Punitive Damages Against Fiduciaries: Leaving Hoppe Behind and Allowing Punitive Damages Where Equitable Relief Is Sought, Part II
In last month’s issue, the first part of this article explored Florida’s cases involving both the traditional rule and the modern rule of whether punitive damages are available for actions traditionally cognizable in equity. Part two explains why punitive damages are indeed available for actions traditionally cognizable in equity and dispels the dated and incorrect notion that exemplary damages have not been, or should not be, available in such a setting.
Arguments supporting the traditional rule are not compelling. First, although equity courts historically lacked statutory authorization to award punitive damages,1 the distinction between law and equity no longer exists in Florida and does not provide a cogent basis for denying punitive relief.2 Some commentators, however, have argued that the law/equity merger has affected only procedural rights, not substantive ones, and, thus questioned whether the right to a jury trial on punitive damages is procedural or substantive:
If the defendant’s misconduct is sufficient in law courts to justify a punitive damage award, it could reasonably be expected that equity courts would have the same power to make such an award. This expectation would seem appropriate in light of the fact that in Florida, law courts and equity courts have merged so that trial courts of general jurisdiction exercise both law and equity powers…. But the merger of law and equity courts only abolished the procedural differences between law and equity; it did not abolish the substantive differences.3
Thus, the question whether the abolition of the equity/law distinction can justify the modern rule may partly turn on whether the right to have a jury determines whether and in what amount punitive relief should be awarded is a procedural or substantive issue.4 Courts which consider the merger to be a matter of procedure frequently conclude substantive differences between law and equity survived the merger and, therefore, favor the traditional rule.5 However, many of the substantive rules of equity were assimilated into the unified court system created by the merger, undermining the substance/procedure distinction and, as one commentator arguing this point explains:
[T]he law has in the past, and will probably continue in the future, to move carefully in the reception of moral principles. But such caution cannot justify the law’s refusal in one part of its judicial system to receive those moral principles which through the course of centuries have been received, tried, and proved in another part of the system. When law and equity were administered by separate and distinct tribunals, many equitable principles were able to travel the gulf and find their way into legal rules. Now that we have the one court, the trip is shorter and should be easier; but such has not proven to be the case. While conceding the validity of equitable principles when specific relief is sought, most courts deny the applicability of these principles when the same plaintiff seeks substitutional relief. Indeed, they deny the applicability of even those principles which have been reduced to more or less concrete rules. Our courts are so enamored with the accident of history which truncated our judicial system and entrusted the two remedies to the different courts that they fail to see the propriety of questioning whether there is anything inherently different about the two remedies which demands the application of different rules to each.6
“Because courts have adopted equitable principles in some legal actions, it would appear to be reasonable that they should unequivocally merge the principles of the two systems.”7 The right to have the “collective conscience” — as expressed through a jury determination — render its judgment as to the quantum of punishment, if any,8 continues to be an important factor which traditional rule apologists cite in favor of their position.
Second, traditional rule advocates have long argued that refusal to award punitive damages on equitable causes is consistent with the principle that equity will award only what is due in justice and fairness without regard to the reprehensibility of defendant’s conduct.9 In a merged system of law and equity, however, the rule against splitting a cause of action would deprive plaintiff of a form of relief:10
It is the height of legal paradox for a court to inform a litigant that he is estopped from asserting a legal claim for punitive damages because he cannot split his cause of action when in the prior proceeding for equitable relief he was not permitted to raise that very issue. The notion that a plaintiff “waives” his right to punitive damages by suing for equitable relief is, as the instant court observed, a constructive fiction based on nothing more than equity’s reluctance to provide a forum of vengeance.. . a plaintiff should not be precluded from pursuing his legal claim for punitive damages by reason of a prior equitable proceeding, but it would be anomalous to suggest that the law-equity dichotomy should be preserved in the disposition of claims for punitive damages which may be administered as effectively by the judiciary as other legal claims that are cognizable in an equitable action…. Adherence to the old equity rule for punitive damages would pro tanto subvert the very purpose of the merger of law and equity which is to facilitate and expedite judicial administration without modifying substantive rights….11
Third, by suing for equitable relief, the injured person waives all claims to punitive damages.12 However, courts have held this rationale is question begging and conclusory.13 In fact, there is no good reason for implying that a waiver was intended (or should be implied) merely because one seeks equitable relief. As explained in I.H.P. Corp. v. 210 Central Park South Corp., 16 App. Div. 2d 461, 228 N.Y.S.2d 883 (1st Dep’t 1962), aff’d, 189 N.E.2d 812 N.Y. (1963):
In the absence of words or conduct by a party which manifest an intention to waive any of his remedies, it merely begs the question to hold that a waiver has resulted from a mere asking for equitable relief. A party cannot reasonably be deemed to have waived a remedy unless he seeks others, knowing they are exclusive. But whether they are exclusive is the very issue to be here resolved. Nor is there any good reason, except that of historical accident, why one should be compelled to elect between two inadequate remedies.14
Fourth, because an award of punitive damages lies within the province of a jury, allowing a court to award punitive damages would deprive a defendant of his or her state-guaranteed right to a jury trial before punishment is imposed.15 The purpose of a punitive award, however, is not merely to punish, but also to deter misconduct.16 Both federal and state courts have, despite the unavailability of punitive damages under specific federal or state laws, made “deterrent awards” in excess of compensatory loss, in appropriate cases.17
For example, in Abell v. Potomac Ins. Co., 858 F.2d 1104, 1139 (5th Cir. 1988), cert. denied sub nom., Abell v. Wright, Lindsey & Jennings, 492 U.S. 918 (1989), a leading securities case, the Fifth Circuit recognized “deterrent damages” could properly be awarded under the deterrent policies of the securities laws even though numerous cases hold that punitive damages may not be awarded under the “actual damages” language in Exchange Act §28. “Deterrent damages,” under the Fifth Circuit’s analysis, are available when compensatory damages are inadequate to deter misconduct and would permit wrongdoers to profit from misconduct. In Roman v. City of Richmond, 570 F. Supp. 1554 (N.D. Cal. 1983), the court held that when state law did not provide for punitive awards, thereby undermining the deterrent purposes of a federal statute, “deterrent damages” could, nevertheless, be awarded to help realize the federal deterrent purpose.
Fifth, at common law, it was thought that the “common conscience” of the community was the best vehicle to determine the quantum of punishment appropriate to a given case. Today, jury determinations, particularly those awarding punitive damages, are frequently criticized, and defendants no longer look to the jury’s “common conscience” to protect them from a chancellor but, rather, to the court to protect them from the “common conscience.” The logic supporting the traditional rule, i.e., that the “common conscience” is best placed to make punitive damage assessments, has lost considerable force. Today, defense counsel frequently wish to avoid jury trials rather than permit the plaintiff to make an impassioned case to the jury for a punitive award.
None of the arguments against the availability of punitive damages in equity provides a sound basis for denying such relief in Florida. Today, moreover, there are good reasons why such relief should be available in Florida and, in particular, in cases involving misconduct directed toward trust beneficiaries by fiduciaries.
• Why Punitive Damages Should be Available, Generally — Florida courts should be deemed to have the legal authority to award punitive damages even when equitable relief is sought. First, punitive damages are intended to deter wrongdoing, not merely to punish it.18 Commentators have argued that even when state policy prevents punitive awards, the deterrent justification of punitive damage awards should provide an adequate justification for rendering such deterrent awards:
To borrow a concept from economics, the deterrent effect sought is to make the ‘marginal cost’ of misconduct unprofitable, a measure, as in economics, inherently unrelated to the net worth of the prospective offender….Deterrent damages are imposed under different standards, are computed in different ways, are measured by different criteria, are designed for different purposes, and, critically, have been awarded in federal court…where and because punitive damages were unavailable under state law.19
Second, Fla. R. Civ. P. 1.040 states that there shall be one form of action to be known as “civil action.” Punitive damages may be “appropriate and just” as contemplated by Rule 1.040.20 Continued reference to the “split” of legal and equity courts ignores the strong current policy favoring awards in excess of actual damages on deterrent grounds, as expressed by the Florida Supreme Court.21
Third, the rationale in Hoppe v. Hoppe, 370 So. 2d 374 (Fla. 4th DCA 1978), is dubious. The notion that one is not entitled to punitive damages for actions cognizable in equity may itself be based on a mistaken rationale, namely that equity could not punish wrongdoers by providing punitive damages.22 This issue was discussed at length by the Supreme Court in Mertens v. Hewitt Assoc., 508 U.S. 248 at 256-259 (1993). Justice Scalia, writing for the majority, explained that courts of equity not only provided monetary relief, but, on occasion, punitive damages. He noted that, at common law, there were situations — including breach of trust cases — in which equity courts provided all relief appropriate, including punitive damages. Mertens was an ERISA case, and ERISA provides that injured parties may recover, inter alia: “such other equitable or remedial relief as the court may deem appropriate.”23 Justice Scalia noted ERISA’s roots in trust law,24 and he discussed the availability of punitive damages in trust cases, criticizing the dissent’s statement that punitive damages were not available in equity.
The dissent’s confident assertion that punitive damages “were not available” in equity, ibid., simply does not correspond to the state of the law when ERISA was enacted. A year earlier, a major treatise on remedies was prepared to say only that “a majority of courts that have examined the point probably still refuse to grant punitive damages in equity cases.” D. Dobbs, Remedies §3.9, p. 211 (1973). That, of course, was speaking of equity cases in general. It would have been even riskier to presume that punitive damages were unavailable in that subclass of equity cases in which law-type damages were routinely awarded, namely, breach-of-trust cases. The few trust cases that did allow punitive damages were not exclusively actions at law. See Rivero v. Thomas, 86 Cal. App. 2d 225, 194 P.2d 533 (1948).25
The dissent had vigorously denied punitive damages were available in trust cases, citing, inter alia, Orkin Exterminating Co. v. Truly Nolen, Inc., 117 So. 2d 419, 422 (Fla. 3d DCA 1960), rev. den., 120 So. 2d 619 (Fla. 1960), the Florida case that adopted the traditional rule as Florida law.26 In Rivero v. Thomas, 86 Cal. App. 2d 225, 194 P.2d 533 (1948),Judge Scalia’s primary authority, a California appeal court noted the traditional rule and the fact that it was “not without exception.”
Citing deterrent principles, the court noted that the case involved fraud in the performance of a trust and that, in the circumstances, punitive damages could be awarded. Numerous cases support a view similar to that expressed in Rivero.
In Gould v. Starr, 558 S.W.2d 755, 771 (Mo. App. 1977), cert. denied, 436 U.S. 905 (1978), for example, an action to remove certain trustees, obtain an accounting and surcharge the trustees for misconduct, the court, noting case conflict, cited I.H.P., recent developments, and Glusman v. Lieberman, 285 So. 2d 29 (Fla. 4th DCA 1973), and followed the modern rule. In Miner v. International Typographical Union Negotiated Pension Plan, 601 F. Supp. 1390, 1393 (D.C. Colo. 1985), plaintiffs sued plan trustees and sought punitive damages. Citing Rivero, the court held punitive damages are available under the common law of trusts to deter misconduct harmful to trusts. In Vale v. Union Bank, 88 Cal. App. 3d 330, 151 Cal. Rptr. 784 (Cal. App. 1979), plaintiffs sued the trustee of a pension and profit-sharing plan for fraud and fiduciary breach. The court held punitive damages could be awarded against a trustee.27 In Sharts v. Douglas, 94 Ind. App. 201, 163 N.E. 109 (1928) (en banc), the court awarded punitive damages against a trustee for defrauding a trust beneficiary.”28
• Why Punitive Damages Should be Available in Florida Fiduciary Cases — The Boston College Center of Wealth and Philanthropy estimates that over $56 trillion dollars will pass from the WWII generation to the Baby Boomers over the next 20 to 30 years.29 This enormous shift of wealth is unprecedented, and much of that wealth will end up in Florida, popularly described as “God’s waiting room.” As a practical matter, increased longevity and the likelihood that many Florida residents will become incompetent before passing mean that one’s property, during life or a period of guardianship, will be administered by others.
Over-reaching by those who are charged with managing property for others is a great problem in Florida. Attorneys-in-fact misuse powers of attorney; trustees treat trust property as their own; children abuse their parent’s illnesses or frailties for their own benefit. The combination of the current, extraordinary aggregation of wealth in Florida and Florida’s position as a leading retirement state have created the incentive and opportunity for fiduciaries to abuse positions of trust and confidence. It is a unique, explosive situation made worse by difficult economic times.
Today, Florida litigators, particularly probate litigators and those who sue or defend fiduciaries, cannot be sure how a court will react to a claim for punitive damages, if equitable relief is sought in the case. This is true no matter what the equities. Bank robber Willey Sutton, when asked why he robbed banks, famously stated: “That’s where the money is.” Today, Florida is where the money is. Florida residents need legal protection, and punitive damages are a critical part of the law’s deterrent arsenal. There is no sound basis for the traditional rule. Hoppe and its progeny should be rejected, and Glusman should be recognized as current Florida law in much the same way I.H.P. rejected prior, contrary New York law that had adopted the traditional rule.
1 See United States v. Bernard, 202 Fed. 728, 732 (9th Cir. 1913); Dunkel v. McDonald, 272 App. Div. 267, 272, 70 N.Y.S.2d 653 (1st Dep’t 1947), aff’d on other grounds, 298 N.Y. 586, 81 N.E.2d 323 (1948) (overruled by I.H.P. Corp. v. 210 Central Park South Corp., 166 A.D.2d 461, 463-65, 228 N.Y.S.2d 885, 886 (1st Dep’t 1962).
2 See John J. Kircher & Christine M. Wiseman, Chapter 20: Actions in Equity, Punitive Damages: Law and Practice, (2d ed. 2009).
3 6 Fla. Practice Series TM, Ch. 15, Punitive Damages, Part II, Establishing Liability, §15:6 Prerequisites for Punitive Damage Awards, Sub. B, text at notes 21-22 (2009-2010 ed.) (emphasis added).
4 Substantive law “prescribes duties and rights and procedural law concerns the means and methods to apply and enforce those duties and rights.” Alamo Rent-A-Car, Inc. v. Mancusi, 632 So. 2d 1352, 1358 (Fla. 1994) (citing Benyard v. Wainwright, 322 So. 2d 473, 475 (Fla. 1975)).
5 See John J. Kircher & Christine M. Wiseman, Punitive Damages: Law and Practice, Second Edition, §20:2 at notes 17-18 (updated June 2009) (citing Garvey, Some Aspects of the Merger of Law and Equity, 10 Catholic L. Rev. 59, 66 (1961)). See generally Rexnord, Inc. v. Ferris, 55 Or. App. 127, 136-37, 637 P.2d 619, 624 (Or. Ct. App. 1981), rev’d, 657 P.2d 673, 680, n.4 (Or. 1983).
6 Kircher & Wiseman, Punitive Damages: Law and Practice, Second Edition, §20:2, text at note 20 (quoting Garvey, Some Aspects of the Merger of Law and Equity, 10 Catholic L. Rev. at 66 (1961) (emphasis added)).
7 Id., text at note 21.
8 The idea of “collective wisdom” finds contemporary expression in current predictive models called “information markets.” See Kris Steckman, Market-based Prediction Models as an Aid to Litigation Strategy and Settlement Negotiations, 2 J. Bus. Entrepreneurship & L. 244 (2008) (research indicates that collective reasoning on predictive issues where the persons making the prediction are incentivized out-perform all other predictive mechanisms).
9 See Livingston v. Woodworth, 56 U.S. (15 How.) 546, 559-60 (1853).
10 I.H.P., 228 N.Y.S.2d at 887. See also Recent Developments, Punitive Damages Held Recoverable in Action for Equitable Relief, Columbia L. Rev. at 179, text at n. 31 (1963) (“Perpetuation of the rule against punitive damages in jurisdictions recognizing only one form of action, in effect, deprives an aggrieved party of one type of relief to which he otherwise would be entitled since the rule against splitting a cause of action, would appear to preclude a plaintiff from suing for punitive damages in a subsequent proceeding after he has brought suit for injunctive relief.”).
11 Recent Developments, Punitive Damages Held Recoverable in Action for Equitable Relief, Columbia L. Rev. at 170, text at n. 32-34.
12 See, e.g., Coca-Cola Co. v. Dixi-Cola Labs., Inc., 155 F.2d 59, 63-64 (4th Cir. Ct. App., 1946), cert. denied, 329 U.S. 773 (1946); Karns v. Allen, 135 Wis. 48, 115 N.W. 357, 360-61 (1908).
13 I.H.P., 228 N.Y.S.2d at 888. See also 6 Fla. Practice Series TM, Ch. 15, Punitive Damages, Part II, Establishing Liability, §15:6 Prerequisites for Punitive Damage Awards, Sub. B, text at notes 21-22 (2009-2010 ed.)).
15 Orkin Exterminating Co. v. Truly Nolen, Inc., 117 So. 2d 419 (Fla. 3d D.C.A., 1960), rev. den., 120 So. 2d 619 (Fla. 1960). See generally 6 Fla. Practice Series TM, Ch. 15, Punitive Damages, Part II, Establishing Liability, §15:6 Prerequisites for Punitive Damage Awards, Sub. B, text at notes 21-22 (2009-2010 ed.) (“In the law courts, damages are assessed by a jury utilizing the common conscience of several individuals while a chancellor utilizes the judgment of himself and no other.. . . Since the judgment of the chancellor is the judgment of just one man and the judgment of the jury is the judgment of several, the jury system of the law courts is the preferred method of calculating and awarding punitive damages.”).
16 See Jay M. Zitter, Punitive Damages: Power of Equity Court to Award, 58 A.L.R. 4th 844, at §2 (2009) (“[I]n response to claims that equity should have nothing to do with a spirit of vindictiveness, some courts have explained that punitive damages are not awarded as a means of vengeance, but as a means of insuring defendant will not repeat his or her egregious conduct.”).
17 See generally Laurence A. Steckman & Robert E. Conner, Arbitral Awards in Excess of Actual Damages, N.Y. L. J. at 1, col. 1 (Jan. 11, 1996).
18 See Owens-Corning Fiberglass Corp. v. Ballard, 749 So. 2d 483, 486 (Fla. 1999) (“Under Florida law purpose of punitive damages is to punish defendant and deter similar misconduct by it and other actors.”); Chrysler Corp. v. Wolmer, 499 So. 2d 823, 825 (Fla. 1986) (same).
19 See Steckman & Conner, Arbitral Awards in Excess of Actual Damages, N.Y. L. J., text at n. 20 (Jan. 11, 1996) (“Principles of damage computation further support the distinction between, and (implicitly) the dissociability of, punishment-based and deterrence-based damage justifications. In computing punitive damages, consideration often focuses on the net worth of the wrongdoer, the severity of the misdeed, and the severity of (or potential for) injury resulting from the misconduct. . . (note omitted).. . . contrast, in computing deterrent damages, consideration may instead focus on assigning a probability-adjusted monetary cost to being caught which so outweighs the expected value of the ill-gotten gain as to reasonably preclude the attempt on the part of a rational, albeit nefarious, decision-maker. In such a computation, neither the oppressive nature of the misdeed, the net worth of the wrongdoer, nor the severity of injury would be relevant.”).
20 See Author’s Comment-1967 Fla. R. Civ. P. 1.040.
21 See, e.g., Owen-Corning Fiberglass Corp. v. Ballard, 749 So. 2d 483, 486 (Fla. 1999); Engle v. Ligget Group, Inc., 945 So. 2d 1246, 1262, 1264, 1265 (Fla. 2006).
22 6 Fla. Practice Series TM, Ch. 15, Punitive Damages, Part II, Establishing Liability, §15:6 Prerequisites for Punitive Damage Awards, Sub. B, text at notes 21-22 (2009-2010 ed.).
23 §502(a)(2), 29 U.S.C. §1132(a)(2).
24 Mertens, 508 U.S. at 255.
25 Id. at 259, n.7 (emphasis added).
27 Vale, 88 Cal. App. 3d at 339, 151 Cal. Rptr. at 790.
28 Sharts, 163 N.E. at 112.
29 See Schervish & Havens, The Golden Age of Philanthropy (The Boston College Center of Wealth and Philanthropy 1999).
John Pankauski practices law in West Palm Beach with the Pankauski Law Firm, PLLC, where his practice is limited to litigation involving estates, trusts, probate, guardianship, and investment losses. He is admitted to practice in Florida, Massachusetts, and several federal courts.
Laurence A. Steckman is a member of the law firm Lester Schwab Katz & Dwyer, LLP. He has practiced law for more than 20 years, primarily in the areas of securities and business litigation and has published 40 works on the law.
Robert E. Conner, general factotum of Thornapple Associates, Inc., in Summit, New Jersey, has provided expert witness services in connection with trials and arbitrations involving securities, commodities, foreign currencies, options, and other derivative instruments, and damage theory and computation for more than 26 years. Mr. Conner is a graduate of the Harvard Business School and the John F. Kennedy School of Government at Harvard University.
This column is submitted on behalf of the Trial Lawyers Section, Clifford C. Higby, chair, and D. Matthew Allen, editor.