Martin v. Monumental Life Insurance

Opinions of the United
2001 Decisions States Court of Appeals
for the Third Circuit
1-23-2001
Martin v. Monumental Life Ins. Co.
Precedential or Non-Precedential:
Docket 00-3307 & 00-3308
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Filed January 23, 2001
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
Nos. 00-3307 and 00-3308
JOHN J. MARTIN, ESQUIRE, TRUSTEE IN BANKRUPTCY
v.
MONUMENTAL LIFE INSURANCE CO.;
MONUMENTAL GENERAL MASS MARKETING, INC.;
MONUMENTAL GENERAL INSURANCE COMPANY;
BANKERS UNITED LIFE ASSURANCE COMPANY;
AEGON USA, INC.; MONUMENTAL GENERAL INSURANCE
GROUP, INC.
John J. Martin, Esquire, Trustee in Bankruptcy,
Appellant in No. 00-3307
Monumental General Insurance Group, Inc.,
Appellant in No. 00-3308
Appeal from the United States District Court
For the Middle District of Pennsylvania
D.C. No.: 95-cv-02198
District Judge: Honorable Thomas I. Vanaskie
Argued: December 4, 2000
Before: McKEE, ROSENN, and CUDAHY,* Circuit Judges.
(Filed: January 23, 2001)
_________________________________________________________________
* Judge Richard Cudahy, Senior Judge, United States Court of Appeals
for the Seventh Circuit, sitting by designation.
Peter J. Mooney, Esq. (argued)
White and Williams LLP
1800 One Liberty Place
Philadelphia, PA 19103-7395
Counsel for Appellant/
Cross-Appellee
James J. Rodgers (argued)
Christie M. Callahan
Dilworth, Paxson, Kalish and
Kauffman, LLP
3200 Mellon Bank Center
1735 Market Street Philadelphia, PA
19103-7595
Counsel for Appellees/
Cross-Appellant
OPINION OF THE COURT
ROSENN, Circuit Judge.
The primary issue in this appeal concerns a dispute over
the interpretation and compliance with two wor ds -- "best
efforts" -- in a comprehensive written agreement between
two sophisticated business entities, an insurance agency
and its underwriter. George N. Pegula Agency ("Agency"),
CGA Management Corporation ("Management"), George
Pegula ("Pegula"), Barbara Pegula, and Monumental Life
Insurance Company ("Monumental") enter ed into an asset
and restructuring agreement on December 30, 1993
("Agreement").1 Agency brought an action in 1995 in a state
court against Monumental which was removed to the
United States District Court for the Middle District of
Pennsylvania alleging a breach of the Agr eement. Agency
claimed that Monumental failed to use its "best efforts" to
market insurance programs to Catholic Golden Age ("CGA")
members. CGA is an organization of senior citizens who are
Catholic. After a six-day non-jury trial, the District Court
held that Agency did not prove that Monumental failed to
_________________________________________________________________
1. When referred to together, George and Barbara Pegula will be referred
to as "The Pegulas."
2
satisfy its obligations under the Agreement. The District
Court, additionally holding that Pegula wilfully br eached
the Agreement, imposed personal liability on the Pegulas
under the terms of the Agreement. Agency and the Pegulas
were ordered to pay $9,112,760 plus interest of $80,053,
costs of suit, and attorneys' fees of $888,048.
Agency timely filed post-trial motions under Fed. R. Civ.
Proc. 52 and 59 challenging the District Court's findings,
and moved to disqualify the trial judge under 28 U.S.C.
S 455(a). After hearing the recusal motion, the District
Court denied it. The Court subsequently denied all of
Agency's post-trial motions, except that it vacated its
finding of personal liability against Geor ge and Barbara
Pegula. On April 20, 2000, Agency and Managementfiled
petitions under Chapter 7 of the Bankruptcy Code. On
November 29, 2000, during the pendency of this appeal,
Agency and Management moved this court to substitute
John J. Martin, Trustee in Bankruptcy, as party in interest
and to amend the caption accordingly.2 We granted the
motion.
Agency appealed the District Court's judgment with
respect to the interpretation and operation of the "best
efforts" provision in the Agreement and challenges the
judge's refusal to recuse himself. Monumental General
Insurance Group, Inc. timely cross-appealed the District
Court's reconsidered ruling that the Pegulas did not wilfully
breach the Agreement. We affir m the judgment of the
District Court in favor of Monumental and affir m the
judgment of the District Court in favor of Geor ge and
Barbara Pegula.3
_________________________________________________________________
2. This opinion, to the extent it attributes ar guments and contentions to
Agency and/or Management, is actually referring to arguments
considered to have been raised by the T rustee.
3. Subject matter jurisdiction exists under 28 U.S.C. S 1332. The amount
in controversy exceeds $75,000. Plaintif fs/counterclaim-defendants are
Pennsylvania corporations with principal places of business in
Pennsylvania or are residents of Pennsylvania. See Appx. 5. Defendants/
counterclaim-plaintiffs are corporations incorporated in or with principal
places of business located in states other than Pennsylvania. See id. We
have appellate jurisdiction because the appellant and cross-appellant
have timely appealed from a final judgment of the District Court.
3
I.
Neither party contests the District Court's findings of
fact, so they are the best source of the history of the
dispute before us.
A. Breach of Contract
1. Background
Catholic Golden Age ("CGA") is a non-pr ofit Pennsylvania
corporation offering various benefits to its members, senior
citizens of the Catholic faith primarily over 60 years old.
One of CGA's popular benefits is the opportunity to
purchase various types of health and life insurance. Pegula
was instrumental in establishing CGA, and is listed on its
letterhead as "founder."
As Agency's counsel explained at oral argument, CGA
itself had no employees, only a Board of Dir ectors (advised
by Pegula) and attorneys representing its interests. CGA is
essentially a shell that is run by Management, which is
owned by Pegula. By written agreement dated November 4,
1976, CGA appointed Agency as its exclusive agent to
market and administer insurance products to CGA
members, including billing and collecting pr emiums. CGA
also gave Management the exclusive right to of fer non-
insurance services to CGA members. Management assumed
responsibility for developing membership in CGA and for
managing its day-to-day affairs. Between 1976 and 1993,
Agency marketed to CGA members health insurance
products including Medicare Supplement ("Med Supp"),
hospital indemnity, major illness, home health car e, cancer
and skilled nursing coverage, and whole life insurance.
Agency created all of the promotional material stating that
CGA was the sponsor. There was a dir ect relationship
between Agency's sales of insurance products to CGA
members and Management's success in enrolling new CGA
members. Agency's sales to CGA members peaked in 1986,
when insurance premiums for new policies totaled almost
$3.7 million.
Agency's fortunes decreased dramatically in the early
1990's as sales of new insurance failed to materialize.
4
Between 1990 and 1993, the annual premiums paid to
Agency shrank over one third, from $956,581 to $597,257,
due in large part to the aging CGA membership. Agency
commission income declined accordingly. A 1990 federal
law limiting the portion of each Med Supp pr emium dollar
available for payment of overhead expenses, marketing, and
agent commissions also contributed to Agency's financial
difficulties.
Beginning in the early 1980's, Monumental underwr ote
the insurance products marketed and administer ed by
Agency. During the 1980's, Agency incurred substantial
debt to Barclays American Business Credit, Inc. ("Barclays")
and to Monumental. In 1988, Monumental, Barclays,
Agency, and Pegula restructured theirfinancial
relationships. As of October 18, 1988, Agency owed
Monumental approximately $3.4 million. Agency defaulted
in 1992 and 1993, so in October, 1993, Monumental,
Barclays, Agency, Pegula, and Management enter ed a
Memorandum of Understanding. Immediately prior to
entering this Memorandum of Understanding, Monumental
purchased Barclays's note, becoming the sole principal
creditor of Agency with a total obligation outstanding of
over $8.2 million. On December 30, 1993, the r estructuring
Agreement, which is at issue on this appeal, was executed.
The Agreement replaced the Memorandum of
Understanding.
2. 1993 Agreement
Only the provisions of the December, 1993 Agreement
relevant to this appeal are stated her e. The Agreement
restructured Agency's debt obligations, conditionally
relieved George and Barbara Pegula of personal liability for
the Agency's outstanding debt obligation, made Agency
responsible for marketing CGA membership, and assigned
to Monumental the administration and marketing of its
insurance products to CGA members. Agency and
Management (both controlled by George Pegula) agreed to
diligently use their respective best ef forts to market CGA
memberships. Agency was required to obtain 20,000 new
CGA members by December 31, 1994; 30,000 new CGA
members by December 31, 1995; and 40,000 new CGA
5
members for each of years 1996, 1997, and 1998. Failure
to generate the required new CGA members constituted an
"Event of Default" under the Agreement; Monumental's
relief was limited to retention of commissions payable to
Agency.
The Agreement required Pegula to cr eate a fund devoted
"exclusively for marketing purposes to obtain new members
for CGA;" he was required to "use best efforts to initially
establish the Fund before March, 1994. Agency was
required to provide Monumental with a written marketing
plan by December 1 of each year; the plan had to pr oject
cost breakdowns, marketing objectives, and a pr o forma
detailed accounting of projected membership development
expenses and revenues. Pegula's deliberate failure to
prepare the required plan was deemed an "Event of
Default."
Under S 1.01 of the Agreement, Agency ceded to
Monumental the marketing of "[t]he curr ent CGA Life and
Health Insurance programs underwritten by [Monumental]
or any of its affiliates." Appx. 1473. S 1.01 continues:
Provided that [Monumental] and/or any of its affiliates
is/are licensed in all of the states in which it is
determined by [Monumental] and CGA that products
are to be marketed . . . to CGA members,
[Monumental] shall underwrite and be r esponsible for
all new marketing of existing CGA insurance pr ograms
and will underwrite and market all new Life and Health
Insurance programs, as well as annuity pr ograms to be
made available to CGA members. [Monumental] agrees
to use its best efforts to actively market insurance and
annuities (where agreed upon by CGA and
[Monumental]) to the CGA members.
***
If it is determined by [Monumental] that a particular
form of Life, Health, or Annuity product will not be
underwritten by [Monumental] or any one of its
affiliates after receiving a request fr om CGA to offer
such a product, Agency shall then be per mitted to
place that particular insurance program, as to that
benefit and product structure, with another insurance
6
company. . . . If [Monumental] deter mines that it or any
of its affiliates will underwrite and offer a new product,
[Monumental] shall use its best ef forts to offer such
product to substantially all CGA members located in
each state where the product is appr oved by the
appropriate governmental authorities. (emphasis
added)
The Agreement relieves George and Barbara Pegula from
personal liability for the loan balances owing Monumental,
provided that the Pegulas did not engage in fraud, wilful or
wanton misfeasance, malfeasance or nonfeasance, or
deliberate subversion of the intent of the Agr eement.
3. Insurance Economics4
The price of any insurance product must first cover the
amount the insurance company must pay to its insur eds
based on the claims received. For Med Supp insurance,
75% of the premiums for such policies must cover claims or
the difference between 75% and the claims cost must be
refunded to insureds in subsequent years. If a company's
claims cost exceeds 75%, there is no mechanism for an
insurance company to recover that additional percentage;
the insurer's profit margin is r educed. Insurance companies
use a ratio called TAP:MC to price insurance pr oducts and
to evaluate whether their marketing activities ar e
successful. TAP represents total annualized premium; MC
represents marketing costs. Monumental's T AP:MC goal for
Med Supp for CGA was 9:1; for other products it ranged
from 1.5:1 to 2.5:1. 9:1 was a reasonable TAP:MC goal. The
lower the response rate for a particular mailing or
marketing campaign, the fewer policies are issued, and
each policy must cover a higher percentage of the
marketing costs. In creating and implementing a marketing
campaign, Agency never used the TAP:MC ratio to
determine cost-effectiveness.
To market an insurance product in a state, an insurance
company must be licensed to market insurance in that
state, the product must be approved by the state, and, in
_________________________________________________________________
4. We attribute our information on insurance economics to the analysis
of the subject by the District Court. See Appx. 18-21.
7
some states, the approval of the group to which the
company sells must also be obtained. In 1993, Monumental
was licensed to sell insurance in all states, but it could not
market Med Supp in two states. Monumental maintains a
"Contracts and Compliance Department" r esponsible for
obtaining product approval in all states.
For various reasons, Monumental did not of fer insurance
products to individuals over 80 years of age. Accordingly,
approximately 25% of the CGA membership consisted of
individuals to whom Monumental had no product to
market.
4. Monumental's & Agency's Marketing Ef forts and
Results
In 1994, Monumental developed and tested special
creative kits for CGA for some of its pr oducts (not Med
Supp), tested telemarketing on Med Supp coverage, and
conducted direct mail marketing for all pr oducts other than
its Accident, Death & Dismemberment, HIP , and skilled
nursing products. Monumental mailed 96,950 marketing
pieces to CGA active and inactive members. Monumental
spent $96,679 marketing insurance programs to CGA
members; it received $275,563 in insurance policy
premiums from CGA members. Agency was paid
$23,327.95 in commissions from new business generated
by Monumental. Agency met its obligation of enr olling at
least 20,000 members in 1994.
In 1995, Monumental contracted with an outside entity
to create a new insurance solicitation kit. The kit failed,
however, and was abandoned. Agency failed to meet its
required enrollment goal of 30,000 new CGA members.
Monumental mailed 233,849 marketing pieces to CGA
members. Monumental spent $178,348 in marketing
insurance programs to CGA members; it sold $276,171 in
insurance policy premiums and paid Agency $23,576.73 in
commission.
In 1996, Monumental tested a gender specific cancer
insurance product, marketed a more af fordable Med Supp
product to an expanded age bracket, and experimented
with a Family Care Product. In that year , Monumental
8
mailed 117,637 marketing pieces to CGA members,
spending $69,316. Monumental earned $152,403 in
insurance premiums from CGA members and, determining
that Agency breached the Agreement in failing to reach the
agreed-upon CGA membership goals, retained all Agency
commissions.
5. Other Facts Relevant to Agency's Br each
Between 1993 and 1995, Monumental negotiated
advertising rates in the CGA World Magazine. An agreement
could never be reached because CGA wanted over $4,000
for advertisements normally costing Monumental $1,800.
Monumental never advertised its products in the CGA
magazine.
In 1994, Pegula expressed an interest in telemarketing
Med Supp, Monumental responded that it would pursue
expansion of its current efforts if Pegula proved that his
past efforts had been successful. Pegula did not produce
the requested information after r epeated requests.
Pegula never created the $200,000 marketing fund
required under the Agreement. In 1994, the only year that
Agency met its member recruitment requir ement under the
Agreement, it spent more to achieve the new members than
it received in dues. When Agency proposed its membership
plan for 1995, it projected that expenses would again
exceed dues revenue. Upon questioning, Agency defended
the propriety of membership development not being
economically self-sufficient. Because Agency'sfinances were
so poor and the 1994 membership marketing plan very
costly, Agency did not have the funds to conduct the 1995
membership marketing campaign. Agency also failed to
conduct any membership marketing effort in 1996, neither
did it meet the minimum of 30,000 new CGA members
required of it in 1995, or meet the minimum of 40,000 new
CGA members in 1996.
Agency's failure to submit a membership development
plan when due, or to submit a marketing plan that could
withstand reasonable objection by Monumental, also was
held to constitute breach of the Agreement. Monumental
rejected the 1995 marketing plan. The District Court found
9
other breaches of the Agreement by Pegula and Agency not
directly relevant to this appeal.
6. Monumental's Performance
Between 1993 and 1996, Monumental worked to obtain
approval for its products in all states. It expended money
for new marketing solicitations for CGA, often employing
marketing experts. It marketed insurance products for CGA
that it did not offer for other associations. Monumental
instituted an expensive computer system that personalized
Med Supp insurance solicitations and employed an
experienced telemarketer to market Med Supp insurance to
CGA members. Monumental changed its affiliates so it
could offer cheaper Med Supp insurance. It of fered to use
Pegula's suggested telemarketing strategy if Pegula offered
evidence that it had been successful, and pr ovided input
into Agency's marketing plans, including suggesting that
Agency target new memberships in states wher e there was
no large CGA membership and where Agency had not
previously marketed insurance.
Though Agency does not appeal any of the District
Court's findings of fact, it sets forth many examples of
Monumental's deficient performance. Agency's contentions
cannot be taken seriously because it has not appealed any
of the Court's findings of fact. We owe gr eat deference to
findings of fact not challenged on appeal. Appellant's brief
spends time trying to convince us of the unr easonableness
of the District Court's findings without having challenged
their accuracy or validity on appeal.
B. Recusal
Four months before the plaintiffs filed this action, CGA
filed a similar action against Monumental concer ning the
Agreement. See Catholic Golden Age v. Monumental Life Ins.
Co., 95-CV-1359 ("CGA Action" or"CGA"). CGA's complaint
involved the same principals, witnesses, insurance
products, and trial judge as are involved in the instant
case. Attorney George Clark repr esented CGA; Attorney
James J. Rodgers ("Rodgers"), of Dilworth, Paxson, Kalish &
Kauffman ("Dilworth"), repr esented Monumental. After
being assigned the CGA action, the trial judge on August
10
22, 1995 sua sponte informed the parties that he had been
affiliated with the Dilworth firm as an associate from 1983
through 1986, and as a partner from 1986 through 1992.
The judge had joined Dilworth at the same time as had
Attorney Rodgers; in 1986 they both had become partners.
The judge worked for the firm in the Scranton office;
Rodgers worked in its Philadelphia office. In 1992, the
judge terminated his association with Dilworth; his
financial arrangements with the firm ceased in October
1994, and he had never represented Monumental during
his affiliation with Dilworth. The judge explained that his
disqualification "may be appropriate based on an
appearance of partiality," but informed the parties that if
they desired to waive the ground for disqualification, they
could. All parties filed timely written waivers with the Clerk
of Court and Judge Vanaskie continued to pr eside over the
CGA litigation.
On December 29, 1995, Monumental removed the instant
action from the state court to the United States District
Court for the Middle District of Pennsylvania. Because of its
relationship to the CGA action, this case was assigned to
Judge Vanaskie. The first conference between the judge and
counsel was held on March 19, 1996 by telephone.
Lawrence M. Ludwig ("Ludwig"), counsel for Agency, and
James J. Rodgers from Dilworth, counsel for Monumental,
participated. It is disputed whether in that confer ence the
district judge advised counsel of his potential conflict;
Judge Vanaskie and Rodgers claim that disclosure was
made and oral waivers obtained. Counsel for Agency claims
disclosure was not made. Neither the Case Management
Order nor the docket entries reflect any disqualification in
the underlying action. Nor do Ludwig's notes of the March
19, 1996 conference call record a disqualification
discussion. Counsel for Agency claims that he did not know
that Judge Vanaskie conditionally disqualified himself in
CGA until after the trial in this case, when Judge Vanaskie
held a conference call on January 4, 1999, to schedule a
hearing in response to Agency's Rule 59 post-trial motion
for disqualification.5
_________________________________________________________________
5. Before claiming to know about the conditional disqualification in CGA,
counsel for Agency based their recusal motion on, inter alia, the district
judge's purportedly undisclosed personal relationship with Rodgers.
Such a relationship is denied by Rodgers and the district judge. See
Appx. at 74.
11
It appears undisputed that Barbara Pegula Verrastro,
Pegula's daughter, was corporate designee of CGA during
the CGA litigation. Ludwig represented CGA during the
settlement negotiations and depositions in the CGA
litigation. It is also undisputed that the CGA action arose
out of the same 1993 Agreement as the instant action, and
that CGA, Agency, and Pegula are inter-r elated entities --
Pegula is the founder of and advisor to CGA and is a
principal of the Agency. Judge Vanaskie made full
disclosure in the CGA action of his past association with
the Dilworth firm and its termination, and Pegula and
Ludwig knew of Judge Vanaskie's participation in the CGA
action.
Counsel for Agency disclosed at oral argument before this
court that CGA is essentially a shell corporation with a
Board of Directors and attorneys. CGA is essentially
operated by Management. For example, it appears fr om the
record that Pegula was a requir ed attendee at the
settlement conferences in CGA, even though neither he nor
Agency were parties in the action.
II.
There are three issues on appeal: 1) whether the District
Court committed reversible error in excluding parol
evidence of Agency's understanding of "best ef forts" in the
Agreement; 2) whether the District Court violated the
recusal statute, 28 U.S.C. S 455; and 3) whether the
District Court erred in vacating the portion of its judgment
that had imposed personal liability on George and Barbara
Pegula for Agency's contractual damages. First, however, we
turn to the consequences of Agency's and Management's
recent bankruptcy filings.
A. Agency and Management Bankruptcy
On April 20, 2000, Agency and Management filed
petitions for relief under Chapter 7 of the Bankruptcy Code.
The right to appeal is part of the debtors' estates. See 11
U.S.C. S 541(a). Only Agency's and Management's trustee
can pursue their appeals unless the trustee has abandoned
the appeals. See 11 U.S.C. S 554(a). On December 1, the
trustee, John Martin, Esquire, moved for substitution to
12
pursue the appeal and amendment to the caption of the
case. We granted the motion. Therefor e, the appeal is not
abandoned and we proceed to the merits.
B. "Best Efforts"
The District Court excluded extrinsic evidence of the
parties' understanding of the extent of Monumental's
obligation to use its best efforts to market its insurance
products to the CGA membership. The court r endered its
decision, making findings of fact and conclusions of law
without reference to evidence of contemporary facts or
discussions concerning the parties' understanding of "best
efforts" when the Agreement was enter ed.
The District Court's interpretation of contract law, i.e.,
the admissibility of parol or extrinsic evidence, or whether
the contract is ambiguous, receives plenary r eview. See
Sumitomo Machinery Corp. v. Allied Signal, Inc., 81 F.3d
328, 332 (3d Cir. 1996); Commonwealth Dept. of Transp. v.
E-Z Parks, 620 A.2d 712, 717 (Pa. Cmwlth. 1993). Where a
party makes known the substance of the evidence it desires
to introduce, we review the District Court's decision to
exclude the evidence for an abuse of discretion. See Narin
v. Lower Merion School Dist., 206 F.3d 323, 334 (3d Cir.
2000).
In interpreting a contract, a court must first consider the
intent of the parties as expressed in the wor ds used in the
agreement. See Mellon Bank, N.A. v. Aetna Business Credit,
619 F.2d 1001, 1009 (3d Cir. 1980). If parties have
integrated their agreement into a single written memorial,
all prior negotiations and agreements in r egard to the same
subject matter, whether oral or written, ar e excluded from
consideration. See Nicolella v. Palmer, 432 Pa. 502 (1968).
Parol evidence is excluded to preserve the integrity of
written agreements by refusing to per mit the contracting
parties' attempt to change the meaning of the contract
through the use of "extraneous infor mation." See In re:
Columbia Gas System, Inc., 50 F.3d 233, 241 (3d Cir. 1995).
When a written contract is clear and unequivocal, its
meaning must be determined by its contents alone. See
Mellon Bank, 619 F.2d at 1010 (citing East Crossroads
Center, Inc. v. Mellon-Stuart Co., 416 Pa. 229, 230 (1965)).
13
Agreements and negotiations prior to or contemporaneous
with the adoption of a writing are admissible, however, to
establish the meaning of ambiguous terms in the writing,
whether or not the writing is integrated. See Mellon Bank,
619 F.2d at 1011; Olympia Hotels Corp. v. Johnson Wax
Dev. Corp., 908 F.2d 1363, 1373 (7th Cir . 1990) (inquiry
into preliminary discussions precluded unless necessary to
"disambiguate" the contract); Proteus Books, Ltd. v. Cherry
Lane Music Co., 873 F.2d 502, 509-10 (2d Cir.1989); 11
Richard A. Lord, Williston on Contracts S 33:23 (4th ed.
1999). If the contract terms are ambiguous or incomplete,
and extrinsic evidence is examined, interpretation of the
contract becomes a question of fact, unless the extrinsic
evidence is conclusive. See In re Minnesota Power & Light
Company, 435 N.W.2d 550, 563 (Minn. Ct. App. 1989).
A term is ambiguous if it can have two or mor e
reasonable meanings. See Sumitomo, 81 F .3d at 332; Mellon
Bank, 619 F.2d at 1011. "If a r easonable alternative
interpretation is suggested, even though it may be alien to
the judge's linguistic experience, objective evidence in
support of that interpretation should be considered by the
fact finder." Mellon Bank, 619 F .2d at 1011. In determining
whether a contract term is ambiguous, we must consider
the actual words of the agreement, as well as alternative
meanings offered by counsel, and extrinsic evidence offered
in support of those alternative meanings. See St. Paul Fire
and Marine Ins. Co. v. Lewis, 935 F.2d 1428, 1431 (3d Cir.
1991).
"Best efforts" has been widely held to be an ambiguous
contract term. See, e.g., U.S. Airways Group, Inc. v. British
Airways PLC, 989 F. Supp. 482, 491 (S.D.N.Y. 1997); Grant
v. Board of Educ., 668 N.E.2d 1188 (Ill. App. 1996). In U.S.
Airways, the court explained that under New Y ork law, "to
the extent that the term ``best efforts' . . . is ambiguous, and
criteria by which to measure the parties' ``best efforts' are
lacking, the extrinsic circumstances concer ning the parties'
understanding of that term may be consider ed by the finder
of fact." U.S. Airways Group, Inc., 989 F. Supp. at 491.
"Best efforts" depends on the factual circumstances
surrounding an agreement. See T riple-A Baseball Club
Assocs v. Northeastern Baseball, Inc., 832 F.2d 214, 225
14
(1st Cir. 1987). However, in Olympia Hotels Corp. v. Johnson
Wax Dev. Corp., 908 F.2d 1363, 1373 (7th Cir. 1990), the
court reasoned that a "best efforts" clause in a contract
with an integration clause could not be illuminated by parol
evidence. The Olympia court stated that" ``best efforts' is a
familiar [term] in contract parlance, and its meaning is
especially plain in a case such as this wher e the promisor
has similar contracts with other promisees. In such a case
``best efforts' means the efforts the promisor has employed
in those parallel contracts where the adequacy of his efforts
have not been questioned." Id. at 1373.
In this case, the District Court concluded that
Monumental exercised its best efforts to market its
products to the CGA membership, reasoning that
Monumental exercised its business judgment to decide to
which CGA members it would market. The District Court
defined "best efforts" by refer ence to good faith and sound
business judgment. By excluding Agency's offer of extrinsic
evidence, the District Court concluded that "best efforts"
was not ambiguous and could be construed by r eference to
case law and surrounding facts. The District Court held
that Monumental exercised its best business judgment in
its marketing in the face of Agency's default. Monumental
telemarketed and hired consultants even when their results
were disappointing, and expended "substantial" amounts
on marketing in a "diligent and consistent" ef fort to uphold
its end of the bargain. To the extent Monumental got off to
a slow start in 1993, the District Court reasoned that
Agency's slow provision of CGA membership lists
contributed at least in part to the delay.
Agency argues it would have produced extrinsic evidence
showing that Monumental promised the following before the
written Agreement was executed: 1) Dave Rutkowski of
Monumental met with Pegula on or about August 31, 1993
and stated that Monumental's efforts at marketing
insurance products to CGA members would r esult in
significant new commissions and at least $600,000 in
renewal commissions to Agency in the first year; 2) on or
about September 22, Micky Feldman, attorney for
Monumental, represented that Monumental would advertise
in "CGA World" magazine as much as or more than Pegula
15
had done in the past, and that Monumental would spend
substantial sums to build insurance sales to CGA
members; 3) in conversations between September and
December, 1993, Paul Latchford of Monumental assured
Pegula that approvals in "no sell" states would be
aggressively sought, and that Monumental's marketing
efforts would be aggressive in all states; 4) On October 22,
1993, Latchford and Don Loren of Monumental told Pegula
that Monumental had a new marketing campaign to
aggressively market products in all states; and 5) at an
October 18, 1993 meeting, Latchford insisted that
Monumental was capable of maintaining the same
marketing level Pegula had maintained.
Agency also claims that a Monumental officer said
Monumental could do much more business than Agency
because it was licensed to sell in all states and had
marketing expertise. Agency also claims it was pr epared to
offer evidence of Monumental's acknowledgment of an
obligation to market to all CGA members, not just members
that could meet its profit goals.6 None of Agency's
evidentiary offerings suggest that Monumental bound itself
to invest in marketing efforts it knew would be unprofitable.
Nor do Agency's offerings, taken as true, upset the District
Court's conclusions of law.
The Agreement was fully integrated. The Agr eement also
contained a provision stating that "[i]n the event of any
inconsistency between this Agreement and those prior
agreements, this Agreement shall contr ol and any
inconsistent terms or provisions in those prior agreements
shall be deemed null and void." Section 1.01 of the
Agreement is unambiguous, based on a reasonable reading
of the Agreement in the context of the surr ounding facts
and circumstances.
_________________________________________________________________
6. Agency also argues that the Memorandum of Understanding required
Monumental to market to all CGA members. But the Agr eement does not
retain the term "all, " and S 5.04 of the Agreement states that "[i]n the
event of any inconsistency between this Agreement and those prior
agreements, this Agreement shall contr ol and any inconsistent terms or
provisions in those prior agreements shall be deemed null and void."
Agency's reliance on the Memorandum of Understanding is misplaced.
16
Precedent treats "best efforts" as a form of good faith and
sound business judgment. See National Data Payment
Systems v. Meridian Bank, 212 F.3d 849, 854 (3d Cir. 2000)
(considering "best efforts" in the context of appellee's sale of
a business to appellant, and holding that it r equires
diligence and an elevated duty of good faith). The District
Court's holding in the instant case that Monumental
exercised sound business judgment, diligence, and good
faith is supported by the record. Agency and Pegula did not
define "best efforts" to state clearly Monumental's
marketing obligation; in the absence of such a definition,
the District Court's interpretation of the ter m is consistent
with the surrounding facts and circumstances of the
Agreement.
Section 1.01 frequently states "If Monumental
determines," implying that there is an element of discretion
in Monumental's duty to market to CGA members. "Best
efforts" is a dynamic notion. Monumental's best efforts in
1993 were certainly changed when Congress amended the
laws concerning Med Supp insurance. No r easonable
reading of "best efforts" compels Monumental to market to
all, or even to substantially all of the CGA members,
regardless of age. Monumental did not compromise its right
to exercise sound business judgment in its marketing
programs. Its efforts, from working to obtain approval for
its products in all fifty states to substantial investment in
computers and marketing consultants, but constrained by
targeted TAP:MC ratios, evince good faith, fair dealing, and
diligence. The District Court properly r ejected extrinsic
evidence of the parties' intent.
Even if the District Court had erred as a matter of law by
not admitting extrinsic evidence of the parties' intended
meaning of "best efforts," the err or would have been
harmless. Under Fed. R. Civ. Proc. 61,"[n]o error in . . . the
exclusion of evidence . . . is ground for granting a new trial
or for setting aside a verdict or for vacating, modifying, or
otherwise distributing a judgment or order , unless refusal
to take such action appears to the court inconsistent with
substantial justice." The District Court issued a careful and
thorough 64-page decision; none of its 231findings of fact
were contested on appeal. The District Court'sfindings and
17
conclusions of law concerning Monumental's"best efforts"
are convincing, and we are satisfied that they would not
reasonably be affected by the evidence Agency offers. Had
the extrinsic evidence been admitted, Monumental would in
all probability have responded that it never would have
agreed to be forced to market to all CGA members,
regardless of the losses in so doing, the absence of their
insurability and eligibility, especially when its goal was to
recoup funds from Agency and the Pegulas.
Even if Agency's proposed evidence was taken as true
and unrebutted, the District Court could have r easonably
concluded that Monumental exercised "best ef forts"
because nothing Agency offered suggests that Monumental
was bound to make repeated losing investments in
marketing plans. For Agency's theory to prevail, we must
believe that Monumental bound itself to make r epeated
unprofitable marketing expenditures-- from paying inflated
advertising rates in the CGA magazine to marketing to CGA
members for whom Monumental offered no pr oducts or
from whom Monumental would obtain little, if any, profit.
In light of Monumental's goal to recoup the mor e than $8
million owing to it by Agency, such a conclusion is illogical.
If Agency's contentions were true, it should have appeared
in the text of the Agreement; it did not. W e see no abuse of
discretion by the district judge in excluding Agency's
evidence.
C. Recusal
Agency argues that the district judge imper missibly failed
to notify counsel of his relationship with Monumental's law
firm, and failed to disqualify himself under 28 U.S.C.
S 455(e).7 The district judge disqualified himself in the CGA
action, but purportedly failed to offer his disqualification in
the instant action. Agency claims that the district judge's
failure to offer the same disqualification in this action
constituted reversible error.
_________________________________________________________________
7. 28 U.S.C. S 455(a) states that "[a]ny . . . judge . . . of the United
States
shall disqualify himself in any proceeding in which his impartiality might
reasonably be questioned." 28 U.S.C. S 455(e) provides that "waiver may
be accepted provided it is preceded by a full disclosure on the record of
the basis for disqualification."
18
In reviewing Agency's contention on appeal that the
District Court improperly denied its motion for recusal, it is
appropriate that we view this motion in its pr oper
perspective. Agency alleges no conflict of inter est on the
part of the judge; indisputably, there is none. Agency, even
after a lengthy an arduous trial, asserts no bias or
prejudice of the judge, and, on appeal, challenges none of
the judge's 231 findings of fact. Although this pr oceeding
followed on the heels of the earlier and related CGA case,
Agency made no motion for recusal befor e trial.
Notwithstanding that all of these considerations suggest
that plaintiff 's motion is a desperate ef fort to overturn an
adverse decision, Agency argues that its motion for recusal
deserves favorable consideration because Judge V anaskie
sua sponte offered to recuse himself in the prior CGA trial
because of his former relationship with the Dilworth firm.
The implication of that argument is that the judge must a
fortiori recuse himself in this case.
Although the judge offered to recuse himself in the CGA
action, he did so out of excess caution. The only applicable
section of the recusal statute under the cir cumstances is
28 U.S.C. S 455(a) which, at the same time, sets forth the
pertinent standard of review: "Any . . . judge . . . of the
United States, shall disqualify himself in any pr oceeding in
which his impartiality might reasonably be questioned." See
also Liteky v. United States, 510 U.S. 540, 548 (1994);
Massachusetts School of Law at Andover v. American Bar
Assoc., 107 F.3d 1026, 1042 (3d Cir . 1997). By the time the
judge issued his findings of fact and conclusions of law, six
years had elapsed since his resignation fr om the Dilworth
firm. There were no circumstances showing any lingering,
disqualifying relationship and nothing to suggest to any
reasonable person an appearance of impartiality. His
unnecessary and even improvident disqualification in the
CGA was a matter of record, as was the waiver.
Furthermore, Judge Vanaskie's history of previous
employment and partnership in the Dilworth fir m had been
published in his profile contained, since his elevation to the
Court, in Volume C of Justices and Judges of the United
States Courts.
19
Agency's argument, when distilled, amounts to nothing
more than a whisper that the judge's participation in this
trial, in light of his prior recusal, has an appearance of
impartiality. It certainly had no such appearance to Agency,
an intensely interested party, because it claims it knew
nothing of the prior recusal until after this trial, although
it is hardly possible to accept such a r epresentation in light
of the circumstances pertaining to the CGA litigation.
These circumstances reveal that the judge had strong
reason to believe that Agency, Pegula, and CGA were so
intertwined that his conditional disqualification on the
record in CGA was known to the principals in this action.
Close study of the record reveals that CGA, Agency,
Management, and Pegula had significant cross-over in their
business, management, and staffing. Pegula and his
daughter are the primary conduit in this cr oss-over. As
Agency's counsel admitted at oral argument, CGA has no
employees of its own. Although CGA has a Boar d of
Directors and attorneys, it executes its Board's commands
through Management (i.e., Pegula). Ther efore, the district
judge's conditional disqualification in CGA must be treated
as having been known and waived by Agency, which is also
controlled and owned by Pegula. Pegula will not be
permitted to hide behind corporate for ms to assert lack of
knowledge or notice. Agency's argument that neither it nor
its counsel knew of the prior CGA disqualification was not
convincing to the District Court, nor to us.
We also believe that there must be a mor e compelling
standard for recusal under S 455(a) after the conclusion of
a trial than before its inception. After a massive proceeding
such as this, when the court has invested substantial
judicial resources and there is indisputably no evidence of
prejudice, a motion for recusal of a trial judge should be
supported by substantial justification, not fanciful illusion.
See, e.g., United States v. Anderson, 160 F.3d 231, 235 (5th
Cir. 1998); Summers v. Singletary, 119 F.3d 917, 920 (11th
Cir. 1997).
Support for our ruling can be found in the r ecent case of
Microsoft Corp. v. United States, 1221 S. Ct. 25 (2000),
where the Chief Justice declined to recuse himself from
participating in an appeal in an antitrust action even
20
though his son then represented Micr osoft in separate
antitrust actions. See Microsoft Corp. v. United States, 121
S. Ct. 25 (2000). The Chief Justice "[did] not believe that a
well-informed individual would conclude that an
appearance of impropriety exists simply because[his] son
represents, in another case, a party that is also a party to
litigation pending in [the Supreme Court]." Id. at 26. In the
instant matter, the relationship between the trial judge and
the Dilworth firm had terminated several years before the
case commenced; there was no blood relationship between
the trial judge and anyone in the Dilworth fir m; there is no
claim of any bias by the trial judge; and the trial has been
concluded. We see no error in the District Court's refusal to
grant the motion.
D. Wilful Nonfeasance
Monumental General Insurance Group, Inc. cr oss-
appeals the District Court's reconsider ed finding that the
Pegulas did not commit wilful nonfeasance in ceasing their
performance under the Agreement.
Section 5.03 of the Agreement conditionally r elieved
Pegula and Barbara Pegula from personal liability for the
restructured loan:
Pegula shall have no personal liability whatsoever with
regard to payment of the loan balances. Excepted from
the foregoing is the right to prosecute Pegula in the
event of fraud, wilful or wanton misfeasance,
malfeasance or nonfeasance or in the event of
deliberate subversion by Pegula of the intent of this
Agreement which is for Agency and Management to
increase CGA memberships, for [Monumental] to
market and sell insurance programs to CGA members
. . . .
Pegula ceased marketing new CGA memberships in 1995
and never resumed; Monumental asserts that this was
wilful nonfeasance. Pegula argues that his nonfeasance was
not wilful, and that he was justified in his action because
he bona fidely believed that Monumental br eached the
Agreement by failing to exercise "good faith."
21
1. Procedural Challenge
Monumental first raises a procedural challenge to the
District Court's reconsideration of the personal liability
issue. Only Agency filed timely post-trial motions under
Fed. R. Civ. Proc. 52 and 59; the Pegulas neverfiled such
a motion. However, Agency's motion raised the Pegulas'
successful request for reconsideration. See Appx. 97 n.1
(District Court's reconsideration memorandum stating
"Although the motions were filed only on behalf of Agency,
they will be construed as having been filed on behalf of
Agency, Management and the Pegulas.") Monumental
argues that the effect of construing Agency's Rule 52 and
Rule 59 motions as filed by the Pegulas impr operly
extended the time for reconsidering the December 8, 1998
Order.
Federal Rules of Civil Procedure 52 and 59 have strict 10
day time limits that cannot be expanded by the District
Court. See Fed. R. Civ. Proc. 6(b). A court is constrained to
reconsider its rulings within the time limits provided by
Rules 52 and 59. See Fed. R. Civ. Pr oc. 6(b). In Hertz Corp.
v. Alamo Rent-A-Car, Inc., 16 F.3d 1126, 1128 (11th Cir.
1994), the court held that a co-defendant's filing of timely
motion to amend judgment did not excuse another
defendant from the ten-day time limit for filing motion to
amend judgment.
Agency's post-trial motions clearly raised the Pegulas'
arguments for reconsideration. Agency's proposed orders
also purportedly included the Pegulas' desir ed outcome.
Monumental did not suffer lack of notice. Unlike Hertz,
both the motion and supporting memorandum specifically
requested relief on behalf of the Pegulas individually, and
the District Court treated the motion as having been filed
on behalf of the Pegulas as well as Agency and CGA. Under
these circumstances, we do not believe it was impermissible
for the District Court to consider Pegula's ar guments for
reconsideration.
Monumental is incorrect that the District Court extended
the time within which the Pegulas could file a post-trial
motion for reconsideration. The Pegulas never made a late
filing; Agency's timely filing also included the Pegulas. The
22
District Court and Monumental were always on notice that
the Pegulas' interests were tied with Agency's, and it was
clear to all concerned that the Pegulas' inter ests were
advocated in Agency's post-trial submissions. W e see no
error in the District Court's treatment of the Agency's
motions as also filed on behalf of the Pegulas.
2. Merits
In its December 8, 1998 opinion, the District Court,
reasoning that Pegula wilfully refused to perform under the
Agreement, attached personal liability to Pegula and his
wife under S5.3 of the Agreement.8 On reconsideration, the
District Court, relying on a new hearing and a new analysis
of the definition of "wilful," held that wilfulness requires an
element of fault or culpability -- more than the mere
occurrence of an act. Pegula genuinely thought there was
legal justification for his failure to comply under the
Agreement. The District Court therefor e held on
reconsideration that Pegula had not committed a wilful act
in violation of S 5.03. In so doing, the District Court also
credited Pegula's justification for his actions -- that literally
complying with the Agreement would have wr ought
financial havoc because it was impossible for his Agency to
recoup the projected marketing expenditur es.
This issue turns on whether "wilful" r equires
consciousness of fault or culpability, or whether it requires
the performance of an act. We exercise plenary review of
the District Court's interpretation of the Agr eement.
Monumental argues that a decision not to per form a
contractual duty, made deliberately, constitutes wilful
nonfeasance under the Agreement. Pegula counters with
the assertion that wilful nonfeasance requir es a heightened
level of ill will beyond a failure to act, and that he never
wilfully ceased performance. Pegula also argues that even if
he wilfully ceased performance, he was justified in doing it.
Pennsylvania law does not provide a consistent definition
of "wilful." Even Black's Law Dictionary pr ovides two
definitions:
_________________________________________________________________
8. The District Court found that Pegula did not act wantonly in his
refusal to perform.
23
Willful. Proceeding from a conscious motion of the will;
voluntary; knowingly; deliberate. Intending the r esult
which actually comes to pass; designed; intentional;
purposeful; not accidental or involuntary. [Monumental
wins under this phrasing. But the definition
continues:]
Premeditated; malicious; done with evil intent, or with
a bad motive or purpose, or with indiffer ence to the
natural consequences; unlawful; without legal
justification. [Pegula wins under this phrasing.]
Black's Law Dictionary 1599 (6th ed. 1990). The District
Court cited Evans v. Philadelphia Trans. Co., 212 A.2d 440
(Pa. 1965) (tort case); Dudley v. USX Corp., 606 A.2d 916
(Pa. Super. 1992) (tort case); and Edmondson v. Zetusky,
674 A.2d 760, 767 (Pa. Cwth. Ct. 1996) (tort case). All of
these cases used the definition of wilful misconduct
entailing mal intent. We must determine, however, whether
Pegula committed wilful nonfeasance under a contract that
also specifies liability for wanton nonfeasance. W ilful
nonfeasance must be distinct from wanton nonfeasance, or
else both terms would not be stated in the same section of
the Agreement. Wanton is defined as r eckless, heedless,
malicious, and unruly. See Black's Law Dictionary 1582
(6th ed. 1990). Interestingly, Black's definition of wanton
includes "willful and malicious." Id. The District Court
relied on In re Jury Estate, 112 A.2d 634 (1955), a case
concerning whether a spouse willfully failed to support his
deceased wife. Jury Estate ruled that "willful" implied
consciousness of fault.
The Agreement before us contemplates thr ee levels of
nonfeasance: plain nonfeasance, willful nonfeasance, and
wanton nonfeasance. Only willful nonfeasance and wanton
nonfeasance trigger the Pegulas' personal liability under
S 5.03. Nonfeasance is the nonperfor mance of some act that
a person is obligated or has responsibility to perform. See
Black's Law Dictionary 1054 (6th ed. 1990). For wilful
nonfeasance to be distinct from nonfeasance, an additional
element of mental state must be present -- an evil intent.
Wanton nonfeasance entails a further heightened mens rea
-- that of reckless, unruly failure to perform an obligation.
24
George Pegula's conduct was nonfeasance; ther e is no
evidence that he had improper motive or evil intent in
failing to conduct marketing activities in 1995 and beyond.
When Pegula breached his obligations under the
Agreement, he had lost a significant amount of money
during the prior year, and he had a good faith belief that
Monumental had already breached the obligations under
the Agreement. Pegula's attorney advised him that he was
justified in ceasing performance because of Monumental's
perceived breach. Pegula may have been guided by the
principle that a breaching party cannot stop performance
and continue taking advantage of a contract's benefits. See
S&R Corp. v. Jiffy Lube Int'l., Inc., 968 F.2d 371, 375 (3d
Cir. 1992). Pegula believed he was excused fr om
performance because, in his view, Monumental had
breached the contract, and this released him from
continued performance.
The District Court justifiably reconsider ed its earlier
decision as to Pegula. The Court committed no r eversible
error by concluding on further consideration that Pegula
did not commit willful nonfeasance.
III.
Accordingly, for the reasons stated her ein, the judgment
in favor of Monumental entered on December 8, 1998 and
the order denying the motion for recusal entered on March
9, 1999, will be affirmed. Likewise, the judgment entered
on January 25, 2000 granting the Pegulas' request for
reconsideration will be affirmed. Each side will bear its own
costs.
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
25