Reinhardt v. Gulf Insurance CompanyReinhardt v. Gulf Insurance Company
Allen N. David, with whom Terri L. Pastori and Peabody & Arnold LLP, were on brief, for defendants-appellants/cross-appellees.
Joseph H. Reinhardt, J.D., with whom Edwin A. McCabe, was on brief, for plaintiff-appellee/cross-appellаnt.
Before TORRUELLA, Circuit Judge, STAHL, Senior Circuit Judge, and HOWARD, Circuit Judge.
TORRUELLA, Circuit Judge.
EIU Group, Inc. (“EIUG“) filed this lawsuit against Gulf Insurance Company (“Gulf“), Citibank Delaware, Inc. (“Citibank“), and Kent Ziegler (collectively, “Appellants“) alleging that Ziegler breached his fiduciary duties to EIUG, thereby causing the company financial detriment. Gulf filed a counterclaim alleging breach of a $1.5 million promissory note. The case went to trial and the jury found that Ziegler had breached his fiduciary duty to EIUG, that Citibank was vicariously liable for Ziegler‘s conduct, and that Gulf was not entitled to recover on its counterclaim. The jury awarded damages to EIUG and noted on the verdiсt slip that Ziegler and Citibank were to pay 100% of EIUG‘s legal fees. Judgment was entered against Ziegler and Citibank for the damages awarded by the jury, but not for any amount of attorney‘s fees.
All parties filed timely post-trial motions: EIUG to alter or amend the judgment by adding attorney‘s fees and to vacate the previous dismissal of EIUG‘s claim under
On June 3, 1999, James Broderick and John Stamatov entered into an agreement with Gulf to develop, underwrite, and sell environmental insurance policies issued by Gulf. This agreement, as embodied in a Plan of Organization (the “Plan“), provided for the formation of EIUG as a holding company with two subsidiaries, Environmental Caрital Insurance Brokerage, Inc. (“ECIB“) and Environmental Insurance Underwriters Agency, Inc. (“EIUA“). ECIB was a company Broderick and Stamatov formed in 1997 to broker environmental insurance policies. Under the Plan, ECIB was to continue its role as a broker, selling environmental insurance issued by a number of companies, including Gulf. The Plan provided for the organization of EIUA as a program manager for Gulf. In this role, EIUA was to develop, sell, and underwrite Gulf environmental insurance products. Gulf and EIUA entered into a Program Manager‘s Agreement (the “PMA“) under which the parties agreed that Gulf was responsible for obtaining rеinsurance for the insurance products EIUA developed. The PMA also provided that Gulf had to approve any materials before they could be used to advertise Gulf insurance products.
As start-up capital for EIUG, Broderick and Stamatov contributed all of their interest in ECIB stock. Citibank, a Gulf affiliate, contributed $500,000. Thus, Broderick and Stamatov together owned 68.75% of the EIUG stock and Citibank owned 31.25%. Broderick, Stamatov, and Citibank entered into a Stockholders Agreement (the “Agreement“) allowing each of the three shareholders to nominate a director who had to be elected unanimоusly. Broderick and Stamatov nominated themselves for the director positions, and Citibank nominated Kent Ziegler, the Chief Financial Officer and an executive vice president at Gulf. The Agreement also provided that most major corporate decisions — declaring dividends, borrowing money, employing officers, etc. — had to be unanimous.
The first product Broderick and Stamatov developed was called Terraguard, an environmental insurance policy designed for owners of low-risk properties. Gulf retained James Cincotta, a reinsurance specialist, to obtain reinsurаnce for this policy. By the spring of 1999, a reinsurance treaty was in place, and EIUA began selling Terraguard policies.
Terraguard did not sell well. Each month the company suffered losses until, in December 1999, EIUG became insolvent. By the beginning of 2000, Broderick viewed Terraguard as essentially unsalable.
Given these financial problems, EIUG approached Gulf for a loan in January 2000. Initially, Gulf made an interim loan of $25,000. On January 21, 2000, Gulf loaned EIUG $1.5 million. Under the promissory note for the $1.5 million loan (the “Promissory Note“), EIUG agreed to a repayment plan under which interest payments were due on January 21 and July 21 of each year, and the entire principal balance was due on January 21, 2005. In addition, the Promissory Note specified that EIUG would be considered in default if it became insolvent. In the event of a default, the Promissory Note provided that Gulf could, by written notice, declare the principal and accrued interest immediately due and payable. The Promissory Note also provided that EIUG would be responsible for attorney‘s fees and costs incurred in attempting to seek repayment.
Using the loaned money, Broderick and Stamatov developed a new product line called Millenious, consisting of three new policies. The first was a property owner‘s policy on low-risk properties that was very similar to Terraguard. The second was a pollution legal liability policy for high-risk properties. The third was a secured creditors policy, which insured lenders against the risk that property held as collateral would become polluted while the borrowers were in default. At the outset, only the property owner‘s policy had reinsurance because it was reinsured under the Terraguard reinsurance treaty.
Thereafter, Broderick and Stamatov began trying to sell the policies. In late July 2000, Gulf acquired the renewal rights to United Capitol‘s casualty and environmental insurance policies, which were arguably in direct competition with EIUG‘s business. As CFO of Gulf, Ziegler was involved in this transaction, but he did not tell Broderick or Stamatov about it, nor did he do anything to prevent it from taking place.
Broderick testified that soon after this acquisition, Gulf withheld approval of Broderick and Stamatov‘s advertising campaign for the Millenious products. Ziegler did not intervene on EIUG‘s behalf to try to get advertising approval from Gulf.
Ultimately, Millenious was no more successful than Terraguard. On December 18, 2000, Broderick, Stamatov, EIUG, and EIUA filed a complaint against Gulf, Citibank, and Kent Ziegler. On April 11, 2001, the plaintiffs moved to amend the Complaint by adding ECIB as a plaintiff. The Amended Complaint alleged, among other claims, that Ziegler, in breach of his fiduciary duty, had caused the demise of EIUG by failing to act on its behalf to (1) expedite the reinsurance process for the Millenious products, (2) lift the hold on advertising, and (3) prevent the acquisition of the United Capitol insurance rights or allow some form of participation in the transaction. The defendants answered, and Gulf counterclaimed alleging breach of the $1.5 million promissory note and unjust enrichment.
The parties filed a series of summary judgment motions, which resulted in two opinions by the district court. On July 9, 2003, the district court dismissed without prejudice EIUG‘s claim for attorney‘s fees pursuant to
On June 2, 2004, Appellants filed a motion to confirm that certain claims were dismissed by the district court on summary judgment. Along with the motion, the defendants alleged that EIUG‘s counsel, Joseph Reinhardt, had refused to enter into good faith negotiations over a stipulation for what a docket entry should read, forcing them to file a motion and incur significant litigation costs. In support of their contention, the defendants submitted an email exchange between counsel wherein Reinhardt responded to the defendants’ first proposed stipulation saying, “For reasons that should be obvious to all of you, my response to the request to enter into a FRCP dismissal is NO.... Try agаin, if you want to.” After the second proposed stipulation, Reinhardt faulted the defense counsel for not “figur[ing] out [his] concerns,” and stated that Appellants’ counsel should file a motion and consider the exchange as satisfying the obligation to confer.
The district court held that Reinhardt violated
In a general verdict, the jury found that Ziegler had breached his fiduciary duty and that Citibank was vicariously liable for Ziegler‘s conduct. It awarded $654,585 in damages. The jury also found that Gulf was not entitled to recover on its counterclaim. Finally, the jury noted on the verdict slip that Ziegler and Citibank were to pay EIUG‘s legal fees.
The district court entered a judgment against Ziegler and Citibank for $654,585 in damages, but denied EIUG attorney‘s fees. EIUG filed a motion to alter or amend the judgmеnt by adding attorney‘s fees pursuant to the jury verdict and, in the alternative, a motion to vacate the previous dismissal of the Chapter 93A claim for attorney‘s fees. Ziegler, Citibank, and Gulf also filed post-trial motions asking for judgment as a matter of law or for a new trial. The district court denied all post-trial motions.
II. Discussion
A. Breach of Fiduciary Duty
Appellants argue that the district court erred in denying their motion for judgment as a matter of law because EIUG did not produce sufficient evidence to establish that Ziegler breached his fiduciary duty to EIUG or that such a breach would have caused any harm to EIUG. We review the district court‘s denial of the
Directors of business corporations are fiduciaries who “must place their management of corporate affairs above their purely personal concerns.” Brown v. Little, Brown & Co., 269 Mass. 102, 168 N.E. 521, 528 (1929). They may be held liable for a violation of this duty, where the violation results in “impairment of assets, or injury to [the corporation‘s] property, or unlawful profit to themselves.” United Zinc Cos. v. Harwood, 216 Mass. 474, 103 N.E. 1037, 1038 (1914).
As the plaintiff in an action for breach of fiduciary duty, EIUG had the burden at trial of establishing a causal connection between Ziegler‘s allegеd breach of fiduciary duty and the injury sustained by EIUG. See Hanover Ins. Co. v. Sutton, 46 Mass. App. Ct. 153, 705 N.E.2d 279, 280 (1999). “This connection cannot be left to the jury‘s conjecture or speculation“; that is, “it is not enough to show the mere possibility of a causal connection; the probability of such a connection must be shown.” Jorgensen v. Mass. Port Auth., 905 F.2d 515, 524 (1st Cir. 1990) (citing Berardi v. Menicks, 340 Mass. 396, 164 N.E.2d 544, 546-47 (1960)). Under Massachusetts law, a plaintiff seeking to establish causation must show that the “defendant‘s conduct was a but-for cause of [its] injury, and that [the] defendant‘s conduct was a `substantial legal factor’ in bringing about the alleged harm to [the] plaintiff.” Id. (citing Wallace v. Ludwig, 292 Mass. 251, 198 N.E. 159, 161 (1935); Tritsch v. Boston Edison Co., 363 Mass. 179, 293 N.E.2d 264, 267 (1973)).
With respect to the reinsurance issue, there was no evidence submitted to the jury that any influence exerted by Ziegler would have expedited the reinsurance process. The only evidence relevant to causation was testimony that some reinsurers are sometimes subject to influence by third parties. This is insufficient to establish even a reasonable likelihood that Ziegler had any influence or that such influence, if exerted, would have expedited the reinsurance process. In fact, the evidence presented was that Ziegler was not responsible for reinsurance decisions and that he could not have dictated the terms of any reinsurance treaty.
With respect to the advertising issue, EIUG did not present sufficient evidence that any action taken by Ziegler would have changed the outcome of the advertising ban. EIUG does not dispute that Ziegler was not in charge of advertising decisions; it only presented evidence that he was “involved” in the process insofar as he agreed to talk to Steven Zеitman, Executive Vice President at Gulf and Ziegler‘s superior, about the advertising prohibition. Such evidence cannot support a jury finding that, if Ziegler had lobbied on EIUG‘s behalf, as EIUG suggests, this act would have affected Gulf‘s ultimate decision and would have lifted the advertising ban.
Finally, with respect to the United Capitol renewal rights acquisition issue, there is insufficient evidence that Ziegler‘s actions, or omissions, caused EIUG‘s injuries. First, to the extent that EIUG argued that Ziegler breached his fiduciary duties by not lobbying on its behalf to stop the acquisition, EIUG did not present sufficient evidence to support a rational jury‘s conclusion that any lobbying by Ziegler could have halted such a transaction. The only evidence EIUG presented in support of this argument was that Ziegler worked under Christopher Watson, Gulf‘s president and the person who had the ultimate authority to decide whether to purchase the United Capitol renewal rights. Watson testified that he made that decision “with the help of [his] team.” This statement does not establish the extent of Ziegler‘s influence in that decision-making process. He may have “help[ed]” as part of a team, but that alone is insufficient to establish that he had the power to alter the ultimatе decision; EIUG did not show that any exercise of Ziegler‘s influence on behalf of EIUG would have resulted in a decision by Gulf to forego the opportunity to acquire the renewal rights.
EIUG also argued that Ziegler breached his fiduciary duties by not informing Broderick or Stamatov of the acquisition of the renewal rights before that transaction was made public. But EIUG presented insufficient evidence that any injury was caused by this delay in information. In fact, Broderick testified that “[he was] not sure exactly what [EIUG] would have done” had it known about the transaction earlier. There is no evidence of concrete or even probable loss to EIUG resulting from Ziegler‘s failure to tell Broderick or Stamatov about the transaction. EIUG did not show that it could or would have done anything different that would have avoided the losses EIUG incurred.
In its appellate brief, EIUG does not point to evidence of causation. Instead, it points out that Appellants made these arguments on summary judgment and lost. EIUG argues that because the district court found that there were enough facts on the summary judgment record to allow a reasonable jury to find for them on these same issues, and because those same facts were presented at trial, “it is only consistent and apрropriate to rule that the evidence entered at trial is sufficient to withstand a judgment as a matter of law.”
But looking to the district court‘s summary judgment decisions does not help EIUG. On summary judgment, the court found that causation was satisfied because
taking the facts in the light most favorable to the plaintiff, a reasonable jury could find that Ziegler had influence in Gulf‘s decision making, Ziegler did not investigate and intervene in the advertising prohibition; Ziegler participated in Gulf‘s decision to acquire competing environmental products and did not tell EIUG about the impending transaction; and Ziegler did not adequatеly support EIUG after the United Capitol acquisition. EIUG has provided expert testimony indicating that the delay in locating reinsurance, the advertising prohibition, the purchase of United Capitol, and the subsequent management issues resulted in losses to EIUG.
These facts, however, are insufficient to establish causation. The district court essentially found that EIUG presented evidence that Ziegler had influence in Gulf‘s decision-making, that he did not exercise this influence on behalf of EIUG, and that the reinsurance delay, the advertising ban, and the renewal rights purchase harmed EIUG. Significantly, the district court was silent as to whether there was evidence that had Ziegler exerted any influence, reinsurance would have been expedited, the advertising ban would have been lifted, or the United Capitol renewal rights acquisition would not have proceeded just as it did. That is, the district court found that EIUG presented evidence of breach and harm, but it did not cite to any evidence that the breach caused the harm. Because EIUG has not demonstrated that Ziegler‘s actions caused the company any harm, we hold that the district court erred in denying Appellants’
B. Gulf‘s Counterclaim: Breach of Promissory Note
Appellants argue that the district court erred in denying Gulf‘s motion for judgment as a matter of law on its claim for breach of the Promissory Note. We review the court‘s denial of the
Under the Note, Gulf was required to loan EIUG $1.5 million at 11% interest. EIUG, in turn, was required to repay the loan, making interest payments twice a year, each year, until January 15, 2005, at which time the principal balance would be due. Gulf performed its obligation, but EIUG never repaid the loan. It is undisputеd that EIUG received the proceeds of the $1.5 million loan, that it made one interest payment of $82,500, and that it never made any other interest payments or payment of the principal. EIUG‘s sole defense for non-payment at trial and on appeal is that Gulf breached the covenant of good faith and fair dealing.
EIUG does not point to any misconduct on Gulf‘s part in support of its argument. Instead, EIUG argues that because Ziegler was Gulf‘s Chief Financial Officer and executive vice president during the time at issue, Ziegler may be considered Gulf‘s agent. As such, EIUG argues that Ziegler‘s “wrongdoing, in advancing Gulf‘s interest at the expense of EIUG, is fully attributable to Gulf.” EIUG goes on to cite the reinsurance, advertising hold, and acquisition of United Capitol issues to establish that Gulf — through Ziegler — engaged in “nefarious actions,” thus breaching the implied covenant of good faith and fair dealing.
Appellee‘s argument fails because (among other reasons) Gulf never owed EIUG any fiduciary duties. Ziegler‘s wrongdoing, assuming there was any, stems from his personal duties to EIUG as a director in the company. He was nominated and voted into the position as an individual, not as Gulf‘s agent; Gulf was never a director in EIUG. EIUG‘s vicarious liability theory, therefore, rests only on the fact that Ziegler was employed by Gulf.
It is a basic principle of tort law that vicarious liability will only be imputed to an employer if the tort was committed within the scope of employment. Davis v. Larhette, 39 A.D.3d 693, 834 N.Y.S.2d 280, 283 (2007) (“An employer is vicariously liable for its employees’ torts under the theory of respondent superior if the acts were committed while the employee was acting within the scope of his employment. An act is considered to be within the scope of employment if it is performed while the employee is engaged generally in the business of his employer, or if his act may be reasonably said to be necessary or incidental to such employment“). In рerforming his duties as director of EIUG (or in failing to, for that matter), Ziegler was not acting as Gulf‘s employee; he was acting as a director of EIUG — two separate and distinct jobs. Therefore Ziegler‘s alleged wrongdoing — his breach of fiduciary duties — cannot be imputed to Gulf.
Because Gulf set forth undisputed documentary evidence that EIUG executed the Promissory Note, received the benefits thereof, and failed to make payment, Gulf is entitled to judgment as a matter of law on the breach of Promissory Note claim. See Gateway State Bank v. Shangri-La Private Club for Women, Inc., 113 A.D.2d 791, 493 N.Y.S.2d 226, 227 (N.Y. App. Div. 1985), aff‘d., 67 N.Y.2d 627, 499 N.Y.S.2d 679, 490 N.E.2d 546 (1986). We thereforе reverse the district court‘s denial of Appellants’
C. Attorney‘s Fees
On cross-appeal, EIUG argues that the district court erred in denying EIUG‘s post-trial motions (1) to vacate the dismissal, without prejudice, of the Chapter 93A claims and (2) to alter and amend the judgment by adding attorney‘s fees pursuant to the jury‘s verdict.
D. Rule 11 Sanctions
EIUG‘s trial and appellate counsel, Joseph Reinhardt, argues that the district court abused its discretion in imposing a
Reinhardt argues that the district court‘s imposition of
Under
Giving you guys the benefit of the doubt, you still haven‘t figured out my concerns. Rather than continue this game of 20 questions, why don‘t you go ahead and file your motion — consider the exchange of e-mail to have satisfied the ... obligation to confer — and I‘ll review it and respond as appropriate.
In view of these facts, we find that the district court was justified in its decision to impose sanctions. The fact that the district court ultimately adopted Reinhardt‘s proposed language does not alter our conclusion. The district court did not fault Reinhardt for misstating facts or law, rather it reprimanded him for unnecessarily “forcing defendants to litigate the issue” and “tаk[ing] up court time and consequently burden[ing] other individuals’ rights to come before [the] court in a timely manner to have their issues litigated.” Had Reinhardt proposed that language in response to the defendants’ attempts at negotiation, the need for motion practice likely would have been obviated.
III. Conclusion
For the reasons stated above, we affirm the district court‘s denial of EIUG‘s motions to vacate and to alter or amend the judgment, as well as the district court‘s imposition of a
Affirmed in part and reversed and remanded in part.
As to the appeal and cross-appeal of the district court‘s ruling on the post-trial motions, costs shall be taxed against the appellee. As to the appeal of the district court‘s imposition of