PSM Holding Corp. v. Nat'l Farm Fin. Corp.

• Decision Date: 07 March 2018
• Docket Number: 15-56184,15-55943,15-55941,Nos. 15-55026,Nos. 15-55087,s. 15-55026,s. 15-55087
• Parties: PSM HOLDING CORP., a Corporation, Plaintiff-Appellant, v. NATIONAL FARM FINANCIAL CORPORATION, a Corporation; Business Alliance Insurance Company, a Corporation; Larry P. Chao, an Individual, Defendants-Appellees. PSM Holding Corp., a Corporation, Plaintiff-Appellee, v. National Farm Financial Corporation, a Corporation; Business Alliance Insurance Company, a Corporation; Larry P. Chao, an Individual, Defendants-Appellants.
• Court: U.S. Court of Appeals — Ninth Circuit

884 F.3d 812

PSM HOLDING CORP., a Corporation, Plaintiff-Appellant,

v.NATIONAL FARM FINANCIAL CORPORATION, a Corporation; Business Alliance Insurance Company, a Corporation; Larry P. Chao, an Individual, Defendants-Appellees.

PSM Holding Corp., a Corporation, Plaintiff-Appellee,

v.National Farm Financial Corporation, a Corporation; Business Alliance Insurance Company, a Corporation; Larry P. Chao, an Individual, Defendants-Appellants.

Nos. 15-55026

15-55941

Nos. 15-55087

15-55943

15-56184

United States Court of Appeals, Ninth Circuit.

Argued and Submitted December 6, 2016 Pasadena, California

Filed March 7, 2018

Aluyah I. Imoisili (argued) and Linda Dakin-Grimm, Milbank Tweed Hadley & McCloy, Los Angeles, California, for Plaintiff-Appellant/Cross-Appellee.

Peder K. Batalden (argued) and Mitchell C. Tilner, Horvitz & Levy, Encino, California; Joseph W. Cotchett and Nancy L. Fineman, Cotchett Pitre & McCarthy, Burlingame, California; for Defendants-Appellees/Cross-Appellants.

Before: Stephen Reinhardt, A. Wallace Tashima, and Richard A. Paez, Circuit Judges.

TASHIMA, Circuit Judge:

At the heart of this case lies a conceptually straightforward, but procedurally complex, question of first impression for our Circuit: Can a judgment creditor, who seizes a judgment debtor’s company pursuant to a judgment that is subsequently reversed on appeal, recover in restitution for losses suffered while it was in possession of the seized company? The district court answered in the affirmative. In doing so, it awarded Plaintiff PSM Holding Corp. more than $1.1 million in restitution. Defendants now challenge this award.

All told, the parties have filed five appeals and cross-appeals, which were consolidated for oral argument and decision. We have jurisdiction under 28 U.S.C. § 1291, and we affirm in part, reverse in part, and dismiss in part.

I.

A. The Lawsuit and Trial

Prior to the instant lawsuit, Defendant-Appellee/Cross-Appellant National Farm Financial Corporation ("National Farm") owned Business Alliance Insurance Company ("BAIC"). Larry Chao, the president of National Farm, co-founded BAIC in the 1990s with his wife, Julie Chao. BAIC provided insurance to small businesses. BAIC had $14.2 million in net written premiums and $2.8 million in net income by 2005.

In early 2005, National Farm entered into negotiations to sell BAIC to Plaintiff-Appellant/Cross-Appellee PSM Holding Corporation ("PSM"). Ultimately, however, National Farm walked away from the deal. Thereafter, PSM sued National Farm, Larry Chao, and BAIC (collectively, "Defendants") alleging claims for breach of contract and fraud.

Following a trial, a jury found in favor of PSM and awarded it $40 million on its breach of contract claim and $3 million on its fraud claim. In post-trial proceedings, Judge Fairbank granted in part and denied in part Defendants' motion for judgment as a matter of law ("JMOL"). The motion was denied, with the exception that judgment was entered in favor of Defendants on the fraud claim, thereby reducing PSM’s damages award to $40 million. Judge Fairbank also granted Defendants' motion to stay execution of the judgment pending appeal, conditioned on Defendants posting a $40 million bond. However, after Defendants failed to post the required bond and National Farm entered bankruptcy, PSM executed on the judgment. In October 2008, BAIC was transferred to PSM. At the time of transfer, BAIC had more than $30 million in assets.

After taking possession of BAIC, PSM took various steps to integrate BAIC into its existing business. For example, PSM and BAIC entered into an intercompany quota share reinsurance agreement (the "QSA"). The QSA provided that, for every insurance policy BAIC issued, PSM would receive 90 percent of the policy’s insurance premiums in exchange for assuming 90 percent of the policy’s risk of loss. BAIC would retain the remaining ten percent of the premiums and would continue to be responsible for ten percent of the policies' risk of loss. PSM also assumed control of 90 percent of BAIC’s loss and loss expenses reserves, thereby rendering it responsible for 90 percent of BAIC’s losses on policies written prior to October 21, 2008, as well as on future policies. Additionally, PSM and BAIC entered into an Intercompany Service Agreement ("ISA"), under which PSM would provide to BAIC certain executive, administrative, and other services.

B. The Judgment is Reversed

On June 18, 2009, the Ninth Circuit reversed Judge Fairbank’s partial denial of Defendants' JMOL motion. The Ninth Circuit held that "[t]he plain terms of the agreement dictate that no contract was formed because the signature lines for National Farm; Larry Chao, as an individual; and Julie Chao, as an individual, were left blank. As a result, none of the parties could be liable under its terms." PSM Holding Corp. v. Nat'l Farm Fin. Corp. , 339 Fed.Appx. 693, 694 (9th Cir. 2009). The case was remanded to the district court.

C. Post-Remand Proceedings

1. July 26, 2010, Order on Restitution

On remand from the Ninth Circuit, it was undisputed that PSM should pay restitution to Defendants. At issue, however, was the appropriate amount.

On July 26, 2010, the district court granted in part and denied in part Defendants' motion for restitution and attorney’s fees. Although Defendants' motion opposed a return of BAIC to National Farm and, instead, sought a restitution award in the amount of $59.6 million, the district court ordered "[r]estitution in the form of the return of BAIC’s shares to [D]efendants."

The district court’s decision relied heavily on Restatement (First) of Restitution § 74, which provides that:

A person who has conferred a benefit upon another in compliance with a judgment, or whose property has been taken thereunder, is entitled to restitution if the judgment is reversed or set aside, unless restitution would be inequitable or the parties contract that payment is to be final; if the judgment is modified, there is a right to restitution of the excess.

Restatement (First) of Restitution § 74 (Am. Law Inst. 1937). In such situations, comment e to § 74 provides, "the judgment debtor is entitled to specific restitution, together with the value of [the property’s] use in the meantime, diminished by expenses necessarily incurred in the protection of the property and the payment of taxes and liens, but not including the expense of improvements." Id. at § 74, cmt. e.

According to the district court, this rule is consistent with a similar principle set forth in Restatement (Third) of Restitution and Unjust Enrichment § 18 (Am. Law. Inst. 2011) :

A transfer or taking of property, in compliance with or otherwise in consequence of a judgment that is subsequently reversed or avoided, gives the disadvantaged party a claim in restitution as necessary to avoid unjust enrichment.

Finally, the court supported its decision by relying on several state court decisions—from California and elsewhere—that confronted similar issues, including Stockton Theatres, Inc. v. Palermo , 121 Cal.App.2d 616, 264 P.2d 74 (1953), Erickson v. Boothe , 127 Cal.App.2d 644, 274 P.2d 460 (1954), and Fleer Corp. v. Topps Chewing Gum, Inc. , 539 A.2d 1060 (Del. 1988).

Based on these authorities, the district court concluded that "Defendants are entitled to specific restitution of the BAIC shares."¹ Additionally, the district court determined that Defendants were "entitled to an accounting of the profits earned while PSM held BAIC, ‘diminished by expenses necessarily incurred in the protection of the property and the payment of taxes and liens.’ " (Quoting Restatement (First) of Restitution, § 74 cmt. e (Am. Law Inst. 1937).) Accordingly, the district court ordered "an accounting of the profits PSM generated through its ownership of [the BAIC] shares."²

2. October 8, 2013, Order on Accounting and Rescission of QSA

Post remand, Defendants filed a motion for an award of PSM’s profits. Defendants sought $14 million in profits. PSM opposed the motion, arguing that it actually suffered a $1.5 million loss as a result of its temporary possession and control of BAIC. Additionally, PSM sought to rescind the QSA. The district court determined that expert testimony was required in order to resolve Defendants' motion for profits and PSM’s request for rescission. Accordingly, it appointed two experts: (1) Debra J. Roberts, who would consider the QSA issue; and (2) Timothy H. Hart, a forensic accountant, who would consider the question of profits. After each expert filed her/his report, the district court ruled.

On the question of rescission, the district court denied PSM’s request, relying on the following illustration:

A obtains judgment in ejectment against B and is put in possession of Blackacre. After knowledge that an appeal has been taken, A makes improvements thereon to the amount of $1000, at an expense of $100 repairs a roof which otherwise would have leaked, and pays taxes thereon to the amount of $300. He remains on the land for two years, at the end of which time the judgment is reversed. B is entitled to restitution of the land and to the reasonable rental value of the land during the two years, less the amount expended by A for the necessary repairs and for the payment of taxes; ordinarily [diminishment in] restitution for the value of the improvements would not be granted.

Restatement (First) of Restitution § 74 cmt. f, illust. 14 (Am. Law Inst. 1937). This rule, the district court reasoned, is consistent with the well-established proposition that "the distinction between ‘repairs and maintenance’ and ‘improvements’ can be characterized as the difference between ‘keeping’ and ‘putting’ [an] ... asset in good condition." (Quoting Moss v. Commissioner , 831 F.2d 833, 835 (9th Cir. 1987).)

Under this legal framework, the district court concluded that "[t]he factual record supports the conclusion that the reinsurance agreement was an improvement rather than a necessary cost of protecting BAIC." It reasoned that "[t]he reinsurance...