[00:00:00] Speaker 04:
We'll move on to our second case set for argument today, which is Pacific American Title Insurance versus Evanston Insurance Company, case number 25-2705.

[00:00:53] Speaker 00:
May it please the Court. Good morning, Your Honor. My name is Scott Batterman. I am counsel for Appellant Pacific American Title Insurance and Escrow Company. We'll abbreviate that to PATICO if the Court doesn't disagree with me. And also Ms. Lourdes San Nicolas. At this time, I would like to reserve five minutes for rebuttal.

[00:01:18] Speaker 00:
This is another duty to defend case. I'm sure the Court is familiar with those. In analyzing this case, I think it would be helpful to start by breaking down the underlying action into its simplest terms. The underlying action is ULG Inc. versus Mary Guerrero. I refer to her as Mary because the record is rife with Guerreros, and it gets a little confusing after a while. But in any event, Mary sold a piece of ULG property to Columbus Development Corporation, and Patico through Ms.

[00:01:52] Speaker 00:
San Nicolas, acted as the escrow company for the transactions, and in accordance with the instructions that they had received, they transferred the sale proceeds.

[00:02:02] Speaker 04:
Okay. So ultimately it's a conversion claim.

[00:02:08] Speaker 00:
It's a conversion claim, but not against Patico. It's a conversion claim against Mary. It was not covered by the policy. So we do not agree that it is a conversion claim as far as our client is concerned.

[00:02:17] Speaker 04:
What is it as to your client?

[00:02:21] Speaker 00:
As to our client, again, breaking it down to its basic components.

[00:02:27] Speaker 04:
What did they allege was the claim against your client?

[00:02:30] Speaker 00:
The claim against my client was that they gave the money over to Mary when they knew they shouldn't have.

[00:02:36] Speaker 00:
But that last part isn't necessary to state a claim. And the complaint is fully amendable to bring it under other theories.

[00:02:44] Speaker 04:
But that's kind of where I'm getting to.

[00:02:47] Speaker 04:
They did not bring a negligence claim. You're trying to suggest that they did bring a negligence claim.

[00:02:52] Speaker 00:
I'm trying to suggest two things. I'm trying to suggest that the fact in the complaint would still lend themselves to a negligence claim. They chose to bring it.

[00:03:00] Speaker 04:
They bring a negligence claim.

[00:03:02] Speaker 00:
They did not. Okay. The court, however, analyze it in terms of negligence. And under the cases that say that we're under the facts, the complaint is freely amendable to bring it within the policy. There is still coverage. And that is the case here.

[00:03:17] Speaker 04:
Um, But then you run up against cases in our court like the L.A. Lakers case and the Scottsdale insurance case where amendment at a future date could be spec, you know, the fact that you could have amendment at a future date is not enough.

[00:03:35] Speaker 00:
There is a break in jurisdiction, in authority between different cases. I believe the cases that we cite are the ones that are more likely to have been approved in Guam, but We're looking at, I guess, a combination of Guam law versus.

[00:03:49] Speaker 04:
Correct me. I thought Guam followed California here.

[00:03:52] Speaker 00:
Largely. But the question is, which cases do they follow?

[00:03:55] Speaker 04:
And you point to any Guam law where that would be different under Guam law than California law.

[00:04:02] Speaker 00:
I don't think different so much as which part of California law do they follow. And in this case, we would suggest that we were looking at the specific case that I'm referring to.

[00:04:15] Speaker 00:
is National Union Fire Insurance Company versus Guam Housing Urban Renewal Authority, 2000 Guam 19, which we cite numerous times in there. And one of the things that that court points out is that the claim isn't necessarily limited to the theory on which the plaintiff brought the case.

[00:04:35] Speaker 04:
Well, that may be true.

[00:04:38] Speaker 04:
It might not be limited to the theory, but it still has to be a claim that's in the case. I mean, part of the problem it seems to me with your argument, is what is an insurance company supposed to do? When this gets tendered to the insurance company, the insurance company reads the complaint and they say, well, here's the claim that's in the complaint. This is what they're alleging. These are the claims that are being brought. That claim is covered or it's not covered. I mean, you seem to be trying to impose an additional duty on the insurer to say, well, if the plaintiff's and I'm not talking about in this case, in the underlying claim case, if the plaintiffs were smarter or if they pled it differently, then it could be covered.

[00:05:26] Speaker 00:
I think the duty does go beyond looking at the complaint. I think the cases indicate that there is a duty to look at all the facts and circumstances, not just the complaint that's present in some of the cases that we cite. But what it boils down to here is the bottom line of the case is that my client handed over money to somebody who is now alleged wasn't supposed to receive it. And whether they did so intentionally or whether they did so negligently, it's almost to be considered, if we were to take an analogy from the criminal world, a lesser included offense.

[00:06:03] Speaker 03:
Counsel, why does this even matter in light of the exclusion to paragraph 4B7? I apologize, Keith.

[00:06:11] Speaker 00:
I don't memorize things as well as I used to.

[00:06:13] Speaker 03:
That's the exclusion for conversion.

[00:06:15] Speaker 00:
We would argue that that exclusion only applies to conversion by members of the insured.

[00:06:21] Speaker 03:
Well, it says any conversion, and then the next sentence says this exclusion shall apply irrespective of which individual party or organization actually or allegedly committed or caused in whole or in part the conversion.

[00:06:35] Speaker 00:
I get down to the reasonable expectations of a person reading that they would assume that might be different parts of their own organization, but that have converted, but after closing the conversion takes place, you know, three blocks down or three transactions down the road and that they would not assume we would, they would not reasonably, I apologize. They wouldn't, I get, I'm actually from New York, not Hawaii originally. So sometimes my tongue gets ahead of me when it shouldn't. I apologize.

[00:07:02] Speaker 00:
Um,

[00:07:03] Speaker 03:
I mean, this is a pretty broad exclusion for the things that are named, the conversion, misappropriation, commingling, defalcation, theft, disappearance, or insufficiency, because it says it begins with the words any, and then it applies irrespective of which individual party or organization. Again, that's pretty broad language.

[00:07:22] Speaker 00:
Most exclusions go as broad as they can, Your Honor, but it still gets down to what is the

[00:07:26] Speaker 03:
reasonable expectation of a person and reasonable expectation, these all sound like... What could a party reasonably expect? How can you possibly read that and say, well, it doesn't cover this?

[00:07:39] Speaker 00:
You would read that to... The reasonable expectation is these are all forms of embezzlement or conversion or theft, which is the kind of things you'd expect to happen inside the company... Which makes it very difficult for somebody like Pataco to detect...

[00:07:53] Speaker 03:
And the insurance company may say, yeah, we're just not ready to insure that kind of risk. So it's so difficult to detect. We don't want our people, we don't want to pay for this kind of action.

[00:08:09] Speaker 00:
I think what it boils down to is that Pathico can't make a claim based on its own employees or dishonesty. Words like defalcation and conversion, they all seem to strike at the company itself.

[00:08:23] Speaker 00:
after the funds have left the companies.

[00:08:25] Speaker 03:
They are surely covered. I'm trying to figure out why Ms. Guerrero's conversion is not covered here.

[00:08:32] Speaker 00:
Because she's not part of Pateko.

[00:08:34] Speaker 03:
Well, that doesn't say anything about Pateko here. It just says irrespective of which individual, party, or organization actually or allegedly committed or caused in whole or in part. An individual, a party, or organization, that doesn't say anything about an insured there.

[00:08:50] Speaker 00:
It doesn't say anything about it, but what is the reasonable expectation of an insured that the insured is being covered for its own wrongs, but not – an insured is being covered for claims against it, but an insured won't expect that it will be covered if it commits a dishonest act.

[00:09:09] Speaker 01:
I'm not sure that that's a reasonable expectation. I mean, as Judge Bybee is pointing out, you just got to – we start with the text. Just like a statute for a contract, we start with the text. Is it reasonable to interpret this text contrary to what it flatly says?

[00:09:23] Speaker 00:
I believe it is, Your Honor, because it's reasonable to interpret it that a conversion or anything like this, it should be something within the company's own control. Once the funds have left their control and once the funds are and the escrow has closed, a conversion down the road is entirely out of its hands and it wouldn't be reasonable to expect that they would lose their insurance coverage because of the

[00:09:46] Speaker 01:
I don't know how to follow that argument, particularly where not only is it broad, but it provides us a list, as Judge Bybee has quoted a couple of times, individual party or organization. The fact that party is in that list and things that are not parties are in that list makes your argument really difficult because there's no way to read that language as limited to the insured entity.

[00:10:07] Speaker 00:
I think the party... I think the insured reading that would see it as limited to the insured entity because they have no control over actions outside of themselves and these kind of exclusions normally relate to the actions of the company. They're excluded if they or their employees commit improper acts. Once it's out of their control, they shouldn't expect that they lose their insurance coverage because some third party over whom they have no control.

[00:10:37] Speaker 01:
I understand that argument. I mean, I'm not even sure that that argument It has a whole lot of sway here because the complaint here alleges that Pataco's employee knew that Mary did not have the authority to sell this property and conduct this transaction. And so even if sort of on an equitable ground, the argument they are advancing had some sway, I'm not sure it does here because the allegations here are not that Pataco was completely innocent and had no idea that there was improper conduct happening.

[00:11:08] Speaker 01:
The allegation is that they did know.

[00:11:11] Speaker 00:
And that gets to the issue of the complaint and what the complaint could have been read, can be amended to read, that we are not directly involved in that, but that this is an act of negligence. And if you read the decision of the Guam court, you can see that the Guam court's reasoning strays very deeply into the concept of negligence. And if you go to, for instance, page 628 of the record on appeal, the Guam court said, if the escrow holder acts negligently, it is ordinarily liable for any loss occasioned by its breach of duty. That language is in there because I believe the Guam Court is seeing this case at least in part as a negligence type of case, or at least having the attributes of a negligence case.

[00:11:52] Speaker 01:
As Judge Bybee has pointed out, if we conclude that this exclusion applies, we never have to even address whether negligence is at issue in this complaint or not.

[00:11:59] Speaker 00:
Yes, Your Honor. If there's an overriding exclusion, that is an issue. But again, we would argue that the complaint could be upheld without any notice or knowledge of conversion on the part of Patrico through the negligence concept that the Guam court pushed and through the amendability of the complaint.

[00:12:25] Speaker 00:
And I think that's the reason why the Guam judge in his analysis spent so much time talking about duty and negligence and saying if the escrow holder acts negligently, it is ordinarily liable for any loss occasioned by its breach of duty.

[00:12:40] Speaker 00:
If the Guam court didn't see this at least in part as a negligence type of a case or having the capacity of a negligence type of case, that language would have had no place in the court's ruling. I think it's clear that the court was indicating that this is how the court views the case and it's the Guam judge in a Guam complaint. So I think that should be given some strength by this court in terms of interpreting what the complaint, the the stretching or the reach of the complaint and its amendability to cover these issues.

[00:13:14] Speaker 04:
Do you want to reserve?

[00:13:16] Speaker 00:
Yes, Your Honor. I have no idea how much. I apologize, Your Honor. You're fine.

[00:13:21] Speaker 04:
I mean, you're answering our questions. That's always a good thing.

[00:13:24] Speaker 00:
I was trying to answer your questions. I wouldn't be so bold as to say I actually answered them. Thank you, Your Honor.

[00:13:37] Speaker 02:
Good morning. My name is Daniel Formeller, and I represent Evanston Insurance Company. I'm honored to be here this morning.

[00:13:45] Speaker 02:
The appellant would urge that the district court was wrong on the facts on the law and on the application of the law to the facts.

[00:13:56] Speaker 02:
When looking at coverage under a contract of insurance, the facts become the context within which the coverage decisions are made. We first look to the four corners as a complaint. There are two counts in this underlying complaint brought by ULG. One of them is for aiding and abetting a breach of fiduciary duty, and one is for conspiracy.

[00:14:20] Speaker 04:
Right, but I think you kind of may have walked into a problem here because you said you look at the context of the facts here, and that kind of rolls right into their argument, at least on the coverage issue.

[00:14:35] Speaker 04:
which is, yeah, but this wouldn't have taken a lot of thought to realize this ultimately was a negligence theory in some respects.

[00:14:49] Speaker 02:
So the ensuring agreement here in the policy, which is a typical errors and omissions policy, is that a wrongful act must occur in the provision of professional services.

[00:15:03] Speaker 02:
Wrongful act is defined as a negligent error or omission, right? The cases that, and Guam, your Honor asked this earlier, Guam borrows very heavily on California law. California cases discuss this issue of possibility or probability or practicality of coverage being manifested even if it isn't manifested in the exact words of the complaint.

[00:15:35] Speaker 02:
But there isn't anything here in the facts of this case that gives one thought that a negligence.

[00:15:44] Speaker 04:
Because the allegations, as you read them, are intentional acts. Correct.

[00:15:51] Speaker 04:
So even if even if theoretically they could amend it, you agree they could amend it and add allegations that would have made this a negligence claim.

[00:16:02] Speaker 02:
Right.

[00:16:04] Speaker 04:
But they haven't.

[00:16:06] Speaker 01:
I'm not sure. So do you think that they would have to add factual allegations, or do you think that they would have to add just assertions of a different claim?

[00:16:14] Speaker 02:
No, they'd have to add, in our view, we'd have to add factual allegations that fit the actual facts. This case is primarily transactional.

[00:16:24] Speaker 01:
Okay, so let me ask it this way. Let's say that we had the exact same facts, and instead they asserted a negligence claim. Could your client move to dismiss that claim as improperly pled because it's a negligence theory on facts that you think are only an intentional action?

[00:16:41] Speaker 02:
No.

[00:16:41] Speaker 01:
Okay, so if that's true, then why couldn't they amend and just assert a negligence claim based on the exact same facts that exist?

[00:16:49] Speaker 02:
They could amend if they could plead facts that actually meet what occurred during this transaction. But what occurred during this transaction was was ultimately a conversion of over $2 million.

[00:17:05] Speaker 04:
Well, but by the non-party, but not by the insured.

[00:17:12] Speaker 04:
I mean, the insured, well, I guess it's open to debate, but the insured didn't convert it. They might have aided in the conversion, but that's not inconsistent with the negligence theory. And I mean, as I understand California law, at least in that Scottsdale insurance case, even intentional actions under California law can form the basis of a negligence claim.

[00:17:41] Speaker 02:
Well, again, when we look at the context of this case, which is now over six years old, my experience, and I'm sure most lawyers' experience, is that lawyers are are well educated and knowing how to plead into coverage if that's what they wish to do. Here in our jurisprudence, great deference is given to claimants or plaintiffs as to the court that they wish to be heard in and the theories which they wish to present.

[00:18:13] Speaker 04:
Well, maybe we need to move on to the exclusion point because I think you've got, this is a difficult issue, it seems to me. I mean, the L.A. Lakers case says, well, we're not going to, look to speculative future amendments.

[00:18:31] Speaker 04:
This one, it's not entirely clear to me if this fits within the speculative category. I mean, I understand that an insured can't look at this and start coming up with all the, you know, they can't like pretend they're the plaintiff's attorney in the underlying case and all the spin off all the theories. But this one fits a little bit closer into what could have, you know, what maybe the insured should have been able to see. So then we get into, as Judge Bybee pointed out, the exclusion part.

[00:18:59] Speaker 02:
So as we have indicated in the briefs, even if the insuring agreement had been triggered, the exclusion, B7, amended by the endorsement, would take it out of coverage. The language in the exclusion is arising out of, which under California law is broadly interpreted, broadens the exclusions. In addition to which, any means just literally any in terms of what the action is.

[00:19:34] Speaker 02:
It is not temporally restricted, so there is no time limit when this may occur, nor does it indicate by whom it must occur. The focus is on the act itself and whether or not it occurred.

[00:19:51] Speaker 03:
So, counsel, is this a pretty standard exclusion in policies? It is. It's extraordinarily broad, so it covers any theft. You're just not insured for any theft or embezzlement, for example.

[00:20:04] Speaker 02:
Because those, again, are intentional quasi-criminal, you might say, fraudulent, knowing the kinds of things that an errors and omissions policy typically would not insure in the first instance.

[00:20:20] Speaker 03:
This exclusion... So this provision was added later on, is that correct?

[00:20:25] Speaker 02:
It was originally in the policy and then an endorsement was added to the policy that exchanged the language in the endorsement for the language that was originally in the policy form.

[00:20:41] Speaker 04:
Same thought.

[00:20:43] Speaker 04:
So help me understand why this exclusion would apply. If they had brought Let's say they had brought both a aiding and abetting conversion claim against Pataco and a negligence claim against Pataco. Would this exclusion still apply? Or would you say we have a duty to defend on the negligence claim, but we don't have a duty to defend on – I mean, can you have a partial duty to defend in the case?

[00:21:13] Speaker 02:
No. No. Because I think if the actions are linked together, as they would be in the hypothetical that you just rendered, then this exclusion would take it out of coverage.

[00:21:29] Speaker 04:
So the only way this would not apply, let's say they brought a straight-up negligence claim against Pataco and a conversion claim against the third party.

[00:21:44] Speaker 04:
Would the exclusion apply in those circumstances?

[00:21:47] Speaker 02:
Probably not.

[00:21:51] Speaker 02:
What I think is important here is when we think about the underlying transaction and what occurred here, an errors and omissions policy typically would deal with a transposition error or an unfound lien on a piece of property in a title of companies. But they could have easily, I mean, they didn't, but

[00:22:12] Speaker 04:
They could have easily said, you know, you had a duty to figure out that she was converting this, and you failed to do that, and so you helped in an illegal transfer. And they could have pled this fairly easily as a negligence claim. Now, they didn't do that.

[00:22:36] Speaker 04:
But if they had done that, then the exclusion wouldn't have applied. So that's a very interesting statement. theory here that if we would just allow them to amend their complaint, they could have amended around the exclusion. No, I'm not saying we should allow that at this point.

[00:22:51] Speaker 02:
I'm sorry for interrupting. No, go ahead. The case is far enough in its procedural progression where discovery is finished, motions have been filed, and this case is setting itself up for trial. And again, thinking ahead, the charging instructions in this case are going to charge on intentional acts. Not negligence.

[00:23:13] Speaker 04:
Well, I'm not sure the intention. I think under California law, the intentional act part only gets you so far because I don't think they would have had to. I mean, I think you've said this. They would not have had to make additional allegations of fact in the complaint. They could have just said, we're relying on these facts that we've alleged and we're adding a negligence claim. They could have done that.

[00:23:37] Speaker 02:
They could have, Your Honor, but my point is the charging instructions to a jury would be, do you find that, Mr. San Nicolas, and then fill in the blanks. And it would be aided and abetted or conspired to.

[00:23:53] Speaker 04:
Under the complaint, I understand I'm looking at an alternate universe.

[00:23:56] Speaker 02:
Yeah, understood.

[00:23:58] Speaker 04:
But if they had amended that, I mean, that's the irony here is, they could have gotten around both issues, including the exclusion, if they just amended the complaint and added a negligence claim.

[00:24:10] Speaker 02:
Right. And that's why all of the cases that we've looked at, and I'm sure you've looked at too, talk about first the contract and then extrinsic facts known to the insurer as the sort of second element here. And our argument is that the appellant has failed in its burden under the insuring agreement and that even if it triggered the exclusion would take this out of coverage.

[00:24:40] Speaker 02:
That's all I have.

[00:24:41] Speaker 05:
Thank you very much, Your Honor.

[00:24:50] Speaker 00:
Thank you, Your Honor, for noting me again.

[00:24:54] Speaker 00:
The case is not yet set for trial, so that's not an issue in terms of amendability, but that's outside the record. But since...

[00:25:02] Speaker 04:
Mr. What is the case you would point us to that would give us the authority to say, hey, you know what?

[00:25:13] Speaker 04:
This wasn't this. This could have been more carefully crafted by the plaintiff's attorney below, and it could have avoided the exclusion and it could have theoretically gotten around or fallen within the coverage.

[00:25:29] Speaker 04:
We're going to remand this so that they can read. Is there a case that you can point us to that gives us the authority to do that?

[00:25:36] Speaker 00:
I don't think this court can remand to the Guam trial court.

[00:25:41] Speaker 00:
But what it can do is look at cases like the CNA insurance case that we cite, which points out that a complaint that can be easily amended under the terms of the facts in the case can trigger coverage if it's clear that that's a possibility.

[00:25:57] Speaker 04:
Even if we agreed with you on that, Do you have a case then that says amendability could also apply to an exclusion?

[00:26:08] Speaker 00:
I don't think that that issue has directly come up, but I'd also point out that once you get into negligence here beyond conversion on the part of my client, because my client does not negligently convert anything. And again, I think we have to go back to insurance policies are not like other contracts. They're not read like other contracts. They're not read in terms of reasonable expectations of the insurer. They're read in terms of reasonable expectation of the insured. And then the insured would assume that this was the kind of clause that says if you and your own people are criminal, you can't do this. But if it's negligence, then we're not criminal and we're not involved in the conversion.

[00:26:41] Speaker 04:
OK, so let me ask you the same question. If you I mean, because there's two ways you could have amended this or I say you, I don't know whether you were counsel below, but the two ways that they could have amended the complaint or well, it could have been amended to say.

[00:27:01] Speaker 04:
only negligence or it could be conversion and negligence. If it was conversion and negligence, would coverage be implicated there in your view?

[00:27:11] Speaker 00:
Under the law, if you have two causes of action in a complaint and one's covered and one's not, the entire complaint is covered. So they could win entirely on negligence was after proving conversion.

[00:27:20] Speaker 04:
Except for the exclusion.

[00:27:22] Speaker 00:
Except for the exclusion.

[00:27:24] Speaker 00:
So would the exclusion exclude the entire claim?

[00:27:29] Speaker 04:
in that situation or just the one claim?

[00:27:32] Speaker 00:
I think we would argue that it would only exclude the one claim. And again, under well-established law, if you have five causes of action in a complaint and only one of them is covered, the entire complaint gets defended. Thank you, Your Honor.

[00:27:46] Speaker 04:
Thank you to both counsel for your arguments. The case is now submitted.