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NATIONAL CASUALTY COMPANY,
Claimant/Respondent,
v.
JORDACHE ENTERPRISES, INC.,
GREATER TEXAS FINISHING
CORPORATION, GOLDEN TRADE,
S.R.L. and CONKLE & OLESTEN, P.C.,
Claimants/Respondents.
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ARBITRATOR’S FINDINGS AND AWARD
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 & Olesten, PLC (“C&O”) [the former name of Conkle, Kremer & Engel, PLC], a firm of Los Angeles attorneys that Jordache had used in other matters. NC ultimately retained C&O to defend Jordache. C&O 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 C&O 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 C&O. Jordache and C&O counterclaimed: Jordache sought damages for failure to defend and sought indemnification in the Golden Trade Action, and C&O 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 C&O. 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 C&O 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.
C&O’S Claims
C&O claims breach of contract, promissory estoppel and quantum meruit, based on the following allegations:
1. NC entered into an agreement with C&O to pay C&O to defend NC’s insured, Jordache, in the Greater Texas action. Pursuant to the agreement, C&O performed services and advanced expenses, for which NC has not paid.
2. C&O 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 C&O.
3. Notwithstanding any contractual obligation of NC to pay C&O fees and costs, C&O 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 C&O 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 C&O, 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 C&O 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 C&O 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 C&O 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 C&O 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 C&O.
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/C&O 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/C&O are awarded expenses of $138,861 incurred directly by Jordache (Ex. 388).
3. Jordache/C&O are awarded interest at 9% on the above amounts of $367,358.
4. Jordache/C&O 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 C&O, this Award is made entirely and solely to C&O, and any proceeds from such an award will be held by C&O for distribution pursuant to an agreement between Jordache & C&O.
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/C&O, that the filing of the declaratory judgment action did not constitute a withdrawal from the defense.
5. I specifically find that C&O 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.
