Bettius & Sanderson, P.C. v. National Union Fire Ins. Co. of Pittsburgh, Pa.

• Court: U.S. Court of Appeals — Fourth Circuit
• Writing for the Court: Before HALL and MURNAGHAN, Circuit Judges, and BUTZNER; BUTZNER; MURNAGHAN
• Citation: Bettius & Sanderson, P.C. v. National Union Fire Ins. Co. of Pittsburgh, Pa., 839 F.2d 1009 (4th Cir. 1988)
• Decision Date: 26 April 1988
• Docket Number: 87-3043,Nos. 87-3036,s. 87-3036
• Parties: , 24 Fed. R. Evid. Serv. 1031 BETTIUS & SANDERSON, P.C., Plaintiff-Appellant, v. NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA., Defendant-Appellee. BETTIUS & SANDERSON, P.C., Plaintiff-Appellee, v. NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA., Defendant-Appellant.

Page 1009

839 F.2d 1009

56 USLW 2485, 24 Fed. R. Evid. Serv. 1031

BETTIUS & SANDERSON, P.C., Plaintiff-Appellant, v. NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA.,

Defendant-Appellee.

BETTIUS & SANDERSON, P.C., Plaintiff-Appellee, v. NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA.,

Defendant-Appellant.

Nos. 87-3036, 87-3043.

United States Court of Appeals Fourth Circuit.

Argued Dec. 2, 1987.

Decided Feb. 17, 1988.

Rehearing and Rehearing En Banc Denied April 26, 1988.

Thomas Phillip Mains, Jr. (Mains & Nichols, Alexandria, Va., Wallace L. Duncan; Duncan, Weinberg & Miller, Washington, D.C., on brief), for plaintiff-appellant.

David P. Durbin (Paul D. Krause, Jayson L. Spiegel, Jordan, Coyne, Savits & Lopata, on brief), Larry Lee Simms (Theodore B. Olson, John A. Mintz, Gibson, Dunn & Crutcher, Washington, D.C., on brief), for defendant-appellee.

Before HALL and MURNAGHAN, Circuit Judges, and BUTZNER, Senior Circuit Judge.

BUTZNER, Senior Circuit Judge:

Bettius & Sanderson, P.C., (Bettius) appeals a judgment entered in favor of its professional liability insurer, National Union Fire Insurance Company. Its two primary assignments of error protest the district court's rulings that compensation paid to principals of a professional corporation is not evidence of corporate net profits, and, second, Virginia law does not authorize an insured to recover punitive damages from its insurance carrier for delaying, in bad faith, to settle a third-party claim. Because compensation paid to a professional corporation's principals is relevant evidence of a professional corporation's net profits, we vacate the judgment of the district court with respect to the claim for compensatory damages and remand the case for further proceedings. We affirm the judgment in favor of National Union on the issue of punitive damages. Other assignments of error and cross-error do not warrant reversal or modification of the district court's judgment.

I

Bettius was a professional corporation engaged in the practice of law in Northern Virginia until early 1986. National Union's lawyers' professional liability policy obligated it to "pay on behalf of [Bettius] all sums which [Bettius] shall become legally obligated to pay as damages because of any claim ... arising out of any act or omission of [Bettius] in rendering or failing to render professional services for others in [Bettius's] capacity as" lawyers. The policy excluded any claim arising out of any employee's fraud, but it waived the exclusion with respect to any insured who did not personally participate in the fraud. The policy provided coverage up to $2,000,000.

Russell Rosenberger, a principal in Bettius, undertook the registration and sale of a highrise condominium building in Alexandria, Virginia. In violation of the Virginia Condominium Act, he failed to file notice of changes in the public offering statements and to furnish information about the changes to purchasers of condominiums.

Twenty-seven purchasers brought suit in equity in a state court against Rosenberger, Bettius, the developer, and others, claiming fraud. Rosenberger notified National Union on behalf of Bettius, and National Union engaged an attorney to represent Rosenberger and Bettius in the litigation. On May 10, 1985, after a lengthy bench trial, the court found Rosenberger liable for fraudulently misleading the purchasers and Bettius vicariously liable. The court found that other principals of Bettius were not personally liable. On October 3, the court ordered Rosenberger, Bettius, and the other defendants to repurchase the units sold to the purchasers on November 29, 1985, and to relieve the purchasers of their mortgages in the amount of $1,400,000 and pay rescission damages of approximately $400,000.

National Union did not advance funds to Bettius or to the purchasers on or before November 29, 1985, the settlement date designated by the court. In the meantime, Bettius retained counsel to represent it in efforts to get National Union to either settle the claim or discharge the judgment.

The state court, after learning that Bettius and the other defendants had not complied with its order, found them to be in contempt, ordered them to pay all day-to-day costs incurred by the purchasers until its order was satisfied, and imposed a fine of $5000 per day, later increased to $10,000 per day, on each defendant for each day that each remained in contempt. Bettius's failure to satisfy the purchasers' claims and the sanctions imposed against it were reported by the press. The court also ordered execution on the judgment. Execution on all of Bettius's assets failed only because of a defect in the writ.

Bettius remained in contempt of court until January 13, 1986. On that date, National Union offered to contribute $400,000 toward settlement of the purchasers' claims. All of the parties agreed to this contribution and settled the claims. The court vacated the fines imposed on Bettius and the other defendants, and the litigation in state court came to an end.

Bettius filed the present action against National Union in the state court, and National Union removed it to the district court. Bettius alleged four claims against National Union: breach of contract, bad faith, fraud, and a violation of 18 U.S.C. Sec. 1961 et seq. (1980) (RICO). Bettius claimed, among other things, that because National Union failed to timely satisfy the purchasers' claims, Bettius received adverse publicity which caused it to lose clients and staff and eventually forced it to dissolve on February 1, 1986. It demanded both compensation for lost profits and punitive damages.

To prove damages, Bettius relied in part on a certified public accountant who testified about its gross receipts, some of its expenses, and the amount of compensation it paid to its principals. The accountant testified that Bettius's gross receipts declined dramatically after it received adverse publicity for failing to promptly satisfy the purchasers' claims and that as a result Bettius could not cover its expenses.

At the conclusion of Bettius's case National Union moved for a directed verdict on all counts. The court directed verdicts on the fraud and RICO claims. We find no error in these rulings. Bettius failed to prove the elements of a cause of action for these claims.

With respect to the contract and bad faith claims, National Union argued that the compensation that Bettius paid to its principals was an expense of Bettius and not its net profit because it was operating as a professional corporation, not a partnership. Viewed in this light, National Union contended, Bettius failed to prove damages because it did not present sufficient evidence of its net profit or of its expenses.

The court allowed the breach of contract and bad faith claims to go to the jury, ruling that Bettius had presented sufficient evidence of damages by introducing evidence of gross receipts, expenses, and compensation to principals. The jury returned a verdict for Bettius, awarding $2,000,000 in compensatory and $5,000,000 in punitive damages.

The court granted a motion by National Union for judgment notwithstanding the verdict on the bad faith claim and set aside the punitive damages award, characterizing Bettius's claims as grounded in contract, for which punitive damages are not recoverable under Virginia law. It denied National Union's motion for judgment notwithstanding the verdict on the compensatory damages award and instead ordered a new trial on the issue. The court found that National Union breached the insurance contract but concluded that Bettius failed to prove its damages. In reversing its earlier ruling, it held that on retrial evidence of compensation to Bettius's principals would be admitted only as an expense of Bettius and not as evidence of its net profit. Bettius then informed the district court that it believed a new trial would be pointless unless it could introduce evidence of compensation to its principals as proof that it was earning a profit. At Bettius's request, the court entered final judgment in favor of National Union on the breach of contract claim, and this appeal and cross-appeal followed.

II

Appellate review of an order for a new trial is limited. "It is well settled that 'the granting or refusing of a new trial is a matter resting in the sound discretion of the trial judge, and that his action thereon is not reviewable upon appeal, save in the most exceptional circumstances.' " Lindner v. Durham Hosiery Mills, Inc., 761 F.2d 162, 168 (4th Cir.1985). A party seeking to overturn a new trial order must make a clear showing that the district court abused its discretion. Wilhelm v. Blue Bell, Inc., 773 F.2d 1429, 1433 (4th Cir.1985). It is appropriate to grant this deference to the district court in most cases because the district court "has had the opportunity to observe the witnesses and to consider the evidence in the context of a living trial rather than upon a cold record...." Massey v. Gulf Oil Corp., 508 F.2d 92, 94 (5th Cir.1975).

Appellate review of the district court's order in this case is proper, however. Although the court believed the evidence was sufficient to warrant the jury's findings that National Union breached its contract, the court ordered a new trial on the breach of contract claim because it concluded that the compensation Bettius paid to its principals was an expense and not evidence of its net profit. Based on this reasoning it held that Bettius failed to prove its net profits and consequent damages for lost profits. The district court's order was based on a conclusion of law and not on factors, such as the credibility of witnesses, that ordinarily would preclude appellate review. Essentially, the court made a ruling on the admissibility of evidence--a legal conclusion that can be reviewed on appeal. "[W]hen the question on which the motion for a new trial is based is a question of law, the action of...