Grant Thornton, LLP v. Yung, No. 2014-CA-001957-MR 2016, Ky. App. LEXIS 164 (Ct. App. Sep. 16, 2016), which is pending before the Kentucky Supreme Court on a motion for discretionary review, involved an action by the 1994 William J. Yung Family Trust (“Trust”) against accounting firm Grant Thornton alleging material misrepresentation and fraud by omission in advising the Trust to use a tax-shelter product later rejected by the IRS. After a six-week bench trial, the court issued a 211-page Findings of Fact, Conclusions of Law, and Judgment in favor of the Plaintiffs. The court awarded $19,315,227.00 in compensatory damages, and $80,000,000.00 in punitive damages. Grant Thornton appealed.
While there were many issues considered by the Court of Appeals, the one of greatest importance to Kentucky banks involved Grant Thornton’s challenge to the punitive damages award. It argued that the award was constitutionally excessive. The Court of Appeals applied the standard for reviewing a punitive damages award set out in State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408 (2003), which consists of 3 prongs: (1) the reprehensibility of defendant’s conduct, (2) the ratio of punitive to compensatory damages, and (3) sanctions for comparable conduct.
In weighing reprehensibility, the most important prong, the Court of Appeals noted that the Trust had suffered only economic damages, was considered a sophisticated party, and was not financially vulnerable. Significantly, though, it rejected Grant Thornton’s argument that prior 6th Circuit case law prohibited a punitive damages award to a “sophisticated business suffering only economic loss”. “A punitive damage award is not prohibited simply because some factors weigh in the defendant’s favor”.
In analyzing the punitive to compensatory ratio, the Court of Appeals acknowledged the Campbell case and the line of 6th Circuit cases holding that an award of substantial compensatory damages should affect the punitive damages award, noting the US Supreme Court had stated that even a 1:1 ratio “can reach the outermost limit of the due process guarantee”.
In comparing the punitive damages award to the potential for civil penalties, the Court of Appeals noted that the “existence of such penalties has a bearing on the seriousness with which a State views the wrongful action.” However, it recognized that though Grant Thornton had been assessed civil fines, the amount was far below what it could have been. As a result, it found that this factor weighed “against the imposition of additional punitive damages based on such conduct”.
In reaching its holding, the Court of Appeals adopted the reasoning of the line of 6th Circuit cases finding that “the ratio of punitive to compensatory damages may not exceed 1:1” when the harm caused is “entirely economic”, the plaintiffs are “sophisticated business entities who were not financially vulnerable” and the award of compensatory damages was “substantial”. The Court of Appeals found that the “4:1 ratio…was manifestly unreasonable in light of the objective criteria as found by the trial court. The goals of punishment and deterrence would be served sufficiently by the imposition of punitive damages equaling no more than the amount of compensatory damages”. Should the Court of Appeals ruling stand, it will be an extremely significant case for Kentucky banks facing lender liability claims by sophisticated borrowers.
Melinda T. Sunderland – Mindy’s practice concentrates on banking and finance law, loan workouts, bankruptcy, commercial litigation, commercial real estate, including foreclosure, and matters under the Uniform Commercial Code.
Charles J. Otten – Charlie supports several of the firm’s practice areas, including banking and finance law, business law and litigation, employment and labor law, and real estate law.