Case Name: Hecke v. Federal Insurance Company
Case No.: 17CV315410

Defendant Federal Insurance Company (“Federal” or “Defendant”) moves for summary judgment in its favor and against plaintiff Leo Hecke (“Plaintiff”).

After full consideration of the evidence, separate statements and authorities submitted by the parties, the Court makes the following rulings:

Plaintiff’s request for judicial notice is GRANTED. (Evid. Code, § 452, subd. (d).)

Federal’s motion for summary judgment is GRANTED. As a general matter, once a judgment has been obtained against an insured defendant, the plaintiff, i.e., the judgment creditor, has a statutory right under Section 11580, subdivision (b)(2), to enforce any liability insurance covering the defendant. (See Reliance Ins. Co. v. Superior Court (2000) 84 Cal.App.4th 383, 386.) There is no right to payment without suit, thus, the insured party may have to bring two lawsuits to obtain payment: the first against the insured to obtain the judgment, and then a separate action against the insurer to enforce that judgment. (Rose v. Royal Ins. Co. of America (1991) 2 Cal.App.4th 709, 718.) This is precisely what Plaintiff has done here. “The judgment creditor’s right to sue is not derivative or dependent upon any assignment from the insured.” (Shafer v. Berger, Kahn, Shafton, Moss, Figler, Simon & Gladstone (2003) 107 Cal.App.4th 54, 68 [internal citation omitted].) Under Section 11580, “a judgment creditor may proceed directly against any liability insurance covering the defendant, and obtain satisfaction of the judgment up to the amount of the policy limits.” (Reliance Ins. Co. v. Superior Court (2000) 84 Cal.App.4th 383, 386.)

Section 11580 mandates that insurance policies which are subject to the statute contain a provision which provides for the aforementioned right, i.e., a direct right of action against the insurer. If the subject policy does not contain such a provision, it is construed to contain such a provision as a matter of law. (Ins. Code, § 11580.) Insurance policies which are subject to the statute include the following: those (1) “for injury suffered by another person other than … a policy of workers’ compensation insurance” or (2) “for loss or damage to property caused by draught animals or any vehicle ….” (Ins. Code, § 11580, subd. (a).) The direct action provision described in subdivision (b) “allows an injured person who has secured a judgment in an action based upon bodily injury, death, or property damage to bring an action against the insurer on the policy.” (People ex rel. City of Willits, supra, 97 Cal.App.4th at 1130.)

Federal maintains that Section 11580 does not apply to the judgment obtained in the Underlying Action due to its nature. In order to bring a direct action against Federal, Plaintiff has to satisfy both subdivisions of Section 11580 by demonstrating:

(1) he obtained a judgment for bodily injury, death, or property damage;
(2) the judgment was against a person insured under a policy that insures against loss or damage resulting from liability for personal injury or insures against loss of or damage to property caused by a vehicle or draught animal,
(3) the liability insurance policy was issued by Federal.
(4) the Policy covers the relief awarded in the judgment, and
(5) the Policy either contains a clause that authorizes the claimant to bring an action directly against Federal or the Policy was issued or delivered in California and insures against loss or property damage resulting from liability for personal injury or insures against loss of or damage to property caused by a vehicle or draught animal.

(Willits, supra, 97 Cal.App.4th at 1130, fn. 2 [emphasis added].)

Here, per the evidence submitted by Federal, the judgment issued in the Underlying Action was solely for claims for economic losses, i.e., breach of contract and fraud. (Federal’s Separate Statement of Undisputed Material in Support of Motion for Summary Judgment (“UMF”) Nos. 1-8.) It clearly was not based upon bodily injury, death, or property damage, but rather the alleged wrongful acts of Ferguson, the owner and operator or Mall Teen Cards, in perpetuating a Ponzi scheme involving investment in the ownership of ATM machines. Several cases in which judgment creditors have sued insurers to recover on judgments based on the wrongful conduct of corporate directors and officers, like the case at bar, concluded that the plaintiff-creditor could not properly proceed under Section 11580, subdivision (b)(2), because the underlying action was patently not based upon bodily injury, death, or property damage within the meaning of the section. (See, e.g., Xebec Dev. Partners, Ltd. v. Nat’l Fire Ins. Co. (1993) 12 Cal.App.4th 501, 527; GDF Int’l, S.A. v. Associated Elec. & Gas Ins. Services Ltd. (N.D. Cal. 2003) 2003 WL 926790, *4 [applying California law].) Thus, because the judgment obtained in the Underlying Action does not come within the ambit of Section 11580, Plaintiff cannot maintain a direct action against Federal under that section to collect on it.

Federal additionally establishes, via the submission of the Policy itself, that it does not cover the relief awarded in the judgment as required by Section 11580. Per its express terms and limitations, the Policy did not provide coverage for any claims “[b]ased upon, or arising from or in any consequence of any liability in connection with an oral or written contract or agreement to which an Organization is a party,” or involving “[c]onduct … based upon, arising from or in consequence of (a) Any deliberately fraudulent act or omission, or any willful violation of any statute or regulation, by an Insured, if a final, non-appealable adjudication in any underlying proceeding or action … establishes such an act or omission or violation; or (b) An insured having gained any profit, remuneration or other advantage to which such Insured was not legally entitled, if a final, non-appealable adjudication in any underlying proceeding or action … establishes the gaining of such profit, remuneration or advantage (UMF No. 21.) The Underlying Action (and resulting judgment) was based on Ferguson and Mall Teen Cards, the Insureds’, alleged fraud and breach of agreements entered into with Plaintiff and his wife. (FAC in Underlying Action, ¶¶ 9, 11, 16.) Thus, by its own terms, the Policy clearly does not cover the relief awarded in the judgment.
Even if the claims asserted in the Underlying Action were covered by the Policy and the Policy was the type to which Section 11580 applies, Federal’s assertion that the Policy is exhausted is yet another strike against Plaintiff’s ability to maintain a direct action under the section. An action by a judgment creditor against an insurer to collect on a judgment under Section 11580 is not viable if the limits of the subject policy have been exhausted. (Archdale v. American Internat. Specialty Lines Ins. Co. (2007) 154 Cal.App.4th 449, 458, fn. 7, 480, fn. 28.) Federal’s evidence establishes that the Policy was exhausted in December 2015 after it entered into a settlement agreement with Mall Teen Cards/Ferguson that included a payment of an amount- $619,055.07- that the parties expressly agreed constituted all of the remaining policy limits. (UMF Nos. 31.)

Based on all of the foregoing, it is clear, therefore, that Plaintiff cannot maintain a direct action under Section 11580 against Federal because he lacks standing to do so. In his opposition, seemingly recognizing the various disqualifying elements of his situation as it relates to asserting a direct action under Section 11580, Plaintiff does not dispute that the section does not apply to his claims. He nevertheless asserts that he can still pursue recovery on the judgment against Federal in the instant action as a third-party beneficiary of the Policy.

In its reply, Federal insists that Plaintiff has only a “singular” means to attack it- through a direct action filed pursuant to Section 11580. However, Federal cites no authority which provides that Section 11580 is a judgment creditor’s sole remedy against an adversary’s insurer, and the Court is aware of none. (See Hearn Pacific Corp. v. Second Generation Roofing, Inc. (2016) 247 Cal.App.4th 117, 142.) One California court has held that a judgment creditor may pursue claims against the insured’s insurer in their own right, and seek tort damages as a third-party beneficiary of the policy, if there is a final judgment rendered against the insured that is covered by the policy and the insurer refuses in bad faith to pay it. (Id., citing Hand v. Farmers Ins. Exchange (1994) 23 Cal.App.4th 1847.) It is also well-settled that judgment creditors may bring suit under an assignment of rights from the insured in some instances. (Id. at 143.) Thus, Federal’s assertion that Plaintiff only has a singular means to attack it is not persuasive.

While there is space, however, for a judgment creditor to bring an action outside of the scope of Section 11580, Plaintiff has not established his ability to do so here. First, even assuming, for the sake of argument, that Plaintiff is a third-party beneficiary to the Policy, he is not seeking tort damages based on Federal’s bad faith failure to pay. There are no allegations in the operative Complaint regarding bad faith on the part of Federal, and in any event, the judgment is not covered by the Policy as explained above. In his opposing memorandum, Plaintiff makes a variety of accusations regarding Federal’s conduct, principally that it wrongfully allowed Ferguson to use the proceeds of the Policy to pay criminal restitution owed by him, an action that purportedly violates California public policy. But none of the foregoing is alleged in the Complaint and Federal is only obligated to respond to what is actually pleaded. (See Hutton v. Fidelity Nat’l Title Co. (2013) 213 Cal.App.4th 486, 493 [explaining that a summary judgment defendant need only “negate plaintiff’s theories of liability as alleged in the complaint; that is, a moving party need not refute liability on some theoretical possibility not included in the pleadings”].)

Second, Plaintiff fails to demonstrate that he is an intended third-party beneficiary under the Policy. Generally, absent an assignment of rights or final judgment involving Section 11580 (or the other circumstances articulated above), a third-party claimant may not bring a direct action against an insurance company on an insurance contract because the insurer only owes a duty to the insured. (See Harper v. Wausau Ins. Co. (1997) 56 Cal.App.4th 1079, 1086.) However, Civil Code section 1559 provides an exception, providing that “[a] contract, made expressly for the benefit of a third person, may be enforced by him at any time before the parties thereto rescind it.” (Id., citing Civ. Code, § 1559.) But if the third party is merely an “incidental beneficiary” of the policy, it has no grounds for recovery. (See American Home Ins. Co. v. Travelers Indem. Co. (1981) 122 Cal.App.3d 951, 967.)

A party claiming to be a third-party beneficiary bears the burden of proving that the contracting parties promised the performance that the third-party beneficiary seeks. (See Whiteside v. Tenet Healthcare Corp. (2002) 101 Cal.App.4th 693, 708.) “Generally, a policy of indemnity insurance will not inure to a third party’s benefit unless the contract makes such an obligation express, and any doubt should be construed against such intent.” (Id. at 967 [emphasis added].) For a third party to qualify as an intended beneficiary under a contract, the intent of the contracting parties must appear from the terms of the contract. (See Johnson v. Holmes Tuttle Lincoln-Merc. (1958) 160 Cal.App.2d 290, 297.) Thus, the determination of whether a third party is an intended beneficiary or merely an incidental beneficiary to the contract “involves construction of the parties’ intent, gleaned from reading the contract as a whole in light of the circumstances under which it was entered.” (Jones v. Aetna Cas. & Surety Co. (1994) 26 Cal.App.4th 1717, 1724.)

Federal responds in its reply that Plaintiff was not a third-party beneficiary of the Policy at its issuance, and would only obtain such status after judgment was obtained in the Underlying Action by virtue of Section 11580, which he cannot do for the reasons set forth above. (See Hughes v. Mid-Century Ins. Co. (1995) 38 Cal.App.4th 1176, 1185 [explaining that “by virtue of section 11580, a judgment creditor of an insured enjoys third party beneficiary status and rights under the policy, and in this respect stands apart from those ‘third party claimants’ who have not achieved that status’].) Importantly, an insurer’s duty to settle a case runs to the insured, not the injured claimant. (See Murphy v. Allstate Ins. Co. (1976) 17 Cal.3d 937, 941.) As the court explained in Murphy, “the duty to settle is implied in law to protect the insured” and “[a] third party should not be permitted to enforce covenants made not for his benefit, but rather for others. He is not a contracting party; his right to performance is predicated on the contracting parties’ intent to benefit him.” (Id. at 944.) Liability provisions, i.e., the type present in the Policy, do not provide for payment without regard to fault and thus do not create a right of enforcement on the part of the injured party. (See Harper v. Wausau Ins. Co. (1997) 56 Cal.App.4th 1079, 1090-1091.) Per its express terms, the Policy is a typical third-party liability policy where the insurer assumes a contractual duty to pay judgments the insured becomes legally obligated to pay as damages. It does not contain a separate obligation to Plaintiff or to any class of persons, nor does it provide coverage for anything other than liability. (See Declaration of Edward Piantek in Support of Motion for Summary Judgment, Exhibit A.) If every liability policy were interpreted to make the injured party a third-party beneficiary of the policy, as Plaintiff appears to argue it should be, the third party would have no need to sue the insured, and could instead sue the insurer directly, completely eviscerating Section 11580. (See Harper, supra, 56 Cal.App.4th at 1086.) Notably, Plaintiff points to no language in the Policy which otherwise supports his contention that he was intended to be a third-party beneficiary to it. The terms instead show an intent to protect the insureds from losses they become legally obligated to pay. Accordingly, Plaintiff lacks standing as a third-party beneficiary to sue Federal directly to recover on the judgment or challenge its payment of the Policy’s proceeds to Mall Teen Cards/Ferguson, as Federal contends.

As for Federal’s remaining argument that Plaintiff is improperly seeking to enforce a judgment that does not belong to him by failing to include his wife, Donna, who is an indispensable party, Plaintiff arguably concedes the merit of this assertion by stating that Donna assigned her claims to her husband and requesting leave to amend to plead as much. Plaintiff thus recognizes the need to account for her absence from this action, which seeks to collect on a judgment that was entered in favor of both Plaintiff and his wife. (UMF No. 69.) A plaintiff is required to join as parties to the action any person whose interest is such that any judgment rendered in the person’s absence might either (a) prejudice the person’s ability to protect his or her interest in later litigation, or (b) leave any of the parties before the court exposed to a risk of additional liability or inconsistent obligations. (Code Civ. Proc., § 389, subd. (a); see Olszewski v. Scripps Health (2003) 30 Cal.4th 798, 808-809.) As relevant here, where a number of persons have an undetermined interest in the same property or fund, each is an indispensable party to any action by the other to obtain his share of the property or fund. (Bank of Calif., Nat’l Ass’n v. Superior Court (1940) 16 Cal.2d 516, 521.) The rationale being that the judgment obtained by one claimant for part of the property or fund would necessarily determine the amount remaining available for the others. (Id.) Given that the judgment in the Underlying Action belongs to both Plaintiff and his wife, it is easy to see how Plaintiff’s engagement in this action, which involves one policy and one party, Federal, necessarily effects his wife. If the preceding arguments raised by Federal were not persuasive, it would be appropriate to grant Plaintiff leave to allege that his wife assigned her claims to him. However, because this action fails for several other reasons, there is no need to do so.

In sum, Plaintiff lacks standing, under Section 11580 or as a third-party beneficiary, to file a direct action against Federal. Further, even if such an action could be asserted, it would not be viable due to the exhaustion of the Policy. Thus, summary judgment in Federal’s favor is warranted.