Opinion ID: 2596903
Heading Depth: 2
Heading Rank: 3

Heading: the order requiring tdc to pay drezga's attorney fees was proper in light of the district court's inherent equitable authority

Text: ¶31 The final issue is whether the district court can order TDC to pay the fees of Drezga's court-appointed counsel. Appellant argues that the district court lacked authority to issue the order. We hold that under the extraordinary circumstances present in this case the order to pay attorney fees fell within the inherent equitable authority of the court. ¶32 In Burke v. Lewis, we decided that the district court acted within its inherent power when it ordered the appointment of counsel for the absent Drezga. 2005 UT 44, ¶ 1, 122 P.3d 533. At the time of the Burke decision, however, we declined to address the separate issue of whether the district court could order TDC to pay for the court-appointed attorney. Id. ¶ 16 n.3. As a general rule, Utah courts award attorney fees only to a prevailing party, and only when such action is permitted by either statute or contract. Hughes v. Cafferty, 2004 UT 22, ¶ 21, 89 P.3d 148. The absence of such authority, however, does not bar the court from awarding attorney fees when it deems it appropriate in the interests of justice and equity. Stewart v. Utah Pub. Serv. Comm'n, 885 P.2d 759, 782 (Utah 1994). In Stewart, we described several categories of cases that may qualify for equitable awards of attorney fees. These include class action suits, cases involving action by a trustee that benefits a group of other trustees, suits under the private attorney general doctrine, and suits in which the non-prevailing party acted in bad faith, vexatiously, wantonly, or for oppressive reasons. [7] Id. (citation omitted). Our precedents involving insurers who seek a declaration relieving them from liability have followed the same logic. Unless there is a showing that the insurance company acted in bad faith or fraudulently or was stubbornly litigious, an equitable award of attorney fees has not been allowed, even when the insured party prevails. Farmers Ins. Exch. v. Call, 712 P.2d 231, 237 (Utah 1985); see also Am. States Ins. Co. v. Walker, 486 P.2d 1042, 1044 (Utah 1971). ¶33 In this case, there is no applicable statute, and we have already held that TDC was not contractually required to pay for Drezga's defense of the complaint for declaratory relief. Burke, 2005 UT 44, ¶ 21. This case also does not fall into any of the previously recognized categories for an equitable award of attorney fees. See Farmers Ins. Exch, 712 P.2d at 237. ¶34 Nonetheless, we believe this case does fall into an additional category in which an equitable award of attorney fees can be made under the court's inherent authority. First and foremost, it would defy equity to give the district courts the authority to appoint counsel for an absent client, but not the authority to ensure that the attorney is compensated for months or years of service. Drezga's attorney has worked on this case for more than eight years. Further, in accordance with our holdings above, Drezga prevails in this action. If we were to reverse the district court's order, however, Drezga's attorney would receive no compensation of any kind for these successful efforts. Drezga, of course, is not available to render payment himself. The only other parties involved are TDC, on one side, and Judd and Athan on the other. It would be perverse to order Judd and Athan to pay Drezga's attorney fees after prevailing in a malpractice suit against him. TDC, as the insurer and the non-prevailing party, is the only logical choice when assigning equitable responsibility for fees under such unusual circumstances. ¶35 Drezga's absence, in conjunction with the presence of Judd and Athan as innocent third parties, provides additional justification for the district court's award of attorney fees. Indeed, it is not difficult to see how this deeply problematic situation could become even more troubling. In a hypothetical case, an injured party files a malpractice suit against a doctor who has disappeared. After being notified of the claim, the insurance company realizes that it has an easy way to relieve itself of liability. The insurer therefore files a complaint for declaratory relief against the absent doctor, its own insured. The doctor, unaware of the litigation, never responds to the complaint. Default judgment is eventually entered, relieving the insurer of any responsibility for defending the doctor or paying the malpractice claim. It is entirely possible that the action for declaratory relief could take place without the involvement, or even the knowledge, of the third party pursuing the malpractice claim. [8] That innocent third party would then find that it has been denied any opportunity to pursue its claims or defend its interests. ¶36 We therefore hold that where an insurer files a complaint for declaratory relief against its own insured, who is absent and unaware of the litigation, and where such relief would adversely affect the interests of an innocent third party, it is within the inherent equitable authority of the court to both appoint counsel for the insured and to order that the insurer pay attorney fees for appointed counsel, if and when the insured prevails in the action. This authority will ensure that the interests of all parties are considered without significantly affecting the ability of an insurance company to argue for declaratory relief. Accordingly, we hold that the action taken by the district court was appropriate. We acknowledge TDC's argument that the district court essentially ordered it to pay Drezga's attorney fees up front, i.e., before Drezga became the prevailing party. We disagree with TDC's characterization of the district court's order, but agree that an award of attorney fees prior to the insured prevailing in the action for declaratory relief would be inappropriate, as our holding makes clear. TDC's argument about up front fees is made irrelevant by our other holdings today, which clearly establish Drezga as the prevailing party. ¶37 We note that this new exception, while an extension of Utah law, provides for attorney fees under much narrower circumstances than is the case in numerous other jurisdictions. A minority of states routinely allow an insured party to recover attorney fees whenever it prevails in an action for declaratory relief, even when there is no finding that the insurer acted stubbornly or in bad faith. See, e.g., Farm Bureau Mut. Ins. Co. v. Kurtenbach, 961 P.2d 53, 64 (Kan. 1998); Litz v. State Farm Fire & Cas. Co., 695 A.2d 566, 573 (Md. 1997); Rubinstein v. Royal Ins. Co., 708 N.E.2d 639, 641 (Mass. 1999). The minority bases its rule on the idea that individuals obtain insurance not merely to be protected from liability, but also to avoid the costs of litigation. When an insurer files an action for declaratory relief, the insured party is forced to litigate in order to receive the benefit that it paid premiums to gain in the first place. Rubinstein, 708 N.E.2d at 642. If no recovery of attorney fees is possible, then an insured party who prevails in the declaratory action can succeed in maintaining insurance coverage but still be worse off financially than it was before. Id. A rule this expansive, however, would run counter to established Utah law and could negatively affect an insurance company's ability to seek judicial resolution of legitimate controversies over coverage. Farmers, 712 P.2d at 237. ¶38 Fortunately, we need not reach so far today in order to secure a just result. Our holding does not overturn Farmers. The rule that attorney fees will not be available to a prevailing insured following an action for declaratory relief unless an insurer is found to have acted fraudulently, stubbornly or in bad faith remains undisturbed. Nor do we intend to abandon the caution that Utah courts have long shown regarding the awarding of attorney fees. Instead, our holding creates a narrow equitable exception applicable only in extraordinary circumstances. An award of attorney fees would not be appropriate if a nonindigent insured party is present to defend its own interests. In addition, the district court would not have the authority to award attorney fees in the absence of an innocent third party. Finally, the district court's authority to order the insurer to pay attorney fees does not exist until the insured party prevails in the action for declaratory relief. This rule, thus limited, best enables the district court to pursue an equitable result under the rare circumstances presented here.