The opinion of the court was delivered by: BARBARA A. CAULFIELD
For the reasons explained below: (1) Fireman's Fund's, Federal's, and Interstate's motions are GRANTED; and (2) CoBank's motion is DENIED.
Fireman's Fund commenced this action against National Bank for Cooperatives, successor-in-interest to the Texas Bank for Cooperatives (hereinafter "CoBank"), seeking declaratory relief to determine whether it is obligated to pay an arbitration award in favor of CoBank against its policyholder, a dissolved corporation known as XLS, Inc., the successor-in-interest to Lawrence Systems, Inc. Three insurance companies intervened. Those companies are Interstate, National Union, and Federal. CoBank filed a counterclaim.
In 1986, Lawrence Systems entered a Certified Inventory Control Service agreement ("Agreement") with Aldus Marketing Association and CoBank.
The Agreement required Lawrence to bond the fidelity and diligence of Aldus employees who issued certificates to CoBank certifying the quantity of certain inventory on Aldus's premises or otherwise under Aldus's control. The Agreement also obligated Lawrence to compensate CoBank for losses not to exceed $ 5,000,000 sustained as a result of CoBank's reasonable reliance upon a material inaccurate representation in the last outstanding certificate.
The Agreement required CoBank to furnish Lawrence with written instructions pertaining to the issuance of Inventory Certificates. The Agreement also obligated CoBank to use reasonably prudent efforts to liquidate the available collateral securing Aldus's loans, with proceeds of such a liquidation to be applied directly to the collateralized loans, before making or prosecuting any claims against Lawrence. By amendment dated June 1, 1987, Lawrence's bonding obligation under the Agreement was increased to a maximum of $ 10,000,000.
The certificates issued by Lawrence to CoBank pursuant to the Agreement were issued weekly and all certificates expressly canceled and superseded the previous certificate issued.
On January 13, 1992, Paul F. Miller, counsel for CoBank, wrote to James L. Jennings, President of Lawrence. His letter demanded $ 10,000,000 from Lawrence pursuant to the Agreement. In the letter, Mr. Miller stated that CoBank had:
suffered an Actual Loss as defined by the above agreement in the amount of $ 16,634,184.00. This loss resulted from reliance upon misrepresentations of both the quantity and value of inventory as reported on the Inventory Certificates submitted to the [Texas Bank for Cooperatives] by Mr. John C. Young.
Illustrative are the misrepresentations on Inventory Certificates numbered 1366, 1377, and 1399. Mr. Young reported the value of the peanuts at $ .55 per pound on each certificate with the exception of certificate number 1366 wherein he reported the value of the peanuts in the Memphis, Texas warehouse at $ .40 per pound. The proper and correct value as determined from Line P ASCS form 1007 is $ .30 per pound, with the results being a misrepresentation of $ 534,335.00, $ 930,300.00, and $ 875,185.00 respectively.
These sums are deemed material and were relied upon by the [Texas Bank for Cooperatives] when making the following extensions of credit: [seven extensions of credit totalling $ 11,366,053.15 are listed.]
At the time of the petition, the outstanding advances to Aldus totalled $ 18,813,656.00. The post confirmation trustee has liquidated all inventory belonging to Aldus and applied the net proceeds against the out-standing unpaid advances owed to the [Texas Bank for Cooperatives].
Allowing for all offsets and credits the unreimbursed balance owed to the [Texas Bank for Cooperatives] is thus the $ 16,634,184.00 quoted above.
(Exhibit A attached to Declaration of James Jennings in Support of Fireman's Fund's Motion).
On February 20, 1993, Mr. Miller wrote another letter to Mr. Jennings. Mr. Miller stated, in part:
As you acknowledged in your response letter, the inventory certificates did not report the peanuts as instructed in the instruction letter, i.e. the peanuts were reported at some value different from the line P value. The failure of Lawrence to accurately report the value of the peanuts is an act which caused confusion and misunderstanding as to the certification of goods and which caused and continues to cause confusion and misunderstanding as the inventory control services performed by Lawrence.
The above agreement made certain representations regarding the inventory certificates that constitute representations by Lawrence. Lawrence represented that the certificates and the peanut inventory had characteristics, ingredients, uses, benefits, or quantities which it did not have or that a person has a sponsorship, approval, status, affiliation, or connection which he does not.
Lawrence represented that the inventory control services are of a particular standard, quality, or grade when they are of another. Lawrence represented that the inventory control services could be relied upon by a lender for the purpose of inventory financing. As facts have shown, the [Texas Bank for Cooperatives] could not and should not have relied upon the inventory control services provided by Lawrence.
The specific complaint is that Lawrence has engaged in acts which constituted violations of § 17.46 of the Texas Business and Commerce Code, failed to report the inventory accurately, failed to follow the instructions set forth in the letter of July 26, 1986, and failed to compensate the [Texas Bank for Cooperatives] or the CoBank according to paragraph 1(b) of the inventory control agreement.
This letter recites in detail the specific complaint of Aldus and the amount of actual damages and expenses incurred.
(Exhibit D to Jennings Declaration.)
On or about April 2, 1992, CoBank filed an arbitration demand with the American Arbitration Association ("AAA") against XLS. CoBank's demand for arbitration stated: "Nature of Dispute: Claims for Breach of Contract; Negligence; Negligent Supervision; Deceit by Bank Fraud; Unfair & Deceptive Trade Practices." (Exhibit A to Declaration of Paul Miller In Support of CoBank's Motion to Dismiss.) The arbitration was held in San Francisco on June 24 and June 25, 1992.
XLS informed the arbitrators that it would not appear at the hearing or be represented by counsel and XLS did not appear at the hearing. No party defended in the arbitration. The arbitration resulted in an award in favor of CoBank and against XLS for $ 10,000,000 plus costs and interest. In their Award of June 30, 1992, the arbitrators made the following relevant findings and conclusions:
8. Under the agreement, Lawrence agreed to compensate the Bank for "actual loss" (as defined in the agreement) not to exceed five million dollars ($ 5,000,000) [this was later raised to ten million dollars] sustained as a result of the Bank's reasonable reliance upon a material inaccurate representation by bonded personnel on the latest certificate outstanding from time to time;
13. In the arbitration proceeding, the claimant claimed damages for breach of contract, negligence, negligent supervision, deceit, unfair and deceptive trade practices under Texas law, and punitive damages.
14. In the period beginning July 16, 1986, and thereafter, Lawrence Warehouse Company failed to perform its obligations to provide services as specified in the contract.
15. [CoBank] suffered damages from such failure in the amount of seventeen million, seventy nine thousand, five hundred and ten dollars ($ 17,079,510).
16. The liability of XLS is limited to ten million dollars ($ 10,000,000) under the June 16, 1986, agreement, as amended, and therefore recovery of damages by the National Bank for Cooperatives against XLS, Inc. is limited to ten million dollars ($ 10,000,000). Damages are hereby awarded to National Bank for Cooperatives against XLS, Inc., in the amount of ten million dollars ($ 10,000,000), with interest from June 30, 1992, at the current legal rate under Texas law applicable to unpaid court judgments, until paid.
17. The claimed damages for negligence, negligent supervision, and deceit are limited to, and included in, the ten million dollars ($ 10,000,000) set forth above. The panel finds that the damages for these claims resulted from a failure to provide the services specified in the agreement.
18. The claimant has not sustained its burden of proof to support a finding of unfair and deceptive trade practices, or to establish punitive damages;
19. Claimant is awarded against XLS, Inc., its attorney's fees and expert's fees in the aggregate amount of $ 330,000. Additionally, claimant is awarded against XLS, Inc., the sum of $ 20,300 paid by claimant for administrative fees to the American Arbitration Association, plus the sums advanced by claimant for arbitrators' fees and other costs in the amount of $ 12,075. Claimant is awarded interest against XLS, Inc., on the aggregate of these sums, $ 362,375, from June 30, 1992, at the current legal rate under Texas law applicable to unpaid court judgments, until paid.
21. All other claims of the National Bank for Cooperatives are denied.
22. This award includes a determination of all the questions submitted to the arbitrators the decision [of] which is necessary to determine the controversy.
The arbitration award was reduced to judgment by the United States Bankruptcy Court for the Northern District of California in orders dated July 20, 1992 and August 21, 1992. (Exhibit A to Barnes Declaration in Support of Fireman's Fund's Motion, Exhibit 13 to Miller Declaration). That court was presiding over XLS's bankruptcy.
A. The Summary Judgment Standard
Federal Rule of Civil Procedure 56(c) provides for summary judgment where no genuine issue exists as to any material fact and where the moving party is entitled to judgment as a matter of law. The burden falls on the moving party to establish that there is no genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S. Ct. 2548, 91 L. Ed. 2d 265 (1986). The moving party may meet this burden by presenting evidence which, if uncontradicted, would entitle it to a directed verdict at trial. Once it has done so, the burden shifts to the non-moving party to present specific facts showing that contradiction is possible. British Airways Board v. Boeing Co., 585 F.2d 946, 950-952 (9th Cir. 1978), cert. denied, 440 U.S. 981, 60 L. Ed. 2d 241, 99 S. Ct. 1790 (1979). It is not required, however, that the plaintiff prove the non-existence of facts to support the non-moving party's case. Summary judgment may be entered "against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex, 477 U.S. at 322-23.
A party opposing summary judgment must set forth, by affidavits or other admissible evidence, specific facts demonstrating the existence of an actual issue for trial. A mere "scintilla" of evidence will not suffice; the non-moving party must show that the fact-finder could reasonably find for the non-moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S. Ct. 2505, 2512, 91 L. Ed. 2d 202, (1986). "If the evidence is merely colorable . . . or is not significantly probative, summary judgment may be granted." Eisenberg v. Ins. Co. of North America, 815 F.2d 1285, 1288 (9th Cir. 1987) (citing Anderson, 106 S. Ct. at 2512). In making this determination, the court must take the non-moving party's evidence as true and all inferences are to be drawn in the light most favorable to the non-moving party. Eisenberg, 815 F.2d at 1289.
"The insurer bears the burden of proving that a potential claim covered by the duty to defend falls within an exclusionary clause." Olympic Club v. Those Interested Underwriters at Lloyd's London, 991 F.2d 497, 502 (9th Cir. 1993). However, "where the scope of the basic coverage itself is at issue, the insured has the burden of showing that the event is a claim within the scope of the --basic coverage." Hartford Fire Ins. Co. v. Karavan Enterprises, Inc., 659 F. Supp. 1075, 1076 (N.D. Cal. 1986), accord Olympic Club, 991 F.2d at 502-03, Chamberlain v. Allstate Ins. Co., 931 F.2d 1361, 1364 (9th Cir. 1991).
B. Fireman's Fund's Motion for Summary Judgment
Fireman's Fund was the general liability insurer of Lawrence from 1984 until 1991. It insured Lawrence under six policies:
Fireman's Fund argues that CoBank's claims were and are not covered by Fireman's Fund's policies because the claims did not allege any of the four types of injury covered by the insuring clause -- property damage, bodily injury, personal injury, and advertising injury.
Property damage and advertising injury are the topics of most dispute.
The question is whether the loss suffered by CoBank constitutes "property damage" within the meaning of the policies. The court finds that it does not.
The first three Fireman's Fund policies defined "property damage" as follows:
(1) physical injury to or destruction of tangible property which occurs during the policy period, including the loss of use thereof at any time resulting therefrom, or
(2) loss of use of tangible property which has not been physically injured or destroyed provided such loss of use is caused by an occurrence during the policy period[.]
The later policies defined "property damage" as follows:
a. Physical injury to tangible property, including all resulting loss of use of that property; or
(Reardon Declaration, Exhibits G at 5 and J at 8.)
As is apparent from Mr. Miller's correspondence with Mr. Jennings and from the arbitration award, CoBank was damaged because its loans to Aldus were uncollectible and there was inadequate collateral to secure the loans. The cause of this damage, as alleged by CoBank and found by the arbitration panel, was CoBank's reliance on inaccurate Inventory Certificates provided by Lawrence. For example, in his first letter to Mr. Jennings, Mr. Miller stated: "This loss resulted from reliance upon misrepresentations of both the quantity and value of inventory as reported on the Inventory Certificates . . . ," and the arbitration panel held: "The panel finds that the damages for these claims resulted from a failure to provide the services specified in the agreement."
CoBank emphasizes, however, that the peanuts at issue were not worth the values they had been assigned because they were rotten, rancid, or otherwise deteriorated. Because the peanuts were physically damaged, they could not be used as collateral (or were worth much less as collateral), thus impairing the ...