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Robert Dorroh, et al v. Deerbrook Insurance Company

September 21, 2012

ROBERT DORROH, ET AL.,
PLAINTIFFS,
v.
DEERBROOK INSURANCE COMPANY, A WHOLLY-OWNED SUBSIDIARY OF ALLSTATE INSURANCE COMPANY,
DEFENDANT.



The opinion of the court was delivered by: Gary S. Austin United States Magistrate Judge

ORDER REGARDING DISCOVERY DISPUTES (Docs. 64, 66, 67, and 75)

INTRODUCTION

This case involves claims of bad faith brought by Plaintiffs, Robert Dorroh and Barbara Dorroh ("Plaintiffs") against Defendant, Deerbrook Insurance Company ("Deerbrook" or "Defendant"). The parties in this case have a contentious history. On May 4, 2102, this Court conducted an informal telephonic conference call regarding a Motion for Protective Order filed by Defendant. (Doc. 59). The Court helped the parties resolve this dispute, however, the conflicts have continued as evidenced by the number of discovery motions pending before this Court. On July 17, 2012, Plaintiffs filed a Motion to Compel. *fn1 (Doc. 64). On July 19, 2012, Defendant filed a Motion to Compel. *fn2 (Doc. 66). Subsequently, on July 20, 2012, Plaintiffs filed a Motion for Protective Order to limit the testimony of Mr. Stucky, Esq. during his deposition. *fn3

The parties filed a Joint Statement Regarding Discovery Disputes ("Joint Statement") on August 27, 2012. (Doc. 75). Both parties have requested monetary sanctions. A hearing regarding all of the above motions was set for September 7, 2012. (Doc. 68). After reviewing the Joint Statement, this Court vacated the hearing date and took the matter under submission for written findings. (Doc. 80). The Court issues the following order as set forth below.

RELEVANT BACKGROUND

The complaint alleges that on March 13, 2000, Cedar Warren was driving to work when he became distracted. To avoid a collision, Mr. Warren swerved into oncoming traffic, and struck the vehicle driven by Mr. Dorroh. As a result of the accident, Mr. Dorroh was gravely injured and rendered a paraplegic. At the time of the accident, Cedar Warren was insured under an insurance policy issued by Deerbrook. *fn4

Because he was on his way to work at the time of the accident, Mr. Dorroh filed a claim against his employer's workers compensation insurance carrier, Superior National Insurance Company ("Superior"). Mr. Dorroh also made a claim against Deerbrook for $15,000.00 which was the policy limit in exchange for a release of all claims against Mr. Warren. At the time of the demand, Deerbrook was aware that Mr. Warren was 100% at fault for the accident, and that Mr. Dorroh had suffered in excess of $300,000.00 in medical bills. (Doc. 75, at Ex. 4 and 5).

During settlement negotiations between the Dorrohs and Deerbrook, the parties agreed to a settlement of the $15,000.00 policy limit. However, before the settlement had been finalized, Deerbrook received a "notice of lien" from Superior, advising Deerbrook of an unknown lien amount. (Doc. 75, Ex. A). Based on the notice of lien, Deerbrook advised Mr. Carcione, Mr. Dorroh's attorney, that it was required under California law to list Superior as a co-payee on any settlement payment made to the Dorrohs. (Doc. 75, at Ex. 7 and 24). In fact, Deerbrook explained that it had concerns that if they ignored the lien notice, it could expose Mr. Warren to personal liability from the lienholder and possibly subject Deerbrook to tort liability for interfering with the lien.

Mr. Carcione refused to accept a joint payee settlement check and demanded that Deerbrook make the check payable to the Dorrohs only. Attorney Carcione contended that Deerbrook could ignore the lien notice because the workers' compensation carrier had denied the claim and no monies were paid. (Doc. 75, at Ex. 8 and 9). Deerbrook asked for written proof that the claim was denied, but Mr. Carcione did not timely provide a denial letter. *fn5 Mr. Carcione however, did offer to indemnify Warren and hold him harmless "from third parties who may claim against [Warren] for additional monies over and above the $15,000.00." (Doc. 75 at Ex. 9, pg. 1).

After it was clear the parties were at an impasse, the Dorrohs filed suit against Cedar Warren in Tuolumne Superior Court. In August 2006, prior to starting a bench trial, the Dorrohs' counsel proposed that Warren assign his claim to the Dorrohs, and that Warren and Deerbrook stipulate to a judgment against Warren. The Dorrohs proposed they would agree not to execute the judgment against Warren, and instead would file a bad faith case only against Deerbrook, thus avoiding the need for a trial between the Dorrohs and Warren, and limiting Warren's liability. (Doc. 75 at Ex. 10). However, Deerbrook, rejected this offer. Mr. Warren then filed for bankruptcy in the United States Bankruptcy Court, District of Oregon, prior to the entering of the verdict. The case went to trial, and on April 1, 2008, a $16 million judgment was entered against Warren. (Doc. 75, at Ex. 1, 14 and 15). Warren and Deerbrook appealed the state court judgment which was ultimately upheld on appeal and is now final. (Doc. 75, Ex. 15).

Meanwhile, Warren scheduled a "bad faith claim" against Deerbrook for its failure to issue a settlement check without listing Superior as a co-payee as an asset of his bankruptcy estate. In May 2009, subject to bankruptcy court approval, the Bankruptcy Trustee reached an agreement with Deerbrook for the settlement of the bad faith claim in the amount of $125,000.00. (Doc. 75, at Ex. 17, pg. 4). The Dorrohs objected to this agreement. The Bankruptcy Court held a bench trial. (Doc. 75, at Ex 17, pg. 8). After the two parties submitted bids, the Bankruptcy Court issued a decision and held inter alia , that Deerbrook's final bid was superior to the Dorrohs final bid and that the bad faith claim had little or no merit. The Dorrohs timely appealed the decision to the Ninth Circuit.

On March 15, 2011, the Ninth Circuit Bankruptcy Appellate Panel ("BAP") held that the Bankruptcy Court had abused its discretion when it approved the settlement with Deerbrook. Specifically, the BAP held that the court had erred in accepting Deerbrook's setttlement because inter alia , there was no finding that the bad faith case was frivolous, the court had failed to determine which of the two bids submitted were of greater value to the estate, and the proposed distribution to creditors violated certain provisions of the Bankruptcy Code. (Doc. 75, Ex 17 at pgs. 16-17). The case was remanded for further proceedings to remedy these deficiencies. (Doc. 75, Ex 17 at pg. 19-20).

Subsequently, on April 19, 2011, David F. Wurst, Trustee of the Bankruptcy Estate of Cedar Sol Warren, filed a complaint for bad faith in the Eugene Division of the United States District Court, District of Oregon, naming Deerbrook as the sole defendant. (Doc. 1). On September 7, 2011, a Notice and Request for Approval of Substitution of Party was filed with the Oregon court. Thereafter, the Dorrohs were substituted in as Plaintiffs for Trustee Wurst (Doc. 26). The matter was then transferred to this Court, following a motion by the Dorrohs (Docs. 27-29). (Doc. 36.)

The Dorrohs are now pursuing the bad faith claim against Deerbrook as Warren's assignee. For the purposes of the discovery issues, the Dorrohs contend that Deerbrook acted in bad faith by: (1) refusing to ignore the workers' compensation lien; (2) failing to issue a settlement draft in Dorrohs name only; and (3) by not accepting Dorrohs proposed judgment prior to the entry of judgment during the state court proceeding. The Dorrohs also allege that Deerbrook inappropriately advised Mr. Warren to file for bankruptcy and offered to pay his bankruptcy fees, and improperly manipulated the Bankruptcy Trustee by convincing him to sell the estate's bad faith claim to Deerbrook for $125,000.00. In contrast, Deerbrook contends that the Dorrohs' bad faith claim is meritless as evidenced by California law and the Bankruptcy Court's finding that the case lacked merit. Moreover, Deerbrook argues that the discovery should be limited to the events related to the notice of lien only, and the Dorroh's discovery requests are too broad as the issues in the bankruptcy and subsequent settlement negotiations are not relevant.

DISCUSSION

As a preliminary matter, the Court notes that much of the parties' positions related to the discovery disputes in this matter have been premised on arguments about whether Deerbrook acted in bad faith when it refused to issue the $15,000.00 settlement check to the Dorrohs without listing Superior as a co-payee. The parties have each argued their respective interpretations of California statutes and case law on this issue including citing inter alia , Coe v. State Farm , 66 Cal. App. 3d 981, 994 (1977), Mercado v. Allstate Ins. Co. , 340 F. 3d 824 (9 th Cir. 2003) and California Labor Code section 3859. However, while this legal discussion is informative for purposes of establishing a context of the issues, it has done little to aid the Court in resolving the discovery disputes presented; the Court would be constrained to limit the discovery of either side absent a ruling from the district court judge on this issue. Moreover, it is apparent that much of this dispute is the result of the attorneys' inability to effectively meet and confer which is a requirement of Fed. R. Civ. P. 26. This is evidenced by the fact that the first twenty pages of the parties' fifty page joint statement consist largely of engaging in unprofessional bantering amongst themselves. The parties are reminded that discovery is broad in scope and is defined in Fed. R. Civ. P. 26(b) which in pertinent part states as follows:

Parties may obtain discovery regarding any matter, not privileged, that is relevant to the claim or defense of any party, including the existence, description, nature, custody, condition, and location of any books, documents, or other tangible things and the identity and location of persons having knowledge of any discoverable matter. For good cause, the court may order discovery of any matter relevant to the subject matter involved in the action. Relevant information need ...


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