Court Opinion

ID: 4535909
Source: CourtListenerOpinion
Date Created: 2020-05-21 20:00:26.783199+00
Date Added: 2024-06-11T09:27:32.332196
License: Public Domain

NOT FOR PUBLICATION                         FILED
                    UNITED STATES COURT OF APPEALS                       MAY 21 2020
                                                                      MOLLY C. DWYER, CLERK
                                                                       U.S. COURT OF APPEALS
                             FOR THE NINTH CIRCUIT

BRADLEY D. SHARP, Chapter 11 Trustee            No.    18-56565
of the Estate of C.M. Meiers Company, Inc.,
                                                D.C. No. 2:17-cv-01400-MRW
                Appellant,

 v.                                             MEMORANDUM*

EVANSTON INSURANCE COMPANY,

                Appellee.

EVANSTON INSURANCE COMPANY,                     No.    18-56566

                Appellant,                      D.C. No. 2:17-cv-01400-MRW

 v.

BRADLEY D. SHARP, Chapter 11 Trustee
of the Estate of C.M. Meiers Company, Inc.,

                Appellee.

                   Appeal from the United States District Court
                      for the Central District of California
                  Michael R. Wilner, Magistrate Judge, Presiding

                              Submitted April 3, 2020**

      *
             This disposition is not appropriate for publication and is not precedent
except as provided by Ninth Circuit Rule 36-3.
      **
             The panel unanimously concludes this case is suitable for decision
                                Pasadena, California

Before: PAEZ and CALLAHAN, Circuit Judges, and LYNN,*** District Judge.

      Appellant Bradley Sharp (“Sharp”), trustee for the chapter 11 bankruptcy

estate of C.M. Meiers Co. (“CMM”), appeals, and Appellee Evanston Insurance

Co. (“Evanston”) cross-appeals, the district court’s judgment in a bankruptcy

adversary proceeding after a two-day bench trial. Sharp initially filed a third-party

adversary proceeding against CMM’s previous owners (the “Rothmans”), which

asserted, inter alia, errors and omissions in the Rothmans’ management of the

CMM Trust Account. The Rothmans were covered by a professional liability

insurance policy from Evanston, but Evanston declined to defend the Rothmans

against Sharp’s claims and did not participate in the settlement mediation that

eventually resulted in a $4.3M settlement. Sharp then filed the current adversary

action against Evanston to recover the unpaid balance of the settlement amount

($3.8 million) as well as other damages. We affirm the district court’s grant of

summary judgment for Evanston on the bad faith claims, and affirm the district

court’s judgment for Sharp on the indemnity claim.

      1. The district court did not err in granting summary judgment to Evanston

without oral argument. See Fed. R. App. P. 34(a)(2).
      ***
             The Honorable Barbara M. G. Lynn, United States Chief District
Judge for the Northern District of Texas, sitting by designation.

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on Sharp’s claim for breach of implied covenant and fair dealing. Under

California law, the “genuine issue rule in the context of bad faith claims” allows a

grant of summary judgment for the insurer “when it is undisputed or indisputable

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

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 Mut. Life Ins.

Co., 290 F.3d 1152, 1161 (9th Cir. 2002) (citing Safeco Ins. Co. of Am. v. Guyton,

692 F.2d 551, 557 (9th Cir. 1982)). Sharp argues that the district court erred in

dismissing his claims under the “genuine dispute” doctrine because the rule does

not apply to third party claims, and in any event, Evanston’s failures to indemnify

and defend the Rothmans against Sharp’s complaint were unreasonable. We

disagree.

      The district court did not err in applying the genuine dispute doctrine to

dismiss Sharp’s bad faith claim insofar as it was based on Evanston’s failure to

indemnify and failure to defend the Rothmans. See Chateau Chamberay

Homeowners Ass’n v. Assoc. Intern. Ins. Co., 108 Cal. Rptr. 2d 776, 784 (Cal. Ct.

App. 2001); Lunsford v. Am. Guarantee & Liab. Ins. Co., 18 F.3d 653, 656 (9th

Cir. 1994). The district court also properly dismissed Sharp’s failure to investigate

claim on the ground that Evanston’s review of the Rothmans’ tender for coverage

and defense against Sharp’s complaint reasonably satisfied its duty to investigate.

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See Baroco West, Inc. v. Scottsdale Ins. Co., 1 Cal. Rptr. 3d 464, 469 (Cal. Ct.

App. 2003); Horace Mann Ins. Co. v. Barbara B., 846 P.2d 792, 795 (Cal. 1993).

      In regard to Sharp’s claim that Evanston acted in bad faith by its failure to

settle, we agree that a genuine dispute over the existence of coverage generally

does not preclude bad faith liability based on the insurer’s refusal to accept a

reasonable settlement offer on a third party claim. See Gibbs v. State Farm Mut.

Ins. Co., 544 F.2d 423, 427 (9th Cir. 1976); Johansen v. Cal. State Auto. Ass’n

Inter-Ins. Bureau, 538 P.2d 744, 748 (Cal. 1975); Howard v. Am. Nat’l Fire Ins.

Co., 115 Cal. Rptr. 3d 42, 70 (Cal. Ct. App. 2010). However, California law also

suggests that an insurer’s mere failure to initiate or pursue settlement discussions

in a third-party case does not incur bad faith liability. See Reid v. Mercury Ins.

Co., 162 Cal. Rptr. 3d 894, 906 (Cal. Ct. App. 2013) (“[N]othing in California law

supports the proposition that bad faith liability for failure to settle may attach if an

insurer fails to initiate settlement discussions, or offer its policy limits, as soon as

an insured’s liability in excess of policy limits has become clear.”); Graciano v.

Mercury Gen. Corp., 179 Cal. Rptr. 3d 717, 727 (Cal. Ct. App. 2014) (“An

insured’s claim for ‘wrongful refusal to settle’ cannot be based on his or her

insurer’s failure to initiate settlement overtures with the injured third party, but

instead requires proof the third party made a reasonable offer to settle the claims

against the insured for an amount within the policy limits.” (emphasis in original)

                                            4
(citations omitted)).

      Here, the undisputed facts demonstrate that Evanston did not participate in

the settlement discussions between Sharp and the Rothmans, but was given little

advance notice of the mediation date and was not presented with a formal

settlement offer until months after the settlement had already taken place. As such,

the record, even when viewed in the light most favorable to Sharp, fails to

demonstrate that Evanston was provided a reasonable opportunity to settle or that

Evanston acted unreasonably when it declined to participate in settlement

discussions. Thus, we affirm the grant of summary judgment for Evanston on

Sharp’s bad faith claims.

      2. We also affirm the district court’s judgment that Evanston was obligated

to indemnify the $3.8 million balance of the settlement between Sharp and the

Rothmans. Evanston challenges the district court’s ruling on the indemnity claim

on four grounds: (1) CMM’s misappropriation of trust funds is not a “professional

service” covered by the policy; (2) coverage is barred by two policy exclusions; (3)

liability is barred under California Insurance Code § 533; and (4) Sharp’s claim for

coverage is barred by judicial estoppel.

      Evanston’s first three challenges rest on the premise that the district court

erred in finding that the Rothmans acted negligently, rather than willfully or with

the intent to steal, during the few months that client funds were deposited directly

                                           5
into CMM’s operating account rather than the Trust Account. However, the

district court’s finding of fact as to the nature of the Rothmans’ conduct is

supported by evidence in the record and at trial—including testimony from Sharp,

which the district court deemed credible—and is not clearly erroneous. Thus, the

district court did not err in concluding that the Rothmans’ mishandling of fiduciary

funds triggered liability and coverage under the “professional services” provision

of the Evanston policy. See Bank of Cal., N.A. v. Opie, 663 F.2d 977, 981 (9th Cir.

1981); see also Utica Mut. Ins. Co. v. Miller, 746 A.2d 935, 944 (Md. Ct. Spec.

App. 2000). Likewise, the district court did not err in concluding that policy

exclusions A and M, as well as California Insurance Code § 533—all of which are

premised on a finding of intentional or willful conduct—did not preclude coverage.

      As for Evanston’s judicial estoppel argument, we conclude that the balance

of equities in this case does not tip in favor of estoppel. See Hamilton v. State

Farm Fire & Cas. Co., 270 F.3d 778, 782 (9th Cir. 2001) (“Judicial estoppel is an

equitable doctrine that precludes a party from gaining an advantage by asserting

one position, and then later seeking an advantage by taking a clearly inconsistent

position.”). The court found that although Sharp originally accused the Rothmans

of “significant misconduct,” Sharp’s later abandonment of these claims in favor of

a negligence-based action was reasonable. Moreover, Sharp’s legal theory and

arguments as to why he believed Evanston was obligated to indemnify and defend

                                          6
the Rothmans for their actions under the policy remained generally consistent from

the first letter that Sharp’s counsel sent to Evanston’s counsel through trial. The

district court’s implicit decision not to invoke the doctrine of judicial estoppel to

Sharp’s indemnity claim was not an abuse of discretion.

      AFFIRMED.

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