INTRODUCTION

On August 4, 1994 a jury in Barbour County, Alabama entered a verdict ordering a subsidiary of Mercury Finance Company to pay $90,000 in actual damages and $50 million dollars in punitive damages to a man whose car our subsidiary financed. No evidence of any harm, either financial or physical, was offered to the jury by the plaintiff in that case. No time was lost from work, no illness or mental disorder was suffered, and no harm to his reputation, credit rating, or financial status was established. The closest that the plaintiff came to a claim for damages was shown in his testimony where he indicated that when our subsidiary made demands for repayment of his defaulted debt, that action caused him to “…go to my job thinking about it cause my mind was on it all the time and I stopped hanging out and started staying home.”1 (emphasis added) When entered, the $50 million dollar award of punitive damages was the largest ever in Alabama and certainly among the largest anywhere in a case where the plaintiff appeared to suffer no harm!

The bill before this committee addresses precisely the flaw in our current legal system that would permit a jury to award such an enormous amount of money to a claimant who could show no tangible detriment to himself and which resulted from an ordinary business transaction he freely entered into. The jury in that rural courthouse was told by a lawyer (with an amazing record of extracting million dollar plus verdicts against out of state companies) to punish our subsidiary and its Chicago based owner, and they did so without any rational basis whatsoever. By doing so, they created another winner in what has become a litigation lottery.

Once report of this verdict was published, many other predatory attorneys in Alabama rushed to file suits to capitalize on the possibility of obtaining punitive damage awards from similar ordinary business transactions. With so much money being awarded for little or no harm, soon attorneys in other states also formulated their own actions against my company and its subsidiaries. The impact of one jury in Alabama had a substantial impact on the operations of our company throughout the United States. The story of this case and its aftermath are, in my opinion, adequate justification for federal legislation to control the ability to pervert justice made possible under the laws of many of our states.
A REGULATED INDUSTRY – A COMMON PRACTICE

Consumer finance companies, like banks and savings and loans, are licensed and regulated. In Alabama, the State Banking Department audits its licensees for compliance with Alabama law. The ability to operate in that state can be lost for non-compliance with the consumer lending and collection laws. Federal lending laws apply to consumer lending also and agencies such as the Federal Trade Commission have regulatory power in this area.

Despite all the safeguards and checks, Alabama statutory law permitted this large punitive damage award to be entered based on conduct that, as you will see, was absolutely legal and proper. The regulatory structure under both the Federal Truth in Lending Act 2 and most state laws stipulates that a seller of goods can enter into a transaction with a buyer and accept payment for those goods over a period of time. In such a transaction the seller of the goods is deemed to be the creditor. This generates a receivable for the creditor (dealership) which can be sold in the regular course of business. Companies such as Mercury Finance Company and its subsidiaries, GMAC, Ford Motor Credit, and numerous banks and savings and loans purchase these receivables from sellers of autos and other goods for a negotiated price. When the contract is sold and assigned the buyer of the car (the consumer) is notified of the transaction and directed to make payments to the new owner of the contract. When completed, the consumer drives off with a car (after paying a negotiated downpayment and signing the appropriate retail installment contract and other documents); the dealership receives a check from the company that purchased the retail installment contract from the dealership; and the purchaser of the contract receives the promise of the consumer that he will make the payments as set forth in the retail installment contract. Exhibit A illustrates how these transactions work.

This type of financing has been utilized for many years in both consumer and commercial transactions. It is the typical way that merchants are able to sell relatively large ticket items such as automobiles and household appliances to consumers who are unable to pay cash for those products. The assignee of the retail installment contract typically does not pay full face value for contracts it buys from automobile dealers since it assumes all the risk of collection. Those receivables are, therefore, generally acquired at a discounted amount from their face value. That means that Mercury or another lender does not pay the automobile dealer 100 cents on the dollar for the promise of a third party consumer to make payments. The amount of the discount is accounted for as a reserve against losses. If the consumer does not make the payments as specified in the agreement, then none of that discount money is ever collected. Such a transaction has absolutely no impact on the transaction that the consumer negotiated with the automobile dealer. The discount is a cost borne by the dealer and as far as the consumer is concerned, he got exactly what he bargained for. His bargain is spelled out for him in the Federal Truth in Lending disclosures and under applicable state disclosure laws. (See Exhibit B for an Illustration of Discounting)

The purchase of an automobile in this fashion is no different than the purchase of a home with the subsequent sale of a mortgage to another lender. The buyer of the home may enter into a loan transaction with a local lender, however, in all likelihood, his payment obligation will be sold and assigned to another entity and collected by it. Because the purchaser of the mortgage may not pay face amount for that mortgage, that does not in any way affect the homebuyer’s obligations. Transactions conducted with credit cards are essentially handled in the same fashion. When you use your Visa or MasterCard to buy something from a local merchant, that merchant sells the receivable generated by that transaction to Visa or MasterCard and is paid an amount several percentage points less than face value. Again, your transaction is not affected by the subsequent sale of that receivable.

These practices are common, commercially reasonable and neither harmful to a consumer nor dangerous in any way. Now, consider what happened when an adept plaintiff’s attorney took advantage of a statutory provision authorizing punitive damages and turned discounting into something evil.
THE CASE

On November 15, 1991, a man named Willie Ed Johnson, a resident of Barbour County, Alabama, purchased a used car from a dealership in Dothan, Alabama for $4,668.00. Because he lacked the funds to pay cash for the car, he sought financing. The dealer offered to sell Mr. Johnson’s contract to Mercury, and our subsidiary bought it. Sometime after a number of payments had been made Mr. Johnson let a friend borrow his vehicle after a party and the friend decided to take it on a jaunt to South Carolina. In the course of this undertaking, the vehicle somehow caught fire and burned. (Mr. Johnson reported this vehicle as stolen to the local police department and the friend was eventually arrested). Mr. Johnson had stopped paying for the car but when he found out it was burned, he discussed the matter with our local branch office and was told that since the car was a total loss under the terms of the insurance coverage on the car, it could be repossessed and the proceeds of the policy could be used to pay off his indebtedness. Mr. Johnson was not happy with that course of events and was able to persuade our local branch, against their better judgment, to loan him an additional $2,000 to fix the vehicle so that he could have transportation and continue to drive it. The branch loaned him this additional amount of money. However, after the vehicle was repaired Mr. Johnson determined that he did not like it and he refused to pay for it. At this point he was indebted to us in an amount in excess of $6,000.00 which consisted of the unpaid balance of his retail installment contract and the unpaid balance of the personal loan which we, unwisely, made to him. When the branch threatened legal action to collect this debt (Exhibit C and D Illustrate Mr. Johnson’s Account History), Mr. Johnson went to a local attorney and the local attorney went to the most successful lawyer in Barbour and surrounding counties.

What grounds did Mr. Johnson have to sue Mercury? Under the Federal Truth in Lending Act and under the state statute that applies to licensed lenders in Alabama, 3 there was nothing inappropriate or illegal about the transactions Mr. Johnson had either with the car dealer or with Mercury. Alabama, however, has a statute addressing what is called “fraudulent suppression” that not only provides for punitive damages but also has the ability to turn almost any ordinary business transaction into a fraud claim by asserting that a material fact was withheld or suppressed from the consumer.4 It was on such a theory that this case proceeded in Barbour County (with the discount deemed to be both a material fact and suppressed!). It mattered not that the federal and state law under which lenders operate was not breached. All that mattered was that there was an avenue available to Mr. Johnson to put the lender in a position to face huge damages because of the unique nature of the Alabama fraudulent suppression law.

Being in Barbour County had special advantages for Mr. Johnson. The judge then presiding over the Circuit Court in that county was the former law partner of Mr. Johnson’s attorney and the jurors there were accustomed to awarding huge damages against out of state corporations for fraudulent suppression and other causes of action. After a trial that lasted less than a day and after deliberations that lasted 65 minutes, the jury decided that an egregious wrong (of some sort) had been done to Mr. Johnson and awarded him the $90,000.00 in compensatory, and $50 million in punitive damages which we previously described.
AFTER THE VERDICT

What does a company do when such a huge verdict is entered against it? In Alabama there is a process to appeal the punitive damage award and of course there is the possibility of appealing the whole case to a higher court. These procedural “safeguards” are less than attractive however. To proceed with the challenge to the punitive damage award an enormous amount of expensive legal work needed to be done. That proceeding is like a second trial and is in front of the same judge that entered the initial verdict. In addition, to appeal the verdict the posting of an appeal bond is required. The amount of that bond is a multiple in excess of the jury award. At $50 million dollars our bond could have been as much as $150 million dollars! For the parent company posting such a large bond would have been almost impossible. For the subsidiary (and the subsidiary was the defendant in this case) that would have been completely impossible and it would have had to file a bankruptcy proceeding in order to pursue an appeal. The publicity from a bankruptcy would have probably harmed the shareholders of the company even more than the 1 point drop in share price which ensued after the $50 million dollar verdict was announced.

This verdict generated significant negative response from both the defendant’s and plaintiff’s bar in Alabama. The theory on the plaintiff’s side was that a verdict this large, in this type of case, might “kill the goose that laid the golden egg.” We prepared a case to present at the “Hammond Hearing” (which is the hearing on the punitive damage issue) which was compelling. We also were vocal in expressing our intent to appeal notwithstanding the potential problem with posting bonds. Those factors, plus negative publicity and skillful negotiations, persuaded the Barbour County judge to reduce the $50 million dollar punitive damage award to $2 million and indicated that he would order a new trial if the plaintiff did not accept it. We were subsequently able to settle with Mr. Johnson for an amount slightly less than $2 million dollars.

The story did not end here. Mr. Johnson’s attorney had filed nine other cases in Barbour County shortly after he brought the Johnson case. Every one of those cases would go to trial in the same courtroom as Johnson and in front of a similar panel of jurors along with the same judge that heard the Johnson case. The possibility of 9 more punitive damage awards whether they were reduced or not was chilling. The company therefore entered into a global settlement with Mr. Johnson’s attorney to settle all of his cases in Barbour County for an amount in excess of $4 million dollars. That involved payments to approximately 51 plaintiffs who were named in those 9 additional suits plus attorneys’ fees. While that concluded our dealings with Mr. Johnson’s attorney, it did not stop the deluge that ensued when this case was reported in the Alabama and national media.
THE ALABAMA FALL OUT

The news of this verdict created a fever among the plaintiff’s bar in Alabama. Lawsuits filed against Mercury in that state went from 3 filed in 1992, to a total of 105 between 1994 and 1996. Most of those cases were not any more succinct or creative than that filed in Barbour County. Indeed most of them simply accused the company of charging a consumer a “reserve” in the course of an automobile financing transaction without any evidence of harm and without any indication as to exactly what a “reserve” is. The company vigorously resisted these claims. The threat of punitive damages hung over every one of these suits like the “Sword of Damocles.” All it would have taken was another case that ignored the law and another jury that became xenophobic and irrationally inflamed and we would have had another Johnson case all over again.

Eventually we won on the discount disclosure issue in federal court in Alabama in two instances, Sampson v. Mercury Finance Corporation of Alabama et al.5 and Preston v. Mercury Finance Corporation of Alabama.6 Because those cases ruled that there was no Truth in Lending violation contained in these ordinary business transactions, we were able to stop claims of that nature in Alabama. Unfortunately, the real danger in that state was under the fraudulent suppression statute and the judges in the federal cases were not willing to rule that compliance with Federal Truth in Lending would necessarily insulate a company from a claim for fraudulent suppression under the state statute. We found ourselves in a situation where we had complete compliance with federal law and yet still were subjected to outrageous and unreasonable liability under a fraud statute broadly drafted and nearly impossible to comply with in the state of Alabama.
OUT OF STATE CONSEQUENCES

The filing of suits was not confined to Alabama. In nearby Georgia, 12 suits were filed against the Company immediately after the Johnson verdict basically charging the Company with the same conduct that it was charged with in Johnson. After protracted litigation, the lead case in that series finally went to the Court of Appeals for the state of Georgia and a decision was entered affirming the lower court decision in favor of our company. That case also held that the practice of discounting or purchasing retail installment contracts at a discount is perfectly legal.7 This occurred in June of 1998, nearly 4 years after the Johnson verdict.

In Illinois we were sued by a specialist in consumer class actions in the case of Perino v. Mercury Finance Company of Illinois.8 The conduct, which he alleged in his class action, was similar to that in the Johnson case. In a well-written opinion, Judge Anderson, in the Northern District of Illinois ruled in favor of Mercury and held that the practice of discounting is not illegal or inappropriate. Another decision in the case of Balderos v. Mercury Finance Company of Illinois9 has been entered in the Northern District of Illinois also ruling that the practice complained of in the Johnson case is, in fact, in compliance with federal law.
CONCLUSION

If all of these courts have ruled in favor of Mercury Finance Company and its subsidiaries relative to the practice of purchasing retail installment contracts at a discount, why did a jury assess $50,000,000 in punitive damages against us in Alabama? The reason is simple. State statutes which authorize uncapped punitive damage awards are capable of being applied to instances where little or no harm is done to a plaintiff. They exist as a dagger pointed at the heart of companies who conduct business in compliance with federal and state regulations but who find themselves embroiled in litigation before unfriendly judges and juries. There is no consistency to these state statutes and, as can be seen in our case, reliance on rules, licensing regulations and federal and state laws are of little comfort and useless as a defense.

The Constitution of the United States prohibits governments from levying excessive fines. The common law, on which our system is based, is successful because it establishes clear rules for the awarding of damages. Traditionally, in common law cases the damage award is related to the harm suffered. If harm cannot be shown, then damages are not awarded. The concept of punitive damages was reserved for conduct that was harmful, life threatening or morally outrageous. It was never intended to be applied to ordinary business transactions. Many safeguards exist to protect consumers from wrongdoing. Besides numerous disclosure statutes and consumer protection laws, in the case of financial institutions and insurance companies, they operate with the permission of the state under their licensing laws. Conduct that is harmful or egregious can result in the loss of a license and ultimately the inability to conduct any business or earn any profits whatsoever. Businesses should not be subjected to “Jackpot Justice” because of the existence of a statute authorizing uncapped punitive damages.

We engaged in conduct that four federal courts and one state appellate court have subsequently found to be perfectly legal. We spent millions of dollars in legal fees and settlements because of the uncapped punitive damage structure in the State of Alabama. The United States Supreme Court, while recently ruling on this issue has really not provided any comfort or certainty in this area and every company which conducts business on a multi-state basis still must deal with the threat of punitive damages in the various states in which they do business. Besides the cost of outside attorneys and settlements, the demands on management time at Mercury were and are substantial. Dozens and dozens of lawsuits cannot be defended in a vacuum and management time which would be better spent creating profits for shareholders and employment opportunities for people, are necessarily taken up with defending suits which are filed not to correct a wrong or to compensate for a legitimate harm, but to generate legal fees, awards and lottery-like winnings for the participants. That’s not what our legal system was constructed to do and this abuse should be halted.

The Fairness In Punitive Damage Awards Act, S1554, provides a fair solution to this problem. It still allows for award of substantial amounts of money to a claimant who has actual harm done to him. That should deter a wrongdoer from perpetuating fraud or harming consumers in a non-physical way. It eliminates, however, the threat of a runaway jury verdict and the possibility of putting a company that is conducting a legitimate enterprise out of business because of the anomaly of a state punitive damage award provision. This is legislation whose time has come and which should be passed.
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