[00:00:00] Speaker 03:
Good morning, your honors, and may it please the court.

[00:00:02] Speaker 03:
My name is Eric Larson.

[00:00:03] Speaker 03:
I represent Tandem Fund, the plaintiff and the appellant below.

[00:00:11] Speaker 03:
This case poses the question of when an insurance company can avoid the contractual language that it drafted itself by invoking public policy concerns.

[00:00:23] Speaker 03:
That's a fairly dramatic outcome.

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And for that reason, the circumstances in which an insurance company can do that

[00:00:29] Speaker 03:
are limited.

[00:00:31] Speaker 03:
However, the district court below applied one of those public policies, we think, quite too broadly, and that's why we were up here today.

[00:00:42] Speaker 03:
I'll address that first public policy first, which is that you can't get insurance coverage for a restitutionary award.

[00:00:52] Speaker 03:
The Supreme Court of California has spoken very specifically on this issue in two cases.

[00:00:58] Speaker 03:
In AIU, the court found that environmental cleanup costs were not restitutionary.

[00:01:07] Speaker 03:
They could be covered by insurance, even though the court acknowledged that it looked a lot like restitution in certain respects.

[00:01:15] Speaker 03:
The court went so far as to say that because compensatory damages

[00:01:19] Speaker 03:
and restitution are both within the concept of, quote, damages.

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For purposes of insurance policy interpretation, that was dispositive.

[00:01:30] Speaker 03:
Now, in Bank of the West then, the Supreme Court

[00:01:34] Speaker 03:
kind of backed off a little bit from that.

[00:01:35] Speaker 03:
They said, hey, we didn't mean to say that restitution is always the same as damages, because they had found a case where they wanted to bar coverage.

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And that was Bank of the West, who was charging illegal interest rates from their depositors.

[00:01:48] Speaker 05:
But this seems quintessentially restitution.

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Money is put in by investors under false pretenses, and the order is to give the money back.

[00:02:04] Speaker 05:
That looks like restitution.

[00:02:06] Speaker 05:
Whether we slap a damages label on it, it seems to be within the core of this public policy that you can't insure against an order that you disgorge wrongfully gotten sums.

[00:02:21] Speaker 03:
The case law is very clear that the purpose of restitution is to restore what the wrongdoer has in their pocket.

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There were two defendants in the arbitration.

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One was Cuff, the company.

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The loan, the loans fund, we're talking about $1.7 million is the nut here.

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That loan was made to Cuff.

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It was not made to the individual.

[00:02:44] Speaker 05:
Do you have a case that says that the bar against insurability of restitution awards does not apply to someone, I mean,

[00:02:59] Speaker 05:
who is essentially a co-conspirator or a co-defendant, is there a tracing requirement?

[00:03:05] Speaker 05:
You actually have to follow the trail of the dollars, or is it just that we look at is it a restitutionary award?

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You're liable for the restitution.

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You're being ordered to give it back.

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We can't allow wrongdoers to ensure that.

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And you have to look at how this developed in the Supreme Court.

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And the Supreme Court, if you read the language in Bank of the West, it's all about restoring.

[00:03:27] Speaker 03:
giving back, ill-gotten gains.

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The individual sued.

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She never had any ill-gotten gains in this case.

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She lost her own money in this endeavor.

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And damages are measured in fraud cases by the out-of-pocket loss of the victim.

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These are called damages.

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I'm not saying that the label is determinative.

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But there was no claim for unjust enrichment.

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It was purely a tort claim.

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The restatement on restitution says restitution's not available on the Torton contract.

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It's available in equity.

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There was no equitable claim.

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Nobody thought of this as restitution ever, certainly not the arbitrators.

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And it's only after the fact that Scottsdale comes in and says, oh, hey, we have this public policy.

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And when Judge Chabria went that direction, I reminded him, well, if you're going to go there, Your Honor, which actually, it shocked me really.

[00:04:22] Speaker 03:
Looks like that's where you're going to and that kind of surprises me, because I think the Supreme Court's been very clear on this.

[00:04:28] Speaker 03:
But there is a specific written exclusion that says if you're going to focus on the benefit received by the insured and not the harm caused by the victim, there needs to be a final judgment.

[00:04:38] Speaker 05:
So is it your view then that that exclusion can narrow the applicability of this public policy so that an insurer can contravene the public policy by putting an additional condition on it and limitation on it?

[00:04:54] Speaker 03:
It's not narrowed so much as it is saying here are the circumstances.

[00:04:57] Speaker 05:
Well, you're saying yes, because no one moved to confirm the arbitration award.

[00:05:01] Speaker 05:
I get to get out of this rule, and I get insurability.

[00:05:05] Speaker 05:
That doesn't seem to make a lot of sense.

[00:05:08] Speaker 03:
Well, let me address that.

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Scott still controlled this process from the beginning.

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starting when they wrote the policy.

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They could have written, and there are policies out there, and we cite in our footnote a case that addresses a policy like this that will say final judgment or other final adjudication.

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They didn't write it that way.

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They wrote it how they wrote it.

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Need a final judgment.

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And we cited the Northern District case of Scottsdale versus Feynman, where the court enforced that

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when there was just an arbitration award in front of it.

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They said, that's not good enough.

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You need a final judgment.

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Here's the other part where Scottsdale had control.

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Scottsdale was a party in the arbitration.

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They intervened over our objection.

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They could have confirmed the award.

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If they had, I wouldn't be sitting here today.

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And yes, Your Honor, I'll be very honest with you.

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The client came to me and said, I got this award against a defunct client.

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another individual without any money, how do I get my money from Scottsdale?

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And I said, well, if they confirm this award, you're in trouble.

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So we need to wait and see what happens.

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And they didn't do it.

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I don't know why they didn't do it, Your Honors, but they didn't, and they could have very easily done that.

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So they control this process from the beginning.

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You see, I'm trying to take advantage like it's a bad thing, Your Honor.

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I represent the victim of the fraud.

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The only person.

[00:06:32] Speaker 04:
But the victim, you acquired the rights of the wrongdoer under the insurance policy.

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Which happened.

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So you're saddled with whatever they're saddled with.

[00:06:39] Speaker 03:
I am.

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I am.

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I'm stuck with it.

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And it's not the easiest case, because this went all the way up to the line of a final judgment.

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I mean, I have a reason to award saying that she committed intentional fraud.

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So this is a dangerous case, because just switching to the 533 issue for a moment, Scottsdale says in their brief,

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A negligent misrepresentation is barred by 533.

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And that's just flat wrong.

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I mean, anybody who reads the definition of wrongful act in the policy would be shocked by that.

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And I think any director or any smart, capable, cautious person who's thinking of going into corporate governance would think twice about that if that's gonna be the law.

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The trouble is there's a lot of district court cases, not a lot, I say a few district court cases,

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give Scottsdale enough ammunition to say that.

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We look to federal courts in California much more than state courts in this one area of insurance law, directors and officers coverage.

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If you do address 533, which I hope you do because I do think this is definitely not restitution, if you do address 533, I think everybody could really benefit by some direction as to

[00:08:00] Speaker 03:
what that means, because right now the cases are really dangerous.

[00:08:05] Speaker 03:
If negligent misrepresentation is barred by 533, there's really no meaningful coverage under every directors and officers policy sold in California and every other state I've seen.

[00:08:19] Speaker 02:
Well, was it negligent misrepresentation or intentional misrepresentation?

[00:08:22] Speaker 03:
It was intentional, Your Honor, but it wasn't willful.

[00:08:25] Speaker 03:
And the exclusion specifically says, there's no bar to coverage for fraud unless you have a final judgment saying there was fraud.

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Otherwise, you can imagine a situation where, say I'm in summary judgment, or I'm just in discovery.

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And the evidence is coming in, and it's coming in bad for me, in whatever state I'm in.

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And the insurance company says, hey, you know what?

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This is looking pretty bad for you.

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We're not going to defend you anymore.

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And I say, wait a minute.

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It says right here, you have to defend me up until there's a final judgment.

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And they'll say, no, no, no.

[00:09:02] Speaker 03:
533, C, Tandem versus Scottsdale, Ninth Circuit.

[00:09:07] Speaker 03:
If you give them an inch on this, Your Honor, the insurance companies are going to take a mile, and it's going to throw directors and officers' coverage into a state of complete deseret.

[00:09:17] Speaker 03:
With that, I'd like to reserve my final six minutes.

[00:09:20] Speaker 01:
All right.

[00:09:20] Speaker 01:
Thank you, counsel.

[00:09:31] Speaker 00:
good morning may it please the court this case can be decided in scottsdale's favor based upon three separate and distinct rules the first being the rule against restitution in california there's a public policy that bars insurers from insuring insureds against claims for restitution which is exactly what we have here the money awarded to tandem fun was the exact amount that they invested

[00:10:01] Speaker 00:
in cuff.

[00:10:03] Speaker 00:
The fact that Sood, Ms.

[00:10:05] Speaker 00:
Sood was also sued is immaterial.

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What the courts look at is what is the amount being claimed and that amount that was being claimed and that was finally awarded was the exact amount that was being invested.

[00:10:19] Speaker 05:
Do you have a case that says that a co-defendant who didn't receive any funds

[00:10:27] Speaker 05:
but is subject to a restitution ward, cannot be insured against that liability?

[00:10:37] Speaker 00:
No, Your Honor, I don't think it would come in the form of restitution.

[00:10:41] Speaker 00:
What I would point the court to would be August entertainment, and that goes to the issue of whether this constitutes a wrongful act under a DNO policy.

[00:10:52] Speaker 00:
In that case, the court

[00:10:55] Speaker 00:
went through an extensive explanation as to why there would not be coverage for a breach of contract claim even though it was asserted against an individual in the company because the individual signed in their individual capacity versus

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in their corporate capacity.

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And in that situation, the court pointed out that D&O policies, as does Scottsdale's policies, contain a breach of contract exclusion that applies to the company only.

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There is not such an exclusion for an individual because an individual, if they are liable for a breach of contract, they are liable in their personal capacity.

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In their personal capacity, they would not be insured.

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It would not constitute a wrongful act under the policy.

[00:11:44] Speaker 00:
So there would be no coverage for that individual anyway.

[00:11:48] Speaker 00:
And the court also pointed out it would be irrational to circumvent the rule against insuring corporations for breaching a contract that they agreed to pay by simply pointing to the fact that, oh, there's an individual that is also named.

[00:12:07] Speaker 00:
That would allow both claimants as well as insureds to circumvent that public policy, and that cannot be the law.

[00:12:14] Speaker 00:
In Oak Park, Calabasas, the court also went extensively into the public policy.

[00:12:21] Speaker 00:
And I'm actually on my second argument now, which coincides with his honor's question.

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But Oak Park, Calabasas also involved a contract case where the Homeowners Association entered into a contract to get a contractor to perform some work.

[00:12:42] Speaker 00:
with no intention of paying for that work.

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Now, regardless of what the cause of action was called, what the court looked at is what is being asked for here.

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What is essentially being asked for is the homeowners association is being asked to pay what they owe under the contract.

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And in turn, what the homeowners association did to the insurer was ask that the insurer pay that amount under contract.

[00:13:08] Speaker 00:
That cannot be the law in California.

[00:13:11] Speaker 00:
that would be extremely dangerous.

[00:13:14] Speaker 00:
That would make an insurance company a corporate partner of every company they provided D&O insurance to.

[00:13:22] Speaker 00:
What that means is that the company could then go out, obtain loans, enter into contracts, not pay, but then look to their insurer to step in and pay those obligations, whether they're debt from loans, whether they're debts from contract.

[00:13:39] Speaker 00:
In Bank of the West, the court pointed out that an insured, it did involve a loan, multiple loans, automobile loans.

[00:13:49] Speaker 00:
And in that case, the bank received improper interest.

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And the court said, that's not right.

[00:13:57] Speaker 00:
We're not gonna step in and allow an insurer to pay for your pre-existing obligation.

[00:14:05] Speaker 00:
That would then allow companies to simply pass off their obligations to insurance companies without insurance companies assuming that risk during the underwriting process.

[00:14:17] Speaker 00:
There is simply no way that an insurance company could underwrite a risk without the ability to know what contracts a company is going to enter into and then later down the road ask them to step in and pay for them.

[00:14:32] Speaker 00:
That's why the courts in California have consistently held that there are no claims, there can be no coverage for claims for restitution.

[00:14:43] Speaker 00:
The court in August Entertainment provided a second reason why this court can confirm dismissal of Tandem Fund's case.

[00:14:54] Speaker 00:
And as I mentioned, they addressed whether that cause of action alleged a wrongful act.

[00:15:00] Speaker 00:
Same issue here, a pre-existing obligation.

[00:15:03] Speaker 00:
A company sought the return of royalties and the court, as I mentioned, explained why that can't be in California.

[00:15:13] Speaker 00:
On a third reason, Insurance Code 533.

[00:15:18] Speaker 00:
And Tandem Fund has often pointed to the policy's conduct exclusion, which requires a final judgment.

[00:15:26] Speaker 00:
There's no inconsistency between Insurance Code 533 and Scott Still's conduct exclusion, and here's why.

[00:15:35] Speaker 00:
Insurance Code 533 addresses indemnity only.

[00:15:38] Speaker 00:
There's no bar to an insurance company

[00:15:43] Speaker 00:
providing a defense to an insured, even when only willful acts are alleged against that insured.

[00:15:53] Speaker 00:
Insurance Code 533 does not bar a defense.

[00:15:56] Speaker 00:
Neither does the conduct exclusion.

[00:15:59] Speaker 00:
It provides that a defense will be provided to the insured through final judgment.

[00:16:08] Speaker 00:
doesn't limit it to final judgment after a verdict or, excuse me, judgment after a verdict or judgment after appeal.

[00:16:19] Speaker 00:
It's a final judgment.

[00:16:20] Speaker 00:
So whenever that final judgment is achieved, the defense obligation ends and Scottsdale would then be permitted to file a deck relief action or defend itself against its denial for indemnity.

[00:16:33] Speaker 00:
That is completely consistent with insurance code 533.

[00:16:37] Speaker 00:
But what we're dealing with here is not a duty to defend.

[00:16:40] Speaker 00:
It's simply a duty to indemnify.

[00:16:42] Speaker 05:
As I mentioned- Why didn't Scottsdale confirm the arbitration award?

[00:16:48] Speaker 00:
It didn't need to.

[00:16:49] Speaker 00:
And confirming the arbitration award would provide a judgment against its insured as well as itself.

[00:16:57] Speaker 00:
And quite frankly, Scottsdale was shocked that Tandem Fund did not seek a final judgment so that it could enforce that judgment.

[00:17:05] Speaker 00:
So it's not to say that no party could attempt to enforce that.

[00:17:10] Speaker 05:
If the restitution, Bank of the West, Jaffee Rule, and 533 did not apply, would the lack of the confirmation, the arbitration award,

[00:17:27] Speaker 05:
Is that required for there to be liability that would result in coverage, or would Scottsdale pay even in the absence of the confirmation of the award?

[00:17:41] Speaker 05:
Do you see what I'm doing there?

[00:17:43] Speaker 00:
I understand.

[00:17:44] Speaker 00:
I don't believe they would pay.

[00:17:46] Speaker 05:
They would insist, get it, until there's a final judgment, it's not actually something we have to pay for yet.

[00:17:55] Speaker 00:
Correct, and Scottsdale has not paid for its own obligation on the final war because it's not been codified or rendered a final judgment.

[00:18:06] Speaker 00:
And what that means is any party who wants to enforce that will now need to move in the state court to have a final judgment.

[00:18:16] Speaker 00:
Getting to Your Honor's question, if we didn't have Bank of the West, if we didn't have August Entertainment and we didn't have Insurance Code 533, Scottsdale may have then moved to confirm the award and sought deck relief on the fact that it did not owe indemnity.

[00:18:35] Speaker 00:
But given those three strong public policy reasons, it's not necessary to go those other steps.

[00:18:42] Speaker 00:
Scottsdale did reserve rights from the beginning.

[00:18:46] Speaker 00:
to raise any of the defenses, even past the pleading stage, if that turns out to be the case.

[00:18:54] Speaker 00:
So I think the court can find for Scottsdale, as I mentioned, under any three of these public policy reasons, there is no case that I would say is directly on point in that we have Mrs. Sood.

[00:19:08] Speaker 00:
But what the cases do provide us with is to look to the

[00:19:13] Speaker 00:
the amount awarded, not the title, not who's involved, and to allow or to accept Tandem Fund's argument that the court can circumvent California's public policy simply because Ms.

[00:19:30] Speaker 00:
Sood is in the case.

[00:19:31] Speaker 00:
would allow all parties in the future to simply circumvent that same public policy by naming an individual, and that just cannot be the law.

[00:19:42] Speaker 00:
And with that, I would submit and thank the court, unless there's any further questions.

[00:19:48] Speaker 01:
All right.

[00:19:48] Speaker 01:
Thank you, counsel.

[00:19:50] Speaker 01:
Mr. Larson.

[00:19:56] Speaker 03:
Thank you, Your Honor.

[00:19:57] Speaker 03:
Just briefly, first of all, I'm not aware of any authority that says that if the amount is the same that the victim departed with, that it's automatically restitution, which appears with Scottsdale's arguing.

[00:20:11] Speaker 03:
I mean, out-of-pocket loss is a measurement of fraud damages.

[00:20:14] Speaker 03:
Just the fact that it's the same as the amount of the loan, if that automatically makes it restitution, then this coverage really becomes illusory.

[00:20:23] Speaker 03:
And I mentioned before that if you give the insurers

[00:20:27] Speaker 03:
an inch on this, they're going to take a mile.

[00:20:29] Speaker 03:
And you just saw it today because I am not arguing that this is a breach of contract case.

[00:20:35] Speaker 03:
I'm not arguing that breaches of contract are covered.

[00:20:38] Speaker 03:
They're not.

[00:20:38] Speaker 03:
That's undisputed.

[00:20:41] Speaker 03:
This argument was not made below that this is just a breach of contract case.

[00:20:45] Speaker 03:
There was no breach of contract claim in the arbitration.

[00:20:49] Speaker 03:
It was intentional fraud.

[00:20:50] Speaker 03:
If an insurer is so easily able to recast a tort

[00:20:55] Speaker 03:
As contract, again, this coverage disappears and becomes illusory.

[00:21:01] Speaker 03:
One quick point on Bank of the West I want to underscore.

[00:21:04] Speaker 03:
Bank of the West was very important to the court that there were no damages available in that claim.

[00:21:10] Speaker 03:
It was under Business and Professions Code Section 17203.

[00:21:13] Speaker 03:
Only restitution and injunctions were available.

[00:21:18] Speaker 03:
court, that was a major underpinning of the court's reasoning as same with Jaffee.

[00:21:23] Speaker 03:
It was a criminal case with criminal fines.

[00:21:25] Speaker 03:
So I urged the court to look very closely on the restitution angle to what the Supreme Court was saying in AIU and Bank of the West, because I think they were very clear.

[00:21:37] Speaker 03:
The money has to be in the defendant's pocket and returned.

[00:21:41] Speaker 03:
Sue never had the money.

[00:21:43] Speaker 03:
She lost her own money.

[00:21:45] Speaker 03:
Thank you, Your Honors.

[00:21:47] Speaker 01:
Thank you, Council.

[00:21:48] Speaker 01:
Tandem Fund versus Scottsdale Insurance Company will be submitted.