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INSURANCE NOTES

Insurer Had Standing To Enforce Settlement Agreements Of Claims Against Its Insured, A Suspended Corporation

08.16.2007
On July 24, 2007, the Court of Appeal for the Third District in formance Plastering v. Richmond American Homes of California, Inc. Cal.Rptr.3d __, 2007 WL 2110489 (July 24, 2007), addressed interesting questions concerning the standing of an insurer to enforce settlement agreements of claims against an insured suspended corporation and the enforceability of settlement agreements entered into by or on behalf of a suspended corporation.

Performance performed stucco work on homes built by Richmond. Following the El Niño rains in 1997, Richmond sued Performance for construction defects. Shortly thereafter, the California Secretary of State and the Franchise Tax Board suspended Performance as a corporation.

Richmond and Performance entered into settlement agreements, under which Performance paid money to Richmond and Richmond released Performance "and its insurers" from certain identified claims.

A short time later, Richmond again sued Performance. In defense, Performance raised the releases of liability in the prior settlement agreements. CalFarm and Performance "by and through CalFarm" entered into a settlement of this last case with Richmond, but reserved rights to seek judicial determination as to the prior settlements.

In a subsequent suit by CalFarm and Performance "by and through CalFarm," the trial court dismissed the suit upon Richmond's demurrer. The trial court determined that CalFarm had no standing to bring claims based upon the agreements, as it was neither a party nor a third-party beneficiary and that Performance could not prosecute the lawsuit because it was a suspended corporation. CalFarm appealed, and the Court of Appeal reversed.

The Court of Appeal agreed that CalFarm was not a party to the settlement agreements. Nevertheless, it concluded that given that the agreements specifically released Performance "and its insurers" and that CalFarm was Performance's insurer, CalFarm had standing as a third-party beneficiary and could sue in its own behalf.[FN1]

The Court also rejected Richmond's second defense that the settlement agreements were "invalid and unenforceable" because they were not signed by Performance and that, as a suspended corporation, it lacked capacity to contract. The Court held that Richmond had accepted money under the agreement, resulting in an executed agreement. Further, the settlement agreements were merely voidable and not void simply because one party was a suspended corporation. Finally, Richmond had not asked a court to declare the agreements void, nor had it agreed to return the money paid by Performance under the agreements. With that, the Court reversed the trial court's dismissal of the action as to the settlement agreements.

The interplay of the rights and obligations of insurers as to suspended corporations is one that continues to develop in California case law. As this case shows, however, suspended corporations' insurers may be third-party beneficiaries of settlements entered into by its insureds and may be entitled to enforce them. By the same token, the agreements could be enforced against them. To avoid enforcement problems regarding settlements of claims against suspended corporations, insurers therefore may wish to make themselves a party to the settlement agreement.

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FN1 As an aside, it is important and interesting that in reviewing a ruling on a demurrer, the Court of Appeal took judicial notice of settlement agreements that were not attached to the complaint or portions of the agreement not alleged in the complaint, stating "there is and can be no factual dispute concerning the contents of the agreements."

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