SPECIAL ISSUES IMPACTING UPON A SURETY'SABILITY TO RECOVER INDEMNITY FOR ATTORNEY

FEES

TWENTY SEVENTH ANNUALNORTHEAST SURETY AND FIDELITY

CLAIMS CONFERENCESEPTEMBER 22nd - 23rd, 2016

PRESENTED BY:

DOUGLAS FINE, ESQUIREAIG

Surety Bond Claims101 Hudson Street, 28th Floor

Jersey City, NJ 07302

ANDREW S KENT, ESQUIREChiesa Shahinian & Giantomasi PC

One Boland DriveWest Orange, New Jersey 07052

SPECIAL ISSUES IMPACTING UPON A SURETY’S ABILITY TO RECOVER INDEMNITY FOR ATTORNEY FEES

Douglas Fine and Andrew S. Kent I. Introduction

It is a goal of surety claims professionals to assure that all losses and expenses arising from the execution of surety bonds be borne or reimbursed by the bond principal and/or those parties who signed indemnity agreements in favor of the surety in consideration for the issuance of such surety bonds. Courts, for the most part, are willing to enforce indemnity agreements as to losses paid or incurred by the surety in “good faith.” Many courts, however, are more circumspect when it comes to enforcing the surety’s contractual right to recover attorney fees incurred by it in investigating and defending claims, and in enforcing its rights under indemnity agreements. This article and presentation discusses common law, contractual, statutory, evidentiary, and procedural challenges impacting upon a surety’s right to recover counsel fees, and suggests strategies for dealing with those issues.

II. The American Rule, In General Courts often display an institutional bias and resistance against permitting a litigant to

recover attorney’s fees from an adversary. That is likely largely due to a deeply-engrained tradition known as the “American Rule,”1 under which litigants are generally expected to absorb the expense of their own attorneys’ work, as well as level of skepticism arising from the fact that courts too often have to deal with misguided efforts by aggressive attorneys attempting to “weasel-around” the American Rule in an effort to compel adversaries to pay their fees.

There are cogent and substantive arguments for and against the American Rule and the

relative merits, vel non, of the contrary “English Rule” of “loser pays.”2 But the reality is that, in the United States, the American Rule prevails, and that nearly all courts are bound by and accustomed to enforcing that rule and accepting the rationale behind it, almost in the manner of received wisdom. As explained by Justice Marshall in F. D. Rich Co., Inc. v. U. S. ex rel Industrial Lumber Co., Inc.,3 a case rejecting an effort to recover attorney fees from a surety under the Miller Act:

1 See BLACK’S LAW DICTIONARY (9th ed. 2009) (defining the American Rule, in relevant part, as “[t]he

general policy that all litigants, even the prevailing one, must bear their own attorney’s fees.” See also Alyeska Pipeline Service Co. v. Wilderness Society, 421 U.S. 240, 271, 95 S.Ct. 161, 244 L.Ed.2d 141 (1975) (observing that the American Rule is “is deeply rooted in our history and in congressional policy.”).

2 See BLACK’S LAW DICTIONARY (9th ed. 2009) (defining the English Rule as “[t]he requirement that a losing litigant must pay the winner’s costs and attorney’s fees.”).

3 417 U.S. 116, 94 S.Ct. 2157, 40 L.Ed.2d 703 (1974).

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Almost a half century ago, the Massachusetts Judicial Council pleaded for reform, asking, On what principle of justice can a plaintiff wrongfully run down on a public highway recover his doctor's bill but not his lawyer's bill? We recognize that there is some force to the argument that a party who must bear the cost of his attorneys' fees out of his recovery is not made whole. But there are countervailing considerations as well. We have observed that one should not be penalized for merely defending or prosecuting a lawsuit, and that the poor might be unjustly discouraged from instituting actions to vindicate their rights if the penalty for losing included the fees of their opponents' counsel. Moreover, the time, expense, and difficulties of proof inherent in litigating the question of what constitutes reasonable attorney's fees has given us pause, even though courts have regularly engaged in that endeavor in the many contexts where fee shifting is mandated by statute, policy, or contract. Finally, there is the possibility of a threat being posed to the principle of independent advocacy by having the earnings of the attorney flow from the pen of the judge before whom he argues.4

The American Rule has, or should have, no direct applicability to enforcing a contractual undertaking by one party to pay another party’s attorneys’ fees. However, the primacy of the American Rule, and judicial support for the public policies behind it, tend to create a form of intellectual inertia in courts—a certain “allergy” against awarding counsel fees—that sometimes must be overcome when advocating for the recovery of such fees. For the purposes of such advocacy, it is helpful to consider context in which American Rule applies, and does not apply, in the first instance.

A. Direct damages; Indemnity for Claims; Fee-Shifting

The American Rule, at its essence, does not broadly apply to all efforts by Party A to recover attorneys’ fees from Party B. Rather, the American Rule discourages fee-shifting in litigation, i.e., fees incurred by Party A in prosecuting or defending a lawsuit against Party B, that Party A then seeks to recover from Party B. “In the United States, the prevailing litigant is ordinarily not entitled to collect a reasonable attorneys' fee from the loser.”5 In other words, the American Rule applies primarily to so-called “first-party” or inter se litigation.

But the American Rule, and the rationale behind it, does not always apply to prevent a party from recovering its attorney’s fees incurred in prior litigation with a third-party. By way of example, where Party A gets sued by Party C, due to circumstances under which Party A is secondarily, vicariously, or allegedly liable to Party C due the actions or inactions of Party B, the American Rule generally does not prevent Party A from seeking to recover its defense

4 Id., 417 U.S. at 128-29 (internal quotations and citations omitted).

5 Alyeska Pipeline, 421 U.S. at 247.

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costs from Party B, the primarily-liable party. Such is the common law in the majority of United States jurisdictions.6

This so-called “third-party litigation exception” to the American Rule has been applied in a variety of contexts, including torts,7 contract,8 indemnity implied-by-law,9 and, as discussed in greater detail below, to “indemnity obligations created by contract.”10 The logic behind this “exception” is that the recovery of third-party litigation expenses is not akin to fee-shifting, but rather simply represents an injured party’s effort to recover its actual direct damages, for which the primarily liable party should be held to account because it was foreseeable that its breach would result in a lawsuit against an “innocent” party. As explained in the Restatement (Second) of Torts:

One who through the tort of another has been required to act in the protection of his interests by bringing or defending an action against a third person is entitled to recover reasonable compensation for loss of time, attorney fees and other expenditures thereby suffered or incurred in the earlier action.11

Similarly, as explained in commentary to the Restatement (Second) of Contracts:

Sometimes a breach of contract results in claims by third persons against the injured party. The party in breach is liable for the amount of any judgment against the injured party together with his reasonable expenditures in the litigation, if the party in breach had reason to foresee such expenditures as the probable result of his breach at the time he made the contract.12

The common law third-party litigation exception to the American Rule does not absolutely

require that the injured party have been a defendant in the prior action. The exception also reaches situations where the injured party was compelled to “bring” an action (against a third party) as a plaintiff to protect its rights. Neither must there have been a “prior action.” Where an “innocent” party is joined as a co-defendant together with the primarily-liable party, the

6 See, e.g., Prentice v. N. Am. Title Guaranty Corp., 381 P.2d 645 (Cal. 1963); Mo. Owners Ass'n v. La

Noue Development, LLC, 357 Or. 333, 353 P.3d 563 (Or. 2015); Peter Fabrics, Inc. v. S.S. Hermes, 765 F.2d 306 (2d Cir. 1985); Pullman Standard, Inc. v. Abex Corp., 693 S.W.2d 336 (Tenn. 1985); Nova Research, Inc. v. Penske Truck Leasing Co., 952 A.2d 275 (Md. 2008); Mutual Fire, Marine and Inland Ins. Co. v. Costa, 789 F.2d 83 (1st Cir. 1986); M.F. Roach Co. v. Town of Provincetown, 247 N.E.2d 377 (Mass. 1969).

7 Pullman Standard, 693 S.W.2d at 340.

8 Montara Owners Ass'n, 353 P.3d at 579; see also Frommeyer v. L. & R. Const. Co., 261 F.2d 879, 881 (3d Cir. 1958) (“If, in our case above put, B is under obligation to hold A harmless from claims of C, but fails to do so, then A having defended himself against C's claim may recover, as part of his damages in a suit against B, what he has had to pay out because of B's failure to perform his contract. This includes what A has had to pay his lawyer as well as other expenses.”).

9 Peter Fabrics, 765 F.2d at 315.

10 Ibid.

11 RESTATEMENT (SECOND) OF TORTS § 914 (1979)

12 Id. at § 351, cmt. C.

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“innocent” party may seek to recover its defense cost by way of a asserting a cross-claim against the primarily liable party.13

Nor is it necessary that the “innocent” party actually have been held liable to the third party in the “prior” action. As explained by one court:

When only litigation expenses are sought it is not necessary that an indemnitee be forced to pay a judgment or settlement to a third party in order to recover such litigation expenses and attorneys’ fees from its indemnitor. Such a requirement would . . . penalize a party for successfully defending the allegations against it. Finding no justification for such a requirement, we reject it.14

The primary limitation placed upon the third-party litigation exception to the American Rule is that the exception not be permitted to swallow the rule. That is to say, the permissible recovery of attorney’s fees must be limited to fees actually incurred by the injured party in litigation adverse to a third-party, and does not extend to the injured party’s expense of recovering indemnity from the primarily-liable party. Rather, such “fees and expenses incurred in establishing the indemnity obligation fall within the ordinary rule requiring a party to bear his own expenses of litigation.”15

The basis for the distinction between first-party fee-shifting, which is highly disfavored by courts, and the recovery of indemnity for third-party litigation expenses, which is more tolerated by courts, is not readily apparent. As to either category of fees, the party paying those fees remains out-of-pocket due to a breach of some kind by the “guilty” party, and the injured party is not truly “made whole” unless or until all of its attorney fees are reimbursed. The underlying “spirit” behind the distinction, however, may be a concern by courts that permitting first-party fee-shifting would place one party at too much of a disadvantage vis-à-vis the other party, would “punish” fair albeit unsuccessful advocacy by the losing party, and would encourage abuse in the form of overly-aggressive lawyering by a party aware of its ability to shift its own expenses to its adversary.

B. Common Law: Indemnity for Claims May Imply Right to Recover Defense Costs

(i) Common Law Prerequisites for Recovery of Defense Costs

As stated, at common law, the right or promise of indemnity is generally regarded to include within it the right of the indemnitee to be held harmless against the reasonable cost of defending against the claims within the scope of the indemnity.

13 Montara Owners Ass'n, 353 P.3d at 579; M.F. Roach Co., 247 N.E.2d at 378.

14 Pullman Standard, 693 S.W.2d at 338.

15 Peter Fabrics, 765 F.2d at 316. See also DiMisa v. Acquaviva, 969 A.2d 1091, 1096 (N.J. 2009) (“ . . . a prerequisite to an award of counsel fees under the exception to the American Rule is litigation with a third party precipitated by another party's wrongful act. No matter how egregious that wrongful act, in the direct action between a plaintiff and a defendant, each party bears his or her own fees under the American Rule.”).

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[T]he reasoning behind it is not hard to understand. Indemnity obligations, whether imposed by contract or by law, require the indemnitor to hold the indemnitee harmless from costs in connection with a particular class of claims. Legal fees and expenses incurred in defending an indemnified claim are one such cost and thus fall squarely within the obligation to indemnify. Consequently, attorney’s fees incurred in defending against liability claims are included as part of an indemnity obligation implied by law, and reimbursement of such fees is presumed to have been the intent of the draftsman unless the agreement explicitly says otherwise.16

There are two possible limitations on this common law rule, however. The first concerns

whether the indemnitor was given (or denied) the opportunity to control the defense of the claim, i.e., a defense tender. The second concerns whether the indemnitor was actually liable for the underlying claim and whether, in the absence of a finding of such liability, the indemnitor is bound to reimburse its indemnitee for the indemnitee’s loss and expense in defending, settling (or losing) the underlying claim. These concerns may overlap.

Courts and commentators have long recognized the efficacy of an indemnitor controlling and/or mitigating those costs by assuming, where appropriate, the defense of claims against its indemnitee.17 Accordingly, under the common law, and in the absence of any agreement to the contrary, the issue of whether or not an indemnitor assumes, or is given the opportunity to assume, its indemnitee’s defense, may impact upon whether or the extent to which a court will permit the indemnitee to recover from the indemnitor the indemnitee’s defense costs from the underlying claim.18 As one prominent treatise explains:

As a general rule, an indemnitee is entitled to recover, as a part of the damages, reasonable attorney's fees, and

16 Peter Fabrics, 765 F.2d at 316.

17 See, e.g., RESTATEMENT (SECOND) OF JUDGMENTS § 57 (1982), cmt. a. explaining (not specific to suretyship, and in the specific context of whether or the extent to which an indemnitor should be bound by a judgment against an indemnitee):

With respect to the liability of the indemnitee to the injured person, the losses involved are those sustained by the injured person and the costs involved in litigating the question of the indemnitee's liability in cases where that liability is doubtful enough to justify litigation. If the liability asserted against the indemnitee is one eventually to be charged to the indemnitor, it is just that the indemnitor be given opportunity to minimize these losses. This he can do most effectively by taking charge of the defense of any claim against the indemnitee that comes within the terms of his obligation to indemnify.

18 See, e.g., Friend v. Eaton Corp., 787 P.2d 474, 477 (Okla. Civ. App. 1989) (permitting a seller to recover common law indemnity from the manufacturer for the seller’s defense costs in an underlying products liability suit, and noting: “Had Yale assumed Medley’s defense as requested, the subsequent assessment of attorney fees could have been avoided.”).

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reasonable and proper legal costs and expenses, even though not expressly mentioned.

This rule is especially applicable where the indemnitor is notified and given an opportunity to contest the adverse litigation but fails or refuses to do so. If the indemnitor fails to defend, then he or she is liable not only for the amount of damages recovered, but for all reasonable and necessary expenses incurred in such defense.19

Where, however, the indemnitee elects to defend itself rather than requesting or permitting the indemnitor to assume its defense, in the absence of an express contract or statutory provision controlling the issue, the courts are in disagreement as to whether or the extent to which the indemnitee is entitled to recover its defense costs.20 And, the absence of a defense-tender, or the offer thereof, may also impact upon the standards of proof that the indemnitee may have to meet in order to recover from its indemnitor for the indemnitee’s settlement of the underlying claim (or, alternatively, for the payment of an adverse result against the indemnitee if the indemnitor did not participate in the defense). As explained by the court in Atlantic Richfield Co. v. Interstate Oil Transport Co.21:

In sum, the rule that has evolved from the cases cited is that where a party seeking indemnity settles with a plaintiff without giving the potential indemnitor an opportunity to approve the settlement, then such party has the burden of proof to show that equitable indemnity principles have not been violated. Notice sufficient to give the indemnitor a meaningful opportunity to defend is the indispensable element to be proven by the party seeking indemnity. If the

19 CORPUS JURIS SECUNDUM, INDEMNITY § 24 (2008) (footnotes omitted). See also Odd Bergs Tankrederi

A/S v. S/T Gulfspray, 650 F.2d 652, 654 (5th Cir. 1981) (internal citations omitted), explaining

Since the indemnitee is required to defend an action by an injured party because of the wrongdoing of the indemnitor and the indemnitor will be liable for any judgment, it is reasonable to require the indemnitor to bear the legal expenses necessarily incurred in that defense. Moreover, an indemnitor, if “vouched in” by the indemnitee, may appear and defend the action rather than rely on the indemnitee's efforts. The indemnitor may not evade the costs of the defense by permitting the indemnitee to continue to represent its interests in the action.

20 Compare, e.g., Seifert v. Regents of Univ. of Minn., 505 N.W.2d 83, 87 (Minn. Ct. App. 1993) (Stating that a “tender of defense is a condition precedent to the creation of an obligation to indemnify.”), with City of Watsonville v. Corrigan, 149 Cal. App. 4th 1542, 58 Cal. Rptr. 3d 458 (2007) (held: city was not required to tender defense of suit against in order to seek reimbursement the costs of that defense, provided that the costs were incurred in good faith and in the exercise of reasonable discretion). Note that the court in Corrigan construed a California statute, Cal.Civ.Code § 2778, that codifies rules of contract construction for indemnity agreements – however, those rules are not inconsistent with the common law in many other jurisdictions.

21 784 F.2d 106, 113 (2nd Cir. 1986).

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indemnitor declines either to approve the settlement or to take over the defense, the indemnitee is required to prove only its potential liability to the plaintiff. Where notice - which includes a meaningful opportunity to assume the defense - is lacking, a demonstration of actual liability is required.

It should be noted that, as it concerns an indemnitor’s liability, the indemnitee’s defense costs for an unsupported or unsuccessful (underlying) claim, the case law is inconsistent. On the one hand, some courts find the indemnitor liable for such defense costs because first, the indemnitee should not be penalized for successfully defending a claim that, in substance, is directed at the indemnitor’s alleged conduct,22 and second:

[W]here an indemnitee is defending a charge that he is constructively liable for the wrongdoing of its indemnitor, he is put in the position of defending the indemnitor’s conduct and the indemnitee is entitled to recover the cost of his defense from the indemnitor because the defense is essentially conducted for the indemnitor’s benefit.”23

Other courts, however, condition the indemnitee’s right to recover defense costs upon the alleged indemnitor actually having been liable for the underlying claim,24 apparently under the view that the alleged indemnitor, having done nothing wrong, should not be held liable merely because a third party asserted an unsupported claim.

Again, the above discussion concerns the application of common law principles in the absence of a written indemnity agreement between the parties defining their respective options and obligations in some other way (e.g., most surety indemnity agreements). Nevertheless, as discussed infra, a number of courts considering claims for counsel fees under general (surety) indemnity agreements have second-guessed sureties’ declination of defense-tenders when denying or limiting the recovery of such fees.

(ii) Exception

Under the common law, there is a significant exception to the concept of requiring an indemnitee to permit its indemnitor to control the defense of the underlying claim as a condition for full indemnity rights. That is where a conflict of interest between the indemnitor and indemnitee renders a defense-tender or joint-representation improper.25 In such a case, the

22 See Heritage v. Pioneer Brokerage & Sales, Inc., 604 P.2d 1059, 1067 (Ala. 1979); Pullman Standard,

693 S.W.2d at 338.

23 Pullman Standard, 693 S.W.2d at 338.

24 See, e.g., Mainstream Am., Inc. v. Capital Prop. Mgm’t, Inc., 732 So.2d 401, 402 (Fl. Dist. Ct. App. 1999).

25 United Pac. Ins. Co. v. Sunset Cove, Inc., 502 P.2d 261, 309 (Or. 1972) (“even though Sunset Cove, Inc. may have been entitled to decline to accept plaintiff’s tender of defense because of the conflict of interest between it and Contractor, it was nevertheless obligated by the terms of its indemnity agreement with Contractor to pay for the cost of Contractor’s defense, including the cost of the services of the attorneys provided by plaintiff”); Transportation Dept. v. Christensen, 581 N.W.2d 807, 813 (Mich. Ct. App. 1998) (“. . . we reject Christensen’s argument that the MDOT was required to tender its defense to Christensen as a prerequisite for

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indemnitee obviously cannot rely upon the indemnitor or its counsel to defend the indemnitee in the underlying action, and the absence of such an (impossible) defense-tender should have no bearing upon the indemnitee’s rights to recover its defense costs.

C. Court Construction of Express Contractual Provisions for Indemnity For Counsel Fees

(i) Indemnity versus Fee-Shifting

As stated, at common law, the American Rule restricts only “first-party” fee-shifting in inter se litigation, and does not prevent efforts to recover third-party litigation expenses from a contractual or common law indemnitor. Unsurprisingly, this distinction has impacted upon how courts tend to interpret written indemnity agreements. As to third-party litigation expenses, the courts tend to view these as falling “squarely within the obligation to indemnify”, and the “reimbursement of such fees is presumed to have been the intent of the draftsman” unless the written indemnity agreement “explicitly says otherwise.”26 However, as to first-party fee-shifting, the courts take a contrary view, and will not find such an obligation except where it is very clearly expressed by the parties in their agreement. As more than one court has stated:

Promises by one party to indemnify the other for attorneys' fees run against the grain of the accepted policy that parties are responsible for their own attorneys' fees. Under New York law, “the court should not infer a party's intention” to provide counsel fees as damages for a breach of contract “unless the intention to do so is unmistakably clear” from the language of the contract.27

(ii) Fee Reciprocity Statutes

Another area of difference between first-party fee-shifting and indemnity for third-party litigation expenses is the applicability of fee reciprocity statutes.

As explained above, courts tend to view the American Rule as just and sound policy, and to view fee-shifting as unjust, over-reaching and ripe for abuse. Similar views have led several state legislatures to get in on the fun by passing statutes requiring or authorizing courts to treat contractual fee-shifting provisions as reciprocal so as to “level the playing field” for parties litigating disputes under such contracts.28 Such fee-reciprocity statutes typically provide essentially as follows:

indemnification in this case. The legal interests of the MDOT and Christensen with respect to plaintiffs’ tort claims were in direct conflict.”).

26 Peter Fabrics, 765 F.2d at 316; Nova Research, 952 A.2d at 286 (quoting Peter Fabrics).

27 Nova Research, 952 A.2d at 487 (quoting with approval Oscar Gruss & Son, Inc. v. Hollander, 337 F.3d 186, 199 (2d Cir. 2003)). Accord Kessler v. Gleich, 13 A.3d 109, 114 (NH 2010).

28 Fla. Hurricane Prot. & Awning, Inc. v. Pastina, 43 So. 3d 893, 895 (Fla. Dist. Ct. App. 2010). See also Wachovia SBA Lending, Inc. v. Kraft, 200 P.3d 683, 687 (Wa. 2009) (explaining that the purpose of Washington’s fee reciprocity statute is to ensure “that no party will be deterred from bringing an action on a contract or lease for fear of triggering a one-sided fee provision.”).

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If a contract contains a provision allowing attorney's fees to a party when he or she is required to take any action to enforce the contract, the court may also allow reasonable attorney's fees to the other party when that party prevails in any action, whether as plaintiff or defendant, with respect to the contract.29

Of note is the fact that such fee-reciprocity statutes, as drafted, apply solely to first-party disputes, and not to indemnity for fees incurred while defending third-party disputes.

III. Surety Indemnity Agreement Provisions Regarding Recovery of Fees

Surety indemnity agreements generally provide that sureties are entitled to recover all fees and expenses incurred in “good faith” or paid under the “belief” that the payments thereof are necessary or expedient. The courts in nearly all jurisdictions, however, require that attorneys charge only “reasonable” fees.30 By extension, where by virtue of a written agreement or otherwise it is permissible to permit a litigant to recover its own attorney’s fees from an adverse party, courts often limit the recovery to so-called “reasonable” fees.

This “reasonableness” requirement potentially conflicts with surety general indemnity agreements that require indemnitors to reimburse sureties for all payments made by the surety in “good faith.” Is it possible for a surety to pay and seek to collect unreasonable fees that were incurred in “good faith”? Is there a distinction between “reasonable” and “not unreasonable”? The answers to these questions ultimately hinge upon how the concepts of “reasonableness” and “good faith” are understood and applied, and how the burden of proof is allocated (whether by the express terms of the parties’ agreement, or by a court). The terms “reasonable” and “good faith” are both fairly general and elastic in nature. Indeed, at least one court has opined in this context that “decisions to pay counsel must pass a test of reasonableness in order to be in good faith.”31 Complicating this issue is a blurring between substantive and evidentiary concepts. That is to say, the terms “good faith” and “belief” classically describe the subjective mental state of a party. However, the absence or opposite of subjective good faith may often only be inferred or proved by manifestly and objectively unreasonable conduct of a party.

In addition, when assessing the “reasonableness” of a surety’s claim for counsel fees, a court may focus not only upon the dollar amounts claimed, but also upon whether, in the court’s view, the fees could have been avoided altogether (e.g., where the principal contends that the defense of a claim should have been tendered to it and its own counsel).

29 FLA. STAT. § 57.105(7) (2008). In addition to Florida, six other states currently have such statutes. See

CAL. CIV. CODE §1717 (2009); HAW. REV. STAT. §607-14 (1993); MONT. CODE ANN. §28-3-704 (2011); OR. REV. STAT. ANN. §20.096 (2003); UTAH CODE ANN. §78B-5-826 (2008); WASH. REV. CODE. ANN. §4.84.330 (2006).

30 See, e.g., ABA MODEL RULES OF PROFESSIONAL CONDUCT 1.5(a) (providing in relevant part: “A lawyer shall not make an agreement for, charge, or collect an unreasonable fee or an unreasonable amount for expenses.”).

31 Ideal Electronic Security Co, Inc. v. Int’l Fid. Ins. Co., 129 F.3d 143, 151 (D.C. Cir. 1997).

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The practical impact of applying a “reasonableness,” rather than “good faith,” standard is to potentially require a surety to introduce quantitatively more, and qualitatively more specific evidence, in order to justify its entitlement to recover fees in the amount sought. This burden upon sureties may be significantly lessened by the proper application of the general indemnity agreement’s prima facie evidence clause, or by courts that award counsel fees based upon their own assessment of reasonableness without requiring a hearing or jury trial.

A. Good Faith or Reasonableness, Based Upon Language of Agreement

Although courts generally apply a “reasonableness” standard to claims for the recovery of attorney’s fees, a number of courts have enforced as written general indemnity agreements that expressly call for the application of a “good faith” or other standard.

For example, the court in Wilson and Company, Engineers and Architects v. Walsenburg Sand and Gravel Company, Inc.,32 concerned an indemnity agreement providing in relevant part that:

Surety shall be entitled to charge for all ... [liabilities incurred] ... in good faith in and about the matters herein contemplated by this Agreement under the belief that it is or was liable for the sums and amounts so disbursed, or that it was necessary or expedient to make such disbursements, whether or not such liability, necessity or expediency existed.33

Noting that “[t]he extent of a contractual duty to indemnify must be determined from the

contract itself,” the Wilson court observed and held as follows:

[B]ased on the plain meaning of the foregoing language, WSG assumed responsibility for Fidelity’s attorney fees and litigation expenses as long as they were incurred in good faith. Because the record discloses no evidence that Fidelity acted in bad faith by defending the claim brought against it, we conclude that it was entitled to collect its attorney fees and costs.

In its findings of fact, the trial court set the amount of Fidelity’s award based on an affidavit submitted by Fidelity’s counsel. We find this basis adequate as the affidavit was not contested and there was sufficient evidence presented to support the amount claimed.34

32 779 P.2d 1386 (Colo. Ct. App. 1989).

33 Id. at 1387.

34 Id.

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Similarly, in Transamerica Premier Insurance Company v. Nelson,35 the Supreme Court of Nevada, explained and held as follows:

Transamerica maintains that many district courts treat the award of attorney’s fees to a surety pursuant to a GIA as a discretionary matter to be determined based upon the court’s subjective analysis of the “reasonableness” of the fees under the circumstances. We conclude that such a standard is in contravention of the purpose of the GIA to hold the surety harmless for all expenses consequential to the issuance of the bond. Thus, we adopt a standard under which courts should consider only whether the attorney’s fees were incurred in good faith as a result of or in consequence of the issuance of a bond. When the parties contractually agree that good faith is the standard, undertaking a determination of anything other than good faith is inappropriate.36

The United States Court of Appeals for the Third Circuit, applying Pennsylvania law, in

Fallon Electric Co, Inc. v. The Cincinnati Insurance Company,37 likewise spoke in favor of enforcing a surety’s right to recover its attorney’s fees based upon the language of its indemnity agreement. The indemnity agreement at issue included a prima facie evidence clause, but did not expressly incorporate a “good faith” standard. Rather the agreement required the indemnitors to reimburse payments made by the surety “in the reasonable belief that [the surety] was liable for the amount disbursed, or that such payment or compromise was reasonable under the circumstances.”38 The district court, following cases from other jurisdictions applying a “reasonableness” standard, had found that the surety had not proven the “reasonable necessity” of a portion of its attorneys fees. On appeal, the Third Circuit Court of Appeals distinguished the cases cited by the district court, noting that the indemnity agreements in those cases did not contain the same “prima facie evidence” language as the indemnity agreement at issue. The court then went on to state the applicable law as follows:

Here . . . the agreement provides that Ravin would be liable to indemnify CIC only for those payments “made . . . in the reasonable belief that [CIC] was liable for the amount disbursed, or that such payment or compromise was reasonable under all of the circumstances.” Pursuant to the foregoing, the court should have placed on Ravin the burden of proving both that: CIC did not actually believe that it was liable for the attorney’s fees disbursed, or that its belief in that respect was unreasonable; and CIC did not actually

35 878 P.2d 314 (Nev. 1994).

36 Id., at 317.

37 121 F.3d 125 (3rd Cir. 1997).

38 Id., at 126.

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believe that the payment of such fees (as opposed to the incurrence of the fees) was reasonable under the circumstances, or that its belief in that respect was unreasonable. A showing that CIC did not actually believe it was liable for the fees or that CIC did not actually believe that the payment of such fees was reasonable under all the circumstances would be tantamount to a showing of bad faith of fraud.39

And, because the record on appeal in Fallon Electric contained no evidence that the surety had paid attorney’s fees in the belief that the fees were unnecessary or unreasonable, the Court of Appeals directed that the District Court award to the surety “attorney’s fees in the amount it requested.”40

B. Good Faith or Reasonableness Implied By Law Where an indemnity agreement does not expressly set forth a standard for the recovery of

attorney’s fees, or where a party is seeking to recover indemnity for attorney’s fees under the common law third-party litigation exception to the American Rule, courts will almost invariably apply some form of “reasonableness” standard to determine the amount of fees awarded.

The court in SCAC Transport (USA) Inc. v. S.S. Danaos,41 applying common law indemnity

principles in an admiralty case, reversed the district court and allowed an indemnitee to recover the full amount of its counsel fees (including counsel fees the indemnitee was compelled by an arbitrator to pay to an adverse party in the underlying case). The S.S. Daneos court ruled tersely as follows: “Given the lack of evidence that the amounts paid by Big Lift for its costs and fees were unreasonable and the fact that Big Lift was made to pay Danais’ attorney’s fees by the arbitration award, Universal must indemnify Big Lift for those amounts.”42

Other courts have suggested that where an indemnity agreement expressly or implicitly

requires the reimbursement of attorney’s fees, but is silent as to what standards should be applied for calculating the amount thereof, a reasonableness standard will be implied.43

39 Id. at 129 (emphasis added) (internal citations omitted).

40 Id. at 130. See also U.S. Fid. and Guar. Co. v. Bilt-Rite Contractors, Inc., No. Civ.A.04-1505, 2005 WL 1168374 *7 (E.D. Pa. May 16, 2005) (following Fallon Electric and enforcing an indemnity agreement with a prima facie evidence clause and “good faith” language, awarding to the surety the amounts sought by it, and explaining: “Defendants fail to provide enough evidence to sustain its burden of showing that Plaintiff violated the good faith clause of the Indemnity Agreement in its payment of costs, fees and expenses with respect to the Bonded Projects.”).

41 845 F.2d 1157 (2d Cir. 1988).

42 Id. at 1165 (emphasis added).

43 See, e.g., Girard Fire & Marine Ins. Co. v. Koenigsberg, 65 S.W.2d 783, 785 (Tex. Civ. App. 1933) (“Unless otherwise stated, a reasonable attorney’s fee is implied in all contracts of indemnity. Where the parties do not expressly agree as to the amount, the law raises a promise to pay that which is reasonable.”); Rishell v. Medical Card Sys., Inc., 925 F.Supp.2d 211, 219 (D.P.R. 2013) (“contracts for advancement and indemnification are subject to an implied reasonableness term”); Neustrom v. Union Pacific R. Co., 156 F.3d 1057, 1068 (10th Cir. 1998) (“. . . under Kansas law, a duty to act reasonably and in good faith must be read into every contract,

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C. Reasonableness Standard Applied as a Matter of Public Policy

A number of courts following (or purporting to follow) the law in various jurisdictions have applied a “reasonableness” standard to the recovery of attorney’s fees, even where the parties’ written indemnity agreement stipulated that a more permissive “good faith” standard should govern. Such courts have generally concluded that any lesser standard than reasonableness would leave the door to abuse and excessive fees. Indeed, a number of such courts have chastised sureties for resisting application of a reasonableness standard to the recovery of counsel fees, stating: “An indemnity agreement does not represent a blank check enabling a surety to incur any expense and send the bill to the principal.”44

A forceful example of a court refusing to enforce, as written, an indemnity agreement calling for the reimbursement of attorney’s fees incurred in “good faith” is International Fidelity Insurance Company v. Jones.45 There, the court rejected “the view that under an indemnity agreement the obligor has no defense and that truly unreasonable [attorney’s fees] payments must be reimbursed as long as they are made in good faith,” observing that the “[f]ailure [of courts] to oversee the reasonableness of such awards could result in inequities if not corruption.”46

Unexplained by the courts that reject a “good faith” standard is why concerns over possible

abusive overspending by sureties could not be adequately addressed by permitting indemnitors to prove a “bad faith” defense where merited by the evidence of a particular case. After all, in the substantial majority of jurisdictions, the application of a good faith standard works just fine, and raises few concerns, with respect to enforcing sureties’ rights to collect indemnity of other categories of payments, such as payments made in the settlement of bond claims. As one court explained, “[s]ureties enjoy such discretion to settle claims because of the important function they serve in the construction industry, and because the economic incentives motivating them are a sufficient safeguard against payment of invalid claims.47

Of course, a surety faces the same economic incentive to limit counsel fees as they do in

taking care not to so easily pay invalid or inflated claim, i.e., the risk of not being indemnified. The primary driver of that risk is the solvency of the indemnitors. The risk of being found to have acted in “bad faith” is secondary. Moreover, from a business standpoint, it is impossible

including the terms of indemnification clauses. . . . In holding that Union Pacific need not show the reasonableness of its attorneys' fees, the court ignored this well-established rule of contract construction.”).

44 Newton County v. State ex rel. Dukes, 133 So.3d 805, 808 (Miss. 2014) (internal quotations omitted). See also Gulf Ins. Co. v. AMSCO, Inc., 889 A.2d 1040, 1048 (N.H. 2005) (“We, however, agree with courts that hold that indemnity contracts, even broadly stated, do not extend a “blank check” for a surety to recover all fees and expenses incurred or paid by it in its sole discretion.”); Jackson v. Hollowell, 685 F.2d 961, 966 (5th Cir. 1982) (“In sum, an indemnity agreement is not a blank check; it does not entitle the surety company to reimbursement for legal expenses which are unreasonable or unnecessary.”).

45 682 A.2d 263 (N.J. Super. Ct. App. Div. 1996).

46 Id. at 265.

47 Gen. Accident Ins. Co. of Am. v. Merritt-Meridian Construction Corp., 975 F. Supp. 511, 516 (S.D.N.Y. 1997) (emphasis added).

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to separate the economic incentives for settling claims from the economic incentive to limit attorney’s fees. The two go hand-in-hand. Sureties incur attorney fees to obtain better results in handling claims; sureties often settle claims in large measure to limit attorney fees once, in the surety’s judgment, incurring additional litigation expenses is not worth the risk of foregoing a settlement opportunity and continuing its defense of a claim.

However, in the context of attorney fees, a surety’s economic incentive to limit those fees—

particularly a surety’s collection risk—are simply lost upon some courts. Thus, for example, in reading a “reasonableness” requirement into a contractual “good faith” standard, the court in Ideal Electronic Security Co, Inc. v. International Fidelity Insurance Company stated as follows:

Although IFIC obviously has some discretion under the parties’ agreement to decide about the scope of the legal work for which it contracts, any decisions to pay counsel must pass a test of reasonableness in order to be in good faith. Indeed, if good faith in this context did not include reasonableness, the indemnitee would have no incentive to police its attorneys’ activities and charges, since it could simply dump any and all charges billed onto the indemnitor. Such a result would make no sense.48

It might be argued that where a surety’s indemnitors are financially strong and collection risk is minimal, that viewed in isolation could lessen a surety’s economic incentive to conserve on counsel fees. On the other hand, where a surety has the luxury of solvent indemnitors who can be counted upon to effectively defend claims using their own counsel and resources, the surety has less of an incentive to devote significant resources to paying attorneys to defend claims. Of course, if a surety concludes based upon its own assessment that a claim has sufficient merit to justify a payment or settlement, the surety may find it appropriate to do so even over the objections of a solvent bond principal desiring to continue the defense of the claim. Regardless, the above-quoted passage from Ideal Electronic and other cases in which courts were apprehensive of sureties providing their attorneys with a “blank check” illustrate that courts are not necessarily familiar with how sureties guard the bottom line or their economic incentives for doing so.

There is one particular category of attorney fees which is often incurred by sureties in good

faith, but which courts are especially prone to second-guess for “reasonableness.” This category includes expenses that courts view as duplicative or unnecessary in view of a bond principal’s willingness to defend claims using its own counsel. As to such fees, a number of courts have adopted the view stated by the court in Central Towers Apartments, Inc. v. Martin49 as follows:

When the principal and his indemnified surety are sued by the obligee under the surety's bond, and the surety exercises its right under the indemnity agreement of the principal to hire its own separate counsel and incur litigation expense in

48 Id. at 150 (emphasis added).

49 453 S.W.2d 789 (1970).

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defense of the action, the liability of the principal for the attorney fees and expenses thus incurred by the surety depends upon whether, under all the facts of the case, it was reasonably necessary for the surety to so act in its own defense, and whether the surety acted in good faith toward the principal.50

In any event, whether in courts following a good faith standard, giving lip-service to that standard, or rejecting that standard in favor of a “reasonableness” standard, as a practical matter, sureties seeking to recover their counsel fees must be ready, willing and able to present, explain and defend the reasonableness of those fees.

IV. Reasonableness of Fees

In lawsuits involving underlying substantive claims (e.g., surety bond claims), additional claims seeking indemnity for counsel fees and other litigation expenses are viewed as collateral to the “main” dispute, and many courts appear to prefer that applications for the recovery of attorney’s fees be made (at least initially) by way of motion at the conclusion of “main” lawsuit.51 Many, but not all, courts appear to prefer that the court, and not a jury, determine the “reasonableness” of the sought-after fees.52 In the event of factual disputes over “reasonableness,” courts will sometimes require a hearing or trial, although this approach is generally not favored.53 Individual courts, however, may exercise considerable latitude in

50 Id. at 800. See also Gulf Ins, Co. v. AMSCO, Inc., 889 A.2d 1040 (N.H. 2005); Jackson v. Hollowell,

685 F.2d 961, 966 (5th Cir. 1982) (quoting Central Towers, and adding: “In sum, an indemnity agreement is not a blank check; it does not entitle the surety company to reimbursement for legal expenses which are unreasonable or unnecessary. To hold otherwise would allow bonding companies to retain counsel and to charge attorneys' fees against the indemnitor even when the surety company does not require a separate legal defense to protect its interests. The indemnity contract cannot reasonably be construed as requiring the indemnitee to bear the cost of such redundant representation.”).

51 See generally Ray Haluch Gravel Co. v. Cent. Pension Fund of Intern. Union of Operating Eng’rs and Participating Emp’rs, 134 S.Ct. 773, 781-782, 187 L.Ed.2d 669 (2014) (discussing the interplay between FED. R. CIV. PR. 54(d)(2)(A) and 58(e), and holding that a civil judgment may be regarded as “final” for purposes of the time limit for appeals, even where there remained an unresolved contractually-based claim for attorney’s fees).

52 See 20 CORPUS JURIS SECUNDUM, COSTS § 170 (“Although under some authority, whether a party is entitled to recover attorney’s fees and the determination of reasonable attorney’s fees are issues of law, whether to award litigation expenses, the amount of such expenses, and the reasonableness of the fees to be awarded are generally questions to be determined by the trier of fact from the evidence and the facts and circumstances of each particular case.”).

53 See, e.g., Hensley v. Eckerhart, 461 U.S. 424, 437 (1983) (“A request for attorney's fees should not result in a second major litigation.”). See also Coastal Fuels Marketing, Inc. v. Fla. Exp. Shipping Co., Inc., 207 F.3d 1247, 1253 (11th Cir. 2000) (explaining and holding as follows: “We do not want attorney's fees proceedings to be full trials. In this case, the evidence available to the court was sufficient for the court to have used its own expertise to assess the reasonableness of the fee request and to award some fees. It was an abuse of discretion to disallow altogether Express's request for Cadwalader's attorney's fees just because Cadwalader did not send a member to the hearing. . . . We do not intend to discourage a court from scheduling an evidentiary hearing where appropriate. To the extent that the absence of certain testimony about a firm's billing records means that specific questions the court might have go unanswered, that is a factor which a court may use in determining whether certain amounts requested were unreasonable. But, in the circumstances of this case, a firm's failure to send a member is, in itself, an insufficient reason to disallow completely a fee request.”).

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how and when they chose to deal with the issue. Care must be taken at the outset of a case (and again when preparing for trial) to determine in advance what the ground-rules will be for the recovery of counsel fees, in order to avoid the risk and expense pursuing the issue too early or too late, and avoiding procedures that may delay the entry of final judgment or that may lead to unwanted inefficiency in appeals.

A. Ordinarily An Issue of Law for the Court, not the Jury

(i) Rationale

Conceptually, one would expect that a contractual claim for “reasonable” attorney’s fees, if disputed, might be viewed as an issue for a jury to decide. However, many courts regard themselves as “experts” that are better-suited to assess reasonableness in this context than a jury of lay people, and therefore regard the reasonableness of fees as an issue of law for decision by the court.54 In addition, courts understandably prefer to judge the issue of reasonableness of attorney’s fees at the end of a case (i.e., after a jury verdict, if any), with the benefit of the full record of the underlying dispute so that the reasonableness of fees may be considered in context and as a collateral matter to the underlying dispute. Finally, a number of courts follow an approach pursuant to which a jury may determine a litigant’s right to recover attorney’s fees under a contract (assuming the issue was not already decided by the court applying summary judgment standards); however, determining the “reasonable” amount of those fees is considered “equitable” in nature, and therefore falls within the province of the court and no right to trial by jury attaches.55 As explained by the court in Ideal Electronic:

The District of Columbia Court of Appeals has long held, and this court has acknowledged, that once a contractual entitlement to attorney's fees has been ascertained, the determination of a reasonable fee award is for the trial court in light of the relevant circumstances. Where a claim for attorney's fees arises from a private contract provision, such a claim does not embody a right to trial by jury.56

54 Spirtas Co. v. Ins. Co. of State of Pa., 555 F.3d 647, 654 (8th Cir. 2009) (“We have repeatedly stated,

however, that district courts rather than juries are the authorities as to the reasonableness of attorney fees.”); Meadowbrook, LLC v. Flower, 959 P.2d 115, 117 (Utah 1998) (“[T]he determination of reasonable attorney fees is an issue generally left to the sound discretion of the trial court, not the jury.”); Paramount Commc’ns Inc. v. Horsehead Indus., Inc., 287 A.D.2d 345, 731 N.Y.S.2d 433, 434 (App. Div. 2001) (“[W]hen a contract provides for an award of attorneys' fees, there is no right to a jury trial on the issue of the reasonable value of such fees.”). See also McGuire v. Russell Miller, Inc., 1 F.3d 1306, 1313 (2d Cir. 1993) (“Following common practice, today we make law out of what was previously common sense: when a contract provides for an award of attorneys' fees, the jury is to decide at trial whether a party may recover such fees; if the jury decides that a party may recover attorneys' fees, then the judge is to determine a reasonable amount of fees.”).

55 See, e.g., Cavallo v. Allied Physicians of Michiana, LLC, 42 N.E.3d 995 (Ind. Ct. App. 2015)

56 Id. 129 F.3d at 150 (internal cites and quotes omitted).

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In any event, surety general indemnity agreements often include provisions under which the indemnitors expressly waive any right to a jury trial in disputes with the surety, and such clauses are generally enforced by the courts.57

(ii) Procedure

As stated, courts have considerable latitude regarding when and pursuant to which procedure(s) they will entertain applications for the recovery of counsel fees. In some cases, it may be appropriate to move for summary judgment on the issue (particularly as to liability) prior to trial. Obtaining an award of partial summary judgment as to the surety’s contractual entitlement to attorney’s fees has the advantage of removing the issue from the trial on the merits, and may facilitate inquiring of the court how and when the court would find it most appropriate and efficient to consider the issue. The same inquiry can and should be made of the court at an initial pre-trial conference, or when formulating and submitting a pre-trial order. Ordinarily, courts prefer to determine attorney fee awards at the end of the case.58

However, it is important to not wait too long, and to also review and comply with the procedural requirements of the particular forum. In federal court, for example, FED R. CIV. PR. 54(d) requires as follows in relevant part:

(2) Attorney's Fees.

(A) Claim to Be by Motion. A claim for attorney's fees and related nontaxable expenses must be made by motion unless the substantive law requires those fees to be proved at trial as an element of damages.

(B) Timing and Contents of the Motion. Unless a statute or a court order provides otherwise, the motion must:

(i) be filed no later than 14 days after the entry of judgment;

(ii) specify the judgment and the statute, rule, or other grounds entitling the movant to the award;

(iii) state the amount sought or provide a fair estimate of it; and

57 See Randall I. Marmor and Jay M. Mann, Complementary Provisions of the Indemnity Agreement, in

THE SURETY’S INDEMNITY AGREEMENT: LAW AND PRACTICE, 369, 391-393 (Marylyn Klinger, George J. Bachrach, Tracey L. Haley, eds.) (2nd ed. A.B.A. 2008).

58 See Murphy v. Stowe Club Highlands, 761 A.2d 688, 701 (Vt. 2000) (citing federal caselaw and explaining the practicalities of and preference for this approach). See also Kaufman v. Diskeeper Corp., 176 Cal.Rptr.3d 757 (Cal. Ct. App. 2014) (“The Legislature enacted the relevant portions of Code of Civil Procedure section 1033.5, subdivision (c)(5) to clarify that the proper method to recover contractual attorney fees is “as an item of costs awarded upon noticed motion,” rather than as an element of damages pleaded in the complaint.”).

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(iv) disclose, if the court so orders, the terms of any agreement about fees for the services for which the claim is made.

(C) Proceedings. Subject to Rule 23(h), the court must, on a party's request, give an opportunity for adversary submissions on the motion in accordance with Rule 43(c) or 78. The court may decide issues of liability for fees before receiving submissions on the value of services. The court must find the facts and state its conclusions of law as provided in Rule 52(a).

(D) Special Procedures by Local Rule; Reference to a Master or a Magistrate Judge. By local rule, the court may establish special procedures to resolve fee-related issues without extensive evidentiary hearings. Also, the court may refer issues concerning the value of services to a special master under Rule 53 without regard to the limitations of Rule 53(a)(1), and may refer a motion for attorney's fees to a magistrate judge under Rule 72(b) as if it were a dispositive pretrial matter.59

Also, although surety attorneys generally do so as a matter of course, it is important to note that a number of courts regard contractually-based claims for attorney’s fees as involving “special damages,” which must be pled with “specificity.”60

(iii) Standard of Review on Appeal

Although a surety’s entitlement to recover indemnity for attorney’s fees is contractual, the amount awarded by a court is generally reviewed on appeal under a highly deferential “abuse of discretion” standard.61

B. Standards Applied By Courts – Liability Issues

59 FED R. CIV. PR. 54(d) (emphasis added).

60 See Perry v. Serenity Behavioral Health Systems, No. CV106–172, 2009 WL 1259367 *2 (S.D. Ga. May 6, 2009) (“While the Eleventh Circuit Court of Appeals has not spoken to the issue, all but one circuit to consider the issue has held that attorney's fees are special damages that must be “specifically stated” in the pleadings pursuant to Federal Rule of Civil Procedure 9(g).”).

61 Global Xtreme, Inc. v. Advanced Aircraft Center, Inc., 122 So.3d 487, 489 (Fl. App. 2013) (“The standard of review for an award of attorney's fees, whether based on contract or statute, is abuse of discretion.”); U.S. Fid. & Guar. Co. v. Braspetro Oil Servs. Co., 369 F.3d 34, 74 (2d Cir. 2004) (“Where a district court has awarded attorneys' fees under a valid contractual authorization, we recognize that it has broad discretion in doing so, and an award of such fees may be set aside only for abuse of discretion.”); Ideal Electronic, 129 F.3d at 150 (“[T]he reasonableness of an attorney's fees award is within the sound discretion of the trial court and is reviewed only for abuse of discretion.”); Spirtas Co. v. Insurance Co. of State of Pa., 555 F.3d 647, 656 (8th Cir. 2009) (“…our standard of review is only for abuse of discretion, and the bonding contract clearly placed the burden on Appellants to disprove ICSP’s prima facie showing as to fees.”).

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(i) In General – Necessity or Appropriateness of Incurring Fees

Some courts have conditioned the surety’s right to recover attorney’s fees upon whether in the view of the court it was “reasonably necessary” for the surety to retain its own counsel in defense of a claim.62 In making that determination, courts following this approach typically consider the following factors:

1. the amount of risk to which the surety was exposed; 2. whether the principal was solvent; 3. whether the surety has called upon the principal to deposit with it funds to

cover the potential liability; 4. whether the principal has refused to comply with a demand by the surety to

deposit with it the amount of the claim; 5. whether the principal was notified of the action and given an opportunity to

defend for itself and the surety; 6. whether the principal hired the attorney for both itself and the surety; 7. whether the principal notified the surety of the hiring of the attorney; 8. the competency of the attorney hired by the principal; 9. the diligence displayed by the principal and his attorney in the defense; 10. whether there is a conflict of interest between the parties; 11. the attitude and cooperativeness of the surety; and 12. the amount charged and diligence of the attorney hired by the surety.

For example, the case of Gulf Insurance Co. v. AMSCO, Inc.63 concerned a surety’s claim

for attorney fees under an indemnity agreement requiring reimbursement for payments made by the surety “in the reasonable belief that it was liable for the amount disbursed, or that such payment or compromise was reasonable under all the circumstances.”64 The court construed that language to require that the surety “not only have subjectively believed that the expenses incurred were reasonable, but the belief must have been objectively reasonable as well.”65 The AMSCO court then proceeded to examine the objective reasonableness of the surety’s decision to engage its own defense counsel in the underlying bond claims, using the above-referenced list of factors. On the facts before it, the AMSCO court upheld the trial court’s determination that the surety’s use of separate counsel matters “was unreasonable for any

62 See Gulf Ins. Co. v. AMSCO, Inc., 889 A.2d 1040, 1049 (N.H. 2005) (quoting Perkins v. Thompson,

551 So.2d 204, 210 (Miss. 1989) (quoting Cent. Towers Apartments, Inc. v. Martin, 453 S.W.2d 789, 800 (Tenn. Ct. App. 1970))). See also Jackson v. Hollowell, 685 F.2d at 966 n. 15 (quoting Central Towers).

63 889 A.2d 1040 (N.H. 2005).

64 Id. at 1047.

65 Id. In applying this “reasonableness” standard, the AMSCO court specifically noted the absence of any “good faith” language in the indemnity agreement. Construing very similar provisions in an indemnity agreement, together with its prima facie evidence clause, the court in Fallon Electric Co. v. Cincinnati Insurance Co., 121 F.3d 125, 127 (3d Cir. 1997) held that to avoid liability for attorney’s fees, the indemnitor had “the burden of proving both that: [the surety] did not actually believe that it was liable for the attorney’s fees disbursed, or that its belief in that respect was unreasonable; and [the surety] did not actually believe that the payment of such fees (as opposed to the incurrence of the fees) was reasonable under all the circumstances, or that its belief in that respect was unreasonable.”

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purpose other than to monitor the litigation,” and affirmed the judgment limiting the surety’s recovery to such “pre-lawsuit and monitoring fees[.]”66

(ii) Surety’s Justifications for Declining Defense Tenders

There are many “reasonable” business reasons, as well as legal and strategic reasons, why a surety may elect to retain its own counsel to defend claims and decline to tender its defense to its principal. These include, but are not limited to: (i) the failure of the principal and indemnitors to collateralize the surety against the claim, or to otherwise indemnify the surety, (ii) conflicts of interest preventing joint representation, or simply (iii) a lack of confidence in the principal, its alleged defenses, and/or its counsel. Of course, when a surety elects to engage its own counsel rather than tender its defense of the claim to the bond principal, the surety may subsequently be called upon by a court to justify the good faith nature or “reasonableness” of that decision. In view of that, it is advantageous for a surety to create an adequate “paper trial” of its decision-making process and, when appropriate, to explain it to the court with sufficient detail and clarity to assist the court in understanding why the surety acted reasonably and in good faith.

(a) Failure to Post Collateral / Financial Insecurity

The failure of a principal to collateralize its surety, or doubts regarding solvency and the financial ability of the principal/indemnitors to protect the surety against any judgment that may entered against it, have been cited by courts as representing either a “reasonable” justification for the surety retaining its own counsel, or at least a factor supporting such reasonableness. Thus, the court in James Constructors, Inc. v. Salt Lake City Corp.67 upheld the lower court’s finding that the surety’s fees were reasonably incurred, based in part upon an indemnitor’s “stubborn refusal to post collateral or to provide other adequate and acceptable security” to the surety.68 In United Riggers & Erectors, Inc. v. Marathon Steel Co.,69 the court found that the principal’s inability to post collateral, together with the magnitude of the claim and allegations that the principal had failed to pay its laborers and suppliers, justified the surety’s hiring of separate counsel to defend itself, and that the lower court's findings to the contrary were “clearly erroneous.”70 And the court in Spirtas Co. v. Insurance Co. of State of Pa.71 observed and held that

the district court was entitled to view ICSP’s extensive participation as reasonable in light of uncertainty as to the Appellant-indemnitors’ solvency. This uncertainty meant

66 AMSCO, 889 A.2d at 1046.

67 888 P.2d 665 (Utah Ct. App. 1994).

68 Id. at 671. The court also noted the surety’s justifiable concerns over (i) the bona fides of the principal’s questionable financial statements, (i) the indemnitor’s reluctance to pay the tendered counsel’s fees, and (iii) the indemnitor’s refusal to authorize or participate in settlement negotiations regarding the claim.

69 725 F.2d 87 (10th Cir. 1984).

70 Id. at 90.

71 555 F.3d 647 (8th Cir. 2009).

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ICSP faced potential liability for the full amount of the bond limits without a meaningful guarantee of indemnification. Appellants’ refusal to post the bond limits and refusal to bear the entire defense demonstrate this point.72

At least two courts have cited the failure of a surety to seek a deposit of collateral as a

ground for concluding that the surety was financially secure enough that its decision to decline a defense tender was unreasonable. The court in Central Towers simply disbelieved the surety’s argument that concerns over the principal’s solvency justified the surety’s decision to retain its own counsel, noting the “failure of the surety to demand a deposit by the contractor under the provisions of Paragraph Sixteen of the indemnity agreement.”73 The decision in Gulf Insurance Company v. AMSCO, Inc., goes further and demonstrates that a single unfulfilled request by the surety for collateral may not be enough to convince some courts that the surety was really serious about the issue. Thus, in upholding the trial court’s determination that the surety’s engagement of its own counsel was not reasonably necessary, the AMSCO court explained:

While the language in paragraph 3(C)(ii) establishes Gulf's contractual right to collateral “in an amount reasonably deemed by [it] to be sufficient to cover the claim or demand and interest,” the trial court was unpersuaded by Gulf's claim at trial that it refused to tender defense to AMSCO because AMSCO failed to post any collateral to cover the Brita claim. It concluded that while Gulf initially requested collateral, “subsequent letters [made] no reference to demand for collateral,” but focused on securing “the loss adjustment expenses it had incurred in the Beacon and Panciocco matters.” Because sufficient evidence exists to support the trial court’s factual finding that AMSCO’s failure to post collateral did not serve as the basis for Gulf’s retention of its own separate legal counsel, we do not review Gulf’s arguments concerning AMSCO’s contractual obligation to post collateral.74

72 Id. at 655.

73 Central Towers, 453 S.W.2d at 800. See also Safeco Ins. Co. v. Criterion Inv. Corp., 732 F. Supp. 834, 842 (E.D. Tenn. 1989) (stating that “Central Towers Apartments appears to apply only to a situation in which the principal is cooperating to keep the surety from exposure to risk on the bond.”).

74 Gulf Insurance Co., 889 A.2d at 1050 (internal citation omitted). See also Am. Sur. Co. of N.Y. v. Vinsonhaler, 137 N.W. 848, 850 (Neb. 1912) (“The petition shows that the agreement was that the principal should furnish funds to the surety sufficient to indemnify it against any claim, and, in the absence of any allegation that he failed to do so, or failed to properly defend the suit, it must be considered, as against the pleader, that the principal had complied with all of his agreements in that regard. If the surety was fully protected by the principal against any possible judgment that might be obtained by the county in its action, and the principal had employed attorneys who were fully and properly defending the action, further expense on the part of the surety must have been unnecessary and wanton. No doubt under this contract the surety ought to be protected against all necessary expenses incurred in defending itself against liability on these bonds, and should be allowed to exercise a reasonable discretion as to necessary measures of defense; but the allegations of this petition indicate

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(b) Conflict of Interest / Divergent Interests

Conflict of interests render defense tenders unreasonable, if not impossible, in several common surety/principal scenarios, particularly where: (i) the surety is seeking collateral and indemnity over the principal’s and indemnitor’s resistance, (ii) the surety and the principal disagree, or appear likely to disagree, over the merits of the claims and defenses and terms under which claims should be resolved, (iii) the surety possesses defenses of its own that conflict with how the principal and its attorney would prefer to frame or present the facts of the case, and/or (iv) the surety faces a “bad faith” claim.

Most jurisdictions have adopted some version of the Model Rules of Professional Conduct (“RPC”), which constrain and in some cases altogether prohibit an attorney’s concurrent representation of clients with conflicting or potentially conflicting interests. The rule most pertinent to possible defense tenders is RPC 1.7, which limits the ability of an attorney to undertake representation where “the representation of one client will be directly adverse to another client” or “there is a significant risk that the representation of one or more clients will be materially limited by the lawyer’s responsibilities to another client[.]”75 In such cases, the lawyer may represent the client only if all of the following conditions are met:

(1) the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client;

(2) the representation is not prohibited by law;

(3) the representation does not involve the assertion of a claim by one client against another client represented by the lawyer in the same litigation or other proceeding before a tribunal; and

(4) each affected client gives informed consent, confirmed in writing.76

With respect to the third condition regarding claims between the parties, the court in Central Towers regarded a surety’s desire to assert a crossclaim for indemnity to be insufficient, by itself, to justify the declination of a proposed defense tender.77 However, all courts appear to agree that a surety seeking a deposit of collateral under the parties’ indemnity agreement (and the principal/indemnitors’ resisting that demand), is “reasonable” grounds for a surety to retain its own counsel.

that the expenses sued for were-unnecessary, and there is no allegation of circumstances showing any necessity for such expense or even that the surety regarded such expense as necessary.”).

75 RPC 1.7(a)(2).

76 RPC 1.7(b).

77 Central Towers, 453 S.W.2d at 797 (“The contractor indemnitor was liable to the surety indemnitee to pay any amount awarded against the surety. Therefore, the relief sought by the surety merely requested the Court to order the contractor to do what he had to do anyway and could not be deemed to have created a conflict of interest.”).

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The official commentary to RPC 1.7 provides insight as to what an attorney should consider, and the kinds of risks that he or she should disclose, prior to undertaking the concurrent representation of multiple parties in the same matter (e.g., as in the case of principal and its surety). Comment 29 to RPC 1.7 advises that

In considering whether to represent multiple clients in the same matter, a lawyer should be mindful that if the common representation fails because the potentially adverse interests cannot be reconciled, the result can be additional cost, embarrassment and recrimination. Ordinarily, the lawyer will be forced to withdraw from representing all of the clients if the common representation fails. In some situations, the risk of failure is so great that multiple representation is plainly impossible. For example, a lawyer cannot undertake common representation of clients where contentious litigation or negotiations between them are imminent or contemplated. Moreover, because the lawyer is required to be impartial between commonly represented clients, representation of multiple clients is improper when it is unlikely that impartiality can be maintained. Generally, if the relationship between the parties has already assumed antagonism, the possibility that the clients' interests can be adequately served by common representation is not very good.

The above comment describes and should be understood to apply to the kind of adversity that develops when an uncollateralized surety and its principal disagree about whether a claim should be settled and under what terms. For example, based upon the surety’s preliminary assessment of a claim, a surety may be inclined to prefer an early settlement. Its bond principal, however, may be inclined assert long-shot, weak, or even entirely-unsupported defenses (perhaps motivated by an improper desire to delay making payment, a desire that the principal or even its attorney might not readily disclose to the surety). By way of example, the following question was actually posed to a state ethics committee by a principal’s attorney considering the implications of undertaking a principal-surety defense tender:

The general contractor gives notice that it is tendering a defense on behalf of itself and the surety. Discussions between the surety and the claimant cease. The claimant files a complaint to perfect the bond claim. The complaint names the subcontractor, the general contractor, and the surety as defendants who are jointly and severally liable for the debt.

The surety has an obligation to the claimant, absent valid defenses, timely to resolve a payment bond claim. The general contractor does not have any valid defenses under the law, but wants to delay the proceeding to avoid payment. Under these circumstances, may one lawyer represent both

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the surety and the general contractor in defense of the claim?78

Of course, the surety’s preliminary impression (or suspicion) that a bond principal lacks valid defenses to a claim may change. In such a case, when facing a lawsuit by a claimant, coupled with a request for a defense tender, it may be advisable for the surety to at least initially retain its own counsel. Then, while considering the principal’s request for a defense-tender, the surety or its counsel could request that the principal’s attorney provide, on a privileged basis,79 his or her own candid written assessment of the strengths and weaknesses of the case, the likely areas of discovery, important factual, legal and evidentiary issues that may impact upon the result of the case, as well as a detailed budget for the defense of the case. Should the principal or its attorney fail to provide a satisfactory response, or provide a response recommending an approach with which the surety “reasonably” disagrees,80 that failure or disagreement could later be cited by the surety as supporting of the “reasonableness” of its determination continue the defense of the claim with its own counsel. As to the reasonableness of the surety’s initial retention of counsel, it should be noted that at least one respected judge expressed (in a concurring opinion) the view that it is almost always “reasonably necessary” for a surety to retain its own counsel to at least initially appear in and monitor a lawsuit (while not unnecessarily duplicating the work of the principal’s counsel):

I construe “necessary” in this context as more nearly denoting “appropriate” than “absolutely indispensable.” Further, I would hold that, except in the most extraordinary circumstances or where actual bad faith is involved, it is, as a matter of law, reasonable and necessary for any party formally made a defendant in almost any lawsuit to at least initially retain counsel of its own selection, having primary loyalty to it, as opposed to relying exclusively on counsel to be retained by a co-defendant or potential indemnitor. Litigation has simply too many deadlines, “deemed” notices and waivers, potential surprises and unexpected developments to warrant any substantial second-guessing of

78 2003 N.C. Eth. Op. 1, 2003 WL 24306940 (N.C. St. Bar.).

79 See FED. R. CIV. PR. 26(b)(3)(A) (restricting discovery of documents prepared in anticipation of litigation “by or for another party or its representative” (including the other party’s attorney, consultant, surety, indemnitor, etc.)).

80 For example, when an obligee/owner terminates a principal/contractor from a construction project, the principal may pursue a wrongful termination against the owner. The principal might seek to build up its claim by adopting the positions of its subcontractors regarding the quality, timeliness or percentage completed of their work, and/or whether certain items of work directed by the owner were outside of the scope of the original contract so as to support claims for additional compensation. The surety, on the other hand, might regard the subcontractors’ positions as too difficult, time consuming, and/or expensive to prove, and might prefer to pursue settlements with the subcontractors by advocating the merits of owner’s position regarding the work of those subcontractors (particularly where, in their subcontracts, the subcontractors agreed to abide by the owner’s or its representative’s determinations on such matters).

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the decision to hire separate counsel by one formally hailed into court as a party defendant.81

A surety’s exposure to a claimant’s or bond obligee’s allegations of “bad faith” is a developing and specialized area of law, implicating among other things the reputational and regulatory interests of the surety and the risk of setting bad precedents. The claimants in such cases may seek to take (intrusive) discovery into areas of the surety’s business that go far beyond the claim, principal, or project at hand. When defending against and responding to such allegations and inquiries, a surety may “reasonably” desire to engage in private and privileged communications with its own attorney. However, under a defense tender, where the surety and principal share the same attorney, the surety’s communications with that common counsel will likely not be regarded as privileged vis-à-vis the principal in any future indemnity dispute with the principal.82 Hence, to more fully and permanently preserve privilege, and to obtain more fully-private, expert, and candid advice that the principal’s attorney is likely able to provide, sureties will understandably-and reasonably-retain their own counsel to defend claims of “bad faith.”

In addition the above-discussed scenarios, actual or potential conflicts of interest “reasonably” precluding defense tenders may arise when the surety possesses potential defense(s) that require proving certain facts that are adverse to the principal’s interest or position. By way of example, an irreconcilable conflict would exist precluding joint representation if the bond principal complains that it completed 80% of its work, but was paid only 55% of its price by the bond obligee, while the surety contends that the principal completed only 40% percent of its work and that the owner/obligee overpaid the principal and thereby failed to mitigate damages and prejudiced the surety’s rights of subrogation.83

Other divergences of interest “reasonably” precluding defense-tenders may include a surety’s defense of fraud in the inducement,84 a “joint-venture” defense,85 or a defense of

81 Jackson, 685 F.2d at 969 (Garwood, J., concurring) (internal citations omitted).

82 See Comment 30 to RPC 1.7, stating: “A particularly important factor in determining the appropriateness of common representation is the effect on client-lawyer confidentiality and the attorney-client privilege. With regard to the attorney-client privilege, the prevailing rule is that, as between commonly represented clients, the privilege does not attach. Hence, it must be assumed that if litigation eventuates between the clients, the privilege will not protect any such communications, and the clients should be so advised.” See also, e.g., N.J.S.A. § 2A:84A-20(2), providing in relevant part that “[w]here 2 or more persons have employed a lawyer to act for them in common, none of them can assert such privilege as against the others as to communications with respect to that matter.”

83 See, e.g., Spirtas, 555 F.3d at 655 (noting the surety’s overpayment defense when holding that the surety’s retention of its own counsel to participate in an arbitration with the bond obligee was reasonable and not “redundant” of the defense provided by the principal and its own counsel). But see Central Towers, 453 S.W.2d at 797 (opining that the surety’s possible overpayment defense did not create a conflict rendering the surety’s retention of its own counsel “reasonably necessary”). The conclusion in Central Towers, however, clearly limited to the facts of the case. The possible overpayment in that case concerned solely the release of retainage, under facts that were not seriously disputed, and which would therefore not place the principal and surety at cross-purposes in terms of presenting proofs at trial.

84 To succeed in a fraud in the inducement defense, the surety must generally be able to prove a degree of culpability by the obligee in misleading the surety into issuing the bond, as opposed to misrepresentations made by the principal, solely. See generally Bogda M.B. Clarke, James D. Ferrucci, and Armen Shahinian, Fraud in the Inducement as a Defense to Fidelity and Surety Claims, 42 TORT TRIAL & INS. PRAC. L.J. 181 (2007).

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discharge of the surety by reason of a material alteration to the bonded contract.86 Likewise, claims involving alleged illegality or dishonesty by the principal may “reasonably” be regarded as inappropriate candidates for defense tenders. Such claims may include, for example, alleged schemes to circumvent prevailing wage requirements and trust fund diversion cases. In cases of this nature, a loss, an admission by, or a finding of fact against, the principal, may impact upon the principal’s ability to qualify for new public work and may have criminal implications. Avoiding those kinds of consequences may therefore become the principal’s primary interest in defending the claim. The surety’s primary interest, in contrast, may be limited to simply getting the best possible economic result in defending the claim. Since the principal’s and surety’s primary goals do not coincide, a defense tender is probably unworkable. Moreover, where the honesty and integrity of the principal is seriously in question, the surety is best served by having its own counsel, who may more objectively examine issues implicating the bond principal’s honesty or lack thereof.

(iii) Opportunity to Recover Limited Amounts Despite a Court’s Disapproval of a Surety Engaging its Own Counsel

Finally, it should be noted that even in cases where courts have found “unreasonable” a surety’s decision to retain its own counsel to fully defend a claim, those courts have nevertheless ordinarily allowed the surety to recover some of its defense costs, i.e., those limited expenses that the court finds reasonable and non-duplicative. Thus, for example, the court in AMSCO, while finding that the surety’s engagement of counsel matters “was unreasonable for any purpose other than to monitor the litigation,” opined that the surety should still be permitted to recover “pre-lawsuit and monitoring fees[.]”87

Another example of a case in which a court severely limited, but did not deny entirely, a surety’s claim for attorney’s fees is Sentry Insurance Co. v. Davison Fuel & Dock Co.88 The case involved a short-form indemnity agreement requiring reimbursement for losses or expenses incurred “for or by reason, or in consequence of (the surety) having become surety

Where the surety believes that it was misled, the principal almost invariably had some involvement, in which case the surety could not reasonably be expected to tender its defense to that principal, nor rely upon its principal’s counsel to investigate or attempt to prove facts that may reflect poorly upon the honesty of the principal.

85 Occasionally a bond principal will enter into a nominal “subcontract” with a party that, in reality, is truly a joint-venturer with the principal rather than a covered subcontractor under the bond. See, e.g., U. S. ex rel PCC Constr. v. Star Ins. Co., 90 F. Supp. 2d 512, 518-21 (D.N.J. 2000). This defense may require inquiry by the surety into areas that may tend to discredit the principal (e.g., why, in applying for the bond, the principal did not alert the surety to the alleged joint venture, and why the principal may have inaccurately described its joint-venturer as a “subcontractor.”). The effective pursuit of such a defense requires that the surety be represented by an attorney not bound by a dual loyalty to the principal.

86 Defenses falling within this broad category generally require proving that the obligee and principal, without notice to the surety, agreed to a fundamental or prejudicial alteration of the terms of the original bonded contract. In such cases, the obligee is likely to attempt to suggest that the surety knew or should have known of the principal’s activities under the contract. A surety may more effectively defend against such suggestions by utilizing its own counsel – both to cross-examine the principal on this subject and to prevent the misapprehension by the finder of fact that the surety and the principal are so closely aligned as to be one-in-the same.

87 AMSCO, 889 A.2d at 1046.

88 396 N.E.2d 1071 (Ohio Ct. App. 1978).

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or entering into such bond[.]”89 In the court’s view, the principal’s obligation under “the language quoted above” was limited “to those counsel fees and expenses that have a rational and reasonable relation to the surety's actual and potential liabilities arising directly from the bonded transaction, reasonable in amount and incurred in good faith.”90 The surety engaged its own counsel, who performed certain tasks relating to three surety defenses not available to the principal, as well as other tasks that the court regarded as “duplication” of “services which were simultaneously being rendered competently by the principal's counsel[.]”91 The court permitted the surety to recover its attorney’s fees only for that portion of its attorney’s work that the court regarded as non-duplicative. Figuring prominently in the court’s decision were the facts that (i) before trial, the surety withdrew its particular defenses in exchange for certain concessions by the obligee, “and from that point forward there was no difference between the trial positions asserted by the principal and the surety,” and (ii) the surety’s counsel attended the full trial without examining or cross-examining a single witness, leaving the “burden” of actively defending the case to the principal’s counsel.92 Of course, Davison Fuel was an a typical matter, both with respect to the language of the indemnity agreement and the unusual facts of the case. As such, the facts and applicable contract language in most surety/indemnity cases should be clearly and easily distinguishable from Davison Fuel.

Addressing the same issue, the concurring opinion in Jackson v. Hollowell,93 which was quoted approvingly by the Tenth Circuit in United Riggers & Erectors,94 stated:

The substantial question in cases of this kind, it seems to me, is not the bonding company's retention of its own separate counsel, but rather whether it was reasonable and necessary that everything done by such counsel have been performed by the bonding company's separate counsel, as opposed to having been performed by the principal's counsel for both the principal and the bonding company. In other words, the real issue is not whether the bonding company should have any services by separate counsel, but rather the nature and extent of services which it is reasonable and necessary that the bonding company call on its separate counsel for, in light of the fact that the principal's counsel is available to carry “the laboring oar” for both.

Accordingly, in the (hopefully) rare case in which a court second-guesses and disagrees with the “reasonableness” of a surety’s decision to engage its own defense counsel, the surety

89 Id. at 1072.

90 Id. at 1074.

91 Ibid.

92 Id. at 1073.

93 685 F.2d at 969-70.

94 725 F.2d 87, 91 (10th Cir. 1984).

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should nevertheless be able to obtain a limited recovery for its preliminary and non-duplicative defense costs.

C. Determining Reasonableness as to Amount

(i) Burden of Proof and Application of the Prima Facie Evidence Clause

The vast majority of surety indemnity agreements include some form of prima facie evidence clause providing, for example, that “[i]n the event of payments by the Surety, the Indemnitors agree to accept the voucher of the Surety or other evidence of such payments as prima facie evidence of the propriety thereof, and of the Indemnitor’s liability therefor to the Surety.”95

Courts have routinely applied such prima facie evidence clauses to claims by sureties to recover counsel fees, holding that proof of payment of such fees shifts the burden to the indemnitors to supply evidence of that the surety’s payment of such fees was unreasonable or in bad faith.96 Precisely how the indemnitors must go about attempting to meet that burden may vary based upon the facts of the case, the jurisdiction, and the language of the indemnity agreement.97

If applied literally, the prima facie evidence clause could allow a surety to recovery full indemnity for its attorney fees simply by virtue of the fact that the surety introduces evidence of its payments. But in reality, a court is more likely to view favorably a fee application that supplies sufficient detail and context for the court to conclude on its own that the fees sought do not appear to be unreasonable. Sometimes, a court may draw a comfort from a general familiarity with the size, scope and history of the underlying disputes, relative to the dollar amount of fees sough. For example, the court in Gray Ins. Co. v. Terry98 upheld an award of summary judgment in favor of a surety, including in attorney’s fees and expenses in excess of $600,000, primarily by enforcing the prima facie evidence clause, noting that the indemnitors:

provided no evidence that would indicate that the amount of legal fees Gray incurred over several years, litigating claims asserted by a number of GTS's subcontractors, was excessive, let alone clearly so. Gray satisfied the prima facie standard for indemnification of attorney's fees as set forth by

95 Acstar Ins. Co. v. Teton Enters., 670 N.Y.S.2d 588, 589 (App. Div. 2d Dep’t 1998) (quoting and

enforcing a prima facie evidence clause, and holding that the indemnitors had failed to produce evidence sufficient to overcome the surety’s right to summary judgment).

96 See, e.g., Ideal Electronic, 129 F.3d at 151; Fallon Electric, 121 F.3d at 126; Spirtas 555 F.3d at 654; Anderson v. U.S. Fidelity & Guar. Co., 600 S.E.2d 712, 716 (Ga. Ct. App. 2004).

97 See, e.g., Fallon Electric, 121 F.3d at 126 (“We conclude that the Pennsylvania courts would hold that a “prima facie evidence” clause in an indemnity agreement shifts to the indemnitor the burden of proving that the costs incurred were not recoverable. We further conclude that what an indemnitor must demonstrate to escape liability for attorney’s fees depends upon the precise language used in the agreement.”).

98 606 Fed. Appx. 188 (5th Cir. March 18, 2015) (applying Louisiana law).

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the contract, and Terry failed to provide any evidence indicating the excessiveness of these fees.99

More often, however, it is advisable to provide the court with a greater level of detail regarding the tasks performed by the attorneys that generated the fees, in the form of copies of the attorneys’ invoices, together with brief yet sufficiently-detailed affidavits from the attorneys and the surety describing the matters in which the fees were incurred and highlighting some of the major tasks performed. The surety in Ideal Electronic attempted to make such a presentation by submitting redacted copies of attorney invoices. The court, while recognizing the prima facie evidence clause as enforceable, opined that “something more than evidence of mere payment will be required if a charge is challenged,” and directed that the surety produce fully unredacted copies of the subject attorney invoices.100 The Ideal Electronic court further explained as follows (and in so doing, provided considerable insight into the kinds of attorney charges that the court might find to be reasonable and unreasonable and what the likely focus of its inquiry would likely be in making that determination):

IFIC’s redaction of portions of the billing statements withholds from Ideal information essential to Ideal’s efforts to meet this burden. The District Court attempted to resolve this issue by awarding attorney’s fees only for the unredacted portions of the billing statements. This is not an adequate solution. As a practical matter, the reasonableness of any portion of the billing statement can only be determined by examining all billing statements pertaining to the legal services provided as a whole. The reasonableness of any one entry on an attorney’s billing statement is likely to be informed by other charges incurred for the same general service. For example, the court needs to determine: Has the attorney over-charged for its services by expending a ridiculous amount of total time on a simple research task? Did the work undertaken encompass issues and tasks outside the scope of the question being litigated? Was each task undertaken a necessary and reasonable component of a reasonable litigation strategy? In this case, the general service at issue is IFIC’s defense against Modern’s claims and its related cross-claim against Ideal. Ideal has the right to challenge whether IFIC’s disbursements for attorney’s fees pertaining to this general service as a whole were reasonable.

Ideal is entitled to discover the information it requires to appraise the reasonableness of the amount of fees requested by IFIC, including the nature and extent of the work done by IFIC’s counsel on various phases of the case,

99 Id. at 191-92 (emphasis added).

100 Ideal Electronic, 129 F.3d at 151.

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so that it may present to the court any legitimate challenges to IFIC’s claim.101

(ii) Factors Considered By Courts

In assessing the “reasonableness” of attorney’s fees, courts often follow some version of the so-called “lodestar” method, which is “defined as the number of hours reasonably expended by the attorney, multiplied by a reasonable hourly rate,” which should “not include excessive and unnecessary hours spent on the case,” and which may be “enhanced or reduced based upon a number of factors, including a reduction for hours spent on unsuccessful or meritless claims that are independent, factually or legally, of the meritorious claims.”102

With respect to the reasonableness of hourly rates,

the equation in the caselaw of a “reasonable hourly fee” with the “prevailing market rate” contemplates a case-specific inquiry into the prevailing market rates for counsel of similar experience and skill to the fee applicant's counsel. This may, of course, include judicial notice of the rates awarded in prior cases and the court's own familiarity with the rates prevailing in the district. But determination of the prevailing market rate in the relevant community also requires an evaluation of evidence proffered by the parties.103

On this point, it should be noted that a number of courts have held that attorneys cannot, by their own affidavits, establish that their rates conform with “reasonable” prevailing market rates, and that at least some form of additional evidence is required.104 Of course, sureties generally do not pay exorbitant hourly rates to their attorneys. And, unless challenged with actual evidence of excessiveness, the reasonableness of a surety’s attorney’s rate should be

101 Ibid.

102 Colonial Sur. Co. v. GMT Contracting Corp., 2014 WL 2479967 *9 (N.J. Super. Ct. App. Div. June 4, 2014). Note, however, that as a practical matter, it would be unrealistic to expect for a court to ever “enhance” an award of attorney’s fees to a surety, particularly in view of the fact that surety indemnity agreements do not expressly authorize “enhanced” recoveries. See also Blum v. Stenson, 465 U.S. 886, 889 (1984) (noting that upward enhancement of fee awards, even when expressly authorized by statute, must be limited to “the rare case where the fee applicant offers specific evidence to show that the quality of service rendered was superior to that one reasonably should expect in light of the hourly rates charged and that the success was ‘exceptional.’”).

103 Farbotko v. Clinton County of N.Y., 433 F.3d 204, 209 (2d Cir. 2005) (internal citations omitted).

104 See, e.g., Gamache v. Steinhaus, 776 N.Y.S.2d 310 (App. Div. 2d Dep’t 2004) (“The petitioners’ counsel failed to support their claim that $300 per hour was a reasonable hourly rate for the type of work performed on the petitioners’ behalf. In fact, the only information that the Supreme Court had before it to support the reasonableness of a $300 per hour fee was the attorneys’ own self-serving statements that they “regularly bill” at that rate.”). See also Suretec Ins. Co. v. BRC Const., Inc., 2013 WL 6199021 *4 (E.D. Cal. Nov. 27, 2013) (denying a surety’s application for counsel fees without prejudice and noting that: “Counsel has explained her background and her firms’ expertise and billing rates, has presented nothing about the prevailing rates for construction litigation in the Sacramento Division of the Eastern District of California or addressed the other factors relevant to the calculation of reasonable fees.”).

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considered established pursuant to the indemnity agreement’s prima facie evidence clause. However, as a proactive measure in anticipation of such possible challenges, it may be worthwhile for a surety and its attorneys to provide the court with information regarding the skill and experience of the attorneys at issue, to submit evidence from the surety that by virtue of its business it is familiar with rates charged by other attorneys performing similar work and attesting that the rates for which indemnity is sought are not inconsistent with such “prevailing” rates,105 and to cite to and ask the court to take judicial notice of other similar cases in which similar rates were held to be reasonable.

In addition, although “prevailing” rates are generally viewed within the context of a given geographical area, at least one court has held that a surety may reasonably pay a premium to import a more expensive surety attorney into a remote locale in order to protect its interests. Thus, the court in Estate of Burgess v. Peterson106 explained and held:

Furthermore, the court [below] did not err by finding the hourly attorney rate reasonable. The sureties’ attorney charged $135 and $140 per hour. Although Eau Claire attorneys charge only $90 to $100 per hour, the trial court reasoned that a surety company differs significantly from an insurance company, that the issues involved were complex, and that the surety companies appropriately selected an attorney with whom they were comfortable. Further, we believe it was appropriate for the trial court to consider that there are few experienced surety attorneys in Wisconsin, none of whom live in Eau Claire. Unrebutted testimony demonstrated that experienced surety attorneys reside in Madison and Milwaukee, where hourly rates are higher, and that this particular surety’s attorney’s rates were low in comparison.107

With respect to the “reasonableness” of attorney hours expended on the tasks performed by them, it is fair to say that a surety increases its odds of both obtaining a greater recovery and overcoming the objections of indemnitors by providing well-itemized, descriptive invoices, together with a narrative of the quantity, nature, scope, and subject(s) of the matters for which the fees were incurred, the durations of those matters, and the major tasks performed, the “reasonable necessity” of those tasks, and results obtained. That narrative should ideally be brief, yet include sufficient information to allow the court to assess the overall reasonableness of the amounts sought. As to specific charges, those that remain unchallenged by the indemnitors should be deemed recoverable by virtue of the indemnity agreement’s prima facie

105 Also, many surety attorneys charged reduced rates to their surety clients, and can truthfully attest to

the court that they are regularly paid higher rates by other clients for matters involving the same level of skill and experience. In addition, if the information is available, evidence that an adversary voluntarily paid similar rates to similarly-experienced attorneys may be viewed as sufficient to resolve any challenge to “reasonableness” as a matter of law. See, e.g., Hartford Fire Ins. Co. v. Vita Craft Corp., 911 F.Supp.2d 1164, 1182 (D. Kan. 2012).

106 571 N.W.2d 432 (Wis. Ct. App. 1997).

107 Id. at 437.

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evidence clause. Challenges to specific items are of course fact-sensitive and must be dealt with based upon the nature of, and evidence allegedly supporting, the challenge.

An example of a case in which a surety successfully obtained recovery for the full amount of counsel fees sought by it is Mountbatten Sur. Co., Inc. v. Szabo Contracting, Inc.108 The below quote from Szabo is illustrative of the kinds of facts, and the kind of presentation of such facts, that tend to vindicate the “reasonableness” of fees in the eyes of a court:

We have carefully reviewed the supporting documentation attached to plaintiff’s attorney’s affidavit and find that it is sufficiently detailed to allow the trial court to assess the reasonableness and necessity of the services rendered. The record shows that plaintiff seeks the recovery of attorney fees stemming from the issuance of numerous performance and payment bonds, which led to 21 lawsuits, and a number of settlements negotiated on several projects. All of this legal action can be traced back to the bonds issued on behalf of defendants. Accordingly, we hold that the trial court did not abuse its discretion in awarding plaintiff all of the attorney fees it sought.

Defendants specifically contend that a number of the entries were too terse to allow the trial court to discern the connection between the service depicted in the entry and the case. We have carefully reviewed the record and find that the supporting documentation lists each attorney, the time spent performing the services, and a description of the services. The descriptions are adequate to inform both the client and the court of what the attorneys were doing.109

Of course, some courts may be inclined to second-guess the reasonableness of particularized charges, and subject a surety to a “haircut” for charges that, as described, appear to the court as duplicative or clerical (i.e., non-legal) in nature. An example of that approach was applied is the case of Western Surety Co. v. Bradford Electric Co., Inc.,110 in which the court engaged in an exhaustive line-by-line review of the surety’s attorney’s invoices, denying indemnity in whole or in part for each line that the court viewed as describing a clerical task or duplicative work, or for which the court subjectively concluded that a pleading or motion should have taken less time to prepare. Ultimately, the Bradford court reduced the surety’s recovery by approximately 30% of the total amount that had been billed by the surety’s attorneys.

The holding in, and methodology applied, in Bradford, appears somewhat unfair. For

example, a court reviewing the final version of a 20-page brief can hardly estimate the time it

108 812 N.E.2d 90 (Ill. App. Ct. 2004).

109 Id. at 105.

110 483 F.Supp.2d 1114 (N.D. Ala. 2007).

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“should have” taken to prepare the brief. The first draft of that same brief may have been 35 pages, and the transition from 35 down to 20 pages may have been the result of a very careful strategic assessment as to what was better left unsaid, or saved for reply or for oral argument, what needed to be changed due to a new decision, concern, or concession by an adversary, or what otherwise important information or argument had to be condensed or cut out altogether in order to meet local limits on the length of briefs. On the other hand, as discussed immediately below, a surety cannot (and should not have to) supply the court with unlimited information concerning what its attorneys actually did and did not do, and why, due to privilege concerns.

(iii) Privilege Concerns

The court in Ideal Electronic111 held that, in defense of a surety’s claim for indemnity for counsel fees, the indemnitor was entitled to obtain in discovery unredacted copies of the attorneys’ billing statements, and that the surety, by offering redacted copies into evidence, had waived the attorney-client privilege as to those billing statements “and any other communication going to the reasonableness of the amount of the fee award.”112 The court further ordered that if the surety continued to withhold production of the unredacted billing statements, “then its claim for attorney’s fees should be dismissed in its entirety.”113

The Ideal Electronic court’s direction that the surety produce “any other communication

going to the reasonableness” of the amount of attorney’s fees should not be understood to require the surety or its counsel to produce privileged communications relating to matters other than billing. To the contrary, courts considering this issue all appear to agree that efforts to recover indemnity for attorney’s fees do not place the content of privileged communications “at issue” and do not result in a waiver of privilege, and that in such cases the invoices themselves together with basic contextual information should be sufficient for a court to determine the “reasonableness” of the fees paid. As one court explained and held:

Safety Mutual has failed to articulate any reason why Relator would need to prove the content of its attorney's legal advice in order to establish the reasonableness of its attorney's fees, nor does Missouri case law suggest that there is any such requirement. Because the trial court is an expert on attorney's fees, it does not require any evidence or other opinion as to their value. Fee awards have been routinely affirmed as reasonable based on attorney affidavits as to hours and services and oral testimony as to the charges made, received and paid.114

111 129 F.3d 143 (D.C.Cir. 1997).

112 Id. at 152.

113 Ibid.

114 State ex rel. Chase Resorts, Inc. v. Campbell, 913 S.W.2d 832, 837 (Mo. Ct. App. 1995) (internal citations and quotations removed). See also Ex parte State Farm Fire and Cas. Co., 794 So.2d 368, 376 (Ala. 2001); Mortgage Guar. & Title Co. v. Cunha, 745 A.2d 156, 159-160 (R.I. 2000).

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A practical lesson from the holding in Ideal Electronic may be that surety attorneys should prepare invoices including sufficient particularity to justify the “reasonableness” of the time spent performing various tasks, but at the same time take care to not divulge the substance of any privileged matter or communication. A second lesson is that communications between a surety and its attorneys concerning billing issues may subsequently become discoverable if and when indemnity is sought.

V. Practice Pointers

A significant consideration with respect to the issue of indemnity for attorney’s fees is whether to seek it at all within the context of a particular case, or stage of a case. Suppose, for example, that an uncollateralized surety settles a $1,000,000 alleged claim for $500,000, over the objection of its bond principal and indemnitors. In such a case, the surety could (hopefully) obtain summary judgment against its indemnitors relatively quickly as to the claim-settlement. And, if it appears to the surety that its indemnitors are not financially capable of fully satisfying a $500,000 judgment, or that there is some danger of the indemnitors moving or shielding their assets while the issue of attorney’s fees is being litigated, obtaining a larger judgment inclusive of indemnity for counsel fees may not be worth the time and expense. Instead, it may be more practical to request for the court to simply enter judgment in the amount of the surety’s $500,000 claim settlement, and to indicate on the face of the judgment that the surety’s claims for expenses and counsel fees are dismissed without prejudice.

Another strategic consideration to a surety facing multiple claims and claim-related lawsuits is whether to seek indemnity for counsel fees (among other items) within the context of each suit separately (which may be impractical), within the context of the largest claim lawsuit, or alternatively in a separate stand-alone suit for indemnity. While the latter choice may sometimes appear to be the most manageable option, that may not necessarily be so in the long run. Where a claim for indemnity for fees and expenses is attached to larger, underlying claims, a court may be more apt to view the claim for counsel fees as an incidental item that may be left for after the resolution of the underlying claims and that, consequently, may be dealt with thereafter in an expedited fashion (e.g., with little or no discovery, no complicated and expensive joint pre-trial order, and providing no reason to delay the entry of an enforceable and appealable final judgment on the other claims).115 In contrast, in the context of a stand-alone lawsuit for indemnity, a court may be more apt to treat the claim for fees and expenses as part of the gravamen of the lawsuit, and therefore permit more time-consuming and intrusive discovery.116

Another strategic issue is choice of forum. Of course, choice of forum is not always dispositive of choice of law, but the burden of persuasion is customarily placed upon the party requesting a court to apply out-of-state law. When a surety has the opportunity to select among different forums for seeking indemnity, it may choose to avoid forums with fee-

115 See FED R. CIV. PR. 54(d). See also Coastal Fuels Marketing, Inc. v. Fla. Exp. Shipping Co., Inc., 207

F.3d 1247, 1253 (11th Cir. 2000) (“We do not want attorney's fees proceedings to be full trials.”).

116 See Ray Haluch Gravel Co., supra., 134 S.Ct. at 783, distinguishing between contractual claims for counsel fees that may be adjudicated at the end of an underlying case wfrom “a freestanding contract action asserting an entitlement to fees incurred in an effort to collect payments that were not themselves the subject of the litigation.”

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reciprocity statutes or that are more prone to second-guess a surety’s decision-making in incurring the fees for which indemnity is sought.

Finally, when a surety declines to tender its defense of a claim to its bond-principal, it is good practice to document the surety’s rationale for making that decision. Sureties that more aggressively plead and pursue collateral deposits may find it easier to convince courts that joint representation was not a viable option, and that it was “reasonable” for the surety to engage and pay for its own counsel. Also, to the extent practical, a surety may both save expense and increase the likelihood of recovering expense, by allowing a principal’s competent counsel (if such exists in a given case) to take the “laboring oar” as to the principal’s own defenses to a claim, by focusing the surety’s attorney’s legal work on issues unique to the surety and/or on which the principal’s and surety’s interests diverge, and by documenting the surety’s and its counsel’s efforts to avoid duplication/redundancy in legal work by surety counsel.