Petition for Writ of Certiorari — National Union Fire Insurance v. Highlands Insurance

SUprems Cost, U:8.

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No. 94 915 Nov 171994

IN THE (fff OF IHE CLERK

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1994

NATIONAL UNION FIRE INSURANCE COMPANY

OF PITTSBURGH, PENNSYLVANIA; AMERICAN

INTERNATIONAL GROUP, INC.; and AMERICAN

ADJUSTMENT COMPANY, INC.,

Petitioners,

Vv.

HIGHLANDS INSURANCE COMPANY,

Respondent.

PETITION FOR WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

AND APPENDIX

CHARLES T. FRAZIER, JR.

Counsel of Record

B. MICHAEL BENNETT

COWLES & THOMPSON, P.C.

901 Main Street, Suite 4000

Dallas, Texas 75202-3793

(214) 670-1100

(214) 698-0310 (Fax)

ATTORNEYS FOR PETITIONERS

November 17, 1994

PA EM ERE ETL RDS tS i? a 2 ney alee mag wens aon

é i Ai ing : Nee patil ests ‘

Sik wien PERRY pt etait aae ahi Bo Telli

ye

QUESTION PRESENTED

Whether the court of appeals’ refusal to remand

the case for further proceedings, after determining

that the district court mistakenly resolved a

dispositive fact issue as a matter of law, coupled

with the court of appeals’ refusal to review the

correctness of the district court’s ruling, operated

to deprive Petitioners of due process.

PARTIES TO THE PROCEEDINGS BELOW

National Union Fire Insurance Company of Pittsburgh,

Pennsylvania, Petitioner.

American International Group, Inc., Petitioner.

American International Adjustment Company, Inc.,

Petitioner.

Highlands Insurance Company, Respondent.

The parent company of National Union Fire Insurance

Company of Pittsburgh, Pennsylvania, is American

International Group, Inc. The non-wholly owned

subsidiaries of National Union Fire Insurance Company of

Pittsburgh, Pennsylvania, are Asesores Bursatiles Capital

Fund N.V., Asesores Bursatiles Venture Fund N.V.,

Developpement et Finance, American International

Specialty Lines Insurance Company, and Lexington

Insurance Company.

The parent company of American International Group, Inc.

is C.V. Starr & Co., Inc. The non-wholly owned

subsidiaries of American International Group, Inc. are AIG

Financial Products Corporation, General Environment

Management Company, Trade Network International,

Limited, IPC Holdings, Inc., SELIC Holdings, Inc.,

American International Life Assurance Company of New

York, and AIG Life Insurance Company.

The parent company of American International Adjustment

Company, Inc., is American International Group, Inc.

American International Adjustment Company, Inc. has no

non-wholly owned subsidiaries.

TABLE OF CONTENTS

CETIT I PURINE ns vt cc eriweeans i

PARTIES TO THE PROCEEDINGS BELOW ....... ii

De Fie I wreen oo Os bee ee ecw tes iii

ep Be Be 2 a ae Vv

PETITION FOR WRIT OF CERTIORARI ......... 1

Ee oo ke Gh AEE oe Reon ewe 2

JURISDICTION ...........-. ORS aT eee eee 2

CONSTITUTIONAL PROVISIONS AND

a ees 4 oi ds ainda > ate ee ® ue de 2 + 4

STATEMENT OF THE CASE .................. 5

i. Course of Proceedings Below. ........... 5

hs Factual Background. ................. 9

REASONS FOR GRANTING THE WRIT .......... 12

A. The decision of the court of appeals

violated the rule of Saunders v. Shaw,

and thereby deprived Petitioners of due

ES SA Wke Weed Re eens a de see i 12

B. The decision of the court of appeals was

based on other errors, as well. ........ 20

ad The decision of the court of appeals

resulted in harmful error. ........... 23

CONCLUSION ... Cee b eee eee eceecueseeeess 25

I She) Sees pa ete tele ot sor ae 27

A. Opinion of the United States Court of

Appeals for the Fifth Circuit ........ A-|

B. Order of the United States Court of

Appeals Denying Petitioner’s Petition

Sar TS keke Ce ees éS OS B-1

¢. Amended Judgment of the United States

District Court for the Southern District

of Texas, Houston Division ......... C-1

D. Order of the United States District

Court for the Southern District of

Texas, Houston Division ........... D-|

TABLE OF AUTHORITIES

CASES

Butler Bros. v. McColgan,

343 U.S. 501, G2 &. Ch. FOE CIDSE).. ww cer vtawes 17

Consarc Corporation v. Marine Midland Bank, N.A.,

gw e by ie 2: ee ee eee 20

Georgia Railway & Electric Company v. City of Decatur,

(295 U.S. 175, 55 S. Ct. 701 (1935) .....---.... 17

Hamling v. United States,

418 U.S. 110, 94S. Ct. 2887 (1974) ......... 13, 17

Helis v. Ward,

308 U.S. 365, 60 S. Ct. 283 (1939) ......... 13, 17

Highlands Insurance Company v. National Union Fire

Insurance Company, 27 F.3d 1027 (Sth Cir.

eer rer rer sa «ee i ee 7

Hudson-Port Ewen Associates v. Chien Kuo,

78 N.Y.2d 944, 573 N.Y.S.2d 637,

ra are ee ee 20

Jackson State Bank v. King,

992 F.26 256 (10th Cie. 1BBG) 0 kw cette eee 19

Jakobson Shipyard v. Aetna Casualty and Surety Company,

775 F. Supp. 606 (S.D.N.Y. 1991) ............. 20

North Mississippi Communications, Inc. y. Jones,

SOE Fe ee Ge a, Fs 8 6 Cs ee ee caewess 19

Vv

Pullman-Standard v. Swint,

456 U.S. 273, 102 S. Cr. 1781 (1982) ........... 18

RTC Transportation, Inc. v. Conagra Poultry Co.,

ee BF. ff ae | ree 19

Saunders v. Shaw,

244 U.S. 317, 37 S. Ct. 638 (1917) .... 12, 13, 14,17

Scanlon v. Travelers Insurance Company,

849 F. Supp. 836 (N.D.N.Y. 1994)............. 20

Snyder v. Commonwealth of Massachusetts,

291 U.S. 97, 54S. Ct. 330 (1934) ............. 17

W.W.W. Associates v. Giancontieri,

77 N.Y.2d 157, 565 N.Y.S.2d 440,

56h 00.96 O...« bs waw Kaci dbase he 20

STATUTES

UBL OS... wink oho oe oc <1

26 USS. 0 10 8 oss err eh ee 2

ay GE, Meee TY ok kk sc os i vlan Seek ees. 4

Sra CE. SOE. We nk cc ca a ces os WES Re. 4

No.

IN THE

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1994

NATIONAL UNION FIRE INSURANCE COMPANY

OF PITTSBURGH, PENNSYLVANIA; AMERICAN

INTERNATIONAL GROUP, INC.; and AMERICAN

ADJUSTMENT COMPANY, INC.,

Petitioners,

Vv.

HIGHLANDS INSURANCE COMPANY,

Respondent.

PETITION FOR WRIT OF CERTIORARI

National Union Fire Insurance Company of Pittsburgh,

Pennsylvania, American International Group, Inc., and American

Adjustment Company, Inc., respectfully petition that a Writ of

Certiorari be issued to review an opinion and judgment of the

United States Court of Appeals for the Fifth Circuit.

OPINION BELOW

The opinion of the United States Court of Appeals for the

Fifth Circuit, entered July 21, 1994, is reported at 27 F.3d 1027,

and is reprinted in the Appendix hereto as Section A. No separate

opinion was entered by the district court.

JURISDICTION

The Judgment of the Court of Appeals was entered on the

same date as its opinion (July 21, 1994). The Order of the Court

of Appeals denying the Petition for Rehearing was entered on

August 19, 1994, and is reprinted in the Appendix as Section B.

The Amended Judgment of the United States District Court for the

Southern District of Texas, Houston Division, was entered on

August 27, 1992, and is reprinted in the Appendix as Section C.

The district court also entered an Order concerning its award of

attorneys’ fees, which is reprinted in the Appendix as Section D.

This Petition for Writ of Certiorari was filed within ninety (90)

days of the entry of the Order denying the Petition for Rehearing.

Federal subject matter jurisdiction in the district court was

predicated on 28 U.S.C. § 1332(a), in that the parties are citizens

of different states and the matter in controversy exceeds the sum

or value of $50,000, exclusive of interest and costs. Jurisdiction

of this Court to entertain this Petition for Writ of Certiorari is

invoked pursuant to 28 U.S.C. § 1254(1). Petitioners contend that

the action of the Fifth Circuit Court of Appeals in this case is

reviewable pursuant to Rule 10.1(a) of the Rules of this Court, in

that the Court of Appeals “has so far departed from the accepted

and usual course of judicial proceedings .. . as to call for an

exercise of this Court’s power of supervision.” Petitioners contend

further that the action of the Court of Appeals violates the due

process clause set forth in the Fifth Amendment of the United

States Constitution, and that its action is therefore reviewable

under Rule 10.1(c) of this Court, in that the Court of Appeals "has

decided a federal question in a way that conflicts with the

applicable decisions of this Court.”

CONSTITUTIONAL PROVISIONS AND STATUTES

No person shall be held to answer for a capital, or

otherwise infamous crime, unless on a presentment or indictment

of a Grand Jury, except in cases arising in the land or naval forces,

or in the Militia, when in actual service in time of War or public

danger; nor shall any person be subject for the same offence to be

twice put in jeopardy of life or limb; nor shall be compelled in any

criminal case to be a witness against himself, nor be deprived of

life, liberty; or property, without due process of law; nor shall

private property be taken for public use, without just

compensation.

U.S. Const. amend. V.

In Suits at common law, where the value in controversy

shall exceed Twenty Dollars ($20.00), the right of trial by jury

Shall be preserved, and no fact tried by jury, shall be otherwise re-

examined in any Court of the United States, than according to the

rules of the common law.

U.S. Const. amend. VII.

STATEMENT OF THE CASE

1. Course of Proceedings Below.

This is a diversity case in which the plaintiff asserted three

state-law causes of action: fraud, negligent misrepresentation and

breach of fiduciary duty. It is undisputed that the claims are

governed by New York law. The plaintiff below was Highlands

Insurance Company ("Highlands"), the issuer of an excess policy

of general liability insurance. The defendants were the issuer of

the primary policy, National Union Fire Insurance Company of

Pittsburgh, Pennsylvania ("National Union"), and two related

companies, American International Group, Inc. ("AIG") and

American International Adjustment Company, Inc. ("AIAC").'

The insured under both policies was a general paving contractor,

Naclerio Contracting Company, Inc. ("Naclerio"), which was not

a party to the litigation.

Highlands filed the lawsuit in July 1990, alleging that the

defendants had concealed the existence of a third insurance policy,

which wouid have provided coverage to Naclerio’s co-defendant,

the City of New York, in a previous personal injury lawsuit. The

concealment, it said, had caused Highlands to pay a greater amount

in settlement of the previous lawsuit than it otherwise would have

' National Union, AIG and ALAC will be referred to collectively in this

Petition as “National Union,” in conformance with the terminology employed by

the court of appeals, and may occasionally be referred to as “Petitioners.”

5

paid. R. 124. The defendants claimed that they had, in fact,

disclosed the existence of the policy to Highlands in a timely

manner, and that they did not contribute to the settlement because

there was no coverage. R. 185.

At trial, the parties disagreed over whether the OCP policy

was in the amount of $500,000 or $3,000,000 on the date of the

injury. Tr. 316-20, 573-74. The question was significant because

the amount of compensatory damages recoverable in the action

necessarily was limited to the amount of the policy. The measure

of damages was, by definition, equal to the amount which “would

have been paid” under the OCP policy if the alleged concealment

had not occurred. R. 357, 360; Tr. 648-49. National Union’s

trial counsel argued that the issue should be resolved by the court,

as a matter of law, contending that the policy was unambiguous.

Tr. 474, 483. The district court deferred its ruling until the close

of the evidence, and then decided that the question indeed was one

of law, for the court. Tr. 650. It instructed the attorneys not to

address the point during closing arguments, and instructed the jury

not to consider the policy limits during its deliberations. Tr. 651.

The jury found for Highlands, and assessed the amount of

compensatory damages at $1,100,000. R. 389. National Union

asked that the award be reduced to $500,000, but the trial court

failed to rule on its request. R. 415, 542. Its failure had the

effect of a finding that the policy was in the amount of

$3,000,000, since that was the only conclusion consistent with a

judgment in the amount of $1,100,000. Petitioners argued to the

Fifth Circuit that the district court’s unarticulated legal conclusion

was erroneous, since no rational interpretation of the contract

would support a conclusion that the policy was in the amount of

$3,000,000. Brief for Appellants at 42; Reply Brief for

Appellants at 18; Appellants’ Petition for Rehearing at 8-9.

The court of appeals held that the issue was one of fact.

App. at A-15; Highlands Insurance Company v. National Union

Fire Insurance Company, 27 F.3d 1027, 1033-34 (Sth Cir. 1994).

Because the district court therefore erred in deciding the question

as a matter of law, the court of appeals should have remanded the

case for further proceedings. Instead, however, it affirmed the

judgment, ruling that Petitioners had waived the "issue of fact" by

not requesting that it be submitted to the jury. App. at A-16; 27

F.3d at 1034 ("A party cannot complain that the fact issue ought

to have gone to the jury unless it has requested their (sic)

submission to the jury."). Moreover, the court of appeals refused

even to consider the correctness of the district court’s legal

determination of the policy limits, based on its conclusion that the

issue was one of fact which had been waived. /d.

In their Petition for Rehearing, Petitioners pointed out that

the opinions of the district court and the court of appeals were

inconsistent, in a manner which operated to deprive them of

meaningful review on the issue of the policy limits:

The problem is that National Union is being

faulted, on appeal, for not submitting a jury

question, when it was instructed not to do so at

trial. The trial judge ruled that the question was

one of law, which she would decide, rejecting

Highlands’ argument that an ambiguity existed.

Tr. 474, 481-83, 487 & 650-51. Had the trial

court ruled that there was an ambiguity, National

Union could have requested a jury instruction

prior to the reading of the charge. National Union

was precluded from doing so by the judge’s

determination that the contract was not ambiguous,

only to be told now that the issue was one of fact

for the jury, which it has waived. Under such

conflicting directions, National Union cannot tell,

even now, what it is supposed to have done. The

judgment should be reduced to $500,000, or the

case remanded, so that National Union is not

penalized for arguing successfully to the trial court

that the question was one of law.

Petition for Rehearing at 11. The Petition for Rehearing was

denied by Order dated August 19, 1994. App. at B-i. Petitioners

now seek review by this Court of whether the court of appeals’

refusal either to remand the case for further proceedings or to

review the district court’s construction of the contract deprives

them of due process of law, in violation of the Fifth Amendment.

2. Factual Background.

On June 21, 1985, four young men were riding in a jeep

on Cross Bay Boulevard in Queens, New York. Tr. 21. Their

names were Timothy Gleason (the driver), Robert Steckler,

Timothy Sullivan and Paul Murray. Tr. 21-22. They were

traveling north in the center lane of three lanes of northbound

traffic, when Gleason pulled into the right-hand lane, in an attempt

to pass a tractor-trailer truck. Tr. 104, 107, 536.

Along that stretch of Cross Bay Boulevard, Naclerio

Contracting Company had been installing sewer basins, pursuant

to a construction contract between Naclerio and the City of New

York. Tr. 104; Defendants’ Exhibit ("Dx") 4a. On this particular

day, Naclerio had stacked loose dirt and debris in a pile

approximately thirteen feet high in the right-hand lane. Tr. 21,

104. As Gleason pulled around the tractor trailer, into the right-

hand lane, the jeep ran into the pile of debris and overturned. Tr.

104. Steckler, Gleason and Sullivan were injured severely in the

accident, and Steckler died from his injuries. Tr. 22, 105. In

early 1986, Steckler’s estate, Gleason and Sullivan filed suit in

Queens County against Naclerio and the City, alleging negligence,

failure to warn and "premises liability." Tr. 152; Dx 4a, 4b & 4c.

At the time of the accident, Naclerio was insured against

such occurrences under a general liability policy issued by National

Union, having a policy limit of $1,000,000, and under an excess

liability policy issued by Highlands, having a policy limit of

$5,000,000. Tr. 22-23, 112. Tr. 537. During the litigation,

Naclerio’s attorneys concluded that Naclerio’s liability would

exceed the limits of the primary policy. National Union therefore

tendered the $1,000,000 policy limits to Highlands, for use in the

settlement negotiations. Tr. 120, 498, 545, 562. Highlands’

Claims supervisor then proceeded to negotiate a settlement of the

suit for a total payment of $2,160,000. Tr. 279, 498.

Early in the litigation, National Union and its agents had

informed Highlands repeatedly that it (National Union) had issued

a one-year Owners’ and Contractors’ Protective ("OCP") policy to

the City of New York on June 7, 1984, which had been renewed

by the City for an additional year as of June 7, 1985. Dx 2. The

OCP policy had been purchased for the City by Naclerio, pursuant

to the terms of the construction contract. Dx 2; Tr. 407, 533.

National Union did not tender any settlement amounts under the

OCP policy, since it had concluded that the City had no liability

which was covered under the OCP policy and, in any event, the

City had been indemnified by Naclerio against losses arising out of

the project. Tr. 523-24, 526, 539.

The Steckler suit was tried before a jury in April 1989.

Dx 5. While the jury was in deliberations, Highlands’ claims

supervisor, Edward Varosky, agreed to settle the case for a total

payment to the plaintiffs of $2,160,000. Tr. 120. Of that amount,

the sum of $60,000 was paid by the insurance company which had

issued Gleason’s automobile liability policy. Tr. 112, Dx 5. One

million dollars was paid by National Union under Naclerio’s

primary liability policy, and the remainder ($1,100,000) was paid

by Highlands, as the excess insurer. Tr. 23, 121. Releases were

executed by the plaintiffs, releasing Gleason, Naclerio and the City

from further liability, and the Steckler suit was dismissed. Dx 6.

Highla:ids then initiated the present litigation, ciaiming that

National Union should have contributed additional money to the

settlement, under the OCP policy. R. 123-24.

REASONS FOR GRANTING THE WRIT

A. The decision of the court of appeals

violated the rule of Saunders v. Shaw,

and thereby deprived Petitioners of due

process.

The decision of the court of appeals to render judgment

against National Union, instead of remanding the case, violates the

rule of this Court announced in Saunders v. Shaw, 244 U.S. 317,

37 S. Ct. 638 (1917) (Holmes, J.). As will be demonstrated

below, the rule has been reaffirmed by this Court and other federal

courts on numerous occasions. In Saunders, the petitioner

complained that he had relied on a ruling of the trial court in

deciding not to introduce certain evidence at trial, only to be

faulted by the appellate court for the absence of proof. The

inconsistent positions of the two courts, he claimed, placed him in

a bind which was fundamentally unfair, and for which he had no

adequate remedy in the absence of certiorari. This Court agreed,

and granted the writ.

12

The Saunders case started out in Louisiana state court.?

During the trial of a suit to enjoin the collection of a property tax,

the plaintiff offered evidence to show that the tax did not benefit

his property, and therefore should not be assessed against his

property. The trial court excluded the evidence as being

“inadmissible under the pleadings.” 244 U.S. at 319, 37S. Ct. at

639. The defendant therefore offered no evidence that the land in

question would benefit from the tax. On appeal from a judgment

for the defendant, the Louisiana Supreme Court decided that the

land could not possibly have benefitted from the tax, and therefore

that the collection of the tax was improper. /d.

| It is important to note that, until that point in the

proceedings, no due process violation had occurred. However,

when the Louisiana Supreme Court then rendered judgment for the

plaintiff, and enjoined collection of the tax -- instead of remanding

the case for further proceedings consistent with its correction of the

district court’s ruling -- it placed the defendant/petitioner in an

impossible bind. Essentially, it faulted the defendant for the

mistake of the trial court. The defendant had urged the trial court

2 While the Saunders decision itself concerned an appeal from the state

court system, it is clear that the Saunders rule also applies to due process analysis

under the Fifth Amendment. See, e.g., Helis v. Ward, 308 U.S. 365, 60 S. Ct.

283, 284 (1939) (granting certiorari to construe the application of the Saunders

rule in an appeal from the Fifth Circuit Court of, Appeals); Hamling v. United

States, 418 U.S. 110, 94 S. Ct. 2887 (1974) (in which the majority finds the

Saunders rule inapposite, while the dissent argues for its application, in an appeal

from the Ninth Circuit).

13

to rule as it did and, having prevailed on that point, he was not

required to take action which would have been inconsistent with

his theory of the case: "[W]hen the trial court ruled that it was

not open to the plaintiff to show that his land was not benefitted,

the defendant was not bound to go on and offer evidence that he

contended was inadmissible, in order to rebut the testimony already

ruled to be inadmissible in accordance with his view." 244 U.S.

at 319, 37 S. Ct. at 639. To the contrary, the defendant was

entitled to rely on the trial court’s ruling in fashioning and

presenting his defense. The trial court had taken the issue away

from the jury, at his request, and he was not required to engage in

an inconsistent attempt to create an issue of fact. Jd.

This Court also held that the defendant’s assertion of the

error in his petition for writ of certiorari was timely, since the

error did not occur until the last stage of the appeal below. [I]t

would leave a serious gap in the remedy for infraction of

constitutional rights if the party aggrieved in such a way could not

come here. The defendant was not bound to contemplate a

decision of the case before his evidence was heard, and therefore

was not bound to ask for a ruling or to take other precautions in

advance.” Jd. at 320, 37 S. Ct. at 640.

In the present case, the court of appeals faulted the

defendant, National Union, for not submitting an issue to the jury

as to the proper construction of the contract in question, even

though the district court had taken the issue away from the jury

prior to the reading of the charge. Because National Union did not

tender a jury question, it said, the issue was waived:

National Union did not ask for an instruction on

this defense, waiving its right to complain that the

jury was not guided on it. We will not now let

National Union complain that the judge accepted

the jury’s verdict, when the jury could not have

considered the argument with which National

Union now attacks the verdict. Nor can National

Union complain that the judge denied it a jury trial

on this factual issue, because it had already waived

that right. A judge is presumed to have made all

fact findings necessary in favor of its judgment

entered or a Rule 49 verdict. A party cannot

complain that the fact issue ought to have gone to

the jury unless it has requested their submission to

the jury.

App. at A-16; 27 F.3d at 1034. The court of appeals ignored the

fact that the trial judge instructed the parties that the question was

one of law, to be decided by the court, prior to the submission of

the charge to the jury. Indeed, the trial judge forbade the parties

from arguing the issue to the jury, and then instructed the jury that

“the policy limits were something that I was to determine, not

something for you to determine.” Tr. 650-51. Petitioners’ trial

counsel pointed out to the court at the time that the jury needed to

know the amount of the policy limits in order to apply correctly

the judge’s instructions concerning the measure of damages, should

it reach the damages issue. R. 360; Tr. 648. The trial judge,

15

nevertheless, refused to provide the results of her decision to the

jury prior to its deliberations. Instead, she continued to defer her

own ruling:

I’m not prepared to construe the contract at this

point. I can’t possibly do that at this point. |

don’t know what to do. I’m in kind of in a

quandary here. ... Let’s go with your not

arguing that; and, depending on what the jury

does, after I have looked at the contract, I may

have to grant a new trial.

Tr. 649-50. Despite her promise to resolve the issue as a matter

of law, the judge made no such ruling. Instead, she simply

entered judgment in the amount of the verdict. R. 467.

Petitioners repeatedly requested an express determination of the

policy limits in their post-trial motions, but the judge ignored the

requests. R. 415-452.

Because the trial judge refused to make an express finding,

it must be presumed that she found the limits to be in the amount

of $3,000,000, since that is the only conclusion which would allow

a judgment to be entered in the amount of $1,100,000. Therefore,

on appeal, Petitioners argued to the Fifth Circuit that the trial court

decided the issue wrongly, as a matter of law. Appellants’ Brief

at 42; Reply Brief for Appellants at 18. The court of appeals

refused to review the trial court’s determination, however, on the

unanticipated ground that the question was one of fact, which had

been waived by failure to submit it to the jury. App. at A-16.

16

This is precisely the sort of bind which the Saunders rule

forbids. See, e.g., Helis v. Ward, 308 U.S. 365, 369, 60 S. Ct.

283, 284 (1939) (acknowledging that "the failure to remand for a

new trial" as to “matters which were immaterial to the issues" until

the time of the appellate court’s ruling may violate “the rule of

Saunders v. Shaw"); Butler Bros. v. McColgan, 315 U.S. 501,

510, 62 S. Ct. 701, 705 (1942) (noting that a litigant may be

"denied procedural due process under the rule of Saunders v.

Shaw" where an appellate court’s "innovation" operates as a

“surprise,” depriving the party of "a full opportunity to be

heard"); Hamling v. United States, 418 U.S. 87, 149, 94 S. Ct.

2887, 2923 (1974) (Brennan, J., dissenting) (characterizing the

Saunders rule as establishing that it is a violation of due process

for the appellate court “to reverse a case and render judgment

absolute . . . upon a proposition of fact that was ruled to be

immaterial at the trial").°

In the present case, if the question was one of fact, then

the court of appeals’ refusal to remand the case deprived

Petitioners of due process of law, both by subjecting them to

conflicting rulings in a manner which precluded a full opportunity

> The Sanders rule is also discussed in Georgia Railway & Electric Company

v. City of Decatur, 295 U.S. 175, 171, 55 S. Ct. 701, 703 (1935) (the refusal of

a court to receive evidence on a material issue may violate due process), and

Snyder v. Commonwealth of Massachusetts, 291 U.S. 97, 128, 54S. Ct. 330, 340

(1934) ("the deprivation of the right to present evidence bearing on the issue (has)

been adjudged to deny due process” under the rule of Saunders).

17

to be heard, and by depriving them of their right to trial by jury

of all material issues of fact. If the question was one of law, then

the court of appeals’ refusal to review the district court’s

determination of the issue deprived Petitioners of due process, by

depriving them of the right to meaningful appellate review.

Similar principles have been recognized by this Court in

other cases. For example, in Pullman-Standard v. Swint, 456 U.S.

273, 102 S. Ct. 1781 (1982), it was held as follows: “When an

appellate court discerns that a district court has failed to make a

finding because of an erroneous view of the law, the usual rule is

that there should be a remand for further proceedings to permit the

trial court to make the missing findings. ... Likewise, where

findings are infirm because of an erroneous view of the law, a

remand is the proper course unless the record permits only one

resolution of the factual issue." 456 U.S. at 291, 102 S. Ct. at

1791. The Court in Pullman-Standard went on to conclude as

foliows: "All of this is elementary. Yet the court of appeals, after

holding that the district court had failed to consider relevant

evidence and indicating that the district court might have come to

a different conclusion had it considered that evidence, failed to

remand for further proceedings." 456 U.S. at 292, 102 S. Ct. at

1792. Accordingly, the judgment of the court of appeals was

reversed, and the case was remanded for further proceedings. 456

U.S. at 293, 102 S. Ct. at 1792.

18

Decisions of other federal courts of appeal are analogous.

For example, in Jackson State Bank v. King, 992 F.2d 256, 257

(10th Cir. 1993), it was held that a remand is necessary “where a

state court announces a new rule of law on certification following

a jury trial." In North Mississippi Communications, Inc. v. Jones,

951 F.2d 652, 657 (Sth Cir. 1992), the Fifth Circuit itself

concluded that "[w]hen a trial court has made a fact finding upon

an erroneous view of the law, the factual determination loses all

vitality, requiring a remand." In RTC Transportation, Inc. v.

Conagra Poultry Co., 971 F.2d 368 (9th Cir. 1992), the Ninth

Circuit Court of Appeals ordered that "[i]f the district court avoids

an issue that, on appellate review, becomes dispositive,” the

appellate court should decide the issue, if the question is one of

law and an appropriate record has been developed, or, if not,

should remand it for further proceedings. /d. at 375.

In the present case, the record shows that, during the

progress of the trial, National Union’s counsel repeatedly urged the

district court to resolve the policy limits issue as a matter of law,

stating expressly that “there is no ambiguity” in the contract and

that the only rational conclusion was that the limits were in the

amount of $500,000. Tr. 474, 483. The court deferred its

* Under New York law, "[wJhether a contract's terms are ambiguous is

a question of law decided by the court. . . . If a contract is unambiguous, courts

are required to give effect to the contract as written, and may not consider

extrinsic evidence to alter or interpret its meaning. (Citations omitted.) That is,

19

ruling. Tr. 487. At the conclusion of the evidence, Highlands’

counsel agreed that the issue was one of law, and the judge

announced that she would determine it as such. Tr. 648-51.

Had the trial ‘court ruled that an ambiguity existed,

National Union could have requested a jury instruction prior to the

reading of the charge. National Union was precluded from doing

so by the judge’s determination that the contract was not

ambiguous, only to be told now that the issue was one of fact for

the jury, which it has waived. Under such conflicting directions,

National Union cannot tell, even now, what it is supposed to have

done. The case should be remanded, so that National Union is not

penalized for arguing successfully to the trial court that the

question was one of law.

B. The decision of the court of appeals was

based on other errors, as well.

Further, the court of appeals’ conclusion was based on an

erroneous reading of the record. At page 13 of the slip opinion,

extrinsic evidence may not be used to create an ambiguity in an otherwise

unambiguous agreement.” Consarc Corporation v. Marine Midland Bank, N.A.,

996 F.2d 568, 573 (2d Cir. 1993) (emphasis supplied), citing Hudson-Port Ewen

Associates v. Chien Kuo, 78 N.Y .2d 944, 573 N.Y.S.2d 637, 578 N.E.2d 435

(1991), and W.W.W. Associates v. Giancontieri, 77 N.Y .2d 157, 565 N.Y.S.2d

440, 566 N.E.2d 639 (1990). “This principle applies equally to contracts of

insurance.” Scanlon v. Travelers Insurance Company, 849 F. Supp. 836, 837

(N.D.N.Y. 1994); accord, Jakobson Shipyard v. Aetna Casualty and Surety

Company, 775 F. Supp. 606, 609 (S.D.N.Y. 1991).

20

ee

for example, the court stated that National Union “does not

challenge the judge's legal conclusion about the proper

interpretation of the contract." On that same page, however, the

court stated just the opposite: “National Union argues that the

judgment should be reduced to $500,000, because the judge made

an error of law in interpreting the contract.” (!) Moreover, a

review of National Union’s appellate briefs demonstrates that

National Union did, in fact, "challenge the judge’s legal conclusion

about the proper interpretation of the contract." Among other

things, National Union’s briefs set forth the following statements

and arguments:

The district court also erred in determining, as a

matter of law, that the limits of the OCP policy

were in the amount of $3,000,000.

Brief for Appellants at 8 (emphasis supplied).

[T}he amount of the OCP policy limits . . . was

resolved by the district court as a question of law.

Therefore, the standard of review is de novo.

Brief for Appellants at 38 (emphasis supplied).

Because it did not reduce the jury’s verdict to

$500,000, it might be implied that the court found

the OCP policy limits to have been in the amount

of $3,000,000. If so, however, then it erred as a

matter of law.

Brief for Appellants at 42 (emphasis supplied).

21

Appellants’ position is, and always has been, that

the issue is one of contract construction, which is

an issue of law for the court, where the language

of the contract is unambiguous. It is Appellants’

position, further, that the language of the contract

in this case is unambiguous, and therefore that the

issue is one of law.

Reply Brief for Appellants at 16 (emphasis supplied).

Under New York law, the construction of an

unambiguous contract presents a question of law,

and even the resolution of an ambiguity is a legal

issue, where it does not necessitate reference to

extrinsic evidence.

Reply Brief for Appellants at 16 n.5 (emphasis supplied).

At the conclusion of Highlands’ evidence, out of

the presence of the jury, Appellants’ counsel asked

the court to decide the policy limits issue as a

matter of law. Tr. 474, lines 15-20. Highlands’

counsel responded that there was "confusion" as to

the intent of the parties, and that an unsigned

endorsement appeared to renew the primary term

after the date of the accident. Tr. 481, line 19;

482, line 13. Appellants’ counsel again asked for

resolution of the issue as a matter of law, saying:

"There is no ambiguity." Tr. 483, line 19. The

court deferred its ruling. Tr. 487, lines 4-6.

Reply Brief for Appellants at 17 (emphasis supplied).

On appeal, Appellants have continued to insist that

the question is one of law.

Reply Brief for Appellants at 18 (emphasis supplied).

22

Appellants’ argument on appeal is that the trial

court decided the issue wrongly, as a matter of

law.

Reply Brief for Appellants at 18 (emphasis supplied). Indeed,

Highlands itself admitted that National Union’s position at trial was

that the question was one of law:

At trial, National Union took the position that the

amount of policy limits was a matter of contract

construction and a question of law for the Court.

Appellee’s Brief at 32 (emphasis supplied). Therefore, the court

of appeals’ statement that National Union "does not challenge the

judge’s legal conclusion about the proper interpretation of the

contract" was incorrect. National Union did challenge the

interpretation of the OCP policy, as a matter of law, just as it had

in the trial court. For the court of appeals to refuse to review the

determination of that legal issue, based on the supposed failure of

National Union to submit a jury issue, constitutes a denial of due

process.

C. The decision of the court of appeals

resulted in harmful error.

Finally, the district court’s determination -- which the court

of appeals refused to review -- was arbitrary and capricious.

There simply is no principle of law which would cause: the OCP

policy to be in the amount of $3,000,000 on June 21, 1985. By

23

its own terms, the policy, as renewed by the signed endorsement,

was in the amount of $500,000 on that date. The only argument

asserted by Highlands to contradict the clear language of the policy

and endorsement is that a second, unsigned endorsement was

subsequently issued. Dx 10, p. 8. However, the unsigned

endorsement offered by Highlands also was in the amount of

$500,000. Not only that, but the unsigned endorsement offered by

Highlands purported only to "renew" the OCP policy as of July 1,

1985. Dx 10, p. 8; Brief for Appellants at 39. The unsigned

renewal is redundant of the signed renewal, except on terms less

favorable to the insured -- it purports only to renew the coverage

in the amount of $500,000 (the same as the signed renewal) as of

July 1, 1985 (as opposed to June 7, 1985). There is no

reasonable rationale whatsoever which reconciles these documents

in such a way as to result in coverage in the amount of $3,000,000

on June 21, 1985. Therefore, the trial court erred as a matter of

law in finding that coverage existed in the amount of $3,000,000

on the date of the accident, no matter which endorsement it

considered or may have considered, or what factors went into its

unarticulated decision-making process. If the signed endorsement

renewed the policy, then the coverage was in the amount of

$500,000; if the unsigned endorsement renewed the policy, then

the coverage also was in the amount of $500,000. If neither

endorsement renewed the policy, then there was no coverage on

24

the date of the accident. In any event, it is fundamentally unfair

for the trial court, without giving any reasons or making any

findings, to hold that a policy which expired by its own terms on

June 7, and was not renewed except by an instrument or

instruments in the amount of $500,000, was in effect on June 21

in the amount of $3,000,000. The court of appeals’ refusal to

review the decision therefore constituted harmful error.

Accordingly, the court of appeals’ refusal to consider the issue

should be reversed, and the case should be remanded so that the

trial court’s decision can be reviewed.

CONCLUSION

If the court of appeals was correct in its conclusion that the

issue was one of fact for the jury, then the district court erred in

deciding that it was a question of law. In that event, the court of

appeals should be instructed to remand the case to the district court

so that the issue may be resolved by a jury. If the court of appeals

was incorrect, and the question was one of law, then the court of

appeals’ refusal to review the issue was erroneous, and the court

of appeals should be instructed to review the trial court's legal

determination of the policy limits under the appropriate standard

of review. In either event, National Union requests that this Court

reverse the decision of the court of appeals that the issue was

waived, and asks that the principal amount of the judgment be

25

reduced to $500,000, or that the consideration of the amount of

damages be remanded to the court of appeals or the district court

for further proceedings.

WHEREFORE, Petitioners respectfully pray that their

Petition for Writ of Certiorari be granted; that this Court reverse

the decision of the court of appeals; that this Court reduce the

principal amount of the judgment to $500,000 or, in the

alternative, that this Court remand the case to the lower courts for

further proceedings; and that Petitioners be awarded such other and

further relief to which they may justly be entitled.

Respectfully submitted,

COWLES & THOMPSON, P.C.

By:

CHARLES T. FRAZIER, JR.

Counsel of Record

State Bar of Texas No: 07403100

B. MICHAEL BENNETT

State Bar of Texas No. 02137500

901 Main Street, Suite 4000

Dallas, Texas 75202-3793

(214) 670-1100

(214) 698-0310 (Fax)

ATTORNEYS FOR PETITIONERS

26

APPENDIX

27

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

NO. 92-2933

HIGHLANDS INSURANCE COMPANY,

Plaintiff-Appellee,

versus

NATIONAL UNION FIRE INSURANCE

COMPANY OF PITTSBURGH, ET AL.,

Defendant-Appellants.

Appeal from the United States District Court

for the Southern District of Texas

Before GOLDBERG, HIGGINBOTHAM, and EMILIO M.

GARZA, Circuit Judges.

HIGGINBOTHAM,, Circuit Judge:

This is an appeal from a judgment in favor of an excess

insurance carrier and against the primary carrier for failure to

disclose the full extent of its primary coverage for an automobile

accident. Victims of a car accident sued a construction company

and the City of New York. National Union carried the primary

A-1

coverage for both defendants. Highlands, the excess Carrier for

the construction company, contributed $1,100,000 to a settlement.

Highlands later sued National Union and two of its affiliated

agents, claiming that not disclosing that National Union insured the

City led Highlands to contribute too much to the settlement. The

trial court found the defendants liable under New York law and

entered judgment for Highlands. We hold that New York law does

not support the trial court’s award of attorney fees for common law

fraud. We affirm the judgment in all other respects.

I.

In 1985, a Jeep carrying four young men collided with

construction debris left on a New York City bridge by Naclerio

Contracting Company. Two of the men suffered severe injuries

and a third died. The two men and the estate of the third sued

Naclerio and the City of New York for damages in early 1986.

Naclerio was insured by a general liability policy issued by

National Union, with a policy limit of $1,000,000, and an excess

liability policy issued by Highlands, with a policy limit of

$5,000,000. National Union had also issued an Owners’ and

Contractors’ Protective policy to the City of New York. The

City’s policy insured its vicarious liability for the acts of Naclerio,

and also against liability arising from its negligent supervision of

the construction activity.

The tort suit against Naclerio and the City settled in 1989

before the jury’s verdict on liability was returned. National Union

contributed its Naclerio policy limits of $1,000,000 while

Highlands contributed $1,100,000. The driver’s automobile

insurer contributed its policy limits of $60,000.

In 1990, Highlands sued National Union and two of its

affiliated agents, American International Group and American

International Adjustment Company, alleging that they withheld the

existence of the OCP policy from Highlands during settlement

negotiations.’ As a result, Highlands argued, it paid funds from

its excess policy in settling the Naclerio litigation that National

Union should have paid from primary coverage. A jury returned

a verdict for Highlands in 1992 for $1,100,000, finding that

Highlands had proven fraud, negligent misrepresentation, and

breach of fiduciary duty under New York law.

Il.

National Union argues that no reasonable jury could have

found’ that Highlands justifiably relied on any fraudulent or

negligent misrepresentation because Highlands had notice of the

OCP policy. On April 10, 1986, National Union’s broker sent a

letter to National Union, on which the broker copied Highlands,

'This opinion refers to the three defendants collectively as “National Union.”

*See Boeing Co. v. Shipman, 411 F.2d 365, 374 (Sth Cir. 1969).

A-3

Saying to “[bJe aware Nat’! Union also insured the City of N.Y.

under OCP Policy #GLA169666." The broker copied Highlands

again on May 27, 1986 with a second letter containing a similar

warning. A some point, Highlands also received copies of the

City’s letter notifying National Union of the auto accident and

National Union’s reply, which both referenced the OCP policy.

Highlands counters by focusing on the context in which it

sought information. With days to go before trial, a law firm that

worked exclusively for National Union took over as the City’s trial

counsel from the City’s in-house counsel.’ Highlands’ claims

supervisor and Highlands’ attorney called National Union to find

out why this change occurred. They spoke to National Union’s

Naclerio file manager and his supervisor but neither called back

with the requested information.‘ Highlands’ supervisor also spoke

to the new City counsel, who said he believed he was on the case

because the City was an additional insured on the Naclerio

policy.’ In the absence of contrary indication from National

*The City appears to have represented itself for most of the litigation,

although lawyers employed by National Union answered for the City.

“Evidence showed that the two conferred and decided not to return Highlands’

calls. The supervisor felt that the OCP policy did not cover the accident, and was

concerned that revealing information about the OCP policy would breach a duty

to the City.

‘Testimony conflicted on this point. Highlands’ claims supervisor

remembered the lawyer making this Statement, but the lawyer did not remember

it.

A-4

Union, and wanting to act before the jury returned its. verdict,

Highlands settled the case on the assumption that Naclerio’s policy

was the only primary coverage available.

Highlands also pointed out that its file contained other

information about National Union’s coverage of the City. A report

prepared by Naclerio’s attorney indicated that the City was self-

insured. The file also contained a November 17, 1987 letter from

a National Union litigation manager indicating that "we do not

insure the City of New York."® While conceding that it did not

review its file before settling the case, Highlands argues that it

would still have needed clarification had it done so.

These facts provide an adequate foundation on which to

uphold the jury verdict. National Union correctly states that a line

of New York cases holds that a plaintiff’s reliance is not justifiable

when it has the means to find the truth on its own,’ as Highlands

*Testimony also conflicted about the meaning of this letter. Because the letter

only referenced National Union's Naclerio policy, it could be read as accurately

saying that the City was not insured under that policy. On the other hand, it

could be read as inaccurately stating that only the Naclerio policy was relevant

to the case, particularly since the letter suggested that the author had the power

to make decisions about the City’s defense and was thus aware of the OCP

policy.

"See Grumman Allied Indus., Inc. v. Rohr Indus., Inc., 748 F.2d 729, 737

(2d Cir. 1984) (buyer had unlimited access to seller's plants, personnel, and

documents); Marine Midland Bank v. Palm Beach Moorings, Inc., 403 N.Y .S.2d

15, 17 (N.Y. App. Div. 1978) (guarantor had “unlimited access to the relevant

financial records” before guaranteeing note).

A-5

did here for some time before trial.* Those cases, however,

involved arms’ length transactions between plaintiff and

defendant.’ The key is that here, as a primary carrier, National

Union owed Highlands the same fiduciary obligation it owed its

insureds.'° Under these circumstances, having told the defendants

of its confusion and its need for a quick answer, Highlands could

justifiably rely on them to clarify the situation."

National Union urges that Rotanelli v. Madden"? defines

the insured-insured relationship differently. Rotanelli dismissed a

claim against a representative of an insurance company for

‘Testimony indicated that data about insurance coverage was public

information available from the broker who sold the policy.

*See Leasco Corp. v. Taussig, 473 F.2d 777, 783 (2d Cir. 1972); Loag Island

Lighting Co. v. Transamerica Delaval, Inc., 646 F. Supp. 1442, 1452 (S.D.N.Y.

1986) (both holding that a plaintiff cannot sue for misrepresentaticns occurring

after the defendant has made truthful representations, in arms-length transactions).

"See Hartford Accident & Indemnity Co. v. Commercial Union Ins. Co. , 772

F. Supp. 741, 743 (E.D.N.Y. 1991), aff'd, 962 F.2d 1 (2d Cir. 1992) (table);

Hartford Accident & Indemnity Co. v. Michigan Mutual Ins. Co., 463 N.E.2d

608, 610 (N.Y. 1984); Zurich Ins. Co. v. State Farm Mut. Auto. Ins. Co., 524

N.Y.S.2d 202, 203 (N.Y. App. Div. 1988).

''See Brown v. Lockwood, 423 N.Y.S.2d 186, 193-94 (N.Y. App. Div. 1980)

(noting that "a fiduciary or confidential relationship warrant{s) the trusting party

to repose his confidence in the defendant"). See also Benson v. RMJ Securities

Corp., 683 F.Supp. 359, 377 (S.D.N.Y. 1988) (holding that “[rjeliance on the

representations of fiduciaries would certainly be reasonable"). See generally

United States v. Chestman, 947 F.2d 551, 568-69 (2d Cir. 1991), cert. denied,

112 S. Ct. 1759 (1992).

"569 N.Y.S.2d 187 (N.Y. App. Div. 1989).

A-6

negligently representing there was coverage, reasoning that an

insured is presumed to have read its policy." We read Rotanelli

as applying the presumption that a person understands the contracts

he executes. That presumption does not extend to contracts

executed by others and does not control this case.

The same analysis holds for negligent misrepresentation.

As this court has recently noted, it is not clear that justifiable

reliance is an element of negligent misrepresentation under New

York law.'* Whether it is, or whether New York employs a

more flexible analysis focusing on the relationship between the

parties, the standard is not more demanding than that for fraud, so

our finding on the fraud issue disposes of this one as well."

Ill.

National Union next attacks the jury’s finding of a breach

of fiduciary duty, arguing that no causal link connected any act by

National Union to the money Highlands paid. We note initially

that National Union enjoyed the benefit of an incorrect standard for

causation. The jury was told that the measure of damages for

"Jd. at 188.

“See Humble Oil & Ref. ;Co. v. Jaybert Esso Serv. Station, 294 N.Y.S.24

190, 192 (N.Y. App. Div. 1968) (cited by Rotanelli, 569 N.Y.S.2d at 188).

Thomas v. N.A. Chase Manhattan Bank, | F.3d 320, 327 (Sth Cir. 1993)

(citing White v. Guarente, 401 N.Y .S.2d 474, 478 (N.Y. 1977)).

"See id.

A-7

breach of fiduciary duty was the difference between the amount

Highlands paid in settlement and the amount they “would have

paid” absent a breach of fiduciary duty. Under New York law,

however, the question is not whether the plaintiff has shown but

for causation,’ but whether the plaintiff has satisfied a less

demanding "substantial factor” standard."*

Regardless, there is sufficient evidence to sustain the

verdict under either standard. When the case settled, the

bifurcated trial had just finished the liability phase. The jury had

announced, but not returned its verdict on liability. Highlands’

representative testified that if he had known about the OCP policy

at this point, he would have let the jury come back instead of

settling. The argument continues that the risk of verdict would

have been quite different with a second primary carrier at risk. If

the City’s share was large enough, Highlands’ excess policy would

be reached only at higher verdict levels or perhaps not at all.

There is little question but that the jury could have found the City

liable, and for the City’s own negligence. That is, Highlands

argues its exposure was much less than it thought--as a result of

defendants’ failure to disclose.

"Milbank, Tweed, Hadley & McCloy v. Boon, 13 F.3d 537, $43 (2d Cir.

1994); Northwestern Nat'l Ins. Co. v. Alberts, 769 F. Supp. 498, 506 (S.D.N.Y.

1991).

"“Diduck v. Kaszycki & Sons Contractors, Inc., 914 F.2d 270, 284 (2d Cir.

1992).

A-8

National Union also argues that if it had disclosed before

settlement, Highlands would still have paid the same amount of

money because Naclerio, Highlands’ insured, had a contractual

obligation to indemnify the City for the City’s losses. The

evidence showed that Naclerio’s obligation was limited to

indemnifying the City for its vicarious liability for Naclerio’s torts.

Ample testimony addressed the distinction between vicarious

liability and liability for the City’s own negligence in supervising

Naclerio, which fell outside Naclerio’s indemnity obligation.

IV.

National Union next makes several challenges to the jury

charge for the first time on appeal. In the context of Federal Rule

of Criminal Procedure 52(b), the Supreme Court has recently

announced that for an appellant in a criminal case to prevail with

a new argument on appeal, he must show: (1) that an error

occurred; (2) that the error was plain, which means clear or

obvious; (3) the plain error must affect substantial rights; and (4)

not correcting the error would "seriously affect the fairness,

integrity or public reputation of judicial proceedings."'® Federal

Rule of Civil Procedure 51” is even more restrictive than

"United States v. Olano, 113 S.Ct. 1770, 1779 (1993).

"Federal Rule of Civil Procedure 51 states: “No party may assign as error

the giving or the failure to give an instruction unless that party objects thereto

before the jury retires to consider its verdict, stating distinctly the matter objected

to and the grounds of the objection.”

A-9

Criminal Rule 52(b);”' indeed, one circuit holds that it allows no

new attacks on instructions on appeal.” We thus agree with the

Sixth Circuit that "{t}he principles and decision enunciated in

Olano apply a fortiori in the civil context where courts pay less

Strict attention to procedural protocol.“ Olano augments this

court's longstanding rule that reversal for plain error is "not a run-

of-the-mill remedy" and will occur "only in exceptional

circumstances to avoid a miscarriage of justice."™

Olano’s requirement of an “obvious” error is stringent.

The Court said that “at a minimum" an alleged error must be

"clear under current law."% United States y. Frady,* an

opinion cited by Olano, required error so clear that "the trial judge

and prosecutor were derelict in countenancing it, even absent the

"Federal Rule of Criminal Procedure 52(b) states: “Plain errors or defects

affecting substantial rights may be noticed although they were not brought to the

attention of the court."

2Hammer v. Gross, 932 F.2d 842, 847 (9th Cir.) (declining to recognize a

plain error exception in civil cases because of Rule 51's plain language), cert.

denied, 112 S. Ct. 582 (1991). The language of Rule 51 offers powerful support

for this view, but this panel is not free to adopt it. Olano pulls this circuit back

from its drift from Rule 51, but it did not free this panel to follow the 9th Circuit.

™Smith v. Gulf Oil Co., 995 F.2d 638, 646 (6th Cir. 1993).

“Peveto v. Sears, Roebuck & Co., 807 F.2d 486, 489 (Sth Cir. 1987).

113 S. Ct. at 1777.

456 U.S. 150 (1982).

‘A-10

defendant’s timely assistance in detecting it."” It is the unusual

case that will present such an error.

These claimed errors must meet all of the Olano elements.

They meet none of them. We discuss them only to give guidance

to the bar on what Olano requires, first observing that each are

subtle legal arguments and emphasize isolated portions of the

charge. There is nothing obvious about these errors so much co

that a contrary contention borders on the frivolous.

Few jury charges in cases of complexity will not yield

“error” if pored over, long after the fact in the quiet of the library

-- if such an enterprise is to be allowed. It is not. The reality is

that must such “errors” will be washed away if the trial court is

given a fair opportunity to consider them. In short, so long as the

trial judge gives counsel a fair opportunity to object, we will listen

to unobjected to rulings only in those handful of cases that can

meet the exacting requirements of plain error. Olano and Rule 51

do not interpose technical barriers or lay traps. These rules

vindicate powerful interests in orderliness and finality. They also

reflect the central order of the United States District Court. It is

not a way station or entry gate. Rather, trials are the heart of the

system. Trial, not appeal, is the main event. The rules we

enforce today tether these statements to reality.

"Id. at 163.

A-Il

National Union first argues that the instructions fail to say

that New York law requires proof of deceitful intent as an element

of a claim for breach of fiduciary duty. The case on which it

relies, Horn v. 440 E. 57th Co. ,™ does not support its argument.

Horn found that the elements of a claim under the Martin Act, a

New York securities law, paralleled the elements of negligent

misrepresentation and breach of fiduciary duty because "both these

causes of action omit the element of a deceitful intent." It went

on to dismiss the plaintiffs’ common law claims as preempted

because of their similarity to the statute, not because of any failure

of proof on the part of the plaintiffs” The correct statement of

New York law is that a plaintiff alleging a breach of fiduciary duty

can recover for loss “regardless of the existence of deceitful

intent. "?!

$47 N.Y.S.2d 1 (N.Y. App. Div. 1989).

Id. at 120.

"See id. See also id. at 4 (assuming that the Martin Act did not forbid the

defendants from making the representations on which the lawsuit focused).

National Union also cites Flickinger v. Harold C. Brown & Co., 947 F.2d 595

(2d Cir. 1991). Flickinger cites only Horn as authority for the proposition for

that breach of fiduciary duty claims under New York law require proof of

deceitful intent. Jd. at 599. As that is not Horn’s holding, we do not find

Flickinger persuasive.

"Eagle Tenants Corp. v. Fishbein, $82 N.Y.S.2d 218, 219(N.Y. App. Div.

1992). See also Brown v. Lockwood, 432 N.Y.S.2d 186, 193-94 (N.Y. App.

Div. 1980).

A-12

National Union next argues that part of the fiduciary duty

instruction presupposed National Union’s liability and invaded the

province of the jury. The contested part begins: "If you find that

defendants’ failure to provide Highlands with correct information

. ., your verdict will be for the plaintiff." The next sentence,

however, gives the jury an alternative, stating that "if the correct

information was provided to Highlands by defendants . . . or if

defendants acted in good faith and in the exercise of honest

discretion, you are to find for defendants." This instruction did

not have a plainly erroneous tendency to confuse or mislead the

jury.”

National Union finally complains that the fiduciary duty

instruction allowed the jury to award damages without finding

causation. The language it challenges reads: "If you find that

there was damage to Highlands, your verdict will be for Highlands

and in such an amount as you find to be actual pecuniary loss it

suffered, that is . . . the amount of money Highlands would have

paid had the defendants not breached their fiduciary duties to

Highlands.” The first sentence says that Highlands was damaged

if "the amount of money it paid . . . is greater than the amount of

money it would have paid if Highlands had been aware of the type

and amount of insurance available to the city of New York."

"Wells v. Hico Indep. School Dist., 736 F 2d 243, 250 (Sth Cir. 1984), cert.

dismissed, 473 U.S. 901 (1985).

A-13

Reading these two sentences in conjunction, we find no plain

error.” -

V.

During closing arguments, the Parties disagreed over

whether the jury should consider the OCP policy limits. The

district judge ruled that she would decide the OCP policy limits,

and would grant a new trial if the verdict was inconsistent with her

determination. She then instructed the jury to not determine the

OCP policy limits. After the jury returned its verdict, the judge

entered judgment without making a finding on policy limits.

National Union argues that the judgment should be reduced

to $500,000 because the judge made an error of law in interpreting

the contract. The argument is that this court should deem the

judge to have found a $3,000,000 policy limit, the only limit

Suggested by the evidence that is consistent with the $1,100,000

verdict.“ National Union then argues that the judge erred in

making this finding because the $3,000,000 limit lapsed when the

original contract term expired several days before the accident.

The correct limit at the time of the accident, contends National

Union, was $500,000, the limit in an endorsement the parties

"See id.

“FED. R. Civ. P. 49(a).

A-14

executed when they agreed to extend the life of the original

contract.

The flaw in National Union’s argument is that it does not

challenge the judge’s legal conclusion about the proper

interpretation of the contract, but rather challenges the judge’s

factual finding that the contract had two relevant endorsements

rather than one.’ Highlands points to a second endorsement,

which took effect a few days after the first, that maintained the

$3,000,000 policy limit for a short period that included the date of

the accident. The parties adopted this endorsement, Highlands

contends, because the City wanted to maintain $3,000,000 of

coverage while shifting $2,500,000 to a different carrier. When

the new carrier had difficulty preparing the policy on time,

Highlands contends that the City came back to National Union and

kept the original policy in force until the new one was ready.

National Union contends that this endorsement was not signed and

did not become part of the contract, while Highlands contends that

industry practice was to only sign one copy of the endorsement.

In other words, National Union attempts to challenge the judge’s

implicit factual finding that Highlands’ witnesses about the effect

of signatures were more credible and that the contract included the

second endorsement.

22 John Alan Appleman et al., Insurance Law & Practice § 12851 (1979 &

1993 Supp.).

A-15

iiieenieenteneenens itera

National Union waived this factual challenge. New York

law places the burden on an insurer to prove the existence of limits

on liability, and National Union pled policy limits as an

affirmative defense before the trial court. Despite having and

recognizing this burden, National Union did not ask for an

instruction on this defense, waiving its right to complain that the

jury was not guided on it.” We will not now let National Union

complain that the judge accepted the jury’s verdict, when the jury

could not have considered the argument with which National Union

now attacks the verdict. Nor can National Union complain that the

judge denied it a jury trial on this factual issue, because it had

already waived that right. A judge is presumed to have made all

fact findings necessary in favor of its judgment entered or a Rule

49 verdict. A part cannot complain that the fact issue ought to

have gone to the jury unless it has requested their submission to

the jury.*8

VI.

National Union argues that the district court had no basis

for awarding $133,185.17 in attorneys fees to Highlands. The

“See Burroughs Wellcome Co. v. Commercial Union Ins. Co., 632 F. Supp.

1213, 1223 (S.D.N.Y. 1986); Emons Indus. v. Liberty Mut. Fire Ins. Co., 544

F. Supp. 185, 189 (S.D.N.Y. 1982).

"Pep. R. Civ. P. $}.

“PED. R. Civ. P. 49.

A-16

court held that New York law allows recovery of attorneys fees

when a suit seeks to overcome the consequences of fraud. Noting

that “there is clear evidence supporting the jury’s finding of

fraudulent misrepresentation," it awarded the plaintiff its attorneys

fees.

The district court erred. The New York rule is that

counsel fees are incidents of litigation which a prevailing party

may not collect unless an award is authorized by agreement

between the parties, statute, or court rule.”? No general exception

to the "American Rule” exists for common law fraud.” The

cases Highlands cite involve a statute allowing fee awards for

fraudulent property transfers to defraud creditors.*' Another says

that where a defendant’s fraud has caused a plaintiff to spend

money defending other lawsuits, those legal expenses are

compensable as damages.“ None establish a general rule

allowing recovery of fees for common law fraud.

AFFIRMED IN PART AND REVERSED IN PART.

*Cross v. Zyburo, 587 N.Y.S.2d 670, 672 (N.Y.App. Div. 1992).

See id. See also 60 N.Y. Jur. 2d, Fraud and Deceit § 244 (1992) ("The

general rule that, in actions for torts, counsel fees and other expenses in

conducting the suit cannot be taken into consideration in assessing damages,

' applies to actions for fraud and deceit.").

“Fred v. Grabowsky, 552 N.Y.S.2d 415, 416 (N.Y. App. Div. 1990);

Bagnall v. Dahajorn, Inc., 452 N.Y .S.2d 658, 659 (N.Y. App. Div. 1982) (both

applying N.Y. Debt. & Cred. Law § 276-a).

“ Penn-Ohio Steel Corp. v. Allis-Chalmers Mfg. Co., 184. N.Y.S.2d 58 (N.Y.

App. Div. 1959).

A-17

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 92-2933

HIGHLANDS INSURANCE COMPANY,

Plaintiff-Appellee,

versus

NATIONAL UNION FIRE INSURANCE

COMPANY OF PITTSBURGH, ET AL.,

Defendants- Appellants.

Appeals from the United States District Court for the

Southern District of Texas

ON PETITION FOR REHEARING

( August 19, 1994 )

Before GOLDBERG, HIGGINBOTHAM and EMILIO M.

GARZA, Circuit Judges

PER CURIAM:

IT IS ORDERED that the petition for rehearing

filed in the above case is denied.

ENTERED FOR THE COURT:

PATRICK E. HIGGINBOTHAM

UNITED STATES CIRCUIT JUDGE

IN THE UNITED STATES DISTRICT COURT

FOR THE SOUTHERN DISTRICT OF TEXAS

HOUSTON DIVISION

HIGHLANDS INSURANCE

COMPANY

Plaintiff,

§

§

§

3

vs. §

§ CIVIL ACTION

NATIONAL UNION FIRE § NO. H-90-2959

INSURANCE COMPANY §

OF PITTSBURGH, §

PENNSYLVANIA; §

AMERICAN INTER- §

NATIONAL GROUP, INC. §

and AMERICAN INTER- §

NATIONAL ADJUSTMENT §

COMPANY,INC. §

Defendants. §

AMENDED JUDGMENT

On the 25th day of August, 1992, came on for

consideration the Plaintiff's Motion and Brief for Amended

Judgment. The Court, after considering said Motion and Brief, the

verdict of the Jury, including evidence on file in this case, is of the

opinion and finds that an Amended Judgment should be entered for

the Plaintiff, as follows:

1. Plaintiff should be awarded damages in the amount

of $1,100,000;

a Plaintiff should be awarded prejudgment interest on

those damages in the amount of $285,361.61; calculated at the rate

of 9% simple interest on the sum of $500,000 from the date that

sum was paid, April 21, 1989; and an additional 9% on the

amount of $600,000, from the date that amount was paid, January

30, 1990;

3. Postjudgment interest at the rate of 9% per annum,

simple interest; and,

4. Costs of Court expended.

For the above sums, let execution issue if the same be not

timely paid.

SIGNED this 25th day of August, 1992, at Houston, Texas.

U.S. DISTRICT JUDGE

C-2

IN THE UNITED STATES DISTRICT COURT

FOR THE SOUTHERN DISTRICT OF TEXAS

HOUSTON DIVISION

HIGHLANDS INSURANCE

COMPANY

Plaintiff,

vs.

CIVIL ACTION

NATIONAL UNION FIRE NO. H-90-2959

INSURANCE COMPANY

OF PITTSBURGH,

PENNSYLVANIA;

AMERICAN INTER-

NATIONAL GROUP, INC.

and AMERICAN INTER-

NATIONAL ADJUSTMENT

COMPANY,INC.

§

§

§

§

§

§

3

8

§

§

8

§

8

§

§

Defendants. §

ORDER

Pending before the Court in the above referenced cause in

which New York law controls is prevailing Plaintiff Highlands

Insurance Company’s motion for Court to award attorney’s fees

(instrument #89). At a hearing on October 30, 1992 counsel

stipulated that while the right to recover fees, costs, and expenses

under New York law was contested, if the Court determined that

these were recoverable, the parties agreed that the amounts set

D-|

forth in Plaintiff's application were correct, necessary, and

reasonable. Specifically Plaintiff requests the following:

i Legal fees $123,500.00

2. Expenses 26,587.15

3. Expert fees 38,710.05

4. N.Y. counsel fees 9,685.17

5.__Deposition costs __ 5,967.92

TOTAL $204,450.29

After reviewing the record and the applicable law, the Court

concludes that the motion should be granted.

The American rule regarding fee shifting is that absent a

contractual or statutory provision to the contrary, each party to a

suit pays its own attorney’s fees and costs. See Alyeska Pipeline

ite Co. v. Wilderness Society, 421 U.S. 240, 245, 247 (1975);

A.P. Ship Maintenance Corp. v. Lezak, 511 N.Y.S.2d 216, 218

(N.Y. 1986). Plaintiff argues that New York recognizes two

exceptions, both applicable here, to the rule: (1) when the

opponent acts in bad faith, especially where there is an obligation

(0 pay money, and continues to deny and conceal after its

misconduct has been exposed, and (2) when the suit is to overcome

D-2

the consequences of fraud. In support of the first exception

Plaintiff cites Sierra Club v. United Army Corp. of Engineers, 590

F. Supp. 1509 (S.D.N.Y. 1980), Republic of Cape Verde v. A&A

Partners, 89 F.R.D. 14, 19 (S.D.N.Y. 1980), and White v. Blue

Cross & Blue Shield of Greater New York, 549 N.Y.S.2d 598

(N.Y. Sup. Ct. 1989). For the fraud exception Plaintiff refers the

Court to Gantell v. Friedman, 197 N.Y.S.2d 605 (N.Y. Sup. Ct.

1959), Fread v. Grabowski, 159 A.D.2d 550, 552 N.Y.S.2d 415

(N.Y. App. Div. 1990), and Bagnall v. Daharjon, Inc., 89

A.D.2d 612, 452 N.¥.S. 2d 658 (N.Y. App. Div. 1982).°

Plaintiff argues that the jury found Defendants’ conduct in

breaching its fiduciary duty and wrongfully denying its claim and

in concealing information about an insurance policy and the type

and amount of its coverage available to the City of New York to

be in bad faith and to constitute common law fraud.

“© Although copies of additional cases were submitted by Defendants at the

hearing, they were inapplicable to the situation here because the fee awards were

based on statutes or rules or on common-law exceptions not relied upon by

Plaintiff. One pertained to frivolous appeals. Accordingly the Court finds that

they were not on point.

D-3

Referring to the Plaintiff's first three authorities,

Defendants National Union Fire Insurance Company of Pittsburgh,

Pennsylvania, American International Group, Inc., and American

International Adjustment Company, Inc. contend that Plaintiff has

misconstrued the bad faith exception, which applies only to a claim

entirely without color and wantonly or vexatiously asserted for

harassment, delay, or other oppressive purposes. Defendants insist

such is not true of their defenses in this suit. They further urge

that the fraud exception requires a simultaneous claim for punitive

damages. At the hearing Defendants challenged recovery of expert

fees as costs under New York law, but provided no authority for

their stance.

Plaintiff responds that it is not seeking fees based on

Defendants’ conduct of this litigation but for their denial of claims

and their coverups prior to litigation, as supported by Sierra Club

and Cape Verde. Furthermore Defendants cite no authority for the

proposition that the failure to request one type of relief, here

punitive damages, when multiple kinds of relief are available,

D-4

precludes an award of attorney’s fees. In White, Plaintiff argues,

the Court determined that the defendants’ fraudulent conduct

warranted an award of both attorney’s fees and punitive damages.

After reviewing the law cited in Plaintiff's brief, the Court

concludes that an award of fees and costs is appropriate here on

the basis of the fraud exception to the American rule.

Sierra Club and Cape Verde make clear that the bad faith

exception applies to prelitigation, willful misconduct in the face of

a plaintiff's obvious rights, as well as to that during pendency of

a suit. 590 F. Supp. at 1513; 89 F.R.D. at 20-21. Moreover the

Court concurs with the jury’s finding of bad faith conduct by

Defendants, which imposed on Plaintiff, despite its clear rights, the

expenditure of time and money in this litigation. However, New

York requires that there be clear evidence that Defendants’

defenses are "entirely without color,” as well as that they be made

for reasons of harassment, delay or other improper purpose.

Sierra Club, 590 F. Supp. at 1514, citing Browning Debenture

Holders’ Committee v. DASA Corp., 560 F.2d 1078, 1088 (2d Cir.

D-5

1977). "A claim is colorable, for the purpose of the bad faith

exception, when it has some legal and factual support, considered

in light of the reasonable beliefs of the individual making the

claim." Sierra Club, 590 F. Supp. at 1514. Because these

defenses might well have constituted the reason for prelitigation

denial of Plaintiff's claim, this test should be applicable. No

motion for summary judgment was filed by Plaintiff in this action,

nor was there a directed verdict. This Court is hesitant to find that

the defenses were entirely without color.

However, there is clear evidence Supporting the jury’s

finding of fraudulent misrepresentation warranting an award of

legal expenses. See Gantell, 197 N.Y.S. 2d 605; Fread, 552

N.Y.S.2d 415. The Court reads White, 549 N.Y.S. 598, as

permitting recovery for attorney’s fees in a breach of contract suit

for public policy reasons when punitive damages are sought for

morally reprehensible conduct directed toward the public, rather

than merely a private injury. Significantly, the White court

characterized the fees as a part of the punitive damages rather than

as a separate award. 7d. It did not hold that a plaintiff must seek

punitive damages as the sole means of obtaining legal expenses

from the opponent. -

Neither side has provided any authority on whether expert

fees are included within costs in any insurance claim case rooted

in the common law. The Court’s own research leads it to conclude

that the general rule barring taxation of expert witness fees beyond

ordinary witness fees should apply here. Allied Chemical Corp. v.

Town of Geddes, 386 N.Y.S.2d 810, 813-14 (N.Y. Sup. Ct.

1976). Accordingly, Plaintiff needs to make adjustments to its

request in this category.

Conditioned upon the above modification, the Court

ORDERS that Plaintiff's motion to award attorney’s fees

is GRANTED.

SIGNED this 11th day of November, 1992 at Houston, Texas.

MELINDA HARMON

UNITED STATES DISTRICT COURT

D-7

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