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Hopeman Brothers, Inc. v. Continental Casualty Company

United States District Court, E.D. Virginia, Newport News Division

October 3, 2017

HOPEMAN BROTHERS, INC., Plaintiff,
v.
CONTINENTAL CASUALTY COMPANY, et al., Defendants.

          MEMORANDUM OPINION AND ORDER

          LAWRENCE R. LEONARD UNITED STATES MAGISTRATE JUDGE

         Before the Court are Defendant Continental Casualty Company ("Continental") and Defendant Lexington Insurance Company's ("Lexington") Joint Motion to Bifurcate (ECF No. 47) and Joint Motion to Stay Discovery (ECF No. 49), which were referred to the undersigned by Order of Court dated September 21, 2017 (ECF No. 59). The Motions are fully briefed and ready for disposition. Continental and Lexington (collectively "Defendants") have requested a hearing on the aforementioned Motions (ECF No. 63), however, the Court finds that oral argument is unnecessary and will rule upon the subject motions without a hearing.[1]

         I. Factual and Procedural Background

         This dispute arises out of excess insurance policies procured by Plaintiff from Defendants for liability coverage to Plaintiff for any and all sums Plaintiff would become legally obligated to pay as damages because of personal injury, property damage, or advertising injury that occurred during the relevant policy periods of approximately 1971 through 1974 and 1974 through 1977. Beginning in 1979, Plaintiff was named in over a hundred thousand lawsuits brought by individuals who claim to have suffered personal or bodily injury as a result of their alleged exposure to asbestos fibers contained in marine interior materials sold by Plaintiff.

         Unsurprisingly, Plaintiff has and continues to incur substantial costs and expenses in defending and settling these lawsuits. Up until recently, these defense costs were covered by other insurance policies, however, those polices were exhausted or were close to exhaustion. In 2013, Plaintiff contacted Defendants, who were insurers that provided the excess policy coverage, to advise of the exhaustion or expected exhaustion of previous polices, and the impending need for Defendants to honor their excess coverage policies. Continental began making payments, but stopped in or about July 2014. Defendant Lexington never began making payments. On December 27, 2016 Plaintiff filed a two count Complaint[2], after approximately four (4) years of pre-suit settlement negotiations proved unfruitful. In so doing, Plaintiff included in its prayer for relief as to all counts, a request for attorneys' fees pursuant to Va. Code § 38.2-209, which provides:

Notwithstanding any provision of law to the contrary, in any civil case in which an insured individual sues his insurer to determine what coverage, if any, exists under his present policy or fidelity bond or the extent to which his insurer is liable for compensating a covered loss, the individual insured shall be entitled to recover from the insurer costs and such reasonable attorney fees as the court may award. However, these costs and attorney's fees shall not be awarded unless the court determines that the insurer, not acting in good faith, has either denied coverage or failed or refused to make payment to the insured under the policy.

         After Defendants were unsuccessful in their Motions to Dismiss, Motions to Transfer Venue, and Motions to Stay Proceedings based on abstention principles, Defendants ultimately filed their respective Answers on or about May 1, 2017. ECF Nos. 32-33. Plaintiff served Defendants with its First Set of Requests for Discovery Production on or about May 26, 2017. Pursuant to the parties' agreement, Defendants submitted their objections, responses, and a Privilege Log on June 27, 2017. On July 7, 2017, Plaintiffs counsel sent a letter to Defendants outlining what Plaintiff considered deficiencies in Defendants' discovery responses to which Defense counsel responded on July 13, 2017. In an effort to resolve these disputes, the parties conferred by telephone on August 16, 2017, but contested issues persisted.

         II. Defendants' Motion to Bifurcate and Motion to Stay Discovery (ECF Nos. 47-48; 49-50)

         On or about September 8, 2017, Defendants filed a Motion to Bifurcate Discovery and accompanying memorandum, ECF Nos. 47-48, and a Motion to Stay Discovery Relating to "Bad Faith", ECF Nos. 49-50, [3] to which Plaintiff filed a single Opposition, ECF No. 53. Defendants filed their Joint Reply on September 20, 2017, ECF No. 58. Essentially, the gravamen of Defendants' Motions appears to be their desire for the Court to bifurcate not only the claim for attorneys' fees, but also discovery related thereto, and specifically with regards to Plaintiffs Requests for Production of Documents Nos. 11 and 12.[4] See ECF No. 48 at 4-5; ECF No. 50 at 4-5. Defendants insist that their efforts are necessary "to protect Defendants from [Plaintiffs] sandbagging discovery." ECF No. 58 at 4.

         As an initial matter it should be noted that Defendants, through two footnotes, ECF No. 48 at 3 nn.1-2; ECF No. 50 at 3 nn.1-2, seem to suggest that the Virginia statute providing for additional recovery of attorneys' fees for bad faith in a contract claim is not applicable to the claim sub judice, and instead "submit the law of New York applies" and their filings cite to the pertinent Virginia statute only because Plaintiffs claims are predicated thereon.[5] Neither the Motions to Bifurcate/Stay Discovery nor memoranda in support appear to make any further mention of the applicability of New York law beyond these two footnotes. In the event that they did, Plaintiff vehemently rejects this notion, and the Court is inclined to agree. As Plaintiff notes, in Virginia "everything related to the making of the contract is to be governed by the law of the place where it is made; everything related to the performance of the contract is to be controlled by the law of the place of performance." Black v. Powers, 628 S.E.2d 546, 554 n.8 (Va. Ct. App. 2006) (emphasis in original) (citation and internal quotation marks omitted). Thus, because Plaintiff is incorporated in Virginia[6], and has been headquartered there since at least 1976, its sole office is in Virginia[7], and Defendants' duty to perform is to pay Plaintiff for the asbestos-related liabilities at its Virginia headquarters, Virginia law controls Defendants' performance under the contracts and their potential liability for costs and attorneys' fees. See Seneca Specialty Ins. Co. v. Dockside Dolls, Inc., No. 3:12CV19-REP-DJN, 2012 WL 3579879, at *3 (E.D. Va. June 22, 2012), report and recommendation adoptedo. 3:12CV19, 2012 WL 3562755 (E.D. Va. Aug. 17, 2012) ("It is Seneca's failure to pay Dockside that might constitute a breach of the insurance policy. Because those funds are to be paid at Dockside's place of business in Virginia, Seneca's alleged failure to perform occurred in Virginia. Thus, Virginia law governs issues of performance.").

         Federal Rule of Civil Procedure 42(b) governs a party's motion to bifurcate. Saint John's African Methodist Episcopal Church v. GuideOne Specialty Mut. Ins. Co., 902 F.Supp.2d 783, 785 (E.D. Va. 2012) (citing Epps v. Arise Scaffolding & Equip., Inc., No. 2:10cvl89, 2011 WL 1566004, at *12 (E.D. Va. Feb. 17, 2011)). Rule 42(b) provides that "[f]or convenience, to avoid prejudice, or to expedite and economize, the court may order a separate trial of one or more separate issues . . ." Fed.R.Civ.P. 42(b). In the Fourth Circuit, it is well-established that the decision whether to bifurcate pursuant to Rule 42(b) "is within the sound discretion of the trial judge." Bowie v. Sorrell, 209 F.2d 49, 51 (4th Cir. 1953). As identified earlier, the crux of Defendants' Motions to Bifurcate and Stay Discovery relating to "Bad Faith" is that a Plaintiff verdict on the breach of contract claim is a prerequisite to any discovery on the matter of bad faith. According to Defendants, unless and until Plaintiff secures a favorable disposition on its breach of contract claim (to wit: that Defendants improperly denied Plaintiffs insurance claims and demands for payment), Plaintiff is not entitled to discovery on the subject, and specifically whether such denials were in bad faith. Defendants are not entirely incorrect. See Styles v. Liberty Mut. Fire Ins. Co., No. 7:06CV00311, 2006 WL 1890104, at *1 (W.D. Va. July 7, 2006) ("The defendant is correct that an award of fees and costs under this statute cannot be adjudicated until a decision has been issued on the breach of contract claim. It is incorrect, however, in asserting that the statutory remedy must be dismissed until the contract claim is decided."). However, it is a misstatement of the applicable law in the Fourth Circuit to contend that a decision to bifurcate the award of attorneys' fees based on bad faith unequivocally extends such bifurcation to discovery as well.

         In their Motions, Defendants rely heavily on two (2) cases in support of their argument for bifurcation and a stay of discovery: Massachusetts Bay Ins. Co. v. Decker, No. 7:11-CV-00342, 2012 WL 43614 (W.D. Va. Jan. 9, 2012) and Seneca Ins. Co. v. Shipping Boxes I LLC, 30 F.Supp.3d 506 (E.D. Va. 2014). As Judge Jackson observed in one such case cited by Defendants in support of their Motions, "[t]he statute is 'designed to punish an insurer guilty of bad faith in denying coverage or withholding payment and to reimburse an insured who has been compelled by the insurer's bad-faith conduct to incur the expense of litigation.'" Seneca Ins. Co. v. Shipping Boxes I, LLC, 30 F.Supp.3d 506, 512 (E.D. Va. 2014) (hereinafter "Shipping Boxes") (quoting CUNA Mut. Ins. Soc. v. Norman, 237 Va. 33, 375 S.E.2d 724, 726 (1989)). In Shipping Boxes, Judge Jackson ultimately granted the Motion to Bifurcate, observing that "[o]ther district courts have granted similar requests, noting that delaying discovery on the issue of the insurer's bad faith is 'expedient' where it may not even ultimately be necessary." Seneca Ins. Co. v. Shipping Boxes I, LLC, 30 F.Supp.3d 506, 513 (E.D. Va. 2014) (citing Massachusetts Bay Ins. Co. v. Decker, No. 7:ll-CV-00342, 2012 WL 43614, at *2 (W.D. Va. Jan. 9, 2012); Tiger Fibers, LLC v. Aspen Specialty Ins. Co., 594 F.Supp.2d 630, 655 (E.D.Va. 2009) ("A claim under § 38.2-209 may not therefore be brought as a separate cause of action ... but only as a source of recovery of costs and attorney's fees once a judgment is entered against the insurer.") (emphasis in original)). Shipping Boxes is distinguishable from the instant case in two respects.

         First, the opposing party (Shipping Boxes) did not object to the Motion to Bifurcate. The same can certainly not be said for this Plaintiff whose Motion to Compel (ECF No. 45) appears to be the impetus for Defendants' Motions to Bifurcate and Stay Discovery. In their Joint Reply (ECF No. 58), Defendants minimize this distinction as "irrelevant" because "it is 'the interest of efficient judicial administration that is to be controlling under the rule, rather than the wishes of the parties." ECF No. 58 at 5 (citing Freeman v. Globe Life and Accident Ins. Co., No. 5:13-cv-05249, 2013 WL 12180763, at *2 (S.D. W.Va. Aug. 2, 2013) (quoting 9A Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 2388 (3d ed. 2012))). The Court notes that while the Freeman decision arises out of a sister division within the Fourth Circuit, its holding does not amount to controlling law in this district and in this case. See McBurney v. Young, 661 F.3d 454, 465 (4th Cir. 2012), aff'd, 569 U.S. 221 (2013) ("First, as out-of-circuit authority, it is not binding on this Court."); United States ex rel Carter v. Halliburton Co., 866 F.3d 199, 211 (4th Cir. 2017) (same). Furthermore, Freeman sought the bifurcation of the bad faith issue at trial, as opposed to discovery of the same. As discussed further herein, the Court does not equate bifurcation of a triable issue with bifurcation of discovery regarding the issue. The Freeman Court articulated the sentiments shared by this Court: "although the evidence needed to properly support the declaratory judgment question and any asserted breach of contract claim may likely be similar, the evidence and legal dispute relative to the coverage question and any asserted bad faith claim will be different." Freeman v. Globe Life & Accident Ins. Co., No. 5:13-CV-05249, 2013 WL 12180763, at *2 (S.D. W.Va. Aug. 2, 2013).

         As a second point of distinction, in Shipping Boxes, the request for bifurcation occurred very early on in the proceedings, via a Motion to Bifurcate which was filed concomitantly with a timely filed Motion to Dismiss. Here, the timing of Defendants' Motions to Bifurcate and Stay Discovery could be indicative of dilatory tactics and a tacit admission of bad faith denials. According to Plaintiff, this is merely Defendants' attempt to thwart Plaintiffs previously filed Motion to Compel, which seeks, among other things, discovery production regarding Defendants' alleged bad faith in denying payment of Plaintiff s claims. See ECF No. 45. As Plaintiff notes, and is corroborated by the docket entries, it does appear that Defendants had ample opportunity to raise this issue before September 8, 2017 and did not. Defendants have requested (and been denied) several other forms of relief (i.e., a Motion to Transfer Venue to New York, Motion to Dismiss, Motion to Stay these Proceedings pending resolution of a New York station action, etc.), but at no time was the relief now sought by the Motions to Bifurcate and Stay "Bad Faith" Discovery requested, nor were these arguments regarding bifurcation or discovery raised. Indeed Plaintiff has only ever proceeded on one Complaint: the original one filed on December 27, 2016 which included the required references to Defendants' alleged bad faith and notice that Plaintiff planned to seek attorneys' fees pursuant to Va. Code § 38.2-209. See ECF No. 1 at 8, ¶ 40; id. at 9, ¶ C. This is an approved method of complying with the notice requirements pursuant to the operative statute and case law interpreting the same. See Seneca Specialty Ins. Co. v. Dockside Dolls, Inc., No. 3:12CV19-REP-DJN, 2012 WL 3579879, at *4 (E.D. Va. June 22, 2012), report and recommendation adopted, No. 3:12CV19, 2012 WL 3562755 (E.D. Va. Aug. 17, 2012) (explaining that "[t]o obtain fees under ยง 38.2-209, 'a party must notify its adversary in its complaint that it plans to seek costs and attorneys' fees, and the complaint must contain an allegation of bad faith ... so that the allegation may be investigated during ...


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