Court Opinion

ID: 4243439
Source: CourtListenerOpinion
Date Created: 2018-02-08 17:04:44.193452+00
Date Added: 2024-06-11T14:44:21.622260
License: Public Domain

IN THE

    SUPREME COURT OF THE STATE OF ARIZONA
KNIGHTBROOK INSURANCE COMPANY; KNIGHT MANAGEMENT INSURANCE
                           SERVICES LLC,
              Plaintiffs/Counter-Defendants/Appellees,

                                     v.

              PAYLESS CAR RENTAL SYSTEM INCORPORATED,
                          Defendant/Appellant,

                    PCR VENTURE OF PHOENIX LLC,
                  Defendant/Counter-Claimant/Appellant.

                           No. CV-17-0156-CQ
                          Filed February 8, 2018

          United States District Court for the District of Arizona
                         No. 2:12-cv-01671-DGC

                      Certified Question from the
          United States Court of Appeals for the Ninth Circuit
           KnightBrook Ins. Co. v. Payless Car Rental Sys. Inc.;
        PCR Venture of Phoenix, LLC, 855 F.3d 1072 (9th Cir. 2017)
                       QUESTION ANSWERED

COUNSEL:

Alison R. Christian, Gena L. Sluga (argued), Douglas L. Christian, Stephen
M. Dichter, Christian Dichter & Sluga, PC, Phoenix, Attorneys for
KnightBrook Insurance Company and Knight Management Insurance
Services LLC

William J. Maledon, Thomas L. Hudson, Osborn Maledon, P.A., Phoenix;
William F. Greaney (argued), Philip J. Levitz, Covington & Burling LLP,
Washington, D.C.; and Arron Nesbitt, Wilson Elser, Denver, CO, Attorneys
for Payless Car Rental System Incorporated and PCR Venture of Phoenix,
LLC
      KNIGHTBROOK V. PAYLESS CAR RENTAL (PCR VENTURE)
                      Opinion of the Court

JUSTICE LOPEZ authored the opinion of the Court, in which CHIEF
JUSTICE BALES, VICE CHIEF JUSTICE PELANDER, and JUSTICES
BRUTINEL, TIMMER, BOLICK, and GOULD joined.

JUSTICE LOPEZ, opinion of the Court:

¶1             The United States Court of Appeals for the Ninth Circuit
certified the following questions for our review: (1) whether Arizona
equitable indemnity law incorporates the Restatement (First) of Restitution
§ 78 (Am. Law Inst. 1937) (hereinafter “First Restatement”) and, if so, (2)
whether § 78 requires that the indemnity plaintiff and indemnity
defendant’s liability be coextensive as to the underlying plaintiff. We hold
that § 78 is not incorporated in Arizona law. Consequently, we decline to
answer the second certified question as moot.

                             BACKGROUND

¶2            Michael Bovre rented a vehicle from Payless Car Rental
System Inc. (“Payless”). At the rental counter, Payless offered Bovre
supplemental liability insurance (“SLI”) under a master policy provided by
KnightBrook Insurance Co. (“KnightBrook”). Bovre did not pay the $13.95
daily premium for such coverage, but he contends that he is entitled to
coverage because he did not initial the space provided in the rental contract
to decline SLI coverage.

¶3            While driving the rented vehicle, Bovre caused an accident
that injured Robert and Lorraine McGill. The McGills sued Bovre and made
a settlement offer, which included an amount representing SLI coverage.
KnightBrook denied Bovre’s demand for SLI coverage because he did not
purchase it.

¶4            Bovre ultimately entered into a settlement agreement with the
McGills, under which they were paid the combined policy limits of $530,000
from the state-mandated insurance and Bovre’s own Travelers policy.
Bovre also executed a Damron agreement, in which he assigned to the
McGills his claims against KnightBrook and Payless for their alleged failure
to provide SLI insurance (breach of contract, negligence, and insurance bad
faith), and agreed to an $8 million adverse judgment in exchange for the
McGills’ covenant not to execute on the judgment against his personal

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      KNIGHTBROOK V. PAYLESS CAR RENTAL (PCR VENTURE)
                      Opinion of the Court

assets. See Damron v. Sledge, 105 Ariz. 151 (1969) (recognizing the validity
of an agreement in which an insured stipulates to a judgment, assigns his
claims against the insurer to the claimant, and, in turn, the claimant agrees
not to execute the judgment against the insured personally).

¶5            The McGills then sued Payless and KnightBrook, seeking to
recover the $8 million judgment. The McGills and KnightBrook entered
into a settlement in which the McGills’ (previously Bovre’s) claims against
Payless were further assigned to KnightBrook, which paid the McGills the
$970,000 SLI policy limit and promised them a percentage of any recovery
from Payless. The settlement resolved the McGills’ insurance bad faith and
Damron claims against KnightBrook but did not extinguish all the claims
against Payless. Payless was not notified of the final settlement agreement
terms until after it had been executed.

¶6             KnightBrook subsequently filed an action in federal court
against Payless, asserting its assigned claims, along with an equitable
indemnification claim for the $970,000 it paid the McGills, arguing that the
Payless employee at the rental counter was at fault for not memorializing
Bovre’s denial of SLI coverage. The district court dismissed the contract
claims, holding that they were extinguished by accord and satisfaction
when KnightBrook settled with the McGills. Relying on the First
Restatement § 78, the court also ruled that KnightBrook was entitled to
equitable indemnification from Payless for the $970,000 SLI policy limits it
paid to settle the McGills’ claims.

¶7           Payless appealed to the Ninth Circuit, which concluded that
the outcome of the case rests on answers to the two questions certified to
this Court. We accepted jurisdiction pursuant to A.R.S. § 12-1861.

                              DISCUSSION

¶8           Section 78 of the First Restatement provides, in relevant part:

      A person who with another became subject to an obligation
      or supposed obligation upon which, as between the two, the
      other had a prior duty of performance, and who has made
      payment thereon although the other had a defense thereto,

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        KNIGHTBROOK V. PAYLESS CAR RENTAL (PCR VENTURE)
                        Opinion of the Court

              (a) is not entitled to restitution if he became subject to the
                  obligation without the consent or fault of the other;
              (b) is entitled to restitution if he became subject to the
                  obligation with the consent of or because of the fault of
                  the other and, if in making payment, he acted
        ...
                 (ii) in the justifiable belief that such a duty existed[.]

¶9             In awarding KnightBrook equitable indemnification from
Payless, the district court relied on § 78 as a “refinement” of the rule stated
in First Restatement § 76 to hold that, although KnightBrook need not prove
that it or Payless was actually liable to the McGills, “it is sufficient if
[KnightBrook] were subject to a ‘supposed obligation’ which [Payless] had
a greater responsibility to discharge, [KnightBrook] became subject to the
obligation because of the fault of [Payless], and, in choosing to make the
settlement payment, [KnightBrook] acted in the ‘justifiable belief’ that [it]
would be liable in the McGills’ lawsuit.” KnightBrook Ins. Co. v. Payless Car
Rental Sys., Inc., 100 F. Supp. 3d 817, 829 (D. Ariz. 2015).

¶10          We hold that Arizona’s equitable indemnity law does not
incorporate § 78 because it conflicts with Arizona’s general equitable
indemnity principles.

   I.         Equitable Indemnity in Arizona

¶11            Arizona’s equitable indemnity law seeks to avoid unjust
enrichment by allowing recovery only when an indemnity plaintiff subject
to derivative or imputed liability discharges an actual obligation that a
culpable indemnity defendant owed to a third party. See MT Builders, LLC
v. Fisher Roofing, Inc., 219 Ariz. 297, 303 ¶ 13 n.2 (App. 2008) (enumerating
the elements of an Arizona common law indemnity claim). Arizona’s
equitable indemnity principles are consistent with § 76 of the First
Restatement and § 23 of the Restatement (Third) of Restitution and Unjust

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        KNIGHTBROOK V. PAYLESS CAR RENTAL (PCR VENTURE)
                        Opinion of the Court

Enrichment (Am. Law Inst. 2011) (hereinafter “Third Restatement”). 1 See
First Restatement ch. 3, topic 3, intro. note (noting that the right to
indemnity under § 76 arises when an indemnity plaintiff’s payment confers
a benefit on an indemnity defendant); Third Restatement § 23 reporter’s
note a (stating that “[i]ndemnity, a form of restitution, is founded on
equitable principles; it is allowed where one person has discharged an
obligation that another should bear” (citation omitted)).

¶12            In Arizona, the plaintiff in a common law indemnity action
generally must show: (1) it “discharged a legal obligation owed to a third
party”; (2) for which the “indemnity defendant was also liable”; and (3) as
between the two, “the obligation should have been discharged by the
[indemnity] defendant.” MT Builders, 219 Ariz. at 303 ¶ 13 n.2 (citing Am.
& Foreign Ins. Co. v. Allstate Ins. Co., 139 Ariz. 223, 225 (App. 1983) (relying
upon the First Restatement § 76 to note the elements of an Arizona common
law indemnity claim)). Thus, there is no “duty of indemnity unless the
payment discharges the primary obligor from an existing duty.” Am. &
Foreign Ins. Co., 139 Ariz. at 225 (citing First Restatement § 76 cmt. b for the
proposition that its principles apply “only where the payor becomes
obligated to pay because of the consent or fault of the principal obligor” or,
in the absence of consent or fault, where “the payment is beneficial [to the
principal obligor]”).

¶13            Payless correctly notes that Arizona courts citing the First
Restatement have repeatedly applied the general rule of § 76 to equitable
indemnity cases rather than § 78. See, e.g., MT Builders, 219 Ariz. at 303 ¶ 13
n.2; INA Ins. Co. of N. Am. v. Valley Forge Ins. Co., 150 Ariz. 248, 252 (App.
1986); Am. & Foreign Ins. Co., 139 Ariz. at 225. Arizona’s approach is not
unique. In fact, our research reveals that § 78 boasts a mere twelve case
citation references nationwide, most from the 1940s and 1950s, while § 76
has been cited in 291 cases, including fifteen in Arizona.

1   First Restatement § 76 reads:

      A person who, in whole or in part, has discharged a duty which is
      owed by him but which as between himself and another should
      have been discharged by the other, is entitled to indemnity from
      the other, unless the payor is barred by the wrongful nature of his
      conduct.
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      KNIGHTBROOK V. PAYLESS CAR RENTAL (PCR VENTURE)
                      Opinion of the Court

¶14            KnightBrook argues, citing language in several cases, that § 78
is congruent with Arizona’s equitable indemnity common law. See, e.g.,
Blakely Oil, Inc. v. Crowder, 80 Ariz. 72, 75 (1956) (“The right of
indemnity . . . insures [sic] to a person who, without active fault on his own
part, has been compelled, by reason of some legal obligation, to pay
damages occasioned by the initial negligence of another, and for which he
himself is only secondarily liable.” (quoting Builders Supply Co. v. McCabe,
366 Pa. 322, 325 (1951))); INA Ins. Co. of N. Am., 150 Ariz. at 252 (“[A] party
has a right to indemnity when there is an implied contract for indemnity or
when justice demands there be the right.”); Allison Steel Mfg. Co. v. Superior
Court, 22 Ariz. App. 76, 79 (1974) (“In this jurisdiction, we are committed to
the rule that a contract of indemnity will not be construed to cover losses to
the indemnitee caused by his own negligence unless the intention is
expressed in clear and unequivocal terms.”). These cases, however, do not
support KnightBrook’s sweeping assertion. With a single exception—Hatch
Development, LLC v. Solomon, 240 Ariz. 171 (App. 2016)—none of the
Arizona cases cited by KnightBrook apply § 78, depart from the general
principle that an actual obligation is necessary for an equitable indemnity
claim, or suggest that a “supposed obligation” may give rise to such a claim.

¶15           Hatch is the only Arizona case to rely on § 78 to reject the
three-pronged MT Builders test as the exclusive basis for equitable
indemnity. See Hatch Dev., LLC, 240 Ariz. at 175–76 ¶¶ 9–12. In Hatch, a
property owner (Hatch) settled a lawsuit initiated by a neighboring
landowner (Hunt) for property damage arising from a contractor’s
(Solomon) negligent work on Hatch’s property. Id. at 173 ¶ 2. The court of
appeals held that Hatch was entitled to common law indemnity against
Solomon, even though the statute of limitations had run on Hunt’s claims
as to Solomon, because Hatch justifiably believed that he owed an
obligation to Hunt. Id. at 176 ¶¶ 11–12. The court further held that, based
on § 78, “a duty to indemnify may arise in at least two alternative
circumstances: First, when the party seeking indemnity has ‘extinguished
an obligation owed by the party from whom it seeks indemnification,’ or
second, when the indemnity defendant is ‘at fault.’” Id. at 175 ¶ 10 (quoting
KnightBrook Ins. Co., 100 F. Supp. 3d at 827). The court reasoned that
although Hatch was not entitled to indemnification under § 76 because the
settlement did not discharge an obligation owed by Solomon,
indemnification was proper under § 78 because Solomon was at fault for
Hunt’s damages. Id. at 176 ¶ 11. Hatch’s reliance on § 78, however, was

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      KNIGHTBROOK V. PAYLESS CAR RENTAL (PCR VENTURE)
                      Opinion of the Court

based exclusively on the district court’s decision in this case, id. at 175–76
¶ 10, with which we disagree.

¶16            KnightBrook also relies on Evans Withycombe, Inc. v. Western
Innovations, Inc., 215 Ariz. 237 (App. 2006), contending that although Evans
does not cite § 78, it applies its principles. We disagree. In Evans, a general
contractor settled a construction defect lawsuit with homeowners and filed
a third-party complaint seeking contractual and common law
indemnification against its subcontractors who performed the deficient
work. 215 Ariz. at 238 ¶¶ 1–4. Evans held only that the trial court erred
when it “dismissed all of [the contractor’s] indemnity claims based on the
statute of repose without otherwise considering the merits of [the] common
law indemnity claims.” Id. at 243 ¶ 24. Rather than embrace § 78’s
approach, Evans simply acknowledged the general rule that common law
indemnity is subject to the limiting principle that “[o]ne seeking [a common
law right to] indemnity must be proven free from negligence in order to
make any claim to indemnity.” Id. at 241–42 ¶ 19 (internal quotations
omitted). Although we need not revisit Evans here, nothing in that case
implicates § 78 or expands equitable indemnity law to include “supposed
obligation[s]” that an indemnity plaintiff and defendant may not actually
owe.

¶17            In this case, we assume without deciding that the court of
appeals in MT Builders and other cases properly applied § 76’s general
principles. Thus, it is understandable that the district court would apply
§ 78 if it perceived that section as a “refinement” of § 76. But § 78 is not a
refinement of § 76; instead, § 78 expands the scope of equitable indemnity
in a manner inconsistent with § 76 and Arizona’s equitable indemnity law.
Section 78 does not require an actual legal obligation or a discharge of the
indemnity defendant’s liability. Rather, it creates a new cause of action
based on the relationship between the indemnitor and the indemnitee,
expanding equitable indemnity to cover “supposed obligation[s]” that may
be based on the payor’s “justifiable belief” that he owed a duty to the third
party. The “[r]eason for the rule,” as explained in § 78, is to provide
equitable indemnity where § 76 does not: in “situations [where] the
performance is not a benefit to the primary obligor and hence there can be
no recovery by the payor because of unjust enrichment.” First Restatement
§ 78 cmt. a.

                                      7
           KNIGHTBROOK V. PAYLESS CAR RENTAL (PCR VENTURE)
                           Opinion of the Court

¶18            This approach departs sharply from Arizona equitable
indemnity law. The lower indemnification standard in § 78 adopted by the
district court entitles KnightBrook to indemnification with the mere
“justifiable belief” that it faced a “supposed obligation” for which Payless
bore the greater responsibility. We are unwilling to impose liability based
on the “justifiable belief” that a duty exists, and we are troubled that § 78
could preclude an indemnitor from raising viable defenses to the
underlying claim, as Payless contends happened here.

     II.      Arizona and the Restatement of Restitution

¶19           KnightBrook also urges this Court to adopt First Restatement
§ 78 because “[i]n the absence of contrary authority Arizona courts follow
the Restatement of the Law.” Bank of Am. v. J. & S. Auto Repairs, 143 Ariz.
416, 418 (1985). But this argument ignores the compelling reasons
militating against adopting § 78. First, the Third Restatement superseded
the First Restatement in 2011. Although we are not bound to the latest
edition if we choose to follow the Restatement, the changes made by the
Third Restatement are material to our analysis. The Third Restatement
attempted to clarify the law of restitution by abandoning § 78, declining to
include an analogous provision, and limiting its equitable indemnity
language to § 23, which resembles the general rule delineated in First
Restatement § 76. 2 Second, as discussed, § 78 expands and conflicts with
long-settled equitable indemnity principles. There is no reason to adopt

2   Third Restatement § 23 reads:

      (1) If the claimant renders to a third person a performance for which
          claimant and defendant are jointly and severally liable, the
          claimant is entitled to restitution from the defendant as necessary
          to prevent unjust enrichment.
      (2) There is unjust enrichment in such a case to the extent that
           (a) the effect of the claimant’s intervention is to reduce an
               enforceable obligation of the defendant to the third person,
               and
           (b) as between the claimant and the defendant, the obligation
               discharged (or the part thereof for which the claimant seeks
               restitution) was primarily the responsibility of the
               defendant.

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      KNIGHTBROOK V. PAYLESS CAR RENTAL (PCR VENTURE)
                      Opinion of the Court

§ 78, as KnightBrook contends, to create additional indemnity remedies.
Arizona law recognizes causes of action in contract and tort for
compensation, such as KnightBrook’s breach of fiduciary duty claim
against Payless for its handling of Bovre’s rental car counter transaction,
that adequately address § 78’s focus on scenarios where a person subject to
a “supposed obligation” makes a payment to satisfy the perceived
obligation, but the payment is not beneficial to the other ostensibly culpable
party. 3

¶20           “In Arizona, if there is no statute or case law on a particular
subject, we have traditionally followed the Restatement of Laws, and
generally will embrace the Restatement if it prescribes a sound and sensible
rule.” Cramer v. Starr, 240 Ariz. 4, 10 ¶ 21 (2016) (citations and internal
quotation marks omitted). Although we leave for another day whether to
adopt other portions of the First or Third Restatements of Restitution, we
now decline to adopt First Restatement § 78 because it is contrary to
Arizona’s equitable indemnity principles and does not, in our view, reflect
a sound rule.

                                  CONCLUSION

¶21            We answer the certified questions posed to us by the Ninth
Circuit by holding that Arizona equitable indemnity law does not
incorporate the Restatement (First) of Restitution § 78. Consequently, we
decline to answer whether § 78 requires coextensive liability between the
parties, as the issue is moot.

3  The district court briefly noted that the Third Restatement § 24, titled
“Performance of an Independent Obligation (Equitable Subrogation),”
could also be applied in this case. KnightBrook Ins. Co., 100 F. Supp. 3d at
827 n.3. Section 24 does not change our analysis, however, because: (1)
KnightBrook did not assert an equitable subrogation claim in its complaint;
(2) the fact that § 78 is reformulated as an equitable subrogation provision
further militates against adopting § 78 as an equitable indemnification
principle; and (3) § 24 jettisoned the amorphous “supposed obligation”
standard that makes § 78 troublesome.

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