California Supreme Court Holds Assignee Can Recover Brandt Fees
Five Star Dye House, Inc. (Five Star) obtained a judgment against Luis Sanchez (Sanchez). Sanchez then assigned to Five Star his rights against Essex, which had denied Sanchez’s tender of defense. In return, Five Star “agreed to delay execution on the judgment in the underlying action until the claims against Essex for the judgment amount were exhausted.”
In the subsequent declaratory relief and bad faith action, the California Supreme Court held that the prospective right to recover “Brandt fees” in bad faith actions is assignable. Essex Ins. Co. v. Five Star Dye House, Inc., 38 Cal. 4th 1252 (2006). Brandt fees are attorney fees incurred in obtaining policy benefits in the course of a bad faith lawsuit; the term derives from Brandt v. Superior Court, 37 Cal. 3d 813 (1985). The concept behind Brandt fees is that policy benefits should not be reduced by fees required to obtain them in a tort (bad faith) action. The Essex holding changed California law, in that the California Court of Appeal had decided in Xebec Development Partners, Ltd. v. National Union Fire Ins. Co., 12 Cal. App. 4th 501 (1993), that Brandt fees were not available to an assignee.
The rationale of the Xebec court, in deciding Brandt fees were not available to the assignee, was premised on certain aspects of assignment law and tort law. An assignee stands in the shoes of its assignor. As such, the Xebec court had held that since the assignors had not incurred Brandt fees themselves, their assignee had no right to claim such fees. And, the Xebec court held that the assignee did not have the right to claim Brandt fees on its own behalf. It held that since the insurer that refused to defend had no duty to the assignee to pay policy benefits to anyone, Brandt fees could not be construed as the assignee’s own tort damages.
The Essex court parted ways with Xebec by holding that the prospective right to claim Brandt fees is part of the assignment of rights against the insurer that has wrongfully refused to defend. The Essex court held that Brandt fees are a form of compensatory, economic damages. They are not awarded as personal damages or punitive damages. They are awarded, despite the American Rule against recovery of attorney fees in the absence of a statutory or contractual provision for them, to make the insured whole in a tort lawsuit. An assignee seeking to recover Brandt fees is merely seeking “to recover as tort damages . . . the monetary value of the policy benefits wrongfully withheld.” The right to such fees is therefore assignable, or may be considered part of the policyholder’s assignment.
At first glance, there may seem to be a breakdown in the logic of the Essex court. After all, Brandt fees are only recoverable in bad faith actions, not in policy disputes involving mere breach of contract. This suggests that the true purpose of Brandt fees must, in part, be punishment for the fact that bad faith has been committed. Viewed in that light, the right to Brandt fees would seem to fall within the same bucket as punitive damages, and not be assignable.
It remains true, however, that Brandt fees are a form of compensation. They compensate the policyholder that successfully pursues a bad faith action for the attorney fees incurred in pursuing that action, and thereby prevent a de facto reduction in policy benefits. This is unlike punitive damages, which do not compensate the claimant for loss incurred.
Ultimately, the result of Essex reflects the fact that Brandt fees are compensatory damages. While they may only be recovered in a case where bad faith is proven, they are still compensatory damages. This is consistent with general law that the purpose of tort damages (such as damages in a bad faith action) is to make the tort victim whole and put them back in the position they were in before the tort was committed. In contrast, the purpose of contract damages (such as damages for the mere breach of the insurance contract) is to provide what is due under the contract. This basic difference between tort damages and contract damages reflects that some degree of “punishment” may be one of the underlying policy objectives of tort law in general.
The Essex court noted California’s strong policy in favor of assignability of property rights, stating “[w]e start from the proposition that assignability is the rule.” Viewed as compensatory, economic damages recoverable in a particular type of tort case, as opposed to personal damages or punitive damages, it followed that Brandt fees are assignable.
The Essex decision illustrates how both general principles of law (such as the objective of tort damages vs. the objective of contract damages, or the California policy in favor of assignability of property rights) and specific points of law (such as the purpose of Brandt fees as explained by the Brandt court) may mesh together to lead to a particular result. When a court perceives one party’s position as being the best fit with the law as a whole, at all levels, that party has an advantage. Sometimes lawyering makes the difference in this regard.
The way that the particular assignment agreement in Essex was structured is also interesting. The judgment creditor, Five Star, “agreed to delay execution on the judgment in the underlying action until the claims against Essex for the judgment amount were exhausted.” With this type of assignment, the Essex court was aware that its decision would affect Essex’s policyholder (Sanchez), and language in its decision reflects that awareness (“all sums recovered from Essex, including Brandt fees, will be credited against the judgment in the underlying action, directly reducing Sanchez’s liability to Five Star”).