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Century Surety Company v. 350 W.A.

September 28, 2011

CENTURY SURETY COMPANY,
PLAINTIFF,
v.
350 W.A., LLC, ET AL.,
DEFENDANTS.



The opinion of the court was delivered by: M. James Lorenz United States District Court Judge

ORDER GRANTING MOTION FOR SUMMARY JUDGMENT [doc. #254] AND RELATED COUNTERCLAIMS.

Plaintiff/counterdefendant Century Surety Company moves for summary judgment or in the alternative for summary adjudication. [doc. #254] In its motion, plaintiff seeks a declaration that it is entitled to rescind the insurance policy and is not liable under an insurance policy it issued because of 350's late tender. Century also seeks summary judgment on counterclaimants' breach of contract and bad faith claims. The motion has been fully briefed and is considered without oral argument.

Background

David A. Blackburn purchased a commercial office building at 350 West Ash Street in San Diego from Hokojitsugyo Co., LTD. During escrow, the building sustained significant damage due to multiple flooding incidents. Nevertheless, Blackburn completed the purchase with the Grant Deed recorded on May 15, 2003. Immediately thereafter Blackburn transferred the property to 350 W.A. LLC, which was formed for the property ownership, with the Grant Deed also recorded on May 15, 2003. Century issued a commercial general liability policy, CCP267153 to 350, for the 350 West Ash commercial office building with an effective date of May 15, 2003.

At the time of the transfer of ownership, Jacqueline Helleis ("Helleis") was and had been leasing space in the building for her business, Flagship Research ("Flagship").*fn1

On May 15, 2003, 350, by letter signed by Blackburn, advised the building tenants that their leases -- including Flagship's lease -- were being terminated due to environmental and fire safety concerns. Blackburn had determined the building to be uninhabitable.

On June 12, 2003, Helleis filed a Complaint against 350 and Blackburn in the Superior Court for the County of San Diego ("underlying action" or "Helleis"). The Helleis action included causes of action for breach of contract, breach of the covenant of good faith and fair dealing, breach of the covenant of quiet enjoyment, constructive eviction, nuisance, and declaratory relief. Neither 350 nor Blackburn tendered their claim for defense to Century at any time during the course of the trial. Instead, 350 and Blackburn retained the law firm of Duckor Spradling Metzger and Wynne to defend them in the Helleis action.

The Helleis bench trial concluded on June 27, 2005, with the court announcing its decision from the bench. The trial court dismissed plaintiff's causes of action for nuisance and declaratory relief and found in favor of Blackburn on all claims, but Helleis was successful in the remaining causes of action against 350. The trial court awarded Helleis damages in the amount of $504,826.44, and attorneys' fees of $295,902.00 against 350 only.

On July 8, 2005, twelve days after the trial court made its decision, 350 tendered a claim for defense and indemnity to Century. Four days after 350 tendered the claim, the state court entered judgment against 350. On July 27, 2005, Century sent 350 notice it would defend it in post-judgment and appellate proceedings under a reservation of rights. Century then filed the above-captioned case against 350 and Helleis on August 3, 2005, seeking a declaration of its rights and duties under the policy it issued to 350 contending it had no obligation to defend or indemnify 350. 350 filed an answer on October 3, 2005. 350 and Blackburn filed a counterclaim for declaratory relief, breach of written contract, and breach of the implied covenant of good faith and fair dealing on October 3, 2005.

350 timely filed an appeal in the underlying state court action. As previously noted, Blackburn was found not liable on all of the claims brought against him in the Helleis action. Neither Blackburn nor Helleis appealed the decision. In an effort to obtain an appeal bond to protect 350's assets from immediate and allegedly aggressive execution by the judgment creditor (Helleis), Century, Blackburn and 350 entered into an "Agreement to Procure Appeal Bond" ("Bond Agreement") whereby Century would provide, for a six-month period only, collateral as security for the appeal bond and after that time period expired, 350 and Blackburn would substitute their collateral as security for the appeal bond. Under the parties' Bond Agreement, in the event Blackburn and 350 did not substitute their collateral within the six-month period, a Stipulated Judgment would be entered in Century's favor against Blackburn, 350 and other entities associated with Blackburn. After the six-month period expired, along with several extensions of time, Blackburn and 350 failed to substitute their own collateral for the appeal bond. Plaintiff eventually advised Blackburn's counsel that it would be filing an application for entry of judgment -- the Stipulated Judgment -- in accordance with the parties' Bond Agreement.

The California Court of Appeal affirmed the Helleis trial court in its entirety on July 11,

After full briefing, the Court granted plaintiff's motion for entry of the stipulated judgment on September 25, 2007. In that same Order, the Court granted plaintiff's motion for summary judgment finding that the insurance policy did not provide coverage for breaches of contract or for constructive eviction of a business entity from a commercial building. Because of the grant of summary judgment in Century's favor, all claims brought by 350 and Blackburn in their counterclaim were denied with the Court making no findings as to whether Century was substantially prejudiced as a matter of law by 350's late tender or Blackburn's standing to bring counterclaims in this action.

350 and Blackburn appealed the Court's decision to the Ninth Circuit Court of Appeals. In its decision, the Ninth Circuit affirmed the district court's entry of the stipulated judgment but reversed the summary judgment portion of the Order finding coverage under the relevant provision of the policy. Century Sur. Co. v. Helleis, 367 Fed. Appx. 765 (9th Cir. 2010). The Court of Appeals later clarified that its decision did not foreclose further factual development in the district court of Century's claim that a late tender caused substantial prejudice. (Doc. #233.)

Century again moves for summary judgment on its claims and on 350's and Blackburn's counterclaims.

Legal Standard

Rule 56 of Federal Rules of Civil Procedure empowers the court to enter summary judgment on factually unsupported claims or defenses, and thereby "secure the just, speedy and inexpensive determination of every action." Celotex Corp. v. Catrett, 477 U.S. 317, 325, 327 (1986). 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 a judgment as a matter of law. FED. R. CIV. P. 56(c).

The moving party's burden on summary judgment depends on whether it bears the burden of proof at trial with respect to the claim or defense at issue. "When the party moving for summary judgment would bear the burden of proof at trial, it must come forward with evidence which would entitle it to a directed verdict if the evidence went uncontroverted at trial. In such a case, the moving party has the initial burden of establishing the absence of a genuine issue of fact on each issue material to its case." See C.A.R. Transp. Brokerage Co., Inc. v. Darden Restaurants, Inc., 213 F.3d 474, 480 (9th Cir. 2000) (citations omitted). If the moving party does not bear the burden at trial, it can meet its burden on summary judgment by pointing out the absence of evidence with respect to any one element of the claim or defense. See Celotex, 477 U.S. at 325.

If the movant meets its burden on summary judgment, the burden shifts to the non-movant to show summary adjudication is not appropriate. Celotex, 477 U.S. at 317, 324. In this regard, the non-movant must "go beyond the pleadings" and rely on "evidentiary materials" such as his "own affidavits, or . . . the depositions, answers to interrogatories, and admissions on file" to designate specific facts in opposition to the summary judgment motion. Celotex, 477 U.S. at 324 (internal quotation marks omitted). These evidentiary materials must show that genuine factual issues remain which "can be resolved only by a finder of fact because they may reasonably be resolved in favor of either party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250 (1986). If the moving party meets its burden, the party opposing summary judgment "may not rely merely on allegations or denials of its own pleading; rather, its response must ... set out specific facts showing a genuine issue for trial." FED. R. CIV. P. 56(e); see Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986). All inferences drawn from the evidence must be viewed in the light most favorable to the non-moving party, Eastman Kodak Co. v. Image Technical Servs., Inc., 504 U.S. 451, 456 (1992), but inferences must be based on evidence which, if believed, would be sufficient to support a judgment for the nonmoving party. Celotex, 477 U.S. at 322. Moreover, inferences cannot be created by pointing to "some metaphysical doubt as to the material facts." Matsushita, 475 U.S. at 586 (citations omitted). Instead, deference to the nonmoving party has limits: (1) a plaintiff cannot rest on allegations in his pleadings to overcome a motion for summary judgment, Brinson, 53 F.3d at 1049; and (2) self-serving affidavits do not establish a genuine issue of material fact if they fail to state facts based on personal knowledge or are too conclusory. Rodriguez v. Airborne Express, 265 F.3d 890, 902 (9th Cir. 2001).

Determinations regarding credibility, the weighing of evidence, and the drawing of legitimate inferences are jury functions, and are not appropriate for resolution by the court on a summary judgment motion. Id.

Rescission

The Court first looks to plaintiff's claim for rescission that was included in its first amended complaint filed September 14, 2007. If the policy is rescinded, the counterclaims for breach of contract and bad faith fail as a matter of law.

Century contends that it is entitled to rescind the insurance policy based on two material, false responses Blackburn provided in the policy application.

Material misstatements or concealment of material facts in an application for insurance, even if unintentional, entitle an insurer to rescind the insurance policy. Mitchell v. United Nat. Ins. Co., 127 Cal.App.4th 457, 468-469 (2005) ; INS. CODE, §§ 331, 359. The insurer must prove that the insured made a material "false representation" in the application. A representation is false "when the facts fail to correspond with its assertions or stipulations." (§ 358.) Materiality is determined under "a subjective test; the critical question is the effect the truthful answers would have had on [the insurer], not on some 'average reasonable' insurer." Imperial Casualty & Indemnity Co. v. Sogomonian, 198 Cal. App.3d 169, 181 (1988). "Materiality is to be determined not by the event, but solely by the probable and reasonable influence of the facts upon the party to whom the communication is due, in forming his estimate of the disadvantages of the proposed contract, or in making his inquiries." INS. CODE, § 334.

Insurance Code §§ 331 and 359 impose "heavy burdens of disclosure" "upon both parties to a contract of insurance, and any material misrepresentation or the failure, whether intentional or unintentional, to provide requested information permits rescission of the policy by the injured party." Mitchell (quoting Imperial, 198 Cal. App.3d at 179-80). Insurance Code § 332, provides that each party to an insurance contract disclose, ...


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