Opinion
B183193
12-15-2006
CENTURY NATIONAL INSURANCE COMPANY, Plaintiff and Appellant, v. STATE COMPENSATION INSURANCE FUND, Defendant and Appellant.
Demler, Armstrong & Rowland, Robert W. Armstrong, James P. Lemieux, and Bruce E. Sample for Plaintiff and Appellant. Sonnenschein Nath & Rosenthal, Paul E. B. Glad, and David R. Simonton for Defendant and Appellant.
Century National Insurance Company (Century) brought an action against the State Compensation Insurance Fund (State Fund) to recover approximately $65,000 that was expended in the defense of Centurys insured, Calvin Gregory (not a party to this appeal). The trial court concluded that, contrary to Centurys claim, State Fund was not required to defend Gregory and granted State Funds motion for summary judgment. The trial court also awarded State Fund $16,542.31 for its defense costs incurred in defending the action brought by Century; the trial court denied State Funds motion for sanctions. Century appeals from the judgment and State Fund appeals from the order denying its motion for sanctions. We affirm the judgment and dismiss State Funds appeal as moot.
THE UNDERLYING FACTS
State Fund insured Gregory under a workers compensation and employers liability policy for the period between April 17, 1998, to April 17, 1999. In pertinent part, the policy covered Gregorys liability for workers compensation benefits to his employees.
Century issued Gregory for the same time period a general liability policy that covered damages arising from bodily injury, including death. Centurys policy contained an exclusion for "[b]odily injury to an employee of yours arising out of or in the course of employment by you . . . . This applies whether you may be liable as an employer or in any other capacity . . . ." (Boldface omitted.)
Gregory owned an apartment complex in Inglewood. He hired Jesus Morales to trim a rubber tree on the premises. On December 18, 1998, while trimming the tree, Morales was electrocuted and died.
At the time of his death, Morales did not have the license required by Business and Professions Code section 7026.1, subdivision (d) to trim trees taller than 15 feet. Thus, under the provisions of Labor Code section 2750.5, Morales was deemed to be Gregorys employee. Section 2750.5 creates a rebuttable presumption that an unlicensed person performing service for which a license is required under the Contractors State License Law (Bus. & Prof. Code, § 7000 et seq.) is an employee rather than an independent contractor.
THE PRINCIPAL ISSUE ON APPEAL
As we set forth in detail below, Moraless heirs sued Gregory in a civil action for wrongful death. State Fund took the position that the exclusivity provision of workers compensation law barred this action and, for this reason, State Fund was not obliged to defend the action.
Century contends that State Fund was under a duty to defend the action for wrongful death because there was a "potential" for coverage under Part Two of State Funds employers liability policy. This "potential," according to Century, is based on the circumstance that Morales was not subject to the exclusivity provision of workers compensation law because he worked for Gregory less than 52 hours in the 90 days that preceded his death. As we set forth immediately below, the contention that this exception applies is based on Labor Code section 3352, subdivision (h) (hereafter section 3352(h)).
Section 3352(h) states in relevant part that any "person defined in subdivision (d) of Section 3351 [(hereafter section 3351(d))] who was employed by the employer to be held liable for less than 52 hours during the 90 calendar days immediately preceding the date of the injury" is excluded as an "employee" under the workers compensation law. We will refer to this exception from time to time as the "52-hour exception."
Section 3351 provides in relevant part: " `Employee means every person in the service of an employer under any appointment or contract of hire or apprenticeship, express or implied, oral or written, whether lawfully or unlawfully employed, and includes: [¶] . . . [¶] (d) Except as provided in subdivision (h) of Section 3352, any person employed by the owner or occupant of a residential dwelling whose duties are incidental to the ownership, maintenance, or use of the dwelling, including the care and supervision of children, or whose duties are personal and not in the course of the trade, business, profession, or occupation of the owner or occupant." (Italics added.)
As we develop more fully in the text, post, pages 7-8, the interplay of sections 3352(h) and 3351(d) means that a household worker employed for less than 52 hours in the 90 days preceding the injury is not an employee for workers compensation purposes. A person like Morales who was not a household worker does not qualify as a "person defined in subdivision (d) of Section 3351," as stated in the first sentence of section 3352(h), and it is therefore immaterial whether he worked less than 52 hours.
Scott v. Workers Comp. Appeals Bd. (1981) 122 Cal.App.3d 979, 985, held that a section 3351(d) employee is a household worker whose duties are not in the course of the employers trade or business.
We explain in the text, post, pages 7-8, why Morales was not a household worker.
PROCEDURAL HISTORY
In December 1999, Moraless heirs filed a wrongful death suit against Gregory. We refer to the heirs as the "Morales plaintiffs" and to this action as the "Morales civil action."
Initially, no mention was made of section 3352(h) in the Morales civil action by the Morales plaintiffs, nor even of the 52-hour exception in general terms. The 52-hour exception and section 3352(h) were not to surface in the Morales civil action until much later, in November 2003, nearly four years after theMorales civil action was filed.
Century retained the firm of Demler, Armstrong & Rowland (hereafter the Demler firm) to defend Gregory in the Morales civil action. The Demler firm continued to represent Gregory until the Morales civil action terminated, and also represents Century in the instant proceedings, both in the trial and this court.
In December 2000, the Demler firm moved for summary judgment on behalf of Gregory in the Morales civil action. The motion, which contended that the exclusivity provisions of the workers compensation law barred the action, was opposed on the grounds that Gregory had failed to allege the exclusivity provision as an affirmative defense and had failed to submit proof that he had workers compensation insurance. The motion was granted but was reversed by Division Three of this court in July 2002 on the ground that there was no evidence that Gregory had workers compensation insurance, which is a prerequisite to the application of the exclusive remedy.
The first summary judgment in the Morales civil action is relevant to this appeal only because of the circumstance that at no time during the hearing, rendition, and appeal of this first summary judgment was section 3352(h) or the 52-hour exception ever mentioned, i.e., the Morales plaintiffs never relied on this provision, and neither the trial nor the appellate court ever addressed it.
The fact that section 3352(h) did not surface in the Morales civil action until later is significant because one of Centurys contentions in this appeal is that State Funds initial coverage decision should have been made in light of the contention that the 52-hour exception of section 3352(h) applied to the case. However, that initial decision was made before section 3352(h) surfaced in the Morales civil action.
In January 2001 and then in May 2002, the Demler firm sent letters to State Fund, demanding that State Fund defend Gregory in the Morales civil action. The letters made no mention of section 3352(h). State Fund did not respond to these letters and did not assume Gregorys defense in the Morales civil action.
Although this interrupts our chronological account, we note here that in March 2003 Century again demanded that State Fund defend the Morales civil action. Once again, Century made no mention of section 3352(h) or the 52-hour exception. State Fund refused this demand on April 7, 2003.
In December 2002, roughly half a year after the first summary judgment in the Morales civil action had been reversed by Division Three of this court, the Demler firm filed a second motion for summary judgment in the Morales civil action. This time, the motion was supported by evidence that Gregory had purchased workers compensation insurance. In their opposition to the motion, the Morales plaintiffs did not rely on section 3352(h). The superior court agreed with the Demler firm that the exclusivity of workers compensation law barred the action, and granted the motion for summary judgment.
In the ensuing appeal from the second summary judgment in the Morales civil action, the Morales plaintiffs for the first time contended that Morales had worked less than 52 hours in the 90 days preceding his injury and death; that, in view of the 52-hour exception set forth in section 3352(h), Morales had not been an employee; and that he was therefore not subject to workers compensation laws. This contention was advanced for the first time in the opening brief that was filed on November 26, 2003.
Not surprisingly, on December 3, 2003, the Demler firm sent State Fund yet another letter demanding that State Fund defend the Morales civil action. In the December 3, 2003 letter, the Demler firm relied on the 52-hour exception of section 3352(h) in claiming that Morales worked for less than 52 hours in the relevant time period, and that the Morales civil action was therefore not subject to workers compensation law. This was the first mention of the 52-hour exception by the Demler firm.
In response to the opening brief filed by the Morales plaintiffs, the Demler firm, citing Scott v. Workers Comp. Appeals Bd., supra, 122 Cal.App.3d 979, 985, contended that Morales was not a household employee but was employed by Gregory in the course of Gregorys business. The Demler firm contended that since Morales was not a section 3351(d) employee, he did not qualify for the exception under section 3352(h). The brief that set forth this argument which, as we relate below, proved to be the winning argument, was filed in January 2004.
See footnote 2, ante, and accompanying text.
While the appeal from the second summary judgment was pending, the Morales plaintiffs presented a workers compensation claim to State Fund. The claim was settled for $170,000 and the Workers Compensation Appeals Board approved the settlement in May 2004. (The second appeal in the Morales civil action was decided in November 2004.)
In March 2004, while the second appeal in the Morales civil action was pending, Century filed the instant action against State Fund. This action is predicated on the theory that there was a potential that the 52-hour exception of section 3352(h) applied and that State Fund therefore had an obligation to defend Gregory in the Morales civil action.
There now ensued a course of litigation conduct that is not remarkable for its consistency. In the Morales civil action, Gregory, defended by the Demler firm, contended that Morales did not qualify for the exception set forth in section 3352(h) because he was not a household worker, that for this reason workers compensation law applied and that the Morales civil action was therefore barred by the exclusivity provision. In the instant action, Century, also represented by the Demler firm, contends that there was a potential that Morales qualified for the section 3352(h) exception, in which event workers compensation did not apply, and that State Fund therefore was under a duty to defend the Morales civil action.
The conflict between these two positions intensified in September 2004, when Century and State Fund filed cross-motions for summary judgment in the action that is now before us. Century militantly contended in its motion for summary judgment that there had been a potential that the 52-hour exception of section 3352(h) applied and that for this reason State Fund was under an obligation to defend the Morales civil action. In the appeal from the second summary judgment in the Morales civil action, Gregory, represented by the Demler firm, maintained the workers compensation did apply, and that it barred the Morales civil action.
The cross-motions for summary judgment in the instant case were heard and decided on January 14, 2005. Thus, between September 23, 2004, when Century filed its motion for summary judgment in the instant case, and December 8, 2004, when the last papers were filed in the cross-motions, the issue raised in this case was intensively briefed by the parties. Throughout these briefs, Century contended that there was a potential that workers compensation law did not apply because of the 52-hour exception set forth in section 3352(h).
On November 22, 2004, Division Three handed down its decision in the second appeal in the Morales civil action. In an unpublished decision, the court agreed with Gregory, i.e., the Demler firm, that workers compensation barred the Morales civil action. (Morales-Navarro v. Gregory (Nov. 22, 2004, B166664) [nonpub. opn.] (hereafter the Morales appellate opinion).)
The Morales appellate opinion began with stating the facts that Morales was a gardener and tree trimmer and that Gregory hired Morales and others for the specific purpose of trimming trees that ringed the apartment complex owned by Gregory. This pivotal fact has never been disputed. We note that this fact, standing alone, established that Morales was not a "person defined in subdivision (d) of Section 3351," i.e., in terms of section 3351(d), Morales was employed "in the course of the trade, business, profession, or occupation of the owner" of the apartment complex, which removed him from the coverage of section 3351(d). (See fn. 1, ante.)
This is the conclusion that the Morales appellate opinion reached. After stating the operative facts, the court turned to section 3352(h) which, as noted, provides in relevant part that any "person defined in subdivision (d) of Section 3351 who was employed by the employer to be held liable for less than 52 hours during the 90 calendar days immediately preceding the date of the injury" (italics added) is excluded from the definition of "employee." The Morales appellate opinion concluded that Morales was not a "person defined in subdivision (d) of Section 3351" because Gregory hired Morales in the course of his business as an owner of an apartment building. The court explained, citing Scott v. Workers Comp. Appeals Bd., supra, 122 Cal.App.3d 979, 985, that a section 3351(d) employee is a household worker whose duties are not in the course of the employers trade or business. The Morales appellate opinion, as well as Scott v. Workers Comp. Appeals Bd., rely on the plain text of section 3351(d).
Century filed its opposition to State Funds motion for summary judgment on November 29, 2004. The opposition made no mention of the Morales appellate opinion that had been handed down on November 22, 2004. However, the opposition contained a declaration of attorney Bruce E. Sample under penalty of perjury with the following paragraph: "22. Ultimately, plaintiffs in the wrongful death action settled their civil suit against Gregory after receiving a workers compensation award from State Fund and before any ruling on the appeal." (Italics added.) The declaration clearly identifies the "appeal" referred to as the second appeal in the Morales civil action, i.e., the appeal that terminated with the filing of the Morales appellate opinion.
It is noteworthy that the opposition that was filed by Century on November 29, 2004, acknowledges that Gregorys position in the Morales civil action is inconsistent with Centurys argument in this case. Responding to the argument that judicial estoppel should be applied to prevent Century from taking these inconsistent positions, Century first pointed out that judicial estoppel applies only when the same party has taken inconsistent positions. Gregory, in the Morales civil action, was a different party from Century in this action. In addition, Century argued that a "potential" for coverage existed under the State Fund policy because the Morales plaintiffs alleged that the 52-hour exception set forth in section 3352(h) applied.
A reply brief filed on December 8, 2004, by Century in the cross-motions for summary judgment also failed to mention the Morales appellate opinion.
On December 10, 2004, in a status conference, the trial court confronted Centurys counsel with the Morales appellate opinion. Counsel for Century, attorney Sample, stated that this opinion was "irrelevant," an opinion he had apparently voiced earlier in a telephonic conference. Realizing that this opinion was not impressing the trial court, counsel went on to state that in hindsight, when he filed his reply brief, he should have given it a "footnote," even though Sample continued to maintain that theMorales appellate opinion was "irrelevant."
On January 14, 2005, the trial court granted State Funds motion for summary judgment and denied Centurys motion for summary judgment. The trial court did not rely on that opinion but rather independently concluded that Morales did not qualify for an exception to the exclusivity rule under section 3352(h) and 3351(d), that there was therefore "no potential for coverage" and thus no duty to defend on the part of State Fund.
On March 30, 2005, the trial court granted, in part, State Funds motion for reasonable defense costs brought under Code of Civil Procedure section 1038; State Fund sought $86,147.35, and the court allowed $16,542.31. On the same day, the trial court denied State Funds motion for sanctions brought under Code of Civil Procedure section 128.7 because State Funds motion did not comply with the "safe harbor" provision of section 128.7. The court entered judgment on April 8, 2005.
DISCUSSION
1. State Fund Was Not Under a Duty To Defend the Morales Civil Action
"In Montrose [Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287], the Supreme Court reviewed the `familiar principles governing adjudication of the insurers duty to defend. It reaffirmed the rules established in Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263 that the duty to defend is broader than the duty to indemnify, that a liability insurer must defend a suit which potentially makes claims within the coverage of the policy, and that facts extrinsic to the allegations of the complaint may give rise to a duty to defend when they reveal a possibility that the claim may be covered by the terms of the insurance policy. On the other hand, the Supreme Court also reaffirmed that the extrinsic facts which may create a duty to defend must be known by the insurer at the inception of the third party lawsuit; and that the duty to defend ceases as soon as it has been shown that there is no potential for coverage. (Montrose Chemical Corp. v. Superior Court, supra, 6 Cal.4th at pp. 295-296; [citations].)" (Gunderson v. Fire Ins. Exchange (1995) 37 Cal.App.4th 1106, 1113-1114, original italics.)
Although extrinsic facts known to the insurer must also be taken into account, courts will first look to the allegations of the third party complaint to determine whether the insurer had a duty to defend. (Walker v. Truck Ins. Exchange (1995) 11 Cal.4th 1, 19.) Here, Century concedes that the complaint did not allege that Morales "was an employee excluded from the workers compensation system." This carefully couched concession does not do justice to what the complaint does not allege. There is not even a tangential reference in the complaint to the hours worked by Morales that might, conceivably, have put State Fund on notice of the 52-hour exception; and there certainly is no reference in the complaint, direct or indirect, to section 3352(h).
While the complaint contains nothing that would suggest the application of the 52-hour exception, it does contain an allegation that suggests that Morales was not a household worker and therefore did not qualify for the exception provided for by sections 3351(d) and 3352(h). The complaint alleges that Gregory failed to act reasonably in hiring an unlicensed and unqualified person to trim a tree on the property located at 10112 Felton Avenue in Lennox. Anyone could readily determine that the address was that of the apartment complex owned by Gregory. Thus, the allegation that Gregory hired Morales to trim a tree at his apartment complex effectively suggested that Morales was not a household worker, which meant that he did not qualify for the exception provided for in sections 3351(d) and 3352(h), whether or not he worked less than 52 hours in the 90 days preceding his injury and death.
It is certainly not difficult to understand the operation of sections 3351(d) and 3352(h). And, as soon as the Morales plaintiffs raised the 52-hour exception in their appellate brief, the Demler firm replied with a citation toScott v. Workers Comp. Appeals Bd., supra, 122 Cal.App.3d 979, which disposed of the argument. It appears that the complaint neither alleged the 52-hour exception set forth in section 3352(h), nor did it contain allegations that showed that the Morales plaintiffs could rely on section 3352(h), since he was not a household worker, and thus did not qualify as a section 3351(d) employee.
It is also true that an insurer does not have a continuing duty to investigate whether there is a potential for coverage. "If it [the insurer] has made an informed decision on the basis of the third party complaint and the extrinsic facts known to it at the time of tender that there is no potential for coverage, the insurer may refuse to defend the lawsuit." (Gunderson v. Fire Ins. Exchange, supra, 37 Cal.App.4th at p. 1114.)
Thus, State Funds decision not to defend because there was no potential for coverage was eminently sound as of the time that decision was made. In light of the undisputed fact that Gregory hired Morales to trim trees around the apartment complex, there simply was no basis upon which it could be found that the exception provided for by the interplay of sections 3351(d) and 3352(h) applied.
Century propounds a number of arguments to support its position. We do not find these arguments to be persuasive.
Century contends that under Aubrey v. Workers Comp. Appeals Bd. (1995) 60 Cal.Comp.Cases 408 (Aubrey), there was a possibility that the apartment complex owned by Gregory was not a "trade, business, profession, or occupation," but rather an investment to supplement retirement income. Aubrey held that when an apartment building is an "investment," it is not a "business" for purposes of section 3351(d). There are three reasons why this argument is without merit.
First and second. "An insured may not trigger the duty to defend by speculating about extraneous `facts regarding potential liability or ways in which the third party claimant might amend its complaint at some future date." (Gunderson v. Fire Ins. Exchange, supra, 37 Cal.App.4th at p. 1114.) As Century concedes, Aubrey appeared for the first time in the appellate reply brief filed in January 2004 by the Morales plaintiffs, slightly over three years after the Morales civil action was filed. There is nothing in the complaint that would suggest that the 46-unit apartment complex was an "investment" under Aubrey rather than a "business." The insured may not speculate about unpled third party claims to manufacture coverage. (Gunderson v. Fire Ins. Exchange, supra, at p. 1114.) That the apartment may have been an investment is sheer speculation. Thus, the contention that State Fund should have considered the Aubrey decision is flawed because it is: (1) speculative and (2) not apparent from the complaint as filed, or from facts known to State Fund when the Morales civil action was commenced.
Third. The last point is reinforced by the circumstance that the Morales plaintiffs never adduced any evidence that the apartment complex was an "investment" rather than a "business." The argument premised on Aubrey was not supported by any evidence in the record; it was therefore simply a hypothetical possibility. In any event, the Morales appellate opinion concluded that it was undisputed that "Gregory hired Morales in the course of his business as owner of an apartment building." It appears that there were no facts to support the argument that the apartment complex was an investment and not a business.
We add here the observation that it is not clear that Aubrey was correctly decided. The fact that the purpose of an enterprise is to serve as an investment does not necessarily mean that the enterprise is not a "business." Thus, even if Aubrey were relevant to State Funds decision, and it is not, it would be a question of law whether Aubrey should be followed. When the only potential for coverage turns on an unresolved legal question that is resolved in the insurers favor, the insurer has no duty to defend. (State Farm Mut. Auto. Ins. Co. v. Longden (1987) 197 Cal.App.3d 226, 233.)
Century also contends that its December 3, 2003 letter, in which Century referred to the 52-hour exception and section 3352(h), "alone created a duty to defend." This argument is also without merit.
First, as noted, the question whether the insurer has a duty to defend turns on facts known to the insurer, or disclosed by the complaint, when the third party suit is commenced. (Montrose Chemical Corp. v. Superior Court, supra, 6 Cal.4th 287, 295.) December 2003 was four years after the Morales civil action was commenced.
Second, the fact that Gregory hired Morales in his business was known and undisputed in December 2003, when Centurys letter was written. This fact rendered the 52-hour exception of section 3352(h), standing alone, immaterial, i.e., it made no difference that Morales worked less than 52 hours in the relevant time period. Indeed, the circumstance that the dispositive fact was that Morales was not a household worker was well known to Century and it counsel on December 3, 2003, when the letter was written; the Demler firm relied on this fact and its legal significance when it filed Centurys respondents brief the very next month, in January 2004.
Third. Centurys letter of December 3, 2003, appears to suggest that all that is required under section 3352(h) is that the person in question worked less than 52 hours in the 90 days preceding the injury. Indeed, even in the opening brief in this appeal, Century appears to make this suggestion. As we have repeatedly made clear, this is not the law. The case before us is squarely predicated on the fact that Morales was hired to work for a business, which means that Morales could not claim an exclusion from workers compensation law. The cases on which Century relies, Rosas v. Dishong (1998) 67 Cal.App.4th 815 andCedillo v. Workers Comp. Appeals Bd. (2003) 106 Cal.App.4th 227, are on their face distinguishable because in both cases the work was done on a private home, which means that the workers qualified as household workers under section 3351(d). (Rosas v. Dishong, supra, at p. 817;Cedillo v. Workers Comp. Appeals Bd., supra, at p. 230.)
As an example, Century states at one point in its brief: "[U]nder Labor Code sections 3351(d) and 3352(h), an unlicensed contractor performing work at a residential dwelling is excluded from the workers compensation system if he has not worked 52 hours at the residence during the 90 days preceding an injury."
Finally, we reject Centurys suggestion that the trial court was guided by "hindsight" in finding State Funds coverage decision to be correct. The trial court did not base its decision on the fact of the Morales appellate opinion. Rather, the trial court concluded independently that Morales could not avail himself of the exception set forth in section 3351(d) and 3352(h).
In sum, we find that State Funds initial decision not to defend Gregory in theMorales civil action was correct. As we make clear in part 2, post, nothing changed when the Morales plaintiffs contended, for the first time in the appeal in the Morales civil action, that the 52-hour exception applied. As the Demler firm correctly pointed out in that appeal, the 52-hour exception clearly did not apply to the Morales civil action. Thus, at no time was State Fund required to defend the Morales civil action.
2. The Trial Court Erred In Limiting Litigation Expenses Under Code of Civil Procedure Section 1038 To Work Performed After the Filing of the Morales Appellate Opinion
State Funds motion for its defense costs under Code of Civil Procedure section 1038 sought an award of $86,147.35. Of that amount, $16,542.31 was incurred after November 22, 2004, when the Morales appellate opinion was filed.
The trial court found that "this action was not frivolously filed or filed without a good faith belief in a judicial controversy; however, once the [Morales appellate opinion] came down in November, November 22, 2004, I think that there were obligations which the plaintiffs had which they did not fulfill. [¶] And I think that from point forward [sic], that there is cause under 1038(b) for the court to grant the request for attorneys fees and costs, from that date forward."
We agree with State Funds contention that the trial court erred in limiting the defense costs to work done after the Morales appellate opinion was filed.
"[B]efore denying a section 1038 motion, a court must find the plaintiff brought or maintained an action in the good faith belief in the actions justifiability and with objective reasonable cause." (Kobzoff v. Los Angeles County Harbor/UCLA Medical Center (1998) 19 Cal.4th 851, 862, italics added.) This rule pertains not only to the filing, but also to the continued maintenance of the action. (Id. at p. 853, fn. 1.) While the good faith requirement involves a factual inquiry into the plaintiffs subjective state of mind, reasonable cause is to be determined objectively, i.e., the question is whether any reasonable attorney would have thought the claim tenable. (Knight v. City of Capitola (1992) 4 Cal.App.4th 918, 932.)
On the question of reasonable cause, we begin and end with the fundamental fact that Century, represented by the Demler firm, knew from the moment that the Morales plaintiffs raised the 52-hour exception that the fatal flaw in that argument was that Gregory had hired Morales for his business, and for that reason Morales was not a household worker. This meant that Morales was not a section 3351(d) employee and did not qualify for the section 3352(h) exception.
This fundamental fact resolves itself into four components.
First, there was never a question about the pivotal fact that Morales was not a household worker; this was an undisputed fact throughout. Whatever tenuous validity the "investment-not business" holding of Aubrey v. Workers Comp. Appeals Bd., supra, 60 Cal.Comp.Cases 408, has, and we think that this decision is questionable, the "investment-not business" argument collapses since there are no facts to support it. Thus, Centurys action against State Fund lacked any factual support.
Second, Scott v. Workers Comp. Appeals Bd., supra, 122 Cal.App.3d 979, 985, is dispositive authority on the legal point, i.e., that persons employed in a business are not section 3351(d) employees and thus are not subject to the exemption from workers compensation laws provided for in sections 3352(h) and 3351(d). Centurys action was therefore devoid of any legal merit.
Third, there is no question that the Demler firm not only knew about Scott v. Workers Comp. Appeals Bd. and the principle for which it stands, the Demler firm fully understood, and correctly applied, the principle to the Morales civil action. Thus, the Demler firm cannot claim that it was ignorant of the significance of the first and second factors outlined above.
Fourth, and most important, is that the question whether Morales was covered by workers compensation laws was simply not a close question. The facts (factor one) and the law (factor two) were, in one word, compelling. As State Fund points out, this fact is corroborated by Centurys, i.e., the Demler firms, appellate briefing in the Morales civil action where the Demler firm pointed out, quite correctly, that every single reported decision supported its position in that case, and that no case has ever held otherwise. A correct statement of the law in the Morales appeal remains a correct statement of the law in this appeal, and in this case.
These factors inexorably lead to the conclusion that no reasonable attorney would have filed and prosecuted the action against State Fund that the Demler firm filed and maintained.
The unreasonableness of Centurys action is corroborated by the conduct of its counsel. Rather than reporting the Morales appellate opinion to the court and State Fund, counsel attempted to conceal it and, when found out, declared the opinion to be irrelevant. A more fundamentally erroneous characterization is hard to imagine; the Morales appellate opinion went to the heart of the matter, and showed that State Fund had been right all along. Worse yet, attorney Sample stated after November 22, 2004, under penalty of perjury that the Morales civil action had settled. This was a lie, and must be characterized as such. The conduct of counsel, which to many would appear to consist of desperate, ill-advised measures, only underscores the reality that no reasonable lawyer would have filed and maintained Centurys action against State Fund.
We also find the contention that State Funds motion for defense costs was not supported by the evidence to be without merit. The request for fees is supported by the five-page declaration of David Simonton, an attorney with the firm that represented State Fund.
In light of the foregoing, we conclude that, as a matter of law, the trial court erred in finding that it was only after the Morales appellate opinion was filed that there was no objective, reasonable cause to maintain Centurys action against State Fund. As a matter of law, we find that there was no objective, reasonable cause to file and maintain that action. Accordingly, we remand with directions to determine State Funds reasonable defense costs from the filing of Centurys action to its conclusion.
3. The Matter of the Trial Courts Order Denying State Funds Motion Under Code of Civil Procedure Section 128.7 Is Moot
The sanctions that may be awarded under Code of Civil Procedure section 128.7 are broadly limited to "what is sufficient to deter repetition of this conduct or comparable conduct by others similarly situated." (Code Civ. Proc., § 128.7, subdivision (d).) More specifically, a court is empowered under subdivision (d) of section 128.7 to award all of the reasonable attorney fees and other expenses "incurred as a direct result of the violation."
We think that an award of reasonable attorney fees and expenses would be an appropriate sanction under subdivision (d) of section 128.7 of the Code of Civil Procedure. Since we are remanding the case with directions to determine these amounts under the provisions of Code of Civil Procedure section 1038, the matter of State Funds motion for sanctions under section 128.7, and the trial courts ruling on that motion, are moot. Accordingly, we decline to address the issue of the section 128.7 motion and dismiss State Funds appeal as moot.
DISPOSITION
The judgment awarding $16,542.31 for State Funds reasonable defense costs is vacated. In all other respects, the judgment is affirmed. The case is remanded with directions to hear and determine the amount of defense costs reasonably and necessarily incurred by State Fund in defending Centurys action brought against State Fund, as provided for in Code of Civil Procedure section 1038, from the date of the filing of the action to its conclusion. State Funds appeal is dismissed. State Fund is to recover its costs on appeal.
We concur:
RUBIN, Acting P. J.
BOLAND, J.