Lionel Simon owns a paper supply company. He rents his office space. But he spotted a downtown office building that would be perfect for his business.

It was a foreclosure property acquired by the lender bank. Real estate broker William Atha represented the seller. Duane King, vice president of the San Paolo Bank, negotiated for the seller.

Purchase Bob Bruss reports online.

On June 12, King and Simon signed a letter of intent drafted by Atha, for a $1.1 million sale price with the sale closing to be before June 27. The buyer and seller agreed “to exclusively negotiate upon execution of this letter” and “to proceed to escrow and attempt to complete a transaction based upon the above conditions.”

Simon hired a real estate attorney, paying him a nonrefundable $5,000 retainer. Later, King insisted the sale close by June 21 so he could receive a bonus.

Meanwhile, San Paolo Bank reached an agreement to sell the same building to Robert DeVogelaere for $1 million. Even after the bank opened escrow with DeVogelaere, King told Atha (who was unaware of the DeVogelaere sale) to continue negotiating with Simon. The building was eventually sold to DeVogelaere for $1 million.

Upon learning of the secret sale and the bank’s breach of the letter of intent, Simon filed a lawsuit for specific performance of the sale and for fraud and breach of contract damages.

Because there was no signed sales contract between the bank and Simon, the trial court denied specific performance since there was no accepted contract. But the jury awarded Simon $5,000 actual damages, plus $1.7 million punitive damages for the fraud of the bank. The bank appealed the $1.7 million punitive damages award.

If you were the appeal court judge would you affirm the $1.7 million punitive damages award for the bank’s fraud although Simon suffered only $5,000 actual damages?

The judge said no!

Although the conduct of the bank and its representative, Duane King, was reprehensible for fraudulently misleading Simon, it was not so severe that the bank must pay 340 times Simon’s actual $5,000 damages for punitive damages, the judge began.

Such an award is excessive under the U.S. Constitution’s 14th amendment due-process clause, the judge explained. Therefore, the punitive damages must be reduced, he added.

In light of the fact there was only a signed letter of intent, and no actual sales contract, Simon is entitled only to his $5,000 actual damages plus reasonable punitive damages, the judge emphasized.

San Paolo Bank is a $46 million subsidiary of a large Italian bank, the judge noted. In light of the fact there was never a written sales contract, the $1.7 million punitive damages award was excessive, the judge commented.

Therefore, a more reasonable punitive damages award, since Simon’s actual damages were only $5,000, is 10 times that amount, or $50,000 punitive damages, the judge concluded.

Based on the 2005 California Supreme Court decision in Simon v. San Paolo U.S. Holding Co. Inc., 29 Cal.Rptr.3d 379.

(For more information on Bob Bruss publications, visit his
Real Estate Center
).

***

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