Edward T. Joyce & Assocs., P.C. v. Professionals Direct Ins. Co.
| Decision Date | 21 March 2016 |
| Docket Number | No. 14–3341.,14–3341. |
| Citation | 816 F.3d 928 |
| Parties | EDWARD T. JOYCE & ASSOCIATES, P.C., Plaintiff–Appellant, v. PROFESSIONALS DIRECT INSURANCE COMPANY, Defendant–Appellee. |
| Court | U.S. Court of Appeals — Seventh Circuit |
Claire E. Gorman Kenny, Attorney, Nisen & Elliott, Chicago, IL, Michael Moirano, Attorney, Moirano Gorman Kenny, LLC, Chicago, IL, for Plaintiff–Appellant.
Michelle M. Bracke, Attorney, Lewis Brisbois Bisgaard & Smith LLP, Chicago, IL, for Defendant–Appellee.
Before BAUER, EASTERBROOK, and SYKES, Circuit Judges.
SYKES
, Circuit Judge.
The Illinois law firm of Edward T. Joyce & Associates, P.C., purchased professional-liability insurance from Professionals Direct Insurance Company, a Michigan-based insurer. In 2007 the Joyce firm won a large damages award for a class of securities-fraud plaintiffs and hired another law firm to sue to collect the money from the defendant's insurers. Some of the class members thought the Joyce firm should have handled this aspect of the litigation itself under the terms of its contingency-fee agreement. The class members took the firm to arbitration over the extra fees incurred in the satellite collection litigation.
Professionals Direct paid for the Joyce firm's defense in the arbitration. But when the arbitrator found for the clients and ordered the firm to reimburse some of the fees they had paid, the insurer refused the firm's demand for indemnification. The Joyce firm initiated coverage litigation in state court, which the insurer promptly removed to federal court. Ruling on cross-motions for summary judgment, the district judge sided with the insurer, concluding that the arbitration award was a "sanction" under the insurance policy's exclusion (o ), which excludes coverage for "fines, sanctions, penalties, punitive damages or any damages resulting from the multiplication of compensatory damages."
We affirm, though on a different rationale. The arbitration award was not functionally a sanction, so exclusion (o ) does not apply. But another provision in the policy excludes "claim[s] for legal fees, costs or disbursements paid or owed to you." Because the arbitration award adjusted the attorney's fees owed to the firm in the underlying securities-fraud class action, the "legal fees" exclusion applies.
Professionals Direct issued a professional-liability insurance policy to the Joyce firm promising to pay "all sums which you [the firm] become legally obligated to pay as damages because of any claim or claims first made against you."1 The policy defines "claim" as "a demand or suit for money or services you receive, including any arbitration proceedings." Eligible claims are those "aris[ing] out of the rendering of or the failure to render professional services. " And "professional services" include "services you [the Joyce firm] render in a lawyer-client relationship as a lawyer, mediator, arbitrator, notary public, administrator, conservator, receiver, executor, guardian, trustee, or in any similar fiduciary capacity."
"Damages" are defined as "monetary judgments, awards or settlements unless otherwise excluded. " (Emphasis added.) To that end, the policy lists 27 exclusions, two of which are relevant here. Exclusion (o ) excludes coverage for "any claim for fines, sanctions, penalties, punitive damages or any damages resulting from the multiplication of compensatory damages. " Exclusion (p) excludes coverage for "any claim for legal fees, costs or disbursements paid or owed to you."
In 2002 a class of plaintiffs retained the Joyce firm to prosecute a securities-fraud action against EPS Solutions Corporation and Enterprise Profit Solutions Corporation (collectively, "EPS"). Under the retainer agreement, the Joyce firm would receive a $200,000 flat fee and 25% of any award or settlement, plus reimbursement of costs. The agreement permitted the Joyce firm to retain local counsel outside Illinois if the firm deemed such assistance necessary, with any resulting third-party legal fees to be treated as costs under the agreement.
In 2007 the Joyce firm won a substantial arbitration award against EPS. By that point, however, EPS had become insolvent, and its insurers were the only source of funding to collect on the award.
This is where the dispute between the firm and its clients arose. The Joyce firm thought it had fully satisfied its obligations under the terms of the original retainer agreement by securing the arbitration award. The firm recommended the retention of Morgan, Lewis & Bockius LLP, a California law firm, to handle the collection litigation against EPS's insurers. The clients, however—or at least a large subset of the class that later pursued a claim against the Joyce firm—thought the firm should have continued to represent them under the terms of the original retainer agreement.
Regardless, the Joyce firm arranged for Morgan Lewis and later Reed Smith LLP to pursue the insurance litigation. Because of its "intimate knowledge of the facts and legal theories," the Joyce firm assisted in the litigation on an hourly-fee basis, with payment deferred until and only if there was an actual recovery. The case ultimately settled when EPS's insurers agreed to pay $8.6 million.
In January 2011 Walter Duemer, a plaintiff in the securities-fraud class action, filed a demand for arbitration against the Joyce firm on behalf of roughly 90% of his fellow plaintiffs. He alleged claims for breach of fiduciary duty, wrongful conversion of client trust funds, and breach of contract. The claims centered on the Joyce firm's retention of the Morgan Lewis and Reed Smith firms to handle the satellite litigation against EPS's insurers.2 The Joyce firm denied any wrongdoing and retained counsel to defend it in the arbitration, forwarding counsel's invoices to Professional Direct for payment. The insurer agreed to pay for the firm's defense under a reservation of rights and paid the invoices as they were submitted. (There were two exceptions, which we'll discuss later.)
The arbitrator rejected the conversion and breach-of-contract claims but found the Joyce firm liable for breach of fiduciary duty in the manner in which it had arranged for the two outside firms to handle the satellite litigation. More specifically, the arbitrator found that the Joyce firm did not make "up front full disclosure about the change in legal representation" and that the new fee arrangement "was presented [to the clients] as already accomplished," suggesting "an element of undue influence about the purported negotiation of a new fee agreement."
As a remedy, the arbitrator sought to unwind some of the additional attorney's fees incurred by the Duemer claimants in the satellite litigation. The arbitrator ordered the Joyce firm to remit the $405,674.87 in fees it had charged for consultative work with Morgan Lewis and Reed Smith. And because the original retainer agreement had called for a 75/25 client/attorney split of any recovery yet the clients had footed the entire bill for the satellite litigation, the arbitrator also ordered the Joyce firm to pay 25% of the fees charged by Morgan Lewis and Reed Smith. This added $150,127.15 to the award. Finally, the arbitrator ordered the firm to pay $72,725.45 to offset the costs incurred in the arbitration.
The Joyce firm unsuccessfully challenged the arbitration award in Illinois state court on grounds unrelated to this appeal. The firm was thus on the hook for $628,527.47. At this point Professionals Direct balked and refused to pay the award, relying on exclusions (o ) and (p) in the policy (among other policy defenses).
The Joyce firm filed suit in state court seeking a declaration that the insurer had breached its duty to indemnify. Professionals Direct removed the action to federal court based on diversity jurisdiction. See 28 U.S.C. § 1332
. On cross-motions for summary judgment, the district court honed in on the arbitrator's use of the word "sanction" to describe the final award against the Joyce firm. Since "claims for ... sanctions" are expressly excluded from coverage under exclusion (o ) of the policy, the judge held that the insurer owed no indemnification duty and entered summary judgment for Professionals Direct. This appeal by the Joyce firm followed.
The primary question in this case is how to classify the arbitration award won by the Duemer claimants: Is it a sanction, the return of disputed fees, or simply damages? If the award qualifies as a sanction, then exclusion (o ) knocks out coverage. If the award is an adjustment of disputed legal fees, then exclusion (p) applies and the result is the same. If the arbitrator awarded ordinary compensatory damages, then Professionals Direct may be required to pay.
We review de novo the district court's ruling on cross-motions for summary judgment. Dunnet Bay Constr. Co. v. Borggren, 799 F.3d 676, 688 (7th Cir.2015)
. Because this case is in federal court under diversity jurisdiction, Illinois substantive law controls.
As a threshold matter, the Joyce firm asserts that Professional Direct is estopped from relying on any policy exclusions because it reneged on its duty to defend in the arbitration. Under Illinois law "an insurer's duty to defend under a liability insurance policy is so fundamental an obligation that a breach of that duty constitutes a repudiation of the contract." Emp'rs Ins. of Wausau v. Ehlco Liquidating Tr., 186 Ill.2d 127, 237 Ill.Dec. 82, 708 N.E.2d 1122, 1135 (1999)
. A breach of the duty to defend estops the insurer from raising policy defenses to coverage. Id.
The district judge declined to address the estoppel argument because it was underdeveloped and therefore waived. The Joyce firm challenges that conclusion on appeal.
We don't need to address waiver because the estoppel argument is so obviously meritless. An insurance company has two options when an insured...
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