The opinion of the court was delivered by: JOHN S. RHOADES, SR.
On June 8, 1987, twenty-month-old Danielle Chitkin nearly drowned in a duck pond. Danielle wandered out of an open sliding glass door at the home of Ed and Judy Way while Nancy Chitkin visited with Judy Way. Danielle then made her way across the backyard, through an unlocked, unauthorized gate, and toward the duck pond, before falling into the pond. Danielle suffered severe brain damage as a result of the incident.
Lincoln National provided medical benefits to Danielle Chitkin because her father, John Chitkin, participated in a the Jerome's Furniture Warehouse Health VEBA Plan (the "Plan"). Lincoln National issued a group policy of insurance to the Plan. Lincoln National has paid claims totalling $ 701,048.66 under the Plan for medical treatment for Danielle.
The Plan includes a section entitled "Return of Over Payment." That section states in full:
Payment made for charges must be returned to Lincoln National if:
1. it is found that such charges were paid in error, or
2. a third party is determined to be liable for such charges.
If an individual insured under the policy has
a. medical or dental charges; or
as a result of the negligence or intentional act of a third party, and makes a claim to Lincoln National for benefits under the policy for such charges or such lost earnings, the insured individual (or legal representative of minor or incompetent) must agree in writing to repay Lincoln National from any amount of money received by the insured individual from the third party, or its insurer. The repayment will be to the extent of the benefits paid by Lincoln National, but will not exceed the amount of the payment received by the individual from the third party, or its insurer. However, the reasonable expenses, such as lawyers' fees and court costs, incurred in effecting the third party payment reimbursed to Lincoln National may be deducted from the repayment to Lincoln National.
The repayment agreement will be binding upon the insured individual (or legal representative of a minor or incompetent) whether:
a. the payment received from the third party, or its insurer, is the result of:
2) an arbitration award; or
3) a compromise settlement; or
4) any other arrangement; or
b. the third party, or its insurer, has admitted liability for the payment; or
c. the medical or dental charges or loss of earnings are itemized in the third party payment.
On August 20, 1987, the Chitkins entered into a settlement agreement with Ed and Judy Way for $ 100,000, the maximum benefits available under the Ways' homeowners insurance policy.
Beginning in late 1987, Lincoln National began to take steps to control its expenditures on behalf of Danielle Chitkin. In October 1987, for example, Lincoln National endeavored to reduce Danielle's nursing care from twenty-four to sixteen hours per day. According to the Chitkins, Lincoln National's efforts included its misrepresentation to Danielle's doctor that the Chitkins wanted to reduce Danielle's nursing care, when, in fact, the Chitkins wanted no such thing. Later, in November 1987, Lincoln National took the position that Danielle's care could be characterized as custodial only. Such a characterization again would save Lincoln National a substantial sum. Lincoln National did not retreat from its "custodial care" position until January 1989. In October 1988, an attorney for Lincoln National asked the Chitkins to consider a voluntary reduction in nursing care in order to prolong Danielle's entitlement to benefits because Lincoln National's expenditures on behalf of Danielle were approaching the lifetime maximum coverage limits set out in the Plan.
In December 1987, Lincoln National announced that it planned to raise medical rates substantially for employees of Jerome's Furniture because Jerome's was "a group where it has been difficult to proactively manage an ongoing claim." The Chitkins argue that the "ongoing claim" was Danielle's claim. Lincoln National does not dispute the Chitkin's interpretation. The Chitkins argue that this rate hike was the first significant step in Lincoln National's effort to terminate the Plan. According to the Chitkins, Lincoln National raised rates in an effort to force most employees out of the Plan. Once Plan membership fell below a certain level, Lincoln National could exercise its right under the Plan to terminate coverage. In December 1988, Lincoln National announced that it would raise rates again in February 1989 to a level almost three times the rate charged during 1987. John Chitkin was the only Jerome's employee who did not leave the Plan after the second rate increase. Lincoln National cancelled the Jerome's Furniture Policy on March 31, 1989.
Following Lincoln National's cancellation of the Plan, the Chitkins were able to obtain coverage through PacifiCare. Lincoln National, however, still retained some obligations toward Danielle under the terms of the Plan because Danielle was completely disabled at the time of the cancellation. Lincoln National's coverage was secondary to PacifiCare's coverage. PacifiCare's coverage of Danielle's physical therapy contained a limit of sixty days of therapy. Danielle soon exhausted these sixty days and turned to Lincoln National for payment for additional treatment under Lincoln National's secondary coverage, because the Jerome's Plan contained no limit on therapy benefits. Despite numerous inquiries by the Chitkins, their attorney, and Danielle's therapy provider, Lincoln National refused to assure the Chitkins or Danielle's therapy provider that it would pay any amount for Danielle's therapy.
On August 15, 1988, the Chitkins filed suit in San Diego Superior Court against a number of defendants, including Le Chateau Homeowners Association and the designer and builder of the Chitkins' subdivision, W. Wolf Industries, Inc.
On January 24, 1990, the Chitkins' counsel sent Lincoln National's counsel, Vicki Lai, a letter asking Lai to make someone available to participate in a mediation between the Chitkins and various tortfeasors. The mediation, however, did not take place as scheduled.
The Chitkins settled their disputes with W. Wolf Industries, Inc., Le Chateau Homeowners, Inc., A & P Management Company, Aquatic Life Services, and Martineau Landscaping in the spring of 1990 for $ 3,156,967.20, bringing their total recovery from all tortfeasors to $ 3,256,967.20. The Chitkins dismissed all but their strict liability cause of action against one of the tortfeasors, W. Wolf Industries, before settling.
The Chitkins' settlement agreement with W. Wolf Industries states that "settlement has been effected on the basis of exposure as a result of the strict liability cause of action." The Wolf Industries settlement makes up $ 1,950,000 of the Chitkins' total recovery from the various tortfeasors.
Each of the Chitkins' settlement agreements, with the exception of that with Ed and Judy Way, apportions 8% of the damages to John and Nancy Chitkin and for their future wrongful death claims. The agreements also apportion 25% of Danielle's recovery to special damages (including both medical expenses and loss of income) and 75% to general damages.
On March 15, 1990, Lincoln National filed a notice of lien in Superior Court in the amount of $ 712,000 in an effort to assert reimbursement rights over a portion of the damages the Chitkins appeared likely to recover in their tort suits against various tortfeasors. The Chitkins' counsel argued, apparently successfully, to the various tortfeasor defendants that Lincoln National's lien was invalid and could be ignored. Even after Lincoln National's counsel contacted each of the defendants and asked them to place Lincoln National's name on the settlement drafts, none of the defendants appears to have given much consideration to Lincoln National's position.
The Chitkins filed suit against Lincoln National in state court on August 16, 1990. The Chitkins' complaint listed a number of causes of action including actions for bad faith, breach of the covenant of good faith and fair dealing, and for a declaration that the reimbursement provision in the Plan was invalid. On September 19, 1990, Lincoln National filed a notice of removal in this court, alleging diversity of citizenship and the existence of a federal question, namely whether ERISA preempted any or all of the Chitkins' causes of action.
Lincoln National filed an answer and counterclaim on September 26, 1990. In its counterclaim, Lincoln National alleges that it is entitled to enforce the reimbursement provision in the Plan. Lincoln National prays for $ 740,456.13, the amount Lincoln National claimed, at one time, to have paid the Chitkins in Plan benefits. The Chitkins filed an answer to Lincoln National's counterclaim on October 17, 1990. The Chitkins' answer includes fourteen affirmative defenses, including unclean hands and unjust enrichment.
On November 15, 1991, this Court issued a seventeen-page order regarding the Chitkins' and Lincoln National's motions for summary judgment. This Court granted Lincoln National's motion for summary judgment on the Chitkin's complaint, finding the Chitkins' state law causes of action were preempted by ERISA. This Court also granted the Chitkins' motion for summary judgment on Lincoln National's counterclaim and denied Lincoln National's cross motion for summary judgment on its counterclaim. This Court held that Lincoln National was not entitled to reimbursement under either a contract-based or unjust enrichment theory because it never required the Chitkins to execute the written repayment agreement called for by the Plan. On March 9, 1992, this Court denied the Chitkins' motion for attorney fees and granted Lincoln National's motion for entry of final judgment on its counterclaim.
Lincoln National filed a notice of appeal on March 26, 1992. On November 24, 1993, the Ninth Circuit reversed this Court in a Memorandum disposition with one judge dissenting. See Appendix (quoting the text of the Memorandum). In its Memorandum, the Ninth Circuit held that Lincoln National had standing to seek reimbursement as a Plan fiduciary even though it had ceased to serve as insurer for the Plan. In addition, the Ninth Circuit noted that "the appeal centered around an extremely poorly-drafted provision of the Plan's contract with Lincoln National," but nevertheless construed that provision to favor the insurance company. According to the Ninth Circuit, the clause in the reimbursement provision stating that the insured must agree in writing to reimburse Lincoln National was merely a condition precedent to Lincoln National's obligation to advance funds to cover medical expenses. The Ninth Circuit then held that Lincoln National was entitled to waive the condition precedent. As a result, the Ninth Circuit found, Lincoln National's failure to require the Chitkins to sign a written reimbursement agreement did not affect Lincoln National's rights to reimbursement. According to the Ninth Circuit, the Chitkins could not use "the murky contract language" to their advantage, and they had no right "to a windfall in the form of a double reimbursement, once from Lincoln National and again from the third party tortfeasors."
The Ninth Circuit's November 24, 1993 Memorandum concludes with the following line: "The judgment of the district court is REVERSED and the case REMANDED for entry of judgment in favor of Lincoln National."
In December 1993, the Chitkins filed a petition for rehearing with suggestion for rehearing en banc. In their petition, the Chitkins argued, inter alia, that no court had ever ruled on their affirmative defenses and that numerous issues of fact lingered. The Ninth Circuit ordered Lincoln National to respond to the Chitkins' petition for rehearing on January 5, 1994. Lincoln National filed its answer to the Chitkins' petition on January 20, 1994.
On March 9, 1994, the Ninth Circuit issued a two-sentence Order Amending Memorandum that states:
The memorandum disposition filed on November 24, 1993 is amended:
The last paragraph is deleted and replaced with: "The district court's grant of summary judgment in favor of the Cbitkins (sic) is reversed. The case is remanded to the district court for further proceedings consistent with this memorandum disposition."
Lincoln National filed its motion for summary judgment the same day this Court issued its mandate hearing notice, April 18, 1994.
This Court has continued this matter a number of times to allow further briefing. The parties have submitted three rounds of briefs: The second and third rounds of briefs address specific questions posed by this Court.
A. Summary Judgment Standard
Fed. R. Civ. P. 56(c) provides that summary judgment is appropriate if the "pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." One of the principal purposes of the rule is to dispose of factually unsupported claims or defenses. Celotex Corp. v. Catrett, 477 U.S. 317, 325, 91 L. Ed. 2d 265, 106 S. Ct. 2548 (1986).
In considering a motion for summary judgment, the Court must examine all the evidence in the light most favorable to the non-moving party. United States v. Diebold, Inc., 369 U.S. 654, 655, 8 L. Ed. 2d 176, 82 S. Ct. 993 (1962). A moving party who bears the burden of proof at trial is entitled to summary judgment only when the evidence indicates that no genuine issue of material facts exists. Fed. R. Civ. P. 56(c); Celotex, 477 U.S. at 325. If the moving party does not bear the burden of proof at trial, he may discharge his burden of showing that no genuine issue of material fact remains by demonstrating that "there is an absence of evidence to support the non-moving party's case." Celotex, 477 at 325. The moving party is not required to produce evidence showing the absence of genuine issue of material fact on such issues, nor must the moving party support its motion with evidence negating the nonmoving party's claim. Lujan v. National Wildlife Fed'n, 497 U.S. 871, 885, 111 L. Ed. 2d 695, 110 S. Ct. 3177 (1990); United Steelworkers v. Phelps Dodge Corp., 865 F.2d 1539, 1542 (9th Cir.), cert. denied, 493 U.S. 809, 107 L. Ed. 2d 20, 110 S. Ct. 51 (1989). Instead, "the motion may, and should, be granted so long as whatever is before the District Court demonstrates that the standard for the entry of judgment, as set forth in Rule 56(c), is satisfied." Lujan, 497 U.S. at 885 (quoting Celotex, 477 U.S. at 323).
Once the moving party meets the requirement of Rule 56 by either showing that no genuine issue of material fact remains or that there is an absence of evidence to support the non-moving party's case, the burden shifts to the party resisting the motion, who "must set forth specific facts showing that there is a genuine issue for trial." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256, 91 L. Ed. 2d 202, 106 S. Ct. 2505 (1986). It is not enough for the party opposing a properly supported motion for summary judgment to "rest on mere allegations or denials of his pleadings." Id. Genuine factual issues must exist that "can be resolved only by a finder of fact because they may reasonably be resolved in favor of either party." Id. at 250.
To make such the required showing, the nonmoving party must go beyond the pleadings to designate specific facts showing that there is a genuine issue for trial. Celotex, 477 U.S. at 325. Such evidence need not be in a form admissible at trial to avoid summary judgment. Id. The moving party is entitled to judgment as a matter of law if the nonmovant fails to make a sufficient showing of an element of its case with respect to which it has the burden of proof. Id.
Under the law of the case doctrine, an appellate court's determination of a legal issue "must be followed in all subsequent proceedings in the same case." Waggoner v. Dallaire, 767 F.2d 589, 593 (9th Cir. 1985) (internal quotation marks omitted), cert. denied, 475 U.S. 1064, 89 L. Ed. 2d 601, 106 S. Ct. 1374 (1986). The Waggoner court adds:
The law of the case controls unless the first decision is clearly erroneous and would result in manifest injustice, there has been an intervening change in the law, or the ...