By: Paul T. McBride
On November 7, 2017, Judge David Brown of the Sacramento County Superior Court ruled that an intervenor insurance carrier may not file a cross-complaint in a construction defect lawsuit. While this ruling is not binding precedent, if upheld on appeal it will affect the rights of intervening insurance carriers, and so merits discussion.
Background- Effect of Corporate Suspension
California Revenue & Taxation Code §23301 provides for suspension of a California corporation’s “rights, powers, and privileges” for nonpayment of taxes. Once it is suspended, a corporation is prohibited from taking any actions; it can neither prosecute nor defend lawsuits. Gar-Lo, Inc. v. Prudential Sav. & Loan Assn. (1974) 41 Cal.App.3d 242. Since it cannot defend a lawsuit, it is a comparatively simple matter to take a default judgment against a suspended corporation, provided it is properly served. Once a default judgment is entered against a suspended corporation, it may be enforced, i.e. collected, against its insurance carrier, pursuant to California Insurance Code §11580(b)(2), assuming the judgment creditor can prove the damages encompassed by the judgment are covered by the policy of insurance.
Intervention by Insurance Carrier in Case Involving Suspended Corporation
When a suspended corporation is named as a defendant or cross-defendant in a lawsuit, they may not answer the suit. This disability puts their insurance carriers at substantial risk, since a default judgment entered against the suspended contractor corporation may be enforced against them. As a result, insurance carriers typically intervene in cases in which a suspended corporation they insure is a defendant. Intervention is authorized under Code of Civil Procedure §387, which provides:
“Upon timely application, anyone who has an interest in the matter in litigation, or in the success of either of the parties, or an interest against both, may intervene in the action or proceeding.”
The interest of the insurance carrier in the litigation is obvious- it will be asked to pay the default judgment entered against its suspended insured. Since the insured cannot defend itself, there will be no opportunity to defend the merits of the claim unless the insurance company is allowed to intervene and defend the claim itself.
Pre-1998 Law- Intervention to Protect Insurance Carrier’s Rights Only
Truck Insurance Exchange v. Superior Court (1997) 60 Cal.App.4th 342 was a dispute between three insurance carriers, Truck Insurance Exchange (“Truck”), Transco, and Alpine. All three carriers insured RCS, a suspended roofing corporation. Several construction defect lawsuits were pending against RCS, of which Truck was defending at least one. In the meantime, Transco and Alpine filed a separate lawsuit against RCS seeking declaratory judgment rescinding their policies of insurance with RCS. If rescission was granted, Truck would lose any claims it might otherwise have against Transco and Alpine for equitable contribution from their policies as to the claims against RCS that Truck was defending. Since RCS could not defend itself in the declaratory relief action, Travelers sought leave to intervene in it. Transco and Alpine opposed Travelers motion for leave to intervene.
The court found that Travelers did have an interest in the litigation, for the reasons stated above, and allowed it to intervene in the declaratory relief action. It held:
“If Truck is not permitted to intervene, it will have no opportunity to prove that Transco and Alpine are coinsurers of RCS. Permitting Truck to intervene and putting Transco and Alpine to their proof will simply bar them from unilaterally obtaining a judicial determination that their policies are rescinded. The intervention certainly will not foreclose the possibility that they will prevail but will force them to prove their case. In other words, there is no apparent injustice in a procedure that simply forecloses Transco’s and Alpine’s chances of “shooting fish in a barrel.” However, if the evidence to support rescission is insufficient, then Truck’s interest in preserving its claim for equitable indemnity would not be lost as it would be if the matter is concluded due to RCS’s default.”
The Court also rejected the argument that allowing Truck to intervene and defend the rescission action would be equivalent to allowing a suspended corporation to defend itself. The Court stated that intervention and subrogation are two different concepts. A party intervenes to protect its own rights in its own name, and is not affected by the disability of any other party. By contrast, a party who enters an action as a subrogee stands in the shoes of its subrogor, and possesses no greater rights or powers than the subrogor. Since the subrogor, RCS, was a suspended corporation, Truck would not be able to defend the case if its status was merely that of a subrogee. However, as an intervenor, it could litigate its own interests, but only those interests: “Truck has independent standing to preserve its right to claim such contribution as may be available from Transco and Alpine.”
1998 Amendment to Taxation and Revenue Code
Section 19719 of the Taxation and Revenue Code makes it a misdemeanor for any person to attempt to exercise the powers of a suspended corporation. In 1998, subsection (b) was added to Section 19719, and states as follows:
“This section shall not apply to any insurer, or to counsel retained by an insurer on behalf of the suspended corporation, who provides a defense for a suspended corporation in a civil action based upon a claim for personal injury, property damage, or economic losses against the suspended corporation, and, in conjunction with this defense, prosecutes subrogation, contribution, or indemnity rights against persons or entities in the name of the suspended corporation.”
On its face, this provision appears to specifically authorize an insurance carrier to not only defend claims against a suspended corporation, but also to prosecute actions for contribution or indemnity, such as a cross-complaint for equitable indemnity. However, this interpretation has been rejected by the Court of Appeals, in Kaufman and Broad Communities, Inc. v. Performance Plastering (2006) 136 Cal.App.4th 212, and most recently, by the Sacramento County Superior Court in a ruling issued on November 7, 2017, in the case of Bankett v. Beazer Homes.
Performance Plastering Case- Carriers Still Must Intervene
In the Performance Plastering case, CalFarm Insurance, the insurance carrier for a suspended stucco corporation, retained counsel who filed an answer for “Performance Plastering, Inc., a suspended corporation, by and through its general liability insurance carrier, CalFarm Insurance Company.” CalFarm did not attempt to intervene in the action. The plaintiff, Kaufmann and Broad, dismissed its action against Performance Plastering. CalFarm/Performance Plastering filed a memorandum of costs against K&B. K&B filed a motion to dismiss the memorandum of costs, arguing that CalFarm was not a party to the action, because it had not intervened, and Performance Plastering, as a suspended corporation, could not maintain the action in its own right.
The appellate court agreed with Kaufman and Broad and ordered the memorandum of costs dismissed. It rejected CalFarm’s argument that the 1998 amendment to Section 19719 of the Taxation and Revenue Code authorized an insurance carrier to retain defense counsel to defend a suspended corporation in the corporation’s own name. It noted that such an interpretation would have the effect of reviving a suspended corporation and granting it corporate powers, and would thus violate Section §23301 of the Taxation and Revenue Code. Rather, in the Court’s view, the 1998 amendment served merely to clarify that any actions taken by an insurance company or its attorney in intervening on behalf of a suspended corporation would not subject them to criminal sanctions. However, they still must intervene in the insurance company’s name and could only exercise such rights as the insurance company held, not rights held only by the insured.
The court noted, with respect to the 1998 amendment of Section 19719:
“While the enactment of the section exempted insurance companies from penal sanctions for participating in such litigation, it did not remove the disability applicable to suspended corporations under section 23301 nor did it authorize a new form of participation in a lawsuit-neither as a party nor intervener . . . Section 19719 does not generally authorize the insurer to exercise the rights and powers of its corporate insured. This obviously includes the right to sue or defend a lawsuit or even to appear in the lawsuit. This statute does not authorize the insurance company to exercise those rights and powers in the corporation’s name in a lawsuit. Instead, the only manner in which the insurer may exercise those powers is by intervening in the lawsuit under Code of Civil Procedure section 387 and asserting any defenses on behalf of its insured.”
Bankett v. Beazer- Intervenor for Suspended Corporation May not File Cross-Complaint
Bankett v. Beazer is a current construction defect case pending in Sacramento County Superior Court. It involves 201 homes in several Beazer-built projects throughout Sacramento County.
CLF was a subcontractor who installed Milgard windows at some of the homes. By the time the lawsuit was filed, CLF was a suspended corporation. Beazer named it as a cross-defendant. Beazer did not name Milgard.
One of CLF’s insurance carriers, AMCO, filed a complaint in intervention to defend the claims against CLF. AMCO also filed a cross-complaint for contribution and equitable indemnity against Milgard, essentially seeking to pass through any judgment based on product defects, as opposed to installation defects, to the window manufacturer.
Milgard filed a motion for judgment on the pleadings with respect to AMCO’s cross-complaint. It cited Truck Insurance Exchange and Performance Plastering for the proposition that an intervenor may only assert its own rights, not those of the suspended corporation. While an insurance carrier has a right to intervene to defend the claims against its insured, it has no right, Milgard argued, to seek affirmative relief, because an action for affirmative relief rests with the insured, not with the insurance carrier.
In opposition, AMCO argued, first and foremost, that the 1998 amendment of Section 19719 specifically authorizes the insurance carrier to prosecute indemnity rights as well as to defend the claim. In addition, it pointed out that it would be inequitable and unfair to punish the insurance carrier for the actions of its insured, i.e. to deprive the insurance carrier of the right to seek indemnity from other potentially responsible parties.
Judge Brown, in a ruling issued on November 7, 2017, granted Milgard’s motion. He rejected the contention that Section 19719(b) specifically authorizes an intervening insurance carrier to file an indemnity-based cross-complaint. He characterized the right to prosecute an indemnity claim as one “belonging solely to CLF.” Since the case law clearly states that an intervenor may only litigate its own interests, AMCO could only defend the claims against CLF, not prosecute cross-complaints based on rights that inhered only to CLF. He wrote:
“Although an insurer can intervene in an action to prevent a default judgment being entered and enforced against available insurance proceeds, neither case nor statutory law provides that an intervening party may cannibalize all the rights and privileges of an insured suspended corporation, as if the suspension never occurred. This is particularly true where the insurer seeks affirmative relief.” (Emphasis added.)
ANALYSIS AND DISCUSSION
We disagree with the analysis and ruling of the Superior Court and believe the ruling stands a good chance of being overturned on appeal, should AMCO choose to challenge it. We say this because it renders a nullity of the statutory language in Section 17219(b) that authorizes, in conjunction with the defense of a suspended corporation, an insurance carrier to prosecute “subrogation, contribution, or indemnity rights against persons or entities in the name of the suspended corporation.” This language, it seems to us, is direct legislative authority for an insurance company to not only defend claims, but to prosecute such indemnity rights as its insured possesses.
Moreover, we believe that defense of a claim must include the right to apportion responsibility for the claim to others where the evidence warrants it. The situation presented by this case presents a clear example. A window supplier/installer is liable for both product and installation defects in the window. However, as to product defects, a jury, if given the opportunity, will likely shift liability from the supplier to the manufacturer. If AMCO is not allowed to bring Milgard into the case, it faces far higher potential liability than if it is.
We are involved in many cases where an intervenor insurance carrier has filed a cross-complaint against other parties. The ruling issued by the Sacramento County Superior Court will probably motivate many such parties to challenge the insurance intervenor’s right to prosecute their cross-complaints. As stated above, we do not think this ruling is well-reasoned or correct, but others may have a different opinion.
Paul T. McBride is Partner of Kring & Chung, LLP. He can reached via email at [email protected]