2008 Decisions

Opinions of the United

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Precedential or Non-Precedential: Precedential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)
2

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.
 At the time this action was filed, David T. Bard was the 1

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

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. In 1985, the Commissioner brought a 1

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
4

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. Id. § 3563.

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
 An insurance company’s surplus is a measurement of the excess 2

of assets over liabilities. Regulators typically restrict an insurer’s

policy underwriting to a multiple of its unrestricted surplus. 

5

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.” In April 1983, 2

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. 
 “Insolvent” is defined as a debtor “having liabilities that exceed 3

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). 

The Commissioner presented evidence at trial regarding Coopers’ 4

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

Within two months, Kramer issued a report concluding that

Ambassador was $3 million insolvent. Immediately, the Insurance 3

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. Specifically, the Commissioner claimed that 4

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
 For the purposes of our discussion going forward, we will refer

5

to Coopers and PwC collectively as PwC. 

 Doris Chait and Richard Tafro were dismissed individually with 6

prejudice before trial pursuant to settlement agreements with the

Commissioner. 

7

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 with PriceWaterhouse to form

PriceWaterhouseCoopers (“PwC”) in 1998. In the years that 5

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
The District Court had subject matter jurisdiction under 28 U.S.C. 7

§ 1332 based on diversity of citizenship. We have jurisdiction

under 28 U.S.C. § 1291. PwC filed a timely notice of appeal. 

8

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 prejudgment 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 contendsthat 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
 In denying PwC’s motion for summary judgment as to the 8

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

tort damages. Under New Jersey law, the measure of damages for 8

a negligence action are the damages proximately caused by

defendant’s conduct. See Schroeder v. Perkel, 432 A.2d 834 (N.J.

1981); Gleitman v. Cosgrove, 227 A.2d 689, 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.
 The net interest expense was the difference between the cost of 9

borrowing and the interested earned on premiums collected. 

10

(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.” Id. The jury 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. (App. 1886.) The total cost incurred from continuing 9

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. 
11

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 448 F.3d 672, 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. 267 F.3d 347,

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.” Id. at 347.

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.” Id. at

350. 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 insolvency. 448

F.3d at 675. 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. Id. at 676. 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
12

by virtue of the compilation statements prepared and relied upon by

third parties.” Id. at 677 (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. Id. To the 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. Id. at 678. 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.” Id. at 677 (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.” Id.

The CitX court also stated that “[t]he deepening of a firm’s

insolvency is not an independent form of corporate damage.” Id.

at 678 (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 calculation. 

448 F.3d at 678 (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
13

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, 304 U.S. 64, 78 (1938); see also Commonwealth of

Pennsylvania v. Brown, 373 F.2d 771, 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. 901 A.2d 871, 888 (N.J. 2006).

In NCP I, KMPG was retained as the accountant for the Physician

Computer Network, Inc (“PCN”). Id. at 873. In the mid-1990’s

two officers of PCN conducted fraudulent transactions to

artificially inflate PCN’s revenues. Id. at 874. The auditors failed

to detect the misrepresentations initially. Id. After KPMG

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. Id. at 876. Under the bankruptcy plan, PCN assigned

all its potential causes of action to the NCP Litigation Trust (the

“Trust”). Id. In 2002, the Trust initiated suit against KPMG

alleging causes of action for (i) negligence (ii) negligent

misrepresentation, (iii) breach of contract, and (iv) breach of
 The in pari delicto doctrine dictates that a plaintiff who has 10

participated in wrongdoing may not recover damages resulting

from the wrongdoing. See Black’s Law Dictionary 806 (8th ed.

2004). 

14

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. Id. 10

at 877. 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. Id. at 878.

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. Id. at

890. 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.” Id. at 888. The New Jersey Supreme

Court remanded the case for discovery, noting that the only issue

before it was the applicability of the imputation doctrine. Id. at

890. 

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, 945 A.2d

132, 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. Id. at 142-143. Relying on the Supreme Court’s
15

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. 

Id. at 144. 

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
16

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., 484 A.2d 1234,

1243 (N.J. 1984). To incur liability, the defendant’s negligence

must be “a substantial factor in bringing about the injuries.” Id.

(quotations omitted). 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
17

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, 967 F.2d 166, 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.” Id. The district

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.” Id. at 170

(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.” Id. at 172. 

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
18

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, 660 N.Y.S.2d 969 (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.” Id. at 16. 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
19

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 addressthe 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
 The New Jersey Model Civil Charges were revised in October 11

2007 and these sections are now numbered 6.13 and 6.14

respectively. 

 Model Civil Charge 7.14 states, in part: “You must determine 12

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]

negligence was not a p roximate cause of the

accident/incident/event or injury/loss/harm.”

20

should also be charged. Nevertheless, the District Court did not 11

issue Civil Charge 7.14. Furthermore, the record reflects that 12

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, 744 A.2d 113,

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
21

normal incident of the risk created by a tortfeasor’s action does not

relieve the tortfeasor of liability. See Lynch, 744 A.2d at 124

(quoting Rappaport v. Nichols, 156 A.2d 1 (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. Id. However, where 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., 279 A.2d 827, 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.” Lafferty, 267 F.3d at 354. 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 Lafferty, 267 F.3d at 354. 
 We also note that the District Court recognized that this was an 13

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

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.” (App. 452.) Based on the record, it is clear that 13

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’sreceiver, 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
23

Lafferty, 267 F.3d at 358 (“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.” Id. at 359.

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. Id. This exception 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. Id. 

New Jersey courts have also held that “one who contributed

to the misconduct cannot invoke imputation.” NCP Litig. Trust,

901 A.2d at 882. 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. Id. at 873. 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. Id. at 883.

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.” Id.

The court 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. Id. The NCP 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. Id. Thus, KMPG 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. Id. 

PwC asserts that the Commissioner, as Ambassador’s
24

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. 711

F.2d 1343 (7th Cir. 1982), cert. denied, 464 U.S. 1002, 104 S.Ct.

509 (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. Id. at 1345. When the

corporation became insolvent, a liquidator was appointed to

manage its affairs and to initiate any actions belonging to the

bankruptcy estate. Id. at 1346. The liquidator eventually sued the

auditor for negligently failing to discover the fraud. Id. The

auditor argued that the liquidator, as the corporation’s
25

successor-in-interest, “stand[s] in the shoes” of the corporation and

only can advance those claims that the corporation could advance

directly. Id. Therefore, the corporate agents’ fraud was imputable

to the liquidator in the same way that it was imputable to the

corporation. Id. The Court held that the corporation’s officer’s

conduct was not a benefit to the corporation, and therefore the

adverse interest exception to imputation applied. Id. at 1348.

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 corporation. 901 A.2d at 888. 

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 thirdparty 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
26

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, 978 F.2d 98, 105 (3d Cir.

1992); see also Idzojtic v. Pennsylvania R.R. Co., 456 F.2d 1228,

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
 PwC asserts that the District Court’s failure to order a separate 14

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

doctrine of joint and several liability. PwC contends that its

14

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
28

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
29

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, 617

F.2d 1248 (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 nondefaulting defendants could result in inconsistency and possibly

two distinct damages awards on a single claim. Id. at 1262. The

Court found this to be a concern of “possible inconsistency and

judicial economy, rather than actual prejudice.” Id. Here, there

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., 425 F.2d 715, 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. 
30

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
31

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, 851 F.2d 652, 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., 833 F.2d 491, 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
32

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,

726 F.2d 972, 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.”

Id. (quoting Bd. of Comm’rs of Jackson County v. United States,

308 U.S. 343, 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, 519 A.2d 1384, 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
33

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, 751 A.2d 158, 159 (N.J. Super. Ct. App. Div.
34

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, 519 A.2d 1384, 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
35

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, 341 F.3d 193, 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., 313 U.S. 487, 496 (1941). New Jersey has

accepted the “governmental interest” choice of law test. Warriner

v. Stanton, 475 F.3d 497, 500 (3d Cir. 2007) (citing Veazey v.

Doremus, 510 A.2d 1187 (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. Id. at 500

(quotations omitted). “The governmental interest analysis is factintensive: ‘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.’” Id.

(quoting Erny v. Estate of Merola, 792 A.2d 1208, 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 Erny, 792 A.2d at

1213 (citing Gantes v. Kason Corp., 679 A.2d 106, 108-09 (N.J.

1996)). 
36

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. Erny, 171 A.2d at 1216. 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.

Erny, 792 A.2d at 1216 (citing Fu v. Fu, 733 A.2d 1133, 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. Id. The factors 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.” Id. The New Jersey Supreme Court has held that “[t]he

most important of those is the competing interests of the states.”

Erny, 792 A.2d at 1217. 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.’” Id. (quoting Fu, 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
In granting summary judgment, because the District Court 15

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

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
38

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, 792 A.2d 1208, 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 Jersey. 792 A.2d at

1210. 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. Id. at 1219. 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.

Id. The Court 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.” Id. at 1219. In making this

statement, the Court noted that the interest and purpose of the 1987

and 1995 statutes were consistent. Id. The Court 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
39

its concern about increased liability insurance costs.” Id. at 1219-

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. Id. at 1217. 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. Id. at 1212. 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, 893 F. Supp. 484 (W.D. Pa. 1995) to be unpersuasive.

In Phar-Mor, a Pennsylvania court applied New Jersey’s choice of
40

law rules and found them to favor the application of Pennsylvania

law over New Jersey law. Id. at 489. 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.

Id. at 488-89. 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. Id. Vermont has 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 determination.” 792 A.2d at 1221. 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.