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SPENCER Y. KOOK (SBN 205304)
skook@hinshawlaw.com
KENT R. KELLER (SBN 043463)
kkeller@hinshawlaw.com
HINSHAW & CULBERTSON LLP
633 West Sth Street, 47th Floor
Los Angeles, CA 90071-2043
Telephone:
Facsimile:
213-680-2800
213-614-7399
TRAVIS WALL (SBN 191662)
twall@hinshawlaw.com
HINSHAW & CULBERTSON LLP
One California Street, 18th Floor
San Francisco, CA 94111
Telephone:
Facsimile:
415-362-6000
415-834-9070
Attorneys for Defendants and Cross-Complainants
ELECTRONICALLY
FILED
Superior Court of California,
County of San Francisco
07/09/2018
Clerk of the Court
BY: VANESSA WU
Deputy Clerk
SUPERIOR COURT OF THE STATE OF CALIFORNIA
FOR THE COUNTY OF SAN FRANCISCO
UNLIMITED JURISDICTION
WARWICK AMUSEMENTS CORPORATION, et
al.,
vs.
Plaintiffs,
APPLIED UNDERWRITERS, INC., et al.,
And related cross-action
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Case No. CGC-16-551614
DEFENDANTS’ AND CROSS-
COMPLAINANTS’ RESPONSE TO
PLAINTIFFS’ POST-TRIAL BRIEF
First Amended Complaint Filed:
May 19, 2016
Date: May 21, 2018
Time: 9:30 a.m.
Dept: 306, Judge Richard B. Ulmer, Jr.
DEFENDANTS’ AND CROSS-COMPLAINANTS’ RESPONSE TO PLAINTIFFS’ POST-TRIAL
BRIEF
Case No. CGC-16-551614I.
TT.
TABLE OF CONTENTS
Page(s)
INTRODUCTION 0... c.cecscesesseeseesessessssessseesessussessneesesusssssssesesanssessuseussneenesscsserseesscaaresseenenensenes 1
LEGAL ANALYSIS.....cccccccessessessseeesnessessseseeeserssnesessssesssneasecsessesnserssisssriteresassrasseesesneseeesnrss 1
A. Plaintiffs Have Failed To Satisfy Their Burden of Rebutting the Statutory
Presumption of Joint and Several Liability... esc eee eeeeeeeseeseeseeeeeneenesseneeees 1
B. Plaintiffs Do Not Pursue and, Therefore, Have Abandoned Their Insurance
Bad Faith, UCL, Conversion and Declaratory Relief Claims.............ccesceseeeeeeeneees 5
C. Plaintiffs Have Not Proven a Breach of Contract .......c.scccssssssesseessseressessssesseeseerseseenees 5
1. Plaintiffs Have not Established Any of the Elements for a Breach of
Contract.
2. Plaintiffs May not Rely upon Alleged “Ambiguities” to Rewrite the
RPA to Insert New Provisions to which the Parties Never Agreed........0.... 6
D. Plaintiffs are Not Entitled to a Rescission Remedy ............ccecssecesesesressseesesnsseeeesesnese 8
Plaintiffs have Not Proven Fraud or Negligent Misrepresentation.........0.ccccseeeceees 9
F. Plaintiffs Have Waived Their Illegality Arguments, and, In Any Event, the
RPA is Enforceable ........cccscccssecssecssecssesssecssesssesssesasecesecssessseesusessseseeessreseesssesseesssesseessy 10
1. Unfiled Workers’ Compensation Rates are Legal and Enforceable ............... ll
2. The RPA’s Rates Would be Enforceable Even If One Were to Assume
that the RPA is [legal ccc ese eeresesscsessesesesnsseeressssecsesseseseensseeeseeaes 14
G. Plaintiffs are Not Entitled to Attorney Fees... .ccsceseceeeeceseseeseeceseneeeeenenies 15
CONCLUSION. .....cccccssssssssssscssessssssessssesssssansesssesssnescssssssscesssseceassssssesssssssassessssescsnssensennananoes 15
DEFENDANTS’ AND CROSS-COMPLAINANTS’ RESPONSE TO PLAINTIFFS’ POST-TRIAL
BRIEF
Case No. CGC-16-551614TABLE OF AUTHORITIES
Page(s)
Cases
Akin v. Certain Underwriters at Lloyd's London,
140 Cal. App. 4th 291 (2006) ...ssscsssssssessssssssssssessesssessssssesnsesesssesusranseseseeseesesenvavasenereseeseeee 1,8
Am. Home Ins. Co. v. Travelers Indem. Co.,
122 Cal. App. 3d 951 (1981)
Asdourian v. Araj,
38 Cal. 3d 276 (1985) w.eeeccececessseessessesssesssseeseesessecessssesseesesssesssesesessessessneenssnessessiesscasesesessecsetens 14
Barry v. OC Residential Properties,
LLC, 194 Cal. App. 4th 861 (2011)
California Physicians’ Service v. Aoki Diabetes Research Institute,
163 Cal. App. 4th 1506 (2008)
Chapman vy. Skype Inc.,
220 Cal. App. 4th 217 (2013) ..cceccesssecsseesssesssessesssssesssesssesssecssesssecssecssecssscssessaesssessesenseevesevese 9
Dep't of Corr. & Rehab. v. State Pers. Bd.,
247 Cal. App. 4th 700 (2016) ...
Forbes v. Board of Missions,
17 Cal. 2d 332 (1941) .eeccecseesseessseesesssecssesssecssesssecsseessecssecssecssecssessssseceseseseteuereserssecssensseesaseseen 3
Interinsurance Exch. of Auto. Club v. Sup. C1
148 Cal. App. 4th 1218 (2007)
Jolley v. Chase Home Fin., LLC,
213 Cal. App. 4th 872 (2013) ceccccsssssscsssssssussssseesvesssssnunsnsseesassseenunseatensssensensesarseneasessene 8
Joshua Tree Townsite Co. v. Joshua Tree Land Co.,
100 Cal. App. 2d 590 (1950)
Kaneko v. Okuda,
195 Cal. App. 2d 217 (1961) -.cecssecssecssecssesssecssecssecssesssessssessesssssssessiserssesesesessseeeseessensseesneessan 3,4
M. Arthur Gensler, Jr. & A.
7 Cal. 3d 695 (1972)
McIntosh y. Mills,
121 Cal. App. 4th 333 (2004) ..cccccssssssessssssessssssesssssesssessssssssuessesssssssnastesaseseseanssseenuensee 14
Olson v. Cohen,
106 Cal. App. 4th 1209 (2003)
DEFENDANTS’ AND CROSS-COMPLAINANTS’ RESPONSE TO PLAINTIFFS’ POST-TRIAL
BRIEF
Case No. CGC-16-551614Paularena v. Sup. Ct.,
231 Cal. App. 2d 906 (1905) .ecccecsseesseesseesseessessseessecesecssesssesssecsserssecssessueessessusesssssurerseeeeesesesesees 1
Richman v. Hartley,
224 Cal. App. 4th 1182 (2014) ..eeceesceeseessecsseesseesseesseessessseesseessecssesssessssssusssessisssecsseseuessueesvess 5
Saret-Cook v. Gilbert, Kelly, Crowley & Jennet,
74 Cal. App. 4th 1211 (1999) .occesseesseesseesseessersseesseessessiesseessesssrsssesseeseesessmesessessiesseessessee 8
Shasta Linen Supply, Inc. v. Applied Underwriters, Inc.,
No. CV 2:16-158 WBS AC, 2016 U.S. Dist. LEXIS 82850 (E.D. Cal. June 20, 2016) ......... 12
Shasta Linen Supply, Inc. v. Applied Underwriters, Inc.,
No. CV 2:16-158 WBS AC, 2016 U.S. Dist. LEXIS 143545 (ED. Cal. Oct. 17, 2016)......... 13
Shopoff & Cavallo LLP vy. Hyon,
167 Cal. App. 4th 1489 (2008) oo... cecceecseesseesseesseesssesssesseessseeseeesarsserssesssssnsssesesessvessveesneesnees® 14
Tenet Healthsystem Desert, Inc. v. Blue Cross of Cal.,
245 Cal. App. 4th 821 (2016)...
Tri-Q, Inc. v. Sta-Hi Corp.,
63 Cal. 2d 199 (1965) .oeecessecssesssesssesssesssesssessssssesssesssesssessseessesesessseessecsseessessesssesssessseeenesneas 14
Statutes
Cal. Civ. Code § 102 L ..eeseesseesessessecsecsnecssesecsessesrmssnnesssessessssssusssuessusesessnesssecsssssecsssssasenasesnae 15
Cal. Civ. Code § 1636
Cal. Civ. Code § 1638
Cal. Civ. Code § 1659... ceccsecceseseesesnssessesescssceeasesuesesssesessesesseassesesaesesasseaeseeaceneseeueneeees 1,2,3
Cal. Civ, Code § 1660.0... cceccssssescsressesssssenssreassnsaeenesssseaesnsaseacsnssesusnessessseneeeeneaseacanerenseneaseneers 1,2
Call. Civ. Code § 1690... eccceccsccccseessesesessseseeeseesssesesescsessseseacaenesesssessueseseaeaeseeeasecaeecaeeteesesseasecase 8
Cal. Civ. Code § 3399.0... cesceesseessecssesssersseesseesseesseesssessessnecseeseesessssessessesssecsserssersseessuessussseesseeese 7,8
Cal. Ins. Code § 381 oo. cececescseceseseensecsesesessscsesceesceessecncecnsnensscaescaesceessessnaucneeensacasaceescarscaeasaeaenas 11
Cal. Ins. Code § 185 Lo.ceccceecessssesnsssssssesssscesesescsesssessscessesssessscssssssessussesssarseseseseneeeearseaeaees 12
Cal. Ins. Code § 1861.05 ..c.cceccssessssscseseenssesserecsesesnsacenesecsesesnsaesussessssesveasssaesusseseenessaeeesnensencansnenee 12
Cal. Ins. Code § 11658 ...cccccseccsesessessssesesesnsscsresesseseersscsnesesesseersssesacssseeresesnseceereseaeengs 10, 13
Cal. Ins. Code § 11730(g) -sseessecssecssesssessseessesssesssesssessessesseesensesssesecssecssesesesssessasssesssessnesssecssersnees 11
Cal. Ins. Code § 11730(j)
DEFENDANTS’ AND CROSS-COMPLAINANTS’ RESPONSE TO PLAINTIFFS’ POST-TRIAL
BRIEF
Case No. CGC-16-551614Cal. Ins. Code § 11737(c).
Cal. Ins, Code § 11737(Q) sssssssssssvssssesesssstssasissanssnisnssnsssesssnssnssnsesssstsinsssssssaseessneet 12
DEFENDANTS’ AND CROSS-COMPLAINANTS’ RESPONSE TO PLAINTIFFS’ POST-TRIAL
BRIEF
Case No. CGC-16-551614I. INTRODUCTION
Plaintiffs’ post-trial brief is consistent only in its inconsistency. Plaintiffs simultaneously
argue that they have the right to rescind the Reinsurance Participation Agreement (“RPA”) but in
fact seek to enforce it and its profit-sharing benefits. California law is clear that “[dJamages may not
be recovered on the theory that the contract exists and additionally on the theory that the contract is
at an end.” Paularena v. Sup. Ct., 231 Cal. App. 2d 906, 915 (1965). In short, “rescission and an
action for breach of contract are alternative remedies. The election of one bars recovery under the
other.” Akin v. Certain Underwriters at Lloyd’s London, 140 Cal. App. 4th 291, 296 (2006).
Plaintiffs’ inconsistency does not end with their rescission and damages claims. After
dedicating five pages in the brief (pages 6 through 10) discussing the purported illegality and
unenforceability of the RPA, as it pertains to the non-California Warwick companies (whose claims
are not at issue in this trial), Plaintiffs do an about face and ask this Court to enforce the “unlawful”
RPA, as modified and amended by them with respect to the California Warwick plaintiffs only. In
short, as Warwick would have it, the RPA is lawful for some of the contracting parties and unlawful
as to others. This disingenuous argument should be summarily rejected.
Cutting through Plaintiffs’ arguments, the following conclusions are clear:
e Plaintiffs are jointly and severally liable for the obligations assumed under the RPA;
e Plaintiffs have abandoned their fraud, conversion and declaratory relief claims, as
well as their claims under California’s Unfair Competition Law;
e Plaintiffs have failed to demonstrate their breach of contract claim;
e Plaintiffs do not and, in fact, cannot seek a rescission remedy;
e Plaintiffs have no right to attorneys’ fees; and
e Plaintiffs have offered no defense to Applied’s breach of contract claim.
Il. LEGAL ANALYSIS
A. Plaintiffs Have Failed To Satisfy Their Burden of Rebutting the Statutory
Presumption of Joint and Several Liability
Plaintiffs do not dispute that the rebuttable presumption of joint and several liability under
Sections 1659 and 1660 of the Civil Code applies with respect to the RPA under the EquityComp®
1
DEFENDANTS’ AND CROSS-COMPLAINANTS’ RESPONSE TO PLAINTIFFS’ POST-TRIAL
BRIEF
Case No. CGC-16-551614Program (the “Program”). [See Plaintiffs’ Brief, pp. 3-5] They cannot. All Warwick! entities
collectively entered into the RPA as a “Participant” in exchange for benefits that inured to each
entity. Pursuant to Sections 1659 and 1660 of the California Civil Code, the obligations of the RPA
are “presumed to be joint and several” for each of the Warwick entities. See Cal. Civ. Code § 1659
(“Where all the parties who unite in a promise receive some benefit from the consideration, whether
past or present, their promise is presumed to be joint and several.”); § 1660 (“A promise, made in the
singular number, but executed by several persons, is presumed to be joint and several.”).”
Instead, Plaintiffs contend that they have satisfied their burden of presenting evidence
sufficient to rebut the presumption that the parties intended the RPA’s obligations to be joint and
several. [Plaintiffs’ Brief, pp. 3-5] In so contending, Plaintiffs cite a single “fact” — that is, that Mr.
Sheh supposedly “said on numerous occasions ... it was Warwick’s intention that each hotel []would
be responsible for and pay their own bills.” [Id., p. 5, Ins. 4-8] This “fact,” however, is unsupported
by the evidence and, in any event, does not rebut the presumption of joint and several liability.
Plaintiffs cite no evidence demonstrating that Mr. Sheh advised Applied on “numerous
occasions” of Warwick’s intent to have each hotel be “responsible for and pay their own bills.” None
of the evidence cited sets forth any actual communication involving Applied, much less ones
reflecting any such communication. Certainly such a purportedly significant issue would have
' Unless otherwise indicated, the term “Warwick” refers to all Warwick entities, including those
outside California.
? Plaintiffs’ attempt to impeach Ms. Gardiner’s testimony concerning Defendants’ limited ability to
sell the Program to “small” accounts [Plaintiffs’ Brief, p. 3, Ins. 3-23] is a red-herring. Regardless of
Defendants’ practices vis-a-vis small accounts, the circumstances surrounding the execution of the
RPA at issue here is only relevant to the joint and several analysis. Further, the testimony by Messrs.
Anthony Will and Paul Moreno do not make untrue the fact that Defendants did not sell the Program
to small accounts at the time the Program was sold to Warwick. For instance, Mr. Will’s testimony
concerned an EquityComp® account entered into in 2008 [0604TR:410:18:411:1; Exh. P-13], five
years prior to the facts at issue here, and, therefore, does not vitiate Ms. Gardiner’s testimony on
Applied’s practices in 2013 of the Program. Also, Mr. Moreno’s testimony concerned a different
product (the SolutionOne® program, not EquityComp®), which was not a profit-sharing program
[0604TR:420:2-5; 422:15-17] and employed an RPA that did not use factors, such as LDFs
{Exh. P-15.] Therefore, any testimony by Mr. Moreno is not probative of Defendants’ practices
concerning the sale of the Program to Warwick in 2013. Finally, testimony by Messrs. Will and
Moreno do not address the fact that the rates and factors used in the RPA would be different if
Warwick was presented as California only entities, which still renders Exhibit P8 as irrelevant.
DEFENDANTS’ AND CROSS-COMPLAINANTS’ RESPONSE TO PLAINTIFFS’ POST-TRIAL
BRIEF
Case No. CGC-16-551614warranted at least one written communication with Applied confirming this understanding.
Furthermore, the assertion that the Warwick entities may have intended to allocate program
charges to each hotel does not rebut the presumption that liability of the Warwick entities vis-a-vis
AUCRA would be joint and several. Those understandings are not contradictory. Affiliated
parties may enter into an agreement in which their promise to a third party is joint and several while,
at the same time, agree internally as to how the costs may be allocated. Indeed, this is presumably
true in nearly every agreement where multiple parties enter into a joint contract for a shared benefit.
As such, an internal agreement among the Warwick entities to allocate costs does not rebut or
negate, in any way, the presumption that they intended obligations under the RPA to be joint and
several. Because this singular “fact” does not rebut the presumption that the parties intended the
RPA’s obligations to be joint and several, the statutory presumption controls. See Kaneko v. Okuda,
195 Cal. App. 2d 217, 227 (1961) (presumption of section 1659 “is rebuttable but controls in the
absence of evidence to the contrary”); Forbes v. Board of Missions, 17 Cal. 2d 332, 338 (1941)
(presumption of section 1659 “must control” where no contrary evidence).
Plaintiffs also ignore the actual facts surrounding Warwick’s execution of the RPA, which
confirm the joint and several presumption. Warwick attempted to obtain separate insurance for each
of its hotels, which might have led to separate “several” obligations amongst the Warwick entities,
but determined that this approach would be “more expensive” than combining the risks together.
{Exh 74, p. 1.] Instead, the Warwick account was presented to Defendants as a national package,
including all hotel operations. [Exh. 111.] The Warwick account was priced based upon the
Warwick entities as a group. [0530TR:134:16-23; 224:23-225:11.] Mr. Sheh executed the RPA on
behalf of all Warwick entities as a singular “Participant” with the expressed intent that AUCRA
“establish a segregated protected cell whereby the Participant may share in the underwriting results
of the Workers’ Compensation policies of insurance issued for the benefit of the Participant by the
Issuing Insurers.” [Exh. 136, p. 1.] The Warwick entities collectively entered into the RPA as the
sole “Participant,” and no provision separated the obligations of the Warwick entities. These facts
confirm that the parties intended the RPA’s obligation to be joint and several.
In addition, the Warwick account was charged on a group basis. [See, e.g., Exhs. 155 & 173.]
3
DEFENDANTS’ AND CROSS-COMPLAINANTS’ RESPONSE TO PLAINTIFFS’ POST-TRIAL
BRIEF
Case No. CGC-16-551614Though Plaintiffs contend that Defendants allocated the liability of the RPA to the separate Warwick
entities, they have cited no such evidence. The so-called “allocation” to which Plaintiffs refer is a
single page in the plan analyses, entitled “Plan Volume by Entity,” which simply provided a
breakdown of entities by loss pick containment amounts. [See, e.g., Exh. 173, p. 4.] On its face, this
page does not allocate program charges amongst the Warwick entities. Program charges were
calculated and charged as to the entire account. [See, e.g., Exh. 173, p. 5.] As Ms. Gardiner
explained without contradiction, the “Plan Volume by Entity” page is provided to customers with
multiple entities, such as Warwick, “for the convenience of the customer” and is not used to
calculate program charges. [0530TR:166:10-21.] The fact that there was no breakdown of charges
by entity confirms the mutual understanding that the RPA’s obligations were joint and several.
Warwick’s reliance upon Exhibit 109, a pre-approved but non-admitted exhibit, is
unavailing. That exhibit sets forth a breakdown of program charges by the broker not Defendants.
({Exh. 109, p. 2] Furthermore, Exhibit 109 demonstrates that there was no mutual understanding at
the time of contracting that the obligations of the RPA would be “several” amongst the Warwick
entities. In that exhibit, Mr. Sheh advised Willis that Warwick “would like to distribute/allocate the
premium in accordance with loss runs in addition to payroll ... [p]lease discuss with Applied how
we could achieve this.” [Exh. 109, p. 1.] Applied never provided a breakdown in this fashion. And, if
there were a mutual understanding that the Warwick entities would only be responsible for their
allocable share of program charges, Mr. Sheh would not have been sending this email to his broker a
month after execution of the RPA to ask how such a distribution and allocation could be made.
In assessing the intent of the parties, “[a] contract must be so interpreted as to give effect to
the mutual intention of the parties as it existed at the time of contracting, so far as the same is
ascertainable and lawful.” Civil Code § 1636; see also Kaneko v. Okuda, 195 Cal. App. 2d 217, 227
(1961) (quoting Civil Code section 1636) (emph. added). Exhibit 109 underscores the lack of any
mutual intent at the time of the execution of the RPA that there would be a separation of the
liabilities among the separate Warwick entities. Based upon this exhibit and other evidence
presented, the joint and several liability presumption controls and cannot be rebutted.
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DEFENDANTS’ AND CROSS-COMPLAINANTS’ RESPONSE TO PLAINTIFFS’ POST-TRIAL
BRIEF
Case No. CGC-16-551614B. Plaintiffs Do Not Pursue and, Therefore, Have Abandoned Their Insurance Bad
Faith, UCL, Conversion and Declaratory Relief Claims
Plaintiffs’ post-trial brief provides no argument regarding Plaintiffs’ insurance bad faith,
UCL, conversion, and declaratory relief causes of action. [See First Amended Complaint (second,
third, fourth, sixth, seventh, eighth, and ninth causes of action).] Plaintiffs have failed to address the
elements of those causes of action or present admissible evidence allegedly supporting these claims.
Those causes of action should be dismissed as abandoned.
Cc. Plaintiffs Have Not Proven a Breach of Contract
1. Plaintiffs Have not Established Any of the Elements for a Breach of Contract
To prevail on a cause of action for breach of contract, Warwick must prove “(1) the contract,
(2) the plaintiff's performance of the contract or excuse for nonperformance, (3) the defendant’s
breach, and (4) the resulting damage to the plaintiff.” Richman v. Hartley, 224 Cal. App. 4th 1182,
1186 (2014). Plaintiffs have failed to establish any of the requisite elements.
The “contract” Plaintiffs seek to enforce is not the RPA but a modified version with terms
and conditions to which neither side agreed. Thus, Plaintiffs cannot prove the agreed terms of the
supposed contract they seek to enforce. Further, Plaintiffs do not claim that Defendants have
breached the actual terms of RPA at issue. Also, because AUCRA has not been shown to have
breached the RPA, Plaintiffs cannot show that they suffered harm as a result of a breach.
Plaintiffs’ breach of contract claim is based upon a series of unwarranted assumptions for
which there is no legal or factual support. Among other things, Plaintiffs erroneously presume that:
(1) AUCRA and the Warwick California entities entered into a separate RPA on the same terms as
the Warwick group as a whole though there is no evidence that AUCRA would have issued a
separate RPA to the California entities, let alone issue an RPA with the exact same formulas and
underwriting assumptions despite differences in geographic scope, size, and payroll; (2) the
California entities have paid all amounts due under this fictional “contract” though no business
records were submitted showing that the California companies paid anything; and (3) this fictional
RPA contained cell-closure provisions like the one in the Retrospective Rating Participation
Agreement (the “RRPA”), even though there is no evidence the parties ever agreed to be governed
by the RRPA, which only came into existence well after the Warwick’s RPA.
5
DEFENDANTS’ AND CROSS-COMPLAINANTS’ RESPONSE TO PLAINTIFFS’ POST-TRIAL
BRIEF
Case No. CGC-16-551614Plaintiffs are trying to make it up as they go. Under the law, a plaintiff cannot simply rewrite
a contract and then prove a breach of contract based on fictional terms to which neither side agreed.
Because Plaintiffs have not proven all elements of a breach of contract claim, Defendants are entitled
to a judgment on Warwick’s breach of contract cause of action.
2. Plaintiffs May not Rely upon Alleged “Ambiguities” to Rewrite the RPA to
Insert New Provisions to which the Parties Never Agreed
Plaintiffs’ vagueness arguments cannot rescue the breach of contract claim. Plaintiffs contend
that Paragraph 5 of Schedule 1 of the RPA (which sets forth the circumstances under which there is a
closure of the cell and final calculation (the “Cell Closure Provision”)) is ambiguous and allegedly
inconsistent with pre-binder representations. [Warwick’s Brief, p. 14:5-12.] On that basis, Plaintiffs
invite the Court to rewrite the RPA to include provisions to which the parties never agreed. Plaintiffs
then argue that Defendant’s breached this agreement, albeit as revised. This is improper.
First, Plaintiffs do not contend that Paragraph 5 of Schedule 1 of the RPA, in and of itself, is
vague and ambiguous. It cannot as the provision’s meaning is clear. That paragraph sets forth five
different circumstances under which AUCRA may terminate the RPA and liquidate the cell. Because
Plaintiffs have presented no argument or evidence explaining how this provision, standing alone, is
vague and ambiguous, its terms control. See Civ. Code § 1638 (“The language of a contract is to
govern its interpretation, if the language is clear and explicit, and does not involve an absurdity.”).
Second, the Cell Closure Provision does not conflict with any pre-binder communications.
Plaintiffs quote the following statements from the proposal documents provided to Warwick:
“Based on your individual claims experience, this program can provide
immediate cash flow benefits and financial reward unlike other plans
that require waiting for cumbersome retrospective or uncertain
dividend calculations that can run for years beyond policy expiration.”
[Plaintiffs’ Brief, p. 13:18-20 (citing Exh. 134, p.2).]
“At the end of the active term of the Profit Sharing Plan, calculations
will continue to be performed annually thereafter in accordance with
the Final Agreement.” [Plaintiffs’ Brief, p. 13:25-27 (citing Exh. 133,
p- 3) (the statement quoted in full here).]
The first quote speaks to the fact that, under EquityComp®, participants fund collateral in real time
as losses occur rather than fully funding collateral up front. Mr. Osborne explained that, with a
6
DEFENDANTS’ AND CROSS-COMPLAINANTS’ RESPONSE TO PLAINTIFFS’ POST-TRIAL
BRIEF
Case No. CGC-16-551614typical captive, a participant must pay the full policy premium, contribute additional collateral up to
the maximum exposure, and then wait years after policy termination to start seeing a return of
money. [0531TR:345:12-347:5, 351:23-352:13.] EquityComp® allows participants to fund the cell
in a slower fashion, giving them an immediate cash flow benefit that may not exist with other
captive arrangements and loss sensitive plans. The second quote mentions that there would be annual
calculations of reserve requirements based on ongoing claims development. But, as noted in the
quote itself, calculations would be based on the RPA’s formulas. Neither statement speaks to the
circumstances upon which a cell may be closed, and, therefore, neither provides a basis for
concluding that that the Cell Closure Provision is vague or ambiguous.
The same is true for the other provision from the RPA that Plaintiffs cite:
“Applied Risk Services, Inc. [] has been appointed the billing agent for
the Company and the Issuing Insurers and it authorized by the Company,
Issuing Insurers, and Participant to account for, offset and true up any and
all amounts due each of the parties and is authorized to collect any
amounts due and owing under this Agreement.” [Exh. 135, 4 8.]
This provision simply specifies that the parties have appointed Applied Risk Services, Inc. (“ARS”)
to act a billing agent to ensure that monies owed under the Program are properly distributed. [See,
e.g., 0530TR:127:9-17 (explaining how ARS receives program charges and distributes premium to
the insurers and capital deposits to AUCRA); 142:13-19 (same).] The appointment of ARS as billing
agent does not have any bearing on the proper interpretation of the Cell Closure Provision.
Under the guise of challenging the Cell Closure Provision as “vague and ambiguous,”
Plaintiffs seek to rewrite (i.e., reform) the RPA to insert a provision from the RRPA. [Warwick’s
Brief, p. 15:1-12.] This is improper. The reformation doctrine applies where a written contract does
not accurately express the parties’ mutual intent. See Cal. Civ. Code § 3399 (allowing for
modification to conform to the parties' shared intent). In those situations, the contact may be
reformed to conform to the parties’ true mutual intent — that is, the shared intent that existed prior to
execution of the erroneous written agreement. Jolley v. Chase Home Fin., LLC, 213 Cal. App. 4th
872, 908 (2013) (“The intention of the parties, as stated in [California] Civil Code section 3399,
refers to a single intention which is entertained by both parties.”).
7
DEFENDANTS’ AND CROSS-COMPLAINANTS’ RESPONSE TO PLAINTIFFS’ POST-TRIAL
BRIEF
Case No. CGC-16-551614Plaintiffs have not made this claim. In any event, Plaintiffs presented no evidence of a
mutual intent, at the time of the RPA’s execution, that the RPA would contain a cell closure
provision like the one set forth in the RRPA. Indeed the RRPA did not even exist at the time
Warwick began participating in the Program. Without evidence of such mutual intent, there can be
no reformation. See Am. Home Ins. Co. v. Travelers Indem. Co., 122 Cal. App. 3d 951, 963 (1981)
(“although a court of equity may revise a written instrument to make it conform to the real
agreement, it has no power to make a new contract for the parties . . . .”).
D. Plaintiffs are Not Entitled to a Rescission Remedy
Plaintiffs purport to have the right to rescind the RPA but yet at the same time attempt
enforce the RPA to take advantage of its profit-sharing benefits. This position is untenable — a party
may not seek damages based upon a breach of contract and, at the same time, obtain relief based
upon rescission. See Akin, 140 Cal. App. 4th at 296. A party must choose one or the other.
Even assuming arguendo that Plaintiffs have a basis to rescind in the first instance — which
Defendants categorically reject — Plaintiffs have chosen to enforce the RPA and seek a remedy based
upon an enforcement of the RPA’s payment obligations, though based upon Plaintiffs’ flawed
allocation applicable to Warwick’s California operations. [See, e.g., Exh. P-8, see also Warwick’s
Brief, p. 16, Ins. 5-14.] In seeking to enforce the RPA and retain the benefits received through the
RPA and the Program, Plaintiffs are not entitled to a rescission remedy. See id.; see also Cal. Civ.
Code § 1691; Saret-Cook v. Gilbert, Kelly, Crowley & Jennet, 74 Cal. App. 4th 1211, 1226 (1999).
In truth, Plaintiffs cannot restore all benefits and consideration obtained through
EquityComp® and the execution of the RPA — i.e., insurance, reduced up-front cash-flow benefits,
and profit-sharing potential. Because they cannot restore the consideration received, there can be no
rescission. See Olson v. Cohen, 106 Cal. App. 4th 1209, 1216 (2003) (denying rescission because
“[a]ppellant cannot restore to respondents the services which he has received from them under the
fee agreements.”); Joshua Tree Townsite Co. v. Joshua Tree Land Co., 100 Cal. App. 2d 590, 593
(1950) (“Rescission is not allowable where the party demanding it cannot or does not restore the
other party to the condition he would have been in but for the contract.”).
8
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Case No. CGC-16-551614E. Plaintiffs have Not Proven Fraud or Negligent Misrepresentation
Nor have Plaintiffs demonstrated a fraud that might have provided for a basis for seeking a
rescission remedy in the first instance. “The essential elements of a count for intentional
misrepresentation are (1) a misrepresentation, (2) knowledge of falsity, (3) intent to induce reliance,
(4) actual and justifiable reliance, and (5) resulting damage.” Chapman v. Skype Inc., 220 Cal. App.
Ath 217, 230-31 (2013) (citation omitted). “The essential elements of a count for negligent
misrepresentation are the same except that it does not require knowledge of falsity but instead
requires a misrepresentation of fact by a person who has no reasonable grounds for believing it to be
true.” Jd. at 231. Similar elements apply to a fraudulent concealment claim with the added
requirement that there must be a duty to disclose the concealed information. See Tenet Healthsystem
Desert, Inc. v. Blue Cross of Cal., 245 Cal. App. 4th 821, 844 (2016).
Plaintiffs base their fraud claims on a single alleged concealment: that Defendants concealed
the factors on which they would calculate the “Total Pay-In We are Requiring Now” each month.
[Plaintiffs’ Brief, pp. 10-11.] In each billing statement, one line item, entitled the “Total Pay In
Amount Due Under Your Contract,” set forth the total due under the RPA’s formulas. A second line
item, entitled “Total Pay-In We are Requiring Now,” reflected a discounted value that Applied was
requiring the participant pay at that time. [See, e.g., Exhs. 157, p. 1 (statement); 166, p. 7 (plan
analysis).] Plaintiffs contend that Applied committed a fraud by not disclosing beforehand precisely
how it would calculate that discount each month.
Plaintiffs have failed to establish how this constitutes an actionable concealment, let alone
how this conduct caused any harm. Plaintiffs cite no authority holding that, if one party has agreed to
pay a full contract price and the second party agrees to accept a lesser amount during certain periods,
the second party has a legal obligation to disclose how that discounted amount is calculated. In
addition, because AUCRA charged less than what was actually owed under the RPA, Warwick has
not suffered any harm. It follows that Warwick cannot contend that it was harmed by any alleged
concealment as how that discount was calculated.
> The “Total We are Requiring Now” is always less than or equal to the amount due under the RPA’s
formulas; it never exceeds the contract amount. [0§31TR:258:25-259:4.]
DEFENDANTS’ AND CROSS-COMPLAINANTS’ RESPONSE TO PLAINTIFFS’ POST-TRIAL
BRIEF
Case No. CGC-16-551614Warwick also claims to be harmed by the fact that charges fluctuated from month to month.
Warwick knew it was entering into a loss sensitive program in which the charges would vary as
losses occurred. [Exh. 132, p. 4 (proposal) (providing that pay-in factor “will vary as losses occur”).]
This is the essence of a loss-sensitive plan. Under the circumstances, Plaintiffs could not have
reasonably expected that charges would never fluctuate but remain the same from month to month.
F. Plaintiffs Have Waived Their Illegality Arguments, and, In Any Event, the RPA
is Enforceable
The Court need not reach the issue of illegality. By refusing to return the benefit received
and by seeking to enforce the RPA, as noted above, [see supra, pp 8-9], Plaintiffs are not entitled to a
rescission remedy. In other words, because Plaintiffs seek to enforce the RPA, it is irrelevant if the
RPA can be proven to be unlawful and unenforceable so as to give rise to a possible rescission right.
Further, the RPA should be enforced even if the Court were to address the issue of illegality.
Workers’ compensation filing requirements do not apply to the RPA in the first instance.
Plaintiffs maintain that the RPA should have been filed with the California Department of Insurance
(“CDI”) under Insurance Code section 11658 and related regulations as a workers’ compensation
“endorsement” or “policy” issued by an “insurer.” This argument fails. Section 11658 does not apply
since AUCRA is not Plaintiffs’ “insurer,” and the RPA is neither an “insurance policy” nor an
“endorsement” within the meaning of the section 11658. AUCRA is not a party to the CIC policies,
and the RPA is a separate agreement with different parties.
As Mr. Osborne explained, segregated cell reinsurance facilities like AUCRA are used in
many jurisdictions for all types of insurance, including workers’ compensation programs, and states
have not required the filing of participation agreements like the RPA. [0531TR:328:3-332:25.] This
has been true for California as well. [Id.] The CDI examined EquityComp® four times in ten years.
{Exhs. 176-179.] In a 2015 report describing EquityComp® and later approved by the Insurance
Commissioner, the CDI expressly noted that AUCRA “enters into a Reinsurance Participation
Agreement with the insured in order to form a segregated cell by which the insured shares in a
portion of the premiums and losses under the [CIC] policy.” [Exh. 179, p. 7.] Thus, the CDI and
Commissioner understood that EquityComp® involved: (1) a captive reinsurer [AUCRA] that (2)
10
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Case No. CGC-16-551614was a segregated cell facility, in which (3) insureds entered into RPAs that (4) determined the
ultimate costs insureds paid for workers’ compensation coverage. Notwithstanding these facts, the
CDI never concluded that the RPA was a workers’ compensation form or rate that needed to be filed.
The Commissioner’s recent Shasta Linen Decision reflects a sharp departure from past practices.*
1. Unfiled Workers’ Compensation Rates are Legal and Enforceable
Even if one were to assume that the RPA formulas change the CIC policies’ premiums and
thus should have been filed with the Commissioner before use, the RPA’s rates must be enforced.
Insurance Code section 11730(g) defines a “rate” as “the cost of insurance per exposure base unit,”
and section 11730(j) defines “supplementary rate information” as any “manual or plan of rates, .. .
rating schedule, . . . rating plan, and any similar information needed to determine the applicable
premium for the insured.” Ins. Code § 11730(j). Under these statutory definitions, the RPA’s
formulas would be characterized as a “rate” or “supplementary rate information.”
Under California’s workers’ compensation laws, unfiled rates and supplementary rate
information are legal and enforceable unless and until the Commissioner disapproves them after a
formal rate disapproval hearing. See id. § 11737(a)-(g). Section 11737(a) specifies that a
commissioner “may disapprove a rate if the insurer fails to comply with the filing requirements
under Section 11735.” Jd. at § 11737(c) (emphasis added). Because the disapproval of an unfiled rate
is not mandatory, and depends upon the exercise of the Commissioner’s discretion, the use of an
unfiled rate is not unlawful per se. See Ins. Code § 11737.
* The Shasta Linen Order should be afforded no deference. While the construction of a statute by
officials charged with its administration are entitled to “great weight and respect . . . as appropriate
under the circumstances,” the judiciary takes “ultimate responsibility for the construction of
statutes.” Dep’t of Corr. & Rehab. v. State Pers. Bd., 247 Cal. App. 4th 700, 708 (2016). Not all
agency interpretations are entitled to deference — only those that reflect longstanding administrative
construction of a statute or that were adopted through formal regulations are entitled to deference.
See Interinsurance Exch. of Auto. Club v. Sup. Ct., 148 Cal. App. 4th 1218, 1236 (2007) (refusing to
afford any weight to the CDI’s interpretation of Insurance Code section 381 because the opinion was
not a formal regulation or longstanding agency interpretation). Here, the Commissioner has not long
maintained that participation agreements — such as the RPA — are required to be filed or that their
unfiled status renders them void. Further, the Commissioner’s Consent Order [Exh. 183] — in which
it permitted continued enforcement of RPAs instead of voiding them — is a reversal of the
Commissioner’s prior determination in the Shasta Linen Decision that the RPA at issue there was
void.
u
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Case No. CGC-16-551614Before disapproving an unfiled rate, the Commissioner must also comply with certain
procedural requirements. Under the Code, the Commissioner must serve “notice of the intent to
disapprove” and “schedule a hearing to commence within 60 days of the notice.” /d. § 11737(d).
Even then, Insurance Code section 11737(g) provides that the Commissioner may only disapprove a
rate prospectively for new policies issued after the notice of disapproval.
Not all lines of insurance are the same with respect to filing requirements. Workers’
compensation laws stand in stark contrast to California’s Proposition 103 “prior approval” laws,
which apply to other lines of insurance such as automobile or homeowners insurance and which
expressly prohibit the use of rates without “prior approval” of the Commissioner.* For example,
Proposition 103 expressly prohibits rates that are “excessive, inadequate, unfairly discriminatory” or
otherwise in violation of the prior approval laws. See Ins. Code § 1861.05. By contrast, workers’
compensation rate laws require the Commissioner to disapprove a workers’ compensation rate under
only one circumstance — where the rate, in the aggregate, would “tend to impair or threaten the
solvency” of the insurer. Ins. Code § 11737(c). Because the workers’ compensation statutes do not
prohibit allegedly excessive rates and only permit the Commissioner to disapprove an unfiled rate
prospectively, there is no public policy or statutory basis to conclude that an unfiled rate is per se
void from inception, as Plaintiffs maintain.
Indeed, analyzing the workers’ compensation rate filing requirements as a whole, a federal
district court held that an unfiled workers’ compensation rate is not unlawful and is enforceable
unless and until the Commissioner initiates a rate disapproval hearing to disapprove of that unfiled
rate, which has not happened here. See Shasta Linen Supply, Inc. v. Applied Underwriters, Inc., No.
CV 2:16-158 WBS AC, 2016 U.S. Dist. LEXIS 82850, at * 2 (E.D. Cal. June 20, 2016) (holding
“the use of a rate that has not been filed as required by § 11735 is not an unlawful rate unless and
until the Commissioner conducts a hearing and disapproves the rate”); see also Shasta Linen Supply,
* See Ins. Code § 1851 (excluding workers’ compensation insurance from Chapter 9 of Part 2 of
Division 1 of the Insurance Code, which includes Proposition 103 “prior approval” laws, see, e.g.,
Ins Code §§ 1858-1861.16); see also Supp. RJN, Exh. T (distinguishing between lines of insurance
that are subject to “file and use” and Proposition 103’s “prior approval” filing requirements
(http://www. insurance.ca.gov/0250-insurers/0800; tate-filings/rate-filing-review-process.cfm).
DEFENDANTS’ AND CROSS-COMPLAINANTS’ RESPONSE TO PLAINTIFFS’ POST-TRIAL
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Case No. CGC-16-551614Inc. v. Applied Underwriters, Inc., No. CV 2:16-158 WBS AC, 2016 U.S. Dist. LEXIS 143545, at *
5-6 (E.D. Cal. Oct. 17, 2016) (continuing to hold the same and specifically disagreeing with and
rejecting the Commissioner’s contrary view and finding that the Commissioner’s designation of the
Shasta Decision as precedential was not binding).
In an attempt to do end run around the rate filing statutes, Plaintiffs contend that the RPA is
unenforceable due to alleged failures to comply with workers’ compensation form filing
requirements under Insurance Code section 11658. This argument fails. Because Plaintiffs challenge
the RPA’s payment obligations on the ground that they alter the “premium” under the CIC Policies,
the legal validity of that challenge can only be assessed under the workers’ compensation rate filing
statutes. To construe form filing laws as providing a private party the ability to void an unfiled rate
would be an end run around the rate statutes and contravene the public policy concerns underlying
workers’ compensation rate regulation.
And if the RPA were void as an unfiled rate or form, as Plaintiffs contend, then their
modified version of the RPA would be unenforceable on identical grounds. As the California
Legislature has stated, the primary public policy goal behind workers’ compensation regulation is
the need “to protect the worker and ensure prompt payment of claims.” [Supp. RJN, Exh. S at § 1(b)
(Stats. 2011, c. 566 (S.B.684).] This public policy is reflected in the rate statutes themselves, which
require the Commissioner to disapprove a rate only in one circumstance — where the rate tends to
threaten insurer solvency. Compare Ins. Code § 11737(c) (the Commissioner “shall” disapprove
rates that tend to threaten the insurer’s solvency) with id. §§ 11737(a) & (b) (the Commissioner
“may” disapprove rates that are unfiled or unfairly discriminatory or that tend to create a monopoly).
In other words, the primary goal behind the rate statutes is to ensure that rates are high
enough to ensure an insurer’s solvency, not to protect against high premiums. In fact, the
Commissioner himself has acknowledged that a workers’ compensation rate may not be disapproved
solely on the grounds that it is excessive.° Permitting an employer to enforce a modified, unfiled
° The Department of Insurance notes in the “Open Rating” section on its website that “The
Commissioner does not have the authority under law to disapprove rates that may be considered.
excessive only.” [Supp. RJN, Exh. U at 6.] B
DEFENDANTS’ AND CROSS-COMPLAINANTS’ RESPONSE TO PLAINTIFFS’ POST-TRIAL
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Case No. CGC-16-551614rate so the employer can reduce its premiums — as is the apparent intent of Plaintiffs in this action —
would contravene the public policies underlying the workers’ compensation laws.
2. The RPA’s Rates Would be Enforceable Even If One Were to Assume that the
RPA is Illegal
The fact that a contract is deemed unlawful in some respect does not mean that the contract is
unenforceable. Rather, the enforceability of an alleged unlawful contract turns on “the particular
facts.” Asdourian v. Araj, 38 Cal. 3d 276, 292 (1985); Barry v. OC Residential Properties, LLC, 194
Cal. App. 4th 861, 870 (2011) (‘Each case must turn on its own facts.”): Ward v. TruSpeed
Mortorcars, LLLC, 184 Cal. App. 4th 378, 391(2010); California Physicians’ Service v. Aoki
Diabetes Research Institute, 163 Cal. App. 4th 1506, 1516 (2008). The California Supreme Court
also has repeatedly held that even an illegal contract may be enforced when “the forfeiture resulting
from unenforceability is disproportionately harsh considering the nature of the illegality.” 44. Arthur
Gensler, Jr. & Associates, Inc. v. Larry Barrett, Inc., 7 Cal. 3d 695, 703 (1972); Tri-Q, Inc. v. Sta-Hi
Corp., 63 Cal. 2d 199, 220 (1965). “[T]he need to void contracts in violation of the law must be
tempered by the countervailing public interest in preventing a contracting party from using the
doctrine to create an unfair windfall.” Shopoff & Cavallo LLP v. Hyon, 167 Cal. App. 4th 1489,
1523 (2008) (quoting McIntosh v. Mills, 121 Cal. App. 4th 333, 347 (2004)).
In considering the enforceability of allegedly illegal contracts, courts also distinguish
between “contracts that are malum prohibitum (illegality set by statute), and malum in se (illegality
based on morals).” McIntosh, 121 Cal. App. 4th at 344 n.10. “[MJalum prohibitum contracts may be
enforceable despite their illegality.” /d. The fact that the alleged illegality of a contract involves “no
serious moral turpitude” is a reason not to void the contract. Tri-Q, 63 Cal. 2d at 219.
Here, the only taint of illegality is the peripheral claim that the RPA was not filed as a
workers’ compensation form or rate — the alleged non-filing is simply malum prohibitum, not malum.
in se, and involves no moral turpitude. Thus, even if the RPA were illegal in some respect, the
contract is not void and should be enforced to prevent an unfair windfall.
Finally, the Commissioner entered into a Stipulated Consent Order in which he permitted
AUCRA and CIC to continue to administer policies subject to RPAs. [Exh. 183 (changing the LDFs
14
DEFENDANTS’ AND CROSS-COMPLAINANTS’ RESPONSE TO PLAINTIFFS’ POST-TRIAL
BRIEF
Case No. CGC-16-551614in RPAs in their active terms as of July 1, 2016 but otherwise allowing CIC and AUCRA to continue
EquityComp® programs).] Where the administrator charged with regulating the filing of workers’
compensation policies has permitted the RPAs to be enforced despite their alleged unfiled status,
private party litigants like Plaintiffs have no standing to void the RPA on regulatory grounds.
G. Plaintiffs are Not Entitled to Attorney Fees
Under the so-called “American Rule,” parties to litigation must pay their own attorney fees.
California courts have long followed the rule, which has been codified in California Code of Civil
Procedure section 1021. Under that section, in the absence of a statute or contract, prevailing
litigants are entitled to an award of their costs but not their attorney fees. Plaintiffs are not the
prevailing party in this litigation and cite no contractual or statutory basis for an award of attorney
fees. Accordingly, their request for attorney fees and costs should be rejected.
Hil. CONCLUSION
In their Opening Brief, Plaintiffs do not dispute that they executed the RPA, that they have
been charged monies in accordance with the RPA and the Program, and that they have not paid all
charges under the RPA and the Program. Because of these admissions and because Plaintiffs have
not otherwise demonstrated a defense to failing to comply with the terms of the RPA, the Court
should find that Plaintiffs are jointly and severally liable for breach of the RPA’s payment
obligations and a judgment should be issued in favor of Defendants and Cross-Complainants for that
breach in the amounts set forth in the Opening Brief with applicable interest. Further, as Plaintiffs
have failed to satisfy their burden on their claims, Plaintiffs should take nothing from this action.
Dated: July 9, 2018 HINSHAW & CULBERTSON LLP
By: t
SPENCER Y. KOOK
KENT R. KELLER
TRAVIS WALL
Attorneys for Defendants and Cross-
Complainants
15
DEFENDANTS’ AND CROSS-COMPLAINANTS’ RESPONSE TO PLAINTIFFS’ POST-TRIAL
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Case No. CGC-16-551614CERTIFICATE OF SERVICE
WARWICK AMUSEMENTS CORPORATION, a Delaware corporation, et al. v. APPLIED
UNDERWRITERS, INC., a Nebraska corporation, et al.
CGC-16-551614
STATE OF CALIFORNIA, COUNTY OF LOS ANGELES:
Lama citizen of the United States and employed in Los Angeles, California, at the office of a
member of the bar of this Court at whose direction this service was made. I am over the age of 18
and not a party to the within actions; my business address is 633 West Sth Street, 47th Floor, Los
Angeles, California 90071.
On July 9, 2018, I served:
« DEFENDANTS’ AND CROSS-COMPLAINANTS’ RESPONSE TO
PLAINTIFFS’ POST-TRIAL BRIEF
on the interested parties in this action as stated below:
Larry J. Lichtenegger, Esq.
The Lichtenegger Law Office
3850 Rio Road, #58
Carmel, CA 93923
Telephone: (831) 626-2801
Facsimile: (831) 886-1639
Email: larry@jllaw.com; lawyer@mbay.net
[X] (BY E-MAIL OR ELECTRONIC TRANSMISSION): Based on a court order or an
agreement of the parties to accept service by e-mail or electronic transmission, I caused the
document(s) to be sent to the person[s] at the e-mail address[es] set forth herein. I did not receive,
within a reasonable time after the transmission, any electronic message or other indication that the
transmission was unsuccessful. See Cal.R.Ct.R. 2060.
I declare under penalty of perjury under the laws of the United States that the above is true
and correct and was executed on July 9, 2018, at Los Angeles, California.
/
“Vid i
Veronica Montero-Kossak
PROOF OF SERVICE
Case No. CGC-16-551614