Spirtos v. Mosley

Filed 4/13/07 Spirtos v. Mosley CA2/2

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS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 This opinion has not been certified for publication or ordered published for purposes of rule 977.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

SECOND APPELLATE DISTRICT

DIVISION TWO

APPEAL from a judgment of the Superior Court of Los Angeles County.

Ralph W. Dau, Judge. Affirmed.

Law Offices of Jon Eardley, Jon Eardley for Plaintiff and Appellant.

Berger Kahn, Allen L. Michel for Defendants and Respondents.

___________________________________________________

Thelma Spirtos filed suit against her insurer and the insurers attorneys for their alleged mishandling of her insurance claim.^[1] The trial court dismissed Spirtoss lawsuit after sustaining demurrers without leave to amend. We affirm. The lawsuit is barred by res judicata, because Spirtoss claims, based on the same set of facts, were found to be meritless and dismissed by the federal courts in a prior lawsuit between the same parties.

ALLEGATIONS

Appellant Spirtos had a deluxe homeowners policy with Allstate Insurance Company (the Policy). In January 2002, Spirtoss Whittier residence was damaged by fire and water. She reported the loss to Allstate. Spirtos was unhappy with Allstates handling of her claim: among other things, she disliked the insurers failure to immediately relocate her, provide veterinary treatment for her pets, clean up her residence, or seal leaking pipes.

Spirtos alleges that Allstate routinely hires attorneys to handle insurance claims, instead of employing licensed claims adjusters. In this case, Allstate hired respondent law firm Berger, Kahn, Shafton, Moss, Figler, Simon & Gladstone (the Law Firm) and one of the Law Firms lawyers, respondent Melody Mosley. Spirtos maintains that Allstate and the Law Firm failed to follow the Policy and state law, turning the claims process into an adversarial situation.

According to Spirtos, the Law Firm uses the legal system to undermine the claims process provided for in the Policy, creating an inherent conflict of interest by virtue of receiving payment from Allstate in compensation for billable hours expended adjusting the claims submitted by plaintiff and the class. The Law Firm allegedly prolongs the claims process in furtherance of its own financial interest, thereby causing Allstates insureds financial and emotional stress. The Law Firm made numerous misrepresentations as to the coverage of claims, the claims process, and appraisal for their own financial gain . . . . Spirtos seeks a declaration that Allstate cannot use the Law Firm as both attorneys and insurance adjusters with respect to insurance claims.

In the operative pleading, the third amended complaint, Spirtos asserts a claim of fraud against the Law Firm and Mosley. The essence of the claim is that no one informed Spirtos that the Law Firm lacked the requisite licensing to serve as insurance claims adjusters under California law. Instead, the Law Firm falsely presented themselves as valid insurance claims adjusters under California law. Mosley lied about the scope of her authority to accept or reject claims on behalf of Allstate, informing Spirtos that all claims decisions were made by an adjuster at Allstate; however, Spirtos alleges, this was not true because Mosley has always retained full and unilateral authority to make decisions regarding plaintiffs claims and acted in such capacity when adjusting plaintiffs claims under her policy with Allstate, without obtaining approval from any Allstate internal agent.

In her position as an adjustor, Mosley made false statements about the Policys provisions regarding suitable alternative living arrangements, and she purposefully delayed responding to Spirtoss requests for additional living expenses. As a result, Spirtos and her family continued to live in the burned residence until March 2002, and were deprived of rental accommodations comparable to their residence. Mosley failed to take prompt action with respect to mold that developed inside the burned residence, or communicate with Allstate about it. The mold was not remediated until April 2003, over a year after the fire, and the attendant renovation expenses remain unsatisfied. Mosley and the Law Firm subverted the appraisal process and lied to Spirtos regarding her right to an appraisal hearing.

PROCEDURAL HISTORY

Spirtos initiated a state court action against Allstate and respondents in 2002 (the prior lawsuit). The complaint in the prior lawsuit involved the same factual allegations as are made in the present lawsuit, and purported to state claims against respondents for violations of the Consumers Legal Remedies Act; breach of the Policy; breach of fiduciary duty; constructive fraud; intentional infliction of emotional distress; interference with prospective economic advantage; violation of the Business and Professions Code statute regarding unlawful, unfair or fraudulent business practices; RICO violations; and breach of the implied covenant of good faith and fair dealing.

Allstate, a resident of Illinois, removed the prior lawsuit to federal court based on diversity jurisdiction. Spirtos sought to have the case remanded to state court, arguing that the inclusion of the Law Firm as a defendant destroys diversity jurisdiction. She argued that the Law Firm acts as a superadjuster for Allstate, essentially substituting itself for Allstates claims agents. She maintained that the Law Firm owed her a duty of care to properly adjust her claims.

The federal district court rejected Spirtoss action against respondents: it systematically discounted each of Spirtoss causes of action, including the core claim that the Law Firm improperly acts as Allstates superadjustor. The district court concluded that the prior lawsuit fail[s] to state any cognizable claims against the Berger Law Firm or its alleged principal, Mosley, and it dismissed all of Spirtoss claims against the Law Firm with prejudice. The court characterized the Law Firm as a sham defendant.

Spirtos appealed the judgment in the prior lawsuit to the Ninth Circuit. Relying on California law, the federal appeals court agreed that all of Appellants arguments are without merit. The law firm of Berger Kahn and attorney Mosley were sham defendants because Appellants failed to allege viable claims against them. (Spirtos v. Allstate (2006) 173 Fed.Appx. 538, 540.)^[2]

After the district court rejected Spirtoss claims against respondents, she filed the present action against Allstate and respondents, in May 2004. The complaint alleged claims against respondents for violations of the Consumers Legal Remedies Act; violations of the Business and Professions Code for engaging in unlawful, unfair or fraudulent business practices; breach of contract; intentional infliction of emotional distress; and breach of the implied covenant of good faith and fair dealing. The trial court sustained demurrers to the claims for breach of the implied covenant of good faith and fair dealing and for violations of California consumer laws, without leave to amend.

Spirtos added a claim for fraud. The trial court sustained the Law Firms demurrers to the fraud claim in the third amended complaint without leave to amend, finding that there are insufficient facts alleged to constitute a cause of action. The court also determined that this lawsuit covers the same subject matter that was resolved in the prior lawsuit in federal court; therefore, there is a good possibility that the defense of res judicata applies. Spirtos takes her appeal from the order of dismissal.

DISCUSSION

Spirtos appeals from the dismissal of her complaint. (Code Civ. Proc.,  581, subd. (f)(1). The dismissal is an appealable final judgment. (Desai v. Farmers Ins. Exchange (1996) 47 Cal.App.4th 1110, 1115.) We review de novo the trial courts ruling, exercising our independent judgment to determine whether, as a matter of law, a claim has been stated. (Ibid.)

The trial court observed that Spirtoss claims may be barred by res judicata, because they were resolved against her by the judgment in federal court. A federal judgment is conclusive between the parties, provided they have notice of the pendency of the action or proceeding. (Code Civ. Proc.,  1908, subd. (a)(2).) We take judicial notice of the federal judgment. (Evid. Code, 452, subd. (d) [judicial notice may be taken of the records of any U.S. court].) On a demurrer that raises the defense of res judicata, the courts take judicial notice of a prior judgment in a different case, if the judgment is appropriately drawn to the courts attention and the plaintiff has adequate notice and opportunity to be heard on the question of the effect of such judgment. (Flores v. Arroyo (1961) 56 Cal.2d 492, 496.)

Here, the judgment in the prior lawsuit was drawn to the attention of the trial court, which was asked to take judicial notice of the federal proceedings. Respondents asserted the defense of res judicata in their demurrers to Spirtoss first amended complaint, and in their demurrers to the second amended complaint. Respondents continue to assert res judicata in their appellate brief. Spirtos had the opportunity to address respondents res judicata argument in her reply brief, but elected not to do so.^[3]

To make the res judicata determination, we study the allegations in the present lawsuit and those made in the prior lawsuit to determine what claims were or could have been raised, who were the parties sued, whether the party against whom the bar is asserted was in privity with a party to the prior suit, whether the prior adjudication was a judgment on the merits. While all these issues may have factual predicates, they are peculiarly legal determinations. (Windsor Square Homeowners Assn. v. Citation Homes (1997) 54 Cal.App.4th 547, 557.)

The doctrine of res judicata precludes a party from relitigating a cause of action that was finally resolved in a prior proceeding. Collateral estoppel precludes a party from relitigating an issue in a subsequent lawsuit on a different cause of action. (Vandenberg v. Superior Court (1999) 21 Cal.4th 815, 828.) Res judicata and collateral estoppel avoid piecemeal litigation, and are intended to preserve the integrity of the judicial system, promote judicial economy, and protect litigants from harassment by vexatious litigation. (Id. at p. 829; City of Simi Valley v. Superior Court (2003) 111 Cal.App.4th 1077, 1083.)

The prior lawsuit was removed from state court to federal court, where all of Spirtoss claims against the Law Firm were dismissed with prejudice for failure to state a claim upon which relief could be granted. In federal court, [a] dismissal for failure to state a claim [citation] is ordinarily treated as an adjudication on the merits. (Bell v. Hood (1946) 327 U.S. 678, 682 [citations]. Such a dismissal bars further litigation of the claim when it determines the real or substantial grounds of action or defense as distinguished from matters of practice, procedure, jurisdiction or form. [Citation.] Stated another way, [t]he judgment is on the merits if it is based on the substantive law, and determines that the plaintiff has no cause of action . . . . (Boccardo v. Safeway Stores, Inc. (1982) 134 Cal.App.3d 1037, 1042.) The judgment in the prior lawsuit was based on the substantive application of California law, which the federal courts determined was hostile to Spirtoss claims.

Full faith and credit must be given to a final order or judgment of a federal court. (Levy v. Cohen (1977) 19 Cal.3d 165, 172.) In federal court, res judicata prevents the readjudication of all matters (including jurisdiction) which were, or might have been, litigated in a prior proceeding between the same parties. (Id. at p. 173, italics added.) The claims that were dismissed on the merits in this case included Spirtoss causes of action for breaches of consumer laws, unfair or fraudulent business practices, and breach of the implied covenant of good faith and fair dealing. It is immaterial that Spirtos did not assert a cause of action for fraud in the prior lawsuit, because res judicata may be pleaded as a bar, not only as respects matters actually presented . . . in the earlier proceeding, but also as respects any other available matter which might have been presented to that end. (Id. at p. 174.)

With respect to what constitutes a matter that might have been presented in a prior proceeding, California follows a primary right theory, meaning that a cause of action consists of (1) a primary right possessed by the plaintiff, (2) a corresponding duty owed by the defendant, and (3) the defendants breach of the primary right. (Amin v. Khazindar (2003) 112 Cal.App.4th 582, 589.) If the matter was within the scope of the action, related to the subject matter and relevant to the issues, so that it could have been raised, the judgment is conclusive on it despite the fact that it was not in fact expressly pleaded or otherwise urged. . . . The reason for this is manifest. A party cannot by negligence or design withhold issues and litigate them in consecutive actions. Hence the rule is that the prior judgment is res judicata on matters which were raised or could have been raised, on matters litigated or litigable. (Id. at pp. 589-590.)

Spirtoss fraud claim was within the scope of the prior lawsuit, related to the subject matter, and relevant to the issue of the Law Firms conduct in adjusting her insurance claim. The primary right alleged to have been violated in the primary lawsuit and in the case at bench concerned Spirtoss alleged right under the Policy and state law to have her fire insurance claim against Allstate handled by a licensed insurance adjuster, rather than by the Law Firm. In both cases, the Law Firm is alleged to have violated Spirtoss right to a licensed claims adjustor and to have engaged in obstructive and improper adversarial behavior. The claims made in the prior lawsuit and in the present lawsuit are based on the same facts and the same harm. (Boccardo v. Safeway Stores, supra, 134 Cal.App.3d at p. 1043.) Because Spirtos could have raised the fraud claim in the prior lawsuit, based on the same set of facts in both cases, she was not privileged to remain quiet and raise it in a subsequent suit. (Levy v. Cohen, supra, 19 Cal.3d at p. 174.)

In sum, all of Spirtoss claims are barred by the doctrine of res judicata, as a matter of law. The federal courts have already determined that her claims against the Law Firm are meritless under California law. Res judicata applies to Spirtoss reiteration of identical claims in both the federal court and this court, and it applies to her claim of fraud, which could have been raised in the prior lawsuit. Full faith and credit requires us to honor the federal judgment. The trial court correctly dismissed Spirtoss lawsuit.

DISPOSITION

The judgment is affirmed.

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS.

BOREN, P.J.

We concur:

DOI TODD, J. ASHMANN-GERST, J.

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^[1] The insurance company is not a party to this appeal.

^[2] In her reply to respondents demurrers, Spirtos contended that the federal court never ruled on any of the substantive allegations of the plaintiffs with respect to respondents liability. This is incorrect. Both the federal district court and the Ninth Circuit examined the substantive allegations made by Spirtos and concluded that her claims were not viable under California law.

^[3] Spirtos asserted at oral argument that this Court cannot reach the res judicata issue. A trial courts judgment is affirmed if correct on any theory, even if the court did not act on that ground. (Carman v. Alvord (1982) 31 Cal.3d 318, 324.) Further, purely legal theories may be argued for the first time on appeal. (Ibid.) A demurrer will lie if the grounds for sustaining it appear on the face of the complaint or from matters that may be judicially noticed. (Code Civ. Proc.,  430.30, subd. (a). The defense of res judicata may be resolved on demurrer. (Brosterhous v. State Bar (1995) 12 Cal.4th 315, 324.)