Daniel Watkins Cynthia Watkins v. Terry Lundell Stephanie Lundell

Citations: 169 F.3d 540; 43 Fed. R. Serv. 3d 65; 1999 U.S. App. LEXIS 3031; 1999 WL 95704Docket: 97-3684

Court: Court of Appeals for the Eighth Circuit; February 26, 1999; Federal Appellate Court

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Terry and Stephanie Lundell appeal a district court's partial denial of their motions to set aside a default judgment in a case involving Daniel and Cynthia Watkins. The district court had previously set aside part of the judgment to correct actual damages and reduce punitive damages, but the Lundells sought to have the entire judgment overturned, arguing that the punitive damages awarded were erroneous. 

The case originated from a contract dispute where Terry Lundell, after contracting to buy approximately 5,381 acres of Iowa farmland, defaulted due to financial issues and forfeited the property. Daniel Watkins, who had agreed to purchase the land, provided substantial payments including a vintage Ferrari and additional fees but was ultimately unable to finalize the sale due to the Lundells' failure to perform.

In 1992, the Watkins filed a breach of contract and fraud lawsuit in California, which led to a settlement requiring the Lundells to make a series of payments and obtain a life insurance policy for the Watkins. The Lundells failed to comply with the settlement terms, prompting the Watkins to file a confession of judgment.

Subsequently, in July 1993, the Watkins initiated a new action for breach of the settlement agreement and fraud in Iowa. The Lundells were served with the complaint but failed to file an answer despite initial engagement with an attorney. The appeal involves a review of the district court's handling of damages and the Lundells' arguments regarding the punitive damages assessed against them. The court's decision affirmed part of the lower court's ruling while reversing another aspect.

The Watkins attempted to enforce a confessed judgment from a prior California action when they were approached by an Arizona attorney for the Lundells, who indicated the Lundells were considering bankruptcy and proposed a settlement that included a quitclaim deed, a third-position deed of trust, and an unsecured interest-free promissory note totaling $75,000. The Watkins rejected this offer, leading to the Lundells not making further contact. After no answer was filed by the Lundells, the Watkins moved for default, which was granted, and a magistrate judge held a hearing without the Lundells present. The judge found that the Lundells had fraudulently induced a settlement and failed to defend the action, estimating Terry Lundell's net worth at approximately $11 million. The magistrate judge recommended actual damages of $335,000 and punitive damages of $3.5 million against the Lundells, which the district judge adopted on February 16, 1994.

In June 1995, the Watkins filed the judgment in Arizona, prompting the Lundells to file motions to set aside the default judgment under various rules, including Federal Rule of Civil Procedure 60(b). A magistrate judge recommended setting aside part of the judgment due to a calculation error, reducing actual damages to $235,000 and punitive damages against Stephanie Lundell to $117,500, while maintaining punitive damages against Terry Lundell due to his pattern of fraud. The district court adopted this recommendation partially.

The review of the decision to set aside the default judgment under Rule 60(b) focuses on whether it was an abuse of discretion. Although the Lundells invoked multiple theories for relief, only Rule 60(b)(6) was applicable. This rule allows relief for "any other reason justifying relief" if filed within a reasonable time. The determination of what constitutes "reasonable time" depends on the case's specific circumstances and is also reviewed for abuse of discretion.

Concerns were raised regarding the timeliness of the Lundells' Rule 60(b)(6) motion, as they did not contest the default judgment for about seventeen months. However, this issue was not addressed by the district court or mentioned by either party, leading to the conclusion that it is not properly before the appellate court. The Watkins support the district court's partial relief to the Lundells and do not contest its appropriateness, while the Lundells seek to overturn the entire default judgment under Rule 60(b)(6), presenting eleven arguments, primarily focused on punitive damages.

Relief under Rule 60(b) is considered extraordinary, requiring exceptional circumstances to alter a final judgment. The Lundells argue either that Iowa's punitive damages criteria are unmet or that the awarded punitive damages are excessive and unconstitutional. Under Iowa law, punitive damages are applicable for willful and wanton disregard for another’s rights, particularly if tied to tortious or fraudulent actions in a breach of contract context. The district court found the Lundells' conduct met this threshold, justifying punitive damages.

The Lundells sought to challenge the district court's factual findings regarding their disregard for the Watkins' rights, but the court declined to review these findings. The appellate court agreed, stating that revisiting factual determinations without exceptional circumstances would undermine the judicial process. Consequently, the focus shifted to evaluating the Lundells' claim of excessive punitive damages.

An award of excessive punitive damages raises significant constitutional concerns regarding judicial discretion. The Supreme Court has emphasized the need for strict procedures and substantive criteria when reviewing punitive damages, citing cases such as *Pacific Mutual Life Insurance Co. v. Haslip* and *BMW of North America, Inc. v. Gore*. These guidelines aim to ensure that punitive damages, intended for punishment and deterrence, align with constitutional standards.

In the case concerning Terry and Stephanie Lundell, the punitive damages awarded—$3,617,500 on default—were reviewed only by the presiding judge, raising procedural concerns inconsistent with Supreme Court rulings that require adequate judicial review, as highlighted in *Honda Motor Co. v. Oberg*. This situation justified the invocation of Rule 60(b)(6) due to exceptional circumstances.

The constitutionality of the punitive damages against the Lundells, specifically $3,500,000 for Terry and $117,500 for Stephanie, was examined under the due process clause to assess whether they were "grossly excessive." The Supreme Court in *BMW* established three critical guideposts: the degree of reprehensibility of the defendants' actions, the ratio of actual harm to punitive damages, and the comparison with civil penalties in similar cases. The degree of reprehensibility is particularly crucial, as a higher level of reprehensibility can support larger punitive awards, necessitating that they reflect the severity of the offense.

Reprehensible conduct is highlighted as involving a breach of contract and fraud, with the Watkins settling their claims against Terry Lundell based on his representations. Despite a small initial payment due shortly after the settlement, the Lundells failed to pay any amount despite extensions and efforts by the Watkins. Evidence suggests that Lundell induced the settlement with no intention of fulfilling it, providing worthless property as security and making false assurances, thereby delaying his obligations to the detriment of the Watkins' rights. The district court characterized Lundell's actions as a pattern of fraud and deceit, qualifying them as more egregious than mere negligence and supporting punitive damages. However, the appropriateness of a substantial punitive damages award is questioned, particularly given the punitive to actual damages ratio of 14.89-to-1, which is considered very high.

The Supreme Court precedent indicates that excessive punitive damages should have reasonable relationships to the harm inflicted. In similar cases, such as Haslip, a lower ratio was deemed close to the constitutional line of impropriety. It is argued that Lundell's conduct may not justify a ratio exceeding 4-to-1. Moreover, when comparing the punitive damages to potential civil penalties for fraudulent practices, a punitive damages award of $3,500,000 against a maximum fine of $10,000 yields a 350-to-1 ratio, indicating a significant disparity. The district court also considered Lundell's wealth, found to be $11,000,000, suggesting that while financial position is a relevant factor, the $3,500,000 punitive damages award remains excessive relative to his net worth.

The punitive damages award against Terry Lundell is deemed exaggerated. While conduct justifies punitive damages, the court finds the award should not exceed a 4-to-1 ratio, amounting to $940,000, and concludes the district court abused its discretion by not setting aside the default judgment under Rule 60(b)(6) to reduce this award. In relation to Stephanie Lundell, $117,500 in punitive damages was awarded; however, the court supports her defense that she acted merely as a guarantor, lacking the requisite reprehensible conduct such as fraud or deceit. The magistrate judge had constitutional concerns about her punitive damages, which were acknowledged by the court, leading to a determination that the district court also abused its discretion regarding her award.

The court affirms part and reverses part of the district court's denial of relief, remanding for further proceedings. A dissenting opinion argues that relief under Rule 60(b)(6) is not warranted due to lack of exceptional circumstances and contends that the original judgment should be upheld, stating that the punitive damages complied with due process and that the amounts were not grossly excessive as per established legal standards. The dissent emphasizes that the procedural context was inadequately addressed by both parties.