Opinion
No. 1:03-cv-0590-JDT-TAB.
October 12, 2004
Plaintiff, Chicago Insurance Company ("CIC"), brought this interpleader action and, pursuant to court order, interpleaded and deposited with the Clerk of the Court $500,000 which reflects its policy limits on a professional liability insurance policy issued to Defendant, Abstract and Title Guaranty Company, Inc. ("ATG"). The Defendants other than ATG have claims against ATG that may be covered by the policy.
I. Background
On December 16, 2003, ATG moved the court for payment of attorneys' fees and defense costs to be distributed from the interpleaded funds. Objections were filed by several Defendants. On March 31, 2004, Magistrate Judge Tim A. Baker issued his Report and Recommendation ("RR"), recommending that ATG's motion be granted and providing for a procedure by which ATG could request payment of defense costs. On April 10, 2004, Defendant Republic Bank filed a timely objection to the RR.
On July 15, 2004, ATG and Republic Bank moved the court to distribute a portion of the interpleaded funds, $175,000. Their motion represented that they had reached a settlement agreement, pursuant to which they agreed to settle pending claims, ATG agreed to move with Republic Bank to seek distribution of $175,000 and Republic Bank agreed to withdraw its objection to ATG's motion for payment of attorney's fees. Republic Bank withdrew its objection to the RR. The court then adopted the RR (dkt. no. 180). ATG and Republic Bank's motion was granted by court order on July 20, 2004 (dkt. no. 182). The next day, Chicago Title Insurance Co. ("Chicago Title"), Kenneth Herrington ("Herrington") and Nexstar Financial Corporation ("Nexstar") moved the court to reconsider its Order allowing the distribution of funds. Chicago Title represents that it has already incurred $400,000 in settlement costs and significant other costs and fees as a result of ATG's alleged negligence and anticipates incurring substantially greater costs and fees. Monroe Bank joined in the motion to reconsider, representing that its claim to the interpleaded funds may total several million dollars and it has incurred substantial fees and expenses in litigation due to ATG's alleged actions or omissions.
On July 23, 2004, ATG submitted a request for payment of defense costs in the amount of $161,744.29 from the interpleaded funds. Objections to the request have been made by Monroe Bank, Chicago Title, Herrington and Nexstar. Chicago Title represents that it already has incurred $400,000 in settlement costs and other costs and fees as a result of ATG's actions and inactions and that Monroe Bank has incurred substantial fees and expenses in litigation arising from ATG's actions and inactions.
II. Discussion
Interpleader is a suit in equity. Indianapolis Colts v. Mayor City Council of Balt., 741 F.2d 954, 957 (7th Cir. 1984). "Interpleader allows a party exposed to multiple claims on a single obligation or property to settle the controversy and satisfy his obligation in one proceeding." Commercial Union Ins. Co. v. United States, 999 F.3d 581, 583 (D.C. Cir. 1993). Interpleader allows such a party "`to put the money . . . in dispute into court, withdraw from the proceeding, and leave the claimants to litigate between themselves the ownership of the fund in court.'" Commercial Nat'l Bank of Chicago v. Demos, 18 F.3d 485, 487-88 (7th Cir. 1994) (quoting Commercial Union, 999 F.3d at 583) (internal quotation omitted).
An interpleader benefits both the interpleading party and the claimants to the interpleaded funds. This is because "[i]nstead of a haphazard looting of a fund by the first comers, a bill in the nature of interpleader, filed before numerous judgments have ripened, assures a fair share of the insurance money to each victim and conforms to the principal, `Equity is equality.'" Commercial Union, 999 F.2d at 589 (citation omitted).
A. ATG's Request for Payment of Defense Costs
ATG moved for an order allowing the payment of defense costs from the interpleaded funds. The Magistrate Judge considered the motion and objections thereto and recommended that the motion be granted, that ATG file its requests for approval of defense costs quarterly, and the other parties have an opportunity to object to said requests. The Magistrate Judge concluded that the objecting Defendants had standing to contest ATG's motion for attorneys' fees, CIC waived payment of the deductible, the inclusion of defense costs within the liability limits of the policy was not against public policy, ATG is entitled to payment of attorneys' fees and other defense costs from the interpleaded funds, and ATG is not entitled to payment of attorneys' fees or defense costs from the funds which do not fall within the policy's definition of "Claims Expenses." The court adopts these conclusions and the Magistrate Judge's reasoning as its own.
However, in the court's view, ATG has not shown that its interest in the interpleaded funds is greater than that of the other named Defendants. This issue was preserved by Republic Bank's objection to the RR, contending that the RR ignored the policy objective of protecting claimants to the funds. Republic Bank was the only claimant to make a timely objection to the RR. Learning of the anticipated withdrawal of that objection, Monroe Bank joined in Republic Bank's objection. Though Monroe Bank's joinder was untimely, it nonetheless should be allowed to rely on Republic Bank's objection despite the ultimate withdrawal of same. Monroe Bank joined in the objection prior to its withdrawal by Republic Bank, and ATG has not articulated any undue prejudice caused by Monroe Bank's late joinder in Republic Bank's objection.
The court finds that ATG offers no persuasive authority to support its claim of entitlement to payment from the interpleaded funds of defense costs as they are incurred. The court of course agrees that the policy was a contract between CIC and ATG and the duty to defend is broader than the duty to indemnify. However, the court disagrees that these facts by themselves entitle ATG to payment of defense costs from the interpleaded funds as the costs are incurred. ATG cites Employers Insurance of Wausau v. Recticel Foam Corp., 716 N.E.2d 1015, 1025 (Ind.Ct.App. 1999), and McGinniss v. Employers Reinsurance Corp., 648 F. Supp. 1263 (S.D.N.Y. 1986), as authority for the contemporaneous payment of defense costs. ATG states in its brief that "[t]he fact that the funds are now in the possession of the Court, as opposed to CIC itself, should not change this result." (Mem. Supp. Mot. Pmt. Attorneys' Fees at 7.) This seems like an important, indeed critical, point, yet it is not supported by citation to any legal authority. Neither Employers Insurance, McGinniss nor the other authorities cited in ATG's memorandum at pages four to six holds that an insured is entitled to payment of defense costs or attorneys' fees from an interpleaded fund as the costs and fees are incurred. Indeed, none of these cited authorities involve interpleader actions.
ATG also relies on In re Technical Equities Corp., 163 B.R. 350 (Bankr. N.D. Cal. 1993), in which the court ordered that payment of defense costs be made to the insured from interpleaded funds as incurred. Id. at 352, 361. ATG states that the Technical Equities court noted that the insurance policy was a contract between the insureds and the insurer and no other claimants were parties to that contract and, therefore, the payment of defense costs took priority. (Mem. Supp. Mot. Attorneys' Fees at 7.) ATG oversimplifies the case. The court's implicit conclusion that the defense costs had priority over the other claims to the interpleaded fund was based on the language of the insurance policy at issue. See Technical Equities, 163 B.R. at 361 ("Requiring payment of defense costs as incurred . . . was consistent with prevailing Ninth Circuit cases interpreting similar provisions.") (Emphasis added). Under the policy, "National Union promise[d] to pay on behalf of the insured officers and directors `against loss . . . arising from any claim or claims.'" Helfand v. Nat'l Union Fire Ins. Co., 13 Cal. Rptr. 2d 295, 299 (Cal.Ct.App. 1992). The policy defined "loss" as "any amount which the insureds are legally obligated to pay for a claim or claims made against them . . . and shall include damages, . . . costs, charges and expenses . . . incurred in the defense of actions[.]" Id. at 299 n. 3. Thus, the policy language led to the conclusion that defense costs should be paid as incurred: An insured becomes legally obligated to pay defense costs when the legal services are rendered. See Gon v. First State Ins. Co., 871 F.2d 863, 868 (9th Cir. 1989) (cited in Technical Equities, 163 B.R. at 361). Because the policy provided for payment of defense costs as the insured became legally obligated to pay them, the policy gave the payment of defense costs priority over other claims to the policy proceeds and, thus, to the interpleaded funds.
The Technical Equities decision does not contain the policy language at issue, but the Helfand decision does, which is why the court cites to that case.
The policy in this case contains no language analogous to that in the policies at issue in Technical Equities or the cases upon which that decision relied. ATG points to the language indicating that "Claims Expenses" are part of the limits of liability and that CIC has the duty to defend ATG, but these provisions do not support the conclusion that the payment of defense costs takes priority over other claims to the policy proceeds. The insuring agreement provides in relevant part that CIC "will pay on behalf of the Insured all sums which the Insured shall become legally obligated to pay as Damages for Claims. . . ." (Compl., Ex. C at 1.) The policy definition of "Damages" cannot reasonably be read to include defense costs or attorneys' fees. ( See id. at 5.) Thus, Technical Equities and the cases upon which it relies are inapposite and lend no support to ATG's claim of priority.
The court finds that ATG has not shown that the policy gives the payment of the insured's defense costs priority over payment of other claims to the policy proceeds. Thus, the court looks to principles of equity governing interpleader in order to determine whether funds should be distributed to ATG for the payment of its defense costs. Equity mandates that the interpleaded funds be divided among all claimants on a proportional basis. ATG has not shown entitlement to anything other than a proportional share of the funds.
ATG requests distribution of $161,744.29 from the funds. Objections have been made by Monroe Bank, Chicago Title, Herrington and Nexstar. While the court finds that ATG has a claim for defense costs as against the policy, it is premature at this time to order any distribution of the interpleaded funds to ATG. This is because the court has insufficient information upon which to determine whether this amount represents ATG's fair share of the interpleaded funds. None of the other claims to the interpleaded funds have been adjudicated. Thus, the court is unable to determine any claimant's fair share to the funds.
Therefore, the court SUSTAINS the objection to the Magistrate Judge's RR recommending that ATG's motion for payment of attorneys' fees be granted, and ATG's motion for payment of attorneys' fees (and other defense costs) is DENIED. Likewise, ATG's request for payment of defense costs is DENIED. Accordingly, the court's prior entry adopting the Magistrate Judge's RR (dkt. no. 180) is VACATED as indicated by the current entry. These denials are without prejudice to a later request at such time as the court has determined the rights of all claimants to the interpleaded funds.
B. Motion to Distribute $175,000 to Republic Bank
ATG and Republic Bank offer no legal authority which authorizes the court to distribute the funds based only on their request. As noted, none of the other claims to the funds has been adjudicated, and several Defendants have objected to the requested distribution. While CIC had the right under the policy to negotiate a settlement of claims against ATG and use the proceeds of the policy for settlement, that right does not justify the requested distribution. ATG and Republic Bank essentially ask that priority be given to Republic Bank's claim to the funds, but they offer no legal authority for such priority. Their settlement agreement — an agreement of only two of the many claimants to the funds — is an insufficient reason. They have not otherwise shown that Republic Bank has a greater claim to the funds than any other claimant. Principles of equity dictate that the interpleaded funds be distributed among all rightful claimants on a ratable basis.The Supreme Court recognized the unfairness which may result to claimants if another claimant beats them out in reaching a settlement with an insurance company holding a limited fund:
Were an insurance company required to await reduction of claims to judgment, the first claimant to obtain such a judgment or to negotiate a settlement might appropriate all or a disproportionate slice of the fund before his fellow claimants were able to establish their claims. The difficulties such a race to judgment pose for the insurer, and the unfairness which may result to some claimants, were among the principal evils the interpleader device was intended to remedy.State Farm Fire Cas. Co. v. Tashire, 386 U.S. 523, 533 (1967) (emphasis added). There is a very real potential that such an unfairness would come from the distribution of $175,000 to Republic Bank from the $500,000 interpleaded funds. The court is unable to determine at this time whether the $175,000 is Republic Bank's fair share of the funds. Therefore, the motion of ATG and Republic Bank for a distribution of a portion of the interpleaded funds is DENIED. This denial is without prejudice to a request for distribution following adjudication of all the claimants' rights to the interpleaded funds.
III. Conclusion
For the foregoing reasons, the objections to the Magistrate Judge's RR of March 31, 2004 are SUSTAINED and ATG's motion for attorneys' fees (dkt. no. 121) is DENIED without prejudice; ATG's and Republic Bank's motion to distribute a portion of the interpleaded funds (dkt. no. 178) is DENIED without prejudice and the court's prior order for distribution of funds to Republic Bank (dkt. no. 182) is VACATED; and ATG's request for payment from the interpleaded funds (dkt no. 187) is DENIED without prejudice.