author: MARTIN, Circuit Judge GILBERTSON, Justice AMUNDSON, Justice

text:
    2001 SD 3
    Frank ALVINE, Plaintiff and Appellee, v. MERCEDES-BENZ OF NORTH AMERICA, Defendant and Appellant.
    Nos. 21187, 21193.
    Supreme Court of South Dakota.
    Considered on Briefs April 26, 2000.
    Decided Jan. 3, 2001.

      Steven W. Sanford and Karen A. Hilmoe of Cadwell, Sanford, Deibert & Garry, Sioux Falls, SD, Attorneys for plaintiff and appellee.
    Lon J. Kouri and Deborah A. Birgen of May, Johnson, Doyle & Becker, Sioux Falls, SD, Attorneys for defendant and appellant.
   MARTIN, Circuit Judge

[¶ 1.] Mercedes-Benz of North America, Inc. (Mercedes-Benz) appeals from a judgment determining that it breached an express warranty for a used Mercedes automobile purchased by Frank Alvine. We affirm all issues but remand issue 4 in part.

FACTS

[¶ 2.] In 1992, Mercedes-Benz introduced a new model automobile, the 500 SEL. Everything on this model was new except the engine. Mercedes-Benz offered a limited written warranty with this vehicle, which provided in part:

Mercedes-Benz of North America, Inc. (MBNA) warrants to the original and each subsequent owner of a new Mercedes-Benz passenger car that any authorized Mercedes-Benz Dealer will make any repairs or replacements necessary, to correct defects in material or workmanship.
Our intention is to repair under the warranty, without charge to you, anything that goes wrong with your car during the warranty period which is our fault. All we ask that you properly maintain and care for the car and that you have warranty repairs or adjustments performed by an authorized Mercedes-Benz dealer.

(emphasis added).

[If S.] The warranty period was forty-eight months or 50,000 miles, whichever came first. The limited warranty provided in part, “[t]he warranty period starts on the date the car is delivered to the first retail purchaser or put in service as a dealer demonstrator or MBNA Company Car.” The first purchaser, Jerry Berger, purchased the vehicle on February 18, 1992 and kept it until October 27, 1993. Vaughn Woodward and his wife were the second purchasers, owning the car from February 2, 1994 until the summer of 1995. Alvine was the third owner, acquiring the vehicle on September 23, 1995 for $57,000. At that time, the vehicle had just under 44,661 miles and there were approximately five months left on the warranty. He purchased the vehicle from Superior Lexus Motor Company in Kansas City, Missouri and the dealership had it driven to Sioux Falls. Alvine was unaware of any problems with the vehicle.

[¶ 4.] On January 15, 1996, while the warranty was still in effect, the vehicle simply stopped running and would not restart. It had to be pushed off the street and towed to the local Mercedes dealer, Vern Eide Motorcars, Inc. (Vern Eide). Alvine had similar experiences eight more times in less than 3,000 miles. These incidents occurred after the term of the express warranty expired in February 1996. The vehicle was towed to Vern Eide each time and repair attempts were made, but were unsuccessful. Alvine registered complaints to Mercedes Benz, but its involvement did not cure the problem. Finally, in the summer of 1997, Alvine had enough and tried to return the car by leaving it at Vern Eide, but it refused the vehicle and delivered it back to Alvine. Mercedes-Benz believed its obligation under its warranty expired when the warranty term expired.

[¶ 5.] Alvine commenced a lawsuit against Mercedes-Benz for breach of express warranty. At trial, the jury awarded Alvine damages in the amount of $70,-440. This figure represented the $57,000 purchase price of the vehicle, plus $1,440 for storage and $12,000 for the lease of a replacement vehicle. In addition, the trial court awarded attorney fees in the amount of $47,328.50. Mercedes-Benz appealed, raising five issues. By notice of review, Alvine appealed the denial of his motion for new trial based on the failure to award prejudgment interest.

[¶ 6.] 1. Whether the trial court erred in denying Mercedes-Benz’ motion for directed verdict and in allowing the jury to decide if the vehicle had been repaired per the express warranty.

[¶ 7.] The jury heard testimony from Alvine regarding the problems with the vehicle stalling and also heard extensive testimony from Mercedes-Benz about this model, including the reasons for the stalling problem, the problems of this particular vehicle, and the repair attempts made thereto. The jury had the opportunity to consider all this testimony and observe the witnesses.

[¶ 8.] Reasonable minds could differ whether the problems experienced by Alvine after the warranty expired were the same as the problems experienced within the warranty period. This issue was properly presented to the jury. McDonough v. Kahle, 1999 SD 14, ¶ 8, 588 N.W.2d 600, 602. Put another way, whether the problems incurred by Alvine after the warranty term expired were latent in nature or caused by a failure of the dealer to appropriately fix the problems that occurred during the warranty period was a jury question. Defects occurring before the expiration of the warranty period should be repaired in accordance with the warranty, and, if not, then a warrantor’s liability for breach of warranty continues even after the expiration of the term of express warranty. Johnson v. John Deere Co., 306 N.W.2d 231, 235 (S.D.1981); Durant v. Palmetto Chevrolet Co., 241 S.C. 508, 129 S.E.2d 323, 326 (S.C.1963); Nearhouse v. Volkswagen of America, Inc., 42 Ohio App.3d 42, 536 N.E.2d 46, 48 (1987). The trial court did not err in denying the motion for directed verdict.

[¶ 9.] 2. Whether the trial court abused its discretion in allowing testimony of a prior lawsuit and complaints from previous lawsuit and complaints from previous owners regarding the vehicle in determining damages.

[¶ 10.] The trial court allowed the jury to hear testimony from the two previous owners regarding their problems with this vehicle, as well as evidence from Mercedes-Benz about the problems with this car. This vehicle had 73 warranty claims between February 18, 1992 and July 6, 1995 and went to the repair shop 35 times before Alvine purchased it. A problem experienced by all of the owners was that the vehicle would, without warning, simply quit and not restart. The first two owners also experienced problems with this vehicle involving windows not working, computer replacement, replacement of contact rings and brush set in motor, seals on windows leaking, vehicle hesitating on acceleration, replacement of mirror motors, transmission shifting jerkily, doors out of alignment, and the trunk, air conditioner, and phone not working. Both owners were allowed to testify that a national class action lawsuit had been brought involving this make and model for tire and vibration problems.

[¶ 11.] Admissibility of evidence is within the sound discretion of the trial court. The trial court has broad discretion in balancing the probative value of evidence against its prejudicial effect and its ruling will not be disturbed on appeal absent abuse of discretion. Schaffer v. Edward D. Jones & Co., 521 N.W.2d 921, 925 (S.D.1994); Time Out, Inc., v. Karras, 469 N.W.2d 380, 384 (S.D.1991). An abuse of discretion refers to a discretion exercised to an end or purpose not justified by, and clearly against reason and evidence. Harter v. Plains Ins. Co., Inc., 1998 SD 59, ¶ 13, 579 N.W.2d 625, 629.

[¶ 12.] The decision by the trial court to allow such testimony has not been shown to be an abuse of discretion. This evidence may have been probative to the jury in determining the amount of damages for breach of warranty. In addition, Mercedes Benz cannot be heard to complain since it made no timely objection nor motion to strike this evidence. SDCL 19-9-3(1); Andreson v. Black Hills Power & Light, 1997 SD 12, ¶ 19, 559 N.W.2d 886, 890; Bakker v. Irvine, 519 N.W.2d 41, 47 (S.D.1994). Mercedes-Benz made a motion in limine regarding this testimony but failed to specifically object during the trial, and is foreclosed from raising this issue on appeal. State v. Gallipo, 460 N.W.2d 739, 743 (S.D.1990).

[¶ 13.] 3. Whether the trial court erred in denying Mercedes-Benz’ motion for directed verdict regarding consequential damages.

[¶ 14.] At the conclusion of Al-vine’s evidence, Mercedes Benz made a motion for a directed verdict on the issue of consequential damages. However, Mercedes-Benz failed to renew its motion at the close of all the evidence. Thus, it is not reviewable on appeal. Pearson v. Adams, 279 N.W.2d 674, 677 (S.D.1979). In addition, Mercedes-Benz made no objection to this evidence nor to the jury instruction on the measure of damages. This instruction provided in part,

In this case, the measure of damages for breach of warranty is the difference at the time and place of acceptance between the value of the goods accepted and the value they would have had if they had been as warranted, unless special circumstances show proximate damages of a different amount.

This instruction permitted the jury to determine if special circumstances were present making the usual measure of damages inadequate in this case. Mercedes-Benz cannot now be heard to complain. No error has been shown, on this record, in the trial court’s ruling denying the motion for directed verdict on consequential damages.

[¶ 15.] 4. Whether the trial court erred in denying Mercedes-Benz’ motions for remittitur and judgment notwithstanding the verdict.

[¶ 16.] Mercedes-Benz claims that the damages for the vehicle of $57,000, storage costs of $1,440, and replacement rental loss of $12,000 should be remitted. The jury was instructed, with the concurrence of Mercedes-Benz, that “the measure of damages is the difference at the time and place of acceptance between the value of the goods accepted and the value they would have had if they had been as warranted, unless special circumstances show proximate damages of a different amount.”

[¶ 17.] The standard regarding a motion for remittitur is that:

The damages, therefore, must be so excessive as to strike mankind, at first blush, as being, beyond all measure, unreasonable and outrageous, and such as manifestly show the jury to have been actuated by passion, partiality, prejudice or corruption. In short, the damages must be flagrantly outrageous and extravagant, or the court cannot undertake to draw the line; for they have no standards by which to ascertain the excess.

Stormo v. Strong, 469 N.W.2d 816, 826 (S.D.1991) (quoting Schuler v. City of Mobridge, 44 S.D. 488, 493, 184 N.W. 281, 283 (1921)).

[¶ 18.] In this case, the jury heard evidence of the purchase value, the problems suffered by Alvine during his ownership, Alvine’s inability to use the vehicle because of the problems, the time the dealer had the vehicle for repairs, the many attempts by the dealer to cure the problem, the depreciation of the vehicle as presented by Mercedes-Benz, Blue Book evidence, Mercedes-Benz’ current value of the vehicle and its trade-in value, the problematic history of the vehicle, the value testimony of Alvine, and the ultimate refusal of the dealer or Mercedes-Benz to take back the vehicle. Mercedes-Benz further testified that the Kelly Blue Book provided that: “[suggested retail represents a price a dealership might ask for this make and model vehicle. This represents a fully reconditioned vehicle in excellent condition with clean title history.” Mercedes-Benz testified to values for a 1992-500 SEL Mercedes-Benz from the Kelly Blue Book rather than the value of the vehicle owned by Alvine. Mercedes-Benz had the opportunity to present evidence of the current value of the vehicle in question, with all its imperfections, but instead chose to testify in generic terms. The owner, Alvine, testified that the vehicle was basically unusable and its value was zero.

[¶ 19.] The jury heard all the testimony and had the opportunity to observe the witnesses. By its verdict, it appears the jury chose to believe Alvine and adopted his value of the vehicle, rejecting Mercedes-Benz’ testimony in this regard. The jury also adopted Alvine’s testimony regarding storage costs and expense of the replacement rental.

[¶ 20.] The decision of the jury, under these facts, was not flagrantly unreasonable or outrageous and therefore the motion for remittitur and the motion for judgment NOV must fail. There is no showing that the trial court abused its discretion in denying these motions.

[¶ 21.] We realize that Alvine earlier attempted to return the vehicle to Mercedes-Benz and it refused the vehicle. However, by virtue of the damages awarded in this case we feel that Alvine should not also be entitled to retain the vehicle. Therefore, we remand to require Alvine to make the vehicle available for return to Mercedes-Benz for 30 days from remitti-tur at the option of Mercedes-Benz.

[¶ 22.] 5. Whether the trial court abused its discretion in awarding attorney fees to Alvine.

[¶ 23.] Alvine submitted documentation of time spent by his attorney and the trial court approved the same in the amount of $47,328.50. Mercedes-Benz claims this amount includes time and expense attributable to legal theories upon which plaintiff did not prevail and therefore should not recover.

[¶ 24.] Alvine alleged in his complaint that Mercedes-Benz was in violation of the Magnuson-Moss Warranty Act which entitled Alvine to recover attorney fees and costs in an amount to be determined by the court. The Magnuson-Moss Warranty Act provides:

If a consumer finally prevails in any action brought under paragraph (1) of this subsection, he may be allowed by the court to recover as part of the judgment a sum equal to the aggregate amount of costs and expenses (including attorneys’ fees based on actual time expended) determined by the court to have been reasonably incurred by the plaintiff for or in connection with the commencement and prosecution of such action, unless the court in its discretion shall determine that such an award of attorneys’ fees would be inappropriate.

15 USC § 2310(d)(2).

[¶ 25.] In Hensley v. Eckerhart, 461 U.S. 424, 103 S.Ct. 1933, 76 L.Ed.2d 40 (1983), the United States Supreme Court held that even though the jury did not adopt every theory advanced, and plaintiff did not prevail on every motion, he would still be entitled to recover his full attorney fees. The Court stated:

[w]here a plaintiff has obtained excellent results, his attorney should recover a fully compensatory fee. Normally this will encompass all hours reasonably expended on the litigation, and indeed in some cases of exceptional success an enhanced award may be justified. In these circumstances the fee award should not be reduced simply because the plaintiff failed to prevail on every contention raised in the lawsuit. Litigants in good faith may raise alternative legal grounds for a desired outcome, and the court’s rejection of or failure to reach certain grounds is not a sufficient reason for reducing a fee. The result is what matters.

Id., 461 U.S. at 435, 103 S.Ct. at 1940, 76 L.Ed.2d at 52 (internal citation omitted). Reasonable attorney fees are determined by calculating the number of hours reasonably expended on the litigation multiplied by a reasonable hourly rate. Id., 461 U.S. at 433, 103 S.Ct. at 1939, 76 L.Ed.2d at 50.

[¶ 26.] Mercedes-Benz has not shown an abuse of discretion by the trial court in awarding reasonable attorney fees to Al-vine.

[¶ 27.] 6. Whether the trial court erred in denying Alvine’s motion for a new trial based on the failure to grant prejudgment interest.
[¶28.] Under SDCL 21-1-13.1: [a]ny person who is entitled to recover damages ... is entitled to recover interest thereon from the day that the loss or damage occurred.... If there is a question of fact as to when the loss or damage occurred, prejudgment interest shall commence on the date specified in the verdict or decision.... If necessary, special interrogatories shall be submitted to the jury. Prejudgment interest on damages arising from a contract shall be at the contract rate, if so provided in the contract; otherwise, if prejudgment interest is awarded, it shall be the Category B rate specified in § 54-3-16. The court shall compute and award the interest provided in this section and shall include such interest in the judgment in the same manner as it taxes costs.

(emphasis added).

[¶ 29.] Prejudgment interest is now mandatory, not discretionary. However, in this case, the jury was instructed that the allowance of prejudgment interest was in its discretion. Also, the instruction did not set forth an individual line for each loss incurred (vehicle, storage, and rental replacement) and the respective time of loss (for each). This instruction was given with the concurrence of Advine and .no special interrogatories were submitted to the jury. Alvine will not now be heard to complain.

[¶ 30.] In the future, it is recommended that a jury instruction on prejudgment interest provide that the same is mandatory when damages are recoverable, and request the jury to determine the amount of loss and the date of loss. Special interrogatories may also be submitted. The court will then compute the interest award.

[¶ 31.] We affirm all issues but remand Issue 4 in part.

[¶ 32.] SABERS and KONENKAMP, Justices, concur.

[¶ 33.] GILBERTSON, Justice, concurs in part and dissents in part.

[¶ 34.] AMUNDSON, Justice, concurs in part and dissents in part.

[¶ 35.] MARTIN, Circuit Judge, for MILLER, Chief Justice, disqualified.

GILBERTSON, Justice

(concurring in part and dissenting in part).

[¶ 36.] I concur with the majority opinion on Issues One, Two, Three, Four and Six.

[¶ 37.] I join the dissent of Justice Amundson at to Issue Five (attorney’s fees).

AMUNDSON, Justice

(concurring in part and dissenting in part).

[¶ 38.] I concur in issues 1 and 2.

[¶ 39.] I respectfully dissent as to issues 3, 4 and 5.

ISSUE 3: INCIDENTAL AND CONSEQUENTIAL DAMAGES

[¶ 40.] The majority holds that the issue of incidental and consequential damages has been waived. It is true, as the majority states, that SDCL 15-6-50(a) requires that a motion for directed verdict be made at the close of all the evidence in order to preserve that issue for appeal. Pearson v. Adams, 279 N.W.2d 674 ,(S.D.1979). The holding of Pearson, however, does not dispose of this case.

[¶ 41.] In Pearson, we stated that "insufficiency may not be reviewed unless it has been timely presented to the trial court by a proper motion for directed verdict, request for findings, or other apt motion, offer, objection or exception.” 279 N.W.2d at 676 (citations omitted) (emphasis supplied). When a party challenges the sufficiency of the evidence at the close of the plaintiffs case and during settlement of instructions, that party has timely preserved the issue by apt motion or objection. In this case, not only did the defense move for a directed verdict, but also objected to the jury instruction on incidental and consequential damages by arguing that “there is[n’t] sufficient evidence to submit to the Court [ ] the issue of the storage or the rental value,” thus it would be improper to have a verdict form that would allow for such damages. Although the trial court disregarded such argument and allowed the plaintiffs version of the verdict form, defense counsel took exception. The objection and exception by defense counsel preserved this issue for appeal. We have stated that “[questions of insufficiency of the evidence [of damages] may be presented on appeal without the necessity of an application for a new trial if the questions by appropriate proceedings have been first presented and decided in the court below.” Schoenrock v. City of Sisseton, 78 S.D. 419, 103 N.W.2d 649, 653 (1960). Based on the above, this issue is properly before the court.

[¶ 42.] SDCL 57A-2-715 permits the trial court to grant incidental and consequential damages. SDCL 57A-2-715 in part provides:

(1) Incidental damages resulting from the seller’s breach include expenses reasonably incurred ... and any reasonable expense incident to the delay or breach.
(2) Consequential damages resulting from the seller’s breach include:
(a) Any loss ... and
(b) Injury to person or property proximately resulting from any breach of warranty.

Therefore, according to statute, the damages must be an expense actually incurred, and they must be the proximate result of the breach. We have also stated that damages “may be recovered if the evidence shows with reasonable certainty both their occurrence and the extent thereof.” Drier v. Perfection Inc., 259 N.W.2d 496, 507 (S.D.1977). Thus, it is paramount for the plaintiff to put forth evidence of actual damages. Kobbeman v. Olesen, 1998 SD 20, ¶ 5, 574 N.W.2d 633, 635 (citations omitted). It is the plaintiffs burden to establish that he or she has, in fact, been damaged by the defendant. Id.

[¶ 43.] At trial, however, Dr. Alvine produced no evidence that he had actually incurred any expense for storage. No estimates, receipts, or records were produced to show such an expense. This is because he, in fact, had the vehicle stored exclusively at his own residential garage. Thus, the $1440 cost for storage was not actually incurred. On cross-examination Dr. Alvine admitted as much:

Q: You have not procured any such storage have you?
A: That’s correct.

This exchange, coupled with the inability to produce any documents establishing such expense, should lead one to the conclusion that Dr. Alvine had incurred no expenses related to storage of the Mercedes. We have often stated that damages must be proven by a reasonable degree of certainty. Damages are not recoverable unless they are “clearly ascertainable in both their nature and origin.” High Plains Genetics Research Inc. v. J K Mill-Iron Ranch, 535 N.W.2d 839, 844 (S.D.1995) (citing SDCL 21-2-1). “It is fundamental that damages, which are uncertain, contingent or speculative cannot be made the basis of recovery.” Kunkel v. United Sec. Ins. Co., 84 S.D. 116, 168 N.W.2d 723, 733 (1969). Without an expense incurred, one is not entitled to damages. Kobbeman, supra.

[¶ 44.] The evidence shows the same for the $12,000 lease award. Again, Dr. Alvine did not incur any expense related to the rental of a car because one was never rented. Dr. Alvine speculated that it would probably cost him around five hundred dollars per month to rent a car similar to that of the Mercedes. Again, no receipts, estimates, or documents of any kind were offered to show that the five hundred-dollar per month figure was more than conjecture and speculation.

[¶ 45.] More importantly, according to Dr. Alvhie’s testimony, he had five other vehicles from which to choose. He admitted that he owned two pickups, a Jaguar, an Oldsmobile, and a Dodge Durango. In a follow up question on cross-examination, Dr. Alvine was asked:

Q: So with all those vehicles you’re not hurting for wheels to get around are you?
A: No. I’m using my pick-up and Oldsmobile, yes.

There was no reason for Dr. Alvine to rent a vehicle because he had an array of vehicles from which to choose. Regardless, Dr. Alvine did not, in fact, rent a car. Because he never rented a car, he cannot exactly show how he was damaged.

[¶ 46.] It is clear that damages must be actually incurred before recovery is allowable. SDCL 57A~2-715(1). Damages are not appropriate unless the plaintiff can show that he or she can show a loss or damages actually incurred. Kobbeman, supra. Here, Dr. Alvine has failed to offer such proof. Therefore, an award for incidental and consequential damages was not proper. Courts of law are to dispense justice and fair decisions, and should not allow a litigant to recover an award that amounts to a damage bonus. On the record before us, I do not agree with the trial court’s decision to allow incidental and consequential damages. As such, I also dissent to the outcome reached in issue 4 as it relates to remittitur of incidental and consequential damages.

ISSUE 5: ATTORNEYS’ FEES

[¶ 47.] The Magnuson-Moss Warranty Act allows recovery of attorneys’ fees in an action brought in state court. Champion Ford Sales, Inc. v. Levine, 49 Md.App. 547, 433 A.2d 1218 (1981). Under the Act, attorneys’ fees are recoverable by the prevailing party at the discretion of the trial court. The question raised on appeal, however, is not the initial granting of attorneys’ fees, but rather the amount of the attorneys’ fees awarded. Mercedes claims that the award of $47,328.50 for attorneys’ fees was not reasonable.

[¶ 48.] By affidavit, Dr. Alvine’s attorney requested a $5,565 increase in the fee award because of the successful result. The $5,565 figure is the equivalent of a $25 per hour enhancement. A fee enhancement is prohibited under the Magnuson Moss Warranty Act. See Volkswagen of America, Inc. v. Smith, 690 So.2d 1328 (Fla.Dist.Ct.App.1997); Maserati Automobiles Inc. v. Caplan, 551 So.2d 501 (Fla.Dist.Ct.App.1989). The prevailing attorney should be held to the terms of the fee contract agreed upon with his client. “In no case should the court-awarded fee exceed the fee agreement reached by the attorney and his client.” Maserati, supra, at 503 (citing Perez-Borroto v. Brea, 544 So.2d 1022, 1023 (Fla.1989)). When an attorney and a client agree upon a fixed hourly rate, it would be unjust to allow that attorney a higher rate because of the mere presence of a fee-shifting statute.

[IT 49.] Nowhere in the Magnuson-Moss Warranty Act does it state that a fee enhancement is required or discretionary. Rather, the Act states that the fees must ■be reasonable. “What we require the trial court to do is exercise its discretion regarding an attorney’s fee award in a reasonable mannerf.]” Samuels v. American Motors Sales Corp., 969 F.2d 573, 579 (7th Cir.1992). The purpose of the Act is not to pynish the losing party, rather it is to give what is generally considered persons unable to afford legal representation an avenue of cost savings that would not normally be afforded such a person under our American rule for attorneys’ fees. With this purpose in mind, it is contrary to the purpose of the Act to dispense punishment by awarding a fee enhancement to the detriment of the defending party. Dr. Al-vine’s attorney would have been made whole without such a fee enhancement. This Court should not adopt a rule that gives bonuses to those who prevail and, concomitantly, punishes those who defend such claims and are unsuccessful.

[¶ 50.] This Court should strike the award as to the incidental and consequential damages, and the fee enhancement. We should also remand for a determination of reasonable attorneys’ fees without the inclusion of the fee enhancement.

[¶ 51.] GILBERTSON, Justice, joins this writing as to issue 5 (attorney’s fees).

      15 USC § 2310(d)(2). The statute provides:
      If a consumer finally prevails ... he may be allowed by the court to recover as part of the judgment a sum equal to the aggregate amount of cost and expenses (including attorneys' fees based on actual time expended ) determined by the court to have been reasonably incurred by the plaintiff for or in connection with the commencement and prosecution of such action, unless the court in its discretion shall determine that such award of attorneys’ fees would be appropriate. (emphasis supplied).
      The majority's reliance on Hensley is erroneous for two reasons. First, Hensley involved an involuntary commitment proceeding under 42 USC § 1983. Second, under such action, attorneys' fees are awarded under 42 USC § 1988, which does not expressly allow attorneys' fees "based on actual time expended” as expressed in the Magnuson-Moss Warranty Act. Hensley clearly does not support an award of attorneys’ fees based on the Magnu-son-Moss Warranty Act.


source: Caselaw Access Project

author: TERNUS, Justice.

license: Public Domain

text:
    Donna Rae KELLY, Individually, and as the Administrator of the Estate of Leo J. Kelly, Deceased, and as Parent and Next Friend of Amy Kelly, a Minor, Appellant, v. IOWA MUTUAL INSURANCE CO., Appellee.
    No. 99-319.
    Supreme Court of Iowa.
    Nov. 16, 2000.
    As Amended on Denial of Rehearing Jan. 22, 2001.

      Philip Willson and Michael J. Davenport of Willson & Pechacek, P.L.C., Council Bluffs, for appellant.
    Roy M. Irish of Patterson, Lorentzen, Duffield, Timmons, Irish, Becker & Ord-way, L.L.P., Des Moines, for appellee.
    Fred M. Haskins of Patterson, Lorent-zen, Duffield, Timmons, Irish, Becker & Ordway, L.L.P., Des Moines, for amicus curiae Iowa Insurance Institute.

       Senior judge assigned by order pursuant to Iowa Code section 602.9206 (1999).

   TERNUS, Justice.

This case requires the court to decide whether an insured being defended under a reservation of rights breaches his duty of cooperation by agreeing to a stipulated judgment with the claimant. We hold that if the insurance company has breached the contract by wrongfully rejecting a reasonable settlement offer, the insured may accept the settlement offer over the insurer’s objection without breaching policy duties and losing his right to seek coverage. Because the record before the district court was insufficient to allow a resolution of this issue, we reverse the court’s summary judgment ruling in favor of the insurer, and remand the case for further proceedings consistent with this opinion.

I. Background Facts and Proceedings.

On April 18, 1993, Leo Kelly was killed while making repairs to a farm implement owned by Philip McCarthy. The appellee, Iowa Mutual Insurance Company, insured McCarthy at the time under a farm liability policy. The policy specifically excluded coverage for bodily injury sustained by “any employee ... as a result of his or her employment by the ‘Insured.’ ”

The appellant, Donna Rae Kelly, individually and as the administrator of the Estate of Leo Kelly and as parent and next friend of Amy Kelly (hereinafter “the estate”), made a claim against McCarthy for damages arising from Leo Kelly’s alleged wrongful death. In turn, McCarthy sought coverage for this claim from Iowa Mutual.

Iowa Mutual believed that Kelly was McCarthy’s employee and that his fatal injuries occurred as a result of his employment by McCarthy. Based on this belief and the employee exclusion contained in the policy, Iowa Mutual disputed coverage. Accordingly, on September 29, 1993, Iowa Mutual instituted a declaratory judgment action against McCarthy and the estate, seeking a declaration that the employee exclusion precluded coverage for any claims of the estate against McCarthy. The estate, in addition to filing an answer, also filed a cross-claim against McCarthy seeking damages for Kelly’s wrongful death. At this point, Iowa Mutual provided McCarthy with an attorney to defend him on the wrongful death claim. The insurer also requested, and the court granted, a severance of the wrongful death cross-claim from the coverage action.

The declaratory judgment action proceeded to trial. The sole issue was whether Kelly was McCarthy’s employee at the time of the accident. The jury found against Iowa Mutual, but the trial court granted the insurer’s motion for judgment notwithstanding the verdict, ruling that Kelly was McCarthy’s employee as a matter of law. The trial court’s judgment NOV was reversed on appeal. Iowa Mut. Ins. Co. v. McCarthy, 572 N.W.2d 537, 545 (Iowa 1997). This court reinstated the jury’s verdict and remanded “for the entry of a declaratory judgment that Iowa Mutual’s policy provides coverage for the estate’s wrongful death claim.” Id.

During the pendency of the appeal of the declaratory judgment action, McCarthy and the estate entered into settlement negotiations, the nature and extent of which are not clear from the summary judgment record. It does appear, however, that Iowa Mutual was notified of these discussions, but refused to agree to any kind of settlement because, it contended, its insured, McCarthy, had no liability to the estate and the tort claim could be successfully defended.

Despite Iowa Mutual’s objection, McCarthy settled the estate’s wrongful death claim. Pursuant to the settlement agreement, McCarthy agreed that a judgment could be entered against him for $507,500 and costs. The estate agreed to accept a $7,500 payment from McCarthy, leaving a balance of $500,000 due on the judgment. (Iowa Mutual’s limit of liability was $500,000.) The estate promised that it would not make any further claims against McCarthy, that it would refrain from executing upon or otherwise enforcing the remaining judgment against McCarthy, and that the balance of the judgment would not be satisfied by attachment of, nor become a lien upon, any assets of McCarthy. As part of the settlement, McCarthy assigned to the estate any claims he had against Iowa Mutual. The estate agreed that it would seek to satisfy the remaining judgment only from the proceeds of Iowa Mutual’s policy. Pursuant to the agreement, the district court entered a judgment in the stipulated amount, and McCarthy paid the estate $7,500 in partial satisfaction of that judgment.

A few months after the coverage action was resolved, the estate filed the present action against Iowa Mutual seeking payment of the remaining $500,000 judgment, plus interest and costs. Iowa Mutual filed a motion for summary judgment alleging that McCarthy’s settlement of the wrongful death case over Iowa Mutual’s objection constituted a breach of policy conditions and resulted in a forfeiture of coverage. The estate resisted, claiming that Iowa Mutual breached the policy and, consequently, McCarthy was excused from performance of the policy conditions. The district court granted summary judgment to Iowa Mutual and the estate filed this appeal.

II. Scope of Review.

Our review of a summary judgment ruling is for the correction of errors of law. See Continental Ins. Co. v. Bones, 596 N.W.2d 552, 555 (Iowa 1999). Summary judgment is appropriate where the moving party shows there are no genuine issues of material fact and it is entitled to judgment as a matter of law. See Iowa R. Civ. P. 237(c). In determining whether the moving party has met this burden, we view the record in the light most favorable to the party opposing the motion for summary judgment. See Met-Coil Sys. Corp. v. Columbia Cas. Co., 524 N.W.2d 650, 654 (Iowa 1994). This court’s role on appeal is “to determine whether a genuine issue of material fact exists and whether the law was correctly applied.” Red Giant Oil Co. v. Lawlor, 528 N.W.2d 524, 528 (Iowa 1995).

III. General Legal Principles.

We note initially that the estate, as McCarthy’s assignee, stands in the shoes of McCarthy, and its recovery under the Iowa Mutual policy is subject to any defense that Iowa Mutual has against its insured. See id. at 533; 2 Allan D. Windt, Insurance Claims & Disputes § 9.15, at 61-62 (3d ed.1995) [hereinafter “Windt”]. It is also well established under Iowa law that a party seeking to recover under an insurance policy “must prove compliance with its terms.” Am. Guar. & Liab. Ins. Co. v. Chandler Mfg. Co., 467 N.W.2d 226, 228 (Iowa 1991). In cases such as the one before us, where a third party seeks to establish coverage, the burden shifts to the insurer to introduce evidence of noncompliance. See id. at 229; Haynes v. Dairyland Mut. Ins. Co., 199 N.W.2d 83, 86 (Iowa 1972). If it is established that the insured has not substantially complied with the policy conditions, the party claiming coverage -bears the burden to prove that performance was excused or waived or that the failure to comply was not prejudicial to the insurer. See Simpson v. U.S. Fid. & Guar. Co., 562 N.W.2d 627, 631 (Iowa 1997). Where excuse or waiver is not proved, there is a rebuttable presumption of prejudice. Id. at 631-32.

The estate does not argue that McCarthy complied with the policy conditions, but it does assert that various actions of Iowa Mutual released McCarthy from his obligations under the policy. Specifically, the estate complains of Iowa Mutual’s defense of McCarthy under a reservation of rights, its commencement of a declaratory judgment action to litigate coverage, and Iowa Mutual’s refusal to approve the settlement between McCarthy and the estate.

“It is a basic principle of contract law that once one party to a contract breaches the agreement, the other party is no longer obligated to continue performing his or her own contractual obligations.” 1 Windt § 3.10, at 139; accord Van Oort Constr. Co. v. Nuckoll’s Concrete Serv., Inc., 599 N.W.2d 684, 692 (Iowa 1999) (holding that the breach must be material) (citing Restatement (Second) of Contracts § 237, at 215 (1981)).. Our Red Giant case presents an example of this principle in operation. In Red Giant, we held that, where an insurance company refuses to defend the insured against a claim covered by the policy, the insured is free to settle with the injured party by stipulating to the entry of a judgment that is collectible only from the insurer. 528 N.W.2d at 531. The right of the insured in Red Giant to settle the claim against it resulted from the insurance company’s refusal to defend. Under such circumstances, the “insurer’s unjustified refusal to defend relieves the insured from his or her contract obligations not to settle and the insured is at liberty to make a reasonable settlement or compromise without losing his or her right to recover on the policy.” 14 Lee R. Russ & Thomas F. Segalla, Couch on Insurance 3d § 202:7, at 202-32 (1999) [hereinafter “Couch’ ]; accord Fullerton v. U.S. Cas. Co., 184 Iowa 219, 231-32, 167 N.W. 700, 705 (1918) (“[The insurer] repudiated its obligation to assume and carry the defense to final judgment; and, having abandoned the ease, it left the assured at liberty to take up the defense and contest the claim to final judgment, or, if so advised, to make the most favorable settlement possible.”).

Unlike the insurer in Red Giant, Iowa Mutual did not breach its duty to provide a defense. The undisputed facts show that Iowa Mutual employed an attorney to defend McCarthy against the wrongful death claim asserted by the estate. Therefore, we must look at the other circumstances revealed by the record to determine whether there potentially was a breach of the insurance contract by Iowa Mutual. As noted above, the estate contends that Iowa Mutual breached the contract in three ways: (1) by defending McCarthy under a reservation of rights; (2) by commencing a declaratory judgment action; and (3) by refusing to consent to the proposed settlement. We address each contention separately.

IV. Defense Under a Reservation of Rights.

The estate appears to argue that Iowa Mutual’s defense of McCarthy pursuant to a reservation of rights violated the contract. An insurer does not breach the policy simply because the defense it provides is under a reservation of rights. See 14 Couch § 202:38, at 202-95 to 202-96; accord Cay Divers, Inc. v. Raven, 812 F.2d 866, 870-71 (3d Cir.1987); Gates Formed Fibre Prods., Inc. v. Imperial Cas. & Indem. Co., 702 F.Supp. 343, 346 (D.Me.1988); United Servs. Auto. Ass’n v. Morris, 154 Ariz. 113, 741 P.2d 246, 252 (1987); Miller v. Shugart, 316 N.W.2d 729, 733 (Minn.1982). Nevertheless, some courts have held that an insured may settle without the insurer’s consent where the insurer provides a defense to the insured but reserves its right to deny liability for any ultimate judgment. See, e.g., Cay Divers, 812 F.2d at 870; Ins. Co. of N. Am. v. Spangler, 881 F.Supp. 539, 545 (D.Wyo.1995); Morris, 741 P.2d at 252. But see 1 Windt § 3.09, at 138 (“An insured should not be allowed to enter into an unauthorized settlement simply because it is being defended pursuant to a reservation of rights.”). We think the reasoning of these cases is flawed because they permit an insured to breach his duties under the policy without losing coverage, even though there has not been a breach of the contract by the insurance company. See 1 Windt § 3.09, at 138-39 (criticizing the Cay Divers and Morris cases). Therefore, we decline to follow them. This conclusion requires us to consider whether Iowa Mutual breached the policy in any of the other ways claimed by the estate.

V. Iowa Mutual’s Commencement of a Declaratory Judgment Action.

The estate appears to acknowledge in its brief that under ordinary circumstances an insurance company that questions coverage may initiate a declaratory judgment action. According to the estate, however, Iowa Mutual’s declaratory judgment action does not fall within this general rule because the employment issue that was determinative of coverage was also an issue that would necessarily be determined in the tort suit. The estate asks us to rule that the commencement of a declaratory judgment action under these circumstances was wrongful and constituted a breach of contract.

The majority of courts hold that “a declaratory judgment should not be entered if it depends on the resolution of factual disputes that are at issue in the underlying action.” 2 Windt § 8.04, at 8. Compare Constitution Assocs. v. N.H. Ins. Co., 930 P.2d 556, 562 (Colo.1996) (stating that declaratory judgment action must “concern issues that are independent of and separable from those in the underlying case”); Md. Cas. Co. v. Peppers, 64 ILL.2d 187, 355 N.E.2d 24, 30 (1976) (holding that declaratory judgment action was premature due to overlapping issues in that action and in tort suit); U.S. Fid. & Guar. Co. v. Continental Ins. Co., 216 Kan. 5, 531 P.2d 9, 15 (1975) (holding that declaratory judgment action was not appropriate where it sought resolution of a fact question that was also a principal issue in a previously filed tort suit); Roussos v. Allstate Ins. Co., 104 Md.App. 80, 655 A.2d 40, 42 (Ct.Spec.App.1995) (same), with Reisen v. Aetna Life & Cas. Co., 225 Va. 327, 302 S.E.2d 529, 532 (1983) (holding that an action for declaratory judgment filed prior to resolution of tort case presented justiciable controversy, even though the determinative ' coverage issue would also be decided in tort case). Under this rule, the insurance company must await the resolution of the tort suit before litigating coverage. See State Farm Fire & Cas. Co. v. Shelton, 176 Ill.App.3d 858, 126 Ill.Dec. 286, 531 N.E.2d 913, 916, 920 (1988) (noting that insurer could present its coverage defense in proceedings following the tort suit). Even if we were to adopt this rule in Iowa, it is of no assistance to the estate.

If the timing of Iowa Mutual’s declaratory judgment action was wrong, then the remedy was to stay or dismiss the coverage suit. We know of no legal rationale for holding that the premature commencement of a declaratory judgment suit instantly releases the insured from his policy duties, and the estate has cited no cases that so hold. If McCarthy did not want to litigate coverage before his tort liability was determined on the basis that the issues in the coverage case and the tort suit were the same, he should have raised this issue in the coverage action. It is too late to complain of Iowa Mutual’s conduct in filing the declaratory judgment action now, in a suit to collect a judgment entered on the tort claim. Therefore, we reject the estate’s argument that Iowa Mutual’s initiation of a declaratory judgment action to determine issues that were to be resolved in the tort suit constituted a breach of the insurance contract and released the insured from his obligation to comply with the policy conditions.

VI. Iowa Mutual’s Refusal to Consent to the Proposed Settlement.

When an insurer defends an insured, it has control over the defense and over settlement. See Kooyman v. Farm Bureau Mut. Ins. Co., 315 N.W.2d 30, 32 (Iowa 1982). We have recognized that in this situation a covenant of good faith and fair dealing is implied. See id. at 83. “This covenant includes a duty to settle claims without litigation in appropriate cases.” Id.; accord 1 Windt § 5.01, at 295 (“One of an insurer’s obligations under a contract of liability insurance, arising out of its implied duty of good faith and fair dealing, is to settle a claim that has been brought against the insured when it is appropriate to do so.”).

Our court has considered several cases in which it was alleged that the insurance company breached its duty of good faith by failing to settle a claim within policy limits. See Dolan v. Aid Ins. Co., 431 N.W.2d 790, 792 (Iowa 1988); Kooyman, 315 N.W.2d at 33-34; Koppie v. Allied Mut. Ins. Co., 210 N.W.2d 844, 846 (Iowa 1973); Henke v. Iowa Home Mut. Cas. Co., 250 Iowa 1123, 1127, 97 N.W.2d 168, 171 (1959). We have summarized the legal principles developed in these cases as follows:

We begin with the simple assumption that an insured buys an agreed amount of liability protection for a set premium. The insured, in the first instance, is at risk for the amounts in excess of the protection which has been purchased. The policy limits, however, set a boundary which the insurer cannot misuse to the detriment of the insured. It is bad faith for an insurance company to act irresponsibly in settlement negotiations with respect to the insured’s risk in that part of the claim in excess of coverage. It is bad faith for the company to factor in its consideration of settlement offers the limited amount between an offer and the policy limits.
The best standard for good faith in a specific negotiation is to ignore the policy limits. If, but for the policy limits, the insurer would settle for an offered amount, it is obliged to do so (and pay toward settlement up to the policy limits). But the insurer is free to reject the offer if it would have rejected the same offer under policy limits covering the whole claim.

Wierck v. Grinnell Mut. Reins. Co., 456 N.W.2d 191, 194-95 (Iowa 1990). Thus, the test in Iowa for excess liability has been clearly established as one of bad faith, not negligence. See Ferris v. Employers Mut. Cas. Co., 255 Iowa 511, 516, 122 N.W.2d 263, 266 (1963).

We have not had an occasion to consider the insurer’s duty to settle under circumstances such as those before us, where the insurer has reserved its right to deny coverage for any judgment entered against the insured. Certainly under these circumstances, where the insured may ultimately be responsible for a judgment if coverage is found not to exist, it is extremely important that the insurance company, who is controlling the defense, fulfill its contractual obligation to settle where appropriate. One commentator has observed that an insurer may breach the contract by failing to settle an appropriate case, even though its failure to settle is attributable ’solely to the company’s negligence. See 1 Windt § 5.14, at 329. This commentator suggests that,

recognizing that the company has, despite the absence of bad faith, breached the insurance contract, the company should be precluded from enforcing the provisions in the policy inuring to its benefit, such as the one prohibiting unauthorized settlements by the insured.

Id.

We agree. An insurance company cannot use its erroneous belief that it has no coverage to justify a refusal to settle. See 1 Windt § 5.05, at 310 & n. 56, at 310-11 (citing cases). At the point in time that the insurer is faced with a fair and reasonable settlement demand that a reasonable and prudent insurer would pay, the insurer must either abandon its coverage defense and pay the demand or lose its right to control the conditions of settlement. If the insurer prefers to debate coverage and, accordingly, refuses to pay the settlement demand, the insured is free to either pay the settlement demand or stipulate to the entry of judgment in the amount of the demand. The insurer, if found to have coverage, will be liable for the insured’s settlement if the settlement is found to be fair and reasonable.

Although our holding bears some similarity to the legal principles set forth in Wierck with respect to an insurer’s liability for an excess judgment, we do not impose a bad faith standard for failure to settle a case where the defense is provided under a reservation of rights. The bad faith standard is simply not appropriate here, where the issue is one of contractual liability as opposed to extra-contractual liability. We hold, therefore, that when an insurer provides a defense under a reservation of rights and rejects a fair and reasonable settlement demand that a reasonable and prudent insurer would pay, the insured is free to consummate the settlement on terms that protect the insured from any personal exposure.

Applying these principles to the case before us, we think that summary judgment was premature. The record before the district court showed that settlement negotiations occurred, but 'the exact course of these negotiations and Iowa Mutual’s involvement in them were not made clear. Therefore, we think Iowa Mutual has failed to demonstrate the absence of a genuine issue of material fact that would permit summary judgment. We recognize that the parties and the court did not have the benefit of any Iowa decision setting forth the applicable law under the circumstances of this case. Therefore, we do not mean to imply by our reversal of the summary judgment that the parties, on remand, will not be able to file properly supported motions for summary judgment that demonstrate one or the other party is entitled to judgment as a matter of law based on the legal principles set forth in this opinion. We merely hold that the information needed to test the insurer’s conduct under the law we announce today is lacking in the record before us. Consequently, we reverse the district court’s summary judgment ruling in favor of Iowa Mutual and remand for further proceedings.

REVERSED AND REMANDED.

McGIVERIN, S.J., participates in place of NEUMAN, J., who takes no part.

      . The policy in question here contained the following provisions:
      c. You and any other "Insured” involved must:
      (4) Cooperate with us in the investigation, settlement, or defense of the claim or "suit”;
      d. No "Insured” will, except at his or her own cost, voluntarily make any payment, assume any obligation, or incur any expense, other than for first aid, without our consent.
      The policy also provided that an insured’s "rights and duties under this policy may not be transferred without our written consent except in the case of death of an individual named insured.” The final relevant policy term was the proviso that no person has any rights under the policy "unless all of its terms have been fully complied with.”

      . If we have misinterpreted the estate's position and the estate is actually asserting that the mere commencement of a declaratory judgment action constitutes a breach of the policy, we reject that argument. See Miller, 316 N.W.2d at 733 (holding that insurer did not repudiate contract by seeking a determination of coverage); see also McAndrews v. Farm Bureau Mut. Ins. Co., 349 N.W.2d 117, 119 (Iowa 1984) (noting insurer that believes it has no coverage may commence a declaratory judgment action).

      . The record before the district court did not contain any pleadings or other documents that showed what issues were raised in the tort suit. Therefore, we do not know whether the estate would be able to prove that Kelly’s status as an employee, which was determinative of the coverage dispute, was also a material issue in the tort suit. Nevertheless, we assume for purposes of our discussion that such is the case.

      . The duty to settle third-party claims against an insured should be distinguished from the duty to pay first-party claims. This court has refused to "recognize a cause of action for [an insurer's] negligent failure to pay” its own insured's claim. Hollingsworth v. Schminkey, 553 N.W.2d 591, 596 (Iowa 1996). Our decision today in the context of third-party claims does not affect the standards governing an insurer's liability for failure to pay a first-party claim.

      . We do not mean to imply that an insurer who refuses to settle a case based on a coverage dispute acts in bad faith. See Cay Divers, 812 F.2d at 871 (holding that carrier's “refusal to consent to settlement in the face of a genuine concern over coverage does not constitute bad faith''); Associated Wholesale Grocers, Inc. v. Americold Corp., 261 Kan. 806, 934 P.2d 65, 90 (1997) (holding that an insurer is not subject to excess liability where it refuses to settle a claim based on a good faith question as to coverage). That issue is not presented in this case because the estate does not seek a recovery in excess of Iowa Mutual's policy limits.

      . We assume, of course, that the demand is within policy limits. As we have previously held, the insurer has no obligation to pay any amount in excess of its limits. See Wierck, 456 N.W.2d at 194.

      . This holding does not affect the continued validity of our bad faith standard in cases of the insurer’s liability for a judgment in excess of its policy limits. Nor should our decision be interpreted to impose a general duty to settle when coverage is not disputed and the adequacy of coverage is not a concern. See 1 Windt § 5.01, at 298 (noting that there should not be a duty to settle where the insurer is “gambling] with its own money”).


author: BLATZ, Chief Justice. .

text:
    REGENTS OF the UNIVERSITY OF MINNESOTA, Appellant, v. Lance RAYGOR and James Goodchild, Respondents.
    No. C1-99-1140.
    Supreme Court of Minnesota.
    Jan. 4, 2001.

      Mark R. Rotenberg, General Counsel, Lorie S. Gildea, Associate General Counsel, Minneapolis, MN, Andrew Parker, Matthew E. Johnson, Smith Parker, PLLP, Minneapolis, MN, for appellant.
    Howard L. Bolter, Borkon, Ramstead, Mariani & Letourneau, Ltd., Minneapolis, MN, for respondents.
   OPINION

BLATZ, Chief Justice. .

This ease raises the issue of whether the tolling provision of the federal supplemental jurisdiction statute, codified at 28 U.S.C. § 1367(d) (1993), applies to toll the statute of limitations for Minnesota Human Rights Act claims against the Regents of the University of Minnesota during the time the state law claims were pending in federal court. Respondents Lance Raygor and James Goodchild brought this action against appellant Regents of the University of Minnesota (University) alleging age discrimination in violation of the Minnesota Human Rights Act (MHRA). The University brought a motion to dismiss, arguing that the statute of limitations for the MHRA claims had expired. In granting the motion, the state district court found that the statute of limitations for respondents’ MHRA claims was not tolled under the federal supplemental jurisdiction statute and that equitable tolling did not apply to the facts in this case; therefore, the claims were not timely. The Minnesota Court of Appeals reversed, concluding that section 1367(d) did toll the state statute of limitations and that, in the alternative, the MHRA claims were equitably tolled during the pendency of the federal district court action. We reverse, holding that the application of section 1367(d) in this case is an unconstitutional infringement on state sovereign immunity in violation of the Eleventh Amendment of the United States Constitution, and that the district court did not abuse its discretion in concluding that equitable tolling does not apply.

-In August 1995, respondents filed charges of discrimination with the Minnesota Department of Human Rights alleging age discrimination by the University of Minnesota in certain employment decisions. The department dismissed the claims on July 17, 1996, and advised each respondent by letter that he could bring a civil action against the University in state district court within 45 days of receipt of the letter. Rather than filing in state court, respondents filed separate actions in the federal district court for the District of Minnesota on or about August 29, 1996, alleging violations of the federal Age Discrimination in Employment Act, 29 U.S.C. §§ 621-634 (1999), and the Minnesota Human Rights Act, Minn.Stat. ch. 363 (2000). In its answers, the University raised Eleventh Amendment immunity and lack of jurisdiction as affirmative defenses. The federal actions were consolidated. In June 1997, the University served and filed a motion to dismiss the complaints pursuant to Fed.R.Civ.P. 12(b)(1), arguing that the Eleventh Amendment bars suits in federal court against a state by citizens of that or another state. The federal district court granted the motion by order filed July 14, 1997, dismissing the claims without prejudice. Respondents appealed the federal district court’s decision to the Eighth Circuit Court of Appeals. The appeal was stayed. On January 11, 2000, the United States Supreme Court held in Kimel v. Florida Bd. of Regents, 528 U.S. 62, 120 S.Ct. 631, 145 L.Ed.2d 522 (2000), that the Eleventh Amendment is a valid defense to an Age Discrimination in Employment Act claim against a state. After Kimel was decided, respondents moved to withdraw the appeal, and the Eighth Circuit Court of Appeals dismissed the appeal.

Meanwhile, on August 1, 1997, respondents commenced this action in state district court alleging age discrimination under the MHRA. The action was stayed while the federal appeal was still pending; however, the stay was lifted on December 31, 1998, for the limited purpose of deciding the University’s summary judgment motion. In moving for summary judgment, the University claimed that the action was barred by the state statute of limitations because respondents failed to file their claims in state district court within 45 days of receiving notice that the Minnesota Human Rights Department had dismissed the claims. See MinmStat. §§ 363.06, subd. 3, 363.14, subd. 1(a)(1) (2000). The state district court granted the motion, concluding that the limitations period for the state action was not tolled while the federal action was pending and that equitable tolling did not apply to extend the limitations period.

Respondents sought review of the state district court’s judgment in the court of appeals. The court of appeals reversed, concluding that 28 U.S.C. § 1367(d) tolled the statute of limitations for respondents’ MHRA claims during the pendency of the federal district court action. See Raygor v. University of Minn., 604 N.W.2d 128, 133 (Minn.App.2000). Alternatively, the court of appeals concluded that respondents’ claims were equitably tolled while their federal district court action was pending. See id. at 134.

I.

This case presents us with the question of whether the tolling provision of the federal supplemental jurisdiction statute should apply to toll the statute of limitations for a state law claim against a state defendant, in light of the immunity afforded the state by the Eleventh Amendment. In consideration of this issue, we first review the supplemental jurisdiction statute and the Eleventh Amendment.

In United Mine Workers v. Gibbs, the United States Supreme Court recognized the common law doctrine of pendent jurisdiction, which permits a federal court to hear state law claims over which the federal court would not otherwise have jurisdiction when the state law claims are joined with a related federal claim. 383 U.S. 715, 725, 86 S.Ct. 1130, 16 L.Ed.2d 218 (1966). To be related for purposes of pendent jurisdiction, the claims “must derive from a common nucleus of operative fact.” Id. Congress codified the doctrine of pendent jurisdiction at 28 U.S.C. § 1367, known as the supplemental jurisdiction statute. Subdivision (a) provides:

Except as provided in subsections (b) [dealing with diversity jurisdiction] and (c) [discretionary dismissal of supplemental claims] or as expressly provided otherwise by Federal statute, in any civil action of which the district courts have original jurisdiction, the district courts shall have supplemental jurisdiction over all other claims that are so related to claims in the action within such original jurisdiction that they form part of the same case or controversy under Article III of the United States Constitution. Such supplemental jurisdiction shall include claims that involve the joinder or intervention of additional parties.

28 U.S.C. § 1367(a) (1993).

At issue in this case is subdivision (d) of section 1367, which tolls the state statute of limitations for claims asserted under supplemental jurisdiction while the claims are pending in federal court. Subdivision (d) also assures a 30-day period in which to bring a state action after a supplemental claim is dismissed by the federal court:

The period of limitations for any claim asserted under subsection (a), and for any other claim in the same action that is voluntarily dismissed at the same time as or after the dismissal of the claim under subsection (a), shall be tolled while the claim is pending and for a period of 30 days after it is dismissed unless State law provides for a longer tolling period.

28 U.S.C. § 1367(d). By its plain language, section 1367(d) applies to “any claim” asserted under section 1367(a); however, the University argues that this federal statute cannot trump the protections afforded the University by the Eleventh Amendment.

Critical to our analysis of section 1367(d)’s effect in this case is an understanding of the Eleventh Amendment. The Eleventh Amendment provides that “[t]he Judicial power of the United States shall not be construed to extend to any suit in law or equity, commenced or prosecuted against one of the United States by Citizens of another State, or by Citizens or Subjects of any Foreign State.” U.S. Const, amend. XI. Notwithstanding this express language, the Eleventh Amendment has long been interpreted to also prohibit citizens from pursuing claims against their own state in federal court. See Hans v. Louisiana, 134 U.S. 1, 15, 10 S.Ct. 504, 33 L.Ed. 842 (1890). The protections of the Eleventh Amendment exist unless the state has unequivocally consented to suit in federal court, or Congress has unequivocally abrogated state immunity in order to effectuate the provisions of the Fourteenth Amendment. See Seminole Tribe v. Florida, 517 U.S. 44, 54-55, 116 S.Ct. 1114, 134 L.Ed.2d 252 (1996); Kentucky v. Graham, 473 U.S. 159, 169, 105 S.Ct. 3099, 87 L.Ed.2d 114 (1985). Because there is no dispute that the University is an “arm” of the State of Minnesota, the University is entitled to the protections of the Eleventh Amendment in a suit brought by citizens of Minnesota in a federal court. See Treleven v. University of Minn., 73 F.3d 816, 819 (8th Cir.1996).

Prior to the enactment of section 1367, the United States Supreme Court applied Eleventh Amendment immunity to claims brought in federal court under common law pendent jurisdiction. See Pennhurst State Sch. & Hosp. v. Halderman, 465 U.S. 89, 106, 104 S.Ct. 900, 79 L.Ed.2d 67 (1984). In Pennhurst, the Court concluded that “neither pendent jurisdiction nor any other basis of jurisdiction may override the Eleventh Amendment.” 465 U.S. at 121, 104 S.Ct. 900. Therefore, under the reasoning in Pennhurst, the federal district court could not exercise jurisdiction over the MHRA claims once the Eleventh Amendment was asserted by the University. See Cooper v. St. Cloud State Univ., 226 F.3d 964, 968 (8th Cir.2000); Mayer v. University of Minn., 940 F.Supp. 1474, 1476 (D.Minn.1996). In fact, respondents did not dispute the University’s motion in federal court to dismiss the MHRA claims, and the consolidated MHRA claims were dismissed.

Because respondents then filed the MHRA claim against the University in state district court after the 45-day statute of limitations set forth in Minn.Stat. § 363.14, subd. 1(a)(1) (2000) expired, we must decide if section 1367(d) can be applied to toll the statute of limitations on claims dismissed under an assertion of Eleventh Amendment immunity in federal court. The University argues that the Eleventh Amendment is an automatic jurisdictional bar preventing original and supplemental jurisdiction from ever attaching, thus preventing the application of tolling under section 1367(d). Respondents argue that the Eleventh Amendment is a waiva-ble affirmative defense that permits supplemental jurisdiction to attach until immunity is successfully asserted, thereby allowing the statute of limitations to be tolled under section 1367(d) until the case is dismissed from federal court.

Underlying the parties’ positions is a basic disagreement as to how the Eleventh Amendment operates as a jurisdictional defense. While we do not solve this dispute, we recognize that the Eleventh Amendment is a jurisdictional defense, but that it has unique characteristics not always shared with other limitations on federal jurisdiction. Indeed, the United States Supreme Court has long recognized Eleventh Amendment immunity as a limit on the reach of the federal judiciary. See, e.g., Seminole Tribe, 517 U.S. at 72-73, 116 S.Ct. 1114 (“The Eleventh Amendment restricts the judicial power under Article III.”); Pennhurst, 465 U.S. at 98, 104 S.Ct. 900 (“[T]he fundamental principle of sovereign immunity limits the grant of judicial authority in Art. III * * *.”); Missouri v. Fiske, 290 U.S. 18, 25, 54 S.Ct. 18, 78 L.Ed. 145 (1933) (“The Eleventh Amendment is an explicit limitation of the judicial power of the United States.”).

Nonetheless, while recognizing the Eleventh Amendment as a constraint on the exercise of federal court jurisdiction, the Court has also consistently acknowledged two characteristics that distinguish Eleventh Amendment immunity from typical subject-matter jurisdiction limitations. First, a party entitled to Eleventh Amendment protection may waive immunity and submit to federal court jurisdiction. See Clark v. Barnard, 108 U.S. 436, 447, 2 S.Ct. 878, 27 L.Ed. 780 (1883) (stating that Eleventh Amendment immunity is a “personal privilege” that a state may waive). This differs from typical jurisdictional requirements, such as diversity jurisdiction, where the parties cannot confer jurisdiction by waiver or consent. See Insurance Corp. of Ireland v. Compagnie des Bauxites de Guinee, 456 U.S. 694, 702, 102 S.Ct. 2099, 72 L.Ed.2d 492 (1982) (“[N]o action of the parties can confer subject-matter jurisdiction upon a federal court.”). Second, a federal court is not required to raise an Eleventh Amendment defense sua sponte, whereas jurisdictional defects in general must be raised by the court if not addressed by the parties. Compare Patsy v. Board of Regents, 457 U.S. 496, 515 n. 19, 102 S.Ct. 2557, 73 L.Ed.2d 172 (1982) (“[Bjecause the State may, under certain circumstances, waive this [Eleventh Amendment] defense, we have never held that it is jurisdictional in the sense that it must be raised and decided by this Court on its own motion”), with Insurance Corp. of Ireland, 456 U.S. at 702, 102 S.Ct. 2099 (“[A] court, including an appellate court, will raise lack of subject-matter jurisdiction on its own motion.”).

Given these distinct characteristics, the court of appeals determined that when a state law claim asserted in federal court is subject to an Eleventh Amendment immunity defense, the federal court has jurisdiction over that claim until the state defendant successfully asserts the Eleventh Amendment and the claim is dismissed. The University, on the other hand, argues that the Eleventh Amendment automatically bars federal court jurisdiction until immunity is waived. We need not answer this quintessentially federal question because, as explained below, our holding is not based on whether jurisdiction temporarily attaches. Rather, we must simply determine whether the Eleventh Amendment’s proscription on Congress’ power to extend federal judicial power over an un-consenting state allows Congress to impose tolling of a state statute of limitations for a claim against an unconsenting state defendant in state court. We conclude that application of the tolling provision violates the Eleventh Amendment, because the Eleventh Amendment prohibits Congress from extending the state’s liability to suit in state court via the state’s uncon-sented presence in federal court. Specifically, the Eleventh Amendment does not permit Congress to affect the liability of the University as to a state law claim in state court when the University did not consent to federal jurisdiction.

II.

The parties do not dispute that the Eleventh Amendment will bar a federal action against a state unless Congress has unequivocally abrogated the states’ sovereign immunity in enacting legislation pursuant to section 5 of the Fourteenth Amendment or the state has waived its sovereign immunity. This principle is supported by Supreme Court case law. See Seminole Tube, 517 U.S. at 55, 116 S.Ct. 1114. Section 5 is an affirmative grant of power giving Congress the authority to “enforce, by appropriate legislation,” the equal protection guarantees of the Fourteenth Amendment. U.S. Const, amend. XIV, § 5. Here, neither party contends that section 1367 effectuates a valid abrogation of state sovereign immunity.

Absent valid abrogation of the University’s sovereign immunity through section 1367, the federal court could not exercise jurisdiction over the supplemental claims against the University without its consent. The University did not consent; instead, it asserted Eleventh Amendment immunity as an affirmative defense in its answer in the federal district court, and later as a basis for the motion to dismiss in federal court. As a result, the action was dismissed from the federal court system and the MHRA claims were subsequently filed in state district court.

The tentacles of section 1367 were not completely severed when the federal district court dismissed the supplemental claims, however. Allowing tolling under section 1367(d) would alter the University’s position in state court by requiring the University to answer a claim in state court that would otherwise be barred by the state statute of limitations. Because Congress cannot, absent valid abrogation of sovereign immunity, extend federal judicial power against unconsenting states, it follows that Congress cannot impose a penalty on a state defendant for being named, without its consent, as a defendant in federal court. To allow such a result would, in effect, penalize the unconsenting state defendant for the other party’s failed attempt to sue the state in federal court. The Eleventh Amendment does not permit Congress to extend this federal judicial power over the states.

The constraints on federal power imposed by sovereign immunity are evident in decisions of the United States Supreme Court upholding assertions of sovereign immunity in contexts that fall outside the strict language of the Eleventh Amendment. See Atascadero State Hosp. v. Scanlon, 473 U.S. 234, 238 n. 2, 105 S.Ct. 3142, 87 L.Ed.2d 171 (1985) (“The Constitution never would have been ratified if the States and their courts were to be stripped of their sovereign authority except as expressly provided by the Constitution itself.”). This expansive scope of sovereign immunity is apparent in Alden v. Maine, 527 U.S. 706, 711-12, 119 S.Ct. 2240, 144 L.Ed.2d 636 (1999), in which a group of probation officers filed suit in federal district court against their employer, the State of Maine, alleging violations of the overtime provisions of the federal Fair Labor Standards Act, 29 U.S.C. §§ 201-19 (1994). After dismissal from the federal courts, the plaintiffs filed the same action in state court, as provided by the federal statute. See Alden, 527 U.S. at 712, 119 S.Ct. 2240. The state court also dismissed the action on the basis of sovereign immunity. See id. Concluding that a federal statutory provision that purports to allow private actions against unconsenting states in their own courts is unconstitutional, the Court held that “the States retain immunity from private suit in their own courts, an immunity beyond the congressional power to abrogate by * * * legislation.” Id. at 754, 119 S.Ct. 2240. Therefore, absent consent, Congress could not make the State of Maine subject to suit in state court for violations of the federal Fair Labor Standards Act. See Alden, 527 U.S. at 754,119 S.Ct. 2240.

This case differs from Alden in that the contested claims here are not federal claims, but rather state law claims from which the University has no immunity in state court. See Minn.Stat. § 363.01, subds. 17, 28 (2000) (defining “employer” under the MHRA to include the state, its departments, agencies, and political subdivisions). However, we read Alden to require that the University’s waiver of immunity be limited to the parameters set forth by state statute. 527 U.S. at 749, 119 S.Ct. 2240 (“[T]he immunity of a sovereign in its own courts has always been understood to be within the sole control of the sovereign itself.”). Thus, as defined by state law, the University’s exposure to MHRA suit in this case existed only for the 45-day period following respondents’ notification of dismissal of charges by the Department of Human Rights. See Minn. Stat. § 363.14, subd. 1(a)(1).

Furthermore, the state’s waiver of sovereign immunity for MHRA claims timely filed in state court does not diminish the University’s Eleventh Amendment protections from federal judicial power with respect to MHRA claims. The University’s “constitutional interest in immunity encompasses not merely whether it may be sued, but where it may be sued.” Pennhurst, 465 U.S. at 99, 104 S.Ct. 900. Therefore, the general waiver of immunity in state court is not a waiver of the University’s Eleventh Amendment immunity in the federal courts. See Pennhurst, 465 U.S. at 99 n. 9,104 S.Ct. 900.

Through the federal tolling provision, respondents seek to expand the University’s liability exposure by extending the time in which the MHRA claims can be filed in state court. Here, as in Alden, Congress has enacted legislation impacting an unconsenting state defendant’s liability for suit in that state’s own courts. The Eleventh Amendment does not allow this exercise of federal power over an uncon-senting state. As the Court stated in Alden,

Congress has vast power but not all power. When Congress legislates in matters affecting the States, it may not treat these sovereign entities as mere prefectures or corporations. Congress must accord States the esteem due to them as joint participants in a federal system, one beginning with the premise of sovereignty in both the central Government and the separate States.

527 U.S. at 758, 119 S.Ct. 2240. Congress, through application of section 1367(d), does not treat the University as a sovereign entity. Based on the principles articulated in Pennhurst and Alden, we conclude that application of section 1367(d) to toll the statute of limitations applicable to state law claims against an unconsenting state defendant first filed in federal court but then dismissed and brought in state court is an impermissible denigration of the University’s Eleventh Amendment immunity.

We also reject respondents’ argument that tolling is required in the interests of judicial economy. Judicial economy and efficiency were central principles behind the Judicial Improvements Act of 1990, which included section 1367. See 136 Cong. Rec. S17580 (1990). However, in Pennhurst, the United States Supreme Court rejected the judicial economy argument in the context of applying the Eleventh Amendment to pendent state claims, concluding that “such considerations of policy cannot override the constitutional limitation on the authority of the federal judiciary to adjudicate suits against a State.” 465 U.S. at 123, 104 S.Ct. 900; see also Fiske, 290 U .S. at 25-26, 54 S.Ct. 18 (“Considerations of convenience open no avenue of escape from the [Eleventh Amendment’s] restriction.”). Similarly, we conclude that policy considerations cannot override Eleventh Amendment limitations on the authority of Congress to affect claims against the University in state court.

Extension of the University’s exposure to suit in state court because a claim barred by the Eleventh Amendment has been filed against it in federal court is an infringement on the University’s Eleventh Amendment immunity. Accordingly, we hold that section 1367(d) does not toll the state statute of limitations on the MHRA claims against the University.

III.

Even though section 1367(d) does not apply to toll the statute of limitations, the court of appeals held, in the alternative, that the limitations period should be tolled under equitable principles. It is within the discretion of the district court to grant or deny equitable relief. See Nadeau v. County of Ramsey, 277 N.W.2d 520, 524 (Minn.1979). The district court’s decision will be reversed only upon a clear showing that such discretion has been abused. See id.

Respondents argue that equitable tolling is warranted because they elected to pursue their MHRA claims in federal court with the good faith belief that the federal court had jurisdiction over the claims. The district court acknowledged that at the time the federal actions were filed, there was some confusion surrounding the question of whether Eleventh Amendment immunity should apply to the federal Age Discrimination in Employment Act claim. The district court found, however, that under Pennhurst it was clear the federal district court could not exercise jurisdiction over the supplemental MHRA claims. Noting the limited scope of the equitable tolling remedy and failing to find any other grounds sufficient to invoke the remedy, the district court found that the respondents’ election to pursue their MHRA claims in federal court did not justify equitable tolling.

In reversing the district court, the court of appeals did not discuss the district court’s analysis or provide any reason to conclude that the district court abused its discretion. Our careful review of the record compels the conclusion that the district court did not abuse its discretion when it denied respondents the remedy of equitable tolling.

Because section 1367 does not toll the state statute of limitations for the MHRA claim against the University and because the district court acted within its discretion in deciding that equitable tolling did not apply, we reverse the court of appeals and

reinstate the district court’s judgment that the claims were not timely filed.

Reversed.

PAGE, J., took no part in the consideration or decision of this case.

      . The University brought the motion as a motion for summary judgment; however, the state district court’s May 28, 1999, order and memorandum granted the motion as a motion to dismiss.

      . Dicta in Wisconsin Dep’t of Corrections v. Schacht, 524 U.S. 381, 391, 118 S.Ct. 2047, 141 L.Ed.2d 364 (1998), indicates that whether Eleventh Amendment immunity is a matter of subject matter jurisdiction is “a question [the Court has] not decided.” More recently, however, the Court noted in Kimel v. Florida Bd. of Regents that ‘Tor over a century now, [the United States Supreme Court has] made clear that the Constitution does not provide for federal jurisdiction over suits against non-consenting States.” 528 U.S. at 73, 120 S.Ct. 631.

      . In support of the proposition that the Eleventh Amendment did not destroy original jurisdiction until it was successfully asserted by the University, the court of appeals also relied on the United States Supreme Court's statement in Schacht, that ‘‘[t]he Eleventh Amendment * * * does not automatically destroy original jurisdiction.” 524 U.S. at 389, 118 S.Ct. 2047. This reliance is misplaced because the issue before the Court in Schacht was whether the presence of a single claim barred by the Eleventh Amendment prohibited the federal court from exercising removal jurisdiction over any of the other claims. See Schacht, 524 U.S. at 385-86, 118 S.Ct. 2047. Thus, Schacht informs us that when a cause of action consists of several claims with independent sources of federal jurisdiction, and one of those claims is barred by the Eleventh Amendment, the original jurisdiction is not destroyed for the remaining claims not subject to the Eleventh Amendment. See Schacht, 524 U.S. at 391, 118 S.Ct. 2047. Schacht does not tell us whether the federal district court has jurisdiction over a claim barred by the Eleventh Amendment before sovereign immunity is asserted.