Knightbrook Ins. Co. v. Payless Car Rental Sys., Inc., 15-15998

KNIGHTBROOK INSURANCE COMPANYand KNIGHT MANAGEMENT INSURANCE SERVICES, LLC, Plaintiffs-Appellees, v. PAYLESS CAR RENTAL SYSTEM, INC. and PCR VENTURE OF PHOENIX, LLC, Defendants-Appellants.

No. 15-15998

UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT

Argued and Submitted: April 6, 2017

Resubmitted: February 8, 2018

April 26, 2018

NOT FOR PUBLICATION

D.C. No. 2:12-cv-01671-DGC

MEMORANDUM^*

Appeal from the United States District Court for the District of Arizona

David G. Campbell, District Judge, Presiding

Argued and Submitted April 6, 2017

Resubmitted February 8, 2018 Pasadena, California

Before: M. SMITH and N.R. SMITH, Circuit Judges, and FEINERMAN,^** District Judge.

Payless Car Rental System, Inc. and PCR Venture of Phoenix, Inc. (together, "Payless") appeal the district court's judgment, entered after a bench trial, awarding equitable indemnification to KnightBrook Insurance Company and Knight Management Insurance Services LLC (together, "KnightBrook") in the amount of $970,000 and denying Payless's insurance bad faith counterclaim.

1. The district court's equitable indemnification decision relied on § 78 of the Restatement of Restitution, which provides, in relevant part:

A person who with another became subject to an obligation or supposed obligation upon which, as between the two, the other had a prior duty of performance, and who has made payment thereon although the other had a defense thereto, ...

(b) is entitled to restitution if he became subject to the obligation with the consent of or because of the fault of the other and, if in making payment, he acted ...

(ii) in the justifiable belief that such a duty existed[.]

Restatement (First) of Restitution § 78 (1937) (emphasis added). After hearing oral argument, we issued an opinion, familiarity with which is assumed, certifying this question to the Arizona Supreme Court: "[W]hether Arizona equitable indemnity law incorporates § 78 of the Restatement." KnightBrook Ins. Co. v. Payless Car Rental Sys. Inc., 855 F.3d 1072, 1073 (9th Cir. 2017).

The Arizona Supreme Court answered that question in the negative, holding that Arizona equitable indemnity law does not incorporate § 78. KnightBrook Ins.Co. v. Payless Car Rental Sys. Inc., 409 P.3d 293, 294 (Ariz. 2018).¹ As the court explained: "Arizona's equitable indemnity law seeks to avoid unjust enrichment by allowing recovery only when an indemnity plaintiff subject to derivative or imputed liability discharges an actual obligation that a culpable indemnity defendant owed to a third party." Id. at 295 (emphasis added). That understanding of equitable indemnity law, the court added, is "consistent with § 76 of the First Restatement." Id. In declining to adopt § 78, the court reasoned that it was disinclined to "expand[] equitable indemnity law to include 'supposed obligations' that an indemnity plaintiff and defendant may not actually owe." Id. at 297 (alteration omitted).

Because the Arizona Supreme Court rejected § 78 as a matter of Arizona law, it did not reach the second question we had certified: "[W]hether equitable indemnity under § 78 requires that the indemnity plaintiff's liability to the underlying plaintiff have been coextensive with the indemnity defendant's liability to the underlying plaintiff." KnightBrook, 855 F.3d at 1073. Nonetheless, the court made clear that equitable indemnity under Arizona law effectively requires coextensive liability, noting that recovery is permitted only "when an indemnity plaintiff subject to derivative or imputed liability discharges an actual obligationthat a culpable indemnity defendant owed to a third party." 409 P.3d at 295 (emphasis added). In other words, equitable indemnification is available only when the indemnity plaintiff, through no fault of its own, automatically assumes the indemnity defendant's liability to a third party by virtue of some legal relationship between the plaintiff and defendant. See id. at 296 ("The right of indemnity [inures] to a person who, without active fault on his own part, has been compelled, by reason of some legal obligation, to pay damages occasioned by the initial negligence of another, and for which he himself is only secondarily liable.") (quoting Blakely Oil, Inc. v. Crowder, 292 P.2d 842, 844 (Ariz. 1956)).

We will remand to the district court to apply in the first instance the "actual obligation" standard as newly articulated by the Arizona Supreme Court. See Detrich v. Ryan, 740 F.3d 1237, 1248-49 (9th Cir. 2013) (en banc) ("[O]ur general assumption is that we operate more effectively as a reviewing court than as a court of first instance."). If the district court concludes that KnightBrook and Payless were actually liable to the McGills, it then will need to consider whether the $970,000 settlement that KnightBrook entered into with the McGills, which might have reflected the total outstanding value of the insurance policy that KnightBrook claims Payless entered into with Bovre on KnightBrook's behalf, discharged a common liability of KnightBrook and Payless. It may be relevant to both issues whether Payless acted as KnightBrook's agent when it allegedly entered into theinsurance contract with Bovre (a question that the district court left open) and, if so, whether KnightBrook was a disclosed or undisclosed principal. See Restatement (Third) of Agency § 6.01 (2006) (noting that an agent entering into a contract on behalf of a disclosed principal is generally not a party to the contract); id. § 6.03 (noting that an agent entering into a contract on behalf of an undisclosed principal is a party to the contract).

2. That leaves Payless's bad faith insurance counterclaim. Implicit in any insurance contract "is the insurer's obligation to play fairly with its insured." Zilisch v. State Farm Mut. Auto. Ins. Co., 995 P.2d 276, 279 (Ariz. 2000) (quoting Rawlings v. Apodaca, 726 P.2d 565, 570 (Ariz. 1986)). "The insurer has 'some duties of a fiduciary nature,' including 'equal consideration, fairness and honesty.'" Id. (alterations omitted) (quoting Rawlings, 726 P.2d at 571).

The district court held after a bench trial that KnightBrook did not breach its duties of equal consideration, fairness, or honesty when it acquired and prosecuted the McGills' negligence and contract claims against its insured, Payless, because KnightBrook did so in an effort to mitigate a risk "created by the fault of ... Payless," and only after Payless had refused KnightBrook's request that it pay half the settlement cost. The district court's decision does not rest on a legal error or a clearly erroneous factual finding. See Lentini v. Cal. Ctr. for the Arts, Escondido, 370 F.3d 837, 843 (9th Cir. 2004).

KnightBrook stipulated that it was seeking to recover from Payless only the $970,000 it had paid to the McGills—a liability that KnightBrook believed it had incurred as a result of Payless's negligence in handling Bovre's...