National Union Fire Insurance Co. of Pittsburgh, PA et al v. Seagate Technology, Inc.

Filing 396

AMENDED ORDER DENYING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT AND GRANTING PLAINTIFFS' CROSS MOTION FOR SUMMARY JUDGMENT re 379 Order on Motion for Partial Summary Judgment, Order on Motion for Summary Judgment,, 394 Order on Motion to Vacate,. Signed by Judge Alsup on March 27, 2013.. (whalc1, COURT STAFF) (Filed on 3/27/2013) Modified on 3/27/2013 (whalc1, COURT STAFF).

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1 2 3 4 5 6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE NORTHERN DISTRICT OF CALIFORNIA 8 9 11 For the Northern District of California United States District Court 10 NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA, et al., Plaintiffs, 12 13 14 15 No. C 04-01593 WHA AMENDED ORDER DENYING DEFENDANT’S MOTION FOR SUMMARY JUDGMENT AND GRANTING PLAINTIFFS’ CROSS MOTION FOR SUMMARY JUDGMENT v. SEAGATE TECHNOLOGY, INC., Defendant. / 16 INTRODUCTION 17 18 In this action involving insurers’ obligation to defend their insured, 19 defendant/counterclaimant moves for partial summary judgment on its counterclaim for breach 20 of contract, and plaintiffs/counterclaim defendants cross-move for partial summary judgment on 21 the same claim. For the reasons explained below, defendant’s motion is DENIED and plaintiffs’ 22 cross-motion is GRANTED. 23 24 STATEMENT More than a decade ago, defendant/counterclaimant Seagate Technology, Inc. purchased 25 liability insurance from plaintiffs/counterclaim defendants National Union Fire Insurance 26 Company of Pittsburgh, PA (“NIU”), American International Underwriters Insurance Company, 27 and American International Specialty Lines Insurance Company (“AISLIC”). In 2000, 28 Convolve, Inc. and Massachusetts Institute of Technology filed a lawsuit in the Southern District 1 of New York triggering the insurers’ obligation to defend. In 2004, the insurers filed a 2 declaratory action in this district arguing they had no defense obligation in the Convolve action. 3 Another six years of motions, appeals, and proceedings after remand resulted in a district 4 court judgment (by Judge James Ware) ruling that the insurers had a duty to defend in the 5 Convolve action from November 1, 2000, until July 18, 2007. At this point, NIU decided it 6 would rely on the district court’s entry of judgment and stop paying for Seagate’s defense. 7 Meanwhile, the parties cross-appealed again. 8 9 In January 2012, our court of appeals ruled, inter alia, that the district court erred in concluding that NIU’s duty to defend Seagate terminated in 2007. Put differently, NIU suddenly found itself five years late on payments for Seagate’s legal defense. Seagate then delivered 11 For the Northern District of California United States District Court 10 invoices for its legal bills from 2007 to 2012 from the Convolve action to NIU and made a 12 demand for prejudgment interest. NIU paid only part of the legal bills and paid prejudgment 13 interest on the reduced amount. NIU based the reduced payment on California Civil Code 14 Section 2860, which limits the insurer’s obligation to pay legal defense fees to rates the insurer 15 pays to attorneys it retains “in the ordinary course of business . . . in similar actions.” 16 Seagate contends that the appellate decision converted NIU’s reliance on the lower court 17 rulings into breach of the insurance contract nunc pro tunc to 2007. As a result, it contends, NIU 18 cannot rely on Section 2860 and must pay the full fees as well as prejudgment interest on the full 19 amount due. At oral argument, counsel represented that the delta between the fees paid and the 20 fees allegedly due is in excess of 20 million dollars. NIU replies that it properly relied on the 21 district court order and that any remaining disputes are subject to mandatory arbitration under 22 Section 2860(c). 23 24 ANALYSIS Summary judgment is proper when the pleadings and the evidence in the record “show 25 that there is no genuine issue as to any material fact and that the moving party is entitled to 26 judgment as a matter of law.” FRCP 56(c). For the purposes of the instant motions, no facts are 27 at issue. The dispute hinges on a purely legal question suitable for summary judgment: did NIU 28 breach its insurance contract with Seagate when NIU decided to stop defending Seagate in 2 1 reliance on the district court judgment that was subsequently reversed on appeal? This order 2 holds that there was no breach. 3 The parties have not produced any authority that is directly on point, and the Court’s own clear result. In the ordinary case, the duty to defend terminates upon a judicial determination 6 that the insured does not have a potentially-covered claim. Montrose Chem. Corp. v. Superior 7 Court, 6 Cal. 4th 287, 301 (1993). The decision granting summary judgment became such a 8 judicial determination when judgment was entered under Rule 54(b) (Dkt. No. 324). The entry 9 of judgment created a final order with res judicata effect. Cont’l Airlines, Inc. v. Goodyear Tire 10 & Rubber Co., 819 F.2d 1519, 1525 (9th Cir. 1987). It is a “basic proposition that all orders and 11 For the Northern District of California research has not revealed any. Nevertheless, the application of general principles provides a 5 United States District Court 4 judgments of courts must be complied with promptly. If a [defendant] believes that order is 12 incorrect the remedy is to appeal, but, absent a stay, he must comply promptly with the order 13 pending appeal.” Maness v. Meyers, 419 U.S. 449, 458 (1975). 14 These general principles compel the conclusion that NIU did not act wrongfully when it 15 chose to rely on the district court’s final judgment. Seagate appealed but did not seek a stay of 16 the adverse district court ruling at issue. As a result, NIU was entitled to the benefit of the 17 (erroneous) ruling that there was no longer a duty to defend. To hold that NIU was committing a 18 breach of contract all along would convert a final judgment under Rule 54(b) into a provisional 19 one and directly conflict with the principle that absent a stay, a party must comply with a 20 judgment pending appeal. Although NIU cross-appealed and chiefly lost, the cross-appeals did 21 not challenge the basic victory that it had already won before Judge Ware. 22 The only analogous decision cited by the parties is Auto-Owners Insurance Co. v. Potter, 23 242 F. App’x 94 (4th Cir. 2007), an unpublished, non-precedential opinion. In Auto-Owners, 24 which involved insurer liability for a settlement, (1) the insurer brought a declaratory relief 25 action to determine if there was a duty to defend, (2) the district court held there was no duty, 26 and (3) the insurer chose not to defend during the pendency of the (successful) appeal because 27 there was no stay of the litigation. Id. at 97–98. The Fourth Circuit held that the withdrawal of 28 defense was not unjustified under North Carolina law. The insurer had a right to rely on the 3 1 declaratory judgment absent a stay because the federal declaratory judgment had the force and 2 effect of a final judgment under North Carolina law. Id. at 101–02. The Fourth Circuit reasoned 3 that (id. at 101): 4 5 6 7 it would tip the balance too far in favor of the insured to hold that an insurer must wait for all appeals of a declaratory judgment (relieving it of a duty to defend) to be exhausted before removing its defense of the insured. The fact that the insurer provided a defense for the insured until the time the insurer received a declaratory judgment Order demonstrates to this Court that the insurer adhered to the spirit of the public policy requiring defense of insured persons. 8 Although not binding in this district, the Fourth Circuit’s reasoning in Auto-Owners is persuasive 9 and, notably, it comports with the general principle in Maness that judgments and orders of 10 This does not mean that Seagate is not entitled to the benefit of its own bargain. Our For the Northern District of California United States District Court courts should be complied with promptly. 11 12 court of appeals reversed the prior district court decision and NIU’s contractual responsibilities 13 were reinstated retroactively. See Levy v. Drew, 4 Cal. 2d 456, 459 (1935) (when a judgment is 14 reversed on appeal the appellant is entitled to restitution of all things taken from him under the 15 judgment). Reinstatement does not require an additional finding of wrongful breach, however. 16 None of the decisions cited by Seagate alters this conclusion. Judge Ware’s grant of 17 summary judgment on Seagate’s counterclaim for breach of contract against AISLIC (Dkt. 18 No. 306) is not analogous. There, the initial judgment found no duty to defend and was reversed 19 on appeal. The Court subsequently ruled on remand that there was a duty to defend between 20 2000 and 2007 (Dkt. No. 264 at 9, 13). Because there was no dispute that AISLIC did not pay 21 up until 2008, the Court then granted summary judgment on the issue of breach for the 2000 to 22 2007 time period (Dkt. No. 306 at 7). The distinction, however, is that AISLIC did not base its 23 decision not to defend in the first instance on a final judgment in its favor. AISLIC decided on 24 its own that it was not bound by the contract. NIU, in contrast, made its decision to stop 25 defending after the entry of a declaratory judgment holding that it had no duty to defend. NIU 26 was entitled to rely on final judgment in its favor during the pendency of the appeal, whereas 27 AISLIC gambled that it would later be vindicated in the first instance. 28 4 1 Seagate cites Harbison v. American Motorists Insurance. Company, 636 F. Supp. 2d 2 1030 (E.D. Cal. 2009) (Judge Frank Damrell Jr.), for the proposition that where a “declaratory 3 judgment is reversed on appeal, the initial decision in the insurer’s favor provides no insulation 4 against further claims of breach of contract or bad faith” (Dkt. No. 376 at 3). This proposition 5 misstates the holding of Harbison. Although Harbison involved an appeal, it did not address a 6 fact pattern analogous to the case at bar. 7 In Harbison, the insured contended that his insurer denied coverage in bad faith. The 8 district court granted summary judgment in favor of the insurer, and our court of appeals 9 reversed. On remand, the insurer argued that the summary judgment finding was evidence that the original decision to deny coverage was reasonable. The district court disagreed because 11 For the Northern District of California United States District Court 10 “public policy mandates that the reasonableness of the insurer’s decision must be evaluated as of 12 the time it was made, and that no subsequent court ruling can be the justification for the 13 decision.” In other words, the insurer did not know at the time it made the coverage decision 14 that it would later win (and subsequently lose) at summary judgment and, therefore, it could not 15 rely on that later judgment to support its prior decision to deny coverage. Otherwise, as a 16 practical matter, an insured would be denied the benefit of an appeal because the overturned 17 decision that there was no bad faith denial of coverage would still support a conclusion that there 18 was no bad faith denial of coverage. 636 F. Supp. 2d at 1035–37, 1043. 19 The instant action is quite different. NIU is not attempting to advance a subsequent 20 declaratory judgment backwards in time to its decision to stop defending. NIU based its decision 21 to stop defending Seagate on the then-extant declaratory judgment itself. The public policy 22 rationale in Harbison is inapplicable here. Quite the opposite, public policy favors requiring a 23 party to immediately comply with the entry of final judgment (although, as NIU concedes, a 24 party executing a judgment during appeal may be later responsible for returning the executed 25 judgment if the appeal is successful). Thus, under these particular circumstances, the initial 26 decision in the insurer’s favor does provide insulation against a further claim of breach of 27 contract. 28 5 1 The Pruyn and Isaacson decisions are inapposite. In Pruyn v. Agricultural Insurance 2 Company, 36 Cal. App. 4th 500, 514–15 (1995), a California court of appeal declared that “[a]n 3 insurance company bears a duty to defend its insured whenever it ascertains facts which give rise 4 to the potential of liability under the policy. Wrongful failure to provide coverage or defend a 5 claim is a breach of contract.” Seagate also relies on Isaacson v. California Insurance 6 Guarantee Ass’n, 44 Cal. 3d 775, 791 (1988), for the same proposition. The facts of Pruyn, 7 however, related to the enforcement of a stipulated judgment following settlement. Similarly, 8 Isaacson involved an attempt to seek reimbursement after settlement of a claim. Neither fact 9 pattern has any relevance here. To the extent that the general principle from Pruyn and Isaacson is applicable, the critical language is “wrongful failure.” It was not wrongful for NIU to stop 11 For the Northern District of California United States District Court 10 defending Seagate after the district court’s entry of judgment in its favor and therefore there was 12 no breach. 13 Two other decisions cited by Seagate are somewhat helpful in that they use the word 14 “appeal,” but they do not have analogous fact patterns. Both CNA Casualty of California v. 15 Seaboard Surety Co., 176 Cal. App. 3d 598 (1986), and Fireman’s Fund Insurance Co. v. 16 Chasson, 207 Cal. App. 2d 801 (1962), involved an insurer’s obligation to defend in the first 17 instance — not whether it breached a duty to defend following appeal of a successful declaratory 18 action. Although these decisions state that an insurer’s duty to defend continued until the 19 declaratory judgment was final “on appeal,” the actual principle being advanced in both 20 decisions was that the duty continued until the judgment was final. To conclude otherwise 21 would mean that all final judgments under Rule 54(b) were in fact provisional until there was no 22 longer any possibility of appeal, indeed, until all time had expired for further petition for a writ 23 of certiorari. 24 The parties present a question of first impression in our circuit. Once a party obtains a 25 favorable declaration of rights from a district judge, is that party entitled to place any reliance on 26 the judgment of the district judge, or must it do so only at its peril lest it someday be reversed on 27 appeal? This order holds that interim reliance on the judgment of a district judge is entitled to at 28 6 1 least some consideration in the calculus unless the effectiveness of the order is stayed by the 2 district court or the appellate court pending appeal. 3 Accordingly, this order holds that NIU did not breach its insurance contract with Seagate 4 when NIU decided to stop defending Seagate in reliance on a district court declaratory judgment 5 in its favor. 6 7 * * * With the conclusion in hand that no breach occurred, the other disputes in the parties’ 8 cross-motions fall away quickly. The parties dispute whether NIU was entitled to reduce its 9 payment of fees, and in turn the amount of prejudgment interest, under Section 2860: “[t]he insurer’s obligation to pay fees to the independent counsel selected by the insured is limited to 11 For the Northern District of California United States District Court 10 the rates which are actually paid by the insurer to attorneys retained by it in the ordinary course 12 of business in the defense of similar actions in the community where the claim arose or is being 13 defended.” But, “an insurer who wrongfully denies coverage may not rely on section 2860 after 14 the fact, once it has agreed to — or been found obligated to — provide a defense.” 15 Michael Taylor Designs, Inc. v. Travelers Prop. Cas. Co. of Am., 761 F. Supp. 2d 904, 914 (N.D. 16 Cal. 2011) (Judge Richard Seeborg) (emphasis added). 17 Again, the key word is “wrongfully.” NIU did not wrongfully deny coverage after 2007; 18 now that its contractual obligations have been reinstated, it has elected to pay and it may 19 accordingly take advantage of Section 2860. By the same token, NIU properly based its ten 20 percent prejudgment interest damages calculation on the reduced payment. During the pendency 21 of the appeals, Seagate should have been aware that it was retaining expensive counsel at a risk 22 to itself. If Seagate had wanted to change this calculus, it should have made a motion for stay 23 pending appeal. 24 Finally, Seagate complains in its motion for partial summary judgment that NIU has not 25 provided information sufficient to determine the specific fee payment reductions or the amount 26 of prejudgment interest NIU paid. Seagate requests an accounting or in the alternative that it be 27 permitted to take discovery on this issue. Given the holding that NIU properly relied on 28 Section 2860, these requests amount to a dispute over the specific amount of attorney’s fees paid 7 1 (the question of prejudgment interest is contingent on the resolution of that dispute). Although 2 Seagate should have reasonable access to this type of information, this falls plainly within the 3 mandatory arbitration provision of Section 2860(c), which provides: “[a]ny dispute concerning 4 attorneys fees . . . shall be resolved by final and binding arbitration by a single neutral arbitrator 5 selected by the parties to the dispute.” These requests are accordingly DENIED. 6 CONCLUSION summary judgment is GRANTED. The Court hereby certifies the summary judgment issues 9 decided herein for interlocutory review under Section 1292(b). The Court finds that this order 10 involves a controlling question of law as to which there is substantial ground for difference of 11 For the Northern District of California Seagate’s motion for partial summary judgment is DENIED. NIU’s cross-motion for 8 United States District Court 7 opinion and that an immediate appeal from the order may materially advance the ultimate 12 termination of the litigation. 13 14 IT IS SO ORDERED. 15 16 Dated: March 27, 2013. WILLIAM ALSUP UNITED STATES DISTRICT JUDGE 17 18 19 20 21 22 23 24 25 26 27 28 8

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