NOTE: THE SUPREME COURT ACCEPTED REVIEW AND AFFIRMED THIS OPINION

The court tells us that this is an original issue about the substitution of real parties in interest under Rule 17(a).

Preston, while in bankruptcy, died in Kindred Hospital. His sisters sued it for malpractice. The hospital moved to dismiss, arguing that the bankruptcy trustee owned the claim. The sisters admitted this and moved under Rule 17(a) to join or substitute the trustee as plaintiff.

That rule says that “no action shall be dismissed on the ground that it is not prosecuted in the name of the real party interest until a reasonable time has been allowed after objection for . . . joinder or substitution of the real party in interest.” But the trial court granted the dismissal, reasoning that the rule must refer to situations is which the real party in interest is, basically, unknown or uncertain. That is the gloss that the federal rule has acquired and it is what a State Bar Committee note, parroting the corresponding federal note, suggests.

The Court of Appeals reverses. It says that this is an issue of first impression. What it apparently means is that 17(a) has never been brought up on these exact facts, for it then goes on to cite, among others, its own earlier case holding – in a case where the real-party-in-interest wasn’t unknown or uncertain – that the trial court can’t immediately dismiss without allowing time for joinder or substitution. The case suggested that prejudice might be a factor but that wasn’t argued here so the court “declines to consider” whether it is or not.

We’ve waited for a case like this. We knew one had to come. The practice of making, printing, and paying any attention to State Bar Committee notes is a lousy idea. The notion that the committee members are experts on a particular rule or subject matter – or, for that matter, on any – is a flattering myth; as here, they’re as often as not cribbing from another source, one that might or might not itself have been more knowledgeable than they and one that they might or might not have given much consideration to. And to the extent that they make a substantive, original contribution, they shouldn’t. The language required to understand what the rule means belongs in the rule. The rest belongs in the rulings; judges should tell us what rules mean, not anonymous nobodies trying to steer the law in one direction or another. (Yes, we’re anonymous, and you can assume that we’re nobodies, but we’re not trying to make law or decide your case.) As for strictly factual/historical matters, lawyers and judges can read; whether a 1970 rule was intended to change, or not, the result of a 1966 opinion they can figure out by seeing that the later rule differs, or not, from the earlier case.

Why are the notes made? Because they’re printed. And why are they printed? Mostly to stroke the egos of the committee members. Have you ever met a member of a Bar committee (other than yourself, of course) whose ego needed to be stroked? Most need to be tied up in a box and kept in a cool, dark place.

(link to opinion)

This case holds that failure to give proper notice of default renders default judgment void.

Ruiz sued Lopez and served her at work. When she didn’t file an Answer he filed for default; he sent copies of the default paperwork to the large apartment complex where she lived without including the apartment number on the envelope. She moved to set aside the resulting default and default judgment. Lopez argued that Ruiz should have sent mail to her work address, which he knew, and that in any event there was excusable neglect. Ruiz’ argued that he didn’t know the right apartment number but that the letter carrier or apartment manager would deliver it anyway and that the letter wasn’t returned to him as undeliverable. The trial court granted the motion, although it found no excusable neglect. Ruiz appealed; this opinion affirms.

Rule 55(a)(1)(i) says that a copy of the application for default must be mailed to the defaulting party if his “whereabouts” are known. The court concludes that “whereabouts” means the particular place were the party can be found, not the general area. Ruiz knew where that was – Lopez’ workplace – but sent it to an area instead. Moreover, “mailed” implies a proper mailing address, which includes the apartment number according to a New York case discussing postal requirements. A party, the court said, should give the “best notice practicable” – in this case, to the workplace.

Ruiz argued that the judgment was voidable, not void, and that Lopez could therefore obtain relief only under Rule 60(c)(1) (excusable neglect). But the court holds that because notice was insufficient the default was of no effect and the default judgment was void. The trial court was therefore required to set it aside under Rule 60(c)(4).

(link to opinion)

[THIS OPINION HAS BEEN AFFIRMED]

A long opinion about general liability insurance, telling you things we rather imagine you never knew.

Desert Mountain developed and sold some houses in Scottsdale. When the buyers complained of soil and other problems, Desert Mountain paid $200,000 per house, on average, to fix them. It then sought to recover the money from Liberty Mutual, its CGL carrier. Liberty Mutual denied the claim. Desert Mountain sued for breach of contract and bad faith.

The trial court granted Liberty Mutual summary judgment on bad faith.  It ruled that Desert Mountain could not recover the cost of repairing poorly-compacted soil, since that wasn’t an “occurrence,” but could recover the cost of repairing damage caused by the poorly-compacted soil. It also ruled that Desert Mountain couldn’t “mark up” the costs incurred, i.e., build in additional amounts to cover its employee’s time. The contract claim went to trial; Desert Mountain won; Liberty Mutual appealed.

The insurance promised to pay sums Desert Mutual was “legally obligated to pay as damages.” Liberty Mutual argued, first, that Desert Mountain hadn’t been legally obligated to the homeowners since they hadn’t sued it. The carrier relied on California law, which is that “legally obligated” means legally obligated by a court. But this opinion disagrees, holding that courts enforce legal obligations but are not needed to create them.  And “damages,” according to the opinion, are monies paid for a loss, not simply amounts awarded by a court. Liberty Mutual didn’t argue that the homeowners’ claims had no merit nor that the amounts Desert Mountain paid were excessive, so Desert Mountain was entitled to recover.

But Liberty Mutual also argued that the damage to the houses was, under the economic-loss rule, recoverable only in a contract action and that insurance policies cover tort, not contract, claims. The court, however, was “reluctant” to hold that a CGL policy can’t cover contract damages because it does not expressly and flatly bar all contract claims. Being “reluctant” to do something is an unforthright way of doing the opposite: “Instead, we hold that the ‘proper inquiry is whether an ‘occurrence’ has caused ‘property damage.’”

An endorsement to the policy denied coverage for damage to property not owned or rented by the insured, “the restoration, repair, or, replacement of which has been made or is necessary by reason of faulty workmanship thereon by or on behalf of the insured.” This, the court says, applies to the repair of defective workmanship and not to the repair of damage caused by defective workmanship to non-faulty property. In other words, the houses were perfectly fine, it was only the soil that was faulty, so fixing the soil isn’t covered but fixing the homes is. (We wonder how many homeowners in all those faulty-soil cases consider, and allege, that their houses are just peachy, thanks, its just that pesky soil that’s the problem.)

The policy also said, as all such policies do, that it doesn’t cover payments made voluntarily and without the insurer’s consent. The court held that the provision only applies if the insurer is prejudiced and that a jury could reasonably have concluded that Liberty Mutual wasn’t.

Liberty Mutual argued that Desert Mountain knew of the problems with the houses before it bought the policy. In that case, an exclusion would apply. Desert Mountain’s people testified that its prior knowledge was only of a few, minor problems, not of anything widespread, and that those minor problems had been fixed. Liberty Mutual’s expert apparently agreed. In any event, there was sufficient evidence for a jury to find that Desert Mountain didn’t have prior knowledge.

Liberty Mutual also complained about some jury instructions, about some fact-specific issues, and about the award of attorneys fees, which are of no real importance unless your name is Desert Mountain or Liberty Mutual. We do wonder, though, how it is that the court instructed the jury on what the coverage was, turning a question of fact into a matter of law.

Desert Mountain cross-appealed.

First, it contested the trial court’s ruling that it couldn’t recover the cost of repairing the soil because some of that cost resulted from having to rip up perfectly good walls or floors. The Court of Appeals concluded that this was part of repairing the defect and that the trial court was therefore right in not allowing it.

Next, Desert Mountain contended that Liberty Mutual wasn’t entitled to summary judgment on bad faith. The court, for factual reasons, disagreed.

Finally, Desert Mountain argued about the mark-up damages. But the policy did not specifically allow them. In addition, its mark-up did not reflect the actual value of the employee’s time, so the jury couldn’t have awarded it anyway.

The important part of all this is that liability polices now cover claims never made and that would have been contract claims if they had been made, courtesy of some hair-splitting sophistry of the sort we thought Arizona courts were now trying to discourage.

(link to opinion)