Wallis et al v. Centennial Insurance Company Inc et al

Filing 268

MEMORANDUM OF ORDER signed by Senior Judge William B. Shubb on 11/8/2013 JUDGMENT SHALL BE ENTERED in favor of defendants on all of plaintiffs' claims; in favor of plaintiffs on defendants' counterclaim for declaratory relief; in favor of defendants and against Dr. Wallis, Mr. Wallis, and Hygieia, jointly and severally, in the amount of $115,995.90 on defendants' counterclaim for indemnity; and in favor of third party defendant Mendoza on defendants' third party complaint. The Clerk of the Court is instructed to enter judgment accordingly. CASE CLOSED (Reader, L)

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UNITED STATES DISTRICT COURT

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EASTERN DISTRICT OF CALIFORNIA

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----oo0oo----

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DALE M. WALLIS, D.V.M., JAMES L.
WALLIS, an HYGIEIA BIOLOGICAL
LABORATORIES, INC., a California
Corporation,

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No. CIV. 08-02558 WBS AC

MEMORANDUM OF DECISION

Plaintiffs,
v.
CENTENNIAL INSURANCE COMPANY,
INC., a New York Corporation,
ATLANTIC MUTUAL INSURANCE CO.,
INC., a New York Corporation,
Defendants,
AND RELATED COUNTERCLAIMS AND
THIRD PARTY COMPLAINT.

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----oo0oo---Plaintiffs Dale M. Wallis, D.V.M. (“Dr. Wallis”), James

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L. Wallis (“Mr. Wallis”), and Hygieia Biological Laboratories,

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Inc. (“Hygieia”) filed this suit against defendants Centennial

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Insurance Company, Inc. (“Centennial”) and Atlantic Mutual

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Insurance Company (“Atlantic Mutual”) arising out of defendants’

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alleged wrongdoing in defending Dr. Wallis under a professional
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liability insurance policy.

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counterclaim against plaintiffs and a third party complaint

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(“TPC”) against plaintiffs’ attorney, Joanna Mendoza.

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Defendants subsequently filed a

After conducting a nine-day bench trial, the court

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finds in favor of defendants on both of plaintiffs’ claims.

The

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court further finds in favor of defendants on their counterclaims

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against plaintiffs.

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party defendant on defendants’ third party complaint.

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memorandum constitutes the court’s findings of fact and

Finally, the court finds in favor of third
This

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conclusions of law pursuant to Federal Rule of Civil Procedure

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52(a).

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I.

Factual and Procedural Background

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A.

Factual Background

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The underlying evidentiary facts are for the most part

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undisputed.

Most of the relevant communications were in writing.

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The letters and emails containing those communications are in

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evidence, and the court incorporates them into this decision.

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All objections as to relevance were reserved, and the court has

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considered only those exhibits and that testimony which may

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relate to the facts and issues discussed in this decision.

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Dr. Wallis is a research veterinarian who has been

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licensed to practice veterinary medicine in California since

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1988.

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president of Hygeia.

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Mr. Wallis is the former husband of Dr. Wallis and

In 1988, Dr. Wallis purchased a professional liability

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insurance policy (“the Policy”) through the American Veterinary

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Medical Association Professional Liability Insurance Trust.

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Wallis was issued the Policy from Centennial as a “member of the
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Dr.

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Atlantic Mutual Companies.”1

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(Ex. 1.)

In 1994, Dr. Wallis filed suit in the Superior Court of

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California, County of Yolo, against her former employer, Poultry

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Health Laboratories (“PHL”), alleging causes of action for unjust

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enrichment, fraud, conspiracy, constructive fraud, constructive

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trust, and conversion.

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against Dr. Wallis, Mr. Wallis, and Hygieia, alleging causes of

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action for declaratory relief, rescission, intentional

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interference with contractual advantage, fraud, misappropriation

In 1999, PHL filed a cross-complaint

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of trade secrets, conversion, breach of fiduciary duty, unfair

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competition, and conspiracy.

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On May 26, 1999, Centennial agreed to provide a defense

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of the PHL cross-complaint subject to a reservation of rights.

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(Ex. 15.)

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reservation of rights, plaintiffs retained independent counsel of

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their own choosing (“Cumis counsel”) pursuant to California Civil

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Code section 2860.

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Mendoza, then at Graham & James LLP, as Cumis counsel.

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Mendoza had previously been representing plaintiffs in their

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underlying suit against PHL.

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the firm Livingston & Mattesich.

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Because defendants provided the defense under a

Plaintiffs selected third party defendant

(Id.)

(Ex. 14.)

Subsequently, Mendoza joined

(Ex. 16.)

Plaintiffs successfully moved to bifurcate the trial on

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the complaint and the cross-complaint.

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the complaint, a jury awarded Dr. Wallis more than $2 million in

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compensatory damages and $500,000.00 in punitive damages.

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NNN.)

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In 2000, after trial on

(Ex.

The trial court also awarded Dr. Wallis a constructive
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For the purposes of this decision, the court makes no
distinction between Centennial and Atlantic Mutual.
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trust against PHL for more than one million dollars.

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court, however, did not enter final judgment because the cross-

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complaint was still pending.

(Id.)

The

(Id.)

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The first billing issues began in late 2002.

On

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December 23, 2002, Mendoza sent an email to Tanya Turner, a claim

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specialist at Atlantic Companies, informing Turner that the

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insurance company was past due on about $90,000.00 in legal fees,

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with $113,000.00 owed in total to Mendoza’s firm.

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Turner responded the next day that she would “handle the

(Ex. 26.)

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invoices” but informed Mendoza that Mendoza had failed to provide

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timely reporting on the case and that the “bills are consistently

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high.”

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she had heard of a requirement to send status reports to the

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insurer, and she did not recall when she received payment on the

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invoice.

(Id.)

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Mendoza testified that this was the first instance

In early 2003, the parties reached a tentative

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agreement to settle both plaintiffs’ complaint as well as PHL’s

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cross-complaint.

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settlement, contending that one of its provisions requiring

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defendants to pay Dr. Wallis $1 million directly was not covered

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under the Policy.

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(Ex. 29.)

Defendants did not agree to the

(Ex. 44.)

From July 2000 to November 2003, defendants paid a

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total of $932,743.82 to Livingston & Mattesich.

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fall of 2003, Mendoza formed the firm Malovos & Mendoza LLP.

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(Ex. 64.)

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reflects an unpaid balance due of $336.50.

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(Ex 305.)

In

Mendoza’s final invoice from Livingston & Mattesich
(Ex. 500.)

Mendoza testified that, through late 2003 and early
2004, Atlantic Mutual paid bills slowly, but that she received
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responses on bill inquiries “fairly quickly.”

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February 10, 2004, Mendoza sent Turner another status report and

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again complained that it had been “about 60 days” since receiving

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the last payment.

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received a payment of $71,985.53 on her December and January

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invoices, paying the balance due in full.

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November 2004, after receiving a payment of $100,239.41,

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Mendoza’s invoice reflected a balance of $107,479.63.

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at 181.)

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(Ex. 79.)

For example, on

Then, on February 23, 2004, Mendoza

(Ex. 502 at 75.)

By

(Ex. 502

In August 2005, Turner informed Mendoza that Mendoza’s

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bills would be subsequently subject to independent auditing.

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(Ex. 105.)

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$31,438.17 to Malovos & Mendoza for Mendoza’s January-April

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invoices.

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$79,027.00 in questioned fees and $1,471.84 in questioned

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expenses by the independent audit.

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to the deductions, contending that she had never received any

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billing guidelines from Atlantic Mutual.

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In September, Atlantic Mutual issued a check for

(Ex. 117.)

This payment reflected deductions of

(Ex 116.)

Mendoza objected

(Ex. 118.)

On October 4, 2005, Mendoza informed Turner that she

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would be raising her hourly rate from $200 an hour to $300 an

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hour.

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Mendoza a check for $77,442.80 for Mendoza’s fees from May 2005

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to August 2005.

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invoice billing $151,491.12.

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(Ex. 125.)

On October 28, 2005, Atlantic Mutual issued

The fees had been audited and reduced from an
(Ex. 127.)

The reductions and audits continued through 2006 and

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2007, with defendants asserting limitations on the amount of time

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spent on research, (Ex. 174), and objecting to the billing rates

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of Joel Baiocchi, a solo practitioner who had worked with Mendoza
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at Livingston & Mattesich and who was now assisting Mendoza on a

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contract basis, (Ex. 176).

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On October 19, 2007, defendants’ coverage attorney Gary

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Selvin sent Mendoza a letter seeking an accounting of Mendoza’s

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unpaid invoices in order to address the billing dispute.

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237.)

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for related clerical expenses and promised a $100,000 “good

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faith” payment toward the outstanding fees owed.

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Defendants sent the check to Malovos & Mendoza on October 22,

(Ex.

In the letter, Selvin promised to reimburse Mendoza $1,000

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2007.

(Ex. 239.)

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Mendoza.

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promising to get back to defendants.

(Id.)

This was the last check defendants would send

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On October 27, 2007, Mendoza sent a short response
(Ex. 240.)

On December 12, 2007, Selvin sent Mendoza another

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letter reiterating defendants’ request that Mendoza compile all

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outstanding bills in order to “move forward on the billing

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issues.”

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to the letter.

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Mendoza a total of $1,757,211.52 dating back to 2003.

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point did Mendoza seek payment directly from plaintiffs.

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(Ex. 255.)

Mendoza testified that she never responded

By that time, defendants had paid Malovos &
At no

In 2007, Mennemeier, Glassman & Stroud associated in as

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additional Cumis counsel to assist in the defense of the cross-

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complaint.

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$382,082.98.

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signed an agreement with defendants and is not seeking any

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further payments in the matter.

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(Ex. 181.)
(Ex. 305.)

Defendants ultimately paid the firm
Andy Stroud testified that the firm

In January 2007, the discovery referee in the PHL

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cross-action issued a report recommending sanctions under

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California Code of Civil Procedure section 128.5 against Dr.
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Wallis, Mr. Wallis, and Mendoza for the violation of a protective

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order and obtaining information that was inadvertently not filed

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under seal.

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the referee’s recommendations and awarded sanctions of $43,678.42

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jointly and severally against Mendoza and plaintiffs.

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(Ex. 514.)

In April 2007, the trial court adopted

(Id.)

Defendants agreed to fund the appeal of the sanctions

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motion under a reservation of rights, but refused to fund

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Mendoza’s defense.

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Appeal upheld the sanctions order, and the California Supreme

(Ex. 254.)

The Third District Court of

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Court ultimately denied review.

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Glassman & Stroud $115,995.90 to defend the sanctions motion on

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appeal.

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(Ex. 505.)

Defendants paid Mennemeier,

Dr. Wallis paid the sanctions award herself.

By the end of October 2008, at which time plaintiffs

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filed the complaint in this action, Mendoza’s invoices reflected

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a balance due of $872,927.59, some of which comprised interest on

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the difference between the previous payments defendants made and

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the total Mendoza sought.

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(Ex. 503 at 3.)

In May 2009, Mennemeier, Glassman & Stroud withdrew as

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Cumis counsel for plaintiffs, citing a breakdown in the attorney-

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client relationship, as well as “ongoing differences” with

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Mendoza.

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reasons for withdrawal were not related to Centennial or Atlantic

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Mutual.

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case but the trial judge denied her motion.

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(Ex. OOO at 120.)

At trial, Stroud testified that the

That month, Mendoza also attempted to withdraw from the

Subsequently, plaintiffs engaged Sedgwick, Detert,

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Moran & Arnold LLP to represent Dr. Wallis, (Ex. 349), and

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Michael Wilcox of Bullivant Houser Bailey, PC, to represent Dr.

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Wallis and Hygeia.

(Ex. 338.)

Wilcox, who had already been
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involved in the matter representing Mr. Wallis on a limited

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basis, (id.), testified that he did not understand his role to be

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Cumis counsel, but acknowledged that the insurers did pay his

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firm’s bills.

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of Bullivant testified they were not seeking to collect any

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unpaid fees from plaintiffs.

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Mendoza accused the firm of engaging in unethical conduct.

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491.)

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At trial, both Steve Roland of Sedgwick and Wilcox

Sedgwick later withdrew because
(Ex.

On July 20, 2009, the parties reached a mediated

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settlement of the PHL cross-action.

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handwritten agreement, defendants agreed to pay PHL $2 million,

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PHL agreed to pay plaintiffs $173,000 to compensate for a second

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sanctions award Hygieia paid, and PHL agreed to dismiss the

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cross-complaint against plaintiffs.

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Dr. Wallis to continue pursuing her complaint against PHL.

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(Ex. H.)

(Id.)

According to a

The agreement allowed
(Id.)

PHL dismissed the cross-complaint on July 6, 2010.

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Following the settlement of the cross-action, the trial court

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entered judgment on the 2000 trial of plaintiffs’ complaint

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against PHL.

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$1,944,997 on the jury’s fraud verdict, $500,000 on the jury’s

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punitive damages verdict, and $671,259 on the equitable claims.

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(Id.)

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claims, the trial judge offset the amount of compensatory damages

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awarded to Dr. Wallis by the amount of the settlement on PHL’s

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cross-complaint.

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“the offset.”

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(Ex. NNN at 10).

The judgment against PHL included

However, in calculating prejudgment interest on the

(Id.)

The parties refer to this calculation as

On October 17, 2013, however, the Third District Court
of Appeal reversed the trial court’s calculation of damages based
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on the offset and held that the trial judge should have

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calculated pre-judgment interest solely off Dr. Wallis’s

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judgment.

(Id.)

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B.

Procedural Background

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Plaintiffs filed this action on October 27, 2008,

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bringing claims for breach of the duty to defend and breach of

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the implied covenant of good faith and fair dealing, (Docket No.

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1), as well as a claim for breach of fiduciary duty that the

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court later dismissed on defendants’ motion for judgment on the

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pleadings.

(Docket No. 17.)

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filed counterclaims against plaintiffs for declaratory relief

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regarding the reasonableness of Cumis counsel’s fees and the duty

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to indemnify or defend plaintiffs for breach of the protective

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order.

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Mendoza alleging a single claim for declaratory relief and

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reimbursement of any and all sums paid for the purpose of

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defending Mendoza against the motion for sanctions.

(Docket No. 9.)

On December 23, 2008, defendants

Defendants also filed the TPC against

(Id.)

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On April 16, 2009, the court granted defendants’ motion

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to compel arbitration under California Civil Code section 2860(c)

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“with respect to the amount of attorney’s fees allegedly owed to

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Cumis counsel.”

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jurisdiction “over issues not squarely involving the calculation

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of Cumis counsel fees.”

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reaffirmed this Order on plaintiffs’ motion for reconsideration,

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holding that the “mere fact that plaintiffs’ Complaint includes

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causes of action for bad faith and breach of contract does not

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exempt the Cumis fee dispute from section 2860 arbitration.”

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(Docket No. 121.)

(Docket No. 41.)

(Id.)

The court retained

On June 25, 2010, the court

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In July 20, 2009, the PHL cross-action settled, but

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the settlement agreement also included terms purporting to settle

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the present action, with the exception of claims subject to the

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court’s April 16, 2009, order to compel arbitration.

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The agreement contained the provision that “this release will be

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reduced to a formal release to be executed by all parties.”

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(Id.)

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agreement is binding upon all signators, whether or not the

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parties execute a formal agreement.”

(Ex. H.)

The document went on to state, however, that “this

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(Id.)

On January 20, 2010, the court denied plaintiffs’

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motion to enforce the July 20, 2009, agreement.

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On June 25, 2010, the court denied defendants’ motion to enforce

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the agreement, finding that, because it was uncertain whether the

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July 2009 document was intended to be a completed agreement and

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the parties proceeded to dispute the terms of the agreement, it

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appeared “that the parties never had a meeting of the minds.”

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(Docket No. 120.)

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(Docket No. 74.)

In September 2010, Centennial and Atlantic Mutual were

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declared insolvent and placed into Rehabilitation Status by the

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Superintendent of Insurance of the State of New York.

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No. 122.)

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stayed.

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2012.

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(Docket

On December 7, 2010, the court ordered the action
(Docket No. 124.)

The court lifted the stay on May 1,

(Docket No. 141.)
On February 27, 2013, the court granted Atlantic

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Mutual’s motion for judgment on the pleadings, holding that

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plaintiffs had not sufficiently alleged that Atlantic Mutual was

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a party to the insurance policy.

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filed an amended complaint on March 20, 2013, (Docket No. 214),
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(Docket No. 212.)

Plaintiffs

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which the court ordered stricken after plaintiffs included new

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claims.

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operative complaint on April 4, 2013, bringing claims for

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declaratory relief, breach of insurance contract, and breach of

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the implied covenant of good faith and fair dealing.

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217).

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dismiss the declaratory relief claim.

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II.

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(Docket No. 216.)

Plaintiffs filed their current

(Docket No.

On July 19, 2013, the court granted defendants’ motion to
(Docket No. 228.)

Discussion
A.

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Plaintiffs’ Breach of Contract Claim
Plaintiffs first bring a claim for breach of contract,

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contending that defendants’ delay and reduction of payments to

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plaintiffs’ counsel constituted a breach of defendants’ duty to

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defend under the Policy.

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that Centennial and Atlantic did not breach their duty to defend.

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Further, even if defendants breached their duty, the court finds

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that plaintiffs did not suffer any damages as a result.

As set forth below, the court finds

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1.

Defendants Did Not Breach Their Duty to Defend

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Under the Policy, defendants had a duty to defend

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against covered third party claims by mounting and funding a

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defense.

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Cal. App. 4th 1185, 1189 (4th Dist. 2004).

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“providing competent counsel and paying all reasonable and

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necessary costs.”

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Indem. Co., 17 Cal. 4th 38, 57-58 (1997)).

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Gray Cary Ware & Freidenrich v. Vigilant Ins. Co., 114

Id.

This duty included

(citing Aerojet-Gen. Corp. v. Transp.

“Where, as here, an insurer provides a defense under a

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reservation of rights, a conflict of interest may arise between

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the insurer and its insured, providing the insured with the right

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to demand independent counsel,” also known as Cumis counsel.
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Id.

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at 1190 (citing San Diego Navy Fed. Credit Union v. Cumis Ins.

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Soc’y, Inc., 162 Cal. App. 3d 358, 364 (4th Dist. 1984)).

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statute, the insurer must pay Cumis counsel only those fees

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equivalent “to the rates which are actually paid by the insurer

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to attorneys retained by it in the ordinary course of business in

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the defense of similar actions in the community where the claim

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arose or is being defended.”

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otherwise provided for in an agreement between the parties,

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“[a]ny dispute concerning attorney’s fees . . . shall be resolved

Cal. Civ. Code § 2860(c).

By

Unless

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by final and binding arbitration by a single neutral arbitrator

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selected by the parties to the dispute.”

Id.

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In some circumstances amounting to a breach of the duty

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to defend, however, an insurer may forfeit its right to arbitrate

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under section 2860.2

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two actions, and payment of $130,579.40 out of $2,253,433.48

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billed in another, constituted a breach of the insurers’ duty to

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defend sufficient to extinguish their right to compel arbitration

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under section 2860.

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Co. of Pittsburg, Pa., 737 F. Supp. 2d 1013, 1017 (N.D. Cal.

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2010).

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tender of the insured’s defense precluded arbitration under

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In one case, the failure to pay at all in

Seagate Tech. LLC v. Nat’l Union Fire Ins.

In another, an insurer’s improper refusal to accept

“California Courts of Appeals [sic] have been somewhat
inconsistent in their treatment of the timing of arbitration
within larger coverage actions over the duty to defend.”
Arrowood Indem. Co. v. Bel Air Mart, No. 2:11-CV-00976-JAM, 2013
WL 2434830, at *5 (E.D. Cal. June 4, 2013). What is clear,
however, is that the trial court must initially resolve the
question of whether the insurer owes a duty to defend before
submitting any fee dispute to arbitration. See, e.g., Handy v.
First Interstate Bank, 13 Cal. App. 4th 917, 927 (2d Dist. 1993).
Such circumstances are not present here, as defendants do not
dispute they owed a duty to defend.
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section 2860.

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Midwest, No. CV007267NM(JWJX), 2001 WL 34050685, at *4 (C.D. Cal.

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May 22, 2001); see also Atmel Corp. v. St. Paul Fire & Marine,

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426 F. Supp. 2d 1039, 1047 (N.D. Cal. 2005) (“Here, it is

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undisputed that St. Paul did not defend Atmel in the Seagate

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Action, and thus the Court concludes defendant cannot avail

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itself of the protections and limitations set forth in § 2860.”);

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Janopaul + Block Cos. v. Superior Court, 200 Cal. App. 4th 1239,

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1248 (4th Dist. 2011) (holding that insurer who “waited more than

Concept Enters., Inc. v. Hartford Ins. Co. of the

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two years to accept the tender of defense and nearly three years

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to begin paying for that defense” could not arbitrate amount of

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fees owed before court determined issues of bad faith and breach

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of the duty to defend).3

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The present case is distinguishable.

Here, defendants

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acknowledged their duty to defend the plaintiffs against the PHL

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cross-complaint and agreed to provide independent Cumis counsel

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pursuant to section 2860.

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Concept Enterprises, 2001 WL 34050685, at *4, and Atmel, 426 F.

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Supp. 2d at 1047, wherein the insurer could not seek arbitration

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after making an improper refusal to defend, do not apply.

Thus the principles embodied in

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Although defendants did not pay Mendoza’s

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bills in full, they were required only to pay fees that were

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27
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3

Plaintiffs also rely on a recent California Court of
Appeal case holding that an insurer who initially refused to
accept tender of the defense in a matter for which it had a duty
to defend could not compel arbitration. J.R. Mktg., L.L.C. v.
Hartford Cas. Ins. Co., 216 Cal. App. 4th 1444 (1st Dist. 2013),
review granted and opinion superseded sub nom. Hartford Cas. Ins.
v. J.R. Mktg., 162 Cal. Reptr. 3d 1 (2013). Because the
California Supreme Court has granted review of the case, it is
now considered unpublished. Cal. R. Ct. 8.1105.
13

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“reasonable and necessary” and therefore withholding any portion

2

of fees cannot constitute a breach per se.

3

Inc. v. OneBeacon Am. Ins. Co., No. 11–CV–05318–RMW, 2012 WL

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3017689, at *5 (N.D. Cal. July 23, 2012) (“Aerojet does not

5

impose on an insurer a prophylactic duty to assume expenses

6

alleged by its insured to be ‘reasonable and necessary’ to

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minimize liability in a covered action.”).

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failed to offer any evidence establishing that the withheld fees

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were “reasonable and necessary” to their defense.

10

See NextG Networks,

Plaintiffs have

Moreover, the deductions to payments made by defendants

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here did not rise to the levels in Seagate, where the insurers

12

paid only $130,579.40 out of $2,253,433.48 billed, a percentage

13

below six percent.

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defendants had paid Mendoza’s firms $2,716,147.36 in attorneys’

15

fees through October 2007, (Ex. 305), after which time defendants

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made no further payments to Mendoza but continued paying other

17

Cumis counsel.

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this case, Mendoza claimed a balance due of $872,927.59.

19

503 at 3.)

20

to the cross-complaint, dated October 1, 2010, reflects a balance

21

of $1,288,039.46 owed, some of which comprised of interest on the

22

difference between the previous payments defendants made and the

23

total Mendoza sought.

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received a substantial amount of funding, the court finds the

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deficiencies in payments did not rise to the level of a breach of

26

defendants’ duty under the insurance contract, and defendants did

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not forfeit their right to arbitrate the fee dispute.

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737 F. Supp. 2d at 1015.

In contrast,

By the time plaintiffs filed the complaint in
(Ex.

Mendoza’s final invoice showing any activity relating

(Id. at 50.)

Because Mendoza still

Thus, plaintiffs’ claims seeking reimbursement of
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1

unpaid fees and costs to Mendoza and Baiocchi, most of whose fees

2

are billed on Mendoza’s invoices, are subject to section 2860

3

arbitration.

4

the full amount of fees sought by Mendoza and Baiocchi were

5

“reasonable and necessary,” defendants’ withholding of the full

6

amount of fees cannot serve as a basis for plaintiffs’ breach of

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contract and bad faith claims here.

8

Gen. Ins. Co., 196 Cal. App. 4th 1443, 1468 (4th Dist. 2011)

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(holding that breach of contract claim for unpaid fees depended

10

on arbitrator’s determination of what fees were reasonable, and

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awarding summary judgment to insurer on claim after insurer paid

12

amount owed under arbitration award).

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Without a determination from the arbitrator that

Cf. Behnke v. State Farm

Accordingly, because plaintiffs have not proved that

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defendants withheld reasonable or necessary fees to the defense,

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the court finds that defendants did not breach their duty to

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defend.4

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2.
4

Plaintiffs Did Not Suffer Damages from Any Breach

Plaintiffs also contend that defendants breached the
duty to defend by imposing billing guidelines on Cumis counsel,
citing dicta from one California Court of Appeal decision
hypothesizing that “[i]nsurer-imposed restrictions on discovery
or other litigation costs may well violate the insurer’s duty to
defend.” Dynamic Concepts, Inc. v. Truck Ins. Exch., 61 Cal.
App. 4th 999, 1009 (4th Dist. 1998). The court is not aware of
any published case applying this dicta and will not do so here.
Even though such limitations “may well” breach the duty to defend
in some instances, plaintiffs have not shown the billing
guidelines imposed by defendants were unreasonable or
unnecessary. In any event, the imposition of billing guidelines
is not actionable here since there is no evidence that
plaintiffs’ attorneys were precluded from engaging in any
specific discovery, hiring of expert witnesses, conducting
research, or pursuing any other litigation tactic. Nor have
plaintiffs demonstrated they suffered any damages as a result of
the billing guidelines.
15

1

Even if defendants breached their duty to defend,

2

plaintiffs have not shown by a preponderance of the evidence that

3

they suffered any damages as a result.

4

not actionable without damage.”

5

Interiors, Inc., 119 Cal. App. 4th 468, 473, (4th Dist. 2004).

6

“The general measure of damages for a breach of the duty to

7

defend an insured . . . are the costs and attorney fees expended

8

by the insured defending the underlying action.”

9

Cmty. Ass’n v. Golden Eagle Ins. Corp., 130 Cal. App. 4th 1078,

“A breach of contract is

Bramalea Cal., Inc. v. Reliable

Emerald Bay

10

1088-89 (4th Dist. 2005); see also Amato v. Mercury Casualty Co.,

11

53 Cal. App. 4th 825, 831 (2d Dist. 1997) (“Where an insured

12

mounts a defense at the insured’s own expense following the

13

insurer’s refusal to defend, the usual contract damages are the

14

costs of the defense.”).

15

for an unpaid liability to a third party, unless the plaintiff

16

proves to a reasonable certainty that the liability could and

17

would be enforced by the third party against the plaintiff or

18

that the plaintiff otherwise could and would satisfy the

19

obligation.”

20

Grp., Inc., 156 Cal. App. 4th 766, 776 (2d Dist. 2007).

“A plaintiff may not recover damages

Green Wood Indus. Co. v. Forceman Intern. Dev.

21

Here, plaintiffs have not persuaded the court that any

22

of them suffered damages from any act or omission of defendants.

23

Specifically, plaintiffs have not shown by a preponderance of the

24

evidence that they ever had, or will have, to make up the

25

shortfall between the fees Mendoza billed and the amount

26

defendants paid, much less that plaintiffs suffered any financial

27

impact defending against the cross-complaint.

28

App. 4th at 831.

See Amato, 53 Cal.

And whatever amount may be due to Mendoza
16

1

beyond the sums already paid will be adjudicated in the

2

arbitration.

3

full amount she billed does not make defendants liable beyond

4

what the arbitrator determines to be reasonable and necessary.

5

See Behnke, 196 Cal. App. 4th at 1468-69 (holding that insurer

6

was not liable to insured, even though insured had granted

7

security interest in insured’s residence to Cumis counsel to

8

cover unpaid fees, when insurer paid amount arbitrator deemed

9

reasonable).

10

Simply because plaintiffs say they owe Mendoza the

In addition, each attorney who also worked on the case

11

alongside Mendoza testified that he had received payment from

12

defendants, and each stated that there no was no intention to

13

seek further payment from plaintiffs.

14

testified that he believed all of his firm’s bills were paid by

15

the insurers.

16

looking for any payment, and was not owed any fees by plaintiffs.

17

And Stroud testified that plaintiffs did not owe his firm any

18

outstanding fees.

19

in payments to plaintiffs’ attorneys amounted to a breach of the

20

duty to defend, the court finds that plaintiffs did not suffer

21

any damages therefrom because none of the attorneys sought or

22

seek payment from plaintiffs.

23

actionable.

24

(finding plaintiff insured could not show it suffered any

25

contract damages when insurer and third party paid its legal

26

expenses).5

27

5

28

For example, Wilcox

Roland testified that his firm was no longer

Thus, even if defendants’ delay and reduction

Any breach, therefore, is not

See Emerald Bay, 130 Cal. App. 4th at 1088-89

Moreover, even if plaintiffs are correct that
defendants breached their duty to defend and therefore lost the
right to arbitrate under section 2860, plaintiffs are incorrect
17

1

Plaintiffs demonstrate only one potential instance of

2

pecuniary loss relating to owed attorneys’ fees or costs.

At

3

trial, Mr. Wallis testified that he personally paid Baiocchi in

4

relation to the settlement with the estate of a PHL principal

5

that was not party to the 2009 settlement.

6

no documentation to substantiate this payment, nor did he testify

7

that he ever sought reimbursement from defendants for this

8

payment.

9

whether these payments related to work done on the complaint, for

Mr. Wallis provided

Without such documentation, the court cannot determine

10

which the defendants owed no coverage, or the cross-complaint.

11

At the time, Mennemeier, Glassman & Stroud, as well as Mendoza,

12

were representing plaintiffs on the cross-complaint, while

13

Baiocchi was counsel of record on the underlying complaint, which

14

was not subject to the insurers’ duty to defend.

15

Mennemeier, Glassman & Stroud withdrew, Wilcox was attorney of

Later, after

16
17
18
19
20
21
22
23
24
25
26
27
28

that they would be entitled to all fees Mendoza billed regardless
of whether those fees where reasonable and necessary to
plaintiffs’ defense. See NextG Networks, Inc., 2012 WL 3017689,
at *5 (“[W]here the insurer refuses to defend, the insured may
recover both any excess judgment and the ‘expenses of
litigation.’ But an insured’s expenditures cannot be recoverable
simply because the insured elected to incur them; otherwise, an
insurer could be held liable for expenses that far exceed those
necessary to defend an action covered by the policy. Thus,
Aerojet and its progeny establish an objective standard,
requiring the court to consider ‘whether the benefits of the
[insured’s] strategy are worth the cost.’ Put another way,
Aerojet stands for the proposition that where an insurer refuses
to defend, it is liable for any costs it would reasonably have
incurred had it complied with its contractual obligation in the
first place.”) (internal citations omitted) (second alteration in
original). Here, plaintiffs have not provided any persuasive
evidence, in the form of expert testimony or even their own
testimony, that the withheld fees were reasonable and necessary
to the defense of the cross-complaint. Therefore, even assuming
plaintiffs are entitled to damages based on defendants’
withholding of fees, they have failed to carry their burden in
establishing the amount of those damages.
18

1

record for Mr. Wallis on the cross-complaint while Sedgwick

2

Detert, Moran & Arnold represented Dr. Wallis.6

3

plaintiffs have not shown by a preponderance of the evidence that

4

any payments made by Mr. Wallis to Baiocchi constituted damages

5

from defendants’ failure to defend against the cross-complaint.

6

Accordingly,

Because any fees owed to Mendoza and Baiocchi are

7

subject to arbitration under section 2680, Mendoza did not seek

8

any payment from plaintiffs, and the other attorneys who

9

represented plaintiffs have not sought and do not intend to seek

10

unpaid fees from plaintiffs, plaintiffs have not shown by a

11

preponderance of the evidence much less “to a reasonable

12

certainty” that any third party liability could and would be

13

enforced against them.

14

Accordingly, because plaintiffs have not satisfied the court that

15

they incurred any damages, much less that defendants breached the

16

duty to defend in the first place, the court will enter judgment

17

in favor of defendants on the breach of contract claim.

18

B.

19

Green Wood, 156 Cal. App. 4th at 776.

Plaintiffs’ Bad Faith Claim
Plaintiffs’ second claim is for breach of the implied

20

covenant of good faith and fair dealing.

21

discussed below, the court does not find that defendants engaged

22

in bad faith by unreasonably withholding any benefits under the

23
24
25
26
27
28

6

For the reasons

Sedgwick’s 2009 “to-do list,” which received
defendants’ approval, includes an entry for “Hanzo settlement.”
(Ex. 364.) Thus, while the evidence may support an inference
that this settlement was related to defense of the crosscomplaint, it also supports an inference that defendants were
already paying existing Cumis counsel to handle the settlement.
Whether Mr. Wallis’s payments to Baiocchi were reasonable and
necessary to the defense, therefore, may be addressed in the
section 2860 arbitration.
19

1

Policy.

2

plaintiffs have failed to show that they suffered any actionable

3

damages as a result.

4
5
6

Further, even if plaintiffs could show bad faith,

1.

Plaintiffs Have Not Shown that Defendants Dealt in
Bad Faith

“In order to establish a breach of the implied covenant

7

of good faith and fair dealing under California law, a plaintiff

8

must show: (1) benefits due under the policy were withheld; and

9

(2) the reason for withholding benefits was unreasonable or

10

without proper cause.”

11

987, 992 (9th Cir. 2001) (citing Love v. Fire Ins. Exch., 221

12

Cal. App. 3d 1136, 1151 (4th Dist. 1990)); see also Dynamic

13

Concepts, Inc. v. Truck Ins. Exch., 61 Cal. App. 4th 999, 1010

14

(4th Dist. 1998) (“A carrier is subject to tort liability for bad

15

faith only where it unreasonably fails to provide benefits due

16

under the policy or the law.”).

17

Guebara v. Allstate Ins. Co., 237 F.3d

The covenant of good faith and fair dealing “is implied

18

as a supplement to the express contractual covenants.”

Waller v.

19

Truck Ins. Exch., Inc., 11 Cal. 4th 1, 36 (1995).

20

contractual right, however, the implied covenant has nothing upon

21

which to act as a supplement, and should not be endowed with an

22

existence independent of its contractual underpinnings.”

23

(internal quotation marks omitted).

“Absent that

Id.

24

Initially, because plaintiffs have not proved a breach

25

of contract for the reasons discussed above, they have not shown

26

that any benefits due under the policy were withheld.

27

plaintiffs could prove they were denied benefits under the

28

policy, the court finds plaintiffs have failed to prove by a
20

Even if

1

preponderance of the evidence that “the reason for withholding

2

benefits was unreasonable or without proper cause.”

3

F.3d at 992.

4

Guebara, 237

The benefits which plaintiffs argue were withheld were

5

the fees allegedly due to plaintiffs’ Cumis counsel.

Plaintiffs

6

have not proved, however, that the failure to pay the full amount

7

of fees charged by Mendoza and Baiocchi was unreasonable.

8

the reasons discussed above, whether the fees and costs charged

9

by Mendoza and Baiocchi were reasonable and necessary to the

For

10

defense is a question to be determined by the section 2860

11

arbitration, not by this court.

12

that defendants owe an amount less than the amount billed by

13

Mendoza and Baiocchi, defendants’ decision to dispute the

14

billings would not have been unreasonable.

15

App. 4th at 1470 (holding that insurer’s conduct in disputing

16

billed amount of fees and costs by plaintiff’s attorney was

17

reasonable and not bad faith because arbitrator awarded amount

18

less than the amount originally billed).

19

yet occurred, and any determination made by this court as to its

20

result would be improperly speculative.

21

breach of contract claim, plaintiffs have not provided any

22

testimony--expert or otherwise--or other evidence that the full

23

amount of fees charged was reasonable or that the failure to pay

24

in full was unreasonable.

25

to pay the full amount of fees charged by Mendoza and Baiocchi

26

cannot serve as a basis for plaintiffs’ claim of bad faith.

If the arbitrator determines

See Behnke, 196 Cal.

The arbitration has not

As with plaintiffs’

Accordingly, the refusal by defendants

27

Plaintiffs also argue that defendants acted

28

unreasonably by forcing plaintiffs to accept a settlement of the
21

1

PHL cross-complaint despite Dr. Wallis’s preference to “seek

2

vindication” and continue litigation.

3

is not clear whether this issue is even properly before the

4

court.

5

in an amended complaint filed March 20, 2013.

6

The court had previously given plaintiffs leave to amend after

7

granting Atlantic Mutual’s motion for judgment on the pleadings,

8

holding that plaintiffs had not sufficiently alleged that

9

Atlantic Mutual was a party to the insurance policy.

As a threshold matter, it

Plaintiffs added the allegations regarding the settlement
(Docket No. 214.)

(Docket No.

10

212.)

11

new allegations regarding the settlement, the court ordered the

12

amended complaint stricken.

13

current operative complaint, (Docket No. 217), does not contain

14

these allegations.

15

claims in defendants’ trial brief, (Docket No. 246), and the

16

court has ruled that neither side may amend their pleadings to

17

conform to proof because doing so would prejudice the other side.

18

See Fed. R. Civ P. 15(b)(1) (“The court should freely permit an

19

amendment when doing so will aid in presenting the merits and the

20

objecting party fails to satisfy the court that the evidence

21

would prejudice that party’s action or defense on the merits.”);

22

see also Davis & Cox v. Summa Corp., 751 F.2d 1507, 1522 (9th

23

Cir. 1985) (“The question whether the parties have impliedly

24

consented to the trial of an issue lies within the discretion of

25

the trial court.”), superseded by statute on other grounds as

26

stated in Northrop Corp. v. Triad Int’l Mktg. S.A., 842 F.2d 1154

27

(9th Cir. 1988) (per curiam).

28

However, after plaintiffs’ amended complaint included the

(Docket No. 216.)

Plaintiffs’

Defendants objected to the inclusion of the

More importantly, assuming the issue is properly before
22

1

the court, plaintiffs have failed to prove by a preponderance of

2

the evidence that defendants acted unreasonably with regard to

3

the settlement negotiations.

4

because plaintiffs faced a potential adverse judgment of $15-20

5

million, settlement was a superior option to further litigating

6

the cross-complaint.

7

case to be a good one for settlement based on the significant

8

downside risk facing plaintiffs.

9

assessment that plaintiffs faced a potential adverse judgment of

Multiple attorneys testified that,

Stroud testified that he considered the

Roland corroborated the

10

$15-20 million.

11

credible and persuasive in their determination that settlement

12

was in the best interests of Dr. and Mr. Wallis.

13

Wallis testified at trial that she made her own educated decision

14

to settle the cross-complaint, in an effort to protect herself

15

against the prospect of significant liability.

16

learned anything from the demeanor of Dr. Wallis while testifying

17

in this case it is that she is a strong willed individual who

18

makes up her own mind on decisions that may affect her interests.

19

The court cannot believe that she could be coerced into any

20

decision.

21

The court finds the testimony of these witnesses

And even Dr.

If the court

Plaintiffs further argue that defendants committed bad

22

faith at the mediation by lying about the impending insolvency of

23

Centennial and Atlantic Mutual in order to induce settlement.

24

Absent proof that defendants knowingly misrepresented their

25

financial status, however, the fact that Centennial and Atlantic

26

Mutual lasted longer than defendants predicted does not point to

27

any bad faith, nor does it change the remote possibility that the

28

insurers would have survived the duration of an entire trial and
23

1

appeal of the cross-complaint.

2

the insurers faced, at the very least, an uncertain financial

3

future, the decision to settle was entirely reasonable.7

4

Accordingly, even if settlement was a result of some subtle

5

pressure by defendants, the court does not find that any actions

6

taken by defendants with respect to the settlement negotiations

7

were “unreasonable or without proper cause.”

8

at 992.

9

Given the undisputed fact that

Guebara, 237 F.3d

Finally, plaintiffs have not proved that defendants

10

unreasonably interfered with the ability of counsel to litigate

11

the case.

12

themselves caused much of the difficulties that ultimately

13

resulted in the withdrawal of counsel.

14

testified, and the record shows, that Mennemeier, Glassman &

15

Stroud sought to withdraw from its representation because of a

16

breakdown in the attorney-client relationship, as well as

17

“ongoing differences” with Mendoza.

18

Stroud specifically testified that the reasons for withdrawal

19

were not related to Centennial or Atlantic Mutual.

20

Roland testified, and the record reflects, that Sedgwick Detert,

21

Moran & Arnold withdrew because Mendoza accused the firm of

22

engaging in unethical conduct.

23

best evidence of any interference are disparaging comments

24

regarding plaintiffs made by Selvin to attorneys from PHL.

25

474.)

26
27
28

Instead, the record shows that Mendoza and plaintiffs

For example, Stroud

(Ex. OOO at 120.)

(Ex. 491.)

Further,

In addition,

Perhaps plaintiffs’

(Ex.

While these remarks are not of the kind that should be
7

Any representations by defendants during mediation
regarding their impending insolvency may simply have been efforts
to put pressure on PHL--not plaintiffs--to settle the crosscomplaint.
24

1

condoned, they occurred after the cross-complaint settled and are

2

insufficient to support a finding of bad faith on their own.

3

Thus, because the record shows neither that any

4

reductions in payments affected plaintiffs’ representation nor

5

that defendants otherwise interfered with the defense, plaintiffs

6

have not proven that they were unreasonably deprived of a policy

7

benefit of full representation in defense of the cross-

8

complaint.8

9

2.

10

Plaintiffs Did Not Suffer Damages as a Result of
Any Act or Omission of Defendants

11

Even if plaintiffs had sufficiently demonstrated an

12

unreasonable denial of benefits under the Policy, plaintiffs have

13

completely failed to prove any damages as a result of defendants’

14

alleged bad faith.

15

On the outset, plaintiffs’ could not recover unpaid

16

attorneys’ fees as damages for their claim of bad faith for the

17

same reasons stated with regard to their breach of contract

18

claim.

19

attorneys’ fees owed to Mendoza and Baiocchi is subject to

As with the breach of contract claim, the amount of

20
8

21
22
23
24
25
26
27
28

Plaintiffs’ contentions that defendants otherwise
interfered with the ability of counsel to litigate the case are
without merit and unsupported by the evidence. For example,
plaintiffs claim that defendants prevented Mennemeier, Glassman &
Stroud from fully litigating the defense, resulting in an
extensive “to-do list” by the time that Sedgwick Detert, Moran &
Arnold assumed the defense in 2009. (Ex. 364.) The court does
not find such accusations credible, given that Roland testified
that defendants approved all items on Sedgwick’s list, save for
the funding of a mock trial. Plaintiffs’ protestations that
Mennemeier, Glassman & Stroud failed to advance the litigation
especially ring hollow given the time and effort the firm had to
expend opposing the bad faith sanctions levied against plaintiffs
and Mendoza for their behavior during the litigation.
25

1

arbitration, and plaintiffs’ other counsel do not claim that

2

plaintiffs owe them anything.

3

Aside from fees, plaintiffs argue that defendants’

4

alleged bad faith resulted in (1) the failure to complete the

5

purported settlement in 2003; (2) the inability of their

6

attorneys to complete all of the tasks necessary to marshal their

7

defense; and (3) a weakened position at the 2009 mediation.

8

if all that were so, it resulted in no economic loss to

9

plaintiffs because it was defendants, not plaintiffs, who

Even

10

ultimately paid the full amount of the 2009 settlement, and any

11

remaining damages would be the attorneys’ fees incurred after

12

2003, which, for the reasons stated above, are not actionable.

13

Despite plaintiffs’ contentions that they would have

14

prevailed if Mendoza had fully litigated the cross-complaint to a

15

verdict, the court finds that such an outcome is implausible.

16

More importantly, even if plaintiffs had prevailed on the cross-

17

complaint at trial, the best result they could have achieved

18

would be a verdict that required them to pay nothing on the

19

cross-complaint.

20

settlement, the net economic result to plaintiffs was the same as

21

if they had prevailed at trial – they paid nothing.

22

have not demonstrated by a preponderance of the evidence that,

23

but for defendants’ conduct, it was more likely than not that

24

plaintiffs would have received a superior outcome from the

25

settlement, in which defendants paid PHL $2 million and PHL

26

agreed to dismiss the cross-complaint against plaintiffs.

27

Plaintiffs, therefore, have not proven any economic damages from

28

the alleged bad faith of defendants in litigating, and ultimately

Because defendants bore the full cost of the

26

Plaintiffs

1

settling, the cross-complaint.

2

Plaintiffs argue that they suffered damages as a result

3

of the 2009 settlement because the state trial court applied the

4

“offset” to reduce the amount of prejudgment interest owed to

5

plaintiffs on their 2000 jury verdict.

6

essentially boils down to the theory that, had Mendoza received

7

full funding from the insurers, she would have maintained the

8

lead in litigating the defense of the cross-complaint and would

9

have heeded Dr. Wallis’s wishes not to settle, resulting in a

Plaintiffs’ argument

10

successful defense verdict on the cross-complaint and no offset.

11

However, this theory is counterfactual, entirely speculative, and

12

insufficient to carry plaintiffs’ burden of proof.

13

First, there is no indication that full funding from

14

the insurers would have resulted in any different result in the

15

case.

16

complaint testified at trial that the reduced payments from the

17

insurers did not impact their defense of the case.

18

testified that while the payment issues impacted who could staff

19

the case at Mennemeier, Glassman & Stroud, the firm did not make

20

any different strategic choices based on the payments.

21

also testified that the payment issues did not affect the firm’s

22

representation on the case, and that he did not recall plaintiffs

23

ever stating a concern with his firm adequately representing

24

them.

25

expressed some concerns with billing reductions, Stroud never

26

indicated that the issue was impacting Stroud’s representation of

27

plaintiffs.

28

Multiple attorneys who worked on defense of the cross-

Stroud

Stroud

Wilcox affirmed this, testifying that while Stroud had

Second, as to the consequence of the offset, any
27

1

potential damages to plaintiffs as a result of the offset are now

2

entirely speculative given that the California Court of Appeal

3

overruled the trial court’s application of the offset, rendering

4

any damages from the offset moot.

5

fundamental that ‘damages which are speculative, remote,

6

imaginary, contingent, or merely possible cannot serve as a legal

7

basis for recovery.”

8

953, 989 (4th Dist. 2001) (citing Frustuck v. City of Fairfax,

9

212 Cal. App. 2d 345, 367–68 (1963)).

(See Ex. NNN.)

“[I]t is

Piscitelli v. Friedenberg, 87 Cal. App. 4th

Although the offset could

10

be re-instated by the Court of Appeal on rehearing or by the

11

California Supreme Court on review, plaintiffs have failed to

12

convince the court that it is more likely than not that such an

13

outcome would occur.

14

this court concludes it is highly unlikely that it will be

15

overturned.

16

rare for the California Supreme Court to overrule an appellate

17

decision, and the court finds such an outcome especially unlikely

18

with an opinion as well-reasoned as this one.

19

damages to plaintiffs from the offset are speculative, uncertain,

20

and insufficient to merit a finding of bad faith.

21

To the contrary, having read the opinion,

The court agrees with Stroud’s testimony that it is

Accordingly, any

Plaintiffs also argue that bad faith on the part of

22

defendants caused damages from the failed defense of the

23

sanctions motion.

24

Glassman & Stroud, plaintiffs’ defense counsel on the sanctions

25

motion and appeal, withdrew from representing plaintiffs because

26

of differences with the clients and co-counsel, not because of

27

any actions by defendants.

28

below, defendants did not ultimately have a duty to defend

However, as discussed above, Mennemeier,

(Ex. OOO.)

28

Further, as discussed

1

plaintiffs against the sanctions motion.

2

not establish a causal relationship between defendants’ actions

3

and the sanctions award against plaintiffs, the failure to defend

4

the sanctions motion cannot sustain a claim of bad faith.

5

Because plaintiffs do

Plaintiffs seek reimbursement for attorneys’ fees

6

incurred defending against the offset in state court on appeal

7

after the cross-complaint had settled, but do not provide any

8

authority tending to show that this fell within defendants’ duty

9

to defend against the cross-complaint.9

Plaintiffs also seek

10

future legal fees and costs resulting from defendants’ failure to

11

defend against the offset, as well as future legal fees

12

associated with plaintiffs’ efforts to protect their intellectual

13

property rights, but do not provide any factual foundation to

14

substantiate these claims.

15

remote, imaginary, contingent, or merely possible cannot serve as

16

a legal basis for recovery,” Piscitelli, 87 Cal. App. 4th at 989,

17

these assertions do not satisfy plaintiffs’ burden of proving

18

they are entitled to relief on their bad faith claim.

19

As “damages which are speculative,

Finally, plaintiffs’ bad faith claim seeks additional

20

damages for emotional distress.

Emotional distress damages are

21

recoverable in bad faith cases “only when the insureds have

22

suffered a financial loss.”

Waters v. United Servs. Auto. Ass’n,

23
24
25
26
27
28

9

Plaintiffs contend that defendants had a duty to fund
the defense of all issues “reasonably related” to the crosscomplaint and argue that the offset was such an issue. Safeway
Stores, Inc. v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., 64
F.3d 1282, 1289 (9th Cir. 1995). Safeway, however, does not
stand for such a proposition, instead involving the apportionment
of defense costs between an uninsured corporation and its insured
officers and directors. Id.
29

1

41 Cal. App. 4th 1063, 1069 (2d Dist. 1996).

2

must be “actual, not merely potential.”

3

Co., 169 Cal. App. 4th 1197, 1214 (4th Dist. 2009).

4

emotional distress damages are recoverable in bad faith cases

5

“only when the insureds have suffered a financial loss,” Waters,

6

41 Cal. App. 4th at 1069, and the court has found that plaintiffs

7

have failed to prove a financial loss, plaintiffs are not

8

entitled to any damages for emotional distress.

9

Such financial loss

Major v. W. Home Ins.
Because

Moreover, the court is not persuaded that Dr. Wallis or

10

any other plaintiff suffered emotional distress as a result of

11

any act or omission on the part of defendants.

12

emotional distress Dr. Wallis may have suffered is just as likely

13

to have been caused by the prolongation of litigation, adverse

14

rulings received along the way, and the stress of litigation

15

itself.

16

emotional distress she suffered as a result of Mendoza’s

17

emotional distress during the litigation, there is no authority

18

for the proposition that a client may recover vicariously for the

19

emotional distress of her attorney.

20

Whatever

Although Dr. Wallis testified at length regarding the

In sum, plaintiffs have not shown that they suffered

21

any actionable harm, much less that defendants actually committed

22

bad faith by unreasonably withholding policy benefits.

23

Accordingly, because plaintiffs have failed to show by a

24

preponderance of the evidence that they are entitled to relief on

25

their bad faith claim, the court will enter judgment in favor of

26

defendants on that claim.10

27
28

10

Because plaintiffs do not satisfy their burden of
proving defendants unreasonably withheld policy benefits,
30

1

C.

2

Defendants’ Counterclaim for Declaratory Relief
Defendants’ counterclaim first seeks a judicial

3

determination regarding the reasonableness of plaintiffs’ Cumis

4

counsel fees.

5

motion to compel arbitration with respect to the amount of

6

attorney’s fees allegedly owed to Cumis counsel.”

7

41.)

8

squarely involving the calculation of Cumis counsel fees.”

9

On June 25, 2010, the court reaffirmed this Order on plaintiffs’

On April 15, 2009, the court granted “defendants’

(Docket No.

The court retained jurisdiction, however, “over issues not
(Id.)

10

motion for reconsideration, holding that the “mere fact that

11

plaintiffs’ Complaint includes causes of action for bad faith and

12

breach of contract does not exempt the Cumis fee dispute from

13

section 2860 arbitration.”

14

(Docket No. 121.)

Defendants’ counterclaim for declaratory relief

15

regarding the reasonableness of plaintiffs’ attorneys’ fees fits

16

squarely within the court’s previous order to arbitrate Cumis

17

counsel fees.

18

arbitration ruling, and, absent a determination from the

19

arbitrator, the court cannot grant such relief.

20

court will enter judgment for plaintiffs on the counterclaim

21

regarding the reasonableness of plaintiffs’ Cumis counsel fees.

22

D.

The question of reasonableness depends on the

Accordingly, the

Defendants’ Counterclaim Regarding Duty to Defend or

23

Indemnify Breach of the Protective Order

24

Defendants also seek a declaration that they had no

25

duty to defend or indemnify plaintiffs or Mendoza in connection

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27
28

plaintiffs are not entitled to damages in the form of the
expenses incurred seeking unpaid benefits under Brandt v.
Superior Court, 37 Cal. 3d 813 (1985).
31

1

with the breach of the protective order and subsequent sanctions.

2

Defendants seek reimbursement for fees and costs paid to

3

plaintiffs’ counsel to defend against and appeal the sanctions

4

motion.

5

The Supreme Court of California has recognized that an

6

insurer that has provided a defense under a reservation of rights

7

“has a right of reimbursement that is implied in law as quasi-

8

contractual” for defense costs with respect to claims that “are

9

not even potentially covered” by the applicable policy.

Buss v.

10

Superior Court, 16 Cal. 4th 35, 50-51 (1997).

11

to reimbursement is based on the law of restitution and “such a

12

right runs against the person who benefits from ‘unjust

13

enrichment’ and in favor of the person who suffers loss thereby.”

14

Id. at 51.

15

bearing of unbargained-for defense costs.”

16

thus entitled to reimbursement if they can show by a

17

preponderance of the evidence that defendants paid certain fees

18

or expenses solely allocable to uncovered issues.

19

An insurer’s right

Such “unjust enrichment” stems from “the insurer’s
Id.

Defendants are

Id. at 53.

California Insurance Code section 533 states that “[a]n

20

insurer is not liable for a loss caused by the wilful act of the

21

insured.”

22

sanctions under Code of Civil Procedure section 128.5, for bad

23

faith conduct or tactics in engaging in litigation which is

24

totally and completely without merit, cannot be shifted to that

25

litigant’s insurer.”

26

App. 4th 1527, 1531 (1992).

27

shifted to an insurer by law, it follows that such a penalty is

28

“not even potentially covered” by an insurance policy.

Pursuant to this provision, “a court-imposed award of

Cal. Cas. Mgmt. Co. v. Martocchio, 11 Cal.
Because such sanctions cannot be

32

Buss, 16

1

Cal. 4th at 50.

2

Here, plaintiffs and Mendoza were subject to court-

3

ordered sanctions under section 128.5 to pay $43,678.00 jointly

4

and severally.

5

sanctions and claim that the various state courts, including the

6

discovery referee, trial court, court of appeal, and California

7

Supreme Court, all ruled incorrectly, the underlying merits of

8

the sanctions motion are immaterial for the purposes of coverage

9

under section 533.

Although plaintiffs and Mendoza dispute the

The question is not whether the actions of

10

plaintiffs and Mendoza were in fact willful.

11

whether, in order to impose sanctions, the trial court

12

necessarily had to find that plaintiffs and Mendoza engaged in

13

conduct proscribed the statute.

14

11 Cal. App. 4th at 1534 (“Such bad faith actions or tactics are

15

. . . acts which are always intentional and wrongful and in which

16

harm is always inherent as a matter of law.

17

‘wilful’ acts for which insurance coverage is always proscribed

18

by Insurance Code section 533 . . . .”)

19

order necessarily entailed a finding of conduct precluded from

20

insurance coverage under section 533, plaintiffs were not even

21

potentially covered under the policy, and defendants may seek

22

reimbursement for costs expended in defending against the

23

sanctions.

24
25
26
27
28

The question is

And, under Martocchio, it did.11

They are patently

Because the sanctions

Buss, 16 Cal. 4th at 50.
Because Centennial and Atlantic Mutual had no duty to

11

Although Gumabao v. Gumabao, 150 Cal. App. 3d 572, 577
(2d Dist. 1984) suggests that a court may impose sanctions under
section 128.5 for conduct that is not necessarily willful, the
court finds the analysis of Martocchio controlling here, as that
case addresses specifically whether such sanctions can be covered
by insurance under section 533.
33

1

defend against the sanctions motion, they are entitled to

2

reimbursement of the attorneys’ fees and costs paid to defend

3

plaintiffs against the sanctions.

4

defendants paid $115,995.90 to Mennemeier, Glassman & Stroud over

5

the course of the defense of the sanctions motion appeal.12

6

505.)

7

$115,995.90 against plaintiffs on the counterclaim.

8

The evidence demonstrates that

(Ex.

Therefore, defendants are entitled to a judgment of

E.

9

Defendants’ TPC Against Mendoza
Defendants’ TPC seeks reimbursement from Mendoza for

10

sums the insurers expended defending Mendoza against the

11

sanctions motion.

12

may not obtain reimbursement for non-covered claims from defense

13

counsel under ordinary circumstances,” but claim, without citing

14

any authority, that “these are not ordinary circumstances.”

15

(Defs.’ Resp. to Pls.’ Trial Brs. at 26:22-25 (Docket No. 250).)

16

Further, the evidence shows that defendants expressed their

17

desire not to fund the defense of Mendoza on the appeal of the

18

sanctions order, (Ex. 254), and defendants have not demonstrated

19
20
21
22
23
24
25
26
27
28

12

Defendants concede, however, “that an insurer

Plaintiffs contend that defendants cannot seek damages
for their counterclaim because defendants failed to list any
damages on their Rule 26 disclosures. See Fed. R. Civ. P.
26(a)(1)(A)(iii) (requiring, before trial, “a computation of each
category of damages claimed by the disclosing party”) The court
has independently reviewed the evidence submitted on the issue of
attorneys’ fees incurred during the sanctions appeal. From those
records the amount of fees paid by defendants to fund the
sanctions appeal can be readily determined with reasonable
certainty. Accordingly, the court finds failure to set forth the
amount in the Rule 26 disclosure harmless. See Fed. R. Civ. P.
37(c)(1) (“If a party fails to provide information . . . as
required by Rule 26(a) or (e), the party is not allowed to use
that information . . . to supply evidence on a motion, at a
hearing, or at a trial, unless the failure was substantially
justified or is harmless.”).
34

1

which, if any, payments made to Mendoza’s firm supported this

2

work.

3

Centennial are intertwined between the defense of [plaintiffs]

4

and [Mendoza], such that the legal fees and costs cannot

5

reasonably be allocated between either of them.”

6

Br. at 26:13-15 (Docket No. 246).)

7

defendants failed to prove that Mendoza improperly received any

8

fees relating to her own defense against the sanctions motion,

9

they are not entitled to reimbursement and the court will ender

10

In fact, defendants concede that the “amounts paid by

(Defs.’ Trial

Accordingly, because

judgment in favor of Mendoza on the TPC.

11

For the foregoing reasons, JUDGMENT SHALL BE ENTERED in

12

favor of defendants on all of plaintiffs’ claims; in favor of

13

plaintiffs on defendants’ counterclaim for declaratory relief; in

14

favor of defendants and against Dr. Wallis, Mr. Wallis, and

15

Hygieia, jointly and severally, in the amount of $115,995.90 on

16

defendants’ counterclaim for indemnity; and in favor of third

17

party defendant Mendoza on defendants’ third party complaint.

18

The Clerk of the Court is instructed to enter judgment

19

accordingly.

20

Dated:

November 8, 2013

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25
26
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