Hilgedick v. Koehring Finance Corp.

• Decision Date: 22 April 1992
• Docket Number: No. A039723,A039723
• Citation: 8 Cal.Rptr.2d 76,12 Cal.App.4th 330
• Court: California Court of Appeals Court of Appeals
• Parties: Previously published at 12 Cal.App.4th 330, 5 Cal.App.4th 1118 12 Cal.App.4th 330, 5 Cal.App.4th 1118 Steven K. HILGEDICK et al., Plaintiffs, Respondents and Cross-appellants, v. KOEHRING FINANCE CORPORATION et al., Defendants, Appellants and Cross-respondents.

Page 76

8 Cal.Rptr.2d 76

Previously published at 12 Cal.App.4th 330, 5 Cal.App.4th 1118

12 Cal.App.4th 330, 5 Cal.App.4th 1118

Steven K. HILGEDICK et al., Plaintiffs, Respondents and Cross-appellants, v. KOEHRING FINANCE CORPORATION et al., Defendants, Appellants and Cross-respondents.

No. A039723.

Court of Appeal, First District, Division 2, California.

April 22, 1992.

Review Dismissed and Cause Remanded July 15, 1993.

As Modified on Denial of Rehearing May 14, 1992.

Review Granted July 23, 1992.

Certified for Partial Publication ^*

Pillsbury, Madison & Sutro, Walter R. Allan, James N. Roethe, David S. Winton, San Francisco, for defendants, appellants and cross-respondents.

Paul N. Halvonik, Deborah J. Hinkel, George Gilmore, Berkeley, for plaintiffs, respondents and cross-appellants.

BENSON, Associate Justice.

Defendants Koehring Finance Corporation and Koehring Company (collectively "defendants") have appealed from a judgment after trial partly to the court and partly to a jury. Plaintiffs Steven Hilgedick, Hilgedick Rental Company and Bigelow-Manufacturing Company, doing business as Pacific Manufacturing, (collectively "plaintiffs") also have appealed from portions of the judgment. We have ordered these appeals consolidated in this proceeding.

STATEMENT OF THE CASE

Plaintiffs' complaint alleged five causes of action for declaratory relief, quieting title, interference with business relations, bad faith and breach of contract. The parties stipulated that the declaratory relief, quiet title and breach of contract causes of action would be submitted to the court for decision. The cause of action for interference with business relations was submitted to the jury. The court granted defendants' motion for nonsuit on the bad faith cause of action.

The jury returned a verdict in favor of plaintiffs for compensatory damages in the sum of $730,482.10. In accordance with a stipulation of the parties for a bifurcated trial on the issue of exemplary damages, the jury was then informed that the net worth of defendants was $159 million and it was instructed on the issue of exemplary damages; the jury returned a verdict of punitive damages in the identical amount of the compensatory damages. Thereafter, the court ruled in favor of defendants on the declaratory relief, quiet title and breach of contract causes of action, awarding defendants $1,986,025 on the declaratory relief cause of action together with interest on that amount at 18 percent from March 31, 1981, to the date of judgment. The court denied plaintiffs' motion for a new trial on the causes of action submitted to the court. The court granted defendants' motion for a new trial on the issue of exemplary damages only.

The second jury trial on the issue of exemplary damages began on April 21, 1987, before a different trial judge and a different jury. ¹ The jury returned a verdict in favor of plaintiffs in the sum of $11 million. Judgment was then entered providing as follows: (1) plaintiffs are to recover Defendants filed before the court presiding at the second exemplary damage trial, motions to vacate the judgment, for a new trial and for judgment notwithstanding the verdicts. The court denied the motion for judgment notwithstanding the verdicts but ruled the exemplary damages award in favor of Steven Hilgedick excessive by $2.5 million and granted a new trial subject to his consent to a remittitur in that amount. Hilgedick consented to the remittitur. Plaintiffs and defendants have appealed from those portions of the judgment adverse to them.

compensatory damages of $730,482.10 with interest thereon at 10 percent from December 27, 1982; (2) plaintiffs are to recover exemplary damages totalling $11 million with interest thereon at 10 percent from the date of the verdict of the second jury on May 14, 1987; (3) the deeds of trust and other security documents executed by plaintiffs are valid and enforceable against them in the amount of $1,986,025; (4) plaintiffs are entitled to a credit against the $1,986,025 debt owing to defendants in an amount equal to the compensatory jury verdict and defendants are entitled to interest on the difference at the rate of 18 percent; (5) no part of the exemplary damages awarded to plaintiffs is available to defendants as an offset; and (6) there is added to the judgment an amount equal to any amount recovered by defendants in the bankruptcy proceeding entitled In re Steven Hilgedick, United States Bankruptcy Court, Northern District of California, No. 4-83-02174-H, to the extent defendants' recovery in that proceeding comes from funds that would not have existed but for the award of exemplary damages in this action.

We rendered our initial decision in this matter on August 30, 1990. Defendants petitioned for rehearing of our decision, and on October 1, 1990, we issued an order modifying our opinion and denying rehearing. After defendants' petition for review was denied by the California Supreme Court, they petitioned the United States Supreme Court for a writ of certiorari. On April 22, 1991, --- U.S. ----, 111 S.Ct. 1614, 113 L.Ed.2d 713, the Supreme Court granted the writ, vacated the judgment in this matter, and remanded the case to us for further consideration in light of Pacific Mut. Life Ins. Co. v. Haslip (1991) 499 U.S. 1, 111 S.Ct. 1032, 113 L.Ed.2d 1 (hereafter Haslip ). The parties have submitted supplemental briefing addressing the Haslip decision. As directed by the Supreme Court, we consider the impact of Haslip below.

DISCUSSION

Plaintiffs and defendants have challenged determinations reached in the first liability trial and in the second trial on the issue of exemplary damages. Since the evidence presented at each trial differs somewhat, we shall discuss the issues with respect to each trial separately.

I. The First Trial

A. Statement of Facts

This trial commenced on December 13, 1982 and lasted eight days. Plaintiff Steven Hilgedick testified he bought 75 percent of Pacific Trencher & Equipment, Inc. in 1972. Between 1973 and 1979 Pacific Trencher's gross sales of construction equipment and of replacement parts for trenchers grew from over $1 million to over $10 million and the number of its employees increased from nine to about 70. In 1979 over 50 percent of its gross sales came from sales of used construction equipment.

Hilgedick also purchased an interest in Bigelow-Hilgedick Manufacturing Company which did business under the name Pacific Manufacturing Company. This company designed and built a new trencher called the P-40 which it sold to Pacific Trencher which in turn retailed the trenchers. Between 1973 and 1978 the annual sales volume of Pacific Manufacturing grew from $60,000 to over $1 million.

Hilgedick Rental Company, a sole proprietorship of Steven Hilgedick, bought construction machinery and made it available to Pacific Trencher for rental purposes. If Defendant Koehring Finance is a wholly owned subsidiary of Koehring Company. Koehring Finance finances sales of equipment manufactured by various divisions of Koehring Company and sold by Koehring Company or its distributors.

Pacific Trencher had a rental customer for a machine owned by Hilgedick Rental, Pacific Trencher would rent the machine from Hilgedick Rental. Hilgedick Rental would then invoice Pacific Trencher for the rental. By 1978 Hilgedick Rental had a sales volume between $700,000 and $1 million.

By 1977 Pacific Trencher was selling new lines of equipment, including machines from one of Koehring Company's divisions known as Speedstar. In late 1977 the Lorraine division of Koehring Company approached Hilgedick about selling its cranes. Hilgedick agreed to sell the cranes if he could also sell excavating equipment and backhoes produced by another division of Koehring. At the time Koehring Company had no Northern California dealer for this equipment. Agreement was reached in January 1978. In order to handle the new lines, Pacific Trencher hired additional employees and moved to a larger facility on Washington Street in San Leandro which Hilgedick purchased and leased to Pacific Trencher. The Rexnord line of construction equipment was added later with Koehring Company's agreement.

To finance this expansion, Hilgedick obtained a $1.5 million line of credit with United California Bank ("UCB") and arranged for "flooring" credit with Koehring Finance Corporation. The flooring arrangement between Pacific Trencher and Koehring Finance provided for one year without any payments for unsold equipment followed by six months of payments of interest only.

The Koehring Company cranes and tractors did not sell well. In March 1979 Pacific Trencher had to begin borrowing an average of $14,000 a month against its accounts receivable to pay interest on the unsold equipment and other operating costs.

About this time, Pacific Manufacturing began making successful bids on government contracts. Pacific Trencher acted as financial guarantor for these contracts.

In mid 1979 the bank officer who handled Pacific Trencher's line of credit at UCB left. The new bank officer did not understand the debt-to-net-worth ratio in the construction equipment industry. UCB lowered the line of credit from $1.5 million to $750,000 and dropped the advance on eligible accounts receivable from 80 to 60 percent, cutting cash flow and making it impossible for Pacific Trencher to pay its bills.

Hilgedick discussed this problem with Koehring Finance representatives at an annual convention in early 1980. In January 1980 the construction equipment industry was weakening and sales were dropping off causing concern to Koehring Finance. Rexnord and the Westinghouse Credit which floored the Rexnord line for Pacific Trencher both gave Hilgedick a three month moratorium on payments. UCB then directed Pacific Trencher's creditors to pay money owed Pacific Trencher directly to UCB, effectively cutting off Pacific Trencher's cash flow completely.

Ray Lackenbauer,...