Ronald O. REICHERT, Plaintiff and Appellant, v. GENERAL INSURANCE COMPANY OF AMERICA, Industrial Indemnity Company, Insurance Company of North America, and National Union Fire Insurance Company, Defendants and Respondents.
Plaintiff appeals from a judgment of dismissal after the court sustained demurrers to the second amended complaint without leave to amend. Plaintiff sued for $1,500,000, besides $5,000,000 punitive damages in an action initiated as the result of a fire followed by a foreclosure and bankruptcy in connection with the Bakersfield Inn (said to have been the first motel in North America).
The original complaint denominated “Complaint for Fraud and Conspiracy to Defraud” was filed by the plaintiff on December 11, 1964. It contained a single cause of action which alleged that four of the defendants had issued insurance policies covering fire damage to the Inn bought from defendant American National Insurance Company by the plaintiff on February 1, 1964. It was alleged that the plaintiff spent the approximate sum of $500,000 as part payment of the purchase price and for improvements, repairs and renovations, and that the property was of the value of $1,500,000 as of the date of purchase. At that time, plaintiff secured by assignment insurance policies then in full force and effect by the payment of the following premiums:
1) Industrial Indemnity Company, premium $7,184.60 for full replacement coverage in the sum of $280,000.
2) Insurance Company of North America, premium $4,370.20, full replacement coverage $240,000.
3) National Union Fire Insurance Company, premium $12,316.50, full replacement coverage $480,000.
4) General Insurance Company of America, premium $7,859.15, full replacement coverage $375,000.
It was thus stated that the total premium paid on all policies was $31,730.55, and that the total coverage on the structures and contents was $1,375,000.
A fire occurred on the premises on the 19th day of February, 1964, causing damage to part of the buildings and their contents; due notice was given to the insurance carriers of a loss in excess of $424,000, but the defendant American National Insurance Company, the holder of the first deed of trust for $850,000” * * * acting in concert with the other defendants with the intent and purpose of causing plaintiff to lose his equity in the Bakersfield Inn” allegedly caused such other defendants to refuse to recognize plaintiff's claim promptly and to cooperate to save the property; it was claimed the plaintiff was thereby caused to lose possession of the Inn, and that, as a consequent victim of his creditors, “ * * * plaintiff was adjudicated [an involuntary] bankrupt on July 24, 1964.”
Paragraph VIII of the first complaint alleges that at the time of purchase of the Inn the defendant insurance carriers and the defendant American National Insurance Company, through their agent, Wallace Moir Company, “ * * * offered to and did sell, transfer and assign to plaintiff the insurance policies set forth above,” and assured plaintiff that they “would give plaintiff all of the coverage and protection he needed.” “That in order to induce plaintiff to enter into said contracts, and * * * to purchase the property and [take over] the policies, the defendants and their agent, their employees and representatives, orally and in writing, represented to plaintiff, that the defendants, and each of them, would stand behind and indemnify plaintiff from any damage or loss arising from fire or explosion to the extent of policy limits.” The paragraph continues:
“That the defendants and their agent further represented that the plaintiff could expect payment of said claims and losses, to be made fairly and with promptness and dispatch. Further defendants, and their agent, at the time of purchase did represent to plaintiff that in case of loss, prompt and efficient adjusting service and immediate ascertainment of values would be furnished by the defendants, who did offer and sell said policies of insurance to plaintiff.”
The pleading alleges that the representations made by defendants were false and fraudulent, and made pursuant to a conspiracy to defraud the plaintiff and to induce him to purchase the property and the policies of insurance, but that the said representations were false and fraudulent in that the defendants did not intend promptly and fairly to indemnify the plaintiff in case of fire, or to make a prompt and forthright payment for loss by fire, or promptly to settle and adjust any loss.
The pleading further states that if the representations had been true plaintiff's loss would have been fairly and promptly settled and plaintiff would not have lost the property nor would he have been forced into bankruptcy; “[t]hat as a direct and proximate result of said fraud and misrepresentations on the part of the defendants, and each of them, plaintiff has been deprived of and caused to lose a property reasonably worth $1,500,000.00 all to his actual damage in that sum”; that what was done by defendants was done maliciously and oppressively and in wanton disregard of plaintiff's rights, and that by reason thereof, plaintiff has been damaged in the further sum of $5,000,000 as penal damages.
The respondents' demurrers to the complaint were sustained but leave to amend was granted.
At this point in the litigation, the action was dismissed by stipulation as to American National Insurance Company.
A first amended complaint containing eight counts for money had and received and for fraudulent failure to adjust the fire loss promptly was filed by the plaintiff against the remaining defendants and again demurrers were interposed by all of the respondents and sustained. The court, however, gave plaintiff leave to amend a second time in response to the request of his counsel that he be allowed to put his pleading in what he should consider to be optimum shape. The second amended complaint realleged the eight counts and added a ninth cause of action for “bad faith” in which the alleged failure of all the respondents “ * * * to exercise the highest degree, or an ordinary degree, of good faith, care, skill, or diligence for the protection of plaintiff's rights * * * ” was set forth; actual damages of $1,500,000 and punitive damages of $5,000,000 were prayed for.
Again the respondents filed demurrers to the second amended complaint, accompanied by motions to strike, which latter were never ruled upon; the demurrers were argued and were sustained without leave to amend, “ * * * on the grounds that (1) the complaint, and each and every cause of action thereof, does not state facts sufficient to constitute a cause of action against said defendants or any of them, and (2) the complaint and each and every cause of action thereof does not state facts sufficient to constitute a cause of action in plaintiff against said defendants or any of them.”
The trial court's memorandum with respect to its rulings states that the first, second, third and fourth causes of action of the second amended complaint are common counts seeking the return of insurance premiums for the various fire policies which form the bases for the causes of action set forth in the fifth, sixth, seventh, eighth and ninth causes of action, saying that these common counts are “in truth, in fact reliant upon the factual allegations contained in the other causes of action, and that they should stand or fall with actions in which the facts are specifically pleaded.” The court cites the applicable cases of Fruns v. Albertsworth, 71 Cal.App.2d 318, 321, 162 P.2d 666, and Orloff v. Metropolitan Trust Company, 17 Cal.2d 484, 489, 110 P.2d 396, in support of this ruling and no opposition to this conclusion is expressed in appellant's brief.
The memorandum says further that each of the fifth to ninth causes of action contains by direct allegation or by reference paragraph V of the fifth cause of action, which states that the plaintiff was adjudicated a bankrupt, and comments that those causes of action, if any, arise out of alleged breach of contract of the various policies of insurance, and, that they consequently passed to the trustee in bankruptcy. The court holds that each cause of action is “ * * * contractual in origin and specifically within the terms of Section 70 of the Bankruptcy Act,” and that even if these claims were considered to be ex delicto section 688.1 of the Code of Civil Procedure grants a creditor a lien upon a cause of action of such a nature, and has made such rights of action “subject to attachment, execution, garnishment, sequestration, or other judicial process and, therefore, within the meaning of Section 70, [subdivision] a(5) of the Bankruptcy Act.”
The court also expressed its opinion that the plaintiff did not allege in those causes of action any damage for breach of contract.
Appellant first asserts, as a ground for reversal, that his oral motion to disqualify Judge Borton made just prior to the argument of the demurrers to the second amended complaint should have been granted. The appellant also purports to appeal separately “from a denial by the trial court of plaintiff's motion under CCP 170 [subdivision] 4, and the refusal of the trial judge to disqualify himself after motion by plaintiff under section 170 [subdivision] 4 of the California Code of Civil Procedure,” but as there is no direct appeal from such an order or refusal, this purported appeal must be dismissed. However, it is, of course, proper to consider this alleged error on the appeal from the judgment itself.
The case was not heard by Judge Borton until after the filing of the first amended complaint; the Honorable J. Kelly Steele of the Kern County Superior Court sustained the demurrers to the original complaint. Before the case was assigned to Judge Borton, the action against American National Insurance Company as an original defendant had been dismissed; the dismissal documents indicated tht the attorneys for that party defendant were Messrs. Borton, Petrini, Conron, Brown & Condley, a well-known Bakersfield firm of attorneys from which Judge Borton had withdrawn when he was appointed to the bench. It is indicated in one place in the record that counsel for the plaintiff did not originally know that the Borton specified in the name of the former firm of attorneys was in fact Judge Borton. In any event, nothing was done toward moving to disqualify Judge Borton until immediately before the hearing of the demurrers to the second amended complaint. At that time the procedure required by section 170 of the Code of Civil Procedure was not followed. Counsel for plaintiff stated that Judge Borton was disqualified for the reason that he had been a member of the firm which represented American national Insurance Company, within two years prior to the commencement of the suit. Subdivision 4 of section 170 of the Code of Civil Procedure holds that a judge is disqualified “when, in the action or proceeding, or in any previous action or proceeding involving any of the same issues, he has been attorney or counsel for any party; or when he has given advice to any party upon any matter involved in the action or proceeding; or when he has been retained or employed as attorney or counsel for any party within two years prior to the commencement of the action or proceeding;”
The following appears in the record:
“MR. MOST: I would like at this time to state for the record your Honor, to move based on Section of the Code of Civil Procedure Number 170.4, that within two years of the time of the filing of this action, that your Honor, was a member of the firm that was representing one of the parties in the action as a party defendant, which party was later dismissed out of the cause without prejudice.
“BY THE COURT: What party are you referring to?
“MR. MOST: I believe that is the American National Insurance Company, your Honor, the holder of the mortgage on the Bakersfield Inn.
“BY THE COURT: Well, for the record I was a member of the firm of Borton, Petrini, Conron, Brown and Condley prior to January 9th, 1964 when I became Judge. I had no contact with this matter. There has been no appearance made of any kind by my former firm in this matter. I see nothing more than a request for the entry of a dismissal as far as the American National Insurance Company, which was filed February 17th, 1965. It does show that Borton, Petrini, Conron, Brown and Condley were attorneys for that organization at the time of the filing, however they had not appeared in the action. That dismissal removes that particular defendant from the category of a defendant, does it not counsel?
“MR. KING: Is in my opinion it would your Honor.
“MR. MOST: I might add this your Honor, just to complete the record, that we expect that the American National Insurance Company will be an important part of the evidence in this case, if as and when it goes to trial and that your firm will be appearing for that insurance company.
“BY THE COURT: Well, that may possibly be, but this is not the time set for the hearing of this matter and it would be my judgment that until such time as my former firm enters the picture in some manner or another, there is no disqualification under that section. There is no defendant that they purport to represent at this time as I understand it. Is that correct counsel?
“MR. BROWN: That is correct, your Honor.
“BY THE COURT: Does any counsel representing the various defendants have the slightest qualm of my disqualification under that section?
“MR. BROWN: No, your Honor.
“MR. SCOYEN: No, your Honor.
“BY THE COURT: I will deny the motion.”
The fact that Judge Borton was once a member of the partnership which had represented American National Insurance Company made him an attorney for that party (30A Am.Jur., Judges, § 178, p. 92; Mayo v. Beber, 177 Cal.App.2d 544, 549, 2 Cal.Rptr. 405). If the matter had been properly presented in compliance with the strict requirements of section 170 of the Code of Civil Procedure, this would have been a close question. While no longer a party, American National Insurance Company had been, in fact, a defendant at the inception of the litigation. However, the question must be decided adversely to appellant on the ground that plaintiff failed to comply with the requirements of section 170, subdivision 5, of the Code of Civil Procedure, which reads in part:
“Whenever a judge of a court of record who shall be disqualified under the provisions of this section, to sit or act as such in any action or proceeding pending before him, neglects or fails to declare his disqualification in the manner hereinbefore provided, any party to such action or proceeding who has appeared therein may present to the court and file with the clerk a written statement objecting to the hearing of such matter or the trial of any issue of fact or law in such action or proceeding before such judge, and setting forth the fact or facts constituting the ground of the disqualification of such judge.” (Italics added.)
This procedure was not followed by plaintiff. No written statement setting forth the alleged grounds of disqualification, as required by the code, was filed, and plaintiff cannot now raise the point based wholly on an informal allegation of alleged facts in the oral proceedings. (Krebs v. Los Angeles Ry. Corp., 7 Cal.2d 549, 554–555, 61 P.2d 931; Ephraim v. Superior Court, 42 Cal.App.2d 578, 109 P.2d 378; People v. Emmett, 123 Cal.App. 678, 682, 12 P.2d 92.)
We turn to a consideration of the propriety of the demurrers to the second amended complaint. The ruling sustaining these demurrers without leave to amend was made on the general ground that no cause of action was stated in them and that no cause of action was shown to inhere in the plaintiff as distinguished from his trustee in bankruptcy. The court did not consider the special demurrers, and it is unnecessary, in view of the ruling on other grounds, for us to review that portion of the objections to the second amended complaint.
The record clearly demonstrates, incidentally, that the second amended complaint was in a form which was considered by his counsel to be the best possible statement of the plaintiff's cause of action. That attorney particularly requested the court at the argument of the demurrers to the first amended complaint to give him an opportunity to consider amendments which would place the pleading in its optimum form.
It is our conclusion that the trial court correctly sustained the general demurrers to the second amended complaint.
Because of his adjudication of bankruptcy, the plaintiff lost any right which he might otherwise have had to bring the suit; at the time he filed the complaint on December 11, 1964, the trustee in bankruptcy had whatever right may have inhered in the facts alleged in the complaint and the trustee continued to possess such right at the time of the filing of the second amended complaint, and the sustaining of the demurrers without leave to amend.
Section 110 of Title 11 of the United States Code Annotated states in pertinent part:
“(a) The trustee of the estate of a bankrupt * * * shall in turn be vested by operation of law with the title of the bankrupt as of the date of the filing of the petition initiating a proceeding under this title, except insofar as it is to property which is held to be exempt, to all of the following kinds of property wherever located * * * (5) property, including rights of action, which prior to the filing of the petition he could by any means have transferred or which might have been levied upon and sold under judicial process againt him, or otherwise seized, impounded, or sequestered: Provided, That rights of action ex delicto for libel, slander, injuries to the person of the bankrupt or of a relative, whether or not resulting in death, seduction, and criminal conversation shall not vest in the trustee unless by the law of the State such rights of action are subject to attachment, execution, garnishment, sequestration, or other judicial process: * * * (6) rights of action arising upon contracts, or usury, or the unlawful taking or detention of or injury to his property; * * * ”
In California, causes of action based on injuries to the property of a bankrupt vest in the trustee in bankruptcy. (Brown v. Guarantee Ins. Co., 155 Cal.App.2d 679, 692–695, 319 P.2d 69, 66 A.L.R.2d 1202; Comunale v. Traders & General Ins. Co., 50 Cal.2d 654, 661, 328 P.2d 198, 68 A.L.R.2d 883; Civ.Code, § 954, 66 A.L.R.2d 1217.) And here, even cases involving personal wrongs, except those specifically excluded by the Act itself are subject to “judicial process” and are vested in the trustee in bankruptcy. (Carmona v. Robinson, 9 Cir., 336 F.2d 518; in re Farris, D.C., 217 F.Supp. 598; 11 U.S.C.A. § 110.)
The appellant instituted the present action after he was adjudged a bankrupt. If one who becomes a bankrupt has instituted a suit before adjudication in bankruptcy, the trustee may or may not choose to intervene in the case. But if the bankrupt has not filed an action before adjudication, the cause of action is transferred to the trustee in bankruptcy by operation of law, and the bankrupt then has no right to bring an action in his own name unless there is a showing that the trustee had specifically abandoned the cause of action. (Estate of Aldrich, 35 Cal.2d 20, 23, 215 P.2d 724, 19 A.L.R.2d 885; Roberts v. Bank of America, 112 Cal.App.2d 823, 824, 247 P.2d 356.) If there had been an abandonment of the alleged cause of action by the trustee, appellant had ample time and opportunity to make such an allegation, but he completely failed to do so. The trustee in bankruptcy, and not the plaintiff in this case, had the right to bring whatever suit was legitimate. (Benson v. Probst, 12 Utah 2d 348, 366 P.2d 700; Connolly v. National Surety Co., 35 Ohio App. 76, 171 N.E. 870; Gochenour v. Cleveland Terminals Bldg. Co., 6 Cir., 118 F.2d 89, 93; Henderson v. Binkley Coal Co., 7 Cir., 74 F.2d 567.)
We are in accord with the argument of respondents and the view of the trial court that this is essentially a contract action notwithstanding the allegations of fraud in the pleading. No request is made in the complaint for the payment of the amount of damages contracted for, counsel for plaintiff saying that unquestionably that right of recovery was transferred by operation of law to the trustee in bankruptcy. The plaintiff in a portion of his pleading alleges that the defendants, by agreement among themselves, failed to act promptly to adjust and settle plaintiff's loss by reason of the fire and that the incidental delay was actuated by bad faith; plaintiff further alleges that the insurers through an agent had told the plaintiff at the time he bought the property that the policies would give him all of the protection that he needed, that by reason of failure to come to a prompt settlement of plaintiff's claim, he was caused to become bankrupt, and that the insurance carriers were guilty of oppression and fraud. Plaintiff does not claim in this suit recovery of the contractual promises made by the defendants, but asks instead for the alleged value of the property which he lost, namely, $1,500,000, together with $5,000,000 as exemplary damages.
Appellant apparently assumes in his argument that a contract obligation may be converted into a tort liability by a failure to perform promptly, accompanied by the wish to harass, vex and annoy the other contracting party. The great weight of authority is clearly against this contention; the obligation is still one of contract, rather than tort. Baumgarten v. Alliance Assur. Co., C.C., 159 F. 275, is highly persuasive. That action was brought to recover on certain policies of fire insurance. After alleging the contract, plaintiff stated that the defendant had refused to pay more of the fire loss than fifty percent on the dollar, and further that if such offer were not accepted within a specified time, the company would not pay anything, such actions being “ ‘ * * * willful and fraudulent, and were done solely with the desire to take advantage of the necessities' of plaintiffs ‘for ready money.’ ” The trial court granted a motion to strike and there was an affirmance on appeal, the court stating on page 277:
“It is somewhat difficult to understand the theory upon which the plaintiffs proceed in making the averments the substance of which is thus stated. If by the matter thus alleged it is sought or intended to recover exemplary damages for a willful or malicious breach of the contract sued on, such damages cannot be recovered, since the case is not one in which such relief may be had. Civ.Code Cal. § 3294. If it is intended thereby to lay a claim for damages for the mere nonpayment of money due under the contract, above or in addition to interest, such damages cannot be recovered. Civ.Code Cal. § 3302; New Orleans Ins. Co. v. Piaggio, 16 WQall. (U.S.) 378, 21 L.Ed. 358; Loudon v. Taxing dist., 104 U.S. 771, 26 L.Ed. 923.”
The court further states on page 278:
“Failure to perform a duty prescribed by contract cannot be converted into a tort by reason of the motive of the party guilty of the breach.”
This result is approved generally in 1 Witkin, California Procedure, Actions, section 36, page 529, where it is said that mere breach of contract is usually thought to give rise only to a contract right of action.
The opinion in Harlow v. American Equitable Assur. Co., 87 Cal.App. 28, 31–32, 261 P. 499, points out that in the usual action involving an insurance policy, the damages recoverable are those specified in the policy and are not to be increased by delay in the payment. in 37 A.L.R.2d 538, 539–540, it is said:
“In the majority of cases in which the question has arisen, the circumstances present and the damages sought were such that the failure to delay of an insurer in making the payments under the contract of insurance was held not to entitle the insured to any damages because of such failure or delay, although he was entitled to the principal named in the policy, and perhaps to interest.”
Among the cases cited in support of the above note is Independent Grocery Co. v. Sun Ins. Co., 146 Minn. 214, N.W. 582, 583, where the following is stated:
“Though the complaint abounds in allegations and charges of malice and intentional wrongdoing on the part of defendants, the action is not one in tort, but one for the recovery of damages for a breach of the contract, and the rule of liability in actions of that kind must control the rights of the parties. [Citations.] And the real question in the case, on the facts alleged, is whether the willful and malicious delay by defendants in the adjustment and payment of the insurance loss, the amount of which was paid before the commencement of this action, entitles plaintiffs to damages in the respects states in the complaint. We answer the question in the negative. “The general rule of damages for the breach of contract obligations is well-settled law in this state. * * * for as to the breach of the contract, whether malicious or not, plaintiffs'; recovery, within the rule stated, must be limited to the amount of the legal liability under the policy with interest.”
The next question is whether there can be a recovery of exemplary damages in this case. Generally speaking,t he law of this state as incorporated in section 3294 of the Civil Code does not permit the recovery of exemplary damages in an action based upon contract. (Doyle v. chief Oil Co., 64 Cal.App.2d 384, 295, 148 P.2d 915; Chelini v. Nieri, 32 Cal.2d 480, 487, 196 P.2d 915; Contractor's, etc., Assn. v. Cal. Comp. Ins. Co., 48 Cal.2d 71, 307 P.2d 626; Baumgarten v. Alliance Assur. Co., supra, C.C., 159 F.275; Freedman v. Rector, etc., 37 Cal.2d 16, 22, 230 P.2d 629, 31 A.L.R.2d 1; Crogan v. Metz, 47 Cal.2d 398, 405, 303 P.2d 1029.)
Of the California cases cited by appellant in an attempt to justify his prayer for exemplary damages in this case only one seems factually in point—Sharp v. Automobile Club of So. Cal., 225 Cal.App.2d 648, 37 Cal.Rptr. 585; there an award of exemplary damages was upheld in an action on an insurance policy; it was said that the specific promise of defendant's agent to pay damages of a certain character plus delay of approximately a year in settling a claim arising out of an automobile collision justified the award of panel damages. The other authorities cited are all readily distinguishable from the present situation. Some merely state that an insurance company should not perpetrate fraud (Golden Gate Motor Transport Co. v. Great American Indemnity Co., 6 Cal.2d 439, 58 P.2d 374), or that in a tort action against the person responsible for property damages, exemplary damages may be awarded for an undue delay in payment (Valencia v. Shell Oil Co., 23 Cal.2d 840, 147 P.2d 558); unquestionably, punitive damages may be awarded in a tort action (Ward v. Taggart, 51 Cal.2d 736, 336 P.2d 534), and a willingness to vex, harass or injure is a proper foundation for an award in such a case (Gruner v. Barber, 207 Cal.App.2d 54, 24 Cal.Rptr. 292; Roth v. Shell Oil co., 185 Cal.app.2d 676, 8 Cal.Rptr. 514); and if defendants in a tort action are guilty of oppression, fraud and malice, exemplary damages can be pleaded and awarded (James v. Herbert, 149 Cal.App.2d 741, 309 P.2d 91).
We conclude that we should follow the well-established rule that in an action sounding in contract, as this one does, exemplary damages cannot be awarded. Among the cases cited by appellant on this question in Haigler v. Donnelly, 18 Cal.2d 674, 680, 117 P.2d 331, 335, in the opinion written by the present Chief Justice Traynor, the correct rule is thus stated:
“ * * * Under this section [§ 3294 Civ.Code] exemplary damages may not be recovered in an action based upon a contractual obligation even though the breach of contract is wilful or malicious. Berning v. Colodny & Colodny, 103 Cal.App. 188, 284, P. 496; Baumgarten v. Alliance Assurance Co., 159 F.275; see 8 Cal.Jur. 872. If on the other hand the action is one in tort, exemplary damages may be recovered upon a proper showing of malice, fraud or oppression even though the tort incidentally involves a breach of contract. Gorman v. Southern Pac. Co., 97 Cal. 1, 31 P. 1112, 33 Am.St.Rep. 157; Lyles v. Perrin, 119 Cal. 264, 51 P. 332; Jones v. Kelly, 108 Cal. 251, 280 P. 942; Berning v. Colodny & Colodny, supra.”
(See also 84 A.L.R. 1345.)
In view of the foregoing major facts and the proper conclusion of the trial judge that there was a failure to set forth a cause of action, or one inhering in plaintiff in view of his bankruptcy, it is unnecessary to examine and pass upon other points raised by the demurrers of the defendants.
The judgment is affirmed.
CONLEY, Presiding Justice.
STONE, J., and McMURRAY, J. pro tem.,* concur.