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Boardwalk Apartments, Lc v. State Auto Property and Casualty Insurance Co.

United States District Court, D. Kansas

March 2, 2015

BOARDWALK APARTMENTS, L.C., Plaintiff,
v.
STATE AUTO PROPERTY AND CASUALTY INSURANCE COMPANY, Defendant.

MEMORANDUM AND ORDER

JULIE A. ROBINSON, District Judge.

This insurance coverage action was tried to a jury, which found in favor of Plaintiff Boardwalk Apartments, L.C. ("Boardwalk") on its claims of breach of contract under Kansas law against Defendant State Auto Property and Casualty Insurance Company ("State Auto"). Before the Court is Plaintiff Boardwalk's Motion for Attorneys' Fees (Doc. 349) that is now fully briefed. The Court previously denied State Auto's motions for discovery and to strike one of the affidavits in support of Boardwalk's attorneys' rates, however, the Court allowed State Auto to file a motion for leave to supplement its evidence in opposition to the requested rates.

In conjunction with Boardwalk's fee application, the Court also considers (1) State Auto's Motion for Leave to File Affidavits in Support of its Opposition to the Motion for Attorneys' Fees and Expenses Out of Time (Doc. 414), and (2) Boardwalk's Motion for Leave to Supplement its Motion for Award of Reasonable Fees and Expenses (Doc. 411). As explained more fully below, Boardwalk's motion for attorneys' fees and expenses is granted in part and denied in part. It is denied to the extent Boardwalk seeks fees incurred in defending the Missouri litigation. It is otherwise granted with some adjustment by the Court for reasonableness, for a total award of $1, 470, 949.64 in reasonable attorneys' fees and expenses. State Auto's motion for leave to file exhibits out of time is denied. Boardwalk's motion to supplement is denied without prejudice. It may file a single supplemental fee request within 21 days of this Order. State Auto may respond to the supplemental fee request within fourteen days. No reply shall be filed.

I. Relevant Background

A complete factual background of this case has been recounted in detail in both the summary judgment Order and in the Court's Order ruling on the merits-based post-trial motions.[1] The Court incorporates by reference this factual matter to the extent it is relevant to the fee dispute here. This case arises out of a fire that occurred on October 7, 2005, that destroyed Building 1, the largest building in the Boardwalk apartment complex. On March 27, 2006, State Auto filed a declaratory judgment action against Boardwalk in the United States District Court for the Western District of Missouri (the "Missouri Litigation"), asking for a declaration that it had paid all amounts owed under its Policy under the Kansas Valued Policy Statute, K.S.A. § 40-905(a), or in the alternative, that the coinsurance provision applied to limit any replacement cost coverage. State Auto filed its lawsuit before the period of time provided for in the Policy expired for replacing or repairing the property. State Auto contended that it paid $2, 128, 194.17 to Boardwalk during the course of the claim investigation and that it was entitled to a setoff and/or credit in the amount of this advance payment against any future sum paid to Boardwalk under the Policy. After initiating the Missouri Litigation, State Auto made no further payment to Boardwalk on its business income or property loss claims.

Boardwalk filed an Answer and Counterclaim, [2] arguing that if the Kansas Valued Policy Statute applied, it was entitled to the entire "Blanket Policy" limit of $7, 394, 389.74 for the loss of Building 1. It asserted seven counterclaims: (1) property damage under the Kansas Valued Policy statute; (2) breach of contract for replacement cost coverage; (3) breach of contract-contents; (4) breach of contract-inflation; (5) breach of contract-business income loss; (6) attorneys' fees under K.S.A. § 40-908; and (7) vexatious refusal to pay.[3]

In an Order dated February 15, 2008, United States District Judge Nanette Laughrey ruled on the parties' cross motions for summary judgment.[4] The court granted summary judgment to State Auto on Boardwalk's counterclaims, "except to the extent Boardwalk requests a declaration that it has a right to replace Building 1, repair Building 4 and recover its lost business under the terms of the policy."[5] The court granted partial summary judgment to State Auto on the issue of coinsurance, holding that because the Kansas Valued Policy Statute did not apply to this claim, the coinsurance provision applied to potentially reduce Boardwalk's recovery.[6] The court also ruled that the exclusion for reimbursement for extra costs incurred to comply with modern laws and ordinances was not void against public policy.[7]

The court subsequently vacated its summary judgment ruling with respect to the third and fourth counterclaims because State Auto had not specifically sought summary judgment on those claims. The parties filed cross-motions for summary judgment on those two remaining counterclaims for replacement of lost contents, and for attorneys' fees; Boardwalk also requested that the court retain jurisdiction to enforce the judgment. As to the contents claim, the court held that Boardwalk was entitled to replacement costs for contents under the policy, however because Boardwalk has not yet replaced the contents, State Auto was not required to pay under the terms of the policy.[8]

As for attorneys' fees under K.S.A. § 40-908, and continuing jurisdiction, Judge Laughrey explained as follows:

Boardwalk erroneously believes it should be able to recover attorney's fees if it is ultimately shown that the replacement costs were more than the amount originally tendered by State Auto. However, that claim is not yet ripe. Boardwalk confuses the Court's declaration that it has a right to replace, which was the necessary converse of State Auto's declaratory judgment claim, with actually prevailing under its breach of contract claims and receiving a right to recover damages. In fact, the Court held that Boardwalk did not succeed on its breach of contract claims specifically because it had not replaced the property. Boardwalk, as it admits, has not yet replaced the damaged and destroyed property; therefore, State Auto has not yet refused to pay all of the replacement costs. There is simply no case or controversy for the Court to adjudicate, and Article III does not extend so far as to allow the Court to "retain" jurisdiction until such a case or controversy arises. Whether State Auto will pay replacement costs for property that Boardwalk has yet to replace is too speculative and indeterminate at this time.
In addition, Boardwalk requests that the Court not penalize it from bringing its compulsory counterclaims, and that it should receive its attorney's fees. First, because Boardwalk neither submitted an actual cash value claim nor actually replaced the contents, it cannot be said that there was a breach of contract claim that Boardwalk was required to bring in this declaratory judgment action. More importantly, however, contrary to Boardwalk's arguments, § 40-908 expressly recognizes that there may be situations where insureds bring suit against an insurance company and prevail, but are still not entitled to attorney's fees because the insurance company has already tendered an amount equal to, or in excess of, the judgment recovered. This is one of those situations.
If Boardwalk chooses to replace its destroyed property, and if State Auto refuses to pay all of the replacement costs (subject to Policy terms and limits), Boardwalk may bring another breach of contract action and seek attorneys fees. However, that would be a separate action. Boardwalk is not entitled to its attorney's fees for the current action, either now or in the future, because, under the determinable facts at this time, it cannot recover in excess of the amount already tendered by State Auto. This action, initiated by State Auto, was based on whether Boardwalk had a right to replace, not whether State Auto improperly refused to pay replacement costs already incurred. The Court, therefore, declines to retain jurisdiction.[9]

On April 17, 2008, the parties entered into and filed an Agreed Stipulation of Dismissal Without Prejudice. In the Stipulation, the parties state that they "desire final adjudication on the issues addressed by the Court's Orders, including any appeal, as soon as possible."[10] They further stipulated: (1) to the issues not resolved by Judge Laughrey's Orders; (2) that the actual cash value of Building 1 at the time of the loss was $1, 751, 160; (3) that any statute of limitations applicable to the remaining claims shall be tolled for six months after the court's Orders, including any appeals, become final; (4) that Boardwalk has the right to replace Building 1 under the condition that it initiates the process of replacing the destroyed building by formally seeking municipal approval thereof, and proceeds to diligently replace the building within six months of the court's Orders, including any appeals, becoming final; and (5) that failure to do so will constitute a waiver of Boardwalk's right to replacement cost under the Policy and limit its recovery to the actual cash value of Building 1, further obligating it to refund State Auto $377, 034.17 in excess monies previously paid by State Auto to Boardwalk.

The issues agreed by the parties not to have been resolved by Judge Laughrey included, if Boardwalk elected to rebuild Building 1: (1) the replacement cost of Building 1; (2) the calculation of the coinsurance penalty; and (3) the business income loss, including the period of restoration. The parties stipulated to the dismissal "without prejudice to and expressly preserving each party's right to reassert any and all remaining claims which one party may have against the other in a court of competent jurisdiction."[11]

On Boardwalk's appeal of the district court's summary judgment orders, the Eighth Circuit Court of Appeals ruled on July 14, 2009, affirming in part and reversing in part and remanding for further proceedings. The Eighth Circuit affirmed the district court's orders on all issues appealed except its ruling that the exclusion for reimbursement for extra costs incurred in order to comply with modern laws and ordinances was not void against public policy. On September 8, 2009, the district court vacated its "prior ruling regarding policy provisions limiting coverage for the cost of repair/replacement in order to comply with ordinances... [as] void as against public policy." The Missouri Litigation was finalized when Judgment was entered on September 8, 2009.

Boardwalk ultimately replaced Building 1 and this Court found as a matter of law in ruling on summary judgment that it replaced Building 1 by the deadline provided in the parties' 2008 Stipulation. Boardwalk notified State Auto that the City of Lawrence had issued Certificates of Occupancy in July 2011.

On December 11, 2011, Boardwalk initiated this action to recover its lost business income under the Policy. It filed an Amended Complaint on October 5, 2012, adding the property damage claim, as well as alternative tort claims for negligent claims handling and misrepresentation. Boardwalk contended that State Auto formally denied the replacement cost claim in a proposed pleading filed in this lawsuit. The Court ruled on several matters on cross-motions for summary judgment, narrowing the issues to be decided at trial. Beginning on June 24, 2014, this case was tried to a jury. The jury returned verdicts in favor of Boardwalk on both breach of contract claims, calculating damages for each claim and awarding consequential damages. This Court thereafter ruled on the parties' post-trial motions, ordering remittitur of the consequential damages award as an alternative to a new trial, and awarding Boardwalk prejudgment interest on the business income claim. An Amended Judgment was entered on January 16, 2015 for $4, 797, 479.20.[12] The Court has ruled that under Fed.R.Civ.P. 58(e), Boardwalk's motion for attorneys' fees has the same effect under Fed. R. App. P. 4(a)(4) as a timely motion under Rule 59.

Boardwalk now seeks its reasonable attorneys' fees incurred on the insurance claims associated with the October 7, 2005 fire, dating back to February 1, 2006 when Patrick Bello, the independent adjuster hired to adjust the claims immediately after the fire, reached an agreement with Boardwalk on the monthly business income loss. Boardwalk has submitted its timesheets under seal, as well as a comprehensive amount of evidence in support of its timekeepers' rates and the hours expended on this litigation.

The Court previously ruled on a number of issues raised by State Auto in conjunction with its response to the fee motion. The Court denied State Auto's motion for discovery of (1) the engagement letter between Boardwalk and counsel's law firm, Husch Blackwell; (2) invoices establishing that the fees were actually paid by Boardwalk; (3) unredacted and broken down billing entries; and (4) investigation into the "previously undisclosed expert opinions" of Kevin Bielawski. The Court also declined State Auto's request to strike the Bielawski affidavit as an undisclosed expert report. The Court found it unremarkable that a party moving for attorneys' fees would submit the affidavit of a law firm representative tasked with setting the firm's rates, which relied upon a third-party survey of market rates to which the firm subscribed. The Court found that State Auto should have been on notice that Boardwalk's attorneys would submit affidavits in support of its attorney fee request, but out of an abundance of caution, allowed State Auto to file no later than November 14, 2014, a motion for leave to submit rebuttal affidavit(s), or other exhibits out of time on the issue of the reasonableness of applicable rates in this case. State Auto filed its motion to supplement out of time by the November 14, 2014 deadline, attaching four attorney affidavits regarding the rates charged in the Kansas City market for insurance cases, and commenting on appropriate staffing levels for such cases.

Also in November, Boardwalk filed a motion to supplement its fee request for work expended from August 1, 2014 through October 31, 2014: (1) researching and briefing its motion for an award of prejudgment interest; (2) preparing its fee request; (3) opposing State Auto's fee-related motions filed in September 2014; and (4) preparing for oral argument on the post-trial motions.

II. Discussion

A. Entitlement to Attorneys' Fees

In Kansas, attorneys' fees cannot be granted without statutory authority or by agreement.[13] Boardwalk argues that it is entitled to its reasonable attorneys' fees incurred in obtaining the Judgment in this matter under K.S.A. §§ 40-908 and 40-256, and under the Kansas common law. State Auto responds that while Boardwalk is entitled to attorneys' fees under K.S.A. § 40-908, it is not entitled to attorneys' fees under § 40-256 or the common law. Moreover, State Auto urges that Boardwalk should not be able to recover its fees and expenses incurred in the Missouri litigation. As described in detail below, the Court finds that Boardwalk is entitled to its reasonable attorneys' fees incurred in the Kansas litigation only, pursuant to K.S.A. § 40-908. It is not entitled to fees under either K.S.A. § 40-256 or the Kansas common law.

1. K.S.A. § 40-908

Under K.S.A. § 40-908,

That in all actions... in which judgment is rendered against any insurance company on any policy given to insure any property in this state against loss by fire, ... the court in rendering such judgment shall allow the plaintiff a reasonable sum as an attorney's fee for services in such action including proceeding upon appeal to be recovered and collected as a part of the costs: Provided, however, That when a tender is made by such insurance company before the commencement of the action in which judgment is rendered and the amount recovered is not in excess of such tender no such costs shall be allowed.

Boardwalk has obtained a judgment against State Auto on its insurance policy, which insured its property and business income against loss by fire. The amount of the judgment is in excess of the amount that State Auto tendered in 2006. Therefore, under K.S.A. § 40-908, Boardwalk is entitled to its reasonable attorneys' fees "for services in such action including proceeding upon appeal."

State Auto argues that Boardwalk is not entitled to fees incurred during the Missouri litigation under this statute. It urges that such fees were incurred in a separate case where attorneys' fees have already been denied, and the Court is bound by res judicata, collateral estoppel, and the law of the case doctrine from reconsidering Judge Laughrey's decision to deny attorneys' fees in that case, which was affirmed by the Eighth Circuit on appeal.

The Court agrees with State Auto that Boardwalk is not entitled to fees incurred during the Missouri litigation under this statute. First and foremost, a plain reading of the statute makes clear that Boardwalk may recover attorneys' fees "for services in such action. "[14] The parties disagree about whether liberal or strict rules of construction apply to this attorneys' fees statute. Boardwalk urges the Court not to strictly construe the "such action" language in this statute because, "when the interpretation of a statute (not penal in nature) according to the exact and literal import of its words would defeat the manifest purpose of the legislature in its enactment, it should be construed according to its spirit and reason disregarding as far as may be necessary, the strict letter of the law."[15] Boardwalk argues that a fair reading of the statute as applied in this case, is that Boardwalk should be compensated for the "entirety of its effort' to obtain its Policy benefits in full after it was compelled to bring claims against State Auto-from 2006 to the present."

The Court does not find that § 40-908 can be fairly read as broadly as Boardwalk urges. First, Boardwalk was not compelled to bring claims against State Auto in 2006, it was compelled to bring claims in 2011. Judge Laughrey ruled that Boardwalk's counterclaims in the Missouri litigation were not compulsory and were not ripe. Second, Boardwalk points to no evidence that the legislature intended § 40-908 to encompass all actions related to the one in which judgment is ultimately rendered.[16] The Court finds that the plain meaning of the term "such action, " refers to the action in which the judgment was rendered. The only judgment in this litigation that awarded Boardwalk its replacement costs and lost business income was this action.

Moreover, the decisions rendered in the Missouri litigation preclude an award of fees for time spent on that case. In the Missouri litigation, Boardwalk sought attorneys' fees under K.S.A. § 40-908. The court denied Boardwalk's claim, finding that a determination of its right to replace did not equate to a right to recover damages, an inquiry for a separate lawsuit after Boardwalk actually replaced the property.[17] Indeed, in the Missouri litigation, the Court granted summary judgment in favor of State Auto on Boardwalk's breach of contract counterclaims, except to the extent it requested a declaration that it had a right to replace Building 1, repair Building 4, and recover its lost business income even though the time for doing so under the Policy had elapsed.[18] It later found that those counterclaims were not compulsory counterclaims because they were not yet ripe; they would only be ripe after Boardwalk replaced Building 1.

Under Kansas law, the doctrine of res judicata precludes relitigation of previously litigated claims and requires four elements: (1) same claim; (2) same parties; (3) claims that were or could have been raised; and (4) a final judgment on the merits.[19] The Court finds that res judicata applies to Boardwalk's claim for fees incurred in the Missouri litigation under K.S.A. § 40-908. Boardwalk advanced the same claim in that case-that it should be able to recover attorneys' fees for time spent during that litigation if it is ultimately determined that the replacement cost of Building 1 is more than the amount tendered by State Auto under K.S.A. § 40-908. That case also involved the same parties. Boardwalk raised the same breach of contract claims here as counterclaims in that case, and sought attorneys' fees based on the limited ruling by Judge Laughrey in its favor on those claims. There was a final judgment in that case on the issue of attorneys' fees. Unlike the issues itemized in the 2008 Stipulation, the issue of attorneys' fees was decided by Judge Laughrey and affirmed by the Court of Appeals, a decision rendered after the 2008 Stipulation.

Boardwalk argues that Judge Laughrey's decisions are not dispositive in this case for several reasons: (1) the parties agreed to "continue the dispute" in their 2008 Stipulation; (2) Judge Laughrey only ruled that the breach of contract counterclaims were not ripe; and (3) the Eighth Circuit left the door open for an award of attorneys' fees. The Court disagrees that a fair reading of the Stipulation and decisions in the Missouri litigation contemplated a retroactive award of fees in that case if it is ultimately determined that State Auto's judgment exceeds the amount tendered under K.S.A. § 40-908.

First, there is no provision in the 2008 Stipulation about Boardwalk's request for attorneys' fees. While the parties agreed that the counterclaims in that case-the breach of contract claims in this case-were not "ripe for adjudication, " as this Court has previously ruled, the Stipulation did not mandate that the parties file a second lawsuit. The Stipulation merely preserved the parties' rights to refile a case on the issues agreed to be left open. Of course, after the Stipulation was filed, Boardwalk appealed Judge Laughrey's summary judgment orders, including her order that "Boardwalk is not entitled to its attorney's fees for the current action, either now or in the future, because, under the determinable facts at this time, it cannot recover in excess of the amount already tendered by State Auto."[20] The Eighth Circuit affirmed this ruling on attorney's fees.[21]

The Court reads Judge Laughrey's Order as precluding any future award of fees incurred by Boardwalk in that case. She explained that there had not yet been a breach of contract since Boardwalk had not yet replaced the property, a requirement under the Policy. And she explained that if Boardwalk chose to replace the property, and if State Auto refused to pay, then Boardwalk could bring another lawsuit to recover its replacement cost, "and seek attorneys fees."[22] But she made clear that such an action would be separate from that lawsuit and that Boardwalk is not entitled "now or in the future" to attorneys' fees incurred in that action.[23] The Eighth Circuit ruled that "[t]he district court correctly ruled on attorney fees."[24]

Boardwalk argues that there is a policy basis for allowing fees under these circumstances-it otherwise provides a disincentive for parties to voluntarily dismiss actions out of fear that they will waive a claim of attorneys' fees. The Court does not view its ruling so broadly. Here, we have a prior case where a request for attorneys' fees was made and denied. In this subsequently-filed action, the same party requested the same fees again. The 2008 Stipulation does not speak to the issue of attorneys' fees, notwithstanding the fact that it itemizes every other issue the parties agreed had not be adjudicated. As described below, Boardwalk could have attempted to argue that it was entitled to fees in the declaratory judgment action under the Kansas common law, a question that would have been properly addressed by Judge Laughrey as the presiding judge in that action. Nor did Boardwalk claim that its attorneys' fees and costs in the Missouri action were consequential damages in this action. The Court does not find that under the unique circumstances of this case, its denial of attorneys' fees incurred during the Missouri litigation that preceded this case would disincentivize parties in the future from entering into voluntary dismissals.

Of course, as contemplated by the parties when they entered into the 2008 Stipulation, our case did present the ripe question of whether Boardwalk could recover under the insurance Policy in an amount that exceeded what State Auto had already tendered because by the time this case was filed, Boardwalk had replaced Building 1. The Court has entered judgment against State Auto on the verdict and on the Court's legal rulings, in a sum far in excess of the 2006 indemnity payments. This judgment certainly entitles Boardwalk to its reasonable attorneys' fees incurred during this action, the Kansas litigation, but to the extent Boardwalk seeks fees under K.S.A. § 40-908 incurred during the Missouri litigation, the Court denies its request.

2. K.S.A. § 40-256

Under this statute, an insured may recover attorneys' fees if the Court finds that the insurer "has refused without just cause or excuse to pay the full amount of [the] loss."[25] Whether the insurer has refused to pay without just cause or excuse depends on the facts of each case.[26] "[I]f a bona fide and reasonable factual ground for refusing to pay a claim exists, attorney fees are not awardable."[27] Moreover, denying payment "where not arbitrary, capricious, or in bad faith will not give rise to an award of attorney fees."[28]

The Court finds that State Auto advanced legitimate, albeit unsuccessful, grounds for refusing to pay the claims asserted in this action. On the property damage claim, State Auto asserted and continues to assert that coinsurance should have applied to reduce Boardwalk's recovery. The application of coinsurance in this case involved difficult and highly contentious issues. The Court was required to interpret the terms of the Policy in light of previous rulings in the Missouri litigation. The Court cannot find that it was unreasonable for State Auto to take the position that coinsurance applied, nor that its position was arbitrary, capricious, or made in bad faith.

State Auto further argued that the business income claim was properly delayed based on Boardwalk's failure to provide it with certain evidence of its investment of the indemnity payments, and because the parties disagreed on the duration of the payment, as well as the saved expenses that must be part of the business income calculation. The Court ruled on summary judgment that the interest income that was earned on the indemnity payment could offset the business income award, a determination supported by case law. The question for the jury at trial was the appropriate calculation of that award. While the Court disagreed that State Auto's method of calculating interest income was reasonable, the fact that it sought a reduction for this earned interest was not unreasonable. Moreover, given the rulings in the Missouri litigation, and the complicated 2008 Stipulation entered into between ...


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