Court Opinion

ID: 6952322
Source: CourtListenerOpinion
Date Created: 2022-07-24 01:33:34.398806+00
Date Added: 2024-06-11T16:08:06.775856
License: Public Domain

KOZINSKI, Circuit Judge,
dissenting.
Appellant, a lawyer, was once convicted for helping bilk insurance companies out of attorney’s fees. This time he gets away with it.
I
My colleagues find there is coverage for attorney’s fees incurred in criminal proceedings based on a clause in the policy where the insurance company promises to defend “any proceeding ... brought by any governmental regulatory agency seeking non-pecuniaiy relief.” This clause covers defense costs when regulatory agencies, like the Securities and Exchange Commission, the Federal Trade Commission or the state bar, seek civil relief, such as an injunction, suspension of a license or disbarment. The proceedings the insurers were asked to defend-a grand jury investigation and subsequent criminal prosecution-were manifestly not “brought” by a “regulatory agency.” They were brought by a federal grand jury and by the Attorney General acting through the United States Attorney. Not even appellant claims that the grand jury or the United States Attorney is a regulatory agency.
The majority nevertheless finds coverage on two grounds. First, my colleagues argue that the United States Postal Service’s investigation was the proceeding brought by a governmental regulatory agency that the insurers should have defended. See maj. op. at 1415. While I have serious doubts whether an informal investigation constitutes a “proceeding” under the policy, the fact is that the insurers weren’t asked to defend the Postal Service’s investigation. Appellant demanded only that they defend the grand jury proceedings. In fact, neither of appellant’s tender of defense letters, which contained almost identical language, even mentioned the Postal Service:
In particular, I have heard that I am a subject or target of a Grand Jury investigation by the United States Attorney for the Southern District of California relating to my alleged actions as an attorney. This is a proceeding by a governmental regulatory agency seeking non-pecuniary relief. Consequently, I request that the insurer immediately undertake my defense of this Grand Jury proceeding as required under the policy issued to me.
*1419Letters from Gregory S. Bodell to Jardine, Emmett & Chandler Los Angeles Inc., Insur. Brokers, Dec. 14, 1989. Insurers cannot be faulted for failing to defend a proceeding they were never asked to defend. In any event, it’s hard to imagine how the insurers could have helped Bodell defend against an investigation, or what expenses he could have incurred in connection therewith. Targets of investigations are notoriously passive and don’t get to do anything unless they are interviewed.
Second, the majority views the grand jury proceeding and subsequent criminal prosecution as part of a regulatory enforcement proceeding; the Postal Service “brought” the criminal proceeding against appellant because its law enforcement unit, the Postal Inspection Service, initiated the investigation which led to the criminal charges. See maj. op. at 1418. Even assuming the United States Postal Service could be considered a regulatory agency-something I seriously doubt-the majority misconceives the role of such agencies in criminal prosecutions. While agencies may bring a host of civil and administrative proceedings, they can institute neither a grand jury investigation nor a criminal prosecution. A federal district judge must summon the grand jury, see Fed. R.Crim.P. 6(a)(1), but an empaneled grand jury is an independent body that does the bidding of no one. See Stirone v. United States, 361 U.S. 212, 218, 80 S.Ct. 270, 273, 4 L.Ed.2d 252 (1960) (grand jury “act[s] independently of either prosecuting attorney or judge”); see also United States v. Williams, 504 U.S. 36, 47, 112 S.Ct. 1735, 1742, 118 L.Ed.2d 352 (1992) (“In fact the whole theoiy of [the grand jury’s] function is that it belongs to no branch of the institutional Government----”). Although federal grand juries do rely on the United States Attorney for assistance, see 1 Charles Alan Wright, Federal Practice and Procedure § 101, at 199-201 (2d ed.1982), even the United States Attorney cannot force the grand jury to investigate anything or keep it from looking into whatever it pleases. And, once a federal grand jury decides to indict, only the Attorney General may bring the criminal charges to trial. See United States v. Cox, 342 F.2d 167, 190 (5th Cir.1965) (Wisdom, J., concurring) (en banc) (“The prosecution of offenses against the United States is an executive function within the exclusive prerogative of the Attorney General.”); see also In re Subpoena of Persico, 522 F.2d 41, 54 (2d Cir.1975). Under Federal Rule of Criminal Procedure 7(c)(1), an indictment is invalid unless the United States Attomey-or other attorney for the government authorized by the Attorney General-signs it. See Fed.R.Crim.P. 7(c)(1); see also United States v. Singer, 660 F.2d 1295, 1302 (8th Cir.1981) (the signature requirement “is intended to show that the attorney for the government joins with the grand jury in instituting the proceeding” (citation omitted)).
Regulatory agencies that become aware of criminal misconduct may, of course, refer the matter to the United States Attorney for possible criminal prosecution. But so can any other person or entity, public or private, who learns of a federal crime. The agency can no more force the United States Attorney to bring a prosecution than can a private party. And, if a prosecution is brought, the United States Attorney no more represents the agency that conducted the investigation than he does a private party who is victimized by a crime. A criminal action vindicates the rights of the United States, not of any agency or party aggrieved by the misconduct.
The facts of this case make my point. The branch of the Postal Service involved here, the Postal Inspection Service, has no power to initiate any proceeding; it can only investigate wrongdoing. See, e.g., 39 C.F.R. § 224.3(b)(4) (authority to “[c]arry[ ] out investigations and present[ ] evidence to ... U.S. Attorneys ... in investigations of a criminal ... nature.”). Of course, the Postal Inspection Service is part of the Postal Service which can “sue ... in its official name.” 39 U.S.C. § 401(1). Had the Inspection Service turned over its information to the Postal Service’s General Counsel, and had the General Counsel then brought a complaint against appellant seeking a cease and desist order from an administrative law judge, see, e.g., Silver v. United States Postal Service, 951 F.2d 1033, 1034-35 (9th Cir.1991), appellant’s insurers may well have had a duty to *1420defend. But here the Postal Service instituted no proceedings; instead, it turned over its information to the grand jury and the United States Attorney’s office, which eventually brought criminal proceedings against appellant. Under the clear terms of the policy, these proceedings were not brought by the Postal Service or any other agency. No duty to defend was triggered.
The majority seems to argue that the Postal Service really did bring the grand jury investigation and criminal charges, because the United States Attorney was acting on behalf of the Postal Service-much like a lawyer representing a private party.1 See maj. op. at 1414-15. This argument doesn’t pass the snicker test. If a private party wants to bring suit and is turned away by a lawyer, it can find another lawyer or bring the case pro se. But if the United States Attorney refuses to prosecute, the complaining agency can’t hire another lawyer to bring the criminal prosecution anyway. This is because a civil suit is brought by the aggrieved plaintiff even though a lawyer filed the suit; by contrast, “[t]he United States Attorney is the representative not of an ordinary party to a controversy, but of a sovereignty.” United, States v. Hill, 953 F.2d 452, 458 (9th Cir.1991) (quoting Berger v. United States, 295 U.S. 78, 88, 55 S.Ct. 629, 633, 79 L.Ed. 1314 (1935), overruled on other grounds, Stirone, 361 U.S. at 215, 80 S.Ct. at 272). Unlike civil actions, criminal prosecutions cannot be brought-in any rational sense of the word-by anyone other than the sovereign. We need look no farther than the caption in a criminal case to know this is so: It doesn’t read United States Postal Service v. Bodell; it reads United States of America v. Bodell. This is because a federal criminal prosecution “is a judicial proceeding in a federal court alleging violation of federal laws and is brought in the name of the United States as sovereign.” United States v. Nixon, 418 U.S. 683, 694, 94 S.Ct. 3090, 3100, 41 L.Ed.2d 1039 (1974).
Although Joseph P. Bomstein, Ltd. v. Nat. Union Fire Insur., 828 F.2d 242 (4th Cir.1987), resolves almost the same question presented here, the majority fails to mention the rationale employed by the Bomstein court. One reason is that Bomstein provides no analysis. Applying Virginia law, the court simply concludes that, because both parties had offered “reasonable, though conflicting, constructions of the relevant policy language,” the policy was ambiguous and must be construed against the insurer. Id. at 245. Bomstein does not explain why it is reasonable to conclude that a grand jury investigation might be a proceeding brought by a regulatory agency. In any event, Bomstein’s method of analysis is flawed under California law. The mere fact that a policy provision is susceptible to two conflicting interpretations doesn’t render it ambiguous. Instead, in determining whether a policy provision is ambiguous, California courts treat insurance contracts like ordinary contracts, focusing on the objectively reasonable expectations of the insured and considering the context in which the terms are used. See Bank of the West v. Superior Court of Contra Costa County, 2 Cal.4th 1254, 1264, 10 Cal.Rptr.2d 538, 833 P.2d 545 (1992). “Only if th[e reasonable expectations] rule does not resolve the ambiguity do we then resolve it against the insurer.” Id. at 1265, 10 Cal.Rptr.2d 538, 833 P.2d 545.
Here, appellant offers an objectively unreasonable interpretation of the policy language. Perhaps the best evidence of the unreasonableness of appellant’s interpretation is that it leads to absurd distinctions. For example, imagine an immigration lawyer who smuggles illegal aliens in hopes of representing them in their INS proceedings, but is *1421caught and charged with violating 8 U.S.C. § 1324(a)(1). If he’s caught by the Border Patrol, which is part of the INS, his defense costs would be covered because the subsequent criminal proceedings were initiated-at least tangentially-by an agency. But if he’s caught by the FBI, he’s not covered because the FBI isn’t a regulatory agency, or part of one. It’s inconceivable that any rational insured or insurer would have expected coverage to turn on such irrelevant distinctions. Therefore, unlike the Bomstein court, we cannot conclude under California law that the policy provision is ambiguous.
II
Insuring criminal defense costs also violates the public policy of California; thus, if the policy said what the majority claims, it would be void. See Cal. Insur. Code § 533.5(b) & (d). Not only has the California Legislature specifically prohibited insurers from defending criminal proceedings, no California court has ever construed an insurance policy to cover criminal defenses, including federal criminal prosecutions. See, e.g., Perzik v. St. Paul Fire & Marine Ins. Co., 228 Cal.App.3d 1273, 279 Cal.Rptr. 498 (1991) (no duty to defend, under medical malpractice policy, federal grand jury investigation and criminal prosecution); Jaffe v. Cranford Ins. Co., 168 Cal.App.3d 930, 214 Cal.Rptr. 567 (1985) (no duty to defend, under psychiatrist’s malpractice policy, state criminal charges).
In reaching the contrary conclusion, the majority simply misreads section 533.5(b). That section states:
No policy of insurance shall provide ... any duty to defend ... any claim in any criminal action or proceeding or in any action or proceeding brought pursuant to [unfair competition and false advertising statutes] in which the recovery of a fine, penalty, or restitution is sought by the Attorney General, any district attorney, any city prosecutor, or any county counsel—
Cal. Insur. Code § 533.5(b) (emphasis added). Although, as the majority points out, the list of government lawyers in this provision doesn’t include the United States Attorney, it doesn’t have to because it enumerates only the government lawyers who can bring suit under California’s unfair competition and false advertising statutes. As insurers point out, the phrase “any criminal action or proceeding” is separated by the disjunctive “or” from actions brought pursuant to California’s unfair competition and false advertising statutes. This makes perfect sense because such actions can be brought by both the government and private parties. See Cal. Bus. & Prof.Code §§ 17204, 17535; see also Bank of the West v. Superior Court of Contra Costa County, 2 Cal.4th 1254, 10 Cal.Rptr.2d 538, 833 P.2d 545 (1992). As applied to the specified civil actions, therefore, the list serves a useful function: It limits the statute’s scope to unfair competition and false advertising actions brought by the government, not those brought by private parties.
By contrast, the majority’s interpretation-under which this is a list of lawyers who can bring criminal proseeutions-makes no sense because at least one of the lawyers listed (the county counsel) cannot bring criminal charges. See Cal. Gov.Code §§ 26529, 27642. Thus, it’s hard to see how the list could modify the phrase “any criminal action.” In fact, the circumstance under which “county counsel” was added to the list conclusively undermines the notion that the list has any relevance to criminal prosecutions. In 1991, the legislature for the first time authorized county counsels to seek relief under the unfair competition statute; in doing so, it conformed section 533.5 to reflect this by adding county counsel to the list. See 1991 Cal. Legis. Serv. 5013, ch. 1195 (West). Quite obviously, the list only includes those lawyers who are authorized to bring unfair competition and false advertising actions, and has nothing at all to do with criminal prosecutions.
The majority’s interpretation also ignores the phrase preceding the list, which the list also modifies: “in which the recovery of a fine, penalty, or restitution is sought by” the listed lawyers. The use of the word “recovery” reinforces insurers’ view that the list of lawyers applies only to civil actions: A prosecutor doesn’t seek “recovery” of a conviction in a criminal proceeding.
*1422The majority’s reading leads to other interpretive conundrums. For example, section 533.5(a), which precludes indemnification of any criminal “fine, penalty, or restitution,” contains the same list of lawyers as section 533.5(b). Reading the provisions in pari materia, the majority’s reasoning requires us to interpret section 533.5(a) as prohibiting indemnification of monetary sanctions for criminal conduct imposed by the state but not those imposed by the federal government. This would effect a significant departure from existing law, which precludes indemnification of all criminal acts, see Cal. Civil Code § 1668, Cal. Insur. Code § 533, in a statute that was supposed to be “declaratory of ... the existing law.” 1988 Cal. Stat. 1897, ch. 489, § 3. Moreover, such a distinction would be irrational: Why would indemnification of criminal fines imposed under federal law create any less of a moral hazard than indemnification of fines imposed under state law?
The California Supreme Court’s observation that “on its face [section 533.5] does not apply to relief sought by the federal government,” AIU Ins. Co. v. Superior Court, 51 Cal.3d 807, 837 n. 15, 274 Cal.Rptr. 820, 799 P.2d 1253 (1990), relied on by the majority, is taken out of context. See maj. op. at 1417. The court there was referring to whether insurers were precluded from defending and indemnifying civil claims brought by the federal government. Moreover, the court merely observed an irrefutable fact: On its face, section 533.5(b) doesn’t apply to certain civil proceedings instituted by the federal govemment-the federal government can’t sue under California’s unfair competition and false advertising statutes. See Cal. Bus. & Prof. Code §§ 17201, 17204, 17206, 17535. The court said nothing at all about the question before us: Whether the phrase “any criminal action” excludes federal prosecutions.
* * *
The good thing when a federal court misapplies state law is that its opinion can be ignored by the state courts. This may be cold comfort to appellees, but I am confident that the courts of California will lose no time in rejecting the majority’s flawed interpretation of the policy and section 533.5(b). The sooner the better.

. As proof that the United Stales Attorney was really working for the Postal Service, the majority cites an affidavit from an Assistant United States Attorney where he states that he is "assisting the Postal Inspection] Service and Federal Grand Jury.” This affidavit was given nearly nine months before appellant even raised the issue of the insurers’ duty to defend (the affidavit was given on February 28, 1989 and appellant tendered his defense around December 14, 1989) in an effort to obtain a stay of civil suits against appellant and his cohorts. It thus doesn’t say anything about who actually "brought” the criminal proceedings against appellant; the AUSA merely says he was "assisting,” not representing, the Postal Service. But even if the AUSA said what the majority thinks he said, so what? It's just not true and surely cannot bind the United States.