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JET SOURCE CHARTER, INC.,v. DOHERTY Part I

JET SOURCE CHARTER, INC.,v. DOHERTY Part I
03:18:2007



JET SOURCE CHARTER, INC.,v. DOHERTY



Filed 1/30/07; part. pub. & mod. order 2/28/07 (see end of opn.)



COURT OF APPEAL, FOURTH APPELLATE DISTRICT



DIVISION ONE



STATE OF CALIFORNIA



JET SOURCE CHARTER, INC.,



Plaintiff and Respondent,



v.



BRIAN J. DOHERTY et al.,



Defendants and Appellants.



D044779



(Super. Ct. No. GIN14623)



APPEAL from a judgment of the Superior Court of San Diego County, Lisa Guy-Schall, Judge. Reversed and remanded in part; affirmed in part.



The jury in this case determined that in locating and negotiating the purchase price of aircraft on behalf of the plaintiff, the defendant aircraft dealers owed the plaintiff the duties of a fiduciary. The jury further found that in providing the plaintiff with misleading information about the negotiated price of the aircraft, the defendants breached their fiduciary duty to the plaintiff.



There is sufficient evidence in the record to support the jury's finding of liability. Although the parties did not have a written agency contract, their course of conduct and the customary practice in the aircraft industry fully supported a finding the aircraft dealers were the plaintiff's agents and therefore obligated to provide the plaintiff with accurate information about the price the aircraft dealers had negotiated with the sellers of the aircraft.



Although we agree the trial court erred in instructing the jury that both brokers and agents owe purchasers the duties of a fiduciary, in light of testimony from the aircraft industry experts offered by the parties and the record of willful deceit on the part of the defendants, the error was harmless. Moreover, the record contains ample evidence from which the jury could reasonably infer the aircraft dealer had retained concealed secret profits equal to or greater than the compensatory damages awarded to plaintiff.



However, we reverse and remand as to the award of punitive damages with instructions that the trial court limit them on a pro rata basis to an amount which in total does not exceed the compensatory damages awarded. Where, as here, the conduct in question only involves economic damage to a single plaintiff who is not particularly vulnerable, an award which exceeds the compensatory damages awarded is not consistent with due process.



FACTUAL AND PROCEDURAL BACKGROUND



Plaintiff and respondent Jet Source Charter, Inc. (Jet Source), was formed in 1997 by Richard McWilliam. McWilliam is the sole shareholder of Jet Source and its chief executive officer. At all pertinent times McWilliam was also the chairman and chief executive officer of Upper Deck, a sports memorabilia and trading card company. McWilliam devotes most of his time and energy to management of Upper Deck.



From 1997 to 1999 Jet Source's business consisted of chartering private aircraft and renting office and hangar space at Palomar Airport in Carlsbad. In 1999 McWilliam hired Steven Bogner, a pilot with marketing experience, to act as a full-time manager of Jet Source.



Defendant and appellant Mach I, Inc. (Mach I), was formed in 1998 by defendant and appellant John Moyous. Moyous is the sole shareholder and chief executive officer of Mach I. Moyous has been a pilot since 1969. Moyous flew contract missions for a number of government agencies, including the Department of Justice, and developed a number of relationships with people working in the aircraft industry throughout the world. Mach I is registered with the FAA as an aircraft dealer. Mach I Aircraft, Inc. (Aircraft), was a second entity owned by Moyous.[1]



Defendant and appellant Brian Doherty is also a licensed pilot. Like Moyous, Doherty flew contract missions for government agencies and in that capacity befriended Moyous. Doherty was an officer of Mach I and worked with Moyous at Mach I.



In March 1999 Mach I began renting office space from Jet Source at the Carlsbad airport. Mach I executed a standard form lease which in part stated that neither party was the agent of the other.[2] Shortly after Mach I became a tenant of Jet Source, McWilliam, Bogner, Mouyos and Doherty met at Mach I's office and discussed Jet Source's interest in acquiring a particular airplane, a Falcon 50, Serial No. 15. They also discussed Jet Source's general interest in acquiring aircraft for its charter business.



According to McWilliam, Doherty informed him that Mach I did not have the money to fund purchases or pay the expenses of inspecting aircraft. McWilliam understood that Mach I was offering to act as Jet Source's broker in acquiring aircraft for Jet Source and being paid an enhanced commission on the resale of the aircraft. McWilliam, on behalf of Jet Source, agreed to have Mach I act as its broker.



Between April 1999 and August 2001, Mach I assisted Jet Source in six aircraft transactions. According to McWilliam, Mach I located aircraft for purchase by Jet Source, negotiated the "lowest possible price" for the aircraft, and used Jet Source's funds to acquire the aircraft for Jet Source. Jet Source would then pay Mach I a commission of between one and two percent on the resale of the aircraft to third parties. In some instances Jet Source also paid Mach I a commission on the acquisition of the aircraft. In all cases Jet Source paid Mach I's expenses in connection with the transactions.



In the first transaction in May 1999, Mach I negotiated a price of $9.7 million from Philips Electronics for the purchase of a Falcon 50, serial number 15. However, Mach I represented to Jet Source that the price of the aircraft was $10.6 million and in fact produced a sales contract which reflected the higher price. Jet Source paid $10.6 million for the Falcon 50 and eventually resold it. During the course of discovery Jet Source obtained a sales contract which was largely identical in form to the sales contract initially provided by Mach I, except that it showed that Mach I only paid $9.7 million for the Falcon 50. An escrow statement Jet Source obtained through discovery showed that an entity known as Aircraft Dealer Services received $985,000 from the transaction. Mouyos conceded that Mach I controlled Aircraft Dealer Services and ultimately received the $985,000.



In the second transaction Mach I negotiated a purchase price of $9.4 million for a second Falcon 50 from Volvo. However, Mach I represented to Jet Source that the purchase price was $10 million and produced a purchase contract which reflected that price. Although in its discovery responses Mach I maintained that the negotiated price was $10 million, Jet Source established at trial the negotiated price was $9.4 million.



In the third transaction Mach I represented to Jet Source that it had negotiated a purchase price of $8.7 million for three Lear jets, when in fact the price for the three aircraft included $2.25 million in secret profits obtained by Mach I. In addition to the secret profits, Jet Source paid Mach I a buyer's commission of $75,000.



The fourth transaction involved another Falcon 50. Mach I negotiated a $10.3 million purchase price with the seller, Ronaele Aviation, Inc. However, Mach I provided Jet Source with a sales contract which showed a price of $10.85 million. At trial Doherty conceded that the sales contract appeared to have been altered.



In the fifth transaction Mach I obtained over $500,000 in undisclosed profits by using a "confidence company" it controlled to act as the purported seller of a Falcon 20.



In the sixth and final transaction Jet Source purchased a Cessna Citation from Cessna for $2.2 million and leased it back to Mach I. The parties agreed Mach I would bear the costs of maintaining the Cessna Citation as part of Jet Source's charter fleet, that they would split any profits upon resale, and that Mach I would bear the risk of any loss on the resale. After Mach I had failed to pay the expenses of the Cessna Citation, Jet Source sold the aircraft back to Cessna for $950,000. It incurred a $1.25 million loss on the transaction.



According to Bogner, Mach I brought several proposed transactions a week to him during the period Mach I was acting as Jet Source's agent. During this period Doherty and Moyous used Jet Source's credit cards to pay for approximately $100,000 in expenses they incurred in locating aircraft and negotiating with their owners. Although Mach I found propeller driven aircraft for other clients during this period, Jet Source was the only client to whom it provided jet aircraft.



PROCEDURAL HISTORY



Jet Source sued Mach I, Mouyos and Doherty in August 2001. Initially, Jet Source's claims were limited to the losses it had suffered upon Mach I's breach of the Cessna lease. Later, Jet Source amended its complaint to include claims seeking to recover the undisclosed profits Mach I, Mouyos and Doherty had earned on the other five transactions on theories of fraud and breach of fiduciary duty.



The case was tried to a jury which returned a special verdict in favor of Jet Source. The jury found Moyous and Doherty liable for intentional misrepresentation, negligent misrepresentation, breach of fiduciary duty, breach of contract and conversion. The jury awarded Jet Source $3,783,667 in damages for breach of fiduciary duty; $1.25 million for breach of contract on the Cessna lease and resale; and $20,396.90 for misuse of Jet Source's credit cards. In addition to compensatory damages the jury awarded Jet Source $11.4 million in punitive damages against Doherty and $7.6 million in punitive damages against Moyous; the jury assessed $3.8 million in punitive damages against Mach I and $3.8 million in punitive damages against Aircraft. The trial court determined that Jet Source was entitled to $1.5 million in prejudgment interest.



The trial court denied the defendants' motions for new trial and judgment notwithstanding the verdict. Judgment was entered on the jury's verdict and the defendants filed timely notices of appeal.[3]



DISCUSSION



I



In their first argument on appeal, the defendants contend there is no substantial evidence to support the jury's implied finding they owed Jet Source any fiduciary duty. In making this argument the defendants confront a familiar burden. "Where findings of fact are challenged on a civil appeal, we are bound by the principal that 'the power of an appellate court begins and ends with a determination as to whether there is any substantial evidence, contradicted or uncontradicted,' to support the findings below. [Citation.] We must therefore view the evidence in the light most favorable to the prevailing party, giving it the benefit of every reasonable inference and resolving all conflicts in its favor. [Citation.]" (Ninety Nine Investments, Ltd. v. Overseas Courier Service (Singapore) Private, Ltd. (2003) 113 Cal.App.4th 1118, 1127.)



At trial in attempting to show the existence of a fiduciary duty, Jet Source argued that Mach I was at all times Jet Source's agent and therefore obligated to tell Jet Source the price it had negotiated for each of the aircraft Jet Source acquired as a result of Mach I's efforts. Mach I on the other hand argued it was a "middleman" in each of the transactions and was acquiring the aircraft for its own account and then, as owner of the aircraft, selling them to Jet Source in a series of arms length transactions. The respective positions of the parties were aptly described by the court in Zalk v. General Exploration Co. (1980) 105 Cal.App.3d 786, 793: "The middleman falls under no obligation to others, and he may act solely to further his own best interests. . . . [T]he middleman . . . remains free to peddle his find to the highest bidder . . . . In sharp contrast . . . an agent exclusively employed by a principal to seek out acquisitions stands in a confidential relationship to his principal and owes him an individual duty of loyalty. He is a fiduciary, held to the standard of loyalty and honesty of a trustee [citations]." In finding the defendants liable for breach of fiduciary duty, the jury apparently resolved this dispute in Jet Source's favor and found that Mach I owed Jet Source the duties of an agent. The record amply supports the jury's conclusion.



"An agent 'is anyone who undertakes to transact some business, or manage some affair, for another, by authority of and account of the latter, and to render an account of such transactions.' [Citation.] 'The chief characteristic of the agency is that of representation, the authority to act for and in the place of the principal for the purpose of bringing him or her into legal relations with third parties. [Citations.]' [Citation.] 'The significant test of an agency relationship is the principal's right to control the activities of the agent. [Citations.] It is not essential that the right of control be exercised or that there be actual supervision of the work of the agent; the existence of the right establishes the relationship.' " (McCollum v. Friendly Hills Travel Center (1985) 172 Cal.App.3d 83, 91, italics added.)



Importantly, immediate physical control over an agent is not necessary and many agents are in fact independent contractors. " '[M]ost of the persons known as agents, that is, brokers, factors, attorneys, collection agencies, and selling agencies are independent contractors as the term is used in the Restatement . . . since they are contractors but, although employed to perform services, are not subject to the control or right to control of the principal with respect to their physical conduct in the performance of the services. However, they fall within the category of agents. They are fiduciaries; they owe to the principal the basic obligations of agency: loyalty and obedience.' [Citations.]" (Cross v. Bonded Adjustment Bureau (1996) 48 Cal.App.4th 266, 277, quoting Rest.2d Agency,  14 N, com. a.)



Here, with respect to what the court in McCollum stated is the chief characteristic of agency, the right to control the activities of the agent, there is very little dispute. None of the defendants contend Mach I had the resources to finance the worldwide search and negotiations it conducted for the aircraft Jet Source eventually acquired, let alone the wherewithal to purchase any of those aircraft for its own account. Rather, Jet Source produced evidence that its resources financed both Mach I's activities and the purchase price of each of the subject aircraft. The financing provided by Jet Source created a very strong inference that Jet Source had the right to control Mach I's activities, even if Jet Source never exercised that right. The role Jet Source played in financing Mach I's activities and in acquisition of the aircraft plainly undermines Mach I's argument that it was a middleman who held the subject aircraft in its own right and for its own account. We also note there does not seem to be any dispute in the record that any decision to purchase aircraft was solely Jet Source's. As Bogner testified, in any given week during the two years Mach I helped Jet Source acquire aircraft, Mach I would bring him between 15 and 20 prospective purchases and in the end Jet Source only acquired aircraft in six transactions.



In addition to the evidence which showed that only Jet Source had the ability to acquire the subject aircraft and Jet Source made its own purchase decisions, the record also contains evidence that Mach I, Doherty and Moyous themselves believed they had an obligation to provide Jet Source the actual price they had negotiated with the sellers of the aircraft. This evidence comes in the form of the sales contracts which the defendants provided to Jet Source and which, with the exception of the price listed, were identical in form to sales contracts which listed the actual, lower price Mach I had negotiated with the sellers of the aircraft. From these fairly blatant, purposeful and repeated misrepresentations of the price Mach I had negotiated, the jury was entitled to infer, and probably did infer, the defendants believed they were fiduciaries and therefore were obligated to provide accurate price information to Jet Source.



Contrary to the defendants' argument, the terms of the office space lease did not prevent them from acting as Jet Source's agent in the aircraft transactions. The lease cannot be expanded beyond its subject matter. (See Civ. Code,  1648; Hollander v. Wilson Estate Company (1932) 214 Cal.582, 585; Brookshire Oil Co. v. Casmalia Ranch Oil & Development Co. (1909) 156 Cal. 211, 215-216.) By its terms the scope of the lease is limited to the "lease [of] office space."



In sum, there is more than sufficient evidence the defendants acted as agents for Jet Source in acquiring the subject jet aircraft and owed Jet Source the duties of a fiduciary.[4]



II



Next, the defendants contend the trial court erred in permitting Jet Source's expert to testify that in the aircraft industry an aircraft broker or agent owes fiduciary obligations to his or her client. They contend the expert's opinions were improper because they embraced the ultimate issue in the case and were otherwise inadmissible legal conclusions. We find no error.



As Jet Source points out, the fact that the expert's opinion embraced the ultimate issue in the case did not make it inadmissible. (Evid. Code,  801, subd. (a); Summers v.



A. L. Gilbert Co. (1999) 69 Cal.App.4th 1155, 1179.) Moreover, while an expert may not testify as to the legal conclusion the jury should draw from particular facts (see Summers v. A. L. Gilbert Co., supra, 69 Cal.App.4th at p. 1179), an expert can testify as to the standards of care and practices required in certain professions, including their fiduciary obligations. (See Stanley v. Richmond (1995) 35 Cal.App.4th 1070, 1087; Hanson v. Grode (1999) 76 Cal.App.4th 601, 606-607; Landeros v. Flood (1976) 17 Cal.3d 399, 410.) As the court in Stanley v. Richmond stated with respect to attorneys: "Whether an attorney has breached a fiduciary duty to his or her client is generally a question of fact. [Citation.] Expert testimony is not required [citation], but is admissible to establish the duty and breach elements of a cause of action for breach of fiduciary duty where the attorney conduct is a matter beyond common knowledge. [Citations.]" (35 Cal.App.4th at p. 1087.) Here the aircraft expert's testimony was limited to the customs and practices in the aircraft industry. The trial court did not abuse its discretion in admitting it. (Ibid.)



TO BE CONTINUED AS PART II.



Publication Courtesy of California free legal resources.



Analysis and review provided by Spring Valley Property line Lawyers.







[1] Unless otherwise indicated, all references to Mach I include Mach I Aircraft.



[2] The lease stated: "15.7. No Agency. Nothing contained in this Agreement and no action by either party will be deemed to constitute any party or any such party's employees or agents to be employee or agent of the other party or will be deemed to create any partnership, joint venture, association, syndicate among or between any of the parties or will be deemed to confer on any party any express or implied right, power or authority to enter into any agreement or commitment, express or implied, or to incur any obligation or liability on behalf of the other party."



[3] John Moyous filed a notice of appeal on behalf of himself and Mach I, dba as Mach I Aircraft. This was the manner in which Mach I and Aircraft were denominated in the complaint and in the judgment entered by the trial court. Thereafter Mach I and Aircraft were the subject of bankruptcy petitions and the automatic stay provided by Title 11, United States Code, section 362. Those stays were lifted on January 24, 2006, and Mach I and Aircraft filed briefs simply joining in the briefs filed on behalf of Doherty. We deny Jet Source's motion to dismiss Mach I's and Aircraft's appeals. Because it replicated the manner in which those entities had been denominated in Jet Source's complaint and in the underlying judgment, the notice of appeal filed on behalf of Mach I and Aircraft was sufficient to preserve their right of appeal. (See Luz v. Lopes (1960) 55 Cal.2d 54, 59; D'Avola v. Anderson (1996) 47 Cal.App.4th 358, 361-363.) Under Title 11, United States Code, section 108 (c)(2), Mach I and Aircraft were not required to meet any other appellate deadlines until after the automatic stays were lifted.



[4] We note the defendants rely upon the unpublished opinion in Omni Jet Trading, Inc. v. Heerensperger (4th Cir. 1997) 121 F.3d 699 (1997 WL 543381] (Omni Jet).) However, in Omni Jet the jury rejected claims that an agency or contractual relationship existed and given that finding, the Court of Appeals held that no liability for negligent misrepresentation could be imposed on aircraft brokers. Here we have no such factual finding by the jury.





Description Punitive damage award of $26 million was excessive where compensatory damages totaled $6.5 million, damages were largely in the way of restitution to single plaintiff for funds defendants improperly took from it, and harm defendants caused was solely economic and did not involve a "vulnerable victim." In such cases, punitive damage awards in excess of compensatory damages violate due process.
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