Key Decisions

September 2013 – All Articles

(filed under: Key Decisions Archive | September 24, 2013)

A 10 To 1 Punitive Damages Ratio is Constitutional

Nickerson v. Stonebridge Life Insurance Company
(Cal. Ct. of App., 2d Dist.), filed August 29, 2013, published August 29, 2013


Thomas Nickerson sued Stonebridge Life Insurance Company based on its partial denial of hospitalization benefits claim. The trial court ruled that a policy provision limiting coverage was not conspicuous, plain, and clear and was therefore unenforceable, entitling Nickerson to $31,500 in additional benefits. A jury then found that Stonebridge breached the implied covenant of good faith and fair dealing and awarded Nickerson $35,000 in compensatory damages for emotional distress. The jury found Stonebridge acted with fraud, and it assessed a $19 million punitive damages award.

The trial court conditionally granted Stonebridge’s new trial motion unless Nickerson consented to a reduction of the punitive damages to $350,000. This represented a ratio of punitive to compensatory damages of 10:1. The trial court explained it “may be unlikely that a punitive damage award reduced to a 10:1 ratio will deter Stonebridge from engaging in similar tortious conduct in the future,” but the court felt “constrained to reduce the punitive damage award to 10:1 based on recent California and federal authority.” In calculating the amount of punitive damages, the court considered only the $35,000 in compensatory damages for Stonebridge’s breach of the implied covenant; it did not include the $31,500 in damages for the insurer’s breach of contract or the $12,500 in attorney fees.

Both Nickerson and Stonebridge appealed. However, the issue was limited to the amount of the punitive damages award.


The Court of Appeal affirmed.

In determining the constitutional maximum for a particular punitive damage award under the due process clause, courts are directed to follow three guideposts: “(1) the degree of reprehensibility of the defendant’s misconduct; (2) the disparity between the actual or potential harm suffered by the plaintiff and the punitive damages award; and (3) the difference between the punitive damages awarded by the jury and the civil penalties authorized or imposed in comparable cases.”

In determining the reprehensibility of Stonebridge’s behavior, the court considered five aggravating factors, namely whether (1) the “harm caused was physical as opposed to economic:” (2) the conduct “evinced an indifference to or a reckless disregard of the health or safety of others:” (3) the conduct’s “target had financial vulnerability;” (4) the conduct was repeated or isolated; and (5) the harm resulted from “intentional malice, trickery, or deceit, or mere accident.”

Nickerson’s injuries were solely economic. They “arose from a transaction in the economic realm, not from some physical assault or trauma” and “there were no physical injuries.”

Stonebridge acted with indifference to, and a reckless disregard of, the health or safety of Nickerson and others. Among other things, the record revealed Stonebridge’s indifference to the health and safety of others through its practice of using a hidden limitation to deny other policyholders’ claims and by preventing full communication between peer reviewers and treating physicians.

Nickerson was financially vulnerable: He was a 58-year-old permanently disabled paraplegic and a former marine whose only source of income was a paltry military pension. The court rejected Stonebridge’s argument that Nickerson did not need the money to survive; that Nickerson’s income was not affected by its decision to deny him his policy benefits because his pension was unaffected by the hospital stay and his medical treatment was free. It said: “Such argument trivializes Nickerson’s plight. Nickerson has extremely limited financial resources and needed the proceeds from his Stonebridge policy to replace his 10-year-old, specially modified van, which vehicle had 250,000 miles on it and was unsafe. Merely because Nickerson could survive without the policy proceeds does not mean Stonebridge’s conduct did not affect his solvency or that he was financially invulnerable.”

Reprehensibility is “influenced by the frequency and profitability of the defendant’s prior or contemporaneous similar conduct.” Conduct undertaken “in order to augment profit represents an enhanced degree of punishable culpability…” In reviewing punitive damages, due process allows courts to consider the defendant’s “illegal or wrongful conduct towards others that was similar to the tortious conduct that injured the plaintiff or plaintiffs…[A] civil defendant’s recidivism remains pertinent to an assessment of culpability….[A] recidivist may be punished more severely than a first offender [because] repeated misconduct is more reprehensible than an individual instance of malfeasance.”

The court agreed that Stonebridge placed its interests above its insured’s and repeatedly profited both from the sale of such unlawful insurance policy clauses to Nickerson and others, and from its wrongful claims-handling practices. “Manifestly, the denial of coverage here was the result of a practice repeatedly utilized, and not an isolated incident.”

The court rejected Stonebridge’s suggestion that the trial court improperly permitted the jury to punish it for its handling of other insureds’ claims. California has the “constitutional freedom to use punitive damages as a tool to protect the consuming public, not merely to punish a private wrong.” To consider the defendant’s entire course of conduct is not to punish the defendant for its conduct toward others. Rather, by placing the defendant’s conduct on one occasion into the context of a business practice or policy, an individual plaintiff can demonstrate that the conduct toward him or her was more blameworthy and warrants a stronger penalty to deter continued or repeated conduct of the same nature.

The court rejected Stonebridge’s argument that the record lacked evidence showing it was aware that the policy provision asserted was unenforceable when it denied Nickerson’s and others’ claims. The court reasoned that if Stonebridge seeks to do business in California, it must follow California law and it has long been the law in California that any provision purporting to limit coverage must be “conspicuous, plain and clear.” Merely because those prior similar incidents did not result in an earlier finding of bad faith does not entitle Stonebridge to keep this clause in the policy with impunity until a court finds it is unenforceable.

Next, because the jury found Stonebridge engaged in fraudulent conduct, the element of intentionality was satisfied. The court reasoned that there was substantial evidence supporting the finding of fraud: “[T]he historical evidence shows first that Stonebridge limited the scope of its promise of coverage by burying it in the definition of ‘Necessary Treatment,’ which constitutes a concealment designed to increase Stonebridge’s profits by depriving policy holders of their policy benefits. Second, Stonebridge’s practice was never to authorize peer reviewers to communicate with treating physicians, thus intentionally concealing material information from the claims’ functional decision-maker so as to limit the amount Stonebridge would have to pay out on its policies.”

Having found several aggravating factors, the court turned to the second signpost, the ratio of punitive damages to compensatory damages, which were 10 to 1.

Punitive damages must bear a “reasonable relationship” to compensatory damages or to the plaintiff’s actual or potential harm. Courts must ensure that the measure of punishment is both reasonable and proportionate to the amount of harm to the plaintiff and to the general damages recovered.

The Supreme Court has “consistently rejected the notion that the constitutional line is marked by a simple mathematical formula,” and “reiterate[d its] rejection of a categorical approach.” Although repeatedly declining to establish a ratio beyond which a punitive damage award could not exceed, the high court found “instructive” decisions approving ratios of four to one, and recognized that in the past “few awards exceeding a single-digit ratio between punitive and compensatory damages, to a significant degree, will satisfy due process.” Additionally, ratios between the punitive damages award and the plaintiff’s actual or potential compensatory damages significantly greater than 9 or 10 to 1 are suspect and, absent special justification (by, for example, extreme reprehensibility or unusually small, hard-to-detect or hard-to-measure compensatory damages), cannot survive appellate scrutiny.

The court observed that Stonebridge’s conduct evinces a high level of reprehensibility; Nickerson received a small amount of compensatory damages for his personal injury, and the monetary value was difficult to determine because he was “stoic” during his testimony; the $35,000 tort award contained no punitive element as that award was to compensate him for his emotional distress, not to punish Stonebridge; and it took a lawsuit and a court finding before Stonebridge paid all policy benefits due. It then found that a ratio of 10 to 1 did not exceed constitutional standards.

The court rejected Nickerson’s argument that a ratio of more than 10 to 1 was warranted because the small award was unlikely to deter future misconduct and that a 10 to 1 award was something Stonebridge was likely to simply treat as a cost of doing business “as usual.” While the court recognized this was likely the case, it felt compelled to limit the award to 10 to 1.

The court also rejected Nickerson’s argument that the amount of policy benefits should have been included in the punitive damage calculation. It reasoned that these were contract benefits and could not be used for punitive damages purposes.

The court also rejected Nickerson’s argument that attorney’s fees awarded under Brandt v. Superior Court, 37 Cal.3d 813 (1985) should have been included in the punitive damage calculation. It noted that when such fees are awarded by the court after the jury verdict, they cannot be used for punitive damages purposes because they were not before the jury when it assessed punitive damages.


Drawing bright lines between constitutional and unconstitutional punitive damages awards remains very difficult. Two interesting aspects of this opinion arise from the holding that only emotional distress damages could be used as the base award for purposes of determining the punitive damages ratio. This court held that the wrongfully withheld policy benefits were contract damages that could not be used a part of base award when calculating the punitive damages ratio for purposes of assessing constitutionality. Other courts, of course, have held that an insurer’s wrongful withholding of policy benefits is a tort, not just a breach of contract. See, e.g., Essex Ins. Co. v. Five Star Dye House, Inc. 38 Cal.4th 1252 (2006). At least when punitive damages are alleged, plaintiff attorneys will continue to argue that wrongfully withheld policy benefits qualify as tort damages, not just breach of contract damages.

In addition, this court held that because the Brandt fee award was assessed by the court after the jury was discharged, the award could not be used for purposes of calculating the base award used to assess constitutionality of the punitive damages ratio. Policyholder attorneys may attack this aspect of the court’s ruling on two fronts. First, they will probably argue that this ruling would complicate trials by forcing plaintiffs to try Brandt fee issues to the jury. Second, they will probably argue that it is the court that assesses the constitutionality of punitive damages, not the jury. So whether the issue is initially presented to a jury or not, the argument will be that any Brandt fee award should also be used as part of the compensatory base reviewing courts can look at for purposes of assessing the constitutionality of punitive damages ratios.


A Pollution Exclusion Reservation Of Rights Did Not Create A “Cumis” Conflict

Federal Insurance Company v. MBL, Inc.
(Cal. Ct. of App., 6th Dist.), filed August 26, 2013, published August 26, 2013


The federal government brought a Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) action against owners of a dry cleaning facility. The action was to recover the costs of monitoring and remediating the contamination. The defendants in that action filed third-party actions against MBL, Inc., a supplier of dry cleaning products, including perchloroethylene. In it, they sought indemnity, contribution and declaratory relief.

MBL tendered its defense to its liability insurance companies, including Federal Insurance Company, Centennial Insurance Company, Atlantic Mutual Insurance Company, Nationwide Indemnity Company, Utica Mutual Insurance Company and Great American Insurance Company. The insurers accepted the tender, subject to reservations of rights. They appointed counsel to defend MBL.

MBL refused to accept appointed counsel asserting the insurers’ reservations of rights created a conflict of interest and that it was entitled to “Cumis” (or independent) counsel. The insurers denied any conflict of interest and filed declaratory relief actions.

The trial court granted summary judgment in favor of the insurers, finding there was no actual conflict of interest.


The Court of Appeal affirmed.

In San Diego Federal Credit Union v. Cumis Ins. Society, Inc., 162 Cal.App.3d 358 (1984), the court held that if a conflict of interest exists between an insurer and its insured, based on possible noncoverage under the insurance policy, the insured is entitled to retain its own independent counsel at the insurer’s expense. Such counsel became known as “Cumis counsel.” The principle was partially codified in 1987 by the enactment of Civil Code Section 2860.

For independent counsel to be required, the conflict of interest generally must be “significant, not merely theoretical, actual, not merely potential.”

The court rejected MBL’s contention that the “qualified pollution exclusions” in some of the policies created a conflict of interest. That exclusion eliminated coverage for property damage arising out of discharges of pollutants, but provided coverage if those discharges were “sudden and accidental.” However, to the extent insurers did not assert the exclusion as a basis for noncoverage, it did not trigger a conflict of interest.

The court rejected MBL’s contention that there was a conflict of interest because of the “absolute pollution exclusion.” It agreed with the insurers that the underlying actions arose out of pollution and sought indemnity and contribution from MBL for cleanup costs related to soil and groundwater contamination. Whether the absolute pollution exclusion barred a claim arising out of MBL’s activities was not an issue that would be litigated in the underlying actions. As such, appointed counsel could not influence the outcome of this coverage issue, which was strictly a matter of contract interpretation.

The court rejected MBL’s contention that there was a conflict of interest because there was a question of whether there was one or several “occurrences.” This question, MBL argued, impacted the limits available for payment of a judgment. However, the insurers did not reserve rights based on questions about the number of occurrences. Therefore, there was no conflict of interest.

The fact that some of the insurers provided insurance to defendants or cross-defendants other than MBL did not create a conflict of interest that gave rise to a right to “Cumis counsel.” MBL did not show how the appointed attorneys’ defense of other insureds could control coverage. The court saw any conflict arising from multiple insureds as not significant, but merely theoretical.

The fact that the insurers reserved their rights to deny coverage for liabilities for damages that occurred outside their policy periods did not create a conflict of interest. The court noted: “MBL provided no evidence to establish how defense counsel could have controlled the issue of when certain damages occurred. Defense counsel could not control the facts at issue below, such as when MBL delivered solvents to the dry cleaning facility, or when the seepages and resulting environmental contamination occurred.”

The court also held that the insurers’ “general” reservations of rights did not create a conflict of interest. Such reservations might have given rise to specific reservations and those specific reservations might or might not have triggered a conflict of interest. However, absent a specific reservation that would create a conflict, a “general” reservation would create nothing more than a theoretical conflict.


California insurers, policyholders, attorneys, and courts continue to struggle with precisely when an insured’s reservation of rights creates a conflict of interest that requires independent counsel at the insured’s expense. Courts often see no conflict of interest when policyholders simply point to the reservation of rights and argue that the reservation, in and of itself, creates a conflict of interest. Where a specific decision has to be made by the insurer-appointed attorney, and where that decision could directly impact the likelihood of coverage, courts are much more likely to find a conflict of interest that requires the insurer to pay for an independent attorney that the policyholder selects.


The Particular Insurance Policy Provided Pro Rata Coverage

Progressive Choice Insurance Company v. California State Automobile Association Inter-insurance Bureau
(Cal. Ct. of App., 2d Dist.), filed August 13, 2013, published August 13, 2013


Benjamin White was injured in a traffic collision, while riding as a passenger in a vehicle Scott Tortora was driving. The party who caused the collision was underinsured.

White was an “insured” under two automobile insurance policies. Progressive issued one of those policies to Tortora. That policy insured the vehicle. Because White was a passenger in Tortora’s vehicle, he was an “insured.” Progressive’s policy provided underinsured motorist bodily injury coverage with limits of $100,000 for each person. CSAA issued the other policy to White as the named insured. It provided underinsured motorist bodily injury coverage with limits of $50,000 for each person.

The Progressive policy used language substantially similar to that mandated by the Insurance Code. Under “Exclusions,” the policy stated that coverage is “not provided for bodily injury sustained by any person while using or occupying…a motor vehicle, other than a covered vehicle, if the owner has insurance similar to that provided under this Part.”

This Part also included an “Other Insurance” provision. That provision stated: “If there is other applicable uninsured or underinsured motorist coverage, the damages which an insured person is entitled to recover” under this Part “shall be deemed not to exceed the highest limit of any applicable coverage. We will pay only our share of the damages. Our share is the proportion that our Limit of Liability bears to the total of all available coverage limits. Any insurance we provide shall be excess over any other uninsured or underinsured motorist coverage, except for bodily injury to you or a relative when occupying a covered vehicle.”

The CSAA policy did not include an exclusion comparable to Progressive’s. However, the CSAA policy stated:

With respect to bodily injury to an insured person occupying a motor vehicle not owned by you, the coverage under this Part applies only as excess insurance over any similar insurance available to such insured person and covering such automobile as primary insurance. In this situation this coverage will apply only in the amount by which the limits of liability for this coverage exceeds the limits of liability of such other insurance.

If there is other similar insurance on a loss covered by this Part, we will pay our proportionate share as our limit of liability bears to the total limits of all applicable similar insurance. But, any insurance for a vehicle you do not own is excess over any applicable similar insurance.

White settled with the at-fault driver’s automobile insurance company for the policy limit of $25,000. White then made a claim for Underinsured Motorist benefits under the Progressive and CSAA policies.

CSAA denied coverage. It asserted that its policy was excess over Progressive’s policy. Because of CSAA’s denial, Progressive paid White $62,500. Progressive then demanded that CSAA reimburse Progressive $20,833.33, the pro-rata share of the payment it made to White. CSAA declined.

Progressive sued CSAA. The parties each moved for summary judgment. The trial court granted Progressive’s motion.


The Court of Appeal affirmed. It held that because CSAA’s policy did not include an exclusion such as the one authorized by the Insurance Code and included in Progressive’s policy, CSAA could not deny coverage.

The court rejected CSAA’s argument that the “Other Insurance” provision of its policy expressly incorporates Insurance Code Section 11580.2(c)(2). It found that CSAA’s language was not “substantially similar” to that provided for in the Insurance Code.

The court also rejected CSAA’s argument that it need not expressly incorporate the language of Section 11580.2 (c)(2) in order to exclude the underinsured motorist coverage that it provided to the insured. The court noted that such an argument was rejected in Utah Property & Casualty Ins. v. United Services Auto. Assn., 230 Cal.App.3d 1010 (1991). There, the court remarked that a time limitation on a trigger for uninsured motorist coverage did not apply because it was not stated in the policy and “a layperson reading the policy would have no reason to suspect [such a limitation].”


Prioritizing or prorating uninsured motorist coverage can be very tricky. Careful assessment of the particular policy language is obviously required. At least one court has suggested that California Insurance Code Section 11580.9 may even come into play. See State Farm Mut. Auto. Ins. Co. v. Progressive Marathon Ins. Co., 148 Cal.App.4th Supp. 1 (2007).


Attorney’s Fees Were Properly Awarded In An Interpleader Lawsuit

Farmers New World Life Insurance Company v. Rees
(Cal. Ct. of App., 2d Dist.), filed August 30, 2013, published August 30, 2013


Frank and Rosamaria Rees married in 1997. In May 1998, they each obtained from Farmers New World Life Insurance Company, a life insurance policy with benefits of $150,000. Rosamaria’s policy insured her life, and Frank’s policy insured his life. They named the other as the sole primary beneficiary and listed no contingent beneficiaries.

On September 18, 2009, Rosamaria was shot and killed in the street outside the home she shared with Frank.

A Farmers claims representative contacted Frank, who indicated that the LAPD was investigating Rosamaria’s death as a homicide. Further investigation showed that the LAPD had not ruled anyone out as a suspect. Based on the fact the LAPD had not ruled anyone out, Farmers deferred making a claims decision. It then filed an interpleader action in which it asked the court to figure out whether Frank, as the beneficiary, was entitled to the policy proceeds or whether Rosamaria’s mother, who would be entitled to them if Frank was the killer, was entitled to them.

Frank appeared in the action. Rosamaria’s mother did not and was defaulted. Based on the fact that Rosamaria’s mother was defaulted, the court ruled Frank was entitled to the policy proceeds, less attorney’s fees Farmers incurred in bringing the interpleader action and in filing a challenge to Frank’s right to the proceeds.

Frank appealed based on his contention that Farmers should not have been allowed to offset the payment by its attorney’s fees.


The Court of Appeal affirmed.

The court rejected Frank’s contention that the attorney fees and costs award was erroneous because his right to the policy benefits never was in dispute and that as a result, the interpleader action was unnecessary and the statutory requirements for attorney fees and costs unmet. It ruled that under the circumstances, Farmers was entitled to file an interpleader action, and the court did not err by exercising its discretion to award attorney fees and costs.


Significantly, this case does not grant insurers an unfettered right to file interpleader actions and then deduct their attorney’s fees any time there is a dispute as to how policy proceeds are to be allocated. The court expressly held that under the circumstances of the particular case, the trial court had not abused its discretion in awarding Farmers its attorney’s fees and costs.


A $176,900 Discovery Sanction Was Reasonable

Ellis v. Toshiba America Information Systems
(Cal. Ct. of App., 2d Dist.), filed August 7, 2013, published August 7, 2013


Jeffrey Ellis sued Toshiba America Information Systems in a class action lawsuit. Ellis was represented by two law firms. One was Caddell & Chapman, a Texas law firm with experience litigating class actions. The other was Lori Sklar, a sole practitioner and a member of the California Bar doing business as Sklar Law Offices out of her home office in Minnesota.

After the matter settled, Caddell & Chapman and Sklar sought fees as the attorneys for the successful class. Sklar stated that she would seek legal fees of more than $24,700,000 (represented as 25 percent of a settlement value placed at $98,975,862), to be apportioned between Sklar and Caddell & Chapman, plus expenses of $99,750. Toshiba did not oppose the application by Caddell & Chapman for $1,125,000 in fees. However, it indicated the intention to take discovery into the basis of what it considered to be Sklar’s “exorbitant” fee request. It indicated it would seek the production of documents and the depositions of Sklar and others, including Sklar’s expert.

Protracted litigation and many discovery disputes followed Sklar’s initial fee estimate. In essence, Toshiba sought the source data for Sklar’s time records, in “native format.” It wanted these so it could search the entries and sort and categorize them. It also wanted the records in “native format” because it would contain information, decipherable by a computer expert, relative to when the information was prepared and edited. Sklar resisted. The trial court entered two orders compelling Sklar to provide the records and to permit a forensic expert to inspect the hard drive on her computer. The trial court warned about the consequences of non-compliance, including that it might lead to the court concluding that what Sklar submitted in support of her fee petition was not credible and did not support the petition. Nonetheless, Sklar did not comply. Eventually, the trial court granted Toshiba’s motion for monetary sanctions against Sklar in the amount of $165,000 for fees and costs Toshiba incurred related to Sklar’s failure to comply with court discovery orders, and her failure to meet and confer in good faith.

The trial court issued a 27-page ruling awarding Sklar $176,900 in fees (for work during the merits phase of the class action by the staff of Sklar), and awarding nothing for Sklar’s own work. It then subtracted the $165,000 sanctions award. The net award to Sklar was $11,000.


The Court of Appeal affirmed the sanction award and the trial court’s determination that Sklar was entitled to nothing for her own work. It reversed and remanded as to the fee for the work done by Sklar’s staff, as there was a computational error that it wanted the trial court to correct. In addition, the court sanctioned Sklar for submitting as an item in the appellant’s appendix, something that was altered from what had been submitted to the trial court.

As to the trial court’s imposition of monetary sanctions, the court found no abuse of discretion as Sklar failed to comply with two different trial court orders. The court reminded that “[t]here is no requirement that misuse of the discovery process must be willful for a monetary sanction to be imposed;” and that “[w]henever one party’s improper actions—even if not “willful”—in seeking or resisting discovery necessitate the court’s intervention in a dispute, the losing party presumptively should pay a sanction to the prevailing party.” It then ruled that Sklar’s conduct, as it had detailed in its opinion, “amply supports the sanctions award.” It agreed with the trial court’s remark that “the record in this case is one of obfuscation and delay by [Sklar].”

The court also found monetary sanctions were justified based on Sklar’s failure to engage in the meet and confer process mandated by the Code of Civil Procedure. It reminded: “[A] reasonable and good faith effort at informal resolution entails something more than bickering with [opposing] counsel…Rather, the law requires that counsel attempt to talk the matter over, compare their views, consult, and deliberate.” Sklar failed to do so.

The court rejected Sklar’s argument that the trial court exceeded its jurisdiction in ordering that a forensic expert be permitted to inspect the hard drive of her computer and that as a result, she was justified in disobeying its order. Among other things, the court observed: “[T]he sizeable nature of Sklar’s fee request and her resistance to the court’s inquiries regarding her seemingly excessive rates made the court’s inspection orders reasonable and necessary.” It stated:

Sklar requested over $24 million in attorney fees. In support, she provided hard copies of her billing records purporting to show that she worked at a superhuman rate, followed by a CD with PDF copies of those time records (which she acknowledges had been redacted). Sklar later represented that she had deleted all the original electronic billing records that arguably might have cast doubt on the accuracy of her billing. We therefore reject Sklar’s complaint that the court exceeded its jurisdiction when it authorized Toshiba’s inspection of her hard drive to determine whether any of that electronically stored information survived her destruction of the files.

After finding that the monetary sanction award was not an abuse of discretion, the court found that the trial court did not abuse its discretion in declining to award Sklar anything on her fee request.

The trial court was within its discretion in concluding that Sklar’s billing records were “unusable” for the purpose of calculating a fee. The records were inconsistent, contained omissions, and billing entries were inaccurate and even contradictory. The number of hours claimed were excessive (over five years, about 11 hours a day every day), and Sklar’s hours included activities that should have been handled by an expert witness, fact investigator, or paralegal. In addition, the trial court was within its discretion to apply the negative inference resulting from Sklar’s failure to submit source information for her fee request.


This harsh result seems to be the court’s reaction to a very over-the-top fee request. The court’s opinion strongly suggests that it perceived significant over-reaching, to put it mildly, in the fee request. The sanctions more or less neutralized even the legitimate aspects of the fee request.


A Tenant Could Sue For Fraud

Thrifty Payless, Inc. v. The Americana at Brand
(Cal. Ct. of App., 2d Dist.), filed July 19, 2013, published August 14, 2013


Thrifty/Payless, Inc. sought to rent space at Americana at Brand’s shopping center. During negotiations held through letters of intent, Americana provided per square foot estimates concerning Thrifty’s probable pro rata share of property taxes, insurance, and common area maintenance.

The final lease stated that Thrifty would pay its pro rata share of such expenses and did not contain any formulas, figures or percentages regarding Thrifty’s share of such expenses.

After Thrifty moved into the shopping center, its share of these expenses substantially exceeded Americana’s estimates and Thrifty sued for fraud, rescission based on mutual mistake and mistake of fact, breach of lease and breach of the implied covenant of good faith and fair dealing. Americana challenged the legal sufficiency of Thrifty’s legal theory by filing a demurrer.

The trial court sustained Americana’s demurrer without leave to amend. It found that the prior negotiations constituted estimates and could not be statements of fact upon which a claim of fraud could be based, and that Thrifty failed to allege facts establishing innocent misrepresentation, mistake, breach of lease, or breach of the implied covenant of good faith and fair dealing.


The Court of Appeal reversed.

The elements of fraud, which give rise to the tort action for deceit, are (a) misrepresentation (false representation, concealment, or nondisclosure); (b) knowledge of falsity (or “scienter”); (c) intent to defraud, i.e., to induce reliance; (d) justifiable reliance; and (e) resulting damage. In contrast, a claim for negligent misrepresentation does not require knowledge of falsity. Rather, the plaintiff must show (1) the misrepresentation of a past or existing material fact, (2) without reasonable grounds for believing it to be true, (3) with intent to induce another’s reliance on the fact misrepresented, (4) justifiable reliance on the misrepresentation, and (5) resulting damages.

The court found that under existing precedent, Americana’s grossly inaccurate estimates satisfied the element of a misrepresentation. Those estimates induced Thrifty to enter into the lease. As a result, the fact that the integration clause contained in the lease did not preclude the introduction of evidence of those estimates. Thus, Thrifty could state a viable cause of action for fraud and misrepresentation.


It is important to remember that demurrers admit the truth of the pleaded facts and even the reasonable inferences to be drawn from those facts.


Land Owners Obtained A Prescriptive Easement

King v. Wu
(Cal. Ct. of App., 2d Dist.), filed August 14, 2013, published August 14, 2013


Fred and Viola Fluckiger bought real property in 1960. Shortly after that, they poured a concrete driveway partly encroaching on the neighboring property. The strip of driveway on the neighboring property was approximately eight inches wide and ninety feet long.

In 1963, the Wus became the owners of the property neighboring the Fluckigers. They used it as rental property, renting it to a series of tenants over the years.

In 1994, Michael and Linda King bought the Fluckiger property. They used the concrete driveway for ingress and egress to their garage and for parking in the rear of the driveway.

In 2009, the Wus began constructing a metal guardrail over the strip of land that the Fluckigers and later, the Kings had been using.

The Kings filed a complaint seeking to quiet title over the strip of land and asserting claims for trespass and declaratory relief. The Wus’ answer asserted an affirmative defense, that the Wus had leased the property, and, therefore, did not have possession of the property until 2008.

The trial court granted a motion for summary adjudication in favor of the Wus on the Kings’ prescriptive easement and declaratory relief claims. It concluded that the Wus had established an affirmative defense because they or their predecessors had not been in possession of the property for five continuous years during the Kings’ and Fluckigers’ 49-year use.


The Court of Appeal reversed. It held that the Wus failed to meet their burden of proof because they could neither establish an affirmative defense nor demonstrate that the Kings had not obtained a prescriptive easement.

To obtain a prescriptive easement, the Kings or their predecessors must have used the property “for the statutory period of five years, which use has been (1) open and notorious; (2) continuous and uninterrupted; (3) hostile to the true owner; and (4) under claim of right.” However, the court found the Wus failed to negate any of these elements.

As to the Wus’ affirmative defense that they and their predecessors had not been in continuous possession of the Wu property for five years, the court held that California law does not require the actual owners of the adversely used land to have been in continuous possession for five years. As a result, the affirmative defense was no defense at all.


This is one more decision which emphasizes the absentee landlord can suffer legal consequences just as if the landlord was there everyday, closely watching the property.


A Landlord Had The Right To Enter

Dromy v. Lukovsky
(Cal. Ct. of App., 2d Dist.), filed August 30, 2013, published August 30, 2013


Donald Dromy owned a condominium in Santa Monica. In 1994, the prior owner leased it to Marina Lukovsky.

In 2010, Dromy sought to sell the condominium and entered into a listing agreement with a licensed real estate agent. Although Lukovsky had allowed the agent to privately show the property to prospective purchasers by appointment, she had refused to permit open houses on weekends.

Frustrated by what he perceived to be an undue barrier to his ability to sell the property, Dromy filed a complaint for declaratory relief against Lukovsky. In it, Dromy sought a declaration regarding his rights and duties under Civil Code Section 195.4 to enter property for the purpose of exhibiting it to prospective purchasers.

The trial court granted a summary judgment in Dromy’s favor. The resulting judgment provided that Dromy’s designated licensed real estate agent shall be entitled to hold two open houses per month. It further stated that open houses “may be held on weekend days between 1:00 p.m. and 4:30 p.m.” and that Dromy’s designated agent “shall be present and defendant may be present during any and all such open houses.” Finally, the judgment stated that Dromy’s designated agent “shall give 10 days advance email notice to defendant of proposed weekend open house dates, and defendant shall respond within 48 hours of receipt of same acknowledging the proposed dates or providing alternative weekend dates.”

Lukovsky filed a timely notice of appeal of the judgment.


The Court of Appeal affirmed.

The court first reiterated the rules for summary judgments. It then reiterated those applicable to statutory interpretation. Having done so, the court turned to Section 195.4, which addressed a landlord’s right of entry.

Section 195.4 permits a landlord to enter the property to show it to prospective purchasers, but requires that it be during regular business hours. However, it did not say if regular business hours included weekends, which was when prospective buyers generally looked at listed properties.

After concluding that the legislative history on Section 195.4 included weekends, the court affirmed.


While the landlord scores a litigation victory, this seems like the type of situation that is typically better resolved through negotiation. After all, the court gave the defendant the right to be in the property when prospective purchasers attend these “open houses.” That’s probably not the ideal situation from the perspective of the owner who is trying to sell property.

On the other hand, this case shows that residential tenants do not always win legal battles with their landlords in California.


Loan Forgiveness May Not Satisfy A Judgment

Cunningham v. Magidow
(Cal. Ct. of App., 2d Dist.), filed August 30, 2013, published August 30, 2013


Kathleen Cunningham owned half the stock of Royal Airline Linen, Inc. Norman Magidow owned the other half and was also an officer and director. Royal was in a precarious financial position and both Cunningham and Magidow had loaned it large sums of money.

Cunningham filed a shareholder derivative action against Magidow and others, alleging claims for breach of fiduciary duty, usurpation of corporate opportunity, and conversion.

The trial court found Magidow liable for breach of fiduciary duty, awarded compensatory and punitive damages, and entered judgment against him.

Magidow responded to the judgment by forgiving $452,000 of a loan he had made to Royal. He then moved for an order compelling Cunningham to acknowledge that the judgment had been partially satisfied in the amount of $452,000. The trial court granted the motion. Cunningham appealed.


The Court of appeal reversed.

The court first rejected Magidow’s argument that the appeal had become moot because Cunningham had acknowledged satisfaction of the judgment. It reasoned that Cunningham had merely complied with the trial court’s order. She was not required to disobey an order and risk being held in contempt in order to challenge it.

The court then found the trial court abused its discretion in permitting Magidow to satisfy the judgment against him by forgiving the loan. It reasoned that the effect was for Magidow to have repaid the loan he had made to Royal with the proceeds of the judgment. Because of Royal’s precarious financial condition, Magidow was getting preferential treatment with respect to Cunningham and other creditors. This was particularly inappropriate in as much as Magidow had been found liable for breaching his fiduciary duties to Royal.


The decision shows that not all financial instruments of equal value are perfectly fungible. It also provides a common sense answer to the issue of whether a litigant can both obey and appeal a trial court order the litigant believes to be erroneous.


Substantial Evidence Standard On Appeal Requires The Appellant To Discuss Both Favorable And Unfavorable Evidence

Rayii v. Gatica
(Cal. Ct. of App., 2d Dist.), filed July 24, 2013, published August 20, 2013


Nadja Rayii suffered severe injuries when she had a head-on collision with a car being driven by Melvin Gatica. Gatica had bought the car he was driving the day before the collision from Carlos Seciada. At the time, Gatica was unlicensed and had never driven in the United States.

At the time of the collision, Gatica was employed by Gateway Insulation, Inc. That morning Gatica’s boss sent him to another of Gateway’s facilities, where he spent the day working. There was contradictory evidence as to whether, at the time of the accident, Gatica was returning to Gateway’s office or was going home.

The jury found that Gatica was liable to Rayii, but that he was not acting in the course and scope of his employment for Gateway when the collision occurred. It also found in favor of Seciada.

Rayii made a motion for a new trial on grounds of attorney misconduct, irregularity in the proceedings and inadequate damages. The trial court denied the motion.

Rayii appealed. She challenged the jury’s finding that Gatica was not acting in the course and scope of his employment and the denial of relief against Carlos Seciada, who she contended was the registered owner of the car Gatica was driving. She also appealed the denial of her new trial motion.


The Court of Appeal affirmed.

On the issue of Gatica’s employment and Gateway’s liability, Rayii asserted that there was no substantial evidence in support of the jury’s finding. The court rejected this challenge because Rayii failed to comply with the rules of appellate procedure.

Rayii’s brief discussed the evidence in support of her challenge, and in particular the evidence tending to show that Gatica was acting within the course and scope of his employment.

But she did not address the evidence supporting the jury’s finding. That failure alone supported rejecting the challenge.

As to Seciada’s liability, Rayii did not challenge the jury’s finding that he was not the owner of the car. Rather, she asserted he was liable as the registered owner of the car.

The court rejected this assertion because Rayii did not assert it at the time of trial and did not offer evidence that Seciada had not taken the proper steps to re-register the car in Gatica’s name.

The court also rejected Rayii’s claims of attorney misconduct because she did not object at the time it occurred and she failed to ask the trial court to instruct the jury to disregard opposing counsel’s allegedly improper statements.

Finally, the court rejected Rayii’s claims of irregularities in the proceedings. Those claimed irregularities consisted of the trial court permitting certain defense experts to be called out of order and examined during Rayii’s presentation of her case-in-chief. Rayii failed to establish that under circumstances that necessitated calling them out of order, the trial court abused its discretion.


Appellate courts occasionally reject challenges to the sufficiency of the evidence based on the appellant’s failure to discuss the evidence supporting the verdict.


Other Cases Of Interest

A Subrogation Action Was Timely

Liberty Mutual Insurance Company v. Brookfield Crystal Cove LLC
(Cal. Ct. of App., 4th Dist.), filed August 28, 2013, published August 28, 2013

Eric Hart bought a newly constructed home from Brookfield Crystal Cove LLC. A pipe in the home’s sprinkler system burst, causing significant damage. Brookfield repaired the damage. Hart’s homeowners insurer, Liberty Mutual Insurance Company, paid Hart’s relocation expenses, incurred while Hart was out of his home during the repair period.

Liberty Mutual sued Brookfield in subrogation to recover those expenses. The trial court found Liberty Mutual’s complaint was time-barred under the Right to Repair Act embodied by Civil Code Section 895 et seq., and dismissed its action.

The Court of Appeal reversed.

The Right to Repair Act was enacted to provide remedies where construction defects have negatively affected the economic value of a home, although no actual property damage or personal injuries have occurred as a result of the defects. The court held that the Act does not eliminate a property owner’s common law rights and remedies, otherwise recognized by law, where actual damage has occurred. As a result, Hart retained his common law rights against Brookfield.

Under the doctrine of subrogation, when an insurer pays money to its insured for a loss caused by a third party, the insurer succeeds to its insured’s rights against the third party in the amount the insurer paid.

As a result, Liberty Mutual was entitled to sue Brookfield based on Hart’s common law rights. Therefore, it brought its action within the time permitted by the statute of limitations.