Under California’s Uniform Voidable Transactions Act, a third-party claimant could challenge an insured’s release of a bad faith claim against an insurer after the insurer allegedly failed to accept a reasonable settlement demand within policy limits. (Potter v. Alliance United Insurance Co. (2019) — Cal.App.5th —- )
Facts
In October 2007, Christopher Potter (Potter) was severely injured in an auto accident caused by Jesus Remedios Avalos-Tovar (Tovar). At the time of the accident, Tovar was insured under an Alliance United Insurance Company (AUIC) automobile policy with bodily injury liability limits of $15,000 per person. Tovar did not have any other significant assets.
Two months after the accident, Potter wrote to AUIC and offered to settle his claims against Tovar in exchange for the $15,000 policy limit. Although the settlement offer stated that it would expire in 30 days, AUIC did not accept the offer within that time.
Subsequently, Potter filed a personal injury action against Tovar. In July 2009, the personal injury action proceeded to trial and the jury returned a verdict of $908,643 in favor of Potter. Tovar then filed a motion for a new trial, which the trial court granted. Potter appealed the order granting the motion for new trial.
In April 2010, while Potter’s appeal was pending, AUIC and Tovar entered into a confidential Settlement Agreement and Release (Release). Pursuant to that Release, AUIC paid Tovar $75,000 to release any bad faith claim Tovar had against AUIC based on AUIC’s failure to accept Potter’s earlier offer to settle for the $15,000 policy limit.
In November 2011, the Court of Appeal affirmed the order granting a new trial in the personal injury action, and the appellate court remanded the action for retrial. In early April 2012 (some two years after the Release had been signed), Tovar’s counsel disclosed the existence of the Release to Potter’s counsel.
Approximately a year later, the personal injury action went to trial for the second time. The jury again returned a verdict in Potter’s favor, this time awarding him $975,000 in damages. The trial court subsequently awarded Potter costs and prejudgment interest, which brought the judgment in favor of Potter to $1,523,887.
AUIC paid its $15,000 policy limit in partial satisfaction of the judgment Tovar owed to Potter. Potter desired to take an assignment of Tovar’s bad faith claim against AUIC in exchange for Potter’s agreement not to execute on Tovar’s personal assets. However, because Tovar had already signed the Release in favor of AUIC, Tovar could not give any such assignment to Potter.
Potter sued AUIC for statutory fraudulent conveyance based on California Civil Code section 3439, et seq., commonly referred to as the Uniform Voidable Transactions Act (UVTA). Potter essentially alleged that Tovar was insolvent prior to and at the time Tovar and AUIC entered into the Release; that Tovar had a viable claim against AUIC for bad faith failure to settle, which was an asset Tovar could have used to pay down his civil liability to Potter; and that AUIC participated in a fraudulent conveyance of that asset by entering into the Release with Tovar, thus preventing Potter from collecting on the judgment in Potter’s favor. The trial court ruled that Potter had failed to state a cause of action against AUIC, and thus dismissed Potter’s suit against AUIC. Potter appealed.
Holding
The Court of Appeal reversed, and held that Potter had sufficiently stated a cause of action against AUIC under the UVTA.
The appellate court noted that under the UVTA, a “fraudulent transfer” is a transfer by the debtor of property to a third person undertaken with the intent to prevent a creditor from reaching that property in satisfaction of the creditor’s claim. Under the UVTA, a transfer can be invalid either because of actual fraud or constructive fraud. A creditor who is damaged by a fraudulent transfer can either (a) set the transfer aside, or (b) obtain monetary damages from the transferor or the transferee.
Here, Potter had stated a cause of action against AUIC for violation of the UVTA. Specifically, Potter sufficiently alleged actual or constructive fraud by AUIC. Further, Tovar’s release of AUIC for bad faith failure to settle was the transfer of an asset under the UVTA because Tovar’s bad faith claim against AUIC was an assignable form of personal property when the Release was signed. Also, while Potter did not have a judgment against Tovar when the Release was signed, Potter did have a claim against Tovar at that time. In addition, Potter sufficiently alleged injury because the bad faith claim was an asset of Tovar’s that was essentially put out of Potter’s reach by the Release. Last, AUIC was a proper defendant because the transfer of the bad faith claim was made for AUIC’s benefit.
Under the circumstances, the appellate court remanded the case to the trial court so that Potter could pursue his claim against AUIC under the UVTA.
Comment
Note that this is a “pleading” case, i.e., the appellate court was only examining whether Potter had alleged facts which, if proven, could give Potter a right to recover against AUIC. Whether Potter can actually prove his allegations remains to be seen.
That said, if Potter’s allegations are true, the case could present difficulties for AUIC. The essence of Potter’s claim is that the Release was fraudulent because the insolvent Tovar transferred his claim for bad faith to AUIC; AUIC intended to prevent Potter from collecting the full amount of any judgment against Tovar; and Tovar did not receive reasonably equivalent value for the claim released. If true, such facts could have rather “bad optics” for AUIC.