Judge: Armen Tamzarian, Case: 23STCV25320, Date: 2024-06-26 Tentative Ruling
Case Number: 23STCV25320 Hearing Date: June 26, 2024 Dept: 52
Cross-Defendant
State National Insurance Co.’s Demurrer to Cross-Complaint
Cross-defendant
State National Insurance Co. (State National) demurs to all causes of action
alleged against it in the cross-complaint by cross-complainants Chateau Nob
Hill Apartments, LP and Global Integrity Realty Corporation.
3rd,
4th, and 6th Causes of Action: Declaratory Relief
The
cross-complaint asserts three causes of action for declaratory relief against
State National. Declaratory relief is
available “in cases of actual
controversy relating to the legal rights and duties of the respective parties” under
a contract. (CCP § 1060.) Declaratory relief “operates prospectively” (Baldwin v. Marina City Properties, Inc.
(1978) 79 Cal.App.3d 393, 407) and requires “a probable future controversy”
between the parties (Reiner v. Danial (1989) 211 Cal.App.3d 682,
688).
The gravamen of the cross-complaint is that
cross-complainants assert they are entitled to independent counsel to defend
them in the lawsuit underlying this coverage action. The three causes of action for declaratory
relief, however, do not actually seek such a declaration. The cross-complaint instead seeks detailed
declarations of various minutiae, avoiding the real issue:
are they entitled to Cumis counsel?
None of these causes of action
alleges an actual controversy relating to the parties’ rights and duties under
the insurance policy.
The
third cause of action alleges, “State National, [and] L&W have a duty to
Chateau and Global to not falsely represent that the harmonious tripartite
relationship eliminates any possibility for any conflict of interest that might
ethically disqualify L&W from representing the interests of both State National
and Chateau and Global in defending the Baroudi action. Chateau and Global are entitled to a
declaration from this Court that the tripartite relationship does not eliminate
any possibility for any conflict of interest that might ethically disqualify
L&W from representing the interests of both State National and Chateau and
Global in defending the Baroudi action.”
(¶¶ 34-35.)
This
is not an actual or prospective controversy.
A controversy is only justiciable if “the court can grant the plaintiff any effectual relief.” (Cuenca v. Cohen (2017) 8 Cal.App.5th
200, 217.) A conflict of interest
either exists or does not. What State
National “represents” to its insured about the possibility of a conflict makes
no difference. Issuing a declaration
that State National owes a duty to not say things it already said would not
constitute any effectual relief. And if State
National made a false representation in the past, at most, that would be a past
controversy not susceptible to prospective declaratory relief.
The fourth cause of action alleges, “Chateau
and Global are entitled to a declaration from this Court that L&W and State
National each have a duty to disclose to Chateau and Global whether L&W can
control the outcome of coverage issues created by State National’s reservation
of rights. Chateau and Global are also
entitled to a declaration from this Court that L&W and State National each
have a duty to disclose to Chateau and Global that if L&W can control the
outcome of coverage issues created by State National’s reservation of rights,
then L&W is disqualified from representing Chateau and Global without their
informed written consent and State National is obligated to pay independent
counsel to represent them in the Baroudi action unless they waive that right.” (¶¶ 39-40.)
This cause of action also does not
demonstrate an actual controversy.
Issuing such a declaration would not constitute effectual relief. Lynberg & Watkins either can or cannot control
the outcome of coverage issues. Whether
the firm or State National disclose that is irrelevant—particularly because cross-complainants
already know the thing they allege State National owes a duty to disclose. The cat is out of the bag. The latter declaration is phrased as an
“if/then” statement. (¶ 40.) That necessarily means it is hypothetical,
not actual. And, as State National
argues, this declaration amounts to merely restating rules of law.
The
sixth cause of action alleges, “Chateau and Global allege that State National
has no panel counsel who are ethically qualified to represent them in the defense
of the Baroudi action and that, therefore, the rate limitation provision of the
code does not apply. Chateau and Global
are entitled to a declaration from this Court that State National’s obligation
to pay fees to the independent counsel selected by Chateau and Global is not
limited to the rates which are actually paid by State National as set forth in Civil
Code § 2860.” (¶¶ 46-47.)
This is another hypothetical
controversy. Plaintiff’s opposition
relies solely on Handy v. First Interstate Bank (1993) 13 Cal.App.4th
917, which illustrates why this is not an actual controversy. There, the Court of Appeal stated: “The issue
presented in this case is whether a trial court can properly authorize an
arbitrator in an arbitration ordered pursuant to Civil Code section 2860 to
decide the foundational issues of whether the insurer had a duty to defend and
whether a conflict of interest existed between the insurer and insured
requiring appointment of independent counsel to represent the insured. We hold these preliminary matters, if
contested, may not be decided in an arbitration ordered pursuant to Civil Code
section 2860 but must be resolved by the trial court in the first instance.” (Id. at p. 924.)
This
cause of action seeks to skip the threshold matters and obtain declaratory
relief from this court about the amount paid to hypothetical independent
counsel. The presence of independent
counsel is a prerequisite to this purported dispute over how much to pay them. And if that dispute existed, it “shall be
resolved by final and binding arbitration.”
(Civ. Code, § 2860(c).) “ ‘[T]he
California Legislature has spoken. It
has decided that within the California courts these Cumis fee
issues are to be decided in an arbitration forum, not the state’s
judicial forum.’ ” (Long v. Century
Indem. Co. (2008) 163 Cal.App.4th 1460, 1474 (Long).)
The
sixth cause of action also fails for another reason. Cross-complainants provide no authority that,
absent a contrary policy provision, there is any exception to the statutory
limit on rates paid to independent counsel.
They instead argue Civil Code section 2860, including the rate limit,
does not apply at all. (Opp., pp.
13-14.) If so, then cross-complainants
are not entitled to independent counsel. How much the non-existent independent counsel
should be paid is not a real controversy.
8th
Cause of Action: Breach of Contract & 9th Cause of Action: Bad Faith
The cross-complaint alleges
sufficient facts for these causes of action.
The portions of the cross-complaint dedicated
to these causes of action (¶¶ 63-77) largely make conclusory allegations
without identifying what State National did to breach the contract. But the
court must read the complaint “as
a whole and all its parts in their context” (Moore v. Regents of University
of California (1990) 51 Cal.3d 120, 125) and must liberally construe
it in favor of the plaintiff (Perez v. Golden Empire Transit Dist. (2012) 209 Cal.App.4th 1228, 1238). When read as a whole, the cross-complaint
alleges State National breached the contract’s express terms and the implied
covenant of good faith and fair dealing by refusing to appoint independent
counsel.
Persuasive federal authority has held that failing
to provide independent counsel when required can constitute breach of the
insurance contract and breach of the implied covenant of good faith and fair
dealing. (Citizens Insurance Company
of America v. Chief Digital Advisors (S.D. Cal. 2020) 578 F.Supp.3d 1113,
1120-1122; see also Intergulf Development LLC v. Superior Court (2010)
183 Cal.App.4th 16, 20 [in dicta, discussing claims for breach of contract and
bad faith arising in part from failing to appoint independent counsel].) These causes of action therefore rely on the
existence of a conflict of interest requiring independent counsel.
The cross-complaint alleges sufficient facts
constituting such a conflict of interest.
“A reservation of rights by an
insurer does not necessarily constitute a conflict of interest requiring the
insurer to provide independent counsel. The
conflict must be ‘significant, not merely theoretical, actual, not merely
potential.’ ” (Centex Homes v. St.
Paul Fire & Marine Ins. Co. (2015) 237 Cal.App.4th 23, 30–31.) “Independent counsel may be required … ‘when
an insurer reserves its rights on a given issue and the outcome of that
coverage issue can be controlled by counsel first retained by the insurer for
the defense of the claim.’ ” (Id.
at p. 31.)
The cross-complaint
alleges a variation of a typical conflict of interest. The Court of Appeal has noted, “Perhaps the
most common situation in which a conflict of interest exists and independent or
Cumis counsel is required occurs when the insured’s allegedly wrongful
conduct could be found to be intentional, with coverage thus depending on the
ultimate characterization of the insured’s actions. Both the insured and the insurer, of course,
share a common interest in defeating the claims. But if liability is found, their interests
diverge in establishing the basis for that liability.” (Long, supra, 163 Cal.App.4th at p.
1471.)
Here, the parties share an interest in minimizing
overall liability in the underlying action, but their interests diverge in establishing the basis for the tenants’
damages. The cross-complaint
alleges, “State National asserts that damages claims by Baroudi caused by mold
are not covered, while damages claims caused by water intrusion are covered by
the Policies.” (CC, ¶ 12.) State National’s first amended complaint
alleges, “The underlying plaintiff alleges … damages because of exposure to or
the existence of mold at the property … .
The Policies do not afford coverage for the mold damages.” (FAC, ¶¶ 24-25.) The first amended complaint also seeks to
consolidate this action with the underlying action. (Id., ¶ 22.) It asserts, “Allowing the jury to determine
what percentage or amount of damages occurred because of mold will greatly
simplify the trial of this declaratory relief action.” (Ibid.)
State National is incentivized to minimize its
obligation to indemnify the insured via a determination that mold caused 100%
of the damages. The insured have the
opposite incentive. This is equivalent
to the typical conflict discussed in Long. On demurrer, the court cannot rule insurance
counsel have no control over that issue.
The cross-complaint therefore alleges sufficient facts for the eighth
and ninth causes of action.
10th
Cause of Action: “Injunctive Relief”
The cross-complaint does not allege
sufficient facts for this cause of action.
Though labeled “injunctive relief” (which is a remedy, not a cause of
action), this cause of action alleges “unlawful, unfair or fraudulent business
acts and practices.” (CC, ¶ 79.)
The
unfair competition law “ ‘borrows’ violations from other laws by making them independently
actionable as unfair competitive practices.”
(Korea Supply Co. v. Lockheed Martin Corp. (2003) 29 Cal.4th 1134, 1143.) A claim based on unlawful business
practices fails “when the underlying legal claim fails.” (AMN Healthcare,
Inc. v. Aya Healthcare Services, Inc. (2018) 28 Cal.App.5th 923, 950.)
Except
for the eighth and ninth causes of action, the cross-complaint’s underlying
legal claims fail. The opposition argues, “The 10th cause of
action seeks an injunction pursuant to Business & Professions Code § 17200
et. seq. for it [sic] unlawful, unfair or fraudulent business practices,
including those specified in the 3rd through 6th causes of action.” (Opp., p. 14.) Those claims fail and therefore do not
constitute unfair business practices.
The
eighth and ninth causes of action do not constitute unlawful acts under the
unfair competition law. “A breach of
contract, and by extension, a breach of the implied covenant of good faith and
fair dealing, is not itself an unlawful act for purposes of the UCL.” (Boland, Inc. v. Rolf C. Hagen (USA) Corp.
(E.D. Cal. 2010) 685 F.Supp.2d 1094, 1110.)
Disposition
Cross-defendant
State National Insurance Company’s demurrer to the cross-complaint’s third,
fourth, sixth, and 10th causes of action is sustained with 20 days’
leave to amend. The demurrer to the
eighth and ninth causes of action is overruled.
Notice
of Related Case
On
April 11, 2024, State National filed a notice of related case in this
action. But no notice of related case
was filed in the potentially related action, Rajia Anne Baroudi v. Global
Integrity Realty Corporation, No. 22STCV09009. California Rules of Court, rule 3.300(d)
provides, “The Notice of Related Case must be filed in all pending cases listed
in the notice and must be served on all parties in those cases.” Moreover, a notice of related case cannot be
ruled upon without filing it in the earliest action. “Where all the cases listed in the notice are
unlimited civil cases, or where all the cases listed in the notice are limited
civil cases, the judge who has the earliest filed case must determine whether
the cases must be ordered related and assigned to his or her department.” (Cal. Rules of Court, rule 3.300(h)(1)(A).) This court cannot determine whether the cases
are related.
The
parties are ordered to file a notice of related case in Rajia Anne
Baroudi v. Global Integrity Realty Corporation, No. 22STCV09009,
forthwith.
Cross-Defendant
State National Insurance Co.’s Special Motion to Strike
Cross-defendant
State National Insurance Co. (State National) moves under Code of Civil
Procedure section 425.16 to strike the cross-complaint by cross-complainants
Chateau Nob Hill Apartments, LP and Global Integrity Realty Corporation.
Legal Standard
for Anti-SLAPP Motion
Courts use a two-step
process for resolving anti-SLAPP motions under Code of Civil Procedure section
425.16: “First, the court decides whether the defendant has made a threshold
showing that the challenged cause of action is one arising from protected
activity.” (Navellier v. Sletten (2002) 29 Cal.4th 82, 88 (Navellier).) The defendant
must show “the cause of action is based on the defendant’s protected free
speech or petitioning activity.” (Id. at p. 89.)
Second, once the defendant establishes the
first element, courts “must then determine whether the plaintiff has
demonstrated a probability of prevailing on the claim.” (Navellier,
29 Cal.4th at p. 88.) “[T]he plaintiff
need only have stated and substantiated a legally sufficient claim.” (Ibid.,
internal quotes and citations omitted.)
“[C]laims with the requisite minimal merit may proceed.” (Id. at p. 94.) “Put another way, the plaintiff ‘must
demonstrate that the complaint is both legally sufficient and supported by a
sufficient prima facie showing of facts to sustain a favorable judgment if the
evidence submitted by the plaintiff is credited.’ ” (Wilson v. Parker, Covert & Chidester (2002)
28 Cal.4th 811, 821.)
Dismissed 5th
Cause of Action
On April 11,
2024, plaintiff voluntarily requested dismissal of the fifth cause of action
without prejudice. State National filed
this motion weeks later. It argues the
court should still strike the fifth cause of action to preclude
cross-complainants from reviving the claim.
The court has no
jurisdiction to strike the fifth cause of action after cross-complainants
voluntarily dismissed it. “[A]s
a general rule, a voluntary dismissal of an action deprives the court of both
subject matter and personal jurisdiction in that case. [Citation.]
Based on this general rule, ‘most orders entered after the dismissal are
void and have no effect.’ ” (Manhan
v. Gallagher (2021) 62 Cal.App.5th 504, 509.) “[I]f a plaintiff voluntarily dismisses the
case prior to the hearing on the anti-SLAPP motion, the court loses
jurisdiction to rule on the anti-SLAPP motion.”
(Dickinson v. Cosby (2017) 17 Cal.App.5th 655, 679.)
Protected
Activity
Cross-defendant’s
motion fails to show any remaining causes of action in the cross-complaint arise
from protected activity. “[T]he moving
defendant bears the burden of identifying all allegations of protected
activity, and the claims for relief supported by them. When relief is sought based on allegations of
both protected and unprotected activity, the unprotected activity is
disregarded at this stage.” (Baral v.
Schnitt (2016) 1 Cal.5th 376, 396 (Baral).) Protected activity includes any statement or
writing “made before a legislative, executive, or judicial proceeding, or any
other official proceeding authorized by law” (CCP § 425.16(e)(1)) or “made in
connection with an issue under consideration or review by a legislative,
executive, or judicial body, or any other official proceeding authorized by law”
(id., subd. (e)(2)).
The remaining
claims against State National do not arise from such protected activity. “ ‘A defendant may file a cross-complaint
against the plaintiff for any existing cause of action regardless of its nature
and origins. [Citation.] Only those cross-complaints alleging a cause
of action arising from the plaintiff’s act of filing the complaint
against the defendant and the subsequent litigation would potentially qualify
as a SLAPP action. [Citation.] For example, a person may attempt to bring a
SLAPP suit alleging that libelous allegations or statements were contained in
the complaint itself.’ ” (Raining
Data Corp. v. Barrenechea (2009) 175 Cal.App.4th 1363, 1373.) “ ‘A compulsory cross-complaint on a “related
cause of action” against the plaintiff [citation] would rarely, if ever,
qualify as a SLAPP suit arising from petition activity. By definition, a “related cause of action” is “a
cause of action which arises out of the same transaction, occurrence, or
series of transactions or occurrences as the cause of action which the
plaintiff alleges in his complaint.” [Citation.] The SLAPP suit is not “related” to the
transaction or occurrence which is the subject of the plaintiff’s complaint,
but arises out of the litigation process itself.’ ” (Id. at pp. 1373-1374.) State National’s motion makes only a brief,
conclusory argument about protected activity.
(Memo, p. 11.)
Every remaining
allegation against State National concerns the underlying transaction or
occurrence: the insurance coverage dispute for which State National brought
this action. For example, the sixth
cause of action for declaratory relief alleges State National owes a duty to
pay for independent counsel in the underlying lawsuit. (¶ 47.)
The eighth cause of action for breach of contract alleges State National
breached the insurance policy by failing to provide benefits. (¶ 64.)
The ninth cause of action alleges a claim for insurance bad faith. (¶¶ 68-76.)
For such claims, the Court of Appeal has noted, “While a breach of the
implied covenant of good faith and fair dealing may be carried out by means of
communications between the parties’ respective counsel, the fact of counsels’
communications does not transform the claim to one arising from protected
activity within the meaning of section 425.16.”
(Miller v. Zurich American Ins. Co. (2019) 41 Cal.App.5th 247,
258.)
The
cross-complaint’s remaining claims do not seek to hold State National liable
for filing this lawsuit or for anything done in the process of litigation. If State National is liable, it is liable for
failing to appoint independent counsel, among other things. Not for filing this lawsuit. That State National filed this lawsuit merely
evidences the dispute. State National
fails to meet its burden on the first element of this anti-SLAPP motion.
Disposition
Cross-defendant
State National Insurance Company’s special motion to strike is denied.