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Edmark Auto, Inc. v. Zurich American Insurance Co.

United States District Court, D. Idaho

February 6, 2018

EDMARK AUTO, Inc. an Idaho corporation; CHALFANT CORP., an Idaho corporation, Plaintiffs,




         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]


         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.


         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.)


         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 ...

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