FIRST PACIFIC NETWORKS v. Atlantic Mut. Ins. Co., C-94-2851 DLJ.

• Decision Date: 10 May 1995
• Docket Number: No. C-94-2851 DLJ.,C-94-2851 DLJ.
• Citation: 891 F. Supp. 510
• Parties: FIRST PACIFIC NETWORKS, INC., Plaintiff, v. ATLANTIC MUTUAL INSURANCE COMPANY, Defendant.
• Court: U.S. District Court — Northern District of California

891 F. Supp. 510

FIRST PACIFIC NETWORKS, INC., Plaintiff, v. ATLANTIC MUTUAL INSURANCE COMPANY, Defendant.

No. C-94-2851 DLJ.

United States District Court, N.D. California.

May 10, 1995.

Darryl M. Woo, Sheppard, Mullin, Richter & Hampton, San Francisco, CA, for plaintiff.

Trelawney K. James-Riechert, and Gary R. Selvin, Larson and Burnham, Oakland, CA, for defendant.

ORDER

JENSEN, District Judge.

On April 19, 1995, the Court heard arguments on plaintiff's and defendant's motions for summary adjudication of two issues: (1) whether defendant Atlantic Mutual Ins. Co. ("Atlantic Mutual") had a duty to defend plaintiff First Pacific Networks, Inc. ("FPN") in Phase I of the underlying lawsuit, Arthur Bass v. First Pacific Networks (the "Bass lawsuit"); and (2) whether Atlantic Mutual breached that duty. Darryl M. Woo of Sheppard, Mullin, Richter & Hampton appeared on behalf of FPN. Gary R. Selvin of Larson & Burnham appeared on behalf of Atlantic Mutual. Having considered the arguments of counsel and the papers submitted, the Court hereby GRANTS plaintiff's motion for partial summary judgment.

This case is about whether an insurance company, Atlantic Mutual, breached its duty to defend. Atlantic Mutual issued a policy covering various torts, including defamation, by FPN. FPN was sued in the Bass lawsuit by a past chairman, Arthur Bass, for conversion of stock and defamation. FPN counterclaimed that Bass acquired the stock by "extortion" or "duress." Judge Ware, presiding over the Bass lawsuit bifurcated the action into two Phases. The First Phase was to determine who owned the stock. The Second Phase was to determine the amount of damages, if any, due to Bass. Atlantic Mutual refused to defend FPN in the First Phase on the grounds that its policy only covered suits for damages. FPN sued Atlantic Mutual for breach of the duty to defend. Both parties move for summary judgment on the issue of whether Atlantic Mutual breached its duty to defend.

I. BACKGROUND

A. Factual Background

Atlantic Mutual issued an insurance policy covering torts, including defamation by FPN. In August 1992 Arthur C. Bass, a former director and Chairman of FPN, filed a complaint against FPN and a Mr. Gibby, FPN's then President. This complaint alleged, among other things, that FPN and its officers had converted certain shares of FPN stock owned by Bass. This complaint did not allege defamation or any other causes of action that were covered by Atlantic Mutual's policy.

In October 1992, Bass amended the complaint to allege defamation against Gibby. Though FPN was not named as a defendant to the defamation cause of action, one of the allegations in the complaint alleged that some of the defamatory statements were made "at a meeting of the Board of Directors of FPN held at FPN's offices."

On November 12, 1992, FPN tendered the defense and indemnity of the Bass lawsuit, including the defamation claim, to Atlantic Mutual under the insurance policy. Atlantic Mutual did not respond until February 18, 1993.

On January 20, 1993, FPN filed a counterclaim in the Bass lawsuit against Bass for cancellation of the shares of Bass's FPN stock. FPN alleged that Bass had procured such stock from the company by duress and extortion, and for no consideration or legally inadequate consideration, and thus that the issuance of the shares was void. FPN's answer to Bass's First Amended Complaint included these same allegations as affirmative defenses.

On February 18, 1993, Atlantic Mutual accepted the defense of the Bass lawsuit by hiring the law firm, Ericksen, Arbuthnot to "protect the rights and interests of FPN with respect to the Bass lawsuit." FPN responded in a letter that it would not be happy with substituting Ericksen for its present firm.

On March 11, 1993, Judge James Ware, presiding over Arthur C. Bass v. First Pacific Networks, Inc., filed an order bifurcating the action as follows:

This action is hereby ORDERED to be bifurcated into two phases. The `First Phase' shall consist exclusively of the adjudication of the controversy regarding the right to ownership of the stock represented by the stock certificates ...

The `Second Phase' shall consist of the claims for damages brought by the Plaintiff Bass against each of the Defendants in this action. Apart from the motions currently pending and submitted as of February 26, 1993, discovery, motion practice and all other pretrial activity relating to the Second Phase is hereby STAYED, pending further order of this court after completion of trial or settlement of the First Phase.

On April 9, 1993, Atlantic Mutual denied that the Bass suit fell within the policy and refused to undertake the defense.

On May 4, 1993, Atlantic Mutual asked FPN for information as to the alleged defamation.

On May 10, 1993, FPN responded to Atlantic Mutual's request for information as to the defamation by stating that since the alleged defamation never occurred, they could not give any information about it.

Commencing on April 27, 1993, Phase I of the Bass lawsuit was tried before Judge Ware. On June 30, 1993, Judge Ware filed an Interlocutory Judgment in favor of Bass and against FPN. On September 24, 1993, at a case management conference, Judge Ware set the Second Phase of the trial to commence with jury selection on May 16, 1994.

On November 12, 1993, Atlantic Mutual accepted defense of the defamation claim with respect to Gibby.

On March 11, 1994, FPN was added as a defendant to the defamation claim in the Bass lawsuit.

On March 17, 1994, FPN settled the Bass lawsuit. Judge Ware approved the settlement and entered the Court's Final Judgment and Order of Dismissal on April 4, 1994.

Atlantic Mutual issued three checks as follows: $2,667.13 to local counsel in Memphis on June 29, 1994; $355,082.04 to FPN on July 13, 1994, which was received on or about July 18, 1994, by FPN; and $299,105.19 to St. Paul's (a co-insurer which paid for part of the fees incurred in the Bass lawsuit) on July 13, 1994. Approximately $200,000 of fees are still in dispute.

B. Procedural History

On July 18, 1994, FPN filed the present lawsuit, alleging, among other things, bad faith breach of the duty to defend. FPN brings this motion for a determination that (1) Atlantic Mutual had a duty under its policy to provide a defense or pay for the defense of FPN and its officers with respect to the Bass Lawsuit; (2) Atlantic Mutual's duty to defend included a duty to provide a defense of all claims in the Bass lawsuit, including the trial of the bifurcated counterclaim and affirmative defense which sought to establish the truth of the alleged defamatory statements that Bass "extorted" or "stole" the FPN stock; and (3) Atlantic Mutual breached its duty to defend FPN under the insurance policy by (a) failing to provide a defense during the pendency of the Bass lawsuit; and (b) failing to pay any portion of FPN's attorney's fees and costs in the Bass Lawsuit during the pendency thereof.

Atlantic Mutual moves for a determination that (1) it did not breach its duty to defend in the Bass lawsuit and (2) it had a right to allocate the defense fees in the Bass lawsuit and had no obligation to pay for discovery or trial of the First Phase.

C. Legal Standard: Cross Motions for Summary Judgment

Rule 56 governs motions for summary judgment. This rule states that summary judgment may be granted when "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(e).

In a motion for summary judgment, "if the party moving for summary judgment meets its initial burden of identifying for the court those portions of the materials on file that it believes demonstrates the absence of any genuine issues of material fact," the burden of production then shifts so that "the nonmoving party must set forth, by affidavit or as otherwise provided in Rule 56, `specific facts showing that there is a genuine issue for trial.'" T.W. Electric Service, Inc. v. Pacific Elec. Contractors Ass'n, 809 F.2d 626, 630 (9th Cir.1987); (citing Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 2553, 91 L.Ed.2d 265 (1986); Kaiser Cement Corp. v. Fischbach & Moore, Inc., 793 F.2d 1100, 1103-04 (9th Cir.), cert. denied, 479 U.S. 949, 107 S.Ct. 435, 93 L.Ed.2d 384 (1986)) (emphasis in original).

On cross motions for summary judgment, the burdens faced by the opposing parties vary with the burden of proof they will face at trial. To succeed on summary judgment plaintiff must prove each element essential of the claims upon which it seeks judgment by undisputed facts. Fontenot v. Upjohn Co., 780 F.2d 1190, 1194 (5th Cir. 1986) (party with burden "must establish beyond peradventure all of the essential elements ..." (emphasis in original)). In an influential article, Judge Schwarzer has phrased plaintiff's as follow: "Where the moving party has the burden of proof at trial ..., his showing must be sufficient for the court to hold that no reasonable trier of fact could find other than for the moving party." Schwarzer, Summary Judgment Under the Federal Rules: Defining Genuine Issues of Material Fact, 99 F.R.D. 465, 487-488 (1984).

In contrast, defendant's motion for summary judgment faces a lighter burden. Because the defendant does not bear the burden of proof at trial, the defendant need only point to the insufficiency of the plaintiff's evidence to shift the burden to the plaintiff to raise genuine issues of fact as to each claim by substantial evidence. T.W. Electric Service, Inc. v. Pacific Elec. Contractors Assoc., 809 F.2d 626, 630 (9th Cir.1987); citing Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 2553, 91 L.Ed.2d 265 (1983); Kaiser Cement Corp. v. Fischbach & Moore, Inc., 793 F.2d 1100, 1103-04 (9th Cir.), cert. denied, 479 U.S. 949, 107 S.Ct. 435, 93...