Desoto Cab Company v. Texas Insurance Company, et al.

Background

Desoto Cab Company brought claims for breach of contract, breach of the implied promise of good faith and fair dealing, and fraudulent concealment against the insurance defendants. The dispute arose from an underlying personal-injury lawsuit after a Desoto driver collided with Carissa Copeland. Desoto had a $1 million business-auto liability policy issued by Onyx Insurance Company, which Texas Insurance Company succeeded. The insurers retained Hinshaw & Culbertson LLP and Bradley Zamczyk to defend Desoto.

Copeland offered to settle for $749,999 under California Code of Civil Procedure section 998. The insurers rejected the offer. After trial, judgment was entered against Desoto for $10,855,221.24 plus interest. The insurers appealed and posted a $6 million bond, which Copeland received toward the judgment. The appeal was affirmed in January 2024. Desoto alleged that about $7.8 million remained unpaid and that it faced collection efforts and possible bankruptcy.

Texas Insurance later sued Hinshaw and Zamczyk for legal malpractice in state court, seeking the amount of the Copeland judgment as damages. Desoto’s fraudulent-concealment claim in this federal case alleged that the insurers failed to disclose facts about defense counsel’s competence, the insurers’ knowledge of alleged malpractice, their control of Desoto’s defense, and their post-judgment conclusions about counsel’s performance.

Motions and governing standards

The insurers filed two motions. First, they sought to strike allegations under California’s anti-SLAPP statute. An anti-SLAPP motion is an early request to remove allegations based on protected speech or petitioning activity, including participation in litigation. Second, they moved under Federal Rule of Civil Procedure 12(b)(6) to dismiss the concealment claim for failure to plead a duty to disclose, concealment, fraudulent intent, and fraud with the particularity required by Rule 9(b).

For the anti-SLAPP motion, the court examined whether the challenged allegations arose from protected petitioning activity and, if so, whether Desoto showed a legally sufficient claim with a probability of prevailing. The court also considered California’s litigation privilege, which generally bars tort liability based on qualifying communications in judicial proceedings.

For the concealment claim, the court applied the pleading rules requiring a plausible claim and particular allegations of fraud. Under California law, fraudulent concealment requires a concealed material fact, a duty to disclose, an intent to defraud, the plaintiff’s lack of awareness and likely different action if informed, and resulting damage.

Anti-SLAPP ruling

The court held that allegations based on filing and prosecuting the Hinshaw malpractice action, asserting a damages theory in that action, and opposing Desoto’s efforts to intervene or obtain a stay arose from protected petitioning activity. The court also held that the litigation privilege barred tort theories based on those litigation communications and positions. The court concluded that the insurance policy did not plausibly prohibit Texas Insurance from filing its malpractice action, asserting its damages theory, or opposing intervention or a stay.

The court distinguished allegations concerning the insurers’ handling of the insurance claim, including the alleged refusal to pay the excess judgment and decisions that allegedly increased Desoto’s exposure and interest burden. Those allegations were based on claims-handling conduct rather than the contents of appellate filings. The court therefore denied the motion as to the subparts identified in its analysis as paragraphs 49(D) and 54(R).

Overall, the court granted the motion to strike in part. It stated in its conclusion that paragraphs 30, 49(B)–(D), 49(H), 54(P)–(Q), and 54(U) were struck. The court said Desoto could continue to use the insurers’ litigation conduct as evidence supporting unprotected claims-handling theories, subject to the rules of evidence. The court also stated that the legally defective allegations could not be amended to serve as independent bases for liability, damages, or other relief.

Because the insurers prevailed in part on the special motion to strike, the court stated that they were entitled to seek attorney’s fees and costs attributable to the successful portions. The court denied Desoto’s request for fees because the motion was supported by authority and was not frivolous.

Motion to dismiss ruling

After removing the litigation-based allegations from consideration, the court held that Desoto plausibly alleged concealment based on four remaining categories: the insurers allegedly appointed counsel unable to provide a competent defense; allegedly learned during the Copeland action that counsel had committed correctable malpractice; allegedly abused control over Desoto’s defense; and allegedly concluded after judgment that counsel had breached the standard of care.

The court held that an insurer may have a duty to disclose information it controls when the insured lacks access to the information and may lose benefits or legal rights without it. It relied in part on California Insurance Code section 332 and the insurer-insured relationship. The court found that Desoto plausibly alleged that the insurers knew about defense failures while Desoto could still protect itself.

The court rejected the argument that the public nature of the later malpractice lawsuit defeated the claim. Later public disclosure would not substitute for disclosure when Desoto allegedly could have acted to protect its interests. The court also held that intent could be alleged generally and that Desoto had alleged a possible motive, material information withheld, a relevant time period, a person with authority, the recipient of the omissions, and how Desoto would have acted if informed.

The motion to dismiss the concealment claim was denied. The court noted that factual disputes about what information was accessible and what the insurers knew could not be resolved at the pleading stage.