Coleman v. Gulf Ins. Group

• Decision Date: 22 May 1986
• Citation: 718 P.2d 77,226 Cal.Rptr. 90,41 Cal.3d 782
• Court: California Supreme Court
• Parties: , 718 P.2d 77, 62 A.L.R.4th 1083 Eloise COLEMAN et al., Minors, etc., Plaintiffs and Appellants, v. GULF INSURANCE GROUP et al., Defendants and Respondents. L.A. 31916.

Page 90

226 Cal.Rptr. 90

41 Cal.3d 782, 718 P.2d 77, 62 A.L.R.4th 1083

Eloise COLEMAN et al., Minors, etc., Plaintiffs and Appellants, v. GULF INSURANCE GROUP et al., Defendants and Respondents.

L.A. 31916.

Supreme Court of California In Bank.

May 22, 1986.

King & Seligsohn, Stephen Scott King and Henry Seligsohn, Los Angeles, for plaintiffs and appellants.

Brown & Brown, Bradley A. Raisin, Los Angeles, Leonard Sacks, Encino, Jean Corey, Venice, Al Schallau, Ranch Palos Verdes, Robert E. Cartwright, San Francisco, Wylie A. Aitken, Santa Ana, Harlan Arnold, Los Angeles, Glen T. Bashore, North Fork, Ray Bourhis, San Francisco, Richard D. Bridgman, Oakland, Edwin Train Caldwell, San Francisco, David S. Casey, Jr., San Diego, Victoria De Goff, Berkeley, Douglas K. de Vries, Sacramento, H. Grieg Fowler, San Francisco, Sanford M. Gage, Beverly Hills, Ian Herzog, G. Dana Hobart, Stanley K. Jacobs, Los Angeles, Harvey R. Levine, San Diego, John C. McCarthy, Claremont, Timothy W. Peach, San Bernardino, Robert H. Sulnick, Los Angeles, Arne Werchick, Sausalito, and Stephen I. Zetterberg, Claremont, as amici curiae on behalf of plaintiffs and appellants.

Demler & Armstrong, Edison J. Demler and Robert W. Armstrong, Long Beach, for defendants and respondents.

Latham & Watkins, Donald P. Newell, Milton A. Miller, Jeffrey A. Toder, Los Angeles, Greines, Martin, Stein & Richland, Irving H. Greines, Alan G. Martin, Beverly Hills, Spray, Gould & Bowers, Daniel O. Howard, James S. Link, Los Angeles, Horvitz & Levy, Ellis J. Horvitz, Michael R. Tyler, S. Thomas Todd, Encino, Howard Wollitz, Finley, Kumble, Wagner, Heine, Underberg, Manley & Casey, Beverly Hills, Fred J. Hiestand, San Francisco, Richard E. Bawden, Reynolds, Reider & Bawden, Robert F. Wilson and Wilson, Borror, Dunn & Scott, San Bernardino, as amici curiae on behalf of defendants and respondents.

GRODIN, Justice.

Plaintiffs obtain a judgment against defendant, defendant appeals, and the parties settle while the appeal is pending. May plaintiffs then bring a new suit to recover additional damages against the defendant's insurer, claiming that the insurer was responsible for instigating the appeal, and that it did so knowing the appeal was without merit but in order to achieve delay and coerce settlement?

As we shall explain, while the prosecution of a frivolous appeal for the purpose of delay is clearly improper, the Legislature has provided a remedy for such frivolous and delaying conduct in section 907 of the Code of Civil Procedure, ¹ which authorizes an appellate court in which a frivolous appeal is filed to assess "such damages as may be just" for such misconduct. Past cases applying section 907 have recognized that the assessment of damages in this context is a particularly delicate task because of the potential danger of improperly "chilling" valid appeals (In re Marriage of Flaherty (1982) 31 Cal.3d 637, 183 Cal.Rptr. 508, 646 P.2d 179), and section 907 leaves the determination of this matter to a reviewing court which is generally in the best position both to evaluate the frivolousness of the appeal and to gauge damages so as to avoid the deterrence of legitimate appeals. Although plaintiffs proffer a number of theories to support their attempt to obtain damages for an improper appeal in a new and separate lawsuit, rather than through section 907, we conclude that none of the theories can be sustained. Accordingly, we affirm the trial court judgment in favor of defendant.

I.

Plaintiffs are the survivors of William Coleman who drowned in a swimming facility owned and operated by the City of Monrovia in August 1975. After the accident, plaintiffs brought a wrongful death action against the city, and a jury found the city liable and awarded plaintiffs $350,000 in damages. Following denial of its motion for a new trial, the city appealed.

Sometime after filing the appeal, the city's insurer, Gulf Insurance Group (Gulf), offered plaintiffs an amount equal to less than one-half of the judgment award to settle the case. Plaintiffs declined to settle. Later, in January 1982, Gulf tendered and plaintiffs accepted $300,000 in full settlement of the judgment. As a result, the appeal was dismissed.

Six months later, plaintiffs filed the present action against Gulf, seeking to recover additional compensatory and punitive damages on the basis of Gulf's conduct in the original appeal. The complaint alleged that Gulf controlled all aspects of the initial proceedings, including appeal and settlement, and that when Gulf instituted the appeal it had no reasonable basis for believing that the judgment would be reversed but simply desired to postpone payment of the judgment. The complaint claimed that Gulf had two objectives in mind. First, the complaint alleged that Gulf, knowing that plaintiffs were of modest financial means and had lost their principal source of financial support with the death of William Coleman, hoped by postponing payment to force plaintiffs to settle for a fraction of the judgment. Second, the complaint alleged that Gulf intended to capitalize during the pendency of the appeal on the significant differential between the statutory rate of interest and the general market rate. The complaint suggested that because Gulf was not required to post an appeal bond as a result of the city's status as a public entity, Gulf could invest the $350,000 at the general market rate of over 15 percent while having to pay plaintiffs only 7 percent during the pendency of the appeal, thereby depriving plaintiffs of the higher return they would have obtained had the judgment been promptly paid. The complaint alleged that in adopting this course of conduct, Gulf acted with "malicious" and "oppressive" intent.

On the basis of these allegations, plaintiff claimed that it was entitled to recover damages on four separate causes of action: (1) bad faith refusal to pay insurance benefits; (2) violation of Insurance Code section 790.03, subdivision (h)(5)'s requirement to attempt good faith settlement; (3) malicious prosecution of an appeal; and (4) abuse of process. ² The trial court sustained Gulf's demurrer as to all causes of action without leave to amend and dismissed the action. Plaintiffs appeal from the judgment. ³

II.

Before examining each of the disparate causes of action which plaintiffs seek to invoke to support their present suit, it is important that we emphasize at the outset that the conduct in which Gulf allegedly engaged during the earlier proceedings--filing an appeal maliciously and in bad faith, solely for the purpose of delay--is clearly improper conduct which is subject to sanctions under California law. Section 907 of the Code of Civil Procedure, one of the general provisions included in the portion of the code dealing with "Appeals in Civil Actions," specifically provides: "When it appears to the reviewing court that the appeal was frivolous or taken solely for delay, it may add to the costs on appeal such damages as may be just." (See also Cal.Rules of Court, rules 26(a), 135(a).) ⁴ Thus, if plaintiffs had requested sanctions under section 907 in the initial appeal and had established the facts alleged in the present complaint, the appellate court could have awarded damages on this basis. ⁵

We discussed the proper interpretation and application of section 907 at some length in In re Marriage of Flaherty, supra, 31 Cal.3d 637, 645-654, 183 Cal.Rptr. 508, 646 P.2d 179. In Flaherty we recognized the deleterious consequences--both to the opposing party and to the administration of justice--that result from the filing of frivolous appeals, and noted that appellate courts had in the past justifiably imposed sanctions pursuant to section 907 on a number of occasions. (See, e.g., Estate of Wempe (1921) 185 Cal. 557, 564, 197 P. 949; Seidell v. Tuxedo Land Co. (1932) 216 Cal. 165, 171, 13 P.2d 686; Miller v. R.K.A. Management Corp. (1979) 99 Cal.App.3d 460, 469-470, 160 Cal.Rptr. 164; In re Marriage of Schwander (1978) 79 Cal.App.3d 1013, 1022, 145 Cal.Rptr. 325.) At the same time, however, we stressed the difficulty in distinguishing frivolous and nonfrivolous appeals and cautioned that any definition of "frivolousness" must be applied "so as to avoid a serious chilling effect on the assertion of litigants' rights on appeal. Counsel and their clients have a right to present issues that are arguably correct, even if it is extremely unlikely that they will win on appeal. An appeal that is simply without merit is not by definition frivolous and should not incur sanctions. Counsel should not be deterred from filing such appeals out of a fear of reprisals." (31 Cal.3d at p. 650, 183 Cal.Rptr. 508, 646 P.2d 179.) "The difficulty," we emphasized, "is in striking a balance that will ensure both that indefensible conduct does not occur and that attorneys are not deterred from the vigorous assertion of clients' rights." (Id., at p. 648, 183 Cal.Rptr. 508, 646 P.2d 179.)

In Flaherty we established a general standard for determining "frivolousness" ⁶ and relied on the good judgment of appellate courts to strike the proper balance, emphasizing that in light of the competing interests "the punishment should be used most sparingly to deter only the most egregious conduct." (Id., at p. 651, 183 Cal.Rptr. 508, 646 P.2d 179.) ⁷ Flaherty did not directly address the issue presented by this case: whether, after the settlement of an appeal, a plaintiff may bring an independent action to recover compensatory and punitive damages on the basis of the defendant's alleged bad faith prosecution of the earlier appeal. The reasoning of Flaherty, however, appears substantially at odds with the recognition of such a cause of action. Unlike section 907, which leaves the determination of frivolousness to an appellate court which is qualified to judge the degree of meritlessness of the arguments raised on appeal, plaintiffs' proposed causes of action would require that...