KnightBrook Insurance Co. v. Payless Car Rental System Inc. , 855 F.3d 1072 ( 2017 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
KNIGHTBROOK INSURANCE No. 15-15998
COMPANY; KNIGHT MANAGEMENT
INSURANCE SERVICES LLC, D.C. No.
Plaintiffs-Counter-Defendants- 2:12-cv-01671-
Appellees, DGC
v.
ORDER
PAYLESS CAR RENTAL SYSTEM CERTIFYING A
INCORPORATED, QUESTION TO
Defendant-Appellant, THE SUPREME
COURT OF
PCR VENTURE OF PHOENIX LLC, ARIZONA
Defendant-Counter-Claimant-
Appellant.
On Appeal from the United States District Court
for the District of Arizona
David G. Campbell, District Judge, Presiding
Argued and Submitted April 6, 2017
Pasadena, California
Filed May 5, 2017
2 KNIGHTBROOK INS. V. PAYLESS CAR RENTAL SYSTEM
Before: MILAN D. SMITH, JR. and N. RANDY SMITH,
Circuit Judges, and GARY FEINERMAN, District Judge. *
Order
SUMMARY **
Certification to Arizona Supreme Court
The panel certified the following questions of state law
to the Arizona Supreme Court:
1. Whether Arizona equitable indemnity law
incorporates § 78 of the Restatement (First) of
Restitution; and if so,
2. Whether equitable indemnity under § 78 requires that
the indemnity plaintiff’s liability to the underlying
plaintiff have been coextensive with the indemnity
defendant’s liability to the underlying plaintiff.
*
The Honorable Gary Feinerman, District Judge for the U.S. District
Court for the Northern District of Illinois, sitting by designation.
**
This summary constitutes no part of the opinion of the court. It
has been prepared by court staff for the convenience of the reader.
KNIGHTBROOK INS. V. PAYLESS CAR RENTAL SYSTEM 3
COUNSEL
William F. Greaney (argued), Eric C. Bosset, Daniel E.
Matro, and Philip J. Levitz, Covington & Burling LLP,
Washington, D.C.; Arron Nesbitt, Taylor Anderson LLP,
Denver, Colorado; for Defendants-Appellants.
Gena L. Sluga (argued), Stephen M. Dichter, Jeffrey O.
Hutchins, Douglas L. Christian, and Alison R. Christian,
Christian Dichter & Sluga PC, Phoenix, Arizona, for
Plaintiffs-Appellees.
ORDER
KnightBrook Insurance Company and Knight
Management Insurance Services, LLC (together,
KnightBrook) sued PCR Venture of Phoenix, LLC, a
franchisee of Payless Car Rental System, Inc. (together,
Payless), for, among other things, equitable indemnification.
After a bench trial, the district court awarded KnightBrook
$970,000; in so doing, the court applied §§ 76 and 78 of the
Restatement (First) of Restitution. Having heard oral
argument on Payless’s appeal, we have concluded that the
appeal’s outcome turns on two questions of law: (1) whether
Arizona equitable indemnity law incorporates § 78 of the
Restatement; and, if so, (2) whether equitable indemnity
under § 78 requires that the indemnity plaintiff’s liability to
the underlying plaintiff have been coextensive with the
indemnity defendant’s liability to the underlying plaintiff.
Because these questions are governed by Arizona law but
have not been definitively resolved by the Arizona judiciary,
we respectfully certify them to the Supreme Court of
Arizona pursuant to Arizona Revised Statutes § 12–1861
and Supreme Court of Arizona Rule 27.
4 KNIGHTBROOK INS. V. PAYLESS CAR RENTAL SYSTEM
I. Factual Background
KnightBrook insured Payless under a master policy that
enabled Payless to sell supplemental liability insurance
(SLI) to individuals who rented cars from Payless. In
February 2010, Michael Bovre rented a car from Payless in
Phoenix. Bovre did not purchase or pay for pay for SLI.
However, he would later argue that he was entitled to SLI
coverage because the Payless desk agent: (1) failed to notice
that Bovre did not initial the line on the contract that
expressly declined SLI; and (2) told Bovre that “liability
coverage” was included in the rental contract. Bovre’s rental
did include insurance coverage under a $30,000 state-
mandated policy.
While driving his Payless rental car, Bovre collided with
Robert and Lorraine McGill’s motorcycles, causing them
serious injuries. Bovre received coverage under the $30,000
state-mandated policy and $500,000 of coverage from his
personal liability policy from Travelers Insurance Company.
The McGills sued Bovre in state court. KnightBrook
denied Bovre’s request for SLI coverage, explaining in a
letter that “you did not purchase the optional Supplemental
Liability Insurance (SLI) coverage at the time of the rental.”
KnightBrook did not defend Bovre under a reservation of
rights or file a declaratory judgment action over the coverage
dispute.
Bovre settled with the McGills. The settlement included
a “Damron agreement,” see Damron v. Sledge, 460 P.2d 997(Ariz. 1969), in which the parties stipulated to an $8 million
judgment in exchange for: (1) the McGills’ covenant not to
execute upon the judgment against Bovre’s personal assets;
and (2) Bovre’s assignment to the McGills of Bovre’s claims
against KnightBrook. Bovre also paid the McGills
KNIGHTBROOK INS. V. PAYLESS CAR RENTAL SYSTEM 5
$530,000, the combined limits of the state-mandated and
Travelers policies.
Next, the McGills sued KnightBrook and Payless in state
court, and the case was removed to federal court. The
McGills pursued the claims that Bovre had assigned to them
(breach of contract, negligence, and insurance bad faith) and
also sought to recover the $8 million stipulated judgment.
The McGills made a settlement demand of $970,000.
KnightBrook asked Payless if it would contribute 50% to
satisfy that demand, and Payless declined.
Ultimately, KnightBrook alone settled with the McGills.
The settlement agreement provided that: (1) the McGills
would dismiss all of their claims against KnightBrook in
exchange for $970,000; and (2) the McGills would assign to
KnightBrook all of their claims against Payless in exchange
for 15% of the first $250,000 and 10% of any amount in
excess of $250,000 that KnightBrook recovered from
Payless. Payless was not notified of the terms of the final
settlement agreement until after it had been signed.
KnightBrook then took over as the plaintiff against
Payless. Its amended complaint asserted the contract and
negligence claims that Bovre had assigned to the McGills
and that the McGills had in turn assigned to KnightBrook, as
well as KnightBrook’s own claims against Payless for
equitable indemnification and breach of fiduciary duty.
Payless filed a counterclaim against KnightBrook for
insurance bad faith. The district court dismissed the contract
claims on summary judgment, reasoning that they were
extinguished through an accord and satisfaction when
KnightBrook paid the McGills $970,000. The remaining
claims proceeded to a bench trial. After the trial, the district
court ruled: (1) that KnightBrook’s negligence and breach of
fiduciary duty claims were barred by the statute of
6 KNIGHTBROOK INS. V. PAYLESS CAR RENTAL SYSTEM
limitations; (2) that KnightBrook was entitled to equitable
indemnification for the entire settlement payment of
$970,000; and (3) that Payless had failed to prove its
insurance bad faith claim.
Payless filed this appeal challenging the district court’s
ruling in favor of KnightBrook on KnightBrook’s equitable
indemnification claim and Payless’s insurance bad faith
claim. The questions of law certified in this Order concern
only the equitable indemnification claim.
II. The Questions of Law
The outcome of this appeal turns on two issues of state
law: (1) whether Arizona equitable indemnity law
incorporates § 78 of the Restatement; and (2) whether
equitable indemnity liability under § 78 requires that the
indemnity plaintiff’s liability to the underlying plaintiff have
been coextensive with the indemnity defendant’s liability to
the underlying plaintiff.
A. Section 78 of the Restatement
Section 78 of the Restatement (First) of Restitution
provides, in relevant part:
A person who with another became subject to
an obligation or supposed obligation upon
which, as between the two, the other had a
prior duty of performance, and who has made
payment thereon although the other had a
defense thereto,
(a) is not entitled to restitution if he
became subject to the obligation
KNIGHTBROOK INS. V. PAYLESS CAR RENTAL SYSTEM 7
without the consent or fault of the
other;
(b) is entitled to restitution if he became
subject to the obligation with the
consent of or because of the fault of
the other and, if in making payment,
he acted
...
(ii) in the justifiable belief that
such duty existed . . . .
The district court cited § 78 for the proposition that for
purposes of its equitable indemnification claim against
Payless, “it is sufficient if [KnightBrook] w[as] subject to a
‘supposed obligation’ which [Payless] had a greater
responsibility to discharge, [KnightBrook] became subject
to the obligation because of the fault of [Payless], and, in
choosing to make the settlement payment, [KnightBrook]
acted in the ‘justifiable belief’ that [it] would be liable in the
McGills’ lawsuit.” The district court awarded equitable
indemnification—without finding that either KnightBrook
or Payless would have been found liable in the underlying
lawsuit—on the ground that “[t]he requirements of § 78 of
the Restatement are satisfied.”
At the time the district court issued its opinion, § 78 had
never been cited in a published decision of an Arizona court.
After the district court issued its decision, however, the
Arizona Court of Appeals applied § 78 in Hatch
Development, LLC v. Solomon, 377 P.3d 368 (Ariz. Ct. App.
2016), in holding that “a duty to indemnify may arise in at
least two alternative circumstances: First, when the party
8 KNIGHTBROOK INS. V. PAYLESS CAR RENTAL SYSTEM
seeking indemnity has ‘extinguished an obligation owed by
the party from whom it seeks indemnification,’ or second,
when the indemnity defendant is ‘at fault.’” Id. at 372. The
district court’s decision is the only authority cited in Hatch
for the proposition that Arizona equitable indemnity law
incorporates § 78 of the Restatement.
B. Coextensive Liability
If Arizona law incorporates § 78, the next question is
whether equitable indemnity liability under § 78 requires
that the indemnity plaintiff’s potential liability to the
underlying plaintiff have been coextensive with the
indemnity defendant’s potential liability to the underlying
plaintiff.
The district court recognized that KnightBrook and
Payless did not face coextensive obligations in the McGills’
suit. KnightBrook paid the McGills $970,000 to settle a case
in which the McGills “sought to recover [from KnightBrook]
the $8 million established in the consent judgment against
Bovre.” The suit asserted negligence, breach of contract,
and insurance bad faith claims. But only KnightBrook, and
not Payless, was potentially liable for the insurance bad faith
claim and the $8 million Damron judgment. See Webb v.
Gittlen, 174 P.3d 275, 280–81 (Ariz. 2008) (en banc) (ruling
that insurance agents are not bound by Damron agreements
to which they were not parties). Accordingly, as the district
court correctly observed, although the McGills could have
recovered $8 million from KnightBrook, they could have
recovered from Payless only $1 million (the maximum
available amount of SLI coverage) plus any compensable
damages for Bovre’s “emotional suffering, time, effort, and
KNIGHTBROOK INS. V. PAYLESS CAR RENTAL SYSTEM 9
inconvenience.” 1 Because KnightBrook’s settlement
payment to the McGills enabled it to avoid substantial
liability that Payless did not face, KnightBrook’s and
Payless’s liability to the McGills was not coextensive.
Whether this matters under Arizona law is unclear. In
Herstam v. Deloitte & Touche, LLP, 919 P.2d 1381 (Ariz.
Ct. App. 1996), the court observed that “[i]ndemnity allows
one who has discharged a common liability to seek
reimbursement in full from another,” but it did not define
“common liability” or otherwise address whether
coextensive liability is a necessary prerequisite for equitable
indemnity. Id. at 1388. Although other state courts have
held that an indemnitee and indemnitor’s respective
obligations to the underlying plaintiff must be identical for
equitable indemnity liability to attach, see, e.g., Denny’s Inc.
v. Avesta Enters., Ltd., 884 S.W.2d 281, 291 (Mo. Ct. App.
1994) (“[T]he doctrine [of implied indemnity] is
inapplicable unless the indemnitee and the indemnitor have
co-extensive, identical duties.”); Nat’l Fruit Prod. Co. v.
Balt. & Ohio R.R. Co., 329 S.E.2d 125, 130 (W. Va. 1985)
(observing that “[s]everal other courts . . . have concluded
that the lack of a common and coextensive obligation
1
KnightBrook made its settlement payment to the McGills in
connection with several obligations, including “the duty to defend and
indemnify Mr. Bovre in the Underlying Lawsuit”—a duty that Payless
did not owe. KnightBrook’s decision to deny coverage in July 2010 was
the factual basis for the insurance bad faith claim; that decision was also
a necessary prerequisite for the Damron agreement. See Damron,
460 P.2d at 1001 (“If the [insurance] company refuses to defend at all, it
must accept the risk that an unduly large verdict may result . . . .”). As
KnightBrook’s CEO testified at trial, KnightBrook’s exposure to at least
$8 million of potential liability arising from the “bad faith claim against
KnightBrook” and the Damron judgment was an important factor
motivating his decision to settle the case for $970,000.
10 KNIGHTBROOK INS. V. PAYLESS CAR RENTAL SYSTEM
forecloses any claim of implied indemnity” and citing
cases), no Arizona court has resolved this issue. Cf. Hatch,
377 P.3d at 373 (affirming an equitable indemnity judgment
without addressing whether the plaintiff and the defendant
faced coextensive liability to the underlying plaintiff).
The evolution of Arizona’s equitable indemnity doctrine
is better entrusted to the Supreme Court of Arizona than to
us. We therefore certify the foregoing questions of law to
the Supreme Court of Arizona. The Clerk shall file with the
Supreme Court of Arizona an original and six certified
copies of this Order, along with counsel’s addresses and
telephone numbers, as directed by Supreme Court of
Arizona Rule 27.
III. Counsel
For Plaintiffs-Appellees KnightBrook Insurance
Company and Knight Management Insurance Services,
LLC: Alison R. Christian, Gena L. Sluga, Jeffrey O.
Hutchins, Stephen M. Dichter, Christian Dichter & Sluga,
P.C., 2700 North Central Avenue, Suite 1200, Phoenix, AZ
85004, Telephone (602) 792-1700.
For Defendants-Appellants Payless Car Rental System,
Inc. and PCR Venture of Phoenix, LLC: William F.
Greaney, Eric C. Bosset, Philip J. Levitz, Covington &
Burling LLP, One CityCenter, 850 Tenth Street, NW,
Washington, DC 20001, Telephone (202) 662-6000; and
Arron Burt Nesbitt, Taylor Anderson, LLP, 1670 Broadway,
Suite 900, Denver, CO 80202, Telephone (303) 551-6657.
IV. Filing Fee
The parties shall equally share the required filing fees
under Supreme Court of Arizona Rule 27(a)(3)(D).
KNIGHTBROOK INS. V. PAYLESS CAR RENTAL SYSTEM 11
V. Stay of Proceedings and Withdrawal of Submission
In light of our decision to certify the two issues set forth
above, the submission of this appeal is withdrawn, and all
further proceedings in this case before our court are stayed
pending final action by the Supreme Court of Arizona, save
for any petition for rehearing regarding this order. The Clerk
is directed to administratively close this docket, pending
further order. The parties shall notify the Clerk of this court
within fourteen days of the Supreme Court of Arizona’s
acceptance or rejection of certification, and again, if
certification is accepted, within fourteen days of the
Supreme Court of Arizona’s issuance of a decision.
QUESTION CERTIFIED; PROCEEDINGS
STAYED.