Zaxis Wireless Communications, Inc. v. Motor Sound Corp.

Opinion

BLEASE, Acting P. J. A jury found that Motor Sound Corporation (Motor Sound) committed fraud in inducing Zaxis Wireless Communications, Inc. (Zaxis) to remain as its subagent in selling wireless services. Zaxis was awarded $190,000 in compensatory damages. In a bifurcated proceeding the jury awarded Zaxis $300,000 in punitive damages.

Motor Sound does not contest the finding of fraud, the magnitude of harm to the plaintiff or the amount of compensatory damages. Its sole claim is the punitive damages award was excessive as a matter of law because it lacked the ability to pay by reason of a negative net worth of $6.3 million. The net worth was calculated, inter alia, by deducting a $6 million note to the sole owner of the corporation and $4.9 million of accumulated depreciation.

Motor Sound operates a substantial business. It had average annual revenues for 1997, 1998 and 1999 in excess of a quarter billion dollars but suffered a net loss, after allowing for depreciation and amortization, of $2.5 million in 1998 and $800,000 in 1999. During this period it had a $50 million line of credit with Wells Fargo Bank.

[580]We conclude that Motor Sound had the ability to pay the $300,000 punitive damage award.

We will affirm the judgment.

Factual and Procedural Background

Motor Sound and Zaxis were involved in the sale of cellular phones and services.1 Motor Sound had a contract with AirTouch Communications (AirTouch) to sell phones and services to the public through subagents. Zaxis was a subagent. When Zaxis notified Motor Sound in 1996 that it had agreed with AirTouch to be a direct agent, Motor Sound made various representations to Zaxis, which convinced it to remain as its subagent.

The jury found that Motor Sound’s representations were false and fraudulent and awarded Zaxis $234,000 for breach of contract, and $190,000 as compensatory damages for Motor Sound’s fraudulent misrepresentations.

The evidence presented at a separate trial of punitive damages consisted of financial statements and the testimony of Motor Sound’s chief financial officer, Dennis Pastrik. Pastrik testified that in 1997 Motor Sound’s total revenues were $276 million and expenses were $283 million. Net loss for the year was $6.5 million. Motor Sound’s total revenues in 1998 were $237 million, and its expenses were $239 million for a net loss of $2.5 million. The balance sheet, as of November 1999, shows a negative net worth of minus $6.3 million.