United States: Hartford Casualty Insurance Company v. J.R. Marketing, L.L.C.

(Insurer Can Maintain a Lawsuit for Reimbursement of Unreasonable Attorneys’ Fees and Expenses Charged by Insured’s Independent Counsel)

In Hartford Cas. Ins. Co. v. J.R. Marketing, L.L.C., 61 Cal.4th 988 (August 10, 2015), the California Supreme Court, in a narrowly reasoned decision, held that Hartford Casualty Insurance Company (“Hartford”) can maintain a lawsuit for unjust enrichment and restitution against insured, J. R. Marketing, L.L.C.’s (“J.R. Marketing”) independent counsel (a.k.a.: Cumis counsel), for unreasonable fees and costs charged in connection with the defense of an underlying intellectual property lawsuit filed against J.R. Marketing. The court order allowing Hartford to file an action for recovery of unreasonable attorneys’ fees and costs was drafted by J. R. Marketing’s counsel and formed the basis for Hartford’s lawsuit for recovery of unreasonable attorneys’ fees and costs.

The parties’ dispute arose out of an underlying action filed in Marin County Superior Court against J.R. Marketing, Noble Locks and several of their employees. The Complaint alleged claims for intentional misrepresentation, breach of fiduciary duty, unfair competition, restraint of trade, defamation, interference with business relationships, mismanagement and conspiracy. Noble Locks and J.R. Marketing tendered the defense of the Marin County lawsuit to Hartford under two different policies issued by Hartford to Noble Locks for the period of July 28, 2005 to July 28, 2006 and to J.R. Marketing for the period of August 18, 2005 to August 18, 2006. The policies afforded personal and advertising injury coverage to include business related defamation and disparagement.

Subsequently, Hartford denied J.R. Marketing’s and Noble Locks’ tenders of defense of the Marin County action based on the first publication exclusion in its policies. Subsequently, counsel for Noble Locks and J.R. Marketing, Squire Sanders, filed an action for declaratory relief and bad faith against Hartford regarding its denial of defense of Noble Locks and J.R. Marketing of the Marin County action. Squire Sanders was also acting as independent counsel for these parties in the defense of the underlying Marin County action.

In July 2006, the trial court in the coverage action entered a summary adjudication order finding that Hartford had a duty to defend Noble Locks and J.R. Marketing (“insureds”) in the Marin County action effective on the date of tender. The court also held that Hartford’s reservation of rights triggered a right to Cumis counsel to represent the insureds in the underlying Marin County action. In that regard, the insureds retained Squire Sanders as Cumis counsel.

The trial court also issued an enforcement order on September 26, 2006 directing Hartford to promptly pay all defense invoices submitted to it as of August 1, 2006, and to pay all future defense costs in the Marin County action within 30 days of receipt. The order, which was drafted by Squire Sanders and adopted by the court, further stated that Hartford had breached its defense obligations by refusing to provide Cumis counsel until ordered to do so and by thereafter failing to pay counsel submitted bills in a timely fashion. The order also declared that although Squire Sanders’ bills still had to be reasonable and necessary, as a result of its breach, Hartford would be precluded from invoking the rate provisions of Section 2860. Finally, the order provided that to the extent Hartford seeks to challenge fees and costs as unreasonable or unnecessary it may do so by way of reimbursement after resolution of the Marin County action.

In October 2009, the Marin County action was resolved. The coverage action, stayed during the pendency of the Marin County action, resumed. Hartford filed a Cross-Complaint, and then a First Amended Cross-Complaint (“FAC”) against various parties, including Squire Sanders. The FAC alleged that Hartford was entitled to recoup from the cross-defendants, including Squire Sanders, a significant portion of some $15 million in defense fees and expenses, including some $13.5 million Hartford paid to Squire Sanders pursuant to the enforcement order. The FAC alleged claims for reimbursement based on unjust enrichment and restitution. In response, Squire Sanders demurred to the FAC arguing that Hartford lacked standing to assert a claim against non-insureds, including an insured’s independent counsel, for reimbursement of attorneys’ fees and costs. Rather, the insurer’s remedy was to assert a claim against the insured directly for reimbursement of such alleged unreasonable fees and costs.

On September 27, 2011, the trial court sustained, without leave to amend, the demurrer to the reimbursement and rescission causes of action in the FAC as to the “non-insured” cross-defendants, including Squire Sanders. In sustaining the demurrer as to Squire Sanders, the trial court concluded that Hartford’s right to reimbursement, if any, was from its insureds, not directly from Cumis counsel. The court subsequently entered a judgment dismissing Squire Sanders from Hartford’s cross-action.

Thereafter, Hartford appealed, contending that it was entitled to recover directly from Cumis counsel for “unreasonable” and “excessive” fees and costs. Hartford alleged that counsel, not the insureds, had been unjustly enriched by over-charging Hartford for the insureds’ defense. The Court of Appeal affirmed the dismissal of Squire Sanders from Hartford’s cross-action. Subsequently, the Supreme Court granted Hartford’s petition for review based on the narrow question of: “may an insurer seek reimbursement directly from counsel when, in satisfaction of its duty to fund its insureds’ defense in a third party action against them, the insurer paid bills submitted by the insureds’ independent counsel for the fees and costs in mounting this defense, and has done so in compliance with a court order expressly preserving the insurer’s post-litigation right to recover ‘unreasonable and unnecessary’ amounts billed by counsel.”

In reversing the Court of Appeal’s decision affirming the trial court’s entry of judgment in favor of Squire Sanders, based on the trial court’s order affording Hartford the right to pursue an action for reimbursement of unnecessary and unreasonable defense fees and costs, the Supreme Court found that Hartford could maintain an action for unjust enrichment and restitution against Squire Sanders.

As respects Hartford’s claim for restitution, the Supreme Court reasoned as follows:

An individual who has been unjustly enriched at the expense of another may be required to make restitution. (See Ghirardo v. Antonioli (1996) 14 Cal.4th 39, 51 [57 Cal. Rptr. 2d 687, 924 P.2d 996]; see also Rest.3d Restitution and Unjust Enrichment, § 1; 1 Witkin, Summary of Cal. Law (10th ed. 2005) Contracts, § 1013, p. 1102.) Where the doctrine applies, the law implies a restitutionary obligation, even if no contract between the parties itself expresses or implies such a duty. (See Buss, supra, 16 Cal.4th at p. 51.) Though this restitutionary obligation is often described as quasi-contractual, a privity of relationship between the parties is not necessarily required. (Ibid.; see CTC Real Estate Services v. Lepe (2006) 140 Cal.App.4th 856, 860–861 [44 Cal. Rptr. 3d 823].)

Restitution is not mandated merely because one person has realized a gain at another’s expense. Rather, the obligation arises when the enrichment obtained lacks any adequate legal basis and thus “cannot conscientiously be retained.” (Rest.3d Restitution and Unjust Enrichment, § 1, com. b, p. 6.)
. . .

As we concluded in Buss, if an insurer were required to absorb the costs of defending claims it clearly never agreed to defend, it is the insured who would gain a direct and unjust enrichment at the insurer’s expense. But in Buss, we did not confront the question presented here—i.e., who is “unjustly” enriched if independent counsel representing the insured, but compensated by the insurer, are allowed to retain payments that were unreasonable and unnecessary for the insureds’ defense against any claim. In the present situation, Hartford alleges that it is counsel who are the unjust beneficiaries of the insurer’s overpayments. Thus, the question in this instance is premised on the assumption that counsel’s fees were excessive and unnecessary and were not incurred for the benefit of the insured. In such a case, it is counsel who should owe restitution of the excess payments received. As applied here, accepting for the sake of argument that Squire Sanders’s bills were objectively unreasonable and unnecessary to the insured’s defense in the underlying litigation and that they were not incurred for the benefit of the insured, principles of restitution and unjust enrichment dictate that Squire Sanders should be directly responsible for reimbursing Hartford for counsel’s excessive legal bills.

We emphasize that our conclusion hinges on the particular facts and procedural history of this litigation. As noted, the trial court’s September 2006 enforcement order foreclosed Hartford from “invok[ing] the rate provisions of [s]ection 2860,” but nevertheless admonished that counsel’s bills must be “reasonable and necessary,” and, citing cases that allow reimbursement actions based on restitution principles, expressly provided that Hartford could challenge Squire Sanders’s bills in a subsequent reimbursement action. This enforcement order was upheld on appeal and is now final. We thus assume its propriety for purposes of the question presented here. Our task is to determine only whether, taking as given that Hartford is entitled to challenge the reasonableness and necessity of counsel’s fees in a reimbursement action, Hartford may seek reimbursement directly from Squire Sanders. We conclude that it may, but express no view as to what rights an insurer that breaches its defense obligations might have to seek reimbursement directly from Cumis counsel in situations other than the rather unusual one before us in this case

The Supreme Court also rejected Squire Sanders’ arguments that Hartford could not maintain causes of action for unjust enrichment and restitution due to the absence of contractual privity between Squire Sanders and Hartford. The Supreme Court noted that Hartford did not accept a contract to absorb whatever defense fees and expenses the insureds’ independent counsel might chose to bill, no matter how excessive. Therefore, Hartford’s claim against Squire Sanders for reimbursement of alleged over-charges does not contravene or alter any terms of the contract between Hartford and its insureds.

Further, the Supreme Court rejected Squire Sanders’ argument that an action for reimbursement would contravene public policy of entitling Cumis counsel to be completely independent of any requirements imposed by an insurer due to a conflict of interest entitling the insured to Cumis counsel. In rejecting this argument, the Supreme Court reasoned as follows:

This argument is not convincing. Although Cumis counsel must indeed retain the necessary independence to make reasonable choices when representing their clients, such independence is not inconsistent with an obligation of counsel to justify their fees. In numerous settings in our legal system, the attorneys representing their clients know they will later have to justify their fees to a third party—including cases brought under fee-shifting statutes, class action settlements, probate, and bankruptcy. (Chavez v. City of Los Angeles (2010) 47 Cal.4th 970, 975–976 [104 Cal. Rptr. 3d 710, 224 P.3d 41] (Chavez); Concepcion v. Amscan Holdings, Inc. (2014) 223 Cal.App.4th 1309, 1314–1315 [168 Cal. Rptr. 3d 40] (Concepcion); Estate of Trynin (1989) 49 Cal.3d 868, 873 [264 Cal. Rptr. 93, 782 P.2d 232]; 11 U.S.C. § 330(a).) Squire Sanders offers no convincing explanation for why attorney independence is possible in these settings, but not here.

Lastly, the Supreme Court rejected Squires Sanders’ argument that allowing Hartford to maintain claims for unjust enrichment and restitution would violate the prohibition against the assignment of legal malpractice claims. In that regard, the Supreme Court noted that Hartford does not seek to stand in the insureds’ shoes in order to assert a claim that counsel violated a duty to the insureds by performing deficiently on their behalf. Rather, the Supreme Court noted that Hartford is attempting to recover legal charges it paid, under court order, to counsel for their services to the insureds – fees Hartford now contends were excessive for the work that was done.

In a concurring opinion, Justice Liu, noted that “it will be Hartford’s burden to show not only that the fees it seeks to recover from Squire Sanders were not “objectively reasonable at the time they were incurred, under the circumstances then known to counsel, but also that the fees were not incurred for J.R. Marketing’s benefit. If Squire Sanders’ fees were unreasonable, but incurred primarily for J.R. Marketing’s benefit, Hartford’s reimbursement action should lie against J.R. Marketing, not Squire Sanders.”

Hence, Justice Liu noted that Hartford will have to overcome a presumption that any fees billed by Squire Sanders, -- even fees later found to be unreasonable, were incurred primarily for the benefit of J.R. Marketing. This approach would be in accord with the purposes behind the Cumis scheme as well as the Court’s understanding of the attorney-client relationship.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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