Maryland Casualty Co. v. State Farm Fire and Casualty Co.

Filed 10/6/06 Maryland Casualty Co. v. State Farm Fire and Casualty Co. CA1/3

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

California Rules of Court, rule 977(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 977(b). This opinion has not been certified for publication or ordered published for purposes of rule 977.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

FIRST APPELLATE DISTRICT

DIVISION THREE

Maryland Casualty Company and Northern Insurance Company of New York (jointly “Maryland”) appeal the trial court’s grant of summary judgment in favor of State Farm Fire and Casualty Company and State Farm General Insurance Company (jointly “State Farm”) in Maryland’s action for equitable contribution against State Farm. The trial court ruled Maryland’s claims were barred by the doctrine of laches. We affirm.

BACKGROUND

A. Heers v. Pejcha Litigation

The geneses of Maryland’s claims against State Farm lie in a 1991 lawsuit in Sacramento Superior Court between certain property development entities (collectively “the Heers Group”) and Ivan and Marie Pejcha, individually and as trustees of the Pejcha Revocable Family Trust (collectively “the Pejchas”). The Heers Group sued the Pejchas for judicial foreclosure, breach of fiduciary duty and breach of management agreement regarding three apartment complexes the Heers Group sold to the Pejchas. On September 20, 1991, the Pejchas filed a cross-complaint for damages against the Heers Group alleging breach of contract, fraud and negligence on account of various construction defects in the three apartment complexes (“defects cross-complaint”).

The Heers Group tendered defense of the defects cross-complaint to Maryland, State Farm and other insurers. State Farm rejected tender on the basis no State Farm policy was in effect during the occurrences alleged in the defects cross-complaint. Maryland accepted tender and paid for counsel to defend and settle the defects cross-complaint. Maryland participated in a pre-trial settlement conference and paid $50,000 to settle the action, but failed to obtain a comprehensive release because the policy-specific settlement agreement failed to list all applicable Maryland policies.[1] After the case against the Heers Group went to trial, the court entered an amended judgment on April 1, 1994, in favor of the Pejchas in the sum of $4 million plus costs. Maryland paid out over $550,000 in defense costs in this action.

B. Section 11580 Litigation[2]

1. Pejcha v. State Farm

During 1994, the Pejchas filed two separate actions pursuant to Insurance Code Section 11580[3] (“section 11580”) in the U.S. District Court for the Northern District of California. In the first of these actions filed in June 1994, the Pejchas sought to enforce judgment against State Farm on the basis of five separate insurance policies issued by State Farm to the Heers Group between 1985 and 1988. The federal district court granted summary judgment for State Farm. The court concluded the first reported manifestation of defects occurred in May 1987, by which time the State Farm policies had been cancelled. The court also concluded that any defects which occurred during construction phase, when the State Farm policies were active, were excluded from coverage under the “owned property“ exclusion in the governing State Farm policies. The Ninth Circuit affirmed the district court’s finding that because the “owned property” exclusion applied, “State Farm was not obligated to indemnify its insureds, [Heers Group], for a judgment obtained against them by Pejcha.”

2. Pejcha v. Maryland

In November 1994, the Pejchas filed a section 11580 suit against Maryland, seeking to enforce judgment on the basis of three policies issued by Maryland to the Heers Group between 1985 and 1988. The federal district court granted summary judgment to Maryland. As in the case of State Farm, the district court ruled Maryland was not obligated to indemnify the Heers Group because the “owned property” exclusion applied. In October 1997, the same panel of Ninth Circuit Court of Appeals affirmed in part and reversed in part. The court of appeals reversed in part because the “owned property” exclusion did not apply to Charles Heers, as he was only a limited partner and not an owner of the property in question. In 2001, Maryland sought to file a third-party complaint against State Farm but the district court denied the request as untimely. Subsequently, Maryland settled the Pejchas’ section 11580 suit in September 2001 for a sum in excess of $1 million.

C. State Farm Litigation

In April 1995, during the course of Pejchas’ section 11580 suit against State Farm, State Farm filed a Third Party Complaint for declaratory relief against Maryland and various other insurance companies. State Farm sought a ruling it owed no indemnity or coverage obligations to its insureds for losses claimed by the Pejchas under the State Farm policies listed in the Pejchas’ section 11580 complaint. Maryland answered State Farm’s complaint for declaratory relief without asserting any counterclaims against State Farm. In October 1995, State Farm voluntarily dismissed its third-party complaint without prejudice.

D. Current Litigation

Maryland filed its action for contribution against State Farm and other insurers on September 11, 2002, and filed an amended complaint December 10, 2003. State Farm filed its motion for summary judgment on December 20, 2004. State Farm sought summary judgment on three grounds: first, under both California and federal law, Maryland was obliged to assert its claims for indemnity and contribution against State Farm in the Pejchas’ first section 11580 action; second, Maryland was barred by res judicata; third, Maryland’s claims were barred under the doctrine of laches.

On April 21, 2005, the trial court granted summary judgment in favor of State Farm under the doctrine of laches. The trial court denied State Farm’s request for summary judgment on its theories of res judicata and compulsory counterclaim. Judgment in favor of State Farm was entered on April 27, 2005. Maryland filed a timely notice of appeal on June 17, 2005.

DISCUSSION

A. Applicable Legal Standards

“The defense of laches is derived from the maxim that ‘[t]he law helps the vigilant, before those who sleep on their rights.’ This has been restated as ‘equity frowns upon stale demands and declines to aid those who have slept on their rights.’ In practice, laches is defined as an unreasonable delay in asserting an equitable right, causing prejudice to an adverse party such as to render the granting of relief to the other party inequitable.” (Piscioneri v. City of Ontario (2002) 95 Cal.App.4th 1037, 1046 [citations and brackets omitted.) Laches requires both (1) unreasonable delay; and (2) prejudice. (Ibid.) Here, the trial court awarded State Farm summary judgment based on its finding of laches. Ordinarily, we review a trial court’s grant of summary judgment de novo. (See, e.g., Merrill v. Navegar, Inc. (2001) 26 Cal.4th 465, 476.) Accordingly, we review de novo the trial court’s grant of summary judgment under the doctrine of laches. (Johnson v. City of Loma Linda (2000) 24 Cal.4th 61, 67-68 [stating Court of Appeal erred in reviewing summary judgment on the basis of laches under the deferential abuse of discretion standard].)

B. Laches

1. Unreasonable Delay

The trial court noted the Pejchas’ underlying construction defects action was filed in September 1991, and that by early 1994 Maryland had paid out over $550,000 in defense costs and contributed $50,000 towards a partial settlement. The trial court reasoned Maryland knew or should have known by then it had a potential claim against State Farm, but it neither made a demand for contribution nor did anything to put State Farm on notice it would ever seek to do so. The trial court also noted Maryland did not assert any affirmative claims against State Farm when the latter filed its third-party complaint against Maryland in the Pejchas 1994, section 11580 case. In summary, the trial court stated: “Maryland finally filed this suit seeking contribution from State Farm in 2002 -- almost 15 years after State Farm issued the policies at issue, 11 years after the underlying construction defect litigation was initiated, 8 years after Pejcha initiated coverage litigation and State Farm asserted in a third-party complaint against Maryland that it had no coverage obligation, and 5 years after the Ninth Circuit finally determined that State Farm’s position in the Pejcha coverage litigation was correct. Nothing prevented Maryland from asserting its rights against State Farm at any point during this time. Nothing justifies its having chosen not to do so over such a long period of time, particularly in the face of State Farm’s legitimate expectation that its exposure in this matter was finally adjudicated in 1997 when the Ninth Circuit held that State Farm was not obligated to indemnify its insureds for a judgment obtained against them by Pejcha -- the very obligation Maryland now seeks to impose on State Farm. . . .”

Maryland does not dispute the timeline developed by the trial court in its ruling on unreasonable delay. Rather, Maryland contends there was no unreasonable delay because its right to equitable contribution did not accrue until it settled its liability in the Pejchas’ section 11580 action in October 2001. Thereafter, Maryland filed its action against State Farm within a reasonable time frame, viz., in September 2002, eleven months after its cause of action accrued and well within the two-year statute of limitations. Ultimately, this contention is unconvincing.

If, as claimed by Maryland, its cause of action against State Farm did not accrue until October 2001, then its action certainly was filed within the statute of limitations. (See Century Indemnity Co. v. Superior Court (1996) 50 Cal.App.4th 1115, 1124 [action by insurer against coinsurer for equitable contribution did not sound in contract and was subject to two-year statute of limitations].) Also, we acknowledge courts should consider the applicable statute of limitations in determining the reasonableness of a delay for purposes of laches. (See David Welch Co. v. Erskine & Tulley (1988) 203 Cal.App.3d 884, 893-894 [no unreasonable delay where first account was misappropriated 20 months before action was filed, well within 4-year statute of limitations for breach of fiduciary duty].) Nonetheless, the statute of limitations is not the sole determining factor on the issue of unreasonable delay, and under appropriate circumstances laches may be invoked before the applicable statute of limitations has expired. (See In re Marriage of Plescia, (1997) 59 Cal.App.4th 252, 260 [“laches exists independently of a relevant statute of limitations”] [superceded by statute on another ground]); El Dorado Palm Springs, Ltd. v. Rent Review Com. (1991) 230 Cal.App.3d 335, 346-347; Stevedoring Services of America v. Prudential Lines, Inc. (1986) 181 Cal.App.3d 154, 161.) However, a statute of limitations approach does not help Maryland, because we reject the fundamental premise that Maryland’s cause of action against State Farm did not accrue until October 2001.

Maryland’s claim against State Farm is one for equitable contribution. “ ‘In the insurance context, the right to contribution arises when several insurers are obligated to indemnify or defend the same loss or claim, and one insurer has paid more than its share of the loss or defended the action without any participation by the others.’ [Citation.] ‘Where multiple insurance carriers insure the same insured and cover the same risk, each insurer has independent standing to assert a cause of action against its coinsurers for equitable contribution when it has undertaken the defense or indemnification of the common insured.’ [Citations.]” (Travelers Casualty and Surety Co. v. Employers Ins. of Wausau (2005) 130 Cal.App.4th 99, 108 (Travelers) [italics added].) Moreover, “[t]he right to contribution arises, not from the insurance contract itself, but from ‘equitable principles designed to accomplish ultimate justice in the bearing of a specific burden. As these principles do not stem from agreement between the insurers[,] their application is not controlled by the language of their contracts with the respective policy holders.’ “ (Ibid. [citations omitted].)

Here, Maryland’s claim against State Farm is based on its assertion State Farm was obligated to join in defense of the Pejchas’ September 1991 cross-complaint, for damages arising from construction defects, against their joint insured, the Heers Group. Maryland undertook defense of the Pejchas claim and State Farm did not participate at all because it declined tender at the outset. The Pejchas claim went to trial, and an amended judgment was entered in favor of the Pejchas in April 1994. By that time Maryland had paid out $50,000 in settlement funds and over $550,000 in costs during its defense of the Pejchas claim. On these undisputed facts, we conclude Maryland’s claim for equitable contribution arose, at the latest, upon entry of judgment in the Heers Group v. Pejchas litigation in April 1994. We further conclude Maryland delayed unreasonably by waiting over eight years, until September 2002, to file its claim for equitable contribution against State Farm. Maryland tries to blame the delay on the time taken by the courts and litigants to resolve not only the construction defects case, but also the Pejchas’ subsequent coverage cases, both of which involved appeals to the Ninth Circuit. But as noted, there was no need for Maryland to wait any longer than entry of judgment in the underlying construction defects case in April 1994. Furthermore, even during the Pejchas’ section 11580 coverage cases, Maryland eschewed another opportunity to assert a claim against State Farm when the latter filed its third-party action for declaratory relief against Maryland in April 1995. Instead, Maryland answered State Farm’s third-party complaint without asserting any affirmative claims against State Farm. In any case, Maryland’s asserted right to equitable contribution flowed from State Farm’s alleged failure to defend a joint insured, the Heers Group--and any such failure to defend long predated the Pejchas’ actions to enforce its judgment in subsequent and distinct section 11580 actions against Maryland and State Farm.[4]

Maryland cites Lerner v. Los Angeles City Board of Education, (1963) 59 Cal.2d 382 (Lerner) for the proposition laches does not begin to run until plaintiff’s cause of action has accrued. Lerner did not so hold, exactly. Rather, Lerner concluded a teacher’s action against the local education board for reinstatement was not barred by laches because (1) his cause of action accrued in July 1958 when the board refused to reinstate him despite the restoration of his credential, and, (2) the teacher did not delay unreasonably by filing his action six months after it accrued. (Id. at pp. 399-400.) Nonetheless, we do not quarrel with Maryland’s basic proposition because it would certainly defy common sense to apply the equitable defense of laches to defeat a claim which had not yet come into existence. That is not the case here. Maryland’s equitable claim for contribution arose when it alone undertook defense of the Pejchas’ cross-complaint and it accrued at the latest upon entry of judgment in that case.

We also find unpersuasive Maryland’s contention that its equitable contribution claim did not accrue until it suffered a loss sum-certain through payment of an adverse judgment or settlement in the Pejchas section 11580 coverage litigation.

Maryland relies on Valley Circle Estates v. VTN Consolidated, Inc. (1983) 33 Cal.3d 604 (Valley Circle) and People ex rel. Dept. of Transportation v. Superior Court (1980) 26 Cal.3d 744 (Dept. of Transportation). In the former, the Supreme Court held “Code of Civil Procedure section 337.15 permit[s] a general contractor tort defendant to file a cross-complaint for equitable indemnity against a subcontractor who cannot otherwise be reached under the limitations period of the statute in a direct action for damages.” (Valley Circle, supra, 33 Cal.3d at p. 606.) In so holding, the Valley Circle court drew upon Department of Transportation, supra, in which the Supreme Court endorsed the rule “that a tort defendant’s equitable indemnity action is separate and distinct from the plaintiff’s tort action. The indemnity action, unlike the plaintiff’s claim, does not accrue for statute of limitations purposes when the original accident occurs, but instead accrues at the time that the tort defendant pays a judgment or settlement as to which he is entitled to indemnity.” (Dept. of Transportation, supra, 26 Cal.3d at p. 748.)

Valley Circle and Dept. of Transportation deal with the issue of equitable indemnity between joint tortfeasors, not with the issue of equitable contribution between joint insurers of the same risk. This distinction is important. Unless the defendant tortfeasor pays a judgment or settlement, i.e., until the defendant tortfeasor either admits liability or is adjudged liable to the injured party, the defendant tortfeasor has no reason to lay liability at the door of another. Equitable contribution between joint insurers is different. An insurer’s right to seek equitable contribution may arise from a joint insurers failure to defend even if no liability finally attaches to the joint insured. As we have seen, the right to equitable contribution is not dependent upon a finding of liability, and flows from neither tort nor contract, but arises from “equitable principles designed to accomplish ultimate justice in the bearing of a specific burden.” (Travelers, supra, 130 Cal.App.4th at p. 108.) Thus, Maryland is not in the same position as the tortfeasors in Valley Circle and Dept. of Transportation who first had to suffer judgment before their right to indemnity arose. Rather, Maryland’s right to contribution arose when it undertook to defend Pejchas’ action against the Heers Group “without any participation“ by State Farm. (Ibid.)

Furthermore, Maryland’s contention it has no right to equitable contribution until it suffers a direct judgment or settlement makes no sense in practical or equitable terms. If we accept the contention, it would mean Maryland would have no right to equitable contribution for defense costs if its insured prevailed in the underlying suit. And in the event its insured did not prevail, it would mean Maryland’s right to equitable contribution for defense costs in the underlying suit would be dependent upon the judgment creditor bringing a direct action against Maryland to enforce the judgment. And if the judgment creditor brought a direct action against Maryland to enforce the judgment, Maryland would have no right to equitable contribution for its defense costs in the underlying suit if it prevailed in the judgment creditor’s action. These hypotheticals underscore the fact Maryland’s claim for equitable contribution arises from State Farm’s failure to defend the underlying construction defects suit, and is not contingent upon the outcome of any subsequent action by the joint insured’s judgment creditor.[5] In sum, for all the above reasons and upon de novo review, we agree with the trial court’s determination that State Farm showed Maryland exercised unreasonable delay in asserting its claim for equitable contribution.

2. Prejudice

The trial court concluded the showing on prejudice was clear. The trial court stated: “Maryland seeks to prove liability on the basis of a long list of State Farm policies issued in the late 1980’s. Many of these policies and the files concerning these policies no longer exist. State Farm no longer has access to many potential witnesses, and the memories of those few who still are available have faded on many of the relevant issues concerning these policies, including the facts and circumstances of their issuance, their effective dates, and who the parties intended to be insured under them. Although much of this evidence may have been lost by 1994, Maryland’s lack of diligence deprived State Farm of the opportunity to preserve the evidence that was still available a decade ago. In a case such as this where the contracting parties’ intent and secondary evidence concerning the existence and terms of policy coverage could prove significant, and where Maryland has indicated an intention to rely on such evidence, Maryland cannot fairly be heard to argue that State Farm is not disadvantaged by a lessened ability to marshal such evidence in its defense. Nor, given Maryland’s concession that it intends to rely on evidence going beyond the four corners of the written contracts, can it rely on the principle that ordinarily insurance contracts are construed as a matter of law and without reference to secondary evidence.” (Citations and footnotes omitted.)

Maryland does not contest directly the trial court’s findings regarding prejudice. Rather, Maryland asserts the trial court impermissibly shifted the burden to Maryland to show State Farm had not been prejudiced by the delay. In addition, Maryland asserts any prejudice is due to State Farm’s own neglect in failing to preserve evidence.

Maryland mischaracterizes the trial court’s ruling. Although the trial court stated a long delay may create a rebuttable presumption of prejudice, nothing in its ruling indicates the trial court applied a rebuttable presumption in this case. Indeed, the trial court stated the showing of prejudice was “clear.” The trial court did not rely upon any failure of proof on Maryland’s part, but rather relied on undisputed material facts provided by State Farm which were not contradicted by Maryland. For example, the trial court found Maryland did not dispute or contradict evidence presented by State Farm that the memories of material witnesses “have faded on many points.” Our independent review of the record confirms this. For example, the 2004 deposition testimonies of Robert Little, the Heers’ State Farm agent; Timothy Cline, Little’s employee; and Stephen Kitlas, a State Farm claim representative involved in the handling of the Pejchas’ construction defect claim; are replete with instances of their lack of recall on relevant matters. The Declaration of Stephen Wayne White, Commercial Operations Superintendent of State Farm, shows State Farm fares no better with respect to the loss of physical evidence. White stated that under State Farm’s document retention policy, all policy files, including underwriting files, are maintained for a period of ten years after the policy goes out of force, and are thereafter purged. Further, he stated State Farm’s computer database contained only very limited information on a few of the policy numbers identified by Maryland in this case, and in at least two of those cases the numbers had been reassigned to other insureds due to passage of time. White found no paper files relating to any of the policy numbers identified by Maryland. He also stated that any policies issued by State Farm to the Heers Group through the Little Agency would have been handled by an underwriting department that is no longer in existence. Also, White stated he was unable to answer questions posed at his deposition about State Farm’s practices and procedures during the mid-1980’s, including practices related to the use of insurance policy forms and endorsements, due to lack of memory. In sum, upon our de novo review of the record, we agree with the trial court’s conclusion State Farm has demonstrated prejudice.

We affirm the trial court’s summary judgment in favor of State Farm under the equitable doctrine of laches. Accordingly, we do not reach State Farm’s contention the trial court should have granted summary judgment on the alternate ground Maryland’s claim for equitable contribution was a compulsory counterclaim in the prior federal action.

DISPOSTION

The judgment is affirmed. Maryland shall bear costs on appeal.

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Parrilli, J.

We concur:

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McGuiness, P. J.

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Pollak, J.

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[1] Maryland states this defect in the release agreement later allowed the Pejchas to bring their section 11580 claim against Maryland, see post.

[2] Further references to code sections are to the Insurance Code, unless otherwise specified.

[3] Insurance Code section 11580, subsection (b)(2), allows a judgment creditor, after securing judgment against an insured, to recover on the judgment by bringing an action directly against the insurer.

[4] Maryland’s reliance on Transwestern Pipeline Co. v. Monsanto Co. (1996) 46 Cal.App.4th 502 (Transwestern) is unavailing. There, Transwestern filed a claim for equitable indemnity against Monsanto in 1990 after it settled a gas company’s damages claim for remedial costs due to PCB contamination in its pipelines caused by a lubricant manufactured by Monsanto. Monsanto alleged laches (which the court of appeal stated more “closely resembles a defense based on unclean hands”) because Transwestern did not notify Monsanto when PCBs were discovered in the gas pipelines in 1981. (Id. at p. 520 & fn. 5.) The court of appeal rejected Monsanto’s laches defense because “by 1972 Monsanto was fully aware the PCB’s in its products were escaping into the environment” (id. at p. 521) and it suffered no prejudice because “it had been on notice for many years about the potential for litigation arising from its use of PCB’s and had taken steps to preserve evidence for use in such litigation.” (Id. at p. 523.) We fail to see how this case, concerned as it is with issues of notice and prejudice, advances Maryland’s cause on the issue of unreasonable delay.

[5] Indeed, the trial court implied as much in denying State Farm’s motion for summary judgment on grounds of res judicata, stating: “The district court order in the Pejcha case recited that State Farm had neither a duty to defend nor an indemnity obligation. That can only be regarded as dictum. While it might fairly report the implications of the district court’s ruling, Pejcha did not plead a violation of the duty to defend and had no interest in establishing a violation of that duty.”