Ceres Envtl. Servs., Inc. v. Arch Specialty Ins. Co.

• Decision Date: 04 April 2012
• Docket Number: No. Civ. No. 10–4570 (RHK/JSM).,Civ. No. 10–4570 (RHK/JSM).
• Citation: 853 F.Supp.2d 859
• Parties: CERES ENVIRONMENTAL SERVICES, INC., Plaintiff, v. ARCH SPECIALTY INSURANCE COMPANY, Defendant.
• Court: U.S. District Court — District of Minnesota

853 F.Supp.2d 859

CERES ENVIRONMENTAL SERVICES, INC., Plaintiff,

v.ARCH SPECIALTY INSURANCE COMPANY, Defendant.

No. Civ. No. 10–4570 (RHK/JSM).

United States District Court,

D. Minnesota.

April 4, 2012.

Steven L. Theesfeld, Yost & Baill, LLP, Minneapolis, MN, for Plaintiff.

Neal M. Glazer, Jonathan L. Kranz, D'Amato & Lynch, LLP, New York, NY, Richard A. Lind, Matthew D. Sloneker, Lind, Jensen, Sullivan & Peterson, P.A., Minneapolis, MN, for Defendant.

MEMORANDUM OPINION AND ORDER

RICHARD H. KYLE, District Judge.

Plaintiff Ceres Environmental Services, Inc. (“Ceres”) alleges in this action that Defendant Arch Specialty Insurance Company (“Arch”), its insurer, failed to pay all the costs it incurred defending a lawsuit brought against it in state court in Alabama. Presently before the Court is Arch's Motion for Summary Judgment. For the reasons that follow, its Motion will be granted.

BACKGROUND

The background in this matter is complex and is set forth in more detail in the Court's December 29, 2011 Order on Arch's Motion for Summary Judgment Based on Collateral Estoppel (Doc. No. 47). Familiarity with that background is presumed and will be recounted here only to the extent necessary to provide an overview of the parties' claims and the pending Motion.

In July 2007, a truck being driven in Alabama by a Ceres subcontractor (“CMT”) collided with a car, causing serious injuries to the car's occupants. The accident victims commenced an action against CMT and Ceres in Alabama state court (the “State Action”), and Ceres tendered defense of the matter to Arch, its insurer. Ceres then retained a large Atlanta law firm to serve as lead counsel, a smaller Alabama firm to act as local counsel, and a private investigation company to locate and interview potential witnesses to the accident. Ultimately, it paid these firms over $1.7 million in connection with the State Action. Ceres asserts that Arch expressly authorized it to retain these firms to defend itself, but there is no evidence before the Court to support that assertion.¹

In July 2009, more than a year after Ceres tendered defense of the State Action to Arch, Arch denied coverage and refused to indemnify or defend it in that case. Ceres asked Arch to reconsider, and in September 2009, it reversed itself and agreed to defend Ceres, subject to a reservation of rights. Its reservation-of-rights letter expressly provided that it would reimburse Ceres only for “reasonable defense expenses.” (Doc. No. 41, Ex. 1 at 2.) Not long thereafter, the State Action settled, with Arch contributing nearly $3 million to the settlement on Ceres's behalf. It later reimbursed slightly more than $1 million Ceres had expended defending the State Action. Yet, this left unpaid over $600,000 in Ceres's defense costs.

Meanwhile, on September 29, 2008, Ceres filed a cross-claim against CMT in the State Action, asserting that it was entitled to indemnification for all amounts paid, including defense costs, in connection with that action. The state court severed this claim and CMT removed it to the United States District Court for the Southern District of Alabama (the “Alabama Federal Action”). It was eventually determined in the Alabama Federal Action that the “reasonable” amount of fees and costs incurred by Ceres defending the State Action was $1,118,293, not the $1.7 million it had actually expended.

On November 16, 2010, Ceres commenced the instant action, alleging inter alia that Arch had breached its insurance policy (the “Policy”) by failing to reimburse all of Ceres's defense costs in the State Action. The Complaint asserted four claims: commonlaw tort of bad faith (Count 1); violation of Alabama Code § 27–12–24 (Count 2); ² breach of contract and bad faith under New York law (Count 3); ³ and violation of the Minnesota Consumer Fraud Act, Minn.Stat. § 325F.69 et seq. (Count 4). Arch asserted three counterclaims, generally alleging that if Ceres were successful on its claims against CMT in the Alabama Federal Action, it (Arch) was entitled to a portion of Ceres's recovery under the terms of the Policy. Arch later moved for partial summary judgment, arguing that Ceres was collaterally estopped from relitigating the reasonableness of the fees and costs incurred defending the State Action, in light of the decision in the Alabama Federal Action. By Order dated December 29, 2011, this Court agreed. ( See Doc. No. 47.) In its Order, however, the Court noted that Arch had not explained what effect, if any, collateral estoppel would have on this case. ( See id. at 6 (noting that “even if the Court were to determine that collateral estoppel bars Ceres from relitigating the reasonableness of its fees, it does not automatically follow that Arch would be entitled to summary judgment on any of the claims in the Complaint or its counterclaims”).)

The instant Motion puts this issue squarely before the Court. That is, Arch now asserts it is entitled to dismissal of Ceres's claims because Ceres cannot recover more than reasonable fees and costs incurred defending the State Action, which amount already has been determined in the Alabama Federal Action and been paid by Arch.⁴ It also argues that Ceres's remainingclaims (for bad faith and violation of various state statutes) fail as a matter of law. The Motion has been fully briefed, the Court held a hearing on March 28, 2012, and it is now ripe for disposition.

STANDARD OF DECISION

Summary judgment is proper if, drawing all reasonable inferences in favor of the nonmoving party, there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(a); Celotex Corp. v. Catrett, 477 U.S. 317, 322–23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). The moving party bears the burden of showing that the material facts in the case are undisputed. Id. at 322, 106 S.Ct. 2548;Whisenhunt v. Sw. Bell Tel., 573 F.3d 565, 568 (8th Cir.2009). The Court must view the evidence, and the inferences that may be reasonably drawn from it, in the light most favorable to the nonmoving party. Weitz Co., LLC v. Lloyd's of London, 574 F.3d 885, 892 (8th Cir.2009); Carraher v. Target Corp., 503 F.3d 714, 716 (8th Cir.2007). The nonmoving party may not rest on mere allegations or denials, but must show through the presentation of admissible evidence that specific facts exist creating a genuine issue for trial. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); Wingate v. Gage Cnty. Sch. Dist., No. 34, 528 F.3d 1074, 1078–79 (8th Cir.2008).

ANALYSIS

I. Ceres cannot recover more than reasonable fees

The crux of Ceres's case is breach of contract, and the primary question posed by Arch's Motion is whether, under New York law,⁵ Ceres can recover legal fees incurred in the State Action exceeding the amount already determined (in the Alabama Federal Action) to be reasonable. Stated differently, Ceres incurred approximately $1.7 million defending the State Action, but the Alabama federal court determined that amount was excessive and reduced it to about $1.1 million. While Arch does not dispute it owed Ceres a duty to defend under the Policy—meaning that it was obligated to pay at least some of Ceres's defense costs—the dispositive question is whether Ceres can recover the remaining $600,000 from Arch, which was determined to be “unreasonable” in the Alabama Federal Action. Arch argues that New York law limits an insured “to reimbursement ... for reasonable defense costs” (Def. Mem. at 4 (emphasis added)), while Ceres argues that no such limitation exists ( see Mem. in Opp'n at 7–11). In the Court's view, Arch has the better argument.

Neither party has cited a controlling case from the New York Court of Appeals (New York's highest court), and this Court's own research has not uncovered one.⁶ Accordingly, this Court's task is to predict how New York's highest court would resolve the issue if confronted with it. E.g., Marvin Lumber & Cedar Co. v. PPG Indus., Inc., 223 F.3d 873, 876 (8th Cir.2000). Cases from New York's intermediate appellate courts provide mixed signals. Compare, e.g., Urban Res. Inst., Inc. v. Nationwide Mut. Ins. Co., 191 A.D.2d 261, 594 N.Y.S.2d 261, 262 (1993) (breach of duty to defend obligates insurer to pay “ any and all legal costs incurred in defending” the underlying action) (emphasis added), with, e.g., George Muhlstock & Co. v. Am. Home Assurance Co., 117 A.D.2d 117, 502 N.Y.S.2d 174, 180 (1986) (“A breach of the covenant to defend makes the insurer liable for ... reasonable counsel fees and necessary expenses.”) (emphasis added).⁷

Rational arguments support each side of this issue. New York follows the “ordinary” rule that unambiguous insurance-policy language will be applied as written, Bridge Metal Indus., L.L.C. v. Travelers Indem. Co., 812 F.Supp.2d 527, 535 (S.D.N.Y.2011), and it would be a simple task for an insurer to include language in its policy limiting its liability to “reasonable” defense costs. Notably, Arch acknowledged at oral argument that no such Policy language exists here. Moreover, to the extent the scope of Arch's obligations under the Policy are unclear, such ambiguity inures to Ceres's benefit. See, e.g., Butler v. N.Y. Cent. Mut. Fire Ins. Co., 274 A.D.2d 924, 711 N.Y.S.2d 607, 609 (2000). And, consistent with its duty to defend, Arch retained the right to select counsel to defend Ceres in the State Action. E.g., Ottaviano v. Genex Coop., Inc., 15 A.D.3d 924, 790 N.Y.S.2d 791, 792 (2005) (“As a general rule, a liability insurer has a right to control the defense of underlying litigation against its insured.”). Arch failed to avail itself of that right, undermining its complaints about the “unreasonable” costs incurred by Ceres.

On the other hand, courts have been reluctant to permit recovery of more than reasonable costs, with good reason: lawyers are ethically bound to charge only reasonable fees to their clients. See American...