Opinion
A147302
01-10-2017
STATE FARM FIRE AND CASUALTY COMPANY, Plaintiff and Respondent, v. RICHARD PYORRE, Defendant and Appellant.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS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 This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. (Sonoma County Super. Ct. No. SCV-234700)
Some 16 years ago, State Farm sued its agent, Richard Pyorre, for stealing trade secrets. Pyorre, himself, had State Farm insurance and obtained a defense from his adversary. State Farm, however, proceeded under a reservation of rights. Later, in light of a pending Supreme Court case, whose outcome could nullify State Farm's duty to defend, the insurer informed Pyorre it would seek recoupment of prospective defense costs should the Supreme Court decision permit. Following a Supreme Court decision favorable to State Farm, a coverage lawsuit ensued between it and Pyorre.
In 2012, we reviewed the judgment in the coverage lawsuit. We concluded State Farm had no duty to defend and no equitable defenses absolved Pyorre from reimbursement. We remanded "for determination of the amount of recoupment to which State Farm is entitled." State Farm then moved for summary judgment. Pyorre did not dispute the accuracy of the amount sought, but asserted he owes reimbursement as of a later date and he is entitled to a setoff. We reject these assertions and affirm the summary judgment granted to State Farm.
FACTUAL BACKGROUND
Underlying Lawsuit
In 2000, State Farm sued two of its agents, Pyorre and John Wier, after they joined a competitor and solicited customers from State Farm's confidential policyholder lists. State Farm's complaint in Mendocino County Superior Court alleged three causes of action: misappropriation of trade secrets, conversion, and breach of the agency contracts.
The former agents had bought what they had been selling, and so had acquired several insurance policies from State Farm. The agents tendered their defense to their new adversary. State Farm "agreed to provide a defense under a reservation of rights based on the 'advertising injury' clause of their business liability policies. State Farm specifically reserved the right to 'deny coverage at any time or to further defend the proceedings.' The agents then filed cross-complaints alleging breach of their agent agreements, bad faith, intentional interference with contract, unfair competition, and unjust enrichment or alternatively a violation of public policy." (State Farm Fire & Casualty Company v. Wier (Oct. 26, 2012, A127243, A125563, A127551) [nonpub. opn.]) (Wier II).)
Around this time, a Court of Appeal, citing a pair of federal court decisions, held when an insurer agrees to defend claims of "advertising injury," that includes claims arising from solicitation of a competitor's customers. (Hameid v. National Fire Ins. of Hartford (2001) 94 Cal.App.4th 1155.) On April 10, 2002, the Supreme Court granted review. (Hameid v. National Fire Ins. of Hartford (2002) 119 Cal.Rptr.2d 296.)
"This precipitated a discussion between State Farm and its attorneys as to whether it should issue additional letters reserving the right to recoup defense costs given that the court might hold, contrary to the Court of Appeal, that there was no duty to defend, let alone to provide indemnity. State Farm concluded it should issue such letters and did so on June 19, 2002. State Farm advised the agents it continued to reserve the right to indemnify and, referencing Hameid, now also reserved the right to recoup defense costs incurred after the date of the letter. It further stated, 'Should we seek such reimbursement, it would be after this action has been concluded or our participation in the action has been terminated.' Trial in the trade secrets case was scheduled to start in five days. The agents did not respond to the letters, nor did they seek a continuance of the trial date." (Wier II, supra, A127243.)
After jury trial, posttrial motions, and appeal, State Farm largely prevailed on its affirmative claims related to the agency contracts and defeated the agents' various cross-claims. (Wier II, supra, A127243, citing to State Farm Mutual Automobile Insurance Co. v. Wier (Dec. 27, 2004, A101791) [nonpub. opn.].) This included prevailing on the agents' unjust enrichment cause of action premised on the firm's retention of, and failure to make, post-termination payments under the contracts.
In the meantime, in July 2003, the Supreme Court decided Hameid. (Hameid v. National Fire Ins. of Hartford (2003) 31 Cal.4th 16 (Hameid).) "The court reversed the court of appeal and held using a competitor's customer list to solicit those customers did not give rise to a duty to defend under a CGL [commercial general liability] policy's 'advertising injury' provisions. Rather, the term 'advertising injury' in insurance contracts requires 'widespread promotion to the public,' rather than individual solicitation. (Hameid, . . . at p. 19.)" (Wier II, supra, A127243.)
"In light of the Hameid decision, State Farm withdrew its defense of the trade secrets case and notified the agents it intended to seek reimbursement of defense costs paid after the date of the supplemental reservation of rights letter." (Wier II, supra, A127243.) The agents would not pay.
This Recoupment Action
"In April 2004, State Farm filed the instant action in Sonoma County Superior Court against the agents, seeking recoupment of defense costs it had paid after its supplemental reservation of rights letter. The agents cross-complained for breach of contract, unfair business practices, bad faith and declaratory relief, and also interposed various equitable defenses to State Farm's claims for recoupment." (Wier II, supra, A127243.)
"The recoupment case proceeded to trial in two phases. Phase one was a court trial on whether State Farm had a duty to defend the agents in the trade secrets case. The court ruled State Farm had no duty to defend. Phase two was a jury trial on the agents' equitable defenses to recoupment, and on their cross-claims. The jury denied any recoupment and found for . . . Pyorre on his cause of action for declaratory relief. All parties appealed." (Wier II, supra, A127243.) This court agreed there was no duty to defend. We then reversed the phase two judgment, concluding "the agents did not, and cannot, establish each of the requisite elements of the[ir] defenses and that State Farm is not precluded from recovering defense costs expended after the date of its June 19, 2002, reservation of rights letter." (Ibid.) Given the absence of any waiver, forfeiture, equitable estoppel, or unclean hands, "State Farm is entitled, as of the date of its supplemental reservation of rights letter, to recoup the costs of a defense it never owed." (Ibid.)
After the 2012 appeal, State Farm moved for summary judgment. It sought the $354,934.26 it spent on defense fees and costs, starting from June 24, 2002—five days after it sent the letter regarding Hameid and the first day of jury trial. By June 24, all agree, the agents had the letter notifying them of State Farm's new position.
The agents opposed summary judgment. They contended there was an issue of fact as to when they became liable for their defense costs. According to the agents, the date of receipt of the letter was unfairly soon. Though they offered no concrete alternative, the agents posited they had a buffer zone of a "reasonable time" before being liable for costs. The purpose of a reservation of rights, they argued, was to allow the insured to explore ways of avoiding recoupment liability, which they claim they could not meaningfully avoid because the notice was served just five days ahead of trial. The agents also asserted the right to a "substantial setoff" (of approximately $322,000 for Wier and over $1.2 million for Pyorre) in post-termination payments and prejudgment interest State Farm supposedly owed under the agency contracts.
The trial court granted summary judgment to State Farm and Pyorre, but not Wier, appeals.
DISCUSSION
Start Date of Duty to Pay
Despite this court's pronouncement in 2012 that "State Farm is entitled, as of the date of its supplemental reservation of rights letter, to recoup the costs of a defense it never owed" (Wier II, supra, A127243), Pyorre renews his argument that the trial court should have denied summary judgment because there was a factual dispute about what "reasonable time" should have elapsed from his receipt of State Farm's notice before Pyorre became liable for his own defense costs.
The only authority Pyorre cites for pushing back the repayment obligation for a "reasonable time" is a footnote in Buss v. Superior Court (1997) 16 Cal.4th 35 (Buss). "Through reservation, the insurer gives the insured notice of how it will, or at least may, proceed and thereby provides it an opportunity to take any steps that it may deem reasonable or necessary in response—including whether to accept defense at the insurer's hands and under the insurer's control [citations] or, instead, to defend itself as it chooses." (Id. at p. 61, fn. 27.)
While Buss does remark upon the important notice function of reservations of rights, it does not grant an insured some undefined extra time to review its options once it has acquired knowledge of the legal landscape. Instead, Buss instructs the insured to "take any steps," such as declining insurance counsel, if the reservation of rights changes the insured's calculus. (Cf. Davis v. Blue Cross of Northern California (1979) 25 Cal.3d 418, 428 [noting focus is on giving insured "knowledge"].) Notably here, "[t]he agents did not respond to the letters, nor did they seek a continuance of the trial date." (Wier II, supra, A127243.) Nor did the agents respond later after some "reasonable time." They did not respond at all. (See Blue Ridge Ins. Co. v. Jacobsen (2001) 25 Cal.4th 489, 497-498 [reservation effective when no objection, or when objection but defense accepted].) The agents, Pyorre included, simply ignored the letter and took the risk the Supreme Court would rule in their favor. The gamble did not pay off.
Moreover, we addressed the reasonable time issue in Wier II, citing American Modern Home Ins. Co. v. Fahmian (2011) 194 Cal.App.4th 162 (American Modern). (Wier II, supra, A127243.) "In that case, the insurer provided a defense under a homeowner's policy, under a reservation of rights, in a personal injury action against the insured by one of the insured's employees. The insurer subsequently notified the insured it intended to accept a policy-limits settlement offer unless the insured either took over his own defense or waived a bad faith claim based on the insurer's failure to settle, and gave the insured five days to respond. ([American Modern, supra,] . . . at pp. 164-165.) The insured did not respond, and the insurer paid the policy limits to settle the case and then sued the insured for reimbursement of the settlement amount. Although the trial court concluded there was no coverage under the policy for the claim, it denied the insurer's claim for reimbursement on the ground the settlement notification had not given the insured sufficient time to review and decide among the options, including to carry on with his defense. [Citation.]" (Ibid.)
"The Court of Appeal reversed, holding the insurer had complied with the requirements established in Blue Ridge Ins. Co. v. Jacobsen [, supra,] 25 Cal.4th 489—it had (a) defended under a timely and express reservation of rights, (b) expressly notified the insured of its intent to accept the settlement, and (c) expressly advised the insured it could assume his own defense or waive any potential bad faith claim arising out of failure to settle. The appellate court held there was no additional requirement that the insured have 'sufficient time' to consider the notice of intent to settle. Among other things, 'a plaintiff's settlement offer might come at any time and usually contains its own time limits.' (American Modern, supra, 194 Cal.App.4th at pp. 171-172.) The court also observed Blue Ridge has 'two important purposes,' to avoid 'unjust enrichment on the part of an insured that was not covered for the underlying loss in the first place' and to promote settlement. (American Modern, at p. 173.)" (Wier II, supra, A127243.)
"Considerations in the case at hand are similar. State Farm defended under a timely reservation of rights. When the Supreme Court granted review in Hameid, raising the prospect the law as to the duty to defend might change and there might be a Buss claim for reimbursement, State Farm issued a supplemental reservation of rights, expressly reserving Buss rights. The timing of the grant of review was not something over which State Farm had control. Nor is there any reason that these particular insureds should be unjustly enriched by retaining the benefits of policies that provided no coverage for 'the underlying loss in the first place.' " (Wier II, supra, A127243; American Modern, supra, 194 Cal.App.4th at p. 175 ["a determination whether the insurer provided the insured with sufficient time to respond" to a change in the coverage landscape after a proper initial reservation of rights "is not required"].)
In accord with this analysis, we concluded State Farm did not waive or forfeit recoupment, was not estopped from recoupment, and did not act with unclean hands. (Wier II, supra, A127243.) We now conclude there is no disputed material fact in this case and that, as a matter of law, State Farm may obtain the recoupment it sought and was awarded below on summary judgment—recoupment from the date the agents received and became aware of the amended reservation of rights.
Setoff Claim
The trial court correctly rejected Pyorre's setoff claim. To start, Pyorre raised and lost his termination payment claim in the 2000 Mendocino action, an action premised entirely on the unraveling of his agency contract with State Farm. We do not have a complete record of that case, but we have Pyorre's first amended cross-complaint and the judgment.
Pyorre's cross-complaint in that case alleged: there was a termination payments clause in his agency contract; its allowance of payment withholding under certain conditions was an unenforceable penalty; Pyorre had been "deprived of a large portion of the going concern value of [his] agenc[y]," resulting in a breach of contract; the "egregious" withholding of the termination payments "i.e., the putative purchase price for the goodwill and going concern value," illustrated a breach of the covenant of good faith and fair dealing; and finally, as alleged in the eighth cause of action, even if the provision allowing withholding of termination payments was enforceable, which it was not, the withholding of the payments—reflecting a buyout—would be unjust enrichment if State Farm could also recover damages in its lawsuit. The eighth cause of action concludes, Pyorre is "entitled to the post-termination payments." The prayer for relief sought, in addition to compensatory damages, "disgorgement of the amount of the termination payments to prevent State Farm's unjust enrichment or, in the alternative, an award of damages in the amount of the termination payments for State Farm's violation of public policy."
The trial court granted summary judgment to State Farm on Pyorre's eighth cause of action for unjust enrichment and granted nonsuit in favor of State Farm on Pyorre's breach of contract and breach of the covenant claims related to Pyorre's alleged loss of the going concern value of his agency. After review by this court, the Mendocino trial court ultimately entered judgment resolving the parties' various claims related to the agency contract and Pyorre's separation from state farm.
Given the record Pyorre has put before us, we can only conclude his entitlement to termination payments was at issue, and was resolved in the Mendocino action. Under the simplest version of res judicata or claim preclusion, Pyorre could not raise the issue again in the 2004 recoupment action. (See Bucur v. Ahmad (2016) 244 Cal.App.4th 175, 185 (Bucur).)
Even had Pyorre omitted or abandoned the claim for termination payments because of oversight or strategy, as Pyorre now contends, it would now be barred because he was compelled to raise it in his cross-complaint in the prior action. A compulsory cross-claim arises "out of the same transaction, occurrence, or series of transactions or occurrences as the cause of action which the plaintiff alleges in his complaint." (Code Civ. Proc., §§ 426.10, subd. (c), 426.30, subd. (a); see Align Technology, Inc. v. Tran (2009) 179 Cal.App.4th 949, 959 (Align).) Failure to plead such a claim forfeits it. (Code Civ. Proc., § 426.30, subd. (a).) " '[A] party cannot by negligence or design withhold issues and litigate them in successive actions.' " (Align, at p. 959; see Custis, Litigation Management Handbook (2016) § 2:28 [cataloging risks and rewards of pursuing or abandoning compulsory counterclaims].) "In the breach of contract context, the rule means any claims the defendant has against the plaintiff based on the same contract generally must be asserted in a cross-complaint, even if the claims are unrelated to the specific breach or breaches that underlie the plaintiff's complaint." (Frog Creek Partners, LLC v. Vance Brown, Inc. (2012) 206 Cal.App.4th 515, 538; see Align, at p. 962; see also Bucur, supra, 244 Cal.App.4th at p. 185 [claim preclusion applies even to those "that could have been litigated in a prior proceeding"].) The rule barring compulsory cross-claims applies even if the claimant couches the claim as one for defensive offset or setoff. (Code Civ. Proc., § 431.70 [The setoff "defense provided by this section is not available if the cross-demand is barred for failure to assert it in a prior action under Section 426.30."]; Sidney v. Superior Court (1988) 198 Cal.App.3d 710, 717.)
Despite Pyorre's protestations, State Farm raised the compulsory counterclaim argument in its initial summary judgment papers and has not forfeited it.
The 2000 Mendocino action unquestionably addressed disputes arising from Pyorre's agency contract, and any claim of failure to make payments under that contract had to be raised in that action and, if not, were forfeited.
We also note, though the parties do not address it, that by the time State Farm filed the present recoupment action in 2004, Pyorre's termination payment claims, which arose when State Farm refused payments in 1999, were over four years old, thus also potentially implicating California's four-year statute of limitations for bringing breach of contract claims, or possibly other statutes of limitation. (Code Civ. Proc., § 337, subd. (1); Angeles Chemical Co. v. Spencer & Jones (1996) 44 Cal.App.4th 112, 119.)
DISPOSITION
Appellant's motion to augment the record is denied. --------
/s/_________
Banke, J. We concur: /s/_________
Margulies, P.J. /s/_________
Dondero, J.