Ninth Circuit rules that California Insurance Code § 533 bars coverage for a settled malicious prosecution lawsuit

In an interesting new decision, the Ninth Circuit in Aspen Specialty Ins. Co. v. Miller Barondess, LLP (“Miller Barondess”)[1] held that Section 533 of the California Insurance Code—which states that “[a]n insurer is not liable for a loss caused by the willful act of the insured; but he is not exonerated by the negligence of the insured, or of the insured’s agents or others”[2]—precluded coverage under a lawyers professional liability insurance policy issued to the law firm Miller Barondess, LLP for a malicious prosecution action. In doing so, the Ninth Circuit reversed a district court ruling that Section 533 did not apply because there had been no final adjudication of the malicious prosecution allegation.[3]

FACTS

The litigation resulting in the Miller Barondess coverage decision spun off from two other cases: Lincoln Studios, LLC v. DLA[4] (the “Lincoln Studios Action”) and P6 LA MF Holdings SPE, LLC v. NMS Capital Partners I, LLC[5] (the “Malicious Prosecution Action”).

A. The Lincoln Studios Action

In 2010, P6 LA MF Holdings SPE, LLC (“AEW”) and NMS Capital Partners I, LLC (“NMS”) entered into a joint venture agreement (the “JVA”) in order to acquire and develop residential and mixed use buildings in West Los Angeles. A dispute later arose between them concerning a “Buy/Sell term” in the JVA that allowed either party, at an agreed-upon time, to buy or sell interests in the joint venture at a certain price. NMS asserted that the parties had agreed to a three-year buy/sell provision and produced a version of the JVA that included a three-year buy/sell provision. AEW maintained that the parties had agreed to a five-year buy/sell provision, produced a version of the JVA that included a five-year buy/sell provision, and alleged that the version of the JVA relied upon by NMS was a forgery.

In 2014, NMS, represented by Miller Barondess, filed the Lincoln Studios Action against AEW and others. During the pendency of the Lincoln Studios Action, AEW accused NMS of forging and destroying evidence with the aid of Miller Barondess, and AEW subsequently filed a motion for sanctions against AEW and Miller Barondess. The trial court ultimately found that NMS had engaged in forgery, perjury, and the destruction of evidence and, in November 2016, issued an order imposing sanctions upon NMS, although the court declined to impose sanctions on Miller Barondess.

B. The Malicious Prosecution Action

In 2019, AEW filed a Complaint for Malicious Prosecution against NMS and Miller Barondess, as well as the attorneys at the firm who represented NMS in the Lincoln Studios Action (collectively, the “Miller Barondess Parties”).[6] AEW alleged that NMS and the Miller Barondess Parties wrongfully initiated and continued to prosecute the Lincoln Studios Action despite knowing that it was based on forgery and false allegations. AEW specifically alleged that “in order to keep their malicious and frivolous lawsuit against AEW alive, Defendants knowingly submitted to the trial court . . . forgeries, and perjury, and oversaw one of the most far-reaching and brazen acts of evidence spoliation that any court has ever seen.”

The Miller Barondess Parties later filed a special motion to strike AEW’s complaint as a prohibited strategic lawsuit against public participation (“SLAPP”). The court presiding over the Malicious Prosecution Action denied the motion because it determined that AEW had adequately pled each of the elements required to state a claim for malicious prosecution under California law—to wit, the Lincoln Studios Action (1) was initiated by or at the direction of NMS and legally terminated in AEW’s favor, (2) was brought or maintained without probable cause, and (3) was initiated with malice.[7]

The Miller Barondess Parties appealed the court’s order denying their anti-SLAPP motion to the Ninth Circuit. While that appeal was pending, the parties to the Malicious Prosecution Action settled.

C. The coverage dispute

The Miller Barondess Parties sought coverage for the Malicious Prosecution Action under a lawyers professional liability insurance policy issued by Aspen to Miller Barondess (the “Policy”). Aspen provided a defense, and eventually funded settlement, pursuant to a reservation of rights – including the right to seek reimbursement for all amounts it had paid for uncovered claims pursuant to the Policy and California law. Aspen thereafter filed a Complaint for Declaratory Relief against the Miller Barondess Parties seeking reimbursement for the amounts Aspen paid in connection with the defense and settlement of the Malicious Prosecution Action.[8]

THE DISTRICT COURT’S DECISION

In Aspen’s declaratory judgment action, the district court granted the Miller Barondess Parties’ motion to dismiss, ruling that Section 533 did not apply to prevent coverage for the Malicious Prosecution Action.[9]

This ruling relied in large part on an earlier decision by the California Court of Appeals, Downey Venture v. LMI Insurance Co. (“Downey”), which deserves some discussion.[10] Downey involved a lawsuit brought by The Downey Venture against trustees of a trust that was the owner and lessor of a shopping center in which Downey was a lessee. Richard Posell, Mitchell Shapiro, and Ruth Shapiro (collectively, the “Downey Partners”) were Downey’s attorneys of record in that suit and were also its general partners. After summary judgment was entered against Downey and in favor of the trustees, the trustees filed two separate lawsuits against the Downey Partners that included claims for malicious prosecution.

The Downey Partners tendered the defense of those lawsuits to LMI Insurance Company (“LMI”) under a comprehensive general liability policy issued to Downey. That policy expressly covered malicious prosecution. LMI agreed to provide a defense, but reserved rights to dispute coverage and to seek reimbursement of defense costs or amounts paid by LMI on any settlement or judgment.

Before the trustees’ lawsuits went to trial, the trial court granted one of the trustee’s motions in limine, to the effect that the Downey Partners had filed their action against her without probable cause. Shortly after that ruling, the Downey Partners settled both of the trustees’ lawsuits, and LMI contributed to both settlements. Coverage litigation between the Downey Partners and LMI ensued.

In the coverage action, one issue presented was whether “indemnification coverage for malicious prosecution [was] necessarily precluded as a ‘willful act’ within the meaning of [S]ection 533 even though expressly promised in the policy.” The California Court of Appeal answered that question in the affirmative, ruling that “the commission of [the] tort [of malicious prosecution] constitutes a willful act within the meaning of [S]ection 533.”

Notwithstanding this ruling, the district court in Miller Barondess held that Section 533 did not apply because, unlike in Downey Venture, the Malicious Prosecution Action was resolved by way of a settlement.  Thus, there was no final adjudication of liability for malicious prosecution. Aspen appealed.

THE NINTH CIRCUIT’S DECISION

On appeal, the Ninth Circuit reversed and remanded.[11] The Court determined that the district court had erred in concluding that Section 533 did not apply where there had been no final adjudication of willful conduct.

The Court reasoned that “[c]ontrary to the district court’s conclusion, Downey did not require a finding of liability for malicious prosecution.” Instead, the court recognized that Downey “categorically” found that malicious prosecution is a “willful act” within the meaning of Section 533. As such, Section 533 bars coverage for a cause of action for that willful act, even if settled short of an adjudication.

TAKEAWAY THOUGHTS

The Ninth Circuit’s common sense ruling that Section 533 applies where the allegations in the underlying claim necessarily involve willful acts by the insureds themselves is consistent with both the letter and legislative intent of Section 533, as well as the collection of cases cited in the Ninth Circuit’s opinion.

However, finding that Section 533 does not require an adjudication or admission of liability is particularly notable, given that many if not most civil claims are settled, rather than adjudicated. Further, many insurance policies have final adjudication requirements in their intentional acts exclusions. As it stands, at least in certain factual scenarios under California law, the Miller Barondess decision appears to read those requirements out of insurance policies as a matter of public policy.

 

 

[1] Aspen Specialty Ins. Co. v. Miller Barondess, LLP, No. 22-55032, 2023 WL 2523841, at *2 (9th Cir. Mar. 15, 2023) (unpublished).

[2] Cal. Ins. Code § 533.

[3] Aspen Specialty Ins. Co. v. Miller Barondess, LLP, No. 221CV04208ABAFMX, 2021 WL 6333376, at *4 (C.D. Cal. Dec. 2, 2021), rev’d and remanded, No. 22-55032, 2023 WL 2523841 (9th Cir. Mar. 15, 2023) (unpublished).

[4] No. BC551551, in the Superior Court of California, County of Los Angeles.

[5] No. 2:19-cv-1150, in the Unites States District Court for the Central District of California.

[6] Complaint, P6 LA MF Holdings SPE, LLC v. NMS Capital Partners I, LLC, No. 2:19-cv-1150 (C.D. Cal. filed Feb. 14, 2019), ECF 1.

[7] P6 LA MF Holdings SPE, LLC v. NMS Cap. Partners I, LLC, No. 219CV01150ABAFMX, 2019 WL 8135416, at *6–10 (C.D. Cal. Sept. 4, 2019).

[8] Complaint, Aspen Specialty Ins. Co. v. Miller Barondess, LLP, No. 2:21-cv-04208 (C.D. Cal. filed May 20, 2021, ECF 1.

[9] Miller Barondess, 2021 WL 6333376, at *4.

[10] 78 Cal. Rptr. 2d 142 (Cal. Ct. App. 1998).

[11] Miller Barondess, 2023 WL 2523841, at *3.