Mancini et al v. The Insurance Corporation of New York et al

Filing 84

ORDER Granting in part and Denying in part 65 Defendant's Ex Parte Motion to Stay Proceedings: Defendant's ex parte motion to stay proceedings is DENIED with respect to plaintiffs first and second causes of action for breach of contract, and is GRANTED IN PART with respect to plaintiffs claims based on breach of the implied covenant of good faith and fair dealing. INSCORP shall within 30 days communicate this courts decision to the New York Supreme Court and the New York Superintendent of Insurance. IT IS FURTHER ORDERED that the action shall proceed immediately as to plaintiffs breach of contract claims. Signed by Judge M. James Lorenz on 3/15/2010. (mjj) (jrl).

1 2 3 4 5 6 7 8 9 10 11 CAROL MANCINI, et al., 12 13 14 15 16 17 ) ) ) Plaintiffs, ) ) v. ) THE INSURANCE CORPORATION OF ) ) NEW YORK, ) ) Defendant. ) Civil No. 07cv1750-L(NLS) ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT'S EX PARTE MOTION TO STAY PROCEEDINGS [doc. #65] UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF CALIFORNIA

On June 23, 2009, defendant Insurance Corporation of New York ("INSCORP") filed an

18 ex parte motion to stay the proceedings in the above-captioned case. In its application to stay 19 this action, INSCORP provided notice that the New York Supreme Court entered a Temporary 20 Restraining Order enjoining prosecution of all actions against INSCORP throughout the United 21 States. The motion for a TRO was brought by the New York State Superintendent of Insurance. 22 Thereafter, on June 29, 2009, the New York Supreme Court entered an Order of Rehabilitation 23 with respect to INSCORP. (Lozano Declar., Exh. A.) 24 25 26 27 28 The Order of Rehabilitation provides, inter alia, that: 10. All persons are permanently enjoined and restrained from commencing or prosecuting any actions or proceedings against INSCORP, . . . with respect to claims against INSCORP; 11. All persons are permanently enjoined and restrained from obtaining preferences, judgments, attachments or other liens, or making any levy against
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INSCORP's assets or any party thereof; . . .

As a result of the Order of Rehabilitation and because both New York and California

4 have adopted the Uniform Insurers Liquidation Act ("UILA"), ­ which makes them reciprocal 5 states ­ defendant argues that this action must be stayed. Plaintiffs oppose the stay contending 6 under Ninth Circuit law, the UILA does not prohibit plaintiffs from maintaining the present in 7 personam action. See Hawthorne Sav. F.S.B. v. Reliance Ins. Co. of Ill., 421 F3d 835 (2005). 8 The purpose of the UILA was to provide for a uniform, orderly and equitable method of

9 making and processing claims against a defunct insurer and to provide for a fair procedure to 10 distribute the assets of the insolvent insurance carrier. Id. at 852, fn. 20 (citing G.C. Murphy Co. V. 11 Reserve Ins. Co., 54 N.Y. 2d 69 (Ct. App. 1981). In other words, the UILA "bar[s] claimants from 12 directly interfering with liquidation proceedings." Id. at 855. 13 The UILA prevents actions in California to enforce or collect on a judgment against an

14 insurer in insolvency proceedings in a reciprocal state: "[N]o action or proceeding in the nature 15 of an attachment, garnishment, or execution shall be commenced or maintained in the courts of 16 this state against the delinquent insurer or its assets." Id. (quoting CAL. INS. CODE § 1064.9). 17 The Hawthorne Court noted that this "language suggests that an `action or proceeding' may be 18 maintained unless it is "in the nature of an attachment, garnishment, or execution.'" Id. 19 (emphasis in original). Therefore, the Hawthorne Court held that the UILA does not prohibit a 20 party from maintaining a California in personam action to obtain a judgment against an insurer 21 in insolvency proceedings elsewhere. Id. ("(A)n action in personam to establish the extent of an 22 insolvent's liability on a claim is held not to interfere with the receivership res." ). Accordingly, 23 under Ninth Circuit law interpreting California law, an in personam action against a receivership 24 defendant in a reciprocal UILA state need not be brought in the receivership court and a stay in 25 the federal or state court is unwarranted. 26 But defendant contends that this Court should not apply Hawthorne but instead should

27 rely upon an earlier California Supreme Court case, Webster v. Superior Court of Los Angeles 28 County, 46 Cal. 3d 596 (1988). In Webster, plaintiff filed an action in the California state court
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1 based on injuries he had suffered during a shooting at the offices of his employer that shared 2 offices with Enterprise Insurance Company ("Enterprise"). Enterprise, a California insurance 3 company, had liability insurance coverage for Webster's lawsuit. Id. at 342. While Webster's 4 case was proceeding, Enterprise was placed in insolvency proceedings. The Insurance 5 Commission of California ("Commissioner") obtained an order that provided that "all persons 6 are hereby enjoined from maintaining or instituting any action at law or suit in equity . . ." 7 against Enterprise or the Commissioner. Id. at 342. Webster sought relief from the stay which 8 was denied. In response, Webster offered to stipulate that he would seek to recover from 9 Enterprise's liability insurance carrier only and not from Enterprise's assets. The court of 10 appeals affirmed the denial of the lift stay order based upon California Insurance Code § 1020. 11 12 13 14 15 16 Section 1020 provides in relevant part: [T]he court shall issue such other injunctions or orders as may be deemed necessary to prevent any or all of the following occurrences: (a) Interference with the commissioner or the proceeding. ... (c) The institution or prosecution of any actions or proceedings. In reversing the court of appeals, the California Supreme Court held that § 1020 did not

17 require the mandatory imposition of a stay of proceedings against an insolvent insurer. Webster, 18 46 Cal. 3d at 343. Instead, a stay is discretionary. Id. at 345. Noting that Enterprise was both 19 an insurer and an insured, the Court found that Enterprise's status as an insured was controlling 20 and Insurance Code § 11580 was applicable which allows a direct action against an insolvent 21 insured tortfeasor. Id. at 346. Therefore, the Court lifted the stay and allowed Webster to 22 maintain his action against Enterprise because its assets would be preserved as any recovery 23 would be paid by Enterprise's insurance carrier.1 24 Here, defendant has indicated that INSCORP has no insurance coverage against

25 plaintiff's bad faith claims and the only assets plaintiff can proceed against with respect to the 26 The Court required Webster to notify the court supervising the insolvency action that he "unequivocally elect[ed] to recover payment of any judgment against Enterprise only 28 from its insurers and that he [would] not under any circumstances seek to recovery from Enterprise's assets. Webster, 46 Cal. 3d at 350. 27
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1 bad faith claims are INSCORP's own assets. The New York court has ordered INSCORP's 2 assets be preserved as part of its liquidation. 3 If plaintiffs' complaint were based solely on bad faith claims, there would be an argument

4 that no insurance would be available to pay plaintiffs claims if they are successful. However, 5 plaintiffs also bring claims for breach of written contract based on failure to defend and failure to 6 indemnify. INSCORP is silent as to whether it has insurance coverage for such claims. If it 7 does, then plaintiffs should be permitted to maintain their breach of contract claims because 8 INSCORP's assets would not be impacted. 9 Based on the foregoing, IT IS ORDERED defendant's ex parte motion to stay

10 proceedings is DENIED with respect to plaintiffs' first and second causes of action for breach of 11 contract, and is GRANTED IN PART with respect to plaintiffs' claims based on breach of the 12 implied covenant of good faith and fair dealing. INSCORP shall within 30 days communicate 13 this court's decision to the New York Supreme Court and the New York Superintendent of 14 Insurance. IT IS FURTHER ORDERED that the action shall proceed immediately as to 15 plaintiffs' breach of contract claims. 16 IT IS SO ORDERED.

17 DATED: March 15, 2010 18 19 20 COPY TO: 21 HON. NITA L. STORMES UNITED STATES MAGISTRATE JUDGE 22 23 ALL PARTIES/COUNSEL 24 25 26 27 28
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M. James Lorenz United States District Court Judge