Opinion ID: 2570318
Heading Depth: 2
Heading Rank: 1

Heading: Uncompensated Harm/Potential Harm

Text: Before undertaking the multifactor evaluation mandated by BMW, supra, 517 U.S. 559, 116 S.Ct. 1589, 134 L.Ed.2d 809, and State Farm, supra, 538 U.S. 408, 123 S.Ct. 1513, 155 L.Ed.2d 585, we address Simon's principal arguments for upholding the award: that the $400,000 gain he assertedly would have made by purchasing the subject building for $1.1 million may be deemed a measure of either the harm San Paolo Holding's fraud actually caused him or the harm it potentially could have caused him, and that such uncompensated or potential harm may properly be considered in the comparison of punitive damages to harm required by the high court. San Paolo Holding, in contrast, contends the actual compensatory damages award, here $5,000, provides the appropriate basis for comparison under the high court's rulings. United States Supreme Court precedents appear to contemplate, in some circumstances, the use of measures of harm beyond the compensatory damages. Thus in State Farm, discussing the second BMW guidepost, the high court spoke repeatedly of a proportionality between punitive damages and the harm or potential harm suffered by the plaintiff. ( State Farm, supra, 538 U.S. at pp. 418, 424, 123 S.Ct. 1513.) At another point ( id. at p. 426, 123 S.Ct. 1513), the court referred to the relationship between punitive damages and both the amount of harm and the general damages recovered, impliedly recognizing that these two are not always identical. More explicitly, in State Farm the high court reiterated its recognition in BMW that in some cases compensatory damages are not the definitive quantification of harm because `the injury is hard to detect or the monetary value of noneconomic harm might have been difficult to determine.' ( State Farm, supra, at p. 425, 123 S.Ct. 1513 quoting BMW, supra, 517 U.S. at p. 582, 116 S.Ct. 1589.) State Farm's reference to potential harm echoed the high court's earlier decision in TXO Production Corp. v. Alliance Resources Corp., supra, 509 U.S. 443, 113 S.Ct. 2711, 125 L.Ed.2d 366 ( TXO ), a business tort case in which the court approved a $10 million punitive damages award on compensatory damages of only $19,000. The plurality opinion relied heavily on the economic injuries the defendant's scheme to cheat the plaintiff of oil and gas royalties could have caused had it succeeded, injuries estimated in the millions of dollars. ( Id. at pp. 459-462, 113 S.Ct. 2711.) It is appropriate to consider the magnitude of the potential harm that the defendant's conduct would have caused to its intended victim if the wrongful plan had succeeded.... ( Id. at p. 460, 113 S.Ct. 2711; see also id. at p. 484, 113 S.Ct. 2711 (dis. opn. of O'Conner, J.) [I have no quarrel with the plurality that, in the abstract, punitive damages may be predicated on the potential but unrealized harm to the victim].) In the wake of TXO, BMW and State Farm, a large number of federal and state courts have, in a variety of factual contexts, considered uncompensated or potential harm as part of the predicate for a punitive damages award. [3] In the present case, however, we conclude that the $400,000 in profit that plaintiff might have gained by purchasing the building is not a proper consideration. As explained above, we must determine independently the relationship between the harm done plaintiff and the amount awarded in punitive damages. ( Cooper Industries, supra, 532 U.S. at pp. 436-440, 121 S.Ct. 1678.) While we defer to express jury findings supported by the evidence (see ante, 29 Cal.Rptr.3d at p. 70, 113 P.3d at p. 387), in the absence of an express finding on the question we must independently decide whether defendant's promissory fraud did, or foreseeably could have, hurt plaintiff in the amount of $400,000. The first jury did not specify the false promise about a material matter it found San Paolo Holding had made. Based on the evidence and argument, the finding could refer to San Paolo Holding's express promise, in the letter of intent, to proceed to escrow and attempt to complete a transaction on the agreed terms, to its express promise to exclusively negotiate, to its implied promise to seek approval from the New York office for a sale on the agreed terms, or to any combination of these. None of these possible false promises, however, was the factual cause of a $400,000 loss to Simon. Had San Paolo Holding never promised to proceed to escrow, never promised to negotiate exclusively with Simon, and never promised to seek the New York office's approval, Simon would still not have obtained the property. Simon, the first jury found, had no contractual right to buy the property. Consequently, San Paolo Holding's promissory fraud did not deprive him of property he would otherwise have obtained; it merely led him, as the jury indeed found, to spend $5,000 to retain an attorney in anticipation of opening escrow. Gray v. Don Miller & Associates, Inc. (1984) 35 Cal.3d 498, 198 Cal.Rptr. 551, 674 P.2d 253 is closely on point. The plaintiff made an offer to purchase real property for his business. The broker falsely told him the sellers had accepted his offer, leading him to expend various sums in anticipation of closing the purchase and moving to the new site. In the plaintiff's action against the broker for fraud, we held he was entitled to the amounts he had spent in reliance on the misrepresentation, but not to claimed delay damages for increases in the cost of construction during the six-month period he believed the purchase would proceed. ( Id. at p. 504, 198 Cal.Rptr. 551, 674 P.2d 253.) The plaintiff's inability to promptly begin renovating the property for his business, we explained, was not caused by [the broker's] misrepresentation, but by the sellers' refusal to accept his offer of sale. ( Ibid.; accord, Kenly v. Ukegawa (1993) 16 Cal. App.4th 49, 53-55, 19 Cal.Rptr.2d 771 [where defendant falsely promised to sell plaintiff farm property, plaintiff may recover only costs incurred in reliance on the promise, not profits that would have been gained had he purchased and resold the property].) Simon contends, and the Court of Appeal agreed, that he was precluded from recovering the $400,000 in lost profits only by operation of Civil Code section 3343, subdivision (a)(1), which in effect sets damages for a defrauded attempted purchaser of property at the [a]mounts actually and reasonably expended in reliance upon the fraud. We disagree. Regardless of the effect of Civil Code section 3343, Simon could not recover those lost profits on his promissory fraud cause of action because the fraud did not cause them. Fraudulent promises to sell (as in Kenly v. Ukegawa, supra, 16 Cal.App.4th at p. 55, 19 Cal.Rptr.2d 771), fraudulent representations that an offer to purchase has been accepted (as in Gray v. Don Miller & Associates, Inc., supra, 35 Cal.3d at p. 504, 198 Cal.Rptr. 551, 674 P.2d 253) or, as here, fraudulent promises to negotiate exclusively and proceed to escrow may cause the attempted buyer to expend money in reliance, but they do not themselves cause the losses occasioned by the attempted buyer's failure to actually obtain the property. That injury is instead caused by the seller's breach of an enforceable contractual obligation to sell the property  where one exists. If Simon had prevailed on his breach of contract cause of action, he would have been entitled to recover on that cause of action the benefit of his bargain, here assertedly $400,000, because San Paolo Holding's refusal to sell to him caused that injury. (See Civ.Code, § 3306.) But San Paolo Holding in fact had no contractual obligation to sell Simon the property. It had an obligation  imposed by law  not to fraudulently promise to sell Simon the property, but had San Paolo Holding complied with its legal obligation by refraining from making false promises, Simon still would not have obtained the property. [4] This is not a case like Neal v. Farmers Ins. Exchange, supra, 21 Cal.3d 910, 148 Cal.Rptr. 389, 582 P.2d 980, in which a statute barred recovery of damages actually caused by the defendant's tortious acts. In that insurance bad faith case, the plaintiff died before judgment, precluding her estate's recovery of damages for emotional distress. ( Id. at p. 920, fn. 3, 148 Cal.Rptr. 389, 582 P.2d 980; see Code Civ. Proc., § 377.34 (formerly Prob.Code, § 573).) Considering it likely that absent this limitation plaintiff would have recovered a substantial additional amount in compensation for emotional distress, this court held the disparity between the relatively small compensatory damages award and the significant award of punitive damages did not require nullification of the latter under state law. ( Neal v. Farmers Ins. Exchange, supra, at p. 929, 148 Cal.Rptr. 389, 582 P.2d 980; see also Romo v. Ford Motor Co., supra, 113 Cal.App.4th at pp. 760-761, 6 Cal.Rptr.3d 793 [reaching similar conclusion under State Farm ].) Farmers' bad faith conduct had actually caused Mrs. Neal substantial emotional distress; her estate was barred from recovering such damages only by Probate Code former section 573. In contrast, San Paolo Holding's false promise or promises, as we have seen, did not cause Simon's failure to obtain the property; even in the absence of Civil Code section 3343, subdivision (a)(1), he would not be entitled to recover benefit-of-the-bargain damages for San Paolo Holding's promissory fraud. Simon also contends San Paolo Holding's fraud was intended to cause him, or risked causing him, potential losses ... well in excess of $455,000. In addition to the $400,000 anticipated profit from acquiring the building and his $5,000 out-of-pocket loss, Simon includes in this sum the $50,000 deposit that was, under the letter of intent, to become nonrefundable upon completion of inspections and due diligence on June 26, 1996. Simon argues that had he agreed to King's demand to move the completion date up to June 21, King would likely have strung [him] along until the 22nd, and then manufactured some other reason to back out of the sale, resulting in the loss of his deposit. Simon further contends his potential losses include an unquantified financial impact: had he given up his leased business premises after signing the letter of intent, he would then have found himself on the street when San Paolo Holding pulled out of the sale. We conclude, however, that these asserted potential injuries, like the uncompensated harm Simon claims, may not be considered in assessing the ratio of punitive damages to harm. The potential harm that is properly included in the due process analysis is `harm that is likely to occur from the defendant's conduct. ' ( TXO, supra, 509 U.S. at p. 460, 113 S.Ct. 2711.) In TXO, the high court, quoting from the state court decision, gave a hypothetical illustration: `For instance, a man wildly fires a gun into a crowd. By sheer chance, no one is injured and the only damage is to a $10 pair of glasses. A jury reasonably could find only $10 in compensatory damages, but thousands of dollars in punitive damages to teach a duty of care.' ( Id. at p. 459, 113 S.Ct. 2711.) A potential injury that was foreseeable from the defendant's conduct  whether because it constituted an unintended but reasonably likely risk or because it was a goal of the tortfeasor's conduct  is properly considered because the tortfeasor had notice of the likelihood of such an injury. Considering such injuries in assessing punitive damages therefore comports with the due process mandate that a person receive fair notice ... of the severity of the penalty that a State may impose. ( BMW, supra, 517 U.S. at p. 574, 116 S.Ct. 1589.) In TXO itself, the defendant, hoping to renegotiate downward the royalties it had agreed to pay for development of the plaintiff's oil and gas rights, had solicited a false affidavit impairing the plaintiff's title, then brought an unsuccessful declaratory relief action in state court. ( TXO, supra, 509 U.S. at pp. 448-449, 113 S.Ct. 2711.) The high court plurality held it appropriate to consider the harm the defendant's conduct would have caused to its intended victim if the wrongful plan had succeeded. ( Id. at p. 460, 113 S.Ct. 2711.) Other cases have also considered foreseeable potential injuries in the punitive damages-to-harm ratio. [5] By contrast, in Pulla v. Amoco Oil Company (8th Cir.1995) 72 F.3d 648, where the employer defendant had invaded the employee plaintiff's private credit card records to determine whether he had been abusing sick leave, the potential injury to other employees from similar conduct could not properly be considered because such injury was not  likely to occur from the defendant's tortious conduct  the plaintiff failed to present any evidence that Amoco put any other individual's privacy at risk. ( Id. at p. 660.) And in Leatherman Tool Group, Inc. v. Cooper Industries, Inc., supra, 285 F.3d at page 1149, the appellate court declined to consider as a measure of potential harm all of the gross profits the defendant might have made on its copycat product had the plaintiff not obtained a preliminary injunction against the product's sale, as the sale of the copied product was not itself illegal, though passing it off as the plaintiff's was. The present case more closely resembles the last cited decisions, in which the asserted potential injuries were not foreseeable results of the defendant's tortious conduct, than it does the decisions approving consideration of potential losses. The $400,000 in profit Simon claims he would have earned by acquiring the property cannot be considered potential harm from San Paolo Holding's promissory fraud because, in the absence of any contractual obligation to sell Simon the property, San Paolo Holding's tortious conduct could not have had the foreseeable effect of depriving Simon of an entitlement to purchase it. As in Leatherman Tool Group, Inc. v. Cooper Industries, Inc., supra, 285 F.3d at page 1149, Simon erroneously characterizes damages he might have obtained on another cause of action, one on which he did not prevail, as potential damages for the cause of action on which he did prevail. And, as in Pulla v. Amoco Oil Company, supra, 72 F.3d at pages 659-660, Simon's potential loss of his $50,000 deposit was simply not shown to be a likely result of defendant's fraud: to obtain the $50,000, San Paolo Holding would first have had to open escrow, which required entering into a binding contract of sale, giving Simon an enforceable right to purchase. The same may be said of Simon's possible cancellation of his then current leasing arrangement: that he might do so without first entering into a binding purchase contract was not foreseeable, and had he done so after executing such a contract he would not have been out on the street because he could have enforced the contract. As observed by an amicus curiae, there is no basis for believing that San Paolo [Holding] knew that Simon was at risk of having no place to operate his business, much less intended him to suffer that consequence. As the record does not reveal the goals of San Paolo Holding's fraud, it is difficult to say what injuries beyond his $5,000 out-of-pocket loss, if any, Simon would have suffered had those goals been achieved. To the extent King, for reasons that are not apparent, [6] simply wanted to keep Simon on the hook as long as possible, he succeeded, but Simon's only resulting loss, as far as the record shows, was the $5,000 retainer. (See Bains LLC v. Arco Products Company (9th Cir.2005) 405 F.3d 764 [no potential harm to be added to compensatory damages where the defendant's wrongful conduct succeeded].) King's scheme, whatever it was, evidently did not extend to executing and then breaching a binding contract of sale, for he had the opportunity to execute such a contract on June 13, 1996, and instead broke off dealings with Simon. We are thus unable to conclude Simon demonstrated the existence of substantial potential damages representing harm the defendant's conduct would have caused to its intended victim if the wrongful plan had succeeded. ( TXO, supra, 509 U.S. at p. 460, 113 S.Ct. 2711.) The $5,000 award of compensatory damages, therefore, must be considered the true measure of the harm (or potential harm) San Paolo Holding's tortious act caused to Simon.