City of Farmington v. L.R. Foy Const. Co.

• Decision Date: 22 July 1991
• Docket Number: No. 18914,18914
• Citation: 1991 NMSC 67,112 N.M. 404,816 P.2d 473
• Parties: CITY OF FARMINGTON, Plaintiff-Appellant, v. L.R. FOY CONSTRUCTION COMPANY, Defendant, and Continental Insurance Company, Defendant-Appellee.
• Court: New Mexico Supreme Court

Page 473

816 P.2d 473

112 N.M. 404

CITY OF FARMINGTON, Plaintiff-Appellant, v. L.R. FOY CONSTRUCTION COMPANY, Defendant and Continental Insurance Company, Defendant-Appellee.

No. 18914.

Supreme Court of New Mexico.

July 22, 1991.

[112 NM 406] Wheatley & Ranquist, Charles F. Wheatley, Jr., Harold A. Ranquist, J. Craig Smith, Salt Lake City, Utah, Tansey, Rosebrough, Gerding & Strother, P.C., Michael T. O'Loughlin, Farmington, for plaintiff-appellant.

Farlow, Simone, Roberts & Weiss, P.A., Norman F. Weiss, Albuquerque, for defendant-appellee.

OPINION

BACA, Justice.

We have withdrawn our previous opinion entered in this cause and substitute the following.

Plaintiff-appellant City of Farmington (City) appeals an award of attorneys' fees to defendant-appellee Continental Insurance Company (Continental) made pursuant to NMSA 1978, Section 59A-16-30 (Repl.Pamp.1988), and based on a groundless suit for insurance benefits. The appeal arises out of a suit based on contract and insurance claims and the City's claim for damages against defendant Foy Construction Company (Foy), a construction contractor for the City. We vacate the judgment and remand.

Foy's contract with the City required Foy to obtain insurance, including a comprehensive general liability policy and an owner's and contractor's protective liability policy to protect the City as insured should other claims against Foy exhaust coverage. The contract required that the City be named as an additional insured, with cross-liability provisions, on policies including a catastrophic umbrella policy; that the coverage be primary as to the City; and that the City receive notice before cancellation, limitation, or expiration of coverage. Certificates of insurance were required to document compliance.

Foy procured the necessary coverage, including the appropriate documentation, through Kline Insurance Agency, Inc. Foy subsequently changed insurance agencies, and another agency secured coverage, obtaining the comprehensive general liability insurance from Continental. No documentation of this was relayed to the City; the new policies did not provide the City with primary coverage; the City was not named as an additional insured, nor did the City receive notice of the cancellation of the original policies or of the changes in coverage.

Foy installed underground tanks without the necessary drain plugs. Over 28,000 gallons of gasoline leaked through the tanks, contaminating soil and groundwater, causing great damage, and requiring extensive clean up at a cost of over $1,300,000.

The City notified the original insurers, only then to learn that coverage with them had been cancelled. Subsequently, without knowledge of the changes in coverage, the City learned of the new insurers and notified Continental of its claims. Continental did not respond to the claims of coverage. The City brought suit against Continental alleging a third-party cause of action based on Royal Globe Insurance Co. v. Superior Court, 23 Cal.3d 880, 592 P.2d 329, 153 Cal.Rptr. 842 (1979) (in bank), overruled, Moradi-Shalal v. Fireman's Fund Insurance Cos., 46 Cal.3d 287, 758 P.2d 58, 250 Cal.Rptr. 116 (1988) (in bank), and a violation of the Trade Practices and Frauds provisions of the Insurance Code, NMSA 1978, Sections 59A-16-1 to -30 (Repl.Pamp.1988 & Cum.Supp.1990).¹

After discovery and denial of the motion to submit a fourth amended complaint against the parties already joined,² the court dismissed the suit against Continental and awarded Continental attorneys' fees against the City pursuant to Section 59A-16-30 in the amount of $19,126.46 plus interest. The court found that the action against Continental was groundless and without factual basis; that none of the City's insurance experts could articulate any basis or grounds for this action, and that the City knew the action was groundless. The City appeals from this judgment.

Section 59A-16-30 sanctions a private right of action to a party suffering injury due to a violation of Article 16 of the Insurance Code, which deals with trade practices and fraud. Subsection A allows attorneys' fees to a prevailing defendant if "the party complaining of the violation * * * has brought an action which he knew to be groundless."

The City contends the district court erred in finding that its claims against Continental were groundless and in finding that the City brought suit with knowledge that the claims were groundless. We will consider initially the definition of "groundless" as that term is used in Section 59A-16-30 and then determine whether the standard was applied properly against the City.

I. WHAT CONSTITUTES A GROUNDLESS ACTION ALLOWING ATTORNEYS' FEES?

Interpretation of this fee award provision is an issue of first impression in New Mexico. However, several tenets developed with reference to other statutory provisions sanctioning fee awards provide an appropriate starting point for our analysis.

Generally, each party to litigation must pay its own attorneys' fees. Martinez v. Martinez, 101 N.M. 88, 678 P.2d 1163 (1984). Fees may be awarded where allowed by statute at the discretion of the trial court. See Keeth Gas Co. v. Jackson Creek Cattle Co., 91 N.M. 87, 570 P.2d 918 (1977). The claim, however, must fall within the scope of the statutory grant of authority. See Hiatt v. Keil, 106 N.M. 3, 738 P.2d 121 (1987).

A statutory grant of attorneys' fees to a defendant-insurer when a plaintiff brings suit knowing it is groundless discourages the bringing of such suits.³ Section 59A-16-30, however, by its express terms is narrow. The legislature did not intend to penalize plaintiffs who may not prevail despite arguably meritorious claims or to deter potential plaintiffs from bringing suit out of fear that an adverse judgment may subject them to an assessment of attorneys' fees.

Section 59A-16-30 contemplates a discretionary award of attorneys' fees not for the pursuit of an action ultimately found to be groundless, but if the complainant "has brought an action which he knew to be groundless." (Emphasis added.) In other words, the statute expresses the clear legislative intent that for plaintiffs to be sanctioned with attorneys' fees it must be shown they subjectively knew at the time the suit was filed that the complaint was groundless.⁴ Under the appropriate circumstances, however, the filing of an amended complaint may constitute the bringing of an action, and, if done with knowledge that its allegations provided no grounds to prevail, may subject the plaintiff to sanctions.⁵

The groundlessness of a suit should not be determined in retrospect. Merely because in hindsight it may appear obvious that no facts or law support a judgment for the plaintiff, a suit may not necessarily be groundless. See Christiansburg Garment Co. v. EEOC, 434 U.S. 412, 421-22, 98 S.Ct. 694, 700-01, 54 L.Ed.2d 648 (1978). A claim may appear meritorious to a plaintiff based on the initial pleadings, although as facts and legal theories develop it may become apparent that the suit is in fact groundless. Thus, dismissal prior to a trial on the merits is not dispositive of the issue of groundlessness.⁶ See Whitten v. Progressive Casualty Ins. Co., 410 So.2d 501, 505-06 (Fla.1982), overruled on other grounds, Florida Patient's Compensation Fund v. Rowe, 472 So.2d 1145 (Fla.1985). An award of attorneys' fees against a plaintiff who has a good-faith belief at the time the complaint is filed that facts and law arguably may support a favorable judgment would run counter to the statute's plain language. See generally Rivera v. Brazos Lodge Corp., 111 N.M. 670, 675, 808 P.2d 955, 960 (1991) (subjective measure of Rule 11 good-ground provision depends on what attorney or litigant knew and believed at relevant time).

A claim is groundless if the allegations in the complaint, although sufficient to survive a motion to dismiss for failure to state a claim, are not in good faith discoverable through litigation. Thus, plaintiffs are subject to Section 59A-16-30 fee sanctions if they have brought suit knowing they can present no legal argument to support the claim, or knowing they cannot come forth with the appropriate factual predicate to support their theory.

II. DID THE CITY BRING A GROUNDLESS CLAIM?

The City claims that when it brought the suit, it was not groundless, arguing: (a) it raised an issue of first impression regarding statutory interpretation, and (b) it had a right to have the facts determined.

a. Issue of First Impression.

The City maintains that, when it commenced its suit, the law was unclear as to whether a third-party claimant could pursue a private right of action against an insurer under Section 59A-16-30. That section authorizes a private right of action to "[a]ny person covered by [Article 16] who has suffered damages as a result of a violation of [Article 16.] ...."⁷

At the time this suit was brought, the City presented a good-faith argument to extend the law of New Mexico. Although certain precedent indicated that a third-party cause of action could not be maintained against an insurer, see Patterson v. Globe Am. Casualty Co., 101 N.M. 541 685 P.2d 396 (Ct.App.1984), this precedent was not dispositive.⁸ While the precedent upon which the City relied, Royal Globe Insurance Co. v. Superior Court, 23 Cal.3d 880, 592 P.2d 329, 153 Cal.Rptr. 842 (1979) (in bank), was overruled by Moradi-Shalal v. Fireman's Fund Insurance Cos., 46 Cal.3d 287, 758 P.2d 58, 250 Cal.Rptr. 116 (1988) (in bank), it was not overruled until shortly before the summary judgment motion was heard by the district court. Moreover, the decision of a California court to overrule its precedent does not prevent New Mexico from adopting that jurisdiction's previous construction of its similar statute.⁹ The legislature did not intend to sanction potential plaintiffs who may bring a case based on a good-faith proposal to extend our law merely because it turns out that the theory...