Colorado Supreme Court: Prejudgment Interest Applies to Garnishment Awards

In Thompson v. Catlin’s fourth appeal, court alters landscape of insurance litigation

Colorado Supreme Court

In what the Colorado Supreme Court called “seemingly interminable litigation,” the almost decade-long insurance dispute of Thompson v. Catlin has just received its latest appellate decision.

The Supreme Court ruled Dec. 10 that plaintiffs who seek damages from insurance companies in garnishment proceedings are entitled to prejudgment interest on garnished awards. The ruling came on Thompson v. Catlin’s fourth appeal, and it reversed a finding by the Colorado Court of Appeals that prejudgment interest is only limited to damages awards.

Through a garnishment proceeding, a plaintiff can recover money a defendant owes them from a judgment by having the defendant’s insurance company pay out of a relevant insurance policy.

While the court decided the interest issue unanimously, it narrowly decided that the Court of Appeals division in Thompson IV reasonably construed a mandate issued by the Thompson III division.

Christopher Mosley, a member at Sherman & Howard who represented the petitioners, said he and his clients were “pleased with the court’s decision as it provides judgment creditors a valuable tool to collect judgments from a judgment debtor’s insurer.” The decision, he added, “is the latest in a recent line from our Supreme Court directing insurers to pay claims promptly and stop playing games.”

Catlin’s attorney at the Supreme Court, John Mann of Gordon Rees, did not respond to a request for comment.

The litigation stemmed from a botched property investment the petitioners, Mark Thompson and Rosalin Rogers, made through their broker, United Securities Alliance. Thompson and Rogers went into arbitration with United, won damages, and then confirmed the award in district court. But then the petitioners sought to recover a large portion of that award through the insurance policy United had with Catlin, which carried a liability limit of $1 million.

In the garnishment proceedings, Catlin unsuccessfully argued that United’s policy didn’t cover the underlying claim. Then Catlin sought to deduct “reasonable and necessary fees and costs” from the garnishment award, but it submitted invoices to the court that were redacted to the point they were indecipherable. The court refused to deduct Catlin’s fees and costs in its 2010 order, but a division of the Colorado Court of Appeals remanded to the court to try again to calculate some sort of deduction. The division’s reasoning was that the invoices, though unreadable, proved Catlin had incurred costs of some amount.

Catlin claimed $550,000 in defense fees. But the district court, still unable to read the company’s invoices on remand, simply applied the petitioners’ legal fees from the arbitrations — $320,000 — and made that Catlin’s deduction. Catlin again appealed, and the Court of Appeals remanded again, ordering the district court to “make a more specific determination of the reasonable costs and fees that Catlin may deduct” after “review[ing] the existing record.”

On remand, Catlin then submitted the invoices to the district court unredacted. The petitioners argued that this move breached the scope of the appellate court’s mandate. But the district court considered the invoices and approved $450,000 in deductions from the award against Catlin. The petitioners appealed, also contending that they were owed prejudgment interest on their award.

On Prejudgment Interest

In the fourth appeal, a division of the Court of Appeals held that prejudgment interest can’t be applied to a garnishment award because a garnishor doesn’t suffer damages in a garnishment proceeding. In its Dec. 10 majority opinion, the Supreme Court reversed that judgment, taking a broader view of the money owed to the petitioners.

“We perceive no basis to treat a garnishee against whom a judgment is entered any differently from a defendant against whom a judgment is entered in a non-personal-injury action, as both are obligated to make a payment in favor of the judgment creditor,” wrote Justice William Hood for the majority.

The statute in question, Colorado Revised Statute 5-12-102, deals in interest owed to creditors. “Nothing in the text of section 5-12-102 so limits its reach” to compensatory damages, the majority said, but rather the statute refers to “money … wrongfully withheld.”

 “The money was due on the date Petitioners demanded it, and Catlin has delayed paying this money for almost a decade,” according to the opinion.

Damian Arguello, an insurance law attorney who founded the Colorado Insurance Law Center, said the Thompson v. Catlin decision is significant because prejudgment interest can be a weighty factor in garnishment proceedings.

“Had the court ruled otherwise, that garnishment plaintiffs could not collect prejudgment interest … it would affect a lot of insurance cases and put those cases on a different footing” than matters where plaintiffs sue policyholders directly, Arguello said. Arguello represented United Policyholders in an amicus brief he authored in Thompson v. Catlin IV but did not speak to Law Week on the organization’s behalf.

The position the Court of Appeals took — that the statute on prejudgment interest only speaks in terms of damages — prompted second-guessing even among some insurance lawyers, Arguello said.

One of the keys to the Supreme Court’s reasoning is that refusing to pay insurance benefits is a wrongful withholding, Arguello said. That finding came despite Catlin’s “tempting argument” that there has to be bad faith in order for there to be a wrongful withholding of insurance proceeds, he added.

With prejudgment interest factoring into garnishment awards, insurance companies in Colorado now have to think more carefully about how they proceed in garnishment litigation, Arguello said. The potential award could swell if the matter drags out through many rounds of arguments and appeals.

In his statement for the petitioners, Mosley said the Supreme Court’s decision “may afford judgment creditors the protection of Colorado’s bad faith statute given the Court’s recognition of judgment creditors as creditors to whom insurance benefits are payable.”

On the Appellate Mandate

Where the Supreme Court wasn’t unanimous, however, was on whether the district court was right to consider Catlin’s unredacted invoices. According to the majority, the Court of Appeals should be able to judge whether the district court satisfied the orders it issued, even through a different division.

“It would seem … questionable for this court to tell a division of the court of appeals what another division meant when it remanded the case to the district court,” Hood wrote.

That aside, the majority didn’t find the unredacted invoices to be out of bounds. The order to make a “more specific determination” of Catlin’s reasonable costs and fees “implies that the district court would be required to go beyond the existing record, as the district court obviously considered the existing record deficient,” according to the majority. The district court could have interpreted its directions to “review the existing record” to preclude a “fishing expedition” but not necessarily consideration of new evidence. “On these peculiar facts, we can’t say that the division’s construction was an unreasonable one,” Hood wrote.

In his dissent, Justice Richard Gabriel said there was nothing in the mandate that left room for the district court to consider new evidence. He cited the Court of Appeals’ dissenting judge in the Thompson IV decision:

“[The mandate] plainly and unambiguously directed the district court to make additional findings from the existing record because, as Judge Webb correctly observed in his partial dissent below, ‘[T]he problem in Thompson III was insufficient explanation, not a lack of evidence.’”

“Moreover, this mandate made perfect sense,” Gabriel continued. “After almost a decade of litigation, the division made clear that the district court was to conduct no more hearings and receive no further evidence.”

In addition to having “effectively rewarded Catlin for its delay tactics,” Gabriel wrote, the majority’s ruling “unnecessarily diminishes the mandate rule by introducing new grounds to question when — or even if — a district court must follow an appellate court’s mandate.” Justices Brian Boatright and Melissa Hart joined Gabriel’s dissent.

Michael Rosenberg, a plaintiffs’ attorney at the Gold Law Firm, said the majority essentially deferred to the Court of Appeals’ findings.

“I think they wanted to put an end to this thing,” he said, adding that if the Supreme Court remanded on the issue of the unredacted invoices, it would have increased the likelihood of yet another appeal.

Rosenberg, who authored an amicus brief on behalf of the Colorado Trial Lawyers Association, said the CTLA favors a strict construction of the mandate rule. If the district court refused to consider the unredacted invoices because they weren’t “existing evidence,” there might not have been a fourth appeal. 

“We like finality in verdicts and judgments,” Rosenberg said. “It’s not in our clients’ interest to have appeals go on for decades.”

Rosenberg said he didn’t think “that justice was done” by allowing the insurance company to make a strategic decision to provide redacted invoices up “until it didn’t go well for them.” 

— Doug Chartier

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