Opinion ID: 2548554
Heading Depth: 2
Heading Rank: 4

Heading: Attorney Fees Under Brandt v. Superior Court

Text: The jury awarded the Cassims a combined $3,594,600 in compensatory damages and $5 million in punitive damages. Before the verdict, the parties stipulated that the trial court, sitting as a trier of fact, would separately decide the issue of Brandt fees, that is, the amount of attorney fees payable as damages. ( Brandt, supra, 37 Cal.3d 813, 210 Cal.Rptr. 211, 693 P.2d 796.) Thereafter the trial court, without explanation, awarded plaintiffs $1,193,533 in Brandt fees. Allstate contends the trial court erred by calculating the Brandt fees as a percentage of the entire compensatory damage award, rather than as a percentage of only that portion of the award that represented lost benefits on the insurance policy. We conclude Allstate is incorrect, but because the trial court's decision is not supported by substantial evidence, it abused its discretion in awarding as much in Brandt fees as it did. California adheres to the American rule, which provides that each party to a lawsuit must ordinarily pay his own attorney fees. ( Trope v. Katz (1995) 11 Cal.4th 274, 278, 45 Cal.Rptr.2d 241, 902 P.2d 259.) The rule has been codified in Code of Civil Procedure section 1021: Except as attorney's fees are specifically provided for by statute, the measure and mode of compensation of attorneys and counselors at law is left to the agreement, express or implied, of the parties. . . . (See also id., § 1033.5, subd. (a)(10) [The following items are allowable as costs under Section 1032: [¶] ... [¶] (10) Attorney fees, when authorized by any of the following: [¶] (A) Contract. [¶] (B) Statute. [¶] (C) Law].) In Brandt, this court established a notable exception to this rule for insurance bad faith cases. We explained that if an insurer fails to act fairly and in good faith when discharging its responsibilities concerning an insurance contract, such breach may result in tort liability for proximately caused damages. Those damages can include the insured's cost to hire an attorney to vindicate the insured's legal rights under the insurance policy. When an insurer's tortious conduct reasonably compels the insured to retain an attorney to obtain the benefits due under a policy, it follows that the insurer should be liable in a tort action for that expense. The attorney's fees are an economic loss  damages  proximately caused by the tort. [Citation.] These fees must be distinguished from recovery of attorney's fees qua attorney's fees, such as those attributable to the bringing of the bad faith action itself. What we consider here is attorney's fees that are recoverable as damages resulting from a tort in the same way that medical fees would be part of the damages in a personal injury action. ( Brandt, supra, 37 Cal.3d at p. 817, 210 Cal.Rptr. 211, 693 P.2d 796.) Brandt distinguished the limitation set forth in Code of Civil Procedure section 1021, reasoning that recovery of attorney fees as damages flowing from an insurer's breach of the implied covenant of good faith and fair dealing was different from the award of attorney fees as fees. ( Brandt, supra, 37 Cal.3d at pp. 817-818, 210 Cal.Rptr. 211, 693 P.2d 796.) We noted our holding was consistent with the rule permitting recovery of attorney fees as damages in cases of false arrest and malicious prosecution. ( Id. at p. 818, 210 Cal. Rptr. 211, 693 P.2d 796, citing Nelson v. Kellogg (1912) 162 Cal. 621, 123 P. 1115 and Bertero v. National General Corp. (1974) 13 Cal.3d 43, 59, 118 Cal.Rptr. 184, 529 P.2d 608.) The rule permitting recovery of attorney fees as damages in insurance bad faith cases is now well settled. [10] Because, however, entitlement to attorney fees as compensatory damages is premised on an insured's need to hire an attorney to vindicate his or her contractual rights under an insurance policy, we placed a critical limitation on the amount of fees recoverable. The fees recoverable, however, may not exceed the amount attributable to the attorney's efforts to obtain the rejected payment due on the insurance contract. Fees attributable to obtaining any portion of the plaintiff's award which exceeds the amount due under the policy are not recoverable.  ( Brandt, supra, 37 Cal.3d at p. 819, 210 Cal.Rptr. 211, 693 P.2d 796, italics added.) As if to underscore this point, we immediately thereafter explained that the calculation of fees was best done by the trial court sitting as trier of fact, after the jury had reached its verdict. ( Id. at pp. 819-820, 210 Cal.Rptr. 211, 693 P.2d 796.) If the issue is submitted to the jury, however, the court should instruct along the following lines: `If you find (1) that the plaintiff is entitled to recover on his cause of action for breach of the implied covenant of good faith and fair dealing, and (2) that because of such breach it was reasonably necessary for the plaintiff to employ the services of an attorney to collect the benefits due under the policy, then and only then is the plaintiff entitled to an award for attorney's fees incurred to obtain the policy benefits, which award must not include attorney's fees incurred to recover any other portion of the verdict. ' ( Id. at p. 820, 210 Cal. Rptr. 211, 693 P.2d 796, italics added.) The Cassims agreed to pay their attorney a 40 percent contingency fee, that is, 40 percent of all sums recovered. Nothing in the contingent fee agreement differentiated between recovery on the contract and recovery on the tort, or between compensatory damages and punitive damages. The amount due on their insurance policy apparently was $40,856.40. [11] According to Allstate, the Brandt fees therefore should have been 40 percent of $40,856.40, or $16,342.56. By contrast, plaintiffs argue the Brandt fees awarded by the trial court were correct. As they argued to the trial court, [a]ll of the causes of action and all of the defenses were inextricably bound in the litigation as Allstate has always taken the position that the policy was void because of its allegations that the Plaintiffs had committed arson and fraud. These defenses, if established, would defeat any obligation to pay on the insurance policy and the Plaintiffs would never have received any policy benefits at all. Plaintiffs' counsel did not attempt to apportion fees between the contract and tort causes of action, declaring in their motion that, [a]s is customary with contingency fee attorneys, counsel did not keep contemporaneous time records. Brandt, supra, 37 Cal.3d 813, 210 Cal. Rptr. 211, 693 P.2d 796, does not disclose whether the plaintiff in that case had a contingent or an hourly fee arrangement and thus provides no express direction on how to calculate Brandt fees in a contingent fee case. Nevertheless, we reject both proffered methods of calculation. Although Allstate argues that Brandt fees should be limited to 40 percent of the recovery on the contract, that method of calculation is flawed. First, it is premised on the assumption that when plaintiffs agreed to pay a 40 percent contingent fee, they were agreeing to pay separately 40 percent of the contract recovery and 40 percent of the tort recovery. From this unstated and unsupported premise, Allstate reasons that plaintiffs paid their attorney only $16,342.56 (40 percent of $40,856.40) to recover on the contract. More accurate, however, is to say that plaintiffs agreed, as is generally the case, to pay their attorney an unallocated and undifferentiated 40 percent of their total recovery, whatever that might be. To conclude that to obtain a $40,856.40 contract recovery plaintiffs are out of pocket precisely $16,342.56, no more and no less, is therefore a fiction. To be sure, had the jury failed to return a verdict on any of the tort causes of action, plaintiffs would have been out of pocket exactly 40 percent of the contract recovery. [12] (Of course, without a tort judgment, there could be no Brandt fees.) But here the jury found Allstate's actions tortious and awarded plaintiffs both contract and tort compensatory damages. Plaintiffs, in turn, were obligated to pay a percentage of the total compensatory damages judgment as an attorney fee. If plaintiffs can prove that some portion of that fee was for legal work solely or partially attributable to the contract, failure to reimburse plaintiffs for that out-of-pocket expense would necessarily result in a diminution of their policy benefits. Allstate's proposed method of calculating Brandt fees also erroneously assumes that a client who agrees to pay a 40 percent contingent fee will never pay more than 40 percent of the contract recovery to obtain that recovery. But a client paying his or her lawyer an hourly fee may choose to pay more than 40 percent (or even more than 100 percent) of an anticipated contract recovery in order to obtain that recovery. The same is true for a client operating under a contingent fee agreement. Certainly nothing in Brandt limits the amount of fees awarded as damages to a percentage of the contract benefits. We held in Brandt only that such fees may not exceed the amount attributable to the attorney's efforts to obtain the rejected payment due on the insurance contract. ( Brandt, supra, 37 Cal.3d at p. 819, 210 Cal.Rptr. 211, 693 P.2d 796, italics added.) That amount, even in a contingency fee case, could exceed a set percentage of the contract benefit. Indeed, in either an hourly or a contingent fee case, the amount attributable to the attorney's efforts to obtain the contract benefits could conceivably exceed those benefits entirely. Campbell v. Cal-Gard Surety Services, Inc., supra, 62 Cal.App.4th 563, 73 Cal. Rptr.2d 64 ( Campbell ), is illustrative. In that case, the insurer promised to pay the insured $2,500 if her car was stolen while equipped with a certain antitheft system. When the insured made a claim after her car was stolen despite the antitheft system, the insurer failed to pay. The insured sued on the contract and for bad faith; she recovered $2,500 on the contract, $7,288 for emotional distress, and $64,417 in punitive damages. ( Id. at p. 569, 73 Cal.Rptr.2d 64.) The trial court denied her Brandt fees, but the Court of Appeal reversed. Because the insured documented that the amount of attorney fees attributable to the contract cause of action was $13,010, and the defendant did not contest the amount, the appellate court directed the trial court, on remand, to enter an order awarding her that amount. ( Id. at pp. 572, 575, 73 Cal.Rptr.2d 64.) The appellate court in Campbell correctly awarded Brandt fees in an amount greater than the benefits owing under the contract. The key question is how much did it cost the insured  how much were her damages  to hire an attorney when her insurer acted in bad faith and denied the benefits due her under her policy. As the appellate court held: At trial she documented that amount to be $13,010. [Her insurer] did not challenge the reasonableness of the amount. ( Campbell, supra, 62 Cal.App.4th at p. 572, 73 Cal. Rptr.2d 64.) Had the court limited the recoverable Brandt fees to a set percentage of the contract recovery, the plaintiff in Campbell would not have received the full measure of her policy benefits. [13] As in Campbell, supra, 62 Cal. App.4th 563, 73 Cal.Rptr.2d 64, the fees attributable to obtaining the contract recovery for the Cassims may have exceeded the amount of their policy benefits. Plaintiffs argued that a large number of issues on which their attorney toiled were related to both the tort and contract causes of action. Substantial evidence supports the claim that many of the legal issues were intertwined. For example, as plaintiffs argued below, in order to prevail both on the contract claim and on the tort claim, they were required to refute Allstate's assertion that they were responsible for starting the fire. Similarly, in order to prevail both on the contract claim and on the tort claim, the Cassims were required to refute Allstate's position that the policy was void and unenforceable due to their alleged material misrepresentations in submitting falsified receipts for their living expenses. Herzog's failure to prevail on either of these issues would have precluded a recovery on both the contract and the tort causes of action. Theoretically, the opposite could also be true. That is, the amount of legal fees attributable to the contract might be less than 40 percent of the contract recovery. Were we to preclude defendant Allstate from attempting to prove the damages flowing from its breach were less than 40 percent of the contract recovery, we arguably would deprive it of important rights as well. Focus on the work plaintiffs' attorney did in this case, what Brandt termed the attorney's efforts ( Brandt, supra, 37 Cal.3d at p. 819, 210 Cal.Rptr. 211, 693 P.2d 796), is thus relevant, but not because he is deserving of some fair measure of compensation for his work. In agreeing to a contingent fee arrangement, he accepted the risk that the recovery would be small or nonexistent. Focus on the attorney's work is relevant instead because, plaintiffs having received a sizeable tort recovery, the 40 percent contingent fee they were required to pay their attorney was also sizeable. To the extent some portion of that legal fee represents legal work that was related to both the tort and the contract recoveries and was thus at least partially  attributable to the attorney's efforts to obtain the rejected payment due on the insurance contract  ( ibid., italics added), failure to reimburse plaintiffs for a portion of that shared amount would necessarily diminish their contract recovery and violate Brandt 's premise that plaintiffs should recover, as tort damages, the legal fees incurred to recover their policy benefits. Accordingly, we reject Allstate's argument that Brandt fees in this case should have been limited to 40 percent of the benefits owing under the contract. Our conclusion does not necessarily mean the trial court's award to plaintiffs of over $1 million in Brandt fees was correct. The parties apparently agreed to submit the matter on their pleadings, and the trial court made no findings in ruling for plaintiffs. Nothing in the record indicates how the trial court arrived at its figure, although the amount is roughly equal to 33-1/3 percent of the compensatory damage award. [14] We may thus speculate that the trial court largely accepted plaintiffs' claim that all of their attorney's legal work comprised an undifferentiated whole, with all work attributable to both the contract and tort causes of action. Plaintiffs' proffered justification has some plausibility, for Herzog's efforts to establish that plaintiffs neither set fire to their own home nor intentionally misrepresented their losses and interim living expenses were relevant to proving both Allstate's failure to pay benefits under the insurance policy and its bad faith in handling the claim. Permitting plaintiffs, however, in a mixed contract/tort case, to recover the majority of their attorney fees attributable to the entire compensatory damages award (here, about 83 percent of those fees), is inconsistent with the premise of our decision in Brandt, supra, 37 Cal.3d 813, 210 Cal.Rptr. 211, 693 P.2d 796. Beginning with the general rule that parties are expected to shoulder their own legal fees, we recognized in Brandt only a limited exception to that rule. We have no doubt that many bad faith insurance cases involve an identity of several issues, requiring counsel to work simultaneously on tort and contract issues. (See Croskey et al., Cal. Practice Guide: Insurance Litigation, supra, ¶ 13:129, p. 13-28 [The attorney's efforts are often directed at both the contract and bad faith claims].) Nevertheless, the premise of our decision in Brandt is that a plaintiff is entitled to only a portion of the overall legal fees as damages. As one treatise author advises, if an attorney spends time in pursuit of both contract and extracontractual claims simultaneously, plaintiff should be entitled to a portion of any nonsegregated fees and costs for pursuing these joint claims. ( Id., ¶ 13:135, p. 13-29, italics added.) Thus, to the extent some overlap in legal work occurs, the trial court should exercise its discretion to apportion the fees. Moreover, that virtually all of the legal work in this case was indivisibly attributable to both the contract and tort causes of action seems unlikely. For example, common sense suggests that fees attributable to legal work relevant to establishing the existence and valuation of the emotional distress the Cassims suffered as a result of Allstate's bad faith are fairly apportionable to only the tort causes of action and are thus not properly includable in the Brandt fees. Other issues, such as the reason for the low estimate for the replacement value of the lost home furnishings and Birkmeyer's insistence that the Cassims fire Thompson as a condition of receiving a settlement, also seem relevant only to the bad faith cause of action. Having found fault with the methods of calculating Brandt fees proffered by both parties, we turn to explaining the proper method of calculating such damages in a contingent fee context. This method requires the trier of fact to determine the percentage of the legal fees paid to the attorney that reflects the work attributable to obtaining the contract recovery. Some outer limits are immediately discernible. First, no portion of legal fees attributable to the punitive damage award can be recovered as Brandt fees. Brandt 's focus was solely on ensuring that attorney fees for contract recovery did not diminish a plaintiff's compensatory damages award, and did not concern diminution of the punitive damages award, which is essentially a windfall for plaintiffs that the law permits for public policy reasons. Second, the Brandt fees can never exceed the legal fees for the combined tort and contract recovery; in most cases the amount will be far less. To determine the percentage of the legal fees attributable to the contract recovery, the trial court should determine the total number of hours an attorney spent on the case and then determine how many hours were spent working exclusively on the contract recovery. Hours spent working on issues jointly related to both the tort and contract should be apportioned, with some hours assigned to the contract and some to the tort. This latter figure, added to the hours spent on the contract alone, when divided by the total number of hours worked, should provide the appropriate percentage. An example of this calculation, with numbers similar to the instant case, illustrates the point. Suppose the compensatory damages are $3,594,000. Suppose further that the attorney and the client have a 40 percent contingent fee agreement. The total legal fee for the compensatory award is thus 40 percent of $3,594,000, or $1,437,600. Now suppose counsel spent 1,500 hours on the case, and can prove this breakdown: 200 hours on issues related solely to the contract, 500 hours on issues relevant to both the contract and the tort, and 800 hours on issues related solely to the tort. The trial court could reasonably conclude that half the hours spent on the joint contract/tort issues are fairly attributable to the contract (i.e., half of 500 hours, or 250 hours), and thus 30 percent of the hours worked (200 hours plus 250 hours, divided by 1,500 total hours) is attributable to the contract recovery. Thirty percent of the total legal fee (30 percent times $1,437,600) is $431,280. This is the amount a trial court should award as Brandt fees in this hypothetical situation. [15] Defendants are protected from excessive Brandt fees in two ways. First, as in any tort case, the plaintiff bears the burden of proving by a preponderance of the evidence both the existence and the amount of damages proximately caused by the defendant's tortious acts or omissions. (See BAJI No. 2.60.) Accordingly, on remand, plaintiffs will bear the burden of demonstrating how the fees for legal work attributable to both the contract and the tort recoveries should be apportioned. (See Slottow v. American Cas. Co. (9th Cir.1993) 10 F.3d 1355, 1362 [applying California law, indicating it is the plaintiff's burden to show how fees should be apportioned]; Croskey et al., Cal. Practice Guide: Insurance Litigation, supra, ¶ 13:128, p. 13-28 [it is the plaintiff's burden to identify which fees and costs were incurred to recover the policy benefits]; see also id., ¶ 13:135, p. 13-29 [advising the plaintiff's counsel to keep careful time records].) [16] Second, trial courts retain discretion to disregard fee agreements that appear designed to manipulate the calculation of Brandt fees to the plaintiff's benefit. For example, a client who enters a fee agreement in an insurance bad faith case in which an attorney will take 40 percent of the entire compensatory damage award as his fee for working to obtain the contract recovery, and agrees to work on the tort recovery pro bono, cannot expect to receive Brandt fees of 40 percent of the entire compensatory award. Because the record fails to indicate that the trial court apportioned legal fees to ensure that the Brandt fee award reflected only those fees attributable to the attorney's efforts to obtain the rejected payment due on the insurance contract ( Brandt, supra, 37 Cal.3d at p. 819, 210 Cal.Rptr. 211, 693 P.2d 796), we conclude the court abused its discretion.