In Reichert v. General Insurance Company of America, 59 Cal.Rptr. 724, 428 P.2d 860 (1967), vacated for other reasons, 69 Cal.Rptr. 321, 442 P.2d 377 (1968), the plaintiff purchased a 325-unit motel worth $1,500,000.Summary of this case from Exum v. Ferguson
L. A. 28767
June 23, 1967 Rehearing Granted July 26, 1967
Louis Most, Los Angeles, for plaintiff and appellant.
Thelen, Marrin, Johnson Bridges, San Francisco, King, Eyherabide, Cooney Owen, Bakersfield, Bolton, Groff Dunne, Los Angeles, Thornton Taylor, San Francisco, Gene E. Groff, Los Angeles, and Graham G. Campbell, San Francisco, for defendants and respondents.
Action by insured against insurers for damage resulting from insurers' failure to promptly indemnify plaintiff for fire loss. The Superior Court, Kern County, Paul R. Borton, J., sustained demurrers to complaint, without leave to amend and denied motion for judge to disqualify himself and plaintiff appealed. The Supreme Court, Peters,. J., held that judge's refusal to disqualify himself was not appealable, but that, if motel owner would not have lost any of his equity in motel, and his bankruptcy would not have occurred if fire insurers had promptly paid amount due when motel was damaged by fire, trustee in bankruptcy would not take title to consequential damage caused by insurers' improper delay in payment and motel owner would have standing to sue insurers for such consequential damage.
Judgment of dismissal reversed with directions, purported appeal from denial of motion to disqualify dismissed.
McComb, J., dissented.
Plaintiff appeals from a judgment entered after demurrers to his second amended complaint were sustained without leave to amend. Plaintiff also purports to appeal from the trial judge's denial of a motion for the judge to disqualify himself. The judge's order refusing to disqualify himself is not appealable (Cothran v. San Jose Water Works, 89 Cal.App.2d 518, 201 P.2d 85), but his refusal may be reviewed as part of the appeal from the final judgment (Oak Grove School Dist. of Santa Clara County v. City Title Ins. Co., 217 Cal.App.2d 678, 693, 32 Cal.Rptr. 288).
Allegations common to all three of plaintiff's complaints may be summarized as follows: Plaintiff purchased a 325-unit motel worth $1,500,000. As part of the transaction he took assignments of four fire insurance policies with a total coverage of $1,375,000. Concurrently with the assignment, agents for the four fire insurance companies promised plaintiff all the protection he needed against the peril of fire loss. On February 19, 1964, a fire caused $424,000 of damage to the motel, but the insurance companies denied plaintiff's claim for indemnity. In July 1964 some of plaintiff's creditors had him adjudicated an involuntary bankrupt. Bankruptcy was followed by foreclosure of an $850,000 deed of trust on the motel.
The original complaint in this action was filed on December 11, 1964. Named as defendants were the four fire insurance companies and American National Insurance Company, the beneficiary of the deed of trust on the motel. The complaint alleged that although the fire insurance companies had promised to promptly indemnify plaintiff for fire loss, they never intended to carry out their promises. The complaint also alleged that four fire insurers and American National had conspired to deny plaintiff's claim so that plaintiff would lose his equity in the motel. Plaintiff asked for $1,500,000 actual damages and $5,000,000 punitive damages.
Judge Steele sustained demurrers to this complaint. One of the grounds for sustaining the demurrers was that plaintiff lacked the capacity to sue, for the reason that his causes of action had passed to the trustee in bankruptcy.
Plaintiff's first amended complaint omitted the misrepresentation and conspiracy allegations of the original complaint and did not name American National as a defendant. Instead, plaintiff asserted that the fire insurance companies' refusal to pay was oppressive and fraudulent and caused plaintiff to lose his motel and be adjudicated a bankrupt. Plaintiff sought $1,500,000 for loss of the motel, punitive damages of $5,000,000, and the premiums paid for the policies. He did not claim the $424,000 allegedly owed him for the fire damage to the motel.
At oral argument defendants' attorney stated that American National was paid over $200,000 and that the trustee in bankrupty was paid $2,500 for this loss. The attorney also stated that the trustee gave the defendants a release.
Demurrers to that complaint were heard before Judge Borton. He sustained the demurrers because, among other things, he found that plaintiff lacked the capacity to sue.
The second amended complaint is substantially the same as the first amended complaint, except that it asserts in addition that the fire insurance companies were acting in bad faith when they refused to satisfy plaintiff's claims.
On June 14, 1965, plaintiff's attorney appeared before the Judge Borton for argument on the demurrers to the second amended complaint. The lawyer made an oral motion to disqualify the judge under Code of Civil Procedure section 170, subdivision 4. Counsel alleged, and the judge admitted, that until January 9, 1964, the judge had been associated with the law firm that represented American National Insurance Company, which had been named as a defendant in the original complaint. Judge Borton denied the motion to disqualify.
Section 170, subdivision 4, disqualifies a judge "When, in the action or proceeding, or in any previous action or proceeding involving any of the same issues, he has been attorney or counsel for any party; or when he has given advice to any party upon any matter involved in the action or proceeding; or when he has been retained or employed as attorney or counsel for any party within two years prior to the commencement of the action or proceeding * * *."
The parties then argued the demurrers. Plaintiff's lawyer insisted that the plaintiff's causes of action had not vested in the trustee. He said that the second amended complaint was as well drawn as he could make it, and he invited the court to sustain the defendants' demurrers without leave to amend.
The judge sustained the demurrers without leave to amend. The court's order recited that (1) plaintiff had not stated a cause of action for any recoverable element of damages and (2) any cause of action stated by plaintiff had passed to the trustee in bankruptcy.
The point involved in the claimed disqualification of Judge Borton need not be passed upon, because the judgment must be reversed for other reasons. It should be mentioned that section 170, subdivision 5, of the Code of Civil Procedure while making it the duty of a judge who knows of facts disqualifying him to disqualify himself on his own motion, also provides that where the judge does not do so the party claiming disqualification may file with the clerk a written statement setting forth the grounds for the disqualification, and that the judge may file a written answer within five days. When the judge does not act on his own initiative the procedure last above outlined apparently provides the sole method by which a party can disqualify a judge under section 170, subdivision 4. (See People v. Kirk, 98 Cal.App.2d 687, 693, 220 P.2d 976; cf. Bompensiero v. Superior Court, 44 Cal.2d 178, 183, 281 P.2d 250.)
On the merits, we are of the opinion that the complaint states a good cause of action against each insurer for several types of damages, and we are further of the opinion that the right to sue for some of those damages may not have passed to the trustee in bankruptcy.
An insurance policy is, of course, a contract. (Ins. Code, § 22.) For breach of contract the usual measure of damages is all detriment flowing from the breach which the breaching party contemplated or should have contemplated at the time of contracting as likely to result from his failure to perform. (Civ. Code, § 3300; Weaver v. Bank of America, 59 Cal.2d 428, 434, 30 Cal.Rptr. 4, 380 P.2d 644; Ely v. Bottini, 179 Cal.App.2d 287, 294, 3 Cal. Rptr. 756.)
Where the owner of a heavily mortgaged motel or other business property suffers a substantial fire loss, the owner may be placed in financial distress, may be unable to meet his mortgage payments, and may be in jeopardy of losing his property and becoming a bankrupt. A major, if not the main, reason why a businessman purchases fire insurance is to guard against such eventualities if his property is damaged by a fire. Certainly, the property owner who purchases fire insurance may reasonably expect that if a fire occurs, the insurance proceeds will be promptly available to protect him from those eventualities. The business of the fire insurer is to provide such protection. Insurers are, of course, chargeable with knowledge of the basic reasons why fire insurance is purchased, and of the likelihood that an improper delay in payment may result in the very injuries for which the insured sought protection by purchasing the policies.
[5, 6] The question whether a particular kind of damages is within the reasonable contemplation of the parties is not one which ordinarily can be resolved on demurrer. (Weaver v. Bank of America, supra, 59 Cal.2d 428, 434, 30 Cal.Rptr. 4, 380 P.2d 644.) Certainly this court cannot say, as a matter of law, that at the time of contracting the defendants should not have contemplated that plaintiff would be in very serious financial trouble if a fire destroyed one-third of his motel and the insurers refused to perform their contractual obligations. (Cf. Venturi v. Zurich General A. L. Co., 14 Cal.App.2d 89, 57 P.2d 1002; Henkel v. Pacific Employers Ins. Co., 140 Cal.App.2d 301, 305-307, 295 P.2d 80)
The insurers' liability is not limited to the amount specified in the policy (Ins. Code, § 2071). (See Crisci v. Security Ins. Co., 66 A.C. 435, 58 Cal.Rptr. 13, 426 P.2d 173; Comunale v. Traders General Ins. Co., 50 Cal.2d 654, 328 P.2d 198, 68 A.L.R.2d 883; Venturi v. Zurich General A. L. Co., supra, 14 Cal.App.2d 89, 57 P.2d 1002.) "The policy limits restrict only the amount the insurer may have to pay in the performance of the contract * * * they do not restrict the damages recoverable by the insured for a breach of contract by the insurer."( Comunale, supra, 50 Cal.2d at p. 659, 328 P.2d at p. 201.)
It is clear that plaintiff has alleged sufficient facts to show detriment which, within the meaning of section 3300 of the Civil Code, the breaching party contemplated or should have contemplated at the time of contracting as likely to result from his failure to perform.
The fire insurers urge, however, that the ordinary measure of damages for breach of contract set forth in section 3300 of the Civil Code is not applicable, that the damages recoverable here are set forth in section 3302 of the Civil Code, and that the latter section provides the exclusive measure of damages for breach of an obligation to pay money.
Section 3302 of the Civil Code provides: "The detriment caused by the breach of an obligation to pay money only, is deemed to be the amount due by the terms of the obligation, with interest thereon."
An analogous problem was presented in Royer v. Carter, 37 Cal.2d 544, 550, 233 P.2d 539. Royer held that section 3307 of the Civil Code does not provide the exclusive measure of damages for breach of an agreement to purchase an estate in real property and that a seller can recover not only the excess of the amount due under the contract over the value of the property to him but also additional expenses, such as escrow charges, title charges, and broker's fees, borne by the seller because of the breach. The court reasoned that injustice would result if the seller could not recover such additional expenses when they were the natural consequences of the breach. Royer was followed in Honey v. Henry's Franchise Leasing Corp., 64 Cal.2d 801, 805; 52 Cal. Rptr. 18, 415 P.2d 833; Allen v. Enomoto, 228 Cal.App.2d 798, 803-804, 39 Cal.Rptr. 815; and Pasteur Realty Corp. v. La Fleur, 154 Cal.App.2d 5, 9, 315 P.2d 374. Similarly, it has been held that former section 3311 of the Civil Code did not establish the exclusive measure of damages for breach of an agreement to buy personal property. (King v. Globe Grain, etc., Co., 58 Cal. App. 105, 114, 208 P. 166.)
Section 3307 of the Civil Code provides: "The detriment caused by the breach of an agreement to purchase an estate in real property, is deemed to be the excess, if any, of the amount which would have been due to the seller, under the contract, over the value of the property to him."
Section 3302 provides that the detriment caused by a breach "is deemed to be" the amount due plus interest. Section 3307, which was construed in Royer, also contains that quoted phrase, but, as we have seen, Royer rejected the view that section 3307 set forth the exclusive measure of damages. Other cases have expressly recognized that while "deemed" can create a conclusive presumption, "deemed" may also raise only a rebuttable presumption. (Bd. of County Com'rs of County of Logan v. Morris, 147 Colo. 1, 362 P.2d 202, 205; Brimm v. Cache Valley Banking Co., 2 Utah 2d 93, 269 P.2d 859, 863-864; Zimmerman v. Zimmerman, 175 Or. 585, 155 P.2d 293, 300; Erickson v. Erickson, 167 Or. 1, 115 P.2d 172, 178, and cases cited; In re Barbour's Estate, 185 App.Div. 445, 173 N.Y.S. 276, 280; Kleppe v. Odin Tp., McHenry County, 40 N.D. 595, 169 N.W. 313, 314-315.) The code commissioners in their annotation to section 3302 indicated that they were cognizant of a statute that created a conclusive presumption. (See 2 Haymond Burch, Civil Code of the State of California (1872) p. 391 which refers to section 1929 of the Louisiana Civil Code of 1825.) Nevertheless the commissioners and the Legislature did not use such language.
"The damages due for delay in the performance of an obligation to pay money are called interest. The creditor is en-titled to these damages without proving any loss, and whatever loss he may have suffered he can recover no more."
In two situations it has been held in this state that damages for the breach of an obligation to pay money are not limited to the sum specified in the contract plus interest. Thus consequential damages have been permitted for failure to make a loan, and where the contract called for the payment to be made to a third party. (Hunt v. United Bank Trust Co., 210 Cal. 108, 291 P. 184; Venturi v. Zurich General A. L. Co., supra, 14 Cal.App.2d 89, 57 P.2d 1002.)
It is true that the general rule at common law is that the damages for breach of a contractual obligation to pay money are the amount due plus interest thereon. (Lally v. Wise, 28 Cal. 539, 543-544; Heyman v. Landers, 12 Cal. 107, 111; Guy v. Franklin, 5 Cal. 416, 417.) The rule is based on three theories. First, money is always available in the market at the lawful rate of interest. (Lowe v. Turpie, 147 Ind. 652, 44 N.E. 25, 33, 47 N.E. 150, 37 L.R.A. 233.) Second, consequential damages are too remote to be proximately caused by the delay in payment. (Friend Terry L. Co. v. Miller, 67 Cal. 464, 467, 8 P. 40.) Third, the rule provides "a measure of damages of easy and certain application." (5 Williston, Contracts (1937) § 1410, p. 3926.)
Those reasons are not convincing. The facts of this case demonstrate that money is not always available in the market. (See also Venturi v. Zurich General A. L. Co., supra, 14 Cal.App.2d 89, 57 P.2d 1002; Hunt v. United Bank Trust Co., supra, 210 Cal. at p. 117, 291 P. 184; 5 Corbin, Contracts (1964) § 1078, p. 447.) Nor are consequential damages always so remote that the defendant should not be held responsible for them. (Weaver v. Bank of America, supra, 59 Cal.2d 428, 432-435, 30 Cal.Rptr. 4, 380 P.2d 644.) The claimed simplicity of determining damages by limiting the damages to the sum due plus interest should not justify the great hardship that such simplicity may cause. As Jessel, M. R., said in Wallis v. Smith (1882) 21 Ch.D. 243, 257, "Now it may well be that the Courts thought that it was absurd to make a man pay a larger sum by reason of the non-payment of a smaller. It has always appeared to me that the doctrine of the English law as to non-payment of money — the general rule being that you cannot recover damages because it is not paid by a certain day, is not quite consistent with reason. A man may be utterly ruined by the non-payment of a sum of money on a given day, the damages may be enormous, and the other party may be wealthy. However, that is our law. If however, it were not our law the absurdity would be apparent."
[10, 11] We are satisfied that in view of the injustice which could otherwise result, section 3302 of the Civil Code should not be construed as establishing the exclusive measure of damages for breach of an obligation to pay money or to limit the damages recoverable under section 3300 of that code, and that the word "deemed" in section 3302 creates only a rebuttable presumption that interest will compensate a non-breaching party for all the detriment which he suffers and which the breaching party did or should have contemplated at the time of contracting as likely to flow from the breaching party's failure to make timely delivery of the money he had contracted to pay.
This interpretation of section 3302 is not inconsistent with prior California case law. Heyman v. Landers, supra, 12 Cal. 107, and Lally v. Wise, supra, 28 Cal. 539, denied interest in excess of the statutory rate, and Gray v. American Surety Co., 129 Cal.App.2d 471, 277 P.2d 436, held that the market rate of interest was irrelevant. When the damages sought are only interest, the convenience of a fixed rate may outweigh the hardship caused by awarding a larger or smaller sum than the actual damages. Knight v. Marks, 183 Cal. 354, 357, 191 P. 531, and Ricker v. Rombough, 120 Cal.App.2d Supp. 912, 917, 261 P.2d 328, used section 3302 to invalidate clauses in leases that provided for defaulting lessees to pay more than the rent due. Section 3302 was not needed for that purpose, and Civil Code section 3308 now governs the situation. Hartford v. All Night and Day Bank, 170 Cal. 538, 540-541, 150 P. 356, L.R.A.1916A, 1220, and Conner v. Bank of Bakersfield, 174 Cal. 400, 163 P. 353, held that a bank was not liable for a drawer's arrest or other damage caused by the bank's wrongful refusal to negotiate the drawer's check. Holdings of that type were disapproved in Weaver v. Bank of America, supra, 59 Cal.2d 428, 435, 30 Cal.Rptr. 4, 380 P.2d 644, and Commercial Code section 4402 is now the applicable law. (See also Sixth Progress Report to the Legislature by Senate Fact Finding Committee on Judiciary (1959-1961) The Uniform Commercial Code, pt. 1, pp. 481482. quoted in West's Commercial Code Ann., § 4402 at pp. 637-638.) Guy v. Franklin, supra, 5 Cal. 416, and Friend Terry L. Co. v. Miller, supra, 67 Cal. 464, 8 P. 40, contain dicta that the sum due under a contract plus interest is the maximum amount of damages. However, Guy is is a pre-code case and Miller makes no reference to section 3302.
It is true that Baumgarten v. Alliance Assur. Co., C.C., 159 F. 275, 277, held that section 3302 prevents an insurance company from being liable for more than the face value of a policy, plus interest from the time the insurer should have paid the claim. Baumgarten's interpretation of section 3302 is simply incorrect.
Moreover, even if we were to assume that section 3302 of the Civil Code is a limitation on the recovery of damages under section 3300 of that code, the former section by its own terms is not applicable here. Section 3302 speaks of obligations "to pay money only." In the instant case the fire insurers had the alternatives of either repairing the motel or paying for the loss, and since the obligation thus was not "to pay money only," section 3302 does not immunize them from liability for consequential damages caused by their alleged breach of contract.
The remaining question is whether plaintiff's bankruptcy has divested him of his cause of action.
With certain exceptions irrelevant here, clauses (5) and (6) of section 70(a) of the Bankruptcy Act ( 11 U.S.C. § 110(a) (5, 6)) vest the trustee with (i) contract actions to which the bankrupt had title on the date the bankruptcy petition was filed and (ii) all rights of action to which the bankrupt had title on the date the bankruptcy petition was filed and which the bankrupt could have transferred or creditors could have seized prior to the filing.
Those clauses undoubtedly gave the trustee title to plaintiff's claims against the insurers for the amounts the insurers contracted to pay as indemnity. The clauses also gave the trustee title to those consequential damages that plaintiff would have suffered if he had not been forced into bankruptcy. (Cf. Brown v. Guarantee Ins. Co., 155 Cal.App.2d 679, 692-695, 319 P.2d 69, 66 A.L.R.2d 1202.) However, the trustee did not take title to causes of action that the bankrupt acquired after the bankruptcy petition was filed. (4 Collier, Bankruptcy (14th ed. 1964) ¶ 70.07, p. 985; 3 Remington, Bankruptcy (Henderson's ed. 1957) § 1211.05; § 1405, p. 316.)
In Wooten v. Central Mutual Insurance Company (La.App.) 182 So.2d 146, a man was forced into bankruptcy by a judgment rendered against him after his insurance company refused to settle the suit. The trustee in bankruptcy sued the insurance company for unreasonable refusal to settle the claim against the bankrupt. The trustee sought $10,000 for the judgment rendered against the bankrupt in excess of the policy limits. The trustee also sought $150,000 for the impairment caused to the bankrupt's reputation and credit by the bankruptcy. The Louisiana court held that the trustee was vested with the claim for the excess judgment but not with the claim for impairment of the bankrupt's credit. The court said that the claim for impairment of credit was after-acquired property.
In Pattern v. Fidelity-Philadelphia Trust Co. (E.D.Pa.) 246 F.Supp. 1015, the plaintiff claimed that the defendant's breach of an agreement had forced the plaintiff into bankruptcy with a consequent injury to the plaintiff's credit and reputation. The court held that the claim was for breach of contract and therefore vested in the trustee under section 70(a) (6) of the Bankruptcy Act. (Id. at pp. 1020-1021.) The court did not consider whether the cause of actionty. The cases cited by Pattern are not apposite on the question of whether damages caused by bankruptcy are after acquired property. Tamm v. Ford Motor Co. (8th Cir.) 80 F.2d 723, involved damages that the bankrupt suffered before bankruptcy. Constant v. Kulukundis (S.D.N.Y.) 125 F.Supp. 305, 307, said only that the statute of limitations would bar any action for damages caused by bankruptcy.
It would appear that a trustee does not succeed to a bankrupt's action for damages caused by bankruptcy. Although these damages may stem from a wrong perpetrated before bankruptcy, the damages are not suffered until the bankruptcy petition is filed; and until that time the bankrupt cannot claim any such damage. The claim is not vested until the petition is filed. (Compare In re Rechtman (E.D. N.Y.) 11 F.Supp. 347, 351.)
The situation before us is different from those cases where property in the estate is stolen, destroyed, or converted. (See e. g., Passen v. United States Casualty Co., 319 Ill.App. 59, 48 N.E.2d 545; Fuller v. New York Fire Ins. Co., 184 Mass. 12, 67 N.E. 879, 880-881.) The right of action to recoup those losses is not after-acquired property, because the trustee's claim is only a different form of the assets which were originally in the estate.
Plaintiff owned a motel which on general demurrer this court must assume was worth $1,500,000. Before the fire plaintiff's equity was $650,000 — the value of the motel less the $850,000 deed of trust held by American National. The fire reduced plaintiff's equity to about $226,000. After plaintiff's bankruptcy the deed of trust was foreclosed, and plaintiff apparently received nothing.
At that time plaintiff also had a cause of action for $424,000.
These facts provide the basis for a claim that bankruptcy caused plaintiff to suffer a loss that he would not have suffered otherwise. Had the insurers paid more promptly, plaintiff might have been able to pay his general creditors, and they might not have thrown plaintiff into bankruptcy. American National, which did not foreclose until after plaintiff was adjudicated a bankrupt, might then have refrained from foreclosing, and petitioner would not have lost his equity in the motel.
Although petitioner's allegations are not entirely clear, this court cannot say, as against a general demurrer, that the damages plaintiff seeks to recover would have resulted even if there had been no bankruptcy. If plaintiff can prove that bankruptcy caused him to lose his equity, in whole or in part, and that such loss would not have occurred in the absence of bankruptcy, the trustee did not take title to all the consequential damages caused by the insurers' allegedly improper delay in payment. Consequently, plaintiff may have standing to sue, and the defendants' general demurrers should not have been sustained.
[17-19] Plaintiff also claims punitive damages. Exemplary damages cannot be awarded for breach of contract. (Civ. Code, § 3294.) Although plaintiff alleges that the insurers' refusal to pay was oppressive and fraudulent, a comparison of the original and second amended complaints shows that plaintiff is no longer contending that the defendants committed a misrepresentation. A defendant's evil intent when it breaches an express contractual duty does not enable the plaintiff to recover exemplary damages unless the breach also constitutes a tort. (Haigler v. Donnelly, 18 Cal.2d 674, 680, 117 P.2d 331.) There is no basis for tort liability here.
The judgment of dismissal is reversed with directions to the trial court to overrule the general demurrers and to rule on the points presented by the special demurrers. The purported appeal from the denial of the motion to disqualify Judge Borton is dismissed.
TRAYNOR, C. J., and TOBRINER, MOSK, BURKE, and SULLIVAN, JJ., concur.
I dissent. I would affirm the judgment of dismissal for the reasons expressed by Mr. Presiding Justice Conley in the opinion prepared by him for the Court of Appeal in Reichert v. General Insurance Company of America (Cal.App.) 53 Cal. Rptr. 693.