Dawson v. New York Life Ins. Co.

• Decision Date: 18 March 1998
• Docket Number: No. 96-4226,96-4226
• Citation: 135 F.3d 1158
• Parties: 13 IER Cases 1212 Ronald D. DAWSON, Plaintiff-Appellee, v. NEW YORK LIFE INSURANCE COMPANY and NYLIFE Securities, Inc., Defendants-Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1158

135 F.3d 1158

13 IER Cases 1212

Ronald D. DAWSON, Plaintiff-Appellee, v. NEW YORK LIFE INSURANCE COMPANY and NYLIFE Securities, Inc. Defendants-Appellants.

No. 96-4226.

United States Court of Appeals Seventh Circuit.

Argued Sept. 22, 1997.

Decided Feb. 6, 1998.

Rehearing and Suggestion for Rehearing En Banc Denied March 18, 1998.

Thomas P. Sullivan (argued), Russell J. Hoover, Thomas S. O'Neill, Jenner & Block, Chicago, IL, Sherwin H. Leff, Leff, Cohen & Rosenberg, Ltd., Chicago, IL, for Plaintiff-Appellee.

James R. Thompson (argued), Dan K. Webb, Lawrence R. Desideri, Winston & Strawn, Chicago, IL, James A. Klenk, Sonnenschein, Nath & Trosenthal, Chicago, IL, Edwin G. Schallert, Debevoise & Plimpton, New York City, for Defendants-Appellants.

Philip C. Stahl, Christopher B. Wilson, Lisa L. Ash, Grippo & Elden, Chicago, IL, for Amicus Curiae American Council of Life Insurance.

Stuart J. Kaswell, Securities Industry Association, Washington, DC, for Amicus Curiae Securities Industry Association.

T.G. Gallery, Washington, DC, for Amicus Curiae National Association of Securities Dealers, Incorporated.

Before CUDAHY, KANNE, and DIANE P. WOOD, Circuit Judges.

KANNE, Circuit Judge.

Ronald Dawson sued New York Life Insurance Company and NYLIFE Securities, Inc. (collectively "New York Life") for defamation resulting from statements made on forms New York Life filed with the National Association of Securities Dealers ("NASD") and oral statements New York Life officers made at a company meeting. The case proceeded to trial, and a jury awarded Dawson $1,300,000 in compensatory damages and $5,000,000 in punitive damages. New York Life appeals, questioning some of the jury instructions used and asserting immunity from defamation suits. Because certain jury instructions were erroneous, we reverse and remand for a new trial.

I. HISTORY

For a very detailed description of the facts leading up to this appeal, see the district court's thorough opinion on New York Life's motion for summary judgment. Dawson v. New York Life Ins. Co., 932 F.Supp. 1509 (N.D.Ill.1996). We recount the facts that are most relevant to this appeal.

Ronald Dawson started working as an insurance agent with New York Life in 1974. His excellent performance earned him several promotions until ultimately he became the General Manager of New York Life's branch office in Corpus Christi, Texas. He continued to please his supervisors who showered him with recognition, financial rewards, and additional responsibility. He ascended through the company until he left the Corpus Christi office in September 1989 to head the Oak Brook, Illinois office.

In March 1989, Ramiro and Lamar Hernandez came into $333,000 and decided to purchase life insurance and an annuity from New York Life in Corpus Christi. Unfortunately, they met an unsavory character there. Oscar Herrera, an insurance agent in the Corpus Christi office, altered the Hernandezes' life insurance application by adding a zero to increase the value of the policy from $100,000 to $1,000,000, thereby substantially increasing Herrera's commission as well as the premiums due. Herrera falsified paperwork and signatures to withdraw money from the Hernandezes' annuity to pay the higher premiums.

In October 1990, Ramiro Hernandez died and Lamar asked for a withdrawal from her annuity to pay funeral expenses and her living expenses. Rather than tell Lamar that he had fraudulently depleted her annuity, Herrera forged paperwork to withdraw money from another customer's annuity and gave it to Lamar.

The game was up. Lamar discovered the fraud when she received a premium notice that showed the value of her policy at $1,000,000 rather than $100,000. Lamar sued New York Life and Herrera in Texas state court, and in 1993 she won $65,000 in compensatory damages and $15 million in punitive damages. Much of the testimony in that case indirectly implicated the management in the Corpus Christi office, including Dawson. Herrera testified that "windowing" signatures (holding them up to a window and tracing them onto another piece of paper) was common and done with the knowledge of management. Herrera also testified that management was aware of and encouraged agents to convert policies, reassuring agents that if they were caught they could simply apologize for a clerical error and restore the customer's policies. Other agents testified that management had a loose attitude towards fraud and deceitful practices. The only testimony that linked Dawson directly to fraudulent activity indicated that Dawson directed agents to share their commissions so underperforming agents could be eligible for some of New York Life's benefits and incentives.

The verdict in Corpus Christi reverberated in New York Life offices around the country. The home office intensely followed the trial. Immediately after the verdict, top New York Life officials met to decide on a national corporate response. First, they fired Dawson. Next, they prepared comments for the upcoming meeting of all New York Life office managers. At that meeting, New York Life's general counsel Alice Kane elaborated on "a pattern of unethical behavior in the Corpus Christi office." She referred to the previous management without naming Dawson. Other top officials from New York Life gave speeches or participated in panel discussions which similarly referred to unethical or illegal conduct in Corpus Christi without naming Dawson directly. Because of the publicity the case had received, the audience knew the officials were talking about Dawson. Parts of the managers' meeting speeches and presentations were videotaped and mailed around the country for training agents and employees. The videotape contained some remarks that referred indirectly to Dawson.

Immediately after firing Dawson, New York Life filed a required document with the NASD called a Form U-5. Any dealer in securities who is a member of the NASD must file a Form U-5 whenever a registered agent leaves the firm for any reason. In the space on the Form U-5 asking the reason for the termination, New York Life answered, "Failure to follow rules and procedures of New York Life Insurance Company. No securities involved." Shortly thereafter, New York Life received two demand letters from the lawyer who had tried the case in Texas for Lamar Hernandez. The letters alleged that agents in the Corpus Christi office had fraudulently converted his clients' term life insurance policies. After deciding that these letters constituted customer complaints, New York Life filed a first amended Form U-5 indicating that Dawson was the subject of a customer complaint. In the space on the accompanying Disclosure Reporting Page ("DRP-5") asking for the allegations against the agent, New York Life answered, "Allegedly condoned forgery of customer's name to pay $300 premium needed to convert term insurance policy to whole life and condoned other alleged forgeries. Allegedly informed person who committed the forgery in the Cruz matter that if detected they would not be reported to proper authorities." New York Life settled the two new customer complaints and amended Dawson's Form U-5 to reflect this fact. New York Life attached copies of the pleadings and settlement agreements to this second amended Form U-5. Simultaneously, New York Life filed a third amended Form U-5 to inform the NASD that yet another customer had filed a complaint in Texas state court against the Corpus Christi office arising out of agent Herrera's fraudulent behavior and Dawson's supervision.

On December 5, 1994, the NASD contacted Dawson and told him that they had investigated the circumstances described in the Forms U-5 (but not those in the last Form U-5 alleging more misconduct by Herrera and Dawson) and determined that they would not take any action against him.

Dawson sued New York Life in the Northern District of Illinois. His complaint alleged defamation based on the statements made on the Forms U-5 and accompanying Forms DRP-5, defamation based on New York Life officials' statements at the managers' meeting, defamation based on the republication by videotape, and intentional infliction of emotional distress. The case was tried to a jury for one month. The jury awarded no damages for defamation by videotape or intentional infliction of emotional distress. The jury awarded $200,000 for defamation based on the first amended Form U-5, $100,000 for defamation based on the second amended Form U-5, and $1,000,000 based on defamation at the managers' meeting. The jury also awarded $5,000,000 in punitive damages not attributable to any particular count. New York Life appeals to this Court.

II. ANALYSIS

New York Life raises several issues on appeal. We address three that dispose of this appeal completely. Before analyzing these questions, we will put them into context by giving an overview of the legal issues involved in this case.

In Illinois, a plaintiff can prevail on a defamation claim by showing that the defendant acted negligently in making the defamatory statement. See Kuwik v. Starmark Star Mktg. & Admin., Inc., 156 Ill.2d 16, 188 Ill.Dec. 765, 769, 619 N.E.2d 129, 133 (1993). However, in this case the district court decided as a matter of law that all of the statements at issue (the Forms U-5 and accompaniments and the managers' meeting statements) enjoy the protection of a qualified privilege. That is, so long as New York Life made these statements for legitimate reasons, Dawson had to prove that New York Life acted recklessly, not just negligently. See id. (adopting Restatement (Second) of Torts §§ 593-99). New York Life challenges the district court's decision that the statements were qualifiedly privileged, asserting instead that the statements enjoyed an absolute privilege.

To reflect its determination that all the statements at issue enjoyed a qualified privilege, the district court instructed the jury that Dawson could win only if he...