Village Northridge Ass'n v. State Farm, No. B188718.

CourtCalifornia Court of Appeals
Writing for the CourtRubin
Citation157 Cal.App.4th 1416,69 Cal.Rptr.3d 551
PartiesVILLAGE NORTHRIDGE HOMEOWNERS ASSOCIATION, Plaintiff and Appellant, v. STATE FARM FIRE AND CASUALTY COMPANY, Defendant and Respondent.
Decision Date17 December 2007
Docket NumberNo. B188718.
69 Cal.Rptr.3d 551
157 Cal.App.4th 1416
VILLAGE NORTHRIDGE HOMEOWNERS ASSOCIATION, Plaintiff and Appellant,
v.
STATE FARM FIRE AND CASUALTY COMPANY, Defendant and Respondent.
No. B188718.
Court of Appeal, Second District, Division 8.
December 17, 2007.

[69 Cal.Rptr.3d 552]

Engstrom, Lipscomb & Lack, Jerry A. Ramsey, Brian J. Heffernan and Alexandra J. Thompson, Los Angeles, for Plaintiff and Appellant.

Robie & Matthai, James R. Robie, Kyle Kveton and Steven S. Fleischman, Los Angeles; LHB Pacific Law Partners and Clarke B. Holland, Emeryville; and Crandall, Wade & Lowe and Michael J. McGuire, Irvine, for Defendant and Respondent.

RUBIN, J.


SUMMARY

An insurer and its insured, a homeowners association, settled disputed claims arising from the Northridge earthquake, with the insurer paying $1.5 million and the insured releasing the insurer from all claims or causes of action it had or.may have arising out of its earthquake claim. Two years later, the association sued the insurer, and still later discovered the limits of its insurance policy were almost $7 million greater than had been represented by the insurer. The insurer insists that the association cannot pursue its claim unless it rescinds the settlement agreement and returns the $1.5 million, relying on Supreme Court precedents holding that a plaintiff cannot avoid a fraudulently induced contract of release without rescinding the contract and restoring the money paid as a consideration for the release. (Garcia v. California Truck Co. (1920) 183 Cal. 767, 773, 192 P. 708 (Garcia).) The association, which long ago used the $1.5 million to repair earthquake damage, insists it has the option of affirming the settlement agreement and recovering damages for the fraud. (See Bagdasarian v. Gragnon (1948) 31 Cal.2d 744, 750, 192 P.2d 935.)

We agree with the association, concluding that the Supreme Court precedents on which the insurer relies apply only to the release of personal injury claims, and not to the settlement and release of claims arising from a contract of insurance. Accordingly, the trial court erred when it sustained the insurer's demurrer on the ground the association could not "have it both ways" by keeping the settlement monies but not releasing the claims.

FACTUAL AND PROCEDURAL BACKGROUND

This is the second time this case has come to the Court of Appeal.

The lawsuit arose from the Northridge earthquake in January 1994, and was filed in December 2001, after the Legislature revived insurance claims otherwise barred by the statute of limitations. Village Northridge Homeowners Association (the Association or the insured) sued State Farm Fire and Casualty Company (State Farm or the insurer), alleging breach of contract and breach of the implied covenant of good faith and fair dealing. The complaint alleged State Farm improperly undervalued the Association's loss, inducing it to forego proper repairs and to forego payment of amounts properly owed under the policy. The Association further alleged it "was required to sign a release and did so under compulsion and with no other option afforded to secure partial benefits owed," and that it did not agree "that the partial payments provided fully compensated [the Association] for the actual damages and loss sustained. . . ."

1. Previous trial court proceedings and appeal.

State Farm filed a motion for summary judgment, contending the release the Association executed barred its lawsuit. State Farm's declarations asserted, among

69 Cal.Rptr.3d 553

other things, that the policy limits for earthquake damage were $4,974,900, with a deductible of ten percent, but it submitted no documentary confirmation of the policy limits. State Farm made various payments, totaling approximately $2,068,000, and in 1998 the Association sought additional policy benefits. State Farm reinspected the property and determined that a portion of the claimed additional damage might be earthquake related and that a portion was not. In November 1999, the parties negotiated a compromise of the claim, agreeing to payment by State Farm of $1.5 million. The Association unconditionally released State Farm from all claims, known or unknown, in any way related to the Association's earthquake claim. In late 2000, the Association contacted State Farm to reopen the claim, and State Farm declined to do so.

In its opposition to State Farm's summary judgment motion, the Association asserted that the insurance contract provided a limit of $11,905,500 with a 10 percent deductible, and that State Farm misrepresented its policy limits to the Association in the course of adjusting the claim and inducing the execution of the release. A declaration from an Association board member who signed the release stated that State Farm's offer "was made in conjunction with overt representations, written and oral, that the policy limits were $4,974,900.... At the time, we had no idea that this representation regarding policy limits was untrue and we executed the subject Release under the mistaken belief that State Farm had honestly and accurately represented its policy limits to us." State Farm's $1.5 million offer was made on a "take it or leave it" basis, and "was not the product of any `negotiation.'" The association "was upside down financially" and "simply had no choice but to do whatever State Farm insisted in order to at least secure a portion of the policy benefits that were owed and to partially fund the massive earthquake repairs that were presented." Homeowners were individually assessed thousands of dollars to partially fund repairs but "millions of dollars of further repairs remain to be performed at this time." With the declaration, the Association submitted a copy of the policy declarations that was "recently retrieved from storage from our property manager...." It showed policy limits of $11,905,500 for buildings, an earthquake endorsement and 10 percent earthquake deductible, and no indication of any different policy limits for earthquake coverage.

The trial court granted summary judgment for State Farm, ruling the Association had not demonstrated the release agreement was a product of undue influence or fraud, and that it was binding on the parties.

This court reversed the judgment, concluding material issues of disputed fact existed concerning the limits of the earthquake policy and whether the policy limits were misrepresented by the insurer during the adjustment process. (Village Northridge Homeowners Association v. State Farm Fire & Casualty Co. (Mar. 14, 2005, B172913) [nonpub. opn.].) Because a resolution of these issues was necessary to a determination whether the insured's release was valid and enforceable, we held summary judgment was improper.

2. Current trial court proceedings.

When the case was returned to the trial court, State Farm filed a motion for judgment on the pleadings. State Farm asserted the complaint did not state a claim upon which relief could be granted, because the Association's claims were barred by the settlement agreement and release, and the Association could not rescind the settlement agreement without first offering

69 Cal.Rptr.3d 554

to restore to State Farm the consideration it paid under the agreement. The trial court granted the motion, with leave to amend, observing that the complaint did not allege fraud in the inducement or rescission, and that the Association "need[s] to either rescind the agreement or affirm the agreement and sue for damages."

The Association then filed a first amended complaint, alleging a cause of action for fraud in addition to its original claims for breach of contract and breach of the implied covenant of good faith and fair dealing. The Association alleged it had spent the $1.5 million on partial earthquake repairs and was not offering to return the $1.5 million; acknowledged a credit in that amount in State Farm's favor against the damages sought in the lawsuit; did not seek to rescind the release; and "`affirm[ed]' the Release, as requested by the Court, and [sought] damages ...," contending the release was unenforceable as the product of fraud.

State Farm demurred, asserting, inter alia, that the Association could not affirm the settlement agreement and simultaneously assert claims that were explicitly released in it. The trial court sustained the demurrer with leave to amend, stating that the Association must either rescind the settlement agreement and release or affirm the settlement agreement and release, and that "[h]ere, the release was the purpose of the settlement agreement and they are all part of the same agreement ...," citing Garcia, supra, 183 Cal. 767, 192 P. 708.

The Association filed a second amended complaint, which was not significantly different from the first, alleging the $1.5 million was a grossly deficient, partial payment toward an $8 million loss; the $1.5 million was owed under the insurance policy independent of the release; and the court had the inherent power to set aside a release procured by fraud. State Farm again demurred. The trial court sustained the demurrer without leave to amend, observing the Association chose to affirm the settlement agreement and keep the money paid by State Farm, but not to release the claims, and "[t]hey can't have it both ways."

Judgment was entered and the Association filed this timely appeal.

DISCUSSION

State Farm contends the Association's only option under California law for avoiding its release was to rescind the settlement agreement and return the $1.5 million to State Farm, and it cannot "keep the money and sue." While the question is not without difficulty, we conclude that, in the circumstances of this case, State Farm is mistaken.

In Garcia, supra, 183 Cal. 767, 192 P. 708, the Supreme Court made it clear that rescission is essential to the extinguishment of a contract of release in a personal injury case, and that there can be no rescission without restoration of the...

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1 practice notes
  • Myerchin v. Family Benefits, Inc., G038569 (Cal. App. 5/20/2008), G038569
    • United States
    • California Court of Appeals
    • 20 d2 Maio d2 2008
    ...claiming rescission. Additionally the very recent case ofVillage Northridge Homeowners Assn. v. State Farm Fire and Casualty Co.(2007) 157 Cal.App.4th 1416 is distinguishable. In that case, the court concluded plaintiff was not required to return $1.5 million paid by its insurer in settleme......
1 cases
  • Myerchin v. Family Benefits, Inc., G038569 (Cal. App. 5/20/2008), G038569
    • United States
    • California Court of Appeals
    • 20 d2 Maio d2 2008
    ...claiming rescission. Additionally the very recent case ofVillage Northridge Homeowners Assn. v. State Farm Fire and Casualty Co.(2007) 157 Cal.App.4th 1416 is distinguishable. In that case, the court concluded plaintiff was not required to return $1.5 million paid by its insurer in settleme......

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