Unpublished Disposition, 868 F.2d 1273 (9th Cir. 1984)

Nos. 85-2552, 86-1953, 86-2236, 86-2610 and 86-2763.

United States Court of Appeals, Ninth Circuit.

Before SCHROEDER and FLETCHER, Circuit Judges, and LAUGHLIN E. WATERS,^*  District Judge.

MEMORANDUM^** 

These consolidated appeals all grow out of the effect of floods and mudslides on a Northern California house owned by David and Fern Kowal. The mudslides made the home uninhabitable because they rendered adjacent land unstable and created an imminent threat of further flooding and mudslides.

Two insurance policies covering flood damage had been issued on the property. One was issued by the Federal Emergency Management Agency ("FEMA") pursuant to the National Flood Insurance Act of 1968, 42 U.S.C. § 4001. The other was issued by Safeco Insurance Company ("Safeco"). After Safeco denied any liability on its policy, the Kowals filed suit against Safeco. Safeco eventually agreed to a policy limit settlement but filed an interpleader action to determine the proper distribution of the proceeds among the Kowals and the two holders of deeds of trust on the property: Great Western Savings and Loan and John Harden, Jr. FEMA was later brought into the Safeco action.

The district court held that the FEMA policy covered the loss of the home, and FEMA appeals from that determination. FEMA's primary contention on appeal involves the statute of limitations. The court distributed the proceeds of the FEMA policy among the Kowals, Great Western, and Harden. Harden appeals the district court's denial of interest under California law. Finally, the district court awarded the proceeds of the Safeco policy to Great Western, less thirty percent in fees to the Kowals' attorney. Great Western appeals from that attorney's fees award. We affirm in part and reverse in part.

BACKGROUND

The Kowals' home is located in Santa Clara County. The property was subject to a first deed of trust held by Great Western Savings and Loan, securing a loan with an outstanding balance of approximately $149,000, and to a second deed of trust held by John Harden, Jr. in the sum of $50,000. The Kowals had a $173,000 homeowner's insurance policy with Safeco and had flood insurance under a Standard Flood Insurance Policy issued by FEMA.

In March 1983, the area was hit by heavy rains causing serious floods. Mudflows originating from a neighboring uphill parcel invaded the Kowals' property. That parcel contained an old quarry that had been filled improperly. The Kowals' residence was rendered uninhabitable due to the threat of future mudslides or flooding from the adjacent quarry.

When Safeco refused to pay under its insurance policy, the Kowals retained counsel, Daniel Hanley of Mariani & Hanley, pursuant to a contingent fee agreement. The agreement provided that Hanley would receive thirty-five percent of any amount recovered. Hanley filed suit on the Kowals' behalf against Safeco. Hanley advised Great Western of this lawsuit and invited it to participate because Great Western was the loss payee to the extent of the mortgage balance under the Safeco policy. Great Western did not choose to participate.

The cost of making the property inhabitable exceeded both the property's value and the insurance policy limits. In November 1983, when it was apparent that the property was a total loss, Safeco and the Kowals settled. Safeco agreed to pay the $173,000 policy limit. On December 1, 1983, Hanley sent Great Western the settlement check and asked Great Western to honor his attorney's fees agreement with the Kowals by paying him a portion of the settlement. Great Western refused. On March 19, 1984, Safeco commenced an interpleader action joining Great Western, Mariani & Hanley, the Kowals, and Harden.

Meanwhile, on April 22, 1983, the Kowals submitted a claim to FEMA for their losses resulting from the mudslide. FEMA denied the Kowals' claim in a letter dated May 11, 1983. The Kowals filed a second proof of loss form with FEMA for the same claim, which FEMA denied on September 26, 1983.

FEMA was eventually added to the Safeco action by Great Western and Harden. Great Western filed its complaint against FEMA on August 27, 1984, and Harden filed on September 14, 1984. Because the statute of limitations ran one year after FEMA denied the Kowals' claim, Great Western and Harden's complaints were timely only if the second denial was effective. See 42 U.S.C. § 4072.

The district court held that FEMA was liable on its flood insurance policy, under which Great Western was entitled to $82,551.55; the Kowals were entitled to $34,594.99; and Harden was entitled to $55,853.46. Harden had foreclosed on the Kowals' property under the power of sale in his deed of trust, and reacquired title to the property in April 1984 after bidding $1,000 at the trustee's sale. Thus, the amount the court awarded to Harden excluded interest accruing after his nonjudicial foreclosure on the deed of trust.

With respect to the Safeco insurance proceeds, the district court awarded Great Western the entire amount less thirty percent, representing costs and attorney's fees to Hanley, the Kowals' attorney.

In the appeal before us, FEMA appeals from the district court's judgment that it is liable on its policy. Great Western appeals the district court's judgment that its proceeds must be reduced by the amount of Hanley's contingent fee earned in obtaining a policy limit settlement from Safeco. Harden appeals the district court's decision that under California law he was not entitled to interest on his note following his nonjudicial foreclosure.

FEMA'S APPEAL

Claims under the National Flood Insurance Act must be filed within one year of the date of FEMA's denial. 42 U.S.C. § 4072.

[T]he Director shall be authorized to adjust and make payment of any claims for proved and approved losses covered by flood insurance, and upon the disallowance by the Director of any such claim ... the claimant, within one year after the date of mailing of notice of disallowance or partial disallowance by the Director, may institute an action against the Director on such claim in the United States district court for the district in which the insured property ... shall have been situated....

42 U.S.C. § 4072. In this case there were two denials by FEMA, the first on May 11, 1983, and the second on September 26, 1983.

Great Western and Harden filed their impleader complaints against FEMA on August 27, 1984, and September 14, 1984, respectively. FEMA contends that the statute of limitations began to run from the time of the first denial and that Great Western's and Harden's claims are therefore time-barred.

Our recent decision in Wagner v. Director, Federal Emergency Management Agency, 847 F.2d 515 (9th Cir. 1988), compels us to find in FEMA's favor. We stated in Wagner:

Once FEMA has triggered the statute of limitations by issuing a denial, reconsideration of that denial or responding to further inquiries about the case has no effect on the running of the limitations period. Only where the Federal Insurance Administrator expressly and in writing sets aside the previous disallowance of a plaintiff's claim does a new limitations period commence upon a subsequent denial of the claim. See SFIP, art. VIII, p D (provisions may only be waived with "the express written consent of the Federal Insurance Administrator").

Id. at 521. Here, the Federal Insurance Administrator has not set aside the disallowance of the Kowals' claim. Therefore, the statute of limitations began to run on May 11, 1983, and thus Great Western's and Harden's claims are time-barred. Our holding eliminates all other issues except the challenge to attorney's fees.

REMAINING APPEAL

The remaining appeal is brought by Great Western. Great Western contests the district court's award of attorney's fees to Mariani & Hanley, the law firm retained by the Kowals to pursue their claim against Safeco. Great Western argues that the Kowals were contractually liable to Great Western for the legal expenses incurred to protect Great Western's security in the property.

The discretionary power of the district court to award costs, including attorney's fees, in interpleader actions stems from interpleader's equitable origin. See 7 C. Wright, A. Miller & M. Kane, Federal Practice and Procedure Sec. 1719, at 647 (2d ed. 1986). Here, equitable considerations justify the court's award. At the outset of the litigation, the Kowals believed they could use the Safeco insurance proceeds to repair their property. Mariani & Hanley represented them under the impression that they would be able to enforce the contingency agreement. Hanley informed Great Western that he was representing the Kowals and sent Great Western a copy of the contingency fee contract. Great Western never objected to the fee agreement, but declined to participate in the lawsuit and instead encouraged the firm to continue handling the litigation. Only after Safeco agreed to settle the case did Great Western inform the firm that it intended to claim all the insurance proceeds.

The fact unknown to any of the parties was that the contingency agreement could not operate as intended. Because the property was a total loss, Great Western, not the Kowals, was entitled to retain the insurance proceeds. Thus, Great Western received the only benefit. Great Western also received the benefits of the attorney's services with full knowledge of the contingent fee agreement, and understanding that the attorney was to be compensated out of the insurance proceeds. Accordingly, it was inequitable for Great Western to allow the suit to proceed and then claim all the benefits. See Holt v. Ravani, 22 Cal. App. 2d 213, 215, 34 Cal. Rptr. 417, 419 (1963). Moreover, the district court awarded only thirty percent of the proceeds rather than the thirty-five percent specified in the contingent fee agreement. Taking all these considerations into account, we find no basis for overturning the district court's award of attorney's fees to Mariani & Hanley.

We therefore AFFIRM the district court's award of attorney's fees to Mariani & Hanley from the proceeds of the Safeco policy. However, because Great Western's and Harden's claims were time-barred, we REVERSE the district court's judgment with regard to the FEMA policy, and REMAND with instructions that judgment be entered for FEMA.