Judge Randolph M. Hammock, Case Number: 23STCV07137, Date: 2024-06-06 Tentative Ruling

Judge: Randolph M. Hammock, Case: 23STCV07137, Date: 2024-06-06 Tentative Ruling

Plaintiff Creditors Adjustment Bureau, Inc., is the assignee of debts from the State Compensation Insurance Fund. Plaintiff brings this action to collect on the debts from Defendant JC&J Construction, Inc., owed as premiums pursuant to a written agreement to provide workers compensation insurance to Defendant. Plaintiff asserts causes of action for (1) breach of contract, (2) open book account, (3) account stated, and (4) reasonable value.

If a plaintiff wishes to amend a complaint after the answer has been filed or after the demurrer has been filed and after the hearing on the demurrer, or if he or she has already amended the complaint “of course,” permission of the court must be obtained before the amendment will be allowed. (CCP §§ 473(a)(1), 576.)

Motions for leave to amend the pleadings are directed to the sound discretion of the court. “The court may, in furtherance of justice, and on any terms as may be proper, allow a party to amend any pleading . . . .” (CCP § 473(a)(1); see CCP § 576.) Policy favors liberally granting leave to amend so that all disputed matters between the parties may be resolved. (See Howard v. County of San Diego (2010) 184 Cal.App.4th 1422, 1428.) Absent prejudice to the adverse party, the court may permit amendments to the complaint “at any stage of the proceedings, up to and including trial.” (Atkinson v. Elk Corp. (2003) 109 Cal.App.4th 739, 761 [internal quotes omitted].)

Although denial is rarely justified, a judge has discretion to deny leave to amend if the party seeking the amendment has been dilatory, and the delay has prejudiced the opposing party. (Morgan v. Sup.Ct. (1959) 172 Cal.App.2d 527, 530; see also Hirsa v. Superior Court (1981) 118 Cal.App.3d 486, 490). An opposing party is prejudiced where the amendment would necessitate a trial delay along with a loss of critical evidence, added preparation expense, increased burden of discovery, etc. (Magpali v. Farmers Group, Inc. (1996) 48 Cal.App.4th 471, 486-488.

Ordinarily, the court will not consider the validity of the proposed amended pleading in ruling on a motion for leave since grounds for a demurrer or motion to strike are premature. The court, however, does have discretion to deny leave to amend where a proposed amendment fails to state a valid cause of action as a matter of law and the defect cannot be cured by further amendment. (See California Casualty General Ins. Co. v. Superior Court (1985) 173 Cal.App.3d 274, 281 (overruled on other grounds by Kransco v. American Empire Surplus Lines Ins. Co. (2000) 23 Cal.4th 390).)

Plaintiff moves for leave to file a First Amended Complaint. By the proposed amendment, Plaintiff will add treble damages to the prayer for relief due to Defendant’s alleged failure to allow a physical audit for the insurance policies at issue under Insurance Code § 11760.1.

Under Insurance Code Section 11760, where an employer fails to provide an insurer or its authorized representative access to its records to perform an audit, the “employer shall be liable to pay to the insurer a total premium for the policy equal to three times the insurer’s then-current estimate of the annual premium on the expiration date of the policy.” (§ 11760.1(a).) To recover the 3X damages, the insurer must comply with subdivision (d), which requires the insurer to “notify the employer through its mailing of a certified, return-receipt, document of the increased premium and the total amount of the costs incurred by the insurer for its attempts to perform an audit…” (§ 11760.1(d).)

Under CRC Rule 3.1324(a), a plaintiff seeking leave to amend must provide (1) the effect of the amendment; (2) why the amendment is necessary and proper; (3) when the facts giving rise to the amended allegations were discovered; and (4) the reasons why the request for amendment was not made earlier. (CRC, Rule 3.1324(b).)

Plaintiff represents that before and after the filing of this complaint, Plaintiff made at least three attempts over a ninety-day period to obtain Defendants’ records for audit purposes. On August 31, 2023—after the filing of the Complaint—Plaintiff sent a letter to Defendant’s counsel pursuant to California Insurance Code 11760.1. (Freed Decl. 4, Exh. 1.) The letter informed Defendant’s counsel that Plaintiff would seek an increased premium equal to three times Plaintiff’s then-current premium estimate based on Defendant’s failure to cooperate with the audit. (Id.)

As an initial point, it must be noted that the proper procedure under these circumstances—where new causes of action arise after the filing of the original complaint—is not an amended complaint, but a supplemental complaint.

“A ‘supplemental’ pleading is used to allege facts occurring after the original pleading was filed. [Citation.] In contrast, the additional allegations in an ‘amended’ pleading address matters that had occurred before the original pleading was filed.” (Foster v. Sexton (2021) 61 Cal.App.5th 998, 1032.) Code of Civil Procedure section 464, subdivision (a) provides: “The plaintiff and defendant, respectively, may be allowed, on motion, to make a supplemental complaint or answer, alleging facts material to the case occurring after the former complaint or answer.” As with amended pleadings, a motion to file supplemental pleadings is addressed to the sound discretion of the court and the same policy favoring liberality in amending pleadings applies. (Louie Queriolo Trucking, Inc. v. Sup.Ct. (1967) 252 Cal.App.2d 194, 197.) The court therefore construes the motion as one for leave to file a supplemental complaint.

Moving on, Defendant opposes the filing of an amended or supplemental pleading. Defendant argues the amendment would be futile because Plaintiff failed to comply with the statutory requirements of section 11760.1. As already discussed, to receive 3X treble damages under this section, the insurer must “notify the employer through its mailing of a certified, return-receipt, document of the increased premium and the total amount of the costs incurred by the insurer for its attempts to perform an audit as described under subdivision (a).” (§ 11760.1(d).) Defendant contends this has not been satisfied because Plaintiff mailed the letter not to the Defendant-employer, but instead to Defendant’s counsel.

Although courts may deny leave to amend where it appears the amendment would be futile, the “better course of action” is to permit the amendment, “and then let the parties test its legal sufficiency in other appropriate proceedings.” (Atkinson v. Elk Corp. (2003) 109 Cal. App. 4th 739, 760.) Thus, the court need not determine conclusively at this time whether service on Defendant’s attorney was sufficient to comply with section 11760.1(d).

With that said, the court does note that the current California Rules of Professional conduct generally prohibit a lawyer from “communicat[ing] directly or indirectly about the subject of the representation with a person the lawyer knows to be represented by another lawyer in the matter, unless the lawyer has the consent of the other lawyer.” (Rule 4.2(a).) [FN ] Moreover, Defendant provides no authority suggesting service on a represented party’s attorney would be insufficient to give notice to the represented party. In other words, there is no clear indication as a matter of law that the amendment would be futile.

Defendant also argues it would suffer prejudice by the amendment, suggesting that Plaintiff possesses only “limited authority” as assignee of the State Compensation Insurance Fund, and that does not include authority to amend the complaint.

Defendant cites no on-point authority for that position. It also defies common sense. Plaintiff was assigned the case from the State Compensation Insurance Fund “for collection purposes.” (Compl. ¶ 4.) The pursuit of treble damages authorized by § 11760.1 is undoubtedly a collection purpose. Additionally, the ability to amendment the complaint to assert the claim for treble damages is necessary for that purpose. Therefore, Defendant has not demonstrated that Plaintiff lacks authority to amend the complaint, or that Defendant will be unduly prejudiced by the amendment.

Therefore, leave to amend is appropriate. This is consistent with the “policy of great liberality in allowing amendments at any stage of the proceeding so as to dispose of cases upon their substantial merits.” (Bd. of Trustees v. Superior Ct. (2007) 149 Cal. App. 4th 1154, 1163.)

Judge of the Superior Court

FN 1- On the other hand, the rule does not prohibit “communications otherwise authorized by law…” (Rule 4.2(c)(2).) Undoubtedly a letter to the employer, which is expressly required by Insurance Code section 11760.1(d), would be a communication authorized by law. Thus, the court has its doubts that the letter needed to be sent to Defendant’s counsel rather than the Defendant.