Fremont Indemnity v. Fremont General

Filed 2/28/07 Fremont Indemnity v. Fremont General CA2/3

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

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, Lisa W. Chao, Deputy Attorneys General; Orrick, Herrington & Sutcliffe, Thomas J. Welsh, Cynthia J. Larsen, James E. Houpt and John. M. Murray 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, Paul M. Gelb and Matthew G. Clark for Defendants and Respondents.

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 demurrers 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 NOL action, Indemnity alleges that the defendants misappropriated its net operating losses. In a separate action known as the Comstock action, Indemnity alleges that the same 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). The Comstock action is the subject of a separate appeal.

The superior court took judicial notice of a letter agreement dated July 2, 2002, determined that the agreement allowed Fremont General to use the net operating losses in the manner alleged, and sustained the demurrer to eleven of the twelve counts alleged in the first amended complaint without leave to amend. The court also determined that portions of the prayer for relief violated title 26 United States Code section 7401, which prohibits an action for the collection or recovery of taxes without the prior approval of federal authorities, and granted a motion to strike those paragraphs. The court later sustained a demurrer to three fraud counts alleged in the third amended complaint based on the failure to plead an actionable misrepresentation, a fiduciary duty, or resulting damages. As in the Comstock appeal, Indemnitys principal contention on appeal is that the court erred by taking judicial notice of not only the existence of the letter agreement but also its proper interpretation and enforceability. Indemnity also challenges the striking of portions of the prayer for relief and the sustaining of the demurrer to the fraud counts.

We conclude that the court erred by taking judicial notice of the proper interpretation and enforceability of the letter agreement and by deciding those questions in ruling on the demurrer. We conclude further that the sustaining of the demurrer to the first amended complaint cannot be affirmed on other grounds, with the exception of counts eight and nine for violation of Insurance Code section 1034, which fail to allege an antecedent debt as required by the statute. We also conclude that the striking of portions of the prayer for relief based on a federal statute was error and that the third amended complaint adequately alleges counts for intentional misrepresentation, concealment, and false promise. We therefore reverse the judgment with directions.

FACTUAL AND PROCEDURAL BACKGROUND[1]

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. Fremont General, Insurance Group, Indemnity, and other subsidiaries entered into a Tax Sharing Agreement in September 1998 providing for the companies to file a consolidated federal income tax return. The agreement provided for intercompany payments among the affiliated companies based on each companys separate tax liability, but allegedly did not require fair compensation for use of a companys net operating losses.[2] When the commissioner questioned Fremont General in 1998 about the fairness of the Tax Sharing Agreement, Fremont General assured the commissioner that Indemnity would be compensated for any future use of Indemnitys net operating losses. The commissioner in a Report of Examination as of December 31, 1999, found that the Tax Sharing Agreement appeared to violate Insurance Code section 1215.5, which requires transactions between insurers and their affiliates to be fair and reasonable, and concluded that the terms of the agreement should be amended. The Tax Sharing Agreement, however, was never amended.

Fremont General, Insurance Group, and the commissioner entered into an agreement that was memorialized in a letter dated November 27, 2000, providing for the commissioner to supervise and provide enhanced regulatory oversight of Indemnity and Insurance Group.[3] Fremont General, Insurance Group, Indemnity, and the commissioner later entered into a letter agreement dated July 2, 2002, providing that Insurance Group and Indemnity could continue to operate under the commissioners oversight but would issue no new policies. The July 2, 2002, letter agreement also stated that Fremont General would pay up to $92.75 million in cash to Insurance Group and Indemnity from 2002 forward and that, in return, Indemnity would transfer all of its then-existing net operating losses to Fremont General. It stated that the payments would cease, however, if any proceeding for the conservation or liquidation of Indemnity began before March 1, 2004.

Indemnity was engaged in a dispute with Gerling Global Reinsurance Corporation of America (Gerling) at the time of the July 2, 2002, letter agreement. Gerling had requested an audit and had threatened to discontinue monthly payments to Indemnity on Indemnitys largest reinsurance contract if Indemnity failed to provide certain documents. Fremont General negotiated with Gerling on behalf of Indemnity and failed to inform the commissioner of the dispute. Fremont General failed to resolve the dispute, and Gerling made its last monthly payment under the reinsurance contract in July 2002. Indemnitys net operating losses exceeded $900 million as of January 1, 2003.

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. Fremont General advised the commissioner in September 2003 that it had claimed a worthless stock deduction for its shares of stock of Indemnity in the affiliated companies 2002 consolidated federal income tax return, the effect of which allegedly was to appropriate Indemnitys net operating losses without compensation to Indemnity.

2. Complaint and First Amended Complaint

Indemnity, by and through the commissioner, filed a complaint against Fremont General and Insurance Group in June 2004, and filed a first amended complaint in July 2004 alleging the facts stated ante. The complaint alleges that Fremont General appropriated Indemnitys net operating losses by making certain elections in consolidated income tax returns, thereby reducing Fremont Generals tax liability, without compensating Indemnity and that Indemnity suffered damage as a result. It alleges that the July 2, 2002, letter agreement explicitly and implicitly provides that nothing in the July 2 Letter precludes the Commissioner as liquidator from requiring that Fremont General make additional contributions in addition to or in excess of the payments described in the letter agreement. The complaint alleges further that the letter agreement does 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.

The first amended complaint alleges counts for (1) declaratory relief, seeking a declaration that Fremont Generals use of Indemnitys net operating losses without adequate compensation was improper and that to the extent the July 2, 2002, letter agreement authorized the alleged conduct, the letter agreement violates Insurance Code sections 1020, 1034, 1034.1, and 1215 et seq.; (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 claim a worthless stock deduction for Indemnitys net operating losses, to prevent further interference with Indemnitys net operating losses, and to order Fremont General to pay compensation for the economic benefit received from its prior use of the net operating losses; (3) breach of contract, alleging that even if the July 2, 2002, letter agreement allowed Fremont General to appropriate Indemnitys net operating losses generated before January 1, 2002, without adequate compensation, a premise that Fremont Indemnity expressly denies, it did not allow Fremont General to use Indemnitys net operating losses generated after January 1, 2002, or after July 2, 2002, and that Fremont General did so without the commissioners prior written approval as required by the letter agreement; (4) breach of fiduciary duty; (5) unjust enrichment; (6) breach of the implied covenant of good faith and fair dealing, implied in the July 2, 2002, letter agreement; (7) concealment, alleging that the defendants intentionally failed to disclose the Gerling dispute to the commissioner before the commissioner entered into the July 2, 2002, letter agreement, and seeking rescission of the letter agreement; (8) avoidance of voidable preferences under Insurance Code section 1034, alleging that if the July 2 letter agreement allowed Fremont General to appropriate Indemnitys net operating losses generated before January 1, 2002, without adequate compensation, a premise that Fremont Indemnity expressly denies, the letter agreement was a voidable preference; (9) avoidance of voidable preferences under Insurance Code section 1034, alleging that Fremont Generals use of a worthless stock deduction was a voidable preference; (10) avoidance of fraudulent transfers under Insurance Code section 1034.1, based on both the July 2, 2002, letter agreement and the worthless stock deduction; (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, part of the same act. Counts one, two, eleven, and twelve are alleged against Fremont General only, while counts three through ten are alleged against both Fremont General and Insurance Group.

3. Demurrer to the First Amended Complaint

Fremont General and Insurance Group demurrer to the first amended 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 because the complaint identified a letter agreement dated July 2, 2002, reference to the letter itself 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.[4] 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].[5]

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 also requested judicial notice of a Tax Sharing Agreement dated August 1, 1997, and a Tax Sharing Agreement dated September 1, 1998, both between Fremont General, Insurance Group, and numerous subsidiaries, including Indemnity. Fremont General and Insurance Group argued that the Tax Sharing Agreements authorized Fremont General to file consolidated income tax returns on behalf of the affiliated companies and to aggregate income and losses so as to minimize the companies tax liability. They argued that under the agreements, companies contributing net operating losses received only a contingent right to receive compensation for the use of NOLs if earned on a separate company basis.

Fremont General and Insurance Group argued that the July 2, 2002, letter agreement precludes each count alleged in the complaint. They argued that under the terms of the agreement, Indemnity transferred all of its past and future net operating losses to Fremont General and released Fremont General from liability to Indemnity for use of Indemnitys net operating losses generated through the 2001 tax year. They argued further that apart from the letter agreement, the Tax Sharing Agreements established Fremont Generals right to use Indemnitys net operating losses. They argued that counts one, two, four, five, and eight through twelve effectively challenge the validity of the Tax Sharing Agreements and are barred by the four‑year limitations period applicable to a rescission action (Code Civ. Proc.,  337, subd. (3)).

Fremont General and Insurance Group also argued that counts eight and nine for avoidance of voidable preferences under Insurance Code section 1034 fail to state a cause of action because Indemnity does not allege that the defendants were creditors and that the transfer of net operating losses was for or on account of an antecedent debt (id., subd. (a)), as required by the statute. They also argued that count twelve for recovery of impermissible distributions under Insurance Code section 1215.16 fails to state a cause of action because it does not allege a distribution within one year before the petition for liquidation, as required by subdivision (a) of the statute. They argued further that the statute authorizes the commissioner as liquidator to recover only distributions of shares of stock, and that the complaint fails to allege such a distribution.

Fremont General and Insurance Group also moved to strike all allegations and claims for relief that seek to require, or would have the effect of requiring, Fremont General, or any of its subsidiaries or affiliates, to file amended tax returns, to forfeit tax deductions, or to pay additional federal income taxes. They argued that title 26 United States Code section 7401 precludes Indemnity from pursuing those claims.

Indemnity opposed both the demurrer and the motion to strike, and opposed the request for judicial notice as to the Tax Sharing Agreements only. After a hearing on January 25, 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, and the two Tax Sharing Agreements. The minute order stated, The July 2, 2002 letter agreement from the Insurance Commissioner allows Fremont General to use the NOLs in the very manner that the Insurance Commissioner now complains of. Demurrers to all causes of action except the 7th are therefore sustained without leave to amend. As to the 7th cause of action (presently for concealment) 20 days leave to amend is granted to plead fraud and/or concealment. Allegations need to be fact-specific. The court also granted the motion to strike as to several paragraphs in the prayer for relief.

4. Second Amended Complaint and Demurrer

Indemnity filed a second amended complaint alleging a single count for concealment, alleging that at the time of the July 2, 2002, letter agreement, Fremont General and Insurance Group intentionally concealed from the commissioner and from Fremont Indemnitys officers and directors who were acting consistent with their fiduciary duty toward Fremont Indemnity the dispute with Gerling and Indemnitys true financial condition. Indemnity sought compensatory and punitive damages and rescission of the letter agreement.

Fremont General and Insurance Group demurred to the second amended complaint arguing that (1) the complaint alleges that the defendants fraudulently induced the commissioner to enter into the July 2, 2002, letter agreement by misrepresenting that the conservation or liquidation of Indemnity before March 2004 would impair Fremont General financially, but the alleged misrepresentation was a representation of opinion rather than an actionable representation of fact; (2) the complaint on its face alleges that Gerlings audit request letter was sent to Indemnitys chief financial officer, John Donaldson, which negates the allegation that the defendants concealed the audit request; (3) the defendants had no duty to disclose the audit request to the commissioner because they had no fiduciary duty to the commissioner; (4) the complaint fails to adequately allege any representation to the commissioner that, although true in itself, was misleading due to the failure to disclose other facts; and (5) the net operating losses have no value to Indemnity because Indemnity is in liquidation with no use for the NOLs itself, so the complaint fails to allege damage to Indemnity.

The court sustained the demurrer with leave to amend. The minute order dated July 15, 2005, stated: The Second Amended Complaint contains much surplusage and editorializings and fails to plead clearly and specifically any actionable misrepresentation or omission. Is the alleged fraud based on an affirmative representation? If so, what specifically? Is it based on omission? If so, what specifically? Is there a valid fiduciary duty between Fremont General and the Commissioner? If so, what is the basis.

5. Third Amended Complaint

Indemnity filed a third amended complaint alleging counts for intentional misrepresentation, concealment, and false promise. The complaint alleges that prior to the July 2, 2002, letter agreement, the defendants agreed to pay Indemnity the value of benefit that they obtained through their use of Indemnitys net operating losses. It alleges that the defendants induced Indemnity to enter into the letter agreement by misrepresenting and concealing material facts and making false promises. It alleges that absent the letter agreement, the commissioner would have conserved Indemnity sooner and would have preserved more of Indemnitys assets, including net operating losses. The complaint alleges that the defendants gained over $300 million through their use of Indemnitys net operating losses, but failed to adequately compensate Indemnity for their use.

The complaint alleges that Indemnity, acting under the direction and control of Fremont General, engaged in improper underwriting practices and that Reliance Reinsurance (Reliance), a reinsurer under a reinsurance contract with Indemnity, so discovered through an audit. It alleges that Indemnity entered into a settlement with Reliance, known as a commutation, announced in February 2000, terminating the reinsurance contract, causing a pretax loss to Indemnity of approximately $100 million. The complaint alleges that Indemnitys chief financial officer, Ronald Groden, falsely represented to the commissioner in 2000 that the only reason for the commutation was concern about Reliances financial condition and failed to disclose that the true reason was Reliances discovery of Indemnitys improper underwriting practices.

The complaint alleges that after the November 27, 2000, letter agreement, the commissioner appointed Constance Korte as a special deputy examiner to oversee the daily operations of the defendants subsidiaries, including Indemnity. It alleges that the defendants restricted the information available to Korte and prevented her from learning about potential threats to Indemnitys continued receipt of reinsurance income, including the dispute with Gerling described ante. It alleges that the defendants delayed the requested audit by Gerling until after the execution of the July 2, 2002, letter agreement in order to conceal from the commissioner the potential loss of income. The complaint alleges that Gerling made its last reinsurance payment to Indemnity in July 2002, that the defendants unilaterally terminated Gerlings audit in September 2002, and that Gerling sued Indemnity for fraud in federal district court in July 2005.

The complaint alleges further that before the July 2, 2002, letter agreement, the defendants falsely represented to the commissioner that Indemnity was financially sound and that its assets and income were sufficient to avoid insolvency until well past March 1, 2004. It also alleges that the defendants securities filings in 2002 were misleading in that they stated that Indemnitys income and assets were sufficient to fund future obligations and did not disclose the substantial risk to Indemnitys continued receipt of reinsurance payments. The complaint alleges that the defendants falsely represented to the commissioner that they believed that the conservation of Indemnity before March 2004 could be an event of default under outstanding debt instruments, which would severely threaten their financial condition and make them unable to continue the payments to Indemnity.

The complaint alleges that the alleged misrepresentations and concealments caused the commissioner to delay seeking conservation and liquidation of Indemnity and resulted in greater financial loss to Indemnity, and to its policyholders and creditors. The complaint alleges counts for intentional misrepresentation based on nine alleged misrepresentations, concealment based on fourteen alleged concealed facts, and false promise based on three alleged false promises. It seeks rescission of the July 2, 2002, letter agreement, compensatory and punitive damages, and disgorgement of the value of the benefit obtained by the defendants through their use of Indemnitys net operating losses.

6. Demurrer to the Third Amended Complaint

Fremont General and Insurance Group demurred to the third amended complaint arguing that it is essentially identical to the second amended complaint and fails to answer the questions presented by the court in sustaining the demurrer to the prior complaint. They argued that the alleged representations that Indemnitys assets and income were sufficient to avoid insolvency until after March 1, 2004, and that payments on reinsurance contracts would continue were representations of opinion rather than fact and therefore are not actionable. They also argued that the commissioner in the July 2, 2002, letter agreement expressly determined that Indemnity had sufficient invested assets to pay its obligations as they became due, and that the commissioner was bound by that determination. They argued further that the complaint fails to identify who made the alleged misrepresentations concerning the potential consequences of conservation of Indemnity before March 1, 2004, to whom they were made, and by what means, when, and where they were made.

Fremont General and Insurance Group argued that the alleged representations concerning the commutation with Reliance were made more than two years before the July 2, 2002, letter agreement, and before the prior November 27, 2000, letter agreement, and therefore could not have been intended to induce reliance on the later letter agreement because it was not even contemplated at the time. They argued further that other alleged representations were representations of opinion about future events rather than existing facts and are not alleged with sufficient specificity. The defendants argued that the complaint fails to allege a proper basis for a fiduciary duty and therefore fails to state a cause of action for concealment. They also argued that the complaint fails to allege a promise regarding a material fact and fails to allege a false promise with sufficient specificity.

Finally, the defendants argued that apart from the July 2, 2002, letter agreement and the 1998 Tax Sharing Agreement, no damages resulted from the alleged conduct as a matter of law because the defendants were entitled to use Indemnitys net operating losses to offset the income of other affiliated companies, and Indemnity is entitled to no compensation for that use because Indemnity is in liquidation with no use for the NOLs itself.

The court sustained the demurrer without leave to amend. The minute order dated November 22, 2005, stated: Demurrer is sustained without leave to amend, consistent with past rulings. Plaintiff has still failed to plead any affirmative misrepresentation which is actionable. There is no fiduciary duty, and the alleged misrepresentations are either opinions of future events or failures to disclose. Neither categories [sic] are actionable. Further, the pleading is inadequate as to damage allegations.

6. Judgment and Appeal

The court entered a judgment of dismissal in January 2006. Indemnity timely appealed the judgment.

7. 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 I), in which we reversed orders disqualifying counsel for Fremont General and Insurance Group in both the Comstock and the NOL actions. We have contemporaneously filed on this date an opinion in case No. B183974 (Fremont Indemnity Co. v. Fremont General Corp. (2007) ___ Cal.App.4th ___ (Fremont II) in which we reversed the judgment of dismissal after the sustaining of a demurrer without leave to amend to Indemnitys complaint in the Comstock action.

CONTENTIONS

Indemnity contends with respect to the sustaining of the demurrer to the first amended complaint and the striking of portions of that complaint (1) the court erred by taking judicial notice of the proper interpretation and enforceability of the July 2, 2002, letter agreement; (2) the transfer of net operating losses to Fremont General under the letter agreement and Fremont Generals taking of a worthless stock deduction appropriating the value of the net operating losses were preferences to a creditor for or on account of an antecedent debt (Ins. Code,  1034, subd. (a)) because the defendants contend the letter agreement was a settlement of Fremont Generals claim to ownership of the net operating losses; (3) the complaint adequately alleges that the defendants acquisition of Indemnitys net operating losses was an impermissible distribution (id.,  1215.16); (4) 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 his role as regulator, and the commissioners preliquidation regulatory activities cannot diminish or defeat his statutory powers as liquidator; (5) the commissioner cannot be estopped from acting for the benefit of innocent policyholders, creditors, and the public by avoiding preferences and fraudulent transfers; and (6) this is not an action for the collection or recovery of taxes (26 U.S.C.  7401) because Indemnity does not seek to recover taxes.

Indemnity contends with respect to the sustaining of the demurrer to the third amended complaint (7) the complaint alleges several misrepresentations of fact by the defendants in their successful effort to persuade the commissioner to forbear from conservation and instead agree to the terms of the July 2, 2002, letter agreement; (8) the determination whether a representation is one of fact or opinion is a question of fact that cannot be decided in ruling on a demurrer; (9) the defendants had a duty to disclose to the commissioner material facts in connection with the letter agreement, but failed to do so; (10) beginning with the November 27, 2000, letter agreement, the defendants falsely promised to submit to enhanced regulatory oversight by allowing the commissioner access to all material information concerning Indemnitys operations, and the commissioner reasonably relied on those false promises when he entered into the July 2, 2002, letter agreement and refrained from seeking a conservation order earlier than he did; (11) Indemnity need not plead or prove damages in order to establish a right to rescind the July 2, 2002, letter agreement based on fraud and a right to complete relief, including restitution of benefits, if any, conferred by him as a result of the transaction (Civ. Code,  1692, 3d. par.); (12) Indemnity is entitled to compensation for Fremont Generals use of Indemnitys net operating losses, and the complaint properly alleges damages resulting from Fremont Generals failure to pay for that use and other damages resulting from the delayed conservation and liquidation.

DISCUSSION

1. Standard 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.)

2. The Court Erred by Taking Judicial Notice of the Proper Interpretation

and Enforceability of the Letter Agreement and by Deciding those

Questions in Ruling on the Demurrer to the First Amended Complaint

As we explain fully in Fremont II, supra, ___ Cal.App.4th ____, a court ruling on a demurrer cannot decide by means of judicial notice a question that may depend on disputed facts. Because the interpretation of a document may depend on extrinsic evidence that cannot properly be considered in ruling on a demurrer, a court ruling on a demurrer cannot take judicial notice of the proper interpretation of a document submitted in support of the demurrer. Moreover, if the plaintiff challenges the enforceability of a contract submitted in support of the demurrer based on disputed facts, the court cannot take judicial notice of the enforceability of the contract. Those same conclusions apply in this action.

Fremont General and Insurance Group contend the July 2, 2002, letter agreement is a clear and unambiguous release of liability that the court can judicially notice and enforce in ruling on their demurrer. They argue that the express terms of the letter agreement state that Indemnity transferred all of its net operating losses to Fremont General, that Indemnity and the commissioner released them from, in the words of paragraph 21, liability for any additional tax settlement payments to Indemnity, and that the complaint seeks to establish that liability. Indemnity, on the other hand, argues and alleges in the first amended complaint that the letter agreement provides that in the event of liquidation, the commissioner may act in the best interests of Indemnitys policyholders and creditors, need only consult with Fremont General, and therefore may require further payment by Fremont General for its prior use of Indemnitys net operating losses; that it transferred all of its then-existing net operating losses to Fremont General, but the letter agreement conveyed no rights to Fremont General with respect to Indemnitys net operating losses generated after January 1, 2002; and that the letter agreement is unenforceable because the defendants misrepresented and concealed from the commissioner material facts before entering into the letter agreement.

We conclude that both the proper interpretation of the July 2, 2002, letter agreement as relevant in this action and its enforceability may depend on extrinsic evidence that, for the reasons explained in Fremont II, supra, ___ Cal.App.4th at pp. ___ (slip opn., pp. 18‑27), cannot be considered in ruling on a demurrer. The trial court erred by deciding those questions by means of judicial notice and by sustaining the demurrer to the first amended complaint based on the letter agreement.

3. The Sustaining of the Demurrer to the First Amended Complaint Cannot

Be Affirmed Based on the Other Reasons Asserted in the Demurrer Except

as to Counts Eight and Nine

a. Counts One, Two, Four, Five, and Eight through Twelve

Fremont General and Insurance Group argued in their demurrer to the first amended complaint that the 1997 and 1998 Tax Sharing Agreements established their right to use Indemnitys net operating losses to offset the income of other affiliated companies. They requested judicial notice of the Tax Sharing Agreements. Although the complaint does not request rescission of either of the Tax Sharing Agreements, the defendants argued in their demurrer that counts one, two, four, five, and eight through twelve effectively seek to rescind the Tax Sharing Agreements and therefore are barred by the four-year statute of limitations applicable to an action to rescind a written contract (Code Civ. Proc.,  337, subd. 3).

The applicable statute of limitations depends on the nature of the right sued upon, that is, the gravamen of the cause of action. (Hensler v. City of Glendale (1994) 8 Cal.4th 1, 22-23.) The first amended complaint does not request rescission of either of the Tax Sharing Agreements. The defendants argument that those agreements authorized their alleged conduct is an attempt to establish an affirmative defense by way of demurrer and does not convert a complaint for various other relief into a complaint for rescission of the Tax Sharing Agreements. We conclude that the rescission of the 1997 or 1998 Tax Sharing Agreement is not the gravamen of any count alleged in the complaint.

b. Counts Eight and Nine

The defendants argued in their demurrer that counts eight and nine fail to allege an antecedent debt as required to establish a voidable preference under Insurance Code section 1034. That statute authorizes the commissioner as liquidator to avoid any preference as defined in the statute. (Id., subds. (c), (d).) A preference is a transfer of any of the property of the person proceeded against to or for the benefit of a creditor, for or on account of an antecedent debt, made or suffered by the person proceeded against within one year before the filing of a petition for liquidation pursuant to Section 1016, the effect of which transfer may be to enable the creditor to obtain a greater percentage of this debt than another creditor of the same class would receive. (Id., subd. (a).) An antecedent debt within the meaning of the statute means a prior actual liability, and not merely a prior claim of liability. (Low v. Lan (2002) 96 Cal.App.4th 1371, 1385.)

The first amended complaint alleges that under the terms of the July 2, 2002, letter agreement, Indemnity transferred all of its then-existing net operating losses to Fremont General in exchange for Fremont Generals agreement to pay up to $92.75 million to Insurance Group and Indemnity, provided that the payments would cease if the commissioner obtained an order for conservation or liquidation of Indemnity before March 1, 2004. The complaint also alleges that Fremont General claimed a worthless stock deduction for its shares of stock of Indemnity, allegedly resulting in Fremont Generals appropriation of net operating losses without compensation to Indemnity. The complaint, however, does not allege that either the transfer of Indemnitys net operating losses or the taking of a worthless stock deduction was to satisfy a prior debt, in whole or in part. The complaint therefore does not allege a transfer of property for or on account of an antecedent debt (Ins. Code,  1034, subd. (a)) and does not allege a preference within the meaning of Insurance Code section 1034.

Indemnity does not argue that the complaint alleges an antecedent debt or request leave to amend the complaint to allege an antecedent debt. Instead, Indemnity argues that the defendants argued in support of their demurrer that the transfer of net operating losses under the terms of the July 2, 2002, letter agreement was in settlement of the defendants prior claim of ownership of the net operating losses. Apart from the fact that Indemnity does not request leave to amend the complaint to allege that the letter agreement was in settlement of an antecedent debt and apparently declines to adopt the defendants argument to that effect as its own position, the defendants purported mere claim of ownership was not an antecedent debt within the meaning of the statute. (Low v. Lan, supra, 96 Cal.App.4th at p. 1385.) We conclude that the sustaining of the demurrer without leave to amend as to counts eight and nine was proper.

c. Count Twelve

The defendants argued in their demurrer that count twelve fails to allege a distribution within one year before the petition for liquidation, as required under Insurance Code section 1215.16, subdivision (a). The commissioner filed the petition for conservation and liquidation on June 3, 2003. The complaint alleges, By taking the actions described above, Fremont General improperly and unreasonably distributed to itself the value of the NOLs of Fremont Indemnity. We construe the actions described above to include not only the worthless stock deduction, which Indemnity alleges it first learned of in September 2003, which was after the petition for liquidation, but also the transfer allegedly effected by the July 2, 2002, letter agreement, which was executed within one year before the petition for liquidation and therefore within the statutory period.

The defendants argued further that the term distributions as used in Insurance Code section 1215.16, subdivision (a) is limited to distribution of shares of stock. Section 1215.16, subdivision (a) states that the receiver under an order for liquidation or rehabilitation of a domestic insurer may recover from any parent corporation, holding company, or other controlling person or affiliate the amount of distributions other than distributions of shares of the same class of stock paid by the insurer on its capital stock, or any payment in the form of a bonus, termination settlement, or extraordinary lump sum salary adjustment made by the insurer or its subsidiary to a director, officer, or employee, provided that the distribution or payment was made within one year before the petition for liquidation, conservation, or rehabilitation. Subdivision (b) states that the receiver cannot recover a distribution if the parent or affiliate shows that the distribution was lawful and reasonable when it was paid, and that the insurer did not know and could not reasonably have known that the distribution might adversely affect the ability of the insurer to fulfill its contractual obligations.

The statute refers to distributions rather than distributions of shares of stock, and the statutory language does not suggest that the term distributions is limited to only distributions of shares of stock. Moreover, the apparent purpose of the provision to allow the receiver to recover assets conveyed unreasonably to a parent corporation or other controlling person or affiliate suggests that the Legislature did not intend such a restrictive meaning of the term distributions as the defendants suggest. In support of their demurrer, the defendants requested judicial notice of a legislative committee analysis stating that the bill Authorizes receivers for insolvent insurers to recover from holding companies and affiliates distributions of shares, and bonuses or other extraordinary salary adjustments . . . . (Assem. Com. on Insurance, Analysis of Sen. Bill No. 1666 (1991‑1992 Reg. Sess.) as amended June 16, 1992, p. 4.) They also requested judicial notice of an enrolled bill report stating, This bill authorizes receivers for insolvent insurers to treat distributions to holding company employees of shares and bonuses or other extraordinary salary adjustments by the insolvent insurer . . . as a fraudulent conveyance . . . . (Off. of Insurance Advisor, Enrolled Bill Rep. on Sen. Bill No. 1666 (1991-1992 Reg. Sess.) Aug. 12, 1992, p. 3.) We do not view these brief summaries as comprehensive statements of the intent of the statute. Moreover, although legislative history can help to disclose the intent of the Legislature when a statute is unclear or ambiguous, the statutory language is the primary indication of legislative intent. (S. B. Beach Properties v. Berti (2006) 39 Cal.4th 374, 379.) Absent some indication in the language of the statute that the term distributions was intended to mean only distributions of shares of stock, we cannot construe the statute so restrictively.

4. The Striking of Portions of the Prayer for Relief Was Error

Section 7401 of title 26 United States Code states, No civil action for the collection or recovery of taxes, or of any fine, penalty, or forfeiture, shall be commenced unless the Secretary authorizes or sanctions the proceedings and the Attorney General or his delegate directs that the action be commenced. Based on this statute, the trial court struck portions of the prayer for relief in the first amended complaint seeking to compel the defendants to file an amended 2002 consolidated federal tax return in which they would not claim a worthless stock deduction, to cancel and avoid the July 2, 2002, letter agreement and the worthless stock deduction, to enjoin the defendants from future use of Indemnitys net operating losses, and seeking similar relief.

The defendants argue that an amended federal tax return without the worthless stock deduction would result in a greater tax liability and payment of additional taxes. They construe title 26 United States Code section 7401 broadly to prohibit any action to compel the filing of an amended federal tax return absent the prior approval of federal authorities. Indemnity, on the other hand, argues that because it does not seek to recover any taxes, fine, penalty, or forfeiture this is not a civil action for the collection or recovery of taxes, or of any fine, penalty, or forfeiture (ibid.) within the meaning of the statute. Neither the defendants nor Indemnity cites any authority on point.

This action arises in part from the defendants conduct with respect to filing federal income tax returns, and Indemnity seeks as a remedy an order requiring the defendants to file an amended tax return. Although such an amended tax return would be likely to result in a greater federal income tax liability, Indemnity in this action does not seek to collect either additional taxes owed to the federal government or any fine, penalty, or forfeiture (26 U.S.C. 7401) with respect to the defendants tax liability. Moreover, the complaint does not allege a violation of federal tax law. We therefore conclude that neither the plain language of the statute nor any authority cited to us justifies the striking of portions of the prayer for relief under the statute.

5. The Third Amended Complaint Adequately Alleges Intentional

Misrepresentation

a. The Complaint Adequately Alleges Actionable Misrepresentations

The trial court concluded that the complaint fails to allege an actionable misrepresentation and that the alleged misrepresentations are either opinions of future events or failures to disclose. An actionable misrepresentation ordinarily must be a representation of fact, rather than opinion. (Barron Estate Co. v. Woodruff Co. (1912) 163 Cal. 561, 572-573; Neu-Visions Sports, Inc. v. Soren/McAdam/Bartells (2000) 86 Cal.App.4th 303, 308.) But the qualifications and modifications of this general rule are as important as the rule itself. (Barron Estate Co., supra, at p. 573.) A statement by a person who possesses or purports to possess superior knowledge, although made in the form of an opinion, in some circumstances may induce reasonable reliance and be treated as an actionable affirmation of fact. (Bily v. Arthur Young & Co. (1992) 3 Cal.4th 370, 408; Gagne v. Bertran (1954) 43 Cal.2d 481, 489.) Moreover, a statement of opinion expressed as an affirmation of fact in some circumstances may be treated as an actionable representation of fact if the statement induces reasonable reliance. (Gagne, supra, at p. 489; Cohen v. S & S Construction Co. (1983) 151 Cal.App.3d 941, 946.) A prediction of future events, however, generally is regarded as a nonactionable statement of opinion (Neu-Visions Sports, supra, at pp. 309-310), unless the speaker actually possesses or appears to possess superior knowledge that would justify reliance on the statement as implying the existence of supporting facts. (Barron Estate Co., supra, at p. 574.)

The distinction between a mere opinion and an actionable affirmation of fact often is difficult to discern and depends on the particular facts and circumstances. (Willson v. Municipal Bond Co. (1936) 7 Cal.2d 144, 151.) Whether a statement is an actionable representation of fact or a nonactionable statement of opinion is a question of fact for the trier of fact if there is any room for doubt. (Ibid.; Furla v. Jon Douglas Co. (1998) 65 Cal.App.4th 1069, 1081.)

The third amended complaint specifies nine alleged misrepresentations by the defendants. The alleged representation to the commissioner in 2000 that the sole reason for Indemnitys commutation with Reliance was concern about Reliances financial condition clearly was an alleged misrepresentation of an existing fact. The defendants argument that those alleged misrepresentations as a matter of law could not have been intended to induce reliance on the July 2, 2002, letter agreement is unpersuasive, particularly in light of the allegations of the defendants repeated efforts to mislead the commissioner in order to avoid or delay conservation. Moreover, several alleged representations to the commissioner concerning Indemnitys financial condition, its ability to remain solvent in the future, and its continued receipt of reinsurance payments were made by the defendants at a time when they allegedly possessed or purported to possess superior knowledge on the subject. We cannot conclude based on the facts alleged in the complaint either that the alleged representations necessarily were nonactionable statements of opinion or that the commissioner could not have reasonably relied on the representations. Rather, we conclude that the complaint adequately alleges actionable misrepresentations and that the allegations are sufficiently specific (see Lazar v. Superior Court (1996) 12 Cal.4th 631, 645).

b. The Complaint Adequately Alleges Resulting Damages

The trial court also concluded that the third amended complaint fails to adequately allege resulting damages. We disagree. The complaint alleges that the alleged misrepresentations and concealments caused the commissioner to delay seeking conservation and liquidation of Indemnity and resulted in greater financial loss to Indemnity, and to its policyholders and creditors. These allegations are sufficient to support an award of damages. Accordingly, we need not address the parties other contentions with respect to damages. Moreover, Indemnity in its count for intentional misrepresentation, and its counts for concealment and false promise, seeks additional relief, including rescission of the July 2, 2002, letter agreement and restitution of benefits conferred on the defendants, as authorized by Civil Code section 1692. The defendants have failed to establish at the pleading stage that Indemnity is not entitled to that relief.

6. The Third Amended Complaint Adequately Alleges Concealment

A duty to disclose is an essential element of a cause of action for concealment. (Marketing West, Inc. v. Sanyo Fisher (USA) Corp. (1992) 6 Cal.App.4th 603, 612‑613.) The trial court concluded, There is no fiduciary duty, and apparently therefore concluded that the complaint fails to allege an actionable concealment. A duty to disclose a material fact can arise not only if the plaintiff and defendant are in a fiduciary or confidential relationship, but also if the defendant actively conceals the fact from the plaintiff, if the defendant makes a representation to the plaintiff that is likely to mislead absent further disclosure (Civ. Code,  1710, subd. 3), or if the defendant has sole knowledge of or access to a material fact and knows that the fact is neither known to nor reasonably discoverable by the plaintiff. (Goodman v. Kennedy (1976) 18 Cal.3d 335, 347; Warner Constr. Corp. v. City of Los Angeles (1970) 2 Cal.3d 285, 294; LiMandri v. Judkins (1997) 52 Cal.App.4th 326, 336.) A duty to disclose imposed by statute also can support a concealment cause of action. (Lovejoy v. AT & T Corp. (2004) 119 Cal.App.4th 151, 158-159 [Pub. Util. Code,  2889.5]; Pastoria v. Nationwide Ins. (2003) 112 Cal.App.4th 1490, 1499 [Ins. Code,  330].)

The third amended complaint alleges that although the November 27, 2000, letter agreement provided for a special deputy examiner (Korte) to oversee and supervise Indemnitys daily activities, (1) the defendants restricted the information available to Korte, (2) instructed Indemnitys general counsel not to meet with her without Fremont Generals prior approval, (3) failed to inform her of Gerlings extraordinary audit request, and (4) postponed Gerlings audit until after July 2, 2002, to prevent Korte from learning of Indemnitys improper underwriting practices and the resulting danger that Gerling and other reinsurers would terminate their reinsurance contracts with Indemnity. The complaint alleges further that the defendants informed Korte on June 27, 2002, that they expected to receive Gerlings monthly reinsurance payment the next day, but failed to inform her of the impending audit that was likely to and actually did result in the termination of the reinsurance contract.

We conclude that these allegations are sufficiently specific and that, if true, are sufficient to create a duty to disclose material facts based on, at a minimum, at least one of the recognized bases for such a duty: active concealment of material facts. Because the record discloses no valid basis for the trial courts ruling, the sustaining of the demurrer to the concealment count was error.

7. The Third Amended Complaint Adequately Alleges a False Promise

A false promise, a species of intentional misrepresentation, is a promise made without the intention to perform. (Civ. Code,  1710, subd. 4; Lazar v. Superior Court, supra, 12 Cal.4th at p. 638.) The trial court did not expressly address the false promise count in its order sustaining the demurrer to the third amended complaint without leave to amend, but stated that the alleged misrepresentations are either opinions of future events or failures to disclose and that the complaint fails to adequately plead damages. The complaint alleges that the defendants had no intention to allow the commissioner enhanced regulatory oversight of Indemnity as they agreed in the November 27, 2000, letter agreement and that they failed to allow such oversight. We conclude that these alleged facts are sufficient to support a false promise and that the facts are alleged with sufficient specificity. The allegations of resulting damages, and the alleged entitlement to other relief, also are sufficient for the reasons stated ante. Absent any valid basis for the trial courts ruling, the sustaining of the demurrer to the false promise count was error.

In light of our conclusions, we need not address the parties other contentions.

DISPOSITION

The judgment is reversed with directions to the superior court to (1) vacate its order sustaining the demurrer to eleven counts alleged in the first amended complaint without leave to amend, and enter a new order sustaining the demurrer without leave to amend as to counts eight and nine only and overruling the demurrer as to counts one through six and ten through twelve; and (2) vacate its order sustaining the demurrer to each count alleged in the third amended complaint without leave to amend, and enter a

new order overruling the demurrer in its entirety. Indemnity is entitled to recover its costs on appeal.

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

CROSKEY, Acting P. J.

We Concur:

KITCHING, J.

ALDRICH, J.

Publication Courtesy of San Diego County Legal Resource Directory.

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

[1] As later noted, the factual background that we recite is based on the allegations of the first amended complaint filed by Indemnity, which for purposes of our review of the trial courts ruling on demurrer, we must accept as true.

[2] 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.)

[3] Indemnity alleges in the Comstock action that the November 27, 2000, letter agreement was an agreement between Fremont General, Insurance Group, and Indemnity, rather than the commissioner.

[4] 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