Kinsale Insurance Company v. Sky High Sports LLC, et al.

Filing 56

MEMORANDUM AND ORDER signed by District Judge Morrison C. England, Jr. on 05/24/17 ORDERING that the 37 Motion for Summary Judgment is GRANTED IN PART and DENIED IN PART as follows: Plaintiffs Motion is GRANTED as to Defendants' liability f or breach of contract arising from the failure to pay unreimbursed deductibles and insurance premiums pursuant to the Insurance Contracts. Plaintiff's motion is DENIED, without prejudice, with regard to the determination of specific amounts owe d by each Defendant, and with regard to any prejudgment interest owed on those amounts, since the amounts owed remain unclear. The parties are ordered to schedule a prove-up hearing concerning the narrow issue of how much each Defendant is liable for in unpaid insurance premiums and deductibles under the Insurance Contracts, and the question of whether prejudgment interest should be awarded on any said amounts. (Benson, A)

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1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 EASTERN DISTRICT OF CALIFORNIA 10 11 12 KINSALE INSURANCE COMPANY, an Arkansas corporation, Plaintiff, 13 14 15 16 17 18 19 20 21 22 23 24 v. No. 2:14-cv-02086-MCE-DB MEMORANDUM AND ORDER SKY HIGH SPORTS CONCORD LLC, a California and Nevada Limited Liability Company, SKY HIGH SPORTS NASHVILLE LLC, a Nevada and Tennessee Limited Liability Company, SKY HIGH SPORTS ONTARIO LLC, a California and Nevada Limited Liability Company, SKY HIGH SPORTS OPPORTUNITIES LLC, a California and Nevada Limited Liability Company, SKY HIGH SPORTS SACRAMENTO LLC, a California and Nevada Limited Liability Company, SKY HIGH SPORTS SANTA CLARA LLC, a California and Nevada Limited Liability Company, Defendants. 25 26 In bringing this lawsuit, Kinsale Insurance Company (“Plaintiff”) seeks redress 27 from Sky High Sports Opportunities LLC (“Opportunities”) and three Sky High Sports 28 franchisees: Sky High Sports Santa Clara LLC, Sky High Sports Sacramento LLC, and 1 1 Sky High Sports Concord LLC (“Ownership Companies”), (collectively “Defendants”).1 2 FAC, ECF No. 35, at 1:24–2:5. Presently before the Court is Plaintiff’s Motion for 3 Summary Judgment (“Plaintiff’s Motion”), which is premised on the contention that 4 Plaintiff is entitled to recover unpaid insurance premiums and unreimbursed deductibles 5 from Defendants. Pl.’s Mot., ECF No. 37; Pl.’s P & A Mot., ECF No. 37-1, at 3:14–18. 6 Defendants filed an Opposition to Plaintiff’s Motion, to which Plaintiff submitted a Reply. 7 Defs.’ Opp., ECF No. 51; Pl.’s Reply, ECF No. 53. 8 9 For the reasons set forth below, the Court GRANTS in part and DENIES in part Plaintiff’s Motion, ECF No. 37.2 10 11 BACKGROUND 12 13 Defendants franchise and/or operate amusement centers with trampolines, foam 14 pits, and snack bars at various locations across the United States. FAC ¶ 13. Plaintiff is 15 an Arkansas corporation that provides, inter alia, commercial general liability insurance. 16 Id. at ¶ 1. 17 Most of the facts surrounding the present action are undisputed by the parties. 18 Defs.’ Opp. at 3:5–8; SUMF, ECF No. 53-2.3 Plaintiff issued five total commercial 19 general liability insurance policies (“Insurance Contracts”) to various Sky High entities 20 between November 2, 2011 and September 21, 2013. Pl.’s P & A Mot. at 4:15–5:12; 21 22 23 24 25 26 27 28 1 In its First Amended Complaint (“FAC”), Plaintiff named additional Sky High Sports defendants, including Sky High Sports Nashville LLC and Sky High Sports Ontario LLC. FAC at 1. However, Plaintiff now concedes that those additional defendants do not owe any insurance premiums or deductibles under the insurance contracts disputed here. Pl.’s P & A Mot., ECF No. 37-1, at 2:12–18. According to Plaintiff, it therefore intends to seek a Stipulation to Dismiss these named-Defendants from the present action. Pl.’s P & A Mot. at 5:23–6:3. 2 Because oral argument was not of material assistance, the Court ordered this matter submitted on the briefs. E.D. Cal. Local Rule 230(g). 3 Plaintiff filed a Statement of Undisputed Material Facts (“SUMF”), (Pl.’s SUMF, ECF No. 37-2), to which Defendants filed a Response, (Defs.’ Resp. Pl.’s SUMF, ECF No. 51-3), and Plaintiff filed a Reply. Defs.’ Reply SUMF, ECF No. 53-2. Where the facts are disputed, the Court considers Defendants’ version of the facts, as it must on a motion for summary judgment. However, the Court primarily refers to Plaintiff’s Reply. 2 1 SUMF ¶ 13. Only two of these Insurance Contracts are at issue here: (1) the 2 September 21, 2011 to September 21, 2012 Insurance Contract issued to Ownership 3 Companies and Opportunities; and (2) the September 21, 2012 to September 21, 2013 4 Insurance Contract issued to Ownership Companies. FAC ¶ 14. Pursuant to the 5 Insurance Contracts, Plaintiff was entitled to advance amounts within the applicable 6 $25,000 deductible threshold to satisfy insurance claims, and then seek reimbursement 7 for these deductible payments from Defendants. Id. at ¶¶ 20, 22; SUMF ¶¶ 1, 24. 8 Additionally, at the time the policies were issued, Defendants paid an insurance premium 9 deposit, with the agreement that the final premium owed would be adjusted based on 10 Defendants’ gross sales figures. Pl.’s P & A Mot. at 7:19–27, 10:22–11:1; SUMF ¶ 54. 11 To determine the final premium, Plaintiff was entitled to perform an audit of 12 Defendants’ finances at the end of each policy term. FAC ¶ 15; SUMF ¶¶ 17, 54. A 13 dispute arose when Defendants refused to provide Plaintiff original financial ledgers after 14 the coverage periods of the Insurance Contracts ended. FAC ¶ 16. This prevented 15 Plaintiff from calculating Defendants’ gross sales for the purpose of determining the 16 insurance premiums owed. Id. Plaintiff filed a Complaint against Defendants on 17 September 9, 2014, claiming that Defendants’ actions were in breach of the audit 18 provisions of the Insurance Contracts. FAC ¶ 17; Compl., ECF No. 1. Plaintiff 19 subsequently filed a motion for summary judgment on the basis of that breach, (ECF 20 No. 11), which the Court granted in part, by ordering an audit of Defendants’ finances as 21 stipulated in the Insurance Contracts. FAC ¶ 17; 2015 Order, ECF No. 21. Plaintiff’s 22 auditor commenced that audit in September of 2015, and concluded the following: 23 (1) Ownership Companies owe $777,372.00 in final premiums and $96,211.76 in 24 unreimbursed deductibles; and (2) Opportunities owes $350,376.00 in final premiums 25 and $69,822.76 in unreimbursed deductibles. FAC ¶ 18; Pl.’s Am. Mot., ECF No. 39, at 26 2:4–20. 27 28 By way of this lawsuit Plaintiff seeks to recover those final premiums and unreimbursed deductibles as identified by the audit. FAC ¶ 19–20. Plaintiff filed the 3 1 present Motion on June 21, 2016, asking that this Court find as a matter of law that 2 Defendants are liable in accordance with the audit’s findings. Pl.’s P & A Mot. at 20:18– 3 21. Defendants filed an Opposition, conceding that Plaintiff is owed reimbursement for 4 the deductible payments, but challenging the amount owed for insurance premiums. 5 Defs.’ Opp. at 2:2–7, 3:18–6:11. 6 7 STANDARD 8 9 The Federal Rules of Civil Procedure provide for summary judgment when “the 10 movant shows that there is no genuine dispute as to any material fact and the movant is 11 entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a); see also Celotex Corp. v. 12 Catrett, 477 U.S. 317, 322 (1986). One of the principal purposes of Rule 56 is to 13 dispose of factually unsupported claims or defenses. Celotex, 477 U.S. at 325. 14 Rule 56 also allows a court to grant summary judgment on part of a claim or 15 defense, known as partial summary judgment. See Fed. R. Civ. P. 56(a) (“A party may 16 move for summary judgment, identifying each claim or defense—or the part of each 17 claim or defense—on which summary judgment is sought.”); see also Allstate Ins. Co. v. 18 Madan, 889 F. Supp. 374, 378-79 (C.D. Cal. 1995). The standard that applies to a 19 motion for partial summary judgment is the same as that which applies to a motion for 20 summary judgment. See Fed. R. Civ. P. 56(a); State of Cal. ex rel. Cal. Dep’t of Toxic 21 Substances Control v. Campbell, 138 F.3d 772, 780 (9th Cir. 1998) (applying summary 22 judgment standard to motion for summary adjudication). 23 In a summary judgment motion, the moving party always bears the initial 24 responsibility of informing the court of the basis for the motion and identifying the 25 portions in the record “which it believes demonstrate the absence of a genuine issue of 26 material fact.” Celotex, 477 U.S. at 323. If the moving party meets its initial 27 responsibility, the burden then shifts to the opposing party to establish that a genuine 28 issue as to any material fact actually does exist. Matsushita Elec. Indus. Co. v. Zenith 4 1 Radio Corp., 475 U.S. 574, 586-87 (1986); First Nat’l Bank v. Cities Serv. Co., 391 U.S. 2 253, 288-89 (1968). 3 In attempting to establish the existence or non-existence of a genuine factual 4 dispute, the party must support its assertion by “citing to particular parts of materials in 5 the record, including depositions, documents, electronically stored information, 6 affidavits[,] or declarations . . . or other materials; or showing that the materials cited do 7 not establish the absence or presence of a genuine dispute, or that an adverse party 8 cannot produce admissible evidence to support the fact.” Fed. R. Civ. P. 56(c)(1). The 9 opposing party must demonstrate that the fact in contention is material, i.e., a fact that 10 might affect the outcome of the suit under the governing law. Anderson v. Liberty Lobby, 11 Inc., 477 U.S. 242, 248, 251-52 (1986); Owens v. Local No. 169, Assoc. of W. Pulp and 12 Paper Workers, 971 F.2d 347, 355 (9th Cir. 1987). The opposing party must also 13 demonstrate that the dispute about a material fact “is ‘genuine,’ that is, if the evidence is 14 such that a reasonable jury could return a verdict for the nonmoving party.” Anderson, 15 477 U.S. at 248. In other words, the judge needs to answer the preliminary question 16 before the evidence is left to the jury of “not whether there is literally no evidence, but 17 whether there is any upon which a jury could properly proceed to find a verdict for the 18 party producing it, upon whom the onus of proof is imposed.” Anderson, 477 U.S. at 251 19 (quoting Improvement Co. v. Munson, 81 U.S. 442, 448 (1871)) (emphasis in original). 20 As the Supreme Court explained, “[w]hen the moving party has carried its burden under 21 Rule [56(a)], its opponent must do more than simply show that there is some 22 metaphysical doubt as to the material facts.” Matsushita, 475 U.S. at 586. Therefore, 23 “[w]here the record taken as a whole could not lead a rational trier of fact to find for the 24 nonmoving party, there is no ‘genuine issue for trial.’” Id. 87. 25 In resolving a summary judgment motion, the evidence of the opposing party is to 26 be believed, and all reasonable inferences that may be drawn from the facts placed 27 before the court must be drawn in favor of the opposing party. Anderson, 477 U.S. at 28 255. Nevertheless, inferences are not drawn out of the air, and it is the opposing party’s 5 1 obligation to produce a factual predicate from which the inference may be drawn. 2 Richards v. Nielsen Freight Lines, 602 F. Supp. 1224, 1244–45 (E.D. Cal. 1985), aff’d, 3 810 F.2d 898 (9th Cir. 1987). 4 5 ANALYSIS 6 7 Plaintiff brings four causes of action against Defendants: (1) Breach of Contract, 8 based on the alleged failure to pay deductibles and premiums pursuant to the Insurance 9 Contracts; (2) Money Due for Unpaid Insurance Premiums, seeking payment of interest 10 at a rate of 10% per annum for the aggregate debt of the unpaid insurance premiums; 11 (3) Open Book Account, seeking reimbursement of deductibles paid by Plaintiff on 12 Defendants’ behalf; and (4) Money Had and Received (“Quantum Valebant”), seeking 13 payment of interest at a rate of 10% per annum for the unreimbursed deductibles owed 14 to Plaintiff by Defendants. FAC at 8:18–10:16. 15 Defendants raise only two contentions in opposition to Plaintiff’s Motion. Defs.’ 16 Opp. at 3:21–23. First, Defendants contend that including franchise fee payments 17 (“Royalties”) in Opportunities’ gross sales calculations for the purpose of determining 18 insurance premiums was improper, as these Royalties should have been excluded from 19 gross sales figures pursuant to the plain language of the Insurance Contracts. Defs.’ 20 Opp. 4:1–5. Second, Defendants contend that the classification of Opportunities as an 21 “Amusement Center” within the relevant Insurance Contract should be amended since it 22 is incorrect and has resulted in inflated premium calculations. Defs.’ Opp. at 2:18–3:3, 23 5:18–21. 24 Defendants’ two contentions each concern only the amount owed by 25 Opportunities in unpaid insurance premiums. Defendants concede that Plaintiff is 26 entitled to judgment with regard to the unreimbursed deductible payments. Defs.’ Opp. 27 at 3:21–23. Defendants also do not contend that the Ownership Companies received 28 Royalties, or that the Ownership Companies were incorrectly classified as “Amusement 6 1 Centers” within the applicable Insurance Contracts. Therefore, the Court GRANTS 2 Plaintiff’s Motion with regard to culpability for unreimbursed deductibles owed by 3 Defendants, and further finds Ownership Companies liable for unpaid insurance 4 premium payments under the Insurance Contracts. 5 The issues remaining are as follows: (1) whether the Royalties received by 6 Opportunities were derived from “patent rights or copyrights” such that they should be 7 excluded from its gross sales figures; and (2) whether Opportunities was improperly 8 classified as an “Amusement Center” in the 2011–2012 Insurance Contract, such that 9 the contract should not be enforced as written. The Court answers both questions in the 10 negative. As set forth below, it determines that franchise fee payments received by 11 Opportunities were properly included in its gross sales figures, and further finds that 12 Defendants have offered no evidence that would justify reformation of the 2011–2012 13 Insurance Contract. 14 15 16 A. Opportunities’ “Royalty Fee” Income Is Not Derived From Copyrighted Material, And Thus Is Properly Included In Its Gross Sales Figures The Insurance Contracts define “Gross Sales” to exclude, in relevant part, 17 “Royalty income from patent rights or copyrights which are not product sales . . . .” 18 SUMF ¶ 21. Opportunities argues that as a franchisor, it grants licenses to franchisees 19 permitting the use of its proprietary property, including, but not limited to, policies, 20 procedures, marks trade dress, trade secrets, and management training programs. 21 Defs.’ Opp. at 4:9–5:4. Use of this license, Opportunities contends, subjects the 22 franchisee to a “Royalty” fee based off a percentage of the franchisee’s gross revenue. 23 Defs.’ Opp. at 5:5–17. As “license” Royalty payments, Opportunities argues that this 24 revenue stream does not constitute “product sales” for the purpose of determining gross 25 sales. Defs.’ Opp. at 5:5–17. 26 Plaintiff contends that Defendants rely on bare references to unidentified 27 copyrighted materials, and that Opportunities has identified no copyrighted materials that 28 it purportedly licensed to franchisees. Pl.’s Reply at 3:4–20. The Court agrees. 7 1 Copyright protection does not “extend to any idea, procedure, process, system, method 2 of operation, concept, principle, or discovery, regardless of the form in which it is 3 described, explained, illustrated, or embodied in such work.” 17 U.S.C. § 102(b). 4 Defendants have failed to provide any evidence that “Royalties” paid by the Ownership 5 Companies were derived from “original works of authorship” which include “(1) literary 6 works; (2) musical works, including any accompanying words; (3) dramatic works, 7 including any accompanying music; (4) pantomimes and choreographic works; 8 (5) pictorial, graphic, and sculptural works; (6) motion pictures and other audiovisual 9 works; (7) sound recordings; and (8) architectural works.” 17 U.S.C. § 102(a). While 10 Defendants may have described the franchisee’s fee payments as “Royalties” in its 11 franchise agreements, such a description does not confer copyright status upon this 12 source of income without evidence of copyrighted material, which the record does not 13 contain. 14 Therefore, the Court finds that inclusion of the franchise fee payments received by 15 Opportunities was properly included in the calculations of gross sales for the purpose of 16 determining the amount of insurance premiums owed under the 2011–2012 Insurance 17 Contract. 18 B. 19 Defendants’ second argument in opposing Plaintiff’s Motion rests on a contention Reformation Of The 2011–2012 Insurance Contract Is Not Warranted 20 that the Declarations Page of Opportunities’ 2011-12 policy should, in essence, be 21 rewritten so as to exempt Opportunities from a gross sales calculation of its final 22 premium owed, and instead calculate Opportunities’ premium based on the square 23 footage of its Nevada headquarters building. Specifically, Defendants urge the Court to 24 change the classification code for Opportunities’ policy from one applicable “Amusement 25 Centers” (under Class Code 10015.01) to a “Buildings or Premises—Office—premises 26 occupied by employees of the insured” classification pursuant to Class Code 61224.01. 27 That argument, however, is not well taken. 28 /// 8 1 Defendants’ contention that the policy’s classification is incorrect amounts to a 2 request for reformation of the insurance contract. To support that contention, 3 Defendants argue that Opportunities is a management/administration company that has 4 nothing to do with the Sky High-branded Amusement Centers operated by the 5 Ownership Companies. Consequently, Defendants claim that Opportunities’ activities 6 pose no insured risk or exposure to Plaintiff. They maintain that Opportunities’ premium 7 classification should be changed to a buildings and premises code that calculates 8 premium based on square footage as opposed to a surcharge-based formula predicated 9 on gross sales. 10 This Court has, however, already resolved the dispute as to how any premium 11 due in this matter should be calculated by finding that the final premium due under each 12 policy, including Opportunities’, will be derived from the gross sales formula attaching to 13 an Amusement Centers classification. Kinsale Ins. Co. v. Sky High Sports LLC, 14 No. 2:14-cv-02086-GEB-DAD, 2015 U.S. Dist. LEXIS 113416, at *5 (E.D. Cal. Aug. 25, 15 2015). As a preliminary matter, arguing otherwise at this point would appear to be 16 barred by collateral estoppel since the issue has already been determined. See, e.g., 17 Hamilton v. State Farm Fire & Cas. Co., 270 F.3d 778, 782-83 (9th Cir. 2001).4 18 Defendants fare no better even if the Court were to proceed to the merits of their 19 reformation claim. First, no claim for reformation has been raised in any previous 20 pleading, including Defendants’ prior summary judgment motion. Moreover, in order to 21 justify reformation, Defendants must show through clear and convincing evidence that 22 the policy provisions in question, here the classification codes in Opportunities’ 23 Declarations Page, did not reflect the pre-formation intent of both parties. Matter of 24 Beverly Hills Bancorp, 649 F.2d 1329, 1333 (9th Cir. 1981). A court cannot reform or 25 remake a contract if there was never a common intent to make the agreement urged by 26 the party seeking reformation. Gillis v. Sun Ins. Office, Ltd., 238 Cal. App. 2d 408, 414 27 28 4 Given the plain language of the 2011-12 Declarations Page, Defendants are also precluded from arguing that interpreting the Opportunities policy requires that it be rewritten. See Safeco Ins. Co. of Am. v. Robert S., 26 Cal. 4th 758, 764 (2001); Cal. Code Civ P. § 1858. 9 1 (1965). Here, there is no evidence that Opportunities sought, prior to issuance of 2 Plaintiff’s policy, to have its premium calculated on a square foot basis, or that Plaintiff 3 agreed to do so. Instead, Opportunities argues only in hindsight that any uniform 4 premium formula based on gross sales is unfair. That argument does not suffice to 5 justify reformation. 6 C. 7 8 9 While Defendants Are Culpable For Breach Of Contract, The Court Cannot Determine How Much Money Is Owed Without Additional Information While Defendants are liable for their breach of the Insurance Contracts, it remains unclear to the Court how much each Defendant allegedly owes in unpaid insurance 10 premiums and unreimbursed deductibles. Plaintiff’s FAC provides that “Defendants” are 11 liable to Plaintiff for $969,984.96 in unpaid deductibles and premiums. FAC ¶ 46. 12 Plaintiff subsequently asserts that the Ownership Companies owe $376,965.00, and 13 Opportunities owes $496,818.76 in unpaid premiums and deductibles. Pl.’s P & A Mot. 14 20:17–21. Thereafter, Plaintiff’s Amended Motion provides that “Sky High Sports 15 Ontario LLC, Sky High Sports Sacramento LLC, [and] Sky High Sports Santa Clara LLC” 16 owe an aggregate sum of $873,783.73, and that Opportunities owes a total of 17 $496,818.76. Pl.’s Am. Mot., ECF No. 39, at 2:4–20. Plaintiff’s Amended Motion also 18 lists Sky High Sports Ontario LLC as a liable party, (Pl.’s Am. Mot. at 2:7–10), which 19 contradicts Plaintiff’s earlier concession that the Ontario franchisee owed no premium or 20 deductible payments. See Pl.’s P & A Mot. at 2:13–15. Finally, the Amended Motion 21 additionally omits Defendant Sky High Sports Concord LLC from the list of companies 22 that are liable for the $873,783.73 in unpaid premiums and deductibles. Pl.’s Am. Mot. 23 at 2:7–10. Additionally, Plaintiff seeks prejudgment interest on the amounts owed by 24 Defendants, but fails to address when such interest should have begun to accrue. FAC 25 at 8:18–10:16. Without further clarification, the Court is unable to provide a 26 determination of the amount owed by each Defendant, and thus is unable to grant 27 Plaintiff’s Motion in its entirety. 28 /// 10 1 Therefore, the Court GRANTS Plaintiff’s Motion with regard to Defendants’ 2 culpability, but orders the parties to schedule a prove-up hearing concerning the narrow 3 issue of how much each Defendant is liable for in unpaid insurance premiums and 4 deductibles under the Insurance Contracts, as well as whether any prejudgment interest 5 is due on amounts owed. 6 7 CONCLUSION 8 9 For the reasons discussed, the Court GRANTS, in part, and DENIES, in part, 10 Plaintiff’s Motion for Summary Judgment, ECF No. 37. Plaintiff’s Motion is GRANTED 11 as to Defendants’ liability for breach of contract arising from the failure to pay 12 unreimbursed deductibles and insurance premiums pursuant to the Insurance Contracts. 13 Plaintiff’s motion is DENIED, without prejudice, with regard to the determination of 14 specific amounts owed by each Defendant, and with regard to any prejudgment interest 15 owed on those amounts, since the amounts owed remain unclear.5 16 The parties are ordered to schedule a prove-up hearing concerning the narrow 17 issue of how much each Defendant is liable for in unpaid insurance premiums and 18 deductibles under the Insurance Contracts, and the question of whether prejudgment 19 interest should be awarded on any said amounts. 20 21 IT IS SO ORDERED. Dated: May 24, 2017 22 23 24 25 26 27 28 5 Since the amounts owed by Defendants remain unclear at this time pending prove-up, any determination as to prejudgment interest on sums ultimately owed is necessarily premature and that portion of Plaintiff’s Motion is denied without prejudice on that basis. 11

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