Action House, Inc., Plaintiff-Counter-Defendant-Appellant v. Stanley Koolik, Defendant-Counter-Claimant-Appellee

54 F.3d 1009, 1995 U.S. App. LEXIS 8070

• Court: Court of Appeals for the Second Circuit
• Decided: April 7, 1995
• Docket: 878, Docket 93-7669
• Status: Published

Opinions

WINTER, Circuit Judge:

Action House, Inc., appeals from Judge Cedarbaum’s order granting appellee Stanley Koolik’s motion to vacate a jury’s award of $362,000 in punitive damages on the ground that, under New York law, an award of punitive damages cannot be sustained in the absence of an award of compensatory damages. We believe that there should be a new trial on damages.

After some sixteen years of business, Stanley Koolik and Stanley Markowitz, each owner of half the shares (totaling 100) of a successful dress-making concern, Action House, Inc., decided to go them separate ways. This litigation arose from the fractious end of their business relationship.

Action House sought compensatory and punitive damages from Koolik under various tort and contract theories. It claimed that Koolik had taken more than his one-half share of Action House’s profits in the three years preceding his withdrawal from Action House.¹ It attempted to prove inter alia that Koolik wrongfully used Action House checks to pay for personal expenses and made illicit withdrawals from the petty cash account.

In defense, Koolik argued that the withdrawals were made with Markowitz’s knowledge and pursuant to an informal practice agreed to by the principals. Koolik also maintained that any excessive withdrawal of Action House funds was explicitly recompensed through a stock purchase agreement that Koolik and Action House executed on December 15, 1988. By this agreement, Koolik sold his half interest of 50 shares to Action House for $1 and, inter alia, agreed to a restrictive covenant for two years. In return, Koolik obtained a release from guarantees he had made and the continuation of some benefits he received from Action House. The parties also agreed to the following provision, labelled Section 16(c):

(c) The SELLER [Koolik] agrees to reimburse the PURCHASER [Action House] for any payments after December 1, 1988 which the PURCHASER is required to or shall make for the account of the SELLER. Any payments theretofore made by the PURCHASER for the account of the SELLER are hereby waived and need not be repaid by the SELLER.

(emphasis added). Koolik presented evidence that an earlier version of the Purchase Agreement proposed that Action House buy the shares for $100,000, and that Markowitz’s handwritten notes on another draft of the agreement reflected his understanding that the release was meant to waive all claims for payments made by Action House on Koolik’s behalf. Koolik also introduced accounting statements purportedly showing that Koolik had repaid all outstanding loans from Action House as of June, 1988.

The jury was instructed on the law and asked to answer specific questions on a verdict form. Although Koolik’s counsel objected to the giving of any punitive damage charge to the jury, neither party objected to the content of the jury instructions on either compensatory or punitive damages. The instruction on compensatory damages stated that tort damages should make the party whole while contract damages should give the party the benefit of the bargain. The punitive damage instruction stated:

In addition to compensatory damages, Action House and Markowitz are seeking punitive damages from Koolik.

In certain limited circumstances, you are allowed, but are not required, to award punitive damages. Punitive damages are available only with respect to claims involving torts, not claims involving breach of contract or transfer of an interest in real property.

Punitive damages are available only for egregious conduct that is wanton and reckless. Conduct is wanton and reckless when it - is done in such a manner and under such circumstances as to show an utter disregard for the potential consequences of the conduct on the rights and safety of others. Punitive damages are available only for especially shocking and offensive conduct.

The purpose of punitive damages is to punish a party for shocking antisocial conduct and to deter him and others from committing similar acts in the future.

In reporting your verdict, you should state separately the amount fixed by you, if any, as compensatory damages and the amount fixed by you, if any, to punitive damages, as the verdict form indicates.

The last paragraph clearly allowed the jury to award punitive damages without making an award of compensatory damages. Action House did not request an instruction on the jury’s power to award nominal damages. Koolik did not ask for an instruction that an award of punitive damages could be made only if compensatory damages also were awarded.

The pertinent questions on the verdict form asked the following:

QUESTION ONE

Do you find by a preponderance of the evidence that STANLEY KOOLIK breached his fiduciary duty to ACTION HOUSE by withdrawing funds from ACTION HOUSE’S checking and petty cash accounts?

Yes_or No _

If, and only if, the answer to Question One is “Yes,” proceed to answer Question Two.

If the answer to Question One is “No,” skip Questions Two and Three and proceed to answer Question Four.

QUESTION TWO

Do you find by a preponderance of the evidence that the Purchase Agreement released STANLEY KOOLIK from liability for all payments made by ACTION HOUSE to or on behalf of STANLEY KOOLIK before December 1, 1988?

Yes_or No_

If, and only if, the answer to Question Two is “No,” proceed to answer Question Three.

If the Answer to Question Two is ‘Tes,” skip Question Three and proceed to answer Question Four.

QUESTION THREE

What is the amount of damages to ACTION HOUSE caused by STANLEY KOO-LIK’S breach of fiduciary duty? $-

QUESTION FOUR

Do you find by a preponderance of the evidence that STANLEY KOOLIK misappropriated ACTION HOUSE’S property by withdrawing funds from ACTION HOUSE’S checking and petty cash accounts?

If, and only if, the answer to Question Four is “Yes,” proceed to answer Question Five.

If the answer to Question Four is “No,” skip Questions Five and Six and proceed to answer Question Seven.

QUESTION FIVE

Do you find by a preponderance of the evidence that the Purchase Agreement released STANLEY KOOLIK from liability for all payments made by ACTION HOUSE to or on behalf of KOOLIK before December 1, 1988?

If, and only if, the answer to Question Five is “No,” proceed to answer Question Six.

If the Answer to Question Five is ‘Yes,” skip Question Six and proceed to answer Question Seven.

QUESTION SIX

What is the amount of damages to ACTION HOUSE caused by STANLEY KOO-LIK’S misappropriation? $_

* * *

QUESTION TWENTY-TWO

Do you award any punitive damages to ACTION HOUSE for STANLEY KOO-LIK’S withdrawals of funds from ACTION HOUSE’S checking and petty cash accounts? You may award punitive damages to ACTION HOUSE only if you answered “Yes” to either Question One or Four and answered “No” to Questions Two and Five and you need not do so even if you answered “Yes” to either Question One or Four and answered “No” to Questions Two and Five. $-

Neither party objected to the formulation of the verdict questions on compensatory or punitive damages.

After several hours of deliberation, the jurors sent the court two notes with several questions. The jurors asked, inter alia, what damages Action House was seeking with regard to Questions 3 and 6. In response, the district court responded that Action House was seeking $358,540 for checking account withdrawals, and $70,177.40 for petty cash withdrawals. With regard to the $358,-540, Koolik’s counsel noted that Action House was seeking $363,000, a figure that had been used in Action House’s opening statement and Koolik’s summation.

After several more hours of deliberation, the jury sent another note asking how long they had to deliberate before being declared a hung jury and whether the “charges” could be “condensed.” Judge Cedarbaum instructed the jury that “it is far too soon to be discouraged,” and ordered them to continue to deliberate. An hour-and-a-half later, the jury returned a verdict finding, in relevant part, that Koolik had breached his fiduciary duty to Action House and misappropriated funds from Action House. It thus answered Questions One and Four ‘Yes.” It found that Koolik had not been relieved from liability for this claim, answering Questions Two and Five “No.” The jury answered Questions Three and Six, thus denying an award of compensatory damages for the breach of fiduciary duty and misappropriation. However, the jury then awarded Action House punitive damages for Koolik’s withdrawals of funds from the checking and petty cash accounts, and answered Question Twenty-Two “$362,000.”

After the jury’s verdict had been read, Koolik’s counsel requested a “clarification” of the award of punitive damages. Judge Ce-darbaum denied this request as too general, and Koolik’s counsel declined to formulate a more specific inquiry. The court on its own initiative then asked the jury to consider whether their answers “$-0-” to Questions Three and Six involved compensatory damages. After returning to the jury room briefly, the jury returned the special verdict form unaltered.

Following the verdict, Koolik moved pursuant to Fed.R.Civ.P. 50 for judgment as a matter of law and, inter alia, an order setting aside the jury’s award of punitive damages to Action House on the ground that punitive damages are not available under New York law in the absence of a finding of actual damages. Action House responded by, inter alia, arguing that Koolik had waived any objection to the punitive damages award and that punitive damages are properly awarded without compensatory damages under New York law. Action House also moved for a partial new trial on compensatory damages under Fed.R.Civ.P. 59(a) in the event the court granted Koolik’s motion to set aside the punitive damages award.

Judge Cedarbaum granted Koolik’s motion to vacate the punitive damages award. She concluded that such damages were not available under New York law in the absence of an award of compensatory damages and that the jury’s refusal to alter the “$-0-” answers to Questions Three and Six upon being asked to reconsider them necessitated the vacating of the punitive award. Action House appeals from Judge Cedarbaum’s granting of Koo-lik’s motion.²

The district court’s instructions on punitive damages were not consistent with New York law, which requires a finding of actual damages before punitive damages may be awarded. Bryce v. Wilde, 39 A.D.2d 291, 294, 333 N.Y.S.2d 614, 616 (3d Dep’t), aff'd, 31 N.Y.2d 882, 340 N.Y.S.2d 185, 292 N.E.2d 320 (1972). In the final sentence of the instruction on punitive damages, the court explicitly stated that the jury should state “separately” the amount of compensatory damages, “if any,” and the amount of punitive damages, “if any.” On the verdict form, Question Twenty-Two authorized an award of punitive damages if the jury answered ‘Yes” to either Questions One or Four and “No” to Questions Two and Five. Viewed as a whole, therefore, the instructions failed to inform the jury that it could not award punitive damages unless it also awarded compensatory damages.

Koolik advances various arguments amounting to a claim that Action House waived its rights in the district court by not objecting to the instructions. The shoe is on the other foot, however, because the instructions favored Action House, and it was under no burden to make objections on Koolik’s behalf. Action House certainly had no reason to anticipate that the district court would upset the punitive award because of the finding of “$ — 0—” compensatory damages.³ Koo-lik’s strongest argument, of course, is that because the jury found “$-0-” compensatory damages, the court could safely strike the award of punitives because the jury would have necessarily arrived at answers of “$-0-” compensatory and “$-0-” punitive if properly instructed. There is much force in this argument, but it depends upon two assumptions.

The first and most critical assumption is that Action House waived its right to an instruction concerning nominal damages. Had nominal damages been awarded in response to Questions Three and Six, we believe that an award of punitive damages would have been consistent with New York law.⁴ See Bryce, 39 A.D.2d at 294, 333 . However, Action House could not have anticipated the vacating of the punitive award under the instructions and verdict form given to the jury and thus did not waive its rights. Had Koolik made the objection regarding the relationship between compensatory and punitive damages before the case went to the jury instead of after it returned its verdict, Action House could have protected itself by requesting an instruction regarding nominal damages. An award of such damages might well have been made by the jury, and Koolik should not reap a windfall as a result of his own failure to make a timely objection.

The second assumption is that the jury properly understood the difference between the two types of damages. We believe that some doubt exists as to that understanding. There is a possibility that the instructions caused the jury to consider compensatory and punitive damages as alternative forms of relief depending on the degree of culpability. The jury may thus have believed that it should award compensatory damages to redress ordinary wrongs and punitive damages to redress egregious wrongs, but that either should reflect the loss suffered by the injured party. For a lawyer, this would be an obvious misreading of the instructions. However, apart from the use of the labels “compensatory” and “punitive,” the instructions offered little differentiation between the types of damage awards except when the instructions described the purpose of punitive damages as punishment and deterrence. A lay person might reasonably believe that having to compensate a party for a loss is a punishment that deters. The verdict form did nothing to dispel any such mistaken view in stating that a “Yes” answer to either Questions One or Four and “No” to Questions Two and Five were sufficient to support an award of punitive damages. Had New York law regarding punitive damages been correctly stated, no such confusion would have been possible.

Such a possibility would not concern us but for events at trial. Both parties mentioned in arguments to the jury that Action House was seeking $363,000 on one of its tort claims. The instructions stated that punitive damages could be awarded only on tort claims, and the jury posed a question during its deliberations that sought to determine how much Action House was seeking as tort damages. (The court’s answer as to one claim stated $358,540 instead of $363,000). The jury then returned a verdict of $362,000 as punitive damages. The jury’s questions regarding Action House’s tort claims combined with a verdict near the amount that had been argued as compensatory damages for checking account withdrawals give us pause regarding the jury’s differentiation between compensatory and punitive damages. We acknowledge that it is speculative to conclude that the jury believed that Action House had suffered $362,000 in damages because of egregious wrongs by Koolik (rather than $362,000 because of ordinary wrongs) and that Action House was thus entitled to punitive damages in that amount. It is quite possible that the jury found that Action House suffered no damage and awarded pu-nitives because Koolik’s conduct, however redeemed, was egregious. The point, however, is that we cannot tell, and Action House again never had an opportunity to seek appropriate instructions that would have protected it from the district court’s upsetting of the verdict. Whether this possibility would by itself justify a new trial need not be addressed because the nominal damages issue is of much greater significance and in our view itself entitles Action House to a new trial.⁵

On remand, the issues to be determined are whether Koolik repaid all sums wrongfully withdrawn from Action House’s checking account and petty cash fund. If not, the jury may then consider whether to award compensatory, nominal and/or punitive damages.

Reversed and remanded for further proceedings.

1 . The instant case was consolidated for trial with the case of Koolik v. Markowitz, 89-CIV-5367, 1993 WL 204807 (MGC).

2 . Action House’s notice of appeal does not explicitly mention the district court’s implicit denial of its motion for a new trial under Fed. R.Civ.P. 59(a). While Fed.R.App.P. 3(c) requires that the appellant "designate the judgment, order or part thereof appealed from," we interpret that requirement liberally. SEC v. American Bd. of Trade, 830 F.2d 431, 438 n. 2 (2d Cir.1987); Conway v. Village of Mt. Kisco, 750 F.2d 205, 211 (2d Cir.1984). Because both parties seem to have understood Action House’s notice of appeal to embrace the implicit denial of its motion for a new trial, and, liberally interpreted, the notice of appeal may fairly be said to do so, we conclude that Action House’s challenges to the jury instructions are properly before us.

Action House’s notice of appeal also included Judge Cedarbaum’s denial of its motion to set aside the jury's award of $52,000 in disability benefits to Koolik on his counter-claim. Action House, however, has not briefed that issue, and we therefore do not consider it.

3 . Our dissenting colleague states that we may not now review errors in the jury instructions absent a finding of plain error because “neither party objected to the charge given.” Infra at 1016. We do not believe that Fed.R.Civ.P. 51 and the plain error doctrine are applicable here because, as noted, Action House had no reason to object to the instructions that were read to the jury. When the district court asked the jury to confirm that it intended to award "$-0-” compensatory damages, she gave no hint that she was planning to overturn the verdict if the answer was in the affirmative. Moreover, Action House's primary claim on appeal challenges not the instructions given, but rather the decision to overturn a verdict consistent with those instructions. In fact, it was Koolik, not Action House, who belatedly challenged the jury instructions by making a motion for J.N.O.V.

4 .We are aware that certain language in a recent opinion by the Court of Appeals, Kronos Inc. v. AVX Corp., 81 N.Y.2d 90, 595 N.Y.S.2d 931, 612 N.E.2d 289 (1993), might be interpreted to preclude an award of nominal damages in this case. The Kronos court stated that "[njominal damages are always available in breach of contract actions ... but are allowed in tort only when needed to protect an ‘important technical right.’ ” Id. at 95, 595 N.Y.S.2d 931, 612 N.E.2d 289 (citation omitted). However, Kronos dealt with a lower court's holding that, for purposes of starting the statute of limitations, nominal contract damages could also serve as actual damages in a claim for tortious interference with contract. The authorities cited in Kronos seem to exclusively concern tortious interference with contract. See id. at 95-96, 595 N.Y.S.2d 931, 612 N.E.2d 289 (citing Note, Damages Recoverable in an Action for Inducing Breach of Contract, 30 Colum.L.Rev. 232, 238 (1930); Annotation, Liability for Procuring Breach of Contract, 26 A.L.R.2d 1227, § 43; W. Page Keeton, Prosser and Keeton on Torts, § 129 (5th Ed. 1984) (concerning "Interference with Contractual Relations”)). Because Kronos does not address the use of nominal damages to support an award of punitive damages, and because such a broad reading of the opinion would vitiate the holdings of many New York cases permitting the award of nominal damages in this context, see, e.g., Bryce, 39 A.D.2d 291, 333 N.Y.S.2d 614; Reinah Dev. Corp. v. Kaaterskill Hotel Corp., 59 N.Y.2d 482, 465 N.Y.S.2d 910, 452 N.E.2d 1238 (1983); 105 East Second Street Assocs. v. Bobrow, 175 A.D.2d 746, 573 N.Y.S.2d 503 (1st Dep’t 1991); Weiss v. Miller, 166 A.D.2d 283, 564 N.Y.S.2d 110 (1st Dep't 1990), aff'd, 78 N.Y.2d 979, 574 N.Y.S.2d 932, 580 N.E.2d 404 (1991), we believe that the Court of Appeals intended its holding to apply only to cases concerning tor-tious interference with contract. Action House could thus have requested an award of nominal damages in this case.

5 . We normally review a claim of error in a jury charge "to-determine 'whether the entire charge, viewed in light of all of the evidence, would tend to confuse or mislead the jury as to the principles of law that apply to the facts.’ " Phelan v. Local 305 of the United Ass’n of Journeymen, 973 F.2d 1050, 1062 (2d Cir.1992), cert. denied, — U.S. —, 113 S.Ct. 1415, 122 L.Ed.2d 785 (1993). The instructions regarding the difference between compensatory and punitive damages might pass muster under this standard. However, this case is in a different procedural posture in that a verdict consistent with erroneous instructions has been upset, and the question is whether judgment for the defendant should be entered or a new trial held. In such circumstances, arguably, any articulable doubt as to what the jury found or evidence of actual confusion on the jury's part may be sufficient to justify a new trial.