Low, Ball & Lynch's

WEEKLY LAW RESUME

October 9, 2003 Issue By: Raymond Coates

Bad Faith - Stipulated Judgments

Edward M. Wolkowitz v. Redland Insurance Company

Court of Appeal, Second District

(September 25, 2003)

This is another in a series of cases interpreting Hamilton v. Maryland Cas. Co. (2002) 27 Cal.4th 718. That opinion dealt with the liability of an insurance company for a stipulated judgment where the insurer is providing a defense.

In this case, Edward M. Wolkowitz, a bankruptcy trustee for Shamrock Tire, Inc., sued Redland Insurance Company and its attorneys retained to defend Shamrock for the bad faith refusal to accept the pretrial offer to settle a personal injury action against Shamrock within policy limits. The underlying case involved a person who purchased from Shamrock a "lift kit" for installation in his vehicle. While driving, he lost control of his vehicle and was severely injured. He sued Shamrock and others for those injuries. He offered to settle his complaint for the policy limits of $500,000. Redland refused the offer. He then offered an agreement not to execute a judgment against Shamrock in exchange for an assignment of Shamrock's cause of action against Redland for allegedly bad faith refusal to settle. Shamrock thereafter filed bankruptcy before the scheduled trial date. The trustee and the plaintiff in the personal injury action entered into an agreement providing that plaintiff had a $26,225,000 claim against the bankruptcy estate as an unsecured creditor. The agreement further provided that plaintiff would seek recovery solely against proceeds to be recovered from Redland. The bankruptcy court approved the settlement and allowed the claim. Thereafter, this action was filed by the trustee.

Redland demurred to the complaint, and the trial court sustained the demurrer without leave to amend and dismissed the complaint. The trustee appealed.

The Court of Appeal affirmed. In doing so, it relied upon Hamilton v. Maryland Cas. Co., supra. This Supreme Court decision held that a settlement between the insured and third party claimants entered into without the defending insurer's consent or participation and where the insured had no obligation to pay the judgment, was entitled to no weight or effect in an action against the insurer for breach of the contractual duty to settle. The Court reached this decision even though the settlement had been determined to be in good faith. The Court further held that until a judgment had been entered against the insured after trial, the insured had not suffered any damages. Damages are only suffered after trial when an excess verdict has been rendered. Hamilton further held that a good faith hearing did not amount to a judicial finding of liability. Further, it did not matter whether the bad faith cause of action was based upon tort or contract. In either case, the action could not be brought.

In this case, the question was whether allowing the claim in the bankruptcy court constituted a judicial determination of liability and accurately reflected the actual damages sustained by Shamrock. This Court stated it did not. There was no contested evidentiary hearing. Rather, the bankruptcy court simply granted the allowance of a claim. Thus, there was no actual judicial finding that Shamrock was liable to the plaintiff in an agreed amount.

The Court stated the fact that the insured elected not to oppose or defend a bankruptcy claim and the bankruptcy trustee agreed with the claimant did not make the claim binding on the insurer. A bankruptcy court's allowance of a claim did not provide sufficient assurance that a stipulated claim, approved without objection and without a contested evidentiary hearing, accurately or reliably reflected the debtor's actual liability on the claim. Thus, no bad faith action for unreasonably refusing to settle could be brought based upon the allowance of that claim.

Furthermore, the trustee had not alleged any damages caused by the refusal to settle. Since the complaint could not be amended to allege such damages, the complaint did not properly allege Redland was in bad faith by refusing to settle. Thus, the demurrer was properly sustained without leave to amend. The case was also dismissed against the defense counsel since the same damages were sought. Since Shamrock suffered no harm, no cause of action was stated against the attorneys.

The judgment of dismissal was affirmed as against both Redland and the attorneys.

COMMENT

This case further reaffirms the decision in Hamilton and applies it to a bankruptcy proceeding. In the absence of an actual trial with an excess verdict, no cause of action can be stated for bad faith refusal to settle. ____ To order a printed version of this analysis, or change your subscription information, reply to this transmission. Information regarding this and other WEEKLY LAW RESUME TM articles is available from Raymond Coates at

(650) 685-7160, RCoate[email protected] or at WWW.LOWBALL.COM. The WEEKLY LAW RESUME TM is published fifty-two times a year, and is a complimentary publication of LOW, BALL & LYNCH, Attorneys at Law, a Professional Corporation, with offices in San Francisco, Redwood City and Monterey, California.