Court Opinion

ID: 2668905
Source: CourtListenerOpinion
Date Created: 2014-04-04 17:14:44.898645+00
Date Added: 2024-06-11T12:40:48.887673
License: Public Domain

FOR PUBLICATION

    UNITED STATES COURT OF APPEALS
         FOR THE NINTH CIRCUIT

 YOLANDA E. QUIHUIS and                          No. 11-18067
 ROBERT QUIHUIS, a married
 couple,                                          D.C. No.
           Plaintiffs-Appellants,            4:10-cv-00376-RCC

                    v.
                                                 ORDER
 STATE FARM MUTUAL                             CERTIFYING
 AUTOMOBILE INSURANCE                         QUESTION TO
 COMPANY, a foreign corporation,              THE ARIZONA
            Defendant-Appellee.              SUPREME COURT

                         Filed April 4, 2014

  Before: Richard C. Tallman and Sandra S. Ikuta, Circuit
     Judges, and Andrew P. Gordon, District Judge.*

                                Order

 *
   The Honorable Andrew P. Gordon, District Judge for the U.S. District
Court for the District of Nevada, sitting by designation.
2                    QUIHUIS V. STATE FARM

                           SUMMARY**

          Certification to Arizona Supreme Court

   The panel certified the following question to the Arizona
Supreme Court:

         Whether a default judgment against insured-
         defendants that was entered pursuant to a
         Damron agreement that stipulated facts
         determinative of both liability and coverage
         has (1) collateral estoppel effect and precludes
         litigation of that issue in a subsequent
         coverage action against the insurer, as held in
         Associated Aviation Underwriters v. Wood, 98
         P.3d 572 (Ariz. Ct. App. 2004), or (2) no
         preclusive or binding effect, as suggested in
         United Servs. Automobile Ass’n v. Morris,
         741 P.2d 246 (Ariz. 1987).

  **
     This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
                  QUIHUIS V. STATE FARM                       3

                           ORDER

    We respectfully request that the Supreme Court of
Arizona exercise its discretion to decide the certified question
set forth in Part II of this order.

I. COUNSEL

     Pursuant to Arizona Supreme Court Rule 27(a)(3)(C), the
names and addresses of the counsel appearing in the matter
are:

    For Plaintiffs-Appellants:

        Jeffrey A. Imig
        Haralsan, Miller, Pitt, Feldmen & McAnally, PLC
        One South Church Ave., Suite 900
        Tucson, AZ 85701
        Tel.: 520-792-3836

    For Defendant-Appellee:

        David M. Bell, Howard L. Andari
        David M. Bell & Associates, PLLC
        1850 E. Thunderbird Rd.
        Phoenix, AZ 85022
        Tel.: 602-354-0050

II. QUESTION CERTIFIED

    Pursuant to Arizona Supreme Court Rule 27, a panel of
the United States Court of Appeals for the Ninth Circuit,
before which this appeal is pending, requests that the
Supreme Court of Arizona answer the question presented
4                      QUIHUIS V. STATE FARM

below. This court will accept the Arizona Supreme Court’s
decision on this question. Our phrasing of the question is not
intended to restrict the Arizona Supreme Court’s
consideration of the case or formulation of the question. See
Broad v. Mannesmann Anlagenbau AG, 196 F.3d 1075, 1076
(9th Cir. 1999). The question certified is as follows:

         Whether a default judgment against insured-
         defendants that was entered pursuant to a
         Damron1 agreement that stipulated facts
         determinative of both liability and coverage
         has (1) collateral estoppel effect and precludes
         litigation of that issue in a subsequent
         coverage action against the insurer, as held in
         Associated Aviation Underwriters v. Wood,
         98 P.3d 572 (Ariz. Ct. App. 2004), or (2) no
         preclusive or binding effect, as suggested in
         United Services Automobile Association v.
         Morris, 741 P.2d 246 (Ariz. 1987).

    1
    A Damron agreement refers to a settlement agreement between an
insured and an injured party in circumstances where the insurer has
declined to defend a suit against the insured. In such an agreement, the
insured agrees to liability for the underlying incident and assigns all rights
against the insurance company to the injured party. The injured party, in
turn, agrees to relieve the insured of all liability and recover only against
the insurance company. See Damron v. Sledge, 460 P.2d 997 (Ariz.
1969). When the insurer defends a suit against the insured under a
reservation of right, such agreements are sometimes referred to as Morris
agreements. See United Servs. Auto. Ass’n v. Morris, 741 P.2d 246, 252
(Ariz. 1987). For simplicity, we will refer to any agreement of this sort as
a Damron agreement.
                   QUIHUIS V. STATE FARM                       5

III.    RELEVANT FACTUAL AND PROCEDURAL
        BACKGROUND

    Norma Bojorquez (“Norma”) and Carol Cox (“Carol”)
were coworkers in Nogales, Arizona. Norma sought a car for
her daughter, Iliana Bojorquez (“Iliana”), and expressed
interest in Carol’s 1994 Jeep Cherokee (the “Jeep”). By
January 9, 2008, Carol and Norma had executed a written
sales agreement for the Jeep which called for eight monthly
installments totaling $3,000. Carol gave Norma the only set
of keys to the Jeep, and Norma drove the car home. Norma
gave the keys to Iliana so that Iliana could drive the Jeep at
her pleasure. Carol did not transfer the Jeep’s title certificate
to Norma because she thought it necessary to retain the title
certificate as collateral until Norma paid off the Jeep. The
Coxes never retook possession of the Jeep.

    The Coxes maintained insurance coverage on the Jeep
through a policy with State Farm (the “Policy”). The Policy
provided liability coverage for bodily injury caused by
accident resulting from the use of cars owned by the Coxes,
including the Jeep. The Policy covered the Coxes and
permissive users of their cars if the use was within the scope
of their consent. The Policy also imposed a duty to defend on
State Farm. The Coxes did not cancel the policy until
January 29, 2008.

    On January 22, 2008, Iliana was driving the Jeep when it
collided with a car driven by Yolanda Quihuis. In Arizona
state court, Yolanda Quihuis and her husband, Robert
Quihuis, sued Iliana for negligence and the Coxes for
negligent entrustment. The negligent entrustment claim
relied on the Coxes’ alleged ownership of the Jeep at the time
6                     QUIHUIS V. STATE FARM

of the accident.2 State Farm refused to defend the Coxes
because the Jeep’s ownership had transferred to Norma
before the accident.

    On October 29, 2009, the Coxes, the Bojorquezes, the
Quihuises, and Dairyland Insurance entered into a Damron
agreement entitled “Assignment of Rights, Agreement Not to
Execute.”3 In pertinent part, they stipulated that the Coxes
owned the Jeep at the time of the accident, that Iliana was
incompetent to drive a motor vehicle and her negligence
caused the accident, and that the Coxes should have known
that Iliana was incompetent to drive and therefore should not
have entrusted the Jeep to her. The Coxes and Bojorquezes
agreed to damages in the amount of $275,000. The Coxes
assigned their rights under the Policy to the Quihuises, who
agreed not to execute upon a judgment against the Coxes or
the Bojorquezes. The parties also agreed to request a default
judgment to terminate the case. On December 31, 2009, the
state court entered default judgment in the amount of
$350,000—$325,000 for Yolanda’s injuries and $25,000 for
Robert Quihuis’ loss of consortium.4

            2
        Under Arizona law, “where one who owns a dangerous
instrumentality, such as an automobile, and loans it to another who, to the
knowledge of the owner, is incompetent to drive such a vehicle, the owner
is guilty of negligen[t] [entrustment] if the driver negligently injures
another.” Powell v. Langford, 119 P.2d 230, 232 (Ariz. 1941).
        3
      Dairyland Insurance was a party to the Damron agreement, as
Dairyland provided coverage for Iliana’s injuries through a policy with
Iliana’s parents. Dairyland is not a party to this case, however.
    4
   The discrepancy between the $275,000 in the Damron agreement and
the $350,000 judgment amount is unexplained but irrelevant for this
appeal.
                   QUIHUIS V. STATE FARM                       7

    The Quihuises, standing in the Coxes’ shoes, then brought
a declaratory judgment action against State Farm in Arizona
state court for indemnification and failure to defend. State
Farm removed the case to the United States District Court for
the District of Arizona.

     In November 2011, the district court granted State Farm’s
motion for summary judgment. Applying Arizona law, the
district court held that the default judgment did not preclude
State Farm from litigating the question of whether the Coxes
owned the Jeep at the time of the accident for two reasons.
First, a conflict of interest existed between the Coxes and
State Farm, which denied preclusive effect to the issues in the
default judgment. Specifically, the court held it was in State
Farm’s interest to prove that the Bojorquezes owned the Jeep
at the time of the accident, while the Coxes were best served
to admit ownership in order to obtain an agreement from the
Bojorquezes not to execute any judgment against them.
Second, the court held that only issues determinative of
liability and damages are preclusive in this context; issues
relating to coverage are open for relitigation. Consequently,
State Farm could litigate the question of coverage, and the
court held that the undisputed facts established that the
Bojorquezes owned the Jeep at the time of the accident as a
matter of law.

     The Quihuises timely appealed, contending there was no
conflict of interest between the Coxes and State Farm, and
that Arizona case law establishes that an insurer may not
litigate an issue determinative of coverage if that issue is also
determinative of liability and was stipulated to as part of a
Damron agreement that resulted in entry of a default
judgment. They also contended that ownership of the Jeep
was a genuine issue of material fact.
8                 QUIHUIS V. STATE FARM

    Because we agree with the district court that the
undisputed facts establish the Coxes were not the owners of
the Jeep at the time of the accident, the outcome of this
appeal depends on the scope of the default judgment’s
preclusive effect. More specifically, the issue is whether the
stipulation (and the subsequent default judgment) between the
Coxes and Bojorquezes that the Coxes owned the Jeep
prevents State Farm from contesting coverage under the
Policy on the basis that the Coxes did not own the Jeep. We
disagree with the Quihuises that Arizona case law
conclusively decides the preclusion issue.

IV.    EXPLANATION OF OUR REQUEST

    Arizona cases are unclear on the answer to the specific
question at issue here, namely whether an insurer who
declines to defend its insured can be estopped from raising a
coverage defense in a subsequent action based on a default
judgment entered pursuant to a Damron agreement that
included a stipulation between the third-party plaintiffs and
the insured. Basic principles of collateral estoppel, see
Chaney Bldg. Co. v. City of Tucson, 716 P.2d 28, 30 (Ariz.
1986), and the principles of indemnity law set forth by the
Arizona Supreme Court in Morris, 741 P.2d at 253, indicate
that an insurer may generally raise a coverage defense
notwithstanding the stipulation. On the other hand, the
collateral estoppel principles adopted by the Arizona Court of
Appeals in Wood, indicate that an insurer is estopped from
raising a coverage defense where “the ‘coverage’ issues [the
insurer] seeks to litigate hinge on facts and law bearing
directly on the insureds’ liability, and those issues were
completely subsumed in the consent judgment [albeit not
actually litigated or determined by a trier of fact] in the
underlying tort actions.” 98 P.3d at 585.
                  QUIHUIS V. STATE FARM                      9

     In Morris, the Arizona Supreme Court analyzed the
preclusive effect of a settlement between an insured and a tort
plaintiff. 741 P.2d at 253. The plaintiff was a burglar who
had been shot by an occupant of a home he was burglarizing.
Id. at 248. The burglar pleaded two theories of liability:
negligence and intentional tort. Id. at 253. The homeowner’s
insurance policy covered negligent, but not intentional, acts.
Id. at 248. Before trial, the homeowner entered a settlement
agreement with the burglar, in which they stipulated that the
shooter’s actions “were either negligent or intentional.” Id.
at 253. The insurance company then sought to litigate the
issue of whether the harm was intentional and thus outside of
its duty to indemnify. Id. at 253–54. The Arizona Supreme
Court stated that the insurance company could litigate this
issue because the settlement stipulation left the coverage
issue “clearly unresolved.” Id. at 253. Morris then stated
that:

       [The burglar] presumably did not demand that
       [the defendants] stipulate that their acts were
       negligent and thus covered because he knew
       that any stipulation of facts essential to
       establishing coverage would be worthless.
       See [Farmers Ins. Co. of Ariz. v. Vagnozzi,
       675 P.2d 703, 708 (Ariz. 1983)] (insurers are
       not even bound by litigated issues as to which
       there was a conflict of interest). . . . An
       insured’s settlement agreement should not be
       used to obtain coverage that the insured did
       not purchase.

Id.
10                QUIHUIS V. STATE FARM

     This statement indicates that the Arizona Supreme Court
has adopted the principle of insurance and indemnity law that
an insurer cannot be bound by “any stipulation of facts
essential to establishing coverage.” Id. In enunciating this
rule, Morris relied on a leading treatise of insurance law. See
id. (citing 7C Appleman, Insurance Law and Practice § 4690,
at 235 (1979)). The section of Appleman cited by the
Arizona Supreme Court observed that “[a]lthough the insured
can make such settlements as his interests require, such a
settlement is not conclusive upon the insurer which still has
a right to be heard on the question of policy coverage or the
possibility of fraud.” Appleman, supra, § 4690, at 235.
Morris noted the inherent conflict of interest in Damron
agreements: “[t]o relieve himself of personal exposure, the
insured may be persuaded to enter into almost any type of
agreement or stipulation by which the claimant hopes to bind
the insurer by judgment and findings of fact.” Morris,
741 P.2d at 252–53. Accordingly, Morris concluded that
“any stipulation of facts essential to establishing coverage
would be worthless.” Id. at 253. Because the parties in
Morris did not stipulate whether the insured’s acts were
negligent or intentional, however, this statement might be
considered dicta. Nevertheless, Morris recited a basic tenet
of indemnity law: an insured cannot manufacture coverage by
making admissions in a settlement agreement, given the
conflict between the insured and insurer that arises once the
insurer refuses to defend. 741 P.2d at 251, 253. To hold
otherwise would allow an insured “to obtain coverage that the
insured did not purchase.” Id. at 253.

    Morris did not cast doubt on principles of collateral
estoppel, which may preclude an insurer who refuses to
defend a suit tendered by an insured from contesting issues
that were actually litigated in the underlying action.
                  QUIHUIS V. STATE FARM                      11

Restatement (Second) of Judgments § 58, adopted by the
Arizona Supreme Court in Vagnozzi, provides that when an
insured is sued by an injured party, “a judgment for the
injured person” estops an indemnitor who had notice and an
opportunity to assume the defense of the claim from
“disputing the existence and extent of the indemnitee’s
liability to the injured person” and “from relitigating those
issues determined in the action against the indemnitee as to
which there was no conflict of interest between the
indemnitor and the indemnitee.” 675 P.2d at 708. A conflict
“exists when the injured person’s claim against the [insured]
is such that it could be sustained on different grounds, one of
which is within the [insurer’s] obligation to indemnify and
another of which is not.” Id.

     These principles are consistent with Arizona’s collateral
estoppel principles. As explained by the court in Chaney,
“[u]nder the doctrine of res judicata, a judgment ‘on the
merits’ in a prior suit involving the same parties or their
privies bars a second suit based on the same cause of action,”
while “[c]ollateral estoppel or issue preclusion is applicable
when the issue or fact to be litigated was actually litigated in
a previous suit, a final judgment was entered, and the party
against whom the doctrine is to be invoked had a full
opportunity to litigate the matter and actually did litigate it,
provided such issue or fact was essential to the prior
judgment.” 716 P.2d at 30. Thus, where the underlying suit
is litigated to judgment, the insurer can be bound by those
factual determinations because of its privity with the insured.
See Vagnozzi, 675 P.2d at 706. However, “in the case of a
judgment entered by confession, consent or default, none of
the issues is actually litigated,” and collateral estoppel does
not apply. Chaney, 716 P.2d at 30.
12                QUIHUIS V. STATE FARM

     The Arizona Court of Appeals’ holding in Wood can be
read to either fill a gap left unresolved by the Arizona
Supreme Court in Morris or to conflict with Morris’s
admonition that settlement agreements should not be used to
manufacture coverage that the insured did not purchase,
Morris, 741 P.2d at 253, and Chaney’s principle that default
judgments are not accorded collateral estoppel effect,
716 P.2d at 30. In Wood, the Arizona Court of Appeals
applied the collateral estoppel rule enunciated in Vagnozzi to
the settlement agreement context. Wood involved a mass-tort
litigation in which a number of plaintiffs sued the City of
Tucson and its Airport Authority for environmental harms.
98 P.3d at 578–79. The City eventually entered into a
Damron agreement with plaintiffs. Id. at 579. In the
agreement, the City stipulated that it was liable for $35
million in damages for contamination in the groundwater, and
stipulated as to the facts necessary to establish its tort
liability. Those facts were also determinative of coverage. In
exchange, the plaintiffs agreed not to execute on the City and
to pursue the insurance company instead. Id. The insurance
companies argued in a separate declaratory judgment action
that under principles of insurance and indemnity law, the
facts contained in the stipulation were not binding on them as
to coverage. Id. at 580, 581–82.

     Wood rejected that argument and invoked collateral
estoppel to preclude the insurers from relitigating facts
necessary to both liability and coverage. Id. at 584–85. In so
doing, the Arizona Court of Appeals relied on Vagnozzi and
principles of collateral estoppel, even though the factual
stipulations in the Damron agreement were not “actually
litigated” as that term is used in the collateral estoppel
context. Wood understood Morris to permit the “suspension”
of the “‘actually litigated’ element of collateral estoppel.”
                   QUIHUIS V. STATE FARM                      13

Wood, 98 P.3d at 589. Wood concluded that even though
stipulations in a settlement are not “actually litigated” as
required by Arizona collateral estoppel principles, in the
unique context of Damron agreements, a consent judgment’s
implicit adoption of stipulations in a settlement between an
insured and a plaintiff collaterally estops the insurer from
contesting coverage where the facts essential to liability and
coverage overlap. Id. at 585, 588–89.

     Although Morris recognized the conflict of interest
inherent in Damron agreements, 741 P.2d at 252–53, Wood
held that the only conflict of interest that defeats the
application of collateral estoppel in this context is where “the
injured person’s claim against the [insured] is such that it
could be sustained on different grounds, one of which is
within the [insurer’s] obligation to indemnify and another of
which is not,” 98 P.3d at 586 (quoting Restatement (Second)
of Judgments § 58(2)). Absent this specific conflict,
collateral estoppel will apply and prevent the insurer from
litigating any factual issue that would have been essential to
liability in the underlying case, even if that issue is also
essential to coverage. Wood, 98 P.3d at 585.

    Wood’s ruling on the collateral estoppel effect of
stipulated admissions appears to conflict with the statement
in Morris that “any stipulation of facts essential to
establishing coverage would be worthless” and “[a]n
insured’s settlement agreement should not be used to obtain
coverage that the insured did not purchase.” 741 P.2d at 253.
Recognizing this inconsistency, Wood distinguished scenarios
in which “the unresolved coverage issue . . . [is] related to the
nature or characterization of the insureds’ conduct and not to
other issues of fault, causation or damages,” from those
where litigating coverage inherently requires the relitigation
14                QUIHUIS V. STATE FARM

of issues necessary to liability. Wood, 98 P.3d at 584–85.
Thus, where coverage issues “hinge on facts and law bearing
directly on the insureds’ liability, and those issues were
completely subsumed in the consent judgment,” those issues
have preclusive effect. Id. at 585.

     Our dilemma here is that the outcome of the case before
us depends on whether we follow Morris’s statements
regarding Damron agreements and general principles of
collateral estoppel, or instead look to Wood’s more narrow
holding. On the one hand, Morris observed that an insured’s
stipulations in a settlement agreement regarding facts
essential to coverage should not bind insurance companies.
741 P.2d at 253. If we follow Morris, State Farm would not
be bound by the stipulation that the Coxes owned the Jeep at
the time of the accident, and the Jeep’s ownership could be
litigated.

    Wood, on the other hand, appears to accord collateral
estoppel effect to the stipulation in the Damron
agreement—that the Coxes owned the Jeep at the time of the
accident—even though that issue was never litigated. The
issue of the Jeep’s ownership was an essential element of
both the Quihuises’ negligent entrustment claim against the
Coxes and the question of coverage. Because the Quihuises
claimed only that the Coxes were negligent, and did not
advance a claim of intentional wrongdoing, the Coxes did not
have a conflict of interest with their insurer of the type set
forth in Vagnozzi and the Restatement § 58(2). Therefore, if
we were to apply Wood, we would have to conclude that State
Farm is bound by the stipulation that the Coxes owned the
Jeep.
                   QUIHUIS V. STATE FARM                       15

    We are unsure whether Wood should be interpreted
narrowly and confined to its facts in light of Morris and
general Arizona collateral estoppel law, or whether it
established a rule of general applicability for situations where
there is overlap of factual issues determinative of both
liability and coverage. We are unaware of any statutes or
cases that resolve this tension between Morris and Wood.
Based on the uncertainty of Arizona law in this area, we
believe it is appropriate to defer to the Arizona Supreme
Court on this important issue of state law: whether a default
judgment entered pursuant to a settlement agreement that
included the stipulation of a factual issue that is determinative
of both liability and coverage in a tort liability action has a
collateral estoppel effect, precluding litigation of that issue in
a subsequent coverage action. Ariz. Rev. Stat. § 12-1861.

    This legal issue is “determinative of the cause” in this
appeal because State Farm’s ability to assert transfer of
ownership as a coverage defense depends on whether the
factual issue of the Jeep’s ownership may be litigated. Id. If
State Farm is precluded from asserting that the Bojorquezes
owned the car at the time of the accident, the Quihuises will
win their appeal because State Farm did not raise any other
coverage defenses before the trial court. See Kimes v. Stone,
84 F.3d 1121, 1126 (9th Cir. 1996) (with narrow exceptions,
new issues may not be raised on appeal). If the default
judgment is not preclusive as to the Jeep’s ownership, State
Farm will prevail because the district court correctly
determined both that there is no genuine dispute of fact as to
the Jeep’s ownership at the time of the accident and that the
Coxes owned the Jeep as a matter of law. Fed. R. Civ. P.
56(a).
16                QUIHUIS V. STATE FARM

    If clarified definitively by the Arizona Supreme Court, the
answer to this unsettled question of law presented by the
Quihuises’ appeal will have far-reaching effects on
automobile insurers and policyholders in Arizona. We are
reluctant to create uncertainty in this area of state law by
answering this question ourselves in the first instance.

V. ACCOMPANYING MATERIALS

    If the Arizona Supreme Court accepts review of the
certified question, the Quihuises and State Farm may file
briefs in accord with Arizona Supreme Court Rule 27(d).

    The Clerk of Court is hereby ordered to transmit forthwith
to the Arizona Supreme Court, under official seal of the
United States Court of Appeals for the Ninth Circuit, a copy
of this order and all briefs and excerpts of record pursuant to
Arizona Revised Statute § 12-1861 and Arizona Supreme
Court Rule 27(a).

    Further proceedings in this court are stayed pending the
Arizona Supreme Court’s decision whether it will accept
review and, if so, receipt of the answer to the certified
question. The case is withdrawn from submission until
further order from this court. The panel will resume control
and jurisdiction upon receipt of an answer to the certified
question or upon the Arizona Supreme Court’s decision to
decline to answer the certified question. When the Arizona
Supreme Court decides whether or not to accept the certified
question, the parties shall file a joint status report informing
this court of the decision. If the Arizona Supreme Court
                  QUIHUIS V. STATE FARM                    17

accepts the certified question, the parties shall file a joint
status report informing this court when the Arizona Supreme
Court issues its answer.

   It is so ORDERED.