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 Campbellcase 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.
Just this past March, the Kentucky Supreme Court handed down a complex decision in Sneed v. Burress that has implications for trial conduct beyond the criminal-trial setting involved in the case.
Sneed was charged with first-degree rape, and Bullitt Circuit Court Judge Rodney Burress presided over Sneed’s trial in July 2014. In an opening statement, Sneed’s lawyer, Julie Kaelin, remarked that the victim’s father, a witness to be called by prosecutors, was “a liar.” The Commonwealth objected and asked for a mistrial. Judge Burress sustained the objection, but rather than granting a mistrial, simply directed Kaelin not to make any more such comments. Moments after that admonition, however, Kaelin made a remark about the victim herself having “trouble with lying.” When Kaelin did that, Judge Burress granted a mistrial.
On Sneed’s appeal, the Kentucky Supreme Court upheld the mistrial, but its decision consisted of a majority opinion, a concurring opinion, and a dissenting opinion, thereby demonstrating the intricate nature of the trial issues at hand.
All of the Court’s justices seemingly agreed that witnesses called at trial are forbidden from characterizing the truthfulness (or lack thereof) of another witness. This rule applies to witnesses in all form of criminal cases and even in civil cases in that witness veracity is a fundamental determination treated as being within the exclusive province of a given jury.
Never before, though, has a court in Kentucky concluded that a lawyer cannot characterize a witness as being untruthful. Yet that appears to be what a majority of Kentucky Supreme Court justices inSneed has ruled as being prohibited in courts of the Commonwealth from here on out. As the two dissenting justices emphasized, though, “Nothing…in any case that [we] know of, prohibits a lawyer in his opening statement from telling the jury that the evidence will show that an adversarial witness [is] lying.” Interestingly, the concurring opinion may limit (or at least clarify) the majority ruling by prohibiting lawyers from making such characterizations in opening statements but not in closing arguments.
The full extent to which the majority’s opinion will muzzle lawyers going forward is unclear because the Court’s ruling hinges on the premise that Judge Burress had – indeed, that all judges must have – the discretion to grant a mistrial when a lawyer explicitly ignores a court’s clear directives. Lawyers will be left to make sense of the ruling as it applies to specific cases they try, meaning it is almost guaranteed that the Sneed decision will be revisited sometime in the future.
Regardless of how the decision washes out for attorneys, witnesses of any kind – including in civil cases – should not comment on whether another party or witness is believable. Many might find it difficult to refrain from doing so in particular trial settings, but it is clear now that Kentucky courts only want a jury to make witness‑credibility assessments. If nothing else, Sneed v. Burress reflects the Kentucky Supreme Court’s continued disdain for witnesses characterizing any other witnesses’ veracity.
By Tom Coffey – Thomas Coffey’s practice focuses on litigation, drawing upon his employment background as a Jefferson County Assistant Commonwealth Attorney and an Assistant District Attorney for Montgomery County, Pennsylvania. He has extensive jury trial, bench trial, and appellate and administrative court experience, and has logged numerous appearances in front of every circuit court judge in Jefferson County.