Brooks Kushman P.C. v. Continental Casualty Co.

Citations: 213 F. Supp. 3d 917; 2016 U.S. Dist. LEXIS 135311; 2016 WL 5661577Docket: Case No. 15-12351

Court: District Court, E.D. Michigan; September 30, 2016; Federal District Court

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The Court granted the Defendant, Continental Casualty Company’s, motion to dismiss or transfer venue in a case involving Plaintiff Brooks Kushman P.C., which sought to collect attorney fees related to its representation of Alternative Technology Solutions, Inc. (Alternative) in a lawsuit initiated by Epicor Software Corporation in California. The Defendant had provided a defense to Alternative under a general commercial liability policy, with a reservation of rights to withdraw the defense if the claims were deemed not covered. The Plaintiff contended that by allowing them to represent Alternative, the Defendant assumed liability for the incurred fees, yet failed to pay a portion of those fees.

The Defendant argued for dismissal under Federal Rule of Civil Procedure 12(b)(6), claiming the Plaintiff did not adequately plead a viable theory for recovery. In the alternative, the Defendant requested a transfer to the Central District of California, asserting it as a more appropriate forum, or a stay of the action pending the resolution of an insurance coverage dispute in California. After reviewing the submissions, the Court determined that the Plaintiff's allegations did not establish a valid legal theory for holding the Defendant liable for the attorney fees, leading to the dismissal of the complaint.

Alternative initially appointed Clark Hill PLLC as independent counsel but replaced them with Brooks Kushman P.C. on March 6, 2014, due to a notification from coverage counsel Eric R. Little. Subsequently, attorneys from Brooks Kushman entered their appearances in the California Litigation, and on April 1, 2014, a representative of the Defendant insurer communicated billing information and requested a case analysis and budget from attorney Mark A. Cantor. Following a California Supreme Court decision, the Defendant insurer concluded it had no obligation under the insurance policy to defend Alternative and notified Mr. Little on July 29, 2014, that it was withdrawing its defense. Although the Defendant initially paid invoices from Brooks Kushman, payments ceased after the withdrawal notice, leading the Plaintiff to claim unpaid fees. In June 2015, the Plaintiff filed a lawsuit alleging breach of implied contract, promissory estoppel, and breach of obligation as a third-party beneficiary of the insurance policy. The Defendant seeks dismissal of these claims under Fed. R. Civ. P. 12(b)(6), arguing that the Plaintiff's complaint fails to state a claim upon which relief can be granted. The court must view the complaint favorably towards the Plaintiff, accepting factual allegations as true but not legal conclusions. The complaint must provide sufficient factual basis for claims, moving beyond mere labels and conclusions to demonstrate a plausible entitlement to relief.

A claim is considered facially plausible when the plaintiff presents factual content allowing the court to reasonably infer the defendant's liability for the alleged misconduct. The complaint fails to establish a plausible theory or factual allegations that would enable the Plaintiff law firm to recover fees from the Defendant insurer. The Defendant asserts that the Plaintiff lacks standing to pursue state-law claims due to the absence of an attorney-client relationship, as the Plaintiff's obligations are solely to its client, Alternative. Although the concept of standing is not further analyzed in the briefs, the court concludes that the Plaintiff's complaint does not present a viable basis for fee recovery under the alleged facts. According to both California and Michigan law, there is no attorney-client relationship between an insurer and a law firm retained by the insured as independent counsel. The law, specifically regarding Cumis counsel, dictates that independent counsel represents only the insured, not the insurer, thereby precluding the Plaintiff from pursuing a breach of contract claim against the Defendant for unpaid fees. In response, the Plaintiff proposes three state-law theories for fee recovery, focusing on the claim that it is an intended third-party beneficiary of the insurance policy issued to Alternative. Under California and Michigan law, a non-party may enforce a contract if it was intended to benefit them, without needing to be explicitly named. However, case law from other jurisdictions indicates that a law firm representing an insured under an insurer’s duty to defend is generally not recognized as a third-party beneficiary of the insurance contract.

In Old Republic Insurance Co. v. Sidley, Austin, 702 F.Supp. 207 (N.D. Ill. 1988), Old Republic Insurance issued an excess D&O policy providing $3.5 million in coverage to trustees of the Bradley Trusts, who were already covered by a $5 million policy from Federal Insurance Company. After beneficiaries sued for the removal of trustees, the trustees retained legal counsel with Federal's consent, later replaced by Sidley law firm before trial. Post-trial, a judgment awarded $3 million to the beneficiaries, prompting Old Republic to agree to cover the trustees' remaining obligations, including legal fees. Sidley billed Old Republic nearly $1 million, leading Old Republic to file suit seeking a judicial determination of its obligation and a declaration that Sidley’s fees were excessive. Sidley moved to dismiss, claiming Old Republic lacked standing. Old Republic contended it had a direct obligation to pay Sidley as a third-party beneficiary from both the insurance policy and the agreement with trustees. The court, applying Illinois law, ruled that Sidley was not a third-party beneficiary, asserting that the trustees were the sole intended beneficiaries of the policy, and Sidley was merely an incidental beneficiary. The court emphasized that no legal precedent supports a law firm suing on an insurance policy for legal fees owed by the insurer to a contracting party.

The court dismissed Old Republic's argument that Sidley was a third-party beneficiary of the agreement made between the insurer and trustees following the Bradley Trust litigation. It clarified that merely having a provision for attorneys’ fees does not automatically confer third-party beneficiary status. The essential factor is the intent of the parties to benefit the law firm, which the court found was not the case here. The provision for payment of defense costs was intended to benefit the trustees, as their insurance policy covered attorneys’ fees as part of "loss." The agreement simply restated the coverage terms of the policy, ensuring the trustees received their expected benefits in exchange for the insurance premium.

The court noted that existing case law on a law firm’s status as a third-party beneficiary under insurance policies is limited, particularly under California and Michigan law. It referenced a Florida case where an attorney, Richard Marx, was denied recovery under an insurance policy intended for his clients, emphasizing that the policy did not indicate an intent to benefit the attorney directly. The appellate court concluded that Marx received only an incidental benefit from the enforcement of the policy, thus reinforcing the court's decision in the Old Republic case. The summary included references to additional case law that supports this view.

The Court determines that the Plaintiff law firm is unable to recover unpaid legal fees from the Defendant insurer, as it is not a viable third-party beneficiary of the insurance Policy issued to the Plaintiff's client, Alternative. Consistent with case law, including Old Republic Insurance, the record does not indicate that the law firm was an intended beneficiary of the Defendant's obligation to cover Alternative’s defense costs. Instead, the Policy's provisions are intended solely to benefit Alternative, rendering the law firm an incidental beneficiary, which precludes enforcement of the obligation under both California and Michigan law. 

The Court further examines the Plaintiff's claims of breach of implied contract and promissory estoppel, noting that some prior cases allow for recovery based on these theories. For instance, in Yale Galanter, the court permitted a breach of contract claim based on a specific engagement letter even though the law firm was not a third-party beneficiary of the relevant insurance policies. In the current case, the Plaintiff asserts that an implied contract or a promise for payment by the Defendant can be established. However, the Court finds that the Plaintiff has not adequately pled the necessary elements to overcome the Defendant's Rule 12(b)(6) challenge against these claims.

Plaintiff claims breach of an implied contract based on a series of events beginning with a letter dated March 6, 2014, from Alternative’s coverage counsel, Eric R. Little, Esq., which notified Defendant’s counsel of a desire to replace existing independent counsel with the Plaintiff firm. Plaintiff alleges reliance on an agreement from Defendant to permit this substitution, leading to actions such as entering an engagement agreement, filing for substitution of counsel in a California lawsuit, and appearing in that case. On April 1, 2014, Defendant's representative confirmed acceptance of Plaintiff's representation and provided billing guidelines, followed by Defendant processing and paying Plaintiff’s invoices until withdrawing defense in August 2014.

Plaintiff argues this sequence constituted an implied contract requiring them to provide legal services to Alternative and obligating Defendant to compensate Plaintiff at the agreed rates. However, the claim fails for two reasons. First, the allegations contradict the supporting exhibits, particularly the March 6 letter, which stated Alternative had already retained the Plaintiff firm as new counsel and did not seek Defendant’s agreement. The letter indicated that while Defendant could communicate with Plaintiff regarding the litigation, all insurance coverage correspondence should continue to go to Mr. Little's firm, indicating no invitation for Defendant’s approval. Second, although Plaintiff asserts reliance on an agreement from Defendant, all actions it took occurred before any evidence of such an agreement from Defendant, undermining the basis for an implied contract.

Plaintiff's assertion that an April 1, 2014 email from Defendant's representative confirmed Defendant's acceptance of Plaintiff's representation of Alternative is unsupported by any prior agreement. The court must accept factual allegations as true but not legal conclusions presented as facts, nor allegations contradicted by accompanying exhibits. The claim of an implied contract is deemed implausible under California law, which mandates that when a conflict arises between an insurer and the insured, the insurer must cover the reasonable costs for the insured to retain independent counsel. Both parties acknowledge that Defendant's reservation of rights created a conflict, triggering this obligation, which led Alternative to initially hire Clark Hill PLLC as independent counsel. Furthermore, a July 30, 2013 letter from Defendant confirmed that Alternative had the right to select independent counsel, which would be compensated by Defendant at standard rates. Since the Plaintiff firm represented only Alternative and not Defendant, it contradicts the state law for Defendant to control or veto Alternative’s choice of independent counsel. This understanding is further supported by a March 6, 2014 letter from Alternative's coverage counsel, which indicated that Alternative had replaced Clark Hill without seeking Defendant's approval. Consequently, the Plaintiff cannot establish a plausible breach of implied contract claim that would survive a motion to dismiss under Rule 12(b)(6).

Counsel retained by an insured cannot establish an implied contract with the insurer if their interests conflict, as noted in *Continental Casualty*. The Plaintiff cannot claim an implied contract based on the Defendant's offer and the Plaintiff's acceptance of the role as independent counsel for Alternative. Attempts to argue that the Defendant's silence and initial payments constituted acceptance of a contract are deemed implausible since the Defendant was not in a position to object to Alternative's choice of counsel and was legally required to pay the independent counsel. The Plaintiff's claim of breach of implied contract fails to present sufficient factual content to support liability.

Similarly, the claim of promissory estoppel lacks merit because the actions taken by the Plaintiff in March 2014 were not done in reliance on any agreement from the Defendant. The first communication indicating acceptance of the Plaintiff's representation occurred after these actions, undermining the reliance argument. Further, payments by the Defendant are not characterized as promises but as obligations under California law. Consequently, both the implied contract and promissory estoppel claims are dismissed.

The Defendant's motion to dismiss the Plaintiff's complaint is granted, while the alternative request for a transfer of venue is denied as moot. The Court also notes ongoing legal proceedings regarding the Defendant's duty to defend Alternative, which are currently stayed.

This case is under the Court's diversity jurisdiction, making Michigan's choice-of-law rules applicable for determining the law governing Plaintiff's state-law claims. Defendant argues that California law should apply, providing a detailed analysis in its motion. In contrast, Plaintiff does not analyze the choice-of-law issue in its response but cites both Michigan and California law to preempt any conflict. The Court finds Defendant's analysis persuasive and concludes that California law governs. Despite this conclusion, the Court notes that the relevant legal issues have not been directly addressed by either California or Michigan courts, suggesting that the choice of law may not significantly affect the case's outcome. The Court will reference the laws of both states in its analysis. Additionally, Plaintiff acknowledges its status as "Cumis counsel" under California law. A related case, Continental Casualty, dismissed a claim for recovery under an implied contract for services rendered, leading to summary judgment for the insurer, which was affirmed by the Eleventh Circuit. The term "Cumis counsel" refers to independent attorneys under California law.