Vallejo v. Fire Insurance Exchange CA3

Filed 11/21/22 Vallejo v. Fire Insurance Exchange CA3
NOT TO BE PUBLISHED
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication
or ordered published for purposes of rule 8.1115.
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
THIRD APPELLATE DISTRICT
(San Joaquin)
----
JOSE VALLEJO, C091547
Plaintiff and Appellant, (Super. Ct. No.
STKCVUIC20140008644)
v.
FIRE INSURANCE EXCHANGE,
Defendant and Appellant.
SUMMARY OF THE APPEAL
In 2013, Jose Vallejo sought payment from Fire Insurance Exchange (Fire) of a
default judgment he had secured against Fire’s insureds, Marsha and Franklin Savoy.
Vallejo had secured the default judgment in 2009, in a personal injury action he had
brought against the Savoys and Marsha’s father, Manual C. De La Garza. Fire denied
Vallejo’s claim, and Vallejo filed this action, alleging he was entitled to benefits und er
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Insurance Code section 11580, a breach of contract cause of action, and that Fire had
breached the covenant of good faith and fair dealing when it denied his claim. A jury
found in Vallejo’s favor, and the trial court awarded Vallejo contract damages in the form
of the amount due to him under the policy plus interest, damages for emotional distress,
and attorney fees expended to collect the amount he was due under the policy under
Brandt v. Superior Court (1985) 37 Cal.3d 813 (Brandt).
On appeal, Fire argues that the Insurance Code section 11580 and breach of
contract causes of action were time-barred by the time Vallejo filed this action. Central
to Fire’s position is its argument that a bankruptcy proceeding the Savoys filed after
Vallejo secured his personal injury judgment but before he submitted a claim to Fire did
not toll the statute of limitations applicable to the filing of Vallejo’s claim under
Insurance Code section 11580. On this point we agree with Fire. Because Vallejo
secured a judgment against the Savoys before they filed for bankruptcy, the bankruptcy
stay did not prevent him from filing an Insurance Code section 11580 or breach of
contract action to collect funds from Fire during the pendency of the bankruptcy
proceeding.
Fire also argues that Vallejo should not have been able to maintain an action
alleging Fire breached the covenant of good faith and fair dealing when it denied his
claim. On this point, we disagree with Fire, because while the statute of limitations on
the Insurance Code section 11580 and contracts causes of action lapsed before Vallejo
filed this action, that statute of limitations had not passed at the time Fire denied his
claim. Vallejo has raised a convincing argument that the statute of limitations on his bad
faith cause of action is different than the one that applied to the other two causes of
action, and Fire has not made a convincing argument that it acted reasonably at the time it
denied Vallejo’s claim.
In this appeal, we also consider two arguments regarding the calculation of
damages owed to Vallejo: one raised by Fire and the other raised in a cross-appeal by
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Vallejo. We will conclude that Fire correctly argues that the contract damages award
needs to be recalculated, and that Vallejo correctly argues the Brandt award ought to
have included litigation costs.
FACTS AND HISTORY OF THE PROCEEDINGS
Fire Issued a Policy on the Savoys’ Real Property covering the period from
April 27, 2006, to April 27, 2007
In March 2005, De La Garza transferred interest in a house he owned (the
property) to the Savoys. De La Garza continued to reside at the property after the
transfer.
Fire, a Farmers Insurance entity, issued a landlord’s protector insurance package
(the policy) on the Savoy’s property which covered the period of April 27, 2006, to
April 27, 2007. Though De La Garza was not specifically named as an insured under the
policy, the jury found that he was an insured under the policy and neither party has
challenged the jury’s finding on appeal. The policy included business liability coverage,
under which Fire would pay “all damages from an occurrence which an insured is legally
liable to pay because of bodily injury [or] personal injury . . . arising out of the
ownership, maintenance, or use of the insured location covered by this policy.”
The business liability coverage terms included a “Suit Against Us” provision,
which stated, “[Fire] may not be sued unless there has been full compliance with the
terms of this policy. No one shall have any right to make [Fire] a party to a suit to
determine the liability of a person [Fire] insure[s]. [Fire] may not be sued under” the
business liability coverage policy, “until the obligation of the insured has been
determined by [a] final judgment or agreement signed by [Fire].” Under the terms of the
business liability coverage, the “[b]ankruptcy of an Insured . . . will not relieve [Fire] of
[their] duties under this policy.”
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The policy also contained liability coverage designated as “medical pay to others”
coverage with a $1,000 per person limit. With certain qualifications, this coverage would
be used to pay, “the necessary medical expenses incurred by a person other than an
insured within three years from the date of an occurrence causing bodily injury” if the
bodily injury, “arises from a condition on the insured location, and [¶] . . . arises from an
occurrence for which an insured is covered under this policy.”
According to the policy, the Savoys resided in Las Vegas at the time the policy
was issued.
Vallejo’s Injury in May 2006, the Personal Injury Action, and Default Judgments
During the policy coverage period, in May 2006, Vallejo was injured when he fell
off a ladder while helping De La Garza remove a tree from the property.
According to Vallejo, after the injury, De La Garza would go along with Vallejo to
medical visits to treat the injury, and he visited Vallejo at home. Though De La Garza
told Vallejo he had insurance that could cover Vallejo’s medical expenses, De La Garza
told Vallejo he would pay for treatment, because De La Garza did not want to report the
incident to the insurer and have the cost of insurance increase. When Vallejo needed to
make a $300 deposit for surgery related to the injury, De La Garza covered the deposit
with a credit card. When Vallejo received a medical bill showing a balance owing of
over $14,000, he showed it to De La Garza, and De La Garza ceased contact with Vallejo
and stopped paying for Vallejo’s medical bills.
In July 2006, Vallejo retained an attorney, Jeffrey Silvia, to assist him in obtaining
compensation for medical expenses incurred to treat the injuries he suffered. Vallejo
represented to Silvia that De La Garza owned the property and had a homeowner’s
insurance policy. Silvia’s office contacted De La Garza, who acknowledged that the
policy existed but refused to provide the identity of the insurer.
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On October 10, 2006, Vallejo filed a personal injury action against De La Garza
for damages related to his injuries (underlying action). De La Garza did not file an
answer, and on June 28, 2007, the trial court entered a default judgment in Vallejo’s favor
against De La Garza awarding total damages of $125,184.84 (De La Garza judgment).
When Silvia sought to record an abstract of judgment against the property, he
learned that the Savoys owned the property at the time Vallejo was injured. As a result,
in November 2007, Vallejo filed an amended complaint in the underlying action naming
the Savoys as defendants.
A process server served the Savoys at the property using substitute service on
De La Garza who told the process server the Savoys lived at the property with him, but
worked long hours; and then De La Garza represented to the process server that he would
give the documents to the Savoys. The record does not tell us what, if anything,
De La Garza, who died in September 2009, ever told the Savoys about the personal injury
action.
The Savoys did not file an answer, and on January 28, 2009, the trial court entered
a default judgment in Vallejo’s favor against the Savoys awarding total damages of
$125,184.84 (Savoy judgment). In 2009 and 2010, Silvia made various efforts to identify
the property insurer to no avail.
We note that in its opening brief, Fire describes these efforts—including how
those efforts related to Vallejo’s own chapter 7 bankruptcy proceedings—in more detail.
Fire then argues that Vallejo and his counsel’s alleged “diligence” did not toll the statute
of limitations in this action. In his responsive brief, Vallejo does not argue that anything
other than the Savoys’ bankruptcy proceedings and Fire’s representations regarding the
impact of those proceedings tolled the statute of limitations. Ad ditionally, we find
persuasive Fire’s argument that Vallejo did not need to know the name of the insurer to
bring the action because (1) he was aware there was a liability insurer and that the
predicate requirement—a judgment against the insured—for an Insurance Code section
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11580 cause of action against that liability insurer existed when he secured the default
judgments; and (2) he could have filed a timely action naming the insurer as a Doe
defendant. (See Bernson v. Browning-Ferris Industries (1994) 7 Cal.4th 926, 932; see
also Fox v. Ethicon Endo-Surgery, Inc. (2005) 35 Cal.4th 797, 807 [“The discovery rule,
as described in Bernson, allows accrual of the cause of action even if the plaintiff does
not have reason to suspect the defendant’s identity. . . . As the court reasoned in Norgart[
v. Upjohn Co. (1999) 21 Cal.4th 383, 399], ‘[i]t follows that failure to discover, or have
reason to discover, the identity of the defendant does not postpone the accrual of a cause
of action, whereas a like failure concerning the cause of action itself does’ ”].) Thus, the
minute details of Vallejo’s efforts to identify Fire are not important for our analysis.
According to the trial court’s ruling on a motion for summary judgment in the
instant action, “[t]he parties agree that between 2006 through 2012, [Vallejo] did not
know where the Savoys were located and did not obtain any new information about any
insurance policy.”
In May 2017, Vallejo obtained a renewal of judgment as to all parties in the
underlying action, adding $124,191.12 in interest accrued after the De La Garza
judgment and a filing fee of $30 for the renewal application, for a total renewed judgment
of $249,405.96. In an attachment to his application for renewal of judgment, Vallejo
noted that if interest were calculated on the judgment entered as to the Savoys, it would
have been $104,332.44, instead. Thus, if the total renewed judgment amount had been
based on the Savoy judgment, the amount would have been $229,547.28.
The Savoys Filed for Bankruptcy in Nevada in 2012
On July 13, 2012, the Savoys filed for chapter 7 bankruptcy in the U.S.
Bankruptcy Court for the District of Nevada (Bankruptcy Court). The Savoys would
later claim it was not until they began considering filing for bankruptcy that they learned
Vallejo had secured a default judgment against them in the underlying action.
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The Savoys identified Vallejo as a judgment creditor on their list of creditors
holding unsecured nonpriority claims against them. The Savoys did not identify the Fire
policy, or any interest in any insurance policy, on their schedule of assets. The
Bankruptcy Court discharged the debtor—the Savoys—on October 15, 2012. On
November 27, 2012, without Vallejo or his counsel ever learning about the Savoys’
bankruptcy proceeding, the Bankruptcy Court issued a final decree in the Savoys’
bankruptcy proceeding, closing the matter and discharging the trustee.
Vallejo’s Efforts to Collect from Fire in 2013 and 2014
On July 9, 2013, after Silvia contacted American Bankers Insurance Co. of Florida
(American) to see if it had been the liability insurer associated with the property in May
2006, American sent Silvia a letter, informing him that their records demonstrated the
Fire policy was in effect on the date Vallejo was injured. This is the first time anyone
told Silvia that Fire was the insurer. On July 18, 2013, Silvia wrote a letter to Fire in
which he stated that a judgment had been entered against the Savoys in the amount of
$125,184.84 and demanded that Fire satisfy the judgment.
On July 30, 2013, Lisa Newton, a field claims representative with Fire, wrote back
to Silvia and informed him that Fire was investigating coverage in the case.
“[H]owever,” she added, “Mr. and Mrs. Savoy have indicated that they had the judgment
discharged in bankruptcy in 2012 . . . in Clark County Nevada.” Silvia then asked
Newton to provide him with the bankruptcy case number and the identity of the Savoys’
bankruptcy attorney. Newton provided Silvia with the requested information and, in her
August 8, 2013, letter transmitting the information, wrote, “[a]s we have discussed, Mr.
and Mrs. Savoy filed [for] bankruptcy in Clark County Nevada and discharged the
judgment at that time. Neither were aware that Manual De La Garza was ever served
naming them as defendants in this matter and Mr. De La Garza died in 2009.” The letters
between Silvia and Newton identify claim unit number 8001847946-1-2.
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In late August and early September 2013, Silvia communicated with another Fire
representative who did process a medical-payment claim for Vallejo. Fire paid Vallejo
$1,000, the maximum medical payment it concluded was allowed under the policy. In
the September 20, 2013, cover letter transmitting the $1,000 payment and informing
Vallejo that available medical benefits were exhausted with that payment, the Fire claims
representative wrote, “California laws and regulations require that we provide you with
the four year limitation period upon which we may rely to deny a claim.” The letters to
Silvia from Fire regarding the medical payment are identified with claim unit number
8001847946-1-3.
On October 24, 2013, Newton made a note to Fire’s file on Vallejo’s claim that as
they had not “heard back” from Silvia or the Savoys, Fire would close the file, but they
would reopen the file if Silvia sent “further correspondence and needs additional
infor[m]ation.”
Meanwhile, Silvia consulted with a bankruptcy counsel in California, and located
a bankruptcy attorney in Nevada to assist him with navigating issues that stemmed from
the Savoys’ bankruptcy case.
On January 10, 2014, Vallejo’s Nevada bankruptcy counsel filed an ex parte
motion to reopen the Savoys’ bankruptcy case, and a motion to modify the stay to allow
Vallejo to name the Savoys nominally in order to pursue insurance policy proceeds under
the policy. The Bankruptcy Court granted the request to reopen the matter. Fire learned
about the motion to modify the stay, and initially considered opposing the motion, but no
record of it filing an opposition is identified on the register of actions for the bankruptcy
action.
Notes from Fire’s file state that as of February 6, 2014, Fire had reopened
communications with Silvia and Vallejo’s Nevada bankruptcy counsel, and Casey
Corless, a claims supervisor with Fire, had communicated with them that it was her belief
that there were some coverage and liability issues Fire needed to explore. More
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specifically, she noted the Savoys had not given Fire any notice of the claims until the
summer of 2013, and it was Fire’s belief that there had been some serious service of
process issues in the underlying action against the Savoys. She advised Silvia that there
had been a discharged bankruptcy action in Nevada, and there would be no active claim
until and unless the Bankruptcy Court granted their motion for relief from the bankruptcy
stay.
The Bankruptcy Court heard the motion to lift the automatic stay on February 12,
2104.
On February 19, 2014, Newton sent Silvia a letter denying Vallejo’s claim. She
wrote, “[w]e have completed our investigation and have determined that there is no
coverage available for this loss.” She provided no further explanation to Vallejo or his
counsel in the letter.
However, also on February 19, 2014, Stewart Lewis, Fire’s Northern California
Litigation Manager, sent a letter to the Savoys, explaining why Fire had concluded “there
is no coverage provided for this [Vallejo’s] loss” under the policy. This letter was also
prepared by Newton. First, Fire concluded that De La Garza was a tenant of the Savoys
on May 15, 2006, and, therefore, no coverage was available to him under the policy.
With respect to the Savoys, Fire wrote, “Fire Insurance Exchange was not notified of the
accident that occurred on May 15, 2006 until the claim was reported [to] us on July 18,
2013. Moreover, Fire Insurance Exchange was not notified that a lawsuit had been
served on Franklin and Marsha Savoy or that a default judgment had been entered against
Franklin and Marsha Savoy on January 28, 2009. Failure to notify Fire Insurance
Exchange of the lawsuit and judgment entered against Franklin and Marsha Savoy is a
material breach of your duties under the policy. [¶] Based on the foregoing, Fire
Insurance Exchange does not owe you a defense of indemnity obligation under the
referenced policy.”
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Newton admitted at trial that the letter does not state Fire had identified any
prejudice to it as a result of the Savoys’ failure to notify them, and that the letter would
have included a comment about prejudice to Fire if she had identified any prejudice that
had occurred to Fire as a result of the Savoys’ failure to notify Fire. She also admitted
that while the letter did identify the Savoys’ failure to notify Fire of Vallejo’s claim
before judgment was entered in the underlying action as a basis for the denial, it did not
“identify the delay from the [entry of the] judgment” in the underlying action and the date
the claim was submitted to Fire as a factor.
On February 24, 2014, the Bankruptcy Court granted the motion to modify the
automatic stay in the Savoys’ bankruptcy action. The order says, “IT IS HEREBY
ORDERED the Motion to Modify the Automatic Stay to Name Debtors Nominally to
Pursue Insurance Policy and Waive the 14-Day Stay under Rule 4001(a)(3) is
GRANTED in its entirety; [¶ ] IT IS FURTHER ORDERED that the bankruptcy case
shall be closed thirty (30) days after the entry of this Order; and [¶] IT IS FURTHER
ORDERED that any ensuing pleadings filed by Mr. Vallejo against Farmers Insurance
shall note in the caption that Debtors are only named nominally, and the pleadings shall
state that the Discharge of the Debtors was entered in the Bankruptcy Court on October
15, 2012, as Docket No. 31.”
This Action
Complaints and Demurrers
Vallejo first filed this action on August 26, 2014, alleging only one cause of
action: a complaint for damages under Insurance Code section 11580. In a first amended
complaint filed on March 30, 2017, Vallejo added two causes of action: one for breach
of contract, and another for compensatory and punitive damages as a result of insurers’
breach of the covenant of good faith and fair dealing (bad faith) for refusing to pay the
personal injury judgment. Fire demurred to the first amended complaint, and Vallejo
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filed a second amended complaint, to which Fire also demurred. After the trial court
sustained Fire’s demurrer to the second amended complaint with leave to amend, Vallejo
filed the operative complaint, the third amended complaint, in September 2017, which
also alleges an Insurance Code section 11580 cause of action, a breach of contract cause
of action, and bad faith cause of action. Fire also demurred to the third amended
complaint.
Fire filed a supplemental brief in support of its demurrer responding to a request
the trial court made to address whether the statute of limitations to bring the action ran
from Vallejo providing notice of the claim in 2013 or from the date the Bankruptcy Court
lifted the stay in the bankruptcy action. Fire argued that the stay in the bankruptcy case
did not bar Vallejo from bringing an action against Fire—which Fire characterized as a
non-debtor defendant—during the stay, and, therefore, the bankruptcy stay did not toll
the statute of limitations for this action against Fire.
The trial court overruled Fire’s demurer to the third amended complaint, and Fire
filed an answer.
Fire’s Other Efforts to Dismiss the Case Based on Statute of Limitations
Issues
Fire made other efforts to dismiss the action on the ground that Vallejo had failed
to meet the statute of limitations.
First, Fire filed a motion for summary judgment or summary adjudication, in
which it argued Vallejo’s Insurance Code section 11580 cause of action was time-barred
by the statute of limitations; that because his Insurance Code section 11580 cause of
action was time-barred, so too was Vallejo’s breach of contract cause of action; and that
Vallejo’s bad faith cause of action must fail because no benefits were due to Vallejo.
Among other theories, in opposition to the motion for summary judgment, Vallejo
argued his case against Fire would have been tolled from when the Savoys filed the
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bankruptcy action in July 2012 to the date his motion for relief from the bankruptcy stay
was granted on February 24, 2014. The trial court denied Fire’s motion for summary
judgment or summary adjudication. In so doing, the court cited case law to support the
proposition that a four-year statute of limitations under Code of Civil Procedure section
337 calculated from the date judgment was entered in the underlying action applied to the
Insurance Code section 11580 cause of action, and then it—incorrectly—stated Vallejo
filed this action within one year of the entry of the judgment in the underlying action.
Next, Fire brought a motion for judgment on the pleadings, in which it argued that
the lawsuit, filed 5.5 years after entry of judgment in the underlying personal injury
action, was time-barred under a four-year statute of limitations that began to run when the
personal injury judgment was final. Fire again argued the breach of contract cause of
action was not separate from the Insurance Code section 11580 cause of action and was,
therefore, subject to the same statute of limitations as the underlying Insurance Code
section 11580 cause of action. Also, Fire argued Vallejo could not argue the statute of
limitations was tolled by waiver or estoppel theories based on Fire’s representations in
the September 20, 2013, cover letter regarding a four-year time frame to challenge the
denial of a claim.
Additionally, Fire argued Vallejo could not maintain a bad faith claim independent
of the Insurance Code section 11580 claim. Fire reasoned that if Vallejo’s Insurance
code section 11580 action was time-barred, Vallejo could have no separate claim for bad
faith. In opposition to the motion for judgment on the plead ings, Vallejo once again
argued the statute of limitations had, in fact, been tolled between July 13, 2012, and
February 24, 2014, due to the bankruptcy action. The trial court denied the motion.
Vallejo’s Motion in Limine Regarding the Bankruptcy Stay
In contrast to Fire’s efforts to convince the trial court that the bankruptcy stay
caused by the Savoys’ bankruptcy filing had no tolling impact on the applicable statute of
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limitations, Vallejo sought to exclude “all requested arguments, evidence, etc. by [Fire]
that the bankruptcy stay of 11 U.S.C. § 362 arising from the bankruptcy filing and case of
Franklin Savoy and Marsha Savoy did not apply to the Farmers’ policy of insurance as to
[Vallejo]” during the trial proceedings.
At an initial hearing regarding the motion, the court reserved its ruling on the
matter and gave the parties the opportunity to provide further briefing regarding the
impact and length of the bankruptcy stay. At the second hearing on the motion, the trial
court concluded the bankruptcy stay applied as a matter of law and created an injunction
that prevented Vallejo from seeking payment under the policy. As such, the court
tentatively stated it would rule in Vallejo’s favor on the motion and exclude any evidence
Fire might produce to suggest the stay did not apply to the policy. After hearing
additional argument from Fire, the court acknowledged that “the Ninth Circuit is not
really consistent with all these things” when it comes to determining if bankruptcy stays
would have tolled the action against an insurer, and “there’s some language that supports
[Fire’s] side” of the argument. Yet, recognizing this issue had been presented to it “as a
matter of law” the judge stated it had to “make a decision.” The court ruled, its decision
“may be” one “of first impression or . . . might be limited to the facts of the case. If I’m
wrong, then I’m wrong, but I have to make a decision. My decision is going to be to side
with the plaintiff on this,” and it ruled the stay remained in place until it was lifted by the
Bankruptcy Court, tolling the statute of limitations over 500 days, thereby tolling the
statute of limitations to file this action beyond the date it was filed. Because it found that
the stay had tolled the statute of limitations beyond the date this action was filed, the
court excluded evidence that the bankruptcy stay should not apply as “irrelevant.”
Trial and Judgment
The court conducted a trial in this action in late July and early August 2019.
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The jury found that De La Garza was an insured under the policy; that Fire had not
been prejudiced by the Savoys’ failure to give them notice prior to July 18, 2013; that
Fire’s failure to pay Vallejo’s judgment was unreasonable; that Vallejo was entitled to
$165,000, in emotional distress damages covering the period of February 19, 2014—the
date Fire denied the claim—to the date the verdict was entered; and that Vallejo did not
prove by clear and convincing evidence that Fire had acted with malice, oppression, or
fraud in its failure to pay Vallejo.
After the jury reached its verdict, Vallejo made a request for an award of attorney
fees and costs on the bad faith cause of action under Brandt, supra, 37 Cal.3d 813. At a
hearing, the trial court determined that Vallejo was entitled to $445,092 in Brandt fees
and did not award additional costs under Brandt. Regarding its decision to not award
costs, the court explained, “I’ve read the cases. The cases talk about attorney’s fees.
There’s only one reference in there that mentions costs, and it’s . . . in one of the cases
that this happens to be quoting some other source and puts the word costs in there. I
think it’s dicta. I don’t think it was discussed in that case. I d idn’t see any authority that
would include the costs as you’ve described them . . . as part of the [Brandt] fees. . . . So
you got an argument there, but I’m not going to award them at this point.”
At the hearing when the court considered Brandt fees, the trial court granted a
request Vallejo made for prejudgment interest on the renewed judgment, calculated from
the date of renewal, May 30, 2017, to the date of the hearing, which was December 18,
2019. Applying an interest rate of 10 percent per annum, the trial court calculated the
interested to be $24,940.59 per year, or $68.33 per day, for a total of $63,683.56 covering
May 30, 2017, to December 18, 2019.
On January 3, 2020, the trial court entered a judgment in which, pursuant to the
jury’s verdict and its ruling following the hearing on Brandt and prejudgment interest
fees, the court awarded Vallejo a total of $923,181.52, as follows: the amount due on the
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renewed personal injury action totaling $249,405.96; pre-judgment interest totaling
$63,683.56; emotional distress damages of $165,000; and attorney fees of $445,092.
DISCUSSION
I
Timeliness of Vallejo’s Insurance Code Section 11580 Claim
Fire argues that Vallejo failed to meet the statute of limitations to file an action
against Fire pursuant to Insurance Code section 11580. Central to Fire’s argument is its
position that the stay in the Savoys’ bankruptcy proceeding did not toll the statute of
limitations for Vallejo to file this action.
Though Fire preemptively makes arguments regarding why other possible theories
Vallejo might offer as to why the statute of limitations was tolled would lack merit, in his
responsive brief Vallejo makes only two arguments as to why the statute of limitations
was tolled on the Insurance Code section 11580 cause of action. First, Vallejo argues
that the bankruptcy stay that went into effect pursuant to 11 U.S.C. section 362 when the
Savoys filed for bankruptcy in Nevada stayed Vallejo’s ability to bring this action against
Farmers, and therefore tolled the applicable statute of limitations, from July 13, 2012, to
February 24, 2014. Central to this argument is Vallejo’s position that the Fire policy was
an asset of the Savoy’s bankruptcy estate. Second, Vallejo makes the argument that Fire
should be equitably estopped from arguing the bankruptcy stay did not toll the action,
because Fire represented to him that the stay did apply and “refused to even accept or
deny the clam until relief from the automatic stay was obtained.”
Here we conclude that because Vallejo obtained a judgment against the Savoys
before they filed for bankruptcy, the stay in the Savoys’ bankruptcy action did not bar
Vallejo from filing this action against Farmers and, therefore, the stay did not toll the
statute of limitations for him to file this action. We also conclude that principles of
equitable estoppel did not apply to toll the statute of limitations for Vallejo to file this
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action. However, we do conclude Vallejo’s claims were not yet time-barred as to the
Savoy judgment when he submitted his claim to Fire, and equitable tolling did apply
from the date Vallejo submitted his claim to Fire to the day Fire denied his claim. Yet
even with that equitable tolling, Vallejo still did not meet the statute of limitations to file
his Insurance Code section 11580 cause of action.
A. Nature of Insurance Code Section 11580 Actions
Insurance Code section 11580, subdivision (b) requires liability insurance policies
issued in California to contain: “(1) A provision that the insolvency or bankruptcy of the
insured will not release the insurer from the payment of damages for injury sustained or
loss occasioned during the life of such policy[;]” and “(2) A provision that whenever
judgment is secured against the insured . . . in an action based upon bodily injury, death,
or property damage, then an action may be brought against the insurer on the policy and
subject to its terms and limitations, by such judgment creditor to recover on the
judgment.” “ ‘The primary purpose of the statute is to protect an injured person when the
insured is bankrupt or insolvent.’ ” (Barrera v. State Farm Mut. Automobile Ins. Co.
(1969) 71 Cal.2d 659, 682.)
This statute, “effectively makes an injured plaintiff who obtains a final judgment
against a tort defendant a third party beneficiary of the defendant’s liability insurance
policy.” (Catholic Mutual Relief Society v. Superior Court (2007) 42 Cal.4th 358, 367;
see also Hand v. Farmers Ins. Exchange (1994) 23 Cal.App.4th 1847, 1856; Murphy v.
Allstate Ins. Co. (1976) 17 Cal.3d 937, 943.) Under the statute, “once having secured a
final judgment for damages, the plaintiff becomes a third party beneficiary of the policy,
entitled to recover on the judgment on the policy. At that point the insurer’s duty to pay
runs contractually to the plaintiff as well as the insured.” (Hand, at p. 1858.) Thus,
“[u]pon obtaining a judgment against the insured, the judgment creditor has an
independent cause of action against the insurer to enforce the insurer’s obligation to
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indemnify the insured. (Gonzalez v. St. Paul Mercury Ins. Co. (1976) 60 Cal.App.3d
675, 680-681.) ‘The judgment creditor’s right to sue is not derivative or dependent upon
any assignment from the insured.’ (Croskey et al., Cal. Practice Guide: Insurance
Litigation, supra, ¶ 15:1039, p. 15-187.)” (Shafer v. Berger, Kahn, Shafton, Moss,
Figler, Simon & Gladstone (2003) 107 Cal.App.4th 54, 68.) “[I]t is clear from the
history of the statute that its purpose and effect were to create a right in the insurance
contract.” (Hand, at pp. 1858-1859.)
Consequently, Insurance Code section 11580 allows a judgment creditor to file a
“direct action against an insurer based on the insured’s underlying insurance policy.”
(Guastello v. AIG Specialty Ins. Co. (2021) 61 Cal.App.5th 97, 100, fn. 1; see also Clark
v. California Ins. Guarantee Assn. (2011) 200 Cal.App.4th 391, 397.) The judgment
creditor’s claim will be subject to the terms and limitations of the insurance policy.
(Shafer v. Berger, Kahn, Shafton, Moss, Figler, Simon & Gladstone, supra,
107 Cal.App.4th at p. 68.)
B. Without Tolling Insurance Code Section 11580 Causes of Action Have a
Four-Year Statute of Limitations
An Insurance Code section 11580 cause of action against an insurer by an
insured’s judgment creditor is governed by the four-year statute of limitations prescribed
by section 337, former subdivision (1), now subdivision (a), of the Code of Civil
Procedure. (Woolett v. American Employers Insurance Co. (1978) 77 Cal.App.3d 619,
624.) The cause of action arises, and the statute of limitations begins to run, when a final
judgment against an insured has been entered. (Woolett, at p. 624; see also Comunale v.
Traders & General Ins. Co. (1958) 50 Cal.2d 654, 662.) For purposes of determining
when a cause of action arises under Insurance Code section 11580, a judgment is “ ‘final’
. . . after an appeal is concluded or the time within which to appeal has passed.” (McKee
v. National Union Fire Ins. Co. (1993) 15 Cal.App.4th 282, 287.) Absent exceptions not
17
applicable here, the last day a party can possibly appeal a judgment is 180 days from the
date of entry of the judgment. (Cal. Rules of Court, rule 8.104.)
The trial court entered the De La Garza judgment on June 28, 2007. At the latest,
for purposes of our calculations, the De La Garza judgment became final on
December 26, 2007. (See Cal. Rules of Court, rules 1.10(b) & 8.104; see also Morehart
v. County of Santa Barbara (1994) 7 Cal.4th 725, 741 [Code Civ. Proc., § 904.1, subd.
(a) “authorizes appeal . . . from a judgment that is not intermediate or nonfinal but is the
one final judgment. . . . Judgments that leave nothing to be decided between one or more
parties and their adversaries, or that can be amended to encompass all controverted
issues, have the finality required by section 904.1, subdivision (a)”]; Nguyen v. Calhoun
(2003) 105 Cal.App.4th 428, 437 [finding judgments were final and appealable as to
plaintiff’s claims against some of the defendants in a multidefendant lawsuit even though
claims remained pending against other defendants].) Without tolling, the last day Vallejo
had to file an Insurance Code section 11580 action based on the De La Garza judgment
was December 26, 2011.
The trial court entered the Savoy judgment on January 28, 2009. At the latest, for
purposes of our calculations, the Savoy judgment became final on July 27, 2009.
(See Cal. Rules of Court, rule 8.104.) Absent tolling, the last day to file an Insurance
Code section 11580 action based on the Savoy judgment would be July 29, 2013, because
July 27, 2013, was a Saturday. (See Code Civ. Proc., § 12a.) When Vallejo made his
claim to Fire on July 18, 2013, he had 11 days left to file an Insurance Code section
11580 action predicated on the Savoy judgment.
C. Equitable Tolling Applied While Fire Considered the Claim
Without wholly conceding the point, Fire allows that it is possible that equitable
tolling applied to toll the statute of limitations while Fire considered Vallejo’s claim
based on the Savoy judgment. Fire argues that equitable tolling would not have applied
18
to toll the statute of limitations as to an action related to the De La Garza judgment,
because the statute of limitations on that claim had already lapsed by the time Silvia
contacted Fire.
The four years Vallejo had to bring his Insurance Code section 11580 action
against Fire regarding the Savoy judgment was tolled from the time he sought to resolve
the claim directly with Fire to the day Fire denied the claim. “In Elkins v. Derby (1974)
12 Cal.3d 410, 414 (Elkins), the Supreme Court held that the doctrine of equitable tolling
may apply to toll the statute of limitations on a claim during the period in which a
plaintiff pursues another remedy for the harm that the plaintiff suffered. The Elkins court
adopted a line of cases in which courts had concluded that ‘if the defendant is not
prejudiced thereby, the running of the limitations period is tolled “[w]hen an injured
person has several legal remedies and, reasonably and in good faith, pursues one.” ’ (Id.
at p. 414, quoting Myers v. County of Orange (1970) 6 Cal.App.3d 626, 634 (Myers).)”
(Hopkins v. Kedzierski (2014) 225 Cal.App.4th 736, 746.)
However, as Fire observes, only 11 days remained on the four-year statute of
limitations to bring an action regarding the Savoy judgment when Vallejo made his
claim, and Fire denied his claim on February 19, 2014. As Fire argues the February 19,
2014, denial would have restarted—but not reset—the clock on the statute of limitations,
extending the deadline to file a suit against Fire based on the Savoy judgment to March 3,
2014, still months before Vallejo filed this action on August 26, 2014.
We agree with Fire that equitable tolling would have had no impact on the statute
of limitations for Vallejo to bring an action regarding the De La Garza judgment, because
the statute of limitations on an action based on that judgment had passed well before
Vallejo submitted a claim to Fire.
19
D. Impact of the Bankruptcy Stay
1. Basic Nature of a Bankruptcy Stay and Principles of Review
When a person files a petition for bankruptcy, the petition “operates as a stay” of
“the enforcement, against the debtor or against property of the estate, of a judgment
obtained before the commencement of the case under this title,” and of “any act to obtain
possession of property of the estate or of property from the estate or to exercise control
over property of the estate.” (11 U.S.C. § 362(a)(2)-(3), italics added.) Property of the
estate is defined to include, “all legal or equitable interests of the debtor in property as of
the commencement of the case,” and “[p]roceeds, product, offspring, rents, or profits of
or from property of the estate . . . .” (11 U.S.C. § 541(a)(1) & (6).) It does not include,
“any power that the debtor may exercise solely for the benefit of an entity other than the
debtor.” (11 U.S.C. § 541(b)(1).)
“ ‘Whether property is property of the [debtor’s] estate is a question of law
reviewed de novo.’ ” (Shaoxing County Huayue Import & Export v. Bhaumik (2011)
191 Cal.App.4th 1189, 1196, quoting In re Mwangi (9th Cir. 2010) 432 B.R. 812, 818.)
The parties cite to California appellate court opinions and decisions issued in
bankruptcy and circuit courts throughout the United States in advancing their arguments.
“As explained by one federal court, ‘while federal law defines in broad fashion what
property interests are included within the bankruptcy estate, state law determines the
nature and existence of a debtor’s rights.’ (In re Moffett (4th Cir. 2004) 356 F.3d 518,
521; see also In re O’Dowd (3d Cir. 2000) 233 F.3d 197, 202 [‘While federal law defines
what types of property comprise the estate, state law generally determines what interest,
if any, a debtor has in property.’]; 2 Cowans, Bankruptcy Law and Practice (7th ed. 1998)
§ 9.2(b), p. 342 [‘The question of what is “property of the estate” is a federal question,
but state law determines the nature and quantum of interest’ (fns. omitted)].)” (Uecker v.
Zentil (2016) 244 Cal.App.4th 789, 794.)
20
Additionally, when deciphering the federal laws at issue, “ ‘[o]n a federal
question, the decisions of the United States Supreme Court are binding on state courts.
However, the decisions of the lower federal courts, while persuasive, are not binding on
us. (People v. Bradley (1969) 1 Cal.3d 80, 86.) Thus, in the absence of a controlling
United States Supreme Court opinion,’ ” which is the scenario we are faced with on the
precise issue we address here, “ ‘we make an independent determination of federal law.
Where the federal circuits are in conflict, the decisions of the Ninth Circuit are entitled to
no greater weight than those of other circuits.’ (Irwin v. City of Hemet (1994)
22 Cal.App.4th 507, 520, fn. 8.)” (Forsyth v. Jones (1997) 57 Cal.App.4th 776, 782-783;
id. at p. 782 [“Jones also contends that there is no decision from the Ninth Circuit Court
of Appeals on this issue, implying that we are bound to follow that court's lead on matters
of federal law. That implication is mistaken”].)
2. The Savoys’ Bankruptcy Action Did Not Toll the Statute of
Limitations to Bring this Action
As a preliminary matter, to state the obvious, as “direct action[s] against an
insurer based on the insured’s underlying insurance policy,” Insurance Code section
11580 actions are not actions against bankruptcy debtors. (Guastello v. AIG Specialty
Ins. Co., supra, 61 Cal.App.5th at p. 100, fn. 1, italics added; see also McKee v. National
Union Fire Ins. Co., supra, 15 Cal.App.4th at p. 289 [“[A]n action under section 11580,
subdivision (b)(2), is not an enforcement action against the judgment debtor. It is a
separate action against an insurance company, subject to different defenses . . . .”].)
Thus, in order to determine if the bankruptcy stay in the Savoys’ bankruptcy
action tolled the time in which Vallejo had to file the action against Farmers, we need to
ask if, in bringing the action, Vallejo was seeking to (1) enforce “a judgment obtained
before the commencement of the” bankruptcy proceeding “against property of the
estate,” (2) to “obtain possession of property of the estate or of property from the estate,”
21
or (3) “to exercise control over property of the estate.” (11 U.S.C. § 362(a)(2)-(3), italics
added.) We conclude he was not seeking to do any of those three things, and the statute
of limitations was not tolled.
“While the rights held by a debtor under insurance policies are property of the
estate, whether the funds paid by the Insurers on account of the insurance policies are
property of the estate is an entirely different question. A split of authority has developed
regarding whether proceeds payable from such insurance are property of the estate.”
(Landry v. Exxon Pipeline Co. (Bankr. M.D. La. 2001) 260 B.R. 769, 785 (Landry).) The
analysis employed by the United States District Court for Middle District of Louisiana in
Landry is on point and is, to us, persuasive.
In Landry, supra, 260 B.R. at page 773, various plaintiffs had brought an action in
Louisiana state court against the National Energy Group, Inc. (NEG) and other
defendants alleging damages under Louisiana law. After plaintiffs filed their action, an
involuntary Chapter 11 bankruptcy proceeding was commenced against NEG, and the
plaintiffs had NEG dismissed from the state court action. (Id. at p. 774.) The plaintiffs
then successfully moved to add, as defendants, NEG’s insurers under a Louisiana statute
allowing for direct action against insurers, and sought “to recover against certain
comprehensive general liability . . . insurance policies issued by the Insurers to NEG.”
(Ibid.) Louisiana’s direct action statute provides that, “[n]o policy or contract of liability
insurance shall be issued or delivered in this state, unless it contains provisions to the
effect that the insolvency or bankruptcy of the insured shall not release the insurer from
the payment of damages for injuries sustained or loss occasioned during the existence of
the policy, and any judgment which may be rendered against the insured for which the
insurer is liable which shall have become executory, shall be deemed prima facie
evidence of the insolvency of the insured, and an action may thereafter be maintained
within the terms and limits of the policy by the injured person, or his survivors, . . . or
heirs against the insurer.” (La. Rev. Stat. Ann. § 22:1269.)
22
The defendants to the NEG state court action removed the action to the United
States District Court for the Middle District of Louisiana under the theory that the district
court had jurisdiction under statutes conferring federal jurisdiction in bankruptcy actions
and in actions related to bankruptcy actions. (Landry, supra, 260 B.R. at pp. 774, 775.)
Plaintiffs, in turn, filed a motion to remand on equitable grounds as permitted by title 28
United States Code section 1452(b) or to abstain under title 28 United States Code
section 1334(c). (Landry, at pp. 774-775.) In light of the fact that the matter potentially
involved questions regarding bankruptcy court jurisdiction, the district court referred the
matter to the United States Bankruptcy Court for the Middle District of Louisiana for
resolution. (Id. at p. 775.) The bankruptcy court concluded that while the federal courts
would not have exclusive jurisdiction over the action, removal jurisdiction under title
28 United States Code section 1452(a) and title 28 United States Code section 1334(b)
would be permissible, because it was an action related to the bankruptcy proceedings.
(Landry, supra, 260 B.R. at pp. 780-781.) However, the court observed, though the
federal court could “take cognizance of the action,” the action also could “have
proceeded with equal dignity in the state court.” (Id. at p. 781.)
In order to decide whether it ought to remand the case to the Louisiana state court
on equitable grounds as contemplated title 28 United States Code section 1452(b), the
bankruptcy court conducted an exhaustive examination of the split in authority regarding
whether insurance proceeds due to third parties under liability insurance policies, like
proceeds collectible under Insurance Code section 11580, are property of a bankruptcy
estate. (Landry, supra, 260 B.R. at pp. 783-794.) Ultimately, the court concluded,
“[u]nder [Louisiana’s] state law, the debtor has no interests in the funds used by an
insurance company to pay its own obligations which are separate and independent of the
obligation owed by the debtor to pay that same debt. Therefore, the proceeds of liability
insurance payable to non-debtor parties are not property of the debtor’s estate under 11
U.S.C. § 541, or any other provision of the Code.” (Id. at p. 801, fn. omitted.)
23
In carrying out its analysis, the bankruptcy court acknowledged that property of
the bankruptcy estate is broadly defined, but not without limits: “[b]y choosing the
phrase ‘all legal or equitable interests of the debtor in property,’ ” to define the property
of the bankruptcy estate, “Congress intended to include a broad range of property within
the estate. In essence, all economic rights the debtor holds at the commencement of the
bankruptcy become property of the estate under 11 U.S.C. § 541. ‘Property of the estate,’
however, is not limitless. The term is measured by the interests held by the debtor as of,
or up to, the commencement of the case, unless otherwise provided within the statute. As
stated by the Fifth Circuit [in In re Louisiana World Exposition, Inc. (5th Cir. 1987) 832
F.2d 1391, 1399], ‘the estate’s legal and equitable interests in property rise no higher
tha[n] those of the debtor.’ The estate includes only property to which the debtor would
have a right if the debtor were solvent.” (Landry, supra, 260 B.R. at pp. 783-784, fns.
omitted.)
In considering a standard for determining if insurance proceeds under a policy are
property of an estate, the Landry court favorably quoted In re Edgeworth (5th Cir. 1993)
993 F.2d 51, 55-56, for the rule that, “ ‘[t]he overriding question when determining
whether insurance proceeds are property of the estate is whether the debtor would have a
right to receive and keep those proceeds when the insurer paid on a claim. When
payment by the insurer cannot inure to the debtor’s pecuniary benefit, then that payment
should neither enhance nor decrease the bankruptcy estate. In other words, when the
debtor has no legally cognizable claim to the insurance proceeds, those proceeds are
not property of the estate.’ ” (Landry, supra, 260 B.R. at p. 786, boldface &
underscoring added by Landry.)
The bankruptcy court then observed that in the liability insurance context, “the
debtor has no cognizable claim to the proceeds paid by an insurer on account of a covered
claim.” (Landry, supra, 260 B.R. at p. 786.) The court also observed that the payment of
proceeds under a liability policy could not be made available for distribution to the
24
creditors other than those with claims under the policies. (Ibid.) The proceeds that
would be paid are “a component of the asset structure of the insurance company,” and the
claim to them is an obligation of the insurance company. (Id. at p. 787.) “When a
covered claim arises, the injured debtor may have an interest, albeit a self-serving
interest, in having a third party (the insurance company) pay for its wrongdoing, but this
is not a legal or equitable interest in the property used to pay the claim.” (Ibid., boldface
& underscoring omitted.) And when liability insurance is used to pay an obligation, “the
debtor’s estate will not be used to pay covered claims unless and until all coverage is
exhausted.” (Id. at p. 789.) Additionally, while the estate may be enriched by reducing
the estate’s liabilities when equitable and legal title to proceeds belongs to a third party,
the estate does not actually increase. (Ibid.) “Property, however, does not become
property of the estate merely because such property has the effect of reducing the estate’s
liability, or because of some other beneficial effect such property has on the estate. The
estate must have a legal or equitable interest in the property which benefits the estate.”
(Id. at p. 790, boldface & underscoring omitted.)
Here, by the time the Savoys filed for bankruptcy, the liability insurance proceeds
at issue would have been payable from Fire to Vallejo under an independent cause of
action against Fire under Insurance Code section 11580. Fire would not have owed any
funds to the Savoys. Having secured the Savoy judgment before the Savoys filed for
bankruptcy, the right to bring a cause of action to collect funds from Fire pursuant to
Insurance Code section 11580 belonged to Vallejo as the Savoys’ judgment creditor, and
Vallejo did not need to take any further actions against the Savoys to exercise that right.
What is more, under the persuasive reasoning outlined in Landry, the proceeds Vallejo
would have been paid under the policy were not an asset of the bankruptcy estate—they
were due to Vallejo and the Savoys had no claim to them. Consequently, the bankruptcy
stay did not apply to Vallejo’s action to collect those proceeds from Fire, and it did not
25
toll the statute of limitations applicable to Vallejo’s Insurance Code section 11580 action
against Fire.
3. Vallejo’s Arguments
Vallejo argues that in entering an order to lift the stay in the Savoys’ bankruptcy
proceeding on February 24, 2014, the Bankruptcy Court made a determination that relief
from the stay in that action was needed before Vallejo could pursue this action, and we
are bound by that determination. We disagree with Vallejo’s interpretation of the
Bankruptcy Court’s order.
In the order, the Bankruptcy Court stated it was modifying the stay “to Name
Debtors Nominally to Pursue Insurance Policy . . . .” Essentially, the Bankruptcy Court
entered an order that would have allowed Vallejo to name the Savoys as defendants to an
action if he needed to name them to collect proceeds under their insurance policy. The
order does not make an explicit determination that either (1) the Savoys had to be named;
or (2) that proceeds available under the policy could not be sought from Fire without
lifting the stay.
Vallejo argues that “[i]f there [was] no interest [in] the bankruptcy” at issue in this
action, “the Bankruptcy Court would have denied the request to reopen [the] bankruptcy
as moot, as there would be no automatic stay restricting the lawsuit,” but this assumes too
much. The motion to lift the stay asked the Bankruptcy Court to lift a stay “for the sole
purpose of permitting Vallejo to name Debtors nominally to allow Vallejo to proceed
against Debtors’ insurance policy.” The supporting memorandum makes no mention of
Insurance Code section 11580, and it states that Vallejo seeks to “name Debtors
nominally to allow Vallejo to proceed against” Fire. Given the way the motion and its
supporting memorandum were worded, it is equally likely that the bankruptcy judge,
sitting in a state without a direct action statute, did not even consider the nature of
insurance proceeds to be awarded and, instead, just created a clear path to bring an action
26
naming the Savoys if that would have been a prerequisite to bringing an action to collect
the proceeds.
Both of the parties rely on Jones v. Golden Eagle Ins. Corp. (2011)
201 Cal.App.4th 139 (Jones) to support their arguments, with Vallejo characterizing it as
the “single California reported decision directly addressing the interaction of the
automatic stay with an action under Insurance Code § 11580[, subdivision ](b)(2).” Fire
cites Jones, supra, 201 Cal.App.4th at page 148, for the proposition that the rights
granted to a judgment creditor by Insurance Code section 11580, subdivision (b)(2),
“exist ‘without lifting the [bankruptcy] stay.’ ”
Vallejo disagrees with Fire’s characterization of Jones. First, Vallejo argues that
Fire’s use of the Jones decision is a misquote—i.e., Vallejo argues the quoted language
does not actually stand for the proposition that a judgment creditor’s right to sue a
bankruptcy debtor’s insurer under Insurance Code section 11580, subdivision (b)(2),
exists without the need to lift the bankruptcy stay. Next, Vallejo argues that the Jones
decision holds that an Insurance Code section 11580 action may be brought by lifting the
stay as to the insurer, but not the bankruptcy debtor. Vallejo is correct on the first point.
Fire’s use of the quoted language is misleading: the passage at issue does not state that,
as a matter of law, a judgment creditor’s right to bring an action against a liability insurer
of a bankruptcy debtor exists without lifting the bankruptcy stay. But Vallejo’s
interpretation also misconstrues the subject passage of Jones and the central issues in
Jones. A closer look at Jones and where the language at issue appears reveals that Jones
does not dictate a result contrary to the one we reach here.
In Jones, supra, 201 Cal.App.4th at pages 142-143, a series of individuals (tort
action plaintiffs) had sued Golden Eagle Insurance Corporation’s (Golden Eagle) insured,
Calsol, Inc. (Calsol), alleging they were harmed by exposure to one of Calsol’s products.
Golden Eagle was one of multiple companies that had provided general liability
insurance to Calsol during the timeframe in which Calsol was alleged to have harmed the
27
tort action plaintiffs. (Id. at p. 143.) Calsol was in bankruptcy, but the bankruptcy court
had granted the tort action plaintiffs relief from the automatic bankruptcy stay to allow
them to pursue claims against Calsol “on the condition any judgment could be enforced
only against Calsol’s insurers, not against Calsol itself.” (Id. at p. 142.)
Golden Eagle was placed in a conservatorship. (Jones, supra, 201 Cal.App.4th at
p. 142.) As part of the conservatorship, the California Insurance Commissioner
(Commissioner) established a procedure to handle claims against Golden Eagle, and sent
notice of the procedure to counsel for the tort action plaintiffs. (Id. at p. 144.) When the
tort action plaintiffs failed to file timely claims with the Commissioner, the
Commissioner denied their claims. (Ibid.) Other companies that had provided Calsol
general liability insurance during the timeframe at issue in the tort action filed claims in
the Golden Eagle conservatorship proceeding seeking some of the costs of the defense
and settlement of the tort action plaintiffs’ claims, which the Commissioner rejected. (Id.
at pp. 144-145.) The other insurers then filed an order to show cause in superior court,
challenging the Commissioner’s refusal, and the order to show cause was denied. (Id. at
p. 145.) The insurers then appealed, and our First District Court of Appeal affirmed the
trial court’s decision. (Id. at pp. 142-143.) Thus, the central issue in Jones was whether
Golden Eagle was required to share costs of the defense of the tort action plaintiffs’
claims against Calsol. (Id. at p. 145.)
In resolving the central issue, the Jones court considered aspects of bankruptcy
law to provide part of the context in which the issue arose. (Jones, supra,
201 Cal.App.4th at p. 147.) The court explained, “[f]ederal law provides that whenever a
corporation or individual files for bankruptcy, all legal proceedings against the bankrupt
are stayed, a provision referred to as the ‘automatic stay.’ (11 U.S.C. § 362(a);
[citation].) . . . [U]pon a showing of ‘cause,’ the bankruptcy court has discretion to grant
relief from the automatic stay. (11 U.S.C. § 362(d); [citation].) As noted, the bankruptcy
court granted the [tort action] plaintiffs relief from the automatic stay to pursue Calsol’s
28
insurers, but the plaintiffs continued to be barred from enforcing any judgment against
Calsol itself.” (Jones, at p. 147, italics added.) The court continued, “Calsol’s
bankruptcy did not release Golden Eagle and [other insurers] from their obligations under
the insurance policies issued to Calsol. Insurance Code section 11580, subdivision (b)(1)
expressly preserves the obligation of insurers to honor insurance policies issued to
entities that become bankrupt. [Citation.] Further, section 11580, subdivision (b)(2)
permits a plaintiff who has obtained a judgment against an insured defendant to pursue a
cause of action directly against the insurer for enforcement.” (Jones, at p. 147, italics
added.) It is in this context that the court considered the other insurers argument that they
should be able to seek costs of a defense in the tort action from Golden Eagle because,
even though the tort action plaintiff’s failure to file a claim against Golden Eagle may
have extinguished Golden Eagle’s obligation to those plaintiffs, the failure did not
extinguish the tort action plaintiffs’ claims against Calsol. (Ibid.)
In responding to this argument, the court used the language Fire and Vallejo focus
on in their arguments. (Jones, supra, 201 Cal.App.4th at p. 148.) The court noted the
other insurers’ argument failed to take into account the situation created by Calsol’s
bankruptcy. (Ibid.) In the excerpt provided by Vallejo, the court stated, “[t]he
bankruptcy court’s order relieving the plaintiffs from the automatic stay restricted the
enforcement of any judgment rendered in their lawsuits to Calsol’s insurers. In effect, the
bankruptcy court permitted the plaintiffs to pursue their remedy against the insurers under
the rights granted by Insurance Code section 11580, subdivision (b)(2), without lifting the
stay with respect to claims against Calsol (or, rather, its bankruptcy estate).” (Jones, at
p. 148, underlined language quoted by Fire.) In a sentence not quoted by Vallejo, the
court further explained, “[a]s a result, the plaintiffs’ claims are only nominally against
Calsol, being pleaded against Calsol only as a means to recover against the insurers. The
[tort action] plaintiffs’ lawsuits do not, in fact, place any assets of Calsol at risk. [¶]
Because Calsol is not threatened with loss by the plaintiffs’ lawsuits, the lawsuits did not
29
trigger Golden Eagle’s duty to defend.” (Ibid., italics added.) In short, as a step in
reaching the conclusion that Golden Eagle did not need to share in the costs of defending
Calsol, the Jones court concluded the actions to determine Calsol’s liability did not
actually place any of Calsol’s assets at risk, because any payments would come from
insurers. (Ibid.)
The language quoted by the parties is not, as Fire suggests, a statement of law that
a right to bring an Insurance Code section 11580 action against a bankruptcy debtor’s
liability insurer exists without lifting a bankruptcy stay. However, it also is not a judicial
acknowledgment that a party previously injured by a bankruptcy debtor must always
secure an order “lifting the stay as to the insurer” before that party can bring an Insurance
Code section 11580 action against the bankruptcy debtor’s insurer as Vallejo implies.
Rather, it is an acknowledgment by the Jones court that under the facts of the Jones case,
the tort action defendants had to obtain a stay in the bankruptcy action in order to bring
an action against Calsol, which would serve as the statutory prerequisite for those
defendants to then pursue their own rights against Calsol’s insurers.
The reasoning employed by the Jones court supports our conclusion here. The
right to bring an Insurance Code section 11580 direct action against a person’s or entity’s
liability insurer is dependent on there being a judgment against that person or entity. In
Jones, the bankruptcy stay prevented the tort action plaintiffs from bringing actions
against Calsol, and, therefore, they needed to lift that stay to obtain judgments against
Calsol. Once those judgments were obtained, those defendants could then collect from
the insurers without “plac[ing] any assets of Calsol at risk.” (Jones, supra,
201 Cal.App.4th at p. 148.)
In contrast, here, Vallejo did not need to lift a bankruptcy stay to obtain a
judgment against the Savoys and secure his rights to bring an action against Fire under
Insurance Code section 11580. This is so because by the time the Savoys filed for
bankruptcy, Vallejo had already obtained a judgment against the Savoys. With that
30
judgment, he then had an independent right of direct action against Fire that did not
“place any assets of [the Savoys] at risk.” (See Jones, supra, 201 Cal.App.4th at p. 148.)
And, thus, he did not need to obtain relief from the bankruptcy stay to bring an action
against Fire in which he sought to collect insurance proceeds under the policy.
E. Equitable Estoppel Did Not Toll the Statute of Limitations in Which to
Bring the Insurance Code Section 11580 Cause of Action
In his responsive brief, Vallejo argues that even if the bankruptcy stay did not toll
the statute of limitations for him to bring his Insurance Code section 11580 cause of
action, Fire should be estopped from raising a statute of limitations defense based on its
conduct while considering Vallejo’s claim—i.e., based on its representations between
July 18, 2013, and February 19, 2014, when the cause of action was already being
equitably tolled as Fire considered Vallejo’s claim for payment. Vallejo’s argument in
his responsive brief is that Fire told Vallejo’s counsel that Vallejo could not claim
benefits from Fire until Vallejo obtained relief from the bankruptcy stay, and this
“affirmative statement that the automatic stay applied and precluded suit against Fire
reasonably led Vallejo to believe that the statute of limitations was tolled based upon the
automatic stay.” Vallejo additionally notes that Fire not only told Vallejo the stay
applied, it also refused to accept or deny the claim until relief from the stay was obtained.
In reply to this argument, Fire argues equitable estoppel did not apply in this instance,
primarily because (1) the applicability of the stay in the Savoys’ bankruptcy proceedings
to this action was a question of law not fact, and estoppel will not apply unless insurance
companies misrepresent or fail to disclose material facts; (2) an insurance adjusters
opinion’s about questions of law are irrelevant; and (3) the law particularly disfavors
estoppels when the party raising an estoppel was represented by counsel.
We directed the parties to submit supplemental briefing regarding a second
possible basis equitable estoppel might have applied to toll the statute of limitations.
31
Specifically, we asked the parties to submit supplemental briefs on the following
questions: “(1) Setting aside all consideration of whether the statute of limitations to file
the action was tolled by the Nevada bankruptcy proceedings of the Savoys, what is the
potential estoppel effect of the September 20, 2013, letter written by Elizabeth Croft to
Jeffrey Silvia in which she wrote: ‘California laws and regulations require that we
provide you with the four year limitation period upon which we may rely to deny a
claim’?[; and ¶] (2) If the statute of limitations was not tolled by the bankruptcy
proceeding, should this matter be returned to the trial court for consideration of the above
question in appropriate proceedings?”
In its supplemental opening brief, Fire made various arguments as to why the
September 20, 2013, letter had no estoppel effect, the most persuasive of which were that
it would not be reasonable to assume the letter’s representations applied to payments due
under the policy’s business liability provisions, and it would not be reasonable for
Vallejo’s counsel to rely on Fire’s representations about a legal issue.
In his supplemental brief, Vallejo does not attempt to argue that the September 20,
2013, letter, standing alone, created an estoppel that would preclude Fire from arguing
that statute of limitations ran on Vallejo’s claims. Instead, Vallejo’s primary estoppel
argument in his supplemental brief is a reiteration of his position that Fire’s
representations regarding the impact of the bankruptcy stay created an equitable estoppel.
To the extent he considers the impact of the September 2013 letter regarding the medical
payment, he notes that when Fire made a payment under the medical payments policy in
September 2013, it “made no mention of the claim for the judgment,” then states that in
the next communication regarding Vallejo’s general claim, Fire was back to asserting it
would not address the liability claim unless and until relief from the bankruptcy stay was
obtained.
Having considered all these arguments and the record, we conclude estoppel
principles did not toll the statute of limitations for Vallejo to file his action against Fire.
32
The following standards as recited in May v. City of Milpitas (2013) 217 Cal.App.4th
1307 (May) guide our analysis here:
“ ‘Generally speaking, four elements must be present in order to apply the doctrine
of equitable estoppel’ ” to effectuate a tolling of the statute of limitations in which to file
an action: “ ‘(1) the party to be estopped must be apprised of the facts; (2) he must intend
that his conduct shall be acted upon, or must so act that the party asserting the estoppel
had a right to believe it was so intended; (3) the other party must be ignorant of the true
state of facts; and (4) he must rely upon the conduct to his injury. [Citations.]’ (Driscoll
v. City of Los Angeles (1967) 67 Cal.2d 297, 305.) The detrimental reliance must be
reasonable. (See Lantzy v. Centex Homes [(2003)] 31 Cal.4th [363], 384; Vu v.
Prudential Property & Casualty Ins. Co. (2001) 26 Cal.4th 1142, 1152-1153.) ‘The
defendant’s statement or conduct must amount to a misrepresentation bearing on the
necessity of bringing a timely suit . . . . [Citations.]’ (Lantzy v. Centex Homes, supra,
31 Cal.4th at p. 384, fn. 18.) [¶] ‘As [the California Supreme Court] long ago explained
in McKeen v. Naughton (1891) 88 Cal. 462, 467, “ ‘in order to work an estoppel,’ ” a
representation “ ‘must generally be a statement of fact. It can rarely happen that the
statement of a proposition of law will conclude the party making it from denying its
correctness, except when it is understood to mean nothing but a simple statement of fact.’
[Citation.]” ’ (Steinhart v. County of Los Angeles (2010) 47 Cal.4th 1298, 1315.) ‘[I]n
the absence of a confidential relationship . . . where the material facts are known to both
parties and the pertinent provisions of law are equally accessible to them, a party’s
inaccurate statement of the law or failure to remind the other party about a statute of
limitations cannot give rise to an estoppel.’ (Jordan v. City of Sacramento (2007)
148 Cal.App.4th 1487, 1496.)” (May, supra, 217 Cal.App.4th at p. 1338, italics added,
original italics omitted.)
“Moreover, ‘[i]n general, the law “particularly” disfavors estoppels “where the
party attempting to raise the estoppel is represented by an attorney at law.” [Citation.]
33
For purposes of analyzing estoppel claims, attorneys are “charged with knowledge of the
law in California.” (Tubbs v. Southern Cal. Rapid Transit Dist. (1967) 67 Cal.2d 671,
679 [rejecting claim of estoppel to assert statute of limitations].)’ (Steinhart v. County of
Los Angeles, supra, 47 Cal.4th at p. 1316.)” (May, supra, 217 Cal.App.4th at p. 1339.)
With respect to the September 20, 2013, letter, we agree with Fire that it would not
have been reasonable for Vallejo to treat this letter as tolling the statute of limitations to
bring an action regarding his claim for benefits under the liability coverage beyond what
was provided for under the law, and Vallejo has pointed to no evidence and proffered no
argument that the letter suggested as much. The first sentence of the letter indicates it is
in reference to “medical benefits” available to Vallejo under the policy, and the claim
unit number used to identify in the heading of the letter ends is “-1-3.” That same
number had been used in prior communications from Fire in which Fire explained the
scope of potential medical coverage under the policy and is different from the number
used by both Silvia and Newton, which ended in “-1-2,” in discussing a possible payment
on the larger judgment liability. Second, the statement regarding the four-year statute of
limitations says nothing about when the statute would have begun to run and what, if
anything, might have tolled the statute. There is no evidence the letter could have
reasonably led Vallejo to conclude he had more than the four years from the date the
Savoy judgment became final to challenge Fire’s denial of his claim for liability
payments. Therefore, the letter had no estoppel effect on the statute of limitations.
As to Vallejo’s argument that Fire ought to be estopped from arguing the statute of
limitations was not stayed by the bankruptcy in light of Fire’s representations about the
bankruptcy during the negotiations phase, we find it significant that the question of the
impact of the stay was a legal one and Vallejo was represented by California counsel and
consulted with bankruptcy counsel while Fire was considering his claim. Simply put,
Vallejo was in as good a position as Fire during this time to figure out the legal
ramifications of the Savoys’ bankruptcy stay. Fire should not be estopped from arguing
34
the statute of limitations was not stayed by the bankruptcy because it took legal positions
that Vallejo’s counsel should have been equipped to question and challenge.
II
Breach of Contract Cause of Action
In its opening brief, Fire states that Vallejo’s breach of contract claim is really a
redundant pleading of his Insurance Code section 11580 claim, and that, therefore, the
same statute of limitations requirements apply to that claim. While Vallejo does make a
case for why a different statute of limitations may have applied to his bad faith claim, he
does not make a similar effort to differentiate the breach of contract claim from the
Insurance Code section 11580 claim.
Decisions describing the nature of a judgment creditor’s rights under Insurance
Code section 11580, subdivision (b), tend to support the conclusion that a judgment
creditor’s effort to collect funds due under a debtor’s liability policy through a breach of
contract action against the insurer is really just a different way to state a cause of action
under Insurance Code section 11580. (See Johnson v. Holmes Tuttle Lincoln-Mercury,
Inc. (1958) 160 Cal.App.2d 290, 298 [Ins. Code, § 11580, subd. (b) “is a part of every
policy and creates a contractual relation which inures to the benefit of any and every
person who might be negligently injured by the insured as completely as if such injured
person had been specifically named in the policy”]; see also Murphy v. Allstate Ins. Co.,
supra, 17 Cal.3d at pp. 942-943 [Ins. Code, § 11580, subd. (b)(2) makes the judgment
creditor a third party beneficiary of the insurance contract between the insurer and
insured, and “[a] third party beneficiary may enforce a contract expressly made for his
benefit”]; Escobedo v. Travelers Ins. Co. (1961) 197 Cal.App.2d 118, 127; Fuller-Austin
Insulation Co. v. Highlands Ins. Co. (2006) 135 Cal.App.4th 958, 998.) As such, our
conclusions here regarding the statute of limitations as applied to Vallejo’s Insurance
35
Code section 11580 claim also apply to his breach of contract claim. By the time he filed
this action, the cause of action was time-barred.
III
Timeliness of Bad Faith Cause of Action
In the above sections we concluded that by the time Vallejo contacted Fire, the
statute of limitations for him to file an Insurance Code section 11580 action—or breach
of contract action—with respect to the De La Garza judgment had already passed. With
respect to the statute of limitations for those actions on the Savoy judgment, 11 days
remained until he needed to file a lawsuit. The statute of limitations was then tolled until
Fire denied his claim on February 19, 2014, giving him until March 3, 2014, to file his
Insurance Code section 11580 and breach of contract causes of action. As a result, when
Vallejo filed this action on August 26, 2014, his Insurance Code section 11580 and
breach of contract causes of action were time-barred.
This leaves us to consider whether Vallejo’s cause of action alleging bad faith and
the judgment on that cause of action can stand. We conclude that they can. Fire has not
raised a persuasive argument that either (1) the action was time-barred, or (2) its denial of
payments on the Savoy judgment was reasonable.
“The covenant of good faith and fair dealing is implied in every contract as a
method to protect the interests of the parties in having the contractual promises and
purposes performed.” (Love v. Fire Ins. Exchange (1990) 221 Cal.App.3d 1136, 1147.)
The covenant “ ‘imposes upon each contracting party the duty to refrain from doing
anything which would render performance of the contract impossible by any act of his
own, [and] also the duty to do everything that the contract presupposes that he will do to
accomplish its purpose.’ (Harm v. Frasher (1960) 181 Cal.App.2d 405, 417.)” (Hand v.
Farmers Ins. Exchange, supra, 23 Cal.App.4th at p. 1854.) When a liability policy
contains, “ ‘the usual promise to pay “on behalf of the insured . . . all sums which the
36
insured shall become legally obligated to pay as damages because of bodily injury or
property damage. . . .” ’ (Zahn v. Canadian Indem. Co. (1976) 57 Cal.App.3d 509, 511.)
There can be no doubt that, pursuant to this express policy undertaking, the implied
covenant of good faith and fair dealing imposes a duty not to withhold in bad faith
payment of damages which the insured has become obligated by judgment to pay.”
(Hand v. Farmers Ins. Exchange, at p. 1857.) When bad faith is alleged in the
withholding of a payment by the liability insurer, the judgment creditor can bring a cause
of action for bad faith nonpayment of a finally adjudicated claim. (See id. at p. 1860.)
“[T]here are at least two separate requirements to establish breach of the implied
covenant: (1) benefits due under the policy must have been withheld; and (2) the reason
for withholding benefits must have been unreasonable or without proper cause. (See also
California State Auto. Assn. Inter-Ins. Bureau v. Superior Court (1986) 184 Cal.App.3d
1428, 1433 [no award for bad faith can be made ‘without first establishing that coverage
exists’]; Kopczynski v. Prudential Ins. Co. (1985) 164 Cal.App.3d 846, 849.)” (Love v.
Fire Ins. Exchange, supra, 221 Cal.App.3d at p. 1151, fn. omitted.)
In its opening brief, Fire argues that because Vallejo’s suit was barred by the
statute of limitations, Fire did not owe Vallejo benefits under the policy, and there could
be no bad faith by Fire in denying the claim. Fire further argues that even if this court
were to conclude the statute of limitations was tolled during the Savoys’ bankruptcy
proceeding, Fire’s denial still would not have been in bad faith because it would have
been reasonable for Fire to believe the bankruptcy stay did not apply. Notably absent
from this argument is any explanation as to why Fire did not owe benefits under the
policy at the time it denied the claim when, regardless of the impact of the bankruptcy
stay, the statute of limitations had not run as to the Savoy judgment at the time Vallejo
submitted his claim, and that statute of limitations was tolled until Fire issued its denial.
That is, Fire appears to be asking this court to believe that even if there was no good
reason to deny Vallejo’s request for a payment on the day he made his claim, we should
37
find Fire did not act in bad faith because they would have had legal cause to deny the
claim if he had submitted it 11 days later.
In response, Vallejo argues that even if this court were to find the statute of
limitations bars his Insurance Code section 11580 cause of action, the statute of
limitations applicable to his bad faith cause of action did not begin to run until Fire
allegedly denied his claim without cause, i.e., on February 19, 2014. Vallejo cites Code
of Civil Procedure section 312 and Norgart v. Upjohn Co. (1999) 21 Cal.4th 383, 397, for
the proposition that a statute of limitations does not commence until the cause of action
has accrued. Then, citing Frazier v. Metropolitan Life Ins. Co. (1985) 169 Cal.App.3d
90, 103-104, Vallejo argues that his bad faith cause of action did not accrue until Fire
denied his claim.
In Frazier, supra, 169 Cal.App.3d at pages 95 and 97, a life insurance provider
paid the wife of a decedent a basic death benefit, and later it denied her an accidental
death double indemnity payment, stating it had concluded the decedent’s death had been
the “ ‘result of self-destruction.’ ” On a motion to dismiss, the trial court dismissed the
breach of contract claim as time-barred by the limitations period contained in the policy.
(Id. at p. 98.) However, the trial court allowed the plaintiff to proceed with her breach of
covenant of good faith and fair dealing claim on the basis that it was governed by the
four-year limitation contained in Code of Civil Procedure section 337, former subdivision
(1), now subdivision (a), that applied to actions on written contracts. (Frazier, at p. 98.)
On appeal, the Second District Court of Appeal agreed that the plaintiff’s “[a]ction [did]
not commence until [the insurer] denie[d] her claim on the ground of suicide. Prior to
such time [plaintiff] ha[d] a right (so far as the policy limitation is concerned) to sit back
and wait until denial of claim before urging bad faith. Because it is not until [the insurer]
actually denies the claim on the ground of suicide that [plaintiff] can actually ascertain
whether or not [the insurer] has acted in bad faith. So long as [the insurer] continues to
tell [plaintiff] they are trying to uncover new evidence, they have not committed an
38
ultimate act of bad faith, and [plaintiff] has a right to rely upon their assurances.” (Id. at
pp. 103-104, italics added.) The court also found that plaintiff was entitled to a four-year
statute of limitations on the bad faith claim. (Id. at p. 102.)
In its reply, Fire does not directly address Vallejo’s argument that the statute of
limitations on the bad faith cause of action did not begin to run until Fire denied his
claim, and Fire otherwise makes no argument that the bad faith cause of action was itself
time-barred. Instead, Fire again argues that in order for Fire to have acted in bad faith in
denying Vallejo’s claim, there needed to be an underlying contract obligation—or
Insurance Code section 11580 obligation—from which the duty of good faith would
flow. Then Fire makes more explicit its position that, regardless of Fire’s actual reasons
for denying coverage on February 19, 2014, it “had an objectively reasonable basis to
deny coverage eleven days later when the statute of limitations elapsed,” suggesting the
passage of time can convert what is a bad faith decision into a good faith decision after
the fact. This argument is not persuasive. Fire could not escape paying Vallejo’s claim
due to the passage of the applicable statute of limitations at the time he submitted his
claim: Vallejo still had 11 days left to submit it. And those 11 days remained every day
Fire spent considering his claim. Had Fire waited another month to decide the claim, it
still could not have denied the claim on the basis that it was time-barred.
Based on the record and the arguments made, we find that Vallejo’s bad faith
cause of action was not time-barred when Fire denied it, Fire has failed to raise a
convincing argument that it could have reasonably believed the claim was time-barred
when Fire denied it, and Fire has not persuasively countered Vallejo’s argument that the
statute of limitations on the bad faith claim began to run the day Fire denied his claim.
On this basis, we find there was no error in allowing the bad faith cause of action to
proceed.
39
IV
Calculation of Contract Damages
In its opening brief, Fire argues the trial court miscalculated the “underlying-
judgment-owed contract damages” Fire needed to pay Vallejo to compensate him for the
amount Fire owed him under the policy when Fire denied the claim. Fire first observes
that when the trial court calculated how much Fire owed Vallejo under the policy by the
time judgment was entered in this action, it used the $249,405.96 figure from the May 30,
2017, renewed judgment in the underlying action as a starting point, and it added to that
figure prejudgment interest at a rate of 10 percent per year from the date of renewal to the
day of the hearing to calculate damages in this action, December 18, 2019. Fire then
notes that the 2017 renewed judgment calculated the total amount due on the underlying
lawsuit as of the date of renewal by adding interest to the De La Garza judgment from the
date the De La Garza judgment was entered. Fire then correctly states that Vallejo’s
ability to collect on the De La Garza judgment with an Insurance Code section 11580
claim or breach-of-contract cause of action expired in 2011, before the Savoys’
bankruptcy action—and before any other of the myriad possible tolling events we
consider above occurred.
Fire then argues that if Fire owed Vallejo funds at the time it denied his claim,
those funds were owed to cover what the Savoys and not De La Garza owed in the
underlying action, and, pursuant to the 2017 judgment renewal, that figure had reached
only $229,517.28 by May 2017, because the Savoy judgment was entered later than the
De La Garza judgment. Fire argues the $229,517.28 figure should have been used as the
baseline for calculating damages based on the nonpayment of funds owing under the
policy, and that, using that base figure, the total interest due as of December 18, 2019,
was $58,605.46, making the total amount due to cover Fire’s obligation to pay the Savoy
judgment $288,122.74, not $313,089.52.
40
In response to Fire’s argument regarding the amount owing under the policy,
Vallejo does not quibble with Fire’s calculations and the basis for those calculations.
Instead, Vallejo argues Fire waived this argument by failing to raise it below.
In reply, Fire claims that it preserved its ability to bring this argument,
unconvincingly pointing to two arguments it made below that none of the post-judgment
interest added in the 2017 renewal ought to have been included to calculate prejudgment
interest in this action. While we disagree with Fire’s position that it made an analogous
argument below, “[a] legal argument may be raised for the first time . . . on appeal only
‘so long as the new theory presents a question of law to be applied to undisputed facts in
the record.’ (Hoffman-Haag v. Transamerica Ins. Co. (1991) 1 Cal.App.4th 10, 15;
[citation].)” (Nippon Credit Bank v. 1333 North Cal. Boulevard (2001) 86 Cal.App.4th
486, 500.) Here, Fire is essentially asking us to resolve a legal issue: despite the fact that
an action against Fire for failure to pay Vallejo under the De La Garza judgment was
time-barred when Vallejo filed his claim with Fire, could the trial court award Vallejo
interest owing on that judgment alone as if Fire had been legally required to pay on that
judgment? We agree with Fire that the trial court had no legal basis to use the post-
judgment interest awarded on the De La Garza judgment to calculate damages in this
action, because Fire did not owe a payment on the De La Garza judgment. We direct the
trial court to rely on amounts due under the Savoy judgment when recalculating damages
on remand.
V
Cross Appeal: Collectability of Costs Under Brandt
In a cross-appeal, Vallejo argues that the trial court incorrectly found that costs are
not collectible under Brandt, supra, 37 Cal.3d 813, and as a result the trial court
improperly failed to award him costs incurred in obtaining benefits owed to him under
the policy. Fire counters that Brandt does not permit trial courts to award anything other
41
than attorneys’ fees. Fire also argues that if the trial court could have awarded costs
under Brandt, Vallejo has failed to properly identify which costs would be collectible
under the Brandt standard. Fire argues that because Vallejo failed to demonstrate, with
evidence, which costs were incurred to obtain contract damages and which were incurred
to obtain tort damages, Vallejo was not prejudiced by the trial court’s determination and,
thus, cannot show he was prejudiced by the trial court’s ruling.
We agree with Vallejo’s interpretation of Brandt and its progeny and find the trial
court ought to have awarded Vallejo costs incurred to obtain the policy benefits. Though
the trial court may have had discretion to review the evidence and calculate the
distribution of amounts owed under Brandt (see Track Mortgage Group v. Crusader Ins.
Co. (2002) 98 Cal.App.4th 857, 868 [“We must affirm the award in the absence of a
showing of a clear abuse of discretion”]), the question presented here is whether the trial
court correctly interpreted the law when it decided it could not also consider the evidence
and make an appropriate award of costs. “Questions of law are reviewed d e novo.”
(American Contractors Indemnity Co. v. Hernandez (2022) 73 Cal.App.5th 845, 848.)
“California adheres to the American rule, ‘which provides that each party to a
lawsuit must ordinarily pay his own attorney fees.’ (Trope v. Katz (1995) 11 Cal.4th 274,
278.)” (Cassim v. Allstate Ins. Co. (2004) 33 Cal.4th 780, 806; see also Code Civ. Proc.,
§ 1021 [“Except as attorney’s fees are specifically provided for by statute, the measure
and mode of compensation of attorneys and counselors at law is left to the agreement,
express or implied, of the parties”].) In Brandt, our Supreme Court “established a
notable exception to this rule for insurance bad faith cases. [The Court] explained that if
an insurer fails to act fairly and in good faith when discharging its responsibilities
concerning an insurance contract, such breach may result in tort liability for proximately
caused damages. Those damages can include the insured’s cost to hire an attorney to
vindicate the insured’s legal rights under the insurance policy.” (Cassim, at p. 806.)
42
In finding Brandt does not extend to allow for the recovery of costs, the trial court
observed that Brandt only talks about the collection of fees. This is a fair observation:
Brandt does not articulate a rule which explicitly applies to costs. However, the
reasoning employed in Brandt and the Court’s application of it in a subsequent decision
both suggest that the underlying principles and policies that allowed for an award of fees
should also extend to costs if and when a party has the foresight to seek them.
In Brandt, the Court reasoned, “ ‘It is well settled that if an insurer, in discharging
its contractual responsibilities, “fails to deal fairly and in good faith with its insured by
refusing, without proper cause, to compensate its insured for a loss covered by the policy,
such conduct may give rise to a cause of action in tort for breach of an implied covenant
of good faith and fair dealing.” (Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566, 574,
original italics.) When such a breach occurs, the insurer is “liable for any damages which
are the proximate result of that breach.” (Neal v. Farmers Ins. Exchange (1978)
21 Cal.3d 910, 925.)’ (Austero[ v. Washington National Ins. Co. (1982) 132 Cal.App.3d
408,] 419-420 [dis. opn. of Morris, P. J.].) [¶] When an insurer’s tortious conduct
reasonably compels the insured to retain an attorney to obtain the benefits due under a
policy, it follows that the insurer should be liable in a tort action for that expense. The
attorney’s fees are an economic loss -- damages -- proximately caused by the tort.
(Mustachio v. Ohio Farmers Ins. Co.[ (1975)] 44 Cal.App.3d [358,] 363.) These fees
must be distinguished from recovery of attorney’s fees qua attorney’s fees, such as those
attributable to the bringing of the bad faith action itself. What we consider here is
attorney’s fees that are recoverable as damages resulting from a tort in the same way that
medical fees would be part of the damages in a personal injury action. [¶] ‘When a
pedestrian is struck by a car, he goes to a physician for treatment of his injuries, and the
motorist, if liable in tort, must pay the pedestrian’s medical fees. Similarly, in the present
case, an insurance company’s refusal to pay benefits has required the insured to seek the
services of an attorney to obtain those benefits, and the insurer, because its conduct was
43
tortious, should pay the insured’s legal fees.’ (Austero, supra, at p. 421.)” (Brandt,
supra, 37 Cal.3d at p. 817.)
The Court agreed with and adopted much of the dissenting opinion in Austero v.
Washington National Ins. Co., supra, 132 Cal.App.3d 408, quoting it to explain that
“ ‘when the insurer’s conduct is unreasonable, a plaintiff is allowed to recover for all
detriment proximately resulting from the insurer’s bad faith, which detriment Mustachio
has correctly held includes those attorney’s fees that were incurred to obtain the policy
benefits and that would not have been incurred but for the insurer’s tortious cond uct.’
(Austero, supra, at p. 422.) The fees recoverable, however, may not exceed the amount
attributable to the attorney’s efforts to obtain the rejected payment due on the insurance
contract. Fees attributable to obtaining any portion of the plaintiff’s award which
exceeds the amount due under the policy are not recoverable.” (Brandt, supra, 37 Cal.3d
at p. 819, italics added, fn omitted.)
In justifying awards of attorney fees as tort damages in insurance bad faith actions,
the Brandt court also cited Bertero v. National General Corp. (1974) 13 Cal.3d 43, 59 to
support its observation that in malicious prosecution cases, damages “may include
attorney’s fees incurred to obtain . . . dismissal of the unjustified charges.” (Brandt,
supra, 37 Cal.3d at p. 818.) Notably, in Bertero, supra, 13 Cal.3d at page 59, the court
stated that “the measure of compensatory damages for the malicious prosecution of a
civil action includes attorney fees and court costs for defending the prior action.” (Italics
added.)
In short, in considering the question of whether attorney fees ought to be
collectible, the court found they should be to the extent they were part of what might be
considered “ ‘ “any damages which are the proximate result of that breach,” ’ ” or, “ ‘for
all detriment proximately resulting from the insurer’s bad faith.’ ” (Brandt, supra,
37 Cal.3d at p. 817; id. at p. 819, italics added.) Because some costs incurred in litigation
44
are also arguably part of any or all detriment an insurance beneficiary suffers when an
insurer wrongly denies benefits, Brandt’s reasoning should extend to include them.
Moreover, shortly after the court decided Brandt, it issued a decision in which it
did apply Brandt to allow for an award of litigation expenses other than just attorney fees.
In White v. Western Title Ins. Co. (1985) 40 Cal.3d 870, superseded by statute on other
grounds as stated in Lee v. Fidelity National Title Ins. Co. (2010) 188 Cal.App.4th 583,
595-596, the court applied Brandt’s holding to uphold an award that included various
non-attorney fee litigation expenses: “[In Brandt we] stated that ‘ “when the insurer’s
conduct is unreasonable, a plaintiff is allowed to recover for all detriment proximately
resulting from the insurer’s bad faith, which detriment . . . includes those attorney’s fees
that were incurred to obtain the policy benefits and that would not have been incurred but
for the insurer’s tortious conduct.” ’ ([Brandt, supra, ]37 Cal.3d 813, 819.) The same
reasoning supports inclusion of witness fees and other litigation expenses as an element
of damage.” (White, at p. 890.)
To the extent costs incurred by Vallejo were the proximate result of Fire’s bad
faith denial of Vallejo’s claim, Vallejo ought to be able to collect them as part of his
damages using formulas articulated in Brandt and its progeny.
With respect to Fire’s argument Vallejo failed to meet evidentiary burdens that
would allow the trial court to allocate costs under Brandt, the trial court ought to be given
the opportunity to consider the strength of the evidence submitted, applying our
interpretation of the rule articulated in Brandt before we consider what the evidence
might or might not show. Accordingly, we remand to the trial court to consider which
costs incurred by Vallejo in bringing this action were incurred to collect the amount Fire
owed him under the policy at the time it denied his claim.
45
DISPOSITION
We remand to the trial court to recalculate damages consistent with this opinion,
that is, the policy benefits due and interest thereon should be calculated assuming the
judgment Fire was obligated to pay was the Savoy judgment, and not the De La Garza
judgment. Additionally, the trial court should award Vallejo costs incurred to collect the
amount owing to him under the policy, consistent with the reasoning articulated in Brandt
and its progeny for calculating an award of attorneys’ fees. Each party is to pay its own
costs on appeal. (Cal. Rules of Court, rule 8.278.)
HULL, Acting P. J.
We concur:
DUARTE, J.
EARL, J.
46