A-Mark Financial Corp. v. CIGNA Property & Casualty Companies

• Decision Date: 09 May 1995
• Docket Number: COMPANIES-INSURANCE,No. B075843,A-MARK,B075843
• Citation: 40 Cal.Rptr.2d 808,34 Cal.App.4th 1179
• Court: California Court of Appeals Court of Appeals
• Parties: FINANCIAL CORPORATION et al., Plaintiffs and Appellants, v. CIGNA PROPERTY AND CASUALTYCOMPANY OF NORTH AMERICA et al., Defendants and Respondents.

Page 808

40 Cal.Rptr.2d 808

34 Cal.App.4th 1179

A-MARK FINANCIAL CORPORATION et al., Plaintiffs and Appellants, v. CIGNA PROPERTY AND CASUALTY COMPANIES-INSURANCE COMPANY OF NORTH AMERICA et al., Defendants and Respondents.

No. B075843.

Court of Appeal, Second District, Division 4, California.

May 9, 1995.

Review Denied July 27, 1995.

Malley, Koffman & Associates, Gregory Koffman, Los Angeles, Hawley Troxell Ennis & Hawley and John F. Kurtz, Jr., Boise, ID, for plaintiffs and appellants.

Hornberger & Criswell, Ann M. Ghazarians, James L. Wellman, David Berry, Booth, Mitchell & Strange, Robert F. Keehn, Lisa Tinsley O'Hara, Bruce Trent & Associates, Bruce Davis, Oxnard and Lawrence Bistany, Los Angeles, for defendants and respondents.

ARLEIGH WOODS, Presiding Judge.

In Bank of the West v. Superior Court (1992) 2 Cal.4th 1254, 10 Cal.Rptr.2d 538, 833 P.2d 545, the Supreme Court held that an insurance policy which by its terms protected the insured against claims for "damages" caused by "unfair competition" arising from "advertising activity" did not cover claims for unfair competition brought under California's Unfair Business Practices Act, which does not permit recovery of damages. The issue raised by this appeal is whether the holding in Bank of the West applies, where the claims arose under Idaho's version of the Unfair Business Practices Act and the Commodity Exchange Act, both of which contain a damage remedy. We conclude that it does.

The procedural history of this case is as follows: Appellants, A-Mark Financial Corporation, and its subsidiaries Spiral Metal Company and FI Holding, Inc. (collectively "A-Mark") brought an action for breach of insurance contract, breach of the duty of good faith, and declaratory relief against its former insurers: (1) Insurance Company of North America ("INA"), incorrectly designated as CIGNA Property and Casualty Companies-Insurance Company of North America; (2) Pacific Indemnity Company, incorrectly designated as Chubb Group of Insurance Companies-Pacific Indemnity Company; and (3) Continental Casualty Company and National Fire Insurance Company of Hartford ("CNA"), incorrectly designated as CNA Insurance Companies-Continental Casualty Company. The complaint alleges that defendants wrongfully failed to provide a defense to A-Mark in a series of lawsuits arising out of its dealing with an Idaho resident and involving Idaho's Consumer Protection Act (Idaho Code, § 48-601 et seq.), and the Commodity Exchange Act (7 U.S.C., § 1 et seq.).

To resolve the coverage issue, A-Mark and Pacific Indemnity brought cross-motions for summary judgment. The trial court granted Pacific Indemnity's motion, "adopt[ing] a narrow interpretation of 'unfair competition,' and conclud[ing] that the causal connection between the advertising practice and the general public is too remote to give rise to coverage." The court based its decision on the Supreme Court's holding in Bank of the West. Judgment was entered in favor of defendant Pacific Indemnity and, following that, INA's and CNA's motions for judgment on the pleadings were granted on the same grounds. A-Mark appeals, contending Bank of the West is not applicable here, where the issue is not payment of claims, but duty to defend, and the underlying claims at least potentially involve damages. We reject these contentions and affirm the judgment. ¹

The undisputed facts are that A-Mark, a California corporation, is in the business of wholesaling precious metals to dealers. Between April 1982 and December 1986, A-Mark made hundreds of sales to Keith Bybee, a retail dealer doing business in Boise, Idaho. Bybee's purchases were made both on his own behalf and for resale to his customers. At some point, Bybee was offered the opportunity to purchase on margin, for ten or twenty percent down, and thereafter made many such purchases over the remaining course of the parties' relationship. Whenever Bybee made margin purchases, A-Mark kept possession of the metals as collateral until the full purchase price was paid. During this same period, Bybee purchased silver and other metals on behalf of his customers, which were also kept in his name at A-Mark. Apparently he advised his customers that their silver was being stored at A-Mark for safekeeping, but not that it was under his name and subject to his debts.

The relationship began to unravel in 1983 when the market price of silver declined. A-Mark imposed a series of margin calls on Bybee. After having exhausted his financial resources and his ability to borrow, Bybee liquidated all the precious metals held in his name by A-Mark. Bybee sold the metals back to A-Mark to re-pay his personal debt, even though some of the metals had been purchased--and fully paid for--by his customers. Bybee then used the money recovered to continue to speculate in the commodities market, eventually losing it all. In 1987, he lost his business, filed for bankruptcy, and was convicted of theft.

I

A series of lawsuits were filed against A-Mark in Idaho arising out of its relationship with Bybee. The first, Krommenhoek v. A-Mark Precious Metals Inc., et al., Adversary No. 87-0033, in the United States Bankruptcy Court for the District of Idaho, was brought by the trustee of Bybee's bankruptcy estate. The complaint alleged, among other things, that Bybee, "as agent for A-Mark and with A-Mark's express, implied, or apparent authority, would impliedly and expressly represent to public customers that their precious metals were being physically stored at A-Mark." The actions of A-Mark, and those of its "agent" Bybee, were alleged to be "unfair methods and practices" under Idaho's Consumer Protection Act, which is similar to California's Unfair Business Practices Act. Although the complaint appears to seek only restitutionary recovery, there is no dispute that, unlike California's Unfair Business Practices Act, damages are available under the Idaho statute. (Idaho Code, § 48-608.)

The margin sales to Bybee were also said to be "unlawful, unregistered futures contracts" or "leverage transactions" under the Commodity Exchange Act. The Act provides for recovery of damages caused by unlawful sale of futures contracts and leverage transactions (7 U.S.C., § 25(a)), and the complaint included a claim for damages under this cause of action.

Prior to trial in the Krommenhoek action, A-Mark obtained dismissal of all causes of action except for Count 1, involving a few thousand dollars of silver paid for but not received by Bybee, and Count 7, the alleged violation of the Commodity Exchange Act. At trial, plaintiff sought to prove that A-Mark had violated the Act by, among other things, marketing its sale of precious metals through margin accounts to the general public. In this regard, brochures and news releases prepared by A-Mark and describing its operations and products were referenced. Although the brochures were delivered solely to dealers, some may have been transmitted to Bybee's customers--indeed, some appear to have been designed for that purpose with a place for the dealer to stamp its name and address before passing them along. Plaintiff also attempted to demonstrate that A-Mark's salesmen advertised to the general public when they held conversations with Bybee on speaker phones, discussing such things as the price of silver or the merits of purchasing silver, which were overheard by Bybee's customers. The advertising brochures were used by plaintiff in Krommenhoek in a different context as well, to demonstrate "standardization" and "right to offset," two other indicia of an unlawful futures contract or leverage transaction under the Commodity Exchange Act. Plaintiff sought as "revisionary damages" all monies paid to A-Mark for the silver and other precious metals purchased by Bybee. A-Mark obtained a defense verdict, which was upheld on appeal. However, A-Mark spent several hundred thousand dollars on its defense.

The second case, State of Idaho v. A-Mark Precious Metals Inc., et al., Civil No. 89-1055, in the United States District Court for the District of Idaho, alleged based on similar facts the same violations of the Commodity Exchange Act, and also alleged violations of state and federal securities laws. This case was resolved as a result of the ruling in the Krommenhoek lawsuit that no violation of Commodities Exchange Act occurred.

The third case, Roundy, et al. v. A-Mark Precious Metals Inc., et al., Case No. CIV 90-0101, in the United States District Court for the District of Idaho, was a class action brought on behalf of those who lost their money and silver as a result of their dealings with Bybee. Like the other complainants, the Roundy plaintiffs alleged that A-Mark was collusively involved in Bybee's scheme to store his customer's precious metal under his own name and use it for his own purposes, or at least was aware of Bybee's practice in this regard. The claims included violation of the Idaho Consumer Protection Act and the Commodity Exchange Act. The complaint sought to "treat any purchase or sale agreement incident [to violations of the Idaho Consumer Protection Act] as void and to have returned all money or property obtained by A-Mark through its trading partner Bybee together with costs and attorneys fees and punitive damages." It sought damages for the Commodity Exchange Act violations. As far as the record discloses, that action is still pending.

II

There is no dispute that the respondent insurance companies, INA, Pacific Indemnity, and CNA, had issued policies to A-Mark which were in effect during at least some portion of the relevant period. Although the precise wording differs in numerous respects, all of the policies cover sums the insured is obligated to pay as "damages" because of "advertising injury," which is defined to include "unfair competition" or injury arising out of "unfair competition." ² All the policies obligated the insurers to defend A-Mark against such...