USDC Should Have Considered the Intentional Act Statute

Barry Zalma
Nov 24, 2023

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California State Grange (“Grange”) brought this action as a judgment creditor of non-party Chico Community Guilds (“Guilds”) seeking to recover from Guilds’ insurer Carolina Casualty Insurance Company (“Carolina Casualty”) damages awarded by the state court. The underlying judgment followed a lawsuit quieting title to real and personal property wrongfully converted by Guilds. Grange appealed the district court’s grant of Carolina Casualty’s motion to dismiss without leave to amend based on its conclusion that the underlying claims were not covered under the policy.

In California State Grange v. Carolina Casualty Insurance Company, No. 22-16169, United States Court of Appeals, Ninth Circuit (November 13, 2023) the Ninth Circuit Agreed to the District Court’s ruling in part and sent the case back to the court to another part of the case.

FACTS

Grange sued Guilds in Butte County Superior Court over the assets of Chico Grange No. 486 in which Grange brought several causes of action including cancellation of deed and quiet title, slander of title, and conversion. On February 25, 2021, the state court entered a ruling granting summary judgment to Grange on all claims. The judgment awarded in relevant part:

• the cancellation of the unauthorized deed recorded by Guilds in 2017;

• $23,167.50 in attorney’s fees related to the slander of title claim;

• “damages for conversion” of bank accounts in the amount of $80,697.68 plus $9,307.87 in prejudgment interest; and

• $1,945.49 in costs.

Grange sued Carolina Casualty in the USDC seeking a declaration that Carolina Casualty has a duty to indemnify Guilds under the policy to collect on the judgment for all monies awarded. The district court dismissed Grange’s suit without leave to amend.

ANALYSIS

The district court did not err in dismissing Grange’s claim for indemnification as to the conversion damages and prejudgment interest awarded by the Butte County Superior Court as restitution not covered under the policy. In the state court’s ruling on summary judgment, the Butte County Superior Court noted that Grange was not seeking title to the other personal property items identified in the complaint, but rather, only sought the converted funds totaling at least $80,697.69 in Guilds’ bank accounts, which, in turn was the exact amount awarded.

The relevant insurance policy explicitly excepts disgorgement or restitution from the definition of damages covered under the policy. Because the conversion damages and prejudgment interest awarded by the Butte County Superior Court was restitution not covered under the policy, the district court’s dismissal as to that claim was affirmed.

The USDC failed to consider whether the attorney’s fees awarded pursuant to the slander of title claim may have been covered under the policy where a wrongful act is defined as including any “error, misstatement, [or] misleading statement.” Slander of title involves the publication of a false statement that could be negligent.

The district court also failed to consider whether such coverage would implicate California Insurance Code § 533. Carolina Casualty argued that under such an interpretation – if slander of title is a wrongful act because it includes a misleading statement – coverage is barred under California Insurance Code § 533 because such an action would be purposeful.

Despite Carolina Casualty’s contention to the contrary, a willful act does not include negligent misrepresentations within the meaning of section 533. Bearnaise Butte County Superior Court made no finding as to whether Guilds’ actions were done with the requisite “willfulness” the applicability of section 533 is thus not readily apparent on the face of the record before the Ninth Circuit. Because the district court failed to consider the available, alternative basis for coverage under the policy that may be vulnerable to the argument that coverage was barred by section 533, the district court should reconsider the interpretive question.

The district court’s dismissal of Grange’s claim for attorney’s fees was vacated and remanded for reconsideration consistent with the opinion.

Because the issue for which the case is now being remanded was not considered by the district court because it would be futile, the district court did not err by denying California State Grange leave to amend.

ZALMA OPINION

The Ninth Circuit, trying to help a plaintiff to recover from an insurer when coverage is questionable, sent the case back to the District Court to determine if the acts of the Guilds were sufficiently intentional to bring into effect California Insurance Code Section 533 or not. If the USDC finds it willful then Carolina Casualty will owe nothing and if not it will owe a few dollars more. In so doing the Ninth Circuit makes the litigation a punishment of the insurer who was required to deal with a suit and an appeal on a policy that probably owed nothing but it will cost more to succeed than to pay off the plaintiff.

(c) 2023 Barry Zalma & ClaimSchool, Inc.

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