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Gordon Bankhead et al v. Arvinmeritor

April 19, 2012

GORDON BANKHEAD ET AL., PLAINTIFFS AND RESPONDENTS,
v.
ARVINMERITOR, INC., DEFENDANT AND APPELLANT.



Trial Court: Alameda County Superior Court Trial Judge: Hon. Robert B. Freedman (Alameda County Super. Ct. No. RG10502243)

The opinion of the court was delivered by: Ruvolo, P. J.

CERTIFIED FOR PUBLICATION

In this asbestos personal injury case, a jury found ArvinMeritor, Inc. (ArvinMeritor) liable to Gordon and Emily Bankhead*fn1 for compensatory and punitive damages. On appeal, ArvinMeritor does not challenge the jury's verdicts as to liability or the amount of compensatory damages. It contends only that the trial court erred in declining to reduce the amount of punitive damages awarded by the jury.

ArvinMeritor disputes the punitive damages award on two grounds: first, that the amount is excessive under California law in light of ArvinMeritor's financial condition, and in particular, the evidence that ArvinMeritor has a negative net worth; and second, that the ratio of punitive to compensatory damages is so high as to violate the due process clause of the United States Constitution, under the guidelines adopted by the United States Supreme Court.

As to the first contention, we hold that there is no legal requirement that punitive damages must be measured against a defendant's net worth. Here, there was expert testimony that ArvinMeritor's net worth was not a reliable indicator of its ability to pay punitive damages, and that other indicators in its financial data merited the amount of the award.

As to ArvinMeritor's second contention, we conclude that the 2.4-to-one ratio of punitive damages to compensatory damages awarded by the jury did not violate the federal due process clause of the Fourteenth Amendment, or the guidelines for making such awards as articulated by the United States Supreme Court.

Consequently, we affirm.

Facts and Procedural Background

As is required on review after a jury trial, in reciting the facts, we "resolv[e] . . . all conflicts in the evidence and all legitimate and reasonable inferences that may arise therefrom in favor of the jury's findings and the verdict. [Citations.]" (Weeks v. Baker & McKenzie (1998) 63 Cal.App.4th 1128, 1137-1138 (Weeks).) We give only a general summary of the facts relating to liability and compensatory damages, because the details are not germane to the issues presented by this appeal.

ArvinMeritor is the successor in interest to another company, Rockwell,*fn2 which manufactured brake shoes for installation on commercial trucks during the time frame involved in this case. The brake shoes were fitted with asbestos-containing linings that were manufactured by a number of other companies, including Pneumo Abex LLC (Abex), the respondent in a companion appeal to this one.*fn3

By the 1960's, ArvinMeritor knew that workers exposed to asbestos dust were at risk of developing asbestos-related diseases. Indeed, in 1973 and again in 1975, it wrote letters to Abex and other manufacturers complaining about the presence of asbestos dust in the brake linings it was receiving from them. Nonetheless, ArvinMeritor did not place any warnings on its products until the early 1980's, and continued to market asbestos-containing brakes until its inventory of them was exhausted sometime in the early 1990's. Not until the fall of 1987 did ArvinMeritor include an express reference to cancer in the warnings on its products.

Bankhead was exposed to asbestos dust from brake linings during the 30 years he worked at automotive maintenance facilities, primarily as a "parts man," starting in 1965 and continuing through his retirement in 1999. As a result of this exposure, Bankhead contracted mesothelioma, a form of lung cancer, in 2009. Before his mesothelioma was diagnosed in January 2010, Bankhead experienced difficulty breathing, and underwent painful medical treatment to drain fluid from one of his lungs. After the diagnosis, Bankhead was told he only had 12 months to live,*fn4 and as his disease progressed, the quality of his life decreased significantly. At trial, Bankhead's medical experts testified that his condition would become increasingly painful until his inevitable death.

After Bankhead's mesothelioma was diagnosed, he sued numerous defendants, including ArvinMeritor and Abex. By the time the case went to trial, Bankhead had settled with all but four of the defendants. The jury found against all of the defendants as to liability, allocating fault 30 percent to each brake lining manufacturer (Abex and one other), 15 percent to each brake shoe manufacturer (ArvinMeritor and one other), and 10 percent to other defendants. The jury also found all defendants liable for punitive damages.

The jury calculated respondents' economic damages at $1.47 million, including Bankhead's medical expenses, lost earnings, and lost retirement benefits, and the value of the household services he had been providing before he became ill. It also awarded a total of $2.5 million in non-economic damages for Bankhead's pain, suffering, and emotional distress, and his wife's loss of consortium. Based on its 15 percent share of fault, ArvinMeritor was held jointly and severally liable for the $1.47 million in economic damages, and severally liable for $375,000 of the non-economic damages, for a total of $1.845 million.*fn5

A separate trial was held to determine the amount of punitive damages to be assessed against each defendant. By the time of that trial, all defendants except ArvinMeritor and Abex had settled. At the punitive damages trial, respondents presented an expert witness, Robert Johnson, to testify about ArvinMeritor's financial condition. In evaluating ArvinMeritor's economic status, Johnson reviewed publicly available documents filed with the Securities and Exchange Commission, including ArvinMeritor's 2008, 2009, and 2010 annual 10-K reports; its adjusted 2009 10-K reports; a 2010 proxy statement sent to shareholders; and data regarding its market capitalization. These are "generally accepted financial documents used and relied upon by economists or experts in finance to evaluate a company."

Johnson testified that between 2006 and 2010, ArvinMeritor attained over $3 billion in sales revenue each year, and an average annual cash-flow profit of $111 million.*fn6 ArvinMeritor's lowest performing year during that period was 2009, but even in that year, it had $95 million in cash available to it. In 2010, ArvinMeritor's annual sales revenues reached $3.59 billion; its annual report indicated it had earned $211 million in cash-flow profit; and it reported to its shareholders that it had earned a $12 million net profit--a conservative figure, as Johnson explained, because companies seek to reduce their reported net income, using legally available deductions such as depreciation, in order to minimize their tax liability. At the end of 2010, ArvinMeritor had on hand some $343 million in cash and cash equivalents, and its outstanding stock had a total market value of almost $2 billion.

ArvinMeritor's chief executive officer, who also served as its board chair and corporate president, earned over $7.6 million in 2010, and stood to receive between $19.9 million and $26.9 million upon leaving the company. Johnson explained that a company's willingness and ability to pay sums of this magnitude to its chief executive is an indicator of financial strength. Given all of these facts, Johnson opined that ArvinMeritor is financially sound.

Johnson acknowledged that ArvinMeritor reported that as of 2010, it had a negative net worth of $1.023 billion. He opined, however, that this number, taken on its own, did not "reflect the full context of ArvinMeritor's financial condition and ability to pay." Johnson explained that net worth is only one of "a number of different tools that we use to assess a company's financial health, wealth and condition," and opined that "net worth is probably one of the least reliable financial metrics or statistics you can use," because there are "a number of financial or accounting transactions" in which a company can engage to lower its net worth, while remaining profitable. Johnson testified that net worth "is not a measure of a company's financial condition totally or their ability to pay," because "even within the guidelines of the generally accepted accounting principles . . . net worth is something that can be pretty easily manipulated." As an example, Johnson noted that a company can reduce its net worth simply by repurchasing shares of its stock.

Johnson explained that because net worth can be unreliable, banks look instead to a company's cash flow and profits, which are the most reliable indicators of its ability to repay debt, in determining whether to lend money to it. For this reason, companies with a negative net worth are still able to borrow money. Indeed, ArvinMeritor itself borrowed a total of $245 million in 2010, and still had $539 million available on its line of credit as of September 30 of that year.

Johnson also acknowledged that over the past couple of years, ArvinMeritor had been "weathering . . . the financial travails of the economy"; its sales had not gone up, and it had lost some money. He believed, however, that ArvinMeritor was "still a financially sound company" that was "able to meet all of its obligations," was "not anywhere near on the verge of bankruptcy," and had "generally turned the corner." In all but one year (2009) during the period Johnson considered (2006-2010), the company's losses resulted primarily from significant capital expenditures, as well as expenses for research and development.

ArvinMeritor's trial counsel cross-examined Johnson, but ArvinMeritor did not offer any expert witness or other evidence to cast doubt on Johnson's methodology or his conclusions. In its opening brief on appeal, ArvinMeritor cites various financial data taken from ArvinMeritor's 2010 annual report. However, though the report was entered into evidence, Johnson was not asked about those particular figures at trial, and they were not called to the attention of the jury.

The jury returned a verdict awarding respondents $4.5 million in punitive damages against ArvinMeritor. ArvinMeritor filed motions for judgment notwithstanding the verdict and for new trial. The trial court denied both motions, and this timely appeal ensued.

Discussion

A. Amount of Punitive Damages Relative to Financial Condition

ArvinMeritor's first argument on appeal is that the punitive damages award is excessive under California law, primarily because of ArvinMeritor's negative net worth. ArvinMeritor argues that because of its financial condition, the award ...


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