TWENTY THIRD ANNUAL SOUTHERN SURETY AND FIDELITY CLAIMS CONFERENCE Clearwater, Florida APRIL 19 TH & 20 TH, 2012

TWENTY THIRD ANNUAL SOUTHERN SURETY AND FIDELITY CLAIMS CONFERENCE Clearwater, Florida APRIL 19 TH & 20 TH, 2012 PUTTING EXCESSIVE ATTORNEYS' FEES CLAIMS OUT TO PASTURE - RELYING ON A STATUTORY CAP TO PREVENT MOTOR VEHICLE DEALER BOND SURETIES FROM BEING "MILKED LIKE CASH COWS" PRESENTED BY: MARIE A. BORLAND GREGORY P. BROWN ERIK P. RAINES HILL WARD HENDERSON 101 East Kennedy Blvd. - Suite 3700 Tampa, FL 33602 (813) 227-8459 GARY W. HORST Capitol Indemnity Corporation

PUTTING EXCESSIVE ATTORNEYS FEES CLAIMS OUT TO PASTURE RELYING ON A STATUTORY CAP TO PREVENT MOTOR VEHICLE DEALER BOND SURETIES FROM BEING MILKED LIKE CASH COWS Marie A. Borland Gregory P. Brown Erik P. Raines Gary W. Horst I. Milking Motor Vehicle Bond Sureties For Excessive Fees: An End In Sight? Recently, we reported on a disturbing practice by certain lawyers who have targeted motor vehicle dealer bond sureties as potential sources of income through substantial attorneys fee awards. See Florida Auto Dealer Bonds And Excessive Attorneys Fee Claims Going to Hell in a Hand-Basket? Florida motor vehicle dealer bonds are governed by Florida Statutes section 320.27(10). Under the statute, a motor vehicle dealer must post a surety bond or irrevocable letter of credit for the benefit of consumers in the sum of $25,000 before the dealer can receive a license. While the statute protects the consumers, it also protects the surety by capping its potential liability to the penal sum of the bond. According to the statute: The aggregate liability of the surety in any one year shall in no event exceed the sum of the bond... (emphasis added). The Florida Supreme Court has weighed in on the legislature s intent in enacting the statute. According to the Court: The legislative scheme was intended to establish a very modest fund of $25,000 from which consumers could recover damages when car dealers went out of business and defaulted in their obligations. Hubbel v. Aetna Cas. & Surety Co., 758 So. 2d 94, 97 (Fla. 2000). Indeed, sureties writing motor vehicle dealer bonds had little to be concerned about, given the Florida legislature s clear directive that in no event shall the aggregate liability of the surety in any one year exceed the sum of the bond. That is, until certain attorneys began looking to Florida motor vehicle dealer bonds as a source of income specifically, as a mechanism for recouping exorbitant attorneys fees, well in excess of the consumer claims at issue and the penal sum of the bond. And, notwithstanding the plain language of the statute, which expressly caps the surety s liability to the $25,000 bond amount, these dubious efforts actually have succeeded in some instances. Some Florida trial courts have not only awarded fees to these attorneys well in excess of the claims at issue and the penal sum of the bond, but often by several multiples.

This paper will discuss some of the methods used by attorneys in their efforts to obtain sizeable fee awards against motor vehicle dealer bond sureties, and how the Florida appellate courts have responded to such practices. The discussion will focus on a recent decision by the Florida Fifth District Court of Appeal, Hakes v. Orlando Auto Specialists, Inc., which signals a potential end to this disturbing practice. In Hakes, the Fifth District affirmed the trial court s order rejecting the attorney s request for a fee award of over $160,000 against the motor vehicle dealer bond surety on a $13,000 consumer claim, and limiting the surety s liability to the penal sum of the bond. The trial court not only correctly upheld the plain language of the motor vehicle dealer bond statute, but wisely saw through counsel s scheme, aptly stating: Simply, auto dealer sureties are not cash cows to be milked by attorneys. II. The Set Up The motor vehicle dealer bond statute contemplates a pre-suit proof of loss process. See Fla. Stat. 320.27(10)(b)( When the department determines that a person has incurred a loss as a result of a violation of chapter 319 or this chapter, it shall notify the person in writing of the existence of the bond or letter of credit. ) Attorneys who have targeted the statute as a source of fee income, however, have purposefully avoided this administrative claims process altogether, immediately filing suit so that the surety has no opportunity to pay what is typically a minor claim, and avoid the inevitable cost of litigation. Often, the surety is not even named as a party to the lawsuit. Other times, the attorney includes a claim against the surety under the motor vehicle dealer bond statute, setting up the fee claim before the litigation has even commenced. The attorneys proceed to engage in heavy litigation activity with one goal in mind: generating fees, not resolving the underlying claim. After receiving little or no notice of the underlying suit against the principal, the surety is confronted with substantial fee exposure. Often, the surety has been given no opportunity to defend the claim or, at a minimum, has been deprived of any opportunity to engage in its normal claims and investigation process by these aggressive litigation tactics. But if the motor vehicle dealer bond statute plainly states that in no event shall a surety s liability in any one year exceed the penal sum of the bond, why have attorneys gone to such lengths to target the bond as a source of substantial income, notwithstanding the modest reward it is intended to provide? Because notwithstanding the statute s plain language, some Florida trial courts have 2

ignored the statutory cap altogether, awarding fees not only in excess of the penal sum of the bond, but at lofty hourly rates, coupled with the highest multiplier permitted in Florida. The courts awarding fees have applied a separate statute, which allows for the recovery of fees against an insurer (or bonding company) in a direct claim, and have ignored the 327.27(10) fee cap. See Florida Statute 627.428 (discussed below.) This is an alarming trend, not only for sureties, but also for: (i) Florida auto dealers no longer able to find a surety willing to write the statutorily required bond; and (ii) the consumers who the statute was designed to benefit if sureties are unwilling to write bonds, then there will no longer be even a modest fund from which consumers can seek damages Fortunately, recent appellate activity in Florida indicates a shift in the tide, and a potential end to a practice threatening Florida s motor vehicle dealer bond industry. III. Case Study: Hakes v. Orlando s Auto Specialists, Inc. In December 2011, Florida s Fifth District Court of Appeal addressed whether a surety can be held liable for attorneys fees in excess of the penal sum of a motor vehicle dealer bond as a sanction for unreasonably delaying the investigation and payment of a claim against its principal even where the plaintiff made no pre-suit claim against the bond or otherwise notified the surety of her claim before filing the lawsuit. Plaintiff s counsel s decision in Hakes to file the lawsuit raised several troubling issues. To begin with, the plaintiff in Hakes had signed an arbitration agreement when she purchased her vehicle from the dealership. By filing the lawsuit, therefore, the plaintiff had already violated her agreement with the dealership to arbitrate her claims in order to avoid costly litigation. And, in addition, Plaintiff never provided advance notice of the claim to the surety prior to filing suit. Moreover, the six-count lawsuit which included a count against the surety under the terms of the surety bond was an obvious set-up. Predictably, with the complaint against both the Dealership and the surety (which was not a party to the arbitration agreement) on file, the plaintiff proceeded to demand arbitration in a letter to the dealership, which she did not serve on the surety. The plaintiff and the dealership were ordered to mediate and, if necessary, to arbitrate their dispute. The tactics continued. Although the surety was not a party to the arbitration agreement, the plaintiff moved for an award of attorneys fees and 3

costs against the surety as a sanction for the surety s failure to appear at the mediation, which had ended with an impasse. The motion was denied. The plaintiff and the dealership then commenced binding arbitration but agreed that the arbitrator was authorized to determine the issue of attorneys fees against the dealership only not the surety. The tactics went on. The plaintiff served the surety with a Proposal for Settlement in the arbitration proceeding (even though the surety was not a party to the arbitration). The amount of the proposal was mathematically calculated to enable plaintiff s counsel to recoup his fees if the plaintiff prevailed on her claims and received the full penal sum of the bond. The plaintiff ultimately prevailed at arbitration with a damage award against the dealership and the surety in the approximate amount of $13,000. The arbitrator awarded punitive damages in the amount of $7,500 and attorneys fees in the amount of $65,840 against the dealership only. Plaintiff s counsel s boldest move came during post-award confirmation proceedings. When Plaintiff s counsel moved to confirm the arbitration award, the dealership moved to vacate or modify the award on the grounds that it failed to identify the prevailing party on each of the claims and the basis for awarding punitive damages. After hearing argument on the parties motions, the Court remanded the action to the arbitrator for one simple task to clarify the prevailing party on each of the causes of action pled and the basis upon which punitive damages were awarded. But Plaintiff s attorney seized the remand order as an opportunity to further his cause. Specifically, notwithstanding the trial court s limited remand order to clarify a two page Supplemental Award, counsel provided the arbitrator with a twenty-page proposed Amended Award that included findings of fact and conclusions of law to the effect that the surety (which was not even a party to the arbitration) had unreasonably delayed in the investigation, processing and payment of a valid and meritorious claim for which damages and losses are recoverable under the statutory surety bond. The arbitrator issued this Amended Award, notwithstanding his prior Order stating that he would not consider, determine or rule upon the issue of entitlement or amount of attorneys fees as the same relates to [surety]. This finding which, of course, the arbitrator never made was included in the proposed Amended Award by plaintiff s attorney ostensibly to provide a basis for his planned attempt to recoup sizeable attorneys fees (bolstered by a contingency fee multiplier) against the surety as a sanction for purportedly delaying the investigation and payment of the plaintiff s claim a claim that 4

plaintiff simply never made. Indeed, in a flurry of subsequent hearings, plaintiff s attorney argued that this finding entitled him to a fee award calculated at a rate of $400 per hour with a multiplier of 2, for a total award of $163,000 against the surety: on a modest $13,000 consumer claim. The trial court rejected this request. Upholding the plain language and intent of the motor vehicle dealer bond statute, the court held that the surety s liability for plaintiff s damages and fees could not exceed $25,000, the penal sum of the bond. The court, moreover, wisely saw through counsel s transparent plan. In language that should resonate with sureties who write motor vehicle dealer bonds, and with lawyers who ignore the bond statute s plain language, the court criticized counsel s tactics, making abundantly clear: Sureties are not cash cows to be milked by attorneys. Notwithstanding this reprimand, plaintiff s counsel boldly appealed the trial court s order to Florida s Fifth District Court of Appeal. The issue on appeal was whether the trial court correctly limited the surety s liability to the penal sum of the motor vehicle dealer bond. In resolving that issue, the Fifth District was tasked with reconciling the plain language of the motor vehicle dealer bond statute with a series of Florida appellate decisions which, according to plaintiff s counsel, left the question open to debate. Hubbel v. Aetna Cas. & Sur. Co. In Hubbel v. Aetna Cas. & Sur. Co., 758 So. 2d 94 (Fla. 2000), the Florida Supreme Court addressed whether attorneys fees may be awarded under the motor vehicle dealer bond statute, section 320.27(10), Florida Statutes. Hubbel involved a claim for $345.00 against a motor vehicle dealer, and a subsequent request for fees under the statute in the amount of $10,000. Anecdotally, the claimant s attorney in Hubbel was the same attorney who would later seek the exorbitant fee award in Hakes. Turning to the plain language of the statute, the Florida Supreme Court denied the request, determining that attorneys fees are not included under the statutory scheme set forth in section 320.27(10). Rejecting counsel s argument that public policy supported the fee award because the statute was designed to protect consumers and to make them whole, the Florida Supreme Court concluded that these asserted public policy concerns were not only unjustifiable, but would effectively destroy the statutory scheme which establishes a modest fund for consumers to obtain a refund of their monies. The Hubbel Court was critical of counsel s tactics. The Court noted: 5

As illustrated by the facts in this case, to accept the view of the petitioners would mean the primary beneficiary of the fund would be the attorneys, not the consuming public. The legislative scheme was intended to establish a very modest fund of $25,000 from which consumers could recover damages when car dealers went out of business and defaulted in their obligations Once the default was entered and the validity of the claim established, which easily could have been done in a small claims proceeding, the judgment was immediately paid by the surety. If we accepted the arguments of the claimants in this case, logic and commonsense necessarily lead to the conclusion that the asserted judicial construction would result in the attorneys fee provisions substantially depleting the fund.if the obligation were as open-ended as asserted by the claimants, few sureties or banks would provide the bond or letter of credit to make this statutory scheme work. (emphasis added). Snow v. Jim Rathman Chevrolet, Inc. Undaunted by the Florida Supreme Court s decision in Hubbel, the same attorney who represented the claimant in Hubbel (and later the claimant in Hakes) tried a different approach for recouping attorneys fees under the motor vehicle dealer bond statute, this time in Snow v. Jim Rathman Chevrolet, Inc., 39 So. 3d 368 (Fla. 5th DCA 2010). In Snow, plaintiff s counsel argued that even if attorneys fees are not mentioned in the motor vehicle dealer bond statute, such fees are nevertheless awardable against a motor vehicle dealer bond surety under section 627.428, Florida Statutes, which provides for prevailing party attorneys fees upon the rendition of a judgment against an insurer and in favor of an insured. This time, counsel was successful. As an initial matter, the court noted that a surety is considered by the courts to fit within the definition of insurer and to be subject to the same regulations as insurers in the Florida Insurance Code. Then, turning to the Florida Supreme Court s earlier decision in Nichols v. Preferred Nat l Ins. Co., 704 So. 2d 1371 (Fla. 1997) for guidance, the Fifth District concluded that an attorneys fee award against a motor vehicle dealer bond surety is authorized under section 627.428, Florida Statutes. The court, however, did not address whether a fee award could exceed the penal sum of the motor vehicle dealer bond, as the issue was not (yet) before the court. 6

Nichols v. Preferred National Ins. Co. The Florida Supreme Court s decision in Nichols would become critical to counsel s continuing quest for fees against motor vehicle dealer bond sureties in amounts well in excess of the penal sum of the statutory bonds. In Nichols, the Florida Supreme Court considered whether section 627.428, Florida Statutes, authorized an award of attorney s fees against a surety on a guardianship bond governed by Florida Statutes section 744.357. Because the guardianship bond statute like the motor vehicle dealer bond statute does not provide for an award of attorneys fees, the Nichols Court concluded that attorneys fees were recoverable against guardianship bond sureties under the general attorneys fees provision in Florida Statutes section 627.428. The Court went on to consider, however, whether such fees are limited to the face amount of the guardianship bond by the language of section 744.357, which provides that [n]o surety for a guardian shall be charged beyond the property of the ward. The Nichols Court concluded that while the guardianship bond statute appears to limit recovery against a surety to the face amount of the bond, it does not do so in all cases. Relying on the section 627.428 attorneys fee provisions, the Court made a distinction between sureties which promptly discharge their duties, and those that do not, stating: When principals misappropriate guardianship funds or insufficiently discharge their duties, attorneys fees and costs for a claim based solely on this negligence are limited to the face amount of the bond pursuant to section 744.357. However, when the trial court specifically determines that attorneys fees and costs were incurred because a surety failed to act diligently and unreasonably delayed the payment of a claim, such attorneys fees and costs are not protected by section 744.357. (emphasis added). In other words, the Court determined that fees against the surety under section 627.428 could exceed the face amount of the guardianship bond if the fees were generated as a result of misconduct by the surety in delaying payment on a valid pre-suit claim on the bond (rather than misconduct by the principal). Arguably, this is consistent with the purpose of section 627.428, which is to place the insured in the place he or she would have been if the insurer had seasonably paid the claim and not caused the insured to engage counsel and incur obligations for attorney s fees. Travelers Indem. Ins. Co. of Illinois v. Meadows, 900 So.2d 676 (Fla. 4 th DCA 2005). The Nichols Court went on to say, however: [T]he filing of a claim, by itself, does not justify an award of costs and attorney s fees over the amount of the bond. It is for the trial court to 7

determine whether any delay in paying the claim was unreasonable. Each claim will present different circumstances and must be evaluated on a case-by-case basis to determine whether the surety was proceeding unreasonably. Because the surety in Nichols acknowledged the principal s misappropriations but nevertheless delayed paying the pre-suit bond claim for over fourteen months, forcing the claimant to file suit to recover under the bond, the surety was held responsible for fees over the face amount of the bond for its unreasonable delay in payment. Hakes v. Orlando s Auto Specialists, Inc. Which brings us to Hakes. With Nichols and Snow in hand, counsel was near the finish line. To recap, Nichols holds that attorney s fees above the statutorily capped guardianship bond amount are awardable under Florida Statutes section 627.428 where the surety fail[s] to act diligently and unreasonably delay[s] the payment of a claim. And in Snow, the Fifth District held that section 627.428 also supports a fee award against a surety on a motor vehicle dealer bond. Only one step remained: a determination that fees against a motor vehicle dealer bond surety under section 627.428 could exceed the penal sum of the bond. And Hakes which was before the same Court that had issued Snow only months earlier was perfectly positioned for this result. Or so counsel thought. The arguments made to the Fifth District were predictable. Citing Snow, counsel argued that attorneys fees against a motor vehicle dealer bond surety are awardable under section 627.428. And citing Nichols, counsel went one step further and argued that such fees could exceed the statutorily capped penal sum of the bond because the surety purportedly unreasonably delayed payment of the claim by failing to participate in mediation and arbitration, or otherwise investigate the claim. After briefing the case, the moment of truth arrived: oral argument before the Fifth District. Having recently determined in Snow, only months earlier, that attorneys fees are recoverable against a motor vehicle dealer bond surety under Florida Statutes section 627.428, the Court was prepared and ready with questions. Didn t the surety have a duty to investigate? And why wasn t counsel entitled to fees against the surety in excess of the penal sum of the bond, as in Nichols? 8

But the Court apparently began to see the full picture. To begin with, unlike the guardianship bond statute at issue in Nichols, the motor vehicle dealer bond statute says, in mandatory language, in no event shall fee awards exceed the penal sum of a motor vehicle dealer bond. And setting aside this mandatory language, how could there ever be an unreasonable delay in the investigation and payment of a claim by the surety, warranting a fee award under section 627.428, when a claim against the bond was never filed? And how could a surety unreasonably delay by failing to participate in arbitration along with the dealership, when the surety was not a party to the arbitration agreement? And what case and none was cited prevented a surety from allowing a principal to defend against a claim, before tendering payment under the bond? Finally, wasn t this a case where counsel for the claimant raced to the courthouse and filed suit simply for the purpose of securing a fee award precisely the circumstance where courts will not step in and award fees under section 627.428? Lewis v. Univ. Prop. and Cas. Ins. Co., 13 So.3d 1079, 1083 (Fla. 4 th DOA 2009). The Court saw that this was not a Nichols situation. In Nichols, the surety acknowledged the principal s liability, but nevertheless delayed paying the claim for fourteen months, forcing the claimant to file a lawsuit to recover the bond proceeds. And the bond statute at issue in Nichols, moreover, does not state that in no event shall the surety s liability exceed the penal sum of the bond. In Hakes, in clear contrast, claimant s counsel filed a lawsuit against the Dealership and the surety, before ever making a claim against the bond, thus depriving the surety of any opportunity to conduct a pre-suit investigation. Unlike the guardianship bond statute, moreover, the motor vehicle dealer bond statute forbids an award against the surety above the penal sum of the bond. And even if the statute did not state in no event shall a surety s liability exceed the penal sum of the bond, by prematurely filing the lawsuit, claimant s counsel was deprived of any right to seek attorneys fees in excess of the penal sum of the bond, because section 627.428 would potentially permit such awards only where the surety has failed to investigate or has unreasonably delayed payment of a claim. Thus, by failing to make a claim against the bond or otherwise providing the surety with a reasonable opportunity to investigate before filing the lawsuit, claimant s counsel had no basis for seeking a fee award in excess of the penal sum of the bond under section 627.428 even without the mandatory language of the statute. The Fifth District, therefore, correctly disposed of counsel s claim with three words: Per Curiam Affirmed. 9

Conclusion Because the Fifth District in Hakes did not write an opinion, attorneys seeking fee awards under Florida s motor vehicle dealer bond statute will likely take the position that it has no precedential value. They may argue that the decision does not preclude a fee award in excess of the penal sum of the bond under section 627.428, if they can prove that a surety failed to investigate or unreasonably delayed payment of a claim. But sureties, and lawyers who represent sureties, should take comfort in the court s decision. Lawyers representing sureties at the trial court level are advised to come to fee hearings armed with the Hakes decision and the trial court s order and final judgment, which were affirmed on appeal. Read together, and in light of the plain language of the motor vehicle dealer bond statute, the trial court s order in Hakes and the 5 th District s per curiam affirmance will provide solid ammunition against excessive fee claims. It is reasonable to expect that some plaintiffs attorneys may present perfunctory claims to sureties simply to avoid the outcome in Hakes. However, bond claims handlers would be well advised to take seriously any such claims and to investigate them with the same, if not more, rigor typically afforded to other claims. The sureties that do so will help themselves twofold. First, the investigation should reveal whether the claim is valid, and if so, whether the damages are significant. If the investigation reveals that the claim is valid and the damages are nominal, then it may simply be more cost-efficient to pay the claim, than to tender the claim or litigate it. If the investigation reveals that the claim is meritless, or if there is a genuine dispute regarding the validity or amount of damages, making pre-suit resolution impractical, then a surety can confidently approach an ensuing litigation knowing that its reasonable investigation efforts will likely immunize it from exorbitant fee claims. Trial courts must be made aware that the mandatory language of the motor vehicle dealer bond statute cannot be disregarded, and that Nichols cannot be read to support fee awards exceeding the penal sum of such bonds. And when the statutory language is taken into account, along with the narrow circumstances under which any surety can face liability above the penal sum of a bond, sureties in Florida should remain cautiously optimistic that the bad practices detailed in this paper will not continue in the future. Simply put, plaintiffs attorneys who race to the courthouse and file suit simply for the purpose of securing a fee award, as in this case, should end up exactly as they deserve to be: empty-handed. 10