Sharp v. Essex Ins. Co. (In re C.M. Meiers Co.), Case No.: 1:12-bk-10229-MT
| Decision Date | 20 March 2015 |
| Docket Number | Case No.: 1:12-bk-10229-MT,Adv No: 1:14-ap-01042-MT |
| Court | United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — Central District of California |
| Parties | In re: C.M. Meiers Company, Inc. Debtor(s). Bradley D Sharp Plaintiff(s), v. Essex Insurance Company Defendant(s). |
RE: MOTION FOR SUMMARY JUDGMENT
Date: December 3, 2015
Time: 1:00 p.m.
The Chapter 11 Trustee previously filed another adversary action captioned, Sharp v. Herbert Rothman, et al., adversary case no. 1:12-ap-01118 MT ("Adversary Action") against C.M. Meiers' former officers and directors, Herbert Rothman, Eric Rothman and Rebecca Rothman, (the "Rothmans"). The Trustee's Complaint and First Amended Complaint ("FAC") asserted claims against the Rothmans for, among other things, acts, errors and omissions committed in regard to their Professional Services in connection with their control and management of the C.M. Meiers' ("CMM") Insurance Trust Account. The Trustee now alleges that Defendant Essex Insurance Company ("Essex") wrongfully denied the coverage provided by Essex's Insurance Agents and Brokers Errors and Omissions Liability Insurance Policy, Policy No. AB-351400 (the "Policy") and failed to offer a defense, without assertion of a proper reservation of rights, for the claims brought by the Trustee in the Rothmans Adversary Action.
The majority of the facts are undisputed. The questions are mainly whether genuine issues of material fact exist as to whether Defendant Essex Insurance Company had a duty to defend the Rothmans based on the insurance policy issued to CMM; whether by denying coverage, Essex breached contractual obligations it owed to the Rothmans, and lastly, whether based on its policy, after denying coverage without reserving its rights, Essex now has the duty to indemnify under the Rothmans' settlement agreement with the Trustee.
Summary judgment should be granted "if 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 moving party is entitled to a judgment as a matter of law. FRCP 56(c) (incorporated by FRBP 7056).
The moving party has the burden of establishing the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). If the moving party shows the absence of a genuine issue of material fact, the nonmoving party must go beyond the pleadings and identify facts that show a genuine issue for trial. Id. at 324. The court must view the evidence in the light most favorable to the nonmoving party. Bell v. Cameron Meadows Land Co., 669 F.2d 1278, 1284 (9th Cir. 1982). All reasonable doubt as to the existence of a genuine issue of fact should be resolved against the moving party. Hector v. Wiens, 533 F.2d 429, 432 (9th Cir.1976). The inference drawn from the underlying facts must be viewed in the light most favorable to the party opposing the motion. Valadingham v. Bojorquez, 866 F.2d 1135, 1137 (9th Cir. 1989).
In addition, the interpretation of an insurance contract presents a question of law. Stanford Ranch, Inc. v. Maryland Cas. Co., 89 F.3d 618, 624 (9th Cir. 1996). In the instant case, the parties do not dispute the terms of the insurance contract, but disagree as to the proper interpretation of the contract. Thus, because Defendant's duty to defend rests on the construction and interpretation of the contract, resolution by summary judgment is appropriate.
The Trustee is seeking declaratory relief that (1) Essex's insurance policy provides coverage for the claims and losses incurred as a result of the Rothmans' mismanagement of CMM's trust account (claim no. 3); (2) that Essex was obligated to provide a defense to the Rothmans for the claims presented in the Trustee's FAC; and (3) that Essex is liable for the Trustee's attorney's fees incurred in obtaining coverage for the claim.
To prevail in an action seeking declaratory relief on the question of the duty to defend, the insured must prove the existence of a potential for coverage, while the insurer must establish the absence of any such potential. In other words, the insured need only show that the underlying claim may fall within policy coverage; the insurer must prove it cannot. The duty to defend exists if the insurer becomes aware of, or if the third party lawsuit pleads, facts giving rise to the potential for coverage under the insuring agreement. Delgado v. Interinsurance Exch. of Auto. Club of S. Cal., 47 Cal. 4th 302, 303, 97 Cal. Rptr. 3d 298, 300, 211 P.3d 1083, 1085 (2009).
There are certain presumptions that California law applies in cases involving insurance contracts—and, more specifically, those involving the duty to defend. "[W]hen the policy is ambiguous and the insured would reasonably expect coverage based on thenature and kind of risk covered by the policy," or when "the underlying suit potentially seeks damages within the coverage of the policy," the California courts have held that an insurer has a duty to defend its insured against third-party lawsuits. Conestoga Servs. Corp. v. Executive Risk Indem., Inc., 312 F.3d 976, 981-82 (9th Cir. 2002) citing Stanford Ranch, 89 F.3d at 624 (quoting La Jolla Beach & Tennis Club, 9 Cal.4th at 38, 36 Cal.Rptr.2d 100, 884 P.2d 1048) (Citations and internal quotations omitted).
Here, Essex was given notice of the complaint, the mediation, and the possibility of the existence of a potential for coverage. Thus, Essex was aware of, and the third party lawsuit plead facts giving rise to the potential for coverage under the insuring agreement.
A. Duty To Defend
Essex argues that it had no duty to defend the Rothmans' operation of CMM for a number of reasons:
1) Maintaining a trust account is not a "professional service;"
3) Claims that arise from CMM's inability to make payments from the depleted trust account are excluded by the policy's exclusion for "failure or refusal to collect, pay, or return any policy premium, return premium, commission..;"
4) Stealing from a trust account is excluded by the policy's exclusion for claims that arise out of dishonesty;
5) The Trustee's claim is for uninsurable restitution;
6) The Trustee's claim is uninsurable under Cal. Ins. Code § 533; and
7) The Trustee's claim is barred by the Policy's "insured vs. insured" exclusion.
The Trustee contends that Essex owed a duty because the FAC alleged that the Rothmans committed errors and omissions in the course of their Professional Services as to their management and control of the CMM Insurance Trust Account, (the "Trust Account"), which CMM was required to maintain in accordance with California Insurance Code §1733 et seq. See RJN 2, Ex. 1 Third Claim for Relief, ¶¶ 75-83; see also RJN 8. Specifically, the Trustee alleged that the failure of the Rothmans, as the officers and directors of CMM, to supervise the business affairs and management of CMM through its Trust Account was a Wrongful Act done in the performance of their Professional Services that consisted of the control, maintenance and operation of the Trust Account for the benefit of its clients and the insurance companies it represented. After the Rothmans tendered the Trustee's claims to Essex for defense and for coverage, Essex denied coverage, without a reservation of rights.
A starting point must be the pertinent policy provisions of the Essex issued Policy to CMM, Inc. for the June 1, 2011 through June 1, 2012 Policy Period.
[Essex's Separate Statement of Undisputed Facts ("SSUF") 51 (Policy Insuring Agreement A.)] (Emphasis Added)
"Wrongful Act" is defined to mean "any act, error or omission in Professional Services." [SSUF 51 (Policy Definitions N.)]
Policy Definitions K then describes "Professional Services" in pertinent part to mean "the following services rendered for others:
[SSUF 51 (Policy Definitions K.)
The threshold issue is whether the administration of the CMM Trust Account is a Professional Service for others. The Ninth Circuit has defined "professional service" in a different context as follows:
The act or service must be such as exacts the use or application of special learning or attainments of some kind. The term 'professional' in the context used in the policy provision means something more than mere proficiency in the performance of a task and implies intellectual skill as contrasted with that used in an occupation for production or sale of commodities.... In determining whether aparticular act is of a professional nature or a 'professional service' we must look not to the title or character of the party performing the act, but to the act itself.
Bank of California, N.A. v. Opie, 663 F.2d 977, 981 (9th Cir.1981) (quoting Marx v. Hartford Accident and Indem. Co., ...
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