ALEXANDER MFG., INC. v. Illinois Union Ins. Co.

Decision Date22 February 2010
Docket NumberNo. CV. 06-735-PK.,CV. 06-735-PK.
Citation688 F. Supp.2d 1170
PartiesALEXANDER MANUFACTURING, INC. EMPLOYEE STOCK OWNERSHIP AND TRUST, Plaintiff, v. ILLINOIS UNION INSURANCE CO., Defendant.
CourtU.S. District Court — District of Arizona

Elizabeth Farrell Oberlin, Attorney at Law, Hillsboro, OR, Michael Allen Maurer, Lukins & Annis, PS, Spokane, WA, for Plaintiff.

Diane L. Polscer, Lloyd Bernstein, Gordon & Polscer, LLC, Portland, OR, Tae S. Um, Wilson Elser Maskowitz Edelman & Dicker LLP, Los Angeles, CA, Michael Allen Maurer, Lukins & Annis, PS, Spokane, WA, for Defendant.

OPINION & ORDER

PAPAK, United States Magistrate Judge:

Plaintiff Alexander Manufacturing Inc. Employee Stock Ownership Plan and Trust (Trust) filed this suit against defendant Illinois Union Insurance Company for breach of contract and breach of good faith and fair dealing. The Trust is the assignee of three former Alexander Manufacturing officers, who were insured under a policy issued by Illinois Union. Following this court's ruling on the parties' cross motions for summary judgment, Illinois Union made an offer of judgment, which the Trust accepted. The Trust's motion for attorney fees and costs (#129) is now before the court. The Trust's motion is granted in part and denied in part, for the reasons set forth below.

FACTUAL BACKGROUND

Illinois Union insured Alexander Manufacturing, Inc. under a policy that included both directors and officers liability coverage and fiduciary liability coverage, each with a limit of $1,000,000. (Opinion & Order, #121, at 2.) In early 2003, Alexander Manufacturing's chief executive officer, William Klutho, provided false financial information to the company's accountants, with the knowledge of two other company officers. Id. at 6. Based on the false information, Alexander Manufacturing's accountants prepared a 2002 financial statement indicating that the company made a small profit that year when in fact the company had incurred substantial losses. Id. at 6-7.

I. The Underlying Coverage Dispute

The Trust, which is an employee pension plan and the sole shareholder of Alexander Manufacturing, Inc., filed an action against Klutho and the two other officers in late 2004. Id. at 8. In December 2004, Klutho's counsel sent a letter and a copy of the complaint to Illinois Union. (Bernstein Decl. Ex. A.) The letter indicated that Klutho believed the claims fell under Illinois Union's coverage and asked whether Illinois Union would defend. Id. Illinois Union retained counsel for the officers and Alexander Manufacturing. (Opinion & Order at 9.) The attorney conducted discovery and, by July 2005, was able to estimate the damages that the Trust would assert at trial. (Bernstein Decl. Ex. B.)

The parties entered mediation in October 2005, after Illinois Union rejected the Trust's offer to settle for what it asserted as the applicable policy limit: $1 million under the fiduciary coverage and $1 million under the directors and officers coverage. (Opinion & Order at 9-10.) Illinois Union's coverage counsel threatened to rescind the contract, despite having no real basis to do so. Id. at 11. Illinois Union's counsel, however, also offered to "use his resources" to settle the claim for approximately $300,000, the limit remaining under the directors and officers coverage. Id. at 10. Illinois Union was unwilling to arbitrate the reasonableness of the fees and costs it had deducted from the available coverage limit, although the Trust expressed an interest in doing so. (Maurer Supp. Aff., #139 at 3.) The $300,000 figure quoted by Illinois Union as the approximate policy limit was in error, however. (Opinion & Order at 10.) Illinois Union overestimated defense costs and actually had approximately $377,000 to $458,900 available under the directors and officers coverage. Id.

The Trust then offered to settle for the amount remaining under the fiduciary policy limits minus defense costs, an amount it estimated to be $620,000. (Maurer Supp. Aff., #139 at 3; Opinion & Order at 11.) Illinois Union rejected that offer but later that same day made a written offer to settle for the amount remaining under the directors and officers coverage. (Opinion & Order at 11-12.) Before the Trust received Illinois Union's written offer to settle, however, it entered into an agreement with Alexander Manufacturing and its officers. Id. at 12.

As part of the settlement agreement, the parties agreed that the officers would each pay $10,000 from their personal assets and that the officers would stipulate to a judgment of an additional $1.3 million against them. Id. The Trust, however, agreed not to file the $1.3 million judgment or proceed against the officers' personal assets for that amount. Id. In exchange, Alexander Manufacturing and its offers assigned their rights under the policy to the Trust.

II. The Parties Efforts to Settle the Current Suit

The Trust then brought suit against Illinois Union to recover under the insurance policy. The parties filed cross motions for summary judgment on the validity of the officers' assignment of their claims under the policy. This court granted defendant's motion, denied plaintiffs motion and dismissed the case, The Ninth Circuit reversed that decision on appeal. Alexander Mfg. v. Illinois Union Ins. Co., 560 F.3d 984 (9th Cir.2009).

Following the appeal, the Trust sent a settlement demand to Illinois Union, asserting that Illinois Union had an obligation to indemnify the Trust for $1.3 million. (Bernstein Decl. Ex. C.) Illinois Union offered $245,000 to settle all claims and threatened further expensive litigation if the Trust did not accept. (Maurer Supp. Aff. at 3.) The parties failed to reach a settlement and resumed briefing on Illinois Union's motions for summary judgment on several coverage issues and on the Trust's bad faith claim.

On September 16, 2009, after the Trust filed a cross motion for summary judgment on its bad faith claim, Illinois Union offered to settle for $425,000 "inclusive of all claims." (Bernstein Decl, Ex. D,) The Trust responded that it would never settle for that amount. Id. The Trust, however, later inquired whether Illinois Union would settle for $700,000. (Bernstein Decl. Ex. E.) In response, on September 24, 2009, Illinois Union reiterated its $425,000 offer. Id. The Trust rejected the counter offer and indicated that it "no longer desired to seek a mutual resolution." (Bernstein Decl. Ex. F.)

I ruled on the dispositive motions one month after the parties' attempts to settle. I denied Illinois Union's motion on four coverage issues but granted its motion asserting that a common claim endorsement limited the coverage available to the amount remaining under the directors and officers portion of the policy. I denied the Trust's cross motion on that issue. I also denied the parties' cross motions on plaintiffs' bad faith claim because material questions of fact remained. I found, however, that the most the Trust could recover under that claim was the amounts the officers paid from their individual assets, because that was the only actual loss that they suffered as a result of the settlement.

After I issued my opinion, Illinois Union made an offer "pursuant to Rule 68 of the Federal Rules of Civil Procedure" for a judgment in favor of the Trust "in the total sum of $425,000, exclusive of recoverable attorney fees and costs, if any, but inclusive of any and all other claims for relief." (Pl.'s Acceptance of Offer of Judgment, #125.) The Trust accepted. Upon the stipulation of the parties, I entered a judgment of $425,000 against Illinois Union, with "fees and costs, if any" to be determined. (Judgment, #128.)

III. The Trust's Attorney Fee Petition and Bill of Costs

The Trust now seeks $433,792.75 in attorney fees.1 The Trust's counsel avers that he discounted the petition by $50,000 for fees related to claims that were not covered under the applicable attorney fee statute or that were potentially redundant.

The Trust also seeks $40,137.93 in costs. The Trust's bill of costs, however, does not include any accompanying documentation. In addition, the Trust seeks costs related to travel, lodging, long distance phone service, parking, mail services and mediation in addition to other expenses.

LEGAL STANDARD

Federal Rule of Civil Procedure 68 provides, in relevant part, "At least 14 days before the date set for trial, a party defending against a claim may serve on an opposing party an offer to allow judgment on specified terms, with the costs then accrued." Fed. R. Civ, P. 68(a). The term "costs" in Rule 68 refers "to all costs properly awardable under the relevant substantive statute or other authority." Champion Produce, Inc. v. Ruby Robinson Co., 342 F.3d 1016, 1027 (9th Cir.2003) quoting Marek v. Chesny, 473 U.S. 1, 9, 105 S.Ct. 3012, 87 L.Ed.2d 1 (1985). Thus, "costs" under Rule 68 include the costs "provided for in 28 U.S.C. § 1920, which is the general federal cost statute." Sea Coast Foods, Inc. v. Lu-Mar Lobster & Shrimp, Inc., 260 F.3d 1054, 1060 (9th Cir.2001). In addition, "absent congressional expressions to the contrary, where the underlying statute defines `costs' to include attorneys' fees, such fees are to be included as costs for purposes of Rule 68." United States v. Trident Seafoods Corp., 92 F.3d 855, 860 (9th Cir.1996).

DISCUSSION
I. Bill of Costs
A. Whether Plaintiff Is a Prevailing Party

To constitute a Rule 68 offer, a settlement offer must "allow judgment on specified terms, with the costs then accrued." Fed. R. Civ. Proc. 68(a); Marek, 473 U.S. at 6, 105 S.Ct. 3012 ("As long as the offer does not implicitly or explicitly provide that the judgment not include costs, a timely offer will be valid.") "In order to determine whether an offer of settlement comports with the requirements of Rule 68, a court will ordinarily apply the usual rules of contract construction." Herrington v. County of Sonoma, 12 F.3d 901, 907 (9th Cir.1993). Those rules dictate...

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