Knightbrook Ins. Co. v. Payless Car Rental Sys., Inc.

• Decision Date: 19 December 2018
• Docket Number: No. CV-12-01671-PHX-DGC,CV-12-01671-PHX-DGC
• Citation: 356 F.Supp.3d 856
• Parties: KNIGHTBROOK INSURANCE COMPANY; and Knight Management Insurance Services, LLC, Plaintiffs, v. PAYLESS CAR RENTAL SYSTEM, INC.; and PCR Venture of Phoenix, LLC, Defendants.
• Court: U.S. District Court — District of Arizona

356 F.Supp.3d 856

KNIGHTBROOK INSURANCE COMPANY; and Knight Management Insurance Services, LLC, Plaintiffs,

v.PAYLESS CAR RENTAL SYSTEM, INC.; and PCR Venture of Phoenix, LLC, Defendants.

No. CV-12-01671-PHX-DGC

United States District Court, D. Arizona.

Signed December 19, 2018

Filed December 20, 2018

Alison Rebecca Christian, Stephen M. Dichter, Gena LoPresto Sluga, Jeffrey O. Hutchins, Christian Dichter & Sluga PC, Phoenix, AZ, for Plaintiffs.

Arron Burt Nesbitt, Taylor Anderson LLP, Scottsdale, AZ, Barry Matthew Markson, Gust Rosenfeld PLC, Phoenix, AZ, Eric C. Bosset, Philip Joseph Levitz, Covington & Burling LLP, Washington, DC, Kyle Paul Seedorf, Taylor Anderson LLP, Denver, CO, for Defendants.

ORDER

David G. Campbell, Senior United States District Judge

Following an appeal, the Ninth Circuit remanded the equitable indemnification claim asserted by Plaintiffs KnightBrook Insurance Company and Knight Management Insurance Services, LLC (collectively, "KnightBrook") against Defendants Payless Car Rental System, Inc. and PCR Venture of Phoenix, LLC (together, "Payless"). Doc. 418. The parties have briefed the remaining issues (Docs. 433, 439, 441), and the Court heard oral argument on November 30, 2018 (Doc. 443). For reasons stated below, the Court finds that KnightBrook has failed to establish a right to indemnification from Payless.

I. Background.

The following background information is based on evidence presented at the previous bench trial and the Court's findings of fact. See Doc. 376 at 2-5.

In February 2010, Payless rented a car to Michael Bovre. The rental agreement provided Bovre with an opportunity to purchase Supplemental Liability Insurance ("SLI") of $ 1 million. KnightBrook provided the SLI coverage pursuant to a commercial automobile liability insurance policy issued to Payless. Bovre did not affirmatively decline SLI coverage by initialing the rental contract where appropriate, and the Payless desk agent told Bovre that "liability" coverage was included in the contract at no charge. As required under Arizona law, Payless provided Bovre with liability insurance coverage for minimum financial limits of $ 15,000/$ 30,000.

On March 1, 2010, Bovre was driving the Payless rental car when he collided with a motorcycle carrying Robert and Lorraine McGill, causing them significant and permanent injuries. Bovre sought coverage for the accident under the SLI policy, but KnightBrook denied the claim because Bovre did not pay for SLI coverage.

The McGills sued Bovre and issued a settlement demand in February 2011. See McGill v. Bovre , No. CV2011-003518 (Maricopa Cty. Super. Ct. Feb. 8, 2011). The McGills sought the total available liability limits afforded by (1) Bovre's personal liability insurance policy with Travelers, which was $ 500,000; (2) Payless's state-mandated rental car coverage of $ 30,000, provided by Great American Assurance Company, and (3) the SLI coverage of $ 1,000,000.

Travelers and Great American offered to pay $ 530,000 to settle the claims against Bovre, but the McGills declined to accept this amount in full satisfaction of their claims. To protect his interests, Bovre entered into a Damron settlement agreement with the McGills. See Damron v. Sledge , 105 Ariz. 151, 460 P.2d 997 (1969). Under the agreement, Bovre paid the available $ 530,000 of insurance coverage to the McGills and assigned them all claims he had against KnightBrook and Payless. Bovre and the McGills stipulated to an $ 8 million judgment against Bovre, and the McGills agreed not to seek further payments from him.

The McGills filed this action in June 2012, asserting Bovre's assigned claims for breach of contract, negligence, and bad faith against KnightBrook and Payless. See Doc. 1-2 at 36-43; Doc. 40. On March 14, 2013, the McGills sent a settlement demand for $ 1 million to Payless and KnightBrook that would resolve all claims in the lawsuit. The McGills later reduced their demand to $ 970,000 to account for the $ 30,000 they had received in state-mandated coverage.

KnightBrook suggested to Payless that they each pay half of the $ 970,000 to settle the suit. When Payless declined, KnightBrook settled with the McGills by paying $ 970,000 and taking an assignment of the McGills' claims against Payless. On June 14, 2013, KnightBrook filed a complaint against Payless asserting the assigned claims for breach of contract and negligence, as well as its own claims for equitable indemnification and breach of fiduciary duty. Doc. 116. Payless counterclaimed for insurance bad faith. Doc. 144.

The Court held on summary judgment that the breach of contract claims assigned to KnightBrook were extinguished by an accord and satisfaction when $ 970,000 was paid to the McGills. Docs. 261. Following a bench trial, the Court held that the negligence and breach of fiduciary duty claims were time-barred, that Payless failed to prove its bad faith counterclaim, and that KnightBrook was entitled to equitable indemnification for the $ 970,000 settlement payment. Doc. 376. Relying in part on § 78 of Restatement (First) of Restitution, the Court held that KnightBrook was subject to and discharged a "supposed obligation" to the McGills which Payless had a greater responsibility to discharge. Id. at 15-18; see KnightBrook v. Payless , 100 F.Supp.3d 817, 827-34 (D. Ariz. 2015). The Court entered judgment in favor of KnightBrook and against Payless on the equitable indemnification claim. Doc. 377 at 1.

Payless appealed the rulings on its bad faith counterclaim and KnightBrook's equitable indemnification claim. Doc. 385. The Ninth Circuit certified two questions to the Arizona Supreme Court: (1) whether Arizona equitable indemnity law incorporates Restatement § 78, and (2) whether equitable indemnity liability under § 78 requires that the indemnity plaintiff's liability to the underlying plaintiff be "coextensive" with the indemnity defendant's liability to the underlying plaintiff. KnightBrook v. Payless , 855 F.3d 1072, 1074 (9th Cir. 2017). The Arizona Supreme Court answered the first question in the negative and deemed the second question moot. KnightBrook v. Payless , 243 Ariz. 422, 409 P.3d 293, 294 (2018). The Ninth Circuit remanded KnightBrook's equitable indemnification claim to this Court to apply the "actual obligation" standard articulated by the Arizona Supreme Court and to determine whether KnightBrook's $ 970,000 settlement with the McGills discharged a "common" liability of KnightBrook and Payless.

KnightBrook v. Payless , 731 Fed.Appx. 632, 634 (9th Cir. 2018). The Ninth Circuit affirmed the judgment against Payless on its bad faith counterclaim.

Because a full record had been created by the bench trial, the Court and the parties agreed that the equitable indemnification claim could be resolved by additional briefing and argument. Doc. 427. The Court now finds that KnightBrook did not make the $ 970,000 settlement payment solely to discharge a common or coextensive obligation. Because the Court cannot determine what portion of the payment may have been paid to discharge such an obligation, KnightBrook has not shown that it is entitled to equitable indemnification under Arizona law. Given this ruling, the Court need not decide whether an actual obligation was owed to Bovre.

II. Arizona's Equitable Indemnity Law.

In addressing the certified questions, the Arizona Supreme Court described the state's equitable indemnity law as follows:

Arizona's equitable indemnity law seeks to avoid unjust enrichment by allowing recovery only when an indemnity plaintiff subject to derivative or imputed liability discharges an actual obligation that a culpable indemnity defendant owed to a third party.

KnightBrook , 409 P.3d at 295 (citing MT Builders, LLC v. Fisher Roofing, Inc. , 219 Ariz. 297, 197 P.3d 758, 764 n.2 (Ariz. Ct. App. 2008) ). Applying the three-part test set forth in MT Builders , the court explained that "the plaintiff in a common law indemnity action generally must show: (1) it ‘discharged a legal obligation owed to a third party’; (2) for which the ‘indemnity defendant was also liable’; and (3) as between the two, ‘the obligation should have been discharged by the indemnity defendant.’ " Id. at 295 (quoting MT Builders , 197 P.3d at 764 n.2 ). The court noted that Arizona's equitable indemnity principles are consistent with § 76 of the Restatement (First) of Restitution and § 23 of the Restatement (Third) of Restitution and Unjust Enrichment. Id. at 295.¹

According to the Ninth Circuit, the Arizona Supreme Court made clear that equitable indemnity under Arizona law "effectively requires coextensive liability[.]" KnightBrook , 731 Fed.Appx at 634. Payless argues that KnightBrook's settlement with the McGills did not discharge a coextensive liability because Payless faced only a $ 1 million claim on the SLI policy, while KnightBrook faced not only the SLI liability claim but also Bovre's assigned insurance bad faith claim and exposure to the full $ 8 million Damron judgment. Doc. 439 at 5-7. Payless notes that the Ninth Circuit explicitly found that "[b]ecause KnightBrook's settlement payment to the McGills enabled it to avoid substantial liability that Payless did not face, KnightBrook's and Payless's liability to the McGills was not coextensive." KnightBrook , 855 F.3d at 1076.

KnightBrook counters that the parties' liability for the SLI policy claim was coextensive, and that no other damages were paid when KnightBrook settled with the McGills for the SLI policy limits of $ 970,000. Doc. 441 at 6-7. KnightBrook asserts that § 76 of the Restatement speaks to a duty that is "common" and does not require that all of the parties' putative liabilities be identical. Id. at 6 (citing Herstam v. Deloitte & Touche , 186 Ariz. 110, 919 P.2d 1381, 1388 (Ariz. Ct. App. 1996) ("Indemnity allows one who has discharged a common liability to seek reimbursement from another." (emphasis in original) ) ).

Having carefully considered the parties' arguments and...