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When Punitive Damages Are Too Punitive

May 2009, F&I and Showroom - Feature

by Thomas B. Hudson and Maya Hill

For years, courts have wrestled over the relationship between punitive damages awarded and actual damages a plaintiff has suffered. This issue matters to dealers because customers who sue them nearly always claim punitive damages, and any judicially-imposed caps on such damages can dramatically reduce the settlement value of these cases.

The latest court to address this issue is an Oregon appellate court. According to the case, Shawn Yovan bought a used car with 98,000 miles from Lithia Motors, which assigned the related retail installment contract to TranSouth.

After driving the vehicle, Yovan suspected something was wrong and ordered a CarFax report. The report led Yovan to believe the car had more miles than the odometer showed, and that it was rolled back.

Yovan then showed the report to Lithia. While there was no evidence Lithia knew about the discrepancy, the dealership and Yovan attempted to fix the situation.

Yovan’s lawyer sent a letter informing Lithia that Yovan decided to keep the car, continue making payments, and sue Lithia for damages unless a settlement could be reached. Lithia proposed a variety of settlement offers, but Yovan rejected each one. Additionally, a dispute arose between Lithia and Yovan over who had legal authority to negotiate the terms of a settlement, or take any action with respect to the car as between Lithia and TranSouth.

Lithia then sent an agent to repossess the car, but Yovan refused to let it go. The agent allegedly told him that Lithia would take criminal action against him if he did not return the car.

Lithia eventually repurchased the retail installment contract from TranSouth and tried to rescind the transaction with Yovan, telling him in a letter that he had no legal right to keep the car. Lithia then sued Yovan to rescind the transaction and recover the car.

The trial court found that Lithia was entitled to rescind the sale based on language in the retail installment contract. The jury awarded Yovan $500 for emotional injury and $100,000 in

punitive damages.

Lithia was able to get the trial court to reduce the punitive damages award to $2,000 on grounds that the award was grossly excessive. Yovan appealed, but the Oregon Court of Appeals affirmed the trial court’s decision.

The appellate court noted that a determination of whether a punitive damages award is "grossly excessive" requires an analysis of: (1) the degree of reprehensibility of the conduct giving rise to the award; (2) the disparity between the actual or potential harm and the punitive damages award; and (3) the difference between the punitive damages awarded and the civil penalties authorized in comparable cases.

The appellate court found that although Lithia attempted to repossess the vehicle and threatened criminal action if it was not returned, Yovan was not a particularly vulnerable victim. The appellate court noted that Yovan had worked in the car industry and knew how the process worked. Further, Yovan had a lawyer who could advise him about what legal actions Lithia could take.

The appellate court found that although Lithia’s actions may have been reprehensible, they did not justify an egregious punitive damages award. The appellate court then considered the disparity between the actual or potential harm and the punitive damages award. It found that the jury’s award of $500 for emotional harm was not proportionate to its $100,000 punitive damages award. Accordingly, the appellate court affirmed the trial court’s decision to reduce the punitive damages award to $2,000, noting that the reduced award represented a proper 4-to-1 ratio of punitive damages to civil penalties. Anything greater, noted the appellate court, would be “grossly excessive.”

That is one court’s take on what the ratio of punitive to actual damages should be. Your state’s court may have spoken on this topic recently, or may do so in the future. Ask your lawyer whether there is such a test in your state that could provide you with some exposure guidance.

Lithia Motors v. Yovan, 2009 Ore. App. LEXIS 152 (Or. App. March 19, 2009)

Thomas B. Hudson Esq. (thudson@special-finance.com) is a partner, and Maya Hill is an associate, in the Maryland office of Hudson Cook LLP. Copyright CounselorLibrary.com 2008, all rights reserved. Based on an article from Spot Delivery.

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