POIZNER v. FREMONT GENERAL CORPORATION

Filed 2/28/07

CERTIFIED FOR PUBLICATION

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION THREE

APPEAL from a judgment of the Superior Court of Los Angeles County, Wendell Mortimer, Jr., Judge. Reversed with directions.

Bill Lockyer, Attorney General, W. Dean Freeman, Mark P. Richelson, Raymond B. Jue, Deputy Attorneys General; Orrick, Herrington & Sutcliffe, Thomas J. Welsh, James E. Houpt and Jonathan G. Riddell for Plaintiff and Appellant.

Pachulski, Stang, Ziehl, Young, Jones & Weintraub, Iain A.W. Nasatir, James K.T. Hunter; Kaye Scholer, George T. Caplan, Kristopher S. Davis and Matthew G. Clark for Defendants and Respondents.

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Fremont Indemnity Company (Indemnity) appeals a judgment dismissing its complaint against Fremont General Corporation (Fremont General) and Fremont Compensation Insurance Group, Inc. (Insurance Group), after the court sustained a demurrer without leave to amend. Indemnity, by and through the Insurance Commissioner as its liquidator, sued Fremont General and Insurance Group in two separate actions alleging the misappropriation of funds. In this action, known as the Comstock action, Indemnity alleges that the defendants misappropriated net operating losses of its predecessor in interest, Comstock Insurance Company (Comstock), and misappropriated other assets of a former subsidiary of Indemnity, Fremont Reinsurance Company, Ltd. (Bermuda) (Re). In a separate action, known as the NOL action, Indemnity alleges that the same defendants misappropriated Indemnitys net operating losses that were not acquired through its merger with Comstock. The NOL action is the subject of a separate, pending appeal (case No. B188900).

The superior court took judicial notice of a letter agreement dated July 2, 2002, and determined that the agreement allowed Fremont General to use the net operating losses in the manner alleged. The court also concluded that the complaint alleged counts on behalf of Re and against Re, which is not a party to this action. Indemnity contends the court erred by taking judicial notice of not only the existence of the letter agreement but also its enforceability and proper interpretation. Indemnity also challenges the sustaining of the demurrer on other grounds. We conclude that the court erred by taking judicial notice of the enforceability and proper interpretation of the letter agreement and by deciding those questions in ruling on the demurrer. We also conclude that the complaint alleges facts sufficient to constitute a cause of action for the conversion of intangible personal property. We conclude further that the sustaining of the demurrer cannot be affirmed on other grounds, with the sole exception of count eleven for violation of Insurance Code section 1215.5, which fails to state a proper cause of action. Accordingly, we reverse the judgment with directions.

FACTUAL AND PROCEDURAL BACKGROUND

1. Factual Background

Indemnity is a wholly-owned subsidiary of Insurance Group, which is a wholly owned subsidiary of Fremont General. Indemnity was engaged in the underwriting and sale of workers compensation insurance. Comstock was a wholly‑owned subsidiary of Insurance Group until March 2003, when Comstock was merged into Indemnity. Comstock was engaged in the underwriting and sale of multiple lines of property and casualty insurance before 1986, and at that time ceased issuing new or renewal policies and limited its business to its preexisting policies. Fremont Reinsurance Company, Ltd. (Bermuda) (Re) was a wholly‑owned subsidiary of Indemnity until September 2000, when Re was acquired by Insurance Group.

Fremont General, Insurance Group, and Indemnity entered into an agreement that was memorialized by a letter dated November 27, 2000, providing for the commissioner to supervise and provide regulatory oversight of Indemnity. The same parties, in the words of the complaint, purported to enter into a second agreement, allegedly memorialized by a letter dated July 2, 2002, on the same subject.

Comstock was merged into Indemnity in March 2003, as we have stated. The commissioner filed an application to be appointed conservator of Indemnity on June 3, 2003. The court appointed the commissioner as conservator on June 4, 2003, and appointed the commissioner as liquidator on July 2, 2003.

2. Complaint

Indemnity, by and through the commissioner, filed a complaint against Fremont General and Insurance Group in August 2004. Indemnity alleges that Fremont General dominated and controlled each of the insurance company subsidiaries and did so in a manner that benefited Insurance Group at the expense of Indemnity. Specifically, Indemnity alleges the following facts.

Fremont General and Comstock entered into an Intercompany Tax Allocation Agreement in October 1996 providing for the two companies to file a consolidated federal income tax return. The agreement provided that within three years after filing a consolidated tax return, Fremont General would pay Comstock for benefits that Fremont General received from claiming Comstocks net operating losses in the return.[1] Comstocks net operating losses exceeded $52 million as of December 31, 2002. Fremont General caused Comstock to be merged into Indemnity in March 2003, resulting in Indemnitys acquisition of all the assets and liabilities of Comstock. Indemnity alleges that both before and after the merger, Fremont General appropriated Comstocks net operating losses by various means, reducing its own tax liability, without compensating either Comstock or Indemnity and that Indemnity suffered damage as a result.

Indemnity also alleges that Fremont General caused Re to transfer more than $19 million in assets to Insurance Group in December 1996 in exchange for an unsecured promissory note, caused Re to allow Insurance Group to defer payment of over $1.9 million due on the note, and caused Re to invest over $7.5 million in Fremont General in December 1999 and May 2000. Indemnity alleges that Fremont General caused Insurance Group to purchase Re from Indemnity in September 2000 for $6,819,912, which was less than fair value, and then caused Re to declare a dividend, the value of which exceeded the purchase price.

Indemnity alleges further that Fremont General caused Comstock to assume certain liabilities of Re to the benefit of Insurance Group, as Res parent company after September 2000, and to the detriment of Indemnity, which later merged with Comstock. The liabilities included reinsurance policy obligations that formerly were shared by both companies but were transferred to Comstock, and a series of settlements on reinsurance policies, known as commutations, for which both companies were liable but that were paid by Comstock alone. Indemnity alleges that Re recorded accounts payable for its share of the commutations but failed to repay Comstock in full either before or after the merger.

Indemnity alleges counts for (1) declaratory relief, seeking a declaration that Fremont General by various means appropriated Comstocks net operating losses without adequate compensation;(2) a permanent injunction under Insurance Code section 1020, to cause Fremont General to file an amended consolidated federal income tax return for 2002 in which Fremont General would not misappropriate Comstocks net operating losses, to prevent further interference with Comstocks net operating losses, and to order Fremont General to pay compensation for the economic benefit received from its prior use of Comstocks net operating losses; (3) breach of contract, alleging the failure to pay amounts due under the Intercompany Tax Allocation Agreement; (4) breach of fiduciary duty; (5) unjust enrichment; (6) constructive trust; (7) conversion; (8) avoidance of fraudulent transfers under the Uniform Fraudulent Transfer Act (Civ. Code,  3439 et seq.); (9) avoidance of voidable preferences under Insurance Code section 1034; (10) avoidance of fraudulent transfers under Insurance Code section 1034.1; (11) recovery of misappropriated funds under Insurance Code section 1215.5, part of the Insurance Holding Company System Regulatory Act (Ins. Code,  1215 et seq.); and (12) recovery of impermissible distributions under Insurance Code section 1215.16, which is part of the same act.

The first two counts are alleged against Fremont General only, while counts three through twelve are alleged against both Fremont General and Insurance Group. The first three counts pertain to only the alleged misappropriation of Comstocks net operating losses, while counts four through twelve pertain to that and also to the alleged misappropriation of assets involving Re.

Indemnity alleges similar theories of recovery against Fremont General and Insurance Group in the NOL action arising from the alleged misappropriation of Indemnitys net operating losses that were not acquired through its merger with Comstock. In its first amended complaint in the NOL action filed in July 2004, Indemnity also alleges that the letter agreement dated July 2, 2002, did not relieve Fremont General of its obligation to pay fair and reasonable consideration for use of Indemnitys net operating losses and alleges that to the extent the letter may be construed differently, the defendants obtained the commissioners consent to those terms by fraudulently concealing Indemnitys precarious financial condition.

3. Demurrer

Fremont General and Insurance Group demurred to the complaint and each count alleged. They requested judicial notice of a letter dated July 2, 2002, and other documents. They cited no statutory authority for judicial notice, but argued that the court previously had taken judicial notice of the same letter in the NOL action and that reference to the document was essential to an understanding of the facts alleged in the complaint. The letter was from the commissioner and was addressed to the president of Insurance Group, who was also the president of Indemnity, and to the secretary and general counsel of Fremont General. The letter purported to express an agreement between the Department of Insurance, Fremont General, Insurance Group, and Indemnity. The letter stated among other things that Fremont General would contribute up to $92.75 million in cash to Insurance Group and Indemnity in 2002 and subsequent years and that, in return, Indemnity would transfer to Fremont General all rights with respect to the net operating loss of or attributable to FIC [Indemnity] (the NOL). The letter stated that the payments would cease, however, if the commissioner obtained an order for conservation of Indemnity before March 1, 2004.[2] It stated that the Department of Insurance consented to these terms and that if Indemnity were placed in liquidation, the department would seek to preserve the benefit of the NOL for FGC [Fremont General].[3]

Paragraph 21 of the letter stated: All intercompany balances between Fremont [defined as Insurance Group and Indemnity collectively] and FGC [Fremont General] as of the effective date of this agreement shall be considered settled, which includes all management fees paid or incurred as well as any intercompany tax balances arising out of the Tax Sharing Agreement between Fremont and FGC. The Department [of Insurance] agrees and acknowledges that all intercompany tax balances between Fremont and FGC have been paid and settled and that no additional tax payments for tax years 2001 and prior are due from FGC. Further, the Department agrees and acknowledges that the utilization in the FGC consolidated income tax returns of any tax net operating losses generated prior to January 1, 2002 by Fremont or Comstock Insurance Company, shall not give rise to a liability for any additional tax settlement payments to FCIG [Insurance Group] and its associated companies. FGC agrees that no additional taxes will be owed by Fremont in the event that any pending or future IRS tax audit results in additional taxes owed. The letter stated further: As of the date this Agreement is executed by all parties to it, this Agreement supersedes and terminates the November 27, 2000 Letter in all respects. The letter was signed by Fremont General, Insurance Group, and Indemnity on June 28, 2002, and by the commissioner on July 2, 2002.

Fremont General and Insurance Group argued that counts one, two, and three fail to state a cause of action for two independent reasons. First, they argued that under the terms of the July 2, 2002, letter agreement, Indemnity transferred all of its past and future net operating losses to Fremont General, including those that Indemnity later acquired by merger with Comstock. Second, they argued that apart from the letter agreement, Fremont General had a fiduciary obligation to use Comstocks net operating losses to offset the taxable income of other affiliated companies, and the net operating losses had no value to Indemnity because Indemnity had no taxable income, so Indemnity and Comstock were not entitled to compensation for use of the net operating losses. They also argued that count three is defective because the complaint fails to allege the terms of the Intercompany Tax Allocation Agreement or attach a copy of the agreement to the complaint.

Fremont General and Insurance Group argued that counts four through seven fail to state a cause of action to the extent they are based on the alleged misappropriation of Comstocks net operating losses, for the same reasons stated ante. They also argued that those counts fail to state a cause of action based on the alleged misappropriation of Res assets because only Re, not Indemnity, is a real party in interest with standing to sue on those counts, and the complaint does not allege a separate injury to Indemnity as Res former shareholder; that to the extent those counts are based on Comstocks alleged payment of commutations that were also Res liabilities, Re is an indispensable defendant and Fremont General and Insurance Group are not proper defendants; and, with respect to count seven, that the unauthorized taking of an intangible property interest that is not merged with or reflected in tangible property is not an actionable conversion.

Fremont General and Insurance Group argued that counts eight, nine, and ten fail to state a cause of action because those counts are based on statutes and are required to be pleaded with particularity, but are not pleaded with particularity. They also argued that the letter agreement dated July 2, 2002, bars those counts to the extent they are based on the alleged misappropriation of Comstocks net operating losses; that Indemnity alleges standing as Comstocks creditor to avoid fraudulent transfers and preferences arising from Comstocks payment of commutations, but Indemnity has no standing as Comstocks creditor because the two companies have merged; that any claim arising from Comstocks payment of commutations must be asserted . . . against [Re]; that only Re has standing to sue to remedy the alleged misappropriation of Res assets; that count eight, to the extent it is based on the alleged manipulation of Re, is barred by the four‑year statute of limitations under the Uniform Fraudulent Transfer Act (Civ. Code,  3439.09) because the alleged fraudulent transfers all occurred more than four years before Indemnity filed its complaint, with the sole exception of the alleged improper dividend in October 2000, which can support a cause of action against Insurance Group only; and that the alleged fraudulent transfers and avoidable preferences involving Re all occurred more than one year before the filing of the petition for liquidation (see Ins. Code,  1034, subd. (a), 1034.1, subd. (a)) and therefore cannot support counts nine and ten.

Fremont General and Insurance Group argued that counts eleven and twelve fail to state a cause of action because they are statutory claims but are not pleaded with particularly as required. They also argued that Insurance Code section 1215.5 authorizes the commissioner to regulate the transactions of insurers but does not authorize a civil remedy against an insurers holding company or affiliates. Finally, they argued that Insurance Code section 1215.16 authorizes the commissioner as liquidator to recover only distributions of shares of stock or monetary bonuses, but the complaint fails to allege such a distribution.

Indemnity opposed both the demurrer and the request for judicial notice. They argued that the July 2, 2002, letter agreement by its terms did not relieve the defendants of liability for their use of Comstocks net operating losses and that the letter agreement was unenforceable because it was obtained by fraud. Indemnity also moved to strike purported statements of fact asserted by Fremont General and Insurance Group in the demurrer. Fremont General and Insurance Group opposed the motion to strike on the ground of insufficient notice. After a hearing on the demurrer on April 22, 2005, the court entered a minute order ruling on the demurrer and related matters. The court took judicial notice of the letter agreement of July 2, 2002, consistent with the Courts previous ruling.[4] The minute order stated that the defendants objections to Indemnitys motion to strike were overruled, but failed to rule on the motion to strike. The minute order stated, Demurrers are sustained without leave to amend. The letter agreement of July 1, 2002 [sic] written by the Insurance Commissioner allows Fremont General to use the NOLs in the very manner now complained of by the Insurance Commissioner. [] Paragraph 21 of that letter makes specific reference to Comstock Insurance Company. As to the allegations on behalf of and against Fremont Re (Bermuda), that entity is not a party to this case. The court later entered a judgment of dismissal. Indemnity appealed the judgment.

4. Related Appeals

We filed an opinion in case No. B182250 on September 20, 2006 (Fremont Indemnity Co. v. Fremont General Corp. (2006) 143 Cal.App.4th 50 (Fremont).), in which we reversed orders disqualifying counsel for Fremont General and Insurance Group in both the Comstock action and the NOL action. On this date, we have also filed an opinion in case No. B188900 (Fremont Indemnity Co. v. Fremont General Corp. (B188900) [nonpub. opn.]) in which we reversed the judgment of dismissal after the sustaining of a demurrer without leave to amend to Indemnitys complaint in the NOL action.

CONTENTIONS

Indemnity contends (1) the parties dispute whether the letter agreement is enforceable and its proper interpretation, and the court cannot resolve those disputes by reliance on judicial notice; (2) the letter agreement by its terms did not transfer Comstocks net operating losses to Fremont General or relieve Fremont General of its liability to Comstock or Indemnity for use of those net operating losses; (3) the court effectively found that the commissioner was estopped from exercising his statutory powers as liquidator due to the letter agreement, but the commissioner as liquidator acts as a trustee for the benefit of creditors, a role distinct from the his role as regulator, and the commissioners preliquidation regulatory activities cannot diminish or defeat his statutory powers as liquidator; (4) the commissioner cannot be estopped from acting for the benefit of innocent policyholders, creditors, and the public by avoiding preferences and fraudulent transfers; (5) Comstocks net operating losses were the property of and had value to Indemnity, and Indemnity is entitled to compensation for Fremont Generals use of the net operating losses; (6) Indemnity has standing to sue Fremont General and Insurance Group for injuries suffered by Indemnity as a result of the defendants misappropriation of Res assets and manipulation of Res reinsurance obligations; and (7) counts four through six are not directed against Re, the defendants as Res corporate parents are not prejudiced by Res absence, and Res absence is not an obstacle to achieving complete relief among the parties.

DISCUSSION

1. Standard and Scope of Review

We independently review the ruling on a demurrer and determine de novo whether the complaint alleges facts sufficient to state a cause of action. (McCall v. PacifiCare of Cal., Inc. (2001) 25 Cal.4th 412, 415.) We assume the truth of the properly pleaded factual allegations, facts that reasonably can be inferred from those expressly pleaded, and matters of which judicial notice has been taken. (Schifando v. City of Los Angeles (2003) 31 Cal.4th 1074, 1081.) We construe the pleading in a reasonable manner and read the allegations in context. (Ibid.) We affirm the judgment if it is correct on any ground stated in the demurrer, regardless of the trial courts stated reasons. (Aubry v. Tri-City Hospital Dist. (1992) 2 Cal.4th 962, 967.)

TO BE CONTINUED AS PART II.

Publication Courtesy of San Diego County Legal Resource Directory.

Analysis and review provided by San Diego County Property line attorney.

[1] By carrying over or carrying forward a net operating loss, a taxpayer can reduce its taxable income in a given year. (26 U.S.C. 172.)

[2] Paragraph 18 of the letter stated, in relevant part: This Agreement will be superseded, in its entirety, except for Paragraphs 19 and 21 herein, if prior to March 1, 2004, the Department obtains an Order of Conservation from a California Superior Court. However, contributions received pursuant to Paragraph 20 are not refundable under any circumstance. On and after March 1, 2004, this Agreement shall remain in full force and effect until a) the Department provides written notice to Fremont [defined as Insurance Group and Indemnity collectively] that it is released from its obligations required herein or b) it is superseded by Order of a California Superior Court except for Paragraphs 19 and 20, which shall remain in full force and effect.

[3] Paragraph 19 of the letter stated: In consideration of FGC [Fremont General] agreeing to make the contributions to FIC [Indemnity] described in Paragraph 20 hereof, FIC hereby transfers to FGC, with the Departments express consent, any and all right, title and interest in and to the right to benefit from the net operating loss of or attributable to FIC (the NOL). The Department acknowledges that the NOL is critical to and the property of FGC and maintenance of such asset is dependent on the continued consolidation of FIC with FGC for federal income tax purposes. The Department shall cooperate with FGC in the preparation of consolidated income tax returns and shall not request from the Internal Revenue Service termination of status of FIC as a member of the FGC consolidated group. If FGC is placed into conservatorship or receivership, neither the Department nor any of its agents or representatives shall sell any or all of FIC stock, issue FIC stock, claim tax exempt or nonprofit status for FIC or transfer substantially all of the assets of FIC to another corporation. If FIC is placed in liquidation, the Department shall consult with FGC and its advisors and shall take such reasonable actions as requested by FGC necessary to preserve the benefit of the NOL for FGC, consistent with the Departments obligations to FICs policyholders and creditors.

[4] Fremont General and Insurance Group had requested judicial notice of the letter agreement dated July 2, 2002, in the NOL action. In that action, they cited no statutory authority for judicial notice, but argued that reference to the document was essential to an understanding of the facts alleged in the complaint. Indemnity did not oppose the request. The court granted the request, stating only, Judicial Notice is taken of the July 2, 2002 letter agreement. We take judicial notice of the request for judicial notice filed in the NOL action on August 16, 2004, and the minute order in that action dated January 25, 2005, pursuant to Evidence Code sections 452, subdivision (d) and 459.