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GIANT EAGLE, INC. v. FEDERAL INS. CO.

April 24, 1995

GIANT EAGLE, INC., Plaintiff,
v.
FEDERAL INSURANCE COMPANY, Defendant.



The opinion of the court was delivered by: DONALD E. ZIEGLER

 ZIEGLER, Chief Judge

 Pending before the court is the motion of plaintiff, Giant Eagle, Inc. ("Giant Eagle"), for judgment as a matter of law pursuant to Fed.R.Civ.P. 50(b) or, in the alternative, for a new trial. Giant Eagle contends that defendant, Federal Insurance Company ("Federal"), failed to sustain the burden of proving its claim for reformation of an insurance contract by clear and convincing evidence and that plaintiff is entitled to judgment n.o.v. In addition, plaintiff renews its objection to our pretrial ruling that Federal was entitled to a jury trial pursuant to the teachings of Beacon Theatres, Inc. v. Westover, 359 U.S. 500, 3 L. Ed. 2d 988, 79 S. Ct. 948 (1959).

 Giant Eagle is a Pennsylvania corporation which operates and supplies retail grocery supermarkets in Pennsylvania, Ohio and West Virginia. Giant Eagle was, at one time, the parent company of Phar-Mor, Inc. ("Phar-Mor"), a discount drugstore chain located throughout the United States. During the relevant time period, the six members of the Board of Directors of Giant Eagle also comprised the majority of the Board of Directors of Phar-Mor. However, with a few exceptions, the corporations did not have common officers. Federal is a New Jersey corporation that issues insurance policies, including directors and officers policies ("D&O policies"), in return for premiums paid by the insureds. Federal's principal place of business is in New Jersey. Jurisdiction is based on diversity of citizenship and the amount in controversy exceeds $ 50,000.00.

 I. RIGHT TO A JURY TRIAL

 Before we consider the merits of Giant Eagle's motion for judgment as a matter of law, we must first resolve the jury trial issue. A Rule 50 motion for judgment as a matter of law is proper only within the context of a jury trial. If we conclude that this action should have been tried to the court, Rule 50 is inapplicable. See Schlitt v. State of Florida, 749 F.2d 1482, 1482-83 (11th Cir. 1985) ("Fed.R.Civ.P. 50, governing directed verdicts, applies only in cases tried to a jury with power to return a binding verdict."). In that event, Giant Eagle submits that we should treat its motion as a motion for judgment on partial findings pursuant to Fed.R.Civ.P. 52(c). See Lentino v. Fringe Employee Plans, Inc., 611 F.2d 474, 476 n.1 (3d Cir. 1979). Because, as explained below, the two types of motions are judged under different standards, both at the trial court level and on appellate review, we must first determine whether we correctly held that Federal had the right to a trial by jury.

 Pursuant to Rule 50(a), a court may enter judgment as a matter of law against a party that receives a favorable jury verdict if there is insufficient evidence for a reasonable jury to find for that party. However, in considering a motion for judgment n.o.v.:

 
the trial court must view the evidence in the light most favorable to the non-moving party, and determine whether the record contains the 'minimum quantum of evidence from which a jury might reasonably afford relief.' Keith v. Truck Stops Corp., 909 F.2d 743, 745 (3d Cir. 1990) (citations omitted). The court may not weigh evidence, determine the credibility of witnesses or substitute its version of the facts for that of the jury. Blair v. Manhattan Life Ins. Co., 692 F.2d 296, 300 (3d Cir. 1982).

 Parkway Garage, Inc. v. City of Philadelphia, 5 F.3d 685, 691 (3d Cir. 1993). Moreover, appellate review of the grant of a judgment n.o.v. is plenary and the judgment will not stand "unless the record is critically deficient of that minimum quantum of evidence from which the jury might reasonably afford relief." Id. at 692 (quoting Fineman v. Armstrong World Industries, Inc., 980 F.2d 171, 183 (3d Cir. 1992)). Thus, the standards applicable to a Rule 50 motion are equivalent to those applied to motions for summary judgment under Rule 56.

 In contrast, Rule 52(c) authorizes a court, in all actions tried upon the facts without a jury or with an advisory jury, to enter judgment as a matter of law against a party at any time after that party has been fully heard on the issue. In entering a Rule 52 judgment:

 
the court is not as limited in its evaluation of the nonmovant's case as it would be on a motion for a directed verdict. The trial judge is not to draw any special inferences in the nonmovant's favor nor concern itself with whether the nonmovant has made out a prima facie case. Instead, the court's task is to weigh the evidence, resolve any conflicts in it, and decide for itself where the preponderance lies.

 Wright and Miller, Federal Practice and Procedure: Civil 2d, § 2573.1 (citations omitted). Moreover, a judgment entered pursuant to Rule 52 shall not be overturned on appeal unless the findings of the district court are "clearly erroneous." Agathos v. Starlite Motel, 977 F.2d 1500, 1504 (3d Cir. 1992). "Factual findings are not clearly erroneous if the record contains sufficient evidence to support them." Id. (citation omitted).

 In view of the disparate treatment of the two motions, an initial resolution of the jury trial issue is essential. Giant Eagle contends that Federal was not entitled to a jury trial because Federal was seeking reformation of a written contract which is purely an equitable claim in nature. Federal rejoins that the civil action at bar consists of both legal and equitable claims, that legal issues predominate, and that Federal is entitled to a jury trial as a matter of right pursuant to the Supreme Court's decision of Beacon Theatres and its progeny. In the alternative, Federal contends that the parties stipulated to try the action to a jury.

 In analyzing this issue, a review of the procedural and historical facts is necessary. The dispute centers around the scope of a $ 20 million D&O insurance policy purchased by Giant Eagle from Federal. The policy was issued on February 24, 1992 and was effective from January 14, 1992 through April 13, 1993. In the fall of 1992, Giant Eagle became embroiled in the extensive litigation which emanated from the fraud that occurred at Phar-Mor during the late 1980's and early 1990's. Much of that litigation has been consolidated in this court by the Judicial Panel on Multidistrict Litigation as part of In re Phar-Mor, Inc. Securities Litigation, MDL No. 959 (W.D.Pa.). Giant Eagle, along with many of its directors and officers, are defendants in a number of the civil actions in the MDL proceedings. Following commencement of the MDL, Giant Eagle sought coverage under the D&O policy by providing Federal with a timely written notice of the claims as required by the policy. Federal declined coverage of the claims by letter dated September 29, 1992 and again by letter on September 2, 1993. The denial of coverage was premised on Federal's contention, as set forth in the September 2, 1993 letter, that Endorsement No. 2 to the policy excludes, or was intended to exclude, claims against Giant Eagle's directors and officers that are based on "common claims or common wrongful acts relating to Phar-Mor."

 Giant Eagle filed the instant two-count complaint against Federal on January 21, 1994. Count I of the complaint seeks declaratory relief pursuant to the Declaratory Judgment Act, 28 U.S.C. § 2201 and requests the entry of a judgment declaring that the D&O policy insures Giant Eagle and its directors and officers for the claims asserted in the Phar-Mor MDL up to a liability limit of $ 20 million. Count II is a breach of contract claim and plaintiff seeks damages for Federal's refusal to pay the defense costs of the directors and officers of Giant Eagle. The complaint does not contain a demand for a jury trial.

 At or around the time that the complaint was filed and with a view towards expediting resolution of the coverage question, the parties executed a stipulation which, among other things, set the parameters for the instant action. Specifically, the stipulation, at paragraph 12, states that:

 
Federal has denied coverage under the [D&O policy] with respect to the Phar-Mor Securities Litigation based on Endorsement #2, as set forth in the September 2, 1993 letter from Dan A. Bailey, Esquire to Jane S. Barnes, Esquire. The parties agree that the only issue to be litigated in this expedited action is whether Federal may continue to deny coverage obligations under the [D&O policy] for the reasons relating to Endorsement #2 set forth in Attorney Bailey's letter. The parties expressly reserve the right to assert outside of this action all other alternative potential coverage issues and defenses. The parties further agree that there will be no determination in this case of the amount of any obligation of Federal pursuant to any policy of insurance, including but not limited to, extra-contractual damages, and any such claims are reserved.

 In addition, paragraph 13 of the stipulation provides that the "parties agree that all issues of fact to be decided at time of trial which they are legally entitled to have decided by a jury shall be decided by a jury and not the court."

 Federal filed an answer, with a jury trial demand, on February 15, 1994. As its "Fifth Defense," Federal alleges that Endorsement No. 2 fails to state the intent of the parties due to a scrivener's error and/or a mutual mistake and that the policy should be reformed by the court to reflect the actual intention and agreement of the parties. Federal's "Sixth Defense" incorporates the stipulation and states that the parties have agreed "that the only issue to be litigated in this action is whether Endorsement 2 [of the D&O policy], either as intended by the parties, reformed by the Court, or as set forth therein, excludes coverage for the claims made against the Giant Eagle officers and directors . . .."

 After the close of discovery, the court ordered counsel for the parties to file briefs addressing Federal's right to a jury trial. After considering the submissions of the parties, the urgings of Federal, and the decisions of the Supreme Court in Beacon Theatres and Dairy Queen, Inc. v. Wood, 369 U.S. 469, 8 L. Ed. 2d 44, 82 S. Ct. 894 (1962), we held that the legal issues predominated over the action and, over Giant Eagle's objection, that Federal had the right to try its reformation claim to a jury. Giant Eagle now requests that we reconsider this holding based on the contention that the issue of reformation is purely equitable in nature and should be decided by the court. *fn1"

  "The right of trial by jury as declared by the Seventh Amendment to the Constitution or as given by statute of the United States shall be preserved to the parties inviolate." Fed.R.Civ.P. 38(a). The Seventh Amendment preserves the right to a jury trial in suits at common law, that is, actions at law, and the right does not attach to suits in equity dealing with equitable matters. Ross v. Bernhard, 396 U.S. 531, 533, 24 L. Ed. 2d 729, 90 S. Ct. 733 (1970). This right is neither extended nor limited by the Declaratory Judgment Act, Beacon Theatres at 504, and a "workable formula that has been developed is to determine in what kind of suit the claim would have come to court if there were no declaratory judgment remedy." Owens-Illinois, Inc. v. Lake Shore Land Co., Inc., 610 F.2d 1185, 1189 (3d Cir. 1979) (citation omitted).

 In Owens-Illinois, the Court of Appeals reiterated the general rule for determining whether a party has a right to a jury trial. It stated that:

 
In considering a demand for a jury trial, a court should look to the substance of the pleadings and not rely on the labeling used by the litigants. The test is whether the issues raised by the pleadings are such as would be triable to a jury at common law, and federal not state law is determinative, even in an action founded on diversity of citizenship.
 
Generally speaking, if the case is a purely equitable one, the parties are not entitled to a jury. The determination of the nature of the litigation has been made more difficult, however, by the merger of law and equity accomplished by the Federal Rules of Civil Procedure, and has been further complicated by the creation of new statutory remedies.

 Id. at 1189 (citations omitted).

 In Beacon Theatres and Dairy Queen, the Supreme Court wrestled with the application of the constitutional right to a jury trial in mixed cases of law and equity. In both cases, the Court held that the right to a jury trial attached because a determination of the equitable claims would also have finally determined issues which were common to both the equitable and legal claims and would deprive the party seeking trial by jury of the right to have those issues determined by a jury. In Beacon Theatres, the Court stated that "only under the most imperative of circumstances . . . can the right to a jury trial be lost through prior determination of equitable claims." 359 U.S. at 510-11. Similarly, in Dairy Queen, the Court noted that:

 
attempts were made indirectly to undercut [the right to a jury trial] by having federal courts in which cases involving both legal and equitable claims were filed decide the equitable claim first. The result of this procedure in those cases in which it was followed was that any issue common to both the legal and equitable claims was finally determined by the court and the party seeking trial by jury on the legal claims was deprived of that right as to these common issues.

 369 U.S. at 472.

 Relying on Beacon Theatres and Dairy Queen, we concluded prior to trial that Federal was entitled to a jury trial on the issue of reformation. After further consideration of the issue, we now conclude that our initial holding was erroneous and that Federal's claim must be determined by the court.

 A situation nearly identical to that presented here occurred in Enserch Corp. v. Shand Morahan & Co., Inc., 952 F.2d 1485 (5th Cir. 1992). One of the issues in that case was whether the court should reform the insurance policies at issue, due to an alleged mutual mistake, to reflect that the parties had intended to limit the recovery for one claim under both policies to a maximum of $ 25 million. The trial court submitted the issue to a jury, which found that there was no mutual mistake. On motion for judgment n.o.v., the trial court disregarded the jury's verdict and held that the parties had intended to limit the maximum recovery under both policies for a single claim.

 On appeal, the Court of Appeals noted that "despite the apparent procedural posture of this case as an appeal from an order granting a motion for [JNOV], we believe this is in fact an appeal from an order granting reformation of an insurance policy." 952 F.2d at 1502 (brackets in original; quoting Great Atlantic Insurance Co. v. Liberty Mutual Insurance Co., 773 F.2d 976, 978 (8th Cir. 1985)). In concluding that the ...


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