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Mga Entertainment, Inc., et al. v. the Hartford Insurance Group

February 24, 2012

MGA ENTERTAINMENT, INC., ET AL. PLAINTIFFS,
v.
THE HARTFORD INSURANCE GROUP, ET AL., DEFENDANTS.



The opinion of the court was delivered by: David O. Carter United States District Judge

ORDER GRANTING (1) LEXINGTON'S MOTION FOR SUMMARY JUDGMENT (Dkt. No. 333), AND (2) GRANTING THE CHARTIS EXCESS INSURERS' MOTION FOR SUMMARY JUDGMENT (Dkt. No. 342)

Before the Court are two Motions for Summary Judgment, the first filed by Lexington Insurance Company ("Lexington") (Dkt. 333) and the second filed by National Union Fire Insurance Co. of Pittsburgh, PA ("National Union") and Chartis Specialty Insurance Co. ("Chartis") (collectively, the "Chartis Excess Insurers") (Dkt. 342). Together, Lexington and the Chartis Excess Insurers are referred to as the Chartis Member Companies.*fn1 After considering the papers for and against the Motions and oral argument, the Court GRANTS the Motions.

I.Background

This consolidated action arises from coverage disputes surrounding the defense of MGA Entertainment, Inc. ("MGA") in the underlying case Carter Bryant v. Mattel, Inc., Case No. 04-09049 (the "Mattel Action"). Because the parties are intimately familiar with the undisputed background facts of both the Mattel Action and this consolidated coverage action, they are repeated here only as necessary to support the Court's ruling.

In the Mattel Action, MGA tendered its defense to Crum & Forster on January 5, 2007. Crum & Forster denied coverage on July 3, 2007. After Mattel filed its SAAC, on October 22, 2007, MGA tendered its defense to The Hartford Insurance Group ("Hartford") and Evanston, both of which declined to defend. In November 2007, MGA also tendered its defense to Lexington. Lexington first declined to defend, but stated that it would "monitor" the claims. Also in November 2007, MGA tendered its defense to National Union and Chartis.

On April 3, 2008, MGA sued Crum & Forster, Hartford, and Lexington. On January 7, 2009, MGA sued Evanston. These actions, alleging breach of the insurance agreements and breach of the implied covenant of good faith and fair dealing, were consolidated into the present action. The first three actions were resolved ultimately by settlement; the action against Evanston remains unresolved.

In response to MGA's lawsuit, in May 2008, Lexington agreed to participate in MGA's defense pursuant to a reservation of rights. Lexington agreed to reimburse MGA at the customary rates for similar work in the jurisdiction, citing California Civil Code § 2860. After MGA began submitting invoices to Lexington, Lexington retained Jim Wagoner of McCormick, Barstow, Sheppard, Wayte & Carruth LLP ("McCormick") to review MGA's invoices. Lexington stated that the review was to determine whether the invoices were objectively reasonable, and to apply the § 2860 rates. Upon reviewing invoices, McCormick recommended certain payments, net of deductions, be made to MGA. Those payments are discussed in further detail below.

In addition to Lexington, the Chartis Excess Insurers also agreed to participate in funding MGA's defense after Evanston, which had the primary scheduled coverage below the Chartis Excess Insurers, declined to defend.

After the Chartis Member Companies agreed to defend MGA, a dispute over billing rates arose. After negotiations, the Chartis Member Companies entered into a confidential settlement agreement with MGA (the "Chartis-MGA Settlement Agreement") that resolved the billing rate disputes for fees incurred through September 30, 2008. The Chartis-MGA Settlement Agreement set forth hourly rates and reimbursement limits which the Chartis Member Companies agreed to follow. Following an independent review by McCormick, the parties also agreed on the total amount of fees and costs MGA would be paid from the date of tender through September 30, 2008. The total amount paid pursuant to the Chartis-MGA Settlement Agreement is discussed in further detail below. Pursuant to the Chartis-MGA Settlement Agreement, MGA also released the bad faith claim it brought against Lexington based on Lexington's initial failure to defend.

On June 24, 2009, Judge Larson entered an order finding that Crum & Forster and Evanston had an ongoing duty to defend MGA beginning at the time of tender. That order explained that allegations in Mattel's SAAC triggered the duty to defend. In November 2009, both Crum and Forster and Evanston began participating in MGA's defense on a going-forward basis. Because only the Chartis Member Companies paid for MGA's defense from May 2008 until Judge Larson's order finding a duty to defend, they brought a contribution action against Evanston and Crum & Forster. As part of that dispute, the Chartis Member Companies filed the present Motions for Summary Judgment seeking reimbursement from Crum & Forster and Evanston for the post-tender period in which the other primary insurers were not participating. As stated previously, due to a settlement, the Motions have been withdrawn with respect to Crum & Forster.

II.Legal Standard

Summary judgment is proper if "the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c). The court must view the facts and draw inferences in the manner most favorable to the non-moving party. United States v. Diebold, Inc., 369 U.S. 654, 655 (1992); Chevron Corp. v. Pennzoil Co., 974 F.2d 1156, 1161 (9th Cir. 1992). The moving party bears the initial burden of demonstrating the absence of a genuine issue of material fact for trial, but it need not disprove the other party's case. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256 (1986); Celotex Corp. v. Catrett, 477 U.S. 317, 323-25 (1986). When the non-moving party bears the burden of proving the claim or defense, the moving party can meet its burden by pointing out that the non-moving party has failed to present any genuine issue of material fact. Musick v. Burke, 913 F.2d 1390, 1394 (9th Cir. 1990).

Once the moving party meets its burden, the opposing party must set out specific facts showing a genuine issue for trial; merely relying on allegations or denials in its own pleading is insufficient. See Anderson, 477 U.S. at 248-49. A party cannot create a genuine issue of material fact simply by making assertions in its legal papers. S.A. Empresa de Viacao Aerea Rio Grandense v. Walter Kidde & Co., Inc., 690 F.2d 1235, 1238 (9th Cir. 1982). Rather, there must be specific, admissible evidence identifying the basis for the dispute. Id. The Supreme Court has held that "[t]he mere existence of a scintilla of evidence . . . will be insufficient; there must be evidence on which the jury could reasonably find for [the opposing party]." Anderson, 477 U.S. at 252.

III.Lexington's Motion

a.Equitable Contribution

Under California law, "[a]n action for equitable contribution allows an insurer to sue for pro rata reimbursement from another insurance company when it has defended a mutually insured party without participation by the other insurance company." Hudson Ins. Co. v. Colony Ins. Co., 624 F.3d 1264, 1267 (9th Cir. 2010) (citing Monticello Ins. Co. v. Essex Ins. Co., 162 Cal. App. 4th 1376, 76 Cal. Rptr. 3d 848, 856 (2008)). Equitable contribution is invoked where the party seeking contribution wishes to recover from a co-obligor, in other words, a party who shares in the same liability. Monticello, 162 Cal. App. 4th at 1385. Specifically, "[i]n the insurance context, the right to contribution arises when several insurers are obligated to indemnify or defend the same loss or claim, and one insurer has paid more than its share of the loss or defended the action without any participation by the others." Id. The purpose of this rule of equity is to accomplish substantial justice by equalizing the common burden shared by coinsurers, and to prevent one insurer from profiting at the expense of others." Id. at 1386 (quoting Fireman's Fund Ins. Co. v. Maryland Casualty Co., 65 Cal. App. 4th 1279, 1293) (citations and footnote omitted).

"[I]n an action for equitable contribution by a settling insurer against a nonparticipating insurer, the settling insurer has met its burden of proof when it makes a prima facie showing of coverage under the nonparticipating insurer's policy-the same showing necessary to trigger the recalcitrant insurer's duty to defend-and [] the burden of proof then shifts to the nonparticipating insurer to prove the absence of actual coverage." Safeco Ins. Co. of Am. v. Superior Court, 140 Cal. App. 4th 874, 881, 44 Cal. Rptr. 3d 841, 846 (2006).

b.Duty to Defend

Because Lexington was the only primary insurer to defend during the relevant time period, Lexington is entitled to contribution from Evanston for defense costs if it establishes a potential for coverage on behalf of MGA under Evanston's policies. See Monticello, 162 Cal. App. 4th at 1386. See also Scottsdale Ins. Co. v. Century Sur. Co., 182 Cal. App. 4th 1023, 1035, 105 Cal. Rptr. 3d 896, 906 (2010) ("[A] single insurer who bears the entire defense burden has paid more than its fair share of the defense costs.").

As previously discussed, on June 24, 2009, this Court already found that Evanston had a duty to defend MGA based on the allegations in the SAAC. This ruling is a sufficient basis for finding that Lexington has met its burden to show the potential for coverage. Indeed, this issue has already been resolved. Evanston's opposition does not present any substantive challenges to the finding of a duty to defend (from the date of tender until Evanston started participating in MGA's defense) because the Court has already adjudicated this issue. Accordingly, because the duty to defend has been established, the Court concludes that Lexington is entitled to contribution from Evanston.

c.Allocation of Settlement Agreement Payments

Evanston argues that Lexington may not seek contribution because the Chartis-MGA Settlement Agreement does not allocate the settlement amount between defense costs incurred in the Mattel Action and the release of MGA's bad faith claim. Citing Essex Ins. Co. v. Heck, 186 Cal. App. 4th 1513, 1527-28 (2010), Evanston argues that where a settlement agreement does not apportion the settlement between payment of claims covered under the policy (i.e., breach of contract), and other claims (e.g., bad faith), the settling insurer may not seek contribution from other insurers.

In Essex, the California Court of Appeal found that an insurer seeking equitable subrogation from a physician waived its claim to recover $700,000 paid to an injured party as settlement of personal injury claims and two related actions for declaratory relief and bad faith. The court based its holding on the fact that the settlement agreement did not identify the insured or the amount paid to settle the medical malpractice claims against the physician, and it did not apportion damages between economic and non-economic injuries. The court reasoned that allowing the insurer to seek equitable subrogation from the physician would place the physician in a position of having to prove unprovable facts such as how much was paid to settle the medical malpractice claim.

In discussing the equitable subrogation claim, the Essex court noted that in order for the insurer to prevail, the insurer had to prove that it compensated the injured party for the same loss for which the physician was liable. Id. at 1523. Turning to the elements of equitable subrogation, the court asked whether the insurer proved that its settlement payment included payment for personal injury damages of the injured party on behalf of the insured (the second element) and the amount it paid for these damages (sixth element). Id. The court looked to the insurer's settlement agreement with the injured party and found that it released not only the named insured, the insurer, and the insurer's attorneys, but another third party as well, and the release was for all claims arising from the incident, including claims asserted in the personal injury action, the declaratory relief action, and the bad faith action. Id. at 1524. Based on the blanket language in the settlement agreement, the court could not tell whether the insurer was stepping into the shoes of the insured and what amount was paid to compensate each claim.

As an initial matter, the Court notes that Essex is an equitable subrogation case, not an equitable contribution case. *fn2 See id. at 1522 (sole cause of action for indemnity based on equitable subrogation). In the insurance context, the doctrine of equitable subrogation "permits the paying insurer to be placed in the shoes of the insured and to pursue recovery from third parties responsible to the insured for the loss for which the insurer was liable and paid." Id. at 1522 (internal quotation marks omitted).

Lexington does not seek equitable subrogation from Evanston and the Court questions whether the analysis in Essex, which relies heavily on whether the insurer met the six elements of an equitable subrogation claim, may be imported to the present analysis of Lexington's equitable contribution claim.*fn3 See Emerald Bay Cmty. Ass'n v. Golden Eagle Ins. Corp., 130 Cal. App. 4th 1078, 1092, 31 Cal. Rptr. 3d 43, 55 (2005) ("The right of equitable contribution is not based on any right of subrogation to the rights of the insured, and is not equivalent to standing in the shoes of the insured.") (internal quotation marks and alteration omitted).

The other case cited by Evanston, United Auto. Ass'n v. Alaska Ins. Co., 94 Cal. App. 4th 638, 644-48 (2001), was also decided on equitable indemnity or equitable subrogation grounds. It does not address equitable contribution.

While neither of these cases is on point, and the Court was unable to find an equitable contribution case with similar facts, the Court agrees with Lexington that in order to succeed on its equitable contribution claim, Lexington must prove that it paid more than its fair share of defense and settlement costs such that some of what it paid is allocable to Evanston. See Scottsdale Ins. Co. v. Century Surety Co., 182 Cal. App. 4th 1023, 1036 (2010). In order for Lexington to meet its burden, it must be able to demonstrate the total amount it paid in defense and settlement costs, exclusive of any other payments made because they are irrelevant to this analysis. For example, any amount Lexington paid to release non-contractual claims brought by MGA against Lexington (e.g., bad faith) cannot be considered part of the total defense and settlement costs subject to contribution.

While the Chartis-MGA Settlement Agreement indeed releases MGA's initial bad faith claim against Lexington, the plain language of the settlement agreement demonstrates that the amounts paid correspond with defense fees and costs, and are thus allocable to Evanston based on Evanston's own concurrent obligation to defend MGA during this time period. If it was MGA's and/or the Chartis Member Companies' intent to allocate a portion of the settlement funds to settlement of the bad faith claim, then the allocation could have been set forth explicitly in the settlement agreement, the same way payment of the defense fees and costs was explained in detail. Instead, the Agreement releases the bad faith claim without allocation of any portion of the settlement amount. See Atlantic Mutual Ins. Co. v. J. Lamb, Inc., 100 Cal. App. 4th 1017, 1042-43, 123 Cal. Rptr. 2d 256, 275 (2002) (finding that the trial court properly resolved the issue of equitable contribution on summary judgment because if the insured intended to allocate some or all of the settlement amount to a bad faith claim against the insurance company, the insured should have caused such allocation to be explicitly set forth in the Settlement Agreement.) "As it is presently worded, [the Chartis-MGA Settlement Agreement] supports, rather than precludes, [Lexington's] pursuit of equitable contribution against [Evanston]." Id. at 1043.

Specifically, the Chartis-MGA Settlement Agreement provides that:

7. The Member Companies further agree that to date MGA and Larian are entitled to reimbursement for 16,141.52 partner hours, 5,375.00 counsel hours, 42,826.55 associate hours, 5,645.50 client specialist hours, 5,155.38 staff attorney hours, and 28,085.71 paralegal hours for work performed by independent counsel from the date of MGA's and/or Larian's initial tender, November 1, 2007, through September 30, 2008 (the "Agreed Hours"). The Agreed Hours when multiplied by the AIG Rates, results in an obligation to pay $25,144,808.20 (the "Settlement Fees"), less the Reimbursed Fees ($14,896,193.45) resulting in a net amount of $10,248,614.75 (the "Owed Fees").

8. The Member Companies agree to pay to MGA and Larian the Owed Fees ($10,248,614.75) plus the Additional Costs ($1,375,259.71), less the Credited Amount ($401,790.57) for a total payment of $11,222,083.89 (the "Settlement Amount"). *fn4

Parker Decl. [Under Seal] Ex. E at 6-7, ¶¶7-8.

This precise language details the agreed upon number of hours, hourly rates, and total agreed legal fees and costs to defend the Mattel Action for the relevant period. The detailed nature of this explanation supports the conclusion that the amount paid in settlement was to cover the defense fees and costs described in the Settlement Agreement. The Settlement Agreement does not describe any additional amounts paid to MGA to settle non-breach of insurance contract claims arising out of the billing dispute, including MGA's bad faith claim. Instead, after explaining the basis for the amount to be paid in settlement, the Agreement goes on to release claims relating to reimbursement, attorneys' fees, and bad faith, without any indication that the reimbursement of defense fees and costs should be partially allocated to these releases. While Evanston speculates as to why MGA did not allocate any sum to settlement of the bad faith claim, this speculation does not create a genuine issue of material fact in light of the plain language of the Agreement.

Similarly, although Evanston cites statements by MGA that the Chartis-MGA Settlement Agreement included payment for release of the bad faith claim, Khetan Decl., Exs. 3, 11, the nature of these statements is self-serving because MGA was trying to limit what offsets to defense costs Evanston could potentially seek. In other words, if MGA could limit possible offsets by a portion of the settlement that allegedly did not go toward reimbursement of defense fees and costs, in theory, Evanston would have to reimburse MGA for more fees and costs. This type of self-serving statement is insufficient to defeat summary judgment, especially when considered in light of the clear terms of the ChartisMGA Settlement Agreement.

The reimbursement of defense fees and costs set forth in the Settlement Agreement is further supported by the McCormick invoice review and the resulting recommended payments. The below table summarizes the relevant invoice review periods and recommended/issued payments. See Helsley Decl. [Under Seal], Exs. A-D.

Review Period

Invoice Review McCormick

Payment Amount

Letter

$1,000,000

Fees

Skadden: $27,178,827.43 OMM: $158,364.00

12/07-05/08

06/25/08 Further information requested re fees.

recommended due to MGA's "dire financial situation," and because future ...


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