Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-5_09-cv-04853/USCOURTS-cand-5_09-cv-04853-4/pdf.json

Nature of Suit Code: 423
Nature of Suit: Bankruptcy Withdrawal 28 USC 157
Cause of Action: 28:0157 Motion for Withdrawal of Reference

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 This disposition is not designated for publication in the official reporter. 1

Case No. C 09-4853

ORDER GRANTING IN PART, DENYING IN PART, AND DEFERRING IN PART PLAINTIFF'S MOTION FOR

SUMMARY JUDGMENT, ETC.

(JFLC3) 1

**E-Filed 5/19/10**

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

SAN JOSE DIVISION

IN RE:

SONIC BLUE INCORPORATED, a Delaware

corporation; et al.,

 Debtors.

_________________________________________

DENNIS J. CONNOLLY, Plan Administrator for

SONICblue Incorporated,

 Plaintiff,

 v.

ADMIRAL INSURANCE COMPANY and OLD

REPUBLIC INSURANCE COMPANY,

 Defendants.

District Court Case No. C 09-4853 JF 

Chapter 11 Case No. 03-51775 MM

(Case Nos. 03-51775 through 03-51778)

(Jointly Administered)

Adv. Proc. No. 09-05270

ORDER GRANTING IN PART, 1

DENYING IN PART, AND

DEFERRING IN PART

PLAINTIFF’S MOTION FOR

SUMMARY JUDGMENT;

GRANTING OLD REPUBLIC

INSURANCE COMPANY’S

MOTION FOR PARTIAL

SUMMARY JUDGMENT; AND

DENYING ADMIRAL INSURANCE

COMPANY’S MOTIONS TO

DISMISS AND FOR PARTIAL

SUMMARY JUDGMENT

[re: docket nos. 4, 17, 22, 27]

Defendant Admiral Insurance Company (“Admiral”) moves to dismiss Plaintiff’s

complaint for lack of jurisdiction. Fed. R. Civ. P. 12(b)(1). Plaintiff Dennis Connolly, plan

Case 5:09-cv-04853-JF Document 61 Filed 05/19/10 Page 1 of 18
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Where indicated with brackets, the Court has made modifications for brevity and clarity. 2

Case No. C 09-4853

ORDER GRANTING IN PART, DENYING IN PART, AND DEFERRING IN PART PLAINTIFF'S MOTION FOR

SUMMARY JUDGMENT, ETC.

(JFLC3) 2

administrator for SONICblue Incorporated (“Plaintiff”), Defendant Old Republic Insurance

Company (“Old Republic”), and Admiral each move for partial summary judgment. The Court

has considered the moving and responding papers and the oral argument of counsel presented at

the hearing on April 9, 2010. For the reasons discussed below, Plaintiff’s motion will be granted

in part, denied in part, and deferred in part; Old Republic’s motion will be granted; and

Admiral’s motions dismiss will be denied. 

I. Background

The relevant facts are undisputed. The following summary is taken from Plaintiff’s

motion, which is both echoed in and cited by Defendants in their moving papers:

2

In 2002, SONICblue purchased a Directors’ and Officers’ Liability

Insurance Policy (the “Primary Policy”) from Admiral . . . providing $5 million

worth of coverage. As a premium for the Primary Policy, SONICblue paid a gross

amount of $750,000 to its insurance broker, Technology Insurance Services, of

which a net amount of $630,000 (subtracting commissions) was paid to Admiral. 

See Declaration of Sandy Osgood in Support of Plan Administrator’s Motion for

Summary Judgment (“Osgood Declaration”), ¶¶ 3–4. SONICblue also purchased

an Excess Directors’ and Officers’ Liability and Reimbursement Coverage Policy

(the “Excess Policy”) from Old Republic . . . , providing excess coverage of $5

million. As a premium for the Excess Policy, SONICblue paid a gross amount of

$585,000, of which a net amount of $497,250 was paid to Old Republic. See

Osgood Declaration, ¶¶ 3–4.

On March 21, 2003, SONICblue and three of its subsidiaries filed petitions

for relief under chapter 11 of the Bankruptcy Code. [“Once SONICblue filed

bankruptcy, the automatic stay imposed under section 362(a)(3) of the Bankruptcy

Code issued.” (Admiral’s Cross-Mot. for Part. Summ. J. 2.)] Two years later, on

April 21, 2005, a group of SONICblue creditors (the “Bondholders”) filed a

lawsuit (the “Underlying Action”) (originally in the Santa Clara Superior Court,

but the case was later removed to the Bankruptcy Court) against a group of

SONICblue directors and officers (the “D&O Defendants”) alleging breach of

fiduciary duty and constructive fraud and seeking up to $50 million in damages. 

[citation omitted] Later that year, on December 23, 2005, Admiral and Old

Republic filed an adversary complaint (the “Coverage Action”) against

SONICblue and the D&O Defendants, seeking to establish that they had no

obligation to provide insurance coverage under their respective D&O Policies in

connection with the Underlying Action. [citation omitted] Among the asserted

grounds for relief were claims for “Rescission of the Primary Policy” and

“Rescission of the Excess Policy.” [citation omitted] [“By the Coverage Action,

Old Republic [and Admiral] sought to resolve issues of coverage and/or to reform

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Case No. C 09-4853

ORDER GRANTING IN PART, DENYING IN PART, AND DEFERRING IN PART PLAINTIFF'S MOTION FOR

SUMMARY JUDGMENT, ETC.

(JFLC3) 3

or, in the alternative, rescind the [Primary and Excess Policies] as to the [D&O

Defendants].” (Old Republic’s Cross-Mot. for Summ. J. (“MSJ”) 2.)] 

[“SONICblue was named as a defendant in the Coverage Action and was made

aware of the action but requested that it not be served with the carriers’ Complaint

so as to preserve the SONICblue estate’s assets, and in fact SONICblue did not

participate in the Coverage Action.” (Admiral’s Cross-Mot. for Part. Summ. J. 3

(footnote omitted).)] 

In support of their claims for rescission of the Primary and the Excess

Policies, Admiral and Old Republic alleged that the D&O Defendants failed to

disclose certain relevant communications in the policy application; that Admiral

and Old Republic reasonably relied on the misrepresentations and/or omissions;

that the non-disclosures were material to Admiral and Old Republic; that Admiral

and Old Republic were “ready, willing and able to return to SONICblue” the

Primary and Excess Policy premiums; and that the Primary and Excess Policies

should therefore be rescinded. [citation omitted] 

In 2007, a settlement [of the Underlying Action] was reached among the

Bondholders, the D&O Defendants, and Admiral and Old Republic, pursuant to

which: (a) certain consideration was to be paid contingent on the outcome of the

Coverage Action; (b) the Bondholders substituted into the Coverage Action in

place of the D&O Defendants; and (c) Old Republic dismissed its claims, leaving

Admiral as the plaintiff [in the Coverage Action]. [citation omitted] 

Th[is] Court withdrew the reference of the Coverage Action (Case No.

C07-4185 JF) [citation omitted] and both sides filed motions for summary

judgment. On May 28, 2009, in response to a request by the District Court for

supplemental briefing, Admiral argued that it was “entitled to rescind the policy

with the reimbursement to SONICblue of its premium for the Policy.” Admiral

Insurance Company’s Supplemental Brief in Response to the Court’s Summary

Judgment Order [] 8. It stated that it remained “ready, willing and able to repay to

SONICblue’s Administrator the full amount of the premium paid to Admiral by

SONICblue, for the benefit of its creditors.” Id. at 7. It invited the [C]ourt to

“grant Admiral’s motion for summary judgment, rescind the Admiral Policy, and

in doing so, provide the only form of relief in this case that provides any benefit to

SONICblue’s estate.” Id. at 8.

On August 14, 2009, the [] Court granted summary judgment in favor of

Admiral, finding that it was entitled to rescind its policy. The [C]ourt found that

material facts were omitted from the policy application, and that rescission was

therefore warranted:

“When a policyholder conceals or misrepresents a material

fact on an insurance application, the insurer is entitled to rescind

the policy.” LA Sound USA, Inc. v. St. Paul Fire & Marine Ins.

Co., 156 Cal. App. 4th 1259, 1266 (2007). Accordingly, Admiral’s

motion for summary judgment on its claim for rescission will be

granted.

[Admiral Insurance Co. v. SONICblue, Inc., No. C07-4185 JF, 2009 WL

2512197, at *7 (N.D. Cal. Aug. 14, 2009).]

On September 14, 2009, Plaintiff Dennis J. Connolly (who was appointed

Chapter 11 Trustee for SONICblue on April 17, 2007, and is currently Plan

Administrator under a plan confirmed on December 4, 2008) demanded return of

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Case No. C 09-4853

ORDER GRANTING IN PART, DENYING IN PART, AND DEFERRING IN PART PLAINTIFF'S MOTION FOR

SUMMARY JUDGMENT, ETC.

(JFLC3) 4

the Primary and Excess Policy premiums from Admiral and Old Republic.

[citation omitted] . . .

Admiral and Old Republic refused to return the premiums, in whole or in

part. [citation omitted] . . . Plaintiff accordingly filed the present lawsuit [on

October 7, 2009, seeking restitution of the premiums SONICblue paid under the

Primary and Excess Policies and the interest thereon].

(Pl.’s Mot. for Summ. J. 2-5.)

At a case management conference in the Coverage Action held on October 30, 2009, the

Bondholders contended that the order granting summary judgment did not dispose of the

question of whether reformation of the contract was a more appropriate remedy. The Court

ordered the parties to the Coverage Action to submit additional briefing with respect to this issue. 

After considering the parties’ supplemental briefing, the Court concluded that rescission was the

appropriate remedy and entered judgment for Admiral in the Coverage Action. Admiral Ins. Co.

v. SONICblue, Inc., No. C07-4185 JF, 2010 WL 1266675 (N.D. Cal. April 1, 2010); see also

Case No. C07-4185 JF at Doc. Nos. 69-70. 

II. Legal Standards

A. Motion to Dismiss Under Rule 12(b)(1)

A motion to dismiss is proper under Rule 12(b)(1) where the Court lacks jurisdiction over

the subject matter of the complaint. Fed. R. Civ. P. 12(b)(1). The court presumes a lack of

subject matter jurisdiction until the plaintiff meets her burden establishing subject matter 

jurisdiction. Fed. R. Civ. P. 12(b)(1); see Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S.

375, 378 (1994). The non-moving party must support its allegations with competent proof of

jurisdictional facts when a party moves for dismissal under Rule 12(b)(1). See Thomson v.

Gaskill, 315 U.S. 442, 446 (1942).

B. Motions for Summary Judgment

A motion for summary judgment should be granted if there is no genuine issue of

material fact and the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P.

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Case No. C 09-4853

ORDER GRANTING IN PART, DENYING IN PART, AND DEFERRING IN PART PLAINTIFF'S MOTION FOR

SUMMARY JUDGMENT, ETC.

(JFLC3) 5

56(c); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986). Material facts are those

that might affect the outcome of the case under the governing law. Id. at 248. There is a genuine

dispute about a material fact if there is sufficient evidence for a reasonable jury to return a verdict

for the nonmoving party. Id. The moving party bears the initial burden of informing the Court of

the basis for the motion and identifying portions of the pleadings, depositions, admissions, or

affidavits that demonstrate the absence of a triable issue of material fact. Celotex Corp. v.

Catrett, 477 U.S. 317, 323 (1986). Where the party moving for summary judgment would not

bear the ultimate burden of persuasion at trial, it must either produce evidence negating an

essential element of the nonmoving party’s claim or defense or show that the nonmoving party

does not have enough evidence of an essential element to carry its ultimate burden of persuasion

at trial. Nissan Fire & Marine Ins. Co. v. Fritz Cos., 210 F.3d 1099, 1102 (9th Cir. 2000). If the

moving party meets its initial burden, the burden shifts to the nonmoving party to present specific

facts showing that there is a genuine issue of material fact for trial. Fed. R. Civ. P. 56(e);

Celotex, 477 U.S. at 324. 

The evidence and all reasonable inferences must be viewed in the light most favorable to

the nonmoving party. T.W. Elec. Serv., Inc. v. Pac. Elec. Contractors Ass’n, 809 F.2d 626, 630-

31 (9th Cir. 1987). Summary judgment thus is not appropriate if the nonmoving party presents

evidence from which a reasonable jury could resolve the material issue in its favor. Liberty

Lobby, 477 U.S. at 248-49; Barlow v. Ground, 943 F.2d 1132, 1134-36 (9th Cir. 1991). 

III. Discussion

The four instant motions involve largely overlapping legal questions. 

A. Timing of the Rescission of the Primary and Excess Policies 

Plaintiff’s motion for summary judgment is based upon his contention that Defendants

rescinded the Primary and Excess Policies as a matter of law by instituting the Coverage action in

December 2005. Plaintiff argues that since 1961, California law has recognized only unilateral

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This argument also serves as a basis for Admiral’s motion to dismiss for mootness and 3

for its cross-motion for partial summary judgment. However, since Admiral filed its motions,

the Court issued its judgment in the Coverage Action concluding that rescission was the

appropriate remedy. See Admiral Ins. Co. v. SONICblue, Inc., No. C07-4185 JF, 2010 WL

1266675 (N.D. Cal. April 1, 2010); see also Case No. C07-4185 JF at Doc. Nos. 69-70. 

Admiral also argues in its motions and in opposition to Plaintiff’s motion that the instant

action will not be ripe until the judgment in the Coverage Action has survived all appeals. This

argument is without merit. The case Admiral cites for its position, Cheng v. C.I.R., 878 F.2d

306, 311 (9th Cir. 1989), is easily distinguishable. The Ninth Circuit held in that case that the

order being appealed “d[id] not conclusively end the litigation on the merits.” Cheng, 878 F.2d

at 310. Here, the judgment ended litigation on the merits in the Coverage Action. Accordingly,

Admiral’s motion to dismiss will be denied. 

Case No. C 09-4853

ORDER GRANTING IN PART, DENYING IN PART, AND DEFERRING IN PART PLAINTIFF'S MOTION FOR

SUMMARY JUDGMENT, ETC.

(JFLC3) 6

rescission and no longer recognizes judicial rescission. Unilateral rescission is “accomplished by

giving notice of the rescission, see [Cal. Civil Code] § 1691(a), and restoring or offering to

restore to the other party any value received, see § 1691(b).” (Pl.’s MSJ 6.) Alternatively,

Section 1691 provides that “[w]hen notice of rescission has not otherwise been given or an offer

to restore the benefits received under the contract has not otherwise been made, the service of a

pleading in an action or proceeding that seeks relief based on rescission shall be deemed to be

such notice or offer or both.”

1. Rejection of Rescission

Admiral argues that the filing of the complaint did not effectuate a “complete” rescission

because SONICblue did not accept Admiral’s offer to rescind. Relying upon Section 1691’s

requirement that the party seeking rescission must give notice and “[r]estore to the other party

everything of value which he has received from him under the contract or offer to restore the

same upon condition that the other party do likewise, unless the latter is unable or positively

refuses to do so,” Cal. Civil Code § 1691(b) (emphasis added), Admiral contends that rescission

is not complete until “a court determines the rescinding party’s right to rescind” when the offer to

rescind is either rejected or is not affirmatively accepted. (Admiral’s Opp’n to Pl.’s MSJ 5.)3

Admiral also relies upon Maniar v. Capital Bank of California, No. C-89-2774 MHP, 1993 WL

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Case No. C 09-4853

ORDER GRANTING IN PART, DENYING IN PART, AND DEFERRING IN PART PLAINTIFF'S MOTION FOR

SUMMARY JUDGMENT, ETC.

(JFLC3) 7

515880 (N.D. Cal. Dec. 6, 1993). In that case, the plaintiff purchased a thoroughbred race horse

in exchange for a $550,000 note. Maniar, 2010 WL 1266675, at *1. Slightly more than a year

later, the plaintiff informed the note holder that he was rescinding the contract and offered to give

the horse back in exchange for return or cancellation of the note. Id. After the original seller

refused to return or cancel the note, the plaintiff filed an action in state court to effectuate the

rescission and for relief on additional claims. Id. at *1-2. Following removal, the plaintiff and

the Federal Deposit Insurance Corporation (“FDIC”), the note holder at the time, both moved for

summary judgment. Id. at *1. In granting the FDIC’s motion for summary judgment as to the

plaintiff’s claims and as to the FDIC’s cross-complaint, Judge Patel held that

Maniar properly attempted unilateral rescission by providing VSB notice of his

intent to rescind, offering to return the horse, and requesting cancellation of the

Note. [footnote omited] Upon VSB’s rejection of the offer, Maniar correctly

filed suit to effectuate the rescission. However, the rescission was incomplete at

this juncture; the Note was not void but merely voidable, i.e., subject to rescission.

. . . If the court were to proceed to the merits of Maniar’s claim for relief based

upon his unilateral rescission, the possibility remains that the court may find

insufficient grounds for rescission under section 1689(b) and conclude that the

contract has in fact not been rescinded. Thus, the rescission is not irrevocable and

the contract is not void until the court’s final determination. 

Id. at *3. Admiral contends that as was the case in Maniar, none of the parties to the Primary

Policy accepted Admiral’s offer to return the net premium and effectuate the rescission, nor has

SONICblue offered “to restore to Admiral, or to set-off against its inchoate premiumreimbursement claim.” (Admiral’s Opp’n to Pl.’s MSJ 6.) 

Also relying on Maniar, Old Republic argues that it effectively withdrew any rescission

effected by the initiation of the Coverage Action by settling and dismissing its claim in 2007. 

According to Old Republic, Plaintiff’s theory would mean that “a rescinding party could

accomplish a final, irrevocable rescission by first filing a complaint and then voluntarily

dismissing it. Such a process is inconsistent with California’s statutory scheme. As Maniar

holds, California state law requires either agreement between the contracting parties and/or a

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Case No. C 09-4853

ORDER GRANTING IN PART, DENYING IN PART, AND DEFERRING IN PART PLAINTIFF'S MOTION FOR

SUMMARY JUDGMENT, ETC.

(JFLC3) 8

court’s final determination of rescission.” (Old Republic’s Opp’n & Cross-MSJ 11.) 

Plaintiff argues that the Court should not follow Maniar as “the definitive statement of

California law on the irrevocability of unilateral rescission under current law.” (Pl.’s Opp’n to

Cross-Motions 8.) Plaintiff maintains that one of the principal cases relied upon by Judge Patel–

Mackenzie v. Voelker, 123 Cal. App. 2d 536, 541 (Cal. Ct. App. 1954)–is irrelevant because it

involves a claim for judicial rescission, which was abolished in 1961 when the California

Legislature amended the Civil Code. Another case cited by Judge Patel–Karapetian v. Carolan,

83 Cal. App. 2d 344, 355 (Cal. Ct. App. 1948)–recognized that under California law a unilateral

rescission is “effective” upon notice and offer. Plaintiff claims that Karapetian does not stand

for the proposition that a court order is needed to make unilateral rescission effective. Rather,

Plaintiff contends, the court addressed the irrevocability of a party’s unilateral rescission where

the opposing party attempts to prevent the rescission from becoming “effectual,” another issue

affected by the 1961 amendments: 

The Karapetian court was concerned with protecting the right of a rescinding

party to seek damages in the event that the rescission is made “ineffectual” by the

other side’s noncooperation (see, footnote 7). That was in 1948. As part of the

1961 amendments, the California legislature specifically provided that in an action

seeking to enforce a unilateral out-of-court rescission, a party is not precluded

from seeking damages, either in the alternative or in conjunction with relief based

on rescission. See Cal. Civ. Code § 1692 [quotation of statute omitted]. 

Karapetian’s concerns about keeping the door open to a damages claim in the

event of “ineffectual” rescission has [sic] therefore been obviated.

(Pl.’s Opp’n to Cross-Motions 8.) 

Plaintiff draws the Court’s attention to another case from this district, Atmel Corp. v. St.

Paul Fire & Marine, 426 F. Supp. 2d 1039 (N.D. Cal. 2005), in support of his interpretation of

Maniar. In that case, the plaintiff relied on Maniar to support its argument that the defendant

insurer who rescinded the plaintiff’s policy “had a duty to defend unless and until a court

enforced its rescission of the policy.” Atmel, 426 F. Supp. 2d at 1045. Judge Illston found

plaintiff’s reliance on Maniar “unavailing” because

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Case No. C 09-4853

ORDER GRANTING IN PART, DENYING IN PART, AND DEFERRING IN PART PLAINTIFF'S MOTION FOR

SUMMARY JUDGMENT, ETC.

(JFLC3) 9

Maniar simply holds in a situation where the non-rescinding party objects to a

rescission–as is the case here–the rescission is not finalized and may be set aside

as improper by a court. As in Maniar, this Court may later conclude that St.

Paul’s rescission of the policy was improper, and at that time the Court would set

aside the rescission and determine the parties’ rights and obligations under the

policy.

Id. at 1046. Plaintiff argues that Atmel properly limits Maniar and that “[h]ere, too, if a court

were to determine that Admiral’s and Old Republic’s rescission of SONICblue’s policies was

improper, it would be empowered to set aside the rescission. Otherwise, the rescission is and

remains effective.” (Pl.’s Opp’n to Cross-Motions 8.) 

Admiral contends that “Maniar’s discussion concerning when rescission is complete is

relevant and on point to the issues before the Court” and that Plaintiff’s “attempts to undercut

[Maniar] fail.” (Admiral’s Reply ISO Cross-MSJ 3-4.) Admiral also claims that Plaintiff

mischaracterizes Judge Illston’s decision in Atmel and argues that “Atmel recognizes the need for

court adjudication on whether grounds for rescission exist before rescission can be made

effective.” (Id. at 4.)

This Court concludes that Plaintiff’s interpretation of California law is correct. The

Ninth Circuit addressed this issue several years after Maniar was decided. In Peterson v.

Highland Music, Inc., 140 F.3d 1313 (9th Cir. 1998), it affirmed a district court’s ruling that a

musical group’s rescission of its contract to sell the rights to one of its songs was effective on the

date the group filed its complaint in federal court for rescission: 

Under California law, “a party to a contract [can] rescind it and . . . such

rescission [can] be accomplished by the rescinding party by giving notice of the

rescission and offering to restore everything of value which [the rescinding party

has] received.” Runyan v. Pacific Air Indus., 2 Cal.3d 304, 311, 85 Cal.Rptr. 138,

466 P.2d 682 (1970); see also id. at 311-13, 85 Cal.Rptr. 138, 466 P.2d 682.

When a party gives notice of rescission, it has effected the rescission, and any

subsequent judicial proceedings are for the purpose of confirming and enforcing

that rescission. See id. at 311-12, 85 Cal.Rptr. 138, 466 P.2d 682. Thus, when

the Kingsmen filed suit in 1993, they rescinded the contract and became owners

of the [rights to the group’s song]. The lawsuit that followed confirmed that their

rescission was a proper one and resulted in an order enforcing that rescission. The

district court correctly ruled that, as the owners of the [rights to the group’s song],

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Case No. C 09-4853

ORDER GRANTING IN PART, DENYING IN PART, AND DEFERRING IN PART PLAINTIFF'S MOTION FOR

SUMMARY JUDGMENT, ETC.

(JFLC3) 10

the Kingsmen are entitled to all income derived from the exploitation of the

recordings following September 29, 1993, the date of the notice of rescission.

Peterson, 140 F.3d at 1322-23. Accordingly, under Peterson, because the Court concluded in the

Coverage Action that the rescission of the Primary Policy was proper, that policy is deemed

rescinded as of the filing of the Coverage Action in 2005.

While the Excess Policy also was rescinded upon the filing of the Coverage Action, the

2007 settlement agreement pursuant to which Old Republic dismissed its claims in the Coverage

Action with prejudice altered the relationship of the parties to that policy. Plaintiff contends that

Old Republic did not withdraw its rescission through the settlement agreement but instead

“expressly reserved its rescission.” (Pl.’s Opp’n to Cross-MSJ 5.) Plaintiff relies upon a section

of the settlement, which he filed under seal in this case, that provides for arbitration of Old

Republic’s coverage defenses in the event two specific conditions are satisfied. (See Stipulation

for Judgment, Ex. A.) Old Republic argues that this section does not support Plaintiff’s

argument but rather “further buttresses Old Republic’s position that the Coverage Action has had

and will have no binding effect as to the validity of the [Excess] Policy.” (Old Republic Reply

ISO Cross-MSJ 6.) 

The Court concludes that Old Republic effectively withdrew its rescission of the Excess

Policy. Under the 2007 settlement, both Old Republic and SONICblue (and its directors and

officers) received significant consideration. That consideration included dismissal of Old

Republic’s claims in the Coverage Action with prejudice. To enforce rescission of the Excess

Policy now would frustrate both the purpose of the 2007 settlement and the policy of the

California and federal courts favoring out-of-court agreements. 

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Old Republic makes a similar argument that rescission was barred by the bankruptcy stay 4

because federal bankruptcy law preempts California law. To the extent that Old Republic’s

argument does not overlap with Admiral’s and thus is not addressed in this Section, it is moot in

light of the foregoing discussion.

Case No. C 09-4853

ORDER GRANTING IN PART, DENYING IN PART, AND DEFERRING IN PART PLAINTIFF'S MOTION FOR

SUMMARY JUDGMENT, ETC.

(JFLC3) 11

2. Effect of the Bankruptcy Stay4

Admiral argues that rescission of the Primary Policy could not be completed without

court approval of the rescission in the Coverage Action, which was stayed by the bankruptcy

court. It claims that as a result of the stay SONICblue “could not, and cannot now, return to

Admiral the benefits that it received under the Admiral Policy–the funding of the D&Os’

defense–because the [Primary] Policy was at least arguably part of the bankruptcy estate.” (Id. at

7 (citing 11 U.S.C. § 541(a)(1)).) 

Plaintiff contends that Admiral’s argument is “problematic” because while Admiral

“clearly want[s] to retain the benefit of having rescinded against the director and officer

insureds[,] [it] do[es]n’t want the rescission upset in its entirety because then [it] ha[s]to pay the

sums to the claimants set forth in the settlement agreement [of the Underlying Action].” (Pl.’s

Opp’n to Cross-Motions 4.) Plaintiff argues that this result is impossible because under

California Insurance Code Section 650 a rescission of an insurance policy applies to all insureds. 

As a result, if Admiral’s position is that the stay rendered the rescission of the Primary Policy

ineffective as to SONICblue, it also rendered it ineffective as to the directors and officers. 

Plaintiff claims that Admiral “have it both ways” by rescinding as to the directors and officers

while refusing to repay the premiums paid by SONICblue. (Id. at 5.) 

Admiral contends that it was required to pay D&O defense costs during the bankruptcy

stay and was prevented by federal bankruptcy law from completing a rescission by restoring the

premiums to SONICblue. According to Admiral, “the D&O defendants rejected the rescission

and SONICblue chose to remain silent,” and Admiral thus could not “force adjudication of

whether grounds existed for rescission” because the bankruptcy court had already issued the stay

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Old Republic also makes this argument in its papers. To the extent Old Republic’s 5

argument does not overlap with Admiral’s and thus is not addressed in this Section, it is moot in

light of the foregoing discussion.

Case No. C 09-4853

ORDER GRANTING IN PART, DENYING IN PART, AND DEFERRING IN PART PLAINTIFF'S MOTION FOR

SUMMARY JUDGMENT, ETC.

(JFLC3) 12

pending resolution of the Underlying Action. (Admiral’s Reply ISO Cross-Mot. for Summ. J. 6.)

As discussed above, the Court concludes that rescission was effective upon the filing of

the Coverage Action. Admiral has identified no authority for the proposition that the bankruptcy

stay altered the effective date of the rescission because it enjoined judicial confirmation and

enforcement of the rescission pending the subsequent resolution of the Underlying Action. 

3. Effect of Third Party Rights5

Admiral also contends that rescission could not have been effective upon the filing of the

Coverage Action because California law prohibits unilateral rescission, the D&Os are insureds

under the Primary Policy, and the D&Os claimed contractual rights independent of SONICblue. 

Admiral claims that because rescission renders the policy unenforceable, “[e]ffectuating a

unilateral rescission merely through the filing of an insurer’s declaratory relief action would

deprive the D&O Defendants of coverage without any judicial remedy.” (Admiral Opp’n to Pl.’s

MSJ 9.) 

Plaintiff relies upon R.J. Cardinal Co. v. Ritchie, 218 Cal. App. 2d 124, 149 (Cal. Ct.

App. 1963), for the proposition that “[t]he principles governing rescission of third-party

beneficiary contracts are those applicable to the rescission of contracts generally.” Accordingly,

Plaintiff contends that the unilateral rescission effected by the filing of the Coverage Action is

not affected by the presence of the D&O third party beneficiaries of the policy. Plaintiff also

argues that the directors and officers’ settlement was “not the settlement of a rescission action,”

but, that rather, “[t]he parties settled and capped their exposure in connection with any

subsequent breach of contract claim by the directors and officers based on a theory of wrongful

rescission.” (Pl.’s Opp’n to Cross-Motions 10.) He claims that Admiral’s decision to enter into

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Case No. C 09-4853

ORDER GRANTING IN PART, DENYING IN PART, AND DEFERRING IN PART PLAINTIFF'S MOTION FOR

SUMMARY JUDGMENT, ETC.

(JFLC3) 13

this settlement thus had no effect on “the finality of its rescission and its obligation to return the

premiums.” (Id.)

Admiral argues that Plaintiff fails to account for the fact that if rescission was completed

upon the filing of the Coverage Action, “Admiral divested the D&O defendants of coverage by

simply filing an Adversary complaint.” (Admiral’s Reply ISO Cross-MSJ 6.) Admiral contends

that such a rescission is prejudicial to a third party’s rights and thus forbidden under California

law. (Id. (citing Angle v. United States Fid. & Guar. Co., 201 Cal. App. 2d 758, 763 (Cal. Ct.

App. 1962)).) According to Admiral, California law does not allow insurers to “terminate all its

obligations under a policy to the detriment of its insureds by simply filing a complaint seeking

rescission.” (Id. at 7.) 

However, California law protects the rights of third parties even while allowing rescission

to be effected by filing suit. Judge Illston addressed this issue in Atmel: 

Plaintiff contends that allowing unilateral rescission without judicial approval

would allow for an anomalous result: the carrier could delay defending just by

alleging grounds for rescission, then when the insured files suit, it could tender

rescission and vitiate not only its duty to defend but also the insured’s declaratory

relief and breach of contract duties. However, the [Imperial Cas. & Indem. Co.

v.] Sogomonian [, 198 Cal.App.3d 169, 182, 243 Cal.Rptr. 639 (Cal. Ct. App.

1988)] court rejected a similar argument, stating “[o]ur conclusion here should not

result in an assumption by insurers that policy liability can, with impunity, be

avoided or delayed by assertion of a claim for rescission. That is a tactic which is

fraught with peril. Where no valid ground for rescission exists, the threat or

attempt to seek such relief may itself constitute (1) a breach of the covenant of

good faith and fair dealing which is implied in the policy and/or (2) the

commission of one or more of the unfair claims settlement practices proscribed by

Insurance Code section 790.03, subdivision (h).” Sogomonian, 198 Cal.App.3d at

185 n. 16, 243 Cal.Rptr. 639. [FN2: Sogomonian pre-dated the California

Supreme Court’s decision in Moradi-Shalal v. Fireman’s Fund Insurance

Companies, 46 Cal.3d 287, 250 Cal.Rptr. 116, 758 P.2d 58 ([Cal.] 1988), which

held that there is no private right of action to enforce Cal. Ins. Code § 790.03(h).]

Atmel, 426 F. Supp. at 1046. Following Judge Illston’s reasoning, the directors and officers

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Case No. C 09-4853

ORDER GRANTING IN PART, DENYING IN PART, AND DEFERRING IN PART PLAINTIFF'S MOTION FOR

SUMMARY JUDGMENT, ETC.

(JFLC3) 14

would be left without recourse only if the rescission claim were valid. Here, the Court found in

the Coverage Action that rescission was proper because of misrepresentations by the directors

and officers. Had the Court found otherwise, the directors and officers may have had valid

claims against Admiral. 

4. Equity

Admiral next claims that making rescission effective as of the filing of the complaint in

the Coverage Action would be inequitable because it would allow Plaintiff “who has sat idly by

and observed the [Coverage and Underlying Actions],” to “reap the benefits of Admiral’s hardwon success” through recovery of “an undiminished refund of premium, with interest no less,”

thus leaving Admiral “holding the bag for monies that it paid under reservation of rights as well

as the foreseeable additional expenses it incurred as a direct result of the misrepresentations that

SONICblue perpetrated to induce the issuance of the [Primary] Policy.” (Admiral Opp’n to Pl.’s

MSJ 9.)

Much of Admiral’s argument is moot in light of the final judgment in the Coverage

Action. Given the Court’s conclusion that rescission is proper, it is equitable to order the return

of both parties to their respective positions before they entered into the contract. 

5. Judicial Estoppel and Laches

Admiral contends that Plaintiff is precluded by the doctrine of judicial estoppel from

asserting that the Primary Policy was rescinded upon the filing of the complaint in the Coverage

Action. It argues that SONICblue’s former positions on the issue are demonstrated by the

following:

C SONICblue’s report to the Bankruptcy Court that the potential repayment

of the premium was a contingency;

C SONICblue’s treatment of Admiral’s request for rescission as contingent

in its lawsuit against the Pillsbury, Winthrop, Shaw & Pittlman LLP

alleging that the nondisclosure was due to the law firm’s negligence;

C SONICblue’s refusal to adopt a position regarding the Coverage Action

when the Withdrawal of Reference was being considered;

C SONICblue’s refusal to provide a declaration supporting Admiral’s

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In a footnote, Old Republic makes a similar argument under the doctrines of estoppel 6

and laches: 

In fact, had Plaintiff ever asserted before now that Old Republic was obligated to

return premium immediately upon filing the Coverage Action, Old Republic

would not have settled the Coverage Action on the terms and conditions set forth

in the settlement. Accordingly, Plaintiff should be either precluded by the

application of the laches doctrine or estopped from arguing that Old Republic was

obligated to pay the premium upon the mere filing of the Coverage Action.

(Old Republic’s Opp’n & Cross-MSJ n.11.) 

Case No. C 09-4853

ORDER GRANTING IN PART, DENYING IN PART, AND DEFERRING IN PART PLAINTIFF'S MOTION FOR

SUMMARY JUDGMENT, ETC.

(JFLC3) 15

request for rescission.

(Admiral’s Opp’n to Pl.’s MSJ10 (citation omitted).) 

6

Plaintiff argues that “the statements Admiral points to come nowhere near the kind of

assertion that would justify judicial estoppel.” (Pl.’s Reply to Admiral’s Opp’n 3.) With respect

to his disclosures to the bankruptcy court, Plaintiff quotes the following language from his report:

The Chapter 11 Trustee and the Reconstituted Creditors’ Committee may

determine to take an active position in one or both litigations. It is possible that

active participation in those litigations could result in additional funds being

available to the Estates; however, the Plan Proponents are not in a position at the

time of the filing of the this First Amended Disclosure Statement to estimate the

amount of any such additional funds.

(Pl.’s Supp. Request for Judicial Notice Ex. A at 41-42.) Plaintiff submits that this statement is

insufficient to estop him from seeking restitution for premium payments made under the policy.

Similarly, Plaintiff asserts that he “is a at a loss to explain how his allegations concerning

Pillsbury’s mishandling of SONICblue’s D&O liability policies could amount to an admission

that the insurers’ rescission was not complete at the time the Coverage Action was filed.” (Pl.’s

Reply to Admiral’s Opp’n 4.) As for the remaining “inconsistencies,” Plaintiff maintains that he

“had no obligation to take sides” in the Coverage Action, as his “job wasn’t to favor one party’s

position over another’s in [the Coverage Action], but to maximize the return of the estate.” (Id.)

Admiral’s argument is without merit. The fact that the directors and officers and the

Bondholders contested or continue to contest the validity of the rescission does not preclude

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Case No. C 09-4853

ORDER GRANTING IN PART, DENYING IN PART, AND DEFERRING IN PART PLAINTIFF'S MOTION FOR

SUMMARY JUDGMENT, ETC.

(JFLC3) 16

Plaintiff, who is a member of neither of those groups, from arguing that the filing of the

Coverage Action effected a rescission of the Primary Policy. Nor does Plaintiff’s position, or his

decision not to take a position, in the Coverage Action, to which he was not a party, so limit him

here. Finally, neither Plaintiff’s disclosures to the bankruptcy court nor his allegations against

his former counsel establish any legal position in conflict with the arguments he makes in the

instant motions. 

B. Plaintiff’s Entitlement to Repayment of Policy Premiums 

Plaintiff asserts that he is entitled to repayment of the policy premiums made by

SONICblue prior to the rescission. Plaintiff is correct. In Sogomonian, the court faced the

question of remedies in the event of the rescission of an insurance contract:

But what of the circumstance where the dispute between the insurer and the

insured goes beyond the issue of coverage and results in the rescission of the

entire contract of insurance?

“A contract is extinguished by rescission.” (Civil Code § 1688.) The

consequence of rescission is not only the termination of further liability, but also

the restoration of the parties to their former positions by requiring each to return

whatever consideration has been received. (1 Witkin, Summary of Cal. Law (9th

ed. 1987) Contracts, § 869, p. 781.) Here, this would require the refund by

Imperial of any premiums and the repayment by the defendants of any proceeds

advance which they may have received. The policy would be “extinguished” ab

initio, as though it had never existed.

Sogomonian, 198 Cal.App.3d at 184. 

Applying this rule, Plaintiff is entitled to the premiums SONICblue paid on the Primary

Policy. With respect to the Excess Policy, as discussed above, the 2007 settlement resolved any

disputes between Old Republic and the bankruptcy estate. 

C. Discovery Required to Determine Defendants’ Entitlement to Reimbursement of

Defense Costs and Benefits Conferred Under the Policy

For the same reason that Plaintiff is entitled to a return of premiums in light of the

rescission of the Primary Policy, Admiral is entitled to recover the benefits it conferred on

SONICblue under the policy. In opposing Plaintiff’s motion, Admiral asserts that if Plaintiff is

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Case No. C 09-4853

ORDER GRANTING IN PART, DENYING IN PART, AND DEFERRING IN PART PLAINTIFF'S MOTION FOR

SUMMARY JUDGMENT, ETC.

(JFLC3) 17

entitled to rescission, he must return all of the benefits SONICblue received under the Primary

Policy. In particular, Admiral argues that it is entitled to the defense costs it incurred under the

Primary Policy for defense of SONICblue’s directors and officers, because without the policy

SONICblue would have been required to indemnify these individuals pursuant to the company’s

agreement with them. Admiral claims that it paid $589,043.88 to defend SONICblue’s directors

and officers. (Admiral’s Opp’n to Pl.’s MSJ 3.) Admiral also contends that it is entitled to the

costs incurred in the Coverage Action because the action was necessitated by SONICblue’s

fraud. Admiral represents that those costs amounted to $295,389.35 in legal fees through

October 2009. (Id.) 

Plaintiff opposes Admiral’s request for reimbursement on the basis that Admiral’s offer

of proof, a declaration by a claims attorney for Admiral’s managing underwriter, does not itemize

the defense costs, thus making it “impossible to tell what portion of those costs were incurred

prior to Admiral’s rescission of the policy, and for which Admiral would therefore arguably be

entitled to a refund, and what portion were incurred after rescission, when Admiral had no further

obligation to defend.” (Pl.’s Reply to Admiral’s Opp’n 5.) Plaintiff cites Atmel for the

proposition that “[o]nce a rescission is effected, the insurer has no further liability, and no further

duty to defend.” (Id.) Because Admiral has failed to provide sufficient evidence with respect to

its actual defense costs, Plaintiff contends that he is entitled to recovery of the full premium. In

the alternative, Plaintiff requests the opportunity for further discovery on the issue. 

Admiral contends that it is entitled to all of its defense costs because “[t]he policy was

still in effect when all payments were made to the D&O defendants. Admiral did not voluntarily

pay the D&Os [sic] defense costs. Admiral paid the defense costs based on its contractual

obligations under the [Primary] Policy.” (Admiral’s Reply ISO MSJ 9.) Admiral maintains that

Plaintiff’s “cut off date” is not supported by the case law. However, the only case it cites–In re

Worldcom, Inc. Sec. Litig., 345 F. Supp. 2d 455 (S.D.N.Y. 2005)–involved an interpretation of

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Case No. C 09-4853

ORDER GRANTING IN PART, DENYING IN PART, AND DEFERRING IN PART PLAINTIFF'S MOTION FOR

SUMMARY JUDGMENT, ETC.

(JFLC3) 18

New York rather than California law. Admiral provides no California authority inconsistent with

Atmel.

Plaintiff filed his motion for summary judgment shortly after filing his complaint. 

Admiral asserts that it “has not had an opportunity to conduct discovery to obtain all evidence

proving the full extent of benefits SONICblue received so that a complete rescission can be

effectuated.” (Admiral’s Opp’n to Pl.’s MSJ 14.) Plaintiff does not oppose this argument. The

Court concludes that the record does not contain a sufficient accounting of the costs incurred and

benefits conferred under the Primary Policy, including when and for what purpose defense costs

were incurred. The parties may conduct discovery on these issues, and determination of the

motion will be deferred pending their resolution.

D. Judicial Estoppel

Plaintiff contends that Defendants are judicially estopped from taking the position that

SONICblue is not entitled to recovery of its premiums because they asserted in the Coverage

Action that they were “ready, willing, and able to return to SONICblue” the policy premiums. 

For the reasons discussed above, this argument is moot. Admiral will be ordered to return the

premiums paid under the Primary Policy, less the benefits conferred upon SONICblue under the

policy. Old Republic and SONICblue were relieved of their obligations under the Excess Policy

as a result of the 2007 settlement. 

IV. Conclusion 

For the reasons stated above, Old Republic’s motion for summary judgment will be

granted; Plaintiff’s motion for summary judgment will be granted in part, denied in part, and

deferred in part; and Admiral’s motion to dismiss and motion for partial summary judgment will

be denied. A case management conference is scheduled for July 16, 2010, at 10:30 A.M. 

DATED: May 19, 2010 

JEREMY FOGEL

United States District Judge

Case 5:09-cv-04853-JF Document 61 Filed 05/19/10 Page 18 of 18