Judge: Joseph Lipner, Case: 23STCV23567, Date: 2024-04-02 Tentative Ruling
Case Number: 23STCV23567 Hearing Date: April 2, 2024 Dept: 72
SUPERIOR COURT OF CALIFORNIA
COUNTY OF LOS ANGELES
DEPARTMENT 72
TENTATIVE
RULING
|
KEVIN LAUGHLIN, Plaintiff, v. LIBERTY MUTUAL INSURANCE COMPANY,
et al., Defendants. |
Case No:
23STCV23567 Hearing Date: April 2, 2024 Calendar Number: 7 |
Defendants Ohio Casualty Insurance Company (“Ohio Casualty”)
and Ohio Security Insurance Company (“Ohio Security”) (collectively,
“Defendants”) demur to the First Amended Complaint (“FAC”) filed by Plaintiff
Kevin Laughlin (“Plaintiff”).
The Court SUSTAINS the demurrer to Plaintiff’s first and
second causes of action WITHOUT LEAVE TO AMEND.
The Court SUSTAINS the demurrer to Plaintiff’s third cause
of action WITH LEAVE TO AMEND.
Moreover, the Court grants Plaintiff’s request for leave to
amend to add to the complaint claims for negligent misrepresentation,
constructive fraud and/or abuse of process, presumably to correct the
deficiencies identified in this ruling.
Plaintiff shall have 20 days to amend the FAC.
The following facts are taken from the allegations in the
FAC and from the materials in Defendants’ request for judicial notice.
This case relates to an insurance dispute. On January 9,
2016, Defendants issued a commercial general liability insurance policy (the
“Policy”) to Sapphire Bakery Company, LLC (“Sapphire”). Sapphire is the named
insured under the Policy. Under the Policy, the named insured can extend
insurance coverage to any person or organization by means of a written contract
or written agreement.
Plaintiff runs Eagle Mist Corporation d/b/a Osagai
International (“Eagle Mist”), which invents and formulates food products. In
the summer of 2015, Plaintiff was asked to re-formulate a protein bar that he
was underselling. Plaintiff and Sapphire agreed that Sapphire would manufacture
the bars.
Before production began, Plaintiff contacted the CEO of
Sapphire and asked that Plaintiff and Eagle Mist be added as additional
insureds under the Policy. Sapphire provided Eagle Mist with a certificate of
liability insurance (the “COI”). As a federal court later found, Plaintiff
reasonably, but incorrectly, believed that Plaintiff and Eagle Mist were
additional insureds under the Policy.
In August 2016, litigation commenced against Eagle Mist,
Sapphire, and other entities involved in the production of the protein bars
(the “Underlying Action”).
Plaintiff contacted Defendant to tender the defense of the
Underlying Action and confirm coverage under the Policy. In October 2016,
Defendants confirmed that Plaintiff and Eagle Mist were covered under the
Policy and that they would provide coverage for Plaintiff’s defense in the
Underlying Action. From October 2016 through November 2019, Plaintiff received
numerous coverage position letters from Defendants where they maintained their
coverage position. Defendants paid all of Plaintiff’s legal bills from 2016
through 2019.
On November 5, 2019, a month before trial in the Underlying
Action, Defendants filed a lawsuit in the Eastern District of Missouri (the
“Federal Action”). Defendants sought declaratory relief absolving them of any
continuing duty to defend Plaintiff in the Underlying Action. Defendants also
raised a claim for unjust enrichment, seeking repayment from Plaintiff of the
defense costs they expended in his defense in the Underlying Action. Plaintiff
raised counterclaims for (1) bad faith; and (2) declaratory relief.
Defendants subsequently refused to pay for any more of
Plaintiff’s defense costs in the Underlying Action. A judgment was entered
against Plaintiff in the amount of $51,990.30 in the Underlying Action.
Defendants continued to defend Sapphire throughout the entire action.
The federal court granted summary judgment in Defendants’
favor on the declaratory relief claims and on Plaintiff’s bad faith claim. (Ohio
Casualty Insurance Company v. Eagle Mist Corporation (E.D. Mo., Dec. 22,
2021, No. 4:19-CV-2974-MTS) 2021 WL 6062520; (Ohio Casualty Insurance
Company v. Eagle Mist Corporation (E.D. Mo., Oct. 4, 2021, No.
4:19-CV-2974-MTS) 2021 WL 4523146.)
Following a bench trial, the federal court issued a judgment
for Plaintiff on Defendants’ unjust enrichment claim.
The federal court found that, although Plaintiff was not
actually an additional insured because no contract existed to provide as such,
Plaintiff reasonably believed that he was covered. (Ohio Casualty Insurance
Company v. Eagle Mist Corporation (E.D. Mo., Dec. 16, 2022, No.
4:19-CV-2974-MTS) 2022 WL 17735530, at *5.)
The court explained that “Defendants had a good faith basis
to believe they were Additional Insureds under the Policy. Laughlin reasonably
believed the COI was valid and conferred coverage. Several written and verbal
communications between Laughlin/Sapphire, Laughlin/Plaintiffs, and
Laughlin/Liberty Mutual show the same. The Court also notes that a single
mention in a twenty-five-plus-page boilerplate reservation of rights letter,
without any further action by Plaintiffs for three years, was insufficient to
put Defendants on notice they might not be covered under the Policy …. Plaintiffs
assumed defense and investigated their coverage position in 2016 (notably,
based on the same Policy and same documents reviewed in 2019 relied on to
disclaim coverage), Plaintiffs sent Defendants coverage letters in 2017, 2018,
and 2019, and Plaintiffs continuously paid Defendants’ legal fees over a
three-year period. Plaintiffs had the ability to investigate whether Defendants
were covered under their own Policy and to clarify their coverage position to
Defendants. Instead of doing so, for more than three years, Plaintiffs did not
notify Defendants of their lack of coverage, Plaintiffs paid Defendants’ legal
bills without involving Defendants, and Plaintiffs continued to defend
Defendants without so much as a peep of this potential coverage issue.
Plaintiffs offered no evidence to justify, what the Court considers,
inconsistent conduct.” (Ibid.)
The federal court further found that “the evidence here
shows, undisputedly, Plaintiffs belatedly asserted their coverage position when
they previously knew of their lack of coverage and took no steps to enforce
their coverage position until Defendants would be, in good faith, most
disadvantaged by Plaintiffs’ change in position. Plaintiffs’ failure to provide
evidence concerning their coverage decision is especially pronounced here given
that Defendants offered evidence that Plaintiffs’ decision to disclaim coverage
in 2019 may have been for nefarious purposes. While the Court stops short of
granting Defendants’ unclean hands defense, the Court notes that Defendants, at
the very least, offered testimony that Plaintiffs’ change in coverage position
was ‘strategic’ and the result of privileged communications with lawyers.” (Id.
at 6.)
Plaintiff filed this case on September 28, 2023 against
Liberty Mutual. Liberty Mutual has since been dismissed from this case. The
operative complaint is now the FAC, against Ohio Casualty and Ohio Security.
The FAC raises claims for (1) breach of covenant of good faith and fair
dealing; (2) malicious prosecution; and (3) unfair competition.
Defendants demurred to the FAC on March 1, 2024. Plaintiff
filed an opposition and Defendants filed a reply.
The Court grants Defendants’ request for judicial notice.
As a general matter, in a demurrer proceeding, the defects
must be apparent on the face of the pleading or via proper judicial
notice. (Donabedian v. Mercury Ins.
Co. (2004) 116 Cal.App.4th 968, 994.) “A demurrer tests the pleading
alone, and not the evidence or facts alleged.” (E-Fab, Inc. v. Accountants,
Inc. Servs. (2007) 153 Cal.App.4th 1308, 1315.) The court assumes the truth
of the complaint’s properly pleaded or implied factual allegations. (Ibid.) The only issue a demurrer is
concerned with is whether the complaint, as it stands, states a cause of
action. (Hahn v. Mirda (2007) 147 Cal.App.4th 740, 747.)
Where a demurrer is sustained, leave to amend must be
allowed where there is a reasonable possibility of successful amendment. (Goodman v. Kennedy (1976) 18 Cal.3d 335,
348.) The burden is on the plaintiff to show the court that a pleading can be
amended successfully. (Ibid.;
Lewis v. YouTube, LLC (2015) 244 Cal.App.4th 118, 226.) However, “[i]f
there is any reasonable possibility that the plaintiff can state a good cause
of action, it is error to sustain a demurrer without leave to amend.” (Youngman v. Nevada Irrigation Dist.
(1969) 70 Cal.2d 240, 245).
“A breach of the implied covenant of good faith and fair
dealing involves something beyond breach of the contractual duty itself and it
has been held that bad faith implies unfair dealing rather than mistaken
judgment.” (Careau & Co. v. Security
Pacific Business Credit, Inc. (1990) 222 Cal.App.3d 1371, 1394.) “If the
allegations do not go beyond the statement of a mere contract breach and,
relying on the same alleged acts, simply seek the same damages or other relief
already claimed in a companion contract cause of action, they may be
disregarded as superfluous as no additional claim is actually stated … [T]he
only justification for asserting a separate cause of action for breach of the
implied covenant is to obtain a tort recovery.” (Id. at pp. 1394-1395.) To recover in tort for breach of the implied
covenant, the defendant must “have acted unreasonably or without proper cause.”
(Id. at p. 1395 [citations and
italics omitted].)
Defendants argue that issue preclusion prevents Plaintiff’s
assertion of a claim for bad faith.
“As generally understood, [t]he doctrine of res judicata
gives certain conclusive effect to a former judgment in subsequent litigation
involving the same controversy.’ The doctrine has a double aspect. In its
primary aspect, commonly known as claim preclusion, it operates as a bar to the
maintenance of a second suit between the same parties on the same cause of
action. In its secondary aspect, commonly known as collateral estoppel, [t]he
prior judgment ... operates in a second suit ... based on a different cause of
action ... as an estoppel or conclusive adjudication as to such issues in the
second action as were actually litigated and determined in the first action.” (Boeken
v. Philip Morris USA, Inc. (2010) 48 Cal.4th 788, 797 [internal citations
and quotation marks omitted.)
“Claim preclusion, the primary aspect of res judicata, acts
to bar claims that were, or should have been, advanced in a previous suit
involving the same parties.” (DKN Holdings LLC v. Faerber (2015) 61
Cal.4th 813, 824 [internal quotations and citations omitted].) “Claim
preclusion arises if a second suit involves: (1) the same cause of action (2)
between the same parties (3) after a final judgment on the merits in the first
suit.” (Ibid.) “To determine whether two proceedings involve identical
causes of action for purposes of claim preclusion, California courts have
consistently applied the ‘primary rights' theory.” (Boeken v. Philip Morris
USA, Inc. (2010) 48 Cal.4th 788, 797 [internal quotations and citations
omitted].) “When two actions involving the same parties seek compensation for
the same harm, they generally involve the same primary right.” (Id. at
798.) A dismissal ordered by a court constitutes a final judgment. (Code Civ.
Proc., § 581d.)
“Issue preclusion differs from claim preclusion in two ways.
First, issue preclusion does not bar entire causes of action. Instead, it
prevents relitigation of previously decided issues. Second, unlike claim
preclusion, issue preclusion can be raised by one who was not a party or privy
in the first suit.” (DKN Holdings LLC v. Faerber, supra, 61
Cal.4th at p. 824.) “In summary, issue preclusion applies: (1) after final
adjudication (2) of an identical issue (3) actually litigated and necessarily
decided in the first suit and (4) asserted against one who was a party in the
first suit or one in privity with that party.” (Id. at p. 825.)
Here, the Federal Action was between, inter alia, Plaintiff
and Defendants. The federal court determined, in a final judgment on the
merits, that Plaintiff was not an insured under the Policy. Plaintiff is
therefore precluded from relitigating that issue here.
“Only one with the right to sue an insurance company for
contract damages for breach of the insurance policy can also sue the insurance
company for tort damages for breach of the covenant of good faith.” (Wexler
v. California Fair Plan Association (2021) 63 Cal.App.5th 55, 62, as
modified on denial of reh'g (Apr. 19, 2021), as modified (Apr. 26, 2021).)
Because Plaintiff was not an insured under the Policy and
therefore cannot sue on the contract itself, he also cannot sue for breach of
the covenant of good faith and fair dealing that travels with the contract.
The Court therefore sustains the demurrer to this cause of
action without leave to amend.
“A plaintiff must plead and prove three elements to
establish the tort of malicious prosecution: a lawsuit (1) was commenced by or
at the direction of the defendant and was pursued to a legal termination
favorable to the plaintiff; (2) was brought without probable cause; and (3) was
initiated with malice.” (Nunez v. Pennisi
(2015) 241 Cal.App.4th 861, 872, quotation marks omitted.)
Defendants base their demurrer to this cause of action solely
on the asserted absence of the element of “a legal termination favorable to the
plaintiff.” Defendants argue that
Plaintiff did not achieve a favorable termination in the Federal Action because
he lost on Defendants’ declaratory relief claim and his cross-claims at the
summary judgment stage. Plaintiff argues that he obtained a favorable termination
because he prevailed at trial on the unjust enrichment claim, the only
remaining cause of action at that point.
Current case law supports Defendants’ argument. The California Supreme Court has stated that,
in order to bring a malicious prosecution claim, “there must first be a
favorable termination of the entire action.” (Crowley v. Katleman
(1994) 8 Cal.4th 666, as modified (Nov. 30, 1994) [emphasis in original].) Appellate
courts have quoted Crowley for the principle that favorable termination
must be of the entire action. (See, e.g., Citizens of Humanity, LLC v.
Ramirez (2021) 63 Cal.App.5th 117, 128; Lane v. Bell (2018) 20
Cal.App.5th 61, 76; Pasternack v. McCullough (2015) 235 Cal.App.4th
1347, 1356.)
In its opposition, Plaintiff does not respond directly to
this argument or the case law cited by Defendants on this point. Although Plaintiff has not made this
argument, the Court notes that the case law cited by Defendants stands in some
tension with an older line of cases that held that favorable resolution of a
claim that is “severable” from the others could be the basis for a malicious
prosecution claim. In 1956, the California Supreme Court held that a plaintiff
could plead favorable termination in an underlying action even where the
defendant obtained a money judgment against the plaintiff, if the claims on
which the plaintiff prevailed are severable from the claims on which the
plaintiff did not. (Albertson v. Raboff (1956) 46 Cal.2d 375, 378.)
Subsequent appellate decisions interpreted Albertson as allowing the
severance of claims that are sufficiently distinct for determining whether an
action is favorably terminated. (Tabaz v. Cal Fed Finance (1994) 27
Cal.App.4th 789, 793; Paramount General Hospital Co. v. Jay (1989) 213
Cal.App.3d 360, 368-369.)
But the Court cannot find more modern cases that follow this
line of reasoning concerning the severability of claims for malicious
prosecution purposes. The 2018 case of Lane
v. Bell noted that “although Crowley did not expressly overrule Albertson
in this respect, we question if any part of the so-called ‘severability’
analysis survives …. Crowley 's overarching conclusion … was that ‘there
must first be a favorable termination of the entire action’, … which appears
inherently inconsistent with Albertson's
‘severability-for-purposes-of-favorable-termination’ approach. In our view, the
logic of Crowley—if not its explicit language—has overruled this aspect of
Albertson.” (Lane, supra, 20 Cal.App.5th at pp. 75–76 [internal
citations omitted; cleaned up].)
Appellate law following Crowley has treated
non-severance as the law. Accordingly, to support a malicious prosecution
action, Plaintiff would have had to prevail on all of his claims. In the federal action, however, Defendants prevailed,
and Plaintiff lost, on certain claims. The
Court therefore sustains the demurrer to this cause of action without leave to
amend.
Plaintiff argues in part that Defendants’ conduct was unfair
because it breached the covenant of good faith and fair dealing. As discussed above, Plaintiff’s claim of bad
faith is not tenable.
However, Plaintiff under these facts should be given a
chance to amend to state a claim separate from the bad faith claim to explain
why the conduct of Defendants is otherwise “unlawful, unfair or fraudulent.”
The Court therefore sustains the demurrer with leave to amend as to this cause
of action.
Moreover, Plaintiff has argued that it can cure certain of
the issues discussed above by asserting claims for constructive trust,
negligent misrepresentation and/or abuse of process. Plaintiff may attempt to do so in the amended
complaint.