Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-1_04-cv-06456/USCOURTS-caed-1_04-cv-06456-5/pdf.json

Nature of Suit Code: 370
Nature of Suit: Other Fraud
Cause of Action: 28:2201 Declaratory Judgement (Insurance)

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UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF CALIFORNIA

AMCO Insurance Company, )

 )

Plaintiff, )

)

v. )

)

MADERA QUALITY NUT LLC, et )

al., )

)

 Defendants. )

______________________________)

)

MADERA QUALITY NUT LLC, et )

al., )

 )

 Counter-Claimants, )

 )

v. )

 )

AMCO INSURANCE COMPANY, )

 )

 Counter-Defendant. )

 )

1:04-cv-06456-SMS

ORDER DENYING PLAINTIFF AND

COUNTER-DEFENDANT AMCO’S MOTION

FOR PARTIAL SUMMARY JUDGMENT

(DOC. 50)

The motion of Plaintiff and Counter-defendant AMCO Insurance

Company for partial summary judgment came on regularly for

hearing on May 4, 2006, at 9:30 a.m. in Courtroom 7 before the

Honorable Sandra M. Snyder, United States Magistrate Judge.

Julian J. Pardini appeared on behalf of Plaintiff and Counterdefendant AMCO Insurance Company; Arturo Gonzales and Jeffrey P.

Davis appeared on behalf of Defendant and Counter-claimant Madera

Quality Nut (MQN). After argument, the matter was submitted to

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the Court subject to submission by Mr. Pardini of 1) Amco’s

position on the waiver of some foundational objections, and 2)

input with respect to the communication of Passport notes within

the AMCO organization; Mr. Pardini subsequently submitted the

materials, and thus the case was submitted to the Court for

decision.

I. Background

Counter-defendant AMCO Insurance Company filed a motion for

summary adjudication of the bad faith counterclaim brought by

Madera Quality Nut (MQN) against it on January 16 through 24,

2006, including a motion, a separate statement of undisputed

material facts, a memorandum, and declarations of Russell Akins,

Chris Anderson, Gordon Park, and Susan Thompson in support

thereof. Counter-claimant MQN filed opposition on April 20, 2006,

including a statement in response to the separate statement of

undisputed facts, objections to evidence offered in support of

AMCO’s motion, a memorandum, and declarations of Jeffrey P.

Davis, Joseph W. Hearington, and Arturo J. Gonzalez, with

exhibits A through Z (absent Exhibit M). Exhibit M to Gonzalez’

declaration (part 1 of 2) was filed on April 21, 2006. Further,

on April 21, 2006, a replacement to Exhibit B to Davis’s

declaration was filed. On April 27, 2006, a reply was filed,

including evidentiary objections and a declaration of Sara J.

Savage. On May 5, 2006, the supplemental declaration of Jeffrey

P. Davis and attachments were filed. Mr. Pardini’s declaration

withdrawing foundational objections was filed on May 11, 2006.

Further, by May 10, 2006, Mr. Pardini sent to opposing counsel

and submitted to the Court a fourteen-page letter and materials

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concerning the Passport notes, including copies of portions of

the Passport notes and excerpts of the depositions of David

Melton, Russel D. Akins, and Christopher David Anderson. This

material was subsequently filed. The Court has not received any

indication from counsel for MQN that the material submitted by

Mr. Pardini contains inaccuracies or is objectionable for any

reason, or any other response.

In the good faith claim, MQN alleges that AMCO unlawfully,

willfully, and maliciously denied payment of substantial

insurance benefits to which MQN was entitled under the policy;

AMCO breached the covenant of good faith and fair and honest

dealing implied in the insurance contract, stonewalled MQN, and

improperly denied the insurance claim. After the fire, AMCO

failed to take independent steps to determine or document the

type and amount of nut products damaged in the fire; guide or

advise MQN with respect to the adjusting process (failure to

instruct MQN to create a photographic inventory or written

inventory of the contents of the plant at the time of the fire,

and to instruct with detail as to documentation, level of

details, and absolute precision required with respect to

identification, segregation, inventory, and storage of damaged

nut products); and AMCO calculatedly abandoned and ignored MQN in

the critically important days, hours, and weeks after the fire

with the intent to increase the likelihood that AMCO would find

grounds to deny the claim and decrease the amount of the

insurance claim that would ultimately be submitted to AMCO. MQN

immediately reported the fire; despite a shortage of storage

space and a need to move nuts inside the night of or after the

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fire, MQN attempted carefully to identify and label the firedamaged nuts, but some fire-damaged product was moved multiple

times before being collected and stored in one of two on-site

warehouses operated by MQN. MQN aggressively mitigated

substantial additional losses that otherwise would have been

submitted to AMCO for payment under the business interruption

coverage of the policy by having employees clean and repair the

plant to permit resumption of some production lines only a few

days after the fire, but MQN would have directed them to create

an absolutely precise fire loss inventory had AMCO advised MQN

that it required absolutely accurate documentation of the

quantity of fire-damaged nuts. MQN frequently updated AMCO,

delivered lists itemizing damaged nuts, invited an inspection

(which AMCO did not undertake until nearly a month after the

fire), and submitted 356,487 pounds of fire-damaged nut products,

which were shipped to a salvage company at AMCO’s direction, for

which AMCO was paid $89,000.00 salvage value. Before MQN

submitted its sworn proof of claim to AMCO, AMCO made a partial

payment of $533,521.95 but no additional payments. After

assistance with the adjusting process by the Greenspan Company,

MQN submitted a claim with a total damage value of $1,291,914.00

for the loss of income, extra expense, and business personal

property, then revised it as of July 12, 2004, to $1,344,335.41,

consisting of $170,142.85 in extra expenses, $65,423.78 in cleanup or debris removal, $650,170.95 in inventory replacement cost,

$394,168.50 in other business personal property, and $64,429.33

in building property replacement. 

It was further alleged that AMCO represented to MQN that the

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claim was being investigated for fraudulent misrepresentation in

July 2004, whereas it had decided much earlier to deny it but

delayed in notifying MQN in order to prejudice MQN’s ability

fairly and accurately to establish the validity of its claim. It

delayed processing of the claim; failed fairly and thoroughly to

investigate the claim; failed to control, supervise, and instruct

its claims agents and attorneys, made unreasonable settlement

offers, and delayed payment of the claim; unreasonably relied on

patently erroneous advice of counsel in furtherance of bad faith,

including, but not limited to, reliance upon intentionally selfserving, biased reports of investigators and consultants; made

knowingly false interpretations of witness testimony; based its

coverage decision on its desire to reduce or avoid its

obligations; made an unreasonable interpretation of the policies

and refused to correct its decision; attempted to force MQN to

accept fewer benefits than it was otherwise entitled to under the

policy; and performed other, unspecified acts of bad faith.

Plaintiff alleges fraud, malice and oppression sufficient to

warrant punitive damages. 

The grounds of the motion for summary adjudication on the

good faith claim are: 1) there is no genuine issue of material

facts as to AMCO’s reasonable reliance on the advice of counsel

in denying MQN’s claim for insurance proceeds such that as a

matter of law there is no bad faith or entitlement to extracontractual damages; 2) there is a genuine dispute concerning the

nature and extent of AMCO’s coverage obligations to MQN, and thus

no bad faith; and 3) there is no genuine issue with respect to

MQN’s inability to demonstrate by clear and convincing evidence

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an intention by AMCO to harm it or any despicable conduct by

AMCO, and thus AMCO may not be held liable for punitive damages.

II. Summary Judgment

Summary judgment is appropriate when it is demonstrated that

there exists no genuine issue as to any material fact, and that

the moving party is entitled to judgment as a matter of law. 

Fed. R. Civ. P. 56(c). Under summary judgment practice, the

moving party 

[A]lways bears the initial responsibility of

informing the district court of the basis for

its motion, and identifying those portions of

"the pleadings, depositions, answers to

interrogatories, and admissions on file,

together with the affidavits, if any," which

it believes demonstrate the absence of a

genuine issue of material fact.

Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). It is the

moving party’s burden to establish that there exists no genuine

issue of material fact and that the moving party is entitled to

judgment as a matter of law. British Airways Board v. Boeing Co.,

585 F.2d 946, 951 (9 Cir. 1978). th

Where a party with the ultimate burden of persuasion at

trial as to a matter moves for summary judgment, it must

demonstrate affirmatively by evidence each essential element of

its claim or affirmative defense and must establish that there is

no triable issue of fact as to each essential element such that a

rational trier of fact could render a judgment in its favor.

Southern California Gas Co. v. City of Santa Ana, 336 F.3d 885,

888 (9 Cir. 2003). If a party moves for summary judgment with th

respect to a matter as to which the opposing party has the

ultimate burden of persuasion at trial, then the moving party

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must show that the opposing party cannot meet its burden of proof

at trial by establishing that there is no genuine issue of

material fact as to an essential element of the opposing party’s

claim or defense; the moving party must meet the initial burden

of producing evidence or showing an absence of evidence as well

as the ultimate burden of persuasion. Nissan Fire Ltd. v. Fritz

Cos., Inc., 210 F.3d 1099, 1102 (9 Cir. 2000). In order to th

carry its burden of production, the moving party must either

produce evidence negating an essential element of the opposing

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. Id. (citing High Tech

Gays v. Defense Indus. Sec. Clearance Office, 895 F.2d 563, 574

(9th Cir. 1990)). In order to carry its ultimate burden of

persuasion on the motion, the moving party must persuade the

court that there is no genuine issue of material fact. Id. 

However, “where the nonmoving party will bear the burden of

proof at trial on a dispositive issue, a summary judgment motion

may properly be made in reliance solely on the pleadings,

depositions, answers to interrogatories, and admissions on file.”

Celotex Corp. v. Catrett, 477 U.S. 317, 323. Indeed, summary

judgment should be entered, after adequate time for discovery and

upon motion, against a party who fails to make a showing

sufficient to establish the existence of an element essential to

that party’s case, and on which that party will bear the burden

of proof at trial. Id. “[A] complete failure of proof concerning

an essential element of the nonmoving party’s case necessarily

renders all other facts immaterial.” Id. In such a circumstance,

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summary judgment should be granted, “so long as whatever is

before the district court demonstrates that the standard for

entry of summary judgment, as set forth in Rule 56(c), is

satisfied.” Id. at 323. 

 If the moving party meets its initial responsibility, the

burden then shifts to the opposing party to establish that a

genuine issue as to any material fact actually does exist. 

Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574,

586 (1986). In attempting to establish the existence of this

factual dispute, the opposing party may not rely upon the denials

of its pleadings, but is required to tender evidence of specific

facts in the form of affidavits or admissible discovery material

in support of its contention that the dispute exists. Rule 56(e);

Matsushita, 475 U.S. at 586 n.11. The opposing party must

demonstrate that the fact in contention is material, i.e., a fact

that might affect the outcome of the suit under the governing

law, Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986);

T.W. Elec. Serv., Inc. v. Pacific Elec. Contractors Ass'n, 809

F.2d 626, 630 (9th Cir. 1987), and that the dispute is genuine,

i.e., the evidence is such that a reasonable jury could return a

verdict for the nonmoving party, Wool v. Tandem Computers, Inc.,

818 F.2d 1433, 1436 (9th Cir. 1987).

In the endeavor to establish the existence of a factual

dispute, the opposing party need not establish a material issue

of fact conclusively in its favor. It is sufficient that "the

claimed factual dispute be shown to require a jury or judge to

resolve the parties' differing versions of the truth at trial." 

T.W. Elec. Serv., 809 F.2d at 630. Thus, the "purpose of summary

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judgment is to 'pierce the pleadings and to assess the proof in

order to see whether there is a genuine need for trial.'" 

Matsushita, 475 U.S. at 587 (quoting Fed. R. Civ. P. 56(e)

advisory committee's note on 1963 amendments). The evidence of

the opposing party is to be believed, Anderson, 477 U.S. at 255,

and all reasonable inferences that may be drawn from the facts

placed before the court must be drawn in favor of the opposing

party, Matsushita, 475 U.S. at 587 (citing United States v.

Diebold, Inc., 369 U.S. 654, 655 (1962)(per curiam)). 

Nevertheless, it is the opposing party's obligation to produce a

factual predicate from which an inference may be drawn. Richards

v. Nielsen Freight Lines, 602 F. Supp. 1224, 1244-45 (E.D. Cal.

1985), aff'd, 810 F.2d 898, 902 (9th Cir. 1987). Although the

Court must not weigh the evidence, the Court must draw reasonable

inferences; evidence that is too insubstantial or speculative may

be insufficient to establish the existence of a genuine issue of

material fact. Coca-Cola Co. v. Overland, Inc., 692 F.2d 1250,

1255 (9 Cir. 1982); Dept. of Commerce v. U.S. House of Rep., th

525 U.S. 316, 334 (1999); Matsushita, 475 U.S. at 586. A mere

scintilla of evidence supporting the opposing party's position

will not suffice; there must be enough of a showing that the jury

could reasonably find for that party. Anderson, 477 U.S. at 251-

52. Where the record taken as a whole could not lead a rational

trier of fact to find for the nonmoving party, there is no

genuine issue for trial. Id. at 587. 

The showings must consist of admissible evidence,

Hollingsworth Solderless Terminal Co. v. Turley, 622 F.2d 1324,

1335 n.9 (9 Cir. 1980), or pleadings, depositions, answers to th

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interrogatories, admissions, and affidavits or declarations, Fed.

R. Civ. P. 56(c). Affidavits shall be based on personal

knowledge, set forth such facts as would be admissible in

evidence, and show affirmatively that the affiant is competent to

testify to the matters stated therein. Fed. R. Civ. P. 56(e).

Sworn or certified copies of all papers or parts thereof referred

to in an affidavit shall be attached thereto or served therewith.

Id. Declarations pursuant to 28 U.S.C. § 1746 may be used with

the same force and effect as affidavits. Pollock v. Pollock, 154

F.3d 601, 611, n.20 (6 Cir. 1998). Personal knowledge may be th

inferred from declarations themselves, such as from facts

concerning a declarant’s position and participation, Barthelemy

v. Air Line Pilots Ass’n, 897 F.2d 999, 1018 (9 Cir. 1990); th

however, a court cannot draw an inference about facts not

specifically put in the record by a party, and a court will not

assume that general averments embrace specific facts needed to

sustain a complaint, Lujan v. National Wildlife Federation, 497

U.S. 871, 887 (1990). Unauthenticated documents cannot be

considered on a motion for summary judgment. Hal Roach Studios,

Inc. v. Richard Feiner and Co., 896 F.2d 1542, 1550 (9 Cir. th

1990). Legal memoranda and oral argument are not evidence and do

not create issues of fact capable of defeating an otherwise valid

motion for summary judgment. British Airways Bd. v. Boeing Co.,

585 F.2d 946, 952 (9 Cir. 1978). th

The Court is not obligated to consider matters that are in

the record but are not specifically brought to its attention; the

parties must designate and refer to specific triable facts. Even

in the absence of a local rule, for evidence to be considered,

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the party seeking to rely on it must specify the fact by

indicating what the evidence is or says and must indicate where

it is located in the file. Although the Court has discretion in

appropriate circumstances to consider other material, it has no

duty to search the record for evidence establishing a material

fact. Carmen v. San Francisco United School Dist., 237 F.3d 1026,

1029 (9 Cir. 2001). th

III. Evidence

Numerous evidentiary objections are lodged by the parties.

In many instances the following analysis contains rulings on the

objections. The evidence considered by the Court has been set

forth in the analysis so that the parties may know what has been

considered by the Court and how it has been considered. In the

interest of the efficient use of resources, some major categories

of objections will be ruled upon generally, and legal standards

will be set forth. 

One large category of objections stems from MQN’s attorneys’

having summarized documentary evidence in their declarations, as

distinct from the customary practice of simply providing a

foundation for the evidence and then referring to it in argument.

The Court has not considered as evidence counsel’s conclusions or

characterizations. In other instances, counsel have directly

declared facts to be true based on their personal knowledge

instead of as a characterization of other evidence; in these

instances, the Court has considered specific objections and has

expressly ruled on them.

Another substantial category of objections concerns the

Passport notes and their evidentiary foundation. Considering the

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post-hearing submission of Passport notes and the testimony of

Akins, Anderson, and Melton, the Court concludes that the

Passport entries are sufficiently authenticated. See, Orr v. Bank

of America, NT & SA, 285 F.3d 764, 776 (9 Cir. 2002). th

Much of the evidence of AMCO’s investigation consists of

data obtained by AMCO’s agents in the course of the

investigation, such as statements made by witnesses or counsel,

reports, etc. The Court has considered this evidence not for the

truth of the matters asserted, but rather for the fact that the

particular statements were made, that the reports were rendered,

etc.

 Numerous objections are made on the basis of a lack of

foundation. In some instances, these objections appear to be

based on a lack of personal knowledge on the part of the person

alleging a fact. Subject to the provisions relating to expert

opinion testimony (Fed. R. Evid. 703), a witness may not testify

to a matter unless evidence is introduced sufficient to support a

finding that the witness has personal knowledge of the matter.

Fed. R. Evid. 602. The burden is on the proponent to establish

personal knowledge to the extent that a reasonable trier of fact

could believe that the witness had personal knowledge about the

fact. United States v. Joy, 192 F.3d 761, 767 (7 Cir. 1999). th

Personal knowledge must be established by admissible evidence,

including the witness’s own testimony or extraneous sources. Fed.

R. Evid. 602; United States v. Lake, 150 F.3d 269, 273 (3d Cir.

1998).

Personal knowledge consists of what a witness actually

directly observed or perceived through his or her own senses.

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Fed. R. Evid. 602, Adv. Comm. Notes (1972). Thus, both

opportunity to observe and actual observation must be

established. McCrary-El v. Shaw, 992 F.2d 809, 810-11 (8 Cir. th

1993). Further, the source of the knowledge must be disclosed; it

is not sufficient for a witness merely to say that he or she is

aware of a fact. Ward v. First Federal Savings Bank, 173 F.3d

611, 617-18 (7 Cir. 1999) (mere statement that a witness was th

aware of something was held to be insufficient to establish

personal knowledge to render the evidence admissible in

connection with a summary judgment motion). Personal knowledge

may include inferences so long as they are appropriately grounded

in personal observation and first-hand experience, United States

v. Joy, 192 F.3d 761, 767 (7th Cir. 1999) (circumstantial

evidence [observation of proceeds and their inspection by

possible purchasers, admissions of coparticipants that a burglary

had been committed with others, knowledge of a person’s history

of having committed burglaries] held sufficient to establish a

foundation of personal knowledge). However, the inferences must

not be based on fancy, speculation, hunches, intuition, or

rumors. Stagman v. Ryan, 176 F.3d 986, 995-96 (7 Cir. 1999). th

In other instances, the objection is accompanied by a

relevance objection or from context appears to be based on an

absence of authentication.

With respect to authentication, the Court notes that Fed. R.

Evid. 901 provides:

(a) The requirement of authentication or identification as a

condition precedent to admissibility is satisfied by evidence

sufficient to support a finding that the matter in question is

what is proponent claims.

(b) By way of illustration only, and not by way of

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limitation, the following are examples of authentication or

identification conforming with the requirements of this rule:

. . .

(4) Distinctive characteristics and the like. Appearance,

contents, substance, internal patterns, or other distinctive

characteristics, taken in conjunction with circumstances. 

Unauthenticated evidence is not relevant. Evidence must have a

"tendency to make the existence of any fact that is of

consequence to the determination of the action more probable or

less probable than it would be without the evidence." Fed. R.

Evid. 401. Authentication constitutes “a special aspect of

relevancy,” Fed.R.Evid. 901(a) advisory committee's note;

evidence cannot have a tendency to make the existence of a

disputed fact more or less likely if the evidence is not that

which its proponent claims. United States v. Branch, 970 F.2d

1368, 1370 (4 Cir. 1992). Upon objection, authentication or th

identification is a condition precedent to admissibility

determined pursuant to Fed. R. Evid. 104(b), Ricketts v. City of

Hartford, 74 F.3d 1397, 1409 (2 Cir. 1996); the Court makes a nd

preliminary determination as to whether there is sufficient

evidence to sustain a jury finding of authenticity; ultimate

resolution of whether evidence is authentic calls for a factual

determination by the trier of fact. United States v. Branch, 970

F.2d at 1370. Authentication requirements are satisfied by

evidence sufficient to support a finding that the matter in

question is what its proponent claims, Fed. R. Evid. 901(a). It

is sufficient if there is enough support in the record to warrant

a reasonable person in determining that the evidence is what it

purports to be; thereafter, the question of weight to be given to

the evidence is left to the finder of fact. United States v.

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Holmquist, 36 F.3d 154, 167 (1 Cir. 1994) (finding that a st

photocopy of a check was authentic in light of the totality of

the circumstances, including the date, payee, amount, and

corroboration provided by its alleged receipt in a package that

included an invoice mentioning a credit in the amount of the

check) (quoting United States v. Paulino, 13 F.3d 20, 23 (1st

Cir. 1994). The burden of authentication does not require the

proponent of the evidence to rule out all possibilities

inconsistent with authenticity, or to prove beyond any doubt that

the evidence is what is purports to be; rather, the standard is

reasonable likelihood. Holmquist, 36 F.3d at 168.

Circumstantial evidence is sufficient to authenticate

evidence. United States v. Englebrecht, 917 F.2d 376, 378 (8th

Cir. 1990) (using a photograph of the Defendant with marijuana

plants after receiving testimony from third parties that the

Defendant had boasted that the crop was his); United States v.

Siddiqui, 235 F.3d 1318, 1322 (11 Cir. 2000) (authentication of th

an e-mail by use of an address that had been used before, content

that only someone familiar with certain facts would have known,

use of a nickname, and extraneous conversational references to

the e-mail), cert. denied 533 U.S. 940; United States v. Bagaric,

706 F.2d 42, 67 (2 Cir. 1983) (authentication of a letter by nd

the addressee, salutation, closing, postmark, content), abrogated

on other grounds in National Organization for Women, Inc. v.

Scheidler, 510 U.S. 249 (1994); see United States v. Lawrence,

934 F.2d 868, 871 (7 Cir. 1991) (voluntary production in th

response to a demand by subpoena for corporate records used to

authenticate a record).

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It is also possible to authenticate evidence by the act of

production in response to a subpoena. Unites States v. Lawrence,

934 F.2d 868, 871 (7 Cir. 1991) (corporate officer’s voluntary th

production in response to subpoena held to be sufficient to

authenticate the documents).

With respect to opinions, an opinion is an inference or

conclusion the witness draws from his or her personal perceptions

or acquired knowledge. Stagman v. Ryan 176 F.3d 986, 996 (7th

Cir. 1999). Aside from expert opinions based on specialized

knowledge within the scope of Fed. R. Evid. 702, an opinion of a

witness is admissible if rationally based on the perceptions of

the witness and helpful to a clear understanding of the witness’

testimony or a determination of a fact in issue. Fed. R. Evid.

701. Further, a party’s evidence submitted with respect to a

summary judgment motion must be based on personal knowledge and

affirmatively show competence to testify. Fed. R. Civ. P. 56(e);

Fed. R. Evid. 602.

IV. Facts

It is undisputed that on August 11, 2003, a fire occurred at

MQN’s nut processing plant in Madera, California, which caused

damage to the structure, equipment, and both raw and processed

nut products. MQN promptly reported the fire to its insurance

carrier, AMCO, which pursuant to a policy admittedly in force

covered stock up to $2,000,000 and covered business income and

extra expense up to $900,000. The policy contained a provision

that excluded from coverage an insured who committed fraud or

intentionally concealed or misrepresented any material fact or

circumstance concerning coverage, the covered property or the

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insured’s interest therein, or a claim under the coverage portion

of the policy. As of November 10, 2003, AMCO advanced $233,521.95

for replacement of equipment and repairs to the building, and

$300,000 for damaged nut products while awaiting verification of

the total amount of that part of the loss. On that date, AMCO

learned through Joe Thacker, an agent or broker of AMCO, that a

former employee of MQN had informed Thacker that MQN managerial

personnel had added old or unsaleable nuts to the damaged nuts

and was thereby fraudulently inflating its insurance claim. The

allegations of fraud dictated that AMCO investigate further. 

Other pertinent disputed and undisputed facts are referred

to in the course of the argument. 

V. Reliance on Advice of Counsel

A. Legal Standard 

An insurer has a duty not to withhold unreasonably payments

due under a policy; if an insurer fails to deal fairly and in

good faith with its insured by refusing, without proper cause, to

compensate its insured for a loss covered by the policy, such

conduct may give rise to a cause of action in tort for breach of

an implied covenant of good faith and fair dealing. Neal v.

Farmers Ins. Exchange, 21 Cal. 3d 910, 920 (1978).

Here, AMCO claims that after its initial investigation of

the fire claim, evidence of fraud arose. Employees and/or exemployees of MQN reported to an insurance broker that the claim

was being inflated. Learning of this, AMCO undertook an

investigation, hired counsel, and determined from numerous

interviews and sworn statements to deny the claim as fraudulent. 

Reliance on the advice of counsel operates defensively in a

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bad faith action in that it may tend to show that the insurer was

acting with proper cause and thus reasonably, and therefore it

will negate bad faith, and it may further negate fraud, malice,

or oppression for an award of punitive damages. State Farm Mut.

Auto Ins. Co. v Superior court (Johnson), 228 Cal.App.3d 721,

725-26 (1991). The defense is a defense of negation, so it need

not be alleged as an affirmative defense in the answer; it is the

burden of the person asserting the defense to establish it. State

Farm, 228 Cal.App.3d at 725-26; Bertero v. National General

Corp., 13 Cal.3d 43, 53 (1974) (recognizing the defense in

malicious prosecution actions where one has acted in good faith

and has disclosed to counsel all facts known to be relevant and

material). The elements are 1) the defendant acted on the opinion

and advice of counsel; 2) counsel's advice was based on full

disclosure of all the facts by defendant or the advice was

initiated by counsel based on counsel's familiarity with the

case; and (3) the defendant's reliance on the advice of counsel

was in good faith. Melorich Builders, Inc. v. Superior Court

(Serabia), 160 Cal.App.3d 931, 936-37 (1984) (recognizing defense

to extreme and outrageous conduct in action for intentional

infliction of emotional distress); Bertero, 13 Cal.3d at 53;

Dalrymple v. United Services Automobile Association, 40

Cal.App.4th 497, 511, 414-15 (1995). However, reliance on the

advice of counsel is simply one factor pertinent to the

determination of whether or not the insurer’s conduct was

reasonable. State Farm Mut. Auto Ins. Co. v Superior court

(Johnson), 228 Cal.App.3d 725-26; 

There is no defense where the insurer did not claim reliance

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on counsel’s advice, Aetna Cas. & Surety Co. v. Superior Court

(Pietrzak), 153 Cal.App.3d 467, 475 (1984), or where the client

knew or had reason to know that the legal advice it was given was

incorrect, Moore v. American United Life Ins. Co., 150 Cal.App.3d

610, 627-28 (1984); Allen v. Allstate Insurance Co., 656 F.2d

487, 489 (9 Cir. 1981). th

B. Analysis

It is undisputed that as AMCO performed its investigation

and gathered evidence, it hired Gordon Park of the Fresno law

firm of McCormick Barstow Shepard Wayte & Carruth LLP to help it

assess the evidence and examine key witnesses under oath. Park

conducted numerous examinations under oath, including those of

Carmina Tapia, the president of MQN; Grant Willits, the plant

manager; and Keith Herring, the production manager. Park declared

that after completing his own investigation and evaluating the

results of AMCO’s investigation and Thompson’s report, he

concluded that all MQN’s explanations as to all of the

discrepancies were not credible. (Decl. of Park ¶ 13.)

1. Complete Investigation 

It is disputed whether or not Mr. Park was provided with the

complete investigation performed by AMCO. Park declared that he

was provided with the complete investigation both as to

information accumulated by AMCO before he was retained and all

evidence and information uncovered by AMCO as its investigation

continued after he was retained; nothing was withheld from him.

(Decl. ¶ 5.) Akins, certified fire investigator and special

investigations unit investigator for AMCO, declared that Park was

provided with the complete investigation performed by AMCO.

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(Decl. at ¶ 24.) 

MQN notes the vague and conclusional form of these

allegations and questions whether there is an adequate foundation

for this statement. Although it is possible and even likely that

Park and Akins have personal knowledge of what Park received,

there are no facts detailed regarding what documents or materials

were transmitted, by whom, or when.

Further, MQN argues that because Park could not recall if he

had received the Passport entries made by Anderson and Melton,

and because Lutkemuller, the AMCO employee who made the decision

to sue, could not remember if anyone told him of AMCO’s earlier

inspection of the product, a rational jury could find that Park

did not know about the Passport entries because had he known, he

surely would have told Lutkemuller about them. 

Park testified that he knew about the allegation of the

commingling or mixing of nuts when he was retained. (Gonzalez

Decl., Ex. H p. 43.) Park had spoken with Chris Anderson, but

Anderson was no longer involved in the file at the time, and Park

did not think it was before AMCO filed the lawsuit. (Gonzalez

Decl., Ex. H at 9.) As to the Passport notes, Park would have had

access to most of the file by the time he filed suit, so he

concluded that it would have been before suit was filed; however,

he did not recall when he first reviewed Chris Anderson’s

Passport entries in connection with the fire and was not sure if

he saw every Passport note or if he received a copy of the

Passport printouts before the lawsuit was filed; he knew he never

saw a complete set because he had seen other references beyond

what had been sent to him, and they were not part of the claim

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file as such that he ever reviewed. (Id. at 9-11, 26). He had no

recollection of ever having talked with Thompson about the

Passport entries (id. at 32-33). 

Excerpts of Passport entries were submitted by AMCO after

the hearing on the motion in connection with argument concerning

whether or not anyone from AMCO read the Passport notes or talked

to Chris Anderson. Passport notes indicate that persons working

for AMCO other than Anderson, including David Smith, Jeffrey

Kaiser, Brandi Bueto, and Jon Kempf, reviewed the file or

discussed it before September 9, the date of Anderson’s second

inspection when he photographed the nuts. The same persons

discussed the claim with Anderson and spoke in depth about the

file; Akins reviewed the file notes on September 23, 2003; Melton

received the complete file on October 2 from the previous

adjuster and reviewed it, concluding that the insured had given

them a complete inventory of nuts; and on November 12, 2003,

Akins discussed with Anderson the handling to date and Anderson’s

photos of the alleged damaged product.

AMCO also submitted excerpts of depositions reflecting that

Melton was sure he reviewed the Passport information when he took

over the file, believed that Anderson had inspected the property,

and believed that he had spoken with Anderson about the

inspection; Anderson at some point confirmed to Melton that

Anderson had seen a lot of nuts that were damaged; and Melton was

sure that he had reviewed Anderson’s entries but did not recall

doing so; he would have relied on Anderson’s entries. Melton

wrote that they could verify all of the destroyed nuts as

Anderson had seen and photographed them; he believed that that

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was accurate. 

Excerpts of the deposition of Akins reveals that he

testified that after Anderson inspected and took photographs, and

after Akins learned that there was a problem, Akins asked

Anderson if he inspected and if there were photographs; he could

not recall what Anderson said, but he also testified that

Anderson said that they identified the damaged product, and he

photographed it; he did not take the time to open the boxes; and

he did not know what else he could have done. If not the sole

conversation Akins had with Anderson about the inspection, this

was the primary one, but it may have been brought up in one

additional conversation. Akins reviewed the photographs taken by

Anderson in order to substantiate a visual inspection and to see

what the photos showed; no date was given with respect to this

review. Akins did not recall any specifics of talking with Melton

about Anderson’s September inspection.

Excerpts of Anderson’s deposition revealed that Anderson

testified that other than conversations with lawyers, Anderson

could not recall anyone asking about the inspection in light of

the later problem, although perhaps one of his coworkers or

someone, a manager, may have said something to that effect; he

had a conversation with David Melton about the case, and he

discussed the case with Brandi Bueto, the supervisor, by

recapping his file notes before putting the notes in the file and

updating her as to the status of the loss and what was being

found.

In summary, Park’s and Akins’ assertions that the complete

investigation was transmitted to Park are conclusional; Park did

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not talk with Anderson before filing suit; and, in view of Park’s

admission that he did not see the complete set of Passport notes,

reasonable inferences could be drawn both ways with respect to

Park’s having seen or been aware of the Passport entries

regarding the inspection. Accordingly, drawing all reasonable

inferences in favor of MQN, the Court concludes that it may

reasonably be inferred that Park did not receive or know of the

particular Passport entries and thus did not receive the complete

investigation with respect to the inspection.

Gonzalez declares that Akins got samples of product from

Winslow that were just recently produced to MQN for inspection at

Park’s office in Fresno. (Decl. ¶ 45.) AMCO objects that this

evidence lacks foundation, is based on hearsay and inadmissible

testimony not before the Court, and is irrelevant. However, it

may be concluded that Gonzalez has personal knowledge that

samples purporting to be Akins’ collection from Winslow had

recently been produced. Further, the evidence is relevant to

whether or not the investigation was complete.

In a letter to Akins dated January 16, 2004, Park stated

that he believed that Akins should interview Winslow and obtain a

recorded statement; if Winslow had any of the remaining nuts

which were not sold, and especially if he confirmed that some of

the nuts were not damaged, Park wanted samples, records showing

to whom he sold any nuts, and records from buyers. (Gonzalez

Decl., Ex. N p. 7.) This document, when viewed in context with

the other communications, contains sufficient indicia for

authentication. The Court considers it for the purpose of the

statement having been made as distinct from the truth of the

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matter asserted. 

Park could not remember whether Akins obtained samples of

the product from Todd Winslow, the salvage purchaser, although he

vaguely remembered that there might have been some samples taken

by him or somebody; he never looked at them or spoke to anyone

about whether one could tell from inspecting either a container

or nuts whether the product had actually been in a fire. (Decl.

of Gonzalez, Ex. H pp. 61, 67-68.)

As a matter of common sense, actual samples of the nut

product, and any information they would reveal, would be relevant

information with respect to the presence of undamaged nuts in the

salvage sold to Winslow; further, the samples would potentially

have great probative force with respect to whether or not there

had been inflation of the claim. Further, it may be inferred that

Park requested that such samples be taken and that such samples

existed. The Court concludes that in this context, the failure of

Park to recall if there were samples warrants an inference that

the samples, or data regarding them, were not transmitted to

Park.

Park sent a letter to AMCO dated November 22, 2004, in which

he stated that after completing his investigation, evaluating the

results of AMCO’s investigation, and Thompson’s report, he had

concluded that MQN violated the policy provisions barring

concealment, misrepresentation and fraud by misrepresenting the

time Willits’ photographs were taken so as to mislead AMCO as to

the quantity of nuts damaged by the fire; concealed and

misrepresented the existence of the security camera videotape

that would have shown the quantity of nuts in the plant at the

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 The Court notes that the letter was dated November 22, 2004, a date 1

after the date upon which the docket reflects that the present lawsuit was

filed, namely, October 26, 2004. The Court further notes that a letter to

Tapia describing the coverage decision and investigation, and inviting a

factual response, was dated November 19, 2004 (Park Decl., Ex. 5). 

25

time of the fire; misrepresented that old, rotted, unsaleable

Brazil nuts and Chinese blanched almonds were fire-damaged;

intentionally commingled fire-damaged nuts to inflate the claim

grossly; and overvalued the business interruption and extra

expense claim. (Park Decl. ¶ 13, Ex. 6 (Park’s letter of November

22, 2004, to Akins).) In the letter, Park states that the letter 1

merely confirms in writing his coverage recommendations

previously made orally at an unspecified time; further, he

drafted and filed a complaint with the authority of AMCO and had

it served. However, MQN’s objection of hearsay is sustained with

respect to inferring the truth of the matters asserted in the

letter.

AMCO asserts that various facts follow from the conclusions

reached by Park in his letter and from Park’s declaration to the

effect that he investigated and concluded that there had been

violations as described in his declaration and as noted in the

attached report. The facts AMCO asserts are established by this

evidence include Park’s having performed a thorough review of

applicable California law regarding insured’s misrepresentation

in presenting a claim, examined all possible defenses the MQN

might raise in an action to void the policy, considered all

possible remedies apart from voiding the policy, and found none

satisfactory. Although the declaration and attachments might

warrant an inference of a thorough investigation, it does not

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appear to preclude an inference to the contrary. Further, there

is no basis before the Court upon which to conclude regarding the 

sufficiency or accuracy of Park’s legal opinion; AMCO has not

mounted a legal argument to this effect or cited any legal

authority to this Court.

Park testified that he was fairly certain that before he

filed suit, he knew that Valladares and two other employees, one

a former employee, had filed a lawsuit against MQN in connection

with the fire; its relevance to him was that the pleading was

interesting. (Gonzales Decl., Ex. H at 39.)

Erich Lutkemuller testified that he was the person within

AMCO who actually decided to file the lawsuit; he had read the

Passport file pertaining to the claim, but he did not remember

what part he had read at the time when he decided to file the

lawsuit. (Decl. of Gonzalez, Ex. G at 12-13.) He did not recall

reading the entries of Chris Anderson before making the decision

or at any time, but he recalled sitting down and discussing the

facts identified in the investigation of Akins and Park with

Akins and Park; with that information he made a decision. (Id. at

13.) He had no knowledge about the record-keeping or inventory

practices of MQN. (Id. at 25.) He never conversed with Chris

Anderson or David Melton. (Id. at 14.) He did not recall whether

he had a discussion with anybody on the actual inspection of the

nuts by Anderson. (Id. at 50.) He did not recall discussing the

inspection with Park or Akins. Further, he characterized

Pentorali as an employee; he testified that AMCO first knew there

was a concern with the claim when AMCO’s agent, Joe Thacker,

received a telephone call on November 10, 2003, from “one of

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Madera Quality Nut’s employees” indicating concerns other the

claim being filed. (Id. at 25-26.) Lutkemuller stated that in

deciding to sue, it was important to look at the whole picture

and not consider just one person’s word. (Id. at 26-27.) When he

decided to sue, he was not aware that or when any of the MQN

accusers had filed a lawsuit against MQN; it was not part of his

conversation. (Id. at 27.)

In summary, the Court concludes that a rational trier of

fact could conclude that the complete investigation was not

communicated to Park or to the AMCO representative who determined

to sue because a rational trier of fact could reasonably infer

that they did not receive or review Passport notes or a full

report thereof, concerning Anderson’s inspection; did not receive

information regarding samples of the salvaged nuts; and did not

apprehend the employment status of the initial complainant

regarding the alleged fraud. Further analysis of the thoroughness

of the investigation, apart from what was communicated to Park or

to Lutkemuller, appears below in connection with the issue of the

presence of a genuine dispute. However, focusing on what was

communicated, it may be concluded that Park’s advice was not

based on, and was not evaluated by Lutkemuller in light of, the

complete facts of the investigation.

2. Reliance on Counsel’s Advice 

With respect to whether or not AMCO actually relied on the

advice of counsel in filing suit, Akins’ declaration that AMCO

relied on Park’s advice in deciding to file the instant action

(Decl. ¶ 26) suffers from a lack of personal knowledge. Although

Akins communicated facts of the investigation to Lutkemuller, it

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is not clear that Akins was a party to, or was aware of, the

actual decision making process at AMCO with respect to the

determination of the claim or the filing of the suit.

However, Lutkemuller testified that he recalled sitting down

with Akins and Park, discussing the facts identified in their

investigation, and with that information making a decision

(Gonzalez Decl., Ex. G p. 13.) This warrants an inference that

Lutkemuller, the decision maker, relied on Park’s advice

regarding the significance of the facts and investigation in

deciding to bring suit.

Park declares that as Amco performed its investigation, it

hired Park (the date of hire was not stated) and his firm to help

it assess the evidence and examine key witnesses; Park was

provided with the complete investigation performed by Amco both

before and after he was retained; he wrote to Carmen Tapia,

president of MQN, explaining his conclusion of fraud and

providing her with information not otherwise provided; and he

concluded in a letter to Amco (actually addressed to Russell

Akins) dated November 22, 2004, that MQN had violated the policy

provision barring concealment and misrepresentation with respect

to the quantity of nuts damaged by the fire, the existence of a

security camera videotape, the fire-damaged status of old, rotted

unsaleable Brazil nuts and Chinese blanched almonds, commingling

fire-damaged nuts with undamaged nuts grossly to inflate the

claim, and overvaluation of business interruption and extra

expense claim. (Decl. at 2-3, Ex. 6.) In the letter, Park

recommended pursuing an action to void the insurance policy for

fraud and to recoup the advance payment, (at pp. 11, 27);

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further, he stated that “with authority from Amco, we drafted and

filed” the complaint in the instant action and had it served;

further, “in accordance with our discussions, and my

recommendation, the Complaint sets forth” the basis for the

common law fraud claim.” (Id. at p. 27.) The instant lawsuit was

filed on October 26, 2004. 

It may be inferred that this letter itself is pretextual, in

that it appears to have postdated the decision to deny the claim

and file suit. Further, a rational trier of fact could infer that

the actual legal opinion postdated the conference among

Lutkemuller, Park, and Akins. However, in view of Lutkemuller’s

testimony, it may also be inferred that Park had given advice

during the earlier conference. 

Thus, the Court concludes that an issue of fact exists as to

whether or not AMCO relied on the advice of counsel (as distinct

from a discussion of facts) in making its decision.

3. Good Faith 

With respect to whether or not the reliance on Park’s advice

was in good faith, Akins declared that AMCO had no reason to

believe that Park’s conclusions and recommendations were wrong at

the time it denied MQN’s claim and filed this declaratory relief

action. (Decl. ¶ 27.) Akins likewise declared that AMCO maintains

today that Park was correct in the conclusions and advice

rendered in the November 22, 2004 letter. (Id. ¶ 28.) 

MQN objects to this evidence as a conclusion, as argument,

as without foundation, and as not supported by the cited

evidence, noting that a rational jury could easily disagree with

Park’s conclusion. The Court rules that this statement lacks a

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showing of personal knowledge and foundation, and further

consists of an inadmissible conclusion.

Arturo Gonzalez’s declaration (at 13) refers to excerpts of

the testimony of Erich Lutkemuller (Ex. G to Decl. of Gonzalez),

who testified at deposition that he was the Amco employee who

decided to sue MQN for fraud but did not know Valladares had sued

MQN for eighty million dollars, could not recall if he knew that

AMCO’s own agent had inspected the product or had viewed

Anderson’s computerized PASSPORT entries, and had never spoken

with Chris Anderson about his inspection of the product.

Lutkemuller testified that whether the nuts were damaged by smoke

could have been determined both visually and by taste, and that

if Amco had obtained samples of the product from the salvage

buyer, Creative Ingredients, Amco could have tested it for

damage. (Gonzalez Decl., Ex. G.) 

AMCO objects on various grounds, including lack of

foundation and hearsay. The Court overrules these objections.

It is undisputed that the insurer made substantial partial

payments. The thoroughness and objectivity of the investigation

conducted and evaluated by AMCO’s personnel and agents (Akins,

Park, Lutkemuller, and others) is discussed more fully below in

connection with the issue of the presence of a genuine dispute.

Because issues of fact exist as to the thoroughness and

objectivity of the process and thus the reasonableness of the

insurer’s conduct, it is concluded that an issue of fact exists

as to whether or not the insurer’s reliance was in good faith. 

///

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VI. Genuine Dispute

AMCO argues that there was a genuine dispute regarding

coverage affecting entitlement to benefits and the scope of the

loss; because AMCO’s position was reasonable, it cannot have

breached the covenant of good faith and fair dealing.

A. Legal Standards 

The gist of the tort of bad faith breach of the implied

covenant of good faith and fair dealing is unreasonable conduct

on the part of the tortfeasor, or conduct without proper cause;

bad faith breach involves something beyond breach of the

contractual duty itself and implies unfair dealing rather than

mistaken judgment, or conduct prompted not by honest mistake, bad

judgment, or negligence, but rather by a conscious and deliberate

act which unfairly frustrates the agreed common purposes and

disappoints the reasonable expectations of the other party.

Chateau Chamberay Homeowners Association v. Associated

International Insurance Co., 90 Cal.App.4th 335, 346 (2001).

An insurer’s bad faith is ordinarily a question of fact to

be determined by a jury by considering the evidence of motive,

intent, and state of mind; however, the question becomes one of

law where there is no dispute as to the underlying facts, and due

to an absence of conflicting inferences, reasonable minds could

not differ. Chateau, 90 Cal.App.4th 335, 350 (2000). A court may

grant summary judgment when it is undisputed or indisputable that

the basis for the insurer’s denial of benefits was reasonable,

such as where even under the plaintiff’s version of the facts

there is a genuine issue as to the insurer’s liability under

California law. Amadeo v. Principal Mutual Life Ins. Co., 290

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F.3d 1152, 1161-62 (9 Cir. 2002). However, an insurer is not th

entitled to summary judgment as a matter of law where, viewing

the facts in the light most favorable to the plaintiff, a jury

could conclude that the insurer acted unreasonably. Amadeo v.

Principal Mutual Life Ins. Co., 290 F.3d 1152, 1161-62 (9 Cir. th

2002) (reversing summary judgment because a rational trier of

fact could have concluded that the insurer’s legal position

regarding interpretation of the policy was arbitrary, and that in

investigating the insured’s disability, the insurer selectively

sought and considered evidence). 

The Court acknowledges that, as AMCO states, where the

genuine dispute relates to policy interpretation, which is

customarily a legal issue for decision by the Court, the

insurer’s reasonableness is a question of law to be decided by

the Court. Chateau Chamberay Homeowners Association, 90

Cal.App.4th at 348 n.7. Here, however, the issue is not the

reasonableness of the insurer’s interpretation of any specific

policy provision. Instead, the case involves a factual issue

regarding the insurer’s conduct in investigating and denying a

claim; if the essentially factual issue of whether or not the

insurer acted in bad faith or reasonably in its treatment and

denial of the claim is resolved, then the application of the

policy is likewise determined. The issue in the present case is a

question properly decided as a matter of law only if, pursuant to

the authorities previously noted, the inferences regarding the

reasonableness or cause for the insurer’s actions are not in

conflict, or if it is undisputed or indisputable that the basis

for the insurer’s denial of benefits was reasonable, such as

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where even under the plaintiff’s version of the facts there is a

genuine issue as to the insurer’s liability under California law.

Application of California’s genuine dispute doctrine is on a

case-by-case basis and may be applied where the assertedly

genuine dispute concerns not only an issue of insurance law but

also where it involves a factual dispute. Guebara v. Allstate

Ins. Co., 237 F.3d 987, 993-94 (9 Cir. 2001). A genuine dispute th

may be present where an insurer denies a claim based on the

opinions of independent experts. Chateau, 90 Cal.App.4th at 346-

47 (citing Fraley v. Allstate Ins. Co., 81 Cal.App.4th 1282, 1292

(2000) (which held in turn that a substantial disparity in

estimates of repair costs by dueling experts relied upon by the

opposing parties did not by itself suggest that the insurer acted

in bad faith)). 

Mistaken or erroneous withholding of policy benefits, if

reasonable or if based on a legitimate dispute as to the

insurer’s liability under California law, does not expose the

insurer to bad faith liability. Chateau, 90 Cal.App.4th at 346-

47. However, the mere presence of a purely factual dispute

between the insurer and the insured does not necessarily mean

that the genuine dispute doctrine may be properly applied. Id. at

348.

B. Facts regarding Failure to Investigate Completely 

MQN argues that the insurer’s investigation was incomplete

and did not include adequate consideration of evidence that would

support an inference that MQN had not engaged in fraudulent

conduct. 

An insurer may act in bad faith if it seeks to discover only

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the evidence that defeats the claim and ignores supporting

evidence; the insurer has a duty diligently to search for

evidence that supports its insured’s claim and should consider

all the information reasonably available to it at the time it

denied the claim for a basis upon which reasonably to deny the

claim. Mariscal v. Old Republic Life Ins. Co., 42 Cal.App.4th

1617, 1620 (1996). An inference of unfair dealing is appropriate

where an insurer fails to consider or to seek to discover

evidence relevant to the issues of liability and damages, such as

where the insurer fails to obtain all relevant records or

inexplicably relies on self-serving evidence while ignoring a

mass of other available evidence. Shade Foods, Inc. v. Innovative

Products Sales & Marketing, 78 Cal.App.4th 847, 880 (2000). It

has been held that where the insurer suspected insurance fraud in

connection with a claim regarding stolen property under a

homeowners policy, and thereafter criminal charges against the

insured were dismissed and the insurer was advised of the

existence of witnesses who had observed insured property in the

home of the insured, the insurer breached the covenant of good

faith and fair dealing when it failed to investigate.

Frommoethelydo v. Fire Ins. Exchange, 42 Cal.3d 208, 220 (1986).

1. Initial Investigation

It is undisputed that when the claim was reported to it,

AMCO assigned Chris Anderson to adjust the loss. Anderson, an

adjuster for Allied Insurance, testified that his job was to

inspect the loss and try to determine the amount of damages and

the facts surrounding a claim; the insurer needed to document

exactly what was damaged when the loss occurred; he documented a

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property loss by visual inspection, taking photographs, and also

taking notes which, if important, were put into the paperless

computerized file of the insurer called “Passport.” (Decl. of

Gonzalez, Ex. B, Dep. of Anderson pp. 10-15.) In his declaration,

he stated that it was his job to determine what MQN’s claim was,

to learn the scope and extent of the loss, the dollar value

assigned by MQN to the loss, and to verify the loss. (Decl. p.

2.) He declared that it was not his job to determine whether MQN

was fraudulently inflating its loss; in the absence of any red

flags indicating the possibility of fraud, his job was simply to

determine how much to pay MQN and to pay it.

Akins testified that if he had investigated the damaged

product, he would have looked for evidence to substantiate the

claim of damage because in “any due diligent investigation” one

has a duty and responsibility to do that, to look for the

obvious. (Gonzalez Decl., Ex. F, Dep. of Akins p. 40-41.) 

Anderson visited MQN’s plant on August 14, observing smoke

damage on the interior walls and floor, water, some debris, and

product stacked outside in bins in a loading area. (Id. at 19-20,

33.) It was his job to take photographs of damaged product. (Id.

at 31.) He took photographs but did not recall what he

photographed. (Id. at 24.) Photographs taken by him that day did

not include photos of damaged product except for some chopped

almond product in process. (Gonzales Decl., Ex. D.) He could not

recall if he was shown all of the product, although he believed

he could have looked at it all had he chosen to do so; he

believed he inspected some of the product, although he thought,

but was not sure, that there was some that had been moved out to

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a holding area or other building. (Id. at 25.) He spoke with

Grant Willits and Carmina Tapia. (Id. at 27.)

On September 9, Anderson returned to MQN and took additional

photos of allegedly damaged product that Anderson believed to be

at a warehouse and that was in boxes and bins. Anderson knew that

it was important for him as the claims representative to have

inspected the damaged product and to do a careful inspection to

satisfy himself that the product was actually in the building at

the time of the fire, and he did whatever he felt he needed to do

to satisfy himself that he had done that. (Id. at 53-54, 90-91.)

He saw the product but did not ask that any of it be moved or

opened up. (Id. at 52-53.) He did this in order to determine the

amount of product had been lost and to document the loss. (Id. at

51.) He could see the top layer of the boxes or bins, and he

could walk around three sides of the pile but could not get to a

fourth side that he believed was against a wall; some of the

bins’ contents had soot or smoke damage, but he could not verify

that all of them had that damage, although he could not remember

if he saw any that did not. (Id. at 69-72.) He satisfied himself

that what he was looking at was actually in the building at the

time of the fire by visual inspection. (Id. at 89-90.) 

Anderson’s Passport notes, constituting entries into a

computer data bank of his notes and observations covering the

visit, indicated that based on the amount of work at the time of

inspection, it was clear that MQN had a large number of pounds of

nuts that were not sealed or covered that would account for the

loss of nuts in the fire; further, he stated that he had

inspected damaged nuts in a separate warehouse, and he

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photographed all bins, bags, boxes, etc.; bins were stacked two

high in rows of ten or more; and based on the volume of the bins,

he visually verified at least 300,000 pounds or more of damaged

nuts. (Id. at 65-66.) He believed it to be accurate; he wrote

that the insured had provided a detailed inventory of pounds,

type and market price per pound of raw, processed, and finished

nuts. He also obtained more documentation of the values for loss

of product, which reflected pounds run per line each month in

2001 and 2002. (Id. at 66.) He declared that there were no red

flags in the first three months after the loss, and at least from

the insurer’s point of view, the adjustment was proceeding

smoothly. (Anderson Decl. at 2.)

David Melton, a later adjuster, confirmed in his declaration

that there were no red flags during the first three months.

(Decl. at 2.) Reference to the Passport notes reveals that on

August 19, 2003, Anderson had been told by MQN that they were

collecting documents, and he informed them that they needed to

complete an inventory of all damaged goods; by August 28,

Anderson was informed by Grant, the plant manager, that they did

not have firm figures for the product loss. 

Anderson testified that the case was reassigned from

Anderson to Dave Melton, a general adjuster who routinely handled

larger losses, after about thirty days. (Id. at 23.) In his

declaration, Anderson stated that on September 10, 2003, he was

no longer the primary adjuster, but he remained on the claim as

co-adjuster until October 29, 2004. (Decl. at 2.) Melton declared

that he worked on adjusting the claim from September 10, 2003,

until October 24, 2004. (Decl. at 2.)

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 The testimony of Anderson at deposition, authenticated by Savage’s 2

declaration and the title page and certificate of the deposition transcript,

refers to pages 1093-95, 1099-1100, and authenticates them and arguably the

remainder of the entries. Likewise, the testimony of Melton (Decl. of

Gonzalez, Ex. C) and Anderson (Gonzalez Decl., Ex. B pp. 13-14) authenticates

their passport entries. Akins testified that one working on a file should

document activity done on the case in the Passport file. (Gonzalez Decl., Ex.

F, Dep. of Akins pp. 30-31.) Further submissions by AMCO concerning Passport

notes removes any doubt as to the authenticity of the Passport entries. If

evidence is authenticated by one party, then it should be considered to be

sufficiently authenticated against all parties, subject to the right of any

party to present evidence to the ultimate fact-finder disputing its

authenticity. Orr v. Bank of America, NT & SA, 285 F.3d 764, 776 (9 Cir. th

2002). 

38

Passport entries of Anderson and of David Melton, which were

declared by Melton to be true and correct copies of relevant

portions of the claims file, indicate that Melton and Anderson

made various notations in the so-called “Passport” computer

system, which are set forth at Gonzalez’s Decl., Ex. A. (Decl. of

Savage, Ex. 1, pp. 25, 53, 55.) These include an entry of 2

September 9, 2003, from David Melton, indicating that after

talking to Anderson in depth about the file, Anderson had the

file totally under control; he had obtained substantiated stock

loss of $631,000 in nuts based on the weight and resale cost of

nuts; Anderson had seen the damaged nuts being stored off site

for salvage and could document the amount with records received

by the insured and by his visual inspection of them. (Id. at pp.

CLM-00001092.) Anderson’s entry of September 9, 2003, indicated

that based on the amount of work at the time of inspection, it

was clear that they had a large number of pounds of nuts that

were not sealed or covered, and that would account for the loss

of nuts in the fire. He further noted that he had inspected

damaged nuts in a separate warehouse; photos were taken of all

bins, boxes, and bags; and the bins, stacked two-high in rows of 

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ten or more, were visually verified to have been at least 300,000

pounds or more of damaged nuts, either raw unprocessed, partially

processed (in machines at the time of fire), or finished nuts in

open bins awaiting final packaging. Further, the insured had

provided a detailed inventory of pounds of nuts, type of nuts,

and market price per pound of raw, processed, and finished nuts.

He noted, “Apparent that [the] amount of product lost is what

they are claiming.” (Id. at pp. CLM-00001093-94.) He had verified

the amount of product produced per month by reviewing records

from 2001 and 2002. Further, the insured had faxed a four-page

inventory of all nuts with prices verified by market values that

appeared to be in line for market values and pounds damaged. (Id.

at CLM-00001095.) On September 10, 2003, an entry of David Melton

indicates that the insured had documented the loss very well, and

they could verify all the destroyed nuts as Anderson had seen and

photographed them. (Id. at CLM-00001099.) On September 15, 2003,

enough information had been received to post an accurate reserve.

(Id. at CLM-00001100; Decl. of Savage, Ex. 1 at 86.) Anderson

also testified that at the time he had no reason to disagree with

the pounds of nuts claimed to be lost.

The reserve for stock damage was increased to $693,396.85 on

September 15 according to Melton’s Passport entry. (Decl. of

Melton, Ex. 1 at p. CLM-00006286.) Melton’s entry of October 2

indicates that the insured had given a complete inventory of

nuts. (Id. at CLM-00006292.) Melton reported on October 17 that

he was going to talk with Paul Migdal from Greenspan, MQN’s

outside adjuster, in the following week to attempt to finalize

the value of the nuts. (Id. at CLM-00006295.)

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2. Allegation of Fraud

On November 10, 2003, Melton’s entry indicates that he spoke

with agent Joe Thacker, who had in turn had received a call from

an ex-employee, a former office manager of MQN whose name was

Sherry Pentorali. Thacker reported that Pentorali reported that

Carmina [Tapia], the person in charge, had taken the loss and

added items that were undamaged to list of damaged items, had

taken stock from cold storage and put it in the damaged items

when the previous adjuster inspected the damage, and had told

factory workers to move the nuts with forklifts from storage and

into the loss area and pack them in so that they would not be so

noticeable; MQN was claiming that it was damaged when it was not

but could not be sold. Pentorali expressed interest in talking to

the adjusters; further, a woman named Rosemary who was still

employed at MQN also knew about it and was really bothered; she

had consulted an attorney who was threatening MQN to come clean,

or he would take action. (Id. at CLM-00006295-96.) Melton agreed

to contact the SIU (special investigations unit) regarding the

matter. Russ Akins of SIU noted on November 11 that he was going

to contact the witness and the employee to evaluate the

information. (Id. at CLM-00006296.)

Russ Akins declared that AMCO assigned the claim to him in

November 2003 to investigate Pentorali’s allegations to determine

in fact whether MQN had fraudulently exaggerated its claim.

(Decl. at ¶ 4.)

3. Sherry Pentorali 

It is undisputed that Akins learned from Pentorali on

November 12, 2003, that Pentorali believed that there were two

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28 It is undisputed that a bin contains approximately 2,000 pounds of 3

nuts. 

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large categories of product that MQN claimed were fire-damaged

when they were not: fifteen bins of finished and boxed almonds 3

that had previously been rejected by the buyer, and eight bins of

Brazil nuts.

Christopher Glenister, the CPA from Greenspan with whom

Pentorali had initially worked in putting together the claim and

evaluating inventory, testified that Pentorali disagreed with him

about the measure of the value of some of the product; she

disagreed with Glenister’s use of a contractual provision that he

understood to permit replacement of goods at the selling price if

the goods had been sold but not delivered, and Pentorali instead

believed that the claim should be limited to replacement cost.

Glenister was critical of schedules that she had prepared. (Decl.

of Savage, Ex. 2, Dep. of Glenister pp. 125.)

An excerpt from Valladares’s deposition and additional

documents referred to in part in the deposition provide an

adequate foundation and tend to show that in 2003 Rosemary

Valladares complained to Tapia of Pentorali’s having engaged in

hostile, angry, aggressive criticism of Valladares in front of

others; Tapia instructed Pentorali in writing to conduct employee

discipline or facts investigation in private and to treat the

immigrant work force with respect, dignity, and courtesy.

(Gonzalez Decl., Exs. P, Q.)

4. Rosemary Valladares 

Akins took a recorded statement from Rosemary Valladares on

December 17, 2003 (Akins Decl., Ex. 3), in which Valladares

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stated that 124 pallets of product in the plant at the time of

the fire had been repackaged and shipped to customers; only

twenty or thirty pallets had actually been lost; the product on

an Excel sheet of five or six pages, consisting of Brazil nuts,

almonds, and pumpkin and sunflower seeds, that had been

represented as having been in the plant at the time of the fire

and for which an advance had been made, was actually not in the

plant but had been in cold storage and other warehouses. In fact,

she stated that the more than 300 pallets on the Excel sheet

would not have even fit in the building. The Brazil nuts were

almost two years old and were thus a month away from being

useless or unsaleable. She had put documents that would reflect

her allegations on a disc and gave it to Akins; she downloaded

Grant Willits’ photographs taken on August 12, early in the

morning before product was moved out of the burnt building; she

gave Akins hard copies of monthly inventories with tags that

would prove where the product on the Excel spreadsheet came from.

She also gave him shipping invoices of product sold to Todd

Winslow in September, but she was not involved in that process

even though she was still in logistics. She acknowledged that she

was not involved in taking the inventory taken immediately after

the fire.

Valladares stated that although she had worked at MQN since

May 2001 in accounts payable and then customer service in

logistics, she had been suspended for a disciplinary matter and

had retained an attorney to represent her; she had been accused

of destroying documents in connection with the fire. She had

confronted Willits and Tapia on September 15, telling them that

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they should be behind bars. She had contacted an attorney, Steven

Derringer, in September, and asked that he expose the matter. She

admitted that she had taken documents out of MQN that she felt

were related to showing that something illegal was taking place.

She was removed from her logistics job on October 10 because

Tapia and Willits felt that she was not doing her job properly;

she was moved to the laboratory as a lab tech specialist, a job 

about which she knew nothing. She further admitted that her

information that Tapia and Willits had orchestrated the

fraudulent inventory shifting had come from Ramon in inventory

control.

Akins testified at deposition that Valladares had told him

that Maria Elena Chavez had said that documents were being

removed from the lab and being destroyed by Grant and Carmina and

others; however, when Akins followed up and spoke with Chavez,

she could not substantiate that any of this was happening. (Decl.

of Davis, Ex. F, Dep. of Akins taken October 13, 2005 at p. 23-

24.)

Gordon Park testified that he had visited the plant;

although he originally had planned to have an engineer determine

if the amount of nuts claimed by MQN could have fit in the plant,

he determined based on his own observations and on diagrams of

the plant that there was room for the amount of nuts claimed.

(Decl. of Gonzalez, Ex. H pp. 64-66.) Testimony of Robert Buckert

of J-2 Engineering, a firm retained by Park, confirmed this.

(Decl. of Gonzalez, Ex. I.)

Akins testified that Valladares told him that she had erased

the hard drive on her computer; Akins’ documentation of this

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event included a statement of Akins that Valladares had told him

that she copied the photos taken by Grant Willits on to her hard

drive at work on the morning of August 12, 2003, sometime around

10:30 a.m. and later transferred them to a CD that she took home;

Akins testified that she admitted that she had erased the MQN

hard drive so that she had the only copies of the photos. (Decl.

of Gonzalez, Ex. Z p. 34.)

Akins, a former police officer, considered potential bias of

people making allegations and the presence of a motive, such as

making up stories because of a beef against a person who is being

accused; further, if he found out that part of what one told him

was not true, it made him suspicious about the person and caused

him to question their motives, their truthfulness, or the facts

they have presented (Gonzalez Decl., Ex. F (Dep. of Akins) at

15-17.) Further, Akins understood that people making accusations

could have a financial incentive; he learned at some point that

Valladares and a couple of other individuals had filed a lawsuit

seeking $80,000,000 from MQN, which was a stronger incentive to

verify independently whatever they said. (Id. at 21; Gonzalez

Decl. Ex. S.) The plaintiffs in the Valladares action include

Valladares, Ramon Delgadillo, and Hugo Perez; the date of filing

is reflected as August 6, 2004. (Gonzalez Decl., Ex. S.) Akins

recalled that there were people who disputed what Valladares said

with respect to several incidents. (Id.) Park testified that he

knew about the lawsuit before filing the present action.

(Gonzalez Decl., Ex. H (Dep. of Park) at 39.)

Akins testified that in investigating, one tried to avoid

leading questions in order not to put words into an individual or

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to be the first person to suggest a particular topic or word;

further, it was possible that one answering a leading question

would simply be agreeing to the question without giving it enough

thought; however, sometimes they were used to prompt a reluctant

witness. (Gonzalez Decl., Ex. F (Dep. of Akins) at 60-61.) Review

of the questioning of Valladares by Akins on December 17, 2003,

reflects many leading questions. (Akins Decl., Ex. 3.)

Akins testified that before this lawsuit was filed, MQN

produced 30,000 pages of documents and never rejected any request

that he made to interview any witness; Akins visited the MQN

facility five times, including making one inspection. (Gonzalez

Decl., Ex. F pp. 53-54, 67.)

Akins declared that the allegations of impropriety were

particularly serious to AMCO because they were brought not only

by the possibly disgruntled ex-employee Valladares, but also by

Pentorali, a continuing employee. Akins declared that in his

experience, it was highly unlikely that a current employee would

make allegations of fraud against the employer because of the

fear of losing one’s job. (Decl. at ¶ 9.) However, Passport notes

reveal that Thacker’s first report to AMCO of Pentorali’s

allegations recited that she was an ex-employee; her last day of

work was November 8, 2003, and it was on November 10, 2003, that

she contacted Joe Thacker. (Melton Decl., Ex. 1 at CLM-00006296;

Gonzalez Decl., Ex. R (Pentorali Dep.) p. 108, Ex. G (Lutkemuller

Dep.) p. 26.) Lutkemuller also testified that the call to Thacker

was from an employee of MQN. (Gonzalez Decl., Ex. G at 25.)

5. Hugo Perez

Akins took a recorded statement from Hugo Perez, a forklift

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operator for MQN, in January 7, 2004. (Akins Decl. ¶ 10, Ex. 4.)

Perez was twenty-one years old and had been terminated on

September 25 from his job as shipping and receiving clerk by

Lucio, his supervisor, for making a mistake in shipping out a

product. Perez believed that Lucio, and not Perez, was

responsible for the mistake. Being blamed for a mistake that he

believed was not his was a big deal to Perez. Perez had been on

duty at the time of the fire, had been one of the first employees

to discover the fire, was ordered home after firefighters

arrived, returned to work at noon, left and returned again at

five p.m., and confirmed that Grant Willits’ photographs of the

scene generally reflected the plant as it had been at the time of

the fire. Perez explained that the stacks of nuts claimed to have

been damaged and shown to the adjuster on September 9 were put

together by Ramon. Akins stated that his information was that not

all of the nuts claimed to have been damaged were damaged, and 

Akins further suggested that the shipping orders given with

respect to the salvaged product was “a little different” ( at

CLM-0000438); Akins also employed numerous leading questions.

Perez thereafter stated that he had loaded twenty-four bins of

mixed nuts that were allegedly damaged which included Brazil

nuts, and that at an unspecified time the Brazil nuts were in

cold storage and not in the front process area but were shipped

as salvage and fire-damaged nuts when Perez knew they were not

damaged. He also stated that the nuts were “not damaged, neither

by the fire nor rotten or any of that,” (id. at CLM-0000440), and

he thought that someone was adding them on. He was instructed to

load them by Joe Lucio; Perez said he might have told Lucio two

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or three times that the stuff was still pretty good, and Lucio

responded that they should do as they were told.

6. Ramon Delgadillo 

It is undisputed that Valladares’ reference to Ramon

Delgadillo caused Akins to interview Delgadillo on June 21, 2004,

which resulted in a recorded statement. (Akins Decl., Ex. 5.)

Akins again employed numerous leading questions. Delgadillo,

whose job was in inventory, was not working because he had

injured his back at work about three and one-half months

previously. When they had previously spoken (apparently in

January 2004), when asked who had instructed Delgadillo to mix

undamaged nut product that had been in cold storage with firedamaged nuts, Delgadillo had said that he could not remember

exactly; however, when asked in June, Delgadillo stated that

Tapia had gone to cold storage with Delgadillo and had pointed

out about ten pallets and boxes of Brazil nuts and some other

small pallets next to them that were not fire-damaged and

instructed him to move them to the warehouse and mix them with

the other nuts. He did not know when it was but then said it was

about two days after the fire. He knew at the time it was not

right. He also described the emptying of the burnt building on

the workday following the fire and the logging of the damaged

items, which took at least seven hours; Willits’ instructions to

segregate and label the fire-damaged matter; the placing of the

emptied contents in a warehouse at Joe’s instructions; the

placement of wrapped product from the burnt building into cold

storage; and Tapia’s instruction a couple of days after that to

mix other nuts in with damaged nuts; another incident involving

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twenty pounds of boxed sliced almonds from cold storage, although

he was uncertain about whether or not they were dumped into bins;

and he stated when prompted by leading questions that he knew of

other product that was in cold storage that was dumped into bins

and moved out, first Brazil nuts, then sliced almonds, and then

other miscellaneous bins; he did not know but speculated that

perhaps fifty or sixty extra bins were added to what had been in

the building. He also described how the bins were stacked double

high for the adjusters, and Grant Willits told him to put the

dirty nuts or nuts in sooty boxes on the outside where they could

be seen by the insurance adjuster and to put the nuts from cold

storage on the inside. Delgadillo complied and then went to talk

to Rosemary to tell them that it was not right. He had never

talked to Grant about this; he talked to Joe Lucio, who

instructed Delgadillo to tell the truth if someone from the

company asked him about whether or not he had seen Brazil nuts in

the production area at the time of the fire. Delgadillo also

loaded trucks that were for Todd Winslow, the salvage purchaser;

some of it was really old product that had been in the warehouse;

some was dirty and was from the fire; some had worms “and stuff,”

(id. at CLM-00001254), and some of it was good stuff. Not all of

what Winslow took was in the fire. Delagadillo was uncertain

about the packaging and status of the Brazil nuts.

7. Janette Zamora

It is undisputed that Akins interviewed Janette Zamora,

whose recorded statement from June 17, 2004, appears as Exhibit 6

to Akins’ declaration. Zamora when interviewed was a production

clerk and had worked at MQN for nine years; Rosemary Valledares

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was also present for the interview for Zamora’s comfort. Zamora

stated that she believed that her job would be in jeopardy if the

employer knew that she was talking with the insurance

investigator. Many leading questions were employed by Akins.

Zamora stated that as a production clerk she reported all input

and output tags on product, recording them on a work order and

sending them to the office to be entered into the system. To

trace what was being processed at any given time, one would

review a lab record, which would show what was finished on a

particular shift; Zamora’s work order paperwork on what was

finished and recorded; paperwork for two or three days back for

production; and shipping records from the office to show what was

actually shipped. Zamora worked on the night of the fire and the

following day, and she would know what product was in the

building at the time of the fire, and the Brazil nuts and almonds

were in cold storage but not in the plant where the fire

occurred; even if the Brazil nuts were being tested, they would

be tested outside the burnt building and thus would not have been

damaged by fire. Nine bins of Brazil nuts could not have fit into

the building. Fifteen bins of blanched almonds were not in the

building at the time of the fire; they were in cold storage. 

Zamora commenced her shift at 1:30 p.m. on the day after the

fire, and the plant was empty and was being cleaned; the things

inside during the fire had been moved out to the back and

possibly to other warehouses. People cleaning up that day got

very dirty and black; a picture of Marescella Mendoza taken by

Grant Willits showed Mendoza, who looked dirty, but Zamora stated

that Mendoza was even dirtier than that at the end of the day.

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Keith told Delfina to keep track of everything damaged, and

Zamora observed that it was being logged. She observed photos

taken by Grant Willits and remembered that they reflected the

plant as she saw it then except for some product that was doublestacked, although they could have been stacked there during the

move of products out of the burnt building after the fire.

Various employees, including Kimberly Delgadillo, had heard

rumors regarding extra product being mixed in the damaged goods

or anticipated bonuses; Zamora herself observed Grant direct

Ramon to load things to be sold to Todd Winslow, and Ramon told

her he did not think it was right. She testified at her

deposition in October 2005 that she had told the truth during her

interview and that she did not lie. (Park Decl., Ex. 7.)

Because of Zamora’s job duties and her presence in the

production line the night of the fire, personal knowledge as to

the absence of the Brazil nuts and almonds in the building that

burned on the night of the fire has been established. The Court

has not considered any statements of Zamora regarding rumors or

Herring’s boasting of bonuses for the truth of the matters

asserted. 

8. Todd Winslow

Akins spoke with Todd Winslow, the person who bought the

salvaged product, on December 3, 2003. (Akins Decl., Ex. 3 p.

CLM00006298.) Winslow had received twelve truckloads; there was

no discussion of the condition of the nuts. (Id.) On December 10

and January 29, Akins received documents from him. (Id. at p.

CLM000006299; Ex. 2 p. CLM00006307.)

It is undisputed that Akins interviewed Todd Winslow, the

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person who bought the allegedly damaged nuts as salvage. (Akins

Decl. ¶ 13, Ex. 7.) The interview occurred on February 20, 2004,

and was recorded. (Id.) Winslow, who had owned a concern that was

a forerunner to MQN but no longer had any financial interest in

it or MQN, and who had been in the nut business for fifteen

years, stated that he bid on the fire-damaged product after

inspecting it at MQN’s dry storage building while it was stored

in fiber totes in double stacks; he inspected only the single

stack, opened the ones that he could, and agreed to purchase 262

bins initially but then was given more product. He first looked

at the material after purchase when it was stored at Waterford

Nut’s parking lot; some exhibited water or soot damage; in other

product he found quite a bit of meal, which he could not use for

his intended purpose; he was surprised that a lot of the material

exhibited webbing, which was evidence of insects, inside the bin

and on the top of the product, and he found live worms; he also

found flyers, or moths, which indicated three stages of

infestation. The Brazil nuts had a rancid taste; Winslow believed

that they were old. Winslow had to have every bin fumigated to

protect nearby product belonging to third parties whose parking

lot he was using for temporary storage of the product. Several

weeks appear to have passed between delivery of the product to

Winslow and the completion of Winslow’s inspection in the parking

lot after fumigation. Winslow believed that the product had been

misrepresented, although he did not confront MQN; he was being

used, and he took it on the chin. Some of the product was still

in Winslow’s possession at the time of his recorded statement.

Winslow stated that the full amount of product was not reflected

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in bills of lading confirming what he had bought; he had to

obtain them from Randy Robertson. His check for the salvaged

product was dated January 22.

Passport notes reveal that on March 1, 2004, Akins obtained

twenty photos from Winslow of 14 of the 305 bins purchased that

had contents of product, floor sweep, milled product, mixed

product, whole and diced almonds, various debris, and nut shells,

which Akins or Winslow concluded would not have been in the

processing area; further, it did not appear to be fire-damaged.

Akins also received four bags of samples containing finely ground

nut meal, almonds, roasted almonds with debris and parts, and nut

meal and balled up product. (Akins Decl., Ex. 2 pp. CLM00006311.)

On August 10, 2004, Akins’ Passport notes reveal that

Winslow called and advised that Brazil nuts and almonds that were

old but not fire-damaged had been soled profitably; he estimated

he had over 60,000 pounds of this product. (Id. p. CLM00006322.) 

The Court does not consider as established fact the

conclusion of Winslow that an infestation of insects occurred at

any particular point in time or space; there is no showing of

personal knowledge or sufficient basis for such an opinion. The

Court notes only that such a conclusion was made.

Excerpts of a statement of Grant Willits (Decl. of Davis,

Ex. A) are, according to attorney Jeffrey P. Davis (Decl. of

Davis ¶ 2), from a statement taken under oath. There is a date of

April 5, 2004 on the excerpts; however, it is not clear who took

this statement and under what circumstances; there is no

certification of a reporter or other indication of an oath and

accuracy of the transcript. AMCO’s waiver of foundational

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objections extended only to deposition testimony; AMCO objects to

the form of the testimony and asserts that it is unsworn matter.

A deposition or extract therefrom is authenticated in a motion

for summary judgment when it identifies the names of the deponent

and the action and includes the reporter’s certification that the

deposition is a true record of the testimony of the deponent.

Fed. R. Evid. 901(b); Fed. R. Civ. P. 56(e) & 30(f)(1); Orr v.

Bank of America, NT & SA, 285 F.3d 764, 774 (9 Cir. 2002). th

Where a reporter’s certification and the names of the deponent

and the action (i.e., the cover page of a deposition and the

reporter’s certification) are missing from a transcript or

excerpt therefrom, an attorney’s affidavit identifying the names

of the deponent, the reporter, and the action, and his or her

further statement that the exhibit is a true and correct copy are

not sufficient to authenticate the document even where the

attorney-affiant was present at the deposition. Orr v. Bank of

America, NT & SA, 285 F.3d 764, 774 (9 Cir. 2002) (citing th

Pavone v. Citicorp Credit Servs., Inc., 60 F.Supp.2d 1040, 1045

(S.D.Cal.1997)). Using the analogy of a deposition, it must be

concluded that there is inadequate foundation for the excerpts.

Therefore, the Court does not consider the statements of Willits

regarding where and how the damaged product was located and

stored in the weeks after the fire and before Winslow purchased

it. 

Further, the Court concludes that MQN has failed to provide

evidence warranting an inference that particular storage

conditions, whether at MQN’s facility after the fire or while in

Winslow’s custody, resulted in infestation by Indianmeal moths.

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Deposition testimony of Winslow in the Valladares action (Decl.

of Davis, Ex. B) shows that he initially received about fourteen

trucks of the product from MQN; some arrived on September 10 and

stayed in the parking lot for about two weeks; the last product

arrived about September 23; then it was all fumigated about a

week later, and then another week passed before the product could

be inspected. However, even though there is evidence of about a

month of storage in a parking lot, the Court sustains the

objection of AMCO to the evidence regarding the possibility of

infestation by a specific insect. All that is presented is

articles concerning the insect, which constitute hearsay;

further, there is no evidence that the particular infestation of

the salvage nuts was Indianmeal moths, and thus the evidence is

irrelevant. AMCO’s objections are sustained.

Erich Lutkemuller, who decided to file AMCO’s suit,

testified that smoke damage to a nut is not always visible to the

eye, so merely looking at the allegedly damaged nuts might not

have determined whether there was water or soot damage; however,

whether the nuts were damaged by smoke could have been determined

both visually and by taste. If AMCO had obtained samples from

Winslow’s concern, Creative Ingredients, it seemed to Lutkemuller

that one thing AMCO could have done was to have retained a

consultant to do sampling or testing to see whether the nuts had

been damaged (Decl. of Gonzales, Ex. G at 41, 45).

Melton testified at deposition that after he heard about the

allegation of commingling of undamaged and damaged nuts, he made

no effort to locate the product to inspect it to see if undamaged

nuts were included in the product because it was not his job; it

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was the job of the SIU. (Decl. of Gonzales, Ex. C, p. 22-23.)

Akins testified that he first knew that the product had been

sold to Winslow’s Creative Ingredients entity when he conversed

with Shery Pentorali regarding Brazil nuts, but he did not send

anyone out to reinspect the product because he thought that he

had contacted Winslow, and some of the product was already gone;

he did not inquire about what was left; he did not know if any of

the product was still there (with Winslow), although he also

testified that he might have asked Winslow in some conversation

if the product was still available, but it had all been moved to

a storage yard up north; however, he also testified that when he

talked with Winslow, he could have inspected the nuts. He had no

specific recollection of having asked to inspect the product. As

a former police officer, he opined that it was generally better

to see evidence as soon as possible. (Decl. of Gonzalez, Ex. F.

Dep. of Akins p. 43-48.)

Gonzalez declared that he had reviewed the Passport computer

file produced by AMCO and had not found any entry where anyone

from AMCO asked to reinspect the product after learning of the

alleged fraud, or any entry indicating that Winslow hampered any

effort by AMCO to reinspect MQN’s product. (Gonzalez Decl., ¶

31.) The Court overrules AMCO’s objections of lack of foundation

and hearsay; it appears that Gonzalez is referring to a specific

Passport computer file produced in discovery and that he had

personal knowledge of the contents of the Passport file that he

reviewed. Further, the Court overrules AMCO’s objection of

irrelevance because the evidence has some tendency to show that

AMCO failed to seek to reinspect any product that remained under

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Winslow’s control, and thus it bears on the nature of the

investigation undertaken by AMCO.

9. Records

AMCO asserts that MQN failed to provide business records

concerning the days before, on, and after the fire that MQN

regularly kept that would have identified the precise product in

the burnt building at the time of the fire, including daily

handwritten lab reports, a lab book recording all lab testing

requests and test results, forms normally generated when fatty

acid tests were performed, the weekly production report, the

daily shipping schedule, and a videotape from a surveillance

system designed to ensure product safety. AMCO cites to

allegations in Akins’ declaration (¶¶ 15-20) that with respect to

such highly probative information, MQN has repeatedly advised

Akins that the documents are missing and cannot be found;

further, MQN has repeatedly advised Akins that the video system

was apparently not recording on the day of the fire. No detail

with respect to Akins’ queries and MQN’s assertions is given;

further, the precise date or dates of the documents sought are

not stated. No supporting documentation of this communication is

pointed to by AMCO. 

MQN disputes Akins’ assertions and submits the declaration

of Davis, in which Davis specifically declares that multiple

pages of such documents, and others, pertaining to the day of the

fire and the relevant time period have already been produced in

discovery, and he identifies the Bates page numbers of such

production; he also explains that in April 2004 MQN produced a

statement of Willits that the fatty acid test results were not

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 The objections of AMCO initially relate to inadmissible deposition 4

testimony not before the Court (Objs. p. 6); thus, it appears that the matter

is from depositions, and thus that the foundational objection is waived by the

later waiver of foundational objections to deposition excerpts. 

57

being retained at the time of the fire (Davis Decl., Ex. E).

Further, he attaches in Exhibit F deposition and EUO transcripts

(it is not clear which is which) that tend to show that the

weekly production report was not a static document but was rather

continually overwritten. No adequate basis for inferring 4

personal knowledge on the part of Davis with respect to the

record-keeping practices of MQN at the time of the fire has been

set forth; however, from Davis’s summaries and charting of

various documents, including production and shipping documents,

it appears that Davis was familiar with numerous types of

documents generated at MQN and with their function. Thus, Davis’s

declaration tends to establish that various documents have been

produced, and that these documents are responsive to discovery

requests for such documents; however, neither Davis nor Akins

specifically details evidence from knowledgeable sources within

MQN concerning the records kept by MQN or the exact source and

function of any particular documents. 

The Court has not been pointed to sufficient evidence, as

distinct from conclusions, to warrant an inference that Akins had

personal knowledge that such documents, or even documents that

were functionally equivalent to such documents, were kept in the

ordinary course of business, were highly probative, were or were

not produced, or that specific documents were missing, as

distinct from not ever having been in existence. The true status

of MQN’s documentation of production and the insured’s

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cooperation with respect to such documentation during the

insurer’s investigation is not discernible based on the limited

argument and evidence submitted by the parties. It is sufficient

to conclude at this point that the parties dispute these matters.

The Court will not scour the materials submitted to try to piece

together a foundation or a context in which to draw inferences

beyond this conclusion. Given the generality and conclusory

nature of Akins’ factual assertions and the absence of a showing

of personal knowledge on his part with respect to MQN’s process

of documentation, and further considering the specificity of

Davis’s assertions regarding production of documents meeting the

description set forth by Akins, the Court concludes that there is

an issue of fact as to whether or not the documents actually

exist and whether or not MQN has actually claimed that documents

are missing or has failed to provide particular documents. 

With respect to the videotape, it appears that MQN through

its counsel informed Park by letter in October 2004 that MQN

asserted that the videotape was not recording on the day of the

fire (Decl. of Davis. Ex. C); further, Akins declares that MQN

advised him that it was not recording on the day of the fire.

Although, as AMCO objects, this letter and Davis’s declaration on

this subject appear to be hearsay and not based on personal

knowledge, the letter may nevertheless be used to show that MQN

stated that position. It is not clear that Akins had personal

knowledge of the alleged purpose of the system (which he states

was to ensure product safety) or of its customary or actual

operation. Park testified that he had seen the machine but had

not seen any actual taping or tape used to record activity in the

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plant, and no one had ever told him that there were any such

tapes. Indeed, it was represented to him that MQN had no tapes.

(Gonzalez Decl.,Ex. H, Dep. of Park, p. 79-80.)

10. Photographs

AMCO asserts that in his examination under oath taken on

April 15, 2004, Willits misrepresented the condition of the plant

and the coverage of the photographs he took on August 12, the day

after the fire.

Keith Herring testified that on August 12, the day after the

fire, they could not re-enter the building until after the

structural engineer and fire marshal approved. (Gonzalez Decl.,

Ex. U p. 32.) 

Reference to the transcript of the examination under oath

(Decl. of Park, Ex. 1 (EUO of Grant Willits)) reveals that

Willits stated under oath that around 8:30 a.m. on August 12, the

fire department gave the o.k. to re-enter the building (id. at

42), which was dark because the power was off; Willits was last

in the plant at 4:00 o’clock on the day of the fire; he was not

sure when he started taking his photographs the day after the

fire, but it was in the afternoon, maybe approximately at 4:30,

and by that time quite a bit of the product had been taken out

and put in both warehouses and the parking lot between the

warehouses (id. at 42-43, 165-66). 

Akins declares (Decl. ¶ 21) that it is plain from the face

of the photographs produced by Willits in the course of his EUO

that they were taken when there was no artificial lighting set up

in the plant; therefore they were taken before 12:00 p.m. and

thus were taken before a huge quantity of nuts could possibly

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have been removed from the plant (id.). Reference to the

photographs (Park Decl., ¶ 8, and Ex. 2 (photos)) reveals a

number of photographs depicting a dark subject, but whether the

darkness is due to lighting conditions or the operation of the

camera is not clear. Further, as MQN notes, this evidence does

not establish the purported time of 12:00 for bringing in

artificial lighting. Excerpts of the examination under oath of

Darren Anderson (Park Decl. ¶. 10, Ex. 4) reveal that the plant

was dark until generated lights arrived, and Anderson was “just

guessing” when he opined that the generated lights were in “over

there” by about noon, (id. at 82-83). No data are provided with

respect to the size, location, or strength of the lighting that

was provided. The Court concludes that there is not a sufficient

context for an inference regarding when the lights were provided

or when the photographs were taken; thus, the further inference

that Willits lied about when the photographs were taken is not

warranted from this evidence.

AMCO points to the statement of Zamora to the effect that

all the fire-damaged nuts were removed from the plant when she

arrived to work at 1:30; inside the plant was empty, and

employees were cleaning it. (Akins Decl., ¶ 12, Ex. 6 at

CLM00001218-19). Further, Zamora stated under oath that a picture

of employee Marisela or Marescella Mendoza reflected in one of

Willits’ photographs showed Mendoza dirty but not as dirty as she

was at the end of the day. (Akins Decl., Ex. 6 p. CLM00001230-

31.) AMCO asserts that Mendoza left work at 1:30 p.m. that day.

However, Davis declares that Mendoza’s time sheet for that day

(Davis Decl. ¶ 12, Ex. J) reveals that she clocked out at 2:32

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p.m. AMCO objects on the basis of hearsay and irrelevance. The

foundation for this document is uncertain, but even assuming that

from context it could be authenticated and treated as a business

record, it would establish only a record of the time she clocked

out, and not necessarily when she left the plant. The statement

of Zamora regarding Mendoza already being dirty but having become

even dirtier by the end of the day is imprecise with respect to

degree of dirtiness and time, and thus does not support a clear

inference one way or another with respect to a misrepresentation

by Willits regarding the time of the pictures.

AMCO points to the recorded statement of Maria Chavez taken

on February 20, 2004, which appears to have been translated as

well (Akins Decl ¶ 14, Ex. 8), in which Chavez, a lab technician

for MQN, stated that she had worked on the second shift, was sent

home on the night of the fire, and returned to work the next day

at 2:30, her usual time; she was instructed to help Ramon and

Hugo put papers that said “fire damaged” on bins that were right

outside or on the loading dock but were supposedly inside when

the fire occurred; and by that time, the product that she was

told had been in the processing building at the time of the fire

had been moved outside already, and there was nothing left in the

building. Assuming that she was inside the building and thus had

the opportunity to observe what was in the building, her

testimony reflects that the usual starting time of the second

shift was 2:30, and thus tends to conflict with Zamora’s

testimony on that point regarding arriving to work at 1:30 for

the beginning of the second shift. Considering the conflicting

evidence of the time that employees’ second shift began, and

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further noting the uncertainty of Willits’ testimony, an

inference that Willits was mistaken or unsure is as reasonable as

an inference that he lied.

Gonzalez declares that Exhibit T to his declaration is a

copy of a page from a SIU report prepared by Akins that was

produced to MQN by AMCO in this litigation, which identifies

twenty-nine photographs taken by Mike Loughney from Olsen

Construction on the day after the fire between noon and 2:00 p.m.

(Decl. ¶ 71.) Insufficient indicia of authentication are provided

with respect to this document.

AMCO’s objections of hearsay and improper foundation to

excerpts of statements taken under oath of Darren Anderson

(Gonzalez Decl., Ex. V) and Joe Lucio (Gonzalez Decl., Ex. W) are

sustained. Likewise, AMCO’s similar objections to Exhibit X,

purporting to be a time sheet from MQN for various days,

including August 12, 2003, and to Exhibit Y, purporting to be an

excerpt from the statement under oath of Tapia, are sustained.

11. Forensic Accountant Susan Thompson

AMCO points to facts assertedly established by the report of

Susan Thompson, a forensic accountant and Litigation and Forensic

Services Director of Hemming Morse, Inc., which is prefaced by

her declaration, in which she states that she has personal

knowledge of facts set forth in the declaration. She declared

that she had examined thousands of documents produced by MQN,

including lab reports, and consulted with many employees,

including President Carmen Tapia, and reached conclusions stated

in her report. Thompson rendered a report to Gordon M. Park on

October 22, 2004 (Decl. of Thompson, Ex. 1). Her report was

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premised on MQN’s being able to track inventory from the time it

was delivered to MQN and through the processing and packaging

stages; another assumption was that nuts were processed to fill

current orders and were not generally kept in the plant (as

distinct from cooled or cold storage) until processing because

rancidity, infestation, and overall quality could be affected by

not keeping the nuts cool. (Id. at CLM-00005146-47.)

Her method included obtaining customer contracts for all the

inventory in the processing warehouse at the time of the fire

(which she admitted she did not do because she stated that they

had not been produced), determining whether or not the inventory

claimed as damaged likely existed in the production warehouse at

the time of the fire, and analyzing the values used for

replacement cost for damaged inventory. (Id. at CLM-00005147-48.)

Analysis of inventory records for the end of July, daily

production documents, and bills of lading indicated discrepancies

between the product on hand at the time of the fire and the

amount claimed as damaged; reference to an inventory history

listing discussed with Tapia resolved some discrepancies but left

many unresolved. Thompson concluded that it was suggested that

the amount of damaged nuts sent to the salvage company might have

been overstated because when the inventory sent to salvage on

September 24, 2003, was deducted from the inventory history

listing, a negative balance on some products was left, which

required adjustments by the insured to remove the negative

balance; the adjustments made were not related to producing or

selling the product, and the insured was unable to provide an

adequate explanation.

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Thompson reported to Park that consideration of the physical

inventory tags from the end of June, July, and August 2003

revealed that many items were located in the same or various

warehouses for the two months preceding the fire; physical

inventory tags, daily lab sheets, and material list log sheets

revealing input and output reflected that inventory on the proof

of loss was not processed in the first few days of August, but

was simply moved from one location to another. The amount of

inventory claimed by the insured to have been moved into the

production warehouse between August 1 and August 11 equaled

277,341 pounds, or 78 per cent of the total pounds claimed on the

proof of loss. Of this amount, Thompson concluded that

approximately 13,846 may have been moved to the processing

warehouse after the June 30 physical inventory was taken and

before the fire. Thus, a portion of the inventory could have sat

in the uncooled processing warehouse for as much as five weeks

without being processed. Further, moving 277,341 pounds of

inventory in a short period of time without contracts that show

that processing was necessary to fill their customer orders was

not consistent with MQN’s practice of processing to fill orders

and would compromise the quality of the product. Further, daily

lab sheets permitted her to identify 79,416 pounds of inventory

listed on the proof of loss that was in production between August

1 and August 11, 2003 and thus likely to be in the warehouse. 

This would equate to 40 pallets of product, assuming 2,000 pounds

per pallet (which could have been too high); however, the proof

of loss contained approximately 178 pallets, or 356,487 pounds.

Further, inventory with manufacture dates after August 11, 2003,

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equaled 35,153 pounds or $59,806 in the proof of loss, but

Thompson concluded that inventory processed after the date of

loss clearly should not be included in the insured’s claim. 

AMCO asserts that the lab reports provided by MQN to AMCO

showed that about 20,210 pounds of nuts were in the facility at

the time of the fire. The citation is to Thompson’s declaration,

which does not mention lab sheets, and to two pages of exhibits

to her report, which, pursuant to headings, consist of a costed

inventory report of unstated date and a summary of tags found in

lab sheets of inventory likely to be in the production area at

the time of the fire. It is unclear how the components of the sum

were selected or how the exhibits demonstrate the reported

amounts. Further, as MQN points out, AMCO’s own evidence, in the

form of Thompson’s report, indicates that using the daily lab

sheets, accountants were able to identify 79,416 pounds of

inventory listed on the proof of loss that was in production

between August 1 and August 11, 2003, and thus was likely to be

in the processing warehouse. (Decl. of Thompson, Ex. 1 at CLM00005150.)

It appears to be undisputed that, as alleged in MQN’s

complaint, MQN’s claim was for 356,487 pounds of nuts. 

AMCO claims that MQN in turn claimed to have moved 297,336

pounds of inventory into the processing plant in the week before

the fire. The evidence cited is an exhibit to the Thompson

declaration (Ex. 1, schedule 1), which is a costed inventory

sheet and a summary of tags found in lab sheets for manufacturing

dates spanning from mid-July through August 11, 2003; it is not

immediately apparent how this documentation establishes the claim

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of AMCO that MQN in turn claimed to have moved the inventory; it

appears to be a conclusion based on the investigation of

Thompson.

AMCO asserts as facts the conclusions of Thompson reached in

her report of October 22, 2004, including that a review of

physical inventory records revealed discrepancies between the

amount of product on hand at the time of the fire and the amount

claimed as damaged; the physical inventory records and contracts

for product then in hand demonstrated that it was unlikely that

there was as much product in the processing plant at the time of

the fire as claimed by MQN; the number of pounds of product

claimed by MQN to have been fire-damaged had not been

substantiated by the insured; and she was unable to verify the

reasonableness of certain aspects of the insured’s claim,

including the replacement cost of product, the cost of finished

goods packaging materials, saved expenses that might apply to

claims for extra expense, and loss due to business interruption. 

MQN objects to the use of the conclusions reached in

Thompson’s report via her declaration that simply states that the

facts in the declaration are true and that she reached

conclusions set forth in her report; MQN notes that crossexamination of Thompson at her deposition with respect to the

basis for her opinion was foreclosed by AMCO (Gonzalez Decl., Ex.

K at 66-69). 

This evidence tends to show that as of the time Park

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 The date of receipt is unclear; further, the Court again notes that 5

the instant lawsuit was filed on October 26, 2004, and the letter to AMCO from

counsel regarding his recommendations on the claim and litigation was dated

November 22, 2004.

67

received Thompson’s letter of October 22, 2004, there was an 5

opinion which, if not biased and if rendered pursuant to

acceptable standards and on the basis of complete information and

adequate documentation, provided a basis to believe that the lab

reports reflected fewer nuts in the facility at the time of the

fire than were claimed on the proof of loss. Based on the

declaration of Thompson, the Court apprehends the conclusions

stated in the report; however, the Court cannot thereby find that

the conclusions were reasonable or otherwise evaluate the

accuracy of the basis or methodology of Thompson’s conclusions.

The declaration merely establishes that conclusions were made by

Thompson in a report after an investigation.

AMCO asserts that MQN was unable to explain why it moved

297,336 pounds of inventory into the processing plant in the week

before the fire. The examination under oath of Keith Herring

(Park Decl., Ex. 3) indicates only that Herring did not know why

production tags with numbers higher than the last finished tag

put on product on the date of the fire could have been in place

at the time of the fire; however, it also demonstrates that

Herring stated that he did not have anything to do with the

tagging. Without further context, it is difficult to infer from

the testimony of one person that the entire entity of MQN was

unable to explain why the inventory was moved, if it was moved. 

Gonzalez declares that he had discussed Thompson’s report

with experts and concluded that it was very vulnerable to attack;

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MQN would be able to establish that there was no foundation for

her assertions and that no reasonable person would rely on that

report as a basis for filing a fraud claim. (Decl. ¶ 55.) AMCO’s

objection on the basis of lack of foundation and improper

conclusion is sustained.

Glenister, the outside adjuster/accountant working on the

claim for MQN, testified that he believed that Thompson’s

conclusions were incorrect, and he did not agree with all of her

methods. (Gonzalez Decl., Ex. O p. 26.) Thus, the conclusions in

the report and its methodology are disputed by someone with

expertise in the field and specific knowledge of the matters

evaluated by Thompson.

C. Analysis of Whether the Investigation Was Complete

That AMCO conducted an investigation and what various

persons stated to AMCO in the course of that investigation are

largely undisputed. It must be determined whether there are

conflicting inferences as to the reasonableness of the insurer’s

denial of the claim based on the investigation. In making this

determination, this Court is required to draw any reasonable

inference in MQN’s favor.

As to much of the information gathered, it is possible to

draw conflicting inferences regarding the reasonableness of

relying on it. Pentorali was an ex-employee who had been

disciplined in 2003 by Tapia; further, she disagreed with

Glenister, the outside adjuster, who had been critical of her

schedules. Thus, it may be inferred that she was biased. 

Rosemary Valladares admitted that she stole documents,

including Willits’ pictures, and then erased her had drive at

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work so that she would have the only copies; and she suffered a

disciplinary suspension for her stealing or destruction of

documents. Chavez disputed Valladares’ story that Chavez had made

statements about documents being removed and destroyed; and

others had disputed what she had said regarding several

incidents. Further, Valladares’ information had to do with the

contents and placement of bins, and yet Park himself determined

that she was wrong with respect to whether or not all the claimed

bins would fit in the building that burned. Finally, she was a

plaintiff in the lawsuit against MQN. It may reasonably be

inferred that she was biased and unreliable or untrustworthy. 

Likewise, Hugo Perez, who visually determined that twentyfour bins of nuts that he loaded were not fire-damaged or rotten, 

believed that he had been fired unfairly because of the mistake

of his supervisor, and he was a plaintiff in the suit against the

company; it may be inferred that he was biased. Further, a

rational trier could conclude that a determination of the

condition of the nuts based on a visual inspection alone was not

reliable or reasonable. Ramon Delgadillo, who stated that a

couple of days after the fire he moved from cold storage ten

pallets of Brazil nuts that he apparently determined by visual

observation alone were undamaged, was unable to remember closer

to the time of the incident some key details, such as who

instructed him to mix the nuts inside the display; however, he

remembered six months later that it was Tapia, and it was Willits

who told him to mix the undamaged nuts on the inside of the

display for the adjuster. Further, he was a plaintiff in the

lawsuit against MQN. Again, one possible set of inferences is

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that his information was unreliable or untrustworthy and that he

himself was biased.

There was the statement of Zamora, who remained an employee

and who as a production clerk claimed to know that the Brazil

nuts and almonds were in cold storage at the time of the fire.

The reliability of her information might be questionable in view

of the fact that she also claimed that nine bins of Brazil nuts

would not have fit into the burnt building, which appears to have

been known to Park to be untrue; and her statement conflicted

with Chavez’s as to the time the second shift started. It is

possible to infer that her information was not completely

reliable or was at least subject to question. 

Winslow believed that he had been disadvantaged or defrauded

in the course of his purchase of MQN’s salvage nuts, and thus, it

could be inferred that he was biased. His statement that a

substantial quantity of the material he bought was not firedamaged is of questionable validity because his method of

inspection (merely visual or otherwise) is not ascertainable. It

is not clear that there is a reliable basis for this conclusion

in the record in light of Lutkemuller’s testimony that a mere

visual inspection might not be sufficient to ascertain whether or

not product was fire-damaged.

 The proposition that MQN destroyed or failed to produce

specific records that were known to have existed has not been

demonstrated to have been based on sound data. It appears that

AMCO asserted that MQN destroyed or failed to produce videos, but

it does not appear that there was any evidence to support such an

inference; indeed, inferring that video tapes were routinely used

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 However, the Court notes that even absent the other problems with 6

Thompson’s portion of the investigation, Thompson’s report was transmitted in

a letter dated October 22, 2004, three days before the date of filing the

instant action. It is unclear when the report was received. A rational trier

might question whether it was relied upon by AMCO in determining its position

on the claim.

71

for surveillance, were in use at the time of the fire, and were

not produced, were destroyed, or were otherwise made unavailable

to AMCO appears to have been based on no evidence at all other

than the observation of AMCO’s agents that cameras were in the

building. A rational trier of fact could conclude that AMCO’s

conclusion in this regard was unreasonable; indeed, a trier could

conclude that it also suggested that the investigation was

biased. 

The pictures taken by Willits appear to have been removed by

an ex-employee; the evidence regarding the time the pictures

might have been taken is in conflict; and Willits was uncertain

as to the time the pictures were taken in the afternoon. Under

these circumstances, a reasonable trier of fact could conclude

that the conclusion that Willits was lying, as distinct from

being mistaken, about the time that the pictures were taken was

unreasonable.

The insurer relied on a forensic accountant, which would

otherwise warrant an inference of a diligence and reason on the

part of the insurer with respect to examination of the

documentary evidence. However, as is discussed below, a rational 6

trier could nonetheless infer that Thompson was biased, that the

insurer consciously chose an investigator who was not independent

or objective, and that Thompson, at the direction of AMCO or its

counsel, engaged in unethical behavior and misrepresentation with

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the insured. This permits an inference that the process of

reviewing the documentation was not independent or reliable but

was in fact pretextual, unfair dealing, and that the insurer thus

did not perform a complete or reasonable investigation with

respect to the documentary portion of the claim. 

Further, the Court notes that the conclusions of Thompson

are shown to be based on a methodology that was disputed by

another expert.

Finally, numerous facts concerning the overall performance

and methodology of the investigation might warrant a rational

trier of fact in inferring that the investigation was not

thorough or reasonable. Anderson purported to be charged with the

task of verifying the loss, and yet he did not examine a

substantial portion of the nuts even visually; indeed, he did not

know what he could have done. A rational trier of fact could

conclude that Anderson’s efforts to inspect the product were

deficient even by AMCO’s own standards, and indeed, so deficient

so as not to be sincere. Akins characterized Pentorali as an

employee and concluded that this fact warranted particular

concern; however, she was not an employee, and Akins clearly had

access to information to that effect. Akins repeatedly used

leading questions and sometimes engaged in suggestive remarks

during the interviews; in so doing, he was engaging in conduct

that even he admitted could affect a witness’s testimony and was

not appropriate with respect to an effective investigation. It

may be inferred that no timely or unbiased effort was made to

obtain samples of the salvage nut product or to undertake

meaningful testing of that product to determine the extent of

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fire damage, a central issue.

In conclusion, even with respect to facts concerning the

investigation that are not disputed, multiple inferences are

possible. A rational trier of fact could conclude that the

investigation was not thorough or reasonable. 

D. Biased Investigation

In Guebara v. Allstate Ins. Co., 237 F.3d 987 (9 Cir. th

2001), the court upheld the trial court’s grant of summary

judgment to an insurer who had hired several investigators to

help determine the scope of a home fire claim that was believed

by the insurer to be inflated because some items claimed to be

damaged were inexplicably missing from the scene of the fire,

there were many inconsistent statements by the insured or insured

family members regarding the location or disposition of the

items, there was no evidence of bias, and the chief problem with

the investigation was delay. There had been a complete

investigation by the insurer’s experts, and there were

corroborative findings by the official, independent arson

investigators who found indicators of arson at a time when the

insured was in desperate financial straits. The court noted that

the genuine dispute doctrine is applied on a case-by-case basis

and may be applied in cases involving either an unsettled area of

insurance law or a reasonable factual dispute. Guebara, 237 F.3d

at 994. The court noted:

Our decision does not eliminate bad faith claims

based on an insurer's allegedly biased investigation.

Expert testimony does not automatically insulate

insurers from bad faith claims based on biased

investigations. Although this list is not exhaustive,

we can think of several circumstances where biased

investigation claims could go to a jury: (1) the insurer is guilty of 

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investigatory proceedings, see Tomaselli v. Transamerica Ins.

Co., 25 Cal.App.4th 1269, 1281, 31 Cal.Rptr.2d 433, 439 (1994)

(allowing a bad faith claim to go to the jury where an insurance

company without any evidence of fraud forced an insured to submit

to an examination under oath, dissuaded the insured from having

an attorney present, and misled the insured about the purpose of

the examination); (2) the insurer's employees lie during the

depositions or to the insured; (3) the insurer dishonestly

selected its experts; (4) the insurer's experts were

unreasonable; and (5) the insurer failed to conduct a thorough

investigation.

Id. at 996. 

MQN produced evidence which warrants an inference that

Thompson’s investigation and report were the product of bias.

Excerpts of Thompson’s deposition (Gonzalez Decl., Ex. K) reveal

that she testified that her husband was an attorney working for

the same law firm for which Gordon Park, AMCO’s counsel, worked;

however, she purported not to know how many times she had worked

with his law firm on a litigation matter, although she did recall

that she worked on a case involving a loss of chemicals used on

grapes and was retained by Gordon Park; further, she had three or

four active matters for insurance companies as well (id. at 44,

62, 64). Park testified that he or a client had retained

Thompson’s firm eight to twelve times over fifteen to twenty

years. (Decl. of Gonzalez, Ex. H p. 68.)

A rational trier of fact might infer that Thompson’s status

as the spouse of another member of Park’s firm is inconsistent

with the independence from counsel and the remainder of the

investigative effort that is to be expected from a forensic

professional. It could be inferred that she had a financial

interest in the case above and beyond her compensation as an

expert. It might also be reasonably inferred that it would affect

her objectivity. A rational trier of fact could infer bias.

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Other factors suggesting an inference of bias are present.

In Tomaselli v. Transamerica Ins. Co., 25 Cal.App.4th 1269

(1994), the insured was subjected to an examination under oath

(EUO) but was told by the insurer’s agent that it was not

necessary to have her attorney present and that the EUO was

merely a procedure to help settle the claim; the insured was not

told that one purpose of it was to investigate potential policy

violations; expert testimony established that an insured should

be told she might want to have an attorney present; and the

insured felt intimidated and badgered during the EUO. Based in

part on the EUO, the claim was denied for late notice because of

facts that the insurer claimed were likely to alert a reasonable

person to the existence of the problem for which coverage was

sought. There was evidence that the insurer failed to examine the

crack in a concrete foundation relied upon to provide notice, to

examine a craftsman who had worked on it during the pertinent

time, to examine the status of a pertinent endorsement, or to

respond to new information submitted by the insured because of

the insurer’s position that any further investigation would not

have altered the coverage determination. It was held that

although an objective approach to the evidence would suggest mere

negligence on the part of the insurer in denying coverage, a more

sinister set of inferences of bad faith was permissible based in

part on the inadequacy of the investigation (failure actually to

examine the crack and the maintenance history of the area with

the crack), the use of the EUO, and the insurer’s misleading of

the insured about the purpose of the EUO and the advisability of

having counsel present. The presence of innocent explanations for

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these and other indicia of bad faith did not preclude denial of

summary judgment; the jury could find that the handling and

denial of the claim were unreasonable and in bad faith. Tomaselli

v. Transamerica Ins. Co., 25 Cal.App.4th 1269, 1281-82 (1994).

Joseph W. Hearington, Jr., the corporate director of

internal auditing for Defendant Universal Corp, and vicepresident of Universal Leaf Tobacco Co., Inc., declared that he

had been advised by Melton on January 8, 2004, that an accountant

named Schroeder had been retained to assist with MQN’s insurance

claim and to review claim documentation, which had not yet been

submitted. Melton told Hearington that because Shroeder was in

Sacramento, Hearington could contact Susan Thompson of Hemming

Morse locally regarding the final preparation of the claim.

Hearington contacted her and asked Thompson what she had been

engaged to do; she replied that she was a manager with Hemming

Morse; her company specialized in “helping” smaller insureds like

MQN process the difficult areas of claim recoveries, often at the

expense of the insurance carrier, and participating in what was

represented as a common practice of helping the insureds; and in

their case she would be “helping” MQN with final preparation of

the proof of loss, calculation of business interruption recovery,

and identifying and claiming other recoverable expenses. (Decl.

¶¶ 8-11.)

Thompson told MQN people when she set up her meeting with

them where she worked and that she had been hired by the insurer

to help them with their business interruption; she did not

mention any allegation of misconduct. (Id. 31, 36.) She testified

that she did not know when she first learned that Chris Glenister

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was working on the matter and did not remember if she was advised

that Glenister and his firm were working with MQN when she first

met with Park, and she did not remember if she advised Glenister

that she would be having the meeting with MQN people. (Id. at 44-

45). When asked if she recalled being told by Park not to tell

Glenister that she was going to meet with Carmina and Grant, she

replied, “Absolutely not,” and further stated that she was not

even sure she knew Glenister existed when she met with Carmina

and Grant (id. at 51). However, when her recollection was

refreshed with her notes, she recalled that at her first meeting

with Park and Akins, she was informed that Greenspan (Glenister’s

firm) had been hired by MQN (id. at 81-82); she met with Park on

the seventh and then talked to Tapia and Willits the following

day (id. at 93). It is clear that Thompson was assisting the

insurer; correspondence from Park to Thompson dated March 3,

2004, which is authenticated sufficiently from all indicia,

indicates that Park stated that she had helped prepare a list of

documents desired from Tapia and was invited to suggest questions

for the upcoming examination under oath of Tapia. (Gonzalez

Decl., Ex. L.)

Glenister testified that he had known and had worked with

Thompson before working on MQN’s claim. One or two days after

Thompson’s visit with Tapia or learning of the visit, he

contacted Thompson and asked why Greenspan had not been called as

a courtesy to let them know that she had been retained, and had

not been given the opportunity to meet with her when she appeared

at MQN that day; Thompson advised Glenister that she was acting

on the instructions of her client. (Decl. of Gonzalez, Ex. O p.

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28 Counsel for MQN explains that the Tapia deposition testimony was taken 7

the day before the brief was due. (Decl. of Gonzalez, ¶ 61.)

78

36.)

Park testified that he was familiar with the Greenspan

company, which did not like anyone from the insurance company

meeting with the insured without their being present; the custom

and practice would be that Glenister would be present during that

whole discussion. (Gonzalez Decl., Ex. H p. 84.)

Thompson denied that she asked Tapia to sign any document

during the meeting, but she did testify that Tapia signed a sworn

statement and proof of loss in her presence during the meeting

despite Tapia’s having said that there were a few things not on

there yet and her having made notations to that effect; further,

Thompson asked her if it was the final document and asked if she

was going to sign it so that they had something to start with or

not; Thompson also remembered that after Thompson asked Tapia if

she had a proof of loss and after Tapia had provided the unsigned

document to Thompson, Thompson told her that if she was going to

sign it, to sign each page and number the pages (id. 47-50).

Thompson admitted that she asked for copies of documents during

the meeting, they agreed to copy the documents, and the insurer

did ultimately obtain the copies (id. at 51-52). Although AMCO

objects to the evidence as without foundation, given the

testimony of Thompson and the other indicia of its identity,

Exhibit M to Gonzalez’s declaration appears to be a proof of loss

statement signed by Tapia on January 8, 2004.7

Gonzalez refers to a letter dated January 16, 2004, from

Park to Akins, in which Park stated that at the meeting on

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January 7, 2004, of Park, Thompson, and Akins, it was agreed to

have Thompson make an effort to meet with Tapia to see if they

would be cooperative and provide access to records and to see

whether Tapia would sign a proof of loss. The same letter states

that since that meeting, Thompson was able to gain access to the

company and obtain a signed statement of loss (Gonzalez Decl.,

Ex. N.) Although objections are made to this evidence on the

basis of lack of foundation, hearsay, and relevance, the letter

itself contains sufficient indicia for authentication; the letter

is not hearsay but rather may be used for the fact that the

statement was made and thus to serve as impeachment of Thompson.

In summary, a rational trier of fact could conclude that at

AMCO’s direction, Melton and Thompson, agents of AMCO,

intentionally misrepresented to MQN agents the status and

function of Thompson and the purpose of the meeting, all with the

object of obtaining information immediately from MQN personnel

outside the presence of Glenister, who was known to be serving as

AMCO’s outside adjuster and who, according to industry standards,

should have been given an opportunity to be present. A rational

trier could conclude that Thompson was dishonest and biased, and

that therefore, her investigation and conclusions were tainted

and unreliable.

Cases applying the genuine dispute doctrine in situations

involving factual disputes (as distinct from legal issues

involving the reasonableness of an insurer’s interpretation of

the contract) often involve the insurer’s reliance on multiple

independent experts. See, Guebara, 237 F.3d 987 (three

independent experts plus the insured’s inconsistent

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explanations); Hubka v. Paul Revere Life Ins. Co., 213 F.Supp.2d

1089, 1092-95 (S.D.Cal.2002); Phelps v. Provident Life and

Accident Ins. Co., 60 F.Supp.2d 1014, 1021 (C.D.Cal.1999)

(multiple independent experts and surveillance film); Allstate v.

Madan, 889 F.Supp. 374, 381 (C.D.Cal.1995) (multiple independent

experts). However, it has been held that the single report of an

independent expert may be sufficient to support application of

the genuine dispute doctrine; the Court must consider the record

as a whole and consider each bad faith claim on a case-by-case

basis in determining whether an insurer’s denial of a claim was

reasonable. Adams v. Allstate Ins. Co., 187 F.Supp.2d 1219 (C.D.

Cal.2002).

Here, a rational trier could infer that neither Thompson nor

in-house personnel of AMCO were independent, objective, or

unbiased.

Other factors invite reasonable inferences to the effect

that the investigation was biased, incomplete, or unreasonable.

Anderson testified that an outside vendor could come in to help

the insured and Anderson inventory items damaged; he could not

recall if he offered such services to MQN, although he usually

did so. MQN was already in the process of boxing up the inventory

and was going through it on its own. (Dep. p. 10, 12-13.) One

reasonable inference is that he did not think that the insurer

needed such help, or that he may have offered; however, this

Court must draw all reasonable inferences favorable to the

nonmoving party. One reasonable inference is that in the face of

the involvement of a massive amount of product and damage,

Anderson and AMCO did not offer the help despite a situation that

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clearly called for it, and that such conduct was unreasonable.

Willingness to reconsider a denial of coverage and to

continue investigation of a claim has been held to weigh in favor

of good faith, whereas an early closure of an investigation and

unwillingness to reconsider a denial when presented with evidence

of factual errors would support a finding of bad faith. Shade

Foods, Inc. v. Innovative Products Sales & Marketing, 78

Cal.App.4th 847, 880 (2000). 

It is undisputed that AMCO advanced a substantial portion of

the claim. Akins declares that AMCO would reconsider its position

in this matter and act accordingly if Park were demonstrated to

be incorrect in his conclusions. (Akins Decl. ¶ 29.) MQN objects

to this evidence as lacking foundation for Akins to make this

statement on behalf of AMCO because he did not decide to deny the

claim, and because other evidence is such that a rational jury

could disagree with based on the evidence in opposition to the

motion. 

Although AMCO made advance payment of a significant portion

of the claim and maintains to this day that it is willing to

reconsider its determination upon receipt of appropriate

evidence, it is not for this Court to resolve conflicting

rational inferences on this motion.

MQN points to evidence warranting an inference that various

AMCO personnel who were active in the fraud investigation, 

including Thompson and Melton, did not tell various persons who

were employed by or were acting on behalf of MQN (Hearington,

Migdal, Greenspan, or others) that there were allegations of

insurance fraud by Pentorali, an issue of commingling, or a

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question regarding location of product in the plant at the time

of the fire. (Decl. of Gonzalez, Ex. K at 36; Decl. of Joseph

Hearington, Jr. ¶¶ 8-11; Dep. of Melton, Gonzalez Decl., Ex. C

pp. 20-21.) Further, Akins testified that he never told Tapia or

Willits of the alleged fraud, commingling, or location of product

at the time of the fire and did not know anyone else at AMCO,

other than perhaps legal counsel, who would have done so. (Decl.

of Gonzalez, Ex. F pp. 76-77.) Park testified that it was not his

practice to reveal fraud or commingling allegations at the

beginning of the investigation because of the desire to obtain

truthful testimony unrelated to what the insurer knew or did not

knew, and because the investigation might ultimately reveal that

the insured’s claim was fully supported. (Gonzalez Decl., Ex. H

p. 49-50.) However, he claimed to have revealed the allegation to

Davis relatively early in the EUO process and while he was in the

middle of the examinations under oath, although the precise time

is not clear. (Id. p. 43.) Gonzalez declares that the first EUO 

was of Tapia on April 5, 2004. (Decl. ¶ 47.)

In any event, the insurer had no affirmative duty to provide

an opportunity to the insured directly to respond to a third

party’s allegations of fraud before denying a claim. Feldman v.

Allstate Insurance Co., 322 F.3d 660, 669 (9 Cir. 2003); Cal. th

Code Regs. tit. 10, § 2695.7(b)(2), (c)(2).

The drawing of reasonable inferences in favor of the insurer

is possible at many points of the analysis. The fact that the

insurer made substantial payment on the claim warrants an

inference that it proceeded in good faith; however, having made a

payment cannot insulate an insurer from inferences against it

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based on other conduct at other points in the claims process. The

insurer used a forensic accountant who employed what might be

inferred to be reasonable methods; however, the conduct of the

insurer and accountant in the course of that documentary

investigation warrants an inference not merely of negligence or

mistaken judgment, but rather of unfair dealing and intent to

harm MQN or disregard its rights that is incompatible with an

inference of mere negligence or overzealousness. Akins proceeded

in some respects in a manner that even he testified was not

likely to obtain reliable information. It is possible in this

case to draw the more sinister set of inferences to the effect

that the investigation was designed or carried out to gather

information supportive of the insurer’s position, and that

evidence that warranted caution, disbelief, or additional

investigation by the insurer was overlooked, systematically

undervalued, or excluded from the investigatory process; and that

the reason for this was that the insurer had the intention to

deny the claim in order to recoup all portions of the claim. 

In summary, the Court concludes that conflicting inferences

are possible with respect to whether or not AMCO’s investigation

was reasonable, thorough, or biased, and as to whether or not

AMCO’s denial of MQN’s claim was unreasonable, unfair, and in bad

faith. AMCO has not established under the pertinent legal

standards that there was a genuine dispute as to coverage

affecting entitlement to benefits and the scope of the loss. A

rational trier could conclude that AMCO’s conduct was not

prompted by honest mistake, bad judgment, or negligence, but

rather was consciously and deliberately undertaken, and that it

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unfairly frustrated the parties’ agreed common purposes and the

reasonable expectations of the insured. 

VII. Punitive Damages

The mere fact that an insurer is determined to have breached

its duty to deal reasonably and in good faith with the insured,

and thereby to be liable for compensatory damages, does not

automatically entitle the insured to punitive damages. Neal v.

Farmers Ins. Exchange, 21 Cal.3d 910, 922 (1978).

Cal. Civ. Code § 3294 provides in pertinent part: 

a) In an action for the breach of an obligation not

arising from contract, where it is proven by clear and

convincing evidence that the defendant has been guilty

of oppression, fraud, or malice, the plaintiff, in

addition to the actual damages, may recover damages for

the sake of example and by way of punishing the

defendant.

. . .

(c) As used in this section, the following definitions

shall apply:

(1) "Malice" means conduct which is intended by the

defendant to cause injury to the plaintiff or

despicable conduct which is carried on by the defendant

with a willful and conscious disregard of the rights or

safety of others.

(2) "Oppression" means despicable conduct that subjects

a person to cruel and unjust hardship in conscious

disregard of that person's rights.

(3) "Fraud" means an intentional misrepresentation,

deceit, or concealment of a material fact known to

the defendant with the intention on the part of the

defendant of thereby depriving a person of property

or legal rights or otherwise causing injury.

“Despicable conduct” is conduct that is so vile, base,

contemptible, miserable, wretched, or loathsome that it would be

looked down upon and despised by ordinary, decent people, Mock v.

Michigan Millers Mutual Ins. Co., 4 Cal.App.4th 306, 330 (1992);

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it has the character of outrage frequently associated with crime,

Tomasellil, 25 Cal.App.4th at 1287. If the defendant’s acts are

reprehensible, fraudulent, or in blatant violation of law or

policy, then punitive damages are appropriate. Id. Unintentional

conduct is not sufficient. Mock, 4 Cal.App.4th at 332. The

defendant must act with the intent to vex, injure, or annoy the

plaintiff, or with a conscious disregard of the plaintiff’s

rights. Neal v. Farmers Ins. Exchange, 21 Cal.3d 910, 922 (1978).

Mere carelessness or ignorance does not justify punitive damages;

rather there must be tortious conduct rising to the level of

extreme indifference to the plaintiff’s rights, a level which

decent citizens should not have to tolerate. Tomaselli, 25

Cal.App.4th at 1286-87. Conduct constituting negligence,

overzealousness, legal error, and callous failure to communicate

does not support a punitive damages award. Tomaselli, 25

Cal.App.4th at 1288. Merely taking an unreasonable position is

insufficient to establish intent to harm or malice. Beck v. State

Farm Mutual Auto Ins. Co., 54 Cal.App.3d 347, 356 (1976). “Clear

and convincing evidence” requires a finding of high probability

based on evidence that is sufficiently strong to command the

assent of every reasonable mind and so clear as to leave no

substantial doubt. Id. (citing In re Angelia P. 28 Cal.3d 908,

919 (1981)).

Using an expert’s opinion that lacks a firm basis, and is

contrary to the weight of expert evidence, as a pretext to end

contractual benefits could be construed by a reasonable juror as

clear and convincing evidence of a conscious disregard of a

plaintiff’s rights. Hubka v. Paul Revere Life Ins. Co., 215

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F.Supp.2d 1089, 1095 (S.D.Cal. 2002) (where treating doctors all

opined that the plaintiff was disabled, an independent doctor

found that the plaintiff had lost fifty percent of his capacity

for heavy work, the only doctor not finding the plaintiff

disabled was an in-house doctor who did not know the requirements

of the plaintiff’s work and had not examined the plaintiff, the

insurer failed to obtain an expert chiropractic opinion as

advised by the insurer’s chosen IME, and the court noted the

absence of multiple independent experts supporting the insurer’s

position).

Taking an adamant position and refusing to change it,

avoiding discovery of adverse information or documentation

thereof, coaching the insured to share the insurer’s position,

failure timely to inform the insured of a conflict of interest,

and examining cross-files of other insureds has been held to be

sufficient to warrant an inference of callous indifference and an

intent to vex, injure and annoy the insured, and thus to uphold

an award of punitive damages. Betts v. Allstate Insurance Co.,

154 Cal.App.3d 688 (1984).

Punitive damages are appropriate where the insurer refused a

full investigation or examination of the claimant, made the

claimant cry, terminated benefits when the insured was still ill,

and attempted to make the insured surrender the policy if the

insured did not take a smaller check. Egan v. Mutual of Omaha

Insurance Co., 24 Cal.3d 809 (1979).

Akins declares that AMCO did not act to vex, injure, or

annoy MQN but only to seek guidance as to whether its conclusion

that MQN had improperly exaggerated its insurance claim and

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thereby voided its insurance policy was correct. (Decl. ¶¶ 30-

31.) MQN objects to the evidence as a conclusion, and as without

foundation for testimony as to motives of others at AMCO. The

Court sustains these objections. 

AMCO points to additional evidence that it asserts precludes

punitive damages. It is undisputed that due to AMCO’s

investigation, MQN hired counsel and had access to counsel and to

the services of a public adjuster, which it hired to assist it in

responding to AMCO’s inquiries and to prove its claim. It is also

undisputed that Park wrote Tapia through MQN’s attorney Jeffrey

Davis and provided MQN with copies of some or all the information

AMCO had gathered in the course of its investigation; it appears

that other documentation of the investigation had been sent to

the insured. AMCO claims that this shows scrupulous fairness and

further notes that MQN failed to respond to Park’s explicit

invitation to respond to the information (i.e., to send him

information, facts, or arguments that might be relevant or that

might show the facts as stated by AMCO were in error (Park Decl.,

Ex. 5 p. 20) and advise AMCO if it had reached the wrong

conclusion. However, when this letter was sent, AMCO’s lawsuit

had already been filed. A rational fact finder could infer that

the letter was pretextual or undertaken self-protectively.

Further, a rational trier of fact could conclude that MQN’s

undisputed filing of the counterclaim for breach of contract,

extra-contractual damages, and bad faith was a response of sorts.

Finally, this evidence does not undercut the reasonable

inferences of bad faith discussed in the foregoing analysis.

The parties dispute whether MQN has ever indicated that its

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continued existence depends upon the outcome of this dispute.

Akins declared that to AMCO’s knowledge, this dispute was simply

one between relative commercial equals with roughly equal

economic power and sophistication. (Decl. ¶ 32.) Davis declares

that MQN produced unspecified financial records to AMCO at the

outset of AMCO’s investigation; further, based on Davis’s review

of the records, MQN definitely does not have roughly equal

economic power as AMCO. Davis also declares that AMCO has enjoyed

significant leverage over MQN throughout the matter because MQN

has incurred tremendous expense in defending against AMCO’s

unfounded allegations and that there is no contractual basis for

recovery of those legal fees and related operational expenses

incurred by MQN. AMCO objects that Davis’s statements are based

on hearsay, irrelevant, self-serving, lacking in foundation,

improper legal conclusion, and expert opinion evidence without

qualification as an expert. The Court concludes that Davis is

qualified and appears to have personal knowledge to report the

expense undertaken by MQN in the litigation in which he is

participating; further, it likewise appears that there is a

foundation for his opinion regarding the absence of a contractual

basis for payment of fees and expenses incurred by MQN. As to the

conclusion or opinion regarding the financial position of the

parties, no foundation has been shown.

In connection with its argument that the evidence in this

case is insufficient as a matter of law to support an award of

punitive damages, AMCO cites various cases. In two of the cases,

Mock v. Michigan Millers Mutual Ins. Co., 4 Cal.App.4th 306, 329-

330 (1992), and Basich v. Allstate Insurance Company, 87

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Cal.App.4th 1112 (2001), there is no useful analysis of a body of

evidence. In Beck v. State Farm Mutual Auto Ins. Co., 54

Cal.App.3d 347, 355-56 (1976), also cited by AMCO, the insurer

took an unreasonable position on the validity of a defense to

coverage and failed to act on separate property damage and

medical payments claims. In internal memoranda the insurer

recommended that even though the insured had a valid uninsured

motorist claim, the issue of the insured’s failure to make a

police report should be used in settlement negotiations. The

insured was claiming far more damages than she had proved. The

withholding of benefits under those circumstances was sufficient

to support a verdict of bad faith but insufficient to permit an

inference of intent to harm or actual malice or oppression,

despite an admission of a claims representative that he knew that

it would vex or oppress the insured. Beck is not sufficiently

analogous on its facts to guide the Court in this instance. 

The holdings in several cases relied on by AMCO underscore

the principle that the bar has been set at a high level for the

sufficiency of the evidence to demonstrate malice or oppression.

In Shade Foods, Inc. v. Innovative Products Sales & Marketing,

Inc., 78 Cal.App.4th 847, 892 (2000), the court found

insufficient the insurer’s initial inflexible position on

extremely complex coverage issues combined with failure to

communicate with the insured and a minimal investigation that

would have revealed the weakness of the insurer’s coverage

position; the evidence warranted an inference of negligence and

stubbornness at most. Comparable conduct in connection with

another insured combined with insistence upon unreasonable

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conditions to a settlement offer were likewise held to be

insufficient. Id. at 893. Misleading the insured as to coverage

and then clarifying its position was likewise insufficient. Id.

at 909-10. The court characterized the cases as being marginally

sufficient cases of bad faith but inadequate to constitute

despicable conduct in conscious disregard of the insured’s

rights. Id. Unlike Shade, the instant case did not involve

extremely complex coverage issues. 

In Tomaselli v. Transamerica Ins. Co., 25 Cal.App.4th 1269,

the court reversed a judgment after verdict of punitive damages

supported by evidence of the insurer’s hiring counsel, failing to

investigate, misleading the insured about an EUO and dissuading

the insured from having counsel present, and erroneously relying

on an endorsement which was not shown to have been delivered; the

judgment was unsupported by any evidence of a pattern or practice

of handling claims in bad faith. The court determined that the

evidence did not meet the high quantum of proof of malice,

oppression, or despicable conduct. At most there was a basis for

an inference of overzealousness, negligence, bureaucratic

inertia, and inefficiency. Id. at 1288. In Stewart v. Truck Ins.

Exchange, 17 Cal.App.4th 468, 482-84 (1993), involving a

substantial and complex question of medical causation regarding

which the jury had ultimately concluded that the insured had been

seventy-five per cent responsible, the court likewise concluded

that evidence of the insurer’s delay in investigating and making

settlement offers were insufficient to constitute malice.

The present case is similar in the sense that when limited

evidence is viewed, one set of inferences is that the insurer

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acted with some evidence supporting its position and thereafter

engaged in overzealous and negligent conduct. However,

consideration of the totality of the evidence in this case

renders uncertain the line between mere overzealousness and

negligence, on the one hand, and on the other a course of conduct

undertaken not with a good faith desire to investigate

reasonably, but with an awareness of a high likelihood of

extremely negative effects upon the insured, with a purpose to

reach a desired position on the claim in disregard of the

totality and probative force of the evidence, and without heeding

known and established norms of conduct. In the present case, the

trier of fact could conclude that the insurer was not only inept,

but was also consciously biased and took advantage of an

opportunity to avoid its coverage obligation entirely to the

known detriment of the insured. A rational trier of fact could

infer that in multiple instances and respects, AMCO consciously

investigated unreasonably and with bias; purposefully engaged in

significant misrepresentations to the insured with respect to the

process; and unilaterally sought sworn information from the

insured without notice to, or opportunity for input from, the

insured’s known agent and advisor. It is fundamentally the

obligation of the trier of fact to evaluate the seriousness of,

and risks presented by, any misconduct by either of the parties

and the precise intentions and other pertinent states of mind of

the relevant agents.

The present case does not present complex legal issues of

coverage; here, there is really only one major factual issue.

There is significant evidence of not mere nonfeasance or

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overzealousness, but of actual bias in the investigation

undertaken in what in a full factual context might be inferred to

be conscious disregard of the rights of the insured and

potentially even intent to harm the insured. The alleged

mishandling of the claim and failure of the investigation

concerned the most critical evidence available with respect to

the alleged fraud of the insured. This case involves not merely

economic harm, but with respect to the interest of the insured,

also the interest in reputation and in freedom from criminal

process and sanctions. 

With respect to the clear and convincing standard, the Court

on summary judgment is not permitted to resolve evidentiary

conflicts with respect to material issues of fact or generally 

to engage in weighing the evidence or resolving credibility

disputes. Although the higher burden of persuasion required of

the bad faith claimant is the same on summary judgment and at

full trial on the merits, the evidentiary context is necessarily

different. A large body of evidence may be expected to be

introduced at trial concerning matters which are only developed

skeletally in these motion proceedings, including the inventory

tracking and other documentary practices of the insured and the

insurer’s information regarding those practices; key witnesses’

opportunity to perceive and recollect various events before and

after the fire; the apparent credibility of the various reporting

witnesses, including important witnesses from MQN from whom

little sworn testimony has been presented; available evidence

concerning the location and condition of massive amounts of

product at the time of and after the fire; the extent of

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cooperation between the parties; and the value of the methodology

of the expert witnesses and other agents acting on behalf of the

parties, etc. 

The instant case presents a close case with respect to the

sufficiency of an evidentiary basis upon which to infer malice or

oppression warranting punitive damages. Given the state of the

evidence, the Court at this point should not say that the

evidence of AMCO’s conduct could not be considered clear and

convincing evidence of reprehensible, despicable conduct

undertaken with an intention to vex or harm MQN and/or with a

conscious disregard of the potentially serious, unjust

consequences to MQN and of MQN’s rights. AMCO has not established

that it is entitled to judgment as a matter of law on the issue

of the adequacy of the evidence to establish punitive damages by

clear and convincing evidence.

VIII. Disposition

Accordingly, the Court DENIES the motion of Plaintiff and

Counter-defendant AMCO Insurance Company for partial summary

judgment on the bad faith counterclaim.

IT IS SO ORDERED.

Dated: July 26, 2006 /s/ Sandra M. Snyder 

icido3 UNITED STATES MAGISTRATE JUDGE

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