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An appellate court in California, reversing a trial court's decision, has ruled that an injured plaintiff who obtained a $1.5 million judgment against an allegedly insolvent driver could proceed with his fraudulent conveyance action against the driver's insurer.

The Case

In October 2007, Christopher Potter was injured when the motorcycle he was riding collided with the automobile Jesus Remedios Avalos-Tovar was driving.

Two months after the accident, Mr. Potter wrote to Mr. Tovar's auto insurer, Alliance United Insurance Company (“AUIC”), and offered to settle his claims against Mr. Tovar in exchange for payment of the $15,000 policy limit. The offer stated it would expire in 30 days.

AUIC did not respond to the offer before it expired.

Thereafter, Mr. Potter sued Mr. Tovar. The action proceeded to trial in July 2009. Mr. Tovar conceded he was at least partially at fault for Mr. Potter's injuries but challenged the amount of damages. The jury returned a verdict in Mr. Potter's favor, awarding him $908,643.

Mr. Tovar filed a motion for a new trial and the trial court granted it, vacating the existing jury verdict and judgment. Mr. Potter appealed.

In April 2010, while Mr. Potter's appeal was pending, AUIC and Mr. Tovar entered into a confidential “Release and Settlement Agreement” (the “Release”) pursuant to which Mr. Tovar released and discharged AUIC from “any claims for negligence, delay, bad faith, punitive damages, unfair practices, malpractice, emotional distress, consequential loss and damage, excess judgment, and personal injury.” Mr. Tovar also agreed that he would “not make any assignments, file any suit, take any action or pursue any action [or] proceeding against releasees arising out of or in any way pertaining to the [Potter] automobile accident or the insurance and legal claims relating to said accident.”

In exchange for Mr. Tovar's release of claims and agreement to forego any assignment related to the Potter liability action, AUIC paid Mr. Tovar $75,000.

The court of appeal affirmed the order granting a new trial in the Potter liability action and the case was remanded for retrial.

In early April 2012, counsel for Mr. Tovar disclosed the existence of the Release to Mr. Potter's counsel.

After a second trial, the jury again returned a verdict in Mr. Potter's favor, this time awarding him $975,000 in damages. The trial court also awarded Potter $108,455.59 in recoverable costs and $441,697.92 in prejudgment interest. In December 2013, the trial court entered judgment for Potter in the amount of $1,523,887.16.

Mr. Potter offered to take an assignment of Mr. Tovar's rights against AUIC in exchange for a covenant not to execute the judgment against Mr. Tovar's personal assets. Because he already had signed the Release, however, Mr. Tovar was unable to agree.

AUIC paid Mr. Potter the $15,000 policy limit but refused to satisfy the remainder of the judgment.

Mr. Potter sued AUIC, asserting a claim under California's Uniform Voidable Transactions Act (the “UVTA”). Mr. Potter alleged that Mr. Tovar was insolvent prior to and at the time he and AUIC entered into the Release. Mr. Potter further alleged that Mr. Tovar had a viable claim for breach of the implied covenant of good faith and fair dealing against AUIC, which was an “asset” he could have used to pay down his civil liability, and that AUIC participated in a fraudulent transfer of that asset by entering into the Release, which prevented Mr. Potter from collecting all or a greater share of the judgment in his favor.

For its part, AUIC asserted that Mr. Potter's UVTA-based cause of action was barred by the statute of limitations. AUIC also argued that Mr. Potter had not sufficiently alleged that an asset was transferred, that Mr. Potter was injured by the transfer, and that any suffered injury entitled Mr. Potter to sue AUIC.

The trial court dismissed Mr. Potter's action, and he appealed.

The Appellate Court's Decision

The appellate court reversed.

In its decision, the appellate court found that Mr. Potter's UVTA claim was “timely filed” because the fraudulent transfer complained of was made during the pendency of a lawsuit that would (and did) establish whether a debtor-creditor relationship existed between Mr. Potter and Mr. Tovar.

Under applicable California law, the appellate court said, the statute of limitations did not begin to run until judgment was entered in Mr. Potter's action against Mr. Tovar, which occurred on December 20, 2013. Because Mr. Potter filed his original complaint against AUIC within four years of that date, on June 24, 2016, his suit was timely, the appellate court ruled.

The appellate court concluded that Mr. Potter's UVTA claim could proceed. It reasoned that:

• Mr. Tovar's right to sue for bad faith was an asset under the UVTA because it was an assignable form of personal property at the time the Release was executed;
• Mr. Potter had a “claim” against Mr. Tovar when the Release was executed;
• Mr. Potter sufficiently alleged injury because the cause of action was an asset of Mr. Tovar's that was put out of Mr. Potter's reach by the Release; and
• AUIC was a proper defendant because the “transfer” of the bad faith claim (within the meaning of the UVTA, which defined “transfer” to include a “release”) was made for its benefit.

The case is Potter v. Alliance United Ins. Co., No. B287614 (Cal. Ct. App. July 23, 2019). Attorneys involved include: Black Compean & Hall, Michael D. Compean and Frederick G. Hall, for Plaintiff and Appellant. Lewis Brisbois Bisgaard & Smith, Lane J. Ashley, Raul L. Martinez, and Celia Moutes-Lee, for Defendant and Respondent.

Steven A. Meyerowitz, a Harvard Law School graduate, is the founder and president of Meyerowitz Communications Inc., a law firm marketing communications consulting company. Mr. Meyerowitz is the Director of the Insurance Coverage Law Center and editor-in-chief of journals on insurance law, banking law, bankruptcy law, energy law, government contracting law, and privacy and cybersecurity law, among other subjects. He may be contacted at smeyerowitz@meyerowitzcommunications.com.