In County of San Bernardino v. Walsh, (— Cal.Rptr.3d —, 2007 WL 4532629, Cal.App. 2 Dist., Dec. 27, 2007), a California Court of Appeal considered the defendants’ challenges to an award of compensatory and punitive damages in a county’s civil action against public and private individuals involved in a bribery and corruption scandal. The Court of Appeal upheld the trial court’s judgments and rejected the defendants’ claims that the damages awarded were invalid and/or excessive.
Facts
In the late 1990s, San Bernardino County (“County”) was victimized by a series of corruption scandals involving its Chief Administrative Officer, James J. Hlawek (“Hlawek”), and other public officials. Hlawek was indicted on federal bribery charges as a result of his favorable treatment of certain private individuals and companies doing business with County in exchange for bribes.
As a result, of the scandals, County filed civil actions against Hlawek and others for, among other claims, fraud, breach of fiduciary duty, unfair competition, and unjust enrichment. The cases included (1) an action against former CAO Harry M. Mays, Kenneth James Walsh, and Bio-Reclamation Technologies, Inc. (“Mays/Walsh”), Norcal Water Systems, Inc. (“Norcal”), Miller & Schroeder bond underwriters (“M&S”), all of whom were involved in a scheme to procure a solid waste management contract with County; and (2) an action against William McCook and Oakridge Group Corporation (“McCook/Oakridge”), who bribed Hlawek to obtain approval of a billboard lease from County. Two defendants in the Mays/Walsh suit — Norcal and M&S — entered into a $6.5 million settlement with County prior to trial.
Following a bench trial, the trial court awarded judgments in favor of County based in part on the court’s determination that the defendants were jointly and severally liable and should be required to disgorge all profits resulting from the bribes. As to Mays/Walsh, the trial court awarded compensatory damages of more than $4.2 million, comprised of Hlawek’s salary, direct bribes by Mays/Walsh to Hlawek, kickbacks, consulting fees, and profits resulting from the illegal transactions. The trial court also awarded punitive damages of $1 million against Mays and $500,000 against Walsh on County’s breach of fiduciary duty and fraud claims. As to McCook/Oakridge, the trial court found liability based on violation of Government Code § 1090 by virtue of bribery of Hlawek, and breach of the billboard lease due to underpayment of rent. It awarded County $3.8 million, which was the profit received by McCook/Oakridge when it assigned the illegally obtained lease to a third, unrelated party.
All defendants appealed, claiming the compensatory damages awards were not supported by substantial evidence or allowed by law. Mays/Walsh also challenged the punitive damages awards as excessive.
Decision
The Court of Appeal first addressed Mays/Walsh’s argument that the evidence against them was insufficient because County’s approval of the contract with Norcal was “inevitable” regardless of the bribery, and because the contract was a “good bargain.” The evidence clearly showed that Mays or Walsh began bribing Hlawek long before approval of the Norcal contract and before any County action that made approval inevitable, the court said. In addition, aside from the fact that there is no such thing as “harmless bribery” or “honest graft,” the court said, there was considerable evidence that County lost millions of dollars due to Norcal’s receipt of increased compensation over the years, demonstrating the contract was not a “bargain” at all.
The court also rejected Mays/Walsh’s claim that County had not suffered damage because County’s money was not used to pay bribes. The trial court had imposed the disgorgement remedy based on the equitable principle of “unjust enrichment,” which holds that “one person should not be permitted to unjustly enrich himself at the expense of another, but should be required to make restitution” for property or benefits unjustly received. The emphasis is on the wrongdoer’s enrichment, not the victim’s loss, the court said. Particularly when a person in a fiduciary position acts in conscious disregard of the rights of those to whom the duty is owed, he or she should be required to disgorge all profits if for no reason other than to deter the perpetrator from committing the same unlawful actions again, the court said. The judgment against Mays/Walsh took back money the defendants had “reaped from their personal fraud and dishonesty,” and awarded County “that which was rightfully the County’s,” the court said, a result which was not only equitable but which also vindicated public policy.
The court also upheld the award of punitive damages against Mays and Walsh, finding it was justified due to (1) the reprehensibility of the defendants’ conduct; (2) the relationship between the punitive damages award, the compensatory damages award, and the harm done; and (3) the amount of the award in proportion to each defendant’s net worth. Substantial evidence supported the trial court’s awards, as well as its conclusion that the defendants retained sufficient exempt or “judgment-proof” assets to live comfortably despite the award, the court held.
Finally, the Court of Appeal agreed with the trial court damages award against McCook/Oakridge, finding substantial evidence supported the judgment based on Government Code § 1090. Section 1090 prohibits public officials from being financially interested in contracts made by them in their official capacity, and embodies the principle that the duties of public office demand the “absolute loyalty” and ¨undivided allegiance” of those in office, the court said. Courts have construed the statute as prohibiting “any form of self dealing,” and have allowed public entities to recover compensation without restoring benefits it received under the contract.
The court therefore rejected the defendants’ claim that § 1090 limited damages to County’s direct financial loss, and found instead, for reasons similar to its analysis of the unjust enrichment recovery against Mays/Walsh, that the trial court properly required McCook/Oakridge to disgorge profits they received from sale of the billboard lease. An actual loss to the public entity is not necessary to a recovery; there were no mitigating factors that would make disgorgement unfair; and the trial court did not err simply because it computed the “ill-gotten gains” of McCook/Oakridge for purposes of assessing damages rather than for purposes of figuring “profit” for accounting purposes, the court said. Substantial evidence supported the trial court’s finding that McCook/Oakridge breached the lease due to underpayment of rent, the Court of Appeal said, and therefore affirmed the trial court’s judgment in all respects.