filed: June 11, 1992; As Corrected July 2, 1992.
On Appeal from the United States District Court for the Eastern District of Pennsylvania. (District Court Civil Action Nos. 87-4000 & 88-1064)
Before: Becker, Mansmann, and Scirica, Circuit Judges
These consolidated appeals in a diversity case involving Pennsylvania law arise from a bitter dispute concerning the obligations of Presbyterian Medical Center of Philadelphia ("Presbyterian") and Monarch Life Insurance Corporation ("Monarch") to pay disability benefits to Dr. Terry Langer. Presbyterian had lured Langer, a leading cardiologist, away from the Hospital of the University of Pennsylvania (HUP) with a lucrative contractual package, an important part of which, in view of Langer's medical history, was disability benefits. Although Langer and Presbyterian had sought disability insurance from Monarch, Langer was stricken with a disabling stroke before Monarch acted with finality on Langer's application, and Monarch subsequently denied coverage. Langer sued both Monarch and Presbyterian for disability payments, but subsequently settled with Monarch under a loan receipt agreement entitling Monarch to reimbursement if Langer obtains a sufficient recovery from Presbyterian. After that settlement, Presbyterian claimed, in a companion case, that if it is found liable to Langer, then Monarch is liable over to it under various equitable and legal theories.
Presbyterian appeals from a judgment of the district court for the Eastern District of Pennsylvania entered on a jury verdict finding Presbyterian contractually liable to pay Langer disability benefits. Presbyterian contends, among other things, that the district court erred in taking from the jury an important defense, namely that Presbyterian satisfied all or most of its obligations to Langer when Langer obtained, and Presbyterian paid for, disability insurance from Monarch. Presbyterian also asserts that the district court erred in granting summary judgment to Monarch in the companion case. The district court there held that Presbyterian's responses to requests for admissions under Federal Rule of Civil Procedure 36 destroyed the predicate for two of the hospital's claims against Monarch, that one claim was factually insupportable, and that another was moot in light of the jury verdict.
Langer and Monarch have also appealed. Langer contends that the district court erred in not molding the jury verdict to award him future disability benefits. Monarch asserts that the district court erred in failing to award it sanctions under Federal Rule of Civil Procedure 11 against Presbyterian's counsel. According to Monarch, the district court recognized that Presbyterian's counsel violated Rule 11 by filing procedurally improper cross-claims that resulted in a later-lifted default judgment against Monarch, but the court abused its discretion by not assessing any sanctions.
We conclude that the district court erred in taking the issue of Langer's insurance with Monarch, and Presbyterian's theory that it was, at most, a "back-up insurer," from the jury. We will therefore vacate the judgment for Langer and remand for a new trial. We also hold that Presbyterian's judicial admissions did not justify the district court's award of summary judgment to Monarch against Presbyterian. We will therefore vacate the judgment for Monarch and remand for further proceedings on all but one of Presbyterian's liability-over claims. Finally, we conclude that the district court did not abuse its discretion in its handling of the Rule 11 motion, and will affirm its ruling on that issue. In view of these Dispositions, we need not reach some of the subsidiary issues raised in these appeals, although we do dispose of a number that are likely to recur on remand.
I. FACTS AND PROCEDURAL HISTORY
In the spring of 1985, Presbyterian's Chief of Medicine, Dr. Richard H. Helfant, approached Langer, a 45 year-old cardiologist with a national reputation, and suggested that Langer leave his staff position at the Hospital of the University of Pennsylvania ("HUP") and bring his lucrative clinical practice to nearby Presbyterian (then known as the Presbyterian-University of Pennsylvania Medical Center). Langer had suffered a heart attack in the summer of 1983, and although he had recovered by 1985, he remained particularly concerned about his disability benefits. Accordingly, disability benefits were an important part of the offering put together by Robert Bauer, Presbyterian's Vice President for Finance.
By July 1985, Presbyterian had agreed in principle to double the $135,000 annual disability coverage that Langer was then receiving under two policies at HUP. That offer appeared in letters dated July 23 and July 30, 1985, and in an attachment to an August 14, 1985 letter that outlined the benefits that Presbyterian would provide Langer. The August 14, 1985 offer letter was the most important because it served as the basis for Discussions at an August 15, 1985 meeting at which Langer and Presbyterian tried to hammer out a final agreement. The relevant portion of Presbyterian's August 14, 1985 letter read:
Double your present coverage. We understand this will result in coverage of approximately $270,000 per year.
At the August 15, 1985 meeting, however, Presbyterian's benefits expert, Frank Raiti (of the accounting firm Coopers & Lybrand), noted that Presbyterian's existing group disability policy would not be sufficient to provide $270,000 in annual coverage, and that structuring the benefits that way would be disadvantageous taxwise in any event. He therefore suggested that a better course would be for Langer to purchase disability insurance, and for Presbyterian to reimburse him for that amount plus an additional sum to cover the income taxes he would have to pay on the premium reimbursement.
The parties agreed -- or so they thought. Bauer recalls that at the August 15, 1985 meeting he stated that he did not want Presbyterian "to be an insurance company." He further testified that he thought that Presbyterian was committing itself only to make premium payments, although he concedes that he never explicitly stated that if Langer was unable to obtain insurance he would be without coverage. Raiti and Langer's lawyer, Phillip Weiss, recalled no manifestation of Bauer's qualms, however, and Langer apparently believed that Presbyerian was unconditionally offering to provide disability benefits.
At all events, in a letter dated August 21, 1985, Helfant outlined Presbyterians revised offer to Langer, including salary, responsibilities, title, and benefits. The benefits were listed in a special Attachment I. The provision for disability benefits was identical to that contained in the August 14, 1985 letter, except that a crucial third sentence was added. Captioned "Disability," the paragraph read:
Double your present coverage. We understand this will result in coverage of approximately $270,000 per year. We agree to "gross-up" payments to provide you with sufficient after tax dollars to purchase this coverage (the "gross-up" will be calculated on the basis of your marginal federal tax rate plus applicable state and city income taxes).
On August 23, 1985, Langer accepted Presbyterian's offer, and Attachment I became part of the contract between them.
Some time in late September 1985, Helfant asked Robert Hardin, Administrator of Presbyterian's Department of Medicine and Division of Cardiology, to meet with Finance Vice President Bauer to facilitate Langer's transition to Presbyterian. Although Hardin had not been involved in the recruiting, he soon became the liason between Langer and Presbyterian. Hardin and Bauer apparently recognized that Langer's earlier heart attack might make securing disability coverage for him a difficult task. Hardin therefore contacted an insurance agent, Gabriel Agins, who knew of Langer's medical history and had arranged one of Langer's existing disability policies. Hardin hoped that Agins might be able to arrange an insurance package for Langer.
Agins agreed that it might be difficult to secure coverage for Langer. Agins suggested, however, that he might be able to arrange coverage for amount less than $270,000 or for a short term (five years) rather than a longer term, and that in any case the coverage would probably depend on the results of a current medical examination. Agins later informed Hardin that two insurance carriers had rebuffed Agins's inquiries on behalf of Langer, although Hardin apparently did not pass this information on to Langer. Agins eventually notified Hardin that Monarch would be willing to consider an application for long-term disability insurance, although only for a maximum annual benefit of $204,000. Langer underwent a physical examination, was reported to be an excellent risk, and signed an application for insurance from Monarch. Presbyterian thereupon sent a check to Monarch for the premium down payment, which Monarch deposited.
About this time (late October 1985), Hardin and Agins discussed Langer's application and the effect of the premium deposit, which Agins apparently described as a "binder." Based on his conversations with Agins, Hardin thought that the premium deposit covered Langer with a temporary insurance policy until Monarch acted on the application, although Hardin does not recall whether Agins explained what the term "binder" meant.*fn1 According to Langer's original complaint, Langer believed at that time that he was covered by insurance with Monarch.
On November 1, 1985, Langer formally left HUP and began working at Presbyterian. Unfortunately, on December 13, 1985, he suffered a major right parietal lobe stroke, which left him partially paralyzed on the left side. His speech and vision were impaired, and his mobility and strength were reduced. He remained hospitalized until February 1986. Although he has apparently not recovered fully, he has since resumed his medical practice.
At the time that Langer suffered the stroke, his insurance application with Monarch was still pending, apparently because Monarch had not yet received a chest x-ray required for approval of the application. Agins was notified of Langer's stroke, although the record is unclear whether those at Monarch who were to consider Langer's application were made aware of the stroke. What is clear (and undisputed) is that in early January 1986, Agins informed Presbyterian that Monarch had rejected Langer's application. On January 15, 1986, Monarch returned the premium deposit to Langer, who deposited the check but reimbursed Presbyterian. Monarch took the position that Langer had no insurance when he was disabled, and therefore refused to pay him disability benefits.
On January 20, 1986, Hardin wrote to Weiss, Langer's lawyer, informing him that Monarch had denied Langer's application "and therefore the disability coverage will be provided via the Medical Center itself," commencing after a 90-day wailing period. On February 10, 1986, Hardin advised Bauer and Presbyterian's controller, Richard Bennett, that the payments to Langer should be treated as "self insured disability payments," in order to ensure that Langer's other disability policy would not become void. On April 15, 1986, Hardin wrote Bennett that "the guaranteed disability income to Dr. Langer (per agreement with Presbyterian) was $270,000 per year," and that Langer was owed payments for the period beginning March 13, 1986, the expiration date of the 90-day waiting period. Two days later, Bennett wrote Langer that "in accordance with our agreement dated August 21, 1985," disability payments would commence.*fn2
Presbyterian continued monthly payments from April 1986 through June 1987. During this time, Langer's recovery had progressed to the point where he began going to the office and seeing patients on a limited basis. In March 1987, however, I. Donald Snook, Presbyterian's President and CEO, told Langer that he considered their contract null and void because Langer was not fulfilling his duties. Snook also threatened to cut off the disability payments. The parties' continued Discussions proved unfruitful, and on June 18, 1987, Snook wrote to Langer, notifying him that unless they could reach an agreement by June 30, 1987, the Medical Center would terminate his appointment. Snook also informed Langer that Presbyterian would phase out over three months the "financial support payments" that it had been making, although it would not seek recovery of past "support payments" at that time.
On June 29, 1987, Langer fled suit against Presbyterian. He claimed that Presbyterian had anticipatorily breached their contract and sought an order for continuation of the disability payments in that lawsuit ("the Langer action"), Langer also joined Monarch as a defendant. Langer alleged that Monarch's acceptance of his insurance application and initial premium payment had created a temporary contract of insurance that covered him while Monarch was considering his application. Therefore, he claimed, Monarch had acted in bad faith by refusing to provide disability payments under the policy after proper request, and that it must begin current disability payments and make back payments.
On July 17, 1987, Snook wrote to Langer, staring that Langer's employment was terminated and that Presbyterian would discontinue all payments to him, including not only the "support" payments, but also salary Langer's rent at the hospital, and educational benefits for his children. Additionally, Presbyterian sought repayment of a $100,000 loan and return of all disability payments made since March 15, 1986. On August 7, 1987, Presbyterian filed a counterclaim against Langer for those amounts; it did not, however, assert a cross-claim against Monarch at that time. In the interim, on July 30, 1987, Langer had amended his complaint to seek damages from Presbyterian for wrongful discharge and intentional infliction of emotional harm. An October 15, 1987 amendment added Langer's wife as a co-plaintiff and included an additional claim for loss of consortium.
In November 1987, without advance notice to Presbyterian, Langer settled his claims against Monarch and moved, over Presbyterian's objection, to dismiss his complaint against Monarch. Under the terms of the settlement, Monarch "loaned" the Langers $10,000 per month, the "loans" to continue until Langer reached age 65 or died, or the Langers obtained a judgment from or a settlement with Presybterian. Under the settlement, the Langers would only be obligated to repay the loans out of proceeds from the recovery from Presbyterian, if any; if the recovery was worth less than $2,000,000, the Langers would owe nothing and Monarch would continue to make payments to the Langers, but in lesser amounts.*fn3 Consistent with this settlement, Langer and Monarch became allies against Presbyterian in this litigation, although they hid the fact of settlement from Presbyterian during several crucial depositions of Langer in mid-November 1987, and concealed the details of the settlement from Presbyterian until February 1988.
On December 7, 1987, in response to the Langer-Monarch settlement, Presbyterian filed what it styled as a "cross-claim" against Monarch for subrogation, indemnity, and breach of contract. Presbyterian did not purport to amend its recent answer and counterclaims to Langer's amended complaint, nor did it seek leave of the court or the written consent of Langer or Monarch to file the "cross-claim." At a status conference before the court that day, counsel for Monarch orally (and correctly) informed counsel for Presbyterian that the "cross-claims" violated the Federal Rules of Civil Procedure, although Monarch did not formally respond to them. On December 31, 1987, Presbyterian caused a default judgment to be entered against Monarch on the "cross-claims." Only then did Monarch move to strike the cross-claims" and to open the default. Not until March 3, 1988 did Presbyterian seek leave to amend its answer and include cross-claims.
The district court addressed the Presbyterian Monarch procedural tempest on April 5, 1988. It denied Presbyterian's motion to amend, lifted the default, and struck the "cross-claims." It noted that Presbyterian's conduct "prima facie" called for Rule 11 sanctions but deferred a final ruling. On the same day, the court granted Langer's motion to dismiss Monarch from the action pursuant to their settlement.
In the meantime, on February 10, 1988, Monarch had filed a separate suit against Presbyterian. That suit ("the Monarch action") sought a declaratory judgment that Presbyterian had no valid claims against Monarch. Presbyterian then asserted its erstwhile "cross-claims" in the Langer action as counterclaims in the Monarch action. Presbyterian essentially averred that if it was liable to Langer, Monarch was "liable over" to it under equitable principles and because Presbyterian was a third party beneficiary of the Insurance contract that Langer had with Monarch. The district court consolidated the Langer and Monarch actions for discovery and trial.
In June 1988, the parties filed various motions for summary judgment. On August 1, 1988, the district court ruled in the Langer action that Presbyterian was not responsible for further disability payments, although Presbyterian could not recover payments already made. The court reasoned that the contractual provision regarding disability payments unambiguously provided that Presbyterian's only obligation was to pay Langer sufficient after-tax dollars for him to purchase insurance. The court dismissed the Monarch action as moot in light of that reasoning, but it left the other claims and counterclaims (including Langer's claims for wrongful discharge and intentional infliction of emotional distress and Presbyterian's counterclaim for repayment of loans) for trial. That trial resulted in a hung jury, but Langer and Presbyterian later settled those claims. As part of the district court's January 5, 1989 order approving the settlement, however, Langer's right to appeal the summary judgment in favor of Presbyterian on the disability payments claim was preserved.
Langer appealed, and on July 6, 1989, this court reversed, concluding that the employment contract was ambiguous as to who would bear the loss if insurance coverage was not obtained. Langer v. Monarch Life Insurance Co., 879 F.2d 75 (3d Cir. 1989) ("Langer I"). In light of the reversal in the Langer action, this court reinstated the Monarch action with instructions to consider Monarch's pending motion for summary judgment. Discovery closed on December 15, 1989, and trial was scheduled for January 1990.
Trial was delayed, however, and in the interim, on March 9, 1990, the district court revisited Monarch's pending motion for Rule 11 sanctions (including attorneys fees) regarding the "cross-claim" controversy. Although the court again criticized Presbyterian's counsel for "questionable" conduct in filing a document that "probably had no legal basis under the Federal Rules of Civil Procedure" and for not rectifying the error upon notice by opposing counsel, it declined to order sanctions. The court ruled that Monarch's attorneys' fees were not reasonable expenses because Monarch, by moving to strike instead of "awaiting the inevitable" entry of the default judgment, could have avoided its expenses. Concluding its ruling, the court admonished the parties that "the time had come to get on to the substance of this case.
On April 24, 1990, before trial, the district court granted Monarch's motion for summary judgment in the Monarch action, basing its ruling on various judicial admissions by Presbyterian.*fn4 Presbyterian moved for reconsideration, but the district court held that motion in abeyance. Trial in the Langer action began on May 14, 1990.
The trial, like the rest of the litigation, proved fractious. Citing Langer's discovery defaults (particularly his failure to provide certain documents until trial and his failure identify an exert witness until the eve of trial), the district court felt it necessary to recess the trial for two weeks in the middle. Eventually the trial was completed, and on June 15, 1990, the jury returned a unanimous verdict for Langer and against Presbyterian. Specifically, the jury verdict found that the "letter agreement between Dr. Langer and Presbyterian obligated Presbyterian to pay disability income to Dr. Langer in the event he became disabled," and that Presbyterian was "obligated to pay disability income to Dr. Langer beyond the date the Dr. Langer returned to work full time." The jury awarded Langer the full $855,000 that he sought $270,000 per year for the period July 1987 through July 1990, plus $3,000 per month withheld during the April 1986 to June 1987 period. Because the jury awarded Langer his full request on his primary breach of contract theory, it did not reach his alternative theories based on fraud and detrimental reliance. On June 19, 1990, judgment was entered on the verdict.
In an opinion dated October 31, 1990, the district court denied Presbyterian's post-trial motions for judgment notwithstanding the verdict or for a new trial. It also granted Langer's motion for prejudgment interest, but it denied his motion to amend the judgment or mold the verdict to declare him permanently disabled and give him the same annual benefits in the future.*fn5 Finally, the court reaffirmed its summary judgment against Presbyterian in the Monarch action by denying Presbyterian's motion for reconsideration.
These appeals followed. Presbyterian appeals from the district court's rulings in both the Langer and Monarch actions. Langer cross-appeals from the district court's refusal to award him future damages against Presbyterian.*fn6 Monarch cross-appeals from the district court's denial of Rule 11 sanctions against Presbyterian. The district court had diversity jurisdiction under 28 U.S.C. § 1332 (1988). We have jurisdiction over the district court's final judgments and orders under 28 U.S.C. § 1291 (1988).*fn7
II. PRESBYTERIAN'S APPEAL IN THE LANGER ACTION
A. Overview of the Issues
In Langer I, both Presbyterian and Langer argued to this court that the contract was unambiguous and that they were entitled to summary judgment. Presbyterian argued that the contract unambiguously required it to do no more than provide funds for Langer to purchase his own insurance (taking taxes into account), a duty that Presbyterian had undoubtedly fulfilled. The district court had adopted this interpretation. Langer, in contrast, contended that the contract contained Presbyterian's unconditional promise to provide disability benefits, whether or not Langer was able to obtain insurance. On this view, Presbyterian was primarily liable to provide Langer with disability benefits, not just money to pay insurance premiums, although Presbyterian was permitted to fulfill its duties by buying insurance from a third party insurer which would actually disburse the benefits.
As noted above, this court held that the clause of Langer's employment contract covering disability benefits was ambiguous, and that neither party was entitled to summary judgment. In so holding, we noted that, because the contract made no statement as to who would bear the loss if no coverage were obtained, a third interpretation was possible: that Presbyterian would pay for premiums, but would also be an insurer, although only of last resort. That is, Langer may have had the duty to attempt to obtain insurance, but Presbyterian would be responsible to make disability payments if Langer was unable to obtain insurance. 879 F.2d at 81 n.7.*fn8 Under this interpretation, Presbyterian was only liable in the absence of coverage by Monarch.
At trial after remand, Presbyterian accordingly sought to adduce evidence that Langer had obtained insurance from Monarch.*fn9 The district court, however, ruled that the question of primary versus secondary liability (including whether Langer had insurance with Monarch) was a question of law for the court, and should not be argued to the jury. At the close of evidence, Presbyterian moved for a directed verdict that it had performed its obligation, at least to the extent of the $204,000 in annual coverage that Langer allegedly had with Monarch.*fn10 That motion was denied, as was Presbyterian's post-trial motion for judgment notwithstanding the (adverse) verdict.
Presbyterian now reiterates its argument that the district court should have decided as a matter of law that Langer did have interim insurance with Monarch, and that, as a result, its liability must be reduced by $204,000 per year.*fn11 In the alternative, Presbyterian suggests that the question whether insurance existed depended on disputed factual issues which should have been submitted to the jury, and that the district court erred by refusing to give Presbyterian's proposed jury instruction on that question.
Our review of the district court's legal decision to withhold this issue is plenary. The parties agree that Pennsylvania substantive law governs in this diversity case.
B. Langer's Alleged Interim Insurance With Monarch
1. The Collister Issue (Introduction)
Presbyterian contends that Langer had an interim insurance contract with Monarch under the principles of Collister v. Nationwide Life Insurance Co., 479 Pa. 579, 388 A.2d 1346 (1978). In Collister, the plaintiff's husband had applied for life insurance from the defendant insurance company, and the insurance company had accepted a two-month premium as a "conditional receipt." At the time that the plaintiff's husband died, the insurance company had neither issued the policy nor rejected the application. The insurance company subsequently denied liability, asserting that the applicant had failed to take a medical examination as required.
The Pennsylvania Supreme Court in Collister held that the insurance company's acceptance of the application form and the first premium payment created a temporary insurance contract extending from the acceptance of the deposit until the insurance company either accepted or rejected the application. 388 A.2d at 1348. The court based its decision on the reasonable expectations of the insured, holding that
in situations where the circumstances of the transaction do not indicate that the insurer intended to provide interim insurance, but nevertheless show that the insurer accepted payment of the first premium at the time it took the application, it is then up to the insurer to establish by clear and convincing evidence that the consumer had no reasonable basis for believing that he or she was purchasing immediate insurance coverage.
The court concluded that an Insurance company could meet its burden by informing the prospective applicant, in a manner calculated to attract the applicant's attention and before money changes hands, that no immediate coverage would be provided. Id. at 1355. Nevertheless,
only after such an unequivocal showing that the consumer is to be given no immediate benefits in return for his or her cash payment can a court say that the insurer has sustained its burden of establishing by clear and convincing evidence that the consumer could not reasonably have expected to receive immediate coverage in return for the payment of the required premium.
In this case, the district court refused to charge on Collister and, after trial, ruled that Collister did not apply. Therefore, in the district court's view, Langer had no insurance coverage with Monarch, and the third (backup insurer) interpretation of the contract could not help Presbyterian, even if correct. We could uphold the district court's ruling on either of two grounds. First, we could rule, as did the district court, that Presbyterian had no standing to raise the Collister issue when Langer, the putative insured, no longer wishes to.*fn12 Second, even if Collister applies, if no reasonable jury could have ...