KnightBrook Insurance Company et al v. Payless Car Rental System Inc et al

Filing 414

ORDER - The Payless entities' motion to alter or amend the judgment (Doc. 384 ) is granted. The Knight entities' motion for attorneys' fees (Doc. 380 ) is granted in part and denied in part. The Knight entities are awarded fees of $41,145. The Clerk is directed to terminate this action. See document for details. Signed by Judge David G Campbell on 07/01/15. (ATD)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE DISTRICT OF ARIZONA

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KnightBrook Insurance Company and
Knight Management Insurance Services,
LLC,

No. CV-12-01671-PHX-DGC
ORDER

Plaintiffs,

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v.

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Payless Car Rental System, Inc.; PCR
Venture of Phoenix, LLC; ABC
Corporations I-X; XYZ Partnerships I-X.

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Defendants.

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Plaintiffs have filed a motion for attorneys’ fees. Doc. 380. Defendants have filed

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a motion to alter or amend the judgment pursuant to Rules 52(b) and 59(e). Doc. 384.

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The motions are fully briefed, and no party has requested oral argument. The Court will

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grant Defendants’ motion to amend the judgment and award attorneys’ fees of $41,145.

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I.

Background.

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The parties in this case, KnightBrook Insurance Company and Knight

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Management Insurance Services, LLC (collectively, the “Knight entities”), and Payless

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Car Rental System, Inc. and PCR Venture of Phoenix, LLC (collectively, the “Payless

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entities”), were originally sued by Robert and Lorraine McGill for negligence, negligent

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misrepresentation, breach of contract, and bad faith, among other claims. The Knight

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entities entered into a settlement with the McGills for $970,000, and then asserted claims

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against the Payless entities for breach of contract, negligent misrepresentation,

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negligence, and equitable indemnification, among others. The Payless entities filed a

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counterclaim against the Knight entities for insurance bad faith.

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At the conclusion of a bench trial, the Court entered judgment in favor of the

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Knight entities on their claim for equitable indemnification, finding the Payless entities

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liable for the entire $970,000. Docs. 376, 377. The Court ruled against the Knight

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entities on all of their other claims, and found in favor of the Knight entities on the

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Payless entities’ claim for insurance bad faith. Doc. 376 at 7, 12, 24.

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In its order awarding the Knight entities $970,000, the Court also found that they
were entitled to recover some attorneys’ fees:

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“The general rule is that attorney’s fees and costs are recoverable as
part of the indemnification.” Schweber Electronics v. Nat’l Semiconductor
Corp., 850 P.2d 119, 125 (Ariz. Ct. App. 1992). There is, however, an
important limitation: “the right of indemnity includes a right to attorney’s
fees incurred in defending the underlying claim, but does not include the
right to fees incurred in establishing the right of indemnity.” INA Ins., 722
P.2d at 983; see also Howard P. Foley Co. v. Employers-Commercial
Union, 488 P.2d 987, 990 (Ariz. Ct. App. 1971) (“[L]egal fees and
expenses incurred in connection with trial of the issue of indemnity are not
recoverable by the indemnitee.”). The Knight entities will be awarded the
attorneys’ fees they incurred in defending against the McGills’ second
lawsuit, but not the fees incurred in pursuing their claim against the Payless
entities.
Doc. 376 at 23.

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The Knight entities have now filed a memorandum seeking attorney’s fees.

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Doc. 380. They seek two categories of fees: $107,424.00 incurred in defending against

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the McGills’ lawsuit and $68,575.33 incurred in defending against the Payless entities’

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counterclaim for bad faith. Doc. 389 at 9; Doc. 390 at 1. The Knight entities do not seek

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to recover fees incurred in litigating their various claims – including their successful

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claim for equitable indemnification – against the Payless entities. Doc. 380 at 5.

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The Payless entities have filed a motion to alter or amend the Court’s judgment.

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They ask the Court to hold that the Knight entities cannot recover fees as part of their

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damages in the indemnity claim because the Knight entities failed to include such relief

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in the joint pre-trial order. Doc. 384. In response, the Knight entities clarify that they do

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not seek to recover any fees as damages. Doc. 389 at 4 (“The issue regarding [the Knight

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entities’] attorneys’ fees was not included in the [final pretrial order], and witnesses and

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exhibits were not disclosed concerning proving-up attorneys’ fees as damages, because

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they were not and are not sought in that context.”). Rather, the Knight entities seek both

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categories of their fees under A.R.S. § 12-341.01. Doc. 389.

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II.

Motion to Alter or Amend Judgment.

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As quoted above, the Court’s order awarding $970,000 to the Knight entities also

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held that they could recovery attorneys’ fees incurred in defending against the McGill

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lawsuit. The Court found these fees to be recoverable as indemnification damages. The

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Court relied on Schweber Electronics v. Nat’l Semiconductor Corp., 850 P.2d 119 (Ariz.

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Ct. App. 1992), which held that “attorney’s fees and costs are recoverable as part of the

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indemnification.” Id. at 125 (emphasis added); Doc. 376 at 23.

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When the Court entered this order, it was not aware that the Knight entities had

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failed to preserve their right to attorneys’ fees as indemnification damages in the final

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pretrial order. Because a claim for damages not included in a final pretrial order is

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waived, Rockwell Intern. Corp. v. United States, 549 U.S. 457, 474 (2007), the Court

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will, by this order, amend its previous order’s suggestion that the Knight entities may

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recover attorneys’ fees as indemnification damages. Such damages are not available

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given the waiver in the final pretrial order. The Court must therefore consider whether

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the Knight entities can recover the fees incurred in defending against the McGill lawsuit,

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and in defeating the Payless entities’ bad faith claim, under A.R.S. § 12-341.01.1

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As already noted, the Knight entities’ response to the motion to amend the
judgment does not argue that the Knight entities are entitled to recover their attorneys’
fees as indemnification damages. Doc. 389 at 4. The response instead asserts that they
can recover their fees under A.R.S. § 12-341.01. Id. To the extent that some of the
Knight entities’ other briefing could be read to argue that they can recover attorneys’ fees
as indemnification damages through post-trial briefing (see, e.g. Doc. 390 at 7), the Court
does not agree. Fees sought as indemnification damages must be proved at trial. United
States Indus., Inc. v. Blake Constr. Co. Inc., 765 F.2d 195 (D.C. Cir. 1985) (barring claim
for attorneys’ fees sought in indemnity because the claimant failed to present evidence of
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III.

Motion for Attorneys’ Fees.

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A.

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“In any contested action arising out of a contract, express or implied, the court

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may award the successful party reasonable attorney fees.” A.R.S. § 12-341.01(A). The

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Court has discretion regarding an award of attorneys’ fees. See Wilcox v. Waldman, 744

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P.2d 444, 450 (Ariz. Ct. App. 1987).

Legal Standard.

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B.

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The Knight entities seek to recover $107,424.00 in fees they incurred in defending

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The Knight Entities’ Claim for $107,424.00.

against the action brought by the McGills.

Although these fees might have been

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recoverable as indemnification damages if the Knight entities had preserved that claim,

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the Court is not persuaded that they can be recovered under A.R.S. § 12-341.01.

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When this case was first filed, the McGills were the plaintiffs the Knight and

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Payless entities were defendants. Doc. 1-2 at 36. The Knight entities’ answer to the

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original complaint (Doc. 7) and their amended answer to the McGills’ amended

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complaint (Doc. 92) made no claims or allegations against the Payless entities. Rather,

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the Knight and Payless entities asserted the same defenses against the McGills (Doc. 30

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at 6) and even jointly filed a motion to dismiss the McGills’ complaint (Doc. 57). It was

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not until the Knight entities settled with the McGills for $970,000, and the Payless

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entities refused to contribute to the settlement, that the Knight and Payless entities

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became adverse. The Knight entities moved under Rule 25 to be substituted as plaintiffs

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in this action in place of the McGills and to assert a second amended complaint against

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the Payless entities. Doc. 109. The Court granted the motion, realigned the parties, and

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the litigation between the Knight and Payless began.

Docs. 114, 116.

Thus, the

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the attorneys’ fees as damages during trial); Carolina Power & Light Co. v. Dynegy
Mktg. & Trade, 415 F.3d 354 (4th Cir. 2005) (holding that legal costs sought under
indemnity constitute an element of damages to be proved at trial); Federal Agricultural
Mortgage Corp. v. It’s A Jungle Out There, Inc., No. C 03-3721 BZ, 2006 WL 1305212,
at *4 (N.D. Cal. May 9, 2006) (attorneys’ fees must be proved as damages in connection
with a claim for indemnification). And to the extent the Knight entities suggest that Rule
54(d)(2)(A) permits them to seek fees as indemnification damages by motion, they are
wrong. That rule does not apply where the “substantive law requires those fees to be
proved at trial as an element of damages.” Fed. R. Civ. P. 54(d)(2)(A).
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$107,424.00 was incurred by the Knight entities at a time when the Knight and Payless

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entities were not adverse.

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“In order for a party to recover attorneys’ fees under A.R.S. § 12–341.01, it is

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necessary that the parties be adverse.” Pioneer Roofing Co. v. Mardian Const. Co., 733

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P.2d 652, 663 (Ariz. Ct. App. 1986) (citing Nationwide Resources Corp. v. Ngai, 630

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P.2d 49, 55 (Ariz. Ct. App. 1981)). Adversity “is not determined solely from the parties’

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alignment in the pleadings, but rather must be ascertained from the opposing positions or

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interests of the parties.” Id. Before the Knight entities moved to be substituted as

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plaintiffs in this action, they not only were aligned with the Payless entities as defendants,

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they were also asserting a joint defense. The essence of that defense was that no contract

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had been created between the Knight and Payless entities on one hand, and Bovre (the

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McGills’ assignor) on the other hand. Doc. 30 at 6; Doc. 57. Because the Knight entities

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were not adverse to the Payless entities while the $107,424.00 in fees were incurred, they

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cannot recover those fees under § 12-341.01.

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In addition, the fee statute permits an award of fees only to the “successful party.”

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A.R.S. § 12-341.01. The Court cannot conclude that the Knight entities were successful

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parties in the portion of the litigation that resulted in their paying $970,000 to the

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McGills. Although the Knight entities prevailed in the second half of the litigation when

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they sued the Payless entities for indemnification, the Court cannot conclude that they

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were the “successful party” within the meaning of the statute during the first portion.

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For these reasons, the Court concludes that the Knight entities are not entitled to
recover their claimed $107,424.00 in fees under § 12-341.01.

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C.

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The Knight entities seek $68,575.33 in fees they incurred in defending against the

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Payless entities’ counterclaim for insurance bad faith. In litigating this claim, the parties

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clearly were adverse and the Knight entities were successful. In addition, a claim of

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insurance bad faith arises out of contract within the meaning of § 12-341.01. See Sparks

The Knight Entities’ Claim for $68,575.33.

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v. Republic Nat. Life Ins. Co., 647 P.2d 1127, 1142 (1982).2 Therefore, § 12-341.01

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permits the Court to award reasonable attorneys’ fees to the Knight entities.

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In deciding whether to award attorneys’ fees under § 12-341.01, courts consider

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the merits of the unsuccessful party’s claim, whether the successful party’s efforts were

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completely superfluous in achieving the ultimate result, whether assessing fees against

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the unsuccessful party would cause extreme hardship, whether the successful party

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prevailed with respect to all relief sought, whether the legal question presented was novel

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or had been previously adjudicated, and whether a fee award would discourage other

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parties with tenable claims from litigating. Am. Const. Corp. v. Philadelphia Indem. Ins.

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Co., 667 F. Supp. 2d 1100, 1106-07 (D. Ariz. 2009) (citing Assoc. Indem. Corp. v.

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Warner, 694 P.2d 1181, 1184 (Ariz. 1985)).

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Considering these factors, the Court concludes that the Knight entities are entitled

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to a fee award for defending against the bad faith claim. Although not completely

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meritless, the Court had little difficulty disposing of the claim. Doc. 376 at 19-20.

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Indeed, the Court held that the Payless entities “clearly were not covered” by the

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insurance contract with the Knight entities as alleged. Id. at 20. The Knight entities’

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efforts were not superfluous in obtaining victory on this claim, assessing fees would not

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cause extreme hardship to the Payless entities, the Knight entities prevailed completely

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on this claim, the legal issues in the bad faith claim were not novel, and assessing fees

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would not, in the Court’s judgment, discourage companies like the Payless entities from

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asserting their rights in court. Warner, 694 P.2d at 1184.

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Counsel for the Knight entities states that he made an estimate of the time devoted

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to the bad faith claim, but admits that it is not completely accurate given the combined

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As the Arizona Supreme Court held in Sparks, “the tort of bad faith cannot be
committed absent the existence of an insurance contract and a breach thereof. Because
the existence of the tort is so intrinsically related to the contract, we conclude that an
action alleging [an] insurer’s bad faith is one ‘arising out of a contract’ within the
meaning of § 12-341.01(A).” 647 P.2d at 1142. In this case, as part of their bad faith and
other arguments, the Payless entities asserted that the Knight entities were their insurer
under an insurance contract. The Court ultimately rejected this argument (Doc. 376 at
19-20, 24), but it clearly was premised on a contract.
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billing done on the several claims and defenses at issues in this case. Doc. 380-5 at 6.

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He states that one-half of these combined time entries, including those for trial, were

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attributed to the bad faith claim. Id. The Court views this as too high a percentage in

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light of the number of other claims and defenses in this case and the amount of time in

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trial devoted to other issues. Exercising its discretion, the Court will reduce the requested

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amount by 25% because of this combined billing issue.

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In addition, contrary to LRCiv 54.2(e)(1)(B), which requires separate time entries

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for “each individual unrelated task,” many of the time entries made by counsel for the

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Knight entities includes several tasks within a single block of time. The Court will

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reduce the fee award by another 15% because of this failure to comply with the local

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rules.

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The Court views the resulting amount of $41,145 ($68,575.33 x 60%) to be a

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reasonable fees award. In light of this substantial reduction, the Court finds the Payless

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entities’ other arguments on reasonableness to be unpersuasive.3

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IT IS ORDERED:

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1.

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The Payless entities’ motion to alter or amend the judgment (Doc. 384) is
granted.

2.

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The Knight entities’ motion for attorneys’ fees (Doc. 380) is granted in
part and denied in part. The Knight entities are awarded fees of $41,145.

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3.

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Dated this 1st day of July, 2015.

The Clerk is directed to terminate this action.

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The Knight entities also seek $1,807.55 in costs, but counsel’s affidavit attributes
these costs to defense of the McGill claim, for which recovery is not allowed in this
order. See Doc. 380-5 at 5.
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