SUPREME COURT OF ARIZONA
En Banc
MEDASYS ACQUISITION CORPORATION, ) Arizona Supreme Court
dba MEDASYS DIGITAL SYSTEMS, ) No. CV-02-0045-PR
)
Plaintiff, Counterdefendant- ) Court of Appeals
Appellant, ) Division One
) No. 1 CA-CV 00-0472
v. )
) Maricopa County
SDMS, P.C., an Arizona profes- ) Superior Court
sional corporation, ) No. CV 98-011575
)
Defendant, Counterclaimant- )
Appellee. ) O P I N I O N
)
Appeal from the Superior Court of Maricopa County
The Honorable Jonathan H. Schwartz, Judge
Court of Appeals, Division One
Memorandum Decision
VACATED IN PART AND REMANDED
WARNICKE & LITTLER, P.L.C. Phoenix
by Thomas E. Littler
and
FINE & ASSOCIATES, P.A. Coral Gables, Florida
by Edward A. Licitra
Attorneys for Plaintiff, Counterdefendant-Appellant
BURCH & CRACCHIOLO, P.A. Phoenix
by Bryan F. Murphy
and John D. Curtis
Attorneys for Defendant, Counterclaimant-Appellee
B E R C H, Justice
¶1 We granted review to determine whether a party’s election
of the equitable remedy of rescission automatically precludes it
from also receiving an award of punitive damages. We conclude that
it does not.
BACKGROUND
¶2 In January 1998, SDMS, a medical practice, contracted to
purchase computer-assisted diagnostic nuclear imaging equipment
from Medasys Acquisition Corporation. The contract required that
SDMS trade in its old diagnostic imaging equipment and make a down
payment of $10,900. SDMS was to pay the balance of $98,100 in
three installments after Medasys installed the equipment and
trained SDMS personnel to use it. Medasys understood SDMS’s
requirements that the equipment perform “head to toe” whole body
imaging, that the software perform “renal function studies at all
ages with age-corrected nomograms for all age groups,” and that the
equipment perform three-dimensional studies. Medasys representa-
tives assured SDMS that the equipment could perform these func-
tions.
¶3 After Medasys delivered the imaging equipment, SDMS
discovered that it did not perform the required functions. The
whole body imaging function, which was supposed to generate a
computer image of a subject’s body, would produce an image on which
the subject’s feet would appear on the top of the subject’s head on
subjects taller than 1.9 meters. The renal software could not
provide age-corrected nomograms for individuals over sixty years of
age – a group that comprised a large portion of SDMS’s practice –
and the camera head did not pivot freely, thus preventing it from
making three-dimensional studies.
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¶4 SDMS exchanged several letters with Medasys attempting to
resolve the problems. On April 21, 1998, Medasys demanded that
SDMS begin making payments on the balance of the contract. When
SDMS refused to pay until the problems with the equipment were
corrected, Medasys sued for breach of contract and unjust enrich-
ment. SDMS counterclaimed for breach of contract, breach of
warranty, and consumer fraud,1 seeking consequential damages,
punitive damages, and rescission. SDMS offered to return Medasys’s
equipment in exchange for the return of its down payment and SDMS’s
original equipment.
¶5 During a three-day trial, SDMS presented damaging
testimony from former Medasys employees regarding that company’s
fraudulent business practices. A former Medasys field engineer
testified that Medasys routinely delivered equipment that the
company knew was not functioning properly. Indeed, he testified
that Medasys knew that the whole body imaging function on the
diagnostic imaging machine sold to SDMS was not working properly
before it was delivered to SDMS. An independent contractor who
handled sales for Medasys testified that he was instructed to
“[g]et the sale. Promise [SDMS] whatever you need to. We’ll worry
about it later.” He characterized such promises as routine and
1
Although SDMS requested an instruction on consumer fraud,
a cause of action that would have supported punitive damages, the
trial court did not give one. The court of appeals did not address
the issue because SDMS did not object to the failure to give the
instruction.
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customary business practices for Medasys.
¶6 The jury returned a verdict in favor of SDMS. The jury,
sitting in an advisory capacity on the equitable claims, recom-
mended awarding SDMS $20,488 in rescissory damages and $275,000 in
punitive damages. The rescissory damages equaled the down payment
of $10,900 and an additional $9,5882 to compensate SDMS for its old
imaging equipment, which Medasys had either thrown away or
disassembled for parts and thus was unable to return. The trial
court adopted the jury’s recommendation, finding that “the evidence
was clear and convincing that Medasys consciously disregarded the
risk [to] . . . SDMS [by] not getting equipment capable of
performing the functions Medasys knew SDMS required.”
¶7 Medasys appealed, arguing among other things that the
trial court erred as a matter of law by awarding punitive damages
where no actual damages had been awarded. The court of appeals
agreed and vacated the portion of the judgment awarding punitive
damages to SDMS. Medasys Acquisition Corp. v. SDMS, P.C., 1 CA-CV
00-0472, slip op. at ¶ 27 (Jan. 3, 2002) (mem. decision). We
granted review to determine whether punitive damages were properly
awarded.
DISCUSSION
¶8 Whether punitive damages are awardable on an equitable
2
The parties’ contract had provided this value for SDMS’s
old machine.
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claim is a legal issue, which we review de novo. Hall v. Lalli,
194 Ariz. 54, 57, ¶ 5, 977 P.2d 776, 779 (1999).
¶9 Citing Hubbard v. Superior Court (American Alliance Life
Insurance Co.), 111 Ariz. 585, 535 P.2d 1302 (1975), the court of
appeals held that SDMS’s election of the equitable remedy of
rescission precluded its claim for punitive damages. This court’s
summary disposition in Hubbard, however, did not foreclose an award
of punitive damages in an equity case. It simply reaffirmed the
traditional rule that actual damages must be proved before punitive
damages may be recovered. Id. at 586, 535 P.2d at 1303. The court
of appeals evidently concluded that SDMS had not proved actual
damages.
¶10 This court’s two-paragraph per curiam decision in Hubbard
must be read in light of the expanded opinion on the subject in
Starkovich v. Noye, 111 Ariz. 347, 529 P.2d 698 (1974), decided
just six months earlier. In Starkovich, we concluded that Arizona
courts may award punitive damages in an equitable action and
construed broadly the “actual damages” needed to support the award
as including the alteration of one’s position to one’s detriment.3
See id. at 352, 529 P.2d at 703.
3
In seeming to require that monetary damages be proved,
the court in Hubbard failed to give effect to the well-considered
rationale in Starkovich for expanding the definition of “actual
damages” to allow Arizona courts to provide more complete relief in
equity cases. To the extent that Hubbard may be read to conflict
with Starkovich, Hubbard is overruled.
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¶11 Starkovich informs the disposition of this case. The
plaintiff in Starkovich had sued for a declaratory judgment,
seeking reformation of a contract (an equitable claim) and punitive
damages (a legal claim) for the defendants’ alleged fraud. Id. at
348, 529 P.2d at 699. The trial court found reformation appropri-
ate and awarded punitive damages. Id. at 350, 529 P.2d at 701.
The court of appeals reversed. Id. Agreeing with the trial court,
this court noted that “Arizona ha[d] long abolished the distinction
between legal and equitable action[s],” id. at 351, 529 P.2d at
702. We thus reasoned on review that courts should be able to
award the relief appropriate in each case “without distinction as
to the nature of the relief demanded” and further directed that
courts “shall give all the relief either in law or equity to which
a party may show himself entitled.” Id. (quoting McRae v. Lois
Grunow Memorial Clinic, 40 Ariz. 496, 14 P.2d 478 (1932)). We
found no “reason in logic to deny a complete remedy for a fraud,”
Starkovich, 111 Ariz. at 352, 529 P.2d at 703, and therefore
allowed the recovery of punitive damages.
¶12 Much as Medasys does in this case, the defendants in
Starkovich objected that the award of equitable relief did not
satisfy the requirement that “actual damages” be proved before
punitive damages can be awarded. They argued that the reformation
could not be “construed as compensatory damages sufficient to
satisfy the requirement that actual damages must be awarded in
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order to support [the] punitive damages [award].” Id. at 350, 529
P.2d at 701. We disagreed and expanded the definition of actual
damages to include not only pecuniary loss, but also “the alter-
ation of one’s position to his prejudice.” Id. at 351, 529 P.2d at
702 (quoting Nab v. Hills, 452 P.2d 981, 987 (Idaho 1969) (emphasis
in original)).
¶13 The expanded definition applies here. SDMS has altered
its position to its prejudice in reliance upon Medasys’s false
representations that the new medical imaging equipment would
fulfill specific requirements. Although SDMS offered to return
Medasys’s equipment for return of its old machine and a refund of
its down payment, Medasys, having destroyed or parted-out SDMS’s
machine, was unable to return it. SDMS therefore was left with no
working machine and not enough money to buy a functioning one, an
alteration of its position to its detriment because of its reliance
on Medasys’s fraudulent promises.4
¶14 The traditional rule requires an award of actual damages
before punitive damages may be awarded, and we adhere to that rule.
But several reasons support expanding the definition of actual
damages to allow other types of harms to serve as the actual
4
The court of appeals characterized this state of affairs
as a return to the status quo ante. We disagree. Before it began
its dealings with Medasys, SDMS had functioning, though concededly
inferior, diagnostic imaging equipment. During its interaction
with Medasys and for some time afterward, SDMS was left without
vital diagnostic equipment.
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damages predicate that will support the recovery of punitive
damages.
¶15 First and foremost, Arizona authorities have long
subscribed to the notion that courts must be able to provide the
relief to which the parties before them are entitled. See, e.g.,
id. at 352, 529 P.2d at 702; Jennings v. Lee, 105 Ariz. 167, 173,
461 P.2d 161, 167 (1973) (affirming the court’s “ample authority”
to award a defrauded party not only “the consideration he gave,”
but also “any sums that are necessary to restore him to his
position prior to the making of the contract”); Fousel v. Ted
Walker Mobile Homes, Inc., 124 Ariz. 126, 129, 602 P.2d 507, 510
(App. 1979) (upholding an award of punitive damages on an equitable
claim of rescission where consequential damages were also awarded);
Dan B. Dobbs, THE LAW OF REMEDIES § 3.11(10) (2d ed. 1993); Ariz. R.
Civ. P. 54(d) (requiring Arizona courts to award appropriate relief
in any civil action, “even if the party has not demanded such
relief in the party’s pleadings”); Ariz. Rev. Stat. (“A.R.S.”) §
12-1838 (1994) (allowing “further relief” in a declaratory judgment
case); A.R.S. § 47-2720 (1997) (Uniform Commercial Code provision
stating that rescission of a contract “shall not be construed as a
renunciation or discharge of any claim in damages”).5 No reason
5
Although the parties did not raise the issue, this sale
would fall within the scope of the Uniform Commercial Code (“UCC”),
A.R.S. §§ 47-1101 to -9501 (1997). As noted above, under UCC § 47-
2720, rescission of a contract does not bar a claim for damages.
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justifies allowing punitive damages for the tort of fraud, which by
its nature involves intentional wrongdoing, but denying such
damages for tortious fraud in connection with an equitable action.
See, e.g., Mehovic v. Mehovic, 514 S.E.2d 730, 734 (N.C. App.
1999); Black v. Gardner, 320 N.W.2d 153, 161 (S.D. 1982). Thus, if
a party has “pursued a course of conduct knowing that it created a
substantial risk of significant harm to others” and its conduct was
guided by evil motives, punitive damages should be available to
punish such behavior. See Rawlings v. Apodaca, 151 Ariz. 149, 162,
726 P.2d 565, 578 (1986).
¶16 Second, to deny punitive damages to prevent “double
recovery” of an item of contract damages protects against an
unfounded concern. See Fousel, 124 Ariz. at 129, 602 P.2d at 510
(quoting Dan B. Dobbs, THE LAW OF REMEDIES § 9.4, at 634 (1973)). An
award of punitive damages in an action for rescission does not
raise this double-compensation concern because “punitive damages do
not stem from enforcement of the contract and are not to compensate
the plaintiff for losses sustained, but rather to punish the
defendant for his conduct.” Id. at 130, 602 P.2d at 511.
Therefore, there is no fear of overcompensation for any element of
contract damages, which is the fear underlying the preclusion of
both compensatory damages and rescission.
¶17 Finally, we do not believe, as Medasys asserts, that
allowing punitive damages in an equitable action will encourage
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parties to sue expecting a “windfall [of punitive damages] to the
recipient.” Punitive damages are awarded only “in the most
egregious of cases, where [a plaintiff proves by clear and
convincing evidence that the defendant engaged in] reprehensible
conduct” and acted “with an evil mind.” Linthicum v. Nationwide
Life Ins. Co., 150 Ariz. 326, 331-32, 723 P.2d 675, 680-81 (1986);
Fousel, 124 Ariz. at 130, 602 P.2d at 511. For that reason,
punitive damages should rarely be awarded. In those cases in which
they are appropriate, punitive damages should be available to deter
egregious conduct.
¶18 We therefore agree with those authorities that have
observed that an election of an equitable remedy need not preclude
an award of punitive damages. E.g., Dan B. Dobbs, THE LAW OF REMEDIES
§ 3.11(10) (2d ed. 1993); Gary L. Monserud, Rescission and Damages
for Buyer Due to Seller’s Fraudulent Inducement of an Article 2
Contract for Sale, 1998 Colum. Bus. L. Rev. 331, 404; Note, Recent
Developments: Punitive Damages Held Recoverable in Action for
Equitable Relief, 63 Colum. L. Rev. 175, 178-79 (1963); Madrid v.
Marquez, 33 P.3d 683, 686 (N.M. Ct. App. 2001); Mehovic, 514 S.E.2d
at 734; Black, 320 N.W.2d at 161. The critical inquiry should be
whether such an award is appropriate to penalize a party for
“outwardly aggravated, outrageous, malicious, or fraudulent
conduct” that is coupled with an “evil mind.” Linthicum, 150 Ariz.
at 331, 723 P.2d at 680. If it is, punitive damages should be
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available to allow the imposition of a remedy appropriate to punish
the wrongful act and to remedy the injury caused.
¶19 No reason justifies distinguishing between rescissory
damages and compensatory damages as a basis for allowing or denying
an award of punitive damages. Conduct so egregious as to warrant
punitive damages if compensatory damages are awarded should
similarly support an award of punitive damages if only rescissory
damages are awarded. See Dobbs, THE LAW OF REMEDIES § 3.11(10) (2d
ed. 1993); Note, Punitive Damages Held Recoverable, supra at 178-
79. This conclusion follows the modern trend of allowing “punitive
damages in equity in order to facilitate judicial administration,
to deter misconduct, and to completely serve justice.” Madrid, 33
P.3d at 686; see also Forster v. Boss, 97 F.3d 1127 (8th Cir. 1996)
(interpreting Missouri law); Village of Peck v. Denison, 450 P.2d
310 (Idaho 1969); Mehovic, 514 S.E.2d at 734. It also comports
with the Arizona policy of providing complete relief to injured
parties.
¶20 In the case before us, SDMS succeeded in proving
Medasys’s fraudulent conduct. The jury found that SDMS sustained
actual damages and recommended awarding SDMS rescissory damages.
In addition, the jurors found by clear and convincing evidence that
Medasys employees acted with evil intent in their dealings with
SDMS and therefore the jury recommended an award of punitive
damages to punish Medasys for its conduct. Our review shows that
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such an award may be appropriate.6
CONCLUSION
¶21 We vacate the portion of the court of appeals’ decision
reversing the award of punitive damages and remand to that court
for resolution of issues left undecided.
Rebecca White Berch, Justice
CONCURRING:
Charles E. Jones, Chief Justice
Ruth V. McGregor, Vice Chief Justice
Stanley G. Feldman, Justice
Joseph W. Howard, Judge*
*Pursuant to Ariz. Const. Article VI, Section 3, the Honorable
Joseph W. Howard, Judge of the Arizona Court of Appeals, Division
Two, was designated to sit on this case.
6
Medasys asserted in the court of appeals that there was
insufficient evidence that its employees acted with an “evil mind”
to support the punitive damages award. Because that court held
that punitive damages were not recoverable, it did not rule on the
sufficiency of the evidence issue. We therefore remand that issue
to the court of appeals for determination.
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