Bradley Sharp v. Evanston Insurance Company ( 2020 )

NOT FOR PUBLICATION FILED
UNITED STATES COURT OF APPEALS MAY 21 2020
MOLLY C. DWYER, CLERK
U.S. COURT OF APPEALS
FOR THE NINTH CIRCUIT
BRADLEY D. SHARP, Chapter 11 Trustee No. 18-56565
of the Estate of C.M. Meiers Company, Inc.,
D.C. No. 2:17-cv-01400-MRW
Appellant,
v. MEMORANDUM*
EVANSTON INSURANCE COMPANY,
Appellee.
EVANSTON INSURANCE COMPANY, No. 18-56566
Appellant, D.C. No. 2:17-cv-01400-MRW
v.
BRADLEY D. SHARP, Chapter 11 Trustee
of the Estate of C.M. Meiers Company, Inc.,
Appellee.
Appeal from the United States District Court
for the Central District of California
Michael R. Wilner, Magistrate Judge, Presiding
Submitted April 3, 2020**
*
This disposition is not appropriate for publication and is not precedent
except as provided by Ninth Circuit Rule 36-3.
**
The panel unanimously concludes this case is suitable for decision
Pasadena, California
Before: PAEZ and CALLAHAN, Circuit Judges, and LYNN,*** District Judge.
Appellant Bradley Sharp (“Sharp”), trustee for the chapter 11 bankruptcy
estate of C.M. Meiers Co. (“CMM”), appeals, and Appellee Evanston Insurance
Co. (“Evanston”) cross-appeals, the district court’s judgment in a bankruptcy
adversary proceeding after a two-day bench trial. Sharp initially filed a third-party
adversary proceeding against CMM’s previous owners (the “Rothmans”), which
asserted, inter alia, errors and omissions in the Rothmans’ management of the
CMM Trust Account. The Rothmans were covered by a professional liability
insurance policy from Evanston, but Evanston declined to defend the Rothmans
against Sharp’s claims and did not participate in the settlement mediation that
eventually resulted in a $4.3M settlement. Sharp then filed the current adversary
action against Evanston to recover the unpaid balance of the settlement amount
($3.8 million) as well as other damages. We affirm the district court’s grant of
summary judgment for Evanston on the bad faith claims, and affirm the district
court’s judgment for Sharp on the indemnity claim.
1. The district court did not err in granting summary judgment to Evanston
without oral argument. See Fed. R. App. P. 34(a)(2).
***
The Honorable Barbara M. G. Lynn, United States Chief District
Judge for the Northern District of Texas, sitting by designation.
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on Sharp’s claim for breach of implied covenant and fair dealing. Under
California law, the “genuine issue rule in the context of bad faith claims” allows a
grant of summary judgment for the insurer “when it is undisputed or indisputable
that the basis for the insurer’s denial of benefits was reasonable—for example,
where even under the plaintiff’s version of the facts there is a genuine issue as to
the insurer’s liability under California law.” Amadeo v. Principal Mut. Life Ins.
Co., 290 F.3d 1152, 1161 (9th Cir. 2002) (citing Safeco Ins. Co. of Am. v. Guyton,
692 F.2d 551, 557 (9th Cir. 1982)). Sharp argues that the district court erred in
dismissing his claims under the “genuine dispute” doctrine because the rule does
not apply to third party claims, and in any event, Evanston’s failures to indemnify
and defend the Rothmans against Sharp’s complaint were unreasonable. We
disagree.
The district court did not err in applying the genuine dispute doctrine to
dismiss Sharp’s bad faith claim insofar as it was based on Evanston’s failure to
indemnify and failure to defend the Rothmans. See Chateau Chamberay
Homeowners Ass’n v. Assoc. Intern. Ins. Co., 108 Cal. Rptr. 2d 776, 784 (Cal. Ct.
App. 2001); Lunsford v. Am. Guarantee & Liab. Ins. Co., 18 F.3d 653, 656 (9th
Cir. 1994). The district court also properly dismissed Sharp’s failure to investigate
claim on the ground that Evanston’s review of the Rothmans’ tender for coverage
and defense against Sharp’s complaint reasonably satisfied its duty to investigate.
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See Baroco West, Inc. v. Scottsdale Ins. Co., 1 Cal. Rptr. 3d 464, 469 (Cal. Ct.
App. 2003); Horace Mann Ins. Co. v. Barbara B., 846 P.2d 792, 795 (Cal. 1993).
In regard to Sharp’s claim that Evanston acted in bad faith by its failure to
settle, we agree that a genuine dispute over the existence of coverage generally
does not preclude bad faith liability based on the insurer’s refusal to accept a
reasonable settlement offer on a third party claim. See Gibbs v. State Farm Mut.
Ins. Co., 544 F.2d 423, 427 (9th Cir. 1976); Johansen v. Cal. State Auto. Ass’n
Inter-Ins. Bureau, 538 P.2d 744, 748 (Cal. 1975); Howard v. Am. Nat’l Fire Ins.
Co., 115 Cal. Rptr. 3d 42, 70 (Cal. Ct. App. 2010). However, California law also
suggests that an insurer’s mere failure to initiate or pursue settlement discussions
in a third-party case does not incur bad faith liability. See Reid v. Mercury Ins.
Co., 162 Cal. Rptr. 3d 894, 906 (Cal. Ct. App. 2013) (“[N]othing in California law
supports the proposition that bad faith liability for failure to settle may attach if an
insurer fails to initiate settlement discussions, or offer its policy limits, as soon as
an insured’s liability in excess of policy limits has become clear.”); Graciano v.
Mercury Gen. Corp., 179 Cal. Rptr. 3d 717, 727 (Cal. Ct. App. 2014) (“An
insured’s claim for ‘wrongful refusal to settle’ cannot be based on his or her
insurer’s failure to initiate settlement overtures with the injured third party, but
instead requires proof the third party made a reasonable offer to settle the claims
against the insured for an amount within the policy limits.” (emphasis in original)
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(citations omitted)).
Here, the undisputed facts demonstrate that Evanston did not participate in
the settlement discussions between Sharp and the Rothmans, but was given little
advance notice of the mediation date and was not presented with a formal
settlement offer until months after the settlement had already taken place. As such,
the record, even when viewed in the light most favorable to Sharp, fails to
demonstrate that Evanston was provided a reasonable opportunity to settle or that
Evanston acted unreasonably when it declined to participate in settlement
discussions. Thus, we affirm the grant of summary judgment for Evanston on
Sharp’s bad faith claims.
2. We also affirm the district court’s judgment that Evanston was obligated
to indemnify the $3.8 million balance of the settlement between Sharp and the
Rothmans. Evanston challenges the district court’s ruling on the indemnity claim
on four grounds: (1) CMM’s misappropriation of trust funds is not a “professional
service” covered by the policy; (2) coverage is barred by two policy exclusions; (3)
liability is barred under California Insurance Code § 533; and (4) Sharp’s claim for
coverage is barred by judicial estoppel.
Evanston’s first three challenges rest on the premise that the district court
erred in finding that the Rothmans acted negligently, rather than willfully or with
the intent to steal, during the few months that client funds were deposited directly
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into CMM’s operating account rather than the Trust Account. However, the
district court’s finding of fact as to the nature of the Rothmans’ conduct is
supported by evidence in the record and at trial—including testimony from Sharp,
which the district court deemed credible—and is not clearly erroneous. Thus, the
district court did not err in concluding that the Rothmans’ mishandling of fiduciary
funds triggered liability and coverage under the “professional services” provision
of the Evanston policy. See Bank of Cal., N.A. v. Opie, 663 F.2d 977, 981 (9th Cir.
1981); see also Utica Mut. Ins. Co. v. Miller, 746 A.2d 935, 944 (Md. Ct. Spec.
App. 2000). Likewise, the district court did not err in concluding that policy
exclusions A and M, as well as California Insurance Code § 533—all of which are
premised on a finding of intentional or willful conduct—did not preclude coverage.
As for Evanston’s judicial estoppel argument, we conclude that the balance
of equities in this case does not tip in favor of estoppel. See Hamilton v. State
Farm Fire & Cas. Co., 270 F.3d 778, 782 (9th Cir. 2001) (“Judicial estoppel is an
equitable doctrine that precludes a party from gaining an advantage by asserting
one position, and then later seeking an advantage by taking a clearly inconsistent
position.”). The court found that although Sharp originally accused the Rothmans
of “significant misconduct,” Sharp’s later abandonment of these claims in favor of
a negligence-based action was reasonable. Moreover, Sharp’s legal theory and
arguments as to why he believed Evanston was obligated to indemnify and defend
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the Rothmans for their actions under the policy remained generally consistent from
the first letter that Sharp’s counsel sent to Evanston’s counsel through trial. The
district court’s implicit decision not to invoke the doctrine of judicial estoppel to
Sharp’s indemnity claim was not an abuse of discretion.
AFFIRMED.
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