Spirtas Company v. The Insurance Company ( 2009 )

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
___________
No. 07-1547
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Spirtas Company, doing business as *
Spirtas Wrecking Company, formerly *
known as Arnold R. Spirtas Company; *
Spirco Environmental, Inc., formerly *
known as Spirco Services, Inc.; Spirtas *
Industrial Services, Inc.; Service *
Contractors, Inc.; Abatement Services, *
Inc.; Arnold R. Spirtas; Sandra T. * Appeal from the United States
Spirtas; Joel A. Spirtas, * District Court for the Eastern
* District of Missouri.
Plaintiffs - Appellants, *
*
v. *
*
The Insurance Company of the State of *
Pennsylvania, *
*
Defendant - Appellee. *
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Submitted: December 14, 2007
Filed: February 3, 2009
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Before BYE, ARNOLD, and MELLOY, Circuit Judges.
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MELLOY, Circuit Judge.
Appellants are a collection of related individuals, demolition firms, and
environmental remediation firms. Appellee, The Insurance Company of the State of
Pennsylvania (“ICSP”), is a provider of surety bonds. ICSP required Appellants to
enter into two general indemnity agreements in favor of ICSP as a condition for ICSP
to issue a surety bond guaranteeing that one of the appellants, Spirco Environmental,
Inc. (“Spirco”), would perform a remediation contract. ICSP subsequently incurred
attorney and expert witness fees defending a claim on the bond. Eventually, ICSP
sought indemnification for these fees from Appellants in accordance with the general
indemnity agreements. Appellants brought the present declaratory judgment action
seeking a ruling that they were not liable for ICSP’s fees. In ruling on two separate
motions for summary judgment, the district court1 held that ICSP was entitled to
receive fees and expenses from Appellants and that the amount due was approximately
$800,000 plus pre- and post-judgment interest. We affirm.
I. Background
In February 1997, Spirco, a Missouri-based contractor, entered into a
remediation contract with a New Jersey property owner to conduct asbestos removal
at a New Jersey property. Spirco was to receive about $2.8 million under the contract.
In order to obtain the contract, the property owner required Spirco to post a surety
bond, and Spirco sought a bond from ICSP. As a requirement for issuing the bond,
ICSP demanded that Spirco and the other Appellants enter into two separate general
indemnity agreements obligating Appellants to pay ICSP for “all loss and expense,
including attorney fees, incurred by [ICSP] by reason of having executed any Bond.”
Appellants entered into the indemnity agreements, and ICSP issued the surety bond
at issue in the present case in the amount of $2.8 million. The remediation contract
between Spirco and the property owner contained an arbitration clause, and the
contract for the bond between ICSP and Appellants expressly incorporated the
remediation contract by reference.
1
The Honorable David D. Noce, United States Magistrate Judge for the Eastern
District of Missouri, sitting by consent of the parties in accordance with 28 U.S.C. §
636(c).
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Throughout the course of the remediation, a third party inspected and approved
Spirco’s work, and the property owner made partial payments based on the third
party’s approval. When Spirco believed all work was complete, it demanded payment
of the final $150,000 under the $2.8 million contract. The property owner had been
holding this amount as retainage. The third-party inspector recommended that the
property owner pay the final amount. The inspector also reported to the property
owner that the site was clean and that Spirco had completed asbestos removal
according to the scope of work as described in technical project specifications for the
contract.
The property owner refused to pay the final $150,000, alleging that Spirco had
not properly performed the remediation. The property owner asserted that Spirco
failed to remove all asbestos and caused property damage by spreading asbestos to
previously uncontaminated areas by using power-washing equipment without proper
containment. Spirco disputed these allegations based on the third-party inspector’s
approval of Spirco’s work. Spirco further asserted that any asbestos found by the
property owner was not within the scope of Spirco’s work, but rather, was asbestos
other workers had dislodged after Spirco left the site. Spirco asserted specifically that
the asbestos came from areas of the building that were not exposed during Spirco’s
work.
In July 1998, the property owner submitted a bond claim to ICSP demanding
that ICSP pay for additional remediation services allegedly caused by Spirco’s
contamination of the site. ICSP refused to pay the claim.
In September 1998, Spirco initiated arbitration with the property owner in an
attempt to obtain the final $150,000 contract amount. The property owner asserted
a counterclaim against Spirco, seeking over $4 million based on lost rental income and
additional remediation costs. The property owner sought to add ICSP to the
arbitration, asserting a claim for over $4 million in compensatory damages. The
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property owner also sought over $4 million in punitive damages, alleging a bad faith
failure to pay the property owner’s earlier bond claim.
Facing a claim that appeared to exceed Spirco’s ability to pay and that, in fact,
exceeded the bond limit, ICSP eventually elected to participate in the arbitration by
hiring outside counsel and retaining a technical expert. Initially, ICSP resisted
participating in the arbitration and argued the bond contained no provision requiring
arbitration. The property owner, however, threatened to seek a federal court order
compelling arbitration. The property owner noted in a letter to ICSP that the bond
incorporated the remediation contract by reference and that the arbitration clause,
therefore, applied to ICSP as held in Hoffman v. Deposit Co. of Maryland, 734 F.
Supp. 192 (D.N.J. 1990). Eventually the property owner agreed to drop the claim for
punitive damages and reduce its total demand to $2.8 million, the amount of the bond
limits, plus interest, in exchange for ICSP’s agreement to participate in the arbitration.
ICSP’s counsel and expert attended the arbitration, which entailed forty-four
days of proceedings spread over a period of months. ICSP’s counsel and expert were
present for most of these days, and ICSP’s counsel participated actively on many days,
examining and cross examining Spirco’s witnesses and the property owner’s
witnesses. Although ICSP held several suretyship defenses,2 the primary focus of the
arbitration was not on ICSP’s suretyship defenses until after the thirty-seventh day of
proceedings.
Spirco was represented by its own counsel. During the course of arbitration,
counsel for Spirco sent a letter to ICSP questioning ICSP’s motives for participating
in the arbitration and complaining about ICSP’s participation. In the same letter,
2
For example, ICSP argued overpayment by the property owner in that the
property owner claimed to have incurred substantial additional remediation costs
without consulting ICSP as required under the bond. ICSP also argued that the third-
party inspector had improperly certified certain aspects of Spirco’s work.
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however, counsel for Spirco complained that ICSP was not mounting a sufficiently
vigorous defense, suggested strategies for ICSP to employ, and demanded that ICSP
mount an aggressive defense. ICSP responded by letter, offering to let Spirco assume
sole defense of all claims contingent on Appellants posting the $2.8 million bond limit
as collateral to ensure payment of the indemnification obligation in the event
Appellants, or Appellants and ICSP, were to lose in the arbitration. Appellants did not
accept ICSP’s offer to let them assume the entire defense.
The parties eventually submitted the case to the arbitrators who found in favor
of Spirco and ICSP and against the property owner. The arbitrators cited two
rationales for finding in favor of ICSP. First, the arbitrators held, “the finding on the
claim against Spirco is dispositive against [ICSP].” Second, the arbitrators found that
the property owner had improperly contracted with a replacement remediation firm
and commenced additional work without giving ICSP adequate opportunity to respond
to the claim, as required under the bond. Accordingly, ICSP succeeded on its shared
defense with Spirco as well as on a separate, suretyship defense. In reaching these
ultimate conclusions, the arbitrators found that the property owner had permitted
contractors working on ductwork, windows, and other items to enter the building after
Spirco had left. The arbitrators found further that these contractors had exposed and
spread previously unexposed asbestos that was not within the scope of work of
Spirco’s project.
Approximately two years after the arbitrators entered their award, ICSP
submitted a claim to Appellants on the general indemnity agreements seeking
reimbursement for approximately $800,000 in fees that ICSP had spent on the retained
counsel and expert. Appellants refused to pay and eventually brought the present
declaratory judgment action.3 After discovery, the parties filed cross motions for
3
In addition, Spirco submitted a claim to its general casualty pollution insurer
seeking a defense and coverage as to ICSP’s claim for fees. The insurer provided a
defense under a reservation of rights. The insurance claim led to separate litigation
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summary judgment, and the district court interpreted the general indemnity
agreements. The district court found that the general indemnity agreements required
Appellants to pay ICSP’s attorney and expert witness fees. Regarding the amount of
fees owed to ICSP, the district court found that the indemnity agreements required
ICSP to provide an itemized statement from an officer of ICSP swearing to the
amount of fees and that the sworn statement would serve as prima facie evidence of
the fee amount.4 ICSP had not provided such a statement, so the district court denied
summary judgment as to the determination of the fee amount. Subsequently, ICSP
provided a statement as required by the indemnity agreements (along with other
supporting documents beyond what the indemnity agreements required). On a
renewed motion for summary judgment, the district court awarded ICSP the full
amount of its fees plus interest. The district court rejected arguments by Appellants
that ICSP incurred the fees in bad faith, that the fees were unreasonable, and that the
delay in submitting the claim for fees caused prejudice and precluded payment.
On appeal, Appellants argue they should not be held liable for any of ICSP’s
attorney or expert witness fees. Appellants argue in the alternative that ICSP’s
attorney and expert witness fees were not reasonable, and therefore, even if we affirm
the district court’s judgment as to liability, a remittur or a remand for reconsideration
of the fee award is necessary. Appellants no longer argue that ICSP incurred the
attorney and expert witness fees in bad faith or that ICSP’s delay in asserting the claim
for indemnification resulted in prejudice that should preclude Appellants’ duty to pay
under the general indemnity agreements.
between Spirco and its insurer. That litigation resulted in an award against the insurer
and a separate appeal that we address in a companion opinion also filed today.
4
The indemnity agreements provided: “an itemized statement of loss and
expense incurred by [ICSP], sworn to by an officer of [ICSP], shall be prima facie
evidence of the fact and extent of liability of [Appellants] to [ICSP] in any claim or
suit by [ICSP] against [Appellants].”
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II. Discussion
A. Liability
Regarding the question of liability, Appellants argue that the remediation
contract, as incorporated within the surety bond, required express consent from all
Appellants before ICSP could join the arbitration or before the property owner could
add ICSP and claims against ICSP to the arbitration. Based on this argument,
Appellants assert that ICSP was not a proper party to the arbitration and that we
should not view ICSP as having incurred attorney and expert witness fees “by reason
of having executed any Bond.” Appellants also argue that ICSP voluntarily
participated in the arbitration and that this voluntary act broke the chain of causation
connecting the fees to the execution of the bond.
The arguments surrounding Appellants’ consent to ICSP’s participation and the
voluntariness of ICSP’s participation in the arbitration are red herrings. As an initial
matter, it is not entirely clear that ICSP failed to obtain adequate consent because
counsel for Spirco represented to ICSP that there was consent for ICSP’s
participation. Regardless, the questions before us are not whether we should enforce
an arbitration award or whether there was some infirmity with the underlying arbitral
process. If those were the questions we faced, it might be necessary to address in
detail the issue of Appellants’ consent for including ICSP and claims against ICSP in
the arbitration. The questions we face are: (1) whether ICSP incurred its attorney and
expert witness fees “by reason of having executed any bond;” and (2) whether, based
on the methods of proof set forth in the indemnity agreements and the Federal Rules
of Civil Procedure, summary judgment was appropriate as to the amount of those fees.
We hold that the contract language “by reason of having executed any bond”
is unambiguous and sets forth a simple cause-in-fact or “but-for” causation test. See,
e.g., Pacific Ins. Co. v. Eaton Vance Mgmt., 369 F.3d 584, 589 (1st Cir. 2004) (“[W]e
consider the language unambiguous: ‘by reason of’ means ‘because of,’ Black’s Law
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Dictionary 201 (6th ed. 1990), and thus necessitates an analysis at least approximating
a ‘but-for’ causation test.”). Appellants cite Pacific for the proposition that this “but-
for” causation test is strictly limiting and permits a finding of causation only if
execution of the bond was the proximate cause or immediately preceding cause of the
liability. Pacific, however, does not support Appellants’ position. In fact, we find no
authority interpreting the straightforward, “but-for” causation test in the limited or
“proximate cause” manner Appellants advocate.
Rather, we agree with the district court that the “but-for” causation test is
sufficiently broad to demonstrate that ICSP’s participation in the arbitration would not
have occurred had ICSP not executed the bond. Appellants presented no evidence
tending to suggest any other reason or explanation for ICSP’s participation in the
arbitration. Further, the potential liability ICSP faced could not have existed without
ICSP’s execution of the bond with the property owner as obligee.
To the extent Appellants argue ICSP’s voluntary participation somehow broke
the chain of but-for causation, we disagree. The voluntary or compulsory manner in
which ICSP joined the arbitration, like the strategies ICSP employed during the
arbitration and ICSP’s choice of attorney and expert, may bear upon the
reasonableness of ICSP’s fees. None of the circumstances surrounding these issues,
however, change the fact that ICSP would not have been involved in the arbitration
but for the execution of the surety bond with the property owner as obligee.
Further, ICSP entered the arbitration only after the obligee under the bond, the
property owner, made a claim on the bond, raised claims for compensatory and
punitive damages against ICSP, and threatened to seek a federal order compelling
arbitration. ICSP relied on Hoffman v. Fidelity & Deposit Co. of Maryland, 734 F.
Supp. 192 (D.N.J. 1990), in determining that the property owner could compel
arbitration based on the arbitration clause of the remediation contract as incorporated
into the bond. Appellants now argue that a subsequent case debunks this legal theory
and demonstrates that ICSP could not have been required to arbitrate. See Gloucester
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City Bd. of Educ. v. Am. Arb. Ass’n, 755 A.2d 1256 (N.J. Super. Ct. App. Div. 2000).
Gloucester is of no consequence in the present case, however, because ICSP was
entitled to rely upon Hoffman, which, at the time, appeared to be a correct statement
of law. Further, even if we were to assume ICSP had not been entitled to rely upon
Hoffman, it still is by no means clear that it would be appropriate to characterize
ICSP’s participation in the arbitration as voluntary. At a minimum, ICSP faced the
potential expense of having to defend a motion to compel. If ICSP had succeeded in
that effort, ICSP faced the risk of having to defend a substantive battle in the courts
rather than in the arbitral forum. At any rate, it matters not whether the bond and
contract required Appellants’ consent for ICSP’s participation, whether the property
owner successfully could have compelled ICSP to arbitrate, or whether some of
ICSP’s and Appellants’ positions were aligned in the arbitration. Under the “but-for”
causation test at issue today, it is clear that ICSP would not have participated in the
arbitration but for the execution of the bond.
B. Reasonableness of Fees
In the alternative, Appellants argue ICSP’s fees were unreasonable because
Appellants’ and ICSP’s positions were largely aligned throughout the arbitration such
that ICSP’s attorney and expert were redundant or even harmful to the arbitration
process. Appellants also argue that even if it had been proper for ICSP to participate
in the arbitration, ICSP’s attorney and expert witness simply spent an excessive
amount of time on the case, making their fees unreasonable.
In assessing reasonableness, we first note that the indemnity agreement itself
does not contain any language limiting the Appellants’ obligation to pay ICSP’s fees
to only those fees that were reasonable. Our court and Missouri’s courts, however,
generally will infer a reasonableness requirement in all contractual fee provisions as
a matter of public policy. See, e.g., Farmland Indus. v. Frazier-Parrott Commodities,
111 F.3d 588, 591–92 (8th Cir. 1997) (applying Missouri law and affirming a district
court’s grant of attorney fees under a contractual fee-shifting provision where the cited
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contractual provision did not contain a reasonableness limitation and where the district
court had “granted attorneys’ fees that fell within a range that it considered reasonable
and equitable”); Kaminsky v. Kaminsky, 29 S.W.3d 388, 390 (Mo. Ct. App. 2000).
Accordingly, Appellants are correct to argue that ICSP’s fees must be limited to those
that are reasonable.
Appellants argue that questions of fact abound as to the reasonableness and
propriety of ICSP’s attorney and expert witness fees and that summary judgment was,
therefore, inappropriate. We have repeatedly stated, however, that district courts
rather than juries are the authorities as to the reasonableness of attorney fees. As such,
fee award determinations generally do not involve jury questions, and we review
district courts’ fee awards under the abuse of discretion standard. See Fish v. St.
Cloud State Univ., 295 F.3d 849, 852 (8th Cir. 2002) (“The district court was in the
best position to assess the work done by counsel.”); Webner v. Titan Distribution,
Inc., 267 F.3d 828, 383 (8th Cir. 2001); State ex rel. Chase Resorts v. Campbell, 913
S.W.2d 832, 835 (Mo. Ct. App. 1995) (granting a writ of prohibition to preclude trial
court from holding jury trial on issue of reasonableness of attorney fees as it was for
the judge to determine the reasonableness of fees incurred as a matter of law); Am.
Bank of Princeton v. Stiles, 731 S.W.2d 332, 339 (Mo. Ct. App. 1987) (“[T]he trial
court is an expert in the reasonableness of attorneys’ fees, and its judgment as to an
award of such fees shall only be modified upon a finding of a manifest abuse of
discretion.”). This is true whether the fee award occurs in the context of a grant of
summary judgment or following a jury trial. See R.D. Offutt Co. v. Lexington Ins.
Co., 494 F.3d 668, 675 (8th Cir. 2007) (applying abuse of discretion standard to
review award of attorney fees to insured following grant of summary judgment against
insurer); Am. Bank of Princeton, 731 S.W.2d at 339 (“[T]he reasonableness of
attorneys’ fees is a matter of law to be decided by the court. Therefore, even if
defendants challenge the reasonableness of the fee by affidavit, such does not raise a
genuine issue of fact.” (citation omitted)).
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Further, the arguments on appeal in this case show that the present dispute as
to fees is not factual in nature. Appellants do not take issue with ICSP’s factual
assertion that ICSP’s attorney and expert witness expended the hours as claimed or
that ICSP paid these fees as they were incurred. Rather, Appellants attack the
judgment exercised by ICSP, its attorney, and its expert witness in electing to
participate so extensively in the arbitration. These arguments involve only the issue
we typically entrust to the discretion of the district courts, namely, assessment of the
professional judgment exercised in the decision to spend attorney time.
Regarding the burden of proof, the indemnity agreements in the present case
explicitly set forth a method for proving attorney fees. The agreements contain a
burden shifting framework that permitted ICSP to use an itemized sworn statement
from an officer of the company as prima facie evidence of its fees. Having submitted
such a statement (and having supported that statement with additional documentation
regarding the fees), the burden shifted to Appellants to rebut the prima facie showing.
In the district court, then, Appellants bore the burden of disproving ICSP’s sworn
statement and proving the requested fees were unreasonable. Because Appellants do
not challenge the factual basis of the fee request, all that remains is the assessment of
reasonableness.
Appellants’ attacks on the reasonableness of ICSP’s fees fall into two
categories. First, Appellants argue it was unreasonable for ICSP to participate in the
arbitration on such a large scale. We characterize this challenge as a general challenge
to ICSP’s participation and general strategy. Second, Appellants attack the fees on
a piecemeal, item-by-item basis.
Regarding the general arguments, Appellants assert ICSP’s participation was
redundant because Appellants’ and ICSP’s positions were aligned, Appellants were
represented by counsel, and ICSP and its attorney should not have employed a
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technical expert.5 Appellants’ assertion as to the alignment of positions, however, is
only partially correct because the parties’ positions in arbitration were aligned only
in part. ICSP held separate suretyship defenses. For example, ICSP claimed
overpayment by the property owner because the property owner incurred substantial
additional remediation expenses without consulting ICSP. This defense provided one
of the two alternative bases for the arbitrators’ ruling in ICSP’s favor. In addition,
some of ICSP’s arguments in arbitration depended on allegations contrary to
Appellants’ interests. For example, ICSP alleged the third-party inspector had
improperly approved certain work that Spirco performed.
Further, the district court was entitled to view ICSP’s fees as reasonable
because ICSP faced substantial liability relative to the fees expended (the property
owner’s claim was in excess of the bond limits). See Hensley v. Eckerhart, 461 U.S.
424, 430 n. 3 & 434 n.9 (1983) (noting that factors, including “the amount involved
and the results obtained” may be considered in assessing the reasonableness of a fee).
Additionally, the district court was entitled to view ICSP’s extensive participation as
reasonable in light of uncertainty as to the Appellant-indemnitors’ solvency.6 This
uncertainty meant ICSP faced potential liability for the full amount of the bond limits
without a meaningful guarantee of indemnification. Appellants’ refusal to post the
bond limits and refusal to bear the entire defense demonstrate this point. Also,
because Appellants were backed by ICSP’s surety obligations and because ICSP had
negotiated the claim down to the bond limits prior to incuring fees, Appellants were
not necessarily as motivated as ICSP to defend the underlying claims. Against this
5
We note that between 1/4 and 1/3 of the total fee award represents fees ICSP
paid to the technical expert.
6
One of the named Appellants, Joel Spirtas, declared bankruptcy and argued
below that he was prejudiced by ICSP’s failure to raise its indemnity claim in a more
timely fashion because he failed to list the claim as a liability in bankruptcy and
therefore did not obtain a bankruptcy discharge of the claim.
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backdrop, the district court was entitled to determine that ICSP acted reasonably when
it elected to vigorously defend itself with a substantial investment of attorney time.
Regarding Appellants’ general challenges to the extensive use of a technical
expert, ICSP correctly argues that it was the only party to the arbitration not actually
present and involved in the underlying remediation project. As such, it was not
unreasonable for ICSP’s attorney to employ the assistance of a technical expert to
assist in the arbitration. Further, Appellants did not present their own technical expert,
and it was reasonable for the district court to view ICSP’s expert as a necessary and
integral part of the defense for Appellants and ICSP.
Finally, to the extent Appellants argue it generally was unreasonable for ICSP
to participate in the arbitration rather than waiting for a court order compelling
arbitration or addressing the bond claims in a judicial forum, the district court was free
to reject this argument. As already noted, ICSP joined the arbitration under threat of
compulsion and relied on then-current authority in assessing the property owner’s
likely ability to secure a court order compelling arbitration. Even if ICSP had been
incorrect in its view as to the property owner’s ability to compel arbitration, the
property owner had threatened to do so, and it was not unreasonable for ICSP to enter
the arbitration to avoid the expense of defending a motion to compel or the expense
of litigating the merits of the bond claims in federal court.
Regarding the specific or piecemeal attacks that Appellants direct towards
individual examples of participation by ICSP’s attorney and expert witness, we are
unwilling to disturb the judgment of the district court. Both sides point to comments
in the arbitration record where the arbitrators chided attorneys for all parties for taking
too long in their questioning. The arbitrators, however, did not direct their comments
solely at ICSP’s attorney or at Spirco’s attorney, but at both. The comments appear
to express a general frustration with the contentiousness and protracted nature of the
arbitration rather than complaints directed at ICSP’s attorney for taking unnecessary,
redundant, or unreasonable actions during arbitration. In this context, we cannot say
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the district court abused its discretion by discounting the comments cited by
Appellants.
Importantly, as noted above, our standard of review is only for abuse of
discretion, and the bonding contract clearly placed the burden on Appellants to
disprove ICSP’s prima facie showing as to fees. We do not believe that district court
abused its considerable discretion in this case by holding that Appellant’s failed to
prove ICSP’s fees were unreasonable.
We affirm the judgment of the district court.
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