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State National Insurance Co. v. Khatri

United States District Court, N.D. California, San Francisco Division

May 9, 2014

STATE NATIONAL INSURANCE COMPANY, Plaintiff,
v.
PRADEEP KANTILAL KHATRI, et al., Defendants.

ORDER REGARDING THE PARTIES' JOINT DISCOVERY DISPUTE LETTER DATED APRIL 23, 2014 [Re: ECF No. 52]

LAUREL BEELER, Magistrate Judge.

INTRODUCTION

Plaintiff State National Insurance Company ("State National") filed this action against Pradeep Kantilal Khatri and VNS Hotels, Inc. ("VNS") (collectively, "Defendants") seeking reimbursement of defense fees and costs incurred and indemnity of payments made in relation to a state court action in which State National defended Defendants and ultimately settled with the state court plaintiffs. See generally Complaint, ECF No. 1.[1] Defendants now seek to depose the attorneys for State National and the state court plaintiffs about the facts, circumstances, and terms of that settlement. See Joint Letter, ECF No. 52 at 1. State National objects to both depositions. See id. The court held a hearing on the matter on May 8, 2014. 5/8/2014 Minute Order, ECF No. 55. Upon consideration of the joint letter, the arguments of counsel at the hearing, and the applicable authority, the court rules that Defendants may depose Mr. Scheele and Mr. Orloff (if necessary) about the facts, circumstances, and terms of the Mackrani Action settlement agreement (or agreements), subject to the restrictions stated below.

STATEMENT

I. THE MACKRANI ACTION

State National provided coverage to Defendants under a Commercial General Liability Policy (the "Policy") for the period August 19, 2009 to August 19, 2010 (the "Coverage Period"). FAC, ECF No. 17 ¶ 12, Exh. A (Policy). On June 23, 2011, Veena and Arjun Mackrani (collectively, the "Mackranis") filed a complaint against Defendants in San Mateo County Superior Court arising out of conduct that allegedly occurred in part within the Coverage Period (the "Mackrani Action"). Id., ECF No. 17 ¶ 13, Exh. B (the "Mackrani Complaint"). They alleged claims for: (1) Non-payment of Wages, (2) Waiting Time Penalties, (3) Interference with Employment by Misrepresentation, (4) Defamation by Slander Per Se, (5) Unfair Business Practices, (6) Assault, (7) Battery, (8) False Imprisonment, (9) Intentional Infliction of Emotional Distress, and (10) Negligent Infliction of Emotional Distress. Mackrani Complaint, ECF No. 17-2 ¶¶ 4-69. On July 19, 2011, Defendants' counsel tendered the defense and indemnification of the Mackrani Action to State National and demanded that their personally-retained counsel represent them pursuant to California Civil Code § 2860. FAC, ECF No. 17 ¶ 14. On August 24, 2011, State National agreed to defend the Mackrani Action under a reservation of rights to seek reimbursement of attorney's fees, costs, and expenses and to seek indemnification "of claims that are not potentially covered under the policy." Id., ECF No. 17 ¶ 15. State National also agreed to Defendants' designation of counsel under Civil Code § 2860. Id. Pursuant to Civil Code § 1860, State National asked Defendants and their counsel to provide reports to it "advising it of information learned during discovery and investigation in the Mackrani [Action], which is necessary to permit State National to evaluate [Defendants'] liability and damages exposure...." Id., ECF No. 17 ¶ 16.

In August 2012, Defendants notified State National of an upcoming mediation-it was scheduled to take place in September 2012-in the Mackrani Action. Id., ECF No. 17 ¶ 17. State National participated in the mediation. Id. At the mediation, Defendants "demanded that [State National] fully indemnify in full and final settlement of the [Mackrani Action]." Id. The mediation resulted in a two-pronged Mediator's Proposal, "which required the parties to (1) agree to a full and final settlement of the [Mackrani Action] for $125, 000; and (2) for [D]efendants to mutually release all claims that may have against the Mackranis." Id. "The proposed mutual release, " State National alleges, "was an agreement separate from the proposed settlement of the [Mackrani Action], but was material to the Mackranis' acceptance of the settlement of their complaint against [D]efendants." Id., ECF No. 17 ¶ 18.

Defendants "agreed [that] the Mediator's Proposal was a reasonable settlement of the [Mackrani Action], " and they also agreed "to mutually release the Mackranis' from any and all future claims [they] may have against the Mackranis." Id., ECF No. 17 ¶ 19. Defendants also demanded that State

National "fund the entire Mediator's Proposal in settlement of the [Mackrani Action] for $125, 000, " and "threatened to sue State National for tortious breach of [the Policy] if [it] did not fund the entire settlement of the claims [D]efendants admitted were not covered by [the Policy]." Id. State National alleges that Mackranis and Defendants both accepted the Mediator's Proposal, but Defendants "refused to contribute to settle claims [D]efendants admitted were not covered under the [P]olicy." Id., ECF No. 17 ¶ 20.

On September 28, 2012, "hours before the Mediator's Proposal was to expire, and in the face of [D]efendants' acceptance of both prongs of the Mediator's Proposal, " State National "agreed to fund the entire $125, 000 in settlement of the [Mackrani Action] under a strict reservation of rights to seek reimbursement from [D]efendants for moneys it paid to defend a claim not potentially covered under the [P]olicy and to indemnify claims not actually covered under the [P]olicy." Id., ECF No. 17 ¶ 21. State National agreed to do so even though Defendants continued to refuse to contribute to the settlement amount. Id.

Thereafter, the Mackranis' counsel and Defendants' counsel mutually drafted a written settlement agreement (which included Defendants' release of all claims they may have against the Mackranis), but only the Mackranis signed it. Id., ECF No. 17 ¶ 22. Nevertheless, State National alleges that Defendants "performed the settlement agreement by demanding that State National forward the $125, 000 settlement payment to the Mackranis." Id., ECF No. 17 ¶ 23. Defendants also filed a Notice of Settlement of the Mackrani Action in the Superior Court. Id.

On October 22, 2012, State National "complied with [D]efendants' demand and transmitted the $125, 000 [in] settlement funds to the Mackranis' attorney in full and final settlement of the [Mackrani Action] under the reservation of rights to seek reimbursement." Id., ECF No. 17 ¶ 24. By November 27, 2012, "the Mackranis had not received the settlement agreement with [D]efendants' signatures and notified State National and [D]efendants that they would void the settlement" if they did not receive a fully executed copy with Defendants' signatures on it by December 4, 2012. Id., ECF No. 17 ¶ 25. On November 30, 2012, Defendants "notified State National that they would not sign their agreement to mutually release the Mackranis because State National was reserving its right to seek reimbursement." Id., ECF No. 17 ¶ 25. On December 3, 2012, State National "notified [D]efendants that they should assume their own defense if they did not want State National to settle the [Mackrani Action] under [its] express right to reimbursement." Id., ECF No. 17 ¶ 27. Defendants did not assume their own defense and instead "repudiated" their "separate agreement to release the Mackranis from all claims." Id. Following this repudiation, the Mackranis nevertheless "agreed to accept $125, 000 to settle all claims in [the Mackrani Action] against [D]efendants." Id. And on December 6, 2012, State National "consented to the Mackranis' execution of its $125, 000 payment in full and final settlement of the [Mackrani Action] under a strict reservation of rights to seek reimbursement from [D]efendants." Id., ECF No. 17 ¶ 28. The Mackranis "allocated" the $125, 000 as follows: $60, 000 for attorney's fees; $20, 000 for compensation for unpaid wages; $39, 000 for emotional distress damages for assault and loss of consortium; and $6, 000 for civil penalties. Id., ECF No. 17 ¶ 29.

Thereafter, State National alleges that the Mackranis said they would sue Defendants for their breach of their release of all claims they may have against the Mackranis. Id., ECF No. 17 ¶ 31. "[T]o settle their inchoate claim, " the Mackranis demanded $50, 000. Id. So, on December 11, 2012 and apparently after negotiation, "as an accommodation to [Defendants], " State National agreed to pay the Mackranis $12, 500 to settle" the claim. Id., ECF No. 17 ¶ 32. State National says that it was not required to notify Defendants of their right to assume their own defense with respect to the Mackranis' "specific performance and breach of contract claims because the claims were not yet filed and were inchoate." Id. In other words, "[t]here was nothing at that time to defend." Id.

State National alleges that it paid $66, 576.42 in attorney's fees and costs related to the defense of the Mackrani Action. Id., ECF No. 17 ¶ 33.

Throughout the Mackrani Action proceedings and settlement negotiations, State National was represented by attorney Lance Orloff, and the Mackranis were represented by attorney Paul Scheele.

II. THE INSTANT ACTION

State National filed the instant action on January 30, 2013. See generally Original Complaint, ECF No. 1. It initially brought claims for: (1) reimbursement of all expenses incurred in defense of the Mackrani Action because there were no potentially covered claims under the Policy; (2) reimbursement of some expenses incurred in defense of the Mackrani Action because not all claims were potentially covered under the Policy; (3) reimbursement of all expenses incurred in settlement of the Mackrani Action because State National indemnified Defendants for claims not covered under the Policy, and (4) reimbursement of some expenses incurred in settlement of the Mackrani Action because State National indemnified Defendants for claims not covered under the Policy. See id. ¶¶ 31-52. On Defendants' motion, the court dismissed with prejudice State National's first claim because it found that the Mackranis' defamation, assault, battery, false imprisonment, and negligent infliction of emotional distress were potentially covered under the Policy. 5/7/2013 Order, ECF No. 14 at 7-11. The court dismissed without prejudice State National's second claims because it was not sufficiently specific, and dismissed without prejudice State National's third and fourth claims because State National did not allege all of the requirements needed for reimbursement of settlement expenses. Id. at 11-14. The court granted State National leave to file a First Amended Complaint. Id. at 16.

State National did so. FAC, ECF No. 17. In it, State National realleged its first claim-the one that the court previously dismissed with prejudice-as well as its second, third, and fourth claims, and it also added a fifth claim for breach of contract. Id. ¶¶ 34-61. On September 13, 2013, the court granted in part and denied in part Defendants' motion to dismiss it. See Motion to Dismiss FAC, ECF No. 19; 9/13/2013 Order, ECF No. 26. Specifically, the court reiterated it dismissal with prejudice of State National's first claim, dismissed without prejudice State National's fifth claim for breach of contract, and found that State National's second, third, and fourth claims survived. See id.

With respect to State National's third and fourth claims, Defendants in part argued that those claims failed because State National's allegations about the settlement agreement were implausible and insufficient. See Motion to Dismiss FAC, ECF No. 19 ...


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