759 F.2d 1458 (9th Cir. 1985), 83-2075, Othman v. Globe Indem. Co.

Docket Nº:83-2075.
Citation:759 F.2d 1458
Party Name:Ribhi OTHMAN and Yusif H. Mashni, individually, and doing business as E-Z Market, a partnership, Plaintiffs/Appellants, v. GLOBE INDEMNITY COMPANY, Defendant/Appellee.
Case Date:May 13, 1985
Court:United States Courts of Appeals, Court of Appeals for the Ninth Circuit

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759 F.2d 1458 (9th Cir. 1985)

Ribhi OTHMAN and Yusif H. Mashni, individually, and doing

business as E-Z Market, a partnership, Plaintiffs/Appellants,



No. 83-2075.

United States Court of Appeals, Ninth Circuit

May 13, 1985

Argued and Submitted July 13, 1984.

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[Copyrighted Material Omitted]

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Victoria J. De Goff, De Goff & Sherman, Berkeley, Cal., for plaintiffs/appellants.

James A. Reichman, Cooley, Godward, Castro, Huddleson & Tatum, San Francisco, Cal., for defendant/appellee.

Appeal from the United States District Court for the Eastern District of California.

Before PHILLIPS, [*] FLETCHER and REINHARDT, Circuit Judges.

FLETCHER, Circuit Judge:

Plaintiffs Othman and Mashni (Othman) appeal an adverse directed verdict on their causes of action against Globe Indemnity Co. (Globe) for bad faith denial of insurance coverage, intentional infliction of emotional distress, and punitive damages, all resulting from Globe's denial of a claim under a fire insurance policy. 1 Because the complaint names "Doe" defendants, we raise sua sponte the issue of whether diversity jurisdiction exists. 2

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Although the district court initially should not have allowed removal, we find that it had jurisdiction over the case at the time of final judgment, and thus, jurisdiction exists in this court. Reaching the merits, we affirm in part and reverse in part.



Othman's supermarket was destroyed by fire on October 25, 1976. All of the evidence pointed towards arson. In addition, several facts raised suspicions that Othman had set the fire himself: the burglar alarm was not on the night of the fire; inventory had been increased to an unusually high level and had been purchased with cash; insurance coverage had been recently increased; and Othman had been having financial trouble. Othman made a claim for the loss under a fire insurance and business interruption policy issued by Globe. 3

Globe promptly hired a private investigator, Nye, to determine the cause of the fire. Although Nye appears to have done a thorough investigation, Othman alleges that Nye did little more than review the already complete investigation done by the civil authorities. Pursuant to policy provisions providing for an examination of the claimants under oath, Globe's lawyers deposed Othman and Mashni. Globe also requested the production of various documents relating to the claim. At the examination, Othman, on his attorney's advice, refused to produce certain documents and to answer certain questions, most of which related to the circumstances of the fire and Othman's personal financial condition.

Thereafter, the parties' lawyers exchanged correspondence, and some but not all of the requested documents were produced. Finally, on May 24, 1977, Globe denied the claim on the basis of the insured's failure to cooperate with the examination and to produce relevant requested documents.

At this point, Othman got a new lawyer, Barbagelata, who began a new round of correspondence with Globe's lawyer, Hartwell, that continued through the summer and fall of 1977. Finally, on January 11, 1978, Barbagelata stated for the first time that he had assembled the requested materials.

On February 3, 1978, not having received a response to Barbagelata's tender of materials, Barbagelata's associate wrote Globe's lawyers and informed them that if they did not respond within five days Othman would proceed with a lawsuit. On February 17, 1978, Hartwell responded that Globe would not revoke its denial because the claims were now barred by the one-year statute of limitations. Fortunately for Othman, in October, a few days before the statute ran, Barbagelata had filed, but not served, his complaint. 4

Globe removed the case from state court to federal district court in the Northern District of California. The district court raised sua sponte the issue of whether it had diversity jurisdiction because of the presence of Doe defendants. Plaintiff's attorney filed an affidavit stating that he had discovered no Does and that Does had been named according to standard California practice as a precautionary matter only. The court, satisfied that federal jurisdiction

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existed, retained the case, later transferring it to the Eastern District of California on a motion for a change of venue. At the close of plaintiff's case, the district court directed a verdict against Othman on the bad faith, intentional infliction of emotional distress, and punitive damage claims, ruling that plaintiff had not brought forward substantial evidence that would allow these claims to go to the jury. On the remaining causes of action for liability under the policy, the jury rendered a verdict in favor of plaintiffs, answering four special interrogatories in their favor, and awarding them $170,756.21. 5



We raise sua sponte the issue of whether we have jurisdiction over this case because of the presence of "Doe" defendants, who ordinarily destroy diversity jurisdiction. 6 Although the circumstances under which an action including "Doe" defendants may be removed to federal court is not entirely clear in this circuit, 7 we need

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not make that determination here, because any jurisdictional defect is cured. See Grubbs v. General Electric Credit Corp., 405 U.S. 699, 92 S.Ct. 1344, 31 L.Ed.2d 612 (1972). If a state action includes non-diverse parties, it may not be removed until those parties have been dismissed. American Car & Foundry Co. v. Kettelhake, 236 U.S. 311, 35 S.Ct. 355, 59 L.Ed. 594 (1915). Here, the Does were not dismissed before removal. However, the Supreme Court has held that:

where after removal a case is tried on the merits without objection and the federal court enters judgment, the issue in subsequent proceedings on appeal is not whether the case was properly removed, but whether the federal district court would have had original jurisdiction of the case had it been filed in that court.

Grubbs, 405 U.S. at 702, 92 S.Ct. at 1347.

The crucial question, then, is whether the district court would have had original jurisdiction. Generally, Doe pleading is improper in federal court and the mere presence of Does in a complaint requires dismissal if jurisdiction is based solely on diversity. See Garter-Bare Co. v. Munsingwear, Inc., 622 F.2d 416, 423 (9th Cir.1980); Fifty Associates v. Prudential Insurance Co. of America, 446 F.2d 1187, 1191 (9th Cir.1970); Molnar v. National Broadcasting Co., 231 F.2d 684 (9th Cir.1956). However, had the case been filed originally in federal court, the court could allow the jurisdictional defect to be cured. Accordingly, the district court could have had proper original jurisdiction. A court may dismiss non-diverse defendants in order to preserve jurisdiction if they are not indispensable parties. Inecon Agricorporation v. Tribal Farms, Inc., 656 F.2d 498, 500 (9th Cir.1981). Although the district court never formally dismissed the Doe defendants, it could have, and this court may now do so if warranted. Ross v. International Brotherhood of Electrical Workers, 634 F.2d 453, 456-57 (9th Cir.1980). When proceedings began in the district court, Othman was not aware of the existence of any actual Doe defendant. No actual persons as substitutes for Does were ever joined, and Othman has stated to this court that there is no objection to dismissing the Does. Accordingly, the Does are not indispensable parties and served no other purpose than protecting the plaintiffs under California pleading practice. Under these circumstances, the Does should be and are now dismissed, and consequently jurisdiction is proper in this court. See id. at 457.



In determining the propriety of a directed verdict, this court has the same role as the court below. See Shakey's Inc. v. Covalt, 704 F.2d 426, 430 (9th Cir.1983). A directed verdict is proper if the evidence permits only one reasonable conclusion. Id. The court must examine all the evidence in the light most favorable to the nonmoving party to decide whether there is substantial evidence that could support a finding in favor of that party. See Browne v. McDonnell Douglas Corp., 698 F.2d 370, 371 (9th Cir.1982), cert. denied, 461 U.S. 930, 103 S.Ct. 2092, 77 L.Ed.2d 301 (1983). Federal law guides this determination. Id.



Othman's allegations of bad faith arise primarily in three areas: Globe's investigation of the fire, Globe's initial denial of the claim on the basis of Othman's failure to provide all of the information requested at the examinations, and Globe's second denial of the claim, with a note that suit was barred because the statute of limitations had run after promising reconsideration. We find that Othman presented enough evidence of bad faith on the part of Globe in respect to the second denial to permit that claim to go to the jury.

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A. The Duty of Good Faith and Fair Dealing.

A covenant of good faith and fair dealing is a part of every insurance contract in California, and requires an insurer to deal in good faith and fairly with its insured in handling an insured's claim against it. See Gruenberg v. Aetna Insurance Co., 9 Cal.3d 566, 510 P.2d 1032, 1037, 108 Cal.Rptr. 480, 485 (1973). The insurer is obligated to give the interests of the insured at least as much consideration as it gives its own interests and not to withhold payment of claims unreasonably. See Silberg v. California Life Insurance Co., 11 Cal.3d 452, 460, 521 P.2d 1103, 1109, 113 Cal.Rptr. 711, 717 (1974). This duty is not contractual, but is imposed by law, and its breach constitutes a tort. See Gruenberg, 9 Cal.3d at 574, 510 P.2d at 1037, 108 Cal.Rptr. at 485.

To be sure, a similar duty to act in good faith is imposed upon the insured, for "neither party [may] do anything which will injure the right of the...

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