Pershing Park Villas v. United Pac. Ins. Co.

• Decision Date: 10 February 2000
• Docket Number: LTD,No. 98-56261,CSP-PERSHIN,98-56261
• Citation: 219 F.3d 895
• Parties: (9th Cir. 2000) PERSHING PARK VILLAS HOMEOWNERS ASSOCIATION, an unincorporated and non-profit Homeowners Association;, a California Limited Partnership; HARRY BIGHAM; TIMOTHY PENKALA; and JOSEPH JOHN, Plaintiffs-Appellees, v. UNITED PACIFIC INSURANCE COMPANY, a Washington corporation; and RELIANCE INSURANCE CO., Defendants-Appellants. Office of the Circuit Executive
• Court: U.S. Court of Appeals — Ninth Circuit

Page 895

219 F.3d 895 (9th Cir. 2000)

PERSHING PARK VILLAS HOMEOWNERS ASSOCIATION, an unincorporated and non-profit Homeowners Association; CSP-PERSHING, LTD., a California Limited Partnership; HARRY BIGHAM; TIMOTHY PENKALA; and JOSEPH JOHN, Plaintiffs-Appellees, v. UNITED PACIFIC INSURANCE COMPANY, a Washington corporation; and RELIANCE INSURANCE CO., Defendants-Appellants.

No. 98-56261

Office of the Circuit Executive

U.S. Court of Appeals for the Ninth Circuit

Argued and Submitted February 10, 2000--Pasadena, California

Filed July 10, 2000

Amended August 11, 2000

[Copyrighted Material Omitted] Barry R. Levy, Horvitz & Levy, Encino, California, for the defendants-appellants.

Dennis P. Riordan, San Francisco, California, for the plaintiffs-appellees.

Appeal from the United States District Court for the Southern District of California, Edward J. Schwartz, District Judge, Presiding; D.C. No. CV-95-01918-S

Before: Robert Boochever, Michael Daly Hawkins, and Sidney R. Thomas, Circuit Judges.

BOOCHEVER, Circuit Judge:

Reliance Insurance Company appeals a judgment entered on a multimillion-dollar jury verdict. The jury found that Reliance acted in bad faith when it withdrew its defense of insured real estate developers in a construction-defect suit brought by a homeowners' association, and refused to pay the resulting default judgment. We reverse the judgment inasmuch as it permitted the homeowners to recover directly from the insurer without establishing that their claim was covered under the policy. We also reverse the judgment inasmuch as it did not award the amount of the default judgment to the insured developers as damages for Reliance's bad-faith failure to defend. We affirm the judgment in all other respects.

I

The Pershing Park Villas Homeowners Association brought suit against real estate developers Harry Bigham, Timothy Penkala, and Joseph John, alleging defects and property damage in the construction of a twelve-unit condominium. The developers tendered the defense of the suit to their property damage insurer, United Pacific Insurance Company. United Pacific's parent, Reliance Insurance Company, assumed the defense under a reservation of rights. Approximately four months before trial, Reliance withdrew its defense on the ground that the damage in question was not covered under the policy. Though Reliance had obtained a legal opinion from outside counsel to this effect, it did not obtain a declaration of noncoverage from the court.

The developers did not retain new counsel to defend the suit, and the homeowners obtained a default judgment against them for $339,000. Reliance refused to pay the judgment. Faced with the unsatisfied judgment and other debts, the developers petitioned for bankruptcy protection. The developers did not list any unliquidated bad faith claims against Reliance among the assets disclosed in their bankruptcy schedules. Though it appears that at least one of the developers may have referred to claims against an insurance company in later correspondence with his bankruptcy trustee, the developers' trustees never expressly abandoned any pre-bankruptcy claims against Reliance.

Nevertheless, the developers, joined by the homeowners, brought this suit against Reliance for breach of contract, bad faith, and a variety of other torts arising out of Reliance's failure to defend or indemnify the developers.¹ The developers sought the amount of the default judgment, plus consequential damages for emotional distress and for loss of prospective economic advantage. Specifically, the developers claimed that the default judgment had pushed them into bankruptcy, and that as a result they had been unable to obtain credit to participate in the lucrative San Diego repossessed real estate market of the mid 1990s. Concomitant to this financial distress, they claimed to have endured severe depression and anxiety.

The homeowners sought to recover the amount of the default judgment directly from Reliance, contending that they were third-party beneficiaries of the policy under California Insurance Code S 11580(b).

Prior to trial, the district court granted the plaintiffs' motion for partial summary judgment against Reliance for breach of its duty to defend the developers. But the court continued the motion on the issue of Reliance's liability for the entire judgment, allowing Reliance to conduct additional discovery. The plaintiffs later renewed their motion for partial summary judgment, citing internal Reliance documents showing that Reliance knew there was a potential for coverage at the time it withdrew the defense, and cases holding that an insurer is liable for a judgment even on a noncovered claim when it fails to defend in bad faith.

The district court granted the motion for summary judgment and found that Reliance was liable for the entire default judgment as a consequence of its failure to defend the developers. Reliance moved for reconsideration on the ground that the district court had not found that the withdrawal of the defense was tortious. The district court denied the motion, and found that the withdrawal of the defense was wrongful as a matter of law.

On the eve of trial, Reliance submitted a motion styled "Defendants' Motion In Limine No. 1 For Order Requiring Foundation That Plaintiffs Have Standing." The motion contended that the developers lacked standing to bring claims arising out of the construction-defect litigation because those claims accrued before the developers filed for bankruptcy, were not disclosed to or abandoned by the trustee, and therefore remained property of the developers' respective bankruptcy estates. The district court denied the motion on the ground that the developers had a sufficient stake in the suit to present a justiciable case or controversy, and that Reliance had in all other respects waived the issue.

Notwithstanding its finding that Reliance acted in bad faith as a matter of law, the district court submitted to the jury the issue of whether Reliance's conduct breached the covenant of good faith and fair dealing. After a lengthy trial and brief deliberations, the jury found that Reliance had breached a duty of good faith and fair dealing as to both the developers and the homeowners, and awarded damages totaling $27 million. On Reliance's motion for a new trial, the plaintiffs agreed to remit all but approximately $5 million of the jury's award.

Under the reduced award, the homeowners received $175,000 for breach of the covenant of good faith and fair dealing, in addition to the amount of the default judgment that had been awarded to them in the construction-defect suit. The developers received $1,400,000 each for economic losses caused by Reliance's bad faith and negligence, and $200,000 each for emotional distress. Unsatisfied with the remittitur, Reliance appeals on numerous grounds.

II

As a threshold issue, Reliance renews its challenge to the developers' standing to bring claims arising out of Reliance's failure to defend them in the construction-defect suit. Reliance grounds its objection to the developers' standing on the rule that the bankruptcy estate retains title to prebankruptcy causes of action not disclosed to or abandoned by the bankruptcy trustee. See Stein v. United Artists Corp., 691 F.2d 885, 893 (9th Cir. 1982).

A

At the most general level, "[the standing] inquiry involves both constitutional limitations on federal-court jurisdiction and prudential limitations on its exercise. " Warth v. Seldin, 422 U.S. 490, 498 (1975). Constitutional standing concerns whether the plaintiff's personal stake in the lawsuit is sufficient to make out a concrete "case" or "controversy" to which the federal judicial power may extend under Article III, S 2. See United Food and Commercial Workers Union Local 751 v. Brown Group, Inc., 517 U.S. 544, 551 (1996); Lujan v. Defenders of Wildlife, 504 U.S. 555, 559 (1992).

Beyond this constitutional core,"the prudential doctrine of standing has come to encompass `several judicially selfimposed limits on the exercise of federal jurisdiction.' " Brown Group, 517 U.S. at 551 (quoting Allen v. Wright, 468 U.S. 737, 751 (1984)). Principles of prudential standing are not "ordained by the Constitution, but constitute rather `rule(s) of practice,' albeit weighty ones; hence some exceptions to them where there are weighty countervailing policies have been and are recognized." United States v. Raines, 362 U.S. 17, 22 (1960) (alteration in original) (citation omitted) (quoting Barrows v. Jackson, 346 U.S. 249, 257 (1953)).

Because issues of constitutional standing are jurisdictional, they must be addressed whenever raised. See Ripplinger v. Collins, 868 F.2d 1043, 1046-47 (9th Cir. 1989) (citing Bender v. Williamsport Area Sch. Dist. , 475 U.S. 534, 541-42 (1986)). By contrast, a party waives objections to nonconstitutional standing not properly raised before the district court. See Sycuan Band of Mission Indians v. Roache, 54 F.3d 535, 538 (9th Cir. 1995) (as amended).

The district court separately addressed what it deemed to be the jurisdictional and nonjurisdictional dimensions of Reliance's eleventh-hour challenge to the developers' standing. After noting Reliance's failure to designate standing as an issue for trial in the pretrial order, the district court ruled:

I think the question [ ] posed by an issue of standing is whether a party has a substantial [stake in a] controversy to make a justiciable matter. I think it is clear that the three individual plaintiffs do have a significant stake in the controversy.

The issue [respecting title to the claim] may be one of the capacity to sue rather than standing . . . . And I think under all the circumstances that have been adduced in this trial, the objections by the defendants to Bigham, Penkala and John proceeding with this litigation [have] been waived.

[EOR 1397] We review de novo whether the developers had a sufficient stake in their claims...