Court Opinion

ID: 9475990
Source: CourtListenerOpinion
Date Created: 2023-08-05 05:44:59.763921+00
Date Added: 2024-06-11T17:45:04.414454
License: Public Domain

GIBBONS, Chief Judge,
dissenting:
Any system of adjudication that provides for appellate review should, for the benefit of all participants in that system, have at least these three features: 1) clear rules as to when appellate review may or must be sought; 2) workable rules that tend to avoid unnecessary or premature adjudications at both the original and the appellate levels of the system; and 3) rules that in operation do not tend to multiply disputes which require judicial resolution. The monstrous edifice which the federal judiciary has erected as a temple to that great white whale, the final judgment rule, satisfies none of these criteria. Moreover, the syllogistic process whereby federal judges impose one bad rule as the inevitable logical consequence of prior bad rules is mechanical jurisprudence at its worst. At all levels, the federal judiciary has demonstrated its incapacity to deal intelligently with the subject of when interlocutory review should be available. See Civil Appellate Jurisdiction (pt. 1), 47 Law and Contemp. Probs., Spring 1984, at 1. The whole subject cries out for congressional attention.
The opinion of the court in this case is typical. Given the opportunity to adopt a bright-line rule that would give clear guidance as to when an appeal on the merits must be taken, would avoid unnecessary litigation at the trial court level over quantification of liability for attorneys’ fees, and would avoid future adjudications over when appeals may be taken, the majority rejects it by drawing the logical but impractical distinction between statutory liability for fees and liability for fees growing out of a contractual undertaking. One consequence of the majority’s approach is that the trial court will have to adjudicate a fee dispute which, if the appellant is correct on the underlying liability issue, need never have been resolved. Another consequence is that litigants in future cases in which fees are sought will have to determine whether the case falls within the majority’s holding here, or within the Supreme Court’s holding in White v. New Hampshire Department of Employment Security, 455 U.S. 445, 102 S.Ct. 1162, 71 L.Ed.2d 325 (1982) —a decision which, as pointed out hereafter, will not always be easy. A third consequence is that in any doubtful case, the party which loses on the liability issue still will always attempt an interlocutory appeal in order to avoid the risk of a later holding that an appeal on liability is untimely. This court therefore will be required to adjudicate an issue which need never have been resolved had the White v. New Hampshire *293rule been applied across the board to all attorneys’ fee disputes.
In this case, the relationship between the parties which gives rise to the dispute is an insurance contract that contains two independent undertakings by Travelers Indemnity Company — an indemnity undertaking and a defense undertaking. The insured, Beckwith Machinery Company, after settling the underlying liability claim, sued to enforce both the indemnity obligation and the defense obligation. It also sought recovery for the attorneys’ fees incurred in prosecuting the instant action. The insurance contract makes no provision for the payment of attorneys’ fees. They are due, if at all, only because the common law or a Pennsylvania statute, modifying the American rule that each party should bear its own fees, imposes a fee obligation on an insurance company for breach of contract.
The statement in the majority opinion that “the award of attorney’s fees to Beck-with for the instant action should be regarded no differently than the award of attorney’s fees in the Beckwith-Trumbull [liability] litigation inasmuch as both were incurred as a direct consequence and result of Travelers’ breach of the insurance contract” ignores the fact that there is no contractual undertaking to pay fees in a suit for breach of either the indemnity or the defense covenant. Thus, in the future, the majority opinion will be cited for the proposition that any fee award in a contract dispute, even when predicated upon a state statute or a state common law rule modifying the American rule, is “a result of the breach of contract.”
Such a rule is inconsistent with the holding in White v. New Hampshire, since there is no analytical difference between the federal statute modifying the American rule which that case addressed and the Pennsylvania law modifying the American rule which the majority opinion addresses in reference to recovery of fees for prosecuting the instant suit. In both cases, although the fees are assessed because of a breach of a legal obligation separate from the fee obligation, they can be classified, if a judge decides to do so, as a “result” of the breach of that obligation. Further, the presence of the defense covenant in the insurance contract does not distinguish the two situations because that covenant does not by its terms apply to the instant lawsuit and the fees sought in the instant lawsuit are for the enforcement of both the indemnity obligation and the defense covenant. The majority’s equating of fees recoverable under the terms of the insurance contract and fees recoverable as a matter of Pennsylvania law apart from that covenant is therefore unwarranted. It is also unfortunate, since the majority’s casual remark will surely generate future litigation both within and outside the insurance contract context.
Postponement of the quantification of liability for the cost of defense of the Beck-with-Trumbull lawsuit presents a closer question which, because of the language of Fed.R.Civ.P. 54(b), must be considered separately in light of the policy considerations which led the Supreme Court to decide White v. New Hampshire. The White v. New Hampshire Court held that application for a statutory fee award could be considered after the time provided in Fed. R.Civ.P. 59(e), because “the court’s decision of entitlement to fees will ... require an inquiry separate from the decision on the merits — an inquiry that cannot even commence until one party has ‘prevailed’ ” and because “application of Rule 59(e) ... is [n]either necessary [n]or desirable to promote finality, judicial economy, or fairness.” 455 U.S. at 451-52, 102 S.Ct. at 1166. Thus, we should consider whether the fee inquiry requires an inquiry separate from the merits of the dispute over the indemnity obligation, and whether postponing review until after that inquiry is made promotes finality, judicial economy, and fairness.
Although the defense covenant and the indemnity covenant are contained in the same contract, they are clearly independent undertakings. See, e.g., Montgomery Ward & Co. v. Pacific Indemnity Co., 557 F.2d 51 (3d Cir.1977); Kelmo Enterprises, Inc. v. Commercial Union Insurance Co., 285 Pa.Super. 13, 426 A.2d 680 (1981). Indeed, they are frequently litigated in sepa*294rate lawsuits and. involve separate claims for relief. A decision on one claim is unquestionably collateral to the other. Thus, for example, an insurance company might lose a declaratory judgment action that it is obliged to defend, and later successfully defend an action seeking to enforce its indemnity undertaking. In this case, it so happens that both claims were asserted in the same lawsuit because the dispute arose too late to resolve the defense obligation before the underlying liability claim was settled. This happenstance should not, however, obscure the fact that the claims in issue in this action, while both contractual, are in every real sense collateral to each other.
It also happens that in this case the legal and factual issues with respect to the insurance company’s indemnity obligation and its defense obligation are so similar that a decision in favor of Beckwith on the indemnity claim probably will collaterally estop Travelers with respect to liability on its defense covenant liability. This fact should not be dispositive, however, for collateral estoppel often operates in separate lawsuits. Were we to affirm on the indemnification issue, the only issue likely to remain unresolved would be the amount of the fees — not because the fee claim is not collateral to the indemnification claim, but by operation of collateral estoppel. On the other hand, were we to reverse on the indemnity claim, since the defense covenant is broader than the indemnity covenant, liability for defense costs and the amount thereof might still be open for subsequent review. This difference probably will appear only in disputes over insurance contracts. In most other contracts, the liability for fees will be coextensive with the contractual undertaking.
The question presented with respect to an insurance company’s contractual defense covenant is, therefore, slightly different from that presented in statutory fee cases providing for an award to the “prevailing party.” The insurance company might not prevail on the cost of defense even if it prevailed on the indemnity obligation. This difference does not persuade me that the White v. New Hampshire rule should not apply. The question we must consider is whether there are policy reasons for, in effect, prohibiting the district court from separating the final disposition of the fee dispute from the final disposition of the dispute over the indemnity obligation.
One argument in favor of such a prohibition is that the contracting party is entitled to have the same jury determine the amount of the fees reasonably incurred in defense of the underlying liability claim. This argument is not pressed by either Travelers or Beckwith, for neither party objected to the postponement of the quantification of fees; indeed neither party contends that we lack appellate jurisdiction. Assuming the argument were open, however, I would reject it because the claims for indemnification and for costs of defense are so analytically distinct that there can be no serious argument that the seventh amendment requires their submission to the same jury. See Gasoline Products Co. v. Champlin Refining Co., 283 U.S. 494, 51 S.Ct. 513, 75 L.Ed. 1188 (1931) (seventh amendment does not prohibit two issues from being tried separately where they are “distinct and independent” of each other). Thus, if the issue were before us, I would hold that the trial court could try liability for breach of the indemnity contract and liability for contractual defense costs before separate juries.
We are all too familiar with the fact that litigation over the quantification of attorneys’ fees has, since the development of the trend away from the American rule, become a very time-consuming enterprise. The White v. New Hampshire rule, has the considerable merit of permitting district courts to avoid such litigation until such time as it is clear that quantification of fees is necessary. The merit of the White v. New Hampshire rule applies equally to contract fee disputes. In most of these cases the underlying contractual liability dispute will fully resolve the liability for fees, leaving open only their quantification. In the insurance contract context, where the defense obligation and the fee obligation are not coextensive, a rare case *295may arise in which resolution of liability for indemnification will leave open a liability issue for resolution in the reserved fee dispute. The possibility of such a dispute (which in this case is practically nonexistent) is not a sufficient reason for carving out an exception to the White v. New Hampshire rule, even for insurance contract litigation.
If there were countervailing considerations operating at the appellate level, a case might be made for imposing on the district courts the obligation of quantifying fees before entering a judgment on liability in every contract fee case. There are none in the instant case. As I have pointed out, in almost every case, the liability issues, usually legal, will control the liability for fees issue. If they are decided adversely to the claim the appellate court will never see the fee dispute. If they are not, a very large percentage of the disputes over quantification of fees will be settled. For the few disputes that are not, the cost to the entire federal judicial system of having a second panel consider an appeal over the fee issue, when compared with the cost of imposing the obligation on the trial courts of determining the amount in every case, is insignificant.
We spend far more time resolving litigation over appealability than would ever be spent in considering separate appeals in contract fee disputes. Thus, I would follow the sound precedents of those courts of appeals which have applied White v. New Hampshire as a bright-line rule governing all disputes over attorneys’ fees, regardless of whether the exception to the American rule is contractual, common law, or statutory. See, e.g., United States v. Estridge, 797 F.2d 1454, 1459 (8th Cir.1986); Exchange National Bank of Chicago v. Daniels, 763 F.2d 286, 292-94 (7th Cir.1985); Morgan v. Union Metal Manufacturing, 757 F.2d 792, 795 (6th Cir.1985); International Ass’n of Bridge, Structural, Ornamental, and Reinforcing Ironworkers’ Local Union 75 v. Madison Industries, Inc., 733 F.2d 656, 657-59 (9th Cir.1984).
That great white whale, the final judgment rule, has become so encrusted with the barnacles of needless complexity that it has become a beached carcass. We should avoid it in this case and decide now the merits of the rather simple liability issues presented by this appeal.