Nash v. Craigco, Inc.

• Decision Date: 02 October 1978
• Docket Number: No. 15216,15216
• Citation: Nash v. Craigco, Inc., 585 P.2d 775 (Utah 1978)
• Parties: Savery L. NASH, Plaintiff and Appellant, v. CRAIGCO, INC., a Utah Corporation, Craig A. Knight and Cathy Knight, Defendants and Respondents.
• Court: Utah Supreme Court

Page 775

585 P.2d 775

Savery L. NASH, Plaintiff and Appellant, v. CRAIGCO, INC., a Utah Corporation, Craig A. Knight and Cathy Knight, Defendants and Respondents.

No. 15216.

Supreme Court of Utah.

Oct. 2, 1978.

David S. Dolowitz of Parsons, Behle & Latimer, Salt Lake City, for plaintiff and appellant.

Grant Macfarlane, Jr., Chris P. Wangsgard, Salt Lake City, for defendants and respondents.

ELLETT, Chief Justice:

Plaintiff appeals from a judgment entered by the District Court of Salt Lake County on a directed verdict dismissing that portion of plaintiff's complaint praying for punitive damages.

Plaintiff and Defendant Craig A. Knight (hereafter defendant) formed a corporation and issuance of 1,000 shares of capital stock was authorized. Because of involvement with other businesses, plaintiff did not wish to take shares in the corporation at the time of organization, but by agreement with defendant, paid for an option to purchase 501 of the 1,000 shares of capital stock which had all been issued to defendant.

Plaintiff claims the evidence at the trial indicated that it was the intent of both parties at the time of incorporation that they be "partners" throughout the duration of the venture, plaintiff to provide legal advice and capital, defendant to provide management, and that plaintiff would ultimately have voting control of the corporation. Before plaintiff had exercised his option and without informing plaintiff, defendant, under an alleged claim of right caused the now successful corporation to issue an additional 14,700 shares to himself and his wife in exchange for property that they owned. Several weeks later, when plaintiff attempted to exercise his option, defendant refused to honor the option agreement, and informed plaintiff of the issuance of the additional shares which consequently would dilute plaintiff's interest in the corporation. Plaintiff filed an action alleging that the defendant, as "partner" and general manager, maliciously violated his fiduciary duty to plaintiff, and praying for the District Court to order defendant to convey 501 of the 1,000 shares of capital stock to plaintiff, to force rescission of the exchange of property for the additional shares, and to award punitive damages based upon the breach of fiduciary duty by defendant.

The District Court granted plaintiff's motion for a directed verdict, and ordered defendant to specifically perform the option agreement by issuing 501 shares of stock to plaintiff and to cancel the additional 14,700 issued to defendant and his wife.

The court also granted defendant's motion for directed verdict on the issue of punitive damages, ruling as a matter of law that there was no evidence of malice. Plaintiff appeals on this latter portion of the judgment, arguing that the evidence presented a factual issue with respect to malice on the part of defendant, and plaintiff was entitled to have the jury consider this issue.

We have reviewed the evidence and find that reasonable minds could differ in deciding whether defendant acted wilfully and maliciously in issuing the 14,700 shares of stock, and whether he did so with the intent to injure the plaintiff.

The only issue raised is whether punitive damages can be allowed in an equitable proceeding where relief other than financial is sought.

The trial court ruled that the defendant wrongfully increased the number of shares of stock in the corporation from 1,000 of which 501 was to be delivered to Nash, upon exercise of an option which he held, by some 14,700 shares which were given to the individual defendants. This maneuver completely destroyed the value of Nash's option and prevented him from having control of the corporation as originally agreed. Not only did he make it impossible for Nash to control the corporation, but he even refused to honor the option to take the 501 shares of stock provided for therein.

The corporation was organized as a medium through which Nash and Knight as partners could operate. While Knight had control of the corporation he owed a fiduciary duty to deal fairly and openly with Nash. This he failed to do, and even in defiance of the advice of his lawyer that his conduct "would no doubt yield to a lawsuit."

The case was tried to a jury, but the Court took the matters in his own hands and made findings of fact, one of which was that " . . . neither party has acted wilfully, maliciously or in bad faith . . . " That finding just cannot be sustained.

As to punitive damages in this case, it appears that the question was one for the jury to decide. While Nash never requested a sum of money in the prayer of his complaint, he did ask that the 14,700 shares of stock issued to the defendant be cancelled and that Knight cause the corporation to issue the 501 shares of stock according to the original agreement. Whether a party gets relief in equity or as a substitute therefor gets money ought not make a difference.

While the cases generally hold that the amount of punitive damages must bear some reasonable relation to the amount of actual damages awarded, this is not necessarily true. In a tort action of defamation where the charge is not actionable per se, no cause of action can be established unless and until there is a finding of special damages from proof adduced, hence there can be no punitive damage in such cases unless there is an actual financial damage.

In Prince v. Brooklyn Daily Eagle ¹ it was said:

A person may be of such high character that the grossest libel would damage him none; but that would be no reason for withdrawing his case from the wholesome, if not necessary, rule in respect of punitive damages. It is in such cases that the rule illustrates its chief value and necessity.

In the case of Samuels v. Evening Mail Ass'n ² in the dissenting opinion the judge said:

The plaintiff in an action of libel gives evidence of malice whenever he proves the falsity of the libel. It becomes, then, a question for the jury whether the malice is of such a character as to call for exemplary or punitive damages; and that question is not to be taken away from the jury because the defendant gives evidence which tends to show that there was, in fact, no actual malice. When he gives no such evidence it is the duty of the court to say to the jury that, upon proof of the falsity of the libel, the plaintiff is entitled to exemplary damages in their discretion. (Tillotson v. Cheetham, 3 Johns., 56; and see opinion of KENT, Ch.J., in same case; Taylor v. Church, 8 N.Y. 452, where the rule of Tillotson v. Cheetham is approved; Hunt v. Bennett, 19 N.Y. 173.) But where he gives evidence tending to prove the absence of actual malice, then it is the duty of the judge to submit to the jury the question, as one of fact, whether such malice existed in the publication. This is what the learned judge did on the trial of this case; and I think it is a mistake to say that there was no evidence calling for such a charge.

Upon appeal to the court of appeals the dissenting opinion was made the opinion of the court. ³

Our sister state of Idaho had the question raised in the case of Village of Peck v. Denison ⁴ and held that punitive damages may be awarded when the plaintiff only seeks equitable relief. There the plaintiff sought to enjoin the defendants from interfering with the use of water and to quiet title to the same. The trial court gave a judgment which included $6,000 punitive damages but no actual damages. At pages 314 and 315 of the Pacific Reports the court said:

The absence of a showing of actual damages need not bar an award of punitive damages, for such a showing is not a talismanic necessity. The reason for such a requirement is that it first insures that some legally protected interest has been invaded. It prevents the assessment of punitive damages against one who may have caused damage without legal injury. There is no reason why an award of equitable relief may not fulfill this same function, for in either case it is necessary first to show an invasion of some legally protected interest. The Village plainly has done so in this case.

In Haskins v. Shelden ⁵ the Supreme Court in affirming the judgment (except as to attorney fees) cited McCormick on Damages (Sec. 83 of the Hornbook series) as follows (I)t seems desirable to recognize the principle that, if a cause of action is found to exist by the jury, in a case where 'actual' damage is not an essential element of the cause of action, then, if the necessary culpability on defendant's part be established, a verdict for exemplary damages is proper, though the award of other damages is nominal or absent entirely.

It may well be . . . that in a given case the plaintiff has proved the Existence of substantial pecuniary loss, but the evidence fails to fix the amount of that loss with sufficient definiteness to meet the law's standard of certainty. Does this establish a cause of action independent of punitive damages? As a matter of practical justice, it would seem to present a situation where, in cases of malice or recklessness, the requirement of certainty might well be relaxed as against a culpable wrongdoer by allowing a substantial recovery in the form of exemplary damages, and several decisions support the view that, Where the fact of substantial damage is established, though not the amount, punitive damages may be given.

And then said:

(4) Appellants contend that punitive damages cannot be awarded unless an award of actual damages is first made. This being so, they argue that appellee Shelden cannot be allowed to recover punitive damages because she did not recover any actual compensatory damages. In response appellees argue that the judgment entitling appellee Shelden to recovery of the tractor is equivalent to the award of actual damages that is normally required.

On the subject of compensatory damages as a prerequisite to the award of punitive damages, McCormick notes that:

The instant case fits exactly...