Ideal Electronic Sec. Co., Inc. v. International Fidelity Ins. Co.

• Decision Date: 07 November 1997
• Docket Number: Nos. 96-7169,96-7186,s. 96-7169
• Citation: 129 F.3d 143
• Parties: , 39 Fed.R.Serv.3d 477, 42 Cont.Cas.Fed. (CCH) P 77,224 IDEAL ELECTRONIC SECURITY CO., INC., et al., Appellants/Cross-Appellees, v. INTERNATIONAL FIDELITY INSURANCE COMPANY, Appellee/Cross-Appellant.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 143

129 F.3d 143

327 U.S.App.D.C. 60, 39 Fed.R.Serv.3d 477,

42 Cont.Cas.Fed. (CCH) P 77,224

IDEAL ELECTRONIC SECURITY CO., INC., et al Appellants/Cross-Appellees, v. INTERNATIONAL FIDELITY INSURANCE COMPANY, Appellee/Cross-Appellant.

Nos. 96-7169, 96-7186.

United States Court of Appeals District of Columbia Circuit.

Argued Sept. 3, 1997.

Decided Nov. 7, 1997.

Appeals from the United States District Court for the District of Columbia (No. 94cv00385).

John W. Karr, Washington, DC, argued the cause and filed the briefs for appellants/cross-appellees.

Neil L. Henrichsen, Washington, DC, argued the cause and filed the briefs for appellee/cross-appellant.

Before: EDWARDS, Chief Judge, SENTELLE and RANDOLPH, Circuit Judges.

Opinion for the Court filed by Chief Judge HARRY T. EDWARDS. HARRY T. EDWARDS, Chief Judge:

This case involves a claim under an indemnity agreement by a surety company, appellee International Fidelity Insurance Co. ("IFIC" or "surety"), against the holders of a payment bond, appellants Ideal Electronic Security Co., Inc., et al. ("Ideal"). Upon securing the payment bond, Ideal agreed to indemnify IFIC against any losses or expenses, including attorney's fees incurred to defend against claims arising under the bond. In this case, IFIC seeks recovery of attorney's fees incurred by the surety in defending a claim brought by Modern Electric, Inc. ("Modern") against appellants for an alleged underpayment on subcontracted work. The appellants claim (1) that because the surety failed to justify the hiring of counsel, no attorney's fees should be awarded and (2) that even if a claim for attorney's fees is warranted, the surety failed to demonstrate that the amount sought in this case is reasonable.

The District Court found that IFIC is entitled to fees for its defense of appellants on the claim brought by Modern; however, because IFIC asserted that certain billing statements supporting the claim for fees were protected by the attorney-client privilege (and redacted portions of some billing statements), the District Court reduced the award of fees for the amounts covered by the purportedly privileged materials. Ideal contends that it was entitled to review all billing statements, so that it would be in a position to show that the surety's arrangements with counsel were both unnecessary and unreasonable. The surety cross-appeals, claiming that the District Court erred in reducing the award of attorney's fees by the amounts covered by privileged documents.

The contract claims arising under the disputed indemnity agreement are governed by the law of the District of Columbia. Under D.C. law, once a party's contractual entitlement to attorney's fees has been ascertained, it is within the trial court's sound discretion to determine a reasonable fee award. In the instant case, we find that the District Court was correct in holding that the surety was entitled to claim attorney's fees, but abused its discretion in assessing the amount due to IFIC.

Appellants are entitled to full discovery of information underlying the claim for fees; only after obtaining such discovery will the appellants be in a position to assess the reasonableness of IFIC's position and then present to the court any legitimate challenges to the surety's claim. The reasonableness of any portion of the billing statements can only be determined by examining all billing statements pertaining to the legal services provided as a whole. Appellee effectively waived its attorney-client privilege with regard to all communications going to the reasonableness of the fees claimed when it placed the purportedly privileged matters in dispute by claiming indemnification for the attorney's fees. Accordingly, we remand the case to allow appellants an opportunity to challenge the reasonableness of IFIC's claim for fees following full disclosure of the redacted portions of the billing statements. If IFIC declines to disclose the redacted portions of the billing statements, then the entire claim for fees must be denied by the District Court.

I. BACKGROUND

The Miller Act requires payment bonding to assure payments to subcontractors on construction work undertaken for the United States. 40 U.S.C. §§ 270a-270f (1994). Ideal and its principals, Cora Williams and Kenneth Rogers, entered into a contract with the United States to replace or repair electrical transformers at the Walter Reed Army Medical Center in Washington, D.C. Since the contract was of a type governed by the Miller Act, Ideal was required to obtain a payment bond to secure the contract. IFIC provided bonding for the base year, July 29, 1991 to July 28, 1992. In order to induce IFIC to provide the payment bond, Ideal entered into an indemnity agreement in which it agreed, under certain conditions, to indemnify IFIC against any losses or expenses arising from the payment bond, including attorney's fees incurred in defending against claims arising under the bond and costs incurred in enforcing the terms of the indemnity agreement itself. See Agreements of Indemnity at p 2 reprinted in Appendix of Appellee/Cross-Appellant at 21, 25 (hereinafter "Indemnity Agreement").

This litigation commenced when a subcontractor on the Walter Reed project, Modern, sued both Ideal and IFIC, claiming that Ideal had underpaid Modern for subcontracted work. Modern brought this suit in the United States District Court for the District of Maryland, invoking that court's jurisdiction under the Miller Act, 40 U.S.C. § 270b, which provides a federal cause of action for persons supplying labor and materials on federal construction projects to collect payment under the bonds required by 40 U.S.C. § 270a. The suit was subsequently transferred to the District Court for the District of Columbia.

IFIC formally tendered its defense to Ideal, upon the condition that Ideal first deposit with IFIC cash or collateral in the amount of $300,000 to cover its potential liability as surety, including its attorney's fees. See Memorandum Opinion at 4-5 (May 3, 1996) (hereinafter "Mem. Op."). Ideal declined to provide the requested reserve payment; as a consequence, IFIC mounted its own defense against Modern's claims. Id. at 5. After discovery proceedings and two hearings, the District Court granted IFIC's motion for summary judgment dismissing Modern's claims against IFIC. Id. at 5-6.

IFIC asserted the indemnification claim at issue in this appeal in a cross-claim against Ideal and a third-party complaint against Ideal's principals. On October 13, 1995, the District Court denied a motion by IFIC for summary judgment on its indemnification claim. A jury trial was held on April 25 and 26, 1996. At the conclusion of the trial, the District Court granted IFIC's motion for judgment as a matter of law pursuant to FED. R. CIV. P. 50(a)(1). See Mem. Op.; Order Awarding Attorney's Fees (July 1, 1996). In supporting its claim for attorney's fees, IFIC submitted billing statements from counsel. However, over the objection of Ideal, IFIC redacted portions of the billing statements, contending that the undisclosed materials were protected by the attorney-client privilege. The District Court resolved this dispute by awarding fees only for the unredacted portions of the billing statements. Mem. Op. at 11-12. Subsequently, IFIC filed a motion for additional fees incurred in prosecuting the indemnity action. The District Court summarily denied this motion, stating simply that "the judgment already awarded to IFIC is reasonable compensation for legal work that was necessary to protect IFIC's position." Order Denying Additional Attorney's Fees (July 18, 1996).

Ideal appeals the District Court's judgment as a matter of law on the question of liability and on the reasonableness of the amount of fees awarded. IFIC cross-appeals the District Court's denial of fees based on redacted billing statements and also the court's denial of fees incurred in prosecuting the indemnity action.

II. ANALYSIS

A. Choice of Law

Before turning to the merits of the parties' appeals, we must first determine which law governs the case. This appeal involves a state contract claim which is in federal court under supplemental jurisdiction. The Miller Act provides a federal cause of action for subcontractors and suppliers on construction projects governed by the Act to collect on payment bonds required by the Act. 40 U.S.C. § 270b (1994); F.D. Rich Co. v. United States ex rel. Indus. Lumber Co., 417 U.S. 116, 127, 94 S.Ct. 2157, 2164, 40 L.Ed.2d 703 (1974). Accordingly, Modern's suit against Ideal and IFIC was properly brought in federal district court under the court's federal question jurisdiction. Although contract claims between the various parties to a case brought under the Miller Act may be heard by the federal court hearing the Miller Act claim, the appended contract claims are governed by state, not federal, law. See, e.g., United States for Use of Briggs v. Grubb, 358 F.2d 508, 515 (9th Cir.1966) (local law rather than federal law is applicable to cross-complaint under a Miller Act bond); Western Casualty & Surety Co. v. Biggs, 217 F.2d 163, 165 (7th Cir.1954) (suit by surety against general contractors as principals on payment bond was not an action under the Miller Act, since the Act provides only for an action on the payment bond by one who has furnished labor and material and has not been paid).

When deciding state-law claims under diversity or supplemental jurisdiction, federal courts apply the choice-of-law rules of the jurisdiction in which they sit. See Lee v. Flintkote Co., 593 F.2d 1275, 1278-79 n. 14 (D.C.Cir.1979). The District of Columbia has adopted the Restatement (Second) of Conflict of Laws § 188. Finance America Corp. v. Moyler, 494 A.2d 926, 929 & n. 7 (D.C.1985). Where, as here, the parties to a contract have not specified which law governs their agreement, the Restatement approach requires the court to weigh various...