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Potter v. Alliance United Insurance Co.

California Court of Appeals, Second District, Fifth Division

July 23, 2019

CHRISTOPHER POTTER, Plaintiff and Appellant,

          APPEAL from a judgment of the Superior Court of Los Angeles County, No. MC026408 Brian C. Yep, Judge. Reversed and remanded with directions.

          Black Compean & Hall, Michael D. Compean and Frederick G. Hall, for Plaintiff and Appellant.

          Lewis Brisbois Bisgaard & Smith, Lane J. Ashley, Raul L. Martinez, and Celia Moutes-Lee, for Defendant and Respondent.

          BAKER, J.

         Plaintiff and appellant Christopher Potter (Potter) was injured by Jesus Remedios Avalos-Tovar (Tovar) in an auto accident. Tovar was insured by defendant and respondent Alliance United Insurance Company (AUIC), with a maximum liability limit of $15, 000. Potter offered to settle personal injury claims against Tovar for his policy limit, but AUIC did not respond to the offer. The claim was later tried to a jury and Potter obtained a judgment against Tovar for nearly one million dollars-which the trial court subsequently vacated when granting AUIC's motion for new trial. Then, before retrial, AUIC paid Tovar $75, 000 to release any bad faith claim he had against AUIC (for AUIC's failure to accept the early settlement offer). Potter again prevailed after the second trial, this time obtaining a judgment in excess of one million dollars. Unable to collect that sum from the insolvent Tovar, Potter sued AUIC and alleged the release it procured from Tovar was a fraudulent conveyance under statutory and common law. We consider whether the trial court was right to sustain AUIC's demurrer and dismiss the fraudulent conveyance suit on either of two alternative grounds-namely, that the suit was barred by the statute of limitations and failed to state a proper fraudulent conveyance claim.

         I. BACKGROUND[1]

         A. AUIC Procures the Release After a Jury Finding for Potter

         In October 2007, Potter was severely injured when the motorcycle he was riding collided with the automobile Tovar was driving. Tovar was insured under an automobile insurance policy issued by AUIC, which included liability coverage limited to $15, 000 per person.

         Two months after the accident, Potter wrote to AUIC and offered to settle his claims against Tovar in exchange for payment of the $15, 000 policy limit. The offer stated it would expire in 30 days. AUIC did not respond to the offer before it expired.

         Potter later filed a personal injury lawsuit against Tovar in Los Angeles Superior Court. That action proceeded to trial in July 2009. Tovar conceded he was at least partially at fault for Potter's injuries but challenged the amount of damages. The jury returned a verdict in Potter's favor, awarding him $908, 643.

         Tovar filed a motion for a new trial and the trial court granted it-vacating the existing jury verdict and judgment. Potter appealed.

         In April 2010, while Potter's appeal was pending, AUIC and Tovar entered into a confidential “Release and Settlement Agreement” (Release) pursuant to which Tovar released and discharged AUIC from “any claims for negligence, delay, bad faith, punitive damages, unfair practices, malpractice, emotional distress, consequential loss and damage, excess judgment, and personal injury.” Tovar also agreed he would “not make any assignments, file any suit, take any action or pursue any action [or] proceeding against releasees arising out of or in any way pertaining to the [Potter] automobile accident or the insurance and legal claims relating to said accident.” In exchange for Tovar's release of claims and agreement to forego any assignment related to the Potter liability action, AUIC paid Tovar $75, 000.

         B. Judgment Again for Potter, Who Cannot Collect Against Tovar

         The Court of Appeal affirmed the order granting a new trial in the Potter liability action and the case was remanded for retrial. In early April 2012-before a trial setting conference in the personal injury action and some two years after the Release had been executed-counsel for Tovar disclosed the existence of the Release to Potter's counsel. The second trial in the personal injury action commenced approximately a year later. The jury again returned a verdict in Potter's favor, this time awarding him $975, 000 in damages. The trial court also awarded Potter $108, 455.59 in recoverable costs and $441, 697.92 in prejudgment interest. In December 2013, the trial court entered judgment for Potter in the amount of $1, 523, 887.16.

         From the time of the accident through the time of the second jury verdict, Tovar was insolvent-the only means he had of paying any significant portion of the judgment was his prerogative to sue AUIC. Potter offered to take an assignment of Tovar's rights against AUIC in exchange for a covenant not to execute the judgment against Tovar's personal assets. Because he had already signed the Release, however, Tovar was unable to agree.

         AUIC paid Potter the $15, 000 policy limit but refused to satisfy the remainder of the judgment.

         C. Potter Sues AUIC on a Fraudulent Conveyance Theory and the Trial Court Sustains AUIC's Demurrer

         Potter filed an original complaint in this action alleging eight causes of action, including breach of contract, breach of the implied covenant of good faith and fair dealing, and engaging in a fraudulent conveyance. Potter subsequently filed first and second amended complaints, each alleging a single cause of action for fraudulent conveyance. Potter later filed a third amended complaint (the operative complaint) alleging only two causes of action: statutory and common law fraudulent conveyance.

         The former cause of action, predicated on a violation of California's Uniform Voidable Transactions Act (the UVTA, [2] Civ. Code, [3] § 3439 et seq.), alleges Tovar was insolvent prior to and at the time Tovar and AUIC entered into the Release. The cause of action further alleges that Tovar had a viable claim for breach of the implied covenant of good faith and fair dealing against AUIC, which was an “asset” he could have used to pay down his civil liability, and that AUIC participated in a fraudulent transfer of that asset by entering into the Release-which prevented Potter from collecting all or a greater share of the judgment in his favor.[4]

         The operative complaint's common-law-based fraudulent conveyance cause of action proceeded on essentially the same theory, but without reliance on the terms of the UVTA. The Release was illegal, the cause of action alleged, because the insolvent Tovar transferred his right to sue for breach of the covenant of good faith and fair dealing to AUIC, AUIC intended to prevent Potter from collecting the full amount of the judgment, and Tovar did not receive reasonably equivalent value for the claim released.

         AUIC demurred to the operative complaint, arguing the allegations predicated on the UVTA and common law failed to state facts sufficient to constitute a proper fraudulent conveyance cause of action. As relevant for our purposes, AUIC's demurrer argued the UVTA-based cause of action was (1) barred by the statute of limitations and constituted a sham pleading because its amendments contradicted prior allegations regarding when Potter became a creditor of Tovar; (2) Potter lacked standing to assert a UVTA claim because AUIC was not a debtor, a transferee, or a person for whose benefit a transfer was made; (3) the bad faith claim was not an “asset” when Tovar and AUIC entered into the Release because there was no judgment in effect against Tovar at the time; and (4) Potter could not allege he was injured by the transfer. As to the common law cause of action, AUIC argued it failed because Potter lacked standing to sue and could not prove any injury.

         At the demurrer hearing, the trial court initially opined the sham pleading and statute of limitations arguments “have some merit.” But the court asked the parties to focus their arguments on “whether this [i.e., the released bad faith claim] is an asset, whether there's been a transfer of this asset, whether there are damages and, if so, whether they're speculative or not, and the issue of standing.” The parties thereafter argued consistent with their positions in the demurrer briefing.

         After hearing argument from counsel, the trial court acknowledged AUIC's conduct “doesn't pass the smell test for sure, ” but the court further mused that “doesn't mean that something unlawful was done.” The court ultimately concluded it would sustain AUIC's demurrer without leave to amend “for all of the reasons we discussed other than [an argument made by AUIC seeking to invoke] the mediation privilege.” The trial court prepared no ...

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