Gelfand v. North American Capacity Insurance Company

Filing 27

ORDER by Judge Edward M. Chen Granting 21 Defendant's Motion for Partial Summary Judgment. (emcsec, COURT STAFF) (Filed on 7/5/2013)

1
2
3
4
5

UNITED STATES DISTRICT COURT

6

NORTHERN DISTRICT OF CALIFORNIA

7
8

TODD GELFAND,

9

Plaintiff,

For the Northern District of California

United States District Court

10
11

v.
NORTH AMERICAN CAPACITY
INSURANCE COMPANY,

12
13

No. C-12-4819 EMC

ORDER GRANTING DEFENDANT’S
MOTION FOR PARTIAL SUMMARY
JUDGMENT
(Docket No. 21)

Defendant.
___________________________________/

14
15

Plaintiff Todd Gelfand, trustee of the Reata Trust (“Reata”), brought a state-court action

16

(later removed to this Court) to confirm an arbitration award issued against Paragon, the contractor

17

who built Reata’s residence. The state court confirmed the arbitration award. In the case at bar,

18

Reata sues Northern American Capacity Insurance Company (“NAC”), the contractor’s insurer, to

19

recover the full amount of the judgment against Paragon. Currently pending before the Court is

20

NAC’s motion for partial summary judgment. The key issue is whether Reata can recover directly

21

from NAC that portion of the judgment consisting of attorney’s fees and costs awarded against

22

Paragon, the insured.

23

Having considered the parties’ briefs and accompanying submissions, as well as the

24

argument of counsel, the Court hereby GRANTS Defendant NAC’s motion for partial summary

25

judgment.

26

///

27

///

28

///

1
2

I.

FACTUAL & PROCEDURAL BACKGROUND

Paragon General Contractors & Cabinetmakers, Inc. (“Paragon”) constructed a luxury home

3

in Half Moon Bay owned by Reata. See Docket No. 21-3 (Decl. of A. Carl Yaeckel (“Yaeckel

4

Decl.”), Ex. 1) (Complaint (“Compl.”) ¶ 1). Later, alleging construction defects, Reata sued

5

Paragon in arbitration in 2001. Id. ¶ 28.

6

NAC issued a commercial general liability insurance policy (“Policy”) to Paragon. Id. ¶14.

7

NAC retained counsel to defend Paragon in arbitration. See Docket No. 21-3 (Yaeckel Decl., Ex. 1)

8

(Compl. ¶ 29). During arbitration, Paragon filed for Chapter 7 bankruptcy. See id. ¶ 32.

9

In December 2010, the arbitrator awarded Reata $1,390,774.19,1 which included an award of
$585,404.27 in attorney’s fees and $35,767.21 in costs. Id. at ¶ 6. Reata petitioned to confirm the

11
For the Northern District of California

United States District Court

10

award in state court. See Docket No. 22-2 (Heimberger Decl. ¶ 21). The state court confirmed the

12

award, see Docket No. 22-2 (Heimberger Decl., Ex. I) (Order Confirming Award), and entered

13

judgment for Reata, see Docket No. 22-2 (Heimberger Decl., Ex. J) (Judgment Confirming Award).

14

Shortly after entering judgment, the state court awarded Reata $25,000 in additional attorney’s fees2

15

and $2,080 in costs expended to confirm the award. In January 2013, NAC paid Reata $210,687 in

16

partial satisfaction of the judgment relating to some of the property damage alleged by Reata. See

17

Docket No. 22-17 (Heimberger Decl., Ex. O).

18

In August 2012, Reata brought the current action against NAC to recover fees and costs

19

awarded by the state court judgment which confirmed the arbitration award. See Docket No. 21-3

20

(Yaeckel Decl., Ex. 1) (Compl. ¶ 7, at pg. JNI00013). Reata’s complaint asserts three causes of

21

action: (1) “Direct Action of Judgment Creditor Pursuant to Cal. Ins. Code § 11580”; (2) “Breach of

22
23
24
25
26
27
28

1

See Docket No. 22-3 (Heimberger Decl., Ex. A) (Arbitration Award at p. 18). Reata has
moved the Court to take judicial notice of nine documents, including the Arbitration Award. The
Court grants the Reata’s request as to this document, and as to Exhibits B, I, J, and L to the
Heimberger Decl. Reata’s request for judicial notice is uncontested. Moreover, courts may consider
judicial notice of such matters when ruling on a summary judgment motion. See FRE 201(b);
Bennett v. Medtronic, Inc., 285 F.3d 801 n. 2 (9th Cir. 2002) (granting request for judicial notice of
Tennessee state court proceedings).
2

See Docket No. 22-2 (Heimberger Decl., Ex. L) (Order re Attorney’s Fees).

2

1

Insurance Contract”; and (3) “Breach of the Implied Covenant of Good Faith and Fair Dealing.” See

2

id. at ¶¶ 58, 70, and 76.

3

NAC removed to federal court based on diversity. Currently before the Court is NAC

4

motion for partial summary judgment. The issue is whether Reata, a third-party judgment creditor

5

of the insured, may enforce directly against NAC that portion of the underlying judgment awarding

6

attorney’s fees and costs against the insured.

7
8

II.
A.

9

DISCUSSION

Legal Standard
Federal Rule of Civil Procedure 56(c) provides that summary judgment shall be rendered “if

the pleadings, depositions, answers to interrogatories, and admissions on file, together with the

11
For the Northern District of California

United States District Court

10

affidavits, if any, show that there is no genuine issue as to any material fact and that the moving

12

party is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(c). An issue of fact is genuine

13

only if there is sufficient evidence for a reasonable jury to find for the nonmoving party. See

14

Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248-49 (1986). “The mere existence of a scintilla of

15

evidence . . . will be insufficient; there must be evidence on which the jury could reasonably find for

16

the [nonmoving party].” Id. at 252. At the summary judgment stage, evidence must be viewed in

17

the light most favorable to the nonmoving party and all justifiable inferences are to be drawn in the

18

nonmovant’s favor. See id. at 255.

19

In the current case, NAC, a defendant, has moved for partial summary judgment on the issue

20

of whether Reata, a third-party judgment creditor, may recover a portion of the underlying judgment

21

consisting of attorney’s fees and costs awarded in arbitration below. Because Reata has the ultimate

22

burden of proof, NAC may prevail on its motion for summary judgment simply by pointing to

23

Reata’s failure “to make a showing sufficient to establish the existence of an element essential to

24

[its] case.” Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986).

25

B.

Calif. Ins. Code Section 11580

26

Reata did not obtain an assignment from Paragon of any claim for indemnification against

27

NAC. Instead, Reata’s suit against NAC to recover on the judgment against Paragon is predicated

28

solely upon Calif. Ins. Code Section 11580. That section provides that an insurance policy must

3

1

contain a provision (among others) allowing third-party judgment creditors, under certain

2

circumstances, to recover on a judgment against the insured directly from the insurer:

3

“ ... whenever judgment is secured against the insured or the executor
or administrator of a deceased insured in an action based upon bodily
injury, death, or property damage, then an action may be brought
against the insurer on the policy and subject to its terms and
limitations, by such judgment creditor to recover on the judgment.”

4
5
6

Calif. Insurance Code Section 11580(b)(2). See Croskey, et al., Cal. Practice Guide: Insurance

7

Litigation, ¶ 15:1028, p. 15-177.

8

For Reata to recover directly from NAC under Section 11580, the amount of the underlying

both: (a) that the award against Paragon is covered under the terms of the policy issued by NAC;

11
For the Northern District of California

judgment against Paragon, including the award of attorney’s fees and costs, Reata must establish

10

United States District Court

9

and (b) Reata, as a third-party judgment creditor, may enforce the policy term at issue as a third-

12

party beneficiary thereto. See Clark v. CIGA, 200 Cal. App. 4th 391 (2011); San Diego Hous.

13

Comm’n. v. Indus. Indem. Co., 95 Cal. App. 4th 669 (2002).

14

C.

15

Coverage
NAC contends that fees and costs are covered by the NAC policy, if at all, only as either: (a)

16

“damages” under the Insuring Clause; or (b) “costs” under the Supplementary Payments Provision

17

(“SPP”). Reata responds that the No Action Clause instead constitutes the relevant coverage

18

provision. The Court finds the award of fees and costs in the arbitration constitute “costs” under the

19

SPP.

20

1.

21

The Insuring Clause provides:

22
23
24
25

Damages

“[NAC] will pay those sums that [Paragon] becomes legally liable
obligated to pay as damages for bodily injury or property damage to
which this Insurance applies.”
See Docket No. 21-3 (Yaeckel Decl., Ex. 1) (Ex. A to Compl. at JNI00046).
The definition of “damage” under the policy is inapposite. Under the policy, “Damage

26

means the estimated money equivalent for loss or injury sustained.” Id. at JNI00053. Attorney’s

27

fees and costs simply do not fall within the scope of “loss or injury sustained,” an expression that

28

envisions loss to the insured arising from bodily injury or property loss.

4

1

In interpreting a similar insurance provision, the Court in Prichard v. Liberty Mut. Ins. Co.

2

found that awarded attorney’s fees was “inconsistent with the concept of damages.” 84 Cal. App.

3

4th 890, 912 (citing Cutler-Orosi Unified Sch. Dist. v. Tulare Cnty. Sch. etc. Auth., 31 Cal. App. 4th

4

617, 631 [1994]); San Diego Hous. Comm’n. v. Indus. Indem. Co., 95 Cal. App. 4th 669 (2002);

5

Combs v. State Farm Fire & Cas. Co., 143 Cal.App.4th 1338, 1345 (2006). See AIU Ins. Co. v.

6

Super. Ct., 51 Cal.3d 807, 826-27 (1990). See also Croskey, et al., Cal. Practice Guide: Insurance

7

Litigation, ¶ 7:160.4, p. 7A-77 (Rutter Group 2012) (“fee awards are not ‘damages’ under a CGL

8

policy”).

9

Reata cites APL Co. Pte. Ltd. v. Valley Forge Ins. Co., 754 F. Supp. 2d 1084 (N.D. Cal.
2010) as holding to the contrary. The Court disagrees. In APL, the court interpreted the insurance

11
For the Northern District of California

United States District Court

10

policy as obligating the insurer to pay for attorney’s fees awarded to a third-party judgment creditor

12

in the underlying litigation. The court noted the policy obligated the insurer to “pay as damages

13

because of ‘bodily injury,’ ‘property damage,’ ‘personal injury,’ or ‘advertising injury’....” [citations

14

omitted], id. at 1094, and construed damages as encompassing compensation in money recovered for

15

loss or detriment, including “remunerative payment made to an aggrieved party.” Id. Critical to its

16

determination that a fee award was covered as damages under the policy was that the English rule

17

(wherein the losing party pays fees) applied to the case. Id. By contrast, the current case is not

18

governed by the English rule. In the absence of such rule, the California state court cases cited

19

above, rather than APL, applies. Accordingly, attorney’s fees and costs awarded in the underlying

20

case are not “damages” within the meaning of the NAC insurance policy.

21

2.

22

Instead, the award of fees and costs in the underlying case constitute “costs” under the SPP.

23

Supplementary Payments Provision

The Insuring Clause, in relevant part, provides:

24

“[Other than damages], [n]o other obligation or liability to pay sums or
perform acts or services is covered unless explicitly provided for
under SUPPLEMENTARY PAYMENTS - COVERAGES A AND
B.”

25
26

///

27

///

28

///

5

1

And, the Supplementary Payments Provision provides:

2

[SUPPLEMENTARY PAYMENTS PROVISION]

3

“[NAC] will pay with respect to any claim or suit [NAC]
defend[s]...[a]ll costs awarded against [Paragon] in the suit.”

4
5

The California courts have held that attorney’s fees and costs awarded to a third-party

6

claimant against the insured are covered as “costs” under insurance policies comparable to the

7

policy and the SPP clause. See Ins. Co. of N. Am. v. Nat’l Am. Ins. Co., costs are statutorily defined.

8

See Ins. Co. of N. Am. v. Nat’l Am. Ins. Co., 37 Cal. App. 4th 195, 206-207 (1995); San Diego

9

Housing Comm’n, supra, 95 Cal. App. 4th at 684 (2002); see also Clark, supra, 200 Cal. App. 4th at
398 (quoting San Diego Housing, 95 Cal. App. 4th at 685 (2002)); California Civil Code Section

11
For the Northern District of California

United States District Court

10

1033.5(a)(10) (“Attorney’s fees when authorized by any of the following: (A) contract, (B) statute,

12

or (C) law”).

13

3.

14

Reata argues that the No Action Clause, when interpreted along with other provisions,

No Action Clause

15

provides coverage of the entire judgment, including attorney’s fees and costs, and affords Reata the

16

right to sue NAC therefor. The No Action Clause provides:

17
18
19
20
21

“No person or organization has a right under this Coverage Part: [t]o
sue [NAC] on this Coverage Part unless all of its terms have been fully
complied with.”
“A person or organization may sue [NAC] to recover on an agreed
settlement or on a final judgment against an insured obtained after an
actual trial; but [NAC] will not be liable for damages that are not
payable under the terms of this Coverage Part or that are in excess of
the applicable limit of insurance.”

22

See Docket No. 21-3 (Yaeckel Decl., Ex. 1) (Ex. A to Compl. at JNI00051). In essence, Reata

23

contends that since there is a judgment entered against Paragon, this clause permits Reata to sue

24

NAC to recover the entire amount of the judgment.

25

The Court disagrees. The No Action Clause does not adjust the substantive scope of

26

coverage, nor does it create affirmative rights in third-party judgment creditors. Instead, by its plain

27

terms, the No Action Clause is only a procedural limitation on any suit against NAC brought by

28

third parties. This is clear from the first sentence: “No person or organization has a right under this

6

1

Coverage Part: [t]o sue [NAC] on this Coverage Part unless all of its terms have been fully complied

2

with.” The relevant condition that must be satisfied is that a final judgment has been rendered. See

3

Croskey, et al., Cal. Practice Guide: Insurance Litigation, Ch. 15-K, ¶ 15:1037, p. 15-179 (Rutter

4

Group 2012) (“‘no action’ clauses typically require a ‘final judgment’ or that the insured’s

5

obligation shall have been ‘finally determined’”). The mere fact of a judgment in the underlying

6

case does not confer coverage.

7

D.

8
9

11
For the Northern District of California

United States District Court

10

Third-Party Beneficiary
Once coverage is determined to exist, the only remaining issue is whether the third-party

judgment creditor may enforce coverage; to do so, it must be deemed a third-party beneficiary to the
insurance policy provision at issue under San Diego Housing and Clark.
In San Diego Housing, plaintiff brought a construction defect action against a general

12

contractor. Plaintiff proceeded against the insurer under Section 11580 to recover on a default

13

judgment, including an award of attorney’s fees and costs. The trial court held that plaintiff could

14

recover on the entire judgment, including costs covered by the Supplementary Payments Provision,

15

despite its status as a third-party beneficiary of the insurance policy. See San Diego Housing, 95

16

Cal. App. 4th at 677. The Court of Appeal modified the award to exclude amounts that were

17

covered by the Supplementary Payments Provision. The Court of Appeal reasoned that Section

18

11580 creates a beneficiary relationship between the judgment creditor and the insurer, but only as

19

to those policy terms created for his benefit. Id. at 691-92. The court then reasoned that costs

20

covered by the Supplementary Payments Provision were “clearly linked” to the insurer’s duty to

21

defend (in contrast to the insurer’s duty to indemnify) the insured. Id. at 691. The court concluded

22

that the third-party judgment creditor is only an “incidental beneficiary” of the duty to defend. Id. at

23

692 (citing Harper v. Wasau Ins. Co., 56 Cal. App. 4th 1079, 1089 (1997)). As such, the judgment

24

creditor was not an intended third-party beneficiary of the duty to defend and thus cannot recover on

25

the fee award of fees and costs which are covered solely under that duty. Accordingly, the creditor

26

could not sue the insurer under Section 11580 for fees and costs.

27
28

Similarly, in Clark, the plaintiff obtained a personal-injury judgment against an insured.
Because the insurer had dissolved, the California Insurance Guarantee Association (“CIGA”) issued

7

1

a check in partial satisfaction of the judgment. Plaintiff then brought an action under Section 11580

2

to recover the deficiency. The trial court held that a third-party judgment creditor may not enforce

3

an award of costs and interest in a direct action against an insurer under Section 11580, absent an

4

assignment of that right to the third-party judgment creditor. See Clark, supra, 200 Cal. App. 4th at

5

394. Accordingly, the trial court granted summary judgment for CIGA. The Court of Appeal

6

affirmed, concluding that since a judgment creditor is only an “incidental beneficiary” and not a

7

third-party beneficiary of the Supplementary Payments Provision, costs and interest awarded on a

8

judgment are not recoverable under Section 11580. See id. at 397-98. The court cited San Diego

9

Housing in support of its holding.
This Court is unaware of binding or persuasive authority that has disapproved of either San

11
For the Northern District of California

United States District Court

10

Diego Housing or Clark. A number of courts have relied on their reasoning in unpublished

12

opinions.3 See e.g., Sensation Leather, Inc. v. CIGA, No. BC203086, 2008 WL 5050436, *4 (Cal.

13

App. 2d Dist. 2008) (affirming denial of interest on judgment awarded to third-party judgment

14

creditor); Garamendi v. Golden Eagle Ins. Co., No. A102489, 2004 WL 1814163, *7 (Cal. App. 1st

15

Dist. 2004) (reversing trial-court order forcing insurer to accept indemnity claim made by third-party

16

judgment credit because claimant had no recourse without an assignment); Martinez v. Lincoln Gen.

17

Ins. Co., No. 07-CV-7569 (MLR), 2009 WL 6337983, *5 (C.D. Cal. Aug. 27, 2009), rev’d on other

18

grounds, 417 Fed. Appx. 711 (9th Cir. 2011) (unpublished). See Croskey, et al., Cal. Practice

19

Guide: Insurance Litigation, Ch. 15-K, ¶ 15:1042, pg. 15-181 (Rutter Group 2012) (notwithstanding

20

Section 11580, judgment creditor may not recover costs under the supplementary payments

21

provision).

22
23

Key to the holdings of San Diego Housing and Clark is the notion that an insurer’s duty to
pay “costs” under the Supplementary Payments Provision is “clearly linked” to an insurer’s duty to

24
25
26
27
28

3

California Rule of the Court 8.1115 provides that unpublished opinions “must not be cited
or relied on by a court or a party in any other action.” This Court, however, has cited these
unpublished California opinions not as decisional law or for its persuasive value. See OrtizSandoval v. Gomez, 81 F.3d 891, 895 (9th Cir. 1996) (taking note of unpublished California opinion
but not as “decisional law”); Vizcarra-Ayala v. Mukasey, 514 F.3d 870, 876 (9th Cir. 2008) (citing
unpublished California opinions only to show Calif. Penal Code section 475(c), which penalizes
forgery, had been applied outside of the generic definition of “forgery”).

8

1

defend, under which a third-party judgment creditor is only an incidental beneficiary, as opposed to

2

its duty to indemnify, under which it is the intended beneficiary. In Prichard, for example, the court

3

interpreted policy language nearly identical to portions of the Supplementary Payments Provision at

4

issue here as relating to the insurer’s duty to defend (and not its duty to indemnify):

5

“We will pay, with respect to any claim or ‘suit’ we defend: [¶]...[¶] 5.
All costs taxed against the insured in the ‘suit.’”

6

[(i.e., “we defend”)], the supplementary payments provision providing ‘costs taxed’ is a function of

9

the insurer’s defense obligation, not is indemnity obligation.” Id. Similarly, Justice Croskey of the

10

Second Appellate District noted that the words “in suits we defend” is typically interpreted to mean

11
For the Northern District of California

Prichard, 84 Cal. App. 4th at 911. In particular, the court noted: “As the italicized words indicate

8

United States District Court

7

“the insurer’s obligation to pay an award of costs against the insured [is] dependent on the defense

12

duty.” State Farm Gen. Ins. Co. v. Mintarsih, 175 Cal. App. 4th 274, 285-85 (2009).

13

To be sure, the Court recognizes an argument that an insurer’s duty to pay fees and costs

14

under the Supplementary Payments Provision, once incorporated into a final judgment against the

15

insured, seems akin to the duty to indemnify. “[P]roviding a defense is hardly the same as

16

indemnifying the insured for the other party’s costs and attorney fees that the insured becomes

17

obligated to pay only as the result of being found liable for the underlying misconduct.” Combs v.

18

State Farm Fire & Cas. Co., 13 Cal. App. 4th 1338, 1345-46 (2008). However, the California

19

courts that have addressed the precise issue at bar, Prichard, San Diego Housing, and Clark, have

20

consistently held against the third-party creditors on this question. The Court is obliged to follow

21

these cases as the best indicators of how the California Supreme Court would rule. Therefore, given

22

the current state of California law, as articulated by San Diego Housing and Clark, Reata, as the

23

third-party judgment creditor, may not recover directly from NAC fees and costs covered solely

24

under the policy’s SPP.

25

Reata argues that nonetheless, as a factual matter, the parties intended it as a third-party

26

beneficiary in this case. However, the determinations in San Diego Housing and Clark relevant to

27

NAC’s motion for summary judgment here – that (a) “costs” under the SPP are linked to the duty to

28

defend, and (b) a third-party judgment creditor is only an incidental beneficiary of that duty – appear

9

1

to have been resolved as questions of law. Moreover, even if either determination were a question

2

of fact, Plaintiff has adduced no material facts distinguishing the policy at issue here from the

3

supplementary payments provision at issue in San Diego Housing. In particular, Plaintiff has not

4

offered evidence probative on the issue of whether the parties, at the time of formation, intended

5

third-party judgment creditors, like itself, to be the intended beneficiaries of the SPP.4

6
7

III.

CONCLUSION

For the foregoing reasons, the Court grants Defendant’s motion for partial summary

8

judgment. More specifically, the Court concludes that, absent an assignment from the insured,

9

Plaintiff may not enforce directly against NAC the award of attorney’s fees and costs against

11
For the Northern District of California

United States District Court

10

Paragon.
This order disposes of Docket No. 21.

12
13

IT IS SO ORDERED.

14
15

Dated: July 5, 2013

16

_________________________
EDWARD M. CHEN
United States District Judge

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

4

Plaintiffs contend that two pieces of evidence support their interpretation that NAC is
responsible for fees and costs under the policy: (1) NAC’s decision to raise its “allocated loss
adjustment expense,” a measure of the insurer’s estimated coverage risk, to account for the
prevailing party fee award; and (2) NAC’s decision to fight the prevailing party fee awarded in
arbitration. See Docket Nos. 22-16 (Heimberger Decl., Ex. N), 22-9 (Heimberger Decl., Ex. G); 2213 (Heimberger Decl., Ex. K). At the outset, the Court notes that Reata does not contend the intent
of the parties was that judgment creditors would be intended beneficiaries of the SPP, which would
rebut the conclusion that Reata is only an incidental beneficiary. In any case, the Court finds that
such evidence would not create a genuine issue of material fact precluding summary judgment even
if the matters were not categorically questions of law. In particular, such evidence is not probative
of the party’s intention at the time of formation concerning whether judgment creditors were
intended beneficiaries of the Supplementary Payments Provision. Thus, unlike in City of Hope Nat’l
Med. Ctr. v. Genentech, Inc., which Reata cites approvingly, the conduct in question here occurred
well after the dispute had already arisen. City of Hope, 43 Cal. 4th 375, 349 (2008) (party’s conduct
after contract formation but before dispute arose admissible to resolve ambiguities in agreement).
Moreover, a decision to raise the allocated loss adjustment expense, for example, merely may
indicate caution on the part of the insurer rather than an admission that it could be directly liable to
Reata. Nor does such evidence create an ambiguity in the relevant policy language, especially since
Reata fails to identify what specific policy term is rendered ambiguous by this evidence.

10