Passport 420 LLC., et al. v. Starr Indemnity & Liability Company, et al

Case Number

19CV03596

Case Type

Hearing Date / Time

Mon, 10/02/2023 - 10:00

Nature of Proceedings

Defendant Starr Indemnity & Liability Company’s Motion for Summary Adjudication of Issues as Respects Second Cause of Action and Punitive Damages

Tentative Ruling

Passport 420 LLC., et al. v. Starr Indemnity & Liability Company, et al.   

Case No. 19CV03596

           

Hearing Date: September 25, 2023                                       

HEARING:              Defendant Starr Indemnity & Liability Company’s Motion for Summary Adjudication of Issues as Respects Second Cause of Action and Punitive Damages

ATTORNEYS:        For Plaintiffs Passport 420, LLC; Spring Creek Research,

                                                LLC; and William Parrish.: A. Barry Cappello, Lawrence J. Conlan, and Richard Lloyd

                        For Defendant Starr Indemnity & Liability Co.: Ralph S. LaMontagne, Jr., Eric Amador, Michael J. Terhar, and Don Swaim     

                   

    

TENTATIVE RULING:

 Starr Indemnity & Liability Company’s motion for summary adjudication of issues as respects second cause of action and punitive damages is denied.

Background:

Attorney Michael Avenatti (Avenatti) had previously acted as attorney for William Parrish (Parrish) with respect to various matters. In 2016, the two decided to form an entity through which they would purchase and own a private jet, with each providing funds toward the purchase of the jet. Passport 420, LLC (Passport 420) was formed, made up of members Spring Creek Research, LLC (owned by Parrish), and Avenatti & Associates, APC (of which Avenatti was a principal). Avenatti was appointed as Manager of Passport 420.

On January 27, 2017, Honda Aircraft Company LLC delivered a 2016 HA-420 aircraft, Serial No. 42000029, to Passport 420. Through Spring Creek, Parrish claims to have contributed $2,311,000 toward the $4,383,605 purchase price of the jet. The funds which Avenatti contributed to the purchase of the jet had been wired into his trust account in January 2017 by an individual who made the payment in settlement of a claim possessed by Avenatti’s client, Alexis Gardner. Avenatti then misrepresented the terms of the settlement to Ms. Gardner in order to avoid paying the settlement proceeds to her at the time they were paid. She ultimately received only a small portion of the funds received by Avenatti in settlement of her claim. Parrish claims to have had no knowledge that the funds provided by Avenatti toward the purchase of the aircraft had been embezzled by Avenatti.

On March 1, 2017, Passport 420, through its Operations Manager Chris Ohman, applied for, and ultimately obtained, Aircraft Insurance on the jet from Starr Indemnity & Liability Company (Starr), for policy periods from January 26, 2017, to January 26, 2018 (2017 Policy). Additional policies were later issued by Starr with policy periods from January 26, 2018, to January 26, 2019 (2018 Policy), and from January 26, 2019, to January 26, 2020 (2019 Policy). None of the applications for these policies reflected any liens on the aircraft. The 2019 Policy provides that an “employee” or “agent” of the Named Insured may be an Insured only “while that person is acting within their official capacity as such.”

Starr contends that it would not have issued any of the policies had it known that the aircraft had been purchased with stolen funds.

On April 10, 2019, the aircraft was seized by the U.S. Government to secure restitution for persons victimized by Avenatti’s embezzlement, including Gardner.

On May 1, 2019, Parrish submitted a Proof of Loss statement to Starr, making a claim for the value of the aircraft lost to the government’s seizure, under the 2019 Policy.

By letter dated June 26, 2019, Starr initially reserved its rights under the policy, also contending that payment to Parrish as an individual would be inappropriate. Passport 420, Parrish, and Spring Creek filed the current action two weeks later, on July 11, 2019, alleging causes of action for breach of contract, bad faith, and declaratory relief.

On April 24, 2020, plaintiffs Spring Creek and Parrish dismissed, with prejudice, their claims for breach of contract, bad faith, and declaratory relief asserted against Starr. Spring Creek and Parrish’s declaratory relief claims against Avenatti and Avenatti Associates remained. Passport 420’s claims against all defendants remain the same.

On November 2, 2021, Starr denied the Proof of Loss submitted by Passport 420, rescinded the 2017, 2018, and 2019 Policies, offered to return all premiums, and denied coverage under exclusions and terms of the 2019 Policy.

Starr filed the current motion for summary adjudication on April 10, 2023, as to the second cause of action for breach of the covenant of good faith and fair dealing, as well as plaintiffs’ claim for punitive damages.

Passport 420 filed its opposition on September 1, 2023.

Starr filed its reply brief on September 19, 2023. By way of its reply, Starr initially begins by pointing out several examples of factually incorrect assertions made by Passport 420 in its opposition. The court has reviewed the evidence and recognizes which arguments are supported by admissible evidence and those which are not.

The undisputed, and not reasonably disputed, facts are:

On April 14, 2016, Passport 420 was organized pursuant to a Certificate of Formation duly executed and filed under the Delaware Limited Liability Company Act. (Plaintiff’s Separate Statement (PSS), ¶ 1.) A Limited Liability Company Operating Agreement of Passport 420 was entered into as of July 11, 2016, between Avenatti & Associates and Spring Creek. (PSS, ¶ 2.) Avenatti owned Avenatti & Associates. (PSS, ¶ 3.) Spring Creek was owned by Parrish through his family trust. (PSS, ¶ 4.)

The first paragraph of the Operating Agreement stated, inter alia, that both Avenatti & Associates and Spring Creek were “Members” of Passport 420. (PSS, ¶ 5.) The fourth paragraph of the Operating Agreement stated: “WHEREAS, the Members of the Company wish to set forth the terms and conditions of their ownership and operation of one Honda Aircraft Company, LLC (‘Honda/Jet’), model HA-420, Serial Number SN42000029, U.S. Registration Number N227WP (the ‘Aircraft’)” (PSS, ¶ 6.) The fifth paragraph of the Operating Agreement stated: “WHEREAS, within the next ten (10) business days, the Company will take assignment of that certain HondaJet Purchase Agreement dated October 11, 2006, between Avenatti & Associates, APC and HondaJet, as amended (the ‘Purchase Agreement’), for the purchase of the Aircraft.” (PSS, ¶ 7.) The sixth paragraph of the Operating Agreement stated: “WHEREAS, the Company agrees to lease the Aircraft exclusively to the Members without flight crew, which shall be provided by each Member individually under separate agreement, in exchange for the Members’ agreement to insure, operate and maintain the Aircraft and pay their individual charges and pro-rata amounts due under this Agreement, it being the intent of the parties that the Company is not providing transportation services for compensation to the Members, that the Members shall have Operational Control of all flights under this Agreement which shall be conducted under Part 91 of the Federal Aviation Regulations (‘FAR’).” (PSS, ¶ 8.) Section 5 of the Operating Agreement stated: “Management of the Company. The affairs of the Company shall be managed by a Manager.” (PSS, ¶ 9.) Section 5.1 of the Operating Agreement stated, in part: “The Manager shall have full and complete authority, power and discretion to manage and control the affairs of the Company, to make all decisions regarding such matters, and to perform any and all other acts and activities customary or incident to the Company’s purpose. The actions of the Manager taken in accordance with this Agreement shall bind the Company.” (PSS, ¶ 10.) Section 5.2 of the Operating Agreement stated: “Election Of Manager. A Manager shall be elected annually, either at a meeting or by written consent in lieu of a meeting, by a unanimous vote of all of the then Members in the Company.” (PSS, ¶ 11.) Section 5.3 of the Operating Agreement stated: “Reliance by Third Parties. Any person or entity dealing with the Company may rely upon a certificate or document signed by the Manager as to any action of the Company, or as to the existence or non-existence of any facts that are germane to the affairs of the Company.”

Avenatti was elected as “Manager” of Passport 420 on July 11, 2016. (PSS, ¶ 13.) (Note: in PSS Passport 420 states: “Undisputed, with the qualification that Avenatti was appointed, not elected.” However, in request for admission No. 7, Passport 420 is asked to “Admit that Michael Avenatti was appointed manager of Passport 420, LLC pursuant to the Limited Liability Company Operating Agreement for Passport 420, LLC attached as Exhibit ‘B’.  In responses, Passport stated: “Admit that Michael Avenatti was elected (not appointed) . . .”.)  

On January 27, 2017, Passport 420 took delivery of the Aircraft, for a total net price due of $4,383,605.00, pursuant to an invoice from Honda Aircraft Company, and a Delivery Receipt which was signed by Avenatti as the manager of Passport 420. (PSS, ¶ 14.) The Aircraft was titled to "Passport 420," which claimed ownership of the Aircraft pursuant to filings made with the Federal Aviation Administration. (PSS, ¶ 15.)

Passport 420 applied through its insurance broker, Tutton Insurance Services ("Tutton"), to Starr for coverage for the period January 26, 2017, to January 26, 2018. (PSS, ¶ 16.) On January 27, 2017, Starr issued to Passport 420 Policy No. 1000320046-01, with an effective period of January 26, 2017, to January 26, 2018. (17/18 Policy). (PSS, ¶ 18.) On March 3, 2017, Passport 420 submitted an "Aircraft Insurance Application" relative to the 17/18 Policy. Although this application was received after policy issuance, said policy was issued with the understanding that the application would be provided shortly thereafter. (PSS, ¶ 19.)

On January 26, 2018, Starr issued to Passport 420 Policy No. 1000320046-02, with an effective period of January 26, 2018, to January 26, 2019 (18/19 Policy). (PSS, ¶ 20.) On January 16, 2019, Passport 420 executed an "Aircraft Insurance Application" for the coverage period of January 26, 2019, to January 26, 2020. (PSS, ¶ 21.) On January 26, 2019, Starr issued to Passport 420 Policy No. 1000320046-03, with an effective period of January 26, 2019, to January 26, 2020 (19/20 Policy). (PSS, ¶ 22.)

In neither of its applications nor at any relevant time up to and including April

10, 2019, did Passport 420 disclose to Starr that embezzled funds were used to purchase the Aircraft. (PSS, ¶ 23.) (Note: although Passport 420 disputes this fact, it provides no evidence that, during this timeframe, they disclosed to Starr that embezzled funds were used to purchase the aircraft. Rather, they provide various arguments regarding whose responsibility it was to inquire about the source of the funds. Passport 420’s argument is non-responsive to the specific fact asserted. Their position regarding responsibility for inquiring as to the source of the funds would be more properly included in their additional facts in opposition. Starr, on the other hand, does provide evidence of Passport 420’s failure to make such a disclosure. The fact is not reasonably disputed.)

On April 10, 2019, the United States seized the aircraft pursuant to a federal seizure warrant. (PSS, ¶ 24.)

On April 10, 2019, a Grand Jury Indictment (Indictment) was filed against Avenatti in the United States District Court for the Central District of California in the case of United States of America v. Michael John Avenatti, case no. 8: 19-cr-00061-JVS. (PSS, ¶ 25.) The Indictment alleged a number of felonies allegedly committed by Avenatti, including allegations specifically relating to the Aircraft. [Not reasonably disputed.] (PSS, ¶ 26.) Allegations of the indictment set forth the details of Avenatti’s alleged crimes including . . . “On or about January 26, 2017, defendant AVENATTI caused $2,500,000 of the $2,750,000 settlement payment to be transferred to an attorney trust account for another law firm (“Law Firm 1”). That same day, AVENATTI caused Law Firm 1 to transfer the entire $2,500,000 to Honda Aircraft Company, LLC, to purchase a private airplane for defendant AVENATTI’s company, Passport 420, defendant AVENATTI also caused the remaining $250,000 of the $2,750,000 settlement payment to be transferred first to EA Account 2851 and then to A&A [Avenatti & Associates] Account 0661. Defendant AVENATTI concealed and failed to disclose to Client 2 that defendant AVENATTI has used the settlement proceeds in this manner . . .” (PSS, ¶ 27.)

On October 18, 2019, the United States commenced an action for civil forfeiture in the United States District Court for the Central District of California, case no. 8:19-cv-1988, styled United States of America v. One Honda Aircraft, as against the Aircraft, alleging, inter alia, that forfeiture was appropriate because "Avenatti misappropriated Client 2's portion of the settlement funds and diverted some or all of said funds to acquire an interest in the defendant aircraft." (PSS, ¶ 29.)

By a Sworn Proof of Loss dated May 1, 2019, Parrish, purporting to act on behalf of Passport 420, submitted a claim under the 19/20 Policy seeking some $3,990,000 as compensation for the “Government Seizure" of the Aircraft. [Not reasonably disputed.] (PSS, ¶ 31.)

By letter dated June 3, 2019, Passport 420’s counsel, Lawrence Conlan, sent Starr a copy of the Operating Agreement. (PSS, ¶ 34.) Because of the unusual circumstances posed by this claim, including the involvement of federal prosecutors, a decision was made by Starr to retain counsel to analyze the matter and assist with the investigation. [Not reasonably disputed.] (PSS, ¶ 35.)

By letter from its counsel dated June 26, 2019 ("the Reservation Letter"), Starr reserved its rights under the 2019 Policy with respect to insurance coverage for the Seizure of the Aircraft, made clear that it was not denying coverage, posed to Passport 420 a series of questions in an effort to gather additional information regarding the insurance claim, including the source of the funds used to purchase the Aircraft, and identified a number of coverage issues relative to the Seizure. . [Not reasonably disputed.] (PSS, ¶ 36.) The Reservation Letter stated, in closing:

Starr Aviation invites you to let the company know if the understandings set forth herein are in any way incorrect, or if anything has been misstated in this letter. Starr Aviation welcomes any further information you believe may be relevant to its coverage analysis and welcomes any comments or observations by you should any of the assumptions set forth herein be inaccurate in your view. Starr Aviation will certainly consider any information you provide and reconsider its position if appropriate. The writer invites you to contact me directly if you have any questions, or if you would like to discuss this matter in greater detail. (PSS, ¶ 37.) Rather than answering any of these questions, fifteen days later, on July 11, 2019, Passport 420 filed against Starr its Complaint in this action, including a cause of action against Starr alleging “Tortious Breach of the Implied Covenant of Good Faith and Fair Dealing” embodied in the 18/19 Policy, and seeking both compensatory and punitive damages. [Not reasonably disputed.] (PSS, ¶ 38.)

Via requests for admissions propounded to Passport 420 in this action, Starr sought an admission that the Aircraft had been acquired with stolen money, as alleged in the Indictment, but Passport 420 denied the requests upon lack of information and belief. (PSS, ¶ 39.)

During the pendency of this action, Starr also wrote directly to the federal prosecuting attorneys for information that might substantiate or disprove the allegations in the Indictment, but the federal prosecuting attorneys declined to release any such information prior to the federal criminal trial. (PSS, ¶ 40.)

After several delays, the Criminal Trial began in July of 2021 and concluded with a mistrial on or about August 24, 2021, after the federal prosecutors had concluded their case-in-chief. (PSS, 42.)

Counsel for Starr obtained for Starr the transcripts from the Criminal Trial, and they became part of the claim file as documents obtained in Starr’s investigation of whether the seizure of the Aircraft was covered under any Starr policy. [Not reasonably disputed.] (PSS, ¶ 43.)

On November 2, 2021, Starr sent out its Denial Letter, both rescinding all Starr

policies (along with an offer to return all premiums), and, alternatively, denying coverage. (PSS, ¶ 54.) The Denial Letter also discussed in substantial detail the sworn testimony in the Criminal Trial that supported the conclusion that embezzled funds were used to purchase the Aircraft. [Not reasonably disputed.] (PSS, ¶ 55.) The Denial Letter also stated that, had it been disclosed to Starr that embezzled funds had been used to purchase the Aircraft, it would have refused to issue any policies. [Not reasonably disputed.] (PSS, ¶ 56.) The Denial Letter set forth a number of reasons why coverage was not afforded under the 19/20 Policy including, but not limited to: (1) material concealment; (2) applicability of Exclusion D of the basic policy form; (3) lack of an "occurrence" as required by Endorsement 10; (4) applicability of Exclusion D to Endorsement 10; and (5) applicability of Insurance Code section 533. [Not reasonably disputed.] (PSS, ¶ 57.)

Exclusion D of the basic policy form of the 19/20 Policy states:

The insurance provided by the Policy shall not apply: . . . D. to illegal, criminal or dishonest acts or activities, alleged or otherwise, committed by or at the direction of or with the knowledge and consent of directors or officers of the insured and with the knowledge at the time that such act was illegal or criminal, but with respect to the named insured this exclusion shall apply only if such activities or acts are within the knowledge and consent of an officer or director of the named insured. (PSS, ¶ 58.) The second paragraph of Endorsement 10 to the 19/20 Policy states, in part: This coverage is subject to all the terms and conditions shown both in this policy as well as this endorsement. (PSS, ¶ 59.) Section One of Endorsement 10 to the 19/20 Policy states, in part: The Company will pay for the physical loss of or physical damage to any scheduled aircraft (unless excluded by Exclusion G below) that is caused by an occurrence during the policy period arising out of any of the following perils: . . . (e) confiscation, nationalization, seizure, restraint, detention, appropriation, requisition for title, use by, or under the order of any government, public or local authority, whether civil, military or de facto. (PSS, ¶ 60.) The 19120 Policy defines “occurrence” as follows: “Occurrence” means an accident, including continuous or repeated exposure to conditions, which results in bodily injury or property damage neither expected nor intended by the insured. However, the definition includes bodily injury or property damage resulting from the efforts to prevent dangerous interference with any aviation operations. (PSS, ¶ 61.) Exclusion D to Endorsement 10 states: This Endorsement will not cover any loss, damage or expense arising out of: . . . (D) any failure to provide any type of bond, security or any other financial cause whether or not required under a court order. (PSS, ¶ 62.)

The following facts are disputed:

Starr relied upon Tutton and Passport 420 to provide complete information and not to conceal or suppress any material information in applying through its insurance broker, Tutton Insurance Services, to Starr for coverage for the period January 26, 2017, to January 26, 2018. (PSS, ¶ 17.)

In neither of its applications nor at any relevant time up to and including April

10, 2019, did Passport 420 disclose to Starr that embezzled funds were used to purchase the Aircraft. (PSS, ¶ 23.)

Had Starr been aware that embezzled funds had been used, either in whole or in

part, to purchase the Aircraft, it would have refused to issue any policy of insurance. (PSS, ¶ 30.)

The basis of Parrish’s claim was that Endorsement 10 to the 19/20 Policy-the “War Risk For Physical Damage Coverage, Extortion And Hi-Jacking Extra Expense” endorsement. (PSS, ¶ 32.)

At the time the Sworn Proof of Loss was filed, Starr was aware, through media reports, of the Indictment, which alleged that Passport 420 had acquired the Aircraft with money embezzled from an innocent person. (PSS, ¶ 33.)

As a result of Passport 420’s refusal or inability to provide the necessary information regarding the source of the funds used for the purchase of the Aircraft, and the failure of federal prosecutors to provide information in order to conduct a thorough investigation of the facts underlying Passport 420’s claim for coverage for the seizure, Starr was forced to await the completion of the Criminal Trial before it could make a final determination as to coverage for this claim. (PSS, ¶ 41.)

In undertaking its coverage analysis, Starr considered Criminal Trial evidence indicating that on January 25, 2017, in his capacity as attorney for Gardner, Avenatti caused a $2,750,000 payment, received in settlement of her civil claim against Whiteside, to be deposited in his law firm’s client trust account, which had a balance of 23 cents immediately before that deposit. (PSS, ¶ 44.)

In undertaking its coverage analysis, Starr considered Criminal Trial evidence indicating that pursuant to that fee agreement, Gardner was entitled to receive from the Whiteside Payment the net settlement proceeds, less costs and a fee of thirty-three percent due to Eagan Avenatti. (PSS, ¶ 45.)

In undertaking its coverage analysis, Starr considered Criminal Trial evidence indicating that Gardner did not receive any monies out of the Whiteside Payment. (PSS, ¶ 46.)

In undertaking its coverage analysis, Starr considered Criminal Trial evidence indicating that, on January 26, 2017, Avenatti caused his office manager to transfer out of his firm's client trust account $2,500,000 to the X Law Group, PC, and $250,000 to his law firm's operating account, thereby reducing the account balance to $12.81. (PSS, ¶ 47.) In undertaking its coverage analysis, Starr considered Criminal Trial evidence indicating that the source of the above-described transfer amounts was the Whiteside Payment. (PSS, ¶ 48) In undertaking its coverage analysis, Starr considered Criminal Trial evidence indicating that on that same day, January 26, 2017, the X Law Group, PC transferred the $2,500,000 received from Eagan Avenatti to Honda Aircraft Company, at the direction of Avenatti, for the purchase by Passport 420 of the Aircraft. (PSS, ¶ 49.) In undertaking its coverage analysis, Starr considered the fact that, at the time of the two transfers described above, Avenatti was the manager of Passport 420, and he continued to serve in that capacity until August 29, 2018. (PSS, ¶ 50.) In undertaking its coverage analysis, Starr considered Criminal Trial evidence indicating that Gardner never authorized Avenatti to use the Whiteside Payment as part of the funding of the purchase of the Aircraft. (PSS, ¶ 51.) In undertaking its coverage analysis, Starr considered the Criminal Trial testimony of expert forensic accountant, John Drum, who concluded that at least $2,500,000 of the funds used by Passport 420 had been embezzled from Gardner and used by Avenatti, to purchase the Aircraft. (PSS, ¶ 52.) Having reviewed the evidence adduced at the Criminal Trial, Starr concluded that the allegations of the Indictment had been substantiated, and that bases for rescission and denial of coverage existed. (PSS, ¶ 53.)

By way of opposition, Passport 420 sets forth 157 additional material facts (AMF). Most of the AMF’s either support the undisputed material facts provided by Starr, are purely conclusory, or are irrelevant in ruling on the present motion. Those AMF’s that are relevant to the present motion, and do not consist of conclusory opinions, will be referred to in the below analysis where appropriate.

ANALYSIS:

            Evidentiary Objections

“In granting or denying a motion for summary judgment or summary adjudication, the court need rule only on those objections to evidence that it deems material to its disposition of the motion. Objections to evidence that are not ruled on for purposes of the motion shall be preserved for appellate review.” (Code Civ. Proc., § 437c, subd. (q).)

Code of Civil Procedure section 437c, subdivision (b)(1) states that “[t]he motion shall be supported by affidavits, declarations, admissions, answers to interrogatories, depositions, and matters of which judicial notice shall or may be taken.” (Italics added.)

Passport 420 objects to the court taking judicial notice of the contents of excerpts of testimony from Avenatti’s criminal case as well as certain trial exhibits on the grounds of relevance and hearsay.

“ ‘Courts can take judicial notice of the existence, content and authenticity of public records and other specified documents, but do not take judicial notice of the truth of the factual matters asserted in those documents.’ [Citation.]” (Dominguez v. Bonta (2022) 87 Cal.App.5th 389, 400.)

The court will take judicial notice of the documents identified in the request for judicial notice pursuant to Evidence Code section 452, subdivision (d), but will not take judicial notice of the truth of the factual matters asserted therein.

Passport 420 objects to the declaration of Andrew Purdin both in its entirety and as to specific statements contained in the declaration. The argument with respect to the entirety of the  declaration is that: “Mr. Purdin testified in his deposition that he was not contacted by Starr’s claims handling staff until December 2021, long after Starr had issued its reservation of rights letter in June 26, 2019, and after Starr had issued its denial of coverage letter on November 2, 2021. Mr. Purdin’s statements were not, and could not have been, considered as part of Starr’s coverage investigation or its coverage decision, and are therefore irrelevant to whether a ‘genuine dispute’ existed, or whether Starr had a good-faith basis to reserve and ultimately deny coverage.” That objection is overruled. Also overruled are Passport 420’s objections Nos. 2, 3, 4, and 6,  The objections are sustained as to Nos. 5 (hearsay falling under no exception), and 7 (to the extent it contains a legal conclusion).

Passport 420 objects to the declaration of Shari Thompson as to specific statements contained in the declaration. The objections are overruled as to Nos. 2, 3, 4 (overruled only to the extent that it is offered to prove the declarant’s state of mind pursuant to Evidence Code section 1250), and 6. The objections are sustained as to Nos. 1, (to the extent it contains hearsay), and 5 (to the extent it contains hearsay),

Passport 420 objects to the declaration of Ralph S. Lamontagne, Jr. as to specific statements contained in the declaration. The objections are all overruled. The objected to statements are all simply Lamontagne identifying documents and making representations that they are true and correct copies.

Starr objects to the opinions contained in the declarations of Passport 420’s retained experts. “An expert may testify to an opinion “ ‘[r]elated to a subject that is sufficiently beyond common experience that the opinion of an expert would assist the trier of fact.’ ” (Evid. Code, § 801, subd. (a).) “ ‘Testimony in the form of an opinion that is otherwise admissible is not objectionable because it embraces the ultimate issue to be decided by the trier of fact.’ ” (Evid. Code, § 805.)  However, an expert is not permitted to give an opinion on questions of law or legal conclusions. [Citation.]” (City of Rocklin v. Legacy Family Adventures-Rocklin, LLC (2022) 86 Cal.App.5th 713, 728.)

Starr objects to the declaration of David A. Gauntlett both in its entirety and as to specific statements contained in the declaration. As to the entirety of the declaration, Starr objects on the grounds that Gauntlett is unqualified to testify as an expert regarding the handling of first-party insurance claims and that his declaration lacks foundation. While Starr’s argument regarding a showing that Gauntlett has specific experience with first-party claims is well taken, Gauntlett’s experience, as shown through his declaration and attached curriculum vitae, demonstrate that Gauntlett possesses significant experience in coverage issues as well as industry customs and practices. The court finds that Gauntlett has sufficient knowledge that is beyond common experience to assist the trier of fact. The objection is overruled. Starr further objects to the opinions rendered by Gauntlett primarily on the grounds that he is offering improper legal conclusions. To the extent that Gauntlett offers legal opinions in his declaration, the objections are sustained as to objections 3, 4, 6, 7, 10, 12, 19, 23, 24, 26, and 32. As the other objected to opinions are not legal conclusions, but rather properly embrace the ultimate issue, the remaining objections are overruled.

Starr also objects to the declaration of Fred G. Marziano both in its entirety and as to specific statements contained in the declaration. As to the entirety of the declaration, Starr objects on the grounds that Marziano is unqualified to testify as an expert regarding the handling of insurance claims or analyzing insurance coverage in any capacity, and that his declaration lacks foundation. While the court does not find that Marziano is unqualified to render expert opinions on the subjects of his declaration, much of the declaration is cumulative of the opinions given by Gauntlett and therefore irrelevant. To the extent that any of the opinions are not cumulative, the court does not find them material to its disposition of the motion and therefore need not rule on the specific objections.

            Standard on Motion for Summary Adjudication

“A party may move for summary adjudication as to one or more causes of action within an action, one or more affirmative defenses, one or more claims for damages, or one or more issues of duty, if the party contends that the cause of action has no merit, that there is no affirmative defense to the cause of action, that there is no merit to an affirmative defense as to any cause of action, that there is no merit to a claim for damages, as specified in Section 3294 of the Civil Code, or that one or more defendants either owed or did not owe a duty to the plaintiff or plaintiffs. A motion for summary adjudication shall be granted only if it completely disposes of a cause of action, an affirmative defense, a claim for damages, or an issue of duty.” (Code Civ. Proc., § 437c, subd. (f)(1).)

“A defendant … has met his or her burden of showing that a cause of action has no merit if the party has shown that one or more elements of the cause of action, even if not separately pleaded, cannot be established, or that there is a complete defense to the cause of action. Once the defendant … has met that burden, the burden shifts to the plaintiff or cross-complainant to show that a triable issue of one or more material facts exists as to the cause of action or a defense thereto.” (Code Civ. Proc., § 437c, subd. (p)(2).)

“[F]rom commencement to conclusion, the party moving for summary judgment bears the burden of persuasion that there is no triable issue of material fact and that he is entitled to judgment as a matter of law.” (Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 850.) There is no obligation on the opposing party to establish anything by affidavit unless and until the moving party has by affidavit stated facts establishing every element necessary to sustain an adjudication in his favor. (Consumer Cause, Inc. v. Smilecare (2001) 91 Cal.App.4th 454, 468.) “[W]e liberally construe plaintiff’s evidentiary submissions and strictly scrutinize defendant’s own evidence, in order to resolve any evidentiary doubts or ambiguities in plaintiff’s favor.” (Johnson v. American Standard, Inc. (2008) 43 Cal.4th 56, 64.)

“The pleadings play a key role in a summary judgment motion.” (Hutton v. Fidelity National Title Co. (2013) 213 Cal.App.4th 486, 493 (Hutton).) “The materiality of a disputed fact is measured by the pleadings [citations], which ‘set the boundaries of the issues to be resolved at summary judgment.’ [Citations.]” (Conroy v. Regents of University of California (2009) 45 Cal.4th 1244, 1250.) “Accordingly, the burden of a defendant moving for summary judgment only requires that he or she negate plaintiff’s theories of liability as alleged in the complaint; that is, a moving party need not refute liability on some theoretical possibility not included in the pleadings. [Citations.]” (Hutton, supra, 213 Cal.App.4th at p. 493.)

In resolving the motion, the court may not weigh the evidence. (Binder v. Aetna Life Ins. Co. (1999) 75 Cal.App.4th 832, 840.) Rather, the role of the trial court in resolving a summary judgment motion is to determine whether issues of fact exist, not to decide the merits of the issues. (Molko v. Holy Spirit Assn. (1988) 46 Cal.3d 1092, 1107.)

            Bad Faith

“[T]o establish the insurer’s ‘bad faith’ liability, the insured must show that the insurer has (1) withheld benefits due under the policy, and (2) that such withholding was ‘unreasonable’ or ‘without proper cause.’ [Citation.] The actionable withholding of benefits may consist of the denial of benefits due [Citation]; paying less than due [Citation]; and/or unreasonably delaying payments due [Citation]. In first party cases, the implied covenant of good faith and fair dealing obligates the insurer to make a thorough investigation of the insured's claim for benefits, and not to unreasonably delay or withhold payment of benefits. If the insurer ‘without proper cause’ (i.e., unreasonably) refuses to timely pay what is due under the contract, its conduct is actionable as a tort.” (Major v. Western Home Ins. Co. (2009) 169 Cal.App.4th 1197, 1209-1210.)

“The insured must show the insurer’s conduct “ ‘demonstrates a failure or refusal to discharge contractual responsibilities, prompted not by an honest mistake, bad judgment or negligence but rather by a conscious and deliberate act, which unfairly frustrates the agreed common purposes and disappoints the reasonable expectations of the other party thereby depriving that party of the benefits of the agreement.’ ” [Citation.] Accordingly, “ ‘an insurer does not act in bad faith when it mistakenly withholds policy benefits, if the mistake is reasonable or is based on a legitimate dispute as to the insurer’s liability.’ ” [Citation.] “ ‘An insurer which denies benefits reasonably, but incorrectly, will be liable only for damages flowing from the breach of contract, i.e., the policy benefits.’ ” [Citation.]” (Mosley v. Pacific Specialty Insurance Company (2020) 49 Cal.App.5th 417, 436.)

“As a close corollary of that principle, it has been said that “ ‘an insurer denying or delaying the payment of policy benefits due to the existence of a genuine dispute with its insured as to the existence of coverage liability or the amount of the insured’s coverage claim is not liable in bad faith even though it might be liable for breach of contract.’ ” [Citation.] This “ ‘genuine dispute’ ” or “ ‘genuine issue’ ” rule was originally invoked in cases involving disputes over policy interpretation, but in recent years courts have applied it to factual disputes as well.” (Wilson v. 21st Century Ins. Co. (2007) 42 Cal.4th 713, 723.)

“Provided there is no dispute as to the underlying facts (e.g., what the parties did and said), then the trial court can determine, as a matter of law, whether such dispute is “ ‘genuine.’ ” In making that decision, the court does not decide which party is “ ‘right’ ” as to the disputed matter, but only that a reasonable and legitimate dispute actually existed.” (Chateau Chamberay Homeowners Ass’n v. Associated Intern. Ins. Co. (2001) 90 Cal.App.4th 335, 348, fn. 7.)

Starr argues that a “genuine dispute” regarding coverage exists. Starr claims that Avenatti’s indictment supports Starr’s conclusions that no claim under the insurance policy could be honored due to concealment of the aircraft being purchased, at least in part, with embezzled funds. (Motion, p. 11, l. 12 - p. 14, l. 24.) In support, Starr relies on numerous cases, including Superior Dispatch, Inc. v. Insurance Corp. of New York (2010) 181, Cal.App.4th 175, which holds, among other things: “A misrepresentation or concealment of a material fact in an insurance application also establishes a complete defense in an action on the policy.” (Id. at p. 192.)

Starr further argues that a genuine dispute exists due to application of Exclusion D of the insurance policy. That section, as set forth above as an undisputed fact, states: “The insurance provided by the Policy shall not apply: . . . D. to illegal, criminal or dishonest acts or activities, alleged or otherwise, committed by or at the direction of or with the knowledge and consent of directors or officers of the insured and with the knowledge at the time that such act was illegal or criminal, but with respect to the named insured this exclusion shall apply only if such activities or acts are within the knowledge and consent of an officer or director of the named insured.” As acknowledged, when the policy was initially obtained, Avenatti was the Manager of Passport 420 and purported to act on its behalf. As set forth in the authorities cited by Starr, a “Manager” is, as a practical matter, essentially the same as a corporate director for purposes of Exclusion D. As Passport 420 was created solely for the purpose of purchasing the aircraft, there can be no legitimate dispute that Avenatti was acting in his management function on behalf of Passport 420.

Next, as another basis for the existence of a genuine dispute, Starr argues that there was an absence of a required “occurrence” as defined in the insurance policy. As set forth above as an undisputed fact: “ ‘Occurrence’ means an accident, including continuous or repeated exposure to conditions, which results in bodily injury or property damage neither expected nor intended by the insured. However, the definition includes bodily injury or property damage resulting from the efforts to prevent dangerous interference with any aviation operations.” Starr argues that Avenatti’s act of using embezzled funds to purchase the aircraft was intentional rather than accidental and that, therefore, Starr was not obligated to pay on the insurance claim.

As further argument that there was a genuine dispute, Starr cites Exclusion D to Endorsement 10 which, as set forth above, states: “This Endorsement will not cover any loss, damage or expense arising out of: . . . (D) any failure to provide any type of bond, security or any other financial cause whether or not required under a court order.” (Italics added.) Starr argues that the sole reason for the seizure of the aircraft was “100 percent ‘financial’ “ because it was the result of the aircraft being purchased with embezzled funds. As a result, Starr argues, the exclusion applies and it is not required to cover the loss, or, at the very least, it creates a genuine dispute.

Finally, Starr argues that there was a reasonable basis to conclude that Insurance Code section 533 applied. Insurance Code section 533 states: “An insurer is not liable for a loss caused by the willful act of the insured; but he is not exonerated by the negligence of the insured, or of the insured’s agents or others.” The loss was the result of the willful act of Avenatti allegedly using embezzled funds to purchase the aircraft resulting in its seizure.

Based on ample legal authorities, all of the evidence submitted by Starr, and facts admitted true by Passport 420, Starr has met its initial burden of establishing a prima facie case that a “genuine dispute” exists as to coverage for the loss. Passport 420 has not produced any admissible evidence tending to show a triable issue of fact regarding the existence of a “genuine dispute” for Starr’s reservation of rights, or, for its eventual denial of the claim. In so finding, the court makes no determination regarding whether or not the loss is, or is not, properly covered under the insurance policy; only that a “genuine dispute” exists.

However, the inquiry does not end with the finding that a genuine dispute exists based on the information available to Starr at the time of the denial of the claim.

“The genuine dispute rule does not relieve an insurer from its obligation to thoroughly and fairly investigate, process and evaluate the insured’s claim. A genuine dispute exists only where the insurer’s position is maintained in good faith and on reasonable grounds.” (Wilson v. 21st Century Ins. Co., supra, 42 Cal.4th at p. 723.) “Nor does the rule alter the standards for deciding and reviewing motions for summary judgment. “ ‘The genuine issue rule in the context of bad faith claims allows a [trial] court to grant summary judgment when it is undisputed or indisputable that the basis for the insurer’s denial of benefits was reasonable—for example, where even under the plaintiff’s version of the facts there is a genuine issue as to the insurer’s liability under California law. [Citation.] . . . On the other hand, an insurer is not entitled to judgment as a matter of law where, viewing the facts in the light most favorable to the plaintiff, a jury could conclude that the insurer acted unreasonably.’ ” [Citation.] Thus, an insurer is entitled to summary judgment based on a genuine dispute over coverage or the value of the insured’s claim only where the summary judgment record demonstrates the absence of triable issues (Code Civ. Proc., § 437c, subd. (c)) as to whether the disputed position upon which the insurer denied the claim was reached reasonably and in good faith.(Id. at p. 724.)

“[A]n insurer may breach the covenant of good faith and fair dealing when it fails to properly investigate its insured’s claim.” (Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809, 817 (Egan).) “[W]hether an insurer breached its duty to investigate continues to be a question of fact to be determined by the particular circumstances of each case. The Egan court affirmed the trial court’s granting of a directed verdict on the issue of the insurer’s breach of the implied covenant of good faith and fair dealing because the evidence was undisputed that the insurer failed to properly investigate the insured’s claim.” (Paulfrey v. Blue Chip Stamps (1983) 150 Cal.App.3d 187, 196.)

“As the Supreme Court cautioned in White v. Western Title Ins. Co. (1985) 40 Cal.3d 870, an insurer’s duty of good faith and fair dealing does not evaporate after litigation has commenced. To hold otherwise would effectively “ ‘encourage insurers to induce the early filing of suits, and to delay serious investigation and negotiation until after suit was filed when its conduct would be unencumbered by any duty to deal fairly and in good faith.... The policy of encouraging prompt investigation and payment of insurance claims would be undermined. . . .’ ” (Id., at p. 886.)” (Jordan v. Allstate Ins. Co. (2007) 148 Cal.App.4th 1062, 1076, fn. 7.)

Here, Starr provides undisputed facts and admissible evidence that it did the following in investigating the claim: (1) Starr obtained a copy of the Grand Jury Indictment filed against Avenatti that alleged a number of felonies against Avenatti including allegations that Avenatti embezzled money from a client and used a portion of the embezzled money to purchase the aircraft. (SSUF, ¶¶ 25, 26, 27); (2) Starr wrote directly to the federal prosecuting attorneys for information that might substantiate or disprove the allegations in the indictment. (SSUF, ¶ 40); (3) Counsel for Starr obtained transcripts from Avenatti’s criminal trial which were considered in undertaking its coverage analysis. (SSUF, ¶¶ 43, 44, 45, 46, 47, 48, 49); (4) Starr considered that at the time of Avenatti’s alleged embezzlement he was the Manager of Passport 420, and he continued to serve in that capacity until August 29, 2018. (SSUF, ¶ 50); and (5) Starr considered the criminal trial testimony of expert forensic accountant, John Drum, that at least $2,500,000.00 of the embezzled funds were used to purchase the aircraft. (SSUF, ¶ 52). Starr further argues, by way of its reply brief that it retained outside counsel Roger Clark to assist in the investigation, that it reviewed a letter dated June 3, 2019, from Passport 420’s counsel relative to the background of Passport 420, reviewed a number of documents provided by Passport 420’s counsel including Passport 420’s operating agreement, made telephone calls and sent emails to Tutton, sent out nine letters to outside parities, and reviewed transcripts of the sworn testimony of witnesses at Avenatti’s criminal trial. (Reply, p. 7, ll. 15-22.)

With respect to the investigation, Passport 420 argues (Note: many of Passport 420’s arguments in this regard contain references to the incorrect sections of their AMF’s), and provides evidence, primarily by way of deposition testimony and the declaration of David A. Gauntlett that in failing to conduct a thorough and fair investigation, Starr did the following: (1) Assigned the matter initially to Shari Thompson who received no training specific to Starr’s handling of claims and she had no experience or training regarding the handling of seizure claims. (AMF, ¶¶ 179, 180, 181); (2) Before Passport 420 submitted its claim, Starr engaged outside counsel Roger Clark to handle the claim, but Starr did not vet Clark to determine whether he had any experience with seizure claims. (AMF, ¶¶ 170, 190, 191) Note: the admissible evidence shows that Clark was retained as coverage counsel rather as an adjuster “handling the claim.”; (3) Thompson did not make any effort to determine whether there were any independent outside adjusters with experience handling seizure claims, did not [recall] communicating with Starr’s underwriting group regarding their experience with seizure claims, and Ms. Thompson was unaware of the approval process used by Starr’s underwriting department. (AMF, ¶¶ 184, 185, 186); (4) Starr does not maintain a claims manual or other guidelines for its adjusters to follow when handling claims. (AMF, ¶ 176); (5) Starr has no formal policy related to handling of seizure claims, or claims involving “unusual circumstances.” (AMF, ¶ 177); (6) Starr never attempted to interview or depose Avenatti. (AMF, ¶¶ 220, 221); (7) Starr never interviewed the witnesses who testified during Avenatti’s trial. (AMF, ¶ 231); (8) Starr did not contact any insurance brokers as part of their coverage investigation. (AMF, ¶ 250); (9) Starr did not interview anyone in connection with its coverage investigation. (AMF, ¶ 254); (10) Starr never engaged any experts to analyze the claim or offer an expert analysis to assist Starr in reaching its coverage determination. (AMF, ¶ 253); and (11) Starr did not consider whether a partial payment could be made to Parrish and Spring Creek. (AMF, ¶ 210).

“[O]rdinarily “ ‘[w]hether the insurer has acted unreasonably, and hence in bad faith, . . . is a question of fact to be determined by the jury.’ ” [Citation.] This follows from the nature of the issue: “ ‘A determination respecting the presence or absence of good faith involves an inquiry into motive, intent and state of mind. Conclusions concerning such matters, in most cases, are founded upon inferences.’ ” [Citations.] The question becomes one of law only when, because there are no conflicting inferences, reasonable minds could not differ.” (Walbrook Ins. Co. v. Liberty Mutual Ins. Co. (1992) 5 Cal.App.4th 1445, 1454; See Shusha, Inc. v. Century-National Insurance Company (2022) 87 Cal.App.5th 250, 268.)

Here, there are conflicting inferences regarding motive, intent, and state of mind making it possible that reasonable minds could differ as to whether or not Starr “thoroughly and fairly investigate[d], process[ed] and evaluate[d] the insured’s claim.” The court may not weigh the evidence in ruling on the motion. As such, the granting of summary adjudication as to the cause of action for breach of the implied covenant of good faith and fair dealing would be improper and must be denied. Because the court will deny summary adjudication on these grounds, the court declines to comment on Starr’s interpretation of the policy provisions on which it bases its denial of Passport 420’s claim. The court will further decline to comment on the policy provisions because they were argued, and ruled upon, in Starr’s first motion for summary judgment.

As the motion for summary adjudication is being denied, the prayer for punitive damages will remain. By denying the motion for summary adjudication, the court renders no opinion regarding Passport 420’s chances of prevailing at trial when Passport 420 carries the burden of proof. Further, even if Passport 420 meets the burden of proof as to bad faith, in order to recover punitive damages, Passport 420 will have the additional burden of proving, by clear and convincing evidence, that Starr acted with oppression, fraud, or malice. “[T]he evidence required to support an award of punitive damages for breach of the implied covenant of good faith and fair dealing is ‘of a different dimension’ from that needed to support a finding of bad faith. [Citation.] A marginally sufficient case of bad faith is not likely to prove malice or oppression by clear and convincing evidence.” (Shade Foods, Inc. v. Innovative Products Sales & Marketing, Inc. (2000) 78 Cal.App.4th 847, 909-910.)