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Axis Surplus Insurance Company v. Linda Reinoso

June 26, 2012


(Los Angeles County Super. Ct. No. BC377072) APPEAL from a judgment of the Superior Court of Los Angeles County, John A. Kronstadt, Judge. Affirmed.

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



We hold there is substantial evidence to support the finding that appellant was not covered by liability insurance in connection with claims brought against her by tenants of an apartment building that she co-owned. We also hold that in connection with the insurer's action against appellant and others to recover the costs of settling those claims, there is substantial evidence to support the trial court's implied allocation to appellant of joint and several liability to the insurer for the amount of the settlement costs paid by the insurer. The benefit to appellant of the settlement justified such an allocation. We therefore affirm the judgment.


Defendant and appellant Linda Reinoso and her husband Edgar Reinoso, owned and managed about 15 rental properties in the City of Palmdale.*fn2 Proud American Investments, LLC (Proud American), the Reinosos' management company, managed the properties. The Reinosos also owned another 64 rental properties elsewhere in Southern California. During the 30 years prior to trial, the Reinosos had owned, operated, and managed an additional 35 properties.

In 2001, Edgar pleaded no contest in People v. Edgar Reinoso (Los Angeles Superior Court, case No. 1AT03779) to the charge of permitting a fire hazard at a real estate project, a misdemeanor, and was placed on probation. In 2002, the People filed a 33-count misdemeanor complaint in People v. Edgar Reinoso (Los Angeles Superior Court, case No. 2AT06169) alleging violations of the Palmdale Housing Code at four properties Edgar owned. The counts included pest harborage, inadequate heating facilities, and general dilapidation. Edgar pleaded no contest to eight counts in the complaint, including counts for general dilapidation and pest harborage, and was placed on probation. As part of his plea agreement, Edgar agreed to abate those violations. In 2004, Edgar admitted to violating the terms of his probation by failing to abate certain of the violations.

In May, 2003, the Reinosos acquired a 48-unit apartment complex on West Avenue J-3 in Lancaster (the J-3 Apartments) in their names as "husband and wife, as community property." They testified that they worked together in connection with the management of the property. In late September or early October 2003, the City of Lancaster issued a Notice of Code Enforcement Corrections with respect to certain units at the J-3 Apartments. Among the issues raised in the notice were general dilapidation; infestation of insects, vermin, and rodents; inadequate garbage storage; lack of proper water and heat; and dampness of residences.

In January, 2005, the tenants of the J-3 Apartments brought an action against the Reinosos; Proud American; and the J-3 Apartments' former owner, Mark Kaufman, concerning the J-3 Apartments' alleged habitability deficiencies (the Tenant Action). As amended, the Tenant Action alleged causes of action against Edgar and Proud American for breach of written contract (first cause of action) and breach of the implied warranty of habitability (second cause of action); causes of action against Kaufman for breach of the implied warranty of habitability (third cause of action) and negligence (fifth cause of action); and causes of action against Edgar, Linda, and Proud American for negligence (fourth cause of action), nuisance (sixth cause of action), negligent infliction of emotional distress (seventh cause of action), intentional infliction of emotional distress (eighth cause of action), and violation of Business and Professions Code section 17200 (ninth cause of action). The Reinosos have acknowledged that they were sued "as co-owners and co-managers." In their complaint, the tenants alleged habitability deficiencies at the J-3 Apartments, including cockroach infestation, inoperable heating and cooling systems, water leaks, mold, and electrical deficiencies. The tenants also alleged that common areas, including stairways, garbage facilities, and swimming pools were maintained in unsafe and unsanitary condition. According to the tenants, they made repeated requests of the defendants to correct the deficiencies, but the defendants failed to take proper action. The tenants sought damages against all the defendants "in excess of $10,000,000.00," plus punitive damages, attorney and expert fees, and interest. One consultant of the insurer in the Tenant Action estimated that the compensatory damages could be as much as $30 million. Another opined that the range of potential damages was between $3.5 and $22 million.

The Reinosos tendered the defense of the Tenant Action to their insurer, plaintiff and respondent Axis Surplus Insurance Company (Axis). The Reinosos and Proud American had become insured under two policies providing commercial general liability policies issued by Axis with respect to the J-3 Apartments. Axis agreed to represent the Reinosos and Proud American in the Tenant Action under a reservation of rights. The action settled for just over $3,000,000, with Axis contributing $2,162,500.*fn3 Axis then brought this action against the Reinosos seeking to recover its defense costs and its settlement contribution--together about $2,420,000--in the Tenant Action.

At the trial of the action brought by Axis to recover its defense costs and settlement contribution, Michael King, an attorney, testified that Axis retained him to represent Edgar, Linda, and Proud American in the Tenant Action. King referred to a report he prepared for Axis concerning the Tenant Action. The trial court found that the report provided substantial factual support for the "serious" habitability claims in the Tenant Action and the reasonableness of the ultimate settlement of that action. King testified that he did not believe that Edgar, Linda, and Proud American could prevail in the Tenant Action.

In a report King prepared concerning efforts to settle the Tenant Action, he stated that the Reinosos entered a five-year agreement with Steve Donell of Jalmar Properties to manage the J-3 Apartments. Donell's retention, the report stated, would show the Reinosos' good faith efforts to correct any remaining "slum" conditions at the J-3 Apartments. Edgar's onsite property managers told King that before Jalmar Properties began managing the J-3 Apartments, tenants routinely complained about the condition of their apartments. The complaints received little or no response and the problems escalated. A July, 2005, County of Los Angeles inspection report described serious habitability issues with respect to several units at the J-3 Apartments.

King believed that Edgar would not be an effective trial witness before a jury and that a jury would not approve of Edgar's approach to property management given the numerous condition problems with the J-3 Apartments. King's contact with Linda was limited. Linda assisted in locating documents about the J-3 Apartments and their management. King did not believe that Linda had "deep involvement" in managing the J-3 Apartments or "input into decisions in that field." Very little additional time was spent on the representation of Linda. King did not mention Linda in the reports he prepared about the Tenant Action. The foundation for the settlement was the condition of the J-3 Apartments and the "serious concerns" about Edgar as a trial witness.

David Hart, a senior vice president of claims for Axis, testified that Linda was not a factor in his settlement considerations. Hart testified that he "absolutely did not consider Linda Reinoso's culpability" in reaching the decision to settle the Tenant Action and did not allocate any part of the settlement proceeds toward settling the case against her. Hart's testimony reflected that at this point in Axis's action to recover its costs, Axis minimized Linda's involvement, apparently in the event it was determined that Linda was covered by the insurance. Linda and Edgar argued against Axis's position, suggesting that any liability to Axis should be joint and several--also probably because of the possibility that Linda was covered by the insurance.*fn4

Linda testified that she and Edgar had worked together "full-time with the property management and purchasing properties" since 1990. Linda and Edgar married in 1991. Linda testified that she played a somewhat limited role in the management and oversight of the J-3 Apartments and that she paid bills and maintained some records for the J-3 Apartments. The trial court found Linda's testimony about her limited role at the J-3 Apartments to be credible. The trial court found less credible Linda's testimony that she was not aware of the criminal proceedings involving Edgar that arose out of the ownership of rental properties. Edgar testified that Linda played a very limited role in the management of the J-3 Apartments and that her primary responsibility was to pay certain bills. The trial court found this testimony not credible, and Linda, based on her testimony, to be more than a ministerial bill payer.

Edgar testified that he had been involved in real estate ownership and the management of rental properties for about 30 years. He claimed to have little insight into the type of maintenance that rental properties needed and little knowledge or understanding of mold, pest control, or needed repairs. He asserted that he hired a site manager for each of his projects and had that person make management decisions without his input. He said that the site managers reported to a general manager in his organization, implying that he played a limited role in maintenance and improvement decisions. The trial court found Edgar to be an unbelievable witness and rejected his effort to persuade it that he was an uninformed and innocent absentee owner. Instead, the trial court found that the evidence established that Edgar was an involved and informed owner who insisted on managing his property in a manner that led to poor living conditions for his tenants.

Donell testified that he worked with Edgar and Linda for three months at the beginning of 2006. He believed that the J-3 Apartments were in a terrible, unsafe, and unsanitary condition at that time. He also believed that Edgar was not a good owner and that Edgar's decisions were guided only by costs and not by proper management principles. Donnell considered Edgar's approach to property management to be inappropriate. According to Donell, Edgar wanted "things" done cheaply even if that meant substandard living conditions. Edgar told Donell that he wanted Donell to use the Reinosos' business model. Donell said that Edgar told him that Edgar's "business model was to get new, ...

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