Court Opinion

ID: 1014713
Source: CourtListenerOpinion
Date Created: 2013-07-04 21:21:27.977459+00
Date Added: 2024-06-11T15:12:57.635248
License: Public Domain

UNPUBLISHED

                     UNITED STATES COURT OF APPEALS
                         FOR THE FOURTH CIRCUIT

                               No. 03-2082

GUANG LU,

                                              Plaintiff - Appellant,

            versus

ZURICH AMERICAN INSURANCE COMPANY,

                                               Defendant - Appellee,

            and

NEW YORK LIFE INSURANCE COMPANY,

                                                             Defendant.

Appeal from the United States District Court for the District of
Maryland, at Greenbelt. Peter J. Messitte, District Judge. (CA-
01-2103-PJM)

Argued:   September 30, 2004             Decided:     November 10, 2004

Before WILLIAMS, TRAXLER, and KING, Circuit Judges.

Vacated and remanded by unpublished per curiam opinion.

ARGUED: John Umana, Washington, D.C., for Appellant.       David Drake
Hudgins, Alexandria, Virginia, for Appellee.
Unpublished opinions are not binding precedent in this circuit.
See Local Rule 36(c).

                               2
PER CURIAM:

     Plaintiff Guang Lu brought this action against his insurance

carrier, Zurich American Insurance Company, and former employer,

New York Life Insurance Company, for bad faith and breach of

contract, respectively.      The district court denied Zurich’s motion

to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6),

and denied New York Life’s motion for summary judgment.                    At

Zurich’s request, the district court then entered final judgment

for Lu against Zurich for nominal damages in the amount of one

dollar, which Lu appeals.       We vacate and remand.

                                      I.

     According to the Amended Complaint, Lu was employed as a life

insurance agent and securities trader with New York Life and

purchased an Errors and Omissions insurance policy from Zurich. In

September   2000,   Dr.     Xuejiao   Hu   filed    a   complaint   with   the

Securities Division of the Maryland Attorney General’s Office,

claiming that Lu had conducted unauthorized trading in her New York

Life and Charles Schwab accounts and that, as a result, she had

incurred approximately $80,000 in trading losses. Upon learning of

Dr. Hu’s allegations, New York Life terminated Lu’s employment.

     In   January   2001,    the   Securities      Division   instituted    an

administrative action against Lu, alleging violations of securities

regulations.   Zurich issued a preliminary coverage letter for the

                                      3
claims     of    Dr.   Hu   and   assigned     counsel      to   defend     Lu   in   the

administrative action, but later withdrew its defense of Lu in the

administrative action.            Lu denied the charges lodged by Dr. Hu and

the Securities Division.

      In    March      2001,   Zurich   and     New   York       Life   negotiated      a

settlement of Dr. Hu’s claims against Lu and New York Life for

$80,000, under which Zurich and New York Life each paid $40,000 to

Dr. Hu.     Dr. Hu executed a General Release and agreed to contact

the   “Securities       Division,     informing       it    in    writing      that   her

complaint has been resolved amicably and notifying it that said

complaint        has   been    dropped.”       J.A.    22    (quoted      in     Amended

Complaint).        Lu was never consulted or informed of the settlement

negotiations.

      Shortly after executing the General Release, Dr. Hu wrote the

following letter to the Securities Division:

                I am writing this letter to inform you that I
                and NY Life have reached an amicable agreement
                on settling the complaint I filed to your
                office against Mr. Guang Lu and NY Life last
                year. I appreciate very much for your help in
                resolving this matter.

J.A. 21-22 (quoted in Amended Complaint). According to the Amended

Complaint, however, the Securities Division maintained “that Dr. Hu

had not dropped her complaint, notwithstanding her General Release,

and the [administrative] case on that premise proceeded to trial,

causing significant additional damages and costs to Guang Lu.”

J.A. 22.

                                           4
     Lu alleged, inter alia, that Zurich had breached its duty of

good faith by failing to consult with him before settling the claim

with Dr. Hu, by failing to inform him of the proposed $80,000

settlement with Dr. Hu, and by allowing Dr. Hu to receive the

settlement proceeds, including the $40,000 contribution from Zurich

under Lu’s policy, without first obtaining Dr. Hu’s compliance with

the terms of the General Release.      In lieu of answering, Zurich

filed a Rule 12(b)(6) motion to dismiss the Amended Complaint for

failure to state a claim upon which relief may be granted.1

     The district court held a hearing on Zurich’s motion to

dismiss.   Zurich argued that, because it had no duty under the

policy to obtain Lu’s consent to a settlement, it also had no duty

to consult with Lu during the course of settlement negotiations or

to inform him of the settlement.    The district court disagreed,

ruling that the trier of fact might find that Zurich breached a

duty to consult with Lu during the representation and settlement

process, even if the policy did not require Zurich to obtain his

ultimate consent to the settlement.2    Although the district court

also indicated that damages for this technical breach would likely

     1
          New York Life filed a motion for summary judgment, which
was denied.    After the district court entered final judgment
against Zurich, Lu and New York Life filed a consent motion to
dismiss all claims against New York Life with prejudice.
     2
          We express no opinion as to whether Zurich had a duty to
consult with Lu before settling Dr. Hu’s claim. The district court
denied Zurich’s motion to dismiss the bad faith claim and the issue
of Zurich’s duty to Lu is not before us.

                                5
be nominal, it declined to entertain the question at the time

because Lu had not moved for summary judgment on the liability

issue.

      Within days, however, the district court entered a written

order denying Zurich’s motion to dismiss, with the added proviso

that “to the extent that the trier of fact may conclude that Zurich

had a duty to consult with Plaintiff before settling the claim of

Dr. X Hu, Plaintiff shall be limited to the recovery of nominal

damages for the breach of same.”       J.A. 53-54.    The district court

set forth no discussion as to why Lu was properly limited to the

recovery of nominal damages based upon Zurich’s Rule 12(b)(6)

motion.   The court entered a scheduling order setting a discovery

cut-off date of August 7, and a dispositive pretrial motions

deadline of September 8.

      In May 2003, Zurich filed a “Motion for Entry of Judgment” in

the   district   court,   contending    that   Lu’s   damages   had   been

conclusively established by virtue of district court’s prior order

denying Zurich’s Rule 12(b)(6) motion.         J.A. 55.   In the motion,

Zurich offered to consent to entry of a judgment against it for its

failure to consult with Lu prior to settling the claim if the court

would award nominal damages in the amount of one dollar.               Lu

opposed the motion, asserting that it was procedurally improper

under Rule 54(b) of the Federal Rules of Civil Procedure because

the order denying Zurich’s motion to dismiss was interlocutory and

                                   6
“subject to revision at any time before the entry of judgment

adjudicating all the claims and the rights and liabilities of all

the parties.”    Fed. R. Civ. P. 54(b).        Additionally, Lu argued that

entry of judgment was improper because a reasonable jury could

conclude that the costs he incurred in defending the administrative

action were proximately caused by Zurich’s breach of its duty of

good faith.   According to Lu, the letter Dr. Hu wrote, advising the

Securities Division that she “ha[d] reached an amicable agreement

on settling the complaint” with New York Life, J.A. 21, was

insufficient to satisfy her promise to “inform[] [the Securities

Division]   in   writing   that   her       complaint   ha[d]   been   resolved

amicably and . . . that said complaint ha[d] been dropped,” J.A. 22

(quoted in Amended Complaint).          Lu intended to demonstrate that,

had he been consulted by Zurich, he could have taken steps to

ensure that Dr. Hu dropped her administrative complaint as well as

her civil claims, as she was required to do under the terms of the

General Release, prior to her receipt of the settlement proceeds

paid by Zurich on his behalf.

     On June 18, the district court, without further hearing,

granted Zurich’s motion for judgment as to liability with regard to

its duty to consult with Lu, but denied Zurich’s request that

judgment be entered against it for nominal damages.              According to

the district court:

            [it] has made no finding heretofore as to what
            damages would attach to Zurich’s breach of its

                                        7
              duty to consult, having merely speculated that
              such damages were likely to be “nominal.”
              That characterization, hardly the “law of the
              case” as Zurich contends, is always subject to
              revision as the case goes forward. Since the
              case will go forward as to Defendant New York
              Life, it will not greatly inconvenience Zurich
              to remain in the case at the same time. It
              may well eventuate that Guang Lu is only
              entitled to nominal damages after all. But in
              the course of the proceedings, especially to
              the extent that Dr. Hu’s testimony is
              developed, a fuller picture of the events will
              be possible.

J.A. 55-56 (emphasis added).

     Pointing to the language regarding nominal damages set forth

in the district court’s order denying its Rule 12(b)(6) motion,

Zurich promptly filed a motion for reconsideration of its request

that final judgment be entered for nominal damages.                 In the

alternative, Zurich argued that the district court should vacate

its June 18 final judgment as to liability because Zurich had only

agreed to consent to judgment on liability if the plaintiff were

limited to nominal damages.          Because nominal damages were not

awarded, Zurich sought to retrieve its right to contest liability

before a jury.

     On July 16, the district court granted Zurich’s motion for

reconsideration, vacated the June 18 order, and entered final

judgment in favor of Lu against Zurich for nominal damages in the

amount   of    one   dollar.   The   district   court   again   offered   no

explanation as to why Lu’s Amended Complaint failed to state a

claim for compensatory damages, stating only that it had mistakenly

                                     8
indicated in the June 18 order that there had been no prior finding

as to such damages.

                                    II.

     On   appeal,   Lu   asserts   that   the   district   court   erred   in

entering final judgment against Zurich for nominal damages based

solely upon its prior order denying Zurich’s motion to dismiss the

Amended Complaint for failure to state a claim.            We agree.

                                    A.

     As an initial matter, we hold that the district court erred in

entering the order denying Zurich’s Rule 12(b)(6) motion as a final

judgment under Rule 54(b).      Rule 54(b) provides that:

           When more than one claim for relief is
           presented in an action . . . or when multiple
           parties are involved, the court may direct the
           entry of a final judgment as to one or more
           but fewer than all of the claims or parties
           only upon an express determination that there
           is no just reason for delay and upon an
           express direction for the entry of judgment.
           In the absence of such determination and
           direction, any order or other form of
           decision,     however    designated,     which
           adjudicates fewer than all the claims or the
           rights and liabilities of fewer than all the
           parties shall not terminate the action as to
           any of the claims or parties, and the order or
           other form of decision is subject to revision
           at any time before the entry of judgment
           adjudicating all the claims and the rights and
           liabilities of all the parties.

Fed. R. Civ. P. 54(b).        Neither the district court nor Zurich

points us to the procedural rule upon which the district court’s

“Entry of Judgment” rests.      Zurich represents that its motion was

                                     9
not made pursuant to Rule 54(b), but offers no alternative rule

upon which it might rest, and admits that the final judgment is

based upon matters beyond the four corners of the complaint and the

earlier Rule 12(b)(6) ruling.             We can identify no procedural

vehicle for the entry of judgment other than Rule 54(b).

     Pertinent to this appeal, Zurich has filed only two motions --

the Motion to Dismiss under Rule 12(b)(6) and the “Motion for Entry

of Judgment.”    The district court’s order enters “a Final Order of

Judgment in favor of Plaintiff Guang Lu and against Defendant

Zurich.”    J.A. 58.   In doing so, the district court proceeded under

the presumption that Zurich had moved for the entry of judgment “so

that an immediate appeal can be taken by [it],” J.A. 55, and

expressly noted that the judgment entered was indeed “FINAL as to

Defendant    Zurich    American   Insurance   Company   only,    not   as   to

Defendant New York Life Insurance Company.”        J.A. 60.     Thus, we are

satisfied that the district court intended to enter its March 25

order denying Zurich’s Rule 12(b)(6) motion under Rule 54(b) as a

final one for our review.3

     3
           As correctly asserted by Lu, the district court’s order
denying Zurich’s Rule 12(b)(6) motion could only be appealed upon
the district court’s entry of a final judgment as to Zurich only,
splitting the case away from New York Life under Rule 54(b), “upon
an express determination that there is no just reason for delay.”
Fed. R. Civ. P. 54(b). Until that time, the decision was “subject
to revision at any time before the entry of judgment adjudicating
all the claims and the rights and liabilities of all the parties.”
Id.     Although the district court made no such “express
determination,” Lu’s subsequent filing of a consent motion
dismissing the claims against New York Life with prejudice renders

                                     10
     The district court erred, however, because its Rule 12(b)(6)

order, standing alone, cannot suffice as a final order of judgment

against Zurich. The district court’s order plainly denied Zurich’s

Rule 12(b)(6) motion to dismiss the bad faith cause of action for

failure to state a claim.           Thus, even if we could construe the

order   as   one   that   granted    Zurich’s   12(b)(6)   motion   in   part

regarding compensatory damages, there remains a stark gap between

the district court’s Rule 12(b)(6) order and the district court’s

final order of judgment under Rule 54(b).         There is no prior order

establishing liability on Zurich’s part in Lu’s favor at all, only

a determination that a trier of fact might find that Zurich

breached a duty on its part to consult with Lu before settling.

     We also reject Zurich’s attempt to have us construe its motion

to enter judgment as a motion under Rule 54(b) and as an admission

of liability which paved the way for the district court to enter

the Rule 12(b)(6) order on damages as final.           Even if we were to

allow a Rule 54(b) motion to serve as a proper procedural vehicle

for a defendant to admit, for the first time, allegations of

liability set forth in a complaint, Zurich has not done so.          Zurich

has made it plain that it does not admit liability and that its

admission of liability was wholly contingent upon all damages being

limited to one dollar.       Rule 54(b) provides a procedural vehicle

for a district court to enter a prior order as a final judgment, in

the Rule 12(b)(6) order final as to Zurich in any event.

                                      11
order that an appeal as to fewer than all claims or all parties may

proceed; it does not provide a procedural vehicle for a defendant

to confess judgment or otherwise admit liability contingent upon

the district court limiting the award of damages against it.4

Accordingly, the district court erred in entering its Rule 12(b)(6)

order as a final judgment against Zurich under Rule 54(b).

                                B.

     Even if we were to construe the district court’s Rule 12(b)(6)

order as one that granted Zurich’s motion to dismiss Lu’s claim for

compensatory damages and accept Zurich’s conditional motion for the

entry of judgment for nominal damages as a proper filing under Rule

54(b), the entry of judgment also cannot stand. The district court

erred in concluding that Lu had failed to state a claim for

compensatory damages in his Amended Complaint.

     We review a district court’s dismissal of a complaint under

Rule 12(b)(6) under well-established standards. “[A] Rule 12(b)(6)

motion should only be granted if, after accepting all well-pleaded

allegations in the plaintiff’s complaint as true and drawing all

reasonable factual inferences from those facts in the plaintiff’s

favor, it appears certain that the plaintiff cannot prove any set

     4
          At oral argument, counsel for Zurich suggested that we
might construe its motion as an “Offer of Judgment” under Fed. R.
Civ. P. 68. The plain language of that rule reveals that it too
cannot apply to the circumstances here.

                                12
of facts in support of his claim entitling him to relief.”   Edwards

v. City of Goldsboro, 178 F.3d 231, 244 (4th Cir. 1999).

     The Amended Complaint alleges that Zurich breached its duty of

good faith by failing to consult with Lu before settling Dr. Hu’s

claim and inform him of the settlement, and by giving Dr. Hu the

settlement proceeds before she notified the Securities Division

that she was dropping her complaint.   These failures, Lu alleges,

“deprived him of an[y] opportunity to assure that Dr. Hu in fact

had complied with the specific terms and requirements of the

General Release, before they gave her [the] $80,000.”   J.A. 24.

     At the hearing, the district court rejected Zurich’s argument

that it had no such duty to Lu, but proceeded to engage counsel in

an extended discussion of what damages Lu might prove were he to

prevail on the liability issue before the trier of fact.     In doing

so, the court and parties ventured far beyond the allegations of

the Amended Complaint, upon which a Rule 12(b)(6) dismissal must

rest, and well into factual representations, assumptions, and

speculations that may or may not be the subject of ultimate dispute

upon an evidentiary record.

     By way of example, Lu argued that, had he known about the

settlement negotiations before Dr. Hu recouped her money, he could

have retained personal counsel, and ensured that Dr. Hu dropped the

complaint against him, thereby avoiding the substantial litigation

costs associated with defending that action.   In response, Zurich

                                13
counter-argued   that    Lu   could   have     done    nothing     because   the

Securities Division was at liberty to pursue its action whether or

not Dr. Hu dropped her complaint.          Because Lu would not ultimately

be able to establish a causal connection between his costs of

defending the administrative action and Zurich’s failure to consult

with him during the settlement negotiations, Zurich argued that an

award of only nominal damages was proper.

     The flaw in Zurich’s position on appeal is that Zurich did not

move for summary judgment on the issue of compensatory damages

below, asserting that Lu, having been given the opportunity, failed

to make a sufficient evidentiary showing of his entitlement to such

damages should he prevail on the bad faith claim.              Rather, Lu was

asked to explain, well in advance of the discovery cut-off and

dispositive motions date, and in the context of a 12(b)(6) hearing,

what damages he sought to recover and what facts might causally

link such damages to his liability allegations.             At no time did the

district court advise the parties that it intended to convert

Zurich’s Rule 12(b)(6) motion to dismiss to a Rule 56 motion for

summary judgment.   Thus, there was no notice or opportunity given

to Lu to produce affidavits or other evidence in support his stated

claim for compensatory damages. See Fed. R. Civ. P. 56(c) (Summary

judgment   “shall   be    rendered         forthwith   if    the    pleadings,

depositions, answers to interrogatories, and admissions on file,

together with the affidavits, if any, show that there is no genuine

                                      14
issue as to any material fact and that the moving party is entitled

to a judgment as a matter of law.”).   For example, although there

is an allegation that the Securities Division advised Lu that,

contrary to the requirements in the General Release, Dr. Hu did not

drop her complaint after the settlement was finalized, there was no

evidence in the record regarding the Securities Division’s position

on the settlement or its usual course of action in situations where

a complainant actually drops a complaint and declines to cooperate

further.   Nor, as the district court noted in its vacated order,

was there evidence as to the position or actions taken by Dr. Hu

following her execution of the Release.5

     To conclude, we express no opinion as to whether Lu can

ultimately establish a claim for compensatory damages should a jury

determine that Zurich acted in bad faith, or whether Lu’s claim for

     5
          Because we review this matter under Rule 12(b)(6), prior
to the completion of discovery and upon an incomplete record, we
can only speculate as to what facts might have surfaced to support
a claim for compensatory damages. As an example of the manner in
which the hearing wandered far beyond the allegations of the
Amended Complaint, however, we note representations made by counsel
at the Rule 12(b)(6) hearing to the effect that Dr. Hu not only
failed to notify the Securities Division that she was “dropping”
her complaint as required, but also appeared in Maryland to testify
against him in the administrative proceedings.        This led to
disputed factual claims by Zurich that Dr. Hu was subpoenaed to do
so, beyond her control, as well as the contrary claim by Lu that
she was beyond the subpoena power of the Maryland courts. We also
note that, during oral argument before us, Lu’s counsel represented
that he had discovered, after the final entry of judgment, that the
Securities Division was notified of the settlement negotiations
between Dr. Hu, New York Life, and Zurich, and participated in
those negotiations.

                                15
damages can survive a properly filed motion for summary judgment.

At this juncture, it appears that Lu contends only that Zurich’s

bad faith failure to inform him of the settlement negotiations

proximately caused him to incur damages in the form of the costs of

defending and trying the administrative case.       Such damages may

ultimately   prove   to   be   unrecoverable.   However,   taking   the

allegations in the Amended Complaint as true and construing them in

the light most favorable to Lu, we cannot say beyond doubt that the

plaintiff can prove no set of facts in support of his claims which

would entitle him to compensatory damages of more than one dollar.

                                   III.

     For the foregoing reasons, we vacate the district court’s

order entering judgment for Lu against Zurich for nominal damages

and reverse the district court’s Rule 12(b)(6) order to the extent

it limits Lu’s recovery to nominal damages.     We remand the case to

the district court for further proceedings consistent with this

opinion.

                                                VACATED AND REMANDED

                                    16