United States District Court, D. Idaho
EDMARK AUTO, Inc. an Idaho corporation; CHALFANT CORP., an Idaho corporation, Plaintiffs,
v.
ZURICH AMERICAN INSURANCE COMPANY, a New York corporation; and UNIVERSAL UNDERWRITERS SERVICE CORPORATION, a Delaware corporation, Defendants.
MEMORANDUM DECISION AND ORDER; (DKT. 97) REPORT AND
RECOMMENDATION (DKT. 70; DKT 112)
HONORABLE CANDY W. DALE UNITED STATES MAGISTRATE JUDGE
INTRODUCTION
The
claims asserted in this matter stem from a long-running
business relationship between two automobile dealers and a
pair of insurance companies. For nearly 20 years, Edmark
Auto, Inc. (Edmark), and for nearly 10 years, Chalfant Corp.
(Chalfant), sold and marketed the insurance products of
Universal Underwriters Service Corporation (Universal) and
Zurich American Insurance Company (Zurich).
Edmark
and Chalfant are distinct legal entities.[1] Because they
bring the same claims and defenses in this matter, they will
be treated as a unit unless the Court needs to identify a
particular entity (Dealers). According to the Dealers,
Universal and Zurich are agents and alter egos for one and
other - Universal has no employees, and all actions taken on
behalf of Universal are performed by Zurich
employees.[2] (Dkt. 52 at 3.) Therefore, Universal and
Zurich will also be treated as a unit unless it is necessary
for the Court to discuss a particular entity (Insurers).
Three
motions are pending before the Court: The Insurers'
Motion for Partial Summary Judgment (Dkt. 70); and the
Dealers' Motion to Compel (Dkt. 97) and Motion to Amend.
(Dkt. 112.) All three motions are fully briefed and the Court
heard oral argument from the parties on December 21, 2017,
and January 3, 2018.
After
careful consideration of the briefing, the parties'
arguments, the standard of review, and the relevant
authorities, the Court will recommend that the Insurers'
motion for partial summary judgment be denied, and the
Dealers' motion to amend be granted. Additionally, the
Court will grant Dealers' motion to compel, with
limitations set forth below.[3]
FACTUAL
BACKGROUND
On
November 1, 1996, Edmark entered into a Vehicle Service
Contract Dealer Agreement (Dealer Agreement) with Universal.
(Dkt. 19-2.) Thirteen years later, in 2009, Chalfant entered
into the same Dealer Agreement with Universal.[4] Therein, the
Dealers agreed to offer and sell Universal's Vehicle
Service Contracts (VSCs) to their customers for
newly-purchased automobiles.[5] VSCs are contracts for extended
warranty agreements that cover the repair or replacement of
parts due to mechanical breakdown. VSCs require customers to
pay upfront for the extended warranty, but permit
cancellation prior to the expiration of the VSC term -
typically 60 months in duration. When customers exercise the
option to cancel, they are entitled to a pro-rated refund of
any value left in their extended warranty at the time of the
VSC termination.
Universal
drafted an addendum to the Dealer Agreement setting forth
terms and conditions to manage the administration of such
customer refunds. The addendum is entitled: “Addendum
to Vehicle Service Contract - Dealers Designated Refund
Account Program - Dealer Agreement.”[6] This addendum
agreement defined what the Dealers term a “No
Chargeback Program.” It is referred to in the
Insurers' briefing as the DDRA Addendum. (Dkt. 72-3.)
Edmark entered into the DDRA Addendum in 1996 and Chalfant
entered into the DDRA Addendum in 2010.[7] The terms of the
addendum were exactly the same for each party. The
overarching purpose of the DDRA Addendum was to provide a
means of administratively processing the proportional amounts
of the VSC warranty refunds the Dealers and the Insurers owed
to customers.[8]
On
April 21, 2015, the Insurers sent a letter to Mr. Edmark and
Mr. Chalfant terminating the DDRA Addendum. (Zurich's
Termination Letter of April 21, 2015, Dkt. 72-8.) The
Insurers terminated the DDRA Addendum because the
Dealer's Designated Refund Account, discussed more fully
below, was “in a significant deficit position”
and no funds existed for the Insurers to continue to make
refund payments to customers who cancelled their VSCs. (Dkt.
72-8 at 2-3.)[9] At the time the termination letter was
sent, the balance of the Dealer's Designated Refund
Account was purportedly a deficit of $170, 656.65. (Dkt. 91-1
at 18.) However, by May 15, 2015, the Insurers reported that
the deficit was actually a deficit of $231, 123 plus an
additional $429, 066 in estimated future liability.
Id.
PROCEDURAL
BACKGROUND
On
October 8, 2015, the Dealers filed a complaint against the
Insurers asserting the following claims: (1) breach of
contract; (2) breach of the covenant of good faith and fair
dealing; (3) fraudulent concealment; (4) unfair business
practices; (5) breach of fiduciary duty; (6) unjust
enrichment; and (7) fraud in the inducement. (Dkt. 1-3 at
7.)[10]There are presently three motions pending
before the Court: the Insurers' Motion for Partial
Summary Judgment (Dkt. 70); the Dealers' Motion to Compel
(Dkt. 97); and the Dealers' Motion to Amend. (Dkt. 112.)
Each motion is summarized below.
1.
Insurers' Motion for Partial Summary Judgment
The
Insurers argue summary judgment is warranted on four distinct
grounds. First, they argue as a matter of law: (a) that the
language of the DDRA Addendum is clear and unambiguous,
giving the Dealers authority to solicit and sell extended
warranties on behalf of the Insurers. In this, they seek a
ruling that the DDRA Addendum clearly modifies and does not
replace the Dealer Agreement; (b) that the Dealer Agreement
and DDRA Addendum require Dealers to pay portions of refunds
for canceled extended warranties from the Dealer's
Designated Refund Account; that such portions were to be paid
from the Dealer's Designated Refund Account; and that if
the account became insolvent or contained less funds than the
Dealers' obligations, then the Dealers were obligated to
pay the deficiency; (c) that the DDRA Addendum did not
require the Insurers to deposit the $80.00 Dealer Refund
Payments into any specific bank account, and that Dealers
were not entitled to any interest earned on the Dealer Refund
Payments; and finally, (d) that the DDRA Addendum provided
that, upon its termination, the rights and obligations of the
parties would be as set forth within the Dealer Agreement,
with the exception of paragraph 2(c) of the DDRA Addendum,
which would remain in effect.
Second,
the Insurers ask the Court to dismiss the Dealers' unjust
enrichment claim and related disgorgement remedy. The
Insurers argue that unjust enrichment does not apply when
there is an enforceable express contract regarding the same
subject matter. They assert that, if an express agreement is
enforceable, the Court may not apply the equitable remedy of
unjust enrichment in contravention of the agreement. The
Insurers argue also, that under Idaho law, a claim for unjust
enrichment cannot lie when the party retains a
“bargained-for benefit under the terms of a
contract.” Citing Rencher v. Recontrust Co.,
No. 4:15-CV-00130-BLW, 2015 WL 7013393, at *4 (D. Idaho Nov.
12, 2015).[11]
The
Insurers argue further that the disgorgement remedy is
“indisputably intertwined” with the unjust
enrichment claim because the remedy is focused on taking from
the wrongdoer what was gained by its wrongs. They assert the
remedy cannot apply in this case because the Insurers were
acting under allegedly clear terms of negotiated contracts.
(Dkt. 70-1 at 16-17.)
Third,
the Insurers ask the Court to dismiss Dealers' claims for
fraud and breach of fiduciary duty, because the Dealers'
tort-based claims cannot be based on a failure to perform
obligations under a contract; they argue the Dealers have not
provided evidence demonstrating false or misleading
statements made by the Insurers at the time of contracting.
Fourth
and finally, the Insurers assert they are entitled summary
judgment on their breach of contract counterclaim in the
amount of $255, 123, plus interest, because the Dealers have
allegedly failed to pay the deficiency in the Dealer's
Designated Refund Account. The Insurers assert the Dealers
are obligated to do so under the purportedly unambiguous
language of the DDRA Addendum.
2.
The Dealers' Motion to Compel Discovery
Responses
The
Dealers move the Court to compel the Insurers to produce the
amount of customer claims paid on contracts for products
other than the VSCs that they marketed and sold on behalf of
the Insurers. Such contracts include maintenance contracts,
guaranteed auto protection contracts, and tire and wheel
contracts.[12] (Dkt. 91-1 at 1.) The Dealers argue the
customer claims payment information regarding these other
products is “a basic element required to calculate [the
Insurers'] profits” made through their alleged
conscious misconduct. (Dkt. 97-1 at 2.)
The
Dealers further ask the Court to compel the Insurers to
produce information on the manner of investment and amount of
income the Insurers made on the Dealer Refund Payments
remitted by the Dealers under the DDRA Addendum.
(Id. at 1-2.) The Dealers assert that investment
profits are income, and such income is relevant to their
potential remedy. They assert also that the investment income
information will help determine whether the Insurers breached
their fiduciary duties to manage the Dealer's Designated
Refund Account funds-or, if instead, to prove the Insurers
used the funds for their sole benefit to the detriment of the
Dealers. The Dealers assert that both requests are
permissible and compelled under Rules 26 and 37 of the
Federal Rules of Civil Procedure.[13]
3.
The Dealers' Motion to Amend Complaint
Additionally,
the Dealers filed a motion for leave to add a claim for
punitive damages. (Dkt. 112 at 1.) The motion is supported
primarily by the contention that the Insurers would never
have obtained the Dealers' business, nor kept it for so
long -nearly two decades in the case of Edmark- if they had
not misled the Dealers into believing that the Insurers'
administration of the Dealer Refund Payments in the
Dealer's Designated Refund Account would cover all of the
Dealers' future liability for canceled
VSCs.[14](Dkt. 112-1 at 6; Dkt. 91-1 at 4-5.) The
Dealers assert that, pursuant to Idaho Code Section
6-1604(2), they have demonstrated a reasonable likelihood of
proving facts at trial to support a punitive damages award.
(Dkt. 112-1 at 13.)
DISCUSSION
1.
Motion for Summary Judgment
Summary
judgment is appropriate when the evidence, viewed in the
light most favorable to the non-moving party, demonstrates
that “there is no genuine issue of any material fact
and that the movant is entitled to judgment as a matter of
law.” Fed.R.Civ.P. 56(c); Celotex Corp. v.
Catrett, 477 U.S. 317, 322 (1986); Galen v. County
of Los Angeles, 477 F.3d 652, 658 (9th Cir. 2007).
Evidence includes “the pleadings, depositions, answers
to interrogatories, and admissions on file, together with the
affidavits….” DeVries v. DeLaval, Inc.,
No. CV 04-136 S EJL, 2006 WL 1582179, at *5 (D. Idaho June 1,
2006), report and recommendation adopted, No. CIV
04-136-S-EJL, 2006 WL 2325176 (D. Idaho Aug. 9, 2006). The
moving party initially bears the burden to show no material
fact is in dispute and a favorable judgment is due as a
matter of law. Celotex, 477 U.S. at 323. If the
moving party meets this initial burden, the non-moving party
must identify facts showing a genuine issue for trial to
defeat the motion for summary judgment. Cline v. Indus.
Maint. Eng'g & Contracting Co., 200 F.3d 1223,
1229 (9th Cir. 2000). To deny a motion for summary judgment,
a court “need only conclude that a result other than
that proposed by the moving party is applicable under the
facts and applicable law. DeVries, 2006 WL 1582179
at *6.
If a
contract is found to be ambiguous, courts hesitate to grant
summary judgment. San Diego Gas & Elec. Co. v.
Canadian Hunter Mktg. Ltd., 132 F.3d 1303 (9th Cir.
1997). Differing views on the intent of the parties at the
time of contracting raise genuine issues of material
fact.[15] Id.; See also Maffei v.
Northern Ins. Co., 12 F.3d 892, 898 (9th Cir. 1993).
However, in the Ninth Circuit, extrinsic evidence may be
considered by a court to resolve ambiguity raised in a motion
for summary judgment. In considering such evidence, a court
must view it in a light most favorable to the non-moving
party. International Bhd. of Elec. Workers Local 47 v.
Southern Cal. Edison Co., 880 F.2d 104, 107 (9th Cir.
1989).
When the language of a contract is clear and unambiguous, its
interpretation and legal effect are questions of law. An
unambiguous contract will be given its plain meaning. The
purpose of interpreting a contract is to determine the intent
of the contracting parties at the time the contract was
entered. In determining the intent of the parties, this Court
must view the contract as a whole. If a contract is found
ambiguous, its interpretation is a question of fact. Whether
a contract is ambiguous is a question of law. A contract is
ambiguous if it is reasonably subject to conflicting
interpretations.
Commercial Ventures, Inc. v. Rex M. & Lynn Lea Family
Tr., 177 P.3d 955, 960 (Idaho 2008).
For the
reasons outlined below, the Court finds the DDRA Addendum as
whole is reasonably subject to conflicting interpretations
and is ambiguous on its face. The Court need not consider
extrinsic evidence to make this finding. Interpretation of
the DDRA Addendum is a question of fact for a jury.
A.
The DDRA Addendum Contract Claims
First,
the Insurers ask the Court to find as a matter of law that
the DDRA Addendum clearly indicates the Dealers had authority
to solicit their customers and to sell extended warranties on
behalf of the Insurers. The purpose of the DDRA Addendum was
to set forth an agreement between the Insurers and the
Dealers regarding how refund obligations related to canceled
extended warranty agreements would be allocated and
administered. Therefore, it is implicit, and necessary, that
the Dealers had authority to solicit and sell the extended
service warranties to their customers. Additionally, the DDRA
Addendum clearly relates to the Dealer Agreement, of which
the subject was the Dealers' and Insurers'
obligations regarding the sale of extended service warranties
by the Dealers to their customers for the parties' mutual
benefit.
The
Insurers next ask the Court to declare that the DDRA Addendum
clearly modifies the Dealer Agreement. Although the question
seems simple, ambiguity in the terms of the DDRA Addendum
raises multiple issues of material fact. The DDRA Addendum
indicates it was intended to replace Section 15 of the Dealer
Agreement in its entirety. (Dkt. 16 at page 5.) Section 15 of
the Dealer Agreement outlines terms for changes to the Dealer
Agreement and any extended warranty service contract
thereunder. (Dkt. 72-2.) Yet, upon termination of the DDRA
Addendum, other terms indicate that Section 15 of the Dealer
Agreement was to “replace the provisions of [the]
addendum, with the exception of Section 2(c), ” which
was to continue to be in effect. (Dkt. 72-3 at 2.) Section
2(c) outlined what was to happen to funds remaining in the
Dealer's Designated Refund Account upon termination of
the DDRA Addendum. (Id. at 3.)
The
DDRA Addendum both replaces Section 15 of the Dealer
Agreement with its terms, and indicates that Section
15 of the Dealer Agreement replaces the terms of the
addendum-with the exception of Section 2(c) upon termination.
Thus, these provisions create a circular ambiguity that
raises the question of whether the DDRA Addendum continues to
exist post-termination as modified by Section 15 of the
Dealer Agreement.
The
content of Section 2(c) raises other questions. It
specifically references and incorporates the terms of Section
2(b) of the DDRA Addendum. Therefore, for Section 2(c) to
continue post-termination, Section 2(b) would necessarily
have to continue as well. Because of such ambiguity,
considered in the context of the termination language
discussed immediately above, the Court cannot definitively
determine at this stage whether the DDRA Addendum
modifies the Dealer Agreement or if the DDRA
Addendum is modified by the Dealer Agreement
post-termination, or both.
The
Insurers ask the Court to find also, as a matter of law, that
the DDRA Addendum clearly and unambiguously required the
Dealers to pay portions of refunds for canceled extended
warranties from the Dealer's Designated Refund Account.
However, as with the request above, this question asks the
Court to ignore other terms of the agreement and to
oversimplify its analysis to arrive at a fast conclusion.
Because of surrounding ambiguity in the terms of the DDRA
Addendum, the Court cannot find as requested by the Insurers.
The DDRA Addendum defines what it terms the
“Dealer's Designated Refund Account.” The
relevant language reads as follows:
(1) Company and Dealer agree that $80.00 per each Approved
Service Contract hereinafter referred to as “Dealers
Refund Payment”, will be added to dealers remit, and
will be designated for the payment by Company, of
Dealer's refund liability under Section 2(b) of this
agreement. Company and Dealer agree that the sum of such
funds designated for this purpose will be known as
“Dealer's Designated Refund Account.”
It is the intent of Company and Dealer that the total of all
fees in Dealer's Designated Refund Account accurately
reflect the amount of Dealer's future liabilities for
refunds under Section 2(b) of this program and are being
transferred to Company specifically for this purpose.
(DDRA Addendum, Dkt. 73-3 at 2.)
It is
clear that the DDRA Addendum requires the dealerships to pay
a “Dealers Refund Payment” of $80 to Universal
for each VSC sold. (DDRA Addendum, Dkt. 72-3 at 2.) This
amount was then “designated for the payment by
[Universal], of Dealer's refund liability” in the
case the express warranty contract was canceled by the
customer prior to the expiration of its term. Id.
Therefore, it is clear that the Dealers were expected to
provide their $80 portion of the refund upfront, and that
Universal would later administer and pay the refund. As the
DDRA Addendum states: Universal was obligated to make refunds
“under the provision of each Approved Service Contract,
” yet under the DDRA Addendum, the Dealer acknowledged
that it was “obligated to reimburse the Company for a
portion ...