218 Cal.App.3d 1327, C000793, Balboa Ins. Co. v. Trans Global Equities

Docket Nº:C000793
Citation:218 Cal.App.3d 1327, 267 Cal.Rptr. 787
Opinion Judge:[10] Davis
Party Name:Balboa Ins. Co. v. Trans Global Equities
Attorney:[7] Darrell Glahn, Douglas L. Hendricks and Morrison & Foerster for Plaintiffs and Appellants. [8] Daniel U. Smith, George R. Corey and Corey, Orton, Luzaich & Gemello for Defendants and Appellants.
Case Date:March 21, 1990
Court:California Court of Appeals

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218 Cal.App.3d 1327

267 Cal.Rptr. 787

BALBOA INSURANCE CO., et al., Plaintiffs, Respondents and Cross-Appellants,


TRANS GLOBAL EQUITIES, et al., Defendants, Appellants and Cross-Respondents.

No. Civ. C000793.

California Court of Appeal, Third District

March 21, 1990.

[Certified For Partial Publication [*]]

Rehearing Denied April 19, 1990.

Review Denied June 7, 1990.

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[Copyrighted Material Omitted]

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[Copyrighted Material Omitted]

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[Copyrighted Material Omitted]

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Daniel U. Smith, Law Office of Daniel U. Smith, Kentfield, George R. Corey, Corey, Orton, Luzaich and Gemello, Millbrae, for defendants, appellants and cross-respondents.

Darrell Glahn, P.C., Stockton, Douglas L. Hendricks and Morrison & Foerster, San Francisco, for plaintiffs, respondents and cross-appellants.

DAVIS, Associate Justice.

Defendants Trans Global Equities (Trans Global), Collateral Protection Insurance Services (CPIS), Consolidated Financial Insurance Agency (CFIA) and Consolidated Financial Insurance Agency of Nevada (CFIN), appeal from the judgment for plaintiffs Balboa Insurance Company (Balboa), Newport Insurance Company, Newport Management Corporation (NMC or Newport), and Insurance Automation Corporation. 1 The court awarded Balboa $3,721,000 as profits lost from the defendants' unfair competition with Balboa's insurance businesses. The court also awarded Balboa $75,000 in profits lost when three of the defendants sold Balboa's computer software enhancements. 2 Balboa cross-appeals from the portions of the judgment in favor of Barry Maashoff. 3

In the published part of the opinion, we address the impact of federal copyright law upon California law regarding unfair competition. To the extent the unfair competition claims rest on trade secret and breach of confidential or fiduciary relationships, they survive a preemption challenge. In the unpublished parts of the opinion we find substantial evidence of breached duties of fidelity and confidentiality, we uphold the trial court's appointment of an expert and calculation of damages, and in considering

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Balboa's cross-appeal, we shall reverse the trial court's judgment in favor of defendant Barry Maashoff.


Collateral protection insurance covers a lender's interest in the property that secures a loan. Under typical loan agreements, if the borrower fails to insure the collateral for physical damage, the lender may purchase a policy insuring its security interest and charge the premiums to the borrower. 4

In 1972, Jack Nelson began a loan collateral tracking service in Stockton. He formed the company eventually known as "Collateral Protection Insurance Services" (CPIS) to help banks and credit unions keep track of their collateral's insurance status. 5 As insurance agents, Nelson and company could then sell insurance for any uninsured collateral.

The laborious business of tracking thousands of loans on three by five index cards lent itself readily to computerization. By 1979, CPIS had hired programmer Martin Atherton to design software for a Hewlett-Packard computer. That same year, insurance agent Barry Maashoff joined CPIS as its president and manager of the Stockton tracking center. Also that year, to finance the Atherton system, CPIS borrowed $500,000 from Balboa Insurance Company. At the same time, CPIS agreed to sell Balboa's collateral insurance policies to its tracking customers.

By June 1980, CPIS and its agents owed Balboa "several hundred thousand dollars" in premiums for collateral insurance policies placed with Balboa for various lenders. Although CPIS had collected the money from its lenders, it had diverted the funds owed Balboa to "[o]ther purposes and other uses than remitting to Balboa[.]"

To resolve this "out of trust" situation, in June 1980, Balboa required Nelson, Maashoff and other CPIS investors to sign personal guarantees for $1 million. In addition, Balboa required CPIS and its principals to secure the guarantees with the computer tracking system. Finally, Balboa required the new joint venturers of the restructured Stockton service center to write all their business with Balboa. 6

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In January 1981, Nelson or Maashoff told Balboa that CPIS and its principals could not make even interest payments on the outstanding debt. As a result, Balboa, CPIS, and the joint venturers negotiated four agreements signed in March 1981. At trial, the parties submitted these agreements as joint exhibits and refer to them here by their exhibit numbers. For convenience, we adopt their nomenclature.

In Exhibit 1(a), CPIS gave Balboa's affiliate, Newport Management Company (NMC), a perpetual, nonexclusive license to use the computer tracking software. 7 As part of the license, CPIS authorized NMC to modify the software as NMC saw fit. CPIS agreed that "[a]ny modification made by NMC shall remain the property of NMC."

In exchange for the license, NMC agreed to pay CPIS "special override" commissions. Memorialized in Exhibit 1(b), this commission agreement applied to business written on 20 accounts listed on "Exhibit A" attached to the override agreement. NMC agreed to pay CPIS between 1 and 5 percent of net insurance premiums received from Exhibit A policies. 8

In Exhibit 1(c), Balboa released Nelson from his obligations as one of CPIS' guarantors. In exchange, he agreed not to cause any of the 20 accounts listed in Exhibit A or any of an additional 92 accounts listed on an attached Exhibit B to cancel or lapse for six months.

Finally, in Exhibit 1(d), CPIS agreed to transfer to Balboa its rights to normal commissions from the Exhibit A accounts. CPIS also promised "that it will take no action to cause such policies of insurance to be cancelled, lapse or otherwise terminate." In exchange, Balboa agreed to pay CPIS a 5 percent servicing override commission and to release CPIS from its obligations under the 1980 $1,000,000 note and security agreement.

In Exhibit 1(d), Balboa also agreed to pay a similar 5 percent commission for three years on the 92 Exhibit B accounts. In March 1984,

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however, the commissions dropped to 1 percent and expired completely five years later. CFIA also signed this agreement.

Shortly after the parties negotiated the four agreements, NMC took over the Stockton loan tracking center's operations. NMC hired Maashoff as its employee to manage the center. Maashoff headed the Stockton service center until September 1981. At that time, he left Balboa's employment to concentrate on selling collateral protection insurance nationwide. In mid December 1982, Maashoff returned as a "management consultant" to direct the Stockton center's attempts to run more efficiently and smoothly.

After it took over the Stockton center's operations, NMC continued to improve the software licensed from CPIS. It hired the software's original developer, Martin Atherton, to make some of these enhancements. Balboa's employees made others. Maashoff was involved in many of the changes. By 1983, the system's improvements and other changes allowed the Stockton center to become profitable for the first time.

NMC's assumption of management duties at the Stockton center and the transfer of the Exhibit A accounts to Balboa reduced CPIS to collecting its service commissions and marketing its software to other potential loan tracking services. Unfortunately for CPIS, when it licensed its software to NMC in March 1981, both CPIS and Atherton had neglected to keep a copy of the base system.

In 1983, CPIS licensed its software to American Bankers for $150,000. To reconstruct the March 1981 base system, Atherton used a copy of Balboa's system as of September 1981. The September 1981 tape, however, contained extensive changes made by Balboa to the base system. Despite Atherton's efforts to delete these enhancements, the copy of the system delivered in May 1983 to American Bankers contained some. After discussions with Balboa, Atherton attempted again to remove all of Balboa's program material. Even after delivery of the amended tape in late 1983, at least one of Balboa's programs remained in the American Bankers system.

By late 1983, while still the "management consultant" streamlining NMC's Stockton center operations, Maashoff began preparations to form a competing insurance tracking service. He feared that Balboa was going to transfer all of the Stockton center's business to its own system in Irvine. In addition, he feared that Balboa was going to sell insurance directly to the lending institutions. He felt that Balboa would use these actions to reduce

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or eliminate commissions that CPIS and CFIA might otherwise earn. 9 Accordingly, in January 1984, CPIS and Trans Global formed a joint venture to establish the Trans Global Financial Service Center in Stockton.

That same month, CPIS licensed its tracking software to Trans Global. On January 30, 1984, Trans Global hired Maashoff to manage the Trans Global center. 10 He began planning for the new center's building and equipment. He also planned the center's personnel requirements. As part of his efforts to staff the new center, Maashoff discussed the strengths and weaknesses of Balboa's employees with Jan Mehlhaff, a department supervisor at Balboa's Stockton service center. Maashoff also began to plan to move accounts from Balboa's tracking service to the new Trans Global center. Fearing that Balboa might find some way to stop it, Maashoff, CPIS, and Trans Global kept their plans secret from Balboa.

During April and May of 1984, events came to a head. In early April, Maashoff met with Balboa's head, Jack Trapp, to propose a deal. Maashoff told Trapp that Balboa could service in its Irvine center any accounts it wanted and that Trans Global would service the rest in its new Stockton center for a commission. A few days later, before he could respond definitively, Trapp resigned as Balboa's...

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