685 F.2d 961
Arthur JACKSON, Plaintiff,
v.
W. I. (Bill) HOLLOWELL, Etc., et. al., Defendants,
Liberty CASH, Clifford Jennings, Charles Riddell, H. L.
Roberts, Sr., K. C. Peters, Sr., and John Q.
Demoville, Etc., Defendants-Appellants,
v.
GRANITE STATE INSURANCE COMPANY, United States Fidelity and
Guaranty Company, Western Surety Company, St. Paul
Fire and Marine Insurance Co., and New
Hampshire Insurance Co.,
Defendants-Appellees.
Thomas Perry WERNETH, Plaintiff,
v.
UNITED STATES FIDELITY AND GUARANTY COMPANY, Defendant-Appellee,
v.
Thomas D. COOK, Defendant-Appellant.
Nos. 80-3901, 80-3902.
United States Court of Appeals,
Fifth Circuit.
Sept. 13, 1982.
Bill Allain, Atty. Gen., P. Roger Googe, Jr., Asst. Atty. Gen., Robert L. Gibbs, Spec. Asst. Atty. Gen., Jackson, Miss., P. J. Townsend, Jr., Robert Lawson Holladay, Drew, Miss., for defendants-appellants.
T. H. Freeland, III, James L. Robertson, Oxford, Miss., Roy D. Campbell, Jr., Greenville, Miss., for Granite State, et al.
Jerome Steen, Whitman B. Johnson, III, Jackson, Miss., Pascol J. Townsend, Jr., Drew, Miss., for St. Paul Fire & Marine Ins. Co.
Roy D. Campbell, Jr., Greenville, Miss., Champ T. Terney, Indianola, Miss., Pascol J. Townsend, Jr., Drew, Miss., James L. Robertson, Oxford, Miss., Whitman B. Johnson, III, Jackson, Miss., for U. S. Fidelity & Guaranty Co.
Appeals from the United States District Court for the Northern District of Mississippi.
Before GOLDBERG, WILLIAMS and GARWOOD, Circuit Judges.
GOLDBERG, Circuit Judge:
These consolidated appeals present a state law question concerning the right of a surety company to seek indemnification from a bond principal for legal fees incurred by the surety company in defending a suit on the bond. This issue arises in the context of prisoners' civil rights suits brought against Mississippi state officials and against their surety companies for recovery under public official bonds. We find that the surety companies' right to indemnification depends on whether it was reasonably necessary for the sureties to incur legal costs, on whether the costs incurred were reasonable in amount, and on whether the sureties acted in good faith toward the bond principals.
FACTS AND PROCEEDINGS BELOW
In 1975, Arthur Jackson, a Mississippi State Penitentiary inmate, brought suit against an array of Mississippi state officials, seeking damages for injuries sustained during his incarceration. Jackson v. W. I. Hollowell, et al. (No. 80-3901) (hereinafter "Jackson "). Similarly, Thomas Werneth, another Mississippi State Penitentiary inmate, brought suit against various state officials, seeking damages for personal injuries. Werneth v. State of Mississippi, et al. (No. 80-3902) (hereinafter "Werneth ").
As a requirement of holding office, the defendant officials executed "public official bonds" with the appellee surety companies. The applications for the bonds contained similar provisions in which the state officials agreed to indemnify the surety companies against any loss or expense, including attorneys' fees, which the surety companies might incur by reason of executing the bonds.
After filing suit against the prison officials, plaintiffs Jackson and Werneth filed amended complaints adding the surety companies as defendants by virtue of the sureties' liability on the bonds to anyone injured by the officials' breach of duty. The surety companies in turn filed cross-claims against the defendant prison officials seeking indemnification for any losses which might be sustained by the sureties as a result of the suits.
In both the Werneth and Jackson actions, the prison officials' defense was undertaken by the Attorney General of the State of Mississippi. Several of the state officials also retained private counsel. After being joined as defendants, the surety companies hired their own attorneys to represent their allegedly separate interests in the litigation.
1. Jackson
In 1979, the district court granted summary judgment in the Jackson case in favor of all defendants. However, the district court retained jurisdiction to adjudicate the surety companies' cross-claims for attorneys' fees against the defendant prison officials. The Jackson cross-claims for indemnification went to trial before a jury, which found in favor of the cross-defendant prison officials. The trial judge then overturned the jury verdict and granted the surety companies' motion for judgment n.o.v. The court held that the surety companies had an absolute right under the bond application agreements to employ counsel of their own choosing to defend the companies in any action brought against them on the bonds and to charge the bond principals with the costs of retaining separate counsel. In the alternative, the court found that there was no substantial evidence to support the jury's finding that it was not reasonably necessary for the surety companies to retain their own attorneys to defend the suit.
2. Werneth
In 1979, Thomas Werneth died. The district court granted plaintiffs' attorneys' motion to dismiss on the grounds that the plaintiff was deceased. However, the district court retained its jurisdiction over the cross-claim of United States Fidelity & Guaranty Co. (hereinafter "USF&G") against cross-defendant Thomas Cook for attorneys' fees incurred by the surety company in defending the Werneth suit. Based on its disposition of the Jackson cross-claim, the trial court granted summary judgment in favor of cross-claimant USF&G. The court reiterated its holding that the surety company had an absolute right to retain its own attorney, and to charge cross-defendant Cook with the attorneys' fees. The court further found that since the parties had stipulated that the fees claimed by USF&G were reasonable in amount, there was no issue for the jury to decide.
3. Jackson and Werneth
The defendant prison officials in both the Jackson and Werneth cases brought these appeals, arguing that the district court erred in entering judgment in favor of the surety companies on the cross-claims. Because of the similarity in legal issues presented, this Court consolidated the cases for appeal.
INDEMNIFICATION
The surety companies' claims for indemnification are based on agreements signed by the defendant state officials as part of their applications for public official bonds. Under the terms of the applications, the prison officials, as bond principals, agreed to:
indemnify and keep indemnified, the (surety) company from and against any and all liability, loss, costs, charges, suits, damages, counsel and attorneys' fees and expenses of whatever kind or nature, which it shall or may, for any cause, at any time sustain or incur, or be put to, for or by any reason or in consequence of having entered into or executed said bond(s) ...
The surety companies argue that the language of the indemnity agreements vests in the Sureties the absolute right to employ counsel of their own choosing and to charge the costs to the bond principals. The prison officials argue that a surety's right to recover attorneys' fees depends on whether it was reasonably necessary for the surety company to retain separate counsel and on whether the surety acted in good faith toward the bond principal.
In resolving this dispute over the contract provisions, the trial court properly looked to Mississippi law. There being no case directly on point, the court sought guidance in dicta found in the Mississippi Supreme Court's opinion in National Surety Corporation v. Vandevender, 235 Miss. 277, 108 So.2d 860 (1959). In Vandevender, supra, Mississippi's highest court considered a surety company's claim against a bond principal for attorneys' fees incurred by the surety company in defending a suit on the bond, and concluded that because the bond principal had retained his own counsel in reliance on a request by the surety company to do so, the surety company was estopped from claiming reimbursement for fees. Discussion of the estoppel issue is prefaced by this statement:
We assume that, except for the question of estoppel, hereinafter discussed, appellant (Surety) was entitled to reimbursement from appellee (bond principal) of all reasonable sums paid out by it in good faith in defending the Nichols suit, including fees for attorneys of appellant's choice.
National Surety Company v. Vandevender, 108 So.2d at 862. From this language, the district court concluded that the Werneth and Jackson surety companies had an absolute right to employ counsel of their own choosing, and to charge the costs of such counsel to the bond principals.
We read Vandevender differently. Rather than implying the existence of an absolute right to incur attorneys' fees, we believe that the language in Vandevender refers to the well-established doctrine that a surety is entitled to reimbursement for reasonable and necessary expenses incurred by the surety in good faith in defending itself against a suit on a bond.
The rule that a surety is entitled to be reimbursed only for necessary expenses is no new-comer to Mississippi jurisprudence. In 1866, the Supreme Court of that state observed that, with regard to litigation pursued by a surety on his principal's behalf, "It is well settled, and on sound reason, that a surety cannot charge his principal with costs and expenses unnecessarily incurred ..." Whitworth v. Tilman, 40 Miss. 76, 81 (1866) (emphasis in original). Nor is the "necessity rule" unique to Mississippi. In Kilgore v. Union Indemnity Co., 222 Ala. 375, 132 So. 901 (Ala.1931), the Alabama Supreme Court was called upon to construe an indemnity agreement contained in a public official bond in the context of a suit by the surety to recover attorneys' fees from the principal. The court stated,
In construing indemnity covenants ... it is everywhere recognized that the indemnitee must act in good faith. He cannot needlessly, in utter disregard of the burdens he is imposing on his indemnitor, incur attorneys' fees, and in no case such as are excessive and unreasonable in amount.
Kilgore v. Union Indemnity Co., 132 So. at 902.
In a more recent case, USF&G v. Love, 260 Ark. 374, 538 S.W.2d 558 (1976), the indemnity question arose in the context of a civil rights suit brought against a sheriff and his surety company on the sheriff's public official bond. The surety company employed its own counsel to defend the suit, and sued the sheriff for reimbursement of attorneys' fees. The court stated, "To be recoverable by the indemnitee, the attorneys' fees must be reasonable, proper, necessary and incurred in good faith and with due diligence." USF&G v. Love, 538 S.W.2d at 559. Similarly, in Central Towers Apartments, Inc. v. Martin, 61 Tenn.App. 244, 453 S.W.2d 789 (1970) the court held,
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 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.
Id., 453 S.W.2d at 800 (emphasis added).
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. Thus, the weight of authority allows reimbursement for legal costs under the terms of an indemnity contract only if it is necessary for the surety to retain separate counsel, if the amount of the fees claimed is reasonable, and if the surety has acted in good faith toward the bond principal.
Whether it was necessary for a surety company to retain separate counsel, and whether the surety has acted in good faith, are questions of fact. USF&G v. Love, supra, 538 S.W.2d at 559; Central Towers Apartments, Inc. v. Martin, supra, 453 S.W.2d at 800; Kilgore v. Union Indemnity Co., supra, 132 So. at 902. The surety company's good faith, and the reasonable necessity of incurring the legal costs sought to be reimbursed, are determined by looking at all of the facts of the case. It is appropriate to consider, among other factors, whether there is a conflict of interest between the surety and the bond principal, see Central Towers Apartments, Inc. v. Martin, supra ; whether the surety company has requested that the bond principal undertake to defend the suit, see National Surety Company v. Vandevender, supra ; whether the bond principal has retained competent counsel and requested that the surety not incur separate legal costs, Kilgore v. Union Indemnity, supra ; and whether the bond principal can furnish sufficient funds to indemnify the surety against the claim asserted, see American Surety Co. v. Vinsonhaler, supra.
Because the issue of reasonable necessity and good faith is one of fact, it follows that the district court erred in granting summary judgment in favor of USF&G in the Werneth case. The question of whether it was necessary for USF&G to retain separate counsel and whether USF&G acted in good faith, can only be resolved by examining all of the facts and circumstances of the case. Accordingly, the district court's order granting summary judgment in favor of USF&G in the Werneth case must be reversed.
The status of the Jackson case is more complicated. In Jackson, the surety companies' cross-claims against the state prison officials for indemnification were tried to a jury. The jury found in favor of the state officials. In response to special interrogatories, the jury found that it was not reasonably necessary for the surety companies to incur attorneys' fees and legal expenses in defending the Jackson suit, and that the attorneys' fees claimed by each surety company were not reasonable in amount.
The district court granted judgment n.o.v. in favor of the surety companies. If the court had granted judgment n.o.v. solely on the grounds that the surety companies had an absolute right to indemnification for the costs of retaining separate counsel, the order of judgment would have to be reversed. However, the entry of judgment n.o.v. in favor of the sureties was also based on the district court's determination that there was no substantial evidence to support the jury's verdict. According to the district court, the evidence submitted to the jury on the issue of whether it was reasonably necessary for the sureties to engage their own attorneys, and on the issue of whether the fees charged were reasonable in amount, was "so overwhelmingly in favor of the bonding companies, that no reasonable juror could reach a contrary result."
This Court employs the standards set forth in Boeing Co. v. Shipman, 411 F.2d 365 (5th Cir. 1969) (en banc), to review a district court's grant or denial of judgment n.o.v. Maxey v. Freightliner Corp., 665 F.2d 1367, 1371 (5th Cir. 1982) (en banc).
Under the standard established in Boeing, a motion for directed verdict or for judgment n.o.v. should be granted only when the facts and inferences point so strongly and overwhelmingly in favor of the moving party that reasonable persons could not arrive at a contrary verdict. The court should consider all of the evidence-not just that evidence which supports the nonmovant's case-but in the light and with all reasonable inferences most favorable to the party opposed to the motion. If there is substantial evidence opposed to the motion, that is, evidence of such quality and weight that reasonable and fairminded persons in the exercise of impartial judgment might reach different conclusions, the motion should be denied ...
Maxey v. Freightliner Corp., supra.
After reviewing the record, we conclude that judgment n.o.v. in favor of the surety companies was appropriate. The issue at trial was whether it was reasonably necessary for the surety companies to employ separate counsel to protect their interests, and whether the sureties acted in good faith toward the bond principals. While there was no evidence of an actual conflict of interest between the sureties and bond principals, the evidence did show that the interests of the parties were less than completely congruent.
As the sureties were aware, the state prison officials were represented in the Jackson suit by the State Attorney General. There is no evidence that representatives of the sureties believed that the Attorney General would be unable to competently defend the officials on the damage claims. However, the trial exhibits include letters from the Attorney General's Office stating that although the Attorney General would provide a full defense for the state officials, it would not be able to raise any defenses specific to the surety companies. The evidence shows clearly the existence of at least one defense, relating to the surety companies' aggregate liability, which was unique to the sureties. Mr. McNamara, counsel for St. Paul Fire and Marine, testified that he asserted the surety company's "aggregate liability" theory as a defense in the separate answer filed by him on behalf of the company. Mr. Googe, the lawyer in the Attorney General's Office, testified on cross-examination that the bond principals had no direct interest in asserting the surety companies' "aggregate liability" defense. In addition, Mr. Googe testified that he was aware of the multiple damage suits threatening the sureties, and that in his opinion, it was desirable that the surety companies plead "aggregate liability" as a defense.
Thus, there was uncontradicted evidence that in order to fully protect their interests, the surety companies were required to plead as a defense the limitation on their aggregate liability. This defense was specific to the sureties; the bond principals had no interest in asserting it, and the Attorney General had stated clearly at the onset of the litigation that his office could not assert any defenses specific to the surety companies. Thus, there was overwhelming proof that it was at least reasonably necessary for the sureties to retain separate counsel in order to protect their separate interests.
The trial exhibits included copies of the itemized bills for legal services prepared by the sureties' attorneys. The nature of the services performed, and hourly rate charged, were described. Each attorney testified that the amounts charged were reasonable in comparison with the fees of other attorneys in the community. The prison officials introduced no evidence to contradict this testimony.
Finally, the attorneys retained by the surety companies each testified that throughout the Jackson litigation, the attorneys attempted as far as possible to avoid duplicating the legal work performed by the Attorney General's Office. There was no credible evidence to contradict the attorneys' testimony that they had at least attempted to minimize the expenses incurred to defend the sureties' interests in the litigation. That the sureties' acted in good faith toward their bond principals cannot reasonably be questioned.
In sum, the uncontradicted evidence showed that it was necessary for the sureties to retain counsel to protect their separate interests, that the fees charged were reasonable, and that the sureties acted in good faith toward the bond principals. A fairminded jury with a reasonable understanding of the issues could not have reached another result. Therefore, the district court's entry of judgment n.o.v. in favor of the cross-claiming surety companies for the amounts claimed was proper, and should be affirmed.
CONCLUSION
The order of the district court granting summary judgment in favor of the cross-claimant in Werneth is reversed, and the case is remanded for a trial on the merits. The district court's order granting judgment n.o.v. in favor of the cross-claimants in Jackson is affirmed.
Werneth v. Cook, No. 80-3902, is REVERSED and REMANDED.
Jackson v. Hollowell, No. 80-3901, is AFFIRMED.
GARWOOD, Circuit Judge, concurring.
I concur in all the majority opinion. I append these remarks merely to address certain aspects of the "reasonable and necessary" requirement not expressly explored by the majority.
I construe "necessary" in this context as more nearly denoting "appropriate" than "absolutely indispensable." See, e.g., McCulloch v. Maryland, 4 Wheat 316, 413-18, 4 L.Ed. 579, 603-04 (1819). 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 the decision to hire separate counsel by one formally hailed into court as a party defendant.
Accordingly, where the bonding company itself has been formally made a party defendant in a suit on the bond, and the principal has expressly agreed to indemnify the bonding company for "all ... attorneys' fees ... in ... defending any action which may be brought in connection" with the bond or the equivalent, it would have to be a most unusual case before the bonding company's good faith retention of its own separate counsel could legitimately be found so unnecessary and unreasonable as to justify denying the bonding company recovery for any of its counsel's fees.
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.
In the Werneth case the stipulation went only to the reasonableness of the fee for the services rendered. There was no stipulation that it was reasonable and necessary for all of such services to be performed by the bonding company's separate counsel. Accordingly, because this issue remained open, summary judgment was inappropriate. In the Jackson suit, the judgment non obstante veredicto was proper because the evidence established beyond legitimate dispute that all the separate counsel's services, and related fees, were reasonable and necessary.