DANA M. SABRAW, District Judge
Plaintiff LG Infocomm U.S.A., Inc. brings this civil action pursuant to 28 U.S.C. § 1332(a)(1). Plaintiff alleges three counts in its Complaint: (1) Breach of contract, (2) breach of the implied covenant of good faith and fair dealing, and (3) declaratory relief.
I. PROCEDURAL BACKGROUND
On April 1, 2003, Plaintiff filed its complaint in this case. Plaintiff filed the present motion for summary judgment on September 17, 2003. The motion was originally scheduled to be heard on November 17, 2003, before the Honorable Napoleon A. Jones, Jr. However, on October 3, 2003, this case was transferred from the calendar of Judge Jones to the calendar of the Honorable Dana M. Sabraw.
Defendant filed its opposition to the present motion on November 3, 2003. On November 10, 2003, Plaintiff filed its reply. On that date, this Court found the present motion suitable for decision without oral argument pursuant to Civil Local Rule 7.1(d)(1).
On December 10, 2003, Defendant's counsel informed the Court it had received newly discovered facts relevant to Plaintiff's motion. Accordingly, the Court allowed Defendant and Plaintiff an opportunity to file supplemental briefs addressing the newly discovered evidence. Defendant filed its supplemental brief on December 19, 2003. Plaintiff filed its response on December 29, 2003.
After reviewing the moving papers, opposition, reply, supplemental briefs and all supporting evidence, the Court requested oral argument on the present motion. Oral argument was heard on March 12, 2004. Arthur Wellman, Esq. appeared on behalf of Plaintiff, and Devin A. McRae, Esq. appeared on behalf of Defendant.
II. FACTUAL BACKGROUND
Plaintiff purchased an insurance policy from Defendant. (See Decl. of Kenneth Klein in Supp. of Pl.'s Mot. for Summ. J. ("Klein Decl."), Ex. 3.) That policy provides coverage for the period from April 1, 2002, through March 31, 2003. (Id. at 45.) There is a per Buyer, per loss "co-insurance" of ten percent for Named Buyers. (Id.) MCI is a Named Buyer under the policy. (Id. at 48.)
The policy provides "insurance against covered credit losses in this Policy, subject to the terms and conditions stated herein, in return for the Premium and [Plaintiff's] compliance with the provisions of this Policy." (Id. at 56.) Specifically, the policy provides coverage "against credit losses due to the non-payment of amounts due from a covered Buyer for Shipments of Covered Products made by [Plaintiff] during the Policy Period, on terms no longer than the Maximum Terms of Sale and which were invoiced in U.S. or Canadian dollars." (Id.) The policy excludes coverage for "Losses due to Insolvency where the amounts owed by the Buyer have not been allowed or scheduled by a Buyer or allowed pursuant to a court order in a bankruptcy or relief of debt proceedings." (Id. at 57.)
During the policy period, Plaintiff made three shipments of cell phones to MCI. On April 16, 2002, Plaintiff shipped 2,500 cell phones to MCI, invoicing $387,500 on that date. (Klein Decl., Ex. 6 at 74.) On April 16, 2002, Plaintiff shipped 1,000 cell phones to MCI, invoicing $155,000 the following day. (Klein Decl., Ex. 7 at 78.) On April 23, 2002, Plaintiff shipped 3,500 cell phones to MCI, invoicing $542,500. (Klein Decl., Ex. 8 at 82.)
On July 21, 2002, MCI filed a voluntary petition for bankruptcy protection pursuant to Chapter 11 of Title 11 of the United States Code. (Klein Decl., Ex. 11.) The following day, Plaintiff completed a Notification of Claim under the policy for $1,652,000, and submitted it to Defendant. (Klein Decl., Ex. 15.) On July 26, 2002, Defendant acknowledged receipt of Plaintiff's claim, and estimated the covered portion at $976,500. (Klein Decl., Ex. 12 at 106.) Defendant also set Plaintiff's tentative loss settlement date at September 25, 2002. (Id.)
On October 1, 2002, Defendant informed Plaintiff it had filed a "Proof of Claim" on Plaintiff's behalf in MCI's bankruptcy proceedings. (Klein Decl., Ex. 16 at 116.) The claim form asserts an unsecured nonpriority claim in the amount of $1,652,000. (Klein Decl., Ex. 5 at 71.) That claim form was received in the bankruptcy court on October 4, 2002. (Id.)
On October 8, 2002, Plaintiff wrote to Defendant requesting that it promptly pay the covered amount of the policy of $976,500. (Klein Decl., Ex. 17.) In a letter dated October 16, 2002, Defendant responded to Plaintiff's request, stating Plaintiff's claim "was not allowed in claim settlement at this time as schedules have not been released by the debtor." (Klein Decl., Ex. 4 at 69.) Defendant clarified its position by citing to the following exclusion in the policy: "`Losses due to insolvency where the amounts owed by the Buyer have not been allowed or scheduled by a Buyer or allowed pursuant to a court order in bankruptcy or relief of debt proceedings.'" (Id.) Defendant stated a determination as to the potential losses due Plaintiff would be made once the schedules were released. (Id.)
On November 4, 2002, MCI filed certain of its debt schedules. (Klein Decl., Ex. 18.) Nearly one month later, on December 2, 2002, Plaintiff sent another letter to Defendant, again demanding payment under the policy. (Klein Decl., Ex. 20.) Defendant responded that Plaintiff's claim was not payable at that time because MCI had not allowed or scheduled its debt to Plaintiff. (Klein Decl., Ex. 21.)
On December 2, 2003, MCI informed Defendant it was not going to object to Plaintiff's claim as filed. (Def.'s Supp. Br., Ex. 1.) After receiving this information, Defendant paid Plaintiff's claim in the amount of $954,000. (Def.'s Supp. Br., Ex. 2.)
III. DISCUSSION
Plaintiff moves for partial summary judgment on its breach of contract claim and its declaratory judgment claim. It argues there are no genuine issues of material fact as to these claims and it is entitled to judgment as a matter of law. Defendant asserts Plaintiff's motion is moot because Defendant has paid Plaintiff's claim. Defendant also claims it, not Plaintiff, is entitled to judgment as a matter of law.
A. Mootness
Defendant argues the present motion is moot because it has paid Plaintiff's claim. Plaintiff disputes Defendant's argument. It asserts a ruling by this Court on the present motion will have an impact on the amount of interest, if any, Plaintiff is entitled to under California Civil Code Sections 3287(b) and 3289(b). It also claims a ruling on the present motion is relevant to Plaintiff's other claims for insurance bad faith and declaratory relief.
"A case is moot when any ruling by this court can have no practical impact or provide the parties effectual relief."Woodward Park Homeowners Ass'n v. Garreks, Inc., 77 Cal. App. 4th 880, 888 (2000) (citing Downtown Palo Alto Com. for Fair Assessment v. City Council, 180 Cal. App. 3d 384, 391 (1986)). In this case, a determination of whether Defendant breached the contract will have an impact on Plaintiff's other claims for insurance bad faith and declaratory relief. A finding that Defendant breached the contract may also entitle Plaintiff to relief in the form of interest under California Civil Code Sections 3287(b) and 3289(b). Therefore, the Court finds the present motion is not moot.
B. Summary Judgment
Summary judgment is appropriate if there is no genuine issue as to any material fact, and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). The moving party has the initial burden of demonstrating that summary judgment is proper. Adickes v. S.H. Kress Co., 398 U.S. 144, 157 (1970). The moving party must identify the pleadings, depositions, affidavits, or other evidence that it "believes demonstrates the absence of a genuine issue of material fact."Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). "A material issue of fact is one that affects the outcome of the litigation and requires a trial to resolve the parties' differing versions of the truth." S.E.C. v. Seaboard Corp., 677 F.2d 1301, 1306 (9th Cir. 1982).
The burden then shifts to the opposing party to show that summary judgment is not appropriate. Celotex, 477 U.S. at 324. The opposing party's evidence is to be believed, and all justifiable inferences are to be drawn in its favor. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986). However, to avoid summary judgment, the opposing party cannot rest solely on conclusory allegations. Berg v. Kincheloe, 794 F.2d 457, 459 (9th Cir. 1986). Instead, it must designate specific facts showing there is a genuine issue for trial. Id. More than a "metaphysical doubt" is required to establish a genuine issue of material fact." Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986).
1. Breach of Contract
Because this case was filed pursuant to this Court's diversity jurisdiction, California law controls. Previews, Inc. v. California Union Ins. Co., 640 F.2d 1026, 1027 (9th Cir. 1981);St. Paul Fire and Marine Ins. Co. v. Werner, 606 F.2d 864, 867 (9th Cir. 1979). Under California law, "insurance contracts are to be broadly construed to afford the greatest possible protection to the insured." Bodell v. Walbrook Ins. Co., 119 F.3d 1411, 1413 (9th Cir. 1997) (citing State Farm Mut. Auto Ins. Co. v. Portridge, 10 Cal. 3d 94 (1973)). However, "[t]he insurer's obligation is not unlimited; the duty to defend is measured by the nature and kind of risks which are covered by the policy." Blumberg v. Guarantee Ins. Co., 192 Cal. App. 3d 1286, 1292 (1987) (citing Giddings v. Industrial Indemnity Co., 112 Cal. App. 3d 213, 218 (1980)).
To prevail on an insurance coverage claim, the plaintiff bears the burden "to establish that the occurrence forming the basis of its claim is within the basic scope of insurance coverage."Aydin Corp. v. First State Ins. Co., 18 Cal. 4th 1183, 1188 (1998) (citations omitted). If the plaintiff makes this showing, the burden then shifts to the insurer "to prove the claim is specifically excluded." Id. (citations omitted).
In this case, the policy provides coverage for the following:
Subject to the terms and conditions of this Policy, we will cover you against credit losses due to the non-payment of amounts due from a covered Buyer for Shipments of Covered Products made by you during the Policy Period, on terms no longer than the Maximum Terms of Sale and which were invoiced in U.S. or Canadian dollars.
(Klein Decl., Ex. 3 at 56.) Among the "credit losses" covered under the policy are "The Insolvency of a covered Buyer[.]" (Id. at 57.) "Insolvency" occurs when a Buyer files a voluntary or involuntary petition for relief under Title 11 of the United States Bankruptcy Code. (Id. at 66.) "Shipments" is defined as "Covered Products which are Dispatched by the Insured and Delivered to a Buyer." (Id. at 68.) The policy defines "Covered Products" as "Telecommunications equipment." (Id. at 45.)
Plaintiff has presented evidence that MCI filed a petition under Title 11 of the Bankruptcy Code, which satisfies the "credit losses" element of the policy. (See Klein Decl., Ex. 11.) Plaintiff has also presented evidence MCI is a covered Buyer under the policy. (See Klein Decl., Ex. 3 at 48.) The invoices provided by Plaintiff demonstrate there were shipments of covered products during the policy period on terms no longer than the maximum and in U.S. dollars. (See Klein Decl., Exs. 6-8.) Defendant does not dispute this evidence, nor does it challenge Plaintiff's argument that the claim falls within the scope of coverage. Accordingly, the Court finds Plaintiff has demonstrated its claim is covered under the policy.
Having made this finding, Plaintiff must now establish that its claim is not subject to an exclusion. The policy at issue in this case excludes coverage for the following: "Losses due to Insolvency where the amounts owed by the Buyer have not been allowed or scheduled by a Buyer or allowed pursuant to a court order in a bankruptcy or relief of debt proceedings." (Klein Decl., Ex. 3 at 57.) Plaintiff argues this exclusion does not apply to its claim because the amount owed has been allowed by MCI.
Section 502(a) of Title 11 of the United States Code states: "A claim or interest, proof of which is filed under section 501 of this title, is deemed allowed, unless a party in interest, including a creditor of a general partner in a partnership that is a debtor in a case under chapter 7 of this title, objects." 11 U.S.C.A. § 502(a) (West 1993). Plaintiff provides evidence that a claim was filed on its behalf in MCI's bankruptcy proceedings. (See Klein Decl., Ex. 5.) It also asserts no objection has been filed, therefore its claim has been allowed.
Defendant argues the lack of objection does not render Plaintiff's claim allowed. The only legal authority Defendant cites to support this argument, however, is Wechsler v. Hunt Health Systems, Ltd., No. 94 Civ. 8294, 1999 U.S. Dist LEXIS 8944 (S.D.N.Y. June 16, 1999), an unpublished decision from the Southern District of New York. This Court declines to adopt the reasoning or conclusion of an unpublished decision from a district court in another Circuit. Furthermore, the evidence presently before the Court indicates MCI will not be objecting to Plaintiff's claim. (See Def.'s Supp. Br., Ex. 1.) For these reasons, the Court rejects Defendant's argument that lack of objection to Plaintiff's claim renders the claim disallowed.
In addition to arguing that lack of objection does not render a claim allowed, Defendant asserts Plaintiff's claim has not been allowed, and will not be deemed allowed, until it is no longer subject to challenge. In support of this argument, Defendant cites Siegel v. Federal Home Loan Mortgage Corp., 143 F.3d 525 (9th Cir. 1998) and In re MicroAge, Inc., 291 B.R. 503 (B.A.P. 9th Cir. 2002).
Siegel, however, does not support Defendant's argument. The issue in Siegel was whether an allowed claim constituted a final judgment for purposes of res judicata. The Ninth Circuit concluded "that a bankruptcy court's allowance or disallowance of a claim is a final judgment." Id. at 529. The court stated this rule would apply regardless of whether the claim was "deemed allowed" under 11 U.S.C. § 502(a) or formally allowed by court order. Id. at 529-30. Rejecting any difference between these types of allowed claims, the Court stated:
Consider: what else can `deemed allowed' mean? It must mean deemed allowed by the court. In other words, it is deemed that the court has acted on the claim and ordered allowance. Congress has relieved the court of the task of actually endorsing its allowance of the claim on that document or on a separate form of order. It has saved the court from that burdensome and almost ministerial task when no interested party demands it. It would be most peculiar if the effect was that uncontested and allowed claims had less dignity for res judicata purposes than a claim which at least one party in interest thought was invalid or contestable in whole or in part. We see no reason to embrace that rather peculiar result.
Id. at 530. Contrary to Defendant's argument,
Siegel, to the extent it applies to this case, supports Plaintiff's argument that its claim was deemed allowed upon filing the proof of claim. It does not support Defendant's position that a claim is not allowed until it is no longer subject to challenge.
MicroAge is equally unavailing to Defendant. In that case, the court was faced with whether the debtor could raise 11 U.S.C. § 502(d) as a defense to payment of a claim. 291 B.R. at 512-13. The court held the debtor could not do so because the claim had already been allowed. Id. at 512. Nothing in MicroAge supports Defendant's argument that Plaintiff's claim has not been allowed because it is still subject to challenge.
Defendant, however, does not solely rely on its argument that Plaintiff's claim has not been allowed under Section 502(a). It also asserts Plaintiff's claim has been "disallowed" as a matter of law under Section 502(d), which states:
Notwithstanding subsections (a) and (b) of this section, the court shall disallow any claim of any entity from which property is recoverable under section 542, 543, 550, or 553 of this title or that is a transferee of a transfer avoidable under section 522(f), 522(h), 544, 545, 547, 548, 549, or 742(a) of this title, unless such entity or transferee has paid the amount, or turned over any such property for which such entity or transferee is liable under section 522(i), 542, 543, 550, or 553 of this title.
11 U.S.C. § 502(d). Defendant claims MCI made a payment to Plaintiff that is avoidable under Section 547(b)(4)(A), which states: "except as provided in subsection (c) of this section, the trustee may avoid any transfer of an interest of the debtor in property . . . (4) made — (A) on or within 90 days before the date of the filing of the petition[.]"
11 U.S.C. § 547(b)(4)(A).
Plaintiff does not dispute the evidence cited by Defendant in support of its argument that Plaintiff's claim is disallowed under Section 502(d). However, Plaintiff does dispute Defendant's legal argument. Plaintiff argues there are certain prerequisites and procedures that must be followed before Section 502(d) will apply, none of which have occurred in this case.
A leading treatise on bankruptcy law states:
Section 502(d) is operative: (1) when the trustee has secured an order to the claimant for a turnover of property under sections 542 and 543; (2) when the trustee, having successfully a voided transfers under the sections dealing with the trustee's avoidance powers, may proceed under section 550; and (3) when a set off has been found avoidable and the amount of the property thus set off is recoverable to the estate.
4 Collier on Bankruptcy ¶ 502.05[1], at 502-57 (Alan N. Resnick et al. eds., 15th ed. 2003). As Plaintiff states, none of these events have occurred in this case. Defendant fails to present any evidence to show the trustee has secured an order directing Plaintiff to turn over any property under section 542 or 543, and it fails to present any evidence that the trustee has successfully avoided any transfers from MCI to Plaintiff. There is a similar absence of evidence of any set off in this case, or that any such set off has been found avoidable. In sum, the Court agrees with Plaintiff's interpretation of Section 502(d), and finds that section is inapplicable to the facts of the present case.
Defendant has failed to raise a genuine issue of material fact concerning whether Plaintiff's claim has been allowed. Having demonstrated its claim is covered by the policy and not subject to any exclusion, Plaintiff is entitled to summary judgment on its breach of contract claim.
2. Declaratory Judgment
Plaintiff argues it is entitled to summary judgment on its declaratory relief claim, and requests this Court enter declaratory judgment accordingly. Plaintiff seeks a judgment decreeing the following: (1) Plaintiff's claim for $976,500 falls within the coverage of the Policy, (2) Defendant has failed to demonstrate an applicable exclusion, and (3) Defendant's failure to pay the claim constitutes a breach of contract. Plaintiff requests the Court find these matters are final adjudications on the merits. For the reasons set out above, the Court grants Plaintiff's request for summary judgment on this claim.
IV. CONCLUSION AND ORDER
For all the foregoing reasons, the Court GRANTS Plaintiff's Motion for Partial Summary Judgment [Doc. No. 20].
IT IS SO ORDERED.