HOMESTEAD INSURANCE COMPANY, INC. v. THE CASDEN COMPANY (C.D.Cal. 2004)

MANUEL REAL, District Judge

Pending before the Court is the motion for summary judgment filed by plaintiff Homestead Insurance Company, Inc. ("Homestead"), with supporting evidence. Homestead moves for summary judgment on both of its causes of action against defendant The Casden Company ("Casden"). In each cause of action, Homestead seeks a declaratory judgment that California Code of Civil Procedure § 340.9, as applied to the facts of this case, violates the Contracts Clause of the United States Constitution.

Homestead issued an earthquake insurance policy to Casden to cover an apartment complex in Los Angeles, California (the "Apartments"). The policy provided, among other things, that any suit for recovery of a claim under the policy must be commenced within one year of the occurrence that gave rise to the claim. On January 17, 1994, the Northridge earthquake struck southern California. Casden hired the Public Adjustment Bureau to adjust its claim and inspect the Apartments. In a Sworn Statement in Proof of Loss dated June 1, 1994 on the letterhead of the Public Adjustment Bureau, Casden made a claim under the Policy for damage to the Apartments from the January 17, 1994 Northridge earthquake stating an amount claimed under the Policy of $389,543.78. On July 13, 1994 Homestead sent Casden a check in the amount of $389,543.78 that stated, "[i]n Payment of:

SETTLEMENT," and stated on its reverse side: "THIS PAYMENT REPRESENTS THE FULL AND FINAL RELEASE OF ANY AND ALL CLAIMS." Casden endorsed and cashed the $389,543.78 check in 1994. In 1996 Casden supplemented its claim regarding the Apartments, claiming the amount of $37,811.08. On September 4, 1996 Homestead sent Casden a check in the amount of $37,811.08 that stated, "[i]n Payment of: SETTLEMENT," and stated on its reverse side: "THIS PAYMENT REPRESENTS THE FULL AND FINAL RELEASE OF ANY AND ALL CLAIMS." Casden endorsed and cashed the $37,811.08 check in 1996.

In 2000, the California Legislature enacted Section 340.9, which Casden claims revives certain Northridge-related claims notwithstanding the expiration of contractual limitations periods or the existence of prior settlements (unless they were signed by California counsel). Casden has sued Homestead for additional amounts under the policy. Homestead brought this declaratory judgment action to have Section 340.9 declared unconstitutional as applied to the facts of this case.

To determine whether Section 340.9 violates the Contracts Clause of the United States Constitution as applied, this Court must determine (1) whether it operates as a substantial impairment of the parties' contractual relationship, (2) whether there is a significant and legitimate public purpose behind the regulation, and (3) whether the regulation is based upon reasonable conditions and is of a character appropriate to the public purpose underlying its adoption. Energy Reserves Group, Inc. v. Kansas Power Light Co., 459 U.S. 400, 411-12, 103 S. Ct. 697, 74 L. Ed. 2d 569 (1983). For purposes of undertaking this constitutional inquiry, the Court accepts the construction afforded the statute by the California state courts, particularly their conclusions that (1) Section 340.9 applies to voluntary contractual limitations periods that are not required by statute, and (2) Section 340.9 serves to revive previously settled claims if the settlement was not signed by a California lawyer. See 20th Century Insurance v. Superior Court (Ahles), 90 Cal. App. 4th 1247, 109 Cal. Rptr. 2d 611 (2001); Hellinger v. Farmers Group, 91 Cal. App. 4th 1049, 111 Cal. Rptr. 2d 268 (2001); Bialo v. Western Mutual Insurance Company, 95 Cal. App. 4^th 68, 115 Cal. Rptr. 2d 3 (2002).

With respect to Homestead's first cause of action, the Court concludes that Section 340.9 violates the Contracts Clause by abrogating the one-year contractual limitations period contained in the contract of insurance. Ordinarily, this provision would give Homestead a complete defense against Casden's belated lawsuit. See, e.g., Campanelli v. Allstate Insurance Co., 85 F. Supp. 2d 980 (C.D. Cal. 2000). Section 340.9 deprives Homestead of that contract-based defense, and thus constitutes a substantial impairment of the insurance contract. Moreover, this impairment is not reasonable or necessary to any legitimate public purpose. It is clear from the Court's review of the legislative history that the Legislature's purpose in enacting Section 340.9 was to afford relief to homeowners who had been victimized by allegedly unscrupulous insurance companies. Nothing in that legislative history reveals any indication that the Legislature was concerned with the situation in this case, namely, a sophisticated commercial property developer that submitted its own Northridge earthquake claim with the help of a public adjuster it hired to adjust its claim and inspect the Apartments, that was promptly paid in full at the time by the insurer. The statute cannot constitutionally be applied in these circumstances.

With respect to Homestead's second cause of action, the Court concludes that Section 340.9 violates the Contracts Clause by abrogating the prior settlement between Homestead and Casden. Ordinarily, the settlement agreement would give Casden a complete defense against Casden's subsequent lawsuit. See A.J. Industries, Inc. v. Ver Halen, 75 Cal. App. 3d 751, 142 Cal. Rptr. 383 (1977). Section 340.9 deprives Homestead of that contract-based defense, and thus constitutes a substantial impairment of the settlement agreement. Moreover, this impairment is not reasonable or necessary to any legitimate public purpose. Nothing in the legislative history of Section 340.9 reveals any public purpose underlying the abrogation of valid settlements, and the public policy of California is, on the contrary, to encourage settlement. See, e.g., In re Marriage of Assemi, 7 Cal. 4th 896, 30 Cal. Rptr. 2d 265 (1994). The Court is aware of no public purpose that would be advanced by drawing a distinction between settlements signed by a California attorney and those that are not. There is no evidence that the settlement agreement in this case was procured by fraud or undue influence. Section 340.9 cannot constitutionally be applied to "revive" Casden's claim in these circumstances.

The Court therefore DECLARES that California Code of Civil Procedure § 340.9, as applied to the circumstances of this case, violates the Contracts Clause of the United States Constitution, and on that basis ORDERS that summary judgment be entered for Homestead and against Casden on both of Homestead's causes of action for declaratory relief.