Bad-faith attorney fee rule: Bad news for insurance plaintiff

When fire destroyed Sherrill Travier’s Lincoln Park home, she filed a timely proof of loss with Auto Club, her homeowners’ insurer.

But shortly after the fire, the police visited the scene, took a whiff and thought they smelled arson. Unsurprisingly, the months crept by with no check from Auto Club.

Insurance investigations take time.

Travier lost patience and hired a lawyer, who sent Auto Club a demand letter.

Auto Club stonewalled. Travier sued. But before serving the complaint, seven months after the blaze, Travier’s attorney made several more unsuccessful payment demands.

“Remarkably,” said the Michigan Court of Appeals in Travier v. Auto Club Group Ins. Co., “Auto Club neither admitted nor denied Travier’s breach of contract averments ‘for lack of sufficient knowledge or information and [left] plaintiff to her proofs.'” That’s an interesting but valid way to deny the allegations under MCR 2.111(C)(3).

About a month later, Travier beefed up her claim that Auto Club was acting in bad faith. She alleged that Auto Club told her she would never see a dime unless she dropped her suit.

Three months later, Auto Club did an about-face, issued full payment for the actual cash value of Travier’s home and threw in the penalty interest.

Auto Club sought dismissal of Travier’s breach-of-contract and bad-faith claims. From the COA’s opinion:

Travier responded with a cross-motion for summary disposition contending that Auto Club had breached the insurance contract by failing to pay her claim within 30 days after its receipt of her proof of loss, and “that a nationally-accepted exception to the ‘American Rule’ authorizes attorney fees when a defendant, including an insurer, acts with bad faith before or during litigation.”

The trial court let the contract claim go forward and the parties settled their differences. But the trial court booted the attorney-fee claim.

The trial court had to, ruled the COA.

Michigan does not recognize an independent tort for bad faith in the handling of an insurance claim. Roberts v Auto-Owners Ins Co, 422 Mich 594, 608; 374 NW2d 905 (1985). On this basis, we must reject Travier’s argument that Auto Club’s allegedly dilatory handling of her claim entitles her to attorney fees.

Hey, wait, Travier argued on appeal, take a look at West Virginia. There, policyholders who have to sue insurance companies to get what they paid for — coverage for a loss — can collect attorney fees.

How true and how aggravating that it’s not that way in Michigan, said the COA.

While we sympathize with Travier’s frustration that adjustment of her claim consumed almost a full year, this Court has unequivocally rejected her attorney fee argument. In Burnside v State Farm Fire & Cas Co, 208 Mich App 422, 424; 528 NW2d 749 (1995), we specifically held that “the American rule precludes the recovery of attorney fees incurred as the result of an insurer’s bad-faith refusal to pay a claim.” …

Travier’s public policy arguments in favor of an exception to the American rule “have already been addressed by the Legislature by the enactment of the [Uniform Trade Practices Act, MCL 500.2001 et seq].”

Michigan’s Legislature is often accused of enacting solutions to problems that not everyone agrees actually exist.

Travier’s case illustrates a real problem. Anyone willing to bet on a legislative solution?

UPDATE (3/1/12): AAA’s attorney, James Gross, responded to this blog post with the following:

I represented the Auto Club on appeal in the Travier case, which was the subject of your recent blog, \Bad-faith attorney fee rule: Bad news for insurance plaintiff\.  I am writing in order to correct some egregious factual inaccuracies and omissions in the opinion and, therefore, in your blog account.

In more than 30 years of practice, this is not the first factually skewed opinion I’ve seen from the Court of Appeals.  I view such opinions as unfortunate, but probably unavoidable.  However, in light of your republication of the Travier factual account to your readership, I feel compelled to set the record straight.

First, the assertion that \the months crept by with no check from Auto Club\ is false.  In fact, on September 24, 2009 — one month after Plaintiff submitted her proof of loss — Auto Club issued a check for more than $13,000 for Plaintiff’s living accommodations.  Between then and the end of November, Auto Club paid an additional $54,000 on the claim.

Second, Plaintiff did not hire her attorney because she \lost patience\.  Although the record does not reflect the exact date she actually retained her attorney, it does show that she had him as of August 7, 2009, two weeks before she submitted her claim, while she was still being interviewed by the police in connection with the fire.

Third, ACIA did not tell Plaintiff \she would never see a dime unless she dropped her suit\.  Actually, by the time Plaintiff amended her Complaint to allege bad faith, Auto Club had already paid more than 670,000 dimes.

Fourth, although it triggered the amendment of the Complaint, the basis for the bad faith claim was not the attempt to have the suit dismissed.  Rather, it was the absence of a response from an attorney in Auto Club’s Legal Department — who was not adjusting the claim (which was not formally in suit) and who had, in fact, directed that it be paid — to the demand letters from Plaintiff’s attorney.  At no time did Plaintiff’s attorney attempt to contact the claims representative who was adjusting the claim, either personally or through Plaintiff’s public adjuster (who was in frequent contact with the claims representative).  Consequently, no sense of urgency or even impatience for payment was ever communicated to the claims representative prior to the suit being served.  Even so, Auto Club paid several thousand dollars in penalty interest for the delay.

Finally, your conclusion that this case \illustrates a real problem\ is accurate but misdirected.  As demonstrated by the foregoing — which is fully supported by the record  — the Court of Appeals’ opinion is long on attitude but woefully short on factual accuracy.  You cannot be faulted too severely for relying on the opinion to accurately reflect the case.  However, let this episode be a cautionary tale.  Before republishing an opinion’s factual account in the context of advocating \reforms\, you should pick up the phone and do a modicum of fact checking with the attorneys.

Thank you for your attention to this matter.

MSC proposes referral fee, juror challenge changes; names chief judge in Barry County

Referral fees would be limited to 25 percent under a proposed amendment of Rule 1.5 of the Michigan Rules of Professional Conduct.

The Michigan Supreme Court’s proposed 25 percent cap would be lifted

if the referring attorney participates in the case to an extent that a greater percentage of the amount recovered should be allowed as a reflection of the referring attorney’s substantial input of time or cost, or assumption of risk, the referring attorney’s share of fees may exceed the maximum referral fee as agreed by the receiving attorney and as approved by the court in which the proceeding takes place.

The proposal would also require that contigent-fee agreements disclose “the amount or percentage of fees to be divided or shared among or between lawyers who are not in the same firm.”

Under the proposed amendment, clients would have to approve “the amount or percentage of fees to be divided or shared among or between lawyers who are not in the same firm.” ADM File No. 2010-07.

Under a proposed amendment of MCR 2.511, courts would be required to excuse to discharge a juror upon learning that the juror is unqualified, rather than waiting for a party to challenge the juror for cause. The staff comment to the proposal explains that

[b]ecause MCL 600.1337 requires a court to discharge an unqualified juror regardless whether a party challenges the juror for cause, the proposed amendment of MCR 2.511 would eliminate the provision from the list of challenges that may be made for cause, and instead would clarify that the discharge must be made when the court learns that the juror is not qualified to serve.

This clarification would foreclose the possibility that an unqualified juror could be allowed to sit because no one challenged his or her qualification.

ADM File No. 2011-10.

The Michigan Supreme Court issued the proposed amendments in orders released yesterday. The comment period for both proposals is open until Sept. 1, 2011.

In another order released yesterday, the MSC appointed Judge William M. Doherty as chief judge of the Barry County Trial Court for a term ending Dec. 31, 2011.

Ambitious land valuation sinks attorney fee request

“Hoist by your own petard: if you are hoist by your own petard, something that you did in order to bring you advantages or to harm someone else is now causing serious problems for you.” Cambridge Idioms Dictionary, 2nd ed. Copyright © Cambridge University Press 2006.

For more than 20 years, Manuel Moroun and the federal government have been tussling about some property Moroun owns near the Ambassador Bridge. Moroun also owns the bridge.

A slow, endless stream of truck traffic flows between Detroit and Windsor, Ontario over Moroun’s bridge. This is great business for Moroun, so much so that he’d like to build another bridge. So would a lot of other folks. The politicians in Lansing have been trying to sort it out for years.

Sometime in the 1970s, the federal government decided that Moroun’s bridge needed a bigger customs facility and that Moroun’s land near his bridge would be the perfect spot. The government filed a condemnation action in 1979.

The haggling about the property’s value dragged on until 2002, when a jury in U.S. District Court Judge Gerald Rosen’s courtroom settled the matter.

The feds offered an appraisal of $923,000. It was Moroun’s turn next. But before Moroun took the stand, Rosen told that jury that whatever Moroun said wasn’t evidence about the land’s actual value. Moroun’s figure could only be considered as his personal belief about what the land was worth.

Moroun’s figure for the jury was $13 million.

Next, Moroun’s expert took the stand and said that if the land’s use was “integrated” with the bridge, the value was $8.1 million. At the government’s urging, Rosen told the jury to disregard that figure and told the expert to try again because an integrated use was not a compensable use.

The expert settled on $6.1 million, based on the land’s proximity to the bridge.

The jury awarded Moroun a shade over $4 million in just compensation.

Well, okay, the Moroun camp figured, $4 million is closer to $6 million, the only number we came up with that the jury could consider. And $4 million is way more than the $923K the government was talking about, so we should be all set for a $2.8 million attorney fee award. We’ve prevailed under the Equal Access to Justice Act.

Not so fast, ruled Rosen. You guys didn’t prevail. Moroun said the land was worth $13 million. The EAJA says you’re stuck with that figure. $4 million is a long way from $13 million and a lot closer to $923K. Sorry, no fees for you.

“Huh?” said the Moroun camp. “That’s right,” said the Sixth Circuit.

In a classic bit of judicial understatement, Sixth Circuit Judge Boyce Martin Jr. observed, “In a condemnation action, it is not always immediately obvious who prevailed.”

That’s because even if the government gets the land, if the property owner’s valuation is closer to the jury’s award than government’s valuation, the property owner prevails for purposes of claiming attorney fees from the government.

A prevailing party in a condemnation case, in the thick words of the EAJA, is “a party who obtains a final judgment (other than by settlement), exclusive of interest, the amount of which is at least as close to the highest valuation of the property involved that is attested to at trial on behalf of the property owner as it is to the highest valuation of the property involved that is attested to at trial on behalf of the Government.” EAJA § 2412(d)(2)(H).

The key word in that long, tortured sentence is “attested.”

Moroun argued mightily that if the jury couldn’t consider his $13 million figure as evidence of what the property was worth, then it shouldn’t be used as a benchmark to determine whether he gets attorney fees.

But that’s not how the EAJA works, explained Martin:

A plain reading of the Act compels the conclusion that valuations testified to at trial be used in performing the prevailing party calculation even if the finder of fact is not permitted to consider them. “Attested” means only that the fact is affirmed to be true. Black’s Law Dictionary 147 (9th ed. 2009) … .

Consistent with the text of the statute, Moroun’s $13 million subjective valuation was a valuation “attested to at trial,” even though the district court instructed the jury not to consider it. …

Therefore, the highest value attested to on behalf of International Bridge Company was the $13 million figure offered by Moroun. Based on this, the district court correctly concluded that International Bridge Company was not the prevailing party.

We cannot substitute our judgment for that of Congress’ and rewrite the statute even though determining the prevailing party based on values that the finder of fact was prohibited from considering is somewhat inconsistent with how we typically treat excluded evidence. …

Were we charged with developing a metric to determine the prevailing party in a condemnation action, we might elect to do so differently. …

[T]he Act’s definition of prevailing party based on valuations attested to at trial may have unintended consequences because it includes valuations testified to but ultimately not accepted into evidence.

As to that last paragraph, I’m sure Moroun would attest to that.

The case is United States v. Certain Land, et al.

SBM director waxes on effects of ‘beyond bad’ state of state at annual meeting

In her report to attendees of the 2010 Solo & Small Firm Institute — as part of the 2010 State Bar of Michigan annual meeting in Grand Rapids — Janet Welch, executive director of the State Bar of Michigan, was upfront about having bad news and good news.

First, the bad, which is the “beyond bad” state of the state, something that affects the court system and, in turn, lawyers.

The state’s per average capital income is the best way to measure how things stand in Michigan, she said, but there are grim numbers involved. In 1970, Michigan was 13th in the nation, but in 2000 it dropped to 19th, and in 2008, sank to 38th.

And citing the House Fiscal Agency’s ranking of Michigan in income growth, “We’re not only dead last, but we’re so far beyond 49th, we can’t even see 49th.”

For that, she turned to the SBM’s Judicial Crossroads Taskforce, a 13-month-old initiative to study and recommend ways for the court system to be saved and advanced in the wake of declining state revenues.

Though the task force’s final meeting isn’t for another few weeks, and the report’s results aren’t public yet, Welch weighed in on what could be recommended.

“In broadest terms, I think their report will call for a court system that’s simpler, more flexible, and more based on evidence-based results,” she said. “It will recognize that in some areas of the states we have more judges than needed, and in other areas, we don’t have enough. And it will say that we will need to measure that by an objective, evidence-based measure.”

One question the task force has asked is whether there’s something the court system can do to handle business disputes that can be perceived as friendly to the business community to help them feel better about staying in Michigan and, in effect, encourage other businesses to come here.

For that, she said, one committee in the task force is recommended a three-year private business docket in three of the biggest Michigan counties, where two or three judges would handle all business cases. She noted that other states that have tried such a program have had great results.

Finally, she said that the task force believes cost savings can only happen with better information systems in court, particularly via statewide e-filing in all state courts.

“The tools exist right now to make the court system more convenient, more accessible, more efficient … . We’re wasting money by not spending money to make that happen,” she said.

So, wasn’t there something mentioned about good news?

Well, Welch did say that the state of the SBM is “good — truly good.”

Given the reserves that SBM has built up by managing the way it delivers services to its members, and based on the current rate of consumption, she said that the SBM won’t have to raise dues for another eight more years.

That’s relief for a state where more and more lawyers are struggling professionally, but where dues are in the bottom percentage compared to other states. Welch pointed to that the fact there is no mandatory continuing legal education requirements as another advantage of practicing in Michigan.

She said the secret is being tech savvy, thus saving administrative costs where they count, and SBM members’ volunteer time helping offset things. An example of the latter, she added, is the launch of the Master Lawyer Section, which will replace the Senior Lawyers Section, and will allow the more experienced members of the bar to participate in pro bono programs and mentoring for younger attorneys.

Also, something she said that’s of “critical” importance is the upcoming triennial economics of law practice survey, which will be sent to bar members in October via e-mail and the SBM website.

Welch pointed to the Michigan Supreme Court’s 2008 Smith v. Khouri attorney fee ruling, for which the Court said the SBM’s previous survey was the most important resource in determining award of attorney fees.

But the Court also cited limitations within the survey, so Welch said the SBM has streamlined the new survey, which will be tailored in two different forms — one for private practice members, the other for all other members. The results will be published in early 2011, and there will be drawings and giveaways to help bolster participation.

Check back on our blog for more from the 2010 State Bar meeting.

Woman’s bankruptcy doesn’t give ex-husband attorney fee relief

Douglas C. Sutphin was probably one happy guy when he learned his ex-wife declared bankruptcy and received a Chapter 7 discharge.

Sutphin figured that her divorce lawyer’s bill, the one he was supposed to be paying but so far hadn’t, was gone with the wind.

But after her bankruptcy discharge, Sutphin’s ex went back to court and obtained an order requiring him to pay the $23,000 bill in three installments. Sutphin went to the Court of Appeals and argued that he wasn’t responsible for her legal bill because it had been discharged in bankruptcy.

There are a few problems with your argument, Mr. Sutphin, said COA Judges Kathleen Jansen and Elizabeth L. Gleicher in the majority opinion of Berryman v. Sutphine.

First, it’s not at all clear that your ex-wife’s legal bill was discharged:

Defendant has presented no evidence substantiating (1) that plaintiff listed or scheduled her divorce attorney debt, or (2) the extent of plaintiff’s divorce attorney’s notice or knowledge of the right to assert a claim in plaintiff’s Chapter 7 case.

Second, if you yourself sought a bankruptcy discharge of the judgment requiring you to pay the attorney fees, you couldn’t do it:

[T]he current bankruptcy code prohibits the Chapter 7 discharge of a divorce-related attorney fee obligation. Depending on the underlying circumstances and the precise language of a divorce court’s attorney fee award, federal courts deem a divorcing party’s attorney fee debt as nondischargeable in a Chapter 7 bankruptcy under either 11 USC 523(a)(5) or (15).

But the real stopper is this:

Even were we to assume for the sake of argument that plaintiff’s Chapter 7 discharge eliminated the debt she owed to her divorce attorney, defendant ignores that plaintiff’s discharge has no legal impact on the distinct attorney fee debt that defendant owed to plaintiff, arising from the circuit court’s … orders.

In a concurring opinion, Judge Christopher M. Murray noted that:

[A] “Chapter 7 discharge does not actually extinguish a debtors debts; however, he is no longer personally liable for the discharged debts.” In re Graham, 297 BR 695, 697 (Bankr ED Tenn, 2003) … .

Thus, even if plaintiff’s debt to her attorney was discharged in the Chapter 7 proceeding, that did not eliminate the actual debt that existed to the attorney.

Therefore, the circuit court was free to determine that defendant should pay the outstanding attorney fees, as long as that decision was supportable under the normal rules governing the award of attorney fees in divorce actions. Since it was, defendant’s argument is properly rejected.

Murray said the only thing missing from the majority opinion was a directive that Sutphin should make the payments directly to the ex-wife’s attorney.

It’s only right. He’s the guy with the unpaid bill.