Developer’s Financial Finagling Supports Punitive Damages Award

Old Town Development sued a slew of companies for fraud and breach of fiduciary duties in operating Old Town Development. After a bench trial, the trial court awarded Old Town over $1 million compensatory damages and three times that for punitive damages.

The defendant companies appealed. The appellate court’s opinion is instructive on the standards of review for the various aspects of a punitive damages award.

The first part of the punitive damages test was whether “punitive damages were available as a matter of law [under] plaintiff’s cause of action.” The appellate court ruled that its standard of review was de novo (no discretion to the trial court). In this case, the First District Illinois Court of Appeals ruled, a breach of fiduciary duty action could support a claim for punitive damages.

The second part of the test was whether the defendant companies acted with willful and wanton disregard for Old Town’s rights. The appellate court reviewed the “factual determination that defendants acted willfully and that aggravating factors exist under the manifest-weight standard … In applying this standard, we give deference to the trial court as the finder of fact because it is in the best position to observe the conduct and demeanor of the parties and the witnesses … For that reason, we may not substitute our judgment for that of the trial court regarding the credibility of witnesses, the weight to be given to the evidence, or the inferences to be drawn.”

In this case, the appellate court affirmed the finding of willful disregard of Old Town’s rights because the trial court “‘was shocked by the nonchalance with which both McLean [defendant] and his accountant * * * described their misconduct in their testimony’ and how any device they could use to deceive Tully was deemed justified because Tully was considered a pest and an impediment to McLean’s business interests.”

Next was the whether it was proper to award punitive damages in view of its legal purpose ― punishment and deterrence. The appellate court gave the trial court lots of latitude on this question, and ruled the standard of review was abuse-of-discretion.

The company defendants argued that the court was biased, and thus the punitive damages award was not made to punish or deter. But the appellate court again referred to McLean’s nonchalance, “which was well within the scope of the [trial] court’s consideration. There is nothing to show the court’s decision to award punitive damages was the result of the court’s bias against defendants …”

The appellate court also considered whether the amount of the punitive damage award was appropriate. The appellate court did not state a standard of review on this question, but it did “review the [trial] court’s computation of the amount of punitive damages award to determine whether the amount was excessive or the result of passion, partiality, or corruption.” The defendant companies argued that a three-to-one punitive-to-compensatory ratio was too harsh because there was no intention to hurt Old Town.

But the appellate court ruled that didn’t matter. “The fact that defendants may not have intended to harm plaintiffs does not take away from the fact that they were fully aware of and ignored the impact their ‘on demand loans’ [taken out of Old Town] would have on Old Town … OTD [Old Town] was harmed by the transfers in that it couldn’t meet its financial obligations and was charged late fees and penalties as a result. It was also unable to use its own funds or earn interest thereon during the period the interest-free loans were outstanding.”

The defendant companies also challenged the punitive damages award as violating their due process rights under the U.S. Constitution. Reviewing the constitutional argument under a de novo standard of review, the appellate court ruled there was no due process violation.

Read this most interesting opinion, Tully v. McLean, No. 1-09-2976 (4/26/11), by clicking here.