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Redding v. Prosight Specialty Management Company, Inc.

United States District Court, D. Montana, Helena Division

June 25, 2015

BILLIE L. REDDING, Plaintiff,
v.
PROSIGHT SPECIALTY MANAGEMENT COMPANY, INC. aka MUTUAL MARINE OFFICE, INC. PROSIGHT SPECIALTY INSURANCE GROUP, INC. aka NYMAGIC, INC. and NEW YORK MARINE AND GENERAL INSURANCE COMPANY, Defendants.

OPINION & ORDER (Motion for Attorney Fees and Costs)

CHARLES C. LOVELL, Senior District Judge.

Before the Court is Defendants' Motion for Fees and Costs Pursuant to the Court's Inherent Authority and 28 U.S.C. § 1927. The motion is opposed. The Court received all of Defendants' billing statements for in camera review on June 19, 2015.

Shortly after entry of the Court's Opinion and Order of February 27, 2015, there was a flurry of activity in this case, and even the lawyers lawyered up. Defendants filed a motion for $1.4 million in attorney fees. Attorney Ward Taleff made an appearance on behalf of Plaintiff's counsel Ms. Lin Deola and Mr. Brian Miller and filed on their behalf a notice of appeal and a motion for stay of enforcement of judgment against them, which latter motion was subsequently granted. Attorney Maxon Davis made an appearance on behalf of Plaintiff's counsel Richard Layne. Plaintiff's counsel Brian Miller and Richard Layne filed a notice of appeal on behalf of Plaintiff Redding. Attorney Jonathan McDonald filed a notice of appearance on behalf of Plaintiff Redding. All of Plaintiff's counsel filed an opposition to Defendants' request for attorney fees.

The filing of this motion for fees caused the other parties to respond with zeal but directed their attack as much to the court's summary judgment decision as to the question of fees. Both Ms. Deola and Mr. Miller filed self-serving affidavits and argument opposing fees and the summary judgment order now under appeal.

And just as Plaintiff's counsel surprisingly seem to have "doubled down" in their positions, I am more convinced than ever that they have been and are still wrong on the law. Several months ago, the Court set forth a lengthy review of the facts of this case but at that time did not draw conclusions as to the appropriateness of Plaintiff's attorney conduct, which is now drawn into sharp question by the demand for attorney fees on the basis of vexatious litigation and bad faith on the part of Plaintiff's counsel.

Prior to this case, I have had some contact with Ms. Deola, and her performance before the Court was quite satisfactory. In fact, I admired her ability. I have had slight experience with Mr. Miller and certainly no problems. I have never seen Mr. Layne nor heard his voice and have no further information about him.

The filing of the attorney's fee demand by Defendants now requires the Court to decide whether fees should be granted to Defendants against Plaintiff and her attorneys. I have already refused to grant fees as against Ms. Redding and will not change that decision now. The issue then is whether fees should be awarded to Defendants as against Ms. Deola, Mr. Layne, and Mr. Miller, and their firms, if applicable, and this compels the Court to determine whether Defendants' fees and expenses have been enlarged, in whole or part, by bad faith, vexatious acts of Plaintiff's counsel. Although the Court can award attorney fees, if at all, in this bad faith case, a correct evaluation of all pertinent facts requires consideration of all three phases of this litigation since they are inextricably intertwined.

I take no pleasure in this examination.

Legal Standards

Inherent Power Sanctions. The Court has the inherent power to assess fees against a party and/or attorney when either has "acted in bad faith, vexatiously, wantonly, or for oppressive reasons." Chambers v. NASCO, Inc., 501 U.S. 32, 45-46 (1991). The Court's inherent power to police itself allows the Court to impose sanctions when it " specifically finds bad faith or conduct tantamount to bad faith. Sanctions are available for a variety of types of willful actions, including recklessness when combined with an additional factor such as frivolousness, harassment, or an improper purpose." Fink v. Gomez, 239 F.3d 989, 994 (9th Cir. 2001) (emphasis supplied). The Ninth Circuit panel held that "an attorney's reckless misstatements of law and fact, when coupled with an improper purpose, such as an attempt to influence or manipulate proceedings in one case in order to gain tactical advantage in another case, are sanctionable under a court's inherent power." Id. Courts are admonished to exercise restraint and discretion in considering inherent powers sanctions, and "avoid using the wisdom of hindsight [when examining attorney conduct] by inquiring what was reasonable to believe at the time the pleading... was submitted." Greenberg v. Sala, 822 F.2d 882, 887 (9th Cir. 1987) (examining "errors in papers filed before an opportunity for discovery").

With sanctions under inherent power, the Court is able to make a party whole "for expenses caused by his opponent's misbehavior...." without resorting to the drastic sanction of contempt of court. Id. Under its inherent power, federal courts may sanction attorney conduct committed before another tribunal, such as a state court. See Western Systems, Inc. v. Ulloa, 958 F.2d 864, 873 (9th Cir. 1992) (citing Chambers v. Nasca, Inc., 501 U.S. 32, 111 S.Ct. 2123, 2139, 115 L.Ed.2d 27 (1991)). "For purposes of imposing sanctions under the inherent power of the court, a finding of bad faith does not require that the legal and factual basis for the action prove totally frivolous; where a litigant is substantially motivated by vindictiveness, obduracy, or malafides, the assertion of a colorable claim will not bar the assessment of attorney's fees.'" In re Itel Securities Litigation, 791 F.2d 672, 675 (9th Cir. 1986) (quoting Lipsig v. National Student Mktg. Corp., 663 F.2d 178, 182 (D.C. Cir. 1980) (per curiam)). Thus, under Itel, a party may be acting for an improper purpose "even if the act consists of making a truthful statement or a non-frivolous argument or objection." Fink, 239 F.3d at 992 (citing Itel, 791 F.2d at 675).

§ 1927 Sanctions. In addition, the Court may also impose sanctions against an attorney pursuant to statute when "[a]n attorney... multiplies the proceedings in any case unreasonably and vexatiously [so that the attorney] may be required by the court to satisfy personally the excess costs, expenses, and attorneys' fees reasonably incurred because of such conduct." 28 U.S.C. § 1927. A finding of subjective bad faith is required for imposition of section 1927 sanctions. Kohler v. Flava Enters., Inc., 779 F.3d 1016, 1020 (9th Cir. 2015). Bad faith can be proven by showing that "the attorney recklessly or intentionally misled the court" or "recklessly raised a frivolous argument which resulted in the multiplication of proceedings." In re Girardi, 611 F.3d 1027, 1061 (9th Cir. 2010). "[I]f a filing is submitted recklessly, it must be frivolous, while if it is not frivolous, it must be intended to harass.... [R]eckless nonfrivolous filings, without more, may not be sanctioned." B.K.B. v. Maui Police Dep't, 276 F.3d 1091, 1107 (9th Cir. 2002) (quoting In re Keegan Mgmt. Co., Sec. Lit., 78 F.3d 431, 436 (9th Cir. 1996)). An argument that "lack[ s] credibility on its face" is frivolous and may be sanctioned. Id. at 1107 n8. It must also be shown that the attorney's conduct has "multiplied the proceedings." For example, continuing to litigate after lack of merit has become clear results in unnecessary proceedings. Edwards v. General Motors Corp., 720 F.3d 736, 738-39 (8th Cir. 2013) ("willful continuation of a suit known to be meritless"). Viewed objectively, an attorney's conduct must demonstrate intentional or reckless disregard of the attorney's duties to the court or to be so abjectly without merit that the court is justified in concluding that the attorney has "some improper purpose such as delay." People of the State of N.Y. by Vacca v. Operation Rescue Nat., 80 F.3d 64, 72 (2d Cir. 1996). The twin purposes of this statute are to compensate the victim of the misconduct and also to deter attorney misconduct. Haynes v. City and County of San Francisco, 688 F.3d 984, 987 (9th Cir. 2012) (citing Hamilton v. Boise Cascade Express, 519 F.3d 1197, 1205 (10th Cir. 2008) (sanctions awards are "victim-centered, " as their purpose is to compensate a party for having to endure opposing counsel's abusive litigation practices)). A court may use a "straight fee recovery or a lodestar-limited recovery." Hamilton, 519 F.3d at 1206-07.

Background

We consider the facts and the law of this case in view of these standards to determine what Plaintiff's counsel knew or should have known about the merits of the case at the time they demanded payment of limits within 30 days. We first address the Montana law applicable in bad faith insurance cases. It derives from the United States District Court case of Jessen v. O'Daniel, 210 F.Supp. 317 (D. Mont. 1962), which was an automobile accident case, wherein the learned Judge W.J. Jameson held in a first-party bad faith case that an insurer acted in bad faith by failing to settle a third-party claim within policy limits. In Jessen, the insured wanted to settle the case within policy limits and offered to make a monetary contribution to a settlement. However, the defense attorney failed to communicate these facts to either plaintiff's counsel or the insurer, and as a result the case went to trial and an excess judgment was rendered against the insured. Judge Jameson looked to the rights and duties of the insurer and the insured under the insurance contract, and began his analysis with the fundamental concept that

[w]hen a liability insurance company by the terms of its policy obtains from the insured a power, irrevocable during the continuance of its liability under the policy, to determine whether an offer of compromise of a claim shall be accepted or rejected, it creates a fiduciary relationship between it and the insured with the resulting duties that grow out of such relationship. Under policies like those here involved, the insurer and the insured owe to each other the duty to exercise the utmost good faith. While the insurance company, in determining whether to accept or reject an offer of compromise, may properly give consideration to its own interests, it must in good faith, give at least equal consideration to the interests of the insured and if it fails so to do it acts in bad faith.

Jessen v. O'Daniel, 210 F.Supp. 317, 326 (D. Mont. 1962) (quoting American Fidelity & Casualty Co. v. G.A. Nichols Co., 173 F.2d 830, 832 (10th Cir. 1949) (emphasis supplied)).

In 1977, the Montana Legislature enacted the Unfair Claims Settlement Practices Act, which provided a statutory framework for bad faith claims against insurers, and in 1983, in Klaudt v. Flink, 658 P.2d 1065 (Mont. 1983), the Montana Supreme Court held that third parties could file bad faith claims against insurers for breaches of the UTPA, MCA § 33-18-201. In 1984, the Montana Supreme Court adopted the Jessen factors when it held that insurance contracts imply the "obligation of good faith and fair dealing by a fiduciary bound by a duty of highest good faith." Gibson v. Western Fire Ins. Co., 682 P.2d 725 (Mont. 1984) (first-party bad faith insurance case). The Jessen factors (to be considered on a case by case basis) include:

(1) whether, by reason of the severity of the plaintiff's injuries, any verdict is likely to be greatly in excess of the policy limits; (2) whether the facts in the case indicate that a defendant's verdict on the issue of liability is doubtful; (3) whether the company has given due regard to the recommendations of its trial counsel; (4) whether the insured has been informed of all settlement demands and offers; (5) whether the insured has demanded that the insurer settle within the policy limits; (6) whether the company has given due consideration to any offer of contribution made by the insured. As a rule no one factor is decisive. All must be considered in determining whether the insurer acted in good faith."

Jessen, 210 F.Supp. at 327.

In 1987, Montana enacted legislation to restrict bad faith claims by providing a single statutory cause of action for bad faith claims against insurers. Sec. 3, Ch. 278, L. 1987; MCA § 33-18-242. This statute provided an absolute defense for insurers with a "reasonable basis in law or in fact for contesting the claim or the amount of the claim whichever is in issue." MCA § 33-18-242(5). While a third-party claimant may bring a bad faith claim under the UTPA, MCA § 33-18-242(1), the Montana Supreme Court has also held that third-party common law claims for bad faith could still be brought against insurers. Brewington v. Employer Fire Ins. Co., 992 P.2d 237, 240 (Mont. 1999).

Jessen and its Montana progeny clearly established that the insurance contract controls, and that it establishes the duties and their scope insofar ...


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