Unpublished Disposition, 849 F.2d 1475 (9th Cir. 1988)

DIAMOND CLAIMS & INVESTIGATION SERVICES, INC., an Oregoncorporation, and Peter J. Diamond and ShirleyDiamond, husband and wife, Plaintiffs-Appellees,v.FARMERS INSURANCE EXCHANGE, Farmers Insurance Group, Inc.,Truck Insurance Exchange, Fire Insurance Exchange,Mid-Century Insurance Company, and Farmers New World LifeInsurance Company, Defendants-Appellants.

Nos. 87-3715, 87-3995.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted May 5, 1988.Decided June 10, 1988.

Before WALLACE and REINHARDT, Circuit Judges, and ALBERT LEE STEPHENS, District Judge^** .

MEMORANDUM^* 

Peter and Shirley Diamond are the sole principals in Diamond Claims & Investigation Services ("Diamond"). Michael Conn was the director of Farmers Insurance Company's ("Farmers") Criminal Investigation Division. Diamond claims that it and Farmers, through Conn, entered an oral agreement in December 1980 that it would receive all investigation work Farmers assigned to an outside investigator in Oregon, Washington, Idaho, Utah and Montana for at least five years, and that Farmers would indemnify Diamond against any claims arising out of such work.

In September 1984, Farmers told Diamond that it would not indemnify Diamond against lawsuits filed against it. Shortly thereafter, Diamond filed an action against Farmers for breach of contract, indemnity, and misrepresentation. Diamond claimed that Farmers had breached both its obligation to indemnify it and its obligation to give it 100% of its outside investigatory work in the five states listed above. Farmers denied that it had breached the agreement, contended the agreement had been modified, and counterclaimed for common law fraud and violations of RICO arising from allegedly fraudulent billings.

After an extended pretrial discovery period, Diamond moved for default judgment, dismissal of counterclaims, and attorney's fees as sanctions for Farmers' discovery abuse. Diamond claimed that Farmers was late in most of its document production, that it destroyed or failed to turn over a substantial number of relevant documents, and that it lied in depositions, interrogatory answers, and affidavits about the existence of documents. Farmers admitted that delays, misstatements, and obstruction occurred. However, it contested the existence and the importance of some of the documents Diamond claimed were not turned over. As for the other discovery abuses, Farmers argued that two employees responsible for much of the alleged discovery abuse, Conn and Ronald Burlison, conspired with Diamond, or at least that they acted in their own interests against those of Farmers. The district court granted Diamond's motion after hearing argument from counsel, both parties having agreed that an evidentiary hearing was not required. Thereafter the court held a hearing on damages and the court awarded Diamond $1.88 million in compensatory and punitive damages and over $220,000 in attorney's fees.

Farmers appeals from both the imposition of sanctions and the calculation of damages. As this is a diversity case, Oregon law applies to substantive questions and federal law to procedural ones, e.g., sanctions. See Hanna v. Plumer, 380 U.S. 460 (1985). On the issue of sanctions, the district court's finding that Farmers deliberately destroyed or withheld documents has substantial basis in the record and is not clearly erroneous. The court considered and rejected lesser sanctions, finding such sanctions inadequate given the nature and quantity of the missing documents. The court concluded that the missing documents would hamper both Diamond's ability to prove its claim and its ability to defend against Farmers' counterclaim. This conclusion was not clearly erroneous. Under these circumstances, the court's imposition of the sanctions of default on the claim, dismissal of the counterclaim, and award of attorney's fees did not constitute an abuse of discretion. See Wyle v. R.J. Reynolds Industries, Inc., 709 F.2d 585, 589 (9th Cir. 1983).

On the issue of damages, Farmers first argues that the district court erred in not considering the issue of modification. Farmers contends that the alleged 1980 oral agreement giving Diamond 100% of Farmers' outside investigations in a five-state area was modified in 1983 to give Diamond only 75% of the outside investigations in a two-state area. The district court held, and we agree, that the issue of modification was decided by the issuance of the default judgment in favor of Diamond. The modification issue was primarily one of liability rather than of damages and it was resolved adversely to Farmers by the default judgment. Whether a modification had been agreed upon was one of the principal questions involved in the determination whether Farmers had breached the agreement.

Second, Farmers claims that the district court improperly allowed Diamond a double recovery: lost profits for breach of contract and reliance damages for alleged fraud (approximately $1.5 million for the former, $35,746 for the latter). Here, we agree with Farmers. One cannot recover both reliance damages and the benefit of the contract as remedies for the same breach. See, e.g., Galego v. Knudsen, 281 Or. 43, 573 P.2d 313, 318, modiifed, 282 Or. 155, 578 P.2d 769 (1978). The case the district court cites for its granting of this double recovery, Selman v. Shirley, 161 Or. 582, 85 P.2d 384 (1938), adhered to on rehearing, 161 Or. 582, 91 P.2d 312 (1939), does not purport to change this basic rule of contract doctrine. Therefore, Diamond's award must be reduced by the $35,746 granted in reliance damages.

Third, Farmers challenges the district court's granting of punitive damages. We are satisfied that the number and nature of the claims of fraud and misrepresentation stated in Diamond's complaint--and found to be true by virtue of the default judgment--was sufficient to justify the court's imposition of punitive damages. See, e.g., McElwain v. Georgia-Pacific Corp., 245 Or. 247, 421 P.2d 957 (1966); Mabin v. Tualatin Development Co., 48 Or.App. 271, 616 P.2d 1196 (1980). Diamond's allegations sufficiently pled the fraud claims. Farmers also argues that punitive damages are penal in purpose and effect and that, as a result, they can only be imposed on persons who have been afforded the safeguards available in criminal cases. However, Farmers can offer no case which supports this position, and we see no reason to adopt so novel a legal conclusion in this case.

Fourth, Farmers argues that the court erred in concluding that the Oregon courts would apply the collateral source rule to civil contract cases. Under the collateral source rule, courts will not offset an award against a defendant by the amount the plaintiff will recover for the same injury from a collateral source (e.g. from insurance or worker's compensation). The district court awarded Diamond over $63,000 on Farmers' alleged breach of an agreement to indemnify without offsetting the amount Diamond received from insurance for the same suits. The district court noted that at the time of the judgment there were no Oregon decisions on whether the collateral source rule applies to contract cases. The court concluded on the basis of a Florida case and an Alaska case that Oregon would extend the collateral source rule to such cases. The district court's conclusion has since been strengthened by a recent Oregon Supreme Court decision. In Seibell v. Liberty Homes, Inc., 305 Or. 362, --- P.2d ---- (1988), the court held that an award for breach of contract should not be reduced by the amount of social security disability benefits the plaintiff was receiving. While Seibell can be read to apply only to cases where the collateral source is a "public benefit program", the case is nevertheless some indication of Oregon law regarding the application of the collateral source rule to civil contract cases. Although the answer is far from clear, we agree with the district court that the Oregon Supreme Court would probably apply the collateral source rule in the case before us.

Fifth, Farmers argues that the district court did not properly take into consideration Farmers' evidence of Diamond's overbilling in determining damages. However, the evidence which formed the basis for the court's calculation of lost profits was not based on Diamond's historical billing practices and therefore would not have been affected by any past overbilling. Moreover, evidence based on the practices of other companies also supports the district court's lost profits determination.

Because Farmers' arguments on appeal were not frivolous, we decline to award Diamond attorney's fees.

For the reasons stated above, we affirm the district court's imposition of sanctions and its calculation of damages, except for the double recovery in the case of reliance damages.

AFFIRMED IN PART, REVERSED IN PART, AND REMANDED.