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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 in 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 new trial on the causes of action submitted to the court. The court granted defendants' motion for 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 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 judgment.
Defendants filed before the court presiding at the second exemplary damage trial, motions to vacate the judgment, for 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.
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 Trial
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 loses 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.
A. Whether there was Substantial Evidence to Support the Liability Award
The jury awarded Hilgedick $42,000, Pacific Manufacturing $426,800 and Hilgedick Rental $261,682.10 for a total award of $730,482.10. On appeal, defendants claim there was no substantial evidence to support the liability verdict on the cause of action for intentional interference with economic relations. “Accordingly, the scope of our review begins and ends with the determination whether, on the entire record, there is any substantial evidence, contradicted or uncontradicted, which will support the conclusions reached by the jury. In reviewing the voluminous record, we must examine all factual matters in the light most favorable to the prevailing parties and resolve all conflicts in support of the judgment.” (Kruse v. Bank of America (1988) 202 Cal.App.3d 38, 51; citations omitted.)
Defendants argue plaintiffs failed to prove the elements of any one of the three separate theories upon which the tort of intentional interference with economic relations may be based: inducement to breach a contract; interference with a contractual relationship or interference with a prospective economic advantage. (Shamblin v. Berge (1985) 166 Cal.App.3d 118, 122.) Defendants assert: first, Pacific Trencher did not breach any contract; second, Koehring Finance's actions in accordance with its own contracts with plaintiffs and with Pacific Trencher did not disrupt contractual relations nor deprive plaintiffs of possible economic benefits; and third, as a matter of law, defendants' actions were privileged by virtue of express contract rights and defendants' financial interest in Pacific Trencher.
Plaintiffs assert defendants disrupted the continuing contractual relationship among Pacific Trencher and all the plaintiffs. In addition plaintiffs claim defendants interfered with prospective economic advantage of Pacific Manufacturing.
First, we must point out that defendants offer this court very little in the way of evidence presented at the liability trial to support their contention that the verdict is not supported by the evidence. Plaintiffs chide defendants for citing to evidence presented at the second trial on the issue of exemplary damages rather than evidence offered at the liability phase. Plaintiffs, however, have not followed their own advice and are guilty of the same infraction. In determining each issue raised concerning the liability trial we shall refer only to evidence presented at that trial.
Defendants cite to the following testimony of Hilgedick presented at the liability trial: he owned 92 percent of the stock of Pacific Manufacturing; during the summer of 1980 Pacific Trencher was having problems paying Koehring Finance for equipment in inventory; and he understood that under the terms of the subordination agreement which he signed as part of the loan documents he had no right to be repaid his $450,000 loan to Pacific Trencher until Koehring Finance was paid in full. Defendants also cite to the following documentary evidence admitted at the first trial: the written guarantees of Pacific Trencher's loan signed by Hilgedick, Pacific Manufacturing and Hilgedick Rental Company; Hilgedick's agreement pledging his stock in Pacific Trencher as security for the loan; and the blanket security agreement covering all inventory, equipment and other assets of Pacific Trencher also securing the loan.
Defendants also maintain plaintiffs failed to establish interference with prospective economic advantage since plaintiffs could not reasonably anticipate future economic benefits because any business losses suffered by plaintiffs were contemplated by the parties and were a bargained-for part of the agreements securing the loan. Defendants rely on Buckaloo v. Johnson (1975) 14 Cal.3d 815, 827, for the proposition that to prevail a plaintiff must show it could reasonably anticipate future economic benefits.
Lastly, defendants argue their actions were privileged. Defendants cite Dryden v. Tri-Valley Growers (1977) 65 Cal.App.3d 990, 996, for the rule that no actionable wrong is committed where a defendant's acts consist of something which he had an absolute right to do. In support of the assertion of privilege, defendants offer Imperial Ice Co. v. Rossier (1941) 18 Cal.2d 33, 37 and Lawless v. Brotherhood of Painters (1956) 143 Cal.App.2d 474, 478, for the principle that where two parties have separate contracts with a third party, each may insist its contract be performed even if that insistence causes a breach of the other contract. Defendants also contend their actions were privileged because they had a financial interest in Pacific Trencher. (Chicago Title Ins. Co. v. Great Western Financial Corp. (1968) 69 Cal.2d 305, 319; Lowell v. Mother's Cake & Cookie Co. (1978) 79 Cal.App.3d 13, 18.)
Plaintiffs assert they presented sufficient evidence from which the jury could find defendants intentionally interfered with plaintiffs' prospective economic advantage. The elements of this tort are: “(1) an economic relationship between the plaintiff and some third party, with the probability of future economic benefit to the plaintiff; (2) the defendant's knowledge of the relationship; (3) intentional acts on the part of the defendant designed to disrupt the relationship; (4) actual disruption of the relationship; and (5) economic harm to the plaintiff proximately caused by the acts of the defendant.” (Youst v. Longo (1987) 43 Cal.3d 64, 71, fn. 6.)
At the liability trial defendants stipulated to the following as a proper instruction to the jury: “To find liability for interference with business relations, you the jury must find from a preponderance of the evidence, that: [¶] (1) There existed business relationships or expectations with the probability of future economic benefit for the plaintiffs; [¶] (2) defendants Koehring Company and Koehring Finance Corporation, at the time they committed the acts complained of, knew of such relationships or expectations, or should have known of them; [¶] (3) but for the conduct of said defendants, plaintiffs were reasonably certain to have continued the business relationships or to have entered into relationships which offered advantages to plaintiffs; [¶] (4) the conduct of said defendants was intentional and unreasonable; and [¶] (5) that as a direct and proximate result, plaintiffs suffered damage.”
We agree with plaintiff there was sufficient evidence presented to the jury from which the jury could determine defendants interfered with Hilgedick's, Hilgedick Rental's and Pacific Manufacturing's business relationships with Pacific Trencher and further interfered with Pacific Manufacturing's prospective economic advantage. We reach this conclusion with little or no help from the appellate briefs filed by plaintiffs. We agree with defendants these briefs fail to focus on the elements of the tort or the evidence related to each element. We shall discuss the evidence with respect to each plaintiff separately.
The jury awarded Hilgedick personally $42,000. This is the amount of rent due from Pacific Trencher to Hilgedick for the Washington Street premises for the months of November 1980 through April 1981 at the rate of $7,000 per month which he claimed and defendants admitted was not paid. Since the jury did not award Hilgedick any money for the promissory notes of Pacific Trencher in the amount of $450,000 we need not discuss arguments of the parties concerning this issue.
The loan agreement between Pacific Trencher and defendants provided in paragraph 6.4 that Pacific Trencher would be allowed to pay its “reasonable expenses incurred in the ordinary course of business,” including Hilgedick's salary and lease payments to Hilgedick of $7,000 per month on the Washington Street premises. In their opening brief on appeal, defendants argue that under the assignment of rents signed by Hilgedick, defendants had a right to collect the $7,000 per month rent and apply it to Pacific Trencher's indebtedness. Plaintiffs argue in their reply brief that defendants offered no evidence at the first trial to support their assertions that plaintiffs were not entitled to be paid in accordance with their contracts with Pacific Trencher and assert this court should not consider these unsupported arguments. Defendants, in their reply brief then cite to exhibit 22, tab 12, the assignment of rents, which they claim was introduced at the first trial as support for their argument.2
The record concerning assignment of rents at the first trial is as follows: (1) defendants' trial brief does not mention the document; (2) the clerk's exhibit record does not mention the assignment of rents; (3) exhibit 22 is described in the clerk's exhibit record as “Loan agreement between Pacific Trencher and Koehring Finance”; (4) the clerk's exhibit record does not list exhibit 22 as a group exhibit although exhibits 12 and 37 are listed as group exhibits; (5) defendants introduced into evidence each of the other documents which were purportedly part of the loan package group exhibit; the loan agreement, the promissory note, the security agreement, the assignment of stock, the stock pledge agreement and the subordination agreement as exhibits 523 through 528; (6) exhibit 22 was a plaintiffs' exhibit yet no reason has been shown why plaintiffs would introduce the assignment of rents; (7) there was no testimony concerning the assignment of rents introduced at the first trial; (8) no argument was made to the jury concerning the assignment of rents at the first trial; (9) defendants made no mention of the assignment of rents in their motion for judgment notwithstanding the verdict although they made arguments about the guarantees, stock assignment, subordination agreement and deeds of trust; and (10) defendants did not seek to have the exhibits from the first trial made part of the record on appeal as provided in California Rules of Court, rule 10(d). The only suggestion in the record that exhibit 22 contained more than one document is a question by defense counsel which refers to exhibit 22 as the “loan documents.” Even if we were to assume the assignment of rents were contained in exhibit 22, we do not see how a jury could have dealt with the document absent any testimony, argument or instruction concerning the document, particularly when they had before them the specific provision in the loan agreement that the rent would be paid. We conclude there was sufficient evidence before the jury that defendants caused Pacific Trencher to breach the lease terms by not paying rent to support the award of $42,000 to Hilgedick.
There was also evidence Hilgedick Rental was entitled to receive rental payments from Pacific Trencher but that defendants caused it to breach that agreement. Certainly these rental payments were reasonable expenses incurred in the ordinary course of business as contemplated by section 6.4 of the loan agreement. Hilgedick described how the business relationship operated. Hilgedick Rental purchased the equipment and made it available for Pacific Trencher to rent to customers. When Pacific Trencher rented the equipment, it paid Hilgedick Rental company a fee. Hilgedick further testified that during the summer of 1980, defendants and Hilgedick orally agreed that Hilgedick Rental would be paid only enough of the rental fees by Pacific Trencher so that it could pay the entities financing the purchase of the equipment. After defendants took over management of Pacific Trencher, Lackenbauer instructed Mullins not to make any payments to Hilgedick Rental until there was “receipt of cash resulting from the [sale] of the product.” Of course, the products were for rent, not sale. Lackenbauer further testified he understood Hilgedick was not in the business of selling equipment but of renting it to Pacific Trencher which would in turn rent it to customers. He also recognized that failure to pay Hilgedick Rental for use of the equipment would eliminate the ability of Hilgedick Rental to pay the people who financed the purchase of the equipment. Hilgedick testified the equipment was repossessed. In closing argument, defendants made no claim of a contract right or privilege to refuse payments to Hilgedick Rental but merely argued it was reasonable to withhold the payment in light of the cash shortage because Hilgedick had guaranteed the loan to Pacific Trencher. There was sufficient evidence from which the jury could find that defendants interfered with the business relationship between Hilgedick Rental and Pacific Trencher.
It was undisputed at trial that Pacific Trencher had been billed by Pacific Manufacturing about $160,000 for four P-40 trenchers purchased by Pacific Trencher from Pacific Manufacturing, that Pacific Trencher was directed by defendants not to pay for the trenchers, and that this loss of money to Pacific Manufacturing impacted its ability to receive government contracts. The total amount owed was about $200,000, including parts and service on the trenchers. Each invoice represented only the cost of the trencher to Pacific Manufacturing, that is, the direct labor cost and the overhead attributable to that trencher. The invoice was sent and was to be paid immediately upon completion of the work on a specific trencher. At the end of the year Pacific Manufacturing would bill Pacific Trencher for its profit in an amount equal to 10 percent of the total costs billed to Pacific Trencher for that year. No invoice for profit was introduced at the trial. Defendants asserted no contractual right to withhold payments to Pacific Manufacturing.
Defendants' only defense to this claim was that Pacific Trencher had received the trenchers and the invoices six to nine months before defendants took over Pacific Trencher and defendants merely carried on the policy previously established by Hilgedick of not paying Pacific Manufacturing and that Pacific Manufacturing had also guaranteed the loan to Pacific Trencher. There was no evidence Pacific Manufacturer suffered cash flow problems when Hilgedick failed to pay for the P-40 trenchers. After defendants took over Pacific Trencher, Hilgedick asked that Pacific Manufacturing be paid for the P-40 trenchers. When defendants failed to pay for the trenchers, this caused severe cash flow problems which made it impossible for Pacific Manufacturing to receive government contracts. There was sufficient evidence from which the jury could determine defendants interfered with Pacific Manufacturing's prospective economic advantage.
Defendants also argue on appeal that under the subordination agreement, they had the right not to make payments to Hilgedick and Hilgedick Rental because that agreement also provided that Hilgedick assigned all his contract rights with Pacific Trencher to defendants. This argument was not made in the trial court. Furthermore, the only testimony concerning the subordination agreement presented at the first trial was that the agreement provided that Hilgedick would not be paid on the $450,000 promissory notes of Pacific Trencher to him. The subordination agreement itself is unclear whether it refers only to the $450,000 promissory notes or to all contract rights of Hilgedick. Absent any evidence as to the meaning of the agreement, the jury was justified in determining the subordination agreement governed payment of the promissory notes only.
Defendants' next arguments concerning justification and privilege are also without merit. Defendants' assertion that their acts were privileged as a matter of law is incorrect. Privilege and justification are questions of facts for the trier of fact. (Lowell v. Mother's Cake & Cookie Co., supra, 79 Cal.App.3d at pp. 20-21.) Restatement of Torts section 767, comment d “spells out that ‘the question on the issue of privilege is whether the actor's conduct was fair and reasonable under the circumstances․' ” (Id. at p. 21; italics omitted.) As further explained in Lowell, “The unjustifiability or wrongfulness of the act may consist of the methods used and/or the purpose or motive of the actor․ [I]t is underscored that the cases involving interference with prospective business advantage ‘ “have turned almost entirely upon the defendant's motive or purpose, and the means by which he has sought to accomplish it. As in the case of interference with contract, any manner of intentional invasion of the plaintiff's interests may be sufficient if the purpose is not a privileged one․” ’ ” (Id. at p. 18; citations and italics omitted.)
Defendants' reliance on Imperial Ice Co. v. Rossier, supra, 18 Cal.2d 33, is misplaced. The justification at issue in that case was one concerning the privilege available to a competitor who interferes with another's economic relations so long as the methods used do not involve wrongful conduct. (Id. at pp. 38-39.) Lawless v. Brotherhood of Painters, supra, 143 Cal.App.2d 474, is also distinguishable. In Lawless the court recognized that one who is in a confidential relationship with a party who has contracted with a third party is privileged to induce the breach of that contract. There, an international labor union was found to have a confidential relationship with its local union. The court also found the acts of the international union were justified because the purpose of the union was to attain a legitimate labor objective. (Id. at p. 478.) Here, defendants were not in competition with Pacific Trencher nor did they have a confidential relationship with that entity. No public policy is involved in this case.
Defendants also claim a privilege for their actions on the grounds of financial interest in Pacific Trencher. We are inclined to believe this privilege does not apply since defendants made a loan to, not an investment in, Pacific Trencher. But even if the privilege were applicable, it would be a qualified one which turns on defendants' predominant purpose in acting as it did. (Lowell v. Mother's Cake & Cookie Co., supra, 79 Cal.App.3d at pp. 21-22.) Here, again there was ample evidence put before the jury which would support an implied finding that defendants' purpose was wrongful.
Plaintiffs offered evidence from which the jury could infer defendants real purposes behind their acts were: first, to force Hilgedick to sell their products no matter what the cost to Pacific Trencher and to plaintiffs so that Koehring Company did not have to take back its equipment in a softening market all the while knowing defendants could receive payment by the guarantors if their acts caused the demise of Pacific Trencher; second, by delaying liquidation of Pacific Trencher, thus causing interest charges to mount, in order to allow Koehring Company time to find a new distributor for Northern California and to protect defendants' second UCC-1 filing from challenge in case of Pacific Trencher's bankruptcy.
Defendants characterize plaintiffs' argument that delay in liquidating Pacific Trencher made it unable to ever pay plaintiffs as nothing more than a claim by creditors of Pacific Trencher which plaintiffs lack standing to pursue. Defendants' reliance on Kruse v. Bank of America, supra, 202 Cal.App.3d 38, is misplaced. Kruse also failed to prove any interference by a third party; only two parties were involved. (Id. at p. 66.) Smith v. Tele-communication. Inc. (1982) 134 Cal.App.3d 338, 342, also relied on by defendants, is inapposite. This is not a derivative suit brought to enforce a cause of action which the corporation itself possesses but rather a suit by third parties seeking damages for interference with their economic relations with Pacific Trencher.
Defendants' other arguments on appeal deal with the second trial on the issue of exemplary damages or with certain provisions of the judgment entered after that trial. These arguments will be dealt with in a later section dealing with the second trial.
A. Whether Damages Could be Awarded in the Declaratory Relief Action
In their appeal from the portion of the judgment dealing with the liability trial, plaintiffs first assert the trial judge erred in awarding defendants $1,986,025 on plaintiffs' declaratory relief action which was tried to the court. Plaintiffs argue defendants sought no affirmative relief in the action and plaintiffs' declaratory relief cause of action did not put damages in issue. Plaintiffs rely on the rule that where a defendant has not sought monetary damages or filed a cross-complaint it may not receive affirmative relief. (McDougald v. Argonaut Land etc. Co. (1897) 117 Cal. 87, 95; Millgee Investment Co. v. Friedrich (1967) 254 Cal.App.2d 802, 807.)
Plaintiffs' first cause of action for declaratory relief sought a determination from the court that Koehring Finance's election to exercise Hilgedick's assignment of stock in Pacific Trencher and the voting of that stock to oust Hilgedick from control of the company together with Koehring Finance's termination of its security interest in the assets of Pacific Trencher, constituted an election on its part to accept the stock in full satisfaction of all obligations of plaintiffs to defendants exonerating plaintiffs from any obligations as guarantors of any indebtedness of Pacific Trencher to defendants. Plaintiffs' prayer sought a declaration that plaintiffs were exonerated on their guarantees.
Defendants admitted the existence of the dispute in their answer. In their prayer, defendants sought the following relief with respect to the declaratory relief cause of action: “For an order and decree establishing that the unlimited guarantees of Hilgedick and his companies are valid and enforceable by [Koehring Finance]”; and “For an order and decree establishing that [Koehring Finance] holds a valid and enforceable lien upon the real property described in the complaint.”
The judgment provided in pertinent part: “[T]he deeds of trust and other security documents executed by the plaintiffs in March, 1980 are valid and enforceable against plaintiffs to the extent of the amount owing to defendants in March 31, 1981, $1,986,025․”
Defendants claim plaintiffs' cases (McDonald and Millgee, supra ) are inapposite since in those cases plaintiffs' declaratory relief causes of action did not put affirmative relief at issue and no evidence was adduced at trial to support an award of damages. Defendants rely on cases in which the pleadings embraced the issue of damages and/or the issue was actually litigated. (California Bank v. Diamond (1956) 144 Cal.App.2d 387, 390, [plaintiff's prayer sought a declaration of liability and the amount of damages was alleged in the complaint and not disputed]; MacIsaac v. Pozzo (1945) 26 Cal.2d 809, 813-814, [failure to seek proper relief is not fatal to a cause of action; defendants should have been granted leave to amend after the court granted judgment on the pleadings]; Westerholm v. 20th Century Ins. Co. (1976) 58 Cal.App.3d 628, 630-631 [facts concerning issue of damages stipulated to by parties at trial].
We agree with plaintiffs that the issue of damages owed by plaintiffs to defendants was not put in issue by the pleadings and the issue was not tried in the liability trial. The record here does not support the proposition that the issue was raised by the pleadings or was litigated in the trial court. Nothing in the law requires a party to seek monetary damages in a declaratory relief action. “The salutary purpose of the declaratory relief provisions is to permit a prompt adjudication of the respective rights and obligations of the parties in order to relieve them from uncertainty and insecurity with respect to rights, status and other legal relations․ It enables a party to get a prompt adjudication without a dispute over the damages suffered. (Lortz v. Connell (1969) 273 Cal.App.2d 286, 301; citations omitted.)
Defendants also argue plaintiffs waived their right to raise this issue on appeal. Defendants first cite a sentence in plaintiffs' memorandum in support of their motion for preliminary injunction to the effect that the trial court would have to determine their liability to Koehring Finance. This statement cannot substitute for an allegation in a pleading nor does it constitute an agreement to try the issue.
Defendants cite to a single piece of evidence, their summary of amounts due from Pacific Trencher to defendants during the relevant period (Exh. 561), and point out that plaintiffs failed to object to this evidence at trial. This evidence, however, was not objectionable. It was admissible to show that at all relevant times Pacific Trencher was indebted to defendants, a fact relied on by defendants to support their theory of defense that their acts were privileged and justifiable because they were exercising their contractual rights to withhold payments to plaintiffs given them in the event of Pacific Trencher's default on loan payments. “[E]vidence which is relevant to an issue actually raised by the pleadings cannot be considered as authorizing the determination of an issue not presented.” (George Arakelian Farms, Inc. v. Agricultural Labor Relations Bd. (1986) 186 Cal.App.3d 94, 104, citations and italics omitted.)
Lastly, defendants maintain plaintiffs have waived their right to raise the issue on appeal by not raising the point in the trial court. Defendants claim plaintiffs had to raise in the trial court the “defect” in defendants' pleadings, i.e., the failure of the cross-complaint to seek damages. (Viglione v. City & County of S.F. (1952) 109 Cal.App.2d 158, 160.) Defendants again cite cases where the parties litigated the issue in the trial court and then sought to raise a defect in the pleading of that issue on appeal. (Cockerell v. Title Ins. & Trust Co. (1954) 42 Cal.2d 284, 288; Fischer v. Ostby (1954) 127 Cal.App.2d 528, 530.) That is not what happened here. Since we have determined the issue of damages not only was not pleaded but also was not litigated at the trial, the cases relied on by defendants are inapposite. Defendants' waiver argument is not meritorious.
B. The Validity of the Security Documents
Plaintiffs next assert that even if the guarantees were valid, defendants were not entitled to what plaintiffs label a “deficiency” judgment. First, plaintiffs argue defendants were not entitled to a deficiency judgment because defendants had not sold the stock in Pacific Trencher. Plaintiffs cite Foto v. Bussell (1919) 45 Cal.App. 281, 283, for the proposition that in order to obtain a deficiency judgment there must be a sale of the collateral and absent a sale there can be no deficiency and, therefore, no deficiency judgment.
Defendants accurately reply that plaintiffs' argument assumes defendants had the stock transferred to their name in satisfaction of Pacific Trencher's debt to defendants. Defendants correctly read Foto to hold that under Civil Code section 2819, the transfer of the stock to the name of the creditor on the company's books and the voting of that stock by the creditor does not constitute acceptance of the collateral in satisfaction of the debt. (Id. at p. 283.) Cases from other jurisdictions have reached the same result under the Uniform Commercial Code (UCC). (Wisconics Engineering, Inc. v. Fisher (1984) 466 N.E.2d 745, 766; Fletcher v. Cobuzzi (W.D.Pa.1980) 499 F.Supp. 694, 698-699; McCullough v. Mobiland, Inc. (1976) 228 S.E.2d 146, 148.) Except in the clearest of cases, the determination of whether a secured party has retained collateral in satisfaction of the debt is a factual question. (Wisconics Engineering, Inc. v. Fisher, supra, at p. 764.) Plaintiffs do not challenge the trial court's factual findings that there was no evidence of defendants' intent to retain the stock in lieu of the debt and that there was no evidence defendants gave the required notice of intent to do so under UCC section 9505. On the contrary, the evidence showed defendants offered the stock back to Hilgedick even though the debt to Koehring Finance had not been paid. We conclude there is no merit to this argument.
Plaintiffs also contend there could be no deficiency judgment because defendants failed to give notice as required under the UCC of election to accept the collateral as discharge of the debt under section 9505, subdivision (2) or notice of decision to sell the collateral under section 9504, subdivision (3). The sale plaintiffs refer to in this argument is the sale of the inventory of Pacific Trencher after Koehring Finance took over management of the company. Plaintiffs treat these sales of inventory as being made by Koehring Finance rather than by Pacific Trencher. This argument fails for three reasons. First, the issue was not raised in the trial court. Whether the sales of inventory were made by Koehring Finance or by Pacific Trencher is a factual question. (Grossman v. Lippson (1978) 81 Cal.App.3d 554, 559.) The issue may not be raised for the first time on appeal. (Parker v. City of Fountain Valley (1981) 127 Cal.App.3d 99, 117.) Second, what evidence was presented on the issue shows that Hilgedick, not Koehring Finance, sold the equipment in inventory. Third, the provisions of UCC section 9504 pertain to sales by the secured creditor, not by the debtor. (Krueger v. Bank of America (1983) 145 Cal.App.3d 204, 214.) Under the UCC, guarantors are debtors. (Connolly v. Bank of Sonoma County (1986) 184 Cal.App.3d 1119, 1125.)
Lastly, plaintiffs maintain defendants did not conduct the sale of collateral in a commercially reasonable manner and this unreasonableness gives plaintiffs an absolute defense against any deficiency judgment under UCC section 9503, subdivision (3). (Atlas Thrift Co. v. Horan (1972) 27 Cal.App.3d 999, 1009.) This assertion is based upon the same sales of Pacific Trencher's inventory by Hilgedick and fails for the same three reasons given in response to plaintiffs' argument that Koehring Finance sold the inventory.
In the trial court, plaintiffs also argued the guarantees were exonerated under the suretyship defense provided by Civil Code section 2918 and UCC section 3606. These arguments are not made on appeal and we treat them as abandoned.
Because it is likely defendants will pursue a damage action based upon the security documents, we feel compelled to add that in such an action the parties may not relitigate the validity of the guarantees and deeds of trust which secured Pacific Trencher's loan, the issue of whether defendants complied with the provisions of the UCC or the issue of a suretyship defense. These issues were all litigated in the liability trial. The only issue not litigated in the present action was the amount of money owed by Pacific Trencher to defendants. We express this concern because in their reply brief, plaintiffs state that had they believed defendants had a cause of action for damages against them they would have presented evidence “including the circumstances surrounding the guarantee (and the attendant agreements regarding rent, etc.; ․) as well as the significance of Hilgedick's revocation of the guarantee.” To the extent this evidence would demonstrate the validity or invalidity of the guarantees and trust deeds or defendants' right to any judgment at all on the issues we have discussed, plaintiffs may not relitigate the issues.
The trial court did not err in finding the guarantees and deeds of trust were valid and enforceable against the guarantors.
C. The Breach of Contract Cause of Action
Plaintiffs' fifth cause of action alleges Koehring Finance breached the “guarantees by wrongfully refusing to acknowledge the termination and exoneration of said guarantees by reason of the actions of said defendants” after October 6, 1980, including the exercise of their rights under the stock pledge agreement, taking control of the Board of Directors of Pacific Trencher, directing the business activities of the company, terminating their security interest in the company's assets, crippling the company and causing it to file a petition for relief in bankruptcy. This cause of action seeks monetary damages and attorneys' fees in accordance with the attorneys' fees clause in the guarantees.
On appeal, plaintiffs argue these actions of defendants violated the duty of good faith contained in UCC section 1203 3 in that defendants, without disclosing they no longer had a security interest in the assets of Pacific Trencher, took over the company, responded to inquiries whether they intended to liquidate the company with false statements they had no such intent, milked the company of all its assets and put the company into bankruptcy.
Defendants respond that plaintiffs ignore the limited scope of the fifth cause of action which alleges only that defendants breached the guarantees by “refusing to acknowledge the termination and exoneration of said guarantees.” Defendants correctly cite to the finding of the trial court which states:
“[T]he fifth cause of action alleges that defendants ‘breached the contracts evidenced by guarantees by wrongfully refusing to acknowledge the termination and exoneration of said guarantees' and by ‘refusing to release the deeds of trust.’ [¶] As pointed out above, defendants' actions did not extinguish the liens; therefore, the claims of these two causes of action [the second seeking to quiet title and fifth] must fail, except as limited below.” Since we have affirmed the decision of the trial court finding the guarantees and deeds of trust valid and enforceable, we conclude the trial court was also correct in its decision on the fifth cause of action.
D. The Tort of Bad Faith
Plaintiffs next urge that the trial court erred in granting defendants' motion for nonsuit on the fourth cause of action for bad faith breach of contract. By amendment made after trial, plaintiffs added to the fourth cause of action paragraph 59 which seeks exemplary damages on the grounds that defendants' conduct was “wilful, oppressive and in derogation of the public interest in corporate responsibility toward those who are dependent on a corporation's good faith” thus making it clear that the cause of action is for tortious breach of the duty of good faith. Indeed, on appeal plaintiffs argue the trial court erred in granting nonsuit “on the tort of bad faith.”
Plaintiffs argue that the bad faith tort exists where the defendant commits bad faith acts extraneous to the contract with the motive of intentionally frustrating the plaintiff's enjoyment of contract rights. (Sawyer v. Bank of America (1978) 83 Cal.App.3d 135, 139.) Plaintiffs assert this test is met here where defendants' course of conduct destroyed Pacific Trencher because defendants had lost their security interest through their own negligence and needed to find another way to protect themselves. Plaintiffs advocate a narrow reading of Foley v. Interactive Data Corp. (1988) 47 Cal.3d 654, that is, that the tort is not available in employment contracts.
Defendants note that the cause of action fails to identify the specific contract upon which the cause of action is based. In their reply brief, plaintiffs identify the guarantees as the contracts referred to in the fourth cause of action.
An allegation of breach of the covenant must be an allegation of breach of an obligation arising out of the contract itself. (Foley v. Interactive Data Corp., supra, at p. 690.) The guarantees signed by each plaintiff provided that Koehring Finance had the right to proceed against that guarantor without first attempting to collect the amounts due from Pacific Trencher. Although, Foley was concerned with the breach of the implied duty of good faith and fair dealing in the employment context, its discussion concerning the protection afforded by the implied covenant is instructive on the issue before us. The Court stated the purpose of the implied covenant is to “protect the express covenants or promises of the contract, not to protect some general public policy interest not directly tied to the contract's purposes.” (Id. at p. 690.) The implied covenant cannot be given more protection than that provided to express and implied-in-fact promises in contracts. The covenant protects “only the parties' right to receive the benefit of their agreement.” It cannot be read to impose another duty on a party to the contract. Nor does the motive of the breaching party bear on the scope of damages that may be recovered for breach of a contract. (Id. at pp. 698-699.) We reject plaintiffs' suggestion that we construe the implied covenant in the guarantees to create a duty on the part of Koehring Finance so as to prevent the guarantors from having to pay in accordance with the terms of the agreement.
Moreover, Foley distinguishes insurance contracts from contracts of employment in part because the employee does not seek a “different kind of financial security than those entering a typical commercial contract. (Id. at p. 692.) Clearly, it is the tenor of the opinion that tort remedies should not readily be extended to commercial contracts. Here, there is no special relationship between Koehring Finance and the guarantors and the purpose of the contract was commercial profit; there is no public purpose involved.
In Price v. Wells Fargo Bank (1989) 213 Cal.App.3d 465, the first division of this court affirmed the granting of summary judgment in favor of the bank on a cause of action for tortious breach of the duty of good faith in an action brought by borrowers. The borrowers essentially argued the implied covenant created a duty of the bank of reasonable forebearance in enforcing its creditor's remedies. The court held: “Contracts are enforceable at law according to their terms. The covenant of good faith and fair dealing operates as a kind of ‘safety valve’ to which judges may turn to fill gaps and qualify or limit rights and duties otherwise arising under rules of law and specific contract language. (Foley v. Interactive Data Corp., supra, 47 Cal.3d 654, 684, quoting Summers, The General Duty of Good Faith -Its Recognition and Conceptualization (1982) 67 Cornell L.Rev. 810, 812.) It does not impose any affirmative duty of moderation in the enforcement of legal rights.” (Price, supra, at p. 479; internal quotation marks omitted.) In Mitsui Manufacturers Bank v. Superior Court (1989) 212 Cal.App.3d 726, plaintiffs sought tort damages for breach of the implied covenant by the bank which reneged on alleged oral agreements to renew short term credit to plaintiffs. The court held that absent a relationship roughly equivalent to the fiduciary relationship of an insured and insurer and a showing that contract damages are inadequate such an action does not exist. (Id. at pp. 732-733.)
Plaintiffs' reliance on Cohen v. Ratinoff (1983) 147 Cal.App.3d 321, is misplaced. That case decided that a landlord's alleged unreasonable refusal to consent to an assignment of a commercial lease could be the basis of a tort cause of action for breach of the duty of good faith and fair dealing. That holding is based upon the public policy against unreasonable restraints on alienation. In Kendall v. Ernest Pestana, Inc. (1985) 40 Cal.3d 488, 497, footnote 11, our Supreme Court adopted the Cohen position to allow a cause of action for contract damages for unreasonable refusal to consent to an assignment but noted that it was not expressing any view on the merits of a claim for punitive damages based on such an allegation. The Court commented not every breach of the implied covenant of good faith in a commercial contract gives rise to an action in tort, citing Seaman's Direct Buying Service, Inc. v. Standard Oil Co. (1984) 36 Cal.3d 752, 768. We conclude the trial court was correct in granting nonsuit on the fourth cause of action.
The Second Trial
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 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.
A. Sufficiency of Evidence to Support Exemplary Damages Award
Defendants first claim there was no substantial evidence of malicious conduct to justify an award of exemplary damages. The gist of their argument is that a plaintiff must show an intent to vex, injure or annoy or a conscious disregard of plaintiffs' rights. (Neal v. Farmers Ins. Exchange (1978) 21 Cal.3d 910, 922.) An evil motive must be shown. (G.D. Searle & Co. v. Superior Court (1975 49 Cal.App.3d 22, 29-30.)
Here, defendants argue, they presented evidence they believed their actions were in accordance with the rights granted them in the loan agreements and their motivation in acting was to protect their financial interests in a manner permitted by these agreements. It is not enough, defendants declare, for plaintiffs to show intent to do an act plus knowledge that plaintiffs will be injured by the acts. (Silberg v. California Life Ins. Co. (1974) 11 Cal.3d 452, 462-463.) According to defendants, plaintiffs showed only that defendants acted to protect their own economic interests and disregarded plaintiffs' interests. This showing is insufficient as a matter of law since this evidence falls far short of the requisite “ ‘act conceived in the spirit of mischief or with criminal indifference towards the obligations owed to others.’ ” (Taylor v. Superior Court (1979) 24 Cal.3d 890, 894.)
Defendants claim plaintiffs argued at trial the intent to injure them had been established in the first trial and defendants' disregard of plaintiffs' rights was enough to show conscious disregard. Defendants view this argument as reading out of the law the required animus malus by substituting conscious disregard in place of malice.
Here, defendants say, they could not reasonably foresee their wrongful acts were in “conscious disregard” of plaintiffs' rights. Such foreseeability is a condition precedent to any conscious disregard of individual rights. (Bartling v. Glendale Adventist Medical Center (1986) 184 Cal.App.3d 961, 970.)
We begin with a brief summary of our standard of review and the law concerning exemplary damages. “To justify an award of punitive damages the defendant must be guilty of oppression, fraud or malice and must act with the intent to vex, injure or annoy, or with a conscious disregard of plaintiff's rights.” (Fenlon v. Brock (1989) 216 Cal.App.3d 1174, 1178-1179.) Where defendants challenge an award of exemplary damages on the ground there is insufficient evidence to support such an award, “[o]ur review begins and ends with a determination of whether there is any substantial evidence, contradicted or uncontradicted, which supports the jury's conclusion.” We view the record as a whole in the light most favorable to the judgment. (Id. at p. 1179.)
The wording of Civil Code section 3294 in effect at the time of trial defined malice to include “conduct which is carried on by the defendant with a conscious disregard of the rights or safety of others” and oppression to mean “subjecting a person to cruel and unjust hardship in conscious disregard of that person's rights.” “Evidence establishing conscious disregard is evidence indicating that the defendant was aware of the probable consequences of his or her acts and willfully and deliberately failed to avoid those consequences.” (Duffy v. Cavalier (1989) 210 Cal.App.3d 1514, 1535; citations and internal quotation marks omitted.) More than the commission of a tort is necessary to support an award of exemplary damages. The requisite quality of intent required to award punitive damages in the context of the case before us is the wilful and deliberate failure to take steps necessary to avoid the adverse consequences of the unwarranted interference with the rights of the plaintiffs. (Weisman v. Blue Shield of California (1984) 163 Cal.App.3d 61, 67.) The showing required has previously been explained by division five of this court: “Punitive damages are proper only when the tortious conduct rises to levels of extreme indifference to the plaintiff's rights, a level which decent citizens should not have to tolerate. The jury's decision to award punitive damages is entitled to great weight, but we must review the entire record to see if there is substantial evidence from which the jury could conclude that the acts of defendant reached the level of outrage and reprehensibility to justify the award․ [¶] ․ However, something more than the mere commission of a tort is always required for punitive damages.” (Flyer's Body Shop Profit Sharing Plan v. Ticor Title Ins. Co. (1986) 185 Cal.App.3d 1149, 1154; citations and internal quotation marks omitted; Hughes v. Blue Cross of Northern California (1989) 215 Cal.App.3d 832, 847.)
The intent required to be shown to prove interference with prospective economic advantage is that the acts which caused the interference were committed with the design to disrupt the formation of the prospective economic relationship. (Fisher v. San Pedro Peninsula Hospital (1989) 214 Cal.App.3d 590, 619.) Thus, the intent necessary to prove the tort and the state of mind necessary to support exemplary damages are not the same. The fact that the first jury found defendants' acts intentional and unreasonable without more would not support an award of punitive damages.
“Conscious disregard can be established by ‘evidence indicating that the defendant was aware of the probable consequences of his or her acts and willfully and deliberately failed to avoid those consequences.’ The defendant must act with the ‘intent to vex, injure, or annoy, or with a conscious disregard of the plaintiff's rights.’ The common element necessary to find malice and oppression is the ‘evil motive’ of defendant. Actual malice necessary for an award of punitive damages may be inferred from the circumstances of the case.” (Slater v. Textron, Inc. (1989) 214 Cal.App.3d 967, 978; citations omitted, emphasis in original.)
We are not faced with the situation presented in Bartling v. Glendale Adventist Medical Center, supra, 184 Cal.App.3d 961, relied on by defendants. There, the court held that the hospital could not have foreseen that it could have been held liable for refusing to terminate medical treatment at the request of a competent person who was being kept alive by a mechanical ventilator since courts had not yet determined the validity of a living will. The court held there was no conscious disregard of the patient's rights at the time the hospital made its decision. (Id. at p. 969.) Here, the law concerning interference with prospective economic advantage was well established at the time Koehring Finance refused to allow Pacific Trencher to honor its contractual duties to plaintiffs.
Plaintiffs offered sufficient evidence from which the jury could have determined Koehring Finance's motives for its acts were wrongful. Plaintiffs stressed to the jury: that Koehring Finance took over Pacific Trencher and milked the company of its assets in order to cover up for its negligence in releasing its security interest in the company's assets; and that Koehring Finance made sure Hilgedick did not receive any money so that he would not have the resources to challenge Koehring Finance's actions by legal actions. Ample evidence was also presented from which the jury could have inferred malice in the unreasonable refusal to allow Pacific Trencher to guarantee the government contract of Pacific Manufacturing and the refusal to pay Hilgedick Rental rent for the equipment which Pacific Trencher rented to customers. Plaintiffs argued to the jury that Lackenbauer “slipped” in his testimony when he said he did not consider putting Pacific Trencher into bankruptcy when Koehring Finance took over because “In a bankruptcy we would certainly not be paid from the proceeds of Pacific Trencher.” Plaintiffs' counsel asserted the only way this would be true would be if Lackenbauer knew at the time Koehring Finance took over Pacific Trencher that Koehring Finance had lost its security interest.
There was sufficient evidence of malicious conduct to support an award of exemplary damages.
B. Instructional Error Concerning the Intent Necessary to Support Exemplary Damages
Defendants maintain the trial court committed prejudicial error in instructing the second jury that they must accept as already determined by the first jury that “[t]he conduct of Defendants was intentional and unreasonable” and then instructing that punitive damages could be awarded upon a finding of malice and that “ ‘[m]alice’ means conduct which is intended by the Defendant to cause injury to the Plaintiff.” Defendants argue that the two instructions together virtually directed a verdict for the plaintiffs on the issue of intent. They do not argue either instruction by itself is incorrect. Indeed, they could not since the instruction to the first jury on the elements of the tort of interference with prospective economic advantage (including the required element that defendants' conduct was intentional and unreasonable) was stipulated to by defendants. The punitive damage instruction given tracked the language of Civil Code section 3294 and BAJI 14.71 as they read at the time of trial.
Defendants do object to the rereading of the instruction on the elements of the tort of interference with prospective economic relations to the second jury to inform that jury of the findings of the first jury. The second jury was instructed as follows: “plaintiffs have already been awarded damages sufficient to compensate them for any and all legally compensable injuries incurred as a result of Defendants' actions which are the subject of this lawsuit. You are to consider whether or not you should award additional damages against the Defendants, called punitive damages, only for the sake of example and by way of punishment. You may in your discretion award such damages, if, but only if, you find that by a preponderance of the evidence that said Defendants were guilty of malice or oppression in the conduct on which the prior jury based its finding of liability.” This instruction was followed by the definitions of malice and oppression contained in section 3294 as it then provided. We believe the jury was adequately informed it had to make additional determinations about the state of mind of defendants which were not made by the first jury. Moreover, it was not error to inform the second jury of the findings necessarily included in the determination of the first jury. (See Code Civ.Proc., § 1911.)
Defendants complain that plaintiffs' counsel used these instructions to argue to the jury that since the first jury had determined defendants intended to cause the injury to plaintiffs, plaintiffs necessarily were entitled to punitive damages. Of course, it is possible such an argument could mislead a jury but that is not how we read plaintiffs' argument to the jury. Plaintiffs' counsel informed the jury that although it had been established that defendants intentionally interfered with the business relationships of the plaintiffs, malice or oppression must also be shown to obtain punitive damages. Counsel then argued that it was unclear to him how these defendants could intend to interfere with plaintiffs' prospective economic advantage but not intend to injure plaintiffs. He gave the jury examples of defenses that could make that distinction such as where a person said I slapped another person on the back but I did not intend to injure the person. Counsel explained the two prongs of the test for malice; intent to injure and conscious disregard of others' rights and the requirement to show oppression. Counsel again explained that intent to interfere and conscious disregard of others rights are two different standards in the law but then commented that he had a hard time distinguishing one from the other in the context of this case and would look forward to defense counsel's comments on the point.
Defense counsel, for whatever reason, never directly addressed the issue in closing argument. He argued that Lackenbauer in his heart believed he had the right to do the things he did and that he acted in good faith.
In closing argument, plaintiffs' counsel again addressed the issue commenting that malice is defined as “intent to injure or conscious disregard of rights.” Plaintiffs' counsel then noted he had waited to hear defense counsel explain how defendants could have intended to interfere with plaintiffs' business relationships but not intended to injure plaintiffs; or how they could intentionally interfere with those rights and yet not consciously disregard plaintiffs' rights; but that all he had heard was the improper argument that the first jury was wrong.
We determine the jury was adequately informed that the finding of the first jury did not control the second jury on the issue of malice or oppression to support an award of punitive damages. Furthermore, we find nothing to support defendants' assertion that plaintiffs' counsel misled the jury.
If there were any ambiguity inherent in the jury instructions, it would be the defendants' burden to propose instructions to clear up such ambiguity. Defendants offered instructions they claim would have clarified the ambiguity of which they now complain. Defendants contend the court erred in not giving four instructions proposed by defendants.4
Instruction 13 was properly denied by the trial court. In the trial court defendants cited Seaman's Direct Buying Service, Inc. v. Standard Oil Co., supra, 36 Cal.3d 752, in support of this instruction. They argued that since interference with contractual relations requires “ ‘intentional acts on the part of the defendant designed to disrupt the relationship’ ” (id. at p. 766), the same definition of intent must govern the “intent to cause injury” which constitutes malice necessary to support punitive damages. This is not a correct statement of the law. Defendants offer no authority and we find none for their proposition that the intent necessary to show malice differs depending on the tort involved. The intent necessary to support a finding of malice was stated by our Supreme Court in Schroeder v. Auto Driveaway Co. (1974) 11 Cal.3d 908, 922: “Defendants contend, however, that since they had no intent to vex, annoy, or injure plaintiffs, exemplary damages cannot be awarded. We assume defendants felt no personal animus toward plaintiffs. But ‘intent,’ in the law of torts, denotes not only those results the actor desires, but also those consequences which he knows are substantially certain to result from his conduct.” (Id. at p. 922, citations omitted.)
Furthermore, the court instructed the jury on the definition of malice as contained in BAJI No. 14.71 (7th Ed.1986): “ ‘Malice’ means conduct which is intended by the Defendant to cause injury to the Plaintiff or carried on by the Defendant with a conscious disregard of the rights of others. A person acts with conscious disregard of the rights of others when he is aware that his conduct will probably result in a violation of the rights of others and willfully and deliberately fails to avoid that consequence.” To the extent that defendants' proposed instruction merely repeats the definition of malice given by the court it is unnecessary; since it omits part of the definition of malice, it is incorrect. “ ‘ “Malice” means conduct which is intended by the defendant to cause injury to the plaintiff or conduct which is carried on by the defendant with a conscious disregard of the rights or safety of others. “Oppression” means subjecting a person to cruel and unjust hardship in conscious disregard of that person's rights. Under these statutory definitions, punitive damages thus may be predicated either on an intent to harm or a conscious disregard of another's rights.’ ” (Hughes v. Blue Cross of Northern California, supra, 215 Cal.App.3d 832, 846.)
Proposed Instruction 13A was also correctly denied. This instruction seeks to inform the jury that there is no wrongful intent to disrupt economic relationships where the defendant is motivated by a legitimate purpose. This is nothing more than the defense of justification or privilege which were presented to the first jury. It would have been improper to present the issues anew to the second jury for a redetermination.
Instructions 14 and 14A both seek to offer the jury a defense of mistake. To the extent that the mistake defense relies upon evidence also presented to the first jury it is again an attempt to relitigate the justification or privilege defenses offered the first jury and, therefore, improper. To the extent the instruction relied upon a new defense presented at the second trial, this defense was withdrawn by defendants and could not be the basis of the instruction. In the second trial, Lackenbauer testified he relied on the advice of counsel that he “had the legal authority to block, to prevent Pacific Trencher from making the payment” to plaintiffs based on the subordination agreement. Plaintiffs then sought to take the deposition of defendants' counsel concerning the advice he had given them. At the deposition, defendants' counsel answered some questions about discussions with his clients and then again asserted the attorney/client privilege concerning certain advice he had given. The court ruled the privilege was waived and defendant decided not to call the attorney and not to present the defense.
Further, defendants' reliance on the holding in Lyles v. Perrin (1897) 119 Cal. 264, 266, is misplaced. That Court held it was error to refuse an instruction similar to No. 14A. In Lyles, plaintiff offered evidence defendant sold him a piece of land and the water rights that went with that land but defendant maliciously severed the water rights from the land and sold them to a third party after the sale but before plaintiff had recorded the deed. Defendants presented evidence the sale of the water rights was inadvertent and made without intent to injure plaintiff. Defendants here offered no evidence their acts were inadvertent.
The trial court did not err in rejecting defendants' proposed instructions.
C. Whether the Award of Exemplary Damages Was Excessive as a Matter of Law
Defendants argue: their conduct was not sufficiently reprehensible to justify the punitive damages awarded since this was an isolated incident and there was no widespread risk to society of the type to justify this award; the punitive damages bear no reasonable relationship to the compensatory damages awarded; and the award is more than seven percent of defendants' combined net worth.
Our standard of review of an award of punitive damages has been described by our Supreme Court as the “historically honored standard of reversing as excessive only those judgments which the entire record, when viewed most favorably to the judgment, indicates were rendered as the result of passion and prejudice․ Stating the matter somewhat differently in a similar case, we indicated that an appellate court may reverse such an award only when the award as a matter of law appears excessive, or where the recovery is so grossly disproportionate as to raise a presumption that it is the result of passion or prejudice.” (Neal v. Farmers Ins. Exchange, supra, 21 Cal.3d at pp. 927-928; internal quotation marks omitted.)
“The decision to award punitive damages is exclusively the function of the trier of fact. So too is the amount of any punitive damage award. The relevant considerations are the nature of the defendant's conduct, the defendant's wealth, and the plaintiff's actual damages.” (Gagnon v. Continental Casualty Co. (1989) 211 Cal.App.3d 1598, 1602, citations omitted.) “In the final analysis, therefore, the propriety and amount of punitive damages depends entirely upon the particular facts of a case. Thus, to meaningfully apply the ‘reasonable relation’ rule, the trier of fact (and the 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).” (Id. at p. 1604.)
Defendants' argument that their acts were not sufficiently reprehensible 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.)
The ratios of the compensatory damages awards to the punitive damages awards and the ratio of the punitive damage award to defendants' net worth are all within ranges approved by other appellate courts. The ratio of the amount of punitive damages to compensatory damages in the instant case is not excessive as a matter of law. The ratio is approximately 11:1 (eight and a half million punitives and three quarter million compensatory). The California Supreme Court has upheld awards with a ratio of 78:1 (Neal v. Farmers Ins. Exchange, supra, 21 Cal.3d 910) and a ratio of 2000:1 (Finney v. Lockhart (1950) 35 Cal.2d 161, 165). California appellate courts have upheld awards with ratios of 40:1 (Chodos v. Insurance Co. of North America (1981) 126 Cal.App.3d 86) and 32.7:1 (Downey Savings & Loan Assn. v. Ohio Casualty Ins. Co. (1987) 189 Cal.App.3d 1072). In Goshgarian v. George (1984) 161 Cal.App.3d 1214, 1228, the court approved a punitive damage award which equalled about 10 percent of the tortfeasor's net worth. Here, the trial judge carefully reviewed the punitive damages awards, considering them separately for each plaintiff and determined the award to Hilgedick was excessive but the other awards were not. Hilgedick has accepted the remittitur of his award which cut the punitive damages awarded him in half. On this record we cannot say the awards of punitive damages were excessive as a matter of law.
D. Whether the Awards of Exemplary Damages Violated the United States and/or California Constitutions
Appellants 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. They also assert the 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. Defendants adopt the arguments of Amicus Curiae Northern California Association of Defense Counsel in its brief filed in this appeal.
The United States Supreme Court has recently determined that punitive damages do not violate the “excessive fines” clause of the Eighth Amendment. (Browning-Ferris v. Kelco Disposal (June 26, 1989) 492 U.S. 257, ---- [106 L.Ed.2d 219, 236-239.) In Browning-Ferris and in Justice O'Connor's concurring opinion in Bankers Life & Casualty Co. v. Crenshaw (1988) 486 U.S. 71, the Court expressly did not determine whether punitive damages violate the due process clause of the Fourteenth Amendment. “[W]e have never addressed the precise question ․: whether due process acts as a check on undue jury discretion to award punitive damages in the absence of any express statutory limit.” (Browning-Ferris, supra, 106 L.Ed.2d 219, 239.)
Appellant's argument that its “due process rights were violated because it did not have ‘fair warning’ that its conduct would render it liable for punitive damages under Civil Code section 3294 ignores the long line of decisions in this state beginning with Donnelly v. Southern Pacific Co. (1941) 18 Cal.2d 863, 869-870, holding that punitive damages are recoverable in a nondeliberate or unintentional tort where defendant's conduct constitutes a conscious disregard of the probability of injury to others.” (Grimshaw v. Ford Motor Co. (1981) 119 Cal.App.3d 757, 811.)
The California Supreme Court has already established that BAJI 14.71 and section 3294 provide adequate guidelines for a jury's determination of whether to award punitive damages. (McCoy v. Hearst Corp. (1986) 42 Cal.3d 835, 871.) While the Court has yet to speak specifically to whether BAJI 14.71 and section 3294 also provide adequate guidelines for determining the amount of the award, we do not foresee any threat to the sufficiency of section 3294 as the guide to trial courts.
In Hasson v. Ford Motor Co., supra, 32 Cal.3d at p. 402), the California Supreme Court directly affirmed the longstanding constitutional validity of punitive damage awards under section 3294. “In an appendix to its opening brief, [appellant] Ford offers a number of theories for holding section 3294 unconstitutional. It is not necessary to devote extensive discussion to the question: the courts have frequently and uniformly upheld that provision's validity. (E.g., Egan v. Mutual of Omaha Ins. Co (1979) 24 Cal.3d 809, 819 [citations]; Bertero v. National General Corp. (1974) 13 Cal.3d 43, 66, fn. 13 [citations]; Zhadan v. Downtown L.A. Motors (1976) 66 Cal.App.3d 481, 489 [citation]; Merlo v. Standard Life & Acc. Ins. Co. (1976) 59 Cal.App.3d 5, 19-20 [citation]; Wetherbee v. United Ins. Co. of America (1971) 18 Cal.App.3d 266, 270 [citation]; Fletcher v. Western National Life Ins. Co. (1970) 10 Cal.App.3d 376, 404 [citations]; Toole v. Richardson-Merrell Inc. (1967) 251 Cal.App.2d 689, 716-717 [citations].)” (Id. at fn. 2.)
In the absence of any subsequent reconsideration of this question of constitutional law by the California Supreme Court, we are compelled by stare decisis to uphold the continuing constitutional validity of Civil Code section 3294 as a standard for an award of punitive damages. (Auto Equity Sales, Inc. v. Superior Court (1962) 57 Cal.2d 450.)
E. Whether the Alleged “Additur” Provisions of the Judgment are Valid
Defendants next challenge the portion of the judgment which provides “that the punitive damages herein awarded would not serve their purpose were the defendants able to recover, for their own use, monies that, but for the award of punitive damages against them, would not exist; accordingly, there is added to this judgment an amount equal to any amount recovered by defendant[s] in the bankruptcy proceeding entitled In re Steve Hilgedick, United States Bankruptcy Court, Northern District of California, No. 4-83-02174-H, to the extent that defendants' recovery, in that proceeding, is a recovery from funds that would not have existed but for the awarding of punitive damages in the instant action.”
Defendants assert: the trial judge exceeded his power by adding this provision which adds money to a judgment; this portion of the judgment contradicts the portion of the judgment which held defendants' debt against plaintiffs was valid and enforceable; and the amount added by this provision is so uncertain as to be unenforceable.
Plaintiffs contend defendants agreed to the provision in the trial court in return for the trial court's ruling under Evidence Code section 352 which excluded evidence of defendants' $4 million claim in Hilgedick's personal bankruptcy as prejudicial and that, therefore, defendants may not now challenge the provision on appeal. Plaintiffs further assert the challenged provision is not an additur but rather a provision to insure that defendants receive no portion of the punitive damages imposed against them.
The problem arose because defendants made a claim in Hilgedick's personal bankruptcy for $4 million. The claim is based on Hilgedick's personal guarantee of the million dollar loan to Pacific Trencher and the first trial judge's determination that Pacific Trencher owed $1.9 million plus interest at 18 percent to Koehring Finance. Although we have reversed that portion of the judgment which awarded defendants $1.9 million plus interest, the issue is not moot because the judgment entered allows a determination whether defendants may be paid a future claim based on the guarantee in the bankruptcy proceeding to the extent the funds in the bankruptcy estate are the funds obtained by Hilgedick as punitive damages. The trial court was concerned that a punitive damage award would not serve the purpose of punishment if defendants paid the money to Hilgedick and then received it back in the bankruptcy proceeding since there was less than $1 million in the bankruptcy estate absent a punitive damage award. The judge termed plaintiffs' argument the “in-one-pocket and out-of-the-other-pocket” argument.
The record on this issue is not as clear as we would wish. We can understand how both sides could interpret what happened to reach opposite conclusions. It appears both sides and the trial judge understood the statements concerned differently. Several hearings on the problem were held during recesses throughout the trial. What is clear is that defendants agreed the issue would not be a jury issue but would be determined by the court; “It's not a matter for the jury to decide.” Defendants also agreed that the jury be partially informed on the issue.5 Indeed, in their reply brief, defendants concede they agreed the court would determine the issue and the jury would not be allowed to increase the verdict in light of the bankruptcy claim. They argue now that the issue was to be decided at a later time and their agreements provide no basis for the extraordinary additur provision included in the judgment.
On the state of this record we conclude it would be inequitable to allow defendants to now challenge the offset provision of the judgment. The trial proceeded without the jury being informed that defendants had a $4 million claim in Hilgedick's bankruptcy, evidence the trial court had ruled was admissible. Defendants agreed the court could determine the issue and the jury could be so instructed as to the bankruptcy claim but not the amount. Defendants filed a written objection to the provision as written in the proposed judgment submitted by plaintiffs and plaintiffs filed a written response to defendants' memorandum. In other words defendants received ample opportunity to argue against the provision as adopted by the court after the verdict was rendered. That is all they had been promised by the trial court.
Defendants also argue that the additur provision is contrary to the first trial judge's determination defendants did not act in bad faith in their management of Pacific Trencher and the guarantees are valid and enforceable. We have previously held the issues decided by the court in the first trial differ from the issue presented in the punitive damage trial. We find no contradiction in the two portions of the judgment.
Defendants' final argument on this issue is that the provision is too uncertain to be enforceable. A provision of a judgment is not so uncertain as to be unenforceable if the amount in question is, as here, ascertainable at a future date. (Lufkin v. Lufkin (1930) 209 Cal. 710, 714; Pinecrest Productions, Inc. v. RKO Teleradio Pictures, Inc. (1970) 14 Cal.App.3d 6, 13.)
F. Whether the Decision to deny defendants an offset is improper
Defendants challenge the provision of the judgment denying them the right to offset the $1.9 million plus interest owed by plaintiffs against the punitive damages awarded plaintiffs. The judgment provision reads: “The court finds that this portion of the judgment in favor of defendants is so related to the unconscionable conduct leading to the judgment of punitive damages against defendants that no part of the punitive damages judgment against defendants is available to defendants as an offset.”
Defendants contend the judgment provision contradicts the decision of the trial judge at the first trial who stated in his intended decision, “There is nothing inequitable in requiring plaintiffs to stand by the guarantees․” This statement did not purport to rule on the issue of setoff and is not pertinent to the issue raised.
Nor do we agree with defendants' argument that the court erred in finding their conduct related to the conduct leading to an award of punitive damages. They assert the $1.9 million debt arose from the loan and the purchase of machinery parts before defendants took over Pacific Trencher and the conduct upon which the punitive damages was based occurred much later and is separate and distinct. The jury could infer defendants took over Pacific Trencher in order to obtain control of its assets after defendants mistakenly released their security interest. Absent an offset, defendants, unlike the usual bankruptcy creditor, would be able to collect 100 cents on the dollar outside of the bankruptcy thus profiting from the conduct which occasioned the award of exemplary damages. The trial court had discretion to order there could be no offset. (Margott v. Gem Properties, Inc. (1973) 34 Cal.App.3d 849, 854.) “The appropriate test for abuse of discretion is whether the trial court exceeded the bounds of reason. When two or more inferences can reasonably be deduced from the facts, the reviewing court has no authority to substitute its decision for that of the trial court.” (Shamblin v. Brattain (1988) 44 Cal.3d 474, 478-479.) We find no error in the offset provision of the judgment.
A. The Motion to Vacate Judgment
Plaintiffs challenge the first trial judge's order which was entered after the second trial and which granted defendants' motion to vacate the judgment. The judge characterized the order as correcting clerical errors in the judgment. The grounds for plaintiffs' challenge are that the motion to vacate the judgment was untimely under Code of Civil Procedure section 663a and that the court was without jurisdiction to hear the motion since defendants had filed a notice of appeal from the denial of this same motion by the trial judge presiding at the second trial on the issue of exemplary damages.
The original judgment provided in pertinent part: “It is further ordered, adjudged, and decreed that the deeds of trust and other security documents executed by the plaintiffs in March, 1980 are valid and enforceable against plaintiffs to the extent of the amount owing to defendants in March 31, 1981, $1,986,025; plaintiffs are entitled, however, to a credit against that amount in an amount equal to the jury verdict; defendants are entitled to interest on the difference at the rate of interest on the loan, Eighteen Per Cent (18%), from March 31, 1981 until the date of judgment.”
The corrected judgment changed the pertinent part to read as follows: “It is further ordered, adjudged, and decreed that the deeds of trust and other security documents executed by the plaintiffs in March, 1980 are valid and enforceable against plaintiffs to the extent of the amount owing to defendants in March 31, 1981, $1,986,025; defendants are entitled to interest on the amount at the rate of interest on the loan, Eighteen Per Cent (18%), from March 31, 1981 until the date of judgment.”
The issue presented is whether defendants are entitled to prejudgment interest on the entire amount of $1,986,025 from the date of the jury verdict in the first trial to the date of judgment or whether defendants are entitled to that interest only on the difference between the damages awarded defendants and those awarded plaintiffs. Since we have found that the issue of damages owed by plaintiffs to defendants on the guarantees was not litigated, we need not address this issue.
The portion of the judgment awarding defendants $1,986,025 and interest on that amount at 18 percent from March 1, 1981 is vacated. The portion of the judgment reading, “The court finds that this portion of the judgment in favor of defendants is so related to the unconscionable conduct leading to the judgment of punitive damages against defendants that no part of the punitive damages judgment against defendants is available to defendants as an offset” is modified to read as follows: “The court finds that any future damage award in favor of defendants based upon the guarantees and deed of trust given by plaintiffs is so related to the unconscionable conduct leading to the judgment of punitive damages against defendants that no part of the punitive damages judgment against defendants may be used by defendants as an offset.” As so modified, the judgment is affirmed.
BENSON, Associate Justice.
SMITH, Acting P.J., and PETERSON, J., concur.
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Docket No: No. A039723.
Decided: August 30, 1990
Court: Court of Appeal, First District, Division 2, California.
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