Fremont Indem. Co. v. Fremont General Corp.

Decision Date28 February 2007
Docket NumberNo. B183974.,B183974.
CourtCalifornia Court of Appeals Court of Appeals
PartiesFREMONT INDEMNITY COMPANY, Plaintiff and Appellant, v. FREMONT GENERAL CORPORATION et al., Defendants and Respondents.

Bill Lockyer, Attorney General, W. Dean Freeman, Mark P. Richelson, Raymond B. Jue, Deputy Attorneys General; Grrick, Herrington & Sutcliffe, Thomas J. Welsh, James E. Houpt and Jonathan G. Riddell for Plaintiff and Appellant.

Pachulski, Stang, Ziehl, Young, Jones & Weintraub, Iain A.W. Nasatir, James K.T. Hunter; Kaye Scholer, George T. Caplan, Kristopher S. Davis and Matthew G. Clark, Los Angeles, for Defendants and Respondents.

CROSKEY, Acting P.J.

Fremont Indemnity Company (Indemnity) appeals a judgment dismissing its complaint against Fremont General Corporation (Fremont General) and Fremont Compensation Insurance Group, Inc. (Insurance Group), after the court sustained a demurrer without leave to amend. Indemnity, by and through the Insurance Commissioner as its liquidator, sued Fremont General and Insurance Group in two separate actions alleging the misappropriation of funds. In this action, known as the Comstock action, Indemnity alleges that the defendants misappropriated net operating losses of its predecessor in interest, Comstock Insurance Company (Comstock), and misappropriated other assets of a former subsidiary of Indemnity, Fremont Reinsurance Company, Ltd. (Bermuda) (Re). In a separate action, known as the NOL action, Indemnity alleges that the same defendants misappropriated Indemnity's net operating losses that were not acquired through its merger with Comstock. The NOL action is the subject of a separate, pending appeal (case No. B188900).

The superior court took judicial notice of a letter agreement dated July 2, 2002, and determined that the agreement allowed Fremont General to use the net operating losses in the manner alleged. The court also concluded that the complaint alleged counts on behalf of Re and against Re, which is not a party to this action. Indemnity contends the court erred by taking judicial notice of not only the existence of the letter agreement but also its enforceability and proper interpretation. Indemnity also challenges the sustaining of the demurrer on other grounds. We conclude that the court erred by taking judicial notice of the enforceability and proper interpretation of the letter agreement and by deciding those questions in ruling on the demurrer. We also conclude that the complaint alleges facts sufficient to constitute a cause of action for the conversion of intangible personal property. We conclude further that the sustaining of the demurrer cannot be affirmed on other grounds, with the sole exception of count eleven for violation of Insurance Code section 1215.5, which fails to state a proper cause of action. Accordingly, we reverse the judgment with directions.

FACTUAL AND PROCEDURAL BACKGROUND
1. Factual Background

Indemnity is a wholly-owned subsidiary of Insurance Group, which is a wholly owned subsidiary of Fremont General. Indemnity was engaged in the underwriting and sale of workers' compensation insurance. Comstock was a wholly-owned subsidiary of Insurance Group until March 2003, when Comstock was merged into Indemnity. Comstock was engaged in the underwriting and sale of multiple lines of property and casualty insurance before 1986, and at that time ceased issuing new or renewal policies and limited its business to its preexisting policies. Fremont Reinsurance Company, Ltd. (Bermuda) (Re) was a wholly-owned subsidiary of Indemnity until September 2000, when Re was acquired by Insurance Group.

Fremont General, Insurance Group, and Indemnity entered into an agreement that was memorialized by a letter dated November 27, 2000, providing for the commissioner to supervise and provide regulatory oversight of Indemnity. The same parties, in the words of the complaint, "purported to enter into a second agreement, allegedly memorialized by a letter dated July 2, 2002," on the same subject.

Comstock was merged into Indemnity in March 2003, as we have stated. The commissioner filed an application to be appointed conservator of Indemnity on June 3, 2003. The court appointed the commissioner as conservator on June 4, 2003, and appointed the commissioner as liquidator on July 2,2003.

2. Complaint

Indemnity, by and through the commissioner, filed a complaint against Fremont General and Insurance Group in August 2004. Indemnity alleges that Fremont General dominated and controlled each of the insurance company subsidiaries and did so in a manner that benefited Insurance Group at the expense of Indemnity. Specifically, Indemnity alleges the following facts.

Fremont General and Comstock entered into an Intercompany Tax Allocation Agreement in October 1996 providing for the two companies to file a consolidated federal income tax return. The agreement provided that within three years after filing a consolidated tax return, Fremont General would pay Comstock for benefits that Fremont General received from claiming Comstock's net operating losses in the return.1 Comstock's net operating losses exceeded $52 million as of December 31, 2002. Fremont General caused Comstock to be merged into Indemnity in March 2003, resulting in Indemnity's acquisition of all the assets and liabilities of Comstock. Indemnity alleges that both before and after the merger, Fremont General appropriated: Comstock's net operating losses by various means, reducing its own tax liability, without compensating either Comstock or Indemnity and that Indemnity suffered damage as a result.

Indemnity also alleges that Fremont General caused Re to transfer more than $19 million in assets to Insurance Group in December 1996 in exchange for an unsecured promissory note, caused Re to allow Insurance Group to defer payment of over $1.9 million due on the note, and caused Re to invest over $7.5 million in Fremont General in December 1999 and May 2000. Indemnity alleges that Fremont General caused Insurance Group to purchase Re from Indemnity in September 2000 for $6,819,912, which was less than fair value, and then caused Re to declare a dividend, the value of which exceeded the purchase price.

Indemnity alleges further that Fremont General caused Comstock to assume certain liabilities of Re to the benefit of Insurance Group, as Re's parent company after September 2000, and to the detriment of Indemnity, which later merged with Comstock. The liabilities included reinsurance policy obligations that formerly were shared by both companies but were transferred to Comstock, and a series of settlements on reinsurance policies, known as commutations, for which both companies were liable but that were paid by Comstock alone. Indemnity alleges that Re recorded accounts payable for its share of the commutations but failed to repay Comstock in full either before or after the merger.

Indemnity alleges counts for (1) declaratory relief, seeking a declaration that Fremont General by various means appropriated Comstock's net operating losses without adequate compensation;(2) a permanent injunction under Insurance Code section 1020, to cause Fremont General to file an amended consolidated federal income tax return for 2002 in which Fremont General would not misappropriate Comstock's net operating losses, to prevent further interference with Comstock's net operating losses, and to order Fremont General to pay compensation for the economic benefit received from its prior use of Comstock's net operating losses; (3) breach of contract, alleging the failure to pay amounts due under the Intercompany Tax Allocation Agreement; (4) breach of fiduciary duty; (5) unjust enrichment; (6) constructive trust; (7) conversion; (8) avoidance of fraudulent transfers under the Uniform Fraudulent Transfer Act (Civ.Code, § 3439 et seq.); (9) avoidance of voidable preferences under Insurance Code section 1034; (10) avoidance of fraudulent transfers under Insurance Code section 1034.1; (11) recovery of misappropriated funds under Insurance Code section 1215.5, part of the Insurance Holding Company System Regulatory Act (Ins.Code, § 1215 et seq.); and (12) recovery of impermissible distributions under Insurance Code section 1215.16, which is part of the same act.

The first two counts are alleged against Fremont General only, while counts three through twelve are alleged against both Fremont General and Insurance Group. The first three counts pertain to only the alleged misappropriation of Comstock's net operating losses, while counts four through twelve pertain to that and also to the alleged misappropriation of assets involving Re.

Indemnity alleges similar theories of recovery against Fremont General and Insurance Group in the NOL action arising from the alleged misappropriation of Indemnity's net operating losses that were not acquired through its merger with Comstock. In its first amended complaint in the NOL action filed in July 2004, Indemnity also alleges that the letter agreement dated July 2, 2002, did not relieve Fremont General of its obligation to pay fair and reasonable consideration for use of Indemnity's net operating losses and alleges that to the extent the letter may be construed differently, the defendants obtained the commissioner's consent to those terms by fraudulently concealing Indemnity's precarious financial condition.

3. Demurrer

Fremont General and Insurance Group demurred to the complaint and each count alleged. They requested judicial notice of a letter dated July 2, 2002, and other documents. They cited no statutory authority for judicial notice, but argued that the court previously had taken judicial notice of the same letter in the NOL action and that reference to the document was essential to an understanding of the facts alleged in the complaint. The letter was from the commissioner and was addressed to the president of Insurance Group, who was also the...

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