NOT FOR PUBLICATION FILED
UNITED STATES COURT OF APPEALS APR 26 2018
MOLLY C. DWYER, CLERK
U.S. COURT OF APPEALS
FOR THE NINTH CIRCUIT
KNIGHTBROOK INSURANCE No. 15-15998
COMPANY and KNIGHT
MANAGEMENT INSURANCE D.C. No.
SERVICES, LLC, 2:12-cv-01671-DGC
Plaintiffs-Appellees,
v.
PAYLESS CAR RENTAL SYSTEM, INC. MEMORANDUM*
and PCR VENTURE OF PHOENIX, LLC,
Defendants-Appellants.
Appeal from the United States District Court
for the District of Arizona
David G. Campbell, District Judge, Presiding
Argued and Submitted April 6, 2017
Resubmitted February 8, 2018
Pasadena, California
Before: M. SMITH and N.R. SMITH, Circuit Judges, and FEINERMAN,**
District Judge.
*
This disposition is not appropriate for publication and is not precedent
except as provided by Ninth Circuit Rule 36-3.
**
The Honorable Gary Feinerman, United States District Judge for the
Northern District of Illinois, sitting by designation.
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Payless Car Rental System, Inc. and PCR Venture of Phoenix, Inc. (together,
“Payless”) appeal the district court’s judgment, entered after a bench trial,
awarding equitable indemnification to KnightBrook Insurance Company and
Knight Management Insurance Services LLC (together, “KnightBrook”) in the
amount of $970,000 and denying Payless’s insurance bad faith counterclaim.
1. The district court’s equitable indemnification decision relied on § 78
of the Restatement of Restitution, which provides, in relevant part:
A person who with another became subject to an obligation or supposed
obligation upon which, as between the two, the other had a prior duty of
performance, and who has made payment thereon although the other had a
defense thereto, …
(b) is entitled to restitution if he became subject to the obligation with the
consent of or because of the fault of the other and, if in making payment, he
acted …
(ii) in the justifiable belief that such a duty existed[.]
Restatement (First) of Restitution § 78 (1937) (emphasis added). After hearing
oral argument, we issued an opinion, familiarity with which is assumed, certifying
this question to the Arizona Supreme Court: “[W]hether Arizona equitable
indemnity law incorporates § 78 of the Restatement.” KnightBrook Ins. Co. v.
Payless Car Rental Sys. Inc., 855 F.3d 1072, 1073 (9th Cir. 2017).
The Arizona Supreme Court answered that question in the negative, holding
that Arizona equitable indemnity law does not incorporate § 78. KnightBrook Ins.
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Co. v. Payless Car Rental Sys. Inc., 409 P.3d 293, 294 (Ariz. 2018).1 As the court
explained: “Arizona’s equitable indemnity law seeks to avoid unjust enrichment by
allowing recovery only when an indemnity plaintiff subject to derivative or
imputed liability discharges an actual obligation that a culpable indemnity
defendant owed to a third party.” Id. at 295 (emphasis added). That understanding
of equitable indemnity law, the court added, is “consistent with § 76 of the First
Restatement.” Id. In declining to adopt § 78, the court reasoned that it was
disinclined to “expand[] equitable indemnity law to include ‘supposed obligations’
that an indemnity plaintiff and defendant may not actually owe.” Id. at 297
(alteration omitted).
Because the Arizona Supreme Court rejected § 78 as a matter of Arizona
law, it did not reach the second question we had certified: “[W]hether equitable
indemnity under § 78 requires that the indemnity plaintiff’s liability to the
underlying plaintiff have been coextensive with the indemnity defendant’s liability
to the underlying plaintiff.” KnightBrook, 855 F.3d at 1073. Nonetheless, the
court made clear that equitable indemnity under Arizona law effectively requires
coextensive liability, noting that recovery is permitted only “when an indemnity
plaintiff subject to derivative or imputed liability discharges an actual obligation
1
In so holding, the Arizona Supreme Court rejected the adoption of § 78 in
Hatch Development, LLC v. Solomon, 377 P.3d 368, 372-73 (Ariz. Ct. App. 2016),
which in turn relied heavily on the learned district judge’s opinion in this case.
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that a culpable indemnity defendant owed to a third party.” 409 P.3d at 295
(emphasis added). In other words, equitable indemnification is available only
when the indemnity plaintiff, through no fault of its own, automatically assumes
the indemnity defendant’s liability to a third party by virtue of some legal
relationship between the plaintiff and defendant. See id. at 296 (“The right of
indemnity [inures] to a person who, without active fault on his own part, has been
compelled, by reason of some legal obligation, to pay damages occasioned by the
initial negligence of another, and for which he himself is only secondarily liable.”)
(quoting Blakely Oil, Inc. v. Crowder, 292 P.2d 842, 844 (Ariz. 1956)).
We will remand to the district court to apply in the first instance the “actual
obligation” standard as newly articulated by the Arizona Supreme Court. See
Detrich v. Ryan, 740 F.3d 1237, 1248-49 (9th Cir. 2013) (en banc) (“[O]ur general
assumption is that we operate more effectively as a reviewing court than as a court
of first instance.”). If the district court concludes that KnightBrook and Payless
were actually liable to the McGills, it then will need to consider whether the
$970,000 settlement that KnightBrook entered into with the McGills, which might
have reflected the total outstanding value of the insurance policy that KnightBrook
claims Payless entered into with Bovre on KnightBrook’s behalf, discharged a
common liability of KnightBrook and Payless. It may be relevant to both issues
whether Payless acted as KnightBrook’s agent when it allegedly entered into the
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insurance contract with Bovre (a question that the district court left open) and, if
so, whether KnightBrook was a disclosed or undisclosed principal. See
Restatement (Third) of Agency § 6.01 (2006) (noting that an agent entering into a
contract on behalf of a disclosed principal is generally not a party to the contract);
id. § 6.03 (noting that an agent entering into a contract on behalf of an undisclosed
principal is a party to the contract).
2. That leaves Payless’s bad faith insurance counterclaim. Implicit in
any insurance contract “is the insurer’s obligation to play fairly with its insured.”
Zilisch v. State Farm Mut. Auto. Ins. Co., 995 P.2d 276, 279 (Ariz. 2000) (quoting
Rawlings v. Apodaca, 726 P.2d 565, 570 (Ariz. 1986)). “The insurer has ‘some
duties of a fiduciary nature,’ including ‘equal consideration, fairness and
honesty.’” Id. (alterations omitted) (quoting Rawlings, 726 P.2d at 571).
The district court held after a bench trial that KnightBrook did not breach its
duties of equal consideration, fairness, or honesty when it acquired and prosecuted
the McGills’ negligence and contract claims against its insured, Payless, because
KnightBrook did so in an effort to mitigate a risk “created by the fault of …
Payless,” and only after Payless had refused KnightBrook’s request that it pay half
the settlement cost. The district court’s decision does not rest on a legal error or a
clearly erroneous factual finding. See Lentini v. Cal. Ctr. for the Arts, Escondido,
370 F.3d 837, 843 (9th Cir. 2004).
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KnightBrook stipulated that it was seeking to recover from Payless only the
$970,000 it had paid to the McGills—a liability that KnightBrook believed it had
incurred as a result of Payless’s negligence in handling Bovre’s rental transaction.
Thus, a reasonable trier of fact could find that KnightBrook, by asserting the
claims it had purchased from the McGills, was not seeking to leverage its position
as an insured in order to profit from Payless, but rather was seeking only to make
itself whole for the harm it believed Payless had caused.
That serves to distinguish this case from Matison v. Transamerica Title
Insurance Co., 845 F.2d 867 (9th Cir. 1988), on which Payless relies. Applying
Arizona law, Matison held that an insurer acted in bad faith when it entered into a
separate settlement with the underlying plaintiff and acquired an interest in the
plaintiff’s remaining claims against the insured (the underlying defendant). Id. at
867-68. As in this case, the insurer was seeking to recover only enough from the
insured to cover the amount it had paid to the plaintiff in the settlement. Id.
However, by contrast to this case, there was no indication in Matison that the
insured, and not the insurer, was at fault for the insurer’s liability. Rather, the
insurer in Matison was simply trying to avoid paying “a penny” for its own
culpable conduct by taking a stake in independent claims against its insured. Id. at
868. In that situation, the insurer sought to “benefit[] itself at the expense of the
[insureds]”—not, as in this case, to make itself whole for a loss it reasonably
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believed the insured had caused. Id. Additionally, the insurer in Matison did not
give the insureds an opportunity to join in the initial settlement—as KnightBrook
did, only to be refused by Payless.
For the foregoing reasons, the district court’s judgment on KnightBrook’s
equitable indemnification claim is VACATED and REMANDED for proceedings
consistent with this memorandum, and the district court’s judgment on Payless’s
bad faith counterclaim is AFFIRMED.
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