NEDE MGMT., INC., et al., Plaintiffs and Appellants, v. ASPEN AMERICAN INSURANCE COMPANY et al., Defendants and Respondents.
B307470
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA SECOND APPELLATE DISTRICT DIVISION EIGHT
Filed 9/20/21
(Los Angeles County Super. Ct. No. 19STCV05442)
CERTIFIED FOR PUBLICATION; (see concurring opinion)
APPEAL from a judgment of the Superior Court of Los Angeles County. Patricia D. Nieto, Judge. Affirmed as modified.
Action Legal Team, Michael N. Sofris; Stillman & Associates and Philip H. Stillman for Plaintiffs and Appellants.
BHC Law Group, David Borovsky; Greines, Martin, Stein & Richland, Robert A. Olson and Eleanor S. Ruth for Defendants
The Darwish family1 controlled a property in Los Angeles where a fire occurred, killing one person and injuring others. The victims sued. The Darwish family‘s insurer Aspen American Insurance Co. (Aspen) and managing underwriter Deans & Homer (D&H) defended the action, which ultimately settled without any out-of-pocket payment from the Darwish family. They nevertheless sued Aspen and D&H in this action, alleging a single claim for declaratory relief. They sought a declaration that a conflict of interest existed in the underlying case between them and Aspen
The trial court sustained a demurrer without leave to amend and entered judgment for Aspen and D&H, holding no conflict existed as a matter of law, so the Darwish family failed to state a claim for declaratory relief. We conclude the demurrer was the incorrect procedural vehicle to resolve the Darwish family‘s declaratory judgment claim against Aspen and D&H. However, the Darwish family suffered no prejudice because the second amended complaint (SAC) did not allege a conflict of interest entitling them to independent counsel pursuant to
The trial court also granted a motion to strike D&H as a defendant. That ruling is moot, so we need not address it.
BACKGROUND
We take the facts from the operative SAC, which we assume are true. (Centex Homes v. St. Paul Fire & Marine Ins. Co. (2015) 237 Cal.App.4th 23, 26 (Centex Homes I).) We also assume the numerous attachments to the complaint are true, and they take precedence over any conflicting allegations in the SAC. (Brakke v. Economic Concepts, Inc. (2013) 213 Cal.App.4th 761, 767.)
Allegations
On July 4, 2015, a fire occurred on a property covered by the insurance policy at issue. A squatter died. Two tenants, two surviving squatters, and the estate of the deceased squatter sued the Darwish family and their corporate entities, including Nede. The lawsuit alleged claims for wrongful death, negligence, premises liability, and conversion (the Hall action).
David and Barbara tendered their defense in the Hall action to D&H and Aspen. D&H assumed control of the action and hired attorney Gary Fields as counsel for the Darwish family. Fields’ representation was subject to two reservations of rights: Aspen would not pay any judgment exceeding the $1 million policy limit and would not pay punitive damages.
The Darwish family alleged Fields “failed and refused to properly defend” them, outlining specific examples of his faulty representation. They believed his poor representation
Aspen and D&H denied the request for independent counsel for David and Barbara. In their view, the reservation of rights limited to damages exceeding policy limits and punitive damages did not create a conflict of interest that triggered a right to independent counsel.
Aspen did, however, approve independent counsel for Nede for a time. Nede was not a named insured, so the approval was subject to a reservation of rights that Nede was deemed an insured under the policy in its role as the building‘s property manager. Aspen also denied any obligation to pay damages arising from any act or omission by Nede in any capacity other than as property manager.
Nede retained separate counsel. According to the SAC, Aspen‘s counsel interfered with that independent representation in various ways. Nonetheless, Aspen paid Nede‘s counsel‘s invoices, subject to reductions. A little less than a year after approval, Aspen terminated approval for Nede‘s separate counsel because it had revoked its reservation of rights.
The Hall action eventually settled. Although not expressly alleged in the SAC, there appears to be no dispute the Darwish family paid nothing out of pocket for the settlement.
Procedural History
The Darwish family sued Aspen and D&H, alleging a single claim for declaratory relief seeking a declaration of their rights pursuant to
Aspen and D&H demurred to the SAC. The trial court sustained the demurrer without leave to amend. The court viewed the declaratory relief claim as “wholly derivative” of an unpled substantive claim under
As for Nede, Aspen was entitled to withdraw its reservation of rights, and nothing alleged in the SAC entitled Nede to independent counsel after that time.
The court also held any fee dispute had to be resolved in arbitration per
D&H had also filed a motion to strike D&H as a defendant. After the court sustained the demurrer, it noted the motion to strike was moot but granted it anyway. It held the SAC did not sufficiently allege D&H was an insurer, and
DISCUSSION
I. Standard of Review
We independently review the sustaining of a demurrer. (Centex Homes I, supra, 237 Cal.App.4th at p. 28.) We assume the truth of properly pleaded facts, and we give the complaint a reasonable interpretation, reading it as a whole. (Ibid.) We review the denial of leave to amend for abuse of discretion, asking whether there is “a reasonable possibility that the complaint can be cured by amendment.” (Ibid.)
II. The Demurrer Was Improperly Sustained But the Darwish Family Suffered No Prejudice
Before turning to
As we explain, the trial court‘s reasoning sustaining the demurrer was incorrect, but the error was not prejudicial because Aspen and D&H were entitled to judgment as a matter of law. (See Robertson v. Saadat (2020) 48 Cal.App.5th 630, 639 [“We are not bound by the trial
“‘The fundamental basis of declaratory relief is the existence of an actual, present controversy over a proper subject.‘” [Citations.] The language of
The Darwish family relies on a line of cases holding that “‘[a] general demurrer is usually not an appropriate method for testing the merits of a declaratory relief action, because the plaintiff is entitled to a declaration of rights even if it is adverse to the plaintiff‘s interest.‘” (Qualified Patients Assn. v. City of Anaheim (2010) 187 Cal.App.4th 734, 751; see Lockheed Martin Corp. v. Continental Ins. Co. (2005) 134 Cal.App.4th 187, 221 (Lockheed), disapproved on another ground by State of California v. Allstate Ins. Co. (2009) 45 Cal.4th 1008, 1036, fn. 11; Ludgate Ins. Co. v. Lockheed Martin Corp. (2000) 82 Cal.App.4th 592, 606.)
This rule dates back at least to Maguire v. Hibernia Savings & Loan Soc. (1944) 23 Cal.2d 719 (Maguire), which held, ”
Hence, “where a complaint sets forth a good cause of action for declaratory relief regarding only a disputed question of law, declarations on the merits unfavorable to a plaintiff have been upheld although such determinations were made in the form of a judgment sustaining a demurrer.” (Jefferson Incorporated v. City of Torrance (1968) 266 Cal.App.2d 300, 303.) “‘[W]hile
In this circumstance, courts treat the appellate opinion as “in effect a declaratory judgment. [Citation.] The proper procedure is to modify the judgment to make that declaration and affirm the judgment as modified.” (Lockheed, supra, 134 Cal.App.4th at p. 222; see Essick v. City of Los Angeles (1950) 34 Cal.2d 614, 624; Farmers Ins. Exchange v. Zerin (1997) 53 Cal.App.4th 445, 460-461 [“Strictly speaking, a demurrer is not an appropriate weapon to attack a claim for declaratory relief inasmuch as the plaintiff is entitled to a declaration of its rights, even if adverse. [Citation.] However, because no benefit would be served by reversal and remand to the trial court for entry of a judgment declaring that Farmers has no right to recovery from defendant, this opinion shall serve as a declaration of rights and duties.“].)
The trial court and Aspen and D&H rely on Ball to support dismissal, which did not acknowledge the Maguire line of authority. In that case, the
We need not follow Ball or Ochs, which did not involve a stand-alone declaratory relief claim as in this case. Instead, we will apply the rule in Maguire. Here, the Darwish family adequately alleged an “actual controversy” under the declaratory relief statute, so the trial court technically should have overruled the demurrer. But we agree with those cases that treat the error as non-prejudicial because the SAC fails to allege the kind of conflict of interest that would have entitled the Darwish family to independent counsel pursuant to
“‘Generally, an insurer owing a duty to defend an insured, arising because there exists a potential for liability under the policy, “has the right to control defense and settlement of the third party action against its insured, and is ... a direct participant in the litigation.“’ [Citations.] The insurer typically hires defense counsel who represents the interests of both the insurer and the insured.‘” (Centex Homes v. St. Paul Fire & Marine Ins. Co. (2018) 19 Cal.App.5th 789, 797 (Centex Homes II).)
Pursuant to
Often called Cumis counsel,
“California law is settled that ‘there is no entitlement to independent counsel where the coverage issue is “independent of, or extrinsic to, the issues in the underlying action [citations].“’ [Citation.] Stated otherwise, “‘where the reservation of rights is based on coverage disputes which have nothing to do with the issues being litigated in the underlying action, there is no conflict of interest requiring independent counsel.“’ [Citation.]
“‘A mere possibility of an unspecified conflict does not required independent counsel. The conflict must be significant, not merely theoretical, actual, not merely potential.’ [Citation.] A case by case analysis is required: “The potential for conflict requires a careful analysis of the parties’ respective interests to determine whether they can be reconciled (such as by a defense based on total nonliability) or whether an actual conflict of interest precludes insurer-appointed defense counsel from presenting a quality defense for the insured.“’ (Centex Homes II, supra, 19 Cal.App.5th at pp. 797-798.)
Aspen‘s reservation of rights for punitive damages and damages beyond policy limits did not create a conflict of interest triggering
That leaves the Darwish family‘s allegations that Fields “failed and refused to properly defend” them in various ways in the Hall action. They misunderstand the nature of the right to independent counsel under
Cumis and
Hence, the Cumis rule and
The Darwish family has not alleged that Fields was thrust into any ethical conflict of interest in his representation of them and Aspen and D&H. They alleged no dispute over coverage. Aspen and D&H did not reserve any rights related to coverage beyond an excess-limits damage award and punitive damages, which did not create an ethical conflict for Fields. The Darwish family points to nothing suggesting their interests diverged from Aspen‘s and D&H‘s interests, forcing Fields to represent one to the detriment of the other. All parties were aligned in defending the Hall action to minimize or avoid liability. In other words, Fields “had no incentive to attach liability to appellant.” (Blanchard v. State Farm Fire & Casualty Co. (1991) 2 Cal.App.4th 345, 350.) Fields’ handling of the case—and the Darwish family‘s dissatisfaction with it—is beside the point, unless perhaps his poor performance shows he was serving Aspen and D&H‘s separate and conflicting interests to their detriment. But the SAC contains no allegations that any such conflict existed that might have encouraged Fields to perform poorly in order to serve Aspen‘s rights over the Darwish family‘s rights.
True, the circumstances giving rise to a conflict of interest are not limited to
First, they cite the “unremitting hostility” of D&H and Fields toward the Darwish family, exemplified by the belief that the Darwish family would be bad witnesses who could not be believed. This is not a conflict of interest. It is part of an attorney‘s honest assessment about the merits of a case. It serves both the insurer and the insured. For the insurer, it can inform the decision whether to litigate or settle. For the insured, it might avoid a much higher damages award if a jury dislikes the insured‘s testimony or finds them not credible. By assessing how a jury might react to testimony from the Darwish family, Fields was serving his clients’ aligned interests in avoiding liability.
Next, the Darwish family cites the rejection of a policy-limit settlement demand at the start of the Hall action without consulting them. They focus on the fact that they might have been exposed to damages exceeding policy limits or punitive damages. But Aspen and D&H were simply exercising the right to control the defense. The policy gave Aspen and D&H
According to a letter attached to the complaint, Fields told Barbara and David he believed the policy limits demand was “clearly premature.” In responding to the demand, Fields chronicled in detail all of the outstanding issues. We need not list them here. Suffice it to say, they were all aimed at defending the Darwish family and Aspen and D&H equally.
Finally, the Darwish family alleges insurer-appointed counsel advised Nede‘s Cumis counsel during later settlement discussions that the Darwish family needed independent counsel because the latest settlement demand exceeded policy limits. This guidance was sound. Aspen and D&H could not settle the case beyond the policy limits without permission from the Darwish family or providing them independent counsel if the Darwish family was expected to pay for the excess amount. One of the circumstances requiring independent counsel is “where the insurer pursues settlement in excess of policy limits without the insured‘s consent and leaving the insured exposed to claims by third parties.” (James 3, supra, 91 Cal.App.4th at p. 1101; see Golden Eagle, supra, 20 Cal.App.4th at p. 1396 [“clear conflict of interest” existed when insureds refused to consent to settlement exceeding policy limits].) The SAC does not allege Aspen pursued a settlement beyond policy limits or even considered accepting this latest demand. At best, there was a “‘mere possibility of an unspecified conflict,” which does not require independent counsel. (Centex Homes II, supra, 19 Cal.App.5th at p. 798.)
The SAC has alleged no divergence between the Darwish family‘s interests and Aspen and D&H‘s interests in the Hall action. The Darwish family may not have liked or agreed with Fields’ litigation decisions, but they have alleged no circumstance that prevented Fields from serving both their interests and Aspen‘s interests. Absent some coverage dispute or reservation of rights that created a risk that Fields will serve Aspen‘s interest to their detriment, independent counsel was not warranted.
III. The Trial Court Properly Denied Leave to Amend
As we have explained, sustaining the demurrer was the incorrect procedure to dispose of the SAC. Because the Darwish family is subject to an adverse judgment on the merits, rather than simply dismissal, it is questionable whether they have the right to amend. In any case, they did not address the trial court‘s denial of leave to amend in their briefs on appeal. They have
IV. The Motion to Strike D&H Is Moot
The Darwish family challenges the trial court‘s grant of D&H‘s motion to strike it from the SAC. Because we modify the judgment in Aspen and D&H‘s favor, that ruling is moot. We need not address it.
DISPOSITION
The judgment is modified to declare (1) no conflict of interest existed entitling the Darwish family to independent counsel pursuant to
The judgment is affirmed as modified. Aspen and D&H are entitled to costs on appeal.
OHTA, J. *
I Concur:
STRATTON, Acting P. J.
* Judge of the Los Angeles Superior Court, assigned by the Chief Justice pursuant to
WILEY, J., Concurring in the result.
I write to attack the notion there is something improper about resolving a suit for declaratory judgment on demurrer. There is not. So long as the parties agree the declaratory judgment complaint serviceably states the facts, a demurrer is the speedy and efficient way to resolve an “actual controversy.” (
If the declaratory judgment complaint alleges facts the defendant thinks are incorrect or incomplete, then a demurrer is not the right way to go, for the demurrer procedure requires the court to accept the factual pleading as it stands. (Cf. Qualified Patients Assn. v. City of Anaheim (2010) 187 Cal.App.4th 734, 756 [“on the few facts known” about the situation, the court “cannot say” what the right answer is] (Qualified).) For material factual disputes, we need a fact finder: a jury or bench trial.
In declaratory judgment cases, dispute over the facts may be common. (Cf. Jefferson, Inc. v. City of Torrance (1968) 266 Cal.App.2d 300, 302 [the defense is rarely satisfied with the complaint‘s statements of the facts].) Whether that is true does not matter here, where there is no factual dispute. What divided the parties was a pure and ripe question of law: whether
The authority for the appropriate and sensible demurrer approach is the memorable 1963 case of Zeitlin v. Arnebergh (1963) 59 Cal.2d 901 (Zeitlin). There the renowned Los Angeles bookseller Jacob Zeitlin sued Los Angeles City Attorney Roger Arnebergh about Arnebergh‘s efforts to suppress Henry Miller‘s then-controversial Tropic of Cancer. Zeitlin appended the book to his complaint for declaratory judgment. Zeitlin wanted a judicial declaration that Tropic of Cancer was not criminally obscene so he could sell copies without fear of prosecution. Defendant and prosecutor Arnebergh answered the complaint and said he believed the book was criminally obscene and he intended to prosecute anyone arrested for its sale. (Id. at pp. 903-905.)
Both sides in Zeitlin agreed on the facts: the words in Tropic of Cancer. The sole question was whether those words were obscene within the meaning of the Penal Code. That question was strictly legal. (Zeitlin, supra, 59 Cal.2d. at pp. 908-911.)
Zeitlin validated using a demurrer to decide the merits of a declaratory judgment action. Arnebergh had filed a general demurrer to Zeitlin‘s complaint. The trial court sustained the demurrer because the trial court read the book and ruled, on the merits, it was obscene. (Zeitlin, supra, 59 Cal.2d. at p. 905.) For a unanimous Supreme Court, Justice Tobriner held the demurrer procedure was right but the substance of the ruling was wrong: Tropic of Cancer was not criminally obscene. (See id. at pp. 908-923.)
After Zeitlin, it is legally wrong to say the demurrer procedure is an inappropriate method for testing the merits of a declaratory relief action. Some more recent authorities thus err. (E.g., Qualified, supra, 187 Cal.App.4th at p. 751; Lockheed Martin Corp. v. Continental Ins. Co. (2005) 134 Cal.App.4th 187, 221, disapproved on another ground by State of California v. Allstate Ins. Co. (2009) 45 Cal.4th 1008, 1036, fn. 11; 5 Witkin, Cal. Procedure (5th ed. 2008 & 2020 supp.) Pleading, § 877.)
This means there is no reason to accuse a thoughtful trial court like this one of error of any kind.
The 1944 decision in Maguire v. Hibernia Savings & Loan Society (1944) 23 Cal.2d 719 (Maguire) did not erect a general ban on demurring to
Zeitlin cited Maguire and repeated its holding: “a plaintiff is entitled to a declaration of his rights, whether the declaration be favorable or adverse . . . .” (Zeitlin, supra, 59 Cal.2d. at p. 908.) Zeitlin then explained what the trial court‘s proper demurrer ruling should have been: Tropic of Cancer was not criminally obscene. (See id. at p. 922 [“Such an art-form must be distinguished from that which is designed to excite or attract pruriency; [Tropic of Cancer] surely does not constitute hard-core pornography.“].)
This trial court did as Zeitlin commanded. The plaintiffs in this case were entitled to a declaration of their rights. The trial court gave them that declaration—on demurrer. Unlike the trial court in Maguire, the trial court here rendered a declaration on the merits. Then it signed the judgment. As a practical matter, that was a declaratory judgment, for the judgment embodied the preceding statement of decision that was its rationale. (See Maguire, supra, 23 Cal.2d at p. 729 [“where the plaintiff is not entitled to a favorable declaration, the court should render a judgment embodying such determination and should not merely dismiss the action“].)
It might be a good practice for a trial court, after ruling on a decisive demurrer in a declaratory judgment action, to cut and paste the court‘s substantive legal analysis into the judgment itself, rather than leaving that substance in a separate minute order or a statement of decision. (See Essick v. City of Los Angeles (1950) 34 Cal.2d 614, 624-625.) Then the “judgment” literally would “declare” the rights and duties of the parties; voila: the demurrer would produce a “declaratory judgment” in name and in fact. (Cf. Guinn v. County of San Bernardino (2010) 184 Cal.App.4th 941, 951 [“Although the statement of decision makes it clear that the court denied the petition on its merits, the judgment does not.“].)
But here no party made this request. The court already had given the parties all they evidently needed.
In sum, defendants that accept the pleaded facts should, as these defendants did, demur to declaratory judgment complaints that properly allege actual controversies. Trial courts should, as this one did, take up the actual
WILEY, J.