Texas Commerce Bank v. Garamendi

• Decision Date: 28 September 1994
• Docket Number: BANK-EL,No. B071545,B071545
• Court: California Court of Appeals Court of Appeals
• Parties: TEXAS COMMERCEPASO, N.A.; Commercial National Bank in Shreveport; First Interstate Bank of Denver, N.A.; First Tennessee Bank National Association; Nationsbank of Texas, N.A.; Norwest Bank Minnesota, N.A.; and Sunburst Bank, et al., El Paso Housing Finance Corporation, a Texas Nonprofit Corporation, Plaintiffs and Appellants, v. John GARAMENDI, Insurance Commissioner of the State of California, Executive Life Insurance Company, a California corporation, et al., Defendants and Respondents; Official Allocated Annuities Committee et al., Intervenors and Respondents.

Page 155

34 Cal.Rptr.2d 155

28 Cal.App.4th 1234

TEXAS COMMERCE BANK-EL PASO, N.A.; Commercial National Bank in Shreveport; First Interstate Bank of Denver, N.A.; First Tennessee Bank National Association; Nationsbank of Texas, N.A.; Norwest Bank Minnesota, N.A.; and Sunburst Bank, et al., El Paso Housing Finance Corporation, a Texas Nonprofit Corporation, Plaintiffs and Appellants, v. John GARAMENDI, Insurance Commissioner of the State of California, Executive Life Insurance Company, a California corporation, et al., Defendants and Respondents Official Allocated Annuities Committee et al., Intervenors and Respondents.

No. B071545.

Court of Appeal, Second District, Division 2, California.

Sept. 28, 1994.

As Modified on Denial of Rehearing

Oct. 28, 1994.

Review Denied Jan. 25, 1995.

Thelen, Marrin, Johnson & Bridges, Paul R. Haerle, Gary L. Fontana and Christine C. Franklin, San Francisco, for plaintiff and appellant Texas Commerce Bank-El Paso, N.A.

Adams, Duque & Hazeltine, Dale A. Welke, Catherine Hunt Ruddy and Terry L. Tron, Los Angeles, for plaintiff and appellant El Paso Housing Finance Corp.

Pillsbury, Madison & Sutro, Philip S. Warden, John M. Grenfell, Kevin M. Fong, Mark Schallert and Robert L. Wallan, San Francisco, for plaintiffs and appellants Commercial Nat. Bank in Shreveport, First Interstate Bank of Denver, N.A., First Tennessee Bank Nat. Ass'n, NationsBank of Texas, N.A., Norwest Bank Minnesota, N.A., and Sunburst Bank.

Daniel E. Lungren, Atty. Gen. of the State of Cal., and Edmond B. Mamer, Deputy Atty. Gen., Howard, Rice, Nemerovski, Canady, Robertson & Falk, Jerome B. Falk, Jr., Steven L. Mayer, Peter J. Busch, and Laurence F. Pulgram, San Francisco, Rubinstein & Perry, Karl L. Rubinstein and Dana Carli Brooks, Los Angeles, for defendant and respondent John Garamendi.

Brobeck, Phleger & Harrison, G. Larry Engel, Kent M. Roger, David M. Higgins NOTT, Associate Justice.

Robert L. Hagle, San Francisco, Pachulski, Stang, Ziehl & Young, Larry W. Gabriel and Iain A.W. Nasatir, Los Angeles, for intervenors and respondents.

The question presented is whether, as prevailing parties in a declaratory relief action brought against the insurance commissioner as conservator of an insolvent insurance company to challenge the commissioner's designation of priority status, appellant policyholders are entitled to attorney fees and costs as provided for in their contract with the insurance company. We hold that they are and reverse the trial court's ruling.

I

FACTS AND PROCEDURAL HISTORY

The judgment in favor of appellants was affirmed by Division Four of this District in Texas Commerce Bank v. Garamendi (1992) 11 Cal.App.4th 460, 14 Cal.Rptr.2d 854, review denied. The following brief statement of the facts underlying the judgment is taken from that opinion.

Executive Life Insurance Co. ("ELIC") sold Municipal Guaranteed Investment Contracts ("Muni-GICs") to the appellant banks as the indenture trustees for municipal entities which had issued low-income housing bonds and transmitted the proceeds to the banks for purchase of Muni-GICs. The Muni-GICs were to accumulate at a guaranteed rate and to pay accumulated interest on semiannual payment dates. (Id., at p. 466, 14 Cal.Rptr.2d 854.)

After it began experiencing severe financial difficulties, ELIC was placed in conservatorship. (Id., at p. 467, 14 Cal.Rptr.2d 854.) In the conservatorship proceedings, the Commissioner of Insurance, John Garamendi (hereinafter "Commissioner Garamendi"), assigned appellants "class-6" or "all other claims" priority status rather than "class-5" priority status as "policyholders." (Id., at p. 468, 14 Cal.Rptr.2d 854.) Appellants challenged the designation by filing a declaratory relief action, in which they were found to be policyholders and therefore entitled to class-5 priority. (Id., at p. 494, 14 Cal.Rptr.2d 854.)

After the trial court entered judgment, plaintiff and appellant Texas Commerce Bank moved for an order that its attorney fees be paid as a priority one administrative expense of the estate pursuant to the terms of the Muni-GIC contract as the prevailing party in the priority litigation. The other appellants subsequently filed similar motions, and appellants were allowed to file cost bills.

The trial court ruled as follows: "From the outset, it has always appeared that the priority determination of the Muni GICs was a question of law rather than one of fact. Only counsel for the parties asserting a priority five for the Muni GICs argued vigorously that there were substantial fact determinations requiring extensive discovery with all of the attendant costs. And those discovery-related costs together with costs of experts form the bulk of the costs sought to be recovered by the various parties who asserted the priority five status. Also, the action turned out to be predominantly, if not entirely, one for declaratory relief involving a close question of law. [p] Accordingly, the Court finds that the appropriate allocation of costs is that each party bear its own costs." The court later made clear that the ruling included attorney fees. This appeal followed.

II

CONTENTIONS

Appellants essentially raise two issues: (1) attorney fees should be awarded pursuant to the Muni-GICs, Civil Code section 1717 and Code of Civil Procedure section 1021; and (2) they are entitled to recover costs under the provisions of the Muni-GICs and Code of Civil Procedure section 1032.

III

DISCUSSION

A. The Attorney Fees Provision Is Enforceable

The Muni-GICs included the following provision: "In the event any litigation is commenced to enforce any rights under this Agreement or the Funding Contract, the prevailing party shall be entitled to its reasonable attorneys' fees and court costs."

Appellants contend that, as prevailing parties in an action on a contract, they are entitled to attorney fees under Civil Code section 1717. ¹ Appellants maintain that the term "on the contract" as it is used in that section has been given a broad interpretation by the courts of this state, which have held that an action seeking a declaration of rights based on an agreement is an action on the contract. They also argue that Commissioner Garamendi, as the conservator of ELIC, stands in the shoes of the insolvent insurer and is bound by the attorney fees provision in the Muni-GICs.

Commissioner Garamendi states that when setting creditor priority status, he acts not as a private party but as a public official. Thus, he maintains, in the declaratory relief action in which appellants challenged his priority-setting determination, he did not stand in the shoes of ELIC and therefore is not subject to the attorney fees provision in the contract between ELIC and appellants.

1. Earlier case law cited by Commissioner Garamendi.

Supporting Commissioner Garamendi's argument are cases holding that the insolvency statutory scheme reflects the state's interest in and power over insurance companies, and that when acting pursuant to those statutes, the insurance commissioner acts on behalf of the state. (See, e.g., Carpenter v. Pacific Mut. Life Ins. Co. (1937) 10 Cal.2d 307, 327, 74 P.2d 761 [affd. by Neblett v. Carpenter (1938) 305 U.S. 297, 59 S.Ct. 170, 83 L.Ed. 182]; Mitchell v. Taylor (1935) 3 Cal.2d 217, 219, 43 P.2d 803; and Garris v. Carpenter (1939) 33 Cal.App.2d 649, 656, 92 P.2d 688.) In particular, Carpenter v. Pacific Mut. Life Ins. Co., supra, relied on by Commissioner Garamendi, contains sweeping language supporting his position. The language appears in the portion of Carpenter analyzing the question of whether a trial court presiding over insolvency proceedings was required to make findings. The court concluded that findings were not required because the proceedings were "special proceedings," evidenced by the fact that "the state is invoking its power over a corporate entity permitted by the state to engage in a business vitally affected with the public interest upon condition of continuing compliance with the requirements provided by the state. It is not a controversy between private parties but a proceeding by the state in the interest of the public." (Id., 10 Cal.2d at p. 327, 74 P.2d 761.)

The question presented in Mitchell was whether, under the former statute (Deering's Gen.Laws 1931, Act 3739), the commissioner was obligated to pay a filing fee. The Supreme Court held that the commissioner was acting on behalf of the state in his official capacity and thus, under former Political Code section 4295, was exempt from payment. (Mitchell v. Taylor, supra, 3 Cal.2d 217, 218-219, 43 P.2d 803.) ² Garris v. Carpenter follows Mitchell (33 Cal.App.2d at p. 656, 92 P.2d 688.)

In our opinion, these cases considered issues very different from the one before us. Moreover, Mitchell interpreted the earlier Act, and in a portion of the opinion not cited by Commissioner Garamendi, Carpenter acknowledged that under the present code the commissioner is not just a state officer but also a trustee of the benefit of the creditors of the insolvent company under Insurance Code section 1057. ³ (See 10 Cal.2d at p. 340, 74 P.2d 761.) Thus, we do not find ourselves compelled to follow Commissioner Garamendi's authorities. We emphasize that we are in no way challenging the fact that "the business of insurance is affected with a public interest. The state has an important and vital interest in the liquidation or reorganization of such a business." (Carpenter v. Pacific Mut. Life Ins. Co., supra, 10 Cal.2d at p. 329, 74 P.2d 761, citing Mitchell v. Taylor, supra, 3 Cal.2d 217, 43 P.2d 803 and German Alliance Ins. Co. v. Lewis (1914) 233 U.S. 389, 34 S.Ct. 612, 58 L.Ed. 1011.) We hold only that that policy does not resolve the attorney fees issue raised in the case before us.

2. Earlier cases cited by appellants.

In the line of cases cited by appellants, courts faced with issues involving the relationship among trial courts, the commissioner as...