Poizner v. Fremont General Corporation
(2007) ___ Cal.App.4th ____, 06 C.D.O.S. 2253

Subsidiary Insurer's Complaint Against Parent Corporation For Misappropriation Of Net Operating Loss Improperly Dismissed By Trial Court

The California Court of Appeal, Second Appellate District, reversed a trial court judgment dismissing a subsidiary insurer's complaint against its parent company. The court held it was error for the lower court to take judicial notice of the enforceability and proper interpretation of a letter agreement that was not attached to the complaint. The court also concluded the complaint adequately alleged facts to constitute a claim for conversion of "intangible" personal property, and that provisions of the Insurance Code permitted a receiver to recover assets unreasonably conveyed to a parent corporation. The court sustained the trial court's ruling only with respect to a single count for violation of Insurance Code section 1215.5, on the grounds plaintiff failed to allege a valid cause of action.

Fremont Indemnity Company ("Indemnity"), a workers' compensation insurer, is a wholly-owned subsidiary of Fremont Compensation Insurance Group, Inc. ("Insurance Group"), which is a wholly owned subsidiary of Fremont General Corporation ("Fremont General"). Comstock Insurance Company ("Comstock"), a property and casualty insurer, was a wholly-owned subsidiary of Insurance Group until March 2003, when Comstock was merged into Indemnity. Fremont Reinsurance Company, Ltd. (Bermuda) ("Re") was a wholly-owned subsidiary of Indemnity until September 2000, when Re was acquired by Insurance Group.

Fremont General, Insurance Group and Indemnity entered into an agreement, memorialized by a November 27, 2000 letter, providing for the Insurance Commissioner to supervise and provide regulatory oversight of Indemnity. According to the complaint the parties "purported to enter into a second agreement, allegedly memorialized by a letter dated July 2, 2002," on the same subject (the "Letter Agreement"). The Letter Agreement purported to express an agreement between the Department of Insurance, Fremont General, Insurance Group, and Indemnity.

Indemnity, by and through the Insurance Commissioner as its liquidator, sued Fremont General and Insurance Group in two separate actions. In this action, Indemnity alleged the defendants misappropriated net operating losses of its predecessor in interest, Comstock, and misappropriated other assets of its former subsidiary, Re. Indemnity also asserted a claim for conversion of the net operating losses, in addition to alleging improper distributions in violation of the California Insurance Code.

Fremont General and Insurance Group demurred to Indemnity's complaint. They sought judicial notice of the Letter Agreement in support of the demurrer. They cited no statutory authority for judicial notice, but argued the court previously had taken judicial notice of the same document in a related action between the parties.

Fremont General and Insurance Group contended the Letter Agreement allowed Fremont General to use the net operating losses in the manner alleged. They also argued the conversion claim failed because the unauthorized taking of an intangible property interest, which is not merged with or reflected in tangible property, is not an actionable conversion. The defendants also challenged plaintiffs' claims under Insurance Code section 1215.16, contending this statute only authorized the Insurance Commissioner as liquidator to recover distributions of stock or monetary bonuses, not net operating losses.

The trial court took judicial notice of the Letter Agreement, sustained the demurrer, and later entered a judgment of dismissal. Indemnity appealed.

In reversing, the court held it was improper for the trial court to take judicial notice of the Letter Agreement, even though it was contained in the court file of a related action. "Although the existence of a document may be judicially noticeable, the truth of statements contained in the document and its proper interpretation are not subject to judicial notice if those matters are reasonably disputable." StorMedia, Inc. v. Superior court (1999) 20 Cal. 4th 449, 457, fn. 9. Moreover, a court ruling on a demurrer cannot take judicial notice that a contract, which was not attached to the complaint and is only submitted in support of a demurrer, is binding and enforceable if the plaintiff claims the contract is unenforceable due to fraud or duress. Gould v. Maryland Sound Industries, Inc., 31 Cal.App.4th 1137, 1145-46. Because the parties disputed the proper interpretation of the Letter Agreement, the trial court erred in interpreting the document and concluding it was binding and enforceable.

The court also concluded the demurrer was improperly sustained as to the conversion claim. It relied on Payne v. Elliot, (1880) 54 Cal. 339, in which a claim of alleged conversion of shares of stock was permitted. Relying on 26 U.S.C. § 172(c), the court concluded conversion is not restricted to tangible property and held a net operating loss, and the owner's alleged right of ownership and exclusive possession to this loss, are sufficiently definite to support a conversion claim.

Indemnity also sought to recover the alleged improper distributions of Comstock and Indemnity assets pursuant to Insurance Code section 1215.16. This statute allows a receiver under a liquidation order, in certain circumstances, to recover improper "distributions" from any parent corporation or holding company if made within one year before the petition for liquidation was filed. The court concluded the term "distributions" in that statute is not limited to shares of stock or monetary bonuses, as Fremont and Insurance Group had argued, and should be interpreted broadly to allow recovery of assets unreasonably conveyed.

The court sustained the trial court's ruling on the cause of action based on Insurance Code section 1215.5. This statute provides, among other things, that (1) the terms of transactions between an insurer and its affiliates must be "fair and reasonable," (2) an insurer must notify the Commissioner before entering into certain types of transactions, and (3) the Commissioner may disapprove the transaction. The court held the enforcement provisions of this statute do not authorize the Commissioner to void contracts and restore the status quo unless certain prerequisites are met, none of which were alleged in the complaint.

This opinion is not final. Though it has been certified for publication, it may be withdrawn from publication, modified on rehearing, or granted review by the California Supreme Court. Should any of these events occur, the opinion would be unavailable for use as authority in other cases.

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