Opinion ID: 1953501
Heading Depth: 3
Heading Rank: 2

Heading: The California Case Law

Text: The trial court also read the California case law to require dismissal of the D & O coverage claim. We do not interpret the California law to mandate that result. The Superior Court's apparent reading of California law is that a liability to pay defense costs and any judgment or settlement that would be a covered Loss under the D & O policies, is extinguished where a third party promises to indemnify the directors against that Loss. That reading fails to take into account that, if AT & T had not intervened, the At Home Directors would have been at all times personally liable to their attorneys for the cost of their defense and would also have been required to contribute out of their own pockets their allocated portion of the Williamson settlement. Under California law, an insured becomes legally obligated to pay legal expenses as soon as the legal services are rendered. [15] For that reason, legally it does not matter (in the Superior Court's words) that the record contains no `document or reference . . . which specifically and clearly establishes an obligation personal to the . . . At Home Directors which obligated or required the directors to pay . . . the costs of defending the Underlying Litigation.' [16] Under California law, the At Home Directors' liability to pay their defense costs arose once their lawyers began performing services on their behalf. And even though AT & T agreed to pay those defense costs, the At Home Director clients would remain liable to their attorneys if, for whatever reason, AT & T reneged on its agreement. [17] Only if the At Home Directors' defense counsel had contractually agreed to look solely to AT & T for payment of their fees would the At Home Directors be relieved from liability. The amended complaint alleges no such agreement by defense counsel. That reasoning applies equally to the Williamson settlement costs, which AT & T undertook to (and did) pay on behalf of the At Home Directors. Again, the trial court's Opinion fails to take into account that, had AT & T reneged on its indemnification undertaking and refused to pay the Williamson settlement, the At Home Directors would have been subject to personal liability for any judgment subsequently entered against them in the Williamson action. In concluding otherwise, the Superior Court reasoned that the settlement agreement in the Williamson Fiduciary Action expressly provides that only AT & T is promising to pay the settlement amount, and that [t]he plaintiffs in Williamson have no recourse against the At Home Directors if AT & T fails to make that payment. [18] That is accurate, but materially incomplete. The Williamson settlement agreement goes on to provide that if the agreement is not approved by the At Home Bankruptcy Court, or if any approval is stayed or reversed on appeal, the settlement shall . . . become null and void and the parties shall return to their respective positions ex ante, as though this settlement had never occurred, and the . . . Action will be returned to the trial calendar for trial setting and trial. [19] Thus, had AT & T reneged on the settlement agreement, the settlement would never be presented to, let alone approved by, the Bankruptcy Court. As a result, the At Home directors would be required to defend themselves at a trial and be subject to an in personam judgment against them in the event they did not prevail. Had AT & T never undertaken to indemnify the At Home Directors, or had AT & T breached that undertaking, the D & O insurers would never have been in a position to argue that the At Home Directors incurred no Loss that triggers D & O coverage. The D & O insurers are able make this argument only because AT & T made and honored its commitmenta fact that elevates irony to new heights. The question is whether under California law, AT & T's commitmentwithout which the At Home Directors would have been entitled to coverage of their defense and settlement costs under the D & O policiesdivested those Directors of that entitlement. No California case cited to us mandates that result. The Superior Court read the cited California cases discussed in its Opinion to require that for the At Home Directors to have incurred a covered Loss, they must have either have suffered the entry of a judgment against them or promised to pay any defense costs and judgments, including a judgment entered as part of a settlement. With respect to the defense costs, that conclusion is incorrect because, as previously discussed, the directors incurred liability to pay defense costs as soon as their counsel performed services on their behalf. As for the At Home Directors' liability for the Williamson settlement, the California case law is less clear. In its Opinion, the Superior Court held that the cases cited by AT & T did not support AT & T's position, because the settlements in those cases involved either the entry of a judgment against the settling directors or an obligation on their part to pay a certain amount equivalent to a judgment debt. [20] For example, in Xebec Dev. Partners, Ltd. v. National Union Fire Ins. Co., [21] the parties reached a settlement that was reduced to a joint and several consent judgment against the company and its officers and directors. The directors and officers then assigned their coverage rights under their D & O insurance policy to the plaintiff in exchange for the plaintiff's promise not to execute on the judgment. In a subsequent insurance coverage litigation, the California court rejected the argument of the insurer (National Union) that the individuals had suffered no covered loss in light of the covenant not to execute, because the directors were liable under the consent judgment. Similarly, in Smith v. Parks Manor, [22] a personal injury case, a liability insurer, acting on behalf of the defendant insureds, reached a settlement with the injured plaintiffs under which the insureds were obligated to pay a certain sum or, stated otherwise, created a settlement debt equivalent to a judgment debt. The court held that [a]t that point [the defendants] had suffered a loss which [the insurer] was obligated by contract to indemnify. . . .  [23] The California cases upon which the Superior Court relied can fairly be read to hold that a settlement that involves a consent judgment being entered against the insured is sufficient to constitute a covered Loss under the D & O policies at issue. But, those cases cannot be read definitively to hold that under California law such a judgment against the insured directors is essential to trigger coverage. [24] Indeed, no authoritative California decision cited to us definitively so holds. The only case that arguably could be read to require a judgment or other legally binding obligation to pay a settlement as a condition for coverage, is a federal court opinion, PLM, Inc. v. National Union Fire Insurance Company of Pittsburgh, PA. [25] (PLM). In that case, PLM settled a breach of contract and fraud action brought by Pillsbury against PLM and certain PLM directors and officers. PLM sought reimbursement of a portion of the settlement payment from National Union, which had issued certain D & O policies covering PLM's directors and officers. National Union denied coverage. In a subsequent lawsuit by PLM against National Union, the federal court ruled that PLM's directors had suffered no covered loss, because they paid no claim and were not legally obligated to pay, even though the PLM directors had individually guaranteed some of the promised settlement payment. Affirming a District Court judgment in favor of National Union, the Ninth Circuit stated: We think it clear that in this case execution of the guarantees created only a contingent obligation to pay on the part of the directors and officers. It was not an obligation to pay and it never became an obligation to pay. Hence, there was no loss as defined by the D & O provision. . . . PLM claims that the words legally obligated to pay include situations in which a payment is made by third persons on behalf of a director or officer. Since the payments made by [PLM] eliminated potential liability of all defendants in the Pillsbury lawsuit, a portion of the payments arguably was made on behalf of the directors and officers. Nonetheless, PLM's argument fails because potential liability is not equivalent to a legal obligation to pay. The directors and officers were not legally obligated to make payments to Pillsbury and therefore the payments made on their behalf were not recoverable under the D & O provision. [26] PLM is an unpublished ruling by a federal court attempting to apply California law. Because PLM is not an opinion by a California state court, it is not an authoritative pronouncement of California law on the issue before us. [27] Moreover, under Ninth Circuit Local Rules PLM, as an unpublished opinion, cannot be cited as precedent in that Circuit or in any courts thereof, except in limited circumstances not applicable here. [28] And, lastly, the PLM opinion cites no California case to support its conclusions, or otherwise attempts to explain why the California courts would adopt the PLM Court's rationale. Accordingly, we do not regard PLM as persuasive evidence of California law or consider ourselves obligated to follow that decision or accord it significant weight. [29] In discharging our independent obligation to ascertain how the California state courts would rule on the precise issue presented to us, we must, therefore, look to other sources. We begin with the proposition, which the insurers themselves concede, that the Williamson settlement payment would be a covered Loss if the Williamson settlement, like that in Xebec, had been structured so that a consent judgment was first entered against the At Home Directors, and then paid by AT & T. In terms of economic substance, a settlement so structured would be identical to the different settlement form actually employed in Williamson. That being the case, the D & O insurers' position necessarily reduces to the proposition that coverage under their policies turns entirely upon the matter of settlement structure. The question is whether the California courts would hold such adherence to form is essential for D & O coverage to attach. We find no indication that the California courts would so hold. Indeed, what indications are available to us point in the opposite direction. Those indications are found in Xebec. There (to reiterate), the settlement of the underlying litigation against the defendants (Xebec and its directors)  all of whom were insured by National Union  took the form of a transaction where: (i) Xebec and its directors stipulated to a judgment in favor of the plaintiff (XDP), in consideration for (ii) which XDP agreed not to execute on its judgment, and (iii) Xebec assigned to the plaintiff its rights to coverage from the D & O insurer. National Union denied coverage, resulting in the plaintiff suing the insurer to recover under the D & O policies. National Union argued ( inter alia ) that because of the plaintiff's covenant not to execute on its judgment against Xebec and the two directors, those policyholders would never be required to pay the plaintiff's claim and, therefore, had no loss that triggered coverage. The insureds having no valid claim for coverage, XDP could not recover as their assignee. Reversing a California Superior Court judgment in favor of National Union, the California Court of Appeals held that the policyholders had suffered a loss covered by the D & O policy, for which the plaintiff XDP, as the policyholders' assignee, was entitled to recover from National Union. Ruling, in effect, that the existence of a covered loss should depend on economic substance and not transactional form, the California Court of Appeals stated: Assuming, for purposes of analysis, that the settlement accurately reflected, and that the arbitration award and judgment sufficiently implemented, a legally enforceable obligation upon [the policyholders] to fund an actual cash payment to XDP, it would be an idle exercise to require [the policyholders] to fund an actual cash payment to XDP and then to pursue their own right of indemnity against National Union. Given these admittedly hypothetical assumptions, the result would be essentially the same in either case: National Union would pay the sum, XDP would receive the sum, and [the policyholders] would neither be wealthier nor poorer for the experience. In a sense [the policyholders] may be regarded as middlemen, and the assignment and covenant not to execute may be regarded as mechanisms by which the transaction can be simplified by permitting the middlemen to withdraw in order to allow XDP to proceed directly against National Union. There is no apparent just purpose to be served, in these circumstances, on a hypertechnically literal payment from [the policyholders] to XDP. [30] In this case the Superior Court found Xebec to be factually distinguishable, because in Xebec a consent judgment was entered against the insured defendants as part of the settlement structure, whereas in Williamson no judgment was entered against the At Home Director defendants. Because of the consent judgment, the insured director-defendants in Xebec had an obligation to pay. In reality, however, that obligation was formalistic, because the plaintiff (XDP) had agreed not to execute on the judgment, but instead to look to the D & O insurer for its recovery. The Williamson settlement in this case differs from Xebec only in that here the settling parties by-passed the idle exercise intermediate step of requiring the At Home Directors to consent to a judgment that they would never have to pay. Stated differently, although Xebec and this case differ in that single respect, in terms of economic substance the settlements in both cases were identical, making the Xebec court's rationale equally applicable to the form of settlement structure employed in Williamson. Here, as in Xebec, the insured At Home Directors may be regarded as middlemen, and the assignment and [the Williamson Settlement Agreement] may be regarded as mechanisms by which the transaction can be simplified by permitting the middlemen to withdraw in order to allow [AT & T] to proceed directly against [the D & O insurers]. Just as in Xebec there was no apparent just purpose to be served by insisting . . . on a hypertechnically literal payment from [the policyholders] to XDP[,] no just purpose would be served in this case by requiring a hypertechnical entry of judgment that the settling parties knew from the outset that the At Home Directors would never be required to pay. Thus, although Xebec involved a settlement one ingredient of which was a consent judgment, nothing in Xebec suggests that the judgment was essential to the result, such that if the California court had confronted the facts in this case, the outcome would be any different. Nor does any other authoritative California decision cited to us require us to reach the result argued for by the D & O insurers here. We therefore conclude that under California law the At Home Directors suffered a covered Loss under the D & O policies. Accordingly, those Directors had a cognizable legal claim against the D & O insurers, which AT & T, as their assignee, became entitled to enforce. In concluding otherwise, the Superior Court legally erred.