Endurance American Specialty Co. v. Lance-Kashian & Co.

• Decision Date: 08 November 2011
• Docket Number: CASE NO. CV F 10-1284 LJO BAM
• Court: U.S. District Court — Eastern District of California
• Parties: ENDURANCE AMERICAN SPECIALTY COMPANY, Plaintiff, v. LANCE-KASHIAN & COMPANY, et al., Defendants. AND RELATED COUNTER-ACTION

ENDURANCE AMERICAN SPECIALTY COMPANY, Plaintiff,

v.LANCE-KASHIAN & COMPANY, et al., Defendants. AND RELATED COUNTER-ACTION

CASE NO. CV F 10-1284 LJO BAM

UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF CALIFORNIA

Dated: November 8, 2011

SUMMARY JUDGMENT DECISION

(Docs. 60, 62, 63, 69.)

INTRODUCTION

This insurance coverage action addresses allocation of costs, setting hourly rates, and selection of counsel to defend insureds and non-insureds in an underlying action. Plaintiff/counter-defendant Endurance American Specialty Insurance Company ("Endurance") seeks summary judgment to the effect that it reasonably set and allocated defense costs for counsel selected by Endurance insureds defendants/counter-complainants Edward Kashian ("Mr. Kashian"), Jennifer Schuh ("Ms. Schuh"), and Lance-Kashian & Company ("Lance-Kashian").¹ The insureds seeks summary judgment to the effect that Endurance's reservation of rights entitled the insureds to select independent counsel to defend theinsureds in the underlying action and in turn to pay defense costs reasonably related to the insureds' defense and in amounts greater than what Endurance claims is reasonable. This Court considered the parties' cross-summary judgment motions on the record without a hearing, pursuant to Local Rule 230(g).² For the reasons discussed below, this Court GRANTS summary judgment to the effect that Endurance reasonably set and allocated defense costs for counsel to which it consented.

BACKGROUND

The Insureds And Others

Lance-Kashian is a California corporation with real estate interests in California. Mr. Kashian is the sole shareholder and chief executive officer of Lance-Kashian and is its former president. Ms. Schuh is Mr. Kashian's daughter and former chief executive officer of Lance-Kashian.

Lance-Kashian is the general partner of River Park Properties III ("RPP III"), a non-party to this action. RPP III is the general partner of non-party Park 41 Limited Partnership ("Park 41") and owns 64 percent of Park 41. In his declaration, Mr. Kashian states that Lance-Kashian controls RPP III pursuant to RPP III's partnership agreement.

At relevant times, non-party Gottschalks, Inc. ("Gottschalks") was the sole limited partner of Park 41 and owned 36 percent of Park 41.

At relevant times, Libby Franson was the risk manager for Mr. Kashian's companies, including Lance-Kashian and RPP III, oversaw insurance issues for the companies, and communicated with insurers, including Endurance.

Prior Endurance Policy

Endurance issued to the insureds and RPP III a Professional, Management, Employment Practices and Fiduciary Liability Insurance Policy ("prior policy"), effective during 2008. In her deposition, Ms. Franson testified that upon renewal of the prior policy in fall 2008, Mr. Kashianinstructed Ms. Franson not to maintain RPP III and other entities as insureds on the renewed policy: "Mr. Kashian made a decision not to. He felt it was most important to have the general partner as an insured." Ms. Franson noted a premium savings. Mr. Kashian testified that only he was authorized to omit RPP III from a renewed policy.

The Effective Endurance Policy

In late 2008, Endurance issued to the insureds a Professional, Management, Employment Practices and Fiduciary Liability Insurance Policy ("policy"), effective during 2009. Endurance notes that the policy "eliminated RPP III as an insured" and "expressly" provided coverage for Lance-Kashian, its subsidiaries, joint ventures and their directors, officers and employees. Endurance points out that RPP III is neither a subsidiary nor joint venture of a named insured under the policy.

The policy gives Endurance "the right and duty to defend any Claim against an Insured"³ and provides that Claim Expenses incurred in the defense of a Claim are included in the policy's $2 million limits. The policy defines "Claim Expenses" as:

1. reasonable fees charged by any lawyer selected by mutual agreement between the Company and the Insured. However, if after a good faith attempt by the Company, the Company and the Insured cannot agree on the selection of the lawyer, the Company shall select the lawyer.

2. all other reasonable fees, costs and expenses resulting from the investigation and defense of a Claim, if incurred by the Company or by the Insured with the written consent of the Company.

Pursuant to the policy, Endurance's determination "as to the reasonableness of Claim Expenses shall be conclusive on the Insured," and "the Insured shall not, except at the Insured's own cost, make any payment . . . or assume any obligation . . ."

The policy includes an "Allocation" provision ("allocation provision"), which provides:

If a Claim made against any Insured includes both covered and uncovered matters or is made against both an Insured and others not insured under this Policy, the Insured and the Company agree that there must be an allocation between insured and uninsured Loss. The Insureds and the Company shall use their best efforts to agree upon a fair and proper allocation between insured and uninsured Loss. However, the Company shall not seek to allocate with respect to Claim Expenses and shall pay one hundred percent (100%) of Claim Expenses so long as a covered matter remains within the Claim. (Italics added.)

Fireman's Fund Policy

The insureds purchased from Fireman's Fund Insurance Company ("Fireman's Fund") a portfolio policy ("Fireman's Fund policy"), which was effective during late 2009 and which covered RPP III.

The Underlying Action

On November 12, 2009 when the policy was in effect, Gottschalks, as debtor in a Delaware bankruptcy proceeding, filed an adversary proceeding ("underlying action") against the insureds and RPP III to allege that the insureds and RPP III had wrongfully interfered with Gottschalks efforts to assign its limited partnership and leasehold interests in Park 41, which owned the Gottschalks corporate headquarters building in Fresno. Gottschalks' Adversary Complaint ("Gottschalks complaint") in the underlying action sought declaratory and injunctive relief, compensatory and punitive damages, and attorney fees and alleged claims for lease interference, breaches of lease agreement, covenant of good faith and fair dealing and fiduciary duty, and intentional and negligent interference with prospective economic advantage.⁴

More specifically, the Gottschalks' complaint accused the insureds and RPP III of:

. . . scheming to misappropriate the value of the Debtor's [Gottschalks'] interest in the partnership for less than its fair market value or improperly squeeze down the size of the Debtor's interest for their own benefit. In furtherance of their scheme, Defendants have made material misrepresentations to potential buyers of the Debtor's assets to dissuade them from purchasing the partnership interest and have made or threatened to make financial and other demands on the Debtor under the partnership agreement and the headquarters' lease that are unreasonable and unjustified and designed to coerce the Debtor into forfeiting its partnership interest or dissuading potential assignees from acquiring such interest.

The Gottschalks complaint further accused the insureds and RPP III of engaging in acts "to harass the Debtor and disrupt its bankruptcy case." In seeking punitive damages, the Gottschalks complaint alleged that the insureds and RPP III "acted oppressively, fraudulently, and maliciously in intentionally interfering with the Office Lease and Debtor's efforts to assign [its partnership and leasehold interests] and in breaching or causing the breach of RPP III's fiduciary duties to the Debtor."

The Gottschalks complaint's intentional interference with prospective economic advantage claim alleged that the insureds and RPP III "engaged in wrongful conduct by making intentionalmisrepresentations" to a potential buyer of Gottschalks' partnership and leasehold interests which "were designed to interfere with or disrupt" Gottschalks' offer to assign those interests. The claim further alleges that the insureds and RPP III "engaged in wrongful conduct by deliberately mismanaging the Office Building and failing to act in good faith with respect to" one of its tenants and that such conduct was "designed to interfere with or disrupt negotiations" between Gottschalks and a tenant over assignment of Gottschalks' interests.

The Gottschalks' complaint alternatively alleged that the insureds and RPP III's interference with prospective economic advantage was "negligent." The Gottschalks complaint's intentional and negligent interference with prospective economic advantage claims sought damages "not less than $2.0 million" regarding attempts to assign it interests and "not less than $92,000 per month" in carrying costs for the office lease.

The insureds characterize the Gottschalks complaint to allege that the insureds and RPP III made unjustified capital calls on Gottschalks and withheld limited partnership distributions to Gottschalks to "unjustly enrich[]" the insureds and RPP III at Gottschalks' expense. The Gottschalks' complaint's intentional interference with office lease claim alleged that the insureds and RPP III "caused Park 41 to breach the Office Lease and the implied covenant of good faith and fair dealing by having Park 41 improperly account for the replacement of the roof membrane on the Office Building as an operating cost . . . and by illegitimately charging the Debtor the full pro-rata amount of the replacement of the roof membrane replacement." The Gottschalks' complaint further accused the insureds and RPP III of "deliberate mismanagement of the Office Building and failure to act in good faith with respect to and in breach of the Office Lease."

The Gottschalks' complaint alleged that the insureds and RPP III engaged in conduct with purposes of:

(i) coercing the Debtor into default under the Office Lease, thus triggering the Penalty Clause that reduces the Debtors LP Interest to 1%, (ii) driving away all

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