and Submitted December 6, 2016 Pasadena, California
from the United States District Court for the Central
District of California D.C. No. CV 05-08891 MMM Valerie B.
Fairbank and Margaret M. Morrow, District Judges,
I. Imoisili (argued) and Linda Dakin-Grimm, Milbank Tweed
Hadley & McCloy, Los Angeles, California, for
K. Batalden (argued) and Mitchell C. Tilner, Horvitz &
Levy, Encino, California; Joseph W. Cotchett and Nancy L.
Fineman, Cotchett Pitre & McCarthy, Burlingame,
California; for Defendants-Appellees/Cross-Appellants.
Before: Stephen Reinhardt, A. Wallace Tashima, and Richard A.
Paez, Circuit Judges.
panel affirmed in part, reversed in part, and dismissed in
part the district courts' judgment and orders concerning
remedies in various appeals arising from claims for breach of
contract and fraud.
district court held that a judgment creditor, who seized a
judgment debtor's company pursuant to a judgment that was
reversed on appeal, could recover in restitution for losses
suffered while it was in possession of the seized company.
The district court denied the judgment creditor's request
to rescind its quota share reinsurance agreement
("QSA") with Business Alliance Insurance Company.
panel held that to the extent the district court's orders
of July 26, 2010, and October 8, 2013, affirmed
defendants' right to recover restitution, they were
sound. In reviewing the district court's December 17,
2014 order, the panel held that the district court erred in
allowing the judgment creditor to recover in restitution. The
panel's conclusion rested on the California Supreme
Court's decision in Ward v. Sherman, 100 P. 864
(Cal. 1909), wherein the court in an analogous situation,
declined to award the judgment creditor an affirmative
recovery to offset its losses. The panel's decision was
bolstered by the plain reading of Restatement (First) of
Restitution § 74 and Restatement (Third) of Restitution
§ 18, which suggested that in similar cases, the right
of restitution ran only to the judgment debtor.
panel rejected the judgment creditor's challenges to the
district court's October 8, 2013 order denying the
judgment creditor's request for rescission of its QSA.
Specifically, the panel held that the district court did not
err by failing to consider California Civil Code § 1019,
which concerns the removal of fixtures from leaseholds.
Second, the district court thoroughly analyzed whether the
QSA amounted to a necessary expense or, instead, an
improvement. Finally, policy considerations did not favor the
judgment creditor's position.
panel reversed the district court's May 19, 2015 order
granting in part and denying in part defendants' motion
to recover post-appeal attorneys' fees. The panel held
that the district court erred in awarding attorneys' fees
under California Civil Code § 1717, while simultaneously
concluding that the judgment creditor had fully satisfied the
obligations stemming from the operative judgments. The panel
dismissed, as moot, defendant's appeal of the district
court's reduction of the lodestar fee amount.
the panel reversed the judgment creditor's restitution
award, the panel vacated the district court's July 14,
2015 order denying defendants' motion to retax costs and
remanded for reconsideration in light of changed
panel ordered that in each of the five appeals, each party
should bear its own costs on appeal.
TASHIMA, Circuit Judge
heart of this case lies a conceptually straightforward, but
procedurally complex, question of first impression for our
Circuit: Can a judgment creditor, who seizes a judgment
debtor's company pursuant to a judgment that is
subsequently reversed on appeal, recover in restitution for
losses suffered while it was in possession of the seized
company? The district court answered in the affirmative. In
doing so, it awarded Plaintiff PSM Holding Corp. more than
$1.1 million in restitution. Defendants now challenge this
told, the parties have filed five appeals and cross-appeals,
which were consolidated for oral argument and decision. We
have jurisdiction under 28 U.S.C. § 1291, and we affirm
in part, reverse in part, and dismiss in part.
The Lawsuit and Trial
to the instant lawsuit, Defendant-Appellee/Cross-Appellant
National Farm Financial Corporation ("National
Farm") owned Business Alliance Insurance Company
("BAIC"). Larry Chao, the president of National
Farm, co-founded BAIC in the 1990s with his wife, Julie Chao.
BAIC provided insurance to small businesses. BAIC had $14.2
million in net written premiums and $2.8 million in net
income by 2005.
early 2005, National Farm entered into negotiations to sell
BAIC to Plaintiff-Appellant/Cross-Appellee PSM Holding
Corporation ("PSM"). Ultimately, however, National
Farm walked away from the deal. Thereafter, PSM sued National
Farm, Larry Chao, and BAIC (collectively,
"Defendants") alleging claims for breach of
contract and fraud.
a trial, a jury found in favor of PSM and awarded it $40
million on its breach of contract claim and $3 million on its
fraud claim. In post-trial proceedings, Judge Fairbank
granted in part and denied in part Defendants' motion for
judgment as a matter of law ("JMOL"). The motion
was denied, with the exception that judgment was entered in
favor of Defendants on the fraud claim, thereby reducing
PSM's damages award to $40 million. Judge Fairbank also
granted Defendants' motion to stay execution of the
judgment pending appeal, conditioned on Defendants posting a
$40 million bond. However, after Defendants failed to post
the required bond and National Farm entered bankruptcy, PSM
executed on the judgment. In October 2008, BAIC was
transferred to PSM. At the time of transfer, BAIC had more
than $30 million in assets.
taking possession of BAIC, PSM took various steps to
integrate BAIC into its existing business. For example, PSM
and BAIC entered into an inter company quota share
reinsurance agreement (the "QSA"). The QSA provided
that, for every insurance policy BAIC issued, PSM would
receive 90 percent of the policy's insurance premiums in
exchange for assuming 90 percent of the policy's risk of
loss. BAIC would retain the remaining ten percent of the
premiums and would continue to be responsible for ten percent
of the policies' risk of loss. PSM also assumed control
of 90 percent of BAIC's loss and loss expenses reserves,
thereby rendering it responsible for 90 percent of BAIC's
losses on policies written prior to October 21, 2008, as well
as on future policies. Additionally, PSM and BAIC entered
into an Intercompany Service Agreement ("ISA"),
under which PSM would provide to BAIC certain executive,
administrative, and other services.
The Judgment is Reversed
18, 2009, the Ninth Circuit reversed Judge Fairbank's
partial denial of Defendants' JMOL motion. The Ninth
Circuit held that "[t]he plain terms of the agreement
dictate that no contract was formed because the signature
lines for National Farm; Larry Chao, as an individual; and
Julie Chao, as an individual, were left blank. As a result,
none of the parties could be liable under its terms."
PSM Holding Corp. v. Nat'l Farm Fin. Corp., 339
Fed.Appx. 693, 694 (9th Cir. 2009). The case was remanded to
the district court.
July 26, 2010, Order on Restitution
remand from the Ninth Circuit, it was undisputed that PSM
should pay restitution to Defendants. At issue, however, was
the appropriate amount.
26, 2010, the district court granted in part and denied in
part Defendants' motion for restitution and
attorney's fees. Although Defendants' motion opposed
a return of BAIC to National Farm and, instead, sought a
restitution award in the amount of $59.6 million, the
district court ordered "[r]estitution in the form of the
return of BAIC's shares to [D]efendants."
district court's decision relied heavily on Restatement
(First) of Restitution § 74, which provides that:
A person who has conferred a benefit upon another in
compliance with a judgment, or whose property has been taken
thereunder, is entitled to restitution if the judgment is
reversed or set aside, unless restitution would be
inequitable or the parties contract that payment is to be
final; if the judgment is modified, there is a right to
restitution of the excess.
(First) of Restitution § 74 (Am. Law Inst. 1937). In
such situations, comment e to § 74 provides, "the
judgment debtor is entitled to specific restitution, together
with the value of [the property's] use in the meantime,
diminished by expenses necessarily incurred in the protection
of the property and the payment of taxes and liens, but not
including the expense of improvements." Id. at
§ 74, cmt. e.
to the district court, this rule is consistent with a similar
principle set forth in Restatement (Third) of Restitution and
Unjust Enrichment § 18 (Am. Law. Inst. 2011):
A transfer or taking of property, in compliance with or
otherwise in consequence of a judgment that is subsequently
reversed or avoided, gives the disadvantaged party a claim in
restitution as necessary to avoid unjust enrichment.
the court supported its decision by relying on several state
court decisions - from California and elsewhere - that
confronted similar issues, including Stockton Theatres,
Inc. v. Palermo, 264 P.2d 74 (Cal. Dist. Ct. App. 1953),
Erickson v. Boothe, 274 P.2d 460 (Cal. Dist. Ct.
App. 1954), and Fleer Corp. v. Topps Chewing Gum,
Inc., 539 A.2d 1060 (Del. 1988).
on these authorities, the district court concluded that
"Defendants are entitled to specific restitution of the
BAIC shares." Additionally, the district court
determined that Defendants were "entitled to an
accounting of the profits earned while PSM held BAIC,
'diminished by expenses necessarily incurred in the
protection of the property and the payment of taxes and
liens.'" (Quoting Restatement (First) of
Restitution, § 74 cmt. e (Am. Law Inst. 1937).)
Accordingly, the district court ordered "an accounting
of the profits PSM generated through its ownership of [the
October 8, 2013, Order on Accounting and Rescission of
remand, Defendants filed a motion for an award of PSM's
profits. Defendants sought $14 million in profits. PSM
opposed the motion, arguing that it actually suffered a $1.5
million loss as a result of its temporary possession and
control of BAIC. Additionally, PSM sought to rescind the QSA.
The district court determined that expert testimony was
required in order to resolve Defendants' motion for
profits and PSM's request for rescission. Accordingly, it
appointed two experts: (1) Debra J. Roberts, who would
consider the QSA issue; and (2) Timothy H. Hart, a forensic
accountant, who would consider the question of profits. After
each expert filed her/his report, the district court ruled.
question of rescission, the district court denied PSM's
request, relying on the following illustration:
A obtains judgment in ejectment against B and is put in
possession of Blackacre. After knowledge that an appeal has
been taken, A makes improvements thereon to the amount of
$1000, at an expense of $100 repairs a roof which otherwise
would have leaked, and pays taxes thereon to the amount of
$300. He remains on the land for two years, at the end of
which time the judgment is reversed. B is entitled to
restitution of the land and to the reasonable rental value of
the land during the two years, less the amount expended by A
for the necessary repairs and for the payment of taxes;
ordinarily [diminishment in] restitution for the value of the
improvements would not be granted.
(First) of Restitution § 74 cmt. f, illust. 14 (Am. Law
Inst. 1937). This rule, the district court reasoned, is
consistent with the well-established proposition that
"the distinction between 'repairs and
maintenance' and 'improvements' can be
characterized 'as the difference between
'keeping' and 'putting' [an] . . . asset in
good condition." (Quoting Moss v. Commissioner,
831 F.2d 833, 835 (9th Cir. 1987).)
this legal framework, the district court concluded that
"[t]he factual record supports the conclusion that the
reinsurance agreement was an improvement rather than a
necessary cost of protecting BAIC." It reasoned that
"[t]he reinsurance agreement increased the amount of
reinsurance BAIC had prior to the time PSM acquired it"
and, consequently, "the agreement added to BAIC's
value by reducing the amount of risk it faced." And,
there is nothing in the record to suggest that "absent
replacement of the existing excess of loss and catastrophe
insurance with the [QSA], BAIC would have been unable to
function as an insurance company." Similarly, the
district court found no evidence suggesting that "there
was an imminent danger that the California Department of
Insurance would take regulatory action against BAIC that
would have precluded it from writing insurance
according to the district court, the QSA was "better
characterized as an 'improvement' [rather] than an
expense necessary to protect BAIC, " the district court
concluded that "rescission of the agreement [was] not
respect to profits, the district court made the following
findings: (1) Defendants were entitled to recover $203, 532
in "synergy profits" from PSM; (2) there was no
evidence to support Defendants recovery of "future
profits"; (3)Defendants were entitled to recover a $30,
973 tax benefit previously received by PSM due to its
ownership of BAIC; (4)Defendants were not entitled to any
recovery as a result of PSM's liquidation of PSM's
stock portfolio; (5) PSM was not entitled to an additional
management fee beyond what had already been paid directly by
BAIC; (6) Defendants were entitled to recover $254, 524 in
improperly charged transition costs; (7) PSM was entitled to
"an adjustment of the restitution award" of $332,
190 to cover "operating expenses associated with BAIC
while it ran the company"; (8) PSM was entitled to a
credit of $557, 402 in "ceded premiums, " i.e.,
premiums paid on reinsurance contracts that BAIC entered into
prior to PSM's ownership; and (9) PSM could
"offset" any restitution payment to Defendants by
$700, 000 to account for PSM's assumption of a loan made
by BAIC to National Farm.
district court then ordered the parties to jointly
"prepare an accounting of the amounts owed [Defendants]
and the amounts PSM [was] entitled to deduct." The court
added that it would "enter judgment in favor of
whichever party is owed money pursuant to the
December 17, 2014, Order on Restitution of Profits
parties - unable to reach agreement on the amounts owed -
each filed a proposed judgment. The parties agreed that,
based on the district court's prior October 8, 2013,
order, PSM was to be allotted $1, 100, 563 in net principal.
That is, per the October 8 order, PSM's offsets and
credits exceeded the Defendants' recovery of profits and
benefits by just over $1.1 million. Nonetheless, the parties
disputed what should happen next. For its part, PSM sought to
recover $1, 100, 563 in net principal, net prejudgment
interest at a rate of $211 per day until the entry of
judgment, and undetermined costs and attorneys' fees. In
contrast, Defendants requested that the district court award
nothing to PSM and award unstated costs to Defendants.
crux of Defendants' position was that the district court
should award nothing to PSM because "[b]ased upon the
rules of restitution, which are grounded on the principles of
equity, it would be inequitable to award PSM monies,
especially since it operated BAIC at a loss during its
December 17, 2014, order, the district court rejected
Defendants' arguments and awarded $1, 100, 563 to PSM. In
support of its decision, the court articulated the following
"fundamental rule" of restitution: "the goal
of restitution is 'to place the parties in as favorable a
position as they could have been in had the judgments not be
enforced pending appeal.'" (Citing Gunderson v.
Wall, 126 Cal.Rptr.3d 880, 883 (Ct. App. 2011).)
Moreover, the district court continued, "[a]bsent
evidence of bad faith, even assuming PSM operated BAIC at a
loss, equity does not require that PSM be held responsible
for the loss." (Citing Restatement (First) of
Restitution § 74, cmt. f. (Am. Law Inst. 1937).)
same order, the district court considered PSM's request
for prejudgment interest, pursuant to California Civil Code
§ 3287(a). As a preliminary matter, the district court
emphasized that, under § 3287(a), "[e]very person
who is entitled to recover damages certain, or capable of
being made certain by calculation . . . is entitled also
to recover interest thereon . . . ." (Quoting Cal. Civil
Code § 3287(a) (emphasis and alterations in original).)
Moreover, the district court added, "an accounting
action is prima facie evidence [that] a claim is
uncertain." (Quoting Chesapeake Indus., Inc. v.
Togova Enters., Inc., 197 Cal.Rptr. 348, 353 (Ct. App.
1983).) Then, after surveying several California appellate
court decisions which stand for the same proposition, the
district court reasoned that "[h]ere, the issue of
restitution was complex, and necessitated that the court
appoint business valuation and reinsurance experts, "
and that "[t]here were numerous discrete questions that
the court had to resolve in order to determine the amount of
restitution." Based on these findings, the district
court declined to award prejudgment interest.
with its December 17 order, the district court entered a
final judgment, in which it ordered that: (1) based on the
Ninth Circuit's reversal, PSM would "take nothing by
way of its complaint"; (2) Defendants would recover $2,
224, 220.76 in attorneys' fees and $53, 984.99 in costs
stemming from pre-reversal proceedings; (3) PSM would ...