Simon v. San Paolo US Holding Co., Inc., S121933.

CourtUnited States State Supreme Court (California)
Citation113 P.3d 63,35 Cal.4th 1159,29 Cal.Rptr.3d 379
Docket NumberNo. S121933.,S121933.
PartiesLionel SIMON, Plaintiff and Appellant, v. SAN PAOLO U.S. HOLDING COMPANY, INC., Defendant and Appellant.
Decision Date16 June 2005

29 Cal.Rptr.3d 379
35 Cal.4th 1159
113 P.3d 63

Lionel SIMON, Plaintiff and Appellant,
SAN PAOLO U.S. HOLDING COMPANY, INC., Defendant and Appellant

No. S121933.

Supreme Court of California.

June 16, 2005.

29 Cal.Rptr.3d 381
Knapp Petersen & Clarke, Andre E. Jardini, Kevin J. Stack and Mitchell B.
29 Cal.Rptr.3d 382
Ludwig, Glendale, for Plaintiff and Appellant

Todd A. Smith; Jeffrey R. White; Smoger and Associates and Gerson H. Smoger, Oakland, for the Association of Trial Lawyers of America as Amicus Curiae on behalf of Plaintiff and Appellant.

Law Office of Daniel U. Smith, Daniel U. Smith, Kentfield, and Ted Pelletier for Consumer Attorneys of California as Amicus Curiae on behalf of Plaintiff and Appellant.

Amy Bach, Mill Valley; Pillsbury & Levinson, Arnold R. Levinson, San Francisco; Esner & Chang, Stuart B. Esner, Los Angeles, and Andrew N. Chang, Oakland, for United Policyholders as Amicus Curiae on behalf of Plaintiff and Appellant.

Epport & Richman, Epport, Richman & Robbins, Steven N. Richman and Lawrence A. Abelson, Los Angeles, for Defendant and Appellant.

Susan Liebeler; Daniel J. Popeo and David Price for Washington Legal Foundation as Amicus Curiae on behalf of Defendant and Appellant.

Horvitz & Levy, Lisa Perrochet and Curt Cutting, Encino, for the California Chamber of Commerce, the American Chemistry Council, the National Association of Manufacturers, Unocal Corp. and American International Companies as Amici Curiae on behalf of Defendant and Appellant.

Mayer, Brown, Rowe & Maw, Andrew L. Frey, Evan M. Tager, Donald M. Falk, Palo Alto; National Chamber Litigation Center and Robin S. Conrad for The Chamber of Commerce of the United States as Amicus Curiae on behalf of Defendant and Appellant.

Greines, Martin, Stein & Richland, Robert A. Olson, Los Angeles, and Feris M. Greenberger for Farmers Insurance Exchange, Truck Insurance Exchange, Fire Insurance Exchange and Mid-Century Insurance Company as Amici Curiae on behalf of Defendant and Appellant.

Hugh F. Young, Jr.; Martin, Bischoff, Templeton, Langlset & Hoffman, Jonathan M. Hoffman; Drinker Biddle & Reath and Alan Lazarus, San Francisco, for The Product Liability Advisory Council, Inc., as Amicus Curiae on behalf of Defendant and Appellant.

Deborah J. La Fetra, Sacramento, for Pacific Legal Foundation as Amicus Curiae.

29 Cal.Rptr.3d 380

In an action arising from plaintiff's failed attempt to purchase an office building from defendant, the jury found that the parties had no binding and enforceable agreement but that defendant had committed promissory fraud. On his fraud cause of action, plaintiff was awarded $5,000 in economic compensatory damages and $1.7 million in punitive damages. Considering all the relevant circumstances, we conclude this award of punitive damages exceeds the federal due process limitations outlined in recent United States Supreme Court decisions. We further conclude the maximum award constitutionally permissible in the circumstances of this case is $50,000.

The central issue presented is whether, in addition to the $5,000 in compensatory damages awarded, the punitive damages award should be measured against the $400,000 in profit plaintiff claims he would have achieved had defendant sold the property to him at the agreed price. Plaintiff argues this amount represents either the uncompensated harm he suffered from defendant's conduct or the potential harm that conduct could have caused him. On this issue, we conclude that while uncompensated or potential harm may in some circumstances be properly considered

29 Cal.Rptr.3d 383
in assessing the constitutionality of a punitive damages award, here defendant's fraud neither caused nor foreseeably threatened to cause $400,000 in harm to plaintiff. Under these circumstances, the $1.7 million punitive damages award must be measured against the $5,000 compensatory award, and so measured it is grossly excessive

Our decision here addresses only the federal constitutional question, not any issue of excessiveness under California law.


Plaintiff Lionel Simon owns and operates a paper supply company, Liberty Paper Company, located in Los Angeles. In 1996, when the events that gave rise to this lawsuit occurred, Simon was leasing premises for his business; he had never before purchased a commercial building.

Defendant San Paolo U.S. Holding Company, Inc. (San Paolo Holding), is a wholly owned subsidiary of an Italian bank, Instituto Bancario San Paolo, S.p.A. (San Paolo Bank). In the mid-1990's, San Paolo Holding acquired and disposed of the nonperforming loans and real property of First Los Angeles Bank, a bank San Paolo Bank sold in 1995. At the end of 1996, San Paolo Holding had net assets worth around $46 million. Pursuant to a plan of liquidation, however, most of this wealth was transferred in cash to the parent corporation, and by 1998, when punitive damages were tried in this case, San Paolo Holding held only about $4.8 million in net assets.

Duane King, who represented San Paolo Holding in the failed negotiations with Simon, was a vice-president in charge of disposing of the properties acquired from First Los Angeles Bank. William Schack, a first vice-president of San Paolo Holding, supervised King.

In 1994, Simon noticed that a small downtown office building at 816 South Figueroa Street was for sale. He considered it perfect for his business needs and remained interested in buying it after San Paolo Holding acquired it through foreclosure in late 1995. In March 1996, Simon learned that an arrangement to sell the building to an investment group headed by Robert DeVogelaere for $1.5 million had fallen though; Simon then asked William Atha, the real estate broker handling the property for San Paolo Holding, to present Simon's offer to buy the building for $1.2 million. In ensuing negotiations, King twice raised the asking price after obtaining Simon's oral agreement to buy, and no written agreement was reached. Additional negotiations in April and May collapsed in disputes over price (King wanted $1.35 million) and closing date (King wanted to close by the end of June for internal bookkeeping reasons, while Simon wanted a long escrow in case the foreclosed prior owner exercised its right of redemption).

The parties finally reached a tentative written agreement in June 1996. On June 12, King and Simon executed a letter of intent drafted by Atha, the broker. In exchange for San Paolo Holding's acceptance of a $1.1 million sale price, Simon promised his cooperation in closing the transaction by June 27. Escrow was to open by 5:00 p.m. the next day, June 13, upon the approval of San Paolo Bank's Los Angeles and New York offices. Simon was to deposit $50,000 to open escrow and was to complete all inspections and due diligence and secure financing by June 26, at which time his deposit would be released to the seller. The parties agreed "to exclusively negotiate upon execution of this letter" and "to proceed to escrow and attempt to complete a transaction based upon the above conditions," which were said to constitute the "essential elements" of the transaction. Simon added a handwritten

29 Cal.Rptr.3d 384
addendum stating, "This letter is intended as a letter of intent only and this transaction is subject to approval by legal counsel of the deposit receipt and escrow instructions." (Simon retained counsel on June 12, paying a nonrefundable $5,000 retainer.) On the facsimile cover sheet transmitting the executed letter to Simon, Atha described it as a "signed letter of intent (nonbinding)."

On the morning of June 13, Atha asked Simon if he could have his inspections done by June 21, instead of June 26 as agreed. Simon replied that he also was anxious to complete the purchase and would try to have the inspections done by June 21. Later, Atha called to tell him that San Paolo Holding was now insisting on completion by June 21. Simon said he would agree to finish by June 24, a Monday, and to use his best efforts to do so by June 21, the previous Friday. Atha drafted a deposit receipt reflecting that schedule, but King did not sign it. Despite Atha's pointing out to both sides that they were only one business day apart in their positions, no further agreement was reached and escrow did not open as planned on June 13. Around 5:00 p.m. on June 13, King faxed a letter to Simon, giving notice that San Paolo Holding "has failed to come to terms with you" and "[a]ccordingly, we are terminating negotiations with you and plan to move on in our efforts to market the building."

Schack, King's supervisor in Los Angeles, testified that he and King wanted to sell the building at 816 South Figueroa Street in the quarter ending June 30, 1996, in order to maximize the department's bonus and show bank headquarters that the Los Angeles office was selling assets. According to Schack, after King signed the letter of intent specifying June 26 as the buyer's date to complete inspections and release his deposit, King and Schack instead decided that "the 21st was what would work for us." Although King told Schack that Simon had agreed to complete by June 24, King and Schack did not seek approval from the New York office for any date other than June 21. Because Simon would not agree to June 21, "the transaction was cancelled."

King agreed with Schack that the "big issue" causing failure of the sale to Simon was the date for completion of inspections and release of Simon's deposit. King also suggested that escrow could not be opened on June 13 because Simon did not submit the financial statements necessary for him to obtain financing from San Paolo Bank. Atha, however, testified that King told him San Paolo Holding would not accept Simon's deposit or financials because of the disagreement over the release date; Atha in turn told Simon not to bother tendering the deposit and submitting the financials.

On June 14, 1996, San...

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