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October 1995 
Vol. 1 No. 4 ISSN 1087-6219
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Overruling yet another decision handed down during the tenure of former Chief Justice Bird, the California Supreme Court has determined that there will no longer be tort liability for bad faith denial of contract. Writing for the court, Chief Justice Lucas agreed with critics that the court's prior ruling to the contrary in Seaman's Direct Buying Service, Inc. v. Standard Oil Co., 36 Cal. 3d 752 (1984) was "confusing and ambiguous, analytically flawed, and promotes questionable policy."
In the present case, the jury had found that Belcher Oil Co. authorized the law firm of Morgan, Lewis & Bockius to retain Freeman & Mills to provide litigation support. Belcher not only refused to pay for the services, but also denied the existence of any agreement to pay, in bad faith. A $400,000 punitive damages award followed.
In Seaman's Direct Buying, the Supreme Court had held that a party to a contract faced tort liability if it breached the contract, and then sought to avoid liability by denying, in bad faith and without probable cause that the contract existed. The decision met with widespread criticism. Courts in other states rejected the doctrine. Ninth Circuit judges called for reconsideration of the ruling. The Supreme Court has now agreed.
Beginning with Moradi-Shalal v. Fireman's Fund Ins. Cos., 46 Cal. 3d 287 (1988), the California Supreme Court under Chief Justice Lucas has handed down a number of decisions that tend to limit tort liability. See, e.g., Foley v. Interactive Data Corp., 47 Cal. 3d 654 (1988) (no tort remedy for breach of good faith covenant in employment agreements); Hunter v. Up-Right, Inc., 6 Cal. 4th 1174 (1993) (no fraud claim for inducing employment termination); Applied Equip. Corp. v. Litton Saudi Arabia Ltd., 7 Cal. 4th 503 (1994) (no claim for conspiracy to interfere with one's own contract); Peterson v. Superior Court, 10 Cal. 4th (1995) (overruling strict liability for landlords and hotel owners). The present case is a continuation of that trend.
Freeman & Mills, Inc. v. Belcher Oil Co., 11 Cal. 4th 85 (1995).
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The California Supreme Court has decided that the standard commercial general liability policy does not require an insurer to defend against incidental emotional distress claims that flow from noncovered economic or business torts.
Truck Insurance Exchange issued a comprehensive general liability policy to Marmac, Inc., which provided coverage for "all damages which the insured becomes legally obligated to pay because of . . . bodily injury to any person, and . . . damage to property . . . to which this insurance applies, caused by an occurrence."
After he was demoted following a corporate reorganization, Lester Amey sued Marmac and its officers on various theories, including intentional infliction of emotional distress. Truck Insurance refused to defend. In the ensuing bad faith suit against Truck Insurance and its adjuster, the jury awarded Marmac and its officers actual and punitive damages for wrongful refusal to defend.
The Supreme Court determined that there was no duty to defend. The damages alleged in Amey's complaint all flowed from intangible property losses, which are not included in the definition of "damage to property." Therefore, the loss was not a covered "occurrence." The derivative emotional distress damages were not covered, because they flowed from the same uncovered acts.
An insurer does have a duty to defend even if noncovered claims predominate, so long as there is any potential for coverage. Horace Mann Ins. Co. v. Barbara B., 4 Cal. 4th 1076 (1993). In this case no claim presented any potential for coverage.
Waller v. Truck Ins. Exch., 11 Cal. 4th 1 (1995), time for granting or denying rehearing extended (Sept. 18, 1995).
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The First District Court of Appeal in San Francisco has rejected charges of unconscionability and fraud directed at the arbitration program established by Kaiser Foundation Health Plan and its related entities.
Kaiser's service agreements require arbitration of all claims under a program that Kaiser administers from an "adversarial" perspective. Each side chooses an arbitrator, who together must agree on a third "neutral" arbitrator. However, Kaiser uses its knowledge of previous rulings and its control of its own party arbitrator to control selection of the neutral.
The claimants in this case argued that Kaiser misrepresented the quickness of its arbitration proceedings, and failed to disclose the adversarial slant of the program. The court determined that any misrepresentation about the quickness of the proceedings had not induced agreement to the arbitration clause. It ruled that Kaiser had no affirmative duty to disclose its approach to arbitration, because it was not a fiduciary to its subscribers in negotiating service agreements.
The court rejected the unconscionability claim because there was nothing outrageous about the three-arbitrator procedure, and claimants knew that such "tripartite" panels would be used. There was also nothing unconscionable about Kaiser's administering its own program rather than using an independent organization.
This case illustrates the prevailing judicial attitude in favor of arbitration, and in favor of Kaiser's program, in particular. The only recent reported decisions to overturn a Kaiser arbitration award involved cases in which the "neutral" arbitrator failed to disclose prior relationships with Kaiser. Kaiser Foundation Hospitals, Inc. v. Superior Court, 19 Cal. App. 4th 513 (1993); Neaman v. Kaiser Foundation Hospital, 9 Cal. App. 4th 1170 (1992).
Engalla v. Permanente Medical Group, Inc., 37 Cal. App. 4th 497 (1995), modified and rehearing denied, 37 Cal. App. 4th 1576a.
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Aligning itself with almost all other courts to consider the issue, the California Supreme Court has ruled that a national bank may charge late payment fees so long as they are allowed by the bank's home state.
National banks are chartered by the federal government, and are governed by federal statutes that preempt state law. 12 U.S.C. § 85 provides that national banks may charge "interest" at the rate allowed by the laws of the state where the bank is located.
Citibank imposed late charges of up to $15 on California credit card accounts. Plaintiff claimed the charges were excessive under California law. Citibank asserted that the charges constituted legal "interest" under the law of South Dakota, where Citibank is located.
Noting that the predecessor to section 85 was enacted as part of the National Bank Act of 1864, the Ninth Circuit turned to an 1851 legal dictionary. It defined "interest" as a "sum of money paid or allowed by way of compensation for the loan or use of another sum." Similar definitions appeared in other dictionaries and in judicial decisions of the time. Using those definitions, the court determined that "interest" encompasses late payment charges.
Smiley v. Citibank (South Dakota), N.A., 11 Cal. 4th 138 (1995).
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Applying the California Supreme Court's decision in Turner v. Anheuser-Busch, Inc., 7 Cal. 4th 1238 (1994), the Ninth Circuit has ruled that an executive, who received a pay cut and whose duties were reduced, cannot claim that his working conditions were so intolerable as to constitute constructive discharge. The decision affirmed a summary judgment in favor of AC&R Advertising in a lawsuit brought by Patrick King.
King claimed that he worked as an advertising executive in Australia until 1987, when AC&R's chief executive officer, Stephen Rose, hired him to head the firm's West Coast operations. According to King, Rose promised him permanent employment. He also claimed that Rose was going to groom him to take over the CEO position.
Rose left the company in 1990, without recommending that King replace him as CEO. Rose's replacement reduced King's duties, proposed that King's salary be reduced by $60,000, and canceled King's expected $100,000 bonus. AC&R fired King when he rejected the terms, but later rescinded the termination and offered the same terms. King then resigned, and claimed that AC&R had "constructively" discharged him.
The Ninth Circuit decided that King's decision to resign was unreasonable as a matter of law. Constructive discharge requires proof that working conditions were so intolerable that a reasonable employee in King's position would have felt compelled to resign. The working conditions must be unusually aggravated or amount to a continuous pattern, rather than single, trivial or isolated acts of misconduct. California cases have established that demotions and pay reductions are normal risks of the employment relationship. Turner, 7 Cal. 4th at 1247; Rochlis v. Walt Disney Co., 19 Cal. App. 4th 201, 212 (1993). The Ninth Circuit concluded that King's evidence of his working conditions did not prove a continuous pattern of harassment or aggravating conditions.
King v. AC&R Advertising, 1995 U.S. App. LEXIS 25208 (9th Cir. Sept. 7, 1995).
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The California Supreme Court has ruled that a lender which purchases its real property security with a full credit bid at a nonjudicial foreclosure sale does not lose its right to sue a nonborrower for fraud. (For another discussion of the full credit bid rule, see the report on Romo v. Stewart Title of California, which appeared in the August 1995 issue of Appellate Decisions Noted.)
Alliance Mortgage alleged that a number of defendants induced it to make mortgage loans by use of inflated appraisals and other fraudulent acts. Alliance did not discover the fraud until after it acquired the mortgaged properties at nonjudicial foreclosure sales by bidding the full amounts owed on the loans secured by the properties-called full credit bids.
Under Cornelison v. Kornbluth, 15 Cal. 3d 590 (1975), a lender who makes a full credit bid generally may not later claim that the property was actually worth less than the bid. However, the Supreme Court interpreted the complaint to allege that defendants' fraud had induced Alliance to make its full credit bids. If it could prove those allegations, the full credit bid rule would not apply, and Alliance could recover the difference between its bids and the actual values of the properties.
If it could not prove that defendants' fraud induced the bids, but could prove it induced the loans, Alliance might still be able to recover other damages that flowed from the fraud. A mortgage lender would not be able to prove that fraud induced a full credit bid, if it was manifestly unreasonable to make a full credit bid without investigating the actual value of the property.
Alliance Mortgage Co. v. Rothwell, 10 Cal. 4th 1226 (1995).
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The Sixth District Court of Appeal in San Jose has ruled that a products liability claim against a maker of contact lens cleaning solution is preempted by the Medical Device Amendments to the Food, Drug and Cosmetic Act.
Leslie Scott mistook CIBA's contact lens cleaning solution for saline solution. She placed a lens with unneutralized cleaning solution on her eye, thereby injuring herself.
Section 360k of the Medical Devices Amendments generally prohibits any state from imposing requirements on medical devices that differ from those imposed by federal law. That preemption extends to state product liability lawsuits, even though the effect of such preemption is to deny injured consumers any remedy whatsoever. They must rely on the Food and Drug Administration to prevent defective devices from reaching the market.
The court declined to follow two recent cases from the Second District Court of Appeal, which had held that some state law tort claims could survive preemption under section 360k. See Powers v. Optical Radiation Corp., 37 Cal. App. 4th 1444 (1995), review denied and official reporter directed not to publish the decision (Nov. 2, 1995); Evraets v. Intermedics Intraocular, Inc., 29 Cal. App. 4th 779 (1994). If you would like to know more about such directions from the Supreme Court, get the facts about depublication.
Scott v. CIBA Vision Corp., 1995 Cal. App. LEXIS 893 (Cal. Ct. App. Sept. 15, 1995).
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Subsequent treatment of decisions reported on in earlier issues:
FDIC v. O'Melveny & Myers (September 1995 issue), now reported at 61 F.3d 17 (9th Cir. 1995).
Fleming v. Imperial Corp. of America (July 1995 issue), time for granting or denying review extended (Sept. 18, 1995).
Honey Baked Hams, Inc. v. Dickens (September 1995 issue), now reported at 37 Cal. App. 4th 421 (1995).
Lafayette Morehouse, Inc. v. Chronicle Publishing Co. (September 1995 issue), now reported at 37 Cal. App. 4th 855 (1995).
Martel v. County of Los Angeles (July 1995 issue), petition for cert. filed (Aug. 30, 1995).
Montrose Chem. Corp. of California v. Admiral Ins. Co. (August 1995 issue), modified and rehearing denied (Aug. 31, 1995).
Peterson v. Superior Court (September 1995 issue), now reported at 10 Cal. 4th 1185 (1995).
Villa v. McFerren (July 1995 issue), review denied (Aug. 31, 1995).
Werner v. Blankfort (August 1995 issue), official reporter directed not to publish the decision (Sept. 28, 1995). The decision may no longer be cited. Cal. R. Ct. 977. If you would like to know more about such directions from the Supreme Court, get the facts about depublication.
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