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NATIONAL CASUALTY COMPANY,
Claimant/Respondent,
v.
JORDACHE ENTERPRISES, INC.,
ARBITRATOR'S
GREATER TEXAS FINISHING
FINDINGS AND AWARD
CORPORATION, GOLDEN TRADE,
S.R.L. and Conkle, Kremer & Engel, P.C.,
Claimants/Respondents.
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KATHLEEN A. ROBERTS, Arbitrator:
This arbitration arises from a dispute among an insurance carrier, its insured and the
lawyers hired to defend the insured in a patent infringement case. In October 1990, Jordache
Enterprises, Inc. ("Jordache"), a clothing manufacturer and retailer was sued (along with other
major makers of denim garments) by Greater Texas Finishing Corporation and Golden Trade
S.R.L. (collectively "Greater Texas") for infringement of a patent claiming, among other
inventions, the "random faded look" of denim treated by an "acid wash" process (the "Greater
Texas Action") Jordache tendered defense of the action to its insurer National Casualty
Company ("NC"). On November 14, 1990, NC accepted the defense under a reservation of
rights and asked Jordache for the name of its defense attorneys. Jordache referred NC to
Conkle, Kremer & Engel, P.C. ("CK&E"), a firm of Los Angeles attorneys that Jordache had used
in other matters. NC ultimately retained CK&E to defend Jordache. CK&E commenced the
defense of Jordache and NC paid for the defense for seven or eight months, but stopped
paying without explicitly withdrawing from the defense of the action. Following the filing
of lawsuits in California by Jordache and CK&E for breach of contract, NC filed an action for
declaratory relief in New York on September 4, 1991, requesting a judicial determination
that it had no duty to defend or indemnify Jordache for the patent infringement case and no
obligation to pay CK&E. Jordache and CK&E counterclaimed: Jordache sought damages for
failure to defend and sought indemnification in the Golden Trade Action, and CK&E sought
payment of the attorneys' fees and expenses billed pursuant to its retention by NC. The
claims were ultimately consolidated in one action in New York, and the parties subsequently
submitted to arbitration those claims relating to defense of the Greater Texas Action [1], which
was settled in October 1997.
The Arbitration Hearing was conducted on October 15, 16, 17, 20, and 21, 1997 (the
Arbitration Hearing). These findings and the Award are based upon the testimony presented
[2] and exhibits admitted at the Arbitration Hearing, the Post-Hearing Briefs, submitted by all
parties on November 14, 1997, and the briefs and submissions received prior to the
Arbitration Hearing.
Under the Agreement in Respect of Court Order, the claims to be decided in the
Arbitration are derived from the claims, counter-claims and the answers of the parties in the
S.D.N.Y. Case No. 91 CIV 5964 and as presented in the Arbitration. Those claims are as
follows:
National Casualty's Claim for Declaratory Judgment
NC initiated Case No. 91 CIV 5964 as a Declaratory Judgment Action, and acted as
the Claimant in the Arbitration Hearing. NC's claim is for a judicial declaration of rights and
obligations between NC, Jordache and CK&E. NC essentially seeks a
termination that:
1. NC has no duty to pay fees or expenses in the Greater Texas action, at all or
following the filing of the Declaratory Judgment Action on September
4, 1991.
Jordache's Claims
In response to NC's claims, Jordache asserts breach of contract, promissory estoppel
and breach of the covenant of good faith and fair dealing ("bad faith"), on the following basic
allegations:
1. The Greater Texas action included claims that were potentially within the
coverage of the NC policy. As a result, NC had the duty to defend Jordache in the Greater
Texas action to pay defense fees and expenses, and to fund any reasonable
settlement.
2. NC breached its fiduciary duties to Jordache by failing to pay defense fees and
expenses for the defense its owed after agreeing to do so. NC acted intentionally to conceal
and obfuscate its true intentions to not pay for the defense, while accepting the benefits of
providing a defense under a reservation of rights.
3. Even if there was no duty to defend, NC promised that it would defend the
Greater Texas action and Jordache justifiably relied on that promise, so that NC is estopped
from denying the benefits of its promise to Jordache.
4. As damages, Jordache seeks defense fees and costs owed to CK&E and the
settlement payment for breach of the duty to defend as punitive damages. Jordache also seeks
its fees and expenses incurred in this action, which it was agreed will be handled as a
post-award proceeding.
CK&E'S Claims
CK&E claims breach of contract, promissory estoppel and quantum meruit, based on
the following allegations:
1. NC entered into an agreement with CK&E to pay CK&E to defend NC's insured,
Jordache, in the Greater Texas action. Pursuant to the agreement, CK&E performed services
and advanced expenses, for which NC has not paid.
2. CK&E relied on the promise of NC to defend Jordache and to pay fees and costs
so that NC is estopped from denying the benefits of its promise to CK&E.
3. Notwithstanding any contractual obligation of NC to pay CK&E fees and costs,
CK&E is entitled to recover for the reasonable value of its services
in quantum meruit.
FINDINGS
In general, I credit the testimony of the witnesses and evidence presented by
Jordache and CK&E with respect to the disputed facts, and the expert testimony with respect
to industry practices and standards in claims handling. I note that NC chose not to present
the testimony of any employee of NC with knowledge of the handling of the claim at issue.
To extent the testimony of NC's only witness, Irwin Adler (NC's outside counsel in
connection with the defense of the Greater Texas Action) conflicted with the testimony
presented by Jordache and CK&E, I find it unpersuasive. Although the question of NC's duty
to defend is a difficult one, I am persuaded by the analysis offered by Jordache and CK&E that
NC had a duty to defend. In any event, there can be no doubt that NC agreed to undertake
the defense and without ever properly withdrawing from that commitment or obtaining a
judicial determination that it had no obligation to defend, simply stopped paying Jordache's
attorneys.
My specific findings are as follows:
1. I find that NC had a duty to defend Jordache in the Greater Texas action under
the NC liability policies, and that NC is liable for all fees and costs incurred in defense of the
Greater Texas action through its resolution by settlement in October
1997. [3]
2. I further find that whether or not NC had a duty to defend Jordache in the Greater Texas
action, NC promised to defend Jordache and promised to pay CK&E for its legal fees and
expenses to defend Jordache in the Greater Texas Action and never effectively terminated
or was relieved of its agreement to defend Jordache. [4] Accordingly, NC is liable for all
fees and expenses incurred by Jordache and CK&E in defending the Greater Texas action
through its resolution by settlement in October 1997.
3. I find that the fees and expenses incurred by Jordache and/or CK&E in the
Greater Texas action were reasonable. [5]
4. I find that NC is not entitled to recoupment of the fees and
expenses incurred by Jordache and/or CK&E.
5. Although I find that NC acted in bad faith and in breach of its fiduciary duty
to Jordache, I find that Jordache's ability to settle the Greater Texas Action was not impaired
and that Jordache is therefore not entitled to claimed damages in the amount of the
settlement. I further find that Jordache suffered no other damages as a result of NC's bad faith
and/or breach of fiduciary duty.
6. I find no basis for an award of punitive damages.
7. The issue of attorneys fees in the coverage litigation is reserved for further
proceedings.
AWARD
1. Jordache/CK&E are awarded $523,048 for unpaid fees and expenses through the filing
of the declaratory relief action in September 1991 (after credit for
NC payments) (Ex. 124).
2. Jordache/CK&E are awarded expenses of $138,861 incurred directly by
Jordache (Ex. 388).
3. Jordache/CK&E are awarded interest at 9% on the above amounts
of $367,358.
4. Jordache/CK&E are awarded $370,863 for fees and expenses incurred from
September 1991 through October 1997 (Ex. 124A), plus interest at 9% in the amount of
$180,278, for a total of $551,141.
Pursuant to the terms of a December 1997 Stipulation and Notice Regarding Form of
Award between Jordache and CK&E, this Award is made entirely and solely to CK&E, and any
proceeds from such an award will be held by CK&E for distribution pursuant to an
agreement between Jordache & CK&E.
Dated: December 19, 1997
New York, New York
SO ORDERED.
KATHLEEN A. ROBERTS
Arbitrator
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Footnotes:
1. NC's declaratory judgment action also seeks a declaration that it has no duty to indemnify. However, pursuant to the Stipulation made by the parties at the Arbitration Hearing, for which there is a written submission, the duty to indemnify has not been submitted for determination in this Arbitration.
2. The parties agreed to conduct the Arbitration Hearing without a court reporter. Accordingly, my findings and award are based upon my contemporaneous notes of the testimony.
3. I express no opinion on whether National Casualty has a duty to indemnify, or on the effect of the Stipulation of Settlement in the Greater Texas Action that allocates the entire settlement to advertising injury.
4. I specifically find, for substantially the reasons argued by Jordache/CK&E, that the filing of the declaratory judgment action did not constitute a withdrawal from the defense.
5. I specifically find that CK&E properly billed
NC for work performed in a related ITC action for which NC had expressly
disclaimed coverage, in view of the substantial similarity of the issues,
the practical advantages of expedited discovery procedures in that forum,
and the fact that Jordache received the benefit of services rendered by
counsel to Jordache's co-defendants in the ITC Action for which NC was
not required to pay.