Citizens State Bank v. Shearson Lehman Bros., Inc., Civ. A. No. 93-2351-JWL.

• Decision Date: 30 December 1994
• Docket Number: Civ. A. No. 93-2351-JWL.
• Citation: 874 F. Supp. 307
• Parties: CITIZENS STATE BANK, Plaintiff, v. SHEARSON LEHMAN BROTHERS, INC., Defendant.
• Court: U.S. District Court — District of Kansas

874 F. Supp. 307

CITIZENS STATE BANK, Plaintiff, v. SHEARSON LEHMAN BROTHERS, INC., Defendant.

Civ. A. No. 93-2351-JWL.

United States District Court, D. Kansas.

December 30, 1994.

Matthew D. Keenan, Paul W. Rebein, Shook, Hardy & Bacon, Overland Park, KS, for plaintiff.

J. Randall Coffey, Blackwell, Sanders, Matheny, Weary & Lombardi, John W. Shaw, Nicholas L. DiVita, Matthew V. Bartle, Lisa J. Henoch, Bryan Cave, Kansas City, MO, for defendant.

MEMORANDUM AND ORDER

LUNGSTRUM, District Judge.

I. Introduction

On October 20, 1994, a jury returned its verdict in this fraud case finding the defendant, Shearson Lehman Brothers, Inc. ("Shearson"), liable to the plaintiff, Citizens State Bank ("CSB"), for $236,000.00 in actual damages. It also found that the plaintiff was entitled to an award of punitive damages. Because the court had held under advisement that portion of defendant's motion for judgment as a matter of law (Doc. # 150) pursuant to Fed.R.Civ.P. 50(a) which focused on the subject of whether or not prejudgment interest was due to the plaintiff,¹ the court directed the clerk to enter a minute order reserving entry of judgment pending the determination of that issue. On December 19, 1994, following the receipt of written submissions, the court conducted a separate proceeding regarding the punitive damage issue as provided for in K.S.A. 60-3702.² At the hearing, the parties introduced several exhibits pertinent to the proper amount of punitive damages to be awarded and counsel for both sides presented oral argument.

Having considered all of the evidence in the case, the papers filed by the parties and counsel's arguments, the court is now prepared to issue its ruling on the interest issue raised in the Rule 50 motion and concerning the amount to be awarded as punitive damages in the case.³ For the reasons set forth below, the court finds that the plaintiff is not entitled to prejudgment interest and the court directs the clerk to enter judgment for the plaintiff against the defendant for actual damages in the amount of $236,000.00 and for punitive damages in the amount of $500,000.00.

II. Discussion

A. Prejudgment Interest

The plaintiff contends that it is entitled to prejudgment interest against the defendant computed at the contract rate for the loan which it was induced to enter into with TransAmerica Equities, Inc., ("TEI") by the false representations of the defendant's former employee, Ephraim Yurowitz. The defendant contends that Kansas law does not authorize an award of prejudgment interest, either at the contract rate or the statutory rate, in a case such as this one. The court agrees with the defendant.

The court's analysis starts with Scholz Homes, Inc. v. Wallace, 590 F.2d 860 (10th Cir.1979), cited by the defendant. There, in rejecting a "benefit of the bargain" damage approach analogous to what the plaintiff seeks here, the court stated, "We find no Kansas authority allowing such recovery against a defendant who fraudulently induces the plaintiff to contract with a third party." Id. at 864. This court has not been shown by the plaintiff, nor has it been able to find on its own, any Kansas authority that permits such a recovery, either. As Scholz Homes holds, recovery under these circumstances is limited to recouping "out of pocket loss" because the remedial goal is to place the injured party in the position it would have occupied had it not been defrauded. Id. Allowing plaintiff a judgment against this defendant for the interest which TEI obligated itself to pay would give plaintiff the benefit of its bargain with TEI and not merely restore it to the status quo ante.

The plaintiff cites Sanders v. Park Towne, Ltd., 2 Kan.App.2d 313, 578 P.2d 1131 (1978), in support of its position. In Sanders, the Kansas Court of Appeals upheld the trial court's allowance of prejudgment interest on the unpaid balance of certain promissory notes as "part of the actual loss". Id. at 320, 578 P.2d 1131. Although arguably at odds, this court believes that the two cases are, in fact, consistent. In Sanders, the fraud affected the priority of a mortgage lien, which deprived the plaintiff of the ability to collect not only the principal but also the interest which it was due. Put another way, had the fraud not occurred the plaintiff would have recovered the entire unpaid balances of the promissory notes, including the interest. The plaintiff was "out of pocket" the interest which was secured by the lien. By contrast, in Scholz Homes, a promoter induced the Wallaces to enter into a contract to build a residence with an insolvent builder, who defaulted on the obligation, and then sought to recover from the perpetrator of the fraud the difference between the contract price and the actual cost of construction. As the court explained, had the Wallaces not been defrauded they would have contracted with a builder who was reputable and solvent, but not necessarily one which would have agreed to that contract price, and the measure of damages, therefore, was the difference between the price a reputable and solvent builder would have charged and what the Wallaces actually paid for the residence. Scholz Homes at 864.

This case is not like Sanders in that the fraud did not prevent the plaintiff from collecting the loan from TEI. The fraud induced the making of it to begin with. In that sense it is much more like Scholz Homes. Absent the fraud, CSB would not have loaned the money at all. It did not actually advance sums over and above the principal. Although failing to collect interest at some rate deprives CSB of the use value of the money advanced, since there was no evidence offered to show what use it would have made of the money has it not made the TEI loan. It would be purely speculative to assume that it would or could have made another loan, or invested the money otherwise, had CSB not loaned the money to TEI. Thus, its out of pocket loss is limited to the unpaid principal balance, which is what the jury awarded as actual damages.

This case is also unlike Federal Deposit Insurance Corp. v. Hudson, 758 F.Supp. 663 (D.Kan.1991). In Hudson, Judge Saffels found the individual defendant who had induced the loan to his insolvent corporation liable for the unpaid interest as well as the principal balance. His decision, however, seems to have been influenced by the inequity of the alternative result, which would have allowed the individual at fault the free use of the money, as well as by certain alter ego considerations which are not applicable to this case. At least as to the fairness prong, Hudson is consistent with Kansas cases such as Lightcap v. Mobil Oil Corp., 221 Kan. 448, 562 P.2d 1 (1977), in which prejudgment interest was allowed because the defendants "made active use of plaintiffs' money, and plaintiffs were deprived of that use." Id. at 469, 562 P.2d 1. In this case, the defendant did not make use of the plaintiff's money and neither equitable principles nor Kansas law in general would seem to allow for the recovery of interest at the contract rate here.

There has also been some question raised concerning whether the Kansas prejudgment interest statute (K.S.A. 16-201) might provide an alternative basis for the plaintiff to recover for its loss of the use of the funds that were advanced to TEI. However, that statute, and the cases decided under it, make it clear that it is not applicable absent the violation of duties which arise under a contract, either express or implied. The Kansas Supreme Court has recently restated that point in Kilner v. State Farm Mut. Auto Ins. Co., 252 Kan. 675, 847 P.2d 1292 (1993). There, in considering whether or not prejudgment interest should be awarded under the statute, the court held, "Where an amount is due upon contract, either express or implied, and there is no uncertainty as to the amount which is due or the date on which it becomes due, the creditor is entitled to recover interest from the due date." Id. at 687, 847 P.2d 1292 (emphasis added). Here, where the defendant's then employee induced the plaintiff to enter into a contract with a third party based upon a false credit reference, with only indirect benefit to the defendant (derived from the value to it of having the guilty employee in its employ), there was neither an express contract or any basis in the law to imply one. This is a straight tort case and K.S.A. 16-201 simply does not apply.

B. Punitive Damages

The court has carefully considered the seven factors listed in K.S.A. 60-3702(b) and discusses them below. However, it does bear noting that the statutory language which sets out those factors is precatory and not mandatory in nature. The Kansas Legislature has suggested that certain criteria be reviewed by indicating that the court at the punitive damage proceeding "may" consider those enumerated factors. This court and others have determined that these considerations are not exclusive. See e.g. Patton v. TIC United Corp., 859 F.Supp. 509 (D.Kan. 1994); Fenstermacher v. Telelect, 1992 W.L. 100312 (D.Kan. April 22, 1992) (O'Connor, J.). Moreover, the determination of an amount of punitive damages should not be a purely mechanistic application of these factors. The judge before whom the case was tried, who has been exposed to the evidence and can evaluate for him or herself the nature of the conduct which gave rise to punitive damage liability, should exercise considerable discretion in fixing the proper amount to be awarded in order to accomplish the purposes for which punitive damages are authorized by statute. Here, the court has taken into consideration all of the evidence presented during the trial of this matter as well as the evidence and arguments presented in the punitive damages proceeding in arriving at its decision.

It also merits mention that this case is somewhat atypical of punitive damage cases. For example, the defendant was found vicariously liable for misconduct which was...