Carolina Cas. Ins. Co. v. Merge Healthcare Solutions, Inc.

• Decision Date: 13 January 2012
• Docket Number: Civil Action No.: 11 C 3844
• Parties: CAROLINA CASUALTY INSURANCE COMPANY, Plaintiff and Counter Defendant, v. MERGE HEALTHCARE SOLUTIONS, INC., Defendant and Counter Claimant.
• Court: U.S. District Court — Northern District of Illinois

CAROLINA CASUALTY INSURANCE COMPANY, Plaintiff and Counter Defendant,

v.MERGE HEALTHCARE SOLUTIONS, INC., Defendant and Counter Claimant.

Civil Action No.: 11 C 3844

UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION

Filed: January 13, 2012

Suzanne B. Conlon, Judge

MEMORANDUM OPINION AND ORDER

Carolina Casualty Insurance Company brings this action for a declaration of its obligation to pay attorneys' fees under the Directors' and Officers' and Corporate Liability Insurance Policy it issued to Amicas, Inc.¹ Amicas and its directors were sued by Amicas shareholders in state court for claims that were covered by the insurance policy. At the end of the shareholder litigation, the state court ordered Amicas to pay approximately $3.1 million for the shareholders' attorneys' fees. The court calculated this amount by multiplying a reasonable hourly rate by reasonably expended hours to arrive at $630,000, then multiplying that amount by five. Carolina Casualty argues it is responsible for paying only $630,000 of the attorneys' fee award under policy language excluding the "multiplied portion of multiplied damages" from the definition of loss. Carolina Casualty moves for summary judgment, arguing the policy language clearly andunambiguously supports its position. It also moves for summary judgment on Amicas' three remaining counterclaims of breach of contract, vexatious failure to pay a claim under 215 ILCS 5/155, and bad faith.

I. Background

The following facts are taken from the parties' Local Rule 56.1 statements, except when discussing the Massachusetts court's memorandum and order awarding attorneys' fees ("Mass. Order"), located in the record at PL Ex. B and Def. Ex. B. Because the parties disagree about the interpretation and context of the statements from the order included in the Rule 56.1 statements, the court cites directly to the state court order. The facts are viewed in a light most favorable to Amicas, and Amicas receives the benefit of all reasonable inferences. Trinity Homes LLC v. Ohio Cas. Ins. Co., 629 F.3d 653, 656 (7th Cir. 2010).

A. The Underlying Litigation: In re: Amicas, Inc. Shareholder Litigation, Nos. 10-174-BLS2,10-412-BLS2 (Mass. Super. Ct.)

Thoma Bravo, LLC, sought to acquire Amicas for $5.35 per share. Def. Facts ¶ 37. The Amicas shareholders thought the amount was inadequate and sued in Massachusetts state court to enjoin the acquisition. Id. After the suit was filed, Merge Healthcare Incorporated presented a competing offer of $6.05 per share. Id. ¶ 39. On its face, the offer was superior to the Thoma Bravo offer and would result in an additional $26 million for the Amicas shareholders. Id.

The attorneys for the plaintiff shareholders believed they would be entitled to attorneys' fees from the $26 million common fund created from the "bump-up" of value from the Merge Healthcare tender offer. Def. Facts ¶ 40. The shareholders' attorneys notified Amicas that they intended to ask the Massachusetts court to place in escrow a portion of the $26 million bump-upwhen the sale to Merge Healthcare occurred to cover the $6 million in attorneys' fees it planned to request from the court. Id. Because the attorneys' fees would come out of the $26 million bump-up, the shareholders would receive a smaller amount from the sale. To avoid diminishing the fund, the shareholders' attorneys asked Amicas to agree to pay the attorneys' fees itself, rather than having the fees taken from the common fund. Id. In Amicas' view, the attorneys' fee demand imperiled the Merge Healthcare transaction because a decrease in the shareholders' return from Merge Healthcare offer could make the original Thoma Bravo offer the superior one. Id.

Amicas contacted its insurer, Carolina Casualty, to determine whether the policy would cover an award of attorneys' fees. Carolina Casualty agreed that the definition of "loss" under the policy included an award of reasonable attorneys' fees. Def. Facts ¶ 41. Carolina Casualty stated in a letter that "the Insurer is willing to cover, subject to the Policy's terms and conditions, reasonable attorneys' fees awarded by the court or negotiated with plaintiffs' counsel that are approved by the court." Id. ¶ 47 (quoting Def. Ex. I, March 19 letter). Amicas told the shareholders' attorneys the fees would not come out of the common fund. Id. ¶ 52.

The Merge Healthcare transaction went through and the Massachusetts court, with the agreement of the parties, dismissed the shareholder litigation as moot but retained jurisdiction for purposes of attorneys' fees. Def. Facts ¶ 54. In Massachusetts, a court has the discretion to award attorneys' fees "[w]here a party has, at his or her own expense, been successful in creating, preserving or enlarging a fund in which other parties have a rightful share." Mass. Order at 3 (internal quotation marks omitted) (quoting Coggins v. New England Patriots Football Club, Inc., 406 Mass. 666, 669 (1990)). The Massachusetts court concluded the shareholder litigationwas a substantial cause in creating the $26 million fund for Amicas shareholders and merited a award of attorneys' fees and expenses. Mass. Order at 4.

The parties disagreed on how the fee award should be calculated. The shareholders' attorneys argued the court should award a percentage of the fund and sought 19% of $26 million for a total of $4,940,000. Mass. Order at 4. Amicas argued for the lodestar method based on the reasonable hours expended on the case. Id. at 4-5. The Massachusetts court noted that the Massachusetts Supreme Court designated the lodestar method as the "basic measure" of reasonable attorneys' fees for a statutory fee request. Id. at 5. The Massachusetts court considered whether the same was true when the fee request was not based on statute but on the creation of a common fund and found no Massachusetts appellate court authorized the use of the percentage method. Id. The court concluded the "lodestar remains the appropriate standard." Id. The court explained,

The lodestar approach seems especially appropriate - and the percentage approach especially inappropriate - in a case such as this one, where a large fund was obtained after a brief, albeit, intensive, efforts by plaintiffs' attorneys. ... To employ the percentage approach in this case, where the lodestar is so relatively modest compared to the fund, is to risk building in a windfall for plaintiffs' attorneys. The better, and in the Court's view more logical, approach is to begin with the amount of fees reasonably billed, and to look to enhancement of those fees to achieve an award that gives due credit for the risk, complexity, and similar challenges the attorneys faced compared to the extremely favorable result they obtained.

Id. at 5 n.3 (emphasis added). The Massachusetts court determined that even under the lodestar method, the court could enhance the fee award based on "the amount of the fund and its relation to the amount of the requested fee." Id. at 6.

The Massachusetts court reduced the billing rates and hours submitted by theshareholders' attorneys and arrived at a lodestar amount of $630,000 ($450/hour x 1,400 hours). It then applied an enhancement multiplier of five for a total fee award of $3,150,000.² Mass. Order at 8. The court concluded an enhancement multiplier was warranted because the attorneys devoted substantial resources to the case without a guarantee of payment, their actions served a public purpose by policing the proposed acquisition, and the $26 million fund was an "exceptionally favorable result." Id. at 7. The $3,150,000 award was approximately 12% of the common fund, which the court noted was "well within the spectrum of awards under a percentage of fund approach." Id. at 8 n.6. Cross-appeals of the fee award are pending in state court. PI. Facts ¶ 25.

B. This Case

Carolina Casualty refuses to pay the full $3.1 million attorneys' fee award. Carolina Casualty contends it is obligated to pay only the $630,000 lodestar amount and not the enhanced portion under policy language excluding the "multiplied portion of multiplied damages" from the definition of loss.³ It therefore asserts that it is required to pay only one-fifth the cost of the state court appeal, though it has advanced the full costs of the appeal, subject to repayment. Carolina Casualty filed this suit for declaratory judgment to determine its obligations under the policy. Amicas counterclaimed for breach of the insurance contract, vexatious failure to pay a claimunder 215 ILCS 5/155, and bad faith. A fourth counterclaim, breach of contract based on a letter from Carolina Casualty, was dismissed early in the case. See Dkt. No. 40 (Opinion of Sept. 21, 2011).

In support of its argument, Carolina Casualty relies on a carve-out to the definition of loss in the policy.

"Loss" means damages, judgments, settlements and Costs of Defense; however, Loss shall not include civil or criminal fines or penalties imposed by law, punitive or exemplary damages, the multiplied portion of multiplied damages, taxes, any amount for which the Insureds are not financially liable or which are without legal recourse to the Insureds, or matters which may be deemed uninsurable under the law pursuant to which this Policy shall be construed.

Def. Facts ¶ 33; PI. Facts ^ 13 (original emphasis omitted and emphasis added).

II. Analysis of Carolina Casualty's Declaratory Action

A. Legal Standard

A federal court sitting in diversity applies the conflict of law rules of the state in which it sits. Land v. Yamaha Motor Corp., 272 F.3d 514, 516 (7th Cir. 2001). Amicas asserts Massachusetts law, not Illinois law, should apply. However, Amicas does not identify any conflict between Illinois and Massachusetts law, and its argument in favor of Massachusetts law is relegated to three sentences in a footnote. In the absence of an identified conflict between the two states' laws, the law of Illinois, the forum state, applies. Crichton v. Golden Rule...