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

United States District Court, D. Idaho

March 16, 2018

EDMARK AUTO, INC., an Idaho corporation; CHALFANT CORP., an Idaho corporation, Dealers,


          Edward J. Lodge United States District Judge.


         On 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.)

         Any 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. 73.1.


         Pursuant 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)).


         The 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.


         As a preliminary matter, the Court adopts the factual findings outlined in the Report. However, by way of brief background, the relevant facts are as follows.

         The 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.

         VSCs 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 Insureds.

         There are two primary contracts at issue:

1. the Vehicle Service Contract Dealer Agreement (“VSC Dealer Agreement”) (Dkt.70-3, Exs. A, D)[1]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).[2]

         According 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.)

         Under 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' books.” (Id.)

         The 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.)

         On 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.)[3] 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 deficiencies. (Id.)

         The 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.)

         Dealers 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. 56.)

         On July 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.)

         In 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.)

         On 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 Judge:

(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 enforceable contracts;
(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.)

         Each of 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.


         1. The Report Correctly Found the Contracts Are Ambiguous without Consulting Extrinsic Evidence and Interpreted ...

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