United States District Court, S.D. New York
June 3, 2014
LEXINGTON INSURANCE COMPANY, NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA, AMERICAN INTERNATIONAL UNDERWRITERS INSURANCE COMPANY AND CHARTIS SPECIALTY INSURANCE COMPANY, Plaintiffs,
MGA ENTERTAINMENT, INC., Defendant.
Mark D. Sheridan, Esq., Mark C. Errico, Esq., Patton Boggs LLP, Newark, New Jersey, For Plaintiffs and Counterdefendants National Union Fire Insurance Company of Pittsburgh, PA:
Michael J. Bidart, Esq., Ricardo Echeverria, Esq., Shernoff Bidart Echeverria Bentley LLP, Claremont, California, For Defendant and Counterclaimant MGA Entertainment, Inc:
MEMORANDUM OPINION AND ORDER
SHIRA A. SCHEINDLIN, District Judge.
On July 10, 2013, I held that National Union Fire Insurance Company of Pittsburgh, PA ("National Union") had a duty to defend MGA Entertainment ("MGA") in connection with a copyright infringement action brought by Bernard Belair against MGA in this Court (the " Belair action"). On August 8, 2013, I set a discovery and briefing schedule on the issue of damages.
On February 28, 2014, MGA moved for summary judgment against National Union, seeking $2, 823, 992.34 in attorneys' fees and costs incurred in the defense of the Belair action, plus prejudgment interest. On March 28, 2014, National Union cross-moved for summary judgment, arguing that MGA suffered no damages because it was not legally obligated to pay any amounts in connection with the Belair action due to a settlement between MGA and its law firms, Skadden, Arps, Slate, Meagher & Flom, LLP ("Skadden") and Orrick, Herrington & Sutcliffe, LLP ("Orrick"). In the alternative, National Union argues that MGA's damages award should be reduced in proportion to the amounts compromised in the Skadden and Orrick settlements.
After a telephone conference with the Court held on May 15, 2014, MGA produced cancelled checks and other documentation showing that it directly paid approximately $2.4 million of the total amount invoiced on the Belair action prior to the Skadden and Orrick settlements. National Union informed the Court on May 22, 2014 that it "has agreed to pay MGA the stipulated amount of $2, 408, 916.02 plus prejudgment interest in an amount to be calculated by the parties." But the parties continue to dispute what obligation, if any, National Union has as to the remaining $415, 076.32, which represents the amount outstanding on the Belair invoices at the time of MGA's global settlements with Skadden and Orrick.
In 2009, MGA retained Orrick to defend the Belair action and to replace Skadden as MGA's lead counsel in an unrelated action involving Mattel, Inc. (the " Mattel action"). In 2011, MGA replaced Orrick with Skadden as its counsel in both cases. "During the course of the Belair and Mattel lawsuits, MGA became embroiled in disputes with both the Orrick and Skadden firms about their fees." The total amount billed to MGA in legal costs pertaining to the defense of the Belair action was $2, 823, 992.34. MGA paid $2, 408, 916.02 of that amount directly to the law firms and vendors prior to the global settlements.
On April 17, 2012 and June 23, 2013, MGA entered into confidential settlement agreements with Skadden and Orrick, respectively. Both firms agreed to accept a fixed sum less than the outstanding unpaid invoices for both the Mattel and Belair actions. The total outstanding balance owed to Skadden and Orrick for both actions was [REDACTED/]. The total amount paid by MGA to Skadden and Orrick as a result of the settlements was [REDACTED/], approximately [REDACTED/] of the total amounts owed. The settlement agreements did not identify any specific written off invoices or time entries and did not allocate any specific amount as to the Belair or Mattel action. The outstanding balance on invoices pertaining to the Belair action was $415, 076.32.
III. APPLICABLE LAW
A. Legal Standard
Summary judgment is appropriate "where, construing all the evidence in the light most favorable to the non-movant and drawing all reasonable inferences in that party's favor, there is no genuine issue as to any material fact and... the movant is entitled to judgment as a matter of law.'" In deciding a motion for summary judgment, "[t]he role of the court is not to resolve disputed issues of fact but to assess whether there are any factual issues to be tried." "Credibility determinations, the weighing of the evidence, and the drawing of legitimate inferences from the facts are jury functions, not those of a judge.'"
B. Damages for Breach of Duty to Defend
Under California law,  "the proper measure of damages" for an insurer's breach of the duty to defend, "is the reasonable attorneys' fees and costs incurred by the insured in defense of the claim." Where "the insurer has breached its duty to defend, the [policyholder] must carry the burden of proof on the existence and amount of the... expenses, which are then presumed to be reasonable and necessary as defense costs." "[D]amages which are speculative, remote, imaginary, contingent, or merely possible cannot serve as a legal basis for recovery.'"
National Union does not dispute the reasonableness of the legal expenses incurred in the Belair action. Rather, National Union contends that MGA is not entitled to the outstanding $415, 076.32 because that amount was compromised as part of the settlements with Skadden and Orrick. MGA asserts that once National Union was found to have breached its duty to defend, it became liable for the "amounts that MGA incurred to defend the Belair action" and any "discount [obtained from counsel] should not inure to the benefit of an insurance company that is in breach of its defense obligations." In sum, MGA argues that the Skadden and Orrick settlements are irrelevant for the purposes of determining its damages.
MGA's only case law in support of this argument is a 1957 California Supreme Court case holding that a policyholder does not have to "actually pay' the defense costs before it can recover them from a breaching insurer." In that case, the court held that an insurer was obligated to pay the full amount of billed attorneys' fees even though counsel testified that he did not ever expect to be fully paid by his clients, the policyholders. The court explained that an insurer who has a duty to defend "will not be allowed to defeat or whittle down its obligation on the theory that plaintiff himself was of such limited financial ability that he could not afford to employ able counsel." But this case is inapposite because MGA has already fully satisfied its obligations to pay its attorneys. MGA cites no case, and I was not able to find one, where the policyholder fully paid its attorneys and the insurer was required to pay more than the policyholder actually paid.
MGA did, at some time, incur $2.8 million in legal bills pertaining to the Belair matter. MGA is undisputedly owed the $2.4 million it actually paid. But the Skadden and Orrick settlements cannot be ignored. MGA has also paid [REDACTED/] to its attorneys - some of which must be allocated to the Belair action. The only issue is how much.
The remaining Belair balance - $415, 076.32 - was included in a legal settlement that compromised MGA's obligations to its law firms by [REDACTED/]. As to the Belair balance, MGA "incurred" and actually paid the attorneys' fees it agreed to pay as a result of its settlements.
National Union argues that it is not required to pay any of the balance because MGA has not proven what it was actually obligated to pay as part of the settlements. MGA concedes that its settlements did not indicate which invoices were written off entirely or in part. Rather, MGA argues that because the outstanding balance on the Belair action represents only [REDACTED/] of the total amounts compromised in the settlements, "there is every reason to believe that the write offs came from the Mattel bills - not the ones from Belair " and thus, National Union owes the entirety of the remaining Belair balance.
While the agreements do not allocate figures between Mattel and Belair, MGA has proven that it owed at least some amount on the outstanding Belair bills at the time of the settlement. MGA is entitled to a proportional recovery, but not the entirety of the remaining Belair balance. Because the total bill was reduced by [REDACTED/], MGA is entitled to [REDACTED/] of the outstanding Belair balance, or [REDACTED/] plus prejudgment interest, to be calculated from the date of the settlement.
For the foregoing reasons, National Union is directed to pay MGA [REDACTED/] in addition to the $2, 408, 916.02 it has already agreed to pay, plus prejudgment interest. The Clerk of the Court is directed to close these motions [Docket Nos. 139, 146].