## F I L E D United States Court of Appeals Tenth Circuit 

### JAN 9 2001 

### PATRICK FISHER Clerk PUBLISH UNITED STATES COURT OF APPEALS

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,

v. NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH and FEDERAL INSURANCE COMPANY, Defendants-Appellees. No. 98-6405

_________________________ 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, a nd Pierce C. Hendrickson of Baysinger & Green, Oklahoma City, Ok lahoma for DefendantAppellee Federal Insurance Company; James M. Peters of Monnet, Hayes, Bullis, Thompson & Edwards, Oklahoma City, Oklahoma for Def endant-Appellee National Union Fire Insurance Company of Pittsburgh , Pennsylvania.* The Honorable Milton I. Shadur, Senior United State s District Judge

for the Northern District of Illinois, sitting by d esignation.

1 For simplicity we will also refer to appellants col lectively as “Fleming,” treated as a singular noun. That dual u sage should not create any confusion, because the context will clearly show wh ether the name is being used to denote the corporation alone or all of the appel lants.
-2- Before BALDOCKand McWILLIAMS , Circuit Judges, and SHADUR , District Judge. *
SHADUR , District Judge. After examining the briefs and appellate record, th is panel has determined unanimously to grant the parties’ request for a dec ision on the briefs without oral argument. See Fed. R. App. P. 34(f); 10th Cir. R. 34.1(G). Acco rdingly 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. (“Flem ing”) and a number of its officers and directors--Robert Stauth, Harry Winn, Kevin Twomey, Donald Eyler, Randolph Devening and James Stuard--in connection w ith their institution and successful prosecution of a declaratory judgment ac tion 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)”) require s the submission of a “proof of loss” in support of such a request and no docume nt fitting that term in the usual sense had been tendered by Fleming. Fleming has appealed the district2 Because Federal’s policies contain the substantive provisions while

National Union’s is a following form, we will use t he 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). -3- 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 t hat Fleming complied fully with its contractual obligations under the insuranc e policies involved so as to satisfy the statutory requirements. We further hol d that under the circumstances an award of attorneys’ fees is mandatory under Sect ion 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 officer s (“D and O”) liability policies (the “1993 Policies”)--one from Federal In surance Company (“Federal”) providing basic coverage and the other from Nationa l Union Fire Insurance Company (“National Union”) providing excess coverag e (we refer to Federal and National collectively as “Insurers”). In 1996 Flem ing renewed these two policies (“the 1996 Policies” 2 ). Between March and June 1996, Fleming shareholders a nd noteholders filed ten different class actions against Fleming, all al leging its violation of the federal-4-

securities laws by having failed to disclose the ex istence of litigation that began in 1993 and settled in 1996. Those multiple action s were eventually consolidated into two actions (“the Class Actions”), one by Flem ing’s noteholders and the other by its shareholders. Fleming notified Insure rs of the existence of the Class Actions and provided them with copies of the compla ints. As we discuss at greater length later, such submiss ion 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 appropr iate action against Insurers if need be. Indeed, by contrast with other types of c overage 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 judgmen t action against Insurers, seeking a determination that they had a d uty to indemnify Fleming in the Class Actions under the 1996 Policies. Although In surers agreed to cover Fleming, they contended that it was covered under t he 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 exha usted, more coverage was available to Fleming under the 1996 Policies. Flem ing also raised a separate issue in the declaratory judgment action as to whatrule--“larger settlement” or “relative exposure”--controlled the allocation of c overage between insureds and-5-

non-insureds. On November 12, 1997 the district court ruled th at the 1996 Policies rather than the 1993 Policies provided coverage forthe Class Actions. On the other disputed issue, the district court ruled thatthe “larger settlement” rule of allocation controlled. Insurers then appealed the district court’s judgment. On appeal a panel of this Court affirmed the holdin g that the 1996 Policies provided coverage but vacated the trial court’s rul ing on allocation as premature (Stauth v. National Union Fire Ins. Co. , 185 F.3d 875 (10 thCir. 1999) (Table), available at 1999 WL 420401, at *1). For that rea son the panel directed the district court to hold the case in abeyance until t he underlying lawsuits were resolved (id . at *15). Because that has not yet occurred, no l iability to the Class Action plaintiffs has been suffered to this point, although Fleming has of course incurred the expense of this litigation while Insur ers 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, Flemi ng filed a motion for attorneys’ fees pursuant to Section 3629(B). As stated earlie r, this appeal has been taken from the district court’s denial of that motion.-6- 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 pr oof of loss, to submit a written offer of settlement or rejection of the c laim to the insured party within ninety (90) days of receipt of that p roof of loss. Upon a judgment rendered to either party, costs and attorn ey fees shall be allowable to the prevailing party. For purposes of this section, the prevailing party is the insurer in those cases wher e 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 de claratory judgment actions; 2. whether the absence of a conventional formal pr oof 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 prev ailing party is mandatory under that statute. Despite the general rule that the standard of revie w 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 th ere), in this instance the district court did not exercise any discretion beca use it based its decision on its-7-

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 under lying facts but rather as to the proper application of Section 3629(B), we conduct o ur review of the district court’s statutory interpretation under a de novo st andard (Ward v. Allstate Ins.
Co. , 45 F.3d 353, 354 (10th Cir. 1994)). Application of Section 3629(B) to Declaratory Judgment Act ions As an initial matter we must determine whether Sect ion 3629(B) operates at all in this type of action: a declaratory judgmentproceeding concerned primarily with the preliminary question of which D and O poli cies (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 Secti on 3629(B)’s applicability to declaratory judgment actions seeking coverage underliability 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 defe nd 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 3 629(B) to recover its expenditures, alleging that the insurer had breache d its duty to defend (id . at 702). In concluding that the statute did apply to such ac tions, An-Son , 767 F.2d at 703 first observed that the Oklahoma courts inte rpreted the statute broadly,-8-

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 a nd 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 declarato ry judgment or indemnity action, Anson , id . at 704 expressed the belief that the Oklahoma Sup reme Court would find persuasive this argument set out in 7C J ohn 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 perm itting the insurer to do by indirection that which it could not do dir ectly. That is, the insured has a contract right to have actions agains t him defended by the insurer, at its expense. If the insurer can fo rce him into a declaratory judgment proceeding and, even though itloses such action, compel him to bear the expense of such liti gation, 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-Sonprecedent and its line of analysis to hold that Section 3629(B) applies here. For its part, Federa l 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-Sonfails for two reasons. First, Federal ignores An-Son ’s explicit rejection of the contention that-9-

Section 3629(B) applies “only to so-called ‘first p arty’ actions where the insured has sustained a loss and the insurer rejects a clai m made under the policy, but not to actions seeking indemnity or declaratory judgmen t, as here” (767 F.2d at 703). In thus distinguishing actions involving indemnity from those involving firstparty insurance (while still holding Section 3629(B ) applicable to both types of action), An-Sonclearly used the word “indemnity” in its broad sen se of insurance providing third-party coverage, including both the duty to defend and the duty to indemnify. Second, nothing in An-Sonlimits its analysis to the duty to defend. We can discern no principled reason why Section 3629(B) sh ould 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 insu rer to bear the consequences of its improper denial of the insured’s right to cover age. Any such improper denial forces the insured to litigate the coverage issue a nd 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 polic y--to provide financial protection. We therefore reject Federal’s attempt to distinguish An-Son

. Federal has also advanced a second argument for avo iding Section 3629(B):-10-

It says that it did provide coverage to Fleming (wh ile also advancing the costs of defending the underlying litigation), so that Flemi ng 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 und er 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 prov ed empty as well, we adhere to our determination that Section 3629(B) applies t o 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 c ourt held that Section 3629(B) requires submission of a proof of loss and noted th at 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, a s contrasted with a first-party action of the type referred to earlier (where the i nsured 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 it s right to such coverage, the loss inheres in having to incur the expense of the lawsu it itself (most importantly in incurring attorneys’ fees), so that the proof that such loss is being incurred is the-11-

very bringing of the lawsuit (of which, needless to say, the insurer is given notice at its very outset). It is scarcely surprising, th en, 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 ques tion 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. C o. , 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 elem ents for obtaining recovery was written in connection with a first-party action. A s for the only prior case from this Court--an unpublished disposition in Western F armers Elec. Coop. v. St. Paul
Ins. Co. , 134 F.3d 384 (10 thCir. 1998) (Table), available at 1998 WL 43168, at *2-*3 (10th Cir.)--that order adverted briefly to aproof-of-loss requirement, but that reference was not made in the context of a dec laratory judgment action such as that involved here. But suppose that it were to be assumed that a “proo f of loss”--one of the-12-

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 acti on when coverage under the 1996 Policies was denied, would be all that was nec essary to satisfy a “proof of loss” requirement. We begin with Section 8 of the “General Terms and C onditions” section of the 1996 Policy, which in relevant part states simp ly, “No action shall lie against the Company unless, as a condition precedent theret o, 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 “E xecutive 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 r eads simply in its Section 10, the Reporting and Notice provision as to that c overage: The Insureds shall, as a condition precedent to exe rcising their rights under this coverage section, give to the company wr itten notice as soon as practicable of any Claim made against any o f them for a Wrongful Act. As is entirely understandable in light of the natur e 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 wa s written notice, which-13-

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 conf irmed 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 c ondition 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 expre sslyrequired a “proof of loss” as conventionally understood. Thus under Sec tion 22 of the “Crime Insurance” provision the 1996 Policy required among other things: Within four months after such discovery [of loss oran occurrence that may become a loss] the Insured shall furnish t o the Company affirmative proof of loss with full particulars. Having thus expressly demanded a proof of loss as aprecondition 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 Sect ion 3629(B) does require a “proof of loss” as a price for bringing into play t he other portions of that statute awarding attorneys’ fees and costs to the “prevaili ng party” and then defining the-14-

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 t he 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 a s 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 inapp licable 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 ex ception: Fleming has itself obtained a judgment confirming its coverage under t he 1996 Policies after Insurers had rejected Fleming’s claim to coverage u nder those policies. Under the statute that made Fleming the “prevailing party.” Although Insurers attempt to counter that the “judg ment” spoken of in Section 3269(B) has to be an actual adjudicated rec overy, in a sense that brings the analysis full circle to the already-decided pro position that Section 3629(B) applies to declaratory judgment actions. Any notio n that an actual adjudicated recovery was required by the statute would be incon sistent with our decision as to-15-

declaratory judgment actions, originally reached in An-Sonand adhered to here. Moreover, nothing either in the language of Section 3629(B) or in the Shinault opinion supports Insurers’ claim that a dollar reco very is essential for the attainment of prevailing party status in the curren t context. Insurers also contend that the pending allocation i ssue must be resolved before Fleming can be deemed a prevailing party. T hat 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 dec laratory 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 r ecover 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 pr evailing party has met the statutory requirements. Because the district courthad ruled against Fleming on the statutory coverage issue, it had no need to con sider that added question. But the issue is one that the district court will neces sarily 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-16-

creating the potential for a second appeal, so we r esolve 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-Adairtwo separate intermediate Oklahoma Courts of Appea ls have read Section 3629(B) differently--each case ho lds that an award of attorneys’ fees is mandatory upon compliance with t he 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 auth ority holding “shall” to be “a word of command or mandate, with a compulsory an d peremptory meaning,” reason that the Oklahoma legislature would have use d the word “may” if it had intended a fee award to be discretionary. As a federal court sitting in diversity of citizens hip 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 cou rse that body would take if-17-

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 und er which principles of stare decisis call for any panel of this Court to f ollow an earlier panel’s interpretation of state law, absent a supervening d eclaration 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 o f Appeals in Oklahoma, each of which has given thoughtful consideration to our Adairdecision but has come out the other way, ruling that Section 3629(B) make s an award of attorneys’ fees mandatory. Although those opinions do not come wit hin the category that is accorded precedential value under Oklahoma law, ins tead being “considered to have persuasive effect” (Okla. Stat. tit. 12, ch. 1 5, app., Okla. S.Ct. Rule 1.200(c)(2)), so that we are not absolutely bound b y those decisions in determining Oklahoma law (Fransen , 64 F.3d at 1492 n.10), such decisions by a state’s intermediate appellate courts provide evide nce 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 p resents an arguable question of interpretation of a state statute, and not one b ut two intermediate Oklahoma Courts of Appeals have considered our Court’s readi ng and have found it3 This opinion has been submitted to the active judge s of the Tenth

Circuit and the Court has unanimously agreed en ban c to the overruling of that part of Adair , as stated here. -18- unpersuasive as to what Oklahoma law means. On balance, we are inclined to follow the lead of t hose courts as to what their Supreme Court is more likely to do if confron ted with the same issue. We therefore overrule that part of Adairthat is inconsistent with this holding. 3 In conformity with Shadoanand 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 distric t court, directing it to award to Fleming the attorneys’ fees and costs that it ha s incurred in the declaratory judgment action and its aftermath (including this appeal).