Background

In 2004, Banco Espirito Santo International and two of its affiliates (collectively, “Banco”) sued BDO Seidman, L.L.C. (“BDO”), an international accounting firm, claiming that BDO negligently audited one of its former clients, E.S. Bankest L.L.C. (“Bankest”), which had perpetrated a loan-fraud scheme against Banco. The suit alleged that BDO “rubberstamped” Bankest’s financial statements, leading to Banco’s loss of $170 million from bogus factoring loans. A criminal case charging Bankest with bank fraud, falsifying financial statements, and other offenses related to its use of fictitious invoices and sham companies led to four convictions in 2006, including that of Bankest’s former president, who was subsequently sentenced to 20 years in prison.

The Trial Court’s “Trifurcation” Order

In the civil case against BDO, the parties had not requested that the trial be bifurcated into two distinct phases of liability and damages. Nevertheless, the trial court decided to try the case in phases. The court determined that the jury would first hear and decide the issue of whether BDO breached its professional duties to its former client, the non-party Bankest. Second, the jury would next hear and decide whether BDO’s duties extended to Banco and, if so, whether Banco relied on BDO’s audit reports and whether BDO breached its duty. Thereafter, if the jury found both duty and breach of duty, a damages trial would follow.

Ultimately, the trial court decided that the case would be tried in three phases. In phase one, the jury heard and determined only the question of whether BDO was “personally guilty of gross negligence.” Having found against BDO in the first phase, in the second phase the jury heard and determined issues of causation and comparative fault. Thus, the jury’s determination of whether BDO was “personally guilty of gross negligence” was made without consideration of BDO’s specific allegations of comparative fault—including failures to report or act—on the part of the Banco parties and several third-party actors. In addition, during the second phase the jury heard and determined the issue of compensatory damages, awarding Banco over $159 million in compensatory damages, as well as Banco’s entitlement to recover punitive damages, but not the amount thereof. Having determined in the second phase that a punitive damages award was appropriate, the jury then proceeded to the third trial phase to quantify the punitive damages award at over $351 million. BDO appealed.

The Appellate Decision

In June 2010, Florida’s Court of Appeal reversed and remanded the case for re-trial. BDO Seidman v. Banco Espirito Santo International et al., Nos. 3-D09-324, 09-197, 07-2746, 07-2472 (Fla. Dist. Ct. App., June 23, 2010). In its 20-page decision written by Judge Salter, the appellate court held that the lower court’s decision to “trifurcate” the trial into three distinct phases impermissibly allowed the jury to render a verdict on BDO’s liability for gross negligence before it ever considered the intertwined and critical issues of comparative fault, reliance, and causation.

The court recognized that several important objectives can be served by bifurcation of liability and damages, that often justify a trial court’s exercise of discretion in ordering these two distinct phases. Judicial economy is served, for example, when the need for a damages hearing is obviated by a defense verdict, or when a larger case is reduced into more easily digestible phases. Here, however, despite the trial court’s good intentions, trifurcation did not advance any such objectives. In this complex case, the court explained, with plaintiffs not in privity with the defendant accounting firm, liability turns on evidence of knowledge, intent, and reliance, and involves consideration of the “inextricably interwined” issues of comparative fault, causation and gross negligence. By allowing the jury to determine prematurely the issue of gross negligence, without first hearing any evidence on comparative fault or causation, the trial court’s trifurcation order severely prejudiced BDO.

Gross Negligence and Punitive Damages

Turning to the punitive damage award, the appellate court explained that under Florida law, punitive damages are intended to punish a defendant for “gross and flagrant negligence,” or conduct which is “committed with such gross negligence as to indicate a wanton disregard for the rights and safety of others.” As codified by the Florida Legislature, the definition of “gross negligence” is substantially similar: conduct “so reckless or wanting in care that it constituted a conscious disregard or indifference to the life, safety or rights of persons exposed to such conduct.” Fla. Stat. § 768.72(2)(n) (2007). The Court of Appeal noted that the standard jury instructions on punitive damages, which include this same definition and which were given in this case, further highlight the link between the two concepts.

Although the term “punitive damages” was not included in phase one of the trial, the appellate court underscored that by the time the trial proceeded to the second phase, the jury had already found the factual predicate for such damages. It had already determined, by clear and convincing evidence, that BDO was “guilty” of gross negligence—negligence rising to the level of conscious disregard for the rights of others. Indeed, in the second phase of the trial argument, Banco’s counsel reminded the jury that they had already reached this conclusion, and argued that BDO’s evidence and argument on causation in the second phase should be rejected as it directly contradicted the jury’s phase one verdict.

Therefore, the Court of Appeals explained, by the time the trial entered phase two, the jurors had already “rendered a verdict of ‘guilt’ reflecting their ‘firm belief or conviction, without hesitation’ that BDO was so reckless or wanting in care that its acts and omissions ‘constituted a conscious disregard or indifference to the rights of persons exposed to its conduct.’” The Court of Appeals disagreed that the jury could adequately determine such an issue without considering all of the evidence on causation and comparative fault.

The Court of Appeals distinguished several cases cited by Banco, including those approving bifurcation in class action suits. Not only was the class action context not analogous to the present case, the court noted, but in one case, Florida’s Supreme Court in fact held that a determination of entitlement to punitive damages during phase I was premature. In conclusion, the court held, a “gross negligence” finding “should be based upon a thorough consideration of all the evidence bearing on causation, reliance and comparative fault. In this case, some of that evidence was not admitted until well after a verdict of gross negligence already had been rendered.”

Remand for a “Streamlined, Two-Phase” Trial

The court noted that the trifurcated trial had at least identified various evidentiary disputes that could be properly resolved in a pretrial conference on remand and in a “streamlined, two-phase” trial. The decision clearly set out these two “streamlined” phases: in phase I, all issues, including Banco’s entitlement to punitive damages, should be determined; then, should the jury approve the award of punitive damages, the amount of such damages would be determined in phase II.

The court acknowledged the extensive time commitment made by both the jury and judge and emphasized that it had carefully considered “every substantive and procedural authority” in an effort to find some way to preserve at least some of the jury’s findings. “In this case, however,” the court wrote, “no such balm is to be found. The fact issues are, to use that word that frustrates bifurcation, ‘intertwined.’ The cart cannot lead the horse.”