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Colorado Casualty Insurance Co. v. Candelaria Corp.


March 31, 2010


The opinion of the court was delivered by: VIRGINIA A. Phillips United States District Judge

[Motions filed on February 12, 2010]


Plaintiff Colorado Casualty Insurance Company ("Plaintiff") filed this action seeking a judicial declaration that it is not obligated to indemnify its insureds, Defendants Candelaria Corporation, EPC Corporation (the "Candelaria Defendants"), and David N. Goff,*fn1 for any punitive damages that may be awarded to Defendants Somlux Lebsack and John Lebsack ("Lebsacks" and, together with Goff and the Candelaria Defendants, "Defendants") in an action currently pending in California Superior Court, Riverside County. The Candelaria Defendants moved to transfer this case to the District of Arizona, and Plaintiff moved for summary judgment. These motions came before the Court for a hearing on March 22, 2010. After reviewing and considering all papers filed in support of, and in opposition to, the motions, the Court DENIES the Candelaria Defendants' motion to transfer and GRANTS Plaintiff's motion for summary judgment.


A. Procedural History

Plaintiff filed this action on November 13, 2009. Plaintiff seeks a judicial declaration that it has no duty to indemnify the Candelaria Defendants or Mr. Goff for any punitive damage award that may be entered against them in the case entitled Lebsack, et al. v. Goff, et al., Case No. RIC472471, pending in the California Superior Court for Riverside County (the "Underlying Action"). Plaintiff also seeks a declaration that it has no duty to pay to the Lebsacks any punitive damages they may be awarded in the Underlying Action.

On February 12, 2010, Plaintiff filed a motion for summary judgment on both claims, and noticed a hearing on the summary judgment motion for March 15, 2010. The Candelaria Defendants filed an ex parte application seeking to continue the hearing date to May 3, 2010, which the Court granted in part, continuing the hearing until March 22, 2010. The Lebsacks' and Candelaria Defendants' Oppositions were filed timely, as was Plaintiff's Reply.

Also on February 12, 2010, the Candelaria Defendants filed a motion to transfer this action to the United States District Court for the District of Arizona. Plaintiff's Opposition and the Candelaria Defendants' Reply were filed timely.

Both the motion to transfer and the motion for summary judgment The Court now considers both the motion to transfer and the motion for summary judgment.

B. Uncontroverted Facts

The following material facts are supported adequately by admissible evidence and are uncontroverted. They are "admitted to exist without controversy" for the purposes of this Motion. See Local Rule 56-3.

Defendants Candelaria Corporation ("Candelaria") and EPC Corporation ("EPC") are Arizona corporations with their principal places of business in Glendale, Arizona. (Candelaria Defs.' Stmt. of Genuine Issues ("SGI") at 6:9--12; Pl.'s Reply to Candelaria Defs.' SGI ¶ 1.) Mr. Goff, a resident of Tucson, Arizona, worked as a construction superintendent for Candelaria. (Candelaria Defs.' SGI at 6:16--19; Pl.'s Reply to Candelaria Defs.' SGI ¶ 2.) Candelaria provided Mr. Goff with a company vehicle. (Id.)

Plaintiff's home office is in Centennial, Colorado, and it is authorized to do business as an insurer in Arizona. (Candelaria Defs.' SGI at 8:10--13; Pl.'s Reply to Candelaria Defs.' SGI ¶ 8.)

The Candelaria Defendants purchased business insurance from Plaintiff in the form of a "Commercial Package Policy" and a policy of umbrella coverage, (collectively, the "Policy"), which were in effect from May 2006 to May 2007.*fn2 (Pl.'s Stmt. of Uncontroverted Facts ("SUF") ¶ 6; Candelaria Defs.' SGI at 3:24--4:4; Lebsacks' SGI at 3:15--20.) The Candelaria Defendants obtained the Policy by working with an Arizona insurance agency known as Sun Insurance Group. (Candelaria Defs.' SGI at 7:18--21; Pl.'s Reply to Candelaria Defs.' SGI ¶ 6.) The company vehicle provided to Mr. Goff was covered under the Policy. (Pl.'s SUF ¶ 7; Candelaria Defs.' SGI at 4:5--8; Lebsacks' SGI at 3:21--24.)

Mr. Goff began working on a construction project for Candelaria in San Pedro, California in November, 2006. (Candelaria Defs.' SGI at 10:18--20; Pl.'s Reply to Candelaria Defs.' ¶ 18--20.) In January 2007,*fn3 Mr. Goff was involved in an automobile accident while driving the Candelaria-provided vehicle in Banning, California. (Candelaria Defs.' SGI at 11:10--13; Pl.'s Reply to Candelaria Defs' SGI ¶ 22.) Defendant Somlux Lebsack was driving the other vehicle involved in that accident. (Candelaria Defs.' SGI at 11:14--18; Pl.'s Reply to Candelaria Defs' SGI ¶ 23.) Ms. Lebsack later filed the Underlying Action against Mr. Goff, Candelaria and EPC in connection with that accident. (Id.) Ms. Lebsack seeks, inter alia, punitive damages in the Underlying Action. The Candelaria Defendants tendered defense of the Underlying Action to Plaintiff. (Pl.'s SUF ¶ 10; Candelaria Defs.' SGI at 5:11--13.)


A. Motion to Transfer

A district court, "for the convenience of parties and witnesses, in the interest of justice,... may transfer any civil action to any other district or division where it might have been brought." 28 U.S.C. § 1404(a). In determining whether a transfer of venue is appropriate in a given case, courts may consider: "(1) the location where the relevant agreements were negotiated and executed, (2) the state that is most familiar with the governing law, (3) the plaintiff's choice of forum, (4) the respective parties' contacts with the forum, (5) the contacts relating to plaintiff's cause of action in the chosen forum, (6) the differences in the costs of litigation in the two fora, (7) the availability of compulsory process to compel attendance of unwilling non-party witnesses, and (8) the ease of access to sources of proof." Jones v. GNC Franchising, Inc., 211 F.3d 495, 498--99 (9th Cir. 2000). Courts also consider as significant factors the presence of a forum selection clause and the public policy of the forum state, if any. Id. at 499. "The defendant must make a strong showing of inconvenience to warrant upsetting the plaintiff's choice of forum." Decker Coal Co. v. Commonwealth Edison Co., 805 F.2d 834, 843 (9th Cir. 1986).

B. Motion for Summary Judgment

A motion for summary judgment shall be granted when there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986). The moving party must show that "under the governing law, there can be but one reasonable conclusion as to the verdict." Anderson, 477 U.S. at 250.

Generally, the burden is on the moving party to demonstrate that it is entitled to summary judgment. Margolis v. Ryan, 140 F.3d 850, 852 (9th Cir. 1998); Retail Clerks Union Local 648 v. Hub Pharmacy, Inc., 707 F.2d 1030, 1033 (9th Cir. 1983). The moving party bears the initial burden of identifying the elements of the claim or defense and evidence that it believes demonstrates the absence of an issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986).

Where the non-moving party has the burden at trial, however, the moving party need not produce evidence negating or disproving every essential element of the non-moving party's case. Celotex, 477 U.S. at 325. Instead, the moving party's burden is met by pointing out that there is an absence of evidence supporting the non-moving party's case. Id. The burden then shifts to the non-moving party to show that there is a genuine issue of material fact that must be resolved at trial. Fed. R. Civ. P. 56(e); Celotex, 477 U.S. at 324; Anderson, 477 U.S. at 256. The non-moving party must make an affirmative showing on all matters placed in issue by the motion as to which it has the burden of proof at trial. Celotex, 477 U.S. at 322; Anderson, 477 U.S. at 252. See also William W. Schwarzer, A. Wallace Tashima & James M. Wagstaffe, Federal Civil Procedure Before Trial § 14:144.

A genuine issue of material fact will exist "if the evidence is such that a reasonable jury could return a verdict for the non-moving party." Anderson, 477 U.S. at 248. In ruling on a motion for summary judgment, the Court construes the evidence in the light most favorable to the non-moving party. Barlow v. Ground, 943 F.2d 1132, 1135 (9th Cir. 1991); T.W. Electrical Serv. Inc. v. Pacific Elec. Contractors Ass'n, 809 F.2d 626, 630-31 (9th Cir. 1987).


A. Motion to Transfer

Plaintiff argues transfer is inappropriate because it could not have filed this action in the District of Arizona. For the reasons discussed below, the Court agrees, and denies Defendants' motion to transfer.

In order for this action to be transferred to the District of Arizona, the District of Arizona must have had personal jurisdiction over all Defendants at the time the action was filed. See Hoffman v. Blaski, 363 U.S. 335, 344 (1960); Technograph Printed Circuits, Ltd. v. Packard Bell Elecs. Corp., 290 F. Supp. 308, 326 (C.D. Cal. 1968) ("[V]enue, i.e., 'where the action might have been brought,' is to be determined as of the time of the filing of the actions."). Plaintiff bears the burden of establishing that this action could have been brought originally in the District of Arizona.

Here, Defendants have failed to meet their burden of showing that this action might have been brought in the District of Arizona. The parties do not dispute that the Lebsacks are citizens of California. (Compl. ¶ 5; Lebsacks' Ans. ¶ 5.) Plaintiff does not identify any connection between the Lebsacks and Arizona. Accordingly, the Court has no basis to conclude that either general or specific jurisdiction exists with respect to the Lebsacks in the District of Arizona. As the District of Arizona lacked personal jurisdiction over the Lebsacks at the time this action was filed, Plaintiff could not have brought this action in Arizona. Transfer to Arizona under Section 1404 thus is inappropriate.

The Candelaria Defendants argue that because the Lebsacks now consent to personal jurisdiction in Arizona for the limited purpose of this action, transfer to the District of Arizona is appropriate. (See Reply at 1:19--3:2.) Under the Candelaria Defendants' theory, whether or not the District of Arizona had personal jurisdiction over the Lebsacks at the time this action was filed is mooted by their consent to personal jurisdiction there. The Supreme Court has expressly rejected this very argument, however, holding that:

If when a suit is commenced, plaintiff has a right to sue in that district, independently of the wishes of the defendant, it is a district "where the action might have been brought." If he does not have that right, independently of the wishes of defendant, it is not a district "where it might have been brought," and it is immaterial that the defendant subsequently makes himself subject by consent, waiver of venue and personal jurisdiction defenses or otherwise, to the jurisdiction of some other forum.

Hoffman, 363 U.S. at 344 (quoting Blaski v. Hoffman, 260 F.2d 317, 321 (7th Cir. 1958) (emphasis added).

That the Lebsacks now consent to personal jurisdiction in the District of Arizona is of no relevance in determining whether it is a venue in which this action "might have been brought." As Defendants have failed to meet their burden of showing Plaintiff might have brought this action in the District of Arizona, transfer is inappropriate. It is unnecessary for the Court to address the GNC Franchising factors.

B. Motion for Summary Judgment

The Court notes that it is unusual for a party to file a summary judgment motion at such a preliminary stage in a case, when no scheduling conference has been held and no discovery has been exchanged. The material facts of this case, however, are uncontroverted,*fn4 and no party has indicated that any further discovery is necessary in order to fully respond to the summary judgment motion. Accordingly, the Court considers the motion for summary judgment.

1. Ripeness

As a preliminary matter, Defendants argue that because the Underlying Action has not yet been resolved, it is uncertain whether or not punitive damages ultimately will be awarded. Defendants contend that under these circumstances, "Plaintiff is essentially asking the Court to issue an advisory ruling." (Candelaria Defs.' Opp'n at 16:22--24.) The Court construes this as an argument that no actual case or controversy exists, and that the matter is not yet ripe.

This argument fails. The Ninth Circuit has made clear that an insurer may bring a declaratory judgment action regarding its duty to defend and indemnify its insured in a pending state court suit even when the underlying litigation has not yet proceeded to judgment, and that such declaratory judgment actions are sufficiently ripe. Am. States Ins. Co. v. Kearns, 15 F.3d 142, 144--45 (9th Cir. 1994). Accordingly, the Court may hear this matter, and declines to dismiss the Complaint or stay any aspect of this action pending resolution of the Underlying Action.

2. Applicable Law

The parties dispute whether California or Arizona law applies to the Policy. Plaintiff argues that California law - which prohibits insurers from indemnifying their insureds for punitive damage awards - applies, and that Plaintiff thus cannot be held liable for any punitive damage award in the Underlying Action. Defendants, on the other hand, argue that Arizona law - which permits insurers to indemnify their insureds for punitive damage awards - applies, and that Plaintiff thus may be held liable for any punitive damage award in the Underlying Action.

In order to resolve this dispute, the Court must perform a choice of law analysis.*fn5 In so doing, the Court applies California's choice of law rules. See Patton v. Cox, 276 F.3d 493, 495 (9th Cir. 2002) ("When a federal court sits in diversity, it must look to the forum state's choice of law rules to determine the controlling substantive law."). Defendants, as the parties seeking to apply the law of a foreign state, bear the burden of showing that Arizona law should apply. See Wash. Mut. Bank, FA v. Super. Ct., 24 Cal. 4th 906, 919 (2001).

a. The Governmental Interest Analysis Is the Correct Choice of Law Analysis

The parties dispute whether the choice of law analysis here is governed by California's "governmental interest analysis" or by California Civil Code § 1646. Under Section 1646, "[a] contract is to be interpreted according to the law and usage of the place where it is to be performed; or, if it does not indicate a place of performance, according to the law and usage of the place where it is made." Defendants maintain that because this dispute requires the Court to interpret the Policy, Section 1646 applies.

The Court need not interpret Policy terms to resolve this dispute here, however. Rather, the Court is called upon to determine whether, apart from the parties' agreement in the Policy, California law prohibiting insurers from compensating insureds for punitive damage awards applies. This is not a question of interpretation of a contract, but application of a statute. Accordingly, California's governmental interest analysis is the proper framework to determine the choice of law question. See Frontier Oil Corp. v. RLI Ins. Co., 153 Cal. App. 4th 1436, 1460--61 (2007); Stonewall Surplus Lines Ins. Co. v. Johnson Controls, Inc., 14 Cal. App. 4th 637 (1993).

The Candelaria Defendants argue that Stonewall is no longer good law after Frontier Oil, and that Frontier Oil requires that the Court apply California Civil Code § 1646. (Candelaria Defs.' Opp'n at 7:1--8:11.) This argument fails. It ignores the Frontier Oil court's express recognition that the Stonewall decision is "not inconsistent with our conclusion that Civil Code section 1646 determines the law governing contract interpretation." Frontier Oil, 153 Cal. App. 4th at 1460. The Frontier Oil court distinguished Stonewall on the ground that "[t]he choice-of-law issue concerned the existence of a right of indemnity for punitive damages and did not involve an issue of contract interpretation." Id. at 1461 (emphasis added).

b. California Law Governs This Dispute

Under California law, the governmental interest approach generally involves three steps. First, the court determines whether the relevant law of each of the potentially affected jurisdictions with regard to the particular issue in question is the same or different. Second, if there is a difference, the court examines each jurisdiction's interest in the application of its own law under the circumstances of the particular case to determine whether a true conflict exists. Third, if the court finds that there is a true conflict, it carefully evaluates and compares the nature and strength of the interest of each jurisdiction in the application of its own law "to determine which state's interest would be more impaired if its policy were subordinated to the policy of the other state" and then ultimately applies "the law of the state whose interest would be more impaired if its law were not applied."

Kearney v. Salomon Smith Barney, Inc., 39 Cal. 4th 95, 107--08 (2006) (internal citations omitted). For the reasons set forth below, the Court concludes that California law governs this dispute.

i. California Law and Arizona Law Differ

California law prohibits insurers from indemnifying insureds for punitive damage awards.*fn6 See PPG Inds., Inc. v. Transamerica Ins. Co., 20 Cal. 4th 310, 317 (1999); Cal. Ins. Code § 533. Arizona law, by contrast, permits insurers to indemnify insureds for such awards. See Price v. Hartford Accident and Indemnity Co., 502 P.2d 522, 524--25 (Ariz. 1972). Accordingly, California and Arizona law are in conflict.

Plaintiff argues that there is no true conflict here because ultimately the same result would obtain under either California or Arizona law. Although Arizona law permits insurers to indemnify insureds for punitive damages, it does not require them to do so. Liability for punitive damages may be excluded by the terms of an insurance policy under Arizona law. See Price, 502 P.2d at 525. Plaintiff contends that the terms of the policy here exclude punitive damages from coverage, and thus the result would be identical under either California or Arizona law.

To support this conclusion, Plaintiff argues that Arizona case law interpreting the relevant policy language at issue here holds that such language excludes coverage for punitive damages. That policy language requires Plaintiff to "pay all sums an 'insured' legally must pay as damages because of 'bodily injury.'" (Pl.'s SUF ¶ 8; Candelaria Defs.' SGI at 4:9--17; Lebsacks' SGI at 4:2--8.) Plaintiff argues punitive damages are excluded from the scope of this language under State Farm Mut. Auto. Ins. Co. v. Wilson, 782 P.2d 723 (Ariz. Ct. App. 1989), which held that punitive damages were outside the scope of coverage where the relevant policy language required the insurer to "pay damages for bodily injury." Id. at 724.

This argument is flawed, however. The State Farm court itself recognized that "the term 'because of bodily injury' arguably has a broader and more inclusive meaning than the term 'for bodily injury.'" Id. at 724. The parties in State Farm, in fact, agreed that punitive damages were included within the term "because of bodily injury." Id. Under Arizona law, it appears that it is, at a minimum, possible that punitive damages would be covered by the term "because of bodily injury."

Thus, a conflict between California and Arizona law exists, as California law would prohibit Plaintiff from paying any punitive damage award against the Candelaria Defendants, and Arizona law permits such a payment. See Stonewall, 14 Cal. App. 4th at 644--45. The plain language of the Policy does not foreclose the possibility of liability for a punitive damages award under Arizona law.

ii. The Interests of California and Arizona in Applying Their Respective Laws Are in Conflict

California and Arizona have competing interests with respect to application of their rules concerning indemnification of punitive damages. The California Supreme Court has expressed the interest of the California government in prohibiting indemnification as follows:

"[T]he purposes of punitive damages[] in California... are to punish the defendant and to deter future misconduct by making an example of the defendant. If we were to allow the intentional wrongdoer... to shift responsibility for its morally culpable behavior to the insurance company, which surely will pass [on] to the public its higher cost of doing business, we would defeat the public policies of punishing the intentional wrongdoer for its own outrageous conduct and deterring it and others from engaging in such conduct in the future."

PPG Inds., 20 Cal. 4th at 317 (internal citations omitted).

Here, California has a clear interest in applying these principles to culpable conduct within its borders. See Stonewall, 14 Cal. App. 4th at 649 ("California's paramount interest is in protecting its residents by deterring tortfeasors."). California's interest in punishing wrongdoers and deterring malicious conduct within its own borders is not diminished by the fact that the Policy was obtained in Arizona and involves non-California entities.

The Lebsacks' argument that California "has absolutely no interest in denying or limiting the tort recovery of one of its citizens against a non-California citizen," (Lebsacks' Opp'n at 11:25--26), is not well-taken. This argument misapprehends both the nature of the policy behind California's rule against indemnity of punitive damage awards and the purpose of punitive damages. The guiding policy behind the rule against indemnification is to punish wrongdoers and deter malicious conduct, not to maximize the chances of recovery of punitive damages for victims. Moreover, the purpose of punitive damages is not to compensate victims. Any compensatory damages awarded to the Lebsacks in the Underlying Action will be unaffected by the outcome of this action. Plaintiff's duty to indemnify the Candelaria Defendants for any compensatory damage award is not at issue here.

Arizona likewise has an interest in having its laws applied to this dispute. The Arizona Supreme Court, while acknowledging the concerns of states, like California, that prohibit insurers from indemnifying insureds for punitive damage awards, has discounted these concerns. In Price, the Arizona Supreme Court held that Arizona's countervailing public policy "that an insurance company which admittedly took a premium for covering all liability for damages, should honor its obligation" took precedence over public policy concerns favoring prohibition of indemnification. See Price, 502 P.2d at 524. Arizona thus has an interest in ensuring that insurers operating within its borders honor their contractual obligations to Arizona citizens, including Arizona businesses. Arizona's interest conflicts with California's.

iii. California's Interest Would Be More Impaired If Its Interest Were Not Applied

In Stonewall, the California Court of Appeal was confronted with a similar conflict between California's law prohibiting indemnification of punitive damage awards and Wisconsin law, which allowed such indemnification for policy reasons substantially similar to those of Arizona. Stonewall, 14 Cal. App. 4th at 642--645. The Stonewall court recognized "California's paramount interest... in protecting its residents by deterring tortfeasors," and that because "the liability imposed grew out of severe injury suffered by a California resident while he was in California and [was] caused by manufacturing and marketing activities which occurred exclusively in this state[,] [i]t is difficult to imagine circumstances where California would have a greater interest in altering the future behavior of a defendant by compelling payment directly from the defendant rather than its insurers." Id. at 649. California has a great interest in ensuring that wrongdoers bear the full brunt of any punitive damage award.

This interest would be frustrated here by application of Arizona law. Assuming the Underlying Action results eventually in a punitive damage award, application of Arizona law would likely impair California's interest by permitting a wrongdoer to shift the burden of his punishment onto a third party. See id. at 649 ("[F]ailure to apply California's rule would severely impair California's interests."). California's twin interests in punishment and deterrence would be entirely frustrated.

Furthermore, application of foreign law in situations such as this would create a class of persons - those who travel to California from states that allow for indemnification of punitive damages - whom California is unable to punish for or deter from malicious conduct, even though such conduct occurs within California's borders. This would represent a serious impairment of California's interest.

By contrast, though Arizona does have an interest in seeing that insurers operating within its borders honor their obligations, that interest is somewhat diminished when the insured chooses to operate outside of Arizona. It should come as no surprise to insureds who choose to operate outside of Arizona that they may be subject to the laws of states other than Arizona. Moreover, Arizona's interests would not be as severely impaired by application of California law as California's would by application of Arizona's, because it would have no effect whatsoever on matters wholly internal to Arizona.

Applying these factors, California's interest in application of its law is more significant, and is more likely to be impaired by application of Arizona law than vice versa.


As discussed above, California law applies to this dispute and prohibits insurers from indemnifying insureds for punitive damage awards. Accordingly, Plaintiff is prohibited from indemnifying the Candelaria Defendants for any punitive damage award arising out of the Underlying Action. The Court GRANTS Plaintiff's motion for summary judgment. For the reasons discussed above, the Court DENIES the Candelaria Defendants' motion to transfer.*fn7

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