Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_03-cv-01746/USCOURTS-cand-3_03-cv-01746-6/pdf.json

Parties Involved:
Federal Insurance Company
Defendant
Longs Drug Stores California, Inc.
Plaintiff

Document Text:

U

nite

d

States District C

o

u

rt

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

LONGS DRUG STORES CALIFORNIA,

INC.,

Plaintiff,

 v.

FEDERAL INSURANCE CO.; DOES 1

through 50,

Defendants.

 /

No. C 03-01746 JSW

AMENDED ORDER RE

DAMAGES PORTION OF

PLAINTIFF’S MOTION FOR

SUMMARY JUDGMENT

Now before the Court is the damages portion of the motion for summary judgment by

Plaintiff Longs Drug Stores California, Inc. (“Longs”) and Plaintiff’s request for sanctions. 

After careful consideration of the parties’ papers and the relevant legal authority, for the reasons

set forth herein, the Court GRANTS Long’s damages portion of its summary judgment motion

and GRANTS Long’s request for sanctions against Defendant Federal Insurance Company

(“Federal”). 

BACKGROUND

As the parties are familiar with the facts and procedural history of this case, there is no

need to recite them here, except where useful in reaching the disposition. The Court previously

granted Long’s motion for summary judgment and denied Federal’s cross-motion for summary

judgment, holding that Federal owed Longs a duty to provide coverage under an insurance

policy for the underlying Palacio Action. Pursuant to Federal’s request, the Court continued

Long’s motion only as to the amount of damages owed. Based on the Court’s previous rulings, 

Case 3:03-cv-01746-JSW Document 88 Filed 08/30/05 Page 1 of 8
U

nite

d

States District C

o

u

rt

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

2

Federal does not dispute it owes damages to compensate Longs for the cost of defending the

underlying Palacio Action, but merely disputes that the amount Longs’ seeks is reasonable and

justified.

Longs is also moving for sanctions against Federal based on Federal’s alleged failure to

meet and confer regarding damages.

ANALYSIS

Longs contends it is entitled to attorneys’ fees and costs incurred in defending against

the underlying Palacio Action, plus pre-judgment interest through August 5, 2005, totaling

$2,909,361.36. This amount reflects reductions Longs made in response to Federal’s opposition

to the damages portion of the pending motion for summary judgment. (Reply Br. at 6.)

It is undisputed that the measure of Long’s damages in this matter are the reasonable

expenses of defending the underlying Palacio Action, including the costs and attorneys’ fees,

incurred after the defense was tendered to Federal, see Arenson v. National Auto. & Cas. Ins.

Co., 48 Cal.2d 528, 537 (1957), as well as pre-judgment interest. Longs bears the burden of

demonstrating the existence and amount of litigation expenses. Aerojet-General Corp. v.

Transport Indem. Co., 17 Cal.4th 38, 64 (1997). However, once Longs does so, the litigation

expenses incurred are presumed to be reasonable and necessary defense costs, and Federal bears

the burden of demonstrating that such expenses were unreasonable or unnecessary. Id.

A. Amount of Fees and Costs

The Court concludes that Longs presented sufficient evidence to demonstrate it actually

incurred $1,938,626.52 in attorneys’ fees and costs, excluding pre-judgment interest, after it

tendered the underlying Palacio Action to Federal. (Declaration of Paul R. Johnson in support

of Reply Brief, ¶¶ 2, 3, Exs. 1, 2.) This amount reflects a reduction of $300,000 for the selfinsured retention and does not include expenses relating to insurance coverage work, pursuit of

damages resulting from the alleged defamatory publications by counsel for the Palacio

plaintiffs, or for two entries for work on Qarshi v. Longs Drugs Stores Corp. that were

inadvertently included in the invoices for the Palacio Action. (Johnson Decl., ¶¶ 2, 14, 15, Ex.

Case 3:03-cv-01746-JSW Document 88 Filed 08/30/05 Page 2 of 8
U

nite

d

States District C

o

u

rt

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

1

 The Court does not address Federal’s arguments concerning the $300,000 for the

self-insured retention, expenses relating to insurance coverage work, or expense relating to

defense of the Qarshi v. Longs Drugs Stores Corp. matter because Longs concedes that it is

not entitled to recover these expenses and has already deleted them from the damages it

seeks.

3

2.) The burden thus shifts to Federal to demonstrate that such expenses were unnecessary or

unreasonable.

Federal attacks the amount of damages Longs seeks on several grounds.1 First, Federal

argues that Longs is not entitled to recover costs for seeking a retraction for statements the

Palacio plaintiffs’ attorney made in the press or for costs related to potential claims for

defamation or malicious prosecution against the plaintiffs’ attorney. (Opp. Br. at 6.) Longs

concedes that costs related to the defamation action should not be included as damages, but

submits evidence demonstrating that expenses relating to seeking a retraction and pursuing a

malicious prosecution claim were reasonable and related to defending the Palacio Action or

mitigating damages from the underlying action. (Reply Br. at 9-10, 20-22; Declaration of

Robert D. Essa in support of Reply Brief, ¶¶ 19-21.) Federal has not met its burden to

demonstrate such expenses were unreasonable or unnecessary.

Second, Federal argues that Longs double billed for Mr. Essa’s time on July 13, 200 and

May 2, 2001. (Opp. Br. at 7.) In response, Longs demonstrates that it did not actually double

bill, but instead, accidentially used the wrong date on two invoices. (Reply Br. at 12-13; Essa

Decl., ¶¶ 12-18, Exs. 3-9.) Accordingly, Federal has not met its burden to demonstrate such

expenses were unreasonable or unnecessary.

Third, Federal contends the rates charged were unreasonable. In support of this

argument, Federal submits the declaration of its expert, Brand Cooper, who states that the initial

rates charged by Longs’ attorneys, which ranged between $125 to $165 an hour were reasonable,

but that rates were then increased in an excessive manner. (Opp. Br. at 7-8; Cooper Decl., Ex.

2.) According to Federal, a 7% annual increase would have been reasonable. (Id. at 8.) As

support, Federal cites to a case in which a magistrate judge recommended that the court approve

the rates charged as reasonable. Etchell v. Royal Ins. Co., 165 F.R.D. 523, 546-47 (N.D. Cal.

1996). Notably, Federal does not argue the amounts charged were unreasonable, but only that

Case 3:03-cv-01746-JSW Document 88 Filed 08/30/05 Page 3 of 8
U

nite

d

States District C

o

u

rt

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

4

the rates were increased too dramatically. Federal did not submit any authority demonstrating

that increasing rates too quickly, even if the overall rate charged was reasonable, would render

the attorneys’ fees excessive or unreasonable. Therefore, Federal fails to meet its burden to

demonstrate that the rates charged were unreasonable. 

Fourth, Federal argues that it should not be responsible for Longs’ pursuit of attorneys’

fees and costs in the underlying Palacio Action, and cites Hogan v. Midland Nat’l Ins. Co., 3

Cal. 3d 553, 564-66 (1970) for the proposition that such fees and costs are not an integral part of

a reasonable defense by the insured. (Opp. Br. at 9.) However, Hogan does not stand for this

proposition. Therefore, Federal fails to demonstrate that efforts by the insured to recover fees

and costs is unreasonable or unnecessary. Alternatively, Federal contends it is entitled to an

offset of $70,794.30, the amount of fees and costs awarded by the trial court in the Palicio

Action. Although Longs was awarded $70,794.30, it does not appear that Long has yet

collected on this amount. Within ten days from the date of this order, Longs shall inform

Federal in writing of how much, if any, Longs has received of the $70,794.30. Federal shall be

entitled to deduct the amount Longs has actually received from the damages awarded pursuant

to this order. To the extent any portion of the $70,794.30 remains outstanding, Longs shall

assign such portion to Federal.

Fifth, Federal attacks the descriptions in some of Longs’ bills. According to Federal,

some descriptions on the invoices are too vague or inappropriately billed in block amounts,

rather than describing how much time was spent on one particular task. (Opp. Br. at 10-11.) 

However, Federal does not dispute that Longs actually incurred these expenses. Nor does

Federal provide any authority demonstrating that the manner in which an expense is described in

an invoice may make an expense unreasonable, or that Longs has an obligation to attach a

specific expense to every small task, rather than describing several tasks together. Therefore,

Federal has not met its burden to demonstrate any expenses were unreasonable or unnecessary

based on how they were described in invoices.

Sixth, Federal argues that Longs should not be able to recover the costs of conducting a

mock trial in preparation for defending the Palacio Action. Federal’s reliance on Finkelstein v.

Case 3:03-cv-01746-JSW Document 88 Filed 08/30/05 Page 4 of 8
U

nite

d

States District C

o

u

rt

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

5

Bergna, 804 F.Supp. 1235 (N.D. Cal. 1992) for this proposition is misplaced. The court in

Finkelstein merely upheld conducting one mock trial as reasonable, but then held that a second

one on the issue of liability was not reasonable because at the time it was conducted, “the

liability issue was all but decided.” Id. at 1239. Federal’s expert opines that spending

$88,155.76 on the mock trial out of a total $432,597 spent on trial preparation was not

reasonable. (Cooper Decl., Ex. 2 at p.18.) In light of the fact that the Palacio plaintiffs were

seeking $24,615,000 in compensatory damages and $27,000,000 in punitive damages (Essa

Decl., Ex. 1), Federal has not shown that spending less than $90,000 to prepare for trial by

conducting a mock trial was unreasonable.

Seventh, Federal contends that Longs should not be able to recover attorneys’ fees when

incurred by an attorney who billed more than twelve hours in a day. Federal proposes that the

expenses for any time over twelve hours in one day should be deducted. Mr. Cooper, Federal’s

expert opines that attorneys become less efficient after the twelfth hour. While that may be true,

Federal has not shown that it was unnecessary or unreasonable for attorneys to work long days

during trial and trial preparation. More importantly, Federal has failed to demonstrate that the

work done by attorneys in these long days was unreasonable. Accordingly, Federal fails to meet

its burden to demonstrate that attorneys’ fees incurred on long days were unreasonable.

Finally, Federal mentions in passing, without providing any authority or argument, that

there are other categories of bills discussed by its expert which should be deducted from its

defense obligation. (Opp. Br. at 11.) Despite Federal’s failure to properly brief these matters,

the Court has reviewed Mr. Cooper’s declaration on these additional points, and does not find it

sufficient to demonstrate such additional costs or attorneys’ fees were unreasonable. (Cooper

Decl., at p.15-18, 22-30.) Accordingly, the Court concludes that Federal owes Longs

$1,938,626.52 in damages from the attorneys’ fees and costs incurred in defending the Palacio

action.

B. Prejudgment Interest

It is undisputed that Longs is entitled to prejudgment interest on the attorneys’ fees and

costs incurred in the Palacio action, and that the interest accrues at a rate of ten percent per year. 

Case 3:03-cv-01746-JSW Document 88 Filed 08/30/05 Page 5 of 8
U

nite

d

States District C

o

u

rt

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

6

However, the parties dispute whether such interest is limited to simple interest, or may be

compounded, and they dispute the date from when the interest started to accrue.

Under California law, the general rule is that “compounded interest is impermissible

unless specifically authorized by statute or by stipulation of the parties.” Salton Bay Marina,

Inc. v. Imperial Irrigation Dist., 172 Cal. App. 3d 914, 961 (1985); see also State of California

v. Day, 76 Cal. App. 2d 536, 554 (1946). Here, Longs has not pointed to any statute or

stipulation specifically authorizing the interest to be compounded. Longs’ attempt to justify

compounded interest by analogizing Federal, as an insurer, to a fiduciary is unavailing. Longs

correctly notes that California courts have found insurers to be akin to fiduciaries in certain

aspects. Love v. Fire Ins. Exch., 221 Cal. App. 3d 1136, 1147 (1990). Longs points out that

compounded interest may be charged against fiduciary trustees where the trustee has

commingled his funds with those of the trust. Compounded interest is allowed in order to attain

the actual or presumed profits for the trust beneficiary and to ensure that the trustee does not

obtain any profit or advantage other than his commission or compensation. Washington Int’l

Ins. Co. v. Super. Ct., 62 Cal. App. 4th 981, 991 n.5 (1998). However, while fiduciaries are

prohibited from commingling trust funds or from profiting from using the funds received from

beneficiaries, “no such prohibition circumscribes an insurer’s use of premiums. Indeed, pooling

of funds from insureds to create loss reserves, and investing such pooled funds for profit in

order to enhance the insurer’s financial strength, appear integral parts of the business of

insurance.” Love, 221 Cal. App. 3d at 1149. Given the different responsibilities and restrictions

governing fiduciaries versus insurers, it does not appear that commingling funds, even if it

happened, would be sufficient to justify charging an insurer with compounded prejudgment

interest. Arcon/Pacific Ltd. v. Coit, 1997 WL 578673, *1 (N.D. Cal. Sept. 8, 1997) (noting

California courts have made an exception to rule prohibiting compounded prejudgment interest

in cases involving deliberate misappropriation of funds by trustees and refusing to award

compounded interest where the case did not involve a trustee or willful misappropriation). 

Significantly, Longs has not cited to, and the Court has not found, any California cases in which

Case 3:03-cv-01746-JSW Document 88 Filed 08/30/05 Page 6 of 8
U

nite

d

States District C

o

u

rt

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

7

a court awarded an insured compounded prejudgment interest. Accordingly, the Court is only

awarding simple interest. 

Next, the parties dispute the date from which the interest accrues. “The test for recovery

of prejudgment interest under [California Civil Code § 3287(a)] is whether defendant actually

know[s] the amount owed or from reasonably available information could the defendant have

computed that amount.” Cassinos v. Union Oil Co., 14 Cal. App. 4th 1770, 1789 (1993)

(quotations and emphasis omitted). The Court concludes that the date on which Federal could

have computed the amount owed was on the date Longs was billed for the attorneys fees and

costs in the Palacio action. See Copart, Inc. v. Travelers Indem. Co., 1999 WL 977948, *3

(N.D. Cal. Oct. 22, 1999) (finding that damages were capable of being computed by defendant

on the date that the insured was billed); see also Foxfire, Inc. v. New Hampshire Ins. Co., 1994

WL 361815, *5 (N.D. Cal. July 1, 1994) (same).

Accordingly, the Court concludes that Longs is entitled to $832,336.34 in prejudgment

interest as of the date of this order, August 29, 2005.

C. Sanctions

Longs also moves for sanctions against Federal for its failure to meet and confer

regarding the damages portion of this motion for summary judgment. In the order ruling on the

liability portion of Longs’ motion, the Court ordered the parties to meet and confer in an effort

to agree upon or narrow their differences as to the fees incurred or any other damages to which

Longs’ may be entitled. Longs made several efforts to present its position with respect to the

amount of damages, both before and after Federal filed its opposition brief. (Johnson Decl., ¶¶

2-3, 14-16, Exs. 1, 2.) With the exception of the self-insured retention issue, the Court

concludes that Federal did not make a genuine effort to discuss its position with respect to the

amount of damages. Therefore, it is appropriate to sanction Federal for its failure to comply

with the Court order to meet and confer. Nevertheless, Longs has not demonstrated that

$32,000 should be awarded in sanctions. Longs argues that it should recover the amount it

expended in responding formally to Federal’s opposition brief, but Longs would have had to

expend resources preparing for and participating in an informal discussion of Federal’s position

Case 3:03-cv-01746-JSW Document 88 Filed 08/30/05 Page 7 of 8
U

nite

d

States District C

o

u

rt

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

8

regarding damages. Accordingly, the Court grants Longs’ request for sanctions but limits the

award to $1,500.

Pursuant to the Court’s order dated August 8, 2006, the Court also sanctions Federal

based on its failure to raise its concerns regarding prejudgment interest earlier and for creating

additional delay on Plaintiff’s motion. The Court orders that Federal shall pay Longs an

additional $7,990 in sanctions. (Declaration of Paul R. Johnson, ¶¶ 2,4.)

CONCLUSION

For the foregoing reasons, the Court HEREBY ORDERS that Federal owes Longs

$2,770,962.86 in damages, including prejudgment interest. To the extent Longs has already

collected any portion of the attorneys’ fees and costs awarded by the trial court in the underlying

Palacio Action, Federal is entitled to deduct such amount from the damages awarded pursuant

to this order. To the extent any portion of the attorneys’ fees and costs awarded by the trial

court in the underlying Palacio Action remains outstanding, Longs shall assign such portion to

Federal. The Court FURTHER ORDERS that Longs’ request for sanctions is GRANTED. 

Federal shall pay $1,500 in sanctions for failing to comply with the order to meet and confer,

plus an additional $7,990 for Federal’s delay in raising its concerns regarding prejudgment

interest.

IT IS SO ORDERED.

Dated: August 29, 2005 

JEFFREY S. WHITE

(by PHYLLIS J. HAMILTON)

UNITED STATES DISTRICT JUDGE

Case 3:03-cv-01746-JSW Document 88 Filed 08/30/05 Page 8 of 8