Hayden Lake Fire Protection Dist. v. Alcorn

• Citation: 141 Idaho 307,109 P.3d 161
• Decision Date: 28 February 2005
• Docket Number: No. 29715.,29715.
• Court: United States State Supreme Court of Idaho
• Parties: HAYDEN LAKE FIRE PROTECTION DISTRICT, and all other corporations, entities, or individuals similarly situated, Plaintiffs-Respondents, v. James M. ALCORN, Manager of the State Insurance Fund; Drew Forney, former Manager of the State Insurance Fund; W.W. Deal, Milford Terrell, Gerald Geddes, Wayne Meyer, and Marguerite Mc Laughlin, Directors of the State Insurance Fund; the State Insurance Fund, an independent body corporate politic; State of Idaho, acting by and through the Department of Administration; and State of Idaho, ex rel., Governor Kirk Kempthorne, Intervenor, Defendants-Appellants, Kelso & Irwin, P.A., Plaintiff-Respondent, v. State Insurance Fund; and Drew Forney, Manager of the State Insurance Fund, individually, pursuant to I.C. § 72-907; and State of Idaho, acting by and through the Department of Administration, Defendant-Appellants.

109 P.3d 161

141 Idaho 307

HAYDEN LAKE FIRE PROTECTION DISTRICT, and all other corporations, entities, or individuals similarly situated, Plaintiffs-Respondents, v. James M. ALCORN, Manager of the State Insurance Fund; Drew Forney, former Manager of the State Insurance Fund; W.W. Deal, Milford Terrell, Gerald Geddes, Wayne Meyer, and Marguerite Mc Laughlin, Directors of the State Insurance Fund; the State Insurance Fund, an independent body corporate politic; State of Idaho, acting by and through the Department of Administration; and State of Idaho, ex rel., Governor Kirk Kempthorne, Intervenor, Defendants-Appellants, Kelso & Irwin, P.A., Plaintiff-Respondent, v. State Insurance Fund; and Drew Forney, Manager of the State Insurance Fund, individually, pursuant to I.C. § 72-907; and State of Idaho, acting by and through the Department of Administration, Defendant-Appellants.

No. 29715.

Supreme Court of Idaho, Coeur d'Alene, October 2004 Term.

February 28, 2005.

Lawrence G. Wasden, Attorney General, Boise, for defendant-appellants. Michael S. Gilmore argued.

Ball Janik LLP, Portland, Oregon; Starr Kelso, Coeur d'Alene, for plaintiff-respondent's Hayden Lake Fire Protection District, et al. Kevin S. Mapes argued.

SCHROEDER, Chief Justice.

The Idaho State Insurance Fund, et al. (SIF) appeals the district court's denial of certain discretionary costs and attorney fees generated in defending a class action suit brought by Hayden Lake Fire Protection District and Kelso & Irwin, P.A. (HLFPD). HLFPD brought a class action suit against the SIF for various claims relating to the SIF's surplus and real estate investments. That case was appealed to this Court and decided concurrently with this case.

I. FACTUAL AND PROCEDURAL BACKGROUND

The SIF is a public entity created by Idaho statute which sells workers' compensation insurance to employers within the State of Idaho. In 1996 Kelso & Irwin, P.A. sued the SIF, alleging that it was threatening the solvency of its surplus by selling insurance policies with artificially low premiums. Kelso amended the Complaint in 1998, adding that the SIF's management of its surplus and certain investment practices violated statutory duties of the fund. The Amended Complaint was dismissed on a motion by the SIF, and Kelso appealed to this Court which affirmed the district court's ruling relating to low premiums but held that the claims regarding SIF's management of surplus and investment practices survived a motion to dismiss. The case was remanded to the district court. That court's decision was appealed and was affirmed by this Court. Hayden Lake Fire v. Alcorn, No. 28996, ___ Idaho ___, ___ P.3d ___, 2005 WL 455743 (Feb. 25, 2005).

While Kelso's initial appeal was pending, the Hayden Lake Fire Protection District sued the SIF, its Manager, and its Directors, claiming it was an employer insured by the SIF and could represent a class of all the SIF policyholders from 1995 to present. HLFPD alleged that the SIF's practices relating to premiums, surplus, dividends and investments breached the SIF's contracts with its policyholders by virtue of the fact that such practices violated the SIF's governing statutes. HLFPD also alleged that the same practices breach the implied covenant of good faith & fair dealing and the fiduciary duties the SIF had to its policyholders.

The district court consolidated Kelso and HLFPD's cases. The consolidated case was then certified as a class action with HLFPD as the class representative of all employers who purchased workers' compensation insurance policies from the SIF from 1995 to the present. The State of Idaho petitioned to intervene as an SIF policyholder, arguing it had a compelling interest in maintaining the solvency of the SIF, which it feared would be in jeopardy if HLFPD prevailed. The court granted the petition.

In November of 2000, HLFPD filed an amended complaints stating claims for breach of contract, breach of covenant, of good faith and fair dealing, breach of fiduciary duties, money had and received, rescission, declaratory relief, injunctive relief, equitable accounting, and attorney fees. All of HLFPD's claims were dismissed in summary judgment proceedings, except the claims for declaratory and injunctive relief.

The State submitted a Memorandum of Fees and Costs. The district court awarded the State, among other costs of right, a portion of their requested discretionary costs for photocopies and bate stamping which the court found necessary, reasonable and exceptional given the magnitude of the case and number of documents involved.

HLFPD and the SIF then filed cross-motions for summary judgment on the remaining declaratory and injunctive relief claims. HLFPD and the SIF relied on expert witnesses, a number of whom were from out of state. Among the experts for HLFPD were: (1) Jerry N. LeCompete¹, who analyzed a set of technical regulatory calculations known as Risk Based Capital ratios between the SIF and other public and privately-owned insurance carriers, (2) Richard Fallquist², who presented detailed calculations of SIF's premiums, surpluses and dividends under a variety of alternative management assumptions, (3) Michael Plesko, who addressed the State of Maine's insurance fund experience, three insolvent or near insolvent workers' compensation carriers in Mr. LeCompete's analysis and other measures related to adequacy of surplus; (4) Brad Janoush³, who argued that the SIF's real estate investments in the Law Enforcement Complex, Parks & Recreation Headquarters and 954 West Jefferson did not provide an adequate rate of return such that no prudent investor would have entered into those transactions, (5) Ed Morse⁴, who similarly contended that the SIF's investment in the J.R. Williams Building and 954 West Jefferson provided an inadequate rate of return and that the building's lease terms favored the State to the disadvantage of the SIF; and finally (6) James R. Tomlinson⁵, who submitted analysis that the SIF's real estate investments were substantially below market rates and that the transactions' leaseback terms were unprecedented for the Boise area.

In response, the SIF engaged the expertise of: (1) Edward J. Muhl⁶, who analyzed the SIF against a peer group of state funds to determine that the SIF was within a reasonable range of appropriate solvency margins and argued that Risk Based Capital was an appropriate test of degree of distressed finances which require regulatory intervention over an insurer; (2) Anthony Grippa⁷, who testified that the SIF had retained a reasonable level of surplus from 1990-2000 and refuted the alternative management proposals of HLFPD's experts; (3) Michael Camilleri, who disputed HLFPD's experts on the surplus and dividend issues; (4) Phillip S. Fast and James A. Steele⁸, who testified that the SIF's rate of return on its real estate investments were in line with others in the Boise market; (5) Mark. W. Richey⁹ and Robert W. Smith¹⁰, who used their appraisal expertise to show the SIF received a fair market value for its investments interest in the J.R. Williams Building and 954 West Jefferson; and finally (6) Martin Igo¹¹, who testified, among other things, that the SIF's real estate transactions and leaseback terms were neither rare nor unprecedented for the Boise area. Additionally, the SIF hired Lori Peel (Peel), a paralegal with the Idaho State Attorney General's Office, to create an extensive document-tracking database for the over 6,200 documents created in the class action. The database consisted of over 44,000 pages and Peel's inter-agency bill totaled $8,288.00 for 187 hours of work at a billing rate of $44.00 per hour.

In a July 1, 2002, opinion the district court granted summary judgment in favor of the SIF on the remaining declaratory and injunctive relief claims. After denying HLFPD's motion for reconsideration, final judgment was entered in favor of the SIF on July 28, 2002. The SIF subsequently filed a memorandum of costs including attorney fees. The SIF itemized $28,301.14 in costs as a matter of right, $516,753.18 in discretionary costs (including $452,508.61 in additional expert witness fees and $8,288.00 for Ms. Peel's database creation fee), and $416, 020.50 in attorney fees. The district court granted the SIF all of its costs of right with the exception of $2,000 for Martin Igo, a portion of their requested discretionary costs and none of the requested attorney fees.

The district court found the SIF's expert witness costs over $2,000 per witness were reasonable but not "exceptional" and therefore would not be granted. The court made no mention of the discretionary cost requests related to Peel's database creation and management bill. Finally, the court rejected the SIF's request for attorney fees on the basis that Idaho Code § 41-1839(4) provided the sole remedy for cases arising out of the context of an insurance contract. A Supplemental Judgment Award of Costs was entered against HLFPD for $29,867.41 jointly and severally. SIF filed a timely appeal of the award.

II.

AN INSURED'S SUIT FOR ALLEGED BREACH OF STATUTORY DUTIES INCORPORATED INTO AN INSURANCE AGREEMENT DOES NOT CONSTITUTE A DISPUTE "ARISING UNDER POLICIES OF INSURANCE" FOR PURPOSES OF APPLYING IDAHO CODE § 41-1839(4)

A. Standard of Review

An interpretation of a statute is a question of law over which appellate courts exercise free review. Kelso v. State Ins. Fund, 134 Idaho 130, 134, 997 P.2d 591, 595 (2000) (citing State v. Hagerman Water Right Owners, 130 Idaho 727, 732, 947 P.2d 400, 405 (1997)).

B. The SIF cannot recover attorney fees under Idaho Code § 12-120(3).

The SIF argues it is entitled to attorney fees as a matter of right under Idaho Code § 12-120(3), which provides that the prevailing party of a suit involving a commercial transaction is entitled to an award of reasonable attorney fees. According to the SIF the purchase of workers' compensation insurance is a commercial transaction...