Opinions of the United
2008 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


9-9-2008

Thabault v. Chait
Precedential or Non-Precedential: Precedential

Docket No. 06-2209




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                                           PRECEDENTIAL

          UNITED STATES COURT OF APPEALS
               FOR THE THIRD CIRCUIT
                    _____________

                        No. 06-2209
                       _____________

         PAULETTE J. THABAULT*, as Receiver of
             Ambassador Insurance Company


                              v.


     DORIS JUNE CHAIT, as Representative of the Estate
   of Arnold Chait; PRICEWATERHOUSECOOPERS LLP

                PriceWaterhouseCoopers LLP,

                                       Appellant

                       _____________

         Appeal from the United States District Court
                  for the District of New Jersey
                 (D.C. Civil No. 2:85-cv-02441)
        District Judge: Honorable Harold A. Ackerman


                 Argued September 11, 2007

  Before: SCIRICA, Chief Judge, RENDELL and FUENTES,
                      Circuit Judges.

                  (Filed: September 9, 2008)




* Amended in accordance with Clerk’s Order dated 6/6/06
pursuant to Fed. R. App. P. 43(c)
Richard B. Whitney, Esq. [Argued]
Tracy K. Stratford
Jones Day
901 Lakeside Avenue
North Point
Cleveland, OH 44114

Robert J. Stickles, Esq.
Buchanan Ingersoll & Rooney
550 Broad Street
Suite 810
Newark, NJ 07102

Fordham E. Huffman, Esq.
Jones Day
325 John H. McConnell Boulevard
Suite 600, P.O.Box 165017
Columbus, OH 43215

             Attorneys for Appellee

Evan R. Chesler, Esq. [Argued]
Antony L. Ryan
Cravath, Swaine & Moore
825 Eighth Avenue
Worldwide Plaza
New York, NY 10019

Jay K. Wright, Esq.
Andrew T. Karron
Matthew A. Eisenstein
Arnold & Porter
555 12th Street, N.W.
Washington, DC 20004

             Attorneys for Appellant

Kevin McNulty, Esq.

                                 2
Gibbons
One Gateway Center
Newark, NJ 07102

              Amicus Curiae for the Court


                  OPINION OF THE COURT


FUENTES, Circuit Judge.

        For over 20 years, the Insurance Commissioner for the State
of Vermont (the “Commissioner”) has served as receiver of
Ambassador Insurance Company (“Ambassador” or “the
company”) and sought to recover damages for claims paid on
insurance policies following the company’s downward spiral and
ultimate collapse.1 In 1985, the Commissioner brought a
professional malpractice claim against Coopers & Lybrand
(“Coopers”), on behalf of the company, alleging that Coopers
failed to disclose the insolvency of Ambassador following their
1981 and 1982 audit and negligently issued unqualified and
favorable audit opinions with knowledge that the financial
statements were untrue and materially understated the company’s
loss reserves. At trial in the United States District Court for the
District of New Jersey, the Commissioner presented a traditional
malpractice claim and proved to the jury that but for Coopers’s
negligence, Ambassador would not have continued to write
insurance policies, which resulted in its ultimate failure. At the
close of a nine-week trial, the jury awarded the State of Vermont
$119.9 million in damages. The judgment reached $182.9 million



1
  At the time this action was filed, David T. Bard was the
Commissioner of Banking and Insurance for the State of Vermont.
Paulette J. Thabault is the current Commissioner of Vermont’s
Department of Banking, Insurance, Securities & Health Care
Administration and has been substituted pursuant to Fed. R. App.
P. 43(c).


                                3
after the District Court added prejudgme+6666+nt interest.
PricewaterhouseCoopers (“PwC”), the successor in interest to
Coopers, appeals the jury verdict. We will affirm the jury’s verdict
in its entirety.

                     I. Factual Background

       Ambassador was an insurance company incorporated in
Vermont, with its principal place of business in North Bergen, New
Jersey. Arnold Chait (“Chait”) founded Ambassador in 1965 and
served as the company’s president and chief executive officer.
Ambassador was a surplus lines insurance company, which insured
high-risk businesses and individuals who were unable to get
insurance from other companies at standard rates. In 1971, Chait
formed a holding company to raise capital for Ambassador named
Ambassador Group. Chait and his wife, Doris Chait, owned
approximately 65% of the Ambassador Group stock; the remainder
was publicly held.

       By virtue of its Vermont domicile, Ambassador was
regulated by the Vermont Department of Banking and Insurance
(the “Insurance Department”). According to Vermont statute,
Ambassador was required to file an annual financial statement with
the Insurance Department (“annual Vermont statement”) each year
by March 15th. The applicable statute required the annual
Vermont statement to be “verified by oath of two of its executive
officers,” but did not require that the statement be audited. See Vt.
Stat. Ann. tit. 8, § 3561 (1984). The statute also authorized
periodic on-site examinations by the Insurance Department
examiners. 

       Ambassador was also required to file an annual financial
statement with the Securities and Exchange Commission (“annual
SEC statement”). Unlike the annual Vermont statement, the annual
SEC statement had to be audited. To audit the Ambassador
Group’s annual SEC statements that were filed between 1979 and
1982, Ambassador retained Coopers. Coopers did not audit the
annual Vermont statements that Ambassador filed with the
Insurance Department; however these statements incorporated
Coopers’s loss reserves calculations from the audited annual SEC

                                 4
statements.

       From January to May 1981, two Vermont state examiners
conducted an on-site examination of Ambassador’s annual
Vermont statements for the five-year period ending December 31,
1979, and detected no significant problems. In particular, the
Vermont state examiners concluded that Ambassador’s loss
reserves reported in 1979 were adequate. The first downturn in
Ambassador’s financial strength was reflected in its 1981 annual
SEC statement, which showed an underwriting loss. Thereafter, in
February 1982, Ambassador Group’s stock price dropped by almost
half. Ambassador Group’s 1982 annual SEC statement recorded
an overall loss and showed a drop in its “surplus.” 2 In April 1983,
Ambassador also failed seven of the National Association of
Insurance Commissioners’s early warning tests that the Insurance
Department used to monitor insurers’ financial condition.

       Following this downturn, in March 1983, the Insurance
Department retained Kramer Capital Consultants (“Kramer”), an
independent financial consulting firm for insurance companies and
regulators, to conduct a special examination of Ambassador,
including its loss reserves. Kramer, relying on Coopers’s audited
annual SEC statements, concluded that there were no material
deficiencies in Ambassador’s reported loss reserves and that it was
solvent. Nonetheless, it reported that Ambassador’s “financial
condition has materially deteriorated, and the [c]ompany may be
deemed to be operating in a hazardous financial condition.” (App.
2038.) In light of this report, the Insurance Department presented
Chait with a plan requiring Ambassador to halt its growth by
reducing premium volumes by 30%. Chait accepted the plan but
he failed to abide by it and continued to increase Ambassador’s
premium volumes. In September 1983, the Insurance Department
ordered Ambassador to cease payment of dividends and ordered
Kramer to resume its on-site examination.




2
 An insurance company’s surplus is a measurement of the excess
of assets over liabilities. Regulators typically restrict an insurer’s
policy underwriting to a multiple of its unrestricted surplus.

                                  5
       Within two months, Kramer issued a report concluding that
Ambassador was $3 million insolvent.3 Immediately, the Insurance
Department filed a complaint against Ambassador in Vermont state
court, seeking to enjoin Ambassador from conducting further
business and to have the Commissioner appointed as receiver.
Based on its conclusion that “it is unsafe and inexpedient for
Ambassador to continue business,” the state court appointed the
Commissioner as Ambassador’s receiver. (App. 1789.) In 1984,
the Commissioner concluded that Ambassador could not be
successfully rehabilitated and, accordingly, obtained an order of
liquidation.

       In May 1985, the Commissioner filed this action in the
United States District Court for the District of New Jersey. The
complaint alleged, among other things, negligent mismanagement
and misfeasance, breach of fiduciary duty, fraud and negligent
misrepresentation against Arnold and Doris Chait and Richard
Tafro, Ambassador’s former vice president of finance. Relevant
here, the complaint also asserted a cause of action for negligent
auditing practices against Coopers.

       In his claim against Coopers, the Commissioner alleged that
Coopers was negligent in its audit of Ambassador’s 1981 and 1982
financial statements.4 Specifically, the Commissioner claimed that
as a result of its audit of Ambassador Group and its subsidiaries,
Coopers either knew or should have known in early 1982 that
Ambassador was only marginally solvent and should not have
continued writing new insurance policies. He further alleged that
if Coopers had issued the adverse audit opinion that it should have


3
  “Insolvent” is defined as a debtor “having liabilities that exceed
the value of assets” or the inability to pay debts as they fall due or
in the usual course of business. See Black’s Law Dictionary 812
(8th ed. 2004).
4
 The Commissioner presented evidence at trial regarding Coopers’
1982 audit, however, the District Court determined that the jury
could only be asked whether Coopers was negligent in the 1981
audit and, if so, whether that negligence caused damages to
Ambassador. This ruling is not before us.

                                  6
the regulators could have acted to protect Ambassador and its
policyholders, claimants and creditors.

       In November 1997, following Chait’s death, the Estate of
Arnold Chait (the “Estate”) was substituted as a defendant in the
Commissioner’s action. Coopers, a national accounting firm,
subsequently merged w ith PriceW aterhouse to form
PriceWaterhouseCoopers (“PwC”) in 1998.5 In the years that
followed, PwC filed numerous motions, seeking, among other
things, summary judgment and separate trials for the
Commissioner’s claims against PwC and the Estate. All the
motions were denied. Approximately six weeks before trial, the
District Court, sua sponte, entered default against Chait’s estate,
pursuant to Federal Rule of Civil Procedure 55(a), for failure to
comply with a Court order to seek replacement counsel or notify
the Court of its intentions with regard to the litigation. The case
against the Estate and PwC then proceeded to trial.6

        At the close of the evidence, the District Court sua sponte
entered a default judgment against the Estate, pursuant to Federal
Rule of Civil Procedure 55(b)(2), removing the Estate’s liability as
an issue for the jury, requiring the jury to only consider Chait’s
percentage of fault, and instructed the jury accordingly. After
deliberating for less than two days, the jury reached a verdict
against PwC and the Estate and awarded total damages of $119.9
million to the Commissioner. The jury apportioned 60% of the
fault to Chait and the remaining 40% to PwC. Following the jury
verdict, the District Court added $63 million in prejudgment
interest to the jury’s damages award, raising the total liability to
$182.9 million. Because PwC was deemed jointly and severally
liable under New Jersey’s then-applicable law, PwC was liable for
the entire $182.9 million judgment. PwC now appeals the District



5
  For the purposes of our discussion going forward, we will refer
to Coopers and PwC collectively as PwC.
6
 Doris Chait and Richard Tafro were dismissed individually with
prejudice before trial pursuant to settlement agreements with the
Commissioner.

                                 7
Court’s final judgment.7

        On appeal, PwC argues that the District Court erred (1) in
not entering judgment for PwC as a matter of law for lack of
compensable injury to Ambassador on the basis that deepening
insolvency cannot be used as a measure of damages for a
negligence claim; (2) in not granting judgment to PwC as a matter
of law for lack of proximate causation; (3) in not entering judgment
as a matter of law on PwC’s in pari delicto defense; (4) in denying
PwC’s motion for a separate trial because the Estate was in default
and no jury issues remained as to Chait’s liability; (5) by entering
an excessive damages award; (6) in awarding $63 million in pre-
judgment interest; and (7) in applying New Jersey law on joint and
severable liability rather than Vermont law. We address each in
turn.

    II. Deepening Insolvency and Damages to Ambassador

       On appeal, PwC contends that the Commissioner’s case was
based on a theory of damages for “deepening insolvency” and that
such a theory cannot be used as a measure of damages for an
independent cause of action such as malpractice.      PwC also
maintains that it was error for the District Court not to enter
summary judgment in favor of PwC because the Commissioner
failed to prove that PwC’s alleged negligence resulted in any
cognizable harm to Ambassador. According to PwC, only
Ambassador’s policyholders and creditors suffered harm, not the
company.

       While we do not ignore the undisputed fact that there was
reference made throughout this case to “deepening insolvency” as
a measure of damages for PwC’s negligence, we conclude that the
damages presented to the jury were based on traditional New Jersey




7
 The District Court had subject matter jurisdiction under 28 U.S.C.
§ 1332 based on diversity of citizenship. We have jurisdiction
under 28 U.S.C. § 1291. PwC filed a timely notice of appeal.

                                 8
tort damages.8 Under New Jersey law, the measure of damages for
a negligence action are the damages proximately caused by
defendant’s conduct. See Schroeder v. Perkel, 

(N.J.
1981); Gleitman v. Cosgrove, 

, 692 (N.J. 1967).
As to damages, the District Court instructed the jury at the close of
trial that:

       The Vermont Commissioner seeks damages for the
       net loss Ambassador incurred from its continued
       operation after March 31st, 1982. The Vermont
       Commissioner contends that [PwC] is liable for such
       damages because Ambassador would have been
       prevented from writing new business if [PwC] had
       conducted an audit of [Ambassador] year-end 1981
       financial statements in a non-negligent manner.
       Accordingly, the [Commissioner’s] theory of
       damages is that, because of [PwC’s] alleged
       negligent audit, Ambassador was permitted to
       continue to write new business until November 9,
       1983.    During that time, the [Commissioner]
       contends that the insurance that [Ambassador] wrote
       produced claims that cost the company more than the
       premiums, plus interest and other investment income
       on those premiums, it collected for that insurance.
       The [Commissioner] claims that this amount equals
       $119.9 million and that this constitutes the
       company’s damages. . . . Your job as jurors will be
       to consider the evidence that the [Commissioner] has
       presented relating to Ambassador’s insolvency and
       its consequences.



8
   In denying PwC’s motion for summary judgment as to the
Commissioner’s claim and the motion to strike the “wrongful
corporate life” damages theory, the District Court engaged in a
choice of law analysis and concluded that New Jersey law would
control the substantive issues. The parties do not dispute that New
Jersey law applies to the substantive issues and only dispute the
applicability of New Jersey’s law imposing joint and several
liability. See infra Part VIII.

                                  9
(App. 1504-05.)      The question of whether PwC caused
Ambassador’s deepening insolvency was never put before the jury.
Rather, on the question of damages, the verdict sheet asked the
jurors: “Has the [Commissioner] proven by a preponderance of the
evidence that [PwC’s] breach was a proximate cause of any
damages that the [Ambassador] may have incurred?” (App. 240.)
(emphasis added). The jury responded: “Yes.” 

was
then asked to determine the total damages incurred by Ambassador
that the Commissioner proved by a preponderance of the evidence.

        Despite PwC’s contention, the jury was not simply presented
with a comparison of Ambassador’s balance sheets at the point of
wrongdoing and at the point of insolvency to show the harm done
to the corporation and to measure the damages. Instead, the
Commissioner proved actual damages: itemized, specific, and
avoidable losses that Ambassador incurred by continuing its
operations beyond the date of PwC’s negligent audits. The
damages that were presented to the jury were Ambassador’s $119.9
million net loss from continuing operations after March 31, 1982,
the date that PwC completed its 1981 audit of Ambassador. The
damages were comprised of $188.2 million in total costs incurred
from continuing operations past March 31, 1982 less $80.9 million
in net premiums earned on the insurance policies that Ambassador
wrote after this date, plus $12.6 million for the net interest
expense.9 (App. 1886.) The total cost incurred from continuing
operations, $188.2 million, included the net cost of claims incurred,
operating and receivership expenses, and dividends paid to the
parent company. (App. 1886.) The net cost of claims incurred
included future unpaid claims.

       Undoubtedly, these losses, which arose from the continued
writing of insurance policies, had an impact on Ambassador’s
solvency and increased Ambassador’s liabilities. This increase in
Ambassador’s liabilities was caused by PwC’s negligence and thus
was properly considered as damages proximately caused by PwC’s
negligence.



9
 The net interest expense was the difference between the cost of
borrowing and the interested earned on premiums collected.

                                 10
        Relying on In re CitX Corp. (“CitX”), PwC asks us to hold
that whenever a plaintiff makes reference to “deepening
insolvency” or “an injury to the Debtor’s corporate property from
the fraudulent expansion of corporate debt and prolongation of its
corporate life,” as part of its explanation of damages in a
negligence action, recovery is not permissible. (Appellant Br. at
24-29 (citing 

, 677 (3d Cir. 2006)). However, CitX
does not support this proposition. When a plaintiff brings an action
for professional negligence and proves that the defendant’s
negligent conduct was the proximate cause of a corporation’s
increased liabilities, decreased fair market value, or lost profits, the
plaintiff may recover damages in accordance with state law.

        In Official Comm. of Unsecured Creditors v. R.F. Lafferty
& Co., (“Lafferty”), we held that the Pennsylvania Supreme Court
would recognize deepening insolvency as an independent cause of
action where it causes damage to corporate property. 

,
351 (3d. Cir 2001). We defined deepening insolvency as “an injury
to the Debtors’ corporate property from the fraudulent expansion
of corporate debt and prolongation of corporate life.” 

We further explained that “prolonging an insolvent corporation’s
life through bad debt may simply cause the dissipation of corporate
assets” and that such harm “can be averted, and the value within an
insolvent corporation salvaged, if the corporation is dissolved in a
timely manner, rather than kept afloat with spurious debt.” 

Lafferty was decided under Pennsylvania law, unlike the
instant case which is controlled by New Jersey law.

        Subsequently in CitX, the trustee of a bankrupt internet
company, CitX Corporation, Inc. (“CitX”), sued the company’s
accounting firm for malpractice and deepening 

. The accounting firm compiled CitX’s financial
statements from July 1997 through December 31, 1999. Using
these financial statements at shareholder meetings, CitX raised over
$1,000,000 in equity, allowing it to continue its operations and
accrue millions of dollars in debt. 

The trustee alleged
that the accounting firm had “dramatically deepened the insolvency
of CitX, and wrongfully expanded the debt of CitX and waste of its
illegally raised capital, by permitting CitX to incur additional debt

                                  11
by virtue of the compilation statements prepared and relied upon by
third parties.” 

(internal quotations omitted).

       We determined that there was no harm to the plaintiff
corporation because the immediate result of the defendant’s audit
was to increase CitX’s capital and reduce its debt through an extra
$1,000,000 in investments. 

extent that the extra capital,
which decreased CitX’s insolvency, extended the corporation’s life
and allowed management to incur more debt, the ultimate harm
was caused by mismanagement, not the auditor. 

In this
case, on the other hand, the jury found that the negligent audit
proximately caused an increase in liabilities through the writing of
more insurance policies. The audit in the present case had an
immediate negative consequence, as contrasted with the immediate
positive consequence following the audit in CitX. In other words,
the damages here are losses incurred on insurance policies that
would not have been written but for Coopers’s negligence.

        In affirming the District Court’s grant of summary judgment
on behalf of the accounting firm in CitX, we stated that Lafferty
had “never held that [deepening insolvency] was a valid theory of
damages for an independent cause of action.” 

(emphasis
in original). We explained that the “statements in Lafferty were in
the context of a deepening-insolvency cause of action,” and held
that “[t]hey should not be interpreted to create a novel theory of
damages for an independent cause of action like malpractice.” 

court also stated that “[t]he deepening of a firm’s
insolvency is not an independent form of corporate damage.” 

(citation omitted). However, we further explained that:

      Where an independent cause of action gives a firm a
      remedy for the increase in its liabilities, the decrease
      in fair asset value, or its lost profits, then the firm
      may recover, without reference to the incidental
      impact upon the solvency 

(quoting Sabin Willett, The Shallows of Deepening
Insolvency, 60 Bus. Law. 549, 552-57 (2005)).

       What is important to note at this juncture is that whether

                                12
deepening insolvency constitutes a valid theory of damages for a
harm is a matter that is uniquely subject to state law principles. It
is well settled jurisprudence that as a federal court sitting in
diversity we are required to apply the law of the state. Erie R. Co.
v. Tompkins, 

, 78 (1938); see also Commonwealth of
Pennsylvania v. Brown, 

, 777 (3d Cir. 1967) (stating
that in diversity cases, “where the applicable rule of decision is the
state law, it is the duty of the federal court to ascertain and apply
that law, even though it has not been expounded by the highest
court of the state”). As in Lafferty, CitX examined deepening
insolvency as a theory of damages under Pennsylvania law, which
is not binding in this case.

         In this case, we are persuaded by New Jersey law that the
Commissioner’s tort damages theory was appropriate for PwC’s
negligent conduct. PwC asserts that “there is no reason to believe
that New Jersey would authorize ‘deepening insolvency’ damages
beyond what is authorized by Lafferty and CitX.” (Appellant Br.
28.) Although neither the New Jersey legislature nor the New
Jersey Supreme Court has authorized a “deepening insolvency”
cause of action, contrary to PwC’s assertion, there has been a trend
among the state’s courts toward recognizing “deepening
insolvency” damages. In NCP Litig. Trust v. KMPG, LLP, (“NCP
I”), the New Jersey Supreme Court addressed the question of
damages resulting from the inflation of a company’s revenues and
continuation beyond insolvency. 

, 888 (N.J. 2006).
In NCP I, KMPG was retained as the accountant for the Physician
Computer Network, Inc (“PCN”). 

In the mid-1990’s
two officers of PCN conducted fraudulent transactions to
artificially inflate PCN’s revenues. 

The auditors failed
to detect the misrepresentations initially. 

uncovered the misrepresentations years later, the company was
forced to acknowledge previously unreported losses of tens of
millions of dollars. The disclosures resulted in a cash flow deficit
and PCN defaulting on its bank debt. In 1998, PCN filed for
bankruptcy. 

Under the bankruptcy plan, PCN assigned
all its potential causes of action to the NCP Litigation Trust (the
“Trust”). 

the Trust initiated suit against KPMG
alleging causes of action for (i) negligence (ii) negligent
misrepresentation, (iii) breach of contract, and (iv) breach of

                                 13
fiduciary duty. The trial court granted KPMG’s motion to dismiss
the complaint. It reasoned that because the wrongdoing of PCN’s
corporate officers had to be imputed to the company and because
under in pari delicto, the Trust stood in the shoes of the company,
PCN, PCN and the Trust’s unclean hands barred the action.10 

The Appellate Division affirmed the dismissal of the
Trust’s breach of fiduciary duty claims and reversed on all the
remaining causes of action, concluding that the in pari delicto
defense is not available to one who contributes to the misconduct
sought to be imputed. 

       On appeal, the New Jersey Supreme Court affirmed the
Appellate Division, holding that because KPMG’s alleged
negligence contributed to the misconduct of officers at PCN,
KPMG was barred from raising the in pari delicto defense. 

In doing so, the Supreme Court explained that “inflating a
corporation’s revenues and enabling a corporation to continue in
business ‘past the point of insolvency’ cannot be considered a
benefit to the corporation.” 

The New Jersey Supreme
Court remanded the case for discovery, noting that the only issue
before it was the applicability of the imputation doctrine. 

         On remand, the trial court addressed the question of whether
New Jersey jurisprudence recognized deepening insolvency as a
theory of harm to the corporation and held that it was a legally
cognizable harm. NCP Litigation Trust v. KMPG, LLP, 

, 140 (N.J. Super. Ct. 2007) (“NCP II”). In NCP II, the court
rejected our language in CitX and embraced the theory that
corporate damage could be found in the form of increased
liabilities, decrease in fair asset value and lost profits, noting that
such damage encompasses the same concept as deepening
insolvency. 

Relying on the Supreme Court’s



10
   The in pari delicto doctrine dictates that a plaintiff who has
participated in wrongdoing may not recover damages resulting
from the wrongdoing. See Black’s Law Dictionary 806 (8th ed.
2004).


                                  14
statement in NCP I, the trial court held that:

       Whether courts term it “deepening insolvency” or
       describe in detail the gamut of destruction that the
       term is meant to embrace, the bottom line is the
       same. Harm is harm. Where there is a harm, the law
       provides a remedy. . . . The artificial prolongation of
       an insolvent corporation’s life can harm a
       corporation. Where there is a harm, the law provides
       a remedy.

        In light of NCP I and NCP II, we are not as resolute that
New Jersey law would not recognize deepening insolvency as a
cause of action or as a theory of damages. In the end, we are
satisfied that New Jersey law provides for a remedy for traditional
tort damages that flow from wrongful conduct that results in
increased liabilities, decrease in fair asset value and lost profits of
a corporation.

         PwC also asserts that the Commissioner failed to establish
an injury to Ambassador separate from an injury to its creditors and
thus recovery is barred by CitX. PwC argues that $89.1 million of
the Commissioner’s $119.9 million damages calculation consists
of net liabilities from insurance policies that Ambassador wrote
between April 1, 1982 and November 10, 1983 – the excess of the
claims paid out over the premiums received and the investment
income on those premiums. According to PwC, this amount
represents an increase in the liabilities of the Estate and a loss to
Ambassador’s policyholders, not a distinct injury to Ambassador.
Further, the unpaid portion on these claims is an increase in the
liabilities of Ambassador and a loss to policyholders. Today we
hold that an increase in liabilities is a harm to the company and the
law provides a remedy when a plaintiff proves a negligence cause
of action.

       Under the facts of this case, we are satisfied that a jury
could properly hold PwC liable for damages under traditional
negligence and malpractice principles. Accepting PwC’s invitation

                                  15
to prevent a plaintiff from recovering damages in a negligence
action where there has been reference to deepening insolvency,
would require us to ignore well-settled New Jersey tort law
doctrine, which we are not inclined to do. We hold that traditional
damages, stemming from actual harm of a defendant’s negligence,
do not become invalid merely because they have the effect of
increasing a corporation’s insolvency.

                      III. Proximate Cause

        PwC argues that its audits of Ambassador were not a
substantial factor in the Insurance Department’s failure to intervene
earlier and that Ambassador’s damages resulted from several other
but-for causes. PwC contends that the District Court should not
have charged the jury on the substantial factor test and instead
should have entered judgment in favor of PwC because its
negligence was “sufficiently remote” or “insignificant.” Finally,
PwC asserts that it is entitled to a new trial because the District
Court refused to instruct the jury on superseding causes, a distinct
causation test requiring a separate instruction. For the reasons
stated, we reject these contentions.

                    A. Substantial Factor Test

        Under New Jersey law, when “multiple factors contribut[e]
to the cause of the accident,” a defendant in a negligence action is
not liable if his conduct was “too remotely or insignificantly
related” to the injury. Brown v. U.S. Stove Co., 

,
1243 (N.J. 1984). To incur liability, the defendant’s negligence
must be “a substantial factor in bringing about the injuries.” 

PwC argues that the District Court should
have entered summary judgment in favor of PwC as a matter of law
because PwC’s negligence was remote and insignificant. PwC
asserts that its audits of Ambassador were not a substantial factor
in the Commissioner’s failure to intervene earlier because the
Commissioner did not rely on PwC’s audit opinions but, rather,
relied on numerous third parties, including its own examiners, who
did not undercover Ambassador’s insolvency.

       The District Court determined that the questions of

                                 16
proximate and intervening causes were to be left to the jury for its
factual determination. In denying PwC’s motion for summary
judgment, the District Court properly recognized that the issue of
proximate cause could be addressed as a matter of law “only where
the outcome is clear or when highly extraordinary events or
conduct takes place.” (App. 138.) The District Court found that
PwC failed to provide evidence that intervening events were
“sufficiently extraordinary or so clearly unrelated to the antecedent
negligence that imposition of liability would be unreasonable.”
(App. 144 (citation omitted).) The District Court also found that
PwC disputed the facts regarding proximate cause, and thus,
summary judgment was inappropriate.

        PwC relies on FDIC v. Ernst & Young, 

, 169
(5th Cir. 1992), in which the Federal Deposit Insurance Company
(“FDIC”), as receiver for the failed Western Savings Association
(“Western”), filed negligence and breach of contract claims against
Western’s auditors, Ernst & Young. In the district court the FDIC
argued that “if the audits had been accurate, . . . government
regulators would have prevented further losses.” 

court granted summary judgment in favor of the auditors observing
that the FDIC, as assignee, stood in the shoes of Western and
because Western already had knowledge of its precarious financial
condition neither it nor the FDIC could have relied on the allegedly
negligent audits. The Fifth Circuit affirmed, noting that “[i]f
nobody relied on the audit, then the audit could not have been a
substantial factor in bringing about the injury.” 

(quotation omitted). The Fifth Circuit found that the sole owner of
Western, Jarrett E. Woods, did not rely on the audits because it was
his risky lending practices that created Western’s precarious
financial condition. The court held that Woods’s fraudulent
activities were on behalf of Western and thus his knowledge and
conduct was imputable to Western. The Fifth Circuit concluded
that the FDIC could not maintain a suit “for a negligently
performed audit upon which neither the owner nor the corporation
relied.” 

        We believe FDIC to be inapposite. The Fifth Circuit, found
that the FDIC had not relied on the audits on the basis that the sole
owner’s knowledge and fraudulent conduct were imputable to

                                 17
Western. Unlike in FDIC, we will not impute Chait’s conduct or
knowledge to Ambassador, as discussed later. See infra Part IV.B.
Thus, Ambassador did not have knowledge of Chait’s negligent
conduct nor of Chait’s breach of fiduciary duty as the CEO, and did
not know that PwC negligently audited it. Furthermore, the record
in the instant case establishes that Ambassador relied on PwC’s
financial statements. Ambassador incorporated PwC’s loss
reserves calculations from the audited annual SEC statements into
the annual Vermont statements Ambassador filed with the
Insurance Department.        The Commissioner’s independent
examiners relied on these same loss reserve calculations. Finally,
Ambassador relied on the PwC’s loss reserves calculations from
the audited annual SEC statements to continue writing insurance
policies.

        PwC also relies on Muhl v. Ambassador Group, Inc., No.
28414/85 (N.Y. Sup. Ct. Sept. 3, 1996), aff’d mem. sub. nom.
Muhl v. Coopers & Lybrand, 

(App. Div. 1997),
a case that involves Ambassador’s subsidiary, Horizon. In Muhl,
the New York Superintendent of Insurance brought an action on
behalf of Horizon Insurance Company against PwC, alleging
negligence based on the same audits as the ones at issue in the
instant case. The New York Superintendent, similar to the
Commissioner, alleged that he would have intervened earlier had
he known Horizon’s true financial condition. The New York
Supreme Court granted summary judgment to PwC on the basis
that the New York Insurance regulator did not rely PwC’s audit of
Ambassador. The Court also emphasized that the New York
insurance regulators usually relied on their “own independent
examinations.” 

In contrast here, the annual Vermont
statements that Ambassador filed with the Insurance Department
incorporated PwC’s loss reserves calculations from the audited
annual SEC statements. Thus the Commissioner did rely on those
loss reserve calculations, unlike the New York Superintendent,
who disregarded the reports of outside auditors.

        Accordingly, we believe that the District Court correctly
concluded that the record contained factual disputes as to
proximate cause and whether any intervening events cut off PwC’s
liability. These questions were properly submitted for the jury’s

                                18
determination. Viewing the evidence in the light most favorable to
the Commissioner, the Court did not err in denying PwC’s motions
for judgment as a matter of law.

            B. Jury Instruction on Superseding Cause

        Having determined that the District Court properly
submitted the issue of proximate cause to the jury, we turn to
PwC’s contention that it is entitled to a new trial because the
District Court refused to instruct the jury on superseding causes, a
distinct causation test under New Jersey law requiring a separate
instruction. A superseding cause is an event or conduct sufficiently
unrelated to or unanticipated by a defendant that warrants
termination of liability, irrespective of whether the defendant’s
negligence was or was not a substantial factor in bringing about the
harm. PwC asserts that a jury could have found that Chait’s
independent and intentional misconduct, as well as failures by third
parties such as the Commissioner’s independent examiners, were
superseding causes of Ambassador’s injury. The Commissioner
responds that PwC failed to request a proper instruction of
“superseding cause” before the District Court, and thus failed to
preserve the issue for appeal.

                            1. Waiver

        We first address the Commissioner’s assertion that PwC has
waived this argument. Under Federal Rule of Civil Procedure
51(c)(1), “[a] party who objects to an instruction or the failure to
give an instruction must do so on the record, stating distinctly the
matter objected to and the grounds for the objection.” We believe
this issue was not waived.

        As shown in the record, PwC requested the following
instruction: “If you find that plaintiff’s damages were the result of
an intervening cause for which [PwC] is not responsible, then you
would find that the conduct of [PwC] was not a proximate cause of
the plaintiff’s damages.” (App. 419.) The District Court denied
this request and adopted New Jersey Model Civil Charge 7.13
entitled “Proximate Cause,” which provides that where there is a
claim of an intervening or superseding cause, Civil Charge 7.14

                                 19
should also be charged.11 Nevertheless, the District Court did not
issue Civil Charge 7.14. 12 Furthermore, the record reflects that
PwC preserved this issue for appeal by objecting to the “absence
of an instruction on multiple causes and intervening cause.” (App.
453.) Because Civil Charge 7.14 is very similar to PwC’s
requested instruction and PwC objected to the absence of such an
instruction, we conclude that PwC’s claim based on the absence of
a superseding cause instruction was not waived. Thus, we turn to
the merits of the District Court’s decision not to instruct the jury on
superseding causes.

        2. The District Court’s Ruling Not to Instruct on
                       Superseding Causes

         Under New Jersey law, “the doctrine of superseding cause
focuses on whether events or conduct that intervene subsequent to
the defendant’s negligence are sufficiently unrelated to or
unanticipated by that negligence to warrant termination of the
defendant’s responsibility.” Lynch v. Scheininger, 

,
125 (N.J. 2000); see also Restatement (Second) of Torts § 440
comment b (1965) (“A superseding cause relieves the actor from
liability, irrespective of whether his antecedent negligence was or
was not a substantial factor in bringing about the harm. Therefore,
if in looking back from the harm and tracing the sequence of events
by which it was produced, it is found that a superseding cause has
operated, there is no need of determining whether the actor’s
antecedent conduct was or was not a substantial factor in bringing
about the harm.”). An intervening cause which is foreseeable or a


11
  The New Jersey Model Civil Charges were revised in October
2007 and these sections are now numbered 6.13 and 6.14
respectively.
12
   Model Civil Charge 7.14 states, in part: “You must determine
whether the alleged intervening cause was an intervening cause
that destroyed the substantial causal connection between the
defendant’s negligent actions (or omissions) and the
accident/incident/event or injury/loss/harm. If it did, then [PwC’s]
n e g li g e n c e w a s n o t a p r o x im a te c a u s e o f th e
accident/incident/event or injury/loss/harm.”

                                  20
normal incident of the risk created by a tortfeasor’s action does not
relieve the tortfeasor of liability. See 

(quoting Rappaport v. Nichols, 

(N.J. 1959)).
Ordinarily, the question of whether an intervening event supersedes
a defendant’s liability is left to the jury for its factual
determination. 

the evidence does not suggest
any superseding or intervening cause, it is improper for the trial
court to instruct the jury and permit the jury to speculate that one
existed. See O’Brien v. Bethlehem Steel Corp., 

, 831
(N.J. 1971).

        As noted above, the District Court found that PwC failed to
provide evidence that intervening events were “sufficiently
extraordinary or so clearly unrelated to the antecedent negligence
that imposition of liability would be unreasonable.” (App. 144
(quotation omitted).) We agree. However egregious Chait’s
conduct may have been, we cannot conclude on the record before
us that the evidence presented at trial indicates that his conduct was
so unrelated to PwC’s negligent conduct that it would have
extinguished PwC’s liability. In our review of the record, we are
satisfied that the District Court properly omitted such an
instruction.

                        IV. In Pari Delicto

        Next we turn to PwC’s argument that Chait’s improper
conduct should have been imputed to Ambassador, triggering the
in pari delicto doctrine and relieving PwC of liability. “The
doctrine of in pari delicto provides that a plaintiff may not assert
a claim against a defendant if the plaintiff bears fault for the
claim.” 

. PwC argues that under this
doctrine a corporate officer’s misconduct is imputed to the
corporation and a plaintiff suing on behalf of the corporation is
barred from filing a third party claim in which the plaintiff is at
fault. PwC argues that because the District Court found that Chait
committed gross negligence and breached his fiduciary duty, and
because that conduct should be imputed to Ambassador, the
Commissioner suing on behalf of Ambassador, should be barred
from suing PwC for wrongful conduct for which Ambassador bears
fault. See 

.

                                 21
                              A. Waiver

        The Commissioner first argues that PwC waived its right to
complain about the lack of a jury instruction on the in pari delicto
defense by not proposing an appropriate charge. The record
demonstrates that PwC did propose a charge, which the District
Court refused to give, which included the following language: “In
general, any agents or employees of an organization may bind the
organization by their acts and declarations made while acting
within the scope of their authority delegated to them by the
organization or within the scope of their duties as agents or
employees of the organization.” (App. 414). PwC also requested
a question on the verdict sheet to determine if officers were acting
for their own benefit, which the District Court also rejected.
Finally, PwC objected to the absence of an “instruction on
attribution of acts of agents or employees of an organization to the
organization.”13 (App. 452.) Based on the record, it is clear that
PwC preserved this issue for appeal.


     B. District Court’s Ruling Not to Instruct on In Pari Delicto


       PwC contends that if Chait’s conduct is imputed to
Ambassador, the Commissioner, as Ambassador’s receiver, cannot
recover from PwC. PwC asserts that Chait’s conduct should be
imputed to Ambassador and the in pari delicto defense should
govern because Chait was found liable for of gross negligence and
breach of fiduciary duty. PwC also argues that under the “sole
actor” doctrine, which provides that acts of a controlling
shareholder or dominating officer are automatically imputed,
Chait’s misconduct should have been imputed to Ambassador. See


13
   We also note that the District Court recognized that this was an
issue of imputation and decided it as such. (App. 468-69) (“The
Court has properly ruled that imputation does not apply to this case
as a matter of law.”). Moreover, the District Court noted in its
opinion denying PwC’s post-judgment motion for judgment as a
matter of law that “PwC has preserved [the imputation] argument
. . . .” (App. 290.)

                                  22


(“Under the law of imputation, courts
impute the fraud of an officer to a corporation when the officer
commits the fraud (1) in the course of his employment, and (2) for
the benefit of the corporation.” (citations omitted))

       We analyze the second requirement of the imputation test –
that the officer’s fraud is committed for the benefit of the
corporation – under the “adverse interest exception.” 

Under the “adverse interest exception,” fraudulent conduct will not
be imputed if the officer’s interests were adverse to the corporation
and not for the benefit of the corporation. 

is
subject to the sole actor doctrine which provides that if an agent is
the sole representative of a principal, then that agent’s fraudulent
conduct will be imputed to the principal regardless of whether the
agent’s conduct was adverse to the principal’s interests. 

courts have also held that “one who contributed
to the misconduct cannot invoke imputation.” NCP Litig. 

. In NCP, a litigation trust acting as a bankrupt
corporation’s successor in interest and shareholders’ representative
brought an action against KPMG to recover for negligent failure to
uncover fraud by corporate officers. 

KMPG sought to
invoke the in pari delicto doctrine. The New Jersey Supreme Court
held that the in pari delicto doctrine does not bar corporate
shareholders from recovering in suit against the auditor. 

The court recognized an “auditor negligence” exception, explaining
“that a claim for negligence may be brought on behalf of a
corporation against the corporation’s allegedly negligent third-party
auditors for damages proximately caused by that negligence.” 

explained that the imputation defense is properly applied
in situations where a principal’s agent defrauded a third party who
the principal subsequently seeks to sue. 

court
distinguished its facts by explaining that the bankrupt corporation’s
officers did not directly defraud an innocent third party – they
defrauded the corporation and its creditors. 

was
not a victim of the fraud and allowing it to avoid liability would not
serve the purpose of the imputation doctrine – to protect the
innocent. 

that the Commissioner, as Ambassador’s

                                 23
receiver, stands in Ambassador’s shoes and thus is barred from
bringing claims against PwC because Chait’s acts as Ambassador’s
president are imputed to Ambassador. To support this proposition,
PwC points to the District Court’s finding that Chait was “guilty of
gross negligence and breach of fiduciary duty.” (App. 1493-94.)
PwC asserts that the “adverse interest” exception does not apply
because Chait was not stealing from the company; moreover should
it apply, Chait’s conduct would still be imputable under the sole
actor doctrine. PwC argues that the auditor exception recognized
in NCP does not alter its position that Chait’s misconduct is
imputed to Ambassador as a matter of law because it does not bar
imputation of conduct by a controlling shareholder.

        First, we agree with the parties that under the first prong of
the imputation test, Chait’s conduct was committed in the course
of his employment with Ambassador. Turning to the second
requirement of the test, for the benefit of the corporation, we look
at the “adverse interest exception.” As stated above, under the
“adverse interest exception,” Chait’s fraudulent conduct will not be
imputed to Ambassador if his interests were adverse to the
corporation and not for the benefit of the corporation. PwC asserts
in its opening brief that the adverse interest exception does not
apply because Chait was not “stealing from the company.”
(Appellant Br. at 48.) In the alternate, PwC argues that Chait’s
actions should be imputed to Ambassador under the sole actor
doctrine. We do not agree with either assertion and decline to
impute Chait’s actions.

       In Schacht v. Brown, the Seventh Circuit addressed the
issue of who can bring claims of negligence against auditors. 

(7th Cir. 1982), cert. denied, 

, 

(1983). In Schacht, the officers and directors of an insurance
corporation allegedly arranged a fraudulent scheme to issue
“extraordinarily high-risk insurance” policies without retaining
sufficient funds to cover possible claims. 

When the
corporation became insolvent, a liquidator was appointed to
manage its affairs and to initiate any actions belonging to the
bankruptcy estate. 

The liquidator eventually sued the
auditor for negligently failing to discover the fraud. 

argued that the liquidator, as the corporation’s

                                 24
successor-in-interest, “stand[s] in the shoes” of the corporation and
only can advance those claims that the corporation could advance
directly. 

corporate agents’ fraud was imputable
to the liquidator in the same way that it was imputable to the
corporation. 

held that the corporation’s officer’s
conduct was not a benefit to the corporation, and therefore the
adverse interest exception to imputation applied. 

Relying on Schacht, the New Jersey Supreme Court has also held,
in NCP, that inflating a corporation’s revenues and enabling a
corporation to exist beyond insolvency could not be considered a
benefit to the 

.

       Given that Chait’s conduct allowed Ambassador to continue
past the point of insolvency, his actions cannot be deemed to have
benefitted the corporation. As in Schacht and NCP, Chait’s
fraudulent conduct cannot be imputed to Ambassador under the
adverse interest exception. PwC attempts to distinguish NCP on
the basis that Chait, unlike the defendants in NCP, was a
controlling shareholder and the NCP court could not implicate the
“sole actor” doctrine. However, we are unpersuaded. The NCP
court did not reveal how much stock the wrongdoers owned and the
court did not rely on their status as controlling shareholders.
Furthermore, the “sole actor” exception is applied to cases in which
the agent who committed the fraud was the sole shareholder of the
corporation or dominated the corporation. Here, Chait and his
wife, collectively, owned 65% of Group’s stock. Thus, PwC’s
argument must fail.

       We also deem applicable the “auditor negligence” exception
recognized by the New Jersey Supreme Court in NCP, which
explained “that a claim for negligence may be brought on behalf of
a corporation against the corporation’s allegedly negligent third-
party auditors for damages proximately caused by that negligence.”
Similar to the fact pattern in NCP, PwC was not a victim of Chait’s
fraud and allowing it to avoid liability by invoking the in pari
delicto doctrine would not serve the purpose of the doctrine – to
protect the innocent.

       PwC further argues that the District Court erred in denying
its motions for summary judgment because the facts material to

                                 25
imputation were not in dispute and if there were any disputed facts,
the District Court erred in refusing to submit the in pari delicto
defense. The District Court did not provide any reasoning or
analysis on the issue of the in pari delicto defense, but merely
rejected PwC’s argument by stating that PwC’s instruction was not
necessary. (App. 1534.) It is clear from witness testimony that
there were disputed facts as to Chait’s misconduct. Based on our
reading of Schacht and NCP, which control, and for the reasons
stated above, we conclude that PwC was barred from raising the
imputation defense against Ambassador because of its negligence
and contribution to Chait’s misconduct. Thus, we will affirm the
District Court’s denial of PwC’s motions for summary judgment
based on the in pari delicto doctrine and refusal to charge the jury
on imputation.

                V. Motion to Bifurcate the Trial

       PwC challenges the District Court’s denial of its motion to
bifurcate the trial and to try the Commissioner’s claims against
PwC and Chait separately. Federal Rule of Civil Procedure Rule
42(b) governs a request by a party to bifurcate a trial and provides:
“[f]or convenience, to avoid prejudice, or to expedite and
economize, the court may order a separate trial of one or more
separate issues [or] claims . . . .” Fed. R. Civ. P. 42(b). We review
the denial of a motion to bifurcate a trial pursuant to Federal Rule
of Civil Procedure 42(b) for abuse of discretion.                Barr
Laboratories, Inc. v. Abbott Laboratories, 

, 105 (3d Cir.
1992); see also Idzojtic v. Pennsylvania R.R. Co., 

,
1230 (3d Cir. 1972) (“The district court is given broad discretion
in reaching its decision whether to separate the issues of liability
and damages”).

        PwC argues that because the District Court entered a default
against Chait’s estate six weeks before trial for failure to respond
to a court order, it was improper that he remained a defendant at
the trial on PwC’s liability. According to PwC, the District Court’s
failure try the claims against the Commissioner separately resulted
in an unfair trial, forcing PwC to defend Chait because of the




                                 26
doctrine of joint and several liability.14 PwC contends that its
liability, as the non-defaulting defendant, should have been
determined in a separate trial. PwC also asserts that the District
Court’s charge regarding the default judgment against Chait’s
estate made it impossible for the jury to find PwC not liable.

        In denying PwC’s motions for separate trials the District
Court ruled that: (1) the entry of a default rather than a default
judgment, which the Court did not enter until the close of evidence,
left certain issues to the jury for a final judgment; (2) the proper
apportionment of fault against all parties was an appropriate
consideration for the jury; and (3) evidence relating to the audit
environment and Chait’s conduct was relevant and properly before
the jury. In denying PwC’s post-judgment motion for a new trial
based, in part, on the denial of its bifurcation request, the District
Court found that “[m]uch of the evidence [regarding Chait’s
culpability] was admissible to establish the particulars of PwC’s
alleged negligence.” (App. 291-92.)

        PwC’s arguments that it was prejudiced by Chait’s presence
at the trial and was forced to defend his actions are unpersuasive.
Eliminating Chait as a defendant would have eliminated little of
the evidence presented at trial. As PwC’s counsel conceded at oral
argument, the jury would have heard evidence of Chait’s
wrongdoing even in a bifurcated trial. PwC chose to defend Chait
not only because of joint and several liability, but also to defend



14
   PwC asserts that the District Court’s failure to order a separate
trial as to PwC forced PwC to “[d]efend the absent Chait due to the
claim of joint and several liability” and caused PwC to suffer “guilt
by association” with Chait. (Appellant Br. at 55.) PwC further
asserts that the Commissioner’s liability theories against Chait and
PwC were inextricably linked. That is, the Commissioner
contended that Coopers was negligent in failing to discover and
report Chait’s mismanagement of Ambassador. Thus, according to
PwC, with Chait included as a defendant, the Commissioner was
able to focus on the allegations of mismanagement by Chait and
PwC suffered the “spillover” harm from “guilt by association.”
(Appellant Br. at 59 (quotations omitted).)

                                 27
PwC’s conclusion that at the time of the audit Ambassador was
properly managed. Moreover, PwC sought to reverse course and
distance itself from Chiat only after the District Court found him
liable.

       Further, contrary to PwC’s argument that the liability of
Chait, a defaulted defendant, was given to the jury to determine,
the District Court issued a limiting instruction, informing the jury
that Chait’s estate was liable to the Commissioner as a matter of
law and guilty of gross negligence and breach of fiduciary duty.
The District Court emphasized the jury’s sole responsibility with
respect to Chait was to assess his proportionate fault. Specifically,
the District Court instructed the jury that:

       Although Mr. Chait’s Estate is a Defendant in this
       case, I have entered a default judgment against the
       estate. Default judgment is a technical term that
       simply means that I have determined that Mr. Chait’s
       estate is liable to the Vermont Commissioner on the
       claims made against Mr. Chait in this case.
       Therefore, you are to accept for purposes of your
       deliberations that Mr. Chait is guilty of gross
       negligence and breach of fiduciary duty in his role as
       director and officer of Ambassador.               Your
       responsibility as triers of fact will be to assess
       damages against Mr. Chait’s estate in accordance
       with the evidence you have heard and, as I will
       instruct later, to apportion fault as between Mr. Chait
       and others for what happened to Ambassador.

       I must stress, however—and I cannot stress this
       enough—that you are not to assume the liability of
       [PwC]. I repeat that simply because I have found
       Mr. Chait to be liable to the Vermont Commissioner
       does not automatically mean that [PwC] is similarly
       liable. Your job as jurors will be to determine
       whether you believe, on the basis of the evidence
       you have heard, that [PwC] was negligent in auditing
       the year-end 1981 financial statements of
       Ambassador Group, Inc., and whether their

                                 28
       negligence was a proximate cause of any damages
       which may have been incurred by Ambassador.

(App. 1493-94.)

       Given the explicit jury charge, PwC’s argument that it was
prejudiced by the District Court’s entry of default judgment against
Chait’s estate at the close of evidence is unpersuasive. Considering
this portion of the District Court’s charge, we believe it was
possible for the jury to have determined that PwC had no liability
and was not negligent in auditing the financials even in light of the
Court’s default judgment against the Estate. Furthermore, the jury
verdict sheet questions were directed solely to PwC’s conduct and
only made reference to Chait in the context of determining his
percentage of fault, if any.

        PwC’s reliance on In re Uranium Antitrust Litigation, 

(7th Cir. 1980) is unavailing. Although the Seventh
Circuit held that a damages hearing should not be held until the
liability of each defendant had been resolved, it reasoned that
holding one damages hearing for a defaulting defendant prior to the
resolution of the liability of joint and severally liable non-
defaulting defendants could result in inconsistency and possibly
two distinct damages awards on a single claim. 

The
Court found this to be a concern of “possible inconsistency and
judicial economy, rather than actual prejudice.” 

was no attempt by the District Court to inquire into or have Chait’s
damages determined before PwC’s liability was determined.
Furthermore, the District Court in the instant case noted its “strong
desire to try all of [the Commissioner’s] claims together” for
judicial economy. (App. 173.)

        Similarly unavailing is PwC’s reliance on Fehlhaber v.
Indian Trails, Inc., 

, 717 (3d Cir. 1970), which only
held that it was within the discretionary authority of the court to
hold a Rule 55(b)(2) hearing to determine the amount defendant
was entitled to by reason of the third party defendants’ default.
There was no issue of joint and several liability in Fehlhaber nor
did the court hold that such a hearing was required when there was
a defaulting defendant.

                                 29
       Based on the record before us and the District Court’s
multiple rulings on PwC’s motions for separate trials, we find that
the District Court did not abuse its discretion by denying the
motions for separate trials.

                          VI. Damages

       PwC argues that the $119 million damages award is
excessive because it exceeds Ambassador’s total insolvency and
contradicts the Commissioner’s theory that Ambassador was
already insolvent at the end of 1981.

                            A. Waiver

       We first address the Commissioner’s argument that PwC
waived its argument about damages by failing to argue this point
before the District Court. In PwC’s motion for a new trial, PwC
asserted that a new trial was required because the damages were
excessive and irreconcilable with the jury’s findings. PwC also
contended that the damages award exceeded Ambassador’s actual
insolvency in its post trial motion for summary judgment. As PwC
asserts, the Commissioner responded to these arguments before the
District Court and the District Court acknowledged PwC’s
argument that the damages awarded were unreasonably excessive.
Thus, based on the record created before the District Court, PwC
did not waive its argument that the damages award was excessive,
and the issue is properly before us.

                    B. Damages Calculation

       PwC argues that the damages award is excessive because it
exceeds Ambassador’s total insolvency. It further maintains that
the award of $119 million contradicts the Commissioner’s theory
that Ambassador was already insolvent at the end of 1981 and that
such inconsistency entitles PwC to a new trial on liability and
damages. In other words, PwC contends that the unpaid liabilities
allegedly caused by PwC’s negligent audit cannot possibly exceed
Ambassador’s total unpaid liabilities. Thus, PwC argues that as the
Commissioner’s expert calculated the net loss from continuing
operations after March 31, 1982 to be $107 million, based on

                                30
Ambassador’s total insolvency as of December 31, 2004 (the latest
calculation before trial) of $125.3 million less $18.3 million in
litigation expenses, the $119.9 million in damages awarded by the
jury is logically too high. Finally, PwC argues that any amount
above $125.3 million, including interest, will go to the Estate,
because it would exceed what Ambassador owes its creditors in
liquidation, creating a windfall recovery to the Estate.

       In response, the Commissioner explains that $125.3 million
was calculated as an alternative theory of damages, which PwC
attacked at trial. The $125.3 million was based on the amount of
current assets that Ambassador owed to creditors as of that point in
time that it could not pay with available assets. At trial, the
Commissioner ultimately opted not to offer that calculation and
instead submitted the $119.9 million “net loss from continuing
operations after March 31, 1982” measure of damages. (App.
1886-87.) The Commissioner also responds that there will be no
windfall to the Estate given that damages were calculated as of
December 31, 2004.

       We “review district court’s ruling on a new trial motion for
only abuse of discretion.” Honeywell, Inc. v. Am. Standards
Testing Bureau, 

, 655 (3d Cir. 1988). A jury’s
damages award will not be upset so long as there exists sufficient
evidence on the record, which if accepted by the jury, would
sustain the award. See National Controls Corp. v. Nat’l
Semiconductor Corp., 

, 496 (3d. Cir 1987). In
denying PwC’s post-judgment motion for summary judgment, the
District Court noted that PwC went to lengths to discredit the
Commissioner’s expert damages calculations of $125.3 million
actual insolvency and perhaps for this reason the jury declined to
accept this calculation. The District Court found that the
Commissioner had presented sufficient evidence in support of its
damages theory to permit the jury’s finding. Reviewing the
testimony of the Commissioner’s damages expert, it is clear that if
the jury accepted his calculation there was sufficient evidence to
sustain an award of $119.9 million as detailed by his testimony.
Moreover, as the District Court noted, “the jury specifically
requested the item-by-item breakdown of [the Commissioner’s]
calculation of damages . . . [and l]ittle more than an hour after

                                31
receiving this information, the jury returned a verdict for the full
amount of damages.” (App. 254.) Furthermore, having decided
that Chait’s conduct is not imputed to Ambassador, PwC’s reliance
on NCP, is unpersuasive as to the issue of determining damages
and concerns that the Estate may reap a windfall. Thus, we agree
with the District Court that the jury accepted the Commissioner’s
damages calculations and the District Court did not abuse its
discretion in denying PwC’s motion for new trial.

                   VII. Prejudgment Interest

        We now turn to the District Court’s calculation of
prejudgment interest. We review a district court’s determination
to require the payment of prejudgment interest for abuse of
discretion. Ambromovage v. United Mine Workers of America,

, 982 (3d Cir. 1984). The district court may exercise
this discretion upon “considerations of fairness” and prejudgment
interest may be denied “when its exaction would be inequitable.”

of Comm’rs of Jackson County v. United States,

, 352 (1939)). Under New Jersey state law, the
purpose of prejudgment interest is to “compensate the plaintiff for
the loss of income that would have been earned on the judgment
had it been paid earlier.” Ruff v. Weintraub, 

, 1390
(N.J. 1987).

        PwC contends that the $63 million prejudgment interest
award by the District Court was punitive rather than merely
compensatory and violates New Jersey’s prohibitions against the
recovery of prejudgment interest on future economic losses and
awarding compound interest. PwC maintains that the bulk of
damages accrued after the Commissioner brought this action in
1985, yet the District Court’s award calculates prejudgment interest
as if each loss existed on the day the case was filed. Accordingly,
PwC argues that the Commissioner is only entitled to prejudgment
interest on “past loss” measured from the specific date each of
Ambassador’s liabilities became payable.

       In calculating the amount of prejudgment interest, the
District Court accepted the Commissioner’s proposal to strike
$54.5 million from the verdict to remove all future economic

                                32
losses, easily resolving PwC’s first argument that the award was
punitive and violated New Jersey’s prohibitions against the
recovery of prejudgment interest on future economic losses. The
Commissioner arrived at the number of the amount to strike from
the verdict, $54.5 million, by adding $36.0 million for “net unpaid
claims” and $20.9 million for “assumed claims payable to
Horizon,” both of which represent future economic losses, and
reducing it to the present value. After reducing the verdict of
$119.9 million by $54.5 million, the amount of future economic
losses, the District Court used a base verdict of $65.4 million to
calculate prejudgment interest.

        The District Court found that while all the claims had not
been filed when this action commenced, the losses were
nevertheless actuarial and anticipated at the time the Complaint
was filed. The District Court calculated prejudgment interest on
the full amount of damages from 1985 to the date of its judgment,
September 30, 2005. We conclude that the District Court did not
abuse its discretion in doing so.

       New Jersey Rules Governing Civil Practice states that:

       Except where provided by statute with respect to a
       public entity or employee, and except as otherwise
       provided by law, the court shall, in tort actions,
       including products liability actions, include in the
       judgment simple interest, calculated as hereafter
       provided, from the date of the institution of the
       action or from a date 6 months after the date the
       cause of action arises, whichever is later, provided
       that in exceptional cases the court may suspend the
       running of such prejudgment interest. Prejudgment
       interest shall not, however, be allowed on any
       recovery for future economic losses.

N.J. Court R. 4:42-11(b). The claims incurred by the company after
the filing of the action were not future losses, defined under New
Jersey law as those that accrue after judgment, but rather damages
that became actualized after the filing of the complaint. See
McKeand v. Gerhard, 

, 159 (N.J. Super. Ct. App. Div.

                                33
2000). PwC does not contest that the claims were actuarial and
anticipated at the time the action was filed.

        The language of the Rule provides that interest should be
calculated from the date of the institution of the action without
reference to when during the litigation a particular claim was
actualized. It is well settled that the purposes for awarding
prejudgment interest in tort actions are not only to compensate
plaintiffs for not having use of judgment money while their actions
are pending and to require defendants to give up benefits of their
use of money during that time, but also to encourage defendants to
settle cases. See Ruff v. Weintraub, 

, 1390(N.J.
1987). Based on these considerations, we find that the District
Court appropriately calculated prejudgment interest on the damages
for the entire period since the filing of the action.

       We also conclude that the District Court did not violate the
prohibition against compound interest. At issue is a $26.8 million
“hypothetical borrowing cost” embedded in the damages set forth
by the Commissioner. Of this $26.8 million, $14.2 million is
hypothetical interest earned on the premiums for policies after
March 31, 1982. The difference between these amounts is a $12.6
million “net interest expense.” PwC argues that the entire $26.8
million “hypothetical borrowing cost” should be deducted from the
verdict prior to calculating the prejudgment interest.

        The District Court deducted the $12.6 million net interest
expense from the base verdict of $65.4 million, noting that it was
the only part of the $26.8 million item that appeared in the verdict.
The District Court then calculated the prejudgment interest as $75.6
million and deducted an additional $12.6 million, arriving at the
prejudgment award of $63 million. The District Court deducted the
second $12.6 million because otherwise it would have resulted in
an award of prejudgment interest higher than the Commissioner
sought. The Court recognized that this second deduction, “would
treat the $12.6 million item as having never been found by the jury”
but nonetheless deducted it so as to not let the Commissioner
recover twice. (App. 262.)

       The Commissioner’s view is that PwC is complaining of a

                                 34
ruling in its favor. The question before us is whether the Court
abused its discretion in “netting” the two interest figures contained
in the avoidable loss damage calculation. While the $26.8 million
item represents a hypothetical borrowing cost, the District Court did
not abuse its discretion by concluding that Ambassador would have
earned $14.2 million in interest on the premiums and this required
an offsetting of the hypothetical interest expense.

                 VIII. Joint and Several Liability

       Finally, we turn to PwC’s argument that the District Court
should have applied Vermont law on joint and several liability,
under which PwC cannot be liable for more than its 40%
proportionate share of the judgment, because Ambassador was
domiciled in Vermont. The District Court’s interpretation and
application of New Jersey’s choice of law rules is a purely legal
matter and therefore subject to plenary review by this Court. Simon
v. United States, 

, 199 (3d Cir. 2003).

       It is well established that in a diversity action, a district court
must apply the choice of law rules of the forum state to determine
what law will govern each of the issues of a case. Klaxon Co. v.
Stentor Elec. Mfg., 

, 496 (1941). New Jersey has
accepted the “governmental interest” choice of law test. Warriner
v. Stanton, 

, 500 (3d Cir. 2007) (citing Veazey v.
Doremus, 

(N.J. 1986)). Under this inquiry we must
determine “the state with the greatest interest in governing the
particular issue” and apply the laws of that state. 

(quotations omitted). “The governmental interest analysis is fact-
intensive: ‘Each choice-of-law case presents its own unique
combination of facts — the parties’ residence, the place and type of
occurrence and the specific set of governmental interest-that
influence the resolution of the choice-of-law issue presented.’” 

v. Estate of Merola, 

, 1221 (N.J.
2002)). Furthermore, the New Jersey Supreme Court has held that
choice-of-law determinations are made on an issue-by-issue basis,
with each issue receiving separate analysis. See 

(citing Gantes v. Kason Corp., 

, 108-09 (N.J.
1996)).



                                   35
        The first prong of the governmental interest test requires us
to determine whether there is an actual conflict between the laws of
the states involved. 

. Unquestionably, an
actual conflict exists between the respective joint and several
liability laws of New Jersey and Vermont. At the time of PwC’s
negligence and in 1985, when the Commissioner filed his action,
New Jersey law provided for joint and several liability for all joint
tortfeasors. N.J. Stat. Ann. § 2A:15-5.3 (Supp. 1974). The New
Jersey statute has since been amended twice, in 1987 and in 1995,
to limit the applicability of joint and several liability. The current
statute, as amended in 1995, only permits joint and several liability
to defendants 60% or more at fault. N.J. Stat. Ann. § 2A:15-5.3(a)
(West 2008). Meanwhile, Vermont established a system of
comparative negligence and abolished joint and several liability
among joint tortfeasors in 1970. Vt. Stat. Ann., tit. 12 § 1036
(1969).

        The second prong of the governmental interest analysis
requires us to determine the interest that each state has in applying
its joint and several liability law to the parties in this litigation.

(citing Fu v. Fu, 

, 1138 (N.J.
1999)). Five factors drawn from section 145 of the Restatement
(Second) of Conflict of Laws guide courts in applying the
governmental interest test in tort cases. 

are: “(1)
the interests of interstate comity; (2) the interests of the parties; (3)
the interests underlying the field of tort law; (4) the interests of
judicial administration; and (5) the competing interests of the
states.” 

Jersey Supreme Court has held that “[t]he
most important of those is the competing interests of the states.”

. The initial focus “should be on ‘what
[policies] the legislature or court intended to protect by having that
law apply to wholly domestic concerns, and then, whether these
concerns will be furthered by applying that law to the multi-state
situation.’” 

733 A.2d at 1142 (citations omitted)
(brackets in original)).

       In its opinion entering judgment, the District Court held that
PwC and Chait’s estate were joint tortfeasors and were both jointly
and severally liable for the entire amount of the $119.9 million jury
verdict. The District Court did not undertake a separate choice of

                                   36
law analysis to determine whether New Jersey or Vermont law
should apply to the issue of whether PwC is jointly and severally
liable with Chait’s estate for the full amount of damages at the time
it entered judgment. Instead, the District Court applied New Jersey
law on joint and several liability solely based on its earlier opinion
denying PwC’s motion for summary judgment that New Jersey state
law would govern the substantive issues in this case.15

        After entering judgment, and in response to PwC’s motion
to amend the judgment pursuant to Rule 59(e), the District Court
corrected its error of applying New Jersey law on joint and several
liability simply because it applied that state’s law to the substantive
issues, and addressed the choice of law issue as it pertained to the
question of joint and several liability. To determine Vermont’s
interest in having its comparative negligence statute applied, the
District Court examined the policy underlying the Vermont statute
and analyzed Vermont’s contacts with PwC’s conduct and the
Commissioner’s litigation. The District Court then analyzed New
Jersey’s interest by looking to the policy underlying the statute that
was in place in 1985, the year that the Commissioner filed this
action. The District Court held that New Jersey had the superior
interest in having its law determine the allocation of damages
because its policy favoring full compensation of tort victims would
be frustrated by application of Vermont’s comparative negligence
statute, whose policy favored the equitable allocation of damages
among Vermont tortfeasors. The Court also concluded that
Vermont had no interest in ensuring that PwC and the Estate pay
only their pro rata share of damages.

       PwC contends that the District Court erred by looking at the
policy underlying New Jersey’s joint and several liability statute in



15
   In granting summary judgment, because the District Court
determined that there was no conflict between New Jersey and
New York law regarding an auditor’s liability for negligence or
malfeasance, it chose to apply New Jersey law. PwC does not
appeal the application of New Jersey law for purpose of the
substantive issues, but rather only contests the application of New
Jersey law as to joint and several liability.

                                  37
effect in 1985 rather than the statute currently in effect. It argues
that because New Jersey’s current statute would only hold PwC
liable for its proportionate share of damages, New Jersey would
have no interest in applying its superseded joint and several liability
statute. In addition, PwC argues that Vermont has a greater interest
in this case because of its stated position that it is a domicile of
choice for insurance companies.

        The Commissioner maintains, however, that even though
New Jersey Legislature did not make the amendments limiting joint
and several liability retroactive, PwC’s assertion, if accepted, would
have us do so. The Commissioner also argues that Vermont has no
interest in having its law applied, as its only contact with this
litigation is that Ambassador and the Commissioner are domiciled
there.

        To determine whether the District Court should have looked
to the 1995 amendment for New Jersey’s current policy on joint and
several liability we examine the New Jersey Supreme Court’s
opinion in Erny, 

, for guidance. In Erny, the
Supreme Court had to determine whether to apply the New York or
New Jersey joint and several liability statute in a case arising from
an automobile accident that took place in New 

. The accident involved a New Jersey plaintiff and occurred
in 1992, so the applicable New Jersey joint and several liability
statute was the 1987 version. 

In assessing New
Jersey’s governmental interest in having the 1987 version of the
statute applied, the Court looked to the 1995 amendments to
understand the legislature’s desire to limit joint and several liability.

stated that “[a]mendments to New Jersey’s statute
indicate, however, that the Legislature limited the liability of joint
tortfeasors to address concerns about both the rising cost of
insurance and increasing litigation.” 

In making this
statement, the Court noted that the interest and purpose of the 1987
and 1995 statutes were consistent. 

further declared
that “the policy underlying New Jersey’s joint and several liability
law promotes redress to plaintiffs but declines to make a joint
tortfeasor fully responsible for damages beyond his or her allocated
share unless that tortfeasor is more than sixty percent at fault. New
Jersey’s policy thus reflects a balancing of interests that factors in

                                   38
its concern about increased liability insurance costs.” 

20.

        Unlike Erny, where there were two versions of the statute
both incorporating amendments limiting joint and several liability
(1987 and 1995), we only consider the law as it was in 1985 and the
current version of the statute. We do not read Erny to hold that a
court may look past the governmental interest reflected in a law if
the legislature has changed the law without making it retroactive.
We conclude that the New Jersey Supreme Court’s reading of the
policy underlying the current statute merely explains New Jersey’s
desire to reduce insurance costs prospectively. Given that the
amendments were not made retroactive, we are not inclined to find
that the New Jersey legislature had an interest in reducing liability
for torts that had already occurred, and had presumably been
factored into the tortfeasor’s liability insurance coverage. If courts
only looked to the policy of the current statute, which is now
inconsistent with the law that may be applied based on when the
tortious conduct took place, application of the 1985 statute would
be rendered null. We do not believe this was New Jersey
legislature intended effect of the amendments.

       Finally, as the Supreme Court stated in Erny, the
Restatement (Second) of Conflict of Laws requires that we look at
the contacts of the parties to a state in evaluating the governmental
interest. 

We believe that the contacts of the parties in
Erny are distinguishable from those here. In Erny, the two
defendants were New York residents. Here, none of the present
defendants are Vermont residents. 

Vermont has less
of an interest in protecting a non-Vermont citizen from joint and
several liability. More significantly, Ambassador’s principal place
of business was in New Jersey, the actionable tort was committed
in New Jersey, Ambassador’s injury occurred in New Jersey, Chait
was a resident of New Jersey, PwC actively conducted business in
New Jersey and the relationship between the parties was centered
in New Jersey.

       We find PwC’s reliance on In re Phar-Mor, Inc. Securities
Litigation, 

(W.D. Pa. 1995) to be unpersuasive.
In Phar-Mor, a Pennsylvania court applied New Jersey’s choice of

                                 39
law rules and found them to favor the application of Pennsylvania
law over New Jersey law. 

The court looked at the
policy of an amendment in New Jersey privity law limiting
accountant liability to third parties under New Jersey law, even
though it did not apply as the substantive law to the claims asserted.

The court found that Pennsylvania had a greater
interest because it was the state where the audit reports in question
were prepared, signed and issued, and where the auditors were
licensed. 

none of these interests in the instant
case and the change in New Jersey’s joint and several liability law
is not a reason to apply Vermont law.

       As the Erny court stated, the determination of what state law
applies must be informed by the “the individualized assessment that
controls in the governmental-interests test that we apply to each
choice-of-law 

. Following this
mandate, we find that the totality of the facts requires application
of New Jersey law joint and several liability and the District Court
correctly did so.

                          IX. Conclusion

       For the reasons stated, we will affirm the judgment of the
District Court.




                                 40