Defendants appeal from a final judgment entered in the United States District Court for the Southern District of New York, following jury trial and bench trial before Shirley Wohl Kram, Judge, (1) awarding plaintiff and third-party-defendant Grauso contract damages, including prejudgment interest, in the amounts of $363,183 and $53,104, respectively, and (2) awarding plaintiff a total of $435,218.75 as attorneys' fees plus $17,601.89 in expenses pursuant to a contract provision for an award of fees. Affirmed as to contract damages, modified as to attorneys' fees and expenses.
Before: OAKES, NEWMAN and KEARSE, Circuit Judges.
Defendants Nineteen Named Trustees ("Trustees") appeal from a final judgment entered in the United States District Court for the Southern District of New York, Shirley Wohl Kram, Judge, following a jury trial on certain issues and a bench trial on other issues. The judgment (1) awarded plaintiff F.H. Krear & Co. ("Krear") $363,183, including prejudgment interest, for the Trustees' breach of contract, (2) awarded third-party-defendant Anthony Grauso $53,104, including prejudgment interest, for the Trustees' breach of contract, and (3) awarded Krear a total of $452,820 in attorneys' fees and expenses, pursuant to a contract provision. A prior attempt by the Trustees to appeal the first two awards was dismissed for lack of appellate jurisdiction since a decision had not yet been rendered on the contract claim for attorneys' fees. See F.H. Krear & Co. v. Nineteen Named Trustees, 776 F.2d 1563 (2d Cir. 1985). On this appeal, the Trustees challenge all of the above awards, contending principally that the court made a variety of errors in its trial rulings and erred in both the awarding and the calculation of attorney's fees to Krear. For the reasons below, we affirm so much of the judgment as awarded damages, plus interest, of $363,183 to Krear and $53,104 to Grauso; we vacate the award of attorneys' fees and remand for entry of a modified judgment awarding Krear $261,518 in attorneys' fees and expenses, upon the condition set forth in Part II.C.5. below.
A. The Parties and the Events
Krear was a firm that offered administrative services to employee benefit plans. The Trustees were trustees of three benefits funds (the "Funds") maintained by Local 69 of the Hotel and Restaurant Employees and Bartenders Union ("Local 69") for the benefit of its members.
In early 1979, the Trustees, anticipating the growth of contributions to the Funds, decided that the Funds needed computerization and professional administration. They formed a committee to select a company to provide these services, and asked third- and fourth-party-defendant Robert Mozer, the Funds' attorney, to assist. They also hired Grauso, a computer consultant with whom the Funds later entered into a five-year consulting contract, to evaluate any proposals the Funds had received or would receive.
During this period a controversy developed between Local 69 and the Hotel and Restaurant Employees and Bartenders International Union ("International") concerning which of them would control the Funds. when Mozer contacted several potential computer and administrative service companies, most of them declined to submit service proposals, stating that they did not want to get involved in a struggle between Local 69 and the International. Consequently only two written proposals were received by the Funds: one from a company called Administrative Consultants, Inc., and the other from Krear. Both Mozer and Grauso recommended that the Trustees negotiate agreements with Krear.
On July 1, 1979, each of the three Funds entered into a three-year contract (collectively the "Contracts") for Krear to furnish, inter alia, "[a]ll administrative functions related to the collection of monies due the Fund . . . [and] [d]evelopment of all computer software as defined by the Fund as reasonably necessary . . . " Each contract provided that Krear would receive a minimum monthly payment or a specified percentage of the collections it made on behalf of the fund, whichever was greater. Although the Contracts did not specify how much time it should take to develop the computer system, Krear's proposal and Grauso's recommendation estimated an eight-to-twelve month start-up period. Each contract provided that New York law would govern, and each contained the following provision: "In the event of any litigation between the parties, the prevailing party shall have the right to reimbursement of reasonable attorney's fees in regards to such litigation from the other."
On October 1, 1979, the International prevailed in the struggle with Local 69 over control of the Funds. Local 69 was merged into another local union ("Local 6") headed by one Vito Pitta, who had the support of the International, and Local 6 began administering the Funds. In that month, the Funds ceased to pay Krear and, according to Krear, barred it from entering the Funds' offices to collect data in preparation for computerization.
Krear promptly commenced the present action against the Trustees seeking, inter alia, $1,382,500 in damages for breach of contract, contending that they had ceased payments to Krear and interrupted its performance without any valid reason but solely because of the International's political victory over Local 69. The Trustees counterclaimed, contending that Krear had failed to perform the Contracts and that the Contracts had been fraudulently procured by means of a conspiracy among Krear, Grauso, and Mozer, resulting in excessively high fees to Krear. On the counterclaims the Trustees demanded $158,476 in compensatory damages and a total of $475,428 as punitive damages. The Trustees also sued Grauso, asserting that he had failed to perform his contractual duties, and Mozer, asserting that he had breached his fiduciary duties to the Funds. Grauso counterclaimed against the Trustees for terminating his five-year consulting contract.
In 1985, a jury trial was held with respect to all issues except those relating to the Contracts' provision for the prevailing party to recover attorneys' fees. At that trial, Krear presented evidence of the above events and introduced the testimony of Mozer indicating that the International, through Local 6, had sought to avoid Local 69's prior contracts:
The policy was to try and get the local trustees to obtain releases I might say on all service providers before they merged into the international funds.
If that could not be done, the policy was to resist payment in the main. Sometimes they were paid, but in the main it was to resist.
Krear sought to prove its damages through documents and the testimony of its two corporate officers, John David Krear ("John Krear") and Saul D. Weiner. The Contracts were introduced, showing that Krear was to have been paid a minimum total of $39,784 per month or a greater amount based upon a percentage, which varied from Fund to Fund, of the contributions collected for that Fund if the contributions exceeded certain levels. John Krear described Krear's anticipated expenses, including the employment contracts he and Weiner had with Krear, and testified that if contributions to the funds increased in accordance with projections made by Krear and the Funds, Krear's profits over the life of the Contracts would have come to $839,511. On cross-examination, he testified that if the projected increases in contributions were not forthcoming, and Krear were entitled only to the minimum payments specified in the Contracts, Krear's losses as a result of the breach would total $269,400.
In support of their conspiracy, excessive fee, and breach of fiduciary duty contentions, the Trustees elicited testimony from their own and Krear's witnesses concerning the rates of compensation received by other administrators of pension or welfare funds. This evidence included testimony by Mozer and the administrator of the International's own pension funds as to the latter's compensation, and the testimony of two of the Trustees about other administrators' fees.
In addition, the Trustees proposed to call one Hugh Brookhart to testify as an expert witness that other administrative service companies had been available to the Funds and that, based on their compensation rates, Krear was charging excessive fees. Brookhart was also to testify that, based on his review of Krear's computerization plans for the Funds, Krear had not been performing under the Contracts. The district court excluded Brookhart's proposed testimony on the grounds that it was "totally irrelevant" and not "of assistance to the trier of fact." The Trustees also proposed to ask attorney Richard Raysman to testify, as an expert witness, that the contracts were unenforceable because they lacked essential terms. The district court also excluded this proposed testimony.
At the close of the evidence, the Trustees moved, in effect, for a directed verdict in their favor on the claims of Krear, contending that Krear's damages were entirely speculative. The court denied the motion and submitted a special verdict form to the jury.
The jury found that the Trustees were liable to Krear for breach of contract in the amount of $269,400 and found for Krear on the Trustees' counterclaims. It found that neither Grauso nor Mozer was liable to the Trustees for any of the damages payable to Krear, and it found that the Trustees were liable to Grauso for breach of contract in the amount of $42,000. The court awarded prejudgment interest to Krear and Grauso and entered judgment in their favor in the amounts of $363,183 and $53,104, respectively. The court ruled that the issue of attorneys' fees would be decided in separate proceedings.
The Trustees immediately attempted to appeal various of the trial court's rulings. Since the claim for fees, which was part of Krear's contract claim, had not been adjudicated, we dismissed the appeal for lack of a final judgment for the reason stated in F.H. Krear & Co. v. Nineteen Named Trustees, 776 F.2d 1563.
C. The Trial on Attorneys' Fees
In the ensuing fees proceedings, the parties waived their rights to a jury trial and submitted the matter to the court on the basis of depositions, documents, and oral argument. After reviewing the evidence, which we discuss in greater detail in Part II.C. below, as to Krear's attorneys' hours, services, record-keeping, and experience, the court awarded Krear and its attorneys a total of $435,218.75 in fees plus $17,601.89 in expenses, stating as follows:
[T]he Court is intimately aware that Krear's attorneys were forced to pursue claims against extremely dilatory tactics by the Trustees. These tactics included asserting a wholly frivolous conspiracy defense, frivolous counterclaims, and several frivolous third-party claims . . . Their conduct throughout these proceedings, and, in particular, during the needlessly protracted trial and in opposing the instant motion, has been so unjustifiable that the Court would be compelled to award virtually the same amount of fees as Rule 11 sanctions if the contracts in question did not provide for an award of attorneys' fees.
The court noted that it was "fully aware" that the attorneys' fees award exceeded the amount of the judgment obtained by Krear and concluded that the fee award was proper "in light of the Trustees' conduct." A final judgment was entered, and this appeal followed.
On this appeal, the Trustees pursue the issues they sought to argue in their earlier appeal prior to its dismissal. As to these issues, the Trustees contend principally that the trial court erred in (1) limiting their recross-examination of John Krear, (2) excluding their proposed expert witness testimony, (3) refusing to instruct the jury that Krear and Mozer were, as a matter of law, fiduciaries under the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. § 1002(21)(A) (1982), (4) denying their motion for a directed verdict on Krear's claim on grounds of insufficiency of the proof as to damages, (5) denying their motion for a new trial on the grounds that inflammatory statements and summation by Krear's counsel at the jury trial denied them a fair trial, and (6) awarding Krear prejudgment interest. In addition, the Trustees contend that the district court's award of attorneys' fees was improper under New York law. We find merit only in the last of these contentions.
A. The Alleged Errors During the Jury Trial
1. The Recross-examination of John Krear
On direct examination, John Krear testified with respect to Krear's anticipated profits on the Contracts and described the employment contracts he and Weiner had with Krear. The Trustees cross-examined John Krear with respect to Krear's prospects but not with respect to the employment contracts. Following the close of John Krear's redirect examination, which did not include questions regarding the employment contracts, those contracts were received in evidence. When the Trustees conducted recross-examination they attempted to question John Krear with respect to the validity and authenticity of those agreements. The district court sustained objections to these questions on the grounds that they were not "within the parameters of redirect." The Trustees contend that this ruling was error. We disagree.
Fed. R. Evid. 611(b) provides that "[c]ross-examination should be limited to the subject matter of the direct examination and matters affecting the credibility of the witness"; it gives the trial court discretion to permit additional latitude in cross-examination. Thus, "the proper scope for cross-questioning is, like the qualification of witnesses, a matter of trial court discretion which we do not lightly disturb." N.V. Maatschappij Voor Industriele Waarden v. A.O. Smith Corp., 590 F.2d 415, 421 (2d Cir. 1978). This deferential standard of review is equally applicable to recross-exmaination. See United States v. Kahn, 472 F.2d 272, 281 (2d Cir.), cert. denied, 411 U.S. 982, 93 S. Ct. 2270, 36 L. Ed. 2d 958 (1973).
Since the redirect examination of John Krear did not include questioning with respect to the employment agreements, it was plainly not error for the district court to exclude the Trustees' recross-examination questions on that subject.
2. The Exclusion of Expert Testimony
The Trustees contend that the district court erred in excluding the proffered expert testimony as to Krear's performance, comparable administrative fees, and the enforceability of the Contracts. We find no basis for reversal.
Rule 702 of the Federal Rules of Evidence provides that an expert may testify to specialized knowledge that may assist the trier of fact in determining a factual issue. Rule 403, however, permits the trial judge to exclude relevant evidence "if its probative value is substantially out-weighed by the danger of unfair prejudice, confusions of the issues, or misleading the jury, or by considerations of undue delay, waste of time, or needless presentation of cumulative evidence." Fed. R. Evid. 403. Thus, "the trial judge has broad discretion in the matter of admission or exclusion of expert evidence, and his action is to be sustained unless manifestly erroneous." Salem v. United States Lines Co., 370 U.S. 31, 35, 8 L. Ed. 2d 313, 82 S. Ct. 1119 (1962); see also N.V. Maatschappij Voor Industriele Waarden v. A.O. Smith Corp., 590 F.2d at 418 (Rule 702, broadening "the range of admissible expert testimony," does not alter the "manifestly erroneous" standard of review). In the present case, the district court's exclusion of the Brookhart and Raysman testimony was within the proper bounds of discretion and was not manifestly erroneous.
According to the Trustees' offer of proof, Brookhart was to testify that Krear had not computerized the Funds as required by the Contracts. However, Krear's proposal and Grauso's recommendation showed that the parties understood that computerization of the Funds pursuant to the Contracts would not be immediate, but instead would be implemented over approximately eight-to-twelve months. Cf. Gordon v. Vincent Youmans, Inc., 358 F.2d 261, 263 (2d Cir. 1965) (under New York contract law, all writings from a single transaction must be read together). The Trustees claimed that Krear's breach had occurred after less than four months. Although Brookhart was to have testified that there were defects in the computerization plan, the offer of proof did not suggest that such defects would not have been curable in the remaining four-to-eight months anticipated for Krear's performance had the Trustees not ceased paying Krear and barred it from the Funds' offices. The district court thus did not abuse its discretion in excluding Brookhart's nonperformance testimony as "irrelevant" and misleading.
Nor did the court abuse its discretion in excluding Brookhart's proposed testimony as to the excessiveness of the administrative fees charged by Krear in comparison to the fees charged by other companies. In light of the testimony of at lead four other witnesses as to administrative fees they charged or of which they had knowledge, Brookhart's testimony would have been cumulative.
Finally, the district court did not err in excluding Raysman's proposed testimony that the Contracts were unenforceable for lack of essential terms. "It is not for witnesses to instruct the jury as to applicable principles of law, but for the judge." Marx & Co. v. Diners' Club, Inc., 550 F.2d 505, 509-10 (2d Cir.) (admission of expert testimony as to party's contractual obligations constituted reversible error), cert. denied, 434 U.S. 861, 54 L. Ed. 2d 134, 98 S. Ct. 188 (1977).
3. The Instruction With Regard to ERISA Fiduciaries
One of the Trustees' defenses to Krear's claim was that the Contracts were unenforceable under ERISA because Krear was an ERISA fiduciary, and its allegedly excessive fees violated the ERISA requirement that fiduciaries charge "no more than reasonable compensation" for their services. 29 U.S.C. § 1108(b)(2) (1982). They also contended that Mozer was an ERISA fiduciary and thus was liable for having caused the Funds to agree to pay Krear excessive compensation. They asked the district court to instruct the jury that ...