holding that punitive damages are available "where the fraud, aimed at the public generally, is gross and involves high moral culpability"Summary of this case from Koch v. Greenberg
Argued October 4, 1961
Decided December 7, 1961
Appeal from the Appellate Division of the Supreme Court in the First Judicial Department, EDGAR J. NATHAN, JR., J.
Lester Samuels, Murray C. Spett and Robert J. Cahn for Milton U. Sheldon, appellant. Murray Levine for Samuel F. Chernoble and others, appellants.
Irwin Karp for respondent.
This appeal, here by permission of the Appellate Division on a certified question, calls upon us to decide whether punitive damages may be allowed in a fraud and deceit action.
The complaint alleges that the plaintiff was induced to enter into a contract with the defendant Comet Press and pay it $1,380 by means of a number of false and fraudulent representations made by the individual defendants who are officers of Comet. The representations, as well as the respects in which they are false, are set forth at some length. The complaint also alleges that the misrepresentations were made "in the regular course of [defendants'] business, and as the basis of their business knowing that plaintiff would, as others similarly situated had in the past, act upon said representations". Consequently, the plaintiff seeks, in addition to compensatory damages of $1,380, punitive damages in the amount of $75,000.
The defendants moved to strike certain allegations of the complaint as irrelevant and prejudicial (Rules Civ. Prac., rule 103). The court at Special Term denied the motions in their entirety and the Appellate Division, although it modified the resulting orders by directing that some of the recitals be stricken, upheld the allegations which relate to punitive damages.
It was the conclusion of the Appellate Division that, if the plaintiff is able to prove (what in effect she alleges) that the defendants were engaged in carrying on "a virtually larcenous scheme to trap generally the unwary", a jury would be justified in granting punitive damages. We agree with that view.
Punitive or exemplary damages have been allowed in cases where the wrong complained of is morally culpable, or is actuated by evil and reprehensible motives, not only to punish the defendant but to deter him, as well as others who might otherwise be so prompted, from indulging in similar conduct in the future. (See, e.g., Toomey v. Farley, 2 N.Y.2d 71, 83; Krug v. Pitass, 162 N.Y. 154, 161; Hamilton v. Third Ave. R.R. Co., 53 N.Y. 25, 28; Oehlhof v. Solomon, 73 App. Div. 329, 333-334.) Moreover, the possibility of an award of such damages may not infrequently induce the victim, otherwise unwilling to proceed because of the attendant trouble and expense, to take action against the wrongdoer. Indeed, such self-interest of the plaintiff has been characterized as "Perhaps the principal advantage" of sanctioning punitive damages because it "leads to the actual prosecution of the claim for punitive damages, where the same motive would often lead him to refrain from the trouble incident to appearing against the wrongdoer in criminal proceedings". (McCormick, Damages , pp. 276-277.) The list of actions in which punitive damages have been permitted in this State is long (see, e.g., Toomey v. Farley, 2 N.Y.2d 71, supra [libel]; Gostkowski v. Roman Catholic Church, 262 N.Y. 320 [desecration of a grave]; Pickle v. Page, 252 N.Y. 474, affg. 225 App. Div. 454, 459-460 [forcible abduction of a minor child]; Kujek v. Goldman, 150 N.Y. 176, 179 [fraud and deceit]; see, also, 1 Clark, New York Law of Damages , p. 104; McCormick, Damages , pp. 286-287; Note, 70 Harv. L. Rev. 517), for, as this court observed in the Hamilton case ( 53 N.Y. 25, 30, supra), "It is not the form of the action that gives the right to the jury to give punitory damages, but the moral culpability of the defendant."
Although punitive damages have been the subject of strong criticism, "the great majority of states retain the doctrine * * * in full force". (Note, 70 Harv. L. Rev. 517, 518.)
Although they have been refused in the "ordinary" fraud and deceit case ( Oehlhof v. Solomon, 73 App. Div. 329, 334, supra), we are persuaded that, on the basis of analogy, reason and principle, there may be a recovery of exemplary damages in fraud and deceit actions where the fraud, aimed at the public generally, is gross and involves high moral culpability. And this court has — in line with what appears to be the weight of authority (see, e.g., Bell v. Preferred Life Soc., 320 U.S. 238; Day v. Woodworth, 13 How. [54 U.S.] 363, 371; Greene v. Keithley, 86 F.2d 238, 241; Laughlin v. Hopkinson, 292 Ill. 80; Whitehead v. Allen, 63 N.M. 63; Saberton v. Greenwald, 146 Ohio St. 414; Craig v. Spitzer Motors, 109 Ohio App. 376; Ann., 165 A.L.R. 614) — sanctioned an award of such damages in a fraud and deceit case where the defendant's conduct evinced a high degree of moral turpitude and demonstrated such wanton dishonesty as to imply a criminal indifference to civil obligations. (See Kujek v. Goldman, 150 N.Y. 176, supra; see, also, Hamilton v. Third Ave. R.R. Co., 53 N.Y. 25, 28, supra.) In the Kujek case ( 150 N.Y. 176, supra), the plaintiff married Katy Moritz — a domestic employed in the family of the defendant, by whom she had become pregnant — in reliance upon the defendant's fraudulent representation that Katy was "a virtuous and respectable woman". After noting that the plaintiff had sustained actual damages, the court went on to hold that "as the wrong involved not only malice but moral turpitude also, in accordance with the analogies of the law upon the subject, the jury had the right to make the damages exemplary" (p. 179). These exemplary damages, the court declared, were left to the jury "in their sound discretion * * * to amplify the damages [actually caused] by way of punishment and example" (p. 180).
As to the contrary opinion expressed by the court in Toho Bussan Kaisha, Ltd., v. American President Lines ( 265 F.2d 418), we need simply say that it reflects an erroneous view of the law of this State.
It should, perhaps, be observed that, since an award of punitive damages — in a case where they may properly be allowed — rests in the "sound discretion" of the jury ( Kujek v. Goldman, 150 N.Y., at p. 180), it is subject to court review. (Cf. Gostkowski v. Roman Catholic Church, 262 N.Y. 320, 325, supra; Toomey v. Farley, 2 N.Y.2d 71, 83-84, supra; Van Siclen v. Bush, 254 App. Div. 851, affd. 279 N.Y. 753.)
Exemplary damages are more likely to serve their desired purpose of deterring similar conduct in a fraud case, such as that before us, than in any other area of tort. One who acts out of anger or hate, for instance, in committing assault or libel, is not likely to be deterred by the fear of punitive damages. On the other hand, those who deliberately and cooly engage in a far-flung fraudulent scheme, systematically conducted for profit, are very much more likely to pause and consider the consequences if they have to pay more than the actual loss suffered by an individual plaintiff. An occasional award of compensatory damages against such parties would have little deterrent effect. A judgment simply for compensatory damages would require the offender to do no more than return the money which he had taken from the plaintiff. In the calculation of his expected profits, the wrongdoer is likely to allow for a certain amount of money which will have to be returned to those victims who object too vigorously, and he will be perfectly content to bear the additional cost of litigation as the price for continuing his illicit business. It stands to reason that the chances of deterring him are materially increased by subjecting him to the payment of punitive damages.
It may be difficult to formulate an all-inclusive rule or principle as to what is an appropriate case for the recovery of punitive damages, but it is our conclusion that the allegations of the complaint before us, if proved, would justify such an award. The pleading charges that defrauding the general public into entering publishing contracts, such as the one involved in the present case, was the very basis of the defendants' business. What is asserted is not an isolated transaction incident to an otherwise legitimate business, but a gross and wanton fraud upon the public. It follows, therefore, that the courts below were thoroughly justified in refusing to strike the allegations which pertain to punitive damages.
The orders of the Appellate Division should be affirmed, with costs, and the question certified as to each order answered in the affirmative.
In our view the rules for the allowance of punitive or exemplary damages should not be extended to the facts of this case. The very circumstance that plaintiff asks for compensatory damages of $1,380 and punitive damages in the amount of $75,000 is an excellent illustration of the reasons on account of which the award of punitive damages should be restricted rather than extended to situations where they are not as yet traditionally allowed. In Dain v. Wycoff ( 7 N.Y. 191, 193-194) the court used language which is applicable to the present situation: "There can be no reason why twelve men wholly irresponsible should be allowed to go beyond the issue between the parties litigating, and after indemnifing the plaintiff for the injury sustained by him proceed as conservators of the public morals to punish the defendant in a private action for an offence against society. If the jury have the right to impose a fine by way of example, the plaintiff has no possible claim to it, nor ought the court to interfere and set it aside, however excessive it may be. In ordinary cases of misdemeanor, the legislature have restricted the power of the court in the imposition of penalties within certain definite limits. But a jury in civil actions have by this hypothesis an unlimited discretion to determine the crime and upon the measure of redress demanded by the public interest. The right stands upon no principle nor, in reference to actions of this character upon any authority."
The rule is firmly established in this State that punitive or exemplary damages are not allowed in fraud cases ( Lane v. Wilcox, 55 Barb. 615; Oehlhof v. Solomon, 73 App. Div. 329; Toho Bussan Kaisha, Ltd., v. American President Lines, 265 F.2d 418, 421 [C.A., 2d]; 1 Clark, New York Law of Damages, pp. 108-109). Those cases consider the subject carefully and at length, stating the particular instances where punitive damages are granted and others in which they are denied.
The case of Kujek v. Goldman ( 150 N.Y. 176), cited in the majority opinion, is not an exception to the denial of punitive damages in the ordinary fraud case. The best proof that they are not allowed is that damages of that nature are almost never demanded in instituting actions based on fraud. It is true that the majority opinion, following language adopted by the Appellate Division, aimed to distinguish the present appeal from the usual fraud case by purporting to limit punitive damages to what is alleged to have been "a virtually larcenous scheme to trap generally the unwary in which event punitive damages may be recoverable on the theory of wanton and malicious conduct." This language of the Appellate Division is based on the circumstance that the complaint alleges that the sum of $1,380 was obtained from plaintiff by misrepresentation for the purpose of a business which was illusory. It may well be that others than plaintiff were similarly mulcted and that this was merely what in popular terms is called a racket. If it was "larcenous", however, as the Appellate Division said, then it may be punishable under the criminal law, and to permit the award of punitive damages in a civil action may render the defendants liable to both civil and criminal punishment by way of admonishment and entirely without relation to whatever damages plaintiff has suffered. The time-honored rule of damages for fraud in business dealings is the actual pecuniary loss sustained ( Reno v. Bull, 226 N.Y. 546, 553; Sager v. Friedman, 270 N.Y. 472, 481).
The reasons against extending the coverage of punitive or exemplary damages are manifold, and many of them are patent under the facts of this case. McCormick on Damages (1935 ed., p. 276) says that it is probable that, in the framing of a model code of damages today, for use in a country without previous legal tradition, "the doctrine of exemplary damages would find no place." His reasons are the double jeopardy involved in subjecting a defendant to both criminal prosecution and to punishment in the form of civil punitive damages for the same act, in violation of the spirit, if not the letter, of the constitutional prohibitions against punishing a man twice for the same offense, and the limitation of exemplary damages "only by the caprice of jurors, subject to a review by the judges only in a rare case where the judge can find impropriety of motive or gross disproportion, and that this want of a guiding measure leads to excess and injustice." Other reasons against extending the coverage of punitive damages in tort cases are stated in a learned article (44 Harv. L. Rev., pp. 1173-1209). Among these objections are the difficulty of apportioning punitive damages where, as in this case, there are several defendants possibly guilty of moral turpitude in varying degrees, and also that in the prosecution of such actions the proper admonition of a defendant need not involve the payment of money in as large an amount as can be obtained by a plaintiff by inflaming the passions of the jury. The motivation of plaintiffs in prosecuting such suits is likened to the situation which would exist if a District Attorney were paid according to the number of convictions that he was able to secure. The plaintiff profits more by heavy punishment than by light, even in instances where light punishment might have better admonitory value. The injustice is, of course, mentioned of lining the pocket of a plaintiff with money taken from a defendant in the interest of society, in addition to any loss which the plaintiff may have actually sustained. If it be thought that such a plaintiff should be recompensed not only for his damages but also for the expense of prosecuting a lawsuit for fraud, then the allowance of punitive damages is an inept manner of doing so. The jury are not instructed that the plaintiff's expenses of suit are a measure of the exemplary damage, but, rather, that whatever amount be awarded should be computed in such sum as would represent the payment of a defendant's debt to society. All of this is more properly the function of the criminal law.
For these reasons we consider that the law of punitive damage should be kept within its present boundaries, and not extended to cases to which it does not presently relate. The limitation on the extension of such coverage to fraud cases, suggested by the Appellate Division and adopted by the majority of this court, will, in practice, be difficult if not impossible to apply. In the ordinary case it is enough to try one lawsuit instead of a multiplicity of actions in order to determine to what extent a defendant is defrauding other members of the public besides the plaintiff.
For these reasons we vote to reverse the order appealed from, to grant the motions to strike out the allegations of the complaint asking for punitive or exemplary damages and to answer the question certified in the negative.
Chief Judge DESMOND and Judges DYE and BURKE concur with Judge FULD; Judge VAN VOORHIS dissents in an opinion in which Judges FROESSEL and FOSTER concur.
Orders affirmed, etc.