Montana is known to many as 'Big Sky Country', but it is also quickly gaining a reputation for big punitive damages awards. Not only are juries imposing breathtaking amounts of punitive damages with increasing regularity, but the Montana courts have generally upheld those awards (or have reduced 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 US Bank of Montana alleged that the defendant bank had offered her a 30-year mortgage loan for the 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 condominium for $40,000 less than the loan balance.
Alleging that she had become suicidal after losing her condominium, the plaintiff sued and was awarded $1 million in compensatory damages (over three-quarters of which was for emotional distress) and $5 million in punitive damages. Misapplying the three excessiveness guideposts identified by the 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 Montana Supreme Court held that all five aggravating factors identified in State Farm were present. Disregarding any consideration of foreseeability, the court found that the harm was physical, not merely economic, because the plaintiff had allegedly become suicidal after she had to sell her condominium. 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 characterisation of the loan.
The Montana Supreme Court overlooked the fact that State Farm involved the same kind of emotional distress arising out of the same fear that the plaintiffs might lose their home. However, the US 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 US 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 is also hard to reconcile with US 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 had 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 stated only that if 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 towards other individuals – that is, to use the US Supreme Court's terminology, unless the defendant is a "recidivist".
Equally troubling is the court's analysis of the ratio guidepost. In previous cases the Montana Supreme Court focused entirely on the US Supreme Court's statement in State Farm that double-digit ratios are rarely permissible and disregarded that 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 harbour for punitive awards that are less than 10 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 – favoured "upholding the punitive damages award" because the $5 million exaction was lower than the cap on punitive damages adopted by the Montana legislature. The court appeared not to appreciate 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 such as 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 $16.76 million punitive award that is close to 60 times the $286,000 compensatory award. It can only be hoped that the Montana Supreme Court will review the punitive damages in that case with a more searching eye.
For further information on this topic please contact Evan M Tager or Andrew L Frey at Mayer Brown LLP by telephone (+1 202 263 3000) or email (email@example.com or firstname.lastname@example.org). The Mayer Brown International LLP website can be accessed at www.mayerbrown.com.
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