541 F.3d 512 (3rd Cir. 2008), 06-2209, Thabault v. Chait

Docket Nº:06-2209.
Citation:541 F.3d 512
Party Name:Paulette J. THABAULT [*], as Receiver of Ambassador Insurance Company v. Doris June CHAIT, as Representative of the Estate of Arnold Chait; PriceWaterhouseCoopers LLP PriceWaterhouseCoopers LLP, Appellant.
Case Date:September 09, 2008
Court:United States Courts of Appeals, Court of Appeals for the Third Circuit

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541 F.3d 512 (3rd Cir. 2008)

Paulette J. THABAULT [*], as Receiver of Ambassador Insurance Company


Doris June CHAIT, as Representative of the Estate of Arnold Chait; PriceWaterhouseCoopers LLP

PriceWaterhouseCoopers LLP, Appellant.

No. 06-2209.

United States Court of Appeals, Third Circuit

September 9, 2008

Argued Sept. 11, 2007.

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Richard B. Whitney, Esq. [Argued], Tracy K. Stratford, Jones Day, Cleveland, OH, Robert J. Stickles, Esq., Buchanan Ingersoll & Rooney, Newark, NJ, Fordham E. Huffman, Esq., Jones Day, Columbus, OH, for Appellee.

Evan R. Chesler, Esq. [Argued], Antony L. Ryan, Cravath, Swaine & Moore, New York, NY, Jay K. Wright, Esq., Andrew T. Karron, Matthew A. Eisenstein, Arnold & Porter, Washington, DC, for Appellant.

Kevin McNulty, Esq., Gibbons, Newark, NJ, Amicus Curiae for the Court.

Before: SCIRICA, Chief Judge, RENDELL and FUENTES, Circuit Judges.


FUENTES, Circuit Judge.

For over 20 years, the Insurance Commissioner for the State of Vermont (the “Commissioner" ) has served as receiver of Ambassador Insurance Company (“Ambassador" or “the company" ) and sought to recover damages for claims paid on insurance policies following the company's downward spiral and ultimate collapse.1 In 1985, the Commissioner brought a professional malpractice claim against Coopers & Lybrand (“Coopers" ), on behalf of the company, alleging that Coopers failed to disclose the insolvency of Ambassador following their 1981 and 1982 audit and

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negligently issued unqualified and favorable audit opinions with knowledge that the financial statements were untrue and materially understated the company's loss reserves. At trial in the United States District Court for the District of New Jersey, the Commissioner presented a traditional malpractice claim and proved to the jury that but for Coopers's negligence, Ambassador would not have continued to write insurance policies, which resulted in its ultimate failure. At the close of a nine-week trial, the jury awarded the State of Vermont $119.9 million in damages. The judgment reached $182.9 million after the District Court added prejudgment interest. PriceWaterhouseCoopers (“PwC" ), the successor in interest to Coopers, appeals the jury verdict. We will affirm the jury's verdict in its entirety.

I. Factual Background

Ambassador was an insurance company incorporated in Vermont, with its principal place of business in North Bergen, New Jersey. Arnold Chait (“Chait" ) founded Ambassador in 1965 and served as the company's president and chief executive officer. Ambassador was a surplus lines insurance company, which insured high-risk businesses and individuals who were unable to get insurance from other companies at standard rates. In 1971, Chait formed a holding company to raise capital for Ambassador named Ambassador Group. Chait and his wife, Doris Chait, owned approximately 65% of the Ambassador Group stock; the remainder was publicly held.

By virtue of its Vermont domicile, Ambassador was regulated by the Vermont Department of Banking and Insurance (the “Insurance Department" ). According to Vermont statute, Ambassador was required to file an annual financial statement with the Insurance Department (“annual Vermont statement" ) each year by March 15th. The applicable statute required the annual Vermont statement to be “verified by oath of two of its executive officers," but did not require that the statement be audited. See Vt. Stat. Ann. tit. 8, § 3561 (1984). The statute also authorized periodic on-site examinations by the Insurance Department examiners. Id. § 3563.

Ambassador was also required to file an annual financial statement with the Securities and Exchange Commission (“annual SEC statement" ). Unlike the annual Vermont statement, the annual SEC statement had to be audited. To audit the Ambassador Group's annual SEC statements that were filed between 1979 and 1982, Ambassador retained Coopers. Coopers did not audit the annual Vermont statements that Ambassador filed with the Insurance Department; however these statements incorporated Coopers's loss reserves calculations from the audited annual SEC statements.

From January to May 1981, two Vermont state examiners conducted an on-site examination of Ambassador's annual Vermont statements for the five-year period ending December 31, 1979, and detected no significant problems. In particular, the Vermont state examiners concluded that Ambassador's loss reserves reported in 1979 were adequate. The first downturn in Ambassador's financial strength was reflected in its 1981 annual SEC statement, which showed an underwriting loss. Thereafter, in February 1982, Ambassador Group's stock price dropped by almost half. Ambassador Group's 1982 annual SEC statement recorded an overall loss and showed a drop in its “surplus." 2 In

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April 1983, Ambassador also failed seven of the National Association of Insurance Commissioners's early warning tests that the Insurance Department used to monitor insurers' financial condition.

Following this downturn, in March 1983, the Insurance Department retained Kramer Capital Consultants (“Kramer" ), an independent financial consulting firm for insurance companies and regulators, to conduct a special examination of Ambassador, including its loss reserves. Kramer, relying on Coopers's audited annual SEC statements, concluded that there were no material deficiencies in Ambassador's reported loss reserves and that it was solvent. Nonetheless, it reported that Ambassador's “financial condition has materially deteriorated, and the [c]ompany may be deemed to be operating in a hazardous financial condition." (App.2038.) In light of this report, the Insurance Department presented Chait with a plan requiring Ambassador to halt its growth by reducing premium volumes by 30%. Chait accepted the plan but he failed to abide by it and continued to increase Ambassador's premium volumes. In September 1983, the Insurance Department ordered Ambassador to cease payment of dividends and ordered Kramer to resume its on-site examination.

Within two months, Kramer issued a report concluding that Ambassador was $3 million insolvent.3 Immediately, the Insurance Department filed a complaint against Ambassador in Vermont state court, seeking to enjoin Ambassador from conducting further business and to have the Commissioner appointed as receiver. Based on its conclusion that “it is unsafe and inexpedient for Ambassador to continue business," the state court appointed the Commissioner as Ambassador's receiver. (App.1789.) In 1984, the Commissioner concluded that Ambassador could not be successfully rehabilitated and, accordingly, obtained an order of liquidation.

In May 1985, the Commissioner filed this action in the United States District Court for the District of New Jersey. The complaint alleged, among other things, negligent mismanagement and misfeasance, breach of fiduciary duty, fraud and negligent misrepresentation against Arnold and Doris Chait and Richard Tafro, Ambassador's former vice president of finance. Relevant here, the complaint also asserted a cause of action for negligent auditing practices against Coopers.

In his claim against Coopers, the Commissioner alleged that Coopers was negligent in its audit of Ambassador's 1981 and 1982 financial statements.4 Specifically, the Commissioner claimed that as a result of its audit of Ambassador Group and its subsidiaries, Coopers either knew or should have known in early 1982 that Ambassador was only marginally solvent and should not have continued writing new insurance policies. He further alleged that if Coopers had issued the adverse audit opinion that it should have the regulators could have acted to protect Ambassador and its policyholders, claimants and creditors.

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In November 1997, following Chait's death, the Estate of Arnold Chait (the “Estate" ) was substituted as a defendant in the Commissioner's action. Coopers, a national accounting firm, subsequently merged with PriceWaterhouse to form PriceWaterhouseCoopers (“PwC" ) in 1998.5 In the years that followed, PwC filed numerous motions, seeking, among other things, summary judgment and separate trials for the Commissioner's claims against PwC and the Estate. All the motions were denied. Approximately six weeks before trial, the District Court, sua sponte, entered default against Chait's estate, pursuant to Federal Rule of Civil Procedure 55(a), for failure to comply with a Court order to seek replacement counsel or notify the Court of its intentions with regard to the litigation. The case against the Estate and PwC then proceeded to trial.6

At the close of the evidence, the District Court sua sponte entered a default judgment against the Estate, pursuant to Federal Rule of Civil Procedure 55(b)(2), removing the Estate's liability as an issue for the jury, requiring the jury to only consider Chait's percentage of fault, and instructed the jury accordingly. After deliberating for less than two days, the jury reached a verdict against PwC and the Estate and awarded total damages of $119.9 million to the Commissioner. The jury apportioned 60% of the fault to Chait and the remaining 40% to PwC. Following the jury verdict, the District Court added $63 million in prejudgment interest to the jury's damages award, raising the total liability to $182.9 million. Because PwC was deemed jointly and severally liable under New Jersey's then-applicable law, PwC was liable for the entire $182.9 million judgment. PwC now appeals the District Court's final judgment. 7

On appeal, PwC argues that the District Court erred (1) in not entering judgment for PwC as...

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