ORDER GRANTING DEFENDANT'S MOTION FOR PARTIAL SUMMARY JUDGMENT (Docket No. 21)

EDWARD M. CHEN, District Judge.

Plaintiff Todd Gelfand, trustee of the Reata Trust ("Reata"), brought a state-court action (later removed to this Court) to confirm an arbitration award issued against Paragon, the contractor who built Reata's residence. The state court confirmed the arbitration award. In the case at bar, Reata sues Northern American Capacity Insurance Company ("NAC"), the contractor's insurer, to recover the full amount of the judgment against Paragon. Currently pending before the Court is NAC's motion for partial summary judgment. The key issue is whether Reata can recover directly from NAC that portion of the judgment consisting of attorney's fees and costs awarded against Paragon, the insured.

Having considered the parties' briefs and accompanying submissions, as well as the argument of counsel, the Court hereby GRANTS Defendant NAC's motion for partial summary judgment.

I. FACTUAL & PROCEDURAL BACKGROUND

Paragon General Contractors & Cabinetmakers, Inc. ("Paragon") constructed a luxury home in Half Moon Bay owned by Reata. See Docket No. 21-3 (Decl. of A. Carl Yaeckel ("Yaeckel Decl."), Ex. 1) (Complaint ("Compl.") ¶ 1). Later, alleging construction defects, Reata sued Paragon in arbitration in 2001. Id. ¶ 28.

NAC issued a commercial general liability insurance policy ("Policy") to Paragon. Id. ¶14. NAC retained counsel to defend Paragon in arbitration. See Docket No. 21-3 (Yaeckel Decl., Ex. 1) (Compl. ¶ 29). During arbitration, Paragon filed for Chapter 7 bankruptcy. See id. ¶ 32.

In December 2010, the arbitrator awarded Reata $1,390,774.19,1 which included an award of $585,404.27 in attorney's fees and $35,767.21 in costs. Id. at ¶ 6. Reata petitioned to confirm the award in state court. See Docket No. 22-2 (Heimberger Decl. ¶ 21). The state court confirmed the award, see Docket No. 22-2 (Heimberger Decl., Ex. I) (Order Confirming Award), and entered judgment for Reata, see Docket No. 22-2 (Heimberger Decl., Ex. J) (Judgment Confirming Award). Shortly after entering judgment, the state court awarded Reata $25,000 in additional attorney's fees2 and $2,080 in costs expended to confirm the award. In January 2013, NAC paid Reata $210,687 in partial satisfaction of the judgment relating to some of the property damage alleged by Reata. See Docket No. 22-17 (Heimberger Decl., Ex. O).

In August 2012, Reata brought the current action against NAC to recover fees and costs awarded by the state court judgment which confirmed the arbitration award. See Docket No. 21-3 (Yaeckel Decl., Ex. 1) (Compl. ¶ 7, at pg. JNI00013). Reata's complaint asserts three causes of action: (1) "Direct Action of Judgment Creditor Pursuant to Cal. Ins. Code § 11580"; (2) "Breach of Insurance Contract"; and (3) "Breach of the Implied Covenant of Good Faith and Fair Dealing." See id. at ¶¶ 58, 70, and 76.

NAC removed to federal court based on diversity. Currently before the Court is NAC motion for partial summary judgment. The issue is whether Reata, a third-party judgment creditor of the insured, may enforce directly against NAC that portion of the underlying judgment awarding attorney's fees and costs against the insured.

II. DISCUSSION

A. Legal Standard

Federal Rule of Civil Procedure 56(c) provides that summary judgment shall be rendered "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c). An issue of fact is genuine only if there is sufficient evidence for a reasonable jury to find for the nonmoving party. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248-49 (1986). "The mere existence of a scintilla of evidence . . . will be insufficient; there must be evidence on which the jury could reasonably find for the [nonmoving party]." Id. at 252. At the summary judgment stage, evidence must be viewed in the light most favorable to the nonmoving party and all justifiable inferences are to be drawn in the nonmovant's favor. See id. at 255.

In the current case, NAC, a defendant, has moved for partial summary judgment on the issue of whether Reata, a third-party judgment creditor, may recover a portion of the underlying judgment consisting of attorney's fees and costs awarded in arbitration below. Because Reata has the ultimate burden of proof, NAC may prevail on its motion for summary judgment simply by pointing to Reata's failure "to make a showing sufficient to establish the existence of an element essential to [its] case." Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986).

B. Calif. Ins. Code Section 11580

Reata did not obtain an assignment from Paragon of any claim for indemnification against NAC. Instead, Reata's suit against NAC to recover on the judgment against Paragon is predicated solely upon Calif. Ins. Code Section 11580. That section provides that an insurance policy must contain a provision (among others) allowing third-party judgment creditors, under certain circumstances, to recover on a judgment against the insured directly from the insurer:

Calif. Insurance Code Section 11580(b)(2). See Croskey, et al., Cal. Practice Guide: Insurance Litigation, ¶ 15:1028, p. 15-177.

For Reata to recover directly from NAC under Section 11580, the amount of the underlying judgment against Paragon, including the award of attorney's fees and costs, Reata must establish both: (a) that the award against Paragon is covered under the terms of the policy issued by NAC; and (b) Reata, as a third-party judgment creditor, may enforce the policy term at issue as a third-party beneficiary thereto. See Clark v. CIGA, 200 Cal.App.4th 391 (2011); San Diego Hous. Comm'n. v. Indus. Indem. Co., 95 Cal.App.4th 669 (2002).

C. Coverage

NAC contends that fees and costs are covered by the NAC policy, if at all, only as either: (a) "damages" under the Insuring Clause; or (b) "costs" under the Supplementary Payments Provision ("SPP"). Reata responds that the No Action Clause instead constitutes the relevant coverage provision. The Court finds the award of fees and costs in the arbitration constitute "costs" under the SPP.

1. Damages

The Insuring Clause provides:

See Docket No. 21-3 (Yaeckel Decl., Ex. 1) (Ex. A to Compl. at JNI00046).

The definition of "damage" under the policy is inapposite. Under the policy, "Damage means the estimated money equivalent for loss or injury sustained." Id. at JNI00053. Attorney's fees and costs simply do not fall within the scope of "loss or injury sustained," an expression that envisions loss to the insured arising from bodily injury or property loss.

In interpreting a similar insurance provision, the Court in Prichard v. Liberty Mut. Ins. Co. found that awarded attorney's fees was "inconsistent with the concept of damages." 84 Cal.App.4th 890, 912 (citing Cutler-Orosi Unified Sch. Dist. v. Tulare Cnty. Sch. etc. Auth., 31 Cal.App.4th 617, 631 [1994]); San Diego Hous. Comm'n. v. Indus. Indem. Co., 95 Cal.App.4th 669 (2002); Combs v. State Farm Fire & Cas. Co., 143 Cal.App.4th 1338, 1345 (2006). See AIU Ins. Co. v. Super. Ct., 51 Cal.3d 807, 826-27 (1990). See also Croskey, et al., Cal. Practice Guide: Insurance Litigation, ¶ 7:160.4, p. 7A-77 (Rutter Group 2012) ("fee awards are not `damages' under a CGL policy").

Reata cites APL Co. Pte. Ltd. v. Valley Forge Ins. Co., 754 F.Supp.2d 1084 (N.D. Cal. 2010) as holding to the contrary. The Court disagrees. In APL, the court interpreted the insurance policy as obligating the insurer to pay for attorney's fees awarded to a third-party judgment creditor in the underlying litigation. The court noted the policy obligated the insurer to "pay as damages because of `bodily injury,' `property damage,' `personal injury,' or `advertising injury' . . . ." [citations omitted], id. at 1094, and construed damages as encompassing compensation in money recovered for loss or detriment, including "remunerative payment made to an aggrieved party." Id. Critical to its determination that a fee award was covered as damages under the policy was that the English rule (wherein the losing party pays fees) applied to the case. Id. By contrast, the current case is not governed by the English rule. In the absence of such rule, the California state court cases cited above, rather than APL, applies. Accordingly, attorney's fees and costs awarded in the underlying case are not "damages" within the meaning of the NAC insurance policy.

2. Supplementary Payments Provision

Instead, the award of fees and costs in the underlying case constitute "costs" under the SPP. The Insuring Clause, in relevant part, provides:

And, the Supplementary Payments Provision provides:

The California courts have held that attorney's fees and costs awarded to a third-party claimant against the insured are covered as "costs" under insurance policies comparable to the policy and the SPP clause. See Ins. Co. of N. Am. v. Nat'l Am. Ins. Co., costs are statutorily defined. See Ins. Co. of N. Am. v. Nat'l Am. Ins. Co., 37 Cal.App.4th 195, 206-207 (1995); San Diego Housing Comm'n, supra, 95 Cal. App. 4th at 684 (2002); see also Clark, supra, 200 Cal. App. 4th at 398 (quoting San Diego Housing, 95 Cal. App. 4th at 685 (2002)); California Civil Code Section 1033.5(a)(10) ("Attorney's fees when authorized by any of the following: (A) contract, (B) statute, or (C) law").

3. No Action Clause

Reata argues that the No Action Clause, when interpreted along with other provisions, provides coverage of the entire judgment, including attorney's fees and costs, and affords Reata the right to sue NAC therefor. The No Action Clause provides:

See Docket No. 21-3 (Yaeckel Decl., Ex. 1) (Ex. A to Compl. at JNI00051). In essence, Reata contends that since there is a judgment entered against Paragon, this clause permits Reata to sue NAC to recover the entire amount of the judgment.

The Court disagrees. The No Action Clause does not adjust the substantive scope of coverage, nor does it create affirmative rights in third-party judgment creditors. Instead, by its plain terms, the No Action Clause is only a procedural limitation on any suit against NAC brought by third parties. This is clear from the first sentence: "No person or organization has a right under this Coverage Part: [t]o sue [NAC] on this Coverage Part unless all of its terms have been fully complied with." The relevant condition that must be satisfied is that a final judgment has been rendered. See Croskey, et al., Cal. Practice Guide: Insurance Litigation, Ch. 15-K, ¶ 15:1037, p. 15-179 (Rutter Group 2012) ("`no action' clauses typically require a `final judgment' or that the insured's obligation shall have been `finally determined'"). The mere fact of a judgment in the underlying case does not confer coverage.

D. Third-Party Beneficiary

Once coverage is determined to exist, the only remaining issue is whether the third-party judgment creditor may enforce coverage; to do so, it must be deemed a third-party beneficiary to the insurance policy provision at issue under San Diego Housing and Clark.

In San Diego Housing, plaintiff brought a construction defect action against a general contractor. Plaintiff proceeded against the insurer under Section 11580 to recover on a default judgment, including an award of attorney's fees and costs. The trial court held that plaintiff could recover on the entire judgment, including costs covered by the Supplementary Payments Provision, despite its status as a third-party beneficiary of the insurance policy. See San Diego Housing, 95 Cal. App. 4th at 677. The Court of Appeal modified the award to exclude amounts that were covered by the Supplementary Payments Provision. The Court of Appeal reasoned that Section 11580 creates a beneficiary relationship between the judgment creditor and the insurer, but only as to those policy terms created for his benefit. Id. at 691-92. The court then reasoned that costs covered by the Supplementary Payments Provision were "clearly linked" to the insurer's duty to defend (in contrast to the insurer's duty to indemnify) the insured. Id. at 691. The court concluded that the third-party judgment creditor is only an "incidental beneficiary" of the duty to defend. Id. at 692 (citing Harper v. Wasau Ins. Co., 56 Cal.App.4th 1079, 1089 (1997)). As such, the judgment creditor was not an intended third-party beneficiary of the duty to defend and thus cannot recover on the fee award of fees and costs which are covered solely under that duty. Accordingly, the creditor could not sue the insurer under Section 11580 for fees and costs.

Similarly, in Clark, the plaintiff obtained a personal-injury judgment against an insured. Because the insurer had dissolved, the California Insurance Guarantee Association ("CIGA") issued a check in partial satisfaction of the judgment. Plaintiff then brought an action under Section 11580 to recover the deficiency. The trial court held that a third-party judgment creditor may not enforce an award of costs and interest in a direct action against an insurer under Section 11580, absent an assignment of that right to the third-party judgment creditor. See Clark, supra, 200 Cal. App. 4th at 394. Accordingly, the trial court granted summary judgment for CIGA. The Court of Appeal affirmed, concluding that since a judgment creditor is only an "incidental beneficiary" and not a third-party beneficiary of the Supplementary Payments Provision, costs and interest awarded on a judgment are not recoverable under Section 11580. See id. at 397-98. The court cited San Diego Housing in support of its holding.

This Court is unaware of binding or persuasive authority that has disapproved of either San Diego Housing or Clark. A number of courts have relied on their reasoning in unpublished opinions.3 See e.g., Sensation Leather, Inc. v. CIGA, No. BC203086, 2008 WL 5050436, *4 (Cal. App. 2d Dist. 2008) (affirming denial of interest on judgment awarded to third-party judgment creditor); Garamendi v. Golden Eagle Ins. Co., No. A102489, 2004 WL 1814163, *7 (Cal. App. 1st Dist. 2004) (reversing trial-court order forcing insurer to accept indemnity claim made by third-party judgment credit because claimant had no recourse without an assignment); Martinez v. Lincoln Gen. Ins. Co., No. 07-CV-7569 (MLR), 2009 WL 6337983, *5 (C.D. Cal. Aug. 27, 2009), rev'd on other grounds, 417 Fed. Appx. 711 (9th Cir. 2011) (unpublished). See Croskey, et al., Cal. Practice Guide: Insurance Litigation, Ch. 15-K, ¶ 15:1042, pg. 15-181 (Rutter Group 2012) (notwithstanding Section 11580, judgment creditor may not recover costs under the supplementary payments provision).

Key to the holdings of San Diego Housing and Clark is the notion that an insurer's duty to pay "costs" under the Supplementary Payments Provision is "clearly linked" to an insurer's duty to defend, under which a third-party judgment creditor is only an incidental beneficiary, as opposed to its duty to indemnify, under which it is the intended beneficiary. In Prichard, for example, the court interpreted policy language nearly identical to portions of the Supplementary Payments Provision at issue here as relating to the insurer's duty to defend (and not its duty to indemnify):

Prichard, 84 Cal. App. 4th at 911. In particular, the court noted: "As the italicized words indicate [(i.e., "we defend")], the supplementary payments provision providing `costs taxed' is a function of the insurer's defense obligation, not is indemnity obligation." Id. Similarly, Justice Croskey of the Second Appellate District noted that the words "in suits we defend" is typically interpreted to mean "the insurer's obligation to pay an award of costs against the insured [is] dependent on the defense duty." State Farm Gen. Ins. Co. v. Mintarsih, 175 Cal.App.4th 274, 285-85 (2009).

To be sure, the Court recognizes an argument that an insurer's duty to pay fees and costs under the Supplementary Payments Provision, once incorporated into a final judgment against the insured, seems akin to the duty to indemnify. "[P]roviding a defense is hardly the same as indemnifying the insured for the other party's costs and attorney fees that the insured becomes obligated to pay only as the result of being found liable for the underlying misconduct." Combs v. State Farm Fire & Cas. Co., 13 Cal.App.4th 1338, 1345-46 (2008). However, the California courts that have addressed the precise issue at bar, Prichard, San Diego Housing, and Clark, have consistently held against the third-party creditors on this question. The Court is obliged to follow these cases as the best indicators of how the California Supreme Court would rule. Therefore, given the current state of California law, as articulated by San Diego Housing and Clark, Reata, as the third-party judgment creditor, may not recover directly from NAC fees and costs covered solely under the policy's SPP.

Reata argues that nonetheless, as a factual matter, the parties intended it as a third-party beneficiary in this case. However, the determinations in San Diego Housing and Clark relevant to NAC's motion for summary judgment here — that (a) "costs" under the SPP are linked to the duty to defend, and (b) a third-party judgment creditor is only an incidental beneficiary of that duty — appear to have been resolved as questions of law. Moreover, even if either determination were a question of fact, Plaintiff has adduced no material facts distinguishing the policy at issue here from the supplementary payments provision at issue in San Diego Housing. In particular, Plaintiff has not offered evidence probative on the issue of whether the parties, at the time of formation, intended third-party judgment creditors, like itself, to be the intended beneficiaries of the SPP.4

III. CONCLUSION

For the foregoing reasons, the Court grants Defendant's motion for partial summary judgment. More specifically, the Court concludes that, absent an assignment from the insured, Plaintiff may not enforce directly against NAC the award of attorney's fees and costs against Paragon.

This order disposes of Docket No. 21.

IT IS SO ORDERED.