McGee v. Zurich American Insurance Company ( 2021 )

1 WO 2 3 4 5 6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE DISTRICT OF ARIZONA 8 9 James McGee, No. CV-17-04024-PHX-DGC 10 Plaintiff, ORDER 11 v. 12 Zurich American Insurance Company, 13 Defendant. 14 15 16 In an order addressing the parties’ motions in limine, the Court discussed but did 17 not decide Plaintiff’s motions in limine 4 and 5. Doc. 122 at 6-8. The Court and the parties 18 addressed these motions at the Final Pretrial Conference on December 17, 2021, and 19 Defendant filed an additional memorandum on December 20, 2021. Doc. 128. The Court 20 rules on each motion in this order. 21 Plaintiff James McGee sued Defendant Zurich American Insurance Company for 22 breach of contract and bad faith, alleging that Defendant improperly refused to defend 23 Elizabeth Foutz in an underlying tort action brought against her by Plaintiff. Plaintiff was 24 injured when his vehicle collided with Foutz, who was driving a car provided by her 25 employer, AAA Landscaping. Defendant provided auto insurance to AAA, and the key 26 questions for trial are whether the policy covered Foutz’s use of AAA’s vehicle at the time 27 of the accident and whether Defendant acted in bad faith when it denied coverage. Foutz 28 assigned her insurance coverage and bad faith claims to Plaintiff in a Damron agreement 1 that resolved the underlying tort case, and Plaintiff now asserts those claims against 2 Defendant. 3 A. Plaintiff’s MIL 5 – Damron Agreement, Fraud, and Collusion. 4 Plaintiff asks the Court to exclude the Damron agreement he entered into with Foutz 5 and any evidence or argument that it was the product of fraud or collusion. Doc. 85. He 6 argues that this evidence would be irrelevant, prejudicial, and confusing to the jury, and 7 has never been properly disclosed. Defendant’s response did not address many of these 8 arguments, but instead argued primarily that Plaintiff bears the burden or proving that the 9 Damron agreement was not fraudulent or collusive. Doc. 108 at 1-2. The Court disagreed, 10 holding that Defendant, not Plaintiff, bears the burden of proof on fraud and collusion. 11 Doc. 122 at 6-8. 12 After considering the additional arguments by the parties, the Court will grant 13 Plaintiff’s motion in part and deny it in part. 14 1. Failure to Disclose Under the MIDP. 15 This case is governed by the Court’s Mandatory Initial Discovery Pilot (“MIDP”). 16 Doc. 4. The MIDP was established by General Order 17-08 and required the parties to 17 disclose, “[f]or each of your claims or defenses, . . . the facts relevant to it and the legal 18 theories upon which it is based.” Doc. 4 at 7, ¶ 4. Each party was also required to disclose 19 all documents “that you believe may be relevant to any party’s claims or defenses.” Id. ¶ 3. 20 The General Order specifically states that “Rule 37(b)(2) shall apply to mandatory 21 discovery responses required by this order.” Id. at 6, ¶ 11. Rule 37(b)(2) provides that 22 “[i]f a party . . . fails to obey an order to provide or permit discovery,” the Court may issue 23 an order “prohibiting the disobedient party from supporting or opposing designated claims 24 or defenses[.]” Fed. R. Civ. P. 37(b)(2)(A)(ii). 25 Defense counsel agreed at the Final Pretrial Conference that Defendant never 26 disclosed its fraud or collusion defense in its MIDP responses. Defendant asserts that it 27 included the defense in its answer, but Defendant’s answer says only that “Plaintiff’s claim 28 is barred by fraud or collusion.” Doc. 8, ¶ 80. It does not disclose the facts relevant to the 1 defense, the legal theories on which it is based, or the documents relevant to the defense, 2 all of which were required by the MIDP. Because Defendant was ordered to provide this 3 information to Plaintiff and failed to do so, the Court will prohibit Defendant from 4 presenting or supporting the defense at trial. Fed. R. Civ. P. 37(b)(2)(A)(ii). 5 2. Defendant’s Lack of Evidence for Fraud or Collusion. 6 The Court additionally concludes that Defendant has identified no evidence that 7 would show fraud or collusion in this case. During the Final Pretrial Conference, 8 Defendant identified the following evidence as supporting its defense of fraud or collusion: 9 Ms. Foutz testified that she had no fault for the underlying accident; the Damron agreement 10 was proposed to Ms. Foutz and her counsel by Plaintiff’s attorneys; Ms. Foutz had no 11 knowledge of what the assignment of her rights entailed; she was not involved in 12 determining the stipulated damages amount of $5 million; no discovery was taken in 13 Plaintiff’s case against Ms. Foutz; and Ms. Foutz was provided a free, pro bono defense by 14 a friend. Defendant’s recent filing adds that the Damron agreement was made only two 15 months after the parties made their initial report in the underlying case and Defendant 16 believes the stipulated judgment is excessive and wishes to demonstrate that fact to the 17 jury. Doc. 128 at 4-5. 18 Defendant cites a number of cases for the definition of fraud and collusion. The 19 most common feature of these cases appears to be that the collusive agreement was secret 20 and perpetrated some kind of fraud on the court or other parties. See, e.g., Hone v. 21 Climatrol Indus., Inc., 59 Cal. App. 3d 513, 522, fn 4, 130 Cal. Rptr. 770, 774 (Cal. App. 22 1976) (“a deceitful agreement or compact . . . to defraud a third party of his right,” “a secret 23 arrangement . . . to defraud a third person,” “a secret combination . . . for fraudulent or 24 deceitful purposes”); Doc. 128 at 2 (“Collusion requires a ‘deceitful agreement,’ ‘secret 25 arrangement,’ or ‘a secret combination [...] for fraudulent or deceitful purposes’” (citing 26 cases)); In re Alcorn, 41 P.3d 600, 601 (Ariz. 2002) (secret agreement that resulted in a 27 manipulated case being presented to the court, without the court’s knowledge, to persuade 28 the court to reverse a summary judgment ruling in favor of another defendant). 1 A more relevant decision was issued by the Arizona Court of Appeals in 2 A Tumbling-T Ranches v. Flood Control District of Maricopa County, 204 P.3d 1051 (Ariz. 3 Ct. App. 2008). In response to the defendant’s argument that a Damron agreement was 4 fraudulent or collusive, and the court of appeals provided this relevant explanation: 5 This issue was squarely addressed in Damron v. Sledge, 105 Ariz. 151, 460 6 P.2d 997 (1969). There, the assertion was made that a covenant not to execute and a subsequent assignment of the underlying judgment constituted 7 a collusive and fraudulent contract. Id. at 152-53, 460 P.2d at 998-99. The 8 court held: “It cannot be held that as a matter of law collusion exists simply because a defendant chooses not to defend when he can escape all liability 9 by such an agreement [a covenant not to execute], and must take large 10 financial risks by defending.” Id. at 155, 460 P.2d at 1001. This scenario describes the exact backdrop for the Dam Owners’ decision to enter into the 11 settlement agreement here. The Dam Owners were exposed to a significant damages claim and presented with a means of “escape.” As the Damron 12 court held, if “it appears that the defendant instead of defaulting agrees to 13 perjure himself and testify falsely to statements that are untrue, and that plaintiff is a party to the agreement, or if some other definite evidence of 14 collusion is adduced by proper testimony,” then there is a basis for a claim 15 of collusion. Id. The facts of record do not establish such a showing here. 16 Id. at 1060 (emphasis added). 17 Defendant’s proposed evidence in this case does not include proof that the Damron 18 agreement included some kind of fraud or deception, or a secret agreement that would have 19 the effect of misleading the Court or others. The agreement was readily disclosed by 20 Plaintiff to the trial court below, Defendant, and this Court. The fact that Plaintiff’s counsel 21 proposed it to Ms. Foutz, that she did not understand its details and was not involved in 22 setting the amount of the stipulated judgment, that it was entered before discovery occurred 23 in the underlying case, or that she was represented by pro bono counsel does not show that 24 the agreement was fraudulent of collusive. These are common characteristics of Damron 25 agreements entered after an insurer denies coverage for a case and leaves the defendant to 26 fend for herself, as Defendant did here. Nor can the Court conclude that the amount of the 27 judgment constitutes evidence of fraud or collusion, even though Defendant believes it to 28 be unreasonably high. See Parking Concepts, Inc. v. Tenney, 83 P.3d 19, 22 n.3 (Ariz. 1 2004) (“[I]n cases where the insurer has refused to defend and the parties enter into a 2 Damron agreement, the insurer has no right to contest the stipulated damages on the basis 3 of reasonableness, but rather may contest the settlement only for fraud or collusion.”). 4 The Court has twice expressed frustration with the agreement in this case. See Docs. 5 59 at 3, 122 at 6. But this view was stated after Plaintiff himself asserted Ms. Foutz was 6 not at fault. Certainly that concession was not made by Plaintiff in the underlying litigation, 7 and, as noted at the Final Pretrial Conference, Ms. Foutz was facing a high-damages claim, 8 after being cited for DUI in connection with the accident, in a comparative fault state where 9 the jury could assign her fault and damages even if she did not solely cause the accident, 10 and she entered the Damron agreement with the advice of counsel. As a result, Plaintiff’s 11 evidence does not show that the agreement was fraudulent or collusive, even if the Court 12 finds this to be a case where the extremes allowed by Damron and related cases are 13 evident.1 14 In summary, Defendant will not be permitted to assert a fraud or collusion defense 15 at trial because it was not disclosed as required by the MIDP, and Defendant has failed to 16 identify evidence that could show fraud or collusion as required to set aside the Damron 17 agreement in this case. The Court cannot conclude, however, that the Damron agreement 18 will itself be irrelevant. Among other things, the jury will need to understand the context 19 in which this case arises, as discussed with the parties at the Final Pretrial Conference. The 20 Court will rule on the admissibility of the Damron agreement, or parts of it, at trial. The 21 Court will grant MIL 5 on fraud or collusion and deny it on the Damron agreement. 22 B. Plaintiff’s MIL 4 – Underlying Incident. 23 Plaintiff asks the Court to preclude any evidence of the underlying accident, arguing 24 that the facts of the accident are irrelevant and would be prejudicial. Doc. 84. The Court 25 cannot conclude, however, that the underlying facts of the accident are irrelevant to the 26 jury’s understanding of this case, including whether Ms. Foutz acted within the scope of 27 1 The Court is obligated to apply Arizona law faithfully in this diversity case. Defendant also cites Continental Casualty Co. v. Hempel, 4 Fed. App’x 703, 717 (10th Cir. 28 2001), but its suggestion that the reasonableness of the stipulated judgment may be evidence of collusion does not appear to be consistent with Arizona law. the permission granted by AAA. Nor can the Court conclude that it would be unfairly 2|| prejudicial. The Court will rule on objections to underlying facts at trial. 3 IT IS ORDERED that Plaintiff's MIL 4 (Doc. 84) is denied, and MIL 5 (Doc. 85) 4|| is granted in part and denied in part as set forth above. 5 Dated this 21st day of December, 2021. 6 . 8 David G. Campbell 9 Senior United States District Judge 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 -6-