F I L E D
United States Court of Appeals
Tenth Circuit
PUBLISH
JAN 9 2001
UNITED STATES COURT OF APPEALS
PATRICK FISHER
Clerk
TENTH CIRCUIT
_________________________
ROBERT E. STAUTH, HARRY L.
WINN, KEVIN J. TWOMEY,
DONALD N. EYLER, R. RANDOLPH
DEVENING, JAMES E. STUARD and
FLEMING COMPANIES, INC.,
Plaintiffs-Appellants, No. 98-6405
v.
NATIONAL UNION FIRE
INSURANCE COMPANY OF
PITTSBURGH and FEDERAL
INSURANCE COMPANY,
Defendants-Appellees.
_________________________
Appeal from the United States District Court
for the Western District of Oklahoma
(D.C. No. CIV-96-1825-M)
_________________________
Submitted on the briefs:
John N. Hermes and Myrna S. Latham of McAfee & Taft, Oklahoma City,
Oklahoma, for Plaintiff-Appellants.
Gerald P. Green, Frances E. Patton, Haven Tobias, and Pierce C.
Hendrickson of Baysinger & Green, Oklahoma City, Oklahoma for Defendant-
Appellee Federal Insurance Company; James M. Peters of Monnet, Hayes, Bullis,
Thompson & Edwards, Oklahoma City, Oklahoma for Defendant-Appellee
National Union Fire Insurance Company of Pittsburgh, Pennsylvania.
Before BALDOCK and McWILLIAMS, Circuit Judges, and SHADUR, District
Judge. *
SHADUR, District Judge.
After examining the briefs and appellate record, this panel has determined
unanimously to grant the parties’ request for a decision on the briefs without oral
argument. See Fed. R. App. P. 34(f); 10th Cir. R. 34.1(G). Accordingly the case
has been ordered submitted without oral argument.
This appeal poses the question of the recoverability of attorneys’ fees and
expenses incurred by Fleming Companies, Inc. (“Fleming”) and a number of its
officers and directors--Robert Stauth, Harry Winn, Kevin Twomey, Donald Eyler,
Randolph Devening and James Stuard--in connection with their institution and
successful prosecution of a declaratory judgment action to resolve the question of
which of two sets of director and officer executive liability policies covered
them. 1 Fleming’s fee request was denied by the district court on the premise that
36 Okla. Stat. §3629(B) (“Section 3629(B)”) requires the submission of a “proof
of loss” in support of such a request and no document fitting that term in the
usual sense had been tendered by Fleming. Fleming has appealed the district
*
The Honorable Milton I. Shadur, Senior United States District Judge
for the Northern District of Illinois, sitting by designation.
1
For simplicity we will also refer to appellants collectively as
“Fleming,” treated as a singular noun. That dual usage should not create any
confusion, because the context will clearly show whether the name is being used
to denote the corporation alone or all of the appellants.
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court’s denial of attorneys’ fees.
We conclude that Section 3629(B) applies to declaratory judgment actions
such as that brought by Fleming, and we also hold that Fleming complied fully
with its contractual obligations under the insurance policies involved so as to
satisfy the statutory requirements. We further hold that under the circumstances
an award of attorneys’ fees is mandatory under Section 3629(B). We therefore
REVERSE and REMAND this action to the district court, directing it to award
Fleming its attorneys’ fees and expenses associated with the declaratory judgment
action.
Background
In 1993 Fleming purchased two directors and officers (“D and O”) liability
policies (the “1993 Policies”)--one from Federal Insurance Company (“Federal”)
providing basic coverage and the other from National Union Fire Insurance
Company (“National Union”) providing excess coverage (we refer to Federal and
National collectively as “Insurers”). In 1996 Fleming renewed these two policies
(“the 1996 Policies” 2).
Between March and June 1996, Fleming shareholders and noteholders filed
ten different class actions against Fleming, all alleging its violation of the federal
2
Because Federal’s policies contain the substantive provisions while
National Union’s is a following form, we will use the singular term “1996 Policy”
when we hereafter discuss the provisions of Federal’s later policy (which, it
should be said, are no different substantively from its 1993 Policy).
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securities laws by having failed to disclose the existence of litigation that began
in 1993 and settled in 1996. Those multiple actions were eventually consolidated
into two actions (“the Class Actions”), one by Fleming’s noteholders and the
other by its shareholders. Fleming notified Insurers of the existence of the Class
Actions and provided them with copies of the complaints.
As we discuss at greater length later, such submission of the complaints
was all the notice that the 1996 Policies required of Fleming for it to become
entitled to policy coverage and to bring an appropriate action against Insurers if
need be. Indeed, by contrast with other types of coverage provided by the
multiperil 1996 Policy, the relevant provision for D and O coverage did not
require Fleming to submit a “proof of loss.”
In October 1996 Fleming filed a declaratory judgment action against
Insurers, seeking a determination that they had a duty to indemnify Fleming in the
Class Actions under the 1996 Policies. Although Insurers agreed to cover
Fleming, they contended that it was covered under the 1993 Policies and not the
1996 Policies. That made a real world difference: Because part of the coverage
afforded by the 1993 Policies had already been exhausted, more coverage was
available to Fleming under the 1996 Policies. Fleming also raised a separate
issue in the declaratory judgment action as to what rule--“larger settlement” or
“relative exposure”--controlled the allocation of coverage between insureds and
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non-insureds.
On November 12, 1997 the district court ruled that the 1996 Policies
rather than the 1993 Policies provided coverage for the Class Actions. On the
other disputed issue, the district court ruled that the “larger settlement” rule of
allocation controlled. Insurers then appealed the district court’s judgment.
On appeal a panel of this Court affirmed the holding that the 1996 Policies
provided coverage but vacated the trial court’s ruling on allocation as premature
(Stauth v. National Union Fire Ins. Co., 185 F.3d 875 (10 th Cir. 1999) (Table),
available at 1999 WL 420401, at *1). For that reason the panel directed the
district court to hold the case in abeyance until the underlying lawsuits were
resolved (id. at *15). Because that has not yet occurred, no liability to the Class
Action plaintiffs has been suffered to this point, although Fleming has of course
incurred the expense of this litigation while Insurers have been providing the
defense in the underlying Class Actions.
Meanwhile, some two weeks after the district court’s November 12, 1997
ruling on the coverage and allocation issues, Fleming filed a motion for attorneys’
fees pursuant to Section 3629(B). As stated earlier, this appeal has been taken
from the district court’s denial of that motion.
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Section 3629(B) and the Standard of Review
Section 3629(B) provides in relevant part:
It shall be the duty of the insurer, receiving a proof of loss, to submit
a written offer of settlement or rejection of the claim to the insured
party within ninety (90) days of receipt of that proof of loss. Upon a
judgment rendered to either party, costs and attorney fees shall be
allowable to the prevailing party. For purposes of this section, the
prevailing party is the insurer in those cases where the judgment does
not exceed the written offer of settlement. In all other judgments the
insured party shall be the prevailing party.
Before us the parties have raised several issues as to that statute’s interpretation
and applicability. We address those issues in this order:
1. whether Section 3629(B) applies to Fleming’s declaratory
judgment actions;
2. whether the absence of a conventional formal proof of loss is fatal
to Fleming’s request for attorneys’ fees;
3. whether Fleming was a “prevailing party” under Section 3629(B);
and
4. whether an award of attorneys’ fees to the prevailing party is
mandatory under that statute.
Despite the general rule that the standard of review for a denial of
attorneys’ fees is an abuse of discretion standard (see, e.g., Mann v. Reynolds, 46
F.3d 1055, 1062 (10th Cir. 1995) and cases cited there), in this instance the
district court did not exercise any discretion because it based its decision on its
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reading of Section 3629(B) as requiring a proof of loss as a matter of law.
Because the parties’ dispute is not as to the underlying facts but rather as to the
proper application of Section 3629(B), we conduct our review of the district
court’s statutory interpretation under a de novo standard (Ward v. Allstate Ins.
Co., 45 F.3d 353, 354 (10th Cir. 1994)).
Application of Section 3629(B) to Declaratory Judgment Actions
As an initial matter we must determine whether Section 3629(B) operates at
all in this type of action: a declaratory judgment proceeding concerned primarily
with the preliminary question of which D and O policies (1993 or 1996) applied
to Fleming’s claim for coverage of the Class Action suits. Fifteen years ago we
gave an affirmative answer to the question of Section 3629(B)’s applicability to
declaratory judgment actions seeking coverage under liability policies. In An-Son
Corp. v. Holland-America Ins. Co., 767 F.2d 700 (10th Cir. 1985) an insured
party had requested that its liability insurer defend it in a personal injury action
(id. at 701-02). After the insurer rejected the claim and the insured provided its
own representation, it brought suit under Section 3629(B) to recover its
expenditures, alleging that the insurer had breached its duty to defend (id. at
702).
In concluding that the statute did apply to such actions, An-Son, 767 F.2d
at 703 first observed that the Oklahoma courts interpreted the statute broadly,
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citing Shinault v. Mid-Century Ins. Co., 654 P.2d 618, 619 (Okla. 1982). Next
the opinion emphasized that the statute declared an insured to be the prevailing
party in “all” judgments other than in a specific and limited category of cases
(id.). Finally, after noting a split of authority on the question whether an insured
can recover attorneys’ fees incurred in a declaratory judgment or indemnity
action, Anson, id. at 704 expressed the belief that the Oklahoma Supreme Court
would find persuasive this argument set out in 7C John Appleman, Insurance Law
and Practice §4691, at 283 (1979):
After all, the insurer had contracted to defend the insured, and it
failed to do so. It guessed wrong as to its duty, and should be
compelled to bear the consequences thereof. If the rule laid down by
these courts [which have denied recovery] should be followed by
other authorities, it would actually amount to permitting the insurer
to do by indirection that which it could not do directly. That is, the
insured has a contract right to have actions against him defended by
the insurer, at its expense. If the insurer can force him into a
declaratory judgment proceeding and, even though it loses such
action, compel him to bear the expense of such litigation, the insured
is actually no better off financially then [sic] if he had never had the
contract right mentioned above.
We adhere to the An-Son precedent and its line of analysis to hold that
Section 3629(B) applies here. For its part, Federal attempts to escape that result
by urging that because this case involves indemnity rather than the defense of
litigation, the An-Son rationale does not support the award of attorneys’ fees to
Fleming. But Federal’s attempt thus to distinguish An-Son fails for two reasons.
First, Federal ignores An-Son’s explicit rejection of the contention that
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Section 3629(B) applies “only to so-called ‘first party’ actions where the insured
has sustained a loss and the insurer rejects a claim made under the policy, but not
to actions seeking indemnity or declaratory judgment, as here” (767 F.2d at 703).
In thus distinguishing actions involving indemnity from those involving first-
party insurance (while still holding Section 3629(B) applicable to both types of
action), An-Son clearly used the word “indemnity” in its broad sense of insurance
providing third-party coverage, including both the duty to defend and the duty to
indemnify.
Second, nothing in An-Son limits its analysis to the duty to defend. We can
discern no principled reason why Section 3629(B) should be operative where the
duty to defend is at issue, but not where the issue is the duty to indemnify. Surely
the Appleman argument approved in An-Son applies with equal force to both
situations, for it is founded on compelling an insurer to bear the consequences of
its improper denial of the insured’s right to coverage. Any such improper denial
forces the insured to litigate the coverage issue and to incur the corresponding
expenses of litigation, or else to forgo its right to coverage. As Appleman
explained, requiring the insured to bear the litigation expenses defeats the purpose
for which the insured purchased the insurance policy--to provide financial
protection. We therefore reject Federal’s attempt to distinguish An-Son.
Federal has also advanced a second argument for avoiding Section 3629(B):
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It says that it did provide coverage to Fleming (while also advancing the costs of
defending the underlying litigation), so that Fleming was never denied any
benefits and has not sustained any injury. But that ignores the critical fact that
Federal turned down Fleming’s claim to coverage under the 1996 Policy. Because
Fleming had more coverage available to it under that policy than remained
available under the 1993 Policy, Federal’s turndown forced Fleming to institute a
declaratory judgment action to determine its rights under the 1996 Policy. With
that added contention on Federal’s part having proved empty as well, we adhere
to our determination that Section 3629(B) applies to this case.
Terms of the 1996 Policy
We now turn to the district court’s order denying attorneys’ fees and costs
to Fleming. In reaching that result the district court held that Section 3629(B)
requires submission of a proof of loss and noted that neither party disputed the
absence of such a submission. It is of course odd to speak of “proof of loss” in
the ordinary formal sense in this kind of action, as contrasted with a first-party
action of the type referred to earlier (where the insured has sustained a loss and
seeks reimbursement from its insurer). After all, where coverage is at stake and
the insured is forced to bring suit to establish its right to such coverage, the loss
inheres in having to incur the expense of the lawsuit itself (most importantly in
incurring attorneys’ fees), so that the proof that such loss is being incurred is the
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very bringing of the lawsuit (of which, needless to say, the insurer is given notice
at its very outset). It is scarcely surprising, then, that (as will be seen) the parties
agreed under the relevant terms of the policies at issue here that written notice of
the underlying D and O claim would be all that was required of Fleming to trigger
the insurers’ obligations.
Before we embark on that discussion, though, it is worth noting that there
are no appellate precedents that deal with the question whether in this type of
situation (the declaratory judgment action seeking coverage, where we have just
explained that a “proof of loss” in the usual sense would be an anomaly) the
submission of a separate proof of loss is required by Section 3629(B). Only one
Oklahoma case-- Shadoan v. Liberty Mut. Fire Ins. Co., 894 P.2d 1140, 1144 n. 9
(Okla. Ct. App. 1995)--speaks of the Section 3629(B) requirements, and its
footnote listing proof of loss as one of three elements for obtaining recovery was
written in connection with a first-party action. As for the only prior case from
this Court--an unpublished disposition in Western Farmers Elec. Coop. v. St. Paul
Ins. Co., 134 F.3d 384 (10 th Cir. 1998) (Table), available at 1998 WL 43168, at
*2-*3 (10th Cir.)--that order adverted briefly to a proof-of-loss requirement, but
that reference was not made in the context of a declaratory judgment action such
as that involved here.
But suppose that it were to be assumed that a “proof of loss”--one of the
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type appropriate to the kind of claim at issue here--were indeed required to trigger
the operation of Section 3629(B) as between Fleming and Insurers. Our
examination of the terms of the 1996 Policy compels the conclusion that
Fleming’s notification to Insurers of the existence of the Class Actions, followed
by the institution of the declaratory judgment action when coverage under the
1996 Policies was denied, would be all that was necessary to satisfy a “proof of
loss” requirement.
We begin with Section 8 of the “General Terms and Conditions” section of
the 1996 Policy, which in relevant part states simply, “No action shall lie against
the Company unless, as a condition precedent thereto, there shall have been full
compliance with all the terms of this policy.” As stated earlier, the 1996 Policy is
one covering a host of perils, one of which--the “Executive Liability and
Indemnification” (D and O) provision--is implicated here. And its statement of
what Fleming had to do to obtain D and O coverage reads simply in its Section
10, the Reporting and Notice provision as to that coverage:
The Insureds shall, as a condition precedent to exercising their rights
under this coverage section, give to the company written notice as
soon as practicable of any Claim made against any of them for a
Wrongful Act.
As is entirely understandable in light of the nature of the coverage involved, not a
word is said in that Reporting and Notice provision about a “proof of loss” as a
precondition to coverage. All that was required was written notice, which
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Fleming provided by advising Insurers of the Class Actions and providing them
with copies of the underlying complaints.
By sharp contrast, the parties themselves have confirmed that they knew
full well how to require Fleming as a party insured to provide a “proof of loss” in
the conventional sense when that was an essential condition of coverage. As to
other types of perils covered by the 1996 Policy--types where a third party had
caused a quantified loss to the Insured, which then asserted a first-party claim to
be made whole by the Insurer--the 1996 Policy expressly required a “proof of
loss” as conventionally understood. Thus under Section 22 of the “Crime
Insurance” provision the 1996 Policy required among other things:
Within four months after such discovery [of loss or an occurrence
that may become a loss] the Insured shall furnish to the Company
affirmative proof of loss with full particulars.
Having thus expressly demanded a proof of loss as a precondition to certain
classes of coverage while conspicuously omitting any such requirement for the D
and O coverage whose denial spawned this litigation, Federal (and hence National
Union under its following form of policy) cannot in good conscience urge such a
proof of loss as a requirement in the formal sense--a sense that does not fit
Fleming’s claim here. Instead we hold that if Section 3629(B) does require a
“proof of loss” as a price for bringing into play the other portions of that statute
awarding attorneys’ fees and costs to the “prevailing party” and then defining the
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latter term, Federal’s own 1996 Policy confirms that the assumed “proof of loss”
requirement was satisfied by Fleming notifying the Insurers about the Class
Actions, followed by its compelled institution of the declaratory judgment action.
Fleming as a “Prevailing Party” under Section 3629(B)
That then leads to the question whether Fleming was a “prevailing party”
under Section 3629(B), which requires such status as the basis for an award of
attorneys’ fees and costs (see Shinault, 654 P.2d at 619). Shinault, id. echoes the
statutory definition under which the insured is the prevailing party unless the
insurer has made a settlement offer and there is a subsequent judgment for a
lesser amount--an exception that is of course inapplicable where the insured is hit
with a judgment after the insurer has rejected the claim. This litigation is
obviously outside of the narrow confines of that exception: Fleming has itself
obtained a judgment confirming its coverage under the 1996 Policies after
Insurers had rejected Fleming’s claim to coverage under those policies. Under the
statute that made Fleming the “prevailing party.”
Although Insurers attempt to counter that the “judgment” spoken of in
Section 3269(B) has to be an actual adjudicated recovery, in a sense that brings
the analysis full circle to the already-decided proposition that Section 3629(B)
applies to declaratory judgment actions. Any notion that an actual adjudicated
recovery was required by the statute would be inconsistent with our decision as to
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declaratory judgment actions, originally reached in An-Son and adhered to here.
Moreover, nothing either in the language of Section 3629(B) or in the Shinault
opinion supports Insurers’ claim that a dollar recovery is essential for the
attainment of prevailing party status in the current context.
Insurers also contend that the pending allocation issue must be resolved
before Fleming can be deemed a prevailing party. That contention lacks merit,
because no resolution of the issue would negate the vital victory as to coverage
under the 1996 Policies that Fleming won in the declaratory judgment action--at
worst the later determination could only reduce the amount of coverage available.
In sum, we conclude that Fleming’s upheld judgment in the declaratory judgment
actions makes it the prevailing party entitled to recover attorneys’ fees and costs
under Section 3629(B).
Mandatory Nature of Fleming’s Award
We turn finally to the question whether an award of attorneys’ fees and
costs is mandatory under Section 3629(B) where a prevailing party has met the
statutory requirements. Because the district court had ruled against Fleming on
the statutory coverage issue, it had no need to consider that added question. But
the issue is one that the district court will necessarily face on remand, it poses a
straight question of law capable of resolution here, and it has been posed to us by
the parties. No useful purpose would be served by our eschewing the issue and
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creating the potential for a second appeal, so we resolve it now.
Section 3629(B) says, “Upon a judgment rendered to either party, costs and
attorney fees shall be allowable to the prevailing party.” What is meant by the
phrase “shall be allowable”?
Nearly a decade ago our Court, emphasizing the word “allowable,” held
that an award of attorneys’ fees under Section 3629(B) is entirely discretionary
(Adair State Bank v. American Cas. Co., 949 F.2d 1067, 1077-78 (10th Cir.
1991)). But post-Adair two separate intermediate Oklahoma Courts of Appeals
have read Section 3629(B) differently--each case holds that an award of
attorneys’ fees is mandatory upon compliance with the statute (Shadoan, 894
P.2d at 1143-44 and Williams v. Old Am. Ins. Co., 907 P.2d 1105, 1107 (Okla Ct.
App. 1995)). Both of those decisions view “shall” as the operative word in the
phrase and, pointing to Oklahoma Supreme Court authority holding “shall” to be
“a word of command or mandate, with a compulsory and peremptory meaning,”
reason that the Oklahoma legislature would have used the word “may” if it had
intended a fee award to be discretionary.
As a federal court sitting in diversity of citizenship litigation, our duty
under Erie v. Tompkins principles is of course to conform to Oklahoma’s
substantive law. And in the absence of definitive direction from the Oklahoma
Supreme Court, that calls for us to predict the course that body would take if
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confronted with the issue (Fransen v. Conoco, Inc., 64 F.3d 1481, 1492 n.10 (10 th
Cir. 1995)).
In this instance we address the special variant under which principles of
stare decisis call for any panel of this Court to follow an earlier panel’s
interpretation of state law, absent a supervening declaration to the contrary by
that state’s courts or an intervening change in the state law (Koch v. Koch Indus.,
Inc., 203 F.3d 1202, 1231 (10th Cir. 2000)). Here such a supervening declaration
has been made by two separate intermediate Courts of Appeals in Oklahoma, each
of which has given thoughtful consideration to our Adair decision but has come
out the other way, ruling that Section 3629(B) makes an award of attorneys’ fees
mandatory. Although those opinions do not come within the category that is
accorded precedential value under Oklahoma law, instead being “considered to
have persuasive effect” (Okla. Stat. tit. 12, ch. 15, app., Okla. S.Ct. Rule
1.200(c)(2)), so that we are not absolutely bound by those decisions in
determining Oklahoma law (Fransen, 64 F.3d at 1492 n.10), such decisions by a
state’s intermediate appellate courts provide evidence of how the state’s highest
court would rule on the issue, and we can consider them as such (id.). Section
3629(B)’s “shall be allowable” language certainly presents an arguable question
of interpretation of a state statute, and not one but two intermediate Oklahoma
Courts of Appeals have considered our Court’s reading and have found it
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unpersuasive as to what Oklahoma law means.
On balance, we are inclined to follow the lead of those courts as to what
their Supreme Court is more likely to do if confronted with the same issue. We
therefore overrule that part of Adair that is inconsistent with this holding. 3 In
conformity with Shadoan and Williams, we hold that an award to Fleming of
attorneys’ fees and costs under Section 3629(B) is mandatory.
Conclusion
We REVERSE the order of the district court denying attorneys’ fees and
costs to Fleming and REMAND the case to the district court, directing it to award
to Fleming the attorneys’ fees and costs that it has incurred in the declaratory
judgment action and its aftermath (including this appeal).
3
This opinion has been submitted to the active judges of the Tenth
Circuit and the Court has unanimously agreed en banc to the overruling of that
part of Adair, as stated here.
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