Pension Trust Fund v. Federal Ins. Co.

• Decision Date: 01 October 2002
• Docket Number: No. 00-17055.,No. 00-17223.,00-17055.,00-17223.
• Parties: PENSION TRUST FUND FOR OPERATING ENGINEERS, Plaintiff-Appellant-Cross-Appellee, v. FEDERAL INSURANCE COMPANY, Defendant-Appellee-Cross-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 944

307 F.3d 944

PENSION TRUST FUND FOR OPERATING ENGINEERS, Plaintiff-Appellant-Cross-Appellee, v. FEDERAL INSURANCE COMPANY, Defendant-Appellee-Cross-Appellant.

No. 00-17055.

No. 00-17223.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted January 18, 2002.

Filed October 1, 2002.

COPYRIGHT MATERIAL OMITTED

Edward Mevi, Suzanne Klotz, Stanton, Kay & Watson, San Francisco, CA; and James J. Wesser, John Plotz, Van Bourg, Weinberg, Roger & Rosenfeld, Oakland, CA, for the appellant-cross-appellee.

H. Paul Breslin, Archer Norris, Walnut Creek, CA, for the appellee-cross-appellant.

Appeal from the United States District Court for the Northern District of California; William H. Alsup, District Judge, Presiding. D.C. No. CV-99-00708-WHA.

Before: GOODWIN, SNEED and TROTT, Circuit Judges.

SNEED, Circuit Judge.

This is an action alleging breach of a fiduciary responsibility insurance policy arising out of an insurance company's refusal to defend its insured against a third party claim. The insured, Pension Trust Fund for Operating Engineers ("PTF"), appeals the district court's grant of summary judgment in favor of Federal Insurance Company ("Federal"). PTF asserts that the district court erred in concluding that Federal had no duty to defend PTF against a claim brought by a third party Winncrest Homes, Inc. ("Winncrest"), in an underlying action ("the Winncrest action"). At issue is whether the Winncrest action involves an alleged breach of fiduciary duty that triggers Federal's obligation to defend under California law. Finding such an obligation, we reverse and remand.

BACKGROUND

I. Procedural History

PTF is an employee benefit trust that has a fiduciary responsibility insurance policy with Federal. The policy protects PTF in the event that a third party sues PTF for breach of fiduciary responsibilities. As an investment trust, PTF engages in commercial investments for the benefit of its pension participants. One of these transactions led to a lawsuit, in which a third party asserted six common law causes of action. When PTF tendered the complaint to Federal for a defense, Federal refused to defend. PTF then brought a diversity action in California against Federal, seeking declaratory relief and damages for breaches of contract and of the covenant of good faith and fair dealing. Both parties moved for summary judgment on the issue of whether Federal had a duty to defend PTF in this action.

In a succession of interlocutory orders, the district court first rejected Federal's argument that the policy only covered fiduciary duties arising under ERISA. The district court later rejected both parties' subsequent motions for summary adjudication on the related issue of claim notice. It did so because of factual issues regarding: (1) whether PTF complied with the policy's notice provisions; and (2) whether Federal was prejudiced by any late tender of the claim. Despite these preliminary determinations, summary judgment was ultimately granted to Federal because the court found that the Winncrest action did not proximately result from a breach of fiduciary duty. The district court deemed this causation conclusion fatal to the duty-to-defend issue. PTF appealed from this summary judgment, and Federal cross-appealed from the court's two earlier adverse determinations.¹

II. The Winncrest Action

In order to determine whether Federal incurred a duty to defend PTF in the Winncrest action, it is necessary to understand the complex factual scenario alleged by Winncrest. In this section, we recite the Winncrest cross-complaint allegations, upon which the defense duty must be evaluated. See Horace Mann Ins. Co. v. Barbara B., 4 Cal.4th 1076, 1081, 17 Cal. Rptr.2d 210, 846 P.2d 792 (1993).

As a pension trust fund, PTF invested in a real estate venture in Sacramento County called Rancho Murieta. It purchased a large tract of land and planned to convert it into a golf country club residential community. PTF formed two corporations to assist in the development: (1) Rancho Murieta Properties, Inc. ("RMPI"), a wholly-owned subsidiary that developed the residential lots; and (2) Rancho Murieta Country Club ("the Club"), a nonprofit corporation that leased and operated the golf courses and clubhouse. PTF controlled the Club's Board of Directors and owed the Club fiduciary duties. Through RMPI, PTF funded the Club's operating losses and executed loans with the Club, secured by deeds of trust. The Club leased the Rancho Murieta property from PTF for the Club's golf courses and country club. Winncrest alleged that in entering into these loan and lease transactions, PTF did not observe the fiduciary duties it owed to the Club. This failure, it claimed, caused the Club to engage in deals that operated to the Club's detriment, which, as reflected in the allegations below, ultimately led to Winncrest's ruin.

PTF eventually sold RMPI to a developer named John B. Anderson ("Anderson") and executed a promissory note with Anderson for this sale. PTF retained a deed of trust as collateral for the loan, encumbering the RMPI properties. Winncrest then purchased parcels from Anderson's RMPI in several transactions. In the last two transactions, PTF became further entangled in the complex scheme by acting as Winncrest's lender, securing the notes by deeds of trust.

Legal disputes between PTF and Anderson's RMPI over funding of the Club's operations soon arose. Because of these disputes, the State of California declined to renew the country club's permit. Winncrest claimed that PTF unreasonably refused to release the earlier Anderson encumbrance, impeding further sales transactions and ultimately controlling the success of the Club, RMPI, and Winncrest. Conflicts between the Club, Anderson's RMPI, and PTF continued, essentially preventing any further transfer of memberships. Without the ability to offer country club memberships, Winncrest was unable to market its tracts and defaulted on its loans to PTF. As Winncrest's lender, PTF then instituted foreclosure actions against Winncrest.

Winncrest cross-appealed, asserting six causes of action against PTF: Fraud and Deceit, Negligent Misrepresentation, Fraudulent Inducement, Intentional Interference with Prospective Economic Advantage, Developer Liability, and Lender Liability. PTF ultimately prevailed against Winncrest at trial and now seeks reimbursement of its defense costs from Federal, who earlier refused to defend PTF.

STANDARD OF REVIEW

We review a grant of summary judgment de novo. State Farm Mut. Auto. Ins. Co. v. Davis, 937 F.2d 1415, 1417 (9th Cir.1991). "[V]iewing the evidence in the light most favorable to the nonmoving party," we must determine "whether there are any genuine issues of material fact and whether the district court correctly applied the law." Id. Issues of contract interpretation are also reviewed de novo. Id.

DISCUSSION

I. The Scope of Federal's Duty to Defend

In California, a liability insurer's duty to defend its insured is broad. It arises whenever a claim may potentially lead to indemnity. Horace Mann, 4 Cal.4th at 1081, 17 Cal.Rptr.2d 210, 846 P.2d 792. This duty is necessarily broader than the duty to indemnify because of "the difficulty in determining whether the third party suit falls within the indemnification coverage before the suit is resolved." Fresno Econ. Import Used Cars, Inc. v. U.S. Fid. & Guar. Co., 76 Cal.App.3d 272, 278, 142 Cal.Rptr. 681 (1977).

The first step in determining whether the duty to defend is triggered is to compare the allegations of the complaint —and "[f]acts extrinsic to the complaint" — with the policy terms to see if they "reveal a possibility that the claim may be covered by the policy." Horace Mann, 4 Cal.4th at 1081, 17 Cal.Rptr.2d 210, 846 P.2d 792. This determination "turns on all facts known by the insurer at the inception of the third party lawsuit." Barnett v. Fireman's Fund Ins. Co., 90 Cal.App.4th 500, 509, 108 Cal.Rptr.2d 657 (2001) (citing Montrose Chem. Corp. v. Superior Court, 6 Cal.4th 287, 295, 24 Cal. Rptr.2d 467, 861 P.2d 1153 (1993)). Furthermore, "the insurer must defend an action against its insured even though it has independent knowledge of facts not in the pleadings that establish that the claim is not covered." CNA Cas. of Cal. v. Seaboard Sur. Co., 176 Cal.App.3d 598, 606, 222 Cal.Rptr. 276 (1986).

Any doubt as to whether these facts trigger a duty to defend is resolved in favor of the insured. Horace Mann, 4 Cal.4th at 1081, 17 Cal.Rptr.2d 210, 846 P.2d 792. Furthermore, any limitations of the defense duty must be communicated to the insured in a way that is "conspicuous, plain and clear." Md. Cas. Co. v. Nationwide Ins. Co., 65 Cal.App.4th 21, 30-31, 76 Cal.Rptr.2d 113 (1998) (quoting Gray v. Zurich Ins. Co., 65 Cal.2d 263, 273, 54 Cal.Rptr. 104, 419 P.2d 168 (1966)).

In resolving the question of whether a duty to defend arises under a policy, the insurer has a higher burden than the insured. "[T]he insured need only show that the underlying claim may fall within policy coverage; the insurer must prove it cannot." Montrose Chem., 6 Cal.4th at 300, 24 Cal.Rptr.2d 467, 861 P.2d 1153. Once the insured makes a showing of potential coverage, the insurer may be relieved of its duty only when the facts alleged in the underlying suit "can by no conceivable theory raise a single issue [that] could bring it within the policy coverage." Id. at 300, 24 Cal.Rptr.2d 467, 861 P.2d 1153. The test is not "whether noncovered acts predominate in the third party's action, but rather ... whether there is any potential for liability under the policy." Horace Mann, 4 Cal.4th at 1084, 17 Cal.Rptr.2d 210, 846 P.2d 792. One limitation on this broad construction is "the nature and kind of risk covered by the policy." Gray, 65 Cal.2d at 275, 54 Cal.Rptr. 104, 419 P.2d 168.

A. Coverage for Non-ERISA Obligations

First, we must consider whether the policy is limited to fiduciary duties arising...