Cincinnati Insurance v. Dynamic Development Group, LLC

Citations: 336 F. Supp. 2d 552; 2004 U.S. Dist. LEXIS 19181Docket: 1:00CV00280, 1:00CV00281, 1:00CV00282, 1:00CV00283 and 1:00CV00284

Court: District Court, M.D. North Carolina; September 17, 2004; Federal District Court

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Cincinnati Insurance Company and its affiliates are plaintiffs in a legal action against Dynamic Development Group, LLC, and BB&T Bank of South Carolina, with various post-trial motions under consideration by the United States District Court for the Middle District of North Carolina. Cincinnati has filed four motions: objections to BB&T's bill of costs, a request to redesignate objections and extend time, a motion for attorney fees under Rule 54(d)(2), and a motion for attorney fees pursuant to Rule 11. Additionally, Cincinnati submitted a bill of costs against Dynamic Development Group (DDG).

DDG responded with two motions: seeking a new trial or judgment as a matter of law, and requesting the disallowance of Cincinnati's bill of costs. BB&T has filed a motion to strike Cincinnati’s objections to its bill of costs and requested the taxation of costs against Cincinnati.

The case originates from a large construction project involving allegedly fraudulent Performance and Payment Bonds and a Dual Obligee Rider. Cincinnati had previously entered into an Agency Agreement with Massey & Associates, granting them authority to act as sales agents. In 1995, Cincinnati provided a Letter of Authority to Massey, allowing him to execute surety bonds on its behalf, supported by a “bond kit” containing necessary documentation and seals, which designated Massey and his agency as attorneys-in-fact for executing bonds within a specified limit of $1,600,000.

Massey and authorized employees of the Massey Agency lacked the authority to use Powers of Attorney (POAs) for executing Cincinnati contract bonds, including Performance and Payment bonds, without prior written approval from Cincinnati. Cincinnati terminated its Agency Agreement with Massey on October 4, 1996, revoking Massey's ability to execute new bonds. Following this, on October 7, 1996, Cincinnati's Senior Vice President instructed Massey to destroy all Cincinnati POAs and return all bond execution materials. Two days later, Massey signed a Limited Agency Agreement confirming the termination and stating that he would only act as a limited agent for servicing pre-termination policies. 

Cincinnati did not notify the public or the North Carolina Department of Insurance about the termination or the Limited Agency Agreement, although it contended that parties involved in a loan closing for the Sleep Inn Motel did not verify Massey's affiliation with Cincinnati. In January 1997, Massey represented to Cincinnati that he had destroyed all powers of attorney, despite Cincinnati's concerns that he might still possess bond materials. A field representative sent to retrieve these materials reported feeling unsafe due to potential threats from Massey's spouse, leading to no further attempts to collect the items.

In January 1999, Dynamic Development Group, LLC engaged Centech Building Corporation for a $2.6 million construction project, with financing from BB&T. Centech, previously reliant on the Massey Agency for bonding, faced difficulties obtaining bonds from Travelers Insurance due to financial issues. Consequently, to facilitate the project and recover $30,000 owed to the Massey Agency, Massey decided to create fraudulent bonds and a Dual Obligee Rider, falsely indicating that Centech met contractual requirements.

Massey manufactured fraudulent bonds by copying existing Cincinnati performance and payment bonds, modifying them by whiting out blanks, and inserting new information. Lacking a standard dual-obligee rider form, he manually added "Dual Obligee Rider" to a Cincinnati indemnity-type performance bond. The forged bonds were missing an original agent's signature, proper seals, and a power of attorney. Cincinnati became aware of the fraudulent bonds when subcontractors and vendors began inquiring about payment bond claims for the Sleep Inn Project, leading to a search of their files which revealed no records of such bonds issued for the project or Centech. Further investigation indicated that Massey had issued fraudulent bonds totaling approximately $9 million.

On March 21, 2000, Cincinnati filed a Complaint for Declaratory Judgment against DDG and other parties, seeking to declare the bond void. An amended complaint on June 6, 2002, added claims against BB&T, alleging negligence in loan closing transactions related to the bonds and seeking indemnification for amounts Cincinnati might have to pay due to BB&T's breach of duty. In response, DDG filed four counterclaims against Cincinnati, including violations of the North Carolina Unfair and Deceptive Trade Practices Act, common law bad faith, enforcement of the performance bond, and negligent misrepresentation. After the parties filed motions for summary judgment, the court ruled on October 2, 2003, granting BB&T's motion based on the statute of limitations and a prior appellate decision that barred the negligent misrepresentation claim. Cincinnati only sought summary judgment against DDG's UDTPA and bad faith counterclaims.

The Court ruled that DDG could not pursue a Unfair and Deceptive Trade Practices Act (UDTPA) claim against Cincinnati based on alleged violations of North Carolina insurance laws, as the relationship was characterized as suretyship rather than insurance. Consequently, DDG's bad faith claim was also dismissed, since the duty of good faith and fair dealing is specific to the insurer-insured relationship. The Court denied Cincinnati's Motion for Summary Judgment regarding the validity of bonds, citing genuine issues of material fact concerning DDG's negligence in enabling Massey, who fraudulently issued bonds without apparent authority. Following trial proceedings that commenced on October 6, 2003, the jury found Massey liable for fraud but determined that Cincinnati was not accountable for the fraudulent bonds. On October 16, 2003, the Court dismissed the case with prejudice. 

Subsequent to the verdict, a series of post-trial motions were filed, including DDG's Motion for New Trial/Judgment as a Matter of Law (JMOL) and various cost-related motions from both BB. T and Cincinnati. The Court indicated it would address these motions and bills of costs in a specific order, beginning with DDG's request for a new trial or JMOL, followed by Cincinnati's motions for attorneys' fees and other cost-related disputes. DDG's motion for extension regarding its response to Cincinnati's motions was granted by the Court on March 19, 2004. All matters are now ready for adjudication.

Judgment as a Matter of Law (JMOL) may be granted if, after a party has been fully heard, there is no legally sufficient basis for a reasonable jury to rule in that party's favor. DDG's renewed JMOL asserts that Cincinnati failed to prove apparent authority, referencing prior grounds from DDG's initial motion. The Court previously denied this motion after evaluating the evidence. In response to the renewed JMOL, the Court found no new arguments presented by DDG and confirmed that a reasonable jury could find for Cincinnati, thus denying the JMOL.

In seeking a new trial, DDG claims that the Court improperly submitted issues to the jury. A new trial may be warranted when a verdict is against the clear weight of the evidence or based on false evidence. The Court has discretion in such matters and may assess evidence and witness credibility. DDG does not argue that the jury's verdict was based on false evidence or contrary to the evidence's weight, but rather contends that the jury instructions were incorrect. New trials are granted only if errors cause a miscarriage of justice.

The Court has broad discretion in framing jury instructions, which must relate the law to presented evidence. Proper instructions must accurately reflect the law and adequately inform the jury without causing confusion. DDG objects to three specific aspects of the jury submission: the verdict sheet’s failure to properly present the negligence issue, the lack of specific instructions on equity principles, and the omission of North Carolina insurance statutes. The Court will address each of these objections sequentially, starting with the verdict sheet, which included questions on fraudulent issuance of bonds, apparent authority of William Massey, and damages owed to DDG.

DDG argues that the jury's second question should have been divided into two distinct issues: (1) whether agent Massey had apparent authority to issue the bonds, and (2) whether Cincinnati was negligent in managing and terminating Massey. DDG claims that the Court's failure to present a separate question on negligence prevented the jury from considering all relevant issues. DDG emphasizes that apparent authority and negligence are separate causes of action with distinct elements. However, a review of the trial transcript indicates that DDG's attorney previously linked the concepts of apparent authority and negligence, suggesting that they are interrelated. During the trial, DDG's attorney proposed a verdict sheet with multiple questions, including one on negligence, but the Court maintained that these issues were encompassed within the overarching question of apparent authority. DDG expressed concerns about potential limitations on damages, jury confusion regarding the order of questions, and the omission of a negligence question potentially leading to an incomplete verdict. The Court addressed these concerns by instructing the jury on available damages for negligence and clarifying the need to independently answer questions on the verdict sheet, with no evidence suggesting that the jury was confused about its responsibilities.

The Court addressed DDG's third concern regarding the jury instructions and the verdict sheet, concluding that it was appropriate to manage this concern without complicating the verdict form. The Court believed that introducing a separate negligence question would complicate matters due to the interrelation between negligence and apparent authority, as acknowledged by DDG. It noted that a simple verdict form benefits all parties involved. The Court aimed to present all pertinent issues clearly to the jury, particularly DDG's theory of recovery focusing on the negligence of the Plaintiffs in allowing Mr. Massey to act with apparent authority. Though DDG now argues that Cincinnati could be liable for negligence independent of apparent authority, the Court found no miscarriage of justice in its decision not to include a separate negligence question.

Additionally, DDG requested the jury be instructed on the principle that the party who first reposed confidence or acted negligently should bear the loss in cases of fraud. While this principle is recognized in North Carolina law concerning apparent authority, the Court opted not to include it in the jury instructions, believing it unnecessary and potentially misleading. The Court chose to adhere to the North Carolina Pattern Jury Instructions for apparent authority instead, clarifying that Cincinnati's liability was contingent upon DDG's reasonable belief in Massey’s authority to issue bonds. The Court referenced established case law to support its position regarding the determination of apparent authority and the associated liabilities. DDG's Motion for a New Trial based on the verdict form's alleged impropriety was denied.

The Court determined that the pattern jury instructions on apparent authority were accurate and appropriate, leading to the denial of DDG's Motion for New Trial/JMOL regarding the exclusion of equitable principles in the instructions. DDG also argued that the jury should have been instructed on North Carolina Insurance statutes mandating companies to report corrupt agents, asserting that Cincinnati's failure to report could indicate negligence. However, the Court clarified that it generally does not include specific facts in its jury instructions, focusing instead on the law applicable to the presented evidence. DDG claimed the Court had previously indicated it would instruct the jury on the statute during a sidebar conversation while questioning a witness from the Department of Insurance. The Court noted that DDG misunderstood this statement, as it only permitted questioning about the obligation to report agents violating licensing requirements, not about specific jury instructions. DDG did not formally request this instruction during the charge conference, and the Court maintained its standard practice of allowing the parties to argue their positions in closing arguments. After the jury instructions were given, DDG did not object to the omission of the requested instruction, leading the Court to conclude that its decision not to instruct the jury on the reporting requirements was not erroneous and did not constitute a miscarriage of justice.

No evidence in the record established that DDG's injuries were caused by Cincinnati's alleged failure to report Massey to the North Carolina Department of Insurance. Even hypothetically, had such evidence existed, the Court determined that its jury instructions on negligence and apparent authority were adequate for the jury to evaluate Cincinnati's alleged negligence. Consequently, DDG's Motion for New Trial/Judgment as a Matter of Law (JMOL) was denied.

Cincinnati filed a Motion for Attorneys' Fees and a Rule 11 Motion against DDG, both of which went unchallenged due to DDG's failure to respond. According to Local Rule 7.3(k), such motions may be treated as uncontested and typically granted, although the Court retains discretion to evaluate the merits of the motions. Cincinnati seeks $25,530.25 in attorneys' fees, asserting that DDG's counterclaims were frivolous and intended to coerce a settlement. Cincinnati cites multiple legal provisions for its claim.

The Court, however, opted to deny Cincinnati's Motion for Attorneys' Fees. The denial was primarily based on Cincinnati's non-compliance with Local Rule 54.2, which mandates that a party must first consult with the opposing party regarding fee arrangements before filing a motion for statutory attorneys' fees. Cincinnati did not provide any evidence of such a consultation, which is a prerequisite for consideration of the motion.

Cincinnati's Motion for Attorneys' Fees was denied by the Court, which determined that DDG's claims of bad faith and violation of the UDTPA were not sufficiently frivolous to warrant an award of fees, despite the Court having granted Cincinnati summary judgment on these claims due to their legal and factual weaknesses. Cincinnati cited the North Carolina Appeals Court case, Henry Angelo. Sons, Inc. v. Property Development Corp., asserting that DDG's claims were invalid because Cincinnati acted as a surety, not an insurer. The Court acknowledged that Angelo influenced its decision but noted that both parties struggled with the legal validity of DDG's claims, indicating a lack of relevant North Carolina case law on the issues presented. Consequently, the Court found both parties made good faith arguments on this unsettled legal matter. Additionally, Cincinnati's Rule 11 Motion for $25,530.25 in attorneys' fees was also denied, as DDG's claims did not warrant sanctions, and Cincinnati failed to comply with Rule 11's safe harbor provisions.

A motion for sanctions under Rule 11 must be filed separately and specify the conduct violating subdivision (b). It must be served in accordance with Rule 5 but not presented to the court until 21 days after service, allowing the challenged party to withdraw or correct the issue. If sanctions are warranted, the court may award reasonable expenses and attorney's fees to the prevailing party. Law firms are jointly responsible for violations by their members. The rule includes a safe harbor provision, enabling a party to rectify the conduct before the court sees the motion. Cincinnati failed to comply with this requirement by not serving the Rule 11 Motion on DDG at least 21 days before filing it. Cincinnati incorrectly cites the case Truesdell v. Southern California Permanente Medical Group to justify its action. In Truesdell, the moving party had properly served the motion within the required timeframe, which is a critical distinction. Additionally, under Fourth Circuit law, Cincinnati's motion is untimely as it was filed over three years after DDG's counterclaims, contradicting the promptness requirement for Rule 11 motions. The Fourth Circuit has stated that the safe harbor provisions prevent filing a motion after a case has concluded.

A party is required to serve a Rule 11 motion promptly and cannot wait until the conclusion of a case to do so. Cincinnati violated this by waiting four and a half months after the Court's Summary Judgment Opinion, which rejected DDG's claims, before filing its Rule 11 Motion. The Fourth Circuit Court of Appeals has reaffirmed that sanctions cannot be sought after a summary judgment has been granted because the rule mandates giving the opposing party the opportunity to withdraw the challenged pleading. Cincinnati's failure to comply with the safe harbor requirements of Rule 11, including not serving DDG before filing and delaying the motion, precludes the imposition of sanctions. As a result, the Court denied Cincinnati's Rule 11 Motion. Additionally, even if the motion had been properly filed, it would have been denied on the merits. 

BB.T subsequently filed a Bill of Costs seeking $96,956.86 from Cincinnati, detailing expenses such as deposition transcripts, postage, FedEx charges, photocopying, travel expenses, and attorneys' fees. Cincinnati objected to this Bill of Costs, and BB.T moved to strike these objections, arguing that they were not authorized under the Rules of Civil Procedure and were filed untimely. The Court will first address BB.T's Motion to Strike, as it pertains to the considerations for taxing costs against Cincinnati.

An adverse party must file a motion for disallowance with a supporting brief within 10 days of a bill of costs being filed, per Local Rule 54.1(b)(1). BB. T argues that Cincinnati's objections should be denied because they were not labeled as a "Motion for Disallowance." However, the Court finds this argument unconvincing, stating that the lack of proper titling does not invalidate the motion as Cincinnati clearly filed objections in accordance with Local Rule 54.1(b)(1). 

BB. T further contends that Cincinnati's objections were untimely, as they were filed on December 8, 2003, beyond the 10-day deadline. Cincinnati argues it filed timely based on Federal Rules of Civil Procedure 6(a) and 6(e), which outline the computation of time periods and grant an additional three days for actions taken after service by mail. The Court notes that Rule 6(a) specifies the first day of the event is not included in the time calculation, while the last day is included unless it falls on a weekend or holiday. Intermediate weekends and holidays are excluded when the period is less than 11 days.

Under these rules, Cincinnati had until December 8, 2003, to file its objections. BB. T claims that the exclusion of weekends and holidays does not apply because the total time allowed for filing (including the additional three days) exceeds 11 days. However, the Court recognizes that Local Rule 54.1(b) requires adherence to the 10-day period, with exclusions for intermediate days applicable.

T fails to cite any authority supporting its position, while established Middle District precedent indicates that the prevailing view excludes intermediate weekends and holidays from the ten-day period outlined in Rule 6(a), but not from the three-day period in Rule 6(e). The Court refers to Chief Judge Tilley's ruling in Douglas v. Sandoz Pharmaceuticals Corp., which supports this interpretation. T’s assertion that the 2001 amendments to Rule 6(e) invalidate the majority view lacks clarity and supporting authority. Conversely, post-amendment cases affirm the traditional interpretation. Consequently, the Court determines that Cincinnati's objections, filed on December 8, 2003, were timely, and denies BB. T’s Motion to Strike these objections. Cincinnati's motion to address procedural issues is deemed moot. The Court will now evaluate the merits of BB. T’s Bill of Costs and Cincinnati’s corresponding objections.

BB. T seeks to tax Cincinnati $96,956.86 in costs, governed by 28 U.S.C. §§ 1920-1924, Federal Rule of Civil Procedure 54(d)(1), and Local Rule 54.1. Cincinnati argues that BB. T's Bill of Costs is both procedurally and substantively flawed, citing several specific objections: the absence of an affidavit from BB. T's attorney, Mr. Donald G. Sparrow, as required by 28 U.S.C. § 1924; the claim that attorneys' fees cannot be taxed under Rule 54(d)(1); the assertion that even a properly filed request for attorneys' fees under Rule 54(d)(2) lacks legal basis; and the request for reimbursement of non-allowable costs under § 1920. The Court finds that Mr. Sparrow's failure to attach the required affidavit means BB. T has not complied with § 1924, which necessitates an affidavit affirming the correctness and necessity of the claimed costs.

Mr. Sparrow's failure to use the AO133 form or attach an affidavit verifying the Bill of Costs prevents the Court from excusing his noncompliance with 28 U.S.C. § 1924. The Court references United States v. Hiland, which emphasizes the necessity of a verified bill of costs. Although the Northern District of Illinois has indicated that additional documentation is preferable but not mandatory under § 1924, an affidavit is still required before costs can be taxed. The Court will consider Cincinnati's objections and, if it finds BB&T's costs to be taxable, will allow BB&T to amend its Bill of Costs by providing the necessary affidavit, citing Dick's Sporting Goods as precedent.

Additionally, the Court addresses the issue of attorneys' fees, stating they are not recoverable as costs under Federal Rule of Civil Procedure 54(d)(1) and must instead be requested through a motion as outlined in Rule 54(d)(2). The relevant provisions clarify that costs, excluding attorneys' fees, can be taxed by the clerk, whereas claims for attorneys' fees must follow specific procedural requirements, including a filing deadline and disclosure of the basis for the fee request. Thus, attorneys' fees cannot be claimed merely by submitting a Bill of Costs.

Under Local Rule 54.2, a motion for attorneys' fees must be filed with the Court. BB. T argues it filed its request under Rule 54(d)(1), which allows for the taxation of attorneys' fees as costs to the prevailing party. However, this interpretation overlooks that Rule 54(d)(1) specifies that only costs, excluding attorney's fees, are automatically allowed. Rule 54(d)(2) requires that claims for attorneys' fees must be made by motion unless the law governing the case allows for recovery as an element of damages, which is not applicable in BB. T's situation since attorneys' fees were not a trial damage element. 

Local Rule 54.2 mandates that a party seeking attorneys' fees must first notify the court in writing after attempting to reach an agreement with the opposing party. There is no evidence that BB. T engaged in such consultation, rendering its fee request defective. Furthermore, Cincinnati contends that BB. T has not presented a valid legal basis for an award of fees. BB. T cites the North Carolina Supreme Court's decision in Horner v. Chamber of Commerce, which allows for attorney fees in common fund cases. However, this precedent does not apply as BB. T has not recovered any funds from Cincinnati, and subsequent North Carolina decisions affirm that attorneys' fees can only be awarded from funds actually recovered.

Consequently, BB. T's request for attorneys' fees is denied due to non-compliance with Federal and Local Rules and the lack of supporting statute or case law. Additionally, BB. T has failed to provide evidence of the reasonableness of its $89,541.15 fee request, including any billing records or relevant information for the Court’s assessment.

The Court declined to award attorneys' fees to BB.T due to the reasonableness of the rates charged by T's counsel. Furthermore, BB.T's requested costs did not comply with 28 U.S.C. § 1920, which enumerates specific costs that may be taxed, including court fees, transcription fees, and expert witness compensation. While local rules allow district courts to delineate taxable items consistent with federal statutes, the items BB.T sought to tax included:

1. $3,391.81 for deposition transcripts,
2. $80.59 for postage,
3. $130.50 for FedEx charges,
4. $1,901.37 for photocopies, and
5. $1,911.44 for travel expenses.

Cincinnati contested the $3,391.81 request for deposition transcripts, arguing that such costs should only be awarded if the depositions were used in trial or involved witnesses called during trial. The Court referenced Fourth Circuit precedent, noting that the determination of whether deposition costs are warranted should focus on their necessity to the prevailing party’s case at the time taken, rather than their use at trial.

A district court should award costs for depositions deemed reasonably necessary at the time they are taken, even if the material is not used at trial, provided it is relevant for litigation preparation. The evaluation focuses on whether the deposition was essential for effective case handling. In this case, the court cannot determine if BB. T's requested deposition expenses are "reasonably necessary" due to insufficient documentation. Cincinnati's objections lack Fourth Circuit support, prompting the court to permit BB. T to refile its Bill of Costs.

Regarding postage and FedEx charges, the court finds these costs generally non-recoverable without special circumstances, which BB. T has not demonstrated. Therefore, these charges will be disallowed. For photocopying expenses, while such costs can be taxable if necessary for the case, BB. T failed to justify the reasonableness of the claimed amount. The court allows BB. T to amend its Bill of Costs to support its claims for deposition and photocopying expenses.

Lastly, Cincinnati objects to BB. T's request for attorneys' travel expenses, which are not recoverable under 28 U.S.C. § 1920, leading to the disallowance of these costs. Ultimately, the court disallows BB. T's Bill of Costs in full but grants the opportunity to amend it with proper justification for deposition and photocopying expenses, adhering to relevant legal standards and rules.

The amended Bill of Costs must be filed within 10 days of the Court's Order and Judgment. Cincinnati has submitted a Bill of Costs against DDG, asserting entitlement due to its victories at summary judgment and trial. DDG responded with a Motion for Disallowance, arguing that Cincinnati's Bill of Costs was filed prematurely and requesting its dismissal without prejudice to refile at the correct time. The Court agrees that Cincinnati's filing was premature, referencing Middle District of North Carolina Local Rule 54.1(a)(1), which allows a prevailing party to file a Bill of Costs within 30 days after the timeframe for appealing a final judgment expires. The Court notes that since DDG filed a Motion for New Trial/JMOL on October 22, 2003, the appeal period was still open, thus making Cincinnati's Bill of Costs premature. The Court disallows Cincinnati's Bill of Costs without prejudice, allowing for a future refile. Additionally, DDG's Motion for New Trial or Judgment as a Matter of Law is denied, and Cincinnati's motions for attorney fees are also denied. BB. T's Motion to Strike Cincinnati's objection to its Bill of Costs is denied, while BB. T's Bill of Costs is disallowed, permitting refile in accordance with the Order. Cincinnati's objections to BB. T's Bill of Costs are granted. Overall, DDG's Motion for Disallowance of Cincinnati's Bill of Costs is granted, and a consistent Order and Judgment will follow.

Motions or Bills of Costs applicable to Cincinnati Casualty Company and Cincinnati Indemnity Company will also apply to Cincinnati Insurance Company, as stated in the Court's Memorandum Opinion. Only Cincinnati, DDG, and BB. T are currently relevant parties to the ongoing Motions and Bills of Costs, despite the initial involvement of other parties. DDG's Motion for New Trial/JMOL is confirmed as timely, having been filed within ten days of the Court's judgment. Under 28 U.S.C. § 1927, attorneys may be held personally liable for excess costs if they unreasonably multiply proceedings. North Carolina General Statutes § 75-16.1 allows the presiding judge to award reasonable attorney fees to the prevailing party if the defendant willfully engaged in violations or if the plaintiff's action was frivolous. Similarly, under North Carolina General Statutes § 6-21.5, a court may award attorney fees to the prevailing party if the losing party presented no justiciable issues. Cincinnati's Rule 11 Motion was filed on February 18, 2004, while DDG's counterclaims against Cincinnati were asserted on May 22, 2000. The Court excluded Thanksgiving Day from the computation under Rule 6(a) but not the following day, as it is not recognized as a state holiday in North Carolina. BB. T's arguments regarding the irrelevance of a cited case for applying Rule 6(a) were deemed incorrect by the Court. The Court confirmed Cincinnati's Objections as timely under Rule 6(a) and did not need to consider the application of Rule 6(e).