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AKH Co., Inc. v. Universal Underwriters Insurance Co.

United States District Court, D. Kansas

March 23, 2015

AKH COMPANY, INC., Plaintiff/Counter-Defendant,
v.
UNIVERSAL UNDERWRITERS INSURANCE COMPANY, Defendant/Counter-Claimant.

MEMORANDUM AND ORDER

JULIE A. ROBINSON, District Judge.

This case comes before the Court on the parties' cross-motions to determine choice of law (Docs. 164, 168). Also before the Court is Defendant/Counter-Claimant Universal Underwriters Insurance Company's Motion to Strike Affidavit in Support (Doc. 184), which asks the Court to strike two declarations of Vatche Chorbajian that were filed in support of Plaintiff/Counter-Defendant AKH Company, Inc.'s ("AKH") motion to determine choice of law. As described below, the Court grants in part and denies in part both parties' choice of law motions. Universal Underwriters Insurance Company's ("UUIC") motion asking the Court to apply California law to issues of reimbursement and good faith and fair dealing is granted; it is otherwise denied. AKH's motion to apply Kansas law to its claim for attorney fees is granted; it is otherwise denied. The Court grants in part and denies in part UUIC's motion to strike the Chorbajian's declarations. The Court grants the motion to strike Exhibit 1; the motion is otherwise denied.

I. Background

This is an insurance coverage dispute filed by AKH against UUIC, arising out of a trademark infringement action against AKH which UUIC defended and settled under a reservation of rights. The Court exercises diversity jurisdiction. In May of 2010, the Reinalt-Thomas Corporation dba Discount Tire ("R-T") filed a civil action against AKH in the District of Arizona, alleging that AKH infringed upon and diluted its trademark under state and federal law. AKH in turn filed its own civil action against R-T in the Central District of California and successfully moved to transfer venue of the first action to the Central District of California. The two lawsuits were consolidated. In December of 2012, after extensive litigation, the consolidated lawsuits were settled. UUIC asserts that R-T and AKH engaged in settlement negotiations between late September and November 20, 2012, but that AKH did not notify UUIC of these discussions until R-T had presented AKH with a settlement demand. AKH asked UUIC for settlement authority, and UUIC authorized a $5 million payment on behalf of AKH to settle the lawsuit filed by R-T against AKH. In the second half of December, R-T and AKH settled the consolidated lawsuits. R-T accepted UUIC's $5 million offer. Simultaneously, R-T agreed to pay $13 million to AKH to settle the AKH lawsuit.

In this case, AKH seeks declaratory relief that UUIC breached its duties to defend, settle, and act fairly and in good faith with respect to the R-T lawsuits. UUIC brought counterclaims for declaratory relief and breach of contract arising out of its defense and settlement of the R-T lawsuit. It seeks reimbursement of the settlement funds. After the parties filed the instant motions to determine choice of law issues on these contract claims, they amended their pleadings. On November 14, 2014, UUIC filed its Third Amended Answer and Counterclaim, adding counterclaims for negligent misrepresentation, intentional or affirmative misrepresentation, concealment or fraud by silence, and statutory claims under California and Kansas insurance codes. On November 25, 2014, AKH filed an Amended Complaint adding claims for negligent misrepresentation, negligence, and intentional misrepresentation.[1] The parties have filed dispositive motions on many of these new claims, which are not the subject of this Order. Moreover, the Court disregards AKH's attempts to argue the merits of the contract issues affected by the choice of law analysis; these motions were to be filed on the narrow issue of choice of law only and the Court's decision is confined to this issue only.

II. Discussion

The parties have identified differences between California and Kansas law with respect to certain issues presented by the contract claims in this case. The parties generally do not dispute the appropriate standards that apply to determine the choice of law in this matter. "[A] federal court sitting in diversity must apply the substantive law of the state in which it sits, including the forum state's choice-of-law rules."[2] Kansas applies the Restatement (First) of Conflict of Laws in addressing choice of law issues.[3] In a contract dispute, the Court should apply lex loci contractus, or the law of the state where the contract was made, to determine "the nature and extent of the duty of each party to the contract."[4] When the issue goes to the manner and method of performance, the Court is to apply the law of the place where performance occurred.[5] UUIC, as the party moving the Court to apply the law of California, has the burden to present sufficient facts to show that California law should apply.[6] Where "a party fails to make a clear showing that another state's law should apply, ' Kansas choice of law principles require a court to default to Kansas substantive law."[7]

A. Actual Conflicts

The first step in any conflicts analysis is to determine whether an actual conflict exists between the law of Kansas and the law of the foreign jurisdiction, because if there is no actual conflict, then the Court need not decide the choice of law issue.[8] It appears that the parties attempted to stipulate to the issues for which a conflicts analysis is required.[9] Yet, their briefs suggest limited agreement. The issues addressed by the parties in the briefs are: (1) whether an insurer possesses a right to reimbursement of settlement funds it paid to defend and settle; (2) whether the claims that R-T alleged against AKH in the R-T lawsuit are excluded from coverage by the prior publication exclusion; (3) whether either party breached the implied covenant of good faith and fair dealing, and if so, what damages are available for that breach, if any; and (4) the scope of AKH's right to attorney fees and costs.

Based on the issues presented in the briefs, the Court finds that an actual conflict exists with respect to UUIC's right to reimbursement. The parties stipulate to this and the authority cited by UUIC makes clear that California recognizes a right to reimbursement while Kansas may not.[10]

UUIC argues that under California law, the prior publication exclusion is a bar to coverage, pointing to California cases that specifically address the exclusion, compared to an absence of Kansas cases on this topic. AKH spends its time arguing that the prior publication exclusion does not apply to the facts of this case under either body of law, a substantive question that is not before the Court at this time. A false conflict exists if the Court determines that "the outcome of this dispute would be the same under the laws of [California] as under the laws of Kansas."[11] In the case of a false conflict, the Court should default to Kansas law.[12]

Here, UUIC points not to a conflict, but to an absence of law on this issue in Kansas. In the absence of clear authority from the Kansas Supreme Court, this Court must predict how the Kansas Supreme Court would address the exclusion if faced with the same facts.[13] To do this, the Court is to look to "analogous decisions by the state supreme court, decisions of lower courts in the state, decisions of federal and other state courts, and the general weight and trend of authority."[14] Neither party provides this Court with arguments or authorities to help it predict how the Kansas Supreme Court would apply the prior publication exclusion, in order to determine if it is different from how the California courts apply it. Instead, they both discuss California law. Of course, the Court may look at authority from other state courts in predicting how the Kansas Supreme Court would handle the prior publication exclusion, so the California authority cited by the parties may be persuasive.[15] Based on the limited authorities presented by the parties, the Court is unable to find that the outcome of this case would be different if the Court applied California law rather than Kansas law, as predicted by this Court. It appears that Kansas law may very well be determined by reference to California law. Therefore, the Court need not conduct a conflicts analysis as to this issue.

UUIC urges that California and Kansas law differ as to its claim for breach of the implied covenant of good faith and fair dealing. The Court agrees. Under California law, an insurer can be found liable for tortious breach of the implied covenant if the insurer's decision is "unreasonable, "[16] whereas under Kansas law, the cause of action sounds in contract only.[17] As a result, tort damages may be available under California law, while under Kansas law, only pecuniary losses sustained are available.[18] There is a true conflict of law on this issue.

Finally, AKH asks the Court to resolve whether Kansas law applies to its claim for attorney fees, merely citing the Kansas statute that it claims would apply here without explaining how it differs from California law. UUIC does not argue for application of California law to this issue. UUIC carries the burden of showing that California law and not Kansas law applies in this diversity. Because UUIC does not move for application of California law to this issue, the default rule should apply that Kansas law, as the law of the forum state, applies to AKH's claim for attorney fees.

The Court therefore will proceed to resolve whether the law that applies to the reimbursement and implied covenant of good faith and fair dealing claim should be determined by reference to the place where the ...


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