United States District Court, D. Idaho
EDMARK AUTO, INC., an Idaho corporation; CHALFANT CORP., an Idaho corporation, Dealers,
ZURICH AMERICAN INSURANCE COMPANY, a New York corporation; UNIVERSAL UNDERWRITERS SERVICE CORPORATION, a Delaware corporation, Defendant.
J. Lodge United States District Judge.
February 6, 2018, United States Magistrate Judge Candy W.
Dale issued a Memorandum Decision and Order (Dkt. 97)
(“MDO”) and Report and Recommendation (Dkt. 70,
Dkt. 112 (“Report”). (Dkt. 135.) The MDO grants
Plaintiffs' Motion to Compel (Dkt. 97) and the Report
recommends that Defendants' Motion for Partial Summary
Judgment (Dkt. 70) be denied and Plaintiffs' Motion to
Amend/ Correct (Dkt. 112) be granted. (Dkt. 135.)
party may challenge the Magistrate Judge's proposed
recommendation by filing written objections within fourteen
days after being served with a copy of the Report. 28 U.S.C.
§ 636(b)(1)(C). In this case, Defendants filed an
Objection to the Report on February 20, 2018 (Dkt. 138);
Plaintiffs filed a timely response to that Objection on March
6, 2018 (Dkt. 142); and the matter is now ripe for this
Court's consideration. Fed.R.Civ.P. 72; Local Civ. R.
to 28 U.S.C. § 636(b)(1)(C), this Court “may
accept, reject, or modify, in whole or in part, the findings
and recommendations made by the magistrate judge.”
Where the parties object to a report and recommendation, this
Court “shall make a de novo determination of those
portions of the report which objection is made.”
Id. Where, however, no objections are filed the
district court need not conduct a de novo review.
Rather, “the Court need only satisfy itself that there
is no clear error on the face of the record in order to
accept the recommendation.” Advisory Committee Notes to
Fed.R.Civ.P. 72 (citing Campbell v. United States Dist.
Court, 501 F.2d 196, 206 (9th Cir. 1974)).
Court has reviewed the objected to portions of the Report
de novo. The Court has also conducted a review of
the entire Report, as well as the record in this matter, for
clear error. Finding no error, the Court adopts the Report
and its Recommendations.
preliminary matter, the Court adopts the factual findings
outlined in the Report. However, by way of brief background,
the relevant facts are as follows.
claims at issue arise from a long-running business
relationship between two automobile dealers, Edmark Auto,
Inc. (“Edmark”) and Chalfant Corp.
(“Chalfant”) (collectively “Dealers”)
and two insurance companies, Zurich American Insurance
Company (“Zurich”) and Universal Underwriters
Service Corporation (“Universal”) (collectively
“Insurers”). Insurers authorized Dealers to offer
and sell certain Vehicle Service Contracts
(“VSCs”) to their customers. VSCs are contracts
for extended warranty agreements that cover the repair or
replacement of parts due to mechanical breakdown.
require customers to pay upfront for the extended warranty
but permit cancellation before the end of the VSC term. When
customers cancelled the VSCs before the end of the VSC term,
the customers were entitled to a pro-rated refund for any
value left in their extended warranty at the time of
cancellation. The parties dispute how they intended to
allocate the costs of that refund between Dealers and
are two primary contracts at issue:
1. the Vehicle Service Contract Dealer Agreement
(“VSC Dealer Agreement”)
(Dkt.70-3, Exs. A, D)and
2. the Dealers Designated Refund Account Addendum
(“DDRA Addendum”) to the VSC
Dealer Agreement signed and effective November 1, 1996 (Dkt.
70-3, Exs. B, C).
to Insurers, the VSC Dealer Agreement and DDRA Addendum are
clear and unambiguous. The DDRA Addendum modified the VSC
Dealer Agreement and provided a mechanism for the Dealers to
pay a portion of the customers' refunds upon
cancellation. (Dkt. 70-1, pp. 2-3.)
the DDRA Program, Dealers paid Insurers $80 upon the sale of
each VSC. (Dkt. 70-1, p. 3.) This $80.00 payment was referred
to as the “Dealers Refund Payment.”
(Id.) The collective sum of all $80.00 payments
remitted by Dealers was referred to as the “Dealers
Designated Refund Account” (“DDRA”).
(Id.) When a VSC was cancelled, Insurers allege that
they paid the entire amount of the cancellation refund,
“and the amount of the dealers' share was
subtracted from the DDRA fund balance on the Defendants'
Dealers referred to their portion of the refunds as dealer
“charge backs.” (Dkt. 52, ¶¶ 19, 24.)
The Dealers referred to the DDRA program with Insurers as the
“No Charge Back Program.” (Id. at
¶¶ 1, 26.) The Dealers understood that Insurers
could change the amount of the Dealers Refund Payment at any
time and that Insurers would monitor and administer the DDRA
fund so that it would cover all anticipated liabilities from
“charge backs.” (Id.)
April 21, 2015, Insurers terminated the DDRA Addendum on the
basis that the DDRA fund balance was “in a significant
deficit position” and “no funds exist from which
to make any distribution.” (Dkt. 72-8.) Defendants seek
repayment of hundreds of thousands of dollars in refund
payments on the basis that the DDRA Addendum and VSC Dealer
Agreement clearly and unambiguously provide that Dealers are
obligated to pay or reimburse Defendants for any and all
Dealers argue that the contracts are ambiguous and, as a
whole, support their understanding that: (1) Insurers had to
pay all chargebacks for VSC cancellations after 90 days of
sale from the DDRA if the dealership paid the Dealers Refund
Payment and (2) the DDRA would never be in deficit if
Universal properly established and managed the account. (Dkt.
91, p. 7.) Accordingly, Dealers refused to pay the alleged
negative deficiency balance in the DDRA and, instead, filed
suit against Insurers. (Dkt. 1.)
make seven claims against the Insurers: (1) breach of
contract, (2) breach of the covenant of good faith and fair
dealing; (3) fraud/ fraudulent concealment, (4) unfair
business practices, (5) breach of fiduciary duty, (6) unjust
enrichment, and (7) fraud in the inducement. (Dkt. 52.)
Insurers filed a Counterclaim with four claims: (1) breach of
contract, (2) breach of the covenant of good faith and fair
dealing, (3) unjust enrichment, and (4) accounting. (Dkt.
20, 2017, Insurers filed the instant summary judgment motion.
(Dkt. 70.) Fundamentally, Insurers argue that this is a basic
contract dispute and that, pursuant to the plain and
unambiguous language of the VSC Dealer Agreement and DDRA
Addendum, Dealers owe them for the growing deficiency in the
DDRA. (Dkt. 70-1.)
contrast, Dealers argue that the VSC Dealer Agreement and
DDRA Addendum are ambiguous and reasonably subject to their
interpretation. (Dkt. 91.) Dealers further argue that
Insurers did not manage the DDRA consistent with applicable
standards and Insurers intentionally misled them into
believing that Insurers were administering the Dealer Refund
Payments in the Dealer's Designated Refund Account in a
manner that would cover all of the Dealers' future
liability for canceled VSCs. (Id.)
February 6, 2018, the Magistrate Judge issued the Report
denying Insurers' summary judgment motion in all respects
and finding substantial evidence in the record to support
Plaintiffs' punitive damages claim. Insurers allege the
Report is flawed in six respects, because the Magistrate
(1) did not apply the correct standard in finding the
contract is ambiguous;
(2) considered extrinsic evidence prior to finding the
contracts were ambiguous;
(3) interpreted the contracts in an unreasonable manner and
in conflict with the actual terms of the contracts;
(4) erred in recommending that Dealers' unjust enrichment
claim and disgorgement remedy may proceed in light of the
(5) erred in analyzing Dealers' fraud claim by
considering inadmissible evidence and finding support for the
justifiable reliance element of the claim; and
(6) erred in analyzing Dealers' motion to amend by
considering inadmissible evidence and failing to find the
punitive damages claim “reasonably disputed” in
light of the “substantial evidence” supporting
Insurers' claims and defenses.
(Dkt. 138, pp. 2-3.)
these arguments is considered and ultimately rejected as
further explained below. The Magistrate Judge found genuine
disputes of material fact for the jury to resolve, including
the proper interpretation of the VSC Dealer Agreement and the
DDRA Addendum. The Court finds no error in the Report's
analysis of the law or the application of the law to the
facts in the record.
The Report Correctly Found the Contracts Are Ambiguous
without Consulting Extrinsic Evidence and Interpreted ...