Hinkle v. State Farm Fire & Cas. Co.

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integrity of this document
New Mexico Compilation
Commission, Santa Fe, NM
'00'04- 13:36:22 2013.08.15
Certiorari Granted, July 26, 2013, No. 34,232
IN THE COURT OF APPEALS OF THE STATE OF NEW MEXICO
Opinion Number: 2013-NMCA-084
Filing Date: June 3, 2013
Docket No. 31,707
GENE E. HINKLE, HINKLE INCOME
PROPERTIES, LLC, a New Mexico
Limited Liability Company, and BETTY
HINKLE,
Plaintiffs-Appellants,
v.
STATE FARM FIRE & CASUALTY
COMPANY,
Defendant-Appellee,
and
COLORADO CASUALTY, DEREK
SANCHEZ, and FIREMAN’S FUND
INSURANCE COMPANY,
Defendants.
APPEAL FROM THE DISTRICT COURT OF BERNALILLO COUNTY
Carl J. Butkus, District Judge
Will Ferguson & Associates
David M. Houliston
Brian Judson
Albuquerque, NM
for Appellants
Guebert Bruckner P.C.
Terry R. Guebert
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Christopher J. DeLara
Albuquerque, NM
for Appellee
OPINION
WECHSLER, Judge.
{1} In this case, we consider whether the district court erred in granting summary
judgment in favor of an insurer in an action alleging that the insurer breached its duty to
defend the insured in a third-party suit. The policy at issue included a duty to defend
lawsuits arising out of the offenses of abuse of process or malicious prosecution. We
conclude that the third-party complaint did not expressly make a claim for the formerly
recognized torts of abuse of process or malicious prosecution, or the currently recognized
combination of the two torts, malicious abuse of process, and that the underlying facts
forming the basis of the third-party complaint were insufficient to state a claim for malicious
abuse of process. We also conclude that the policy did not create a reasonable expectation
that the insurer had a duty to defend. We affirm.
BACKGROUND
{2} Plaintiffs Hinkle Income Properties, LLC, Gene E. Hinkle (Hinkle), and Betty Hinkle
filed this action against Defendants State Farm Fire and Casualty Company (State Farm);
Derek Sanchez, a State Farm insurance adjuster; Colorado Casualty; and Fireman’s Fund
Insurance Company for Defendants’ failure to defend Plaintiffs in an underlying action filed
in state district court. In its complaint, Plaintiffs alleged violations for breach of contract,
negligence, specific performance, bad faith, and violations of the New Mexico Unfair
Practices Act, NMSA 1978, §§ 57-12-1 to -22 (1967, as amended through 2009).
{3} State Farm filed a motion for summary judgment on March 31, 2011, arguing that
it had no duty to defend or provide liability coverage to Hinkle under either of two insurance
policies that it had issued to Hinkle and Betty Hinkle. The remaining Defendants filed for
summary judgment on November 12, 2010. On September 16, 2011, the district court
granted summary judgment in favor of State Farm against all Plaintiffs. The district court
granted summary judgment in favor of the remainder of Defendants on October 14, 2011 and
on July 9, 2012. Plaintiffs filed a notice of appeal regarding the grant of summary judgment
in favor of State Farm.
{4} Plaintiffs’ complaint in this case against State Farm arose out of State Farm’s failure
to defend Plaintiffs in a lawsuit filed by Peterson Inv-Juan Tabo, LLC (Peterson). On
November 20, 2008, Peterson filed a complaint (the Peterson complaint) against Plaintiffs,
as well as the Betty L. Hinkle Revocable Trust, Kenneth Hunt, and Hunt and Davis, P.C. (the
Peterson litigation). The Peterson litigation arose out of a dispute over the development of
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commercial property owned by Plaintiffs. The Peterson complaint asserted claims for
economic duress, breach of contract, breach of implied covenant of good faith and fair
dealing, unjust enrichment, prima facie tort, civil conspiracy, and punitive damages. It
alleged that Peterson and Plaintiffs entered into an agreement in which Peterson leased the
property from Plaintiffs. Peterson was to develop the property into a drug store and lease
the building to Walgreens. The Peterson complaint alleged that after entering into the
agreement, Hinkle used his superior bargaining power to coerce Peterson to provide
additional improvements and concessions not covered by the original agreement.
{5} At the time the Peterson litigation commenced, State Farm insured Hinkle and Betty
Hinkle under two policies. In the complaint in this action, Plaintiffs contended that State
Farm had a duty to defend and to provide liability insurance under the terms of both policies.
One policy, entitled a “Personal Liability Umbrella Policy,” provided liability insurance and
a duty to defend the insured against enumerated classes of claims, including “the
commission of an offense which first results in personal injury during the policy period.”
The “Personal Liability Umbrella Policy” defined “personal injury” as “injury other than
bodily injury arising out of one or more of the following offenses:
a. false arrest, false imprisonment, wrongful eviction, wrongful
detention of a person;
b. abuse of process, malicious prosecution;
c. libel, slander, defamation of character[;] or
d. invasion of a person’s right to private occupancy by physically
entering into that person’s personal residence.”
The other policy was a “Homeowners Policy,” which Plaintiffs do not appear to address on
appeal. We therefore only discuss the “Personal Liability Umbrella Policy” (the Policy).
{6} State Farm filed for summary judgment, arguing that it had no duty to defend or
provide liability insurance under the Policy. In their response, Plaintiffs argued that the
underlying motivation for the Peterson litigation was that Hinkle threatened to use judicial
proceedings against Peterson in order to coerce favorable business terms. Plaintiffs asserted
that State Farm merely performed a “four corners” examination of the Peterson complaint
and determined that there was no duty to defend. According to Plaintiffs, a reasonable
investigation would have uncovered underlying facts and triggered a duty to defend under
the Policy provision providing coverage for abuse of process and malicious prosecution.
The district court assumed that an investigation by State Farm would have revealed that
Hinkle threatened Peterson with litigation. Nevertheless, the district court held that
summary judgment was proper because the mere threat of litigation does not amount to
abuse of process or malicious prosecution under New Mexico law or as the term is ordinarily
understood.
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{7} On appeal, Plaintiffs argue that the district court erred in granting summary judgment
because they presented sufficient evidence to establish material issues of fact that (1) State
Farm denied coverage based on a facial review of the complaint and that an investigation
would have revealed a duty to defend Hinkle under the scope of the Policy, and (2) Hinkle
had a reasonable expectation that a defense would be provided by State Farm. The
arguments on appeal address the scope of the Policy based on the underlying facts of the
Peterson Litigation only as applied to Hinkle.
STANDARD OF REVIEW
{8} “An appeal from the grant of a motion for summary judgment presents a question of
law and is reviewed de novo.” Montgomery v. Lomos Altos, Inc., 2007-NMSC-002, ¶ 16, 141
N.M. 21, 150 P.3d 971. Generally, “[s]ummary judgment is appropriate where there are no
genuine issues of material fact and the movant is entitled to judgment as a matter of law.”
Self v. United Parcel Serv., Inc., 1998-NMSC-046, ¶ 6, 126 N.M. 396, 970 P.2d 582. In
determining whether an issue of material fact exists, we review the whole record in the light
most favorable to the party opposing summary judgment. Yurcic v. City of Gallup, 2013-
NMCA-039, ¶ 5, 298 P.3d 500. “However, if no material issues of fact are in dispute and
an appeal presents only a question of law, we . . . are not required to view the appeal in the
light most favorable to the party opposing summary judgment.” Id. (internal quotation
marks and citation omitted).
DUTY TO DEFEND
{9} Plaintiffs first argue that State Farm had a duty to defend Hinkle under the Policy
because a reasonable investigation would have revealed that the underlying facts of the
Peterson litigation were that Hinkle threatened Peterson with litigation in order to coerce
favorable business terms. Plaintiffs contend that during “the Peterson litigation, the
depositions of the Peterson [p]laintiffs were taken and [that t]he Peterson [p]laintiffs claimed
[Hinkle] threatened to use the litigation process in order to obtain an economic and business
advantage” over Peterson. Plaintiffs further contend that, had State Farm conducted a
reasonable investigation as obligated under New Mexico law, it would have found the
depositions, and it would have had sufficient information to trigger the duty to defend Hinkle
because the Peterson litigation was premised on abuse of process or malicious prosecution.
{10} We begin with a brief discussion of an insurer’s duty to investigate and defend
against a third-party claim against its insured. In G & G Services, Inc. v. Agora Syndicate,
Inc., 2000-NMCA-003, ¶ 1, 128 N.M. 434, 993 P.2d 751, this Court “examine[d] the
parameters of an insurer’s duty to investigate and defend a third-party claim filed against its
insured[.]” We stated that under well-established New Mexico law “facts other than those
set forth in the complaint may also implicate an insurer’s duty to defend.” Id. ¶ 21. Thus,
the “duty of an insurer to defend arises from the allegations on the face of the complaint or
from the known but unpleaded factual basis of the claim that brings it arguably within the
scope of coverage.” Id. (emphasis, internal quotation marks, and citation omitted). Turning
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to the “amount of investigation an insurer is required to undertake when presented with a
demand by an insured to provide a defense,” we held that “an insurance company is required
to conduct such an investigation into the facts and circumstances underlying the complaint
against its insured as is reasonable given the factual information provided by the insured or
provided by the circumstances surrounding the claim in order to determine whether it has
a duty to defend.” Id. ¶¶ 22-23. Our holding was based on the rationale that “[a]n insurance
company cannot construct a formal fortress of the third party’s pleadings and retreat behind
its walls. The pleadings are malleable, changeable[,] and amendable. In light of the
plasticity of modern pleading, we should hardly designate the third party as the arbiter of the
policy’s coverage.” Id. ¶ 27 (alterations, internal quotation marks, and citation omitted).
{11} The district court assumed, and the parties do not dispute, that a reasonable
investigation would have revealed the underlying facts that the Peterson litigation was based
on Hinkle’s threat of litigation to Peterson for a business advantage. The dispute in this case
centers on whether these underlying facts triggered the duty of State Farm to defend Hinkle
under the Policy provision for abuse of process or malicious prosecution.
{12} Originally, the torts of abuse of process and malicious prosecution were two distinct,
but closely related, torts in New Mexico. See DeVaney v. Thriftway Mktg. Corp., 1998-
NMSC-001, ¶ 13, 124 N.M. 512, 953 P.2d 277, overruled on other grounds by Durham v.
Guest, 2009-NMSC-007, 145 N.M. 694, 204 P.3d 19. “Both torts [were] designed to offer
redress to a plaintiff who has been made the subject of legal process improperly, where the
action was wrongfully brought by a defendant merely for the purpose of vexing or injuring
the plaintiff, and resulting in damage to his or her personal rights.” DeVaney, 1998-NMSC-
001, ¶ 14.
{13} In DeVaney, based on the similarities of the torts and developments of law that
blurred the distinction between them, our Supreme Court combined abuse of process and
malicious prosecution into a single cause of action called malicious abuse of process. Id. ¶¶
13-17. The elements for a malicious abuse of process claim are “(1) the initiation of judicial
proceedings against the plaintiff by the defendant; (2) an act by the defendant in the use of
process other than such as would be proper in the regular prosecution of the claim; (3) a
primary motive by the defendant in misusing the process to accomplish an illegitimate end;
and (4) damages.” Id. ¶ 17.
{14} Our Supreme Court subsequently clarified the elements for malicious abuse of
process in Durham. In Durham, the Court overruled DeVaney to the extent that DeVaney
required that the defendant initiate a judicial proceeding against the plaintiff. Durham,
2009-NMSC-007, ¶ 29. Consequently, the elements of malicious abuse of process now are
“(1) the use of process in a judicial proceeding that would be improper in the regular
prosecution or defense of a claim or charge; (2) a primary motive in the use of process to
accomplish an illegitimate end; and (3) damages.” Id. Applying these elements, the Durham
Court reversed the district court’s grant of a motion to dismiss for failure to state a claim
when the plaintiff alleged that the defendant maliciously issued subpoenas for an illegitimate
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purpose during arbitration proceedings not initiated by the defendant. Id. ¶¶ 5, 37.
{15} Applying the elements of malicious abuse of process as stated in Durham, we
conclude that the district court did not err in holding that State Farm did not have a duty to
defend Hinkle under the Policy and in granting summary judgment in favor of State Farm.
The Peterson complaint does not assert a claim for malicious abuse of process, or even the
formerly recognized torts of abuse of process or malicious prosecution. It only asserts
claims for economic duress, breach of contract, breach of the implied covenant of good faith
and fair dealing, unjust enrichment, prima facie tort, civil conspiracy, and punitive damages.
Plaintiffs do not argue that any of Peterson’s stated claims were covered under the Policy.
{16} Even assuming, as the district court did, that a reasonable investigation into the
underlying facts of the Peterson complaint would have revealed that the basis of the Peterson
litigation was Hinkle’s threat of litigation to Peterson in order to obtain an economic and
business advantage over Peterson, these facts are insufficient to state a claim for malicious
abuse of process. Under New Mexico law, malicious abuse of process requires “the use of
process in a judicial proceeding that would be improper in the regular prosecution or defense
of a claim or charge[.]” Id. ¶ 29 (emphasis added). Although Durham modified malicious
abuse of process to remove the requirement that the defendant initiate judicial proceedings
against the plaintiff, malicious abuse of process still requires the improper use of process
within a judicial proceeding. See id. A threat of litigation for an improper purpose, without
more, is insufficient to satisfy the first element as stated in Durham. See State v. Rendelman,
947 A.2d 546, 556 n.9 (Md. 2008) (stating that “the mere threat of the initiation of meritless
or frivolous litigation would not rise to the level of [abuse of process or malicious use of
process]. Rather these civil consequences require the actual pursuit of litigation to be
applicable” under Maryland law); see also Regency Motors of Metairie, L.L.C. v. Hibernia-
Rosenthal Ins. Agency, L.L.C., 868 So. 2d 905, 909 (La. Ct. App. 2004) (stating that
threatened legal action was not sufficient to establish malicious prosecution and therefore
affirming summary judgment in favor of an insurer for breach of contract for failure to
defend the insured); Lafferty v. Rhudy, 878 S.W.2d 833, 836 (Mo. Ct. App. 1994) (“[The
plaintiff’s] petition does not properly plead a claim for abuse of process because it merely
alleges that [the defendant] threatened to file an ethics complaint against [the plaintiff], not
that he ever actually filed such a complaint and pursued it with the improper purpose of
extorting payment from [the defendant].”).
REASONABLE EXPECTATION DOCTRINE
{17} Plaintiffs next argue that the district court erred in granting summary judgment
because a material fact exists as to whether Hinkle had a reasonable expectation that the
Policy required State Farm to defend Hinkle in the Peterson litigation. Plaintiffs argue that
(1) the terms “abuse of process” and “malicious prosecution” are ambiguous to a non-lawyer
or someone not trained in the insurance field; and (2) as a result of the combination of abuse
of process and malicious prosecution into one cause of action called malicious abuse of
process, the terms “abuse of process” and “malicious prosecution” are ambiguous because
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they “cease[] to hold meaning in New Mexico [c]ourts.”
{18} “[I]nsurance contracts are construed by the same principles which govern the
interpretation of all contracts.” Dairyland Ins. Co. v. Herman, 1998-NMSC-005, ¶ 12, 124
N.M. 624, 954 P.2d 56 (internal quotation marks and citation omitted). Our Supreme Court
has held that the doctrine of reasonable expectations applies if the language of an insurance
policy would lead the insured to reasonably expect coverage. Barth v. Coleman, 118 N.M.
1, 5, 878 P.2d 319, 323 (1994). The doctrine of reasonable expectations also applies when
the language of a policy is ambiguous. See Rummel v. Lexington Ins. Co., 1997-NMSC-041,
¶ 22, 123 N.M. 752, 945 P.2d 970; see also Sanchez v. Herrera, 109 N.M. 155, 159, 783
P.2d 465, 469 (1989) (stating that the doctrine of reasonable expectations applies if the
policy creates an ambiguity or the insured has a reasonable expectation of coverage). Under
the doctrine of reasonable expectations, “we refer to what the hypothetical reasonable
insured would glean from the wording of the policy and the kind of insurance at issue[.]”
Rodriguez v. Windsor Ins. Co., 118 N.M. 127, 130, 879 P.2d 759, 762 (1994), modified on
other grounds by Montano v. Allstate Indem. Co., 2004-NMSC-020, 135 N.M. 681, 92 P.3d
1255.
{19} Turning to the language of the Policy, the definition of “personal injury” is defined
and limited to specific legal causes of action. The Policy states that its coverage is limited
to injury “arising out of one or more of the following offenses” and then proceeds to list
specific causes of action. In this context, Hinkle, as the policyholder, could not have
reasonably expected a defense to be provided for a suit based on a cause of action not
enumerated under the Policy. See id. (stating that an insured’s reasonable expectations are
based on the combination and wording and type of policy at issue). An average, reasonably
intelligent consumer would read the Policy as covering only the specific “offenses”
contained in the definitions of “personal injury,” and the Peterson complaint did not make
a claim for the formerly recognized torts of abuse of process or malicious prosecution or the
current combination of the two torts, malicious abuse of process. Under these
circumstances, the district court did not err by determining that the Policy was unambiguous
or that it did not provide a reasonable expectation that State Farm had a duty to defend based
on the Peterson complaint. See Rummel, 1997-NMSC-041, ¶ 19 (stating that ambiguities
arise when sections of a policy appear to conflict, are susceptible to more than one meaning,
when the structure is illogical, or when a matter of coverage is not explicitly addressed by
the policy).
{20} Plaintiffs also argue that our Supreme Court’s consolidation of abuse of process and
malicious prosecution into a single tort, malicious abuse of process, renders the Policy
ambiguous because the Policy uses the former names of abuse of process and malicious
prosecution. Therefore, Plaintiffs contend that we must construe the Policy against State
Farm. However, we disagree that the Policy is ambiguous as applied to the facts of this case.
{21} As we have discussed, the Peterson complaint made no express claim for abuse of
process, malicious prosecution, or malicious abuse of process. Nor did the facts underlying
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the Peterson complaint state a claim for malicious abuse of process. The complaint therefore
is insufficient to state a claim for the previously recognized torts of abuse of process and
malicious prosecution. As a result, although the Policy may refer to the outdated names of
abuse of process and malicious prosecution, under the Peterson complaint and the underlying
facts forming the basis of the Peterson complaint, there is no ambiguity in the language as
to the scope of coverage as applied to the facts of this case. See Barth, 118 N.M. at 5, 878
P.2d at 323 (stating that a “lay person’s expectations of insurance coverage are of course
formed by many factors besides the language of the policies themselves” (internal quotation
marks and citation omitted)).
{22} We note that Plaintiffs direct us to two cases in which a court has held that coverage
for malicious prosecution is ambiguous and must be construed against the insurer. In
Lunsford v. American Guarantee & Liability Insurance Co., 18 F.3d 653, 654-55 (9th Cir.
1994), the Ninth Circuit applied California law and concluded that malicious prosecution
was ambiguous because a lay person’s understanding of the term would be different from
the legal definition of the term. Resolving the ambiguity in favor of the insured, the Ninth
Circuit held that malicious prosecution as used in an insurance policy was broad enough to
encompass the related tort of abuse of process. Id. at 655-56. The court in St. Paul Fire &
Marine Insurance Co. v. Tingley Systems, Inc., 722 So. 2d 849, 849 (Fla. Dist. Ct. App.
1998), relied on Lunsford to reach the same conclusion. However, Lunsford appears to state
a minority position, and the majority of courts have reached the opposite conclusion. See,
e.g., Parker Supply Co., Inc. v. Travelers Indem. Co., 588 F.2d 180, 182-83 (5th Cir. 1979)
(“[T]he policies’ reference to the offense of ‘malicious prosecution’ was not ambiguous and
only a suit against [the defendant] for that offense would have created an obligation for the
insurers to defend and indemnify.”); Heil Co. v. Hartford Accident & Indem. Co., 937 F.
Supp. 1355, 1363 (E.D. Wis. 1996) (“Under Wisconsin law, the offense of ‘malicious
prosecution’ is not ambiguous and only a lawsuit against the insured for malicious
prosecution would create an obligation to defend.”); William J. Templeman Co. v. Liberty
Mut. Ins. Co., 735 N.E.2d 669, 679 (Ill. App. Ct. 2000) (“We do not find the term ‘malicious
prosecution’ as deployed in the policy to be ambiguous.”). These cases support our
conclusion that the Policy, which defined personal injury as injury arising out of specific
offenses including abuse of process and malicious prosecution, unambiguously provided
Hinkle with a reasonable expectation only for suits alleging those specific offenses.
CONCLUSION
{23} The district court did not err in holding that State Farm did not have a duty to defend
under the Policy and in granting summary judgment in favor of State Farm. Accordingly,
we affirm.
{24} IT IS SO ORDERED.
____________________________________
JAMES J. WECHSLER, Judge
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WE CONCUR:
____________________________________
CYNTHIA A. FRY, Judge
____________________________________
LINDA M. VANZI, Judge
Topic Index for Hinkle v. State Farm Fire & Cas. Co., No. 31,707
APPEAL AND ERROR
Standard of Review
CIVIL PROCEDURE
Summary Judgment
CONTRACTS
Ambiguous Contracts
Duty to Defend
INSURANCE LAW
Coverage
Duty to Defend
General Liability Insurance
TORTS
Abuse of Process
Malicious Abuse of Process
Malicious Prosecution
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