Punitive Damages Against a Rogue LLC Manager
Punitive damages are available “where it is proven by clear and convincing evidence that the defendant has been guilty of oppression, fraud, or malice.” They are meant “to punish wrongdoing and deter future misconduct” by the defendant and other potential wrongdoers. In assessing punitive damages, courts consider the reprehensibility of the defendant’s conduct, the amount of actual damages, and the defendant’s financial condition.
In a case recently filed by California’s Fourth Appellate District — Lofts on L Street LLC v. Clippinger — the Court of Appeal affirmed the trial court’s judgment against an LLC’s manager, including an award of punitive damages. While the Lofts on L Street opinion is unpublished and therefore not binding precedent, it still provides a useful guidepost.
Facts: self-dealing by LLC manager
Based on the facts set forth in the Court of Appeal’s opinion:
In 2012, Robert Clippinger (through his company Clippinger Investment Properties, Inc. — “CIP”) solicited millions of dollars from real estate investors to purchase and develop a mixed use condominium and commercial site in Sacramento. He formed Lofts on L Street LLC (“Lofts”) to purchase the property. The investors received either Class A or Class B membership interests in the LLC. Clippinger was appointed as the manager of the LLC.
In 2015, some of the Lofts members discovered that Clippinger had engaged in self-dealing using Loft’s finances. Clippinger had obligated Lofts to pay back $1.4 million in undisclosed bridge loans, which Clippinger had converted to his own benefit. In short, it appeared Clippinger was obligating Lofts to repay his own personal debts. Clippinger also made intercompany transfers out of Lofts accounts into his own accounts.
In an attempt to restrain self-dealing by Clippinger, the Lofts members amended the Operating Agreement to establish an “Authorized Representative” who was to monitor Loft’s financials and approve future expenditures or liabilities in excess of $5,000.
In 2017, Clippinger withheld distributions to a Class B member, VWC Lofts, LLC (VWC), which then sued Clippinger, Lofts, and the Authorized Representative. Clippinger later entered into a settlement agreement with VWC without the Authorized Representative’s knowledge or approval, under which Clippinger would pay nothing to VWC, and the entire settlement amount (of $1.465 million) was to be paid by Lofts. Clippinger signed the settlement agreement without notifying or seeking approval of the Authorized Representative, and without notice to Loft’s members.
In 2020, the Lofts members voted to remove Clippinger as manager of the LLC. Lofts, under new management, then filed a complaint against Clippinger and his company CIP for breach of fiduciary duty among other claims. The complaint sought punitive damages.
Trial court: manager hit with compensatory damages plus an award of punitive damages
Before trial, Lofts had served Clippinger with discovery requiring the production of documents showing Clippinger’s financial condition and net worth for the purpose of assessing potential punitive damages. Clippinger failed to produce any records in response to the discovery.
The trial court ordered Clippinger to produce the requested financial records, but Clippinger failed to do so.
After a bench trial, the court ruled that Clippinger owed Lofts over $2 million in compensatory damages and prejudgment interest.
The trial court then conducted proceedings on punitive damages against Clippinger and his company CIP. Clippinger admitted that he kept relevant financial records but did not produce them in response to the Lofts’ discovery or in response to the court’s prior order. He claimed that while his records showed he had over $28 million in assets at one time with an income of over $32,000 a month, he was currently in bankruptcy and foreclosure.
The trial court issued a ruling awarding Lofts $6 million in punitive damages. The court found that Clippinger’s conduct was “significantly reprehensible” and “took advantage of investors who were vulnerable to abuse because they had no control over the Lofts’ operation. Defendants engaged in a years-long patterns and practice of intentionally using the investors’ funds as their own and then covering it up. Worse, defendants continued to do so after the investors tried to rein in the abuses.”
Clippinger appealed on several grounds, including challenging the award of punitive damages. Clippinger argued that the punitive damage award “was erroneous because there was no evidence of Clippinger’s financial condition.”
Court of Appeal: affirmed
The Court of Appeal affirmed the trial court’s award of punitive damages.
The Court of Appeal agreed that “the record lacks evidence of defendants’ current assets and liabilities” but found that the “absence is fairly attributed to defendants. … A defendant is in the best position to know his or her financial condition, and cannot avoid a punitive damage award by failing to cooperate with discovery orders.”
The court also held that “A defendant’s failure to obey a court order to produce records of his financial condition forfeits an appellate challenge to a punitive damage award.” The court found that Clippinger “failed to obey the trial court’s order to produce sufficient records of his financial condition” and therefore Clippinger forfeited the issue on appeal.
Even aside from forfeiting the challenge to the punitive damage award, the Court of Appeal held that substantial evidence supported the trial court’s finding of fraud, malice, and oppression. The court ruled: “Clippinger surreptitiously used Lofts funds for his own personal benefit over a period of years. This is supported by Loft’s documentary evidence, as well as the testimonial evidence Lofts presented at trial[.]” The court declined to “reweigh the evidence.”
Lesson
Under the unpublished Lofts on L Street opinion, a punitive damages defendant cannot disobey a court order compelling compliance with financial discovery and then attack a later punitive damage award on the grounds that it was not supported by adequate financial evidence.