Torrance County Mental Health Program, Inc. v. New Mexico Health and Environmental Dept.

• Decision Date: 13 April 1992
• Docket Number: No. 19272,19272
• Citation: 113 N.M. 593,1992 NMSC 26,830 P.2d 145
• Parties: TORRANCE COUNTY MENTAL HEALTH PROGRAM, INC., Plaintiff-Appellee, v. NEW MEXICO HEALTH AND ENVIRONMENT DEPARTMENT, Defendant-Appellant.
• Court: New Mexico Supreme Court

Page 145

830 P.2d 145

113 N.M. 593

TORRANCE COUNTY MENTAL HEALTH PROGRAM, INC. Plaintiff-Appellee, v. NEW MEXICO HEALTH AND ENVIRONMENT DEPARTMENT Defendant-Appellant.

No. 19272.

Supreme Court of New Mexico.

April 13, 1992.

Rehearing Denied May 15, 1992.

[113 NM 594] Jerry Dickinson, Clifford M. Rees, Geoffrey Sloan, Special Asst. Attys. Gen., Santa Fe, for defendant-appellant.

Ray Twohig, Albuquerque, for plaintiff-appellee.

William H. Carpenter, Michael B. Browde, Albuquerque, for amicus curiae New Mexico Trial Lawyers Ass'n.

OPINION

MONTGOMERY, Justice.

In this case we answer the question whether punitive damages may be recovered from a governmental entity in an action for breach of contract. We also consider two other damage issues arising under the particular facts in the case and the evidence at trial: whether damages for the plaintiff corporation's "loss in value" caused by the defendant's breach of contract were properly awarded, and whether the plaintiff could recover damages for its employees' efforts in winding up the contract after defendant terminated it.

The first issue is obviously the major one on this appeal. On that issue, we hold that the state's policy of not permitting assessment of punitive damages in tort cases, as reflected in our Tort Claims Act, applies also, despite legislative silence on the issue, to breach-of-contract cases. On the other two issues, we hold that, while damages for loss in value might in a proper case be recovered from the breaching party, the evidence in this case did not warrant submission of the claim to the jury; and that the jury properly awarded damages for the employees' efforts in winding up the contract. We therefore reverse the judgment as to all but the winding-up damages and remand with instructions to enter a new judgment.

I.

Plaintiff Torrance County Mental Health Program, Inc. (TCMHP), is a nonprofit corporation organized to provide mental health and related counseling services in Torrance County, New Mexico. In 1978, defendant New Mexico Health and Environment Department (HED) first contracted with TCMHP to provide specified mental health counseling services in Torrance County. After a series of annual contract renewals, the parties executed a contract for the fiscal year beginning July 1, 1981, and in August of that year amended the contract to authorize TCMHP to provide expanded service to residents of adjacent Valencia County. The contract sum payable to TCMHP in the amended contract was $161,468 for services in both counties.

The contract allowed HED to conduct site visits at TCMHP's offices to monitor the contractor's performance. On September 21-23, 1981, the program manager of HED's Mental Health Bureau, Alfredo Santistevan, conducted a site visit at TCMHP's Torrance and Valencia County offices. He determined, according to HED's version of the facts, that TCMHP had been providing treatment that did not qualify as mental health treatment under the contract and that was therefore unauthorized. He summarized his findings in a report, based upon which HED asserted that TCMHP was guilty of "serious misuse of funds," justifying termination of the contract for cause. The contract provided for termination with or without cause. Termination without cause required thirty days written notice; termination for cause permitted termination without prior notice, with "cause" defined as "client abuse, malpractice, fraud, embezzlement or other serious misuse of funds." Based on Santistevan's site report and HED's evaluation of the program, HED terminated the contract effective December 15, 1981, and directed TCMHP to engage in post-termination activities.¹

TCMHP's version of the facts, which of course we view in the light most favorable to support the jury's verdict, was that HED terminated the contract as the result of a conspiracy among Santistevan, Robert Garcia (then director of the Behavioral Health Services Division at HED), possibly other HED officials, and Sam Vigil. Vigil had been hired by TCMHP's executive director, Madeline Brito-Diaz, and had, according to TCMHP, insinuated himself into a position of power at TCMHP and subsequently assumed executive director-like duties at TCMHP's post-August 1981 program in Valencia County, Valencia Counseling Services Program ("Valencia Counseling"). Valencia Counseling was incorporated with a separate board of directors sometime after HED terminated TCMHP's contract and was subsequently expanded to provide mental-health and related services in three counties. By the time of trial in 1990, it had acquired total assets of $1.5 million. Vigil served as its executive director during all or most of this period.

According to TCMHP (although this is impossible to know, for reasons we shall shortly describe), Vigil conspired and connived with Santistevan and Garcia and others to achieve a position of dominance in the Valencia County program, and HED's termination of the contract occurred as part of the scheme to transfer control of both the Valencia and Torrance County programs to Vigil and withdraw them from TCMHP's management.

TCMHP brought this action against HED in September 1982. As originally filed, the suit sought relief by way of mandamus, injunction, and damages for breach of contract, fraud, and civil rights violations. Nine individuals (consisting of various employees, clients, and members of the board of directors of TCMHP) joined TCMHP as plaintiffs, and three individuals (including Santistevan, Garcia, and George Goldstein, then Secretary of HED) were named along with HED as defendants. In 1985, TCMHP filed an amended complaint, seeking damages for breach of contract, fraudulent and negligent misrepresentation, infliction of emotional distress, and violation of civil rights. Shortly before trial, the claims on behalf of all individual plaintiffs and the claims against all individual defendants were disposed of, either by settlement or by rulings on summary judgment, so that there remained for trial only the claim by TCMHP against HED for breach of contract.

After having been assigned to six different judges, the case was finally ready, more or less, for trial in the spring of 1990. On March 20 of that year, the court entered a pretrial order, specifying, in more detail than had the amended complaint, the nature of the claims of the then plaintiffs (which still consisted of the individuals in addition to TCMHP). The pretrial order, however, did not particularize the nature or extent of the plaintiffs' alleged damages, except that TCMHP's contract claim was asserted to be for "contract damages for work performed from December 15, 1981 through the end of the contract year, June 30, 1982 * * *."

The individual plaintiffs were dismissed as parties to the action following entry of the pretrial order and before commencement of the trial. On the morning of the first day of trial, TCMHP moved to amend the pretrial order to assert claims for damages which, TCMHP's new counsel alleged, had been overlooked by its former counsel in preparing the pretrial order, although new counsel maintained they had been asserted in the amended complaint.² The claims sought to be included in the pretrial order by TCMHP's motion to amend were a claim for punitive damages "in the approximate amount of $100,000," a claim for TCMHP's destruction as an operating entity in the mental health field "in the approximate amount of $100,000," and a claim for carrying out its obligations after termination of the contract "in the approximate amount of $26,640.00." The court granted the motion at the beginning of the second day of trial.

The case went to the jury after four days of trial. As to HED's alleged breach of contract, the court instructed the jury simply that TCMHP claimed that HED had breached the contract "by terminating it 'for serious misuse of funds' which was not true," that HED denied it breached the contract and alleged it had good cause for terminating the contract, and that each party had the burden of proving its claim or defense. Thus, on the record we are called on to review, we know that the jury (assuming it followed the court's instructions) found that HED had breached the contract by terminating it for a reason that was not true and that HED did not have good cause for the termination. We do not know whether or to what extent the jury believed TCMHP's elaborate conspiracy theory--although the size of the punitive damage award, $1.5 million, suggests that the jury gave considerable credence to TCMHP's argument that HED had performed a "hatchet job" and had imposed a "death penalty" on TCMHP, for which it should be made to pay. The court did instruct the jury that it was a breach of contractual duty for a party to act in bad faith--i.e., not to act "honestly under the surrounding circumstances and in accordance with reasonable standards of fair dealing." The court further instructed the jury that it could award punitive damages if it found that HED's acts were reckless or grossly negligent or done in bad faith. The jury returned its verdict in favor of TCMHP, awarding punitive damages of $1,500,000; loss of the corporation's pecuniary value in the amount of $250,000; loss of profits of $0; and damages for reimbursement of five former employees or board members aggregating $27,000 for their services in winding up the contract ("termination management" damages)--for a total award of $1,777,000.

On appeal, HED asserts that the trial court erred: (1) in amending the pretrial order to permit TCMHP to raise new damage claims not previously asserted; (2) and (3) in submitting the claims for compensatory and punitive damages to the jury; and (4) in making erroneous rulings during the trial and giving the jury erroneous instructions. In light of our rulings on what we consider to be the dispositive issues on the appeal--the recoverability of punitive damages and the sufficiency of the evidence...