which apparently used many of the same employees.
The matter of defendants' financial condition appears to have been a neutral factor as to ratio disparity. The judge simply wrote, “it is obvious that the amount of punitive damages which will have a deterrent effect on the defendants in the light of defendants' financial condition does not differ between the different plaintiffs.” (Fn. 1, ante.) My colleagues seem to read into that sentence a finding that identical ratios for each plaintiff would suffice to deter. However, that would be contrary to everything else in the order, including the disparities which the trial judge let stand in his remitted award. To me, the sentence only says, somewhat awkwardly, that the financial position of defendants, and thus the amount needed overall to deter, was the same for all three plaintiffs. In other words, no plaintiff was affected by fewer than all defendants.
No abuse of discretion appears, and so I would uphold the remitted awards despite their ratio disparity.
Finally, even if I believed the disparity warranted a reversal of the awards, I find the course of action chosen by my colleagues to be baffling. My colleagues hack the award down to the lowest of the three ratios, finding “no sound public policy basis for the ratios [as to Hilgedick and Pacific] to exceed the ratio as to Hilgedick Rental.” (Lead opn., ante, p. 87.)
What sort of logic is this? Why assume that the lowest ratio is correct? Why not the middle ratio awarded to Pacific? If the concern is that the punitive damages are not properly apportioned between the plaintiffs, then why not average them all out? We have no power to reweigh the evidence on appeal. Only the trial judge, sitting as a thirteenth juror, had that right. (Holmes v. Southern Cal. Edison Co. (1947) 78 Cal.App.2d 43, 51–52, 177 P.2d 32.) My colleagues set new precedent, acting as jurors 14 and 15, and they do so based on an algebraic formula which assumes, against the evidence, that all three plaintiffs are identically situated.
Using the lowest ratio is not just arbitrary. It also seriously alters the deterrent effect of the award. The trial court's remitted award of $8.5 million is about 5.66 percent of net worth; my colleagues reduce it to about 1.86 percent.
“[T]he purpose of punitive damages is to penalize wrongdoers in a way that will deter them and others from repeating the wrongful conduct in the future․ ‘How much’ in punitive damages is enough to accomplish this purpose in a particular case is not susceptible of mathematical definition.” (Wyatt v. Union Mortgage Co. (1979) 24 Cal.3d 773, 790, 157 Cal.Rptr. 392, 598 P.2d 45, citations omitted.) My colleagues travel beyond mathematical definition, to algebraic precision.
The remitted award of 5.66 percent of net worth falls within acceptable limits. (Gerard v. Ross (1988) 204 Cal.App.3d 968, 979, 251 Cal.Rptr. 604 [5 1/2]; Goshgarian v. George (1984) 161 Cal.App.3d 1214, 1228, 208 Cal.Rptr. 321 [10.7%]; Burnett v. National Enquirer, Inc. (1983) 144 Cal.App.3d 991, 1012, 193 Cal.Rptr. 206 [remitted to 5.8%]; Zhadan v. Downtown Los Angeles Motor Distributors, Inc. (1979) 100 Cal.App.3d 821, 835, 161 Cal.Rptr. 225 [6.8%].) So do the punitive-to-compensatory ratios, even the 60–to–1 ratio for Hilgedick. (Neal v. Farmers Ins. Exchange, supra, 21 Cal.3d 910, 920, 148 Cal.Rptr. 389, 582 P.2d 980 [78:1]; Moore v. American United Life Ins. Co., supra, 150 Cal.App.3d 610, 636, 197 Cal.Rptr. 878 [83:1].)
Finding no abuse of discretion in the remitted award, I would modify the judgment as indicated in the unpublished part of this opinion, but otherwise affirm.
1. Plaintiffs appealed from the decision of the first trial judge granting defendants' motion for a new trial on the issue of exemplary damages. This appeal was later abandoned and the matter remanded to the trial court.
FOOTNOTE. See footnote *, ante.
FOOTNOTE. See footnote *, ante.
5. The Adams court expressed no opinion as to whether this traditional standard of review is constitutionally sufficient under Haslip, supra, 111 S.Ct. 1032. (Adams v. Murakami, supra, 54 Cal.3d at pp. 118–119, fn. 9, 284 Cal.Rptr. 318, 813 P.2d 1348.) We address this issue below. (Majority opn., post, pp. 90–91.)
6. As discussed below, we believe that in an appropriate case an appellate court may also consider the seven factors enumerated in Haslip, supra, 111 S.Ct. at p. 1045, in determining whether a particular award of punitive damages is excessive. (See majority opn., post, pp. 90–91.) In their supplemental briefing, however, defendants do not address the applicability of any of these factors except insofar as they are encompassed in the factors set forth in Adams and Neal.
7. These ratios are computed as follows:PlaintiffPunitive DamagesCompensatory DamagesRatio Hilgedick$1,000,000$261,682 3.82:1Rental Pacific$5,000,000$426,30011.73:1Manufacturing Steven$2,500,000$ 42,00059.52:1Hilgedick
8. Our dissenting colleague chastises us for improperly reweighing the evidence in this case. Not so. Our analysis relies on the trial court's express finding “defendants' conduct toward all three plaintiffs was essentially the same.” (Emphasis added.) Miraculously, the dissent transforms this finding into a finding “their conduct before the first trial was significantly more reprehensible as to [Hilgedick] than as to plaintiffs Hilgedick Rental and Pacific.” (Dis. opn., post, p. 107, emphasis added.)
9. The dissent asserts we should not have come to this resolution without requesting supplemental briefing from the parties. (Dis. opn., post, pp. 105–106.) We disagree. A court must request supplemental briefing “before it renders a decision which was not proposed or briefed by any party.” (Adoption of Alexander S. (1988) 44 Cal.3d 857, 865, 245 Cal.Rptr. 1, 750 P.2d 778; see also Gov.Code, § 68081.) In this case, however, the decision we reach was both proposed and briefed by the parties. Throughout their briefing in this matter—before this court, before the California Supreme Court, before the United States Supreme Court, and again before this court on remand—defendants have consistently argued that the punitive damage awards must be reversed or remitted because they are excessive as a matter of law. In making this argument, defendants have focused specifically on the asserted lack of a “ ‘reasonable relationship’ ” between the punitive damage awards and the compensatory damage awards. Our examination of the disparity in the ratios of punitive damages to compensatory damages is simply one approach to analyzing these issues and, therefore, no supplemental briefing is required. (See People v. Capps (1989) 215 Cal.App.3d 1112, 1123, fn. 6, 263 Cal.Rptr. 791.)
10. By stipulating to the amount of defendants' combined net worth, both plaintiffs and defendants drew the jury's attention to defendants' net worth as the appropriate measure of defendants' ability to pay a punitive damage award. By discussing the issue in terms of net worth, we express no opinion as to whether this is the best measure of a defendant's ability to pay. (See Adams v. Murakami, supra, 54 Cal.3d at p. 116, fn. 7, 284 Cal.Rptr. 318, 813 P.2d 1348.)
FOOTNOTE. ** See footnote *, ante.
1. The “second factor” utilized by reviewing courts in determining whether a punitive damages award is appropriate is the relationship between the amount of the award and the actual harm suffered. (Seeley v. Seymour (1987) 190 Cal.App.3d 844, 867–868, 237 Cal.Rptr. 282; accord, Neal v. Farmers Ins. Exchange (1978) 21 Cal.3d 910, 928, 148 Cal.Rptr. 389, 582 P.2d 980.) “This analysis ordinarily focuses upon the ratio of compensatory damages to punitive damages․” (Wollersheim v. Church of Scientology (1992) 4 Cal.App.4th 1074, 1094, 6 Cal.Rptr.2d 532), as Justice Benson has properly done in the circumstances of this case.
2. Although previous California cases have not expressly adopted all the factors listed in Haslip, it would certainly be permissible for a reviewing judge to receive evidence, on post trial motions directed to a punitive damages award, of any previous civil penalty awards and criminal sanctions defendant has suffered for the same conduct. However, such evidence should never go to the jury. Its prejudicial effect would obviously far outweigh its probative value. (Evid.Code, § 352.) Moreover, as hereinafter discussed, my view is that the reviewing judge must also consider the impact of the award on the plaintiff, by deciding whether the damages, assessed for a public purpose and not to reward the plaintiff, nevertheless provide plaintiff with an undeserved windfall.
3. See, on the contrary, Beavers v. Allstate Ins. Co. (1990) 225 Cal.App.3d 310, 332, 274 Cal.Rptr. 766, review denied [A partial judgment notwithstanding the verdict on some but not all issues is proper.].
4. “Recent years ․ have witnessed an explosion in the frequency and size of punitive damages awards. [Citations.] A recent study by the RAND Corporation found that punitive damages were assessed against one of every ten defendants who [was] found liable for compensatory damages in California. [Citation.] ․ The amounts ‘seem to be limited only by the ability of lawyers to string zeros together in drafting a complaint.’ [Citation.]” (Pacific Mut. Life Ins. Co. v. Haslip, supra, 499 U.S. at p. ––––, 111 S.Ct. at p. 1066 (dis. opn. of O'Connor, J.).) “Unheard of only 30 years ago, bad faith contract actions now account for a substantial percentage of all punitive damages awards. [Citation.]” (Ibid.)
5. While the common law assigned the function of determining punitive damages to the finder of fact, “That authority is not diminished by post-verdict review of the verdict by the trial court․ assigned that function at common law.” (Fuller v. Preferred Risk Life Ins. Co. (Ala.1991) 577 So.2d 878, 884.)
6. California cases holding punitive damages are not assignable because allowed “only to the immediate person injured ” (People v. Superior Court (Jayhill Corporation) (1973) 9 Cal.3d 283, 287, 107 Cal.Rptr. 192, 507 P.2d 1400, emphasis added; accord, French v. Orange County Inv. Corp. (1932) 125 Cal.App. 587, 591, 13 P.2d 1046; Murphy v. Allstate Ins. Co. (1976) 17 Cal.3d 937, 942, 132 Cal.Rptr. 424, 553 P.2d 584) do not preclude judicial modification of California's punitive damages scheme. Before Li, the common law doctrine of contributory negligence was repeatedly approved by our Supreme Court. Thus, prior decisions, that punitive damages are allowed “only to the immediate person injured,” are no more inimical to the evolution of the common law doctrine of punitive damages allocation than the hoary judicial adage, that the slightest contributory negligence barred plaintiff's recovery for defendant's negligence, was in the evolution of common law contributory negligence to a comparative negligence system in Li.
7. Compare article I, section 7, subdivision (a) of the California Constitution: “A person may not be deprived of ․ property without due process of law․”
8. I agree with Justice Benson's analysis that post Haslip constitutional due process requires more than appellate review of the lower court's post trial action on the usual deferential basis of confining the inquiry to whether substantial evidence supports the lower court's action. Appellate courts should independently review the award and disposition of punitive damages made in the trial court to insure due process.
9. The purposes of imposition of punitive damages—public vindication and deterrence of egregious conduct contrary to the public interest—indicate, in my view, that the Legislature, as the elected representatives of the public, should decide how such funds paid on that rationale should be expended from the state's general fund, in lieu of their disbursal on an ad hoc nonuniform basis by judges to various sources thought to serve a “public purpose” or to advance the “cause of justice.” (Fuller v. Preferred Risk Life Ins. Co., supra, 577 So.2d at p. 887 (conc. opn. of Shores, J.).)
10. The U.S. Supreme Court found it unnecessary to decide whether the excessive fines clause of the Eighth Amendment to the Constitution (“[E]xcessive fines [shall not be] imposed․”) applied only to criminal cases, in concluding that clause “does not constrain an award of money damages in a civil suit when the government neither has prosecuted the action nor has any right to receive a share of the damages awarded.” (Browning–Ferris Industries v. Kelco Disposal (1989) 492 U.S. 257, 264, 109 S.Ct. 2909, 2914, 106 L.Ed.2d 219.) The court, however, observed, “Although this Court has never considered an application of the Excessive Fines Clause, it has interpreted the [Eighth] Amendment in its entirety in a way which suggests that the Clause does not apply to a civil-jury award of punitive damages. Given that the Amendment is addressed to bail, fines, and punishments, our cases long have understood it to apply primarily, and perhaps exclusively, to criminal prosecutions and punishments. See, e.g., Ex parte Watkins, [32 U.S.] 7 Pet. 568, 573–574 [8 L.Ed. 786] (1833) ( ‘The eighth amendment is addressed to courts of the United States exercising criminal jurisdiction’)․” (Id. at pp. 262–263, 109 S.Ct. at pp. 2913–2914, emphasis added; see also Ingraham v. Wright (1977) 430 U.S. 651, 664, 97 S.Ct. 1401, 1408, 51 L.Ed.2d 711 [“Bail, fines, and punishment traditionally have been associated with the criminal process, and by subjecting the three to parallel limitations the text of the Amendment suggests an intention to limit the power of those entrusted with the criminal-law function of government.” Emphasis added.]; Fong Yue Ting v. United States (1893) 149 U.S. 698, 730, 13 S.Ct. 1016, 1028, 37 L.Ed. 905.)I do not regard the excessive fines clause of the Eighth Amendment as proscribing the allocation of all or a portion of a civil punitive damages award to the public treasury. Further, the same methodology which is constitutionally sufficient to guard against excessive punitive damages under the due process clause would be sufficient to guard against excessive fines.
11. Section 1021.5, California's private attorney general statute, provides for an award of attorney fees against opposing parties on enumerated conjunctive conditions, one of which is that the court awarding such fees find “such fees should not in the interest of justice be paid out of the recovery, if any.” (Emphasis added.)
12. Effective July 11, 1987, Alabama's Legislature enacted a $250,000 limit on punitive damages in most cases. (1987 Ala. Acts No. 87–185, §§ 1, 2, 4.) However, a majority of the Alabama Supreme Court subsequently invalidated similar legislative reforms of the law of punitive damages, ruling that only the courts could effect such changes. (Armstrong v. Roger's Outdoor Sports (Ala.1991) 581 So.2d 414.) Without expressing any view as to the propriety of this ruling by a majority of the Alabama Supreme Court, the Armstrong decision illustrates, at the very least, one of the problems with a policy of simply awaiting legislative reforms in this area. Under the California view as expressed in Li, of course, the courts and the Legislature are equally empowered to effect needed reforms to the common law as codified.
13. Application of a reformed doctrine on punitive damages in this case, and prospectively thereafter, would not work any injustice. In the present case, the compensatory damages award is ample to serve any need for compensation. The windfall to the plaintiffs from the punitive damages award is especially superfluous here, because the evidence of malice or oppression was rather dubious; and it appears the two juries were simply influenced by their reactions to the evidence as to the defendant's financial resources.
1. The court's order explains: “The ratio between punitive damages and compensatory damages in the matter of Hilgedick Rentals is approximately 4X; in the matter of Pacific Manufacturing, approximately 12X; and in the matter of Steven Hilgedick, more than 119X. The disparity between these ratios cannot be reconciled with the evidence adduced at trial, nor the law relating to the award of punitive damages. As set forth in BAJI 14.71, an instruction provided to the jury, the jury was to consider, in arriving at any award of punitive damages, the following:“1. The reprehensibility of the conduct of the defendant;“2. The amount of punitive damages which will have a deterrent effect on the defendant[s] in the light of defendants' financial condition;“3. That the punitive damages must bear a reasonable relation to the actual damages.“Applying these factors to the evidence presented to the jury ․: First, it is obvious that the amount of punitive damages which will have a deterrent effect on the defendants in the light of defendants' financial condition does not differ between the different plaintiffs. Second, as to the requirement that punitive damages must bear a reasonable relation to the actual damages, it is clear that the jury did not adopt the same relationship as to the different plaintiffs. Third, the reprehensibility of the defendants' conduct toward all three plaintiffs was essentially the same with the exception that there was some evidence to indicate a continuing course of reprehensible conduct towards Steven Hilgedick after the first jury trial.“Although it can be argued that defendants' conduct introduced into evidence relative to Steven Hilgedick between 1982 and 1987 can be the basis for increasing the award of punitive damages in favor of [him], the Court is of the opinion that those additional acts do not justify a ratio ten times higher than the punitive damages awarded to Pacific Manufacturing and 30 times higher than the ratio of punitive damages to compensatory damages awarded to Hilgedick Rentals.“The fact that Steven K. Hilgedick is a natural person and the other plaintiffs are companies may have influenced the jury. There is no basis in law for such a distinction being made especially in light of the fact that Steven K. Hilgedick was the sole owner of Hilgedick Rentals and owned almost all of the stock of Pacific Manufacturing.”
2. My colleagues feel that parties who simply raise the cry of “excessive damages” open the door for reversal on any unbriefed related ground. This is the majority's view even though its opinion involves a previously unannunciated legal rationale. Such an approach obliterates the fairness goal of the statute and could deprive us of critical legal and factual input needed to formulate and apply new law.
3. For example, in sustaining a defense objection, the judge explained in part: “I think the problem is that what—well, there are two things: One, what is the natural and probable result of the actions of the [defendants] which were adjudicated to be civil wrongs in the first trial? What were the natural and probable consequences of their acts that caused harm?“And that's why I let in the bankruptcy, because I think that is a natural and probable consequence of those acts. I think counsel, however, is correct in that the only way you can get in further acts would be to say this was continuing conduct to prove circumstantially that their conduct at the time, that their conduct in taking the acts which were the subject of the first trial were done maliciously.”Acting within his discretion (Evid. Code, § 352), the judge limited collateral inquiry, ruled the dollar amount of any bankruptcy claims inadmissible, and disallowed inquiry into the acts by the attorneys in the actual bankruptcy proceedings.
4. Citing language in the new trial order, my colleagues conclude that the trial judge improperly used post-first-trial conduct as an “independent basis” for imposing punitive damages (lead opn., ante, p. 86), rather than just circumstantial evidence of a prior course of conduct. I disagree. The order is presumed correct (Neal v. Farmers Ins. Exchange, supra, 21 Cal.3d 910, 932, 148 Cal.Rptr. 389, 582 P.2d 980), and nothing in it defeats that presumption. The order only says “it can be argued” that a continuing course of reprehensible conduct after the first trial justified increasing the award of punitive damages, though not to the 119–to–1 level rendered by the jury (fn. 1, ante ). The order does not embrace that theory; it only makes an assumption for sake of argument.
5. Their suggestion that triers may consider “actual harm” over “actual damages” only in special cases is unsupported. Actual “harm” from the defendant's reprehensible acts is what drives the public policy need to deter. (Neal v. Farmers Ins. Exchange, supra, 21 Cal.3d 910, 928, 148 Cal.Rptr. 389, 582 P.2d 980.) In a given case, some modification of the standard jury instruction may be needed to tell a jury that “actual damages” (BAJI No. 14.71) includes harm not reflected in the compensatory award (Gagnon v. Continental Casualty Co., supra, 211 Cal.App.3d 1598, 1605, 260 Cal.Rptr. 305), but the trial judge in this case is presumed to have known that when he reweighed the evidence.My colleagues are also mistaken to suggest, against that presumption, that the judge did not focus on harm beyond the compensatory award. That focus is clear from the evidentiary rulings (e.g., fn. 3, ante ) and from the position of plaintiffs' counsel. For example, counsel correctly argued to the jury, “I'm saying when you ․ are trying to measure proportionality, you can take into account what happened since 1982.”
BENSON, Associate Justice.