Free Objection - District Court of Arizona - Arizona

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Wayne Gill, Esq. (Fla Bar. No. 114953) WALTON LANTAFF SCHROEDER & CARSON LLP 1700 Palm Beach Lakes Boulevard, 7th Floor West Palm Beach, Florida 33401 Telephone: (561) 689-6700 Facsimile: (561) 689-2647 Steven Plitt, Esq. (State Bar No. 007481) Daniel Maldonado, Esq. (State Bar No. 018483) BESS KUNZ, A Professional Corporation 3838 North Central Avenue, Suite 1500 Phoenix, Arizona 85012-1092 Telephone: (602) 331-4600 Facsimile: (602) 331-8600 Attorneys for Defendant/Counter-Plaintiff IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA U-Haul International, Inc., et al Plaintiffs/Counter-Defendants, vs. Lumbermens Mutual Casualty Company, Defendant, Counter-Plaintiff. No. CIV 04-0662 PHX DGC LMC'S RESPONSE IN OPPOSITION TO PLAINTIFFS' MOTION FOR ATTORNEYS' FEES (Assigned to the Honorable David G. Campbell)

Lumbermens Mutual Casualty Company ("LMC"), by its undersigned counsel and for its response in opposition to U-Haul International, Inc. ("U-Haul") and Republic Western Insurance Company's ("Republic") (collectively "Plaintiffs") motion for

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attorneys' fees, states as follows:

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INTRODUCTION This case involves, in essence, a dispute between two insurance companies: the plaintiff, Republic Western Insurance Company ("Republic") and the defendant, a true

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excess liability insurer, Lumbermens Mutual Casualty Company ("LMC"). Although Republic's sister companies, including U-Haul International, Inc. ("U-Haul") are plaintiffs, they are plaintiffs in name only. LMC has shown that U-Haul has not submitted any evidence showing that it was damaged by LMC, but rather U-Haul has

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directly benefited from LMC's payments. The key dispute in this case is Republic's contention that sums that it paid under its insurance policies were not covered under its policies. Republic sought reimbursement from the excess carrier, LMC. In contrast, LMC contended that those sums were covered within the terms of the Republic policies,

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and that, therefore, Republic could not transfer its liability to the excess carrier, LMC. Further, LMC contended that to the extent that Republic was correct, that LMC was not liable because plaintiffs' agent, Aon, had misrepresented the coverage under the Republic policies. When the dispute arose among the parties, rather than denying coverage (as Republic erroneously contends), LMC agreed to funding agreements with the plaintiffs, by which LMC not only paid all of the sums for which there was no dispute, in order to settle the underlying cases, LMC also paid a substantial portion of the amounts in dispute and the parties agreed to resolve their disagreement in this action. With respect to the Nelson case, LMC paid $626,221 towards the settlement of that action, although

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LMC contended that its liability was no more than $500,000. With respect to the Fernandez lawsuit, although LMC contended that its liability was limited to at most $1 million, LMC paid a total of $4,110,769.50 to settle of the Fernandez lawsuit. With the

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$13 million that LMC paid in connection with the Martinez lawsuit, LMC has already paid nearly $18 million under its excess liability policies. LMC participated in funding the Nelson and Fernandez settlements in good faith and with the understanding that the parties would litigate this dispute between the

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parties in good faith, although LMC contended that it was not liable for those sums. In addition to the sums already paid by LMC, plaintiffs now seek nearly $500,000 in attorney fees. In light of all of the circumstances, LMC respectfully submits that plaintiffs cannot establish that they are entitled to any award of attorney fees because

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not only was LMC's position reasonable and founded upon what it believes to be controlling case law, it acted in good faith to fund the settlements of the underlying tort lawsuits by paying sums that it contended it had no obligation to pay. Consequently, in light of all of the circumstances, LMC respectfully requests that plaintiffs' Petition for Attorney Fees be denied. In the alternative, a review of the attorney fee records

submitted establishes that substantial portions of the fees are inconsistent with Arizona law and the local rules. STANDARD UNDER ARIZONA LAW In this diversity action, Arizona substantive law determines whether Plaintiffs should be allowed attorneys' fees. If the court does award attorneys' fees, federal

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procedural law determines the amount of such award. Leavey v. UNUM/Provident Corp., 2006 WL 1515999 (D. Ariz. 2006). Arizona statute § 12-341.01 ("the statute") entitled "Recovery of attorney fees" has been held to be applicable to a declaratory

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judgment action. Nationwide Mut. Ins. v. Granillo, 573 P.2d 80 (Ariz. App. 1977). The controlling Arizona case interpreting the statute is Associated Indem. Corp. v. Warner, 694 P.2d 1181 (Ariz. 1985). The Arizona Supreme Court held that the statute's use of the phrase "may award" makes the award of attorney fees discretionary

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with the trial court, not mandatory. Associated Indem. Corp., 694 P.2d at 1184. The court listed six factors that the trial court may consider in determining eligibility for attorney fees, which are: (1) The merits of the claim or defense presented by the unsuccessful party; (2) Whether the litigation could have been avoided or settled and the

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successful party's efforts were completely superfluous in achieving the result; (3) Assessing fees against the unsuccessful party would cause an extreme hardship; (4) The successful party did not prevail with respect to all of the relief sought; (5) The novelty of the legal question presented and whether such claim or defense had previously been adjudicated in this jurisdiction; (6 ) Whether the award would discourage other parties with tenable claims or defenses from litigating or defending legitimate contract issues for fear of incurring liability for substantial amounts of attorney's fees. 694 P.2d at 1184. The statute governing discretionary award of attorneys' fees to successful litigants in contract actions does not establish a presumption that attorneys' fees be

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awarded in such actions. Id. at 1182-1183. Based on these factors, plaintiffs' petition for attorney fees should be denied. I. PLAINTIFFS FAILED TO ESTABLISH THAT THEY ARE ENTITLED TO AN AWARD OF ATTORNEY FEES UNDER ARIZONA LAW. The factors under Warner, support a denial of an award of attorneys' fees against LMC. First, LMC's position was justified based on controlling precedent, involved a novel interpretation of Republic's policy. Second, LMC acted reasonably throughout

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by agreeing to fund the settlements of the underlying tort cases, and thereby to cap UHaul's liability. A. LMC's Position On a Novel Question of Law Was Justified The first and fifth Warner factors support the denial of plaintiffs' because LMC's

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position was supported by compelling authority and because this issue involved a novel question of the interpretation of the Republic policies in this District. As this Court is well aware, LMC relied upon Ninth Circuit Court of Appeals case law in support of its position that the LAE payments were covered under underlying Republic policies: Mead Reinsurance v. Granite State Ins. Co., 873 F.2d 1185 (9th Cir.1998) and Planet Ins. Co. v. Mead Reinsurance Corp., 789 F.2d 668 (9th Cir.1986). LMC's reliance on these cases, which would constitute controlling authority in this District was reasonable and meritorious, notwithstanding the fact that this Court has ruled against LMC on this issue. The ultimate success of LMC's argument based on these cases is not at issue, of

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course (because otherwise the plaintiffs would not be seeking attorney fees). The issue is whether LMC was justified in asserting this position. The Arizona Supreme Court has held that where an unsuccessful insurer relies

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upon controlling authority to justify its coverage position, an award of attorney fees under the statute is not warranted. Nat'l Indem. Co. v. St. Paul Ins. Co., 150 Ariz. 458, 724 P.2d 544 (Ariz. 1986). There, the insurer relied upon precedent that supported its coverage position in an ultimately unsuccessful attempt to assert that it was not liable to

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a second insurer for defense costs paid by that second insurer. The Arizona Supreme Court held that the insurer, St. Paul, "had a right to rely on the only Arizona precedent on the issue, and that precedent would justify the legal position taken by St. Paul in resisting the demand of National. The award of attorneys' fees by the Court of Appeals

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is vacated." Nat'l Indem. Co., 150 Ariz at 458. Thus, in this case, the Court should likewise find that LMC's reliance on these authorities was meritorious and reasonable, and thus attorneys' fees should not be awarded. Similarly, the fifth Warner factor is also met in this case because this case involved a novel question of the interpretation of the Republic policies in Arizona. The main legal question presented was whether payment of loss adjustment expenses ("LAE"), i.e., legal fees and costs incurred in the investigation, negotiation or defense of claim contributed to the exhaustion of the $7 million in total underlying coverage provided by the Republic policies so as to trigger the coverage of the LMC policies. There are no reported Arizona cases addressing the issue of whether LAE serves to

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exhaust coverage under primary insurance policies so as to trigger an excess insurance policy, and thus the issue is a novel one. Hart v. Seven Resorts, Inc., 947 P.2d 846, 858 (Ariz. Ct. App. 1997). (Attorney's fees denied because the court found the issue was

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novel, in that it had not been addressed by any Arizona cases). Thus, in Stuart v. INA , attorney's fees were denied where the issue in dispute involved a statutory interpretation that was a matter of first impression and which could not be resolved without pursuing the matter through the appeal process. The Court further noted that an attorney fee

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award might deter others from asserting similar claims. Stuart v. INA, 730 P.2d 255 (Ariz. App. 1986). Thus, because the issue presented is novel and has never been adjudicated in Arizona, an award of attorneys' fees is not warranted. B. An Award of Attorney Fees Would Discourage Settlements

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Under the sixth Warner factor, an attorney fee award in this case would discourage other insurers with tenable claims or defenses from litigating or defending legitimate contract issues for fear of incurring liability for substantial amounts of attorneys' fees. This is particularly so here, because in this case, prior to this litigation being filed, the parties entered into a settlement: namely the agreements to fund the settlement of the underlying cases, and to preserve the parties' dispute for resolution in this forum. This is an essential fact to consider in weighing a request for attorney fees: because of LMC's agreement to fund the settlements and by paying sums it disputed that it owed, two underlying lawsuits were settled, and what is perhaps more important, all parties' liability for future defense fees was resolved, and U-Haul's liability for two

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very serious lawsuits was capped. LMC paid funds it asserted that it did not owe to settle these tort lawsuits, and its action directly benefited its insured, U-Haul. Under all of the circumstances, an award of attorney fees against LMC to litigate

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a legitimate dispute, which all parties recognized and which all parties agreed to reserve and to put aside to focus on resolving two other serious lawsuits, is simply not reasonable. This is because an award of fees would simply serve as another impediment to agreements such as the ones between the parties to this action. Such agreements are

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extremely valuable as they cap uncertain liability, avoid future defense fees and expenses in trying the underlying cases, and resolve the tort cases against the insured while at the same time permitting the resolution of legitimate and novel insurance coverage disputes between the insurers. LMC paid more than it claimed that it owed and

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as a result the underlying claims were settled, and U-Haul's contingent liability released. To award attorneys' fees under these circumstances would not only discourage insurers from settling underlying lawsuits while reserving all parties' rights to resolve legitimate disagreements, but would also be unjust to insurers and would inhibit the development of legal authorities to guide the resolution of future disputes. Hart v. Seven Resorts, Inc., 947 P.2d 846, 858 (Ariz. Ct. App. 1997). (Attorney's fees denied where awarding fees might discourage others from bringing meritorious claims.) Accordingly, LMC respectfully submits that plaintiffs cannot satisfy the Warner factors, and in fact such factors require the denial of plaintiffs' petition for attorney fees.

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II.

THE ATTORNEY FEES CLAIMED ARE NOT RECOVERABLE Review of the attorney fee bills submitted reveals substantial billings that are not

recoverable for several reasons. First, no attorney fees can be awarded for time incurred
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before the plaintiffs' settlement demand. Second, the attorney fee bills reveal extensive time devoted to plaintiffs' claims against its other excess carriers, and against its agent, AON, for which they have no right to recover from LMC. Third, the attorney fee bills are replete with block billing entries, and other entries that are inconsistent with Local

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Rule 54.2(d) and (e). In compliance with Local Rule 54.2(f), LMC submits herewith its Statement of Disputed Issues of Material Fact. (Ex. 1). For the reasons set forth in the submission attached as Exhibit 2, and briefly outlined below, to the extent that this Court decides to grant plaintiffs' petition for attorney fees (and for the reasons set forth

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in the preceding section, LMC respectfully submits that the Court should not), plaintiffs' claim for attorney fees should be denied. A. Plaintiffs Are Not Entitled to Fees Incurred Before Their Settlement Demand No attorney's fees should be awarded for time spent prior to plaintiffs' August 15, 2005 settlement offer letter. The Statute clearly states: If a written settlement offer is rejected and the judgment finally obtained is equal to or more favorable to the offeror than an offer made in writing to settle any contested action arising out of a contract, the offeror is deemed to be the successful party from the date of the offer and the court may award the successful party reasonable attorney fees. Arizona Statute § 12-341.01(emphasis added). The key language is that attorney fees can not be awarded "prior to the date of the offer," which was August 15, 2005. The

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language of the statute is absolutely clear in this regard. Moreover, "it is axiomatic that statutes in derogation of the common law should be narrowly construed." Badaracco v. C.I.R., 464 U.S. 386, 404, fn. 3 (1984). Prior to enacting 12-341.01, Arizona followed

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the American Rule with regard to attorney fee claims for breach of contract. State v. Boykin, 112 Ariz. 109 (Ariz. 1975) citing Commercial Standard Ins. Co. v. Cleveland, 86 Ariz. 288 (Ariz. 1959). As such, under the statute, attorney fees can be awarded only from the date of a settlement offer. This was precisely the holding in Greenawalt v. Sun

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City West Fire District, 2006 WL 1663540 (D. Ariz. 2006), where the Court excluded claims for attorney fees incurred before the date of a settlement demand. In light of the language of the statute, pre-settlement demand fees are not recoverable. This Court should disallow all attorneys' fees incurred prior to plaintiffs'

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August 15, 2005 settlement letter, and thus the amount of the attorney fees would be reduced to $221,666.25 (i.e., a $255,570.50 reduction). B. Plaintiffs' Claim for Fees Relating to AON and Other Excess Carriers Plaintiffs' attorney fee bills are replete with references to time spent relating to time spent on claims against other insurers and entities, including its agent, AON. For example, on July 6, 2004, plaintiffs billed 1.5 hours for: "E-mails to/from Courtney Robbins re broker tolling agreement and discovery; review potential claims vs. broker."1 There are numerous other examples concerning plaintiffs' claims against its

LMC's Post Trial motion remains pending, however, it is very notable that plaintiffs' were considering tolling their malpractice action against their agent, AON, yet refuse to concede that Document 187 - Filed 04/27/2007 - 10 Page 10 of 15

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agent, AON, including the preparation of a complaint against AON. (See 3/25/05 entry). Of course, where the court cannot precisely determine the amount of attorney's fees incurred on matters arising out of contract within the meaning of the statute versus time

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spent on matters not arising out of contract within the meaning of the statute, then such entries are not recoverable. True Center Gate Leasing v. Sonoran Gate LLC, 427 F.Supp.2d 946 (D. Ariz. 2006). In addition, plaintiffs are asking this Court to award fees against LMC, for

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plaintiffs discussions with its "high level" excess carriers. For example, plaintiffs ask that LMC pay for the following activities on June 17, 2005: "Telephone call with Cary Hall re products aggregate, potential recovery from high layer excess carriers TIG and Chubb; review e-mail from Cary Hall re same." There are numerous other examples

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concerning plaintiffs' claims against its other insurers, as detailed in LMC's submission marked Exhibit 2. Attorney fees incurred for plaintiffs' claims against AON and their claims against other insurers are not recoverable because, not only are they unrelated to the claim for breach of contract, it would be completely inequitable for LMC to pay for plaintiffs' claims against other insurers and plaintiffs' agents. The total reduction for AON related activities totals at least $54,890.00. The time devoted to the upper level excess carriers totals at least $9,300.00. These sums are clearly not related to the prosecution of the claims against LMC and therefore are not recoverable.
AON was their agent. LMC has never seen a copy of that tolling agreement, and did not know it existed until plaintiffs filed their April 5, 2007 motion for attorneys' fees. Document 187 - Filed 04/27/2007 - 11 Page 11 of 15

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C. Plaintiffs' Bills Do Not Comply With the Local Rules A petition for an award of attorney fees is subject to Local Rule Rule 54.2(d) and (e). Where the attorney fee bill fails to meet the format and/or content requirements of

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Local Rule 54.2, such fees are not recoverable. The fees claimed are not recoverable for a host of reasons. The individual entries are detailed in accordance with the local rule in LMC's attached submission under Local 54.2 (f), Exhibit 2. The following categories of claims are not recoverable:

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· Failure to state the time devoted to each unrelated task (i.e., block billing):Local Rule 54.2(e)(1)(B) ("The itemized statement for legal service shall reflect, . . . the time devoted to each individual unrelated task performed on such day.") · Inadequate description of service provided: Local Rule 54.2(e)(2) "The party seeking an award of fees must adequately describe the services rendered so that the reasonableness of the charge can be evaluated . . . If the time descriptions are incomplete or if such descriptions fail to adequately describe the service rendered, the court may reduce the award accordingly." Shaffer v. State of

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Arizona Citizens Clean Election Commission, 2006 WL 1371613 (D. Ariz. 2006). · Failure to identify reason or participants for phone call: Local Rule 54.2(e)(2)(A) "Telephone Conferences. This time entry must identify all participants and the

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reason for the telephone call."

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· Failure to identify the activities associated with preparation of a document: Local Rule 54.2(e)(2)(C) ("Preparation of Pleadings And Other Papers. This time entry must identify the pleading, paper or other document prepared and the activities associated with its preparation." · The time billed was duplicated in whole or in part by one or more persons and/or was billed for communications between plaintiffs' attorneys: Phoenix Central v. Dean Witter Reynolds, Inc., 768 F.Supp. 702 (D. Ariz. 1991) (No attorney fees may be awarded for any time that was not "reasonably expended".) J.P. Morgan Chase Bank v. The Tamarack Capital, LLC, 2005 WL 2653672 (D. Ariz. 2005). · Failure to identify person performing service: Local Rule 54.2(e)(1)(D) ("The itemized statement for legal services rendered shall reflect. . . the identity of the attorney, paralegal, or other person performing such service." · Failure to identify the specific legal issue researched, or the specific pleadings that occasioned the research: Local Rule 54.2(e)(2)(B) ("Legal Research. This time entry must identify the specific legal issue researched and, if appropriate,

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should identify the pleading or document the preparation of which occasioned the conduct of the research. Time entries simply stating 'research' or 'legal research' are inadequate and the court may reduce the award accordingly.") · Travel time: Local Rule 54.2(e)(2)(D) ("Travel Time. Ordinarily air travel should not be charged. If services were performed during such time, then

describe such services rather than charging for the travel time."

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· Time spent by plaintiffs' attorneys to become admitted pro hac vice in the United States District Court for Arizona, and time spent regarding correspondence to and/or from plaintiffs' auditors: The requested fees were not related to the prosecution of any of plaintiffs' claims against LMC in this action, or to plaintiffs' opposition to LMC's defenses and/or counterclaim in this action. · Time spent in preparing and litigating plaintiffs' motion for attorneys' fees and/or time spent in preparing and litigating plaintiffs' bill of costs: True Center, supra. (Fees incurred in litigating an attorney fee motion will be reduced when the party seeking fees has not been successful in obtaining all the fees it requested.) Again, the specific entries are detailed in the attached submission, which LMC incorporates by reference herein. Because plaintiffs have failed to comply with the

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Local Rule, any claims inconsistent with that Rule must be denied. CONCLUSION For all the reasons set forth in LMC's Motion and Memorandum in Opposition to Plaintiffs' Motion for Attorneys' Fees, and for all the reasons set forth herein, LMC

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respectfully requests that this Court enter an order denying Plaintiffs' Motion for Attorney Fees, and for such other and further relief as the Court deems just and appropriate under the evidence and circumstances.

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DATED this 27th day of April, 2007. WALTON LANTAFF SCHROEDER & CARSON LLP Wayne T. Gill, Esq. Southtrust Center 1700 Palm Beach Lakes Blvd., #700 West Palm Beach, FL 33401 KUNZ PLITT HYLAND DEMLONG KLEIFIELD By: s/ Daniel Maldonado Steven Plitt, Esq. Daniel Maldonado, Esq. 3838 North Central Ave., Suite 1500 Phoenix, AZ 85012-1902 Attorneys for Defendant/Counter-Plaintiff

CERTIFICATE OF SERVICE Filed electronically this 27th day of April, 2007 and copies electronically served/mailed to: Gerald Gaffaney, No. 003789 David J. Ouimette, No. 006423 Attorneys for Plaintiffs/Counter-Defendants Mariscal, Weeks, McIntyre & Friedlander, P.A. 2901 North Central, Suite 200 Phoenix, AZ 85012 Bruce Friedman, (admitted pro hac vice) Mark S. Fragner, (admitted pro hac vice) Attorneys for Plaintiffs/Counter-Defendants Rubin, Fiorella & Friedman, LLP 292 Madison Avenue New York, NY 10017

s/ Tracey Griswold

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