Opinion ID: 901513
Heading Depth: 1
Heading Rank: 4

Heading: Whether Punitive Damages were Recoverable

Text: [¶ 16.] We review a trial court's decision to submit punitive damages to the jury under a clearly erroneous standard. Kieser v. S.E. Props., 1997 SD 87, ¶ 27, 566 N.W.2d 833, 839-40. In order for the issue of punitive damages to be submitted to the jury, the proponent of those damages must establish by clear and convincing evidence that there is a reasonable basis to believe that a party's conduct was willful, wanton, or malicious. Boomsma v. Dakota, Minn., & E. R.R. Corp., 2002 SD 106, ¶ 37, 651 N.W.2d 238, 246 (overruled on other grounds); see also SDCL 21-1-4.1. At the hearing regarding punitive damages, the trial court was presented with Griffiths' deposition, in which Griffiths admitted intentionally withholding Hoaas' portion of the corporate assets. Attached to the deposition were Griffiths' tax returns in which he claimed to be the sole owner of the casino. Thus, the evidence supported the trial court's conclusion that there was a reasonable basis to believe Griffiths' conduct was willful, wanton, or malicious. That determination was not clearly erroneous. [¶ 17.] Second, Griffiths argues that even if Hoaas could properly pursue a punitive damages claim, Hoaas' unauthorized taking of $68,850 cancelled out the compensatory damage award, thus negating Hoaas' right to punitive damages. This issue hinges on whether the offset should apply first to the compensatory damages or whether it should apply to the aggregate amount of damages, which included both compensatory and punitive damages. This question has not previously been presented to this Court. [¶ 18.] We have consistently held that punitive damages are not allowed absent an award for compensatory damages. Schaffer v. Edward D. Jones & Co., 521 N.W.2d 921, 928 (S.D.1994) (citations omitted); see also Henry v. Henry, 2000 SD 4, ¶ 5, 604 N.W.2d 285, 288. One reason for the rule is that we do not punish conduct, no matter how malicious or reprehensible, which in fact causes no injury. Schaffer, 521 N.W.2d at 928 (citations omitted). In this case, the trial court determined by summary judgment that Griffiths withheld Hoaas' share of the sale and profits of the corporation in the amount of $58,447.20. The court then let the jury decide whether Hoaas misappropriated corporate funds for his own use. The court also instructed the jury to consider whether Griffiths' conduct in withholding Hoaas' corporate share was of such a nature that punitive damages should also be awarded. The jury found that Hoaas had misappropriated $68,850, but it also found that Hoaas was entitled to $68,850 in punitive damages. [¶ 19.] If the total offset of $68,850 is applied first to the compensatory damages, it would reduce the compensatory damages to zero. Without compensatory damages, Hoaas would not be entitled to punitive damages. On the other hand, if the offset is applied to the aggregate award of $127,297.20 (compensatory plus punitive), Hoaas would still be entitled to a judgment of $58,447.20. [¶ 20.] In this case, the nature of the offset determines how it should be applied. Here, the trial court permitted Griffiths' claim against Hoaas to proceed under a provision in the bankruptcy code that allows a creditor to offset a mutual debt owing by such creditor to the debtor that arose before the commencement of the [bankruptcy] case. 11 U.S.C. § 553. The United States Supreme Court characterizes the § 553 offset as follows: The right of setoff (also called offset) allows entities that owe each other money to apply their mutual debts against each other, thereby avoiding the absurdity of making A pay B when B owes A. Studley v. Boylston Nat. Bank, 229 U.S. 523, 528, 33 S.Ct. 806, 808, 57 L.Ed. 1313 (1913). Although no federal right of setoff is created by the Bankruptcy Code, 11 U.S.C. § 553(a) provides that, with certain exceptions, whatever right of setoff otherwise exists is preserved in bankruptcy. Citizens Bank of Md. v. Strumpf, 516 U.S. 16, 18, 116 S.Ct. 286, 289, 133 L.Ed.2d 258 (1995). Generally, federal courts view the setoff as an equitable claim. See, e.g., In re Pleasant, 320 B.R. 889, 894 (Bankr. N.D.Ill.2004); French v. Bank One, Lima N.A. ( In re Rehab Project, Inc. ), 238 B.R. 363, 374 (Bankr.N.D.Ohio 1999). Additionally, the burden of proof rests with the party asserting the setoff. See, e.g., First Nat'l Bank of Louisville v. Hurricane Elkhorn Coal Corp. II, 763 F.2d 188, 190 (6thCir.1985); United States v. Krause ( In re Krause ), 261 B.R. 218, 222 (BAP 8thCir.2001); In re Lason, Inc., 314 B.R. 296, 305 (Bankr.D.Del.2004); Photo Mech. Servs., Inc. v. E.I. Dupont De Nemours Co. ( In re Photo Mech. Servs., Inc. ), 179 B.R. 604, 616 (Bankr.D.Minn.1995). As explained by a legal encyclopedia, The doctrine of setoff, or compensation. . . is essentially an equitable one requiring that the demands of mutually indebted parties be set off against each other and that only the balance be recovered in a judicial proceeding by one party against the other. . . . It is a mode that equity adopts to compel the ultimate payment of a debt by one who in justice, equity, and good conscience ought to pay. 20 Am. Jur. 2d Counterclaim, Recoupment, & Setoffs § 6 (citations omitted); see also First Nat'l Bank of Minneapolis v. Kehn Ranch, 394 N.W.2d 709, 716 (S.D.1986) (The allowance of a set-off recognizes the injustice resulting from compelling a creditor to pay the bankrupt estate the full value of a claim owed, while at the same time requiring the creditor to forfeit a claim due from the debtor.). [¶ 21.] In this case, the trial court did not allow Griffiths to amend his pleadings to assert a counterclaim by which he could recover affirmatively. Griffiths was only allowed to introduce evidence that Hoaas converted funds from the corporation in order to justify the amount Griffiths withheld when the corporation was sold. That evidence was clearly offered to reduce the amount Griffiths, as majority shareholder, owed to Hoaas as part of the sale of the casino. [¶ 22.] The evidence to the jury was that $135,000 was missing from the casino. Griffiths' 51% of the missing cash would have been $68,850, which is the exact amount the jury entered on the verdict form. Thus, in effect, the verdict determined that Griffiths owed Hoaas his share of the casino sale and profits in the amount of $58,447.20, and also that Hoaas had misappropriated Griffiths' share of the casino cash in the amount of $68,850. The parties, therefore, not only had mutually owing debts, but those debts arose from the same transaction. [1] The debts were basically part of the dissolution of the corporation of which the parties were the only shareholders. It would be inequitable for Hoaas to enjoy the full benefits of the sale and profits of the corporation without also being responsible for the money he misappropriated. [¶ 23.] Consequently, under the facts of this case we determine that the laws of equity require the amount of the offset first to be applied against the compensatory damages. We base this determination on the intertwined relationship of the two claims. Here, Hoaas' claim and Griffiths' offset are essential and integral to the parties' corporate relationship. Therefore, under the principles of equity Griffiths should be able to reduce the amount he owes to Hoaas by the amount he should have received from Hoaas. By doing so, Hoaas is not entitled to compensatory damages and therefore cannot be awarded punitive damages. [2] [¶ 24.] We affirm the trial court's grant of summary judgment in favor of Hoaas. We direct that the setoff determined by the jury must be applied to Hoaas' compensatory damages. Because the setoff negates compensatory damages, we reverse the award of punitive damages to Hoaas. In light of this decision, we need not address the other issues raised on appeal, and we remand to the trial court for judgment to be entered accordingly. [¶ 25.] GILBERTSON, Chief Justice, and KONENKAMP and ZINTER, Justices, concur. [¶ 26.] SABERS, Justice, concurs specially.