Opinion ID: 1159025
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Heading: Corporate Liability for Punitive Damages Based on Acts of Corporate Agent with Managerial Capacity

Text: Pan Am argues that it is not liable for punitive damages based on Adams's misconduct because Adams was not an executive officer of Pan Am and he did not possess the whole executive power of the corporation such that his acts would constitute corporate authorization, ratification, or participation. Pan Am relies upon Couillard v. Bank of New Mexico, 89 N.M. 179, 184, 548 P.2d 459, 464 (Ct.App.1976), which held that participation by a corporation which would serve as a basis for the imposition of punitive damages may be based upon the tortious conduct of a corporate agent who possesses the whole executive power of the corporation. Pan Am further points to Cornell v. Albuquerque Chemical Co., 92 N.M. 121, 126-27, 584 P.2d 168, 173-74 (Ct.App.1978), which applied Couillard and upheld punitive damages awarded against a corporation, concluding that a vice president possessed the whole executive power of the corporation. In arguing its position, Pan Am urges a definition of whole executive power that is very restrictive and we feel impractical in today's business world. Pan Am clings to a definition similar to the concept first enunciated in Lake Shore & M.S. Ry. Co. v. Prentice, 147 U.S. 101, 13 S.Ct. 261, 37 L.Ed. 97 (1893). In Lake Shore, the United States Supreme Court envisioned that the single, highest executive of a corporation, the corporation's president and general manager, or, in his absence, the vice president in his place, could wield the whole executive power of the corporation and thereby cause corporate punitive liability. Id. at 114, 13 S.Ct. at 265. Because the facts of this case illustrate the shortcomings of such a definition of whole executive power, we join the jurisdictions that follow the managerial capacity theory as articulated in the Restatements (Second) of Agency and Torts. The Restatement (Second) of Agency, Section 217C, subsection (c), and the identical provision in the Restatement (Second) of Torts, Section 909, subsection (c), state, Punitive damages can properly be awarded against a master or other principal because of an act by an agent if ... the agent was employed in a managerial capacity and was acting in the scope of employment. Restatement (Second) of Agency § 217C(c) (1957); Restatement (Second) of Torts § 909(c) (1977) [hereinafter Restatement rule of managerial capacity]. [2] Courts are divided over the issue of when a principal should be liable for punitive damages for the conduct of an agent if the principal has not authorized or ratified its agent's conduct, or participated in it by virtue of its agent's possession of a requisite amount of corporate discretionary authority. See Fusselman v. Ennia Gen. Ins. Co. ( In re P & E Boat Rentals, Inc. ), 872 F.2d 642, 650 (5th Cir.1989); Samedan Oil Corp. v. Neeld, 91 N.M. 599, 603-04, 577 P.2d 1245, 1249-50 (1978) (Easley, J., dissenting). See generally 2 James D. Ghiardi & John J. Kircher, Punitive Damages §§ 24.01 to 24.10 (1987) (Vicarious Liability for Punitive Damages). Several jurisdictions expressly adopt the Restatement rule of managerial capacity. See, e.g., Protectus v. North Pac. Grain Growers, Inc., 767 F.2d 1379, 1386 (9th Cir.1985); Egan v. Mutual of Omaha Ins. Co., 24 Cal.3d 809, 169 Cal.Rptr. 691, 697-98, 620 P.2d 141, 147-48 (1979), cert. denied and appeal dismissed, 445 U.S. 912, 100 S.Ct. 1271, 63 L.Ed.2d 597 (1980); Abshire v. Stoller, 235 Ill.App.3d 849, 176 Ill.Dec. 559, 564, 601 N.E.2d 1257, 1261 (1992), appeal denied, 148 Ill.2d 639, 183 Ill.Dec. 15, 610 N.E.2d 1259 (1993); Kline v. Multi-Media Cablevision, Inc., 233 Kan. 988, 666 P.2d 711, 716 (1983); Fisher v. Carrousel Motor Hotel, Inc., 424 S.W.2d 627, 630 (Tex.1967). Under the Restatement rule of managerial capacity, Pan Am is liable for punitive damages caused by the conduct of Adams if Adams possessed managerial capacity in his dealings with ACC. Defining managerial capacity, the Supreme Court of California wrote, The determination whether employees act in a managerial capacity, however, does not necessarily hinge on their `level' in the corporate hierarchy. Rather, the critical inquiry is the degree of discretion the employees possess in making decisions that will ultimately determine corporate policy. Egan, 620 P.2d at 148. In Abshire, the Appellate Court of Illinois defined a managerial employee as one who formulates, determines and effectuates his employer's policies, one with discretion or authority to make ultimate determinations independent of company consideration and approval of whether a policy should be adopted. 601 N.E.2d at 1263 (quoting Kemner v. Monsanto Co., 217 Ill.App.3d 188, 160 Ill.Dec. 192, 203, 576 N.E.2d 1146, 1157, appeal denied, 142 Ill.2d 655, 164 Ill.Dec. 918, 584 N.E.2d 130 (1991)). A key in determining whether an agent acts in a managerial capacity is to look at the nature of what the agent is authorized to do by the principal and whether the individual has discretion regarding both what is done and how it is done. Job titles, in and of themselves, are not necessarily dispositive. See Egan, 620 P.2d at 148. We therefore do not think it is helpful in this context to attempt to analyze an agent's authority in terms of whole executive power, a phrase which commonly is understood to refer to only a few members of the corporation who hold plenary authority for the corporation. We prefer to address this issue in terms of the Restatement concept of an agent with managerial capacity. By this we refer to one who has discretionary or policy-making authority as described herein. While retaining the philosophy that corporations should not be liable for punitive damages absent corporate culpability, imposition of corporate punitive damages based upon the theory of managerial capacity tends to deter the employment of unfit persons for important positions, see Restatement (Second) of Torts § 909 cmt. b, and encourage their supervision. The facts of this case illustrate another important reason for imposing punitive damages on a principal for the bad acts of its agent with managerial capacity. In the modern world of multinational corporations, corporate control must be delegated to managing agents who may not possess the requisite upper-level executive authority traditionally considered necessary to trigger imposition of corporate liability for punitive damages. See Doralee Estates, Inc. v. Cities Serv. Oil Co., 569 F.2d 716, 722 (2d Cir.1977) (To hold that punitive damages may not be imposed unless there is participation ... by the highest corporate executives is unrealistic given the size of giant corporations....). If we were to adopt the position that misconduct by managing agents who actually control daily operations is not sufficient to trigger corporate punitive damages, large corporations that routinely delegate managerial authority to shape corporate policy by making important corporate decisions could unfairly escape liability for punitive damages by virtue of their size. Corporate liability for punitive damages should depend upon corporate responsibility for wrongdoing, not corporate ability to insulate top executives from daily, hands-on management, i.e. only through exercising the whole executive power of the corporation. Our decision today accommodates modern practicalities. We do not, however, change the requirement that to incur punitive damages, a corporation must itself be culpable. When a corporate agent with managerial capacity acts on behalf of the corporation, pursuant to the theoretical underpinnings of the Restatement rule of managerial capacity, his acts are the acts of the corporation; the corporation has participated. In adopting the Restatement rule of managerial capacity, we disavow statements in New Mexico case law implicitly rejecting this concept. See, e.g., Samedan, 91 N.M. at 601, 603-04, 577 P.2d at 1245, 1247-48 (Easley, J., dissenting) (implying that Restatement rule of managerial capacity is not applicable in New Mexico). Substantial evidence in the record demonstrates that Adams possessed managerial capacity. It is clear that Adams was in charge of negotiations with ACC and oversight of its contract and could independently make decisions regarding claims against Pan Am which were binding on the corporation. By his own admission, Adams was in upper management. Adams had plenary discretionary authority to determine Pan Am's policies in its dealings with ACC. See Egan, 620 P.2d at 148. Because Adams had managerial capacity, his misconduct was correctly attributed to Pan Am, constituting corporate participation and warranting punitive damages.