MCC Management of Naples, Inc. v. International Bancshares Corp. ( 2012 )

FILED
United States Court of Appeals
Tenth Circuit
January 5, 2012
UNITED STATES COURT OF APPEALS
Elisabeth A. Shumaker
Clerk of Court
TENTH CIRCUIT
MCC MANAGEMENT OF NAPLES,
INC., a Florida corporation; BGC II
MANAGEMENT OF NAPLES INC., a
Florida corporation; MILES C. No. 10-6283
COLLIER, individually; BARRON G. (D.C. No. 5:06-CV-01345-M)
COLLIER, II, individually, (W.D. Okla.)
Plaintiffs - Appellees,
v.
INTERNATIONAL BANCSHARES
CORPORATION, a Texas corporation;
INTERNATIONAL BANK OF
COMMERCE, a Texas corporation,
Defendant-Third-Party-Plaintiffs
- Appellants,
and
KRISTY CARVER,
Defendant-Third-Party-
Defendant - Appellee.
ORDER AND JUDGMENT *
Before KELLY, O’BRIEN, and MATHESON, Circuit Judges.
*
This order and judgment is not binding precedent, except under the
doctrines of law of the case, res judicata, and collateral estoppel. It may be cited,
however, for its persuasive value consistent with Fed. R. App. P. 32.1 and 10th
Cir. R. 32.1.
Defendant-Appellant International Bancshares Corporation (“IBC”) appeals
from the judgment of the district court, after trial, in favor of Plaintiff-Appellee
MCC Management of Naples (“Colliers”). The Colliers sued for breach of
contract and fraud in a dispute over tax benefits. We have jurisdiction under 28
U.S.C. § 1291 and we affirm.
Background
This is a contract and tort dispute over entitlement to $16 million in tax
benefits accruing over a period of years to an Oklahoma bank called Local. The
“benefits” at issue are tax deductions that reduce taxable income. On one side are
Miles and Barron Collier, brothers and investors, who owned Local at the time the
tax benefits arose; on the other is International Bancshares Corporation, which
now owns the bank. In 1988, Local began buying troubled loan assets. An
agency later absorbed into the FDIC guaranteed the value of the assets; in return
Local had to “share” some of its profits. When Congress repealed the deductions
Local claimed on losses from these assets, Local stopped its sharing payments and
sued in the Court of Federal Claims; the FDIC counterclaimed for non-payment.
Local’s potential liability in the FDIC suit—possibly as much as $20
million—made prospective purchasers of the bank wary. So when, in 1997, the
Townsend Group, a band of investors, purchased Local from the Colliers, the
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contract (or “Redemption Agreement”) required that the Colliers escrow $10
million of the $154 million purchase price on account of the FDIC liability.
Local already had a $12.7 million FDIC reserve. If the FDIC won more than the
combined $22.7 million, the Colliers had to indemnify Townsend/Local. The
contract was designed to allow Townsend to buy Local while carving out the
potential FDIC liability. In 1999, the parties signed a “Settlement Agreement” to
resolve certain post-closing disputes not relevant here. What is relevant,
however, are clauses in the contract that reaffirmed the terms of the Redemption
Agreement as they bore on the FDIC litigation.
In 2002, Local and the FDIC settled the suit for somewhere around $25-27
million. That same day, Townsend/Local and the Colliers signed a “Resolution
and Modification Agreement,” or RMA. This is the nub of the conflict. Two
things now happened. First, the parties signed an agreement whose effect they
dispute: IBC claims the RMA released any Collier claims on Local assets, which
Local takes to include the disputed tax benefits. The Colliers contend that the
agreement specifically carved out from supersession their interest in these tax
benefits. Second, in 2004, Local realized that by using a different method of
measurement it could claim about $7 million more in tax deductions than it
thought—the “Excess Basis Deduction,” which increases losses attributable to
already-written-down loans that are liquidated at less than book value. Local also
claimed a $7 million deduction on the principal payment made to the FDIC and
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some $140,000 in deductions for attorney’s fees. That year IBC bought Local and
inherited this dispute.
Finally, in 2006, as Local prepared for an audit of the Excess Basis
Deduction, Kristy Carver, Local’s “tax director,” abruptly quit over what she
believed was a bonus owed her for “discovering” the deduction. Instead she
began consulting for the Colliers and alerted them to the millions in deductions
that Local claimed. R. 15, 10891. A few months later the Colliers sued
IBC/Local for these amounts on a variety of fraud and contract theories.
IBC/Local counterclaimed against the Colliers, and added third-party claims
against Ms. Carver for breach of confidentiality and tortious interference with
contract.
The Colliers and Ms. Carver prevailed after a 17-day jury trial in March
2010. The jury found IBC liable for breach of contract. They also found that
Local not only failed to disburse the tax benefits, owed by contract to the
Colliers, but concealed from the Colliers that the deductions had been taken. IBC
was found liable for breach of the duty of good faith and fair dealing, breach of
fiduciary duty, non-disclosure, false representation, constructive fraud, and
negligent misrepresentation. The jury awarded $15.8 million in compensatory
damages and $1.4 million in punitive damages. The district court added $4.3
million in prejudgment interest. The final recovery was $21.6 million.
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Discussion
IBC contends that it was entitled to judgment as a matter of law or, in the
alternative, a new trial. Denial of a Rule 50 motion is reviewed de novo, but IBC
must prove that the evidence and its inferences (viewed in the light most
favorable to its opponents) points but one way, i.e., in its favor. Rocky Mountain
Christian Church v. Bd. of Cnty. Comm’rs, 613 F.3d 1229, 1235 (10th Cir. 2010).
Denial of a motion for a new trial is reviewed for abuse of discretion. Minshall v.
McGraw Hill Broad. Co., Inc., 323 F.3d 1273, 1283 (10th Cir. 2003). This court
will reverse the denial of a motion for a new trial “only if the trial court made a
clear error of judgment or exceeded the bounds of permissible choice in the
circumstances.” Id. We address the issues raised in turn.
A. Did the 2002 RMA supersede or waive the Colliers’ entitlement to the tax
benefits?
This is the central dispute. IBC argues that the 2002 RMA terminated any
Collier claims and that the district court erred in deeming its provisions
ambiguous, obligating a jury to sort out the arrangement. It points to paragraph 3
of the RMA as expressing the crucial terms. The Colliers claim that the contract
did not release their claims, and, in any event, it was a good-faith dispute
resolved by the jury. They look to Section 4 of the 2002 RMA, which refers to
Section 7 of the 1999 Settlement Agreement, which in turn refers to the Collier’s
rights under Section 5.1 of the 1997 Redemption Agreement.
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Under Oklahoma law, the determination of whether a contract is ambiguous
is a question of law; but if the court determines that a contract is ambiguous, its
construction depends on extrinsic evidence and interpretation becomes a question
of fact. Pitco Prod. Co. v. Chaparral Energy, Inc., 63 P.3d 541, 545 (Okla. 2003).
Ambiguity exists when the contract is reasonably susceptible of more than one
construction, such that reasonable persons could honestly disagree as to the
meaning. Id. at 545-46.
We find language in the RMA stating that its terms supersede those of prior
agreements; we also find language that prevents such superseding effect, at least
with regard to liabilities in the FDIC suit. The RMA, in Section 4 (headed “This
Agreement Supersedes the Redemption and Settlement Agreements”), states, in its
opening words, “Except for Section 7 of the Settlement Agreements which will
remain in full force and effect as originally stated....” Then, Section 7, for its
part, styled a “Mutual Release and Waiver of Claims,” purports to discharge both
sides from any claims—“except for any and all rights...with regard to...Section
5.1 of the Redemption Agreement...which [is] hereby expressly excepted from
this mutual release and waiver.” The last line in this paragraph repeats: “this
Mutual Release and waiver...shall not apply to the full performance and
enforcement of Section 5.1 of the Redemption Agreement.”
IBC disparages this interpretation as creating a sort of Jacob’s Ladder toy,
in which this section refers to this section which refers back to this section. But
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we find the Colliers’ explanation perfectly plausible, namely, that the purpose of
the drafting was to exclude from modification the terms covering the FDIC
claims. This makes sense because these claims—Local’s claim and the FDIC’s
counterclaim—were a potential liability of unknown amount. The three
agreements, read together, seem only to work to set aside the whole question.
Joseph Perkovich, who handled the sale of Local for the Colliers, testified that the
intent was to keep Local “financially neutral” in relation to the FDIC suit. R. 15,
10827-29. “It basically took the benefits and obligations right off the bank’s
financial statement and put them on the Colliers’ personal ledger.” R. 15, 10829.
Certainly the ambiguity is apparent enough for the district court to have submitted
to the jury the question of the parties’ intent. This court cannot set aside their
finding absent a conclusion, which we are unable to make, that it was
unreasonable for the jury to reject IBC’s interpretation.
B. Were the Colliers entitled to the benefit of the “Excess Basis Deduction”?
IBC claims the Excess Basis Deduction was purely an asset of the bank.
Unlike the deductions on the FDIC principal payment and the attorney’s fees, this
deduction required no expenditure by the Colliers. Moreover, IBC claims that the
provision, even if ambiguous, should have been construed against the Colliers,
who purportedly drafted it. Finally, it contends it was error to allow an attorney
tax expert, Mr. Scott Knutson, to testify on possible interpretations of the
contract, since it claims he simply dictated the Colliers’ interpretation to the jury.
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The Colliers, again, see a good-faith dispute and claim ample evidence exists to
show that Local received FDIC assistance on those assets from which the Excess
Basis Deduction derived. They also contend that Townsend lawyers were
involved in the drafting of the agreement and that their expert, approved after a
Daubert hearing, refrained from stating legal conclusions.
This court reviews de novo the question of contract ambiguity. As noted,
under the laws of Oklahoma, if reasonable, fair, and honest disagreement exists,
so does ambiguity. Pitco Prod. Co., 63 P.3d at 545-46. We agree that the district
court correctly concluded that the contract was ambiguous on this point. IBC’s
position—in essence, that through its own tax ingenuity it made more fruitful use
of the bank’s assets—is well taken, but we do not find the contracts or extrinsic
evidence dispositive so as to empower us to overturn the district court (on the
law) and the jury (on the facts). The Colliers can plausibly claim (though from
our reading of the record it is hardly self-evident) that the Excess Basis Deduction
was “related” to the FDIC litigation: the loans were “covered” under the FDIC
agreement and the losses occurred during Collier ownership (1988-1993); losses
allow deductions against income; the deductions therefore belonged to the
Colliers. They also show that the financial advantage of such a deduction could
have been claimed by the FDIC (had the agency known of it), under the “sharing”
agreement, and since the Colliers were answerable for the liabilities, so too could
they expect the benefits. See R. 15, 10829, 10833-34 (testimony of Joseph
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Perkovich); R. 16, 11241 (testimony of Kristy Carver).
We review a district court’s admission of expert testimony for abuse of
discretion. To reverse we must have a definite and firm conviction that the court
below “made a clear error of judgment or exceeded the bounds of permissible
choice in the circumstances.” Hollander v. Sandoz Pharma. Corp., 289 F.3d 1193,
1204 (10th Cir. 2002).
The “mystique” that IBC claims Mr. Knutson possessed before the jury, as
he discussed complex tax arrangements, is a concern with experts generally. A
leading case in this circuit is Specht v. Jensen, 853 F.2d 805 (10th Cir. 1988) (en
banc), where an attorney-expert, in a § 1983 suit alleging an illegal search, was
examined about a “hypothetical” that was identical to the actual facts. With an
“array of legal conclusions,” he “painstakingly developed over an entire day the
conclusion that defendants violated plaintiffs’ constitutional rights.” Id. at 808.
This court reversed and drew the following line: expert testimony under Rule 702
is proper “if the expert does not attempt to define the legal parameters within
which the jury must exercise its fact-finding function.” Id. at 809-10. The expert
can refer to the law in expressing his opinion, but he may not tell the jury what
legal standards must guide their verdict. Id.
Mr. Knutson did not overstep this line. He discussed the “common
methodology” that tax lawyers use interpreting phrases like the one at issue—“net
of any related tax benefits, in respect of the FDIC counterclaim”—and suggested
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three possible readings: “narrow,” “intermediate,” or “broad.” R. 16, 11659.
(Only the last would give all three deductions in dispute to the Colliers.) This
was helpful to a lay jury: intricate arrangements and technical tax jargon were
illuminated by his experience with FDIC-bank agreements and knowledge of
industry custom, tax law, and authorities in the field. Mr. Knutson never told the
jury what legal standards applied or which interpretation was correct as a matter
of law, but specifically disclaimed any attempt to interpret the contract for the
jury: “You need to bring to bear your own sort of reasons and based upon all of
the testimony that you have here as to how broad or how narrow you want to
interpret this phrase.” R. 16, 11687. He did testify that, in his opinion, it was
“reasonable to conclude” that the agreement was drafted in a “very broad
manner,” R. 16, 11682, a conclusion touching the heart of this dispute, but expert
opinion is not objectionable because it embraces an ultimate issue to be decided
by the trier of fact. Fed. R. Evid. 704(a). To justify exclusion we require
something more peremptory. Mr. Knutson set out his views in detail sufficient to
allow acceptance or rejection by the jury.
IBC calls him the “worst type of shill,” because he “developed litigation
theories for the Colliers” then testified as an “unbiased expert on them.” Aplt Br.
54. But a shill is a decoy hired to sell something while hiding his affiliations.
Oxford English Dictionary (2d ed. 1989 & online version 2011). Mr. Knutson
believed what he said. He also testified that he consulted but did not concoct
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legal theories, draft complaints, depose witnesses, or participate in any other
litigation activity. IBC’s authority is inapposite. In United States v. Tran Trong
Cuong, 18 F.3d 1132, 1143-44 (4th Cir. 1994), an expert relied on the report of
another expert who prepared it for the prosecution; Mr. Knutson wrote his own
report. This was also Mr. Knutson’s first appearance as an expert witness, yet
IBC points us to National Bank of Commerce v. Dow Chemical Co., 965 F. Supp.
1490 (E.D. Ark. 1996), which excluded a professional “advocate” whose
“litigation animus” was revealed in her participation in some 8,000 cases. Id. at
15163-1515. IBC is correct that this court often has reviewed admission of
attorney-experts. Zuchel v. City and County of Denver, Colo., 997 F.2d 730, 742
(10th Cir. 1993) (expert witness is less objectionable when his expertise is in
police tactics, not constitutional law). But this doesn’t exclude attorneys. In
United States v. Arutunoff, 1 F.3d 1112 (10th Cir. 1993), a securities-law
professor permissibly testified about “several aspects of securities law,” including
the meaning of statutory terms; but he “did not attempt to apply the law to the
facts of the case or otherwise tell the jury how the case should be decided.” Id. at
1118. The district court here did not abuse its discretion in permitting Mr.
Knutson to testify.
As for IBC’s argument that the contract must be construed against the
Colliers, we find that in Oklahoma the rule of contra proferentem applies only as
a matter of last resort, once the other common-law principles of construction
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(which Oklahoma at any rate has codified) are applied. Okla. Stat. tit. 15, § 170
(“In cases of uncertainty not removed by the preceding rules, the language of a
contract should be interpreted most strongly against the party who caused the
uncertainty to exist.”); Dismuke v. Cseh, 830 P.2d 188, 190 (Okla. 1992). In any
event, the jury was instructed that if it could not “decide the intention of the
parties” then it could “interpret the unclear terms in the contract most strongly
against the party responsible for the uncertainty.” Instruction No. 20, R. 5, 5531.
The jury’s decision has substantial support in the record; we sustain its verdict on
this issue.
C. Did the trial court err in denying IBC judgment as a matter of law on the
attorney’s fee deduction?
IBC claims the Colliers never paid attorney’s fees in the FDIC suit, nor did
the FDIC seek fees in its counterclaim; but instead that the fees were paid from
the Local-owned escrow account. The Colliers respond that because the escrow
account was created with Collier money (from proceeds received from their sale
of Local) and because they remained liable for all attorney’s fees, they are
entitled to tax benefits derived therefrom. On appeal IBC must show that all of
the evidence, viewed in the light most favorable to the Colliers, reveals no legally
sufficient evidentiary basis to find for them. Burrell v. Armijo, 603 F.3d 825, 832
(10th Cir. 2010). We find substantial evidence to establish that the Colliers are
entitled to this deduction. The Colliers may not in every instance have paid the
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lawyers challenging the FDIC directly, but those payments issued from an escrow
account created of their money. Even after the 2002 RMA, the Colliers paid
invoices for attorney’s fees sent by Local. R. 15, 10882-83 (testimony of Joseph
Perkovich).
D. Did Judge Steele’s opinion cause unfair prejudice to IBC?
In June 2007, the Colliers sued Arnold & Porter, the attorneys in the FDIC
suit, in federal district court in Florida alleging malpractice and conspiracy to
commit fraud. Early in the proceedings Arnold & Porter filed a Rule 12(f) motion
to strike allegations from the pleadings, claiming they were based on privileged
information that the Colliers received from Ms. Carver. In May 2009, the trial
judge (Judge Steele) denied the motion, ruling that the Colliers violated neither
ethical rules nor Local’s attorney-client privilege in receiving Ms. Carver’s
revelations. MCC Management of Naples, Inc. v. Arnold & Porter, LLP, Nos. 07-
cv-387, 07-cv-420, 2009 WL 1514423 at *25 (M.D. Fla. 2009). The use of that
order in this case was fiercely contested. IBC filed motions in limine to exclude
any reference to it. The district court decided to permit witnesses and counsel to
reference the opinion but to disallow them from quoting it or introducing it into
evidence. (IBC accepted the “language” of the instruction but did not believe it
“cure[d] the error.” R. 15, 10796.) IBC claims that judicial opinions are
uncommonly prejudicial under Rule 403; that reference to the order forced them
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to dispute the findings of a federal judge on the very facts at bar; that it was
impossible to explain to a jury that a Rule 12(f) motion concerns only the
pleadings’ permissibility, not their merit; and that the order was hearsay.
Both parties rely on Johnson v. Colt Industries Operating Corp., 797 F.2d
1530 (10th Cir. 1986). In that case, a products-liability suit against a gunmaker,
the plaintiff introduced a Missouri state-court decision to show that a Colt
executive knew that a dropped pistol could discharge. We held that the Missouri
opinion was improperly admitted as substantive evidence, since judicial opinions
present “obvious dangers”:
The most significant possible problem posed by the admission of a
judicial opinion is that the jury might be confused as to the proper
weight to give such evidence. It is possible that a jury might be
confused into believing that the opinion’s findings are somehow
binding in the case at bar. Put most extremely, the jury might
assume that the opinion is entitled to as much weight as the trial
court’s instructions since both emanate from courts.
Id. at 1534. We cautioned that a court decision should be admitted as substantive
evidence “only in the rarest of cases when no other form of evidence is available
and then only with detailed limiting instructions.” Id. Instead, the “typical and
preferable method of introducing such evidence is through the testimony of one
familiar with the similar accident or the subsequent litigation.” Id. at 1534 n. 4.
(Still, the error was harmless, as the evidence against Colt was overwhelming.)
By contrast, in United States v. Zimmerman, 943 F.2d 1204 (10th Cir. 1991), this
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court reversed the conviction of a lawyer after the district court allowed into
evidence statements by two bankruptcy judges essentially accusing him of
conspiring to hide money. The district court found them admissible under Rule
404, to show notice, but the circuit saw nothing less than judicial conclusions of
guilt as to the crime being tried. Id. at 1211.
The guiding principle, then, in admitting what we might call “judicial”
evidence is that, notwithstanding its special potency, it must be treated like any
other evidence. There is no bright-line rule against its admission. In evaluating
whether the district court’s Rule 403 balancing was an abuse of discretion, we
might consider: How aggressive was the use of the prejudicial evidence? Were
other means available to establish the claim or defense? What exactly was the
judicial finding? Was it a factual finding? Above all, the question is: did the
judicial representation prevent the jury from making its own, and perhaps
different, finding?
It is clear from the record that the Florida order was used by the Colliers
and Ms. Carver to undermine IBC’s allegation that she breached confidentiality
agreements with Local and interfered tortiously with Collier-Local arrangements.
Three witnesses for plaintiff were examined about the Florida order. According
to the first, Mr. Perkovich, “[t]he judge told us that the Colliers were entitled to
all information about the FDIC case and that the information about these tax
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deductions was not confidential as to the Colliers.” 1 Rawle 15, 10913; see also
11111. Ms. Carver said that “Judge Steele issued an order out of that court that
said that I didn’t do anything wrong, that the information wasn’t privileged or
confidential as to the Colliers.” 2 Rawle 16, 11467-68. Prof. Tom Morgan, an expert
witness for the Colliers, testified that the judge “said there was nothing wrong,
the information was not confidential with respect to the Colliers, it was not a
violation of the attorney-client privilege, it was not a violation of any duty of
confidentiality.” 3 Rawle 17, 11785-86. Clearly it was probative for the plaintiffs
(involving, as it did, the same people and facts) and potentially prejudicial to the
defendant.
This is a close question. We have reviewed the record provided as a whole
and conclude that the use of the order, as permitted by the district court, was not
an abuse of discretion. Precedents in which use of judicial opinions, remarks, or
findings constituted reversible error involved statements far more redolent of
1
The question from Colliers’ counsel was: “What, if anything, did Judge
Steele, in the Florida case, say concerning the issues that were presented to him?”
R. 15, 10912-13. Carver’s counsel later asked: “The Court’s ruling was, just in
summary, after hearing her testimony, it was what?” Id. at 11111. Perkovich
responded: “It was that the information pertaining to the tax deductions were
not—the information was not confidential as to the Colliers and we were entitled
to get that information from Kristy, or the bank.” Id.
2
The question from Carver’s counsel was: “What order was issued out of
the Florida Court on May 29, 2009?” R. 16, 11467.
3
The question from the Colliers’ counsel was: “What did the judge rule?”
R. 17, 11785.
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strong opinion, far more conclusory, and far more aggressively used. First, the
Colliers and Carver only referenced the opinion, through the testimony of those
present at the Florida hearing. The order itself was never admitted, which is the
crucial distinction from Johnson. We realize that parties could seek to introduce
prejudicial information by other means. For instance, in United States v. Sine,
493 F.3d 1021 (9th Cir. 2007), a prosecutor seeking to prove mail fraud was
disallowed from proffering the remarks of a federal judge, made in another
proceeding, that disparaged the defendant’s character (“chicanery, mendacity,
deceit, and pretense”). Yet he evaded the restriction by asking some 200
questions about it. Id. at 1028. That did not happen here. On direct examination,
Ms. Carver, over the course of a day-long examination, was asked fourteen
questions about the Florida order. R. 15, 11110-12, R. 16, 11467. Mr. Perkovich,
also on direct examination, over some 200 transcript pages, was asked twenty. R.
15, 10911. Prof. Morgan was asked fifteen. R. 17, 11784-87; 11842-43. IBC
cross-examined these witnesses and repeatedly emphasized the order’s
preliminary nature, see, e.g., R. 16, 11480-81, and the fact that only the conduct
of the Colliers, not Ms. Carver, was directly at issue in Florida. Nor did the
blameworthiness of Ms. Carver turn merely on Judge Steele’s findings. IBC was
able to suggest through witnesses and cross-examination that, among other things,
Ms. Carver violated confidentiality agreements, R. 16, 11403-05; that she had
mercenary motives in contacting the Colliers, R. 16, 11412; that she left Local in
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anger, R. 16, 11398-400; and that accounting practices mandate confidentiality,
R. 16, 11441.
Second, the Colliers and Ms. Carver used the opinion defensively, to rebut
an accusation of fraud. The district court was within its discretion in deciding
that a party, faced with allegations of tortious or malicious conduct, should not be
disabled from inquiring about highly probative evidence. IBC not only alleged
various torts but sought indemnity from Ms. Carver, meaning that IBC was
potentially seeking some $16 million from an individual. See Answer,
Counterclaim, and Third-Party Complaint of Defendants International Bancshares
Corporation, No. 06-cv-1345-M, Doc. 48.
Third, the ruling merely denied a motion to strike information from the
pleadings in the Florida suit. Unlike the judicial remarks in Zimmerman, it cast
no aspersions in any direction. It was a comprehensive 14,000-word opinion that
followed three days of testimony.
Fourth, the court read a jointly prepared limiting instruction when the
Florida order first arose at trial and, later, in its jury instructions. 4 We find that
4
The instruction during the trial was as follows:
Pertaining to the Florida litigation, you have heard or will hear
testimony and argument about a lawsuit by the Colliers against
the law firm of Arnold and Porter, including an order issued by
Judge Steele, the judge in the Florida case. You are instructed
that you are the ultimate finders of fact and the credibility of
witnesses in this case. I have already ruled in this case that
Judge Steele’s opinion is not binding on this Court. His
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the district court struck a permissible balance between the Colliers’ right to
probative evidence and IBC’s right to a fair trial. The fact that we might have
struck the balance in a different fashion is not the inquiry under an abuse-of-
discretion standard of review. We cannot say that the concern of Johnson—that a
jury might accept the Florida order as settling disputed facts in place of making
its own independent finding—was realized here.
IBC is right that judicial declarations are hearsay. Herrick v. Garvey, 298
F.3d 1184, 1191 (10th Cir. 2002). It claims the Florida order was “used
exclusively for the truth” of proving Local’s duty to disclose and the propriety of
the Carver-Collier collaboration. Aplt. Br. 61. The Colliers argue that the order
was only offered for the non-hearsay purpose of “rebut[ting]” IBC’s claim that
Carver and the Colliers acted in a “malicious” manner. Carver Br. 32.
Even if the order was hearsay, to overturn the jury verdict we must find
that the error affected the substantial rights of IBC. Fed.R.Civ.P. 61; Beacham v.
Lee-Norse, 714 F.2d 1010, 1014 (10th Cir. 1983). Wrongly admitted evidence is
fatally prejudicial only if “it can be reasonably concluded that with or without
such evidence, there would have been a contrary result.” Sanjuan v. IBP, Inc.,
opinion also is not binding on you. You may give it the
weight and significance, if any, you find it deserves. Further,
you are bound to apply the law as I instruct you at the end of
this case, regardless of any rulings made by Judge Steele in the
Florida case.
R. 15, 10979-80.
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160 F.3d 1291, 1296 (10th Cir. 1998) (internal quotation marks omitted). We
think any error would have been harmless. The Florida order supported Ms.
Carver’s contention that she and the Colliers acted properly, but it is by no means
the only such evidence. The order harmonized with Ms. Carver’s claim that she
acted properly, but she gave a personal account of her conduct. It was consistent
with Mr. Perkovich’s belief that the Colliers were entitled to her information, but
he had an independent understanding of why this was so, based on his dealings
with Local. It reflected Prof. Morgan’s opinion, but he detailed his own view
separately, drawing on his expertise. There was substantial evidence that Local
acted culpably and that the Colliers were contractually entitled to the information
IBC claims was confidential. The prejudicial effect was mitigated by IBC’s
persistent cross-examination emphasizing the limits of the opinion and by
testimony from Local witnesses suggesting Ms. Carver’s blameworthiness. As
noted, we cannot say that the persuasive force of the Florida order settled a fact
for the jury without its independent judgment. We reject Ms. Carver’s
contention, however, that by seeking attorney’s fees for time spent reviewing the
Florida order IBC “injected” the order into the case; her need to defend against a
claim of fees hardly requires introducing the substance of the order.
E. Is IBC entitled to judgment as a matter of law on the Colliers’ tort and
punitive damages claims?
IBC claims that it was error to permit the jury to award tort and punitive
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damages in a contract case without a showing of wrongful conduct independent of
the breach. They assert that they believed in good faith that the Colliers (1) were
never entitled to the Excess Basis Deduction and (2) released their claims to the
principal-payment deduction—the same good-faith beliefs, they observe, that
allowed the jury ultimately to find for the Colliers. They also claim that the
Colliers could have discovered the facts allegedly withheld through reasonable
diligence and the imputed knowledge of Arnold & Porter. They seek judgment as
a matter of law on the fraud, non-disclosure, constructive fraud, and negligent
misrepresentation claims. Finally, they deny any fiduciary relationship existed,
since everything was done at arm’s length and the Colliers had counsel, and
therefore claim the finding of fiduciary breach of duty requires a new trial.
In Oklahoma, damages for fraud, including punitive damages, may be
awarded in contract cases, so long as the breach amounts to an “independent,
willful tort.” Z.D. Howard Co. v. Cartwright, 537 P.2d 345, 347 (Okla. 1975).
We are persuaded that there was clear and convincing evidence upon which the
Colliers could prove fraud. Testimonial and documentary evidence supports a
finding that IBC received some $15 million in tax benefits, and concealed it,
despite contractual obligations to the contrary. See, e.g., Perkovich testimony, R.
15, 10904 (“I was upset.... [B]asically they pocketed this and have been holding it
for years and hiding it from us”); Carver testimony, R. 16, 11242 (reporting that
Local’s CEO told her that “I don’t want you working on anything that is going to
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benefit [the Colliers]”). Tom Dwyer, then an Arnold & Porter lawyer working on
the FDIC claims, testified for Local that the company’s CEO “made it clear to me
I wasn’t to disclose [Local’s deductions to the Colliers].” R. 18, 12344. There
was testimony that Local’s amended tax return was worded with a vagueness
suggestive of concealment. Ms. Carver, who helped draft the disclosure, testified
that it was “intentionally non-descriptive to prohibit the IRS, the FDIC, and the
Colliers from knowing what was happening.” R. 16, 11278; see also R. 16,
11256. The jury was entitled to find fraudulent misrepresentation in the decision
of Local’s CFO to keep silent about the deductions to Colliers and instructing Ms.
Carver and Mr. Dwyer to say nothing to the Colliers unless asked. Finally, it
bears mention that tortious wrongdoing was alleged on both sides in this dispute.
IBC is correct that the Oklahoma Supreme Court has held that “[a]ctionable
fraud consists of a false material representation made as a positive assertion
which is known either to be false, or made recklessly without knowledge of the
truth, with the intention that it be acted upon, and which is relied upon by a party
to his/her detriment.” Tice v. Tice, 672 P.2d 1168, 1171 (Okla. 1983). But upon
a review of the record, we think a jury could have found that the fraudulent
assertion was the tax disclosure drafted to prevent inquiry into the material facts
and hinder the Colliers from discovering the deductions.
The record also supports the jury’s determination that Local was a fiduciary
of the Colliers. Local controlled the books, documents, records, and assets.
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Local prepared the tax returns. The Colliers had no representatives at the bank.
In Oklahoma, fiduciary relationships can “arise anytime the facts and
circumstances surrounding a relationship would allow a reasonably prudent
person to repose confidence in another person.” Combs v. Shelter Mut. Ins., 551
F.3d 991, 1000 (10th Cir. 2008) (internal quotation marks omitted). The Colliers
had no choice but to rely on Local. See R. 15, 10836-39 (testimony of Joseph
Perkovich). This factual predicate can also constitute the “special relationship”
necessary to a finding of a violation of the duty of good faith and fair dealing.
Combs, 551 F.3d at 999. Finally, it is not true that Arnold & Porter’s knowledge
must be imputed to the Colliers, if the firm was then acting adversely to the
Colliers’ interests. U.S. Fid. & Guar. Co. v. State of Okla. ex rel. Sebring, 383
F.2d 417, 419 (10th Cir. 1967). The Colliers believed (correctly or not) that the
Arnold & Porter lawyers were their lawyers, yet it is apparent that the firm was
taking direction from Local. See R. 18, 12343-44 (testimony of Tom Dwyer).
IBC seems to contend that it is contradictory to hold that IBC (1)
interpreted the contract in good faith yet (2) intended to deceive. We fail to see,
however, why a jury could not conclude that Local had a good-faith opinion that
it was entitled to the tax-deduction benefits, but was nonetheless bound frankly to
disclose them and not (as the jury found) conceal their receipt in opaque half-
disclosures. Because the jury’s findings are not against the weight of the
evidence, IBC cannot show that it is entitled to a new trial or judgment as a
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matter of law.
F. Does the admission of the ethics expert’s testimony require a new trial?
IBC claims that Professor Thomas Morgan, who testified about Carver’s
ethical duties, merely testified about legal standards and served as a medium to
import Judge Steele’s order. Rulings on the admission of expert testimony are
reviewed for abuse of discretion. James River Ins. Co. v. Rapid Funding, LLC,
658 F.3d 1207, 1212 (10th Cir. 2011).
We see no abuse of discretion. Prof. Morgan, a nationally recognized
expert on ethics, helped the jury understand ethics rules, the tort of champerty and
improper payments, the contours of attorney-client privilege, and aspects of
confidentiality that may have bound Ms. Carver. (He believed it a “real stretch”
to say that her confidentiality agreements barred her from communicating with
the Colliers, R. 17, 11783). He gave his opinion that the Colliers “did exactly
what they should have done” in receiving information from a woman they had
worked with reliably for years. R. 17, 11773-74; R. 17, 11775-77. His
testimony was solidly based in his expertise and his review of depositions, filings,
and other documents. 5 Most importantly, since he was retained in the Florida suit,
and submitted an affidavit expressing views identical to those here, R. 17, 11786-
87, we can be sure his opinion was not formed upon the Florida order. Even if he
5
The district court only permitted him to proffer into evidence that he
considered the Florida litigation in his expert report and in forming his opinion in
this case.
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had not been involved in that case, that order is the type of material on which an
expert in Prof. Morgan’s field can reasonably rely in forming his views—as IBC’s
own ethics expert did. R. 19, 12994-95.
G. Was the KPMG document inadmissible double hearsay?
IBC claims it was error to admit a memo produced by KPMG, IBC’s
external auditor, that contained handwritten comments like “Collier [sic] may
have claim,” “What are obligation[s] do [sic] we have to tell Collier,” and “Have
we studied tax sharing agreements with Collier [sic].” R. 12, 9110-13. The
district court admitted the memo, over IBC’s objection, under the business-
records exception to the hearsay rule, or, alternatively, as the statement of a
party-opponent. IBC claims there was no evidence that KPMG created the memo;
that it was that company’s regular practice to create such memos; that the
handwriting was KPMG’s; or that the handwriting, if KPMG’s, was added in the
ordinary course of business. We review the ruling for abuse of discretion. United
States v. Blechman, 657 F.3d 1052, 1063 (10th Cir. 2011).
Federal Rule of Evidence 803(6) allows records of regularly conducted
activity to be admitted for their truth, even though hearsay, since they are
presumed to be inherently reliable. Though she did not type the document, the
typed portion of the document apparently was created by Kristy Carver, not
KPMG. R. 16, 11454-57; R. 5, 5289. The nature of KPMG’s engagement and the
circumstances under which the handwritten notes were created are unclear and we
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doubt the report is a regularly created business record—they do not appear to be
the product of any system, but rather the impressions of an anonymous author.
See Trustees of the Chicago Plastering Instit. Pension Tr. v. Cork Plastering Co.,
570 F.3d 890, 901 (7th Cir. 2009) (audit report not part of routinely conducted
audit probably would not qualify as a business record). Tom Travis, Local’s
CEO, testified that, as to the source of the handwriting, “[w]e assume it is KPMG,
somebody in their diligence work area.” R. 20, 13286. He continued: “These are
notes, these are like when you are listening to things and you write things in the
margin, you know, you are trying to put things on a piece of paper to understand.”
R. 20, 13286. He seemed to suggest that these were notes made by KPMG,
during a 2004 meeting, recording the remarks of Local officers and attorneys
(hence the “we”). The Colliers and Carver do not dispute this. See Carver Br.
34. The handwriting, therefore, was not likely made by one under a business duty
to report to KPMG, the fact that presumptively guarantees the reliability of
evidence admitted under this exception. Nonetheless, information provided by
an outsider can become a business record if it is shown that (1) the business has a
policy of verifying the information provided to it, or (2) the business possesses a
“sufficient self-interest in the accuracy of the record to justify an inference of
trustworthiness.” Blechman, 657 F.3d at 1066 (citations omitted). Here,
however, no foundation supports such an inference. R.16, 11454-55. KPMG no
doubt has an interest in providing sound services to its client, but the handwriting
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merely notes what an unidentified speaker is saying. See Paddack v. Dave
Christensen, Inc., 745 F.2d 1254, 1259 (9th Cir. 1984) (audit reports based upon
inadmissible hearsay were not admissible as summaries). We do not know
whether KPMG relied on the memo, verified it, or just discarded it. United States
v. Carranco, 551 F.2d 1197, 1200 (10th Cir. 1977), held that handwritten
notations on a freight bill—made by another company—can constitute a business
record if relied upon in the regular course of business. But, again, here it was not
shown that KPMG generally relies on the verbal representations of its clients.
Nor do we believe the statement-of-a-party-opponent exclusion applies, since
KPMG made the statements, not Local, and nothing in the record suggests that
KPMG, hired to provide services to Local, could be construed as Local’s “agent
or employee.” Fed. R. Evid. 801(d)(2)(D). We find that it was error to admit this
document.
Wrongly admitted evidence constitutes reversible error only if “it can be
reasonably concluded that with or without such evidence, there would have been a
contrary result.” Sanjuan, 160 F.3d at 1296. We do not believe a contrary result
could have obtained had this memo been excluded: by IBC’s admission, the
handwriting reflects what was said by officers of Local, most likely Ms. Carver,
all of which was otherwise exhaustively explored at trial. We will not order a
new trial or declare judgment for IBC as a matter of law on this basis.
H. Did the district court err in awarding the Colliers prejudgment interest on
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the principal payment and Excess Basis deductions?
An Oklahoma statute allows an award of prejudgment interest to a
prevailing party on “damages certain,” Okla. Stat. tit. 23, § 6, meaning damages
that are “liquidated or capable of ascertainment before judgment,” Taylor v. State
Farm Fire & Cas. Co., 981 P.2d 1253, 1261 (Okla. 1999). This court will reverse
a district court’s finding that damages were certain (or not) only if clearly
erroneous. Strickland Tower Maint., Inc. v. AT&T Commc’ns, Inc., 128 F.3d
1422, 1429 (10th Cir. 1997).
IBC cites Transpower Constructors v. Grand River Dam Authority, 905
F.2d 1413, 1422 (10th Cir. 1990), for the proposition that, under Oklahoma law,
if a trial is necessary to determine damages, then, by definition, the damages
cannot be “certain.” But in that case the plaintiff only got about 60% of what it
claimed; the court ruled that if Transpower’s damages were capable of being
made “certain” before trial, the jury’s award would not have “differed from
Transpower’s total claim by such a significant amount.” Id. (emphasis added).
Here, by contrast, the Colliers initially sought “compensatory damages exceeding
$16,470,122,” see Consolidated Amended Complaint, 23, No. 06-civ-1345-M,
Doc. 33 (filed Aug. 20, 2007), and recovered $17,223,312, see Order, 2, No. 06-
civ-1345-M, Doc. 430 (filed Nov. 16, 2010). In Chesapeake Operating, Inc. v.
Valence Operating Co., 193 F.3d 1153, 1156 (10th Cir. 1999), this court held that,
under Oklahoma law, “if the fact-finder must weigh conflicting evidence in order
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to determine the precise amount of damages due to the plaintiff, then a court
cannot grant prejudgment interest.” Id. The claim in that case was “certain”
because the parties, though contesting the fact of liability, stipulated to the
amount. Here, too, the parties agree that the amount at issue is the sum of the tax
benefits; this dispute is over the fact of liability. Tort and punitive damages were
both part of the judgment, but the jury filled out a verdict form, at IBC’s urging,
that split damages into components. 6 This allowed the district court to award
prejudgment interest only on the principal payment and Excess Basis deductions.
We do not find that the district court’s finding that damages were certain was
clearly erroneous.
AFFIRMED.
Entered for the Court
Paul J. Kelly, Jr.
Circuit Judge
6
The district court entered judgment on the jury’s verdict against IBC for
actual and punitive damages in the amount of $17,223,312.00, consisting of
$7,017,237.00 in actual damages for the principal payment deduction,
$7,136,201.00 in actual damages for the excess basis deduction, $140,482.00 in
actual damages for the attorney’s fee deduction, $1,500,000.00 in actual damages
for amounts withheld in escrow, and $1,429,392.00 in punitive damages.
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