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Michael C. Behnke v. State Farm General Insurance Company

May 31, 2011

MICHAEL C. BEHNKE, PLAINTIFF AND APPELLANT,
v.
STATE FARM GENERAL INSURANCE COMPANY, DEFENDANT AND RESPONDENT.



(Super. Ct. No. GIC861772) APPEAL from a judgment of the Superior Court of San Diego County, David B. Oberholtzer, Judge. Affirmed.

The opinion of the court was delivered by: Nares, J.

Certified for publication 6/29/11 (order attached)

This breach of contract, insurance bad faith, and fraud action brought by plaintiff Michael C. Behnke against his residential property insurer─defendant State Farm General Insurance Company (State Farm)─arose from an attorney fees dispute between State Farm and the law firm of English & Gloven, which Behnke had selected as his independent Cumis counsel*fn1 to defend him against a third-party lawsuit. In his fee agreement with English & Gloven, Behnke agreed to be personally liable for the firm's fees in the event State Farm failed to make full and timely payments. After objecting that English & Gloven's fees were excessive and attempting to replace the firm as Behnke's independent counsel, State Farm allowed English & Gloven to continue representing Behnke and allegedly promised at a January 2004 meeting to pay all of English & Gloven's fees that State Farm had not paid as of the time of the meeting. State Farm eventually paid $50,000 to settle the underlying lawsuit against Behnke. By that time, English & Gloven had billed State Farm a total of about $199,000 in fees and costs. The attorney fees dispute arose when State Farm paid $140,000 to English & Gloven but refused to pay the remaining $59,000. Meanwhile, Behnke signed a promissory note in the amount of $127,000 in favor of English & Gloven secured by a deed of trust on his home. State Farm obtained an order compelling mandatory binding arbitration under Civil Code*fn2 section 2860, subdivision (c) (hereafter section 2860(c)), and the arbitrator reduced the disputed $59,000 attorney fees claim by $16,000 to $43,000, which the arbitrator awarded to English & Gloven with interest. English & Gloven foreclosed on the deed of trust given by Behnke, and State Farm paid English & Gloven's reduced attorney fees claim with interest.

Behnke appeals from a judgment entered in favor of his residential property insurer, defendant State Farm, after the trial court (1) sustained without leave to amend State Farm's general demurrer to the fraud, promissory fraud, and equitable estoppel causes of action asserted in Behnke's second amended complaint; and (2) granted summary judgment in favor of State Farm on Behnke's remaining claims for breach of contract, bad faith denial of insurance benefits, and punitive damages.

Behnke contends the court erred by (1) sustaining without leave to amend State Farm's demurrer to the third cause of action for fraud, fourth cause of action for promissory fraud, and fifth cause of action for equitable estoppel; and (2) granting State Farm's summary judgment motion as to Behnke's remaining first cause of action for breach of contract, second cause of action for bad faith denial of insurance policy benefits, and claim for punitive damages. We affirm the judgment.

FACTUAL AND PROCEDURAL BACKGROUND*fn3

A. Behnke's State Farm Policy and the Castaneda Action Against Him

State Farm issued to Behnke a rental dwelling policy (the policy) for a condominium located in San Diego. Behnke sold the property to Maria Castaneda, who made a third-party claim against his State Farm policy after she discovered mold in the condominium. Castaneda later brought suit against Behnke and others (hereafter occasionally referred to as the Castaneda action), alleging Behnke concealed the mold by painting over it before he sold her the property.

B. Tender of Behnke's Defense and His Hiring of English & Gloven

In February 2003 Behnke tendered to State Farm the defense of the Castaneda action, and he retained the law firm of English & Gloven as his defense counsel. The retainer agreement, dated February 20, 2003, provided that English & Gloven would defend Behnke, who would pay English & Gloven's fees at a negotiated hourly rate if State Farm did not provide him a defense, and that, if State Farm provided a defense and promptly paid all of English & Gloven's invoices "without offset or discount," Behnke would not be responsible for the attorney fees. The retainer agreement also provided that, if State Farm failed to make full and timely payments, Behnke would be required to pay an hourly rate of $295 for work performed by Donald English (English) and $220 per hour for work performed by Jeffrey Flynn. State Farm was not a party to the written retainer agreement between Behnke and English & Gloven.

C. State Farm's Agreement To Defend Behnke Under a Reservation of Rights

In a letter to English & Gloven dated February 27, 2003, State Farm stated that it accepted the tender of Behnke's defense of the Castaneda action subject to the reservation of rights outlined in its letter to Behnke (discussed, post) and that it agreed to pay English & Gloven $160 per hour to defend him. According to Behnke's second amended complaint against State Farm, which is the subject of this appeal, State Farm allegedly agreed to pay an unspecified higher rate ("English & Gloven's normal hourly billing rates") if State Farm did not promptly remit timely payments to English & Gloven. State Farm's letter to English & Gloven confirming the retention, however, did not reference any such alleged agreement. State Farm paid English & Gloven's invoices from February through June 2003, during which time the invoices averaged about $5,300 per month.

In that letter to English & Gloven, State Farm accepted Behnke's choice of English & Gloven as his defense counsel subject to the provisions of section 2860, which limits the fees an insurer is obligated to pay for Cumis counsel and mandates final and binding arbitration of any fee disputes. (§ 2860(c).)

In its letter to Behnke dated February 28, 2003, State Farm informed him that it agreed to defend him in the Castaneda action, but that it was reserving its right to deny coverage on various grounds. State Farm reserved its right to deny coverage on the ground Behnke's concealment of the mold was not an "occurrence" within the meaning of the policy, which defined "occurrence" as an "accident." State Farm also reserved the right to deny coverage based on an exclusion that applied to any personal injury or property damage that was intended or expected by Behnke as the insured.

D. State Farm's Objection that English & Gloven's Bills Were Excessive

In late November 2003 State Farm wrote to English & Gloven objecting that its bills were "grossly excessive." State Farm's letter stated that from March 31 through October 31 of 2003, English & Gloven had billed for 636.5 hours, for a total of more than $91,000 in fees, even though the case was still in its early stages and only four non-expert depositions had been taken.

E. State Farm's Modification of Its Reservation of Rights and Notice to Behnke that English & Gloven Would Be Replaced

State Farm took steps to retain new defense counsel. State Farm Team Manager Sharon Handlin decided to modify State Farm's reservation of rights to eliminate any coverage dispute that could give rise to a right to Cumis counsel, and on December 17, 2003, she sent an amended reservation of rights letter to Behnke informing him he that was no longer entitled to independent counsel under section 2860 and that State Farm was advising English & Gloven to transfer Behnke's defense to attorney Joseph J. Barr.

F. English & Gloven's Resistance to the Replacement of Defense Counsel in the Castaneda action and Its January 2004 Meeting with State Farm

English & Gloven disputed State Farm's position that Behnke was no longer entitled to independent counsel. In a letter to State Farm dated December 23, 2003, English & Gloven maintained that State Farm was still obligated to pay English & Gloven as Behnke's independent counsel despite State Farm's amended reservation of rights letter.

English & Gloven continued to represent Behnke as defense counsel in Castaneda's lawsuit against him and informed State Farm that Behnke would not accept Barr as his sole defense counsel unless State Farm agreed to withdraw all reserved rights.

At a meeting held on January 14, 2004 (the January 2004 meeting), English & Gloven met with Handlin and State Farm's assigned claims adjuster, Ted Krempa, to discuss Behnke's defense. According to the allegations in Behnke's second amended complaint, Handlin and Krempa agreed on State Farm's behalf that (1) Behnke was still entitled to independent counsel, even under State Farm's amended reservation of rights; (2) State Farm would continue to use English & Gloven as Behnke's defense counsel in the Castaneda action; (3) State Farm and English & Gloven would pursue a litigation and settlement strategy that Handlin, Krempa, and English & Gloven all agreed to at that meeting; (4) Barr would perform no additional work on behalf of Behnke in the Castaneda action; and (5) Handlin "would arrange for the payment of English & Gloven's attorney's fees and costs which had not been paid as of that date."

G. State Farm's Payment of $50,000 To Settle Castaneda's Claims Against Behnke

In March 2004 the underlying Castaneda action was mediated, and the parties reached a settlement under which State Farm agreed to pay $50,000 to settle the claims against Behnke. The settlement was ultimately finalized in mid-June 2004.

By the time the Castaneda case ended, English & Gloven had billed State Farm a total of about $199,000 for fees.

H. State Farm's Payment of $140,000 to English & Gloven, Its Refusal To Pay an Additional $45,000, and English & Gloven's Refusal To Arbitrate the Fee Dispute

Kenneth Greenfield, an attorney hired by State Farm to evaluate the necessity and reasonableness of fees and costs incurred by English & Gloven in Behnke's defense, opined that the amounts billed by English & Gloven in excess of $140,000 were unnecessary and unreasonable.

In June 2004 State Farm informed English & Gloven that State Farm would be willing to pay English & Gloven a total of $140,000 for English & Gloven's defense of Behnke. State Farm provided English & Gloven with a check in the amount of about $104,000, which, combined with the roughly $36,000 State Farm had already paid it, brought to $140,000 the total amount State Farm paid to English & Gloven.

English & Gloven, however, claimed an additional $45,000.*fn4 State Farm repeatedly invited English & Gloven to arbitrate the dispute over the remaining $45,000 claimed by English & Gloven, which refused to participate in arbitration.

I. Behnke's Promissory Note to English & Gloven, Secured by His Home

In February 2005 Behnke signed a promissory note in favor of English & Gloven in the amount of $127,606.14. The amount of the promissory note included the fees English & Gloven had billed for Behnke's defense in the lawsuit filed by Castaneda, the fees it billed Behnke for representing him in his coverage dispute with State Farm, and $55,000 in fees billed for other matters. Behnke also signed a deed of trust on his home to secure his obligations to English & Gloven.

J. English & Gloven's Lawsuit Against State Farm on Behnke's Behalf

In February 2006 English & Gloven brought this breach of contract and tort action against State Farm on Behnke's behalf.

K. State Farm's Motion To Compel Arbitration

In January 2007 State Farm's motion to compel arbitration of the fee dispute under section 2860(c) was granted.

L. Behnke's Bankruptcy, the Discharge of His Debt, and English & Gloven's Foreclosure on the Deed of Trust

In April 2007 while this action was pending, Behnke filed a petition for chapter 7 bankruptcy. Behnke's debt to English & Gloven for its services was discharged in the bankruptcy action. After relief from stay was granted, English & Gloven foreclosed on its deed of trust in order to protect its security interest in Behnke's home.

M. Arbitration Award

In early March 2008 the fee dispute at issue in this case was arbitrated before Thomas E. Sharkey, Esq. (the arbitrator), who, in his July 2008 interim arbitration award, determined that English & Gloven's claim for fees, which (as already noted) had increased to $58,907.64, should be reduced by $16,000 to $42,907.64. The arbitrator found that some of the time English & Gloven had spent on the matter was "excessive in the sense that the benefit to the case was outweighed by the cost charged for that work." The arbitrator later corrected the interim arbitration award by awarding prejudgment interest.

N. State Farm's Payment of the Confirmed Arbitration Award

In September 2008 the court confirmed the arbitrator's corrected award. State Farm paid to English & Gloven the full amount it owed under that award ($42,907.64 plus prejudgment interest in the amount of $9,290.40, for a total of $52,198.04).

DISCUSSION

I. STATE FARM'S GENERAL DEMURRER

Behnke first contends the court erred in sustaining without leave to amend State Farm's demurrer to the third cause of action for fraud, fourth cause of action for promissory fraud, and fifth cause of action for equitable estoppel asserted in his second amended complaint. We reject this contention.

A. Applicable Legal Principles

1. General demurrers

"A demurrer tests the legal sufficiency of factual allegations in a complaint." (Rakestraw v. California Physicians' Service (2000) 81 Cal.App.4th 39, 42.) A general demurrer challenges the legal sufficiency of the complaint on the ground it fails to state facts sufficient to constitute a cause of action. (See Code Civ. Proc., § 430.10, subd. (e).)

Whether a complaint states facts sufficient to constitute a cause of action is a question of law. (Hernandez v. City of Pomona (1996) 49 Cal.App.4th 1492, 1497.) We therefore review de novo the sustaining of a general demurrer. (Zelig v. County of Los Angeles (2002) 27 Cal.4th 1112, 1126.)

When a general demurrer is sustained without leave to amend, "we decide whether there is a reasonable possibility that the defect can be cured by amendment: if it can be, the trial court has abused its discretion and we reverse; if not, there has been no abuse of ...


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