Commercial Litigation and Arbitration

By Bringing Bad Faith Action, Insured Places in Issue the Conduct of Both Sides of Litigation — Rule 68 — If Court Does Not Award Costs, Costs Should Be Excluded in Valuing the Judgment — § 1927 Sanctions on Appeal Though Properly Denied Below

Charyulu v. Calif. Cas. Indem. Exch., 2013 U.S. App. LEXIS 7328 (9th Cir. April 11, 2013):

Plaintiff Cindy Charyulu, special administrator of the Estate of Fatu Taputu, appeals the judgment, after a jury trial, entered in favor of the insurance company in her action claiming that the insurance company was guilty of bad faith in failing to settle a claim within the two-week deadline the plaintiff's counsel imposed. The insurance company cross-appeals costs and fees.

Plaintiff's principal argument is that the district court erred in admitting evidence that bore on the motives of the plaintiff's counsel, including the drop dead letter and the demand to prove the absence of other insurance. Plaintiff's argument ignores the fact that in bringing the suit, Plaintiff has put in issue the reasonableness of the conduct of both sides in the litigation. See Allstate Ins. Co. v. Miller, 212 P.3d 318, 324 (Nev. 2009) (defining bad faith as the "actual or implied awareness of the absence of a reasonable basis for denying benefits"). The reasonableness of the conduct of the insurer's counsel must be measured against the corresponding actions of the plaintiff's counsel in this case. There was no error.***

The defendant insurance company cross-appeals the denial of costs under Federal Rules of Civil Procedure 54 and 68. Rule 68 provides that "[i]f the judgment that the offeree finally obtains is not more favorable than the unaccepted offer, the offeree must pay the costs incurred after the offer was made." A party's pre-offer costs are only considered "if [costs] are awarded." Champion Produce, Inc. v. Ruby Robinson Co., Inc., 342 F.3d 1016, 1020 (9th Cir. 2003). Under Rule 54, a prevailing party is entitled to costs, other than attorneys' fees, unless a federal statute, rule, or court order provides otherwise.

As a result of this trial, Plaintiff received a $15,000 judgment, representing the insurance proceeds due on its breach of contract claim. The insurance company had offered to settle the case before trial for $50,000, an amount well above Plaintiff's recovery. The district court erroneously credited Plaintiff's argument that it had expended $36,000 in costs to conclude that Plaintiff's costs, coupled with the recovery, exceeded the offer of settlement. The district court never awarded Plaintiff costs, so pre-offer costs should not be included in valuing the judgment. For Rule 68 purposes Plaintiff only received $15,000, and therefore the defendant was entitled to costs. With regard to the motion for costs under Rule 54, both parties were prevailing parties under the Rule. The district court therefore did not abuse its discretion in denying the defendant insurance company's motion for costs under Rule 54.

The district court denied the defendant insurance company's request for fees as sanctions under 28 U.S.C. § 1927 and Nevada Revised Statute 18.010. Those statutes provide that fees and costs may, in the court's discretion, be awarded for vexatious and baseless litigation. We find that the district court did not abuse its discretion in denying sanctions with respect to the filing of the case in district court, because there were triable issues. See Winterrowd v. Am. Gen. Annuity Ins. Co., 556 F.3d 815, 828 (9th Cir. 2009). On appeal, however, in light of the jury's verdict, the arguments raised are frivolous and have taxed the patience of both the defendant and this court. We therefore award fees under 28 U.S.C. § 1927 to the appellee, together with costs on the appeal. Determination of the appropriate amount of the award is referred to our Commissioner for further proceedings.

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