Montana is known fondly to many as Big Sky Country, but it also is quickly gaining a reputation for big punitive damages awards. Not only are juries imposing breathtaking amounts of punitive damages with increasing regularity, but the courts of Montana generally have been upholding those awards (or reducing them to amounts that would still be considered excessive in most other jurisdictions). Most recently, the Montana Supreme Court upheld a $5 million punitive award that was five times the already generous amount of compensatory damages.
The plaintiff in McCulley v. U.S. Bank of Montana alleged that the defendant bank offered her a 30-year mortgage loan for acquisition of a condominium, but in fact issued her an 18-month bridge loan. When she could not make the required balloon payment, she had to sell the condo for $40,000 less than the loan balance.
Alleging that she became suicidal after losing her condo, the plaintiff sued and was awarded $1 million in compensatory damages (over three-quarters of which is for emotional distress) and $5 million in punitive damages. Misapplying the three excessiveness guideposts identified by the U.S. Supreme Court in BMW v. Gore and State Farm v. Campbell, the Montana Supreme Court upheld the full amount of punitive damages.
With respect to the reprehensibility guidepost, the court held that all five aggravating factors identified in State Farm were present. Disregarding any consideration of foreseeability, the Montana Supreme Court found that the harm was physical, not merely economic, because the plaintiff allegedly became suicidal after she had to sell her condo. The court likewise held that the bank "exhibited indifference or reckless disregard for the health and safety of McCulley" because it knew that she might lose her home (and suffer ensuing emotional distress) as a result of its deceptive characterization of the loan.
Of course, State Farm itself involved precisely the same kind of emotional distress arising out of precisely the same fear that the plaintiffs might lose their home. Yet the U.S. Supreme Court did not treat the case as involving either physical harm or a reckless disregard for health or safety, stating instead that "[t]he harm arose from a transaction in the economic realm, not from some physical assault or trauma; there were no physical injuries." Moreover, the Montana court's treatment of McCulley's emotional distress as an aggravating factor is difficult to square with the U.S. Supreme Court's observation in State Farm that large awards of damages for emotional distress already contain a punitive component, reducing the need for a large and disproportionate punitive award.
The Montana Supreme Court's treatment of the "repeated misconduct" factor also is hard to reconcile with Supreme Court precedent. The Montana court held that, even though the alleged bait-and-switch perpetrated against the plaintiff appeared to be an isolated incident, the "repeated misconduct" factor was present because the bank committed more than one deceptive act in the course of the plaintiff's transaction. Although the court cited decisions of the Colorado Supreme Court and the Third Circuit, those cases say only that when the defendant engaged in more than one wrongful act in its dealings with the plaintiff, this factor "may still be relevant in measuring the reprehensibility of the defendant's conduct, based on the particular facts and circumstances presented." More importantly, the court disregarded the many cases that have squarely held that this factor does not support a finding of high reprehensibility unless the defendant has engaged in similar misconduct toward other individuals—i.e., to use the U.S. Supreme Court's terminology, unless the defendant is a "recidivist."
Equally troubling is the court's analysis of the ratio guidepost. In prior cases, the Montana Supreme Court has focused entirely on the U.S. Supreme Court's statement in State Farm that double-digit ratios are rarely permissible and has disregarded the Court's further observation that "[w]hen compensatory damages are substantial, then a lesser ratio, perhaps only equal to compensatory damages, can reach the outermost limit of the due process guarantee." It repeated the same conceptual errors in McCulley, stating that "the ratio of punitive damages to compensatory damages is 5:1, which fits comfortably within the single-digit instructive numerical guidelines" and "is lower than previous award ratios upheld by this Court." In short, the court has effectively created a safe harbor for punitive awards that are less than ten times the compensatory damages—no matter how high the compensatory damages may be or the extent to which the compensatory damages already serve the purposes of punitive damages.
Finally, the Montana Supreme Court held that the third guidepost—legislatively established penalties for comparable conduct—"favors upholding the punitive damages award" because the $5 million exaction is lower than the cap on punitive damages adopted by the Montana Legislature. The court appears not to have appreciated that the cap—which in Montana is quite high to begin with—sets a maximum punishment that applies to all cases, not just cases of so-called predatory lending. Contrary to the Montana Supreme Court's assertion, the cap does not serve as "an indication of" the legislature's views as to the appropriate punishment for this particular type of tort.
McCulley is contrary to the many cases from other jurisdictions that have refused to allow ratios in the mid-to-high single digits when the compensatory damages are substantial—especially in a case like McCulley involving an isolated incident of comparatively modest reprehensibility. The court may have another opportunity to address excessiveness issues in Kelly Logging, Inc. v. First Interstate Bank, a case in which a Missoula trial judge recently upheld a $16,760,000 punitive award that is close to 60 times the $286,000 compensatory award. One can only hope that the Montana Supreme Court will review the punitive damages in that case with a more searching eye.
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